                        T.C. Memo. 2001-115



                      UNITED STATES TAX COURT



KEVIN D. CASTRO AND MARGARITA C. CASTRO, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 10785-99, 10794-99,            Filed May 14, 2001.
                 10795-99.


     Edward G. Marshall, for petitioners.

     Fred E. Green, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   In separate notices of deficiency,

respondent determined the following income tax deficiencies and



     1
      Cases of the following petitioners are consolidated
herewith: Castro Family Trust, Kevin Castro, Margarita Castro,
Steven Castro, Howie Rossman, Trustees, docket No. 10794-99; and
Castro & Co. Jewelers, Kevin Castro, Margarita Castro, Steven
Castro, Howie Rossman, Trustees, docket No. 10795-99.
                              - 2 -

penalties with respect to petitioners’ Federal income taxes:2

Kevin D. Castro and Margarita C. Castro, docket No. 10785-99

                              Accuracy-Related Penalty
     Year      Deficiency           Sec. 6662(a)
     1995       $16,224                $3,245
     1996        13,863                 2,773

Castro Family Trust, Kevin Castro, Margarita Castro, Steven
Castro, Howie Rossman, Trustees, docket No. 10794-99

                              Accuracy-Related Penalty
     Year      Deficiency           Sec. 6662(a)
     1995       $19,898                $3,980
     1996        12,116                 2,423

Castro & Co. Jewelers, Kevin Castro, Margarita Castro, Steven
Castro, Howie Rossman, Trustees, docket No. 10795-99

                              Accuracy-Related Penalty
     Year      Deficiency           Sec. 6662(a)
     1995       $24,538                $4,908
     1996        20,567                 4,113

     Petitioners filed separate petitions to redetermine the

proposed deficiencies and related penalties.   We consolidated

these cases for trial, briefing, and opinion pursuant to Rule

141(a) because they present common issues of fact and law.




     2
      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. Monetary amounts are
rounded to the nearest dollar.
                                 - 3 -

     After concessions,3 the only issues4 for decision are:

     1)     Whether the Castro Family Trust (CFT) and the Castro &

Co. Jewelers Trust (CCJT) (collectively referred to as the

trusts) should be disregarded for Federal income tax purposes;

    2)     whether the income and expenses of the jewelry business

allegedly owned by the CCJT and operated by Kevin D. Castro

during the years at issue must be reported by Kevin D. Castro and

Margarita C. Castro (collectively referred to as the Castros);




     3
      Respondent conceded that, if we hold the trusts are invalid
for Federal income tax purposes, the trusts are not liable for
the income tax on income properly chargeable to Kevin D. and
Margarita C. Castro. The parties acknowledge that the issue of
fiduciary fees will be determined in accordance with our holding
regarding the validity of the trusts.
     At trial, the Castro & Co. Jewelers Trust (CCJT) conceded
respondent’s adjustment to taxes for 1996. The CCJT also agreed
to concede the adjustment to outside services for 1996 if we hold
that the CCJT is valid for Federal income tax purposes. If,
however, we hold that the CCJT is not valid for Federal income
tax purposes, then respondent concedes, for 1996, the adjustment
to outside services and an increase in depreciation in the amount
of $3,800.
     Respondent proposed adjustments to the following items in
his notices of deficiency, and petitioners are deemed to have
conceded these adjustments because, although petitioners disputed
them in their petitions, petitioners failed to address them at
trial or on brief: The CCJT’s 1995 charitable contribution(s);
the Castro Family Trust’s (CFT) 1995 and 1996 charitable
contributions; and the CFT’s 1995 and 1996 “other deductions” and
“miscellaneous itemized deductions”, including medical,
utilities, automobile, meal, travel, and telephone expenses. See
Rule 151(e)(4) and (5); Petzoldt v. Commissioner, 92 T.C. 661,
683 (1989); Money v. Commissioner, 89 T.C. 46, 48 (1987).        .
     4
         The only other issues are computational.
                                - 4 -

      3)   whether Kevin D. Castro (petitioner) is liable for self-

employment taxes on the net income generated by the jewelry

business during the years at issue;

      4)   whether petitioners are liable for the accuracy-related

penalty for negligence or disregard of rules or regulations

pursuant to section 6662 for each of the years at issue; and

      5)   whether the Castros are liable for a penalty pursuant to

section 6673.

                          FINDINGS OF FACT

I.   Background

      The parties have stipulated some of the facts, which are

incorporated into our findings by this reference.     At the time

the petitions in these cases were filed, the Castros resided, and

the CFT and the CCJT had their principal places of business, in

Cedar City, Utah.

      In 1983, petitioner became a gemologist.    In 1984,

petitioner and his brother formed a partnership in California to

operate a jewelry business called Castro & Co. (the partnership).

