                        T.C. Memo. 2008-219



                      UNITED STATES TAX COURT



   LINMAR PROPERTY MANAGEMENT TRUST, NORMAN PARSONS, TRUSTEE,
                          Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent

                RAYMOND M. MARLIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 18743-06, 19283-06.   Filed September 25, 2008.




     Norman Parsons, pro se.

     Raymond M. Marlin, pro se.

     Chong S. Hong, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   In these consolidated cases, respondent

determined deficiencies in Federal income taxes and additions to

tax with respect to Raymond M. Marlin as follows:1
                                 -2-

                                        Additions to Tax
                                  Sec.          Sec.           Sec.
Year         Deficiency        6651(a)(1)    6651(a)(2)        6654

1999          $186,645          $41,995       $46,661        $9,033
                                                 1
2001            39,282            8,838                       1,570
                                                 1
2002            75,021           16,880                       2,507
                                                 1
2003           140,128           31,529                       3,667
       1
      Respondent determined that Mr. Marlin is liable for sec.
6651(a)(2) additions to tax for 2001 through 2003 in an amount to
be determined.

       Respondent determined deficiencies in Federal income taxes

and additions to tax with respect to Linmar Property Management

Trust (Linmar or Linmar Trust)2 as follows:

                                        Additions to Tax
                                  Sec.          Sec.          Sec.
Year         Deficiency        6651(a)(1)    6651(a)(2)       6654

2001           $41,305           $9,294       $10,326         $8,261
2002            71,774           16,149        13,637         14,355
2003           132,735           29,865        17,256         26,547

       The primary issue in these cases is whether certain income

is attributable to Linmar Trust or Mr. Marlin.       As explained more

fully below, the Court holds that Linmar Trust must be

disregarded for Federal income tax purposes and the income at

issue is properly attributable to Mr. Marlin.




       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. Rule references are to
the Tax Court Rules of Practice and Procedure, unless otherwise
indicated. Amounts are rounded to the nearest dollar.
       2
      The use of the term “trust” and of related terms such as
“trustee” and “beneficiary” is for convenience only and is not
intended to be conclusive as the characterization of Linmar Trust
for Federal tax purposes.
                                 -3-

      The other issues for decision are:       (1) Whether and in what

amounts Mr. Marlin received unreported income; (2) whether Mr.

Marlin is entitled to claimed deductions; (3) whether Mr. Marlin

is liable for self-employment taxes; and (4) whether Mr. Marlin

is liable for additions to tax under sections 6651(a)(1) and (2)

and 6654.

                          FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.       When the Court filed

their petitions, Linmar Trust had a mailing address in

California, and Mr. Marlin resided at the same California

address.

Mr. Marlin’s Businesses

     During the years at issue Mr. Marlin owned and worked for

Marlin Mechanical, Inc. (Marlin Mechanical), and Marlin

Mechanical Contractors (Marlin Contractors), a sole

proprietorship.   These businesses provided mechanical

construction services on commercial and industrial projects,

specifically services related to fire sprinklers, plumbing,

refrigeration, heating, ventilation, and air conditioning

systems.
                                -4-

Linmar Trust Formation

     On August 31, 1991, Beverly Cahill and Eules Grisby signed

the Linmar Trust Declaration of Contract and Indenture of Trust

(Linmar Trust contract) as creator and exchanger respectively.

According to trust documents, Linmar’s capital units, i.e., its

certificates of beneficial interest, were originally issued to

Redondo Enterprises.   On January 1, 1994, the capital units were

purportedly transferred to Nevet’s Investments.   However, on its

1999 Federal income tax return, Linmar’s beneficiary was listed

as Redondo Enterprises.

Linmar Trust Real Estate

     On January 10, 1992, Mr. Marlin transferred four parcels of

real estate to Linmar Trust:   535 North Church Street, Visalia

California; 15675 and 15676 Avenue 296, Visalia, California; and

231 Olive Street, San Francisco, California.   Before its transfer

to Linmar Trust, the North Church Street address was Mr. Marlin’s

residence.   When he filed his petition, Mr. Marlin still resided

at the North Church Street address.   Marlin Mechanical and Marlin

Contractors used the Avenue 296 addresses before and after the

transfer of the real estate to Linmar Trust.   As part of the

transfer of real estate, Linmar Trust purportedly gave Mr. Marlin

a promissory note in the amount of $242,338, requiring Linmar to

make monthly payments of $2,165.
                                 -5-

Linmar Trust’s Trustees and Representatives

     Linmar Trust’s initial trustee was Winnie McGuire, Mr.

Marlin’s wife.   Winnie McGuire died on April 7, 2000, while she

and Mr. Marlin were traveling in Hawaii.

     On September 3, 1991, Winnie McGuire appointed Kathleen

Botta, formerly known as Kathleen Marlin, and now known as

Kathleen Remillard, as Linmar Trust’s financial agent.     Ms.

