TAX COURT OPINION

Case: Larry J. & Anita L. Lundgren
Docket Number: 10174-03
Judge: Wherry
Opinion Type: memo
Filed: 08/23/2006
Pages: 12

8 CB .| STA2. | S. 2. UDGD T. C. Memo. 2006-177 UNITED STATES TAX COURT LARRY J. LUNDGREN AND ANITA L. LUNDGREN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respòndent Docket Nos. 10174-03, 6083-04. Filed August 23, 2006. Ps failed to report certain farming income for the 1999, 2000, 2001, and 2002 taxable years and a capital gain for the taxable year 2001. deficiencies and asserted penalties under sec. 6662, I.R.C., which Ps contested primarily on the basis of tax protester arguments. R determined Held: Ps are liable for the deficiencies determined by R for 1999, 2000, 2001, and 2002 including self-employment I.R.C., and a capital gain for 2001. taxes pursuant to sec. 1401, Held, sec. 6662, further, Ps are liable for penalties under I.R.C., for 1999, 2000, 2001, and 2002. Larry J. Lundgren and Anita L. Lundgren, pro sese. Joan E. Steele, for respondent. SERVED AUG 2 3 2006 - 3 - FINDINGS OF FACT Background The exhibits2 of the parties are incorporated herein. These cases were consolidated for purposes of trial, briefing, and opinion. At the time these petitions were filed, petitioners resided in Gove, Kansas. Respondent issued petitioners notices of deficiency for the 1999 taxable year on March 24, 2003, and for the 2000, 2001, and 2002 taxable years on January 6, 2004. Petitioners timely filed a petition on September 8, 2003, for the 1999 taxable year and a petition on April 8, 2004, for the 2000, 2001, and 2002 taxable years. Larry J. Lundgren (Mr. Lundgren) was a farmer, and Anita L. Lundgren (Mrs. Lundgren) was a registered nurse and the secretary of the Lucky Kirt Trust from 1999 through at least a portion of 2001. The Lucky Kirk trust was formed at the request of Raymond Roemer, father of Mrs. Lundgren, and was allegedly created on October 11, 1990. Neither of petitioners was present during the formation.of the trust or the signing of the trust document. Dennis Roemer, brother of Mrs. Lundgren, was present during trust formation discussions between his father and Jimmy Clayton 2 Although requested by the Court, the parties did not file a stipulation of Luhdgren refused to stipulate anything except petitioners' names. On the basis of religious beliefs, Mr. facts. - 5 - during either the audit or at trial provide a copy of the trust agreement. Raymond Roemer, who was the initial beneficiary of Lucky Kirt Trust, died on April 27, 1994. After the death of Raymond Roemer, Mrs. Lundgren's name was listed as the 100-percent beneficiary of Lucky Kirt Trust, the 100-percent member of Lucky Kirt Trust, or the sole entity receiving payment on several documents submitted to the .U.S. Department of Agriculture (USDA) . In addition, she signed other documents submitted to the USDA as participant, owner, operator, manager, or agent on behalf of Lucky Kirt Trust. These documents were signed for multiple years, among these, the 1999, 2000, and 2001 years in issue. Hall and Strong, LC (Hall and Strong) at a date undisclosed by the record became the successor trustee to the Prudent Man Trustee. Mr. Chisum did not have any documentation at trial supporting Hall and Strong's appointment as trustee of Lucky Kirt Trust. The signature card of·The Farmers State Bank of Oakley, Kansas, for the Lucky Kirt Trust listed the signatures of Mr. Chisum, Raymond Roemer, and the signature stamp of "JC Chisum" as authorized signers on the account. Mrs. Lundgren was authorized during at least some of the years at issue to sign checks for the Lucky Kirt Trust using the signature stamp of Mr. Chisum. Mr. Chisum gave Mrs. Lundgren the authority to perform certain duties in her capacity as the secretary of Lucky Kirt Trust. - 7 - Mr. Chisum was a part-time consultant, who consulted in business planning, business management, estate planning, and estate management, including the creation of trust documents such as the Lucky Kirt Trust. Mr. Chisum held a high school degree and was specially trained in nuclear engineering while in the Navy. He did not learn to read until the age of 40 and learned about tax planning through his accountant, Richard Gilmore and seminar-type courses, rather than any formalized tax education. Mr. Chisum did not hold any professional licenses, nor did he seek legal advice in creating these trusts to determine the trusts' treatment by the Internal Revenue Service. I. Contentions of the Parties OPINION On the premises of tax protester arguments, petitioners contend that they were not required and should not be required to pay income taxes.5 Specifically, petitioners argue that they did not earn any income from, receive any distributions from, and were not involved with Lucky Kirt Trust a.k.a. Lucky Kirt II Trust. Petitioners maintain that they are merely.tenant farmers 3 Petitioners at various junctures have alluded to the As the Court noted at trial, our tax the Internal Revenue Code, and the Tax Court have been Sixteenth Amendment. system, firmly established as constitutional. See Crain v. Commissioner, 737 F.2d 141.7, 1417-1418 (5th Cir. 1984); Ginter v. Southern, 611 F.2d 1226, 1229 (8th Cir. 1979). Specifically, that the "Federal whole purpose of taxes when imposed from apportionment and from a consideration of the source whence the income was derived." Commissioner, 82 T.C. 403, 406-407 (1984). the 16th Amendment was to relieve all income tax laws are constitutional. the Court notes * The * * income Abrams v. II. Burden of Proof In general, the Commissioner's determination of a taxpayer's tax liability is presumed correct, and the taxpayer bears the burden of proving that the Commissioner's determination is improper. