T.C. Memo. 2005-180
UNITED STATES TAX COURT
AMC TRUST, J.O. HANEY, JR., J.O. HANEY, III AND PATRICIA A. HANEY
TRUSTEES, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 22243-03, 22244-03, Filed July 25, 2005.
22245-03, 22246-03,
22294-03.
Curtis W. Cannon and Paul Russo Stone, for petitioners.
Catherine S. Tyson and Sheila R. Pattison, for respondent.
1
Cases of the following petitioners are consolidated
herewith: Jopah Trust, J.O. Haney, Jr., J.O. Haney, III,
Cynthia L. Haney and Patricia A. Haney, Trustees, docket No.
22244-03; Oliver and Company, John Oliver Haney, Jr. and Patricia
Ann Haney, Trustees, docket No. 22245-03; J.O. Haney, Jr. and
Patricia A. Haney, docket No. 22246-03; and Blanco Springs Trust,
Patricia A. Haney and Patricia J. Haney, Trustees, docket No.
22294-03.
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MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies and
additions to tax as follows:
AMC Trust, J.O. Haney, Jr., J.O. Haney, III and Patricia A. Haney
Trustees (docket No. 22243-03):
Additions to Tax/Penalties, I.R.C.
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1999 $419,808 $20,990.40 $83,962.00
2000 390,477 97,619.00 78,095.00
2001 455,935 113,984.00 91,187.00
Jopah Trust, J.O. Haney, Jr., J.O. Haney, III, Cynthia L. Haney
and Patricia A. Haney, Trustees (docket No. 22244-03):
Additions to Tax/Penalties, I.R.C.
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1997 $10,917 –- $2,183.00
1998 21,920 –- 4,384.00
1999 21,899 –- 4,380.00
2000 8,608 –- 1,722.00
2001 8,386 $2,096.50 1,677.00
Oliver and Company, John Oliver Haney, Jr. and Patricia Ann
Haney, Trustees (docket No. 22245-03):
Additions to Tax/Penalties, I.R.C.
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1996 $266,090 –- $53,218.00
1997 220,430 –- 44,086.00
1998 287,916 –- 57,583.00
1999 419,728 –- 83,946.00
2000 390,455 $97,614.00 –-
2001 461,616 115,404.00 –-
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J.O. Haney, Jr. and Patricia A. Haney (docket No. 22246-03):
Additions to Tax/Penalties, I.R.C.
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1996 $32,957 –- $6,591.40
1997 31,879 –- 6,375.80
1998 8,935 –- 1,787.00
1999 155,121 –- 31,024.20
2000 44,365 $11,048.85 8,873.00
2001 41,115 10,278.75 8,223.00
Blanco Springs Trust, Patricia A. Haney and Patricia J. Haney,
Trustees (docket No. 22294-03):
Additions to Tax/Penalties, I.R.C.
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1997 $10,722 –- $2,144.00
1998 5,429 –- 1,086.00
1999 10,917 –- 2,183.00
2000 2,823 –- 565.00
2001 9,559 $2,389.75 1,912.00
The issue for decision is whether certain trust arrangements will
be respected for tax purposes. Unless otherwise indicated, all
section references are to the Internal Revenue Code in effect for
the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
FINDINGS OF FACT
Petitioners resided in or had their principal place of
business in Texas at the time that their respective petitions
were filed. Petitioners J.O. Haney, Jr. (J.O.), and Patricia A.
Haney (Patricia), collectively referred to as the Haneys, were
the parents of J.O. Haney, III (Joey), Patricia J. Haney, and
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Jenna L. Burns. Don Hal Haney is J.O.’s brother. Cynthia L.
Haney (Cynthia) is the Haneys’ daughter-in-law.
Before 1980, the Haneys operated an asphalt repair and
maintenance company (the asphalt business) as a sole
proprietorship under the name Asphalt Maintenance Co. of Texas
(AMC). In February 1980, the Haneys incorporated their asphalt
business under the name J&J Commercial Services, Inc. (J&J). The
business was incorporated on the advice of Earl Post, an
attorney, for the purpose of limiting liability. Neither Post
nor any other attorney or competent professional participated in
the formation of the trusts involved in these cases.
