McKenzie v. Commissioner
| Decision Date | 04 January 1984 |
| Docket Number | 9925-77,9924-77,9926-77 and 9927-77.,Docket No. 6819-76 |
| Citation | 1984 TC Memo 9,47 TCM (CCH) 834 |
| Parties | Dick H. McKenzie Family Estate (a Trust), Gertrude A. McKenzie, Trustee et al. v. Commissioner. |
| Court | U.S. Tax Court |
Joseph W. Weigel, 741 N. Milwaukee St., Milwaukee, Wis., for the petitioners. Edward J. Roepsch, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined the following deficiencies in, and additions to, the petitioners' Federal income taxes:
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Addition to Tax
Sec. 6653(b) Sec. 6651(a) Sec. 6653(a)
Docket No. Petitioner Year Deficiency I.R.C. 19542 I.R.C. 1954 I.R.C. 1954
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6819-76 Dick H. McKenzie 1972 $10,909.21 $5,454.60 .......
Family Estate
(A Trust)
9924-77 Estate of Richard H. 1971 6,659.65 3,329.82 $1,664.91 $332,98
McKenzie 1972 16,006.86 8,003.43 4,001.72 800.34
9925-77 Estate of Richard H. 1973 8,023.33 4,011.67 ....... amounts not
McKenzie and 1974 17,892.11 8,946.06 ....... specified
Gertrude A. McKenzie
9926-77 Gertrude A. McKenzie 1971 6,659.65 3,329.82 1,664.91 332.98
1972 16,006.86 8,003.43 4,001.72 800.34
9927-77 Dick H. McKenzie 1973 8,107.43 4,053.72 .......
Family Estate 1974 18,475.45 9,237.73 .......
(A Trust)
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After concessions by the parties, the issues remaining for decision are: (1) Whether the income reported by a family trust created by Richard McKenzie is taxable to the petitioners, individually; (2) whether the petitioners' income and income tax liabilities for 1971 through 1974 were understated as determined by the bank deposits method; and (3) whether the petitioners are liable for the additions to tax for fraud for any of the taxable years 1971 through 1974 under section 6653(b), or alternatively, for the additions to tax for failure to file returns for 1971 and 1972 under section 6651(a) and for negligence or intentional disregard of rules and regulations for any of the years 1971 through 1974 under section 6653(a).
Some of the facts have been stipulated, and those facts are so found.
Richard H. McKenzie and his wife, Gertrude McKenzie, resided in Janesville, Wis., when they filed the petitions in these cases. Mr. McKenzie died on November 19, 1980, and the Estate of Richard H. McKenzie, Deceased, Gertrude A. McKenzie, Special Administrator, was substituted for him as petitioner. Petitions were filed on behalf of an entity called the "Dick H. McKenzie Family Estate (A Trust)" which then had its principal office in Janesville, Wis. At times, Mr. and Mrs. McKenzie will be referred to as the petitioners.
Prior to the years in issue, Mr. McKenzie had been a Lieutenant Colonel in the Air Force and an aeronautical engineer and had studied tax to some extent. Mrs. McKenzie had attended business school for a few months following her graduation from high school. On September 28, 1971, Mr. McKenzie signed a document titled "Declaration of Trust of This Constitutional Trust" which purported to create "The Dick H. McKenzie Family Estate (A Trust)" (the family trust). The trust declaration empowered the trustees to, among other things, make "distributions of portions of the proceeds and income as in their discretion * * * should be made." A majority vote of all trustees was necessary for the trust to take any action.
Mrs. McKenzie and James Walsh were named as the first trustees although Mr. Walsh resigned on September 30, 1971. Thereafter, in 1971, Mr. McKenzie became a trustee. The trust issued Mr. McKenzie all 100 "units of beneficial interest" on September 29, 1971. The certificate that evidenced the units provided "This Certificate conveys no interest of any kind in the Trust assets, management or control thereof." On November 1, 1971, the McKenzies caused Mr. McKenzie's certificate to be cancelled and new certificates to be issued, each for 50 units, to Mr. and Mrs. McKenzie. On November 2, 1971, the McKenzies cancelled their certificates and had the family trust issue a certificate for 50 units to an entity called "The McKenzie Educational Trust" (the educational trust) and a certificate for 50 units to an entity called "The McKenzie Research Trust" (the research trust). Mr. McKenzie created both the educational trust and the research trust on November 2, 1971. The McKenzies were the trustees of both trusts.
