Cadwell v. Commissioner

G. MASON CADWELL, JR., PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 15456–08. Filed January 3, 2011.

K, an S corporation 100 percent owned by P’s spouse,
adopted and, through its subsidiary KSM, made contributions
to a multiemployer welfare-benefit plan (the plan). Through
KSM, K made a contribution to the plan, part of which was
used to purchase life insurance coverage for P and K’s other
employees, and the remainder of which was an excess con-
tribution. The plan was amended and converted to a single-
employer plan. The plan’s qualification pursuant to sec.
419A(f)(6), I.R.C., is not in issue. Held: R was not required to
send P a ‘‘30 day letter’’, and the notice of deficiency ade-
quately sets forth R’s position in this case and is therefore
valid. Held, further, P’s interest in the plan became substan-
tially vested upon the plan’s conversion from a multiemployer
plan to a single-employer plan. Sec. 1.402(b)–1(b)(1), Income
Tax Regs. Held, further, P must include in gross income the
cash value of the life insurance policy on P’s life. The value
of the life insurance policy is the PERC (premiums, earnings,
and reasonable charges) pursuant to Rev. Proc. 2005–25,
2005–1 C.B. 962. P has not contended that we should deviate
from the safe harbor provision of Rev. Proc. 2005–25, supra;
thus, P may not reduce the PERC value by the surrender
charge under that provision. Held, further, P must include in
his gross income the excess contributions pursuant to sec.
1.402(b)–1(b)(1), Income Tax Regs. Held, further, the current
year cost of insurance protection is an accession to wealth
which P must include in gross income pursuant to sec. 61(a),
I.R.C. Held, further, where the fair market value of a life

38

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 (38) CADWELL v. COMMISSIONER 39

insurance policy has been determined using the PERC
method, P must include in his gross income as the cost of life
insurance protection an amount equal to the sum of mortality
charges and other expenses. Held, further, P is liable for the
accuracy-related penalty for a substantial understatement of
income tax pursuant to sec. 6662(a) and (b)(2), I.R.C.

Richard H. Morton and Kevin J. Ryan, for petitioner.
Kathleen Tagni, Sherri Wilder, and Betty Clary (specially
recognized), for respondent.

OPINION

WELLS, Judge: This case is before the Court on petitioner’s
motion for summary judgment and respondent’s cross-motion
for summary judgment pursuant to Rule 121. 1 Respondent
determined a deficiency of $33,057 in petitioner’s Federal
income tax for tax year 2004 and a penalty pursuant to sec-
tion 6662(a) of $6,611. On August 31, 2009, petitioner filed
a motion for summary judgment. On October 5, 2009,
respondent filed a response to petitioner’s motion for sum-
mary judgment and a cross-motion for summary judgment.
On October 26, 2009, petitioner filed a motion to amend his
petition. 2 On November 4, 2009, petitioner filed a response
to respondent’s cross-motion for summary judgment. On
November 16, 2009, a hearing was held on the parties’
motions. On November 19, 2009, respondent filed a reply to
petitioner’s response to respondent’s motion for summary
judgment and an objection to petitioner’s motion to amend
his petition.
The issues to be decided as a consequence of petitioner’s
motion for summary judgment and respondent’s
cross-motion for summary judgment are: (1) Whether
respondent was required to send a ‘‘30 day letter’’ to peti-
tioner and whether the notice of deficiency adequately sets
forth respondent’s position in the instant case; (2) whether
petitioner must include in gross income the cash value of a
life insurance policy held by a multiemployer welfare benefit
plan that was converted to a single-employer welfare
benefit plan during the year in issue; (3) whether petitioner
1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986

(Code), as amended and in effect for the year in issue, and Rule references are to the Tax Court
Rules of Practice and Procedure.
2 By separate order, we will deny petitioner’s motion to amend his petition.

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 40 136 UNITED STATES TAX COURT REPORTS (38)

must include in his gross income payments made by his
employer in excess of the cost of current year life insurance
protection (excess contribution); (4) whether petitioner must
include in his gross income the current year cost of life insur-
ance protection paid by his employer; and (5) whether peti-
tioner is liable for the penalty under section 6662. 3

Background
The background facts are drawn from the pleadings, the
parties’ motions, facts deemed established, and stipulated
exhibits and are not in dispute. 4
At the time of filing of the petition, petitioner was a resi-
dent of North Carolina.
Petitioner is married to Jennifer K. Cadwell (Mrs.
Cadwell). Petitioner and Mrs. Cadwell have two daughters,
Jennifer Keady Cadwell (Jennifer) and Miranda M. Cadwell
(Miranda). For his 2002 through 2004 tax years, petitioner
filed Forms 1040, U.S. Individual Income Tax Return,
claiming a filing status of married filing separately. For his
2002 through 2004 tax years, petitioner did not report any
wages or salaries on line 7 of Form 1040.
Keady Ltd. (Keady) is a Pennsylvania S corporation orga-
nized during 1998 pursuant to sections 1361–1375. Keady is,
and has always been, 100 percent owned by Mrs. Cadwell.
Mrs. Cadwell is the sole director of Keady. During 2002
through 2004, petitioner served as the secretary of Keady.
Keady does not have any minutes of shareholders or direc-
tors meetings for 2002 through 2004. During 2002 through
2004, Keady’s only income was its share of income (or loss)
from KSM, Limited Partnership (KSM), a Pennsylvania limited
partnership formed during 1998.
During 2002 through 2004, KSM was owned as follows: 90
percent by Mrs. Cadwell; 5 percent by Keady; 2 percent by
petitioner; 1.5 percent by Jennifer; and 1.5 percent by
Miranda. Keady is the general partner of KSM.
During December 2002, petitioner and Mrs. Cadwell
decided to obtain employee welfare benefits for petitioner,
Jennifer, and Miranda through the National Benefit Plan
3 In the notice of deficiency, respondent determined adjustments to petitioner’s personal ex-

emption and itemized deductions. These adjustments are computational and will depend on the
Court’s resolution of the issues discussed herein.
4 Certain facts were deemed established by separate order of the Court.

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 (38) CADWELL v. COMMISSIONER 41

and Trust. 5 The respective plan documents are hereinafter
referred to as the Plan, and the respective trust created
under the Plan is hereinafter referred to as the Trust.
According to its original terms, the Plan was organized as a
multiemployer welfare benefit plan pursuant to section
419A(f)(6). 6 The documents describe the Plan’s design and
operation. The primary purpose of the Plan is to provide
severance and death benefits to eligible employees. According
to the Plan, each employer is to bear the full cost of the bene-
fits provided. Assets held by the Trust are protected from the
claims of each employer’s creditors. Each employer enrolled
in the Plan is entitled to elect the amount of benefits to pro-
vide and the period over which such benefits become vested.
Upon termination of the Plan or employer withdrawal from
the Plan, an employee’s nonforfeitable benefits are deemed to
be 100 percent vested, regardless of the vesting schedule set
by the employer. 7
Before joining the Plan, a prospective employer provides to
the Plan sponsor, Niche Plan Sponsors (Niche), employment
information regarding the employees whom the employer
chooses to include in the Plan. Niche uses the employer’s
information to create a package of information that contains
a summary of the Plan’s benefits to the employer and its
employees. According to the summary, petitioner receives
$50,000 a year in wages from Keady.
On December 31, 2002, petitioner signed the document
adopting the Plan as secretary on behalf of Keady. Petitioner
was 64 years old at the time Keady adopted the Plan. The
adoption agreement identifies Niche as the Plan sponsor,
National Plan Advisory as the Plan Administrator, Wells
Fargo Bank as the Plan Trustee, and National Benefit Plan
and Trust as the Record Owner of the Trust’s assets. Keady
elected to cover petitioner, Miranda, and Jennifer with death
benefits equal to 20 times the covered employee’s compensa-
tion, severance benefits equal to 14.847 percent of compensa-
tion per year up to 10 years (not to exceed 200 percent), and
a modified 4–40 vesting schedule (vesting schedule). Under
the vesting schedule, an employee is first vested in severance
5 The
parties agree that the trust was not exempt from tax under sec. 501(a).
6 Whetherthe Plan meets the requirements of sec. 419A(f)(6) is not in issue.
7 The Plan states: ‘‘The Plan shall terminate upon delivery by the Plan Sponsor to the Trustee

of a written and signed notice of termination.’’

