                          T.C. Memo. 2005-248



                        UNITED STATES TAX COURT



         DENNIS L. ROGERS AND CHARLOTTE ROGERS, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13428-02.              Filed October 26, 2005.



     Dana R. Taylor, for petitioners.

     Kelley A. Blaine and Robert V. Boeshaar, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:     Respondent determined deficiencies in

petitioners’ income tax of $186,536 for 1997 and $269,225 for

1998 and that petitioners are liable for the addition to tax for

late filing under section 6651(a)(1)1 of $45,384 for 1997 and


     1
          Unless otherwise stated, section references are to the
                                                     (continued...)
                                 - 2 -

$66,056.25 for 1998 and the accuracy-related penalty under

section 6662(a) of $37,307.20 for 1997 and $53,845 for 1998.

     After concessions,2 the sole issue for decision is whether

petitioners are liable for accuracy-related penalties of $3,354

for 1997 and $27,638 for 1998.    We hold that they are.

                          FINDINGS OF FACT

     Some of the facts were stipulated and are so found.

A.   Petitioners

     Petitioners are married and resided in Corbett, Oregon, when

they filed their petition.    Petitioners are high school

graduates.    Charlotte Rogers attended 1 year of college.

     Charlotte Rogers was employed as a bookkeeper and general

office worker from 1958 to 1961.    She worked in sales for United

Airlines from 1961 to 1973.    She was a Shaklee distributor from

1973 to 1987, and she owned and operated a restaurant from 1987

to 1992.    Dennis Rogers owned Columbia Sheetmetal until February

1993.    Beginning around 1965, petitioners began to buy rental



     1
      (...continued)
Internal Revenue Code as amended and in effect for 1997 and 1998.
Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
        The parties stipulated that petitioners’ trusts were
invalid for tax purposes and that petitioners have deficiencies
in income tax of $16,771 for 1997 and $138,190 for 1998 and are
liable for the addition to tax for late filing under sec.
6651(a)(1) of $2,768 for 1997 and $33,490 for 1998. They further
stipulated that the amounts of the accuracy-related penalty at
issue in this case are $3,354 for 1997 and $27,638 for 1998.
                                - 3 -

properties and parcels of land for investment.   Petitioners’

oldest son, Spencer Rogers, managed petitioners’ real estate.

Petitioners had an accountant for their businesses before 1992.

Petitioners also have always had a family attorney.

B.    Nikken, Inc.

      Dennis Rogers used healthcare products by Nikken, Inc.

(Nikken), for back problems he has had since 1974.    Nikken is a

marketing company that sells nutritional, health, and personal

wellness products.   Nikken distributors sell products and earn

income by creating a network of marketers (i.e., “downline”

marketers).   When downline marketers sell products, “upline”

Nikken distributors may earn a commission on the sales.

Petitioners began working as Nikken distributors in 1992 and were

very successful in 1997 and 1998.

C.   The Trusts

      1.   Petitioners’ Purchase of Trusts

      Ruth Williams (Williams), a Nikken distributor upline from

petitioners, suggested that petitioners investigate placing their

assets in trusts.    In 1996, Williams and petitioners attended a

presentation by Shawn Dunn of the Aegis Co. relating to placing

their assets in trusts.   Petitioners did not buy any Aegis

products or services.

      Petitioners became interested in a trust package from

Advanta Strategies, which later became World Contract Services
                               - 4 -

(WCS).   WCS held periodic meetings for its trust clients.

Speakers at those meetings discussed technical procedures for

administering WCS trusts.

     James Becker (Becker) sold WCS products on commission.

Becker told petitioners they could rely on WCS staff to answer

any of their questions.   Petitioners received and reviewed a WCS

document entitled “Trust Information and Instruction Manual” that

said that trusts made it easier to:    (a) Protect financial

resources; (b) handle daily details and routine; (c) avoid delays

in settling a decedent’s estate; (d) reduce probate costs; (e)

reduce taxes; (f) protect privacy; (g) assure immediate

distribution of trust assets in a manner that is safer than

distributing those assets outside a trust; (h) provide flexible

forms of organization and operation to manage an individual’s

assets; and (i) provide opportunities for charitable giving.    The

document described the tax advantages as follows:

     One of the most useful advantages of a trust is the
     reduction or elimination of income and estate taxes.
     When a trust is constructed in a proper way, it gives
     “income splitting” advantages. That is: money (passive
     and portfolio income) earned by the trust is separated
     from money that is earned by the person who gave the
     property to the trust. For example, a taxpayer earned
     $30,000 from their job and another $25,000 from passive
     income making them pay taxes on $55,000. When they put
     the passive income into a trust, the trust could pay
     taxes on the $25,000 and the taxpayer would move into a
     lower tax bracket. Dropping from the higher tax
     bracket to the lower tax bracket offers a tremendous
     savings. This is the advantage of “splitting income”.
     The use of a business trust can eliminate self-
     employment tax and trusts in general are allowed to
                                 - 5 -

     donate up to 100% of their income to charity which is
     another way to lower tax liability.

