Mauerman v. Commissioner
This text of 1993 T.C. Memo. 23 (Mauerman v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
*21 Decision will be entered for respondent as to 1984 and 1986, and for petitioner as to 1985.
Petitioner made payments to Pre-Paid Legal Services, Inc. (Pre-Paid), to buy the right to receive 5 years' premium income on legal service contracts issued by Pre-Paid to clients in 1984 and 1986. Petitioner deducted the payments to Pre-Paid on his 1984 and 1986 tax returns. Petitioner should have amortized the payments over 5 years.
Petitioner and respondent have settled the deficiencies; the dispute is whether petitioner is liable for additions to tax for 1984 under
1.
2.
3.
4.
5.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHABOT,
| Additions to Tax | |
| Year | Sec. 6661(a) |
| 1984 | $ 11,160 |
| 1985 | 1,634 |
| 1986 | 10,401 |
*23 The addition to tax under
After concessions by respondent,
FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petition was filed in the instant case, petitioner resided in Oklahoma.
Petitioner obtained an undergraduate degree from Vanderbilt University in 1959 and a medical degree from Columbia Medical School in 1963. Petitioner stayed at Columbia Medical School until 1965 and then spent 2 years in military service, until 1967. From 1967 to 1970, petitioner participated in an orthopedic fellowship in Memphis, Tennessee. Since 1970 petitioner has practiced orthopedic surgery and sports medicine in Tulsa, Oklahoma. He is part of a group of eight orthopedic surgeons and two sports medicine *24 doctors. The predominant source of petitioner's gross income for the years in issue was wages and salaries. On his 1984 tax return petitioner showed his occupation as "Surgeon". Petitioner had investments in stock, and investments through partnerships and corporations. Petitioner does not have any legal, tax, or insurance expertise.
Petitioner's occupation as a physician is his only occupation. Petitioner has never been in the insurance business.
Petitioner reported on his 1984, 1985, and 1986 tax returns the items of gross income shown in table 1.
Table 1
| Item | 1984 | 1985 | 1986 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wages, salaries | $ 280,036.00 | $ 294,261.00 |
| Additions to Tax | |
| Year | Sec. 6661(a) |
| 1984 | $ 11,160 |
| 1985 | 1,634 |
| 1986 | 10,401 |
*23 The addition to tax under
After concessions by respondent,
FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petition was filed in the instant case, petitioner resided in Oklahoma.
Petitioner obtained an undergraduate degree from Vanderbilt University in 1959 and a medical degree from Columbia Medical School in 1963. Petitioner stayed at Columbia Medical School until 1965 and then spent 2 years in military service, until 1967. From 1967 to 1970, petitioner participated in an orthopedic fellowship in Memphis, Tennessee. Since 1970 petitioner has practiced orthopedic surgery and sports medicine in Tulsa, Oklahoma. He is part of a group of eight orthopedic surgeons and two sports medicine *24 doctors. The predominant source of petitioner's gross income for the years in issue was wages and salaries. On his 1984 tax return petitioner showed his occupation as "Surgeon". Petitioner had investments in stock, and investments through partnerships and corporations. Petitioner does not have any legal, tax, or insurance expertise.
Petitioner's occupation as a physician is his only occupation. Petitioner has never been in the insurance business.
Petitioner reported on his 1984, 1985, and 1986 tax returns the items of gross income shown in table 1.
