Webber v. Commissioner

JEFFREY T. WEBBER, PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT

Docket No. 14336–11. Filed June 30, 2015.

P, a U.S. citizen, established a grantor trust that purchased
‘‘private placement’’ variable life insurance policies insuring
the lives of two elderly relatives. P and various family mem-
bers were the beneficiaries of these policies. The premiums
paid for the policies, less various expenses, were placed in
separate accounts whose assets inured exclusively to the ben-
efit of the policies. The money in the separate accounts was
used to purchase investments in startup companies with
which P was intimately familiar and in which he otherwise
invested personally and through private-equity funds he man-
aged. P effectively dictated both the companies in which the
separate accounts would invest and all actions taken with
respect to these investments. R concluded that P retained
sufficient control and incidents of ownership over the assets
in the separate accounts to be treated as their owner for Fed-
eral income tax purposes under the ‘‘investor control’’ doc-
trine. See Rev. Rul. 77–85, 1977–1 C.B. 12. The powers P
retained included the power to direct investments; the power
to vote shares and exercise other options with respect to these
securities; the power to extract cash at will from the separate
accounts; and the power in other ways to derive ‘‘effective
benefit’’ from the investments in the separate accounts. See
Griffiths v. Helvering, 308 U.S. 355, 358 (1939).
1. Held: The IRS revenue rulings enunciating the ‘‘investor
control’’ doctrine are entitled to deference and weight under
Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).
2. Held, further, P was the owner of the assets in the sepa-
rate accounts for Federal income tax purposes and was tax-
able on the income earned on those assets during the taxable
years in issue.
3. Held, further, P is not liable for the accuracy-related pen-
alties under I.R.C. sec. 6662(a) because he relied in good faith
on professional advice from competent tax professionals.

324
(324) WEBBER v. COMMISSIONER 325

Robert Steven Fink, Megan L. Brackney, and Joseph
Septimus, for petitioner.
Steven Tillem, Shawna A. Early, and Casey R. Kroma, for
respondent.
LAUBER, Judge: Petitioner is a venture-capital investor and
private-equity fund manager. He established a grantor trust
that purchased ‘‘private placement’’ variable life insurance
policies insuring the lives of two elderly relatives. These poli-
cies were purchased from Lighthouse Capital Insurance Co.
(Lighthouse), a Cayman Islands company. Petitioner and var-
ious family members were the beneficiaries of these policies.
The premium paid for each policy, after deduction of a
mortality risk premium and an administrative charge, was
placed in a separate account underlying the policy. The
assets in these separate accounts, and all income earned
thereon, were segregated from the general assets and
reserves of Lighthouse. These assets inured exclusively to the
benefit of the two insurance policies.
The money in the separate accounts was used to purchase
investments in startup companies with which petitioner was
intimately familiar and in which he otherwise invested
personally and through funds he managed. Petitioner effec-
tively dictated both the companies in which the separate
accounts would invest and all actions taken with respect to
these investments. Petitioner expected the assets in the sepa-
rate accounts to appreciate substantially, and they did.
Petitioner planned to achieve two tax benefits through this
structure. First, he hoped that all income and capital gains
realized on these investments, which he would otherwise
have held personally, would escape current Federal income
taxation because positioned beneath an insurance policy.
Second, he expected that the ultimate payout from these
investments, including all realized gains, would escape Fed-
eral income and estate taxation because payable as ‘‘life
insurance proceeds.’’
Citing the ‘‘investor control’’ doctrine and other principles,
the Internal Revenue Service (IRS or respondent) concluded
that petitioner retained sufficient control and incidents of
ownership over the assets in the separate accounts to be
treated as their owner for Federal income tax purposes.
Treating petitioner as having received the dividends,
326 144 UNITED STATES TAX COURT REPORTS (324)

interest, capital gains, and other income realized by the sepa-
rate accounts, the IRS determined deficiencies in his Federal
income tax of $507,230 and $148,588 and accuracy-related
penalties under section 6662 of $101,446 and $29,718 for
2006 and 2007, respectively. 1 We will sustain in large part
the deficiencies, but we conclude that petitioner is not liable
for the penalties.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.
The stipulations of facts and the attached exhibits are incor-
porated by this reference. When he petitioned this Court,
petitioner lived in California.
Petitioner’s Background and Business Activities
Petitioner received his bachelor’s degree from Yale College
and attended Stanford University’s M.B.A. program. He left
Stanford early to start a technology consulting firm, and he
later founded and managed a series of private-equity part-
nerships that provided ‘‘seed capital’’ to startup companies.
These partnerships were early-stage investors that generally
endeavored to supply the ‘‘first money’’ to these entities.
Separately, petitioner furnished consulting services to
startup ventures through his own firm, R.B. Webber & Co.
(Webber & Co.).
Each venture-capital partnership had a general partner
that was itself a partnership. Petitioner was usually the
managing director of the general partner. The venture-cap-
ital partnership offered limited partnership interests to
sophisticated investors. These offerings were often oversub-
scribed.
As managing director, petitioner had the authority to
make, and did make, investment decisions for the partner-
ships. To spread the risk of investing in new companies, peti-
tioner often invested through syndicates. A syndicate is not
a formal legal entity but a group of investors (individuals or
funds) who seek to invest synergistically. Generally speaking,
1 All statutory references are to the Internal Revenue Code (Code) as in
effect for the tax years in issue. All Rule references are to the Tax Court
Rules of Practice and Procedure. All dollar amounts have been rounded to
the nearest dollar.
(324) WEBBER v. COMMISSIONER 327

the syndicate’s goal was to make early-stage investments in
companies that would ultimately benefit from a ‘‘liquidity
event’’ like an initial public offering (IPO) or direct acquisi-
tion.
Before investing in a startup company, petitioner per-
formed due diligence. This included review of the company’s
budget, business plan, and cashflow model; his review also
included analysis of its potential customers and competitors
and the experience of its entrepreneurs. Because petitioner,
through Webber & Co., provided consulting services to
numerous startup companies, he had access to proprietary
information about them. On the basis of all this information,
petitioner decided whether to invest, or to recommend that
one of his venture-capital partnerships invest, in a particular
entity. Having made an early-stage investment, petitioner
usually sought to find new investors for that company, so as
to spread his risk, enhance the company’s prospects, and
move it closer to a ‘‘liquidity event.’’
Having supplied the ‘‘first money’’ to these startup ven-
tures, petitioner and his partnerships were typically offered
subsequent opportunities to invest in them. These opportuni-
ties are commonly called ‘‘pro-rata offerings.’’ As additional
rounds of equity financing are required, a pro-rata offering
gives a current equity owner the chance to buy additional
equity in an amount proportionate to his existing equity.
This enables him to maintain his current position and avoid
‘‘dilution’’ by new investors. Depending on the circumstances,
petitioner would accept or decline these pro-rata offerings.
Petitioner invested in startup companies in various ways.
He held certain investments in his own name; he invested
through trusts and individual retirement accounts (IRAs);
and he invested through the venture-capital partnerships
that he managed. To help him manage this array of invest-
ments, petitioner in 1999 hired Susan Chang as his personal
accountant. She had numerous and diverse responsibilities.
These included determining whether petitioner had funds
available for a particular investment; ensuring that funds
were properly transferred and received; communicating with
lawyers, advisers, paralegals, and others about investments
in which petitioner was interested; and maintaining account
balances and financial statements for petitioner’s personal
investments.
328 144 UNITED STATES TAX COURT REPORTS (324)

Because of his expertise, knowledge of technology, and
status as managing director of private-equity partnerships,
petitioner served as a member of the board of directors for
more than 100 companies. As relevant to this opinion, peti-
tioner through various entities invested in, and served on the
boards of, the following companies at various times prior to
December 31, 2007:
Petitioner individually
Board or through a private
member or equity partnership Petitioner through an
Company name officer invested in IRA invested in

Accept Software Yes Yes Yes
Attensity Corp. Yes Yes No
Borderware Tech. Yes Yes Yes
DTL Plum Investments No Yes No
JackNyfe, Inc. Yes Yes No
Lignup, Inc. Yes Yes Yes
Links Mark Multimedia No Yes No
Lunamira, Inc. No Yes No
Medstory, Inc. No Yes No
Milphworld, Inc. No Yes No
Nextalk, Inc. Yes Yes No
Prevarex, Inc. Yes Yes No
Promoter Neurosciences No Yes No
PTRx Media, LLC Yes Yes Yes
Push Media, LLC No Yes No
RJ Research, Inc. No Yes No
Reactrix Systems, Inc. No Yes No
Renaissance 2.0 Media No Yes No
Signature Investments,
RBN, Inc. No Yes No
Soasta, Inc. Yes Yes Yes
Techtribenetworks, Inc. Yes Yes No
Vizible Corp. Yes Yes Yes
WellDunn Restaurant Grp. No Yes Yes
Webify Solutions Yes Yes No

Petitioner’s Tax and Estate Planning
By 1998 petitioner had enjoyed success in his investing
career and accumulated assets in excess of $20 million. An
attorney named David Herbst, who furnished petitioner with
tax advice, recommended that he secure the assistance of an
experienced estate planner. One of petitioner’s college class-
mates referred him to William Lipkind, a partner in the law
firm Lampf, Lipkind, Prupis and Petigrow.
Petitioner met with Mr. Lipkind for the first time in 1998
at Mr. Herbst’s office. Mr. Lipkind laid out a complex estate
plan that involved a grantor trust and the purchase of pri-
vate placement life insurance policies from Lighthouse. He
explained that private placement insurance is a type of vari-
able life insurance that builds value in a separate account.
(The details of this strategy are discussed more fully below.)
(324) WEBBER v. COMMISSIONER 329