In corporate form, J&J continued to do business as Asphalt
Maintenance Co. of Texas. J&J was owned by the Haneys, with J.O.
holding a 49-percent interest and Patricia owning a 51-percent
interest. Patricia served as the president of J&J, and J.O.
served as the vice president.
The Trusts
In 1993, the Haneys paid Royce McCarley (McCarley) the sum
of $11,000 to prepare a trust instrument for AMC Trust. The
Haneys, however, became disenchanted with McCarley and did not
implement the trust document. The trust document prepared by
McCarley was destroyed.
In 1996, the Haneys met with Karl Dahlstrom (Dahlstrom).
Dahlstrom prepared for the Haneys a “Contract and Declaration of
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Trust for AMC, A Common Law Pure Trust Organization” (AMC Trust),
dated October 16, 1996. At all material times, the Haneys and
Joey acted as trustees of the AMC Trust. As of January 1, 1998,
Cynthia acted as a fourth trustee.
Relevant provisions of the AMC Trust instrument conveyed the
accounts receivable of J&J to the AMC Trust in exchange for $10
and trust certificates. The trustees were said to “act as
absolute owners and hold title [to the trust property] in fee
simple and control as joint tenants”. The declaration provided:
6. The named Trustees, for themselves and their
successors in trust irrevocable do hereby accept the
conveyance and acknowledge delivery of all the property
specified, together with all the terms of the Trust
Organization herein set forth, agreeing to conserve and
improve the Trust Organization, to invest and reinvest
the funds of said Trust Organization, in such manner as
will increase the financial rating of the Trust
Organization exercising their best judgment and
discretion, in accordance with the Trust organization
minutes, making distribution of portions of the
proceeds and income as in their discretion, and
according to the minutes, and upon final liquidation
distributing the assets to the existing certificate
holders as their contingent right may appear; and in
all other respects administering said Trust
Organization in good faith strictly in conformity
hereto.
* * * * * * *
16. The Trustees shall regard this instrument as
their sufficient guide, supplemented from time to time
by resolutions of their board covering contingencies as
they arise and recorded in the minutes of their
meetings, or by rules or regulation, as deemed
expedient and consistent with the orderly conduct of
business.
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17. The Trustee(s) shall have the exclusive power
to construe the meaning and intent of this Trust
Organization indenture or instrument and the
Trustee’s(s’) construction shall be conclusive, legally
binding and will govern. The Trustee’s(s’)
construction will be the same as the intention of all
parties as expressed throughout the entire indenture or
instrument.
* * * * * * *
26. This Trust Organization shall continue for a
period of seventy-five years from date, unless the
Trustees shall unanimously determine an earlier date.
The Trustees may at their discretion, because of
threatened depreciation in values, or other good and
sufficient reason, liquidate the assets, distribute and
close the Trust Organization at an earlier date
determined by them. * * *
* * * * * * *
34. Trustees may from time to time declare and
pay out of net income received by them such
distributions as they in their sole discretion deem
proper and advisable. Said distributions may be by
actual payment or by credit. Distribution by credit
means a declaration of income will be transferred to
the certificate holders via appropriate forms pursuant
to the Internal Revenue Code while the actual income
will be retained by the trust for reserves or
reinvestment. The trustees shall have the right, at
their discretion, to revoke the certificates of any
holder thereof who refuses to accept distribution by
credit and pay any tax due thereon.
The Haneys and Dahlstrom also formed a trust to be known as
Oliver & Co. The “Declaration of Charitable Remainder Trust of
Oliver & Co.” designated J&J as the grantor, the Haneys as the
trustees, and Praisesong, Inc., as the beneficiary. The grantors
purported to transfer to the trust property “described in
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Schedule A”, Itemized Deductions, but no Schedule A was attached.
The trust provided:
In each taxable year of the trust, the Trustee(s)
shall pay to J.O. Haney Jr. & Patricia A. Haney,
(hereinafter referred to as “the Recipient(s)”), an
amount equal to five percent (5%) per annum of the net
fair market value of the assets of the trust valued as
of the day of the initial transfer. The annuity trust
amount will be paid on an annual basis. To the extent
income is not sufficient, payments may be made from
principal. Any income of the trust for a taxable year
in excess of the annuity trust amount shall be added to
principal.
