                               T.C. Memo. 2012-329



                         UNITED STATES TAX COURT



     THOMAS S. GLUCKMAN AND ROBY R. GLUCKMAN, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 21175-09.                        Filed November 28, 2012.



      Kathleen R. Barrow and Heather C. Panick, for petitioners.

      Brian J. Bilheimer and Brian E. Derdowski, Jr., for respondent.



                           MEMORANDUM OPINION


      COHEN, Judge: Respondent determined a deficiency of $754,653 and a

section 6662(a) penalty of $150,930.60 with respect to petitioners’ joint Federal

income tax return for 2003. The issues for decision are: (1) whether petitioners

were required to include in income the value of two cash value insurance policies
                                         -2-

[*2] on their lives that were held by a purported section 419A(f)(6) welfare benefit

plan from which petitioners’ employer withdrew; and (2) whether petitioners are

liable for an accuracy-related penalty under section 6662. Unless otherwise

indicated, all section references are to the Internal Revenue Code (Code) in effect

for the year in issue, and all Rule references are to the Tax Court Rules of Practice

and Procedure.

                                     Background

      This case was submitted fully stipulated under Rule 122. The stipulated facts

and accompanying exhibits are incorporated in our findings by this reference. At the

time the petition was filed, petitioners resided in New York.

      Petitioners are married to each other and at all relevant times together were

the majority stockholders in Fownes Brothers & Co., Inc. (Fownes). Fownes is a

corporation that designs and manufactures apparel accessories, including boots and

gloves. Petitioners each owned 28.94% of the Fownes stock. The remainder was

held by petitioners’ son and daughter, each of whom owned 21.06% of the Fownes

stock. Petitioners were the only directors of Fownes and, during 1999 through

2003, also were employees of the corporation. In addition, Mr. Gluckman served as

president of Fownes.
                                         -3-

[*3] The Advantage Death Benefit Plan

      The Advantage Death Benefit Plan and Trust (Advantage Plan) purported to

be a “10 or more employer” welfare benefit plan under section 419A(f)(6) providing

preretirement life insurance to covered employees who were the beneficiaries of the

trust. The plan was not a tax-exempt trust. An employer that chose to participate in

the plan contributed money to the Advantage Plan trust. In exchange, the

Advantage Plan would pay death benefits for covered employees of the participating

employer in accordance with an agreed upon level of death benefits.

      To fund the benefits payable to covered employees, the Advantage Plan used

participating employers’ contributions to acquire cash value life insurance policies

(underlying policies) on the lives of the employees, and the plan withdrew funds

from the trust as needed to pay the premiums for the underlying policies. The

Advantage Plan trustee was required to be the owner and beneficiary of the

underlying policies.

      The marketing brochure for the Advantage Plan advertised the plan as a tax-

advantaged welfare benefit plan for professionals, entrepreneurs, and closely held

businesses. Participating employers were assured that their contributions to the

Advantage Plan were tax deductible, that plan assets would grow on a tax-deferred
                                         -4-

[*4] basis, and that participation in the plan would allow the employer to provide a

select group of employees with benefits that could be used to “fund buy/sell

arrangements, estate tax and business continuation programs with pre-tax dollars.”

Fownes’ Participation in the Advantage Plan

       Petitioners were introduced to the Advantage Plan by their insurance agent

and financial adviser, Lance Rembar. On or about December 15, 1999, Fownes

adopted the Advantage Plan. Thomas S. Gluckman (petitioner) was initially

designated a covered employee, and the next year Fownes designated Roby R.

Gluckman an additional covered employee effective January 1, 2000. In connection

with petitioners’ participation in the Advantage Plan, life insurance policies insuring

petitioners’ lives were selected, and the premiums were paid by the Advantage Plan

trustee.

       At the time Fownes adopted the Advantage Plan, it was administered by

Benistar Admin. Services, Inc. Beginning January 1, 2001, and continuing through

2003, BISYS Insurance Services, Inc. (BISYS) was the plan’s administrator and

sponsor.
                                           -5-

[*5] Under both the original adoption agreement executed in 1999 and the

addendum to adoption agreement executed in 2000, covered employees were,

among other things, required to be actively employed by the employer. The

Advantage Plan featured a nonreversionary clause that prohibited an employer’s

contributions from being recovered by the employer or being used for purposes

other than for the exclusive benefit of the covered employees in the Advantage Plan

or in a succeeding welfare benefit plan.

