                      T.C. Memo. 2001-155



                      UNITED STATES TAX COURT



     MARVIN L. BARMES AND BARBARA J. BARMES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11486-99.            Filed June 28, 2001.


     Marvin L. Barmes and Barbara J. Barmes, pro sese.

     Timothy A. Lohrstorfer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION



                         Table of Contents


Respondent’s Motion To Impose Sanctions . . . . . . . . . . .   4

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . .    18

Petitioners’ Businesses . . . . . . . . . . . . . . . . . .     18

Petitioners’ Real Properties   . . . . . . . . . . . . . . . . 22
                               - 2 -

Petitioners’ Bank Accounts   . . . . . . . . . . . . . . . .    23

Sovereignty Pure Trusts . . . . . . . . . . . . . . . . . .     26

Dealings with the State of Indiana . . . . . . . . .    . . .   36
     Filings with the Knox County Recorder’s Office .   . . .   36
          Documents Relating to Sandbar Wholesale
                 Trust and Sandbar Real Estate Trust    . . .   36
          Warranty Deeds . . . . . . . . . . . . . .    . . .   39
     Filing with the Assessor of the Township
          of Vincennes, Indiana . . . . . . . . . . .   . . .   40
     Unemployment Compensation Claims with Respect to
          Barbara’s Gift Shop and Barmes Wholesale .    . . .   41

Federal Employment Tax Returns . . . . . . . . . . . . . .      48
     Federal Employment Tax Returns--Petitioners . . . . .      48
     Federal Employment Tax Returns--Sandbar Wholesale
          Trust and Sandbar Real Estate Trust   . . . . . .     49

Federal Income Tax Returns . . . . . . . . . . . .    . . . .   50
     Petitioners’ 1994 Federal Income Tax Return .    . . . .   50
     Petitioners’ 1995 Federal Income Tax Return .    . . . .   51
     Federal Income Tax Returns--Sandbar Wholesale
          Trust and Sandbar Real Estate Trust   . .   . . . .   53

Respondent’s Examination of Petitioners’ 1994
     and 1995 Joint Returns . . . . . . . . . . . . . . . .     53

Respondent’s Communications with Petitioners with
     Respect to Sandbar Wholesale Trust and Sandbar
     Real Estate Trust . . . . . . . . . . . . . . . . . .      58

Notice of Deficiency   . . . . . . . . . . . . . . . . . . .    62

Certain Pre-Trial Conduct of Petitioners . . . . . .    . . .   63
     Petitioners’ Position During Informal Discovery
          with Respect to the Automobile Depreciation
          Deductions at Issue . . . . . . . . . . . .   . . .   64
     Petitioners’ Trial Memorandum . . . . . . . . .    . . .   64
     Petitioners’ Motion To Dismiss . . . . . . . . .   . . .   66

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . .     67

Preliminary Matters . . . . . . . . . . . . . . . . . . . .  67
     Petitioners’ Position Regarding the Presumption
          of Correctness . . . . . . . . . . . . . . . . . . 68
     Petitioners’ Position Regarding the Burden of Proof .   72
                                 - 3 -

     Petitioners’ Reliance on Facts Found in Barmes v.
          Commissioner, T.C. Memo. 2000-254   . . . . . . .       73

Respondent’s Determination Regarding Petitioners’
     Claimed Schedule C Gross Receipts . . . . . . . . . .        74

Respondent’s Determination Regarding Petitioners’
     Claimed Depreciation Deductions . . . . . . . . . . .        79

Respondent’s Determination Regarding the Accuracy-Related
     Penalty Under Section 6662(a) . . . . . . . . . . . .        81

Penalty Under Section 6673(a)(1)     . . . . . . . . . . . . .    84


     CHIECHI, Judge:     Respondent determined a deficiency in, and

an accuracy-related penalty under section 6662(a)1 on, petition-

ers’ Federal income tax for 1995 in the amounts of $315,478 and

$63,095.60, respectively.

     The issues remaining for decision2 are:

     (1)   Did petitioners have unreported taxable income for 1995

in the amount of $890,719?    We hold that they did.

     (2)   Are petitioners entitled to the depreciation deductions

that they claimed for 1995 with respect to two automobiles?      We

hold that they are not.

     (3)   Are petitioners liable for the accuracy-related penalty

under section 6662(a)?    We hold that they are.


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
      Certain computational issues also remain for 1995, resolu-
tion of which flows automatically from our resolution of the
determinations in the notice that we address herein.
                               - 4 -

     (4)   Should the Court impose on petitioners a penalty under

section 6673(a)(1)?   We hold that we should, and we shall impose

such a penalty in the amount of $2,000.

Respondent’s Motion To Impose Sanctions

     On October 13, 2000, we issued an Order (October 13, 2000

Order) granting in part and denying in part respondent’s motion

to compel production of documents (respondent’s motion to com-

pel).3   In that Order, we directed petitioners to produce to

counsel for respondent on or before October 19, 2000, those

documents requested in respondent’s request for production of

documents (the requested trust4 documents), which we considered

to be documents of Sandbar Wholesale Trust and/or Sandbar Real

Estate Trust.5   (We shall refer collectively to Sandbar Wholesale


     3
      In a separate Order issued on Oct. 13, 2000, we denied
respondent’s motion to compel answers to respondent’s interroga-
tories. That was because respondent had conceded, and we agreed,
that petitioners’ reliance on the Fifth Amendment to the Consti-
tution (Fifth Amendment) in support of their refusal to answer
those interrogatories was warranted, since respondent was contem-
plating or anticipating the possibility of a future criminal
investigation of petitioners.
     4
      When referring in this Opinion to Sandbar Wholesale Trust
and/or Sandbar Real Estate Trust, our use of the words “trust”,
“trusts”, “trustees”, “general managers”, “certificates of
beneficial interest”, “capital unit certificates”, and similar
terms is for convenience only and is not intended to convey any
meaning or have any significance for Federal income tax purposes.
     5
      In the October 13, 2000 Order, we sustained petitioners’
Fifth Amendment claim and denied respondent’s motion to compel
insofar as that motion pertained to those documents requested in
respondent’s request for production of documents, which we did
                                                   (continued...)
                              - 5 -

Trust and Sandbar Real Estate Trust as the trusts.)    The re-

quested trust documents with respect to each of those trusts that

the October 13, 2000 Order directed petitioners to produce

included, inter alia, the trust agreement with any amendments

from tax year 1995 to the present, the certificates of beneficial

interest issued by the trust during or otherwise effective for

tax year 1995, any agreements between the trust and either

petitioner or both petitioners with respect to the use of the

trust assets by either or both of them, any compensation agree-

ments between petitioner Marvin Barmes (Mr. Barmes) and the trust

for tax years 1995 to the present, all capital unit certificates

issued by the trust from tax year 1996 to the present, all trust

accounting books and records for the period beginning with the

trust’s purported creation through December 31, 1995, all trust

documents pertaining to distributions from the trust for the

period beginning with the trust’s purported creation to the

present, and certain trust bank account information.

     Petitioners objected on the following grounds (petitioners’

objections) to the production of the documents requested in

respondent’s request for production of documents:   (1) Relevancy

with respect to any documents requested regarding Sandbar Real

Estate Trust; (2) petitioners’ lack of custody, possession, or


     5
      (...continued)
not consider to be documents of Sandbar Wholesale Trust and/or
Sandbar Real Estate Trust.
                                 - 6 -

control over the documents requested in respondent’s request for

production of documents, if any such documents existed;

(3) relevancy with respect to any documents requested for any tax

periods other than 1995; and (4) the Fifth Amendment.    In the

October 13, 2000 Order, we considered and rejected each of the

first three of petitioners’ objections.    In that Order, we

considered and (1) sustained petitioners’ Fifth Amendment claim

insofar as it related to the production of petitioners’ personal

documents and (2) rejected that claim insofar as it related to

the production of the requested trust documents.

     In the October 13, 2000 Order, we cautioned petitioners that

we would be inclined to impose sanctions under Rule 104(c) in the

event that petitioners did not fully comply with the provisions

of that Order requiring them to produce to counsel for respondent

the requested trust documents.

     On October 18, 2000, petitioners filed a motion to recon-

sider the October 13, 2000 Order (petitioners’ motion to recon-

sider).    In that motion, petitioners advanced essentially the

same arguments which they had advanced in opposing respondent’s

motion to compel and which we rejected in the October 13, 2000

Order.    On October 18, 2000, we denied petitioners’ motion to

reconsider.

     On October 23, 2000, this case was called from the calendar

(calendar call) at the Court’s trial session in Indianapolis,
                                 - 7 -

Indiana.    At the calendar call, petitioners requested that the

Court schedule the trial in this case on that day.    At the

calendar call, counsel for respondent informed the Court that

petitioners had failed to comply with the October 13, 2000 Order

and filed respondent’s motion to impose sanctions (respondent’s

motion for sanctions).    In that motion, respondent requested the

Court to impose on petitioners pursuant to Rule 104(c) one or

more sanctions because of their failure to comply with the

October 13, 2000 Order.

     We asked petitioners at the calendar call whether they had

complied with the October 13, 2000 Order.    Petitioners replied

that they had not, but that they had filed with the Court peti-

tioners’ motion to reconsider.    We reminded petitioners that we

had denied petitioners’ motion to reconsider.    We then directed

petitioners to produce the requested trust documents to counsel

for respondent as soon as possible before trial and advised

petitioners that we would impose sanctions on them if they failed

to do so.    At the conclusion of the calendar call, we informed

the parties that we were taking respondent’s motion for sanctions

under advisement, and we restated that if petitioners did not

produce the requested trust documents prior to the commencement

of the trial in this case, the Court would impose sanctions on

them because of their failure to do so.

     Thereafter on October 23, 2000, this case was recalled from
                               - 8 -

the calendar for trial (recall of this case).   At that recall, we

asked petitioners whether they had complied with the October 13,

2000 Order.   Petitioners stated that they had not complied with

that Order and began to reassert as an objection to the produc-

tion of the requested trust documents that they did not have

custody or control over such documents.   At the recall of this

case, we reminded petitioners that the Court had previously

rejected that contention in the October 13, 2000 Order.   We also

rejected that contention in our denial of petitioners’ motion to

reconsider.   We advised petitioners at the recall of this case

that we considered them to be willfully failing to comply with

the October 13, 2000 Order.

     We asked petitioners at the recall of this case whether they

had any response to respondent’s motion for sanctions.    Petition-

ers replied by reasserting their Fifth Amendment claim as an

objection to the production of the requested trust documents.     We

reminded petitioners at the recall of this case that in the

October 13, 2000 Order the Court had carefully considered and

rejected petitioners’ Fifth Amendment claim insofar as it per-

tained to the requested trust documents, and we again asked

petitioners whether they had any response to respondent’s motion

for sanctions.   Petitioners stated that they did not have any

response to that motion.

     Thereafter, at the recall of this case, we proceeded with
                               - 9 -

the trial without acting on respondent’s motion for sanctions,

which remained under advisement.   We proceeded with the trial

without acting on that motion because, although we had informed

petitioners at the calendar call and at the recall of this case

that we would impose sanctions on them for their failure to

comply with the October 13, 2000 Order, we had not had adequate

time as of the beginning of the trial in this case to consider

and decide what sanction(s) we would impose on petitioners.

     Although not requested by the Court, on October 31, 2000,

petitioners submitted, and the Court had filed, petitioners’

response (petitioners’ response) to respondent’s motion for

sanctions.   In petitioners’ response, petitioners reasserted

essentially most of the same arguments that they had advanced in

opposition to respondent’s motion to compel, which we rejected in

the October 13, 2000 Order, and that they had continued to

advance in petitioners’ motion to reconsider, which we denied on

October 18, 2000.

     In petitioners’ response to respondent’s motion for sanc-

tions, petitioners also advanced an argument under the Fourth

Amendment to the Constitution (Fourth Amendment).   According to

petitioners, Boyd v. United States, 116 U.S. 616 (1886), holds

that an individual may not be compelled to produce his “private

papers to establish a criminal charge against him, or to forfeit

his property”, id. at 622, and that no negative inferences may be
                                  - 10 -

drawn from such individual’s failure to do so, see id. at 621-

622.       Petitioners’ reliance on Boyd is misplaced.   That case

involved the requested production of certain private books and

papers of the claimants in the context of a forfeiture action by

the United States.      See id. at 622, 624.   The United States

Supreme Court (Supreme Court) held that both the Fourth Amendment

and the Fifth Amendment prohibited the production of those

private items in a forfeiture proceeding.6      See id. at 634-635.

       In the instant case, the requested trust documents are not

the private books and papers of petitioners.      Rather, they are

the documents of Sandbar Wholesale Trust and/or Sandbar Real



       6
      Although the Supreme Court acknowledged that a forfeiture
suit by the United States was technically a civil proceeding, it
characterized such an action as “in substance and effect a
criminal one”. Boyd v. United States, 116 U.S. 616, 634 (1886).
The Supreme Court stated with respect to such suits:

       we think that they are within the reason of criminal
       proceedings for all the purposes of the Fourth Amend-
       ment of the Constitution, and of that portion of the
       Fifth Amendment which declares that no person shall be
       compelled in any criminal case to be a witness against
       himself; and we are further of [the] opinion that a
       compulsory production of the private books and papers
       of the owner of goods sought to be forfeited in such a
       suit is compelling him to be a witness against himself,
       within the meaning of the Fifth Amendment to the Con-
       stitution, and is the equivalent of a search and
       seizure--and an unreasonable search and seizure--within
       the meaning of the Fourth Amendment. * * *

Id. at 634-635. In contrast to the forfeiture action considered
by the Supreme Court in Boyd, the instant case is a civil pro-
ceeding and may not in any way be characterized as criminal in
nature.
                               - 11 -

Estate Trust, for which petitioners were appointed general

managers and managing agents and, as such, had the same duties

and responsibilities as the respective trustees of the trusts.

That distinction is critical as far as the Supreme Court is

concerned.   In United States v. White, 322 U.S. 694 (1944), the

Supreme Court distinguished Boyd v. United States, supra, in

cases where, as here, the requested documents are not those

belonging to the individual personally but are those that the

individual holds in his or her capacity as a representative of a

so-called collective entity.   The Supreme Court stated:   “indi-

viduals, when acting as representatives of a collective group,

cannot be said to be exercising their personal rights and duties

nor to be entitled to their purely personal privileges.”      Id. at

699 (distinguishing Boyd v. United States, supra).   On the

instant record, we find that petitioners, as the appointed

general managers and managing agents of both Sandbar Wholesale

Trust and Sandbar Real Estate Trust, have no valid claims under

the Fourth Amendment that would prevent production of the re-

quested trust documents.7


     7
      Nor would we find on the instant record that petitioners
have a valid claim under the Fourth Amendment assuming arguendo
that the requested trust documents were petitioners’ private
documents, rather than trust documents. “Requiring taxpayers,
who institute civil proceedings protesting deficiency notices, to
produce records or face dismissal constitutes no invasion of
privacy or unlawful search or seizure.” Edwards v. Commissioner,
680 F.2d 1268, 1270 (9th Cir. 1982), affg. per curiam an order of
                                                   (continued...)
                               - 12 -

     Based on our examination of the record before us, we find

that petitioners have willfully failed to comply with the October

13, 2000 Order and that they never had any intention of complying

with that Order.    We further find that petitioners’ willful

flouting of the October 13, 2000 Order hampered respondent’s

ability to develop respondent’s position in this case with

respect to, inter alia, the determination in the notice to

increase petitioners’ Schedule C gross receipts for 1995.

     Rule 104(c) provides that if a party fails to obey an order

of the Court with respect to the provisions of, inter alia, Rule

72 relating to production of documents and things, the Court may

make such orders as to the failure as are just.    Such orders may

include, but are not limited to,

          (1) An order that the matter regarding which the
     order was made or any other designated facts shall be
     taken to be established for the purposes of the case in
     accordance with the claim of the party obtaining the
     order.

         *      *        *        *       *       *       *

          (3) An order * * * dismissing the case or any
     part thereof, or rendering a judgment by default
     against the disobedient party.



