Court Opinion

ID: 802748
Source: CourtListenerOpinion
Date Created: 2012-06-20 19:14:11+00
Date Added: 2024-06-11T18:00:05.298946
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                            No. 11-1667

G. MASON CADWELL, JR.,

                Petitioner - Appellant,

           v.

COMMISSIONER OF INTERNAL REVENUE,

                Respondent - Appellee.

Appeal from the United States Tax Court.   (Tax Ct. No. 15456-08)

Argued:   March 21, 2012                   Decided:   June 20, 2012

Before TRAXLER, Chief Judge, and KING and WYNN, Circuit Judges.

Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Chief Judge Traxler and Judge King concurred.

ARGUED: Kevin J. Ryan, RYAN, MORTON & IMMS, LLC, West Chester,
Pennsylvania, for Appellant.     Randolph Lyons Hutter, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
ON BRIEF: Richard H. Morton, RYAN, MORTON & IMMS, LLC, West
Chester, Pennsylvania, for Appellant. Tamara W. Ashford, Deputy
Assistant Attorney General, Kenneth L. Greene, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

Unpublished opinions are not binding precedent in this circuit.
WYNN, Circuit Judge:

        With     this    appeal,        Petitioner     G.      Mason      Cadwell,     Jr.

challenges the United States Tax Court’s determination that he

had unreported income in 2004 arising from employee benefits

paid     for    and     provided    by    businesses         owned   by    his   family.

Petitioner also argues that the tax court abused its discretion

in denying his motion to amend his petition to allege a defense

against an assessed tax penalty.                    Because we conclude that the

tax court neither erred nor abused its discretion, we affirm its

granting       summary       judgment    in    favor    of    the    Commissioner      of

Revenue and denying Petitioner leave to amend.

                                              I.

       Petitioner, a resident of North Carolina, is married to

Jennifer K. Cadwell (“Mrs. Cadwell”), and together they have two

daughters, Jennifer Keady Cadwell (“Jennifer”) and Miranda M.

Cadwell        (“Miranda”)      (collectively         “Cadwell       Family”).        The

Cadwell    Family       is    engaged    in   two    businesses      related     to   this

case.     The first, Keady Limited (“Keady”), is a Pennsylvania S

corporation wholly owned by Mrs. Cadwell.                      Mrs. Cadwell is also

Keady’s sole director.           Petitioner served as Keady’s secretary.

       Keady’s only income was its share of the income distributed

from KSM, Limited Partnership (“KSM”).                   KSM, the second Cadwell

Family business related to this case, is a Pennsylvania limited

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partnership owned: ninety percent by Mrs. Cadwell; five percent

by Keady; two percent by Petitioner; one and one half percent by

Jennifer; and one and one half percent by Miranda.                          Keady is

KSM’s general partner.

      In   2002,       Petitioner    and    Mrs.     Cadwell    decided    to   obtain

employee welfare benefits for Petitioner, Jennifer, and Miranda.

According to its original terms, the benefits plan was organized

as a multi-employer welfare benefit plan pursuant to Internal

Revenue      Code      Section      419A(f)(6)       and    provided      Petitioner,

Jennifer,       and     Miranda     with     death    and     severance    benefits.

Petitioner,       on     behalf     of     Keady,    signed     the    documentation

adopting the plan.

      Life      insurance     covering          Petitioner’s,     Jennifer’s,      and

Miranda’s lives was selected to fund the death and severance

benefits payable under the plan.                    For Petitioner, a universal

life policy with an initial death benefit of $1 million that

also accumulates cash value was selected to fund his benefit.

In   his   life       insurance   policy        application,    Petitioner      listed

himself    as    Keady’s    “manager,”       and     Jennifer    and   Miranda    were

listed on their applications as “consultants.”

      In 2004, the relevant tax year for this appeal, KSM paid

$38,800 to the plan administrator: $36,000 to cover the plan

contribution and $2,800 in plan fees.                       Checks to cover these

costs were drawn on a KSM escrow account.                    The insurance company

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that     issued     the    life    insurance        policies     then     credited

Petitioner’s life insurance policy with an $18,000 payment.

       In November 2004, the plan sponsor, Niche Plan Sponsors

(“Niche”), sent letters to the employers participating in the

multi-employer welfare benefit plan in which Petitioner and his

family    businesses      participated,    announcing     that    the    plan     had

been    split    into   single-employer     welfare     benefit    plans.         The

stated reasons for the conversion included more employer control

over plan assets and the concern that the plan might be subject

to listed transaction penalties.            Niche’s letter indicated that

the    single-employer      benefit   plans    no    longer     qualified       under

Internal     Revenue       Code   Section      419A(f)(6)       and      that     the

deductibility of the employer’s contributions would be limited.

