# T .C . Memo . 2010-11 5

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

CLC

T .C . Memo . 2010-11 5

UNITED STATES TAX COUR T

MARK CURCIO AND BARBARA CURCIO, ET AL .,1 Petitioners v .
COMMISSIONER OF INTERNAL REVENUE, Respondent .

Docket Nos . 1768-07, 1769-07, Filed May 27, 2010 .
14822-07, 14917-07 .

Ira B . Stechel and John T . Morin , for petitioners ..

Brian E . Derdowski, Jr . ,

Peter James Gavagan , and Brian J .

Bilheimer , for respondent .

'Cases of the following petitioners are consolidated
herewith : Ronald D . Jelling and Lorie A . Jelling, docket No .
1769-07 ; Samuel H . Smith, Jr ., and Amy L . Smith, docket No .
14822-07 ; Stephen Mogelefsky and Roberta Mogelefsky, docket No .
14917-07 .

SERVED May 27 2010

MEMORANDUM FINDINGS OF FACT AND OPINIO N

COHEN,

Judge : The docketed cases, consolidated for th e

purposes of trial, briefing, and opinion, consist of three groups
of test cases selected to resolve a number of disputes regarding
companies participating in the Benistar 419 Plan & Trust (th e
participating companies) . . The groups are : (1) Mark Curcio and
Ronald Jelling, as the equal owners of several car dealerships in
the Paramus, New Jersey, area, and their wives, Barbara Curcio
and Lorie Jelling ; (2) Samuel Smith, as the owner of S .H . Smith
Construction, Inc ., and his wife, Amy Smith ; and (3) Stephen
Mogelefsky, as the owner of Discount Funding Associates, Inc .,
and his wife, Roberta Mogelefsky . In these consolidated cases,
respondent determined deficiencies and penalties with respect to
petitioners' Federal income taxes as follows :
Mark Curcio and Barbara Curcio (Docket No . 1768-07)

Year

Deficiency

Accuracy-Related Penalty
Sec . 6662(a )

2001
$79,946
$15,989
2002
81,568
16,314
2003
72,098
14,420
2004
63,519
12,70 4
Ronald D . Jelling and Lorie A .

Jelling (Docket No . 1769-07 )

Year

Deficiency

2001
2002
2003
2004

$79,946
81,568
71,018
72,100

Accuracy-Related Penalty
Sec . 6662(a )

$15,989
16,314
14,204
14,420

- .3 Samuel H . Smith, Jr . and Amy L . Smith (Docket No . 14822-07)

Year
2003

Deficiency
$64,157

Accuracy-Related Penalt y
Sec . 6662(a)

$12,831 .40

Stephen and Roberta Mogelefsky (Docket No . 14917-07 )

Year

Deficiency

2003

$271,204

Accuracy-Related Penalty
Sec . 6662(a )

$S4,240 .80

The deficiencies are based on respondent's determination
that the contributions by the participating companies to .the
Benistar 419 Plan & Trust are not currently deductible by the
companies as ordinary and necessary business expenses under .
section 162(a) or are currently includable .by petitioners as a
corporate distribution . Respondent accordingly either increased
the net amount of passthrough income that . petitioners received
from the participating companies or directly increase d

petitioners' income .
'The issues for decision are, first, whether payments to the
Benistar 419 Plan & Trust for employee benefits are ordinary and
necessary business expenses under section 162(a), and if so,
whether the payments are deductible contributions to a multipleemployer welfare benefit plan under section 419A(f)(6)•, and,
second, whether petitioners are liable for accuracy-related
penalties under section 6662 .

Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure .
FINDINGS OF FAC T
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference . The
parties have stipulated that . the proper venue for an appeal of
this decision is the Court of Appeals for the Second Circuit .
See sec . 7482(b)(2) . The relevant facts largely concern
petitioners' involvement with the Benistar 419 Plan & Trust .
Benistar Plan

Background
The Benistar 419 Plan & Trust was established in Decembe r
1997, and was crafted by Daniel Carpenter to be a multipleemployer welfare benefit trust under section 419A(f)(6) providing
preretirement life insurance to covered employees : Carpenter i s
a„lawyer with experience in tax and employee benefits law .
addition to designing the plan, he also drafted or approved all
of its subsequent amendments . The trust was not intended to be,
and has never been, a tax-exempt trust under section 501 .
The Benistar Plan & Trust was originally based on A
Professional's Guide to .419 Plans, a 1997 book by Carpenter .
Carpenter wrote the book in response to many financial advisers'

5

impression that Carpenter's section 419 plans were too good to b e
true . In the book, Carpenter discusses the provisions of sectio n
419 .
The Benistar 419 Plan & Trust was first sponsored by
Benistar Employer Services- .Trust Corp ., and then, beginning~in
2002, by Benistar 419 Plan Services, Inc .. (both Benistar Plan
Sponsor) . Carpenter is the chairman and chief executive officer
of Benistar 419 Plan Services . Benistar 419 Plan Services
contracts .with Benistar Admin Services, Inc ., to administer the
trust . We refer to the trust, sponsor,-and administrator
collectively as Benistar Plan .

Benistar Plan provides preretirement life insurance to
select employees of companies enrolled in the plan . The enrolled
companies contribute money to a trust account that funds the
benefits, and Benistar Plan issues a certificate of coverage to
the employer with the amount of the death benefit payable by the
plan . Benistar Plan uses enrolled companies''contributions to
acquire one or more life insurance . policies covering the .
employees insured by the plan, and it withdraws . from the trust
account as necessary to pay the premiums on those policies . We
refer to these . insurance policies as the underlying insurance
policies, because they underlie each policy issued by Benistar
Plan and, as a result, Benistar Plan is fully reinsured .
Enrolled companies can choose the number of years that

- 6 contributions to Benistar Plan will be required in order to fully
.pay for the death benefit or benefits .
Under the plan and trust documents, the Benistar Plan trust
may pay reasonable expenses incurred in the establishment or
administration of the plan, including attorney's and accountant's
fees . In 2006, Benistar Plan withdrew 9 percent of the ne t

surrender value of the insurance policies as of December 31, ,
2005, to cover the expenses of the trust in responding . t
inquiries from and audits by the Internal Revenue Service (IRS) .
At all times during the relevant years at least 10 differen t
business entities participated in Benistar Plan .
Amendment s
Since Benistar Plan's inception in December 1997, .the plan
and trust documents outlining the plan terms have been amended at
least five times . The plan operates as though each amendment to
the plan documents is retroactive to December 1997, but only for
current participants . Amendments to the plan .. documents made
after a former participant has left the plan are not applied
retroactively to that participant .

The first amendment was before 2002, and it made largely
cosmetic changes . In the second amendment, dated 'January 2,
2002, Benistar Plan changed plan sponsors from Benistar Employer
Services Trust Corp . to Benistar 419 Plan Services, Inc .,
switched trustees from First Union to J .P . Morgan, and merged

7
most of its original trust agreement into a plan and trust
agreement .

It also changed the agreement at section 5 .01 by

inserting the additional clause that

" In no event will the Plan

be liable for any death benefit if the Insurer shall, for any
reason, fail to pay such . insurance proceeds on the life of the
Covered Employee . "
Two separate amendments were both dated January 1, 2003 .
The first 2003 amendment was made in response to section
1 .419A( f)(6)-l, Proposed Income Tax Regs .,
(July 11 , 2002 ) .

67 Fed .

Reg . 45938

In an attempt to avoid an experience rating

under 'the proposed regulations, the agreement required that
insurance rates under Benistar Plan be those determined in
section 1 .79-3(d)(2), Income Tax Regs ., using the methodology
described under section 7702 . The amended agreement stated that
the plan sponsor would apply those provisions "to determine the
benefit cost for all Employers, which shall be determined without
regard to the Plan's cost to acquire individual policies of
reinsurance on the lives of Covered Employees ." Benistar Plan
also removed a provision that required the plan sponsor to
distribute the underlying insurance policies to the covered .
employees of an enrolled employer when that employer leaves
Benistar Plan . The second 2003 amendment, although dated January
1, 2003, was made sometime in late 2003 or early 2004 and removed
the clause inserted in 2002 exculpating the plan from paying

8 death benefits if an underlying insurer fails to pay the death
benefit .
The final amendment was dated January 2, 2004 . The changes
made by this amendment included expanding the scope of the
arbitration clause . governing the resolution of disputes between
Benistar Plan and its participants .
Enrollment
To enroll employers, Benistar Plan does not directly target .
,employers or employees, but rather relies on insurance brokers .
To educate insurance brokers, Benistar Plan conducts numerous
seminars .
When enrolling, prospective employers or their employees,
with the aid of their insurance brokers, select life insurance
policies from a .number of major life insurance companies .
Employees exercise a large degree of control over their
underlying insurance policy . In addition to selecting the
carrier, prospective employers or their employees may select the
benefit amount, the premium payments, and the type of insurance-term, whole, universal, or variable .
Term life insurance covers the insured only for a particular
period, and upon expiration of that period, terminates without
value . Whole life .insurancecovers an insured for life, during
which the insured pays fixed premiums, accumulates savings from
an invested portion of the premiums, and receives a guaranteed
benefit upon death, to be paid to a named beneficiary . Universal

9 life insurance is term life insurance in which the premiums are
paid from the insured's earnings from a money-market fund .
Variable life insurance is life insurance in which the premiums
are invested in seciurities, .and whose death benefits thus depend
on the securities' performance ; though there,is a minimum
guaranteed death benefit . Because whole life insurance,
universal life insurance, and variable life insurance include a
savings component in addition to the their insurance component,
they almost always have higher premiums than term .life insurance,
and they accumulate value that may be removed from'the policy
either via a loan from the insurance company secured by .the
policy-or a cash withdrawal that reduces the savings component of
the policy . However, as the owner of the underlying policies,
Benistar Plan does not permit employers or covered employees to
withdraw money from their underlying policies through either
loans or cash withdrawals .
Benistar Plan places three restrictions on the underlying
insurance policies that it will purchase . First, prospective
participants may request policies only from life insurance
companies that are licensed by the State of New York, which
Carpenter perceives as more reliable . Second, Benistar Pla n
requires that any dividend paid out by the policy be reinvested
in the policy as a paid-up addition . Paid-up additions increase
the death benefit of the underlying policy, although they do not
affect the death benefit promised by Benistar Plan to the insured

