                  T.C. Memo. 1998-443



                UNITED STATES TAX COURT



           MICHAEL MORRISSEY, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 13074-97.                Filed December 16, 1998.



      P borrowed money from the pension plans of his
wholly owned corporation. On Oct. 19, 1990, when P
owed the plans principal and interest totaling
$1,150,000, he "repaid" this debt by transferring to
one of the plans his 50-percent interest in two parcels
of unencumbered real estate. The market value of one
parcel was $628,000 on Sept. 23, 1991. The market
value of the other parcel was $1.45 million on Nov. 9,
1991.
      Held: P's transfer of property to his plan was a
"sale or exchange" under sec. 4975(c)(1)(A), I.R.C.;
hence, it was a prohibited transaction under sec.
4975(a), I.R.C., that subjects P to the initial tax set
forth in sec. 4975(a), I.R.C.
      Held, further, The prohibited transaction was
never "corrected" within the meaning of sec. 4975(b),
I.R.C.; hence, P also is liable for the additional tax
set forth in sec. 4975(b), I.R.C.
                                    - 2 -


          Held, further, P is not liable for the additions
     to tax determined by R under sec. 6651(a)(1), I.R.C.,
     for failure to file excise tax returns for 1990 through
     1996; as of the respective due dates for these returns,
     a reasonable person could have concluded that the
     filing of an excise tax return was not required because
     the transfer was not a prohibited transaction, or, if
     it was, that it had been corrected.



     Andrew I. Panken and Robert A. DeVellis, for petitioner.

     Catherine R. Chastanet, for respondent.



                             MEMORANDUM OPINION


     LARO, Judge:        The parties submitted this case to the Court

without trial.      See Rule 122.     Petitioner petitioned the Court to

redetermine respondent's determination of the following

deficiencies in Federal excise tax and additions thereto:

              First-tier               Second-tier
          (initial) deficiency   (additional) deficiency   Additions to Tax
  Year        Sec. 4975(a)              Sec. 4975(b)       Sec. 6651(a)(1)

  1990          $9,584                    ---                 $2,156
  1991          57,500                    ---                 12,398
  1992          57,500                    ---                 12,398
  1993          57,500                    ---                 12,398
  1994          57,500                    ---                 12,398
  1995          57,500                    ---                 12,398
  1996          57,500                 $1,150,000             12,398

     We decide the following issues:

     1.    Whether petitioner's transfer of property to his pension

plan was a prohibited transaction under section 4975(a).               We hold

it was.
                               - 3 -


     2.   Whether the prohibited transaction was "corrected"

within the meaning of section 4975(b).    We hold it was not.

     3.   Whether petitioner is liable for the additions to tax

determined by respondent under section 6651(a)(1) for failure to

file Federal excise tax returns.    We hold he is not.

     Unless otherwise noted, section references are to the

applicable versions of the Internal Revenue Code.    Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.

                            Background

     Most facts are stipulated.    The stipulated facts and

exhibits submitted therewith are incorporated herein by this

reference.   Petitioner resided in Southampton, New York, when he

petitioned the Court.   He is the president and secretary of

Westchester Plastic Surgical Associates, P.C. (Westchester

Associates), his wholly owned corporation.

     Westchester Associates adopted a money purchase plan (the

MPP) effective as of January 15, 1972, and it adopted a defined

benefit pension plan (the DBP) effective as of November 1, 1976.

Both plans (collectively, the Plans) received favorable

determination letters from the Internal Revenue Service.

Petitioner has been the only trustee of the trusts (the Trusts)

associated with the Plans, and, as trustee, he has exercised

control over the management and disposition of the Plans' assets.
                                 - 4 -


     The DBP ceased benefit accruals in 1990.    When it did, the

DBP had three participants, including petitioner, all of whom

were 100 percent vested.    Each of these participants, except for

petitioner, was paid his or her benefits at that time.    The DBP

was formally terminated as of September 26, 1990.

     The MPP was operational throughout its taxable year that

ended on October 31, 1990.    The MPP had two participants at the

beginning and end of that year.    Petitioner was one of these

participants.   The record does not identify the other

participant.