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 42 136 UNITED STATES TAX COURT REPORTS (38)

benefits at 40 percent of the stated benefit after 4 years of
employment, with vesting increasing to 100 percent at year
10 of employment.
Life insurance covering petitioner’s and his daughters’ lives
was selected to fund the death and severance benefits pay-
able under the Plan to petitioner and his daughters. 8 For
petitioner, a universal life policy with an initial death benefit
of $1 million that also accumulates cash value (hereinafter
referred to as the life insurance policy) was selected to fund
his benefit. 9 The life insurance policy was issued by Lincoln
National Life Insurance Co. (Lincoln Life) on December 7,
2002. Petitioner named Miranda and Jennifer as bene-
ficiaries of the life insurance policy. In his life insurance
policy application, petitioner listed himself as ‘‘Manager’’ of
Keady.
For Miranda and Jennifer, identical 10-year, level term life
insurance policies on their lives with death benefits of
$300,000 were selected to fund their benefits. The annual
combined premiums on those policies totaled $645. On their
life insurance applications, Miranda and Jennifer were
identified as ‘‘Consultants’’ for Keady.
On December 31, 2002, KSM paid $75,000 by check to Com-
pass Bank, 10 the Plan Trustee, to cover Keady’s obligation
under the Plan, and $2,050 for the Plan fee. Both checks
were drawn on KSM’s Centennial Bank account and were
signed by petitioner. Lincoln Life credited petitioner’s life
insurance policy for a payment of $73,000 for the month
ending January 6, 2003. Petitioner did not include any
income on his 2002 Form 1040 as a result of any life insur-
8 The parties do not specify how the severance benefits are to be funded, whether through the

cash value of the life insurance policy or some other option. The adoption agreement states: ‘‘The
adopting employer shall contribute for each Covered Employee the contribution necessary to
fund a Covered Employee’s Target Severance Benefit, determined under the formula and rules
set forth in this Article.’’
9 There are many different kinds of life insurance policies.

Term life insurance covers the insured only for a particular period, and upon expiration of
that period, terminates without value. Whole life insurance covers an insured for life, during
which the insured pays fixed premiums, accumulates savings from an invested portion of the
premiums, and receives a guaranteed benefit upon death, to be paid to a named beneficiary.
Universal life insurance is term life insurance in which the premiums are paid from the in-
sured’s earnings from a money-market fund. Variable life insurance is life insurance in which
the premiums are invested in securities and whose death benefits thus depend on the securities’
performance, though there is a minimum guaranteed death benefit. * * * [Curcio v. Commis-
sioner, T.C. Memo. 2010–115.]
10 The record does not reveal at what point Compass Bank assumed the role of Plan Trustee.

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 (38) CADWELL v. COMMISSIONER 43

ance premiums paid by KSM. The payments to the Plan
Trustee were not claimed as a deduction on KSM’s or Keady’s
2002 Federal income tax return. Petitioner’s accountant,
Robert W. Nicolini, C.P.A. (Mr. Nicolini), was not aware of
the payments or that KSM had a bank account with Centen-
nial Bank.
On May 20, 2004, KSM paid $38,800 to 419 Plan Adminis-
trators, 11 the new Plan Administrator, to cover Keady’s
obligation under the Plan. Of that amount, $36,000 was paid
to cover the Plan contribution and $2,800 was paid as the
Plan fee. The checks were drawn on the ‘‘KSM Limited Part-
nership Escrow Account, c/o Crawford Wilson and Ryan LLC’’
(KSM escrow account). 12 The KSM escrow account was main-
tained at National Penn Bank. When Mr. Nicolini prepared
KSM’s 2004 Federal income tax return, he discovered the
$38,800 in payments made to 419 Plan Administrators. Mr.
Nicolini was not aware that KSM or Keady was participating
in the Plan. Mr. Nicolini asked Miranda, the tax matters
partner of KSM, about the payments. Miranda, who was
unable to verify the payments, thought they were for a horse.
Mr. Nicolini recorded the amounts as payments for ‘‘horses’’
and ‘‘booked’’ them as an asset on KSM’s balance sheet. Mr.
Nicolini never depreciated the ‘‘horses’’ on KSM’s balance
sheet, and, during 2006, the ‘‘horses’’ were distributed to the
Cadwells as a capital distribution. Lincoln Life credited peti-
tioner’s life insurance policy for an $18,000 payment for the
month ended September 6, 2004. 13
On June 5, 1995, the Internal Revenue Service (IRS) issued
Notice 95–34, 1995–1 C.B. 309, which described certain
multiemployer plans (MEPs) that do not qualify under section
419A(f)(6). In Notice 2001–51, 2001–2 C.B. 190, the IRS des-
ignated those transactions described in Notice 95–34, supra,
as ‘‘listed transactions’’ subject to enhanced disclosure
requirements. 14 On October 22, 2004, the American Jobs
11 The
record does not reveal when 419 Plan Administrators became the Plan Administrator.
12 KSM paid this amount using two checks, one for $38,000, dated May 20, 2004, and the
other for $800, dated May 20, 2004.
13 The record does not reveal why petitioner’s life insurance policy was not credited with a

$36,000 payment or why petitioner’s payment in May was not credited until September. Peti-
tioner’s life insurance policy was not credited with a payment for 2005.
14 Notice 2001–51, 2001–2 C.B. 190, was supplemented and superseded by Notice 2003–76,

2003–2 C.B. 1181, which was supplemented and superseded by Notice 2004–67, 2004–2 C.B.
600, which was supplemented and superseded by Notice 2009–59, 2009–31 I.R.B. 170. Notice
Continued

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Creation Act of 2004, Pub. L. 108–357, sec. 811(a), 118 Stat.
1575, became law and instituted a new penalty for failure to
disclose a listed transaction. See sec. 6707A.
On November 17, 2004, Niche sent letters to the employers
participating in the Plan announcing that the Plan had been
split into single-employer welfare benefit plans (SEPs or
individually SEP). 15 The reasons stated in the letters for the
conversion included more employer control over Plan assets
and the concern that the Plan might be subject to listed
transaction penalties under section 6707A. Niche’s letter
acknowledged that the SEPs no longer qualified for treatment
pursuant to section 419A(f)(6), and, therefore, the deduct-
ibility of the employer’s contributions would be limited.
Keady’s employee welfare benefit plan was renamed the
‘‘Keady, Ltd. Welfare Benefit Plan’’, and the assets were
maintained by the National Benefit Trust II.
On December 30, 2004, Niche and Wells Fargo, as Trustee,
entered into a new trust agreement for the National Benefit
Trust II. By its terms, the agreement is a ‘‘complete amend-
ment and restatement’’ of the original trust agreement.
Significantly, the new agreement provides that the Plan
Administrator is now the employer unless the employer des-
ignates another person or persons to be Plan Administrator.
The new agreement provides that the employer, Keady, can
terminate the SEP at any time. In the event of Keady’s with-
drawal 16 from the SEP, at the end of the 23-month period fol-
lowing the date Keady terminated the SEP (the 23-month
period), the Trust has the option to distribute the life insur-
ance policies to Keady, sell the life insurance policies to any
interested purchaser with an insurable interest in the
employees, or surrender the life insurance policies to the
insurance company for their cash surrender value. Addition-
ally, the Trust can sell petitioner his life insurance policy.
2009–59, supra, includes transactions described in Notice 95–34, 1995–1 C.B. 309, as listed
transactions.
Listed transactions are transactions that are the same as or substantially similar to those
transactions that have been determined by the IRS to be tax avoidance transactions and have
been identified by notice, regulation, or other form of published guidance. Sec. 1.6011–4(b)(2),
Income Tax Regs.
15 According to the letters, the change was made effective retroactively to Jan. 1, 2004. How-

ever, we treat the change as actually occurring on Nov. 17, 2004, as this is the date of the actual
conversion.
16 The new agreement setting up the SEP appears to use employer ‘‘withdrawal’’ and employer

‘‘termination’’ interchangeably.

