G. Cadwell, Jr. v. Commissioner of IRS , 483 F. App'x 847 ( 2012 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-1667
G. MASON CADWELL, JR.,
Petitioner - Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent - Appellee.
Appeal from the United States Tax Court. (Tax Ct. No. 15456-08)
Argued: March 21, 2012 Decided: June 20, 2012
Before TRAXLER, Chief Judge, and KING and WYNN, Circuit Judges.
Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Chief Judge Traxler and Judge King concurred.
ARGUED: Kevin J. Ryan, RYAN, MORTON & IMMS, LLC, West Chester,
Pennsylvania, for Appellant. Randolph Lyons Hutter, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
ON BRIEF: Richard H. Morton, RYAN, MORTON & IMMS, LLC, West
Chester, Pennsylvania, for Appellant. Tamara W. Ashford, Deputy
Assistant Attorney General, Kenneth L. Greene, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit.
WYNN, Circuit Judge:
With this appeal, Petitioner G. Mason Cadwell, Jr.
challenges the United States Tax Court’s determination that he
had unreported income in 2004 arising from employee benefits
paid for and provided by businesses owned by his family.
Petitioner also argues that the tax court abused its discretion
in denying his motion to amend his petition to allege a defense
against an assessed tax penalty. Because we conclude that the
tax court neither erred nor abused its discretion, we affirm its
granting summary judgment in favor of the Commissioner of
Revenue and denying Petitioner leave to amend.
I.
Petitioner, a resident of North Carolina, is married to
Jennifer K. Cadwell (“Mrs. Cadwell”), and together they have two
daughters, Jennifer Keady Cadwell (“Jennifer”) and Miranda M.
Cadwell (“Miranda”) (collectively “Cadwell Family”). The
Cadwell Family is engaged in two businesses related to this
case. The first, Keady Limited (“Keady”), is a Pennsylvania S
corporation wholly owned by Mrs. Cadwell. Mrs. Cadwell is also
Keady’s sole director. Petitioner served as Keady’s secretary.
Keady’s only income was its share of the income distributed
from KSM, Limited Partnership (“KSM”). KSM, the second Cadwell
Family business related to this case, is a Pennsylvania limited
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partnership owned: ninety percent by Mrs. Cadwell; five percent
by Keady; two percent by Petitioner; one and one half percent by
Jennifer; and one and one half percent by Miranda. Keady is
KSM’s general partner.
In 2002, Petitioner and Mrs. Cadwell decided to obtain
employee welfare benefits for Petitioner, Jennifer, and Miranda.
According to its original terms, the benefits plan was organized
as a multi-employer welfare benefit plan pursuant to Internal
Revenue Code Section 419A(f)(6) and provided Petitioner,
Jennifer, and Miranda with death and severance benefits.
Petitioner, on behalf of Keady, signed the documentation
adopting the plan.
Life insurance covering Petitioner’s, Jennifer’s, and
Miranda’s lives was selected to fund the death and severance
benefits payable under the plan. For Petitioner, a universal
life policy with an initial death benefit of $1 million that
also accumulates cash value was selected to fund his benefit.
In his life insurance policy application, Petitioner listed
himself as Keady’s “manager,” and Jennifer and Miranda were
listed on their applications as “consultants.”
In 2004, the relevant tax year for this appeal, KSM paid
$38,800 to the plan administrator: $36,000 to cover the plan
contribution and $2,800 in plan fees. Checks to cover these
costs were drawn on a KSM escrow account. The insurance company
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that issued the life insurance policies then credited
Petitioner’s life insurance policy with an $18,000 payment.
In November 2004, the plan sponsor, Niche Plan Sponsors
(“Niche”), sent letters to the employers participating in the
multi-employer welfare benefit plan in which Petitioner and his
family businesses participated, announcing that the plan had
been split into single-employer welfare benefit plans. The
stated reasons for the conversion included more employer control
over plan assets and the concern that the plan might be subject
to listed transaction penalties. Niche’s letter indicated that
the single-employer benefit plans no longer qualified under
Internal Revenue Code Section 419A(f)(6) and that the
deductibility of the employer’s contributions would be limited.
