DeAngelis v. Commissioner (574 F.3d 789, 2009)

Citations

574 F.3d 789

Full opinion text

PER CURIAM:

We affirm the orders of the Tax Court for the reasons stated in its decision. See V.R. DeAngelis M.D.P.C. v. Comm’r of Internal Revenue, 94 T.C.M. (CCH) 526 (2007), a copy of which is annexed to this opinion as an appendix. We have considered petitioners’ arguments for a contrary result and found them to lack merit.

APPENDIX

Westlaw.

T.C. Memo. 2007-360 Pagel

T.C. Memo. 2007-360,2007 WL 4257483 (U.S.Tax Ct.), 94 T.C.M. (CCH) 526, T.C.M. (RIA) 2007-360,2007

RIA TC Memo 2007-360

(Cite as: T.C. Memo. 2007-360,2007 WL 4257483 (U.S.Tax Ct.))

United States Tax Court.

V.R. DEANGELIS M.D.P.C. & R.T. Domingo M.D.P.C., V.R. Deangelis M.D.P.C., Tax Matters Partner, et al.

Petitioners

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 10634-05,10637-05,106354)5,10638-05,10636-06.

Dec. 5,2007.

John T. Morin and Ira B. Stechel. for petitioners.

Peter James Gavagan, Peggy J. Gartenbaum. and Thomas A. Dombrowski, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO. Judge.

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*1 These cases are consolidated for purposes of trial, briefing,and opinion. Each couple consists of a medical doctor and his wife, and each doctor is the sole owner of an S corporation that was a partner in the partnership V.R. DeAngelis M.D.P.C. & R.T. Domingo M.D.P.C. (VRD/RTD). These cases concern amounts paid in 1993 and 1994 by the S corporations to VRD/RTD and its ensuing contributions of those amounts to the Severance Trust Executive Program Multiple Employer Supplemental Benefit Plan and Trust (STEP), a plan that was promoted to wealthy professionals as a welfare benefits fund that was part of a 10-or-more-employer plan described in section 419A(f)(6). STEP used the contributions to purchase and pay the premiums on six whole lift insurance policies, five of which were each written with respect to one or both spouses of each couple (with (he exception of the Capizzis, who had no policy insuring either of their lives) and were each payable to the beneficiaries of the insured's choosing in the event of die insured's death. The sixth lift insurance policy was written on the life of Kerry Quinn (Ms. Quinn), an employee of VRD/RTD who was its office manager.

For each subject year, respondent determined in the notice of final partnership administrative adjustment (FPA A) that VRD/RTD could not deduct the $585,000 it paid in that year to STEP as contributions to a welfare benefits fund. The FPAA stated in part that the payments were not ordinary and necessary business expenses under section 162(a).

Respondent determined in the notices of deficiency that the individual petitioners had the following deficiencies in their 1993 and ! 994 Federal income taxes:

Individual Petitioners 1995 1994

DeAngelises $246,768 5208,447

Domingos 185,422 184,932

Durantes 29,174 42,020

Capizzis 1,957 1,546

The deficiencies generally are based on two determinations. First, respondent determined that the payments that the S corporations made to VRD/RTD for contribution to the STEP plan were not deductible by the S corporations because they were not ordinary and necessary business expenses under section 162(a). Respondent accordingly increased the net amount of passthrough income received by each doctor from his S corporation. Second, respondent determined that each doctor received income under section 61(a) in the amount of the life insurance premiums that were paid by his S corporation on his behalf.

We decide whether the S corporations and VRD/RTD were entitled to deduct the payments related to the STEP plan as ordinary and necessaty business expenses under section i 62(a). We hold they were not to the extent that the payments related to the life insurance written on a life of someone other than Ms. Quinn. We also decide whether each doctor realized income in the amount of the life insurance premiums that were paid by his S corporation on his behalf. We hold he did not.

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FINDINGS OF FACT

I. Preliminaries

*2 Some facts were stipulated. The stipulated facts and the exhibits submitted therewith are incorporated herein by this reference. We find the stipulated factsaccordingly. VRD/RTD had a legal address in the State of New York when its petition was filed. The individual petitioners resided in the State of New York when their petitions were filed.

II. Individual Petitioners

A. Overview

Petitioner doctors are Vincent DeAngelis (Dr. DeAngelis), Rodolfo Domingo (Dr. Domingo), Keith Durante (Dr. Durante), and Anthony J. Capizzi (Dr. Capizzi) (collectively, doctors). During 1993 and 1994, each doctor wholly owned an S corporation that employed the doctor to provide his medical and surgical services for VRD/RTD. Each S corporation was a professional corporation (PC), the sole employee of which was its owner. The names of the PCs of Drs. DeAngelis, Domingo, Durante, and Capizzi were Vincent R. DeAngelis M .D.P.C., Rodolfo T. Domingo M.D.P.C., Keith Durante M.D.P.C., and Anthony J. Capizzi M.D.P.C., respectively.

