Court Opinion

ID: 4331183
Source: CourtListenerOpinion
Date Created: 2018-11-14 00:00:54.539722+00
Date Added: 2024-06-11T14:20:17.611438
License: Public Domain

T.C. Memo. 1997-236

                      UNITED STATES TAX COURT

               FOREST L. BUCKMASTER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 5089-96.                        Filed May 21, 1997.

     Kevin G. Elmore, for petitioner.1

     Eric D. Swenson, for respondent.

             MEMORANDUM FINDINGS OF FACT AND OPINION

     LARO, Judge:   Forest L. Buckmaster petitioned the Court on

March 19, 1996, to redetermine respondent's determination of a

$24,821 deficiency in his 1992 Federal income tax, a $1,111

addition thereto under section 6654(a), and a $4,964 accuracy-

     1
       Petitioner filed his petition with the Court pro se.
Kevin G. Elmore entered his appearance in this case on Dec. 24,
1996.
                                - 2 -

related penalty under section 6662(a) for substantial

understatement of income tax.   Respondent reflected these

determinations in a notice of deficiency issued to petitioner on

December 18, 1995.

     Following respondent's concession of the addition to tax

under section 6654(a), we must determine the following issues:

     1.   Whether petitioner's gross income includes his personal

service income paid to a trust entitled Ideal Management.2    We

hold it does.

     2.   Whether petitioner is liable for the accuracy-related

penalty determined by respondent.   We hold he is.

     3.   Whether petitioner is liable for a penalty under section

6673(a)(1).   We hold he is liable for a penalty of $5,000.

     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue.   Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulated facts and exhibits submitted therewith are

incorporated herein by this reference.   Petitioner resided in

San Diego, California, when he petitioned the Court.    He filed a

     2
       Although we use the word "trust" to refer to Ideal
Management, we do not mean to suggest that Ideal Management is a
trust for Federal income tax purposes. As discussed below, we
conclude it is not. We use the word "trust" merely for
convenience.
                                - 3 -

1992 Form 1040, U.S. Individual Income Tax Return, using the

filing status of "Single".

     Petitioner has worked installing floors since 1968.    Before

1990, he worked as a sole proprietor; for 1989, his sole

proprietorship reported gross receipts of $64,081 and net income

of $29,236.    During 1992, petitioner purportedly installed floors

in his capacity as general manager of a trust entitled Ideal

Management.    Ideal Management's sole beneficiary was purportedly

Clark Co. (Clark), a foreign trust based in Gibraltar in 1992,

and in Belize City, Belize, C.A., in 1990 and 1991.    Clark's sole

beneficiary was purportedly Arlington Co. (Arlington), a

third-tier trust with a trustee named Dennis Smith.    The 1992

business address and phone number of Arlington, Clark, and Ideal

Management were listed respectively as petitioner's home address

and petitioner's home phone number.     Clark did not file a Federal

tax return, or pay Federal income tax, for any of the relevant

years.

     On or before April 3, 1989, petitioner paid $2,500 to the

International Businessmen's Association (IBA) for documents to

join Ideal Management.   Ideal Management was purportedly formed

by Cache Properties, Unlimited (Cache), with the transfer of $100

on January 12, 1989, and IBA's corepresentative at that time was

Alex Yung.    Mr. Yung, who also was Ideal Management's first

trustee, was convicted of conspiring to defraud the United States

by impeding, obstructing, and defeating the Internal Revenue
                               - 4 -

Service in the assessment and collection of Federal income taxes

through the marketing through IBA of trusts similar to Ideal

Management.   His conviction was affirmed on appeal.   See United

States v. Scott, 37 F.3d 1564 (10th Cir. 1994).

     On April 3, 1989, petitioner transferred his business

property, including work tools and two vehicles, to Ideal

Management in exchange for 100 capital units.   Petitioner

retained beneficial use of the transferred property after the

transfer.   On the same day, petitioner agreed with Ideal

Management to provide his floor installation services as an

independent contractor of Ideal Management in return for its

paying him $300 per month.   On December 28, 1990, petitioner and

Ideal Management amended this agreement to provide that

petitioner would receive $400 per month, and that petitioner

could not be "terminated" without 30 days' written notice.

