Wycoff v. Comm'r, T.C. Memo. 2017-203
| Decision Date | 16 October 2017 |
| Docket Number | T.C. Memo. 2017-203,Docket No. 24158-09. |
| Parties | JEFFREY WYCOFF AND MERRIE PISANNO-WYCOFF, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Steven R. Toscher and Lacey E. Strachan, for petitioners.
Halvor R. Melom, Debra Ann Bowe, and Michael E. Washburn, for respondent.
MARVEL, Chief Judge: Respondent determined deficiencies in petitioners' Federal income tax and section 6662(a)1 accuracy-related penalties as follows:
| Year |
| Deficiency |
| Penalty |
| sec. 6662(a) |
| 2001 |
| $4,511,398 |
| $902,280 |
| 2002 |
| 518,138 |
| 103,628 |
After concessions,2 the issues for decision are (1) whether two subchapter S corporations petitioners owned, Sirius Products, Inc. (Sirius), and Restore 4, Inc. (Restore 4),3 are entitled to deduct management fees they paid to Albion Management, Inc. (Albion), in 2001-034 (years at issue), and (2) whether petitioners are liable for accuracy-related penalties pursuant to section 6662(a) for the 2001 and 2002 taxable years.
Some of the facts have been stipulated. The stipulations of facts are incorporated herein by this reference. Petitioners resided in Colorado when they petitioned this Court. The parties have stipulated that an appeal in this case would lie to the U.S. Court of Appeals for the Tenth Circuit.
Jeffrey Wycoff earned a bachelor of arts degree from Ryder College in 1975. Mr. Wycoff previously had two California State licenses: a B1 contractor's license and a C54 tile contractor sublicense. In 1981 he sold life insurance. At some point between 1981 and 1985 he managed a Domino's Pizza franchise. From 1985 to 1991 he sold cars. From 1991 to 1995 he managed the Better Bath of L.A. (later named Tile Pros), a construction company.
Merrie Pisanno-Wycoff earned her bachelor of arts degree in public relations from California State University, Chico, in 1980 and her doctor of philosophy degree in comparative religion from the University of Sedona.
In the early 1990s petitioners asked a chemist, Dr. Marantz, to create a chemical formula for a product that would clean tile. Dr. Marantz developed the formula, and petitioners named the product "Zap". Petitioners filed a trademark application for the name "Zap". They also attempted to patent the formula but were advised by legal counsel that it was too simple to patent. They subsequently decided to sell Zap using a direct response marketing model, specifically infomercials. They had previously used direct response marketing for other products, but the marketing for many of those products was not successful. In their experience, whether the consumer liked the product was the most important factor in determining success. They generally expected their products to at best have an 18-month life cycle.
Petitioners incorporated Sirius on January 11, 1995. They initially capitalized Sirius with funds from Tile Pros and personal credit cards. They were the only members of Sirius' board of directors and its only officers.
Sirius formulated, manufactured, and marketed household chemical products. In particular, Sirius sold Zap directly to consumers using infomercials and to various retailers, including Wal-Mart, Costco, Bed Bath & Beyond, Linens 'N Things, Walgreens, Target, Kroger, BJ's, Sam's Club, and several grocery stores in Salt Lake City, Utah. Sirius also sold products that it developed, which were unrelated to Zap. Sirius used direct response marketing, specifically "short form" television advertisements (approximately two minutes long), to market its products.
Petitioners incorporated Restore 4 on January 30, 1997. They initially capitalized Restore 4 with funds from Sirius. Restore 4 sold the same products as Sirius. They incorporated Restore 4 because Sirius could not market its products using the various direct response companies, such as the Home Shopping Network and QVC. The operating companies operated out of the same facility, and they shared a common labor force.
Restore 4 sold Zap under the name "Restore 4" (Restore 4 product). Restore 4 owned the rights to the Restore 4 product name. Restore 4 sold the Restore 4 product directly to consumers and through Home Depot. Restore 4 marketed its products via "long form" television advertisements (approximately 30 minutes long) and on QVC.
On January 1, 2001, Sirius and Restore 4 elected to be subchapter S corporations, and they were subchapter S corporations at all times during 2001-03. Petitioners were at all relevant times the sole officers and board members of the operating companies. After the years at issue Restore 4 merged with Sirius.