In 1992, the partnership closed its jewelry store in California

and opened a jewelry store in Cedar City, Utah.     The Castros also

moved to Cedar City, Utah.   For the taxable years 1984 through

1993, petitioner reported his distributive share of partnership

income on Schedule E, Supplemental Income and Loss, of his Form

1040, U.S. Individual Income Tax Return.     The partnership
                                 - 5 -

operated its jewelry business through 1993 when the partnership

terminated.5

      In or around 1990, a customer of the jewelry business filed

a lawsuit against the partnership.       The lawsuit was dismissed

approximately 18 months later after a 5-day trial.

      After the partnership terminated, petitioner operated the

jewelry business as a sole proprietorship.       Petitioner reported

the income and expenses generated by his jewelry business from

January 1, 1994, to the date he transferred his jewelry business

into trust,6 on Schedule C, Profit or Loss from Business (Sole

Proprietorship), of his Form 1040 for 1994.

II.   The Establishment and Operation of the Trusts

      A.    The Establishment of the Trusts

      In 1994, the Castros decided to place all of their personal

and business assets in a tiered trust arrangement.       The trusts

were established using several steps:

      (1)   On or about April 8, 1994, petitioner Margarita C.

Castro (Mrs. Castro) executed a bill of sale and a quitclaim deed

by which she conveyed to petitioner all of her interests in all



      5
      The parties stipulated erroneously that the jewelry
business was operated as a sole proprietorship during 1993. We
disregard this stipulation and find facts consistent with the
evidence.
      6
      By use of the terms “trust”, “trustee”, “beneficiary”, and
other related terms, we intend no implication as to the validity
of the trusts involved in these cases.
                               - 6 -

real and personal property, including the Castros’ home and

furnishings, in exchange for $20 and other consideration.

     (2)   On April 8, 1994, petitioner, as grantor, executed a

declaration of trust prepared by Dependable Services Group (DSG)

entitled “Castro Family Trust”.   In the declaration of trust,

petitioner promised to provide lifetime services and to transfer

any remuneration paid for those services to the trust.   Part of

the consideration petitioner purportedly received in exchange for

his transfer of assets to the CFT and his promise to provide

lifetime services and any resulting remuneration exclusively for

the benefit of the CFT consisted of all 100 units of beneficial

interest in the CFT.

     (3)   On April 8, 1994, petitioner executed a bill of sale

and a quitclaim deed, which recited that petitioner conveyed all

of his interest in real and personal property, including his home

and furnishings, to the CFT in exchange for $20 and other

consideration.

     (4)   On May 5, 1994, the CFT, as grantor, executed a

declaration of trust prepared by DSG entitled “Castro & Co.

Jewelers”.   The declaration of trust recited that the CFT had

transferred the assets of the jewelry business to the CCJT in

exchange for $10 and all 100 units of beneficial interest in the

CCJT.
                               - 7 -

     (5) On May 5, 1994, the Castros, as trustees of the CFT,

executed a bill of sale purporting to sell the assets of the

jewelry business to the CCJT for $10 and other consideration.

     B.   The Operation of the Trusts

     The declarations of trust with respect to the CFT and the

CCJT provided in pertinent part as follows:

          1.   The CFT

     The CFT’s declaration of trust described the function and

purpose of the CFT:

     THE TRUSTEES purpose shall be authorized to accept
     rights, title and interest in and to real and personal
     properties, whether tangible or intangible, which have
     been conveyed by THE CREATOR HEREOF AND GRANTOR HERETO
     to be the CORPUS OF THIS TRUST. Included therein is
     the exclusive use of HIS lifetime services and ALL of
     HIS EARNED REMUNERATION ACCRUING THEREFROM, from any
     current source whatsoever, so that Kevin D. Castro can
     maximize HIS lifetime efforts through the utilization
     of HIS Constitutional Rights; for the protection of HIS
     family in the pursuit of HIS happiness through HIS
     desire to promote the general welfare, all of which
     Kevin D. Castro feels HE will achieve because they are
     sustained by HIS RELIGIOUS BELIEFS.

     The declaration of trust divided the beneficial interests in

the trust into 100 units in certificate form.   The units were

“non-assessable, non-taxable * * *, non-negotiable, non-

transferable (except back to THE TRUST)”.   The declaration of

trust prohibited the trustees from issuing more than the initial

100 units of beneficial interest.   In consideration for

petitioner’s contribution of assets and his promise to render
                               - 8 -

lifetime services and any attendant remuneration to the CFT,

petitioner received all 100 units of beneficial interest.

     The CFT’s declaration of trust conferred on its trustees

broad authority to administer the trust.   A majority of the

trustees constituted a quorum, and a majority vote of all

trustees was all that was required to authorize expenditures,

including the payment of compensation to the trustees.   The

declaration of trust authorized the trustees to supplement the

trust instrument; a majority of the trustees then in office and

participating in the meeting needed only to adopt a resolution to

effect the change.   The declaration of trust also provided that

“A Minute of Resolution of THE BOARD OF TRUSTEES authorizing what

it is they determine to do or have done shall be evidence that

such an act is within their power.”

