Richardson v. Commissioner, Dkt. No. 16794-03.

Decision Date11 April 2006
Docket NumberDkt. No. 16795-03.,Dkt. No. 16794-03.
Citation91 T.C.M. 981
PartiesHomer L. Richardson v. Commissioner. Gloria M. Richardson v. Commissioner.
CourtU.S. Tax Court

Robert Alan Jones, for petitioners.

Richard J. Hassebrock and John A. Freeman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge.

Respondent determined the following deficiencies and penalties with respect to petitioners' Federal income taxes for the 1996 and 1997 taxable years:1

Homer L. RichardsonDocket No. 16794-03

                Penalties
                Year     Deficiency     Sec. 6662     Sec. 6663
                1996      $164,442        $67.80     $123,077.25
                1997       123,848                     92,886.00
                

Gloria M. RichardsonDocket No. 16795-03

                Year          Deficiency
                1996           $164,442
                1997            123,848
                

The principal issues for decision in these consolidated cases are:

(1) Whether trusts implemented and used by petitioners during 1996 and 1997 should be disregarded for tax purposes as sham entities lacking in economic substance, with resultant (a) inclusion by petitioners of income reported by the trusts; (b) recomputation of business deductions allowable to petitioners; and (c) liability for self-employment taxes and entitlement to corresponding deductions.

(2) Whether petitioners' reported capital loss for both tax years should be adjusted.

(3) Whether there exist underpayments due to fraud for 1996 and 1997 such that petitioner Homer L. Richardson (Mr. Richardson) is liable for civil fraud penalties pursuant to section 6663.

(4) Whether Mr. Richardson is liable for an accuracy-related penalty pursuant to section 6662(a) with respect to that portion of the deficiency for 1996 that is not attributable to fraud.

(5) Whether the statute of limitations bars assessment of liabilities for 1996 and 1997.

(6) Whether petitioner Gloria M. Richardson (Mrs. Richardson) is entitled to relief pursuant to section 6015 for the years 1996 and 1997.

Certain additional adjustments to petitioners' Social Security income and personal exemptions are computational in nature and will be resolved by our holdings on the foregoing issues.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. At all relevant times throughout the years in issue, at the time the petitions in these cases were filed, and at the time of trial, petitioners resided at 758 Quailwoods Drive, Loveland, Ohio 45140.

Personal Background

Petitioners are husband and wife and have four adult children: Laura Morris, Karen Cahill, Susan Richardson, and Barton Richardson. Mrs. Richardson is trained as an x-ray technician. In the past she worked as a medical assistant but apparently ceased her employment in or about 1997 in conjunction with undergoing chemotherapy treatments for cancer.

Mr. Richardson graduated from the University of Missouri in 1958, earning a 4-year business degree in marketing. In connection with obtaining that degree, Mr. Richardson completed two courses in accounting. Since graduating, Mr. Richardson has been engaged in a number of business ventures. He was employed for 12 years in a supervisory capacity over several Super-X drug stores located across Ohio, Indiana, and Kentucky. In approximately 1979, he founded a tool and die business, which he ran for about 3 years. Mr. Richardson obtained licenses to sell insurance and mutual funds in around 1983 and maintained those licenses until allowing them to expire sometime in the 1996 to 1998 timeframe. Each license required Mr. Richardson to attend approximately 40 hours of classes and to pass an examination. From 1993 to 1996, Mr. Richardson was self-employed as an insurance salesman, operating through a sole proprietorship under the name Benefit Planning Services.

Trust Implementation and Operation

In 1995, petitioners met with representatives from the Aegis Company (Aegis), an entity that promoted both domestic and foreign trust packages.2 Michael Vallone was the executive director of Aegis, Robert Hopper was the managing director, and Edward Bartoli (Mr. Bartoli)3 was the legal director. Petitioners purchased a multitrust package from Aegis in 1996 for $5,000. In June of 1996, Mr. Richardson applied for and received from the Internal Revenue Service (IRS) two employer identification numbers, one under the name of HG Asset Management Trust and the other under the name of HG Richardson Charitable Trust (HGRCT). Each application stated that the respective business was started or acquired on April 1, 1996. Also in 1996, Mr. Richardson ceased operations under the name Benefit Planning Services and thereafter conducted any sole proprietorship activities under the name Asset Protection Services.

