                        T.C. Memo. 2010-228



                      UNITED STATES TAX COURT



                 PHILIP S. GLOVER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 1350-08, 3931-08,    Filed October 20, 2010.
                 5031-08.



     Philip S. Glover, pro se.

     Timothy B. Heavner, for respondent.



                        MEMORANDUM OPINION


     PARIS, Judge:   Respondent issued separate notices of

deficiency for tax years 2004, 2005, and 2006 (the tax years at

issue), determining deficiencies in petitioner’s income tax and
                                 - 2 -

additions to tax under sections 6651(a)(1) and (2) and 6654.1

Petitioner timely filed separate petitions with the Court for the

tax years at issue, challenging the deficiencies and additions to

tax.2

        These cases present five issues:   (1) Whether petitioner

received taxable income during the tax years at issue that he

failed to report, causing deficiencies in income tax; (2) whether

petitioner is liable for additions to tax for failing to file

returns; (3) whether petitioner is liable for additions to tax

for failing to pay taxes; (4) whether petitioner is liable for

additions to tax for failing to pay estimated taxes; and (5)

whether petitioner is liable for a penalty for asserting a

frivolous or groundless position.

                              Background

        Some of the facts have been stipulated and are found

accordingly.     The stipulations of facts and the attached exhibits

are incorporated herein by this reference.      Petitioner resided in

Norfolk, Virginia, at the time he filed the petitions.

        During the tax years at issue petitioner received payments

totaling $52,257.21, $83,532.45, and $77,531.13, respectively,


        1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the tax years at issue.
        2
      Per respondent’s motion, the Court consolidated all three
cases.
                               - 3 -

for services he performed.   Petitioner received Forms W-2, Wage

and Tax Statement, for the payments.   The Forms W-2 listed the

amounts of the payments and the amounts withheld for income,

Social Security, and Medicare taxes.   Petitioner also received an

$849 State tax refund and $10 of interest income in tax year

2004, as well as $14 of interest income in tax year 2005.

     Petitioner did not file a Form 1040, U.S. Individual Income

Tax Return, for any tax year at issue.3   Rather, he prepared a

Form 1041, U.S. Income Tax Return for Estates and Trusts, for

each tax year at issue and submitted them for filing.4

Petitioner claims that the Forms 1041 are trust agreements he

executed for the tax years at issue.   On each Form 1041,

petitioner reported (1) the payments he received for services

during the respective tax year as trust income, (2) a $300

exemption,5 (3) a deduction for fiduciary fees in an amount that

zeroed out his tax liability, and (4) the amounts withheld for

income, Social Security, and Medicare taxes.   Petitioner

requested a refund of the amounts withheld.    Petitioner made no


     3
      Petitioner did file a Federal income tax return for tax
year 2003 reporting a tax liability of $1,679.
     4
      Petitioner signed and dated the Forms 1041 for 2004 and
2006 on Nov. 30, 2006, and Dec. 31, 2007, respectively. He did
not sign the Form 1041 for 2005.
     5
      A trust required by its governing instrument to distribute
all its income in the tax year in which the income is earned is
allowed a deduction of $300. Sec. 642(b)(2)(B).
                                 - 4 -

payments of Federal income tax for the tax years at issue other

than the amounts withheld.

     Respondent rejected the Forms 1041, claiming that they did

not constitute valid returns.6    Respondent prepared substitutes

for returns for the tax years at issue pursuant to section

6020(b) and determined deficiencies and additions to tax based on

the section 6020(b) returns.

                              Discussion

I. Taxable Income

     Respondent determined that petitioner received taxable wages

during the tax years at issue that he failed to report.    Under

section 61(a)(1), “Compensation for services” and wages

constitute gross income.     Abrams v. Commissioner, 82 T.C. 403,

407 (1984); see Capps v. Eggers, 782 F.2d 1341, 1343 (5th Cir.

1986); United States v. Romero, 640 F.2d 1014, 1016 (9th Cir.

1981); Rowlee v. Commissioner, 80 T.C. 1111, 1121 (1983).

