MEMORANDUM FINDINGS OF FACT AND OPINION
WHITAKER, Judge: By statutory notice dated February 26, 1987, respondent determined a deficiency in petitioners' 1983 Federal income taxes in the amount of $ 100,219.50. Respondent determined additions to tax: (1) under section 6653(a)(1)1 in the amount of $ 5,010.98; (2) under section 6653(a)(2) in the amount of 50 percent of the interest on $ 100,219.50; and (3) under section 6661 in the amount of $ 25,054.87. Further, respondent determined that petitioners were liable for increased interest pursuant to section 6621(c) of the Internal Revenue Code of 1986. At trial and on brief, respondent asked that we award damages to the United States and against petitioners pursuant to section 6673 in the amount of $ 5,000. The sole substantive issue is whether Park Ridge Enterprises should be recognized as a separate entity, or whether it is a sham, and its gross receipts properly attributed to petitioners.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. The stipulation, supplemental stipulation, and attached exhibits are incorporated by this reference. Petitioners were residents of Arlington, Texas, at the time they filed their petition.
Petitioner Dale Sandvall is a doctor of chiropractic medicine doing business as Chiropractic Associates. Park Ridge Enterprises (Park Ridge) is a trust organized in 1981 in the Turks and Caicos Isles, British West Indies, to assist petitioners with the administrative end of Dale Sandvall's chiropractic practice. Petitioner Dale Sandvall was president of Park Ridge, and signed its 1983 Federal income tax return (Form 1040NR, U.S. Nonresident Alien Income Tax Return) in that capacity. Upon Park Ridge's organization, petitioner Donna Sandvall was appointed secretary, and given signatory authority over its checking account number XXXXXX516-9 at the Metropolitan Savings and Loan Association (Metropolitan) in Dallas, Texas. Dale Sandvall also had signatory authority over that account. Petitioners were the only persons to have such authority. Park Ridge's business address was P.O. Box 14119, Arlington, Texas, a postal box for which petitioners had applied and which they controlled.
Park Ridge was organized to provide services to Chiropractic Associates with respect to the latter's business premises and employees. Park Ridge supplied office space to Chiropractic Associates for a monthly rental of $ 5,500. Park Ridge leased this space from Murray management, a real estate concern in the Dallas-Ft. Worth area, for a monthly rental of $ 2,250. Park Ridge provided office staff, 2 saw to it that all bills were paid, and leased office furniture to Chiropractic Associates. While Chiropractic Associates contracted with Park Ridge for such services so that Dale and Donna Sandvall could devote themselves to the practice of chiropractic medicine and the making of a home, respectively, all checks drawn on Park Ridge's account, as were all other documents with respect to Park Ridge were signed by either or both of them. However, Park Ridge did not attend to all of Chiropractic Associates' administrative needs, as payments for at least some of its taxes, postage, and utilities were made from Chiropractic Associates' own account. Checks written on that account were signed by either Dale or Donna Sandvall. There is no evidence that any other person ever acted for or on behalf of Park Ridge during the year 1983.
During 1983, a total of 33 checks payable to Park Ridge Enterprises were drawn on Chiropractic Associates' bank account in the aggregate amount of $ 354,132.16. However, Park Ridge's 1983 Form 1040NR, Schedule C showed that it had gross receipts in 1983 of only $ 217,407, from which it subtracted returns and allowances of $ 26,447. The return reflected total deductions of $ 193,475 and an overall loss of $ 2,515. Among the claimed deductions were rent on business property of $ 30,552, wages of $ 59,970, and a continuing royalty of $ 66,000. In response to the return's inquiry concerning whether Park Ridge was a trust with a U.S. business, the return stated that the question was not applicable. 3
On January 27, 1983, petitioner Donna Sandvall opened account number XXXXX720-6 at Metropolitan in the name of Oak Ridge Trust Organization (Oak Ridge), 4 into which she deposited a $ 32,000 check drawn on the Park Ridge account. On that same day, Donna Sandvall executed a certificate which transferred the assets of this particular Oak Ridge account to herself, whereupon she withdrew the $ 32,000 by having Metropolitan issue her a check in that amount.