     7
      (...continued)
dismissal; see Coulter v. Commissioner, 82 T.C. 580, 583 (1984);
Ebert v. Commissioner, T.C. Memo. 1991-629, affd. per unpublished
order 986 F.2d 1427 (10th Cir., Feb. 23, 1993). Of course, we
previously found on the record before us that petitioners did
have a valid claim for protection under the Fifth Amendment with
respect to the production of their personal documents. See supra
note 5; see also supra note 3.
                             - 13 -

Rule 104(c)(1), (3).

     In the instant case, respondent alleged the following in

paragraph 7 of respondent’s answer:

          (a) On October 12, 1995, Marvin L. Barmes and
     Barbara J. Barmes established what purport to be “pure
     trusts” into which they, on or about October 12, 1995,
     purportedly transferred title to all their personal
     property, including their ownership interests in Marvin
     L. and Barbara J. Barmes, PTR, d/b/a Barbara’s Gift
     Shop, and d/b/a Barmes Wholesale. The purported trusts
     are known as the Sandbar Real Estate Trust and the
     Sandbar Wholesale Trust.

          (b) On October 18, 1995, Marvin L. Barmes and
     Barbara J. Barmes purportedly transferred title to
     three parcels of real estate to the Sandbar Real Estate
     Trust. These three parcels of real estate comprise all
     of the known real estate holdings of Marvin L. Barmes
     and Barbara J. Barmes, including their personal resi-
     dence and the business location of Barbara’s Gift Shop
     and Barmes Wholesale located at 114 and 120 Main Street
     in Vincennes, Indiana.

          (c) Marvin L. Barmes and Barbara J. Barmes re-
     ceived no consideration in exchange for the purported
     transfer of property to the Sandbar Real Estate Trust
     and the Sandbar Wholesale Trust described in subpara-
     graphs (a) and (b), above.

          (d) Marvin L. Barmes and Barbara J. Barmes con-
     tinued to operate and control the business known as
     Barbara’s Gift Shop and Barmes Wholesale after the
     creation of the Sandbar Wholesale Trust, and have
     continued to enjoy the use of the parcels of real
     estate and the personal property after the purported
     transfers to the the [sic] Sandbar Real Estate Trust.

          (e) During 1995, the trustees of both the Sandbar
     Real Estate Trust and the Sandbar Wholesale Trust are
     as follows: James Rabold, the brother of Barbara J.
     Barmes,[8] and the petitioners’ daughters-in-law


     8
      The parties stipulated that during the year at issue James
                                                   (continued...)
                             - 14 -

     Jennifer Burgess Barmes and Susan Thomas Barmes.

          (f) Jennifer Burgess Barmes and Susan Thomas
     Barmes were employed by petitioners during 1995.

          (g) Petitioners and the trustees of the Sandbar
     Real Estate Trust and the Sandbar Wholesale Trust have
     refused to provide to respondent’s agents or officers
     information or documentation setting forth who the
     beneficiaries are of each trust.

          (h) The Sandbar Wholesale Trust has not filed a
     Form 1041, U.S. Fiduciary Income Tax Return, for the
     tax year ended December 31, 1995.

          (i) The taxpayer identification number used by
     the Sandbar Wholesale Trust, XX-XXXXXXX, is not a valid
     taxpayer identification number registered or otherwise
     recognized by the Internal Revenue Service.

          (j) On March 14, 1996, petitioner Marvin L.
     Barmes, as the general manager of the Sandbar Wholesale
     Trust, executed under penalties of perjury Indiana
     State Form 11405, Business Tangible Personal Property
     Assessment Return, for the calendar year ended December
     31, 1995.

          (k) On the Indiana State Form 11405, Business
     Tangible Personal Property Assessment Return, the
     Sandbar Wholesale Trust, through its general manager,
     Marvin L. Barmes, stated that the trusts had total
     sales of $5,799,767.00 for the calendar year ended
     December 31, 1995, from the general retail and whole-
     sale activities of Barbara’s Gift Shop/Barmes Wholesale
     conducted at 120/114 Main Street in Vincennes, Indiana.


     8
      (...continued)
Rabold was married to Carol Barmes, who is Mr. Barmes’ sister.
James Rabold is the brother-in-law, and not the brother, of
Barbara J. Barmes. As corrected, par. 7(e) of respondent’s
answer should read as follows:

          (e) During 1995, the trustees of both the Sandbar
     Real Estate Trust and the Sandbar Wholesale Trust are
     as follows: James Rabold, petitioners’ brother-in-law,
     and the petitioners’ daughters-in-law Jennifer Burgess
     Barmes and Susan Thomas Barmes.
                             - 15 -

          (l) On their personal income tax return for the
     tax year ended December 31, 1995, petitioners reported
     on Schedule C total gross receipts or sales of
     $4,217,062.00 for Barbara’s Gift Shop and Barmes Whole-
     sale conducted at 120 Main Street in Vincennes, Indi-
     ana.

          (m) Petitioners have continued to control the
     operations of their businesses, Barbara’s Gift Shop and
     Barmes Wholesale, since the creation of the Sandbar
     Wholesale Trust in October 1995.

          (n) In the notice of deficiency, respondent
     determined that petitioners understated their net
     taxable income from their operation of Barbara’s Gift
     Shop and Barmes Wholesale for the tax year ended Decem-
     ber 31, 1995 by $890,719.00.

          (o) Based on the adjustment of $890,719.00 to net
     profit for the tax year 1995 from petitioners’ opera-
     tion of Barbara’s Gift Shop and Barmes Wholesale,
     respondent determined that petitioners had a net profit
     of $793,881.00,[9] not a net loss of $96,883.00, as
     claimed by petitioners.

          (p) Utilizing the net profit percentage based on
     total sales from petitioners’ 1994 personal income tax
     return of 13.83%, respondent determined petitioner’s
     total sales for 1995 to be $5,740,282, as follows:




     9
      Par. 7(o) of respondent’s answer contains a mathematical
error. As corrected, such par. should read as follows:

          (o) Based on the adjustment of $890,719.00 to net
     profit for the tax year 1995 from petitioners’ opera-
     tion of Barbara’s Gift Shop and Barmes Wholesale,
     respondent determined that petitioners had a net profit
     of $793,836.00, not a net loss of $96,883.00, as claim-
     ed by petitioners.
                               - 16 -
                                                    [10]
          1995 net profit                                $793,881.00
          divided [by] net profit percentage                  13.83%
                                                  [10]
          Gross Proft [sic]                            $5,740,282.00

          (q) Based on total sales of $5,799,767.00 as
     reported by Marvin L. Barmes on the Indiana State Form
     11405, Business Tangible Personal Property Assessment
     Return, for the calendar year ended December 31, 1995,
     and utilizing the net profit margin determined by
     respondent of 13.83 percent, net profit for from [sic]
     the operation of Barbara’s Gift Shop and Barmes Whole-
     sale for the tax year ended December 31, 1995 was
     $802,108.00.

          (r) The Sandbar Wholesale Trust is a mere sham
     for tax purposes and should be disregarded.

          (s) The taxable income attributed by petitioners
     to the Sandbar Wholesale Trust for tax year 1995 is
     taxable to petitioners for the taxable year ended
     December 31, 1995.

     Where, as here, there is a failure to comply with an Order

of the Court with respect to discovery, we may impose such

sanctions as we deem appropriate.    See Rule 104(c); Durovic v.

Commissioner, 84 T.C. 101, 119 (1985); Marcus v. Commissioner, 70



     10
      Par. 7(p) of respondent’s answer shows the 1995 net profit
shown in par. 7(o). As we indicated supra note 9, par. 7(o) of
respondent’s answer contains a mathematical error. As corrected,
the 1995 net profit is $793,836. As corrected, par. 7(p) of
respondent’s answer should read as follows:

          (p) Utilizing the net profit percentage based on
     total sales from petitioners’ 1994 personal income tax
     return of 13.83%, respondent determined petitioner’s
     total sales for 1995 to be $5,739,957, as follows:

             1995 net profit                        $  793,836.00
             divided [by] net profit percentage            13.83%
             Gross Proft [sic]                      $5,739,957.00
                              - 17 -

T.C. 562, 571 (1978), affd. without published opinion 621 F.2d

439 (5th Cir. 1980).   In respondent’s motion for sanctions,

respondent requests, inter alia, that the Court deem established

for purposes of the instant case the allegations in paragraph

7(a) through 7(s) of the answer.   We find such a sanction to be

appropriate under the circumstances presented here,11 except that

we do not consider it appropriate to deem paragraph 7(r) and 7(s)

of the answer to be established.   That is because those subpara-

graphs contain allegations that we find to be mixed allegations

of fact and law.   We shall grant respondent’s motion in that the

allegations in respondent’s answer contained in paragraph 7(a)

through 7(d), 7(e) as corrected to reflect the parties’ stipula-

tion, see supra note 8, 7(f) through 7(n), 7(o) and 7(p) with the

mathematical errors corrected, see supra notes 9 and 10, and 7(q)

are deemed established as facts for purposes of this case.12    See

Rule 104(c)(1); see also Durovic v. Commissioner, supra at 119;

Marcus v. Commissioner, supra at 577.




     11
      Rendering a judgment by default against petitioners in
this case is a sanction that also is available to us under Rule
104(c)(3). See Rule 104(c)(3); see also Rechtzigel v. Commis-
sioner, 79 T.C. 132, 139-140, (1982), affd. per curiam on other
grounds 703 F.2d 1063 (8th Cir. 1983). However, we shall not
impose such a sanction here since we proceeded with the trial in
this case on Oct. 23, 2000.
     12
      The trial record in this case also establishes as facts
many of the allegations that, pursuant to Rule 104(c)(1), we are
deeming established as facts for purposes of this case.
                               - 18 -

                          FINDINGS OF FACT

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

discussed above, certain other facts have been deemed established

pursuant to Rule 104(c) and are incorporated herein as findings

of fact by this reference.

     Petitioners, who at all relevant times were husband and

wife, resided in Indiana at the time the petition was filed.

Petitioners’ Businesses

     At all relevant times, petitioners operated two businesses,

one under the name Barbara’s Gift Shop and the other under the

name Barmes Wholesale (collectively, the two businesses).    During

at least the period November 1994 through December 1996, Mr.

Barmes was the individual who had ultimate control over Barbara’s

Gift Shop and Barmes Wholesale and the operations of those two

businesses.

     At all relevant times, Barbara’s Gift Shop, a retail busi-

ness located at 120 Main Street,13 Vincennes, Knox County, Indi-

ana, and Barmes Wholesale, a wholesale business located at 114

Main Street, Vincennes, Knox County, Indiana (collectively, the

business locations), sold many of the same products, which

included adult novelties and tobacco accessories.   At those


     13
      The record is unclear as to whether the street on which
the two businesses were located was called Main Street or East
Main Street. Most of the references in the record are to Main
Street, and, for convenience, we shall refer to the street on
which the two businesses were located as Main Street.
                             - 19 -

times, the respective buildings in which petitioners conducted

the two businesses consisted of at least two floors, and above

Barbara’s Gift Shop were an apartment and offices.14   At all

relevant times, one or two buildings were located on Main Street

between the respective business locations of Barbara’s Gift Shop

and Barmes Wholesale.

     On October 12, 1995, Mr. Barmes advised the respective

employees15 of Barbara’s Gift Shop and Barmes Wholesale (collec-

tively, business employees) (1) that the two businesses had

become part of a trust and (2) that, after October 12, 1995, the

business employees would no longer be employees of petitioners

but would be independent contractors for Sandbar Wholesale Trust.

     In a written notice to the business employees dated November

2, 1995, Mr. Barmes informed such employees that, as of November

1, 1995, Barbara’s Gift Shop and Barmes Wholesale would no longer

carry Workman’s Compensation Insurance.

     On October 20, 1995, Mr. Barmes issued a written statement

(October 20, 1995 written statement) to the business employees,



     14
      The record does not disclose whether the apartment and the
offices located above Barbara’s Gift Shop were separate and
whether those offices served as offices for Barbara’s Gift Shop
only or for both Barbara’s Gift Shop and Barmes Wholesale.
     15
      When referring in this Opinion to the individuals who
worked at the two businesses, our use of the words “employees”,
“independent contractors”, “employer”, and similar terms is for
convenience only and is not intended to convey any meaning or
have any significance for Federal tax purposes.
                                 - 20 -

which stated in pertinent part:

     To all Workers:

     From Marvin Barmes, General Manager

     You will receive a W-2 for the period worked for Marvin
     Barmes (Barbara’s Gift Shop/Barmes Wholesale), January
     1, 1995 thru October 12, 1995.

     On October 12, 1995, Barbara’s Gift Shop and Barmes
     Wholesale businesses became part of a Trust. All
     workers were hired on by the Trust.

     The Trust will issue 1099s for your worked [sic] per-
     formed thereafter.

     All workers will be responsible for any/all taxes owed.
     Some may be required to file quarterly taxes. You may
     want to consult your tax preparer, CPA or call IRS at
     1-800-829-1040.

     An additional 25 cents will be added to your hourly
     compensation, effective on compensation starting Octo-
     ber 15, 1995.

          *        *       *       *       *        *      *

     This is your last paycheck from Marvin L. Barmes, Sr.

     Your vacation check is for accrued vacation pay.

     Your next checks will be from the Trust, as compensa-
     tion for your work.

                        “WORK FOR HIRE STATEMENT”

                 Clarifying the status of the worker!!!

     1.       Supervisors have the right to approve the end
              product.
     2.       Don’t require salesperson to collect money from
              accounts on behalf of the *dba.
     3.       Don’t provide *dba car, business cards, samples,
              stationary [sic], and/or reimburse rent.
     4.       Workers are not required to work exclusively for
              the *dba.
     5.       Don’t provide workers with insurance benefits.
                                 - 21 -

     6.       Worker’s hourly pay is subject to the work
              performed.
     7.       Workers are not entitled to participate in any
              *dba plans, arrangements or distributions pertain-
              ing to any health, bonus, pension, stock,
              profit-sharing or similar benefits.
     8.       Workers will not be given paid vacations.
     9.       When you need a day(s) or week(s) off. [sic]
              Please give a few days notice to your supervisor
              so they [sic] can have a worker prepared to do
              your job.

     *dba refers to Barbara’s Gift Shop/Barmes Wholesale.

At the bottom of the October 20, 1995 written statement was a

blank space at which Mr. Barmes instructed each of the business

employees to sign his or her name as an indication that each such

employee had read and understood that written statement.

     In addition to requiring the business employees to sign the

October 20, 1995 written statement, Mr. Barmes required them to

sign and, in certain instances, to complete certain other forms,

including a document entitled “Affidavit of Citizenship and

Domicile” (citizenship affidavit form) and Form W-8, Certificate

of Foreign Status.      The citizenship affidavit form stated in

pertinent part:

     I was not born in a territory over which the United
     States is Sovereign and I am, therefore, not subject to
     its jurisdiction and I am not a citizen of the United
     States, as defined in 26 CFR Sec. 1.1-1(c). I am not
     liable for the Title 26, Internal Revenue Code (IRC),
     Subtitle A, [Sec.] 1 graduated income taxes for reason
     of my alienage[.]

          *        *       *       *       *        *       *

     I am a sovereign Citizen of one of the 50 contiguous
     states of America, under the Constitution and the Law.
                               - 22 -

     As such, I am a “Nonresident Alien” {as such ‘word of
     art’ is defined in IRC Sec. 7701(b)(1)(B)} under United
     States Tax Laws [Title 26 United States Code and the
     Internal Revenue Code][.]

     26 CFR Sec 31.3401(a)(6)-1(b) “Remuneration paid to a
     nonresident alien individual...is exempted from wages
     and hence is not subject to withholding.”

     Petitioners issued to Susan Thomas Barmes and to Jennifer

Burgess16 Form W-2, Wage and Tax Statement (Form W-2), for the

respective wages that they earned for the period January 1, 1995,

through October 12, 1995.   As of October 23, 2000, the date of

the trial in this case, petitioners, Sandbar Wholesale Trust, and

Sandbar Real Estate Trust had not issued to the business employ-

ees Forms W-2 or Forms 1099-MISC, Miscellaneous Income (or any

other type of Form 1099), for any periods after 1995.

Petitioners’ Real Properties

     At all relevant times until at least October 12, 1995,

petitioners owned the two parcels of real property on which the

business locations were situated.   At those times, petitioners

also owned approximately 17.73 acres of land located at 6393 E.

