                         T.C. Memo. 2000-334



                      UNITED STATES TAX COURT



          ROBERT A. AND COLLEEN L. LUND, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

      ZERO GEE ENTERPRISES TRUST, SUN FEDERAL, INC., TRUSTEE,
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 134-99, 219-99.           Filed October 30, 2000.



     Joe Alfred Izen, Jr., for petitioners.

     Ralph W. Jones, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   These cases were consolidated for trial,

briefing, and opinion.   For 1994, 1995, and 1996, respondent

determined deficiencies in petitioners’ Federal income taxes and

accuracy-related penalties as follows:
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     Robert A. and Colleen L. Lund
                                             Accuracy-Related Penalty
                Year        Deficiency             Sec. 6662(a)
                1994        $ 504,031                $100,806
                1995           945,507                189,101
                1996         1,292,331                258,466

     Zero Gee Enterprises Trust
                                             Accuracy-Related Penalty
                Year        Deficiency             Sec. 6662(a)
                1994        $ 495,582                $ 99,116
                1995           908,550                181,710
                1996         1,259,332                251,866


     After settlement of some issues, the primary issue for

decision involves whether a trust1 petitioner established lacks

economic substance and should be disregarded for Federal income

tax purposes.

     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.   References to petitioner in the singular are to

Robert A. Lund.


                            FINDINGS OF FACT

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

     At the time the petitions were filed, petitioner and Colleen

Lund resided in Albany, Oregon, and the principal place of




1
    By use of the terms “trust”, “trustee”, “beneficiary”, and
other related terms, we intend no implication as to the validity
of the trust involved in these cases.
                                - 3 -

business of petitioner Zero Gee Enterprises (Zero Gee) was

located in Carson City, Nevada.

     In the 1980's, petitioner worked for Hewlett Packard Co.

(HP) and several other computer companies as a computer

programmer.    In 1987, petitioner wrote a book called “Taming the

HP 3000”, which described the use and performance of mid-range

and mainframe HP computer systems.

     In 1990, petitioner organized as a sole proprietorship a

business to provide consulting services, computer software

development, and UNIX training relating to the HP 3000 Series of

computers.    Petitioner was the sole owner of the business, and

the business was operated under the name of Lund Performance

Solutions (LPS).

     After several years, petitioner considered selling LPS and

received an offer to purchase LPS for $700,000.    Petitioner,

however, rejected the offer because he believed LPS to have a

fair market value of $1 to $2 million.

     On May 19, 1993, with assistance from an organization called

Bigelow Charter Corp. (Bigelow Charter), petitioner formed Zero

Gee as a trust, and petitioner purportedly transferred to Zero

Gee his 100-percent ownership interest in LPS in exchange for

100-percent of the beneficial interest in Zero Gee.
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     The principals and apparent owners of Bigelow Charter and

the individual promoters of the trust schemes sold by Bigelow

Charter were Loren and Bonnie Troescher.

     Upon formation of Zero Gee, Bigelow Charter became the

corporate trustee of Zero Gee, with Loren and Bonnie Troescher

acting on behalf of Bigelow Charter.

     In connection with the above transfer to Zero Gee of LPS,

petitioner did not consult with an accountant or an attorney.

     Petitioner paid Bigelow Charter approximately $30,000 for

the documents and other assistance Bigelow Charter provided in

organizing the Zero Gee trust.

     On May 26, 1993, petitioner purportedly transferred his 100-

percent beneficial or ownership interest in the Zero Gee trust to

a British West Indies corporation named International Palm.   The

documentation and evidence in the record does not establish any

consideration or legitimate reason for this transfer to

International Palm.

     On October 10, 1994, International Palm purportedly

transferred its alleged 100-percent beneficial or ownership

interest in the Zero Gee trust to Universal Sun, also a British

West Indies corporation.

     Evidence in the record in these cases regarding the

ownership and operations of International Palm and of Universal

Sun is conspicuously lacking.
                                 - 5 -

     On July 1, 1994, Sun Federal, a corporation owned by Owen

Charles, another promoter of trust schemes similar to that of

Zero Gee, apparently replaced Bigelow Charter as the corporate

trustee of Zero Gee.

     Under terms of the Zero Gee trust document, the trustees of

Zero Gee were to manage, operate, and control Zero Gee for the

benefit of the beneficiaries.    During the years in issue,

however, neither the corporate trustee of Zero Gee nor Loren and

Bonnie Troescher were involved in any significant way in the

management, operations, and control of Zero Gee or LPS.    Zero Gee

paid Sun Federal a total of only $3,600 a year for Sun Federal’s

alleged services as trustee of Zero Gee.

     Under terms of the Zero Gee trust document and other trust

materials:


     (1) The trustee was authorized to make noninterest
     bearing loans to the Lunds; and

     (2) Written approval of the trustees allegedly was
     required for trust expenditures in excess of $5,000.


     Any approval requirement, however, under (2) above was

rescinded on January 30, 1994.

