George v. Commissioner
| Decision Date | 23 November 1999 |
| Docket Number | Docket No. 20868-97. |
| Citation | 78 T.C.M. 816 |
| Parties | Frank W. George v. Commissioner.<SMALL><SUP>1</SUP></SMALL> |
| Court | U.S. Tax Court |
Frank W. George, pro se. Richard A. Rappazzo, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioner's Federal income taxes of $24,295 for 1993 and $27,893 for 1994, and accuracy-related penalties under section 6662(a) for negligence of $4,859 for 1993 and $5,578 for 1994.
In 1993, petitioner transferred his residence and medical practice to the Arivada Health Enterprises Trust (Arivada). Respondent determined that Arivada is a sham and lacks economic substance.
On October 19, 1998, petitioner filed a petition in the U.S. Bankruptcy Court for the District of Arizona. On October 20, 1998, respondent filed a motion to lift the automatic stay of Tax Court proceedings under 11 U.S.C. sec. 362(a)(8) (1994). On October 21, 1998, the bankruptcy court lifted the stay.
The issues for decision are:
1. Whether we have jurisdiction to decide this case after the bankruptcy court lifted the stay on proceedings in the Tax Court. We hold that we do.
2. Whether income received by the trust in the amount of $58,989 in 1993 and $78,772 in 19942 is included in petitioner's income. We hold that it is.
3. Whether petitioner is subject to self-employment tax on income in the amount of $58,989 in 1993 and $78,772 in 1994 which he diverted to Arivada. We hold that he is.
4. Whether petitioner is liable for penalties for negligence under section 6662 for 1993 and 1994. We hold that he is.
Unless otherwise indicated, section references are to the Internal Revenue Code in effect during the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioner lived in Arizona when he filed his petition.
Petitioner and Jaye Jones-George (Jones-George) were married from September 1989 to June 1994. In 1993, they owned and lived in a residence in Scottsdale, Arizona (the Scottsdale residence). Petitioner was not married at the time of trial.
During 1993, petitioner had a personal bank account at the Bank of America.
Petitioner has a bachelor of science degree in Zoology from the University of Michigan and a Doctor of Osteopathy (D.O.) degree from the Chicago College of Osteopathic Medicine. He completed a residency in Biomechanics at Michigan State University.
At the time of trial, petitioner had been an osteopathic physician for 15 years and a homeopathic physician for 4 years. He is licensed as an osteopathic physician by the States of Arizona and Ohio. He is also licensed as a homeopathic physician by the State of Arizona. During the years at issue, petitioner operated a medical practice at his Scottsdale residence and at other locations.
During the years at issue, petitioner had a post office box the address of which was 8711 E. Pinnacle Peak Road #121, Scottsdale, Arizona (the Pinnacle Peak address). Petitioner had a key and access to the post office box at all times in 1993 and 1994. Petitioner used the Pinnacle Peak address on his 1993 tax return and on checks from his checking account.
On June 26, 1993, petitioner and Jimmy C. Chisum (Chisum) formed the Stepping Stone Land Trust3 (Stepping Stone). The trust agreement stated that petitioner was to transfer the Scottsdale residence to Stepping Stone. He and Jones-George were named as the beneficiaries of the trust. However, Jones-George did not participate in the trust and deeded her interest in the trust to petitioner sometime before June 26, 1993.
On November 10, 1993, Jones-George deeded to petitioner her one-half community property interest in the Scottsdale residence. On November 27, 1993, petitioner deeded the Scottsdale residence to Stepping Stone. Petitioner received 100 capital units in trust property for the residence.
Petitioner lived in the Scottsdale residence with Jones-George until she moved out late in 1993. Petitioner lived in the Scottsdale residence until it was sold after the years in issue. He paid the monthly mortgage on the residence both before and after he transferred the residence to Stepping Stone. He did not pay rent to, or have a lease or rental agreement with, Stepping Stone for the use of the residence. He did not use the Scottsdale residence differently after he transferred it to Stepping Stone.
Petitioner and Chisum met several times in 1992 and 1993. Chisum gave petitioner information about forming and using trusts. Arivada was formed on June 26, 1993. Chisum signed documents naming him trustee of Arivada beginning in 1993. Chisum was not an osteopathic or homeopathic physician.
