                         T.C. Memo. 2010-115



                       UNITED STATES TAX COURT



     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.




     1
      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.
                                  - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   The docketed cases, consolidated for the

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 (the

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)

                                           Accuracy-Related Penalty
     Year            Deficiency                  Sec. 6662(a)

     2001              $79,946                     $15,989
     2002               81,568                      16,314
     2003               72,098                      14,420
     2004               63,519                      12,704

Ronald D. Jelling and Lorie A. Jelling (Docket No. 1769-07)

                                           Accuracy-Related Penalty
     Year            Deficiency                  Sec. 6662(a)

     2001              $79,946                     $15,989
     2002               81,568                      16,314
     2003               71,018                      14,204
     2004               72,100                      14,420
                                    - 3 -

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

                                            Accuracy-Related Penalty
     Year              Deficiency                 Sec. 6662(a)

     2003                $64,157                    $12,831.40

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

                                            Accuracy-Related Penalty
     Year              Deficiency                 Sec. 6662(a)

     2003               $271,204                    $54,240.80

     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 increased

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 multiple-

employer welfare benefit plan under section 419A(f)(6), and,

second, whether petitioners are liable for accuracy-related

penalties under section 6662.
                                - 4 -

     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 FACT

     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 December

1997, and was crafted by Daniel Carpenter to be a multiple-

employer welfare benefit trust under section 419A(f)(6) providing

preretirement life insurance to covered employees.   Carpenter is

a lawyer with experience in tax and employee benefits law.    In

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 be

true.    In the book, Carpenter discusses the provisions of section

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 net

surrender value of the insurance policies as of December 31,

2005, to cover the expenses of the trust in responding to

inquiries from and audits by the Internal Revenue Service (IRS).

     At all times during the relevant years at least 10 different

business entities participated in Benistar Plan.

     Amendments

     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)-1, Proposed Income Tax Regs., 67 Fed. Reg. 45938

(July 11, 2002).   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 insurance covers 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 securities 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 Plan

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 assets

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 that

     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 to

Benistar Plan.    Benistar Plan checks the policy applications to

ensure that Benistar Plan Sponsor is the owner and that the

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:

     C    Virtually Unlimited Deductions for the Employer;
     C    Contributions can vary from year to year;
                               - 12 -

     C      Benefits can be provided to one or more key
            Executives on a selective basis;
     C      No need to provide benefits to rank and file
            employees;
     C      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;
     C      Funds inside the BENISTAR 419 Plan accumulate tax-
            free;
     C      Death proceeds can be received both income and
            estate tax-free by beneficiaries;
     C      Program can be arranged for tax-free distribution
            at a later date;
     C      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)-1, 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 to

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 to

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 419 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.       This

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.      If

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 plan

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 mid-

2002 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 insurance

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, which

must be prepaid at the time the insured employee requests to

withdraw the underlying policy.

     An employer may also be terminated from Benistar Plan

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 the

trust.

     If Benistar Plan terminates, the underlying policy may be

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 covered

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 forbidden

distribution.

Mark and Barbara Curcio and Ronald and Lorie Jelling

     Petitioners Mark and Barbara Curcio and Ronald and Lorie

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 and

the Benistar enrollment occurred within about a year’s time.

     Before enrolling in Benistar Plan, Curcio and Jelling

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 Benistar

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 premium

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 death

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 of

contributions to Benistar Plan.

Samuel and Amy Smith

     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, with

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 was

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, 2005, 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 surrender

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 the

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 Mogelefsky

     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 in Benistar 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

Benistar Plan.   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 the

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 1120S 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,

2005, the account value listed on the insurance policy statement

was $166,798 and the surrender charge was $20,803.71, 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 in 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 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.   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 arguments

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 section

419 and the developing caselaw and amended the plan in attempts

to secure deductions for the premiums paid by petitioners.     He

published a book in an attempt to explain the provisions of

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)-1, Income Tax

Regs., is invalid.
                              - 31 -

Retroactive Amendments to Benistar Plan

     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 Proof

     Section 7491(a)(1) provides that

     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 identify

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 Expenses

     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, 414

(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 that

     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/her
     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).    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 of less 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 petitioners

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 insurance

payments, and the issue never came before this Court.    In

Schneider v. Commissioner, T.C. Memo. 1992-24, “The contributions

which petitioner made in each of the subject years were computed

by an independent actuary in an amount necessary to fund the plan

for that year”, which contrasts with these cases, where

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 the

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 the

VEBA for term life insurance, and the Court found “incredible

petitioners’ assertion that the employee/owners of Neonatology

* * * 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 eligible

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 that

          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 the
     account’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 those

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 face

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 50-

50 by two partners, we file them all at the same time, the

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 was

retirement planning.

     Not only did petitioners act as though they personally owned

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 selected 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 was contingent 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-2002

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. 2005-

25, 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 in

2005 or later.    At trial, Carpenter testified that

     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 10-

percent 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 short-

term, 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.   Id.   In March

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. Rul. 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 that such

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’s second policy, significant contributions

were made by Benistar Plan right before those policies were

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 surrender

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 10

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 any

particular loan, nor does it mention any loan terms.

     “Whether a transfer of money creates a bona fide debt

depends upon the existence of an intent by both parties,

substantially contemporaneous to the time of such transfer, to

establish an enforceable obligation of repayment.”     Delta

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 10-

percent 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 were

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 what

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 claim

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 is

consistent with Booth v. Commissioner, 108 T.C. 524 (1997).        In

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 Benistar Plan directly in Mogelefsky’s

income as a constructive distribution.     Sections 1366 through

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.P.C. v. Commissioner, T.C. Memo. 2007-

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 a

corresponding flowthrough of income to petitioners and an

increase in petitioners’ bases in the shares of 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. 1368

(for S corporations); secs. 705, 731 (for JELMAC, LLC, a

partnership); V.R. DeAngelis M.D.P.C. v. Commissioner, supra; cf.
                              - 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.    Therefore,

to determine the proper treatment of the 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; Wright v.

Commissioner, T.C. Memo. 2007-50; 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 -

2003 contribution 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, 292 U.S. 210, 214 (1934); Hyland v.

Commissioner, 175 F.2d 422, 423-424 (2d Cir. 1949), affg. a

Memorandum Opinion of this Court.

Section 6662 Accuracy-Related Penalty

     Petitioners contest the imposition of accuracy-related

penalties for the tax years in issue.    Section 6662(a) and (b)(1)

and (2) 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 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.

     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 has

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)(i), 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 authority

recognized under section 1.6662-4(d)(3)(iii), Income Tax Regs.,

to support their arguments.    We therefore conclude that

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.      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.    “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 to

Benistar Plan.    Raskin testified that he told Curcio and Jelling

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 companies

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 the

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 Mogelefsky had owned

Discount Funding Associates for over 20 years.    Yet petitioners

failed to conduct thorough research regarding deductions of tens

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

wrote A 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 taxpayer fails 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 the

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 LaPlante

v. Commissioner, T.C. Memo. 2009-226, where the Court found that

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
                              - 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-case

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 here.

     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 taxpayer

reasonably relied on the tax advice of an attorney who structured

the transaction at issue.   However, the court reached that

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 of

rules or regulations under section 6662.   We also conclude that

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.
                                - 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 Antonides 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 under

                           Rule 155 in docket Nos. 14822-07

                           and 14917-07.