* * * * * * *
Upon the death of the Recipient(s), the Trustee(s)
shall distribute any amount due either of the
Recipient(s) or the Recipient(s)’ estate, under the
provisions above, to the estate of the Recipient(s).
The balance of the assets of this annuity trust shall
be liquidated and after all termination fees, taxes,
and expenses are paid, the remaining assets shall be
distributed free and clear of all trusts to the
Beneficiary, “Praisesong Inc.”, 3013 Green Hill Dr.,
Plano, Texas 75093, TID #XX-XXXXXXX (hereinafter
referred to as “the Charitable organization”). If the
Charitable Organization is not an organization
described in sections 170(c), 2055(a), and 2522(a) of
the Code at the time when any principal or income of
the trust is to be distributed to it, then the
Trustee(s) shall distribute such principal or income to
such one or more organizations described in section
170(c), 2055(a), and 2522(a) as the Trustee(s) shall
select in their sole discretion.
No minutes were maintained for Oliver & Co.
After formation of the AMC Trust, the Haneys continued to
operate their asphalt business in the same manner as they did
when it was reported by J&J. The Haneys retained substantial
control of all business activity, the business bank accounts, and
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the business assets. The equipment used in the asphalt business
was listed as an asset on the books of AMC Trust.
Joey worked in the asphalt business prior to and during the
years in issue. Commencing in about October 1996, Joey operated
the asphalt business. Joey continued to consult his parents
about various business decisions and operations, and Patricia
continued to perform services in the office. J.O. retained
custody and control of the business records.
Oliver & Co. never made a distribution to any charitable
beneficiary. After Oliver & Co. was formed, the Haneys each
received annual distributions of $3,000 from Oliver & Co. In
this connection, each year $6,000 was transferred from AMC
Trust’s bank account to Oliver & Co.’s bank account, and the
Haneys, as trustees of Oliver & Co., issued checks to themselves.
Otherwise, Oliver & Co. has never been funded with cash or other
assets.
In addition to AMC and Oliver & Co., the Haneys also formed
Jopah Trust (Jopah), TuSwanz Trust (TuSwanz), Blanco Springs
Trust (Blanco Springs), Adobe Springs Trust (Adobe), JoDon II
Trust, and H-Five Productions Trust (H-Five). Jopah leased
equipment and real property to AMC; however, rental proceeds from
AMC were reported on a Schedule C, Profit or Loss From Business,
attached to the Haneys’ returns for 1997 through 1999. For 2000
and 2001, payments by AMC to Jopah were reported on Jopah’s
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Forms 1041, U.S. Income Tax Return for Estates and Trusts, and
deductions were claimed in the same amount, resulting in no
taxable income.
Blanco Springs allegedly owned rental property, although the
income and expenses of the real property rentals were reported on
Schedules E, Supplemental Income and Loss, attached to the
Haneys’ returns for 1997 through 1999. TuSwanz held the real
property that was occupied by the Haneys as a residence. There
was no rental agreement, and the Haneys did not pay TuSwanz rent
for the residence. The Haneys, and not TuSwanz, were compensated
by insurance for damage to real and personal property resulting
from a flood in October 1998. The Haneys claimed a casualty loss
on their 1998 Federal income tax return for damage from the
flood. As of 1999, TuSwanz and J.O.’s brother, Don Hal Haney,
each held a 50-percent beneficial interest in Adobe.
H-Five maintained bank accounts that were used to pay the
Haneys’ personal living expenses. Checks written on Adobe and
payable to Patricia were deposited into the H-Five bank account.
TuSwanz and Adobe received royalty payments from various entities
and received payments from the U.S. Department of Agriculture.
Tax Reporting and Examination
After an election of S corporation status for J&J was made
in 1987, the income of the asphalt business was reported on
Forms 1120S, U.S. Income Tax Return for an S Corporation. After
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the formation of AMC Trust, the income of the asphalt business
was reported on AMC Trust’s Form 1041. AMC Trust claimed income
distribution deductions, flowing the profits of the asphalt
business to Oliver & Co. Neither AMC Trust nor Oliver & Co.
reported any taxable income or any tax liability for the years in
issue.
