MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: In these consolidated cases, respondent determined deficiencies in Federal income taxes and additions to tax with respect to Raymond M. Marlin as follows: ¹

n.1 Respondent determined that Mr. Marlin is liable for sec. 6651(a)(2) additions to tax for 2001 through 2003 in an amount to be determined.

Respondent determined deficiencies in Federal income taxes and additions to tax with respect to Linmar Property Management Trust (Linmar or Linmar Trust) ^{22008 Tax Ct. Memo LEXIS 215">*216} as follows:

The other issues for decision are: (1) Whether and in what amounts Mr. Marlin received unreported income; (2) whether Mr. Marlin is entitled to claimed deductions; (3) whether Mr. Marlin is liable for self-employment taxes; and (4) whether Mr. Marlin is liable for additions to tax under sections 6651(a)(1) and (2) and 6654.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. When the Court filed their petitions, Linmar Trust had a mailing address in California, and Mr. Marlin resided at the same California address.

During the years at issue Mr. Marlin owned and worked 2008 Tax Ct. Memo LEXIS 215">*217 for Marlin Mechanical, Inc. (Marlin Mechanical), and Marlin Mechanical Contractors (Marlin Contractors), a sole proprietorship. These businesses provided mechanical construction services on commercial and industrial projects, specifically services related to fire sprinklers, plumbing, refrigeration, heating, ventilation, and air conditioning systems.

On August 31, 1991, Beverly Cahill and Eules Grisby signed the Linmar Trust Declaration of Contract and Indenture of Trust (Linmar Trust contract) as creator and exchanger respectively. According to trust documents, Linmar's capital units, i.e., its certificates of beneficial interest, were originally issued to Redondo Enterprises. On January 1, 1994, the capital units were purportedly transferred to Nevet's Investments. However, on its 1999 Federal income tax return, Linmar's beneficiary was listed as Redondo Enterprises.

On January 10, 1992, Mr. Marlin transferred four parcels of real estate to Linmar Trust: 535 North Church Street, Visalia California; 15675 and 15676 Avenue 296, Visalia, California; and 231 Olive Street, San Francisco, California. Before its transfer to Linmar Trust, the North 2008 Tax Ct. Memo LEXIS 215">*218 Church Street address was Mr. Marlin's residence. When he filed his petition, Mr. Marlin still resided at the North Church Street address. Marlin Mechanical and Marlin Contractors used the Avenue 296 addresses before and after the transfer of the real estate to Linmar Trust. As part of the transfer of real estate, Linmar Trust purportedly gave Mr. Marlin a promissory note in the amount of $ 242,338, requiring Linmar to make monthly payments of $ 2,165.

Linmar Trust's initial trustee was Winnie McGuire, Mr. Marlin's wife. Winnie McGuire died on April 7, 2000, while she and Mr. Marlin were traveling in Hawaii.

On September 3, 1991, Winnie McGuire appointed Kathleen Botta, formerly known as Kathleen Marlin, and now known as Kathleen Remillard, as Linmar Trust's financial agent. Ms. Remillard is Mr. Marlin's daughter. On September 7, 1991, Winnie McGuire appointed Ms. Remillard as Linmar Trust's secretary. Ms. Remillard understood that Mr. Marlin and Winnie Mcguire made final decisions with respect to Linmar Trust

On September 7, 1991, Winnie McGuire appointed Eileen Pyzer, now known as Eileen McGuire, as contingent trustee of Linmar Trust. Eileen 2008 Tax Ct. Memo LEXIS 215">*219 McGuire is Winnie McGuire's daughter. On June 8, 1992, Winnie McGuire appointed Eileen McGuire as cotrustee. ³ On April 14, 2004, Eileen McGuire resigned as trustee. While serving as trustee, Eileen McGuire did not know Linmar Trust's purpose, she did not participate in decisions with respect to Linmar Trust, and she had no involvement with Linmar's real estate or business operations. Eileen McGuire understood that Mr. Marlin made final decisions with respect to Linmar Trust. She believed Mr. Marlin was the beneficiary of Linmar Trust.

On September 15, 2001, Eileen McGuire appointed Judy Costa as a trustee. Ms. Costa was either married to Mr. Marlin or had a relationship familiar enough with him that they referred to each other as husband and wife. ⁴ Ms. Costa resides at the same North Church Street address as Mr. Marlin. On July 7, 2008 Tax Ct. Memo LEXIS 215">*220 2004, Ms. Costa resigned as trustee.

