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Doctors Argue VEBA Plan not ERISA Plan

MAR. 28, 2002

Neonatology Associates, P.A., et al. v. Commissioner

DATED MAR. 28, 2002
DOCUMENT ATTRIBUTES
  • Case Name
    NEONATOLOGY ASSOCIATES, P.A., ET AL. Petitioners-Appellants v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
  • Court
    United States Court of Appeals for the Third Circuit
  • Docket
    No. 01-2862
  • Authors
    Fram, Steven J.
  • Institutional Authors
    Archer & Greiner, P.C.
  • Cross-Reference
    Neonatology Associates, P.A., et al. v. Commissioner; 115 T.C. No. 5;

    No. 1201-97; 1208-97; No. 2795-97; 2981-97; No. 2985-97; 2994-97; No.

    2995-97; 4572-97 (July 31, 2000) (For a summary, see Tax Notes, Aug.

    7, 2000, p. 773; for the full text, see Doc 2000-20409 (98 original

    pages) or 2000 TNT 148-3 Database 'Tax Notes Today 2000', View '(Number'.)

    For text of Neonatology's opening appellate brief, see Doc 2002-

    1086(64 original pages) or 2002 TNT 23-85 Database 'Tax Notes Today 2002', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2002-8713 (30 original pages)
  • Tax Analysts Electronic Citation
    2002 TNT 76-35

Neonatology Associates, P.A., et al. v. Commissioner

 

IN THE UNITED STATES COURT OF APPEALS

 

FOR THE THIRD CIRCUIT

 

 

ON APPEAL FROM THE DECISIONS OF

 

THE UNITED STATES TAX COURT

 

 

BRIEF FOR AMICUS CURIE

 

VIJAY SANKHLA, M.D., YALE SHULMAN, M.D.,

 

BORIS PEARLMAN, M.D., MARVIN CETEL, M.D.

 

and BARBARA SCHNEIDER, M.D. IN SUPPORT

 

OF AFFIRMANCE ON CERTAIN ISSUES

 

 

STEVEN J. FRAM, ESQUIRE

 

ARCHER & GREINER, P.C.

 

One Centennial Square

 

Haddonfield, New Jersey 08033

 

(856) 795-2121

 

TABLE OF CONTENTS

 

 

TABLE OF AUTHORITIES

STATEMENT OF AMICUS CURIE AND THEIR INTEREST IN THIS CASE

SUMMARY OF ARGUMENT

ARGUMENT

A. The Settling Physicians' ERISA-Based Arguments Were Not Raised Below and Should Therefore Not be Considered By this Court

B. The VEBA Plan is Not an ERISA Plan

C. "Marketing Materials" of Commonwealth's Agents Were Properly Considered By the Tax Court

D. The ERISA Cases Relied Upon by the Settling Physicians Are Inapplicable in this Tax Case

E. Commonwealth's "Agency" Argument Is Legally Irrelevant

CONCLUSION

CERTIFICATION OF BAR MEMBERSHIP

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

 

TABLE OF AUTHORITIES

 

 

FEDERAL CASES

 

 

AMC Partnership v. Commissioner, 157 F.3d 231 (3d. Cir. 1998) cert. denied, 526 U.S. 1017 (1999)

AT&T v. Winback and Conserve Program, Inc., 42 F.3d 1421 (3rd Cir. 1994), cert. denied, 514 U.S. 1103 (1995)

Collins v. E. I. Dupont de Nemours & Co., 34 F.3d 172 (3d Cir. 1994)

Commissioner v. Court Holding Co., 324 U.S. 331 (1945)

Continental Casualty Co. v. Dominick D'Andrea, Inc., 150 F.3d 245 (3d Cir. 1998)

Diebler v. United Food & Commercial Worker's Local Union 23, 973 F.2d 206 (3d Cir. 1992)

Gleason v. Norwest Mortgage, Inc., 243 F.3d 130 (3d Cir. 2001)

Gruber v. Hubbard Bert Karle Weber, Inc., 159 F.3d 780 (3d Cir. 1998)

Haberern v. Kaupp Vascular Surgeons Ltd. Defined Benefit Pension Plan, 24 F.3d 1491 (3d Cir. 1994)

Henglein v. Informal Plan for Plant Shutdown Benefits, 974 F.2d 391 (3d Cir. 1992)

Kluener v. Commissioner, 154 F.3d 630 (6th Cir. 1998)

Ross v. Hotel Employees and Restaurant Employees International Union, 266 F.3d 236 (3d Cir. 2001), cert. denied, 122 S.Ct. 1172 (Feb. 23, 2002)