On its Forms 1120S, J&J reported total income of $47,968.13
for 1993; $69,971 for 1994; $1,160 for 1995; a loss of $11,983
for 1996; and zero income for 1997 through 2001. On
Schedules K-1, Shareholder’s Share of Income, Credits,
Deductions, etc., attached to the returns for 1993 through 1996,
J&J’s income was shown as distributed 49 percent to J.O. and
51 percent to Patricia.
On Schedules C to its Forms 1041, AMC Trust reported profit
or loss from the asphalt business as follows:
Year Profit or loss
1996 $111,712
1997 42,552
1998 75,051
1999 288,096
2000 79,567
2001 66,363
On each of its Forms 1041, AMC Trust reported taxable income of
minus $100, after deducting the total reported profit as an
“income distribution deduction”. The profits from the asphalt
business in fact exceeded the amounts set forth above because of
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deductions disallowed by respondent and not contested by
petitioners.
On their Form 1040, U.S. Individual Income Tax Return, for
1994, filed on or about October 16, 1995, the Haneys reported
total tax of $50,463. On their Form 1040 for 1995, filed on or
about October 15, 1996, the Haneys reported total tax of $183.
On their Form 1040 for 1996, the Haneys reported total tax
of $2,951. On the signature page of the 1996 Form 1040, Patricia
twice wrote the words “*See attached disclaimer statement”.
Attached to the Form 1040 was a “Disclaimer Statement” and
various tax protest materials claiming that the assessment and
payment of income tax is voluntary and other legalistic arguments
taken out of their original context.
On their Form 1040 for 1997, the Haneys reported total tax
due of $3,956. The return was signed by each of the Haneys, with
the word “Trustee” following his or her signature. On
Schedule C, a loss of $13,524 was claimed from “Equipment
leasing”. The return reported wages from AMC Trust in the amount
of $2,000 for J.O. and $7,000 for Patricia.
On their Forms 1040 for 1998 and 1999, the Haneys reported
zero tax liability. On their Form 1040 for 2000, filed in
September 2002, the Haneys reported zero income tax and self-
employment tax of $230. On their Form 1040 for 2001, filed in
October 2002, the Haneys reported total tax of $9,967.
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Oliver & Co. did not report the asphalt business net income
on any return for 1996 through 1999. On its Form 1041-A, U.S.
Information Return Trust Accumulation of Charitable Amounts, for
2000, dated September 25, 2002, Oliver & Co. reported income from
AMC Trust in the amount of $79,567, charitable deductions of
$73,567, and fiduciary fees of $6,000, leaving zero net income.
Oliver & Co. made no distribution to any charitable beneficiary
during the years in issue.
The Oliver & Co. Form 1041-A was filed after examination of
petitioners’ returns commenced. When Joey was contacted about
the examination of AMC Trust, he referred the revenue agent
conducting the examination to J.O. The Haneys sent to the
revenue agent a document entitled “Notice of Expatriation and
Repatriation” dated March 11, 2002, in which they purported to
disavow their citizenship in the United States and “repatriate
back into the Texas Republic”.
The Internal Revenue Service commenced a proceeding to
enforce a summons, and by order filed June 12, 2002, J.O. and
Joey were ordered to produce the records and materials requested
in the summons. On July 1, 2002, the U.S. District Court for the
Western District of Texas, San Antonio Division, filed an order
finding, among other things, that J.O. and Joey “had submitted a
series of ‘tax protestor’ type responses to the summons and had
not complied with the May 9, 2002 Order.” The Court order
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further recited that it had admonished J.O. and Joey to comply
with the applicable law and court orders and recommended that
they consult with qualified legal counsel; that J.O. and Joey
requested additional time to assemble records and have the
opportunity to consult with legal counsel; that, instead, J.O.
and Joey had filed documents that:
are the type that have been previously rejected by the
Courts as groundless, not requiring response and
sanctionable. See Lonsdale v. United States, 919 F.2d
1440, 1447-48 (10th Cir. 1990); United States v.
Montgomery, 778 F.2d 22, 225 (5th Cir. 1985); Crain v.
