T.C. Memo. 2014-55
UNITED STATES TAX COURT
CELIA MAZZEI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ANGELO L. MAZZEI AND MARY E. MAZZEI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 16702-09, 16779-09. Filed April 1, 2014.
Lewis Richard Walton and Lewis Richard Walton, Jr., for petitioners.
Erin K. Salel, Joseph A. Peters, Miles B. Fuller, Peter N. Scharff, and
Paulmikell A. Fabian, for respondent.
MEMORANDUM OPINION
CHIECHI, Judge: These consolidated cases are before us on petitioners’
motion for partial summary judgment.1 We shall deny petitioners’ motion.
1
Petitioners filed a memorandum and the respective declarations of Mr.
(continued...)
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[*2] Background
The record before us for purposes of petitioners’ motion (record) establishes
and/or the parties do not dispute the following.
Petitioners Celia Mazzei (Celia Mazzei), Angelo L. Mazzei (Mr. Mazzei),
and Mary E. Mazzei (Mary Mazzei), resided in California at the time they filed the
respective petitions in these cases.
At all relevant times, Celia Mazzei, Mr. Mazzei, and Mary Mazzei each
owned certain shares of stock of each of Mazzei Injector Corp. (Mazzei Injector)
and ALM Corp. (ALM), each of which was an S corporation. Their respective
stock ownership of each of those S corporations totaled 100 percent.
At all relevant times, Mazzei Injector and ALM each owned a certain inter-
est in a partnership known as Mazzei Injector Co. (Mazzei partnership). Their
respective partnership interests in Mazzei partnership totaled 100 percent.
1
(...continued)
Mazzei, Celia Mazzei, and David Bedke, C.P.A., in support of petitioners’ motion
for partial summary judgment. (We shall refer collectively to petitioners’ motion
for partial summary judgment, petitioners’ memorandum in support of petitioners’
motion for partial summary judgment, and the respective declarations of Mr.
Mazzei, Celia Mazzei, and David Bedke, C.P.A., as petitioners’ motion.) Respon-
dent filed a response to petitioners’ motion and a memorandum in support thereof.
Petitioners filed a reply to that response and that memorandum.
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[*3] Around January 1998, Celia Mazzei, Mr. Mazzei, and Mary Mazzei each
established a Roth individual retirement account (Roth IRA). At a time not estab-
lished by the record during 1998, each of them caused her or his Roth IRA to pur-
chase certain stock of Western Growers Shared Foreign Sales Corp., Ltd. (Western
Growers FSC). At all relevant times, Western Growers FSC had in effect an elec-
tion under section 927(f)2 to be treated for Federal income tax (income tax) pur-
poses as a foreign sales corporation (FSC).
Around February 1998, Mazzei partnership entered into an agreement (sales
agreement) with Western Growers FSC. In that agreement, Western Growers FSC
agreed to provide certain foreign sales services to Mazzei partnership in return for
certain commissions that that partnership agreed to pay to Western Growers FSC
on certain international sales of Mazzei partnership’s export property within the
meaning of section 927(a) (section 927(a) export property).
Pursuant to the sales agreement, during each of the years 1998 through 2001
Mazzei partnership paid to Western Growers FSC certain commissions on certain
of Mazzei partnership’s international sales of section 927(a) export property. Dur-
ing each of those same years, Western Growers distributed certain amounts as
2
All section references are to the Internal Revenue Code in effect for the
years at issue. All Rule references are to the Tax Court Rules of Practice and
Procedure.
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[*4] dividends to the respective Roth IRAs of Celia Mazzei, Mr. Mazzei, and
Mary Mazzei (petitioners’ IRAs).3
In April 2007, respondent commenced an examination of the income tax of
Mazzei Injector for its taxable year 2005. Certain notes that respondent’s revenue
agent (revenue agent) prepared during that examination stated in pertinent part:
There were potentially $200K-$300K commissions paid per year until
the FSC rules were repealed in 2000 or 2001. He [petitioners’ repre-
sentative during the examination] claims that they were entitled to do
that and the law was unclear until Notice 2004-08 was issued. The
contributions ceased after that and there have been no additional con-
tributions since then. The only additional amounts are from earnings
of those amounts. * * * It is unclear what our position may be in this
matter. The older years [1998 through 2001] are closed and if there
were no additional contributions after the 2000 or 2001 years, our
only issue may be the excise tax on the over contributed amounts.
