                       T.C. Memo. 2002-137



                     UNITED STATES TAX COURT



         STEVE M. NORTON AND KHRISTINE NORTON, ET AL.,1
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 6084-99, 6085-99,        Filed May 31, 2002.
                 6086-99, 15498-99,
                 15499-99.


     William A. Cohan, for petitioners.

     Stephen P. Baker, for respondent.




     1
        Cases of the following petitioners are consolidated
herewith: South Denali Lands Trust, docket No. 6085-99; Denali
Company Trust, docket No. 6086-99; Denali Company Trust, docket
No. 15498-99; and Steve M. Norton and Khristine Norton, docket
No. 15499-99.
                                 - 2 -

                MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:     In these consolidated cases, respondent

determined the following deficiencies in, additions to, and

penalties on petitioners’ Federal income taxes:

                                         Additions to Tax     Penalty
Petitioners       Year   Deficiency      Sec. 6651(a)(1)    Sec. 6662(a)

Steve and        1994     $101,230          $25,457          $20,246
  Khristine      1995       51,512            5,752           10,302
  Norton         1996       71,217             -0-            14,243

Denali Co.        1994     119,980            29,995          23,996
  Trust           1995      65,127            16,282          13,025
                  1996      77,351              -0-           15,470

South Denali
  Lands Trust    1994          414               104              83

     Unless otherwise stated, 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.

     The issues for decision are:     (1) Whether income reported by

the South Denali Lands Trust and Denali Company Trust is

includable in the gross income of Mr. and Mrs. Norton; (2)

whether Mr. and Mrs. Norton are liable for additions to tax for

failure to file a tax return pursuant to section 6651(a)(1); (3)

whether Mr. and Mrs. Norton are liable for accuracy-related

penalties pursuant to section 6662(a); and (4) whether Mr. and

Mrs. Norton are liable for penalties imposed under section 6673.
                                - 3 -

                          FINDINGS OF FACT

     Some facts have been stipulated and are so found.    The

stipulation of facts and the attached exhibits are incorporated

herein by this reference.    Petitioners Steve M. Norton (Mr.

Norton) and Khristine Norton (Mrs. Norton), husband and wife,

resided in Palmer, Alaska, at the time they filed their

petitions.    Petitioners South Denali Lands Trust and Denali

Company Trust had mailing addresses in Palmer, Alaska, at the

time of the filing of the petitions.

     Mr. Norton is a general contractor in the construction

business.    He operated a sole proprietorship under the name of

Steve Norton Enterprises (SNE).    In 1973, he moved to Alaska from

Oregon.   In the early 1980s, Mr. Norton purchased residential

real estate in Alaska for income and investment purposes.    Due to

a downturn in the State’s economy, his rental units became

vacant, the value of his real estate sharply decreased, and Mr.

Norton could not find any contract work.     As a result, almost all

of the real estate that Mr. Norton owned was foreclosed upon,

and, in 1987, Mr. and Mrs. Norton filed a bankruptcy petition.

     In 1993, Mr. Norton went to a presentation at his church by

Lonnie Crockett (Mr. Crockett) concerning trust2 programs.      Mr.

Norton attempted to consult his attorney about the trust


     2
        For convenience, we use the terms “trust” and “trustee”.
The use of such terms is not intended to be conclusive as to
characterization for tax purposes.
                               - 4 -

programs, but the attorney was not knowledgeable in that area.

Mr. Norton instead reviewed Mr. Crockett’s publications and

consulted with his sister-in-law, Kim Norton, with regard to

whether to purchase the trusts.   Mr. Norton did not consult the

Internal Revenue Service (IRS) as to the tax consequences of

participating in the trusts.

     Mr. Norton purchased three trust programs from Mr. Crockett

for $3,500 to $8,500 each:   Denali Company Trust, South Denali

Lands Trust, and Finger Lake Holding Trust.3   Mr. Norton also

paid a yearly fee of $1,500 to remain in Mr. Crockett’s trust

program.   For each of these three trusts, Mr. Crockett and Ben

Owens (Mr. Owens) were appointed cotrustees.   Mr. Owens resides

in Palmer, Alaska.

