Unpublished Disposition, 863 F.2d 886 (9th Cir. 1988)

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U.S. Court of Appeals for the Ninth Circuit - 863 F.2d 886 (9th Cir. 1988)


No. 87-7278.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 5, 1988.Decided Nov. 21, 1988.

Before TANG, DAVID R. THOMPSON and O'SCANNLAIN, Circuit Judges.


The tax court ruled that Sunrise Construction Company's contributions to its voluntary employee benefit plan ("the Sunrise plan") were not deductible. Sunrise appeals that ruling. We have jurisdiction under 26 U.S.C. § 7482, and we affirm.

The primary legal issue is whether an employer can deduct contributions to a plan found in substance not to be adopted or operated as an employee benefit plan, but merely as a separate fund controlled by a company's sole shareholder for his own benefit. This court has consistently held that: "The characterization of a transaction for federal tax purposes is controlled by the substantive provisions of the agreement and the parties' conduct, rather than by the particular terminology used in the agreement." Swift Dodge v. Commissioner, 692 F.2d 651, 652 (9th Cir. 1982); Paccar, Inc. v. Commissioner, 849 F.2d 393, 397 (9th Cir. 1988); Thompson v. Commissioner, 631 F.2d 642, 646 (9th Cir. 1980), cert. denied, 452 U.S. 961 (1981). Sunrise concedes that the substance of any employee beneficiary plan, rather than its form, determines the tax exempt status of the plan. Thus, the initial contested issue before us is whether the tax court's factual determination was correct.

We review for clear error the tax court's finding that the Sunrise plan was substantively an artifice, inuring to the benefit of the corporation's sole shareholder. We explained this rule in Thompson:

[T]he Tax Court's determination whether a transaction is lacking in economic substance is essentially a factual determination, and therefore, subject to the clearly erroneous standard of review. This is because the Tax Court's inquiry is not directed toward the application of a statute or an express legal standard. Instead, it requires the Tax Court to focus on the facts and circumstances of particular transactions and resolve whether, as a practical matter, those transactions have any ecomomic impact outside the creation of tax deductions. Enmeshed as it is in factual considerations, the conclusion reached by the Tax Court will spring more from its experience 'with the mainsprings of human conduct' rather than the application of any legalistic formula, and makes appropriate a narrow standard of review.

631 F.2d at 646 (citations omitted); see also Church by Mail, Inc. v. Commissioner, 765 F.2d 1387, 1390 (9th Cir. 1985); Foster v. Commissioner, 756 F.2d 1430, 1436 (9th Cir. 1985) (tax court's finding that taxpayer's "transaction was lacking in economic substance will not be set aside unless clearly erroneous) cert. denied, 474 U.S. 1055 (1986); Zmuda v. Commissioner, 731 F.2d 1417, 1421 (9th Cir. 1984).1 

The tax court found that the plan was nothing more than an artifice designed to create a tax exempt investment fund for Thomas Battershell, Sunrise's only shareholder, and his family. CR 9 at 16-17. The court held that "in substance, the Plan was not adopted or operated as an employee benefit plan but was merely a separate fund controlled by [Sunrise's] sole shareholder for his own benefit." CR 9 at 13.

In support of its holding, the tax court explained:

Our conclusion is based on three primary factors, among the facts and circumstances apparent from the limited record.

First, ... the amount contributed to the Plan far exceeds the amount reasonable or necessary for the express purpose of the Plan.

Second, Battershell invested the excess funds of the Plan in speculative investments, not an appropriate exercise of fiduciary duty over a trust for the benefit of others. Petitioner has failed to prove any reason for the investments chosen other than to accommodate special interests of Battershell.

Third, after the Internal Revenue Service ruled that the Plan was not exempt, the assets of the Plan were returned to petitioner without regard to the terms of the Plan documents or the requirements of the applicable regulation, section 1.501(c) (9)-4(d), Income Tax Regs. Disregard of contractual documents is frequently cited as evidence that a transaction is without its intended effect for tax purposes.... The conduct of petitioner and Battershell with respect to the Plan ... is evidence of their original intention to maintain unlimited control of the Plan's assets and supports the conclusion that no bona fide transfer occurred for tax purposes.

CR 9 at 13-16 (footnotes and citations omitted).

After reading the briefs and reviewing the record, we cannot say that the tax court's well-reasoned factual findings were clearly erroneous. We also hold that, given the factual determination that the plan was an artifice, inuring to Battershell's personal benefit, the tax court did not err in its conclusions that the Sunrise plan was not tax exempt under section 501(c) (9) of the Tax Code and the regulations promulgated thereunder, and that contributions to the plan were not deductible under 162 of the Code.



This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3


Sunrise argues that the parties' stipulation as to the underlying facts transforms this entire case into a simple question of law. However, we review the tax court's inferences drawn from a stipulated record for clear error. Vukasovich, Inc. v. Commissioner, 790 F.2d 1409, 1411 (9th Cir. 1986) (citing Church by Mail, 765 F.2d at 1390). While there are some cases where a stipulation might obviate the need for factual inquiry, this case turns on the crucial factual determination whether or not the Sunrise plan was an artifice