T.C. Memo. 2012-5



                       UNITED STATES TAX COURT



              ASHLEY M. WALKER, ET AL.,1 Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.    1465-08, 1466-08,    Filed January 9, 2012.
                    1467-08, 15055-08,
                   15056-08, 15057-08,
                   15058-08, 15395-08.



     Ashley M. Walker, pro se in docket Nos. 1465-08 and

15057-08.

     Aaron S. Walker, pro se in docket Nos. 1466-08 and 15058-08.

     Alex K. Walker, pro se in docket Nos. 1467-08 and 15056-08.




     1
      Cases of the following petitioners are consolidated
herewith: Aaron S. Walker, docket Nos. 1466-08 and 15058-08;
Alex K. Walker, docket Nos. 1467-08 and 15056-08; Donald R. and
Jennie L. Walker, docket No. 15055-08; Ashley M. Walker, docket
No. 15057-08; and Donald R. Walker, LLC, Donald R. Walker, Tax
Matters Partner, docket No. 15395-08.
                               - 2 -

     Donald R. and Jennie L. Walker, pro sese in docket No.

15055-08.

     Donald R. Walker, pro se in docket No. 15395-08.

     Stewart Todd Hittinger, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies,

penalties, and additions to tax in the individual petitioners’

Federal income taxes as follows:

Ashley M. Walker (Docket No. 1465-08)

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

     2003      $23,267         $4,653.40           $2,323.65

Aaron S. Walker (Docket No. 1466-08)

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

     2003      $16,443         $3,288.60           $1,109.55


Alex K. Walker (Docket No. 1467-08)

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

     2003      $25,387         $5,077.40           $2,692.65
                              - 3 -

Donald R. and Jennie L. Walker (Docket No. 15055-08)

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

     2003     $362,927         $72,585.40          $46,620.60
     2004      139,149          27,829.80              ---
     2005      141,734          28,346.80              ---

Alex K. Walker (Docket No. 15056-08)

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

     2004      $48,546          $9,709.20                ---
     2005       56,812          11,362.40                ---

Ashley M. Walker (Docket No. 15057-08)

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

     2004      $43,888          $8,777.60                ---
     2005       50,067          10,013.40                ---

Aaron S. Walker (Docket No. 15058-08)

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

     2004      $28,062         $5,612.40                 ---
     2005       31,017          6,203.40                 ---

In a Notice of Final Partnership Administrative Adjustment (FPAA)

sent to Donald R. Walker, LLC (Walker LLC), respondent determined

that income of the Walker LLC should be increased by $871,737,

$685,893, and $751,453 for 2003, 2004, and 2005, respectively.

After concessions, the primary issue for decision is whether

L & R Investments, LLC (L & R), is an entity with a valid

business purpose with income taxable to the respective

petitioners in the percentages claimed on their tax returns or is
                                - 4 -

part of a scheme lacking economic substance, created for the

purpose of avoiding Federal income taxes and disregarded for tax

purposes.    If L & R is disregarded, the dental practice income of

the LLC shall be taxed to Donald R. Walker and Jennie L. Walker

(senior Walkers) and not to the other individual petitioners.      In

that event, we must decide whether the senior Walkers are liable

for the section 6662(a) penalties respondent determined.

     Petitioners failed to appear for trial and were declared in

default.    Respondent presented evidence in relation to the

penalty issues.    As a result, and after petitioners failed to

respond to an order to show cause giving them an opportunity to

object, the cases were submitted on the stipulation of facts that

had been filed on an earlier occasion and on the testimony

respondent presented.

     The stipulation executed by the parties includes

computations of the deficiencies in the individual petitioners’

tax liabilities in the event that the Court finds that L & R is

disregarded for tax purposes.    Any issues not addressed by the

stipulation or in this opinion are decided against petitioners by

reason of their defaults.    See Rules 123, 149.   All Rule

references are to the Tax Court Rules of Practice and Procedure.

