                        T.C. Memo. 2012-13



                      UNITED STATES TAX COURT



            JOHN K. AND DANA G. GOYAK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

         JOHN K. GOYAK & ASSOCIATES, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 12990-07, 13022-07.   Filed January 11, 2012.



     Mark D. Allison and Kenneth M. Barish, for petitioners.

     Alexander D. Devitis, Anne W. Durning, Roger P. Law, and

Vanessa M. Hoppe, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   With respect to John and Dana Goyak (Mr. and

Mrs. Goyak), respondent determined deficiencies in Federal income

taxes of $966,155, $1,848,500, and $1,217,910 for tax years 2002,
                                - 2 -

2003, and 2004 respectively.    Respondent also determined

penalties under section 66621 of $193,231, $369,700, and $243,582

for 2002, 2003, and 2004, respectively, as well as an addition to

tax under section 6551(a)(1) of $42,742 for 2002.

     With respect to John K. Goyak & Associates, Inc. (Goyak &

Associates), respondent separately determined deficiencies in

Federal income taxes of $199,503, $262,692, $297, $374,137,

$276,571, and $556,223 for tax years 1997, 1998, 1999, 2000,

2001, and 2002, respectively.    Respondent also determined

penalties under section 6662 of $55,314 and $111,245 for 2001 and

2002, respectively, as well as additions to tax under section

6551(a)(1) of $1,995, $11,820, $74, and $41,486 for 1997, 1998,

1999, and 2001, respectively.

     These cases were consolidated for trial.     As a result of

settlements between the parties, all issues in taxable years

other than 2002 have been resolved.     The only remaining issues

relate to a $1.4 million contribution Goyak & Associates paid in

2002 to the Millennium Multiple Employer Welfare Benefit Plan

(Millennium Plan), a purported section 419A(f)(6) welfare benefit

fund.    The issues remaining for decision are:

     (1)   Whether Goyak & Associates may deduct the $1.4 million

paid to the Millennium Plan under sections 162(a), 404(a)(5),


     1
      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.
                                 - 3 -

419, and 263.    We hold that Goyak & Associates may not deduct the

payment, as it is not an ordinary and necessary business expense

under section 162(a);

      (2)   whether the $1.4 million paid to the Millennium Plan is

taxable to Mr. Goyak, as either a constructive dividend under

section 301 or nonqualified deferred compensation under section

402(b).     We hold that the $1.4 million payment is taxable to Mr.

Goyak as a constructive dividend; and

      (3)   whether Mr. and Mrs. Goyak and Goyak & Associates

(collectively, petitioners) are liable for 20-percent accuracy-

related penalties under section 6662.    We hold that they are.

                           FINDINGS OF FACT

      At the time their petition was filed, Mr. and Mrs. Goyak

resided in Nevada.    Goyak & Associates is a Nevada corporation

which had its principal place of business in Nevada at the time

its petition was filed.

1.   Background of Petitioners and Their Advisers

      Since its incorporation in 1997, Goyak & Associates has

engaged in the business of consulting with defense contractors.

Mr. Goyak owned 60 percent of the stock of Goyak & Associates

during 2002 and was the president and chief executive officer.

Mrs. Goyak owned the remaining 40 percent of the stock and was

the primary manager of the financial affairs of Goyak &

Associates until the end of 2002.
                                - 4 -

     Before organizing Goyak & Associates, Mr. Goyak earned an

undergraduate degree in English and a master’s degree in English

literature.   He also completed most of the work towards a Ph.D.

in criticism.   During the course of his studies, he never took

classes in accounting or tax.   After leaving his Ph.D. program

Mr. Goyak worked at Lockheed Martin for approximately 8 to 9

years, primarily in the business development area.   He also

served as vice president of planning and vice president of energy

programs at SM&A Corp., an aerospace defense consulting firm.

     On account of Mr. Goyak’s efforts, the revenue of Goyak &

Associates grew from $350,000 to over $5 million per year.     After

adjusting for disallowed deductions (both those already settled

and those decided in this opinion), Goyak & Associates had

retained earnings and profits of over $4 million at the end of

2002.   In 2002 Goyak & Associates employed Mr. and Mrs. Goyak and

two other individuals.   During that year Mr. Goyak traveled

extensively and billed nearly 3,000 hours, for which he received

compensation of $1 million.   Goyak & Associates has never paid a

dividend to its shareholders.

     Despite the rapid growth in business, Goyak & Associates was

run as a “Mom and Pop” company until the latter part of 2002.

The books of the company became deficient, and tax returns for

1997 through 2001 were not filed until November 2002.   Many of

Mr. and Mrs. Goyak’s personal tax returns were also filed years
                                - 5 -

late.   Mr. and Mrs. Goyak each participated in the ClassicStar

Mare Lease Program, as a result of which they claimed millions of

dollars in farming expense deductions in 2001 and reported no

Federal tax liability for that year.

     In mid-2002 Mr. and Mrs. Goyak were introduced to

representatives of Private Consulting Group (PCG).    Mr. Goyak

understood that PCG had provided counsel to some of the 400

wealthiest families in the United States.    Two of the PCG

representatives who met Mr. Goyak were Bob Holt (Mr. Holt) and

Gary Thornhill (Mr. Thornhill).    Mr. Holt managed a PCG office

and did financial planning while Mr. Thornhill specialized in

insurance.   Mr. Thornhill had sold 17 section 419 welfare benefit

plans since 1989.   Neither Mr. Holt or Mr. Thornhill had

significant experience with tax issues.

     In July 2002 Mrs. Goyak contacted Mr. Holt seeking

assistance in resolving Goyak & Associates’ financial issues.

Mr. Thornhill was brought into the meetings to discuss insurance

planning.    By the end of 2002 Mr. Thornhill and Mr. Holt had

entered into a consulting arrangement with Goyak & Associates to

serve as financial advisers.    Mr. Thornhill also introduced Mr.

Goyak to David Lieberman (Mr. Lieberman).    Mr. Lieberman was an

accountant and was hired by Goyak & Associates as a consultant in

late 2002 to get its records in order.    In July 2003 Mr.

Lieberman became Goyak & Associates’ full-time chief financial
                                - 6 -

officer (CFO).    Before coming to work for Goyak & Associates, Mr.

Lieberman had performed no tax planning work and had not

specialized in tax return preparation, although he had done some

small tax returns.