Petitioner transferred his capital units to Clark on April 4,

1989.

     Petitioner was Ideal Management's only floor installer

during 1992, and his labor generated over $70,000 in revenue

during that year.   Petitioner worked full time for Ideal

Management during that year at the rate of $400 per month, and

Ideal Management paid him $4,600 in toto.   Petitioner's 1992

Form 1040 reported $4,620 of gross income, consisting of the

$4,600 from Ideal Management and $20 of interest income.     The
                               - 5 -

contractor's license for the floor installation work completed by

petitioner during 1992 was in petitioner's name only.

     Petitioner and Sheila Webb (Webb), his friend and long-time

roommate, lived in San Diego in 1992 at a house (the residence)

which petitioner's father had transferred to them in 1984.    Webb

wrote Ideal Management monthly checks of $500 for petitioner's

"rent" of the residence during that year, drawable on an account

(the joint account) held jointly with petitioner, and the checks

were deposited into an account of Ideal Management (the Ideal

Management account) over which petitioner and Webb had signature

authority.   Ideal Management used petitioner's "rent", as well as

the money received from petitioner's services, to pay the

residence's property taxes, mortgage, and other expenses.    Ideal

Management also used these moneys to pay the expenses that

petitioner purportedly incurred installing floors.

     Ideal Management's 1992 tax return, Form 1041 (U.S.

Fiduciary Income Tax Return), reported depreciation for the

residence and assets that petitioner had originally transferred

to Ideal Management.3   Ideal Management's 1992 Form 1041 also

claimed deductions (e.g., mortgage, insurance, repairs,

utilities) totaling $17,788 for the residence and $40,503 of

expenses (including $18,318 for the cost of goods sold) connected

with petitioner's floor installation.   Ideal Management's 1992

     3
       Ideal Management began depreciating the residence in 1990,
claiming a basis therein of $135,000.
                                - 6 -

Form 1041 claimed a $17,197 loss on its rental of the residence,

which was used to offset the $24,123 of net income from

petitioner's services.    Ideal Management's 1992 "Total income" of

$6,926 ($24,123 - $17,197) was reportedly distributed to Clark

during that year.

     Respondent analyzed the deposits made during 1992 into the

joint account and the Ideal Management account.    The deposits

into the Ideal Management account aggregated $75,553, and the

deposits into the joint account equaled $5,606.    Based on her

analysis, in the context of the surrounding facts, respondent

determined that petitioner failed to report self-employment

income of $73,021.   Respondent also determined that petitioner

was liable for self-employment tax of $8,961 on this unreported

income.   Respondent stated in the notice of deficiency that Ideal

Management was a grantor trust or, alternatively, a sham.

     On or about November 3, 1995, respondent filed a Federal tax

lien against petitioner.    The lien arose from petitioner's 1990

and 1991 taxable years.    Respondent assessed petitioner's

liability for these years on December 12, 1994, and July 3, 1995,

respectively.   Petitioner's liability for the assessed amounts

aggregated almost $100,000 on the date of the lien.

                               OPINION

     We must decide whether the income earned by petitioner and

paid to Ideal Management during 1992 was includable in

petitioner's 1992 gross income.    Respondent argues that it was,
                                 - 7 -

contending primarily that Ideal Management was a sham.

Petitioner argues that it was not.       Petitioner, citing Portillo

v. Commissioner, 932 F.2d 1128 (5th Cir. 1991), affg. in part and

revg. in part T.C. Memo. 1990-68, contends primarily that

respondent's determination was a "naked assertion" because

respondent did not audit Ideal Management.      Petitioner also

contends that Ideal Management was not a sham.

     We agree with respondent that the disputed income is

includable in petitioner's 1992 gross income because Ideal

Management was a sham; i.e., it lacked economic reality.      We find

first that respondent's determination rests on a solid

foundation.   Respondent performed properly a bank deposit

analysis of petitioner's and Ideal Management's bank accounts,

see Parks   v. Commissioner, 94 T.C. 654, 658 (1990); Nicholas v.

