Opinion
20894-19 6791-20 10830-20 17749-21 17771-21
09-25-2023
NOEL M. PARDUCCI & KENNETH L. PARDUCCI, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch, Judge
Pending before the Court is the Commissioner's Motion for Partial Summary Judgment in which he asks the Court to conclude that under the grantor trust rules, Crater Lake Trust's income and deductions are attributable to the Hoyals and should be reported on their tax returns for 2012 and 2013 (years in issue).
The income of a trust is attributable to a grantor if the grantor is treated as the owner of any portion of the trust. A grantor is treated as the owner of a trust to the extent that the grantor has the power of disposition over trust income or corpus without the approval or consent of an adverse party.
This Court may grant summary judgment only when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Because there is a material fact dispute as to whether there was an adverse party that had approval power over the disposition of Crater Lake Trust's income and corpus, we must deny the Commissioner's Motion for Partial Summary Judgment.
BACKGROUND
Jeffrey and Lori Hoyal used multiple entities to conduct business and earn income. One of those entities included Crater Lake Trust, an irrevocable trust settled by the Hoyals in 2005. During the years in issue, Crater Lake Trust's trustee was Mr. Hoyal, and its beneficiary was Dawna Hoyal, Mr. Hoyal's mother.
The Commissioner conducted an examination of the Hoyals and Crater Lake Trust for the years in issue. He determined that the items reported on Crater Lake Trust's tax returns were actually taxable to the Hoyals based on the application of the grantor trust rules under section 671 et seq., the assignment of income doctrine, and sham trust precedent. Accordingly, on March 20, 2020, Notices of Deficiency were issued to the Hoyals and Crater Lake Trust.
On July 12, 2023, the Commissioner filed a Motion for Partial Summary Judgment, asking the Court to conclude that during the years in issue the Hoyals were owners of Crater Lake Trust pursuant to section 674, and therefore the income of the trust, in addition to substantiated deductions, should be reported on their individual tax returns. The Hoyals and Crater Lake Trust object to this motion.
DISCUSSION
The sole issue we must determine is whether the Hoyals are considered owners of Crater Lake Trust under section 674. However, issues of material fact preclude us from deciding this issue.
Summary Judgment Standard
We may grant summary judgment when there is no genuine dispute as to any 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), aff 'd, 17 F.3d 965 (7th Cir. 1994). The moving party bears the burden of showing that there is no genuine dispute as to any material fact. Sundstrand Corp., 98 T.C. at 520. When a motion for summary judgment is properly made and supported, an opposing party may not rest on mere allegations or denials. Rule 121(d). Rather, the party's response, by affidavits or declarations, or as otherwise provided in Rule 121, must set forth specific facts showing there is a genuine factual dispute for trial. Id. In deciding whether to grant summary judgment, we view the facts and make inferences in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520.
Grantor Trust Rules
Section 671 provides that if a grantor or other person is treated as the owner of any portion of a trust then:
there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual.
A grantor or other person will be treated as the owner of all or a portion of a trust if any one of the circumstances enumerated in sections 673 through 678 is satisfied. Treas. Reg. § 1.671-1(a). For purposes of this Order, we will focus on the circumstance listed in section 674.
Section 674 provides,
The grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.
I.R.C. § 674(a); see also Treas. Reg. § 1.674(a)-1(a). An adverse party is defined as "any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust." I.R.C. § 672(a). However, there are exceptions to the general rule of section 674(a). Under section 674(b), a grantor will not be considered the owner of a trust if the grantor exercises any of the powers described in the subsection.
Parties' Arguments
The Commissioner argues that the Hoyals are owners of Crater Lake Trust by operation of sections 671 and 674 because Mr. Hoyal "had the powers to liberally dispose of both trust corpus and income in his absolute discretion." He relies on articles of the trust agreement as support. Specifically, Articles 9.1, 9.4, and 15.2. The Commissioner also argues that none of the exceptions in section 674(b) apply to exclude Crater Lake Trust's income from being attributable to the Hoyals.
The Hoyals and Crater Lake Trust disagree. They argue that the Commissioner's motion should be denied because there are genuine issues of material fact. They contend that there are four genuine issues of material fact which include: (1) whether Dawna Hoyal is an "adverse party" under section 672(a); (2) whether Dawna Hoyal provided "approval or consent" under section 674(a); (3) whether Mr. Hoyal parted with complete dominion and control of Crater Lake Trust's property or income; and (4) whether Crater Lake Trust had more than one beneficiary during the years in issue. Alternatively, they argue that, to the extent that we decide that there are no genuine issues of material fact, Mr. Hoyal did not have absolute discretion to dispose of Crater Lake Trust's income and corpus. Therefore, they argue, the Hoyals are not owners of Crater Lake Trust pursuant to section 674.
Analysis
The principle of substance over form is particularly applicable when applying the grantor trust rules considering how trusts are easily susceptible to manipulation. See Lazarus v. Commissioner, 58 T.C. 854, 864 (1972), aff 'd, 513 F.2d 824 (9th Cir. 1975). Therefore, we are not confined to Crater Lake Trust's trust agreement to determine whether section 674 is satisfied. Under section 674, a grantor will be considered the owner of a trust if the grantor has the power to dispose of the beneficial enjoyment of trust income or corpus without approval or consent from an adverse party.
The Hoyals and Crater Lake Trust argue that Dawna Hoyal is an adverse party that had approval power and used that power. They contend that she is an adverse party because she was the beneficiary of Crater Lake Trust during the years in issue. And they contend that she had approval power because she approved all major decisions about Crater Lake Trust's investments and sale of property, and she reviewed and signed its tax returns. The Hoyals and Crater Lake Trust rely on the deposition of Dawna Hoyal taken on May 24, 2023, and the deposition of Jeffrey Hoyal taken on June 15, 2023, as support for their argument that Dawna Hoyal had approval power.
Whether Dawna Hoyal was an adverse party that approved or consented to Mr. Hoyal's decisions relating to the disposition of Crater Lake Trust's income or corpus is material to determining whether section 674 is met. Focusing primarily on what was provided in the articles of the trust agreement, the Commissioner fails to address this issue as it relates to Dawna Hoyal in his motion. Because genuine issues of fact remain, we cannot hold on summary judgment that the Hoyals are the owners of Crater Lake Trust pursuant to section 674. These issues of material fact preclude us from granting summary judgment, and it is
ORDERED that the Commissioner's Motion for Partial Summary Judgment filed July 12, 2023, is denied.