DUBOIS v. Commissioner
| Decision Date | 21 April 1986 |
| Docket Number | Docket No. 23857-84. |
| Citation | 1986 TC Memo 160,51 TCM (CCH) 895 |
| Parties | Paul G. duBois and Estate of Mary A. duBois, Paul G. duBois, Personal Representative v. Commissioner. |
| Court | U.S. Tax Court |
Richard L. Stradley, for the petitioners. Cynthia J. Olson, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioners' Federal income taxes together with additions to tax as follows:
Addition to Tax
Sec. 6651(a), Sec. 6653(a)
Year Deficiency I.R.C. 1954 I.R.C. 1954
1980 ..... $18,791 $939 $ 968
1981 ..... $19,749 $ 0 $ 987
1982 ..... $25,790 $ 0 $1,290
After certain concessions have been made, the issues for decision are as follows:
1. Whether dividends and interest reported as income by Augie Associates, a purported trust created by petitioners, are taxable to petitioners individually.
2. Whether petitioners have shown that they are entitled to a $3,000 capital loss deduction claimed for 1981.
3. Whether petitioners have shown that their failure to file a timely income tax return for 1980 was due to reasonable cause and not to willful neglect within the meaning of section 6651(a).1
4. Whether any part of petitioners' underpayment of tax for 1980, 1981, and 1982 was due to negligence or intentional disregard of the revenue laws within the meaning of section 6653(a).
5. Whether damages should be awarded to the United States under section 6673.
At the time Dr. and Mrs. duBois filed their petition, they were legal residents of Colorado Springs, Colorado. They filed joint Federal income tax returns for 1980, 1981, and 1982. Mrs. duBois died on April 27, 1985, and her estate has been substituted as a party.
Beginning in 1940 and continuing throughout the years at issue, petitioner Paul G. duBois (Dr. duBois) was a medical doctor who practiced his profession in Colorado Springs, Colorado. During 1980 through 1982, Dr. duBois also sold greenhouses through a sole proprietorship.
On July 30, 1979, Dr. duBois, as creator and trustee, executed a Declaration of Trust purporting to create a trust entitled Augie Associates (sometimes herein the trust or Associates). In doing so, he used a package of preprinted materials that he had purchased from Aurora Financial Consultants, an organization based in California. Prior to executing the Declaration of Trust or filing the joint income tax returns for 1980, 1981, and 1982, he did not consult an attorney or other professional advisor on the tax consequences of the organization he purported to create.
Under date of July 31, 1979, Dr. duBois executed a document entitled "Affidavit General" and other instruments purporting to transfer to the trust certain real property, a Wraparound Deed of Trust, checking and savings bank accounts, stocks, bonds, and other property. One of the instruments was a deed transferring title to the family residence. Another instrument states that Dr. duBois does "assign and convey to Augie Associates in trust, the right to direct that portion of the use of my lifetime personal services which are rendered on behalf of the Aforesaid Trust; and which Trust is to receive all of the earned remuneration resulting therefrom." The same instrument provides that Dr. duBois does "hereby assign and convey to Augie Associates in Trust, the right to direct that portion of the use of the lifetime personal services of Mary G. sic duBois, which are rendered on behalf of the Aforesaid Trust; and which Trust is to receive all of the earned remuneration resulting therefrom."
Mrs. duBois and a son-in-law, Robert D. Carrothers (Carrothers), were named as the initial trustees. The Declaration of Trust states that approval of a majority of the trustees shall be required before any action can be taken. This provision was made subject, however, to the following provisos:
Following the purported property transfers, Augie Associates issued 200 "beneficial certificates" to members of petitioners' family as follows:
Mary A. duBois ...................... 90
Paul G. duBois ...................... 0
Robert D. Carrothers ................ 20
Mary duBois Carrothers .............. 45
Paul Daniel duBois .................. 45
Mary duBois Carrothers and Paul Daniel duBois were children of Dr. and Mrs. duBois.
Dr. duBois intended to, and did, continue in his practice of the medical profession. Under date of July 30, 1979, Dr. duBois and Augie Associates executed a document entitled Agreement which contained the following:
Under date of August 1, 1979, Dr. and Mrs. duBois signed a document entitled Lease Agreement, whereby Augie Associates purportedly leased the family residence to Dr. and Mrs. duBois on a month-to-month basis at $200 per month. The $200 per month was not ever actually paid. Instead, a bookkeeping entry was made with respect to the rent at the time the joint income tax returns were prepared. On the trust tax returns, deductions were taken with respect to the depreciation and maintenance of the family residence.
Carrothers, designated as a trustee, lived in or near Denver, Colorado, approximately 60 miles from Dr. and Mrs. duBois' home. He was never consulted in advance regarding business decisions of the trust and had no way of knowing what action the trust was taking. On his visits to the family in Colorado Springs, he was given general information about the trust and its activities. He never dissented with respect to any action taken by Dr. duBois in handling the trust operations, its income, or its assets.
A preprinted minute of a meeting of the trustees on July 31, 1979, states that Dr. duBois was appointed as a trustee on that date and was designated as Executive Trustee. In that capacity, he was given power "to negotiate contracts of any description, buy and sell property of all kinds, to direct the management of any affair that will benefit the Trust, and any other powers provided for in the Trust Indenture."
During 1980, 1981, and 1982, petitioners maintained several bank accounts. Respondent served a subpoena on Dr. duBois which directed him to produce all documents pertaining to the operation of the trust and all bank accounts over which either petitioner had signatory authority, or were in the name of either petitioner, or in the name of Augie Associates, for the period January 1, 1979 through December 31, 1982.
The only documents produced in response to the subpoena were check registers for two checking accounts, account No. 13-233-4 in the name of Paul G. duBois, M.D., at the American Heritage Bank and Trust Co., Colorado Springs (American Heritage Bank) covering checks numbered 9073 through 9935, dated December 24, 1979 through December 15, 1981, and account No. XXXXXXXXX at the First National Bank, also in Colorado Springs, in the name of Augie Associates, Paul G. duBois, Trustee.
During 1980, 1981, and 1982, petitioners drew checks on the accounts at the American Heritage Bank and First National Bank accounts for their personal living expenses, including department store purchases, laundry, charitable contributions, payments to the National Commodity and Barter Association, investments in precious metals, medical insurance, grocery bills, and repairs for their automobiles. Dr. duBois, in his sole discretion, made all decisions on what bills would be paid with funds purportedly owned by Augie Associates. Dr. duBois discussed none of the trust expenditures with either one of the other two trustees.
Under date of December 31,...
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