79 T.C. 888 (1982)
PROFESSIONAL SERVICES, PETITIONER
COMMISSIONER of INTERNAL REVENUE, RESPONDENT
EUGENE F. and PATRICIA J. MORTON, PETITIONERS
COMMISSIONER of INTERNAL REVENUE, RESPONDENT
Nos. 2674-80, 2675-80.
United States Tax Court
November 23, 1982
1. In 1976 Eugene Morton, pursuant to a prearranged plan, borrowed $47,400 from Greenwich Trust, signed a promissory note for this amount, and transferred the $47,400 to International Tax & Business Consultants in exchange for a package of written materials relating to the creation and operation of " business trust organizations." Prior to filing his 1976 return, the above promissory note was returned to Eugene Morton's control pursuant to the overall plan. Held, Eugene Morton's transfer of $47,400 to International Tax & Business Consultants was a payment merely in form and not in substance and will therefore not support a deduction under either sec. 162 or sec. 212, I.R.C. 1954. Held, further, the underpayment of tax in 1976 was due to fraud, and Eugene Morton is liable for additions to tax under sec. 6653(b), I.R.C. 1954.
2. In 1977, Eugene Morton paid $11,000 to ATES for information, assistance, written materials, and travel to be used to establish certain foreign and domestic " business trust organizations." Subsequently, Eugene Morton established and transferred the assets of his dental practice to one such trust (Professional Services), and leased those assets back from Professional Services. Eugene Morton's relationship to the property transferred to Professional Services was unchanged by virtue of the transfer. Held, petitioners have failed to prove that any part of the $11,000 payment to ATES was an ordinary and necessary expenditure paid for the management, conservation, or maintenance of property held for the production of income or for tax advice. Sec. 212(2) and (3), I.R.C. 1954. Held, further, Professional Services was devoid of economic reality and is to be treated as a nullity for Federal income tax purposes. Held, further, a portion of the underpayment of tax in 1977 was due to fraud, and Eugene Morton is liable for additions to tax under sec. 6653(b), I.R.C. 1954.
Jean S. Schanen, for the petitioner.
Jeannette A. Cyphers, for the respondent.
Respondent determined deficiencies of income tax plus additions to tax under section 6653(a) as follows
|| Docket No.
|| Sec. 6653(a)
| Eugene and Patricia Morton
| Professional Services
By amended answers in docket No. 2675-80, respondent alleged that the underpayments attributable to Eugene and Patricia Morton for the years 1976 and 1977 were due to fraud and accordingly asserted that these petitioners were liable for additions to tax under section 6653(b) with respect to those years. Numerous issues raised in the pleadings and amended pleadings have been conceded by the parties and can be given effect in the Rule 155 computations. After these concessions, the remaining issues for decision are as follows: (1) Whether Eugene and Patricia Morton are entitled to deduct, under section 162 or section 212, amounts they purportedly paid in 1976 to purchase certain materials relating to " business trust organizations" ; (2) whether Eugene and Patricia Morton are entitled to deduct, under section 162 or section 212, amounts they paid in 1977 to purchase certain materials relating to " business trust organizations," and for assistance in establishing these organizations; (3) whether certain payments purportedly made in 1977 by Eugene and Patricia Morton to Professional Services are nondeductible either because Professional Services was totally devoid of economic substance and is therefore not entitled to be recognized for Federal tax purposes, or because the purported payments themselves were without substance; or (4) alternatively, if Professional Services represents a valid, recognizable entity for Federal tax purposes, whether Eugene and Patricia Morton are taxable on any portion of the income of that entity in 1977 under the Page 890
grantor trust provisions of sections 671 through 677; (5) if Professional Services represents a valid, recognizable entity for Federal tax purposes, whether it is entitled to deduct, under section 162, amounts it purportedly paid in 1977 as a management fee; (6) whether Eugene Morton is liable for additions to tax under section 6653(b) with respect to his 1976 and 1977 tax years; or (7) alternatively, if Eugene Morton is not liable for additions to tax under section 6653(b), whether Eugene and Patricia Morton are liable for additions to tax under section 6653(a) for their 1976 and 1977 tax years; and (8) whether Professional Services is liable for additions to tax under section 6653(a) for 1977. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Eugene F. Morton (hereinafter referred to as petitioner) and Patricia J. Morton (hereinafter referred to as Patricia) were husband and wife during the years in issue and on the date of the filing of the petition in this case. Their legal residence on the date the petition was filed was Anchorage, Alaska. They filed joint Federal income tax returns for calendar years 1976 and 1977 with the Office of the Internal Revenue Service at Ogden, Utah. (Hereinafter, when " petitioners" is used it will refer to both petitioner and Patricia.) During the years involved herein, petitioner was a licensed dentist, practicing in Anchorage, Alaska. Petitioner Professional Services (hereinafter Professional Services) purports to be a " business trust organization" and was created in the State of Alaska on September 2, 1977. This entity
filed a fiduciary income tax return (Form 1041) for its short year beginning September 2, 1977, and ending December 31, 1977, with the Office of the Internal Revenue Service at Ogden, Utah. Page 891 I. 1976 Tax Year
Charles H. Bumpus and Glenn A. Huff were business associates and friends residing in Alaska. Through their investment partnership, Minn-Arctic Development Co. (MADCO herein), Mr. Bumpus and Mr. Huff were mutually involved in various real estate partnerships. They had offices in the same building and shared a single secretary. In mid-1976, Mr. Bumpus and Mr. Huff developed concerns about the effect that the death of a partner would have upon the operation of their various partnerships and consulted an attorney in an attempt to resolve these concerns. However, before Mr. Bumpus and Mr. Huff received what they considered to be satisfactory advice from their attorney in this regard, Mr. Bumpus was approached by one Hiram Conley, a representative of the American Law Association (hereinafter A.L.A.). Mr. Conley represented that there was a way for Mr. Bumpus and Mr. Huff to eliminate their income tax and estate tax liability and to avoid probate upon the death of a partner through the use of a certain kind of foreign trust organization. Mr. Conley further represented that the subject had been throughly researched by one Karl Dahlstrom, and that this information would be presented to members of A.L.A. at a 2-day seminar in mid-November 1976, for a fee of $6,600. The prospect of achieving the above-asserted advantages was particularly attractive to Mr. Bumpus and Mr. Huff. Accordingly, through their partnership, MADCO, Mr. Bumpus and Mr. Huff joined A.L.A., paid a single seminar fee of $6,600,
and attended the seminar which was presented by Karl Dahlstrom in mid-November 1976 in Alaska. At the seminar, Mr. Bumpus and Mr. Huff, as MADCO partners, received one package of materials (hereinafter referred to as the tax package). The tax package included preprinted forms for establishing " business trust organizations," preprinted minutes and trust certificates, and numerous excerpts from cases, legal commentary, newspaper articles, and other materials regarding trusts. Mr. Bumpus and Mr. Huff were very impressed by the information which was presented at the seminar. In fact, they Page 892
decided that they would disseminate the information they received at the seminar to all of their partners and partnerships so that they could alter their organizational format and henceforth conduct their affairs in the form of " business trust organizations," rather than partnerships. Mr. Bumpus wanted this structural change to occur by January 1 of the following year in order to avoid complexities which might arise from a mid-year closing of the partnerships' books. Mr. Bumpus and Mr. Huff decided that the best method by which the tax package materials could be disseminated to their partners and partnerships was through the utilization of their newfound knowledge relating to foreign business trust organizations. Accordingly, shortly after the Dahlstrom seminar in November 1976, they traveled to the country of Belize (formerly British Honduras). They took with them the numerous forms for establishing trust organizations which they received as part of the tax package. While in Belize, Mr. Bumpus and Mr. Huff arranged for documents to be executed which purported to establish a number of trust organizations, over some of which Mr. Bumpus intended to, and did, exercise complete control, and over others of which Mr. Huff intended to, and did, exercise complete control. The trust organizations over which Mr. Bumpus exercised complete control were named Continental Trust Association (hereinafter Continental), Worldwide Marketing & Tax Consultants (hereinafter Worldwide), and Greenwich Trust...