Gouveia v. Commissioner
| Decision Date | 09 November 2004 |
| Docket Number | Docket No. 288-03.,Docket No. 563-03.,Docket No. 562-03.,Docket No. 564-03. |
| Citation | 88 T.C.M. 424 |
| Parties | Greg William Gouveia, a.k.a. Greg W. Gouveia, a.k.a Greg Gouveia and Carol Ann Gouveia, a.k.a Carol Gouveia, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Joe Alfred Izen, Jr., for petitioners.
Michael E. Melone, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION1
In separate notices of deficiency, respondent determined the following income tax deficiencies and penalties with respect to petitioners' Federal income taxes:2
Greg William Gouveia, a.k.a. Greg W. Gouveia, a.k.a. Greg Gouveia and Carol Ann Gouveia, a.k.a. Carol
Gouveia, docket No. 288-03
Accuracy-Related Penalty
Year Deficiency Sec. 6662(a)
1995 $30,521 $6,104
1996 22,947 4,589
Greg Gouveia and Carol Gouveia, docket No. 562-03
Accuracy-Related Penalty
Year Deficiency Sec. 6662(a)
1997 $20,620 $4,124
1998 21,982 4,396
Pago Trust, Phillip Norton, Trustee, docket No. 563-03
Accuracy-Related Penalty
Year Deficiency Sec. 6662(a)
1998 $39,331 $7,866
McKenzie Trust, Charles Boatright, Trustee, docket No. 564-03
Accuracy-Related Penalty
Year Deficiency Sec. 6662(a)
1998 $1,136 $227
Petitioners filed separate petitions to redetermine the deficiencies and related penalties. We consolidated these cases (hereinafter this case) for trial, briefing, and opinion pursuant to Rule 141(a) because they present common issues of fact and law.
The issues for decision are:3
(1) Whether the petitions filed in the names of the Pago and/or McKenzie Trusts should be dismissed for lack of jurisdiction;
(2) whether the Pago and/or McKenzie Trusts should be disregarded for Federal income tax purposes;
(3) even if the Pago and/or McKenzie Trusts are not disregarded for Federal income tax purposes, whether the net income of the rental real estate business, allegedly owned by the Pago Trust, and the automobile restoration business, allegedly owned by the McKenzie Trust, must be reported by Greg Gouveia (petitioner) and Carol Gouveia (collectively referred to as the Gouveias) on their Federal income tax returns for the years at issue;
(4) whether the notice of deficiency for the Gouveias' 1995 and 1996 taxable years was timely;
(5) if the Pago and McKenzie Trusts are respected for Federal income tax purposes, whether either trust is entitled to deductions for income distributions, management fees, or fiduciary fees; and
(6) whether petitioners are liable for the accuracy-related penalty for negligence or disregard of rules or regulations pursuant to section 6662(a) for each of the years at issue.
Some of the facts have been stipulated. We incorporate the stipulated facts into our findings by this reference. When the petitions in these cases were filed, the Gouveias4 resided in Pismo Beach, California. Although the Pago and the McKenzie Trusts' petitions alleged that the trusts maintained their principal places of business in California, the parties did not stipulate or otherwise introduce any evidence regarding the addresses of the trustees of the trusts as of the date the petitions were filed.
In 1976, petitioner started an automobile restoration business in his father's garage. Petitioner had previously studied welding, auto body, and machine tool theory at a junior college. In 1977, his cousin became a partner in the business, but in 1978, petitioner purchased his cousin's interest and continued the business under the name of "Brassworks". In the course of Brassworks's business, petitioner fabricated brass radiator reproductions for Model T Fords and shipped them worldwide to customers who restored those automobiles, and petitioner also restored Model T Fords for resale at auctions. From 1976 through 1993, petitioner worked full time for Brassworks, and the Gouveias were the sole proprietors of the business from 1984 until 1993.