2.   Background and Operation of the Millennium Plan

      A.   History and Structure of the Millennium Plan

      The Millennium Plan was established on November 1, 2002, as

a purported section 419A(f)(6) welfare benefit plan.      In short

the Millennium Plan provides certain benefits to covered

employees, such as death, medical, and involuntary severance

benefits.    The Millennium Plan was sponsored by the Millennium

Marketing Group (MMG).    The Millennium Plan grew to 531 covered

employees representing over 300 employers at the end of 2005;

however, the number of covered employees contracted to 459 by the

end of 2008.

      Before establishment of the Millennium Plan, Kathleen Barrow

(Ms. Barrow) and her law firm, Karger, Key, Barnes & Lynn, P.C.,

were retained to provide legal advice, including advice regarding

section 419A(f)(6).    Ms. Barrow drafted the core operating

documents of the Millennium Plan, including the Millennium Plan

Master Plan (master plan), which is the core operating document,

and the Guidelines for Claims Administration (plan guidelines).

Ms. Barrow continued to act as outside counsel for the Millennium

Plan after its establishment.    On June 1, 2004, Ms. Barrow became
                               - 7 -

the president and chief counsel of MMG and was employed by MMG in

this capacity until July 31, 2006.     After leaving her position as

president and chief counsel, Ms. Barrow continued to provide

consulting services to the Millennium Plan.

     Republic Bank & Trust (Republic Bank) in Norman, Oklahoma,

has served as the trustee of the Millennium Plan from the plan’s

inception to the present.   As trustee, Republic Bank holds the

Millennium Plan’s assets for the benefit of the plan’s

participants and keeps certain records.    Other records were kept

by the plan’s third-party administrator (TPA), who made the

initial decisions on benefit requests.    Another company had

served as the initial TPA but was terminated in 2005 following an

audit.   SecurePlan Administrators, LLC (SecurePlan), was the

successor TPA and is the current TPA of the Millennium Plan.

SecurePlan is an operating subsidiary of Republic Bank, the

plan’s trustee.

     Both the TPA and the trustee of the Millennium Plan are

directed by the Millennium Plan’s Plan Committee (plan committee)

which has been functional since the beginning of 2004.    The plan

committee functions like a corporate board of directors and is

the governing body of the Millennium Plan.    It consists of

certain participating employers acting as nonpaid voting members.

Since at least 2008 the plan committee has also had a nonvoting

chairman who is employed and paid by the Millennium Plan.      The
                                 - 8 -

primary duties of the plan committee are to ensure the Millennium

Plan complies with section 419A(f)(6) and related regulations and

to hear benefit appeals from plan participants.     The plan

committee also reviewed a small portion of requests to withdraw

from the Millennium Plan by “voiding” (discussed further below)

before 2008.

     MMG retained Milliman USA (Milliman) for actuarial

assistance with the Millennium Plan.     Milliman is one of the

largest actuarial firms in the United States and is not related

to the Millennium Plan or MMG.    Milliman has served as the

Millennium Plan’s actuary from 2002 to the present.     Milliman

assisted in the creation of participant risk pools, otherwise

known as rating groups, with the goal of compliance with the

requirements of section 419A(f)(6) and the regulations

thereunder.

     B.   Entering the Millennium Plan

     Participants enter the Millennium Plan in one of two ways:

they transfer in from another purported section 419A(f)(6) plan

or they become new covered employers.     To qualify to participate

in the Millennium Plan, an employer must be an S or C

corporation, a limited liability partnership, a limited liability

company, a partnership, a professional corporation, or an

association under State laws applicable to them.     A qualifying

employer adopts the Millennium Plan by resolving to adopt the
                                - 9 -

plan, executing and delivering an adoption agreement to the TPA,

and paying a contribution to the plan.

       An employer chooses the employees to be covered by the

Millennium Plan and the amounts of the contributions it wishes to

make to the plan on behalf of any covered employees, with some

restrictions.    The amount of the initial contribution determines,

in part, the amount of benefits each covered employee is eligible

for.    Employers also choose from a menu of insurance products

that Milliman had determined were appropriate for the plan,

essentially choosing their level of risk.    The employer also

selects an insurance company from which the Millennium Plan will

purchase a life insurance policy on each covered employee.

       When employers enter the Millennium Plan, the trustee seeks

to procure an insurance policy on the life of the new covered

employee(s) comporting with the investment choices made by the

employers.    The employees are assigned to rating groups with

other covered employees of similar insurance risks.    The trustee

holds the insurance policy as an asset of the Millennium Plan

which can be borrowed against to provide cash.    The trustee is

also authorized to purchase various securities.

       The employee and employer purportedly have no interest in

the insurance policy or plan assets; they are entitled to receive

benefits from the Millennium Plan only upon the occurrence of a

triggering event (such as the death or disability of a covered
                               - 10 -

employee).   If a policy cannot be procured on an employee’s life,

the employer’s contribution, minus an administrative fee, is

returned to the employer, and the employee is not able to

participate in the Millennium Plan.

     C.   Millennium Plan Benefits Overview

     The Millennium Plan provides death and life benefits to

covered employees.   Death benefits are payable upon the

employee’s death to a beneficiary or beneficiaries designated by

the covered employee.   Since 2004 the plan has also provided

covered employees certain life benefits such as medical and

involuntary severance benefits.   The amount of both death and

life benefits available to a covered employee is calculated

annually and is affected by the benefits claimed by other covered

employees within the same rating group and by changes in value of

Millennium Plan assets (mostly changes in the cash values of the

life insurance policies held by the plan).

     The amount of death benefits payable upon the death of a

covered employee is reduced by the accumulated amount of any life

benefits claimed by that covered employee during the employee’s

lifetime; this reduction is calculated only upon the death of a

covered employee.    The amount of the reduction in death benefits

is forfeited to the Millennium Plan upon the death of the covered

employee.
                                - 11 -

     Life benefits are purportedly paid only upon the occurrence

of certain triggering events.    Although the Millennium Plan did

not make life benefits available to covered employees until 2004,

the triggering events for life benefits to be paid have been

listed in each version of the plan guidelines.   From 2002 to 2005

the triggering events listed in the plan guidelines were amended

several times.   No further changes were made after those

effective for 2005.   The original master plan was effective

November 1, 2002, with amended master plans becoming effective

March 1, 2003, January 1, 2004, and January 1, 2005.   The plan

guidelines also contained provisions applying to payment of

benefits.   The original plan guidelines became effective January

1, 2003, with amended plan guidelines becoming effective

September 1, 2003, January 1, 2004, and January 1, 2005.

