Zmuda v. Comm'r of Internal Revenue
| Decision Date | 08 November 1982 |
| Docket Number | Docket No. 8572-80. |
| Citation | 79 T.C. 714 |
| Parties | GEORGE V. ZMUDA and WALBURGA ZMUDA, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioners, residents of Olympia, Wash., in 1977 caused to be created in the British West Indies three purported “common law business trusts,” S, M, and B. Petitioners used preprinted forms acquired as part of a package from an organization in Alaska to formalize the trusts, and used a native of B.W.I., a stranger to them, as the “creator” of the trusts. Certificates of beneficial interests were issued for nominal amounts but by their terms gave the holders no interest in the income, management, or corpus of the trusts except in the event of termination. The trustees were given fee simple interests in the corpus of the trusts and complete power to manage the trusts and to distribute the income and corpus to whomever they chose. Petitioners were appointed trustees of S, which had no assets or business activities. S was appointed trustee of both M and B. M was inactive except as a conduit of funds. Petitioners transferred real estate contracts and deeds of trust on real estate formerly owned by them in Alaska and other parts of the United States to B in exchange for 50 units, each, of beneficial interests in B, which they subsequently sold to M for $25, each. All payments on the contracts and deeds of trust were deposited in bank accounts in the United States opened in the name of B by petitioners as agents of B. The income thus received by B was funneled to petitioners in 1978. Held: The three trusts had no economic substance and were nullities for tax purposes. Petitioners retained complete control of the properties transferred to B and were taxable on the income purportedly received by B thereon.
2. Petitioners paid $8,010 to American Law Association to attend a seminar presented by A.L.A. in Anchorage, Alaska, to explain how to establish offshore trusts to receive properties of grantors. They also received a package of materials which included preprinted forms and other materials for establishing and conducting “common law business trusts.” The fee paid A.L.A. also entitled petitioners to use the A.L.A. library with paralegal assistance provided by A.L.A. Petitioners also incurred additional expenses in traveling to Alaska, Texas, and the British West Indies to establish the trusts. Held, the fees paid A.L.A. and the other expenses incurred are not deductible under sec. 212(1), (2), or (3), I.R.C. 1954.
3. Deductible charitable contributions determined.
4. Held, petitioners failed to prove their basis in properties lost or damaged in casualties and are not allowed a deduction for casualty losses.
5. Held, expenses incurred to prepare property for sale are not deductible.
6. Held, petitioners are liable for additions to tax under sec. 6653(a), I.R.C. 1954. Michael R. Pinatelli, for the petitioners.
Jeannette A. Cyphers, for the respondent.
Respondent determined deficiencies in and additions to petitioner's Federal income taxes as follows:
+--------------------------------------+
¦ ¦ ¦Additions to tax ¦
+------+------------+------------------¦
¦Year ¦Deficiency ¦sec. 6653(a) 1 ¦
+------+------------+------------------¦
¦ ¦ ¦ ¦
+------+------------+------------------¦
¦1976 ¦$1,358 ¦0 ¦
+------+------------+------------------¦
¦1977 ¦1,341 ¦$67 ¦
+------+------------+------------------¦
¦1978 ¦2,106 ¦105 ¦
+--------------------------------------+
After concessions,2 the issues are (1) whether petitioners are taxable in 1977 and 1978 on income received by a purported “common law business trust”; (2) whether petitioners are entitled to a deduction for amounts paid in 1977 to purchase a package of materials informing them on how to set up the “common law business trusts”; (3) whether petitioners are entitled to a charitable deduction in 1977 in excess of the amount allowed by respondent; (4) whether petitioners are entitled to a casualty loss deduction in 1976 and 1977; (5) whether petitioners are entitled to a business expense deduction in 1977; and (6) whether petitioners are liable for additions to tax imposed in 1977 and 1978 for negligence.
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by reference.
Petitioners George V. Zmuda (hereinafter petitioner) and Walburga Zmuda, husband and wife, resided in Olympia, Wash., at the time they filed their petition herein.
