Koresko v. United States, Civil Action No. 13–4131

• Decision Date: 19 August 2015
• Docket Number: Civil Action No. 13–4131
• Citation: 123 F.Supp.3d 654
• Parties: John J. Koresko, Plaintiff, v. United States of America, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

123 F.Supp.3d 654

John J. Koresko, Plaintiff,

v.United States of America, Defendant.

Civil Action No. 13–4131

United States District Court, E.D. Pennsylvania.

Signed August 19, 2015

Filed August 20, 2015

John J. Koresko, Bridgeport, PA, pro se.

Sean P. Beaty, U.S. Dept of Justice Tax Div., Washington, DC, for Defendant.

MEMORANDUM

STENGEL, District Judge

John Koresko is the creator of the Regional Employers Assurance Leagues Voluntary Employees' Benefit Association (REAL VEBA) trust, which the IRS determined was a tax shelter. In November 2012, the IRS assessed 26 U.S.C. § 6700 penalties against both Koresko and Penn–Mont Benefit Services, the plan administrator, for their respective roles in promoting the REAL VEBA plan in 2003. As required by statute, Mr. Koresko and Penn–Mont paid a portion of their respective assessments. They then sued the United States in separate suits for a refund of the penalty they each paid—asserting that it was unwarranted, incorrect, or impermissible under several legal theories.¹

The United States filed counterclaims, requesting the penalties be paid in full. The Government asserts six counts or reasons why the REAL VEBA scheme was not a legally permissible tax exemption vehicle. The United States moved for partial summary judgment on two of those bases. Specifically, the Government is asking this court to decide if the REAL VEBA scheme failed to comply with I.R.C. § 419A(f)(6) by: 1) not providing a fixed welfare benefit for a fixed coverage period (Count V), and 2) using non-standard triggers for paying benefits (Count VI).

For the reasons stated below, I will grant the Government's motion and find that the REAL VEBA scheme did not provide a fixed welfare benefit for a fixed coverage period and used non-standard triggers for payment of benefits.

I. BACKGROUND

a. REAL VEBA and affiliated entities

Mr. Koresko has practiced as an attorney since 1984 and a certified public accountant since 1981.² He lives in Bridgeport, Pennsylvania.³ He is a "recognized expert in the fields of estate planning, benefits planning, and taxation" who "has provided advice and comments to committees of the U.S. Congress, the U.S. Treasury Department, the U.S. Department of Labor, and the U.S. Department of Justice regarding important tax issues."⁴ He has appeared before the U.S. Tax Court as an expert witness.⁵ He has authored chapters on estate planning and journal articles on employee benefits and tax law.⁶

The Regional Employers Assurance Leagues (REAL) is an "unincorporated, informal association of employers."⁷ REAL "sponsor(s)" a Voluntary Employees' Benefit Association (VEBA).⁸ "REAL VEBA is a trust, resulting from a combination of five VEBA trusts ..."⁹ and is controlled by four interconnected documents: the Master Trust Agreement, the REAL VEBA Plan Document, the REAL VEBA Adoption Agreement, and participation agreements with limited powers of attorney executed by each beneficiary.¹⁰ Each of those five VEBAs received IRS determination letters in 1993 providing for tax exempt status under Section 501(c)(9).¹¹

"REAL VEBA was originally adopted on March 20, 1995 as a multiple employer VEBA, following consolidation of certain trusts originally known as the Delaware Valley Leagues [DVL], and it has operated successfully since that time."¹² The DVL and DVL VEBA became REAL VEBA.¹³ The REAL VEBA was amended and reinstated on March 18, 2002.¹⁴

Penn–Mont Benefit Services (Penn–Mont) is a Pennsylvania corporation based in Bridgeport, Pennsylvania.¹⁵ Penn–Mont is the settlor and administrator of the REAL VEBA Trust.¹⁶ Mr. Koresko is the majority shareholder and director of Penn–Mont.¹⁷ He formed Penn–Mont in 1992.¹⁸ Penn–Mont was set up so that Mr. Koresko's brother, who is not a lawyer, could have an equity participation.¹⁹ Penn–Mont is a "nationally recognized employee benefits firm that offers design, installation, and administration of qualified retirement plans, VEBAS, and other welfare benefit arrangements" and "offers consulting and educational services to professional and closely held corporations and their financial planners, legal advisors, and accountants."²⁰

Penn–Mont and the REAL VEBA are affiliated with several other entities set up by Mr. Koresko. Penn Public Trust (PPT) "is a Pennsylvania non-profit corporation based in Bridgeport, Pennsylvania."²¹ Mr. Koresko founded and incorporated PPT.²² Initially, PPT served as the Trustee.²³ In the mid–1990s, Penn–Mont appointed First Union National Bank as custodial trustee and in 2002 Community Trust Company was appointed custodial trustee.²⁴ "Mr. Koresko is the sole director, secretary treasurer [sic], president, and counsel of PPT."²⁵

