Cheek v. Commissioner, Docket No. 7824-82.
| Decision Date | 11 February 1987 |
| Docket Number | Docket No. 7824-82. |
| Citation | 53 TCM (CCH) 111,1987 TC Memo 84 |
| Parties | John L. Cheek v. Commissioner. |
| Court | U.S. Tax Court |
John L. Cheek, pro se. William E. Bogner, for respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in and additions to petitioner's Federal income tax as follows:
Section 6653(a)1
Year Deficiency Additions
1978 ............ $ 8,112.30 $405.61
1979 ............ 13,645.00 682.00
The issues for decision2 are:
(1) Whether petitioner's purported conveyance of his lifetime services to a "family trust" was effective to shift to the trust the incidence of taxation on his salary as an American Airlines pilot;
(2) Whether other income reported on the trust return was taxable to petitioner and should have been reported by petitioner;
(3) Whether petitioner may deduct the cost incurred in establishing the trust (4) Whether petitioner is liable for the section 6653(a) addition to tax for negligence; and
(5) Whether petitioner is liable for damages under section 6673.
A few documents have been stipulated into evidence. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioner resided in Elk Grove Village, Illinois at the time the petition in this case was filed. During the years in issue, petitioner was employed by American Airlines, Inc., as a pilot (flight officer). The Forms W-2 attached to petitioner's Federal income tax returns (Forms 1040) show wages from American Airlines in the amounts of $33,935 for 1978 and $42,276 for 1979.
On July 11, 1978, petitioner, an unmarried individual, executed a document captioned "Declaration of Trust." The trust indenture consisted of a preprinted form with blank spaces provided for applicable names. The trust indenture, together with other trust forms and instructions pertaining to formation of a family trust, had been purchased by petitioner from E.S. Publishers for the sum of $3,000. The trust was entitled the "John L. Cheek Family Trust" (hereinafter the Trust). The initial trustees of the Trust were Janet G. Cheek (hereinafter sometimes referred to as Janet) and Michael E. Cheek (Michael), petitioner's mother and brother, respectively. At some unspecified date shortly after the formation of the Trust, petitioner also became a trustee of the Trust.3
The purpose of the Trust, as set forth in the declaration of trust, was to accept real and personal properties conveyed to the Trust by its creator (petitioner), including "the exclusive use of his lifetime services and all of his earned remuneration accruing therefrom." (Emphasis in original text.) This transfer was made so that petitioner could "maximize his lifetime efforts through the utilization of his Constitutional Rights." (Emphasis in original text.) The Trust was established for a period of 25 years unless by unanimous vote the trustees should determine upon an earlier date or, in their discretion, liquidate the assets and close the Trust at any time "because of threatened depreciation in values, or other good and sufficient reason * * *." Upon liquidation, the assets of the Trust were to be distributed to the beneficiaries. The Trust was expressly declared to be irrevocable, not subject to alteration or amendment except as specifically authorized by the declaration of trust, and could only be terminated through distributions permitted by the declaration of trust.
The Trust was to be administered by its trustees, with a majority vote thereof purportedly required for expenditures (including compensation of the trustees). The declaration of trust, as supplemented from time to time by resolutions of the trustees to cover contingencies as they arose, was to serve as the "sufficient guide" in the administration of the Trust. Pursuant to the declaration of trust, the trustees were authorized "to do anything any individual may legally do in any state or country ***." Further, "resolutions of the Board of Trustees authorizing what it is they determine to do or have done shall be evidence that such an act is within their power."
On July 17, 1978, petitioner purportedly conveyed to the Trust his interest in certain real and personal properties, including the "exclusive use of my lifetime services and all of the currently earned remuneration accruing therefrom."4 The document allegedly effecting the conveyance does not designate which of petitioner's real or personal property was the subject of this purported transfer. The alleged conveyance document does indicate that petitioner's earned remuneration resulted from services rendered to American Airlines. Subsequent to the execution of this document, petitioner requested American Airlines to make his payroll checks out to the John L. Cheek Family Trust, rather than to petitioner individually. Such request was denied by American Airlines because company policy required all payroll checks to be made out to the individual employee.
In exchange for the purported conveyance to the Trust of petitioner's real and personal property, including his lifetime services and remuneration therefrom, the Trust issued all of its 100 units of beneficial interest to petitioner on July 17, 1978. Petitioner immediately surrendered such units to the Trust for cancellation, and the 100 units of beneficial interest were thereafter immediately reissued as follows:
A checking account with the Suburban National Bank of Elk Grove Village (the Trust account) was subsequently opened in the name of The John L. Cheek Family Trust. Both petitioner and his mother were authorized signatories on the Trust account, only one signature being required to netotiate checks thereon. During the years in issue, both petitioner and his mother drew checks on the Trust account in payment of what appear to be personal expenses.5
Petitioner also maintained a personal checking account in his individual name at the Bank of Elk Grove (hereinafter the personal account). Among the checks petitioner drew on the personal account during 1978 were the following:
Check No. &
Date Payee Amount
159 4-13-78 Trans-American Development Corp........................ $ 2,000
171 5-23-78 Trans-American Development Corp........................ 1,572
172 6-15-78 Trans-American Development Corp........................ 2,500
197 8-22-78 Charles E. Fisher Jr. Oil Producer .................... 1,500
216 10-28-78 TADC Trans-America Development Corp.................... 2,500
229 12-07-78 Trans-American Development Corp........................ 2,800
230 12-15-78 Charles E. Fisher Jr. (Oil Producer) ................... 3,000
_______
Total .................................................. $15,872
At trial, petitioner claimed that all these checks represented payment of drilling costs associated with several unidentified oil and gas ventures in which petitioner allegedly participated. During 1979, petitioner drew several checks on his personal account payable as follows:
Check No. &
Date Payee Amount
237 1-11-79 Mr. Charles E. Fisher Jr. .............................. $ 1,500
238 1-19-79 Mr. Charles E. Fisher Jr. .............................. 6,000
243 2-01-79 Trans-American Development Corp......................... $ 3,000
These checks also allegedly pertained to investments in otherwise unidentified oil ventures. Other than these canceled checks and his vague, uninformative testimony, petitioner offered no evidence as to the nature of these purported investments or to support his claim that such checks were in fact payment of drilling costs on such oil ventures. Petitioner declined the Court's offer to keep the record open so that he could present documentation as to these oil and gas investments.
On his 1978 and 1979 Federal income tax returns (Forms 1040), petitioner reported gross wages in the amounts of $33,935 and $43,314, respectively. The W-2 Form attached to each return reveals that all of petitioner's reported wages for his 1978 taxable year and that $42,2766 of the total wages reported for his 1979 taxable year represented compensation earned by petitioner as an employee of American Airlines. From the total amount of wages shown on his returns for the years in issue, petitioner deducted the amount of $17,654 in 1978 and the full $43,314 in 1979 as amounts he purportedly received as a nominee for the Trust, thereby reducing the amount of his gross income for each year in issue. Petitioner accomplished this by altering line 12 of the Form 1040 he filed for each year. He marked out the existing heading of "Alimony received," substituted therefor the heading "nominee income for family trust," and entered the above figures as negative amounts.7 Petitioner then increased the amount of his gross income by $5,500 in 1978 and $10,800 in 1979, reporting on line 20 of the Form 1040 he filed for each year that such amounts...
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