Table 1
| Item | 1984 | 1985 | 1986 |
| Wages, salaries | $ 280,036.00 | $ 294,261.00 | $ 252,432.00 |
| Interest income | 2,322.60 | 10,217.67 | 32,949.90 |
| Dividends | 8,659.84 | 5,072.34 | 672.65 |
| Insurance, reinsurance 1*25 | 45,018.00 | 105,000.00 | 105,000.00 |
| Capital gains (losses) 2 | 6,373.00 | (189,210.84) | 84,231.00 |
| Form 4797 | -- | (79,102.98) | -- |
| Rents | 1,795.25 | 3,145.00 | 252.10 |
| Royalties | 12,653.12 | 10,335.00 | 8,230.42 |
| Partnerships | (3,069.59) | (1,380.21) | (1,143.00) |
| Subchapter S | (1,906.92) | 247.96 | (249.14) |
| Other | 300.00 | 528.00 | 29.00 |
Table 2 shows the adjustments, to which petitioner agreed, that led to the understatements of income tax on which the
Table 2
| Item | 1984 | 1985 | 1986 |
| Schedule C net income | $ 106,138 | ($ 915) | $ 88,017 |
| Depreciation -- rental | (14,251) | 14,251 | -- |
| (see supra note 1) | |||
| Total agreed adjustments | 91,887 | 13,336 | 88,017 |
The understatements on which the
*26 Pre-Paid began business in 1973 and was one of the first companies of its type to provide prepaid legal service benefits. Pre-Paid's primary business was the issuance of legal service contracts to its individual members in return for monthly premiums. The legal service contract sold by Pre-Paid provided for the payment of specified legal fees incurred by the individual member. By 1984, Pre-Paid was marketing legal service contracts in 22 States and was a publicly held company listed on the NASDAQ National Market System. Pre-Paid also began a program whereby an individual could become a reinsurer.
Reinsurance is a common business practice for many insurance companies. Basically, it is a contract whereby risk is transferred between two parties. The parties to the contract are the ceding company (reinsured) which wrote the original policy, and the assuming party (reinsurer) which pays a ceding commission and accepts the business risks and rewards of the insurance (claims and premium income). In indemnity reinsurance, liability remains the direct responsibility of the ceding company and the policyholder is not notified of the reinsurance transaction.
Pre-Paid established a pooling*27 agreement which all of the investors and reinsurers were obliged to sign whereby each individual participant in this reinsurance program pooled his contracts that he had purchased into one large pool to be managed and overseen by L.N. Fentem Management Co. (hereinafter sometimes referred to as Fentem Management), where Fentem Management would administer, report, and distribute claims experience among the individual reinsurers.
Petitioner became aware of Pre-Paid in about 1976 or 1977 through an attorney who was a patient of petitioner. Petitioner bought stock in Pre-Paid in 1977, and continued to buy stock for himself and his family through 1986. During this time, petitioner invested more than half a million dollars in Pre-Paid stock. In 1983 petitioner learned about Pre-Paid's reinsurance program. Before deciding to become involved with the reinsurance program, petitioner confirmed that Harland Stonecipher (hereinafter sometimes referred to as Stonecipher), Pre-Paid's president, Rick Haney (hereinafter sometimes referred to as Haney), Pre-Paid's vice president, and Frank Jaques (hereinafter sometimes referred to as Jaques) were putting their own money into Pre-Paid's reinsurance*28 program. Jaques led petitioner to believe that this type of reinsurance program "had already been cleared through the courts" and was "all up-and-up". Petitioner knew that Jaques had the second largest shareholdings in Pre-Paid at that time, that Jaques was legal counsel for Pre-Paid, and that Jaques was on the board of directors of Pre-Paid. Petitioner was told that Fentem Management had researched the reinsurance program, and that an accounting firm, Fentem, Quinten & Thomas, Inc. (hereinafter sometimes referred to as Fentem CPAs), was also involved in the reinsurance program. Jaques, Fentem Management, and Fentem CPAs told petitioner that the payments were currently deductible.
Petitioner made payments to Pre-Paid as investments in the reinsurance program in 1983, 1984, and 1986; he did not make such payments in 1985 because he did not have enough free cash.
In December 1984, petitioner entered into a written contract with Pre-Paid. By the terms of the contract, petitioner would make cash payments to Pre-Paid and indemnify Pre-Paid for administrative expenses and claims under certain prepaid legal insurance contracts issued by Pre-Paid. The contract provides that From*29 January 1, 1985 through December 31, 1989, Principal [petitioner] will receive all premium income from such memberships [in effect, insurance contracts] subject to the following expenses which will be paid Agent [Pre-Paid] solely from the premium income collected by Agent [Pre-Paid] on behalf of Principal * * *.
