                        T.C. Memo. 2003-281



                      UNITED STATES TAX COURT



       MICHAEL T. CAREY AND LEONE R. CAREY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2003-02.            Filed September 30, 2003.


     Michael T. Carey and Leone R. Carey, pro se.

     Jeremy L. McPherson, for respondent.



                        MEMORANDUM OPINION


     COLVIN, Judge:   This case is before the Court on

respondent’s motion for summary judgment and motion for a penalty

under section 6673.

     Respondent determined a deficiency in petitioners' Federal

income tax of $498,933 for 1997, an addition to tax under section
                                 - 2 -

6651(a) of $74,874.99, and an accuracy-related penalty under

section 6662(a) of $99,786.60.

     As discussed below, we will grant respondent’s motion and

will impose a penalty against petitioners under section 6673 in

the amount of $5,000.

     Section references are to the Internal Revenue Code as

amended, and Rule references are to the Tax Court Rules of

Practice and Procedure.   References to petitioner are to Michael

T. Carey.

                             Background

A.   Petitioners

     Petitioners resided in Redding, California, when they filed

their petition.    Petitioner is a licensed occupational therapist.

He performed services at several adult residential facilities in

1997.

B.   Respondent’s Request for Admissions

     Respondent sent a request for admissions to petitioners.

Petitioners did not respond to respondent's request for

admissions.   Each statement in a request for admissions served on

a party is deemed admitted unless a response is served on the

requesting party within 30 days after service of the request.

Rule 90(c).   Thus, we deem petitioners to have admitted the

following facts stated in respondent's request for admissions.
                               - 3 -

     1.   Petitioner’s Residential Facilities

     In 1997, petitioner worked with severely disabled adults at

Residential Management Services, Rancho Residential Facility,

Sunshine Residential Facility, and Home Health Services, which

are residential facilities for disabled adults.

     2.   The Trusts

     Petitioners formed Residential Management Services Trust1

(Residential), Rancho Residential Trust (Rancho), Sunshine

Residential Trust (Sunshine), and Home Health Services Trust

(Home Health) (petitioners’ trusts) before 1997.2   Petitioners’

trusts purportedly were in the business of operating nursing and

personal care facilities in 1997.   Petitioners’ four children

have been the sole named beneficiaries of petitioners’ trusts

since 1997.   Robert Hogue (Hogue) was the purported trustee of

these trusts in 1997.   He was paid no more than $500 per trust in

1997 for his services as trustee.

     Bank accounts were maintained for petitioners’ trusts.

Petitioner had signature authority over those accounts in 1996

and part of 1997.   He paid his personal expenses from those bank


     1
       Our use of the words "trust”, "trustee”, and "form” does
not necessarily indicate that we believe the transactions at
issue have substance.
     2
       Petitioners formed Home Health Services Trust on June 1,
1993, Residential Management Services Trust on Dec. 16, 1994, and
Rancho Residential Trust and Sunshine Residential Trust on Aug.
1, 1996.
                                - 4 -

accounts in 1997.   He used a signature stamp bearing the name

“Robert Hogue” to sign checks on those bank accounts in 1997-

2001.

     Petitioners’ trusts filed Forms 1041, U.S. Fiduciary Income

Tax Return, for 1997.   Each trust reported income and expenses

from one of the nursing care facilities on its 1997 return.    The

trusts reported the following amounts of income for 1997:

    Trust `             Gross Receipts        Interest

Residential                $334,048             $196

Rancho                     $303,628             $219

Sunshine                   $233,694             0

Home Health                $350,310             $453

     3.    Petitioners and Their Residences

     Sometime before 1997, petitioners owned and lived in a

residence in Palo Cedro, California (the Palo Cedro residence).

They transferred title to that residence to Douglas Carpa and

Robert L. Talbot, trustees of Ranch Holding Trust, on a date not

contained in the record.   Robert Hogue was the purported trustee

of Ranch Holding Trust at the end of 1997.    Petitioner used funds

from Sunshine’s bank account to pay the property taxes on the

Palo Cedro residence in April 1997.