     Under its declaration of trust, the CFT had a term of 25

years.   The trustees, however, could liquidate the CFT by

unanimous vote at any time “because of threatened depreciation in

values, or other good and sufficient reason”.   Upon liquidation,

the assets of the CFT were to be distributed pro rata to those

persons having possession of the units of beneficial interest.

During the CFT’s existence, distribution of trust income was in

the trustees’ discretion.

     The original trustees of the CFT were Mrs. Castro and Nelly

Castro (Nelly), petitioner’s mother.   The declaration of trust
                                - 9 -

authorized the selection of a new trustee by unanimous vote of

the remaining trustees.    One week after the CFT was created,

petitioner was appointed a trustee.

     On February 11, 1996, Nelly died.    On February 14, 1996,

Steven Castro (Steven), petitioner’s brother, replaced Nelly as

trustee.

     During the years at issue, only Mrs. Castro received a

fiduciary fee from the CFT.

           2.   The CCJT

     The declaration of trust for the CCJT provides very little

guidance concerning the function and purpose of the CCJT, even

though it directs the trustees to regard it “as their principal

guide”.    The declaration of trust summarizes its “purport” as

follows:

     THE PURPORT of This Instrument is to convey title to
     real & personal property to THE BOARD OF TRUSTEES to
     CONSTITUTE A TRUST for the Benefit of THE
     BENEFICIARIES, with such title held by THE TRUSTEES,
     IN-TRUST in joint tenancy, and as Fiduciaries, with
     instructions to maintain & preserve such property, for
     the duration hereof, AND to provide for an economical
     administration of THE TRUST’S CORPUS, including the
     effective management of TRUST BUSINESS, AND to make
     distributions of Income and/or Corpus to THE
     BENEFICIARIES on a pro-rata basis and in amounts
     determined within the discretionary powers of THE
     TRUSTEES.

     The nature and principle activity of THIS TRUST, is
     first and foremost to preserve and maintain assets.
     The conducting of business, including the holding of
     title to property, with the necessary management and
     control of such TRUST property, are such that there may
     be attempts by outside concerns, agencies,
                              - 10 -

     professionals, & influences to classify THIS TRUST as a
     Business Trust. Directions are hereby given to THE
     TRUSTEES to guard and resist such classification,
     through the sophisticated use of Minutes and Records.

     The declaration of trust provides that the CCJT is

irrevocable and may not be altered, revoked, or amended in any

respect unless specifically authorized “by this direct

instrument” and a unanimous vote of the trustees and further

provides that it may not be terminated except through

distributions permitted by the declaration of trust and approved

by the unanimous vote of the trustees.   The declaration of trust

further provides that the trust shall continue for 25 years

unless the trustees unanimously decide to terminate it earlier or

to extend the trust’s term.

     The declaration of trust confers “exclusive management and

control of THE TRUST property and business affairs” on the

trustees and requires that there be at least two trustees,

although additional trustees may be named “for reasons beneficial

to THE TRUST.”   The trustees have the right to name successor

trustees “by unanimous concurrence and vote”.

     The declaration of trust authorizes the trustees to exercise

broad, general powers including, but not limited to, the

following:
                                - 11 -

     (1) The trustees may hold meetings.   A majority of the

trustees constitutes a quorum for conducting business, “provided

affirmative action may only be had upon a majority vote of the

present TRUSTEES, whether present or absent.”

     (2) The trustees may fix and pay compensation to third

parties and to themselves.

     (3) The trustees, by unanimous vote, may amend, in whole or

in part, the declaration of trust “to better carry out the

purposes and intent thereof”.

     (4) The trustees may consent, unanimously and in writing, to

the transfer of beneficial units in the trust even though the

units were otherwise “non-assessable, non-taxable, non-

negotiable, and non-transferable”.

     (5) The trustees may distribute income from the trust in

their absolute discretion.

     The Castros were the original trustees of the CCJT and

remained trustees throughout the years at issue.7   During the

years at issue, only petitioner received a fiduciary fee from the

CCJT.


     7
      The parties stipulated that Nelly was an original trustee
of the CCJT and that, when she died in 1996, Steven replaced her
as trustee. That stipulation contradicts other evidence in the
record which tends to show that the Castros were the only
trustees of the CCJT. For example, only the Castros signed the
declaration of trust and are listed in the declaration of trust
as trustees. The Castros were the only people who attended the
first meeting of the trustees and signed the minutes or signed
the CCJT’s tax returns.
                                 - 12 -

       Throughout the years at issue, the jewelry business operated

at the same location and in the same manner as it had before its

transfer to the CCJT, and petitioner continued to work as a

jeweler for, and manager of, the jewelry business.