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 (38) CADWELL v. COMMISSIONER 45

During the 23-month period, Keady would be required to con-
tinue paying the annual cost of the life insurance. If peti-
tioner were to die before the end of the 23-month period, he
would still be eligible for the death benefits under the SEP.
Keady, KSM, petitioner, Mrs. Cadwell, Miranda, and Jen-
nifer were not consulted by Niche before the split of the Plan
into separate SEPs. Keady, KSM, petitioner, Mrs. Cadwell,
Miranda, and Jennifer did not attempt to access or use the
Plan benefits at any time during 2004 or 2005. Petitioner did
not include on his Form 1040 for his 2004 tax year any
income resulting from the conversion of the Plan from an
MEP to an SEP.
During December 2004, the life insurance policy covering
petitioner had a death benefit value equal to $1,070,529, a
‘‘fund’’ value equal to $70,529 and a surrender value equal to
$25,237. 17 The fund value was determined by adding the
premiums paid ($91,000 = $73,000 + $18,000) and interest
credited ($6,134 = $3,340 + $2,793), less mortality charges 18
($16,235 = $7,738 + $8,497) and other expenses ($10,370 =
$7,730 + $2,640). 19 The surrender value was the amount of
cash that petitioner would receive upon surrender of the life
insurance policy to Lincoln Life and was calculated by sub-
tracting a surrender charge of $45,291 from the fund value
of $70,529, yielding a surrender value of $25,237. 20
Kevin Ryan (Mr. Ryan), petitioner’s counsel in this case,
prepared two legal opinions for Niche, dated December 6,
2004, and June 16, 2005. Mr. Ryan began serving as counsel
17 The death benefit is the projected amount payable upon the death of the insured. The

‘‘fund’’ value represents the equity in the life insurance policy and is also known as the cash
value of the life insurance policy.
18 Mortality charges are also referred to as ‘‘cost of insurance charges.’’ The IRS provided the

following explanation of mortality charges in Priv. Ltr. Rul. 2009–06–001 n.5 (Oct. 17, 2008):
COI/mortality charges are determined by multiplying a mortality rate (which increases with the
age of the insured) by the ‘‘net amount at risk’’ (the difference between the death benefit and
the cash value, i.e., the pure insurance element of the contract). Mortality rates are determined
with reference to a particular mortality table * * *.
In other words, the mortality charges approximate the term life insurance component of a whole
life or universal life policy. However, because of concerns that insurers might manipulate such
rates, the IRS will not view the mortality charges as the actual premium rates for term life
insurance unless the insurer generally makes such rates available to those who apply for term
insurance coverage and the insurer regularly sells term insurance coverage at such rates. See
Notice 2002–8, 2002–1 C.B. 398, 398–399.
19 The interest credits, mortality charges, and expenses are for 2003 and 2004.

20 These dollar amounts are rounded down to the nearest whole number.

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 46 136 UNITED STATES TAX COURT REPORTS (38)

to Niche after petitioner was involved in the Plan. In Mr.
Ryan’s opinion letter of December 6, 2004, he stated:
QUESTION: Will participants in the Trust have income on the current
value of the death benefits provided under the Trust equal to the lower
of the so-called ‘‘PS 58 Rates’’ or the insurance company’s term insurance
rates? * * *
ANSWER: Yes * * *

In his explanation of the taxation of Plan benefits, Mr. Ryan
stated:
The death benefits are nontransferable, therefore subject to a substan-
tial risk of forfeiture and employees have no right to any cash value,
employees should not be taxed on the death benefit as a transfer of a
permanent life insurance policy. Nevertheless, participating employees
receive an economic benefit each year for the death benefit coverage that
is provided for that year. Thus, in accordance with Regulation Section
1.83–1(a)(2), employees should be taxed each year on the cost of the life
insurance protection under Code Section 61 and the Regulations there-
under in an amount which is equal to the reasonable net premium cost as
determined by the Commissioner of the current life insurance protection
as defined in Regulation Section 1.72–16(b)(3) provided by such contract.
The reasonable net premium costs of the current life insurance protection
as defined in Regulation Section 1.72–16(b)(3) is the same measure of
value for life insurance protection that qualified retirement plans use. The
Service has determined the reasonable net premium costs and published
those amounts as ‘‘PS 58 rates.’’ In Rev. Rul. 66–110, 1966–1 C.B. 12, the
Service held that an employer may use the current published premium
rates charged by an insurer for individual one-year term life insurance
available to all standard risks for determining the costs of insurance in
connection with individual policies instead of the PS 58 costs table. In
Notice 2001–10, an alternative table is set forth labeled Table 2001.
It is the Firm’s opinion that participating employees in the Trust receive
an economic benefit for the death benefit protection provided each year
under the Trust. The annual tax for such benefits shall be determined in
accordance with Code Section 83 and the Regulations thereunder and shall
be the lower of the PS 58 table costs or the insured’s term insurance rates
in accordance with Rev. Rul. 66–110.
[Fn. ref. omitted.]

On April 2, 2008, respondent sent petitioner a notice of
deficiency in which he determined that petitioner’s gross
income for 2004 should be increased by $102,039. The unre-
ported income determined by respondent consists of: (1) The
fund value of the life insurance policy as of December 6,
2004, of $70,529; (2) the excess contribution to the Plan of

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 (38) CADWELL v. COMMISSIONER 47

$18,000, 21 and (3) the cost of term life insurance on peti-
tioner’s life for 2004 of $13,510. Petitioner timely filed a peti-
tion in this Court.

Discussion
Rule 121(a) allows a party to move ‘‘for a summary adju-
dication in the moving party’s favor upon all or any part of
the legal issues in controversy.’’ Rule 121(b) directs that a
decision on such a motion shall be rendered ‘‘if the pleadings,
answers to interrogatories, depositions, admissions, and any
other acceptable materials, together with the affidavits, if
any, show that there is no genuine issue as to any material
fact and that a decision may be rendered as a matter of law.’’
The moving party bears the burden of demonstrating that
no genuine issue of material fact exists and that the moving
party is entitled to judgment as a matter of law. Sundstrand
Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d
965 (7th Cir. 1994). Facts are viewed in the light most favor-
able to the nonmoving party. Id. However, where a motion
for summary judgment has been properly made and sup-
ported, the opposing party may not rest upon mere allega-
tions or denials in that party’s pleadings but must by affida-
vits or otherwise set forth specific facts showing that there
is a genuine issue for trial. Rule 121(d).
I. Caselaw Concerning Section 419A(f)(6) Plans
The issues we must decide concern the income tax con-
sequences of employee welfare benefits. Generally, contribu-
tions to welfare benefit plans are deductible by an employer
when paid if they qualify as ordinary and necessary business
expenses, but only to the extent allowed by sections 419 and
419A. Secs. 162(a), 419, 419A(f)(6). In recent years, adopted
multiemployer plans have been claiming to satisfy section
419A(f)(6) and purporting to generate deductions for the
insurance benefits provided under the plans. Notice 95–34,
supra. This Court has decided several cases regarding pur-
ported section 419A(f)(6) plans.
21 In the notice of deficiency, respondent contends that the value of the excess contribution

was $18,000. Respondent concedes that of the $38,800 contributed, $2,800 was for the Plan fee
and $18,645 was for life insurance premiums ($18,000 for petitioner and $645 for Miranda and
Jennifer). Therefore, respondent contends that the excess contribution of $17,355 should be in-
cluded in petitioner’s gross income.

