                         T.C. Memo. 2005-52


                       UNITED STATES TAX COURT



 HARLAN D. EDWARDS AND FLOORS BY HARLAN, JODY EDWARDS, TRUSTEE,
                         Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10458-02.                 Filed March 22, 2005.


     Harlan D. Edwards and Floors by Harlan, Jody Edwards,

Trustee, pro sese.

     Matthew J. Bailie, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:    In separate notices of deficiency, respondent

determined the following income tax deficiencies, additions to
                                     - 2 -

tax, and penalty with respect to petitioners’ Federal income

taxes for 1998:1

Harlan D. Edwards:

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

         $42,165                   $10,541                  $1,929

Floors by Harlan, Jody Edwards, Trustee:

                                               Penalty
                   Deficiency                Sec. 6662(a)

                     $30,232                    $6,046

     1
      In his answer, respondent asserted a modification to
     the addition to tax under sec. 6651(a) determined in
     Harlan D. Edwards’s notice of deficiency, proposing
     instead a revised amount under sec. 6651(a)(1) coupled
     with an addition to tax pursuant to sec. 6651(a)(2).
     On brief, respondent does not address the asserted sec.
     6651(a)(2) addition. Accordingly, we deem respondent
     to have abandoned the position taken in the answer.

After concessions, the issues remaining for decision are:

     (1) Whether income reported by petitioner Floors by Harlan,

Jody Edwards, Trustee (Floors Trust), is includible in the gross

income of petitioner Harlan D. Edwards (Harlan) because Floors

Trust is a sham that is disregarded for Federal income tax

purposes;

     (2) whether Harlan failed to report income of $6,908;




     1
       All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                               - 3 -

     (3) whether Floors Trust is entitled to deductions taken for

rent, income tax expense, and income distributions;

     (4) whether Harlan is liable for self-employment tax;

     (5) whether Harlan is liable for an addition to tax pursuant

to section 6651(a)(1); and

     (6) whether Harlan is liable for an addition to tax pursuant

to section 6654.

                         FINDINGS OF FACT

     The parties have stipulated some of the facts, which are

incorporated herein by reference.   Harlan resided and Floors

Trust had an address in San Jose, California, at the time the

petition was filed.

     Before 1995, Harlan operated a vinyl floor installation

business, known as Edwards Vinyl Floors (Edwards Vinyl), as a

sole proprietorship.   Harlan managed the business, owned its

assets, and performed the installation work along with his son,

Jody Edwards (Jody).

     In January 1995, Harlan was the grantor of three trusts:2

Floors Trust, Harwood Group Trust (Harwood Group), and Harwood

Holding Co. Trust (Harwood Holding).

     Harlan got the idea of putting his business and assets into

trusts through the advice of Don Fletcher, a trust promoter who


     2
       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 this case.
                               - 4 -

Harlan met after attending a free seminar advertised in the

newspaper.3

Floors Trust

     At the time Floors Trust was created, Edwards Vinyl changed

its name to Floors by Harlan, and all assets associated with the

business were transferred to Floors Trust.   There was no change

in the manner in which Harlan conducted the activities of the

flooring business after the name change and asset transfer.

Harlan was appointed “manager” of the trust’s business and had

unrestricted access to the trust’s assets.   As manager, Harlan

continued to make the same day-to-day managerial decisions for

Floors Trust as he had made for Edwards Vinyl when he managed it

as a sole proprietorship.   No trustee imposed any requirements or

made any demands with respect to the manner in which the flooring

business was operated.   Harlan and Jody performed the floor

installation activities for Floors Trust, and payment for the

services rendered by Harlan, as proprietor of a floor

installation business, was provided to the trust.   Harlan and

Jody maintained a checking account in the name of “Floors by

Harlan ‘A Trust’”, into which they deposited gross receipts from

the floor installation business and over which they had signatory


     3
       Mr. Fletcher was subsequently convicted of one count of
conspiracy to defraud the United States and two counts of aiding
and assisting in the preparation of false income tax returns, see
United States v. Fletcher, 322 F.3d 508 (8th Cir. 2003), and was
incarcerated at the time of trial.
                                 - 5 -

authority.   Harlan or Jody signed all checks drawn on this

account in 1998.

     Jody was appointed trustee of Floors Trust at its inception

and served as trustee in 1998.    Roland Mears (Roland) also served

as trustee of Floors Trust at its inception.