Petitioner Dale Sandvall engaged in a similar transaction in December 1982 and January 1983. On December 31, 1982, he opened account number XXXXX943-7 at Metropolitan in the name of Oak Ridge and deposited $ 55,000 in the form of a check drawn on the Park Ridge account. On the same day, he executed a certificate which transferred the assets in that account to himself. On January 3, 1983, petitioner Dale Sandvall caused Metropolitan to issue a check to him in the amount of $ 55,025.21. Similar transactions took place on January 20, 1984, April 5, 1984, July 6, 1984, December 17, 1984, and December 31, 1984. At least with respect to the April and December 1984 transactions, the Oak Ridge accounts were opened with checks drawn on the Park Ridge account. Because of petitioners' practice of opening accounts in the name of Oak Ridge, transferring the deposited funds to themselves, then closing the accounts, all within a short period of time, Metropolitan asked petitioners for documentation of their authority to deal with Oak Ridge's funds on such a basis. In response to that request, petitioners presented Metropolitan with Oak Ridge's undated minutes stating that the account opened and transferred on July 6, 1984, was the subject of a gift to petitioner Donna Sandvall. The minutes were signed by petitioner Dale Sandvall as trustee of Oak Ridge.
On May 3, 1983, petitioners executed a financial statement in connection with an application for a loan from First City Bank, Arlington, Texas, in which they represented themselves as the owners of all assets held in the name of Park Ridge.
OPINION
Respondent contends that Park Ridge is a sham entity which should not be recognized for Federal tax purposes, citing Professional Services v. Commissioner,79 T.C. 888 (1982), and Zmuda v. Commissioner,79 T.C. 714 (1982), affd. 731 F.2d 1417 (9th Cir. 1984). Alternatively, respondent contends that Park Ridge is a grantor trust subject to the provisions of sections 671 through 679. Under either theory, respondent argues that Park Ridge's gross receipts are properly attributed to petitioners. Because we agree with respondent as to his first contention, we need not address his second.
We first point out that petitioners have gone out of their way to attempt to frustrate this judicial proceeding. In their petition petitioners alleged that respondent "lacked standing to issue the notice of deficiency to Petitioners because [he] is without authority to determine the matter of first impression, that is, whether Park Ridge Enterprises is a legitimate entity." Petitioners alleged that we are without jurisdiction to make a similar determination. After repeated informal discovery requests, 5 respondent on March 7, 1988, sent petitioners a set of 99 interrogatories and a request for production of documents. When these requests were ignored, respondent filed a motion to compel production on April 21, 1988. Respondent filed a similar motion with respect to his interrogatories, along with a request for sanctions, on April 25, 1988. We granted both of respondent's motions in separate orders, reserving a decision on the question of sanctions until the receipt of a status report from respondent concerning petitioners' compliance, and reminding petitioners of section 6673's authorization of damages for frivolous positions or dilatory conduct.
On May 6, 1988, respondent received from petitioners documents purportedly complying with our Order of April 28, 1988. With one exception, petitioners replied to each of respondent's interrogatories with the following answer: "Petitioners herein are Dale K. and Donna L. Sandvall. The entity named [Park Ridge or Oak Ridge] is not before the Court as a petitioner and, therefore, this question regarding this entity is irrelevant." Likewise, petitioners attempted to circumvent our Order compelling production of documents by providing respondent with a response stating that "the entity named 'Park Ridge Enterprises' is not before the Court as a Petitioner and, therefore, this request regarding this entity is irrelevant." Petitioners did comply with that part of respondent's request for production which sought substantiation of expenses listed on petitioners' Schedule C for 1983.
As the transcript reflects, during the trial, petitioners, especially Dale Sandvall, spared no effort to waste the time both of the Court and respondent's counsel. Petitioners made frivolous objections and engaged in a frustrating and time-consuming attempt at gamesmanship. For example, they refused to identify their signatures on photocopies, and when shown original documents refused to say more than that the signatures resembled their own. 6 Petitioner Dale Sandvall also made repeated objections to any inquiry by respondent's counsel concerning Park Ridge or Oak Ridge on the grounds that those purported entities were not before the Court, and that the Court did not have jurisdiction over them. His objections were repeatedly overruled.
