UNITED STATES TAX COURT

T.C. Memo. 1996-147

UNITED STATES TAX COURT

WAYNE E. AND DOROTHY E. WELLS, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1580-93.

Filed March 25, 1996.

James Dudley Williams, for petitioners.

Donald E. Edwards, for respondent.

MEMORANDUM OPINION

PAJAK, Special Trial Judge:

This case was assigned pursuant

to section 7443A(b)(4) and Rules 180 and 181.

All section

references are to the Internal Revenue Code for the taxable years

in issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

- 2 This case is before the Court on petitioners' Motion To

Withdraw Deemed Admissions, filed pursuant to Rule 90(f).

A

hearing on this motion was held at Oklahoma City, Oklahoma.

By separate notices, respondent determined deficiencies in,

and additions to, petitioners' Federal income taxes as follows:

Wayne E. Wells

Year

Deficiency

6651(a)(1)

1986

1987

1988

1989

$7,245

8,466

22,038

9,221

$1,211

2,117

5,510

2,305

Additions to Tax--Sections

6653(a)(1)(A)

6653(a)(1)(B) 6653(a)

$369

423

-----

*

*

-----

----$1,102

---

6654

--$456

600

623

* Amount equal to 50% of the interest due on the underpayment due to negligence.

Dorothy E. Wells

Year

Deficiency

6651(f)

1986

1987

1988

1989

$6,053

5,851

5,032

8,135

------$6,101

Additions to Tax--Sections

6653(b)(1)

6653(b)(1)(A) 6653(b)(1)(B)

----$3,774

---

$4,540

4,388

-----

*

*

-----

* Amount equal to 50% of the interest due on the underpayment due to fraud.

The deficiencies and additions to tax for Wayne E. Wells

(Mr. Wells) were based upon respondent's determination that Mr.

Wells negligently failed to report wage income and Schedule C

income for the years in issue, as well as interest income and a

profit sharing distribution in 1988.

Similar determinations for

taxable years 1983, 1984, and 1985 were sustained in respondent's

favor in Wells v. Commissioner, T.C. Memo. 1990-58.

The deficiencies and additions to tax for Dorothy E. Wells

(Mrs. Wells) were based upon respondent's determination that Mrs.

Wells failed to report Schedule C income for the years in issue.

6654

$292

317

322

551

- 3 Similar determinations for taxable years 1984 and 1985 were

sustained in respondent's favor in Wells v. Commissioner, T.C.

Memo. 1989-150.

However, in the instant case, respondent

determined additions to tax against Mrs. Wells for fraud, rather

than negligence, as had been the case for the previous years.

Background

In their petition, petitioners dispute the "entire amount

for each and every year."

Petitioners challenge the correctness

of the adjustments to income and additions to tax by alleging the

following "facts" in support of their assignments of error:

5.

The facts upon which the petitioner [sic]

relies as a basis of these proceedings are as follows:

(a) That the petitioners are not liable for

penalties/interest as claimed because no

deficiency exists once the true income is

calculated and the business and personal

deductions are subtracted from the true gross

income.

(b) That the petitioners deny that the

amount stated as gross income in notices of

deficiency is accruate [sic].

(c) That the petitioners are entitled to the

normal business deductions associated with

the tax years at issue all of which were not

calculated to determine taxable income.

(d) That the petitioners are entitled to the

personal deductions associated with the tax

years at issue all of which were not

calculated to determine taxable income.

Respondent filed her answer and denied petitioners'

assignments of error.

Respondent also alleged further facts in

support of her fraud determination concerning Mrs. Wells.

- 4 The case was set for trial on May 23, 1994.

Petitioners

were served with the Court's Standing Pre-Trial Order on December

22, 1993.

This order advised petitioners to begin discussions

with respondent as soon as practicable for purposes of settlement

and/or preparation of a stipulation of facts.

In January 1994, respondent attempted to confer informally

with petitioners in order to clarify the issues involved, and to

develop and stipulate where possible the pertinent facts.

By

letter dated January 20, 1994, respondent suggested that

petitioners meet with respondent's counsel on February 1, 1994,

or at a more convenient time, to discuss the case.

