T.C. Memo. 2001-297

UNITED STATES TAX COURT

RESIDENTIAL MANAGEMENT SERVICES TRUST, 

ROBERT HOGUE, TRUSTEE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

MICHAEL T. AND LEONE R. CAREY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10400-99, 10502-99. Filed November 7, 2001.

R attributed to H and W gross receipts and

interest with respect to a trust, on the grounds that

the trust was either a sham or a grantor trust, or on

the ground that the assignment of income doctrine

applies. R also claims that H and W failed to report

certain nontrust items of income and overstated certain

deductions. R determined a sec. 6662(a), I.R.C.,

accuracy-related penalty against H and W. R determined

that the trust understated income, overstated

deductions, and is liable for an accuracy-related

penalty, but R has orally moved to dismiss for lack of

jurisdiction with respect to the trust on the ground

that no proper person has petitioned the Court on

behalf of the trust. Ps claim that R bears the burden

of proof.
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1. Held: Trust income is attributed to H and W

for the reasons stated by R.

2. Held, further, H and W omitted nontrust income

and overstated deductions.

3. Held, further, H and W are liable for the

accuracy-related penalty under sec. 6662(a), I.R.C.

4. Held, further, R’s motion to dismiss for lack

of jurisdiction will be granted.

5. Held, further, Ps bear the burden of proof.

Robert Hogue, pro se in docket No. 10400-99.

Michael T. Carey, pro se in docket No. 10502-99.

Jeremy L. McPherson, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: These consolidated cases involve

determinations by respondent of deficiencies in, and penalties

with respect to, the Federal income tax liabilities of the

following taxpayers, for the 1995 taxable (calendar) year of

each, in the following amounts:

 Penalty

 Taxpayer(s) Deficiency Sec. 6662(a)

 Res. Mgmt. Svcs. Tr. $65,834 $13,167

 Michael & Leone Carey 272,707 54,541

These cases are related in that, under various theories,

respondent believes that there is an identity between Residential

Management Services Trust (the trust) and Michael and Leone Carey

(the Careys or, individually, Michael or Leone). Among other
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1 The amount of the Careys’ liability for self-employment

tax and the amount of the deduction under sec. 164(f) to which

they are entitled are computational matters, the resolution of

which will depend upon our disposition of other issues. Since

the Careys have challenged that liability and deduction only on

computational grounds, we shall not further discuss those items. 

adjustments, respondent would attribute the income of the trust

to Michael.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

Issues for Decision

The principal issues we must decide are as follows:

Whether we have jurisdiction to redetermine the deficiency

and penalty determined by respondent with respect to the trust;

if so, whether the trust omitted from its return certain gross

receipts and interest and overstated certain expenses; if so,

whether the trust is subject to an accuracy-related penalty under

section 6662; whether the Careys (1) omitted from their return

gross receipts and interest reported by the trust and certain

business receipts and (2) overstated certain deductions;

whether the Careys are liable for self-employment tax for 1995

allocable to Michael (and are entitled to a related deduction) on

account of omitted earnings from self-employment;1 whether the

exemption and earned income credit claimed by the Careys must be
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2 This also is a computational matter, and, for the same

reasons set forth supra note 1, we shall not further discuss it.

reduced on account of any increase in their adjusted gross

income;2 and whether the Careys are subject to an accuracyrelated penalty under section 6662.

FINDINGS OF FACT

Some facts have been stipulated and are so found. The

stipulation of facts filed by the parties, along with

accompanying exhibits, is incorporated herein by this reference.

Residence; Principal Place of Business

On the date the trust filed its petition in this case, its

principal place of business was in Redding, California. On the

date the Careys filed their petition in this case, their

residence was in Bella Vista, California. 

Michael Carey

Michael is a licensed occupational therapist. During 1995,

Michael was the proprietor of two residential care facilities for

developmentally disabled adults. Those two facilities were

called Sunshine Residential Program (Sunshine) and Rancho

Residential Program (Rancho). In addition, during at least the

first 11 months of 1995, Michael was obligated by contract to

provide his services as a licensed occupational therapist to the

trust. That contract required Michael to provide various

services to the trust as needed, at $35 an hour. By check dated
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September 18, 1995, Michael transferred $8,000 from one of his

proprietorship’s bank accounts to the trust’s bank account. 

Michael, as the proprietor of Rancho, used equipment under lease

to the trust. 

