                          T.C. Memo. 2009-11



                        UNITED STATES TAX COURT



                EDWARD R. VOCCOLA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.     7699-05, 14888-05,   Filed January 15, 2009.
                    12005-06.



     Edward R. Voccola, pro se.

     Nina P. Ching, for respondent.



                          MEMORANDUM OPINION


     NIMS, Judge:     This matter is before the Court on

respondent’s motions for summary judgment under Rule 121 and

motions to dismiss for lack of prosecution under Rule 53.      Unless
                               -2-

otherwise indicated, all Rule references are to the Tax Court

Rules of Practice and Procedure, and all section references are

to the Internal Revenue Code in effect for the years in issue.

     Respondent determined deficiencies in and an addition to tax

and penalties on petitioner’s Federal income tax as follows:

                                  Penalty         Addition to Tax
  Year        Deficiency         Sec. 6663        Sec. 6651(a)(2)

  1996         $56,715           $38,284.50         $14,178.75
  1997         110,501             82,875.75            --
  1998         122,762             92,071.50            --
                                  1
  2001          87,451              65,588.25           --
  2002         147,966           110,974.50             --
  2003          22,519             16,889.25            --
     1
      Respondent originally determined a $17,490.20 sec. 6662(a)
accuracy-related penalty in the notice of deficiency. The Court
granted respondent permission to file an amendment to the answer
to the amended petition, whereby respondent asserted the sec.
6663 penalty.

     The issues for consideration are:    (1) Whether petitioner

underreported income during the years in issue; (2) whether

petitioner is liable for the addition to tax for failure to

timely pay tax under section 6651(a)(2); and (3) whether

petitioner is liable for fraud penalties under section 6663.

     We will grant respondent’s motions for summary judgment as

to the deficiencies and fraud penalties, rendering respondent’s

motions to dismiss moot.   We will deny respondent summary

judgment on the issue of the addition to tax under section

6651(a)(2).
                                 -3-

                              Background

     These cases are consolidated for purposes of trial,

briefing, and opinion and involve deficiencies, an addition to

tax, and penalties for the 1996, 1997, 1998, 2001, 2002, and 2003

taxable years.   Petitioner was a resident of Massachusetts at the

time he filed the petitions in all three cases.

     In docket No. 14888-05 respondent sent petitioner a notice

of deficiency for the 1996 tax year.       Petitioner filed a petition

with this Court on August 11, 2005, challenging the determined

deficiency and the addition to tax.      On August 3, 2006,

respondent served a request for admissions on petitioner.

Petitioner did not respond.    On March 13, 2007, respondent filed

a motion for summary judgment on the basis of the deemed

admissions of the unanswered request for admissions.

     In docket No. 7699-05 respondent sent petitioner a notice of

deficiency for the 2001 tax year.      Petitioner filed a petition

with this Court on April 26, 2005, challenging the determined

deficiency and fraud penalty.    On December 23, 2005, respondent

served a request for admissions on petitioner.1      On August 3,

2006, respondent served petitioner with a second request for

     1
      There was some uncertainty at the hearing on respondent’s
motions for summary judgment as to whether petitioner received
all three requests for admissions originally served by
respondent. However, petitioner did, in fact, receive copies of
the requests enclosed in a letter respondent later sent to
petitioner on Feb. 27, 2007, almost 3 full months before the
hearing on respondent’s motions for summary judgment.
                                 -4-

admissions.   Petitioner never responded to either request for

admissions.   On April 4, 2007, respondent filed a motion for

summary judgment on the basis of the deemed admissions from both

requests for admissions.

     In docket No. 12005-06 respondent sent petitioner notices of

deficiency for the 1997, 1998, 2002, and 2003 tax years.

Petitioner filed a petition with this Court on June 23, 2006,

challenging the determined deficiencies and fraud penalties.     On

August 21, 2006, respondent filed an answer to the petition.

Petitioner did not file a reply to respondent’s answer.    On

October 17, 2006, pursuant to Rule 37(c), respondent moved for

entry of an order that the undenied allegations in the answer be

deemed admitted by petitioner.   The Court ordered petitioner to

file a reply by November 13, 2006,2 but petitioner never did so.