     The trust instrument for Floors Trust provides that a

trustee who resigns “will sign and have witnessed a letter of

resignation” that is made part of the trust agreement.    The trust

instrument further provides that upon the resignation of a

trustee, the appointment of a successor trustee “shall be upon

the unanimous action of the remaining trustees”.

     On May 1, 1996, Roland purported to resign as trustee from

Floors Trust, but his letter of resignation was not witnessed as

required by the trust instrument.    On the same day, Roland

purported to appoint Becky Mears (Becky) as a successor trustee

by means of a document signed by Roland but not Jody,

notwithstanding the trust instrument’s requirement that successor

trustees be appointed by the unanimous action of the remaining

trustees.4




     4
       The documents evidencing Roland’s purported resignation
and replacement by Becky were submitted by respondent as exhibits
to his motion to dismiss Becky as a party for lack of
jurisdiction, which was granted upon petitioners’ failure to
respond. Petitioners have admitted in their brief the foregoing
facts concerning the purported resignation and replacement.
                                - 6 -

     The beneficiaries of Floors Trust were Jody, Harlan, Harwood

Group, and Harwood Holding.    Harlan originally held all 100 units

of the beneficial interest of Floors Trust, but on February 1,

1995, he surrendered 94 of them to Jody and 2 units each to

Harwood Holding and Harwood Group.

Harwood Holding

     The beneficiaries of Harwood Holding were Harlan and Jody,

as well as other children of Harlan; namely, Jacqueline Spellman,

Greg Edwards (Greg), and Michael Edwards.5

Harwood Group

     Upon his creation of Harwood Group, Harlan transferred to it

his residence, which he owned outright, free of any mortgage

indebtedness.   Harwood Group’s other assets included a

television, a bedroom suite, three lounge recliners, and various

other household furnishings.   The beneficiaries of Harwood Group

were Harlan, Jody, and Greg.   The trustees of Harwood Group were

Jody and Becky.   As with Floors Trust, Harlan served as manager

of Harwood Group.    Additionally, Jody and Harlan were the only

individuals who had authority to sign checks on the Harwood Group

bank account.

     The floor installation business did not change its location

after its transfer to Floors Trust.     The business and its assets


     5
       The record establishes nothing further concerning Harwood
Holding.
                               - 7 -

continued to be located at Harlan’s residence.   However, after

the transfer of the residence to Harwood Group, Floors Trust paid

Harwood Group $500 per month as rent for the use of the garage

and a bedroom located in the residence.   The rent was originally

set at $800 per month, but at some time not disclosed in the

record, it was reduced to $500 per month because Harlan concluded

that Harwood Group did not require that much income.   When Harlan

was operating Edwards Vinyl as a sole proprietorship, the

business did not pay rent for the use of the same space in the

residence.

Bartering Income

     During 1998, Harlan was a member of two bartering clubs,

American Barter Corp. and Tradeworld.   In that year, Harlan

received services from bartering valued at $5,359 and $11,375

from American Barter Corp. and Tradeworld, respectively.

Returns

     Floors Trust filed a Form 1041, U.S. Income Tax Return for

Estates and Trusts, for the taxable year 1998.   Harlan did not

file a Form 1040, U.S. Individual Income Tax Return, for the 1998

taxable year.

                              OPINION

I.   Evidentiary Note

     The record in this case is sparse.   Petitioners attached

several exhibits to their brief and made numerous factual
                                 - 8 -

assertions therein.     However, unsupported statements in a brief

and exhibits that have not been properly admitted into evidence

at trial do not constitute competent evidence.      Rule 143(b);

Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992);

Viehweg v. Commissioner, 90 T.C. 1248, 1255 (1988); Castro v.

Commissioner, T.C. Memo. 2001-115.       Petitioners also complain in

their brief that Becky was “not permitted to speak”.      The Court

did not permit Becky to speak on behalf of petitioners at

calendar call, as she had not entered an appearance on their

behalf and was not herself a party.6      However, petitioners were

free to call Becky as a witness at the trial but failed to do so.

The absence of her testimony is accordingly a circumstance of

their own making.

II.   Burden of Proof

      Petitioners contend that, pursuant to section 7491(a), the

burden of proof has shifted to respondent with respect to all

outstanding issues.