III.    Tax Returns

        A.   1995

       The CCJT filed a timely Form 1041, U.S. Income Tax Return

for Estates and Trusts, for 1995.      The CCJT reported income and

expenses allocable to the jewelry business on Schedule C attached

to its return and also claimed deductions for fiduciary fees,

charitable contributions, and a distribution of the trust’s net

income to the CFT.      The CCJT reported no taxable income and paid

no taxes for 1995.      In respondent’s notice of deficiency to the

CCJT, respondent disallowed all of the CCJT’s deductions.

       The CFT also filed a timely Form 1041 for 1995.      The CFT

reported income it received from the CCJT on Schedule E attached

to its return.      The CFT also claimed deductions for taxes,

fiduciary fees, charitable contributions, and medical, utilities,

automobile, and telephone expenses.        The CFT reported no taxable

income and paid no taxes for 1995.        In respondent’s notice of

deficiency to the CFT, respondent disallowed all of the CFT’s

deductions.

       Petitioner reported fiduciary fees he received from the

CCJT, and Mrs. Castro reported fiduciary fees she received from
                              - 13 -

the CFT, as “other income” subject to self-employment tax on the

Castros’ jointly filed Form 1040 for 1995.   In respondent’s

notice of deficiency to the Castros, respondent increased the

Castros’ income by the jewelry business’ net profit and decreased

the Castros’ income by the fiduciary fees received.

      B.   1996

     The CCJT filed a timely Form 1041 for 1996.   The CCJT

reported income and expenses allocable to the jewelry business on

Schedule C of its return and also claimed deductions for

fiduciary fees and a distribution to the CFT of all but $197 of

its net income.   The CCJT paid income tax of $15 for 1996.    In

respondent’s notice of deficiency to the CCJT, respondent

disallowed all of the deductions and increased the jewelry

business’ net profit accordingly.

     The CFT filed a timely Form 1041 for 1996.    The CFT reported

the income it received from the CCJT on Schedule E to its return.

The CFT also claimed deductions for fiduciary fees, charitable

contributions, and medical, utilities, automobile, meal, travel,

and telephone expenses.   The CFT paid income tax of $16 for 1996.

In respondent’s notice of deficiency to the CFT, respondent

disallowed all of the CFT’s deductions.

     Petitioner reported the fiduciary fees he received from the

CCJT, and Mrs. Castro reported the fiduciary fees she received

from the CFT, as “other income” subject to self-employment tax on
                                - 14 -

the Castros’ jointly filed Form 1040 for 1996.8    In respondent’s

notice of deficiency to the Castros, respondent increased their

income by the jewelry business’ adjusted net profit and decreased

their income by the fiduciary fees received.

                                OPINION

I.   Burden of Proof

      Petitioners contend that petitioner’s testimony was

uncontroverted and credible and that, pursuant to section 7491,

the burden of proof has shifted to respondent.     Respondent

contends that the only issue for decision is which petitioner is

properly taxable on the net income generated by the jewelry

business and that petitioners have the burden of proof on that

issue.

      Generally, the burden of proof is on the taxpayer to show

that the Commissioner’s determinations are erroneous.     See Rule

142(a).     The Internal Revenue Service Restructuring & Reform Act

of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726, however,

added section 7491, which is applicable to court proceedings

arising in connection with examinations commenced after July 22,

1998.     Under section 7491(a)(1), the burden of proof shifts to



      8
      Although the parties stipulated that the Castros’ tax
return for 1996 was in evidence, the exhibit attached to the
stipulation of facts was a copy of the Castros’ 1995 return. Our
factual findings regarding the Castros’ 1996 returns are based on
respondent’s notice of deficiency and the Castros’ 1995 tax
return.
                              - 15 -

the Commissioner, subject to certain limitations, where a

taxpayer introduces credible evidence with respect to factual

issues relevant to ascertaining that taxpayer’s tax liability.

See Ashley v. Commissioner, T.C. Memo. 2000-376.

     The record contains very little evidence regarding the

commencement date of the examination in this case.    Respondent’s

notices of deficiency to each of the trusts included a form

prepared by the examining agent entitled “Income Tax Examination

Changes”, dated August 27, 1998, which supports a finding that

the examination began sometime before that date.    Testimony

elicited by petitioners supports an inference that the

examination in question began before July 1998.    Petitioner

testified that he met his current tax adviser, Kevin Allison, in

early 1997.   Mr. Allison testified that he and the Castros met

approximately 6 months before petitioners’ audit began.    This

testimony, while vague, suggests that the instant examinations

commenced before July 22, 1998.

     In contrast to the evidence described above, there is

nothing in the record that allows us to conclude that the

examination in these cases commenced after July 22, 1998.

