                         T.C. Memo. 2001-133



                       UNITED STATES TAX COURT



     MATRIXINFOSYS TRUST, ANDY HROMIKO, TRUSTEE, Petitioner
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent

            ANDY HROMIKO, Petitioner v. COMMISSIONER
                 OF INTERNAL REVENUE, Respondent



     Docket Nos. 8897-99, 15974-99.              Filed June 7, 2001.


     Andy Hromiko (a trustee), for petitioner in docket
          No. 8897-99.

     Andy Hromiko, pro se in docket No. 15974-99.

     Jeremy L. McPherson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    In these consolidated cases, respondent

determined the following deficiencies in, additions to, and

penalties on petitioners’ Federal income taxes:
                                    - 2 -
                                         Additions to Tax          Penalty
Petitioner      Year   Deficiency   Sec. 6651(a)(1) Sec. 6654   Sec. 6662(a)

MatrixInfoSys   1995   $23,789              –-         --         $4,758
  Trust         1996    23,666              --         --          4,733

Andy Hromiko    1994   $20,340         $5,085        $1,055         --
                1995    20,176          5,044         1,094         –-
                1996    19,447          4,862         1,035         –-
                1997    18,366          4,592           983         –-

     Unless otherwise stated, 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.

     We must resolve a basic dispute between the parties:

whether certain payments made to a trust, MatrixInfoSys (the

trust), on account of services performed by Andy Hromiko

(petitioner) should have been returned as income on petitioner’s

individual tax return.      Because respondent adopted “whipsaw”

positions in making the determinations against petitioner and the

trust, respondent will concede the tax liabilities determined

against the trust if the Court concludes that the payments made

to the trust are properly taxable to petitioner.

                             FINDINGS OF FACT

     At the time of the filing of the trust’s petition, the

trust’s address was in Roseville, California.          Similarly, at the

time petitioner filed his petition, he resided in Roseville,

California.     Before setting out our specific factual
                                - 3 -

 determinations, we describe relevant parts of the procedural

histories of the instant cases.

Procedural Histories

     A.    The Trust

     On May 12, 1999, Andy Hromiko, in his capacity as trustee,

filed a petition for the trust.   In the petition, the trustee

alleged that the trust was a business trust entitled to the

business deductions claimed on the filed tax returns.1   The

trustee requested that the matter be transferred to the Internal

Revenue Service (IRS) Appeals Office on the ground that the

notice of deficiency was incomplete and erroneous, that the trust

had been denied its due process under law, and that it had a

substantial claim against the IRS under “the Taxpayer Bill of

Rights”.    Further, the trustee listed 10 affirmative defenses on

behalf of the trust:

     1.    Res judicata
     2.    Estoppel
     3.    Waiver
     4.    Duress
     5.    Fraud
     6.    Statute of limitations
     7.    Invalid notice of deficiency not complying
           with the tax code provisions
     8.    The “clean hands” doctrine (unclean hands
           of respondent)
     9.    Illegality
    10.    Violation of Taxpayer Bill of Rights




     1
        With regard to petitioner’s actions as a fiduciary of the
trust, we refer to him as the trustee in this opinion.
                                - 4 -

     On August 19, 1999, the trust’s case was calendared for the

Court’s trial session beginning January 24, 2000, in San

Francisco, California.    On November 5, 1999, respondent filed a

motion for continuance of trial with regard to the trust’s case

on the ground that respondent would seek to have the trust’s case

consolidated with petitioner’s individual case (described below);

we granted respondent’s motion on January 10, 2000.    On May 16,

2000, the trust’s case was rescheduled for trial to the San

Francisco, California, trial session beginning October 16, 2000.

     B.     Petitioner’s Individual Tax Case

     On October 12, 1999, petitioner filed a petition for

redetermination with regard to his 1994, 1995, 1996, and 1997 tax

years.    Petitioner asserted that he had not received the income

determined by respondent, and therefore he was not liable for the

deficiencies and additions to tax described in the notice of

deficiency.2   Petitioner requested that the matter be transferred

to an IRS Appeals Office because the notice of deficiency was

allegedly incomplete and erroneous.     In support of his request,

petitioner alleged that he had been denied “due process of law”

and that he had a claim under the “Taxpayer Bill of Rights”

against the IRS.   Finally, petitioner also alleged a laundry list

of defenses:


     2
        In actuality, respondent determined the deficiencies and
the additions to tax relating to petitioner’s income taxes for
the years in issue in two separate notices.
                               - 5 -

     1.   Res judicata
     2.   Estoppel
     3.   Waiver
     4.   Duress
     5.   Fraud
     6.   Statute of limitations
     7.   Invalid notice of deficiency not complying
          with the tax code provisions
     8.   Failure of respondent to exhaust administrative
          remedies
     9.   Laches
    10.   The “clean hands” doctrine (unclean hands
          of respondent)
    11.   Illegality
    12.   Failure of jurisdiction over petitioner
    13.   Violation of Taxpayer Bill of Rights

     Lastly, petitioner submitted documents in which it appears

that he “revokes” and “rescinds” any agreement with the

Government of the United States regarding the Social Security

system.   On May 16, 2000, the Court calendared for trial

petitioner’s individual case; the case was placed on the Court’s

trial session beginning October 16, 2000, in San Francisco,

California.

