                        T.C. Memo. 1995-568



                      UNITED STATES TAX COURT



                  MARCIA TYRRELL, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10683-91.             Filed November 28, 1995.



     Marcia Tyrrell, pro se.

     Helen F. Rogers, for respondent.



                        MEMORANDUM OPINION

     HAMBLEN, Chief Judge:     This matter is before the Court on

respondent's motion for summary judgment pursuant to Rule 121.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the taxable years at issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.   Respondent's motion is based on facts deemed

admitted pursuant to Rule 90(c).    Petitioner failed to oppose or

object to respondent's motion.
                                             - 2 -

       Respondent, in her notice of deficiency issued to

petitioner, determined the following deficiencies in, and

additions to, petitioner's Federal income tax:



Year Deficiency                                              Additions to Tax
                  Sec. 6653(b)(1)(A)   Sec. 6653(b)(1)    Sec.6653(b)(1)(B)
                                                                      Sec. 6661
1987 $48,286          $36,215                                 1         $12,072
1988 23,621                                 $17,716                       5,905
        1
          Sec. 6653(b)(1)(B) provides for an addition to tax equal to 50 percent of the interest
due under sec. 6601 on the portion of the underpayment attributable to fraud.

        After concessions, the issues for adjudication are whether

petitioner is liable for:                (1) Income tax deficiencies for

taxable years 1987 and 1988; (2) additions to tax for substantial

understatement of income tax pursuant to section 6661 for taxable

years 1987 and 1988; and (3) additions to tax for fraud pursuant

to section 6653(b) for taxable years 1987 and 1988.

                                         Background

        Petitioner resided in Beltsville, Maryland, at the time the

petition was filed in this case.                      Respondent determined

deficiencies in petitioner's income tax based on petitioner's

unreported wages, disallowed deductions, and unreported income

from embezzled funds.              The petition generally challenges "all

items in the deficiency notice".

        Respondent's answer denies the substantive allegations of

the petition and alleges affirmatively that petitioner is liable

for additions to tax pursuant to section 6653(b) for fraud and,

in the alternative, for additions to tax pursuant to section
                                - 3 -

6651(b)(1) for failure to file a timely Federal income tax

return.1

     Respondent filed with the Court and served on petitioner a

request for admissions.    Petitioner failed to deny or object to

any of the requests for admissions.     By failing to respond,

petitioner is deemed to have admitted, pursuant to Rule 90(c),2

the following facts.

     Petitioner was a bookkeeper for Nick's Auto during taxable

years 1987 and part of 1988 and for Commander Construction during

part of 1988.   Petitioner was also a tax return preparer during

the years at issue.    Petitioner was aware of what constituted

allowable deductions.

     Petitioner failed to report income from her business and

embezzlement activities.    Specifically, petitioner failed to

report wages from Nick's Auto in the amounts of $11,840 and

     1
      Although petitioner filed no reply to the answer,
respondent did not move that the allegations be deemed admitted,
and the allegations in the answer are treated as denied pursuant
to Rule 37(c).
     2
      The relevant part of Rule 90(c) provides as follows:

     Each matter [contained in a written request for
     admission] is deemed admitted unless, within 30 days
     after service of the request or within such shorter or
     longer time as the Court may allow, the party to whom
     the request is directed serves upon the requesting
     party (1) a written answer specifically admitting or
     denying the matter involved in whole or in part, or
     asserting that it cannot be truthfully admitted or
     denied and setting forth in detail the reasons why
     this is so, or (2) an objection, stating in detail the
     reasons therefor. * * *
                               - 4 -

$3,250 for 1987 and 1988, respectively.   In addition, petitioner

embezzled $13,975 from her employer, Commander Construction,

during 1988.   Subsequently, petitioner made payments in partial

restitution to Commander Construction in taxable years 1989,

1990, and 1991.

     During the years at issue, petitioner claimed various

business expenses, rental expenses, and itemized deductions.