Keady’s resulting single-employer benefit plan was renamed
the “Keady, Ltd. Welfare Benefit Plan.” The new trust agreement
relating to the plan provided, among other things, that the
default plan administrator is the employer. Further, by
December 2004, the life insurance policy covering Petitioner had
a death benefit value of $1,070,529, a fund, or cash, value of
$70,529, and a surrender value of $25,237.
Petitioner did not include on his Form 1040 for the 2004
tax year any income resulting from the conversion of the plan
from a multi-employer benefit plan to a single-employer benefit
plan. Indeed, for tax years 2002 through 2004, Petitioner filed
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a Form 1040, U.S. Individual Income Tax Return, claiming a
filing status of married filing separately, and reporting no
“wages, salaries, tips, etc.”
In April 2008, the Commissioner of Internal Revenue sent
Petitioner a notice of deficiency claiming that Petitioner’s
gross income for 2004 should be increased by $102,039. The
unreported income allegedly consisted of: (1) the fund value of
the life insurance policy, i.e., $70,529; (2) the excess
contribution to the plan of $18,000; and (3) the cost of term
life insurance on Petitioner’s life for 2004 of $13,510.
Petitioner challenged the alleged deficiency in the tax court,
but that court ruled against him, granting summary judgment in
the Commissioner of Internal Revenue’s favor. Petitioner now
appeals to this Court.
II.
On appeal, Petitioner argues that: the tax court
mischaracterized the contributions to the plan; the plan’s 2004
conversion from a multi-employer welfare benefit plan to a
single-employer plan did not result in income that he should
have reported; the tax court improperly valued the life
insurance policy; and the tax court erred in refusing Petitioner
leave to amend his petition. We address each issue in turn,
reviewing the tax court’s decision to grant summary judgment de
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novo, Capital One Fin. Corp., & Subsidiaries v. Comm’r of
Internal Revenue, 659 F.3d 316, 321 (4th Cir. 2011), and
reviewing its decision to deny leave to amend for abuse of
discretion. Braude v. Comm’r of Internal Revenue, 808 F.2d
1037, 1039 (4th Cir. 1986); Manzoli v. Comm’r of Internal
Revenue, 904 F.2d 101, 107 (1st Cir. 1990).
A.
With his first argument, Petitioner contends that the tax
court mischaracterized the contributions to the plan as income.
Petitioner contends that they were not income but instead gifts
from his wife. We disagree.
The Commissioner of Revenue may look through the form of a
transaction to its substance. See, e.g., Gregory v. Helvering,
293 U.S. 465, 469 (1935). By contrast, a “taxpayer may have
less freedom than the Commissioner to ignore the transactional
form that he has adopted.” Bolger v. Comm’r of Internal
Revenue, 59 T.C. 760, 767 n.4 (1973). Generally, “a transaction
is to be given its tax effect in accord with what actually
occurred and not in accord with what might have occurred.”
Comm’r of Internal Revenue v. Nat’l Alfalfa Dehydrating &
Milling Co., 417 U.S. 134, 148 (1974). Because, “while a
taxpayer is free to organize his affairs as he chooses,
nevertheless, once having done so, he must accept the tax
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consequences of his choice, whether contemplated or not, and may
not enjoy the benefit of some other route he might have chosen
to follow but did not.” Id. at 149 (citations omitted).
Here, the 2004 contributions to the plan were made out of a
business—not personal—bank account, namely the KSM escrow
account. Further, the payments were used to fund an employee
benefit plan, and Petitioner served as Keady’s secretary and
manager. Whether the business funds may have been
“distributable”—though undisputedly not actually distributed—to
Mrs. Cadwell is irrelevant. Finally, whether Keady or KSM took
a corresponding employer deduction for contributions made to the
employee benefits plan is of no import: Petitioner cites no
authority conditioning a benefit’s inclusion in income on an
employer’s deduction of the benefit, and we find none. We
therefore conclude that the tax court did not mischaracterize
the plan contributions when it refused to restyle them as
spousal gifts.
