TAX COURT OPINION

Case: The Adorno Business Company
Docket Number: 9457-02
Judge: Dawson
Opinion Type: memo
Filed: 05/01/2003
Pages: 18

T. C. Memo. 2003-1!26 T(cid:0)5417 UNITED STATES TAX COURT THE ADORNO BUSINESS COMPANY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 9457-02. Filed May 1, 2003. Edwin R. Adorno, pro se. Jason W. Anderson, for respondent. MEMORANDUM OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Robert N. Armen, Jr., pursuant to the provisions of section 7443A(b) (5) and Rules 180, 181, and 183.¹ The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. ¹ Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. SERVED MAY f 2003 - 2 - OPINION OF THE SPECIAL TRIAL JUDGE ARMEN, Special Trial Judge: This matter is before the Court on respondent's motion to dismiss for lack of jurisdiction. Respondent maintains that Edwin R. Adorno (Mr. Adorno), the individual who signed the petition, is not a proper party authorized to bring suit on behalf of The Adorno Business Company (Adorno Business) under Rule 60. As discussed in detail below, we shall grant respondent's motion and dismiss this case for lack of jurisdiction. Background A. Notice of Deficiency Respondent issued a notice of deficiency to Adorno Business determining a deficiency in its Federal income tax for the taxable year 1998 in the amount of $758,744 and an accuracy- related penalty under section 6662(a) in the amount of $151,749. In the notice of deficiency, respondent disallowed the deductions claimed by Adorno Business on Schedule C, Profit or Loss from Business, because it "failed to establish the amount, if any, that was paid during the taxable year for ordinary and necessary business expenses and you failed to establish the cost or other basis of the property claimed to have been used in business". Respondent also disallowed the income distribution deduction claimed by Adorno Business because it "failed to establish that the requirements for deduction of IRC sections 651 - 3 - or 661 were satisfied". ' Finally, respondent determined that Adorno Business is liable for an accuracy-related penalty due to negligence or disregard of rules and regulations, a substantial understatement of income tax, or a substantial valuation overstatement. B. Petition The Court subsequently received and filed a petition for redetermination challenging the notice of deficiency.2 The petition was signed by Mr. Adorno as "Edwin R. Adorno (Director)".3 Paragraph 4 of the petition, which sets forth the bases on which the notice of deficiency is challenged, alleges as follows: (1) Business trust are an acceptable business entity (2) Business trust according to Reg. 301.7701.4 (b). has.a business purpose for profit. * * deductions are allowed IRC section 661.[4] (3) Business * 2 The principal place of business of Adorno Business was in Chicago, Ill., at Court. the time that the petition was filed with the 3 Use of the terms "director" and "executive director" in Thus, this opinion is intended for narrative convenience only. no inference should be drawn from our use of such terms regarding any legal status or relationship. 4 A business trust (commonly known as a "Massachusetts trust") is an unincorporated business organization created by a declaration of trust wherein property is conveyed to a trustee to hold and manage for the benefit and profit of such persons as may be or become the holders of transferable certificates evidencing the beneficial Co. v. Hall, 41 N.E.2d 30, 34 v. Commissioner, 74 T.C. 1266 (1980), and cases cited therein for The purpose of a business trust a discussion on business trusts. (continued...) interests in the trust estate. State St. Trust See generally Hynes (Mass. 1942). C. Respondent's Motion - 4 - Respondent filed a motion to dismiss for lack of jurisdiction. In the motion, respondent asserts that this case should be dismissed for lack of jurisdiction because "the petition in the instant case was not brought by a party with proper capacity". Respondent further contends: Upon commencement of the examination of the complete trust documents for petitioner. petitioner's 1998 taxable year, copy of Petitioner failed to cooperate with respondent and provide the documents requested during the examination of this case. respondent requested a To date [July 22, 2002), petitioner has not provided respondent with trust documents which establish the chain of trusteeship from the creation of the petition was filed. the trust until the time Petitioner has not provided sufficient evidence that the appointment of Mr. Adorno, as trustee or as an agent of the trustee, was valid or authorized under the terms of the respective trust indentures. Upon the filing of respondent's motion to dismiss, the Court issued an order directing Adorno Business to file an objection, if any, to respondent's motion, taking into account Rule 60, and to attach to the objection a copy of the trust instrument or other documentation identifying the fiduciary or other 4(...continued) is