Petitioners have failed to convince us that section 7491 applies

to shift the burden of proof to respondent.    We hold, therefore,

that the burden of proof is upon petitioners to prove

respondent's determinations are erroneous.    See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).
                               - 16 -

II.   Lack of Economic Substance

      Respondent’s primary argument in support of his position

that the trusts should be disregarded for income tax purposes is

that the trusts lack economic substance.   Respondent

alternatively argues that the jewelry business’ income is

allocable to the Castros under the assignment of income doctrine

or under the grantor trust rules of sections 671 through 679.

Petitioners dispute each of respondent’s arguments in turn and,

with respect to respondent’s primary argument, contend that the

trusts are valid under State law, that tax was not a

consideration in creating the trusts, and that respondent’s

interpretation of the law is too narrow to permit any

restructuring of a business.

      Taxpayers have a legal right, by whatever means allowable

under the law, to structure their transactions to minimize their

tax obligations.   See Gregory v. Helvering, 293 U.S. 465, 469

(1935).   Transactions, however, that have no significant purpose

other than to avoid tax and do not reflect economic reality will

not be recognized for Federal income tax purposes.   See Zmuda v.

Commissioner, 79 T.C. 714, 719 (1982), affd. 731 F.2d 1417 (9th

Cir. 1984).   We have held that, if a transaction has not altered

any cognizable economic relationships, we must look beyond the

form of the transaction and apply the tax law according to the

transaction’s substance.   See Markosian v. Commissioner, 73 T.C.

1235, 1241 (1980).   This principle applies regardless of whether
                              - 17 -

the transaction creates an entity with separate existence under

State law.   See Zmuda v. Commissioner, supra at 720.

     We have decided several cases involving multitiered trust

arrangements where the Commissioner alleged that the trust

structure lacked economic substance and, therefore, had to be

disregarded for Federal income tax purposes.   See, e.g., Muhich

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

Cir. 2001); Dahlstrom v. Commissioner, T.C. Memo. 1991-264, affd.

without published opinion 999 F.2d 1579 (5th Cir. 1993); Clawson

v. Commissioner, T.C. Memo. 1982-321.   In deciding whether a

purported trust lacks economic substance, we consider the

following factors:   (1) Whether the taxpayer’s relationship, as

grantor, to property purportedly transferred into trust differed

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

the trust had a bona fide independent trustee; (3) whether an

economic interest in the trust passed to trust beneficiaries

other than the grantor; and (4) whether the taxpayer honored

restrictions imposed by the trust or by the law of trusts.    See

Markosian v. Commissioner, supra at 1243-1245.

     A.   The Castros’ Relationship to the Trusts’ Property

     The first factor we consider is whether petitioner’s

relationship, as grantor, to property ostensibly transferred into

trust differed materially before and after the trusts’ formation.

See id. at 1243.

     The Castros lived in the same home with the same furnishings

as they had before their home and furnishings were transferred
                                - 18 -

into trust.   They did not rent or lease the home or furnishings

from the CFT.   Their relationship to these assets did not differ

materially before and after the formation of the CFT.

     The jewelry business was operated in much the same manner

both before and after the CCJT was created.   The jewelry business

and its attendant activities continued under the same name, in

the same office space, and with the same equipment.   Petitioner

continued to make the daily operating decisions and to manage the

jewelry business, including overseeing employees, jewelry repair

and design, and sales.9   Petitioner argued that business

changes–-more employee training with weekly meetings and feedback

sessions--were implemented after the CCJT was created, thereby

changing petitioners’ relationship to the property.   We disagree.

The identified changes may have had the effect of improving the

effectiveness of employees, but they had no material impact on

the nature and structure of the business.

     The Castros’ use of the trust property before and after the

transfers was not materially different.   This factor weighs

against petitioners.    See id. at 1243-1244; Muhich v.

Commissioner, supra; Buckmaster v. Commissioner, T.C. Memo. 1997-

236; Hanson v. Commissioner, T.C. Memo. 1981-675, affd. 696 F.2d

1232 (9th Cir. 1983).

     B.   Independent Trustee

     The second factor we consider in determining whether a trust


     9
      Mrs. Castro also continued to provide bookkeeping services
and customer service just as she had before the CCJT was created.
                                - 19 -

has economic substance is whether the trust had a bona fide

independent trustee.     See Markosian v. Commissioner, supra at

1244.     Petitioners contend that Howie Rossman, the drafter of the

CCJT documents, was an independent trustee who participated in

the daily operations of the jewelry business after the CCJT was

created.     Petitioners also contend that Nelly and Steven10 acted

at different times as independent trustees of both trusts.

     The declarations of trust provided that the trustees, by

majority vote, could supplement and amend the terms of the

declarations.     The trustees were authorized to distribute trust

income and principal in their absolute discretion, determine

compensation for employees and themselves without any apparent

restriction, remove other trustees from office, or generally

perform almost any legal action with respect to the trusts.