Commissioner, 70 T.C. 1057, 1064 (1978); see also Estate of Mason

v. Commissioner, 64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2

(6th Cir. 1977); Harper v. Commissioner, 54 T.C. 1121, 1129

(1970), with the knowledge that petitioner was subject to an

outstanding Federal tax lien aggregating almost $100,000, that he

was connected with Ideal Management, and that his reported gross

income and itemized deductions for 1992 had decreased

dramatically from prior years.    Respondent reached her

determination in the light of United States v. Scott, 37 F.3d

1564 (10th Cir. 1994).   In Scott, the Court of Appeals for the

Tenth Circuit examined certain trusts involving IBA and Mr. Yung,
                                 - 8 -

and found that these trusts were fraudulent.     Id. at 1572.   The

Court of Appeals set forth an extensive analysis of these trusts,

all of which were remarkably similar to Ideal Management.

Suffice it to say that petitioner misread Portillo v.

Commissioner, supra, if he truly believes that Portillo stands

for the broad proposition that the determination at hand was

"naked" because respondent did not actually audit Ideal

Management.

       We find that Ideal Management was merely a device conjured

up for petitioner and other taxpayers seeking to avoid Federal

income tax.    Petitioner testified that he was not tax motivated

when he joined Ideal Management, and that he joined Ideal

Management mainly to protect his assets from creditors.

Petitioner testified that he transferred to Ideal Management his

entire ownership interest in his assets so that his personal

creditors would not be able to seize them if he was ever unable

to pay a judgment or other liability.     Petitioner testified that

he worked for Ideal Management in 1992 for $400 a month, when his

services generated earnings of almost $6,000 a month.     Petitioner

testified that he agreed initially to work for Ideal Management

for $300 per month, performing basically the services he

performed for almost 20 times that amount the year before.

Petitioner asks the Court to believe his testimony and hold for

him.    We decline to do so.   We find his testimony incredible.

See Ruark v. Commissioner, 449 F.2d 311, 312 (9th Cir. 1971),
                                - 9 -

affg. per curiam T.C. Memo. 1969-48; Clark v. Commissioner, 266

F.2d 698, 708-709 (9th Cir. 1959), affg. in part and remanding in

part T.C. Memo. 1957-129; Tokarski v. Commissioner, 87 T.C. 74,

77 (1986); see also Hawkins v. Commissioner, T.C. Memo. 1993-517,

affd. without published opinion 66 F.3d 325 (6th Cir. 1995).

     The Court of Appeals' opinion in United States v. Scott,

supra, is most helpful to us in understanding the form,

substance, and operation of Ideal Management.    The opinion

describes in detail how the trusts were marketed as a device for

a purchaser to eliminate his or her income tax liability without

losing control of his or her money and other assets.       Like the

trust at hand, the trusts in Scott were generally structured so

that it would appear that the trust income was distributed to

foreign trust beneficiaries, which then redistributed the income

to other foreign trust beneficiaries that were outside the reach

of the U.S. taxing arm.    Id. at 1570.   Other relevant

characteristics of the trusts examined in United States v. Scott,

supra, include that:

     (1)    The purchasers transferred their property, including

houses, into trust;

     (2)    the trusts claimed depreciation deductions for the

property;

     (3)    the trusts were reported to the Commissioner as simple

trusts;

     (4)    Mr. Yung was a trustee;
                               - 10 -

     (5)    foreign trusts in Belize acted as beneficiaries of the

purchasers' trusts, and the foreign trusts owned the capital

units;

     (6)    the purchaser was never the named capital unit holder;

     (7)    each trust was established by a fictitious domestic

trust, named "Cache Properties", for a nominal amount of $100;

     (8)    the second trust was usually a foreign trust with a

trustee named Dennis Smith;

     (9)    a purchaser could ensure perpetual control of his or

her trust by naming himself or herself as secretary or manager;

     (10)    a purchaser could not be removed or fired except with

30 days' notice; and

     (11)    the trusts were "sold" by IBA for $2,500 apiece.

Following our detailed review of the facts surrounding Ideal

Management, with our knowledge of the facts in Scott, we reach

the conclusion that Ideal Management was devised and operated

similarly to the trusts examined in Scott.    We conclude that

Ideal Management, like the trusts in Scott, was a sham.    Accord

Hanson v. Commissioner, 696 F.2d 1232 (9th Cir. 1983), affg. T.C.

