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IN THE OREGON TAX COURT
MAGISTRATE DIVISION

Robert A. LUND
and Colleen L. Lund,

Plaintiffs,
v.
DEPARTMENT OF REVENUE,
Defendant.

(TC-MD 011224F)
Plaintiffs appealed the assessment of additional taxes for tax years 1994, 1995, and 1996, which resulted from the issuance of revised Internal Revenue Service audit reports. Plaintiffs disputed that Defendant was entitled to rely upon the audit reports. If that reliance was proper, Plaintiffs asserted that they were not prevented from relitigating their tax liability in the Oregon Tax Court even though the issue was previously litigated before the United States Tax Court. The court held that Defendant's reliance on the audit reports was proper. The court also held that Plaintiffs were prevented by the doctrine of issue preclusion from relitigating their tax liability.

Income Taxation - Statutes - Text and Context
1. The Department of Revenue may determine deficiencies of tax through examination, the auditing of returns or reports, or through the use of information received in any other manner. ORS 305.265(2).

Taxation - Issue Preclusion - Definition
2. Issue preclusion arises in a subsequent proceeding when an issue of ultimate fact has been determined by a valid and final determination in a prior proceeding.

Taxation - Issue Preclusion - Definition - Elements
3. In order for issue preclusion to apply, five elements must be met: (1) the issue was identical in the two proceedings; (2) the issue was actually litigated and essential to a final decision on the merits in a prior proceeding; (3) the party sought to be precluded has had a full and fair opportunity to be heard on the issue; (4) the party sought to be precluded was a party or was in privity with a party to the prior proceeding; and (5) the prior proceeding was of a type to which the court will give preclusive effect.

Taxation - Issue Preclusion
4. If the five elements are met, issue preclusion may apply even though two different governments were
involved.
Submitted on Defendant's Motion For Summary Judgment.

Jerry Bronner, Assistant Attorney General, Department of Justice, Salem, filed the motion for Defendant.
Robert A. Lund and Colleen L. Lund, Plaintiffs, filed the response pro se.

Decision for Defendant rendered January 14, 2004.
SALLY L. KIMSEY, Magistrate.
This matter is before the court on Defendant's Motion For Summary Judgment. At issue are Notices of Assessment for tax years 1994, 1995, and 1996.
I. STATEMENT OF FACTS
Plaintiffs first came to the attention of the Internal Revenue Service for the tax years at issue here. The Internal Revenue Service issued its audit report in October 1998, determining that Plaintiffs operated a trust without economic substance, also known as a sham trust. Accordingly, it determined that income allegedly earned by the trust for tax years 1994, 1995, and 1996 should instead be attributed to Plaintiffs. Plaintiffs appealed to the United States Tax Court where they were represented by counsel. In sustaining the Internal Revenue Services' determination that the trust lacked economic substance, the court examined the following four factors:
"(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
honored restrictions imposed by the trust or by the law of trusts. See Markosian v.
Commissioner, [73 TC 1235,] 1243-1245 (1980)."
Lund v. Commissioner, 80 TCM (CCH) 599, 602 (2000).
In determining that Plaintiffs' relationship to their business did not differ materially after the business was transferred to the trust, the Lund court stated that "[w]e are incredulous that petitioner would have transferred his 100-percent ownership interest in [his business], which petitioner believed to be worth $1 to $2 million, to a foreign corporation in exchange for no stated consideration and with nothing more than an unsecured employment relationship." Id. As to the second factor, the court found that the trustee "performed no meaningful work" and thus was not truly independent. Id. The court also found that the trust beneficiaries "received nothing more than a token payment for their participation or complicity in the trust scheme." Id. at 602-03. Relating to the fourth factor, the court stated that "[t]he evidence also establishes that petitioner, in his continued management of [his business], was not bound or restricted by the terms of the * * * trust," noting that "[p]etitioner appears to have had essentially unrestricted use of the property purportedly transferred to [the trust]." Id. at 603.
Based on its analysis of the four factors, the court concluded that "[t]he only recognizable purpose for the formation of [the trust] was tax avoidance. * * * [The trust] lacked economic substance and * * * the net income of [the trust] is taxable to petitioner." Id. The court also concluded that Plaintiffs were subject to an accuracy-related penalty of 20 percent because the trust was of a type commonly known to be questionable and Plaintiffs did not make a "reasonable inquiry as to the legality of the proposal," such as consulting an accountant or attorney. Id. On appeal, the United States Court of Appeals for the Ninth Circuit affirmed the United States Tax Court, holding "the Tax Court's determination that [the trust] is a sham trust is more than well supported and by no stretch of the imagination clearly erroneous." Lund v.
Commissioner, 2002-2 US Tax Cas

Download TCMD011224F.pdf

Oregon Law