to carry on a business or commercial activity for profit. Id. Use of the terms "trust", "trustee", and "trust instrument" (and their derivatives) convenience only. use of such terms regarding any legal status or relationship. Thus, no inference should be drawn from our in this opinion is intended for narrative representative with legal capacity to in,stitute a case on behalf - 5 - of Adórno Business. D. Mr. Adorno's Obiection Ultimately, the Court received an objection, leave for the filing of which was granted, to respondent's motion to dismiss. Mr. Adorno signed the objection as the "Director of The Adorno Business Company". In the objection, Mr. Adorno contends that he is Adorno Business' representative and authorized fiduciary with the authority to act as director, and to sign on behalf, of Adorno Business. In support thereof, Mr. Adorno attached to the objection a two-page document entitled "The Adorno Business Company, Minutes of Second Meeting, December 26, 1995" (second minutes). The second minutes provide, in part, as follows: the SECOND MEETING of At this, of The Adorno Business Company * * Directors being present, by unanimous accord the following was affirmed and ratified, viz: the Board of Directors * a MAJORITY of the * 18. * * * * * * the prime responsibility of the Board of it's [sic] business, and it's [sic] That Directors is to manage The Adorno Business Company, assets in such a manner as to insure predominate consideration, beneficiaries rights to income distributions. * And, inviolate, Business Company resign, retire, succumb, or are removed * * * their places will be filled on the that it is expected and hereby declared that as Directors of The Adorno for the welfare of the * * 5 Based on the record as a whole, it appears that Mr. Adorno has been the sole member of all relevant times. the "Board of Directors" at - 6 - Board of Directors, PREFERABLY by and from succeeding generations of blood relatives of Directors of The Adorno Asset Management Company * * the * in the best interest of The Adorno Business the Director hereby nominates, That, Company, unanimously elects, and appoints Edwin R. Adorno as THE EXECUTIVE Director of The Adorno Business Company. * * * * * * /s/ 19. * Edwin R. Adorno, Director The second minutes do not list the name of a "trustee" for Adorno Business nor make any reference to a "trustee". The objection also challenges respondent's authority to determine a deficiency against Adorno Business because "IRR 301.7701-4(b) clearly states that: there is another entity that is like a trust, but it is not recognized (not known to exist) as a trust for internal revenue purposes". E. Respondent's Response At the Court's direction, respondent filed a response to the foregoing objection. Respondent contends that the second minutes do not establish that Adorno Business appointed Mr. Adorno as its trustee under Illinois law, and, therefore, Mr. Adorno is not authorized to act on behalf of Adorno Business. Upon the filing of respondent's response, the Court issued an order directing both parties to file certain documents with the Court. Pursuant to the Court's order, respondent filed, - 7 - inter alia, a complete copy of a Form 1041, U.S. Income Tax Return for Estates and Trusts (Form 1041), filed in the name of Adorno Business for 1998.6 The Form 1041, which was executed by Mr. Adorno on September 15, 1999, lists the date the entity was created as December 22, 1995. F. Mr. Adorno's Response Specifically, the Court ordered Adorno Business to produce: a complete copy of the minutes that preceded in time the the organizational document(s) a complete (1) related to the creation of petitioner; copy of all "Minutes of Second Meeting - December 26, 1995" was attached to petitioner's Objection filed September 3, 2002;- and (3) any and all other documentation identifying the fiduciary or other representative thought present case on behalf of petitioner. to have legal capacity to institute this the that (2) Ultimately, the Court received a response, leave for the filing of which was granted, to its order for document production. Mr. Adorno signed the response as "Edwin R. Adorno, Trustee, Adorno Business Company".? Mr. Adorno attached to the response, inter 6 Attached to the Form 1041 was a Schedule C, Profit or Loss From Business, indicating the principal business of Adorno Business as "Retail/Used Auto's". Also attached was a Schedule K-1, Beneficiary's Share of indicating the beneficiary as "The Adorno Asset Management Trust" (Adorno Asset). testified that Adorno Business operates its business on a used car lot at 1442 North Western, Chicago, Ill., and that Adorno Business pays rent Apparently, Adorno Asset collecting rent See infra note 12. Atitrial, Mr. Adorno is only engaged in the business of Income, Ded ctions, Credits, etc., from Adorno Business for use of to Adorno Asset the lot. for use of the lot. 7 This was the first time in the claimed to be the purported trustee of ecord that Mr. Adorno