                        T.C. Memo. 2010-202



                      UNITED STATES TAX COURT



           MCGEHEE FAMILY CLINIC, P.A., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     ROBERT L. PROSSER III & MARY C. PROSSER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 15646-08, 15647-08.     Filed September 15, 2010.



     Ira B. Stechel, for petitioners.

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

respondent.



                        MEMORANDUM OPINION


     COHEN, Judge:   These consolidated cases are before the Court

on petitions for redetermination of two statutory notices of

deficiency.   With respect to McGehee Family Clinic, P.A.,
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respondent determined a deficiency in Federal income tax for the

tax year ended March 31, 2005, of $16,042 and a penalty under

section 6662A of $4,812.47.    With respect to Robert and Mary

Prosser, respondent determined a deficiency in Federal income tax

for 2004 of $17,500 and a penalty under section 6662A of $3,500.

The principal issue in these cases is whether amounts paid by

McGehee Family Clinic in connection with the Benistar 419 Plan &

Trust are deductible.   Regarding this issue, petitioners have

each signed a stipulation to be bound by the decision of the

highest court resolving Mark Curcio and Barbara Curcio, docket

No. 1768-07, Ronald D. Jelling and Lorie A. Jelling, docket No.

1769-07, Samuel H. Smith, Jr., and Amy L. Smith, docket No.

14822-07, or Stephen Mogelefsky and Roberta Mogelefsky, docket

No. 14917-07 (collectively, the controlling cases), which were

consolidated for trial, briefing, and opinion.    The remaining

issue in these consolidated cases is whether petitioners are each

liable for a section 6662A accuracy-related penalty.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

                              Background

     All of the facts have been stipulated, and the stipulated

facts are incorporated as our findings by this reference.    The

parties have stipulated that the proper venue for an appeal of
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this decision is the Court of Appeals for the Second Circuit.

See sec. 7482(b)(2).

     The relevant facts largely concern petitioners’ involvement

in the Benistar 419 Plan & Trust (Benistar Plan), which was

discussed in Curcio v. Commissioner, T.C. Memo. 2010-115.     The

parties have stipulated into the record in this case the evidence

and trial testimony from Curcio, with only minor additions or

clarifications that apply to petitioners.   We therefore

incorporate by this reference our findings in Curcio regarding

the policies and mechanics of Benistar Plan.

     Benistar Plan 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.

Employers enroll in Benistar Plan and make contributions to a

trust account for the benefit of select employees.   In return,

Benistar Plan promises to pay death benefits to those employees

if they die while employed.   Benistar Plan has advertised that

enrolled employers’ contributions are deductible.

     Benistar Plan uses employers’ contributions to acquire one

or more life insurance policies on employees covered by the plan.

We refer to these life 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.
                               - 4 -

Benistar Plan withdraws from the trust account as necessary to

pay the premiums on the underlying policies.

     Petitioner McGehee Family Clinic, an entity taxed as a C

corporation, enrolled in Benistar Plan in May 2001.   McGehee

Family Clinic first claimed a deduction for a contribution to

Benistar Plan on its return filed July 8, 2002, for its tax year

ended March 31, 2002.   McGehee Family Clinic contributed $50,000

to Benistar Plan in connection with plan participation in 2004.

It claimed a deduction of $45,833 relating to the contribution to

Benistar Plan during the corporation’s tax year ended March 31,

2005.   McGehee Family Clinic’s return did not include a Form

8886, Reportable Transaction Disclosure Statement, or materially

similar document.   In a notice of deficiency dated March 21,

2008, the Internal Revenue Service (IRS) disallowed McGehee

Family Clinic’s deduction of the contribution to Benistar Plan.

     Petitioner Robert Prosser was a shareholder of McGehee

Family Clinic at all relevant times.   The Robert and Mary

Prosser’s jointly filed return for 2004 did not include a Form

8886 or materially similar document.   In a notice of deficiency

dated March 21, 2008, the IRS adjusted the Prossers’ 2004 income

to include the $50,000 payment to Benistar Plan from McGehee

Family Clinic.
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                            Discussion

     Section 6662A was enacted as part of the American Jobs

Creation Act of 2004, Pub. L. 108-357, section 812(a), 118 Stat.

