79 T.C. 846 (1982), 3121-79, Luman v. C.I.R.

Docket Nº:3121-79.
Citation:79 T.C. 846
Opinion Judge:SIMPSON, Judge.
Attorney:Myles J. Dolan, for the petitioner. Donald T. Rocen, for the respondent.
Judge Panel:NIMS, J ., concurring: FEATHERSTON, J ., agrees with this concurring opinion.GOFFE, J ., concurring in part and dissenting in part:
Case Date:November 18, 1982
Court:United States Tax Court

Page 846

79 T.C. 846 (1982)

DORIS B. LUMAN, [1] Petitioner



No. 3121-79.

United States Tax Court

November 18, 1982

P and her husband paid $20,000 to Educational Scientific Publishers for materials and advice to establish a family trust. Subsequently, P and her husband transferred most of their assets, including their ranch business, to the trust. The trust was created in an attempt to retain the ranch in their family. Held :

1. The income from the assets of the trust is taxable to P individually under secs. 671-677, I.R.C. 1954 (the grantor trust provisions).

2. The cost of creating the trust was a personal expense (sec. 262, I.R.C. 1954), not deductible under sec. 212, I.R.C. 1954. P failed to prove that any part of the $20,000 payment is deductible under sec. 212(2) as an expenditure for the management, conservation, or maintenance of income-producing property.

3. P is liable for additions to tax under sec. 6653(a), I.R.C. 1954, relating to negligence.

Page 847

Myles J. Dolan, for the petitioner.

Donald T. Rocen, for the respondent.


The Commissioner determined the following deficiencies in, and additions to, the petitioner's Federal income taxes: [2]

The issues for decision are: (1) Whether the income reported by a family trust created by Robert Luman is taxable to the petitioner, individually; (2) whether the petitioner is entitled to deduct under section 212 the expenses of establishing the family trust; and (3) whether the petitioner is liable for the addition to tax under section 6653(a) for negligence.


Some of the facts have been stipulated, and those facts are so found.

The petitioner, Doris B. Luman, was a legal resident of Wyoming at the time she filed the petition in this case. She and her husband, Robert B. Luman, filed joint Federal income tax returns for the years 1974, 1975, and 1976 with the Internal Revenue Service, Ogden, Utah.

The petitioner and her husband, who died on March 31, 1978, were, for many years prior to 1974, engaged in ranching in Sublette County, Wyo. They conducted their ranching activities on property (the ranch) which Robert Luman's

Page 848

father acquired in 1904. This ranch was originally a part of the elder Luman's property, which included eight other ranches in Utah and Wyoming. At the time of the elder Luman's death, these other properties went to the elder Luman's other sons and daughters. These other properties have since been transferred out of the family so that by 1974 the only remaining family ranch was the ranch owned and operated by Robert and Doris Luman.

Mr. Luman wanted to retire from the ranching business. The Lumans consulted with their attorney, sometime prior to 1974, for his assistance in ensuring that this last Luman ranch remain within the family as long as possible. The attorney presented the Lumans with a proposal wherein the ranch would be placed in a trust with himself as the manager. For his services, the attorney would charge a fee of 20 to 25 percent of the income from the trust. The Lumans considered this fee to be exorbitant and rejected the proposal.

Subsequently, the Lumans' next-door neighbors approached them with an offer to purchase their ranch. The offer was made through a certified public accountant who did work for both the Lumans and their neighbors. The Lumans rejected this offer because they wanted to keep the ranch within the family as long as possible.

On April 19, 1974, the Lumans were visited by two men, Logan Barclay and Frank Carnefix, who were representatives of Educational Scientific Publishers (ESP). Mr. Barclay and Mr. Carnefix sought to persuade the Lumans to establish a family trust, using forms provided by ESP. The Lumans saw this proposal as an opportunity to ensure the " orderly transfer of [their] assets to * * * [their] children when * * * [they] should be gone," and for such reason, the Lumans accepted the ESP proposal. The ESP family trust documents are drawn with a purpose of shifting the incidence of taxation from the grantor to the trust, but the discussions between the Lumans and the representatives of ESP included no discussions about taxes. The Lumans did not consult with an attorney before deciding to accept the ESP proposal because they lacked respect for attorneys as a result of their prior experience with attorneys.