Remillard is Mr. Marlin’s daughter.    On September 7, 1991, Winnie

McGuire appointed Ms. Remillard as Linmar Trust’s secretary.     Ms.

Remillard understood that Mr. Marlin and Winnie Mcguire made

final decisions with respect to Linmar Trust

     On September 7, 1991, Winnie McGuire appointed Eileen Pyzer,

now known as Eileen McGuire, as contingent trustee of Linmar

Trust.   Eileen McGuire is Winnie McGuire’s daughter.    On June 8,

1992, Winnie McGuire appointed Eileen McGuire as cotrustee.3     On

April 14, 2004, Eileen McGuire resigned as trustee.     While

serving as trustee, Eileen McGuire did not know Linmar Trust’s

purpose, she did not participate in decisions with respect to

Linmar Trust, and she had no involvement with Linmar’s real

estate or business operations.   Eileen McGuire understood that


     3
      Mr. Marlin argues that Eileen McGuire was a contingent
trustee at all times. However, Linmar Trust’s minutes show that
Eileen McGuire became a cotrustee. There is no mention of her
status as a contingent trustee. Furthermore, in order to
complete a property sale, Mr. Marlin represented that Eileen
McGuire had power to represent Linmar Trust as a trustee.
                                -6-

Mr. Marlin made final decisions with respect to Linmar Trust.

She believed Mr. Marlin was the beneficiary of Linmar Trust.

     On September 15, 2001, Eileen McGuire appointed Judy Costa

as a trustee.   Ms. Costa was either married to Mr. Marlin or had

a relationship familiar enough with him that they referred to

each other as husband and wife.4   Ms. Costa resides at the same

North Church Street address as Mr. Marlin.   On July 7, 2004, Ms.

Costa resigned as trustee.

     On February 5, 1995, Mr. Marlin was appointed manager of

Linmar Trust and given authority over the day-to-day operations.

On January 15, 2002, Linmar Trust and Mr. Marlin entered into a

contract, providing among other things that in exchange for his

trust management services and for occupying the North Church

Street address (where he had been living for several years),

Linmar Trust would pay Mr. Marlin an occupancy fee and all

utilities.   The contract also provided that Linmar Trust would

lend Mr. Marlin funds for personal expenses.   The contract was

signed by Ms. Costa on behalf of Linmar Trust and by Mr. Marlin.

Linmar Trust Transactions and Minute Book

     Linmar’s minutes resolve that the day-to-day affairs of the

trust were delegated to an officer of the trust.   However, the

minutes also state that all real estate matters were to be


     4
      Marlin Mechanical’s credit card statements show that on
more than one occasion airline tickets were purchased for “Judy
Marlin”, including a trip that she and Mr. Marlin took to Hawaii
in 2003.
                                  -7-

referred to the trustees and that contract negotiations were

subject to trustee approval.    On October 22, 1999, Linmar Trust

sold the Olive Street property.    The minutes do not show trustee

approval of the sale.    On September 29, 2000, Linmar Trust sold

the Avenue 296 properties.    The minutes do not show trustee

approval of the sale.    From July 27, 2001, through April 14,

2004, Linmar Trust entered into and modified contracts with

University Marelich Mechanical, Lloyd Allen Pump Service, and

Jason Correia.    The minutes do not show approval of any of these

contracts.

Linmar Trust Distributions

     On November 16, 1999, Linmar Trust wrote a check payable to

Anglo Irish Bank, with Nevet’s Investments written on the memo

line.   Linmar Trust’s 1999 income distribution deduction was

$424,179.    Linmar Trust reported distributable net income for

2001, 2002, and 2003.    However, Linmar’s bank records do not show

income distributions to Nevet’s Investments or Redondo

Enterprises.    The Linmar Trust contract states:   “Any capital

unit holder may waive the right to receive any particular

distribution or distributions, by delivering to the Trustees a

written waiver prior to the date of the distribution, which

waiver shall be entered in the Minutes.”    There are no such

waivers entered in the minutes.
                                 -8-

Mr. Marlin’s Acts on Behalf of Linmar Trust

     Mr. Marlin signed Linmar’s tax returns and contracts.      On

February 11, 2004, Mr. Marlin completed a Form 8821, Tax

Information Authorization, and a Form 2848, Power of Attorney and

Declaration of Representative, on behalf of Linmar Trust.      The

signature line on Form 8821 states:    “If signed by a corporate

officer, partner, guardian, executor, receiver, administrator,

trustee, or party other than taxpayer, I certify that I have the

authority to execute this form with respect to the tax

matters/periods covered.”    The signature line on Form 2848

states:    “If signed by a corporate officer, partner, executor,

receiver, administrator, trustee, on behalf of the taxpayer, I

certify that I have the authority to execute this form on behalf

of the taxpayer.”    Mr. Marlin then signed his name and as his

title wrote “trustee” on each of the forms.