On December 6, 2006, the Court granted respondent’s Rule 37(c)

motion and deemed admitted the allegations in respondent’s

answer.   On April 4, 2007, respondent filed a motion for summary

judgment on the basis of the deemed admissions of the allegations

in the answer.

     The Court ordered petitioner to file responses to the

motions for summary judgment, but he did not do so.   On May 21,

     2
      The Rule 37(c) notice was returned to the Court marked “Box
Closed - Unable to Forward - Return to Sender”, but petitioner
received a copy of the order granting the Rule 37(c) motion with
respondent’s letter of Feb. 27, 2007.
                                 -5-

2007, the Court heard respondent’s motions for summary judgment,

at which time petitioner did not appear and had not filed a Rule

50(c) statement in lieu of an appearance.   The cases were

consolidated on respondent’s oral motion, and respondent filed a

motion to dismiss for lack of prosecution in all three cases.

     At the hearing, respondent also presented testimony

concerning petitioner’s fraud.   Internal Revenue Service PSP

Section Chief Laura Benner (Ms. Benner) testified that petitioner

engaged in a pattern of filing his Federal income tax returns

early, before Forms W-2, Wage and Tax Statement, were generally

issued, and therefore created his own Forms W-2 from various

payroll statements in order to do so.   On his returns petitioner

claimed significant losses on Schedule C, Profit or Loss From

Business, to offset Form W-2 wage income.   He then filed amended

returns to increase and carry back those losses to prior years.

However, in order to qualify as a Schedule C trader in

securities, a taxpayer is generally required to rely on trading

activity as a primary source of income and meet meticulous

recordkeeping standards.   Petitioner did not qualify as a

Schedule C trader in securities because he had substantial Form

W-2 income for some of the years in issue and failed to present

any of the required mark-to-market accounting.   Furthermore,

petitioner had been banned from trading securities by the

Securities and Exchange Commission, yet he continued to claim
                                -6-

Schedule C losses for 2002 and 2003.   In fact, respondent found

no evidence of any trading activity by petitioner during those

years.   Petitioner also engaged in a pattern of claiming

unverifiable charitable contribution deductions on Schedule A,

Itemized Deductions.

     Respondent’s motions for summary judgment request that we

sustain the deficiencies, addition to tax, and penalties

determined in the notices of deficiency.     Respondent contends the

facts deemed admitted under Rules 37(c) and 90(c) satisfy his

burdens of proof as to the deficiencies, addition to tax, and

penalties.

     The facts deemed admitted under Rules 37(c) and 90(c) are

summarized as follows.

     Petitioner omitted income and claimed false deductions on

his 1996, 1997, 1998, 2001, 2002, and 2003 income tax returns as

part of a 10-year pattern of intentionally evading tax.

     On March 29, 2000, petitioner was indicted on three counts

of tax evasion in violation of section 7201.    He was charged with

filing fraudulent joint income tax returns for the 1993, 1994,

and 1995 taxable years, in that they overstated itemized

deductions, reported negative taxable income, and reported a tax

liability of zero.   He pleaded guilty to all 3 counts, and the

U.S. District Court for the District of Massachusetts entered

judgment accordingly on December 30, 2000.
                                 -7-

     On September 10, 2002, petitioner was indicted on 11 counts

of securities fraud, 2 counts of falsely representing Social

Security numbers, 4 counts of mail fraud, and 1 count of wire

fraud.    He pleaded guilty to all of the charges.

     For the tax years at issue petitioner filed Forms 1040, U.S.

Individual Income Tax Return, Forms 1045, Application for

Tentative Refund, and Forms 1040X, Amended U.S. Individual Income

Tax Return, to claim losses and generate refunds to which he was

not entitled for those years.

     In June 2002 petitioner filed a late return for the 1996 tax

year.    He reported taxable income of $42,356 and a tax liability

of $9,256.    After credits, he reported a tax liability of zero.

     On or about December 7, 2000, petitioner filed a late return

for the 1997 tax year and reported a tax liability of $107,652.