Overhead Road, Fritchton, Indiana (the Fritchton property), which

was approximately 6.5 miles from the business locations.   Peti-

tioners’ personal residence and an old farmhouse (old farmhouse)

were situated on the Fritchton property.   In 1994, petitioners

remodeled the old farmhouse and furnished it as an office.


     16
      During the year at issue, Susan Thomas Barmes and Jennifer
Burgess were petitioners’ daughters-in-law.
                              - 23 -

Petitioners’ Bank Accounts

     At least during 1994 and 1995, petitioners owned and main-

tained several bank accounts at Community Bank and Trust (Commu-

nity Bank).

     On October 13, 1995, Mr. Barmes completed five separate

applications (account applications) in order to open five sepa-

rate accounts with Community Bank, into each of which he made an

initial cash deposit of $1,000.   Each account application re-

quired Mr. Barmes to provide the name and the taxpayer identifi-

cation number (TIN) of the account owner.   Mr. Barmes provided

the following names and TIN’s in the respective account applica-

tions that he completed:   (1) Sandbar Wholesale Trust--Barbara

[sic] Gift Shop, TIN XX-XXXXXXX; (2) Sandbar Family Trust, TIN

XX-XXXXXXX; (3) Sandbar Wholesale Trust--Barmes Wholesale, TIN

XX-XXXXXXX; (4) Sandbar Wholesales [sic] Trust--Payroll, TIN 52-

9876140; and (5) Sandbar Real Estate Trust, TIN XX-XXXXXXX.

     Respondent did not issue TIN’s XX-XXXXXXX and XX-XXXXXXX.

As of the date of the trial in this case, respondent had not

issued employer identification numbers (EIN’s) to Sandbar Whole-

sale Trust or Sandbar Real Estate Trust.

     In completing the five separate account applications, Mr.

Barmes provided certain other information to Community Bank with

respect to each account.   In each account application, Mr. Barmes

indicated that he was opening the account for a personal purpose
                              - 24 -

and not a business purpose, that only one signature was to be

required in order for withdrawals to be made from the account,

and that the account owner was a trust.

     In the case of an account’s being opened for a trust as

owner of the account, the account application requested informa-

tion as to the names and the addresses of the beneficiaries of

the trust and whether the trust was a revocable trust or whether

it had a pay-on-death designation.     Mr. Barmes did not provide

that information on any of the account applications that he

completed.

     In a section marked “BACKUP WITHHOLDING CERTIFICATIONS”, the

account application requested that the account owner certify

under penalties of perjury that the TIN provided on the applica-

tion was the correct TIN for that account owner and, if applica-

ble, that the account owner certify that such account owner was

not subject to backup withholding, was an exempt recipient,

and/or was a nonresident alien.   In each account application, Mr.

Barmes indicated on behalf of the account owner, which in each

instance he claimed was a trust, that the TIN provided in such

application was the correct TIN for the trust, that the trust was

not subject to backup withholding, and that the trust was not a

United States person.   Mr. Barmes signed each of the account

applications that he completed under penalties of perjury,

thereby certifying under such penalties that the foregoing
                                - 25 -

information that he provided on behalf of the account holder in

each such application was correct.       Below Mr. Barmes’ signature

in each account application, Mr. Barmes wrote the words “Without

prejudice”.

     As of October 13, 1995, Community Bank listed (October 13,

1995 signature card) the following individuals as having signa-

tory authority (signatories) over various separate Community Bank

accounts maintained under the respective names Sandbar Real

Estate Trust, Sandbar Wholesale Trust,17 Sandbar Family Trust,

and Land Vehicle Trust:18   Marvin L. Barmes, Barbara Barmes,

Marvin Barmes, Jr., Greg Barmes, Mark Barmes, Brian Barmes, Susan

Thomas Barmes, Jennifer Burgess Barmes, and James Rabold.19      The

October 13, 1995 signature card identified Marvin L. Barmes as

general manager and Susan Thomas Barmes, Jennifer Burgess Barmes,

and James Rabold as trustees.



     17
      Mr. Barmes opened three different accounts under the
respective names Sandbar Wholesale Trust--Barbara’s Gift Shop,
Sandbar Wholesale Trust--Barmes Wholesale, and Sandbar Wholesale
Trust--Payroll. The record does not disclose whether the indi-
viduals listed as signatories for the three accounts maintained
under the name Sandbar Wholesale Trust were signatories for all
three of those accounts.
     18
      The record does not disclose that an account was opened at
Community Bank under the name Land Vehicle Trust.
     19
      Marvin Barmes, Jr., Greg Barmes, Mark Barmes, and Brian
Barmes are sons of petitioners. During the year at issue, Susan
Thomas Barmes was married to Greg Barmes, Jennifer Burgess Barmes
was married to Mark Barmes, and James Rabold was married to Carol
Barmes, who is Mr. Barmes’ sister.
                                 - 26 -

     As of March 27, 1996, Community Bank listed (March 27, 1996

signature card) the following individuals as signatories for

various Community Bank accounts maintained under the respective

names Sandbar Real Estate Trust, Sandbar Wholesale Trust, Sandbar

Family Trust, and Sandbar Land Vehicle Trust:20     Marvin L.

Barmes, Barbara Barmes, Marvin Barmes, Jr., Greg Barmes, Mark

Barmes, Brian Barmes, Susan Thomas Barmes, Kim Hall Barmes,21 and

James Rabold.     The March 27, 1996 signature card identified

Marvin L. Barmes as general manager and Susan Thomas Barmes, Kim

Hall Barmes, and James Rabold as trustees.

     As of May 28, 1998, Community Bank listed (May 28, 1998

signature card) the following individuals as signatories for

Community Bank account number 020005325-6 that was maintained

under the name Sandbar Wholesale Trust--Barbara’s Gift Shop:

Marvin L. Barmes, Sr., Barbara Barmes, Greg Barmes, Brian Barmes,

Susan Thomas Barmes, Kim Hall Barmes, and James Rabold.     The May

28, 1998 signature card identified Marvin L. Barmes, Sr. and

Barbara Barmes as general managers and Susan Thomas Barmes, Kim

Hall Barmes, and James Rabold as trustees.

Sovereignty Pure Trusts

     At all relevant times, Sovereignty Pure Trusts (Sovereignty)



     20
      The record does not disclose that an account was opened at
Community Bank under the name Sandbar Land Vehicle Trust.
     21
          Kim Hall Barmes married Brian Barmes on June 3, 1995.
                                - 27 -

was an entity that drafted for a fee so-called “Pure Trust

Organizations” (pure trust organizations).    At those times,

Sovereignty sold pure trust organizations through promotional

materials.    The promotional materials used by Sovereignty during

the year at issue were substantially the same as those that it

used during 1998 (Sovereignty promotional materials).    The

Sovereignty promotional materials identified an individual named

Lynne Meredith as the person who drafted the pure trust organiza-

tion documents that were sold by Sovereignty.    Those materials

stated:   “Your customized Pure Trust Organization(s) will be

mailed within 15 working days from the date that we receive your

completed application.”

     Under the heading “ADVANTAGES OF A PURE TRUST ORGANIZATION”,

the Sovereignty promotional materials stated in pertinent part:

     1.      NO INCOME TAX REQUIREMENTS! As verified by the
             I.R.S., “A Pure Trust Organization has no tax
             requirements!” * * * A Pure Trust is not required
             to pay income tax on its earnings, gains or prof-
             its. It does not file a tax return!

     2.      COMPLETE PRIVACY. A Pure Trust Organization holds
             assets, conducts business, and does banking in
             complete privacy. IT IS NOT REQUIRED TO HAVE A
             SOCIAL SECURITY, E.I.N, OR OTHER FEDERAL IDENTIFI-
             CATION NUMBER! Information about the assets,
             liabilities, and management of Pure Trust Organi-
             zations are completely confidential and are not
             accessible to the government or to the public.

     3.      IRONCLAD ASSET PROTECTION! A Pure Trust Organiza-
             tion protects property from unscrupulous judgment
             creditors, tax liens, levies and seizures, law-
             suits, divorce claims and bankruptcy.
                                - 28 -

     4.     FREEDOM: A Pure Trust Organization is Free from
            Legislative Restrictions!
            a) The Pure Trust has NO accounting, bookkeeping
            or reporting requirements.
            b) The Pure Trust has NO Income Tax Withholding or
            Social Security requirements.
            c) The Pure Trust has NO quarterly tax payment or
            reporting requirements.

     5.     ELIMINATION OF PROBATE AND INHERITANCE TAXES. A
            Pure Trust is not required to pay Probate, Inheri-
            tance and Death Taxes and associated Legal Fees.
            A Pure Trust Organization is unaffected by the
            death of the Trustees or Beneficiaries.

     6.     MAINTAIN BENEFITS OF PROPERTY AND BUSINESS
            OWNERSHIP WITHOUT THE POTENTIAL LIABILITIES!
            Trustees and Beneficiaries are not liable for
            the debts of the Pure Trust Organization and
            Pure Trust Organization CANNOT be invaded
            because of any debt incurred by the Trustees
            or Beneficiaries.

            $695 First Pure Trust Organization - $595 Each
                           Additional Trust
          Liberty International Program - $1650 for (3) Pure
                                Trusts

                 Pays for itself in Legal Tax Savings
          Less than the Cost of a Corporation! [Reproduced
                              literally.]

     Under the heading “Pure Trust Organization Information”, the

Sovereignty promotional materials stated in pertinent part:

          The best time for estate planning and asset pro-
     tection is NOW, before you need it. A Pure Trust
     Organization provides the surest road to freedom per-
     mitted by law, providing the ultimate in tax immunity,
     ironclad asset protection, privacy and estate planning.
     By transferring assets into properly structured Pure
     Trust Organizations, you can maintain complete control
     of, or all of the benefits of ownership without the
     inherent liabilities. Assets “held in trust,” are
     unaffected by bankruptcy, divorce, law suits, liens,
     levies or death.
                             - 29 -

           A “Trust” is defined by Black’s Law Dictionary as,
     “a right of property, real or personal, held by one
     party for the benefit of another.” The “Trustee(s)”
     hold the legal and equitable Title to the property for
     the benefit of the Beneficiaries/ Capital Unit Holders.
     Although the trustees hold the property title, they do
     not own the property. The Trustee(s) is/are delegated
     the management authority for the Pure Trust Organiza-
     tion.

          The Beneficiaries/ Capital Unit Holders also do
     not own the property but they have the right to all of
     the benefits, proceeds and profits of it. This is
     called the “beneficial interest.” In a Sovereignty
     Pure Trust Organization the “beneficial interest” is
     contractually non-assignable and for that reason a
     Creditor may not legally attach it. The Beneficiaries/
     Capital Unit Holders do not have any management control
     of the property.

          A Pure Trust Organization is “created” and given
     life, though a “Contract in the Form of a Pure Trust
     Organization” which is referred to as the “instrument.”
     [Reproduced literally.]

     Under the heading “A Pure Trust Organization has No Income

Tax Requirements”, the Sovereignty promotional materials stated

in pertinent part:

          Like Corporations, Revocable Living Trusts are
     statutory and are subject to legislative control and
     taxation. A Revocable Living Trust is required to file
     a 1041 Form each year. As confirmed by the Chief of
     Accounting for the IRS, * * * “A Pure Trust Organiza-
     tion has no tax requirements.” Therefore, there is no
     legal requirement for a Pure Trust Organization to file
     a tax return.

        *       *       *       *       *       *       *

          A Pure Trust is not considered a taxable “Associa-
     tion” pursuant to tax law. Black’s 6th Law Dictionary
     defines Association as follows: “What is designated as
     a trust or a partnership...may be classified as an
     association [only] if it clearly possesses [all] corpo-
     rate attributes. Corporate attributes include:
                             - 30 -

     [1] centralized management, [2] continuity of exis-
     tence, [3] free transferability of interests,
     [4] limited liability.”

          A Pure Trust Organization is not an “association”
     or an “unincorporated association,” because it does not
     possess the same attributes of a corporation, such as
     continuity of existence and free transferability of
     [beneficial] interests. Further, unlike a corporation,
     a Pure Trust Organization is not an “artificial entity”
     nor does it owe its’ existence to the charter power of
     the State.

          A Pure Trust Organization is also not an alter ego
     or a nominee for any trustee or beneficiary because no
     one individual holds legal and equitable title AND
     beneficial interest. [Reproduced literally.]

     Under the heading “IMPORTANT!    PLEASE READ THE FOLLOWING

BASIC RULES FOR STRUCTUTING [sic] A PURE TRUST ORGANIZATION

BEFORE FILLING OUT THE PURE TRUST ORGANIZATION APPLICATION”, the

Sovereignty promotional materials stated:

     THE STRUCTURE OF THE TRUST IN GENERAL

               Structuring a Pure Trust Organization is
          extremely simple if you just adhere to some basic
          rules. The Pure Trust Organization is like any
          other person or business entity that has the power
          to hold property, sell property, transfer prop-
          erty, conduct business, etc. It’s simply an en-
          tity that has a different name and ID number than
          you. Property is transferred into the name of the
          Pure Trust as if it were any other person.

               Once title to the property is in the name of
          the Trust Organization, it is protected by the
          ironclad Contractual and Constitutional
          protections contained within the trust instrument
          (document). Because your right to contract cannot
          be impaired, you have peace of mind in knowing the
          property is safely protected. You will have the
          advantages of property ownership without the po-
          tential liabilities.
                        - 31 -

THE NUMBER OF PURE TRUSTS NEEDED FOR MAXIMUM ASSET
PROTECTION

          To maximize the benefits of the Pure Trust
     Organization, it is vital to put each asset that
     has the potential of creating a liability into its
     own separate Trust Organization so that it does
     not jeopardize other assets. In a lawsuit, lien,
     levy, etc., the only assets that can be seized are
     those assets in which title is held in the name of
     the person or entity that created the liability.
     For example, let’s say your car was involved in a
     serious accident that created a million dollars
     worth of damages and the insurance company refused
     to honor your claim. Because your name was on the
     Title to the car, if you are successfully sued, a
     judgement will be entered in your name. There-
     fore, every asset held in your name would be sub-
     ject to seizure. The advantage to a Pure Trust
     Organization is that it allows you to contractu-
     ally move assets out of your name while still
     retaining full control or all of the benefits of
     the property.

          In the previous example, if you had the fore-
     thought to put the Title to the car, in the name
     of a Pure Trust Organization instead of your name,
     only the Pure Trust entity” could be sued, under
     its fictitious name. Other assets held in your
     name or in the names of other trusts would be
     immune from judgement!

          If a court judgement, lien, or levy has been
     filed against you, personally, only those assets
     that you hold title to, in your own name are sub-
     ject to seizure. Property can be transferred into
     a Pure Trust even after it has been unlawfully
     liened or levied, in the absence of proper legal
     procedures and a lawful Court Hearing.

          Businesses should always have a minimum of
     two Pure Trust Organizations. The first operating
     entity should hold minimal assets, in case it is
     ever sued. Other Pure Trust Organizations should
     then be established under different names to hold
     and protect all other assets of the business orga-
     nization. Business equipment that has the poten-
     tial of creating a liability should always be
                        - 32 -

     segregated into separate trusts.

NAMING THE PURE TRUST ORGANIZATION:

     Unless you are creating a Family Trust, do not use
your last name or the word “Trust.” Name your business
as if it were a Sole Proprietorship. This will protect
your privacy and will also make doing business and
transferring property simpler.

THE TRUST IDENTIFICATION NUMBER:

     Because a Pure Trust Organization has no tax
requirements, it has no need for a Federal Employer
Identification Number or a Social Security Number,
which are necessary for tax reporting purposes only.

     The Pure Trust Organization will be issued a nine-
digit, internally generated, identification number for
banking and identification purposes, unrelated to
taxes. This Trust Identification Number is private and
will not be linked to any Federal or State Government
agency. It will be included on your final Pure Trust
Organization Document(s). Each Trust will be issued a
separate number.

NAMING TRUSTEES AND BENEFICIARIES

     The most important rule to remember when structur-
ing your Trust Organization is that one individual
cannot be BOTH a Trustee and a Beneficiary/Capital Unit
Holder. It is the complete separation of these two
entities that affords the Pure Trust Organization its
protections. If the same person who holds the legal
and equitable title, also has the beneficial interest
or the right to proceeds, no trust has been created.
The entity then is said to be operating as an “alter-
ego” or as a “nominee” of the trust.