Petitioner attached a Schedule A to her 1987 Federal income tax

return.   On Schedule A, petitioner claimed unsubstantiated

expenses in the amount of $3,460 as itemized deductions in 1987.

     Petitioner also attached both Schedules C and E to her 1987

and 1988 Federal income tax returns.   Petitioner operated United

Accounting & Management at her residence, 4401 Greenwood in

Beltsville, Maryland, during the years at issue.    Petitioner

claimed the following amounts as business deductions on Schedule

C or rental property deductions on Schedule E:


                          Schedule on which the
 Amount           Year         Amount was Claimed

$10,737           1988             Schedule C
  1,927           1987             Schedule E
  5,593           1988             Schedule E

All of these expenses were personal and, consequently, not

deductible.

     Respondent concedes that petitioner is entitled to deduct

an additional $209 as a business deduction for 1987 and that

petitioner "overreported" her State income tax refund by the
                                - 5 -

amount of $1,917 for 1988.    In total, petitioner did not report

income in the amounts of $17,018 and $31,638 on her Federal

income tax returns for taxable years 1987 and 1988, respectively.

After concessions by respondent, there are deficiencies in

petitioner's income tax in the amount of $3,333 for the taxable

year 1987 and in the amount of $5,844, including self-employment

tax of $1,045, for taxable year 1988.

                              Discussion

        Respondent bases her motion for summary judgment on the

facts conclusively established by the deemed admissions.

Petitioner did not respond to the request for admissions or

oppose respondent's motion for summary judgment.

        A motion for summary judgment may be granted "if the

pleadings, answers to interrogatories, depositions, admissions,

and any other acceptable materials * * * show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law."    Rule 121(b); O'Neal v.

Commissioner, 102 T.C. 666, 674 (1994); Bond v. Commissioner, 100

T.C. 32, 36 (1993). The moving party, however, bears the burden

of establishing that no genuine issue exists as to any material

fact.    Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986);

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (7th Cir. 1994); Espinoza v. Commissioner, 78 T.C.

412, 416 (1982).    In deciding whether to grant summary judgment,

we consider the factual materials and draw inferences from them
                                  - 6 -

in the light most favorable to the nonmoving party.      Sundstrand

Corp. v. Commissioner, supra at 520; Naftel v. Commissioner, 85

T.C. 527, 529 (1985).    A motion for summary judgment may be based

upon facts established by deemed admissions. Rule 90(c); Morrison

v. Commissioner, 81 T.C. 644, 651-652 (1983).

     The party opposing summary judgment may not rest upon the

mere allegations or denials in that party's pleadings but must

set forth specific facts showing that there is a genuine issue

for trial.    Rule 121(d); O'Neal v. Commissioner, supra at 674;

Marshall v. Commissioner, 85 T.C. 267, 271 (1985).

     For the reasons set forth below, we find that there are no

genuine issues of material fact remaining for trial and hold that

respondent is entitled to summary judgment.

Issue 1.     Tax Deficiencies

     The first issue for decision is whether petitioner is

liable for the tax deficiencies in the amounts remaining in issue

after concessions by respondent.      Petitioner's deemed admissions

for 1987 establish the following:      (1) Petitioner did not report

wages from Nick's Auto in the amount of $11,840; (2) petitioner

deducted $1,927 in personal expenses as rental property

deductions on Schedule E; (3) petitioner deducted $3,460 in

unsubstantiated expenses as itemized deductions on Schedule A;

and (4) there is a deficiency of $3,333 in petitioner's income

tax for taxable year 1987.      Similarly, petitioner's deemed

admissions for 1988 establish the following:      (1) Petitioner did
                                 - 7 -

not report wages from Nick's Auto in the amount of $3,250; (2)

petitioner deducted $5,593 in personal expenses as rental

property deductions on Schedule E; (3) petitioner deducted

$10,737 in personal expenses as business deductions on Schedule

C; (4) petitioner did not report income from her embezzlement

activities in the amount of $13,975; (5) petitioner did not make

payments in restitution until taxable years 1989, 1990, and 1991;

and (6) there is a deficiency of $5,844 in petitioner's income

tax for taxable year 1988.