1577.   It is effective for tax years ending after October 22,

2004.   Id. sec. 812(f), 118 Stat. 1580.   It provides that “If a

taxpayer has a reportable transaction understatement for any

taxable year, there shall be added to the tax an amount equal to

20 percent of the amount of such understatement.”     Sec. 6662A(a).

The penalty applies to any deficiency which is attributable to

any listed transaction or any reportable transaction if a

significant purpose of the transaction is the avoidance or

evasion of Federal income tax.    Sec. 6662A(b)(2).   The penalty is

increased from 20 to 30 percent of the amount of the

understatement if the disclosure requirements of section

6664(d)(2)(A), requiring disclosure in accordance with the

regulations prescribed under section 6011, are not met.    Sec.

6662A(c).

     Respondent argues that petitioners are liable for the

penalty because they participated in a listed transaction.    A

listed transaction is a transaction that is the same as or

substantially similar to one of the types of transactions that

the IRS has determined to be a tax avoidance transaction and has

identified by notice, regulation, or other form of published

guidance as a listed transaction.    Sec. 6707A(c)(2); sec. 1.6011-
                              - 6 -

4(h), Income Tax Regs. (incorporating by reference section

1.6011-4T(b)(2), Temporary Income Tax Regs., 65 Fed. Reg. 11207

(Mar. 2, 2000)); see Blak Invs. v. Commissioner, 133 T.C. ___,

___, ___ (2009) (slip op. at 23, 29-32).   Respondent claims that

Benistar Plan is substantially similar to the transaction

described in Notice 95-34, 1995-1 C.B. 309, and first identified

as a listed transaction in Notice 2000-15, 2000-1 C.B. 826.

     Notice 95-34, 1995-1 C.B. at 309-310, states:

          In recent years a number of promoters have offered
     trust arrangements that they claim satisfy the
     requirements for the 10-or-more-employer plan exemption
     and that are used to provide benefits such as life
     insurance, disability, and severance pay benefits.
     Promoters of these arrangements claim that all employer
     contributions are tax-deductible when paid, relying on
     the 10-or-more-employer exemption from the section 419
     limits and on the fact that they have enrolled at least
     10 employers in their multiple employer trusts.

          These arrangements typically are invested in
     variable life or universal life insurance contracts on
     the lives of the covered employees, but require large
     employer contributions relative to the cost of the
     amount of term insurance that would be required to
     provide the death benefits under the arrangement. The
     trust owns the insurance contracts. The trust
     administrator may obtain the cash to pay benefits,
     other than death benefits, by such means as cashing in
     or withdrawing the cash value of the insurance
     policies. Although, in some plans, benefits may appear
     to be contingent on the occurrence of unanticipated
     future events, in reality, most participants and their
     beneficiaries will receive their benefits.

          The trusts often maintain separate accounting of
     the assets attributable to the contributions made by
     each subscribing employer. Benefits are sometimes
     related to the amounts allocated to the employees of
     the participant’s employer. For example, severance and
     disability benefits may be subject to reduction if the
                              - 7 -

     assets derived from an employer’s contributions are
     insufficient to fund all benefits promised to that
     employer’s employees. In other cases, an employer’s
     contributions are related to the claims experience of
     its employees. Thus, pursuant to formal or informal
     arrangements or practices, a particular employer’s
     contributions or its employees’ benefits may be
     determined in a way that insulates the employer to a
     significant extent from the experience of other
     subscribing employers.

     According to the regulations applicable to transactions

entered into on or after January 1, 2001, where the taxpayer did

not report the transaction on a tax return filed on or before

June 14, 2002, a transaction is substantially similar to a

transaction identified as a listed transaction in published

guidance if the transaction is expected to obtain the same or

similar types of tax benefits and is either factually similar or

based on the same or similar tax strategy.   Sec. 1.6011-

4T(b)(1)(i), (g), Temporary Income Tax Regs., 67 Fed. Reg. 41327,

41328 (June 18, 2002); see Blak Invs. v. Commissioner, supra at

___ (slip op. at 25).

     Benistar Plan was expected to obtain the same type of tax

benefits as listed in Notice 95-34, supra.   The tax benefit

listed in Notice 95-34, supra, is the deduction of contributions

made to the trust arrangement described within.   Benistar Plan

advertised that contributions to the plan were tax deductible.

