T.C. Memo. 2003-281
UNITED STATES TAX COURT
MICHAEL T. CAREY AND LEONE R. CAREY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2003-02. Filed September 30, 2003.
Michael T. Carey and Leone R. Carey, pro se.
Jeremy L. McPherson, for respondent.
MEMORANDUM OPINION
COLVIN, Judge: This case is before the Court on
respondent’s motion for summary judgment and motion for a penalty
under section 6673.
Respondent determined a deficiency in petitioners' Federal
income tax of $498,933 for 1997, an addition to tax under section
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6651(a) of $74,874.99, and an accuracy-related penalty under
section 6662(a) of $99,786.60.
As discussed below, we will grant respondent’s motion and
will impose a penalty against petitioners under section 6673 in
the amount of $5,000.
Section references are to the Internal Revenue Code as
amended, and Rule references are to the Tax Court Rules of
Practice and Procedure. References to petitioner are to Michael
T. Carey.
Background
A. Petitioners
Petitioners resided in Redding, California, when they filed
their petition. Petitioner is a licensed occupational therapist.
He performed services at several adult residential facilities in
1997.
B. Respondent’s Request for Admissions
Respondent sent a request for admissions to petitioners.
Petitioners did not respond to respondent's request for
admissions. Each statement in a request for admissions served on
a party is deemed admitted unless a response is served on the
requesting party within 30 days after service of the request.
Rule 90(c). Thus, we deem petitioners to have admitted the
following facts stated in respondent's request for admissions.
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1. Petitioner’s Residential Facilities
In 1997, petitioner worked with severely disabled adults at
Residential Management Services, Rancho Residential Facility,
Sunshine Residential Facility, and Home Health Services, which
are residential facilities for disabled adults.
2. The Trusts
Petitioners formed Residential Management Services Trust1
(Residential), Rancho Residential Trust (Rancho), Sunshine
Residential Trust (Sunshine), and Home Health Services Trust
(Home Health) (petitioners’ trusts) before 1997.2 Petitioners’
trusts purportedly were in the business of operating nursing and
personal care facilities in 1997. Petitioners’ four children
have been the sole named beneficiaries of petitioners’ trusts
since 1997. Robert Hogue (Hogue) was the purported trustee of
these trusts in 1997. He was paid no more than $500 per trust in
1997 for his services as trustee.
Bank accounts were maintained for petitioners’ trusts.
Petitioner had signature authority over those accounts in 1996
and part of 1997. He paid his personal expenses from those bank
1
Our use of the words "trust”, "trustee”, and "form” does
not necessarily indicate that we believe the transactions at
issue have substance.
2
Petitioners formed Home Health Services Trust on June 1,
1993, Residential Management Services Trust on Dec. 16, 1994, and
Rancho Residential Trust and Sunshine Residential Trust on Aug.
1, 1996.
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accounts in 1997. He used a signature stamp bearing the name
“Robert Hogue” to sign checks on those bank accounts in 1997-
2001.
Petitioners’ trusts filed Forms 1041, U.S. Fiduciary Income
Tax Return, for 1997. Each trust reported income and expenses
from one of the nursing care facilities on its 1997 return. The
trusts reported the following amounts of income for 1997:
Trust ` Gross Receipts Interest
Residential $334,048 $196
Rancho $303,628 $219
Sunshine $233,694 0
Home Health $350,310 $453
3. Petitioners and Their Residences
Sometime before 1997, petitioners owned and lived in a
residence in Palo Cedro, California (the Palo Cedro residence).
They transferred title to that residence to Douglas Carpa and
Robert L. Talbot, trustees of Ranch Holding Trust, on a date not
contained in the record. Robert Hogue was the purported trustee
of Ranch Holding Trust at the end of 1997. Petitioner used funds
from Sunshine’s bank account to pay the property taxes on the
Palo Cedro residence in April 1997.
Property taxes on the Palo Cedro residence were paid in
December 1997 with funds from Home Health’s account and in April
1999 with funds from Residential’s account.