     C.    Pretrial Discovery and Proceedings

     On July 19, 2000, respondent served petitioner with a formal

set of interrogatories.   Additionally, on July 19, 2000,

respondent served petitioner with a request for admissions of

fact (with attached exhibits) and filed a copy with the Court on

July 20, 2000.   On July 31, 2000, petitioner served respondent

with his own request for admissions of fact.    On August 29, 2000,

petitioner moved this Court to issue a protective order so that

he would not have to answer respondent’s interrogatories and
                                - 6 -

requests for admissions of fact.    Petitioner alleged that

respondent had failed to show that petitioner had received

taxable income.    He contended that there was no evidence to

support the determination; therefore, the determination was

arbitrary and erroneous, and the burden of proof shifted to

respondent.    On August 30, 2000, we summarily dismissed

petitioner’s claims.    On August 31, 2000, respondent filed his

response to petitioner’s request for admissions of fact.      On

September 5, 2000, because petitioner had failed to respond to

respondent’s discovery requests, respondent filed a motion to

compel responses to respondent’s interrogatories.    On

September 6, 2000, we granted respondent’s motion and ordered

petitioner to make full, complete, and responsive answers on or

before September 18, 2000.    We warned petitioner that failure to

comply with the Court’s order could lead to sanctions under Rule

104, including dismissal of the case and entry of a decision

against him.    On September 19, 2000, respondent received

petitioner’s responses, but they were evasive and incomplete.

     D.   Motion To Dismiss and October 16, 2000, Trial

     On October 2, 2000, respondent filed a motion to dismiss for

failure properly to prosecute and for a penalty under section

6673 with regard to petitioner’s case.    On October 16, 2000,

petitioner filed an opposition to respondent’s motion, a response

to respondent’s request for admissions, and a motion to withdraw
                                 - 7 -

“deemed admitted admissions” and accept petitioner’s answers to

respondent’s admissions.   On October 16, 2000, considering

petitioner’s presence at trial, the Court denied respondent’s

motion to dismiss and for the imposition of a section 6673

penalty.   Although the case was allowed to continue, the Court

denied petitioner’s motion to withdraw the deemed admissions.       At

trial on October 16, 2000, the Court consolidated petitioner’s

case with the trust’s case.   After a considerable exchange

regarding his oath, petitioner testified (in general) that “I

think I filed everything I needed to, that I was required to.”

Petitioner's Income-Producing Activity

     During 1994, 1995, 1996, and 1997, petitioner performed

computer analysis and programming services for Duraflame, Inc.,

and California Cedar Products, Inc.      These companies paid for

petitioner’s services at an hourly rate and made payments

directly to the trust.

     Petitioner did not file individual Federal income tax

returns for 1994 through 1997.    Forms 1041, U.S. Income Tax

Return for Estates and Trusts, were filed on behalf of the trust

for 1994, 1995, 1996, and 1997.    Respondent made the following

alternative determinations with regard to the trust:      (1) The

trust is not entitled to various deductions and exemptions; (2)

it is a sham; and (3) it is a grantor trust subject to sections

671 through 679.   Respondent also determined that the money paid
                               - 8 -

to the trust is taxable income to petitioner.    At trial,

respondent orally renewed his motion that the Court impose a

section 6673 penalty on petitioner.

                              OPINION

     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); Johnston v. Commissioner, T.C. Memo. 2000-315.       An

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

burden from the taxpayer to a trust when the taxpayer controls

the earning of the income. See 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.    See Diedrich v.

Commissioner, 457 U.S. 191, 195 (1982); 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 the form.     See 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
                               - 9 -

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

Commissioner, 73 T.C. 1246, 1253 (1980).

     Petitioner does not dispute that the amounts paid to the

trust were on account of his personal services.    Petitioner

simply argues that the trust earned the payments related to his

services and that the trust is bona fide.    On the basis of the

record before us, we conclude that petitioner was the true earner

of the amounts paid and that petitioner established the trust as

a mechanism to avoid tax.   Consequently, we hold that the trust

should not be respected for Federal income tax purposes and that

the money paid to the trust is taxable income to petitioner.3

     Respondent determined that petitioner is 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.

Petitioner did not file any returns for the years in issue or

present evidence indicating that his failure to file was due to

reasonable cause and not due to willful neglect.    See Rule




     3
        Because we rule against petitioner with regard to
respondent’s determinations against him, we accept respondent’s
concession related to the determinations against the trust.
                                 - 10 -

142(a).   Accordingly, we sustain respondent’s determination

regarding this matter.

     Respondent also determined that petitioner is liable for

additions to tax under section 6654 for failure to make estimated

tax payments.   Petitioner did not offer any evidence relating to

this issue.   See Rule 142(a).    We therefore sustain respondent’s

determination as to the additions to tax under section 6654.

     Finally, we reconsider whether petitioner has engaged in

behavior that warrants the imposition of a penalty pursuant to

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

a taxpayer who (1) institutes or maintains a proceeding primarily

for delay, (2) pursues a position in this Court which is

frivolous or groundless, or (3) unreasonably fails to pursue

available administrative remedies.        Petitioner’s conduct

throughout this proceeding has convinced us that he instituted

and maintained this proceeding primarily for delay and pursued a

position that was frivolous and groundless.

     From the filing of his petition to the submission of his

brief, petitioner has devoted much of his time to shopworn

arguments characteristic of the tax-protester rhetoric that has

been universally rejected by this and other courts.        We refuse to

painstakingly address petitioner’s assertions “with somber

reasoning and copious citation of precedent” because “to do so

might suggest that these arguments have some colorable merit.”
                              - 11 -

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

Wilcox v. Commissioner, 848 F.2d 1007, 1008 (9th Cir. 1988),

affg. T.C. Memo. 1987-225; Williams v. Commissioner, 114 T.C.

136, 139 (2000).   Petitioner has wasted the time and resources of

this Court.   Accordingly, we shall impose a penalty of $12,500 on

petitioner pursuant to section 6673.

     To reflect the foregoing,

                                      An appropriate order and

                                 decision will be entered for

                                 respondent in docket No. 15974-99,

                                 and an order and decision will be

                                 entered for petitioner in

                                 docket No. 8897-99.