THE PROTECTOR:

     The Protector has the power to terminate Trustees
and/or appoint new Trustees. The Protector may also
appoint “Successor Trustees” in the event a Trustee
dies. A Protector cannot have any other position in
the Pure Trust Organization. A Protector can be any-
one, related or unrelated to you.
                        - 33 -

     If you, as the original Exchanger (Settlor) are
the only Trustee and a Successor Trustee has already
been named, you do not need a Protector. A Protector
eliminates a need to go to Court to change Trustees.

TRUSTEES

     Trustees hold the legal and equitable title to the
property in Trust, for the benefit of the Beneficia-
ries/Capital Unit Holders. They do not, however,
actually own the property. A Trustee cannot also be a
Beneficiary/Capital Unit holder. Trustees have no
rights to the “beneficial interest” in the form of
income and profits. However, they can receive a con-
tractually agreed upon compensation in return for their
Trustee services. Trustees have Management Control of
the Pure Trust Organization. There can be one Trustee
or as many Trustees as desired. All of the Trustees
can work together in managing the Trust or any or all
Trustee(s) can delegate management authority to one or
more Managing Trustee(s) to transfer property, open and
operate and bank accounts, and take care of the day to
day operations.

     Adversarial (Unrelated) Trustees

     In order to maintain the tax immunity qualities of
     the Pure Trust Organization, it is important that
     it is not considered a “Grantor” Trust, which is
     required to file a 1041 Form. According to the
     I.R.S.: “The title of ‘grantor trust’ arises when
     there is no trustee with averse interest.” The
     words “adverse” or “adversarial” mean unrelated.
     The rule of structure is that; “the majority of
     trustees must have an interest ‘adverse’ or unre-
     lated to that of the beneficiaries/capital unit
     holders. This means that if the beneficiaries are
     your wife/husband/children, the majority of trust-
     ees cannot be related to them. Therefore, for
     example, if you were a man and wanted to be a
     trustee and make your wife and children beneficia-
     ries, you must also have at least two other unre-
     lated Trustees. If you and your wife both want to
     be trustees, there must also be at least three
     other unrelated Trustees. Our company can provide
     adversarial (unrelated) trustees for you at a
     minimal cost. These trustees will delegate the
     authority to your Managing Trustee to open the
                        - 34 -

     bank account, sign checks, transfer property, sign
     the minutes and make management decisions concern-
     ing the contract of trust. If you are not related
     to the beneficiary(ies) you do not need ad-
     versarial trustees.

THE GENERAL MANAGER

     Although it is typically the Trustees or Managing
Trustee(s) that will be responsible for the management
of the Trust, a General Manager may also be appointed
for that purpose. The General Manager is merely an
employee of the Pure Trust and is not an integral part
of it. However, some individuals choose this position
because they want to manage the Trust with privacy.
When transferring title to real property and automo-
biles, it is necessary in include the name(s) of the
Trustee(s) in addition to the name of the Pure Trust,
as a matter of public record. The General Manager’s
name, however, would not appear on title. It would
only be included within the trust minutes, which are
totally private.

THE BENEFICIARY/CAPITAL UNIT HOLDERS

     Beneficiaries/Capital Unit Holders have the right
to the “beneficial interest” which is a right to the
income, profits, and proceeds and use of the Pure Trust
Organization. However, in order to provide maximum
asset protection, the trust must be “Pure.” That means
that “Beneficiaries/ Capital Unit Holders” CANNOT have
any management control of the Pure Trust Organization.
The Trustee assigns the “Exchanger” (Settlor) 100
capital units, which represent 100% of the beneficial
interest of the Pure Trust, in exchange for the prop-
erty he or she conveys into the trust. The Exchanger
can then either keep all 100 Certificates or divide
them in any manner among Beneficiaries of his or her
choice.

BANK ACCOUNTS

Sovereignty Pure Trusts can also open a completely
private bank account with no Federal ID Number or
Social Security number at a major bank. This account
will be like any other checking account, except that it
is completely private. The cost for this is $125 per
account. [Reproduced literally.]
                               - 35 -

     The Sovereignty promotional materials included copies of two

letters.   The first was a letter dated March 29, 1996, written by

“Gregory P. Karl, CPA”, and addressed to “Chuck Felthaus, Chief-

Accounting Branch, Internal Revenue Service” in Philadelphia,

Pennsylvania (Karl letter).   The second was a letter dated

December 17, 1996, written by “Charles F. Felthaus, Chief,

Accounting Branch”, and addressed to “Gregory Paul Karl”

(Felthaus letter).   The Karl letter stated in pertinent part:

     I have a number of Pure Trust clients and I have an
     urgent request. Please let me know the income tax
     requirements for a Pure Trust Organization as well as
     the proper procedure for obtaining an Internal Revenue
     Service issued Employer Identification Number for them.

The Felthaus letter stated in pertinent part:   “We cannot process

your application for a [sic] Employer Identification Number.     A

Pure Trust organization has no tax requirements, therefore a

[sic] Employer Identification Number is not required.”

     The Sovereignty promotional materials also included a

document entitled “Pure Trust Organization Application” (applica-

tion).    The application requested certain information, including

the “settlor’s”22 name and address, the name of the pure trust

organization, the names of the trustees, whether each trustee was

to have signatory authority over any bank accounts, the names of

the beneficiaries, and the number of so-called capital units each


     22
      The application stated: “The Settlor(s) is/are the indi-
vidual(s) who will be transferring property into the ‘Trust
Estate’”.
                              - 36 -

beneficiary was to receive.

Dealings with the State of Indiana

     Filings with the Knox County Recorder’s Office

          Documents Relating to Sandbar
          Wholesale Trust and Sandbar Real Estate Trust

     On October 12, 1995, two documents, each of which consisted

of three pages of printed forms (collectively, the two three-page

documents), were filed with the Knox County Recorder’s Office.23

The first page of each of those documents, which was numbered

“Page 1", was a cover page (cover page) on which appeared the

heading “Common Law Contract and Declaration in the Form of a

Private Pure Living Family Trust and Private Retirement Plan” and

a mailing address for Sovereignty in Las Vegas, Nevada.   Each

page of each of the two three-page documents (each three-page

document) contained identical language, except that one document

made references to Sandbar Wholesale Trust and the number 52-

9876145 and the other document made references to Sandbar Real

Estate Trust and the number XX-XXXXXXX.

     At the bottom of the cover page of each three-page document

appeared the language “Common Law Copyright, Sovereignty Pure

Trusts” and at the bottom of the second page of each three-page

document appeared the language “Common Law Copyright, 1994

Sovereignty Pure Trusts, All Rights Reserved”.   No such language


     23
      The record does not disclose who filed those documents
with the Knox County Recorder’s Office.
                              - 37 -

appeared at the bottom of the third page of each three-page

document.

     The second page of each three-page document, which was

numbered “Page 24", stated:

     BY ALL THOSE PRESENT, for the purposes of protecting,
     conserving and enlarging the corpus of this “Trust
     Estate,” for the benefit of the heirs of the
     Exchanger(s) and other holders of capital unit certifi-
     cates, and for the establishment of a Private Retire-
     ment Plan to assure that such Certificate Holders may
     look forward, with anticipation, to a retirement with
     financial security and dignity, and without fear that
     this period of life will be lacking in the necessities
     to sustain them as human beings within our society, and
     for other purposes contained herein, the parties named
     herein, hereby establish this unimpairable Contract and
     Declaration in the form of a Common Law, Constitu-
     tional, Irrevocable, Sovereign Private Express, Pure
     Trust, Contractual Organization and Private Retirement
     Plan.

        *       *       *       *       *       *        *
          IN WITNESS THEREOF, the Creator appoints and
     Trustee(s) have agreed to the terms, stipulations and
     covenants stated herein and, hereby, acknowledged the
     conveyance, delivery and acceptance of certain real
     and/or personal property listed in Schedule A and
     Addendum to be held in Trust according to the terms,
     herein. [Reproduced literally.]

Neither of the two three-page documents disclosed the identities

of the “Exchangers” and the “Certificate Holders” that were

referred to on the second page of each such document.   Nor did

either of those documents include the “Schedule A” and the

“Addendum” that also were referred to on that page.   (We shall

refer to the language appearing on the second page of each three-

page document as the declaration.)
                               - 38 -

     The declaration appearing on the second page of each three-

page document was signed in the name of Lynne Meredith, who was

identified as “Sovereignty Pure Trusts, Creator”, and in the

names of James Rabold, Susan Thomas Barmes, and Jennifer

Burgess,24 all three of whom were identified as trustees.    Peti-

tioner Barbara Barmes (Ms. Barmes), in her capacity as a notary

public, indicated on the second page of each three-page document

that James Rabold, Susan Thomas Barmes, and Jennifer Burgess

signed the declaration appearing on each such page.

     The third page of each three-page document, which was

unnumbered, was entitled “MINUTES OF THE PROCEEDINGS OF THE

TRUSTEES”.    One such third page referenced Sandbar Wholesale

Trust and the other referenced Sandbar Real Estate Trust.25      (We

shall refer to the third page of each three-page document as

minutes.)    The minutes stated, inter alia:

     Marvin L. Barmes and Barbara J. Barmes is/are hereby


     24
      On Feb. 5, 1996, Jennifer Burgess was divorced from Mark
Barmes. On Mar. 12, 1996, she resigned her duties as trustee of
both trusts. On Feb. 12, 1999, Susan Thomas Barmes resigned her
duties as trustee of both trusts. On May 15, 1999, James Rabold
resigned his duties as trustee of both trusts. Beginning on Mar.
27, 1996, certain Community Bank records identified Kim Hall
Barmes as a trustee of both trusts.
     25
      The third page of the document referencing Sandbar Real
Estate Trust was entitled “MINUTES OF THE PROCEEDINGS OF THE
TRUSTEES OF; [sic] Sandbar Family Trust”. We believe that that
reference to Sandbar Family Trust was a typographical error, and
we construe such minutes to be minutes relating to Sandbar Real
Estate Trust. That is because all other references in such
minutes were to the Sandbar Real Estate Trust.
                             - 39 -

     appointed as General Manager(s), and Managing Agent(s),
     agreeing to act at all times in the best interest of
     the Company and its Capital Unit Certificate Holders
     and is/are, hereby, approved to open a bank account for
     * * * [Sandbar Wholesale Trust or Sandbar Real Estate
     Trust] and to be signer(s) on such account.

          General Manager(s), shall accept the same duties
     and responsibilities as set forth for the Trustees of
     this Organization.

          General Manager(s) shall hold no Title, legal or
     equitable, and no right to the Capital Unit interest,
     income or profit distributions of this “Trust Estate”.
     Further, General Manager(s) shall not be liable for any
     of the debts of this “Trust Estate”.

          A separate Contract will be executed, setting
     forth compensation.

          The undersigned hereby certifies that the above
     has been duly adopted by the Board of Trustees and
     direct that the minutes of these proceedings be re-
     corded in and become a part of the official Company
     Minute Book.

The respective minutes for the trusts were signed in the names of

James Rabold and Jennifer Burgess.    Susan Thomas Barmes witnessed

those signatures in her capacity as a notary public.

     At all relevant times, the State of Indiana had no records

of any business trust under any of the following names:   Sandbar

Wholesale Trust, Sand Bar Wholesale Trust, Sandbar Real Estate

Trust, or Sand Bar Real Estate Trust.

          Warranty Deeds

     On October 18, 1995, three separate warranty deeds (deeds)

executed on that date by petitioners were recorded with the Knox
                               - 40 -

County Recorder’s Office.26   Those deeds pertained to the

Fritchton property, petitioners’ business location at 114 Main

Street, and petitioners’ business location at 120 Main Street,

respectively (collectively, the three parcels of real estate).

At the bottom of each of the three deeds, the following hand-

written statement appeared:   “This instrument prepared by Marvin

L. Barmes.”   Each deed contained a mailing address for Sandbar

Real Estate Trust at 120 Main Street, Vincennes, Indiana, and the

following language:

     KNOW ALL MEN BE [sic] THESE PRESENTS:

          That I (we), Marvin L. Barmes and Barbara J.
     Barmes the undersigned grantor(s), for the consider-
     ation of Ten Dollars, and other valuable consider-
     ations, do hereby convey to Sandbar Real Estate Trust
     all rightm [sic] title and interest to and in the
     certain parcel of Real Property situated in Knox Coun-
     ty, State of Indiana * * *

     Although each deed stated nominal consideration for the

conveyance described therein, petitioners did not receive any

consideration for such conveyances.     After those conveyances were

made, petitioners continued to enjoy the use of the three parcels

of real estate.

     Filing with the Assessor of
     the Township of Vincennes, Indiana

     On March 14, 1996, Mr. Barmes signed, under penalties of

perjury, State of Indiana Form 103--Long Form, Business Tangible


     26
      The record does not disclose who submitted the deeds for
recording with the Knox County Recorder’s Office.
                              - 41 -

Personal Property Assessment Return (Indiana business tangible

personal property assessment return).   In that return, Mr. Barmes

reported the name of the taxpayer as Sandbar Wholesale Trust and

the Federal identification number belonging to that taxpayer as

XX-XXXXXXX.   Mr. Barmes reported in the Indiana business tangible

personal property assessment return that the taxpayer’s Federal

income tax year ended on December 31, 1995, and that the name

under which Federal income taxes were filed was Sandbar Wholesale

Trust.   In that return, Mr. Barmes also reported that the names

under which the businesses were conducted were Barbara’s Gift

Shop and Barmes Wholesale and that the businesses were not

conducted in the form of a trust but were conducted in the form

of what Mr. Barmes described as an “Unincorporated Business

Organization”.   Mr. Barmes further reported in the Indiana

business tangible personal property assessment return that the

business properties were located at “120/114 Main Street” and

that the businesses did not have any other locations in the State

of Indiana.   In that return, Mr. Barmes also reported that the

two businesses had total sales during 1995 of $5,799,767.

     Unemployment Compensation Claims with Respect
     to Barbara’s Gift Shop and Barmes Wholesale

     At all relevant times, the State of Indiana Department of

Workforce Development (Department of Workforce Development)

administered claims for unemployment insurance benefits and

required employers to file quarterly reports and make payments
                                - 42 -

with respect to such claims.    At those times, as part of its

administration of such claims, the Department of Workforce

Development established and maintained a separate account for

each employer who had employees working in the State of Indiana,

including an account for Barbara’s Gift Shop.    The Department of

Workforce Development maintained such an account for Barbara’s

Gift Shop at all relevant times, at least through the year 1997.

Prior to January 1, 1996, Barbara’s Gift Shop timely filed

quarterly reports with the Department of Workforce Development

and maintained its employer account in good standing (i.e., made

payments into that account).    During the two-year period 1996

through 1997, the Department of Workforce Development continued

to maintain an employer account for Barbara’s Gift Shop; however,

Barbara’s Gift Shop did not timely file quarterly reports or make

any payments into its employer account.

     Beginning no later than January 10, 1997, the Department of

Workforce Development maintained an employer account for Sandbar

Wholesale Trust.   The Department of Workforce Development estab-

lished that account and assigned the number 413446 to that

account on a date not disclosed by the record after having

received a certain number of claims for unemployment benefits

from individuals who claimed (e.g., by presenting canceled

checks) that they had received wages from an entity using the

name Sandbar Wholesale Trust.    In order to establish an employer
                               - 43 -

account for Sandbar Wholesale Trust, the Department of Workforce

Development requested certain information and documentation from

petitioners on a date not disclosed by the record.   However, the

Department of Workforce Development did not receive any response

from petitioners with respect to the information and documenta-

tion requested.

     On January 3, 1997,27 Jill Beamon (Ms. Beamon) made a claim

for unemployment benefits with the State of Indiana Department of

Employment and Training Services (Department of Employment and

Training Services).28   On January 7, 1997, in connection with Ms.

