Edwards v. Commissioner
| Decision Date | 22 March 2005 |
| Docket Number | Dkt. No. 10458-02. |
| Parties | Harlan D. Edwards and Floors by Harlan, Jody Edwards, Trustee v. Commissioner. |
| Court | U.S. Tax Court |
Harlan D. Edwards and Floors by Harlan, Jody Edwards, Trustee, pro sese;
Matthew J. Bailie, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In separate notices of deficiency, respondent determined the following income tax deficiencies, additions to tax, and penalty with respect to petitioners' Federal income taxes for 1998:1
Harlan D. Edwards
Additions to Tax
Deficiency Sec. 6651(a)(1)1 Sec. 6654
$42,165 $10,541 $1,929
1 In his answer, respondent asserted a modification to the addition to tax under sec. 6651(a) determined in Harlan D
Edwards's notice of deficiency, proposing instead a revised amount under sec. 6651(a)(1) coupled with an addition to
tax pursuant to sec. 6651(a)(2). On brief, respondent does not address the asserted sec. 6651(a)(2) addition
Accordingly, we deem respondent to have abandoned the position taken in the answer
Floors by Harlan, Jody Edwards, Trustee
Deficiency Penalty Sec. 6662(a)
$30,232 $6,046
After concessions, the issues remaining for decision are:
(1) Whether income reported by petitioner Floors by Harlan, Jody Edwards, Trustee (Floors Trust), is includible in the gross income of petitioner Harlan D. Edwards (Harlan) because Floors Trust is a sham that is disregarded for Federal income tax purposes;
(2) whether Harlan failed to report income of $6,908;
(3) whether Floors Trust is entitled to deductions taken for rent, income tax expense, and income distributions;
(4) whether Harlan is liable for self-employment tax;
(5) whether Harlan is liable for an addition to tax pursuant to section 6651(a)(1); and
(6) whether Harlan is liable for an addition to tax pursuant to section 6654.
The parties have stipulated some of the facts, which are incorporated herein by reference. Harlan resided and Floors Trust had an address in San Jose, California, at the time the petition was filed.
Before 1995, Harlan operated a vinyl floor installation business, known as Edwards Vinyl Floors (Edwards Vinyl), as a sole proprietorship. Harlan managed the business, owned its assets, and performed the installation work along with his son, Jody Edwards (Jody).
In January 1995, Harlan was the grantor of three trusts:2 Floors Trust, Harwood Group Trust (Harwood Group), and Harwood Holding Co. Trust (Harwood Holding).
Harlan got the idea of putting his business and assets into trusts through the advice of Don Fletcher, a trust promoter who Harlan met after attending a free seminar advertised in the newspaper.3
At the time Floors Trust was created, Edwards Vinyl changed its name to Floors by Harlan, and all assets associated with the business were transferred to Floors Trust. There was no change in the manner in which Harlan conducted the activities of the flooring business after the name change and asset transfer. Harlan was appointed "manager" of the trust's business and had unrestricted access to the trust's assets. As manager, Harlan continued to make the same day-to-day managerial decisions for Floors Trust as he had made for Edwards Vinyl when he managed it as a sole proprietorship. No trustee imposed any requirements or made any demands with respect to the manner in which the flooring business was operated. Harlan and Jody performed the floor installation activities for Floors Trust, and payment for the services rendered by Harlan, as proprietor of a floor installation business, was provided to the trust. Harlan and Jody maintained a checking account in the name of "Floors by Harlan `A Trust'", into which they deposited gross receipts from the floor installation business and over which they had signatory authority. Harlan or Jody signed all checks drawn on this account in 1998.
Jody was appointed trustee of Floors Trust at its inception and served as trustee in 1998. Roland Mears (Roland) also served as trustee of Floors Trust at its inception.
The trust instrument for Floors Trust provides that a trustee who resigns "will sign and have witnessed a letter of resignation" that is made part of the trust agreement. The trust instrument further provides that upon the resignation of a trustee, the appointment of a successor trustee "shall be upon the unanimous action of the remaining trustees".