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

that the Commissioner’s determinations are erroneous.      See Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).      However,

subject to certain limitations, section 7491(a) shifts the burden

of proof to the Commissioner with respect to any factual issue

      6
       Becky’s status as a party had been specifically addressed
before trial as a result of respondent’s motion to dismiss her as
a party for lack of jurisdiction, which was granted.
                                 - 9 -

relevant to ascertaining the tax liability of the taxpayer if the

taxpayer introduces “credible evidence” with respect to the

issue.

    While the statute itself does not define “credible evidence”,

the legislative history states as follows:

     Credible evidence is the quality of evidence, which,
     after critical analysis, the court would find
     sufficient upon which to base a decision on the issue
     if no contrary evidence were submitted (without regard
     to the judicial presumption of IRS correctness). * * *
     If after evidence from both sides, the court believes
     that the evidence is equally balanced, the court shall
     find that the Secretary has not sustained his burden of
     proof. [H. Conf. Rept. 105-599, at 240-241 (1998),
     1998-3 C.B. 747, 994-995.]


See also Blodgett v. Commissioner, 394 F.3d 1030 (8th Cir. 2005),

affg. T.C. Memo. 2003-212.

     As more fully discussed hereinafter, section 7491(a) has no

effect on our findings with respect to most of the issues in this

case, as our conclusions are based upon a preponderance of the

evidence.   See id.    The exceptions concern the deductions for

rent and taxes taken by Floors Trust and Harlan’s liability for

self-employment tax.    As discussed below, since petitioners

offered no credible evidence with respect to these issues, the

burden of proof remains with them to show error in respondent’s

determinations, and they have not satisfied the burden.
                              - 10 -

III. Is Floors Trust Disregarded for Federal Income Tax
     Purposes?

     Respondent contends that Floors Trust lacks economic

substance and should therefore be disregarded for Federal income

tax purposes.   Petitioners assert that Floors Trust should be

recognized as a valid entity for Federal income tax purposes.

For the reasons discussed below, we agree with respondent.

Accordingly, the income received by Floors Trust is taxable to

Harlan.

     It is well established that taxpayers have a right to

minimize their taxes by structuring their transactions in any

legally permissible manner.   Gregory v. Helvering, 293 U.S. 465,

469 (1935).   However, transactions that lack any significant

economic purpose other than to avoid taxes will not be recognized

for Federal income tax purposes, see Zmuda v. Commissioner, 79

T.C. 714, 720 (1982), affd. 731 F.2d 1417 (9th Cir. 1984), and we

will look beyond the form of such transactions and apply the tax

law in accordance with the substance of these transactions, see

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

Commissioner, 45 T.C. 360 (1966), affd. per curiam 381 F.2d 22

(5th Cir. 1967).

     We have considered the following factors in deciding whether

a purported trust lacks economic substance and should, therefore,

be disregarded as an invalid entity for Federal income tax

purposes:   (1) Whether the relationship of the grantor to the
                               - 11 -

property purportedly transferred into trust differed in any

material respect before and after the formation of the trust; (2)

whether the trust had at least one bona fide independent trustee;

(3) whether an economic interest in the trust passed to any of

the designated trust beneficiaries other than to the grantor; and

(4) whether the taxpayer felt bound by any of the restrictions

imposed by the trust at issue or the law of trusts.    See

Markosian v. Commissioner, supra at 1243-1245.

     A.   Grantor’s Relationship to Trust Property Before and
          After Trust Formation

     The first factor to be considered in determining whether a

trust lacks economic substance is whether the grantor’s

relationship to the property transferred to the trust at issue

differed in any material respect before and after the formation

of the trust.   Id. at 1243.

     Before the formation of Floors Trust, Harlan operated

Edwards Vinyl as a sole proprietorship.    After the formation of

Floors Trust, he continued to make the day-to-day managerial

decisions for the business.    Additionally, the business assets

were located at Harlan’s personal residence, where he had

unrestricted access to them, both before and after the transfer

to the trust.

     Harlan and Jody were the persons authorized to sign checks

drawn on Floors Trust’s business checking account.    Further,

Harlan conceded in his testimony that no trustee imposed any
                                - 12 -

requirements or made any demands with respect to the manner in

which the flooring business was operated.

     On the basis of the record, we find that Harlan’s

relationship to the property transferred to Floors Trust did not

differ in any material respect after the transfer.    See Gouveia

v. Commissioner, T.C. Memo. 2004-256; Norton v. Commissioner,

T.C. Memo. 2002-137.