The ESP family trust plan used by the Lumans involved the creation of two trusts: the Robert B. Luman Educational Trust

Page 849

(the educational trust) and the Robert B. Luman Family Estate (A Trust) (the family trust). On April 20, 1974, Robert Luman executed a declaration of trust by which he, as grantor, created the educational trust. The purpose of this trust was to provide the Lumans with information regarding the establishment and operation of the family trust. The trustees of the educational trust were the two representatives of ESP, Mr. Barclay and Mr. Carnefix. The Lumans paid this trust $20,000. The payment was, in effect, the fee charged by ESP for its assistance in establishing the family trust. Such assistance included the furnishing of forms for establishing the trust and advice from a lawyer, Paul Wright, and a CPA concerning the conduct of the trust as it related to the Lumans' business affairs. However, the Lumans received no legal advice in establishing the trust; in fact, they received no legal advice concerning the trust until 1976. The educational trust is no longer in existence.

On May 13, 1974, Robert Luman executed a declaration of trust creating the family trust. The original trustees of the family trust were Doris B. Luman and Hazel Werner, a person unrelated to the Lumans. The declaration of trust gave the trustees the power to distribute " proceeds and income" in the trustees' unlimited discretion. The trust instrument also provided that a majority of all trustees was needed to constitute a quorum and to take any affirmative action. The trust instrument gave the trustees extremely broad powers respecting the trust property and the carrying on of any business. The trustees could amend the trust instrument by resolution " covering contingencies as they arise," and the minutes of the trustees' resolution authorizing any action were to be considered evidence that such an action was within their power. Finally, the trust instrument expressly declared " neither The Trustees, officers, or certificate holders, present or future, have or possess any beneficial interest in the property or assets of Said Trust." The certificates representing units of beneficial interest in the trust also expressly stated that " This certificate conveys no interest of any kind in The Trust assets, management, or control thereof."

At the first meeting of the board of trustees of the family trust, held on June 25, 1974, Robert Luman was appointed a trustee of the family trust for life. He received a certificate

Page 850

representing all 100 beneficial units of the family trust. By quitclaim deeds and other documents, the Lumans transferred virtually all of their property to the family trust. This property consisted of the ranch, such non-income-producing property as the family residence and its furniture and fixtures, and a number of stocks, bonds, and Treasury notes. However, the Lumans retained as their own property two automobiles, which they subsequently leased to the trust, but which they continued thereafter to use for both business and personal purposes. Both Robert Luman and the petitioner also transferred to the family trust the exclusive use of their lifetime services and any income therefrom. The Lumans had not received any such income in the recent past, and they did not anticipate receiving any in the future. Neither Robert Luman nor the petitioner received any income from personal services performed for anyone other than the trust in 1974, 1975, or 1976.

On June 26, 1974, the certificate evidencing Robert Luman's ownership of all 100 units of beneficial interest in the family trust was canceled. On the same day, Robert Luman and the petitioner each received a certificate representing 50 units of beneficial interest in the family trust. On the next day, Hazel Werner, an original trustee, resigned, and she was replaced by a daughter of the Lumans, Roberta Luman Bacheller (the daughter), in July 1974. In November 1974, Robert Luman and the petitioner had their certificates of beneficial interest canceled. Robert Luman then received a new certificate representing 20 units of beneficial interest; the petitioner received a certificate representing 35 units; and each of the Lumans' three children received a certificate representing 15 units of interest. These children were all adults and were not dependent on Mr. Luman and the petitioner.

After the creation of the family trust, the Lumans operated the ranch in generally the same manner as they had prior to the creation of the trust. The trustees passed resolutions authorizing Robert Luman to manage the ranch and to invest trust income in stocks using his best discretion. The Lumans, as the trustees, prepared and executed minutes of their meetings in which they meticulously recorded their consideration and approval of investments and capital expenditures for the ranch and recorded their other decisions relating to the

Page 851

investments of the trust and the management of the ranch. The minutes also reflect a decision by the trustees to purchase a new refrigerator for the residence, but it is not clear who paid for such refrigerator. Nevertheless, the Lumans continued to make decisions together as they had done prior to the creation of the trust. The daughter rarely attended the trustees' meetings, although she...

To continue reading