On August 7, 1996, Mrs. Richardson transferred all of her assets, real and personal, as well as her right to receive future income and "exclusive use of my lifetime services (exception being that of an employee situation)", to Mr. Richardson, in exchange for $10. On August 8, 1996, petitioners purportedly transferred their personal residence on 758 Quailwoods Drive to HG Asset Management Company (HGAMC).4 Petitioners continued to reside at that location following the transfer.

By a trust instrument dated August 17, 1996, James Quay (Mr. Quay) as creator, Mr. Richardson as investor, and Mr. Quay and Mrs. Richardson as acceptors and initial directors established HGAMC as a "Common Law Business Organization". Mr. Quay was an attorney whom Mr. Richardson had met at an Aegis training presentation earlier in the year and who apparently prepared the trust documents. The directors were given broad authority to deal with trust property in their discretion for the benefit of HGAMC. The trust instrument further provided: "A Minute of Resolutions of the Board of Directors authorizing what they determine to do or have done shall be evidence that such an act is within their power."

Also on August 17, 1996, a management contract was entered between HGAMC and Mr. Richardson's sole proprietorship Asset Protection Services. The agreement called for HGAMC to provide management services to the sole proprietorship, through the services of Mr. Richardson, in return for a "One time set up fee" of $40,000, a "Monthly management fee" of $12,000, and a charge for "Strategic and Tactical Planning for 1997" of $10,000. The agreement was executed by Mr. Richardson on behalf of Asset Protection Services and by both Mr. and Mrs. Richardson as directors of HGAMC.5 The majority of the stated fees were never paid. The contract was renewed on its anniversary in both 1997 and 1998 for compensation to be paid to HGAMC of $5,000 annually.

Initial actions undertaken by HGAMC were memorialized in the minutes of the entity's first board meeting on August 17, 1996. The trust instrument and the minutes reflect and reference the intended conveyance by Mr. Richardson to HGAMC of real and personal property as well as the exclusive use of all his lifetime services. The minutes also show that the directors were authorized to seek an employer identification number for HGAMC by substituting the word "Trust" for "Company" in the entity's name. On August 19, 1996, petitioners opened two checking accounts at Fifth Third Bank, one in the name of Asset Protection Services and one in the name of HGRCT. At some time prior to August of 1996, a checking account at Fifth Third Bank had been opened in the name of HGAMC. Petitioners held sole signatory authority over all three of these accounts.

A second meeting of the HGAMC board was held on August 20, 1996. On that date, Mr. Richardson transferred to HGAMC all of his assets, real and personal, as well as his right to receive future income and the exclusive use of his lifetime services ("exception being that of an employee status"). The conveyance expressly included all that he had received from Mrs. Richardson under her August 7, 1996, assignment. HGAMC then issued to Mr. Richardson a certificate representing all of the beneficial interest; i.e., 100 units, in HGAMC. On the same August 20, 1996, date, Mr. Richardson returned the certificate to HGAMC, asking the directors to cancel it and to reissue the units as follows: 40 units to Mr. Richardson; 50 units to Mrs. Richardson; and 10 units to HGRCT. New certificates were issued to that effect. According to the terms of the certificates, benefits conveyed by the units "[consisted] solely of the distributions of income from the earnings of the assets as distributed by the action of The Directors and nothing more."

Also at the August 20 meeting, Mr. Richardson was appointed a director of HGAMC and was given the title of Executive Director. Mrs. Richardson was appointed as Executive Secretary of HGAMC. HGAMC contracted for the services of petitioners in those executive roles, in exchange for living accommodations, expenses incident to company business (e.g., transportation, office, entertainment, and meeting expenses), life and medical insurance, and consultant fees.

By a trust instrument likewise dated August 20, 1996, HGAMC created HGRCT. Petitioners executed the document both as directors of HGAMC and as trustees of HGRCT. Petitioners did not obtain section 501(c)(3) status for HGRCT.

On August 23, 1996, Mr. Quay submitted, and petitioners in their capacities as directors of HGAMC accepted, his resignation as a director of HGAMC. On August 29, 1996, petitioners conducted board meetings for both HGAMC and HGRCT. At the HGAMC meeting, petitioners' four children were named as successor directors, in the order listed, and as successors in equal shares to petitioners' beneficial interests. At the HGRCT meeting, HGRCT received 10 units of beneficial interest in HGAMC and in exchange issued to HGAMC all units of beneficial interest; i.e., 100, in HGRCT. At a second meeting of the HGRCT on September 1, 1996, Mr. Richardson was appointed...

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