Lundgren v. Comm'r

T.C. Memo. 2006-177

UNITED STATES TAX COURT

LARRY J. LUNDGREN AND ANITA L. LUNDGREN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10174-03, 6083-04. Filed August 23, 2006.

Ps failed to report certain farming income for the
1999, 2000, 2001, and 2002 taxable years and a capital
gain for the taxable year 2001. R determined
deficiencies and asserted penalties under sec. 6662,
I.R.C., which Ps contested primarily on the basis of
tax protester arguments.

Held: Ps are liable for the deficiencies
determined by R for 1999, 2000, 2001, and 2002
including self-employment taxes pursuant to sec. 1401,
I.R.C., and a capital gain for 2001.

Held, further, Ps are liable for penalties under
sec. 6662, I.R.C., for 1999, 2000, 2001, and 2002.

Larry J. Lundgren and Anita L. Lundgren, pro sese.

Joan E. Steele, for respondent.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: Respondent determined the following Federal

income tax deficiencies and penalties with respect to

petitioners’ Federal income taxes:

Accuracy-Related Penalty
Year Deficiency Sec. 6662

1999 $4,750 $950.00
2000 6,710 1,342.00
2001 10,090 2,018.00
2002 2,577 515.40

The issues for decision are:

(1) Whether the income from the Lucky Kirt Irrevocable Trust

(Lucky Kirt Trust) should be attributed to petitioners;

(2) whether petitioners are liable for self-employment taxes

under section 14011 for the taxable years 1999 through 2002;

(3) whether petitioners are liable for tax on a capital gain

in taxable year 2001;

(4) whether petitioners are liable for accuracy-related

penalties under section 6662 for the taxable years 1999 through

2002; and

(5) whether the Court should impose a penalty, sua sponte,

under section 6673.

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
 - 3 -

FINDINGS OF FACT

Background

The exhibits2 of the parties are incorporated herein. These

cases were consolidated for purposes of trial, briefing, and

opinion. At the time these petitions were filed, petitioners

resided in Gove, Kansas.

Respondent issued petitioners notices of deficiency for the

1999 taxable year on March 24, 2003, and for the 2000, 2001, and

2002 taxable years on January 6, 2004. Petitioners timely filed

a petition on September 8, 2003, for the 1999 taxable year and a

petition on April 8, 2004, for the 2000, 2001, and 2002 taxable

years.

Larry J. Lundgren (Mr. Lundgren) was a farmer, and Anita L.

Lundgren (Mrs. Lundgren) was a registered nurse and the secretary

of the Lucky Kirt Trust from 1999 through at least a portion of

2001.

The Lucky Kirk trust was formed at the request of Raymond

Roemer, father of Mrs. Lundgren, and was allegedly created on

October 11, 1990. Neither of petitioners was present during the

formation of the trust or the signing of the trust document.

Dennis Roemer, brother of Mrs. Lundgren, was present during trust

formation discussions between his father and Jimmy Clayton

2
Although requested by the Court, the parties did not file
a stipulation of facts. On the basis of religious beliefs, Mr.
Lundgren refused to stipulate anything except petitioners’ names.
 - 4 -

Chisum,3 a.k.a. J.C. Chisum (Mr. Chisum), the Lucky Kirt Trust’s

trustee; however, Dennis Roemer was not present during the

signing of the trust documents, nor did he read the trust

documents. To fund the trust, Raymond Roemer transferred land

located in Gove County, Kansas, to Lucky Kirt Trust by warranty

deed dated December 14, 1992, and recorded July 28, 1993.4

Upon the purported creation of the Lucky Kirt Trust, Mrs.

Lundgren signed the “Minutes of Lucky Kirt” in the capacity of

secretary, and her handwritten name appears on the signature line

for the general manager. In the same document, Mr. Lundgren

signed in the capacity of the assistant general manager, and Mr.