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The "presumption of correctness" is appropriate where the Commissioner has furnished evidence linking the taxpayer to (cid:16)042 the "tax generating activity". Gold Emporium, Inc. v. Commissioner, 910 F.2d 1374, 1378 (7th Cir. 1990), affg. Malicki v. Commissioner, T.C. Memo. 1988-559. Where the Commissioner introduces evidence that the taxpayer received unreported income, as respondent did here, the burden generally is on the taxpayer to show by a preponderance of the evidence that the deficiency was arbitrary and erroneous. Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), affg. T.C. Memo. 1997-97; see also Palmer v. IRS, 116 F.3d. 1309, 1312 (9th Cir. 1997) ("The Commissioner's deficiency determinations and assessments for unpaid taxes are normally entitl'ed to a presumption of correctness so long as they are supported by a minimal factual foundation.") (emphasis added)); Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982). However, section 7491 may shift the burden to the Commissioner in specified circumstances, for example, where the taxpayer produces "credible evidence" and meets other requirements. Sec. 7491(a) (1); see also H. Conf. Rept. 105-599, - 11 - tax implications. See Gregory v. Helvering, 293 U.S. 465, 469 (1935); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980). However, where the creation of a trust lacks economic effect and has no other cognizable economic relationship, we may ignore the trust as a sham. See, e.g., Zmuda v. Commissioner, 79 T.C. 714 (1982), affd. 731 F.2d 1417, 1421 (9th Cir. 1984); Markosian v. Commissioner, supra; Muhich v. Commissioner, T.C. Memo. 1999-192, affd. 238 F.2d 860 (7th Cir. 2001). A fundamental principle of tax law is that income is taxed to the person who earns it. See Commissioner v. Culbertson, 337 U.S. 733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111, 114-115 (1930). A taxpayer cannot avoid income taxation by assigning income which a taxpayer 'controlled to a trust, thereby effectively shifting the burden of tax. Vnuk v. Commissioner, 621 F.2d 1318, 1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164. Petitioners, by assigning income from their farming operations, have attempted to shift their income to Lucky Kirt Trust. The Court looks behind the trust and will disregard the trust if it lacks economic substance and was created for tax avoidance purposes. To determine whether a trust has economic substance, we consider these factors: (1) Whether the taxpayer- grantor's relationship to the transferred property differed materially before and after the trust's creation; (2) whether the trust had an independent trustee; (3) whether an economic interest passed to other trust beneficiaries; and (4) whether the - 13 - following the Prudent Man Trustee; however, neither Mr. Chisum nor petitioners provided any documentation evidencing such a change in the trust's trustee. Although Mr. Chisum was purportedly the named trustee, it was Mrs. Lundgren, the 100- percent beneficiary after Raymond Roemer's death, who appeared to make all the decisions regarding the trust and signed documents on behalf of the trust. This included Mrs. Lundgren's authorization to sign checks for Lucky Kirt Trust as she was one of the names listed on the preprinted checks for the Lucky Kirt Trust account. Although Mrs. Lundgren claimed that she signed checks and other documents pertaining to the trust using the signature stamp of Mr. Chisum in her role as secretary for Lucky Kirt Trust, there is no evidence, other than petitioners' self-serving testimony, that Mr. Chisum actually controlled the manner in which she used the signature stamp. Thus, there was no convincing evidence that Mrs. Lundgren's authority to use the signature stamp of Mr. Chisum was restricted in any meaningful way. Raymond Roemer was listed as the trustee on the Legg Mason documents for the Lucky Kirt Trust II account for the years in issue. Mrs. Lundgren signed a client option agreement for the Legg Mason account on May 10, 1994, and for the years in issue, all Legg Mason account statements for the Lucky Kirt Trust II account were sent to Mrs. Lundgren's address. Morever, there is D. Respect for Trust Restrictions - 15 - Petitioners did not demonstrate that they respected the restrictions of the trust or the law of trusts as they did not show they felt bound by restrictions or trust law. Further, they did not show that the trust imposed any substantial restrictions on petitioners' use of the trusts' property or the Legg Mason bank account. As an example of petitioners' disregard for trust restrictions, Lucky Kirt Trust's $195,000 loan to Mr. Lundgren in 2001, which was purportedly made for "good will", lacked any documentation. The.loan agreement, if one existed, was not in writing, and the loan did not provide for a repayment schedule, a payoff date, or an interest rate. Although Mr. Chisum testified that the payments on the loan were being