- 10
employee ., Third, prospective participants selecting a variable
universal life insurance policy must allocate the investment
portion of the policy to either the insurance guaranteed fund or
the Standard & Poor's (S&P) 500 equity index . The purpose of .
,this restriction is to ensure that participants do not use the
underlying insurance policy as a means of accumulating . asset s
within Benistar plan through diversified or more risky
investments . Benistar Plan' .s policy was not to allow covered
employees to change their allocation once selected and to
terminate covered employees that use the plan to accumulate
assets .
In addition to selecting the policy that would underlie the
death benefits promised by the plan, prospective participants,
with their insurance agents, have to complete a number of
documents, including agreement and acknowledgment forms and a
certificate of corporate resolution authorizing the company to
enroll in the plan . One of the forms, a disclosure and
acknowledgment form, states tha t
The undersigned Employer, on its own behalf, and on
behalf of its Participating Employees, hereby
acknowledges the following :
1 . In determining whether to adopt the Plan and to
what extent they would participate, they have
sought and relied on legal and tax advice from
their own independent advisors ;
2 . The Employer and Participating Employees are
responsible for the tax consequences resulting
from adoption and/or participation in the Plan ;
3 . * * * The Plan Sponsor, Administrator, Trustee and
Carrier cannot and have not guaranteed or promised

- 11 any particular legal or tax consequences from the
Employer's adoption or participation . in the Plan ;

7 . The plan provides .for,death benefits for
Participating Employees and cannot be used as a
vehicle for deferred compensation or retirement
income .
The disclosure and acknowledgment forms signed by petitioners
vary slightly in wording, but not materially .
Once the .employers or their employees fill out the
paperwork, the completed life insurance applications are sent t o
Benistar Plan . Benistar Plan checks the policy applications t o
ensure that Benistar Plan Sponsor is the owner and that th e
Benistar 419 Plan & Trust is the beneficiary . Other than those
two fields, Benistar Plan does not modify the applications . Once
the insurance policies are approved by the insurance companies, .
employers are sent an "admin .packet", which consists of copies of
the signed agreement and acknowledgment forms originally
submitted with the application ; certificates of coverage for the
covered employees ; a copy of the corporate resolution ; papers
detailing the benefits of enrollment ; a summary plan description ;
and an opinion letter from Edwards & Angell, LLP, an independent
law firm, claiming that the plan qualifies for the advertised tax
consequences . The benefits of enrollment listed in the admin
packet include :
• Virtually Unlimited Deductions for the Employer ;
• Contributions can vary from year to year ;

- 12 -

• Benefits can be provided to one or more key
.Executives on a selective basis ;
• No need to provide benefits to rank and file
employees ;
Contributions to the BENISTAR 419'Plan are not
limited by qualified plan rules and will not
interfere with pension, profit-sharing or 401(k)
plans ;
• Funds inside the BENISTAR 419 Plan accumulate taxfree ;
• Death proceeds can be received both income and
estate tax-free by beneficiaries ;
• Program can be arranged for tax-free distribution
at a later date ;
• Funds in the BENISTAR 419 Plan are secure from the
hands of creditors .

By the end of 2003, in an effort to comply with section
1 .419A(f)(6)-l ; Income Tax Regs ., Carpenter updated this list to
forbid distributions of Benistar Plan's underlying insurance
policies .
There were a number of Edwards & Angell opinions issued to
Benistar Plan . The firm issued Benistar Plan opinion letters in
December 1998, November 2001, and October 2003 . In addition,
Edwards & Angell issued Benistar Plan a letter in December 2003
stating that Benistar Plan is not a tax shelter as described in
section 6111, or a potentially abusive tax shelter or listed
transaction as described in section 301 .6112-1(b)(2), Proced . &
Admin . Regs .

Contributions
.Once the employer is properly enrolled, it makes
contributions to Benistar Plan in accordance with notices sent by
the plan . The notices, addressed to the employer ; list the

- 13 underlying insurance policy owned by Benistar Plan and'the
amounts due to keep the particular underlying policy active . If
an employer is more than 30 days late in making contributions,
the employer may be terminated from the plan .
In addition, the notices. of contribution state that "you may
contribute additional amounts to the Benistar 419 Plan . If you
choose to do so please contact your broker : [broker's name] . "
If additional amounts are contributed to Benistar Plan, those
amounts remain in the trust account and are not used to make
additional payments on the underlying insurance policy . Benistar
Plan keeps track of the contribution on internal spreadsheets ,
and assuming the plan has enough assets to cover current
liabilities, the contribution is used only for the policy t
which it is allocated . All contributions are deposited in one
trust account, and those amounts, . plus the values of the policies
owned by Benistar Plan, are available to satisfy any claim on the
trust . In addition, as mentioned earlier, the trust may pay
reasonable expenses incurred in the establishment . and
administration of the plan, including attorney's fees and
accountant's fees .
Originally, the enrolled employer and its insurance agent
would determine the amount of any additional contributions t o
make to Benistar Plan . Starting in 2000, Benistar Plan required
that the contributions be sufficient to fully fund the underlying
insurance policy in a maximum of five annual contributions .

- 14 -

In 2002, Benistar Plan began to encourage new employers to
fund their employees' participation in the plan through one large
lump-sum contribution . In .2003, lump-sum funding became
mandatory . The primary reason, according to Carpenter, was to
make sure Benistar Plan was not experience rated, in violation-of
section 419A(f)(6) . . An additional reason listed in some Benistar
Plan enrollment documents was "to insure against .the lack of
deductibility of future contributions to the plan, a potential
downturn in the economy or any other unforeseen financial
circumstance ." To determine the total amount necessary to
contribute, Benistar .Plan developed the Benistar 4 .19 Funding
Calculator, which calculates the cost of life insurance by using
the rate table in section 1 .79-3(d)(2), Income Tax Regs .
Benistar Plan would take the present value, discounted assuming a
6-percent annual interest rate, of each year's cost of life
insurance from the age of the insured until 90--even though
Benistar Plan provides only preretirement death benefits . Thi s
amount was charged regardless of the insured employee's gender or
health .
Termination
Short of dying, there are three ways a covered employee may
leave Benistar Plan . First, the employee may stop working for
the enrolled employer . Second, the enrolled employer may choose
to leave Benistar Plan or may be terminated involuntarily .
Third, Benistar Plan may terminate or discontinue the plan .

- 15 If an employee stops working for an enrolled employer,
according to the terms of the plan and trust agreement-the
employee has 30 days to purchase the underlying policy from
Benistar .Plan at a value determined by Benistar Plan Sponsor . I f
the employee does not purchase the policy, the trustee of
Benistar Plan may surrender the policy to the insurance company
and add the proceeds to the trust account . Originally the
employer could also request that-the policy be transferred to
another welfare benefit .trust, but that clause was removed in the
first 2003 amendment to the plan and trust agreement .
Employers could terminate their participation in the plan at
any time by sending a letter of termination on company letterhead
to Benistar Plan and paying a $500 termination fee . Under the
plan's original terms, if an enrolled employer left Benistar Plan .
voluntarily, the plan could, assuming the liabilities .of the pla n
were currently met, distribute the underlying policies to the
insured employees at no cost . These terms were changed by the
first 2003 amendment to the plan and trust agreement . From mid2002 to mid-2005, it was Benistar Plan's general practice to
distribute the policies to the insured employees for the price
per policy of 10 percent of the net surrender value of that
policy . The net surrender, value was calculated as of December 31
of the previous year, and premium payments that were made during
the year of the distribution were not included . If the policy

16 -

had no net surrender value, Benistar Plan charged $1,000 for the
distribution .
After mid-2005, Benistar Plan began to charge covered
employees the fair market value of the underlying policy, as
defined in Rev . Proc . 2005-25, 2005-1 C .B . 962 . . However,
Benistar Plan does not receive the fair market value of the
policy up front . It permits the insured employee to borrow the
cost of the purchase, providing as collateral the insuranc e
policy itself by signing a collateral assignment agreement . The
collateral . assignment agreement provides :
2 . The [Benistar 419] Trust's interest in the Policy
.shall be limited to :

(a) The right to be repaid its cumulative loans
plus interest paid or ; if less, the net cash
surrender value of the Policy, in the event the
Policy is totally surrendered or cancelled by the
Participant ;
(b) The right to be repaid its cumulative loans
plus outstanding interest, in the event of the
death of the Insured ;
(c) The right to be repaid its cumulative loans
plus outstanding interest, or, if less, the net
cash surrender value of the Policy, or to receive
ownership'of the Policy, in the event of
termination of the Agreement ;
(d) An amount not to exceed $300,000 if less than
the amount listed above .
3 . The . Participant shall retain all incidents of
ownership in the Policy, including, but not limited to,
the sole and exclusive rights to : borrow against the
Policy ; make withdrawals from the Policy ; assign
ownership interest in the Policy ; change the
beneficiary of the Policy ; exercise settlement options ;
and, surrender or cancel the Policy (in whole or in

- 17 part) . All of these incidents of ownership shall be
exercisable by the Participant unilaterally and without
.the consent of any other person .
As a surrogate for 3 years of interest, Benistar Plan charges the ,
insured employee 10 percent of the net surrender value, whic h
must be prepaid at the time the insured employee requests t
withdraw the underlying policy .
An employer may also be terminated from Benistar Plan
i

involuntarily if it fails to contribute the amount previously
billed by the plan . In this case, Benistar Plan may surrender
the policy to the insurance carrier and add the proceeds to th e
trust .
If Benistar Plan terminates, the underlying policy may b e
distributed to either the covered employee or to a trust for that
employee's benefit at the discretion of .Benistar Plan Sponsor .
Aside from termination, an enrolled employer or its covere d
employee may not withdraw contributions made to Benistar Plan .
Benistar Plan allows potential enrolled employers who, prepaid
contributions to request a refund if they later decide not to
participate in the plan, but this is viewed by the plan as an
annulment of the transaction, rather than a forbidde n
distribution .
Mark and Barbara Curcio and Ronald and Lorie Jelling
Petitioners Mark and Barbara Curcio and Ronald and Lori e
Jelling resided in New Jersey at the time they filed their
petitions. Mark Curcio (Curcio) has a bachelor's degree in

- 18 accounting . Curcio was born in 1955, and Ronald Jelling
(Jelling) was born in 1957 .