     After the purported transfer of LPS to the Zero Gee trust

and through at least 1996, petitioner continued to manage,

operate, and control the business of LPS and Zero Gee.    The

business was conducted in the name of LPS and in essentially the
                                 - 6 -

same manner as before the transfer to Zero Gee.     The customers

were invoiced in the name of LPS, and customers paid their bills

to LPS.    Petitioner continued to make all the daily business

decisions for LPS, and petitioner established the levels of

compensation for employees of LPS.

     In 1995, petitioner individually borrowed $130,000 and

obtained a $160,000 line of credit from a credit union secured by

real property owned by petitioner and Colleen Lund.      The $130,000

loan proceeds and the funds obtained under the line of credit

were used in the business of LPS.      The trustees of Zero Gee did

not authorize either of the above credit transactions.

     For 1994, 1995, and 1996, the gross and net income of LPS

were as follows:


               Year          Gross Income        Net Income
               1994           $1,243,338         $ 170,448
               1995            1,751,528            424,960
               1996            2,401,225            640,317

          Cumulative Total   $5,396,091          $1,235,725


     Of the above 3-year cumulative total $1,235,725 in net

income, International Palm and Universal Sun (the purported sole

beneficiaries of the trusts) received apparently $41,100, the

nature of which is not established in the record.      Of the

$1,194,625 balance in the above 3-year cumulative total net

income of LPS, $750,000 was used to purchase another computer

consulting business, $24,000 was used to purchase gold mining
                                 - 7 -

equipment for use in Mexico, and $18,000 was invested in sheep in

New Zealand.     The ultimate disposition of the approximate

$402,625 remaining in the above cumulative 3-year net income of

LPS is not disclosed in the record.      Approximately $100,000 was

also invested in commodity accounts.

     For 1994, 1995, and 1996, Zero Gee timely filed its Federal

Income Tax Returns for Estates and Trusts.     None of the business

income earned by LPS was reported on petitioners’ joint income

tax returns for 1994, 1995, or 1996.

     On Zero Gee’s income tax returns for each of the above

years, distributions equal to the total annual net income of Zero

Gee were claimed as income distribution deductions to the named

beneficiaries of the trust, and no taxable income was reported

for Zero Gee.

     For 1994, 1995, and 1996, petitioners timely and jointly

filed their Federal income tax returns and reported thereon wages

and consulting income both from Zero Gee as follows:


               Year            Wages          Consulting Income
               1994           $     0             $103,820
               1995             4,000               72,315
               1996            29,000                  100

       Cumulative Total       $33,000             $176,235


     Petitioners did not report as income on their joint income

tax returns any of the amounts represented by the income
                                - 8 -

distribution deductions claimed on Zero Gee’s Federal income tax

returns.

       Also, the evidence does not indicate that International Palm

and Universal Sun, the stated beneficiaries of Zero Gee, paid any

taxes (United States, British West Indies, or otherwise) on any

of the funds that Zero Gee treated as income distribution

deductions on its Federal trust income tax returns.

       On audit, petitioner did not provide to respondent’s

representatives records relating to LPS and Zero Gee.    In the

notice of deficiency issued to petitioners Robert and Colleen

Lund, respondent determined that the Zero Gee trust lacked

economic substance, and respondent charged petitioners for each

year in issue with the entire reported gross income of Zero Gee.

       Alternatively, in the notice of deficiency issued to

petitioners Robert and Colleen Lund, respondent determined that

the grantor trust provisions of sections 671 through 677 applied

to Zero Gee and that the income of Zero Gee should be taxed to

petitioners individually.

       Further, and protectively in a separate notice of deficiency

issued to Zero Gee for 1994, 1995, and 1996, respondent

determined under sections 671 through 679 for 1994, 1995, and

1996 that Zero Gee should be taxed on the reported income of Zero

Gee.    No explanation is given in the notice of deficiency as to

the basis for this deficiency determination and, on brief,
                               - 9 -

respondent makes no mention of this protective deficiency

determination against Zero Gee.

     During pretrial discovery, petitioner provided information

to respondent’s representatives regarding the income and expenses

incurred in the business of LPS, and the parties agreed to the

above gross and net income figures of the business conducted in

the name of LPS.


                              OPINION

     Taxpayers have a legal right, by whatever means allowable

under the law, to structure their transactions to minimize their

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

(1935).   Paper transactions, however, that have no significant

purpose other than to avoid tax and that are not based on

economic reality will not be recognized for Federal income tax

purposes.   See Zmuda v. Commissioner, 79 T.C. 714, 719 (1982),

affd. 731 F.2d 1417 (9th Cir. 1984).

     Where the form of a transaction has not, in fact, altered

any cognizable economic relationships, the courts may look

through the form and apply the tax law according to the substance

of the transaction.   See Markosian v. Commissioner, 73 T.C. 1235,

1241 (1980).

