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Petitioners have not offered any persuasive arguments in support
of their contention that the trusts are not shams.
After considering the four factors set forth in Markosian v.
Commissioner, 73 T.C. at 1243-1244, it is clear that the Pago and
McKenzie Trusts were shams which lacked economic substance and
must be disregarded for Federal income tax purposes.
Accordingly, we sustain respondent’s determination, and we hold
that the net income earned by the Pago and McKenzie Trusts is
properly taxable to the Gouveias.28
V. Section 6662(a) Penalties
Section 6662(a) and (b)(1) authorizes a 20-percent penalty
to be imposed on the portion of an underpayment of income tax
attributable to negligence or disregard of rules or regulations.
Respondent bears the burden of production, but petitioners have
the burden of proof. Sec. 7491(c). Negligence “includes any
failure to make a reasonable attempt to comply with the
provisions of * * * [the Internal Revenue Code]”. Sec. 6662(c);
see also Neely v. Commissioner, 85 T.C. 934, 947 (1985)
(negligence is the lack of due care or failure to do what a
reasonable person would do under the circumstances).
28In light of our holding, we need not address respondent’s
alternative arguments that the income from the Pago and McKenzie
Trusts is allocable to the Gouveias under the assignment of
income doctrine or the grantor trust rules.
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