Attached to

this letter was a proposed stipulation of facts and copies of

pertinent Tax Court Rules.

Petitioners failed to respond in any way to the January 20,

1994, letter.

By letter dated February 16, 1994, respondent

informed petitioners that due to their failure to appear for the

scheduled meeting or to arrange another meeting date, respondent

would proceed with discovery under the assumption petitioners

would not abide by the Tax Court Rules.

This letter also

informed petitioners they would be receiving a request for

admissions shortly, and warned petitioners of sanctions the Tax

Court could impose for failure to respond to the request.

Petitioners did not respond to this letter.

Respondent then served petitioners with a Request for

Admissions on March 8, 1994, pursuant to Rule 90.

The request

- 5 clearly advised petitioners they had 30 days to respond by filing

a written answer with the Court and serving respondent with a

copy of the written answer.

Attached to the request were:

Copies of the notices of deficiency for both petitioners; copies

of letters dated July 6, 1990, with incomplete Forms 1040

attached, that petitioners had sent to the Internal Revenue

Service, purporting to be petitioners' tax returns for the years

in issue; and Bureau of Labor Statistics data used for computing

gross income after the base year of 1981.

After respondent's Request for Admissions had been sent to

petitioners, petitioners sent respondent a letter on March 11,

1994, requesting informal discovery "as provided by the Rules of

the United States Tax Court."

This letter requested all

documents that "prove the gross income for Wayne Wells for the

tax years 1986, 1987, 1988 and 1989", "prove the gross income for

Dorothy Wells for the tax years 1986, 1987, 1988 and 1989", and

"prove the purported civil fraud penalties asserted against

Dorothy Wells."

Respondent's reply to this letter reminded

petitioners they had received documents, attached to the proposed

stipulation of facts, which supported the deficiencies and the

additions to tax.

Respondent also enclosed four other relevant

documents with this letter.

The 30-day period following service of respondent's Request

for Admissions expired on April 7, 1994.

Petitioners neither

answered nor objected to the request during the 30-day period.

- 6 Consequently, the requests were deemed admitted on April 7, 1994.

The deemed admissions include the following:

4.

For each of the taxable years 1986, 1987,

1988 and 1989, the petitioner Dorothy E. Wells failed

to file a federal income tax return.

5.

During the four tax years 1986, 1987, 1988

and 1989, petitioner Dorothy E. Wells received income

as a licensed physical therapist from several different

entities.

6.

During the taxable year 1986, petitioner

Dorothy E. Wells received gross income from the

following sources:

American Health Services, Inc.

Cushing Medical Clinic, Inc.

Total

$ 4,675.00

15,852.49

$20,527.49

7.

During the taxable year 1987, petitioner

Dorothy E. Wells received gross income from the

following sources:

Creek County Health Department

Cushing Medical Clinic, Inc.

Cushing Regional Hospital

Total

$

825.00

18,535.25

2,461.50

$21,821.75

8.

During the taxable year 1988, petitioner

Dorothy E. Wells received gross income from the

following sources:

Cushing Medical Clinic, Inc.

Cushing Regional Hospital

Total

$12,161.75

7,847.49

$20,009.24

9.

During the taxable year 1989, petitioner

Dorothy E. Wells received gross income from the

following sources:

Cushing Medical Clinic, Inc.

Cushing Regional Hospital

Total

$15,237.48

12,640.50

$27,877.98

10. During the taxable years 1986 and 1987, the

payors made the amounts payable to Dorothy E. Wells.

- 7 11. Beginning on or about March 15, 1988, Cushing

Regional Hospital, upon the instructions of Dorothy E.

Wells, began to make the income earned by her payable

to an entity named Summit Resources. All of the

$7,847.49 paid by Cushing Regional Hospital to

petitioner Dorothy E. Wells in the taxable year 1988

was made payable to Summit Resources.

12. At some point in 1988, Cushing

Medical Clinic, Inc., upon the instructions

of Dorothy E. Wells, began to make the income

earned by her payable to an entity named

Summit Resources.

All of the $8,940.00 of

the $12,161.75 paid by Cushing Medical

Clinic, Inc. to petitioner Dorothy E. Wells

in the taxable year 1988 was made payable to

Summit Resources.

