Petitioners herein are on the cash method of accounting, 79 T.C. 888">*913 and are therefore entitled to deduct allowable items of expense under either section 162 or section 212 in the year in which the expenses are paid in cash or its equivalent. Sec. 1.461-1(a)(1), Income Tax Regs.; Eckert v. Burnet, 283 U.S. 140">283 U.S. 140 (1931). However, in order to support a deduction under these provisions, the requisite "payment" must be one in substance, and not merely in form. As we have stated in Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742, 54 T.C. 742">754 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940">404 U.S. 940 (1972):

It has repeatedly been held that the substance of a transaction rather than the form in which it is cast is determinative of tax consequences unless it appears from an examination of the statute and its purpose that form was intended to govern * * *

In determining 1982 U.S. Tax Ct. LEXIS 13">*60 whether petitioners truly paid $ 47,400 in 1976 for the purchase of the tax package, petitioners would have us focus our attention solely on the fact that this amount was transferred by petitioner to ITBC in exchange for the tax package materials. However, the true substance of a particular transaction may not always be gleaned from a myopic examination of a single event. Where a formally separate transaction is merely one step in a series of integrated and interdependent steps which are focused on a particular end result, an examination of that individual event, in isolation from the several integrated steps, and a determination of Federal tax consequences based on such an isolated examination, could lead to results which do not comport with economic reality. In such a case, the incidence of Federal taxation must be determined by reference to the overall economic result of the series of interrelated transactions; and the ostensibly separate steps leading to this overall result will not be afforded independent significance. As we have stated in Lazarus v. Commissioner, 58 T.C. 854">58 T.C. 854, 58 T.C. 854">864 (1972), affd. 513 F.2d 824">513 F.2d 824 (9th Cir. 1975):



"Technical considerations, niceties of the law 1982 U.S. Tax Ct. LEXIS 13">*61 of trusts or conveyances, or the legal paraphernalia which inventive genius may construct" must not frustrate an examination of the facts in light of the economic realities. Helvering v. Clifford, [309 U.S. 331">309 U.S. 331] at 344. Moreover, in ascertaining such realities, a series of related transactions may not be broken into bits and pieces but must be viewed as a whole. Minnesota Tea Co. v. Helvering, 302 U.S. 609">302 U.S. 609, 302 U.S. 609">613 (1938); Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685">214 F.2d 685, 214 F.2d 685">691 (5th Cir. 1954).

79 T.C. 888">*914 In the present case, it is abundantly clear that petitioner's transfer of $ 47,400 to ITBC was only one step in a series of interdependent steps which was focused on a particular end result. Mr. Bumpus and Mr. Huff conceived the overall tax package purchase and sale plan in November 1976. According to their plan, Mr. Bumpus, Mr. Huff, and the prospective purchaser would first decide on an appropriate "price" to charge the prospective purchaser. Once this price was established, the purchaser would "borrow" the tax package purchase price from one of Mr. Bumpus' controlled entities and then purchase a tax package from one of Mr. Huff's controlled entities, or vice versa, using the proceeds 1982 U.S. Tax Ct. LEXIS 13">*62 of the "loan" to pay the purchase price. At the time the transactions were entered into, the parties intended that the "purchaser-borrower" would not be required to repay the "loan" to the original "lender." In fact, substantially all individual purchasers' promissory notes were given by the lending entity in the above plan to a relative of, or an entity controlled by, the individual purchaser.

Prior to entering into the purchase of the tax package in 1976, petitioner was approached by Mr. Bumpus and informed about the planned sale. Pursuant to this prearranged plan, petitioner "borrowed" the tax package purchase price from Greenwich, a Bumpus-controlled foreign "entity," and simultaneously used the "loan" proceeds to purchase the tax package materials from ITBC, a Huff-controlled "entity." Although petitioner signed an unsecured deferred interest and principal note as evidence of the above "loan," it was understood from the outset that no amounts would ever be required to be repaid to the lending entity (i.e., Greenwich) on this note. In fact, only 5 months after petitioner signed this note, and before any principal or interest was paid by petitioner, Greenwich gave the note to Swiss 1982 U.S. Tax Ct. LEXIS 13">*63 International, an entity entirely controlled by petitioner.

The above series of transactions was thus entirely prearranged, and there is little doubt that petitioner would not have 79 T.C. 888">*915 agreed to the purchase if any one of the integrated steps in the overall plan had been omitted. ²² It is therefore clear that the loan and petitioner's transfer of the loan proceeds to ITBC in exchange for the tax package materials, together with the gift by Greenwich of the promissory note to Swiss International, must be amalgamated and the Federal tax effect of this series of transactions determined by reference to their end result.

When viewed in this light, it is apparent that petitioner's "payment" of $ 47,400 to ITBC was a payment merely in form and not in substance. In terms of economic reality, petitioner's "purchase" cost him nothing.

Petitioners would argue that, even viewed from this perspective, the "payment" of $ 47,400 represented 1982 U.S. Tax Ct. LEXIS 13">*64 real economic cost. In support of this contention, petitioners point out that petitioner signed a promissory note when he "borrowed" the purchase price from Greenwich and that, although this note was thereafter given to Swiss International, it nonetheless represents bona fide indebtedness.