Carey 1995 Return

For 1995, the Careys made a joint return of Federal income

tax on Form 1040, U.S. Individual Income Tax Return (the Carey

1995 return). That return shows the Careys’ address as 3041

Lawrence Rd, Redding, California. Attached to the Carey 1995

return is a Schedule C, Profit or Loss From Business (Sole

Proprietorship) (the Carey Schedule C). The Carey Schedule C

reports Michael’s income and expenses with respect to Sunshine

and Rancho. The income and expenses are reported under the cash

receipts and disbursements method of accounting. The Carey

Schedule C reports gross receipts, expenses, and net profits from

the operation of Sunshine and Rancho as follows:

Gross receipts $524,734

Expenses:

 Car/truck expense $15,366

 Depreciation 31,029

 Employee benefits 220

 Mortgage interest 9,200

 Other interest 210

 Legal/prof. services 5,342

 Property rental 27,814

 Supplies 6,092

 Taxes/licenses 18,910

 Travel expense 228

 Meals (50%) 1,278

 Utilities 8,790

 Wages 204,621
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 Other expenses:

 Administrative fees 41,006

 Consultation fees 26,886

 Food 38,753

 Laundry 4,129

 Medical services 2,417 

 Maintenance/operations 59,855

 Phone 890

 Business use of home 5,036

 Total $508,072

Net profit $16,662

The Carey 1995 return shows a net operating loss carryover

of $11,311. The return does not identify any income as having

been received from the trust.

Trust Declaration

The trust was created by a declaration of trust (the trust

declaration) dated May 24, 1994. In pertinent part, the trust

declaration provides as follows:

[Begin cover page]

* * * * * 

THIS DOCUMENT IS CREATED UNDER COMMON LAW

RIGHT OF CONTRACT IN WASHINGTON D.C.

RESIDENTIAL MANAGEMENT SERVICES

A Trust Organization and/or Pure Trust executed Under

The Constitutional Laws of the United States of America

* * * * * 

[End cover page]
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DECLARATION OF IRREVOCABLE TRUST

This Declaration of Irrevocable Trust is created this

24TH DAY OF MAY 1994, between CONTRACT ADMINISTRATORS

TRUST, of Washington, D.C., hereinafter called the

SETTLOR and AMERICAN COMMON TRUST, Washington D.C.,

with mailing address of Tempe, Arizona, Douglas J.

Carpa, Trust Officer, hereinafter called the TRUSTEE,

who are legal entities holding full title, not as

individuals, but collectively as the Board under the

name of RESIDENTIAL MANAGEMENT SERVICES and to

collectively act as herein set forth and according to

the inalienable Common Law rights afforded to men. The

wisdom, truth and good faith of this was demonstrated

when the Congress of the United States Passed Public

Law 97-280 declaring 1983 as the year of the Bible and

for all persons to live by spiritual principles no

matter what label one attaches to his faith in God.

FIRST

The SETTLOR hereby irrevocable [sic] assigns, conveys

and gives to the Trustee, in trust, the following

property:

Cash: $100.00;

SECOND

The Trustee shall open and maintain such bank accounts

as necessary to receive and hold said financial

property, together with any additions thereto in trust

for the use and benefit of the Trust Certificate

Holders. Certificate 001 for 100 Trust Certificate

Units issues as indicated below:

SHASTA ENTERPRISES TRUST CERTIFICATE UNITS 100

 * * * * * * *

FOURTH

This agreement and trust created hereby shall be

administered, managed, governed and regulated in all

respects according to the applicable statutes of the

Uniform Trustees’ Powers Act and The Constitution of
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the United States. This trust shall be domiciled in

the City of Washington, District of Columbia. This

Trust Organization shall enjoy the benefits of the

Uniform Commercial Code adopted by the City of

Washington, District of Columbia in the following

citations: Sec. 28:1-105, TERRITORIAL APPLICATION OF

THIS SUBTITLE; PARTIES’ POWER TO CHOOSE APPLICABLE LAW,

and section 28:1-207, PERFORMANCE OR ACCEPTANCE UNDER

RESERVATION OF RIGHTS.

 * * * * * * *

SIXTH

No bond for the faithful performance of duties shall be

required of any * * * Trust Manager under this

agreement.

 * * * * * * * 

EIGHTH

No * * * Trust Manager * * * created by this agreement

shall at anytime [sic] be held liable for any action or

default of any * * * Trust Manager * * * unless caused

by the individual(s) own gross negligence or by

commission of a willful act of breach of trust. A

Successor-Trustee may be appointed by a court of

competent jurisdiction or by consensus with the Trust

Managers and Beneficiaries if the First Trustee resigns

with 30 days notice.

 * * * * * * * 

IN WITNESS WHEREOF, the parties hereto have executed

this agreement the day and year above written.

 /s/ /s/ 

CONTRACT ADMINISTRATORS TRUST, AMERICAN COMMON TRUST

SETTLOR, Enrique Almodovar FIRST TRUSTEE, 

 Douglas J. Carpa,

 Trust Officer
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Recordation

On May 25, 1994, the trust declaration was recorded in

Maricopa County, Arizona.

Fictitious Business Name Certificate 

On October 14, 1994, American Common Trust, Douglas J.

Carpa, Trust Officer, filed in Shasta County, California, a

Fictitious Business Name Statement for the Trust, whose principal

place of business in California was shown as 3041 Lawrence Road,

Redding, CA. 

Employer Identification Number

By notice dated December 16, 1994, the Internal Revenue

Service assigned the trust an employer identification number. 