During the years at issue, the Castros exercised effective

control over the trusts, either as the only trustees or as a

majority of the trustees of the two trusts.     Howie Rossman was

not a trustee of either trust during the years at issue.     The

record is lacking in credible evidence that either Nelly or

Steven functioned as an independent trustee, particularly since

the Castros could and did control significant trust decisions.

Nelly and Steven’s service as trustee was merely a formality that


     10
      Petitioners do not expressly argue that Steven was an
independent trustee for purposes of meeting the second factor,
but because he replaced Nelly as trustee to the CFT when she
died, we assume petitioners intended this as part of their
argument.
                               - 20 -

did nothing to alter the substance of the Castros’ relationship

to the jewelry business or to the other trust assets.

     Under the terms of the declarations of trust, a majority of

the trustees controlled many trust decisions, and the Castros

constituted a majority of the trustees.   As a result, no

independent trustee could wrest control over trust property from

the Castros or prevent the Castros from using the trust property

for their own purposes.   See Buckmaster v. Commissioner, supra.

The Castros had the ability to fully control the trusts’

activities for their own benefit because no independent trustee

had any meaningful control over the management of either trust.

This is evidence that the trusts lacked economic substance.    See

Zmuda v. Commissioner, 79 T.C. at 720-721; Lund v. Commissioner,

T.C. Memo. 2000-334.   This factor weighs against petitioners.

     C.   Economic Interests

     The third factor we consider is whether a genuine economic

interest in the trusts passed to anyone other than the Castros.

See Markosian v. Commissioner, 73 T.C. at 1244.   Petitioner

asserted at trial that the Castros’ children, the Castro Holding

Co., and Good Samaritan, a private charitable trust, were the

CFT’s beneficiaries.   Petitioners asserted on brief that all 100

units of beneficial interest in the CFT originally issued to

petitioner were later canceled by the CFT and ultimately reissued

to other parties.

     The objective evidence does not show that anyone other than

petitioner held any meaningful economic interest in either trust.
                              - 21 -

Petitioners never introduced the CFT certificates of beneficial

interest or any minutes of trustee meetings purporting to show

that certificates were issued to parties other than petitioner

or, even more importantly, to show the identity of the person or

persons who had possession of the certificates.11   We are not

required to accept petitioner’s self-serving testimony as

evidence, particularly in the absence of corroborating evidence,

and we decline to do so in this case.   See Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Peterman v. Commissioner,

T.C. Memo. 1993-129.   Statements in a brief that are not

supported by testimony or documents introduced at trial are not

evidence.   See Rule 143(b); Niedringhaus v. Commissioner, 99 T.C.

202, 214 n.7 (1992); Viehweg v. Commissioner, 90 T.C. 1248, 1255

(1988).

     Even if the Castros’ children, the Castro Holding Co., and

Good Samaritan held beneficial interests in the CFT, as

petitioners contend, petitioners failed to prove that any genuine

economic interest passed to them.   The trustees had absolute

discretion to distribute principal and interest at any time and

in any way they saw fit.   The trustees could modify the

declarations of trust and could even decide to terminate the

trusts early or to extend the trusts beyond the specified term.

See Markosian v. Commissioner, supra at 1244.



     11
      According to the CFT’s declaration of trust, the
certificates of beneficial interest are owned by the person who
is in possession of them.
                               - 22 -

     The absolute and unbridled discretion conferred on the

Castros as trustees is confirmed by language in the CFT’s

declaration of trust, which provided that “A Minute of

Resolutions of THE BOARD of TRUSTEES authorizing what it is they

determine to do or have done shall be evidence that such an act

is within their power.”   We have held on numerous occasions that

such unbridled power gives taxpayer-trustees the same control

over the property as they enjoyed before the formation of the

trust.    See, e.g., id. at 1241, 1244; Cooper v. Commissioner,

T.C. Memo. 1981-369; Palmer v. Commissioner, T.C. Memo. 1981-354.

     Our analysis is supported by the inherent implausibility of

petitioners’ position.    It defies common sense that petitioner

would grant the exclusive use of his lifetime services to the CFT

for no remuneration and make an anticipatory transfer of any and

all future earnings to the CFT.    It defies common sense that the

Castros would transfer practically all of their assets, including

their home, furnishings, and business, to the trusts for

practically nothing in return while retaining no control over the

assets.    See Buckmaster v. Commissioner, T.C. Memo. 1997-236.

     The Castros had the power to allocate all trust principal

and income to themselves in derogation of any other

beneficiaries.   The record fails to show that anyone other than

petitioner held units of beneficial interest in the trusts during

the years at issue.   On these facts, we conclude that petitioners

have failed to prove that any economic interest passed to any
                                - 23 -

other beneficiaries.     See Markosian v. Commissioner, supra at

1244.     This factor weighs against petitioners.

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

     The fourth factor we consider is whether the Castros honored

restrictions imposed by the trusts or by the law of trusts.        See

id. at 1244.    The Castros contend that tax avoidance was not

their primary motivation and that they felt a fiduciary duty to

the trusts and the beneficiaries.     We disagree.