Chisum signed in the capacity of the managing agent on behalf of

the trust’s trustee, The Prudent Man Trustee Co. (Prudent Man

Trustee). Mr. Chisum did not have any documentation relating to

his authority via the Prudent Man Trustee or Lucky Kirt Trust to

sign documents as managing agent and did not provide a copy of

the Lucky Kirt Trust document. Petitioners did not at any time

3
Jimmy Clayton Chisum is a known promoter of tax-avoidance
schemes. Aspects of his tax-avoidance schemes are described in
Lipari v. Commissioner, T.C. Memo. 2000-280 (sec. 6673 penalty
imposed on taxpayers who claimed they were unable to obtain
records from Mr. Chisum, “trustee” of their “trust”) and George
v. Commissioner, T.C. Memo. 1999-381 (“trust” of which Mr. Chisum
was “trustee” was a sham, and payments received by that “trust”
were income of osteopathic physician who performed services that
generated the income).
4
The record contains references to Lucky Kirt II trust and
Lucky Kirt Trust II. There was never a trust named Lucky Kirt
II, rather Lucky Kirt II was the name given to the Legg Mason
Wood Walker (Legg Mason) option trading account.
 - 5 -

during either the audit or at trial provide a copy of the trust

agreement.

Raymond Roemer, who was the initial beneficiary of Lucky

Kirt Trust, died on April 27, 1994. After the death of Raymond

Roemer, Mrs. Lundgren’s name was listed as the 100-percent

beneficiary of Lucky Kirt Trust, the 100-percent member of Lucky

Kirt Trust, or the sole entity receiving payment on several

documents submitted to the U.S. Department of Agriculture (USDA).

In addition, she signed other documents submitted to the USDA as

participant, owner, operator, manager, or agent on behalf of

Lucky Kirt Trust. These documents were signed for multiple

years, among these, the 1999, 2000, and 2001 years in issue.

Hall and Strong, LC (Hall and Strong) at a date undisclosed

by the record became the successor trustee to the Prudent Man

Trustee. Mr. Chisum did not have any documentation at trial

supporting Hall and Strong’s appointment as trustee of Lucky Kirt

Trust. The signature card of The Farmers State Bank of Oakley,

Kansas, for the Lucky Kirt Trust listed the signatures of Mr.

Chisum, Raymond Roemer, and the signature stamp of “JC Chisum” as

authorized signers on the account. Mrs. Lundgren was authorized

during at least some of the years at issue to sign checks for the

Lucky Kirt Trust using the signature stamp of Mr. Chisum. Mr.

Chisum gave Mrs. Lundgren the authority to perform certain duties

in her capacity as the secretary of Lucky Kirt Trust.
 - 6 -

An option trading account at Legg Mason was created on or

about May 9, 1994, and Mrs. Lundgren signed the account’s

documentation on May 10, 1994. The account statements during the

years at issue list Raymond F. Roemer as Trustee, although by

then he was deceased. On April 18, 2001, the Legg Mason account

reflected a sale of a U.S. Treasury note with a face value of

$20,000 for $20,430.

In 2001, Lucky Kirt Trust disbursed $195,000 to Mr. Lundgren

allegedly as a “gentleman’s loan” for farming purposes. The

“loan” was not memorialized in a written agreement, and there was

no repayment schedule, no final payoff date, and no interest

rate.

Lucky Kirt Trust also disbursed money to petitioners’

daughter to buy a car. The “loan” to petitioners’ daughter was

not reduced to a written agreement. Although Mr. Chisum

confirmed that regular payments were made on this loan, he did

not provide any proof of the payments, and there was no interest

rate applied to the loan. Mr. Chisum did not charge interest on

these loans.

Petitioners farmed the land held by Lucky Kirt Trust as

tenant farmers under a crop shares agreement, which provided for

petitioners to live on the land and bring in crops in lieu of

rent payments. The crop share was adjusted to reflect the

profitability of the crops and approximate rental value of the

land. The crop shares agreement was not in writing.
 - 7 -

Mr. Chisum was a part-time consultant, who consulted in

business planning, business management, estate planning, and

estate management, including the creation of trust documents such

as the Lucky Kirt Trust. Mr. Chisum held a high school degree

and was specially trained in nuclear engineering while in the

Navy. He did not learn to read until the age of 40 and learned

about tax planning through his accountant, Richard Gilmore and

seminar-type courses, rather than any formalized tax education.

Mr. Chisum did not hold any professional licenses, nor did he

seek legal advice in creating these trusts to determine the

trusts’ treatment by the Internal Revenue Service.