That notice states that it is in respect to a telephone call and

is addressed to the trust, “Gaynor[,] James G.” trustee. 

California Employer Account Statement

By statement dated November 27, 1996, the trust received a

summary of its account with the Employment Development

Department, State of California. The statement is addressed: 

“James G. Gaynor, Trustee”. 

Resignation of Douglas J. Carpa

On July 15, 1997, Douglas J. Carpa, as trust officer for

American Common Trust, executed a document styled “Trustee

Resignation Appointment of Successor-Trustee” (the resignation). 

The resignation states that Douglas J. Carpa tenders his
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resignation on behalf of American Common Trust as trustee for the

trust, and that his final act as trustee is to name a successortrustee: Robert Hogue. The resignation provides that Robert

Hogue must tender a letter of acceptance and that said letter of

acceptance is “the final act to transfer power”. Both Douglas J.

Carpa and Robert Hogue signed the resignation, which was

notarized in Maricopa County, Arizona.

Douglas J. Carpa also signed a letter addressed to

“Trustees” of the trust, stating that he tendered his resignation

as trustee effective July 15, 1997. Robert Hogue, as trustee,

signed the letter accepting the resignation. 

The “First Minutes of the Residential Management Services

Trust” (the minutes), dated July 31, 1997, state that Douglas J.

Carpa, settlor of the trust, appoints Robert Hogue as legal

trustee. Douglas J. Carpa signed the minutes as “Settlor” and

Robert Hogue signed as “Legal Trustee”. 

Trust 1995 Return

For 1995, Michael made a return of Federal income tax for

the trust on Form 1041, U.S. Income Tax Return for Estates and

Trusts (the trust 1995 return). In the space on that return

calling for the signature of a fiduciary or an officer

representing a fiduciary, Michael signed his name and added:

“Manager”. Attached to the trust 1995 return is a Schedule C,

Profit or Loss From Business (Sole Proprietorship) (the trust

Schedule C). The trust Schedule C refers to a sole
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proprietorship, “Westside Residential”, whose principal business

is shown as “Residential Home Care”. The trust Schedule C

reports gross receipts of $140,928 and expenses of $161,561,

including depreciation of $4,150, for a net loss of $20,633. A

schedule of depreciation shows that the trust owned five

vehicles, with a “cost/basis” of $25,000 (the depreciable

property). The trust also reported interest of $112.

Trust’s Operations

From April 7, 1995, until September 10, 1997, the trust

maintained a bank account at North Valley Bank, account No. 

15-631244 (the trust account). Michael is shown on account

documents as “manager” with respect to the trust, and he is

listed as a person with signature authority with respect to the

trust account. He signed checks drawn on the account during

1995. 

Commencement of Respondent’s Examinations

Gil Akers is a revenue agent employed by respondent. 

Mr. Akers was assigned to examine both the trust 1995 return and

the Carey 1995 return. He conducted those examinations

simultaneously. Mr. Akers’s initial contact with Michael in

connection with Mr. Akers’s examination of the Carey 1995 return

was by letter to Michael dated April 28, 1998, to make an

appointment to meet and discuss that examination. Mr. Akers’s

initial contact with a representative of the trust in connection
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with Mr. Akers’s examination of the trust 1995 return was by

letter dated July 1, 1998, to make an appointment to meet and

discuss that examination. 

OPINION

I. Burden of Proof

Petitioners claim that respondent bears the burden of proof

pursuant to section 7491. Respondent answers that section 7491

is inapplicable to this case. We agree with respondent.

In pertinent part, Rule 142(a) provides: “The burden of

proof shall be upon the petitioner, except as otherwise provided

by statute”. In certain circumstances, if a taxpayer introduces

credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s liability for tax, section 7491

places the burden of proof on respondent. See sec. 7491(a)(1);

Interim Rule 142(a)(2). Section 7491 is effective with respect

to court proceedings arising from examinations commenced after

July 22, 1998. See Internal Revenue Service Restructuring and

Reform Act of 1998, Pub. L. 105-206, sec. 3001(c)(2), 112 Stat.

685, 726. 

Gil Akers is the revenue agent who was assigned to examine

both the trust 1995 return and the Carey 1995 return. During the

course of those examinations, he sent letters to Michael, with

respect to the Carey 1995 return, and to a representative of the

trust, with respect to the trust 1995 return, on April 28 and
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July 1, 1998, respectively. Those are sufficient facts for us to

find that examinations of both the trust and the Careys commenced

on or before July 22, 1998, and we so find.

Section 7491 has no application to this case. Petitioners

bear the burden of proof. See Rule 142(a).

II. Jurisdiction With Respect to Trust

A. Introduction

Respondent has orally moved to dismiss for lack of

jurisdiction with respect to the trust on the ground that no

proper person has petitioned this Court on behalf of the trust. 

Robert Hogue signed the petition filed on behalf of the trust. 

Mr. Hogue argues that he is a proper person to petition this

Court on behalf of the trust.