Petitioner did not consult an accountant or attorney to discuss the validity of the trust before he entered into the trust agreement. Jones-George did not participate in the trust because she was concerned about its tax implications, she did not trust Chisum, and she believed that Chisum would have control over their assets if she and petitioner transferred their assets to Arivada.
On August 5, 1994, petitioner assigned his interest in Stepping Stone to Arivada. Petitioner's use of the Scottsdale residence did not change after he transferred his interest in Stepping Stone to Arivada.
Before Arivada was formed, petitioner operated a medical practice at his Scottsdale residence. After Arivada was formed, petitioner continued to operate his medical practice there just as he had done before Arivada was formed. There was no written employment contract between petitioner and Arivada.
Chisum did not make operational decisions for Arivada in 1993 and 1994. He did not schedule patients and made no decisions about petitioner's medical treatment of patients.
Arivada paid petitioner $4,000 in 1993 and $14,400 in 1994.
Chisum opened a checking account for Arivada at First Interstate Bank of Arizona (now known as Wells Fargo Bank) on July 14, 1993 (the "Arivada checking account" or "Arivada account"). Arivada used the Pinnacle Peak address on its checks. Petitioner kept the checkbook for the Arivada account in his briefcase. Petitioner and Chisum each had a stamp bearing Chisum's signature. Chisum had signature authority over the Arivada account, but petitioner had Chisum's permission to use the signature stamp on checks petitioner wrote on the account. Petitioner wrote all of the checks from the Arivada account during 1993 and 1994. He (and occasionally Chisum) signed them with a stamp bearing Chisum's signature. Petitioner paid personal expenses such as his mortgage, home repairs, homeowners security fees, auto registration, auto insurance, auto service, tires, a magazine subscription, and utility bills from the Arivada account.
Petitioner did not pay rent to Arivada to live in the Scottsdale residence. He had no lease or rental agreement with Arivada to use the residence.
Before Arivada was formed, petitioner paid for water and sewage expenses of the Scottsdale residence from his checking account. After Arivada was formed, petitioner paid for the water and sewage expenses of the Scottsdale residence from the Arivada account.
After Arivada was formed, petitioner told the clinics for which he provided services4 and other payers to pay Arivada rather than petitioner.
Arivada filed Forms 1041, U.S. Fiduciary Income Tax Return,5 for 1993 and 1994. Arivada's 1993 and 1994 tax returns report that Arivada was a simple trust. Arivada used the Pinnacle Peak address on its 1993 and 1994 trust returns. Arivada reported petitioner's medical income and expenses on its 1993 and 1994 returns.
Arivada attached a Schedule K-1 to its 1993 trust return. In it, Arivada reported that it had distributed $16,826 (all of its distributable net income) to a beneficiary named East Point. Arivada attached two Schedules K-1 to its 1994 trust tax return. Arivada reported that it had distributed $32,000 (80 percent of its distributable net income) to East Point, and $8,000 (20 percent of its distributable net income) to an entity called S A Finance. Arivada provided no employee identification number on the Schedules K-1 for East Point or S A Finance. Instructions for Form 1041, Schedule K-1, state:
payers of income are
Arivada filed a petition in bankruptcy on the day the trial in this case was set to begin.
During 1993, petitioner was a doctor on the staff of Clinic Physicians Group, P.C. (CPG). Peggy McGarey (McGarey) was the office manager for CPG. She prepared and signed payroll checks for CPG.
During the first part of 1993, CPG paid petitioner for his services with checks payable to Frank W. George. McGarey gave the checks to petitioner by putting them in his desk drawer at CPG. Petitioner endorsed most of the checks and deposited them in his bank account at the Bank of Arizona.
In the middle of 1993, petitioner told McGarey to make all of petitioner's checks payable to Arivada. McGarey did so. The checks were paid to Arivada to compensate petitioner for the services he rendered for CPG. Petitioner's services for CPG did not change after CPG began making his checks payable to Arivada. McGarey gave the checks to petitioner by putting them in his desk drawer at CPG. Petitioner endorsed most of the CPG checks made payable to Arivada and deposited them in Arivada's checking account.
During 1993 and 1994, petitioner was a clinical consultant for Accutrace...
To continue reading
Request your trial