O'Malley v. Comm'r of Internal Revenue

• Decision Date: 15 April 1991
• Docket Number: Docket No. 15051-89.
• Citation: 96 T.C. 644,96 T.C. No. 24,13 Employee Benefits Cas. 2067
• Parties: THOMAS O'MALLEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

13 Employee Benefits Cas. 2067

96 T.C. 644

96 T.C. No. 24

THOMAS O'MALLEY, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15051-89.

United States Tax Court

Filed April 15, 1991.

P was a trustee of the Teamsters' Pension Fund. P was indicted for conspiring to bribe a United States Senator. The Pension Fund paid the legal fees P incurred in his unsuccessful defense of criminal prosecution. P did not take part in the trustees' vote to pay P's legal expenses but P did receive the benefits voted on by the other trustees. HELD, P is subject to the excise tax imposed under sec. 4975(a), I.R.C. 1954. Patrick J. Calihan and Edward J. Calihan. Jr., for the petitioner.

James S. Stanis and Don M. Parkinson, for the respondent.

HAMBLEN JUDGE:

Respondent determined deficiencies in excise tax against petitioner in the amounts of $13,314, $24,491, $24,491, and $24,491 for the taxable years 1981, 1982, 1983, and 1984, respectively. After concessions by respondent, the sole issue for decision is whether Thomas O'Malley (hereinafter petitioner) is subject to the excise tax imposed under section 4975(a) ¹ for each of the taxable years at issue.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. The stipulation, its two supplements, and their attached exhibits are incorporated herein by this reference. The facts recited by this Court in O'Malley v. Commissioner, 91 T.C. 352, 353-358 (1988), are a substantially accurate outline of the background and actions of petitioner with respect to the years 1981 through 1984 and, to the extent applicable, are incorporated herein.

Petitioner resided in Mount Prospect, Illinois, when he filed his petition in this case.

During the years 1978 through 1982, petitioner was the director of industrial relations at C.W. Transport Company (C.W.). C.W., a common carrier trucking company with headquarters in Central Wisconsin, transported goods within the Midwest and Southeast regions.

From 1978 until December 20, 1982, petitioner also served as an employer trustee of the Central States, Southeast and Southwest Areas Health and Welfare Fund, and the Central States, Southeast and Southwest Areas Pension Fund (Pension Fund). The Pension Fund was a trust fund established to provide retirement and related benefits to members of the International Brotherhood of Teamsters (Teamsters) and was managed by a board of trustees (Board) comprised of employer and employee trustees. At all times herein relevant, the Pension Fund was a trust described in section 401(a) which formed part of a plan, which plan and trust were exempt from tax under section 501(a). Further, the Pension Fund was a plan described in section 4975(e) (1) and, as such, should be afforded the protection of section 4975.

The Pension Fund was a multiemployer plan. Companies doing business anywhere in the Central States, Southeast or Southwest areas, contributed to the Pension Fund on behalf of their employees who were members of the Teamsters. Employer contributions were pooled rather than segregated into separate accounts. During the time petitioner served as trustee, C.W. contributed to the Pension Fund on behalf of approximately 1,800 covered employees.

As a full-time employee of C.W., petitioner received no monetary compensation from the Pension Fund, but the Pension Fund provided him with insurance coverage and other minor benefits. When petitioner became a trustee, however, he did receive an increase in salary from C.W.

On May 22, 1981, petitioner and four other individuals were indicted in the U.S. District Court for the Northern District of Illinois. ² Count I of the indictment charged the defendants with conspiracy to bribe a U.S. Senator in violation of 18 U.S.C. section 371 (1982). Count II charged the defendants with causing petitioner, a trustee, and Amos Massa, a former trustee, to travel in interstate commerce to California, with the intent to promote the bribery, in violation of 18 U.S.C. section 1952 (1982). Counts III to XI charged the defendants with using interstate wires for the purpose of executing a scheme to defraud the Pension Fund of its “right to conscientious, loyal, faithful, disinterested, and unbiased services of Thomas F. O'Malley and Andrew G. Massa, in the performance of acts related to their official duties, functions, and employment,” in violation of 18 U.S.C. section 1343 (1982).

When informed of his indictment, petitioner spoke to George Lehr, the then executive director of the Pension Fund. Mr. Lehr recommended that petitioner contact an attorney named William Hundley and engage Mr. Hundley to represent petitioner. Petitioner immediately contacted Mr. Hundley regarding his representation by Mr. Hundley. Mr. Hundley, after speaking to the representatives of the Pension Fund, called petitioner back and agreed to represent petitioner. Mr. Hundley informed petitioner that every month he (Mr. Hundley) would send his bills for representing petitioner directly to the Pension Fund for payment.

