DocketNumber: Docket No. 21175-09.
Citation Numbers: 2012 T.C. Memo. 329, 104 T.C.M. 651, 2012 Tax Ct. Memo LEXIS 330
Judges: COHEN
Filed Date: 11/28/2012
Status: Non-Precedential
Modified Date: 11/21/2020
Decision will be entered for respondent.
COHEN,
This case was submitted fully stipulated under
Petitioners are married to each other *331 and at all relevant times together were the majority stockholders in Fownes Brothers & Co., Inc. (Fownes). Fownes is a corporation that designs and manufactures apparel accessories, including boots and gloves. Petitioners each owned 28.94% of the Fownes stock. The remainder was held by petitioners' son and daughter, each of whom owned 21.06% of the Fownes stock. Petitioners were the only directors of Fownes and, during 1999 through 2003, also were employees of the corporation. In addition, Mr. Gluckman served as president of Fownes.
The Advantage Death Benefit Plan and Trust (Advantage Plan) purported to be a "10 or more employer" welfare benefit plan under
To fund the benefits payable to covered employees, the Advantage Plan used participating *332 employers' contributions to acquire cash value life insurance policies (underlying policies) on the lives of the employees, and the plan withdrew funds from the trust as needed to pay the premiums for the underlying policies. The Advantage Plan trustee was required to be the owner and beneficiary of the underlying policies.
The marketing brochure for the Advantage Plan advertised the plan as a tax-advantaged welfare benefit plan for professionals, entrepreneurs, and closely held businesses. Participating employers were assured that their contributions to the Advantage Plan were tax deductible, that plan assets would grow on a tax-deferred *332 basis, and that participation in the plan would allow the employer to provide a select group of employees with benefits that could be used to "fund buy/sell arrangements, estate tax and business continuation programs with pre-tax dollars."
Petitioners were introduced to the Advantage Plan by their insurance agent and financial adviser, Lance Rembar. On or about December 15, 1999, Fownes adopted the Advantage Plan. Thomas S. Gluckman (petitioner) was initially designated a covered employee, and the next year *333 Fownes designated Roby R. Gluckman an additional covered employee effective January 1, 2000. In connection with petitioners' participation in the Advantage Plan, life insurance policies insuring petitioners' lives were selected, and the premiums were paid by the Advantage Plan trustee.
At the time Fownes adopted the Advantage Plan, it was administered by Benistar Admin. Services, Inc. Beginning January 1, 2001, and continuing through 2003, BISYS Insurance Services, Inc. (BISYS) was the plan's administrator and sponsor.
*333 Under both the original adoption agreement executed in 1999 and the addendum to adoption agreement executed in 2000, covered employees were, among other things, required to be actively employed by the employer. The Advantage Plan featured a nonreversionary clause that prohibited an employer's contributions from being recovered by the employer or being used for purposes other than for the exclusive benefit of the covered employees in the Advantage Plan or in a succeeding welfare benefit plan.
The plan provided that an employer could terminate its participation at any time. In that event, the plan trustee was to value the portion of the trust attributable to benefits funded *334 by the withdrawing employer and, after ensuring that the withdrawing employer's share of expenses and liabilities was paid, the plan was required to allow the covered employees to purchase their underlying policies. Upon an employer's withdrawal, the plan also was permitted to distribute the underlying policies to the covered employees, so long as an actuary retained by the plan determined that sufficient benefits remained in the plan to meet the plan's benefit requirements. Finally, the plan permitted the underlying policies to be distributed to successor welfare benefit plans that provided similar benefits.
In 2002 the Internal Revenue Service (IRS) issued proposed regulations relating to 10 or more employer welfare benefit plans under
In one such letter sent to petitioner on May 14, 2003, BISYS stated: [E]mployers should consider taking steps to voluntarily terminate their participation in The Advantage Plan before December 31, 2003 and electing one of the alternatives outlined below. Otherwise, after December 31, 2003, an employer's participation in The Advantage Plan will automatically terminate, resulting in the surrender of any policies remaining in the Trust, a reallocation of the cash surrender values, and a distribution of the assets to participants. Employers that do not voluntarily terminate participation in The Advantage Plan on or before December 31, 2003 will not have the option of electing one of the alternatives outlined below. First, the employer terminates its participation in The Advantage Plan. Second, the policies are rolled-out to the employees and the employees are taxed on the reallocated [another BISYS-sponsored plan that purported to be a 10 or more employer welfare benefit plan under
In July 2003, final regulations for 10 or more employer plans were issued by the IRS. In the absence of notification by the participating employers, BISYS intends to start surrendering to the [insurance] carriers the existing trusted [sic] policies. The resulting pool of net cash surrender funds will after year-end be distributed to the remaining no-longer insured participants. This is not a desirable outcome. Fownes should * * * * The non-419 route would be to have the policies distributed to the insureds. Presumably BISYS would issue a [Form] 1099 on the policy's value. * * * Alternatively, Fownes could continue *338 the premium deductible approach by using the Millennium Plan. BISYS would transfer the policies to the Millennium Plan. This plan-to-plan transfer should avoid the 1099 problem.
