73 T.C. 1235 (1980), 10775-77, Markosian v. C.I.R.

Docket Nº:10775-77.
Citation:73 T.C. 1235
Opinion Judge:DRENNEN, Judge:
Attorney:Paul T. Wright, for the petitioners. Richard A. Jones, for the respondent.
Case Date:March 31, 1980
Court:United States Tax Court

Page 1235

73 T.C. 1235 (1980)




No. 10775-77.

United States Tax Court

March 31, 1980

Petitioners transferred all of their business and personal assets, including Louis' dental equipment, his lifetime services, and all remuneration therefrom, to a family trust under which they were the only trustees. Petitioners continued to use their home and personal assets, and Louis continued to use his office and dental equipment in his practice. Louis, however, received all of the gross income from his dental practice and deposited it in his personal account. Petitioners then paid 80 percent of the gross income from the dental practice to the trust as a " fee." Held, the trust was devoid of economic reality and is to be treated as a nullity for Federal income tax purposes.

Paul T. Wright, for the petitioners.

Richard A. Jones, for the respondent.


Respondent has determined a deficiency of $10,312 in petitioners' income tax for the taxable year 1975. The issues for our decision are:

(1) Whether a trust purportedly created by petitioners is entitled to be recognized as an entity separate and distinct from the taxpayers;

(2) Alternatively, whether the taxpayers are to be treated as owners of the trust under sections 671 through 677, I.R.C. 1954; [1] and

(3) Whether a management fee paid by petitioners to the trust created by them is deductible under section 162.


Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Petitioners Louis R. Markosian (Louis) and Joan P. Markosian (Joan), are husband and wife, whose legal residence was in Phoenix, Ariz., at the time of their filing of the petition herein. (Louis and Joan will hereinafter sometimes be referred to collectively as petitioners.) The petitioners filed their joint

Page 1236

Federal income tax return for the taxable year 1975 with the Western Region Service Center, Ogden, Utah.

Louis is a licensed dentist and has been engaged in the practice of dentistry for 23 years. The majority of petitioners' assets had been acquired with Louis' earnings from his dental practice in Arizona, a community property State.

Petitioners have resided in Arizona as husband and wife for the past 19 or 20 years as of the date of trial. The petitioners' children are, and their respective ages at the end of 1975 were, as follows:

Philip Markosian 15 years
Julie Markosian 14 years
John Markosian 12 years
Gary Markosian 9 years
On or about January 11, 1975, petitioners executed a document captioned " Declaration of Trust of This Pure Trust." This trust indenture was published by Educational Scientific Publishers (ESP) and consisted of a preprinted form with blank spaces provided for petitioners' names. Petitioners executed this document based on the advice of physician friends and representations made by an attorney employed by ESP. The representations were to the effect that the trust resulting from the execution of the ESP documents would be viable for Federal tax purposes. The attorney also stated that he would defend the trust at his cost in any proceedings before the Internal Revenue Service. The trust that was purportedly established was styled the " Louis R. Markosian Equity Trust" (the trust). The trust provided in part, as follows: The above named Trustees, for themselves and their successors IN TRUST, do hereby agree to accept properties real and personal to be conveyed and acknowledge acceptance of and delivery of all of 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 and enterprises in commerce for gain, exercising their best judgment and discretion, in accordance with The Trust Minutes, making distributions of portions of the proceeds and income as in their discretion, and according to the minutes, should be made, making complete periodic reports of business transactions, and upon final liquidation distributing the assets to the beneficiaries as their interests may appear; and in all other respects administering Said Trust (Estate) in good faith strictly in conformity hereto. Page 1237 EXPENDITURES The Trust 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. TRUSTEES' DECLARATION OF PURPOSE OF THIS EXPRESS EQUITY PURE TRUST THE DECLARED PURPOSE OF THE TRUSTEES OF THIS TRUST shall be to accept rights, title and interest in and to real and personal properties, whether tangible or intangible, conveyed by THE CREATOR HEREOF AND GRANTOR HERETO to be the corpus of THIS TRUST. Included therein is the exclusive use of his lifetime services and ALL of his EARNED REMUNERATION ACCRUING THEREFROM, from any current source whatsoever, so that Louis Markosian grantor-creator's name 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 Louis Markosian grantor-creator's name feels he will achieve because they are sustained by his RELIGIOUS BELIEFS. 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 to protect or conserve trust assets, liquidate the assets, distribute and close The Trust at any earlier date determined by them. The Trust shall be proportionately and in a pro rata manner be distributed to the beneficiaries. POWERS OF TRUSTEES Trustees may do anything any individual may legally 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, such as, viz: buy, sell or lease land for the surface or mineral rights; buy or sell mortgages, securities, bonds, notes, leases of all kinds, contracts or credits of any form, patents, trademarks, or copyrights; buy, sell or conduct...

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