     B.   Independent Trustee

     At its creation, the trustees of Floors Trust were Jody and

Roland.   On May 1, 1996, Roland purported to resign and appoint

Becky as his replacement.   Petitioners admit that the

requirements of the trust instrument were not observed in this

purported resignation and replacement.7    Roland’s resignation was

not witnessed, and there is no contemporaneous written evidence

that Jody approved the appointment of Becky as successor trustee,

as required in the trust instrument.     Thus, petitioners were at

best somewhat lax with respect to the trust’s formal requirements

concerning trustees, and the competent evidence in this case

fails to establish unequivocally that Becky was a trustee.    If

Roland’s purported resignation and replacement by Becky in 1996

were ineffective, then the only duly appointed trustees in 1998


     7
       Petitioners attached to their brief a “memo” in which Jody
admits that Roland’s 1996 resignation was not witnessed or
recorded in the trust minutes as required by the trust
instrument. Further, Jody admits that he failed to sign the
purported appointment of Becky in 1996.
                               - 13 -

were Roland, a trustee who was under the impression that he had

resigned, and Jody.

     Even if it were accepted that a valid replacement of Roland

by Becky was effected in 1996, so that Becky served as a trustee

in addition to Jody in 1998, Harlan’s own testimony makes it

clear that no trustee imposed any meaningful oversight or control

over Floors Trust in 1998.    He conceded that no trustee made any

demands or imposed any requirements with respect to his operation

of the flooring business.    Further, Harlan (as well as Jody) had

signatory authority over the trust’s checking account.

     Neither Becky8 nor Roland testified at trial concerning any

meaningful oversight they may have performed as trustees of

Floors Trust, and we conclude, on the basis of their failure to

do so, that their testimony would have been unfavorable to

petitioners.    Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947);

Gouveia v. Commissioner, supra.

     In sum, given petitioners’ failure to observe formalities

with respect to the resignation and appointment of trustees, and

Harlan’s unfettered control of the trust’s assets and operations,

we conclude that Floors Trust did not have an independent trustee

who exercised meaningful control over its operations.    See

Buckmaster v. Commissioner, T.C. Memo. 1997-236; see also Zmuda


     8
         See the section entitled Evidentiary Note, supra p. 7.
                               - 14 -

v. Commissioner, supra at 720; Para Techs. Trust v. Commissioner,

T.C. Memo. 1994-366 (and cases cited therein), affd. without

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

(9th Cir. 1997).

     C.    Transfer of Economic Interest to Beneficiaries Other
           Than Grantor

     The third factor we consider is whether a genuine economic

interest in Floors Trust passed to anyone other than Harlan.

Markosian v. Commissioner, 73 T.C. at 1243.

     According to the trust instrument of Floors Trust, Jody held

94 of 100 units of beneficial interest, Harwood Holding and

Harwood Group each held 2 units, and Harlan held the remaining 2

units.    Notwithstanding this formal allocation of the beneficial

interests, Floors Trust’s Schedule K-1 for 1998 reports that Jody

received no distributions while Harlan and Harwood Group received

distributions of $3,979 and $5,000, respectively.

     Petitioners argue that the distribution to Harwood Group

evidences that a genuine economic interest passed to

beneficiaries other than Harlan because Harwood Group’s

beneficiaries consisted not only of Harlan but also of Jody and

Greg.    However, given that Harwood Group’s principal assets were

Harlan’s residence and assorted household furnishings, we are

persuaded that Harwood Group was a mere intermediary for passing

economic benefit to Harlan.    Cf. Norton v. Commissioner, supra
                              - 15 -

(distributions to a trust holding taxpayer’s residence benefited

taxpayer, not economic interests of others).

     On these facts, given the incidence of distributions that

bore no discernible relationship to the formal allocation of

beneficial interests, and the fact that these distributions all

tended to benefit Harlan, we conclude that no genuine economic

interest in Floors Trust passed to anyone other than Harlan.     See

Markosian v. Commissioner, supra at 1244.

     D. Trust Restrictions Binding Taxpayer

     The final factor we consider is whether Harlan felt bound by

any restrictions imposed by Floors Trust or by the law of trusts.

See id.