Petitioners' view of things is, of course, tenable only if a genuine debt in fact existed. "Whether a transfer of money creates a bona fide debt depends upon the existence of an intent by both parties, substantially contemporaneous to the time of such transfer, to establish an enforceable obligation of repayment." Delta Plastics Corp. v. Commissioner, 54 T.C. 1287">54 T.C. 1287, 54 T.C. 1287">1291 (1970). The burden of proof of establishing the requisite intent is on petitioners (Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933)), and "formal evidences of indebtedness are at best clues to proof of the ultimate fact." C. M. Gooch Lumber Sales Co. v. Commissioner, 49 T.C. 649">49 T.C. 649, 49 T.C. 649">656 (1968).

We hold that petitioners have failed to meet their burden of proof on this point. In fact, the substantial weight of the evidence leads directly to the conclusion that no true liability ever existed. The terms and circumstances of the "loan," 1982 U.S. Tax Ct. LEXIS 13">*65 itself, clearly demonstrate that the "loan" was not bona fide. Mr. Bumpus testified to the effect that, from the outset, it was intended that petitioner would not be required to pay any 79 T.C. 888">*916 amounts to the lending entity on the note. Rather, it was intended that the "promissory note" would be placed within the "borrower's" control prior to any payments falling due on the "note." In fact, this "note" was given to Swiss International, an entity entirely controlled by petitioner, only 5 months after the date of the original "loan" and before any amounts of principal or interest fell due on the "loan." No business purpose whatsoever has been shown for this gift, nor for Mr. Bumpus' apparent largesse, and it is quite clear from all of the facts and circumstances in this case that the parties never intended to impose any real liability on petitioners to repay this "loan." The transfer of the "promissory note" was simply the manner which the parties chose to effectuate their preconceived plan to return the "note" to petitioner's control before any payments fell due.

This lack of intent "to establish an enforceable obligation of repayment" at the time of the original transfer is, itself, enough 1982 U.S. Tax Ct. LEXIS 13">*66 to lead us to conclude that no bona fide debt was created. 54 T.C. 1287">Delta Plastics Corp. v. Commissioner, supra. However, other factors lend further support to our ultimate finding in this regard. The promissory note, itself, was unsecured and no payment of principal or interest was to fall due for 25 years. It is highly unlikely that terms such as these would be offered in arm's-length lending. Moreover, while petitioner contends that he truly owes and intends to repay the note to Swiss International, he did not treat it as a true liability. He did not list this amount on any of the three financial statements he prepared in 1978 or 1981 in attempting to secure personal loans from banks. Two of these financial statements were submitted by petitioner as "full, true and correct [statements] of his financial condition on the date stated." The third financial statement was submitted as "true and [representing] a total disclosure of all information requested." Moreover, petitioner did not list this amount as a liability in the divorce petition that he filed with the Alaska Superior Court on December 5, 1980.

Against the above factual backdrop, we have no difficulty in concluding that no genuine 1982 U.S. Tax Ct. LEXIS 13">*67 debt was ever created. Petitioner's "liability" was at all times, and continues to be, a mere paper liability without substance. Cf. Karme v. Commissioner, 73 T.C. 1163">73 T.C. 1163 (1978), affd. 673 F.2d 1062">673 F.2d 1062 (9th Cir. 1982).

79 T.C. 888">*917 Since we find that petitioner's "liability" on the $ 47,400 "promissory note" was without substance, it necessarily follows that, at the end of the integrated series of steps which constituted the tax package "purchase," petitioner's economic position remained exactly the same as it had been at the outset. There was, in fact, no "payment" of $ 47,400 by petitioner, and the deduction under either section 162 or section 212 will therefore be disallowed. ²³

II. 1977

We must next decide whether petitioners are entitled to deduct the $ 11,000 they paid for the purchase of the ATES package. Petitioners contend 1982 U.S. Tax Ct. LEXIS 13">*68 that these amounts are deductible under section 212(2) as costs incurred to manage, maintain, and conserve income-producing property, or under section 212(3) as costs incurred for tax advice. Respondent contends that the $ 11,000 payment represented a personal expenditure and is therefore rendered nondeductible by section 262. Additionally, respondent contends that, even assuming that a portion of the expense was incurred to secure tax advice under section 212(3), petitioners have failed to show what portion of the cost was incurred specifically for that purpose and, therefore, argues that the entire deduction must be disallowed. Moreover, respondent maintains that the deduction should be denied in any event because the expenditures cannot be considered "ordinary and necessary" as required by section 212.

We will initially consider petitioners' argument under section 212(2). Section 212(2)allows a deduction for all ordinary and necessary expenses paid for the management, conservation, or maintenance of property held for the production of income. Petitioners have the burden of proving that the amounts in dispute were both "ordinary and necessary" and were expended for the purposes 1982 U.S. Tax Ct. LEXIS 13">*69 designated in the statute. Rule 79 T.C. 888">*918 142(a); 290 U.S. 111">Welch v. Helvering, supra.Since we think petitioners have failed to establish that the $ 11,000 expenditure in any way related to the management, conservation, or maintenance of income producing property, we need not consider whether the expenditure was "ordinary and necessary" within the meaning of section 212(2).

Initially, it is clear that the $ 11,000 payment did not relate to the management or conservation of income producing property. The materials and assistance petitioners received in exchange for the $ 11,000 purchase price related solely to restructuring the form in which their property was to be held. Petitioners' actual transfers of property to the "business trust organizations" did not, in substance, alter the management or economic ownership of the property. It is well established that expenses paid for advice and assistance which concerns merely rearranging title to property relates neither to the management nor conservation of such property under section 212(2). Schultz v. Commissioner, 50 T.C. 688">50 T.C. 688, 50 T.C. 688">699-700 (1968), affd. per curiam 420 F.2d 490">420 F.2d 490 (3d Cir. 1970); Epp v. Commissioner, 78 T.C. 801">78 T.C. 801 (1982); Luman v. Commissioner79 T.C. 846">79 T.C. 846 (1982).