Beamon’s claim, a claims deputy with the Department of Employment

and Training Services (claims deputy) completed a form entitled

“REQUEST FOR INSPECTION AND WAGE INFORMATION” (request for

inspection and wage information form), which Ms. Beamon had




     27
      The date Jan. 3, 1996, appeared on the form that Jill
Beamon, who worked at Barmes Wholesale from November 1994 to Dec.
23, 1996, signed when she made her claim for unemployment bene-
fits with the Ind. Department of Employment and Training Ser-
vices. However, it is clear from the record that that form was
actually signed on Jan. 3, 1997, and that the year 1996 was
written on that form by mistake.
     28
      At all relevant times, the Department of Workforce Devel-
opment was comprised of four entities, which included the Depart-
ment of Employment and Training Services. See Ind. Code Ann.
sec. 22-4.1-2-2 (Michie 1997). The Department of Employment and
Training Services included an unemployment insurance board and an
unemployment insurance review board. See id. at sec. 22-4.1-2-
2(1).
                                - 44 -

signed on January 3, 199729 (Ms. Beamon’s request for inspection

and wage information form).   Sandbar Wholesale Trust was identi-

fied as the employer on that form.

     At all relevant times, the Department of Employment and

Training Services used the request for inspection and wage

information form whenever (1) an individual made a claim for

unemployment benefits, and (2) the Department of Employment and

Training Services did not have a record of wages having been paid

by the individual’s employer.    After having completed the request

for inspection and wage information form, the claims deputy sent

that form to an audit examiner with the Department of Employment

and Training Services (audit examiner) in order to conduct an

investigation of the claim.   After having conducted an investiga-

tion, the audit examiner reported the results of the investiga-

tion in the request for inspection and wage information form.

     On January 10, 1997, an audit examiner who had conducted an

investigation with respect to an entity using the name Sandbar

Wholesale Trust reported the results of that investigation30 in

Ms. Beamon’s request for inspection and wage information form.



     29
      The date Jan. 3, 1996, appeared on the request for inspec-
tion and wage information form that Ms. Beamon signed. However,
it is clear from the record that that form was actually signed on
Jan. 3, 1997, and that the year 1996 was written on that form by
mistake. See supra note 27.
     30
      That investigation occurred on a date not disclosed by the
record between Jan. 3 and 10, 1997.
                                - 45 -

That investigation revealed that an account had been established

with the Department of Workforce Development for Sandbar Whole-

sale Trust, but that that entity had not reported to the Depart-

ment of Workforce Development any wages paid by it during the

first three quarters of 1996.    The audit examiner indicated in

Ms. Beamon’s request for inspection and wage information form

that, although he had made contact with the entity identified as

Sandbar Wholesale Trust, he received no response or cooperation

from that entity.31

     On January 28, 1997, the Department of Workforce Development

issued a notice (January 28, 1997 notice) addressed to “Sandbar

Wholesale Trust, Barbara’s Gift Shop, 120 Main Street, Vincennes,

IN 47591".   That notice showed the number (account number 413446)

that the Department of Workforce Development had assigned to the


     31
      Ms. Beamon’s request for inspection and wage information
form contained at least three different sets of handwriting, one
that belonged to Ms. Beamon, one that belonged to the claims
deputy responsible for completing that form, and one that be-
longed to the audit examiner responsible for conducting the
investigation with respect to Ms. Beamon’s claim. It is clear
from our examination of Ms. Beamon’s request for inspection and
wage information form that the audit examiner changed the infor-
mation that was originally reported in that form as the “Em-
ployer” and “Account Number”. The audit examiner identified
“Sandbar Wholesale Trust, Barbara’s Gift Shop” as the “Employer”
and listed 413446 as the “Account Number” in that form. Account
number 413446 was the account number assigned by the Department
of Workforce Development to Sandbar Wholesale Trust. We are
unable to determine from Ms. Beamon’s request for inspection and
wage information form who was originally identified in that form
as the “Employer” and what number was originally listed in that
form as the “Account Number”.
                              - 46 -

account that it maintained for Sandbar Wholesale Trust.   The

January 28, 1997 notice indicated that Ms. Beamon had made a

claim for unemployment compensation and that there was a poten-

tial liability for unemployment insurance benefit charges as a

result of that claim.

     On February 3, 1997, Mr. Barmes wrote the following state-

ment, which he signed as general manager, on the bottom of a copy

of the January 28, 1997 notice:   “Sandbar Wholesale Trust did not

open an account with Indiana Department of Workforce Development.

Sandbar Wholesale Trust does not now [have] or ever have [sic]

had employees”.

     On March 3, 1997, the Department of Workforce Development

issued another notice (March 3, 1997 notice) addressed to “Sand-

bar Wholesale Trust, Barbara’s Gift Shop, 120 Main Street,

Vincennes, IN 47591".   That notice showed the same Department of

Workforce Development employer account number for Sandbar Whole-

sale Trust as shown on the January 28, 1997 notice.   The March 3,

1997 notice indicated that Ms. Beamon had made a claim for

unemployment compensation and that there was a potential liabil-

ity for unemployment insurance benefit charges as a result of

that claim.

     At the bottom of a copy of the March 3, 1997 notice, on

March 6, 1997, Susan Thomas Barmes signed the following typed

statement as trustee and “without prejudice”:   “Sandbar Wholesale
                                 - 47 -

Trust did not open this account and has paid no money into this

account.   J A Beamon was an independent contractor starting

October 13, 1995 until December 23, 1996.”

     On May 7, 1997, the Department of Workforce Development

issued a notice to Sandbar Wholesale Trust entitled “Notice of

Complete Disposition of Business to Acquirer” (May 7, 1997

notice).   That notice stated:

     YOU [SANDBAR WHOLESALE TRUST] BECAME THE SUCCESSOR
     EMPLOYER TO THE NAMED DISPOSER [MARVIN L. & BARBARA J.
     BARMES] UNDER THE PROVISIONS OF THE INDIANA CODE 22-4-
     9-3. IN ACCORDANCE WITH THE PROVISIONS OF THE ACT,
     YOUR ACCOUNT ASSUMED THE EMPLOYMENT EXPERIENCE OF YOUR
     PREDECESSOR. YOUR CONTRIBUTION RATE FOR THE YEAR OF
     ACQUISITION IS 1.1000%. YOUR CONTRIBUTION RATE FOR THE
     CURRENT YEAR IS 5.5000%.

     IF YOU DISAGREE WITH THE DETERMINATION, YOU MAY FILE A
     FORMAL WRITTEN PROTEST WITHIN FIFTEEN (15) DAYS FROM
     THE DATE OF THIS NOTICE. PLEASE USE YOUR NEW ACCOUNT
     NUMBER 413446 ON ALL FUTURE CORRESPONDENCE. ADDITIONAL
     INFORMATION REGARDING YOUR RESPONSIBILITIES IS BEING
     SENT UNDER SEPARATE COVER.

     OUR RECORDS SHOW YOU ACQUIRED 100% OF THE BUSINESS ON
     10/12/95 FROM DISPOSER: 138071.

     In response to the May 7, 1997 notice, on May 11, 1997,

petitioners executed a document entitled “AFFIDAVIT” and “FORMAL

WRITTEN PROTEST” (protest affidavit).     In the protest affidavit,

petitioners stated:

     Sandbar Wholesale Trust that acquired dba Barmes Whole-
     sale/dba Barbara’s Gift Shop did not become the succes-
     sors of the employees. They were all terminated prior
     to the business transfers. Marvin L. & Barbara J.
     Barmes let their employees go before the transfer of
     the business and they were not passed onto Sandbar
     Wholesale Trust.
                             - 48 -

     Sandbar Wholesale Trust managers took over and told the
     former employees of Marvin L. & Barbara J. Barmes they
     could be contracted by Sandbar Wholesale Trust and
     would have to fill out new paperwork, which included;
     Work for Hire Statement, U.S. Department of Justice
     Immigration and Naturalization Service Form I-9,
     Late/Absenteeism Policy, Affidavit of Citizenship and
     Domicile, Access to Trade Secrets and Confidential
     Information and Form W-8. * * * No Form W-4 filled out.

     Upon the completion of the above paperwork they would
     be Independent Contractors for Sandbar Wholesale Trust.

     Enclosed you will find two letters. One from Gregory
     Paul Karl, CPA to Internal Revenue Service. The other
     from Internal Revenue Service, Chief Accounting Branch,
     Charles F. Felthaus to Gregory P. Karl, CPA. Sandbar
     Wholesale Trust is a Pure Trust. A Pure Trust organi-
     zation has no tax requirements, therefore an Employer
     Identification Number is not required. [Reproduced
     literally.]

The two letters to which petitioners referred in the protest

affidavit were copies of the Karl letter and the Felthaus letter

that Sovereignty included in its promotional materials and

provided to petitioners.

Federal Employment Tax Returns

     Federal Employment Tax Returns--Petitioners

     On July 7, 1995, Ms. Barmes signed Form 941, Employer’s

Quarterly Federal Tax Return (Form 941), for the quarter ended

June 30, 1995, which was filed under the name “Marvin L. and

Barbara J. Barmes PTR”, EIN XX-XXXXXXX.   That form reflected

total wages, tips, and other compensation paid by Marvin L. and

Barbara J. Barmes PTR in the amount of $304,990.23.

     On October 5, 1995, Ms. Barmes signed Form 941 for the
                             - 49 -

quarter ended September 30, 1995, which was filed under the name

“Marvin L. and Barbara J. Barmes PTR”.   That form reflected total

wages, tips, and other compensation paid by Marvin L. and Barbara

J. Barmes PTR in the amount of $325,414.97.

     On January 16, 1996, Ms. Barmes signed Form 941 for the

quarter ended December 31, 1995, which was filed under the name

“Marvin L. and Barbara J. Barmes PTR”, EIN XX-XXXXXXX.   That form

reflected total wages, tips, and other compensation paid by

Marvin L. Barmes and Barbara J. Barmes PTR in the amount of

$92,179.53.

     On March 11, 1997, Mr. Barmes signed Form 941 for the

quarter ended March 31, 1997, which was filed under the name

“Marvin L. and Barbara J. Barmes PTR”, EIN XX-XXXXXXX.   In that

form, Mr. Barmes wrote “Nothing to report”, checked the box

indicating that Marvin L. and Barbara J. Barmes PTR did not have

to file returns in the future, and stated that the date on which

final wages were paid by Marvin L. and Barbara J. Barmes PTR was

October 12, 1995.

     Federal Employment Tax Returns--Sandbar
     Wholesale Trust and Sandbar Real Estate Trust

     As of the date of the trial in this case, neither Sandbar

Wholesale Trust nor Sandbar Real Estate Trust had filed a Federal

employment tax return or paid any Federal employment tax.
                                 - 50 -

Federal Income Tax Returns

     Petitioners’ 1994 Federal Income Tax Return

     Petitioners filed Form 1040, U.S. Individual Income Tax

Return for 1994 (petitioners’ 1994 joint return), which they

signed on March 10, 1995.      In that return, petitioners reported

taxable income of $837,210.     Such taxable income did not include

any wages or salaries.

     Petitioners’ 1994 joint return included Schedule C, Profit

or Loss From Business (1994 Schedule C).     The 1994 Schedule C

requested, and petitioners provided, inter alia, the following

information:

           Information Requested               Information Provided
             Name of proprietor                  Marvin L. Barmes
Principal business or profession, includ-
          ing product or service              Retail and wholesale,
                                               general merchandise
               Business name                 Barbara’s Gift Shop and
                                                 Barmes Wholesale
   Employer identification number (EIN)             XX-XXXXXXX
             Business address                120 Main St, Vincennes,
                                                     IN 47591
             Accounting method                        Accrual
  Method used to value closing inventory               Cost
 Gross receipts or sales (gross receipts)           $5,445,178
          Returns and allowances                           370
            Cost of goods sold                       2,820,049
                Gross profit                         2,624,759
                Other income                           106,567
                Gross income                         2,731,326
               Total expenses                        1,871,671
  Expenses for business use of your home                      0
           Net profit or (loss)                        859,655
      Inventory at beginning of year                   411,442
  Purchases less cost of items withdrawn
              for personal use                      2,850,804
                Cost of labor                               0
          Materials and supplies                            0
         Inventory at end of year                     442,197
                                - 51 -

     The percentage of gross profit reported in the 1994 Schedule

C to gross receipts reported in that schedule was 48.2 percent.

     Included in the total expenses reported in petitioners’ 1994

Schedule C was automobile depreciation in the amount of $5,920

for a Cadillac and a Corvette (petitioners’ two automobiles).

Petitioners purchased both of those automobiles in 1994, the

Cadillac for $39,215 and the Corvette for $30,090.   Attached to

petitioners’ 1994 joint return was Form 4562, Depreciation and

Amortization (Including Information on Listed Property) (Form

4562).   In Part V, Listed Property--Automobiles (Part V), Section

B--Information on Use of Vehicles (Section B) of that form,

petitioners claimed total miles and total business miles of 3,500

with respect to the Cadillac and 3,200 with respect to the

Corvette.   In Part V, Section A--Depreciation and Other Informa-

tion (Section A) of that form, petitioners indicated that they

had written evidence to support the claimed business use of

petitioners’ two automobiles.

     Petitioners’ 1995 Federal Income Tax Return

     Petitioners filed Form 1040, U.S. Individual Income Tax

Return for 1995 (petitioners’ 1995 joint return), which they

signed on April 3, 1996, “Without Prejudice”.   In that return,

petitioners reported no wages or salaries and no tax due.

     Petitioners’ 1995 joint return included Schedule C (1995

Schedule C).   In the 1995 Schedule C, petitioners reported the
                              - 52 -

same information with respect to the name of the proprietor,

principal business, business name and address, EIN, accounting

method, and method used to value closing inventory as they had

reported in the 1994 Schedule C.   In addition, the 1995 Schedule

C requested, and petitioners provided, inter alia, the following

information:

          Information Requested            Information Provided
              Gross receipts                   $4,217,062
         Returns and allowances                         16
            Cost of goods sold                   2,340,822
                Gross profit                     1,876,224
                Other income                         --
                Gross income                     1,876,224
              Total expenses                     1,973,107
 Expenses for business use of your home              --
           Net profit or (loss)                    (96,883)
     Inventory at beginning of year                442,197
 Purchases less cost of items withdrawn
             for personal use                    1,898,625
               Cost of labor                         --
         Materials and supplies                      --
        Inventory at end of year                         0

     Included in the total expenses reported in the 1995 Schedule

C was automobile depreciation in the amount of $9,400 for peti-

tioners’ two automobiles.   Attached to petitioners’ 1995 joint

return was Form 4562.   In Part V, Section B of that form, peti-

tioners claimed total miles and total business miles of 5,000

with respect to the Cadillac and 3,000 with respect to the

Corvette.   In Part V, Section A of that form, petitioners indi-

cated that they had written evidence to support the claimed

business use of petitioners’ two automobiles.

     As of the date of the trial in this case, petitioners had
                              - 53 -

not filed Federal income tax returns for tax years after 1995.

     Federal Income Tax Returns--Sandbar
     Wholesale Trust and Sandbar Real Estate Trust

     As of the date of the trial in this case, neither Sandbar

Wholesale Trust nor Sandbar Real Estate Trust had filed a Federal

income tax return or paid any Federal income tax.

Respondent’s Examination of
Petitioners’ 1994 and 1995 Joint Returns

     On April 30, 1996, respondent’s revenue agent Jon Eric

Powell (revenue agent Powell) made initial contact with petition-

ers via the telephone with respect to respondent’s examination of

petitioners’ 1994 joint return.   Shortly thereafter, revenue

agent Powell sent petitioners a letter (examination letter)

formally notifying petitioners that their 1994 joint return was

under examination.   In response to the examination letter, on a

date after April 30, 1996, that is not disclosed by the record,

petitioners indicated to revenue agent Powell that they did not

have to provide him with any records with respect to respondent’s

examination of their 1994 joint return.    Consequently, on a date

before May 30, 1996, that is not disclosed by the record, revenue

agent Powell issued a summons (summons) to petitioners, which

required them to appear before him on May 30, 1996, and to

produce certain records with respect to respondent’s examination

of petitioners’ 1994 joint return.

     On May 30, 1996, in response to the summons, petitioners met
                              - 54 -

with revenue agent Powell (May 30, 1996 meeting).   During that

meeting, revenue agent Powell questioned petitioners about the

information requested in the summons with respect to petitioners’

1994 joint return, and petitioners responded that they were not

required under the Fourth and Fifth Amendments to provide such

information to respondent.   Consequently, revenue agent Powell

ended the May 30, 1996 meeting.