C.I.R., 737 F.2d 1417 (5th Cir. 1984). * * * [J.O.
and Joey] are again admonished that they will be held
to comply with applicable laws and questions concerning
their rights and obligations should be directed to
qualified legal counsel. The Court will not permit
valuable judicial resources to be wasted and government
process delayed dealing with frivolous filings.
On July 12, 2002, J.O. and Joey appeared before the revenue
agent. They made frivolous arguments and asserted that they
would not answer questions because of their Fifth Amendment
privilege. At a hearing on July 19, 2002, J.O. testified:
the activity of the trust, the documents that the
Internal Revenue Service–-various things of that sort
have been my creations, my son has followed his
father’s advice apparently to his great sorrow. I take
full responsibility for any of the documents, the
trusts. He has a limited knowledge of–-he’s read it
all, but he’s a very good worker. He manages and runs
the business. * * *
On July 26, 2002, the District Court held J.O. and Joey in
contempt of court. The District Court ordered that Joey be taken
into custody and held pending compliance with the District
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Court’s order, but the District Court stayed incarceration
pending compliance with its orders. Thereafter, records were
finally produced, and the revenue agent’s questions were answered
by then recently retained counsel.
OPINION
The issue in these cases is whether certain trusts
established by the Haneys will be respected for tax purposes.
All other issues have been abandoned by petitioners’ failure to
address them in their briefs. Rule 151(e)(2), (4); Cluck v.
Commissioner, 105 T.C. 324, 325 n.1 (1995); Petzoldt v.
Commissioner, 92 T.C. 661, 683 (1989); Money v. Commissioner, 89
T.C. 46, 48 (1987); see Vetrano v. Commissioner, T.C. Memo. 2000-
128; Levert v. Commissioner, T.C. Memo. 1989-333, affd. without
published opinion 956 F.2d 264 (5th Cir. 1992). Questions
concerning the viability of the various trusts for tax purposes
are substantially resolved based on concessions expressly made in
petitioners’ filings, as quoted below. Petitioners’ concessions
have simplified this opinion, because making sense of the
extensive and internally contradictory record without the
assistance of well-organized proposed findings of fact from
either party would be an undue burden on the Court. See Stringer
v. Commissioner, 84 T.C. 693, 705 (1985), affd. without published
opinion 789 F.2d 917 (4th Cir. 1986).
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Petitioners bear the burden of proof in these cases, and it
has not shifted under section 7491(a). Petitioners did not
present credible evidence that the trusts had economic substance,
and the credibility of the evidence that they did produce was
undermined by their implausible claims. Petitioners did not
cooperate with respondent’s examination; in fact, they obstructed
the examination by refusing to produce documents or answer
questions until J.O. and Joey were found in contempt by the
District Court. Sec. 7491(a)(2)(B).
The most implausible of petitioners’ claims is the Haneys’
assertion that the multiple trusts that they established, with
the effect of their reporting minimal tax liability on
substantial profits of the asphalt business, were not tax-
motivated. Petitioners contend that the trusts were established
for “asset protection” purposes. They have never explained,
however, how the multiple trusts gave them more protection
against potential but unnamed creditors than that provided by the
corporate form in which the asphalt business was operating from
1980 through 1996. We are not persuaded that the vague term
“asset protection” contemplates any creditors other than the U.S.
Treasury.
The Haneys reported significant income tax liability on
their 1994 return, filed in October 1995. The next year they met
with Dahlstrom. Attached to their 1996 return was a frivolous
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“disclaimer”, as to which J.O. testified: “I would assume it
came from Karl Dahlstrom”. The Haneys denied that they discussed
tax avoidance with Dahlstrom. Dahlstrom, however, had been in
the abusive trust business for many years. See, e.g., Akland v.
Commissioner, 767 F.2d 618 (9th Cir. 1985), affg. T.C. Memo.
1983-249; United States v. Dahlstrom, 713 F.2d 1423 (9th Cir.
1983); Dahlstrom v. Commissioner, T.C. Memo. 1991-264 and 1991-
265, affd. without published opinion 999 F.2d 1579 (5th Cir.