Nor 1982 U.S. Tax Ct. LEXIS 13">*70 is petitioner's testimony that he was motivated to purchase the tax package materials and create the "business trust organizations" by his desire to minimize probate expenses and isolate his assets from potential malpractice liability sufficient to sustain petitioners' burden of proving that the expenditure related to the maintenance or conservation of income producing property. ²⁴ Petitioners have completely failed to show what, if any, probate expenses could be saved by the creation of these "entities," and have also failed to show that the creation of these "entities" would, in fact, serve to insulate the assets transferred thereto from potential malpractice liability. Moreover, the deduction provided by section 212(2) applies to expenditures for protection or maintenance of the property, itself, not to expenditures relating to a taxpayer's retention of ownership of the property. 78 T.C. 801">Epp v. Commissioner, supra; United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 372 U.S. 39">4479 T.C. 888">*919 (1963); Reed v. Commissioner, 55 T.C. 32">55 T.C. 32, 55 T.C. 32">42 (1970). Thus, even assuming petitioners are correct when they argue that the transfers of property to the "business trust organizations" would serve to insulate such property from any 1982 U.S. Tax Ct. LEXIS 13">*71 liability arising from petitioner's practice of dentistry, expenses incurred to transfer title to property to protect it against potential malpractice claims are not deductible under section 212(2). 78 T.C. 801">Epp v. Commissioner, supra.See also Wallace v. Commissioner, 56 T.C. 624">56 T.C. 624, 56 T.C. 624">632 (1971); Cobb v. Commissioner, 10 T.C. 380">10 T.C. 380 (1948), affd. 173 F.2d 711">173 F.2d 711 (6th Cir. 1949), cert. denied 338 U.S. 832">338 U.S. 832 (1949). The deduction must therefore be disallowed under section 212(2).

Section 212(3)allows a deduction for ordinary and necessary expenses paid or incurred in connection with the determination, collection, or refund of any tax. Once again, petitioners have the burden of proving that the disputed payment was both "ordinary and necessary" and expended for the purposes designated in the statute. Rule 142(a); 290 U.S. 111">Welch v. Helvering, supra.

Petitioners 1982 U.S. Tax Ct. LEXIS 13">*72 contend that the cost of the ATES package is deductible under section 212(3) since it was paid, at least in part, for Federal tax planning. It is true that ordinary and necessary expenses paid for Federal tax planning are deductible under section 212(3). See Merians v. Commissioner, 60 T.C. 187">60 T.C. 187 (1973); Collins v. Commissioner, 54 T.C. 1656">54 T.C. 1656 (1970); 50 T.C. 688">Schultz v. Commissioner, supra.However, the ATES package was marketed as a device by which a purchaser thereof could isolate his assets from liability, avoid probate costs (exclusive of estate taxes), as well as reduce his Federal tax liability. Moreover, petitioner has testified that he was motivated, in part, to purchase the package by his desire to isolate his assets from malpractice liability and reduce probate costs. To the extent that the amount in dispute was paid for these purposes, they clearly fall outside of the scope of section 212(3).

Where a petitioner sustains his burden of proof only with respect to a portion of a particular expenditure, and the record contains sufficient evidence so that a reasonable allocation between the deductible and nondeductible portions of a particular expense can be made, we will make an allocation, 1982 U.S. Tax Ct. LEXIS 13">*73 and allow the deduction in part. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). Where, however, the record provides no 79 T.C. 888">*920 reasonable basis upon which we can make such an allocation, the deduction must be disallowed in full. 78 T.C. 801">Epp v. Commissioner, supra; 79 T.C. 846">Luman v. Commissioner, supra; Zmuda v. Commissioner, 79 T.C. 714">79 T.C. 714 (1982).

Petitioners have failed to provide any rational method by which the $ 11,000 payment could be allocated between what they contend to be the deductible portion of the expenditure and the nondeductible portion. Thus, even assuming that a portion of the expense in issue falls within the provisions of section 212(3), no portion of the expense can be allowed. 78 T.C. 801">Epp v. Commissioner, supra; 79 T.C. 846">Luman v. Commissioner, supra; 79 T.C. 714">Zmuda v. Commissioner, supra.

Respondent's disallowance of the deduction relating to the $ 11,000 ATES package purchase price will therefore be sustained.

A synopsis of the facts and the parties' respective legal arguments with respect thereto will aid in placing the disputed issues in their proper perspective.

Early 1982 U.S. Tax Ct. LEXIS 13">*74 in 1977, petitioners traveled to Belize in Central America and executed documents which purportedly created three "business trust organizations," namely: Professional Management, National Service, and Swiss International. These organizations were allegedly funded with a total of $ 300 and, by their specific terms, were subject to total, unrestricted dominion and control exercisable by petitioner. No other individual had authority to act on behalf of these organizations, nor had any beneficial interest therein. They remained dormant until September 1977.

On September 2, 1977, petitioner executed documents in Alaska which purportedly created two more "business trust organizations." These organizations were likewise, by their specific terms, subject to the total and unrestricted control of petitioner and no other individual was vested with authority to act on behalf of these organizations. With respect to all five of these organizations, petitioner, by the specific terms of the establishing documents, was empowered to deal with the trust property without restraint. In fact, all of the transactions 79 T.C. 888">*921 which occurred among these organizations in 1977 were conceived of, executed by, and 1982 U.S. Tax Ct. LEXIS 13">*75 performed solely by petitioner either in his individual capacity or ostensibly in his capacity as trustee or executive trustee of one or more of the organizations. The establishing documents make it clear that no attempt was made to separate legal and equitable title in the property transferred to these organizations.

