Samuel Wegbreit v. CIR ( 2021 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 20-1306
SAMUEL WEGBREIT and ELIZABETH J. WEGBREIT,
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
____________________
Appeal from the United States Tax Court.
No. 7109-13 — Mary Ann Cohen, Judge.
____________________
ARGUED DECEMBER 7, 2020 — DECEMBER 29, 2021
____________________
Before SYKES, Chief Judge, and BRENNAN and ST. EVE,
Circuit Judges.
SYKES, Chief Judge. Samuel and Elizabeth Wegbreit
sheltered several million dollars of income in a life-insurance
policy held by a sham trust. The IRS caught on to the
Wegbreits’ scheme and issued a deficiency notice showing
that they owed millions in back taxes. The Wegbreits
challenged the notice in the tax court. After discovery
revealed a series of suspicious documents and transactions
relating to the Wegbreits’ finances, the IRS added civil fraud
2 No. 20-1306
allegations. The tax court agreed with the IRS, finding that
the Wegbreits underreported their income by nearly $15
million and engaged in a pattern of conduct intended to
defraud the government.
We affirm. The Wegbreits’ rambling brief spans 78 pages
yet somehow develops only two coherent arguments
remotely related to the tax court’s decision. And those two
arguments are baseless: the Wegbreits stipulated them away
in the tax court. We therefore order John E. Rogers, the
Wegbreits’ attorney, to show cause why he should not be
sanctioned under Rule 38 for filing this frivolous appeal.
I. Background
Samuel Wegbreit founded and served as an executive of
Oak Ridge, LLC, a financial-services company. In 2003 as his
interest in Oak Ridge gained value, Samuel worked with
Thomas Agresti, his attorney, to reduce his tax liability.
Agresti proposed that Samuel transfer his Oak Ridge interest
to a trust benefitting his wife, Elizabeth, and the couple’s
children. With Agresti as trustee, the trust would in turn
convey the Oak Ridge interest to an offshore insurance
company as an initial premium for a life-insurance policy
benefitting the trust. Samuel agreed to Agresti’s scheme
without conducting any research or seeking independent
legal advice.
The record includes three versions of the Samuel
Wegbreit Trust Fund agreement, with suspicious differences
between them. Most notably, two of the agreements identify
only $18,750 in cash as initial trust assets, but the third also
lists an insurance policy issued by Acadia Life Ltd.—a policy
that was not issued by Acadia until 2004, the year after the
No. 20-1306 3
trust was formed. Another oddity is worth mentioning. One
of the documents declares that it is restating the trust agree-
ment dated January 25, 2002, over a year before Samuel even
met with Agresti. No one could produce the purported 2002
agreement, nor could the Wegbreits explain why there were
multiple trust agreements, the discrepancies between them,
or which was operative.
Agresti, acting as trustee, acquired a variable life-
insurance policy from Threshold Alliance, Ltd. 1 Although
nominally based in the Cook Islands, Threshold shares a
United States office with Agresti’s law firm. The policy lists
its issuance date as January 25, 2002—the same day the
mysterious 2002 trust agreement was supposedly execut-
ed—and states that coverage does not start until the first
premium is paid. As the initial premium payment, Samuel
transferred his Oak Ridge interest to the trust, which it in
turn conveyed to Threshold. Threshold’s supposed policy
administrator, however, denies signing the transfer docu-
ments and ever working for the company.
In 2004 Agresti swapped the Threshold policy for the one
issued by Bermuda-based Acadia Life Ltd. At the time of the
exchange, over 80% of the Threshold policy’s value consisted
of Samuel’s Oak Ridge interest. The remainder was com-
prised of interests in shell companies organized and run by
Agresti and his associates.
1 Variable life-insurance policies split premiums between a cash account
and an investment account, and thus provide an investment vehicle. See
generally Norem v. Lincoln Benefit Life Co., 737 F.3d 1145, 1147 (7th Cir.
2013).
4 No. 20-1306
The Wegbreits leveraged the insurance policies for their
personal benefit in two ways. First, the shell companies
made expensive purchases, including show horses and
several Florida condominiums, on the Wegbreits’ behalf.
Second, the Wegbreits regularly requested policy loans from
Acadia on behalf of the family trust, which would in turn
deposit the money into a bank account in Samuel’s name.