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In Booth v. Commissioner, 108 T.C. 524, 565 (1997), we
held that the plan in issue did not meet the requirements of
section 419A(f)(6) because it was ‘‘an aggregation of separate
welfare benefit plans, each of which has an experience-rating
arrangement with the contributing employer.’’ In
Neonatology Associates P.A. v. Commissioner, 115 T.C. 43
(2000), affd. 299 F.3d 221 (3d Cir. 2002), without deciding
whether the plans in issue met the requirements of section
419A(f)(6), we held that the corporate employer/participants
could not deduct contributions in excess of the cost of term
life insurance. We also held that the disallowed deductions
should be treated as dividend distributions to the employee-
owners of the C corporations to the extent of earnings and
profits. Id. at 96–97. In V.R. DeAngelis M.D.P.C. v. Commis-
sioner, T.C. Memo. 2007–360, affd. per curiam 574 F.3d 789
(2d Cir. 2009), similarly without ruling on whether the plan
met the requirements of section 419A(f)(6), we held that pay-
ments for life insurance were essentially a distribution of S
corporation profits rather than payments made with compen-
satory intent. In Curcio v. Commissioner, T.C. Memo. 2010–
115, again without ruling on whether the plan met the
requirements of section 419A(f)(6), we held that contributions
were distributions of profits to the employee-owners and not
deductible pursuant to section 162(a).
We did not address in any of the foregoing cases the tax
consequences to a nonowner employee for contributions to a
plan that purportedly met the requirements of section
419A(f)(6) and subsequently was converted into a plan that
no longer qualified. We must decide the consequences to peti-
tioner of contributions to such a plan.
II. Whether Respondent Was Required To Send a ‘‘30 day
letter’’ to Petitioner and Whether the Notice of Deficiency
Is Invalid Because Respondent’s Position Is Not Ade-
quately Set Forth
In his petition and motion for summary judgment, peti-
tioner contends that respondent failed to provide him with a
‘‘30-day letter’’ before issuing a notice of deficiency and failed
to provide a specific theory of the case in the notice of defi-
ciency. Generally, we will not look behind a notice
of deficiency to examine the evidence used, the propriety of

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 (38) CADWELL v. COMMISSIONER 49

the Commissioner’s motives, or administrative policy or
procedure used in making the determination. Greenberg’s
Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974).
Accordingly, we will not look into respondent’s alleged failure
to issue a 30-day letter. See id.
As to whether the notice of deficiency is invalid because it
insufficiently sets forth respondent’s position, section 7522(a)
requires that the notice ‘‘describe the basis for, and identify
the amounts (if any) of, the tax due, interest, additional
amounts, additions to the tax, and assessable penalties
included in such notice.’’ The purpose of section 7522 is to
provide the taxpayer with notice of the Commissioner’s basis
for determining a deficiency. Shea v. Commissioner, 112 T.C.
183, 196 (1999). The notice needs to be sufficient to permit
the taxpayer to comply with the requirement of Rule 34(b)
that the taxpayer make clear and concise assignments of
every error alleged against the Commissioner. 22 Id. at 196–
197. We have held that section 7522(a) does not require the
Commissioner to identify the specific statutory provision sup-
porting each adjustment in the notice of deficiency. Wheeler
v. Commissioner, 127 T.C. 200, 205 (2006), affd. 521 F.3d
1289 (10th Cir. 2008); Rogers v. Commissioner, T.C. Memo.
2001–20, affd. without published opinion 281 F.3d 1278 (5th
Cir. 2001). Additionally, the Commissioner is not required to
lay out the factual basis for his determination in the notice
of deficiency. Ocmulgee Fields, Inc. v. Commissioner, 132 T.C.
105, 113 (2009), affd. 613 F.3d 1360 (11th Cir. 2010). More-
over, even an inadequate description of the Commissioner’s
basis in the notice of deficiency will not invalidate the notice.
Sec. 7522(a).
Petitioner received a Form 886–A, Explanation of Items,
accompanying his notice of deficiency. The Form 886–A
explains how the IRS determined petitioner’s deficiency and
states:
22 Rule 34(b) requires that the petition contain:
(4) Clear and concise assignments of each and every error which the petitioner alleges to have
been committed by the Commissioner in the determination of the deficiency or liability. The as-
signments of error shall include issues in respect of which the burden of proof is on the Commis-
sioner. Any issue not raised in the assignment of error shall be deemed to be conceded. Each
assignment of error shall be separately lettered.
(5) Clear and concise lettered statements of the facts on which petitioner bases the assign-
ments of error, except with respect to those assignments of error as to which the burden of proof
is on the Commissioner.

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 50 136 UNITED STATES TAX COURT REPORTS (38)

7.a. Other Income—Niche Conversion/Contribution:
It has been determined that you received income in the amount of
$102,339.00 in the taxable year ending December 31, 2004, under the
provisions of I.R.C. §§ 61, 72, 83 and 402(b) as a result of your participa-
tion in the National Benefit Plan and Trust Plan and it’s [sic] companion
Trust and the Keady Ltd Welfare Benefit Plan Single Employer Plan and
it’s [sic] companion Trust. Accordingly, your taxable income is increased by
$102,039.00 for the taxable year December 31, 2004.

The quoted explanation recites the Code sections on which
the IRS relies even though specific citations are not required
for the notice to be valid. See Wheeler v. Commissioner, supra
at 205; Rogers v. Commissioner, supra. In the instant case,
the explanation provides sufficient detail that petitioner
should be able to understand that the Plan’s conversion to an
SEP is the source of the income respondent determined.
Accordingly, we hold that the notice of deficiency, with the
accompanying Form 886–A, provides an adequate basis for
understanding the IRS’ determination of tax due. Con-
sequently, we hold that petitioner’s contention is without
merit and the notice of deficiency is valid.
III. Inclusion in Petitioner’s Income of the Cash Value of the
Insurance Policy Upon Conversion From MEP to SEP
We next address whether petitioner must include in his
gross income the cash value of the insurance policy upon
conversion of the Plan from an MEP to an SEP. Respondent
contends that petitioner became substantially vested in the
Plan upon its conversion from an MEP to an SEP pursuant to
section 1.402(b)–1(b), Income Tax Regs. Petitioner contends
that he has no interest in the Plan because the terms of the
Plan and the involuntary nature of the conversion of the
Plan from an MEP to an SEP preclude him from being
‘‘substantially’’ vested in the Plan or the Plan assets. See sec.
402(b)(1); sec. 1.402(b)–1(a)(1), Income Tax Regs. Addition-
ally, petitioner contends that the life insurance policy pre-
miums were paid with Mrs. Cadwell’s after-tax funds and,
therefore, result in a gift to petitioner pursuant to section
2523. In the alternative, petitioner contends that, if he has
an interest in the Plan, respondent has overstated its value.
We address each of these issues below.

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 (38) CADWELL v. COMMISSIONER 51

A. Whether Petitioner Is Substantially Vested in His
Interest in the Plan
Section 402(b)(1) provides that employer contributions
made to a nonexempt employee trust 23 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. 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. 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 net fair market value of
all of the assets in the trust as of any date on which some
or all of the employee’s interest in the trust becomes substan-
tially vested. Sec. 1.402(b)–1(b)(2)(i), Income Tax Regs. The
net fair market value of all of the assets in the trust is the
total amount of the fair market values (determined without
regard to any lapse restriction, as defined in section 1.83–
3(h), Income Tax Regs.) of all of the assets in the trust, less
the amount of liabilities, as of the date on which some or all
of the employee’s interest in the trust becomes substantially
vested. Id. If only a portion of an employee’s interest in the
trust becomes substantially vested during a taxable year,
only the corresponding part of the trust value is includable
in the employee’s gross income. Sec. 1.402(b)–1(b)(4), Income
Tax Regs.
An employee’s interest in property is substantially vested
when it is either transferable or 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:

23 An employee trust is a nonexempt trust if it is not exempt from taxation under sec. 501(a).

Sec. 402(b)(1).

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 52 136 UNITED STATES TAX COURT REPORTS (38)

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.]

Property is not subject to a substantial risk of forfeiture if
the employer must pay fair market value for its return or
there is risk that the property’s value may decline. Id. In
instances where an employee of a corporation owns a signifi-
cant amount of the total combined voting power or value of
all classes of stock in the employer corporation, the issue of
whether an employee’s interest is subject to a substantial
risk of forfeiture also depends upon:
(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. * * * [Sec. 1.83–
3(c)(3), Income Tax Regs.]