All section references are to the Internal Revenue Code.
                               - 5 -

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    Alex

K. Walker resided in Florida and the other individual petitioners

resided in Indiana when their petitions were filed.    The

principal place of business of the Walker LLC was in Indiana when

its petition was filed.

     The senior Walkers were married to each other at all

material times.   They are the parents of four children, only

three of whom, Ashley M. Walker, Aaron S. Walker, and Alex K.

Walker (Walker children), are petitioners.    During 2003, the

Walker children ranged in age from 24 to 29 years old.

     Petitioner Donald R. Walker is a licensed and practicing

dentist and oral surgeon.   He has practiced dentistry

and oral surgery since about 1975.     Before the formation of the

Walker LLC, Donald R. Walker operated his dental and oral surgery

practice in the name of Donald R. Walker, DDS, Inc., of which he

was the only shareholder.   Donald R. Walker, DDS, Inc., filed its

Federal income tax returns on Forms 1120S, U.S. Income Tax Return

for an S Corporation.   The income from the Donald R. Walker, DDS,

Inc. Forms 1120S was reported on Schedules K-1, Shareholder’s

Share of Income, Deductions, Credits, etc., and flowed through to

the joint individual income tax returns the senior Walkers filed.
                                 - 6 -

     The Walker LLC was created with the assistance of an

attorney, Scott C. Cole, who explained the purported advantages

of using multiple limited liability companies to own and operate

the dental and oral surgery practice.     The entities petitioners

created were patterned after entities utilized by Scott C. Cole

and his brother, Darren T. Cole, to avoid income and employment

taxes on their law practice, as described in detail in Cole v.

Commissioner, T.C. Memo. 2010-31, affd. 

(7th Cir.

2011).

     Beginning with the taxable year 2000, through and including

the year 2008, all of the income from Donald R. Walker’s dental

and oral surgery practice was reported on partnership returns of

the Walker LLC.     During the years in issue the dental and oral

surgery services performed and billed by the Walker LLC were done

pursuant to professional licenses and certificates obtained by

Donald R. Walker.

     The returns of the Walker LLC for 1999 through 2006 reported

that the LLC was owned 1 percent by Donald R. Walker and 99

percent by L & R.    The ordinary business income of the dental

practice, as reflected on the partnership returns of the Walker

LLC for 1999 through 2006, was allocated 1 percent to Donald R.

Walker and 99 percent to L & R.
                                - 7 -

     L & R was organized in the State of Indiana on December 28,

1999.    Scott C. Cole was the organizer of L & R.   Donald R.

Walker was the only individual that contributed any property to

L & R when it was organized.    No other individuals ever

contributed anything to the entity in exchange for interests in

L & R.

     L & R conducted no business in its own name.     It had no

employees.    It was not involved in the practice of dentistry,

other than by its alleged ownership of 99 percent of the Walker

LLC, and did not have any licenses or permits to practice

dentistry or any other business.    L & R filed Forms 1065, U.S.

Return of Partnership Income, for 2000 through 2006, prepared by

Scott C. Cole.    All of the gross receipts L & R reported during

the years in issue were attributed to the Walker LLC.

     Schedules K-1, Partner’s Share of Income, Credits,

Deductions, etc., attached to L & R’s partnership returns

reported that the entity was owned as follows:    16 percent by the

oldest daughter of the senior Walkers; 16 percent by Ashley M.

Walker; 16 percent by Aaron S. Walker; 16 percent by Alex K.

Walker; 16 percent by Jennie L. Walker; and 20 percent by Donald

R. Walker.    The Walker children reported the income shown on the

Schedules K-1 on personal income tax returns prepared by Scott C.

Cole from information provided by Donald R. Walker.     The

individual petitioners’ returns for 2003 were due, pursuant to
                                - 8 -

filing extensions obtained, by August 15, 2004, but they were not

filed until October 18, 2004.