     In his testimony, Harlan conceded that his flooring business

was operated the same before and after its purported transfer to

Floors Trust.   Indeed, notwithstanding the purported transfer of

the business, Harlan referred to Jody as “my” employee.   Harlan

likewise testified that no trustee imposed any requirements or

made any demands with respect to the manner in which the business

was operated.   Harlan had unrestricted access to the business

assets (as they were located at his residence) and to the

business checking account.   Harlan’s unrestricted use of the

trust’s assets as well as his unrestricted management of the

installation business demonstrate that Harlan was not, in fact,

restricted in any meaningful manner.   See id.; Gouveia v.
                                - 16 -

Commissioner, supra; Norton v. Commissioner, supra.      Accordingly,

on this record, we find that Harlan was not in practice bound by

any restrictions imposed by Floors Trust or the law of trusts.

     E. Conclusion

     Petitioners claim on brief that Floors Trust was created to

benefit the designated beneficiaries and to ensure that Jody

would be the only child who would benefit directly from the

flooring business.   However, the available evidence of

distributions shows that Harlan, not Jody, was the beneficiary of

the trust’s distributions, undermining their claim regarding the

purpose of forming the trust.    Cf. Gouveia v. Commissioner, T.C.

Memo. 2004-256 (claim that trust was created as protection from

business liabilities not supported by evidence).

     After considering the four factors articulated in Markosian

v. Commissioner, supra at 1243-1244, all of which favor

respondent, we find, on the basis of a preponderance of the

evidence, that Floors Trust lacked economic substance and should

be disregarded for Federal income tax purposes.      We therefore

hold for respondent on this issue.9      Accordingly, the net income

of Floors Trust is properly taxable to Harlan.


     9
       In light of our holding, we need not address respondent’s
alternative contentions that Floors Trust’s income is taxable to
Harlan under the grantor trust rules or the assignment of income
doctrine. Additionally, since we have held that Floors Trust is
a nullity for Federal income tax purposes, we do not sustain
respondent’s determination that Floors Trust is liable for an
accuracy-related penalty pursuant to sec. 6662.
                              - 17 -

IV. Unreported Income

     Respondent determined that Floors Trust had unreported

income of $6,908 in 1998, computed as the amount by which the

trust’s $93,831 in cash deposits for the year (determined through

a bank deposits analysis) plus bartering income of $16,734

exceeded reported gross receipts of $103,657.    In the notice of

deficiency issued to Harlan, corresponding amounts were

determined to be taxable income to him as a result of the

disregard of Floors Trust for Federal income tax purposes.10

     With respect to the $16,734 in bartering income determined

by respondent, petitioners stipulated documents indicating, and

Harlan admitted in his trial testimony, that he or Floors Trust

was a member of bartering clubs and that the figure determined by

respondent to be income from bartering represented the value of

services Harlan received from bartering.   Gross income includes

compensation for services.   Sec. 61(a)(1).   When services are

paid for in property or in exchange for other services, the fair

market value of such property or other services must be included

in income as compensation.   Sec. 1.61-2(d)(1), Income Tax Regs.;

see also Whitehead v. Commissioner, T.C. Memo. 2001-317; Badell

v. Commissioner, T.C. Memo. 2000-303.   We accordingly find that

Harlan received bartering income of $16,734 in 1998.


     10
       Respondent has conceded that $83,024 of the $89,024 of
expenses claimed on Floors Trust’s 1998 Form 1041 are allowable
expenses for the flooring business conducted by Harlan.
                               - 18 -

      With respect to the cash gross receipts from the flooring

business purportedly conducted by Floors Trust, respondent

computed cash gross receipts for 1998 as equal to the sum of all

deposits ($93,831) into the checking account maintained by Harlan

and Jody in the name of Floors Trust.   Petitioners have

stipulated that the gross receipts from Floors Trust’s business

were deposited into that account, and Harlan further testified

that the deposits represented income from the business activities

of Floors Trust.   While petitioners claim, for the first time on

brief, that they had business records substantiating gross

receipts (such that respondent need not have resorted to a bank

deposits analysis), no such records were offered as evidence at

trial.    Petitioners also claim, for the first time on brief, that

$3,000 of the deposits represented loans from Jody to the

business.   No evidence was offered at trial to support this

claim, even though Jody was present and sworn as a witness (in

addition to Harlan).   Unsupported statements in a brief and

exhibits that have not been admitted into evidence do not

constitute competent evidence.   Rule 143(b); Niedringhaus v.