Mr. Lipkind acknowledged that this tax-minimization
strategy had certain tax risks, but he orally assured peti-
tioner that the strategy was sound. After several followup
conversations, petitioner hired Mr. Lipkind to do his estate
planning and stated his intention to purchase the private
placement life insurance. Mr. Lipkind then undertook a
series of steps to implement this strategy.
The Grantor Trusts
The first step was the creation of a grantor trust, which
had three iterations between 1999 and 2008. On March 24,
1999, petitioner established the Jeffrey T. Webber 1999
Alaska Trust (Alaska Trust), a grantor trust for Federal
income tax purposes. Mr. Lipkind recommended Alaska as
the situs in part because that State has no income tax; he
was concerned that certain tax risks could arise if the trust
were formed in California, where petitioner resided. Mr.
Lipkind’s firm drafted the trust documents and customized
them to petitioner’s needs.
The trustees of the Alaska Trust were Mr. Lipkind and the
Alaska Trust Co. Petitioner could remove the trustees at any
time and replace them with ‘‘Independent Trustees.’’ 2 The
beneficiaries were petitioner’s children, his brother, and his
brother’s children. Petitioner was named a discretionary
beneficiary of the Alaska Trust, which was necessary to
achieve grantor trust status. 3
In 1999 petitioner contributed $700,000 to the Alaska
Trust. The trustee used these funds to purchase from Light-
house two ‘‘Flexible Premium Restricted Lifetime Benefit
Variable Life Insurance Policies’’ (Policy or Policies). Peti-
tioner timely filed Form 709, United States Gift (and Genera-
2 Independent Trustees could include any bank or an attorney who was

not ‘‘within the meaning of section 672(c) * * * related or subordinate to
the Grantor.’’
3 The Alaska Trust provided that ‘‘any one Independent Trustee acting

alone’’ may distribute to petitioner as Grantor ‘‘such amounts of the net
income and/or principal * * * as such Independent Trustee deems wise.’’
In determining whether to make any such distribution, the trustee was re-
quired to take into consideration ‘‘the Grantor’s own income and property
and any other income or property which may be available to the Grantor.’’
The trustee was empowered to exercise such discretion without regard to
the interest of remaindermen.
330 144 UNITED STATES TAX COURT REPORTS (324)

tion-Skipping Transfer) Tax Return, reporting this $700,000
gift. He attached to this return a disclosure statement
explaining that the Alaska Trust ‘‘purchased two variable life
insurance policies * * * for an aggregate first year’s pre-
mium of $700,000’’ and noting that his ‘‘contributions to the
Trust were completed gifts and the Trust assets will not be
includible in [his] gross estate.’’
The Alaska Trust was listed as the owner of the Policies
from October 28, 1999, to October 8, 2003. During 2003 peti-
tioner became concerned about protecting his assets from
creditors because Webber & Co. was encountering financial
problems, he was going through a divorce, and he feared law-
suits from unhappy private-equity investors following the
‘‘dot.com’’ crash. With the goal of achieving asset protection,
petitioner asked Mr. Lipkind to move the Alaska Trust
assets offshore. Mr. Lipkind advised against doing this
because of the tax disadvantages it could entail. Petitioner
nevertheless persisted in his desire for asset protection, and
Mr. Lipkind complied with his wishes.
On October 9, 2003, Mr. Lipkind established the Chalk
Hill Trust, a foreign grantor trust organized under the laws
of the Commonwealth of the Bahamas. The Alaska Trust
then assigned all of its assets, including the Policies, to the
Chalk Hill Trust. Petitioner filed a timely Form 3520,
Annual Return To Report Transactions With Foreign Trusts
and Receipt of Certain Foreign Gifts, reporting this transfer
and signing the return as ‘‘owner-beneficiary’’ of the Chalk
Hill Trust.
Petitioner was the grantor of the Chalk Hill Trust and is
treated as its owner for Federal income tax purposes. The
trustee was Oceanic Bank & Trust, Ltd.; the U.S. protector
was Mr. Lipkind; and the foreign protector was an entity
from the Isle of Man. Petitioner and his issue were the bene-
ficiaries of the Chalk Hill Trust. During petitioner’s lifetime
the trustee had ‘‘uncontrolled discretion’’ to distribute trust
assets to the beneficiaries. Mr. Lipkind, as the U.S. protector,
could remove and replace the trustee at any time.
The Chalk Hill Trust was listed as the owner of the Poli-
cies from October 9, 2003, through March 6, 2008. It was
thus the nominal owner of the Policies during the tax years
in issue. In early 2008 petitioner became confident that the
credit risks had passed and decided to move the trust assets
(324) WEBBER v. COMMISSIONER 331

back to a domestic grantor trust. The Delaware Trust was
established for that purpose, and all assets of the Chalk Hill
Trust, including the Policies, were assigned to it. The salient
terms of the Delaware Trust arrangement did not differ
materially from the terms of the prior two grantor trust
arrangements. We will sometimes refer to the Alaska Trust,
the Chalk Hill Trust, and the Delaware Trust collectively as
‘‘the Trusts.’’
Lighthouse
Lighthouse is a Cayman Islands class B unlimited life
insurance company established in 1996 and regulated by the
Cayman Islands Monetary Authority. Lighthouse issues
annuity and variable life insurance products. During 1999 it
issued 70 to 100 policies with a total outstanding face value
of $250 to $300 million. Petitioner had no direct or indirect
ownership interest in Lighthouse.
Lighthouse is managed by Aon Insurance Managers (Aon),
a wholly owned subsidiary of Aon PLC, a major insurance
company headquartered in London. Aon was responsible for
the day-to-day operations of Lighthouse, including its record-
keeping, compliance, and financial audits. Lighthouse
reinsures mortality risk arising under its policies with Han-
nover Ru¨ckversicherung-AG (Hannover Re), a well-respected
reinsurer. Lighthouse generally reinsures all but $10,000 of
the mortality risk on each policy, as it did with these Poli-
cies. For some elderly insureds, such as those under peti-
tioner’s Policies, Lighthouse reinsured virtually 100% of the
mortality risk.
Before issuing a policy Lighthouse would conduct an
underwriting analysis and seek medical information about
the prospective insured. Where (as here) the policyholder was
not the insured, Lighthouse performed due diligence
regarding the source of funds. It also confirmed the existence
of an insurable interest.
The Policies
The Policies, initially acquired by the Alaska Trust and
later transferred to the Chalk Hill Trust, insured the lives of
two of petitioner’s relatives. The first Policy insured the life
of Mabel Jordan, the stepgrandmother of petitioner’s then
332 144 UNITED STATES TAX COURT REPORTS (324)

wife. Ms. Jordan, who was 78 years old when the Policy was
issued, died in November 2012 at age 92. The second Policy
insured the life of Oleta Sublette, petitioner’s aunt. She was
77 years old when the Policy was issued and was still alive
at the time of trial. Each Policy had a minimum guaranteed
death benefit of $2,720,000.
Each Policy required Lighthouse to establish a separate
account pursuant to section 7(6)(c) of the Cayman Islands
Insurance Law to fund benefits under that Policy. On
receiving the initial premiums in 1999, Lighthouse debited
against them the first-year policy charges (a one-year mor-
tality risk premium and one year’s worth of administrative
fees). Lighthouse kept the administrative fees and trans-
ferred most of the mortality risk premium to Hannover Re.
The remainder of each premium was allocated to the rel-
evant separate account. On an annual basis thereafter,
Lighthouse debited each separate account for that year’s
mortality and administrative charges. If the assets in the
separate account were insufficient to defray these charges,
the policyholder had to make an additional premium pay-
ment to cover the difference; otherwise, the policy would
lapse and terminate.
The annual administrative fee that Lighthouse charged
each Policy equaled 1.25% of its separate account value.
There was an additional fee to cover services nominally pro-
vided by the Policies’ ‘‘investment manager.’’ (As explained
below, that fee was modest.) The mortality risk charge was
determined actuarially, but it rapidly decreased as the value
of the separate accounts approached or exceeded the min-
imum death benefit of $2,720,000. The mortality risk charges
debited to the separate accounts during 2006–2007 totaled
$12,327.
The minimum death benefit was payable in all events so
long as the Policy remained in force. If the investments in
the separate account performed well, the beneficiary upon
the insured’s death was to receive the greater of the min-
imum death benefit or the value of the separate account. The
Policies provided that the death benefit would be paid by
Lighthouse ‘‘in cash to the extent of liquid assets and in kind
to the extent of illiquid assets (any in kind payment being in
the sole discretion of Lighthouse), or the Death Benefit shall
be paid by such other arrangements as may be agreed upon.’’
(324) WEBBER v. COMMISSIONER 333

The Policies permitted the policyholder to add additional
premiums if necessary to keep the Policies in force. On Sep-
tember 7, 2000, the Alaska Trust made an additional pre-
mium payment of $35,046 to cover a portion of the second-
year mortality/administrative charge. The assets in the sepa-
rate accounts performed so well that no subsequent premium
payments were required. Thus, the total premiums paid on
the Policies by the Alaska Trust (and by its successor grantor
trusts) amounted to $735,046.
The Policies granted certain rights to the policyholder prior
to the deaths of the insureds. Each Policy permitted the
policyholder to assign it; to use it as collateral for a loan; to
borrow against it; and to surrender it. If the policyholder
wished to assign a Policy or use it as collateral for a loan,
Lighthouse had the discretion to reject such a request.
However, the Policies significantly restricted the amount of
cash the policyholder could extract from the Policies by sur-
render or policy loan. This restriction was accomplished by
limiting the Cash Surrender Value of each Policy to the total
premiums paid, and by capping any policy loan at the Cash
Surrender Value. For this purpose, ‘‘premiums’’ were defined
as premiums paid in cash by the policyholder, to the exclu-
sion of mortality/administrative charges debited from the
separate accounts.
Thus, if the separate accounts performed poorly and the
policyholder paid cash to cover ongoing mortality/administra-
tive charges, those amounts would constitute ‘‘premiums’’
and would increase the Cash Surrender Value. By contrast,
if the separate accounts performed well and ongoing mor-
tality/administrative charges were debited from the separate
accounts, those amounts were not treated as premiums that
increased the Cash Surrender Value, but as internal charges
paid by Lighthouse. 4 The result of this restriction was that
the maximum amount the Trusts could extract from the Poli-
cies prior to the deaths of the insureds, by surrendering the
Policies or taking out policy loans, was $735,046.