Curcio and Jelling are business partners owning and
operating car dealerships, and neither has any plans to retire .
They have always split ownership of their car dealerships 50-50 .
Their first dealership was Chrysler of Paramus, founded about
1990 . About 1994, they founded Grand Dodge of Englewood, and in
about 1995 they founded Dodge of Paramus . In about 2002 they
founded Westwood Chrysler Jeep, and they hold it through an
entity treated as a partnership for tax purposes, JELMAC, LLC .
Collectively, we refer to these equally owned entities as the car
dealerships .
Dodge of Paramus enrolled in Benistar Plan in December 2001,
and it elected to provide life insurance benefits through the
Benistar Plan to Curcio and Jelling as employees . It did not
.provide benefits through Benistar Plan to any of the other
approximately 75 full-time employees . None, of the approximately
220 employees employed by the other car dealerships (other than
Curcio and Jelling themselves) received benefits . through Benistar
Plan .
One of the purposes of enrolling in Benistar Plan was to
fund a buy-sell purchase agreement between Curcio and Jelling .
The buy-sell agreement stipulated that should one partner die,
the other partner would buy, and the deceased partner's estate
would sell, the deceased partner's stake in the car dealerships

19 -

for a previously agreed-upon value, . which was set at $6 million .
By naming each other as beneficiaries of the Benistar Plan
policy, Curcio and Jelling ensured that each had sufficient
liquidity to purchase the other's stake for the agreed-upon
price . . Although Dodge of Paramus enrolled in Benistar Plan in
2001, the buy-sell agreement was not executed until March 2003 .
Curcio and Jelling both believed that the buy-sell agreement an d
the Benistar enrollment occurred within about a year's time .
Before enrolling in Benistar . Plan, Curcio and Jellin g
consulted Stuart Raskin, the accountant for Dodge of Paramus .
Neither Raskin nor anyone in his firm is an expert, or appears to
be an expert, in welfare benefit plans . Raskin reviewed the
Edwards & Angell opinion letter and advised Curcio and Jelling
that, solely on the basis of the opinion letter, Dodge of Paramus
could claim deductions for contributions to Benistar Plan .
Consistent with the procedures for enrolling . in Benista r
Plan, Curcio and Jelling met with their respective insurance
agents to select life insurance policies from third-party
insurers to be purchased as investments by Benistar Plan . The
policies they selected both carried death benefits of
approximately $9 million, which would underlie a total death
benefit payable by Benistar Plan of $9 million each even though,
as of the 2003 version of the buy-sell agreement, the most Curcio
or Jelling would be forced to pay for the other's interest was $6
million . Curcio and Jelling also contemplated having to make

- 20
contributions for 10 years, after which they would receive life
insurance coverage but would no longer have to contribute .
Curcio's insurance agent was Robert Iandoli . Iandoli met
Curcio around 1998, when he sold Curcio life insurance and some
securities and assisted Curcio with basic investment and estate
planning . Curcio was not particularly knowledgeable regarding
life insurance and relied at the time on Iandoli's expert advice .
Curcio and Iandoli selected an Ensemble III flexible premiu m
variable life policy, from Jefferson Pilot Financial . The policy
paid a death benefit of $9 million .. Curcio chose to have the
accumulation value of the life insurance policy invested in the
S&P 500 equity index .
Because of a certain health condition, Curcio',s underlying
insurance policy was rated, which means the premiums were more
expensive . Iandoli estimated that $200,000 annually would be
sufficient to cover the premium payments for the selected policy,
and therefore elected to make $200,000 contributions annually to
Benistar Plan .
In 2004, Iandoli, on his own initiative but with Curcio's
knowledge, was successful in having the rating removed from the
policy, thereby reducing the cost of the underlying insurance on
Curcio ; but Jefferson Pilot required that the death benefit be
raised to $9 .1 million . The underlying policy's annual premium
and the death benefit from the Benistar .Plan policy remained the
same .

21 Jelling's insurance agent was Alan Solomon, whom he had
known .at the time for over 30 years . Jelling was not
particularly knowledgeable about insurance and relied on
Solomon's advice . Jelling and Solomon selected two life
insurance policies from, Security Mutual Life Insurance Co .--the
first, a flexible premium whole life with adjusted amounts
policy, and the second, a flexible premium universal life policy .
The two policies were structured so that Jelling's contributions
to Benistar Plan would be the same as Curcio's, $200,000
annually, and the death benefit would be $9 million . Solomon
thought that the two policies would provide the optimum mixture
of insurance for Jelling because "A whole life policy gives you
very good values, gives you a contract that has stringent
parameters, where a universal life is much more flexible,"
because with a universal life insurance policy the term component
of the insurance comes from a savings account, and as long as the
savings account has enough funds to cover the term premium, the
coverage will not lapse . The policies carried a combined deat h

benefit of $9,000,836 .
Once the underlying life insurance policies were selected,
Iandoli and Solomon filled out the necessary paperwork, leaving
the beneficiary and owner fields blank . The forms were then sent
to Benistar Plan to fill in the,'remaining information and forward
to the insurance companies to apply for the policy .

22 Dodge of Paramus paid Benistar Plan a total of $400,000 in
both 2001 and 2002 . On its Forms 1120S, U .S . Income Tax Return
for an S Corporation, Dodge of Paramus claimed a deduction for
the $400,000 payment for both 2001 and 2002 . In 2003, JELMAC
paid Benistar Plan the $400,000 and claimed a deduction for the
payment on its Form 1065, U .S . Return of Partnership Income . In
2004, Chrysler Plymouth of Paramus paid Benistar Plan the
$400,000 and claimed a deduction for the payment on its Form
1120S .

On October 25,

2006,

the IRS sent the Curcios and the

Jellings notices of deficiency, determining deficiencies in their
2001-2004 Federal income taxes, as well as accuracy-related
penalties under section 6662(a) for each of those years . The
deficiencies stemmed from additional passthrough income split
between the Curcios and the Jellings from the car dealerships as
a result of the disallowance of the dealerships' deductions o f
contributions to Benistar Plan .
Samuel and Amy Smit h
Petitioners Samuel and Amy Smith resided in Virginia at the
time they filed their petition . Samuel Smith (Smith) was born in
1963 .
In 1998, Smith started SH Smith Construction, Inc ., after
having run the painting division of his father's company for 4
years . On June 11, 2002, SH Smith . Construction adopted a

certificate of resolution electing to enroll in Benistar Plan .

- 23 At the time, SH Smith Construction had 35,to 40 employees, but it
chose to insure only Smith's life through the plan . Smith, wit h
his financial adviser Richard Emery, selected a flexible-premium
variable life insurance policy from ING Group with a death
benefit of $5 million and annual premium payments of $54,000 to
be purchased by Benistar Plan .

.On the insurance application,

Smith indicated that the purpose of the insurance was retirement
planning. The policy was sent to Benistar Plan, and upon
approval from ING Group, Benistar Plan issued a certificate of
coverage .dated July 15, 2003, insuring Smith with a death benefit
of $5 million .
SH Smith Construction deducted $177,966 on its Form 1120S
for 2003 under "Employee benefit programs" . Of that sum, $750
was an administrative fee paid to Benistar Plan, and $54,000 wa s

contributed to Benistar Plan . Benistar plan paid the premium on
the ING Group policy when the policy was issued in late 2002 and ,
paid premiums again in late 2003 and early 2005 . When the policy
was issued, its accumulation value, as listed on the insurance
policy statement, was invested in the Janus Aspen Balanced fund .
Sometime between July and September 2003, the accumulation value
of the policy was shifted from the Janus Aspen Balanced fund to
the Alger American Leverage All Capital fund . Between July and
September 2005, the accumulation value of the policy was shifted
from the Alger American Leverage All Capital fund and distributed
among five other funds, referred to on the policy statement as

24 AIM VI Utilities, ING Inv . VanKmpn Real Estate, ING INV Evergreen
Omega, ING INV MFS Utilities, and ING PRT AC Small Cap . ,
On September 27,

2 005, SH Smith Construction notified

Benistar Plan that it intended to terminate its participation . in
the plan and requested that Smith be allowed to purchase his
policy . On October 21, 2005, the necessary paperwork, . including
a general release form and a plan termination and policy transfer
release form, was executed .

. To-receive the underlying policy,

Smith paid the termination fee of $500 plus 10 .percent of the net
surrender value of the policy . He . also signed a collateral
assignment agreement . To calculate the 10-percent fee, Benistar
Plan used the net surrender value of the policy as of .December
31, 2004, which was .$29,704 .77, instead of the net surrende r

-value at the time, which was, according to the quarterly
statement ending September 30, 2005, $83,158 .85 .
On November 8, 2005,

Benistar Plan and Smith executed a

transfer, of ownership form, transferring ownership of the
.underlying policy from Benistar Plan to Smith . Smith did not
receive a loan repayment schedule, and he could identify no
additional payments to Benistar in connection with the collateral
assignment agreement or ownership of the policy . On April 17,
2006, Smith requested a partial withdrawal of $77,300 from his
policy . On January 9, 2007, Smith requested a policy loan of
$16,000 from .his policy .