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Petitioners currently live in a house in Bella Vista,
California (the Bella Vista residence). The Bella Vista
residence is located on 54 acres of land. Michael Blomquist,
trustee of Hidden Meadows Holding Trust, acquired title to the
Bella Vista residence in 1996. Robert Hogue was the purported
trustee of Hidden Meadows Holding Trust at the end of 1997.
Petitioner paid the property taxes on the Bella Vista residence
in April 1997 with funds from Sunshine’s bank account.
4. Petitioners’ 1997 Tax Return
Petitioners requested and received an extension of time to
August 15, 1998, to file their 1997 return. Petitioners signed
their 1997 return on October 7, 1998, and respondent received it
on October 16, 1998.
Petitioner received but did not report self-employment
income of $1,221,680 in 1997. Residential, Rancho, Sunshine, and
Home Health reported that amount as gross receipts on their 1997
returns. Petitioners also received but did not report interest
income of $868 in 1997. Instead, Residential, Rancho, and Home
Health reported that amount as interest on their 1997 returns.
Petitioners did not have or provide to respondent
substantiation of car and truck, office, and mortgage interest
expenses they deducted on their 1997 return.
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C. Procedural History
On February 25, 2002, respondent moved to dismiss this case
for failure to state a claim and to impose a penalty under
section 6673. Special Trial Judge Armen ordered petitioners to
file an amended petition by April 19, 2002, and set respondent’s
motion for a hearing at the San Francisco, California, trial
session beginning on June 17, 2002.
Petitioners did not file an amended petition. At the June
25, 2002, hearing on respondent’s motion, the Court ordered
petitioners to file an amended petition by July 16, 2002. The
Court told petitioners that their original petition did not state
a claim and warned them that, if they repeated in the amended
petition the arguments they made in their petition, the Court
would strike those arguments.
In their amended petition, petitioners repeated frivolous
arguments that they had made in their petition. Thus, on August
1, 2002, the Court ordered that petitioners’ frivolous
contentions be stricken from the petition and the amendment to
petition.
This case was calendared for trial during the session of
this Court in San Francisco beginning on March 10, 2003.
Respondent filed a motion for summary judgment and to impose a
penalty under section 6673. We ordered petitioners to file a
response to respondent’s motion, but they did not do so.
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Petitioners did not appear at the calendar call or otherwise
communicate with the Court.
Discussion
A. Summary Judgment
We may grant summary judgment if the pleadings, answers to
interrogatories, depositions, admissions, affidavits, and any
other acceptable materials show that there is no genuine issue of
material fact and a decision may be rendered as a matter of law.
Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), affd. 17 F.3d 965 (7th Cir. 1994); Zaentz v.
Commissioner, 90 T.C. 753, 754 (1988). The moving party bears
the burden of proving that there is no genuine issue of material
fact. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985);
Jacklin v. Commissioner, 79 T.C. 340, 344 (1982). Matters deemed
admitted under Rule 90(c) are conclusively established and may be
considered in deciding whether to grant a motion for summary
judgment. Marshall v. Commissioner, 85 T.C. 267, 272-273 (1985);
Morrison v. Commissioner, 81 T.C. 644, 651-652 (1983); Doncaster
v. Commissioner, 77 T.C. 334, 336 (1981).
We have examined the entire record and construed facts most
favorably for petitioners. We conclude that there is no dispute
as to any material fact and that respondent is entitled to
summary judgment. Rule 121(b).
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1. Whether Petitioners’ Trusts Are Recognized for Federal
Tax Purposes
Respondent contends that petitioners’ trusts should not be
recognized for Federal income tax purposes because they are
shams. Petitioners contend that petitioners’ trusts are not
shams. A trust may be a sham for Federal tax purposes if the
grantor retains control over the property or income placed in the
trust and does not change how the property or income is treated.
Commissioner v. Sunnen, 333 U.S. 591, 604 (1948); United States
v. Noske, 117 F.3d 1053, 1059 (8th Cir. 1997). We generally do
not recognize a trust for Federal tax purposes if the grantor
keeps substantially unfettered powers of disposition or
beneficial enjoyment of trust property. See United States v.