On September 29, 1971, the McKenzies transferred to the family trust certain property, including their Janesville residence, a lot in Colorado, insurance policies, and other personal property. Mr. and Mrs. McKenzie each purported to transfer to the family trust "the exclusive use of my lifetime services and all of the currently earned remuneration accruing therefrom."
In the spring of 1973, James R. Hillman, Mrs. McKenzie's son, became a trustee of the family trust.
Oscar T. Burns, who was Mrs. McKenzie's stepfather, died on July 24, 1970, survived by his wife, Selma. At the time of his death, Mr. Burns owned an undivided one-half interest in real property located at 170 4th Street, Huron, Beadle County S. Dak. (the Huron property). Mrs. Burns owned the other half of the Huron property. Mr. Burns left his interest in the Huron property, worth $30,000 on the date of his death, one-third each to his wife, Mrs. McKenzie, and Mr. Hillman.
Mrs. Burns died on August 4, 1970, owning an undivided two-thirds interest in the Huron property (one-sixth from her husband and one-half which she owned prior to her husband's death) worth $40,000 at the time of her death. Mrs. Burns left five-eighths of her interest in the Huron property to Mrs. McKenzie and three-eights to Mr. Hillman. Mrs. McKenzie also received 1,870 shares of Channing Co. Special Fund stock, worth $1.40 per share on August 4, 1970, from her mother's estate. Mrs. McKenzie redeemed approximately 1112 shares on December 13, 1971, and received $2,247.64.
On September 27, 1971, Mr. Hillman and his wife quit-claimed Mr. Hillman's five-twelfths interest in the Huron property to Mr. and Mrs. McKenzie for no consideration. On September 28, 1971, Mrs. McKenzie created the "170-Fourth Street S.W. Trust" (the Huron trust) to which she conveyed her interest in the Huron property. Mrs. McKenzie created the trust to liquidate the Huron property. Mr. McKenzie and Mr. Walsh were named trustees of the Huron trust. During 1971, Mr. Walsh resigned as a trustee, and Mrs. McKenzie, Mr. Hillman, and Mrs. Hillman became trustees. There is no evidence regarding the identity or existence of any beneficiaries of the Huron trust.
On May 6, 1972, Mr. and Mrs. McKenzie and Mr. and Mrs. Hillman, as individuals and as trustees of the Huron trust, sold the Huron property by warranty deed to a realty company for $95,000. The proceeds of the sale were deposited to the Huron trust bank account, No. XXX-XXX-X, at the Farmers and Merchants Bank, Huron, S. Dak.
During the years in issue, the McKenzies maintained the following accounts, in which deposits were made as follows:
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1971 1972 1973 1974
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Bank of Janesville
account 34-422-5 ....... $ 4,736.00 $ 32,263.49 $19,851.46 $34,715.15
Bank of Janesville
account 34-802-3 ....... 6,559.08 1,249.01 .........
Bank of Janesville
account 52-397-9 ....... 4,621.14 ........ .........
Rock County Bank
account XXX-XXX-X ...... 14,282.61 ........ ......... .........
Merchants & Savings
account 1-1631-0 ....... 2,953.76 1,507.91 ......... .........
Rock County Bank
account XXX-XXX-X ...... ........ 21,362.00 13,785.00 .........
Farmers &
Merchants Bank
account XXX-XXX-X ...... ........ 100,149.13 ......... .........
Peoples State Bank
account 217-146 ........ ........ .......... 15,200.00 60,411.58
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During the years in issue, the McKenzies were involved with several businesses. Safety Magic Sales Co. manufactured special automobile controls for the handicapped. Plastic Decal Co. made decals for aircraft. Technicolor, Inc., was involved with color film. The McKenzies were also involved with distributing the products of an organization called Koscot Interplanetary, Inc. There is no evidence concerning the profitability of such businesses, nor concerning the extent of the McKenzies' involvement with such businesses.
During all of the years in issue, the McKenzies sold family trust plans to individuals in the Wisconsin area. The prices which they charged for the trust materials varied from $1,750 to $20,000. Often, customers made checks for the trust materials payable to their own educational trusts, of which Mr. McKenzie was a trustee. Mr. McKenzie then endorsed such checks. Some of the payments were made to another...
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