25 On March 27, 2007, the IRS sent the Smiths a notice of
deficiency determining a deficiency in their 2003 Federal income
tax as well as an accuracy-related penalty under section 6662(a) .
The deficiency stemmed from additional passthrough income to the
Smiths from SH Smith Construction, resulting from th e
disallowance of the company's $177,966 employee-benefit
deduction . Respondent now concedes that only $54,750, the amount
contributed to Benistar Plan plus the administrative fee, should
have been disallowed :
Stephen and Roberta Mogelefsk y
Petitioners Stephen and Roberta Mogelefsky resided in New
York at the time they filed their petition . Stephen Mogelefsky
(Mogelefsky) has an associate's degree in real estate and
finance . Mogelefsky was born in .1940 .
Mogelefsky has been the president and owner of Discount
Funding Associates, Inc ., an S corporation, continuously since
1979 . The company, at various times, had between 2 and 20
employees . On December 20, 2002, Discount Funding Associates
adopted a certificate

of resolution electing to enroll in

Benistar Plan . It elected to provide life insurance benefits .
through Benistar Plan to Mogelefsky and his stepson, a manager at
the company .
Before enrolling inBenistar Plan, Mogelefsky consulted his
accountant, . Philip Dedora, who is also the accountant for
Discount Funding Associates . Dedora did not conduct research

- 26 with respect to Benistar .Plan . Dedora had no particular
expertise in .welfare benefit plans, nor did he tell Mogelefsky
that he had such expertise . He relied on the opinion of Edwards
& Angell in advising Mogelefsky that Discount Funding Associates
could claim a deduction for contributions to Benistar Plan .
Mogelefsky was aware that Dedora was basing his advice on the
Edwards & Angell opinion letter .
Mogelefsky, with the help of his insurance agent, Gary
Frisina, selected policies from John Hancock Life Insurance Co .
to be purchased by Benistar Plan . To cover himself, Mogelefsky
selected a flexible premium adjustable life insurance policy--a
universal life insurance policy--with , .a death benefit of $1 .35
million (Mogelefsky's first policy) . To cover his stepson,
Mogelefsky selected a flexible premium universal life insurance
policy . Benistar Plan issued a certificate of coverage dated
September 18, 2003, insuring Mogelefsky with a death benefit of
$1 .35 million, insuring his stepson with a death benefit of
$350,000, and listing the enrolled employer as Discount Funding
Associates .

On December .16, 2003, Discount Funding Associates adopted a
certificate of resolution electing to further participate in
BenistarPlan . It elected to provide additional life insurance
benefits to Mogelefsky . Mogelefsky selected a second flexible
premium universal life insurance policy from John Hancock Life
Insurance Co . . with a death benefit of $1 .02 million (Mogelefsky's

27 second policy) . Benistar Plan issued a certificate of coverage,
dated December 28, 2004, insuring Mogelefsky with a death benefit
of

$1 .35 million and insuring his stepson with a death benefit of

$350,000--the same death benefits as outlined in the certificate
of coverage issued in 2003 . The 2004 certificate listed th e
enrolled employer as Oldfield Management Corp, another S
corporation owned by Mogelefsky .
Discount Funding Associates deducted $398,597 on its 2002
Form 1120S corresponding to a contribution to Benistar Plan made'
in early 2003 . Discount Funding-Associates also deducted
$354,821 on its 2003 Form 1120S corresponding to a contribution
to Benistar Plan made .in early 2004 . Discount Funding
Associates' 2003 Form 11205 reported that the company had no
accumulated earnings and profits at the close of 2003 .

Between March 8 and .16, 2006, Mogelefsky and his stepson
completed the documents to withdraw from Benistar Plan . The
paperwork included a general release form and a plan termination
and policy transfer release form . To receive the underlying
insurance policies, Mogelefsky paid 10 percent of the net
surrender value of the policies . He also signed a collateral
assignment agreement, which listed the employer as Oldfield
Management Group . To-calculate the 10-percent fee on
Mogelefsky's first policy, Benistar Plan used $285,773 .41 as the
net surrender value . As of December 22, 2005, the account value
was $313,745 .43 and the cash surrender charge was $28,330 .62, .

28
yielding a net surrender value of $285,414 .81 . There were no
further premium contributions made to the policy . To,calculate
the 10-percent fee on Mogelefsky's second policy, Benistar Plan
used $146,328 .15 as the net surrender value . As of December 16,
200S,

the account value listed on the insurance policy statement

was $166,798 and the surrender charge was $20,803 .7 .1, yielding a
net surrender value of $145,994 .38 . As of March 16, 2006, the
account value was $255,089 .19 . As of December 16 ., 2006, the
surrender charge was $19,647 .95 .

Between March 8 and 16, Benistar Plan and Mogelefsky
executed a transfer of ownership form, transferring . ownership of
the underlying policies from Benistar Plan to Mogelefsky .
Mogelefsky did not think that he had borrowed money from Benistar
Plan and could not recall signing any loan agreements promising
to repay Benistar Plan by a particular time .
On June 25, 2007, the IRS sent the Mogelefskys a notice of
deficiency determining a deficiency in their 2003 Federal income
tax as well as an accuracy-related penalty under section 6662(a) .
The deficiency stemmed from : (1) Additional income of $398,597
related to Discount Funding Associates' contribution to Benistar
Plan made in 2003 but deducted

.n 2002, and (2) additional

passthrough income of $354,821 from Discount Funding Associates,
resulting from the disallowance of the company's deduction of the
2004 contribution .

29 OPINION
Section .419(a) provides that an employer's contributions t o
a welfare benefit fund are deductible, but only if they are
otherwise deductible under . chapter 1 of the Code . The
deductibility of an employer ' s contributions to a welfare benefi t
fund is further limited by section 419(b) to the fund's qualified
cost for the taxable year . Section 419A(f)(6) provides that
contributions paid by an employer to a multiple-employer welfare
benefit fund are not subject to the deduction limitation of
section 419(b )

Petitioners argue that (1) contributions to Benistar Plan
are ordinary and necessary . business expenses deductible under
section 162(a) (which is in chapter 1 of the Code) and (2 )
Benistar Plan is a multiple-employer welfare benefit plan under
section 419A(f)'(6), so that the deduction limits of section
419(b) are not applicable .
We first consider whether the . contributions made by the
participating, companies are ordinary and necessary business .
expenses deductible under section 162(a) . . We . conclude that the
contributions are not ordinary and necessary business expenses
deductible under section 162(a) . Our decision turns on our
factual findings regarding the mechanics of Benistar Plan and our
conclusion that petitioners had the . right to receive the value
reflected in the underlying insurance policies purchased by
Benistar Plan . Petitioners used Benistar Plan to funnel pretax

30 business profits into cash-laden life insurance policies over
which .they retained effective control . As a result,
contributions to Benistar Plan are more properly viewed as
constructive dividends to petitioners and are not ordinary and
necessary business expenses under section 162(a) . .
We acknowledge that the evidence at trial and the argument s
in the briefs in large part deal with Carpenter's attempts to
fashion the Benistar Plan to . qualify as a welfare benefit plan
under section 419 . Carpenter was trained as a tax -lawyer and
studied the evolving regulations issued or proposed under sectio n
419 and the developing caselaw and amended the plan in attempt s
to secure deductions for the premiums paid by petitioners .
published a book in an attempt to explain the provisions o f
section 419 to insurance brokers . The parties presented expert
testimony and opinions about the nature of Benistar Plan and the
underlying policies . Petitioners' expert, however, relied solely
on representations by Carpenter, some of which were contradicted
by the evidence at trial . Under the circumstances of these .
cases, exploration of the intricacies of section 419 would not be
productive and might be misleading as applied to future cases
where the benefits provided did not so clearly exceed ordinary
and necessary expenses deductible under section 162 . Because we
do not interpret section 419A(f)(6), we do not address
petitioners' contention that section 1 .419A(f)(6)-l, Income Tax
Regs ., is . invalid .

-

- 31 Retroactive Amendments to Benistar Pla n
As a preliminary matter, we note that under the annual
accounting system .of Federal income taxation, the'amount of
income tax payable for a taxable year is generally determined on
the basis of . those events happening or circumstances present
during that tax year . See Hubert Enters ., Inc . v . Commissioner,
T .C . Memo . 2008-46 . In these cases, our decision remains the
same regardless of whether we consider only the facts and
circumstances of the particular year in issue or give effect to
the retroactive amendments in Benistar Plan's plan and . trust
agreement and consider only the final amended plan and trust
document .
Burden of Proo f
Section 7491(a)(1) provides tha t
If, in any court proceeding, a taxpayer introduces
credible evidence with respect to any factual issue
relevant to ascertaining the liability . of the taxpayer .
for any tax imposed by subtitle A or B, the Secretary
shall have the burden of proof with respect to such
issue .
Petitioners allege that they have satisfied all the prerequisites
to the application of section 7491 and, therefore, respondent
bears the burden of proof under section 7491(a) . with regard to
each of the factual issues . Petitioners argue that these cases
are similar to McWhorter v . Commissioner , T .C . Memo . 2008-263,
and Forste v . Commissioner , T .C . Memo . 2003-103, where the burden
of proof was shifted to the Commissioner under section 7491 .

- 32 Respondent argues that petitioners failed to satisfy the
requirements of section 7491 ( a) because . they failed to identif y
each issue for which they are seeking to shift the burden of
proof and they have not introduced credible evidence . The .
statute requires petitioners to introduce credible evidence with
respect to each issue for which they seek to shift the .burden of
proof . See sec . 7491(a) ;

Blodgett v . Commissioner , 394 F .3d

1030, 1037 (8th Cir . 2005) ("At a minimum, a taxpayer must
produce credible evidence as to each material factual assertion
necessary to support a claimed deduction before the burden shifts
to the I .R .S ."), affg . T .C . Memo . 2003-212 . The cases
petitioners cite support this proposition . in McWhorter v .
. Commissioner ,

supra , the burden of proof was shifted to the

Commissioner only on the factual issue of whether McWhorter was
an independent contractor or an employee . In Forste v .
Commissioner ,

supra , the Court considered whether the taxpayer

had introduced credible evidence on an issue-by-issue basis .
Regardless, the burden of proof is determinative only when
there is an evidentiary tie . See Estate of Black v .
Commissioner , 133 T .C . (2009) (slip op . at 30) ;

Knudsen v .

