Schulz v. Commissioner

This case was a consolidation of several similarly situated cases. La Verne Schulz (plaintiff) was a dairy farmer and real-estate broker who created a trust in 1972. La Verne and his wife, Barbara, transferred all of their property into the trust—from the farming equipment to the right to Barbara’s wage payments from the county courthouse to the family’s furniture. The trust was divided 50% to Barbara, 15% to each of Barbara and La Verne’s three children, and 5% to La Verne. The initial trustees were La Verne, Barbara, and the wife of the Schulz’s bookkeeper. The trust was to last for 25 years and be renewable for another 25 years, with final distribution to the beneficiaries. Most actions of the trust could be achieved by a majority of trustees, but early termination of the trust required unanimous consent. La Verne was paid a salary by the trust for running his dairy farm and real-estate business, the income from which La Verne reported on his tax return. No distributions were made, and the trust paid income tax on its accumulations less its expenses of administration. In 1972, the trust had an income of $9,321 and expenses of $4,930. In 1973, the income was $25,461, and the expenses were $11,448. The expenses included life-insurance premiums, upkeep on the family car, healthcare expenses for the trustees, and the cost of a home maintained for the convenience of La Verne’s employer, the Schulz Family Trust. Another family, the Whites, used a similar arrangement. The trust was divided 20% to Mrs. White, 14% to each of five White children, and 10% to the Russell White Educational Fund. Russell White and his wife were trustees, along with her brother, who immediately resigned and was never replaced. Similarly, the Whites claimed administrative expenses, including healthcare expenses, the lease of a family car, and other matters. The government (defendant) did not care for this charade and found a deficiency in the reported income tax for the respective earners between the two families. The Schulz and White families—and others like them—filed suit in tax court, and, after a ruling for the government, they appealed to the appellate court.