Court Opinion

ID: 3185301
Source: CourtListenerOpinion
Date Created: 2016-03-14 21:07:54.360703+00
Date Added: 2024-06-11T12:17:50.353654
License: Public Domain

In the

     United States Court of Appeals
                   For the Seventh Circuit
                       ____________________
No. 15-2441
VEE’S MARKETING, INC.,
                                                    Plaintiff-Appellant,

                                    v.

UNITED STATES OF AMERICA,
                                                    Defendant-Appellee.
                       ____________________

          Appeal from the United States District Court for the
                    Western District of Wisconsin.
           No. 3:13-cv-00481-bbc— Barbara B. Crabb, Judge.
                       ____________________

     ARGUED JANUARY 6, 2016— DECIDED MARCH 14, 2016
                 ____________________

    Before POSNER and WILLIAMS, Circuit Judges, and
PALLMEYER, District Judge.*
     POSNER, Circuit Judge. The plaintiff, a broker of fresh on-
ions (see “Vee’s Marketing, Inc.,” http://veesmarketing.com/
(visited March 14, 2016, as were the other websites cited in
this opinion)), is a Subchapter S corporation wholly owned

*Hon. Rebecca R. Pallmeyer of the Northern District of Illinois, sitting by
designation.
2                                                   No. 15-2441

by Scott Vee. The corporation’s income is therefore reported
on Mr. Vee’s own tax returns. Since he effectively is the cor-
poration, we’ll call the plaintiff Vee rather than Vee’s Mar-
keting.
     Vee appeals from the dismissal of his suit for a refund of
penalties that the Internal Revenue Service had assessed be-
cause he took deductions for contributions to a welfare bene-
fit plan from 2004 through 2007 but didn’t file a report (Form
8886, Reportable Transaction Disclosure Statement) with the
Internal Revenue Service disclosing his participation in the
plan. The IRS requires such disclosure because it deemed
IRS Notice 95-34 to require a taxpayer to report his participa-
tion in this type of plan. The IRS assessed and collected from
Vee a penalty of $10,000 a year for each of the four years in
which he’d failed to file the report, for a total of $40,000. Vee
sues for the return of this money. See 26 U.S.C. §§ 6532(a),
7422(a). At the conclusion of a bench trial the district judge
ruled for the government.
    In a separate suit, pending in the Tax Court, the gov-
ernment is arguing that the deductions that Vee took for his
contributions to the welfare benefit plan were improper. But
that issue is not presented by the present suit, which is lim-
ited to the disclosure issue.
     Vee was required to file Form 8886 if he participated in
what is called a “listed transaction,” defined as a transaction
identical or at least substantially similar to a transaction that
the Internal Revenue Service has labeled a listed transaction
in published guidance to taxpayers, meaning a transaction
intended to avoid federal income tax liability unlawfully.
See 26 U.S.C. § 6707A; 26 C.F.R. §§ 1.6011-4(a), (b)(2),
(c)(3)(i)(A), (d); IRS Notice 2000-15, 2000-1 C.B. 826.
No. 15-2441                                                   3

     A company called CJA and Associates (we’ll call it CJA)
advertises that it “specializes in the design and marketing of
innovative insurance products and employee benefit plans
for the small business and estate planning markets.” CJA &
Associates, www.cjamarketing.com/. One of the company’s
products was an employee benefit plan called the “CJA Af-
filiated Employers Health & Welfare Trust,” also known as
the “Prepare Plan.” See CJA & Associates, “Prepare Plan,”
https://cjamarketing.com/prepare_plan.html. We’ll just call it
the plan. CJA marketed it as a “10 or more employer plan”
that qualifies for favorable tax treatment. See Thomas J.
Handler, “Multiple Employer Welfare Benefit Plans Have
Advantages for Employees and Executives,” 3 J. Taxation of
Employee Benefits, May/June 1995, p. 10. Contributions to
such a plan are deductible from federal income tax unless—
and this brings us to the crux of the case—the plan “main-
tains experience-rating arrangements with respect to indi-
vidual employers.” 26 U.S.C. § 419A(f)(6).
     Experience rating in this context means that rather than
pooling the risks borne and contributions made by all the
employees of the different employer members of the plan in
determining benefits, plan benefits are determined separate-
ly for each employer in accordance with that employer’s
contributions to the plan. 26 C.F.R. §§ 1.419A(f)(6)-1(b)(1),
(d)(3). If an employer’s contributions go to purchase life in-
surance policies that accumulate cash value because the con-
tributions are invested, the contributions are not tax deduct-
ible, id. § 1.419A(f)(6)-1(f), Example 6, because such a plan is
mainly an investment vehicle rather than an insurance poli-
cy. See “10 or More Employer Plans,” 68 Fed. Reg. 42254,
42254–56 (July 17, 2003).
4                                                  No. 15-2441