     From November 14, 1979, to February 17, 1989, the Plans made

23 loans to petitioner.    Each of these loans, but one, was

evidenced by a "promissory note" or an "installment note" signed

by petitioner as the obligor.1    As stated on the notes, the dates

of the loans, the obligees, the original loan amounts, and the

interest rates for these loans, some of which were unsecured and

others of which were secured by petitioner's accounts in the

Plans, were as follows:




     1
       The record does not contain the signature page of one of
the 22 notes. Given the fact that petitioner signed each of the
other 21 notes, we find that he also signed the 22d note.
                                   - 5 -


                                        Original
Date Of loan            Obligee1      loan amount    Interest rate
  11/14/79                MPPT              $4,500        12%
  05/01/81                MPPT              10,000        16
  10/01/81                MPPT              10,000        16
  01/04/82                MPPT             145,000        16
  06/11/82                MPPT               7,000        16
  08/02/82                MPPT              30,000        14
  01/03/83                MPPT              60,000        11
  unstated                MPPT               6,000        11
  02/08/84            Pension Plan          13,000        11
  01/08/85                MPPT             153,687        11
  08/27/85            Pension Plan          50,000        12
  09/17/85                MPPT              20,000        11
  12/03/85            Pension Trust          5,500        10
  01/03/86               Pension            14,500    10.50
  04/15/86                MPPT               5,000         9
  07/30/87                MPPT              50,000      9.50
  10/08/87                MPPT              25,000        10
  12/09/87                MPPT              25,000      9.75
  02/01/88                MPPT              15,000   unstated
  02/12/88              BP Trust            20,000      9.75
  12/09/88               Pension             2,000     11.50
  12/09/88                MPPT               8,000     11.50
  02/17/892                                  2,000     11.50
    Total                                  681,187

         1
           Each note references the obligee as "MPPT", "DBT Trust",
   "Pension Plan", "Pension Trust", or "Pension". We believe that
   "MPPT" and "DBP Trust" refer to the money purchase plan trust and
   the defined benefit plan trust, respectively, and we so find. We
   are unable to find which of the Trusts was the obligee where the
   note listed the obligee as "Pension Plan", "Pension Trust", or
   "Pension".
           2
           The record does not contain a note for the loan that was
   made on Feb. 17, 1989. The parties have stipulated the
   information shown on this line.

None of the loan amounts was ever included in petitioner's

gross income as a distribution.

       On October 1, 1990, petitioner's obligations to repay the

loans from the Plans totaled 100 percent of the Trusts'

assets.2       Eighteen days later, when petitioner owed the Plans

   2
       Most of the Trusts' assets consisted of assets held by the
                                                   (continued...)
                                 - 6 -


  $1,150,000 (consisting of principal of $681,187 and interest of

  $468,813), he transferred to the MPP his 50-percent interest in

  two parcels of unencumbered real estate sited in Southampton,

  New York.3    Petitioner's former wife owned the remaining

  interests.    One parcel had a market value of $628,000 on

  September 23, 1991.    The other parcel had a market value of

  $1.45 million on November 9, 1991.     The record does not

  disclose the market value of either parcel on any other date.

         Petitioner has never filed a Form 5330, Return of Excise

  Taxes Related to Employee Benefit Plans, with respect to his

  transfer of the real estate to the MPP.

                               Discussion

         We decide first whether petitioner's transfer of the real

  estate to the MPP was a prohibited transaction under section

  4975(a).     Respondent determined it was, and, relying primarily

  on Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152

 (1993), argues to the same effect in this proceeding.

 Petitioner argues that the transfer was not a prohibited

         2
        (...continued)
money purchase plan trust. The DBP was terminated on Sept. 26,
1990, and its only asset on Oct. 1, 1990, was the right to
receive repayment from petitioner for the amounts it lent him.
     3
       Petitioner asserts in his brief that the real estate was
transferred to both pension plans. The record does not support
this assertion, and we decline to find it as a fact. See Rule
143(b). The record does not show that petitioner ever
transferred any asset to the DBP in repayment of moneys that he
borrowed from it.
                             - 7 -


transaction under section 4975(a).   According to petitioner,

the prohibited transaction rules do not apply to him because he

was the only beneficiary of the Plans at the time of the

transfer.   If he is subject to these rules, petitioner asserts,

the transfer was not a "sale or exchange" under the view of

this Court as stated in Wood v. Commissioner, 95 T.C. 364

(1990), revd. 955 F.2d 908 (4th Cir. 1992), and Keystone

Consol. Indus., Inc. v. Commissioner, T.C. Memo. 1990-628,

affd. 951 F.2d 76 (5th Cir. 1992), revd. 508 U.S. 152 (1993).

Petitioner recognizes that the Supreme Court disagreed with our

view in Commissioner v. Keystone Consol. Indus., Inc., 508 U.S.

