                        T.C. Memo. 1999-172



                      UNITED STATES TAX COURT



             C. EARL ALSOP, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos.    8908-94, 10899-97,           Filed May 20, 1999.
                  10900-97, 10901-97.



    John R. Riley, for petitioners.

    Richard W. Kennedy, for respondent.




1
     Cases of the following petitioners are consolidated
herewith: Mountain Meadows Trust, Jay Zabriskie, Trustee, docket
No. 10899-97; C. Earl Alsop, docket No. 10900-97; and F.C.H.C.
Trust, Jay Zabriskie, Trustee, docket No. 10901-97.
                                    - 2 -


                MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:      In these consolidated cases, respondent

determined deficiencies in petitioners' Federal income taxes,

additions to tax, and accuracy-related penalties as follows:


                                                      Accuracy-Related
                              Additions to Tax            Penalty
    Year   Deficiency   Sec. 6651(a)(1)   Sec. 6654     Sec. 6662(a)

C. Earl Alsop
    1991     $38,259      $ 9,565           $2,202          --
    1992      38,185        9,546            1,665          --
    1993      54,933         --               --         $10,987
    1994      63,709         --               --          12,742

FCHC Trust
    1992     $34,600      $ 8,650            --          $ 6,920
    1993      57,203       14,301            --           11,441
    1994      62,538         --              --           12,508

Mountain Meadows Trust
    1993     $57,203      $14,301            --          $11,441
    1994      62,538         --              --           12,508


     After settlement, the primary issue for decision is

whether two trusts2 that petitioner established are to be

disregarded for Federal income tax purposes and whether

petitioner C. Earl Alsop (Alsop) is to be charged with income of




2
     By the mere use of the term “trusts” we intend no
implication as to whether the trusts should be recognized for
Federal income tax purposes.
                               - 3 -


a chiropractic practice.3   All references to petitioner are to

C. Earl Alsop.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.


                         FINDINGS OF FACT

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

     At the time the petitions were filed, Alsop and the named

trustee of petitioner's trusts resided in Utah.    Alsop was

licensed in the State of Utah as a chiropractor.

     In May of 1992, Alsop established two trusts to which he

purported to transfer the assets and ownership of a chiropractic

business that he had operated for a number of years as a sole

proprietor.   Alsop, his wife, children, and grandchildren held

the legal and beneficial ownership interests in the trusts.    The

named trustee of the trusts was a personal friend of Alsop who

did not function as trustee of the trusts, who was not

compensated, and who rendered no services to or for the trusts.


3
     For each year, as a protective measure, respondent charged
the two trusts that Alsop established with income that respondent
also charged to Alsop individually. If we sustain the tax
deficiencies respondent determined against Alsop, we understand
that respondent will concede the tax deficiencies, additions to
tax, and accuracy-related penalties determined against the
trusts.
                               - 4 -


     The language of the trust documents reflected language

typical of abusive, sham trusts.   It provided generally that the

trusts would pay for “living” and entertainment expenses of trust

officers.   It provided further as follows:


     ALL MINUTES of this trust are inviolable. That is to
     say, that this trust's minutes are to remain ABSOLUTELY
     PRIVATE and they are not to be loaned, borrowed, read,
     or disclosed by ANYONE. Moreover, ALL MINUTES are
     beyond the purview of any person, other than the
     Trustee(s), as evidenced by the following decision of
     the U.S. Supreme Court: The Trustees for the Trust
     Estate have all the power necessary to carry out their
     trust and their books and records are NOT subject to
     review or subpoena Duces Te Cum * * *


     At the time the trusts were established, the name on the

bank accounts that Alsop used in connection with his chiropractic

practice was changed to the name of one of the trusts.   With

regard to charges for services Alsop provided to patients of the

chiropractic practice, Alsop instructed the insurance companies

to make the related payments not to him, but to the trusts.

Other than these two changes, after the trusts were established,

Alsop continued to conduct the chiropractic practice and to treat

patients under the same business name, at the same office, and in

the same manner as he in prior years had treated the patients.

Alsop and his secretary continued to sign the checks relating to

the chiropractic practice.
                               - 5 -


     Periodic distributions were made from the trusts to Alsop

and to family members who were designated beneficiaries of the

trusts.   Evidence in the record, however, does not indicate the

amount or date of distributions from the trusts.

     In years prior to 1991, Alsop filed individual Federal

income tax returns in which he falsely claimed he was a

nonresident alien of the United States and on which tax returns

Alsop reported no income tax liability relating to income of his

chiropractic practice.

     Alsop did not file individual Federal income tax returns for

1991 and 1992 until March 19, 1996, just prior to the trial

herein.   In October 1994, and October 1995, respectively, Alsop

filed his 1993 and 1994 individual Federal income tax returns.

     On his 1991 untimely filed Federal income tax return, Alsop

reported gross receipts of $188,020, cost of goods sold of

$32,059, expenses of $122,290, and net profits of $30,788

relating to his chiropractic practice.

     On his 1992 untimely filed Federal income tax return, Alsop

reported gross receipts, expenses, and net profits relating to

the chiropractic practice only for January through April,

reflecting the months before the trusts were created.

     On his 1993 Federal income tax return, Alsop reported gross

receipts of $13,517, no expenses, and net profits of $13,517

relating to the chiropractic practice.
                                 - 6 -


     On his 1994 Federal income tax return, Alsop reported gross

receipts of $12,000, expenses of $4,257, and net profits of

$7,743 relating to the chiropractic practice.

     For 1992, 1993, and 1994, respectively, the trusts that

Alsop established filed untimely U.S. Fiduciary Income Tax

Returns.4    On the trust income tax returns that were filed with

respondent, certain amounts of gross receipts, expenses, and net

profits relating to the chiropractic practice were reported.