Respondent made repeated attempts to gain access to Park Ridge's organizational documents in an attempt to establish that petitioners controlled that entity. Petitioners at first objected to any requests for information with respect to Park Ridge on relevancy grounds, but later stated that they had no such documents in their possession. We find it difficult to believe that petitioners would have no records concerning Park Ridge's organization, since they obviously controlled its finances.
The rule is well established that the failure of a party to introduce evidence within his possession and which, if true, would be favorable to him, gives rise to the presumption that if produced it would be unfavorable. * * * This is especially true where * * * the party failing to produce the evidence has the burden of proof * * *.
Wichita Terminal Elevator Co. v. Commissioner,6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
Notwithstanding petitioners' failure to produce such records, there is substantial evidence in support of respondent's determination that petitioners exercised complete control over Park Ridge. Petitioners' business premises were subleased from Park Ridge for roughly twice the rent paid by Park Ridge. Both Donna and Dale Sandvall engaged in numerous transactions in which funds were gratuitously transferred from the Park Ridge account to themselves. Petitioners consistently treated the funds in the Park Ridge and Oak Ridge accounts as their own and held themselves out as owners of those assets. We find that the existence of these so-called trusts has no cognizable economic purpose. Zmuda v. Commissioner,79 T.C. at 720. They are, as respondent has determined, mere shams. Accordingly, on this issue we hold for respondent. 7
Respondent also determined that petitioners were liable for additions to tax pursuant to section 6653(a)(1) and (2), and section 6661, and that petitioners are liable for increased interest pursuant to section 6621(c) of the Internal Revenue Code of 1986. On brief, respondent requested that we award damages pursuant to section 6673. These devices are to encourage compliance and discourage taxpayers from playing the "audit lottery." With respect to these sections of the Code, Congress has directed us "to assert, without hesitancy in appropriate circumstances, the penalties that Congress has provided." H. Rept. 98-861 at (Conf.) 985 (1984), 1984-3 C.B. (Vol. 2) 239.
These tools, which Congress has placed at our disposal for efficient management of our docket, are particularly appropriate here. Park Ridge was nothing more than a device used to siphon funds from Dale Sandvall's business through another entity before those funds made their way back to petitioners, all in disregard of the most fundamental rules of Federal income taxation. Petitioners fall squarely within section 6661, both as to the amount by which their Federal income tax liability was understated for 1983 and as to their failure to disclose relevant facts or have substantial authority in their favor. We find that the increased interest of section 6621(c) is also appropriate, as the underpayments are attributable to transactions involving one or more sham entities. See sec. 6621(c)(3)(A)(v). While the burden of proof with respect to such additions and increased interest is on petitioners, see Bell v. Commissioner,85 T.C. 436 (1985), the record contains substantial evidence in support of the application of these additions. In fact, we are surprised that respondent failed to determine the fraud addition under section 6653(b). Petitioners' actions appear to warrant that addition.
Damages pursuant to section 6673 are appropriate when it appears "that proceedings before [us] have been instituted or maintained by the taxpayer primarily for delay, [or] that the taxpayer's position in such proceeding is frivolous or groundless * * *." Sec. 6673. These proceedings, and petitioners' conduct in them, are classic examples of such frivolity. Despite repeated warnings at various stages of this proceeding, petitioners have refused to address the merits of their case. Petitioners were evasive as witnesses and their denials of knowledge were outright falsehoods. Their brief attacks respondent's ability, and this Court's jurisdiction, to make determinations with respect to Park Ridge and Oak Ridge. Petitioners present other frivolous arguments concerning petitioners' due process rights, the definition of a deficiency, and petitioners' perceived arbitrary nature of the statutory notice. Petitioners conduct is merely an extension of their conduct in Sandvall v. Commissioner,T.C. Memo. 1989-56. We therefore award damages to the United States in the amount of $ 5,000 pursuant to section 6673.
Accordingly,
Decision will be entered for respondent.