Both parties treat petitioner’s interest in the Plan as sub-
ject to a substantial risk of forfeiture before the Plan’s
conversion to an SEP on November 17, 2004. As stated above,
the issue of whether the Plan qualified pursuant to section
419(A)(f)(6) before conversion is not in issue. Therefore, for
purposes of the instant motions, we will assume that before
the Plan’s conversion from an MEP to an SEP, the Plan’s
assets were subject to a substantial risk of forfeiture.
On November 17, 2004, Niche amended the Plan to convert
the Plan from an MEP to an SEP. Keady’s SEP received its
proportional share of the Plan’s assets. Following the conver-
sion of the Plan, the assets in Keady’s SEP could be used only
to pay the claims of Keady employees. The conversion of the
Plan from an MEP to an SEP eliminated the risk that Keady’s
assets could be used to pay other employers’ claims. In other
words, a future condition that could have occurred under the
original Plan as an MEP, i.e., another company’s claim to the
cash value of Keady’s life insurance policies, no longer
existed under the Plan as an SEP. See sec. 1.83–1(c)(1),
Income Tax Regs.

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 (38) CADWELL v. COMMISSIONER 53

According to the terms of the SEP, Keady could terminate
the SEP at any time. In the event of an employer withdrawal
from the SEP, the Trust could distribute the life insurance
policies to Keady, sell the life insurance policies to any
interested purchaser with an insurable interest in the
employees, or surrender the life insurance policies to the
insurance company for their cash surrender value. Addition-
ally, the Trust could sell petitioner his life insurance policy.
While section 1.83–1(c)(3), Income Tax Regs., is not
directly applicable because petitioner does not own any of
Keady’s stock, it is instructive under the circumstances of the
instant case. Petitioner’s wife is the sole shareholder of
Keady. 24 At the time of the hearing, petitioner and Mrs.
Cadwell were still married. The record does not contain any
evidence of strife in petitioner’s working or personal relation-
ship with Mrs. Cadwell. Petitioner listed his position as ‘‘Sec-
retary’’ of Keady, and the record does not include any
information regarding other officers. Mrs. Cadwell is the only
director. Accordingly, we conclude that petitioner is the sole
officer of Keady and that he was not subordinate to any other
employee. See also 15 Pa. Cons. Stat. Ann. sec. 1732(a) (West
1995) (every corporation must have a president, a secretary,
and a treasurer and these offices may be held by the same
person). As the sole officer of Keady, he had control over his
own eligibility under Keady’s SEP. Additionally, as the sole
officer, petitioner could terminate the Plan and have the
assets distributed to Keady.
Petitioner cites Booth v. Commissioner, 108 T.C. at 564, for
the proposition that his power to terminate the Plan does not
require the inclusion of the cash value of the life insurance
policy in his income. Petitioner contends that if he were
required to realize income based on his power to terminate,
the Plan contributions would be taxable upon funding. In
Booth, the Court determined whether the plan in issue was
a deferred compensation plan. We stated:
Although respondent is concerned that the ability of a participating
employer to terminate voluntarily its participation in the * * * [plan]
allows the employer to control the timing of income to its employees, we
regard that concern as misplaced. Respondent’s concern could also be
expressed with respect to the pension plan of a corporation owned by a

24 The parties do not contend that family attribution rules apply.

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 54 136 UNITED STATES TAX COURT REPORTS (38)

single shareholder. Although the shareholder may be the only employee,
it does not necessarily follow that such a pension plan provides for receipt
of deferred compensation merely because the owner/shareholder has the
ability to terminate the pension plan at will. [Id.]

Booth is distinguishable from the instant case as deferred
compensation is not in issue here. Moreover, because the
Plan is a nonexempt trust, the taxation of an employee on
contributions made on his behalf turns on whether the
employee’s interest is substantially vested. See sec. 1.402(b)–
1(b)(1), Income Tax Regs. Whether an employee’s interest is
substantially vested depends upon all of the facts and cir-
cumstances, including the employer’s ability to terminate the
Plan. See sec. 1.83–3(c)(1), Income Tax Regs.
Petitioner also contends that the vesting schedule prevents
him from having a vested interest in the SEP during 2004.
Additionally, petitioner contends that, if any interest was
vested, Mrs. Cadwell could fire him at will, and, therefore,
his benefits under the SEP remained subject to a substantial
risk of forfeiture. We disagree.
We conclude that the vesting restrictions are illusory
under the circumstances of the instant case. 25 When the
Trust’s assets came under Keady’s exclusive control, they
became subject to petitioner’s control. As noted above, peti-
tioner could terminate the SEP and have the plan assets or
their cash equivalent distributed to Keady. Moreover, if the
vesting schedule were to apply, the power to enforce the
restrictions against petitioner would be in the hands of peti-
tioner, his wife, or his daughters. Under such circumstances,
the restrictions on petitioner’s power to obtain the Plan pro-
ceeds are illusory.
Petitioner relies upon Olmo v. Commissioner, T.C. Memo.
1979–286, a case in which we held that the taxpayers’
interest in nonexempt trusts was substantially vested only to
the extent of the vesting schedule. In Olmo, a professional
corporation owned by two unrelated taxpayers, each a 50-
25 We note that according to its terms, if the Plan no longer qualifies as an MEP pursuant

to sec. 419A(f)(6), the Trustee was to terminate the Plan. Upon termination, the assets would
be distributed to each covered employee in an amount equal to his or her benefit balance. Addi-
tionally, each covered employee would be 100 percent vested in his or her benefits upon termi-
nation. However, the Plan could be amended at any time with the vesting schedule potentially
remaining in effect. The record is not sufficiently developed to determine whether the Plan was
properly amended before it was converted to an SEP. Because we find the vesting restrictions
illusory, we need not address this argument.

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 (38) CADWELL v. COMMISSIONER 55

percent shareholder, established a pension trust and a profit-
sharing trust. The taxpayers were each 40 percent vested. To
increase their vesting rights, the taxpayers were required to
complete future years of service, and, if they left the busi-
ness, they forfeited their rights to the nonvested portion of
the plan. Upon termination of the trusts, each participant
would be 100 percent vested. Additionally, if a matter arose
affecting an individual taxpayer’s status as a participating
member of a trust, the taxpayer was automatically disquali-
fied from participating in a decision as to that matter. The
Court concluded that the taxpayers’ nonvested interests were
subject to a substantial risk of forfeiture on account of the
internal controls present. Id.
The facts of the instant case are distinguishable from those
of Olmo. In the instant case, the terms of the SEP provide
that the Plan Administrator is the employer. In effect, peti-
tioner, as the only officer, is the Plan Administrator. The
Plan Administrator decides all questions relating to the
‘‘eligibility of employees to participate’’ in the Plan. Unlike in
Olmo, the SEP does not have a disqualification provision that
would prevent petitioner from deciding questions regarding
his own eligibility. Even if Keady did elect to appoint another
person as Plan Administrator, that person would be chosen
by either petitioner, as sole officer of Keady, or Mrs. Cadwell,
as Keady’s sole director. Therefore, any decision regarding
petitioner’s eligibility would be decided by someone with a
potential interest in the life insurance policy; i.e., Mrs.
Cadwell, petitioner’s wife; or petitioner himself. We con-
cluded above that any restrictions on petitioner’s right to
control the disposition of the Trust assets are illusory. Con-
sequently, we find the instant case is distinguishable from
Olmo.
Petitioner’s contention that he could be fired and therefore
lose his benefits is also without merit. As of the hearing,
petitioner was still married to Mrs. Cadwell who was the
100-percent shareholder of Keady, his employer. Petitioner
argues only that there is a possibility that he could be fired
by Mrs. Cadwell. Under such circumstances, we conclude
that the threat that petitioner could be fired by his wife is
illusory and his interest is not subject to a substantial risk
of forfeiture.