The benefits of enrollment listed in the packet sent to newly

enrolled employers included “virtually unlimited deductions”.
                               - 8 -

     Benistar Plan was also factually similar to the plan listed

in Notice 95-34, supra, at all relevant times.   Benistar Plan was

a trust arrangement that claimed to satisfy the requirements for

the 10-or-more-employers-plan exemption under section 419A(f)(6)

and offered life insurance.   Although the record does not include

the underlying policies the Prossers selected for Benistar Plan

to purchase, we note that the policies selected by the taxpayers

in Curcio v. Commissioner, T.C. Memo. 2010-115, were

overwhelmingly variable or universal life policies.    As we noted

in Curcio, the policies required large contributions relative to

the cost of the amount of term insurance that would be required

to provide the death benefits under the arrangement.    Benistar

Plan owns the insurance contracts.

     Our holding in Curcio that contributions to Benistar Plan

were not deductible under section 162(a) was predicated upon our

conclusion that the Benistar Plan participants in those cases had

the right to receive the value reflected in the underlying

insurance policies purchased by Benistar Plan despite the fact

that the payment of benefits by Benistar Plan seemed to be

contingent upon an unanticipated event (the death of the insured

while employed).   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,
                               - 9 -

the taxpayers’ expert in Curcio assumed that there would be no

forfeitures, even though he admitted that an insurance company

would generally assume a reasonable rate of policy lapse.

     Petitioners argue that Benistar Plan has over $20 million in

forfeitures, a reflection of its rigorous enforcement of its

forfeiture policies.   However, as we noted in Curcio, it is

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.    Petitioners have failed to

clarify how the $20 million figure was calculated, so we cannot

rely upon it to counter the evidence that most participants in

Benistar Plan and their beneficiaries receive their benefits

despite the alleged contingency of those benefits on the

occurrence of an unanticipated event.

     Unlike the plan in Notice 95-34, supra, Benistar Plan does

not reduce benefits if the assets derived from an employer’s

contributions are insufficient to fund all of the benefits

promised to that employer’s employees.   However, Benistar Plan

does maintain separate accounting of the assets attributable to

contributions made by each subscribing employer in an internal

spreadsheet.   Benistar Plan permits employers to make

contributions larger than those necessary to maintain the policy;

and assuming Benistar Plan has sufficient assets to cover current

liabilities, the contribution is used only for the policy to
                               - 10 -

which it is allocated.   Because Benistar Plan obtains similar

types of tax benefits and is factually similar to the listed

transaction in Notice 95-34, supra, we conclude that Benistar

Plan is a listed transaction under section 6707A(c)(2).

     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).

     The parties agree that McGehee Family Clinic deducted an

amount related to a contribution to Benistar Plan during its

taxable year ended March 31, 2005.      McGehee Family Clinic’s

deduction of its contribution to Benistar Plan was an improper

tax treatment of an item attributable to a listed transaction.

See sec. 6662A(b).   Respondent has therefore met the burden of

showing that it is appropriate to impose a penalty on McGehee

Family Clinic under section 6662A.

     The parties do not dispute that the Prossers were covered

employees who benefited from McGehee Family Clinic’s contribution

to Benistar Plan.    Nor do they dispute that Robert Prosser was a

shareholder in McGehee Family Clinic.      Thus the amount of McGehee

Family Clinic’s contribution to Benistar Plan should have been

included in the Prossers’ income.    See HJ Builders, Inc. v.

Commissioner, T.C. Memo. 2006-278 (payments by a company for a

car used personally by a shareholder’s wife are constructive
                              - 11 -

dividends to the shareholder); Alexander Shokai, Inc. v.