Schoonejongen v. Curtiss-Wright Corp., 18 F.3d 1034 (3d Cir. 1994)

Swift Dodge v. Commissioner, 692 F.2d 651 (9th Cir. 1982)

Thompson v. American Home Assurance Co., 95 F.3d 429 (6th Cir. 1996)

Thompson v. Commissioner, 631 F.2d 642 (9th Cir. 1980), cert. denied, 452 U.S. 961 (1981)

United States v. Daddona, 34 F.3d 163 (3d Cir. 1994) cert. denied, 513 U.S. 1002 (1994)

 

STATE CASES

 

 

Angloff v. Kenemore, 887 S.W.2d 782 (Mo. App. 1994)

Gennari v. Weichert Co. Realtors, 288 N.J. Super. 504, 672 A.2d 1190 (App. Div. 1996), aff'd, 148 N.J. 582 (1997)

Wright v. State of New Jersey, 169 N.J. 422, 778 A.2d 443 (2001)

 

DOCKETED CASES

 

 

Sankhla v. Commonwealth Life Insurance Co., No. 01-CV-4761 (D.N.J.) (AET)

 

STATEMENT OF AMICUS CURIE AND THEIR INTEREST IN THIS

 

CASE

 

 

[1] The amicus brief is submitted on behalf of five physicians who participated in the Voluntary Employer Benefit Association ("VEBA") Plan at issue in this tax proceeding.

[2] During pre-trial proceedings in the Tax Court, the Appellants in this case entered into a Settlement Agreement and Release with Commonwealth Life Insurance Company ("Commonwealth") pursuant to which Commonwealth agreed to defend this case at its expense and to pay certain portions of Appellants' tax liabilities in the event of an unfavorable outcome. Appellants (hereafter "the Settling Physicians") then proceeded to trial in what was designated as a "test" case for all of the parties who had challenged the IRS's position. Pursuant to Appellants' settlement with Commonwealth, Commonwealth now controls and is funding the appeal in this litigation.

[3] Unlike Appellants, amici declined to release their claims and have filed litigation against Commonwealth and its related parties to recover the losses they suffered through their participation in the "VEBA scheme" condemned by the Tax Court in this case. An Amended Complaint in the proposed class action in which amici are plaintiffs, Sankhla v. Commonwealth Life Ins. Co., No. 01-CV-4761 (D.N.J.)(AET), was filed on March 20, 2002 (the "Sankhla Litigation").

[4] Amici have an interest in the outcome of this case because it has become apparent that Commonwealth, through its control of this appeal, will attempt to induce this Court to address certain non-tax law issues that will impact the rights of amici against Commonwealth and related parties. Thus, the Brief submitted by counsel for the Settling Physicians makes a number of arguments concerning the applicability to the VEBA Plan of the federal Employee Retirement Income Security Act ("ERISA"). These arguments were never made to the Tax Court and are irrelevant to the matter at issue in this appeal.

[5] These very ERISA issues and related issues are in dispute in the Sankhla Litigation. In fact, a number of ERISA issues, including one of the issues raised in this appeal, were briefed and argued to the District Court in the Sankhla Litigation just before counsel for Appellants filed their Brief in this case.

[6] Amici have an interest in urging this Court to avoid addressing any legal issues that are not properly part of this appeal and which may have an impact on the rights and liabilities of various parties to the Sankhla Litigation. For example, the Sankhla Litigation will require the District Court to determine whether any of the plans at issue in the Sankhla Litigation are governed by ERISA and, if they are, whether any of the claims asserted in the Sankhla Litigation are either "completely" preempted or "expressly" preempted by ERISA.

[7] These issues are not properly part of this appeal and are not necessary to this Court's consideration of the Tax Court's rulings. Commonwealth should not be permitted, through this appeal, to have this Court to issue unnecessary pronouncements concerning ERISA and other legal matters that may benefit it, and prejudice the rights of amici, in other litigation.

[8] Amici have an interest in the outcome of this appeal for a second reason. To the extent the Tax Court's factual findings in this case remain undisturbed, amici intend to argue that the Tax Court's factual findings concerning the roles of various parties in the VEBA scheme are binding upon Commonwealth and the other defendants in the Sankhla Litigation under the doctrine of collateral estoppel. Amici expect to prove that Commonwealth and its agents controlled all aspects of the preparation and trial of the Tax Court proceedings which led to the judgment now on appeal, such that Commonwealth and its agents should be deemed "in privity" with Appellants and thereby bound in the Sankhla Litigation by these findings. See, e.g., Collins v. E. I. Dupont de Nemours & Co., 34 F.3d 172 (3d Cir. 1994); Restatement (Second) of Judgments § 39 (1982).