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 56 136 UNITED STATES TAX COURT REPORTS (38)

On the basis of the record, we conclude that petitioner’s
interest in the postconversion SEP was no longer subject to
a substantial risk of forfeiture; i.e., was substantially vested
upon conversion of the Plan to an SEP.
B. Whether the Contributions to the Plan Were a Gift From
Mrs. Cadwell to Petitioner
Alternatively, petitioner contends that the contributions to
the Plan, i.e., the payments for the life insurance policy, were
a gift from Mrs. Cadwell to him pursuant to section 2523 and
that all payments were made using her after-tax dollars.
Petitioner contends that we should apply the substance over
form doctrine, citing Commissioner v. Court Holding Co., 324
U.S. 331, 334 (1945), to recognize such payments as a non-
taxable gift.
Section 2523 allows a donor a deduction in computing tax-
able gifts for purposes of computing the gift tax. As Mrs.
Cadwell would be the hypothetical donor in the scenario pos-
ited by petitioner, we conclude that section 2523 does not
apply. Petitioner may have meant to cite as support for his
contention section 102(a), which excludes from gross income
the value of property acquired by gift. However, for reasons
discussed below, section 102(a) is inapplicable.
Pursuant to the substance over form doctrine, although the
form of a transaction may literally comply with the provi-
sions of the Code, that form will not be given effect where
it has no business purpose and operates simply as a device
to conceal the true character of a transaction. See Gregory v.
Helvering, 293 U.S. 465, 469–470 (1935). If, however, the
substance of a transaction accords with its form, that form
will be upheld and given effect for tax purposes. See Blue-
berry Land Co. v. Commissioner, 361 F.2d 93, 100–101 (5th
Cir. 1966), affg. 42 T.C. 1137 (1964). Additionally, it is well
settled that ‘‘a transaction is to be given its tax effect in
accord with what actually occurred and not in accord with
what might have occurred.’’ Commissioner v. Natl. Alfalfa
Dehydrating & Milling Co., 417 U.S. 134, 148 (1974).
Petitioner’s contention regarding substance over form is
misplaced. The record reveals that the $75,000 payment
made during 2002 was paid from an account held in the
name of KSM. The $38,800 in payments made during 2004

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 (38) CADWELL v. COMMISSIONER 57

was paid out of the KSM escrow account. In his declaration
filed after the hearing on the instant motions, petitioner con-
tends that the premium payments were made with ‘‘after-tax
funds distributable to * * * [Mrs. Cadwell], as primary
owner of KSM.’’ In other words, petitioner claims that the
funds belonged to KSM, but were ‘‘distributable’’ to Mrs.
Cadwell. As the payments were not distributed to Mrs.
Cadwell, therefore, they would have been made by funds still
owned by KSM. Consistent with Natl. Alfalfa, we shall give
effect to the transaction as it actually occurred as opposed to
revising the transaction to create a gift.
On the basis of the record, we conclude that the substance
and the form of the contributions were payments by KSM, not
Mrs. Cadwell. Consequently, section 102(a) is inapplicable.
C. Whether the Cash Value Is Income to Petitioner Where
His Employer Did Not Claim Corresponding Deductions
for Its Contributions to the Policy
We next address petitioner’s contention that the cash value
of the life insurance policy is not income to him because nei-
ther Keady nor KSM claimed deductions for contributions
made during 2002 and 2004. Petitioner contends that,
because a deduction is available under section 83(h), the cash
value of the life insurance policy was not income to him,
since Keady would have claimed a corresponding deduction
for the premium payments. Petitioner’s contention is mis-
placed. Section 402(b)(1) does not condition the inclusion in
income on an employer’s deduction of the payment. Rather,
inclusion in gross income is based upon whether the trust is
not exempt and whether the taxpayer’s interest is substan-
tially vested. See sec. 402(b)(1); sec. 1.402(b)–1(a)(1), (b)(1),
Income Tax Regs. Moreover, while section 83(h) allows a
deduction, it is not required for a contribution to be included
in gross income pursuant to section 83(a). Therefore, whether
Keady or KSM claimed a deduction for the contributions is
immaterial.
Accordingly, we hold that the cash value of the life insur-
ance policy must be included in petitioner’s gross income for
his 2004 tax year pursuant to section 1.402(b)–1(b)(1),
Income Tax Regs.

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 58 136 UNITED STATES TAX COURT REPORTS (38)

D. The Amount To Be Included in Petitioner’s Gross
Income
Respondent contends that the cash value of the life insur-
ance policy is the fund value of $70,529. Petitioner contends
that if he must include any amount in his gross income, only
the cash surrender value of the life insurance policy after
deducting surrender charges of $45,291 should be so
included; i.e., $25,238.
Section 1.402(b)–1(b)(2)(i), Income Tax Regs., provides that
the value of an employee’s interest is ‘‘the amount of the
employee’s beneficial interest in the net fair market value of
all the assets in the trust as of any date on which some or
all of the employee’s interest in the trust becomes substan-
tially vested.’’ The net fair market value is the total fair
market value determined without regard to any ‘‘lapse
restrictions’’ as defined in section 1.83–3(h), Income Tax
Regs., less the amount of liabilities to which such assets are
subject. Sec. 1.402(b)–1(b)(2)(i), Income Tax Regs.
Section 1.83–3(h), Income Tax Regs., defines a ‘‘nonlapse
restriction’’ as a restriction that will never lapse. A nonlapse
restriction is ‘‘a permanent limitation on the transferability
of property’’ and requires the transferee to sell, or offer to
sell, the property at a price determined under a formula, and
the restriction will continue to apply against the transferee
or any subsequent holder. Id. For example, a permanent
right of first refusal in a particular person at a price deter-
mined under a formula would be a nonlapse restriction. Id.;
see also sec. 1.83–5(c), Example (1), Income Tax Regs. A
‘‘lapse restriction’’ is any restriction other than a nonlapse
restriction and includes, but is not limited to, a restriction
that carries a substantial risk of forfeiture. Sec. 1.83–3(i),
Income Tax Regs. The flush language of section
1.83–3(h), Income Tax Regs., cites limitations imposed by
registration requirements of State or Federal security laws
as examples of restrictions that are not nonlapse restrictions.
Rev. Proc. 2005–25, 2005–1 C.B. 962, provides a safe
harbor for determining the fair market value of a life insur-
ance policy for purposes of applying section 402(b), and peti-
tioner has not suggested any reason for deviating from the
formula it provides. 26 For a nonvariable or variable life
26 Rev. Proc. 2005–25, 2005–1 C.B. 962, is applicable to nonexempt employees’ trusts for pur-

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 (38) CADWELL v. COMMISSIONER 59

insurance contract the safe-harbor fair market value is the
greater of:
A) the sum of the interpolated terminal reserve and any unearned pre-
miums plus a pro rata portion of a reasonable estimate of dividends
expected to be paid for that policy year based on company experience, and
B) the product of the PERC amount (the amount * * * based on pre-
miums, earnings, and reasonable charges) and the applicable Average Sur-
render Factor * * * [Id. sec. 3.02, 2005–1 C.B. at 963–964.]

The PERC amount is the aggregate of:
(1) the premiums paid from the date of issue through the valuation date
without reduction for dividends that offset those premiums, plus (2) divi-
dends applied to purchase paid-up insurance prior to the valuation date,
plus (3) any amounts credited (or otherwise made available) to the policy-
holder with respect to premiums, including interest and similar income
items (whether credited or made available under the contract or to some
other account), but not including dividends used to offset premiums and
dividends used to purchase paid up insurance, minus (4) explicit or
implicit reasonable mortality charges and reasonable charges (other than
mortality charges), but only if those charges are actually charged on or
before the valuation date and those charges are not expected to be
refunded, rebated, or otherwise reversed at a later date, minus (5) any dis-
tributions (including distributions of dividends and dividends held on
account), withdrawals, or partial surrenders taken prior to the valuation
date. [Id.]

For variable contracts, the revenue procedure defines the fair
market value in a substantially similar manner as for a non-
variable contract. 27 Id. sec. 3.03. As the valuation methods
are substantially similar, we need not decide whether the life
insurance policy is a variable or nonvariable life insurance
contract.
According to Rev. Proc. 2005–25, supra, the surrender
charge should be disregarded for valuation purposes. The
surrender charges apply in decreasing amounts beginning in
the life insurance policy’s first year and are reduced to zero
in the life insurance policy’s 15th year. In other words, any
holder of the life insurance policy beyond 15 years could
redeem the life insurance policy for its stated cash value with
poses of sec. 402(b) for periods on or after Feb. 13, 2004. Rev. Proc. 2005–25, sec. 5, 2005–1
C.B. at 965.
27 For variable contracts, the only difference occurs in step 3. For step 3, ‘‘all adjustments

(whether credited or made available under the contract or to some other account) that reflect
the investment return and the market value of segregated asset accounts’’ are added or sub-
tracted to determine the PERC value. Rev. Proc. 2005–25, sec. 3.03, 2005–1 C.B. at 964.