On February 5, 1995, Mr. Marlin was appointed manager of Linmar Trust and given authority over the day-to-day operations. On January 15, 2002, Linmar Trust and Mr. Marlin entered into a contract, providing among other things that in exchange for his trust management services and for occupying the North Church Street address (where he had been living for several years), Linmar Trust would pay Mr. Marlin an occupancy fee and all utilities. The contract also provided that Linmar Trust would lend Mr. Marlin funds for personal expenses. The contract was signed by Ms. Costa on behalf of Linmar Trust and by Mr. Marlin.

Linmar's minutes resolve that the day-to-day affairs of the trust were delegated to an officer of the trust. However, the minutes also state that all real estate matters were to be referred to the trustees and that contract negotiations were subject to trustee approval. On October 22, 1999, Linmar Trust sold 2008 Tax Ct. Memo LEXIS 215">*221 the Olive Street property. The minutes do not show trustee approval of the sale. On September 29, 2000, Linmar Trust sold the Avenue 296 properties. The minutes do not show trustee approval of the sale. From July 27, 2001, through April 14, 2004, Linmar Trust entered into and modified contracts with University Marelich Mechanical, Lloyd Allen Pump Service, and Jason Correia. The minutes do not show approval of any of these contracts.

On November 16, 1999, Linmar Trust wrote a check payable to Anglo Irish Bank, with Nevet's Investments written on the memo line. Linmar Trust's 1999 income distribution deduction was $ 424,179. Linmar Trust reported distributable net income for 2001, 2002, and 2003. However, Linmar's bank records do not show income distributions to Nevet's Investments or Redondo Enterprises. The Linmar Trust contract states: "Any capital unit holder may waive the right to receive any particular distribution or distributions, by delivering to the Trustees a written waiver prior to the date of the distribution, which waiver shall be entered in the Minutes." There are no such waivers entered in the minutes.

Mr. 2008 Tax Ct. Memo LEXIS 215">*222 Marlin signed Linmar's tax returns and contracts. On February 11, 2004, Mr. Marlin completed a Form 8821, Tax Information Authorization, and a Form 2848, Power of Attorney and Declaration of Representative, on behalf of Linmar Trust. The signature line on Form 8821 states: "If signed by a corporate officer, partner, guardian, executor, receiver, administrator, trustee, or party other than taxpayer, I certify that I have the authority to execute this form with respect to the tax matters/periods covered." The signature line on Form 2848 states: "If signed by a corporate officer, partner, executor, receiver, administrator, trustee, on behalf of the taxpayer, I certify that I have the authority to execute this form on behalf of the taxpayer." Mr. Marlin then signed his name and as his title wrote "trustee" on each of the forms.

During the years at issue Mr. Marlin did not have a bank account. Mr. Marlin did, however, have a credit card in his name through Citibank (Citibank card No. 3354). Mr. Marlin made payments on the card by endorsing and delivering to Citibank checks payable to him and Marlin Mechanical. Through its bank accounts, Linmar Trust also made payments 2008 Tax Ct. Memo LEXIS 215">*223 on Citibank card No. 3354.

Marlin Mechanical also held a credit card with Citibank (Citibank card No. 4321). In addition to business-related purchases for Marlin Mechanical, Citibank card No. 4321 was used to purchase vacations and antiques. Linmar Trust made regular payments on Citibank card No. 4321.

Mr. Marlin claims the payments Linmar made on the two credit cards are reimbursements for Linmar's expenses. However, he has not shown, nor can the Court decipher, which expenses are attributable to Linmar and whether the amounts paid equal the expenses charged. Petitioners claim they have records detailing the expenses Mr. Marlin submitted to Linmar for reimbursement. Despite being given the opportunity to present the records, petitioners did not present them.

Checks payable to Mr. Marlin and his businesses were deposited into Linmar Trust's bank accounts. Linmar Trust's bank accounts were used to pay for Mr. Marlin's life insurance, ⁵ vacation timeshare, family members' educations, antiques, piano, and homeowner's insurance. Petitioners claim these amounts were offset by the value of checks deposited into Linmar Trust bank accounts by Mr. Marlin and his businesses. Neither petitioner 2008 Tax Ct. Memo LEXIS 215">*224 has shown, nor can the Court decipher, how the payments and deposits are connected.