Commissioner , 131 T .C . 185, 189 (2008) . Where there is an
evidentiary tie in these cases, we consider whether petitioners
have introduced credible evidence on that particular issue in
order to shift the burden . of proof . However, most of the issues

- 33 in . these cases may be decided on the preponderance of the
evidence .
Ordinary and Necessary Business Expense s
Section 162(a) provides that "There shall be allowed as a
deduction all the ordinary and necessary expenses'paid or
incurred during the taxable year in carrying on any trade or
business" . An expense is a deductible business expense if it (1)
was paid or incurred during the taxable year ; (2) was for
.carrying on any trade or business ; (3) was an expense ; (4) was a
necessary expense ; and . (5) was an ordinary expense . See .
Commissioner v . Lincoln Sav . & Loan Association , 403'U .S . 345,
352 (1971) ;

FMR Corp . & Subs . v . Commissioner , 110 T .C . 402, 41 4

(1998) . Determining whether an-expenditure satisfies each of
these requirements involves a question of fact .

Commissioner v .

Heininger , 320 U .S . 467, 475 (1943) .
Petitioners argue in their brief tha t
It is hard to imagine a more natural and legitimate
business deduction than the `ordinary and necessary'
contribution made to a welfare benefit plan by a
company to purchase life insurance or other benefits
for the benefit of a key employee who may be a
shareholder or owner of the business and his/he r

family-.
They miss the point . Purchasing life insurance for the benefit
of an employee is, in many circumstances, an ordinary and
necessary business expense deductible under section 162(a) . See
Neonatology Associates, P .A . v . . Commissioner , 115'T .C . 43, 88
(2000) (holding that Neonatology could deduct as ordinary and

- 34 necessary business expenses under section 162 contributions that
funded current year term life insurance), affd . 299 F .3d 221 (3d
Cir . 2002) (2000) . Petitioners, however, have not presented
relevant evidence of the cost of the term life insurance
component of the insurance purchased through Benistar Plan .
The record does not allow us to determine petitioners'
annual term life insurance cost . See V .R . DeAngelis M .D .P .C . v .
Commissioner , T .C . Memo . 2007-360, affd . per curiam .574 F .3d 789
(2d Cir . 2009), cert . denied No . 09-895 (U .S ., Mar . 22, 2010) ;
see also Neonatology Associates, P .A . v . Commissioner ,

supra

at

62 n .18 . As a rough estimate, however, we consider .table I in
section,1 .79-3, Income Tax Regs ., pertaining to group term life
insurance, since Benistar Plan used this table to construct the
Benistar 419 Funding Calculator .` Calculating the cost of annual
term life insurance with petitioners' death benefits and
accounting for petitioners' ages yields a cost'ofless than 15
percent of the Benistar Plan contribution for Smith and less than
5 percent of the Benistar Plan contribution for the remaining
petitioners . We recognize that while the term rates in table I
consider only age, many insurance companies consider additional
factors such as health and gender in determining the annual term
cost of insuring a particular person and, these factors may raise
the price of term life insurance . Nonetheless, these estimates
are sufficient to show that the Benistar . Plan contributions were
far in excess of the annual cost of term life insurance coverage .

35
Petitioners argue that the contributions are not excessive
because, according to rates published by the Government, it would
cost over $3 million to purchase

$1 million in life insurance

.coverage to age 90 and the contributions to Benistar Plan total
significantly less . Petitioners confuse the total cost of term
life insurance over a set number of years with the . annual . cost .
The relevant consideration is the amounts of contributions to
Benistar Plan in-excess of the amounts necessary to fund annual
term life insurance . We must consider why petitioners would pay
such excess amounts and whether those contributions were ordinary
and necessary business expenses or payments to petitioner s
personally .
Petitioners cite three cases in support of their argument .
In the first case,

Frahm v . Commissioner , T .C . Memo . 2007-351, we

found that an employer may deduct the current cost of health
insurance premiums paid to cover. .an employee's spouse . The
Commissioner conceded the deductibility of life insuranc e
payments, and the issue never came before this Court .
Schneider v . Commissioner , T .C . Memo . 1992-24, "The contributions
which petitioner made in each of the subject years-were computedi
by an independent actuary in an amount necessary to .fund the plan
for that year", which contrasts with-these cases, wher e
petitioners contributed amounts greater than required to provide
them with term life insurance for the year . In Moser v .
Commissioner , T .C . Memo . 1989-142, affd . 914 F .2d 1040 (8th Cir .

36 1990), although we indicated that section 162 did not require
contributions to a voluntary employees' beneficiary association
(VEBA) be based on actuarial calculations, we did not consider
whether contributions in excess of those required to cover the
current cost might be . construed as a distribution to the taxpayer
personally . Personal benefits to the taxpayers are of particular
concern here, where the participating companies made
contributions exclusively on behalf of their owners that were
distributable to the owners at no or low cost .
Petitioners also rely upon Rev . Rul . 69-478, 1969-2 C .B . 29,
which is materially distinguishable . Petitioners may retrieve
their underlying insurance policies from Benistar Plan at no or
low cost . The revenue ruling gives no indication that th e
employees could retrieve their underlying insurance policies from
the group employee benefit trust . Thus, as in Moser v .
Commissioner ,

supra,

the revenue ruling does not consider whether

contributions in excess of those required to cover the current
cost might be construed as a distribution to the taxpayer
personally and therefore . not be ordinary and necessary business
.expenses under section 162(a) .
We found that contributions to plans similar to Benistar
Plan were not deductible under section 162(a) in two previous
cases :

Neonatology Associates, P .A . v ._Commissioner, supra , and

V .R . DeAngelis M .D .P .C . v . Commissioner ,

supra . In Neonatology ,

Neonatology Associates deducted contributions to a VEBA to

- 37 provide life insurance for its employees .

The VEBA invested the

contributions in life insurance that could be distributed to a
covered employee when that employee was no longer eligible for
benefits from the VEBA .

Neonatology substantially overpaid th e

VEBA for term life . insurance, and the Court found "incredible
petitioners' assertion that the employee/owners of Neonatolog y
* * * would have caused their respective corporations to overpay
substantially for term life insurance with no promise or
expectation of receiving the excess contributions back ."
Neonatology Associates, P .A . .v . Commissioner , 115 T .C . at 89 . .

Because in that case the plan participants could, and did,
retrieve their policies from the plan, the Court concluded that
"the purpose and operation of the Neonatology Plan * * * was to
serve as a tax-free savings device for the owner/employees and
not, as asserted by petitioners, to provide solely term life
insurance to the covered employees :"

Id .

at 92 . The extra

contributions above the cost of term life insurance were
essentially distributions' to the shareholders of Neonatology
Associates and not ordinary and necessary business expenses
deductible under section 162(a) .
The Court decided similarly in V .R . DeAngelis M .D .P .C . v .
Commissioner , T .C . Memo . 2007-360, where a partnership named
VRD/RTD enrolled in what purported to be a multiple-employer
welfare benefit plan . The plan was supposed to provide eligibl e
employees with severance benefits and, if elected, life

38 insurance . For each year, the partnership deducted the full
amount of its contributions to the plan in that year as an
ordinary and necessary business expense under section 162(a), and
the plan invested the contributions in whole life insurance
policies . The Court found tha t
The insurance premiums at hand pertained to the
participating doctors' personal investments .in whole
life insurance policies that primarily accumulated cash
value for those doctors personally . VRD/RTD's
contributions to the STEP [Severance Trust Executive
Program Multiple Employer Supplemental Benefit Plan and
Trust] plan were used to pay the initial year's cost of
providing life insurance for each participating doctor
and to create an investment fund for the insured within
his whole life-insurance policy * * * . As to each
investment fund (and as to each insurance policy in
general), the insured doctor regarded that fund (and
policy) as his own, as did the STEP plan trustee, the
STEP plan administrator, and MetLife . Very little (if .
any) value in one participating doctor's fund was
available to pay to another insured, and any
distribution of cash from the STEP plan to a
participating doctor was directly related to the cash
value of his policy . In many . instances, a
participating doctor dealt with his own insurance agent
in selecting and purchasing the policy on his life,
received illustrations on an assortment of life
insurance investments that could be made through the
STEP plan, determined the amount of his investment in
his life insurance policy, selected the form of the
insurance policy to be issued for him (e .g ., single
whole life versus survivor whole life), and selected
his policy's face amount . * * *
The use of whole life insurance policies and the
direct interactions between the participating doctors
and .the STEP plan representatives support our finding
that the . participating doctors in their individual
capacities fully expected to get their promised
benefits and that any receipt of those benefits was not
considered by anyone connected with the life insurance
transaction to rest on any unexpected or contingent
event . . Each whole life insurance policy upon its
issuance was in and of itself .a separate account of the

- 39
.insured doctor, and the insured (rather than the'STEP
plan) dictated and directed the funding and management
of the account and bore most risks incidental to theaccount's performance .
V .R . DeAngelis M .D .P .C . v . Commissioner ,

supra . The Court

concluded that contributions by VRD/RTD to the plan were
essentially distributions to the partners and were not ordinary
and necessary business expenses deductible under section 162(a)
The Court did not determine whether contributions on behalf of
the office manager were deductible because the Commissioner
conceded the issue .

Id .

at n .3 .