Each doctor and his wife filed a joint Form 1040, U.S. Individual Income Tax Return, for each of the years 1993 and 1994. Each couple's returns reported compensation received from the doctor's PC during those years.

B. Dr. DeAngelis

During 1993, 1994, and 1995, Dr. DeAngelis's PC reportedly paid Dr. DeAngelis compensation of $928,000, $581,000, and $60,000, respectively. The DeAngelises' corresponding Federal income tax returns included those amounts ingross income. Dr. DeAngelis's PC did not reportedly pay Dr. DeAngelis any compensation thereafter.

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C. Dr. Domingo

During 1993, 1994, 1995, and 1996, Dr. Domingo's PC reportedly paid Dr. Domingo compensation of $753,000, $452,976, $485,843, and $62,000, respectively. The Domingos'corresponding Federal income tax returns included those amounts in gross income. Dr. Domingo's PC did not reportedly pay Dr. Domingo any compensation thereafter.

D. Dr. Durante

During 1993, 1994, 1995, and 1996, Dr. Durante's PC reportedly paid Dr. Durante compensation of $136,000, $240,000, $283,919, and $208,079, respectively. The Durantes' corresponding Federal income tax returns included those amounts m gross income. During 1998through 2003, Dr. Durante's PC reportedly paid Dr. Durante compensation of $289,398, $340,527, $258,393, $250,604, $258,208 and $240,000, respectively. The Durantes' corresponding Federal income tax returns included those amounts in gross income. The record does not allow the Court to find the amount of compensation (if any) that Dr. Durante's PC repurtedly paid Dr. Durante in 1997.

E. Dr. Capizsf

During 1993 and 1994, Dr. Capizzi's PC reportedly paid Dr. Capizzi compensation of $609,000 and $719,001, respectively. The Capizzis' corresponding Federal income tax returns included those amounts in gross income. During 1996 through 2003, Dr. Capizzi’s PC reportedly paid Dr. Capizzi compensation of $336,240, $240,070, $272,043, $294,60!, $293,331, $190,271, $194,130 and $148,423, respectively. The Capizzis' corresponding Federal income tax returns included those amounts in gross income. The record does not allow the Court to find the amount of compensation (if any) that Dr. Capizzi's PC reportedly paid Dr. Capizzi in 1995,

HI. VRD/RTD

A. General Information

*3 VRD/RTD was formed as a partnership on July I, 1982, under the laws of New York. VRD/RTD provided medical and surgical services to its patients through the doctors and operated under the name "South Shore Surgical Specialists". VRD/RTD reponed its income and expenses for Federal income tax purposes using the cash receipts and disbursements method VRD/RTD filed 1993 and 1994 Forms 1065, U.S. Partnership Return of income, for its taxable years ended December31, 1993 and 1994, respectively.

B. Partners and Employees

During 1993 and 1994, the five partners of VRD/RTD were the four PCs of the doctors and a fifth PC owned by another doctor, Edgar Borrero (Dr. Borrero). The senior partner of VRD/RTD was Vincent R. DeAngelis M.D.P.C. The partners' percentages of profits, losses, and, ownership of capital for 1993 were as follows:

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Partner Beginning of Year End of Year

Vincent R. De Angelis M.D.P.C. 35.09% 25%

Rodolfo T. Domingo M.D.P.C 25.81 23

Anthony 3. Capizzi M.D.P.C. 20.58 24

Edgar Borrero M.D.P.C. 18.52 18

Keith Durante M.D.P.C.' 0 10

FNl. Keith Durante M.D.P.C. became a partner of VRD/RTD on or about July 1, 1993.

The partners' percentages of profits, losses, and ownership of

capital for 1994 were as follows:

Partner Beginning of Year End of Year

Vincent R. De Angelis M.D.P.C 25% 34%

Rodolfo T. Domingo M.D.P.C. 23 17

Anthony I. Capizzi M.D.P.C. 24 20

Edgar Borrero M.D.P.C. 18 17

Keith Durante M.D.P.C. 10 12

During 1993 and 1994, VRD/RTD employed nurses, office staff, and an office manager (i.e., Ms. Quinn). VRD/RTD had at least 29 employees during 1993 and at least 34 employees during 1994. VRD/RTD did not directly pay the doctors any compensation during either subject year.

C. Arrangements With PCs

VRD/RTD entered into arrangements with the PCs for the provision of the doctors' medical services. The doctors performed their services for the patients of VRD/RTD, and VRD/RTD billed the patients for the fees due on these services. VRD/RTD received payment of the fees, deposited the payments into its bank account, and reported the payments as income on its Forms 1065. Dr. Dom ingo performed services for VRD/RTD through the end of 1999; afterwards, through 2003, Dr. Domingo continued to work for his PC performing services for other than VRD/RTD. Dr. DeAngelis terminated his services with VRD/RTD on or about December 31,2003.