In March 1993, the Gouveias sold Brassworks for $661,725 to Inga, Inc., a corporation established by William and Debra Ingalls to purchase the business. Inga, Inc. paid the Gouveias part of the purchase price as a downpayment and executed two promissory notes and an installment note for the remaining amount. The principal amounts of the promissory notes were $35,000 and $16,240, which were payable, with interest, on their respective maturity dates of March 8, 1995, and March 8, 1999. The principal amount of the installment note was $363,877.30, which was payable to the Gouveias, with interest, in monthly installments of $4,100 beginning on June 8, 1993. As part of the sale of Brassworks, petitioner agreed that he would no longer manufacture any brass radiators or water pumps.
In October 1987, the Gouveias purchased a half acre of unimproved land located at 285 and 289 Prado Road, San Luis Obispo, California (Prado Road property).5 The Prado Road property was zoned for light industrial construction, and petitioner subsequently developed that property into five commercial service units. Each unit consisted of commercial office space and had metal rollup doors, which contained areas for light industrial work. Petitioner moved Brassworks to this location and leased the remaining units to other tenants. After developing the Prado Road property, petitioner managed and maintained the property by hiring contractors, locating tenants, entering into lease agreements with tenants, collecting rent payments, and paying property taxes. In 1993 and 1994, the Gouveias earned $41,400 and $57,560 respectively, in gross rental receipts from the Prado Road property.
In approximately 1992 or 1993, petitioner explored the possibility of creating trusts and sought advice from a company called Independent Trust Consultants.6 Petitioner also spoke with his tax return preparer, John Gragg, about forming trusts, but Mr. Gragg was not experienced in that area. In addition petitioner conducted his own independent research on the topic of trusts.
After deciding to form the trusts, petitioner asked Phillip Norton7 to serve as trustee of the Pago Trust. Mr. Norton had met petitioner in 1986 when they were neighbors in the same office park, and Mr. Norton later rented office space from petitioner in 1989 or 1990. Mr. Norton was involved in the communications business; he had no experience managing a trust or developing real property. Petitioner then approached Jeffrey Jeter and asked for his help in creating a trust. Mr. Jeter had been a business acquaintance of petitioner since approximately 1989 and had performed some tool and die work for Brassworks. Mr. Jeter had no prior experience with trusts. Mr. Jeter and Mr. Norton did not know each other personally but were introduced by petitioner during discussions about forming the trust.
On May 1, 1993, Mr. Jeter and Mr. Norton executed a contract entitled "Pago Trust, A Contractual Fiduciary Trust". The contract contained a declaration of trust and a trust indenture which together set forth the terms governing the administration of the trust.
The declaration of trust identified Mr. Jeter8 as the trust's creator and Mr. Norton as the trustee and described the Pago Trust as a "Common Law contractual business trust organization" governed by the common law of England.9 The declaration of trust further provided that the company formed under the trust shall be domiciled in California and "shall not operate as a partnership, association, joint venture, joint stock company, corporation or statutory trust." The trust indenture described the purpose of the Pago Trust as "fraternal, social, economic and remunerative" and stated that "the Trustee(s) shall have freedom to conduct capitalistic enterprises dealing in properties, patents, copyrights, trademarks, formulae and equities, and the acquisition of deeds and deeds of trust in the aforesaid county."
The trust indenture granted sole dominion and control over the administration of the trust to the trustee and expressly prohibited the creator and any beneficiaries from having any voice in the trust's administration. The trustee had the discretion to determine what amounts constituted capital or income and was required to distribute all capital gain and income. The trustee could resign only by tendering a written, dated, and notarized document to the beneficiaries and board of trustees.
The declaration of trust directed the trustee to create 100 capital units of beneficial interest, in the form of certificates, and to issue them to the beneficiaries in exchange for property contributed to the "corpus of the company". The beneficial interest certificates entitled the holder to share in distributions but conveyed no interest in the trust corpus and conferred no rights to participate in the management, control, or administration of the trust. The certificates were freely transferable and were presumed to be owned by the person who possessed them. The owner was entitled to his share of any distributions by presenting the certificate to the board of trustees and demonstrating his lawful possession of it.
On May 1, 1993, the Gouveias acquired 10 capital units of the Pago Trust in exchange for $100 and their agreement to assign the installment and promissory notes from the sale of Brassworks to the Pago Trust. A certificate for 10 units in the Pago Trust was issued in the Gouveias' names and was signed by Mr. Norton.
On May 1, 1993, the Brookes Group acquired 90 capital units...
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