Respondent proposed no adjustments to Mazzei Injector’s income tax for its tax-
able year 2005 as a result of respondent’s examination of Mazzei Injector’s in-
come tax for that taxable year. Nor did respondent propose as a result of that
examination any adjustments to Mazzei Injector’s income tax for its taxable years
1998 through 2001 during which the Mazzei partnership/Western Growers FSC
transactions had taken place. That was because the applicable respective periods
3
We shall refer collectively to the various transactions involving Mazzei
partnership, Western Growers FSC, petitioners’ IRAs, and petitioners as the
Mazzei partnership/Western Growers FSC transactions.
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[*5] of limitations for assessing income tax for taxable years 1998 through 2001
had expired by the time respondent commenced the examination of the income tax
of Mazzei Injector for its taxable year 2005 and learned for the first time about the
Mazzei partnership/Western Growers FSC transactions.
In September 2008,4 respondent commenced respective examinations of the
income tax of Celia Mazzei and Mr. Mazzei and Mary Mazzei for their taxable
year 2005. At the completion of those respective examinations, respondent con-
cluded that the commissions that Mazzei partnership had paid to Western Growers
FSC during each of the years 1998 through 2001 constituted in substance distri-
butions to Celia Mazzei, Mr. Mazzei, and Mary Mazzei, respectively, that were
followed by their respective contributions to their respective Roth IRAs. Respon-
dent proposed no adjustments to petitioners’ respective income tax for their tax-
able year 2005 as a result of respondent’s respective examinations of petitioners’
respective income tax for that taxable year. Nor did respondent propose as a result
of those examinations any adjustments to the respective income tax of Celia
Mazzei and Mr. Mazzei and Mary Mazzei for their taxable years 1998 through
4
Respondent was aware of the Mazzei partnership/Western Growers FSC
transactions when it began the respective examinations in September 2008 of the
income tax of Celia Mazzei and Mr. Mazzei and Mary Mazzei, having learned
about those transactions for the first time during the examination that began in
April 2007 of the income tax of Mazzei Injector for its taxable year 2005.
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[*6] 2001 during which the Mazzei partnership/Western Growers FSC
transactions had taken place. That was because the applicable respective periods
of limitations for assessing income tax for taxable years 1998 through 2001 had
expired by the time respondent commenced the examination of the respective
income tax of Celia Mazzei and Mr. Mazzei and Mary Mazzei for their taxable
year 2005.5
On April 6, 2009, respondent issued Celia Mazzei a notice of deficiency
with respect to her taxable years 2002 through 2007 (Celia Mazzei notice). In that
notice, respondent determined that Celia Mazzei is liable for those taxable years
for the following deficiencies under section 4973(a) in, and additions under sec-
tion 6651(a)(1) and (2) to, her Federal excise tax (excise tax):
Additions to Tax Under Secs.
Year Deficiency 6651(a)(1) 6651(a)(2)
2002 $4,889 $1,100 $1,222
2003 6,148 1,383 1,537
2004 6,372 1,433 *
2005 6,817 1,533 *
2006 7,850 1,766 *
2007 8,616 1,938 *
*Sec. 6651(a)(2) prescribes the method of calculating the addition to tax thereunder.
5
See supra note 4.
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[*7] On April 6, 2009, the same date on which respondent issued the Celia
Mazzei notice, respondent issued to Mr. Mazzei and Mary Mazzei a notice with
respect to their taxable years 2002 through 2007 (Mazzei notice). In that notice,
respondent determined that Mr. Mazzei and Mary Mazzei are liable for those tax-
able years for the following deficiencies under section 4973(a) in, and additions
under section 6651(a)(1) and (2) to, their excise tax:
Additions to Tax Under Secs.