Memo. 1981-675; Markosian v. Commissioner, 73 T.C. 1235 (1980);

Dahlstrom v. Commissioner, T.C. Memo. 1991-265, affd. without

published opinion 999 F.2d 1579 (5th Cir. 1993); Dahlstrom v.

Commissioner, T.C. Memo. 1991-264, affd. without published

opinion 999 F.2d 1579 (5th Cir. 1993).

     Our conclusion is strengthened by our analysis of a number

of factors that this Court has previously considered to help
                               - 11 -

ascertain whether a purported trust lacks economic substance for

Federal income tax purposes.   These factors include:    (1) Whether

the taxpayer's relationship, as grantor, to the property differed

materially before and after the trust's formation; (2) whether

the trust had an independent trustee; (3) whether an economic

interest passed to other beneficiaries of the trust; and

(4) whether the taxpayer felt bound by any restrictions imposed

by the trust itself or the law of trusts. Zmuda v. Commissioner,

79 T.C. 714, 720-722 (1982), affd. 731 F.2d 1417 (9th Cir. 1984);

Markosian v. Commissioner, supra at 1243-1245; Hanson v.

Commissioner, T.C. Memo. 1981-675.      Our analysis of each of these

factors supports our conclusion.

     With respect to the first factor, we look to the economic

reality of a purported arrangement to determine who actually is

the settlor of a trust, whether or not named as settlor in the

related documents.   Zmuda v. Commissioner, supra at 720.

Although the documents at hand list Cache as the settlor of Ideal

Management, the fact of the matter is that Cache acted merely as

a "straw man" to form Ideal Management.     See United States v.

Scott, 37 F.3d at 1570.   We find that petitioner paid a $2,500

fee to transfer his assets to Ideal Management, and that Ideal

Management's only assets during 1992 were petitioner's

transferred assets including, possibly, the residence.     We find

that petitioner used all of these properties as his own both

before and after the transfer; i.e., he used his tools and

vehicles to generate large revenues, and he and Webb lived in the
                              - 12 -

residence.   Although it is true that petitioner ostensibly made

monthly "rent" payments to Ideal Management, Ideal Management

applied these payments mainly to the residence's mortgage,

property taxes, and other expenses.    Thus, we see clearly that

petitioner stood in exactly the same spot with respect to his

assets before and after their transfer to Ideal Management.      We

find that the first factor points to a sham.

     We find likewise with respect to the second factor; i.e.,

Ideal Management lacked a bona fide independent trustee.

Contrary to the assertions of petitioner and R. Richard Evans,

the named trustee of Ideal Management during 1992, Mr. Evans

could not prevent petitioner from using Ideal Management's

property for his own purposes.4   Petitioner had signature

authority over the Ideal Management account, which meant that he

had access to the funds contained therein.    Petitioner also could

not be removed from his position as Ideal Management's manager

without 30 days' notice, which, in turn, gave petitioner

perpetual control of Ideal Management.    See United States v.

Scott, supra at 1571.   Petitioner's use of the residence and the

tools of his trade also were free from restraint.

     As to the third factor, we find no probative evidence in the

record to indicate that petitioner transferred an economic

interest to a third party when he transferred his assets to Ideal

     4
       Mr. Evans testified on behalf of petitioner. We give his
testimony little weight. Among other things, we note that Mr.
Evans was vague and evasive during his testimony.
                               - 13 -

Management.    Petitioner asks the Court to find as a fact that he

transferred his entire beneficial interest in Ideal Management to

Clark for no consideration 1 day after he joined Ideal

Management.    We decline to do so.   The facts of this case

preclude such a finding.    Ideal Management's minutes for an

April 1989 meeting, for example, state that all 100 capital units

would revert back to petitioner and Webb upon Clark's

liquidation.   Likewise, Clark's address during 1992 was

petitioner's home address, which points to the conclusions that

petitioner controlled Clark and that the purported transfer of

the capital units to Clark did not actually give Clark any

meaningful rights or interests in Ideal Management.     We also

believe it is implausible that petitioner would have transferred

away all of his legal and beneficial interests in his assets,

including the tools of his trade, for practically nothing in

return.   Following our review of the record, we are satisfied

that petitioner was the actual beneficiary of Ideal Management.