B. Rule 60

In pertinent part, Rule 60 provides:

 (a) Petitioner: (1) Deficiency or Liability Actions:

A case shall be brought by and in the name of the

person against whom the Commissioner determined the

deficiency (in the case of a notice of deficiency) * *

* or by and with the full descriptive name of the

fiduciary entitled to institute a case on behalf of

such person. See Rule 23(a)(1). A case timely brought

shall not be dismissed on the ground that it is not

properly brought on behalf of a party until a

reasonable time has been allowed after objection for

ratification by such party of the bringing of the case;

and such ratification shall have the same effect as if

the case had been properly brought by such party. * * *

 * * * * * * *
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 (c) Capacity: * * * The capacity of a fiduciary or

other representative to litigate in the Court shall be

determined in accordance with the law of the

jurisdiction from which such person’s authority is

derived.

C. Mr. Hogue’s Burden

Mr. Hogue has the burden of proving that the Court has

jurisdiction, see Fehrs v. Commissioner, 65 T.C. 346, 348 (1975);

Natl. Comm. to Secure Justice v. Commissioner, 27 T.C. 837, 839

(1957), by establishing affirmatively all facts giving rise to

our jurisdiction, see Wheeler’s Peachtree Pharmacy, Inc. v.

Commissioner, 35 T.C. 177, 180 (1960); Consol. Cos. v.

Commissioner, 15 B.T.A. 645, 651 (1929). In order to meet that

burden, Mr. Hogue must provide evidence establishing that he has

authority to act on behalf of the trust. See Natl. Comm. to

Secure Justice v. Commissioner, supra at 839-840; Coca-Cola

Bottling Co. v. Commissioner, 22 B.T.A. 686, 700 (1931).

D. Discussion

1. Introduction

As evidence that he has authority to act on behalf of the

trust, Mr. Hogue offers the trust declaration together with

documents by which Douglas J. Carpa resigned as trustee and,

purportedly, appointed Mr. Hogue his successor. Mr. Hogue relies

specifically on article fourth of the trust declaration, which,

in pertinent part, states: “This agreement and trust created

hereby shall be administered, managed, governed and regulated in
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all respects according to the applicable statutes of the Uniform

Trustees’ Powers Act and The Constitution of the United States.” 

Mr. Hogue does not rely on article eighth of the trust

declaration, which, in pertinent part, states: “A SuccessorTrustee may be appointed by a court of competent jurisdiction or

by consensus with the Trust Managers and Beneficiaries if the

First Trustee resigns with 30 days notice.” Indeed, there is no

evidence (and, thus, Mr. Hogue has failed to prove) that he was

appointed trustee by a court of competent jurisdiction or by

consensus of the trust managers (if any) and the beneficiary.

2. “Uniform Trustees’ Powers Act”

On brief, Mr. Hogue provides the following citation and

quotation from the “Uniform Trustees’ Powers Act”:

“Uniform Power Trustee Act, Chapter 479 Of The Revised

Statutes, 1989 amended 1992, c.8, s.37; 1994-95, c.19"

APPOINTMENT OF NEW TRUSTEE

16(1) When a trustee, either original or

substituted and whether appointed by the Court or a

judge or otherwise, is deed [sic], or remains out of

[the] Province for more than twelve months, or desires

to be discharged from all or any of the trusts or

powers reposed in or conferred on him, or refuses, or

is unfit to act therein, or is incapable of acting

therein, then the person or persons nominated for the

purpose of appointing new trustees by the instrument,

if any, creating the trust, or if there is no such

person, or no such person able and willing to act,

then, if the beneficiaries consent thereto in writing,

the surviving or continuing trustees or trustee for the

time being, or the personal representatives of the last

surviving or continuing trustee, may, in writing,

appoint another person or * * * [other persons] to be
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3 Although it does not figure into our analysis, the record

does not faultlessly support Mr. Hogue’s implicit claim that 

Mr. Carpa, the initial trustee, remained sole trustee until his

claimed appointment of Mr. Hogue as his successor. Our findings

indicate that, in the interim, another individual, James G.

Gaynor, represented himself as trustee.

[a] trustee or trustees in the place of the trustee

dead, remaining out of the Province, desiring to be

discharged, refusing, or being unfit, or being

incapable as aforesaid.

The citation and quotation provided by Mr. Hogue do not

correspond to any provision of the Uniform Trustees’ Powers Act,

7C U.L.A. 396 (2000). The only apparently relevant provision of

the Uniform Trustees’ Powers Act is section 4: “The trustee

shall not transfer his office to another or delegate the entire

administration of the trust to a cotrustee or another.” Unif.

Trustees’ Powers Act sec. 4, 7C U.L.A. 425 (2000). That

provision does not help Mr. Hogue. As best we can tell, Mr.

