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Turnham v. United States

United States District Court, M.D. Alabama, Southern Division

May 29, 2019

Alan C. Turnham M.D., et al., Plaintiff,
v.
United States of America, Defendant. Alan C. Turnham M.D., P.A., Plaintiff,
v.
United States of America, Defendant.

          MEMORANDUM OPINION AND ORDER

          ANDREW L. BRASHER, UNITED STATES DISTRICT JUDGE

         This is a federal lawsuit about a tax form. The lead plaintiff, Dr. Alan C. Turnham, is a medical doctor who practices in Dothan, Alabama, through his medical practice, Alan C. Turnham, M.D., P.A. For the tax years of 2009, 2010, and 2011, the medical practice was taxed as an S Corporation with a single shareholder- Dr. Turnham-such that the practice passed its income, losses, etc. through to him for tax purposes.[1] During those years, the practice made substantial contributions to the Affiliated Employers Health and Welfare Trust Plan (“the PREPare Plan”), which was marketed by CJA & Associates as a 10-or-more-employer welfare benefit plan that enjoyed special tax treatment. Dr. Turnham did not file a Form 8886, reporting his participation in the plan, although such a form must be filed by anyone participating in a “reportable transaction, ” that is, a transaction “that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.” 26 C.F.R. § 1.6011-4(b)(2).

         The United States later determined that Dr. Turnham was required to file a Form 8886 and assessed him a $10, 000 penalty for each of the tax years at issue under 26 U.S.C. § 6707A. That statute imposes penalties on persons who fail to include information on their returns “with respect to a reportable transaction.” Id. Dr. Turnham paid the penalties and filed a claim for refund of the penalty amounts. When the United States did not act on the claim within six months, he and his practice brought these lawsuits (later consolidated) seeking a refund of the penalties under 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a). Litigation is pending elsewhere regarding whether Dr. Turnham erred in claiming deductions for his payments to the PREPare Plan. This litigation presents only the following question: did Dr. Turnham participate in a “reportable transaction” when he made payments to the PREPare Plan such that he was required to file a Form 8886 with his tax returns?

         As explained in more detail below, the answer to that narrow question is “yes.” There is no genuine dispute of fact that the PREPare Plan in which Dr. Turnham participated is the same or substantially similar to an arrangement that the Internal Revenue Service previously identified in its published guidance, specifically IRS Notice 95-34, Tax Problems Raised by Certain Trust Arrangement Seeking to Qualify for Exemption from Section 149, 1995-1 C.B. 309. Accordingly, Dr. Turnham's claim for a refund of these penalty amounts is due to be denied.

         STANDARD

         In a tax refund suit, the taxpayer has the burden of proof to establish that the determination of the Commissioner of Internal Revenue is incorrect. See Central Bank of the South v. United States, 834 F.2d 990, 993 (11th Cir. 1987). Summary judgment is appropriate when the record indicates “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a).

         FACTS

         Alan C. Turnham, M.D. is a medical doctor, specializing in surgical dermatology, who lives and practices medicine in Dothan, Alabama. His medical practice, Alan C. Turnham, M.D., P.A., is an Alabama business entity. Dr. Turnham is the president and sole shareholder of the P.A. For the tax years at issue, 2009, 2010, and 2011, the P.A. elected to be taxed as an S Corporation and passed its income, deductions, losses, and credits through to Dr. Turnham. Dr. Turnham and his wife, Rebecca Turnham, filed their individual income tax returns jointly. Dr. Turnham reported the following wage income from the P.A. for each year at issue in this case: $16, 400 (2009), $16, 800 (2010), and $106, 800 (2011).

         The PREPare Plan was marketed by Raymond Ankner and his company, CJA & Associates, Inc. It “was intended to constitute a ‘10 or more employer plan', as that term is defined in section 419A(f)(6) of the Internal Revenue Code…” (Doc. 45-2 at 1). The relevant iteration of the PREPare Plan became effective on December 1, 2003. The Plan operates through the Affiliated Employers Health & Welfare Trust, which receives participants' contributions, holds assets, and issues death benefits.

         Dr. Turnham joined the PREPare Plan on December 30, 2009. For 2009, 2010, and 2011, Dr. Turnham paid the following amounts to the PREPare Plan: $283, 682 (2009), $283, 775 (2010), and $272, 259.12 (2011). (Doc. 44 at ¶ 4). Dr. Turnham was informed that the P.A.'s contributions to the PREPare Plan would be “tax deductible, ” that “plan assets are protected from creditors, ” and that covered employees would “receive death benefits that are not subject to income tax and may be excluded from estate taxes.” (Doc. 45-7 at 3). He was further informed that death benefits would be “fully paid up at retirement and are projected to increase substantially.” Id.

         The marketing materials for the plan describe the arrangement as “[e]ssentially a Universal Life Contract split into its two parts”-that is, (1) a term life insurance contract and (2) an annuity with residual value. (Doc. 45-5 at 1). After deducting administrative fees, the plan administrator conveyed contributions to Fidelity Security Life Insurance Company (“Fidelity”), and directed Fidelity to pay annual premiums for the covered employees under a group term life insurance policy, and invest the remainder in a group annuity contract. After administrative fees, approximately 97% of the money that Dr. Turnham paid into the plan was invested in the group annuity, and 3% was used to purchase group term life insurance. The following example from 2009 is representative:

Total 2009 contribution:

$283, 682.00

Total 2009 contribution less administrative fees:

$282, 432.00

Total Annuity Investment:

$274, 451.98

Total Group Term Life Premium:

$7, 980.00

         Fidelity's designated deposition witness pursuant to Rule 30(b)(6), Fed. R. Civ. P., explained that “the objective” was for the trust to “utilize accumulated value” that was “allocated” to a specific “individual so that when that individual retired that buildup of funds could then be used to purchase a paid-up [whole life insurance] policy.” (Doc. 45-3 at 16). That policy would have an immediate “forfeiture value, ” which is “essentially the same thing” as a cash value. Id.

         Fidelity assigned internal tracking numbers to Dr. Turnham's business and his employees. This allowed Fidelity to identify the portions of the group annuity contract attributable to each participating employer. Fidelity also generated a report to the plan administrator with amounts attributed to ...


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