       Keady’s resulting single-employer benefit plan was renamed

the “Keady, Ltd. Welfare Benefit Plan.”               The new trust agreement

relating    to    the   plan   provided,    among    other     things,    that    the

default    plan    administrator      is    the     employer.         Further,    by

December 2004, the life insurance policy covering Petitioner had

a death benefit value of $1,070,529, a fund, or cash, value of

$70,529, and a surrender value of $25,237.

       Petitioner did not include on his Form 1040 for the 2004

tax year any income resulting from the conversion of the plan

from a multi-employer benefit plan to a single-employer benefit

plan.     Indeed, for tax years 2002 through 2004, Petitioner filed

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a   Form    1040,   U.S.      Individual     Income     Tax   Return,    claiming        a

filing status of married filing separately, and reporting no

“wages, salaries, tips, etc.”

       In April 2008, the Commissioner of Internal Revenue sent

Petitioner      a   notice     of     deficiency    claiming    that    Petitioner’s

gross income for 2004 should be increased by $102,039.                                The

unreported income allegedly consisted of: (1) the fund value of

the    life    insurance       policy,     i.e.,     $70,529;     (2)    the       excess

contribution to the plan of $18,000; and (3) the cost of term

life    insurance       on    Petitioner’s       life   for     2004    of     $13,510.

Petitioner challenged the alleged deficiency in the tax court,

but that court ruled against him, granting summary judgment in

the Commissioner of Internal Revenue’s favor.                      Petitioner now

appeals to this Court.

                                           II.

       On     appeal,        Petitioner     argues      that:    the     tax        court

mischaracterized the contributions to the plan; the plan’s 2004

conversion      from    a     multi-employer       welfare    benefit    plan       to   a

single-employer plan did not result in income that he should

have    reported;       the     tax     court    improperly     valued       the     life

insurance policy; and the tax court erred in refusing Petitioner

leave to amend his petition.                We address each issue in turn,

reviewing the tax court’s decision to grant summary judgment de

                                            5
novo,    Capital      One     Fin.       Corp.,       &    Subsidiaries           v.     Comm’r    of

Internal       Revenue,      659 F.3d 316,       321     (4th      Cir.      2011),     and

reviewing      its    decision         to   deny      leave      to    amend      for     abuse    of

discretion.          Braude       v.    Comm’r       of    Internal       Revenue,        808 F.2d
1037,    1039       (4th    Cir.       1986);    Manzoli         v.    Comm’r       of     Internal

Revenue, 904 F.2d 101, 107 (1st Cir. 1990).

                                                A.

       With his first argument, Petitioner contends that the tax

court mischaracterized the contributions to the plan as income.

Petitioner contends that they were not income but instead gifts

from his wife.         We disagree.

       The Commissioner of Revenue may look through the form of a

transaction to its substance.                    See, e.g., Gregory v. Helvering,

293 U.S. 465, 469 (1935).                     By contrast, a “taxpayer may have

less freedom than the Commissioner to ignore the transactional

form    that    he    has     adopted.”              Bolger      v.    Comm’r       of     Internal

Revenue, 59 T.C. 760, 767 n.4 (1973).                         Generally, “a transaction

is to be given its tax effect in accord with what actually

occurred    and      not     in    accord       with      what     might      have       occurred.”

Comm’r    of     Internal         Revenue       v.     Nat’l       Alfalfa        Dehydrating       &

Milling    Co.,      417 U.S. 134,     148       (1974).         Because,        “while    a

taxpayer       is    free     to       organize       his     affairs        as     he     chooses,

nevertheless,         once    having        done      so,     he      must    accept       the    tax

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consequences of his choice, whether contemplated or not, and may

not enjoy the benefit of some other route he might have chosen

to follow but did not.”            Id. at 149 (citations omitted).

      Here, the 2004 contributions to the plan were made out of a

business—not       personal—bank          account,    namely       the    KSM    escrow

account.        Further, the payments were used to fund an employee

benefit plan, and Petitioner served as Keady’s secretary and

manager.          Whether      the        business    funds        may    have     been

“distributable”—though undisputedly not actually distributed—to

Mrs. Cadwell is irrelevant.               Finally, whether Keady or KSM took

a corresponding employer deduction for contributions made to the

employee benefits plan is of no import:                      Petitioner cites no

authority conditioning a benefit’s inclusion in income on an

employer’s      deduction     of    the    benefit,   and    we    find   none.        We

therefore conclude that the tax court did not mischaracterize

the   plan      contributions      when     it   refused    to     restyle      them   as

spousal gifts.