      The plan provided that an employer could terminate its participation at any

time. In that event, the plan trustee was to value the portion of the trust attributable

to benefits funded by the withdrawing employer and, after ensuring that the

withdrawing employer’s share of expenses and liabilities was paid, the plan was

required to allow the covered employees to purchase their underlying policies.

Upon an employer’s withdrawal, the plan also was permitted to distribute the

underlying policies to the covered employees, so long as an actuary retained by the

plan determined that sufficient benefits remained in the plan to meet the plan’s

benefit requirements. Finally, the plan permitted the underlying policies to be

distributed to successor welfare benefit plans that provided similar benefits.
                                         -6-

[*6] Termination of the Advantage Plan

      In 2002 the Internal Revenue Service (IRS) issued proposed regulations

relating to 10 or more employer welfare benefit plans under section 419A(f)(6).

See sec. 1.419A(f)(6)-1, Proposed Income Tax Regs., 67 Fed. Reg. 45933 (July 11,

2002). Concluding that the Advantage Plan would not satisfy the proposed

regulations should they become final, BISYS decided to terminate the Advantage

Plan effective December 31, 2003. Starting in January 2003 and continuing

throughout the year, BISYS sent a series of letters and memoranda to insurance

agents, brokers, and participating employers to advise them of the approaching

termination of the Advantage Plan and the options that participating employers and

employees had as a result of the termination.

      In one such letter sent to petitioner on May 14, 2003, BISYS stated:

      [E]mployers should consider taking steps to voluntarily terminate their
      participation in The Advantage Plan before December 31, 2003 and
      electing one of the alternatives outlined below. Otherwise, after
      December 31, 2003, an employer’s participation in The Advantage
      Plan will automatically terminate, resulting in the surrender of any
      policies remaining in the Trust, a reallocation of the cash surrender
      values, and a distribution of the assets to participants. Employers that
      do not voluntarily terminate participation in The Advantage Plan on or
      before December 31, 2003 will not have the option of electing one of
      the alternatives outlined below.
                                        -7-

      [*7] Alternative One -- Employees Retain Policies
      First, the employer terminates its participation in The Advantage Plan.
      Second, the policies are rolled-out to the
      employees and the employees are taxed on the reallocated net cash
      surrender value of the policies in accordance with the Advantage Plan
      document.

      Alternative Two -- Employer Adopts The Advantage DBO Plan
      [another BISYS-sponsored plan that purported to be a 10 or more
      employer welfare benefit plan under section 419A(f)(6)]
      First, the employer terminates its participation in The Advantage Plan.
      Second, the policies are rolled-out to the employees and the employees
      are taxed on the reallocated net cash surrender value of the policies.
      Third, the employer adopts The Advantage DBO Plan and the rolled-
      out policies may in some instances be used as a funding vehicle for The
      Advantage DBO Plan * * *

      Please note that a trustee-to-trustee transfer (i.e., from The Advantage
      Plan to another welfare benefit plan such as The DBO Plan) is not
      permitted under applicable IRS regulations. [Emphasis added.]

      In July 2003, final regulations for 10 or more employer plans were issued by

the IRS. See T.D. 9079, 2003-2 C.B 729. In October 2003, Rembar sent a memo

to Fownes titled “Life Insurance Planning and 419: Moving Forward”. Rembar

advised Fownes to withdraw from the Advantage Plan to avoid the less favorable

consequences that would result from BISYS’ surrender of the policies upon plan

termination. He stated that, after Fownes’ withdrawal, the underlying policies

held by the Advantage Plan could be distributed to petitioners or to another

section 419A(f)(6) welfare benefit plan that met the requirements of the new
                                         -8-

[*8] regulations. Rembar recommended that Fownes consider the Millennium

Multiple Employer Welfare Benefit Plan (Millennium Plan). He explained:

             In the absence of notification by the participating employers,
      BISYS intends to start surrendering to the [insurance] carriers the
      existing trusted [sic] policies. The resulting pool of net cash surrender
      funds will after year-end be distributed to the remaining no-longer
      insured participants. This is not a desirable outcome.

            Fownes should promptly send plan termination notice to BISYS.
      Following the effective termination date * * *, Fownes would have, at
      the most, 60 days to decide on the future structure for the policies.
      Termination means that the policies would be distributed intact, not
      surrendered. If distributed to a welfare benefit trust, the transfer should
      be a non-taxable event.