Upon receipt of the return, respondent made math error

adjustments under section 6213(b)(1), recomputing petitioner’s

total tax liability as $110,501.35.    Petitioner did not contest

these adjustments.

     On or about December 11, 2000, petitioner filed a late

return for the 1998 tax year.    He reported a tax liability of

$122,762 and on or about April 30, 2001, received a refund of

$63,561.85.

     For the 2001 tax year petitioner filed a timely return and

reported a tax liability of negative $196,260.    On or about May
                                -8-

10, 2002, he filed a Form 1040X, increasing his claimed Schedule

C losses and reporting a tax liability of negative $338,625.

     For the 2002 tax year petitioner filed a timely return,

reporting adjusted gross income of negative $249,398, taxable

income of negative $361,292, a tax liability of zero, and an

overpayment of $922.   He also submitted a Form 1045, seeking to

carry back a net operating loss of $249,398 to the 1997 tax year.

Respondent accordingly issued petitioner a $95,428 refund for

1997.

     On June 5, 2003, respondent received petitioner’s amended

return for the 2002 tax year.   Petitioner decreased his adjusted

gross income to negative $435,939 and taxable income to negative

$547,783.   On or about June 1, 2004, respondent received a second

Form 1045, whereby petitioner increased the net operating loss

being carried back to the 1997 tax year to $311,479.   Respondent

accordingly issued an additional refund of $15,073 plus interest

of $203.70.   Petitioner’s carrybacks allowed him to receive

refunds of all the tax he had paid for the 1997 taxable year, and

he then carried forward the remaining $343,334 of claimed net

operating losses to the 1998 taxable year.   This resulted in a

refund of $122,762 plus interest of $1,659.04.

     For the 2003 tax year petitioner filed a timely return and

reported adjusted gross income of negative $238,547, a tax

liability of zero, and an overpayment of $5,155.   Upon receipt of
                                 -9-

petitioner’s 2003 return, respondent made math error adjustments

and recomputed petitioner’s adjusted gross income as negative

$228,548 and his overpayment as $3,425.   Petitioner did not

contest these adjustments.

     Petitioner prepared all of the returns and applications for

refund himself.   He holds a master’s degree in business

administration from Temple University Graduate School of

Business, a juris doctor degree from Suffolk University School of

Law, and a master of laws degree in taxation from Boston

University School of Law.    He also has years of work experience

as a tax specialist.

     Petitioner engaged in a pattern of underreporting his income

tax from 1993 to 2003.   He claimed unsubstantiated Schedule A

deductions, Schedule C expenses and losses, losses on Schedules

D, Capital Gains and Losses, and other deductions and credits on

Forms 1040.   Petitioner also claimed he was in the business of

being a “trader in securities” using a “mark-to-market”

accounting method.   He failed to make timely section 475(f)

elections and was not engaged in a Schedule C trade or business

as a trader in securities during these years.   In fact,

petitioner worked full time as an employee for State Street Bank

& Trust Co. from 1994 to 1999.

     For the 1996 tax year petitioner understated his tax

liability by $56,715.    In calculating his reported tax liability
                                -10-

of $9,256, he deducted an unsubstantiated $3,000 net capital

loss.    This deduction stemmed from an alleged $225,138 short-term

capital loss carryover from 1995 which he could not substantiate.

     Petitioner also overstated his Schedule A itemized

deductions by $58,947.   He falsely claimed that he donated

“equipment, clothing, books, etc.” to a nonexistent St. Vincent

DePaul in Hingham, Massachusetts.      Petitioner also claimed other

unsubstantiated miscellaneous deductions of $24,728, asserting

that he was entitled to a deduction for “income reported for

another taxpayer.”

     On Schedule C petitioner claimed negative $67,406 of “Other

income” and expense deductions of $5,400, for a total loss of

$72,806.    These expense deductions comprised a $5,000 deduction

for legal and professional services and a $400 deduction for

office expenses.   Petitioner could not substantiate any of the

expenses and did not have a Schedule C business called “Osprey

Capital” in 1996, as claimed on his return.