                                            B.

        Next,    Petitioner     contends,        first,     that    the    tax    court

mistakenly made no finding that the multi-employer plan in place

before 2004 was qualified for tax exemption, and second, that

he, for various reasons, did not realize assets from the plan in

2004.     Again, we disagree.

                                            7
       With regard to Petitioner’s first contention, that the tax

court    made     no    finding         that             the       multi-employer        plan     in     place

before 2004 was qualified for tax exemption, Petitioner failed

to properly raise this issue before the tax court.                                             Indeed, the

tax court noted that “[b]oth parties treat petitioner’s interest

in   the   Plan    as       subject             to       a    substantial         risk    of     forfeiture

before     the    Plan’s          conversion                 to    [a   single-employer           plan]    on

November     17,       2004.       .    .       .    [T]he          issue    of    whether        the    Plan

qualified pursuant to section 419(A)(f)(6) before conversion is

not in issue.”          J.A. 242.

       We thus turn to Petitioner’s second contention, that he did

not realize assets from the plan in 2004.                                           Petitioner first

contends that he did not realize assets from the plan in 2004

because he        did       not    voluntarily                    choose    to    convert      the     multi-

employer     welfare         benefit             plan            into   a    single-employer            plan.

However,     Petitioner            cites             no       authority       indicating          that    the

(in)voluntariness of the conversion is in any way relevant to

analyzing this issue, and we fail to see its salience.

        Petitioner also argues that he did not realize assets from

the plan in 2004 because the plan assets had not vested.                                                   In

this    regard,        26    C.F.R.             § 1.402(b)-1               provides       that    employer

contributions          made        to       a       nonexempt           employee         trust    must     be

included     in    gross          income            to       the    extent       that    the     employee’s

interest in such contributions is “substantially vested.”                                                  An

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employee’s interest in property is substantially vested when it

is “either transferable or not subject to a substantial risk of

forfeiture.”        26 C.F.R. § 1.83–3(b).

       “[W]hether      a    risk       of     forfeiture     is    substantial           or    not

depends     upon    the    facts        and    circumstances”          of    the    case.          26

C.F.R. § 1.83–3(c)(1).                 A substantial risk of forfeiture exists

“where rights in property that are transferred are conditioned,

directly or indirectly, upon the future performance . . . of

substantial        services       by    any       person,   or    the       occurrence        of    a

condition     related        to    a     purpose       of   the     transfer,           and    the

possibility of forfeiture is substantial if such condition is

not satisfied.”        Id.

       In   this    case,     after         the    conversion     of    the     plan     from      a

multi-employer to a single-employer welfare benefit plan, the

plan assets could be used only to pay Keady employees’ claims.

The conversion therefore eliminated the risk that Keady’s plan

assets could be used to pay other employers’ claims.

       Further,      Keady        was         wholly    owned      by        Mrs.       Cadwell,

Petitioner’s wife, and Mrs. Cadwell appears to be the business’s

only    director.           Petitioner             identified     himself          as    Keady’s

“secretary” and “manager” and appears to be the business’s sole

officer.     As Keady’s sole officer, Petitioner had control over

his own eligibility under the plan, as well as over decisions

regarding plan assets.                 Therefore, when the trust’s assets came

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under Keady’s control upon the plan’s conversion, they became

subject to Petitioner’s control.                    Cf. 26 C.F.R. § 1.83–3(c)(3).

Further, to       the    extent     that      a    vesting   schedule     applied,   the

power    to    enforce        the   restrictions        of   the   schedule    against

Petitioner would have been in the hands of Petitioner himself,

his wife, or his daughters—i.e., individuals with an interest in

the plan assets.             Under these circumstances, we agree with the

tax court that any restrictions on Petitioner’s power to obtain

the plan proceeds were illusory and that the plan assets had

indeed “substantially vested” upon conversion in 2004.

     Petitioner attempts to convince us otherwise by focusing on

two cases that are, in any event, non-binding: Booth v. Comm’r

of Internal Revenue, 108 T.C. 524 (1997), and Olmo v. Comm’r of

Internal Revenue, 38 T.C.M. 1112 (1979).                      Neither furthers

Petitioner’s cause.             In Booth, the tax court needed to decide

whether       certain        benefits     constituted        deferred     compensation

instead of a welfare benefit plan—not an issue in this case.

