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amounts consistent with those reported on Schedule E of his
individual Federal income tax returns. For 1999, the Mercury
Solar PTO tax return includes two Schedules K-1: One showing
$55,734 of income distributed to Sparkman and another showing
$33,600 of income distributed to Thompson.
HEH filed its Federal income tax return for 1996 on or around
March 30, 2001, and filed its 1997 Federal income tax return on or
around May 22, 2002. HEH filed Federal income tax returns for its
1998, 1999, and 2000 tax years on or around June 2, 2004 (only
shortly before the trial in these cases). HEH filed its Federal
tax returns using Forms 1041. In the entity classification
section for each of HEH’s returns, the box for “Complex trust” is
checked.
Notices of Deficiency
Respondent issued Sparkman a notice of deficiency for his
taxable years 1996 through 2000. Respondent determined that
Mercury Solar PTO is a sham with no economic substance and should
be disregarded for tax purposes.17 In the notice of deficiency,
17 Respondent also raised three alternative arguments in
Sparkman’s notice of deficiency: (1) That Sparkman’s business
income should be increased because Mercury Solar PTO is a grantor
trust whose income is taxable to Sparkman individually; (2)
that if Mercury Solar PTO is recognized for income tax purposes,
Sparkman’s income should be increased to the extent required by
sec. 652(a) or 662(a); and (3) that Sparkman’s attempted
assignment of income to Mercury Solar PTO is not recognized for
Federal tax purposes. Respondent has not pressed these
alternative arguments in this Court proceeding; consequently, we
(continued...)
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