     Under section 5.03 of each of the four versions of the plan

guidelines, life benefits could be claimed upon involuntary

severance of the covered employee, the employer’s withdrawal from

the Millennium Plan, termination of the employee’s participation

in the Millennium Plan by the TPA, or termination of the

Millennium Plan as a whole.   Each version of the plan guidelines

provided that involuntary severance life benefits could be

claimed “in the event of the Covered Employers bankruptcy,

insolvency, corporate dissolution or change of control of the

Covered Employer as defined by the controlling employment
                              - 12 -

agreement.”   If a life benefit was claimed as a result of

employer withdrawal from the Millennium Plan, a life benefit was

not paid to the covered employee but could be transferred to

another welfare benefit plan or trust in accordance with section

419A(f)(6).

     The March 1, 2003, version of the plan guidelines allowed a

life benefit to be claimed for reimbursement of tax-qualified

medical expenses or claimed in the case of certain financial

hardships such as eviction or payment of tax-qualified education

costs.   The final two versions of the plan guidelines removed the

provision relating to financial hardship.    No hardship benefits

were ever paid as the hardship provision was active only during

2003 when the Millennium Plan did not pay out life benefits.

     If a covered employee in the Millennium Plan experiences a

life benefit triggering event, the employee can submit a claim to

the plan to receive life benefits.     According to plan rules, the

covered employee must support his or her claim with documentary

evidence establishing that he or she experienced a triggering

event.   The TPA initially reviews claims for benefits.   For

claims for involuntary severance or disability, the TPA

immediately involves the plan committee chairman, who may then

consult with other members of the plan committee, to help

determine whether a life benefit should be paid.    Should the TPA

deny a claim for life benefits, the claimant may appeal that
                               - 13 -

decision to the plan committee.    Should the plan committee affirm

the decision of the TPA, the only remaining option available to

the claimant would be to file a lawsuit.

     D.    Transfers and Void Transactions

     The Millennium Plan allows participants to transfer to other

welfare benefit plans.    Less than a dozen transfers from the

Millennium Plan have been approved, while a few other transfer

requests have either been rejected or failed to complete the

process.    For every covered employee going to a new plan, the

insurance policy held by the Millennium Plan on the life of that

covered employee is transferred to the new plan.    The death

benefits of the transferred policy is either equal to or nearly

equal to the death benefits that the covered employee had in the

Millennium Plan, and the cash value of the policy is equal to the

covered employee’s remaining life benefit in the Millennium Plan

for the year.

     Certain rules governed transfers from the Millennium Plan.

Each version of the plan guidelines listed similar requirements

for plan transfers, including:    (1) The transferee plan must be

“another employee welfare benefit plan under Code §§ 419 or

419A”; (2) the transfer must not result in a reversion of

Millennium Plan assets to the employer or a distribution to the

covered employees; and (3) the plan committee must receive

documentation that the various requirements are satisfied.
                                - 14 -

Additional requirements designed to protect the Millennium Plan’s

status under section 419A(f)(6) were included in plan committee

rules approved June 21, 2006.

     In addition to transfers, until 2008 employers were able to

“void” their participation in the Millennium Plan.    A void

transaction is one in which the plan transaction is unwound

retroactive to the date the employer became a participant in the

Millennium Plan.   Such an action is different from a mere

withdrawal or transfer from the Millennium Plan.

     Upon a transaction’s being voided, the insurance policy on

the life of any covered employees would be distributed to either

the employer or to the covered employees as indicated by the

employer.   It appears that no adjustments were made to reduce the

cash value of the policy distributed to match the cash value of

the policy at the time the participant entered the Millennium

Plan; nothing stating that such a reduction would occur appeared

in the letters sent to participants who requested their

participation be voided or in the communications between the

Millennium Plan and the plan trustee.    In addition, when the

request for a void transaction had been completed by the

participating employer, communications among the employer, the

trustee, and the Millennium Plan provided that “all Plan assets”

purchased with the employer’s contribution(s) would be

distributed back to the employer or the employee(s).
                             - 15 -

     Voiding is purportedly allowed only when the employer fails

to complete the enrollment, because of mutual mistake of fact, or

because of a misrepresentation by an employer’s adviser regarding

benefits and features of the Millennium Plan in connection with

the employer’s decision to participate.   In addition, employers

who voided their transactions were required to sign a statement

that they would amend any tax returns affected by their

participation in the plan, consistent with the voiding of the

plan transaction.

     Around 30 employers representing approximately 50 covered

employees were allowed to void their transactions after they had

completed the enrollment process, entered the Millennium Plan,

and had their covered employees assigned to a rating group.   Some

employers had been participating in the Millennium Plan for years

at the time their transactions were voided.   In addition, some

employers were allowed to void their participation after their

covered employees had received life benefit payments from the

plan, although if they did so the life benefits previously paid

to the covered employee were required to be reimbursed to the

plan.

     The plan committee was initially unaware of the extent to

which void transactions were occurring.   The plan committee had

reviewed only a very small number of void transaction requests.

The actual number of void transactions occurring did not come to
                                - 16 -

the attention of the plan committee until the third quarter of

2007.     It became obvious to the plan committee that there was a

significant breakdown in the plan’s governance rules and a breach

of its internal controls.     Although the plan committee had been

unaware of the extent of the void transactions, communications

from 2005 and 2006 make it clear that Republic Bank and the

Millennium Plan itself (including Ms. Barrow, the president and

chief counsel of MMG at the time) were well aware of the extent

of void transactions occurring.     In January 2008 the plan

committee adopted a policy ceasing to allow void transactions

going forward.

3.   Petitioners’ Participation in the Millennium Plan

        Mr. Thornhill attended numerous training sessions to learn

about the Millennium Plan, although he was not employed by it and

never had a role in its operation or management.     The training

sessions were conducted by MMG.     Mr. Thornhill also contacted Ms.

Barrow and spoke to her on several occasions about the Millennium

Plan and how it was different from other purported section

419A(f)(6) plans.     He had Ms. Barrow meet with Richard Smith (Mr.

Smith) and Tom Handler (Mr. Handler).     Both Mr. Smith and Mr.

Handler were lawyers familiar with other purported section

419A(f)(6) plans, and Mr. Handler’s firm did legal work for PCG.

Mr. Handler attended an initial meeting between Mr. and Mrs.
                               - 17 -

Goyak and Mr. Thornhill; Mr. Handler would also later do other

tax work for petitioners.

