Markosian v. Comm'r of Internal Revenue
| Decision Date | 31 March 1980 |
| Docket Number | Docket No. 10775-77. |
| Citation | 73 T.C. 1235 |
| Parties | LOUIS MARKOSIAN and JOAN P. MARKOSIAN, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners transferred all of their business and personal assets, including Louis' dental equipment, his lifetime services, and all remuneration therefrom, to a family trust under which they were the only trustees. Petitioners continued to use their home and personal assets, and Louis continued to use his office and dental equipment in his practice. Louis, however, received all of the gross income from his dental practice and deposited it in his personal account. Petitioners then paid 80 percent of the gross income from the dental practice to the trust as a “fee.” Held, the trust was devoid of economic reality and is to be treated as a nullity for Federal income tax purposes. Paul T. Wright, for the petitioners.
Richard A. Jones, for the respondent.
Respondent has determined a deficiency of $10,312 in petitioners' income tax for the taxable year 1975. The issues for our decision are:
(1) Whether a trust purportedly created by petitioners is entitled to be recognized as an entity separate and distinct from the taxpayers;
(2) Alternatively, whether the taxpayers are to be treated as owners of the trust under sections 671 through 677, I.R.C. 1954;1 and
(3) Whether a management fee paid by petitioners to the trust created by them is deductible under section 162.
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioners Louis R. Markosian (Louis) and Joan P. Markosian (Joan), are husband and wife, whose legal residence was in Phoenix, Ariz., at the time of their filing of the petition herein. (Louis and Joan will hereinafter sometimes be referred to collectively as petitioners.) The petitioners filed their joint Federal income tax return for the taxable year 1975 with the Western Region Service Center, Ogden, Utah.
Louis is a licensed dentist and has been engaged in the practice of dentistry for 23 years. The majority of petitioners' assets had been acquired with Louis' earnings from his dental practice in Arizona, a community property State.
Petitioners have resided in Arizona as husband and wife for the past 19 or 20 years as of the date of trial. The petitioners' children are, and their respective ages at the end of 1975 were, as follows:
+--------------------------+
¦Philip Markosian ¦15 years¦
+-----------------+--------¦
¦Julie Markosian ¦14 years¦
+-----------------+--------¦
¦John Markosian ¦12 years¦
+-----------------+--------¦
¦Gary Markosian ¦9 years ¦
+--------------------------+
On or about January 11, 1975, petitioners executed a document captioned “Declaration of Trust of This Pure Trust.” This trust indenture was published by Educational Scientific Publishers (ESP) and consisted of a preprinted form with blank spaces provided for petitioners' names. Petitioners executed this document based on the advice of physician friends and representations made by an attorney employed by ESP. The representations were to the effect that the trust resulting from the execution of the ESP documents would be viable for Federal tax purposes. The attorney also stated that he would defend the trust at his cost in any proceedings before the Internal Revenue Service.
The trust that was purportedly established was styled the “Louis R. Markosian Equity Trust” (the trust). The trust provided in part, as follows:
The above named Trustees, for themselves and their successors IN TRUST, do hereby agree to accept properties real and personal to be conveyed and acknowledge acceptance of and delivery of all of the property specified, together with all the terms of The Trust herein set forth, agreeing to conserve and improve The Trust, to invest and reinvest the funds of Said Trust in such manner as will increase the financial rating of The Trust (Estate) during the period of outstanding liabilities of the various properties and enterprises in commerce for gain, exercising their best judgment and discretion, in accordance with The Trust Minutes, making distributions of portions of the proceeds and income as in their discretion, and according to the minutes, should be made, making complete periodic reports of business transactions, and upon final liquidation distributing the assets to the beneficiaries as their interests may appear; and in all other respects administering Said Trust (Estate) in good faith strictly in conformity hereto.
The Trust shall fix and pay compensation of all officers, employees or agents in their discretion, and may pay themselves such reasonable compensation for their services as may be determined by a MAJORITY of the Board of Trustees.