Hogue has quoted a provision of the Revised Statutes of Nova

Scotia (Canada). See http://www.gov.ns.ca/legi/legc/statutes/

trustee1.htm. Mr. Hogue has failed to establish any nexus

between the trust and Nova Scotia, and we fail to see the

relevance of the quoted provision.

3. Failure To Establish Authority

Mr. Hogue’s claim of authority to represent the trust rests

on his claim that he was validly appointed successor trustee to

Mr. Carpa.3 He has, however, failed to prove that the claimed
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appointment was valid under the law of any jurisdiction. The

cover page of the trust declaration states that the trust

document is created under common law right of contract in

Washington, D.C., and the trust declaration states that

Washington, D.C., is the location of Contract Administrators

Trust, the settlor. The trust declaration was recorded in

Maricopa County, Arizona, and the trust was administrated and

operated in California. Mr. Hogue has not specified the

jurisdiction from which he believes his authority derives. We

have examined the relevant laws of the District of Columbia,

Arizona, and California, and, in the absence of his appointment

pursuant to the terms of the trust declaration or by a court, we

fail to see any basis under the laws of those jurisdictions for

his claim that he succeeded Mr. Carpa as trustee of the trust. 

Since Mr. Hogue has failed to convince us that he was appointed

pursuant to the terms of the trust declaration, and there is no

evidence that he was appointed by a court, Mr. Hogue has failed

to prove that he succeeded Mr. Carpa as trustee and, thus, has

the capacity to litigate in this court on behalf of the trust.

E. Conclusion

Respondent’s motion to dismiss for lack of jurisdiction with

respect to the trust on the ground that no proper person has

petitioned the Court on behalf of the trust will be granted.
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4 On brief, respondent states that, if the Court sustains

those adjustments, respondent will concede that those amounts are

not gross income to the trust. Since we shall dismiss the trust

case for lack of jurisdiction, we need not concern ourselves with

that concession.

III. Careys

A. Deficiency in Tax

1. Attribution of Trust Income

a. Introduction

In making its return of income for 1995, the trust reported

gross receipts of $140,928 from its business of residential home

care and interest income of $112. Among the adjustments giving

rise to respondent’s determination of a deficiency in tax for the

trust for 1995 are an increase in gross receipts of $27,224 and

an increase in interest income of $174. On brief, the Careys

concede both adjustments. On the basis of the trust 1995 return

and those concessions, we find that, for 1995, the trust had

gross receipts from the business of residential home care of

$168,152 (the trust business gross receipts) and received

interest of $286 (the trust interest receipt).

With respect to the Carey 1995 return, respondent has

adjusted the gross income shown thereon by adding thereto both

the trust business gross receipts and the trust interest

receipt.4 In an attachment to the notice of deficiency issued to
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the Careys for 1995, respondent explains those adjustments as

follows:

It is determined that * * * [the trust] was created and

operated for tax avoidance purposes and has no economic

substance; therefore, it is disregarded for tax

purposes. Alternatively, it is determined that it is a

grantor trust within the meaning of sections 671-677 of

the Internal Revenue Code; therefore, the income is

taxable to you individually. It is determined that the

attempted assignment of your income to * * * [the

trust] is not recognized for federal income tax

purposes and that such income is taxable to you

individually.

In their petition, the Careys (then represented by counsel)

assign error to respondent’s assignment of trust income to them

but, in support of that assignment, aver only: “Actual gross

income has not been examined and was incorrectly re-constructed.” 

On the basis of their concessions with respect to the trust

interest and business gross receipts, we assume that the Careys

no longer rely on that averment. On brief, the Careys set forth

no proposed findings of fact with respect to respondent’s

assignment of trust income to them (or with respect to any other

adjustment made by respondent). Proposed findings of fact are

required by Rule 151(e)(3). With no reference to the transcript,

any exhibit, or anything else in the record, they state, simply: 

“MR. CAREY holds no interest in * * * [the trust].” After

disposing of certain legal arguments raised by the Careys, we

shall set forth the applicable law and state why we sustain

respondent’s adjustments assigning trust income to the Careys.
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b. The Careys’ Legal Arguments

(1) Minimal Evidentiary Foundation

The Careys argue that, since respondent has attributed to

Michael gross income not reported by him, respondent must provide

a minimal evidentiary foundation, sufficient to connect Michael

to some income-producing activity, before respondent may enjoy

the presumption of correctness that results from the burden of

proof being borne by the Careys. See Weimerskirch v.

Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672

(1977), to which we defer in accordance with the doctrine of

Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985

(10th Cir. 1971). As stated supra section III.A.1.a., the Careys

concede respondent’s adjustments to the trust’s gross income. 

Michael signed the trust 1995 return as “Manager”, which

establishes that he had some control over trust operations. He

transferred $8,000 from one of his proprietorship’s bank accounts

to the trust’s bank account and had authority to, and did, write

checks on the trust’s bank account. He used equipment leased to

the trust in at least one of his proprietorships. The record

does contain a minimal evidentiary foundation connecting Michael

with the income-producing activity that is the source of the

unreported income (the trust’s operations) that respondent would

attribute to Michael.
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(2) Assessment of Tax

The Careys also argue that they cannot be liable for a

deficiency in tax because there has been no assessment of tax

against them.