Commissioner, 99 T.C. 202 (1999); Viehweg v. Commissioner, 90

T.C. 1248 (1988); Castro v. Commissioner, T.C. Memo 2001-115.

Petitioners do not further contest respondent’s reconstruction.11


     11
       On brief, petitioners allege that the total deposits for
1998 were $87,845.97, as compared to respondent’s figure of
                                                   (continued...)
                               - 19 -

     In the absence of taxpayer records sufficient to establish

the amount of income, the Commissioner may reconstruct income

under any reasonable method.   Meneguzzo v. Commissioner, 43 T.C.

824, 831 (1965).   A bank deposits analysis is an acceptable

method of reconstruction.   Harper v. Commissioner, 54 T.C. 1121

(1970).   On this record, on the basis of a preponderance of the

evidence, we conclude respondent’s treatment of the deposits into

the Floors Trust checking account as equal to the cash gross

receipts of the trust’s business activities is accurate and

accordingly find that Floors Trust had cash gross receipts of

$93,831 in 1998.

     As the cash gross receipts ($93,831) and bartering income

($16,734) together exceed Floors Trusts’s reported gross receipts

of $103,657 by $6,908, we sustain respondent’s determination that



     11
      (...continued)
$93,831 (rounded from $93,831.15). However, this $5,985.18
discrepancy is readily explained. First, petitioners excluded a
$1,000 deposit made on July 7, 1998, on the basis of their claim
(rejected above) that this amount was a loan to the business from
Jody. Second, with respect to the bank statement covering Dec.
5, 1997, through Jan. 7, 1998, petitioners erroneously took the
sum of the running balances posted in 1998 ($3,613.82) rather
that the deposits posted in 1998 ($1,174), which had the effect
of overstating deposits in that period by $2,439.82. Finally,
petitioners erroneously omitted the deposits posted in the
statement covering Feb. 6 through Mar. 5, 1998, resulting in an
understatement of deposits of $7,425. When petitioners’
erroneous understatements and overstatements of deposits are
netted, the result is an understatement of deposits of $4,985.18
which, when added to the $1,000 deposit excluded as a loan,
equals the $5,985.18 discrepancy in the parties’ respective
claims regarding the amount of deposits in 1998.
                              - 20 -

Floors Trust had unreported income in that amount,12 which is

reportable by Harlan because Floors Trust is disregarded.

V. Floors Trust Deductions

     A.   Rent

     Respondent determined that a $6,000 rent expense deduction

claimed on the Floors Trust return should be disallowed for

failure to substantiate or to show that such expenses were

ordinary or necessary business expenses.13   On brief, respondent

contends only that the rent expenditures were not ordinary and

necessary expenses of the floor installation business, within the

meaning of section 162, because rent had not been paid before the


     12
       We are mindful that the Court of Appeals for the Ninth
Circuit, to which an appeal in this case would ordinarily lie,
has held that, where unreported income has been determined, the
presumption of correctness attaches to a notice of deficiency
only where the Commissioner has established “some evidentiary
foundation” linking the taxpayer to an income-producing activity
or the receipt of unreported income. See Rapp v. Commissioner,
774 F.2d 932, 935 (9th Cir. 1985); Edwards v. Commissioner, 680
F.2d 1268, 1270 (9th Cir. 1982). In this case, given that Harlan
conceded (i) that he received services from bartering equal in
value to the amounts determined by respondent and (ii) that
amounts paid for the floor installation services rendered by
Harlan were deposited into the bank account that respondent
analyzed, there is an ample evidentiary foundation for
respondent’s determination of unreported income.
     13
       Because we have concluded that Floors Trust is a sham
that is disregarded for Federal income tax purposes, it is
Harlan, as sole proprietor of the floor installation business
reported to the Schedule C filed by Floors Trust, who may be
entitled to any deduction for rent (or other trade or business
expenses) claimed by Floors Trust. We note in this regard that
respondent has conceded Harlan’s entitlement to deductions for
numerous expenses of the floor installation business initially
claimed by Floors Trust on its 1998 return. See supra note 10.
                             - 21 -

purported transfer of the business to a trust.   As respondent

summarizes his argument: “There is no reason why the payment of

rent suddenly became necessary upon the purported transfer of the

business to a trust, when nothing else changed, and payment of

rent was not previously necessary.”