Petitioner received the payments during the tax years at issue

for services he performed.    He contends, however, that he

transferred the payments to a trust and, by doing so, caused the

payments to become trust income.    The Court rejects petitioner’s

contention.



     6
      For tax year 2004 respondent assessed a $500 penalty
against petitioner for filing a frivolous income tax return.    See
sec. 6702(a).
                               - 5 -

     As a general rule, the person who earns income is taxed on

the income.   Commissioner v. Culbertson, 337 U.S. 733, 739-740

(1949); United States v. Krall, 835 F.2d 711, 714 (8th Cir. 1987)

(citing Vnuk v. Commissioner, 621 F.2d 1318, 1320 (8th Cir.

1980), affg. T.C. Memo. 1979-164).     The true earner may not shift

his tax liability for the income by assigning the income to

another person or entity, including a trust.7    See United States

v. Basye, 410 U.S. 441, 447-448 (1973); Helvering v. Horst, 311

U.S. 112, 116-117 (1940); Lucas v. Earl, 281 U.S. 111, 114-115

(1930); United States v. Krall, supra at 714.     A trust without

economic substance constitutes a sham for Federal tax purposes

and is ignored.8   See Zmuda v. Commissioner, 731 F.2d 1417, 1421

(9th Cir. 1984), affg. 79 T.C. 714 (1982); Schulz v.

Commissioner, 686 F.2d 490, 494 (7th Cir. 1982), affg. T.C. Memo.

1980-568 and White v. Commissioner, T.C. Memo. 1981-73; Markosian

v. Commissioner, 73 T.C. 1235, 1241 (1980); Furman v.


     7
      The prohibition on assigning income applies even if the
assignor does not have tax avoidance as a motive for the
assignment. See Commissioner v. Banks, 543 U.S. 426, 434 (2005);
Helvering v. Eubank, 311 U.S. 122, 124-125 (1940).
     8
      The Court need not address petitioners’ assertion that the
Forms 1041 were valid trust agreements. Even if they were, they
would still lack economic substance and constitute shams for
Federal tax purposes. See Markosian v. Commissioner, 73 T.C.
1235, 1242-1243 (1980); Furman v. Commissioner, 45 T.C. 360, 363-
364 (1966), affd. per curiam 381 F.2d 22 (5th Cir. 1967); see
also O’Donnell v. Commissioner, 726 F.2d 679, 682 (11th Cir.
1984) (“[T]he issue in this case is not the validity of the
trust.”).
                                 - 6 -

Commissioner, 45 T.C. 360, 364 (1966), affd. per curiam 381 F.2d

22 (5th Cir. 1967).   A purported transfer of income to a trust

constitutes a sham because it does not change any real economic

relationship between the income and the person who earned it.

Zmuda v. Commissioner, supra at 1421; Markosian v. Commissioner,

supra at 1241; Furman v. Commissioner, supra at 364.

     Petitioner received compensation for services (i.e., wages)

during the tax years at issue.    He maintained complete dominion

and control over the wages before and after his purported

transfers to the trusts.   Thus, the real economic relationship

between the wages and the petitioner did not change.

Furthermore, because no trust exists for Federal tax purposes, no

fiduciary relationship exists to warrant deductions for fiduciary

fees or a trust exemption.   See Markosian v. Commissioner, supra

at 1245-1246.   Accordingly, the Court sustains respondent’s

determination that the wages be included in petitioner’s gross

income for the tax years at issue.

     Respondent also determined, and the Court finds, that

petitioner received taxable interest income during tax years 2004

and 2005 that he failed to report.       Gross income includes

interest income, which generally is fully taxable to the

recipient.   Sec. 61(a)(4); sec. 1.61-7(a), Income Tax Regs.

Petitioner offered no evidence that the interest payments he
                                - 7 -

received are not taxable to him.   Accordingly, the Court sustains

respondent’s determination in this respect.