Becker gave petitioners a WCS booklet entitled “Structuring Your

Practice for Profit, Privacy & Protection” which described, inter

alia, substantial income and estate tax savings by using trusts.

     On a date not stated in the record, petitioners paid $15,000

to Becker for a trust package from WCS which included a business

trust known as Global Wellness Trust (Global Wellness), a primary

trust known as Wealth Unlimited Investments Trust (Wealth

Unlimited), and 20 holding trusts.       Petitioners created Global

Wellness on December 1, 1996.    Petitioners completed a WCS new

client application and trust purchase agreement on April 3, 1997.

Petitioners appointed James Galligan (Galligan) and Secured

Protections, Inc., as cotrustees for Global Wellness.

Petitioners appointed Galligan and Real Protections, Inc., as

trustees for Wealth Unlimited.    Becker was trustee for Real

Protections, Inc.

     2.   Operating the Trusts

     Petitioners purportedly conveyed to the trusts all of their

personal assets, real estate assets, and assets related to their

Nikken sales distributorship.

     During the years in issue, petitioners used money

distributed to Wealth Unlimited from Global Wellness to improve

their principal residence and to make double payments on the

mortgage on their principal residence.
                                 - 6 -

     In 1998, petitioners unsuccessfully tried to have the trusts

obtain a loan to buy a new motor home.      Petitioners then had the

trusts transfer three parcels of real property to them so that

they could refinance those parcels.      On the refinancing loan

application petitioners stated that they had monthly income of

$20,500, contrary to representations on the trusts’ fiduciary

returns that the income belonged to the trusts.      Petitioners

conveyed the properties back to the trusts more than a year

later.

     Galligan signed minutes of 28 trustees meetings which state

that he attended.   However, he did not attend more than two of

those meetings.   Charlotte Rogers, Spencer Rogers, and Becker

also signed those minutes.   One of the minutes stated that

Spencer Rogers was appointed assistant manager of Global Wellness

and keeper of the minutes.

     3.   Hiring an Accountant

     Jerry Dunning (Dunning), a certified public accountant

(C.P.A.) since 1986, was Becker’s accountant.      Dunning traveled

with Becker to attend a 2-day WCS meeting in Salt Lake City on

dates not stated in the record.    WCS staff explained their trust

product at the meeting.   Becker introduced Dunning to petitioners

at that meeting and recommended to them that Dunning be their

accountant.
                                 - 7 -

D.   Tax Returns

     Dunning prepared petitioners’ Federal individual income tax

returns for 1995-98 and returns for petitioners’ trusts.     He

relied on summaries of income and expenses that he had received

from Spencer Rogers.    Dunning saw (but did not read) petitioners’

trust documents.

     Petitioners operated their Nikken sales distributorship as a

sole proprietorship in 1995 and 1996.     In those years,

petitioners reported income and expenses from their Nikken sales

distributorship on Schedules C, Profit or Loss From Business,

attached to their Forms 1040, U.S. Individual Income Tax Return.

     Petitioners’ 1995 Form 1040 was filed on a date not stated

in the record.     Petitioners reported gross receipts of $315,270,

gross income of $330,049, and net profit of $97,200 for their

Nikken activity in 1995.    Petitioners’ 1996 Form 1040 was filed

on October 19, 1998.    Petitioners reported gross receipts of

about $385,710, gross income of about $370,400, and net profit of

$53,999 for their Nikken activity in 1996.

     Petitioners did not report Nikken income or expenses on

their Forms 1040 for 1997 and 1998.      Petitioners filed their 1997

Form 1040 on June 1, 1999, reporting zero tax due.     Petitioners

signed their 1998 Form 1040 on October 16, 2000, and filed it on

a date not stated in the record.    In it, they reported tax due of

$769.
                               - 8 -

     On its tax returns for 1997 and 1998, Global Wellness

reported income generated by petitioners’ Nikken activity as

passive income, claimed expenses and losses, and distributed the

net income to Wealth Unlimited.   Global Wellness deducted the

distributions in the amounts reported as distributed to Wealth

Unlimited.   Global Wellness reported total income of $361,154 for

1997 and $705,616 for 1998 and zero tax for 1997 and 1998.