Account Commingling

     During the years at issue Mr. Marlin did not have a bank

account.    Mr. Marlin did, however, have a credit card in his name

through Citibank (Citibank card No. 3354).    Mr. Marlin made

payments on the card by endorsing and delivering to Citibank

checks payable to him and Marlin Mechanical.    Through its bank

accounts, Linmar Trust also made payments on Citibank card No.

3354.
                                 -9-

     Marlin Mechanical also held a credit card with Citibank

(Citibank card No. 4321).    In addition to business-related

purchases for Marlin Mechanical, Citibank card No. 4321 was used

to purchase vacations and antiques.    Linmar Trust made regular

payments on Citibank card No. 4321.

     Mr. Marlin claims the payments Linmar made on the two credit

cards are reimbursements for Linmar’s expenses.    However, he has

not shown, nor can the Court decipher, which expenses are

attributable to Linmar and whether the amounts paid equal the

expenses charged.   Petitioners claim they have records detailing

the expenses Mr. Marlin submitted to Linmar for reimbursement.

Despite being given the opportunity to present the records,

petitioners did not present them.

     Checks payable to Mr. Marlin and his businesses were

deposited into Linmar Trust’s bank accounts.    Linmar Trust’s bank

accounts were used to pay for Mr. Marlin’s life insurance,5

vacation timeshare, family members’ educations, antiques, piano,

and homeowner’s insurance.    Petitioners claim these amounts were

offset by the value of checks deposited into Linmar Trust bank

accounts by Mr. Marlin and his businesses.    Neither petitioner

has shown, nor can the Court decipher, how the payments and

deposits are connected.


     5
      Mr. Marlin claims the payments were made as a repayment of
a loan Mr. Marlin provided Linmar. There is no evidence that Mr.
Marlin made a loan to Linmar.
                                 -10-

Petitioners’ Returns and Notices of Deficiency

         Mr. Marlin did not file Federal income tax returns for

1998, 1999, 2001, 2002, or 2003.6       On April 25, 2006, respondent

prepared substitute returns for Mr. Marlin for 1999, 2001, 2002,

and 2003.     On June 22, 2006, respondent issued Mr. Marlin a

notice of deficiency for 1999, 2001, 2002, and 2003.       Mr. Marlin

timely petitioned this Court for redetermination of the

deficiency.

    Linmar Trust untimely filed its 1999, 2001, 2002, and 2003

returns on February 25, 2001, July 1 and December 19, 2003, and

October 19, 2004, respectively.     The 1999 return reported

$424,179 of income and a $424,179 distribution deduction.        The

2001 return reported $80,491 of income and a $80,491 distribution

deduction.     The 2002 return reported $70,371 of income and a

$70,371 distribution deduction.     The 2003 return reported

$166,659 of income and a $166,659 distribution deduction.        On

June 26, 2006, respondent issued Linmar Trust a notice of

deficiency for 2001, 2002, and 2003.       Linmar Trust timely

petitioned this Court for redetermination of the deficiency.




     6
      Mr. Marlin did file a 2000 return, reporting zero tax due.
However, on Mar. 7, 2005, respondent assessed a deficiency of
$90,671 and a penalty under sec. 6662(a) of $18,137 with respect
to Mr. Marlin’s 2000 tax year.
                                 -11-

                                OPINION

I. Burden of Proof

     In cases of unreported income, the Court of Appeals for the

Ninth Circuit, to which an appeal in this case would ordinarily

lie, requires that the Commissioner provide a minimal evidentiary

foundation connecting the taxpayer with the unreported income

before the presumption of correctness attaches to the

Commissioner’s determination.    See Hardy v. Commissioner, 181

F.3d 1002, 1004 (9th Cir. 1999), affg. T.C. Memo. 1997-97;

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, 687-691 (1989).   Once the Commissioner has met this

initial burden, the taxpayer must establish by a preponderance of

the evidence that the Commissioner’s determination is arbitrary

or erroneous.   See Hardy v. Commissioner, supra at 1004.

     As explained more fully below, the Court finds that

respondent has introduced ample evidence connecting Mr. Marlin

with the income-producing activities of Linmar Trust and with the

various items of income not reported by either Mr. Marlin or

Linmar.   The record shows that Mr. Marlin had unfettered access

to Linmar’s financial accounts and property, and that he made all

decisions with respect to Linmar.       Mr. Marlin managed and resided

in rental real estate properties owned by Linmar Trust.      Amounts

owed to Mr. Marlin and Mr. Marlin’s businesses were deposited in

Linmar’s accounts, and Linmar paid their expenses.      Furthermore,
                                 -12-

respondent has presented sufficient evidence linking Mr. Marlin

with the various items of unreported income through the bank

deposits and specific items methods.       Accordingly, the Court

holds that respondent’s determination is entitled to the

presumption of correctness.

