                          T.C. Memo. 1998-290



                        UNITED STATES TAX COURT



           MATTHEW AND JANICE LEONARD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17049-96.                       Filed August 6, 1998.



     Matthew Leonard and Janice Leonard, pro sese.

     Bryan E. Sladek, for respondent.



                          MEMORANDUM OPINION

     VASQUEZ, Judge:     Respondent determined the following

deficiencies in, additions to, and penalties on petitioners'

Federal income taxes:

     Matthew Leonard:

                                          Additions to Tax
          Year      Deficiency        Sec. 6651      Sec. 6654

          1990           $2,097         $524            $137
          1991            2,028          507             116
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     Janice Leonard:

                                                Additions to Tax
           Year        Deficiency           Sec. 6651      Sec. 6654

           1990           $436               $109             ---
           1991            791                198             $45

     Matthew and Janice Leonard:

                                                     Penalty
           Year        Deficiency                Sec. 6662(b)(1)

           1993            $723                        $145
           1994           5,054                       1,011

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

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

Procedure.

     The issues for decision are:       (1) Whether petitioners are

liable for the deficiencies determined by respondent; (2) whether

petitioners are liable for additions to tax for failing to file

Federal income tax returns for 1990 and 1991; (3) whether

petitioners are liable for additions to tax for failing to make

estimated Federal income tax payments for 1990 and 1991; (4)

whether petitioners are liable for accuracy-related penalties for

1993 and 1994; and (5) whether petitioners engaged in behavior

that warrants the imposition of a penalty pursuant to section

6673(a).

Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are
                                - 3 -


incorporated herein by this reference.    Petitioners Matthew and

Janice Leonard, husband and wife, resided in West Sacramento,

California, at the time they filed their petition.

     During 1990, 1991, 1993, and 1994, Mr. Leonard worked as a

firefighter, a welder, and a contractor.    Customers paid for Mr.

Leonard's services by checks made payable to "Republic Project

(Federation)" (Republic) or other trusts1 which allegedly

constituted Republic.

     Petitioners filed fiduciary income tax returns on Form 1041

for Republic for 1990, 1993, and 1994.    For 1991, in lieu of a

Form 1041, petitioners filed a document for Republic entitled

"Beneficiaries Tax Report for 1992".    Petitioners did not file

individual Federal income tax returns for 1990 and 1991.

Petitioners filed joint Federal income tax returns for 1993 and

1994.    On these returns, petitioners reported income only from

trustee's fees relating to Republic.

     Respondent determined that Republic was a sham trust and the

money paid to Republic is taxable income to petitioners.

Discussion

     A fundamental principle of tax law is that income is taxed

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

733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111 (1930).    An

assignment of income to a trust is ineffective to shift the tax

     1
        We use the words "trust" and "trustee" for convenience
only. Our use of these terms is not meant to indicate any
conclusion about the substance of the transactions at issue.
                                 - 4 -


burden from the taxpayer to a trust when the taxpayer controls

the earning of the income.    Vnuk v. Commissioner, 621 F.2d 1318,

1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.

     The Commissioner is not required to apply the tax laws in

accordance with the form a taxpayer employs where that form is a

sham or inconsistent with economic reality.       Higgins v. Smith,

308 U.S. 473, 477 (1940).    Where an entity is created that has no

real economic effect and which affects no cognizable economic

relationships, the substance of a transaction involving this

entity will control over its form.       Zmuda v. Commissioner, 731

F.2d 1417, 1420-1421 (9th Cir. 1984), affg. 79 T.C. 714, 719

(1982); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).

These principles apply even though an entity may have been

properly formed and have a separate existence under applicable

local law.   Zmuda v. Commissioner, 79 T.C. at 720.

     Petitioners argue that Republic is a bona fide trust.         They

have not introduced any evidence, however, that rebuts

respondent's determination that Republic is a sham.      Accordingly,

we hold that Republic shall not be respected as a trust for

Federal income tax purposes, and the money paid to Republic is

taxable income to petitioners.    See Rule 142(a).