     The Castros’ unrestricted use of the assets transferred to

the CFT and the CCJT for nominal, if any, consideration indicates

that the Castros, as trustees, were not restricted in any

economically substantive way.     See Buckmaster v. Commissioner,

supra; Hanson v. Commissioner, T.C. Memo. 1981-675.       Moreover,

the authority granted to the Castros as trustees of the trusts

was so broad that very few restrictions, if any, were actually

imposed on the Castros by the trust structure.       This factor

weighs against petitioners.

     E.     Conclusion

     Petitioner testified at trial that the Castros intended to

limit their liability, protect their assets from creditors, avoid

probate, and ensure their financial privacy by creating the trust

structure and denied that tax factors had any impact on their

decision.     This testimony was not credible, particularly when the

declarations of trust and the facts and circumstances surrounding

the establishment of the trusts are considered, and we do not
                                - 24 -

accept it.    See Tokarski v. Commissioner, supra at 77; Peterman

v. Commissioner, supra.

       After considering the four factors articulated in Markosian

v. Commissioner, 73 T.C. at 1243-1244, we have no doubt that the

trusts in question lacked economic substance and must be

disregarded for Federal income tax purposes.      See also George v.

Commissioner, T.C. Memo. 1999-381.       We hold for respondent on

this issue.12    Because the parties agree that, if we disregard

the trusts for Federal income tax purposes, the net income from

the jewelry business is taxable to petitioner and not to the

trusts, we hold accordingly.

III.    Self-Employment Tax

       Respondent contends that the net income from the jewelry

business qualifies as net earnings derived by petitioner from the

jewelry business that he carried on during the years at issue and

that, therefore, petitioner is liable for self-employment taxes

on that income.    See sec. 1401.   The Castros disagree, arguing

only that the jewelry business was carried on by the CCJT and not

by petitioner.    The Castros asserted no argument with respect to

the net earnings of the jewelry business in the event we held

that the trusts should be disregarded for Federal income tax

purposes.




       12
      In light of our holding, we need not address respondent’s
alternative arguments that the jewelry business’ income should be
allocated to the Castros under the doctrine of assignment of
income or the grantor trust rules.
                              - 25 -

     Before the establishment of the CCJT, petitioner reported

the net income he derived from the jewelry business as net

earnings from his trade or business, and petitioner paid self-

employment taxes on it.   The Castros do not dispute that

petitioner continued to work in the jewelry business after the

CCJT was established.

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

every individual for old age, survivors, and disability

insurance, and hospital insurance.     See sec. 1401(a) and (b);

George v. Commissioner, supra; sec. 1.1401-1(a), Income Tax Regs.

Self-employment income “means the net earnings from self-

employment derived by an individual”.     Sec. 1402(b).   Net

earnings from self-employment “means the gross income derived by

an individual from any trade or business carried on by such

individual, less the deductions allowed by this subtitle which

are attributable to such trade or business”.     Sec. 1402(a); see

also sec. 1.1402(a)-1, Income Tax Regs.

     The Castros have offered no reason other than their belief

that the CCJT owned the jewelry business to explain why the net

income from the jewelry business is not self-employment income to

petitioner.   Since we have concluded that the CCJT must be

disregarded for Federal income tax purposes, it follows that the

net income of the jewelry business represents petitioner’s net

earnings from self-employment and that petitioner is liable for

self-employment taxes on that income for the years at issue.       We

so hold.
                              - 26 -

IV.   Section 6662 Accuracy-Related Penalty

      Section 6662(a) and (b)(1) authorizes a 20-percent penalty

to be imposed on the portion of an underpayment of income tax

attributable to negligence or disregard of rules or regulations.

Respondent’s determination is presumed correct, and petitioners

have the burden of proving otherwise.13   See Rule 142(a); Hall v.

Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo.

1982-337; Neely v. Commissioner, 85 T.C. 934, 947 (1985); Bixby

v. Commissioner, 58 T.C. 757, 791-792 (1972).

      Negligence “includes any failure to make a reasonable

attempt to comply with the provisions of * * * [the Internal

Revenue Code]”.   Sec. 6662(c); see also Neely v. Commissioner,

supra at 947 (negligence is lack of due care or failure to do

what a reasonable and prudent person would do under the

circumstances).

      We previously have held that a taxpayer’s adoption of a

“flagrant tax avoidance scheme” repeatedly rejected by the courts

is patently negligent.   Wesenberg v. Commissioner, 69 T.C. 1005,

1015 (1978); see also Hanson v. Commissioner, supra.    In 1994,

when the Castros established the two trusts, we already had

decided several abusive trust cases.   In each case, we emphasized

that trusts, to be recognized for Federal income tax purposes,

must be infused with economic reality.    See, e.g., Hanson v.