OPINION

I. Contentions of the Parties

On the premises of tax protester arguments, petitioners

contend that they were not required and should not be required to

pay income taxes.5 Specifically, petitioners argue that they did

not earn any income from, receive any distributions from, and

were not involved with Lucky Kirt Trust a.k.a. Lucky Kirt II

Trust. Petitioners maintain that they are merely tenant farmers

5
Petitioners at various junctures have alluded to the
Sixteenth Amendment. As the Court noted at trial, our tax
system, the Internal Revenue Code, and the Tax Court have been
firmly established as constitutional. See Crain v. Commissioner,
737 F.2d 1417, 1417-1418 (5th Cir. 1984); Ginter v. Southern, 611
F.2d 1226, 1229 (8th Cir. 1979). Specifically, the Court notes
that the “Federal income tax laws are constitutional. * * * The
whole purpose of the 16th Amendment was to relieve all income
taxes when imposed from apportionment and from a consideration of
the source whence the income was derived.” Abrams v.
Commissioner, 82 T.C. 403, 406-407 (1984).
 - 8 -

and caretakers of land owned by Lucky Kirt Trust, not owners of

or in control of any Lucky Kirt Trust assets or income.

Petitioners assert that the period of limitations for attacking

the validity of the Lucky Kirt Trust expired in 1994, that the

income tax is one of voluntary self-assessment and they have

correctly self-assessed and paid, that the revenue agent exceeded

her authority, and that this Court has no jurisdiction to decide

these cases.6 Therefore, petitioners conclude there are no

penalties due from petitioners for the taxable years in issue.

Respondent asserts that petitioners earned income through

the sham Lucky Kirt Trust and that the Lucky Kirt Trust should be

disregarded for tax purposes due to its lack of economic

substance. Thus, the income from Lucky Kirt Trust should be

attributed to petitioners, and as a result, petitioners also have

a capital gain in 2001 and are liable for self-employment taxes

for all the years in issue. Morever, respondent contends that

petitioners’ defenses to the deficiencies and penalties comprise

only self-serving testimony and tax protester arguments.

6
Petitioners’ arguments are frivolous. Respondent timely
issued the notices of deficiency in these cases in accordance
with the statute of limitations. Petitioners’ arguments
regarding the legitimacy of the Federal income tax system have
been universally rejected as frivolous and warrant no further
comment. See Crain v. Commissioner, supra at 1417-1418 (“We
perceive no need to refute these arguments with somber reasoning
and copious citation of precedent; to do so might suggest that
they have some colorable merit.”). In the instant cases, the Tax
Court has exclusive jurisdiction over petitioners’ disputed
income taxes. See sec. 6214(a); Marino v. Brown, 357 F.3d 143,
145 n.5 (1st Cir. 2004).
 - 9 -

II. Burden of Proof

In general, the Commissioner’s determination of a taxpayer’s

tax liability is presumed correct, and the taxpayer bears the

burden of proving that the Commissioner’s determination is

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

(1933). The “presumption of correctness” is appropriate where

the Commissioner has furnished evidence linking the taxpayer to

the “tax generating activity”. Gold Emporium, Inc. v.

Commissioner, 910 F.2d 1374, 1378 (7th Cir. 1990), affg. Malicki

v. Commissioner, T.C. Memo. 1988-559.

Where the Commissioner introduces evidence that the taxpayer

received unreported income, as respondent did here, the burden

generally is on the taxpayer to show by a preponderance of the

evidence that the deficiency was arbitrary and erroneous. Hardy

v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), affg. T.C.

Memo. 1997-97; see also Palmer v. IRS, 116 F.3d. 1309, 1312 (9th

Cir. 1997) (“The Commissioner’s deficiency determinations and

assessments for unpaid taxes are normally entitled to a

presumption of correctness so long as they are supported by a

minimal factual foundation.”)(emphasis added)); Edwards v.

Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982).

However, section 7491 may shift the burden to the

Commissioner in specified circumstances, for example, where the

taxpayer produces “credible evidence” and meets other

requirements. Sec. 7491(a)(1); see also H. Conf. Rept. 105-599,
 - 10 -

at 240-241 (1998), 1998-3 C.B. 747, 994-995 (reciting the

definition of credible evidence). In addition, to shift the

burden of proof, taxpayers must maintain all records required by

the Code and regulations and cooperate with reasonable requests

by the Secretary for witnesses, information, documents, meetings,

and interviews. Sec. 7491(a)(2).

Petitioners did not satisfy the prerequisites under section

7491(a)(1) and (2) to shift the burden of proof to respondent.

They did not produce any evidence or documentation disputing

respondent’s determinations or supporting their claims as to the

economic substance of the Lucky Kirt Trust. Specifically, they

failed to provide either a copy of the trust document for Lucky

Kirt Trust or any documentation authorizing Mrs. Lundgren or Mr.