13. For the taxable year 1989, all of the income

earned by Dorothy E. Wells from Cushing Medical Clinic,

Inc. and Cushing Regional Hospital was, upon her

instructions, made payable to Summit Resources.

14. The address for Summit Resources given by

petitioner Dorothy E. Wells to those payors was 5147

South Harvard, Suite 248, Tulsa, Oklahoma 74135, which

is the address of a mailing service called "The Mail

Suite".

15. Petitioner Dorothy E. Wells was an

independent contractor during each of these four years,

and none of the payors withheld any federal income tax

from the income they paid to her, based on her

instructions to them.

16. Petitioner Dorothy E. Wells has not paid any

federal income tax for the taxable year 1986, 1987,

1988 or 1989.

17. On July 6, 1990, petitioner Dorothy E. Wells

signed and mailed a letter to the Internal Revenue

Service, Austin, Texas, attached to which were five

Forms 1040 for 1985, 1986, 1987, 1988 and 1989. A copy

of the same letter was attached to each Form 1040, and

the only difference among the letters was that the

petitioner underlined the appropriate year in the

second line of the letter. A copy of the letter (the

letter in which 1986 was underlined) is attached hereto

as Exhibit 3-C, and a copy of each of the Forms 1040

- 8 for the four years before the Court--1986, 1987, 1988

and 1989--is attached hereto as Exhibits 4-D, 5-E, 6-F

and 7-G.

18. Each of the Forms 1040 contains the

petitioner Dorothy E. Wells' name and address. In the

box for social security number was written "Religious

Objection." On line 7 for wages, salaries, tips, etc.,

was written the word "Estimated."

19. The respondent determined that the Forms 1040

for 1986, 1987, 1988 and 1989 were not valid returns

and did not process them as valid returns.

20. The 1986 Form 1040 had no other

information on it or attached to it. In

regard to the 1987 Form 1040, line 7 also had

the figure $21,821.75, and attached to it

were two Forms 1099-MISC, one from the Creek

County Health Department showing non-employee

compensation of $825.00, and one from the

Cushing Medical Clinic, Inc., showing nonemployee compensation of $18,535.25. The

Form 1099-MISC from the Creek County Health

Department also had the words "Religious

Objection" in the box for the recipient's

identification number.

21. The Form 1040 for 1988 had the figure

$13,621.75 on line 7, but had no other attachments to

it or writing on it.

22. The Form 1040 for 1989 had no other writing

on it, but a Form W-2 was attached to it. That form

listed the employer as Summit Resources, 5147 S.

Harvard, #247, Tulsa, OK 74135. It listed the

employee as Dorothy E. Wells, P.O. Box 1258, Bristow,

OK 74010. It listed her wages as $15,000.00. The

boxes for federal income tax and social security tax

withheld were left blank.

23. The four identical letters included the

statement that "These returns should not be construed

to be a voluntary self assessment," and contained

additional language in which petitioner Dorothy E.

Wells denied that she had any federal income tax

liability for any of the four years.

- 9 24. When the respondent attempted to summons

records from the Cushing Medical Clinic, Inc., and the

Creek County Health Department, petitioner Dorothy E.

Wells filed a petition to quash summons on July 13,

1990, in case number 90-C-599-B, United Stated District

Court, Northern District of Oklahoma. That petition

was dismissed upon the government's Motion For Summary

Judgment.

25. Prior thereto, on February 13, 1989, a trial

was held in the U.S. Tax Court on the petition of

Dorothy E. Wells in Docket No. 28337-87, for the

taxable years 1983, 1984 and 1985. Judgment was

entered for respondent and damages under I.R.C. § 6673

in the amount of $5,000.00 were entered against

petitioner Dorothy E. Wells. Wells v. Commissioner,

T.C. Memo. 1989-150.

26. For each of the taxable years 1986, 1987,

1988 and 1989, the petitioner Wayne E. Wells failed to

file a federal income tax return.

27. Petitioner Wayne E. Wells has not paid any

federal income tax for any of the four taxable years

1986, 1987, 1988 and 1989, except for withholding in

1986 in the amount of $2,141.00.