      *           *          *           *          *           *           *

             The non-419 route would be to have the policies distributed to
      the insureds. Presumably BISYS would issue a [Form] 1099 on the
      policy’s value. * * *

             Alternatively, Fownes could continue the premium deductible
      approach by using the Millennium Plan. BISYS would transfer the
      policies to the Millennium Plan. This plan-to-plan transfer should
      avoid the 1099 problem.

      On October 17, 2003, having been advised that Fownes wished to withdraw

from the Advantage Plan, BISYS sent a letter to Fownes, care of petitioner,

requesting a certified copy of a corporate resolution authorizing Fownes’

withdrawal from the plan. The letter explained that part of the withdrawal process

was for an employer to reallocate the net surrender values of the underlying
                                         -9-

[*9] policies among its participants using a formula that took into account the

amount of the participants’ wage income over the course of their participation in the

Advantage Plan. The purpose of this reallocation was to determine what amount, if

any, employees who received distribution of the underlying policies would be

required to include in taxable income. The letter further advised that “[t]axes may

be due, please consult with your tax advisor regarding tax consequences of this

transaction.” A sample corporate resolution and a form to be signed by all Fownes

participants waiving their rights to purchase the insurance policies held by the

Advantage Plan trust were attached to this letter.

      Fownes submitted a corporate resolution dated October 24, 2003, authorizing

Fownes’ withdrawal from the Advantage Plan effective November 28, 2003.

Fownes also submitted the form, signed by petitioners and two other Fownes

participants, by which the Fownes participants waived their rights to purchase the

underlying policies.

      After receiving Fownes’ corporate resolution and signed participant waiver

form, on November 6, 2003, BISYS sent partially completed change of ownership

and blank change of beneficiary designation forms, as well as the Fownes

participants’ underlying policies, to Fownes, care of petitioner. The change of

ownership forms were already endorsed by the Advantage Plan trustee as the
                                       - 10 -

[*10] current owner of the policies. The letter advised that the forms should be

completed (for the change of ownership form this was by inserting new owner

information and obtaining the new owner’s endorsement), then sent directly to the

insurance carrier. The forms and the original insurance policies also were provided

to petitioners’ insurance agent.

      On December 17, 2003, petitioner signed an adoption agreement for Fownes

to participate in the Millennium Plan. On January 16, 2004, completed change of

ownership forms for the underlying policies covering petitioners were sent to the

Millennium Plan trustee for endorsement as the new owner of the policies.

      On February 13, 2004, the insurance carrier confirmed to BISYS that the

owner and beneficiary for petitioners’ underlying policies had been changed from

the Advantage Plan trustee to the Millennium Plan trustee. Immediately following

that confirmation, BISYS sent letters to petitioners stating: “We have completed

your employer’s termination from the Advantage Death Benefit Plan. You should

be receiving tax information from your employer in regards to the termination of the

Advantage Death Benefit Plan. Please make sure to communicate that information

to your accountant.”
                                        - 11 -

[*11] Petitioners’ Tax Returns and Examination

      Petitioners did not include in taxable income for 2003 any amount related to

the underlying policies as a result of Fownes’ withdrawal from the Advantage Plan.

However, petitioners did include in taxable income for 2002 and 2003 a total of

$80,250, which was the estimated value of current insurance benefits of petitioners’

underlying policies.

      Respondent conducted an examination of petitioners’ 2003 jointly filed

income tax return and determined that petitioners had unreported income of

$2,093,350. This amount represented the value of petitioners’ underlying policies at

or near the time that Fownes withdrew from the Advantage Plan, less the $80,250

petitioners previously reported in connection with those policies.

                                     Discussion

Underlying Insurance Policies

      Generally, taxpayers bear the burden of proving that the Commissioner’s

determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). The burden of proof may shift to the Commissioner if the taxpayers

establish that they complied with the requirements of section 7491(a)(2)(A) and (B)

to substantiate items, to maintain required records, and to cooperate fully with
                                          - 12 -

[*12] the Commissioner’s reasonable requests. However, we decide this matter on

the preponderance of the evidence and, therefore, the burden of proof is not

relevant. See Estate of Black v. Commissioner, 133 T.C. 340, 359 (2009); Knudsen

v. Commissioner, 131 T.C. 185, 189 (2008).