The facts in these cases . are strikingly similar to those in
DeAngelis . As in DeAngelis ; petitioners each personally selected
their individual insurance agents, and together with thos e
agents, chose the policies to be owned by Benistar Plan .
Petitioners, with their insurance agents, chose the life
insurance company, the type of insurance, and the policy's fac e
amount and together filled out most of the necessary insurance
forms . Until the Benistar 419 Funding Calculator was adopted in
2003, petitioners even chose the amount that the participating .
companies would contribute to the plan--provided it was greater
than the premiums on the underlying policies they selected .
Petitioners acted as though they owned personally both their
Benistar policies . and the underlying policies . For example, at
their deposition, neither Curcio nor Jelling was able to
articulate a single advantage of obtaining life insurance through

- 40 Benistar Plan over owning the underlying policy-directly,
implying that the issue was one they had not considered . When
Curcio's underlying policy was rated, thereby making the premium
payments more expensive for Benistar Plan, it was Iandoli,
Curcio's insurance agent, who worked to remove the rating with no
help from the plan . Solomon, Jelling's insurance agent, selected
a mixture of whole life and universal life insurance for the
underlying Benistar Plan insurance policy even though the terms
of the policy issued to Jelling from Benistar Plan were the same .
Curcio and Jelling contributed to Benistar Plan using three
different companies between 2001 and 2004, and when asked about
this at trial Jelling responded that ."the concept to me, and
maybe it's just simple, is there are multiple entities owned 5050 by two partners, we file them all at the same time, th e
revenue falls through a stream to the bottom line ." It was
irrelevant to them : which of their companies actually made the
contribution to Benistar Plan, because they viewed the Benistar
policies as their own .
Similarly, on the certificate of coverage for Mogelefsky,
the enrolled employer changed from Discount Funding Associates to
Oldfield Management Corp between 2003 and 2004 . Smith appears to
have actively managed the accumulation value in the underlying
policy he selected, switching investments three times between
2002 and 2005--despite Carpenter's assurances that covered
employees could invest an underlying policy's accumulation value

- 41
only in the insurance company's guaranteed fund or the S&P 500
equity index . Tellingly, on the'application for the policy,
Smith indicated that his purpose-for getting insurance wa s

retirement planning .
Not only did petitioners act as though they personally owne d
the underlying insurance policies, Benistar Plan itself promoted
the implication that. it was merely a conduit to the underlying
policies and not the actual insurer . For example, Benistar Plan
did not issue Jelling, notices of contribution based on the amount
of life insurance benefits it provided, but rather based on the
number of underlying policies that Jelling selected . Since
Jelling .selec.ted two underlying policies,' he .received two
separate notices of contributions, one for each policy . Further,
Benistar Plan took .measures to completely hedge its insurance .
risk, to the point that for a brief period in 2002 the liability
of the plan for death benefits wascontingent on the underlying
policy's payment of death benefits to Benistar Plan . And
although contributions to the plan were deposited in one account,
Benistar Plan maintained spreadsheets that allocated every
contribution to an employer and a corresponding underlying
policy .
Although Benistar Plan is very similar to the employee
benefit plan in V .R . DeAngelis M .D .P .C . v . Commissioner , T .C .
Memo . 2007-360, it also has a number of important differences .
First, Benistar Plan does not permit its covered employees to

42 borrow against the underlying policy owned by the plan . Second,
and more importantly, starting mid-2002, upon an employer's
election to terminate participation . in Benistar Plan, the plan
began to charge covered employees for withdrawing their
underlying policies . Carpenter testified that from mid-200 2
until mid-2005, the withdrawal fee was 10 percent of the policy's
net surrender value . Carpenter testified that after mid-2005,
covered employees had to purchase the underlying life insurance
policy for its fair market value as outlined in Rev . Proc . 200525,

supra . Covered employees received full financing of this

payment from Benistar Plan but had to sign a collateral
assignment agreement to secure the alleged debt . Participants
still had to pay the 10-percent withdrawal fee, but it was
recharacterized as 3 years of prepaid interest on the alleged
debt .
It is unclear whether this recharacterization occurred i n
2005 or later . At trial, Carpenter testified tha t
If somebody wants to buy their policy we will give, them
a hundred percent financing where they pay interest
equal to the short-term, mid-term, and long-term rate
as published by the Treasury every month . We'll charge
them that interest and then we'll also have them sign a
collateral assignment for the full [fair market] value .
However, on the plan termination and policy release forms signed
by . Smith in October 2005 and Mogelefsky in May 2006, the 10percent fee is still referred to as a_"fee" and not as prepaid
interest . And the fee was still calculated using 10 percent of

43 the net surrender value of the policy and not the fair market
value under Rev . Proc . 2005-25,

supra . We also note that,

contrary to Carpenter's testimony, a charge of 10 percent-over 3 :
years is roughly equal to an interest rate of 3 .22 percent
compounded annually, which is much lower than either the shortterm, mid-term, or long-term . applicable Federal rates for the
relevant periods . In October 2005, when Smith withdrew from
Benistar Plan, the applicable Federal rate was 3 .89 percent for a
short-term loan compounded annually . Rev . Rul . 2005-66, 2005-2
C .B . 686 . Mid- and long-term rates were higher .

In March

Id .

2006, when Mogelefsky withdrew from Benistar Plan, the applicable
Federal rate .was 4 .58 percent for a short-term loan compounded
annually . Rev . Rul . 2006-10, 2006-1 C .B . 557 . The mid-term rate
was 4 .51 percent, and .the long-term rate was 4 .68 percent .

Id .

At no point between September 2005 and May 2006 did the
applicable Federal rate drop below 3 .22 percent compounded
annually . See Rev . Rul . 2005-57, 2005-2 C .B . 466 ; Rev . Rul .
2005-66,

supra ; Rev . Rul . 2005-71, 2005-2 C .B . 923 ; Rev . Rul .

2005-77, 2005-2 C .B . . 1071 ; Rev . Rul . 2006-4, 2006-1 C .B . 264 ;
Rev . Rut . 2006-7, 2006-1 C .B . 399 ; Rev . Rul . 2006-10,

supra ; Rev .

Rul . 2006-22, 2006-1 C .B . 687 ; Rev . Rul . 2006-24, 2006-1 C .B .
875 . Carpenter's testimony is so at odds with .the rest of the
evidence that we must consider whether he was referring to a
completely separate interest charge in addition to the 10-percent

- 44 -

fee . If he was, petitioners have presented no evidence thatsuch
an additional interest . charge was documented, or"was paid .
The 10-percent withdrawal fee/prepaid interest was,a
fiction . The fee was calculated using the net surrender value of
the policy as of . the close of .the previous year . In both Smith's
policy and Mogelefsky'ssecond policy, significant contributions
were made by Benistar Plan right before .those policies wer e
withdrawn from the . plan . These contributions reduced the fee to
significantly below 10 percent . Smith withdrew from Benistar
Plan when the underlying policy had a net surrender value of
$83,158 .85 and he paid $2,970 .47, yielding a fee of 3 .6 percent
Mogelefsky withdrew from Benistar Plan when his . second policy had
an account value of $255,089 .19 and an approximate surrende r
charge of $20,803 .71, yielding a net surrender value of
$234,285 .48 . He paid $14-,632 .81, a fee of 6 .3 percent . Only the
fee charged for Mogelefsky's first policy actually reflected l0
percent of the net surrender value at the time the policy was
withdrawn from the plan .
Petitioners claim that Smith and Mogelefsky withdrew their
policies after 2005 and paid for the fair market values of the
policies under Rev . Proc . 2005-25,

supra . Their ",payment" ,

however,~was fully financed by Benistar Plan, so in order to
determine the amounts paid by Smith and Mogelefsky, we must .
determine whether bona fide debts existed between Benistar Plan
and Smith and Mogelefsky . This is a question of fact . See

-`45 .Beaver v . Commissioner , 55 T .C .

85,

91 (1970) ;

Fisher v .

Commissioner , 54 T .C . 905,909-910' .(1970) . Debt for Federal
income tax purposes connotes an existing ; unconditional, and
legally enforceable obligation to repay .

Hubert Enters ., Inc . v .

Commissioner , 125 T .C . 72, 91 (2005), affd . in part, vacated in
part and remanded on other grounds 230 Fed . Appx . 526 (6th Cir .
2007) . There are no loan documents in evidence, and there is
nothing to indicate the terms of a loan, such as when the
principal is due and what the interest rate is . Nor is there any
evidence that Smith or Mogelefsky is liable for interest payments
after the first 3 years . The collateral assignment agreements
signed by Smith and Mogelefsky, which state that collateral was
provided "in consideration of the [Benistar 419 . Plan &] Trust
agreeing to make certain loans to the Participant in order to
purchase the Policy on the Participant's life held by the trust" .,
imply that loans existed, but the agreement does not refer to an y
particular loan, nor does it mention any loan terms .
"Whether a transfer of money creates a bona fide deb t
depends upon the existence of an intent by both parties,
substantially contemporaneous to the time of such transfer,
establish an enforceable obligation of repayment ."

Delt a

Plastics Corp . v . Commissioner , 54 T .C . 1287, 1291 (1970) ; see
Fisher v . Commissioner ,

supra at 909-910 . At trial, neither

Smith nor Mogelefsky had any recollection of signing any loan
documents . When they were asked about the existence of a loan

46 issued by Benistar Plan, their testimony was vague and
contradictory . Smith testified that the policy that was
collateral for the loan no longer exists, and that he does not
.recall whether he paid Benistar Plan anything aside from the 10percent fee . Assertedly neither Smith nor Mogelefsky, both
businessmen, has any specific recollection of a debt of tens of
thousands of dollars incurred under 5 years ago . The evidence
leads us to conclude that no debt existed between Benistar Plan
and Smith or Mogelefsky. See Recklitis v . Commissioner , 91 T .C . .
874, 890 (1988) ;

Profl . Servs . v . Commissioner , 79 . T .C . 888, 916

(1982) ; see also Sutter v . Commissioner , T .C . Memo . 1998-250 .
We therefore conclude that before 2002 Benistar Plan would
distribute the underlying insurance policies to covered employees
for free . After 2002, and for all the following relevant years,
Benistar Plan would charge a withdrawal fee that was much lower
than 10 percent . Thus petitioners, by causing Benistar Plan to
distribute the underlying policies, could easily retrieve the
value in those policies with minimal expense .
Petitioners argue that Benistar Plan has over $20 million in
forfeitures, a reflection of its rigorous enforcement of its
forfeiture policies . Statistics regarding Benistar Plan
operations do not alter how Benistar Plan treated petitioners .
It is also unclear whether the $20 million figure includes
amounts due to Benistar Plan from the purported loans issued by
the plan to withdrawing employees after mid-2005 .