The Careys fail to understand that, generally, the

determination of a deficiency in tax precedes assessment of the

tax. In pertinent part, section 6212(a) provides that, if the

Secretary determines that there is a deficiency in income tax,

“he is authorized to send notice of such deficiency to the

taxpayer by certified mail or registered mail.” In pertinent

part, section 6213(a) then allows the taxpayer 90 days (150 days

if the notice is addressed to a person outside the United States)

to file a petition in the Tax Court for review of the deficiency. 

Generally, section 6213(a) prohibits any assessment from being

made until either the 90 (or 150) days expires or the decision of

the Tax Court becomes final. That procedure provides an

opportunity for a taxpayer to have his or her tax liability

redetermined by the Tax Court before an assessment is made. The

Careys’ argument is without merit.

c. Applicable Law

(1) Fundamental Principles

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 (1930).
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Recently, in Barmes v. Commissioner, T.C. Memo. 2001-155, we

applied assignment of income principles to tax the income of a

business to a taxpayer who had attempted an anticipatory

assignment of that income to a trust. We had this to say:

Attempts to subvert * * * [the fundamental principle

that income is taxed to the person who earns it] by

diverting income away from its true earner to another

entity by means of contractual arrangements, however

cleverly drafted, are not recognized as dispositive for

Federal income tax purposes, regardless of whether such

arrangements are otherwise valid under State law. See

Vercio v. Commissioner, 73 T.C. 1246, 1253 (1980); see

also Schulz v. Commissioner, 686 F.2d 490, 493 (7th

Cir. 1982), affg. T.C. Memo. 1980-568. The "true

earner" of income is the person or entity who

controlled the earning of such income, rather than the

person or entity who received the income. See Vercio

v. Commissioner, supra at 1253 (citing Wesenberg v.

Commissioner, 69 T.C. 1005, 1010 (1978)); see also

Commissioner v. Sunnen, 333 U.S. at 604 ("The crucial

question remains whether the assignor retains

sufficient power and control over the assigned property

or over receipt of the income to make it reasonable to

treat him as the recipient of the income for tax

purposes."). [Id.]

Pursuant to a second fundamental principle, we may ignore a

transfer in trust as a sham where the transfer has not, in fact,

altered any cognizable economic relationship between the putative

transferor and the trust property. See, e.g., Zmuda v.

Commissioner, 79 T.C. 714, 719-722 (1982), affd. 731 F.2d 1417

(9th Cir. 1984). Recently, in Muhich v. Commissioner, T.C. Memo.

1999-192, affd. 238 F.3d 860 (7th Cir. 2001), we listed the

following factors to be considered in determining whether a trust

lacks economic substance for tax purposes:
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(1) Whether the taxpayer’s relationship as grantor to

the property differed materially before and after the

trust’s formation; (2) whether the trust had an

independent trustee; (3) whether an economic interest

passed to other beneficiaries of the trust; and (4)

whether the taxpayer felt bound by any restrictions

imposed by the trust itself or by the law of trusts. 

* * * [Citations omitted.]

(2) Grantor Trust Provisions

Under specified circumstances, the statutory grantor trust

provisions, sections 671–679, treat the grantor of the trust and,

sometimes, a third party, as the substantial owner of all or part

of the trust. Trust income is taxed to the substantial owner

under the rules of section 671. Because the conditions imposed

by each of the grantor trust provisions are independent of those

imposed by the others, the grantor can avoid taxation only if

(1) he does not possess a disqualifying reversionary interest,

sec. 673; (2) the trust cannot be revoked by the grantor or a

nonadverse party, sec. 676; (3) trust income cannot be

distributed to the grantor or the grantor’s spouse or be used to

pay for insurance on their lives without the consent of an

adverse party, sec. 677; (4) specified powers to control

beneficial enjoyment of the corpus or income are not vested in

the grantor or certain other persons, sec. 674; and (5) certain

administrative powers are not exercisable by the grantor or a

nonadverse party, sec. 675.
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d. Analysis

The Careys bear the burden of proof. They have failed to

prove that the trust interest and business gross receipts should

not be taxed to them under either the fundamental principles or

grantor trust rules described above.

The facts establish Michael’s occupation as an occupational

therapist and his proprietary ownership of two residential care

facilities. The facts also establish the existence of the trust,

that it reported in its Federal income tax return both gross

receipts from a business involving residential home care and

interest, and that Michael had various rights and

responsibilities with respect to the trust, including some

employment relationship and the authority to write checks on the

trust’s bank account. No facts establish that anyone other than

Michael exercised any control over the operations of the trust. 