Koresko & Associates, PC (KAPC) is a Pennsylvania professional corporation in Bridgeport, Pennsylvania.²⁶ "Mr. Koresko is the sole shareholder and director of [KAPC]."²⁷ Penn–Mont "is a corporate affiliate of KAPC."²⁸ Penn–Mont "has no employees and no physical assets."²⁹ Penn–Mont "functions like a division of KAPC on the premises of KAPC."³⁰ "All persons who perform administrative functions for REAL VEBA are employees of KAPC, use assets of KAPC, and are instructed as to the mandates of attorney-client privilege."³¹ "All files of DVL VEBA and REAL VEBA are owned by and in possession of the law firm KAPC."³² KAPC was dissolved, and Koresko Law Firm was created as its successor.³³

Koresko Law Firm (KLF) is a Pennsylvania corporation in Bridgeport, Pennsylvania.³⁴ "Mr. Koresko is the sole shareholder and director of KLF."³⁵ Mr. Koresko practices law through KLF.³⁶ He was the attorney in fact for the REAL VEBA Trust.³⁷ KLF employs another attorney and a handful of support staff.³⁸ KLF performed work for Penn– Mont in administering the REAL VEBA.³⁹

Mr. Koresko, Penn–Mont, PPT, KAPC, and KLF were also involved with setting up and managing a separate multiemployer trust called the Single Employer Welfare Benefit Plan Trust (SEWBP Trust) in 2002. This Trust is similar to the REAL VEBA and was also a party to other litigation involving the REAL VEBA. See In re: REAL VEBA Trust, No. 13–ap–16440, Doc. No. 1 (Koresko's Verified Complaint; Ex. 1 to the United States' motion), at 1–4, ¶¶ 6, 21–23.

The REAL VEBA was set up to be a special type of VEBA known as a ten or more employer or TOME plan.⁴⁰

b. What are VEBAs

In 1928, Congress created a tax exemption for a type of trust called a "voluntary employees' beneficiary association" or VEBA. See I.R.C. § 501(c)(9). See also Neonatology Associates, P.A. v. Commissioner, 299 F.3d 221, 224 (3d Cir.2002). VEBAs are a vehicle through which businesses can provide certain welfare benefits, such as life insurance, to their employees. VEBAs adhering to appropriate IRS standards are exempt from federal income tax; the benefits they provide to their beneficiaries are not taxed until the benefits are received.See I.R.C. § 501(a) ; Counterclaim, Doc. No. 17 at ¶ 9. Final regulations on VEBAs were published in 1981. T.D. 7750, 46 FR 1719–01 (Jan. 7, 1981).

In order to qualify as a VEBA, several requirements must be met. A VEBA must be separate from a participating employer and its employees' membership must be voluntary. 26 C.F.R. § 1.501(c)(9)–1, 2. Members of VEBAs must share "an employment–related common bond"—i.e. they all have the same employer, belong to the same trade union, or do the same type of work in the same geographic area. 26 C.F.R. § 1.501(c)(9)–1, 2, Treas. Reg. § 1.501(c)(9)–1, 2(a)(1). Deferred compensation benefits such as pension annuities or profit sharing are not permissible benefits which a VEBA could provide. See Booth v. Commissioner, 108 T.C. 524, 562–64 (1997). Benefits provided by a VEBA shall not be "discriminatory," meaning they shall not favor "highly compensated individuals."⁴¹ 26 U.S.C. § 505(a), (b) (effective Jan. 1, 2002). No part of the net earnings of the VEBA can inure to the benefit of a private shareholder or individual except through the payment of benefits to VEBA participants. 26 C.F.R. § 1.501(c)(9)–4, Treas. Reg. § 1.501(c)(9)–4.⁴²

c. What are TOMEs

Deductions for VEBAs are typically limited to costs of current benefits for the current year or for limited prefunding of future years' benefits. I.R.C. § 419 and 419A. The Internal Revenue Code carves out an exception for VEBAs operating as "ten or more employer" (TOME) plans. If ten or more employers join a single plan, the restrictions in I.R.C. § 419 and 419A no longer apply. I.R.C. § 419A(f)(6). See also Notice 95–34, 1995–1 C.B. 309, 310 ("In general, contributions to a welfare benefit fund are deductible when paid, but only if they qualify as ordinary and necessary business expenses of the taxpayer and only to the extent allowable under section 419 and section 419A of the Code. Those sections impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(f)(6) provides an exemption from section 419 and section 419A for certain welfare benefit funds.").

This portion of the Code was enacted in 1984 "to prevent employers from taking premature deductions for expenses which have not yet been incurred, by interposing an intermediary organization which holds assets which are used to provide benefits to the employees of the employer." H. Conf. Rept. No. 98–861, at 1155, U.S.Code Cong. & Admin.News 1984, p. 1843; Parker–Hannifin v. C.I.R., 139 F.3d 1090, 1100–01 (6th Cir.1998) ; General Signal Corp. and Subsidiaries v. C.I.R., 103 T.C. 216, 243–44 (1994).⁴³ Congress was also concerned that welfare benefit plans such as VEBAs could serve as potential tax shelters. See Booth v. Commissioner, 108 T.C. 524, 565–66 (1997).

To be a TOME, a plan could not maintain "experience-rating arrangements with respect to individual employers." I.R.C. § 419A(f)(6)(A). See Booth v. Commissioner, 108 T.C. 524, 565 (1997). "The term ‘experience-rated’ means generally that premiums (contributions) are adjusted to reflect experience." See Booth v. Commissioner, 108 T.C....