Chisum to act on behalf of the trust or present any credible

evidence other than their own self-serving testimony that the

trust had economic substance or even existed. Similarly,

petitioners did not provide any evidence regarding the capital

gain determination for 2001 and self-employment tax liabilities

for 1999 through 2002. Consequently, except for any penalties

subject to section 7491(c), as to which respondent bears the

initial burden of production, the general premise of Rule 142(a)

remains applicable.

III. Lucky Kirt Trust as a Disregarded Entity

Taxpayers are generally allowed to arrange and conduct their

affairs and structure their transactions to minimize any adverse
 - 11 -

tax implications. See Gregory v. Helvering, 293 U.S. 465, 469

(1935); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).

However, where the creation of a trust lacks economic effect and

has no other cognizable economic relationship, we may ignore the

trust as a sham. See, e.g., Zmuda v. Commissioner, 79 T.C. 714

(1982), affd. 731 F.2d 1417, 1421 (9th Cir. 1984); Markosian v.

Commissioner, supra; Muhich v. Commissioner, T.C. Memo. 1999-192,

affd. 238 F.2d 860 (7th Cir. 2001).

A fundamental principle of tax law is that income is taxed

to the person who earns it. See Commissioner v. Culbertson, 337

U.S. 733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111, 114-115

(1930). A taxpayer cannot avoid income taxation by assigning

income which a taxpayer controlled to a trust, thereby

effectively shifting the burden of tax. Vnuk v. Commissioner,

621 F.2d 1318, 1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.

Petitioners, by assigning income from their farming operations,

have attempted to shift their income to Lucky Kirt Trust.

The Court looks behind the trust and will disregard the

trust if it lacks economic substance and was created for tax

avoidance purposes. To determine whether a trust has economic

substance, we consider these factors: (1) Whether the taxpayer-

grantor’s relationship to the transferred property differed

materially before and after the trust’s creation; (2) whether the

trust had an independent trustee; (3) whether an economic

interest passed to other trust beneficiaries; and (4) whether the
 - 12 -

taxpayer respected the restrictions placed on the trust’s

operation as set forth in the trust documents; i.e., whether the

taxpayer felt bound by any trust restrictions or the law of

trusts. See, e.g., Markosian v. Commissioner, supra at 1243-

1244; Muhich v. Commissioner, supra. As discussed below, each of

these factors supports a conclusion that Lucky Kirt Trust did not

have any economic substance.

A. Raymond Roemer’s Relationship to Lucky Kirt Trust

There is no indication that Raymond Roemer’s relationship to

the land he transferred to Lucky Kirt Trust before or after the

formation of the trust differed in any material way. Petitioners

did not provide any evidence of any material change in Raymond

Roemer’s relationship to the land after the trust’s formation.

The transfer of land to the trust failed to alter “any cognizable

economic relationship” between Mr. Roemer and the property

transferred. See Markosian v. Commissioner, supra at 1241.

Petitioners did not provide the trust agreement or any evidence

to the contrary. Consequently, it is apparent that Raymond

Roemer retained his same relationship to the property after the

transfer that he had before the transfer.

B. Independence of Lucky Kirt Trust Trustee

Petitioners have failed to establish that the trustee was

actually independent of Lucky Kirt Trust. Mr. Chisum, as the

Prudent Man Trustee, claimed to be the original trustee for the

trust. Then, he claimed that Hall and Strong was the trustee
 - 13 -

following the Prudent Man Trustee; however, neither Mr. Chisum

nor petitioners provided any documentation evidencing such a

change in the trust’s trustee. Although Mr. Chisum was

purportedly the named trustee, it was Mrs. Lundgren, the 100-

percent beneficiary after Raymond Roemer’s death, who appeared to

make all the decisions regarding the trust and signed documents

on behalf of the trust. This included Mrs. Lundgren’s

authorization to sign checks for Lucky Kirt Trust as she was one

of the names listed on the preprinted checks for the Lucky Kirt

Trust account.

Although Mrs. Lundgren claimed that she signed checks and

other documents pertaining to the trust using the signature stamp

of Mr. Chisum in her role as secretary for Lucky Kirt Trust,

there is no evidence, other than petitioners’ self-serving

testimony, that Mr. Chisum actually controlled the manner in

which she used the signature stamp. Thus, there was no

convincing evidence that Mrs. Lundgren’s authority to use the

signature stamp of Mr. Chisum was restricted in any meaningful

way.

