Pursuant to settlements made by the parties on May 4, 2012, the IRS subsequently calculated petitioners’ total tax liability, including penalties and interest, at approximately $33.5 million for the years in issue (2003 was not included as there remained an outstanding issue for trial).
Prompted by the amount of petitioners’ liability and IRS-determined factors such as petitioner’s foreign bank accounts in tax haven jurisdictions, his concealment of assets through nominees, and his having listed petitioners’ personal residence for sale at $17.7 million, the IRS decided to make a jeopardy assessment regarding the years in issue.After the jeopardy assessment, the taxpayer started a collection due process (CDP) proceeding. The taxpayer then offered to make full payment under a long-term complex arrangement described as follows.
After granting petitioners an extension to provide their proposal by December 9, 2013, the settlement officer received a 300-plus-page document on December 12, 2013, which presented a payment arrangement alternative to the collection actions. The first five pages of the proposal outlined how the arrangement would work, as follows in part:
Typically, a policy is purchased from the elderly person at a discount from the death benefit (thus, giving the elderly person the opportunity to spend or invest the cash during their lifetime) and then packaged by the purchaser into a portfolio of such policies. The portfolio can then be sold on the open market to investors.
A typical portfolio consists of approximately 10 policies with an aggregate death benefit of approximately $50 million. The average age of the insured individuals is typically around 82 years, with an average life expectancy of about 8 years. (Obviously, some of the insured individuals will die in less than 8 years and some will live [*8] longer than 8 years.) An investor who purchases a portfolio of policies can either take a risk as to the mortality rate of the insured individuals, or the investor can purchase insurance, known as Mortality Protection Insurance Coverage (“MPIC”), which will insure that 75% of the forecasted death benefit will be paid out in each of the first 15 years of the MPIC coverage.
The cost to acquire a $100 million portfolio is around $10 million and the cost of the MPIC coverage on such a portfolio is around $2 million. Bank financing from a bank in Germany, North Channel Bank, is available to cover half of those costs. In addition, the bank financing will also cover 100% of the premiums that will be due on the policies.
The document went on to explain that insurance payment proceeds would be distributed as determined by two contracts, a Securities Account Control and Custodian Agreement (SACCA), which would retain Wells Fargo Bank to act as a custodian of the proceeds, and an Intercreditor and Security Agreement. These agreements would cause the insurance funds to be distributed in the following priority: (1) Wells Fargo Bank fees; (2) pro rata repayment of the bank loan, including interest; (3) reimbursement to the MPIC insurer if death benefits were to exceed MPIC insurance payments already made; (4) additional payment on the bank loan if the loan-to-value ratio goes below 50%; and (5) distribution to the holder of the Net Insurance Benefit (NIB) that, under these circumstances, would most likely be a Luxembourg entity known as a “SARL” that is indirectly controlled by the underlying investor. The example projected an expected return [*9] of $33.8 million over a 15-year period, which, at a 3% discount rate, would have a net present value of approximately $26.15 million, an amount estimated to be about the same as petitioners’ current tax liability.
The document explained how petitioner proposed to satisfy the tax liability by first borrowing $6 million from an unidentified source and $6 million from North Channel Bank. With those funds he would acquire, through a SARL, two $50 million portfolios of life insurance policies insuring individuals of approximately 82 years of age. Each portfolio would have an accompanying MPIC policy, as well as a SACCA with Wells Fargo Bank that, in effect, would direct NIBs to be paid to an intermediary who in turn would be legally obligated to pay the IRS. This provision was deemed necessary because it would be “impractical to name the IRS as the holder of the NIBs”. Because they needed to make payments over a 15-year period, petitioners offered to consent to an extension of the period of limitations under section 6502.
The document stated that this “arrangement would be treated as an installment agreement for purposes of the limitation on the late payment penalty in IRC § 6661(h)”. Petitioners also wanted the IRS to agree that it would take no enforced collection actions while this agreement was in effect.
[*10] The document also stated that petitioners understood their proposal to be considerably more complex than a typical taxpayer proposal. Nevertheless, it concluded that it would be in the best interest of the IRS to receive these sporadic payments “that, over a period of time, approximately 15 years, should provide sufficient cash payments for full payment of the outstanding tax liabilities.The taxpayer was arguing that, if the IRS gave him enough time and a low interest rate, there would be a risk-free and cash-flow free way that he could pay the taxes, interest and penalties through a financial scheme of great complexity. The taxpayer lost the CDP case.
I offer this case primarily because of the taxpayer's use of offshore accounts and the curiosity of the funding sources: "first borrowing $6 million from an unidentified source and $6 million from North Channel Bank." In addition, the plan contemplated use of an SARL in Luxembourg.