     The deemed admissions establish the amounts of petitioner's

tax deficiencies for the years at issue.   Accordingly, we shall

grant summary judgment on this issue.

Issue 2.    Substantial Understatement

     The next issue for decision is whether petitioner is liable

for additions to tax for substantial understatement of her

Federal income tax pursuant to section 6661 for taxable years

1987 and 1988.    Section 6661 provides for an addition to tax in

the amount of 25 percent of the amount of any underpayment

attributable to a substantial understatement of tax.   A

substantial understatement exists if the amount of the

understatement for the taxable year exceeds the greater of (i) 10

percent of the tax required to be shown on the return, or (ii)

$5,000.    Sec. 6661(b)(1)(A).

     We observe that, in the deemed admissions, petitioner is

deemed to admit the following:
                               - 8 -

     Paragraph 35. The petitioner understated her income tax
     liability (including self-employment tax) for the taxable
     years 1987 and 1988 in the amounts of $3,333 and $5,844,
     respectively.

     Paragraph 41. There was a substantial understatement of
     income tax by petitioner for 1988, and petitioner did not
     have a reasonable basis or good faith claim in making such
     an understatement.

We find that petitioner's understatement is not "substantial"

within the meaning of section 6661(b)(1)(A) for taxable year

1987; however, it is "substantial" for taxable year 1988.

     Section 6661(b)(2)(B) provides that any substantial

understatement can be reduced by the portion for which there was

substantial authority or adequate disclosure on the tax return.

Petitioner has not shown substantial authority supporting the

understatements.   In addition, the tax returns did not contain

any disclosure of petitioner's tax position.

     Based on the facts deemed admitted, we hold that petitioner

is not liable for the addition to tax under section 6661 for the

taxable year 1987; however, she is liable for the addition to tax

for taxable year 1988.

Issue 3.   Fraud

     The final issue is whether we should sustain respondent's

determinations of the additions to petitioner's income tax for

fraud.   Respondent bears the burden of proving petitioner's fraud

for each year by clear and convincing evidence.   Sec. 7454(a);

Rule 142(b).   When respondent determines fraud for each of

several years, respondent's burden applies separately for each
                                - 9 -

year.    Drieborg v. Commissioner, 225 F.2d 216, 219-220 (6th Cir.

1955), affg. in part and revg. in part a Memorandum Opinion of

this Court.    With respect to subparagraphs (A) and (B) of section

6653(b)(1),3 applicable to petitioner's taxable year 1987 and

subsection 6653(b)(1),4 applicable to petitioner's taxable year

     3
      Sec. 1503(a) of the Tax Reform Act of 1986, Pub. L. 99-514,
100 Stat. 2085, 2742-2743, amended sec. 6653(b) effective for
returns the due date of which, determined without regard to
extensions, was after December 31, 1986. Following its
amendment, sec. 6653(b) provides in pertinent part:

             (1) In general.--If any part of any underpayment
        * * * of tax required to be shown on a return is due
        to fraud, there shall be added to the tax an amount
        equal to the sum of--

                 (A) 75 percent of the portion of the
            underpayment which is attributable to fraud,
            and

                 (B) an amount equal to 50 percent of
            the interest payable under section 6601 with
            respect to such portion for the period
            beginning on the last day prescribed by law
            for payment of such underpayment (determined
            without regard to any extension) and ending
            on the date of the assessment of the tax or,
            if earlier, the date of the payment of the
            tax.

             (2) Determination of portion attributable to
        fraud.--If the Secretary establishes that any portion
        of an underpayment is attributable to fraud, the
        entire underpayment shall be treated as attributable
        to fraud, except with respect to any portion of the
        underpayment which the taxpayer establishes is not
        attributable to fraud.
     4
      Sec. 1015(b)(2)(B) of the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3569,
amended sec. 6653(b)(1) effective for returns the due date for
which, determined without regard to extensions, is after December
                                                   (continued...)
                              - 10 -

1988, respondent need only prove that some part of each year's

underpayment was due to fraud.     Sec. 6653(b)(1).    The burden then

shifts to the taxpayer to establish that a portion of the

underpayment is not attributable to fraud.     Sec. 6653(b)(2).

