Tax Court Ruling Overturned in Machacek v. IRS

In early October 2018, a three-judge panel for the Sixth Circuit Court of Appeals reversed a U.S. Tax Court decision in the case of John J. Machacek, Jr. and Marianne Machacek v. Commissioner of Internal Revenue. Howard Richshafer and Jeffrey Teeters of Wood + Lamping LLP represented the Machaceks before the Sixth Circuit Court of Appeals.

Before this reversal, the Tax Court concluded that the Machaceks were responsible for reporting a $100,000 premium on a life insurance policy as income, even though the Machaceks’ pass-through entity could not deduct the premiums.

The $100,000 in question was paid in 2005 by Machacek Inc., as the premium for a life insurance policy for the corporation’s employee John Machacek. The Tax Court correctly ruled that the premium could not be deducted by the corporate pass-through entity, a ruling with which the Machaceks agreed. But the court also determined that John Machacek should claim the $100,000 as income in 2006 as an economic benefit under the split-dollar Treasury regulations.

Wood + Lamping’s Richshafer and Teeters saw this as an instance of double taxation, which is how Richshafer argued the case before the Sixth Circuit, three-judge panel. His argument persuaded the court to rule in  Machaceks’ favor, resulting in the reversal of the Tax Court’s original ruling.

In a quote from the opinion of the Sixth Circuit Appeals Court: “We reverse the Tax Court’s decision with respect to the tax treatment of the economic benefits flowing to the Machaceks from Machacek Inc.’s payment of the $100,000 premium on John Machacek’s life insurance policy and hold, pursuant to § 1.301- 1(q)(1)(i) , that those economic benefits must be treated as distributions of property by a corporation to its shareholder.” The Sixth Circuit Appeals Court also mentioned that this issue was one of first impression and recommended it for full text publication.

According to Richshafer, there may be as many as 30 similar cases pending in courts around the country. And this decision marks a powerful precedent that will help determine the outcome of those cases. Additionally, it may have ramifications to S Corporations around the nation who have split-dollar life insurance policies for their employees.

U.S. Circuit Judges Alice M. Batchelder, Richard Allen Griffin, and Helene N. White sat on the panel for the Sixth Circuit.

This entry was posted in News.
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    Howard L. Richshafer

    Howard Richshafer joined Wood + Lamping in 2008, and his practice is focused on civil and criminal tax problems, estate planning and probate, tax court trial work, mergers and acquisitions, and general corporate business matters. Howard is also a licensed Ohio CPA. Over the past 40 years, Howard has represented clients experiencing all types of civil and criminal tax problems with IRS. Those problems include IRS audits, IRS criminal investigations, enforced collection of unpaid tax liabilities involving levies, liens, and seizures of assets and income.

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