Raymond Roemer was listed as the trustee on the Legg Mason

documents for the Lucky Kirt Trust II account for the years in

issue. Mrs. Lundgren signed a client option agreement for the

Legg Mason account on May 10, 1994, and for the years in issue,

all Legg Mason account statements for the Lucky Kirt Trust II

account were sent to Mrs. Lundgren’s address. Morever, there is
 - 14 -

nothing in the record to suggest that Mr. Chisum exercised any

power or authority over the Legg Mason account. These facts

demonstrate the lack of an independent trustee for the purported

Lucky Kirt Trust.

C. Economic Interests of Beneficiaries

The Lucky Kirt Trust arrangement does not reflect an

economic interest’s being transferred to any other beneficiaries.

Raymond Roemer had the power to revoke or amend the trust, and

petitioners did not provide any evidence to the contrary. Thus,

Raymond Roemer essentially had unlimited power to control the

trust property in any manner, and upon his death, Mrs. Lundgren

in practice replaced her father as the trustee.

Mrs. Lundgren signed several documents for the USDA,

identifying herself in capacities such as the heir or beneficiary

of Lucky Kirt Trust and on behalf of Lucky Kirt Trust as

participant, owner, operator, manager, or agent. After Raymond

Roemer’s death in 1994, Mrs. Lundgren was the only one with

access and control over the Lucky Kirt Trust II bank account

because, as secretary, she was the only other person listed on

the account. Because the Lucky Kirt Trust had no other

beneficiaries than Mrs. Lundgren and because the Lucky Kirt Trust

II bank account was completely controlled by Mrs. Lundgren after

her father’s death, petitioners had the power to allocate all the

income and property of the trust to themselves to the detriment

of other potential trust beneficiaries.
 - 15 -

D. Respect for Trust Restrictions

Petitioners did not demonstrate that they respected the

restrictions of the trust or the law of trusts as they did not

show they felt bound by restrictions or trust law. Further, they

did not show that the trust imposed any substantial restrictions

on petitioners’ use of the trusts’ property or the Legg Mason

bank account.

As an example of petitioners’ disregard for trust

restrictions, Lucky Kirt Trust’s $195,000 loan to Mr. Lundgren in

2001, which was purportedly made for “good will”, lacked any

documentation. The loan agreement, if one existed, was not in

writing, and the loan did not provide for a repayment schedule, a

payoff date, or an interest rate. Although Mr. Chisum testified

that the payments on the loan were being made, petitioners did

not provide any evidence to corroborate Mr. Chisum’s statement.

Similarly, the Lucky Kirt Trust loan to petitioners’

daughter shows that petitioners were not bound by any trust

restrictions. The loan was for the personal purchase of a car

merely because petitioners’ daughter desired a car. As before,

there was no written loan agreement, no interest rate, and no

proof of any loan payments. Mr. Chisum’s statement that he

preferred never to charge interest is inconsistent with his

fiduciary responsibilities and is not a valid reason for a trust

to provide an interest-free loan.
 - 16 -

The Lucky Kirt Trust loans to Mr. Lundgren and petitioners’

daughter will not be respected as bona fide loans. A bona fide

loan requires a debt-creditor relationship and the expectation of

repayment. Fisher v. Commissioner, 54 T.C. 905, 909-910 (1970).

The Court considers the following factors as relevant here in

determining whether a valid debtor-creditor relationship existed:

(1) Whether the purported loan was evidenced by a written

promissory note; (2) whether a reasonable market rate of interest

was charged; (3) whether a schedule for repayment or a stated

maturity date was established; (4) whether security or collateral

for the loan existed; and (5) whether the loan was actually

repaid by the stated maturity date. Clark v. Commissioner, 18

T.C. 780, 783 (1952), affd. 205 F.2d 353 (2d Cir. 1953); Meier v.

Commissioner, T.C. Memo. 2003-94.

The loans from Lucky Kirt Trust to Mr. Lundgren and

petitioners’ daughter did not contain any of the elements that

would support the creation of a bona fide loan. Because of the

relationship between petitioners and the trust, these transfers

will be highly scrutinized. See Clark v. Commissioner, supra at

783 (holding that “intrafamily transactions are subject to rigid

scrutiny”). The loans are conclusive evidence that in practice

the trust was petitioners’ alter ego, and petitioners were not

bound by the restrictions of the trust, if there really was one,

or the law of trusts.
 - 17 -

The combination of these factors and the apparent lack of

any substantive trust purpose other than tax avoidance compels a

finding that Lucky Kirt Trust shall be disregarded for Federal

income tax purposes. See Markosian v. Commissioner, 73 T.C. at

1244-1245. Therefore, petitioners will be taxed on the income

attributed to Lucky Kirt Trust. See sec. 61(a).

