Gluckman v. Commissioner of Internal Revenue , 545 F. App'x 59 ( 2013 )

13-761
Gluckman v. Commissioner of Internal Revenue
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order
filed on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate
Procedure 32.1 and this court’s Local Rule 32.1.1. When citing a summary order in a
document filed with this court, a party must cite either the Federal Appendix or an
electronic database (with the notation “summary order”). A party citing a summary order
must serve a copy of it on any party not represented by counsel.
At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 22nd day of November, two thousand thirteen.
PRESENT:
JOHN M. WALKER, JR.,
JOSÉ A. CABRANES,
BARRINGTON D. PARKER,
Circuit Judges.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
THOMAS S. GLUCKMAN and ROBY R. GLUCKMAN,
Petitioners-Appellants,
-v.- No. 13-761
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
FOR PLAINTIFFS-APPELLANTS: KATHLEEN R. BARROW, (Heather C. Panick,
Christian, Smith and Jewell, LLP, Houston,
TX; Mark Allison, Caplin Drysdale, New
York, NY, on the brief) Jackson Lewis LLP,
Omaha, NE.
1
FOR DEFENDANT-APPELLEE: KENNETH L. GREENE (Theresa T. Milton, on
the brief) for Kathryn Keneally, Assistant
Attorney General, Department of Justice, Tax
Division, Washington, DC.
Appeal from the December 17, 2012 judgment of the United States Tax Court (Mary Ann
Cohen, Judge).1
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the December 17, 2012 judgment of the Tax Court be AFFIRMED.
Appellants Thomas Gluckman and Roby Gluckman (the “Gluckmans”) appeal from the
December 17, 2012 Order of the Tax Court affirming the Tax Commissioner’s (“Commissioner”)
assessment of a Federal income tax deficiency for the year 2003 of $754,653, and an accuracy-
related penalty under 26 U.S.C. § 6662 of $150,930.60 based on the Gluckmans’ failure to report as
income the value of certain life insurance policies upon withdrawal of those policies from a “10 or
more employer” welfare benefit plan under Internal Revenue Code (“Code”) § 419A(f)(6). Gluckman
v. Commissioner, T.C.M. 2012-329, 2012 WL 5951351 (Nov. 28, 2012) (“Tax Op.”).
BACKGROUND2
Familiarity with the factual and procedural background of this case is presumed, and only
limited details are repeated here. The Gluckmans are a married couple and were, at all relevant
times, employees and majority shareholders of Fownes Brothers & Co., Inc. (“Fownes”), a clothing
accessories manufacturer.3 Thomas Gluckman (“Gluckman”) was president and director of Fownes.
In December 1999, Fownes, at the direction of the Gluckmans, adopted the Advantage
Death Benefit Plan and Trust (“Advantage Plan” or “Plan”), a “10 or more employer” welfare
benefit plan under Code section 419A(f)(6), which offered preretirement life insurance to employees
on a tax deductible basis. The Plan was not a tax-exempt trust. Participating employers could
terminate participation at any time. 4 As of 2000, the Gluckmans were both covered employees.
1 The Order and Decision in this case was originally entered on December 4, 2012 but was vacated and set aside
due to a clerical error and replaced by the December 17, 2012 Order.
2 This case was submitted on a stipulated record pursuant to Tax Court Rule 122.
The Gluckmans each owned 28.94% of the Fownes stock and the remainder of stock was shared equally by the
3
Gluckmans’ two children.
4 In the event of a termination by a participating employer, the plan trustee was required to value the portion of
the trust attributable to benefits funded by the withdrawing employer and ensure that the employer’s share of expenses
and liabilities was paid. The trustee was then required to offer the insurance policies to the covered employees on whose
lives those policies were issued. Alternatively, the trustee could distribute the policies to covered employees or successor
plans providing “similar benefits.” App’x 90-91.
2
In 2002, the Internal Revenue Service issued proposed regulations regarding the meaning of
“10 or more employer” welfare benefit plans under which the Advantage Plan would no longer
qualify. As a result, the administrator of the Advantage Plan, BISYS Insurance Services, Inc.
(“BISYS”), decided to terminate the Plan effective December 31, 2003. In a May 14, 2003 letter,
BISYS notified Fownes of its intention to terminate the Plan. BISYS advised employers to
voluntarily terminate their participation in the Plan prior to December 31, 2003 and notified them
of two options upon termination: (1) “roll[] out” the policies to the employees who would then be
taxed; or (2) “roll[] out” the policies to the employees who would then be taxed, after which the
employer could adopt the Advantage DBO Plan and the policies could be used as a funding vehicle
for the Advantage DBO Plan. Tax Op. at 7. The letter stated that “a trustee-to-trustee transfer (i.e.
from The Advantage Plan to another welfare benefit plan such as The DBO Plan) is not permitted
under the applicable IRS regulations.” Id.On October 17, 2003, BISYS acknowledged Fownes’s intention to terminate participation in
the Advantage Plan, and requested a copy of the corporate resolution necessary to terminate
participation. In response, Fownes submitted an October 24, 2003 corporate resolution authorizing
a “complete distribution” of the policies to take effect on November 28, 2003. The resolution was
signed by affected participants, including the Gluckmans, each of whom waived the right to
purchase the underlying policies. BISYS then forwarded to Fownes the change of ownership forms,
which listed the Advantage Plan trustee as the “current owner” of the life insurance policies. BISYS
instructed Gluckman to fill out the new owner information and endorsement and send the forms to
the insurance carrier.
