Mazzei v. Commissioner of Internal Revenue, 030518 FEDTAX, 16702-09

Docket Nº:16702-09, 16779-09
Opinion Judge:THORNTON, JUDGE
Party Name:CELIA MAZZEI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ANGELO L. MAZZEI AND MARY E. MAZZEI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Export year
Attorney:Lewis Richard Walton and Lewis Richard Walton, Jr., for petitioners. Erin Kathleen Salel, Kathleen A. Tagni, and Miles B. Fuller, for respondent.
Judge Panel:MARVEL, VASQUEZ, GALE, GOEKE, GUSTAFSON, PARIS, KERRIGAN, LAUBER, NEGA, PUGH, and ASHFORD, JJ., agree with this opinion of the Court. PARIS and PUGH, JJ. THORNTON, GOEKE, and LAUBER, JJ., agree with this concurring opinion. HOLMES, J., dissenting FOLEY and BUCH (join only Parts I through IV) and ...
Case Date:March 05, 2018
Court:United States Tax Court
 
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150 T.C. No. 7

CELIA MAZZEI, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

ANGELO L. MAZZEI AND MARY E. MAZZEI, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 16702-09, 16779-09

United States Tax Court

March 5, 2018

Ps entered into a prepackaged plan to save taxes by routing funds from their family business through a Bermuda-based foreign sales corporation (FSC) and then into Roth IRAs created for this purpose. Pursuant to this plan, in 1998 each P directly contributed $2, 000, the applicable contribution limit, to his or her newly created Roth IRA, which then paid a nominal amount for stock in the FSC. From 1998 to 2002 Ps routed payments totaling $533, 057 from their family business, through the FSC, and into their Roth IRAs.

Ps contend that we should respect the form of these transactions as payments from Ps' business to the FSC, followed by payments of dividends by the FSC to the Roth IRAs. R contends that the payments from the FSC to Ps' Roth IRAs represented, in substance, contributions from Ps to their Roth IRAs. R contends that because these payments exceeded Ps' contribution limits for their Roth IRAs, Ps are liable for excise taxes under I.R.C. sec. 4973.

Held: On the facts presented, Ps and not their Roth IRAs were the owners, for Federal tax purposes, of the FSC stock; in substance the FSC dividends were income to Ps, who contributed the funds to their Roth IRAs. Summa Holdings, Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017), rev'g T.C. Memo. 2015-119, distinguished.

Held,

further, pursuant to I.R.C. sec. 4973 Ps are liable for excise taxes on excess contributions to their Roth IRAs.

Held,

further, R's imposition of additions to tax under I.R.C. sec. 6651(a)(1) and (2) is not sustained.

Lewis Richard Walton and Lewis Richard Walton, Jr., for petitioners.

Erin Kathleen Salel, Kathleen A. Tagni, and Miles B. Fuller, for respondent.

CONTENTS

FINDINGS OF FACT ............................................... 6

I. WGA's FSC/IRA Program .................................... 8

II. Petitioners' Contribution Limits ............................... 9

III. Petitioners' Entrance Into WGA's FSC/IRA Program ............. 10

A. Operations Procedure Memorandum ...................... 12

B. Commission Agreement ................................ 12

C. Services Agreement ................................... 13

D. Management Agreement ............................... 13

E. Shareholders' Agreement ............................... 13

F. Compliance Guide .................................... 14

IV. Operations of the FSC/IRA Program .......................... 15

V. Procedural Background ..................................... 17

OPINION ........................................................ 18

I. Burden of Proof ............................................ 19

II. Statutory Framework: Roth IRAs and Excess Contributions ........ 19

III. The Parties' Arguments ..................................... 22

IV. General Principles: Substance Over Form ...................... 24

V. The FSC Provisions ........................................ 29

A. Relaxed Transfer Pricing Rules .......................... 30

B. Effective Tax Rate Cut for Qualifying Income .............. 33

C. Application of FSC Rules to Petitioners' Transactions ........ 35

D. The Limited Scope of the FSC Provisions ................. 36

VI. The Payments to the Roth IRAs Were Contributions .............. 38

A. The Roth IRAs Were Exposed to No Risk.. ................ 43

B. The Roth IRAs Could Expect No Upside Benefits ........... 47

C. Conclusion .......................................... 49

VII. Petitioners' Counterarguments .............................. 51

A. Summa Holdings II ................................... 51

B. Petitioners' Ownership Argument ........................ 55

C. Petitioners' Congressional Purpose Arguments ............. 57

VIII. Response to Dissent ...................................... 59

A. Our Analysis Does Not Sham or Disregard Any Entities. . . . . . 59

B. Our Analysis Properly Considers the Facts as a Whole.. ...... 59

C. The Substance Inquiry Is Appropriate. . ................... 60

D. Our Approach Appropriately Considers Value. . ............ 63

E. The Dissent's Hypothetical Misconceives Our Analysis ....... 65

F. The Dissent's Approach Lacks Support in the Code. . ........ 67

IX. Conclusion .............................................. 68

X. Additions to Tax ........................................... 69

THORNTON, JUDGE

By notice of deficiency, respondent determined excise tax deficiencies for Angelo and Mary Mazzei for 2002-07, and additions to tax under section 6651(a)(1) and (2):1

Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2)
2002 $6, 637 $1, 493 $1, 659
2003 9, 408 2, 116 2, 352
2004 10, 523 2, 367 (1)
2005 11, 349 2, 553 (1)
2006 13, 759 3, 095 (1)
2007 15, 914 3, 580 (1)
1 Amounts to be determined. In a separate notice of deficiency, respondent determined excise tax deficiencies for Celia Mazzei for 2002-07, and additions to tax under section 6651(a)(1) and (2):
Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2)
2002 $4, 889 $1, 100 $1, 222
2003 6, 148 1, 383 1, 537
2004 6, 372 1, 433 (1)
2005 6, 817 1, 533 (1)
...

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