152 (1993), but asserts that the Court's decision there applied

only to unencumbered property contributed in satisfaction of a

funding obligation.   Here, petitioner asserts, he transferred

unencumbered property to repay a loan.   Petitioner asserts that

repaying the loan was more beneficial to the Plans than leaving

it outstanding.

     We disagree with petitioner's assertion that he is not

subject to the prohibited transaction rules.   Nor do we agree

with his assertion that the transfer was not a prohibited

transaction.   We start our inquiry with the relevant text.

See Calvert Anesthesia Associates-Pricha Phattiyakul, M.D.,

P.A. v. Commissioner, 110 T.C. 285, 289 (1998); Venture

Funding, Ltd. v. Commissioner, 110 T.C. 236 (1998); Trans City
                                  - 8 -


Life Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996); see

also Garcia v. United States, 469 U.S. 70, 76 n.3 (1984).    This

text is as follows:

     SEC. 4975.       TAX ON PROHIBITED TRANSACTIONS.

          (a) Initial Taxes on Disqualified Person.--
     There is hereby imposed a tax on each prohibited
     transaction. The rate of tax shall be equal to 5
     percent of the amount involved with respect to the
     prohibited transaction for each year (or part
     thereof) in the taxable period. The tax imposed by
     this subsection shall be paid by any disqualified
     person who participates in the prohibited transaction
     (other than a fiduciary acting only as such).

          (b) Additional Taxes on Disqualified Person.--
     In any case in which an initial tax is imposed by
     subsection (a) on a prohibited transaction and the
     transaction is not corrected within the taxable
     period, there is hereby imposed a tax equal to 100
     percent of the amount involved. The tax imposed by
     this subsection shall be paid by any disqualified
     person who participated in the prohibited transaction
     (other than a fiduciary acting only as such).

          (c)     Prohibited Transaction.--

               (1) General rule.--For purposes of
          this section, the term "prohibited
          transaction" means any direct or indirect--

                       (A) sale or exchange * * *
                  of any property between a plan
                  and a disqualified person;

                  *      *    *     *     *   *   *

          (e)     Definitions.--

               (1)   Plan.--For purposes of this
          section, the term "plan" means a trust
          described in section 401(a) which forms a
          part of a plan, or a plan described in
          section 403(a), which trust or plan is
          exempt from tax under section 501(a), * * *
                        - 9 -


          (2)   Disqualified person.--For
     purposes of this section, the term
     "disqualified person" means a person who
     is—-

               (A) a fiduciary;

          *    *    *     *     *   *   *

          (3) Fiduciary.--For purposes of this
     section, the term "fiduciary" means any
     person who—-

               (A) exercises any
          discretionary authority or
          discretionary control respecting
          management of such plan or
          exercises any authority or
          control respecting management or
          disposition of its assets,

          *    *    *     *     *   *   *

(f) Other Definitions and Special Rules.--For
purposes of this section—-

          *    *    *     *     *   *   *

     (2) Taxable period.--The term "taxable period"
means, with respect to any prohibited transaction,
the period beginning with the date on which the
prohibited transaction occurs and ending on the
earliest of—-

          (A) the date of mailing a notice of
     deficiency with respect to the tax imposed
     by subsection (a) under section 6212,

          (B) the date on which the tax imposed
     by subsection (a) is assessed, or

          (C) the date on which correction of
     the prohibited transaction is completed.

     (3) Sale or exchange; encumbered property.--A
transfer of real or personal property by a
disqualified person to a plan shall be treated as a
sale or exchange if the property is subject to a
                           - 10 -


     mortgage or similar lien which the plan assumes or if
     it is subject to a mortgage or similar lien which a
     disqualified person placed on the property within the
     10-year period ending on the date of the transfer.

          (4) Amount involved.--The term "amount
     involved" means, with respect to a prohibited
     transaction, the greater of the amount of money and
     the fair market value of the other property given or
     the amount of money and the fair market value of the
     other property received; * * * For purposes of the
     preceding sentence, the fair market value—-

               (A) in the case of the tax imposed by
          subsection (a), shall be determined as of
          the date on which the prohibited
          transaction occurs; and

               (B) in the case of the tax imposed by
          subsection (b), shall be the highest fair
          market value during the taxable period.

          (5) Correction.--The terms "correction" and
     "correct" mean, with respect to a prohibited
     transaction, undoing the transaction to the extent
     possible, but in any case placing the plan in a
     financial position not worse than that in which it
     would be if the disqualified person were acting under
     the highest fiduciary standards.