Mr. Wycoff was primarily responsible for all operations of the operating companies. His principal duties included: negotiating contracts, overseeing advertising purchases and content, managing the operating companies' finances, selling the products to retailers, and overseeing other employees' work. In short, Mr. Wycoff performed all managerial tasks for the operating companies. He also referred to himself as the national sales manager and product spokesman because of his duties in selling the products and overseeing advertisements.
On August 18, 2000, Robert Boespflug of Marshall & Stevens ESOP5 Capital Strategies Group (Marshall & Stevens) gave a presentation to Barry Marlin, petitioners' attorney at the time. The presentation outlined how the operating companies and petitioners could purportedly reduce their income tax liabilities by way of a series of transactions (collectively, Marshall & Stevens transaction) using a subchapter S corporation, a deferred compensation plan, and an ESOP. Petitioners did not attend this presentation. During the presentation Mr. Boespflug's PowerPoint slides represented that the objectives of the Marshall & Stevens transaction were to: (1) "reduce corporate income tax liability"; (2) "defer income/reduce personal income tax liability of owners"; (3) "get equityownership/special benefits in the hands of key people"; (4) "provide broad-based incentives to rank & file"; and (5) "create tax advantaged structure in preparation of future asset sale". Marshall & Stevens' PowerPoint slides also represented that the proposed steps of the transaction were as follows:
After the presentation Mr. Marlin and Roland Attenborough,6 an attorney with Reish & Luftman hired by Marshall & Stevens to develop the portion of the Marshall & Stevens transaction with respect to the ESOP, met with Mr. Wycoff to discuss the transaction. After the meeting Mr. Wycoff instructed Mr. Marlin to review the transaction. Mr. Marlin's review consisted solely of discussions with two accounting firms. Mr. Marlin did not provide petitioners with a written legal opinion. On the basis of Mr. Marlin's limited review petitioners decided to implement the transaction, and on August 28, 2000, petitioners, on behalf of Sirius, executed a contract with Marshall & Stevens to implement the Marshall &Stevens transaction for a fee of $50,000. The contract contained the following disclaimer:
The parties acknowledge that the S Management corporation and KSOP strategy is an aggressive tax planning program and that the CLIENT has been advised of this fact, has been advised to and has had the opportunity to seek independent legal and tax counsel with respect thereto, and does hereby accept the risk that the IRS may challenge and/or disqualify any aspect of the program * * * .7
On October 19, 2000, Mr. Attenborough incorporated Albion Management, Inc. (Albion), and appointed petitioners as Albion's directors. Albion then designated Mr. Wycoff as its president, Dr. Pisanno-Wycoff as its secretary, and Janie Emaus as its chief financial officer. Petitioners have held their positions with Albion ever since. Albion then issued 10,000 shares of stock and sold 2,500 of those shares to Mr. Wycoff for $250 and 7,500 of those shares to Dr. Pisanno-Wycoff for $750. Albion also elected to be taxed as a subchapter S corporation.
On November 1, 2000, Albion hired Mr. Marlin as its in-house counsel and Mr. Wycoff as a full-time manager for Albion's clients. Mr. Wycoff's contractwith Albion provided that Albion would compensate him with an annual salary, a deferred compensation plan, a life insurance policy, and an option to purchase 100 shares of Albion's stock at any time.
On November 1, 2000, Albion also established a "Supplemental Retirement Plan and Rabbi Trust" (Rabbi Trust).8 The Rabbi Trust was an unfunded deferred compensation plan for the sole benefit of Mr. Wycoff. Mr. Wycoff is, and always was, the sole beneficiary of the Rabbi Trust. Mr. Marlin was appointed as the trustee of the Rabbi Trust. The Rabbi Trust agreement specified that it was effective from November 1, 2000, either until Mr. Wycoff left the company or until petitioners lost control of the company.
Under the Rabbi Trust agreement and Mr. Wycoff's employment contract all contributions to the Rabbi Trust were at Albion's discretion and were to be capped at 80% of Albion's management fees. The Rabbi Trust agreement forbade the assignment, alienation, pledge, or encumbrance of funds in the Rabbi Trust.The Rabbi Trust agreement provided that distribution of benefits was to occur upon Mr. Wycoff's separation from service.
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