Case Law: TC Memo 2012-21: Owen v. Commissioner of Internal Revenue
This is the only case law that can be relied upon for general guidance. Fortunately, on balance the ruling was quite positive for taxpayers.
Editor’s Commentary:
The finding that FFAEP met the definition of a Qualified Trade or Business might surprise some due to the business’s proximity to both insurance and legal services. However, a true insurance company assesses risk, conducts underwriting, maintains reserves, and experiences the potential for gain/loss based upon claims experience, none of which describes FFAEP. It was also not a legal company, since the actual legal services appear to have been performed by another party.
In particular, the court’s finding that the principal asset of FFAEP was not the skill of its owners is encouraging:
Although respondent argues that FFAEP is not qualified because one of the principal assets is the skill of Mr. Owen, the Court disagrees. While we have no doubt that the success of the Family First Companies is properly attributable to Mr. Owen and Mr. Michaels, the principal asset of the companies was the training and organizational structure; after all, it was the independent contractors, including Mr. Owen and Mr. Michaels in their commission sales hats, who sold the policies that earned the premiums, not Mr. Owen in his personal capacity.
On the other hand, the finding that J&L Gems failed to meet the active business requirement should not concern taxpayers. This “business” was a halfhearted attempt to meet the minimum requirements under sections 1045 and 1202 that fell short on many fronts.
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