 

SUMMARY OF ARGUMENT

 

 

[9] Counsel for the Settling Physicians in this case rely upon principles governing certain aspects of employee benefit plans governed by ERISA to argue for the reversal of the Tax Court's judgment as a matter of law. Counsel first argue that the Tax Court erred in failing to determine whether the "'program of benefits" established by the contributing employers was an " employee benefit plan" under ERISA. After contending that the VEBA Plan at issue in this litigation is governed by ERISA, counsel argue that the Tax Court should have limited its consideration to the "written plan documents" and should have disregarded "unauthorized" representations concerning the availability of conversion credits under Commonwealth's insurance policies, representations which Commonwealth now claims were false.

[10] There are three fundamental problems with these arguments. To begin with, no contentions concerning the applicability of ERISA were ever raised below. Under firmly established principles of appellate procedure, issues and arguments not raised below should not be considered by this Court.

[11] Second, virtually all of the cases relied upon by the Settling Physicians to support their arguments are ERISA denial of benefits cases. This matter, however, is a tax case governed by an entirely different set of legal standards.

[12] Third, the ERISA principles relied upon by counsel for the Settling Physicians do not apply to the VEBA Plan at issue in this litigation because that benefit program was not an ERISA plan. As a consequence, ERISA benefits cases which prohibit reference to materials beyond written plan documents under certain circumstances did not prohibit reliance by the physicians who participated in the VEBA Plan on allegedly "unauthorized" representations made concerning the VEBA Plan. Instead, under well settled principles of agency law, the physicians were entitled to rely upon statements made by Commonwealth's agents concerning the VEBA program. The Tax Court properly considered the expectations of those physicians in assessing the tax issues before it.

 

ARGUMENT

 

 

[13] Relying upon this Court's decision in Gruber v. Hubbard Bert Karle Weber, Inc., 159 F.3d 780 (3d Cir. 1998), the Settling Physicians contend that the Tax Court should have determined whether the employer contributions at issue in this case were made to an "employee benefit plan" before considering the tax implications of that arrangement. Appellants' Br. at 23. See also id. at 29 ("Regardless of the context, whenever a court considers the implications of an arrangement to provide benefits, the court must first determine whether the arrangement is an employee benefit plan.") (citing Gruber). After arguing, as a matter of law, that the VEBA Plan qualifies as a multi-employer plan governed by ERISA, the Settling Physicians argue that the Tax Court committed error by not limiting its analysis to the written plan documents but instead by considering "marketing materials that were not binding on and had not been approved by the insurance companies that issued the policies to the plans. . . . 'Appellants' Br. at 35.

 

A. The Settling Physicians' ERISA-Based Arguments Were Not Raised Below and Should Therefore Not be Considered By this Court.

 

[14] The first problem with these arguments is that they were never raised below and, as a consequence, the Tax Court never had an opportunity to consider and reject them. It is well settled, barring exceptional circumstances, that this Court will not review an issue that is being raised for the first time on appeal. See, e.g., Gleason v. Norwest Mortgage, Inc., 243 F.3d 130, 142 (3d Cir. 2001); Continental Cas. Co. v. Dominick D'Andrea, Inc., 150 F.3d 245, 251 (3d Cir. 1998). This Court recently explained the rationale for this policy:

 

This prudential policy seeks to insure that litigants have every opportunity to present their evidence in the forum designed to resolve factual disputes. By requiring parties to present all their legal issues to the district court as well, we preserve the hierarchical nature of the federal courts and encourage ultimate settlement before appeal. It also prevents surprise on appeal and gives the appellate court the benefit of the legal analysis of the trial court.

 

Ross v. Hotel Employees and Restaurant Employees Intl. Union, 266 F.3d 236, 242-43 (3d Cir. 2001)(quoting Patterson v. Cuyler, 729 F.2d 925, 929 (3d Cir. 1984)), cert. denied, 122 S.Ct. 1172 (Feb. 23, 2002).

[15] LAR 21.1(a) requires appellants in their briefs to this Court to designate in their Statement of Issues Presented for Review required by F.R.A.P. 28(a)(f), the specific pages of the appendix or place in the proceedings at which each issue on appeal was raised, objected to and ruled upon. The Settling Physicians present their contention that the Tax Court committed error by failing to determine whether the VEBA Plan was governed by ERISA in their second issue for review, which reads in full as follows:

 

2. Whether the tax Court erred by (a) failing to determine whether the program of benefits established by contributing employers and funded through life insurance contracts was an employee benefit plan and (b) failing to apply the specific statutory provisions governing the tax effects of establishing a plan, I.R.C. §§ 419, 419A, 501(c)(9). (App. 6214-6220 28-32).