Year Deficiency 6651(a)(1) 6651(a)(2)
2002 $6,637 $1,493 $1,659
2003 9,408 2,116 2,352
2004 10,523 2,367 *
2005 11,349 2,553 *
2006 13,759 3,095 *
2007 15,914 3,580 *
*Sec. 6651(a)(2) prescribes the method of calculating the addition to tax thereunder.
Discussion
We may grant summary judgment where there is no genuine dispute of
material fact and a decision may be rendered as a matter of law. Rule 121(b);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965
(7th Cir. 1994). We agree with the parties that there is no genuine dispute of
material fact in resolving the following issue presented in petitioners’ motion:
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[*8] Should we reject the respective excise tax deficiencies that respondent
determined in the Celia Mazzei notice and the Mazzei notice resulting from the
Mazzei partnership/Western Growers FSC transactions because respondent did not
determine respective income tax deficiencies of Celia Mazzei and Mr. Mazzei and
Mary Mazzei resulting from those transactions?
It is petitioners’ position that Hellweg v. Commissioner, T.C. Memo. 2011-
58, 2011 WL 821090, and Ohsman v. Commissioner, T.C. Memo. 2011-98, 2011
WL 1675279, control resolution of the issue presented in petitioners’ motion.
That is because, according to petitioners, the issue presented in petitioners’ motion
“is the same issue presented, argued and decided in Hellweg and Ohsman”. Re-
spondent disagrees.
In Hellweg, the Commissioner of Internal Revenue (Commissioner) had
determined certain excise tax deficiencies against the taxpayers involved there as
a result of the Commissioner’s recharacterization of the following transactions
under the substance-over-form doctrine: A business that the taxpayers controlled
paid certain commissions to a domestic international sales corporation (DISC).
Hellweg v. Commissioner, 2011 WL 821090, at *2. Thereafter, the DISC made
certain distributions to certain C corporations that the respective Roth IRAs of the
taxpayers owned, and the C corporations made certain distributions to those re-
-9-
[*9] spective Roth IRAs. Id. According to the Commissioner in Hellweg, the
transactions involved there should be recharacterized because the taxpayers had
used those transactions as a “vehicle to improperly shift value into their Roth
IRAs.” Id. at *4. As recharacterized by the Commissioner, the respective
commission payments to the DISC made by the business that the taxpayers
controlled constituted in substance (1) distributions from the business to the
respective C corporations that the taxpayers’ respective Roth IRAs owned,
(2) distributions from those C corporations to the respective taxpayers whose Roth
IRAs owned those C corporations, and (3) contributions by the taxpayers to their
respective Roth IRAs. According to the Commissioner, the recharacterized
transactions resulted in the taxpayers’ being liable for excise tax under section
4973(a) with respect to the contributions to their respective IRAs. Id. at *3. In
advancing the Commissioner’s position in Hellweg, the Commissioner informed
the Court that the Commissioner had not challenged for income tax purposes the
transactions at issue in Hellweg. Id. In fact, the Commissioner advised the Court
in Hellweg that those transactions were “valid for income tax purposes, [and]
lack[] substance for excise tax purposes only.” Id. at *7. Thus, the Commissioner
took a position in Hellweg for income tax purposes that was inconsistent with the
position that the Commissioner took in that case for excise tax purposes.
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[*10] In Hellweg v. Commissioner, 2011 WL 821090, at *7, *11, the Court
rejected the Commissioner’s position that the transactions at issue in that case
were “valid for income tax purposes, [and] lack[] substance for excise tax pur-
poses only.” The Court concluded that the taxpayers were not liable for excise tax
under section 4973(a) because (1) that section compels consistent treatment of
transactions for income tax and excise tax purposes, id. at *9, and (2) “respon-
dent’s position that * * * [the transactions at issue in Hellweg are] substantive for
income tax purposes undermines his attempted use of the substance-over-form
doctrine to recharacterize the Transaction[s] for excise tax purposes”, id. at *10.
