DocketNumber: Docket No. 561-76
Citation Numbers: 69 T.C. 1005, 1978 U.S. Tax Ct. LEXIS 148
Judges: Fay
Filed Date: 3/29/1978
Status: Precedential
Modified Date: 11/14/2024
*148
In 1972 petitioners, H and W, created a trust to which H purportedly conveyed his lifetime services and all remuneration earned therefrom.
1. The purported conveyance was merely an assignment of income ineffective to shift the incidence of taxation from petitioners to the trust on amounts paid as compensation for H's services.
2. H, as trustee, held powers sufficient to cause the entire trust to be governed by
3. The amount of allowable deductions incurred by H in writing a book determined.
4. Petitioners are liable for an addition to tax under
*1005 Respondent determined a deficiency in petitioners' Federal income tax for 1972 of $ 4,222, plus an addition to tax under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
*1006 At the time of filing the petition herein, Richard L. Wesenberg, M.D., and his wife, Nancy, resided in Denver, Colo. The couple filed a joint Federal income tax return for 1972 with the Internal Revenue Service Center in Ogden, Utah.
On March 23, 1972, Richard executed, as grantor, a trust instrument creating the Richard L. Wesenberg Family Estate (A Trust) (hereinafter referred to as the Trust). The trust instrument provided, in part, as follows:
The above named Trustees, for themselves and their successors in trust, do hereby accept the conveyance in trust and acknowledge delivery of all the property specified, together with all the terms of the Trust herein set forth, agreeing to conserve and improve the Trust, to invest and reinvest the funds of said Trust in such manner as will increase the financial rating of the Trust (estate) during the period of outstanding liabilities of the various properties*152 and enterprises in commerce for gain, exercising their best judgment and discretion, in accordance with the Trust minutes,
* * * *
Powers of Trustees
Trustees' powers shall be construed as general powers of citizens of the United States of America, to do anything any citizen may do in any state or country, subject to the restrictions herein noted. They shall continue in business, conserve the property, commercialize the resources, extend any established line of business in industry or investment, as herein specially noted, at their discretion for the benefit of this Trust, * * *
Administration
The Trustees shall regard this instrument as their sufficient guide,
[Emphasis supplied.]
* * * *
Expenditures
*1007 The Trustees shall fix and pay compensation of all officers, employees or agents in their discretion, and may pay themselves such reasonable compensation for their services as may be determined by a MAJORITY of the Board of Trustees.
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TRUSTEES' DECLARATION OF PURPOSE OF THIS CONSTITUTIONAL TRUST
Shall be -- to accept the exclusive use of RICHARD LEE WESENBERG's lifetime services to include all of His earned remuneration from any source whatsoever and certain real and personal properties evidenced*154 by affidavit, Deed, and Bill of Sale, in exchange for all of the beneficial interest (100 units) of THIS TRUST so that RICHARD LEE WESENBERG can maximize His lifetime efforts through the utilization of His Constitutional Rights; for the protection of His family in the pursuit of His happiness through His desire to promote the general Welfare, all of which RICHARD LEE WESENBERG feels He (or She) will achieve through the practice of His (or Her) RELIGION.
The Trustees by their resolution of purpose may perform and function for any purpose on behalf of any individual, group, or combination of any individuals, severally or collectively.
In Such Instances the powers and authority of the Trustees shall be defined and limited to the general purposes set forth by the Declaration of Trust.
* * * *
Duration -- Closure
This Trust shall continue for a period of twenty-five years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in values, or other good and sufficient reason, liquidate the assets, distribute and close the Trust at any earlier date determined by them. The Trust shall be proportionately*155 and in a pro rata manner distributed to the beneficiaries.
On April 18, 1972, petitioners executed documents purporting to sell and convey to the Trust their personal residence, numerous items of household furnishings, certain securities, and medical and life insurance policies covering petitioners. As an integral part of this transaction, the Trust assumed Richard's then outstanding debts and liabilities.