 

Appellants' Br. at 1. The appendix pages cited in this statement are part of Appellant's Post-Trial Brief filed with the Tax Court on December 7, 1999. But these pages make no reference to the issue of whether any of the benefits at issue constituted an "employee benefit plan" governed by ERISA. In fact, Petitioner's entire Post- Trial Brief, see Joint Appendix at 6143 to 6224, never once mentions ERISA or cites to any cases decided under ERISA.

[16] In their Third Issue on Appeal, the Settling Physicians also argue at length that the Tax Court should not have relied upon "unauthorized" marketing materials because it was dealing with an ERISA Plan:

 

3. Whether the tax court erred (a) in relying on marketing materials, rather than the terms of the plan documents and life insurance contracts, to determine what benefits were provided to employees and whether the employer contributions funded those benefits and (b) by ignoring the form of the arrangement even though non-tax, economic benefits were provided by the arrangement. (App. 6206-6209, 6-31).

 

Appellants' Br. at 1-2. In making this argument, counsel for the Settling Physicians rely upon a series of cases that involve claims for benefits under ERISA plans, including this Court's decisions in Schoonejongen v. Curtiss-Wright Corp., 18 F.3d 1034 (3d Cir. 1994), Henglein v. Informal Plan for Plant Shutdown Benefits, 974 F.2d 391 (3d Cir. 1992), and Haberern v. Kaupp Vascular Surgeons Ltd. Defined Benefit Pension Plan, 24 F.3d 1491 (3d Cir. 1994). See Appellants' Br. at 34-36.

[17] A review of pages 6206 to 6209 of the Appendix, which are pages 60 to 63 of Appellants' Post-Trial Brief, establishes that counsel for the Settling Physicians never argued that it was improper under ERISA for the Tax Court to look beyond the "plan" documents in assessing the tax consequences of the VEBA Plan and that counsel never cited or argued to the Tax Court based upon the decisions of this Court in Schoonejongen, Henlgein or Haberern. Because this legal argument was not raised below, it should not be considered by this Court for the first time in the context of this appeal.

B. The VEBA Plan is Not an ERISA Plan.

[18] The Settling Physicians' reliance upon ERISA principles is misplaced for another reason: the VEBA Plan at issue is not an ERISA Plan. In Gruber v. Hubberd Bert Karle Weber, Inc., 159 F.3d 780, 787 (3d Cir. 1998), this Court summarized congressional commentary, Department of Labor advisory opinions and case law which have held that ERISA does not cover multi-employer benefit plans that are established for entrepreneurial purposes, including plans designed for the purpose of marketing insurance products and services to others:

 

Plans . . . established and maintained by entrepreneurs for the purposes of marketing insurance products or services to others . . . are not established or maintained by the appropriate parties to confer ERISA jurisdiction, nor is the purpose for their establishment or maintenance appropriate to meet the jurisdictional prerequisites of the Act.

 

Id. at 786 (citations omitted); see also Angloff v. Kenemore, 887 S.W.2d 782 (Mo. App. 1994) (holding that purported welfare plan marketed by insurers through a trade association was not a valid ERISA plan).

[19] In this case, the Tax Court held, in factual findings that have not been challenged on appeal, that Commonwealth and related parties created the purported benefit plans at issue solely for the purposes of furthering a scheme to market the insurance policies at issue. The Tax Court's scathing opinion establishes beyod peradventure that Commonwealth and its agents created a series of plans, including the single employer plans described by the Tax Court, such as the Lakewood Plan, for the purposes of fraudulently marketing the insurance policies. The Tax Court outlined the roles of the various insurance consultants in creating both the insurance products and the VEBAs:

 

Pacific Executive Services ("PES") was a California partnership formed by two insurance men named Steven R. Ross ("Mr. Ross") and Donald S. Murphy ("Mr. Murphy"). PES devised the idea of using a speciously designed life insurance product in the setting of deviously designed VEBAs to prosper financially from the enactment of the Tax Reform Act of 1986 ("TRA") . . . . PES believed that the TRA gave PES the opportunity to market aggressively to owners of such business as a novel tax avoidance scheme.

PES united with Barry Cohen ("Mr. Cohen"), a long time insurance salesman, to market the subject VEBAs to medical professionals primarily through the Kirwan Cos. ("Kirwan").