4 For 2006 and 2007 the separate accounts paid Lighthouse $130,000 and

$161,500, respectively, to cover annual mortality/administrative charges.
The 2007 charges were higher because the separate accounts’ values had
increased.
334 144 UNITED STATES TAX COURT REPORTS (324)

Investment Management of the Separate Accounts
Lighthouse did not provide investment management serv-
ices for the separate accounts. Rather, it permitted the
policyholder to select an investment manager from a Light-
house-approved list. For most of 2006 and 2007 Butterfield
Private Bank (Butterfield), a Bahamian bank, served as the
investment manager for the separate accounts. The Policies
specified that Butterfield would be paid $500 annually for
investment management services and $2,000 for accounting. 5
In November 2007 Experta Trust Co. (Bahamas), Ltd.
(Experta), became the investment manager. No one testified
at trial on behalf of Butterfield or Experta. We will refer to
these entities collectively as the ‘‘Investment Manager.’’
As drafted, the Policies state that no one but the Invest-
ment Manager may direct investments and deny the policy-
holder any ‘‘right to require Lighthouse to acquire a par-
ticular investment’’ for a separate account. Under the Poli-
cies, the policyholder was allowed to transmit ‘‘general
investment objectives and guidelines’’ to the Investment
Manager, who was supposed to build a portfolio within those
parameters. The Trusts specified that 100% of the assets in
the separate accounts could consist of ‘‘high risk’’ invest-
ments, including private-equity and venture-capital assets.
Lighthouse was required to perform ‘‘know your client’’ due
diligence, designed to avoid violation of antiterrorism and
moneylaundering laws, and was supposed to ensure that ‘‘the
Separate Account investments [were managed] in compliance
with the diversification requirements of Code Section 817(h).’’
Besides setting the overall investment strategy for a sepa-
rate account, a policyholder was permitted to offer specific
investment recommendations to the Investment Manager.
But the Investment Manager was nominally free to ignore
such recommendations and was supposed to conduct inde-
pendent due diligence before investing in any nonpublicly
traded security. Although almost all of the investments in
5 It appears that the separate accounts paid Butterfield $8,500 in overall

fees for 2006 and 2007, but there is no evidence that any amount in excess
of $500 per year was allocable to investment management. Petitioner di-
rects the Court’s attention to an accounting entry showing ‘‘Administrative
Fees’’ of $20,500 paid in 2007, but there is no evidence to establish what
these were paid for.
(324) WEBBER v. COMMISSIONER 335

the Policies’ separate accounts consisted of nonpublicly
traded securities, the record contains no compliance records,
financial records, or business documentation (apart from
boilerplate references in emails) to establish that Lighthouse
or the Investment Manager in fact performed independent
research or meaningful due diligence with respect to any of
petitioner’s investment directives.
Lighthouse created a series of special-purpose companies to
hold the investments in the separate accounts. The Light-
house Nineteen Ninety-Nine Fund LDC (1999 Fund), orga-
nized in the Bahamas, was created when the separate
accounts were initially established. During the tax years in
issue the principal special-purpose company was Boiler Riffle
Investments, Ltd. (Boiler Riffle), likewise organized in the
Bahamas. These investment funds were owned by Light-
house but were dedicated exclusively to funding death bene-
fits under the Policies through the separate accounts. These
special-purpose vehicles were not available to the general
public or to any other Lighthouse policyholder.
The ‘‘Lipkind Protocol’’
Mr. Lipkind explained to petitioner that it was important
for tax reasons that petitioner not appear to exercise any
control over the investments that Lighthouse, through the
special-purpose companies, purchased for the separate
accounts. Accordingly, when selecting investments for the
separate accounts, petitioner followed the ‘‘Lipkind protocol.’’
This meant that petitioner never communicated—by email,
telephone, or otherwise—directly with Lighthouse or the
Investment Manager. Instead, petitioner relayed all of his
directives, invariably styled ‘‘recommendations,’’ through Mr.
Lipkind or Ms. Chang.
The record includes more than 70,000 emails to or from
Mr. Lipkind, Ms. Chang, the Investment Manager, and/or
Lighthouse concerning petitioner’s ‘‘recommendations’’ for
investments by the separate accounts. Mr. Lipkind also
appears to have given instructions regularly by telephone.
Explaining his lack of surprise at finding no emails about a
particular investment, Mr. Lipkind told petitioner: ‘‘We have
relied primarily on telephone communications, not written
336 144 UNITED STATES TAX COURT REPORTS (324)

paper trails (you recall our ‘owner control’ conversations).’’
The 70,000 emails thus tell much, but not all, of the story.
Investments by the Separate Accounts
In April 1999, shortly after the Alaska Trust initiated the
Policies, the 1999 Fund purchased from petitioner, for
$2,240,000, stock that petitioner owned in three startup
companies: Sagent Technology, Inc., Persistence Software,
Inc., and Commerce One, Inc. Petitioner was unsure how the
1999 Fund could have paid him $2,240,000 for his stock
when the Alaska Trust at that point had paid premiums
toward the Policies of only $700,000 (before reduction for
very substantial first-year mortality charges). He speculated
that he might have made an installment sale.
Petitioner testified that he expected the stock in these
three companies to ‘‘explode’’ in value. They did. Not long
thereafter, each company had a ‘‘liquidity event’’—either an
IPO or direct sale—that enabled the separate accounts to sell
the shares at a substantial gain. Those profits were used to
purchase other investments for the separate accounts during
the ensuing years.
During 2006–2007 Boiler Riffle was the special-purpose
entity through which petitioner effected most of his invest-
ment objectives for the Policies. 6 (In their email correspond-
ence, petitioner and Mr. Lipkind often refer to Boiler Riffle
as ‘‘BR’’ or ‘‘br,’’ and various parties refer to petitioner as
‘‘Jeff.’’). Petitioner achieved his investment objectives by
entering into transactions directly with Boiler Riffle and by
offering through his intermediaries ‘‘recommendations’’ about
assets in which Boiler Riffle should invest.
The net result of this process was that every investment
Boiler Riffle made was an investment that petitioner had
‘‘recommended.’’ Apart from certain brokerage funds, vir-
tually every security that Boiler Riffle held was issued by a
startup company in which petitioner had a personal financial
interest, e.g., by sitting on its board, by investing in its secu-
6 Boiler Riffle had 5,000 shares of stock outstanding, and its Register of
Members showed 2,500 shares as ‘‘owned’’ by each Policy. Since an insur-
ance policy cannot own property, the Court interprets this reference to
mean that half of the assets held by Boiler Riffle were dedicated respec-
tively to each Policy.
(324) WEBBER v. COMMISSIONER 337

rities personally or through an IRA, or by investing in its
securities through a venture-capital fund he managed. The
Investment Manager did no independent research about
these fledgling companies; it never finalized an investment
until Mr. Lipkind had signed off; and it performed no due
diligence apart from boilerplate requests for organizational
documents and ‘‘know your customer’’ review. The Invest-
ment Manager did not initiate or consider any equity invest-
ment for the separate accounts other than the investments
that petitioner ‘‘recommended.’’ The Investment Manager
was paid $500 annually for its services, and its compensation
was commensurate with its efforts.
The 70,000 emails in the record establish that Mr. Lipkind
and Ms. Chang served as conduits for the delivery of instruc-
tions from petitioner to Lighthouse and Boiler Riffle. The fact
that Boiler Riffle invested almost exclusively in startup
companies in which petitioner had a personal financial
interest was not serendipitous but resulted from petitioner’s
active management over these investments. The following
table shows the startup companies in which Boiler Riffle held
investments at yearend 2006 and 2007, the form of those
investments, and whether petitioner invested in the same
entities outside of the Policies:
Convertible debt/ Petitioner invested in
Company Equity promissory note outside policies

Accept Software 2006 &2007 2007 Yes
Attensity Corp. 2006 &2007 --- Yes
Borderware Tech. 2006 &2007 2006 & 2007 Yes
DTL Plum Investments 2006 &2007 --- Yes
JackNyfe, Inc. 2007 --- Yes
Lignup, Inc. 2006 & 2007 2007 Yes
Links Mark Multimedia --- 2007 Yes
Lunamira, Inc. 2007 --- Yes
Medstory 2006 --- Yes
Milphworld, Inc. --- 2007 Yes
Nextalk, Inc. 2007 --- Yes
Prevarex, Inc. 2007 --- Yes
Promoter Neurosciences 2007 --- Yes
PTRx Media, LLC 2006 & 2007 2007 Yes
Quintana Energy 2006 & 2007 --- Yes
Push Media, LLC 2006 & 2007 --- Yes
RJ Research, Inc. --- 2007 Yes
Reactrix Systems, Inc. 2006 & 2007 --- Yes
Renaissance 2.0 Media 2006 & 2007 --- Yes
Signature Investments,
RBN, Inc. --- 2006 & 2007 Yes
Soasta, Inc. 2007 --- Yes
Techtribenetworks, Inc. 2006 & 2007 2006 & 2007 Yes
Vizible Corp. 2006 & 2007 --- Yes
WellDunn Restaurant Grp. 2006 & 2007 --- Yes
338 144 UNITED STATES TAX COURT REPORTS (324)