     Petitioners have not claimed or established that section

7491(a) shifts the burden of proof to respondent with respect to

any factual issue.   Accordingly, petitioners bear the burden of

proof and production for all issues, except as provided by

section 7491(c).   See Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933).

II. Disregard of Linmar Trust as a Separate Entity

     Respondent argues that Linmar Trust should be disregarded as

a separate entity for Federal tax purposes because it lacks

economic substance and is a sham.       The Court agrees.

     Taxpayers have the right to conduct their transactions in

such a manner and form as to minimize or altogether avoid the

incidence of taxation by whatever means the law permits.       Gregory

v. Helvering, 293 U.S. 465, 469 (1935).       This right, however,

does not bestow upon taxpayers a right to structure a paper

entity to avoid taxation when that entity is without economic

substance.    Zmuda v. Commissioner, 79 T.C. 714, 719 (1982), affd.

731 F.2d 1417 (9th Cir. 1984).    The Commissioner is not required

to apply the tax laws in accordance with the form a taxpayer

employs where that form is a sham or inconsistent with economic
                                -13-

reality.   Higgins v. Smith, 308 U.S. 473, 477 (1940).

Application of these principles requires the Court to look

beneath the surface of the entity and transactions at issue to

examine their reality.   Profl. Servs. v. Commissioner, 79 T.C.

888, 924 (1982).

     If the creation of a trust lacks economic effect and alters

no cognizable economic relationship, the Court may ignore the

trust as a sham.   See, e.g., Zmuda v. Commissioner, supra at 720;

Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).     This rule

applies regardless of whether the entity has a separate existence

recognized under State law and whether, in form, it is a trust, a

common law business trust, or some other form of jural entity.

Zmuda v. Commissioner, supra at 720.   Whether a trust lacks

economic substance for tax purposes is a factual question to be

decided on the basis of the facts before the Court.      Paulson v.

Commissioner, T.C. Memo. 1991-508 (citing United States v.

Cumberland Pub. Serv. Co., 338 U.S. 451 (1950)), affd. per curiam

992 F.2d 789 (8th Cir. 1993).

     To determine whether a trust lacks economic substance for

tax purposes the Court considers these factors:   (1) Whether the

taxpayer’s relationship to the transferred property differed

materially before and after the trust’s creation; (2) whether the

trust had an independent trustee; (3) whether an economic

interest passed to other trust beneficiaries; and (4) whether the

taxpayer respected the restrictions placed on the trust’s
                                -14-

operation as set forth in the trust documents.    See Muhich v.

Commissioner, T.C. Memo. 1999-192, affd. 238 F.3d 860 (7th Cir.

2001).    As discussed below, each of these factors supports a

conclusion that Linmar Trust had no economic substance.

     A.     Mr. Marlin’s Relationship to the Transferred Property
            Before and After Linmar’s Creation

     With respect to the first factor, the Court looks to the

economic reality of a purported arrangement to determine who is

the settlor of a trust, whether or not named as settlor in the

related documents.    Zmuda v. Commissioner, supra at 720.   Mr.

Grisby and Ms. Cahill signed the Linmar Trust contract as

exchanger and creator, respectively.    Neither Mr. Grisby nor Ms.

Cahill was called as a witness.    The Court infers that their

testimony would not have been favorable to Mr. Marlin.    See

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165

(1946), affd. 162 F.2d 513 (10th Cir. 1947).    Petitioners have

presented no evidence that either Mr. Grisby or Ms. Cahill had

any participation in Linmar’s existence after its formation.

From the record it appears that Mr. Grisby and Ms. Cahill acted

as “straw men” to form Linmar Trust.7

     Mr. Marlin contributed four parcels of real estate to

Linmar.   Petitioners colored the transaction as a sale by having


     7
      Black’s Law Dictionary 1421 (6th ed. 1990) defines “straw
man” as “A ‘front’; a third party who is put up in name only to
take part in a transaction. * * * Person who purchases property
for another to conceal identity of real purchaser, or to
accomplish some purpose otherwise not allowed.”
                                -15-

Linmar Trust provide Mr. Marlin a promissory note.     The only

evidence petitioners presented that payments were made on the

note is a canceled check dated August 18, 1999, and made out to

“Global Business Serv. Trust Acct.” in the amount of $2,165,

which is the amount of the monthly installments required by the

promissory note.   “Meadow Brook” was written on the memo line.

This purported payment on the note was made more than 6 years

after the transfer.   Petitioners also suggest that the note was

paid off in the amount of $193,377 as part of Linmar’s sale of

the Olive Street property in 1999.     The payment was allegedly

made to Meadow Brook Investments.      As evidence of this payment,

petitioners direct the Court to a disbursement summary from the

sale of the Olive Street property showing payment to Meadow Brook

Investments and a letter from Meadow Brook Investments showing a

payoff amount of $193,377.

