108 T.C. 524 (T.C. 1997), 2544-94, Booth v. Commissioner of Internal Revenue

Docket Nº:2544-94, 2545-94, 2546-94, 5754-94, 5755-94, 5893-94, 9229-94, 9230-94
Citation:108 T.C. 524, 108 T.C. No. 25
Opinion Judge:LARO, Judge.
Party Name:ROBERT D. BOOTH AND JANICE BOOTH, ET AL., [1]Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Charles A. Pulaski, Jr., Janet E. Barton, and Tim A. Tarter, for petitioners. Katherine H. Ankeny, Anne W. Durning, and Randall P. Andreozzi, for respondent.
Case Date:June 17, 1997
Court:United States Tax Court
 
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Page 524

108 T.C. 524 (T.C. 1997)

108 T.C. No. 25

ROBERT D. BOOTH AND JANICE BOOTH, ET AL., [1]Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 2544-94, 2545-94, 2546-94, 5754-94, 5755-94, 5893-94, 9229-94, 9230-94

United States Tax Court

June 17, 1997

As Corrected July 31, 1997

Decision will be entered for petitioners in docket Nos. 2544-94, 2546-94, 5755-94, 5893-94, and 9229-94; decision will be entered for respondent with respect to the deficiencies and for petitioners with respect to the penalties in docket Nos. 2545-94 and 9230-94; an appropriate decision for respondent will be entered in docket No. 5754-94 as to the deficiency and the addition to tax under section 6651(a)(1) and for petitioner with respect to the penalty.

SYLLABUS

Secs. 419 and 419A, I.R.C., as enacted by the Deficit Reduction Act of 1984, Pub. L. 98-369, secs. 511(a), 512(a), 98 Stat. 494, 854, 862, limit an employer's deductions for contributions made to a welfare benefits fund for employees. These limitations do not apply to a welfare benefits fund that is part of a " 10 or more employer plan" described in sec. 419A(f) (6), I.R.C. Under the Prime Plan, in which Ps participated, each participating employer made a one-time, nonrevertible contribution to a single trust, equal to the amount necessary to fund the dismissal wage and death benefits of its qualifying employees. The trust segregated each contribution into a separate account for payment of benefits to only the contributing employer's qualifying employees. If an employer's account did not have enough assets to pay a promised benefit, the trustee could supplement the account's assets with assets from a " suspense account" that was funded primarily by actuarial gains and amounts forfeited from the employers' accounts in certain enumerated situations. Each employer selected options under the Prime Plan, including participation and vesting requirements. Except through the suspense account, an employee had no right to receive benefits from other than his or her employer's account.

Held : The Prime Plan is a " welfare benefit plan" within the meaning of sec. 419, I.R.C.

Held, further : The Prime Plan is not within the scope of sec. 419A (f) (6), I.R.C., because it is an aggregation of separate plans each having an experience-rating arrangement with the related employer.

Held, further : None of the corporate Ps are liable for the accuracy-related penalties determined by R.

Charles A. Pulaski, Jr., Janet E. Barton, and Tim A. Tarter, for petitioners.

Katherine H. Ankeny, Anne W. Durning, and Randall P. Andreozzi, for respondent.

OPINION

Page 525

LARO, Judge.

The docketed cases, consolidated for purposes of trial, briefing, and opinion, consist of four groups of test cases selected by the parties to resolve their disputes concerning the " Prime Financial Benefits Trust Multiple Employer Welfare Benefit Plan and Trust" . [2] (We hereinafter refer to this " plan" as the Prime Plan and the trust as the Trust. [3]) Each of these four groups consists of a closely held corporation and one or more of its owner/employees. In regard to each group, the Commissioner of Internal Revenue (the Commissioner or respondent) determined that the corporation could not deduct the amounts that it reported as contributions to the Trust and that the individual(s) had income to the extent that the contributions benefited him or her (or them). Each petitioner petitioned the Court to redetermine the Commissioner's determination of the resulting deficiencies in Federal income tax, penalties, and, in one case, an addition to tax. Respondent's notices of deficiency listed the following deficiencies, addition to tax, and penalties: [4]