Petitioner entered into similar contracts with Pre-Paid in 1983 and 1986. The 1983 transaction generated $ 45,000 in gross premiums for 1984, which was reported on Schedule C of petitioner's 1984 tax return.
Petitioner also entered into an agreement (effective January 1, 1984) with Fentem Management. The agreement provides that all revenues and operating expenses attributable to the reinsurance program pooling agreements are to be pooled and any profits or*30 losses are to be distributed. Pursuant to the agreement, Fentem Management would hire C.P.A.'s and attorneys to perform accounting and legal services that would be needed to manage the reinsurance program.
Petitioner received a letter regarding the reinsurance transaction, dated February 28, 1985, from Fentem CPA's stating that "It is our opinion that each individual should report their income and expenses on Schedule 'C' of the 1040". The letter also states: "However, this may not be the correct method for all investors and we suggest that they contact with [sic] their own accountant or tax preparer for the method most suitable to their situation."
Petitioner received a copy of a letter dated March 6, 1985, to Fentem Management from Jaques, who was also the attorney for Fentem Management, stating that "all activities of the pool, [Pre-Paid], and [Fentem Management] during the year 1984 have been legal and proper". Neither of the above-mentioned letters cites any legal authority.
Since about 1970, petitioner had used Don Atkins, an attorney and C.P.A., to prepare or review petitioner's tax returns. Don Atkins prepared petitioner's tax returns for the years in issue. Don Atkins' *31 son, Blake Atkins, did the primary work in preparing these tax returns; Blake Atkins did so as Don Atkins' employee. Blake Atkins has a degree in accounting from Wake Forest University, and a law degree from the University of Tulsa. Blake Atkins began practicing tax and corporate law in 1981.
Neither Don Atkins nor Blake Atkins was an investor in or officer of Pre-Paid. When Blake Atkins received information from petitioner for preparation of petitioner's 1983 tax return, 3Blake Atkins was not aware of what the reinsurance transaction was. Blake Atkins called petitioner for more information. Petitioner briefly reviewed the reinsurance program, and directed Blake Atkins to call Fentem CPAs to see if the reinsurance program "was on the up-and-up". Blake Atkins discussed the reinsurance program over the telephone with an accountant from Fentem CPAs. Fentem Management sent to Blake Atkins the material which had been prepared by Jaques. Blake Atkins reviewed the information, but he did not do any independent research. Blake Atkins confirmed some of the information by looking at the Internal Revenue Code and the Treasury regulations. Blake Atkins read the synopses of cases *32 sent to him from Fentem Management, but he did not read the case opinions. Blake Atkins noted that appellate courts were not in agreement as to whether these types of payments were currently deductible or whether they should be amortized, but he decided there were "sufficient grounds" that the payments were currently deductible. Blake Atkins did not do any legal research other than to verify the information which was sent to him by Fentem Management. Blake Atkins knew that Jaques' holdings in Pre-Paid were the second largest, that Jaques was an officer in Pre-Paid, and that Jaques was legal counsel for Pre-Paid. Blake Atkins did not explain to petitioner the legal basis for treating the payments as currently deductible, nor did he explain to petitioner that appellate courts disagreed about the proper tax treatment. In regard to the reinsurance program, petitioner relied both on the advice of his attorneys, Don Atkins and Blake Atkins, and on Fentem Management and Jaques. Petitioner knew that Don Atkins and Blake Atkins were advising him based on information provided to them by Jaques and Fentem Management.
