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estate rental business was profitable, and the trust declared
distributions each year. From 1994 to 1998, the trust allegedly
distributed more than $294,000 to the Brookes Group with respect
to its purported ownership of 90 units of beneficial interest in
the Pago Trust. Distributions to the Brookes Group were made via
wire transfer to the Century Trust Company’s overseas bank
account. Because the Pago Trust distributed all of its income
each year and claimed a corresponding income distribution
deduction for those amounts, it never reported any taxable income
or paid any taxes.
The Schedules K-1, Beneficiary’s Share of Income,
Deductions, Credits, etc., attached to the Pago Trust’s Forms
1041, listed petitioner, Mrs. Gouveia, and the Brookes Group as
the beneficiaries of the Pago Trust. According to the Schedules
K-1, the Gouveias received the remaining 10 percent of the Pago
Trust’s distributions.
C. Examination of the Pago Trust’s 1998 Tax Return
On its Form 1041 for 1998, the Pago Trust reported income
and expenses allocable to the Prado Road property on Schedule E,
Supplemental Income and Loss. The trust claimed deductions for
interest, taxes, fiduciary fees, trust manager fees, and income
distributions.
On June 6, 2001, Mr. Norton executed a Form 56, Notice
Concerning Fiduciary Relationship, and a Form 2848, Power of
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