       Respondent contends that, under section 402(b)(1), petitioners received

taxable income in the amount of the value of their underlying policies because their

interests in the Advantage Plan trust were substantially vested when Fownes

submitted its resolution authorizing withdrawal from the Advantage Plan.

Alternatively, respondent contends that petitioners received taxable income under

section 402(b)(2) when the Advantage Plan distributed the policy change of

ownership and change of beneficiary designation forms to petitioners.

       Petitioners argue that they did not receive taxable income relative to the

underlying policies because they never owned the policies, they did not control the

policies, and their interests in the policies were at all times subject to a substantial

risk of forfeiture.

       An employee trust is a nonexempt trust if it is not exempt from taxation under

section 501(a). See sec. 402(b)(1). The Advantage Plan was an employees’ trust

that was not exempt from tax and thus was subject to section 402(b) and the
                                        - 13 -

[*13] regulations thereunder. See, e.g., Schwab v. Commissioner, 136 T.C. 120,

127 (2011).

      Section 402(b)(1) provides that employer contributions made to a nonexempt

employee trust are included in the gross income of the employee to the extent that

the employee’s interest in such contribution is substantially vested (within the

meaning of section 1.83-3(b), Income Tax Regs.) at the time the contribution is

made. See sec. 1.402(b)-1(a)(1), Income Tax Regs. If the rights of an employee

under a nonexempt employee trust become substantially vested during a taxable

year of the employee and the taxable year of the trust ends with or within such year,

the value of the employee’s interest in the trust on the date of such change is

included in the employee’s gross income for that taxable year. See sec. 1.402(b)-

1(b)(1), Income Tax Regs.

      The “value of an employee’s interest in a trust” means the amount of the

employee’s beneficial interest in the trust as of any date on which some or all

of the employee’s interest in the trust becomes substantially vested. See sec.

1.402(b)-1(b)(2)(i), Income Tax Regs. The parties do not dispute that the proper

measure of the value of the underlying policies is the policies’ accumulation

account values (the values of the insurance policies before imposition of surrender
                                          - 14 -

[*14] charges). The amounts of the policies’ accumulation account values at or near

the time period in issue also are not in dispute.

      An employee’s interest in property is substantially vested when it is either

transferable or is not subject to a substantial risk of forfeiture. Sec. 1.83-3(b),

Income Tax Regs. Whether a risk of forfeiture is substantial depends on the facts

and circumstances. Sec. 1.83-3(c)(1), Income Tax Regs. A substantial risk of

forfeiture exists “where rights in property that are transferred are conditioned,

directly or indirectly, upon the future performance (or refraining from performance)

of substantial services by any person, or the occurrence of a condition related to a

purpose of the transfer, and the possibility of forfeiture is substantial if such

condition is not satisfied.” Id.

      Because of the Advantage Plan’s requirement that covered employees

continue to be employed by the participating employer to remain eligible for

benefits, the parties treat petitioners’ interests in the Advantage Plan as being

subject to a substantial risk of forfeiture before Fownes submitted its corporate

resolution authorizing withdrawal from the plan. Consequently, the treatment of

Fownes’ contributions to the Advantage Plan from 1999 through 2002 and the status

of petitioners’ interests in the Advantage Plan trust before Fownes’ withdrawal from

the plan are not in issue.
                                          - 15 -

[*15] Once Fownes submitted its resolution in October 2003, however, the situation

was markedly different. Continued employment was no longer a requirement and,

under the relevant Advantage Plan provisions, it appears that there were three

options for disposition of the underlying policies when an employer withdrew from

the plan: (1) the plan could offer the policies for purchase by the covered

employees, (2) the plan could distribute the policies to the covered employees, or

(3) the plan could transfer the policies to another welfare benefit plan for the

covered employees.

      As part of the withdrawal process, all of the covered employees of Fownes,

including petitioners, signed a form waiving the right to purchase the underlying

policies. Additionally, the series of letters the Advantage Plan sent to insurance

agents and brokers and participating employers indicated that the plan would not be

facilitating direct or trustee-to-trustee transfers of the underlying policies to other

welfare benefit plans. Under the plan’s stated procedures, that appears to have left

only one alternative, which was distribution to the covered employees. In light of

the scheduled termination of the plan, BISYS apparently waived the plan’s

requirement that an evaluation of plan assets and liabilities be performed before

distributing the policies to covered employees. There is no mention of this
                                         - 16 -

[*16] requirement in any of BISYS’ communications in 2003 with respect to an

employer’s withdrawal from the plan.

