U.S. v. Buttorff

• Citation: 761 F.2d 1056
• Decision Date: 03 June 1985
• Docket Number: No. 83-1368,83-1368
• Parties: -5247, 85-1 USTC P 9435 UNITED STATES of America, Plaintiff-Appellee, v. Gordon S. BUTTORFF, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1056

761 F.2d 1056

56 A.F.T.R.2d 85-5247, 85-1 USTC P 9435

UNITED STATES of America, Plaintiff-Appellee, v. Gordon S. BUTTORFF, Defendant-Appellant.

No. 83-1368.

United States Court of Appeals Fifth Circuit.

June 3, 1985.

Joe Alfred Izen, Jr., Houston, Tex., for defendant-appellant.

Gordon S. Buttorff, pro se.

James A. Rolfe, USA, Dallas, Tex.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Jonathan S. Cohen, Robert S. Pomerance, U.S. Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before RUBIN, POLITZ, and GARWOOD, Circuit Judges.

GARWOOD, Circuit Judge:

This is an appeal from a preliminary injunction issued pursuant to section 7408 of the Internal Revenue Code. 26 U.S.C. Sec. 7408. We affirm.

FACTS AND PROCEEDINGS BELOW

Approximately ten years ago appellant, Gordon S. Buttorff, organized and is now executive director of Constitutional Trust Associates, a group engaged in a commercial tax practice doing business in Dallas, Texas. Since at least 1976, appellant and his associates have promoted, sold, and serviced a trust package, ¹ the "Constitutional Pure Equity Trust" (also referred to by the parties as a "Pure Equity" or "Family Trust") which they said would enable its purchasers to avoid probate, significantly reduce income tax liability, and keep financial dealings private. Appellant is neither a lawyer ² nor an accountant, though he does employ accountants to prepare tax returns.

A. The Trust. Appellant advised customers to transfer all their property (including such items as bank accounts, stocks, vehicles, insurance, furniture, jewelry, residences and other real estate) to a trust and then claim the expenses of upkeep Such an arrangement was said to yield tax benefits in one of two ways. If no income were conveyed to the trust while a variety of deductions were claimed, a substantial loss would result which was then transferred to the taxpayer's personal tax return as a "distributable net loss" of the trust and used to reduce the personal taxable income to zero or near zero. On the other hand, if the taxpayer conveyed all or most of his income to the trust along with all income producing assets, deductions claimed by the trust could offset income reported by the trust leaving little or no net income to be reported. The taxpayer would then report little or no income on his personal tax return apart from amounts distributed to him by the trust as "consulting fees" (though his actual occupation did not change) or in the form of the trust's distributable net income. Another tax benefit said to follow from use of the trust is income splitting. It was said that when the taxpayer conveyed part of his income to the trust he would put himself in a lower tax bracket by lowering the amount reported on the personal return. Income conveyed to the trust was then offset by deductions.

and operation of that property as deductible trust expenditures (including expenses related to home maintenance and repair, utilities, insurance, and automobile upkeep) such that the trust would pay for practically all family ordinary personal living expenses except food. According to trust documents submitted to the court below, generally the wife conveyed her real and personal property to the husband who then conveyed all family property to the trust, along with his income or the right to receive income from his lifetime services, in return for the entire beneficial interest in the trust evidenced by beneficial interest certificates, shares of which were then divided between the husband and wife and/or other family members. Any disbursement of trust income would be made pro rata according to the distribution of beneficial interest as evidenced by the certificates, and, if the trust were terminated, the assets were also to be distributed according to the beneficial interest certificates. Appellant and the wife were originally named as trustees; appellant subsequently resigned and the husband was made a trustee. The customers then became sole trustees and beneficiaries (perhaps with other members of the family at the couple's discretion) of the trust. As trustees, the taxpayers still had almost unlimited discretionary powers to deal with the trust assets, distribute income, and terminate the trust.

Appellant's clients generally had their tax returns completed by preparers recommended by him. They were also instructed not to seek professional advice from any lawyer or accountant, who were said not to understand such trusts. Appellant also told customers that the trust was unlikely to be examined by the Internal Revenue Service ("IRS"), but, if it were, it would withstand scrutiny.