On September 2, 1977, the same date the documents were executed which purportedly established Professional Services, petitioner executed documents, including a quitclaim deed, which purported to transfer to himself as executive trustee of Professional Services, all of the real property and equipment which he was then using in his practice of dentistry. This quitclaim deed was not recorded until late in 1979. Shortly thereafter, petitioner, in his capacity as trustee of Professional Management, which was trustee of National Service, entered into a contract with himself, as trustee of Professional Services, whereby National Service promised to provide management services to Professional Services for a fee of $ 16,000 per month during the remaining months of 1977. Then, on September 10, 1977, petitioner, as executive trustee of Professional Services, executed a lease 1982 U.S. Tax Ct. LEXIS 13">*76 agreement under which he leased back to himself, individually, for his use in the practice of dentistry, the building and equipment that he had previously conveyed to Professional Services. Additionally, Professional Services agreed to provide petitioner with "management services." These services were to be rendered by petitioner, either in his capacity as executive trustee of Professional Services, or in his capacity as trustee of Professional Management, which was trustee of National Service, which had a contract to provide management services to Professional Services. After petitioner's purported transfer of his property to Professional Services, he continued to use that property in the same manner as he had prior to the transfer.

Although payments required under the contract between Professional Services and petitioner totaled $ 89,999 in 1977, petitioner transferred only $ 85,000 to Professional Services in that year, and the monthly transfers did not comply with those required under the contract terms. Of the $ 85,000 transferred to Professional Services, $ 64,000 remained in Professional Services only for a theoretical instant. Checks totaling $ 64,000 79 T.C. 888">*922 were written against 1982 U.S. Tax Ct. LEXIS 13">*77 Professional Services' account payable to National Service on the same day as the original transfers of checks totaling $ 85,000 to Professional Services. This same $ 64,000 was then transferred by petitioner from National Service to Swiss International, and from Swiss International to Alaska Rental on the same day that the funds were originally transferred to Professional Services. Of this $ 64,000 circulated through these entities, $ 59,000 was transferred from Alaska Rentals to petitioner on the same day as the original transfer of the funds to Professional Services. An additional $ 3,500 of the amount circulated to Alaska Rentals was transferred to petitioner several weeks after the original transfer, but before the close of the 1977 tax year.

Petitioners claimed $ 88,000 of the amounts due under their contract with Professional Services as deductible business expenditures in various ways on their 1977 joint income tax return, but now concede that only the $ 85,000 actually paid is allowable. Respondent, in his statutory notice of deficiency, disallowed these claimed deductions in their entirety. In addition, respondent added to petitioners' income the adjusted taxable income 1982 U.S. Tax Ct. LEXIS 13">*78 of Professional Services, as determined by respondent.

Respondent accepted the gross income of $ 85,000 reported by Professional Services (the amount paid to it by petitioners), but disallowed certain deductions claimed in its return, including the $ 64,000 fee paid to National Service.

After concessions, the only remaining adjustment to Professional Services' income which is in issue is the claimed deduction of $ 64,000, and it is this same amount (plus the allowable trust exemption of $ 100) which respondent also added to petitioners' income, as noted in the preceding paragraph. ²⁵

In support of the above determinations, respondent proffers two alternative legal arguments. First, and primarily, respondent contends that Professional Services is a sham and is not entitled to be recognized for Federal tax purposes. Respondent argues that Professional Services, in conjunction with petitioner's 79 T.C. 888">*923 other controlled "business trust organizations" was created solely for the purpose of enabling petitioner 1982 U.S. Tax Ct. LEXIS 13">*79 to manufacture deductions in excess of those normally generated by the operation of his dental practice, based on "payments" which were totally devoid of economic substance. It is therefore respondent's primary position that petitioner's Federal income tax liability should be determined as though Professional Services had never been created.

Alternatively, respondent contends that, if we should find that Professional Services is entitled to be recognized for Federal tax purposes, and further if we determine that petitioner's payments to that "entity" were payments in substance as well as in form, then the income of Professional Services should be attributed to petitioners under the grantor trust provisions of sections 671 through 677.

In either event, respondent maintains that the income of Professional Services and petitioners should be computed without allowing a deduction for $ 64,000 paid by petitioners to Professional Services, and, by that entity, to National Service.

Petitioners, on the other hand, maintain that by petitioner's formation of the business trust organizations, he "restructured his entire manner of doing business," that the entities thus created were not shams, and 1982 U.S. Tax Ct. LEXIS 13">*80 that all payments made to Professional Services were payments in substance as well as in form. Accordingly, petitioners contend that they are entitled to deduct the full amount of $ 85,000 paid in 1977.

Additionally, petitioners contend that the income of Professional Services should not be attributed to them under the grantor trust provisions. In support of this contention, petitioners argue, for the first time on brief, that Professional Services is not taxable as a trust and is therefore not subject to the grantor trust rules. Petitioners maintain that Professional Services constitutes a Massachusetts business trust, and, as such, should be classified as an association taxable as a corporation rather than as a trust for Federal tax purposes. Furthermore, petitioners argue that Professional Services' "payments" of $ 64,000 to National Service constitute an ordinary and necessary business expense, and are therefore properly deductible by that "entity" under section 162.

