# UNITED STATES TAX COURT > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A2e79007058cc5880 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 136 T C. No 2 UNITED STATES TAX COURT G. MASON CADWELL, 2R ,9e itioner . COMMISSIONER OF INTERNAL REVENUE Resþondent Docket No. 15456 08. Filed January 3, *2011. K, an S corporation 100 percent owned by P' s spouse? adòpted and, t hrough iÝs subsidiary KSlòda.de contributions to a multiemployer welfare-benefit plan (the ylan) . Through KSM K made a Montrib'ution to the plan, part of which was used to purchase life insurance coverage for P and K's other employees; and tihe remainder of which was an excess contribut.ion. The plan was amended and converted to a single-employer plan. The plan's qualification pursuant to sec. 419A(f) (6), I.R.C., is not i'n issue. Held R was not required to send P a - "30 day lettër", and the notice of deficiency ade ùately sets forth R's position7in this case and is therefore valid. Held, further, P' s' interest in the plan became substantially vested upon the plan's conversion from a multiemployer plan to a single-employer plan. Sec. 1. 402 (b) -1 (b) (1) , Income Tax Regs . SERVED JAN 3 2011 - 2 - Held, further, P rust include in gross income the c sh value of the life insurance policy on P's life. T e value of the life insurance policy is the PERC (premiums, earnings, and reasonable charges) pursuant tb Rev. Proc. 2005-25, 2005-1 C.B. 962. P may not : rŠduce the PERC value by the surrender charge, as it spould be disregarded for valuation purposes pursuant to Rev. Proc . 2005-25, lsupra. Held, further, P must include in his gross income the excess contributiorls pursuant to sec. 1.402(b)1 (b) (1) , Income Tax Recjs . Held, further, the' current year cost of insurance protection is an accesdion to wealth which P must i clude in gross income pursuant to sec. 61(a), I.R.C. Held, further, where the fair market value of a 1i.fe insurance policy låas been determined using the PERC method, P must include in his gross income as the c st- of life insurance protection an amount equal to the sum of mortality charges and other expenses. Held, further, P is liable for the accuracyrelated penalty for a substantial understatement of i come tax pursuant to sec. 6662(a) and (b) (2), I.R.C. R chard H. Morton and I evin J. Ryan, för petitioner. K thleen Tagni, Sherri Wilder, and Betty Clary (specially recognized) , f or respondent OPINION . W LLS, Judge: This case is before the Court on petitioner' s motion for summary judgment anc respondent's cross-motion for - 3 - summary judgment spursuant to Rule 121. Respondent determined a deficiency of $33,057 in petitioner's Federal rincome tax for tax year 2004 and a penalty pursuant to section -6662(a) of $6,611 On August 31, 2009, petitioner filed a motion-for summary judgment. On October 5,- 2009, respondent filed a response sto - petitioner's motion for summary judgment and a -cross-motion for summary-judgments On Octobero26, 2009; petitioner filed a motion to amendehis petition.3 i On November 4, 2009, petit ioner filed a response to respondent's cross-motion .for summary judgment. On November 16, 2009, a hearing wastheld onathe parties' motions. On November 19, 2009, respondent filed a reply to petitioner's response to respondent' s motion for summary judgment and anobjection to- petitioner s motion to amend hisopetition. The issues to be decided as a consequence of Petitioner's moti'on for summaryejudgmentiandaRespondent's cross-motionsfor summary judgment are: (1) Whether respondent was required to send a "30 day -letter" to petitioner and whether the notice of deficiency adequately sets forthsrespondent's position inethe instant; case; (2)e whether petitioners must include in gross income the cash value of a life insurances policy held, by a multiemployer Unless otherwise indicated, -section refer.ences are to the Internal oRevenue Code o f . 198 6 ( Code ) as amende d and in e f f ec t for the year sin issue, andrRule- references are t o the Tax Court Rules of Practicemand Procedure. By separate order amend his petition. we will deny petitioner s motionato - 4 welfare benefit plan that wàs converted to a single-employer welfare benefit plan during?the year in issue; (3)*whether petit oner must include in his gross income payments made by his emplo er in excešs of the -cêst of current year life insurance prote$tion (excess contribut ion) ; (4) whether petitioner must includel "in his gross income the current year cost of life insurance protection paid b his employer; and (5) whether petiti ner is liable for the penalty under section 6662. ackground The abackground facts are drawn- from the pleadings, the parties' motions, facts deeãed established, and stipulated t exhibits, and are not in dispute. t the time "of filing of the petitio , petitioner was a resident of North Carolina. 