     Petitioner’s correct tax liability3 was $57,675.     He

claimed, but failed to substantiate, an $8,296 general business

credit carryforward.   After an allowed child care credit of $960,

petitioner’s understatement was $56,715.



     3
      Respondent’s requested admission incorrectly states that
taxable income was $57,675.
                                -11-

     For the 1997 tax year petitioner understated his tax

liability in the amount of $135,502.4   He claimed an

unsubstantiated Schedule C loss of $60,127, consisting of “Other

income” of negative $30,057 and interest expenses of $30,070.     He

also claimed an unsubstantiated total net operating loss

carryback of $311,479.    This alleged net operating loss carryback

originated from fabricated losses claimed on the 2002 return and

the amended 2002 return.

     After the carrybacks and carryforwards claimed on his

return, petitioner reported taxable income of negative $26,173

and a tax liability of zero.    Petitioner’s correct taxable income

and tax liability were $374,614 and $135,502, respectively.

     For the 1998 tax year petitioner understated his tax

liability by $227,331.    Petitioner claimed an unsubstantiated

Schedule C loss of $256,371, consisting of negative $245,769 in

“Other income” and $10,602 in interest expenses.    Petitioner

claimed a total net operating loss carryback of $343,334 which he

could not substantiate.    The alleged net operating loss carryback

again originated from fabricated losses claimed on the 2002

return and the amended 2002 return.

     4
      Neither for 1997 nor for 1998, infra, does the
understatement coincide with the deficiency, supra, because
respondent appears to have determined deficiencies only in the
amounts of the refunds received by petitioner. Respondent did
not seek deficiencies for the full amounts of the
understatements.
                                 -12-

     After carrybacks and carryforwards, petitioner reported

taxable income of negative $24,417 and a tax liability of zero.

Petitioner’s correct taxable income was $631,813, and his correct

tax liability was $227,331.

     For the 2001 tax year petitioner understated his income tax

liability by $87,451.    He failed to report $229,815 in realized

short-term gains from sales of stock and bonds, $2,437 in

interest income, $50,293 in Massachusetts State income tax

refunds, and $2,024 in unemployment compensation from the

Commonwealth of Massachusetts.

     Petitioner claimed an unsubstantiated Schedule C net loss of

$164,418, but his trading activity during the 2001 tax year was

not substantial, frequent, regular, and continuous.   He also

received Form W-2 wage income of $4,673 from Herb Chambers, Inc.

(Herb Chambers).

     Petitioner reported a tax liability of negative $196,260 on

his 2001 return and negative $338,625 on his amended return.    His

correct tax liability was $259,410.

     For the 2002 tax year petitioner understated his tax

liability by $147,966.   He failed to report $785,000 in capital

gain income, $266 in wage income from Herb Chambers, and $582 in

interest income from the Massachusetts Department of Revenue and

the U.S. Department of the Treasury.
                               -13-

     Petitioner and his former spouse, Joanne P. Voccola (Joanne

Voccola), sold their residence in Hingham, Massachusetts, for

$1,375,000 on July 17, 2002.   They had purchased the property for

$340,000 as tenants by the entirety on December 13, 1990.

Petitioner, however, failed to substantiate his ownership

interest and basis in the property at the time of the sale.

     Petitioner also improperly claimed dependency exemptions for

his three children during the 2002 taxable year.   Petitioner and

his spouse divorced in 2002, and Joanne Voccola was granted

physical custody of their three children.   Petitioner did not

attach a Form 8332, Release of Claim to Exemption for Child of

Divorced or Separated Parents, to his 2002 return and was not

entitled to claim the dependency exemptions.

     Petitioner worked as a mortgage broker during the 2002 tax

year, earning $5,125 of self-employment income from GMC Mortgage

(for which he received a Form 1099-MISC, Miscellaneous Income)

but incorrectly reporting it as “other income” on his return.     On

his amended return he claimed an unsubstantiated Schedule C loss

of $450,052, consisting of negative $339,266 of “other income”

and $110,786 of unsubstantiated expenses.

