140 T.C. 294 (T.C. 2013)
Chapman Glen Limited, Petitioner
Commissioner of Internal Revenue, Respondent
Nos. 29527-07L, 27479-09.
United States Tax Court
May 28, 2013
In 1998, P was a foreign insurance company that elected under I.R.C. sec. 953(d) to be treated as a domestic corporation for U.S. Federal income tax purposes. G signed the election in G's reported capacity as P's secretary. P also applied for and was granted tax-exempt status as an insurance company effective Jan. 1, 1998. For 2003, P filed a Form 990, Return of Organization Exempt From Income Tax, that was not signed by one of P's officers. In 2009, three years after P consented to R's revocation of P's tax-exempt status effective Jan. 1, 2002, R determined that (1) P's election was terminated in 2002 because P was not an insurance company in that year and (2) P was therefore deemed under I.R.C. secs. 354, 367, and 953(d)(5) to have sold its assets on Jan. 1, 2003, in a taxable transaction. P's primary asset on Jan. 1, 2003, was its investment in a disregarded entity (E) that owned various pieces of real property. Held: The three-year period of limitations under I.R.C. sec. 6501(a) remains open as to 2003 because P's Form 990 was not a valid return in that it was not signed by one of P's corporate officers. Held, further, P properly elected under I.R.C. sec. 953(d) to be treated as a domestic corporation, and the termination of that election in 2002 resulted in P's making a taxable exchange under I.R.C. secs. 354, 367, and 953(d)(5) during a one-day taxable year commencing and ending on Jan. 1, 2003. Held, further, E's real property is included in that taxable exchange, and the fair market value of the real property is determined. Held,
further, P's gross income does not include amounts that R determined were ''insurance premiums'', and R may not for the first time in R's posttrial opening brief recharacterize the premiums as a different type of taxable income.
Vicken Abajian and Gary Michael Slavett, for petitioner.
Najah J. Shariff, James C. Hughes, and Michael K. Park, for respondent.
These cases are consolidated for purposes of trial, briefing, and opinion. Petitioner petitioned the Court in docket No. 2952707L to review the Internal Revenue Service (IRS) Office of Appeals' determination sustaining respondent's proposed levy on petitioner's property to collect $66,539 in additions to tax for 2004. The additions to tax relate to respondent's determination that petitioner failed to timely file Forms 990, Return of Organization Exempt From Income Tax, and 990T, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)), for 2004 and failed to timely pay the related tax. The parties' only dispute remaining from this petition is a computational adjustment that turns on the amount of the deficiency for 2004.
Petitioner petitioned the Court in docket No. 2747909 to redetermine respondent's determination of the following deficiencies and additions to tax under section 6655:
to tax sec. 6655 |
1Jan. 1, 2003 ||
10,130,454 ||-0- |
2Dec. 31, 2003 ||113,181
Respondent alleged in an amendment to answer that the fair market value of real property underlying the deficiency for the one-day taxable year was $36,589,000 instead of $28,943,229 as determined in the notice of deficiency and that the deficiency for that year is therefore $12,806,452
instead of $10,130,454.
Respondent asserts in respondent's opening brief that recent concessions put the applicable value of the real property at $34,607,500. Petitioner argues that the fair market value of the real property is $13,711,775. Following concessions (including petitioner's concessions that it is not an insurance company and that it does not qualify as a tax-exempt organization under section 501(c)(15) as of January 1, 2002), we are left to decide the following issues: 1. whether respondent issued the deficiency notice to petitioner before the three-year period of limitations of section 6501(a) expired as to 2003; 2. whether petitioner properly elected to be treated as a domestic corporation under section 953(d); 3. whether the subsequent termination of petitioner's section 953(d) election resulted in a taxable exchange under sections 354, 367, and 953(d)(5) during the one-day taxable year in 2003; 4. whether the real property that Enniss Family Realty I, L.L.C. (EFR), owned was included in that taxable exchange; 5.whether the fair market value of the real property at the time of the exchange on January 1, 2003 (valuation date), was $34,607,500 as respondent asserts; and 6. whether petitioner's gross income for the respective taxable years includes ''insurance premiums'' of $128,584, $882, $299,178, and $298,000. FINDINGS OF FACT I. Preliminaries
The parties submitted stipulated facts and exhibits. We incorporate the stipulated facts and exhibits herein. 