dorno Business. At all (continued...) - 8 - alia, a copy of an eight-page purported trust instrument dated December 22, 1995 (purported trust instrument), a two-page document entitled "The Adorno Business Company, Minutes of First Meeting, December 22, 1995" (first minutes), and a notarized affidavit dated October 17, 2002. The purported trust instrument* provides, in part, as follows: COMMON LAW BUSINESS ORGANIZATION THIS COMMON LAW CONTRACT IN THE FORMAT OF AN IRREVOCABLE DECLARATION OF TRUST AUTHORIZES ITS DIRECTORS TO OPERATE UNDER THE NAME OF The Adorno Business Company (referred to as the company) DATED December 22, 1995 THIS agreement, conveyance and acceptance is made the time and on the date appearing and entered into at in the acknowledgment hereto attached, by and between The Adorno Asset Management Company CREATOR hereof and INVESTOR herein, Edwin R. Adorno, Acceptor hereof fee simple as Director who shall comprise the Board of Directors for conducting the business of The Adorno Business Company hereby established. in THE CREATOR hereby constitutes and appoints the above designated Director to be, The Adorno Business Company hereby created and established. the objects and purposes herein set forth and other considerations of value the receipt of which is hereby THE CREATOR for and in consideration of in fact, Director of '(...continued) other relevant fiduciary, Business. times, Mr. Adorno claimed to be the director, legal representative, or executive director of Adorno The provisions of the purported trust instrument are substantially identical Adorno Asset Mgmt. Trust v. Commissioner, T.C. Memo. 2003-127. See infra note 12. to the purported trust instrument in The _ 9 _ acknowledged, does hereby convey and deliver unto said Director, who is to hold title in fee simple, of $10.00 in cash and other considerations of value, which shall form the assets of this Company. the sum The Adorno Asset Management Company shall receive, as part consideration for it's conveyance: All One Hundred (100) units of Certificates of Beneficial Interest Business Company. in the income and assets of The Adorno THE DIRECTORS herein named, or their successors elected to fill vacancies, shall hold office, have and exercise collectively the exclusive management and control of The Adorno Business Company property and business affairs. * * * * * * * the UNITED to the type restrictions leases of They shall continue in business, to do anything any citizen may do in POWER OF DIRECTORS: Directors' powers shall be construed as general powers of a citizen of STATES OF AMERICA, any state or country, subject herein noted. 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 Company, vis: perform as agents for the surface or mineral rights buy or sell mortgages, securities, bonds, notes, all kinds, contracts or credits of'any form, patents, trademarks, or copyrights buy, sell, or conduct mailorder business, or branches thereof operate stores, shops, business, advertise, borrow money, pledging the Company property for the payment and other property, own stock in, or entire charters of TRUST COMPANIES, and or corporations, or other such properties, companies, or associations as they may deem advantageous. factories, warehouses or other places of thereof, ypothecate assets OFFICERS AND MANAGEMENT: The Direc ors may in their discretion elect among their number, or any other person, an Executive Director, Executive Secretary, - 10 - Treasurer Director * or more offices simultaneously, * *. Any Directors may hold two * * * * * * * * * * IN WITNESS WHEREOF the Creator/Investor and Acceptor hereof * * have hereunto set their hands and seals. * Director of The Adorno Asset Management Company (INVESTOR) Edwin R. Adorno, Director /s/ Director of The Adorno Business Company Edwin R. Adorno, Director /s/ This document prepared by: Name: Attorney Edward Bartoli[91 9 At the hearing, Mr. Adorno was abrupt and evasive in responding to the Court's questions concerning Edward Bartoli wherein the following colloquy ensued: Q: Are you familiar with Edward Bartoli? * A: Yes. involved. * * I believe he was one - a company that was Q: Involved in what? A: Your Honor, at this time, stipulations, Your Honor. I stand by my Q: Okay. Who was Edward Bartoli? A: Mr. Bartoli, director of something like that. the Aegis Company, Q: Did you have any dealings with this individual? Ai At stand by my stipulation. the time of forming the trust - Your Honor, I (continued...) - 11 - Address: 11022 Southwest Hwy., Palos Hills, IL 60465 The purported trust instrument does not list the name of any "trustee" for Adorno Business nor make any reference to a "trustee". Further, none of the provisions of the purported trust instrument grant the director the power to litigate on behalf of Adorno Business. The first minutes" provide, in part, as follows: the BOARD OF DIRECTORS of the FIRST MEETING of At this, The Adorno Business.Company * * *. All Directors being present, by unanimous accord the