*33 Petitioner deducted the payments to Pre-Paid in the year paid. On his 1984 tax return, petitioner reported the reinsurance program on Schedule C. Petitioner listed total deductions of $ 142,937.40 from this program. The total deductions were broken down into different categories as follows: $ 105,256.38 as "Commissions", $ 9,417.50 as "Interest on business indebtedness", $ 4,500 as "Legal and professional services", $ 10,129.02 as "General Administrative", $ 13,544.48 as "Claims", and $ 90.02 of "Bank Charge". The parties have stipulated that the relevant deductions are all of these items except for the $ 90.02 "Bank Charge". See
On his 1986 tax return, petitioner again reported the reinsurance program on Schedule C. Petitioner listed total deductions of $ 196,259.26 from this program. The total deductions were broken down into different categories as follows: $ 124,627.08 as "Commissions", $ 8,017.37 as "Other interest" (i.e., other than mortgage interest paid to financial institutions), $ 40,047.49 as "Claims", and $ 23,567.32 as "Administration". On his Schedule C petitioner reported $ 105,000 of "Premium Income" on Schedule C. On the line preprinted "Principal business or profession" of Schedule C, petitioner listed "Reinsurance".
Petitioner's tax return explanation of his insurance activities appears only on Schedule C (and, for 1984, Form 8271); no attachment to his 1984 or 1986 tax returns deals with this matter. On his 1985 tax return Schedule C, petitioner reported $ 105,000 premium income and $ 111,212.78 deductions, for a net loss of $ 6,212.78.
Respondent disallowed petitioner's claimed deductions for his payments to Pre-Paid on petitioner's 1984 and 1986 tax returns. The dispute was settled by allowing the payments in both 1984 and 1986 to be*35 amortized over the 5-year terms of the contracts.
On his 1984 tax return, petitioner shows a tax liability of $ 28,628.71; his correct liability is $ 73,267. On his 1986 tax return, petitioner shows a tax liability of $ 15,123.05; his correct liability is $ 56,726.
Petitioner asked respondent to waive all or part of the substantial understatement additions to tax pursuant to
The issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies was not the primary and predominant business activity of petitioner during either 1984 or 1986.
The relevant facts affecting the tax treatment of the payments are not adequately disclosed in petitioner's tax returns for 1984 and 1986.
Respondent's refusal to waive the additions to tax was not an abuse of discretion.
OPINION
If an item is not attributable to a tax shelter (see
*37 Respondent has authority to waive all or any part of this addition to tax, under circumstances specified in the statute.
We consider first, whether petitioner had substantial authority for the positions taken on his tax returns; second, whether there was adequate disclosure of relevant facts on petitioner's tax returns; third, whether respondent abused her discretion in not waiving the
I. Substantial Authority
Petitioner contends that he had substantial authority for the position taken on his tax returns that the payments to Pre-Paid were currently deductible. Petitioner's analysis is that (1) ceding commissions in a reinsurance setting are currently deductible for life insurance companies,
Respondent contends that petitioner did not have substantial authority to support his position taken on his 1984 and 1986 tax returns that the insurance commissions were currently deductible. Respondent contends that only insurance companies may currently deduct ceding commissions pursuant to the provisions of subchapter L (sections 801 through 844). Respondent contends that petitioner has not established that he qualifies as an insurance company for purposes of subchapter L.
We agree with respondent.
Firstly, we consider what constitutes substantial authority for purposes of
There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of*39 authorities supporting contrary positions.
*40 All authorities relevant to the tax treatment of an item, including contrary authorities, are taken into account in determining whether substantial authority exists and the weight of those authorities is determined in light of the pertinent facts and circumstances.
In determining whether there is substantial authority for a taxpayer's position, the following authorities are considered: applicable provisions of the Internal Revenue Code and other statutory provisions; temporary and final regulations construing such statutes; court cases; administrative pronouncements (including revenue rulings and revenue procedures); tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; and Congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers. * * *
The weight of the authorities for the tax treatment of an item is determined by the same analysis that a court would follow in evaluating the treatment of the item. Thus, if an authority is materially distinguishable on its facts from the facts of the case at issue, then the authority is of little relevance.
The taxpayer's belief that the authorities regarding the tax treatment of an item constitute substantial authority is not to be taken into account in determining whether there is substantial authority.