3 - 4 Petitioner is married tio Jennifer K. Cadwell (Mrs:. Cadwell) . Petitioner, and Mrs. Cadwell have two daughters, Jennifer Keady Cadwelt 1(Jennifer) and Miranda« M., Cadwell (Miranda) . For his 2002 through 2004 tax yearsy petitioner filed:Forms 1040 U.S. Individual Income Tax Return, claiming a filing status of married filinc separately. For his 2002 through 2004 tax yearsI, In the notice of deficiency, respondent determined adjust nents to petitioner's personal exemption and itemized deductions. These adjustmerits are computational and will depend on the Court' s resolution of thei issues discussed -herein. 4 ' 'Certain facts were deelned established by separate order of the Cohrt . 5 - petitioner did-not report any wages or salaries on line 7 of Form 1040 ræKeady Ltd -(Keady) , is a Pennsylvania, S corporation organized during 1998.pursuant to sections 1361-1375. Keady is, and has always been; 100 percent, OOO for thermontheending Januarye6, 2003.a a Petitioner 'did not include,any income -on liis 2002 Form 1040 as a result of any life insurance prentiums paid by KSM;aThe payments to the Plandrustee were not claimed as'a deduction on KSM' s or Keadyi' s -20 0 23 Federal income tax return . Petitioner' s accountant, Robert W.sNicolini,trC.iP..A.4 (Mr. Nicolini), Wassmoteaware of the paymentsi or that -KSM lhad a - bank saccount swith: Centennial Bank . On - May~ 20 , 2004 , KSM paid $38, 800 to 419 Plan Administrators , a 1 a? the snewe Plan Administrator ; to cover Keady' s obligation sunder ?the-21an'. y Of thats amount, $36, 000s wast paid to coverathe, Plan contribution and $2,800 was paid as the 'Plan fee. The checks were 'drawn on the, "KSM Limited Partnership Escrow -* Account, c o Crawford Wilson and Ryan LLC" s(KSM escrow account),. T The KSM sescrow account was maintained at National "The record does not reveal at what point Compass Bank assumed the role of Plan Trustee . a EThe record adoes not reveal when 419 Plan Administdators became the Plan Administrator. KSM paid this amount using two checks,l one for $38, 000, dated May 20, 2004, and the other for $800, datedrMay 20, 2004. - 10 Penn Bank. - When Mr. Nicolini -prepared KSM's 2004,'Federal income. tax return,r he -discovered the =$38;800 in payments añade to 4194 Plan Administrators. Mr. Nicolini das not aware that'KSM ore Keady was participating in the Plan. Mr. Nicolini-asked Miranda, the tax matters partner ,of KSM, about the payments - " Miranda, who was unable to verify the payments, thought they were for a horse. Mr. N colini recorded the a ounts as payments for "horses" and "bookŠl"; them as an asset on KSM' s balance sheet . never Mr .- Nicolini epreciated the "horses"' on KSM' s balance .sheet / and during 2006,-;the "horses" wdre distributed to the Cadwells as a capital distribution. Lincoln Life credited petitioner's life insurance poiicy for an $18 000 payment for ithe month ended September 6, -2004. » On Dune 5., 1995, the Internal Revenue Service (IRS) issued Notice 95 34, 1995-1 C.B. 309, which described certain multiemployer plans (MEPs) that do not qualify under section 419A (f ) (6) . In Notice 2001g51, 2001-2 C.B. 190, , the I-RS desigr ated those transactions described ii Notice 95-34, supra, as "listed transactions" subject to enhanced disclosure The record does not rgveal why petitioner's life insurance policy was not credited with a $36, 000 payment or shy petitioner' s payment in May was not credited until September. Petitioner' s life insurance policy was not creditied with a payment for 2005. e - 11 requirements.4 Act of 2004, On Octobere22 Ptib. L. 108-357 2004, t he American Jobs Creation sec. 811(a),41182 Stat. 157/5, became law and instituted a new penalty for fallùre to -disclose a listed transaction. See sec. 6707A. On- Novemb¯er 17, 2004, Niche sentalettets to the employers participating¿ in the Plan announcing* that the Plan had been split into singlse-employer welfare benefit plans SEP) . 5 SEPs or individually The feasons stated in the ietters for the donversion included more employer control over Plah rassets arid the concern that the Plan might be subject to listed trarisactiön penalties under Necti'on 6707A. Niche's letter acknowledged that the SEPs no longer quaelified for treatment pursuarituto section 419A(f) (6), and, therefore, the deductibility of the employer' s contfibutions would bes limited.« Keady's employees welsfare benefit plan was "Notice 2001-51 2001-2 C.B. 190, was supplemented and superseded -by Notice 2003-76, 2003-2 C.B. 1181 which was sa supplemented and superseded by Notice 2004-67, 2004-2 C.B. 600, which was .supplemented and supe,rseded by Notices 2009-59, 2009-31 I.R.B. 170. Notice 2009-59, subra, includes transactions desgribed in Notice 95-34, 1995-1 C.B. 309, as listed transactions. Liste transactions are transactions that are the same as or substantially similar to those transactions that havegeen determined by the IRS to be tax avoidarice transactions and have been identified by notice, regulation, or other formeof ,published guidance . . Sec . 