TAX COURT OPINION

Case: McGehee Family Clinic, P.A.
Docket Number: 15646-08
Judge: Cohen
Opinion Type: memo
Filed: 09/15/2010
Pages: 16

T .C . Memo . 2010-20 2 UNITED STATES TAX COURT MCGEHEE FAMILY CLINIC, P .A ., Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t ROBERT L . PROSSER III & MARY C . PROSSER, Petitioners V . COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos . 15646-08, 15647-08 . Filed September 15, 2010 . Ira B . . Stechel , for petitioners . Brian E . Derdowski, Jr . and Brian J . Bilheimer , for respondent . MEMORANDUM OPINIO N COHEN, Judge : These consolidated .cases are before the Court on petitions for redetermination of two statutory notices of deficiency . With respect to McGehee Family Clinic, P .A . , SERVED SEP 15 201 9, 2 respondent determined a deficiency in Federal income . tax for the tax year ended March931, 2005, of $16,042 and a penalty under . section 6662A of $4,812 .47 . With'respect to Robert and Mary Prosser, respondent determined a deficiency in Federal income tax for 2004 of $17,500 and a penalty under section 6662A of $3,500 . The principal issue in these cases'is whether amounts paid by McGehee Family Clinic in connection ; with the Benistar 419 Plan Trust are deductible . Regarding . thisdissue, petitioners have ,,each signed a stipulation to be bound by the decision of th e highest court resolving Mark Curcio .and Barbara Curcio , docket No . 1768-07, Ronald D . Jelling and Lorie A .>~Jelling ,, docket No . 1769-07, Samuel H . Smith, :Jr_ and-Amy L . Smith ,,docket No .. 14822-07,For StephenMogelefsky and Roberta Mogelefsky , docket No . .14917-07 (collectively, the controlling cases ), which were consolidated for trial, briefing, and opinion . The remainin g issue in these consolidated cases . is whether petitioners are each . liable for a section 6662A accuracy-related penalty . Unless otherwise indicated, all .section references are t o the Internal Revenue Code in effect for the years in .issue. . Backgroun d All of the facts have been stipulated, and the stipulated facts are incorporated ., as our findings by this reference . ,The parties have stipulated .that_the proper venue for,an appeal of - 3 - this decision is°the Court-of Appeals for the Second Circuit . See sec . 7482(b)(2) . The relevant facts largely concern petitioners! . involvement in the,Benistar 419 Plan & Trust (Benistar Plan), which was discussed . in Curcio .v . Commissioner , T .C ." Memo . 2010-115 . Th e parties have stipulated into the record in this case the evidence and trial testimony from Curcio , with only minor additions or clarifications that apply to petitioners . We therefore incorporate by this reference .our findings in Curcio regarding the policies and mechanics of'Benistar Plan . Benistar Plan was crafted by Daniel Carpenter to be a multiple-employer welfare benefit trust under'section 419A(f)(6) providing preretirement life insurance to covered' employees . Employers enroll in Benistar Plan and make contributions to a trust account for the benefit of select employees . In return, Benistar Plan promises to-pay death benefits to those employees if they die while employed . Benistar'Plan has,advertised that enrolled employers' contributions are deductible . 'Benistar Plan uses employers''contributions to acquire one or"more life insurance policies on employees covered by the plan . We refer to these life insurance policies'as the underlying insurance policies, because they underlie each policy issued by Benistar Plan and, as a result, Benistar Plan is fully reinsured . Benistar Plan withdraws 'from ,the trust account as„necessary t o pay the premiums on the underlying policies . Petitioner McGehee Family Clinic, an .-entity .taxed as a C corporation,, enrolled in Benistar .Planin May 2001 . . McGehee ' Family Clinic°first claimed a deduction ,for a contribution t o Benistar Plan . on its return filed ,July 8,'2002 ,,, for-its tax year ended March 31, ;2002 . McGeheeFamily Clinic contributed $50',00 0 to Benistar Plan in connection with plan participation in 2004 . It claimed a deduction of, $45, 833 'relat'ing to the contribution t o Benistar Plan during the corporation's tax year ended,March'3 1 2005 . McGehee Family Clinic's return : did . not include a,Form 8886, Reportable. Transaction,Disclosure Statement, or . materiall y similar 'document . . ,in a notice "of deficiency dated March 21 , 2008, the . Internal Revenue Service (IRS) disallowed,,McGehe e Family Clinic's'deduction .of the contribution to Benistar Plan . Petitioner Robert Prosser was ashareholder of McGehe e Family Clinic at all-relevant times . The Robert and Mary Prosser's jointly filed return for 2004 . did not include a Form 8886 or'materially similar-document .