B.
Next, Petitioner contends, first, that the tax court
mistakenly made no finding that the multi-employer plan in place
before 2004 was qualified for tax exemption, and second, that
he, for various reasons, did not realize assets from the plan in
2004. Again, we disagree.
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With regard to Petitioner’s first contention, that the tax
court made no finding that the multi-employer plan in place
before 2004 was qualified for tax exemption, Petitioner failed
to properly raise this issue before the tax court. Indeed, the
tax court noted that “[b]oth parties treat petitioner’s interest
in the Plan as subject to a substantial risk of forfeiture
before the Plan’s conversion to [a single-employer plan] on
November 17, 2004. . . . [T]he issue of whether the Plan
qualified pursuant to section 419(A)(f)(6) before conversion is
not in issue.” J.A. 242.
We thus turn to Petitioner’s second contention, that he did
not realize assets from the plan in 2004. Petitioner first
contends that he did not realize assets from the plan in 2004
because he did not voluntarily choose to convert the multi-
employer welfare benefit plan into a single-employer plan.
However, Petitioner cites no authority indicating that the
(in)voluntariness of the conversion is in any way relevant to
analyzing this issue, and we fail to see its salience.
Petitioner also argues that he did not realize assets from
the plan in 2004 because the plan assets had not vested. In
this regard, 26 C.F.R. § 1.402(b)-1 provides that employer
contributions made to a nonexempt employee trust must be
included in gross income to the extent that the employee’s
interest in such contributions is “substantially vested.” An
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employee’s interest in property is substantially vested when it
is “either transferable or not subject to a substantial risk of
forfeiture.” 26 C.F.R. § 1.83–3(b).
“[W]hether a risk of forfeiture is substantial or not
depends upon the facts and circumstances” of the case. 26
C.F.R. § 1.83–3(c)(1). A substantial risk of forfeiture exists
“where rights in property that are transferred 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.
In this case, after the conversion of the plan from a
multi-employer to a single-employer welfare benefit plan, the
plan assets could be used only to pay Keady employees’ claims.
The conversion therefore eliminated the risk that Keady’s plan
assets could be used to pay other employers’ claims.
Further, Keady was wholly owned by Mrs. Cadwell,
Petitioner’s wife, and Mrs. Cadwell appears to be the business’s
only director. Petitioner identified himself as Keady’s
“secretary” and “manager” and appears to be the business’s sole
officer. As Keady’s sole officer, Petitioner had control over
his own eligibility under the plan, as well as over decisions
regarding plan assets. Therefore, when the trust’s assets came
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under Keady’s control upon the plan’s conversion, they became
subject to Petitioner’s control. Cf. 26 C.F.R. § 1.83–3(c)(3).
Further, to the extent that a vesting schedule applied, the
power to enforce the restrictions of the schedule against
Petitioner would have been in the hands of Petitioner himself,
his wife, or his daughters—i.e., individuals with an interest in
the plan assets. Under these circumstances, we agree with the
tax court that any restrictions on Petitioner’s power to obtain
the plan proceeds were illusory and that the plan assets had
indeed “substantially vested” upon conversion in 2004.
Petitioner attempts to convince us otherwise by focusing on
two cases that are, in any event, non-binding: Booth v. Comm’r
of Internal Revenue, 108 T.C. 524 (1997), and Olmo v. Comm’r of
Internal Revenue, 38 T.C.M. 1112 (1979). Neither furthers
Petitioner’s cause. In Booth, the tax court needed to decide
whether certain benefits constituted deferred compensation
instead of a welfare benefit plan—not an issue in this case.
