O'Donnell v. C.I.R.

• Decision Date: 05 March 1984
• Docket Number: No. 83-5392,83-5392
• Parties: 84-1 USTC P 9275 Clarence H. O'DONNELL and Georgia G. O'Donnell, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee. Non-Argument Calendar.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 679

726 F.2d 679

84-1 USTC P 9275

Clarence H. O'DONNELL and Georgia G. O'Donnell, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.

No. 83-5392

Non-Argument Calendar.

United States Court of Appeals Eleventh Circuit.

March 5, 1984.

Joel Gerber, Acting Chief Counsel, George M. Sellinger, IRS, Glenn L. Archer, Jr., Michael L. Paup, Chief-Appellate Section, Ann Belanger Durney, Philip I. Brennan, Dept. of Justice, Tax Div., Washington, D.C., for respondent.

Appeal from the Decision of the United States Tax Court.

Before HATCHETT, ANDERSON and CLARK, Circuit Judges.

PER CURIAM:

Petitioners, Clarence H. O'Donnell and Georgia G. O'Donnell (taxpayers), appeal from an order of the United States Tax Court granting the government's motion for partial summary judgment, and from the stipulated decision entered on February 11, 1983, determining deficiencies in taxpayers' income tax for 1976 and 1977, in the amounts of $4,500 and $6,500, respectively. ¹ The sole issue presented in this appeal is whether the tax court erred in granting partial summary judgment.

Background

In 1975, the taxpayers created a self-titled "Express Equity Pure Trust." The instrument provided:

THE DECLARED PURPOSE OF THE TRUSTEES OF THIS TRUST shall be to accept rights, title and interest in and to real and personal properties, whether tangible or intangible, conveyed by the CREATOR HEREOF AND GRANTOR HERETO to the corpus of THIS TRUST. Included therein is the exclusive use of his lifetime services and ALL of his EARNED RENUMERATION ACCRUING THEREFROM, from any current source whatsoever, so that

C. H. O'Donnell

* * *

Grantor-Creator's name

can maximize his life time effort through the utilization of his Constitutional Rights; for the protection of his family in the pursuit of his happiness through his desire to promote the general welfare, of which

C. H. O'Donnell feels he will

* * *

Grantor-Creator's name

achieve because they are sustained by his RELIGIOUS BELIEFS.

Taxpayers were appointed as trustees of the trust.

Taxpayers' 1976 and 1977 income tax returns included Mr. O'Donnell's salary from Eastern Airlines. These amounts, $50,774.78 in 1976, and $54,481.56 in 1977, were deducted from gross income in both years as "adjustments in income" for "Payment of Nominee income to C.H. O'Donnell Equity Trust # 59-657897."

In both 1976 and 1977, Mrs. O'Donnell filed on behalf of the trust a Fiduciary Income Tax Return (Form 1041) reporting, among other income, amounts corresponding to the compensation received by Mr. O'Donnell from Eastern Airlines. A schedule of deductions attached to each return included charitable and political contributions and expenses for housing, utilities, travel, telephone, auto and insurance.

Following an audit of taxpayers' federal income tax returns for 1976 and 1977, on May 1, 1980, the Commissioner issued a deficiency notice to taxpayers disallowing the deductions for payments of Mr. O'Donnell's salary to the trust, on the ground that those payments did not qualify as deductions under the Internal Revenue Code. ² After adjustments and penalties, the total deficiency came to over $33,500. On July 18, 1980, taxpayers filed a petition for a redetermination of those deficiencies in the tax court.

On April 30, 1981, the government moved for partial summary judgment on the issue whether taxpayers are entitled, as a matter of law, to deduct the payments made to the Equity Pure Trust. At a hearing held on December 9, 1981, the government renewed its motion for partial summary judgment and the motion was granted from the bench. Taxpayers' motion for reconsideration was denied.

The tax court's partial summary judgment did not preclude taxpayers from personally claiming any legitimate deductions for itemized expenses claimed on the federal income tax returns of the trust. Accordingly, taxpayers produced some documents relating to their claimed deductions, and a settlement was reached between the parties. On February 11, 1983, pursuant to the parties' agreement, the tax court entered a decision determining deficiencies in income tax due from the taxpayers for the taxable years 1976 and 1977, in the amounts of $4,500 and $6,500, respectively. By its express terms, that decision did not preclude an appeal by either party of the case, and this appeal followed.

Opinion

The parties are in dispute as to the issue presented in this appeal. The government contends that the issue is simply whether the taxpayers were entitled to deduct the above-mentioned payments to the trust from their gross income. Brief for Respondent at 11. Taxpayers claim that the issue is not the validity of the deductions, but whether the tax court denied them an opportunity to present evidence to show that their trust was not the usual "family trust" by granting the government's motion for partial summary judgment. Brief for Petitioners at 9. A "family trust" is a tax protester's scheme for tax reduction and/or avoidance through multiple income splitting and extensive administration expenses. Typically, the trust reports all the personal income of the settlor and then deducts all personal living expenses to create a net loss, thereby enabling the trust and/or the settlor to pay little or no income tax. Such schemes have been universally condemned by the courts. See, e.g., Schulz v. Commissioner, 686 F.2d 490, 492-94 (7th Cir.1982). ³ In the usual "family trust," the income flows directly from the settlor's employer to the trust. Because in the instant case the income flowed from the employer to the taxpayer and then to the trust, taxpayer contends that the tax court should have given taxpayers an opportunity to present evidence to show that such an arrangement is different from the usual "family trust" and is therefore legitimate.

We find this argument incredible. The rationale underlying the courts' universal rejection of the "family trust" is the...