     We must next determine whether this income, which is taxable

wholly to petitioners, is community property income.2      Under

     2
        Respondent, in the separate notices of deficiency sent to
each petitioner in 1990 and 1991, determined: (1) That Mr.
                                                   (continued...)
                               - 5 -


California law, earned income of a spouse is community property

income unless the spouses have an agreement to the contrary.

Cal. Fam. Code sec. 760 (West 1994).   Community property income

is attributable 50 percent to each spouse.   See Poe v. Seaborn,

282 U.S. 101 (1930).   Petitioners have failed to produce any

evidence that the income they earned (i.e., the money paid to

Republic) was not community property income.   We conclude that

under California law this income must be allocated 50 percent to

each petitioner.

     Respondent determined that petitioners are liable for

additions to tax under section 6651(a)(1).   Section 6651(a)(1)

imposes an addition to tax for failure to file a return on the

date prescribed (determined with regard to any extension of time

for filing), unless the taxpayer can establish that such failure

is due to reasonable cause and not due to willful neglect.   The

taxpayer has the burden of proving the addition is improper.

     2
      (...continued)
Leonard earned, and is taxable on, 100 percent of the income
reported as earned by "Republic Manufacturing", an alleged sub-
entity of Republic; (2) that Mrs. Leonard earned, and is taxable
on, 100 percent of the income reported as earned by "Lionheart
Enterprises" and "Lionheart Horse Farms", alleged subentities of
Republic; and (3) that 50 percent of the net income earned by
each petitioner from Republic Manufacturing, Lionheart
Enterprises, and Lionheart Horse Farms is taxable income to the
nonearning spouse.

     Respondent took these inconsistent positions to protect
respondent's rights under California law because petitioners were
uncooperative married nonfilers. On brief, however, respondent
argues that all the earned income should be allocated 50 percent
to each petitioner in accordance with California community
property law.
                               - 6 -


Rule 142(a); United States v. Boyle, 469 U.S. 241, 245 (1985).

Petitioners offered no credible evidence showing that they filed

returns in 1990 and 1991 or that their failure to file was due to

reasonable cause and not due to willful neglect.    Accordingly, we

hold that petitioners are liable for the additions to tax under

section 6651(a)(1).

     Respondent also determined that petitioners are liable for

additions to tax under section 6654 for failing to make estimated

tax payments and penalties under section 6662(b)(1) for

negligence or disregard of rules or regulations.    Petitioners did

not offer any evidence relating to these issues.    Therefore, we

hold that petitioners are liable for the additions to tax under

section 6654 and penalties under section 6662(b).   See Rule

142(a).

     Finally, we consider whether petitioners have engaged in

behavior that warrants the imposition of a penalty pursuant to

section 6673.   Section 6673(a)(1) authorizes this Court to

penalize a taxpayer for taking frivolous positions or instituting

proceedings primarily for delay.   Petitioners received a warning

that respondent would move for a penalty under section 6673.

Petitioners filed numerous frivolous motions with the Court.3

Their conduct throughout this proceeding has convinced us that

they instituted and maintained this proceeding primarily for



     3
        For example, petitioners filed a motion that was entitled
"Petitioners Closing Motion for IRS to do something".
                                 - 7 -


delay.   Furthermore, petitioners devoted much of their briefs to

shopworn arguments characteristic of the tax-protester rhetoric

that has been universally rejected by this and other courts.       We

will not painstakingly address petitioners' assertions "with

somber reasoning and copious citation of precedent; to do so

might suggest that these arguments have some colorable merit."

Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984).

Petitioners have wasted the time and resources of this Court.

Accordingly, we shall impose a penalty of $1,000 pursuant to

section 6673.

     To reflect the foregoing,

                                              Decision will be entered

                                         under Rule 155.
