If You Want to be Taxed Thereon
No, this is not The Weavers’ classic injunction to the union miners; au contraire, this is the story of a Harvard-Stanford trained venture-capitalist who sought to keep his hand upon the dollars locked up in his super-successful start-ups. And gets taxed therefor.
Come along with me, if you will (in the words of the late W. David Curtiss, Esq., from long ago and Far Above), as we follow the trail of Jeffrey T. Webber, 144 T. C. 17, filed 6/30/15, with Judge Lauber as our guide.
JT got a Cayman Island insurer to write two variable life policies on elderly relatives. Variable life means no fixed premium and no fixed benefit; the policyholder puts up cash or securities. These are investments, whose success or failure fund the policies. If the investments make money, the benefit goes up. If they lose, the policyholder stumps up enough cash to cover the mortality risk (actuarially-derived) of the insured life departing this vale of tears, and the benefit is whatever is left.
JT had a bushelbasketful of startups, a messy divorce, a couple kids (hi, Judge Holmes) and an allergy to income taxes.
His trusty lawyer puts him into these deals, warning him of the risks of “investor control.”
If JT lets the independent investment advisors furnished by the Cayman Islanders choose the investments and keeps his hands off same, all the accretion on the accounts is tax-free to JT, and when the old folks head to the last round-up, death benefits are tax-free to JT.
JT follows the paths of many clients: his lawyer can say what he likes, and JT does what he likes.
Though a set of trusts, from Alaska to the Bahamas to Delaware, and investment managers and banks, create an illusion of independent management, JT, via trusty lawyer, pays the piper and calls the tune.
Every investment is in one of the startups wherein JT already has a substantial stake. The advisers do whatever trusty lawyer tells them to do (of course with JT’s blessing on each and every act or forbearance), exchanging e-mails in which they call the biggest trust, fetchingly named “Boiler Riffle,” “Jeff’s Wallet.” Oh, those cutesy names. And, oh those e-mails, more than 70,000 discoverable ones.
Judge Lauber decides that Skidmore deference is due Rev. Rul. 77-85, 1977-1 C.B. 12.
You remember that “Skidmore deference…is the lowest. If Mayo deference is the equivalent of ‘Aye aye, sir’ and salute the quarterdeck, then Skidmore is the equivalent of ‘yeah, ok’, ranking just above ‘meh’.” This is from my blogpost “The Junk Mailer Gets Trashed,” 10/24/13.
And even though Rev. Rul. 77-85 had to do with annuities, and even though a USDCDC case threw it out, the Circuit Court of Appeals reversed the case for want of jurisdiction. And IRS has been telling the same story time out of mind.
If your hand is on the dollar, or the means whereby the dollar is realized, it’s your money for income tax purposes.
So JT gets nailed.
But trusty lawyer wasn’t an enabler; he didn’t get more than his usual hourly rate. And relayed JT’s orders to the Caymans. But he did do some due diligence, had credentials, knew the whole story, and JT didn’t understand variable life insurance and its anfractuousities.
JT beats the 20% chop.