Mr. Marlin did not file Federal income tax returns for 1998, 1999, 2001, 2002, or 2003. ⁶ On April 25, 2006, respondent prepared substitute returns for Mr. Marlin for 1999, 2001, 2002, and 2003. On June 22, 2006, respondent issued Mr. Marlin a notice of deficiency for 1999, 2001, 2002, and 2003. Mr. Marlin timely petitioned this Court for redetermination of the deficiency.

Linmar Trust untimely filed its 1999, 2001, 2002, and 2003 returns on February 25, 2001, July 1 and December 19, 2003, and October 19, 2004, respectively. The 1999 return reported 424,179 of income and a $ 424,179 distribution deduction. The 2001 return reported $ 80,491 of income and a $ 80,491 distribution deduction. 2008 Tax Ct. Memo LEXIS 215">*225 The 2002 return reported $ 70,371 of income and a $ 70,371 distribution deduction. The 2003 return reported $ 166,659 of income and a $ 166,659 distribution deduction. On June 26, 2006, respondent issued Linmar Trust a notice of deficiency for 2001, 2002, and 2003. Linmar Trust timely petitioned this Court for redetermination of the deficiency.

OPINION

In cases of unreported income, the Court of Appeals for the Ninth Circuit, to which an appeal in this case would ordinarily lie, requires that the Commissioner provide a minimal evidentiary foundation connecting the taxpayer with the unreported income before the presumption of correctness attaches to the Commissioner's determination. See Hardy v. Comm'r, 181 F.3d 1002">181 F.3d 1002, 181 F.3d 1002">1004 (9th Cir. 1999), affg. T.C. Memo. 1997-97; Weimerskirch v. Commissioner, 596 F.2d 358">596 F.2d 358, 596 F.2d 358">360-361 (9th Cir. 1979), revg. 67 T.C. 672">67 T.C. 672 (1977); Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 92 T.C. 661">687-691 (1989). Once the Commissioner has met this initial burden, the taxpayer must establish by a preponderance of the evidence that the Commissioner's determination is arbitrary or erroneous. See 181 F.3d 1002">Hardy v. Commissioner, supra at 1004.

As explained more fully below, the 2008 Tax Ct. Memo LEXIS 215">*226 Court finds that respondent has introduced ample evidence connecting Mr. Marlin with the income-producing activities of Linmar Trust and with the various items of income not reported by either Mr. Marlin or Linmar. The record shows that Mr. Marlin had unfettered access to Linmar's financial accounts and property, and that he made all decisions with respect to Linmar. Mr. Marlin managed and resided in rental real estate properties owned by Linmar Trust. Amounts owed to Mr. Marlin and Mr. Marlin's businesses were deposited in Linmar's accounts, and Linmar paid their expenses. Furthermore, respondent has presented sufficient evidence linking Mr. Marlin with the various items of unreported income through the bank deposits and specific items methods. Accordingly, the Court holds that respondent's determination is entitled to the presumption of correctness.

Petitioners have not claimed or established that section 7491(a) shifts the burden of proof to respondent with respect to any factual issue. Accordingly, petitioners bear the burden of proof and production for all issues, except as provided by section 7491(c). See Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 54 S. Ct. 8">54 S. Ct. 8, 78 L. Ed. 212">78 L. Ed. 212, 1933-2 C.B. 112 (1933).

Respondent argues that Linmar Trust should be disregarded as a separate entity for Federal tax purposes because it lacks economic substance and is a sham. The Court agrees.

Taxpayers have the right to conduct their transactions in such a manner and form as to minimize or altogether avoid the incidence of taxation by whatever means the law permits. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 293 U.S. 465">469, 55 S. Ct. 266">55 S. Ct. 266, 79 L. Ed. 596">79 L. Ed. 596 (1935). This right, however, does not bestow upon taxpayers a right to structure a paper entity to avoid taxation when that entity is without economic substance. Zmuda v. Commissioner, 79 T.C. 714">79 T.C. 714, 79 T.C. 714">719 (1982), affd. 731 F.2d 1417">731 F.2d 1417 (9th Cir. 1984). 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. Higgins v. Smith, 308 U.S. 473">308 U.S. 473, 308 U.S. 473">477, 60 S. Ct. 355">60 S. Ct. 355, 84 L. Ed. 406">84 L. Ed. 406 (1940). Application of these principles requires the Court to look beneath the surface of the entity and transactions at issue to examine their reality. Profl. Servs. v. Commissioner, 79 T.C. 888">79 T.C. 888, 79 T.C. 888">924 (1982).