     Section 4975 was added to the Code in 1974 by the Employee

Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406,

sec. 2003(a), 88 Stat. 829, 971.    See also Commissioner v.

Keystone Consol. Indus., Inc., 508 U.S. at 160 (section

4975(c)(1)(A) contains "broad language").   The Congress enacted

section 4975 to effectuate its intent to tax disqualified

persons who engage in self-dealing rather than innocent

employees who were previously faced with plan disqualification

on account of a prohibited transaction.   S. Rept. 93-383, at
                            - 11 -


94-95 (1973), 1974-3 C.B. (Supp.) 80, 173-174; see also

Greenlee v. Commissioner, T.C. Memo. 1996-378.

Disqualification penalized employee/plan participants in that

they were denied favorable tax consequences such as deferral of

taxation.   S. Rept. 93-383, supra at 94, 1974-3 C.B. (Supp.) at

173; see also Hamlin Dev. Co. v. Commissioner, T.C. Memo.

1993-89, for a discussion of the favorable tax consequences

that flow from a pension plan.    The Congress' intent in

enacting pension plan legislation has primarily been to protect

participants and their beneficiaries by ensuring that plan

assets are held for their exclusive benefit.    H. Conf. Rept.

93-1280, at 303 (1974), 1974-3 C.B. 415, 464.

     Petitioner does not contest respondent's determination

that petitioner was a disqualified person under section 4975 on

the date of the transfer.   He was by virtue of his status as

the Plans' trustee.   See sec. 4975(e)(2)(A) and (3)(A).     Nor

does petitioner contest respondent's determination that each of

the Trusts was a "plan" under section 4975(e)(1).    Petitioner's

dispute with respondent begins with petitioner's assertion that

he is excepted from the prohibited transaction rules because,

he contends, he was the only beneficiary of the Plans.

     We disagree with petitioner that he is excepted from the

prohibited transaction rules.    He was not the MPP's only

beneficiary when he transferred the real estate to it.      Even if
                              - 12 -


 he had been, in at least one prior case, a Court of Appeals has

 held a beneficiary of a one-person pension plan liable under

 section 4975.    See Wood v. Commissioner, 955 F.2d 908 (4th Cir.

 1992).   Petitioner attempts to distinguish Wood by arguing that

 the issue there related to a satisfaction of a funding

 obligation, whereas here he transferred the real estate to the

 MPP in repayment of a loan.4   We do not believe that this bare

 difference in fact leads to a different result.    The repayment

 of a loan, like the honoring of a funding obligation, satisfies

 a debt owed by the transferor.    We see no meaningful

 distinction that may be drawn from the fact that the obligation

 in one case stems from a borrowing, whereas the obligation in

 the other stems from a contractual promise to set aside a

 stated sum of money for the benefit of plan participants.

 In both cases, a transfer is made to satisfy an obligation.

 For present purposes, the former obligation is

 indistinguishable from the latter.

        The Congress' goal in enacting section 4975 "was to bar

 categorically a transaction that was likely to injure the

 pension plan."    Commissioner v. Keystone Consol. Indus., Inc.,


    4
       Generally, any lending money between a plan and a
disqualified person is a prohibited transaction. Sec.
4975(c)(1)(B). Sec. 4975(d)(1), however, carves out an exception
in the case of certain loans that meet the criteria set forth
therein. Respondent does not assert that petitioner's loans from
the Plans were outside this exception.
                              - 13 -


508 U.S. at 160 (citing S. Rept. 93-383, supra at 95-96, 1974-3

C.B. (Supp.) at 174-175).     Before ERISA, a transfer of property

to a pension plan either to satisfy a funding obligation or to

repay a loan presented the potential for abuse.     The transferor

could transfer nonliquid assets to the plan, or he or she could

otherwise "sell" the assets to the plan at a price that was not

indicative of their true worth.     Id.   By adding section 4975 to

the Code, the Congress endeavored to bar any transfer of

property in payment of a transferor's obligation to his or her

plan.   Id.