-,,In a notice of deficienc y dated March 21, 2008, .the,IRS adjusted the-Prossers' .2004 income to include the $50,000 payment to,Benistar Plan from . McGehee Family Clinic . 5 - Discussio n Section 6662A was enacted as part of the American'Jobs Creation Act of 2004,, Pub . L .. 108-357 ., section 812(a)'118 Stat . 1577 . It is effective for tax years ending after October 22, 2004 . Id . sec . 812(f) ., 118 Stat . 1580 . It provides that "If a 'taxpayer has -a reportable transaction understatement for any ,taxable-year, there shall be added to the tax an amount equal to 20 percent of the amount of such understatement ." Sec . 6662A(a) . The penalty applies to any deficiency which is attributable to any listed transaction or any reportable-transaction if a significant purpose of . the transaction is the avoidance or . evasion of Federal income tax . Sec . 6662A(b)(2) . The . penalty is increased from 20 to 30 percent of the amount-of the understatement if the disclosure requirements of sectio n 6664(d)-(2)(A), requiring disclosure in accordance with the regulations prescribed under section 6011, are not met . Sec . 6662A(c) Respondent-.argues that petitioners . are liable for th e penalty because they participated. in a listed transaction . ..A -listed transaction is a transaction that is the same-as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and has identified by notice, regulation, or other form of published guidance as a listed transaction . Sec' . 6707A(c)(2) ; sec . 1 .6011- 4(h), Income Tax Regs . (incorporating by reference sectio n 1 . 6011-4T (b) ,(2) ,'. Temporary Income : Tax ,Regs ., 65 'Fed . .Reg;. 11207 (Mar . 2,, 2000)) see, Blak Invs . v . Commissioner,. 133 .T .C . ' (2009 ) (slip op :; at 23 ,, 29-32),, .,,, Respondent claims tha t Benistar.Plan is substantially similar3fto the transaction .. described in Notice 95 .-34, ; 1995-1 C .B .;, 309, and first identifie d as a listed-,transaction in' Notice 2000-15,, 2000-r1 . C .,B . 826 . ' Notice 95-34,1995-1 ; C .B . .at 3,09-310, states : . In .recent-years'a number, of promoters have offered' ; trust arrangements that they claim satisfy th e requirements for the=°10-or,-more-employer plan-exemptio n and that are used to provide benefits-'such as lif e insurance, ' disability,(cid:127) andxseverance pay benefits . Promoters of these arrangements claim that-all employe r contributions"are tax-deductible when paid, relying on , the 10-or-more-employer exemption from the section 419 , limits and on -the .fact_that=they have .enrolled at leas t 10 employers in their multiple employer trusts . These arrangements typically are invested i n variable life or universal glife insurance contracts, on,- the lives of the covered employees, but require large , employer contributions relativevto the cost .of the . amount of term insurance that would be required t o provide the death benefits under the arrangement . Th e trust owns the insurance contracts . The trus t administrator . may obtain=the'cash-to pay benefits, . other than death benefits, by such means as cashing i n or withdrawing, the cash value of the- insurance policies . Although, in some plans, benefits may appea r to be contingent on the occurrence of unanticipated future events, in reality, most participants and thei r beneficiaries .wi-ll :receive their-- , benefits .: y The trusts often=maintain separateaccounting of (cid:127) the assets attributable to-the contributions made by each subscribing employer .. Benefits are sometime s related to the amounts allocated to the employees o f the ; participant'spemployer . For .example,, severance and,,, , disability benefits maybe subject to reduction if the - 7 - - ..assets derived from an employer's contributions are' insufficient to fund,all benefits promised to that employer's .employees . In other cases, . .an employer's contributions are related to the claims experience of its employees. Thus, pursuant to formal or informal arrangements or practices, a particular employer's contributions or its employees' benefits may be determined in a way that insulates the employer to a significant extent from the experience of other subscribing employers . According to the regulations applicable to transactions entered into on or after January 1, 2001, where the taxpayer di d not report the transaction on a tax return filed on or before June 14, 2002, a transaction is substantially similar to a transaction identified as a listed transaction in publishe d guidance if the transaction is expected to obtain the same or similar types of tax benefits and is either factually similar or ,based on the same or similar tax strategy . Sec . 1 .6011 4T(b)(1)(i), (g), Temporary Income Tax Regs . , 67 Fed . Reg . 