Between 2004 and 2008, the Wegbreits received over
$3 million in policy loans, none of which they reported as
taxable income.
The biggest payoff came when Acadia, at Samuel’s
direction, sold his Oak Ridge interest to an investment firm
for $11.3 million. Although the purchase agreement was
finalized in 2004, the Wegbreits stipulated in the tax court
that the sale occurred in January 2005, and the record shows
that the money changed hands later that month. Because the
proceeds were wired directly to Agresti, who passed them
on to Acadia, the Wegbreits did not report any taxable
income from the sale.
After a 2008 audit, the IRS determined that the trust
income and Acadia policy gains, including those from the
Oak Ridge sale, were taxable to the Wegbreits. In total they
underreported their income from 2005 to 2009 by nearly
$15 million. The Wegbreits disputed the IRS’s conclusion in
the tax court. After discovery revealed the suspicious
documents related to the trust and life-insurance policies,
the Commissioner of Internal Revenue amended his answer
to assert civil fraud penalties.
After trial the tax court found that Samuel never
effectively transferred his Oak Ridge interest to the trust.
The rest of the tax scheme collapsed from there. Without the
No. 20-1306 5
Oak Ridge interest, the trust never paid the initial premium
for the Threshold policy—a condition to its issuance—and
Agresti could not exchange the invalid Threshold policy for
the Acadia policy. The judge additionally found that the
trust was a sham lacking economic substance and thus
should be disregarded for tax purposes. With the trust and
insurance policies out of the way, the judge agreed with the
Commissioner’s assessment of the Wegbreits’ tax liability.
She also imposed fraud penalties, noting that the record
displayed several indications of fraud, including false and
misleading documents and failure to cooperate with tax
authorities.
II. Discussion
We review the tax court’s legal conclusions de novo and
its factual findings for clear error. Cole v. Comm’r, 637 F.3d
767, 773 (7th Cir. 2011). We also presume that the Commis-
sioner’s assessment of a tax deficiency is correct. Id. To shift
the burden to the Commissioner, the taxpayer must show
that the assessment “lacks a rational foundation or is arbi-
trary and excessive.” Id. (quotation marks omitted).
Although “[t]he purpose of an appeal is to evaluate the
reasoning and result reached by the” court below, Jaworski v.
Master Hand Contractors, Inc., 882 F.3d 686, 690 (7th
Cir. 2018), the Wegbreits raise a bevy of legal topics wholly
irrelevant to the tax court’s decision, from statutory-
diversification rules for life-insurance portfolios to the
grantor-trust doctrine. When they do address germane
issues, their brief flagrantly violates Rule 28’s requirement to
support each argument “with citations to the authorities and
parts of the record on which [they rely].” FED. R. APP. P.
28(a)(8)(A). As just a sample, the brief cites a 489-page
6 No. 20-1306
insurance treatise—all of it—in support of a single proposi-
tion and the “entire record” in support of another. Notwith-
standing this general incoherence, we can discern two
contested issues on which the Wegbreits’ brief satisfies the
bare minimum of Rule 28: the date of the sale of Samuel’s
Oak Ridge shares, and the Commissioner’s compliance with
26 U.S.C. § 6751 in seeking fraud penalties. The balance of
the Wegbreits’ conclusory arguments are waived. See, e.g.,
Cole, 637 F.3d at 773.
A. Oak Ridge Sale Date
The Internal Revenue Code states that “[t]he amount of
any item of gross income shall be included in the gross
income for the taxable year in which received by the taxpay-
er,” unless the taxpayer’s accounting method permits oth-
erwise. 26 U.S.C. § 451(a). The Wegbreits maintain that the
Commissioner is barred by the statute of limitations from
assessing any back taxes based on 2004 income, see id.§ 6501(a), and that because the Oak Ridge sale was consum-
mated in 2004, the proceeds are taxable income for 2004.
The flaws in this argument are numerous. Most
obviously, the Wegbreits stipulated below that the sale
occurred on January 1, 2005. They ask us to release them
from this stipulation, but they never made such a request to
the tax court. That’s a waiver. See Soo Line R.R. Co. v.
Consolidated Rail Corp., 965 F.3d 596, 601 (7th Cir. 2020).
