                        T.C. Memo. 2001-264



                      UNITED STATES TAX COURT



             LEROY AND SHIRLEY COMBS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9198-00.             Filed October 3, 2001.


     Leroy and Shirley Combs, pro sese.

     Dale A. Zusi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notice dated May 24, 2000, respondent

determined a $298,992 deficiency, a $74,598 section 6651(a)

addition to tax, and a $59,798 section 6662(a) penalty relating

to petitioners’ 1994 Federal income tax.   All section references

are to the Internal Revenue Code in effect for the year in issue.

The issues for decision are whether petitioners failed to report

income for 1994 and are liable for a section 6651 addition to
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tax, a section 6662 accuracy-related penalty, and a section 6673

penalty for advancing frivolous and groundless arguments.

                           FINDINGS OF FACT

     Petitioners, husband and wife, resided in Fresno,

California, at the time their petition was filed.

     In 1994, petitioners created, and diverted their taxable

income to, seven trusts.    Petitioners funded the trusts with

their real property and businesses, including rental properties,

two day care centers, and a print shop.       Payments for services

rendered, rental income, and other funds were deposited in the

trusts’ bank accounts.   Petitioners drew numerous checks on these

accounts.

     Petitioners, on May 30, 1997, filed their 1994 income tax

return and reported no Federal income tax liability.       U.S.

Fiduciary Income Tax Returns for the taxable year 1994 were filed

on June 24 and 25, 1997 for the seven trusts.       Collectively, the

trusts reported as their gross receipts all income earned by

petitioners in 1994.   In 2000, respondent audited petitioners

1994 return, reconstructed their income, disallowed their

unsubstantiated deductions, determined income and self-employment

tax deficiencies, and imposed a section 6651(a) addition to tax

and a section 6662(a) penalty.

     Petitioners failed to comply with this Court’s April 27,

2001, Order to File Response to Request for Admissions and May 1,
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2001, Order to Compel Responses to Interrogatories and Documents,

and have made no meaningful attempt to participate in

administrative proceedings, or the discovery process.    At trial,

respondent requested that the Court impose a penalty pursuant to

section 6673.    Despite several warnings by this Court, Mr. Combs

persistently asserted why he believes taxes are unconstitutional.

                               OPINION

      At the outset, we note that petitioners failed to cooperate

with respondent and as a result, pursuant to section 7491, have

the burden of proof.    Petitioners’ primary contention is that

respondent’s determinations are not entitled to a presumption of

correctness.    We disagree.

     Respondent’s determinations were supported by substantive

evidence that the taxpayer received unreported income.    See Rapp

v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985)(holding that

once the Government introduces evidence linking the taxpayer with

income producing activity, the burden shifts to the taxpayer to

establish that the deficiency determination is arbitrary or

erroneous); Weimerskirch v. Commissioner, 596 F.2d 358, 360-361

(9th Cir. 1979), revg. 67 T.C. 672 (1977); Petzoldt v.

Commissioner, 92 T.C. 661, 687-690 (1989)(discussing Court of

Appeals for the Ninth Circuit authorities).    Petitioners had

unfettered control of trust property.    Petitioners had signatory

authority over, and drew checks on, trust bank accounts.    In
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addition, petitioners resided in, encumbered, and sold real

property they transferred to the trusts.    Respondent’s

determinations are not arbitrary or erroneous and are entitled to

a presumption of correctness.

     Petitioners diverted income from their businesses to several

trusts.   These payments are ineffective assignments of income.

Thus, the diverted income is taxable to petitioners.     See Lucas

v. Earl, 281 U.S. 111, 114-115 (1930); Finley v. Commissioner, 27

T.C. 413 (1956), affd. 255 F.2d 128 (10th Cir. 1958).      In

addition, petitioners did not contest any of respondent’s

determinations (i.e., income determination, liability for self-

employment tax, and liability for a section 6651 addition to tax

and section 6662 penalty).   Accordingly, these determinations are

sustained.    Welch v. Helvering, 290 U.S. 111, 115 (1933); Kasey

v. Commissioner, 33 T.C. 656, 660 (1960).

     Petitioners instituted these proceedings primarily for

delay, repeatedly advanced frivolous and groundless arguments,

and failed to comply with orders of this Court or cooperate with

respondent.   Despite this Court’s warnings, Mr. Combs

persistently asserted frivolous constitutional arguments.       We,

therefore, impose a $25,000 section 6673(a)(1) penalty.

     Contentions we have not addressed are moot, irrelevant, or

meritless.
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To reflect the foregoing,

                                         Decision will be entered

                                    for Respondent.
