Vercio v. Comm'r of Internal Revenue

Decision Date31 March 1980
Docket Number10919–77.,Docket Nos. 7108–77
Citation73 T.C. 1246
PartiesRAYMOND A. VERCIO AND ROSEANNE VERCIO, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTRAY HAILEY, JR., AND WILMA HAILEY, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Petitioners created trusts to which lifetime services and all remuneration accruing therefrom were purportedly conveyed. Included in the trust instrument was a provision which allowed for the application of income for the benefit of the grantor's spouse. Held:

1. The purported conveyances were merely an assignment of income ineffective to shift the incidence of taxation to the trusts on amounts paid as compensation for services.

2. Petitioners as grantors are to be treated as owners of the entire trust under secs. 671 and 677, I.R.C. 1954.

3. Petitioners are liable for additions to tax under sec. 6653(a).

4. Petitioners in docket No. 7108–77 are liable for additions to tax under sec. 6651(a). Paul T. Wright, for the petitioners.

Frederick B. Strothman, for the respondent.

DRENNEN, Judge:

In these consolidated cases, respondent determined the following deficiencies in petitioners' Federal income tax:

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                ¦            ¦            ¦      ¦            ¦Addition to tax under  ¦
                +------------+------------+------+------------+-----------------------¦
                ¦            ¦            ¦      ¦            ¦Sec.      ¦Sec.        ¦
                +------------+------------+------+------------+----------+------------¦
                ¦Docket No.  ¦Petitioner  ¦Year  ¦Deficiency  ¦6651(a)   ¦6653(a)1    ¦
                +------------+------------+------+------------+----------+------------¦
                ¦            ¦            ¦      ¦            ¦          ¦            ¦
                +---------------------------------------------------------------------+
                
7108-77  Ravmond A. Vercio
                         and Roseanne Vercio  1973 $16,333.45 $1,454.08 $864.54I
                                              1974 21,050.25  2,349.03  1,277.96
                10919-77 Rav Hailey, Jr., and
                         Wilma Hailey         1974 4,500.00   ---       225.00
                

The issues for decision are:

(1) Whether conveyances by petitioners of their lifetime services to family trusts established by them were effective to shift the incidence of taxation on amounts representing compensation to them but paid to the trust;

(2) Whether certain income and expense items reported by the trusts should have been included on petitioners' Federal income tax returns under sections 671 through 677;

(3) Whether petitioners are liable for additions to tax under section 6653(a); and

(4) Whether petitioners in docket No. 7108–77 are liable for additions to tax under section 6651(a).

FINDINGS OF FACT

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.

Ray Hailey, Jr. (Hailey), and Wilma Hailey (Wilma), the petitioners in docket No. 10919–77, are husband and wife, and they resided in Denver, Colo., at the time of the filing of the petition herein. The Haileys timely filed their joint Federal income tax return for the taxable year 1974 with the Director, Internal Revenue Service, Ogden, Utah.

Raymond A. Vercio and Roseanne Vercio, the petitioners in docket No. 7108–77, are individuals who resided in Denver, Colo., at the time of the filing of the petition herein. They filed joint Federal income tax returns for the taxable years 1973 and 1974 with the Director, Internal Revenue Service, Ogden, Utah. The returns were not filed within the time prescribed by law.

The parties have agreed that the facts as found by this Court relating to the Hailey case will also apply to the Vercio case. Due to this agreement, no evidence was introduced on behalf of the Vercios; therefore, when we hereinafter refer to petitioners, we will be referring solely to the Haileys.

On September 14, 1973, petitioners signed a document captioned ‘Declaration Of Trust Of This Pure Trust.’ Hailey signed as grantor-creator, and Wilma Hailey and Pipp Marshall Boyls, the attorney who appeared on behalf of petitioners at trial,1 signed as trustees. By this declaration, petitioners created what is styled the Ray Hailey, Jr. Family Estate (A Trust) (hereinafter the trust). Additionally, on this same date, Hailey also created the Ray Hailey, Jr., Educational Trust. The purpose of this latter trust was to obtain materials to be able to establish the trust. Hailey subsequently purchased the materials with which to fund this trust, and he deducted $5,600 on his 1974 income tax return with the following notation: ‘Educational endowment * * * to maintain and conserve assets.’ On brief, petitioners concede this amount is not deductible due to their failure to show that the sum was actually expended.

The trust instrument 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.

EXPENDITURES

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.

* * *

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 Ray Hailey Jr. 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 Ray Hailey Jr. 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 necessary 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 distributed to the beneficiaries. * * *

POWERS OF TRUSTEES

Trustees may do anything any individual may legally to 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 mail-order business, or branches thereof; operate stores, shops, factories, warehouses or other trading establishments or places of business of any kind; construct, buy, sell, lease or rent suitable buildings or other places of business; advertise different articles or business projects; borrow money for any business project, pledging The Trust property for the payment thereof; hypothecate assets, property, or both, of The Trust in business projects; own stock in, or entire charters of corporations, or other such properties, companies, or associations as they may deem advantageous.

A Minute of Resolutions of The Board of Trustees authorizing what is is they determine to do or have done shall be evidence that such an act is within their power. Anyone lending or paying money to The Trustees shall not be obliged to see the application thereof; all funds paid into the treasury are and become a part of the CORPUS OF THIS TRUST.

ADMINISTRATION

The Trustees shall regard this instrument as their sufficient guide, supplemented from time to time by their resolutions (said resolution to be ratified ALWAYS by a MAJORITY of the Trustees then in office and participating in the issuing meeting) covering contingencies as they arise and are recorded in the minutes of their meetings, which are the by-laws, rules and regulations of THIS TRUST.

Shortly after the creation of the trust, Hailey and Wilma executed documents which purported to be a conveyance to the trust of ‘exclusive use of * * * [their] lifetime services and all of the currently earned remuneration therefrom.’ Additionally, the Haileys executed documents purporting to convey certain real property (including their home), oil and gas interests, insurance policies, and personal property (including their home furnishings) to the trust.

Originally, Hailey...

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