     Respondent must prove fraud with affirmative evidence for

each year; fraud is never imputed or presumed.        Beaver v.

Commissioner, 55 T.C. 85, 92 (1970).     In this respect,

petitioner's failure to satisfy her burden of proving error does

not satisfy respondent's burden of proving fraud.        Petzoldt v.

Commissioner, 92 T.C. 661, 700 (1989); Habersham-Bey v.

Commissioner, 78 T.C. 304, 312 (1982).     Nevertheless, when direct

evidence is not available, fraud may be established by

circumstantial evidence.   Kotmair v. Commissioner, 86 T.C. 1253,

1260 (1986).   It is well settled that fraud may be established

through facts deemed admitted under Rule 90.     Marshall v.

Commissioner, 85 T.C. 267, 272 (1985); Doncaster v. Commissioner,

77 T.C. 334, 338 (1981).

     Courts have developed a nonexclusive list of factors

demonstrating fraudulent intent.    These "badges of fraud"

     4
      (...continued)
31, 1988. Sec. 6653(b)(2) remained the same as under the Tax
Reform Act of 1986. Following its amendment, sec. 6653(b)(1)
provides in pertinent part:

          (1) In general.--If any part of any underpayment
     * * * of tax required to be shown on a return is due
     to fraud, there shall be added to the tax an amount
     equal to 75 percent of the portion of the underpayment
     which is attributable to fraud.
                              - 11 -

include:   (1) Understating income, (2) maintaining inadequate

records, (3) failing to file tax returns, (4) having implausible

or inconsistent explanations of behavior, (5) concealing assets,

(6) failing to cooperate with tax authorities, (7) engaging in

illegal activity, (7) creating false documents or records, (8)

dealing in cash, and (9) overstating deductions.

See Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.

1986) affg. T.C. Memo. 1984-601; Meier v. Commissioner, 91 T.C.

273, 297-298 (1988); Estate of Temple v. Commissioner, 67 T.C.

143, 161 (1976).

     Petitioner's deemed admissions contain numerous indicia of

her fraudulent intent to evade taxation with respect to each of

the taxable years in issue.   For example, the facts deemed

admitted establish the following:

     Paragraph 26. Petitioner's failure to maintain
     complete and accurate records of her income-producing
     activities and her failure to produce complete and
     accurate records to the respondent in connection with
     the examination of petitioner's income tax returns for
     taxable years 1987 and 1988 was fraudulent with the
     intent to evade tax.

     Paragraph 32. For both 1987 and * * * 1988,
     petitioner fraudulently and with intent to evade tax
     deducted personal items as business expenses, deducted
     items she could not substantiate and claimed expenses
     that were not ordinary and necessary business expenses
     pursuant to section 162.

     Paragraph 33. During 1987 and 1988, the petitioner
     engaged in a pattern of conduct which demonstrates
     that she intentionally and knowingly failed to report
     substantial income in both years.
                             - 12 -

     Paragraph 36. Petitioner's failure to report her
     correct taxable income and her correct tax liability
     for the taxable years 1987 and 1988 was done
     fraudulently and with intent to evade tax.

     Petitioner's deemed admissions provide clear and convincing

evidence that petitioner's entire underpayments for taxable years

1987 and 1988 were due to fraud.    We hold that respondent has

satisfied her burden as to the additions to tax for fraud.5

Accordingly, respondent's motion for summary judgment will be

granted with respect to this issue.



                    An appropriate order and decision

               will be entered.




     5
      Our holding with respect to   the additions to tax for fraud
under sec. 6653(b) eliminates the   need to consider respondent's
alternative position with respect   to the addition to tax pursuant
to sec. 6651(b)(1) for failure to   file a timely income tax return
for the taxable year 1988.