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 60 136 UNITED STATES TAX COURT REPORTS (38)

no penalty. Accordingly, it will be disregarded for the pur-
pose of valuing petitioner’s interest in the life insurance
policy. See Rev. Proc. 2005–25, sec. 3.04(1), 2005–1 C.B. at
964 (‘‘The Average Surrender Factor for purposes of § * * *
402(b) (for which no adjustment for potential surrender
charges is permitted) is 1.00.’’).
On December 31, 2002, KSM paid $75,000 to the Plan
Trustee to cover Keady’s initial contribution and $2,050 to
cover the MEP fee. Of the $75,000 payment, $73,000 was
credited to petitioner’s life insurance policy. On May 20,
2004, KSM contributed $36,000 for the Plan’s premiums and
$2,800 to cover the Plan fee. Of the $36,000 contribution,
$18,000 was credited to petitioner’s life insurance policy.
During 2003 and 2004, petitioner’s life insurance policy was
also increased by interest payments of $6,134, for a total of
$97,134. Petitioner’s life insurance policy was decreased
during 2003 and 2004 for mortality charges of $16,235 and
other expenses of $10,370, respectively, for a total of $26,605.
As noted above, petitioner’s interest in the life insurance
policy is not reduced by any surrender charges. Accordingly,
we conclude that the PERC value of petitioner’s interest in the
life insurance policy is $70,529. 28
Neither party contends that the alternative valuation
measure allowed pursuant to Rev. Proc. 2005–25, supra,
would result in a higher valuation. Additionally, neither
party contends that petitioner’s life insurance policy is sub-
ject to any liabilities. See sec. 1.402(b)–1(b)(2)(i), Income Tax
Regs. Accordingly, we hold that petitioner must include in
gross income the cash value of the life insurance policy of
$70,529.
IV. Whether Petitioner Must Include in Gross Income the
Excess Contributions
During 2004, KSM contributed life insurance policy pre-
miums of $36,000. Petitioner’s life insurance policy was cred-
ited with a payment of $18,000. Respondent concedes that
$645 of the remaining $18,000 was used to pay the annual
premium on Miranda’s and Jennifer’s policies. Respondent
contends that the excess contribution, $17,355, should be
28 Petitioner does not contend that the premiums, interest credits, mortality charges, or other

expenses should be prorated. Accordingly, we deem this argument conceded.

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 (38) CADWELL v. COMMISSIONER 61

included in petitioner’s gross income pursuant to section
1.402(b)–1(b)(1), Income Tax Regs.
As discussed above, the parties treat petitioner’s interest in
the Plan before conversion as being subject to a substantial
risk of forfeiture, i.e., not substantially vested. We concluded
above that, following the conversion of the Plan to an SEP,
petitioner’s interest was substantially vested. See id.
Additionally, neither party contends that the excess contribu-
tion is subject to any liabilities. Sec. 1.402(b)–1(b)(2)(i),
Income Tax Regs. (the net fair market value of a taxpayer’s
interest in the trust is the fair market value of all the assets
less any liabilities to which such assets are subject).
Petitioner makes the same contentions with respect to the
inclusion of the excess contributions in gross income as he
did with respect to the cash value of the life insurance policy;
i.e., the Plan contributions were a gift from Mrs. Cadwell,
and he has no interest in the Plan. We apply the same anal-
ysis as we did above and conclude that petitioner’s conten-
tions are without merit.
Petitioner also contends that the excess contributions have
been accounted for in the cash value of the life insurance
policy. Of the $36,000 contribution for life insurance protec-
tion made during 2004, $645 was credited towards Miranda’s
and Jennifer’s life insurance policies. In the PERC calculation
set forth above, $18,000 of the $36,000 was credited towards
the cash value of petitioner’s life insurance policy. The
$17,355 excess contribution was not credited toward the cash
value of the life insurance policy covering petitioner dis-
cussed in the PERC valuation above. Consequently, the inclu-
sion of the excess contribution in petitioner’s income would
not be ‘‘double-counting’’.
Accordingly, we hold that the excess contribution of
$17,355 must be included in petitioner’s gross income for his
2004 tax year. 29

29 Petitioner contends that respondent has overstated the value of the excess contributions.

Where a motion for summary judgment has been properly made and supported, the opposing
party may not rest upon mere allegations or denials in that party’s pleadings but must by affi-
davits or otherwise set forth specific facts showing that there is a genuine issue for trial. Rule
121(d). Respondent’s motion was properly made and supported. Petitioner has not offered spe-
cific facts to show that there is a genuine issue for trial regarding the value of the excess con-
tributions. Accordingly, we conclude that summary judgment is appropriate on this issue.

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 62 136 UNITED STATES TAX COURT REPORTS (38)

V. Whether Petitioner Must Include the Cost of the Life
Insurance Protection in His Gross Income
Respondent contends that the cost of life insurance protec-
tion Keady provided to petitioner during 2004 was an eco-
nomic benefit and, therefore, should be included in his gross
income under section 402(b) or section 61. Petitioner con-
tends that neither section is applicable. We agree with
respondent that the value of the cost of life insurance protec-
tion is included in petitioner’s gross income under section 61.
Gross income includes income from whatever source
derived, including income for services. Sec. 61(a). The term
‘‘gross income’’ is construed broadly, as opposed to exclusions
from gross income, which are construed narrowly. Commis-
sioner v. Schleier, 515 U.S. 323, 328 (1995). Generally, life
insurance premiums paid by an employer on the life of his
employee, where the proceeds of such insurance are payable
to the beneficiary of the employee, are included in the gross
income of the employee. Sec. 1.61–2(d)(2)(ii)(A), Income Tax
Regs.
We note that section 1.61–2(d)(6), Income Tax Regs., does
not apply because, pursuant to section 1.83–3(e), Income Tax
Regs., current life insurance protection is not ‘‘property’’. As
noted above, section 402(b)(1) is inapplicable. Moreover, the
cost of life insurance protection generally is taxable under
section 61 and the regulations pursuant to section 61. Sec.
1.83–1(a)(2), Income Tax Regs.
Petitioner received life insurance protection pursuant to
the payments made by KSM to purchase the life insurance
policy on petitioner’s life. That life insurance protection was
a valuable benefit and significant accession to petitioner’s
wealth; i.e., $1 million payable to his daughters if he were
to die during 2004. See United States v. Burke, 504 U.S. 229,
233 (1992) (‘‘Congress intended through § 61(a) * * * to
bring within the definition of income any ‘accession to
wealth’ ’’ (quoting Commissioner v. Glenshaw Glass, Co., 348
U.S. 426, 431 (1955))). In V.R. DeAngelis M.D.P.C. v.
Commissioner, T.C. Memo. 2007–360, a group of doctors com-
bined to form a trust, purportedly qualified pursuant to sec-
tion 419A(f)(6), whose purpose was to fund the purchase of
life insurance policies. In discussing the tax consequences of
the premium payments in V.R. DeAngelis M.D.P.C., we

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 (38) CADWELL v. COMMISSIONER 63

stated that the ‘‘payments of the premiums were indeed
accessions to the doctors’ wealth’’. 30 Similarly, the premium
payments are accessions to petitioner’s wealth and should be
included in his gross income pursuant to section 61.
Petitioner offers the same theories regarding the current
year cost of life insurance protection as he did for the inclu-
sion of the cash value of the life insurance policy and the
excess contributions. Those theories are similarly
unpersuasive regarding the inclusion of the current year cost
of life insurance in his gross income. Accordingly, we hold
that petitioner must include in his gross income for his 2004
tax year the current year cost of life insurance protection.
Petitioner contends that the fair market value of the cost
of life insurance is $8,496; i.e., the 2004 mortality charges.
Respondent contends that the value of the life insurance
protection is $13,510; i.e., the annual cost, according to
Notice 2001–10, Table 2001, 2001–1 C.B. 459, 463, for $1
million worth of life insurance for an individual who is 66
years old. The regulations provide little guidance in deter-
mining the cost of life insurance protection that is included
in gross income pursuant to section 61. Accordingly, it is
helpful to examine how other parts of the Code, including
provisions governing the taxation of split-dollar life insurance
and group term life insurance, calculate the cost of 1 year of
life insurance protection.
Generally, split-dollar life insurance is any arrangement
between an owner and a nonowner of a life insurance con-
tract where one party pays the premiums and is entitled to
recover all or a portion of such premiums from the proceeds
of the life insurance contract and the arrangement is not
group term life insurance. Sec. 1.61–22(b)(1), Income Tax
Regs. Rev. Rul. 64–328, 1964–2 C.B. 11, provides that an
employee must include in gross income the annual value of
the benefit the employee receives under a split-dollar
arrangement, which is an amount equal to the 1-year term
cost of life insurance protection to which the employee is
30 In V.R. DeAngelis M.D.P.C. v. Commissioner, T.C. Memo. 2007–360, we held that the pre-

mium payments were ‘‘essentially a distribution to the doctors of corporate profits rather than
a payment that the PCs made to the doctors with a compensatory intent’’, because the doctor-
employees were also the owners of the S corporations that provided them with benefits. See also
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000) (premium payments are a divi-
dend to the extent of earnings and profits to employee-owners of a C corporation), affd. 299 F.3d
221 (3d Cir. 2002).