Moreover, their request to undo the stipulation consists of an
utterly undeveloped assertion that the date of a sale is a legal
conclusion that cannot be conceded. That’s a double waiver.
See Shipley v. Chi. Bd. of Election Comm’rs, 947 F.3d 1056, 1063
(7th Cir. 2020) (undeveloped, cursory arguments are
waived). And the assertion is wrong: The date of a sale is a
No. 20-1306 7
question of fact (or at least a mixed question of fact and law),
Williams v. Comm’r, 1 F.3d 502, 505 (7th Cir. 1993), and thus
fair game for stipulation, TAX CT. R. 91(a) (permitting
stipulation of a fact or an application of law to a fact).
In any event, the Wegbreits’ argument is factually base-
less because the evidence unambiguously shows, and the
Wegbreits concede, that the funds were received in January
2005. In a single conclusory sentence, the Wegbreits assert
that Acadia is an “accrual base” taxpayer permitted to report
the sale proceeds as 2004 income, see 26 U.S.C. § 451(b)(1)(A),
but this unsupported, cursory argument is waived too,
Shipley, 947 F.3d at 1063. In yet another woeful failure to
grapple with the tax court’s decision, the Wegbreits also do
not explain why Acadia’s accounting method matters since
the judge found that the Acadia policy was never valid and
the trust purportedly holding the policy was a sham.
B. Compliance with § 6751
With a few exceptions, the IRS may not assess any
penalty “unless the initial determination of such assessment
is personally approved (in writing) by the immediate
supervisor of the individual making such determination or
such higher level official as the Secretary may designate.”
§ 6751(b)(1). The Wegbreits insist that we must vacate the tax
court’s fraud penalty because the Commissioner did not
comply with § 6751.
As with the Oak Ridge sale date, the Wegbreits’
stipulations in the tax court foreclose this argument. They
agreed both to the factual basis for the Commissioner’s
compliance with § 6751 and to the ultimate conclusion: The
Commissioner “complied with the written approval
8 No. 20-1306
requirement under … § 6751(b)(1).” Their attempts to skirt
this unequivocal stipulation are perfunctory and raised for
the first time on appeal. Either constitutes a waiver. Soo Line,
965 F.3d at 601.
C. Sanctions
Rule 38 permits us to impose sanctions for frivolous
appeals. FED. R. APP. P. 38. The presumptive sanction for a
frivolous tax appeal is $5,000. Veal-Hill v. Comm’r, 976 F.3d
775 (7th Cir. 2020) (per curiam). “An appeal is frivolous if
the appellant’s claims are cursory, totally undeveloped, or
reassert a previously rejected version of the facts. An appeal
is also frivolous if it presents arguments that are so
insubstantial that they are guaranteed to lose.” McCurry v.
Kenco Logistics Servs., LLC, 942 F.3d 783, 791 (7th Cir. 2019)
(citations omitted). This appeal fits both standards.
The Wegbreits’ brief, signed by attorney John E. Rogers,
is woefully deficient. The bulk of its 78 pages consists of
rambling, unsupported assertions, most of which do not
bear any relationship to the reasoning in the tax court’s
decision. As we’ve explained, the only two discernable,
arguably relevant arguments are sure losers, stipulated away
without excuse and frivolous to boot. On top of these glaring
shortcomings, the Wegbriets accuse the IRS’s attorneys of
threatening and intimidating them to settle the case, yet they
offer no evidence for such a serious allegation. This baseless
accusation is irresponsible and entirely inappropriate for a
lawyer admitted to practice before this court.
We have cautioned Rogers before about the
consequences of bringing frivolous appeals, Sugarloaf Fund,
LLC v. Comm’r, 953 F.3d 439, 441 (7th Cir. 2020), but that
No. 20-1306 9
warning apparently went unheeded. We therefore order
Rogers to show cause within 14 days why he should not be
sanctioned for bringing this utterly frivolous appeal in
violation of Rule 38 of the Federal Rules of Appellate
Procedure. We also direct the Clerk of Court to forward this
opinion to the Illinois Attorney Registration and
Disciplinary Commission for any action it deems
appropriate.
AFFIRMED; ORDER TO SHOW CAUSE ISSUED