     Petitioners were introduced to the Millennium Plan by PCG,

Mr. Thornhill, and Mr. Holt.   Mr. Thornhill told Mr. Goyak that

contributions to the plan were deductible to the corporation and

that it was a tremendous way to accumulate post- and pre-

retirement benefits.   Mr. Goyak was also told that the plan would

provide substantial tax-free retirement income to him and his

wife while they were still alive, which he liked because he was

setting his company up so that he could retire when he chose to.

Mr. Goyak also liked that the Millennium Plan was asset protected

and divorce-proof.

     Mr. Thornhill gave a presentation to Mr. Goyak detailing

some aspects of the Millennium Plan.    One of the sheets in the

presentation, entitled “If You Keep Doin’ What You’re Doin’”,

details how a taxable investment of $466,667 for each of 3 years

would perform over the next 15 years.    The sheet indicates that

at the end of 15 years the investment would have a balance of

$1,683,810.   The next sheet is entitled “If You Implement The

Millennium Plan” and details the results of using a tax-

deductible contribution to the Millennium Plan over 15 years.

The sheet indicates that at the end of 15 years the cash value of

the insurance policy in the plan would be $2,647,887.
                               - 18 -

     On the basis of their analysis and the financial condition

of Goyak & Associates at the end of 2002, Mr. Lieberman, Mr.

Thornhill, and Mr. Holt ultimately determined that Goyak &

Associates could afford to make a $1.4 million contribution to

the Millennium Plan.    Mr. Goyak did not know how the amount of

the contribution was determined.    In December 2002 Mr. Goyak

signed documents that approved the adoption of the Millennium

Plan by Goyak & Associates, including an adoption agreement and

corporate resolution.    Mr. Goyak was the only employee of Goyak &

Associates who would be covered by the Millennium Plan.

     Goyak & Associates made the $1.4 million contribution to the

Millennium Plan on December 30, 2002, and selected the life

insurance policy to be issued on Mr. Goyak’s life.    In addition

to the $1.4 million contribution, Goyak & Associates agreed to

pay the Millennium Plan a $2,500 annual administration fee for as

long as it participated in the plan.    On July 12, 2003, an

insurance policy was issued on Mr. Goyak’s life from American

General Life Insurance Co. (American General).    Mr. Thornhill and

PCG were in contact with American General before the policy was

issued, seeking to get favorable terms on the policy and also to

have the policy backdated to December 2002.    The face amount of

the policy was $8,221,752, and it required three annual premiums

of $466,667, which were paid by the Millennium Plan.    Mrs. Goyak

was designated beneficiary of Mr. Goyak’s death benefits paid
                              - 19 -

from the Millennium Plan, although a trust for the Goyak family

was made the beneficiary in January 2004.

     The policy on Mr. Goyak’s life had a cash surrender value

that could be collected by the policyholder should he or she

terminate the policy.   The cash surrender value of the policy on

Mr. Goyak’s life was increased each time a premium was paid on

the policy.   It was also increased by an interest rate which was

guaranteed to be at least 2 percent per year.

     Once the policy was issued and Mr. Goyak became a covered

employee, he was eligible for any available life benefits

retroactive to the signing of the adoption agreement.    Mr.

Thornhill received a commission from American General in

connection with the purchase of the policy; however, the amount

he received was less than what he otherwise would have received

had the same policy been purchased by Mr. Goyak or Goyak &

Associates directly instead of by the Millennium Plan.

     Other than the death benefits, Mr. Goyak did not know what

benefits he was entitled to as a participating employee in the

Millennium Plan.   At the time of trial he had never made a claim

for benefits from the plan; indeed, he did not know how to claim

benefits.   From 2003 to 2009 Mr. Goyak’s death benefits increased

from $8,221,758 to $9,521,678, and from 2004 to 2009 his life

benefits increased from $557,718 to $1,184,444, reaching a high

of $1,490,515 for 2008.
                              - 20 -

     Mr. Goyak never interacted directly with representatives of

the Millennium Plan, instead always going through his advisers.

Mr. Goyak did not know what a section 419A(f)(6) plan was either

at the time Goyak & Associates entered into the Millennium Plan

or at trial.   Mr. Goyak never expressed to Mr. Thornhill any

concerns about the tax aspects of the Millennium Plan; instead,

Mr. Goyak deferred to and relied upon the financial knowledge of

Mr. Thornhill and Mr. Holt as financial professionals.    Mr.

Lieberman provided no advice to Mr. Goyak about Goyak &

Associates’ participation in the Millennium Plan other than

helping to determine the amount Goyak & Associates could afford

to contribute.   Neither in 2002 nor at trial did Mr. Lieberman

know how section 419A(f)(6) plans worked or how the Millennium

Plan was designed, operated, or managed.

     In 2002 before Goyak & Associates made the contribution to

the Millennium Plan, Mr. Thornhill recommended that Mr. Goyak

seek outside legal advice.   Mr. Thornhill also sent a letter to

all PCG clients participating in the Millennium Plan in April

2005 which stated that “it cannot be stressed enough to discuss

* * * [the Millennium Plan] with your tax adviser to determine

the appropriate course of action for you.”   In addition, Goyak &

Associates received documents from the Millennium Plan stating

that participation in the plan involved certain tax risks,
                              - 21 -

especially when only one owner/employee of a business was being

covered (as was the case in Mr. Goyak’s situation).

     Mr. Goyak did not seek outside legal advice about the

Millennium Plan, although he knew Mr. Handler was aware of the

Millennium Plan through his association with PCG.   While it

appears Mr. Goyak believed that Mr. Handler would have warned him

about the Millennium Plan had it been risky, there is no evidence

that Mr. Goyak ever asked Mr. Handler about the Millennium Plan.

In addition, no evidence was supplied that Mr. Handler was ever

aware that Goyak & Associates was contemplating entering or had

entered the Millennium Plan, even when Mr. Handler was doing tax

work for petitioners after 2002.

     After becoming a covered employee in the Millennium Plan,

Mr. Goyak received a Plan Administration Manual, which included a

summary of a legal opinion provided by Ms. Barrow on the tax

qualification issues arising in connection with the Millennium

Plan.   Ms. Barrow’s opinion had concluded that the Millennium

Plan complied with section 419A(f)(6) and the regulations

thereunder.   In addition, the Millennium Plan sent instructional

materials to participating employers stating that they should pay

heed to section 162 issues and recommending that they get advice

and comparable reports on compensation and other items.

     On a June 29, 2006, conference call among Ms. Barrow, Mr.