- 47 -

As Carpenter acknowledged, as`long as plan participants wer e
willing to abide by Benistar Plan's distribution policies, there
was no reason ever to forfeit a policy to the plan . In fact, in.
.estimating life insurance rates, petitioners' expert assumed that
there would be no forfeitures, even though he admitted that an
insurance company would generally assume a reasonable rate of
policy lapse .
After considering the facts and weighing the evidence, . we
conclude, as we did similarly in V .R . DeAngelis M .D .P .C . v .
Commissioner , T .C . Memo . 2007-360, that contributions to Benistar
Plan were payments on behalf of petitioners personally and were'
not ordinary and necessary business expenses under section
162(a) . The level of control that covered employees exerted over
their underlying policies, the degree to which contributions to
Benistar Plan were structured around those underlying policies,
and the means through which covered employees could-procure a
distribution of those underlying . policies all lead us to conclude
that Benistar Plan is a thinly . disguised vehicle for unlimited
tax-deductible investments . Because we hold that contributions
to the plan are not ordinary and necessary expenses under section
162(a), we also hold that the administrative fees paid to
Benistar Plan are not ordinary and necessary expenses under
section 162(a) .
Petitioners have not argued that they should be entitled to
deduct the annual cost of term life insurance purchased through

48 Benistar Plan, nor have they identified evidence that would
enable us to establish that cost . As a result, we find that no
part of petitioners' contributions to Benistar Plan is
deductible. See V .R . DeAngelis M .D .P .C . v . Commissioner ,

supra .

Similarly, the record is devoid of information regarding
Mogelefsky's stepson . Absent from the record is any information,
regarding how Mogelefsky's stepson's underlying policy was
selected . While Mogelefsky's stepson did sign a collateral
assignment agreement, we have already determined that the
agreement did not create a bona fide debt . Although it is clear
that Discount Funding Associates enrolled Mogelefsky's stepson in
Benistar Plan, the record does not allow us to determine wha t
portions of . the 2003 and 2004 contributions were for his benefit .
Petitioners do not argue . that contributions to Benistar Plan on
behalf of Mogelefsky's stepson should be treated : differently from
other contributions . We therefore do not distinguish between
contributions for Mogelefsky's benefit and contributions for his
stepson's benefit . We find that no part of Mogelefsky's
contributions to Benistar Plan is deductible . Cf .

id .

(holding

that because the record was insufficient to establish the term
life insurance component of the contribution, . no part of the
contribution was deductible) .
Our interpretation and application of section 162(a) does
not undermine sections 419 and 419A, because our conclusion that
contributions to Benistar Plan are not deductible is not based

49 exclusively on our determination that employers cannot clai m
deductions for plan contributions in excess of the annual cost of
benefits . See Schneider v . Commissioner, T .C . Memo . 1992-24 .
Such deductions are barred by the limitation provisions under .
section 419(b), not section 162(a) . Rather, our decision is
based on our finding that . contributions to Benistar Plan were
payments for petitioners personally, and the large contributions
to Benistar Plan, as well as the rest of the evidence discussed
above, support this finding . See V .R . DeAngelis M .D .P .C . v .
Commissioner ,

supra .

Finally, we note that our treatment of Benistar Plan i s
consistent with Booth v . Commissioner,

108T .C . 524 (1997) .

Booth , we decided that the welfare benefit plan failed to qualify
as a multiple-employer welfare benefit plan under section
419A(f)(6) . because it was really an aggregation of individual
plans formed by separate employers .

Id .

at 570 .

Booth was

decided under section 419A ; we do not reach section 419A here
because we decide these cases on the basis of section 162 . See
V .R . DeAngelis M .D .P .C . v . Commissioner ,

supra .

Respondent argues that in addition to finding that the .
distributions made by the participating companies are not
deductible, we should include Discount Funding Associates' early
2003 contribution to BenistarPlan directly in Mogelefsky's
income as a constructive distribution . . Sections 1366 throug h
1368 govern the tax treatment of S corporation shareholders, such

50 as Mogelefsky, with respect to their investments in such
.entities . Section 1366(a)(1) provides that a shareholder shall
take into account .his or her pro rata share of the .S .
.corporation's items of income, loss, deduction, or credit for the
S corporation's taxable year ending with or in the shareholder's
taxable year . Section 1367 provides that basis in S corporation
stock is increased by income passed through to the shareholder
under section 1366(a)(1), and decreased by, inter alia,
distributions not includable in the shareholder's income pursuant
to section 1368 . Section 1368(b) provides that distributions
from an S .corporation with no accumulated earnings and profits ,
like Discount Funding Associates, are not included in the gross
income of the shareholder to the extent .that they do not exceed
the adjusted basis of the stock, and any excess over adjusted
basis is treated as gain from the sale or exchange of property .
To summarize, section 1366 establishes a regime under which items
of an S corporation are generally passed through to shareholders,
rather than being subject to tax at the corporate level . See
Gleason v . Commissioner , T .C . Memo. 2006-191 .
Petitioners argue that respondent is treating Mogelefsky
inconsistently because respondent is treating the 2003
contribution and the 2004 contribution under different and
contradictory theories . On the one hand, respondent is treating
the 2004 contribution as nondeductible, with the result that
Mogelefsky must include that amount in income under section 1367 .

51 -

On the other hand, respondent is treating the 2003 . contribution?
as a constructive distribution, with the result that Mogelefsky°
must include the amount in income . If both theories'were applied
to the same contribution, the contribution would be taxed twice-once under section 1367'and again as a constructive distribution .
Respondent's treatment of Mogelefsky is not inconsistent . .
As in V .R . DeAngelis'M .D .PC . v .` Commissioner , T .C . Memo . 20*07-

360, our decision-turns on our finding that the participating
companies' contributions to Benistar Plan were essentially
distributions to petitioners of corporate profits and were not
deductible under section 162(a) . To correct petitioners'
mistaken deductions, the income of the participating companies
must be increased by their contribution to Benistar Plan,"with
corresponding flowthrough of income to petitioners and a n
increase in petitioners'

bases

in the' sharessof

their- respective

companies . See sec . 1367(a)(1) (for .the S corporations) secs . ;
702, 705 (for JELMAC, LLC, a partnership) ;

Briggs'v .

Commissioner , T .C . Memo . 2000-380 ("Generally, a shareholder's
adjusted basis in S corporation stock is increased for his or her
share of the pass-through amounts-") . The contributions to
Benistar Plan, when viewed as distributions, then reduce
petitioners' bases in the-shares of the participating companies '
and are not-taxed to petitioners a second time . See . . sec ." 136 8
(for S corporations) ; secs . 705, 731 (for JELMAC,
partnership) ;

LLC, a

V .R . DeAngelis M .D .P .C . v . Commissioner ,

supra ;

- 52
Neonatology Associates, P .A . v . Commissioner , 115 T .C . at 95-96
(tax at the shareholder level was appropriate where the employer
was a C . corporation) .
However, Discount Funding Associates' income is not
increased by the 2003 contribution because the deduction was
claimed in .2002,and we . have no . jurisdiction to review the tax for
that, year because the Mogelefskys are not petitioning the Court
from a notice of deficiency issued to them for that year ., See
sec . 6214 ; Rule 13(a) . Although,we have no jurisdiction over
2002, we .may consider the Mogelefskys' : Federal income tax in 2002
to correctly determine their tax liability in 2003 . See sec .
6214(b) . Because Discount Funding Associates deducted the 2003
contribution in 2002, Mogelefsky did not increase the basis of
his Discount Funding Associates stock by that amount . 9Therefore ,

.to determine the proper treatment ofthe 2003 contribution, we
must determine Mogelefsky's basis . in his Discount Funding
Associates stock in 2003 .

. See sec .

1368(b) .

Petitioners do not argue that Mogelefsky,has sufficient
basis in Discount Funding Associates . to offset the distribution .
.See sec . 1368(b) . Because the record does not permit us to
determine Mogelefsky's basis in his Discount Funding Associates
stock, we assume that his basis is zero . See Rule 142 ;
Commissioner , T .C . Memo .,2007-50 ;

Wright v .

Blodgett v . Commissioner , T .C .

Memo . 2003-212,-affd . 394 F. .3d 1030 (8th Cir . 2005) . Under
section 1368(b)(2), the amount of Discount Funding Associates'

53
200
.contribution
3
to Benistar Plan is treated as gain from the
sale or exchange of property and is long - term capital gain to
Mogelefsky ..

See secs . 1221 and 1222 .

Petitioners argue that the 2003 contribution should not be
included . in Mogelefsky's 2003 income because the distribution
occurred in 2002 . Respondent argues that Mogelefsky received the
distribution in early 2003, when Discount Funding Associates
actually made the . contribution to Benistar Plan .
The date of the distribution is the date on which the
property is unqualifiedly made subject to the taxpayer ' s demands .
Sec .

1368 ; .sec . 1 .301 - 1(b), Income Tax Regs . Discount Funding

Associates was not legally obligated to make the contribution in
2002, nor did it set aside the money in 2002 ; and therefore the
contribution was not unqualifiedly made subject to Mogelefsky's
demands

in-2002 .

The actual contribution was made in early 2003,

.and that is when Mogelefsky was required to account for it . See
Avery v . Commissioner ,
Commissioner ,

292 U .S .

175 F .2d 422 ,

.210, 214

423-424

( 1934) ;

Hyland v .

( 2d Cir . 1949 ),

affg . a

Memorandum opinion of this Court .

