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.
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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-
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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
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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”.
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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,
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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
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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
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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
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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).
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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
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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.”);
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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
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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.