     During the course of the examination of petitioners’ 1994

joint return, on a date after April 30, 1996, and before May 20,

1996, that is not disclosed by the record, revenue agent Powell

received a report (CID report) from the Criminal Investigation

Division (CID) of the Internal Revenue Service (IRS).   The CID

report indicated that Barbara’s Gift Shop had failed to file

certain Federal employment tax (employment tax) returns and had,

in the opinion of the CID, arbitrarily changed the classification

of its workers from employees to independent contractors.

Revenue agent Powell became aware from reading the CID report

that Sandbar Wholesale Trust was formed sometime during October

1995.   On May 20, 1996, revenue agent Powell forwarded the CID

report to respondent’s revenue officer Shawn Kennedy (revenue

officer Kennedy) for further investigation of the employment tax

issues contained therein.

     During the course of the examination of petitioners’ 1994

joint return, on a date after May 30, 1996, and before November
                              - 55 -

6, 1996, that is not disclosed by the record, revenue agent

Powell received petitioners’ 1995 joint return from the Internal

Revenue Service Center in Cincinnati, Ohio.   Revenue agent Powell

reviewed that return and compared it with petitioners’ 1994 joint

return.   That comparison disclosed to revenue agent Powell that

in the 1995 joint return there were:   (1) A significant decrease

from 1994 to 1995 in the gross receipts that petitioners reported

in the respective Schedules C of petitioners’ 1994 joint return

and 1995 joint return, (2) an ending inventory for Barbara’s Gift

Shop for 1994 of $442,197 and an ending inventory for that

business for 1995 of $0, and (3) an increase from 1994 to 1995 in

the expenses that petitioners claimed in the respective Schedules

C of petitioners’ 1994 joint return and 1995 joint return.    As a

result, revenue agent Powell formally commenced an examination of

petitioners’ 1995 joint return.

     Although revenue agent Powell became aware through the CID

report of certain employment tax issues involving Barbara’s Gift

Shop and Sandbar Wholesale Trust, he concluded that that informa-

tion did not affect his examination of petitioners’ 1994 and 1995

joint returns, and he did not make any inquiries of petitioners

regarding Sandbar Wholesale Trust during his examination of those

joint returns.   Nor did petitioners allude to Sandbar Wholesale

Trust or to any purported transfer of the two businesses to that

trust during that examination.
                               - 56 -

     On November 6, 1996, revenue agent Powell had a telephone

conversation with Mr. Barmes during which he advised Mr. Barmes

that he had completed an examination report with respect to

petitioners’ 1994 and 1995 joint returns (examination report)

that contained certain adjustments which he had made to those

returns.    During that telephone conversation, revenue agent

Powell asked Mr. Barmes whether Mr. Barmes intended to provide

any information or documentation to the IRS to refute those

adjustments.    At no time did Mr. Barmes provide any information

or documentation to the IRS to refute or otherwise respond to the

adjustments contained in the examination report.

     On November 16, 1996, each petitioner executed an affidavit,

both of which respondent received on November 20, 1996.      Each of

those affidavits stated in pertinent part:

     1.    *I am a “natural born free Citizen” adult
            Constitutionally, aka USA National, of Indiana
            Republic by birth, thus of America, and a
            temporary inhabitant living in Knox County,
            Indiana Republic; thankfully endowed by our
            Creator God with Unalienable Rights partially
            enumerated in America’s founding organic
            documents, which I have never with knowingly
            intelligent acts waived * * *

     2.     Recent diligent studies have convinced me of the
            above, and that as such I am not “subject to” the
            territorially-limited “exclusive Legislation” and
            its foreign jurisdiction mandated for Washington,
            D.C. etc. * * *, including its “internal” govern-
            ment organizations therein or by contract
            adhesioned thereto across America. And neither
            are millions of other such Citizens, unless they
            have provided “WAIVERS of Constitutional Rights”
            with “knowingly intelligent act” (contracts with
                        - 57 -

     such government[s]) “with sufficient awareness of
     the relevant circumstances and likely conse-
     quences”; as ruled by the 1970 U.S. supreme Court
     (Brady v. US, 397 US 742 at 748). I’ve given no
     such “waivers”.

3.   These studies also prove that a shrewd and crimi-
     nal Constructive Fraud has been slipped over the
     “UNITED STATES OF AMERICA” by a corporate federal
     #2--“UNITED STATES” and accomplices under counter-
     feit “color of law” * * *. By never-repealed
     American Law, such sources of past and present
     Criminal Element in (and behind) Government, here-
     inafter referred to as the “CEG”, should be
     brought to Justice in a Constitutional Court for
     aiding and abetting this Fraud as willing Accom-
     plices. It is for such Court with a 12-member
     Jury of Peers to decide who is and isn’t Guilty
     among personnel of government, media,
     schools, lawyers, accountants, clergy and other
     pushers of misinformation mind-set propaganda in
     this and related regards, thank God.

4.   Due to such shrewd entrapments, over the years I
     unwittingly signed many of the related documents
     or contracts, some even under the foreign “per-
     jury” jurat as was supposedly required. With
     American Law On this Citizen’s side, I hereby
     REVOKE all such signatures and render them null
     and void except for those that I choose to have
     measured as being under “TDC” (threat, duress
     and/or coercion), past and now. This is also my
     Lawful Notice that all such signatures of mine in
     the future, with such governmental or otherwise-
     adhesioned sources, are to be considered as under
     “TDC”, whether appearing therewith or otherwise
     and including banks etc. * * *

5.   With this accurate knowledge, I Lawfully “squarely
     challenge” the fraudulent usurping-octopuslike
     JURISDICTION/AUTHORITY cited in item #2 that does
     NOT apply to me * * *. * * * For fairness, IRS
     agents generally lack Lawful “Delegation of Au-
     thority”, and their so-called “Form 1040" seems to
     be bogus concerning me.

6.   With all of the above in mind, it appears that
     this private Citizen is by Law as “Foreign” and a
                              - 58 -

           “Non-Resident Alien” * * *.

     On December 10, 1996, petitioners jointly executed a decla-

ration in which they stated the following:

     I, Marvin L. Barmes/Barbara J. Barmes, hereby declare
     that I do not have nor have I had any income from
     Alcohol, Tobacco and Firearms. I also declare that I
     do not have nor have I had a contract with the Depart-
     ment of the Treasury to manufacture, sell, or distrib-
     ute alcohol, tobacco, or firearms.
     All gasoline used is and was purchased at a gasoline
     service station.
     I am not a federal employee.
     I am not a corporation or partnership.
     I am not effectively connected with the conduct of a
     trade or business within the United States.
     I was not involved in any revenue taxable activity.

     I declare under penalty of perjury under the laws of
     the united [sic] States of America that the foregoing
     to the best of my knowledge and belief is true and
     correct.

Respondent’s Communications with Petitioners with Respect
to Sandbar Wholesale Trust and Sandbar Real Estate Trust

     On May 1, 1997, respondent’s revenue agent Rosetta Arnold

(revenue agent Arnold) issued two letters (revenue agent Arnold’s

two letters dated May 1, 1997), one of which was addressed to

“Sandbar Real Estate Trust, Attn:   Marvin and Barbara Barmes,

Managing Agents” and the other of which was addressed to “Sandbar

Wholesale Trust, Attn:   Marvin and Barbara Barmes, Managing

Agents”.   Revenue agent Arnold’s two letters dated May 1, 1997,

were identical in content, except that one letter referenced

Sandbar Real Estate Trust and the other letter referenced Sandbar

Wholesale Trust.   In those two letters, revenue agent Arnold
                               - 59 -

stated that respondent had no record of receiving Form 1041, U.S.

Fiduciary Income Tax Return (Form 1041), for either of the two

trusts for the tax periods ended 1995 and 1996.         Revenue agent

Arnold further stated in those two letters:

     If you are required to file the returns, but have not
     done so, we are requesting these returns to be filed by
     May 16, 1997. Please submit the following information
     by May 16, 1997 * * *.

            - Completed returns
            - A copy of the managing agent’s compensation
              agreement referenced in the trust agreement
            - A copy of Schedule A and the Addendum referred
              to in the trust document

        *        *       *       *        *         *         *

     If you were not required to file returns for the peri-
     ods indicated, please explain why you are not [sic]
     longer liable in the space provided below.

     On May 8, 1997, Mr. Barmes responded to revenue agent

Arnold’s two letters dated May 1, 1997.       Mr. Barmes made identi-

cal responses in the space provided on the second page of each of

revenue agent Arnold’s two letters dated May 1, 1997.         That

response consisted of the following statement:      “No beneficiary

disbursements made.    No K-1's necessary.”

     On May 14, 1997, revenue agent Arnold issued a letter

addressed to “Marvin and Barbara Barmes, Managing Agents” (reve-

nue agent Arnold’s letter dated May 14, 1997).      That letter

stated in pertinent part:

     We have received your response on May 9, 1997 to our
     May 1, 1997 letters requesting the tax returns (1041)
     for Sandbar Wholesale Trust and Sandbar Real Estate
                              - 60 -

     Trust for the tax years of 1995 and 1996. Based on
     your response, it appears that these two entities are
     required to file income tax return [sic] per Internal
     Revenue Code Section 6012(a)(4). However, we have no
     records of receiving these tax returns.

     If you have filed these returns please provide us a
     copy by May 21, 1997. If you have not filed these
     returns, we are requesting these returns be filed by
     May 28, 1997. * * * The following information should be
     submitted to the address listed above by May 28, 1997:

          - Completed returns
          - A copy of the managing agent’s compensation
            agreement referenced in the trust agreement
          - A copy of Schedule A and the Addendum referred
            to in the trust document.

     On May 16, 1997, Mr. Barmes responded in writing (Mr.

Barmes’ letter dated May 16, 1997) to revenue agent Arnold’s

letter dated May 14, 1997.   Mr. Barmes’ letter dated May 16,

1997, stated in pertinent part:   “According to our CPA, Gregory

P. Karl out in California our Pure Trust organization has no tax

requirements according to the Internal Revenue Service.”     Mr.

Barmes attached to that letter copies of the Karl letter and the

Felthaus letter, which Sovereignty included in its promotional

materials and provided to petitioners.

     On August 4, 1997, revenue agent Arnold responded in writing

(revenue agent Arnold’s letter dated August 4, 1997) to Mr.

Barmes’ letter dated May 16, 1997.     Revenue agent Arnold’s letter

dated August 4, 1997, stated in pertinent part:

          We have reviewed your response to our letter of
     May 14, 1997 requesting that you file trust returns for
     the Sandbar Real Estate Trust and the Sandbar Wholesale
     Trust. You replied by providing us with a letter from
                             - 61 -

     the Philadelphia Service Center stating that a “Pure
     Trust” organization has no filing requirements. We
     wish to advise you that the term “Pure Trust” is not
     used in the Internal Revenue Code. Whatever the name
     of the trust arrangement, the taxation of the entity
     must comply with the requirements of the Internal
     Revenue Code. These requirements are based upon the
     economic reality of the arrangement, not its nomencla-
     ture.

        *       *       *       *       *       *        *

          In your response to out [sic] letter dated May 1,
     1997, you stated that no beneficiary disbursements were
     made and that no Forms K-1 were necessary. From this
     statement, we conclude that the trusts have not treated
     you as their owners, although it appears to us it
     should have done so. We note also that you did not
     report the trust income, deductions and credits on your
     personal return for 1995. Accordingly, the trusts are
     required to file their own returns. With this law in
     mind, we request that you file Forms 1041 for the
     Sandbar Wholesale Trust and Sandbar Real Estate Trust
     with us on or before August 18, 1997. In addition, we
     request that you provide us with the following documen-
     tation for the tax year ended December 31, 1995:

          1. The case [sic] receipts and disbursements
     journals for each trust;

          2. The checking and savings accounts for each
     trust (along with cancelled checks and deposit slips);

          3. A copy of the managing agent’s compensation
     agreement referred to in the trust agreement;

          4. A copy of Schedule A and the Addendum referred
     to in each trust document; and

          5. Any statements issued to you from the trusts
     informing you of the trusts’ income, deductions and
     credits that you are required to report on your per-
     sonal return for 1995 * * *.

     On September 29, 1997, Mr. Barmes responded in writing (Mr.

Barmes’ letter dated September 29, 1997) to revenue agent Ar-
                               - 62 -

nold’s letter dated August 4, 1997.     Mr. Barmes’ letter dated

September 29, 1997, stated in pertinent part:

     The Service has filed notices of federal tax lien
     against the trusts, which are based on allegations that
     the trusts are alter egos, nominee agents, constructive
     trusts and/or transferees. The Service has further
     proceeded against Marvin and Barbara Barmes as if they
     are partners, filed notices of federal tax lien based
     on this alleged partnership status, and apparently
     proceeded against Marvin and Barbara Barmes individu-
     ally.

          It should be readily apparent that it is the
     Service which has prevented us from filing appropriate
     forms at this time. Until the Service determines which
     legal theory pertains to us by taking a coherent posi-
     tion, our hands are tied. * * *

          * * * We need your help or binding assurance that
     if the trusts file Form 1041's, then all filing re-
     quirements have been met. * * *

In that letter, Mr. Barmes further asserted that Sandbar Whole-

sale Trust and Sandbar Real Estate Trust were “contractual

trusts”, which he described as “not so much a trust as a contrac-

tual relationship based on trust form”.

Notice of Deficiency

     In the notice of deficiency (notice) issued to petitioners

for 1995, respondent determined, inter alia, to increase the 1995

Schedule C gross receipts and consequently petitioners taxable

income by $890,719.32   With respect to those determinations,


     32
      Although respondent determined to increase petitioners’
taxable income for 1995 as a result of respondent’s determination
to increase petitioners’ Schedule C gross receipts for that year,
for convenience we shall refer only to unreported gross receipts
                                                   (continued...)
                              - 63 -

respondent stated in the explanation of adjustments (explanation)

included in the notice:   “in the absence of adequate books and

records an indirect method was utilized to determine Gross

Receipts”.   Exhibit C of the explanation further detailed the

method that respondent used to determine the increase in peti-

tioners’ 1995 gross receipts, as follows:

                                            December 31, 1994
 Total expense per 1994 Form 1040
        as originally filed                    $1,871,671
  Gross profit per 1994 Form 1040
        as originally filed                     2,624,759
   Total expense to gross profit
 percentage (divide item 1 by 2)                   71.31%

                                            December 31, 1995
 Total expense per 1995 Form 1040
         as originally filed                    $1,973,107
   Total expense to gross profit
      percentage (see above)                        71.31%
  Corrected gross profit (divide
             item 4 by 5)                        2,766,943
          Amount per return                      1,876,224
        Adjustment to income                       890,719

     In the notice, respondent also determined, inter alia, to

disallow the depreciation deductions of $9,400 that petitioners

claimed in the 1995 Schedule C.

     Respondent also determined in the notice that petitioners

are liable for 1995 for the accuracy-related penalty under

section 6662(a).

Certain Pre-Trial Conduct of Petitioners



     32
      (...continued)
and not to unreported taxable income.
                                - 64 -

     Petitioners’ Position During Informal Discovery with
     Respect to the Automobile Depreciation Deductions at Issue

     In Part V, Section A of Form 4562 attached to petitioners’

1995 joint return, petitioners indicated that they had written

evidence to support the claimed business use during that year of

petitioners’ two automobiles.    However, in a letter to respondent

dated July 11, 2000, that petitioners wrote during the course of

the parties’ informal discovery in this case, petitioners indi-

cated that they did not have any mileage logs or other documenta-

tion with respect to the business use during 1995 of those two

automobiles.   In another letter to respondent dated July 17,

2000, petitioners indicated that such documentation did not

exist.

     Petitioners’ Trial Memorandum

     On September 12, 2000, petitioners submitted their trial

memorandum (petitioners’ trial memorandum) to the Court.    In

petitioners’ trial memorandum, petitioners advanced, inter alia,

various arguments and contentions challenging the jurisdiction

and authority of the Court.   On September 19, 2000, we issued an

Order (September 19, 2000 Order) in which we directed that

petitioners’ trial memorandum be filed as of September 12, 2000,

the date of its receipt by the Court.    In that Order, we also

stated that we found the arguments and contentions with respect

to the jurisdiction and authority of the Court that petitioners

advanced in petitioners’ trial memorandum to be frivolous and/or
                              - 65 -

groundless.   We reminded petitioners in the September 19, 2000

Order about the provisions of section 6673(a)(1)(A) and (B),

which allows the Court to require a taxpayer to pay a penalty to

the United States whenever it appears to the Court that a pro-

ceeding before it has been instituted or maintained by the

taxpayer primarily for delay or when the taxpayer’s position in

such a proceeding is frivolous or groundless.   We informed

petitioners in the September 19, 2000 Order that “In the event

that petitioners continue to advance frivolous and/or groundless

contentions, the Court will be inclined to impose a penalty not

in excess of $25,000 on petitioners under section 6673.”

