Commentary
The court basically determined that the
Plan did not satisfy the requirements of Section 162(a). The court found
that Goyak could not deduct his contribution of $1.4 million into the
Millennium Plan because it is not an ordinary and necessary business expense
under section 162(a).
The next issue is that
the court determined that Goyaks $1.4 million contribution was taxable to Goyak
because it was a constructive dividend. (In essence the plan is set up so he
can get his money out)
T.C.
Memo. 2012-13
UNITED
STATES TAX COURT
JOHN
K. AND DANA G. GOYAK, Petitioners v.
COMMISSIONER
OF INTERNAL REVENUE, Respondent
JOHN
K. GOYAK & ASSOCIATES, INC., Petitioner v.
COMMISSIONER
OF INTERNAL REVENUE, Respondent
Docket
Nos. 12990-07, 13022-07. Filed January 11, 2012.
Mark
D. Allison and Kenneth M. Barish, for petitioners.
Alexander
D. Devitis, Anne W. Durning, Roger P. Law, and
Vanessa
M. Hoppe, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE,
Judge: With respect to John and Dana Goyak (Mr. and
Mrs.
Goyak), respondent determined deficiencies in Federal income
taxes
of $966,155, $1,848,500, and $1,217,910 for tax years 2002,
-
2 -
2003,
and 2004 respectively. Respondent also determined
penalties
under section 66621 of $193,231, $369,700, and $243,582
for
2002, 2003, and 2004, respectively, as well as an addition to
tax
under section 6551(a)(1) of $42,742 for 2002.
With
respect to John K. Goyak & Associates, Inc. (Goyak &
Associates),
respondent separately determined deficiencies in
Federal
income taxes of $199,503, $262,692, $297, $374,137,
$276,571,
and $556,223 for tax years 1997, 1998, 1999, 2000,
2001,
and 2002, respectively. Respondent also determined
penalties
under section 6662 of $55,314 and $111,245 for 2001 and
2002,
respectively, as well as additions to tax under section
6551(a)(1)
of $1,995, $11,820, $74, and $41,486 for 1997, 1998,
1999,
and 2001, respectively.
These
cases were consolidated for trial. As a result of
settlements
between the parties, all issues in taxable years
other
than 2002 have been resolved. The only remaining issues
relate
to a $1.4 million contribution Goyak & Associates paid in
2002
to the Millennium Multiple Employer Welfare Benefit Plan
(Millennium
Plan), a purported section 419A(f)(6) welfare benefit
fund.
The issues remaining for decision are:
(1)
Whether Goyak & Associates may deduct the $1.4 million
1Unless
otherwise indicated, all section references are to
the
Internal Revenue Code (Code) in effect for the years in
issue,
and all Rule references are to the Tax Court Rules of
Practice and Procedure.
A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.
ReplyDeleteUnder §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.
According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.
Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appealable and must be paid before filing an administrative claim for a refund.
The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.
In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.
"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."
A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."
An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to $860,000 the first year - as well as the costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.
The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they we