Kooyers v. Commissioner

Citation88 T.C.M. 605
Decision Date20 December 2004
Docket NumberDocket No. 20203-02.,Docket No. 20060-02.,Docket No. 20202-02.
PartiesOrneal and Martha Kooyers, et al. v. Commissioner.
CourtU.S. Tax Court

Paul L. Dixon, for respondent.


KROUPA, Judge:

Respondent determined the following income tax deficiencies and penalties with respect to petitioners' Federal income tax returns for 1998:2

                                                              Accuracy-related    Fraud1
                Petitioner                    Deficiency     Sec. 6662(a)    Sec. 6663
                   Orneal & Martha Kooyers       $125,772          --            $25,154
                   OMK Company Trust              50,221         $10,044           --
                   OMK Family Trust                824            165              --
                1 Respondent determined in the alternative that, if Orneal and Martha Kooyers are not liable for the fraud penalty, they
                are liable for the accuracy-related penalty under sec. 6662(a)

Respondent concedes that Orneal and Martha Kooyers are not liable for the fraud penalty under section 6663. Following that concession we must first decide whether the OMK Company Trust and OMK Family Trust (collectively the OMK trusts) should be disregarded for Federal income tax purposes. We hold that the OMK trusts are to be disregarded. Because the OMK trusts are disregarded for Federal income tax purposes, we must decide five additional issues.

First, we decide whether Orneal and Martha Kooyers (petitioners) are taxable on income from Tamarisk Operations, Ltd., and Fountain Global Trust. We hold that they are not.

Second, we decide whether petitioners are taxable on capital gain of $6,008 as reported by the OMK trusts or $123,391 as determined by respondent. We hold that they are taxable on capital gains of $103,791.

Third, we decide whether petitioners may deduct expenses claimed as business expenses by the OMK trusts. We hold that they may not.

Fourth, we decide whether petitioners are liable for self-employment taxes on compensation paid to the OMK trusts by Pacific Island Ministries (P.I. Ministries). We hold that they are.

Finally, we decide whether petitioners are liable for the accuracy-related penalty under section 6662(a). We hold that they are.


Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated in these findings by this reference. When the petitions in these cases were filed, petitioners, who are married, resided in Grass Valley, California, where, at that time, they conducted the activities of the OMK trusts.

A. Petitioners' Missionary Service in New Guinea

In the spring of 1959, Mr. Kooyers had an epiphany and believed himself called to serve as a missionary. At the time, petitioners were teaching in northern California. After obtaining releases from their teaching contracts, petitioners joined the Wycliffe organization and took linguistic courses for Bible translators and jungle training conducted by Wycliffe. In February 1961, petitioners began performing missionary work in the Sepik River Basin area of Papua, New Guinea. Petitioners settled with their children in the primitive village of Madiwai, where they built a house and studied the village culture and the language of Washkuk. After 2 years, they built a school where Mrs. Kooyers taught.

Petitioners traveled to the United States in 1966, so that Mr. Kooyers could recuperate from hepatitis and they could raise funds for their work in New Guinea. They returned to New Guinea in the fall of 1967 and settled in the town of Ambunti. Mrs. Kooyers began teaching classes there, and eventually the classes evolved into the Ambunti Akademi.

Petitioners completed their translation of the New Testament in 1975. The Wycliffe organization required its missionaries upon completion of a translation to relocate to a new area, study the language, and begin another translation. Petitioners believed that they had been called to serve in the Sepik area of New Guinea. Consequently, they separated from the Wycliffe organization and established P.I. Ministries, through which they continued to conduct their missionary work in New Guinea. Petitioners were employed by P.I. Ministries; Mr. Kooyers served as chief executive officer, and Mrs. Kooyers served as a teacher and missionary.

Petitioners' daughter Leah graduated from college in 1978 and married Doug Heidema, a son of other missionaries. Leah and Doug settled in Ambunti and assisted petitioners with their missionary activities. Petitioners also sought and trained New Guinea nationals to serve as leaders in the mission activities of P.I. Ministries. Eventually, those nationals conducted a large portion of the mission's activities.