Before moving to the parties' substantive arguments, a preliminary procedural point must be addressed. As noted 79 T.C. 888">*924 above, in their original brief, petitioners for the first time contended that Professional Services1982 U.S. Tax Ct. LEXIS 13">*81 is a State law/Massachusetts business trust, and should therefore be classified as an association taxable as a corporation for Federal tax purposes. Although this contention was raised in response to respondent's alternative assertion that the grantor trust rules apply with respect to Professional Services, a resolution of this issue in favor of petitioners would completely alter the posture of this case as it was pleaded and tried. Petitioners had consistently taken the position that Professional Services is taxable as a trust until their argument on brief. That entity filed fiduciary returns, and no indication that petitioners had changed their position in this regard was presented in their pleadings or amended pleadings.

We have consistently held that since the primary purpose of pleadings is the joinder of issue between the parties, issues attempted to be raised by brief will be disregarded. Factor v. Commissioner, 281 F.2d 100">281 F.2d 100, 281 F.2d 100">122 (9th Cir. 1960), affg. a Memorandum Opinion of this Court, cert. denied 364 U.S. 933">364 U.S. 933 (1961); Gregg v. Commissioner, 18 T.C. 291">18 T.C. 291 (1952), affd. per curiam 203 F.2d 954">203 F.2d 954 (3d Cir. 1953); H.D. & J.K. Crosswell, Inc. v. Commissioner, 6 B.T.A. 1315">6 B.T.A. 1315 (1927). 1982 U.S. Tax Ct. LEXIS 13">*82 See also Rules 31(a), 34(a). Thus, as a procedural matter, we would be free to decline to consider this issue. In any event, however, we do not think it is necessary for us to determine whether Professional Services falls within a particular classification under State law. Since, as explained below, we believe that Professional Services was without real substance and is therefore not entitled to be recognized for Federal tax purposes, it is unnecessary for us to consider whether Professional Services falls within a particular State law niche. See, e.g., Furman v. Commissioner, 45 T.C. 360">45 T.C. 360, 45 T.C. 360">364 (1966), affd. per curiam 381 F.2d 22">381 F.2d 22 (5th Cir. 1967); Markosian v. Commissioner, 73 T.C. 1235">73 T.C. 1235 (1980). It is equally unnecessary for us to determine how Professional Services would have been taxed if it, in fact, had any real substance.

The "sham" theory requires that we examine not only the surface transactions and entities involved, but also requires that we examine their reality. Weyl-Zuckerman & Co. v. Commissioner, 23 T.C. 841">23 T.C. 841, 23 T.C. 841">847 (1955), affd. per curiam 232 F.2d 214">232 F.2d 214 (9th Cir. 1956). We must, that is, look beyond "superficial formalities of a transaction to determine the 79 T.C. 888">*925 proper tax 1982 U.S. Tax Ct. LEXIS 13">*83 treatment." Blueberry Land Co. v. Commissioner, 361 F.2d 93">361 F.2d 93, 361 F.2d 93">101 (5th Cir. 1966), affg. 42 T.C. 1137">42 T.C. 1137 (1964). Labels, semantic technicalities, and formal written documents do not necessarily control the tax consequences of a given transaction. Rather, we are concerned with economic realities and not the form employed by the parties. Frank Lyon Co. v. United States, 435 U.S. 561">435 U.S. 561, 435 U.S. 561">572 (1978). Transactions which are devoid of economic substance and are engaged in solely to acquire tax benefits will be disregarded. Knetsch v. United States, 364 U.S. 361">364 U.S. 361 (1960); Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221(1981); Derr v. Commissioner, 77 T.C. 708">77 T.C. 708 (1981). Additionally, the fact that all of the entities involved herein are controlled, either directly or indirectly, by petitioner requires that we closely scrutinize transactions occurring among these entities and petitioner in determining their substance. Investors Diversified Services, Inc. v. Commissioner, 39 T.C. 294">39 T.C. 294, 39 T.C. 294">306 (1962), affd. 325 F.2d 341">325 F.2d 341 (8th Cir. 1963); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 58 T.C. 757">776 (1972). Moreover, whether the transactions and entities lack economic substance is a factual question which must be decided 1982 U.S. Tax Ct. LEXIS 13">*84 within the unique parameters of this case. United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451 (1950).

When viewed in the above light, it becomes clear that no substantial change in economic ownership of the assets or income of petitioner's dental practice was effected by his purported transfer of those assets, and subsequent "payments," to Professional Services (and onward to other entities), and it therefore necessarily follows that Professional Services is not entitled to be recognized as a separate entity for Federal tax purposes. As we have stated in 73 T.C. 1235">Markosian v. Commissioner, supra at 1241: "When the form of a transaction has not, in fact, altered any cognizable economic relationships, we will look through the form and apply the tax law according to the substance of that transaction." Cf. 58 T.C. 757">Bixby v. Commissioner, supra; Miles v. Commissioner, 41 T.C. 165">41 T.C. 165 (1963); Burde v. Commissioner, 352 F.2d 995">352 F.2d 995 (2d Cir. 1965), affg. 43 T.C. 252">43 T.C. 252 (1964), cert. denied 383 U.S. 966">383 U.S. 966 (1966).

Initially, the documents which purport to establish Professional Services as an entity separate and distinct from petitioners, themselves, fail to alter "any cognizable economic relationship" between 1982 U.S. Tax Ct. LEXIS 13">*85 petitioner and the property purportedly 79 T.C. 888">*926 transferred. That is, the specific terms and conditions (or, rather, lack of conditions) contained in these documents left petitioner in exactly the same relationship to the property after the "transfer" that he was in prior to the "transfer."