     Respondent’s argument focuses on the transfer of the floor

installation business to Floors Trust and overlooks the transfer

of Harlan’s residence to Harwood Group.   Respondent’s brief does

not address the latter transfer at all.

     Nonetheless, even if one assumes that Harwood Group is a

valid trust to which a valid transfer of Harlan’s residence was

made, petitioners have not shown entitlement to the claimed

deductions for rent.

     We note first that petitioners have not shown that the

burden of proof with respect to this issue has shifted to

respondent pursuant to section 7491(a).   As discussed more fully

below, the deductibility of rent for the use of property that has

been transferred to a trust and then leased back by the trust’s

grantor depends, inter alia, upon the reasonableness of the rent

and the independence of the trustee in negotiating it.   The

evidence offered by petitioners with respect to the foregoing

factors consisted of Harlan’s testimony, wherein he stated that

the monthly rent paid to Harwood Group (for the office and garage

space at Harlan’s residence) was initially set at $800 but
                              - 22 -

reduced to $500 when “I found that Harwood Group did not need

that kind of an income”.   This evidence, while credible, is an

insufficient basis for a decision on this issue in petitioners’

favor.   Indeed, it tends to show the opposite; namely, that the

rent was set arbitrarily and that decisions thereon were made by

Harlan rather than an independent trustee.   Accordingly, the

burden of proof has not shifted to respondent with respect to the

disallowed rent deductions.

     As noted, where property has been transferred to a trust and

then leased back by the trust’s grantor, the rent is deductible

under section 162(a) upon a showing that, inter alia, the rent is

reasonable in amount and the trustee has acted independently.

See May v. Commissioner, 76 T.C. 7 (1981), affd. 723 F.2d 1434

(9th Cir. 1984).   The Court of Appeals for the Ninth Circuit, to

which an appeal in this case would normally lie, has placed

particular emphasis on the independence of the trustee.   See

Brooke v. United States, 468 F.2d 1155, 1157 (9th Cir. 1972)

(“Many decisions pivot on the issue of the independence of the

trustee.”).   Whether the trustee has acted independently is a

question of fact, involving the consideration of such criteria as

the trustee’s securing appraisals, requiring timely payment,

exercising prudent business judgment, and evidencing awareness of

his or her fiduciary obligations.   Lerner v. Commissioner, 71

T.C. 290 (1978).
                                - 23 -

     Petitioners have offered no competent evidence regarding the

independence of the Harwood Group trustee or the foregoing

criteria bearing thereon.   As noted, Harlan’s testimony tends to

show that the monthly rent was based on Harlan’s perception of

Harwood Group’s “need” for income rather than the fair rental

value of the leased property and, further, that it was Harlan

rather than an independent trustee who made the determinations

regarding the amount of rent.     On this record, we sustain

respondent’s determination to disallow the $6,000 deduction

claimed for rent expense.

     B.   Taxes

     Respondent also determined that a $102 deduction claimed by

Floors Trust for taxes should be disallowed for failure to

substantiate or to show business purpose.     Petitioners have

offered no credible evidence with respect to this issue, Harlan

having testified only that he had “no clue” regarding what the

deduction was for.   Accordingly, the burden of proof remains with

petitioners, see sec. 7491(a), and they have offered no competent

evidence to meet that burden.14    We therefore sustain

respondent’s determination.



     14
       Petitioners argue for the first time on brief that the
deduction was for State income tax paid in 1997. As previously
noted, unsupported statements in a brief do not constitute
competent evidence. Rule 143(b); Niedringhaus v. Commissioner,
99 T.C. 202 (1992); Viehweg v. Commissioner, 90 T.C. 1248 (1988);
Castro v. Commissioner, T.C. Memo. 2001-115.
                                 - 24 -

      C.   Income Distribution

      Respondent determined that $8,789 deducted by Floors Trust

as an income distribution was disallowed for failure to meet the

requirements of section 651 or 661.       Because we have held that

Floors Trust is disregarded for Federal income tax purposes, no

deductions for distributions of income are allowed.       We

accordingly sustain respondent’s determination increasing trust

income (reportable by Harlan) in the foregoing amount.

VI.   Self-Employment Tax

      Respondent determined that the net income from the flooring

business constituted Harlan’s net income from self-employment,

taxable pursuant to section 1401.     Petitioners offered no

evidence with respect to this issue.       There is accordingly no

shift in the burden of proof to respondent under section 7491(a).