     Property taxes on the Palo Cedro residence were paid in

December 1997 with funds from Home Health’s account and in April

1999 with funds from Residential’s account.
                                 - 5 -

     Petitioners currently live in a house in Bella Vista,

California (the Bella Vista residence).    The Bella Vista

residence is located on 54 acres of land.    Michael Blomquist,

trustee of Hidden Meadows Holding Trust, acquired title to the

Bella Vista residence in 1996.    Robert Hogue was the purported

trustee of Hidden Meadows Holding Trust at the end of 1997.

Petitioner paid the property taxes on the Bella Vista residence

in April 1997 with funds from Sunshine’s bank account.

     4.    Petitioners’ 1997 Tax Return

     Petitioners requested and received an extension of time to

August 15, 1998, to file their 1997 return.    Petitioners signed

their 1997 return on October 7, 1998, and respondent received it

on October 16, 1998.

     Petitioner received but did not report self-employment

income of $1,221,680 in 1997.    Residential, Rancho, Sunshine, and

Home Health reported that amount as gross receipts on their 1997

returns.   Petitioners also received but did not report interest

income of $868 in 1997.   Instead, Residential, Rancho, and Home

Health reported that amount as interest on their 1997 returns.

     Petitioners did not have or provide to respondent

substantiation of car and truck, office, and mortgage interest

expenses they deducted on their 1997 return.
                                - 6 -

C.   Procedural History

     On February 25, 2002, respondent moved to dismiss this case

for failure to state a claim and to impose a penalty under

section 6673.   Special Trial Judge Armen ordered petitioners to

file an amended petition by April 19, 2002, and set respondent’s

motion for a hearing at the San Francisco, California, trial

session beginning on June 17, 2002.

     Petitioners did not file an amended petition.   At the June

25, 2002, hearing on respondent’s motion, the Court ordered

petitioners to file an amended petition by July 16, 2002.    The

Court told petitioners that their original petition did not state

a claim and warned them that, if they repeated in the amended

petition the arguments they made in their petition, the Court

would strike those arguments.

     In their amended petition, petitioners repeated frivolous

arguments that they had made in their petition.   Thus, on August

1, 2002, the Court ordered that petitioners’ frivolous

contentions be stricken from the petition and the amendment to

petition.

     This case was calendared for trial during the session of

this Court in San Francisco beginning on March 10, 2003.

Respondent filed a motion for summary judgment and to impose a

penalty under section 6673.   We ordered petitioners to file a

response to respondent’s motion, but they did not do so.
                                - 7 -

Petitioners did not appear at the calendar call or otherwise

communicate with the Court.

                              Discussion

A.   Summary Judgment

     We may grant summary judgment if the pleadings, answers to

interrogatories, depositions, admissions, affidavits, and any

other acceptable materials show that there is no genuine issue of

material fact and a decision may be rendered as a matter of law.

Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994); Zaentz v.

Commissioner, 90 T.C. 753, 754 (1988).     The moving party bears

the burden of proving that there is no genuine issue of material

fact.   Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985);

Jacklin v. Commissioner, 79 T.C. 340, 344 (1982).     Matters deemed

admitted under Rule 90(c) are conclusively established and may be

considered in deciding whether to grant a motion for summary

judgment.   Marshall v. Commissioner, 85 T.C. 267, 272-273 (1985);

Morrison v. Commissioner, 81 T.C. 644, 651-652 (1983); Doncaster

v. Commissioner, 77 T.C. 334, 336 (1981).

     We have examined the entire record and construed facts most

favorably for petitioners.    We conclude that there is no dispute

as to any material fact and that respondent is entitled to

summary judgment.   Rule 121(b).
                                - 8 -

     1.     Whether Petitioners’ Trusts Are Recognized for Federal
            Tax Purposes

     Respondent contends that petitioners’ trusts should not be

recognized for Federal income tax purposes because they are

shams.    Petitioners contend that petitioners’ trusts are not

shams.    A trust may be a sham for Federal tax purposes if the

grantor retains control over the property or income placed in the

trust and does not change how the property or income is treated.

Commissioner v. Sunnen, 333 U.S. 591, 604 (1948); United States

v. Noske, 117 F.3d 1053, 1059 (8th Cir. 1997).    We generally do

not recognize a trust for Federal tax purposes if the grantor

keeps substantially unfettered powers of disposition or

beneficial enjoyment of trust property.    See United States v.