On October 17, 2003, having been advised that Fownes wished to withdraw from the Advantage Plan, BISYS sent a letter to Fownes, care of petitioner, requesting a certified copy of a corporate resolution authorizing Fownes' withdrawal from the plan. The letter explained that part of the withdrawal process was for an employer to reallocate the net surrender values of the underlying *337 policies among its participants using a formula that took into account the amount of the participants' wage income over the course of their participation in the Advantage Plan. The purpose of this reallocation was to determine what amount, if any, employees who received distribution of the underlying policies would be required to include in taxable income. The letter further advised that "[t]axes may be due, please consult with your tax advisor regarding tax consequences of this transaction." A sample corporate resolution and a form to be signed by all Fownes participants waiving their rights to purchase the insurance policies held *339 by the Advantage Plan trust were attached to this letter.
Fownes submitted a corporate resolution dated October 24, 2003, authorizing Fownes' withdrawal from the Advantage Plan effective November 28, 2003. Fownes also submitted the form, signed by petitioners and two other Fownes participants, by which the Fownes participants waived their rights to purchase the underlying policies.
After receiving Fownes' corporate resolution and signed participant waiver form, on November 6, 2003, BISYS sent partially completed change of ownership and blank change of beneficiary designation forms, as well as the Fownes participants' underlying policies, to Fownes, care of petitioner. The change of ownership forms were already endorsed by the Advantage Plan trustee as the *338 current owner of the policies. The letter advised that the forms should be completed (for the change of ownership form this was by inserting new owner information and obtaining the new owner's endorsement), then sent directly to the insurance carrier. The forms and the original insurance policies also were provided to petitioners' insurance agent.
On December 17, 2003, petitioner signed an adoption agreement for Fownes to participate *340 in the Millennium Plan. On January 16, 2004, completed change of ownership forms for the underlying policies covering petitioners were sent to the Millennium Plan trustee for endorsement as the new owner of the policies.
On February 13, 2004, the insurance carrier confirmed to BISYS that the owner and beneficiary for petitioners' underlying policies had been changed from the Advantage Plan trustee to the Millennium Plan trustee. Immediately following that confirmation, BISYS sent letters to petitioners stating: "We have completed your employer's termination from the Advantage Death Benefit Plan. You should be receiving tax information from your employer in regards to the termination of the Advantage Death Benefit Plan. Please make sure to communicate that information to your accountant."
Petitioners did not include in taxable income for 2003 any amount related to the underlying policies as a result of Fownes' withdrawal from the Advantage Plan. However, petitioners did include in taxable income for 2002 and 2003 a total of $80,250, which was the estimated value of current insurance benefits of petitioners' underlying policies.
Respondent conducted *341 an examination of petitioners' 2003 jointly filed income tax return and determined that petitioners had unreported income of $2,093,350. This amount represented the value of petitioners' underlying policies at or near the time that Fownes withdrew from the Advantage Plan, less the $80,250 petitioners previously reported in connection with those policies.
Generally, taxpayers bear the burden of proving that the Commissioner's determinations are erroneous.
Respondent contends that, under
Petitioners argue that they did not receive taxable income relative to the underlying policies because they never owned the policies, they did not control the policies, and their interests in the policies were at all times subject to a substantial risk of forfeiture.
An employee trust is a nonexempt trust if it is not exempt from taxation under
The "value of an employee's interest in a trust" means the amount of the employee's beneficial interest in the trust as of any date on which some or all of the employee's interest in the trust becomes substantially vested.
An employee's interest in property is substantially vested when it is either *344 transferable or is not subject to a substantial risk of forfeiture.
Because of the Advantage Plan's requirement that covered employees continue to be employed by the participating employer to remain eligible for benefits, the parties treat petitioners' interests in the Advantage Plan as being subject to a substantial risk of forfeiture before Fownes submitted its corporate resolution authorizing withdrawal from the plan. Consequently, the treatment of Fownes' contributions to the Advantage Plan from 1999 through 2002 and the status of petitioners' interests in the Advantage Plan trust before Fownes' withdrawal from the plan are not in issue.