41327 , 41328 (June 18, 2002) ; see Blak Invs . v . Commissioner , supra at (slip op . at 25) . Benistar Plan was expected to obtain the same type of tax benefits as listed in Notice 95-34, supra . The tax benefi t listed in Notice 95-34, supra , is the deduction of contribution s made to .the trust arrangement described within . Benistar Pla n advertised that contributions to the plan were tax deductible . The benefits of enrollment listed in the packet sent to newl y enrolled employers included "virtually unlimited deductions" . Benistar Plan was also factually similar to the plan liste d in Notice 95-34, su ra ,'at all relevant times . Benistar Plan was trust arrangement that claimed : to satisfy the requirements fo r the 10-or-more-"employers-plan exemption under section 419A(f)(6 ) and offered life-insurance .- Although the record does not include the underlying policies-the Prossers selected .for Benistar .Plan to purchase, we note that the policies selected by the taxpayer s in Curcio V . Commissioner , T .C . Memo .~2010-115, wer e overwhelmingly variable or universal life policies . As we noted in Curcio , the policies required large contributions relative to the cost of the amount of term insurance that would be required to provide . the death benefits under the arrangement . Benistar Plan owns the insurance contracts . Our holding in Curcio that contributions to Benistar Plan were not .deductible under section 162(a) was predicated upon our conclusion that the Benistar Plan participants in those cases-ha d the right to receive the value reflected in the underlying insurance policies purchased by .Benistar Plan'despite the fact that the payment of benefits by Benistar Plan seemed to be contingent upon an unanticipated event (the death of the insure d while employed) . As Carpenter acknowledged, as long as plan participants were willing to abide by Benistar Plan' s distribution policies, there was no reason ever to forfeit a policy to the plan . In fact, in estimating life insurance rates, .- g _ the taxpayers' expert in Curcio assumed that : there would be no forfeitures, . even though he admitted that-an insurance company, would generally assume°a reasonable ; rate of policy-lapse . Petitioners argue that Benistar .Plan has over $20'million in forfeitures, a reflection of its rigorous enforcement of 'its ;forfeiture policies . However,- as we noted in Curcio , it is unclear whether the $20 million figure-includes amounts due to Benistar Plan from the purported . loans . issued by the plan to withdrawing employees"after mid-2005 . Petitioners have failed to clarify how the $20 million figure was calculated, so we cannot .rely upon it'to counter the evidence that most participants in° Benistar Plan and their beneficiaries receive their benefits despite the alleged contingency of those benefits on-the, occurrence of an unanticipated event . . Unlike the plan in Notice 95-34, supra , Benistar Plan=does ,not reduce benefits if the assets derived from an employer's ,contributions are insufficient 'to fund all of the . benefits' promised to that employer's employees . However, Benistar Plan does . maintain separate accounting of the :'assets attributable to contributions made by each subscribing employer in an internal spreadsheet . Benistar Plan permits employers to make contributions larger' those necessary to maintain the policy ; and :assuming Benistar Plan has sufficient assets to cover current liabilities,-the contribution is'used .only for .the policy to 10 - which it is allocated Because .Benstar Plan obtains similar types of tax benefits and is "factually, :similar, to the listed : transaction in Notice'95-34,, ., . supra , : we ..conclude that'Benistar ' Plan is a listed, transaction under section 6707A(c)(2) . . Under section 7491(c)1 the Commissioner bears the burden o f production .with regard , to ; penalties and must come forward wit h sufficient'evidence' .indicating that itis'appropriate .to impose penalties . See; Higbee v . Commissioner , 116 T .'C . 438, 446,(2001) . The parties agree . that McGehee Family Clinic deducted a n amount, related to, a contribution =to Benistar .. Plan during its taxable-year ended March 31, 2005 .{ McGehee Family, Clinic's deduction of itscontribution to Benistar Plan was an,-improper tax treatment of .an'item attributable to ' a listed transaction . See sec . 6662A(b) . Respondent has .therefore, met the ; burden of ., showing°that :it ..is appropriate to impose-_a penalty . .on McGehee Family Clinic under section 6662A .- The parties do not dispute-that the Prosse'rs were covere d employees who benefited from,McGehee Family .Clinic',s .contribution to Benistar Plan . Nor .do they dispute that Robert Prosser ;was a ., shareholder in McGehee Family Clinic . .