Prior to the criminal trial, Andrew J. Decker and Execon, Inc., executive consultants, assisted in the preparation and presentation of petitioner's defense to the charges in the indictment. Prior to and during the criminal proceedings and on appeal, the law firm of Hundley & Cacheris, P.C., represented petitioner. Hundley & Cacheris, P.C., was located in Washington, D.C., and specialized in Federal criminal litigation. The total fees for the services provided for petitioner by Hundley & Cacheris, P.C., Andrew J. Decker, and Execon, Inc., were $266,280.55 in 1981 and $212,212.34 in 1982 and were paid for by the Pension Fund in those amounts in those years. Petitioner knew that the bills for these legal fees were being submitted for payment to, and were being paid from time to time by, the Board.

The Pension Fund's litigation defense costs policy was originally adopted by resolution at a meeting of the Board on February 15, 1978. This litigation defense costs policy was based upon the following provisions of the trust agreement of the Pension Fund:

1. DEFINITION OF POLICY COVERAGE. The Fund shall pay reasonable costs of defense, including reasonable attorneys' fees, on behalf of any Covered Person, in any civil litigation involving an alleged Covered Act or Omission by the Covered Person.

* * *

3. DEFINITION OF COVERED PERSONS. As used herein, “Covered Person” means and includes any former or present Trustee of the Fund and any former or present officer or employee of the Fund.

4. DEFINITION OF COVERED ACTS AND OMISSIONS. As used herein, “Covered Act” and “Covered Omission” means and includes any alleged act and any alleged omission during the course of service by the Covered Person as a Trustee, officer, or employee of the Fund (except for Exclusions described in this Policy).

SEC. 6. EXPENSES-All proper and necessary expenses incurred by any former or incumbent Trustee, including costs of defense in litigation arising out of the Trusteeship of this Fund, and also including costs incurred by any former or incumbent Trustee in providing testimony or information about administration of this Fund in any investigation, trial or other proceeding, shall be paid out of the Trust Fund, as a matter of right of any such former or incumbent Trustee, to the extent permitted by applicable law. As used in the preceding sentence, the term “costs” includes but is not limited to reasonable attorneys' fees.

Under the litigation defense costs policy adopted at this meeting on February 15, 1978, the Pension Fund would pay costs of defense, including reasonable attorneys' fees, on behalf of present or former trustees, officers, or employees of the Pension Fund. The policy coverage applied only to costs of defense in civil litigation involving alleged acts or omissions during the course of service of the trustee, officer, or employee.

As a condition of the policy coverage, the Pension Fund was to be subrogated to the right of recovery of the covered trustee, officer, or employee against any person or entity for the amounts the Pension Fund paid on his behalf.

At a meeting held on June 4 through 6, 1981, the Board granted petitioner's request that the Pension Fund pay his legal expenses and accordingly adopted a resolution authorizing the present and future indemnification of reasonable defense costs, including reasonable attorney's fees, incurred by petitioner before and during the trial relating to the criminal indictment. Petitioner abstained from the vote.

At its meeting on October 20 through 21, 1981, the Board adopted a new litigation defense cost policy for the Pension Fund, effective retroactively. This new defense cost policy was substantially identical to the prior policy except that it covered both civil and criminal litigation defense costs. Again, petitioner abstained from the vote.

At a meeting on August 17 through 18, 1982, the Board resolved that the Pension Fund would not pay any additional attorneys' fees and other defense costs in the criminal case on behalf of any trustees of the Pension Fund, without specific authorization by the Board after written notice had been given to the Department of Labor. The Pension Fund made no additional payments for petitioner's defense costs after the August 17 through 18, 1982, meeting of the Board.

On or about December 16, 1982, after a ten-week jury trial, petitioner was convicted on all counts of the indictment and sentenced to a prison term of 30 months. Petitioner filed a notice of appeal with the Court of Appeals for the Seventh Circuit. His conviction was affirmed on June 8, 1984. ³ As a result of petitioner's conviction, he was prohibited from working in labor relations for 13 years.

The Pension Fund subsequently was reimbursed for the litigation expenses paid on behalf of petitioner by two insurance companies, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, and Midland Insurance Company. C.W. was...