 

(App. 6).

[20] The Tax Court also described how these insurance salesmen formed the VEBAs for the purposes of marketing the insurance policies to physicians:

 

The SC VEBA and the NJ VEBA were formed by the Southern California Medical Professional Association and the New Jersey Medical Professional Association, respectively. PES establishes, manages, and controls both of these associations, neither of which is valid or operating professional association. PES established both associations for the sole purpose of forming the subject VEBAs and of furthering its VEBA scheme by misleading target investor/medical professionals into believing that respectable, established medical associations were sponsoring an investment in the VEBAs.

 

(App. 7).

[21] In ruling that Commonwealth and related parties had perpetrated a massive fraud both on the IRS and on the participating physicians, the Tax Court summarized the essence of Commonwealth's scheme and concluded, with direct relevance to the issue of whether an ERISA plan existed, that the VEBAs were nothing more than vehicles for the sale of insurance policies:

 

The VEBAs' framework was crafted by the insurance salesmen mentioned here and marketed to professional, small business owners as a viable tax claim device. The VEBAs' scheme was subscribed to by various small businesses whose employees/owners sought primarily the advertised tax benefits and tax-free asset accumulation. The subject VEBAs were not designed, marketed, purchased, or sold as a means for an employer to provide welfare benefits to its employees . . . . The small business owners . . . invested in the VEBAs through their businesses and caused their businesses to purchase the C-Group product from the insurance salesmen.

 

(App. 22) (emphasis added).

[22] These unchallenged factual determinations establish that the VEBA Plan was set up solely by insurance salesmen as a vehicle to sell what the Tax Court characterized as "speciously designed life insurance products" to the participating physicians. "The existence of an ERISA Plan is a question of fact, to be answered in light of all the surrounding facts and circumstances from the point of view of a reasonable person." Thompson v. American Home Assurance Co., 95 F.3d 429, 434 (6th Cir. 1996); See also Diebler v. United Food & Commercial Worker's Local Union 23, 973 F.2d 206, 209 (3d Cir. 1992). The Tax Court's findings in this case compel the conclusion that the VEBA Plan was not governed by ERISA.

[23] Gruber emphasizes that whether a benefit plan is governed by ERISA depends not merely upon its structure, but also the manner in which it actually operates. Separate from its holding that benefit plans set up primarily for the purposes of marketing insurance are not ERISA plans, Gruber also holds that a multi employer plan must meet two requirements to qualify as an employee welfare benefit plan subject to ERISA:

 

First, the group of employers that establishes and maintains the plan must be a "bona fide" association of employers tied by a common economic or representation interest, unrelated to the provision of benefits . . .

Second, the employer-members of the organization that sponsors the plan must exercise control, either directly or indirectly, both in form and in substance, over the plan.

 

Id. at 787. The "commonality of interest" and "control" requirements must both be met for a plan to qualify as an ERISA plan. Id.

[24] In Gruber, this Court considered whether an employee benefit plan established by the Lake Erie Employers' Association (the "LEEA") was governed by ERISA. The LEEA was established as a non-profit corporation for the purposes of promoting business in Northwestern Pennsylvania and opened its membership to any individuals or entities that were engaged in business in that area and which employed at least five but no more than 150 employees. This Court held that the LEEA Plan was not governed by ERISA because the group of employers that established and maintained the plan was not a "bona fide" association of employers "tied by a common economic or representation interest, unrelated to the provision of benefits." Gruber, 159 F.3d at 787 (quoting Wisconsin Educ. Ass'n Trust v. Iowa State Bd., 804 F.2d 1059, 1063 (8th Cir. 1986)

[25] The facts of this case compel the same conclusion. As noted above, the Tax Court specifically found that the organization that sponsored the VEBA, the Southern California Medical Professional Association (the "SCMPA"), was a complete sham. That entity had no meetings, conducted no business and was formed solely for the purposes of marketing the SCMPA program and selling the insurance policies. The SCMPA was not a "bona fide" association of employers and the employer-members of the VEBA did not exercise any control, either directly or indirectly, over the VEBA "'sponsored" by the SCMPA.

C. "Marketing Materials" of Commonwealth's Agents Were Properly Considered By the Tax Court.

[26] Even if the two ERISA arguments noted above had been properly raised before the Court below, and even if the VEBA Plan involved were an ERISA Plan, the Tax Court would not have committed error in disregarding those arguments. The reason is simple: there is a tax dispute involving the Government and the provisions of the Tax Code, not an ERISA case between private parties. Tax proceedings such as this case are governed by a well-developed set of legal principles, many of which pre-date the enactment of ERISA.