D. Partnership Agreement

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The VRD/RTD partnership agreement in effect for the subject years (partnership agreement) was executed on June 19,1990. The partnership agreement stated that Drs. DeAngelis and Domingo were employed by their PCs and that any future doctor who wished his PC to become a partner of VRD/RTD had to be employed by his PC. The partnership agreement stated that it was anticipated that Dr. DeAngelis would fully retire from VRD/RTD on July 1,1994, and that Dr. Domingo would not retire until 1 year after Dr. DeAngelis retired. If Dr. DeAngelis continued working for VRD/RTD until at least July I, 1995, the partnership agreement allowed Dr. Domingo to retire at the same time as Dr. DeAngelis or at any time after July 1,I996.Thepartnershipagreementprovidedforpayments to be made to a doctor's PC in case the doctor becamedisabled.

IV.STEP

A. Overview

*4 STEP purports to provide eligible employees with severance benefits, funded entirely by their participating employerthrough the purchase of whole life insurance policies, and, if elected, an employer-provided optional life insurance benefit payable upon the death of a covered employee or an alternate insured. STEP invested the contributions made to the STEP plan in whole life insurance policies issued by eight insurancecompanies; namely, Metropolitan Life InsuranceCo. (MetLife), Allmerica Financial Life Insurance and Annuity Co., National Life Insurance Co. of Vermont, Prudential Life Insurance Co. of America, Equitable Life Assurance Society of the United States, ITT Hartford Life Insurance Co., New York Life Insurance and Annuity Corp., and Massachusetts Mutual Life Insurance Co. The life insurance policies insured the individuals covered by the STEP plan, and the STEP plan assets, as reported, consisted largely of the cash values of those policies. Insurance agents earned substantial commissions on the sales of the life insurance policies; e.g., $605,053 in 1994.

Drs. DeAngelis, Domingo, and Durante (collectively, participating doctors) participated in the STEP plan through their PCs and VRD/RTD. Alvin Rapp (Mr. Rapp) was an authorized insurance agent of MetLife, and he recommended that all contributions to the STEP plan made on behalf of the participating doctors be invested in whole life insurance policies issued by MetLife. That recommendation was followed. Each whole life insurance policy related to a participating doctor required that a payment be made annually on December 28 for the policy year beginning on that date.

B. Formation of the STEP Plan

The originator of the STEP concept was Kenneth L. Katz (Mr. Katz), an insurance agent credentialed as a chartered life underwriter and a chartered financial consultant. In 1988, Mr. Katz asked his friend, Jeffrey Mamorsky (Mr. Mamorsky), to draft a plan that could be marketed as a tax-beneficial welfare benefits fund that complied with section 4I9A(fK6). Mr. Mamorsky was an attorney practicing primarily in the area of employee benefitsand compensation. Mr. Mamorsky later also served as counsel to the STEP plan; in that capacity, Mr. Mamorsky was available and willing to discuss with covered employees (at the expense of the STEP plan) the manner in which they should prepare their applications for benefits from the plan. The intent of the STEP plan was to create an incentive to buy, and thus to generare the sale of, whole life insurance policies through aclaim of permissible tax avoidance and the ability to pay and deduct premiums on the purchased policies which would eventually be transferred to and owned by the insureds. Many participants in the STEP plan believed tlat the plan was one of deferred compensation.

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Mr. Mamorsky prepared an initial version of the STEP plan on or about December 15,1989, and Mr. Katz began operating the STEP plan at that time. Mr. Mamorsky prepared a second version of the STEP plan in 1990. Mr. Mamorsky wrote other and all versions of the STEP plan through June 2001, with an understanding that the deductibility of contributions was critical both to the marketability of the STEP plan and to the operation and existence of STEP. The various versions of the STEP plan through June 2001 included the following:

Version I: Executed on December 15,1989

Version 2: Version I Amended and Restated on July 26,1990

Version 3: Executed on January 30,1992

Version 4: Executed on December 29,1993

Version 5: Executed as of November 1,1994

Version 6: Executed as of February 14,1997

Version 7: Executed as of June 1J, 2001

*S The four versions executed in or after 1993 were stated as effective as of January l, 1993.

C, Trustees. Administrators, and Sponsors

Connecticut National Bank was the STEP plan trustee from the plan's inception through April 1,1992. The successor trustees were United States Trust Co. ofNew York (U.S.Trust), Mellon Trust ofNew York (Mellon Trust), and STEP Plan Services, Inc. (SPS1). U.S. Trust served as trustee from April I, 1992, through February 14, 1997; Mellon Trust served as trustee from February 14, 1997, through February 2002; and SPSI served as trustee from February 2002 to date.

STEP, Inc., served as the STEP plan administrator from the plan's inception through July 26,1990. Teplitzky &Co., L.L.C. (Teplitzky