Indeed, Michael signed the trust 1995 return, and the trust’s

principal place of business was at the address we presume (from

the Carey 1995 return) to be Michael’s residence. The Careys

claim that, during 1995, Douglas J. Carpa, as trust officer of

American Common Trust Co., served as trustee of the trust. If

so, then, certainly, he is knowledgeable as to who controlled

trust operations during 1995. The Careys have failed to show

that Mr. Carpa was unavailable to testify at the trial of this

case. We think that a fair inference to be drawn from the
- 25 -

Careys’ failure to call Mr. Carpa is that his testimony would

have been negative to Michael. See Wichita Terminal Elevator Co.

v. Commissioner, 6 T.C. 1158, 1165 (1946) (“the failure of a

party to introduce evidence within his possession and which, if

true, would be favorable to him, gives rise to the presumption

that if produced it would be unfavorable”), affd. 162 F.2d 513

(10th Cir. 1947); see also United States v. Tory, 52 F.3d 207,

211 (9th Cir. 1995) (similar). We, find, therefore, that Michael

did control the trust’s operations.

We also draw negative inferences from the Careys’ failure to

identify the beneficiary (or beneficiaries) of Contract

Administrators Trust, the claimed settlor of the trust, and the

interest (or interests) behind Shasta Enterprises, the claimed

beneficiary of the trust. Mr. Carpa would also seem a likely

witness on those issues (as would representatives of Contract

Adminstrators Trust and Shasta Enterprises). We infer from the

Careys’ failure to call Mr. Carpa or another knowledgeable

witness to testify on those issues that any such testimony would

have been negative to Michael, i.e., that any witness would have

testified that Michael, or Michael and Leone, transferred

property to the trust and benefited from it, and we so find.

If Michael had sufficient power and control over the trust’s

receipt of income, then that income would be taxable to him. See

Barmes v. Commissioner, supra. The Careys have failed to prove
- 26 -

5 Respondent has attributed to Michael the trust business

gross receipts without allowing to the Careys the various

offsetting deductions claimed by the trust. We have no occasion

to consider whether the Careys are entitled to those deductions

because they have not made any claim to them. Moreover, while we

assume that some costs were incurred in generating the trust

business gross receipts, we have no basis other than the selfserving figures on the trust 1995 return for estimating those

costs. A taxpayer must keep sufficient records to substantiate

amounts, such as deductions, required to be shown on a return. 

See sec. 1.6001-1(a), Income Tax Regs. While it is within the

purview of this Court to estimate the amount of allowable

deductions where there is evidence that deductible expenses were

incurred, Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), we

must have some basis on which an estimate may be made, Vanicek v.

(continued...)

that Michael retained any less power and control than necessary

to tax to him that income. They also have failed to prove that

the trust should not be disregarded as a sham, since the transfer

in trust lacked economic substance. See the discussion of

relevant factors, section III.A.1.c.(1), supra, as set forth in

Muhich v. Commissioner, T.C. Memo. 1999-192. Finally, the Careys

have failed to prove that one or both of them should not be

treated as the owner of all or a portion of the trust on account

of application of one or more of the grantor trust rules found in

sections 673 through 676.

e. Conclusion

We sustain so much of respondent’s determination of a

deficiency in tax as is attributable to his inclusion in the

Careys’ gross income of the trust interest and business gross

receipts.5
- 27 -

5(...continued)

Commissioner, 85 T.C. 731, 742-743 (1985); see also Norgaard v.

Commissioner, 939 F.2d 874, 879 (9th Cir. 1991), affg. in part

and revg. in part T.C. Memo. 1989-390. Because the record

contains no evidence upon which we could base such an estimate,

we could not allow the Careys any deductions even were we to

conclude that they had asked us to do so.

2. Carey Schedule C-–Omission of Gross Receipts

Respondent has adjusted the gross receipts shown on the

Carey Schedule C by adding thereto $9,886. In their reply brief,

the Careys concede that adjustment to the extent of $6,253. They

argue that the remaining amount of the adjustment, $3,633, is not

taxable to them in 1995 because, although that amount was

received by them in 1995, it was not deposited into their bank

account until 1996. Michael elected the cash method of

accounting to report income from Rancho and Sunshine. Checks are

income to a cash method taxpayer in the year of receipt, not in

the year of deposit. See Lavery v. Commissioner, 158 F.2d 859

(7th Cir. 1946), affg. 5 T.C. 1283 (1945); Friscia Constr., Inc.

v. Commissioner, T.C. Memo. 2000-192. We sustain respondent’s

adjustment in full.

3. Carey Schedule C-–Disallowance of Deductions

Respondent has adjusted the net profit shown on the Carey

Schedule C by disallowing all of the expenses that the Careys

claimed in determining that net profit. Respondent explained his

adjustment by stating that the Careys had failed to establish
- 28 -

that the claimed expenses were paid or incurred during 1995 and

that they were ordinary and necessary to Michael’s business. 