IV. Self-Employment Tax

Section 1401 imposes, in addition to other taxes, a tax on

the self-employment income of every individual. Subject to

exclusions not applicable in the instant case, “self-employment

income” refers to the “net earnings from self-employment derived

by an individual”. Sec. 1402(b). Section 1402(a) defines “net

earnings from self-employment” as “the gross income derived by an

individual from any trade or business carried on by such

individual, less the [claimed] deductions [in the year in issue]

allowed by this subtitle which are attributable to such trade or

business”.

The burden of proof to show that respondent’s determination

was in error remains with petitioners. They offered no evidence

and advanced no arguments with respect to liability for self-

employment taxes. The burden does not shift to respondent under

section 7491.

Petitioners farmed the land held in the Lucky Kirt Trust and

assigned their income from farming activities to the trust.

Because we have determined that Lucky Kirt Trust is a sham trust,
 - 18 -

petitioners earned farming income as sole proprietors or

partners. Thus, their income is subject to self-employment tax.

See, e.g, Pelham v. Commissioner, T.C. Memo. 2001-173; Whitehead

v. Commissioner, T.C. Memo. 1991-455, affd. without published

opinion 17 F.3d 398 (9th Cir. 1994). Petitioners did not provide

any evidence that they were entitled to nor did they attempt to

claim any further deductions arising from their farming

activities.

V. Unreported Capital Gain

Respondent determined that petitioners are liable for tax on

an unreported capital gain for 2001 from the April 18, 2001, sale

of a U.S. Treasury note. Gross income includes any gain on

property. Sec. 61(a)(3). The amount of any gain on property is

the excess of the amount realized over the adjusted basis of the

property. See sec. 1001(a). Generally, the adjusted basis for

determining gain or loss from the sale or disposition of property

is the cost of such property. Secs. 1011(a), 1012. Where

property is acquired from a decedent, the basis is the fair

market value of the property at the date of death, unless the

alternate valuation date is elected. Sec. 1014. A taxpayer must

establish the basis of the property for purposes of determining

the amount of gain or loss the taxpayer must recognize. “Proof

of basis is a specific fact which the taxpayer has the burden of

proving.” O’Neill v. Commissioner, 271 F.2d 44, 50 (9th Cir.

1959), affg. T.C. Memo. 1957-193.
 - 19 -

Although it is highly probable that the Treasury note had a

material tax basis, petitioners did not provide any evidence or

documentation regarding the basis of the Treasury note.7

Petitioners’ contention that the income is that of Lucky Kirt

Trust is unavailing because the Lucky Kirt Trust is disregarded

for Federal income tax purposes. The Court, therefore, sustains

respondent on this issue.

VI. Section 6662 Penalty

With respect to examinations beginning after July 22, 1998,

the Commissioner bears the burden of production in any court

proceeding involving an individual’s liability for penalties or

additions to tax. Sec. 7491(c). To meet this burden, the

Commissioner must come forward with sufficient evidence

indicating that it is appropriate to impose the relevant penalty

or addition to tax. Higbee v. Commissioner, 116 T.C. 438, 446

(2001). In instances where an exception to the penalty or

addition to tax is afforded upon a showing of reasonable cause,

the taxpayer bears the burden of showing such cause. Id. at 447.

Section 6662(a) provides for an accuracy-related penalty in

the amount of 20 percent of the portion of an underpayment

attributable to (among other things): (1) Any negligence or

7
The Court highlighted this issue at the start of the trial
by suggesting to petitioners that the Court should hear any
evidence pertaining to the amount they paid for the note or any
other evidence that could be relevant to their tax liability.
 - 20 -

disregard of the rules or regulations or (2) any substantial

understatement of income tax. Sec. 6662(b).

Section 6662(c) and section 1.6662-3(b)(1) and (2), Income

Tax Regs., define “negligence” as including any failure to make a

reasonable attempt to comply with the Code and define the term

“disregard” as including any “careless, reckless, or intentional

disregard”. Negligence is a “lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.” Marcello v. Commissioner, 380 F.2d 499, 506

(5th Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C.