      13
      Sec. 7491(c), which provides that the Secretary shall have
the burden of production in any court proceeding with respect to
an individual’s liability for a penalty, does not apply in this
case.
                              - 27 -

Commissioner, 696 F.2d at 1234 (“No reasonable person would have

trusted this scheme to work.”).

     Petitioners argue that the penalty may not be imposed with

respect to any portion of the underpayments because there was

reasonable cause for the underpayments and they acted in good

faith with respect to the underpayments.   See sec. 6664(c)(1).

In determining whether a taxpayer acted in good faith, we look at

such factors as the taxpayer’s knowledge and experience, the

taxpayer’s reliance, if any, on the advice of well-informed and

competent professionals, and the taxpayer’s efforts to assess his

proper tax liability.   See Stubblefield v. Commissioner, T.C.

Memo. 1996-537; sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioners introduced no evidence of the Castros’ knowledge

or experience in financial and tax matters or of the knowledge

and experience of any professionals with whom they may have

consulted to complete their income tax returns for the years at

issue.   Petitioners argue only that they maintained complete and

accurate books and records and that the CCJT reported the jewelry

business’ income.

     We reject petitioners’ arguments.   A taxpayer’s effort to

ascertain his correct tax liability is the most important factor

in deciding whether a taxpayer acted in good faith within the

meaning of sections 6662 and 6664(c)(1).   Petitioners have

offered no evidence other than petitioner’s testimony in support

of their argument that they are not liable for the accuracy-

related penalties.   That testimony offers no insight into the
                                - 28 -

effort made by the Castros and any advisers with whom they may

have consulted to ascertain whether the trust structure at issue

in these consolidated cases would be respected for Federal income

tax purposes.     Absent such proof, we cannot relieve petitioners

of liability for the accuracy-related penalties under section

6662(a) and (b)(1).    See Neely v. United States, 775 F.2d 1092,

1095 (9th Cir. 1985); George v. Commissioner, T.C. Memo. 1999-

381; Hanson v. Commissioner, T.C. Memo. 1981-675; sec. 1.6664-

4(b)(1), Income Tax Regs.    We sustain respondent’s determination

that petitioners are liable for accuracy-related penalties

pursuant to section 6662(a) for 1995 and 1996 on any underpayment

of income tax that may be due as a result of this opinion.

V.   Section 6673 Penalty

     Section 6673(a)(1)(A) and (B) provides that this Court may

impose a penalty of up to $25,000 whenever proceedings have been

instituted or maintained by the taxpayer primarily for delay, or

whenever the taxpayer’s position in a proceeding is frivolous or

groundless.     Before trial, respondent warned the Castros that

respondent intended to move for a penalty under section 6673 and

gave the Castros copies of cases supporting respondent’s

contention that their arguments lacked merit.

     We are satisfied that the Castros did not institute or

maintain these proceedings primarily for delay.     The Castros’

belief that their trust structure should be respected for Federal

income tax purposes was sincere if uninformed by any reasonable

analysis of pertinent authority.     In addition, there is no
                                - 29 -

evidence in the record to suggest that the Castros unreasonably

delayed the proceedings.

     We are not satisfied with the Castros’ position regarding

the validity of the trusts for Federal income tax purposes,

however.    Their position was frivolous, and our conclusion in

this regard satisfies the statutory predicate for imposing a

penalty under section 6673.     But section 6673 grants the Court

discretion in deciding whether to impose a penalty.       See sec.

6673; Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43,

102 (2000).     Exercising our discretion, we decline to impose a

penalty under section 6673 in these cases.       Our decision on this

issue is based on several factors.       Petitioner testified he

cooperated during the examination of the relevant tax returns

conducted by respondent’s agents and that he maintained records

of the jewelry business’ income and expenses during the years at

issue.     The record supports a conclusion that the Castros

attempted to abide by the terms of the declarations of trust and

that they maintained records regarding the trusts.       In addition,

there is no evidence to indicate that the Castros manipulated

income or exaggerated expenses with respect to the jewelry

business or that they engaged in any other transactions

structured to unreasonably reduce or eliminate their proper

income tax liability.     Consequently, we decline to impose a

penalty under section 6673 upon the Castros.       We caution the

Castros and their counsel, however, that if they present similar

arguments to this Court again, they invite the imposition of such
                              - 30 -

penalties upon themselves.   See sec. 6673(a)(1) and (2); Rule

33(b); Leach v. Commissioner, T.C. Memo. 1993-215.

VI.   Conclusion

      We have carefully considered all remaining arguments made by

the parties for contrary holdings and, to the extent not

discussed, find them to be irrelevant or without merit.

      To reflect the foregoing,


                                         Decisions will be entered

                                    under Rule 155.