     Whether a trust is to be regarded as lacking in economic

substance for income tax purposes represents a question to be
                              - 10 -

decided on the totality of the facts.    See United States v.

Cumberland Pub. Serv. Co., 338 U.S. 451, 454 (1950).

     The following factors are generally considered in deciding

whether, for income tax purposes, a purported trust is to be

treated as lacking in economic substance:   (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 honored restrictions imposed by the

trust or by the law of trusts.    See Markosian v. Commissioner,

supra at 1243-1245.

     Petitioner argues that his relationship to LPS materially

changed after the transfer of LPS to Zero Gee.   We disagree.

After Zero Gee was established, petitioner essentially continued

to manage and operate LPS in the same manner as before the

purported transfer to Zero Gee.   Petitioner’s relationship to LPS

did not materially change.   The ordinary business affairs of Zero

Gee were conducted in the name of LPS.   Daily business decisions

were made by petitioner.   Compensation of employees was

determined by petitioner, and customers were invoiced by and paid

their bills to LPS.   The record does not reflect that the named

trustees of Zero Gee limited petitioner’s control over any aspect

of the business of LPS.
                              - 11 -

     We are incredulous that petitioner would have transferred

his 100-percent ownership interest in LPS, which petitioner

believed to be worth $1 to $2 million, to a foreign corporation

in exchange for no stated consideration and with nothing more

than an unsecured employment relationship.   Petitioners have

failed to establish that their relationship to LPS differed

materially before and after the formation of Zero Gee.

     With regard to the second factor, in form, Zero Gee

purportedly was managed by an independent trustee.   The failure

of Bigelow Charter, Sun Federal, Loren and Bonnie Troescher, or

Owen Charles to have any meaningful role in the management of the

trust is evidence that the Zero Gee trust lacked economic

substance.   See Zmuda v. Commissioner, 79 T.C at 720-721.    The

evidence in these cases indicates that the trustees of Zero Gee

performed no meaningful work for Zero Gee.

     The sparse evidence regarding the third factor indicates

that the beneficiaries of Zero Gee received nothing more than a

token payment for their participation or complicity in the trust

scheme.   Clearly, neither International Palm nor Universal Sun

received an economic interest in Zero Gee.   In spite of Zero

Gee’s cumulative 3-year net income in excess of $1 million,

International Palm and Universal Sun received nominal funds from

Zero Gee (i.e., the majority of Zero Gee’s income was not

distributed), and yet Zero Gee reported no tax on any of its
                               - 12 -

reported income.    Additionally, the ownership of International

Palm and Universal Sun was not disclosed.    Based on the evidence,

we are convinced that no economic interest in LPS or in Zero Gee

passed to any named beneficiary of Zero Gee.

       The evidence also establishes that petitioner, in his

continued management of LPS, was not bound or restricted by the

terms of the Zero Gee trust.    Petitioner obtained bank loans and

credit for the business without approval of the trustees of Zero

Gee.    Petitioner appears to have had essentially unrestricted use

of the property purportedly transferred to Zero Gee.    The

trustees were not meaningfully involved in the business of LPS or

of Zero Gee.    Petitioner was not restricted in any meaningful

manner in his use of the funds or in his management of LPS and

Zero Gee.

       The only recognizable purpose for the formation of Zero Gee

was tax avoidance.    For $30,000, petitioner purchased a sham

trust package supported by no economic substance.    We conclude

that Zero Gee lacked economic substance and that the net income

of Zero Gee is taxable to petitioner.

       Because we disregard Zero Gee for tax purposes and sustain

respondent’s deficiency determination against petitioners for the

years in issue, respondent’s protective deficiency determination

against Zero Gee is not sustained.
                               - 13 -

     Section 6662 imposes a penalty of 20 percent on any portion

of an underpayment of tax attributable to negligence or to

disregard of the rules or the regulations.    For purposes of

section 6662(a) negligence is a failure to make a reasonable

attempt to comply with the Internal Revenue Code.    See sec.

6662(c).

     The accuracy-related penalties under section 6662(a) do not

apply to any part of an underpayment if the taxpayer shows

reasonable cause and if the taxpayer acted in good faith based on

the facts and circumstances.   See sec. 6664(c).   A taxpayer may

establish reasonable cause under section 6662(a) by proving

reasonable reliance in good faith on the advice of a competent,

independent expert or tax professional.    See United States v.

Boyle, 469 U.S. 241, 250 (1985).

     Where it is common knowledge that a tax planning proposal is

questionable, taxpayers are expected to make reasonable inquiry

as to the legality of the proposal.     See Neely v. United States,

775 F.2d 1092, 1095 (9th Cir. 1985).

     Petitioner failed to consult with an attorney or accountant

regarding the trust program promoted by Bigelow Charter.

Petitioners negligently disregarded the tax laws and are liable

for the accuracy-related penalties under section 6662(a).
                        - 14 -

To reflect the foregoing,

                                     Decisions will be entered

                                 under Rule 155.
