Curcio v. Comm'r of Internal Revenue
2012 U.S. App. LEXIS 16645
| 2d Cir. | 2012Background
- Four small-business owners enrolled in Benistar 419 Plan for employees, funding life-insurance policies with Plan contributions that were deducted by the businesses.
- Tax Commissioner disallowed the deductions as not ordinary and necessary business expenses, creating passthrough income and penalties.
- Tax Court ruled for Commissioner, finding nondeductibility and penalties; petitioners appealed consolidating four cases.
- Plan designed to benefit owners and families, with premiums funding personal life-insurance benefits rather than broad employee benefits.
- Record shows owners could withdraw from Plan and access cash-laden policies, undermining business-purpose arguments; accountants relied on opinions not guaranteeing deductibility.
- Court addresses whether welfare-plan contributions are deductible under §162(a) and whether penalties were warranted, eventually affirming tax court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are Plan contributions deductible as ordinary and necessary expenses under §162(a)? | Curcio/Jelling: deductions are ordinary and necessary business expenses. | Commissioner: contributions are not ordinary and necessary; personal-benefit scheme. | No; deductions not deductible under §162(a). |
| How should Discount's two Plan contributions be treated for tax purposes? | Discount's 2002 deduction and 2003 deduction should be treated consistently. | First contribution treated as undisallowed deduction or constructive distribution; second deduction disallowed. | First contribution treated as distribution under existing framework; second deduction denied as non-deductible. |
| Are accuracy-related penalties warranted? | Tax positions relied on accountants and opinions about deductibility. | Plan contributions plainly not ordinary/necessary; negligence established. | Penalties affirmed; petitioners acted with negligence/disregard. |
| Did §419A(f)(6) affect deductibility of Plan contributions, or was §162(a) determinative? | If §419A(f)(6) applies, deductions could be broader. | Threshold issue is §162(a); §419A(f)(6) not reached; not deductible. | Court did not reach §419A(f)(6); affirmed denial under §162(a). |
Key Cases Cited
- Comm'r v. Lincoln Sav. & Loan Ass'n, 403 U.S. 345 (1971) (defining ordinary and necessary expenses; tax deductions require a bona fide profit objective)
- Welch v. Helvering, 290 U.S. 111 (1933) (necessity vs. ordinaryness of expenses; common or frequent occurrence in business)
- INDOPCO, Inc. v. Comm'r, 503 U.S. 79 (1992) (definition of necessary expense; business purpose)
- Chenango Textile Corp. v. Comm'r, 148 F.2d 296 (2d Cir. 1945) (treatment of expenses under tax rules; fact-intensive determinations)
- Green v. Comm'r, 507 F.3d 857 (5th Cir. 2007) (whether retirement or incentive benefits qualify as ordinary and necessary)