     However, petitioners have not presented any evidence of when

or for what consideration Mr. Marlin transferred the note to

Meadow Brook Investments.    In short, there is no evidence that

Linmar made any payment to Mr. Marlin on the note or that Meadow

Brook paid Mr. Marlin any amount in exchange for the note.     That

a taxpayer would transfer four valuable parcels of real estate to

a trust for no value while retaining no control over the real

estate is not plausible.    Accordingly, the Court finds that the
                                 -16-

transfer of the four parcels of real estate was not a sale.8     See

Gouveia v. Commissioner, T.C. Memo. 2004-256.

     After the transfer of the real estate to Linmar, the use of

the properties did not change.    Mr. Marlin resided at the North

Church Street address before and after Linmar’s formation.     Mr.

Marlin owned Marlin Mechanical and Marlin Contractors, and each

used the Avenue 296 addresses before and after Linmar’s

formation.

     The financial accounts of Mr. Marlin, Mr. Marlin’s

businesses, and Linmar Trust were commingled.   As manager of

Linmar Trust, Mr. Marlin had authority to conduct Linmar’s day-

to-day operations.   Rents were deposited into Linmar’s accounts

on which Mr. Marlin was a signatory.    The record shows that Mr.

Marlin had unfettered access to Linmar’s funds.   Furthermore, the

record indicates that Mr. Marlin and not the purported trustees

made all decisions relating to the transferred properties.

     The Court concludes that after their transfer to Linmar, Mr.

Marlin’s relationship to the transferred properties did not

change in any material way.   Accordingly, this factor points to a

sham.




     8
      Although certainly not dispositive, the Court recognizes
that the name “Linmar” is the reverse of the syllables of
“Marlin”. Petitioners offered no explanation as to why the
trust’s name so closely resembles Mr. Marlin’s name.
                               -17-

     B.   The Independence of Linmar’s Trustees

     The failure of a nominal trustee to have any meaningful role

in the operation of the trust has been repeatedly cited by this

Court as evidence that the entity lacks economic substance.    See,

e.g., Zmuda v. Commissioner, 79 T.C. at 720-721; Para Techs.

Trust v. Commissioner, T.C. Memo. 1994-366, affd. without

published opinion sub nom. Anderson v. Commissioner, 106 F.3d 406

(9th Cir. 1997).

     During the years at issue Linmar’s trustees were Winnie

McGuire, who was Mr. Marlin’s wife; Eileen McGuire, who is Winnie

McGuire’s daughter; and Ms. Costa, who is either Mr. Marlin’s

wife or familiar enough with Mr. Marlin that they refer to each

other as husband and wife.   Ms. Remillard, who was Linmar’s

secretary and financial agent, and Eileen McGuire both testified

that Mr. Marlin made all decisions with respect to Linmar Trust.

     Neither petitioner presented evidence that Winnie McGuire or

Eileen McGuire acted independently.   Eileen McGuire testified

that she did not know Linmar’s purpose, she did not take part in

decisionmaking with respect to Linmar, and she did not have any

involvement with Linmar’s real estate or business operations.

When asked about the extent of her participation in the trust,

she stated:   “I just signed papers occasionally, didn’t really

understand what they were or question it.”   Eileen McGuire also
                                 -18-

testified that she believed Mr. Marlin was the beneficiary of the

Trust.

     Neither petitioner presented any evidence that Ms. Costa

acted independently.    Ms. Costa did not testify at trial.   The

Court infers that her testimony would not have been favorable to

Mr. Marlin.     See Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. at 1165.

     The Court concludes that during the years at issue Linmar

did not have an independent trustee and that decisions with

respect to Linmar were made by Mr. Marlin.     Accordingly, this

factor points to a sham.

     C.   Economic Interests Passed to Beneficiaries

     In determining to whom economic interests passed, this Court

has considered whether a taxpayer identified the ultimate

beneficiary, or holder of certificates of beneficial interest.

See Gouveia v. Commissioner, supra.     Petitioners claim that

during the years at issue Linmar’s beneficiary was either Redondo

Enterprises or Nevet’s Investments.     None of Linmar’s

representatives know anything about Redondo Enterprises or

Nevet’s Investments other than their names and addresses.     That

neither Mr. Marlin, who is intimately involved with the trust,

nor Mr. Parsons, Linmar’s current trustee, would know anything

about the trust’s beneficiary other than its name and address is
                                 -19-

not plausible.   Furthermore, Linmar’s trustee during the years at

issue believed that Mr. Marlin was the beneficiary.