fdllowing was affirmed and ratified, viz: 1. to the request and declaration of That, pursuant The Adorno Asset Management Company, on this date, a Contract Creating This Entity creating The Adorno Asset Management Company (A Common Law Business Organization) was duly executed, acknowledging Edwin R. Adorno, the above named person by their signature evidenced the acceptance of obligations and faithful performance of said Company. its Director, and the duties, *(...continued) Q: You're unable to answer our question? Is that what your response is? A: Right now, yes. Q: You don't know who Edward Bartoli is? A: I stand by my stipulations, Your Honor. The first minutes here appear to be reproduced from the first minutes of The Adorno Asset Management Trust Asset), which would explain the erroneous references to Adorno Asset rather than Adorno Business. Cf. The Adorno Asset Mgmt. Trust v. Commissioner, T.C. Memo. 2003-127. See infra note 12. (Adorno - 12 - 3. * * However, in order to acquire a proper * [employer identification] number, the Director hereby changes the name of The Adorno Business Company, by substituting the word "Trust" for the word "Company". * * * * * /s/ * * * * * Edwin R. Adorno, Director The first minutes do not list the name of a "trustee" for Adorno Business nor make any reference to a "trustee". The affidavit provides, in part, as follows: I, Edwin Adorno, * personal knowledge: * * state as follows based on my 1. I am trustee of lawfully authorized to represent and act on behalf of Adorno Asset Management Trust. the Adorno Asset Management Trust * * * * * * * 10/17/02 Date: /s/ Edwin Adorno, Trustee Adorno Asset Management Trust The affidavit does not list the name of a "trustee" for Adorno Business nor make any reference to the purported trustee of Adorno Business. Mr. Adorno also filed a supplemental objection with his response stating that he is the "trustee" of Adorno Business and attesting to his capacity and authority to act on behalf of Adorno Business. In addition, Mr. Adorno submitted a "motion to vacate claims, motion for summary judgment and complaint under authority of 26 U.S.C. 7433, 7214(a)" which the Court filed as a - 13 - Motion to Dismiss, challenging respondent's authority to assess tax against Adorno Business and stating that he is the trustee of Adorno Business.¹¹ G. Hearing on Respondent's Motion This matter was called for hearing at the Court's trial session in Chicago, Illinois.¹² Counsel for respondent appeared at the hearing and offered argument and evidence in support of respondent's motion to dismiss. Specifically, respondent challenges the validity of all of the documents submitted by Mr. Adorno and contends that these documents do not demonstrate that Mr. Adorno has current representative capacity as trustee. Mr. Adorno appeared pro se, purportedly on behalf of Adorno Business.¹³ Offering no evidence to supplement the previously ll The Court denied Mr. Adorno's motion by Order dated Nov. 6, 2002. 12 This case was called for hearing with a related case in which Mr. Adorno also filed a petition purportedly on behalf of a so-called trust, which case is also beihg dismissed on the ground that it was not filed by a proper party Mamt. Trust v. Commissioner, T.C. Memo. 2003-127. Mr. Adorno himself also has a case pending before the Court assigned docket No. 9459-02. See The Adorno Asset ¹³ We note that, at the beginning of the hearing, Mr. table with another individual by the (Mr. Fiol), whom Mr. Adorno identified as Adorno appeared at counsel name of Lorenzo Fiol his accountant. gallery behind counsel disrupt gallery railing whereupon the Court directed Mr. Fiol the rear of Commissioner, T.C. Memo. 2003-127, note 13. table. However, Mr. Adorno persisted to the proceedings by communicating with Mr. Fiol over the to sit in The Court directed Mr. Fiol to sit in the the courtroom. See The Adorno Momt. Trust v. - 14 - submitted documents, he asserted that "the minutes elected me as director" and "I stand by my stipulations and affidavits that are in the Court's [sic]". H. Post-Hearing Memorandum Briefs At the conclusion of the hearing, the Court directed the parties to file memorandum briefs in support of their respective positions. Respondent complied with this order, but Mr. Adorno failed to do so. Discussion According to respondent, Adorno Business failed to show that Mr. Adorno is a proper party authorized to act on its behalf. Respondent asserts that as a result, no valid petition has been filed and the Court must dismiss this case for lack of jurisdiction. We agree. It is well settled that the taxpayer has the burden of affirmatively establishing all of the facts giving rise to our jurisdiction. See Patz Trust v. Commissioner, 69 T.C. 497, 503 (1977); Fehrs v. Commissioner, 65 T.C. 346, 348 (1975); Wheeler's Peachtree Pharmacy, Inc. v. Commissioner, 35 T.C. 177, 180 (1960); Natl Comm. To Secure Justice v. Commissioner, 27 T.C. 837, 838-839 (1957). Furthermore, unless the petition is