Also, however, on the income tax returns of the trusts that were

filed with respondent, deductions were claimed for purported

distributions of trust income to the trust beneficiaries.    As a

result of the distribution deductions that were claimed for each

trust, for 1992, 1993, and 1994, negative taxable income and zero

Federal income tax liability were reported for the trusts.

     On his Federal income tax returns for 1992, 1993, and 1994,

Alsop did not report as taxable income any distributions from the

trusts.     The record does not reflect whether other beneficiaries

of the trusts reported as taxable income on their Federal income

tax returns distributions they received from the trusts.

     On audit, Alsop was not cooperative, and he did not provide

respondent with copies of the trust documents until a court order

to do so was issued on January 17, 1997.    After reviewing the


4
     For 1992, one of the trusts that Alsop established has yet
to file a U.S. Fiduciary Income Tax Return.
                              - 7 -


trust documents, respondent determined that the trusts were sham

trusts and that all gross receipts, expenses, and net profits

relating to the chiropractic practice were to be charged to Alsop

individually.

     On April 29, 1998, by a supplemental stipulation of facts,

for 1991, 1992, 1993, and 1994, Alsop and respondent agreed to

the total gross receipts, costs of goods sold, expenses, and net

profits relating to the chiropractic practice as follows:


              Gross       Cost of                      Net
     Year    Receipts    Goods Sold    Expenses      Profits
     1991    $188,020     $34,942      $103,831      $49,247
     1992     178,098      22,265        90,820       65,013
     1993     150,535      26,277        87,299       36,959
     1994     158,575      30,428        67,867       60,280


                             OPINION

     As a fundamental principle of Federal income tax law, income

is taxed to the person who earns the income.   See United States

v. Basye, 410 U.S. 441, 450 (1973); Commissioner v. Culbertson,

337 U.S. 733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111, 114-

115 (1930); Holman v. United States, 728 F.2d 462, 464 (10th Cir.

1984); Leavell v. Commissioner, 104 T.C. 140, 148 (1995).

     The tax laws do not recognize sham transactions or

transactions that contradict economic reality.    See Higgins v.

Smith, 308 U.S. 473, 477 (1940); Uri v. Commissioner, 949 F.2d

371, 374 (10th Cir. 1991), affg. T.C. Memo. 1989-58.   Where the
                                - 8 -


establishment of trusts has no real economic effect, the

substance of the transactions involving the trusts will control

over the form.    See Zmuda v. Commissioner, 731 F.2d 1417,

1420-1421 (9th Cir. 1984), affg. 79 T.C. 714, 719 (1982);

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

Commissioner, T.C. Memo. 1998-255.

       This Court and the U.S. Courts of Appeals have long rejected

attempts similar to Alsop’s herein to avoid taxation by the use

of abusive family trusts.    See Holman v. United States, supra;

Hanson v. Commissioner, 696 F.2d 1232 (9th Cir. 1983), affg. per

curiam T.C. Memo. 1981-675; Schulz v. Commissioner, 686 F.2d 490

(7th Cir. 1982), affg. T.C. Memo. 1980-568; Vnuk v. Commissioner,

621 F.2d 1318 (8th Cir. 1980), affg. T.C. Memo. 1979-164; Vercio

v. Commissioner, 73 T.C. 1246 (1980); Wesenberg v. Commissioner,

69 T.C. 1005 (1978); Buckmaster v. Commissioner, T.C. Memo. 1997-

236.    Such trusts are treated as lacking in economic substance

and as constituting a nullity for Federal income tax purposes.

See Hanson v. Commissioner, supra; Markosian v. Commissioner,

supra; Wenz v. Commissioner, T.C. Memo. 1995-277.

       Attempts by chiropractors, in particular, who have sought to

avoid taxation on income relating to their chiropractic practices

by assigning or attributing income from the practices to "family

trusts" have been rejected.    See Sandvall v. Commissioner,
                               - 9 -


898 F.2d 455 (5th Cir. 1990), affg. T.C. Memo. 1989-189; Kelley

v. Commissioner, T.C. Memo. 1983-322.

     Alsop argues that the trusts he established constitute valid

business entities that should be recognized as taxable entities

and that the gross receipts, expenses, and net profits relating

to the chiropractic practice should be charged to the trusts.

Respondent contends that the trusts constitute sham family trusts

that lacked economic reality, that the trusts were used only for

tax avoidance purposes, and that the agreed net profits of the

trusts are chargeable to Alsop.   We agree with respondent.

     The evidence establishes that Alsop's chiropractic practice

operated essentially the same after the trusts were established

as it did before the trusts were established.   Alsop continued

treating patients at the same office under the same business

name.   Alsop and his secretary continued to sign the checks

relating to the chiropractic practice.   The trustee did not

perform any duties as trustee regarding the chiropractic

practice, and the trustee received no compensation.   Alsop

retained control over his chiropractic practice and over the

receipts, expenses, and taxable income relating to the

chiropractic practice.

     The evidence in the record is not complete as to what, how

much, and to whom distributions were made from the trusts and as

to how beneficiaries of the trusts reported on their Federal
                               - 10 -


income tax returns distributions they received from the trusts.

The totality of the evidence, however, establishes that the

trusts Alsop established in May of 1992 were shams.   The trusts

lacked economic substance, and they are not to be recognized for

Federal income tax purposes.

     In light of our holding on the above issue, we need not

address an alternative argument made by respondent that under the

grantor trust rules Alsop should be taxed on the trust income.

     With regard to the additions to tax and accuracy-related

penalties determined by respondent, Alsop makes no separate

argument, and we sustain respondent's determination of the

additions to tax and penalties.

     To reflect the foregoing,

                                         Decisions will be entered

                                    under Rule 155.
