T.C. Memo. 1998-290
UNITED STATES TAX COURT
MATTHEW AND JANICE LEONARD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17049-96. Filed August 6, 1998.
Matthew Leonard and Janice Leonard, pro sese.
Bryan E. Sladek, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined the following
deficiencies in, additions to, and penalties on petitioners'
Federal income taxes:
Matthew Leonard:
Additions to Tax
Year Deficiency Sec. 6651 Sec. 6654
1990 $2,097 $524 $137
1991 2,028 507 116
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Janice Leonard:
Additions to Tax
Year Deficiency Sec. 6651 Sec. 6654
1990 $436 $109 ---
1991 791 198 $45
Matthew and Janice Leonard:
Penalty
Year Deficiency Sec. 6662(b)(1)
1993 $723 $145
1994 5,054 1,011
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
The issues for decision are: (1) Whether petitioners are
liable for the deficiencies determined by respondent; (2) whether
petitioners are liable for additions to tax for failing to file
Federal income tax returns for 1990 and 1991; (3) whether
petitioners are liable for additions to tax for failing to make
estimated Federal income tax payments for 1990 and 1991; (4)
whether petitioners are liable for accuracy-related penalties for
1993 and 1994; and (5) whether petitioners engaged in behavior
that warrants the imposition of a penalty pursuant to section
6673(a).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
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incorporated herein by this reference. Petitioners Matthew and
Janice Leonard, husband and wife, resided in West Sacramento,
California, at the time they filed their petition.
During 1990, 1991, 1993, and 1994, Mr. Leonard worked as a
firefighter, a welder, and a contractor. Customers paid for Mr.
Leonard's services by checks made payable to "Republic Project
(Federation)" (Republic) or other trusts1 which allegedly
constituted Republic.
Petitioners filed fiduciary income tax returns on Form 1041
for Republic for 1990, 1993, and 1994. For 1991, in lieu of a
Form 1041, petitioners filed a document for Republic entitled
"Beneficiaries Tax Report for 1992". Petitioners did not file
individual Federal income tax returns for 1990 and 1991.
Petitioners filed joint Federal income tax returns for 1993 and
1994. On these returns, petitioners reported income only from
trustee's fees relating to Republic.
Respondent determined that Republic was a sham trust and the
money paid to Republic is taxable income to petitioners.
Discussion
A fundamental principle of tax law is that income is taxed
to the person who earns it. Commissioner v. Culbertson, 337 U.S.
733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111 (1930). An
assignment of income to a trust is ineffective to shift the tax
1
We use the words "trust" and "trustee" for convenience
only. Our use of these terms is not meant to indicate any
conclusion about the substance of the transactions at issue.
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burden from the taxpayer to a trust when the taxpayer controls
the earning of the income. Vnuk v. Commissioner, 621 F.2d 1318,
1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.
The Commissioner is not required to apply the tax laws in
accordance with the form a taxpayer employs where that form is a
sham or inconsistent with economic reality. Higgins v. Smith,
308 U.S. 473, 477 (1940). Where an entity is created that has no
real economic effect and which affects no cognizable economic
relationships, the substance of a transaction involving this
entity will control over its form. Zmuda v. Commissioner, 731
F.2d 1417, 1420-1421 (9th Cir. 1984), affg. 79 T.C. 714, 719
(1982); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).
These principles apply even though an entity may have been
properly formed and have a separate existence under applicable
local law. Zmuda v. Commissioner, 79 T.C. at 720.
Petitioners argue that Republic is a bona fide trust. They
have not introduced any evidence, however, that rebuts
respondent's determination that Republic is a sham. Accordingly,
we hold that Republic shall not be respected as a trust for
Federal income tax purposes, and the money paid to Republic is
taxable income to petitioners. See Rule 142(a).
We must next determine whether this income, which is taxable
wholly to petitioners, is community property income.2 Under
2
Respondent, in the separate notices of deficiency sent to
each petitioner in 1990 and 1991, determined: (1) That Mr.
(continued...)
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California law, earned income of a spouse is community property
income unless the spouses have an agreement to the contrary.
Cal. Fam. Code sec. 760 (West 1994). Community property income
is attributable 50 percent to each spouse. See Poe v. Seaborn,
282 U.S. 101 (1930). Petitioners have failed to produce any
evidence that the income they earned (i.e., the money paid to
Republic) was not community property income. We conclude that
under California law this income must be allocated 50 percent to
each petitioner.
Respondent determined that petitioners are liable for
additions to tax under section 6651(a)(1). Section 6651(a)(1)
imposes an addition to tax for failure to file a return on the
date prescribed (determined with regard to any extension of time
for filing), unless the taxpayer can establish that such failure
is due to reasonable cause and not due to willful neglect. The
taxpayer has the burden of proving the addition is improper.
2
(...continued)
Leonard earned, and is taxable on, 100 percent of the income
reported as earned by "Republic Manufacturing", an alleged sub-
entity of Republic; (2) that Mrs. Leonard earned, and is taxable
on, 100 percent of the income reported as earned by "Lionheart
Enterprises" and "Lionheart Horse Farms", alleged subentities of
Republic; and (3) that 50 percent of the net income earned by
each petitioner from Republic Manufacturing, Lionheart
Enterprises, and Lionheart Horse Farms is taxable income to the
nonearning spouse.
Respondent took these inconsistent positions to protect
respondent's rights under California law because petitioners were
uncooperative married nonfilers. On brief, however, respondent
argues that all the earned income should be allocated 50 percent
to each petitioner in accordance with California community
property law.
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Rule 142(a); United States v. Boyle, 469 U.S. 241, 245 (1985).
Petitioners offered no credible evidence showing that they filed
returns in 1990 and 1991 or that their failure to file was due to
reasonable cause and not due to willful neglect. Accordingly, we
hold that petitioners are liable for the additions to tax under
section 6651(a)(1).
Respondent also determined that petitioners are liable for
additions to tax under section 6654 for failing to make estimated
tax payments and penalties under section 6662(b)(1) for
negligence or disregard of rules or regulations. Petitioners did
not offer any evidence relating to these issues. Therefore, we
hold that petitioners are liable for the additions to tax under
section 6654 and penalties under section 6662(b). See Rule
142(a).
Finally, we consider whether petitioners have engaged in
behavior that warrants the imposition of a penalty pursuant to
section 6673. Section 6673(a)(1) authorizes this Court to
penalize a taxpayer for taking frivolous positions or instituting
proceedings primarily for delay. Petitioners received a warning
that respondent would move for a penalty under section 6673.
Petitioners filed numerous frivolous motions with the Court.3
Their conduct throughout this proceeding has convinced us that
they instituted and maintained this proceeding primarily for
3
For example, petitioners filed a motion that was entitled
"Petitioners Closing Motion for IRS to do something".
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delay. Furthermore, petitioners devoted much of their briefs to
shopworn arguments characteristic of the tax-protester rhetoric
that has been universally rejected by this and other courts. We
will not painstakingly address petitioners' assertions "with
somber reasoning and copious citation of precedent; to do so
might suggest that these arguments have some colorable merit."
Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984).
Petitioners have wasted the time and resources of this Court.
Accordingly, we shall impose a penalty of $1,000 pursuant to
section 6673.
To reflect the foregoing,
Decision will be entered
under Rule 155.