Though Mr. Lipkind was careful to insulate petitioner from
direct communication with the Investment Manager, he fre-
quently represented to the personnel of target investments
that he and petitioner controlled Boiler Riffle and were
acting on its behalf. Indeed, he often referred to Boiler Riffle
as ‘‘Jeff ’s wallet.’’ (Ms. Chang once suggested that the target
companies change their email protocol ‘‘in order to maintain
the appearance of separation.’’) ‘‘When Butterfield gets some-
thing with respect to Boiler Riffle,’’ Mr. Lipkind told one tar-
get company, ‘‘they always solicit my views before doing any-
thing.’’ ‘‘While it [may] sound complex,’’ he told another com-
pany, ‘‘the process does move quite rapidly. Besides,
Butterfield will do nothing unless and until both I and Light-
house sign off.’’ We set forth below a representative sample
of communications among Mr. Lipkind, Ms. Chang, Light-
house, the Investment Manager, and the startup companies
in which petitioner wished Boiler Riffle to invest.
Accept Software. Petitioner invested in Accept Software
personally and through funds he managed and was a
member of its board of directors. In January and June 2006
he communicated directly with its representatives, prior to
any consultation with the Investment Manager, and com-
mitted to have Boiler Riffle purchase its series B equity
round shares. Petitioner made a personal financial commit-
ment to officers of Accept Software and then directed Boiler
Riffle to finance that commitment. In December 2006 Mr.
Lipkind emailed a staff person at Butterfield and informed
her that petitioner wished to make this investment: ‘‘It is
most strongly recommended that BR go forward with this. If
there are any questions, please call.’’ The Investment Man-
ager duly complied with this recommendation.
In mid-2007 Accept Software offered its shareholders a
chance to participate in a bridge financing. Petitioner ini-
tially indicated that he wished Boiler Riffle to participate for
its ‘‘pro-rata amount,’’ and this instruction was relayed to the
Investment Manager. Later, Mr. Lipkind thought petitioner
had changed his mind and emailed a staff person at
Butterfield: ‘‘An issue has now arisen with respect to going
as high as ‘pro-rata.’ Have papers been sent in? If not, hold.
I should get matter cleared up by tomorrow. If papers went
in already, I will deal with it at Company level.’’ The staff
person responded: ‘‘I have not sent the paper work as yet
(324) WEBBER v. COMMISSIONER 339

[and] I will hold until I h[ear] f[rom] you.’’ Petitioner ulti-
mately decided to take his pro-rata share, and Boiler Riffle
obediently made that investment.
PTRx Media. Petitioner invested in PTRx personally and
through funds he managed and was a member of its board
of directors. In March 2006 petitioner told Mr. Lipkind that
he wanted Boiler Riffle to invest $50,000 in PTRx’s series B
financing. On March 31, 2006, Mr. Lipkind emailed Ms.
Strachan of Butterfield as follows: ‘‘Boiler Riffle should
participate in the attachments for Series B to the tune of
$50,000, the same amount it did on Series A. I assume you
will process same.’’ Boiler Riffle purchased the PTRx stock.
PTRx later offered a series D financing, and Mr. Lipkind
asked petitioner whether Boiler Riffle should participate.
Petitioner responded: ‘‘[PTRx is] doing great [and] they
should be break even by the end of the year. They have just
hired a killer sales guy. We cut a great deal this morning
with a bank. * * * I would do pro-rata at the minimum.’’ Mr.
Lipkind emailed the Investment Manager and ‘‘strongly rec-
ommended that Boiler Riffle * * * participate at least to
their pro-rata.’’ Boiler Riffle duly purchased its pro-rata
share of the series D financing.
WellDunn Restaurant Group. Petitioner invested in
WellDunn personally and through a fund he managed. On
September 1, 2006, Mr. Lipkind emailed Ms. Strachan at
Butterfield as follows: ‘‘We recommend WellDunn as an
investment for Boiler Riffle. WellDunn had hoped that BR
would invest $250,000, but I advised them it was unlikely
that the investment would exceed $150,000. Until they
indicate that is OK, it is unnecessary to proceed.’’
WellDunn subsequently acquiesced in the reduced invest-
ment amount and Mr. Lipkind sent a followup email to Ms.
Strachan: ‘‘Please proceed with BR investing $150,000 in this
deal.’’ Mr. Lipkind then informed his contact at WellDunn: ‘‘I
have * * * instructed Kimberly to proceed and to deal
directly with you. BR’s investment should now proceed
quickly and smoothly.’’ On September 13, 2006, Boiler Riffle
invested $150,000 in WellDunn.
JackNyfe, Inc. Petitioner invested in JackNyfe personally
and through a fund he managed and was on its board of
directors. On August 27, 2007, petitioner informed Mr.
Lipkind that he had structured a $1.2 million financing for
340 144 UNITED STATES TAX COURT REPORTS (324)

JackNyfe that would be effected in $200,000 tranches. He
told Mr. Lipkind that ‘‘the participants in these financings
will be br and others. * * * br should consider to be on point
for the first $400,000.’’ On September 6, 2007, Ms. Chang
sent Mr. Lipkind wire instructions that Boiler Riffle was to
use when making its initial $200,000 investment.
Mr. Lipkind forwarded these wire instructions to a staff
person at Butterfield but noted: ‘‘I am still reviewing certain
documents so that I have not given a green light rec-
ommendation yet.’’ On September 10, 2007, Mr. Lipkind com-
pleted his document review and emailed the Investment
Manager with instructions that ‘‘we proceed.’’ On September
18, 2007, Mr. Lipkind sent a followup email instructing the
Investment Manager to get the investment in JackNyfe done
‘‘ASAP’’ because ‘‘Jeff wanted to close this tranche as soon as
possible.’’ Boiler Riffle followed Mr. Lipkind’s instructions
and invested $200,000 in JackNyfe.
Lignup, Inc. Petitioner invested in Lignup personally and
through a fund he managed and was on its board of direc-
tors. On December 16, 2005, without approval from the
Investment Manager, petitioner committed to Lignup’s rep-
resentatives that Boiler Riffle would invest $300,000 in the
company. In late December 2005 Mr. Lipkind followed up
with a ‘‘recommendation’’ to the Investment Manager. Boiler
Riffle made the desired investment in the desired amount.
After instructing Boiler Riffle to invest in Lignup, peti-
tioner directed what actions Boiler Riffle should take in its
capacity as a Lignup shareholder. On May 19, 2006, Mr.
Lipkind relayed petitioner’s instructions that Boiler Riffle
consent to an amendment of Lignup’s certificate of incorpora-
tion, but that it reject participation in a subsequent financing
round. Mr. Lipkind told the Investment Manager to ‘‘[k]indly
process’’ petitioner’s instructions, and it did so.
As a shareholder in his own right, petitioner had the
opportunity to subscribe for pro-rata offerings of Lignup
shares, but on certain occasions he assigned his rights to
Boiler Riffle. On June 1, 2006, Ms. Chang told Mr. Lipkind
that ‘‘Jeff would like Boiler Riffle to take his pro rata of
74,743 shares of Lignup Series B stock.’’ Mr. Lipkind passed
this recommendation on to the Investment Manager, and
Boiler Riffle purchased the shares. Six months later, Mr.
Lipkind noted that ‘‘Jeff in all of his incarnations’’ would
(324) WEBBER v. COMMISSIONER 341

take his pro-rata share of a subsequent Lignup offering and
would assign part of his share to Boiler Riffle. Mr. Lipkind
said, ‘‘Full speed ahead on this one,’’ and a staff person from
Butterfield replied that this could ‘‘get done next week.’’
Techtribenetworks, Inc. Petitioner invested in Techtribe-
networks personally and through funds he managed and was
on its board of directors. In early 2006 he lent the company
$50,000 in exchange for a promissory note. Later that year
he sold that promissory note to Boiler Riffle for $50,000. In
early 2007 petitioner advanced an additional $200,000 to
Techtribenetworks. At petitioner’s request, Boiler Riffle then
lent Techtribenetworks $200,000 so that it could reimburse
petitioner for the funds he had invested several months pre-
viously.
The $200,000 note Boiler Riffle received from Techtribe-
networks was convertible into its series B stock. When a ‘‘B’’
financing round was announced later in 2007, Mr. Lipkind
instructed Boiler Riffle to invest $250,000. A staff person
from Butterfield asked whether Boiler Riffle should convert
the $200,000 note and add $50,000 in cash, or whether it
should invest $250,000 of new money on top of the note. Mr.
Lipkind directed that Boiler Riffle do the former, and it did.
Quintana Energy. On September 19, 2006, Mr. Lipkind
emailed a representative of Quintana Energy stating: ‘‘Our
entity, Boiler Riffle, a Bahamian corporation, would like to
invest an aggregate of $600,000. In addition, Jeff ’s IRA
would like to invest $200,000.’’ The following week, Mr.
Lipkind emailed that individual and others stating: ‘‘For very
important reasons, please do not, in any communication with
me concerning Quintana and Boiler Riffle, include Jeff
Webber as a copy.’’ On September 22, 2006, Boiler Riffle
made a substantial investment in Quintana Energy.
In January 2007 Quintana Energy issued a capital call to
its shareholders. On January 22, 2007, a Butterfield staff
person emailed Mr. Lipkind asking him to ‘‘confirm whether
Boiler Riffle is interested in the Quintana capital call for
Jan. 30th.’’ Mr. Lipkind responded, ‘‘ Yes. BR should honor
the capital call.’’ Boiler Riffle evidently did so.
Signature Investments RBN, Inc. In 2006 petitioner wanted
Boiler Riffle to invest $500,000 in Longboard Vineyards, LLC
(Longboard), a California winery. (Petitioner had previously
owned a winery himself.) He began negotiations directly with
342 144 UNITED STATES TAX COURT REPORTS (324)