Noske, supra; Paulson v. Commissioner, 992 F.2d 789, 790 (8th

Cir. 1993), affg. per curiam T.C. Memo. 1991-508; United States

v. Buttorff, 761 F.2d 1056, 1061 (5th Cir. 1985); Schulz v.

Commissioner, 686 F.2d 490, 495 (7th Cir. 1982), affg. T.C. Memo.

1980-568; Vnuk v. Commissioner, 621 F.2d 1318, 1320-1321 (8th

Cir. 1980), affg. T.C. Memo. 1979-164.

     Petitioners controlled and dealt with the alleged trust

property as if it were their own.    Petitioner retained

substantial enjoyment of the trust property as shown by the fact

that he had signature authority over the bank accounts of

petitioners’ trusts in 1996 and for part of 1997, and that he

paid his personal expenses from those bank accounts in 1997.
                               - 9 -

Robert Hogue allowed petitioner to do so.   Robert Hogue did not

act as an independent trustee or control any aspects of

petitioners’ trusts.   Thus, we do not recognize petitioners’

trusts as trusts for Federal income tax purposes, and the money

paid to those trusts is taxable to petitioners.   We will grant

summary judgment with respect to the invalidity of petitioners’

trusts.   Accord Residential Mgmt. Servs. Trust v. Commissioner,

T.C. Memo. 2001-297 (involving the Careys’ income tax liability

for 1995).

     2.   Unreported Income and Failure To Timely File

     Petitioners admitted that petitioner received but did not

report $1,221,680 in 1997 as income from his health care

facilities.   Petitioners also admitted that they filed their

return for 1997 late and that they are liable for an addition to

tax for failure to timely file their 1997 return and an accuracy-

related penalty under section 6662(a) for negligence for 1997.

Thus, we will grant respondent’s summary judgment motion with

respect to petitioners’ taxability on the self-employment and

interest income and petitioners’ liability for the addition to

tax for late filing and the accuracy-related penalty.

     3.   Deductions

     Petitioners have admitted that they did not have or provide

to respondent substantiation or documentation for car and truck,

office, and mortgage interest expenses they deducted on their
                              - 10 -

1997 return.   Thus, respondent is entitled to summary judgment

that petitioners may not deduct car and truck, office, and

mortgage interest expenses for 1997.

B.   Whether Respondent Is Entitled to Summary Judgment Relating
     to the Section 6673 Penalty

     The Court may impose on a taxpayer a penalty of up to

$25,000 if the taxpayer instituted or maintained proceedings

primarily for delay, if the taxpayer's position is frivolous or

groundless, or if the taxpayer unreasonably failed to pursue

administrative remedies.   Sec. 6673(a).

     In their petition, petitioners contended: (1) They had no

unreported income or tax liability; (2) respondent failed to

identify Code sections which establish their liability for tax;

(3) respondent failed to provide them with certified assessment

information; (4) respondent failed to identify the person making

the adjustments on which the determination was based; (5) the

determination is a naked assessment because it is based on

hearsay evidence; and (6) respondent must show certified evidence

to support the determination before this case can proceed to

trial.   The Court struck most of these allegations of error from

the petition for failure to state a claim.   After the Court

ordered petitioners to amend their petition to raise justiciable

issues, petitioners filed an amended petition, most of which was

also stricken by the Court.   Petitioners’ contentions are

frivolous, see Nestor v. Commissioner, 118 T.C. 162, 166-167
                              - 11 -

(2002) (Commissioner not required to identify Code sections

establishing tax liability); Thacker v. United States, 84 AFTR 2d

6303, 99-2 USTC par. 50862 (E.D. Ky. 1999) (assessment not

required for tax liability to exist), affd. 221 F.3d 1336 (6th

Cir. 2000); Residential Mgmt. Servs. Trust v. Commissioner, supra

(trust income attributed to petitioners for 1995); Schaefer v.

Commissioner, T.C. Memo. 1983-361 (assessment not required for

tax liability to exist).   We conclude that petitioners’ claims

are frivolous and groundless, see Coleman v. Commissioner, 791

F.2d 68, 71 (7th Cir. 1986), and that they instituted this case

for purposes of delay.   Under these circumstances, we require

petitioners to pay to the United States a $5,000 penalty under

section 6673(a).



                                         An appropriate order

                                    and decision will be entered.