Petitioner's Page 297
principal office was in Lakeside, California, when its petitions were filed. Petitioner was formed in the British Virgin Islands as a private international business company on August 29, 1996. It filed Forms 990 for 2002, 2003, and 2004 (as well as for earlier years). Later, in April 2006, petitioner submitted Forms 1120F, U.S. Income Tax Return of a Foreign Corporation, for 2002 and 2003 to the IRS. The IRS did not accept those Forms 1120F. II. Petitioner
Petitioner was formed primarily to operate as an insurance (including captive insurance and reinsurance) company and to own, develop, and deal in real property, securities, and personal property. On January 8, 1998, its initial director resolved that all of petitioner's stock be issued to Caesar Cavaricci and that Adam Devone and Bruce Molnar be appointed as petitioner's directors. The initial director also resolved that its contemporaneously tendered resignation as petitioner's initial director was accepted. B. Section 953(d) Election
On or about November 16, 1998, petitioner delivered to the IRS a ''Foreign Insurance Company Election Under Section 953(d)'' (section 953(d) election), stating that petitioner was electing under section 953(d) to be treated as a domestic corporation for U.S. tax purposes effective the first day of petitioner's taxable year commencing December 27, 1997. Deanna S. Gilpin signed the election on November 16, 1998, in her reported capacity as petitioner's secretary and under penalty of perjury that the statements therein were true and complete to the best of her knowledge and belief. On or about March 20, 2000, petitioner submitted to the IRS a Form 2848, Power of Attorney and Declaration of Representative, designating Mr. Molnar, Mr. Cavaricci, and David B. Liptz (an associate of Mr. Molnar's) as petitioner's authorized representatives regarding the section 953(d) election and other stated matters, as each applied to petitioner's Federal income tax for 1996 through 2000. Page 298
III. Enniss Family
A. Family Members
The Enniss family (as relevant here) has eight members. Arnold Reid Enniss (Reid Enniss) and his wife (now deceased), Delpha Enniss, are two of the members. Their children are the other six members. The children's names are Chad Enniss, Wade Enniss, Blake Enniss, Carolyn Sandoval, Kelly Kufa, and Eric Enniss. B. Enniss Family Business
The Enniss family has owned and operated a sand mine or quarry through various entities for over five decades. The related business mines or dredges sand, topsoil, and other dirt products (collectively, sand) mainly (if not solely) from riverbeds and markets and sells the mined sand. The Enniss family also for many years has through various entities owned and operated a general engineering and general building contracting business and a steel fabrication and erection, construction trucking, demolition, and grading business. Each member of the Enniss family is involved in the family businesses. The Enniss family began operating the sand mine in the early 1970s through their controlled corporation, Enniss Enterprises, Inc. In 1987, Enniss Enterprises, Inc., applied for a major use permit (MUP) with respect to the sand mine. The sand mine was in Lakeside, and a significant portion of the property was on the San Vicente Creek riverplain. On April 5, 1990, the San Diego County Planning and Environmental Review Board approved the MUP, allowing Enniss Enterprises, Inc., for a 15-year period, to conduct a mining operation that excavated and removed 2.2 million cubic yards of sand and gravel and conducted related screening.
Eventually, from January 2002 through 2004, the sand mine business was owned and operated by Enniss, Inc. (another entity that the Enniss family controlled as discussed below). The Enniss family, through their various entities, excavated approximately 1,708,960 tons of sand (approximately Page 299
1,139,307 cubic yards) from the sand mine from 1990 to 2001.
In February 1998, an employee of the Enniss family business was seriously injured while at work, and he sued some or all of the Enniss family members both personally and through their business. The Enniss family retained various attorneys to defend them in the lawsuit and to structure the family's finances to protect their assets. The Enniss family asked Earl Husted, an attorney, for advice on asset protection and estate planning. Mr. Husted recommended that the Enniss family contact another attorney, Fred Turner, and Mr. Molnar, a certified public accountant (C.P.A.). Mr. Turner and Mr. Molnar coowned a business in Orange County, California, named Global Advisors. V. Petitioner's Application for Tax Exemption
On June 17, 1999, petitioner filed with the IRS a Form 1024, Application for Recognition of Exemption Under Section 501(a), seeking tax-exempt status...