      Section 1401 imposes a tax on self-employment income,

defined generally as “the net earnings from self-employment

derived by an individual”.    Sec. 1402(b).     The net earnings from

self-employment are, in turn, defined generally as “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).

      In light of the parties’ stipulation that Harlan performed

the floor installation activities for Floors Trust and that the
                                 - 25 -

payment for services rendered by Harlan was provided to Floors

Trust, and our conclusion that Floors Trust was a sham trust, we

sustain the determination.      See Castro v. Commissioner, T.C.

Memo. 2001-115.

VII. Additions to Tax Under Sections 6651(a) and 6654

     Pursuant to section 7491(c), respondent bears the burden of

production with respect to the liability for any addition to tax

and must, therefore, present sufficient evidence showing that

such additions are appropriate.      Higbee v. Commissioner, 116 T.C.

438, 446 (2001).    Once respondent has met his burden of

production, petitioners must come forward with evidence

sufficient to persuade the Court that respondent’s determination

is incorrect.     Id. at 447.   Petitioners also bear the burden of

proof with regard to issues of reasonable cause, substantial

authority, or similar provisions.      Id. at 446.

    Respondent determined that Harlan is liable for an addition

to tax pursuant to section 6651(a)(1) for 1998.      Section

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

return (required under the Internal Revenue Code) 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.        Sec.

6651(a); Norton v. Commissioner, T.C. Memo. 2002-137.       The

parties have stipulated that Harlan did not file a Federal income
                                 - 26 -

tax return for 1998 and, as previously outlined, respondent has

shown that Harlan had income in excess of the filing threshold in

1998.   See secs. 6012, 6072.    Thus, respondent has sustained his

burden of production.

    Hence, Harlan bears the burden of proving that the failure to

file was due to reasonable cause and not willful neglect.    See

Higbee v. Commissioner, supra.    Petitioners appear to argue, for

the first time on brief, that Harlan did not file a return for

1998 because he did not believe he had sufficient taxable income

to require it, given his belief that the income from the flooring

business was attributable to Floors Trust.    Petitioners do not

argue, and there is no evidence to indicate, that Harlan sought

professional advice regarding his decision not to file.     Harlan’s

belief that he was not required to file a tax return does not

constitute reasonable cause for a failure to file a return in the

absence of timely advice from competent tax counsel.    See Stevens

Bros. Found., Inc. v. Commissioner, 39 T.C. 93, 133 (1962), affd.

on this point 324 F.2d 633, 646 (8th Cir. 1963); Rollins v.

Commissioner, T.C. Memo. 2004-260.    We find that Harlan has not

met his burden of proving that his failure to file was due to

reasonable cause and not willful neglect.    Accordingly,

respondent’s determination that Harlan is liable for the addition

for failure to timely file his 1998 return pursuant to section

6651(a) is sustained.
                                - 27 -

     Respondent also determined that Harlan was liable for an

addition to tax pursuant to section 6654 for failure to pay

estimated tax.    Section 6654 provides for an addition to tax in

the event of an underpayment of a required installment of

individual estimated tax.    See sec. 6654(a).   In general, each

required installment of estimated tax is equal to 25 percent of

the “required annual payment”, which in turn is equal to the

lesser of (i) 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 (ii) 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)(A) and (B).    The

section 6654 addition to tax applies to an underpayment of a

required installment unless the taxpayer comes within one of the

exceptions provided in subsection (e) thereof.     See Grosshandler

v. Commissioner, 75 T.C. 1, 20-21 (1980).

     The parties have stipulated that Harlan did not file a

Federal income tax return for 1997 or 1998, and respondent has

shown that Harlan had sufficient income to incur Federal income

tax for 1998.    See sec. 6654(d)(1)(B).   In their brief,

petitioners respond to respondent’s argument that Harlan is

liable for a section 6654 addition to tax by claiming that Harlan

“had no taxable income”.    We treat this response as a tacit

admission that Harlan did not pay any estimated tax in 1998.     As
                             - 28 -

a consequence, we are satisfied that respondent has met his

burden of production with respect to this issue.   As petitioners

do not argue, nor do we find, that Harlan qualifies for an

exception listed in section 6654(e), respondent’s determination

is sustained.

VIII. Conclusion

     We have considered all remaining arguments made by the

parties for contrary holdings and, to the extent not addressed,

find them to be irrelevant, moot, or meritless.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