108 T.C. 524. In Olmo, the tax court did have to determine
whether assets in employee benefit accounts had vested. 38
T.C.M. (CCH) 1112. But the circumstances in Olmo—including
unrelated employees and owners, a prohibition on assignment of
rights to benefits, and a requirement of additional service for
additional vesting upon penalty of forfeiture—differ materially
from those present here. Id.
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In sum, we agree with the tax court that Petitioner’s
interest in the plan vested, i.e., was no longer subject to a
substantial risk of forfeiture, in 2004. Petitioner did,
therefore, have to declare his vested interest as income in
2004.
C.
Petitioner next argues that the tax court improperly valued
the universal life insurance policy by considering the fund
value without accounting for surrender charges. Petitioner
contends that such charges must be accounted for pursuant to two
recent (non-binding) tax court decisions: Schwab v. Comm’r of
Internal Revenue, 136 T.C. 120 (2011), and Lowe v. Comm’r of
Internal Revenue, 101 T.C.M. 1525 (2011). We disagree.
In Schwab, the tax court addressed whether surrender
charges should be considered when determining the “amount
actually distributed.” 136 T.C. at 121. The Schwab court
expressly distinguished the operative statutory section and
language, which applied to distributed insurance policies, from
the statutory section and language relevant to this case, in
which assets are still held in trust. Id. at 130. Similarly,
in Lowe, the tax court recognized a distinction in the laws
applicable, on the one hand, to “an employee beneficiary who
receives the benefit of a contribution made by an employer to a
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nonexempt employee trust[,]” as in Petitioner’s case here, and,
on the other, to “an employee who receives a distribution from a
nonexempt employee trust[,]” as was the case in Lowe. 101
T.C.M. 1525, at *4. Because the facts and law at issue in
Schwab and Lowe differ materially, we cannot agree with
Petitioner that they shed light on, much less control, this case
and the valuation of Petitioner’s universal life policy.
D.
Finally, Petitioner argues that he should have been allowed
to amend his petition over a year after its filing and less than
a month before the scheduled hearing on the parties’ motions for
summary judgment. Again, we cannot agree.
A court may deny leave to amend a complaint or petition
“when the amendment would be prejudicial to the opposing party,
the moving party has acted in bad faith, or the amendment would
be futile.” Equal Rights Ctr. v. Niles Bolton Assocs., 602 F.3d
597, 603 (4th Cir.), cert. denied, 131 S. Ct. 504 (2010).
Generally, “mere delay in moving to amend is not sufficient
reason to deny leave to amend[;]” rather, the delay should be
“accompanied by prejudice, bad faith, or futility.” Island
Creek Coal Co. v. Lake Shore, Inc., 832 F.2d 274, 279 (4th Cir.
1987) (quotation marks omitted). Nevertheless, “the further the
case progresse[s] . . ., the more likely it is that the
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amendment will prejudice the defendant or that a court will find
bad faith on the plaintiff’s part.” Laber v. Harvey, 438 F.3d
404, 427 (4th Cir. 2006).
Here, Petitioner filed the motion to amend more than a year
after he filed his petition, after the parties had filed their
respective motions for summary judgment, and less than a month
before the scheduled hearing on the motions for summary
judgment. Petitioner did not offer any excuse or justification
for his delay in seeking leave to amend. He simply sought to
add a new, fact-bound defense that he acted with reasonable
cause and in good faith by relying upon the advice of his
counsel and accountant. Consideration of that defense may well
have necessitated additional discovery and, certainly,
postponement of the summary judgment hearing. The prejudice
posed by Petitioner’s unexcused tardiness, alone, supported
denying the motion to amend, and the tax court did not abuse its
discretion in doing so.
III.
In sum, we affirm the tax court’s grant of summary judgment
in the Commissioner of Revenue’s favor, as well as the tax
court’s denial of Petitioner’s motion for summary judgment and
motion to amend his petition.
AFFIRMED
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