Longboard without consulting the Investment Manager.
Because Longboard was a pass-through entity for Federal
income tax purposes, Mr. Lipkind advised petitioner that ‘‘it
is tax inefficient for it to be owned by Boiler Riffle.’’
On Mr. Lipkind’s advice, petitioner accordingly organized
Signature Investments RBN, Inc. (Signature), a domestic C
corporation of which he was the president and beneficial
owner, and capitalized it with $50,000 of his own funds. Peti-
tioner then made arrangements for Boiler Riffle to lend
$450,000 to Signature, with the plan that Signature would
then lend $500,000 to Longboard. Longboard was experi-
encing financial difficulty at this time, but petitioner assured
Mr. Lipkind that the loan from Signature ‘‘brings everything
in compliance’’ and ‘‘the bank is in the loop.’’
Petitioner’s personal attorneys reviewed the operating
agreement for Longboard, made comments on it, and worked
with Longboard’s representatives to draft the promissory
note. During these negotiations petitioner asked that the
note from Longboard to Signature act as security for the note
from Signature to Boiler Riffle. Longboard’s representative
told Mr. Lipkind that ‘‘this would probably be okay if Boiler
is owned or controlled by Webber.’’ Mr. Lipkind responded:
‘‘Boiler Riffle is 100% owned by two variable life insurance
policies * * * both of which are owned by a Trust of which
Jeff [Webber] is the Settlor and a discretionary beneficiary.’’
This explanation satisfied Longboard.
After getting Longboard’s signoff on the security agree-
ment, Mr. Lipkind instructed his associate to send the draft
promissory note to the Investment Manager ‘‘explaining the
transaction which is contemplated and ‘recommend’ and seek
their approval both for the loan and the form of the note.
Thereafter, please coordinate * * * to get this thing done.’’
On November 11, 2006, Boiler Riffle lent Signature $450,000
in exchange for its note, and on December 18, 2006, Signa-
ture lent Longboard $500,000 in exchange for its note.
Longboard’s note to Signature was subordinated to the
winery’s outstanding bank loans.
Boiler Riffle made two additional loans to Signature the
following year. In September 2007 Longboard required more
capital, and petitioner arranged a $100,000 loan from Boiler
Riffle through Signature to the winery. Ms. Chang asked Mr.
Lipkind ‘‘to request that Boiler Riffle proceed with its consid-
(324) WEBBER v. COMMISSIONER 343

eration of a $100,000 advance to Signature.’’ As soon as Mr.
Lipkind’s staff drafted the note and petitioner had signed it,
Ms. Chang requested that it ‘‘be presented to Boiler Riffle to
fund along with wire instructions.’’ Boiler Riffle promptly
complied.
Later that month Boiler Riffle lent Signature another
$80,000. As Ms. Chang explained to Mr. Lipkind, this loan
had nothing to do with the winery: ‘‘Jeff needs to borrow
from Boiler Riffle $80,000 as soon as possible for a deposit
on the Canada Maximas lodge, to be purchased through Wild
Goose Investments.’’ Boiler Riffle promptly complied.
Philtap Holdings, Ltd. In April 2006 petitioner wanted to
invest in Post Ranch Investments Limited Partnership (Post
Ranch), which was developing a luxury property in Big Sur,
California. Without prior approval from the Investment Man-
ager, petitioner began negotiations directly with Post Ranch’s
representatives. On April 4, 2006, Ms. Chang informed Mr.
Lipkind of the status: ‘‘Jeff wants to invest in an LP that will
be a part owner of a luxury resort in Big Sur * * *. We
thought Jeff could purchase 250K interest through his IRA,
but there are a number of hurdles. * * * Would you * * *
be able to make such an investment happen by early next
week?’’ She later followed up: ‘‘Since [Jeff] insists on making
this investment and it is not a wise use of onshore dollars
at this time given existing capital commitments and the
bank’s liquidity requirements, he is looking towards Boiler
Riffle.’’
After reviewing Post Ranch’s offering materials, Mr.
Lipkind advised petitioner against making this investment:
‘‘When one adds up the various and conflicting roles of the
promoters, one concludes there is virtually no way in law to
protect oneself adequately. Thus, you are giving your money
to these promoters and praying to God that they treat their
LPs fairly.’’ Although Mr. Lipkind warned that ‘‘a reasonably
prudent investor with no personal knowledge or relationship
with the promoters would take a pass,’’ petitioner decided to
invest anyway.
Mr. Lipkind then passed petitioner’s ‘‘recommendation’’ on
to the Investment Manager. He was told that Boiler Riffle
had $250,000 available but that Lighthouse preferred to have
the investment made by an entity other than Boiler Riffle.
Mr. Lipkind then instructed the Investment Manager to form
344 144 UNITED STATES TAX COURT REPORTS (324)

a new entity ‘‘ASAP’’ to complete the deal. The Investment
Manager followed Mr. Lipkind’s instruction and set up a new
company, Philtap Holdings, Ltd. (Philtap), which was owned
by Lighthouse. On April 19, 2006, Philtap invested $250,000
in Post Ranch as petitioner had instructed.
Webify Solutions. Petitioner and two other investors pro-
vided the initial seed money to Webify Solutions (Webify),
and petitioner served on its board of directors. In October
2002 Webify issued petitioner warrants to purchase 250,000
shares of its common stock for 5 cents per share. Petitioner
wanted Boiler Riffle to acquire these warrants from him, and
Mr. Lipkind conveyed this ‘‘recommendation’’ to the Invest-
ment Manager. On March 31, 2003, Boiler Riffle purchased
the warrants from petitioner for $3,085. He reported this sale
on a 2003 gift tax return, attaching an appraisal supporting
the $3,085 value. In 2004 Boiler Riffle exercised the warrants
and purchased 250,000 shares of Webify for $12,500.
Petitioner was aware that International Business
Machines (IBM) might be interested in Webify, and he rec-
ommended that Boiler Riffle make additional Webify invest-
ments. In a series of transactions during 2002–2004, Boiler
Riffle purchased $412,500 of Webify convertible debentures
and entered into an agreement to purchase series B pre-
ferred stock for an amount in excess of $400,000. In July
2006 IBM agreed to purchase Boiler Riffle’s aggregate invest-
ment in Webify for more than $3 million. Of this sum,
$2,731,087 was paid in 2006, and the remainder was put into
escrow to indemnify IBM against certain risks. An additional
$212,641 was paid to Boiler Riffle from the escrow in 2007,
and the remaining balance was apparently paid in 2008. As
shown on Butterfield’s financial records, Boiler Riffle’s aggre-
gate basis in its Webify investment was $838,575.
Milphworld, Inc. While acknowledging that Lighthouse
implemented ‘‘the vast bulk’’ of his instructions, petitioner
contends that it demurred to his recommendation to buy
shares of Milphworld. This was supposedly because Light-
house thought the company’s name had a derogatory con-
notation. There is no documentary evidence of such reluc-
tance, and Boiler Riffle in fact invested in Milphworld.
Petitioner initially suggested the Milphworld investment in
August 2006, but SEC restrictions apparently prevented
Boiler Riffle from acquiring its stock. To get around these
(324) WEBBER v. COMMISSIONER 345

restrictions, petitioner made loans to Milphworld and
arranged to have Boiler Riffle purchase its promissory notes
from him. A staff person from the Investment Manager
emailed Mr. Lipkind: ‘‘Kindly advise if we are to proceed
with the Milphworld investment in Boiler Riffle.’’ Mr.
Lipkind responded, ‘‘[Y]es.’’ In February 2007 Boiler Riffle
purchased from petitioner six Milphworld promissory notes
with an aggregate face value of $186,600.
Lehman Brothers Fund. Besides investing in startup
companies that petitioner ‘‘recommended,’’ Boiler Riffle
placed funds in money-market and other investment vehicles
offered by brokerage firms. Petitioner cites a Lehman
Brothers fund as another of his recommendations that the
Investment Manager supposedly rejected. There is no record
support for this contention; in fact, the record establishes the
opposite.
In May 2006, without prior approval from the Investment
Manager, Mr. Lipkind emailed a broker at Lehman Brothers
regarding that firm’s Co-Investment Partners fund (CIP),
inquiring how they might ‘‘splice this investment into an
appropriate place in Jeff ’s universe.’’ Two days later Mr.
Lipkind emailed Butterfield, stating: ‘‘We recommend Boiler
Riffle sign up for a $1,000,000 investment’’ in CIP. One week
later, Mr. Lipkind emailed petitioner to confirm that Boiler
Riffle had made this investment. Later in 2006 CIP issued a
capital call. On November 7, 2006, Mr. Lipkind emailed Ms.
Strachan: ‘‘This is a Jeff Webber/BR investment. I assume
you will take care of the capital call.’’ There is no evidence
that the Investment Manager failed to do so. 7

7 Petitioner cites only one other occasion on which the Investment Man-

ager allegedly declined to implement an investment recommendation that
petitioner had made, concerning a company called Safeview. The Invest-
ment Manager apparently pointed out to petitioner a ‘‘due diligence’’ issue
concerning this company—the State of California had issued a complaint
against one of its principals—but petitioner himself made the final decision
not to invest. On July 12, 2007, Mr. Lipkind accordingly emailed the In-
vestment Manager: ‘‘I want Safeview Investment to be ‘on hold’ until I rec-
ommend further.’’ Later in 2007 petitioner again suggested an investment
in Safeview. The record contains no evidence that the Investment Manager
opposed the investment at that time.
346 144 UNITED STATES TAX COURT REPORTS (324)

