Pinn v. Comm'r

• Decision Date: 11 February 2013
• Docket Number: T.C. Memo. 2013-45,Docket No. 767-07,Docket No. 768-07
• Parties: ALAN R. PINN AND TONI A. PINN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent DAVID R. PINN AND DIANE PINN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

ALAN R. PINN AND TONI A. PINN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent DAVID R. PINN AND DIANE PINN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2013-45

Docket No. 767-07

Docket No. 768-07

UNITED STATES TAX COURT

Filed: February 11, 2013

Docket Nos. 767-07, 768-07.¹

Jerold A. Reiton, Aaron M. Valanti, and Christian E. Picone, for petitioners.

Jason W. Anderson, David S. Weiner, and Angela B. Friedman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: Alan and David Pinn borrowed money from a welfare benefit fund in 1999 and 2000, and haven't paid it all back. The Commissioner says they should have reported cancellation-of-debt (COD) income for 2002 when the fund listed the loans as in default on an information return that it filed with the federal government. The Pinns and the lender disagree, arguing that the loans remain in force and are fully collateralized.

FINDINGS OF FACT

I. Beginnings and Businesses

The Pinn brothers started out as high-school teachers in the Santa Clara Valley south of San Francisco. The pay wasn't great, so they decided to supplement their income with summer projects. One summer they headed up to Lake Tahoe to build and sell a cabin. To their great amazement, and with the help of low-cost student labor, their profit on the sale was greater than their yearly teaching salaries. The next summer they built another cabin and succeeded again. Their success led them to abandon teaching and pursue homebuilding full time. Within seven years the brothers were building 300 houses a year. And over the last 35 years, the company they founded has built 6,000 homes.

The Pinns also stitched together a number of different business entities:

• Pinn Brothers Construction, Inc. (PBC), which builds the homes;

• BWS, Inc. (BWS), which repairs PBC-built homes that are subject to an implied warranty;²

• Development Sales Concepts, Inc. (DSC), which markets homes built by PBC;

• White Oaks Investors, Inc., which provides warranties for certain homes and insulates PBC from liability; and

• Pfeiffer Ranch Investors, Inc., which owns the land on which PBC builds.

With the exception of Pfeiffer Ranch, which implemented an employee stock-ownership plan, each corporation's shares were quartered among Alan, David, and their wives. Alan was president and David was vice president of each company until 2007, when Alan's son Greg became president of all the companies. The various entities had a total of about 140 employees in 1999, about 10% ofwhom were in management with the rest out in the field actually building homes. And about 90% of all these employees worked full time. Although each corporation was separate from PBC, payroll for all the corporations was administered through PBC under a common-paymaster agreement.³

II. The Death-Benefits-Only (DBO) Plan⁴

In 1999 the Pinns met with their accountants at Crawford, Pimental & Co., Inc., and Bret Petrick--an "insurance expert" who advised the Pinns on employee-benefit plans. Marshall Katzman, one of Petrick's business associates, presented a slideshow entitled "American Workers Benefit Fund, THE '419' PLAN WITH A DIFFERENCE!"⁵ The slides outlined how the Pinns could obtain preretirementlife insurance through a union-sponsored welfare benefit fund. According to the slideshow, life-insurance premiums would be fully deductible to the sponsoring employer, and very little current income would have to be recognized by the employee-participants. The Pinns liked what they heard, and decided to sign PBC up.

A. The Union Arrives

Signing up meant that PBC had to sign some kind of union contract, which it did with Local 707 of the National Production Workers Union (Local 707),⁶ on December 18, 1999, when it recognized Local 707 as the exclusive bargaining agent for its "full-time office personnel." As we've already mentioned, most PBC employees were job-site laborers, and many of PBC's other employees wereprofessionals, guards, and supervisors⁷--all excluded as well.⁸ This left very few PBC employees eligible to join Local 707, and only four actually did.

B. The Collective-Bargaining Agreement

On or about December 16, 1999, PBC also joined the American Workers Master Contract Group. The American Workers Group was an organization which represented all the employers of Local 707 members. The American Workers Group was responsible for negotiating the master contract⁹ with the union. And PBC, as a member of the Group, was bound by the terms of the master contract with respect to its four union employees.

One of the most important of those terms was the master contract's provision for the DBO plan. The master contract stipulated that "the benefits program * * * be administered through the American Workers Benefit Fund in accordance with the terms of the Fund and the rules and regulations created thereunder." The same provision appears in the later master contracts PBC signed on December 19, 2000; December 19, 2003; and December 19, 2006, except that the United Employee Benefit Fund (United Fund) was substituted for the American Workers Benefit Fund (American Fund).

