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NANCY L. TRENERRY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTrenerry v. CommissionerDocket No. 5570-91
United States Tax Court T.C. Memo 1994-500; 1994 Tax Ct. Memo LEXIS 508; 68 T.C.M. (CCH) 897;October 11, 1994, Filed*508 Decision will be entered under Rule 155.
In 1973, a partnership (A-I) was formed, with petitioner (P) as the only general partner; and A-I bought an apartment complex. In 1976, A-I redeemed the interests of the limited partners, so that P owned the business and hence the apartment complex. In 1982, limited partners joined P to form partnership A-II; P contributed the apartment complex to A-II; and P contributed her A-II interest to a newly formed revocable trust (T-I), of which P was the trustee. In 1984, the A-II limited partners transferred their A-II interests to T-I; A-II sold the apartment complex to third parties and took a note; P revised the trust instrument and renamed the trust (T-II); and P assigned the note to T-II. In 1986, a business trust (BT-I) was created in Turks and Caicos Islands; a corporate Turks and Caicos Islands trustee (CT-I) was appointed trustee of BT-I; and petitioner received units in BT-I in exchange for the note (which supposedly had been held by T-II). In early 1987, P caused CT-I to be replaced as BT-I's trustee by CT-II, another corporate Turks and Caicos Islands trustee; P exchanged her BT-I units for units in another Turks and Caicos Islands*509 business trust (BT-II); and CT-II was appointed trustee of BT-II. In late 1987, BT-I sold the note to a third party for cash.
P concedes that she is taxable on income of A-I, A-II, T-I, and T-II.
Held : BT-I and BT-II are shams; the interest received on the note in 1986 and 1987, and the capital gain on the sale of the note in 1987, are taxable to P.Nancy L. Trenerry, pro se.For respondent:Cathleen A. Jones andLeann Page Drummond .CHABOTCHABOTMEMORANDUM FINDINGS OF FACT AND OPINION
CHABOT,
Judge : Respondent determined deficiencies in Federal individual income tax and additions to tax undersections 6651 Additions to Tax Sec. Sec. Sec. Year Deficiency 6651 6653(a)(1) 6653(a)(2) 1983 $ 24,500 $ 6,125 $ 1,225 n1 1984 30,590 7,648 1,530 n1 1985 30,394 7,599 1,520 n1 1986 29,566 7,392 -- -- 1987 100,545 25,136 -- -- Additions to Tax Sec. Sec. Sec. Year 6653(a)(1)(A) 6653(a)(1)(B) 6654 1983 -- -- $ 1,499 1984 -- -- 1,924 1985 -- -- 1,741 1986 $ 1,478 *510 1,430 1987 5,027 5,430 After concessions *511 by both parties, the issues for decision are as follows:
(1) Whether certain "common law contractual business trust organizations" *512 reference.
When the petition was filed in the instant case, petitioner resided in Claremore, Oklahoma.
1. Background During the years in issue, petitioner resided in the State of Washington. On August 1, 1973, Auvil Investments, Ltd., a Washington partnership (hereinafter sometimes referred to as Auvil-I), was formed. (Auvil was petitioner's parents' surname.) Petitioner was the general partner and also was one of the three limited partners in Auvil-I. In October 1973, Auvil-I bought a 32-unit apartment complex (hereinafter sometimes referred to as the Apartment Complex) in Federal Way, Washington, from Edward L. Crosby and Marilyn D. Crosby (hereinafter sometimes referred to as the Crosbys).
In April 1976, Auvil-I redeemed the interests of the limited partners, other than petitioner, for cash and deferred payments (monthly payments on interest-bearing notes due April 1, 1996). After the limited partners' interests were redeemed, Auvil-I filed a cancellation of its certificate of limited partnership. However, Auvil-I was not to be terminated until the redeemed limited partners were fully paid. Petitioner continued to operate the Apartment Complex under the name of *513 Auvil-I, albeit without partners. The income and expenses of the Apartment Complex were reported on Schedule E of petitioner's individual income tax returns for 1977 through 1980.
On March 31, 1982, petitioner formed the Nancy Lee Trenerry Trust (hereinafter sometimes referred to as the Trenerry Trust), a revocable trust, of which she was both the grantor and the only trustee. *514 Also on March 31, 1982, Auvil-I's partnership agreement was amended to form Auvil Investments, Ltd., a Washington limited partnership (hereinafter sometimes referred to as Auvil-II). Petitioner was the general partner and also was one of the three limited partners of Auvil-II. Susan and Joan were the other two limited partners. Susan and Joan each agreed to contribute $ 13,500 to Auvil-II. Petitioner contributed to Auvil-II the Apartment Complex, which was valued at $ 273,000, after mortgages and encumbrances.
