Opinion ID: 4320610
Heading Depth: 3
Heading Rank: 3

Heading: The Machaceks’ Argument

Text: The thrust of the Machaceks’ argument is that the economic benefits should be treated as a distribution of property by an S corporation to its shareholder. The Machaceks’ argument appears to proceed in four main steps, although their briefs do not present these steps in clear succession. At the first step, the Machaceks argue that notwithstanding that the economic benefits here flowed from a compensatory split-dollar arrangement, the regulations require that the economic benefits “be treated as a ‘distribution of property’ from the corporate-owner (Machacek, Inc.) to the non-owner (Mr. Machacek).” (Appellants’ Br. at 17.) This step of the argument relies on 26 C.F.R. § 1.301-1(q)(1)(i), which states that the provision of economic benefits “by a corporation to its shareholder pursuant to a split-dollar life insurance arrangement . . . is treated as a distribution of property.” Neither the Machaceks nor the Commissioner addressed this regulation before the Tax Court, and the Tax Court made no mention of this regulation. At the second step, the Machaceks point to the fact that “distributions of property” to a shareholder are ordinarily governed by 26 U.S.C. § 301(c). See 26 U.S.C. § 301(a) (“[A] distribution of property . . . made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in [§301(c)].”). At the third step, the Machaceks argue that Subchapter S—rather than § 301(c)—governs the treatment of the distribution here because Machacek, Inc. is an S corporation. See 26 U.S.C. § 1368(a) (“distribution of property made by an S corporation with respect to its stock to which (but for this subsection) section 301(c) would apply shall be treated in the manner provided” by Subchapter S). At the fourth step, the Machaceks argue that Subchapter S mandates that any shareholder distribution “taxable under the Subchapter S provisions . . . would escape taxation under the split-dollar regulations.” (Appellants’ Br. at 17.) No. 17-1131 Machacek, et al. v. Commissioner Page 8 The Machaceks also state that the “split-dollar regulations are interpretative rather than legislative” and argue that the regulations “do not carry sufficient weight to overcome Congress’ unambiguous standards expressed in S corporation statutes.” (Appellants’ Br. at 14.) In their reply brief, the Machaceks again state that “the Subchapter S provisions relating to avoiding the double taxation of dividends override and control the split-dollar regulations.” (Reply at 2.) Although the Machaceks appear to argue that statutes must trump regulations, they do not pursue this argument any further. In fact, the linchpin of their argument is that 26 C.F.R. § 1.301- 1(q)(1)—a regulation—requires that the economic benefits be treated as distributions of property.