     Respondent also determined that petitioner received taxable

income in tax year 2004 from a state tax refund that he failed to

report.   A state tax refund is generally taxable to a recipient

who deducted the tax for a prior year unless the deduction

provided no Federal tax benefit.   Sec. 111(a); sec. 1.111-1(a),

Income Tax Regs.   Petitioner received a state tax refund in tax

year 2004.   He offered no evidence that the refund he received is

not taxable to him.    Accordingly, the Court sustains respondent’s

determination that the refund must be included in income.9

II. Additions to Tax Under Section 6651(a)(1)

     Respondent determined that petitioner is liable for an

addition to tax under section 6651(a)(1) for each tax year at

issue.    Section 6651(a)(1) imposes an addition to tax for failure

to file tax returns.   Respondent must produce sufficient evidence


     9
      Petitioner also contends that he does not owe any tax
because he has “rendered all tribute that the scripture (commonly
referred to as the [H]oly [B]ible) requires * * * [him] to
render.” Petitioner is not exempt from income taxes on religious
or moral grounds. See Hernandez v. Commissioner, 490 U.S. 680,
699-700 (1989); United States v. Lee, 455 U.S. 252, 260 (1982);
Olsen v. Commissioner, 709 F.2d 278, 281 (4th Cir. 1983), affg.
T.C. Memo. 1982-340; see Russell v. Commissioner, 60 T.C. 942,
947 (1973) (“To allow a taxpayer to choose not to pay a tax
because of * * * [his] religious beliefs * * * would create chaos
and destroy the ability of the Government to raise revenue, to
maintain an orderly society, and to assure national security.”).
Thus, petitioner’s contention has no merit, and consequently the
Court rejects it.
                                 - 8 -

to show that imposing this addition is appropriate.    See sec.

7491(c); Wheeler v. Commissioner, 127 T.C. 200, 206 (2006)

(citing Higbee v. Commissioner, 116 T.C. 438, 446 (2001)), affd.

521 F.3d 1289 (10th Cir. 2008).    Petitioner may avoid this

addition by establishing that he had reasonable cause for failing

to file and that his failure did not result from willful neglect.

See sec. 6651(a)(1); Wheeler v. Commissioner, supra at 207;

Higbee v. Commissioner, supra at 447.

     Respondent maintains that the Forms 1041 petitioner

submitted did not constitute valid returns.    The Court agrees.   A

taxpayer must generally use the prescribed form furnished by the

Internal Revenue Service (IRS) to file a tax return.    See sec.

6011(a); Commissioner v. Lane-Wells Co., 321 U.S. 219, 223

(1944); Parker v. Commissioner, 365 F.2d 792, 800 (8th Cir.

1966), affg. in part and revg. in part Found. for Divine

Meditation, Inc. v. Commissioner, T.C. Memo. 1965-77; sec.

1.6011-1(b), Income Tax Regs.    Courts have sometimes allowed a

taxpayer to prepare a return without using the prescribed form,

but only when the return:   (1) Provides sufficient data to

calculate the taxpayer’s tax liability; (2) purports to be a tax

return; (3) constitutes an honest and reasonable attempt to

satisfy the requirements of the tax law; and (4) is executed

under penalties of perjury.     Beard v. Commissioner, 82 T.C. 766,

777 (1984), affd. 793 F.2d 139 (6th Cir. 1986).
                                 - 9 -

      The prescribed form for individual income tax returns is

Form 1040.   Petitioner did not use Forms 1040 for the tax years

at issue, and the Forms 1041, regarding income tax for estates

and trusts, neither reflected honest and reasonable attempts to

comply with the tax law nor provided sufficient data to calculate

petitioner’s tax liability.   Petitioner prepared the Forms 1041

to assign income to a trust and avoid paying tax on wages.      To

compute petitioner’s tax liability on the basis of the Forms

1041, the IRS would have to ignore the line descriptions on the

forms, “imagining instead the correct ones from an official Form

1040”.   Beard v. Commissioner, supra at 779.      Thus, respondent

has produced sufficient evidence that the addition to tax under

section 6651(a)(1) is appropriate.       Furthermore, petitioner did

not establish that his failure to file was due to reasonable

cause and not willful neglect.    Accordingly, the Court sustains

respondent’s determination.

