Penn-Mont Benefit Servs. v. United States
| Decision Date | 20 August 2015 |
| Docket Number | CIVIL ACTION No. 13-4130 |
| Court | U.S. District Court — Eastern District of Pennsylvania |
| Parties | PENN-MONT BENEFIT SERVICES, Plaintiff, v. UNITED STATES OF AMERICA, Defendant. |
Penn-Mont Benefit Services is the administrator 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 Penn-Mont and John Koresko, the REAL VEBA creator and primary officer of Penn-Mont, for their respective roles in promoting the REAL VEBA plan in 2003. After paying the portion of the assessment required by statute, Mr. Koresko and Penn-Mont sued the United States in two separate actions for a refund of the penalty assessment they paid—asserting that it was unwarranted, incorrect, or impermissible under several legal theories.
The United States filed a counterclaim, 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. Penn-Mont failed to answer the Government's counterclaim. The Clerk of Court entered default at the Government's request. TheUnited States has moved for default judgment. For the reasons explained below, I will grant this motion in part and deny it in part.
On or about November 19, 2012, pursuant to 26 U.S.C. § 6700, the IRS issued a Notice of Penalty Charge to Penn-Mont assessing a penalty of $386,000 under 26 U.S.C. § 6700 for promoting an abusive tax shelter in taxable year 2003.1 On December 17, 2012, Penn-Mont paid $57,900 or 15% of the penalty and filed a Claim for Refund of Tax Return Preparer and Promoter Penalties.2 On July 16, 2013, Penn-Mont filed this action seeking a tax refund under 26 U.S.C. § 6703(c)(2).3 It claims the civil penalty is erroneous for several reasons: it cannot be considered a "promoter" within the meaning of the statute; it lacked the requisite intent of knowing that its statements were false; and the calculation of penalties is incorrect.4 Penn-Mont seeks declaratory judgment that it is not liable for these penalties, a refund with interest of the 15% already paid, attorney's fees and costs.5
The Government answered Penn-Mont's complaint and asserted a counterclaim comprised of seven distinct violations of § 6700.6 According to the counterclaim, the REAL VEBA arrangement was an "abusive tax shelter."7 The REAL VEBA allowed business owners to purchase expensive, cash-value life insurance for themselves without treating that benefit as taxable income. Contributions to the REAL VEBA were then deducted from the businesses' taxable income and treated as a "business expense." The Government claims, in the alternative, that even if the business owners were not aware that this arrangement was an "abusive tax shelter," Penn-Mont led them to believe it was lawful as a way to defraud them. Either way, the Government claims that Penn-Mont, through its officers and agents, made statements about the lawful nature of the REAL VEBA which they knew or should have known were false or fraudulent. Under § 6700, the Government argues Penn-Mont would be liable for civil penalties.8
Penn-Mont did not respond to the Government's counterclaim.9 The Government requested that the Clerk of Court enter default on May 16, 2014. After default was entered, the Government moved for default judgment on its counterclaim.