     On his amended return he reported taxable income of negative

$547,783 and a tax liability of zero.   His correct taxable income

was $750,184, and his correct tax liability was $147,966.
                                -14-

     For the 2003 tax year, petitioner understated his income tax

liability by $22,519.   He failed to report interest income of

$4,017 and a prior year’s State refund of $350.

     Petitioner again claimed dependency exemptions for his three

children during the 2003 taxable year.   He did not have physical

custody of the children and was not entitled to claim said

exemptions.

     Petitioner reported $77,302 of gross receipts on his

Schedule C, but he erroneously reported as Schedule C income

$27,112 in wages that he received from Ark Mortgage & Investment

Co. (Ark Mortgage).   Respondent accordingly adjusted the gross

receipts reported to $50,189.   Since petitioner’s Schedule C

self-employment income from Ark Mortgage was actually $52,644, he

underreported his Schedule C income by $2,455.    Petitioner also

claimed various expenses of $60,849 and “other income” of

negative $245,000, which he could not substantiate.   The total

unsubstantiated net Schedule C loss he claimed on the return was

$255,660.

     Petitioner reported taxable income of negative $245,498 and

a tax liability of zero.   His correct taxable income was $72,605,

and his correct tax liability was $22,519.
                                 -15-

     Petitioner failed to maintain, or to submit for examination

by respondent, complete and adequate books and accounts of his

income-producing activities, expenses, and deductions for the

years in issue, as required.

                            Discussion

     Summary judgment may be granted when there is no genuine

issue of material fact and a decision may be rendered as a matter

of law.   Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.

518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).     The opposing

party cannot rest upon mere allegations or denials in his

pleadings and must “set forth specific facts showing that there

is a genuine issue for trial.”    Rule 121(d).   The moving party

bears the burden of proving that there is no genuine issue of

material fact, and factual inferences will be read in a manner

most favorable to the party opposing summary judgment.     Dahlstrom

v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982).

     The first issue for decision is whether we should grant

respondent summary judgment as to the deficiencies for the years

in issue.

     Respondent’s motions for summary judgment are supported by

petitioner’s failure to answer the affirmative allegations in

respondent’s answer and requests for admissions.     Where a reply

is not filed, affirmative allegations in the answer will be
                               -16-

deemed denied unless the Commissioner, within 45 days after

expiration of the time for filing the reply, files a motion that

specified allegations in the answer be deemed admitted.       Rule

37(c).   Facts deemed admitted under Rule 37(c) are considered

conclusively established and may be relied on by the Commissioner

even when he bears the burden of proof.    Baptiste v.

Commissioner, 29 F.3d 1533, 1537 (11th Cir. 1994), affg. T.C.

Memo. 1992-198.

     Similarly, a request for admissions is deemed admitted

unless an objection or written answer specifically denying the

matter is served within 30 days after service of the request.

Rule 90(c); Freedson v. Commissioner, 65 T.C. 333, 334-336

(1975), affd. 565 F.2d 954 (5th Cir. 1978).    Facts deemed

admitted under Rule 90(c) may satisfy the burden of proving that

no genuine issue of material fact exists as to respondent’s

deficiency determinations and that the Commissioner is entitled

to a decision as a matter of law.     Marshall v. Commissioner, 85

T.C. 267, 272 (1985).

     Respondent alleged in his answer and requests for admissions

that petitioner omitted income and claimed false deductions which

he could not substantiate for the years in issue.    By virtue of

petitioner’s failure to respond and the Court’s granting of

respondent’s Rule 37(c) motion, petitioner is deemed to have

admitted these facts.   These deemed admissions satisfy
                                -17-

respondent’s burden of proving no genuine issue of material fact

exists, and we accordingly will grant respondent summary judgment

as to the deficiencies.

     The second issue for decision is whether we should grant

respondent’s motion for summary judgment on the section

6651(a)(2) addition to tax for the 1996 tax year.