108 T.C. 524.           In Olmo, the tax court did have to determine

whether   assets        in    employee     benefit     accounts    had    vested.    38

T.C.M.    (CCH)    1112.         But    the       circumstances    in    Olmo—including

unrelated employees and owners, a prohibition on assignment of

rights to benefits, and a requirement of additional service for

additional vesting upon penalty of forfeiture—differ materially

from those present here.            Id.

                                              10
        In   sum,    we     agree    with       the    tax     court   that    Petitioner’s

interest in the plan vested, i.e., was no longer subject to a

substantial         risk    of    forfeiture,          in    2004.       Petitioner        did,

therefore,     have        to   declare     his       vested      interest    as   income    in

2004.

                                                C.

      Petitioner next argues that the tax court improperly valued

the   universal       life       insurance       policy      by    considering       the   fund

value    without      accounting          for    surrender         charges.        Petitioner

contends that such charges must be accounted for pursuant to two

recent (non-binding) tax court decisions: Schwab v. Comm’r of

Internal Revenue, 136 T.C. 120 (2011), and Lowe v. Comm’r of

Internal Revenue, 101 T.C.M. 1525 (2011).                          We disagree.

      In     Schwab,       the      tax    court       addressed       whether       surrender

charges      should        be    considered          when    determining       the     “amount

actually     distributed.”            136       T.C.    at   121.      The    Schwab       court

expressly      distinguished          the       operative         statutory    section      and

language, which applied to distributed insurance policies, from

the statutory section and language relevant to this case, in

which assets are still held in trust.                          Id. at 130.         Similarly,

in Lowe, the tax court recognized a distinction in the laws

applicable, on the one hand, to “an employee beneficiary who

receives the benefit of a contribution made by an employer to a

                                                11
nonexempt employee trust[,]” as in Petitioner’s case here, and,

on the other, to “an employee who receives a distribution from a

nonexempt    employee      trust[,]”         as    was    the     case      in      Lowe.      101
T.C.M. 1525, at *4.                Because the facts and law at issue in

Schwab    and    Lowe     differ          materially,       we     cannot           agree     with

Petitioner that they shed light on, much less control, this case

and the valuation of Petitioner’s universal life policy.

                                              D.

       Finally, Petitioner argues that he should have been allowed

to amend his petition over a year after its filing and less than

a month before the scheduled hearing on the parties’ motions for

summary judgment.        Again, we cannot agree.

       A court may deny leave to amend a complaint or petition

“when the amendment would be prejudicial to the opposing party,

the moving party has acted in bad faith, or the amendment would

be futile.”      Equal Rights Ctr. v. Niles Bolton Assocs., 602 F.3d
597,   603   (4th      Cir.),       cert.    denied,      131     S.     Ct.     504    (2010).

Generally,      “mere   delay       in    moving     to   amend        is     not     sufficient

reason to deny leave to amend[;]” rather, the delay should be

“accompanied      by    prejudice,          bad    faith,    or    futility.”               Island

Creek Coal Co. v. Lake Shore, Inc., 832 F.2d 274, 279 (4th Cir.

1987) (quotation marks omitted).                   Nevertheless, “the further the

case   progresse[s]       .     .    .,     the    more     likely       it      is    that    the

                                              12
amendment will prejudice the defendant or that a court will find

bad faith on the plaintiff’s part.”                       Laber v. Harvey, 438 F.3d
404, 427 (4th Cir. 2006).

       Here, Petitioner filed the motion to amend more than a year

after he filed his petition, after the parties had filed their

respective motions for summary judgment, and less than a month

before       the        scheduled     hearing      on     the    motions        for    summary

judgment.          Petitioner did not offer any excuse or justification

for his delay in seeking leave to amend.                           He simply sought to

add    a    new,    fact-bound        defense   that      he     acted    with    reasonable

cause       and    in    good   faith   by   relying        upon    the    advice       of   his

counsel and accountant.                Consideration of that defense may well

have        necessitated         additional         discovery            and,     certainly,

postponement of the summary judgment hearing.                               The prejudice

posed       by    Petitioner’s        unexcused         tardiness,       alone,       supported

denying the motion to amend, and the tax court did not abuse its

discretion in doing so.

                                             III.

       In sum, we affirm the tax court’s grant of summary judgment

in    the    Commissioner        of    Revenue’s        favor,     as    well    as    the   tax

court’s denial of Petitioner’s motion for summary judgment and

motion to amend his petition.

                                                                                       AFFIRMED

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