Sparkman

I. Facts and Procedural History

James Sparkman has sold solar water heating systems to homeowners since 1983. Until 1993, Sparkman operated his business as a sole proprietorship, under the registered trade name “Mercury Solar.” 1 Unless otherwise indicated, all references are to the Internal Revenue Code of 1986, title 26 of the United States Code, as amended, and as in effect during the years at issue. 16172 SPARKMAN v. CIR A. Hawaii Environmental Holdings (HEH)

In 1993, Sparkman purported to create and transfer his business to Hawaii Environmental Holdings (“HEH”), styled in its formation document an “Unincorporated Business Orga- nization.” The formation document, entitled “Contract and Declaration of Unincorporated Business Organization,” pro- vides that Sparkman (identified as the “Exchanger or Exchangers”) will convey the Mercury Solar business to HEH in exchange “for twenty-five dollars of silver, Certificates comprising a total of one hundred units, and other full and adequate consideration.” The formation documents also pro- vide for a “Trustee” who will be responsible for the “exclu- sive management and control of [HEH’s] property and business…