Commissioner, T.C. Memo. 1992-41 (gratuitous payments by a

company to a shareholder’s wife are constructive dividends to the

shareholder), affd. 34 F.3d 1480 (9th Cir. 1994); Broad v.

Commissioner, T.C. Memo. 1990-317 (the distribution of corporate

funds to the children of controlling shareholders are deemed to

be constructive dividends to the controlling shareholders absent

a showing that the payments were made for bona fide business

purposes and were not due to family considerations); see also

58th St. Plaza Theatre, Inc. v. Commissioner, 195 F.2d 724, 725-

726 (2d Cir. 1952), affg. 16 T.C. 469 (1951).    The Prossers’

failure to include the amount of the contribution in income was

an improper tax treatment of an item attributable to a listed

transaction.   See sec. 6662A(b).   Respondent has therefore met

the burden of showing that it is appropriate to impose a penalty

on the Prossers under section 6662A.

     Respondent claims that McGehee Family Clinic is subject to

the increased 30-percent penalty.    McGehee Family Clinic filed

its Federal income tax return for the taxable year ended March

31, 2005, but did not attach a disclosure statement described in

section 1.6011-4T(c), Temporary Income Tax Regs., 67 Fed. Reg.

41327 (June 18, 2002), or any materially similar document,

indicating its participation in Benistar Plan.    McGehee Family

Clinic did not disclose its participation in Benistar Plan in
                                - 12 -

accordance with section 6664(d)(2)(A), and it is liable for the

increased 30-percent penalty.    See sec. 6662A(c).

     Section 6664(d) provides that under certain circumstances a

taxpayer may avoid section 6662A penalties if there was

reasonable cause for the taxpayer’s treatment of the reportable

or listed transaction and the taxpayer acted in good faith.

However, this exception applies only if the transaction was

disclosed in accordance with the regulations prescribed under

section 6011.   Sec. 6664(d)(2)(A).      Assuming the Commissioner has

met the burden of production regarding the penalty, the taxpayer

bears the burden of proving the penalty is inappropriate because

the taxpayer acted with reasonable cause and in good faith.      See

Williams v. Commissioner, 123 T.C. 144, 153 (2004); Higbee v.

Commissioner, supra at 446-447.

     Although petitioners claim that they “clearly disclosed

their tax deduction on the appropriate line and in statements

accompanying their [returns]”, there is no evidence that

petitioners properly disclosed their involvement in Benistar Plan

as required under section 6664(d)(2)(A).      Because petitioners

have not introduced credible evidence with respect to this issue,

they are not entitled to shift the burden of proof.      See sec.

7491(a).   We therefore conclude that petitioners are not entitled

to the exception under section 6664(d).
                              - 13 -

     Petitioners argue that “The assessment of [section 6662A]

penalties against Petitioners raises due process issues that have

been resolved in Petitioners’ favor in at least a half-dozen

Supreme Court decisions that are on point with these cases”.    As

petitioners note in their brief, to fall within the protection of

the Due Process Clause, petitioners must show that the assessment

of penalties in these cases is so harsh and oppressive as to

transgress the constitutional limitation.   See DeMartino v.

Commissioner, 862 F.2d 400, 408-409 (2d Cir. 1988), affg. 88 T.C.

583 (1987); see also United States v. Carlton, 512 U.S. 26, 30-31

(1994); Welch v. Henry, 305 U.S. 134, 147 (1938); Blodgett v.

Holden, 275 U.S. 142, 147 (1927).

     Petitioners argue that

     the violation of due process as it affects Petitioners
     in these cases is that there was no fair warning or
     ‘foreseeability’ on the part of Petitioners that a
     contribution to a welfare benefit plan in 2004 would
     render them liable for a penalty in 2008 for a failure
     to fill out a form that was unknown to them in 2004
     when the transaction was completed or in 2005 when the
     form was to be filed with the individual’s personal and
     corporate tax return.

Petitioners appear to be arguing that section 6662A is

unconstitutionally harsh and oppressive because it is being

applied retroactively and without fair warning.