     Mr. Norton initially met Mr. Owens through his church in the

late 1980s.   Mr. Owens was an acquaintance of Mr. Norton’s

brother, David Norton.   Mr. Norton and Mr. Owens became better

acquainted in 1992 when Mr. Owens sought Mr. Norton’s advice on a

family matter, and when Mr. Owens joined Amway after Mr. Norton’s

introduction.   Mr. Norton appointed Mr. Owens as a trustee due to

his “impeccable character”, his tendency to make conservative



     3
        Mr. Norton is the trustee of several other trusts,
including the Buffalo Contracting Trust, the Clement’s Family
Trust, the Nicholas and Lake Family Trust, and the North Fork
Trust. Mr. Norton created another trust named the 2880 Papa
Trust, but did not carry out his intention to grant assets to the
trust.
                               - 5 -

decisions, and his experience in the construction business.

Before accepting the position, Mr. Owens went to a presentation

by Mr. Crockett and read Mr. Crockett’s publications.    Mr. Owens

accepted the position after reading a “hold harmless” clause,

which protects the trustee from the fraudulent behavior of

others.

     As trustee, Mr. Owens would frequently visit and call the

offices of SNE.   Mr. Owens would provide advice to SNE on how to

diversify (i.e., move from residential to commercial construction

projects) and how to seek payment, and would be consulted if SNE

wanted to make a large decision; i.e., involving more than

$10,000 (large projects).   Mr. Owens would confer with Mr.

Crockett monthly and would rely on Mr. Crockett’s advice on the

trusts because Mr. Owens perceived Mr. Crockett to be more

educated on the application of the trusts.   For his services as

trustee, Mr. Owens was paid $300 each year per trust.

     Mr. Owens and Mr. Crockett could be removed from their

positions as trustees by David Norton.   Mr. and Mrs. Norton

appointed David Norton to be the protector of all three trusts.

As protector, he could fire Mr. Owens or Mr. Crockett and appoint

new trustees at his discretion.   David Norton, however, would

consult Mr. and Mrs. Norton about replacing a trustee.

     Mr. Owens is employed fulltime as an estimator for

commercial construction projects by Architectural Roofing and
                                - 6 -

Siding.   On the side, Mr. Owens assists in the sale of metal

roofing and siding for residential construction projects through

Northern Enterprises, and works miscellaneous construction-

related jobs (i.e., building houses, putting on roofs, framing

houses, working on concrete projects).    Mr. Owens would sell

materials for Northern Enterprises to SNE on some construction

projects and receive a 5-percent commission on these sales.

Northern Enterprises is a trust in which Mr. Owens owns one

share.    The beneficiary of the Northern Enterprises trust is the

Fall Creek Company Trust, in which Mr. Owens’ children are the

beneficiaries.4   Additionally, when not acting as trustee, Mr.

Owens would perform subcontract work for SNE.

Finger Lake Holding Trust

     The Finger Lake Holding Trust owns the house in which Mr.

Norton and his family currently reside.    The trustees are Mr.

Owens and Mr. Crockett.    The protector of the trust is David

Norton.   The beneficiaries of this trust are Mr. and Mrs. Norton

and their children.

South Denali Lands Trust

     The South Denali Lands Trust was formed in 1993.    This trust

owns one duplex that was formerly the residence of Mr. Norton and


     4
        Mr. and Mrs. Norton sent $70,000 to the Fall Creek
Company Trust in order to purchase railroad bonds from World
Contractual Services (WCS) in Salt Lake City. Mr. Owens was in
charge of the Norton purchase; Mr. Norton does not know what Fall
Creek does, except that Mr. Owens is involved in its business.
                                - 7 -

his family.    The duplex provides rental income.   The term of the

trust is 20 years.    The trustees are Mr. Owens and Mr. Crockett.

Both trustees and the Finger Lake Holding Trust are signatories

on the bank account for the trust.      The protector of the trust is

David Norton.    The beneficiary of this trust is the Finger Lake

Holding Trust.    Mr. Norton serves as general manager of the

trust.   As manager, Mr. Norton would handle the daily activities

of the trust.    Mr. Norton’s responsibilities did not change with

regard to these daily activities because of the South Denali

Lands Trust.

