MERRITT A. LOGAN and DOLORES F. LOGAN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 4423-78, 14386-81.

UNITED STATES TAX COURT

46 T.C.M. (CCH) 1051; T.C. Memo 1983-475; T.C.Mem. (RIA)

83475

August 15, 1983.

CORE TERMS: family trust, conveyed, income tax, certificate, recognizable,

deductible, purportedly, transferred, lifetime, grantor trust, regulations,

units of beneficial interest, intentional disregard, dental practice, net

income, remuneration, disregarded, furniture, captioned, resigned, taxation

SYLLABUS: Petitioners transferred to a family trust most of their business and

personal assets, including their home, petitioner-husband's office equipment,

and their lifetime personal services and all remuneration therefrom (except for

petitioner-husband's net income from his dental practice).

Held: (1) The trust was devoid of economic reality and is not recognizable

for Federal income tax purposes.

(2) Petitioners are liable for additions to tax under section 6653(a), I.R.C.

1954.

COUNSEL: Gloria T. Svanas, for the petitioners.

Deborah A. Butler, for the respondent.

OPINIONBY: CHABOT

OPINION: MEMORANDUM OPINION

CHABOT, Judge: Respondent determined deficiencies in Federal individual

income tax and additions to tax under section 6653(a) n1 (negligence, etc.)

against petitioners as follows:

Additions to Tax

Docket No. Year Deficiency Sec. 6653(a)

4423-78 1974 $17,019

14386-81 1977 73,105 $3,655

1978 94,955 4,748

n1 Unless indicated otherwise, all section references are to sections of the

Internal Revenue Code of 1954 as in effect for the years in issue.

These cases have been consolidated for trial, briefs, and opinion.

After concessions by both sides, the issues for decision are as follows:

(1) Whether income and expenses are attributable to petitioners or to the

Merritt A. Logan Family Estate (a Trust); and

(2) Whether petitioners are liable for additions to tax under section

6653(a).

These cases have been submitted fully stipulated; the stipulations and the

stipulated exhibits are incorporated herein by this reference.

When the petitions in the instant cases were filed, petitioners Merritt A.

Logan (hereinafter sometimes referred to as "Merritt") and Dolores F. Logan

(hereinafter sometimes referred to as "Dolores"), husband and wife, resided in

Fair Oaks, California.

During the years in issue, Merritt was in the practice of dentistry.

On January 13, 1974, Merritt executed a document captioned "Declaration of

Trust of This Constitutional Trust". The trustees of this trust were Susan J.

Tramblie (hereinafter sometimes referred to as "Tramblie"), Robert A. Scott, and

Lois M. Hawes. Petitioners paid $3,500 to this trust. This trust was entitled

the "Merritt A. Logan Educational Trust" (hereinafter sometimes referred to as

"the first trust").

On March 7, 1974, Merritt executed a document captioned "Declaration of

Trust of This Pure Trust". The trust indenture consisted of a preprinted form

with blank spaces provided for applicable names. The trust was entitled the

"Merritt A. Logan Family Estate (a Trust)" (hereinafter sometimes referred to as

"the second trust"). The initial trustees of the second trust were Dolores and

Tramblie. On March 8, 1974, Merritt became a trustee of the second trust. On

March 10, 1974, Tramblie resigned as a trustee and on that date Douglas M. Logan (hereinafter sometimes referred to as "Douglas") and Donald J. Logan

(hereinafter sometimes referred to as "Donald") became trustees of the second

trust. On September 15, 1974, Douglas and Donald resigned as trustees of the

second trust.

On March 7, 1974, Dolores purportedly conveyed her interest in certain

properties and her lifetime services to Merritt in order to facilitate

reconveyance to the second trust. On March 8, 1974, Merritt purportedly

conveyed to the second trust various items of real and personal property,

including petitioners' personal residence, several parcels of land, Merritt's

interest in a limited partnership, the contents of the residence, and office

equipment and furniture from Merritt's office. Additionally, Merritt

purportedly conveyed to the second trust the exclusive use of his and Dolores'

"lifetime services and all of the currently earned remuneration accruing

therefrom." On March 8, 1974, the second trust resolved that it would make no

claim to the net income Merritt received from his dental practice.

On March 8, 1974, Merritt received 100 units of beneficial interest, which

constituted all the units of beneficial ownership of the second trust. Merritt

transferred 50 units to Dolores on March 7 or 8, 1974. On December 15, 1974,

Merritt and Dolores transferred units so that Merritt held 20 units, Dolores

held 30 units, and 10 units were held by each of the following: Audra Fund,

Douglas, Donald, Robert Mauri Logan, and Brent Franklin Logan. On December 29, 1976, Merritt gave his 20 units to "Don Logan for a period of 4 years, * * *

then to Robert Logan for a period of 4 years, * * * then to Brent Logan for 4

years, * * * and thereafter to * * * Dolores * * *". On August 15, 1977,

Douglas gave his 10 units to "Don Logan for years '77, '78, '79; then transfer

to Bob Logan for year '80; then transfer to Brent Logan for years '81, '82,

'83, '84, and then to be returned to Merritt Logan n2 if no longer needed by any

of the above beneficiaries for educational purposes by May '84." The units of

beneficial interest were evidenced by certificates that conveyed to the owner

solely the "emoluments" as distributed by the action of the trustees. The

certificates conveyed no interest in the second trust's assets, or in the

management of the second trust.

n2 One of Douglas' 5-unit certificates is "to be returned to Merritt" and the

other certificate is "to be returned to Dolores".