[27] Thus, it is well-settled that the courts, in determining the tax consequences of a transaction, are not limited to consideration of plan documents and are not bound by private parties' characterization of the transaction. As this Court recently noted, in determining the tax consequences of a transaction the courts must view the transactions "as a whole, and each step, from the commencement . . . to the consummation . . . is relevant." AMC Partnership v. Commissioner, 157 F.3d 231, 247 (3d. Cir. 1998) (quoting Weller v. Commissioner, 270 F.2d 294, 297 (3d Cir. 1959)) cert. denied, 526 U.S. 1017 (1999). The courts have repeatedly emphasized that the Internal Revenue Code assesses taxes based upon a transaction's true purpose, not its formal or ostensible purpose. Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945). Under the "substance-over-form doctrine," the courts assess the economic reality of a transaction in light of all of the facts and circumstances. The Sixth Circuit recently noted that the substance-over-form-doctrine is motivated by pragmatic concerns: "To permit the true nature of a transaction to be disguised by mere formalisms . . . would seriously impair the effective administration of the tax policies of Congress." Kluener v. Commissioner, 154 F.3d 630, 634 (6th Cir. 1998) (quoting Commissioner v. Court Holding Co., 324 U.S. at 334)).

[28] Consistent with these well-established principles, the courts have long held that the characterization of a transaction for federal tax purposes "is controlled by the substantive provisions of the agreement and the parties' conduct, rather than by the particular terminology used in the agreement." Swift Dodge v. Commissioner, 692 F.2d 651, 652 (9th Cir. 1982).

[29] The Tax Court's conclusions about the substance of a transaction are factual in nature, and are therefore subject to review on a clearly erroneous basis. As the Ninth Circuit has noted:

 

The Tax Court's determination whether a transaction is lacking in economic substance is essentially a factual determination, and therefore, subject to the clearly erroneous standard of review. This is because the Tax Court's inquiry is not directed toward the application of a statute or an expressed legal standard. Instead, it requires the Tax Court to focus on the facts and circumstances of particular transactions and resolve whether, as a practical matter, those transactions have any economic impact outside the creation of tax deductions. Enmeshed as it is in factual considerations, the conclusion reached by the Tax Court will spring more from its experience "with the main springs of human conduct" rather than the application of any legalistic formula, and makes appropriate a narrow standard of review.

 

Thompson v. Commissioner, 631 F.2d 642, 646 (9th Cir. 1980), cert. denied, 452 U.S. 961 (1981) (citations omitted).

D. The ERISA Cases Relied Upon by the Settling Physicians Are Inapplicable in this Tax Case.

[30] The ERISA cases relied upon by counsel for the Settling Physicians in this appeal, on the other hand, involve disputes between private parties over ERISA benefits. These cases may have some bearing on the claims at issue in the Sankhla Litigation, but they are irrelevant to the tax issues pending before this Court.

[31] Gruber was a complex dispute involving a multi- employer plan known as the Lake Erie Employers' Association ("LEEA Plan"). After the LEEA Plan became insolvent in 1985, employers who had participated in the Association and employee beneficiaries of the LEEA Plan filed suit against a brokerage firm which had created the LEEA Plan, the principals of the brokerage firm and the officers and directors of the LEEA Plan. Separate lawsuits by the employers and the employees were consolidated into a single class action which included claims for breach of fiduciary duty and other obligations under ERISA as well as state law claims for breach of contract, fiduciary duty and duty of care. This court's decision in Gruber addressed the important issue of the applicability of ERISA to both the LEEA Plan and the individual plans created by participating employers. The applicability of ERISA to the plans at issue in Gruber was important because an insurance policy issued to the directors and officers of LEEA Plan by Western World Insurance Company had a policy exclusion for claims arising under ERISA.

[32] Gruber did not involve any tax issues; it was strictly a dispute among private parties and is therefore irrelevant for the purposes of this tax appeal.

[33] This Court's decision in Schoonejongen involved a claim by an employee of the defendant, Curtis-Wright Corporation, that he had wrongfully been deprived of ERISA benefits. During the course of its opinion, this court relied upon the well settled principle that in determining an entitlement to benefits under ERISA, written plan documents are controlling. Like Gruber, Schoonejongen did not consider or address any tax issues.