     The South Denali Lands Trust tax return for 1994 was

received by respondent on January 4, 1996.     The tax return

reported no taxable income.    In the notice of deficiency to the

South Denali Lands Trust, respondent disallowed a depreciation

deduction in 1994 because it failed to establish the basis of the

property claimed to have been used in the business, thereby

increasing the net rental income.    Additionally, respondent

imposed an addition to tax under section 6651(a)(1) for failure

to file and an accuracy-related penalty under section 6662(a).

     Respondent received Mr. and Mrs. Norton’s 1994 tax return on

January 3, 1996.    The tax return did not report any rental income

from the South Denali Lands Trust.      In the notice of deficiency

to Mr. and Mrs. Norton, respondent increased their income to

account for the rental income from the South Denali Lands Trust.
                                 - 8 -

Respondent asserted that, alternatively:    (1) The trust

arrangements are a sham and are disregarded for tax purposes; (2)

the South Denali Lands Trust is a grantor trust whose income is

taxable to Mr. and Mrs. Norton; and (3) the assignment of income

to the South Denali Lands Trust is not recognized for tax

purposes and is taxable to Mr. and Mrs. Norton.    Additionally,

respondent imposed an addition to tax under section 6651(a)(1)

for failure to file and an accuracy-related penalty under section

6662(a).

Denali Company Trust

     The Denali Company Trust was created in 1993 and is doing

business as SNE.   The Denali Company Trust owns trucks,

equipment, and tools.   These items were owned and used in the

construction business by Mr. and Mrs. Norton and then transferred

to the Denali Company Trust.   Mr. Owens and Mr. Crockett are the

trustees and the signatories on the bank account.    David Norton

is the protector of the trust.    The beneficiaries are the Crystal

Diversified Trust and Michael André.     Mr. Norton is the general

manager.   Mr. Norton’s day-to-day conduct of business has not

changed due to the formation of the Denali Company Trust, except

that the trust required Mr. Owens’ permission on large projects.

The trustees approved a resolution that would allow Mr. Norton

the following duties as manager:

     * * * lend his name, reputation, goodwill, and good
     credit standing, licenses and authorizations etc. to
                                 - 9 -

     the advancement of the business endeavors of Denali Co.
     Trust. Additional, both as an individual and a
     manager, Steve M. Norton will work to secure credit for
     the business affairs of Denali Co. Trust. To
     accommodate this, from time to time assets may be
     transferred, as an assignment only and not as ownership
     to Steve M. Norton for the purpose of obtaining a
     credit line for construction, materials, purchases, and
     other needs as approved by the board.

     The money received for services by SNE was deposited into

the Denali Company Trust.   The funds were then transferred from

the Denali Company Trust to SNE’s business account so that Mr.

Norton could sign checks in order to pay bills and to purchase

personal items.   The bookkeeping was maintained by Mrs. Norton.

     Mr. Crockett recommended having Crystal Diversified, a

foreign trust, as a beneficiary of the Denali Company Trust.   Mr.

and Mrs. Norton and Mr. Owens do not know and have never talked

to Michael André, trustee of Crystal Diversified.    If not

received directly, Crystal Diversified would receive the funds

from the Denali Company Trust through the use of intermediaries

unknown to Mr. and Mrs. Norton.    Crystal Diversified would make

foreign investments and distribute the investment to the Finger

Lake Holding Trust at the expiration of the trust.    Mr. Crockett

and Crystal Diversified would take a percentage of the money

invested for services performed.

     Under the conditions of the trust, Mr. and Mrs. Norton are

not entitled to know where their money is invested and receive no

regular statements of account.    Throughout the term, gifts may be
                               - 10 -

received from time-to-time, but the trust does not allow Mr. and

Mrs. Norton and Mr. Owens to have any control over when their

money would be returned during the term.   The trust provides no

assurance as to when the money will be received except at the end

of the term of the trust of 20 years.

     During the tax years at issue, SNE had gross sales of over

$1 million each year.   SNE did not report any amounts, and no tax

was paid on its profit because it was reported by the Denali

Company Trust.