     The type of abusive property transfer that the Congress

was concerned about appears to be present in the instant case,

where petitioner transferred a nonliquid asset to the MPP, and

the transfer was most likely injurious to the MPP.     The benefit

that the MPP would have enjoyed from a cash repayment of the

loan far exceeded any benefit that it received upon receipt of

the property.    The MPP and the DBP are separate entities, and

the fact that petitioner transferred the real estate only to

the MPP means that the MPP now owes him an amount equal to the

real estate value that exceeded his debt to the MPP before the

transfer.     Following the transfer, the MPP had minimal assets,

but for the real estate, and, in order to restore its position

and satisfy its obligation to petitioner, the MPP was required

to convert the real estate into cash.     Such a conversion is
                            - 14 -


generally problematic and costly, especially in the instant

setting where petitioner's 50-percent interest would most

likely have had to be partitioned before it could be sold.

To the extent that the excess value remained in the MPP, it

would constitute an overfunding of the MPP, which, under basic

principles of pension law, would have to be given back to the

transferor to avoid plan termination.   See sec. 1.415-9(a)(1),

Income Tax Regs.; see also Buzzetta Constr. Corp. v.

Commissioner, 92 T.C. 641 (1989).    The mere fact that the value

that petitioner transferred to the MPP may have equaled the

amount that he owed both the Plans, a fact that petitioner

asserts but which the record disproves, does not mean that both

debts are satisfied as a result of the transfer.   Indeed, it

appears that petitioner continues to owe the DBP the money

(with interest) that it lent to him because he has never

transferred any value to the DBP to repay these amounts.    The

record suggests that petitioner attempted to satisfy his

$1,150,000 obligation to the Plans by surrendering property of

inadequate value.   The property had been appraised at a total

of $2,078,000 shortly after the transfer, and the record does

not support a finding that petitioner's 50-percent interest in

the property was worth more than $1,039,000 on the date of the

transfer (i.e., 50% x $2,078,000).   Of course, it would be an

unusual case where petitioner's 50-percent undivided interest
                               - 15 -


actually equaled 50 percent of the value of the real estate in

fee.

       We also disagree with petitioner's assertion that his

transfer to the MPP was not a "sale or exchange".      In

Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. at 159,

the Supreme Court faced an analogous issue with respect to

property that had been transferred to satisfy an employer's

obligation to fund a qualified defined benefit plan.        In

holding that the transfer was a sale or exchange subject to the

rules of section 4975, the Court noted that the meaning of the

term "sale or exchange" was well settled for income tax

purposes to include any transfer of property in satisfaction of

a monetary obligation.    Id. at 158-159.     The Court stated that

the Congress' use of that term in section 4975 generally

encompassed all "sales or exchanges", whether they be "direct

or indirect".    Id. at 159.   The Court, by way of example,

described a situation where a transfer of property to a plan

was outside the reach of that term by virtue of an exception

prescribed in section 4975(f)(3).       The Court's example covered

an employer who transferred unencumbered property to a plan,

without satisfaction of an obligation to it.       Id. at 161 n.2.

As stated by the Court with respect thereto:      "A transfer of

encumbered property, like the transfer of unencumbered property

to satisfy an obligation, has the potential to burden a plan,
                              - 16 -


while a transfer of property that is neither encumbered nor

satisfies a debt presents far less potential for causing loss

to the plan."   Id. at 162.

     Contrary to petitioner's assertion, the Court's decision

in Keystone governs our decision here.   Petitioner owed the

Plans money which they had lent to him, and he transferred the

real estate to the MPP in payment of his debt to it.   Under the

Court's holding in Keystone, the fact that petitioner's

transfer to the MPP was in repayment of his debt is enough to

categorize the transfer as a "sale or exchange" for purposes of

section 4975(c)(1)(A).   Petitioner's reliance on our decisions

in Wood and Keystone to support a contrary result is misguided.

As the Supreme Court recently stated:

     When this Court applies a rule of federal law to the
     parties before it, that rule is the controlling
     interpretation of federal law and must be given full
     retroactive effect in all cases still open on direct
     review and as to all events, regardless of whether
     such events predate or postdate our announcement of
     the rule. [Harper v. Virginia Dept. of Taxation,
     509 U.S. 86, 97 (1993).]

On the basis of the Supreme Court's opinion in Commissioner v.

Keystone Consol. Indus., Inc., 508 U.S. 152 (1993), we sustain

respondent's determination that petitioner is liable for excise

taxes under section 4975(a).

     As to respondent's determination under section 4975(b),

petitioner argues that this determination is wrong because "the

tremendous appreciation in the subject real estate since the
                              - 17 -


 date of transfer (October 19, 1990) made the transaction

 self-correcting * * *.   See Zabolotny v. Commissioner, 7 F.3d

 774 (8th Cir. 1993)", affg. in part and revg. in part 97 T.C.