      Therefore, consistent with the Advantage Plan’s provisions and the plan

withdrawal procedures communicated to participating employers, at that point it

appears that the underlying policies were substantially certain to be distributed to

petitioners or placed within their control. Even if transfers to other welfare benefit

plans were still being permitted by BISYS at that time, subsequent events

demonstrate that the policies were placed within petitioners’ control no later than

early November 2003. After receiving the resolution, BISYS sent endorsed,

partially completed change of ownership forms that lacked only the new owner

information and sent blank change of beneficiary designation forms, as well as

duplicate copies of the policies, to petitioner’s attention. The forms and the

original insurance policies also were provided to petitioners’ insurance agent.

These actions placed petitioners’ underlying policies squarely within their control

because petitioners were then free to name the policies’ new owner and beneficiary,

which could have been themselves or another welfare benefit plan. When a

taxpayer has dominion and control over property, the value of such property

generally will be included in his or her gross income. See Cadwell v.

Commissioner, 136 T.C. 38, 52-56 (2011), aff’d without published opinion, 109
                                        - 17 -

[*17] A.F.T.R.2d (RIA) 2012-2693 (4th Cir. 2012); Chambers v. Commissioner,

T.C. Memo. 2011-114.

      This case is very similar to Cadwell. In that case, the taxpayer was an

employee and the only officer of an S corporation. The taxpayer’s wife was the sole

shareholder and director of the S corporation. The S corporation participated in a

10 or more employer plan under section 419A(f)(6), and the taxpayer was a covered

employee under that plan, which held an underlying insurance policy covering the

taxpayer. The plan sponsor subsequently converted the multiple-employer plan to a

single-employer plan, and we held that, upon conversion, the taxpayer’s interest in

the plan became substantially vested. The deciding factor with regard to that issue

was one of control. After the plan was converted to a single-employer plan,

because of the taxpayer’s position in the corporation and his close relationship to

the sole shareholder, he had the ability to control the assets of the plan and was

therefore required to include in his taxable income the value of his underlying

insurance policy, which represented his interest in the plan.

      There are some factual differences between this case and Cadwell. Here we

are concerned with the withdrawal of an employer from a purported section

419A(f)(6) plan rather than the conversion of a welfare benefit plan from a

multiple-employer plan to a single-employer plan. The holding in Cadwell,
                                         - 18 -

[*18] however, makes the taxpayer’s ability to control the property in question the

key factor to consider. In Cadwell, the taxpayer’s interest was substantially vested

because he gained the ability to control the plan assets when the plan was converted

to a single-employer plan. Here, either at the time Fownes submitted its corporate

resolution withdrawing from the plan or when the change of ownership and

beneficiary forms were sent to them, petitioners gained the ability to control their

underlying policies.

      Petitioners contend, however, that their interests could not have

substantially vested because the underlying policies were at all times owned by a

welfare benefit plan and subject to a substantial risk of forfeiture. They argue that

transfers to other welfare benefit plans were still being permitted by the Advantage

Plan and that the transfer of the policies from the Advantage Plan to the

Millennium Plan was a nontaxable trustee-to-trustee transfer. In support of this

argument, petitioners cite Rev. Rul. 67-213, 1967-2 C.B. 149, and Rev. Rul. 78-

406, 1978-2 C.B. 157. In Rev. Rul. 67-213, supra, the IRS concluded that where

funds were transferred from one qualified employee plan to another qualified

employee plan without being made available to the participants, the participants

did not have taxable income. In Rev. Rul. 78-406, supra, the IRS extended this
                                         - 19 -

[*19] treatment to trustee-to-trustee transfers from one individual retirement account

to another.

      This Court is not bound by interpretations of the law in revenue rulings. See

Johnson v. Commissioner, 115 T.C. 210, 224 (2000); Stark v. Commissioner, 86

T.C. 243, 251 (1986). Furthermore, the IRS has not extended the reasoning in these

two revenue rulings to nonqualified plans, such as the Advantage Plan and the

Millennium Plan. Most importantly, however, even if trustee-to-trustee transfers to

other plans were still being done by the Advantage Plan, such a transfer simply did

not occur here. BISYS distributed the change of ownership and change of

beneficiary designation forms to petitioners, the covered employees, in care of

Fownes and to petitioners’ insurance agent, not to another plan trustee.