     CJA’s marketing materials describe contributions to the
plan sold to Vee as intended to be used either to finance pre-
and post-retirement life insurance benefits—that is, provide
money to the insured’s beneficiaries—or to provide retire-
ment medical benefits to the insured. Vee’s plan document
contained no provision for medical benefits, however, and
was oriented less to funding death benefits than to provid-
ing cash for him or his beneficiaries to use as they pleased.
He deducted the contributions from his taxable income, and
that’s where Notice 95-34 bit. The Internal Revenue Service
contends that Vee’s plan is a “listed transaction” (the term
does not appear in Notice 95-34, but a subsequent Notice,
2000-15, states that the transaction described in Notice 95-34
is indeed a listed transaction), so classified because it in-
volves plan contributions that exceed the cost of the term life
insurance (one-year insurance that yields proceeds only if
the employee dies during that year, and that has no cash
value), which is all that the contributions buy. The excess of
contributions over expense leaves the plan administrator
with a surplus with which to provide other benefits to the
plan’s beneficiaries.
     And like the transaction described in Notice 95-34, Vee’s
plan is experience rated, meaning as we said that the em-
ployer’s contributions are allocated to his own employees.
This feature too is inconsistent with the premise of a 10 or
more employers benefit plan that contributions and risks are
to be pooled. In effect though not in name Vee’s plan is what
is called a “universal life insurance contract.” Such a contract
provides both current life insurance and a savings feature.
Vee’s contribution to his CJA plan in its first year was
$165,000, but the cost of the term life insurance bought with
that money was only $5,400, the difference (minus some fees
No. 15-2441                                                   5

paid to CJA and to the insurance company maintaining the
account) being placed in an “accumulation account” (also
referred to as a “reserve account”). The account earns inter-
est for and is the property of the employee-contributor—
Vee.
      When later Vee strategically terminated his participation
in the plan, the plan used $147,000 from the reserve account
to buy a paid-up life insurance policy for Vee with a face
value of $400,000. That was the amount payable upon Vee’s
death to his beneficiaries, but it wasn’t all that the reserve
account could be used for. CJA told its customers that the
paid-up policy could be sold, and it even helped find buyers.
As explained in Ohio National Life Assurance Corp. v. Davis,
803 F.3d 904, 908 (7th Cir. 2015), it is lawful in many states
(including Vee’s state, Wisconsin, although generally not un-
til five years after the issuance of the policy, see Wis. Stat.
§ 632.69(12)) to purchase the beneficial interest in an existing
policy on the life of the insured. Vee thus could if he wanted
sell the beneficial interest in his post-retirement life insur-
ance policy. He would be taxed on his income from the sale
but he would not have been taxed on the income that had
gone into his accumulation reserve and thus financed his ac-
quisition of the life insurance policy that he then sold.
    Vee was obtaining a tax deduction not only for pay-
ments that he made for the purchase of term life insurance
but also for payments that he could use to fund benefits that
do not qualify as health or welfare benefits, even though the
plan is a health and welfare benefit plan. As explained in
Prosser v. Commissioner, 777 F.3d 582, 585 (2d Cir. 2015), quot-
ing Curcio v. Commissioner, 689 F.3d 217, 226 (2d Cir. 2012),
such contributions are “a mechanism by which [owners of
6                                                 No. 15-2441

participating businesses—Vee is such an owner] could divert
company profits, tax-free, to themselves, under the guise of
cash-laden insurance policies that were purportedly for the
benefit of the businesses, but were actually for petitioners’
personal gain.” If Vee keeps rather than sells his life insur-
ance, upon his death the benefits will accrue to the benefi-
ciaries designated in the insurance policy. Any benefit plan
that allows Vee to convert tax-free contributions to guaran-
teed payments for either himself (the owner—an “employ-
ee” only in name) or his beneficiaries is a listed transaction
within the meaning of Notice 95-34.
    The CJA plan was enough like the questionable plan de-
scribed in the notice to require listed-transaction notice to
the IRS on Form 8886. Vee failed to file the form and there-
fore was properly penalized to the tune of $10,000 a year for
the four years in which he took tax deductions without re-
porting his participation in the plan.
                                                    AFFIRMED