B. IRS Treatment of Pure Equity Trusts. The IRS has consistently refused to recognize such trusts as vehicles for shifting income away from the actual earner or for generating deductions not otherwise available. Thus, when returns of appellant's clients are identified and audited, only deductions which would normally be allowed to an individual, such as home mortgage interest, or to a legitimate business, such as an office in the home used as the exclusive business location, are allowed. Personal expenses are not allowed as deductible merely because property is owned by the trust, and legitimate business expenses are deductible regardless of whether a business is owned by the trust.

The IRS estimated that 464 income tax returns were generated from trusts sold by appellant for the years 1978 to 1981. After properly realigning income and legitimate deductions, the IRS estimates (at an average rate of $6,866 per return) total tax deficiencies of $3.2 million (exclusive of penalties and interest) are attributable to appellant's customers. The wages and overhead for auditing the returns of his customers are estimated to have cost the IRS more than $400,000.

C. Disposition Below. The United States instituted this action seeking to enjoin appellant from the promotion and sale of the Constitutional Pure Equity Trust, an allegedly abusive tax shelter within the meaning of sections 6700 and 7408 of the Internal Revenue Code. Some two months later, the district court entered an order denying appellant's motion to dismiss, which rejected his First Amendment defense. Thereafter, following an evidentiary hearing, the court entered an opinion, United States v. Buttorff, 563 F.Supp. 450 (N.D.Tex.1983), granting a preliminary injunction to prohibit the promotion, sale, or servicing of the Constitutional Pure Equity Trust or similar schemes or devices by appellant and those acting with him pending final determination of this action. This appeal followed. For the reasons stated below, we affirm.

DISCUSSION

This Court has stated: "When an injunction is explicitly authorized by statute, proper discretion usually requires its issuance if the prerequisites for the remedy have been demonstrated and the injunction would fulfill the legislative purpose." Donovan v. Brown Equipment and Service Tools, Inc., 666 F.2d 148, 157 (5th Cir.1982). See also United States v. Hayes International Corporation, 415 F.2d 1038, 1045 (5th Cir.1969); Securities and Exchange Commission v. Management Dynamics, Inc., 515 F.2d 801, 806-08 (2d Cir.1975). The district court found that "each" of the four factors traditionally required before granting preliminary injunctive relief "is specifically satisfied under the facts of this case." ³ The court further pointed out that not only were individual taxpayers who had subscribed to appellant's service faced with actual and anticipated risks and penalties, but there was also a continuing financial drain on the United States Treasury caused by lost revenues and depleted enforcement resources. Obviously, much of this could never be recouped.

A. Statutory Criteria.

The district court also found that issuing the injunction would fulfill the legislative purpose by specifically finding that the two requirements imposed by section 7408 ⁴ were met--that appellant's conduct was subject to penalty under section 6700 and that injunctive relief is appropriate in this case to prevent a recurrence of the conduct.

1. Subject to Penalty. Section 6700 penalizes any person who makes statements regarding the tax benefits of an arrangement organized or sold by him which he knows or has reason to know are false or fraudulent as to any material matter. ⁵

(a) Trust invalid. Several United States Courts of Appeals and the United States Tax Court have consistently invalidated similar trusts for federal income tax purposes on an individual taxpayer basis. ⁶ We cite only a few of the many cases so holding. See, e.g., Zmuda v. Commissioner, 731 F.2d 1417, 1421 (9th Cir.1984) (similar trusts "were shams"); Holman v. United States, 728 F.2d 462, 465 (10th Cir.1984) (similar trust "is a mere sham"); O'Donnell v. Commissioner, 726 F.2d 679 (11th Cir.1984); 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); Taylor v. Commissioner, 49 T.C.M. (P-H) para. 80,552 (1980); Taylor v. Commissioner, 52 T.C.M. (P-H) para. 83,034 (1983) (disallowing claimed loss from constitutional pure equity trust marketed by appellant on the basis of repeated rejection of similar trust arrangements; a copy of this opinion was filed in the proceedings below); Wesenberg v. Commissioner, 69 T.C. 1005 (1978). Such trusts have generally been invalidated on four grounds.

(i) Deduction of personal consumption expenses. Appellant told clients that once they had conveyed their personal assets, such as cars and residences, to a trust they could deduct personal consumption expenses such as fire insurance, utilities, and repair and maintenance--indeed, almost everything except food consumed at home. However, "[i]t is fundamental to our income tax regime that personal consumption...