Issue 1. Common Law Business Trust
In September 1977, petitioner flew to the Turks and Caicos Islands, British West Indies, to set up three common law business trusts3 (sometimes hereinafter referred to as the trusts).3a Upon arriving there, petitioner contacted a notary, Irene Roberts (hereinafter Irene), and told her he wished to see her and that she should bring along another person to serve as the “creator” of common law business trusts. Irene brought along her brother, Lloyd Roberts (hereinafter Lloyd), to serve as the “creator.” Upon meeting Irene and Lloyd,4 petitioner presented them with some preprinted forms that had been prepared for him, entitled, “Contract and Declaration of Trust.” Petitioner, Irene, and Lloyd signed the forms and purportedly created three common law business trusts.
Each trust had 100 beneficial units that were exchanged with petitioner, or one of the other common law business trusts created by petitioner, for certain property. Ownership of the certificates did not entitle the holder to any legal or equitable title in or to the trust property, nor in the management of the trusts. The rights of the certificate holders were limited to merely a claim against the trustees to carry out the terms of the contract and declaration of trust.5
Except for the designated trustees and the owners of the beneficial units of the trusts, the contract and declaration of trust for the three organizations contained identical terms and provisions. The term of each trust was stated to be 25 years, but the trustees were explicitly empowered to extend or shorten the term. Lloyd was the “creator” of each of the three trusts.6 The creator was to appoint a first trustee who could then appoint a second trustee, and together the two trustees could appoint a third trustee. The property of each of the trusts was assigned to the trustees to hold as joint tenants in fee simple. The trustees were authorized in their sole discretion to make a distribution of the proceeds and income to anyone, including themselves. The declaration of trust also provided that “resolutions of the board of trustees authorizing a special thing to be done shall be evidence that such act is within its power.” The effect of these provisions was that the trustees had complete control and dominion of the property of the trusts and were free to distribute or transfer it to whomever they desired.
The first of the three business trusts purportedly created was the Sunnyside Trust Co. (hereinafter Sunnyside). The contract and declaration of trust for Sunnyside provided that the creator (Lloyd) transferred 100 trust units to petitioner 7 in exchange for $100.8 The creator was to hold the $100 in Sunnyside's name pursuant to the terms of the declaration of trust. The creator then appointed petitioner to serve as the first trustee, and petitioner then appointed his wife to serve as the second trustee.9 The property of Sunnyside ($100) was assigned to the trustees to hold as joint tenants in fee simple.
The second common law business trust purportedly created was the Medford Trust Organization (hereinafter Medford). The 100 beneficial interest certificates of Medford were transferred to Sunnyside for $50, and Sunnyside was appointed the trustee of Medford. On October 1, 1977, petitioners were appointed the agents of Medford with full authority to open bank accounts in Medford's name and otherwise act for Medford.
The third business trust purportedly created was the Buena Trust Organization (Buena). Sunnyside was named as the trustee of Buena. Petitioner and his wife were appointed as the agents of Buena. Petitioner and his wife transferred the following property to Buena: (1) Four deeds of trust and one real estate contract covering Alaska property; (2) one deed of trust covering Missouri property; (3) one deed of trust covering Oregon property; (4) and one unimproved lot in Alaska. In exchange, petitioner and his wife each received 50 beneficial units of Buena.10
The payments due and paid on the deeds of trust and real estate contracts were deposited in various bank accounts of Buena located in the United States. During 1977 and 1978, the payments made to Buena totaled $8,559.84 and $16,487.96, respectively. In 1978, over $24,000 was withdrawn from the Buena accounts and deposited into accounts of Medford.11 During 1978, $3,220 of this money was distributed by Medford to petitioner and members of his family. In 1978, $18,000 was transferred out of Medford's accounts back into Buena's accounts, $17,600 of which was then paid out to petitioners.12 It was petitioner's understanding that Buena would continue in existence until all the payments had been received on the real estate trust deeds and contracts and then paid out to petitioner and his family.
Buena did not engage in the operation of any trade or business but rather merely collected the payments on the real estate trust deeds and contracts.
In the notice of deficiency, respondent determined that petitioners failed to include $3,089 of interest income and $313 of capital gains on their 1977 return and that they failed to include $10,165 of interest income and $1,953 of capital gains income on their 1978 return. These amounts were attributable to payments received by Buena...
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