These documents named petitioner "executive trustee" of Professional Services. As executive trustee, petitioner was entrusted with:

sole authority acting in behalf of all other Trustees. This authority includes the power to execute contracts of any description, buy and sell property of all kinds, direct the management concerning any affair that will benefit the trust or any other powers provided for in the trust indenture. [Emphasis supplied.]

Moreover, the documents vested the trustee with absolute and unrestricted authority to act in any manner with respect to trust property. The documents provided that: "Resolutions of the Board of Trustees authorizing that a special thing to be done shall be evidence that such act is within its powers."

Additionally, petitioners owned all of the trust certificate units of Professional Services during the years in issue and were therefore entitled to all of the trust 1982 U.S. Tax Ct. LEXIS 13">*86 assets upon its termination, and such termination could occur at any time in the sole discretion of petitioner as executive trustee. ²⁶

We therefore cannot perceive any economic interest which passed to anyone other than petitioners under the specific terms of the trust instrument. Petitioner continued to possess unlimited power to deal with the trust property (and its income) in any manner he chose. Cf. 73 T.C. 1235">Markosian v. Commissioner, supra.

In addition to the failure of the documents which established Professional Services to vest that entity with substantial incidents of economic reality, other factors in 1982 U.S. Tax Ct. LEXIS 13">*87 the totality of facts convince us that Professional Services must be treated as a nullity for Federal tax purposes. First, although petitioner 79 T.C. 888">*927 executed a quitclaim deed in favor of Professional Services as evidence of the transfer of his dental office and building in September 1977, that deed was not recorded until late in 1979. The trust instruments were never recorded. See 45 T.C. 360">Furman v. Commissioner, supra.

Second, petitioner contends that he reacquired the right to use the property transferred to Professional Services only by virtue of the lease agreement which he signed in both his individual capacity and in his capacity as executive trustee of Professional Services. However, the property was purportedly transferred to Professional Services on September 2, 1977, and the leaseback "agreement" was not executed until September 10, 1977. Moreover, no funds were "transferred" to Professional Services until October 7, 1977, although, under the terms of the lease agreement, $ 18,500 was due in September. Additionally, although total payments due under the lease agreement in 1977 were $ 89,999, only $ 85,000 was actually transferred to Professional Services in 1977. Thus, petitioner 1982 U.S. Tax Ct. LEXIS 13">*88 continued to use the property purportedly transferred to Professional Services in his dental practice in exactly the same manner as he had prior to the "transfer" until September 10, 1977, although no formal lease had been executed. Moreover, petitioner's use of this property continued unrestricted after the execution of a formal lease, although the terms of the lease were not strictly complied with, and petitioner, as executive trustee, made no effort to enforce the lease according to its terms. Cf. Audano v. United States, 428 F.2d 251">428 F.2d 251 (5th Cir. 1970).

Finally, although the avowed purpose of the trust was to --

provide for a sane and economical administration by natural persons acting in a fiduciary capacity, to begin at once and that the Trustees act solely within their constitutional rights as based upon their common law rights and immunities vouchsafed to citizens of the United States of America and defined in Article IV, Section 2, providing that "Citizens of each state shall be entitled to all privileges and immunities of citizens in several states:" and Article VI, Section 2, providing that "The Constitution of the United States and the laws made in pursuance thereof shall 1982 U.S. Tax Ct. LEXIS 13">*89 be the supreme law of the land;" and the 14th Amendment thereof, providing, that "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States."

it is clear that, in reality, Professional Services, as well as petitioner's other "business trust organizations," acted solely 79 T.C. 888">*928 as conduits in non-arm's-length, prearranged transactions which were designed to generate tax deductions in excess of those legitimately generated in petitioner's practice of dentistry, at zero economic cost to petitioner. Cf. Plunkett & Co. v. Commissioner, 42 B.T.A. 464">42 B.T.A. 464 (1940).

In this regard we note that, of the $ 85,000 transferred to Professional Services in 1977, only $ 21,000 remained within that entity for more than a theoretical instant. This amount was used to pay certain ordinary and necessary expenses of petitioner's dental practice, and the funds, themselves, were generated by petitioner's dental practice. ²⁷ The remaining $ 64,000 was circulated through petitioner's other controlled "business trust organizations," the majority of these funds (i.e., $ 59,000) were redeposited in petitioner's personal account on the same day as the original 1982 U.S. Tax Ct. LEXIS 13">*90 transfer of the funds to Professional Services, and $ 3,500 of this amount was redeposited in petitioner's personal account shortly thereafter.

Although the circulation of these funds was variously camouflaged as payments for "management fees" and "advisory trustees fees," petitioner has failed to establish what, if any, services were rendered in consideration of these "payments." Moreover, although petitioner attempted to retroactively camouflage, as gifts and loans, the retransfers of funds to himself at the end of the circular flow, it is apparent that these transfers were merely the final step of petitioner's overall plan to generate deductions at no out-of-pocket cost, and that petitioner did not assume any real liability at any point with respect to any alleged loans. The salient fact is that, irrespective of the form in which petitioner attempted to cast the various transfers of funds, at all times, by the specific terms of the documents which created the entities through which the funds were passed, petitioner maintained absolute and unrestricted control over the funds, as well as the "promissory 1982 U.S. Tax Ct. LEXIS 13">*91 notes" which petitioner purportedly signed, and no one other than petitioners ever had any legal or beneficial interest therein. ²⁸ Cf. 42 B.T.A. 464">Plunkett v. Commissioner, supra.