     Petitioners claim that in November 1999, Linmar wrote a

check for $400,000 to Nevet’s Investments.    However, the check is

paid to the order of Anglo Irish Bank.    Nevet’s Investments is

only written on the memo line.    There is no evidence that Nevet’s

Investments received any benefit from the check.    In fact, other

than their own uncorroborated testimony, neither Mr. Marlin nor

Mr. Parsons presented any evidence that the purported

beneficiaries even exist.

     Furthermore, under the terms of the Linmar contract, it is

unclear whether Linmar has a beneficiary at all.    The contract

states that the trustees “shall continue to conserve and protect

the assets, and initiate, continue, extend or discontinue any

venture or investment at their sole discretion for the benefit of

the Trust.”   A trust exists for the benefit of its beneficiaries,

not for its own benefit.    Petitioners also state that the Trust’s

purpose is to “protect the Trust assets from suitors, spend

thrift relatives, and probate.”    These are the purposes of

individuals, not business organizations such as Linmar’s

purported beneficiaries.

     The Court also notes that the transfer of property to Linmar

did not create any rights in anyone else with respect to the

transferred property.   The Linmar Trust contract states that
                              -20-

“Ownership of capital units does not entitle such owner to any

title, legal or equitable, nor to any management powers or rights

to or in, any assets or income of the Trust.”    The contract also

states that a capital unit holder’s death or termination does not

create any rights in Linmar or its assets:

     All rights of a Capital Unit Holder terminate upon the
     death of that Holder, such rights automatically
     reverting to the Trustees hereof. The death,
     insolvency or bankruptcy of any Capital Unit Holder
     shall not operate to dissolve, terminate or in any
     other manner affect this Trust nor any of its
     operations or affairs nor may the heirs, legal
     representatives, or transferees of said Holder demand a
     division of property of the Trust, nor any special
     accounting, nor any rights whatsoever.

     The agreement gives the beneficiaries a right to annual

income, and, upon termination, trust assets.    However, these

rights are illusory because the trustees are given broad

discretion to determine what constitutes corpus, income, and net

distributable income to the capital unit holders.    In fact,

despite the fact that Linmar reported distributable net income in

2001, 2002, and 2003, the record is devoid of any evidence that

distributions were made to the beneficiaries or that the

beneficiaries waived their rights to distributions.

     The trustees also have authority to amend the contract,

terminate the trust, or extend the trust’s term.    The agreement

clarifies that the trustee’s discretion is absolute.    “The

trustees have exclusive power to construe the meaning and intent

of this contract. * * * Such construction is conclusive, legally
                                 -21-

binding and will govern.”    Such unbridled power gives taxpayer-

trustees the same control over property as they enjoyed before

the formation of the trust.     See Markosian v. Commissioner, 73

T.C. at 1244; Castro v. Commissioner, T.C. Memo. 2001-115.      As

stated previously, Linmar had no independent trustee, and for all

intents and purposes, Mr. Marlin functioned as Linmar’s trustee,

making all decisions.

     Petitioners have not proven that anyone other than Mr.

Marlin and his immediate family received an economic benefit from

Linmar Trust.   Accordingly, this factor points to a sham.

     D.     Restrictions Imposed by Linmar Trust or by the Law of
            Trusts

     The record shows that neither the Linmar contract nor trust

law restricted Mr. Marlin’s use of the transferred property.     To

the extent that the Linmar contract required certain procedures

or actions, there is no evidence that the contract was followed.

For example, there is no evidence that the trustees approved all

real estate transactions and contracts as required by the Linmar

contract.   All evidence indicates that Mr. Marlin made those

decisions without trustee approval.     Mr. Marlin’s unrestricted

use of trust property indicates that he was not restrained in any

meaningful manner, including fiduciary restraints.     Accordingly,

this factor points to a sham.
                                 -22-

     E.      Conclusion

     Petitioners have provided no evidence that Linmar had a

valid business purpose or was anything more than a vehicle for

Mr. Marlin to conduct his business and personal affairs to evade

Federal income taxes.     In substance, Mr. Marlin remained the

owner of the properties purportedly transferred to Linmar and is

taxable on the income derived therefrom.     After considering the

four factors above, the Court concludes that Linmar Trust lacked

economic substance and must be disregarded for Federal income tax

purposes.9

III. The Amount of Income Attributable to Mr. Marlin

     When a taxpayer fails to maintain or produce adequate books

and records, the Commissioner is authorized under section 446 to

compute the taxpayer’s taxable income by any method that clearly

reflects income.     Holland v. United States, 348 U.S. 121, 130-132

(1954); Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965).       The

Commissioner has great latitude in selecting a method for

reconstructing a taxpayer’s income, and the method need only be

reasonable in light of all the surrounding circumstances.     This

Court has long accepted the bank deposits method of income

reconstruction.     Nicholas v. Commissioner, 70 T.C. 1057, 1064-



     9
      In light of our holding, the Court need not address
respondent’s alternative arguments that Linmar’s income should be
allocated to Mr. Marlin under the assignment of income doctrine
or the grantor trust rules. See Gouveia v. Commissioner, T.C.
Memo. 2004-256 n.28; Castro v. Commissioner, T.C. Memo. 2001-115
n.12.
                                -23-

1065 (1978).    While not conclusive, bank deposits are prima facie

evidence of income.    Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).    Mr. Marlin bears the burden of proving respondent’s

determinations are erroneous, and with respect to the bank

deposits analysis, must show the deposits came from a nontaxable

source.    See Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933); Harper v. Commissioner, 54 T.C. 1121, 1129 (1970).