     On its 1994 return received on January 4, 1996, the Denali

Company Trust reported an adjusted gross income of $210,314.    The

same amount was deducted as an income distribution to Crystal

Diversified; therefore, the Denali Company Trust reported zero

taxable income.5   In the notice of deficiency, respondent

disallowed certain business expense deductions and the income

distribution deduction because the trust failed to substantiate

the deductions.    Additionally, respondent imposed an addition to

tax under section 6651(a)(1) for failure to file and an accuracy-

related penalty under section 6662(a).




     5
        A promissory note was issued from the Denali Company
Trust to Michael André, as trustee of Crystal Diversified, for
$210,014 on Feb. 18, 1995, because Denali Company Trust did not
have cash in its account to pay the amount allegedly due to
Crystal Diversified. Payments were made on this note starting on
Feb. 27, 1996, when cash became available.
                               - 11 -

     On their 1994 return received on January 3, 1996, Mr. and

Mrs. Norton did not report any income from the Denali Company

Trust.   In the notice of deficiency, in addition to the

imposition of an addition to tax under section 6651(a) and an

accuracy-related penalty under section 6662(a), respondent

increased their self-employment income by the net business income

of Denali Company Trust.    Respondent determined that,

alternatively:    (1) The Denali Company trust is a sham with no

economic substance; (2) the Denali Company Trust is a grantor

trust; and (3) Mr. and Mrs. Norton’s attempted assignment of

income to the Denali Company Trust is not recognized for tax

purposes.

     On its 1995 return received on September 23, 1996, Denali

Company Trust reported an adjusted gross income of $116,752.     It

deducted the same amount, of which $116,452 was treated as an

income distribution.    As a result, it did not report any taxable

income in 1995.

     On its 1996 return, Denali Company Trust reported an

adjusted gross income of $171,329.      It deducted the same amount,

of which $171,029 was treated as an income distribution.     As a

result, it did not report any taxable income in 1996.

     In the notice of deficiency for 1995 and 1996, respondent

disallowed business expense deductions for depreciation, legal

and professional fees, and seminars, because respondent
                               - 12 -

determined that the Denali Company Trust did not substantiate the

amounts.    Additionally, respondent imposed an addition to tax

under section 6651(a)(1) for failure to file in 1995 and

accuracy-related penalties under section 6662(a) for 1995 and

1996.

     On their 1995 and 1996 tax returns received on September 23,

1996, and June 13, 1997, respectively, Mr. and Mrs. Norton did

not report any of the income reported by the Denali Company

Trust.   In the notice of deficiency for 1995 and 1996, respondent

increased their self-employment income by the net business income

of Denali Company Trust.    Respondent determined that,

alternatively:   (1) The Denali Company trust is a sham with no

economic substance; (2) the Denali Company Trust is a grantor

trust; and (3) Mr. and Mrs. Norton’s attempted assignment of

income to the Denali Company Trust is not recognized for tax

purposes.   Respondent also imposed an addition to tax under

section 6651(a)(1) for failure to file in 1995, and accuracy-

related penalties under section 6662(a) for 1995 and 1996.
                              - 13 -

                              OPINION

I.   Is Income Reported by the South Denali Lands Trust and
     Denali Company Trust Includable in the Gross Income of Mr.
     and Mrs. Norton?

     Petitioners have the burden of proving that they are not

liable for the deficiencies determined by respondent.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).6

     Petitioners argue that the trust documents provide a

sufficient description of the trust and the trustees’ duties, and

they are, therefore, legally enforceable because the form cannot

be ignored.   Petitioners contend that Mr. and Mrs. Norton had an

established business purpose for altering the form of SNE from a

sole proprietorship to a trust in order to protect their assets

from a decline in the economy.   Additionally, petitioners argue

that the trusts pass the economic substance test because, in

petitioners’ view, the trusts have an independent trustee; Mr.

Norton’s relationship to the property differed materially after

trust formation; an economic interest passed to the

beneficiaries; and Mr. and Mrs. Norton honored the restrictions

imposed by the trusts.




