Booth v. Comm'r of Internal Revenue

• Citation: 21 Employee Benefits Cas. 1494,108 T.C. No. 25,108 T.C. 524
• Decision Date: 17 June 1997
• Docket Number: 9230–94.,No. 2544–94,9229–94,5754–94,5755–94,2546–94,2545–94,5893–94,2544–94
• Parties: Robert D. BOOTH and Janice Booth, et al.,1 Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

108 T.C. 524

108 T.C. No. 25

21 Employee Benefits Cas. 1494

Robert D. BOOTH and Janice Booth, et al.,1 Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 2544–94

2546–94

5755–94

9229–94

2545–94

5754–94

5893–94

9230–94.

United States Tax Court.

June 17, 1997.

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

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

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

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. BackgroundA. 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 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 funding, benefits, and accessibility to funds.

Prime marketed the Prime Plan primarily to highly compensated small business owners with five to six employees. These business owners could expect to receive the following benefits from the Prime Plan, as the plan was advertised to them:

1. The employer would currently deduct a one-time contribution that it made to the Prime Plan to fund DWB's and death benefits, and the contribution would not be taxable to the employer's employees until received as benefits;

2. The employer could contribute to pension plans, as well as to the Prime Plan, but, in the case of the Prime Plan, the employer would not be subject to the rules limiting contributions to pension plans;

3. Contributions to the Prime Plan would earn income tax-free because the Trust, although not a tax-exempt entity, would invest each employer's contributions in life insurance and municipal bonds;

4. The employee/owners could reap personally most of the benefits offered by the Prime Plan by basing an employee's receipt of benefits on compensation and by using vesting schedules to limit the benefits payable to employees other than the owners themselves;

5. Trust assets would be insulated from creditors;

6. Death benefits would not be subject to income tax or, with minimal planning, estate tax.

As of December 31, 1994, approximately 800 employers had participated in the Prime Plan. On that date, approximately 625 of these employers continued to participate in the Prime Plan.

C. David Weiss

Mr. Weiss is an attorney who was employed during the relevant years by the law firms of Streich Lang and Snell & Wilmer. In early 1988, Prime contacted Mr. Weiss to help create a welfare benefit plan subject to section 419A(f)(6) and to draft a tax opinion that would be used to market the plan nationwide. Mr. Weiss initially refused, believing there was insufficient guidance on section 419A(f)(6) to allow him to create such a plan. Mr. Weiss later agreed to do so. Mr. Weiss was a principal architect of the Prime Plan and the Trust, and he wrote a series of tax opinion letters related thereto. These letters included opinions dated June 2, 1988, July 25, 1988, April 12, 1989, June 30, 1990, October 1, 1991, and April 1, 1993. D. Dr. William L. Raby

Dr. Raby is an accountant with a national reputation in areas related to the Prime Plan and the Trust. At the behest of Mr. Weiss, Streich Lang engaged Dr. Raby from February 1988 to the beginning of 1990, to assist Mr. Weiss in forming the desired plan and to express a concurring opinion on Mr. Weiss' tax opinions related thereto. Prime informed Dr. Raby that it wanted to develop a plan that offered a front-end reduction of taxes for small employers and a deferral of income for their employees. Dr. Raby and Mr. Weiss advised Prime that the plan needed an element of risk-shifting to qualify for the desired benefits, and that a “suspense account” could be used to accomplish the required shifting of risk. Dr. Raby and Mr. Weiss later presented Prime with different provisions for the Prime Plan, some of which Prime found unacceptable for marketability purposes. Dr. Raby and Mr. Weiss redrafted the unacceptable provisions, and Prime found the redrafted provisions more to their liking.

Dr. Raby wrote an opinion concurring with Mr. Weiss' tax opinion dated June 2, 1988, and Dr. Raby concurred with Mr. Weiss' opinion dated April 12, 1989. Dr. Raby's concurrences were based on his understanding of the tax law including the “possible purposes” of section 419A(f)(6). Dr. Raby's concurrences, as well as Mr. Weiss' opinions that related thereto, did not address any version of the Prime Plan that is at issue herein; they discussed a hypothetical plan that evolved into the instant versions. Dr. Raby's name was used to promote versions of the Prime Plan that were marketed to the public.

At Mr. Weiss' request, Dr. Raby performed services in May and June 1993, in connection with respondent's consideration of issues flowing from the Prime Plan. Dr. Raby's fees were paid from the suspense account (the Suspense Account) that was part of the Trust. The Suspense Account served primarily as the depository for amounts forfeited by the employers and employee groups connected to the Prime Plan.

E. The Trust

The Trust was a separate, taxable entity apart from Prime and its affiliates. The Trust owned all of its assets, and it was supervised by an independent trustee. The Trust's assets consisted of the money and other property contributed by the participating employers, and any earnings (or less any losses) thereon, less payments made by the trustee.

The Trust's first trustee was Northern Trust Bank of Arizona, N.A. (Northern). Northern was succeeded by Security Pacific Bank Arizona (Security Pacific) on or about June 30, 1990. Firstar Metropolitan Bank & Trust (Firstar) succeeded Security Pacific effective January 2, 1992. Firstar's trustee fees included an asset management fee of 1 percent of the market value up to $2 million per account, with 0.8 percent of the market value on the balance, plus a $15 per item transaction charge.

F. The Administrator of the Prime Plan

The Prime Plan was overseen by an administrator. Improved Funding Techniques, Inc. (IFTI), was the Prime Plan's first administrator. On October 24, 1990, Financial's board of...