     Section 6651(a)(2) provides for an addition to tax of up to

25 percent for failure to timely pay the tax shown on the return

unless such failure was due to reasonable cause and not willful

neglect.   Respondent erred when he applied the applicable 25

percent rate to the full amount of the deficiency.     Petitioner is

not liable for any addition to tax under section 6651(a)(2)

because his total tax shown on the return was zero.    The tax

shown on the return is reduced by the amount of credits which may

be claimed.   Sec. 301.6651-1(d)(1), Proced. & Admin. Regs.

Petitioner’s 1996 return showed an initial tax liability of

$9,256.    He then claimed a child care credit of $960 and a

general business credit of $8,296.     Since the total tax shown on

petitioner’s return was zero, there is no amount to which the

section 6651(a)(2) addition to tax may be applied.

     Although respondent subsequently disallowed the general

business credit, this does not render petitioner liable for the

penalty.   The disallowance creates a deficiency rather than a
                               -18-

nonpayment of tax shown on the return.   In Service Center Advice

200001037 (Nov. 10, 1999), the Commissioner detailed the effect

of reductions of different types of credits:

     For purposes of the Form 1040, U.S. Individual Income
     Tax Return, the “amount shown as tax on the return” is
     the amount of total tax as shown on the line
     immediately above the payments section * * * [line 51
     on 1996 Form 1040]. * * * [Refundable] credits are
     considered “below the line” credits because they are
     all applied after the calculation of total tax
     * * * [below line 51 on 1996 Form 1040]. These credits
     are treated like payments of tax. All other credits
     [i.e., nonrefundable credits] are included in the
     calculation of the total tax and are considered “above the
     line” credits * * *

     * * * reductions to non-refundable credits directly
     affect the calculation of the total tax, whereas
     reductions to refundable credits do not. Since the
     § 6651(a)(2) penalty is only applicable to the failure to
     pay tax as shown on the return, reductions to non-refundable
     credits would not trigger the § 6651(a)(2) penalty
     * * *

     While the informal guidance provided by Service Center

Advice is not binding on the Commissioner--unlike the effect of

revenue rulings under Rauenhorst v. Commissioner, 119 T.C. 157

(2002)--the analysis provided by this particular advisory is

correct as it relates to the business credit petitioner claimed.

The general business credit is a nonrefundable credit, and

respondent’s disallowance of the credit results in an adjustment

to petitioner’s total tax.   The amount of the disallowed credit

is therefore included in the deficiency, thus rendering it
                               -19-

subject to the section 6663 fraud penalty but not the section

6651(a)(2) addition to tax.   We will accordingly deny respondent

summary judgment as to the section 6651(a)(2) addition to tax.

     The third issue is whether we should grant respondent’s

motion for summary judgment as to the section 6663 fraud

penalties.

     Section 6663 imposes a penalty equal to 75 percent of the

portion of any underpayment attributable to fraud.    The

Commissioner bears the burden of proving by clear and convincing

evidence that an underpayment exists and some portion of each

underpayment is due to fraud with the intent to evade tax.       Sec.

7454(a); Rule 142(b).   This burden may be satisfied by facts

deemed admitted under Rule 37(c), Doncaster v. Commissioner, 77

T.C. 334, 336-338 (1981), or Rule 90(c), Coninck v. Commissioner,

100 T.C. 495, 499 (1993); Marshall v. Commissioner, supra at 273.

     Respondent’s burden of proof as to the section 6663 fraud

penalties is satisfied by petitioner’s deemed admissions and the

testimony presented by respondent.    By failing to respond to

affirmative allegations in the answer and requests for

admissions, petitioner is deemed to have admitted that he

fraudulently omitted income and claimed false deductions as part

of a plan to evade tax during the years in issue.    Petitioner is

also deemed to have admitted that he fraudulently filed returns

for those years in order to claim losses and generate refunds to
                                 -20-

which he was not entitled.    These deemed admissions conclusively

establish that the underpayments of tax were due to fraud with

intent to evade tax.   The admissions are further supported by Ms.

Benner’s testimony.    For these reasons, we will grant

respondent’s motions for summary judgment as to the section 6663

penalties.

     To reflect the foregoing,



                                        Appropriate orders and

                                 decisions will be entered.