Mr. Lipkind’s Tax Advice
After explaining the mechanics of private placement life
insurance at their 1998 meeting, Mr. Lipkind noted that
there were certain Federal tax risks associated with this tax-
minimization strategy. He told petitioner that he had
reviewed pertinent IRS rulings, relevant judicial precedent,
and opinion letters from several U.S. law firms. These
opinion letters, issued by Powell Goldstein, Rogers & Wells,
and other firms, addressed the U.S. tax consequences of
Lighthouse private placement life insurance products gen-
erally. James A. Walker, Jr., the author of the Powell Gold-
stein opinions, later became outside general counsel for
Lighthouse. Mr. Lipkind had lengthy discussions with Mr.
Walker about the Lighthouse products and the tax risks
associated with them.
Three of these opinion letters specifically addressed the
‘‘investor control’’ doctrine. They stated that ‘‘investor control
is a factual issue and uncertain legal area’’ but concluded
that the Lighthouse policies as structured would comply with
U.S. tax laws and avoid application of this doctrine. Mr.
Lipkind told petitioner that he concurred in these opinions.
Acknowledging the risk that the IRS would challenge the
strategy, Mr. Lipkind concluded that the ‘‘investor control’’
doctrine would not apply because petitioner would not be in
‘‘constructive receipt’’ of the assets held in the separate
accounts. While assuring petitioner that the outside legal
opinions supported this conclusion, Mr. Lipkind did not pro-
vide a written opinion himself. Mr. Herbst approved the
Lighthouse transaction but did not provide a written opinion
either.
For their work preparing Trust documents and all other
work for petitioner, Mr. Lipkind and his colleagues charged
time at their normal hourly rates. Neither Mr. Lipkind nor
his firm received from petitioner any form of bonus or other
remuneration apart from hourly time charges. Neither Mr.
Lipkind nor his firm received compensation of any kind from
Lighthouse or the Investment Manager.
IRS Examination and Tax Court Proceedings
The IRS examined petitioner’s timely filed 2006 and 2007
Federal income tax returns. Initially, petitioner directed his
(324) WEBBER v. COMMISSIONER 347

staff to produce all documents and other information that the
IRS requested. He declined, however, to let the IRS interview
Ms. Chang, and respondent therefore issued an administra-
tive summons for her testimony. Petitioner’s attorneys moved
to quash this summons contending (among other things) that
IRS personnel had made false statements about petitioner to
third parties. IRS representatives eventually interviewed Ms.
Chang.
After the examination the IRS advanced a variety of theo-
ries to support its determination that petitioner was taxable
on the income that Boiler Riffle derived from the investments
it held for the Polices’ separate accounts. These theories
included the contention that the Lighthouse structure lacked
economic substance or was a ‘‘sham’’; that Boiler Riffle was
a ‘‘controlled foreign corporation’’ (CFC) whose income was
taxable to petitioner under section 951 through the Chalk
Hill Trust; and that petitioner should be deemed to own the
assets in the separate accounts under the ‘‘investor control’’
doctrine. The parties have stipulated that Boiler Riffle had
the following items of book income and expense during 2006
and 2007:
Item 2006 2007

Realized gain $1,913,237 $28,379
Unrealized gain -0- 82,562
Unrealized loss (21,555) -0-
Dividends/interest 78,595 214,799
Loan interest -0- 210,741
Miscellaneous/other income 40 212,641

Total income 1,970,317 749,122

Policy mortality/admin. charges 130,000 161,500
Bank service charges 2,172 6,157
Butterfield bank fees 8,500 -0-
Administration fees -0- 20,500
Government fees and taxes 350 1,871
Miscellaneous/other expense 1,163 454

Total expense 142,185 190,482
Net income per books 1,828,132 558,640

Boiler Riffle had total assets of $7.2 million and $12.3 mil-
lion at the end of 2006 and 2007, respectively. The separate
accounts appear to have held other assets, owned by Philtap
or other special-purpose entities, but the record does not
348 144 UNITED STATES TAX COURT REPORTS (324)

reveal the amounts of those other assets. The IRS issued
petitioner a notice of deficiency on March 22, 2011. He timely
sought review in this Court.

OPINION

I. Burden of Proof
When contesting the determinations set forth in a notice of
deficiency, the taxpayer generally bears the burden of proof.
See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). If a taxpayer introduces ‘‘credible evidence with
respect to any factual issue,’’ the burden of proof on that
issue will shift to the Commissioner if certain conditions are
met. Sec. 7491(a)(1). ‘‘Credible evidence is the quality of evi-
dence which, after critical analysis, the court would find
sufficient upon which to base a decision on the issue if no
contrary evidence were submitted.’’ Higbee v. Commissioner,
116 T.C. 438, 442 (2001) (quoting H.R. Conf. Rept. No. 105–
599, at 240–241 (1998), 1998–3 C.B. 747, 994–995). To
qualify for a shift in the burden of proof, the taxpayer must
(among other things) have ‘‘cooperated with reasonable
requests by the Secretary for witnesses, information, docu-
ments, meetings, and interviews.’’ Sec. 7491(a)(2)(B). The
taxpayer bears the burden of proving that all of these
requirements have been satisfied. See Rolfs v. Commissioner,
135 T.C. 471, 483 (2010), aff ’d, 668 F.3d 888 (7th Cir. 2012).
As explained infra p. 363, petitioner did not introduce
‘‘credible evidence’’ on the central factual issues in this case.
Nor did he fully cooperate with respondent’s reasonable dis-
covery requests. He rejected respondent’s request to inter-
view Ms. Chang, forcing the IRS to issue a summons; when
the summons was issued, petitioner’s attorneys moved to
quash it. An interview with Ms. Chang could reasonably
have led, and did lead, to relevant evidence. See Polone v.
Commissioner, T.C. Memo. 2003–339, aff ’d, 479 F.3d 1019
(9th Cir. 2007). By seeking to block respondent’s access to
Ms. Chang, petitioner failed to ‘‘cooperate[ ] with reasonable
requests by the Secretary for witnesses, * * *, meetings, and
interviews.’’ See sec. 7491(a)(2)(B); see Rolfs, 135 T.C. at 483.
The burden of proof thus remains on him. 8
8 In any event, whether the burden has shifted matters only in the case
(324) WEBBER v. COMMISSIONER 349

II. Tax Treatment of Life Insurance and Annuities
The Policies in this case are a form of private-placement
variable life insurance. Private-placement insurance is sold
exclusively through a private-placement offering. These poli-
cies are marketed chiefly to high-net-worth individuals who
qualify as accredited investors under the Securities Act of
1933. See 15 U.S.C. sec. 77b(a)(15) (2006); 17 C.F.R. sec.
230.501(a) (2006).
Variable life insurance is a form of cash value insurance.
Under traditional cash value insurance, the insured typically
pays a level premium during life and the beneficiary receives
a fixed death benefit. Under a variable policy, both the pre-
miums and the death benefit may fluctuate. The assets held
for the benefit of the policy are placed in a ‘‘segregated asset
account,’’ that is, an account ‘‘segregated from the general
asset accounts of the [insurance] company.’’ Sec. 817(d)(1).
The policy does not earn a fixed or predictable rate of return
but a return dictated by the actual performance of the invest-
ments in this separate account.
If the assets in the separate account perform well, the pre-
miums required to keep the policy in force may be reduced
as the account buildup lessens the insurer’s mortality risk. If
those assets perform extremely well, as was true here, the
value of the policy may substantially exceed the minimum
death benefit. Upon the insured’s death, the beneficiary
receives the greater of the minimum death benefit or the
value of the separate account.
Life insurance and annuities enjoy favorable tax treat-
ment. Under section 72, earnings accruing to cash value and
annuity policies—often referred to as the ‘‘inside buildup’’—
are not currently taxable to the policyholder (and generally
are not taxable to the insurance company). The cash value of
the policy thus grows more rapidly than that of a taxable

of an evidentiary tie. See Polack v. Commissioner, 366 F.3d 608, 613 (8th
Cir. 2004), aff ’g T.C. Memo. 2002–145. In this case, we discerned no evi-
dentiary tie on any material issue of fact. See Payne v. Commissioner, T.C.
Memo. 2003–90, 85 T.C.M. (CCH) 1073, 1077 (‘‘Although assignment of the
burden of proof is potentially relevant at the outset of any case, where
* * * the Court finds that the undisputed facts favor one of the parties,
the case is not determined on the basis of which party bore the burden of
proof, and the assignment of burden of proof becomes irrelevant.’’).
350 144 UNITED STATES TAX COURT REPORTS (324)

investment portfolio. The policyholder may access this value,
often on a tax-free basis, by withdrawals and policy loans
during the insured’s lifetime. See sec. 72(e). If the contract is
held until the insured’s death, the insurance proceeds gen-
erally are excluded from the beneficiary’s income under sec-
tion 101(a). With proper structuring, the death benefit will
also be excluded from the estate tax. See sec. 2042. 9
A variable contract based on a segregated asset account
‘‘shall not be treated as an annuity, endowment, or life insur-
ance contract for any period * * * for which the investments
made by such account are not, in accordance with regulations
prescribed by the Secretary, adequately diversified.’’ Sec.
817(h)(1). Under these regulations, a separate account is
‘‘adequately diversified’’ if no more than 55% of the total
value is represented by any one investment; no more than
70% of the total value is represented by any two invest-
ments; no more than 80% of the total value is represented by
any three investments; and no more than 90% of the total
value is represented by any four investments. Sec. 1.817–
5(b)(1), Income Tax Regs. The separate accounts underlying
the Policies invested in dozens of startup companies in which
petitioner was interested. Respondent does not contend that
the separate accounts fail the section 817(h) asset-diversifica-
tion requirements.
III. The ‘‘Investor Control’’ Doctrine
A. Background
The preceding discussion assumes that the insurance com-
pany owns the investment assets in the separate account.
The ‘‘investor control’’ doctrine posits that, if the policy-
holder’s incidents of ownership over those assets become
sufficiently capacious and comprehensive, he rather than the
insurance company will be deemed to be the true ‘‘owner’’ of
those assets for Federal income tax purposes. In that event,
a major benefit of the insurance/annuity structure—the
deferral or elimination of tax on the ‘‘inside buildup’’—will be
9 Under section 7702(a), a contract is considered to be ‘‘life insurance’’ for
Federal income tax purposes only if it meets certain tests. See infra pp.
371–373. Respondent does not contend that the Policies fail any of the sec-
tion 7702(a) requirements.
(324) WEBBER v. COMMISSIONER 351