On the same date, Richard also executed a document purporting to convey to the Trust the exclusive use of his lifetime services and "all my earned and to be earned remuneration and all my right, title and interest in such earnings from my services rendered or to be rendered" to the University of Colorado Medical School and the Hoeber Medical Division of *1008 Harper & Row Publishers, Inc. Shortly thereafter, Richard entered into an employment contract with, *156 issued checks in the amount of $ 23,895.75 to the Trust as payment for Richard's services during the remainder of 1972. In return, Richard received all 100 units of beneficial interest in the Trust. Such units of beneficial interest conveyed only a right to receive a pro rata share of any "emoluments" distributed at the discretion of a majority of the trustees. Richard, Nancy, and Marvin J. Roesler (Marvin), a colleague of Richard's, were designated as trustees in the trust instrument. *157 Shortly after the creation of the Trust, the trustees held several meetings at which various resolutions affecting the administration of the Trust were adopted. At the third such meeting, Richard returned his certificate of ownership of all 100 units of beneficial interest for cancellation and reissuance of 30 units to each of his three minor children. *158 was to bear the cost of their health insurance, vacation expenses which were approved by them as trustees, beauty and barbershop expenses, and such other *1009 incidental expenses which, in their opinion, as trustees, were in the "best interests" of the Trust. Item Amount Interest $ 3,774.00 Taxes 1,402.65 Charitable deduction 786.27 Travel 6,210.91 Health care 640.63 Insurance 2,247.60 Housing provided as a convenience to employer 13,672.33 Consultant fees 4,400.00
*159 On their Federal income tax return for 1972, petitioners included as income amounts received by them prior to the creation of the Trust as well as $ 4,400 in consultant fees received by them for services rendered to the Trust.
During 1971 and 1972 Richard, a licensed physician, authored an illustrated book entitled "The Newborn Chest," which consisted of 296 pages devoted to the diagnosis and treatment of chest disorders in infants. As of the date of the trial of this case, Richard had received royalties from its sale of $ 7 to $ 8 thousand. In addition, expenses of $ 3,893 *160 decreased their income for the consulting fees paid by the Trust to petitioners. Further, respondent determined that the capital gains and losses reported by the Trust were properly reportable by petitioners. In *1010 addition, respondent determined that the expenses deducted by the Trust should have been deducted by petitioners but limited to the amount of $ 5,894.45. Finally, of the $ 3,893 deducted by petitioners in connection with the writing of Richard's book, respondent disallowed all but $ 139.
OPINION
The first issue we must decide is whether the purported conveyance by Richard of his lifetime services to a family trust was effective to shift the incidence of taxation on amounts representing compensation to him but paid to the Trust. Briefly stated, it is respondent's contention that the attempted conveyance by Richard constituted an anticipatory assignment of income, and therefore petitioners must report as gross income the compensation owed Richard but paid to the Trust by the school. We agree with respondent.
Described by the Supreme Court as the "first principle of income taxation" is the old saw: that income must be taxed to the one who earns it.
To begin, Richard, and not the Trust, was obliged under a contract with the school to provide services which were inherently personal in nature to him. We seriously question whether the Trust could (or that Richard ever intended that it be able to do so) obligate Richard to perform these services or interfere with his contractual arrangement with the school. Furthermore, it was the school, and not the Trust, which determined Richard's salary and supervised his employment. See
Accordingly, we hold that Richard's conveyance of his lifetime services, and the income earned through the performance of those services, was simply an assignment*163 of income and ineffective to shift the tax burden thereon from petitioners to the Trust. Thus, the total amount paid to the Trust by the school for Richard's services was includable in petitioners' gross income. *164 At the outset we note that although respondent contends that the income and expense items in issue are reportable by petitioners, he does not argue -- and in view of the record, we believe correctly so -- that the existence of the Trust established by petitioners should be disregarded for Federal income tax purposes. Rather, it is respondent's contention that these items are properly reportable by petitioners because the Trust is governed entirely by the so-called "grantor trust rules." We agree with this contention.
*1012 Ordinarily, the income taxation of trusts is controlled by sections 641 through 668 of subchapter J of the Code. However, where the grantor of a trust retains certain powers enumerated in sections 673 through 677, then, for income tax purposes, he is treated as the "owner" of that portion of the trust over which the proscribed powers extend. Where the grantor is so treated,
*165 In ascertaining whether a particular power retained by the grantor is within the group of powers proscribed by the statute, it is usually necessary to first determine if the power is exercisable by the grantor with or without the consent of an "adverse party." The term "adverse party" is defined in section 672(a) as "any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust." While under this definition the beneficiaries of the Trust would be adverse parties, the trust instrument did not require their consent or approval prior to the exercise of any powers granted under the Trust. With respect to Marvin and Nancy, neither had a direct beneficial interest in the Trust. Furthermore, their interest in the Trust as cotrustees does not make them adverse with respect to the exercise of any power in conjunction with Richard.
Next, we must decide whether the powers held by Richard were within those proscribed by the statute, and, if so, over what portion of the Trust he is deemed owner.