     Section 6662A is not retroactive, nor is it being applied

retroactively; it was enacted October 22, 2004, and is applicable

for tax years ended after that date.   The tax years currently at
                              - 14 -

issue ended March 31, 2005, for McGehee Family Clinic and

December 31, 2004, for the Prossers.   Thus, at the time that

petitioners were deciding on the tax treatment of contributions

to Benistar Plan for the years at issue, section 6662A had

already been enacted.   Petitioners may, consistent with the Due

Process Clause, be liable for a penalty on a deficiency stemming

from a transaction entered into long before the penalty was

enacted.   See Patin v. Commissioner, 88 T.C. 1086, 1127 n.34

(1987) (increased interest charged on deficiencies from

substantial underpayments attributable to tax-motivated

transactions that occurred years before the interest rate

increase was enacted is not unconstitutional), affd. without

published opinion 865 F.2d 1264 (5th Cir. 1989), affd. without

published opinion sub nom. Hatheway v. Commissioner, 856 F.2d 186

(4th Cir. 1988), affd. sub nom. Skeen v. Commissioner, 864 F.2d

93 (9th Cir. 1989), affd. sub nom. Gomberg v. Commissioner, 868

F.2d 865 (6th Cir. 1989); DeMartino v. Commissioner, 88 T.C. at

587-588 (same); Solowiejczyk v. Commissioner, 85 T.C. 552, 555-

556 (1985) (same), affd. without published opinion 795 F.2d 1005

(2d Cir. 1986).   Petitioners’ ignorance of the law is no excuse

for their failure to comply with it.   See United States v. Intl.

Minerals & Chem. Corp., 402 U.S. 558, 563 (1971) (“The principle

that ignorance of the law is no defense applies whether the law

be a statute or a duly promulgated and published regulation.”);
                               - 15 -

Barlow v. United States, 32 U.S. 404, 411 (1833) (ignorance of

the law is no excuse in either civil or criminal cases); Dezaio

v. Port Auth., 205 F.3d 62, 64 (2d Cir. 2000) (ignorance of the

law is no excuse for missing the deadline to file a complaint for

discrimination); Pagnucco v. Pan Am. World Airways, Inc. (In re

Air Disaster at Lockerbie Scot. on Dec. 21, 1988), 37 F.3d 804,

818 (2d Cir. 1994) (ignorance of the law is no excuse in civil or

criminal cases).

     The cases petitioners cite are distinguishable in that they

all discuss taxing statutes applied retroactively.   See Untermyer

v. Anderson, 276 U.S. 440 (1928) (holding that the retroactive

provision of the novel gift tax of the Revenue Act of 1924 was

invalid as applied to gifts antedating the act); Blodgett v.

Holden, supra (four Justices thought that the retroactive

application of a gift tax violates the Due Process Clause);

Nichols v. Coolidge, 274 U.S. 531, 543 (1927) (holding that “the

statute here under consideration, in so far as it requires that

there shall be included in the gross estate the value of property

transferred by a decedent prior to its passage merely because the

conveyance was intended to take effect in possession or enjoyment

at or after his death, is arbitrary, capricious and amounts to

confiscation”).    Milliken v. United States, 283 U.S. 15, 20-21

(1931), cited by petitioners in support of their argument,

succinctly highlights the distinction between that case and
                               - 16 -

petitioners’:   “This court has held the taxation of gifts made,

and completely vested beyond recall, before the passage of any

statute taxing them, to be so palpably arbitrary and unreasonable

as to infringe the due process clause.”

     Petitioners complain that “since Respondent is seeking to

explain now why he has the right to require of Petitioners that

they file a Form 8886 in 2005 for the 2004 year or face a

penalty, where was Respondent’s warning in 2005, 2006, or 2007

that the Benistar 419 Plan was ‘substantially similar’ to Notice

95-34?”   Respondent is not required to send petitioners

personalized notices of the applicability of a penalty.    Such a

requirement would be administratively impossible, and it runs

counter to the definition of listed transactions, which include

transactions substantially similar to those identified in

published guidance.    See sec. 6707A(c)(2).

     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.

     To await final decisions under section 7481 in the

controlling cases,


                                        An appropriate order will

                                  be issued.