     6
        Cf. sec. 7491 is effective for court proceedings arising
in connection with examinations commencing after July 22, 1998.
Respondent contends that sec. 7491 is inapplicable because the
examinations commenced before July 22, 1998. Petitioners do not
contend that their examinations began after this date or that
sec. 7491 is applicable to their case.
                              - 14 -

     Respondent presented alternative arguments as to why Mr. and

Mrs. Norton should be taxed individually on the incomes reported

by the trusts.   First, respondent argues that the trusts are

shams and should be disregarded for tax purposes because the

trusts lack economic substance.   Second, respondent argues that

the South Denali Lands and Denali Company trusts are grantor

trusts.   Third, respondent argues that income of the South Denali

Lands and Denali Company trusts is taxable to Mr. and Mrs. Norton

on assignment of income principles.

     A fundamental principle of tax law is that income is taxed

to the person who earns it.   Commissioner v. Culbertson, 337 U.S.

733, 739 (1949); Lucas v. Earl, 281 U.S. 111, 114 (1930);

Johnston v. Commissioner, T.C. Memo. 2000-315.   An assignment of

income to a trust is ineffective to shift the tax burden from the

taxpayer to a trust when the taxpayer controls the earning of the

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

1980), affg. T.C. Memo. 1979-164.

     The Commissioner is not required to apply the tax laws in

accordance with the form a taxpayer employs where that form is a

sham or inconsistent with economic reality.   Diedrich v.

Commissioner, 457 U.S. 191, 195 (1982); Higgins v. Smith, 308

U.S. 473, 477 (1940).   Where an entity is created that has no

real economic effect and which affects no cognizable economic

relationships, the substance of a transaction involving this
                               - 15 -

entity will control over the form.      Zmuda v. Commissioner, 731

F.2d 1417, 1420 (9th Cir. 1984), affg. 79 T.C. 714, 719 (1982);

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

principles apply even though an entity may have been properly

formed and have a separate existence under local law.      Zmuda v.

Commissioner, 79 T.C. at 720; Vercio v. Commissioner, 73 T.C.

1246, 1253 (1980).

     Whether a trust lacks economic substance for tax purposes is

a factual question to be decided on the basis of the facts before

the Court.    Paulson v. Commissioner, T.C. Memo. 1991-508, affd.

per curiam 992 F.2d 789 (8th Cir. 1993) (citing United States v.

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

     We consider the following factors to determine whether a

purported trust lacks economic substance for Federal income tax

purposes:    (1) Whether the taxpayer’s relationship, as grantor,

to the property differed materially before and after the trust’s

formation; (2) whether the trust had an independent trustee; (3)

whether an economic interest passed to other beneficiaries of the

trust; and (4) whether the taxpayer felt bound by any

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

Markosian v. Commissioner, supra at 1243; Hanson v. Commissioner,

T.C. Memo. 1981-675, affd. per curiam 696 F.2d 1232 (9th Cir.

1983).   After considering each factor, we hold that the South
                              - 16 -

Denali Lands Trust and the Denali Company Trust lacked economic

substance and are shams for tax purposes.

     A.   Did the Taxpayer’s Relationship, as Grantor to the
          Property, Differ Materially Before and After the
          Formation of the Trusts?

     We find that Mr. and Mrs. Norton’s relationship, as grantors

to the property, did not differ materially before and after the

formation of the trusts.7

     Before the formation of the trusts, Mr. Norton operated SNE

as a sole proprietorship.   Mr. Norton testified that, after the

formation of the trusts, his day-to-day conduct of SNE was the

same as before the formation of the trusts.   Additionally, with

regard to the Denali Company Trust, the trustees approved a

resolution that allowed Mr. Norton to “lend” his name,

reputation, goodwill, good credit standing, licenses, and

authorizations to the Denali Company Trust.   In essence, the

Denali Company Trust was SNE and operated as such.   Further, the

Denali Company Trust would transfer its funds to SNE’s business

account that would allow Mr. Norton to sign checks in order to

pay bills and purchase items for business and personal use.     Mr.

Norton still had access to SNE’s funds, even after SNE’s assets

were transferred to the Denali Company Trust.