On May 1, 1996, Roland purported to resign as trustee from Floors Trust, but his letter of resignation was not witnessed as required by the trust instrument. On the same day, Roland purported to appoint Becky Mears (Becky) as a successor trustee by means of a document signed by Roland but not Jody, notwithstanding the trust instrument's requirement that successor trustees be appointed by the unanimous action of the remaining trustees.4
The beneficiaries of Floors Trust were Jody, Harlan, Harwood Group, and Harwood Holding. Harlan originally held all 100 units of the beneficial interest of Floors Trust, but on February 1, 1995, he surrendered 94 of them to Jody and 2 units each to Harwood Holding and Harwood Group.
The beneficiaries of Harwood Holding were Harlan and Jody, as well as other children of Harlan; namely, Jacqueline Spellman, Greg Edwards (Greg), and Michael Edwards.5
Upon his creation of Harwood Group, Harlan transferred to it his residence, which he owned outright, free of any mortgage indebtedness. Harwood Group's other assets included a television, a bedroom suite, three lounge recliners, and various other household furnishings. The beneficiaries of Harwood Group were Harlan, Jody, and Greg. The trustees of Harwood Group were Jody and Becky. As with Floors Trust, Harlan served as manager of Harwood Group. Additionally, Jody and Harlan were the only individuals who had authority to sign checks on the Harwood Group bank account.
The floor installation business did not change its location after its transfer to Floors Trust. The business and its assets continued to be located at Harlan's residence. However, after the transfer of the residence to Harwood Group, Floors Trust paid Harwood Group $500 per month as rent for the use of the garage and a bedroom located in the residence. The rent was originally set at $800 per month, but at some time not disclosed in the record, it was reduced to $500 per month because Harlan concluded that Harwood Group did not require that much income. When Harlan was operating Edwards Vinyl as a sole proprietorship, the business did not pay rent for the use of the same space in the residence.
During 1998, Harlan was a member of two bartering clubs, American Barter Corp. and Tradeworld. In that year, Harlan received services from bartering valued at $5,359 and $11,375 from American Barter Corp. and Tradeworld, respectively.
Floors Trust filed a Form 1041, U.S. Income Tax Return for Estates and Trusts, for the taxable year 1998. Harlan did not file a Form 1040, U.S. Individual Income Tax Return, for the 1998 taxable year.
OPINIONThe record in this case is sparse. Petitioners attached several exhibits to their brief and made numerous factual assertions therein. However, unsupported statements in a brief and exhibits that have not been properly admitted into evidence at trial do not constitute competent evidence. Rule 143(b); Niedringhaus v. Commissioner [Dec. 48,411], 99 T.C. 202, 214 n. 7 (1992); Viehweg v. Commissioner [Dec. 44,853], 90 T.C. 1248, 1255 (1988); Castro v. Commissioner [Dec. 54,338(M)], T.C. Memo. 2001-115. Petitioners also complain in their brief that Becky was "not permitted to speak". The Court did not permit Becky to speak on behalf of petitioners at calendar call, as she had not entered an appearance on their behalf and was not herself a party.6 However, petitioners were free to call Becky as a witness at the trial but failed to do so. The absence of her testimony is accordingly a circumstance of their own making.
Petitioners contend that, pursuant to section 7491(a), the burden of proof has shifted to respondent with respect to all outstanding issues.
Generally, the burden of proof is on the taxpayer to show that the Commissioner's determinations are erroneous. See Rule 142(a); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111 (1933). However, subject to certain limitations, section 7491(a) shifts the burden of proof to the Commissioner with respect to any factual issue relevant to ascertaining the tax liability of the taxpayer if the taxpayer introduces "credible evidence" with respect to the issue.
While the statute itself does not define "credible evidence", the legislative history states as follows:
Credible evidence is the quality of evidence, which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness). * * * If after evidence from both sides, the court believes that the evidence is equally balanced, the court shall find that the Secretary has not sustained his burden of proof. [H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995.]
See also Blodgett v. Commissioner [2005-1 USTC ¶ 50,146], 394 F.3d 1030 (8th Cir. 2005), affg. [Dec. 55,232(M)] T.C. Memo. 2003-212.
As more fully discussed hereinafter, section 7491(a) has no effect on our findings with respect to most of the issues in this case, as our conclusions are based upon a preponderance of the evidence. See id. The exceptions concern the deductions for rent and taxes taken by Floors Trust and Harlan's liability for self-employment tax. As discussed below, since petiti...
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