Opinion
5458-16
09-21-2021
Ruben De Los Santos & Martha De Los Santos, Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
Albert G. Lauber, Judge
This case involves an S corporation that adopted an employee welfare benefit plan for petitioners and four rank-and-file employees. We have ruled that petitioners' participation in this benefit plan constituted a compensatory "split-dollar" life insurance arrangement under section 1.61-22(b), Income Tax Regs., and that the economic benefits that flowed to petitioners generated current taxable income. De Los Santos v. Commissioner, T.C. Memo. 2018-155. We left for further proceedings the computation of the exact amounts to be included in petitioners' gross income for each year, as well as a determination as to whether they are liable for accuracy-related penalties.
All statutory references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
On May 14, 2019, petitioners filed a second motion for partial summary judgment. They asserted that the economic benefits at issue are taxable to petitioner husband as distributions under section 301 because he is a shareholder of the S corporation. In support, petitioners relied on Machacek v. Commissioner, 906 F.3d 429 (6th Cir. 2018), rev'g T.C. Memo. 2016-55. On April 12, 2021, the Court issued its Opinion declining to follow the Sixth Circuit's opinion in Macha-cek. We held that section 301 has no application in this context because the economic benefits flowed to petitioner husband in his capacity as an employee of the S corporation pursuant to a "compensatory split-dollar" arrangement. De Los Santos v. Commissioner (De Los Santos II), 156 T.C.___, ___ (slip op. at 12) (Apr. 12, 2021).
Currently before the Court is petitioners' Motion for Certification of an Interlocutory Order to Permit Immediate Appeal, filed August 18, 2021. Petitioners request that we certify the following question for immediate appeal to the U.S. Court of Appeals for the Fifth Circuit:
Where a shareholder receives economic benefits from a split-dollar life insurance arrangement, does 26 C.F.R § 1.301-1(q)(1)(i) require that those benefits be treated as a distribution of property from an S Corporation to the shareholders, rather than individual income?
Section 7482(a)(2)(A) permits this Court to certify an interlocutory order for immediate appellate review only if we conclude that "a controlling question of law is involved with respect to which there is a substantial ground for difference of opinion and that an immediate appeal from that order may materially advance the ultimate termination of the litigation." See Rule 193(a); Kovens v. Commissioner, 91 T.C. 74, 77 (1988); N.Y. Football Giants, Inc. v. Commissioner, T.C. Memo. 2003-28. Certification of an interlocutory order for immediate appeal is an exceptional measure that courts employ sparingly. See Gen. Signal Corp. v. Commissioner, 104 T.C. 248, 251 (1995); Kovens, 91 T.C. at 78. In assessing these factors the Court must weigh the policies favoring the "avoidance of piecemeal litigation and dilatory and harassing appeals." Kovens, 91 T.C. at 78.
The section 301 issue involves a question of law, and there appears to be a difference of opinion about it. But it is not necessarily a "controlling question of law." As we held in De Los Santos II, there is an alternative ground for determining that the economic benefits are taxable as ordinary income. For purposes of taxing employee fringe benefits such as this, petitioner husband is treated as a partner in a partnership. See sec. 1372. The economic benefits he realized are thus taxable under section 707(c) as "guaranteed payments" and thus as ordinary income. See De Los Santos II, 156 T.C. at ___ (slip. op. at 22-27). Petitioners do not allege a "substantial ground for difference of opinion" on this latter question.
Nor do we believe that immediate appeal of the section 301 issue would "materially advance the ultimate termination of the litigation." See sec. 7482(a)(2)(A). The requirement that an immediate appeal "materially advance the ultimate termination of the litigation" means that resolution of the controlling legal question "would serve to avoid a trial or otherwise substantially shorten the litigation." McFarlin v. Conseco Servs., LLC, 381 F.3d 1251, 1259 (11th Cir. 2004); see Clark-Dietz & Assocs.-Eng'rs, Inc. v. Basic Constr. Co., 702 F.2d 67, 69 (5th Cir. 1983).
An immediate appeal would not avoid or meaningfully shorten the litigation. If our holding on the section 301 issue were reversed on interlocutory appeal, petitioner husband's economic benefits would be taxed as distributions of property. That would require him to produce evidence for the Court to determine (among other things) the fair market value of the distributions, the S corporation's earnings and profits, and his basis in the stock. See sec. 1368.
Nor would an immediate appeal avoid the need to determine the applicability of penalties under section 6662(a) and section 6662A. Trial would in any event be necessary to determine whether petitioners acted with reasonable cause and good faith, see sec. 6664(c)(1), and whether the split-dollar arrangement was "substantially similar to" the transaction identified in IRS Notice 95-34, see sec. 6707A(c)(2). We accordingly find that an interlocutory appeal would protract, rather than shorten, the proceedings necessary to resolve all the issues in this case.
Upon due consideration, it is
ORDERED that petitioners' Motion for Certification of an Interlocutory Order to Permit Immediate Appeal, filed August 18, 2021, is denied. It is further
ORDERED that the parties shall file with the Court, on or before October 22, 2021, a joint status report detailing the then-present status of the case.