III. Additions to Tax Under Section 6651(a)(2)

     Respondent determined that petitioner is liable for an

addition to tax under section 6651(a)(2) for each tax year at

issue.   Section 6651(a)(2) imposes an addition to tax for failure

to pay the tax required to be shown on a return.       Respondent must

produce sufficient evidence to show that imposing this addition

is appropriate.   See sec. 7491(c); Wheeler v. Commissioner, supra

at 206 (citing Higbee v. Commissioner, supra at 446).       Petitioner
                               - 10 -

may avoid this addition by establishing that he had reasonable

cause for failing to pay and that his failure did not result from

willful neglect.   See sec. 6651(a)(2); Wheeler v. Commissioner,

supra at 207; Higbee v. Commissioner, supra at 447.

     Petitioner made no payments of Federal income tax for any

tax year at issue other than the amounts withheld.    To support an

addition to tax for such failure, respondent must produce

sufficient evidence that petitioner filed a return showing his

tax liability for each tax year at issue.   See Wheeler v.

Commissioner, supra at 210.    As noted above, the Forms 1041

petitioner filed do not constitute valid tax returns.

Respondent, however, properly created a substitute for return on

petitioner’s behalf for each tax year at issue.   See sec.

6020(b).    A substitute for return constitutes “the return filed

by the taxpayer” when determining an addition to tax under

section 6651(a)(2).   Sec. 6651(g)(2); Wheeler v. Commissioner,

supra at 208-209; Cabirac v. Commissioner, 120 T.C. 163, 170

(2003).    Thus, respondent has produced sufficient evidence that

the addition to tax under section 6651(a)(2) is appropriate.

Petitioner did not establish that his failure to pay was due to

reasonable cause and not willful neglect.   Accordingly, the Court

sustains respondent’s determination.
                                  - 11 -

IV. Additions to Tax Under Section 6654

     Respondent determined that petitioner is liable for an

addition to tax under section 6654(a) for each tax year at issue.

Section 6654(a) imposes an addition to tax on an individual who

underpays his estimated tax10 for a given tax year.   This

addition applies if the individual does not make required

installment payments for that tax year.11   See sec. 6654(a), (c).

Each required installment payment equals 25 percent of the

“required annual payment.”   Sec. 6654(d)(1)(A).   The required

annual payment equals the lesser of (1) 90 percent of the tax

shown on the individual’s return for the tax year at issue (or,

if he files no return, 90 percent of his actual tax liability for

that tax year); or (2) if he filed a return for the preceding tax

year, 100 percent of the tax shown on the preceding tax year’s

return.12   Sec. 6654(d)(1)(B).


     10
      The tax consists of the individual’s income and self-
employment tax. Sec. 6654(f)(1) and (2). It is determined
before applying the credit for withheld wages but after applying
other allowable credits. Sec. 6654(f)(3).
     11
      In other words, an underpayment occurs if the required
installment payment exceeds any actual installment payment(s)
paid on or before the required installment payment’s due date.
Sec. 6654(b)(1). Withheld tax constitutes payment, and an equal
amount of the withholding credit is deemed to be paid on each
required installment payment’s due date. Sec. 6654(g)(1).
     12
      If the individual’s adjusted gross income shown on the
preceding tax year’s return exceeds $150,000, a higher percentage
may apply. Sec. 6654(d)(1)(C)(I). Petitioner’s adjusted gross
income did not exceed $150,000 for any tax year at issue or for
                                                   (continued...)
                              - 12 -

     To hold petitioner liable for this addition to tax,

respondent must produce sufficient evidence showing that the

addition is appropriate.   See sec. 7491(c); Wheeler v.

Commissioner, 127 T.C. at 206 (citing Higbee v. Commissioner, 116

T.C. at 446).   Specifically, respondent must produce evidence

showing that petitioner had a required annual payment for each

tax year at issue.   See sec. 6654(d)(1)(B); Wheeler v.