     On its income tax returns for 1997 and 1998, Wealth

Unlimited reported the Global Wellness distributions as passive

income.   Wealth Unlimited reported on its 1998 trust income tax

return that it had distributed the amounts it had received from

Global Wellness to Nick Rogers, Tude Tide, and V & S Trust.

Wealth Unlimited reported a loss of $66,887 for 1997 and income

of $216,975 for 1998 and zero tax for 1997 and 1998.

     Petitioners reported on their Forms 1040 adjusted gross

income of $142,343 in 1995, $97,081 in 1996, $9,546 in 1997, and

$17,628 in 1998.   Petitioners’ standard of living did not change

when they began using trusts even though their adjusted income

dropped precipitously.3   Petitioners did not offer any authority

for recognizing their trusts for tax purposes or disclose their

trusts on their individual returns for 1997 and 1998.




     3
        Mrs. Rogers testified that petitioners’ “style of life”,
which we take to mean standard of living, did not change when
petitioners began using trusts.
                                 - 9 -

                                OPINION

A.   Accuracy-Related Penalty

     A taxpayer is liable for an accuracy-related penalty in the

amount of 20 percent of any part of an underpayment attributable

to, among other things, a substantial understatement of income

tax, negligence, or disregard of rules or regulations.    Sec.

6662(a) and (b)(1) and (2).   The amount of the understatement is

reduced by amounts attributable to items (1) for which there was

substantial authority for the taxpayer's position, or (2)

adequately disclosed on the taxpayer's return or in a statement

attached to the return if there is a reasonable basis for the tax

treatment of the items at issue by the taxpayer.   Sec.

6662(d)(2)(B).   The accuracy-related penalty does not apply to

any part of an underpayment for which there was reasonable cause

and with respect to which the taxpayer acted in good faith.      Sec.

6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.

B.   Whether Respondent Met the Burden of Producing Evidence
     Showing That Petitioners Are Liable for the Accuracy-Related
     Penalty

     Petitioners contend that respondent did not meet the burden

under section 7491(c) of producing evidence showing that they are

liable for the accuracy-related penalty for 1997 and 1998.    We

disagree.
                                  - 10 -

       Section 7491(c)4 places on the Commissioner the burden of

producing evidence showing that it is appropriate to impose a

particular addition to tax.       However, the Commissioner need not

produce evidence relating to defenses such as reasonable cause or

substantial authority.       Higbee v. Commissioner, 116 T.C. 438, 446

(2001); H. Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747,

995.       To meet the burden of production under section 7491(c),

respondent must produce evidence showing that it is appropriate

to impose the accuracy-related penalty under section 6662(a).

Once respondent meets that burden, petitioner must, in order to

not be found liable for the addition to tax, produce evidence

sufficient to show that respondent’s determination is incorrect.

See Higbee v. Commissioner, supra at 447.

       Respondent has produced evidence showing that imposition of

the accuracy-related penalty under section 6662(a) is appropriate

by showing that petitioners substantially understated their tax

for 1997 and 1998.       Petitioners reported tax due on their income

tax returns of zero for 1997 and $769 for 1998.       The amounts of

tax required to be shown were $16,771 for 1997 and $139,059



       4
            Sec. 7491(c) provides:

            SEC. 7491(c). Penalties.--Notwithstanding any
       other provision of this title, the Secretary shall have
       the burden of production in any court proceeding with
       respect to the liability of any individual for any
       penalty, addition to tax, or additional amount imposed
       by this title.
                                - 11 -

($138,290 deficiency plus $769 shown on the return) for 1998.

Thus, petitioners’ understatements of tax were greater than 10

percent of the amount required to be shown and $5,000 for 1997

and 1998.

     Petitioners contend that, in meeting the burden of

production under section 7491(c), respondent may not rely on

their concession in the stipulation that the trusts were invalid

for tax purposes.    We disagree.   The Commissioner may take a

taxpayer’s concession into account to meet the burden of

production under section 7491(c).     See e.g., Montagne v.

Commissioner, T.C. Memo. 2004-252; Oatman v. Commissioner, T.C.

Memo. 2004-236.     Petitioners cited no authority to the contrary.

     Respondent has met the burden of production even without

considering petitioners’ concession.     The stipulation of facts,

documents admitted in evidence, and testimony at trial show that

petitioners personally benefited from trust assets, petitioners

treated trust property as their own, petitioners did not follow

trust formalities, and trust minutes were not reliable.       This

evidence is sufficient to meet respondent’s burden of production.

     We conclude that respondent has met the burden of producing

evidence showing that it is appropriate to impose the accuracy-

related penalty under section 6662(a) for 1997 and 1998.
                               - 12 -

C.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty

     A taxpayer is not liable for the accuracy-related penalty

under section 6662(a) and (b)(1) if there was reasonable cause

for the underpayment and the taxpayer acted in good faith.      Sec.