Goyak, Mr. Lieberman, and Mr. Thornhill, Mr. Lieberman asked
                              - 22 -

about Mr. Goyak’s collecting severance benefits when he could not

get fired from the business he and his wife entirely owned.     Ms.

Barrow and Mr. Thornhill replied that a significant corporate

event could cause Mr. Goyak to qualify for severance benefits and

that corporate clients could “time” the event for tax-planning

purposes.

4.   Other Information

      Goyak & Associates dismissed Mr. Holt and Mr. Thornhill when

it could no longer afford their services.   Mr. Lieberman left

Goyak & Associates in 2006 to become CFO and chief operating

officer of another company.   Mr. Goyak has initiated a civil

action in Nevada against PCG, MMG, Mr. Thornhill, Mr. Holt, and

Mr. Lieberman as a protective measure given the uncertainty in

how these cases would be decided.

      On March 5, 2007, respondent issued a notice of deficiency

to Goyak & Associates for tax years 1997 through 2002 and a

notice of deficiency to Mr. and Mrs. Goyak for tax years 2002

through 2004.   Petitioners timely filed their petitions

contesting the deficiencies, additions to tax, and penalties.

      As of the time of trial, Mr. Goyak remained a participating

employee in the Millennium Plan.

5.   Expert Witness

      Charles DeWeese (Mr. DeWeese) was admitted as an expert

witness for petitioners.   Mr. DeWeese has extensive experience
                              - 23 -

with section 419A(f)(6) plans and has previously testified for

respondent in other Tax Court cases involving section 419A(f)(6)

plans where we found his testimony to be reliable, relevant, and

helpful.   Since April 2004 Mr. DeWeese has worked for MMG serving

in an advisory capacity to the Millennium Plan.    He has never had

an operational role in or an advocacy role for the plan.    Mr.

DeWeese testified at trial and submitted an expert report which

was accepted into evidence.

     In preparing his report, Mr. DeWeese reviewed Millennium

Plan claim files.   During this review, Mr. DeWeese wrote down

many of his concerns regarding certain life benefits which had

been paid by the plan to covered employees.    In particular, Mr.

DeWeese had several concerns regarding severance claims which had

resulted in benefit payouts from the plan.    Mr. DeWeese was

concerned because several claims had been paid out when the claim

file lacked documentation that the severance was involuntary.     In

one case Mr. DeWeese was also concerned because the covered

employee was the sole employee of an employer who was going out

of business.

     After reviewing the claims files, Mr. DeWeese had a

conversation with Ms. Barrow about his concerns, some of which

she was able to resolve.   Mr. DeWeese testified that he was

satisfied that the Millennium Plan “had the will to manage their

claims appropriately.”   Mr. DeWeese’s report concluded that the
                              - 24 -

Millennium Plan met the requirements of section 419A(f)(6).    His

conclusion was based in part on his “understanding that life

benefits are paid only on properly investigated legitimate

claims”.

      Mr. DeWeese testified that he considered it “troublesome”

and “inappropriate” for covered employees to void their

participation in the Millennium Plan years after enrollment or

after they had received payment of life benefits.   It appears Mr.

DeWeese was not aware of the extent to which void transactions

were being used as a way to exit the Millennium Plan at the time

he prepared his report, only learning of such facts afterwards.

                              OPINION

I.   Burden of Proof

      Generally, taxpayers bear the burden of proving, by a

preponderance of the evidence, that the determinations of the

Commissioner in a notice of deficiency are incorrect.   Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Deductions

are a matter of legislative grace, and a taxpayer bears the

burden of proving entitlement to any claimed deductions.    Rule

142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

Petitioners have not argued that respondent should bear the

burden of proof in these cases.
                              - 25 -

II.   Deductibility of Contributions Made to Section 419A(f)(6)
      Welfare Benefit Funds in General

      Section 419(a) provides that an employer’s contributions to

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 benefit

fund is further limited by section 419(b) to the fund’s qualified

cost for the taxable year.   However, section 419A(f)(6) provides

that contributions paid by an employer to a welfare benefit fund

which is part of a “10 or more employer plan” are not subject to

the deduction limitation of section 419(b).

      Petitioners argue that (1) contributions to the Millennium

Plan are ordinary and necessary business expenses deductible

under section 162(a) (which is in chapter 1 of the Code), and (2)

the Millennium Plan is a “10 or more employer plan” under section

419A(f)(6), so that the deduction limits of section 419(b) are

not applicable.

      Respondent argues that Goyak & Associates’ $1.4 million

contribution to the Millennium Plan is not deductible under

section 162(a) as an ordinary and necessary business expense and

that the contribution was made for the personal benefit of Mr.

and Mrs. Goyak.   As a result, respondent claims the $1.4 million

should be included in Mr. and Mrs. Goyak’s gross income as a

constructive dividend.   Respondent alternatively claims that

Goyak & Associates is not entitled to the claimed $1.4 million
                               - 26 -

deduction because the Millennium Plan is a nonqualified deferred

compensation arrangement under section 404(a)(5).    Respondent

further claims that if this contribution was not a dividend or

nonqualified deferred compensation, the Millennium Plan

constituted a welfare benefit fund under section 419(e), and thus

the $1.4 million deduction is subject to the limits (based on the

fund’s qualified cost) imposed by section 419(b) and that the

exception to those limits provided in section 419A(f)(6) did not

apply.    Finally, respondent claims that even if the Millennium

Plan qualified as a section 419A(f)(6) plan, the contribution

from Goyak & Associates was a nondeductible capital expenditure

under section 263.

       For the reasons stated below, we find that the contribution

Goyak & Associates made to the Millennium Plan is not an ordinary

and necessary business expense under section 162(a).    We

therefore hold that Goyak & Associates may not deduct the $1.4

million contribution paid to the Millennium Plan in 2002 and that

the $1.4 million should instead be treated as a constructive

dividend paid to Mr. Goyak.

III.   Whether Goyak & Associates’ Contribution to the Millennium
       Plan Is an Expense Deductible Under Section 162(a) or a
       Constructive Dividend Paid to Mr. Goyak

       We have found that Goyak & Associates’ $1.4 million

contribution to the Millennium Plan is not an ordinary and

necessary business expense deductible under section 162(a).    Our
                              - 27 -

decision turns on our conclusion that covered employees in the

plan were able to (1) freely void their participation in the plan

and have the life insurance policy distributed to them, or (2)

receive life benefits at a time of their choosing by “timing” a

severance event.   Participating employers funneled their pretax

business profits into the Millennium Plan to claim tax deductions

and covered employees were able to functionally withdraw those

amounts at a later time of their choosing.   As a result, Goyak &

Associates’ contribution to the Millennium Plan should be

considered a constructive dividend paid to Mr. Goyak, rather than

an ordinary and necessary business expense under section 162(a).