     Neither petitioner introduced evidence that contemporaneous

books and records were maintained.     Respondent used a combination

of the specific items and bank deposits methods to determine Mr.

Marlin’s unreported income.    Respondent determined Mr. Marlin’s

unreported gross receipts that should have been reported on

Schedule C, Profit or Loss from Business; rental income that

should have been reported on Schedule E, Supplemental Income and

Loss; and interest income by comparing the results of the

specific items and bank deposits analyses with Linmar Trust’s tax

returns.    Mr. Marlin provided no evidence that respondent’s

calculations were incorrect or that any of the deposits were

nontaxable.10   Respondent properly took into account income

reported on Linmar’s returns and Mr. Marlin’s specific items of

income to prevent the double counting of that income.

     Respondent also determined that Mr. Marlin received $720,000

of capital gain from the sale of the Olive Street property.      The



     10
      Before trial respondent conceded $90,000 of gross receipts
for 2003 because it was a nontaxable transfer.
                                -24-

gain from the sale of property is equal to the excess of the

amount realized therefrom over the adjusted basis of the

property.   Sec. 1001(a).   Mr. Marlin admits the amount realized

on the sale was $720,000.    A taxpayer must establish his cost or

adjusted basis for the purpose of determining gain or loss that

he must recognize on a sale of property.    O’Neill v.

Commissioner, 271 F.2d 44, 50 (9th Cir. 1959), affg. T.C. Memo.

1957-193.   Taxpayers who fail to prove a basis in a sold asset

are considered to have a zero basis in that asset.11     Garrett v.

Commissioner, T.C. Memo. 1997-231.

      Mr. Marlin presented no evidence of his basis in the Olive

Street property and is therefore considered to have a zero basis.

Accordingly, he received $720,000 of capital gain on the sale of

the Olive Street property.

IV.   Self-Employment Tax

      Respondent determined that Mr. Marlin is liable for self-

employment tax under section 1401 for each of the years at issue.

Section 1401 imposes a tax on the self-employment income of




      11
      In certain circumstances, the Court may use the Cohan rule
to estimate a taxpayer’s basis in an asset at the time of
transfer. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).
For the Court to estimate basis, the taxpayer must provide some
reasonable evidentiary basis for the estimation. Polyak v.
Commissioner, 94 T.C. 337, 345 (1990); Vanicek v. Commissioner,
85 T.C. 731, 743 (1985). Mr. Marlin has not provided any basis
that would permit a reasonable estimate of his basis in the Olive
Street property.
                                -25-

individuals.   Self-employment income means the net earnings from

self-employment derived by an individual.   Sec. 1402(b).

     Mr. Marlin presented no evidence that would indicate the

Schedule C gross receipts he received are not self-employment

income.   Therefore, he is liable for self-employment tax on that

income for the years at issue.12

V.   Deductions

     Linmar Trust claimed deductions on its Schedules C and

Schedules E during the years at issue.   Respondent did not allow

Mr. Marlin any deductions other than the standard deduction and

the deduction for self-employment tax.   Deductions are a matter

of legislative grace, and a taxpayer bears the burden of proving

that he has complied with the specific requirements for any

deduction he claims.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934); see also Rule 142(a).   Mr. Marlin has presented no

evidence that would indicate he is entitled to any deductions

beyond those determined by respondent, nor has he provided the

Court any reasonable factual basis upon which the Court may

estimate his allowable deductions under Cohan v. Commissioner, 39

F.2d 540 (2d Cir. 1930).   Therefore, he is not entitled to any

deductions beyond those determined by respondent.



     12
      For each of the years at issue, respondent allowed Mr.
Marlin a deduction for one-half of the self-employment tax under
sec. 164(f).
                               -26-

VI.   Additions to Tax

      A.   Burden of Proof

      The Commissioner bears the initial burden of production with

respect to a taxpayer’s liability for additions to tax under

sections 6651(a)(1) and (2) and 6654(a).    Sec. 7491(c); Rule

142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).     To

meet this burden, the Commissioner must come forward with

sufficient evidence indicating it is appropriate to impose the

additions to tax.   Higbee v. Commissioner, supra at 446-447.    The

taxpayer bears the burden of proof as to any exception to the

additions to tax.   See sec. 7491(c); Rule 142(a); Higbee v.

