Paulson v. C.I.R., 92-2750

• Decision Date: 03 May 1993
• Docket Number: No. 92-2750,92-2750
• Citation: 992 F.2d 789
• Parties: -1717, 93-1 USTC P 50,271 Jon J. PAULSON; Gloria J. Paulson, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 789

992 F.2d 789

71 A.F.T.R.2d 93-1717, 93-1 USTC P 50,271

Jon J. PAULSON; Gloria J. Paulson, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 92-2750.

United States Court of Appeals Eighth Circuit.

Submitted April 22, 1993.

Decided May 3, 1993.

Jon J. Paulson, Gloria J. Paulson, appellants pro se.

James A. Bruton, Washington, DC (James A. Bruton, Gary R. Allen, Bruce R. Ellisen and William J. Patton, Washington, DC, on the brief), for appellee.

Before FAGG, BEAM, and HANSEN, Circuit Judges.

PER CURIAM.

Jon J. Paulson and Gloria J. Paulson, husband and wife, appeal from the tax court's ¹ decision sustaining deficiencies assessed by the Commissioner in their federal income taxes for the years 1984 and 1985. We affirm.

Prior to September 1983, Jon Paulson practiced veterinary medicine in a partnership called Western Veterinary Service (WVS). On the advice of James and Joan Noske, the partners changed the form of their business from a partnership to a business trust in the fall of 1983, creating Western Veterinary Company (WVC). ² The trustees named in WVC's declaration of trust were Armageddon, Inc., and Parnell, Inc., both South Dakota nonprofit corporations.

In addition to his veterinary practice, Jon Paulson raised livestock. Also in September 1983, Paulson transferred his interest in his livestock operation and in WVC to P Quad. In exchange, the Paulsons received one hundred percent of the shares of P Quad's trust certificates. P Quad had been established in April 1983 by a declaration of trust similar to the one that established WVC. Armageddon and Parnell were named as P Quad's trustees. The trust was designed to operate as a common law or Massachusetts trust--a separate unincorporated legal entity for doing business.

On April 11, 1989, the Commissioner issued a notice of deficiency to the Paulsons for tax years 1984 and 1985, assessing back taxes and penalties. The Paulsons responded by filing a petition contesting the alleged deficiencies and raising a statute of limitations defense. The tax court agreed with the Commissioner and found that P Quad was a sham entity and that the Paulsons should be taxed on its receipts; determined that the statute of limitations had not expired; denied a motion made by the Paulsons on the first day of trial to amend the pleadings to allow a claim for a net operating loss carryforward; and sustained the imposition of self-employment taxes on them for income P Quad earned. Paulsons appeal each of these decisions by the tax court.

Whether P Quad is a sham entity lacking in economic substance is a question of fact. See United States v. Cumberland Pub. Serv. Co., 338 U.S. 451, 454, 70 S.Ct. 280, 281, 94 L.Ed. 251 (1950). Reviewing the findings of fact for clear error, we will sustain the tax court's findings if they are "plausible in light of the record viewed in its entirety." Moser v. Commissioner, 914 F.2d 1040, 1044 (8th Cir.1990). Upon review of the record, we conclude the tax court did not clearly err by finding P Quad was a sham entity lacking in economic substance. At trial, Cheryl A. Foshaug and Marti Inman, the presidents of Armageddon and Parnell, trustees for both P Quad and WVC, testified that they had never heard of either entity and had not performed any act for these entities. They had no management authority, and their primary duty was to sign blank slips of paper. This evidence supports the tax court's finding that P Quad was, in reality, simply a paper entity wholly without economic substance. See Chase v. Commissioner, 926 F.2d 737 (8th Cir.1991). Paulsons's other arguments challenging the tax court's finding that P Quad was a sham entity are foreclosed by Chase.

The Paulsons next argue the tax court erred by rejecting their claim that the deficiencies were barred by the three-year statute of limitations. Relying on Fendell v. Commissioner, 906 F.2d 362 (8th Cir.1990), the Paulsons contend that the Commissioner was barred from making any assessment against them which resulted in an adjustment to P Quad's tax for the period prior to November 1, 1985, because the three-year...