Respondent further explained his adjustment disallowing the

claimed deduction for Michael’s business use of his home on the

ground that certain prerequisites to that deduction had not been

established. On brief, respondent concedes (and we agree) that

the Careys may deduct the following expenses, on the basis of

evidence they presented:

Mortgage interest $8,785

Property rental 22,200

Supplies 684

Utilities 609

Wages 102,311

Food 19,377

Medical services 150

Maintenance/ops 3,460

Telephone 315

 Total 157,891

Respondent argues that the Careys have failed to prove any

additional expenses. In the main, we agree with respondent. At

the trial of this case, the Court accepted into evidence two

exhibits offered by the Careys, together consisting of over 300

pages showing photocopies of checks and other documents relating

to Sunshine and Rancho. In each case, the checks and other

documents appear to relate to only a portion of 1995. 

Particularly with regard to the Rancho checks and documents, much

of the data entered thereon is illegible. The Court instructed

the Careys to schedule that data and, on brief, make proposed
- 29 -

findings of fact from which the Court could find that the Careys

had proven the expenses claimed on the Carey Schedule C. The

Careys failed to propose such findings. We have reviewed the

Careys’ objections to respondent’s proposed findings of fact,

which objections incorporate references to the data in the two

exhibits (and to other exhibits); and, except in two instances,

the Careys have failed to prove that they are entitled to deduct

expenses in excess of those conceded by respondent. We believe

that they have established rental payments for Sunshine of

$10,000 for 1995, not the $9,000 conceded by respondent, and,

thus, allow them an additional deduction on account of those

payments of $1,000. We also believe that they have established

one rental payment of $1,105.75 on account of equipment rented

from ARJO Credit Corp. Otherwise, the Careys have failed to

carry their burden of proving deductible expenses in excess of

those conceded by respondent.

Except with respect to the $157,891 of expenses conceded by

respondent and the additional $2,105.75 of expenses allowed by

us, we sustain respondent’s disallowance of expenses claimed on

the Carey Schedule C.

4. NOL Carryover

Respondent has disallowed the net operating loss carryover

of $11,311 claimed by the Careys on the Carey 1995 return. The

Careys have failed to prove any facts showing their entitlement
- 30 -

to that carryover, see sec. 172(a), and we sustain respondent’s

disallowance.

B. Section 6662(a) Penalty

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

(the accuracy-related penalty) in the amount of 20 percent of the

portion of any underpayment attributable to, among other things,

negligence or intentional disregard of rules or regulations

(without distinction, negligence), any substantial understatement

of income tax, or any substantial valuation misstatement. 

Section 6664(c)(1) provides that the accuracy-related penalty

shall not apply to an underpayment if the taxpayer had reasonable

cause for his or her position and acted in good faith. 

Respondent determined the accuracy-related penalty against the

Careys. Although, in his notice of deficiency to the Careys,

respondent states that he bases his imposition of the section

6662(a) accuracy-related penalty upon “1 or more” of the three

grounds listed in section 6662(b)(1) through (3), on brief,

respondent relies only on his claims that the Careys were

negligent or substantially understated their income tax.

On brief, the Careys argue that they should not be subject

to the accuracy-related penalty because they relied on the advice

of professionals. They argue as follows:

The respondent states the Carey’s are liable for

accuracy related penalty. The Carey’s acted in good

faith to comply with all IRS regulation. Income tax
- 31 -

form 1040 was filed and signed by the Carey’s for the

year 1995. Mr. Tim Riley from American Tax Service

(bookkeeping) was hired to do all bookkeeping for the

year 1995. American Tax Professionals was hired to

complete the 1040 tax returns based on the information

provided by Mr. Riley. The Carey’s relied on these

professionals to produce accurate tax information. 

Under [secs.] 6662 and 6664 and applicable regulations,

a taxpayers good faith reliance on the advice of

(including opinions) of a professional tax advisor will

generally be taken in account for purposes of

determining whether the taxpayer will be subject to

accuracy related penalty.

The Careys bear the burden of proof. To sustain a defense

to the accuracy-related penalty based on reliance on professional

advice, the Careys must establish, among other things, what

advice they relied on and that the advice was based on adequate

information provided by them. See, e.g., Daugherty v.

Commissioner, 78 T.C. 623, 641 (1982); Pessin v. Commissioner, 

59 T.C. 473, 489 (1972); Ciaravella v. Commissioner, T.C. Memo.

1998-31; Stephens v. Commissioner, T.C. Memo. 1997-204. The

Careys offered no evidence regarding what information they

provided to, or what advice they received from, Tim Riley,

American Tax Service, American Tax Professionals, or Linda

Billingsley, who signed the return as a paid preparer. The

Careys failed to carry their burden of proving that they were not

negligent or that they acted in good faith or had reasonable

cause for the positions they took on their return. The

understatement of income was (and remains) substantial, and we

sustain respondent’s determination of the accuracy-related 
- 32 -

penalty, modified only to take account of the amount of the

deficiency that we have determined. 

An order of dismissal for

lack of jurisdiction will be

entered in docket No. 10400-99.

Decision will be entered under

Rule 155 in docket No. 10502-99.