- Thus the amount, of McGehe e Family Clinic',s, contribution.>to Benistar Plan should ;have been included,in-the Prossers ,income . -See HJ Builders, Inc . v . ; Commissioner , T .C . Memo . 2006.-278, (payments by a ;company fora' .. car used personally by a shareholder' :sawife are constructive . (cid:127) - 11 - dividends to the shareholder) ; Alexander Shokai, Inc .~v3. Commissioner , T .,C . Memo . 1992-41 (gratuitous payments by a company to a shareholder's wife are constructive dividends .to the shareholder), affd . 34F .3d 1480 .(9th Cir . 1994') ;. Broad v. . Commissioner ,(cid:127)T .C . Memo . 1990-317 (the distribution of corporate . funds to the childrenvof controlling shareholders are deemed to be constructive dividends to the controlling shareholders absent a showing that the payments were made for bona'fide business ,purposes and were not due to family considerations) ; see also'- 58th St . , Plaza Theatre Inc . v . Commissioner , 195, F .2d 724, 725 726 (2d (cid:127) Cir 1952), affg . 16 T .C . 469 (1951) . The (cid:127)Prossers' failure=to include the amount of the-contribution in income was an improper tax treatment of-an item attributableto a(cid:127)listed transaction . See sec . 6662A(b) . Respondent has .therefore met,' the burden of showing that'it is appropriate to impose . a penalt y on the .Prossers=under section 6662A . Respondent,claims that McGehee Family Clinic is subject t o the increased 30-percent penalty . McGehee Family-Clinic file d its Federal income tax return for the taxable-year .'ended Marc h 31, 2005 ,"but did not attach a disclosure statement described i n section 1- .6011-4T(c),° Temporary Income Tax Regs ., .67 Fed . Reg . 41327 (June 18, 2002),, or any materially similar document , indicating its participation in Benistar<Plan . McGehee Family Clinic did not disclose its participation in Benistar Plan in accordance with section 66664 (d),,(2) (A) and it As -liable for -th e increased..30-percent penalty ., See sec . 6662A(c)' . .„" Section (cid:127) :6664 (d) provides .that . under .certain 'circumstances ' a : taxpayer may avoid section .6662A penalties if there was h reasonable cause for ;,the ;taxpayer.',s treatment . of the reportabl e or listed ,transaction and the 'taxpayer acted . irn agbod faith . However,, this exception applies only ifh :the .transaction was disclosed in accordance with the regulations prescribed=unde r section, 6011 ._ 4 .Sec . , 6664 (d). (2) (A) .-- Assuming the Commissioner, ha s met'the burden of productionµuregarding the penalty, the taxpayer- bears the .burden of proving the penalty is inappropriate, because the taxpayer acted .wi .th reasonable cause . and,-in 'good faith . : Se e Williams v . ,Commissioner , 123 T .C . 144,, .153 (2004) ;=- Higbee, .v . . Commissioner , supra at,446-447 . -Although petitioners . claim that they 'clearly disclosed their tax deduction on the appropriate line-and in statements .accompanying their . t [returns]' ." , there is, no evidencex that . ' . petitioners properly :disclosed their, . involvementin Benistar Plan as required- under . .section 6664 (d) ('2) ( .A)- .. ., Because. petitioners have not .introduced cr.edible'evidence .with respect . to this issue , they are . not entitled~to shift the burden .of proof . See sec . 7491(a) .~ We .therefore-conclude that petitioners are not entitle d to the' exception, under section 6664 (d) ., ._ 13 - Petitioners argue-that "The assessment of [section 6662A] ,penalties-against Petitioners raises due : process issues that have been resolved in Petitioners' favor in at . least a half-dozen Supreme Court decisions that are on point with these cases"'. As .petitioners note in their brief to fall within the protection of the Due Process Clause, petitioners must . show that the .assessment of penalties in .these cases-is .so harsh and oppressive as to transgress the constitutional' .limitation . See DeMartino v . Commissioner , 862 F .2d 400, 408-409 (2d Cir . 1988),,affg . 88(cid:127)T .C . -583 (1987) ; see also United States v . Carlton ,, 512 .U .S . 26, 30-31 (1994) ; Welch v . .Henry ; 305 U .S . 134,,147:(1,938) ; Blodgett v . . Holden , .275 U .S . 