     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.   Curcio v. Commissioner, T.C. Memo.

2010-115; Hubert Enters., Inc. v. Commissioner, T.C. Memo.

2008-46.   Although the Millennium Plan has altered its rules

multiple times since 2002, we base our finding on the operation

of void transfers as they existed unchanged from 2002 to the

third quarter of 2007 and on the operation of severance life

benefit payouts, which remained the same from 2002 onward.

     Section 162(a) provides a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in
                                - 28 -

carrying on a trade or business.    A taxpayer must meet five

requirements in order to deduct an item under this section.     The

taxpayer must prove that the item claimed as a deductible

business expense:    (1) Was paid or incurred during the taxable

year; (2) was for carrying on his, her, or its 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); Welch v. Helvering, 290

U.S. 111, 113-115 (1933).    Whether an expenditure satisfies each

of these requirements is a question of fact.    See Commissioner v.

Heininger, 320 U.S. 467, 475 (1943).

     Purchasing insurance for the benefit of an employee is, in

many circumstances, an ordinary and necessary business expense

deductible under section 162(a).    See Curcio v. Commissioner,

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

have held that when employers make contributions to purported

section 419A(f)(6) plans and covered employees can receive the

value reflected in insurance policies purchased by those plans,

those contributions made by employers are not deductible under

section 162(a).     Neonatology Associates, P.A. v. Commissioner,

115 T.C. 43, 90-92 (2000) (“The parties * * * have always

expected and understood that the conversion credit balance would

be returned to the insured in the future * * *.    * * * we are

convinced that the purpose and operation of the Neonatology Plan
                                - 29 -

and the Lakewood Plan was to serve as a tax-free savings device

for the owner/employees”), affd. 299 F.3d 221 (3d Cir. 2002);

V.R. Deangelis M.D.P.C. v. Commissioner, T.C. Memo. 2007-360 (“we

decide on the basis of the credible evidence in the record before

us that * * * [covered employees] investing in the STEP plan had

the primary right to receive the value reflected in the insurance

policies written on their lives”), affd. 574 F.3d 789 (2d Cir.

2009); Curcio v. Commissioner, supra (“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

business profits into cash-laden life insurance policies over

which they retained effective control.”).

     Like employees covered by the plans at issue in Neonatology,

Curcio, and Deangelis, covered employees were able to receive the

value reflected in insurance policies held by the Millennium

Plan.   They could receive the policies themselves by having their

employers void their participation in the Millennium Plan, or

they could receive payouts from the Millennium Plan by timing

corporate events which would cause the Millennium Plan to pay

them severance life benefits.
                                - 30 -

     A.    Void Transactions

     In a void transaction the covered employee (if indicated by

the employer) was able to obtain “all Plan assets” purchased by

the Millennium Plan as a result of his or her employer’s

contribution(s).     In their brief, petitioners claim that voiding

was allowed only when the employer failed to complete the

enrollment, because of mutual mistake of fact, or because of a

misrepresentation by an employer’s adviser regarding benefits and

the features of the Millennium Plan in connection with the

employer’s decision to participate.      While this may have been the

theoretical rule, in practice voiding was allowed almost freely

before the third quarter of 2007.    At that time the plan

committee realized that a significant breakdown in the Millennium

Plan’s governance rules and a breach of its internal controls had

occurred with regard to void transactions.     Before this

realization, the plan committee had reviewed very few of the

requests for a void transaction.    However, the plan trustee and

the Millennium Plan itself had been fully aware of the extent to

which void transactions were being used to exit the Millennium

Plan.     No explanation was provided by petitioners regarding why

the plan committee was not informed of the extent of void

transactions.

     The impropriety of the extent of the voiding which occurred

in the Millennium Plan is further emphasized by the fact that
                              - 31 -

some employers had been participating in the Millennium Plan for

years at the time their transactions were voided.   In addition

some employers were allowed to void their participation after

their covered employees had received life benefit payments from

the Millennium Plan (although they did have to return any prior

life benefits paid to them before voiding).   The fact that the

Millennium Plan would approve void requests in such circumstances

underlines the minimal amount of regard paid to the plan voiding

rules (which were designed to comply with the Code).   Even

petitioners’ expert Mr. DeWeese recognized that it was

“troublesome” and “inappropriate” that employers were able to

void their participation in the plan years after enrollment or

after their covered employees had received payment of life

benefits.

     Petitioners point out that participants voiding their

transactions were required to sign a statement that they would

amend any tax returns affected by their participation in the

plan, consistent with the voiding of the plan transaction.

Petitioners therefore claim it would be impossible for

participants to gain by voiding their transactions, as all

deductions previously claimed would be lost as a result of the

amended returns.   However, petitioners presented no evidence that

the Millennium Plan or MMG enforced or checked on the amendment

of tax returns in any way after receiving participants’
                               - 32 -

signatures stating that the participants would amend their

returns.   Even if a participant did amend a return after voiding,

that participant could still benefit if the plan assets returned

to the participant upon voiding had appreciated in value over the

amount of the (initially) tax-free contributions made to the

Millennium Plan, as the appreciation would have occurred on a

tax-free amount rather than an amount reduced by taxes.

     B.    Severance Life Benefits

     Under each of the four versions of the plan guidelines, life

benefits could be claimed upon involuntary severance of the

covered employee from the employer.     Each version of the plan

guidelines provided that involuntary severance life benefits

could be claimed “in the event of the Covered Employers

bankruptcy, insolvency, corporate dissolution or change of

control of the Covered Employer as defined by the controlling

employment agreement.”

     We believe that severance benefits were paid upon events

which did not amount to involuntary severance.     We note that on a

June 29, 2006, conference call among Ms. Barrow, Mr. Goyak, Mr.

Lieberman, and Mr. Thornhill, Mr. Lieberman asked about Mr.

Goyak’s collecting severance benefits when he could not get fired

from the business which he and his wife entirely owned.     Ms.

Barrow and Mr. Thornhill replied that a significant corporate

event could cause Mr. Goyak to qualify for severance benefits and
                               - 33 -

that corporate clients could “time” the event for tax-planning

purposes.