In Ohsman, the Commissioner had determined certain excise tax deficien-
cies against the taxpayers involved there as a result of the Commissioner’s rechar-
acterization of the following transactions under the substance-over-form doctrine:
A business that one of the taxpayers, Michael S. Ohsman (Mr. Ohsman),6 owned
paid certain commissions to an FSC. Ohsman v. Commissioner, 2011 WL
1675279, at *1. Thereafter, the FSC made certain distributions to a Roth IRA that
Mr. Ohsman owned. Id. According to the Commissioner in Ohsman, the trans-
6
There were two taxpayers in Ohsman v. Commissioner, T.C. Memo. 2011-
98, 2011 WL 1675279, Mr. Ohsman and Pamela S. Ohsman (Ms. Ohsman). Mr.
Ohsman was involved in the transactions at issue in Ohsman, and Ms. Ohsman
was a party to that case only because she filed a joint income tax return with Mr.
Ohsman.
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[*11] actions involved there should be recharacterized because Mr. Ohsman had
used those transactions as a “vehicle to improperly shift value into his Roth IRA.”
Id. at *2. As recharacterized by the Commissioner, the respective commission
payments to the FSC made by the business that Mr. Ohsman owned constituted in
substance (1) distributions from the business to Mr. Ohsman and (2) contributions
by Mr. Ohsman to his Roth IRA. Id. According to the Commissioner, the rechar-
acterized transactions resulted in the taxpayers’ being liable for excise tax under
section 4973(a) with respect to the contributions that Mr. Ohsman made to his
Roth IRA. Id. In advancing the Commissioner’s position in Ohsman, the Com-
missioner did not challenge for income tax purposes the transactions at issue in
Ohsman. Id. Thus, the Commissioner took a position in Ohsman for income tax
purposes that was inconsistent with the position that the Commissioner took in
that case for excise tax purposes.
In Ohsman, the Court rejected the Commissioner’s position that the trans-
actions at issue in that case should be recharacterized for excise tax purposes only.
Id. at *3. The Court concluded that the taxpayers were not liable for excise tax
under section 4973(a) because the Commissioner “neglected to challenge the sub-
stance of the * * * [transactions at issue in Ohsman] for income tax purposes.” Id.
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[*12] We find Hellweg and Ohsman to be materially distinguishable from the
instant cases, and petitioners’ reliance on those cases in support of their position in
petitioners’ motion to be misplaced. In contrast to Hellweg and Ohsman, respon-
dent does not take inconsistent positions for income tax purposes and excise tax
purposes with respect to the Mazzei partnership/Western Growers FSC transac-
tions. For both purposes, respondent believes that under the substance-over-form
doctrine those transactions should be recharacterized. However, for income tax
purposes the applicable respective periods of limitations for taxable years 1998
through 2001 during which the Mazzei partnership/Western Growers FSC trans-
actions had taken place had expired by the time respondent learned of those trans-
actions during respondent’s examination of the income tax of Mazzei Injector for
its taxable year 2005 that began in April 2007. In this connection, the revenue
agent noted during that examination: “The older years [1998 through 2001] are
closed and if there were no additional contributions after the 2000 or 2001 years,
our only issue may be the excise tax on the over contributed amounts.” Respon-
dent did not seek to undertake the useless action of determining any income tax
deficiencies for taxable years 1998 through 2001 resulting from the Mazzei part-
nership/Western Growers FSC transactions that respondent was prohibited by law
from assessing and collecting.
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[*13] Based upon our examination of the entire record before us, we conclude
that we should not reject the respective excise tax deficiencies under section
4973(a) that respondent determined in the Celia Mazzei notice and the Mazzei
notice resulting from the Mazzei partnership/Western Growers FSC transactions
on the ground that respondent did not determine respective income tax
deficiencies of Celia Mazzei and Mr. Mazzei and Mary Mazzei resulting from
those transactions.
We have considered all of the contentions and arguments of the parties that
are not discussed herein with respect to the matters that we address herein, and we
find them to be without merit, irrelevant, and/or moot.
To reflect the foregoing,
An order denying petitioners’ motion
will be issued.