On August 25, 1982, petitioner, Susan, and Joan amended the Auvil-II partnership agreement to provide that any partner could freely assign her partnership interest to the trustee of a trust created for that partner's benefit. On September 16, 1982, petitioner transferred her general and limited partnership interests in Auvil-II to the Trenerry Trust, but (according to the transfer instrument) petitioner remained general manager of Auvil-II.
On May 17, 1984, Zaran Sayre and Shirley Sayre (hereinafter sometimes referred to as the Sayres) agreed to buy, and Auvil-II agreed to sell, the Apartment Complex for $ 750,000. Shortly thereafter, Susan (on July 20, 1984) and Joan*515 (on July 25, 1984) assigned and transferred their Auvil-II limited partnership interests to petitioner, as trustee of the Trenerry Trust. On July 25, 1984, Auvil-II filed a Cancellation of Certificate of Limited Partnership Agreement, resulting in Auvil-II's dissolution. Nevertheless, petitioner continued to sign documents as general partner of Auvil-II after that date.
On July 31, 1984, Auvil-II sold the Apartment Complex to the Sayres who, in turn, executed a $ 750,000 promissory note with wraparound provisions (hereinafter sometimes referred to as the Note) to Auvil-II. On the same day, Auvil-II conveyed the Apartment Complex to the Sayres by a statutory warranty deed, which listed many interests to which the Sayres' interest was subject. One of these superior interests was Auvil-I's obligation to the Crosbys, the unpaid principal of which had been reduced to $ 91,641.75 as of August 1, 1984. Under the statutory warranty deed, Auvil-II agreed that it (and, presumably, not the Sayres) was to pay the obligation to the Crosbys.
On August 15, 1984, petitioner, as grantor, changed the name of the Trenerry Trust to the Jennville Trust. This change in name was made "in memory *516 of the Trustor's parents, Fay Glover Jennings Auvil and Jesse Hubert Auvil." Although the amending document revised various provisions of the trust agreement, Susan and Joan (whose name at that time was Joan Trenerry Crews) continued to hold remainder interests, and also to be possible successor trustees. The last paragraph of the amending document provides as follows:
9. Trustor [petitioner] urges Trustees to beware of attorneys and to avoid them whenever [sic] at all possible. Mention of "attorneys" is hereby deleted from this agreement. Substitute "advise [sic] of counsel" wherever "attorneys" is mentioned.
On September 5, 1984, petitioner, as general partner of Auvil-II, assigned the Note to the Jennville Trust. In the assigning document, the Jennville Trust is consistently referred to (in five places) as "Jennville Charitable Trust", a term that does not appear in the August 15, 1984, amending document. The assignment of the Note was accepted for the Jennville Trust by petitioner and Joan as trustees, but the record does not indicate when Joan became a trustee. The assigning document states that the Note had a then-remaining principal balance of $ 748,347.21, and*517 that the Sayres acknowledge that they are thereafter to make payments to the Jennville Trust. The assigning document provides that the Jennville Trust is thereafter to make payments on the obligation to the Crosbys, and states that the unpaid principal of this obligation had been reduced to $ 90,149.51 by September 5, 1984.
Petitioner had control of all income received on the Note until March 12, 1986, and was liable for all income tax associated with this income.
2. Creation of Liberty Holding Co. Nassau Life Insurance Co., Ltd. (hereinafter sometimes referred to as Nassau Life), was incorporated on January 25, 1978.
On March 12, 1986, Liberty Holding Co. (hereinafter sometimes referred to as Liberty), a common law contractual business trust, was created by a contract (hereinafter sometimes referred to as the Contract) in Grand Turk, Turks and Caicos Islands, British West Indies. The parties to the Contract were Walter R. Simons (hereinafter sometimes referred to as Simons), "the CREATOR", and Cynthia A. Francis (hereinafter sometimes referred to as Francis), "the EXCHANGOR". Under the Contract, Simons appointed Nassau Life as trustee, to "control and administer all*518 assets of the Company [Liberty] to the best of its ability for the Certificate Holders." The Contract was signed by Simons, by Francis, and, on behalf of Nassau Life, by Veronica D. Williams. *519 described in Liberty's minutes as being in exchange for $ 100 "and other items of value as listed on Schedules A and B hereof." The minutes were signed by Eldon Samuel Anderson, as Nassau Life's executive vice president, and by petitioner and Joan. The record does not show the above-referenced Schedules A and B. The remaining 25 Units of Liberty were never issued.