Noske, supra; Paulson v. Commissioner, 992 F.2d 789, 790 (8th
Cir. 1993), affg. per curiam T.C. Memo. 1991-508; United States
v. Buttorff, 761 F.2d 1056, 1061 (5th Cir. 1985); Schulz v.
Commissioner, 686 F.2d 490, 495 (7th Cir. 1982), affg. T.C. Memo.
1980-568; Vnuk v. Commissioner, 621 F.2d 1318, 1320-1321 (8th
Cir. 1980), affg. T.C. Memo. 1979-164.
Petitioners controlled and dealt with the alleged trust
property as if it were their own. Petitioner retained
substantial enjoyment of the trust property as shown by the fact
that he had signature authority over the bank accounts of
petitioners’ trusts in 1996 and for part of 1997, and that he
paid his personal expenses from those bank accounts in 1997.
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Robert Hogue allowed petitioner to do so. Robert Hogue did not
act as an independent trustee or control any aspects of
petitioners’ trusts. Thus, we do not recognize petitioners’
trusts as trusts for Federal income tax purposes, and the money
paid to those trusts is taxable to petitioners. We will grant
summary judgment with respect to the invalidity of petitioners’
trusts. Accord Residential Mgmt. Servs. Trust v. Commissioner,
T.C. Memo. 2001-297 (involving the Careys’ income tax liability
for 1995).
2. Unreported Income and Failure To Timely File
Petitioners admitted that petitioner received but did not
report $1,221,680 in 1997 as income from his health care
facilities. Petitioners also admitted that they filed their
return for 1997 late and that they are liable for an addition to
tax for failure to timely file their 1997 return and an accuracy-
related penalty under section 6662(a) for negligence for 1997.
Thus, we will grant respondent’s summary judgment motion with
respect to petitioners’ taxability on the self-employment and
interest income and petitioners’ liability for the addition to
tax for late filing and the accuracy-related penalty.
3. Deductions
Petitioners have admitted that they did not have or provide
to respondent substantiation or documentation for car and truck,
office, and mortgage interest expenses they deducted on their
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1997 return. Thus, respondent is entitled to summary judgment
that petitioners may not deduct car and truck, office, and
mortgage interest expenses for 1997.
B. Whether Respondent Is Entitled to Summary Judgment Relating
to the Section 6673 Penalty
The Court may impose on a taxpayer a penalty of up to
$25,000 if the taxpayer instituted or maintained proceedings
primarily for delay, if the taxpayer's position is frivolous or
groundless, or if the taxpayer unreasonably failed to pursue
administrative remedies. Sec. 6673(a).
In their petition, petitioners contended: (1) They had no
unreported income or tax liability; (2) respondent failed to
identify Code sections which establish their liability for tax;
(3) respondent failed to provide them with certified assessment
information; (4) respondent failed to identify the person making
the adjustments on which the determination was based; (5) the
determination is a naked assessment because it is based on
hearsay evidence; and (6) respondent must show certified evidence
to support the determination before this case can proceed to
trial. The Court struck most of these allegations of error from
the petition for failure to state a claim. After the Court
ordered petitioners to amend their petition to raise justiciable
issues, petitioners filed an amended petition, most of which was
also stricken by the Court. Petitioners’ contentions are
frivolous, see Nestor v. Commissioner, 118 T.C. 162, 166-167
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(2002) (Commissioner not required to identify Code sections
establishing tax liability); Thacker v. United States, 84 AFTR 2d
6303, 99-2 USTC par. 50862 (E.D. Ky. 1999) (assessment not
required for tax liability to exist), affd. 221 F.3d 1336 (6th
Cir. 2000); Residential Mgmt. Servs. Trust v. Commissioner, supra
(trust income attributed to petitioners for 1995); Schaefer v.
Commissioner, T.C. Memo. 1983-361 (assessment not required for
tax liability to exist). We conclude that petitioners’ claims
are frivolous and groundless, see Coleman v. Commissioner, 791
F.2d 68, 71 (7th Cir. 1986), and that they instituted this case
for purposes of delay. Under these circumstances, we require
petitioners to pay to the United States a $5,000 penalty under
section 6673(a).
An appropriate order
and decision will be entered.