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 64 136 UNITED STATES TAX COURT REPORTS (38)

entitled from year to year, less the portion, if any, the
employee provides. See also Johnson v. Commissioner, 74
T.C. 1316, 1322 (1980). We note that Rev. Rul. 64–328,
supra, is not an attempt to include in gross income the entire
life insurance premium, but rather only the cost of the cur-
rent year’s life insurance protection. The 1-year cost of life
insurance protection is the amount to be determined in the
instant case.
Rev. Rul. 64–328, supra, provides that the cost of life
insurance protection should be calculated using the P.S. 58
rates found in Rev. Rul. 55–747, 1955–2 C.B. 228. Notice
2001–10, supra, revoked Rev. Rul. 55–747, supra, and pro-
vided Table 2001 as a substitute for the P.S. 58 rates.
In Curcio v. Commissioner, T.C. Memo. 2010–115, we used
the rates in section 1.79–3(d), Income Tax Regs., as a ‘‘rough
estimate’’ of the cost of life insurance protection to decide
whether the taxpayer’s expenses for life insurance were
deductible pursuant to section 162(a). Table 2001 is an
updated version of the rates found in section 1.79–3(d),
Income Tax Regs. See Notice 2001–10, 2001–1 C.B. at 462
(‘‘Table 2001 is based on the mortality experience reflected in
the table of uniform premiums promulgated under section
79(c) of the Code (see § 1.79–3(d)(2) of the regulations), with
extensions for ages below 25 and above 70, and the elimi-
nation of the five-year age brackets’’); see also Notice 2002–
8, 2002–1 C.B. 398. Accordingly, we conclude that, for pur-
poses of the instant case, Table 2001 is a reasonable estimate
of the cost of 1 year of life insurance protection.
Pursuant to Table 2001, the cost of $1 million worth of life
insurance coverage for a 66-year-old is $13,510. As neither
party has argued that the life insurance policy in issue is
split-dollar life insurance, we need not address any issue
regarding the effect of split-dollar life insurance on the cal-
culation of the cost of the life insurance policy in issue. 31
Additionally, neither party contends that petitioner paid for
such life insurance coverage.
We note that, if we were to include the entire $13,510
amount in petitioner’s income, there would be double
counting. Petitioner’s gross income already includes the cash
31 The life insurance policy in issue may qualify as split-dollar life insurance pursuant to sec.

1.61–22(b)(2), Income Tax Regs. However, the outcome would be the same if we classified the
life insurance policy in issue as split-dollar life insurance.

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 (38) CADWELL v. COMMISSIONER 65

value of the life insurance policy calculated under the PERC
method. That method takes into account the premiums paid
and any other income the life insurance policy earns, but it
subtracts mortality charges and other expenses. To include
the entire $13,510 in addition to the PERC value would par-
tially double count a portion of the premium payment that
has already been included in the PERC amount. 32
Instead, the value for current year life insurance protection
should be calculated by adding the mortality charge ($8,496)
and other expenses ($2,640). The sum of $11,136 reflects the
charges for current year life insurance that were already sub-
tracted from the fair market value calculation determined
using the PERC amount, pursuant to Rev. Proc. 2005–25,
supra. Therefore, we conclude that when the PERC formula
has been used to calculate the fair market value of the policy,
the cost of insurance may be calculated by adding the mor-
tality charges and other expenses.
Petitioner contends that we should consider only the cur-
rent mortality charges rather than the Table 2001 rates.
Petitioner in essence contends that the current mortality
charges are the ‘‘insurer’s published premium rates for one-
year term insurance’’ pursuant to Rev. Rul. 66–110, 1966–1
C.B. 12. Pursuant to Notice 2002–8, 2002–1 C.B. at 398–399,
the insurer’s published premium rates may be used only if
the taxpayer can show that the insurer generally makes the
availability of such rates known to persons who apply for
term insurance coverage from the insurer and the insurer
regularly sells term insurance at such rates to individuals
who apply for term insurance coverage through the insurer’s
normal distribution channels. Petitioner does not argue that
the requirements of Notice 2002–8, supra, are unreasonable
or incorrect. Furthermore, on a motion for summary judg-
ment that is properly made and supported, the opposing
32 Under the PERC method for 2004, petitioner’s policy was credited with an $18,000 premium

payment and was credited with $2,793 in interest, yielding a total of $20,793. However, peti-
tioner’s life insurance policy incurred a mortality charge of $8,496 and other expenses of $2,640,
for a net value for his 2004 tax year of $9,657. Including the entire $13,510 from Notice 2001–
10, Table 2001, 2001–1 C.B. 459, 463, would include in petitioner’s gross income an amount
equal to $23,167 ($9,657 + $13,510). In other words, including the entire $13,510 would double
count the cost of life insurance protection by an amount equal to $2,373. ($23,167 (or $13,510
+ $9,657) – $20,793 (or $18,000 + $2,793) = $2,373.) Consequently, we deem the $2,373 an
amount already contributed by petitioner for purposes of such calculation and, accordingly sub-
tract that amount from the $13,510 in costs. Therefore, petitioner must include in his gross in-
come the value of the current year life insurance protection as a taxable benefit to him of
$11,136.

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 66 136 UNITED STATES TAX COURT REPORTS (38)

party must set forth specific facts showing that there is a
genuine issue for trial. Rule 121(d). Petitioner does not allege
that he has any evidence that would satisfy that require-
ments of Notice 2002–8, supra. Furthermore, petitioner does
not suggest that there is a material factual issue that could
be resolved at trial. Accordingly, we conclude that summary
judgment is appropriate on this issue and that the require-
ments of Notice 2002–8, supra, have not been met. Therefore,
we hold that petitioner must include in his gross income for
his 2004 tax year the cost of current year life insurance
protection of $11,136.
VI. Whether Petitioner Is Liable for the Section 6662 Penalty
Respondent contends that petitioner is liable for the
accuracy-related penalty pursuant to section 6662(a) on
account of a substantial understatement of tax, or in the
alternative, on account of negligence or disregard of rules
and regulations. See sec. 6662(b)(1) and (2).
A substantial understatement of income tax is an under-
statement that is greater than 10 percent of the tax required
to be shown on the return for the taxable year or $5,000. Sec.
6662(d)(1)(A). An understatement is the excess of the amount
required to be shown on the return for the taxable year over
the amount actually shown on the return. Sec. 6662(d)(2).
The record reveals that petitioner’s understatement will be
greater than $5,000. Petitioner has failed to establish any
defense to the accuracy-related penalty.
Consequently, we hold that petitioner is liable for the
accuracy-related penalty under section 6662(b)(2).
We shall therefore grant respondent’s cross-motion for
summary judgment and deny petitioner’s motion for sum-
mary judgment.
We have considered all of the issues raised by the parties,
and, to the extent they are not discussed herein, we conclude
that they are without merit, unnecessary to reach, or moot.

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 (38) CADWELL v. COMMISSIONER 67

To reflect the foregoing,
An order and decision will be entered
under Rule 155.

f

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