If the creation of a trust lacks economic effect and alters no cognizable economic relationship, the Court may ignore the trust 2008 Tax Ct. Memo LEXIS 215">*228 as a sham. See, e.g., 79 T.C. 714">Zmuda v. Commissioner, supra at 720; Markosian v. Commissioner, 73 T.C. 1235">73 T.C. 1235, 73 T.C. 1235">1241 (1980). This rule applies regardless of whether the entity has a separate existence recognized under State law and whether, in form, it is a trust, a common law business trust, or some other form of jural entity. 79 T.C. 714">Zmuda v. Commissioner, supra at 720. 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 (citing United States v. Cumberland Pub. Serv. Co., 338 U.S. 451">338 U.S. 451, 70 S. Ct. 280">70 S. Ct. 280, 94 L. Ed. 251">94 L. Ed. 251, 115 Ct. Cl. 837">115 Ct. Cl. 837, 1950-1 C.B. 18 (1950)), affd. per curiam 992 F.2d 789">992 F.2d 789 (8th Cir. 1993).

To determine whether a trust lacks economic substance for tax purposes the Court considers these factors: (1) Whether the taxpayer's relationship to the transferred property differed materially before and after the trust's creation; (2) whether the trust had an independent trustee; (3) whether an economic interest passed to other trust beneficiaries; and (4) whether the taxpayer respected the restrictions placed on the trust's operation as set forth in the trust documents. See Muhich v. Commissioner, T.C. Memo. 1999-192, affd. 238 F.3d 860">238 F.3d 860 (7th Cir. 2001). 2008 Tax Ct. Memo LEXIS 215">*229 As discussed below, each of these factors supports a conclusion that Linmar Trust had no economic substance.

With respect to the first factor, the Court looks to the economic reality of a purported arrangement to determine who is the settlor of a trust, whether or not named as settlor in the related documents. 79 T.C. 714">Zmuda v. Commissioner, supra at 720. Mr. Grisby and Ms. Cahill signed the Linmar Trust contract as exchanger and creator, respectively. Neither Mr. Grisby nor Ms. Cahill was called as a witness. The Court infers that their testimony would not have been favorable to Mr. Marlin. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158, 6 T.C. 1158">1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947). Petitioners have presented no evidence that either Mr. Grisby or Ms. Cahill had any participation in Linmar's existence after its formation. From the record it appears that Mr. Grisby and Ms. Cahill acted as "straw men" to form Linmar Trust. ^{72008 Tax Ct. Memo LEXIS 215">*230}

Mr. Marlin contributed four parcels of real estate to Linmar. Petitioners colored the transaction as a sale by having Linmar Trust provide Mr. Marlin a promissory note. The only evidence petitioners presented that payments were made on the note is a canceled check dated August 18, 1999, and made out to "Global Business Serv. Trust Acct." in the amount of $ 2,165, which is the amount of the monthly installments required by the promissory note. "Meadow Brook" was written on the memo line. This purported payment on the note was made more than 6 years after the transfer. Petitioners also suggest that the note was paid off in the amount of $ 193,377 as part of Linmar's sale of the Olive Street property in 1999. The payment was allegedly made to Meadow Brook Investments. As evidence of this payment, petitioners direct the Court to a disbursement summary from the sale of the Olive Street property showing payment to Meadow Brook Investments and a letter from Meadow Brook Investments showing a payoff amount of $ 193,377.

However, petitioners have not presented any evidence 2008 Tax Ct. Memo LEXIS 215">*231 of when or for what consideration Mr. Marlin transferred the note to Meadow Brook Investments. In short, there is no evidence that Linmar made any payment to Mr. Marlin on the note or that Meadow Brook paid Mr. Marlin any amount in exchange for the note. That a taxpayer would transfer four valuable parcels of real estate to a trust for no value while retaining no control over the real estate is not plausible. Accordingly, the Court finds that the transfer of the four parcels of real estate was not a sale. ⁸ See Gouveia v. Comm'r, T.C. Memo 2004-256.

After the transfer of the real estate to Linmar, the use of the properties did not change. Mr. Marlin resided at the North Church Street address before and after Linmar's formation. Mr. Marlin owned Marlin Mechanical and Marlin Contractors, and each used the Avenue 296 addresses before and after Linmar's formation.

The financial accounts of Mr. Marlin, Mr. Marlin's businesses, and Linmar Trust were commingled. 2008 Tax Ct. Memo LEXIS 215">*232 As manager of Linmar Trust, Mr. Marlin had authority to conduct Linmar's day-to-day operations. Rents were deposited into Linmar's accounts on which Mr. Marlin was a signatory. The record shows that Mr. Marlin had unfettered access to Linmar's funds. Furthermore, the record indicates that Mr. Marlin and not the purported trustees made all decisions relating to the transferred properties.