Petitioner directs our attention to Substantial authority can be found for the Petitioner's position in Sections 832(c), 809(c)(1), 809(d)(12)[,] and
The difficulties with petitioner's claimed "substantial authority" are that (1) State labels do not control, (2) the claimed Federal tax treatment is available only to an "insurance company", (3) petitioner was not an insurance company, and (4) petitioner does not point us to any "substantial authority" that suggests petitioner might have been an insurance company.
Although State law creates legal interests and rights, the Federal revenue acts designate how the interests or rights so created shall be taxed.
In interpreting the words used in a Federal revenue act, State law is not controlling unless the Federal statute "by express language or necessary implication, makes its own operation dependent upon state law."
Section 832(c) allows certain deductions "In computing the taxable income of an insurance company subject to the tax imposed by section 831". Section*44 831(a) provides the general rule that taxes are to be "computed as provided in section 11". Section 11 imposes income taxes on corporations. Petitioner does not contend that he should be taxes as a corporation. In his tax returns for 1984 and 1986, and in the settlement of adjustments, petitioner has proceeded on the basis that he is to be taxed as an individual and not as a corporation.
The definition of insurance company that applies to the years in issue 6 is in
* * * (a)
*45 Also,
Petitioner's occupation during the years in issue was orthopedic surgeon. As shown in table 1,
We conclude (and we have found) that the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies was not the primary and predominant business activity of petitioner during either 1984 or 1986.
We conclude that the cited Internal Revenue Code provisions, regulations, revenue ruling, and the Oklahoma statute provide no support for the proposition that petitioner qualifies as an "insurance company" under the regulations, nor do they support the proposition that petitioner*46 is entitled to the claimed current deductions even though petitioner is not an insurance company.
Petitioner also cites as substantial authority for his position two law review articles 7 that were written in 1983 and 1984 on the deductibility of reinsurance ceding commissions by insurance companies. Conclusions reached in treatises and legal periodicals are not authority for purposes of determining substantial authority. However, the authorities underlying the conclusions, where applicable to the facts of a particular case, may constitute substantial authority for the tax treatment of an item.
Petitioner asserts that each of the cited articles indicates that this Court's opinion in
Accordingly, we hold that the law review articles are not substantial authority for the position that petitioner is entitled to currently deduct the payments.
Petitioner cites
Petitioners also direct our attention to the Court of Appeals' opinion in
We conclude that petitioner did not have substantial authority for his position that the payments were currently deductible.
We hold for respondent on this issue.
II. Adequate Disclosure
Petitioner contends that he adequately disclosed on the Schedules C of the tax returns his position regarding the current deductibility of the payments to Pre-Paid. Respondent contends that petitioner did not adequately disclose his position on his tax returns.
A taxpayer's position may be adequately disclosed either in a statement attached to the tax return, or on the tax return itself.
Disclosure can be accomplished under
The regulations provide that respondent may promulgate revenue procedures which prescribe the circumstances in which information provided on the tax return will constitute adequate disclosure for purposes of
Although both revenue procedures list several categories of expenses, none of the categories address the types of payments reported by petitioner on his tax returns.
Petitioner concedes that the revenue procedures do not show Schedule C as adequate disclosure for the Pre-Paid deductions. Petitioner's contention on this point is as follows: It [the cited revenue procedure] does not list Schedule C, but it does state that repairs as opposed to capital expenditures can be adequately disclosed by the amount stated as trade or business expenses on the return. 8
*52 It is evident that petitioner does not fall into the specific safe harbors provided by the revenue procedure. We regard petitioner's contention as essentially an argument by analogy, and we consider that contention in the course of our analysis
In the instant case, the potential controversy that must be disclosed is whether petitioner was entitled to deduct all of the payments in the first year of the contracts or was required to capitalize the payments and amortize the deductions over the 5-year terms of the contracts. Nothing on the tax returns sufficed to enable respondent to identify this potential controversy.