79 T.C. 888">*929 In summary, we find that petitioners' creation of Professional Services failed to alter any cognizable economic relationships, and we therefore hold that Professional Services is totally devoid of economic reality and is to be treated as a nullity for Federal tax purposes. 73 T.C. 1235">Markosian v. Commissioner, supra; 45 T.C. 360">Furman v. Commissioner, supra; 79 T.C. 714">Zmuda v. Commissioner, supra.Professional Services was formed and operated as a mere paper entity, and served solely as a conduit through which petitioner manufactured deductions based upon payments which were without substance. Petitioners' taxable income for their 1977 tax year will therefore 1982 U.S. Tax Ct. LEXIS 13">*92 be determined as though Professional Services was never created. Only those deductions claimed by petitioners or by Professional Services which have been conceded or allowed by respondent will therefore be allowed. Having so held, it follows that respondent's determination of additional income against Professional Services, and the further attribution of that same income to petitioners, is disapproved.

Our holding makes it unnecessary for us to consider the application of sections 671 through 677 to the facts herein.

The final issues presented for decision involve respondent's determinations of additions to tax. Respondent contends that petitioners' underpayment of tax was due to fraud in both years in issue. Accordingly, respondent maintains that petitioner Eugene Morton (alone) is liable for additions to tax under section 6653(b). Alternatively, if petitioner is not liable for additions to tax under section 6653(b), respondent contends that both petitioners are liable for additions to tax under section 6653(a). Respondent also determined additions under section 6653(a) against Professional Services.

Section 6653(b)imposes a 50-percent addition 1982 U.S. Tax Ct. LEXIS 13">*93 to tax on an underpayment of tax for a year in which any part of the underpayment is due to fraud. The burden of proving fraud is on respondent, and he must do so by clear and convincing 79 T.C. 888">*930 evidence. Rule 142(b); sec. 7454(a); Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 56 T.C. 213">220 (1971); Miller v. Commissioner, 51 T.C. 915">51 T.C. 915, 51 T.C. 915">918 (1969). When fraud is asserted for more than 1 taxable year, respondent must show that some part of the underpayment was due to fraud for each taxable year in issue for the corresponding addition for fraud for each such year to be upheld. Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 53 T.C. 96">105 (1969). Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing. Mitchell v. Commissioner, 118 F.2d 308">118 F.2d 308, 118 F.2d 308">310 (5th Cir. 1941); Powell v. Granquist, 252 F.2d 56">252 F.2d 56, 252 F.2d 56">60 (9th Cir. 1958); Estate of Pittard v. Commissioner, 69 T.C. 391">69 T.C. 391, 69 T.C. 391">400 (1977).

Whether fraud exists with respect to a particular tax year is a factual question which must be resolved by an examination of the entire record. Mensik v. Commissioner, 328 F.2d 147">328 F.2d 147, 328 F.2d 147">150 (7th Cir. 1964), affg. 37 T.C. 703">37 T.C. 703 (1962), cert. denied 379 U.S. 827">379 U.S. 827 (1964); 53 T.C. 96">Otsuki v. Commissioner, supra.Since fraud can seldom be established 1982 U.S. Tax Ct. LEXIS 13">*94 by direct proof, the requisite intent may be inferred from a showing by respondent that petitioner's conduct was intended to conceal, mislead, or otherwise prevent the collection of taxes that petitioner knew or believed he owed. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 398 F.2d 1002">1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Acker v. Commissioner, 26 T.C. 107">26 T.C. 107 (1956). Moreover, fraud may be established, in a proper case, by showing an overstatement of deductions as well as by an omission of income. Neaderland v. Commissioner, 52 T.C. 532">52 T.C. 532, 52 T.C. 532">540 (1969), affd. 424 F.2d 639">424 F.2d 639 (2d Cir. 1970), cert. denied 400 U.S. 827">400 U.S. 827 (1970). However, since respondent's assertion of fraud requires an inquiry into the taxpayer's frame of mind, seldom can a single act or omission prove determinative of the requisite fraudulent intent. Rather, such intent, or lack thereof, must generally be determined by surveying a taxpayer's whole course of conduct. Stratton v. Commissioner, 54 T.C. 255">54 T.C. 255, 54 T.C. 255">284 (1970).

As we consider the facts bearing on respondent's assertion of fraud, we keep in mind that a taxpayer's attempt to avoid paying taxes does not necessarily establish fraud. As petitioners point out, it is well 1982 U.S. Tax Ct. LEXIS 13">*95 settled that a taxpayer is entitled to arrange his affairs so as to minimize his tax liability. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935). No wrongful intent is inherent in a taxpayer's attempts in this regard. Thus, if 79 T.C. 888">*931 petitioner was of the honest although mistaken opinion that the transactions involved were legally sufficient to support the claimed deductions, no fraudulent intent was present. As we have stated in Mayock v. Commissioner, 32 T.C. 966">32 T.C. 966, 32 T.C. 966">974 (1959):

Although petitioner may have been mistaken as to the legal consequences of the transaction, we are satisfied he had no intention of evading a tax believed to be owing. A mistake of law, if it was a mistake, is not equivalent to the fraud with intent to evade tax * * *

Upon careful review of the record in this case, we conclude that the underpayments of tax for the years in issue resulted from something more than petitioner's honest mistake as to the legal consequences of the various transactions involved. In fact, petitioner's whole course of conduct clearly and convincingly shows that the underpayments of tax were due to fraud. It is clear that petitioner claimed deductions on his 1976 and 1977 returns which he knew 1982 U.S. Tax Ct. LEXIS 13">*96 were based on "payments" which were without substance and thereby attempted to evade taxes he knew to be owing.