     On October 2, 2000, petitioners filed a motion for clarifi-

cation of the September 19, 2000 Order (petitioners’ motion for

clarification).   In that motion, petitioners reasserted their

arguments and contentions challenging the Court’s jurisdiction

and authority, which we had found in the September 19, 2000 Order

to be frivolous and/or groundless.33   On October 2, 2000, we

denied petitioners’ motion for clarification.


     33
      In petitioners’ motion for clarification, petitioners
stated, inter alia:

     The Court has not provided any assistance to petition-
     ers which would enable them to evaluate whether or not
     to pursue their issue(s), and petitioners seek guidance
     from the Court. * * * the [September 19, 2000] Order
     was issued sua sponte, and petitioners have been pro-
     vided no authority to examine which would explain why
     their position(s) is/are “frivolous and/or groundless.”
                               - 66 -

     Petitioners’ Motion To Dismiss

     On October 16, 2000, three days after we issued the October

13, 2000 Order compelling petitioners to produce the requested

documents of Sandbar Wholesale Trust and Sandbar Real Estate

Trust to counsel for respondent and one week before the date of

trial in this case, petitioners filed a motion to dismiss (peti-

tioners’ motion to dismiss).   In that motion, petitioners asked

the Court to dismiss this case because the Court does not have

jurisdiction over it.   In support of petitioners’ motion to

dismiss, petitioners stated:

     As grounds for this motion, petitioners would show the
     Court that the statutory notice of deficiency was not
     executed by the Commissioner of Internal Revenue.

          The statutory notice of deficiency at issue in
     this case, although containing the Commissioner’s name,
     was executed by “R. Arnold.” * * *

          Rule 13 of the United States Tax Court expressly
     provides that “the jurisdiction of the Court depends
     (1) in a case commenced in the Court by a taxpayer,
     upon the issuance by the Commissioner of a notice of
     deficiency in income....”

          * * * the term Commissioner * * * means the Com-
     missioner of Internal Revenue, personally.

     On October 19, 2000, we issued an Order (October 19, 2000

Order) in which we denied petitioners’ motion to dismiss.    In

that Order, we stated, inter alia:

     The Court finds the * * * contentions of petitioners
     [advanced in their motion to dismiss] to be groundless
     and frivolous. The Court notes that petitioners con-
     tinue to advance in this case what the Court finds to
     be frivolous and groundless contentions. See sec.
                              - 67 -

     6673(a)(1); see also the Court’s Order dated September
     19, 2000.

                              OPINION

Preliminary Matters

     At trial, petitioners chose not to testify, did not call any

other witnesses, and, except for the joint exhibits attached to

the parties’ stipulation of facts, introduced no documentary

evidence into the record.   Instead, in support of their position

regarding the determination in the notice that they have unre-

ported Schedule C gross receipts for 1995, petitioners advance,

inter alia, the following arguments with respect to that determi-

nation:   (1)(a) “the Commissioner must introduce some reasonable

foundation supporting the tax deficiency in order to preserve the

presumption of correctness”, and (b) even if such a foundation

exists, respondent’s method of reconstructing petitioners’

unreported Schedule C gross receipts for 1995 is arbitrary; and

(2) respondent has the burden of proof.   In support of their

position regarding the determination in the notice disallowing

the claimed 1995 Schedule C depreciation deductions with respect

to petitioners’ two automobiles, petitioners rely, inter alia, on

certain facts that the Court found in Barmes v. Commissioner,

T.C. Memo. 2000-254, affd. per curiam without published opinion

__F.3d__ (7th Cir., June 19, 2001).
                              - 68 -

     Petitioners’ Position Regarding
     the Presumption of Correctness

     According to petitioners,

     Unless some evidence supports an inference that the
     taxpayer was involved in the business alleged in the
     notice of deficiency during the period covered by the
     notice, “an assessment may not be supported even where
     the taxpayer is silent.” * * * .

          * * * Therefore, before the Barmeses have any
     burden to present evidence in opposition to the Commis-
     sioner’s deficiency notice, the Commissioner is re-
     quired to present substantive evidence that the
     Barmeses received the unreported income asserted.
     Otherwise, the Commissioner is not entitled to a deci-
     sion in its favor.

          Here, there was no evidence showing the predicate
     fact that the Barmeses received the unreported income.
     * * * [Fn. ref. omitted.]

     The U.S. Court of Appeals for the Seventh Circuit (Court of

Appeals), the Court to which an appeal in this case would nor-

mally lie, has held:

     All that is required to support the presumption [of
     correctness] is that the Commissioner’s determination
     have some minimal factual predicate. It is only when
     the Commissioner’s assessment is shown to be “without
     rational foundation” or “arbitrary and erroneous,” that
     the presumption should not be recognized. * * *

Pittman v. Commissioner, 100 F.3d 1308, 1317 (7th Cir. 1996),

affg. T.C. Memo. 1995-243.   Although certain cases on which

petitioners rely, see United States v. McMullin, 948 F.2d 1188,

1192 (10th Cir. 1991), and Weimerskirch v. Commissioner, 596 F.2d

358, 360 (9th Cir. 1979), revg. 67 T.C. 672 (1977), mention the

taxpayer’s “receipt” of income, it is not necessary for the
                              - 69 -

Commissioner to show the taxpayer’s receipt of income in order to

satisfy the requirement of the Court of Appeals (and other

courts) that in unreported income cases the Commissioner’s

determination have some minimal factual predicate.   In this

connection, the Court of Appeals has held that “The ‘presumption

of correctness’ is appropriate where evidence existed which

linked the taxpayers * * * with ‘the tax-generating activity.’”

Gold Emporium, Inc. v. Commissioner, 910 F.2d 1374, 1378 (7th

Cir. 1990), affg. Malicki v. Commissioner, T.C. Memo. 1988-559.

See Shriver v. Commissioner, 85 T.C. 1, 4 (1985), affd. per Order

(7th Cir. 1986).

     The record in this case links petitioners throughout 1995,

the year at issue, to the two businesses, Barbara’s Gift Shop and

Barmes Wholesale.   That record establishes that throughout that

year petitioners operated, controlled the operations of, and

controlled those two tax-generating activities.   The instant

record also shows that the creation of Sandbar Wholesale Trust in

October 1995 did not change petitioners’ operation of, control

over the operations of, or control over Barbara’s Gift Shop and

Barmes Wholesale.

     Petitioners also contend that the method that respondent

used in the notice to reconstruct petitioners’ Schedule C gross
                              - 70 -

receipts for 1995 is arbitrary.34   On the instant record, we

reject that contention.   Petitioners refused to provide respon-

dent with any information or documentation during respondent’s

examination of petitioners’ 1995 joint return.   Under such

circumstances, respondent was authorized to reconstruct petition-

ers’ income by any reasonable means which clearly reflects

income.   See, e.g., Zuhone v. Commissioner, 883 F.2d 1317, 1326

(7th Cir. 1989), affg. T.C. Memo. 1988-142; Petzoldt v. Commis-

sioner, 92 T.C. 661, 686-687 (1989).   On the record presented, we

find respondent’s method of reconstructing petitioners’ 1995

Schedule C gross receipts and the results generated by that




     34
      In order to reconstruct petitioners’ 1995 Schedule C gross
receipts, respondent divided the total expenses reported in
petitioners’ 1994 Schedule C (i.e., $1,871,671) by the gross
profit (total net gross receipts (i.e., total gross receipts
reduced by returns and allowances) minus cost of goods sold)
reported in that schedule (i.e., $2,624,759). The resulting
quotient was 71.31 percent. The revenue agent then divided the
total expenses claimed in petitioners’ 1995 Schedule C (i.e.,
$1,973,107) by that percentage. The result ($2,766,943) was
determined to be the reconstructed Schedule C gross profit for
1995. Respondent determined that the difference (i.e., $890,719)
between that reconstructed gross profit of $2,766,943 and the
gross profit reported in petitioners’ 1995 Schedule C (i.e.,
$1,876,224) constituted petitioners’ unreported 1995 Schedule C
gross receipts. (In this connection, petitioners do not claim
any returns and allowances or cost of goods sold in excess of the
amounts of such items claimed in petitioners’ 1995 Schedule C.)
Pursuant to the foregoing method of reconstructing petitioners’
Schedule C gross receipts for 1995, respondent determined to
increase petitioners’ Schedule C gross receipts for that year by
$890,719.
                               - 71 -

method to be reasonable.35   In fact, the method used by respon-

dent resulted in an amount of total Schedule C reconstructed

gross receipts for 1995 which was less than the total sales from

Barbara’s Gift Shop and Barmes Wholesale for 1995 (i.e.,

$5,799,767) that Mr. Barmes reported to the State of Indiana in

the Indiana business tangible personal property assessment return

that he filed for those businesses for that year.   Under respon-

dent’s method of reconstructing petitioners’ 1995 Schedule C

gross receipts, the gross receipts from Barbara’s Gift Shop and

Barmes Wholesale for 1995 equaled only $5,107,781 (i.e.,

$4,217,046 (gross receipts of $4,217,062 less returns and allow-

ances of $16 that were reported in petitioners’ 1995 Schedule C)

plus $890,719 (unreported 1995 Schedule C gross receipts deter-

mined in the notice)), which is almost $700,000 less than the

total sales for Barbara’s Gift Shop and Barmes Wholesale for 1995

that Mr. Barmes reported in the Indiana business tangible per-

sonal property assessment return.36


     35
      The Court sustained a similar method of reconstructing
income in Markman v. Commissioner, T.C. Memo. 1987-407.
     36
      As respondent points out, the reasonableness of respon-
dent’s method of reconstructing petitioners’ 1995 Schedule C
gross receipts and the results produced by that method is also
evidenced by the relationship of Schedule C gross profit to
Schedule C gross receipts. The percentage of Schedule C gross
profit to reported Schedule C gross receipts for 1994 was 48.2
percent (i.e., 1994 gross profit of $2,624,759 divided by total
1994 reported gross receipts of $5,445,178). If one were to use
that percentage (i.e., 48.2 percent) in order to calculate 1995
                                                   (continued...)
                              - 72 -

     Petitioners’ Position Regarding the Burden of Proof

     Respondent advances the following alternative theories or

principles in support of the determination in the notice to

increase petitioners’ Schedule C gross receipts for 1995:

(1) The assignment of income theory; (2) sham trust principles;

and (3) the grantor trust rules found in sections 671-679 (gran-

tor trust rules).   The notice did not expressly mention any of

the foregoing theories or principles.   Consequently, according to

petitioners, those theories and principles are new matters under

Rule 142(a) on which respondent has the burden of proof.

     We need not decide whether petitioners’ position that

respondent has the burden of proof regarding the alternative

theories advanced by respondent in support of the determination

in the notice to increase petitioners’ Schedule C gross receipts

for 1995 is correct.   The record establishes that petitioners had

unreported 1995 Schedule C gross receipts from Barbara’s Gift

Shop and Barmes Wholesale in the amount determined by respondent

in the notice.   We would reach the same result no matter who has



     36
      (...continued)
total gross receipts, the result would be $5,740,546 (i.e., the
1995 gross profit determined in the notice of $2,766,943 divided
by 48.2 percent). The recalculated total gross receipts for
1995, determined by using the 1994 percentage of gross profit to
total 1994 reported gross receipts, is remarkably close to the
total sales of $5,799,767 that Mr. Barmes reported in the Indiana
business tangible personal property assessment return as the
total sales of Barbara’s Gift Shop and Barmes Wholesale for 1995.
                              - 73 -

the burden of proof on that issue.

     Petitioners’ Reliance on Facts Found in
     Barmes v. Commissioner, T.C. Memo. 2000-254

     In support of their position regarding the depreciation

deductions at issue, it appears that petitioners are arguing that

under the doctrine of collateral estoppel the Court is required

to find as facts in this case the facts that we found in Barmes

v. Commissioner, T.C. Memo. 2000-254.   Barmes involved, inter

alia, petitioners’ claim to Schedule C depreciation deductions

for 1994 with respect to petitioners’ two automobiles, which we

rejected.   The instant case involves, inter alia, petitioners’

claim to Schedule C depreciation deductions for 1995 with respect

to those same two automobiles.

     In Commissioner v. Sunnen, 333 U.S. 591 (1948), the Supreme

Court examined and discussed the doctrine of collateral estoppel

as it applies in Federal income tax cases.   The Supreme Court

stated in pertinent part:

     Income taxes are levied on an annual basis. Each year
     is the origin of a new liability and of a separate
     cause of action. Thus if a claim of liability or non-
     liability relating to a particular tax year is liti-
     gated, a judgment on the merits is res judicata as to
     any subsequent proceeding involving the same claim and
     the same tax year. But if the later proceeding is
     concerned with a similar or unlike claim relating to a
     different tax year, the prior judgment acts as a col-
     lateral estoppel only as to those matters in the second
     proceeding which were actually presented and determined
     in the first suit. Collateral estoppel operates, in
     other words, to relieve the government and the taxpayer
     of “redundant litigation of the identical question of
                              - 74 -

     the statute’s application to the taxpayer’s status.”
     * * *

         *        *     *       *        *       *       *

          * * * where two cases involve income taxes in
     different taxable years, collateral estoppel must be
     used with its limitations carefully in mind so as to
     avoid injustice. It must be confined to situations
     where the matter raised in the second suit is identical
     in all respects with that decided in the first proceed-
     ing and where the controlling facts and applicable
     legal rules remain unchanged. * * *

Id. at 598-600.

     We reject petitioners’ apparent attempt to rely on the

doctrine of collateral estoppel to require us to find as facts in

this case the facts that we found in Barmes v. Commissioner,

supra.   Any such attempt misconstrues and misapplies that doc-

trine.   In determining here whether petitioners are entitled to

the depreciation deductions that they are claiming for 1995 with

respect to petitioners’ two automobiles, we are in no way bound

by the facts that we found in Barmes.   In resolving the deprecia-

tion issue presented to us, we shall rely on the facts that we

have found are established by the record in this case, and not by

the facts that we found in Barmes were established by the record

in that case.

Respondent’s Determination Regarding
Petitioners’ Claimed Schedule C Gross Receipts

     During respondent’s examination of petitioners’ 1995 joint

return, petitioners refused to provide respondent’s revenue agent

with any books, records, or other information with respect to the
                                - 75 -

items of income and deduction reported by petitioners in that

return.    Consequently, respondent relied on the indirect method

of reconstructing petitioners’ 1995 Schedule C gross receipts

described above.    See, e.g., supra note 34.   We have found that

method and the results generated by that method to be reasonable.

The only question that remains for our consideration is whether

the unreported Schedule C gross receipts determined by respondent

in the notice are taxable to petitioners.     On the record before

us, we find that they are.

     As discussed above, respondent advances three alternative

theories or principles in support of respondent’s determination

that petitioners had unreported Schedule C gross receipts for

1995:     (1) The assignment of income theory; (2) sham trust

principles; and (3) the grantor trust rules.     We shall address

only the assignment of income theory because that theory resolves

against petitioners the issue of whether they are taxable on the

unreported Schedule C gross receipts that respondent determined

in the notice.

     As we understand their position regarding the unreported

Schedule C gross receipts at issue, petitioners contend that the

income which Barbara’s Gift Shop and Barmes Wholesale generated

after Sandbar Wholesale Trust was created on October 12, 1995, is

income that Sandbar Wholesale Trust earned, and not income that

petitioners earned.     That is because, according to petitioners,
                              - 76 -

after the creation of Sandbar Wholesale Trust on October 12,

1995, petitioners no longer held title to those two businesses or

to the properties of those businesses.