The Court concludes that after their transfer to Linmar, Mr. Marlin's relationship to the transferred properties did not change in any material way. Accordingly, this factor points to a sham.

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. 714">79 T.C. 720-721; Para Techs. Trust v. Commissioner, T.C. Memo. 1994-366, affd. without published opinion sub nom. Anderson v. Commissioner, 106 F.3d 406">106 F.3d 406 (9th Cir. 1997).

During the years at issue Linmar's trustees were Winnie McGuire, who was Mr. Marlin's wife; Eileen McGuire, who is Winnie McGuire's daughter; and Ms. Costa, who is either Mr. Marlin's wife 2008 Tax Ct. Memo LEXIS 215">*233 or familiar enough with Mr. Marlin that they refer to each other as husband and wife. Ms. Remillard, who was Linmar's secretary and financial agent, and Eileen McGuire both testified that Mr. Marlin made all decisions with respect to Linmar Trust.

Neither petitioner presented evidence that Winnie McGuire or Eileen McGuire acted independently. Eileen McGuire testified that she did not know Linmar's purpose, she did not take part in decisionmaking with respect to Linmar, and she did not have any involvement with Linmar's real estate or business operations. When asked about the extent of her participation in the trust, she stated: "I just signed papers occasionally, didn't really understand what they were or question it." Eileen McGuire also testified that she believed Mr. Marlin was the beneficiary of the Trust. TNeither petitioner presented any evidence that Ms. Costa acted independently. Ms. Costa did not testify at trial. The Court infers that her testimony would not have been favorable to Mr. Marlin. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1165.

The Court concludes that during the years at issue Linmar did not have an independent trustee and that decisions with 2008 Tax Ct. Memo LEXIS 215">*234 respect to Linmar were made by Mr. Marlin. Accordingly, this factor points to a sham.

In determining to whom economic interests passed, this Court has considered whether a taxpayer identified the ultimate beneficiary, or holder of certificates of beneficial interest. See Gouveia v. Comm'r, supra. Petitioners claim that during the years at issue Linmar's beneficiary was either Redondo Enterprises or Nevet's Investments. None of Linmar's representatives know anything about Redondo Enterprises or Nevet's Investments other than their names and addresses. That neither Mr. Marlin, who is intimately involved with the trust, nor Mr. Parsons, Linmar's current trustee, would know anything about the trust's beneficiary other than its name and address is not plausible. Furthermore, Linmar's trustee during the years at issue believed that Mr. Marlin was the beneficiary.

Petitioners claim that in November 1999, Linmar wrote a check for $ 400,000 to Nevet's Investments. However, the check is paid to the order of Anglo Irish Bank. Nevet's Investments is only written on the memo line. There is no evidence that Nevet's Investments received any benefit 2008 Tax Ct. Memo LEXIS 215">*235 from the check. In fact, other than their own uncorroborated testimony, neither Mr. Marlin nor Mr. Parsons presented any evidence that the purported beneficiaries even exist.

Furthermore, under the terms of the Linmar contract, it is unclear whether Linmar has a beneficiary at all. The contract states that the trustees "shall continue to conserve and protect the assets, and initiate, continue, extend or discontinue any venture or investment at their sole discretion for the benefit of the Trust." A trust exists for the benefit of its beneficiaries, not for its own benefit. Petitioners also state that the Trust's purpose is to "protect the Trust assets from suitors, spend thrift relatives, and probate." These are the purposes of individuals, not business organizations such as Linmar's purported beneficiaries.

The Court also notes that the transfer of property to Linmar did not create any rights in anyone else with respect to the transferred property. The Linmar Trust contract states that "Ownership of capital units does not entitle such owner to any title, legal or equitable, nor to any management powers or rights to or in, any assets or income of the Trust." The contract also states that 2008 Tax Ct. Memo LEXIS 215">*236 a capital unit holder's death or termination does not create any rights in Linmar or its assets:

All rights of a Capital Unit Holder terminate upon the death of that Holder, such rights automatically reverting to the Trustees hereof. The death, insolvency or bankruptcy of any Capital Unit Holder shall not operate to dissolve, terminate or in any other manner affect this Trust nor any of its operations or affairs nor may the heirs, legal representatives, or transferees of said Holder demand a division of property of the Trust, nor any special accounting, nor any rights whatsoever.