     We also note that Mr. DeWeese expressed concern because

several claims for life benefits on account of involuntary

severance had been paid when the claim file lacked documentation

that the severance was involuntary.     In one case Mr. DeWeese was

also concerned because the covered employee was the sole employee

of an employer who was going out of business.    Although Mr.

DeWeese testified that when he discussed his concerns with Ms.

Barrow she was able to ease some of them, we believe his concerns

are evidence that the Millennium Plan was in fact allowing

participating employers to time payment of severance life

benefits to their covered employees, just as Ms. Barrow said

Goyak & Associates would be able to do.

     C.   Other Evidence of Covered Employee Access to Plan Assets

     Other facts reinforce our belief that the Millennium Plan

served as a tax-free savings device for the employees

participating in it.    We have previously considered the amount of

risk-sharing in a plan, the amount of control participating

employers had in choosing their policy, and other facts similar

to those noted below when making a section 162(a) determination

regarding contributions made to a purported section 419A(f)(6)

welfare benefit fund.   See, e.g., Curcio v. Commissioner, T.C.
                              - 34 -

Memo. 2010-115; V.R. Deangelis M.D.P.C. v. Commissioner, T.C.

Memo. 2007-360.

     We first note that the amount of death benefits payable upon

the death of a covered employee was reduced by the accumulated

amount of any life benefits claimed by that employee during his

or her lifetime.   This fact acted to preserve the assets of each

covered employee separately and insulated covered employees from

changes in their benefit levels on account of benefits’ being

claimed by other participating employees within their rating

group.   If another participating employee claimed life benefits,

those life benefits were forfeited back to the plan upon the

death of the claiming employee, lessening (or negating) the

impact that the prior life benefit payout would have on other

employees in the same rating group.

     We next note that participants entering the Millennium Plan

choose from a menu of insurance products from several insurance

companies, essentially choosing their level of risk.   The

participating employers also choose the amount to contribute to

the Millennium Plan.   Furthermore, Mr. Goyak’s advisers were able

to directly negotiate the terms of the insurance policy with

American General and sought to have the insurance policy on Mr.

Goyak’s life backdated to December 2002.

     We also note that at the time Goyak & Associates entered the

Millennium Plan, Mr. Goyak was setting his company up with an eye
                              - 35 -

toward retirement and entered the plan under the assumption that

it would provide substantial tax-free retirement income to Mr.

and Mrs. Goyak while they were still alive.   Before Goyak &

Associates entered the plan, Mr. Thornhill had given a

presentation to Mr. Goyak, part of which compared how a taxable

investment would perform against the effect tax-deductible

contributions to the Millennium Plan would have on the cash value

of an insurance policy.

     D.   Conclusion Regarding Deductibility Under Section 162(a)
          and Effect on Constructive Dividend Issue

     We have found the $1.4 million contribution Goyak &

Associates made to the Millennium Plan in 2002 is not an ordinary

and necessary business expense deductible under section 162(a)

because of the access which plan participants had to plan assets.

Because the $1.4 million contribution was not a deductible

business expense under section 162(a) and conferred an economic

benefit on Mr. Goyak for the primary (if not sole) benefit of Mr.

Goyak, we conclude that the contribution was a constructive

distribution paid from Goyak & Associates to Mr. Goyak.2   See



     2
      Petitioners have not argued that Goyak & Associates should
be entitled to deduct the costs of the current life insurance
protection purchased through the Millennium Plan, nor have they
identified evidence that would enable us to establish that cost.
As a result, we find that no part of the contribution to the
Millennium Plan is deductible by Goyak & Associates. See Curcio
v. Commissioner, T.C. Memo. 2010-115; V.R. DeAngelis M.D.P.C. v.
Commissioner, T.C. Memo. 2007-360, affd. 574 F.3d 789 (2d Cir.
2009).
                               - 36 -

Neonatology Associates, P.A. v. Commissioner, 115 T.C. at 91-92;

Curcio v. Commissioner, supra; see also V.R. Deangelis M.D.P.C.

v. Commissioner, supra.

       We next address whether the constructive dividend income

should be taxable to Mr. Goyak as ordinary income, nontaxable

return of capital, or gain from the sale or exchange of property.

Section 301 provides that funds distributed by a corporation over

which the taxpayer/shareholder has dominion and control are taxed

under section 301(c).    Barnard v. Commissioner, T.C. Memo. 2001-

242.    Under sections 301(c) and 316(a), distributions are

dividends taxable to shareholders as ordinary income to the

extent of the earnings and profits of the corporation, and any

amount received by a shareholder in excess of earnings and

profits is considered a nontaxable return of capital to the

extent of the shareholder’s basis in his stock.     Truesdell v.

Commissioner, 89 T.C. 1280, 1294-1295 (1987).     Any amount

received in excess of both the earnings and profits of the

corporation and the shareholder’s basis in his stock is treated

as gain from the sale or exchange of property.     Id.

       By the end of 2002 Goyak & Associates had over $4 million of

retained earnings and profits; it therefore had enough earnings

and profits to cover the $1.4 contribution paid for the benefit

of Mr. Goyak.    We therefore hold that the $1.4 million

contribution paid by Goyak & Associates to the Millennium Plan
                                - 37 -

was a constructive dividend paid to Mr. Goyak, taxable as

ordinary income to him.

IV.   Whether Petitioners Are Liable for Section 6662 Accuracy-
      Related Penalties

      Respondent determined that petitioners were liable for a 20-

percent accuracy-related penalty under section 6662(a) and (b)(1)

for negligence or disregard of rules and regulations, or in the

alternative, under section 6662(a) and (b)(2) for substantial

understatement of income tax.    Petitioners contest the imposition

of accuracy-related penalties for 2002.

      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 by showing that

petitioners improperly deducted or failed to report $1.4 million

contributed to the Millennium Plan and used the funds to purchase

assets for the primary benefit of Mr. Goyak.   This evidence is

sufficient to indicate that it is appropriate to impose penalties
                               - 38 -

under section 6662(a).   See, e.g., Curcio v. Commissioner, T.C.

Memo. 2010-115.

     Section 6662(c) defines negligence as including any failure

to make a reasonable attempt to comply with the provisions of the

Code.    Section 6662(c) also 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 rules or regulations.     Sec.

1.6662-3(b)(2), Income Tax Regs.    Disregard of rules or

regulations is reckless if the taxpayer makes little or no effort

to determine whether a rule or regulation exists.     Id.     Disregard

of rules or regulations is intentional if the taxpayer has

knowledge of the rule or regulation that he disregards.       Id.