*343 Once Fownes*345 submitted its resolution in October 2003, however, the situation was markedly different. Continued employment was no longer a requirement and, under the relevant Advantage Plan provisions, it appears that there were three options for disposition of the underlying policies when an employer withdrew from the plan: (1) the plan could offer the policies for purchase by the covered employees, (2) the plan could distribute the policies to the covered employees, or (3) the plan could transfer the policies to another welfare benefit plan for the covered employees.
As part of the withdrawal process, all of the covered employees of Fownes, including petitioners, signed a form waiving the right to purchase the underlying policies. Additionally, the series of letters the Advantage Plan sent to insurance agents and brokers and participating employers indicated that the plan would not be facilitating direct or trustee-to-trustee transfers of the underlying policies to other welfare benefit plans. Under the plan's stated procedures, that appears to have left only one alternative, which was distribution to the covered employees. In light of the scheduled termination of the plan, BISYS apparently waived *346 the plan's requirement that an evaluation of plan assets and liabilities be performed before distributing the policies to covered employees. There is no mention of this *344 requirement in any of BISYS' communications in 2003 with respect to an employer's withdrawal from the plan.
Therefore, consistent with the Advantage Plan's provisions and the plan withdrawal procedures communicated to participating employers, at that point it appears that the underlying policies were substantially certain to be distributed to petitioners or placed within their control. Even if transfers to other welfare benefit plans were still being permitted by BISYS at that time, subsequent events demonstrate that the policies were placed within petitioners' control no later than early November 2003. After receiving the resolution, BISYS sent endorsed, partially completed change of ownership forms that lacked only the new owner information and sent blank change of beneficiary designation forms, as well as duplicate copies of the policies, to petitioner's attention. The forms and the original insurance policies also were provided to petitioners' insurance agent. These actions placed petitioners' underlying policies *347 squarely within their control because petitioners were then free to name the policies' new owner and beneficiary, which could have been themselves or another welfare benefit plan. When a taxpayer has dominion and control over property, the value of such property generally will be included in his or her gross income.
This case is very similar to
There are some factual differences between this case and
Petitioners contend, however, that their interests could *349 not have substantially vested because the underlying policies were at all times owned by a welfare benefit plan and subject to a substantial risk of forfeiture. They argue that transfers to other welfare benefit plans were still being permitted by the Advantage Plan and that the transfer of the policies from the Advantage Plan to the Millennium Plan was a nontaxable trustee-to-trustee transfer. In support of this argument, petitioners cite
This Court is not bound by interpretations of the law in revenue rulings.
Once the change of ownership and change of beneficiary designation forms were received, petitioners had the ability to name themselves or another welfare benefit plan as the owner and beneficiary of the underlying policies. Because the policies were subject to petitioners' direct control, the transaction was not a trustee-to-trustee transfer.
Petitioners also argue that their interests were not substantially vested because after Fownes submitted its resolution *351 authorizing withdrawal from the Advantage Plan, Fownes, through its board of directors, had the ability to control the underlying policies. They contend that Fownes made the decision to adopt the Millennium Plan and determined who would be covered by that plan.
(i) the employee's relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation, (ii) the position of the employee in the corporation and the extent to which he is subordinate to other employees, (iii) the employee's relationship to the officers and directors of the corporation, (iv) the person or persons who must approve the employee's discharge, and (v) past actions of the employer in enforcing the provisions of the restrictions. * * * [
Petitioners *352 are the only directors of Fownes, and petitioner also serves as president of the corporation. Petitioners are married and together are the majority *349 stockholders in Fownes. The remainder of the Fownes stock is owned by petitioners' son and daughter. The record does not contain any evidence of strife in the working or personal relationships of the family members. Petitioners clearly had the ability to control Fownes' decision-making process and thus had the ability to control their underlying policies.
Petitioners' arguments are unpersuasive, and we determine that petitioners' interests in the Advantage Plan, represented by their underlying policies, were substantially vested under
Under
Once the Commissioner has met the burden of production the taxpayer must come forward with persuasive evidence that the penalty is inappropriate because he or she acted with reasonable cause and in good faith.
Petitioners have not addressed the reasonable cause or good faith defenses to the
In reaching our conclusions, we have considered all arguments made by the parties and, *355 to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,