1993). The Haneys claim that they did not know of Dahlstrom’s
history. Whether they did or did not know of the reported cases,
we do not believe that Dahlstrom did not use tax avoidance as an
objective in promoting his trust schemes. In addition, the lack
of credibility in J.O.’s testimony is demonstrated by the
following colloquy:
Q [respondent’s counsel] Mr. Haney, so
Mr. Dahlstrom did not mention anything about using the
trusts would–-about the trusts providing tax savings?
A [J.O.] Not to my knowledge. Define tax
savings.
Q Sir, are you saying that he did not say it or
do you not remember him saying it?
A I don’t remember him saying it, but what-–what
do you mean, talk about? What--
Q Did he mention taxes, federal income taxes, at
all in his presentations?
A He mentioned that each trust should have an EIN
number so they could do their tax returns.
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Q Anything else?
A Not to my recollection.
Patricia claimed that she did not recall the disclaimer attached
to the 1996 return. Patricia also denied any recollection of the
documents that the Haneys signed in 2002.
J.O. attributed to other sources, including the Internet,
the frivolous documents they submitted in 2002 and their
frivolous responses in the summons enforcement proceedings.
We do not accept petitioners’ claims that the trusts were
not tax-motivated. Tax motivation alone, however, is not a
ground for disregarding the trusts. The parties have addressed
in their briefs the relevant factors, based on Markosian v.
Commissioner, 73 T.C. 1235, 1243-1244 (1980), which are:
(1) Whether the Haneys’ relationship to the asphalt business and
other assets changed when the trusts were created; (2) whether
the trusts had an independent trustee; (3) whether an economic
interest passed to other trust beneficiaries; and (4) whether the
Haneys were bound by any meaningful restrictions on the trusts’
operation. See, e.g., Sparkman v. Commissioner, T.C. Memo. 2005-
136; Edwards v. Commissioner, T.C. Memo. 2005-52; Gouveia v.
Commissioner, T.C. Memo. 2004-256. Petitioners have conceded
that none of the trusts had an independent trustee.
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The Haneys’ Relationship to the Property of the Trust
Petitioners argue in their opening brief:
It is only the economic substance of AMC Trust, and
Oliver & Company Charitable Remainder Trust, that need
be evaluated.
* * * * * * *
Prior to the creation of AMC Trust, Mr. and
Mrs. Haney, as shareholders of the Subchapter S
corporation, J&J Commercial Services, Inc., enjoyed
full and unrestricted use of all the business assets
and income produced by the operation of Asphalt
Maintenance Company.
After the creation of AMC Trust, Mr. and
Mrs. Haney continued to have full and unrestricted use
only of the assets simultaneously placed in the grantor
trusts. Their personal residence was placed in one
grantor trust, and its upkeep was paid for by Mr. and
Mrs. Haney’s personal assets and income, not by
property of AMC Trust. Their personal vehicles were
placed in another grantor trust, and again, upkeep was
paid for from personal sources, not AMC Trust.
Business machinery and equipment was placed in a
grantor trust and was leased to AMC Trust for payment.
Maintenance of the equipment was, per the terms of the
lease, the responsibility of the lessee. Land acquired
by Mrs. Haney was placed in Jopah Trust and leased to
AMC Trust for payment. In both cases, these leases
were reasonable and rational uses for property
controlled by Mr. and Mrs. Haney, but beyond the right
to receive rent, their ownership interest in the
subject property through the grantor trusts does not
imply or convey any greater control over other revenues
of Asphalt Maintenance Company or AMC Trust. [Exhibit
refs. omitted.]
On the other hand, respondent argues:
The Haneys simply operated AMC in the exact same manner
as they conducted operations as J&J. They retained
substantial control of the business activity and the
bank accounts.
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Prior to the creation of the trust arrangements,
the Haneys were grooming their son, Joey Haney, to
assume control of the family-run asphalt business.
After the creation of AMC, the Haneys were still active
in the asphalt business. Eventually, Petitioner-
husband [J.O.] retired but Petitioner-wife [Patricia]
remained active. The asphalt business retained the
same employees and operated in the same manner as prior
to the creation of the trusts.