THE DECLARED PURPOSE OF THE TRUSTEES OF THIS TRUST shall be to accept rights, title and interest in and to real and personal properties, whether tangible or intangible, conveyed by THE CREATOR HEREOF AND GRANTOR HERETO to be the corpus of THIS TRUST. Included therein is the exclusive use of his lifetime services and ALL of his EARNED REMUNERATION ACCRUING THEREFROM,
from any current source whatsoever, so that Louis Markosian grantor-creator's name can maximize his lifetime efforts through the utilization of his Constitutional Rights; for the protection of his family in the pursuit of his happiness through his desire to
promote the general welfare, all of which Louis Markosian grantor-creator's name feels he will achieve because they are sustained by his RELIGIOUS BELIEFS.
This Trust shall continue for a period of twenty-five years from date, unless The Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in values, or other good and sufficient reason to protect or conserve trust assets, liquidate the assets, distribute and close The Trust at any earlier date determined by them. The Trust shall be proportionately and in a pro rata manner be distributed to the beneficiaries.
Trustees may do anything any individual may legally do in any state or country, subject to the restrictions herein noted. They shall continue in business, conserve the property, commercialize the resources, extend any established line of business in industry or investment, as herein specially noted, at their discretion for the benefit of THIS TRUST, such as, viz: buy, sell or lease land for the surface or mineral rights; buy or sell mortgages, securities, bonds, notes, leases of all kinds, contracts or credits of any form, patents, trademarks, or copyrights; buy, sell or conduct mail-order business, or branches thereof; operate stores, shops, factories, warehouses or other trading establishments or places of business of any kind; construct, buy, sell, lease or rent suitable buildings or other places of business; advertise different articles or business projects; borrow money for any business project, pledging The Trust property for the payment thereof; hypothecate assets, property, or both, of The Trust in business projects; own stock in, or entire charters of corporations, or other such properties, companies, or associations as they may deem advantageous.
A Minute of Resolutions of The Board of Trustees authorizing what it is they determine to do or have done shall be evidence that such an act is within their power. Anyone lending or paying money to The Trustees shall not be obliged to see the application thereof; all funds paid into the treasury are and become a part of the CORPUS of THIS TRUST.
The Trustees shall regard this instrument as their sufficient guide, supplemented from time to time by their resolutions (said resolution to be ratified ALWAYS by a MAJORITY of the Trustees then in office and participating in the issuing meeting) covering contingencies as they arise and are recorded in the minutes of their meetings, which are the by-laws, rules and regulations of THIS TRUST.
The initial trustees of the trust were Joan and a Martha Zeigler, a neighbor of petitioners. Louis became a trustee almost immediately after creation of the trust. On February 9, 1975, Martha Zeigler resigned, leaving the petitioners as the only trustees for the balance of 1975.
On the date the trust indenture was executed, petitioners purportedly conveyed to the trust various items of real and personal property. These items included petitioners' personal residence, home furnishings, life insurance policies, savings accounts, and all of the dental equipment used in Louis' practice. Additionally, Louis conveyed his “lifetime services including all his earned remuneration therefrom, from any current source whatsoever.” In exchange for this conveyance, Louis received 100 units of beneficial interest, which constituted all the units of beneficial ownership of the trust.
Due to various transfers, on February 8, 1975, the units of beneficial ownership were owned as follows:
+--------------------------+
¦Louis Markosian ¦25 units¦
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¦Joan Markosian ¦25 units¦
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¦Philip Markosian ¦10 units¦
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¦Julie Markosian ¦10 units¦
+-----------------+--------¦
¦John Markosian ¦15 units¦
+-----------------+--------¦
¦Gary Markosian ¦15 units¦
+--------------------------+
These units of beneficial ownership were evidenced by certificates which stated, in part:
This Certificate conveys no interest of any kind in The Trust assets, management or control thereof.
Benefits hereby conveyed consist solely of emoluments2 as distributed by the action of the Trustees and nothing more. * * *
The petitioners, themselves, did not attempt to make any separation between “emoluments” and other types of income or...
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