C. Selection of the Trust

Local 707 and the American Workers Group had set up the American Fund in December 1995, well before the Pinns signed on, to provide the Local's members with their purportedly bargained-for death benefits. The American Fund was crafted to be a voluntary employees' beneficiary association (VEBA),¹⁰ a tax-exempt trust under section 501(c)(9), and a welfare benefit fund under section 419(e).

Since PBC recognized Local 707, the American Fund was supposed to administer PBC's DBO plan (as stipulated in the master contract operating whenPBC joined the American Workers Group). But the United Fund¹¹--a purported VEBA trust with essentially the same terms and employer-trustee¹²--actually ended up administering it.¹³

D. Eligibility for Death Benefits

The Pinns were the owners of PBC and so they couldn't join the union representing their employees--or at least the tiny fraction of their employees who had joined Local 707. But they could, curiously enough, share some of the benefits of union membership. There was a provision in the master contract requiring the Trust¹⁴ (the American Fund, and later the United Fund) to run PBC's DBOprogram. According to the Trust's Plan,¹⁵ nonunion PBC employees who are designated in an appendix can also get the death benefits. But this appendix isn't in the record.

What we got instead was the testimony of David Fensler, the Fund's trustee representing the employers,¹⁶ that the Pinns were--in addition to being PBC's owners and managers--full-time employees who had voluntarily elected to participate in the Plan. Finding that the Pinns were eligible based only on this testimony thus depends on inference, but we think it more likely than not true given the exceptionally management-friendly terms of the contract between PBC (through the American Workers Group) and Local 707 and the course of conduct of everyone involved.

E. Allotment of Death Benefits

Under the Plan, the Trust promises to provide death benefits to eligible and enrolled employees in the amount agreed to by their employer. To fund the death benefits, the Trust buys and maintains life-insurance policies with money from the participating employer. The employer also has to pay all of the Trust's costs in providing the death benefits to its covered employees. Employees, however, become ineligible for Plan benefits when their jobs end (for reasons other than death)¹⁷ or if their employer drops out of the Plan¹⁸ or if the Plan itself dissolves.¹⁹

PBC agreed to provide both David and Alan Pinn with a death benefit equal to ten times their annual salary up to a ceiling of $6 million and the Trust bought enough life insurance to fund those obligations. The Trust owned these policies but allowed the Pinns to irrevocably designate beneficiaries of their death benefits.²⁰

The paperwork is quite unclear. The Plan makes it seem as though the Pinns' beneficiaries were to receive the death benefits directly from the Trust; but the life-insurance policies and annuities also list the Pinns' trusts as the beneficiaries of the life-insurance policies and annuities themselves. It seems possible, then--though we refrain from even guessing about its probability or consequences--that if David or Alan died, their beneficiaries could collect directly from the insurance companies.

Here's a summary of the annuities and life-insurance policies the Trust purchased for the benefit of Alan Pinn:

+---------------------------------------------------------------------+
                ¦Policy #    ¦Listed owner¦Face value¦Listed employer¦Beneficiary     ¦
                +------------+------------+----------+---------------+----------------¦
                ¦            ¦            ¦          ¦               ¦Pinn Ultra Trust¦
                ¦            ¦            ¦          ¦               ¦                ¦
                ¦Ameritas 1  ¦American    ¦          ¦               ¦(may have       ¦
                ¦            ¦            ¦N/A       ¦BWS            ¦                ¦
                ¦#2477       ¦Fund        ¦          ¦               ¦changed after   ¦
                ¦            ¦            ¦          ¦               ¦                ¦
                ¦            ¦            ¦          ¦               ¦1998)           ¦
                +------------+------------+----------+---------------+----------------¦
                ¦Ameritas    ¦American    ¦          ¦               ¦Alan R. & Toni  ¦
                ¦            ¦            ¦N/A       ¦DSC            ¦                ¦
                ¦#2479       ¦Fund        ¦          ¦               ¦Ann Pinn Trust  ¦
                +------------+------------+----------+---------------+----------------¦
                ¦Lincoln 2   ¦American    ¦          ¦               ¦Alan R. & Toni  ¦
                ¦            ¦            ¦$2,750,000¦BWS            ¦                ¦
                ¦#2943       ¦Fund        ¦          ¦               ¦Ann Pinn Trust  ¦
                +------------+------------+----------+---------------+----------------¦
                ¦Lincoln     ¦American    ¦          ¦

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