lost, and the investor will be taxed currently on investment
income as it is realized.
The ‘‘investor control’’ doctrine has its roots in Supreme
Court jurisprudence dating to the early days of the Federal
income tax. Section 1 imposes a tax on the taxable income
‘‘of ’’ every individual. Construing the predecessor provision of
the Revenue Act of 1926, ch. 27, 44 Stat. 9, the Court stated
in Poe v. Seaborn, 282 U.S. 101, 109 (1930): ‘‘The use of the
word ‘of ’ denotes ownership.’’ The principle thus became
early established that, ‘‘in the general application of the rev-
enue acts, the tax liability attaches to ownership.’’ Blair v.
Commissioner, 300 U.S. 5, 12 (1937). And ‘‘ownership’’ for
Federal tax purposes, as the Court stated in Griffiths v.
Helvering, 308 U.S. 355, 357–358 (1939), means ownership in
a real, substantial sense:
We cannot too often reiterate that ‘‘taxation is not so much concerned
with the refinements of title as it is with actual command over the prop-
erty taxed—the actual benefit for which the tax is paid.’’ Corliss v.
Bowers, 281 U.S. 376, 378 (1930). And it makes no difference that such
‘‘command’’ may be exercised through specific retention of legal title or
the creation of a new equitable but controlled interest, or the mainte-
nance of effective benefit through the interposition of a subservient
agency. * * *

In Corliss, 281 U.S. at 377, the taxpayer transferred assets
to a trust, directing the trustee to pay the income to his wife
for life, but reserving the power to modify or revoke the trust
at any time. In an opinion by Justice Holmes, the Court held
the taxpayer taxable on the trust income even though he did
not receive the income or hold title to the assets that gen-
erated it. The Court reasoned: ‘‘The income that is subject to
a man’s unfettered command and that he is free to enjoy at
his own opinion may be taxed to him as his income, whether
he sees fit to enjoy it or not.’’ Id. at 378.
In Helvering v. Clifford, 309 U.S. 331 (1940), the taxpayer
contributed securities to a trust, directing himself as trustee
to pay the income to his wife for a five-year period. At the
end of five years, the trust was to terminate and the corpus
would revert to the taxpayer. The trust instrument author-
ized the taxpayer to vote the shares held by the trust and to
decide what securities would be bought or sold. The trust
instrument also afforded him ‘‘absolute discretion’’ to deter-
352 144 UNITED STATES TAX COURT REPORTS (324)

mine whether income should be reinvested rather than paid
out.
Speaking through Justice Douglas, the Court noted that
the taxpayer’s control over the securities remained essen-
tially the same before and after the trust was created. ‘‘So far
as * * * [the taxpayer’s] dominion and control were con-
cerned,’’ the Court reasoned, ‘‘it seems clear that the trust
did not effect any substantial change.’’ Id. at 335. The Court
was not concerned that the taxpayer could not ‘‘make a gift
of the corpus to others’’ or ‘‘make loans to himself ’’ for five
years. This ‘‘dilution in his control,’’ in the Court’s view, was
‘‘insignificant and immaterial, since control over investment
remained.’’ Ibid. The Court’s conclusion that the taxpayer
effectively retained the attributes of an owner, and should be
treated as the owner of the trust assets for Federal tax pur-
poses, was based on ‘‘all considerations and circumstances’’ in
the case. Id. at 336. 10
Drawing on the principles of these and similar cases, the
IRS developed the ‘‘investor control’’ doctrine in a series of
revenue rulings beginning in 1977. On the basis of 38 years
of consistent rulings in this area, respondent urges that his
position deserves deference under Skidmore v. Swift & Co.,
323 U.S. 134, 140 (1944). 11 We are not bound by revenue
rulings; under Skidmore, the weight we afford them depends
10 Appellate decisions following these cases are well illustrated
by N. Trust Co. v. United States, 193 F.2d 127 (7th Cir. 1951). The tax-
payer purchased shares of stock, which were placed in escrow with a trust
company until he made payment in full. The taxpayer directed how to vote
the escrowed shares, and any dividends paid reduced the balance due the
seller. The Court of Appeals for the Seventh Circuit held that the taxpayer
was in substance the owner of the shares, even though he was not the title
owner, so that the dividends paid on the escrowed stock were taxable to
him. Id. at 131.
11 In United States v. Mead Corp., 533 U.S. 218 (2001), the Supreme

Court recognized that there are various types of agency pronouncements
that may be entitled to different levels of deference, and that Skidmore
deference, the lowest level of deference, has continuing vitality under
Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837
(1984). See Mead Corp., 533 U.S. at 234 (‘‘Chevron did nothing to eliminate
Skidmore’s holding that an agency’s interpretation may merit some def-
erence whatever its form, given the ‘specialized experience and broader in-
vestigations and information’ available to the agency’’ (quoting Skidmore,
323 U.S. at 139)); ADVO, Inc. v. Commissioner, 141 T.C. 298, 322 n.18
(2013).
(324) WEBBER v. COMMISSIONER 353

upon their persuasiveness and the consistency of the
Commissioner’s position over time. See PSB Holdings, Inc. v.
Commissioner, 129 T.C. 131, 142 (2007) (‘‘[W]e evaluate the
revenue ruling under the less deferential standard enun-
ciated in Skidmore v. Swift & Co.’’). We thus consider the
rulings at hand under the ‘‘power to persuade’’ standard
enunciated in Skidmore. 12
B. Evolution of the Doctrine
In Revenue Ruling 77–85, 1977–1 C.B. 12, a taxpayer pur-
chased an investment annuity contract from an insurance
company. The initial ‘‘premium,’’ less various charges, was
deposited into a separate account held by a custodian. The
custodian invested the funds in accordance with the tax-
payer’s directions but only in assets from an approved list. At
a certain date in the future—the ‘‘annuity starting date’’—
the assets in the separate account would fund an annuity,
which would make monthly payments to the taxpayer based
on the performance of the underlying assets.
Prior to the annuity starting date, the policyholder exer-
cised significant control over the assets in the separate
account. By issuing directions to the custodian, the taxpayer
had de facto power ‘‘to sell, purchase or exchange securities’’;
to ‘‘invest and reinvest principal and income’’; to vote the
shares; and to exercise ‘‘any other right or option relating to
[the] assets.’’ Id., 1977–1 C.B. at 13. The taxpayer could also
make ‘‘a full or partial surrender of the policy’’ and receive
cash equal to the value of the account less applicable
charges. After the annuity starting date, the taxpayer contin-
ued to exercise investment control over the account, but he
could no longer surrender the policy.
The policy in Revenue Ruling 77–85 was meant to qualify
as a ‘‘variable contract’’ based on a ‘‘segregated asset
account’’ within the meaning of section 817(d) (then section
12 Appeal of the instant case, absent stipulation to the contrary, would
lie to the Court of Appeals for Ninth Circuit. See sec. 7482(b)(1)(A). That
Court has not decided whether revenue rulings are entitled to Chevron or
Skidmore deference. See Taproot Admin. Servs., Inc. v. Commissioner, 679
F.3d 1109, 1115 n.14 (9th Cir. 2012), aff ’g 133 T.C. 202 (2009); Bluetooth
SIG, Inc. v. United States, 611 F.3d 617, 622 (9th Cir. 2010). Because re-
spondent urges only Skidmore deference, we need not decide how the
Ninth Circuit would resolve this question.
354 144 UNITED STATES TAX COURT REPORTS (324)

801(g)). But for this treatment to be available, the IRS noted,
‘‘the insurance company must be the owner of the assets in
the segregated accounts.’’ Id., 1977–1 C.B. at 14. The IRS
concluded that the taxpayer possessed such significant
incidents of ownership over those assets that he should be
considered their owner for Federal tax purposes. The fact
that the assets were titled in the custodian’s name did not
alter this analysis because, in the Commissioner’s view,
‘‘[t]he setting aside of the assets in the custodial account
* * * [was] basically a pledge arrangement.’’ Id. at 14–15.
The IRS noted:
When property is held in escrow or trust and the income therefrom bene-
fits, or is to be used to satisfy the legal obligations of, * * * [another]
person * * * , such person is deemed to be the owner thereof, and such
income is includible in that person’s gross income, even though that per-
son may never actually receive it.