[34] Haberern involved the claim by an ERISA plan beneficiary that she had wrongfully been deprived of plan benefits. The pivotal issue was whether the employer-sponsor of the plan had acted in its management capacity in reducing the plaintiff's salary rather than as an ERISA fiduciary. This court held that the plaintiff could not recover the benefits because they were not available under the plan. This court rejected the breach of fiduciary duty claim asserted by the plaintiff, which alleged that certain benefits had been promised to her, as inconsistent with the written terms of the plan. Haberern held that the only benefits available under Section 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B), are those available under the plan. The court did note, however, that misrepresentations by a plan fiduciary concerning benefits available under a plan might give rise to liability under the breach of fiduciary duty provisions of ERISA.

[35] Thus, like the other decisions cited by the Settling Physicians, Haberern did not involve any tax issues and did not discuss or consider the evidence that courts should or should not consider in tax matters.

[36] Finally, Henglein involved a claim by former salaried nonunion employees of a steel plant to recover severance benefits under an alleged informal benefit plan. Henglein held that an informal benefit plan can exist separate and apart from a written ERISA plan and that an informal plan can be proven through internal documents, or representations and other evidence. This court held that where a properly published written plan did not clearly limit benefits, trial courts should consider "all other evidence that would indicate the presence or absence of an informal employee benefit plan." Materials to be considered would include:

 

Internal or distributed documents, or representations, existence of a fund or account to pay benefits, actual payment of benefits, a deliberate failure to correct known perceptions of a plan's existence, the reasonable understanding of employees, and the intentions of the putative sponsor.

 

974 F.2d at 400.

[37] Like the cases discussed above, Henglein did not involve any tax issues and did not address the appropriate standard for determining whether an ERISA plan is entitled to tax-qualified treatment.,

[38] The Settling Physicians' arguments based upon state law governing insurance contracts, see Appellants' Br. at 37, are irrelevant for the same reason. This is not a dispute over insurance proceeds or rights. The transactions at issue were not ones in which the physicians merely purchased insurance policies from insurance companies. The transactions were ones in which the physicians were induced to participate in and contribute to VEBA Plans based upon representations about the benefits, including tax benefits, that could be achieved through the VEBA Plan. Although the "VEBA scheme," to borrow the characterization used by the Tax Court, certainly involved the payment of premiums for insurance policies, the VEBA Plan, as presented by the insurance companies and their agents, promised far more.

[39] As a consequence, even if this tax proceeding required the Tax Court to determine the rights of the physicians vis-a-vis the insurance companies and their agents, the Tax Court was not limited in its consideration to a review of the insurance policies at issue.

[40] In sum, because this case is not an action to recover benefits under ERISA or litigation to enforce rights under an insurance contract, the legal principles applied in ERISA and insurance contract cases are inapplicable. The Tax Court properly looked to all of the facts and circumstances relating to the VEBA Plan in ruling on the tax issues before it.

E. Commonwealth's "Agency" Argument Is Legally Irrelevant.

[41] It is undisputed that Cohen, Kirwan, Murphy, Ross and others were authorized agents of Commonwealth, engaged by it to market its insurance policies. Indeed, the record below contains copies of the written agent agreements between Commonwealth and these individuals and entities. (App. 2340 to 2394; 2404 to 2435; 2471 to 2555).

[42] Counsel for the Settling Physicians argues that Commonwealth is not responsible for certain its agents' representations concerning the operation of the policies because those statements were not "authorized." By asserting that it had no obligation to provide "'conversion credits," Commonwealth, in effect, accuses Cohen, Kirwan, Murphy, and Ross of lying to the physicians concerning the benefits available under its insurance policies.

[43] Even if the "VEBA Scheme" focused only on the terms of the insurance policies issued by Commonwealth, Commonwealth cannot so easily absolve itself of the alleged misconduct of its agents. To begin with, there is ample evidence in the record that Commonwealth knew exactly how its agents were representing its policies and selling them as part of the VEBA scheme. (App. 2779; 5871). Moreover, and more importantly, it is firmly established that principals are, as a general matter, liable for misrepresentations made by their agents. In AT&T v. Winback and Conserve Program, Inc., 42 F.3d 1421 (3rd Cir. 1994), cert. denied, 514 U.S. 1103 (1995), this Court considered the liability of principals for the conduct of their sale agents under the federal common law of unfair competition. After an extensive review of the law in this area, this Court held that principals are liable for the misrepresentations of independent contractor-agents "upon matters which the principal might reasonably expect would be the subject of representations, provided the other party has no notice that the representations are unauthorized." Id. F.3d at 1437 (quoting Restatement (Second) of Agency §258.

