Originally published on Forbes.com.
If you have a large deficiency with the IRS, it might occur to you to stave off them coming to grab your assets by telling them about a great plan you have to pay them off over time. I’m not saying it won’t work, but it didn’t work for Michael D. Brown. Here is the story.
The Forbes 400’s Insurance Guy In Tax Court
Michael D. Brown is known as the insurance agent to the Forbes 400. Apparently he figured out a way to structure policies to transfer large amounts of wealth while avoiding transfer taxes. His special sauce was confidential, but it seems like it worked better than spilt- dollar, assuming it did work. It was so good that he applied for a patent.
Brown was in Tax Court in 2013 over an item on his 2003 return. Janet Novack covered that decision here. Bonus depreciation for the jet that he bought that year. He needed the jet because when a billionaire has space in his schedule to meet you, you better be able to get there quick. He indicated that he had lost out on an eight million dollar commission from a Koch brothers policy, because of a foul-up with his charter flight. He lost in Tax Court because the jet had not been properly placed in service in 2003.
Brown was back in Tax Court according to a decision last week. It turns out that the issue about the jet was really the tip of the iceberg on a comprehensive audit for the years 2001 through 2006. The adjustments on the other years were settled for over $30 million. The more recent decision is not about how much of the $30 million plus is owed. That’s a done deal. This litigation is about when and how it should be paid.
Let’s Play Jeopardy
In 2012, the IRS was concerned about Brown’s foreign bank accounts in tax haven jurisdictions, concealing assets through the use of nominees and having listed his personal residence for sale for $17.7 million, so they issued jeopardy assessments and jeopardy levies. Taxpayer responded with Form 12153- Request for a Collection Due Process or Equivalent Hearing.
In an attachment to the form, petitioners explained that they were concurrently appealing their jeopardy determinations with another IRS department and that this hearing request was being protectively filed in the event that the jeopardy determinations were] ultimately sustained. They requested that this collections appeal be held in suspense pending the outcome of their appeal of the jeopardy determinations, which might include legal proceedings as well. If the IRS ended up sustaining the jeopardy determinations, petitioners alleged that they did not have the present ability to pay and that an alternative collection arrangement would need to be made so that they could pay the tax over an extended period. They also stated that because they did not have regular income, a traditional installment agreement would not be workable but that, if necessary, they would submit a detailed collection alternative proposal for consideration.
Or Lets Make A Deal
When Mr. Brown’s representative had a telephone conference with the IRS settlement officer it was indicated that the only “distrainable asset” was $5 million of equity in the residence. The plan to pay the IRS off in installments would be based on Mr. Brown obtaining financing in order to buy a pool of insurance policies that would produce a flow of income. He promised further details which came in the form of a 300 page document.
The document explained how petitioner proposed to satisfy the tax liability by first borrowing $6 million from an unidentified source and $6 million from North Channel Bank. With those funds he would acquire, through a SARL, two $50 million portfolios of life insurance policies insuring individuals of approximately 82 years of age. Each portfolio would have an accompanying MPIC policy, as well as a SACCA with Wells FargoBank that, in effect, would direct NIBs to be paid to an intermediary who in turn would be legally obligated to pay the IRS. This provision was deemed necessary because it would be “impractical to name the IRS as the holder of the NIBs”. Because they needed to make payments over a 15-year period, petitioners offered to consent to an extension of the period of limitations under section 6502.
The normal statute of limitations on collection is 10 years. In the decision. there is a bit more about how this all works. There is another insurance policy to be bought to insure against the elderly people lousing things up by living too long and banks lined up to make more loans to keep everything going. What could possibly go wrong?
The process from there is a little painful with back and forth between the RO and the representative, but it finally ended with a rejection of the plan.
You reside in a $16 million house with a $7 million mortgage, but declined or neglected to show that you cannot borrow or sell the house to reduce your tax liability. You requested a 15-year installment agreement; however, this wasn’t an acceptable resolution because it wouldn’t result in full payment of your tax liability within the collection statute. *** You disputed your liability with Appeals outside the CDP hearing. Appeals upheld the liability. You didn’t file an appeal with the Tax Court. Liability wasn’t considered in the CDP hearing. The notice also stated: “On June 3, 2014 your representative left a voice mail message stating you can’t borrow or sell your house and he would send something in writing in the next couple of days. We never received the requested financial information from you.”
Attorneys for Mr. Brown argued that the settlement officer did not put enough time into the case to really determine whether it was a good plan. Apparently the scheme based on elderly people dying only got about an hour of the RO’s attention. The court figured that was long enough to determine that the plan did not pay off the obligation in ten years and that was a good enough non-arbitrary reason. Also, there was no documentation of Brown’s inability to borrow against the residence.
I really have to admire the chutzpah of putting that scheme forward as a payment plan. It falls in the “can’t make this stuff up category”. My prediction is that there will be more litigation on this matter, but I doubt that it will be as entertaining.
Other Coverage
Jack Townsend covered the case in Federal Tax Crimes – An Interesting CDP Case with Foreign Bank Aspects.
The taxpayer was arguing that, if the IRS gave him enough time and a low interest rate, there would be a risk-free and cash-flow free way that he could pay the taxes, interest and penalties through a financial scheme of great complexity. The taxpayer lost the CDP case.
I offer this case primarily because of the taxpayer’s use of offshore accounts and the curiosity of the funding sources: “first borrowing $6 million from an unidentified source and $6 million from North Channel Bank.” In addition, the plan contemplated use of an SARL in Luxembourg.
Lew Taishoff has a post titled – Inventive.
Mike would buy this metziah (please pardon an arcane technical term, but you get the idea) with two $6 million loans he would get from a bank and an unidentified source.
Although I love it (the smoke-and-mirrors are glorious), the SO kicked the proposed deal.
I’ll spare you the rest. Basically, it fails because IRS doesn’t get paid within the ten year limit.