6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.     Reliance in good

faith by the taxpayer on the advice of a qualified adviser may

constitute reasonable cause.   Sec. 1.6664-4(b)(1), Income Tax

Regs.

     Petitioners contend that they are not liable for the

accuracy-related penalty under section 6662(a) and (b)(1) because

they reasonably relied in good faith on Dunning, their C.P.A. and

return preparer.5   Sec. 6664(c)(1).    We disagree.   Petitioners

could not reasonably have believed that they could use the trusts

to eliminate all of their self-employment tax liabilities for

1997 and 1998 and all or almost all of their Federal income tax

liabilities for those years.   Tax benefits of this magnitude

should have caused petitioners to question the validity of the

trust scheme.   See Collins v. Commissioner, 857 F.2d 1383, 1386

(9th Cir. 1988), affg. Dister v. Commissioner, T.C. Memo.

1987-217; Gale v. Commissioner, T.C. Memo. 2002-54.      In such

cases, taxpayers have a duty to reasonably inquire into the


     5
        Petitioners contend that respondent bears the burden of
proof under sec. 7491(a). We need not decide which party bears
the burden of proof because the outcome in this case does not
depend on the burden of proof.
                                - 13 -

validity of the tax benefits.    See Zmuda v. Commissioner, 731

F.2d 1417, 1422-1423 (9th Cir. 1984), affg. 79 T.C. 714 (1982).

     Petitioners did not obtain independent advice or look beyond

the trust promoters and an accountant (Dunning) to whom they were

referred by Becker, from whom they bought the trust package.

Their claim of good faith reliance on Dunning is not persuasive;

they should have sought confirmation from a reliable and

disinterested adviser.   See Collins v. Commissioner, supra

(taxpayer failed to obtain independent tax advice); Edwards v.

Commissioner, T.C. Memo. 2002-169 (taxpayer could not rely on the

trust promoter), affd. 119 Fed. Appx. 293 (D.C. Cir. 2005);

Lincir v. Commissioner, T.C. Memo. 1999-98 (reliance on an

accountant’s advice about the tax treatment of an investment

program was not in good faith where the accountant could earn

more if his clients invested in the program), affd. 32 Fed. Appx.

278 (9th Cir. 2002).

     Petitioners contend that the fact that Dunning was in

contact with WCS and attended a WCS meeting shows that it was

reasonable to rely on him.   We disagree.   Dunning’s relationship

with Becker and WCS should have put petitioners on notice that he

was not independent or disinterested.

     Petitioners cite Kantor v. Commissioner, 998 F.2d 1514,

1522-1523 (9th Cir. 1993), affg. in part and revg. in part T.C.

Memo. 1990-380; Norgaard v. Commissioner, 939 F.2d 874, 880 (9th
                              - 14 -

Cir. 1991), affg. in part and revg. in part T.C. Memo. 1989-390;

and Baxter v. Commissioner, 816 F.2d 493, 496 (9th Cir. 1987),

affg. in part and revg. in part T.C. Memo. 1985-378, for the

proposition that petitioners’ incorrect treatment of their trusts

for tax purposes does not in itself justify imposition of the

accuracy-related penalty.   We disagree.   None of those cases

involved a taxpayer’s claim of reliance on an accountant, and all

of the cases included factors favorable to the taxpayers which

are not present here.   The taxpayers in both Kantor and Baxter

presented a viable (although ultimately unsuccessful) challenge

to the Commissioner’s adjustments.     Kantor v. Commissioner, supra

at 1522-1523; Baxter v. Commissioner, supra at 496.     Petitioners

did not.   See, e.g., Neeley v. United States, 775 F.2d 1092 (9th

Cir. 1985); Zmuda v. Commissioner, supra; Schulz v. Commissioner,

686 F.2d 490, 493 (7th Cir. 1982), affg. T.C. Memo. 1980-568;

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

Commissioner, T.C. Memo. 1981-675, affd. per curiam 696 F.2d 1232

(9th Cir. 1983).

     The taxpayers in Norgaard were held not negligent because

they used a reasonable accounting system to keep track of their

gambling losses and they did not lack due care or fail to do what

a reasonable and prudent person would do.     Norgaard v.

Commissioner, supra at 880.   Kantor, Norgaard, and Baxter do not

support petitioners.
                             - 15 -

     We conclude that petitioners did not make a good faith

effort to ascertain their tax liabilities for the years in issue,

that it was not reasonable for them to rely on Dunning, and that

they are liable for the addition to tax for substantial

understatement under section 6662(a) for 1997 and 1998.

     To reflect concessions and the foregoing,


                                             Decision will be

                                        entered under Rule 155.