Petitioner points to the revenue procedure's safe harbor with respect to repairs and capital expenditures. Although the concept may be substantially similar, nothing in the record suggests that unexplained deductions for "Commissions", "Interest on business indebtedness", "Legal and Professional Services", "General Administrative", and "Claims" for 1984, or for "Commissions", "Interest", "Claims", or "Administration" for 1986, would alert respondent to the significant possibility that a capital-expenditure-v.-current-expense dispute was implicated. The*53 tax returns did not suggest that the expenditures were "up-front" payments that entitled petitioner to benefits over 5-year periods. Petitioner does not contend that Form 8271, "Investor Reporting of Tax Shelter Registration Number", which was attached to his 1984 income tax return, constitutes adequate disclosure, and we conclude that it does not. Nothing on that form indicates the potential controversy regarding the current deductibility of the payments.
We conclude that petitioner did not adequately disclose the potential controversy relating to the payments on his 1984 and 1986 tax returns. See
We hold for respondent on this issue. 9
*54
Petitioner contends that respondent has abused her discretion in failing to waive all or part of the substantial understatement addition to tax for 1984 and 1986 pursuant to
Respondent contends that there was no abuse of discretion in failing to waive the substantial understatement addition to tax for 1984 and 1986. Respondent contends that petitioner did not have reasonable cause for the understatements and did not act in good faith.
We agree with respondent that there was no abuse of discretion.
*56 The most important factor in determining reasonable cause and good faith under
Petitioner's reliance on an attorney or accountant in the preparation of his return or general advice about the tax treatment of an item does not necessarily constitute a showing of reasonable cause and good faith.
In deciding*57 whether or not respondent used her discretion arbitrarily, capriciously, or without a sound basis in fact, we examine the facts in the instant case, which involve the current deductions of payments to Pre-Paid.
On the one hand, petitioner was an orthopedic surgeon and not a tax professional. Petitioner relied on the advice of Don Atkins and Blake Atkins, each of whom is an attorney and C.P.A., and neither of whom was an investor in or involved with Pre-Paid. Don Atkins had prepared or reviewed petitioner's tax returns since about 1970. Petitioner asked Don Atkins and Blake Atkins to see if the reinsurance program was on the "up-and-up". Petitioner also confirmed that Jaques, Stonecipher, and Haney were investing their own money in Pre-Paid.
On the other hand, petitioner had a variety of financial investments during the years before the Court, see
If our role were to determine whether petitioner had reasonable cause and acted in good faith, then this would be a close question, on which petitioner might prevail. *59 However, for the years before the Court our role is much more limited. See Unlike other additions to tax such as for failure to timely file (sec. 6651(a)(1)), the statute does not provide that the taxpayer's proof of reasonable cause will excuse the taxpayer's misfeasance.
To put it another way, under the statute's language petitioner's showing of reasonable cause and good faith serve only to bring petitioner to the point where respondent "
Accordingly, we conclude that respondent's failures to waive all or part of the additions to tax for the years before us were not abuses of discretion.
We view petitioner in the instant case as more experienced and sophisticated, and confronted with a more obvious conflict of interest on the part of the sole source of information about the Pre-Paid program and the tax treatment of payments thereunder, than were the taxpayers in
Petitioner directs our attention to language in
We conclude (and we have found) that respondent*61 did not exercise her discretion arbitrarily, capriciously, or without sound basis in fact. Accordingly, we conclude that respondent did not abuse her discretion as to the Pre-Paid adjustments.
IV. Constitutionality of 25-percent Rate
Petitioner contends that the application to him of the 25-percent rate for the
Respondent contends that the retroactive application of the 25-percent rate does not violate petitioner's constitutional rights.