3. Petitioner's Later Transactions With Liberty On March 21, 1986, the Jennville Trust assigned the Note to Liberty. Petitioner and Joan signed this assigning document as the Jennville Trust's trustees. (Again, the Jennville Trust is consistently referred to in this assigning document as "Jennville Charitable Trust".) Petitioner and Joan also signed this assigning document as Liberty's president (agent) and secretary (agent), respectively. No one else signed this assigning document on behalf of the Jennville Trust or Liberty. This assigning document states that the Note had a then-remaining principal balance of $ 745,476.44, and that Liberty is thereafter to make payments on the obligation to the Crosbys. The Note was the substantial part of the property that petitioner exchanged for 74 Units of Liberty.
*520 Also on March 21, 1986, the Trenerry Trust borrowed $ 31,740 from Liberty, pledging as collateral security real property in Texas. The deed of trust, signed by petitioner as trustee for the Trenerry Trust, 4. Replacement of Nassau Life as Trustee
On January 1, 1987, Nassau Life tendered its resignation as Liberty's trustee, to take effect January 31, 1987; and Nassau Life appointed petitioner and Joan as successor, or contingent, trustees of Liberty.
On February 1, 1987, petitioner and Joan, as Liberty's contingent trustees, appointed Century Trust Co. Ltd. (hereinafter sometimes referred to as Century Trust), as trustee for Liberty. On the same day, petitioner and Joan resigned as Liberty's contingent trustees. Century Trust, which had been incorporated under the laws*521 of the Turks and Caicos Islands on April 24, 1986, accepted its appointment, accepted petitioner's and Joan's resignations as contingent trustees, and appointed petitioner and Susan as Liberty's president (agent) and secretary (agent), respectively.
5. Steward Co. Steward Co. (hereinafter sometimes referred to as Steward) was a company similar to Liberty. Century Trust, Liberty's trustee, was also Steward's trustee. On February 1, 1987, petitioner exchanged her 74 Units of Liberty for 100 units of Steward. Petitioner is the only unit-holder of Steward.
6. Petitioner as President of Liberty Petitioner acted as president (agent) of Liberty from its inception. As president (agent) of Liberty, petitioner's duties included signing checks; executing real estate deeds; endorsing, buying, selling, signing or otherwise transferring securities, stocks, bonds, notes, or money fund accounts; and signing any other required legal documents. Petitioner set up, maintained, and was signatory for Liberty's U.S. bank accounts. As president (agent) of Liberty, petitioner received and deposited into Liberty bank accounts the payments made by the Sayres on the Note. Petitioner *522 continued to conduct Liberty's affairs throughout 1987 even though she no longer held Units of Liberty. Petitioner signed the checks (dated April 1, 1987, and August 12, 1987) drawn on Liberty's bank accounts to pay the real estate taxes for the Apartment Complex.
7. Sale of the Note On December 16, 1987, Centrum Financial Services, Inc. (hereinafter sometimes referred to as Centrum), offered to buy the Note from Liberty for $ 400,000. Under the terms of the offer, Centrum would pay $ 400,000 cash to the holder of the Note on closing, which was to take place no later than December 31, 1987. Petitioner, as president (agent) of Liberty, accepted Centrum's offer. On December 24, 1987, Centrum sent a letter to the Sayres asking them to verify the balance owed on the Note. The letter, signed "Sent without signature to avoid delay", states as follows:
On December 28, 1987, Liberty assigned to Centrum the Note and the Deed of Trust. The only signatures on this assigning document were those of petitioner and Susan, as Liberty's*523 president (agent) and secretary (agent), respectively.Nancy Trenerry wishes to close the transfer prior to the end of the year and I would therefore appreciate your prompt attention to this matter.
Also on December 28, 1987, petitioner and Susan, as Liberty's president (agent) and secretary (agent), respectively, notified the Sayres of the assignment and directed the Sayres to make future payments to Centrum. As Liberty's president (agent), petitioner was entitled to compensation by Liberty for her services, but the only payment "of significance" that petitioner remembers is for per diem and expenses on account of her trip to the coast in connection with the sale of the Note.
8. Miscellaneous Apart from the interest and capital gain on the Note, which are in dispute, the parties have agreed to dispose of the 1986 and 1987 notice of deficiency determinations as shown in table 1.