1. 6011-4 (b) (2) , Income- Tax Regs . asAccording to the letters, the change was made effective, retroactively to Jan 1, 2004. However, we treat the change as actually occurring ori-Nova. 17 2004, as this ais the date of the actual conversion. a - 12 - renam d the "Keady, s Ltd. We fare Benefit Plan't , and. the assets were maintained by the National Benefit Trust IIr. Øn December 30, 2004, I iche and Wells Fargo, as Trustee, entered into a new trust agreement for the National Benefit Trust II. By its terms, the: agre ment ist a ,"complete amendment and restatement" of the original trust agreement. Significantly, the new agreement provides that the Plan Administrator is now the emplo er unlessrovided underethe plans , "Notice 95 34, supra. This Court has decided several cases regarding purported section 419A ( f ) (6 ) plans . 2 In Booth v. Commissioner»n of split-dollar life insurance and .group 2term, life insurance, calculate the cost of l' year of life insurance protection. Generally, split dollar li e insurance is any arrang ment betweeÈ an owner and a nonodner oÈ a life" insurance contract where one party pays the prèmiums and is entitled o recove al 43 - or a portion pf such premiums from the proceeds of othe life irisurance "contract and the arrangem'ent insurances. Sec s not group term life 1. 61222 (b) (1) , Incomë Taxe Regs : RRev . Rul 328, -1964±2: C.B. 11 64 provides that an employee amust include in gross income etheaannual value of the benefit theaemployee receives under a split-dollar arrangement,a which is an amount equal to «the 1-year term cost of life*'insurance protections to which the employee isv eittitled :from yearNto y'ear, less the portion, "if any, thetemployee p-rovides.»MSee also Johnson v. Commissioner; 74 T C 1316 1322 (1980) . AWeenote that Rev. Rul. 64-328, supra, is not an attempt to include in gross income the entire- life -insurance premium but rather only the- costrof the current year' s life insu ance protection. The 1-year cost of lifezinsurance protection is. the amount- to be determined in the instarit case. «Rev. Rul. 64-328, supra, provides; that the cost3 of life insurance protectionnshould be balculated «using the P.S 58 rates found in Rev . Rule. e55 -747, 1955 -2 C. B/228d Notice 20 01-10 , supra, revoked Rev. Rul. 55-747, supra, and provided Table 2001 as a substitute for the P.S. 58 rates In, Curc io - v . Commis s ioner , T . C . Memo rates in section 1.79-3 (d) , estimate" of'the cs c 2010 -115 , we used the Income Tax Regs. as a "rough life insurance protection to. decide whether the taxpayer s expenses for fife iËsuranck Were deductible pursuanti to section 162 (a) . versi n o Table 2001 is an updated the rates found inesection 1.79-3(d), Income. Tax Regs. See Nc$tice 2001.-10, 2001-1 .B. at 462 ("Table 2001 is based on the mortality experience reÈlected in the y table of uniform . premiums promulgated under lection 7.9 (c) of the Code (see § 1.793 (d) ( ) of the regulations) with extensions for ages below 25 and a ove 70, and the elimination of the five-year age i brack ts") ; see also Notice 2002 8, 2002-1 C.B. 398. « AccordingjLy, we conclude that Table - for purposes of the instant^ case, 001 .is a reasonable estimate oft the cost of 1 year of life insurance protection. ursuant to Table 2001 the cost of $1 million worth of life insurance coverage for a 66 year-old .is $13, 510 . As neither party hasi arguedithat the life insurance policy in issue is split do).lar life insurance we need not address any issue regarding' the effect of split-dollar life insurance on the calcu ation of the cost of the life insurance policy in issue." + Addit onally, neither party contends that petitioner paid for such ife insurance coverage. J: We note that, if we were to include the entire .$13, 510 amount in petitioner's incoše, there would be double counting. The life insurance po .icy in issue may qualify as splitlife insurance pursuant to sec. 1.61-22 (b) (2) , Income Tax Regs. However, the outcome would be the same if we classified the life insurance policy id issue as split-dollar life insurance . dolla - 45 - Petitioner'.s gìosk incometalready includes ethe cash valüe of the life insurance policy calculated under the-PERC method. That method takes into account the premiums paid and any :other income thealife insurance policy earns, buti it subtracts mortelity charges and other expenses. To' include the entire $13,510cin - additaion ato- the PERC tvalue would partiall o double count a portion .the premium paymentsthat hast already beèneincluded in the PERC amount . Instead,àthe value for currerit year lifet insürance protect-ion should be calculatedebyyaddingethe inortality charges ($8 4296) ,and othera expenses ($2, 640) . The sum of $11;136 reflects the -charges zfore currentayearolifeminsurance: that were already subtractedyfrom theefair market value calcu]:ation : 4 determineduusing-the PERCuamount, pursuant to Reve Proc-. 