 385 (1991).   Respondent argues that petitioner never corrected

 the transfer, and, to the extent that the Court of Appeals for

 the Eighth Circuit held in Zabolotny that a transaction could

 self-correct, this holding is wrong and should not be followed.

 Respondent asserts that we should follow our opinion in

 Zabolotny to the effect that a "correction" requires an

 affirmative act that undoes the transfer.

        Contrary to the parties' assertion, we do not believe that

 our decision here is controlled by either opinion in Zabolotny.

 The facts of that case are significantly different than the

 facts at hand.5   In Zabolotny v. Commissioner, 97 T.C. 385

 (1991), the taxpayers, after discovering oil on their farmland,

 leased the mineral rights in the land.   During the following

 4-year period, the lease generated annual royalty income of

 approximately $1 million to $1.5 million.   On May 20, 1981,

 approximately 4 years after the start of the lease, the

 taxpayers sold their interest in the land, including the lease,


    5
       In fact, the Court of Appeals for the Eighth Circuit
explicitly recognized the uniqueness of the facts in Zabolotny,
stating: "The Zabolotnys have presented a highly unusual set of
circumstances, which are unlikely to appear in combination in a
single case". Zabolotny v. Commissioner, 7 F.3d at 774, 778 (8th
Cir. 1993), affg. in part and revg. in part 97 T.C. 385 (1991).
                              - 18 -


to an employee stock ownership plan (ESOP) that benefited the

employees of a corporation formed by the taxpayers to conduct

their farming operation.   In return for the taxpayers' interest

in the land, the ESOP agreed to pay the taxpayers a private

annuity of $478,615 per year.

     Respondent determined that the sale of the farmland to the

ESOP was a prohibited transaction under section 4975(c)(1)(A)

and that the taxpayers were liable for excise tax deficiencies

under section 4975(a) and (b).    We agreed.    Zabolotny v.

Commissioner, 97 T.C. at 399.    We held in relevant part that:

(1) The sale was a prohibited transaction, and (2) this

transaction was not "corrected", even if the transaction had

been favorable to the ESOP from the start.      Id.   We reasoned

that a "correction" occurs when the transaction is rescinded

through an affirmative act.     Id.

     Upon appeal, the Court of Appeals for the Eighth Circuit

agreed with us only as to the first issue; to wit, that the

transaction was a prohibited transaction.      Zabolotny v.

Commissioner, 7 F.3d at 777.     As to the second issue, the Court

of Appeals held that a correction may occur absent an

affirmative act of rescission.     Id. at 777-778.    The court

found that the transaction in Zabolotny corrected itself at the

end of 1981 because, at that time, the ESOP was in exceptional

financial condition and no plan beneficiary risked losing plan
                              - 19 -


benefits as a result of the prohibited transaction.     Id.   The

court noted that:     (1) The taxpayers were both the disqualified

persons and the ESOP's sole beneficiaries, (2) the prohibited

transaction proved highly productive for the ESOP from the

beginning, leaving it with assets of far greater value than it

would have accumulated from employer contributions alone, and

(3) the ESOP purchased extraordinarily valuable property that

had a 4-year history of producing royalties in the millions of

dollars.     Id.

     In contrast with Zabolotny, we are unable to find here

that the Plans were in exceptional financial condition, or that

a plan beneficiary did not risk losing plan benefits, as a

result of the prohibited transaction.     Unlike the transfer in

Zabolotny, which left the plan with assets of far greater value

than it would have accumulated from employer contributions

alone, the transfer here did not increase the assets held by

the Plans.    The transfer replaced one asset (an account

receivable) with another asset (real estate), and the asset

received by the MPP needed to be sold by it to satisfy its

obligation to petitioner (thus resulting in additional plan

expenditures).     The Plans also did not receive extraordinarily

valuable property that had a solid history of producing income

in the millions of dollars, nor did the prohibited transaction

prove highly productive for the Plans from the start.
                             - 20 -


Petitioner, the disqualified person, also was not the MPP's

sole beneficiary.    Because the MPP was not "in a financial

position not worse than that in which it would be if the

disqualified person were acting under the highest fiduciary

standards", see sec. 4975(f)(5), we sustain respondent's

determination that petitioner is liable for the second-tier

excise tax under section 4975(b).     In so doing, we note that

sections 4961(a) and 4963(e)(1) generally allow for the

abatement of a section 4975(b) second-tier tax if the

prohibited transaction giving rise thereto is corrected within

90 days after our decision sustaining the tax becomes final.