     An underpayment is not attributable to negligence or

disregard to the extent that the taxpayer shows that the

underpayment is due to the taxpayer’s reasonable cause and good

faith.    Sec. 6664(c)(1); Neonatology Associates, P.A. v.

Commissioner, supra at 98.    Reasonable cause requires that the

taxpayer have exercised ordinary business care and prudence as to

the disputed item.    See United States v. Boyle, 469 U.S. 241

(1985); Estate of Young v. Commissioner, 110 T.C. 297, 317

(1998).    Good-faith reliance on the advice of an independent,

competent professional as to the tax treatment of an item may
                                 - 39 -

meet this requirement.   See United States v. Boyle, supra; sec.

1.6664-4(b), Income Tax Regs.     The 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.

For a taxpayer to rely reasonably upon advice so as possibly to

negate a section 6662 accuracy-related penalty determined by the

Commissioner, the taxpayer must prove by a preponderance of the

evidence that the taxpayer meets each requirement of the

following three-prong test:   (1) The adviser was a competent

professional who had sufficient expertise to justify reliance;

(2) the taxpayer provided necessary and accurate information to

the adviser; and (3) the taxpayer actually relied in good faith

on the adviser’s judgment.    Neonatology Associates, P.A. v.

Commissioner, 115 T.C. at 99.     In addition, reliance may be

unreasonable when it is placed upon insiders, promoters, or their

offering materials, or when the person relied upon has an

inherent conflict of interest that the taxpayer knew or should

have known about.   Id. at 98.

     We find that petitioners acted both negligently and with at

least a careless disregard of rules and regulations.     We also

find that the underpayments are not due to petitioners’

reasonable cause and good faith.     Mr. Goyak did not make

reasonable attempts to comply with the Code or to determine the
                              - 40 -

correctness of petitioners’ tax positions.   In addition, it was

unreasonable for Mr. Goyak to rely on those advisers which he did

in deciding to enter the Millennium Plan without getting the

opinion of an independent attorney or accountant.

     We first note that Mr. Goyak is highly educated and

intelligent.   Although he was not educated in the areas of tax or

accounting, he was an experienced and successful businessman.    In

spite of his experience and intelligence, Mr. Goyak choose to

rely on advisers who were unfamiliar with tax law or not

independent when deciding whether to enter the Millennium Plan.

In doing so he ignored repeated warnings, both before and after

entering the Millennium Plan, to seek independent legal advice.

     While Mr. Lieberman was an independent accountant, he did

not have significant tax experience, was not familiar with

section 419 plans, and provided Mr. Goyak with no advice on the

Millennium Plan other than helping to determine the amount Goyak

& Associates could afford to contribute.   Mr. Holt had no

significant experience with tax issues, and no evidence was

presented that he was familiar with insurance plans or provided

advice to Mr. Goyak about entering the Millennium Plan.    Mr.

Goyak received a summary of a legal opinion written by Ms.

Barrow, but she was not an independent attorney; she acted as a

consultant for the plan (and was later employed by MMG) and had

drafted its core operating documents.   Although Mr. Goyak did
                              - 41 -

have Mr. Handler do certain legal and tax work for petitioners,

no evidence was presented that they ever discussed the Millennium

Plan or that Mr. Handler was aware that Goyak & Associates had

entered the Millennium Plan, much less that Mr. Handler gave

petitioners his legal opinion regarding contributions made to it.

     Petitioners focus largely on the advice provided to Mr.

Goyak by Mr. Thornhill.   While Mr. Thornhill was an insurance

specialist familiar with section 419 plans, he did not have

significant experience with tax issues.    Mr. Thornhill did have

Ms. Barrow meet with Mr. Smith and Mr. Handler (attorneys with

section 419 plan experience), but no evidence was presented that

either of these attorneys gave Mr. Thornhill an opinion regarding

the Millennium Plan.   Most importantly, Mr Thornhill told Mr.

Goyak both in 2002 and in 2005 that Mr. Goyak should seek outside

legal advice concerning the Millennium Plan.

     We also note that Mr. Thornhill received a commission from

American General in connection with the purchase of the policy on

Mr. Goyak’s life by the Millennium Plan.   This commission

undermines petitioners’ argument that Mr. Thornhill was an

independent adviser.   While it is true that Mr. Thornhill’s

commission was less than the amount he otherwise would have

received had the same policy been purchased by Mr. Goyak or Goyak

& Associates directly, no evidence was presented that Mr. Goyak

ever considered purchasing an insurance policy himself or through
                                - 42 -

Goyak & Associates.    It may be that Mr. Goyak would not have

considered purchasing a life insurance policy himself or through

Goyak & Associates because such a policy would not have had the

life benefits associated with the Millennium Plan.    A directly

held policy could also have been less attractive because premium

payments on such a policy might not have been deductible to the

same extent that the contributions to the Millennium Plan were

represented to be.

     Petitioners also argue that Goyak & Associates had

substantial authority for its deduction of contributions to the

Millennium 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)(i), Income Tax Regs.

Petitioners believe that the question of whether the Millennium

Plan is within the scope of section 419A(f)(6) is a novel

question for which there was a paucity of available authorities

in 2002, the year petitioners’ tax returns were filed.    We

disagree.     Neonatology Associates, P.A. v. Commissioner, supra at

92, makes it clear that deductions to a purported welfare benefit

fund are not deductible when that fund operates “as a tax-free

savings device for the” participants.    Even if the section

419A(f)(6) issue were novel, the issue of whether an expenditure

by a close corporation is ordinary and necessary under section
                                 - 43 -

162 or a constructive distribution is not novel.     See Neonatology

Associates, P.A. v. Commissioner, 299 F.3d at 234-235; Curcio v.

Commissioner, T.C. Memo. 2010-115.

      We conclude that petitioners’ underpayments of tax were the

result of their negligence and careless disregard of rules or

regulations.      We also conclude that petitioners are not entitled

to the reasonable cause and good-faith defense because they did

not act reasonably in relying on their financial advisers.     We

therefore hold that petitioners are liable for the 20-percent

accuracy-related penalties under section 6662.

V.   Conclusion

      We hold that the $1.4 million contribution paid by Goyak &

Associates to the Millennium Plan was not an ordinary and

necessary business expense deductible under section 162(a) but

rather a constructive dividend paid to Mr. Goyak, taxable as

ordinary income to him.     We also hold that petitioners are liable

for the 20-percent accuracy-related penalties under section 6662.

      In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                            Decisions will be entered

                                       under Rule 155.