Commissioner, supra at 446-447.

      B.   Section 6651(a)(1) Addition to Tax

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

file a return on the date prescribed (determined with regard to

any extension of time for filing) unless the taxpayer can

establish that such failure is due to reasonable cause and not

due to willful neglect.

      Mr. Marlin claims he failed to file tax returns for the

years at issue because he reasonably relied on the advice of a

tax professional who stated that he did not have sufficient

income to require filing a return.    Mr. Marlin presented no

evidence of his adviser’s expertise, nor did he present any

evidence that the adviser was provided all necessary and accurate
                               -27-

information.   If a competent adviser had been presented all of

Mr. Marlin’s tax information, that adviser could not have

reasonably advised Mr. Marlin not to file a return.   Therefore,

the Court holds that Mr. Marlin did not have reasonable cause for

his failure to file the returns at issue.

     C.   Section 6651(a)(2) Addition to Tax

     Section 6651(a)(2) imposes an addition to tax of 0.5 percent

per month (up to a maximum of 25 percent) for failure to make

timely payment of the tax shown on a return unless the taxpayer

shows that the failure is due to reasonable cause and not due to

willful neglect.   The addition to tax applies only when an amount

of tax is shown on a return.   Cabirac v. Commissioner, 120 T.C.

163, 170 (2003).   Under section 6651(g), a return prepared by the

Secretary pursuant to section 6020(b) is treated as a return

filed by the taxpayer for the purpose of determining the amount

of an addition to tax under section 6651(a)(2).   For these

purposes, a section 6020(b) return, in the context of section

6651(a)(2) and (g)(2), “must be subscribed, it must contain

sufficient information from which to compute the taxpayer’s tax

liability, and the return form and any attachments must purport

to be a ‘return’.”   Spurlock v. Commissioner, T.C. Memo. 2003-

124; see also Cabirac v. Commissioner, supra at 170-171.

Respondent prepared substitute returns that satisfied the

requirements of sections 6651(a)(2) and (g)(2) and 6020(b).    Mr.
                                 -28-

Marlin has not paid the tax due and has not established that his

failure to timely pay was due to reasonable cause.

     D.      Section 6654 Addition to Tax

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

underpayment of estimated tax unless one of the statutory

exceptions applies.    See sec. 6654(e).    The addition to tax is

calculated with reference to four required installment payments

of the taxpayer’s estimated tax liability.      Sec. 6654(c)(1);

Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), affd. 521 F.3d

1289 (10th Cir. 2008).    Each required installment of estimated

tax is equal to 25 percent of the “required annual payment.”

Sec. 6654(d)(1)(A).    The required annual payment is generally

equal to the lesser of (1) 90 percent of the tax shown on the

individual’s return for that year (or, if no return is filed, 90

percent of his or her tax for such year), or (2) if the

individual filed a return for the immediately preceding taxable

year, 100 percent of the tax shown on that return.      Sec.

6654(d)(1)(B); Wheeler v. Commissioner, supra at 210-211.      A

taxpayer has an obligation to pay estimated taxes for a

particular year only if he has a “required annual payment” for

that year.     Wheeler v. Commissioner, supra at 211.   The required

annual payment is determined with respect to the tax liability

shown on the taxpayer’s return for the preceding year even when

the return for the previous year fraudulently understates income,
                                -29-

or was filed late.   Mendes v. Commissioner, 121 T.C. 308, 324

(2003).

     Mr. Marlin did not file returns for 1998, 1999, 2001, 2002,

or 2003, nor did he pay estimated tax in any of those years.

However, Mr. Marlin’s 2000 Form 4340, Certificate of Assessments,

Payments, and Other Specified Matters, indicates that he filed a

return for 2000 which reported zero tax due.   Respondent later

determined that Mr. Marlin owed $90,671 in income tax for 2000.

Nevertheless, Mr. Marlin filed a return for 2000, and the

required annual payment for 2001 is limited to 100 percent of the

tax shown on the 2000 return; i.e., zero.   Accordingly, Mr.

Marlin is not liable for an addition to tax under section 6654

for 2001.   See Wheeler v. Commissioner, supra at 212; Mendes v.

Commissioner, supra at 324.

     Mr. Marlin did not file returns for the other years at issue

or for the immediately preceding years, and he did not pay

estimated tax in those years.   Therefore, Mr. Marlin is liable

for additions tax under section 6654 for 1999, 2002, and 2003

calculated with respect to the required annual payments; i.e., 90

percent of the tax due for the respective years.

     In reaching the holdings herein, the Court has considered

all arguments made, and to the extent not mentioned above,

concludes they are moot, irrelevant, or without merit.
                            -30-

To reflect the foregoing,


                                   Decision will be entered for

                            petitioner in docket No. 18743-06.

                                   Decision will be entered

                            under Rule 155 in docket No.

                            19283-06.