AMC used trust units instead of J&J corporate
shares. They continued to use the same name, Asphalt
Maintenance Company of Texas, to do business using the
same assets. They reported the equipment and business
real property assets supposedly transferred to the
trusts on AMC’s financial statements. J&J and AMC used
the same equipment and real property in the asphalt
business.
We agree with respondent. The only instances cited by
petitioners of “differences” with respect to the asphalt business
are differences of form created by the trusts. Thus their
reasoning is circular. They have shown no material difference in
the manner in which the business was operated or the assets were
used before and after creation of the trusts. See Sparkman v.
Commissioner, supra; Edwards v. Commissioner, supra; Gouveia v.
Commissioner, supra; Castro v. Commissioner, T.C. Memo. 2001-115.
Transfer of Economic Interest
Petitioners’ position is that the earnings of the asphalt
business operated by AMC Trust are not taxable because they were
transferred to Oliver & Co., allegedly a “charitable remainder
trust”. This rationale is used by petitioners to explain why
neither AMC Trust nor Oliver & Co., nor any of the other trusts,
ever reported any taxable income or paid any Federal income
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taxes. In fact, however, the only funds ever transferred to
Oliver & Co. were the amounts necessary to pay back to the Haneys
“trustee fees”. In their posttrial opening brief, petitioners:
recognize that there is some doubt as to the
correctness of taking those deductions [for income of
the asphalt business not taxed because it was shown as
distributed to Oliver & Co.], since the funds they
represent remained available to AMC Trust for its
operations of Asphalt Maintenance Company, and were not
actually transferred beyond AMC’s reach. * * *
The facts found concerning Oliver & Co. establish that it was not
a bona fide charitable remainder trust. See secs. 642(c),
664(d); sec. 1.664-1(a)(4), Income Tax Regs. It was simply one
of a series of trust entities established to make taxable profits
of the asphalt business disappear. Petitioners have failed to
prove that any economic interest passed to anyone other than the
Haneys. See Markosian v. Commissioner, supra at 1244; Sparkman
v. Commissioner, supra; Edwards v. Commissioner, supra; Gouveia
v. Commissioner, supra; Castro v. Commissioner, supra.
Trust Restrictions
Our findings of fact are notably devoid of any meaningful
restrictions contained in the trust documents, because there were
no meaningful restrictions. Petitioners concede in their
pretrial memorandum: “The only affirmative restriction placed on
Petitioners’ actions by the AMC trust document is that they are
required to exercise their best judgment and discretion for the
conservation and improvement of the trust organization.” At
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trial, the Haneys agreed that they could not take the funds of
AMC Trust to Las Vegas, Nevada, and gamble them away and asserted
that they could not liquidate the assets of AMC Trust and
distribute the money to the trustees. In their posttrial opening
brief, petitioners argue: “The trustees, in essence, are
required to exercise prudent business judgment, to the benefit of
the trust organization.” Petitioners again proceed to a circular
argument that “these limitations, despite not being excessive or
burdensome, are substantial. They do constrain the discretion of
the trustees, and that fact is reflected in the behavior of the
trustees in this case”. The Haneys’ subjective beliefs as to any
prudent limitations and their behavior do not establish any
restrictions. The objective fact is that none of the Haney
family members were restricted by any provision in the trust
agreements, and they controlled all decisions concerning the
trust property. Neither in the documents nor in their conduct is
there any evidence that they were bound by any meaningful
restrictions imposed by the trusts or by the law of trusts. See
Markosian v. Commissioner, 73 T.C. at 1244; Sparkman v.
Commissioner, T.C. Memo. 2005-136; Edwards v. Commissioner, T.C.
Memo. 2005-52; Gouveia v. Commissioner, T.C. Memo. 2004-256;
Castro v. Commissioner, supra.
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Conclusion
After considering the factors set forth in our prior cases
and discussed in the briefs of the parties, we conclude that AMC
Trust, Oliver & Co., Blanco Springs, and Jopah were shams,
lacking economic substance, and are to be disregarded for Federal
income tax purposes. The net income of the asphalt business is
properly taxable to the Haneys. We need not consider
respondent’s alternative arguments that would lead to the same
result.
To reflect the foregoing and to eliminate “whipsaw”
determinations made against the trusts,
Decisions will be entered
under Rule 155.