Because the issue of whether petitioner will or would qualify

for an abatement is not yet ripe for decision, we express no

opinion on this issue at this time.

     Turning to the additions to tax determined by respondent

under section 6651(a)(1), petitioner argues that these

additions do not apply because the law governing a transfer of

property to a pension plan in repayment of a loan was uncertain

when he transferred the real estate to the MPP, and it is still

uncertain today.    Respondent agrees that the law governing a

transfer of property to a pension plan was uncertain before

Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152

(1993), but points out that the Commissioner, in recognition of

this uncertainty, published rules under which taxpayers could
                                - 21 -


avoid the additions to tax under section 6651(a)(1) and (2).

Respondent argues that petitioner is liable for the additions

to tax at issue because he failed to follow these rules, and he

failed otherwise to exercise ordinary business care and

prudence.

       We hold that petitioner is not liable for the additions to

tax.    Again, we start our inquiry with the relevant text:

       SEC. 6651.    FAILURE TO FILE TAX RETURN OR TO PAY TAX.

            (a)     Additions to the Tax.--In case of failure--

                 (1) to file any return required under
            authority of subchapter A of chapter 61
            (other than part III thereof) * * * on the
            date prescribed therefor (determined with
            regard to any extension of time for
            filing), unless it is shown that such
            failure is due to reasonable cause and not
            due to willful neglect, there shall be
            added to the amount required to be shown as
            tax on such return 5 percent of the amount
            of such tax if the failure is for not more
            than 1 month, with an additional 5 percent
            for each additional month or fraction
            thereof during which such failure
            continues, not exceeding 25 percent in the
            aggregate * * *

       From this text, we understand that a taxpayer who is

required to file an excise tax return, but who does not do so

timely, is generally liable for a monthly addition to tax equal

to 5 percent of the amount of tax that should have been shown

on the return, up to a maximum charge of 25 percent.       See also

Janpol v. Commissioner, 102 T.C. 499, 500 (1994).       We also

understand that the addition to tax does not apply where the
                              - 22 -


failure to file was due to reasonable cause and not due to

willful neglect.   See also United States v. Boyle, 469 U.S.

241, 245 (1985); Janpol v. Commissioner, supra at 504.

Reasonable cause is present where the taxpayer exercised

ordinary business care and prudence but was unable to file the

return within the prescribed time.     United States v. Boyle,

supra at 245; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Willful neglect means a conscious, intentional failure or

reckless indifference.   United States v. Boyle, supra at 245.

Whether a taxpayer acts with reasonable cause, and without

willful neglect, is decided on the basis of the entire record.

Estate of Duttenhofer v. Commissioner, 49 T.C. 200, 204 (1967),

affd. 410 F.2d 302 (6th Cir. 1969).

     A disqualified person who engages in a prohibited

transaction is required to file an excise tax return for each

taxable year in the taxable period.    Secs. 4975(f)(2), 6011;

sec. 54.6011-1(b), Pension Excise Tax Regs.; see also Janpol v.

Commissioner, supra at 500.    Because petitioner was a

disqualified person who engaged in a prohibited transaction on

October 19, 1990, and the transaction remained uncorrected upon

issuance of the notice of deficiency, he was required to file

an excise tax return for 1990 and for each taxable year

thereafter up to and including 1996.    See sec. 4975(f)(2)

(absent a prior correction or a prior assessment of excise tax
                            - 23 -


on a prohibited transaction, the taxable period ends upon

issuance of a notice of deficiency).    Petitioner did not file

an excise tax return for any of these years.

     With respect to the excise tax returns which were due for

1990 and 1991, we believe that petitioner's failure to file

these returns was reasonable.   The Supreme Court had not yet

decided Keystone by the due dates for these returns; i.e.,

July 31, 1991 and 1992, respectively.   See sec. 54.6011-1(b),

Pension Excise Tax Regs.; see also Instructions to Form 5330,

at 2 ("For taxes due under sections * * * 4975 * * *, file

Form 5330 by the last day of the 7th month after the end of the

tax year of the employer or other person who must file this

return.").   Although Keystone later became the law that we

apply herein, we do not impute the knowledge of this law to

petitioner with respect to 1990 and 1991.   Reasonable cause

and the absence of willful neglect are gauged at the time that

a return is due, and we bear in mind only the information that

the taxpayer knew (or could have known) on that date.   See

Ellwest Stereo Theatres, Inc. v. Commissioner, T.C. Memo.