142, 147 (1927) . -Petitioners argue tha t the viblation'of due process . as it affects Petitioners in these cases is that there was no fair warning or 'foreseeability' on the part of Petitioners that '.a contribution to .a welfare benefit plan in 2004 would render them liable for a . penalty in 2008 for a failure to fill out a form that was unknown to them in 2004 when the transaction was completed or in 2005 when the form was to be filed with the individual's personal and corporate tax return . , Petitioners appear to be arguing that section 6662A is ,unconstitutionally harsh and oppressive because it is being applied retroactively and without fair warning . Section 6662A is not' retroactive, nor is it being applied retroactively ; it was enacted October 22, 2004, and is applicable for tax years ended after- that date . .. The tax years currently at - 14 - issue, ended March 31, 2005, for. McGehee Family°'Clinic'an d December 31, 2004, <for, the Prossers Thus, at the time that .petitioners were deciding, on the tax treatment-'of-,contributions to -Benistar Plan, for .the {years atr :issue, section 666.2A had already been--enacted . Petitioners may, consistent with the Due Process Clause,' be 'l-iable for .a .penalty on a= deficiency"stemmin g . from a transaction entered intolong,before the-penal ty was-, enacted, . ; See Patin v.. Commissioner , 88 T .C . 1086, 1127 n .13 4 (1987) (increased interest charged on deficiencies fro m substantial underpayments attributable ;:to,tax-motivated transactions that occurred years .before,the interest rat e increase was enacted is not unconstitutional),,affd . withou t published opinion 865 F .2d 1264 (5t h published opinion sub nom . . Hatheway v . Commissioner , 856 F,..2d 18 6 (4th Cir . 1988) .., affd . ;sub nom . Skeen v . Commissioner , 864 F .2d 93 (9th Cir ._ 1989), affd . (cid:127) sub' .nom . Gomberg v-. 'Commissioner , . 86 8 F .2d 865: (6th Cir . 1989 .) ; Fl DeMartino v . . Commissioner , 88 °T .,C . r :p 587-588 (same) ; Solowiejczvk v . Commiss,ioner,,85 T .C . 552,,555- 556 (1985) (same) :, affd . °without publishedz opinion 795' F .:2d 1005 . (2d ..Cir .; ,1986) . Petitioners' ignorance , of- the law ss no excuse for their failure to comply with it .- See United States v .(cid:127)Intl . Minerals & Chem .. Corp . 402 U . :S .' .558, :-563 ; (1971) . ("The principl e that ignorance of the law is no defenseapplies whether the .-law be.a statute or a duly, promulgated and published regulation .") ;° s - 15 (cid:127) Barlow v . United States , 32'US .. 404,, 41-1 :(1833) (ignoranc e the law is noexcuse in either ; civil, or criminal cases) ; .,Dezaio v . Port Auth .: , 205 F .-3d 62, .64 (2d - Cir . . 2000) (ignorance of the law is no excuse for missing the deadline to file a complaint for discrimination) ; . Pagnucco v .. Pan Am . World Airways, Inc . (In re Air Disaster at Lockerbie .Scot on Dec . 21, 1988) , 37 .F .3d .804, =818 (2d Cir . 1994) (ignorance of the law is no excuse in civil or criminal cases ) The cases petitioners cite are distinguishable in that they all discuss taxing . statutes applied . retroactively .- .See Untermyer v .- Anderson , 276 U .S . 44 .0'(1928) .(holding that the-retroactive provision of the -novel gift ,tax of the Revenue Act of 1924 was invalid as applied to gifts antedating the act) ; Blodgett v . "Holden ,.- supra (four Justices thought that the retroactive application of a gift tax violates the Due Process Clause) ; Nichols v . Coolidge , 274 U .S .,,53l, 543 (1927), (holding that "the 'statute here under consideration, in so-far as it requires that there shall be included in the gross-estate!the(cid:127)value of property transferred by a decedent prior to its passage merely because the ,conveyance was intended to take effect in possession or enjoyment at or after his-death, is arbitrary, capricious and amounts to 'confiscation") . Milliken v . United States , 283 U .S . 15, 20-21- (1931), cited by petitioners in support of their argument , succinctly highlights the distinction between that case and - 16 - petitioners' : "This -court, has .held the taxation ofgifts made, _ ; and completely vested,beyond recall ., before the passage of any, statute taxing them-,,,to be-.-so palpably, :arbitrary and unreasonable as to infringe the-due process clause . " .Petitioners complain that"since Respondent is seeking :. to explain now why he has the right ._to require -of Petitioners that they file a Form 8886in 2005 .for the 2004 year or face a } penalty, where was Respondent's .warning in 2005,,,2006, or 2007 that, the= Benistar 6419 . Plan was-'substantially similar,' to Notice ; ,95-34?" Respondent is,not required to . send petitioners personalized not-ices .of the'applicability,of a penalty . Such a . requirement would . beadministratively impossible,-and it~,run s counter to the definition of'listed transactions, which includ e transactions substantially similar to those identifie d n published guidance . See sec . 6707A(c) .(2 In reaching our decision, we have considered all arguments, made by the parties . To the extent.not mentioned or addressed,,- they are„,irrelevant or ,without merit' . To await .final, decisions under section 7481 in the controlling cases,- An appropriate order wil l be issued .