Sometime in October 2003, the Gluckmans learned of a new, qualified “10 or more
employer” welfare benefit plan called the Millennium Multiple Employer Welfare Benefit Plan (the
“Millennium Plan”). On December 17, 2003, Gluckman signed an agreement providing that
Fownes would participate in the Millennium Plan. The Change of Ownership forms listed the
Millennium Plan as the new owner of the insurance policies, as of January 22, 2004.5 On February
9, 2004, the issuing insurance company acknowledged the change of ownership, and BISYS notified
taxpayers that they would be receiving information about their tax obligations in connection with
the termination from the Advantage Plan.
The Gluckmans did not include as income in 2003 the value of the underlying life insurance
policies. See App’x 61-79.
5 The Gluckmans were not named as owners of the life insurance policies until they purchased the policies from
the Millennium Plan in 2011.
3
DISCUSSION
We review a decision of the tax court based on a stipulated record de novo. See Robinson v.
Sheet Metal Workers' Nat’l Pension Fund, Plan A, 515 F.3d 93, 98 (2d Cir. 2008) (discussing district court
review); 26 U.S.C. § 7482(a)(1) (Tax Court decisions are to be reviewed “in the same manner and to
the same extent as decisions of the district courts”).6
A. Deficiency
The Tax Court found that in 2003 the Gluckmans’s interest in the policies was “substantially
vested” within the meaning of the Code, and therefore required to be included as income.7 Tax Op.
at *21. Specifically, once Fownes authorized withdrawal from the Advantage Plan, the “underlying
policies were substantially certain to be distributed to petitioners or placed within their control,” and,
more importantly, “were placed within petitioners’ control no later than early November 2003.” Id.
at *16. The Tax Court rejected the argument that the policies were “at all times owned by a welfare
benefit plan and subject to a substantial risk of forfeiture,” id. at *18, as well as the argument that the
Fownes board of directors, not the Gluckmans, had control over the disposition of the policies, id.
at *21. We agree.
After Fownes withdrew from the Advantage Plan, BISYS provided Fownes, which was
controlled by the Gluckmans,8 with the change of ownership and change of beneficiary forms,
giving the Gluckmans the “ability to name themselves or another welfare benefit plan as the owner
and beneficiary of the underlying policies.” Id. at *19. That the Gluckmans chose to name a
different welfare benefit plan as the new owner of the policies does not negate the fact that the
Gluckmans had the ability to name themselves or anyone else as owners. The Gluckmans have not
established that anyone else exercised or could have exercised authority over the use or distribution
of the policies following the formal termination from the Advantage Plan. Indeed, BISYS informed
6 But see Scheidelman v. Commissioner, 682 F.3d 189, 193 (2d Cir. 2012) (mixed questions of law and fact in tax cases
are reviewed for clear error). Because the standard of review does not govern the outcome of this case it is unnecessary
to resolve any tension between these two standards here.
7 The Advantage Plan, a non-exempt trust, is governed by Internal Revenue Code (“Code”) section 402(b)(1)
which provides that an employee “must include in gross income the value of her interest in a nonexempt trust in the
first taxable year in which that interest becomes substantially vested.” The governing IRS regulation provides, in relevant
part, “[i]f rights of an employee under a trust become substantially vested during a taxable year of the employee . . . the
value of the employee’s interest in the trust on the date of such change shall be included in his gross income for such
taxable year . . . .” 26 C.F.R. § 1.402(b)–1(b)(2). An employee’s interest is “substantially vested” when it is “either
transferable or not subject to a substantial risk of forfeiture.” Id. § 1.83–3(b). A substantial risk of forfeiture exists
where property rights “are conditioned, directly or indirectly, upon the future performance . . . of substantial services by
any person, or the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is
substantial if such condition is not satisfied.” Id. § 1.83-3(c).
8 The Gluckmans do not seriously dispute that they exercised control over Fownes, nor could they plausibly do so
in view of their status as majority shareholders, and Thomas Gluckman’s position as President.
4
the Gluckmans in the October letter acknowledging Fownes’s withdrawal that the Advantage Plan
was “not responsible for the payment of any death benefit, interest of proceeds of any sort
associated with your participation in the Plan and Trust.” App’x 133.9 We agree that at this point in
2003 the policies were not subject to a substantial risk of forfeiture. Accordingly, we affirm the
decision of the District Court.
B. Accuracy-Related Penalty
The Tax Court affirmed the Commissioner’s assessment of a twenty percent “accuracy-
related penalty” against the Gluckmans for underpayment attributable to “substantial
understatement of income tax.” 26 U.S.C. § 6662(b)(2). An understatement of income tax is
substantial if it exceeds the greater of ten percent of the tax required to be shown, or $5,000.
Section 6662(d)(1)(A). Although the Gluckmans could have rebutted the assessment of the penalty
by providing evidence that the underpayment was made in “good faith” and with “reasonable
cause,” id. § 6664(c)(1), they produced no evidence with respect to the defenses of reasonable cause
or good faith before the Tax Court, Gluckman, T.C.M. 2012-329 at *22, or, for that matter, on appeal.
Accordingly, we affirm the penalty for the reasons stated in the Tax Court’s Memorandum Opinion.
CONCLUSION
We have reviewed the record and the parties’ arguments on appeal. For the reasons set out
above, we AFFIRM the December 17, 2012 judgment of the Tax Court.
FOR THE COURT,
Catherine O’Hagan Wolfe, Clerk of Court
9 The Gluckmans assert that, throughout 2003, BISYS maintained “the right to surrender the policies, borrow
against the policies, assign or transfer the policies, and name or change beneficiaries.” Appellants’ Br. 40.
5