Webber v. Commissioner of Internal Revenue, 063015 FEDTAX, 14336-11
|Opinion Judge:||LAUBER, Judge:|
|Party Name:||JEFFREY T. WEBBER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Robert Steven Fink, Megan L. Brackney, and Joseph Septimus, for petitioner. Steven Tillem, Shawna A. Early, and Casey R. Kroma, for respondent.|
|Case Date:||June 30, 2015|
|Court:||United States Tax Court|
P, a U.S. citizen, established a grantor trust that purchased "private placement" variable life insurance policies insuring the lives of two elderly relatives. P and various family members were the beneficiaries of these policies. The premiums paid for the policies, less various expenses, were placed in separate accounts whose assets inured exclusively to the benefit of the policies. The money in the separate accounts was used to purchase investments in startup companies with which P was intimately familiar and in which he otherwise invested personally and through private-equity funds he managed. P effectively dictated both the companies in which the separate accounts would invest and all actions taken with respect to these investments.
R concluded that P retained sufficient control and incidents of ownership over the assets in the separate accounts to be treated as their owner for Federal income tax purposes under the "investor control" doctrine. See Rev. Rul. 77-85, 1977-1 C.B. 12. The powers P retained included the power to direct investments; the power to vote shares and exercise other options with respect to these securities; the power to extract cash at will from the separate accounts; and the power in other ways to derive "effective benefit" from the investments in the separate accounts. See Griffiths v. Helvering, 308 U.S. 355, 358 (1939).
1. Held: The IRS revenue rulings enunciating the "investor control" doctrine are entitled to deference and weight under Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).
2. Held, further, P was the owner of the assets in the separate accounts for Federal income tax purposes and was taxable on the income earned on those assets during the taxable years in issue.
3. Held, further, P is not liable for the accuracy-related penalties under I.R.C. sec. 6662(a) because he relied in good faith on professional advice from competent tax professionals.
Petitioner is a venture-capital investor and private-equity fund manager. He established a grantor trust that purchased "private placement" variable life insurance policies insuring the lives of two elderly relatives. These policies were purchased from Lighthouse Capital Insurance Co. (Lighthouse), a Cayman Islands company. Petitioner and various family members were the beneficiaries of these policies.
The premium paid for each policy, after deduction of a mortality risk premium and an administrative charge, was placed in a separate account underlying the policy. The assets in these separate accounts, and all income earned thereon, were segregated from the general assets and reserves of Lighthouse. These assets inured exclusively to the benefit of the two insurance policies.
The money in the separate accounts was used to purchase investments in startup companies with which petitioner was intimately familiar and in which he otherwise invested personally and through funds he managed. Petitioner effectively dictated both the companies in which the separate accounts would invest and all actions taken with respect to these investments. Petitioner expected the assets in the separate accounts to appreciate substantially, and they did.
Petitioner planned to achieve two tax benefits through this structure. First, he hoped that all income and capital gains realized on these investments, which he would otherwise have held personally, would escape current Federal income taxation because positioned beneath an insurance policy. Second, he expected that the ultimate payout from these investments, including all realized gains, would escape Federal income and estate taxation because payable as "life insurance proceeds."
Citing the "investor control" doctrine and other principles, the Internal Revenue Service (IRS or respondent) concluded that petitioner retained sufficient control and incidents of ownership over the assets in the separate accounts to be treated as their owner for Federal income tax purposes. Treating petitioner as having received the dividends, interest, capital gains, and other income realized by the separate accounts, the IRS determined deficiencies in his Federal income tax of $507, 230 and $148, 588 and accuracy-related penalties under section 6662 of $101, 446 and $29, 718 for 2006 and 2007, respectively.1 We will sustain in large part the deficiencies, but we conclude that petitioner is not liable for the penalties.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of facts and the attached exhibits are incorporated by this reference. When he petitioned this Court, petitioner lived in California. Petitioner's Background and Business Activities
Petitioner received his bachelor's degree from Yale College and attended Stanford University's M.B.A. program. He left Stanford early to start a technology consulting firm, and he later founded and managed a series of private-equity partnerships that provided "seed capital" to startup companies. These partnerships were early-stage investors that generally endeavored to supply the "first money" to these entities. Separately, petitioner furnished consulting services to startup ventures through his own firm, R.B. Webber & Co. (Webber & Co.).
Each venture-capital partnership had a general partner that was itself a partnership. Petitioner was usually the managing director of the general partner. The venture-capital partnership offered limited partnership interests to sophisticated investors. These offerings were often oversubscribed.
As managing director, petitioner had the authority to make, and did make, investment decisions for the partnerships. To spread the risk of investing in new companies, petitioner often invested through syndicates. A syndicate is not a formal legal entity but a group of investors (individuals or funds) who seek to invest synergistically. Generally speaking, the syndicate's goal was to make early-stage investments in companies that would ultimately benefit from a "liquidity event" like an initial public offering (IPO) or direct acquisition.
Before investing in a startup company, petitioner performed due diligence. This included review of the company's budget, business plan, and cashflow model; his review also included analysis of its potential customers and competitors and the experience of its entrepreneurs. Because petitioner, through Webber & Co., provided consulting services to numerous startup companies, he had access to proprietary information about them. On the basis of all this information, petitioner decided whether to invest, or to recommend that one of his venture-capital partnerships invest, in a particular entity. Having made an early-stage investment, petitioner usually sought to find new investors for that company, so as to spread his risk, enhance the company's prospects, and move it closer to a "liquidity event."
Having supplied the "first money" to these startup ventures, petitioner and his partnerships were typically offered subsequent opportunities to invest in them. These opportunities are commonly called "pro-rata offerings." As additional rounds of equity financing are required, a pro-rata offering gives a current equity owner the chance to buy additional equity in an amount proportionate to his existing equity. This enables him to maintain his current position and avoid "dilution" by new investors. Depending on the circumstances, petitioner would accept or decline these pro-rata offerings.
Petitioner invested in startup companies in various ways. He held certain investments in his own name; he invested through trusts and individual retirement accounts (IRAs); and he invested through the venture-capital partnerships that he managed. To help him manage this array of investments, petitioner in 1999 hired Susan Chang as his personal accountant. She had numerous and diverse responsibilities. These included determining whether petitioner had funds available for a particular investment; ensuring that funds were properly transferred and received; communicating with lawyers, advisers, paralegals, and others about investments in which petitioner was interested; and maintaining account balances and financial statements for petitioner's personal investments.
Because of his expertise, knowledge of technology, and status as managing director of private-equity partnerships, petitioner served as a member of the board of directors for more than 100 companies. As relevant to this opinion, petitioner through various entities invested in, and served on the boards of, the following companies at various times prior to December 31, 2007:
To continue readingFREE SIGN UP