2005/25, supras : Therefore,. we conclude that when thesPERC formula has "Under the PERC method for 2004, petitioner' s policy yas credited~ eith an" $18 000 premium payment and Nas credÏted with $2,793 in interest, yielding a total ofs$20,793. ,However, petitioner'â ]'ife insurance policy incurred a mortality charge of $8, 496 and other expenses of $2, 640, for, a net value for his 2004 tax yRr of $9 è$7 Indludidg the entire $1C510 from Notice 2001-10, Table 2001, 2001-1 C.B. 459, 463, would include .in petitiorfer's cfrösis irc9me an amount equal to $23~,T67 ($9,657 + $13 , 510 ) . In ot-her words , , inc luding the entire $13 , 510. would double count the cost of life insurarice protîction by an amount equal to $2, 373 . ($23, 161 (or $13, 510 + $9, 657) minus. $20 , 7.93 (or Šl8, 000 + $2, 793) éqifals $2, 37 . ) Consequently, we deem the, $2, 373 an amount al eady contributed by peti ioner for purposes of such calcùlatri'on and, accordingry sübtract that amount from the $13, 510 in costs . Therefore,, petitioner musta .include in his gross incoine the valde f Ehe cÏirrent yeak life iniurance protection as a taxable benefit to him of $11,136. 4 - 46 - been used to calculated the fair market value of. the ,policy, the cost f insurance may be ¡cal.culated by -adding the mortality charges and other expenses . i etitioner contends thät we should only sconsider the current !. morta ity chargesurather than the Table 2001 rates. Petitioner in es ence contends that the current mortality charges sareuthe "insu er's published premiudi rates for one-year termeinsurance" pursuant to Rev. Rul. 66-110, 1966-1 C.B. 12. 2002-8, .2002-1 C.B. at 9398 Pursuant to Notice 99, the insurer'ss published premium rates may be used only if tl e taxpayer can showsthat the insurer gener fly makes the availability 'of sucherates known to persons who a ply for term insuranc coverage from tihe insurér and ithe insurer regularly sells tera insurance at such ratestto individuals who apply for term insurance coverage athrough the insurer'es normal distributionachannels. Petitioner does not argue that the requirements of Notice 2002-8 unrêasonable or incorrect. judgm supra,-are Furthermore, on a motion f r summary t thàt is prð];>erly'm de and supported, the o poeing party must 9et forth specific facts showing that there is a genuine issue fo trial. Rule 121(d) . Petitioner does not allege that- he has any evidence that wo ld sat-isfy 'that requirements of Notice 2002-8, supra. Furthermore, petitioner does not suggest that there is a "material ifa tual issue t hat c ul trial. Accordingly, we con lude that summa be resölvec at udgment is 47 - appropriate on this issue and that the requirements sof Notice 2002-8, supra; have not been met. Therefore, w hold that petitioner must include in his gross income for his 2004etaxgear the cost of cuirent year life insurance -protection of $113/136. VI. - Whether Petitioner Is Liableifor the Sectiona6662 Penalty Respondent contends thatupetitioner is liable for the s accuracy-related penalty pursuant rto section 6662 (a) on account of a substantial understatement of tax, or in the alternative, on account of negligence or disregard of rules and regulations . See sec . 6662 (b) (1) and (2) . A substantial understatement of income tax is an understatement that is greater than 10 percent of the tax required to be shown on the return for the taxable year or $5, 000. Sec. 6662 (d) (1) (A) . An understatement" is the excess of the amount required to, be shown on the return for the taxable year over the amount actually shown on the return. Sec. 66623(d) (2) . The record reveals that petitioner' s understatement will be greater than $5, 000 . Petitioner has failed to establish any defense to the accuracy-related penalty. Consequently, we hold that petitioner is liable for the accuracy-related penalty under 6662 (b) (2) ; - 48 - e shall therefore graNt respondent's cross-motion for summar judgment and deny petitioner's motion for summary judgm nt . e have considered allaof the issues raised by the parties, and, t the extent they are anot discussed herein, we conclude that t hey are without merit, unnecessary to reach, or moot . o reflect the foregoi g An order and decision will be entered under Rule 155. s -1 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A2e79007058cc5880. Public record. Not legal advice.