Section 6662 Accuracy - Related Penalt y
Petitioners contest the imposition of accuracy-related
penalties for the tax years in issue .
and (2 )

Section 6662(a) and

(b)(i)

imposes a 20-percent accuracy - related penalty on any

underpayment of Federal income tax attributable to a taxpayer's
negligence or disregard of rules or regulations ,

or substantial

- 54 understatement of income tax . Section 6662(c) .defines,negligence .
as including any failure to make a reasonable . attempt to comply
with the provisions of the Code . and defines disregard as any
careless,-reckless, or intentional disregard . Disregard of rules
or regulations is . careless if the taxpayer does not exercise
reasonable diligence to determine the correctness of a tax return
position that is contrary to the rule or regulation . Sec .
1 .6662-3(b)(2), Income TaxRegs . Disregard of rules or
regulations . is reckless if the taxpayer makes little or no effort
to determine whether .a rule or regulation exists

Id .

Under section 7491(c), the Commissioner bears the burden of
production with regard to penalties and must come forward with
sufficient evidence indicating that it is appropriate to impose
penalties . See Higbee v . Commissioner , 116 T .C . 438, 446 (2001) .
However, once the Commissioner has met the burden of production ,
.the burden of proof remains with the taxpayer, including the
burden of proving that the penalties are inappropriate because of
reasonable cause or substantial authority under section 6664 .
See Rule 142(a) ;

Higbee v . Commissioner ,

supra at 446-447 .

Respondent has met the burden of production . Respondent ha s

shown that petitioners improperly . deducted tens of thousands of
dollars . used . to purchase life insurance which could then be
redistributed to petitioners for free or for a small fraction of
the value of the insurance policy . This evidence is sufficient

55 to indicate that it°is,appropriate to impose penalties under
section 6662(a) :
Petitioners argue-that they had substantial authority for
their deduction of contributions to Benistar Plan . Substantial
authority exists when "the weight of the authorities supporting ,
the treatment is substantial in relation to the weight of
authorities supporting contrary treatment ." Sec . 1 .6662
4(d)(3)(1), Income Tax Regs . Petitioners note that the
regulations under section 419A do not provide any safe harbors
for multiple-employee welfare benefit plans . Furthermore, as,
discussed above, the cases petitioners cite are materially
distinguishable . Other than vague arguments from congressional '
intent, petitioners have been unable to provide any authorit y
recognized under section 1 .6662-4(d)(3)(iii), Income Tax Regs .
to support their arguments . We therefore conclude tha t

petitioners have not shown that there is substantial authority
supporting the deduction=of contributions to'Benistar Plan .
The accuracy-related penalty under section 6662(a) is not
imposed with respect to any portion of the underpayment as to
which the taxpayer acted with reasonable cause and in good faith .
Sec . 6664(c)(1) ;

Higbee v . Commissioner ,

supra at 448 . Th e

decision as to whether a taxpayer acted with reasonable cause and
in good faith is made on a case-by-case basis, taking into
account all of the pertinent-facts and circumstances . Sec .
1 .6664-4(b)(1), Income Tax Regs . "Circumstances that may`

56 indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of
all of the facts and circumstances, including the experience,
knowledge, and education of the taxpayer ."

Id .

Reliance on

professional advice may constitute reasonable cause and good
faith if, under all the circumstances, such reliance .was
reasonable and the taxpayer acted in good faith .

Freytag v .

Commissioner , 89 T .C . 849, 888 (1987),, affd . 904 F .2d 1011 (5th
Cir . 1990), affd . 501 U .S . 868 (1991) ; sec . 1 .6664-4(b)(1),
Income Tax Regs . A taxpayer cannot avoid the negligence penalty
merely by having a professional adviser read a summary of the
transaction and offer advice that assumes the facts presented are
true . See Novinger v . Commissioner , T .C . Memo .

1991-289 .

Petitioners claim that they relied on the tax advice of
their accountants . However, there is no evidence that
petitioners' accountants had any particular expertise in employee
benefit plans or that petitioners thought their accountants had
such expertise . See Neonatology Associates, P .A . v .
Commissioner , 115 T .C . at 99 (taxpayer must show that the tax
adviser was a competent professional who had sufficient expertise
to justify reliance) . There is no evidence that petitioners'
accountants conducted anything other than cursory independent
research to determine the deductibility of the contributions t o
.Benistar Plan . Raskin testified that he told Curcio and Jellin g
that he relied solely on the generic Edwards & Angell tax opinion

57 in providing his advice . Similarly Dedora testified that his
opinion was also based on the opinion letter from Edwards &
Angell and that this was disclosed to Mogelefsky . The disclosure
and acknowledgment form signed by the participating companie s
,expressly acknowledges that they did not rely upon tax advice
from Benistar Plan--advice that Raskin and Dedora relied upon in
rendering their own opinions . Smith could not remember his
accountant's analysis at . all, other than that the deduction was
allowed . Blind reliance on the opinions of accountants given th e
• facts of these cases is insufficient to show that petitioners
acted with reasonable cause and in good faith under section 6664 .
See Whitmarsh v . Commissioner , T .C . Memo . 2010-83 ;

Zaban v .

. Commissioner , T .C . Memo . 1997-479 (citing Bollaci v .
Commissioner , T .C . Memo . 1991-108) ; sec . 1 .6664-4(b)(1), Income
Tax Regs .

Petitioners also claim that they relied on the tax advice of
their insurance, agents . However, there is no evidence that
petitioners' agents were educated in tax law or held themselves
out to be tax advisers, or that petitioners believed their agents
were educated in tax law . See Neonatology Associates, P .A . v .
Commissioner ,

supra at 99 .

Petitioners, regardless of their formal education, are
experienced businessmen . By the years at issue, Curcio and .
Jelling had owned car dealerships for over 10 years ; Smith had
run the painting division of his father's company for 4 years and

58 owned his own company-for 5 years ; and Mogelefskyhad owned
Discount Funding Associates for over 20 years . Yet petitioners,
failed to conduct thorough research regarding deductions of ten s
or hundreds of thousands of dollars that were exclusively for
their own benefit . . Furthermore, some admin packets sent to
Benistar Plan enrolled employers listed "virtually unlimited
deductions" as a perk of participating in the plan . Carpenter
wroteA ..Professional's Guide to 419 Plans because most financial
advisers thought . Carpenter's section 419 plans were too good to
be true . In these cases, they were . See Neonatology Associates ,
, P .A . v . Commissioner , 299 .F .3d at 234 ; sec . 1 .6662-3(b)(1)(ii),
Income Tax Regs . (stating that negligence is-strongly indicated
where a taxpayerfails= .to make'a reasonable attempt . to ascertain
the correctness of a deduction that would seem to a reasonable .
and prudent person to be too good to be true under th e
circumstances) . . Petitioners are not entitled to the reasonable
cause and good faith defense under section 6664 because they .did
not act reasonably in relying on their accountants .
Petitioners argue that their cases are similar to LaPlant e
v . . Commissioner ,

T .C . .Memo . 2009 -226, where the Court found tha t

the taxpayer was not liable for the section 6662(a) accuracy
related penalty .

LaPlante is similar to these cases` in that they

involve taxpayers challenging section 6662(a)penalties on the
basis of their reliance on expert advice, but the similarities
end there . In, LaPlante , the-taxpayer challenged the- 1

59 Commissioner's determination that the taxpayer had additional,
gambling income not reported on her . Federal income tax return .
As stated earlier, the determination of whether a taxpayer acted
with reasonable cause and in good faith is made on a case - by-caste
basis . Sec .

1 .6664-4 ( b)(1), Income Tax Regs . .

The facts in

LaPlante are so completely unrelated to these cases that it is
impossible to draw inferences from the taxpayer in-that case to
petitioners her e
Petitioners also compare their case to Am . Boat Co ., LLC v .
United States , 583 F .3d 471 (7th Cir . 2009), where the Court of
Appeals for the Seventh Circuit found that the taxpaye r

reasonably relied on the tax advice of an attorney who structured
the transaction at .issue . However, the court reached tha t
conclusion by applying the appellate standard of review :
This is .a close case .
In the end, we are
searching for clear error in the district court's
factual determinations, and we are unable to find it .
Whether any judge on this panel might have reached a
different conclusion after hearing the evidence
first-hand is not the appropriate concern .
Id .

at 486 .
We conclude that petitioners' underpayments of Federal

income tax were the result of their negligence or disregard o f
rules or regulations under section 6662 . We also conclude that
petitioners are not entitled to the reasonable cause and goo d
faith defense under section 6664 because they did not act
reasonably in relying on their accountants .

60 Petitioners argue that the complexity of the cases and the
.first-impression issues presented justify abatement of the
accuracy-related penalty . This is not an issue of .first
impression . We decide these cases similarly to and on the same
principles as, Neonatology Associates, P .A . v . Commissioner , 115
T .C . 43 (2000), and V .R . DeAngelis M .D .P .C . v . Commissioner , T .C .
Memo . 2007-360 . Even if these cases were without direct
precedent, the issue of whether an expenditure by a close
corporation is ordinary .and necessary under section 162 or a
constructive distribution is not novel . See Neonatology
Associates, P .A . v . Commissioner , 299 F .3d at 234-235 . . As
petitioners note regarding section 162, there is "an arsenal of
tax law spanning eight decades ." However, petitioners . cannot
rely on that "arsenal" because they have not cited any authority
that is not materially distinguishable from the circumstances
here . See Anionides v . Commissioner , 91 T .C . 686, 703 (1988),
affd . 893 F .2d 656 (4th Cir . 1990) .
In reaching our decision, we have considered all arguments
made by the parties . To the extent .not mentioned or addressed,
they are irrelevant or without merit .

- 61
For the reasons explained above,

Decisions will be entered
for respondent in docket Nos .
1768-07 and 1769-07,

and

decisions will be entered unde r
Rule 155 in docket Nos . 14822-07
and 14917-07 .

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ada7840d8ed374ed0. Public record. Not legal advice.