made, petitioners did not provide any evidence to corroborate Mr. Chisum's statement. Similarly, the Lucky Kirt Trust loan to petitioners' daughter shows that petitioners were not bound by any trust restrictions. The loan was for the personal purchase of a car merely because petitioners' daughter desired a car. As before, there was no written loan agreement, no interest rate, and no proof of any loan pa·yments. Mr. Chisum's statement that he preferred never to charge interest is inconsistent with his fiduciary responsibilities and is not a valid reason for a trust to provide an interest-free loan. - 17 - The combination of these factors and the apparent lack of any substantive trust purpose other than tax avoidance compels a finding that Lucky Kirt Trust shall be disregarded for Federal income tax purposes. See Markosian v. Commissioner, 73 T.C. at 1244-1245. Therefore, petitioners will be taxed on the income attributed to Lucky Kirt Trust. See sec. 61(a). IV. Self-Employment Tax Section 1401 imposes, in addition to other taxes, a tax on the self-employment income of every individual. Subject to exclusions not applicable in the instant case, "self-employment income" refers to the "net earnings from self-employment derived by an individual". Sec. 1402(b). Section 1402(a) defines "net earnings from self-employment" as "the gross income derived by an individual from any trade.or business carried on by such individual, less the [claimed] deductions [in the year in issue) allowed by this subtitle which are attributable to such trade or (cid:16)042business". The burden of proof to show that respondent's determination was in error remains with petitioners. They offered no evidence and advanced no arguments with respect to liability for self- employment taxes. The burden does not shift to respondent under section 7491. Petitioners farmed the land held in the Lucky Kirt Trust and assigned their income from farming activities to the trust. Because we have determined that Lucky Kirt Trust is a sham trust, - 19 - Although it is highly probable that the Treasury note had a material tax basis, petitioners did not provide any evidence or documentation regarding the basis of the Treasury note.' Petitioners' contention that the income is that of Lucky Kirt Trust is unavailing because the Lucky Kirt Trust is disregarded for Federal income tax purposes. The Court, therefore, sustains respondent on this issue. VI. ' Section 6662 Penalty With respect to examinations beginning after July 22, 1998, the Commissioner bears the burden of production in any court proceeding involving an individual's liability for penalties or additions to tax. Sec. 7491(c). To meet, this burden, the Commissioner must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty or addition to tax. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). In instances where an exception to the penalty or (cid:16)042addition to tax is afforded upon a showing of reasonable cause, the taxpayer bears the burden of showing such cause. Id at 447. Section 6662(a) provides for an accuracy-related penalty in the amount of 20 percent of the portion of an underpayment attributable to (among other things): (1) Any negligence or 7 The Court highlighted this issue at the start of the trial by suggesting.to petitioners that evidence pertaining to the amount other evidence that could be relevant the Court should hear any they paid for the note or any to their tax liability. - 21 - or in a statement attached to the return", and (2) "there is a reasonable basis for the tax treatment of such item by the taxpayer." Sec. 6662(d)(2) (B). Where a taxpayer can show there is reasonable cause for any portion of the underpayment and that the taxpayer acted in good faith with respect to that portion of the underpayment, then no penalty shall be imposed under section 6662(a) with respect to that portion of the underpayment. Sec. 6664(c). Petitioners did not report any income for any of the years in issue. They chose to hide their income by attributing their earnings to a sham trust and failed to provide any books or records of Lucky Kirt Trust, or even the trust document itself. Moreover, petitioners did not offer any substantial authority or reasonable cause for failing to report their income. Accordingly, they are liable for a penalty under section 6662 for each of the years in issue. Respondent is sustained on this issue. VII. Section 6673 Penalty Section 6673 allows this Court to award a penalty to the United States in an amount not in excess of $25,000 for proceedings instituted by the taxpayer primarily for delay or for proceedings in which the taxpayer's position is frivolous or groundless. "A petition to the Tax Court, or a tax.return, is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law." Coleman - 23 - as employing religious doctrine instead of presenting legal arguments. The Court is satisfied that a penalty in this case is appropriate, and, therefore, chooses to exercise its .discretion sua sponte under section 6673(a)(1) in requiring petitioners to pay a penalty in the amount of $1,500 to the United States for each of these dockets for a total penalty of $3,000. The Court has considered all of petitioners' contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, irrelevant, or moot. To reflect the foregoing, Appropriate decisions will be entered.