1995-610; see also Industrial Indem. v. Snyder, 54 AFTR 2d

84-5127, 84-1 USTC par. 9507 (E.D. Wash. 1984).    The mere fact

that an individual never files a return for a given year does

not necessarily mean that he or she is liable under section

6651(a)(1) for an addition to that year's tax.    Although
                               - 24 -


  a predecessor of section 6651(a)(1) provided explicitly that

  reasonable cause could not be present where, as is the case

  here, the taxpayer never filed a return, see Revenue Act of

  1928, ch. 852, sec. 291, 45 Stat. 857,6 section 406 of the

  Revenue Act of 1935, ch. 829, 49 Stat. 1027, removed the

  prerequisite of a return for a finding of reasonable cause, and

  it ceases to be a prerequisite today, see sec. 6651(a)(1); see

  also Bowlen v. Commissioner, 4 T.C. 486, 494 (1944); Estate of

  Kirchner v. Commissioner, 46 B.T.A. 578 (1942).

         The knowledge that we do impute to petitioner with respect

  to 1990 and 1991 is that this Court had held twice before

  July 31, 1991, that a transfer of unencumbered property to a

  pension plan in satisfaction of a funding obligation was not

  reportable on a Federal excise tax return.   Although the Court

  of Appeals for the Fourth Circuit reversed one of these

  decisions before July 31, 1992, see Wood v. Commissioner,

  955 F.2d 908 (4th Cir. 1992), the Court of Appeals for the

  Fifth Circuit affirmed the other decision 2 months before that


     6
       Sec. 291 of the Revenue Act of 1928, ch. 852, 45 Stat.
857, provides:

          In case of any failure to make and file a return
     required by this title, within the time prescribed by
     law * * *, 25 per centum of the tax shall be added to
     the tax, except that when a return is filed after such
     time and it is shown that the failure to file it was
     due to reasonable cause and not due to willful neglect
     no such addition shall be made to the tax.* * *
                            - 25 -


reversal, see Keystone Consol. Indus., Inc. v. Commissioner,

951 F.2d 76 (5th Cir. 1992).   With the state of the law as such

on the due dates of the 1990 and 1991 returns, we believe that

petitioner had reasonable cause for failing to file those

returns.   Although the Commissioner, 2 years after the Supreme

Court's holding in Keystone, generally reminded taxpayers that

they needed to file excise tax returns for all transfers of

property to their pension plans and provided rules under which

the Government would not impose additions to tax for failing to

file these returns timely, see Announcement 95-14, 1995-8

I.R.B. 47, we are unable to conclude that this announcement had

any bearing on additions to tax relating to returns which were

due before the date on which the announcement was published.

We repeat, for emphasis, that reasonable cause and the absence

of willful neglect must be gauged at the time that a return is

due, and the fact that a reasonable person may learn after that

time that his or her position is incorrect does not mean that

the position was unreasonable on the due date.   See Ellwest

Stereo Theatres, Inc. v. Commissioner, supra; see also

Industrial Indem. v. Snyder, supra.

     As to the remaining years, i.e., 1992 through 1996, we

also do not believe that it was unreasonable for petitioner to

have failed to file excise tax returns.   On the basis of the

state of the law on the relevant filing dates, a reasonable
                            - 26 -


person in petitioner's shoes could have concluded that excise

tax returns were not required for those years.   The law

governing a transfer of unencumbered property to a pension plan

in satisfaction of a loan was, up until today, not squarely

addressed by a court, and we believe that a reasonable person

could have concluded on the basis of existing case law that an

excise tax return was not required in such a situation.    We

also take into account Zabolotny and the issue of whether a

prohibited transaction can correct itself absent an affirmative

act of rescission.   Although we held in that case that the

prohibited transaction could not correct itself without

rescission, our decision was reversed upon appeal.   The Court

of Appeals concluded that section 4975 applied only to the

first year in issue because the transaction self-corrected.

     We conclude that a reasonable person in the position of

petitioner as of the respective due dates of the 1992 through

1996 excise tax returns could have concluded that the relevant

transfer was not a prohibited transaction, or, if it was, that

it had been corrected earlier.

     We have carefully considered all remaining arguments made

by the parties for holdings contrary to those expressed herein,

and, to the extent not discussed above, find them to be

irrelevant or without merit.

     To reflect the foregoing,
- 27 -


         Decision will be entered for

  respondent as to the deficiencies

  and for petitioner as to the

  additions to tax.