Under the terms of the Trust, petitioners, as a majority of the trustees, had the authority to adopt resolutions affecting the administration of the Trust "covering contingencies as they arise." In this regard, the Trust further provided: "Resolutions of the Board of Trustees authorizing a special thing to be done shall*167 be evidence that such act is within its power." While this language would not of itself cause Richard to be considered the "owner" of any portion of the Trust,
Moreover, the record clearly establishes that Richard used this control for his own benefit. For example, a resolution was adopted by the trustees in which petitioners were "employed" as managers of*168 the Trust. Specifically, the Trust furnished them with a rent-free residence maintained by the Trust and a monthly consultant fee which was determined solely by petitioners. In addition, petitioners caused the Trust to pay for their health care, beauty and barbershop expenses, vacation expenses, and for any other personal expenses of petitioners which they agreed were in the "best interests" of the Trust.
In the alternative we believe our holding is compelled by
As stated above, Richard had complete control over the disposition of the Trust's assets through the Trust provision which permitted the trustees to adopt resolutions to cover contingencies. The manner of the exercise of this power by the trustees was tantamount to a power of revocation, and accordingly, Richard, under
While the trust instrument does not specifically provide for the distribution of income to petitioners, under the "contingency" power, *170 the trustees had the authority to discharge Richard's obligations of medical care, life insurance, and housing.
In his statutory notice, respondent reduced or disallowed entirely some of the deductions of the Trust which he reallocated to petitioners. Respondent's determination as to the amount of the allowable deductions is not challenged by petitioners, and it will therefore be sustained.
The next issue for decision concerns the amount of expenses incurred by Richard and deducted by petitioners in connection with Richard's writing a book. Respondent's only argument for disallowing a major portion of the deduction is that petitioners have failed to substantiate*171 such expenses. We do not agree.
In support of their claimed deduction, petitioners, at the trial of this case, presented Richard's testimony as to the amount of time and expenses incurred by him in writing the book. This *1015 testimony was corroborated by the introduction into evidence of a copy of the 296-page publication which contained numerous photographic illustrations. After viewing Richard's demeanor, and because the evidence offered was wholly uncontradicted, we believe petitioners have met their burden of proof, and accordingly are entitled to the full amount of the deduction claimed by them.
The final issue for decision is whether petitioners are liable for an addition to tax under
To reflect the foregoing,
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩
2. The contract was signed by Richard in his individual capacity and not on behalf of the Trust.↩
3. On or about the time of the creation of the Trust, Marvin J. Roesler signed an undated resignation of his position as a trustee. Although present at the first few meetings of the trustees, he thereafter was no longer active in the affairs of the Trust. Apparently, his trustee position was for purpose of appearances only. Therefore, unless otherwise noted, when we hereafter refer to "trustees," we shall be referring to petitioners only.↩
4. Ten units of beneficial interest were also reissued to an entity styled "The Wesenberg Educational Trust." The record is scant as to the purpose, terms, and beneficiaries of this trust and, therefore, it will not be discussed further.↩
5. This amount could be increased by agreement between petitioners, as managers, and petitioners, as trustees.↩
6. Items found to be in the "best interests" of the trust included such things as a sports coat, life insurance, and an item identified in the record only as a "globe swag."↩
7. This amount included expenditures for such items as secretarial assistance, supplies, photocopying, photography, telephone, as well as auto and office expense.↩
8. At the close of the trial in this case, the Court requested that the parties file original simultaneous briefs by June 6, 1977, and reply briefs thereafter on July 21, 1977. Failing to receive an original brief from petitioners on the designated date, the Court notified petitioners' counsel of such fact and requested that a brief be filed. As of July 8, 1977, the Court still had not received a brief from petitioners' counsel, and at that time issued an order closing the record in this case.↩
9. As stated above, petitioners filed no brief in this case. However, in reaching our conclusions with respect to this first issue, we considered the arguments raised by taxpayers similarly situated in
10. This second issue deals with those items set out in our findings of fact which were reported on the Federal fiduciary income tax return filed for the Trust other than the income item covered in our discussion of the first issue.↩
11. "Portion" could include part or all of a trust depending upon the extent of a person's rights over its income and corpus. See
12. We are cognizant of the fact that trustees are subject to certain duties and limitations imposed by local law. See
13. See n. 6
14. Futhermore, although the amount is not in the record Richard specifically "assigned" all of his debts which existed at its creation to the Trust.↩