Merritt and Dolores were the second trust's executive trustee and executive

secretary, respectively, having been nominated, elected, and appointed to these

positions on March 8, 1974. All decisions concerning the second trust were made

by petitioners.

By a document dated March 8, 1974, and styled "Agreement", the second trust

and Merritt entered into an agreement whereby the second trust agreed to lease

certain office equipment and furniture to Merritt, procure his office supplies

and materials, manage his business personnel, supervise his accounting and

billing, and act as his fiscal agent. Merritt agreed to pay to the second trust

"an amount equal to a certain percentage of the gross income of the Doctor

[Merritt] derived from the operation of his business."

In the notices of deficiency, respondent disregarded the second trust and

made adjustments in order to tax petitioners as if the second trust had not been

created. For 1974, respondent disallowed the deduction taken by petitioners for

the $3,500 paid to the first trust.

I. The Family Trust

Petitioners maintain that the second trust was a valid entity under State law

and that State law determines validity for Federal tax purposes; they claim the

$3,500 is deductible under section 212. Respondent relies on the following

three reasons for asserting that the second trust should be disregarded for

purposes of determining petitioners' Federal income tax liabilities: (1) the

trust lacks economic reality and is a mere paper sham used for tax avoidance

purposes; (2) the trust effects an anticipatory assignment of income; and (3)

the grantor trust provisions of sections 671-677 apply. Respondent maintains

that the $3,500 is a personal expense, made nondeductible by section 262, and in

any event is not deductible under section 212.

We agree with respondent.

This case involves yet another attempt to escape taxation by transferring

property to a "family trust". On numerous occasions this Court and the United

States Courts of Appeals have considered similar attempts, and the taxpayers'

attempts to shift the incidence of taxation have been rejected. E.g., Hanson v.

Commissioner, 696 F.2d 1232 (CA9 1983), affg. a Memorandum Opinion of this

Court; n3 Schulz v. Commissioner, 686 F.2d 490 (CA7 1982), affg. Memorandum

Opinions of this Court; n4 Gran v. Commissioner, 664 F.2d 199 (CA8 1981), affg.

a Memorandum Opinion of this Court; n5 Luman v. Commissioner, 79 T.C. 846

(1982), and cases cited therein at p. 852, n. 4. See Mertsching v. United

States, 704 F.2d 505, 506 (CA10 1983). But see May v. Commissioner, 76 T.C. 7

(1981), on appeal (CA9, Nov. 1, 1982).

n3 T.C. Memo. 1981-675.

n4 T.C. Memo. 1980-568, and T.C. Memo. 1981-73.

n5 T.C. Memo. 1980-558.

We have held that a "family trust" lacked economic substance and was a

nullity for Federal income tax purposes. Hanson v. Commissioner, supra;

Markosian v. Commissioner, 73 T.C. 1235 (1980). The record in the instant fully

stipulated cases presents nothing which would support a different result. The

record does not show that, after creation of the second trust, there was any

change in petitioners' use of the trust assets, or petitioners' full control

over the income generated by the trust assets. For the reasons carefully

explained in Markosian v. Commissioner, supra, we find that the second trust

lacked economic substance and thus is not recognizable for Federal tax purposes.

Since we have determined that the second trust is not recognizable for

Federal income tax purposes, we need not address respondent's additional

arguments in any great detail. However, it is clear that respondent's

application of assignment of income principles and the grantor trust provisions

to these cases is also proper. See, e.g., Hanson v. Commissioner, supra, Vnuk

v. Commissioner, 621 F.2d 1318 (CA8 1980), affg. a Memorandum Opinion of this Court; n6 Luman v. Commissioner, supra, Vercio v. Commissioner, 73 T.C. 1246 (1980); Wesenberg v. Commissioner, 69 T.C. 1005 (1978).

n6 T.C. Memo. 1979-164.

The record in these fully stipulated cases provides no information as to what

the $3,500 was paid for. Indeed, the only information we find (apart from

conflicting characterizations in the parties' briefs) is that it was paid to the

first trust; neither the record nor the briefs inform us as to the relationship

between the first trust and the second trust. The $3,500 is not deductible.

Luman v. Commissioner, supra.

We hold for respondent on this issue.

II. Additions to Tax--Section 6653(a)

An addition to tax under section 6653(a) is imposed if any part of any

underpayment of tax is due to negligence or intentional disregard of rules or

regulations. Petitioners have the burden of proving that their underpayments of

tax were not due to negligence or intentional disregard of rules and

regulations. Hanson v. Commissioner, 696 F.2d at 1234. Petitioners have

presented no evidence on this matter.

Petitioners cite Hoelzer v. Commissioner, T.C. Memo. 1982-6, for the

proposition that the section 6653(a) addition to tax should not be imposed if a

taxpayer shows good faith reliance on the organization that produced and

packaged the family trust materials. Our reading of the opinion in Hoelzer

indicates that the petitioners therein relied on an independent accountant who

signed as preparer of their income tax returns. There is no evidence in the

instant cases as to any such reliance by petitioners.

We hold for respondent on this issue.

To take account of the parties' agreements on other matters,

Decisions will be entered under Rule 155.