[44] The same principle has been adopted by the courts of both New Jersey, where all of the physicians resided, and Pennsylvania, where the insurance agents primarily responsible for promoting the VEBA were located. Thus, in Gennari v. Weichert Co. Realtors, 288 N.J. Super. 504, 672 A.2d 1190 (App. Div. 1996), aff'd 148 N.J. 582 (1997), the Court noted of New Jersey law:

 

The law in this state is that a principal may be held for damages resulting from his agent's fraudulent representation where the principal has put the agent in such a position that a person of ordinary prudence would be reasonably justified in the assumption that the agent has the authority to make the representation.

 

Id. at 546. See also Wright v. State of New Jersey, 169 N.J. 422, 435, 778 A.2d 443 (2001) ("There is perhaps no doctrine more firmly embedded in the law than the principle that liability follows tortious wrongdoing and that employers or principals, individual or corporate, are responsible for that wrongdoing when committed by agents and employees acting within the scope of the employment.") (quoting McAndrew v. Mularchuk, 33 N.J. 172, 190, 162 A.2d 820 (1960)); United States v. Daddona, 34 F.3d 163, 170 (3d Cir. 1994) (Pennsylvania law) ("Under Pennsylvania law, a principal is liable for the acts of its agent committed in the scope of its employment, even though the principal did not authorize the act."), cert. denied, 513 U.S. 1002 (1994).

[45] As a consequence, even if this appeal called upon this Court to determine whether Commonwealth was liable for the alleged misrepresentations of its agents, the arguments being advanced in this appeal, which are controlled by Commonwealth, are legally incorrect. These are issues and arguments for another day and, perhaps, another appeal. The Tax Court properly heard and considered evidence concerning the substance of the transactions at issue in determining the tax issue in this case.

 

CONCLUSION

 

 

[46] For the foregoing reasons, this Court should decline to consider the legal arguments raised by Appellants for the first time on appeal. To the extent the Court considers the arguments noted above, it should decline to apply standards and principles of liability that are not relevant in tax proceedings.
Steven J. Fram, Esquire

 

Archer & Greiner, P.C.

 

One Centennial Square

 

Haddonfield, NJ 08033

 

(856-354-3051)

 

 

Attorneys for

 

Vijay Sankhla, M.D.,

 

Yale Shulman, M.D.,

 

Boris Pearlman, M.D.,

 

Marvin Cetel, M.D., and

 

Barbara Schneider, M.D.

 

Dated: March 28, 2002.

 

CERTIFICATION OF BAR MEMBERSHIP

 

 

[47] I hereby certify that I am a member of the Bar of this Court.
By:

 

Steven J. Fram, Esquire

 

CERTIFICATE OF COMPLIANCE

 

 

[48] Pursuant to Fd.R.App. 32(a)(7)(C), I hereby certify, according to computerized count, that this Brief contains 5452 words.
By:

 

Steven J. Fram, Esquire

 

CERTIFICATE OF SERVICE

 

 

[49] I hereby certify that on March 28, 2002, I served the foregoing Brief upon counsel of record by forwarding two copies thereof by Federal Express as follows:
David R. Levin, Esquire

 

Wiley, Rein & Fielding, LLP

 

1776 K Street, N.E.

 

Washington, D.C. 20006

 

 

Kenneth L. Greene, Esquire

 

Robert W. Metzler, Esquire

 

Tax Division

 

Department of Justice

 

P.O. Box 502

 

Washington, D.C. 20044

 

 

Steven J. Fram, Esquire
DOCUMENT ATTRIBUTES
  • Case Name
    NEONATOLOGY ASSOCIATES, P.A., ET AL. Petitioners-Appellants v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
  • Court
    United States Court of Appeals for the Third Circuit
  • Docket
    No. 01-2862
  • Authors
    Fram, Steven J.
  • Institutional Authors
    Archer & Greiner, P.C.
  • Cross-Reference
    Neonatology Associates, P.A., et al. v. Commissioner; 115 T.C. No. 5;

    No. 1201-97; 1208-97; No. 2795-97; 2981-97; No. 2985-97; 2994-97; No.

    2995-97; 4572-97 (July 31, 2000) (For a summary, see Tax Notes, Aug.

    7, 2000, p. 773; for the full text, see Doc 2000-20409 (98 original

    pages) or 2000 TNT 148-3 Database 'Tax Notes Today 2000', View '(Number'.)

    For text of Neonatology's opening appellate brief, see Doc 2002-

    1086(64 original pages) or 2002 TNT 23-85 Database 'Tax Notes Today 2002', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2002-8713 (30 original pages)
  • Tax Analysts Electronic Citation
    2002 TNT 76-35
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