T.C. Memo. 2001-264
UNITED STATES TAX COURT
LEROY AND SHIRLEY COMBS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9198-00. Filed October 3, 2001.
Leroy and Shirley Combs, pro sese.
Dale A. Zusi, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notice dated May 24, 2000, respondent
determined a $298,992 deficiency, a $74,598 section 6651(a)
addition to tax, and a $59,798 section 6662(a) penalty relating
to petitioners’ 1994 Federal income tax. All section references
are to the Internal Revenue Code in effect for the year in issue.
The issues for decision are whether petitioners failed to report
income for 1994 and are liable for a section 6651 addition to
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tax, a section 6662 accuracy-related penalty, and a section 6673
penalty for advancing frivolous and groundless arguments.
FINDINGS OF FACT
Petitioners, husband and wife, resided in Fresno,
California, at the time their petition was filed.
In 1994, petitioners created, and diverted their taxable
income to, seven trusts. Petitioners funded the trusts with
their real property and businesses, including rental properties,
two day care centers, and a print shop. Payments for services
rendered, rental income, and other funds were deposited in the
trusts’ bank accounts. Petitioners drew numerous checks on these
accounts.
Petitioners, on May 30, 1997, filed their 1994 income tax
return and reported no Federal income tax liability. U.S.
Fiduciary Income Tax Returns for the taxable year 1994 were filed
on June 24 and 25, 1997 for the seven trusts. Collectively, the
trusts reported as their gross receipts all income earned by
petitioners in 1994. In 2000, respondent audited petitioners
1994 return, reconstructed their income, disallowed their
unsubstantiated deductions, determined income and self-employment
tax deficiencies, and imposed a section 6651(a) addition to tax
and a section 6662(a) penalty.
Petitioners failed to comply with this Court’s April 27,
2001, Order to File Response to Request for Admissions and May 1,
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2001, Order to Compel Responses to Interrogatories and Documents,
and have made no meaningful attempt to participate in
administrative proceedings, or the discovery process. At trial,
respondent requested that the Court impose a penalty pursuant to
section 6673. Despite several warnings by this Court, Mr. Combs
persistently asserted why he believes taxes are unconstitutional.
OPINION
At the outset, we note that petitioners failed to cooperate
with respondent and as a result, pursuant to section 7491, have
the burden of proof. Petitioners’ primary contention is that
respondent’s determinations are not entitled to a presumption of
correctness. We disagree.
Respondent’s determinations were supported by substantive
evidence that the taxpayer received unreported income. See Rapp
v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985)(holding that
once the Government introduces evidence linking the taxpayer with
income producing activity, the burden shifts to the taxpayer to
establish that the deficiency determination is arbitrary or
erroneous); Weimerskirch v. Commissioner, 596 F.2d 358, 360-361
(9th Cir. 1979), revg. 67 T.C. 672 (1977); Petzoldt v.
Commissioner, 92 T.C. 661, 687-690 (1989)(discussing Court of
Appeals for the Ninth Circuit authorities). Petitioners had
unfettered control of trust property. Petitioners had signatory
authority over, and drew checks on, trust bank accounts. In
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addition, petitioners resided in, encumbered, and sold real
property they transferred to the trusts. Respondent’s
determinations are not arbitrary or erroneous and are entitled to
a presumption of correctness.
Petitioners diverted income from their businesses to several
trusts. These payments are ineffective assignments of income.
Thus, the diverted income is taxable to petitioners. See Lucas
v. Earl, 281 U.S. 111, 114-115 (1930); Finley v. Commissioner, 27
T.C. 413 (1956), affd. 255 F.2d 128 (10th Cir. 1958). In
addition, petitioners did not contest any of respondent’s
determinations (i.e., income determination, liability for self-
employment tax, and liability for a section 6651 addition to tax
and section 6662 penalty). Accordingly, these determinations are
sustained. Welch v. Helvering, 290 U.S. 111, 115 (1933); Kasey
v. Commissioner, 33 T.C. 656, 660 (1960).
Petitioners instituted these proceedings primarily for
delay, repeatedly advanced frivolous and groundless arguments,
and failed to comply with orders of this Court or cooperate with
respondent. Despite this Court’s warnings, Mr. Combs
persistently asserted frivolous constitutional arguments. We,
therefore, impose a $25,000 section 6673(a)(1) penalty.
Contentions we have not addressed are moot, irrelevant, or
meritless.
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To reflect the foregoing,
Decision will be entered
for Respondent.