Federal Rule of Civil Procedure 55(b)(2) provides that a district court may enter default judgment against a party when default has been entered by the Clerk of Court. FED. R. CIV. P. 55(b)(2). Entry of a default judgment is within the court's discretion and is not automatic in the instance of "a defendant's failure to respond to the complaint." D'Onofrio v. Il Mattino, 430 F. Supp. 2d 431, 437 (E.D. Pa. 2006)(citing Mwani v. bin Laden, 417 F.3d 1, 6 (D.C. Cir. 2005)); Hritz v. Woma Corp., 732 F.2d 1178, 1180 (3dCir. 1984)). Judgment by default is generally disfavored in the interest of deciding a case on its merits. Budget Blinds, Inc. v. White, 536 F.3d 244, 258 (3d Cir. 2008); United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 194-95 (3d Cir. 1984). "[T]he factual allegations of the complaint, except those relating to the amount of damages, will be taken as true." Comdyne I, Inc. v. Corbin, 908 F.2d 1142, 1149 (3d Cir. 1990).10
"Voluntary employees' beneficiary associations" (VEBAs) are a type of tax entity that enables businesses to provide welfare benefits, such as death benefits, to their employees while deducting the cost of the employers' welfare benefit plan from the business's income.12 Deductions for employers' contributions to VEBA welfare benefit plans are governed by several provisions of the Internal Revenue Code and Treasury Regulations, including I.R.C. §§ 501(c)(9) and 419A.13 VEBAs that purport to operate under an exception carved into I.R.C. § 419A(f)(6) are referred to as 'ten or moreemployer' (TOME) plans.14 If a VEBA plan does not comply with the provisions of the Internal Revenue Code and Treasury Regulations, then the IRS may disallow an employer's deduction for contributions to the VEBA arrangement and the IRS may also treat the benefits paid from the plan as taxable income to beneficiaries.15
The REAL VEBA arrangement at issue was originally adopted on March 20, 1995 as a multiple employer VEBA, following consolidation of certain trusts originally known as the Delaware Valley Leagues.16 John Koresko created the REAL VEBA arrangement.17 One of the primary purposes for the REAL VEBA arrangement was to generate large tax deductions for employer participants.18 The REAL VEBA Trust was "a tax-driven 'multiple employer trust' (MET) that was designed and intended from its inception as an entrepreneurial venture offering a tax-favored funding vehicle for participating employers who sought to maximize the deductibility of their cost for welfare benefits for themselves and their employees."19 The REAL VEBA arrangement purported to operate as a voluntary employees' beneficiary association under I.R.C. § 501(c)(9) and as a TOME plan under I.R.C. § 419A(f)(6).20
The REAL VEBA arrangement operated through four interconnected documents (collectively, "the REAL VEBA documents"):21
The provisions of the Plan Documents are all incorporated by reference into the Master Trust Agreement.22 Read together, the REAL VEBA documents describe several interacting elements within the REAL VEBA arrangement, including: (i) a League, (ii) a Trust, (iii) a Trustee, (iv) an Administrator, (v) counsel, (vi) a plan, (vii) a VEBA, and (viii) a Committee.23
Penn-Mont administered the REAL VEBA arrangement
Penn-Mont is a Pennsylvania corporation formed by John Koresko. The REAL VEBA documents name Penn-Mont as the Administrator for the REAL VEBA arrangement.24 As the Administrator, Penn-Mont had the sole power to amend the Master Trust Agreement and Plan Documents.25 Penn-Mont was also named as Administrator in the pre-printed portion of Section 2c of the Adoption Agreement that every employer participant executed.26 Neither employer participants nor employee participants enjoyed the right to appoint another administrator for the REAL VEBA arrangement.27 Since 1995, the Trustee of the REAL VEBA arrangement served as a "directed" trustee of the REAL VEBA Trust.28 As such, the Trustee was subject to the direction of Penn-Mont in all material respects.29 Thus, Penn-Mont, through its officers and agents, controlled the operations of REAL VEBA Trust, and all of the assets owned by the Trust.30
Penn-Mont promoted the REAL VEBA arrangement
Penn-Mont advertised the REAL VEBA arrangement on its website and through its officers and agents.31 Penn-Mont's website claimed that VEBAs have severaladvantages, including tax deductions, and security of plan assets with independent corporate trustees and insurance companies.32 On its website, Penn-Mont advertised that it was 33
Penn-Mont marketed the REAL VEBA arrangement throughout the country via the internet and other means such as postcards, brochures, and seminars.34 Penn-Mont promoted the REAL VEBA arrangement directly through seminars presented by Koresko.35 Penn-Mont advertised that its goal was "to provide insurance agents, financial planners, attorneys and accountants with a working knowledge of cutting edge legal developments in the area of employee welfare benefits, including the design, installation and maintenance of an employee welfare benefit plan as funded through life insurance; the fundamentals of estate planning; and issues governing corporate taxation."36
Penn-Mont made or furnished statements regarding the deductibility of
contributions to the REAL VEBA arrangement
Penn-Mont, through its officers and agents, made statements regarding thedeductibility of employer contributions to the REAL VEBA arrangement in conjunction with...
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