     Reporting of L & R’s income on the individual income tax

returns of the Walker children resulted in significant income tax

liabilities being reported on those returns for each of the years

2003, 2004, and 2005.   However, total taxes reported on the

income earned from Donald R. Walker’s dentistry and oral surgery

practice were reduced as a result of reporting that income as

distributable among the owners of L & R.

     Donald R. Walker paid the tax liabilities reported on each

of the Walker children’s Federal income tax returns for the years

2003, 2004, and 2005.   The Walker children did not receive

distributions of funds, either by cash or check, from L & R.

However, they did not suffer adverse financial impact from the

reporting of L & R’s income on their tax returns because their

father paid the resulting tax obligations.

      Petitioner’s oldest daughter was married to a lawyer and

did not want any income or loss from L & R reported as income or

loss to her, although she was not opposed to having certificates

of ownership issued in her name.   Consequently, no income from

L & R was reported as attributable to her ownership interest in

the entity, and she is not a party to these proceedings.
                                 - 9 -

     The notices of deficiency issued to the Walker children take

a “whipsaw” position with respect to the portions of income

reported from L & R and the inclusion of all the income of L & R

as attributable to Donald R. Walker.     Respondent moved for

consolidation of these cases and acknowledges that the income of

the Walker LLC that flows through to L & R should be taxed only

once; thus to the extent the income is taxable to Donald R.

Walker, it should not be taxed to the Walker children.

     Pursuant to the stipulation of the parties, deductions are

disallowed for contributions to retirement plans of $67,488

claimed on the 2003 Form 1065 filed on behalf of L & R and for

automobile and truck expenses of $12,336 and telephone expenses

of $3,446 claimed on the 2004 Form 1065 filed on behalf of L & R.

     The underpayments resulting from disregarding L & R and

disallowing the deductions specified in the preceding paragraph

are in excess of $5,000 and more than 10 percent of the tax

required to be shown on the tax returns of the senior Walkers for

each of the years in issue and thus are substantial

understatements of income tax for purposes of section 6662(d).

The senior Walkers have not argued or shown reasonable cause for

the underpayments of tax.   Their persistence in underreporting

their tax liabilities after the notices of deficiency were sent

and the petitions were filed negates good faith within the

meaning of section 6664(c)(1).
                               - 10 -

                               OPINION

Preliminary Matters

     The procedural history of these cases is set out here to

explain why the facts found are summary.     The petitions in these

cases were filed by then counsel of record for petitioners during

the first 6 months of 2008.   In September 2008 different counsel

appeared for petitioners, substituting for counsel who had filed

the petitions.   By notice served October 21, 2008, the cases were

set for trial in Indianapolis, Indiana, on March 23, 2009.       When

the cases were called for trial, the parties reported that they

had reached a basis of settlement.      They were ordered to submit

their proposed decisions or to file reports by June 26, 2009.      On

June 8, 2009, Scott C. Cole was substituted as counsel for

petitioners.   On August 21, 2009, respondent reported that

petitioners no longer wished to settle the cases.

     By notice served November 25, 2009, the cases were set for

trial in Indianapolis on May 3, 2010.     The Court’s standing

pretrial order was attached to the notices setting the cases for

trial and contained express directions about pretrial preparation

and deadlines for pretrial memoranda and other matters.     The

notices and orders warned of the consequences of failing to

appear for trial and incorporated reference to Rule 133, which

provides in relevant part:    “A motion for continuance, filed 30

days or less prior to the date to which it is directed * * *
                                - 11 -

ordinarily will be deemed dilatory and will be denied unless the

ground therefor arose during that period or there was good reason

for not making the motion sooner.”       The standing pretrial orders

also required that all documents filed after the notice of trial

be served on all other parties, with a certificate of service as

required by Rule 21(b).

     On March 17, 2010, respondent moved for consolidation of the

cases for trial, briefing, and opinion.      Although ordered to

respond, petitioners did not do so.      The motion to consolidate

was granted.   Rule 141(a) sets forth rules applicable to filing

documents in consolidated cases.