Commissioner, supra at 211.   An individual has a required annual

payment for a given tax year if he (1) files a return for that

tax year or, if not, has an actual tax liability for that tax

year and, (2) if he filed a return for the preceding tax year,

reported a tax liability on the preceding year’s return.      See

sec. 6654(d)(1)(B); Wheeler v. Commissioner, supra at 211-212.

     For tax year 2004 petitioner failed to file a return and

make required installment payments.    He had an actual tax

liability for that tax year that he has not paid.    Petitioner did

file a return for tax year 2003, the preceding tax year,

reporting a tax liability of $1,679.00.    Thus, respondent has

produced sufficient evidence showing that petitioner had a

required annual payment for tax year 2004.    See Wheeler v.

Commissioner, supra at 211-212; Hawkins v. Commissioner, T.C.

Memo. 2008-168.


     12
      (...continued)
tax year 2003, the tax year immediately preceding the first tax
year at issue. Thus, no higher percentage applies.
                               - 13 -

     For tax years 2005 and 2006 petitioner failed to file

returns and make required installment payments.     He had actual

tax liabilities for those tax years that he has not paid.

Furthermore, petitioner did not file returns for tax years 2004

and 2005, the preceding tax years.      Thus, respondent has produced

sufficient evidence that petitioner had a required annual payment

of estimated tax for tax years 2005 and 2006.      See Wheeler v.

Commissioner, supra at 211-212; Hawkins v. Commissioner, supra.

Therefore, respondent met his burden under section 7491(c)

regarding petitioner’s liability for the addition to tax under

section 6654(a).    See Wheeler v. Commissioner, supra at 211-212;

Hawkins v. Commissioner, supra.

     Because respondent met his burden, petitioner is liable for

this addition to tax unless a statutorily prescribed exception

applies.   See sec. 6654(a), (e); Cabirac v. Commissioner, supra

at 170 (citing Grosshandler v. Commissioner, 75 T.C. 1, 20-21

(1980)).   The individual may not avoid this addition by showing

reasonable cause.    Estate of Ruben v. Commissioner, 33 T.C. 1071,

1072 (1960) (“This section has no provision relating to

reasonable cause and lack of willful neglect.     It is mandatory

and extenuating circumstances are irrelevant.”).

     Petitioner does not fit within any exception listed in

section 6654(e).    As noted above, the Court sustains respondent’s

determinations regarding petitioner’s deficiencies for the tax
                               - 14 -

years at issue.   Thus, petitioner’s tax for those tax years, even

after applying allowable withholding credits, exceeds $1,000.

See sec. 6654(e)(1).    Furthermore, petitioner reported a tax

liability of $1,679 for tax year 2003.    Thus, petitioner had a

“liability for tax” for all tax years that qualify as “preceding

* * * [tax years]”.13   See sec. 6654(e)(2)(B).   Respondent did

concede that the addition for tax year 2004 is $39.49 rather than

the amount listed on the notice of deficiency.     Accordingly, the

Court sustains respondent’s determination for tax year 2004 in

accordance with his concession and otherwise sustains his

determinations for tax years 2005 and 2006.

V. Frivolous Argument Penalty Under Section 6673

     Section 6673(a)(1) authorizes the Court to impose a penalty

of up to $25,000 on petitioner if it appears that petitioner’s

position in this proceeding is frivolous or groundless.    See

Abrams v. Commissioner, 82 T.C. 403, 410 (1984).     Petitioner’s

position in these cases is frivolous.    Litigants who advance such

arguments invite sanctions.    Lonsdale v. Commissioner, 661 F.2d

71, 72 (5th Cir. 1981), affg. T.C. Memo. 1981-122.    Therefore,




     13
      The tax years at issue are 2004, 2005, and 2006. Thus,
the tax years that qualify as preceding tax years are 2003, 2004,
and 2005, respectively.
                             - 15 -

the Court warns petitioner that, if he renews such arguments, he

may be subject to a penalty of up to $25,000.

     To reflect the foregoing and the concessions of the parties,


                                        Decisions will be entered

                                   for respondent.