Over the years, the activities of P.I. Ministries greatly contributed to the development of the Sepik area. With funds provided by the U.S. Agency for International Development, P.I. Ministries constructed (i) a large joinery to construct canoes, trusses for buildings, school furniture, and water tanks, (ii) new wards for the Ambunti clinic, and (iii) rain-collection water systems for 165 villages. More recently, P.I. Ministries has supplied villages with medicines and assisted in training orderlies to provide basic medical treatment.

B. Creation of the OMK Trusts

Petitioners were frugal, made wise investments, and were provided retirement benefits by P.I. Ministries. Consequently, by 1995, they had accumulated substantial savings. Petitioners continued to live a very modest lifestyle, however, even after they returned to the United States.3 They primarily wished to use their savings (i) to ensure that the missionary activities of P.I. Ministries in New Guinea continued and (ii) to provide for the education of their grandchildren.

Petitioners made an extended trip to California in 1995. During that visit, an acquaintance suggested to petitioners that they consider establishing trusts. Petitioners learned that National Trust Services (NTS) conducted seminars on investments and the use of "complex" trusts. They paid $9,000 or $10,000 to attend an NTS seminar in 1995.

In November 1995, petitioners created the OMK trusts using forms provided by NTS. Mr. Kooyers was the grantor/creator of the OMK Family Trust. As part of the OMK Family Trust's "Complex Trust System", the OMK Family Trust created other trusts, including the OMK Company Trust. Petitioners were trustees of the OMK trusts and made all decisions concerning the use of trust assets at all times relevant to these cases.4 The term of the trusts was 25 years. As trustees, however, petitioners had discretion to terminate any trust before the end of the 25-year period and, at the end of the period, could renew the trust agreement for another period up to 25 years.

Petitioners intended that 20 percent of the beneficial interest in the OMK Family Trust was to be held by their children and 80 percent was to be held by P.I. Ministries. Minutes of the board of trustees of OMK Family Trust, dated November 17, 1995, indicate that there were 100 beneficial units, of which 80 were held by the OMK Charitable Trust5 and 20 were held by petitioners' children. Minutes of the board of trustees of the OMK Company Trust, dated November 18, 1995, indicate that the OMK Family Trust was the sole beneficiary of the OMK Company Trust.

Minutes of the board of trustees of the OMK Family Trust, dated November 17, 1995, state that the beneficial certificates convey no interest of any kind in the trust assets; convey no voice in the management or control of the trust but do convey a right to receive a pro rata share of "emoluments" that may be distributed by the trustees.

Mrs. Kooyers transferred to Mr. Kooyers all of her interest in all her real and personal property.6 Mr. Kooyers then transferred all of petitioners' property, real and personal, to the OMK Family Trust. The declaration of trust of the OMK Family Trust states that the trustees were authorized to accept rights, title, and interest in real and personal property conveyed by Mr. Kooyers to be the corpus of the trust, including "the exclusive use of his lifetime services and ALL of his EARNED REMUNERATION ACCRUING THEREFROM".

For 1998, the OMK Company Trust entered into separate agreements with P.I. Ministries, pursuant to which the trust agreed to provide the services of petitioners as independent contractors to P.I. Ministries and P.I. Ministries agreed to pay the trust for services provided by petitioners. Mr. Kooyers was to serve as assistant to P.I. Ministries' chief executive officer, and Mrs. Kooyers was to serve as a missionary. In 1998, P.I. Ministries paid the OMK Company Trust $106,788 for petitioners' services.

In 1998, the OMK Company Trust paid all expenses petitioners thought were related to their mission work, including the costs of their housing, medical care, travel, and family gatherings. The OMK Company Trust also paid the education expenses of petitioners' grandchildren.

C. Investments in Ponzi Schemes

Minutes of the OMK Company Trust trustees meeting, dated May 29, 1996, state that the trust contracted with William Joe Little (Little) of NTS to act as "Agent Trustee" to handle investments. Little was also affiliated with Fountainhead Global Trust (Fountainhead). During the course of his relationship with petitioners, Little exploited their strong religious motivations and convinced them that he was a "keen Christian".

In February 1997, petitioners traveled to Grand Cayman Island to attend meetings conducted by Little, Fritts, and Lewis Rowe (Rowe) of Zephyr International Ltd. (Zephyr). The meetings were to explain the NTS/Zephyr relationship and to promote investing through an offshore entity. Little, Fritts, and Rowe convinced petitioners that the proposed investments were sound, that Little, Fritts, and Rowe were highly qualified and licensed...

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