     Although the record shows that Sandbar Wholesale Trust was

established on October 12, 1995, the record does not show that

petitioners transferred Barbara’s Gift Shop and Barmes Wholesale,

or any properties of those businesses, to that trust on that date

or at any other time during 1995.37    On the instant record, we

reject petitioners’ contention that petitioners transferred

Barbara’s Gift Shop and Barmes Wholesale, or any properties of

those two businesses, to Sandbar Wholesale Trust on October 12,

1995, or at any other time during the year at issue.38


     37
      The record shows that Mr. Barmes made initial cash depos-
its of $1,000 into each of the three Community Bank accounts that
he opened on Oct. 13, 1995, with respect to Sandbar Wholesale
Trust in the names of Sandbar Wholesale Trust–-Barbara [sic] Gift
Shop, Sandbar Wholesale Trust–-Barmes Wholesale, and Sandbar
Wholesales [sic] Trust–-Payroll. However, the record does not
establish that the cash used to make those deposits was the
property of Barbara’s Gift Shop and/or Barmes Wholesale. The
record does show that on Oct. 18, 1995, petitioners gratuitously
transferred to Sandbar Real Estate Trust by warranty deed the
Fritchton property and the two parcels of real estate on which
the two business locations were situated. We express no opinion
herein as to whether such transfers should be recognized for
Federal tax purposes.
     38
      The record establishes only that petitioners made certain
claims to, inter alia, respondent and the State of Ind. that they
transferred Barbara’s Gift Shop and Barmes Wholesale and the
properties of those two businesses to Sandbar Wholesale Trust.
For example, the record includes a three-page document relating
to the Sandbar Wholesale Trust that was filed with the Knox
County Recorder’s Office on October 12, 1995, which respondent
                                                   (continued...)
                             - 77 -

     The record before us establishes that throughout 1995,

including the period after the creation of Sandbar Wholesale

Trust, petitioners operated, controlled the operations of, and

controlled Barbara’s Gift Shop and Barmes Wholesale.   On that

record, we find that throughout 1995 petitioners controlled the

earning of the income of those two businesses.   Consequently,

regardless of whether petitioners transferred the two businesses

and/or the properties of those businesses to Sandbar Wholesale

Trust after it was created, on the instant record, petitioners

are taxable under the assignment of income doctrine on the

unreported 1995 Schedule C gross receipts at issue in this case.

See Lucas v. Earl, 281 U.S. 111 (1930).

     The “first principle of income taxation” is that income must



     38
      (...continued)
obtained from that office. That document contained, inter alia,
the following statement: “Trustee(s) have * * * acknowledged the
conveyance, delivery and acceptance of certain * * * property
listed in Schedule A and Addendum to be held in Trust according
to the terms, herein.” The record does not contain the Schedule
A and Addendum to which the document in question referred. Nor
does the record contain any other documents evidencing any
alleged conveyance to Sandbar Wholesale Trust or any other trust
documents relating to that trust.   During respondent’s examina-
tion of petitioners’ 1995 joint return, petitioners did not
provide respondent’s revenue agent with any trust documents
relating to Sandbar Wholesale Trust. During the discovery
process in this case, petitioners refused to comply with the
Court’s October 13, 2000 Order compelling petitioners to produce
to counsel for respondent, inter alia, any trust documents
relating to Sandbar Wholesale Trust that respondent requested in
respondent’s request for production of documents. During the
trial in this case, petitioners did not offer any such documents
into the record.
                              - 78 -

be taxed to the one who earns it.   Commissioner v. Culbertson,

337 U.S. 733, 739-740 (1949) (citing Lucas v. Earl, supra).

Attempts to subvert this principle by diverting income away from

its true earner to another entity by means of contractual ar-

rangements, however cleverly drafted, are not recognized as

dispositive for Federal income tax purposes, regardless of

whether such arrangements are otherwise valid under State law.

See Vercio v. Commissioner, 73 T.C. 1246, 1253 (1980); see also

Schulz v. Commissioner, 686 F.2d 490, 493 (7th Cir. 1982), affg.

T.C. Memo. 1980-568.   The “true earner” of income is the person

or entity who controlled the earning of such income, rather than

the person or entity who received the income.   See Vercio v.

Commissioner, supra at 1253 (citing Wesenberg v. Commissioner, 69

T.C. 1005, 1010 (1978)); see also Commissioner v. Sunnen, 333

U.S. at 604 (“The crucial question remains whether the assignor

retains sufficient power and control over the assigned property

or over receipt of the income to make it reasonable to treat him

as the recipient of the income for tax purposes.”).

     Even if, as petitioners contend, they transferred Barbara’s

Gift Shop and Barmes Wholesale and/or the properties of those

businesses to Sandbar Wholesale Trust after it was created, based

on our examination of the entire record before us, we find that

petitioners’ attempt to divert the income of those two businesses

to Sandbar Wholesale Trust constituted an invalid assignment of
                                     - 79 -

income.        Consequently, we sustain respondent’s determination that

petitioners have unreported Schedule C gross receipts for 1995 in

the amount of $890,719.

Respondent’s Determination Regarding
Petitioners’ Claimed Depreciation Deductions

     In the notice, respondent disallowed the depreciation

deductions that petitioners claimed in the 1995 Schedule C with

respect to petitioners’ two automobiles.

     Deductions are strictly a matter of legislative grace, and

petitioners bear the burden of proving that they are entitled to

any deductions claimed.          See INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).

     Section 167(a) allows a deduction for a reasonable allowance

for the exhaustion, wear and tear, and obsolescence of property

used in a trade or business or held for the production of income.

Section 274(d)(4) operates to disallow any deduction otherwise

allowable under, inter alia, section 167 with respect to, inter

alia, any “listed property” unless the taxpayer satisfies the

substantiation requirements of that section.39         “Listed property”


     39
          Sec. 274(d) provides in pertinent part:

     SEC. 274.       DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC.,
                     EXPENSES.

     (d) Substantiation Required.--No deduction or credit
     shall be allowed--

           *         *       *         *       *       *        *
                                                           (continued...)
                                - 80 -

is defined in section 280F(d)(4) to include passenger automo-

biles.     See sec. 280F(d)(4)(A)(i).    As pertinent here, petition-

ers may satisfy the substantiation requirements of section 274(d)

and the regulations thereunder by adequate records or by suffi-

cient evidence corroborating their own statements.      See sec.

274(d)(4); sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50

Fed. Reg. 46016-46017 (Nov. 6, 1985).

     In support of the automobile depreciation deductions at

issue, petitioners rely on certain facts that we found in Barmes

v. Commissioner, T.C. Memo. 2000-254, and on certain factual

allegations not supported by the record that they advance in

their briefs.     We rejected above petitioners’ reliance on certain

facts that we found in Barmes, supra.       We also reject petition-

ers’ reliance on certain factual allegations in their briefs.

See Rule 143(b).     On the record before us, we find that petition-

ers have failed to establish that they used petitioners’ two

automobiles in a trade or business or that they held such automo-

biles for the production of income.      See sec. 167(a).


     39
          (...continued)

          (4) with respect to any listed property (as de-
     fined in section 280F(d)(4)),

     unless the taxpayer substantiates by adequate records
     or by sufficient evidence corroborating the taxpayer’s
     own statement (A) the amount of such expense or other
     item, (B) the time and place of the * * * use of the
     facility or property * * *, (C) the business purpose of
     the expense or other item * * *.
                                - 81 -

     Assuming arguendo that petitioners had established that they

used petitioners’ two automobiles in a trade or business or that

they held such automobiles for the production of income, peti-

tioners must satisfy the substantiation requirements of section

274(d)(4) and the regulations thereunder.    Petitioners concede

that they kept no records with respect to the business use of

petitioners’ two automobiles.    Consequently, petitioners may

establish their entitlement to the depreciation deductions at

issue only by introducing into the record in this case their own

statements and sufficient evidence corroborating such statements.

See sec. 274(d)(4); sec. 1.274-5T(c)(1), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).    Petitioners introduced

no evidence at trial that supports their position with respect to

the depreciation deductions at issue.    On the instant record, we

find that petitioners have failed to establish that they satisfy

the substantiation requirements of section 274(d)(4) and the

regulations thereunder regarding those deductions.

     Based on our examination of the entire record before us, we

find that petitioners have failed to establish their entitlement

to the depreciation deductions at issue.    Consequently, we

sustain respondent’s determination with respect to those claimed

deductions.

Respondent’s Determination Regarding the
Accuracy-Related Penalty Under Section 6662(a)

     In the notice, respondent determined that petitioners are
                              - 82 -

liable for the year at issue for the accuracy-related penalty

under section 6662(a) and asserted the following alternative

grounds for the imposition of that penalty:   Negligence under

section 6662(b)(1) and a substantial understatement of income tax

under section 6662(b)(2).

     Petitioners bear the burden of proving that they are not

liable for the accuracy-related penalty under section 6662(a).

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment resulting from, inter alia,

negligence or disregard of rules or regulations, see section

6662(b)(1), or a substantial understatement of income tax, see

section 6662(b)(2).   For purposes of section 6662(a), the term

“negligence” includes any failure to make a reasonable attempt to

comply with the Code, and the term “disregard” includes any

careless, reckless, or intentional disregard.   See sec. 6662(c).

Negligence has also been defined as a lack of due care or failure

to do what a reasonable person would do under the circumstances.

See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.

686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).    An under-

statement is equal to the excess of the amount of tax required to

be shown in the tax return over the amount of tax shown in the

tax return, see sec. 6662(d)(2)(A), and is substantial in the
                              - 83 -

case of an individual if it exceeds the greater of 10 percent of

the tax required to be shown or $5,000, see sec. 6662(d)(1)(A).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.   See sec. 6664(c)(1).

     Petitioners introduced no evidence and advance no conten-

tions with respect to the accuracy-related penalty under section

6662(a).   On the record before us, we find that petitioners have

failed to show that they were not negligent and did not disregard

rules or regulations within the meaning of section 6662(b)(1), or

otherwise did what a reasonable person would do, with respect to

any portion of the underpayment for 1995.   On that record, we

further find that petitioners have failed to show that they acted

with reasonable cause and in good faith with respect to any

portion of the underpayment for that year.40   See sec. 6664(c).

     Based on our examination of the entire record before us, we

find that petitioners have failed to establish any error in

respondent’s determination that they are liable for the year at

issue for the accuracy-related penalty under section 6662(a).



     40
      We also find on the record before us that there is a
substantial understatement of tax under sec. 6662(b)(2). Peti-
tioners showed no tax in petitioners’ 1995 joint return. The tax
required to be shown in that return, as calculated by respondent
in the notice, is $315,478, and we have sustained all of respon-
dent’s determinations in the notice.
                               - 84 -

Accordingly, we sustain respondent’s determination with respect

to that penalty.

Penalty Under Section 6673(a)(1)

     On brief, respondent asks the Court to require petitioners

to pay a penalty to the United States pursuant to section

6673(a)(1).

     Section 6673(a)(1) authorizes the Court to require a tax-

payer to pay to the United States a penalty in an amount not to

exceed $25,000 whenever it appears to the Court that, inter alia,

the taxpayer’s position in a proceeding before it is frivolous or

groundless.    See sec. 6673(a)(1)(B).   The Court may impose a

penalty under section 6673(a)(1)(B) even if it finds that not all

of the taxpayer’s arguments are frivolous or groundless.     See

Sloan v. Commissioner, 102 T.C. 137, 148 (1994), affd. 53 F.3d

799 (7th Cir. 1995).

     A position is frivolous when it is “contrary to established

law and unsupported by a reasoned, colorable argument for change

in the law.”    Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir.

1986).   The word “groundless” is a word of common usage.    Web-

ster’s Third New International Dictionary Unabridged 1003 (1993)

provides the following definition of that word:     “having no

ground or foundation: lacking cause or reason for support”.

     In support of respondent’s position that the imposition on

petitioners of a penalty under section 6673(a)(1) is appropriate,
                               - 85 -

respondent points to (1) petitioners’ trial memorandum that the

Court had filed as of September 12, 2000, the date of its receipt

by the Court, (2) the Court’s September 19, 2000 Order directing

that that trial memorandum be filed, (3) petitioners’ motion to

dismiss filed on October 16, 2000, and (4) the Court’s October

19, 2000 Order denying that motion.     In the September 19, 2000

Order, we stated that we found the arguments and contentions with

respect to the jurisdiction and authority of the Court that

petitioners advanced in petitioners’ trial memorandum to be

frivolous and/or groundless.   We also reminded petitioners in the

September 19, 2000 Order about section 6673(a)(1) and informed

them that “In the event that petitioners continue to advance

frivolous and/or groundless contentions, the Court will be

inclined to impose a penalty not in excess of $25,000 on peti-

tioners under section 6673.”   In the October 19, 2000 Order, we

found the contentions of petitioners that the Court lacks juris-

diction over the instant case because the notice issued to

petitioners was not personally signed by the Commissioner of

Internal Revenue to be frivolous and groundless.     We further

noted in the October 19, 2000 Order that petitioners were contin-

uing to advance in this case what we found to be frivolous and

groundless contentions, and we cited in that Order our September

19, 2000 Order, in which we indicated that we would be inclined

to impose a penalty under section 6673 in the event that peti-
                              - 86 -

tioners continued to advance frivolous and/or groundless conten-

tions.

     According to respondent, after the Court issued the Septem-

ber 19, 2000 Order, in which we found the arguments and conten-

tions with respect to the Court’s jurisdiction and authority that

petitioners advanced in their trial memorandum to be frivolous

and/or groundless and in which we reminded petitioners about

section 6673(a)(1), petitioners continued to advance contentions

in their motion to dismiss filed on October 16, 2000, which the

Court found in the October 19, 2000 Order to be frivolous and

groundless.   Consequently, respondent argues, the Court should

impose a penalty on petitioners under section 6673(a)(1).

     Petitioners do not address the reasons advanced by respon-

dent in support of respondent’s position that the Court should

impose a penalty under section 6673(a)(1).    Instead, petitioners

argue that the imposition of such a penalty is not appropriate in

the instant case because they refrained from presenting at trial

and on brief (1) the same arguments and contentions challenging

the Court’s jurisdiction and authority that they had advanced in

petitioners’ trial memorandum and (2) “any challenge whatsoever

to the Court’s jurisdiction and authority.”

     On the record before us, we reject petitioners’ position.

Petitioners first appear to be taking the position that the

September 19, 2000 Order cautioned petitioners only against
                               - 87 -

continuing to advance the specific arguments and contentions

which they had presented in their trial memorandum and which we

found in that Order to be frivolous and/or groundless.   Any such

position ignores the September 19, 2000 Order.   That Order

stated:   “In the event that petitioners continue to advance

frivolous and/or groundless contentions, the Court will be

inclined to impose a penalty not in excess of $25,000 on peti-

tioners under section 6673.”   The September 19, 2000 Order did

not advise petitioners that the Court will be inclined to impose

a penalty under section 6673 only in the event that they continue

to advance the same arguments and contentions that they presented

in their trial memorandum.

     Petitioners also appear to be taking the position that we

should not impose a penalty under section 6673(a)(1) because they

refrained from making any challenge whatsoever to the Court’s

jurisdiction and authority at trial and on brief.   That position

ignores the reasons that respondent advances on brief in support

of the imposition of a penalty under section 6673(a)(1).   Those

reasons are that, after we informed petitioners in the September

19, 2000 Order that we would be inclined to impose a penalty

under section 6673(a)(1) if they continued to advance frivolous

and/or groundless contentions, petitioners continued to advance

frivolous and groundless contentions challenging the Court’s

jurisdiction in petitioners’ motion to dismiss that they filed on
                              - 88 -

October 16, 2000.   We agree that the reasons presented by respon-

dent warrant imposition in the instant case of a penalty under

section 6673(a)(1).

     By continuing to assert after the Court issued the September

19, 2000 Order frivolous and groundless contentions in the motion

to dismiss that petitioners filed on October 16, 2000, petition-

ers consumed the time and effort of the Court, which otherwise

could have been devoted to resolving bona fide claims of other

taxpayers.   See Coleman v. Commissioner, supra at 72; Cook v.

Spillman, 806 F.2d 948 (9th Cir. 1986), affd. per curiam.    Based

on our examination of the entire record before us, we find that,

pursuant to section 6673(a)(1)(B), the imposition of a penalty in

the amount of $2,000 is appropriate in this case.

     We have considered all of the contentions and arguments of

petitioners that are not discussed herein, and we find them to be

without merit and/or irrelevant.

     To reflect the foregoing,

                                      An approriate order will be

                                 issued and a decision will be

                                 entered sustaining respondent’s

                                 determinations and imposing a

                                 penalty under section 6673(a)(1).
