927 F.3d 1081
9th Cir.2019Background
- Interior Glass Systems, Inc. participated in a Group Term Life Insurance Plan (GTLP) that paid premiums on a cash‑value life insurance policy owned by its sole shareholder/employee, Michael Yates, for tax years 2009–2011.
- The IRS issued Notice 2007‑83 identifying arrangements that use cash‑value life insurance through trusts or funds as listed transactions and requiring disclosure under 26 C.F.R. § 1.6011‑4 and 26 U.S.C. § 6707A.
- The GTLP satisfied three of the four elements in Notice 2007‑83; it used a tax‑exempt business league (not a § 419(e)(3) trust) as the intermediary and relied on § 79 group‑term benefits while funding a cash‑value policy.
- The IRS determined the GTLP was "substantially similar" to the listed transaction and assessed a $10,000 penalty for each of the three years under § 6707A; Interior Glass paid the penalties and sought a refund administratively, then sued for refund in district court when administrative relief failed.
- The district court granted summary judgment for the United States; on appeal Interior Glass argued (1) it did not participate in a listed transaction and (2) it was denied due process because it lacked pre‑collection judicial review.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether GTLP was a "listed transaction"/"substantially similar" to Notice 2007‑83 | GTLP is materially different (different intermediary; relied on § 79) so not a listed transaction | Regulation and Notice define "substantially similar" broadly; differences are immaterial | GTLP is substantially similar; disclosure requirement and penalties properly applied |
| Whether due process required pre‑collection judicial review before payment | Requiring full payment before suit denies due process; plaintiff needed pre‑collection court review | Full‑payment rule is permissible; administrative review + post‑collection judicial review satisfies due process | No due process violation; pay‑first, litigate‑later upheld given Mathews factors and administrative remedies |
Key Cases Cited
- Gregory v. Helvering, 293 U.S. 465 (Sup. Ct. 1935) (substance over form principle)
- Mathews v. Eldridge, 424 U.S. 319 (Sup. Ct. 1976) (three‑factor due process test)
- Flora v. United States, 362 U.S. 145 (Sup. Ct. 1960) (full‑payment prerequisite for tax refund suits)
- Jolly v. United States, 764 F.2d 642 (9th Cir. 1985) (applied Mathews to pre‑collection review of tax penalties)
- Fang Lin Ai v. United States, 809 F.3d 503 (9th Cir. 2015) (vagueness standard for civil tax penalties)
- Larson v. United States, 888 F.3d 578 (2d Cir. 2018) (upheld full‑payment rule for related tax penalty)