     In a conference call before the date of trial and on the

record on May 3, 2010, the Court discussed with the parties the

apparent applicability of Rule 24(g) with regard to Scott C.

Cole’s representation of the senior Walkers, on the one hand, and

the Walker children, on the other.       Thereafter, Scott C. Cole was

withdrawn as counsel for the Walker children but continued to

represent the senior Walkers.    The cases were continued, but the

parties were directed to file a stipulation of facts.      The

stipulation was filed May 21, 2010, and was signed by the Walker

children and the senior Walkers, as well as by Scott C. Cole.

Among other things, the stipulation disclosed that Scott C. Cole

had prepared the tax returns reflecting the allocation of income

disputed in these cases.
                               - 12 -

     By notice served November 17, 2010, the cases were set for

trial on April 18, 2011, and the standing pretrial order was

again served on the parties.   On April 1 and 7, 2011, the Court

received from Scott C. Cole documents seeking a continuance, but

the documents could not be filed because they did not comply with

the standing pretrial order or Rule 21(b) or 141(a) and because

Scott C. Cole purported to act on behalf of the Walker children

despite his prior withdrawal from representing them.    The

documents were returned unfiled, as was a late pretrial

memorandum that was similarly defective.

     The cases were called for trial on April 18, 2011.    Scott C.

Cole and Donald R. Walker appeared.     Darren T. Cole purported to

appear on behalf of the Walker children, but he failed to provide

properly executed entries of appearance as required by Rule

24(a)(3).   No motion for continuance was made or mentioned.   With

the acquiescence of all present, the trial was set for the

following afternoon for testimony of Donald R. Walker with

respect to the penalties at issue in the cases.

     The cases were called for trial on the afternoon of April

19, 2011.   Donald R. Walker was not present.   Scott C. Cole moved

to withdraw as counsel for the senior Walkers.    Darren T. Cole

was present and purported to speak on behalf of the Walker

children but still failed to execute proper entries of

appearance.   Both Scott C. Cole and Darren T. Cole represented
                               - 13 -

that their clients wished to have the cases submitted on the

stipulation.    Scott C. Cole was withdrawn as counsel for the

senior Walkers.    Both Scott C. Cole and Darren T. Cole left the

courtroom when respondent’s counsel commenced an opening

statement.    Respondent presented evidence that erroneous tax

reporting by petitioners continued for 2007 and 2008, showing a

continuing pattern of improper tax reporting.

     By order served April 28, 2011, petitioners were ordered to

“show cause in writing, if any they have, why these cases should

not be decided on the Stipulation of Facts filed May 21, 2010,

and the authorities and arguments set forth in respondent’s

Pretrial Memorandum.”    The order also stated that “such showing

shall include any motions, memoranda of law, or briefs that

petitioners wish for the Court to consider in deciding these

cases.”   The deadline for response was extended to August 26,

2011, on the motion of Donald R. Walker, who represented that he

wished to obtain counsel to help him file a response to the order

to show cause.    New counsel (the fourth in these cases) entered

an appearance for the senior Walkers on July 27, 2011, but no

response to the order to show cause was received from any

petitioner.    On September 27, 2011, new counsel moved to

withdraw.

     As a result of the foregoing events, the Court concludes

that petitioners have failed properly to prosecute these cases.
                              - 14 -

See Rules 123, 149.   It also appears that petitioners have

maintained these cases primarily for delay.   See sec. 6673.

However, because the record contains the stipulation of facts and

the testimony respondent presented, the issues addressed in the

stipulation will be discussed in this opinion.

Deficiencies

     Approximately 1 month before submission of these cases, in

Cole v. 