28. On or about July 6, 1990, petitioner Wayne E.

Wells mailed a letter to the Internal Revenue Service,

Austin, Texas, attached to which were five Forms 1040,

purported federal income tax returns for the taxable

years 1985, 1986, 1987, 1988 and 1989. A copy of the

same letter was attached to each Form 1040, and the

only difference among the letters was that the

petitioner underlined the appropriate year in the

second line of the letter. A copy of the letter (the

letter in which 1986 was underlined) is attached hereto

as Exhibit 8-H, and a copy of each of the Forms 1040

for the four years before the Court--1986, 1987, 1988

and 1989--is attached hereto as Exhibits 9-I, 10-J, 11K and 12-L.

29. The four identical letters included the

statement that "These returns should not be construed

to be a voluntary self assessment," and contained

additional language in which petitioner Wayne E. Wells

denied that he had any federal income tax liability for

any of the four years.

- 10 30. Each of the Forms 1040 contain the petitioner

Wayne E. Wells' name and address. On line 7 for wages,

salaries, tips, etc., was written the word "Estimated."

31. The respondent processed the 1040 for 1986 as

a valid, albeit delinquent, federal income tax return,

but the respondent determined that the Forms 1040 for

1987, 1988 and 1989 were not valid returns and did not

process them as valid returns.

32. The respondent used Bureau of Labor

Statistics to partly or wholly determine the income for

petitioner Wayne E. Wells during the four tax years

1986, 1987, 1988 and 1989. The respondent used the

income figures of all urban consumers for a family of

four living in Dallas, Texas, at the intermediate

family level, relying on 1981 as the base year, when

petitioner's Wayne E. Wells income was $22,678.00.

Those computations are reflected in the three-page

Exhibit 13-M.

33. Based solely on those Bureau of Labor

Statistics figures, petitioner Wayne E. Wells had

partial earned gross income for the taxable years 1986,

1987, 1988 and 1989 in the amounts of $27,341.00,

$28,325.00, $61,672.00 and $30,902.00, respectively.

34. From January 1, 1986, to April 8, 1986,

petitioner Wayne E. Wells earned income from Casualty

Reciprocal Exchange reported on a Form W-2 in the

amount of $13,419.36; that amount was included by the

respondent as part of the earned gross income for 1986

of $27,341.00.

35. The respondent also determined that

petitioner Wayne E. Wells' received additional income

during the taxable year 1988 when his profit-sharing

plan with the Dodson Group, of which Casualty

Reciprocal Exchange was a member and the petitioner's

actual employer, was liquidated. It was liquidated

when the IRS seized the money to pay off past

assessments. This amount was $32,185.00 and was

received from the trustee, United Missouri Bank of

Kansas City, Trust Division. The respondent also

determined that petitioner Wayne E. Wells received

additional income in 1988 in the form of interest from

the U.S. Treasury Department, in the amount of $30.00.

- 11 On May 5, 1994, petitioners filed a frivolous Motion To

Dismiss.

This motion is 23 pages in length and, as are most of

petitioners' filings, replete with tax protester arguments.

Also on May 5, 1994, petitioners retained an attorney to

represent them in this case.

Petitioners' counsel subsequently

informed respondent's counsel that he would be requesting a

continuance because he did not have enough time to fully prepare

the case before the May 23, 1994, trial date.

Petitioners filed their Motion For Continuance on May 11,

1994.

Petitioners represented that "Counsel for Petitioners

believes that a realistic prospect of settlement exists if the

continuance is granted, thereby potentially obviating the need

for any trial".

Based on the representations of petitioners'

counsel, respondent's counsel did not object to the continuance.

Respondent's counsel, however, did inform petitioners' counsel

that if there were no progress on the case by mid-July,

respondent's counsel would file a motion for summary judgment

relying on the requested admissions that had been deemed

admitted.

On May 18, 1994, petitioners sent respondent their responses

to respondent's Request for Admissions.

Petitioners also

attempted to file those responses with the Court.

The document

was not filed by the Court and was returned to petitioners as

untimely.

Petitioners did not at this time seek to be relieved

of the deemed admissions.

The Court's transmittal letter

- 12 returning the documents advised them that such a motion was

necessary.