     7
        Mr. and Mrs. Norton are listed as the grantors on the
South Denali Lands Trust. Crystal Diversified Trust is listed as
the grantor of the Denali Company Trust. The parties stipulated
that Mr. and Mrs. Norton are the grantors of the Denali Company
Trust.
                                - 17 -

     The only restriction that the trust placed on Mr. Norton’s

decisions with regard to SNE was that he was required to obtain

authorization from Mr. Owens on large projects.     During trial,

Mr. Owens testified that he would not require or demand that SNE

operate in a certain fashion but would merely provide advice.

Mr. Owens did not forbid Mr. Norton from doing any activities

with SNE.    We find that the authorization on large projects for

SNE did not effect a material change in Mr. Norton’s relationship

to and control of the business or assets of SNE.

     B.     Did the Trust Have an Independent Trustee?

     On the basis of the record, we find that Mr. Owens and Mr.

Crockett were not independent trustees and that they did not

perform any significant duties or exercise any significant

control or power over the trusts.     The failure of a nominal

trustee to have any meaningful role in the operation of the trust

has been repeatedly cited by this Court as evidence that the

entity lacks economic substance.     See, e.g., Zmuda v.

Commissioner, 79 T.C. at 720; Para Techs. Trust v. Commissioner,

T.C. Memo. 1994-366, affd. without published opinion sub nom.

Anderson v. Commissioner, 106 F.3d 406 (9th Cir. 1997).

     First, Mr. Norton exercised control over the trustees

through his brother, David Norton, who was the protector of the

trusts.     David Norton would consult Mr. Norton with regard to

replacing the trustees.     For example, if Mr. Norton disagreed
                               - 18 -

with the trustees, Mr. Norton, through his brother, could fire

them and appoint a new trustee who would be more aligned with his

interests.   In this way, Mr. Norton was able to control the

actions of the trustees.

     Second, the record does not establish that Mr. Owens would

perform his duties as trustee independently.   Besides the

comparatively minor annual fee that Mr. Owens received as

trustee, Mr. Owens received other financial benefits from Mr. and

Mrs. Norton that could have influenced the decisions Mr. Owens

would make as trustee.   Mr. Owens sold products to, earned

commissions from, and performed subcontract labor work for SNE.

Additionally, Mr. Owens received money from Mr. and Mrs. Norton

to purchase railroad bonds through his trust, the Fall Creek

Trust.

     Third, Mr. Norton had access to the funds deposited in the

Denali Company Trust when the funds were transferred back to SNE.

As discussed above, Mr. Owens did not restrict Mr. Norton’s use

of these funds.

     C.     Did an Economic Interest Pass to Other Beneficiaries of
            the Trusts?

     We find that an economic interest did not pass to

beneficiaries of the trusts other than Mr. Norton and his family.

The ultimate beneficiaries of the South Denali Lands Trust and

the Denali Company Trust are Mr. and Mrs. Norton and their

children.    The Crystal Diversified and Finger Lake Holding Trusts
                             - 19 -

acted merely as intermediaries which passed the economic

interests from the trusts ultimately to Mr. and Mrs. Norton and

their family.

     D.   Did the Taxpayer Feel Bound by Any Restrictions Imposed
          by the Trust Itself or the Law of Trusts?

     We find that, in practice, Mr. Norton was not bound by any

restrictions imposed by the trust instruments or the law of

trusts as to the use of transferred property.   Although Mr.

Norton claimed that he needed Mr. Owens’ permission on large

projects, Mr. Owens testified that he did not forbid Mr. Norton

from doing any activity, but merely gave advice.   Mr. Norton,

therefore, was able to use the property as he desired.    Mr.

Norton’s unrestricted use of the property of the trusts

demonstrates that Mr. Norton was not, in fact, restricted in any

meaningful manner.

     Additionally, petitioners presented no credible evidence

that any purpose other than tax avoidance was served by the

trusts to which Mr. Norton transferred his assets.   Although Mr.

and Mrs. Norton argue that the main purpose of the trusts was to

protect their assets, we find it implausible that they would

relinquish control over a substantial amount of their income to a

foreign trust and trustee with whom they and Mr. Owens had no

contact if their true purpose was to protect these assets.