filed by the taxpayer,.or by someone lawfully authorized to act on the taxpayer's behalf, we are without jurisdiction. See Fehrs v. Commissioner, supra at 348. - 15 - Rule 60(a) requires that a case be brought "by and in the name of the person against whom the Commissioner determined the deficiency * * * or by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person. See Rule 23(a)(1)." Rule 60(c) states that the capacity of a fiduciary or other representative to litigate in the Court "shall be determined in accordance with the law of the jurisdiction from (cid:16)042which such person's authority is derived." The record shows that Illinois State law is controlling in this case. Under Illinois law, only the trustee¹4 is authorized to commence litigation on behalf of a trust. 760 Ill. Comp. Stat. Ann. 5/4.11 (West 1992)." In this respect, the Illinois Trusts and Trustees Act does not grant the power to sue on behalf of a trust to a director, a fiduciary, or any other legal representative. See Restatement, Trusts 2d, sec. 16A (1959) ¹4 For purposes of the Ill. Trusts and Trustees Act, see 760 Ill. Comp. Stat. Ann. 5/2(1) 760 Ill. Comp. Stat. Ann. 5/1 (West 1992), a "trust" means a trust created by agreement, declaration or other written instrument. the Ill. Trusts and Trustees Act trust. trustee or any successor or added trustee of appointed by or pursuant order of court or otherwise". (West 1992). is applicable to a business See id. at. 5/4.23. A "trustee" is defined as "the the trust, whether (West 1992). Thus, to the instrument creating the trust, by 760 Ill. Comp. Stat. Ann. 5/2(2) See Pierce v. Chester Johnson Elec. Co., 454 N.E.2d 55, (trustees possess a specific statutory 57 (Ill. App. Ct. 1983) power to sue in a representative capacity on behalf of a trust); see also United States ex rel. Mosay v. Buffalo Bros. Momt., 20 F.3d 739, 742 (7th Cir. 1994) legal right to sue"). ("a trustee is the one who has the - 16 - ("The officers and directors of a corporation, although they are fiduciaries, are not trustees."). In the present case, Adorno Business has failed to provide the Court with the documentary evidence necessary to support its contention that Mr. Adorno is its duly appointed trustee. As previously discussed, Adorno Business is purportedly an irrevocable trust wherein The Adorno Asset Management Trust (Adorno Asset) is the "Creator"/"Investor" and Mr. Adorno is the "Acceptor".¹6 According to the purported trust instrument, Mr. Adorno was specifically designated "director" of Adorno Business. However, no provision of the purported trust instrument appoints or designates Mr. Adorno "trustee" for Adorno Business. We find it difficult to accept that the title "director" confers the legal status of trustee on Mr. Adorno. The purported trust instrument does not define the term "director", but it dictates that the director comprises the "Board of Directors" to "exercise collectively the exclusive management and control of The Adorno Business Company property and business affairs". Further, the purported trust instrument does not provide the director with the authority to. institute legal proceedings on behalf of Adorno ¹6 We have serious doubts that the trust was validly formed because Mr. Adorno lacked the requisite capacity to execute the See The purported trust instrument on behalf of Adorno Asset. Adorno Asset Mgmt. Trust v. Commissioner, T.C. Memo. 2003-127. . However, we assume arguendo that the purported trust instrument is valid. - 17 - Business." The specific duties, powers, and responsibilities set forth in the purported trust instru ent are associated with the day-to-day management affairs of the business. Thus, the director's responsibilities appear to be nothing more than those of a business manager. Indeed, the first time Mr. Adorno ólaimed to be trustee for Adorno Business was in his response dated October 17, 2002, to the Court's order for production of documents evidencing Mr. Adorno's capacity as the purported "trustee" of Adorno Business. With the exception of the response, Mr.!Adorno continually referred to himself as director and signed all relevant documents as director of Adorno Business. Without clear evidence in the purported trust instrument, we are unpèrsuaded that the term "director" is synonymous with the term "trustee" to accord Mr. Adorno the status of trustee. Accordingly, we conclude that Mr. Adorno is not the duly appointed trustee of Adorno Business pursuant to Illinois law. In the absence of any persuasive basis for concluding that Mr. Adorno was duly appointed as trustee for Adorno Business, we shall dismiss this case for lack of jurisdiction consistent with respondent's motion. All of the.arguments and contentions that have not been See 760 Ill. Comp. Stat. Ann. S/4.11 (West 1992). - 18 - specifically analyzed herein have been considered, but do not require any further discussion. In order to give effect to the foregoing, An order of dismissal for lack of jurisdiction will be entered.