Memo. 1964-299; ASAT, Inc. v. Commissioner, 108 T.C. 147, 175

(1997); Neely v. Commissioner, 85 T.C. 934, 947 (1985).

A substantial understatement of income tax exists for an

individual where the amount of the understatement exceeds the

greater of (1) 10 percent of the tax required to be shown on the

return or (2) $5,000. Sec. 6662(d)(1)(A).

An “understatement” is defined as the excess of the amount

of tax required to be shown on the return for the taxable year

over the amount of tax imposed which is shown on the return,

reduced by any rebate. Sec. 6662(d)(2)(A). The amount of the

understatement shall be reduced by that portion of the

understatement attributable to the tax treatment of any item by

the taxpayer if there is or was substantial authority for such

treatment or as to any item if (1) “the relevant facts affecting

the item’s tax treatment are adequately disclosed in the return
 - 21 -

or in a statement attached to the return”, and (2) “there is a

reasonable basis for the tax treatment of such item by the

taxpayer.” Sec. 6662(d)(2)(B). Where a taxpayer can show there

is reasonable cause for any portion of the underpayment and that

the taxpayer acted in good faith with respect to that portion of

the underpayment, then no penalty shall be imposed under section

6662(a) with respect to that portion of the underpayment. Sec.

6664(c).

Petitioners did not report any income for any of the years

in issue. They chose to hide their income by attributing their

earnings to a sham trust and failed to provide any books or

records of Lucky Kirt Trust, or even the trust document itself.

Moreover, petitioners did not offer any substantial authority or

reasonable cause for failing to report their income.

Accordingly, they are liable for a penalty under section 6662 for

each of the years in issue. Respondent is sustained on this

issue.

VII. Section 6673 Penalty

Section 6673 allows this Court to award a penalty to the

United States in an amount not in excess of $25,000 for

proceedings instituted by the taxpayer primarily for delay or for

proceedings in which the taxpayer’s position is frivolous or

groundless. “A petition to the Tax Court, or a tax return, is

frivolous if it is contrary to established law and unsupported by

a reasoned, colorable argument for change in the law.” Coleman
 - 22 -

v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986) (imposing

penalties on taxpayers who made frivolous constitutional

arguments in opposition to the income tax). Courts have ruled

that constitutional defenses to the filing requirement, such as

petitioners present, are groundless and wholly without merit.

Ginter v. Southern, 611 F.2d 1226, 1229 (8th Cir. 1979); see also

Brunner v. Commissioner, T.C. Memo. 2004-187, affd. per curiam

142 Fed. Appx. 53 (3d Cir. 2005); Williams v. Commissioner, T.C.

Memo. 1999-277; Morin v. Commissioner, T.C. Memo. 1999-240;

Sochia v. Commissioner, T.C. Memo. 1998-294 (all of which imposed

a section 6673 penalty for tax protester arguments).

Groundless litigation diverts the time and
energies of judges from more serious claims; it imposes
needless costs on other litigants. Once the legal
system has resolved a claim, judges and lawyers must
move on to other things. They cannot endlessly rehear
stale arguments. Both appellants say that the
penalties stifle their right to petition for redress of
grievances. But there is no constitutional right to
bring frivolous suits, see Bill Johnson’s Restaurants,
Inc. v. NLRB, 461 U.S. 731, 743, 103 S.Ct. 2161, 2170,
76 L.Ed.2d 277 (1983). People who wish to express
displeasure with taxes must choose other forums, and
there are many available. * * * [Coleman v.
Commissioner, supra at 72.].

Respondent did not request a section 6673 penalty; however, the

Court chooses to impose a penalty today. This Court warned

petitioners at trial that they might be liable for a penalty

under section 6673 for raising frivolous arguments. However, at

trial and on brief, Mr. Lundgren continued to present

petitioners’ case using meritless and groundless arguments such
 - 23 -

as employing religious doctrine instead of presenting legal

arguments. The Court is satisfied that a penalty in this case is

appropriate, and, therefore, chooses to exercise its discretion

sua sponte under section 6673(a)(1) in requiring petitioners to

pay a penalty in the amount of $1,500 to the United States for

each of these dockets for a total penalty of $3,000.

The Court has considered all of petitioners’ contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are meritless, irrelevant, or moot.

To reflect the foregoing,

Appropriate decisions

will be entered.