The 25-percent rate under
The instant case was tried after the trial in
To take account of respondent's concessions,
Footnotes
1. Respondent concedes the addition to tax for 1985; the 1985 addition to tax results from the shifting of a $ 14,251 rental property depreciation item from 1985 to 1984. See
infra table 2. Also, respondent concedes that the adjustments do not involve tax shelter items as defined insec. 6661(b)(2)(C) .Unless indicated otherwise, all section and subchapter references relating to 1984 and 1985 are to sections and subchapters of the Internal Revenue Code of 1954 as in effect for 1984 and 1985, and all section and subchapter references relating to 1986 are to sections and subchapters of the Internal Revenue Code of 1986 as in effect for 1986.↩
1. As result of deductions, petitioner's claimed net losses on these two items aggregate about $ 125,000 for 1984, $ 45,000 for 1985, and $ 110,000 for 1986.↩
2. As a result of capital loss carryovers, limitations on loss deductions, and long-term capital gains exclusions, petitioner's adjusted gross income capital gains (losses) amount to the following: 1984 -- $ 3,719.50; 1985 -- ($ 3,000); 1986 -- ($ 3,000).↩
2. On brief, the parties refer to the payments to Pre-Paid variously as "cash payments", "payments", "ceding commissions", and "deductions" relating to Pre-Paid. It appears that all the categories of deductions listed in the Schedules C (commissions, administration expenses, claims, interest, and professional fees) are involved in the parties' arguments, even though at times reference is made only to the "ceding commissions". We will consider all the payments to Pre-Paid which are listed in the Schedules C together, and we will use the term "payments" in referring to them.↩
3. Petitioner first invested in Pre-Paid's reinsurance pool in 1983. His 1984 tax return shows tax effects of his 1983 investment as well as his 1984 investment.↩
4.
SEC. 6661 . SUBSTANTIAL UNDERSTATEMENT OF LIABILITY.* * *
(b) Definition and Special Rule. --
* * *
(2) Understatement. --
(B) Reduction for understatement due to position of taxpayer or disclosed item. -- The amount of the understatement under subparagraph (A) shall be reduced by that portion of the understatement which is attributable to --
(i) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or
(ii) any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return.
[Sec. 6661 was repealed by sec. 7721(c)(2) of the Omnibus Budget Reconciliation Act of 1989 (OBRA 89), Pub. L. 101-239, 103 Stat. 2106, 2399. The substance of formersec. 6661(b)(2)(B) ↩ now appears as sec. 6662(d)(2)(B).]5. Pars. (a) and (b) of
sec. 1.6661-3, Income Tax Regs. , provide, in pertinent part, as follows:§ 1.6661-3 Substantial Authority. -- (a)General rule . -- (1) * * *(2)
Substantial authority standard . The substantial authority standard is less stringent than a "more likely than not" standard (that is, a greater than 50-percent likelihood of being upheld in litigation), but stricter than a reasonable basis standard (the standard which, in general, will prevent imposition of the penalty under section 6653(a), relating to negligence or intentional disregard of rules and regulations). Thus, a position with respect to the tax treatment of an item that is arguable but fairly unlikely to prevail in court would satisfy a reasonable basis standard, but not the substantial authority standard.(b)
Determination of whether substantial authority is present . -- (1)Evaluation of authorities . There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary positions. All authorities relevant to the tax treatment of an item, including the authorities contrary to the treatment, are taken into account in determining whether substantial authority exists and the weight of those authorities is determined in light of the pertinent facts and circumstances in the manner prescribed in paragraph (b)(3) of this section. There may be substantial authority for more than one position with respect to the same item. The taxpayer's belief that the authorities with respect to the tax treatment of an item constitute substantial authority is not taken into account in determining whether there is substantial authority.(3)
Nature of analysis . Except as otherwise provided in this section, the weight of the authorities for the tax treatment of an item is determined by the same analysis that a court would be expected to follow in evaluating the tax treatment of the item. Thus, the weight of authorities depends on their persuasiveness and relevance as well as their source. For example, a case or revenue ruling having some facts in common with the tax treatment at issue would not be considered particularly relevant if the authority is materially distinguishable on its facts, or is otherwise inapplicable to the tax treatment at issue. Similarly, an authority that merely states a conclusion ordinarily would be given less weight than an authority that reaches its conclusion by cogently relating the applicable law to pertinent facts. There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.(4)
Special rules --(iii)
When substantial authority determined . For purposes ofsection 6661 ↩, there is substantial authority for the tax treatment of an item if there is substantial authority at the time the return containing the item is filed or there was substantial authority on the last day of the taxable year to which the return relates.6. Sec. 831(b)(2) provides an alternative to the general rule of sec. 831(a) which "shall apply to every insurance company other than life" if certain requirements are met. Secs. 831 and 832 do not define "insurance company".