(Cole cases), the Court of

Appeals for the Seventh Circuit described the basic legal

principles applicable here as follows:

     Under the assignment of income doctrine, taxpayers may
     not shift their tax liability by merely assigning
     income that the taxpayer earned to someone else.
     Kenseth v. Comm’r, 

, 884 (7th Cir.
     2001) (citing Lucas v. Earl, 

, 114-15
     (1930); United States v. Newell, 

, 919-20
     (7th Cir. 2001)). In Lucas, the Supreme Court held
     that a taxpayer’s salary may not escape tax “by
     anticipatory arrangements and contracts however
     skillfully devised to prevent the salary when paid from
     vesting even for a second in the man who earned 

. Tax law makes “no distinction
     . . . according to the motives leading to the
     arrangement by which the fruits are attributed to a
     different tree from that on which they grew.” 

In Griffiths v. Helvering, the Court refused to
     allow “the refinements of title” to determine a
     taxation issue and focused instead on the “actual
     command over the property taxed.” 

, 357
     (1939) (quoting Corliss v. Bowers, 

, 378
     (1930)). The Court held that “a lawyer’s ingenuity
     devised a technically elegant arrangement” that created
     “an intricate outward appearance . . . to the simple
     sale . . . and the passage of money.” 

. [Parallel citations omitted.]
                               - 15 -

Many more cases illustrating the applicable legal principles

could be cited, but in the absence of any other authorities cited

or arguments made by petitioners, it is unnecessary to belabor

the obvious.   The stipulated facts in these cases compel the

conclusion that the income of L & R, which resulted solely from

services performed by Donald R. Walker in his dentistry and oral

surgery practice, should have been reported by and is taxable to

the senior Walkers on their joint tax returns for the years in

issue.   The attempt to reduce total income taxes and avoid

employment taxes by creating a limited liability company with the

Walker children, whose tax returns were prepared by Scott C. Cole

and whose reported taxes were paid by their father, must fail.

     Petitioners suggest that these cases are distinguishable

from the Cole cases.   The most obvious distinction is that Scott

C. Cole and his brother and law partner Darren T. Cole were

penalized under section 6663 for fraud in their cases, whereas

only the accuracy-related penalty of section 6662 is disputed in

these cases.   See Cole v. Commissioner, T.C. Memo. 2010-31.

(Only Scott C. Cole and his wife appealed our decision, so the

Court of Appeals opinion relates only to their case.)   Other

factual distinctions may be found in the detailed findings in the

Cole cases because they were decided after a trial with testimony

from the taxpayers.    But the essential patterns are

indistinguishable, and the factual distinctions do not make a
                                  - 16 -

difference.    In these cases, as in the Cole cases, the use of

multiple entities and erroneous tax reporting based on fictitious

distribution of taxable income did not reflect any change in the

professional practices of the taxpayers.       The only apparent

purpose of L & R was tax avoidance.        Thus L & R lacked economic

substance.    L & R is therefore disregarded for tax purposes.     The

stipulation setting forth the liabilities of petitioners in the

event that we find “that L & R is not an entity with a valid

purpose and is part of a scheme lacking economic substance” will

be given effect.

Penalties

     Respondent has the burden of production with respect to

penalties.    See sec. 7491(c).    The section 6651(a) additions to

tax for late filing of the 2003 returns have not been contested.

Although petitioners failed to raise any arguments concerning the

section 6662 accuracy-related penalties, we address those

briefly.

     The stipulation establishes that the underpayments of tax by

the senior Walkers on their returns for the years in issue are

substantial understatements of income tax within the meaning of

section 6662(d)(1).    Respondent has also argued that the senior

Walkers were negligent in failing to report the income earned by
                               - 17 -

Donald R. Walker, in claiming unsubstantiated deductions, and in

failing to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.     See sec. 6662(c).

     Once the Commissioner has met the burden of production, as

respondent has in these cases, the burden of proof that the

penalties are not appropriate remains with the taxpayer.     Higbee

v. Commissioner, 

, 446-447 (2001).     To avoid the

penalties, petitioners would have to show that they had

reasonable cause and that they acted in good faith.     See sec.

6664(c)(1).   They have not even attempted to show either.    The

penalties will be sustained.   To reflect the foregoing,


                                        Decisions will be entered

                                consistent with the stipulation

                                and pursuant to Rule 155.