      Once the change of ownership and change of beneficiary designation forms

were received, petitioners had the ability to name themselves or another welfare

benefit plan as the owner and beneficiary of the underlying policies. Because the

policies were subject to petitioners’ direct control, the transaction was not a

trustee-to-trustee transfer. See Jankelovits v. Commissioner, T.C. Memo. 2008-

285 (a trustee-to-trustee transfer is one in which the beneficiary does not gain

control or use of the funds); Crow v. Commissioner, T.C. Memo. 2002-178
                                          - 20 -

[*20] (trustee-to-trustee transfer treatment only applies where the funds are not

within the direct control or use of the participant).

      Petitioners also argue that their interests were not substantially vested

because after Fownes submitted its resolution authorizing withdrawal from the

Advantage Plan, Fownes, through its board of directors, had the ability to control

the underlying policies. They contend that Fownes made the decision to adopt the

Millennium Plan and determined who would be covered by that plan.

      Section 1.83-3(c)(3), Income Tax Regs., is instructive in this situation. In

instances where an employee of a corporation owns a significant amount of the total

combined voting power or value of all classes of stock of the employer corporation,

in determining whether an employee’s interest in transferred property is subject to a

substantial risk of forfeiture the following factors are taken into account:

      (i) the employee’s relationship to other stockholders and the extent of
      their control, potential control and possible loss of control of the
      corporation, (ii) the position of the employee in the corporation and the
      extent to which he is subordinate to other employees, (iii) the
      employee’s relationship to the officers and directors of the corporation,
      (iv) the person or persons who must approve the employee’s discharge,
      and (v) past actions of the employer in enforcing the provisions of the
      restrictions. * * * [Id.]

      Petitioners are the only directors of Fownes, and petitioner also serves as

president of the corporation. Petitioners are married and together are the majority
                                         - 21 -

[*21] stockholders in Fownes. The remainder of the Fownes stock is owned by

petitioners’ son and daughter. The record does not contain any evidence of strife in

the working or personal relationships of the family members. Petitioners clearly had

the ability to control Fownes’ decision-making process and thus had the ability to

control their underlying policies. See, e.g., Cadwell v. Commissioner, 136 T.C. at

54-55.

         Petitioners’ arguments are unpersuasive, and we determine that petitioners’

interests in the Advantage Plan, represented by their underlying policies, were

substantially vested under section 402(b)(1) in 2003. Therefore, we do not consider

respondent’s argument that petitioners had taxable income under section 402(b)(2).

Section 6662 Penalty

         Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on any underpayment of Federal income tax attributable to a taxpayer’s negligence

or disregard of rules or regulations or substantial 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
                                         - 22 -

[*22] correctness of a tax return position that is contrary to the rule or regulation.

Sec. 1.6662-3(b)(2), Income Tax Regs. An understatement of income tax is

substantial if it exceeds the greater of 10% of the tax required to be shown on the

return or $5,000. Sec. 6662(d)(1)(A).

      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). Because the understatement of income tax is substantial,

respondent has satisfied the burden of producing evidence that the penalties are

appropriate.

      Once the Commissioner has met the burden of production the taxpayer must

come forward with persuasive evidence that the penalty is inappropriate because he

or she acted with reasonable cause and in good faith. See sec. 6664(c)(1); Higbee

v. Commissioner, 116 T.C. at 447, 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. See sec. 1.6664-

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

      Petitioners have not addressed the reasonable cause or good faith defenses to

the section 6662 penalty. See sec. 6664(c)(1); Higbee v. Commissioner, 116
                                         - 23 -

[*23] T.C. at 448-449. Petitioners simply claim that they did not have unreported

income for 2003, a claim that we have rejected for the reasons stated above. They

argue that ownership of the policies did not change until 2004. Petitioners

apparently relied on their insurance agent and financial adviser in determining that

they were not required to include the value of their underlying policies in their

income for 2003. However, they produced no evidence indicating that he was

competent to give tax advice. Petitioners’ income tax return for 2003 was prepared

by an accounting firm, but they provided no details regarding what information they

gave to their accountant or what the accountant’s advice was. We therefore sustain

the penalty.

      In reaching our conclusions, we have considered all arguments made by the

parties and, to the extent not mentioned above, we conclude they are moot,

irrelevant, or without merit.

      To reflect the foregoing,


                                                  Decision will be entered for

                                            respondent.
