Holman v. U.S.

• Decision Date: 29 February 1984
• Docket Number: No. 83-1528,83-1528
• Citation: 728 F.2d 462
• Parties: 84-1 USTC P 9265 Dr. Bruce HOLMAN; Audrey B. Holman, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 462

728 F.2d 462

84-1 USTC P 9265

Dr. Bruce HOLMAN; Audrey B. Holman, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 83-1528.

United States Court of Appeals, Tenth Circuit.

Submitted on the Briefs Pursuant to

Tenth Circuit Rule 9.

Decided Feb. 29, 1984.

Dr. Bruce Holman, pro se.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Jonathan S. Cohen and Libero Marinelli, Jr., Attys., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellee.

Before SETH, Chief Judge, and McKAY and SEYMOUR, Circuit Judges.

PER CURIAM.

This three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Circuit R. 10(e). The cause is therefore ordered submitted without oral argument.

This is an appeal from an order of the district court granting summary judgment in favor of defendant and denying any relief to plaintiffs in their action for refund of overpayment of taxes for the years 1973 and 1974.

Plaintiffs, husband and wife, sought to form a trust (the "Bruce Holman Family Estate") which would hold as corpus all personal and real property owned by plaintiffs. In addition, the trust acquired the exclusive right to plaintiff Bruce Holman's services and future earnings. The trust originally named plaintiffs and Bruce Holman's mother, Addie Duncan, as trustees. Approximately five months later, Addie Duncan resigned as trustee leaving plaintiffs as sole trustees. Plaintiffs were also named as officers of the trust for which they were to be paid consulting fees. Plaintiffs, their four children and the "Bruce Holman Educational and Research Trust" were named as beneficiaries. Plaintiffs continued to use their property in the same manner as they had prior to the creation of the trust. The trust was obligated to pay various living expenses for plaintiffs and their family, such as "rent" and maintenance on plaintiffs' home, utilities, automobile expenses such as gas, oil, maintenance, insurance premiums, as well as other miscellaneous expenses.

Under the terms of the trust, the beneficiaries were entitled to receive only what the trustees, in their discretion, decided to distribute. The trustees had the power to fix and pay compensation for themselves in their capacity as trustees. The trustees' powers were "construed as general powers of citizens of the United States of America, to do anything any citizen may do in any state or country," and essentially to take any action that they may "deem advantageous." The duration of the trust was stated as "twenty-five years from date, unless the trustees shall unanimously determine upon an earlier date."

In January 1974 plaintiffs received a letter from the Internal Revenue Service informing them that the Service would not recognize the trust for federal income tax purposes. Nevertheless, the Bruce Holman Family Estate (a Trust) filed a fiduciary income tax return for the tax years 1973 and 1974. Plaintiffs also filed a joint return for those years. The trust included in income the earnings of Dr. Holman and took deductions for various expenses such as payments to the plaintiffs as consultants, officers and trustees of the trust as well as other personal living expenses of plaintiffs.

Upon the filing of the returns in 1973 and 1974, plaintiffs were audited and their income was increased by the amounts reported by the trust. This amount was then decreased by deducting the amounts reported by plaintiffs as consulting fees and distributions from the trust, together with allowable deductions. As a result of the increase in income, plaintiffs were assessed deficiencies for the tax years 1973 and 1974 for taxes, interest, and negligence penalties.

Plaintiffs paid the deficiency and brought the instant action for refund claiming that the trust was valid and that plaintiffs should not have been taxed on the trust's income. Plaintiffs also contended that the Service should have allowed a deduction to plaintiffs for the cost of the materials and forms which enabled plaintiffs to set up the trust. On cross-motions for summary judgment and on stipulated facts and exhibits, the district court entered judgment in favor of defendant and against plaintiffs.

The court held that plaintiffs' attempt to create a trust was merely an anticipatory assignment of income which would not shift the incidence of taxation from plaintiffs to the trust. Secondly, the district court relied on the "grantor trust" provisions of 26 U.S.C. Secs. 671-679 (1976) in determining that plaintiffs were properly taxed on the income. The district court further held that the Service properly disallowed plaintiffs' claimed deduction for the cost of the trust materials and that the Service correctly assessed negligence penalties.

On appeal, plaintiffs raise three claims: (1) The family trust is valid and should have been recognized by the Service; (2) the deduction for trust materials should have been allowed; (3) plaintiffs were wrongfully assessed negligence penalties.

Although this circuit has not yet considered the tax consequences of this type of "family trust," three circuits and the United States Tax Court have considered the issue and have uniformly applied the assignment of income doctrine and the grantor trust provisions in holding that trusts virtually identical to the one in question are mere shams designed for tax avoidance purposes. See, e.g., Hanson v. Commissioner, 696 F.2d 1232 (9th Cir.1983); Schulz v. Commissioner, 686 F.2d 490 (7th Cir.1982); Vnuk v. Commissioner, 621 F.2d 1318 (8th Cir.1980); Vercio v. Commissioner, 73 T.C. 1246 (1980); and Wesenberg v. Commissioner, 69 T.C. 1005 (1978).

The assignment of income doctrine originated with the Supreme Court decision of Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930), which stands for the principle that income is taxed to the one who earned it. The Bruce Holman Family Estate Trust is a transparent attempt to assign the income earned by Dr. Holman. An examination of the terms of the trust reveals that the trust neither supervises Dr. Holman's employment nor determines his compensation. Vnuk, 621 F.2d at 1321. Furthermore, Dr. Holman is under no legal duty to earn money or perform services for the trust. Id. Dr. Holman is no less the earner of the income than he was before simply because he now purports to act as an "employee" or "servant" of the trust.

Under 26 U.S.C. Sec. 671, the grantor of a trust is treated as the owner of that trust if certain conditions specified in 26 U.S.C. Secs. 672-679 exist. Critical to the discussion here is Sec. 674(a) which provides that:

[T]he grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.

"Adverse party" is defined in Sec. 672(a) as "any person having a substantial beneficial interest in the trust...