Sec. 1.831-3(a), Income Tax Regs. , provides that "As used in this section and section 832 and the regulations thereunder, the term 'insurance companies' means only those companies which qualify as insurance companies under the definition provided by paragraph (b) of § 1.801-1 and which are subject to the tax imposed by section 831." The regulation referred to (sec. 1.801-1) applies only to taxable years beginning before Jan. 1, 1955, and so does not apply to the instant case.Sec. 1.801-2, Income Tax Regs.↩ 7. Tatge, "Tax Planning Opportunities Through Reinsurance Still Available Despite TEFRA",
59 J. Taxn. 260↩ (Oct. 1983) ; Kafka, "The Deductibility of Indemnity Reinsurance Ceding Commissions", 38 J. Am. Socy. of CLU 82 (Mar. 1984).8.
Rev. Proc. 85-19, 1985-1 C.B. 520 , provides, in pertinent part, as follows, with regard to tax returns filed in 1984:SEC. 2. BACKGROUND
.04 In general, rules providing guidance on the adequacy of disclosure for purposes of reducing an understatement under
section 6661 of the Code will be set forth in regulations. The Commissioner has determined that under certain circumstances described below in section 3 of this revenue procedure, disclosure of an item on the return with no further statement is adequate disclosure for purposes ofsection 6661 , provided the taxpayer furnishes all required information in accordance with the applicable forms and instructions. This revenue procedure provides guidelines as to when such disclosure is adequate. * * *SEC. 3. PROCEDURE
(b) Trade or Business Expenses:
(6) Repair as Opposed to Capital Expenditure: The amount of repairs stated.
Rev. Proc. 87-48, 1987-2 C.B. 645 (amplifyingRev. Proc. 86-22, 1986-1 C.B. 562 ), provides the identical instructions with regard to tax returns filed in 1986, except that the quoted language appears in secs. 3.04 and 4(b)(6) ofRev. Proc. 87-48↩ .]9. Petitioner's 1985 tax return, in evidence, did not provide any greater disclosure. It would not have been needed for 1985, because petitioner did not make payments to Pre-Paid in 1985. Petitioner's tax return for 1983, when he made payments to Pre-Paid, is not in evidence and it was represented to the Court that petitioner's 1983 tax return did not provide any more disclosure than did petitioner's 1984 tax return. We do not consider in the instant case whether a disclosure in 1 year's tax return may be taken into account in deciding whether there has been adequate disclosure for a later year.↩
10.
Sec. 6661 provides, in pertinent part, as follows:SEC. 6661 . SUBSTANTIAL UNDERSTATEMENT OF LIABILITY.* * *
(c) Authority to Waive. -- The Secretary may waive all or any part of the addition to tax provided by this section on a showing by the taxpayer that there was reasonable cause for the understatement (or part thereof) and that the taxpayer acted in good faith.
[Sec. 6661 ↩ was repealed by sec. 7721(c)(2) of OBRA 89, 103 Stat. 2399. The waiver provision has been replaced by a reasonable cause exception (which now appears as sec. 6664(c)(1)) based on the same circumstances which, under pre-OBRA 89 law, could have been the basis of a waiver. The new provision applies to tax returns the due date of which is after Dec. 31, 1989, and so does not apply to the instant case.]11. The 1984 claimed Pre-Paid deductions would have saved $ 44,638 of petitioner's $ 73,267 liability. The 1986 claimed Pre-Paid deductions would have saved $ 41,603 of petitioner's $ 56,726 liability.↩
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Cite This Page — Counsel Stack
1993 T.C. Memo. 23, 65 T.C.M. 1772, 1993 Tax Ct. Memo LEXIS 21, Counsel Stack Legal Research, https://law.counselstack.com/opinion/mauerman-v-commissioner-tax-1993.