On May 23, 1994, the Court denied petitioners' Motion To

Dismiss and granted petitioners' Motion For Continuance.

Motion for Withdrawal of Deemed Admissions

On July 12, 1994, petitioners served respondent with their

Motion To Withdraw Deemed Admissions.

Between the hearing on May

23, 1994, and the date petitioners' motion was filed, petitioners

had not presented any evidence or any documentation to respondent

concerning the issues involved in the case.

Under Rule 90(c), each matter in a request for admissions is

deemed admitted unless, within 30 days after service (or within

such shorter or longer time as the Court may allow), the party to

whom the request is directed admits, denies, or objects, stating

the reasons for the objection.

The written response must be

served on the other party and filed with the Court.

For purposes

of this case, each matter contained in the request was deemed to

be admitted as of April 7, 1994, because no objection or other

response was made by petitioners within the time period specified

by Rule 90(c).

Freedson v. Commissioner, 65 T.C. 333 (1975),

affd. on another issue 565 F.2d 954 (5th Cir. 1978).

Under Rule 90(f), "Any matter admitted under this Rule is

conclusively established unless the Court on motion permits

- 13 withdrawal or modification of the admission."

The Rule permits

the Court to allow withdrawal or modification of admissions upon

the satisfaction of two elements:

(1) Presentation of the merits

of the case will be subserved; and (2) the party obtaining the

admission fails to satisfy the Court that the withdrawal or

modification will prejudice such party's litigation of the case.

Concerning the first element, this Court has stated that the

first precondition to withdrawal or modification requires that

the moving party indicate facts tending to refute the deemed

admissions.

Although the moving party is not required to "try"

the case in the moving papers, that party must demonstrate a

purpose other than delay; namely, the presentation of competing

evidence, which can be accomplished by indicating facts or

proposed evidence contrary to or inconsistent with the deemed

admissions.

New v. Commissioner, 92 T.C. 1146, 1149 (1989);

Chapoteau v. Commissioner, T.C. Memo. 1989-37.

Though petitioners did not file a Memorandum of Authorities

in support of their motion or testify at the hearing, it appears

that as grounds for withdrawal or modification of the admissions,

petitioners allege their pro se status, that they engaged an

attorney after the admissions were deemed admitted, and that it

would be inequitable to hold them to the admissions.

Petitioners also attached their untimely responses to their

Motion To Withdraw Deemed Admissions.

Of the 43 requested

admissions, petitioners admitted 24, denied 10, and responded

- 14 that they had "insufficient information to either admit or deny"

the remaining 9.

Among the requests answered "insufficient

information to either admit or deny" were several that concerned

the letters petitioners sent to the Internal Revenue Service on

July 6, 1990, purporting to be their tax returns for the years in

issue.

A party must make reasonable inquiry to obtain

information known or readily obtainable that allows the party to

fairly admit or deny.

Memo. 1995-228.

Rule 90(c); Boso v. Commissioner, T.C.

Petitioners wrote and mailed these letters to

the Internal Revenue Service themselves.

We do not believe

petitioners have met the standards set forth in Rule 90 when they

claim "insufficient information to either admit or deny" facts of

which they have personal knowledge.

Respondent's requested admissions relating to documents,

specific facts, and the authenticity of certain documents were a

reasonable attempt to narrow the issues and place facts before

the Court.

Petitioners have been given several opportunities to

address the merits of their case and to present evidence in

support of the issues as to which they have the burden of proof.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Aside

from admitting 24 of the requested admissions, petitioners did

not present in their motion or in their proposed responses any

facts that would tend to refute the deemed admissions.

Thus,

petitioners have shown no bona fide dispute as to the specific

factual statements contained in the Request for Admissions, or

- 15 concerning the documents attached to the Request.

Consequently,

allowing withdrawal of the deemed admissions would not subserve

the "presentation of the merits" of this case.

Because

petitioners have not met the first element of Rule 90(f), we need

not determine whether withdrawal or modification of the

admissions would prejudice respondent's litigation of this case.

For all the aforesaid reasons, petitioners' Motion To

Withdraw Deemed Admissions is denied.

An appropriate order will be

issued, and this case will be

restored to the general docket.