In 1976, petitioner, pursuant to a prearranged plan, "borrowed" $ 47,400 from an entity controlled by one of the promoters of the scheme here involved, immediately turned this money over to another entity controlled by the other promoter, and signed a "promissory note" to the entity from which he "borrowed" the money. This "promissory note" was not intended to impose any real liability on petitioner, but rather was executed in an attempt to conceal the real substance (or, rather, lack of substance) of the transaction. At the time the note was signed, it was intended that petitioner would never have to repay any amounts on the note. In fact, the note was returned to petitioner's unrestricted control prior to the time he filed his 1976 return. He therefore knew, when he filed that return, that he had not incurred the cost for which he was claiming a deduction. In the circumstances, his conduct constituted fraud within the meaning of section 6653(b). Compare Schallman v. Commissioner, 102 F.2d 1013">102 F.2d 1013 (6th Cir. 1939), affg. a Memorandum Opinion of this Court; Clarke v. Commissioner, 22 B.T.A. 314">22 B.T.A. 314 (1931).

That 1982 U.S. Tax Ct. LEXIS 13">*97 petitioner knew that no real debt was created by the above series of transactions is clearly demonstrated by his subsequent actions. He failed to acknowledge this "debt" on financial statements he prepared in attempting to secure 79 T.C. 888">*932 personal loans from banks. Additionally, he did not include this amount in a divorce petition filed with the Superior Court of Alaska. Petitioner's execution of the "promissory note" was merely his attempt to add superficial legitimacy to a transaction which he knew was totally devoid of economic result.

In 1977, petitioner again claimed deductions, to the extent of $ 64,000, based on "payments" which represented no real economic cost to him. All of the checks in the circular flow of funds were personally prepared by petitioner. All of the "entities" through which the funds were passed were subject to the unrestricted control of petitioner. Petitioner was never deprived of control over the money which formed the basis of the claimed deduction. In fact, the majority of these funds were withdrawn from his DDS account and redeposited in his personal account on the same day. Obviously, petitioner knew he incurred no real economic cost by virtue of these 1982 U.S. Tax Ct. LEXIS 13">*98 transfers.

The manner in which petitioner has attempted to characterize the retransfers of funds to himself as loans, rather than adding any legitimacy to the purported payments, is further evidence of his fraudulent intent. Three sets of "promissory notes" were prepared to cover this same retransfer of funds. All of the notes were prepared after the close of the taxable year the retransfer occurred. All of the notes are backdated to make it appear that they had been prepared simultaneously with the retransfer of funds. All of the notes were signed by petitioner. The second and third sets of notes were prepared after the due dates had expired on at least some of the notes in the first set. Additionally, the second and third sets of notes indicate that petitioner was assuming liability on the notes, while the first set indicates that the funds were given to petitioner. This third set of notes was represented to respondent as the original and correctly dated notes representing the transactions as they occurred in 1977. Petitioner's retrospective and belated attempt to add legitimacy to the transactions which he knew were without economic result, as well as his attempt to mislead 1982 U.S. Tax Ct. LEXIS 13">*99 respondent by presenting these notes as original and correctly dated evidences of the transactions as they occurred in 1977, is an indication that petitioner knew what he was doing was wrong when he claimed the deduction on his 1977 return.

Additionally, petitioner was somewhat less than cooperative 79 T.C. 888">*933 when the Internal Revenue Service attempted to examine his 1976 and 1977 tax years. Petitioner repeatedly delayed meetings requested by respondent's agent. Only after this Court ordered petitioner to produce his records was such information forthcoming. This failure to cooperate with respondent's agents is an additional indication of guilty knowledge on petitioner's part. Millikin v. Commissioner, 298 F.2d 830">298 F.2d 830, 298 F.2d 830">836 (4th Cir. 1962), affg. a Memorandum Opinion of this Court; Baumgardner v. Commissioner, 251 F.2d 311">251 F.2d 311, 251 F.2d 311">323 (9th Cir. 1957), affg. a Memorandum Opinion of this Court.

Under these facts, we are convinced that petitioner, a well-educated individual with substantial business dealings, knew that the transactions involved herein in 1977, involving the payment of $ 64,000 to Professional Services, were insufficient to support the claimed deduction. Cf. Iley v. Commissioner, 19 T.C. 631">19 T.C. 631 (1952); 1982 U.S. Tax Ct. LEXIS 13">*100 102 F.2d 1013">Schallman v. Commissioner, supra; Weyl v. Commissioner, 38 B.T.A. 850">38 B.T.A. 850 (1938).

Accordingly, we hold respondent has met his burden of proving that some part of petitioner's underpayment of tax for both 1976 and 1977 was due to fraud, and the section 6653(b) additions to tax will therefore be sustained. This result automatically eliminates the additions to tax for both years against petitioners under section 6653(a), under the specific provisions of section 6653(b).

Having concluded that respondent's entire determination of income and resulting deficiency against Professional Services is to be eliminated, it follows that the imposition of additions to tax against it under section 6653(a) is also to be eliminated.

To give effect to the above, as well as other issues which the parties have conceded,

Decisions will be entered under Rule 155.