     We conclude that the South Denali Lands Trust and the Denali

Company Trust lacked economic substance for Federal tax purposes.
                               - 20 -

Accordingly, we hold that the trust structures of the South

Denali Lands Trust and the Denali Company Trust shall not be

respected for Federal income tax purposes, and the income from

the South Denali Lands Trust and the Denali Company Trust is

taxable to Mr. and Mrs. Norton.

II.   Are Mr. and Mrs. Norton Liable for Penalties Under Section
      6662(a)?

      Respondent determined that Mr. and Mrs. Norton are liable

for accuracy-related penalties under section 6662(a) and (b)(1)

for 1994, 1995, and 1996.    Section 6662(a) imposes a penalty in

the amount of 20 percent on the portion of the underpayment to

which the section applies.    As relevant to this case, the penalty

applies to any portion of the underpayment that is attributable

to negligence or disregard of the rules or regulations.    Sec.

6662(b)(1).    Negligence is any failure to make a reasonable

attempt to comply with the provisions of the internal revenue

laws.   Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Moreover, negligence has been described as the failure to

exercise due care or the failure to do what a reasonable and

prudent person would do under the circumstances.    Neely v.

Commissioner, 85 T.C. 934, 947 (1985).    Disregard includes any

careless, reckless, or intentional disregard of rules or

regulations.    Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.

Once the Commissioner has determined an accuracy-related penalty

pursuant to section 6662(b)(1), the taxpayer bears the burden of
                              - 21 -

proof as to such issue.   Bixby v. Commissioner, 58 T.C. 757, 791

(1972).   See supra note 6.

     In researching the trusts before purchase, Mr. and Mrs.

Norton read publications from Mr. Crockett, consulted an attorney

who had no legal knowledge of trusts, and asked advice from their

sister-in-law.   Mr. and Mrs. Norton did not contact the IRS or

consult an attorney proficient in the area as to the legality of

the trusts.   A reasonable and prudent person, under the

circumstances, would have researched the legality of the scheme

rather than rely on the word of the trust promoter.   Accordingly,

we hold that Mr. and Mrs. Norton are liable for the accuracy-

related penalties under section 6662(a).

III. Are Mr. and Mrs. Norton Liable for Additions to Tax Under
     Section 6651(a) for Failure To File in 1994 and 1995?

     Respondent determined that Mr. and Mrs. Norton are liable

for additions to tax pursuant to section 6651(a)(1) for 1994 and

1995.   Section 6651(a)(1) imposes an addition to tax for failure

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

to any extension of time for filing), unless the taxpayer can

establish that such failure is due to reasonable cause and not

due to willful neglect.   The taxpayer has the burden of proving

that the addition is improper.   Rule 142(a); United States v.

Boyle, 469 U.S. 241, 245 (1985).   Mr. and Mrs. Norton offered no

evidence showing that their failure to file was due to reasonable

cause and not due to willful neglect.   Accordingly, we hold that
                               - 22 -

Mr. and Mrs. Norton are liable for the additions to tax under

section 6651(a).

IV.   Are Mr. and Mrs. Norton Liable for Penalties Imposed Under
      Section 6673?

      Respondent requests that we impose a penalty under section

6673 on Mr. and Mrs. Norton.   Section 6673(a)(1) authorizes this

Court to require a taxpayer to pay to the United States a penalty

not to exceed $25,000 if the taxpayer took frivolous positions in

the proceedings or instituted the proceedings primarily for

delay.   A position maintained by a taxpayer in the Tax Court is

frivolous “if it is contrary to established law and unsupported

by a reasoned, colorable argument for change in the law.”

Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).     A

penalty is properly imposed when the taxpayer knew or should have

known that his claim or argument was frivolous.   See Hansen v.

Commissioner, 820 F.2d 1464, 1470 (9th Cir. 1987).

      We find that petitioners’ arguments are frivolous.   They

have caused this Court to waste its limited resources on their

erroneous views of the tax law which they should have known are

completely without merit.   In view of the foregoing, the Court

will exercise its discretion under section 6673(a)(1) and require

Mr. and Mrs. Norton to pay a penalty to the United States in the

amount of $5,000.
                             - 23 -

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                             Decisions will be

                                        entered under Rule 155.
