- 18 -
proof and production for all issues, except as provided by section
7491(c). See Rule 142(a).
II. Disregard of Mercury Solar PTO as a Separate Entity
Respondent argues that Mercury Solar PTO should be
disregarded as a separate entity for Federal tax purposes because
it lacks economic substance and is a sham.18 We agree.
If the creation of a trust lacks economic effect and alters
no cognizable economic relationship, we may ignore the trust as a
sham. See, e.g., Zmuda v. Commissioner, 79 T.C. 714, 720 (1982),
affd. 731 F.2d 1417 (9th Cir. 1984); Markosian v. Commissioner, 73
T.C. 1235, 1241 (1980); Muhich v. Commissioner, T.C. Memo. 1999-
192, affd. 238 F.3d 860 (7th Cir. 2001). To determine whether a
trust lacks economic substance for tax purposes we consider these
factors: (1) Whether the taxpayer’s relationship to the
18 Respondent now concedes all adjustments to Mercury Solar
PTO’s income except for $113,354 of Hawaii Electric Company
(HECO) rebate income that respondent claims Mercury Solar PTO
failed to report on its 1999 Federal income tax return.
Respondent concedes that Sparkman’s income from Mercury Solar PTO
does not exceed the amounts Sparkman reported therefrom on
Schedule E for each year at issue, plus, with respect to tax year
1999, the $113,354 of disputed HECO rebate income. Consequently,
respondent’s bottom line is that Sparkman should be subject to
self-employment tax on all amounts that he previously has
reported as income from Mercury Solar PTO for the years at issue,
plus should recognize $113,354 additional income (and pay self-
employment tax) with respect to the disputed HECO rebate
payments. As previously noted, petitioners have not separately
challenged respondent’s positions with respect to Sparkman’s
liability for self-employment taxes, other than to argue that we
should reject respondent’s argument that Mercury Solar PTO has no
existence apart from Sparkman.
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