See United States v. Scott, supra at 1572.

     As to the fourth factor, we find that petitioner was not

bound by any restrictions imposed by Ideal Management or the law

of trusts as to the use of the transferred property.

Petitioner's unrestricted use of Ideal Management's property

leads us to believe that it was not restricted in any meaningful

manner, including fiduciary restraints.
                              - 14 -

     We sustain respondent's determination on this issue.5

Although petitioner asks us to allow him some deductions to

offset this income, we decline to do so.   Petitioner must prove

his entitlement to any deduction, and he must keep sufficient

records to substantiate any deduction that he claims.     Sec. 6001;

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Petitioner has not introduced any evidence to substantiate his

entitlement to any deductions, and the record does not persuade

us that petitioner is entitled to any deductions.

     Respondent also determined that petitioner was liable for an

accuracy-related penalty under section 6662(a) because he

substantially understated his Federal income tax.    See sec.

6662(b)(2).   As relevant herein, section 6662(a) imposes an

accuracy-related penalty equal to 20 percent of an underpayment

that is due to a substantial understatement of income tax.

Petitioner will avoid this penalty if the record shows that his

income tax was not understated by the greater of 10 percent of

the tax required to be shown on the return or $5,000.     Sec.

6662(d)(1)(A).   The accuracy-related penalty of section 6662 is

not applicable to any portion of an underpayment to the extent

that an individual has reasonable cause for that portion and acts

in good faith with respect thereto.    Sec. 6664(c)(1).   Such a

determination is made by taking into account all facts and

     5
       Petitioner has not challenged respondent's determination
that this income is subject to self-employment tax. We sustain
that determination without further comment. See Rule 142.
                                  - 15 -

circumstances, including the experience and knowledge of the

taxpayer and his or her reliance on a professional tax adviser.

Sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioner argues that he is not liable for this penalty

because he did not understate his Federal income tax for 1992.

This is so, petitioner contends, because Ideal Management was not

a sham.   We have already held that Ideal Management was a sham.

Nor do we find that petitioner had reasonable cause for his

understatement.       We sustain respondent's determination on this

issue.

     Turning to the final matter, respondent moved the Court at

the end of trial to impose a penalty under section 6673(a)(1).

Respondent asserts that petitioner's position is frivolous and

groundless, and that petitioner instituted this lawsuit primarily

for delay.   In relevant part, section 6673(a)(1) provides:

     SEC. 6673(a).      Tax Court Proceedings.--

               (1) Procedures instituted primarily for
          delay, etc.--Whenever it appears to the Tax
          Court that--

                       (A) proceedings before it
                  have been instituted or maintained
                  by the taxpayer primarily for
                  delay,

                       (B) the taxpayer's position
                  in such proceeding is frivolous or
                  groundless, or

                  *      *    *    *    *    *     *

     the Tax Court, in its decision, may require the
     taxpayer to pay to the United States a penalty not in
     excess of $25,000.
                              - 16 -

     We agree with respondent that petitioner is liable for a

penalty under section 6673(a)(1), and we require him to pay a

penalty to the United States in the amount of $5,000.

Petitioner's conduct throughout this proceeding has convinced us

that he instituted and maintained this proceeding primarily for

delay.   His position in this proceeding also is groundless and

frivolous.   See Coleman v. Commissioner, 791 F.2d 68, 71 (7th

Cir. 1986); see also Neitzke v. Williams, 490 U.S. 319 (1989)

(defining legal frivolousness).   Petitioner's insistence on

pursuing his fruitless arguments has consumed time and effort of

this Court (and of respondent) that could have otherwise been

devoted to resolving bona fide claims of other taxpayers.     See

Cook v. Spillman, 806 F.2d 948 (9th Cir. 1986).

     We have considered all arguments made by petitioner in this

proceeding and, to the extent not discussed above, find them to

be irrelevant or without merit.   To reflect the foregoing,

                                         An appropriate order and

                                    decision will be entered for

                                    respondent except for the

                                    addition to tax under section

                                    6654.