Page 526

Robert D. Booth & Janice Booth (R& J Booth), docket No. 2544-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1990 $ 15,180 __ $ 3,036
1991 8,920 __ 1,784
N.L. Booth & Son, Inc. (N.L. Booth), docket No. 2545-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1989 $ 34,000 __ $ 6,800
1990 21,883 __ 4,377
John N. Booth & Debra Booth (J& D Booth), docket No. 2546-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1990 $ 17,820 __ $ 3,564
1991 10,263 __ 2,053
Young & Young, Ltd. (Young & Young), docket No. 5754-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1989 $ 12,744 $ 637 $ 2,549
Howard S. Young & Elaine P. Young (the Youngs),
docket No. 5755-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1989 $ 14,008 __ $ 2,802
Bruce E. Traegde & Patricia Traegde (the Traegdes),
docket No. 5893-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1989 $ 14,008 __ $ 2,802
Billy J. Johnson & Ruth Johnson (the Johnsons),
docket No. 9229-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1990 $ 83,972 __ $ 16,794
Johnson Systems, Inc. (Systems), docket No. 9230-94
Addition to Tax Penalty
Sec. Sec.
Year Deficiency 6651(a) (1) 6662(a)
1990 $ 108,675 __ $ 21,735

Page 527 We decide the following issues: 1. Whether the Prime Plan is a welfare benefit plan or a plan deferring the receipt of compensation. We hold it is a welfare benefit plan. [5] 2. Whether the Prime Plan is a 10 or more employer plan described in section 419A(f) (6). We hold it is not. [6] 3. Whether the corporate petitioners are liable for the penalties determined by respondent. [7] We hold they are not. Unless otherwise indicated, section references are to the Internal Revenue Code applicable to the relevant years, Rule references are to the Tax Court Rules of Practice and Procedure, and dollar amounts are rounded to the nearest dollar. FINDINGS OF FACT I. Background A. Prime Financial Partners, L.P. (Prime) Prime is a master limited partnership that was traded on the American Stock Exchange during most of the relevant years. Prime was formed on April 16, 1987, under the laws of the State of Delaware, to acquire the financial services and real estate activities of a group of Prime's affiliated entities. Prime's general partner is Prime Partners Limited Partnership (Limited), an Arizona limited partnership, whose general Page 528 partner is Prime Financial Partners, Inc. (Financial), an Arizona corporation. On December 31, 1988, the outstanding stock of Financial and the limited partnership units of Limited were held by Thomas G. Cummings, Jerry P. Franks, Anthony L. Tominac, Marvin D. Brody, and Donald A. Waldman. Joel Boyarsky and a corporation joined this list of owners on December 31, 1989, as did William G. Stalnaker on December 31, 1990. Mr. Tominac and the corporation terminated their ownership interests in both entities during 1990, and Messrs. Franks and Stalnaker terminated their ownership interests in the entities during 1991. On December 31, 1991, the outstanding stock of Financial and the limited partnership units of Limited were held by Messrs. Cummings, Brody, Waldman, and Boyarsky. During the relevant years, Prime was an investment banking and financial services firm that earned revenues mostly by investing and placing money. Prime also earned revenues from commissions and administrative services generated by the Prime Plan. Prime researched, developed, and began marketing the Prime Plan in 1988. The Prime Plan provided death benefits and dismissal wage benefits (DWB's) to qualifying employees of participating employers. On November 29, 1991, Prime filed for protection under Chapter 11 of the U.S. Bankruptcy Code. B. Development of the Prime Plan Mr. Brody developed the concept of the Prime Plan in 1988 in response to 1984, 1986, and 1987 tax legislation that limited the tax benefits a small business owner derived from a pension plan. Mr. Brody expected that the Prime Plan would provide meaningful tax deferral to small businesses with few employees. The Prime Plan purported to enable business owners to make tax deductible contributions for employee benefits, while allowing them to accumulate wealth through the appreciation of assets purchased by the plan with their contributions. The Prime Plan had some similarities to a defined benefit pension plan, but the Prime Plan had fewer limitations on...

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