On the basis of this analysis, the IRS concluded in Rev-
enue Ruling 77–85 that ‘‘the assets in the custodial account
are owned by the individual policyholder, not the insurance
company.’’ Id., 1977–1 C.B. at 15. Therefore, ‘‘any interest,
dividends and other income received by the custodian on
securities and other assets held in the custodial accounts are
includible in the gross income of the policyholder under sec-
tion 61 * * * for the year in which they are received by the
custodian.’’ Id.
The IRS reached the same conclusion three years later
where an annuity contract was supported by a separate
account held by a savings and loan association. Rev. Rul. 80–
274, 1980–2 C.B. 27. The funds in the separate account were
‘‘invested in a certificate of deposit for a term designated by
the depositor,’’ who had the right to ‘‘withdraw all or a por-
tion of the cash surrender value of the contract at any time
prior to the annuity starting date.’’ Id., 1980–2 C.B. at 28.
The IRS concluded that the policyholder/depositor should be
considered the owner of the assets because he possessed
‘‘substantial incidents of ownership in an account established
by the insurance company at * * * [his] direction.’’ Ibid.
Subsequent rulings address situations in which separate
accounts supporting variable contracts invest, not in securi-
ties selected directly by the policyholder, but in shares of
mutual funds with their own investment manager. In Rev-
(324) WEBBER v. COMMISSIONER 355

enue Ruling 81–225, 1981–2 C.B. 13, the IRS considered four
scenarios in which the mutual fund shares were available for
purchase by the general public wholly apart from the annuity
arrangement. The policyholder had the right initially to des-
ignate the fund in which the separate account would invest,
and the right periodically to reallocate his investment among
the specified funds.
In these four scenarios, the IRS concluded that the insur-
ance company was ‘‘little more than a conduit between the
policyholders and their mutual fund shares.’’ Id., 1981–2 C.B.
at 14. Because the ‘‘policyholder’s position in each of these
situations [wa]s substantially identical to what his or her
position would have been had the mutual fund shares been
purchased directly,’’ the IRS concluded that the policyholder
had sufficient investment control to be considered the shares’
owner for Federal tax purposes. Id. The IRS reached the
opposite conclusion in the fifth scenario, where investments
in the mutual fund shares were controlled by the insurance
company and the fund’s sole function was ‘‘to provide an
investment vehicle to allow * * * [the insurance company] to
meet its obligations under its annuity contracts.’’ Id. Because
these shares were not available to the general public but
were ‘‘available only through the purchase of an annuity con-
tract,’’ id. at 13, the IRS considered the insurance company
to be the true owner of these assets. 13
In Revenue Ruling 82–54, 1982–1 C.B. 11, the segregated
account underlying the variable policies comprised three
funds that invested respectively in common stocks, bonds,
and money-market instruments. The insurance company was
the investment manager of these funds, and the funds were
not available for sale to the general public. Policyholders had
the right to allocate or reallocate their investments among
the three funds.
13 The IRS likewise treated the insurance company as the owner where
the separate account invested in shares of mutual funds that were ‘‘closed’’
to the general public. See Rev. Rul. 82–55, 1982–1 C.B. 12, 13. On the
other hand, the IRS treated the policyholder as the owner of a separate
account supporting a variable life insurance policy where the account in-
vested in hedge funds that were available for sale to the general public,
albeit only to ‘‘qualified investors.’’ See Rev. Rul. 2003–92, 2003–2 C.B.
350.
356 144 UNITED STATES TAX COURT REPORTS (324)

‘‘[I]n order for the insurance company to be considered the
owner of the mutual fund shares,’’ the IRS reasoned, ‘‘control
over individual investment decisions must not be in the
hands of the policyholders.’’ Id., 1982–1 C.B. at 12. Under
this standard, the IRS concluded that the insurance company
owned the assets in the separate account:
[T]he ability to choose among broad, general investment strategies such
as stocks, bonds or money market instruments, either at the time of the
initial purchase or subsequent thereto, does not constitute sufficient con-
trol over individual investment decisions so as to cause ownership of the
private mutual fund shares to be attributable to the policyholders.

In Revenue Ruling 2003–91, 2003–2 C.B. 347, a life insur-
ance company offered variable life insurance and annuity
contracts. The contracts were funded by assets held in a
separate account divided into 12 subaccounts. Each sub-
account followed a specific investment strategy keyed to
market sector or type of security (e.g., money-market, large
company growth, telecommunications, international growth,
or emerging markets). None of these funds was available for
sale to the general public, and all of them met the asset
diversification requirements of section 1.817–5(b)(1), Income
Tax Regs.
The policyholder had the right to change the allocation of
his premiums among subaccounts at any time and transfer
funds among subaccounts. All investment decisions regarding
the subaccounts, however, were made by an independent
investment manager engaged by the insurance company. The
IRS stated its assumptions that: (1) the policyholder ‘‘cannot
select or recommend particular investments’’ for the sub-
accounts; (2) the policyholder ‘‘cannot communicate directly
or indirectly with any investment officer * * * regarding the
selection * * * of any specific investment or group of invest-
ments’’; and (3) ‘‘[t]here is no arrangement, plan, contract, or
agreement’’ between the policyholder and the insurance com-
pany or investment manager regarding ‘‘the investment
strategy of any [s]ub-account, or the assets to be held by a
particular sub-account.’’ Rev. Rul. 2003–91, 2003–2 C.B. at
348.
In short, although the policyholder had the right to allo-
cate funds among the subaccounts, all investment decisions
regarding the particular securities to be held in each sub-
(324) WEBBER v. COMMISSIONER 357

account were made by the insurance company or its invest-
ment manager ‘‘in their sole and absolute discretion.’’ Id.
Under these circumstances, the IRS concluded that the
insurance company would be treated as owning the assets in
the separate accounts for Federal income tax purposes. The
IRS indicated that this ruling was intended to ‘‘present[ ] a
‘safe harbor’ from which taxpayers may operate.’’ Id., 2003–
2 C.B. at 347.
C. Deference
The ‘‘investor control’’ doctrine posits that, if a policyholder
has sufficient ‘‘incidents of ownership’’ over the assets in a
separate account underlying a variable life insurance or
annuity policy, the policyholder rather than the insurance
company will be considered the owner of those assets for
Federal income tax purposes. The critical ‘‘incident of owner-
ship’’ that emerges from these rulings is the power to decide
what specific investments will be held in the account. As the
Commissioner stated in Revenue Ruling 82–54, 1982–1 C.B.
at 12, ‘‘control over individual investment decisions must not
be in the hands of the policyholders.’’ Other ‘‘incidents of
ownership’’ emerging from these rulings include the powers
to vote securities in the separate account; to exercise other
rights or options relative to these investments; to extract
money from the account by withdrawal or otherwise; and to
derive, in other ways, what the Supreme Court has termed
‘‘effective benefit’’ from the underlying assets. Griffiths, 308
U.S. at 358.
We believe that the IRS rulings enunciating these prin-
ciples deserve deference. The rulings are grounded in long-
settled jurisprudence holding that formalities of title must
yield to a practical assessment of whether ‘‘control over
investment remained,’’ Clifford, 309 U.S. at 335, and that
ownership for tax purposes follows ‘‘actual command over the
property taxed.’’ N. Trust Co. v. United States, 193 F.2d 127,
129 (7th Cir. 1951) (quoting Griffiths, 308 U.S. at 355–358).
These revenue rulings span a 38-year period and reflect a
consistent and well-considered process of development. After
stating bedrock principles in Revenue Ruling 77–85, the IRS
examined more complex scenarios corresponding to newer
products being offered in the financial markets. The Commis-
sioner’s consideration of these scenarios appears nuanced
358 144 UNITED STATES TAX COURT REPORTS (324)

and reasonable, resolving particular fact patterns favorably
or unfavorably to taxpayers in light of the bedrock principles
initially set forth. Cf. Sewards v. Commissioner, 785 F.3d
1331, 1335 (9th Cir. 2015) (affording ‘‘substantial deference’’
to interpretation of regulations ‘‘adopted by the IRS in Rev-
enue Rulings issued over the last 40 years’’), aff ’g 138 T.C.
320 (2012).
The ‘‘investor control’’ doctrine reflects a ‘‘body of experi-
ence and informed judgment’’ that the IRS has developed
over four decades. Skidmore, 323 U.S. at 140; Fed. Express
Corp. v. Holowecki, 552 U.S. 389, 299 (2008); see Kasten v.
Saint-Gobain Performance Plastics Corp., 563 U.S. 1, 15-16
(2011) (‘‘The length of time the agencies have held * * *
[these views] suggests that they reflect careful
consideration[.]’’). As evidenced by the absence of litigation in
this area during the past 30 years, these rulings have engen-
dered stability and long-term reliance through the private
ruling process and otherwise. See Taproot Admin. Servs., Inc.
v. Commissioner, 133 T.C. 202, 212 (2009) (history of con-
sistent private letter rulings based on published ruling favors
a finding of deference under Skidmore), aff ’d, 679 F.3d 1109
(9th Cir. 2012). 14 The relative expertise of the IRS in admin-
istering a complex statutory scheme and its longstanding,
unchanging policy regarding these issues amply justify def-
erence to the IRS under Skidmore. See Alaska Dep’t of Envtl.
Conservation v. EPA, 540 U.S. 461, 488–492 (2004).
Our decision to afford Skidmore deference to these rulings
is supported by the unanimous opinion of the U.S. Court of
Appeals for the Eighth Circuit in Christoffersen v. United
States, 749 F.2d 513 (8th Cir. 1985), rev’g 578 F. Supp. 398
(N.D. Iowa 1984). The taxpayers there purchased from a life
insurance company a variable annuity policy supported by a
separate account. The initial ‘‘premium,’’ less various
charges, was invested at the taxpayers’ direction in a mutual
fund. Prior to the annuity starting date, the taxpayers could
withdraw all or part of their investment on seven days’
notice, but they were limited to withdrawing cash.
14 These revenue rulings have formed the basis for numerous private let-
ter rulings. See, e.g., Priv. Ltr. Rul. 201105012 (Feb. 4, 2011); Priv. Ltr.
Rul. 200420017 (May 14, 2004); Priv. Ltr. Rul. 9433030 (Aug. 19, 1994);
Priv. Ltr. Rul. 8820044 (May 20, 1988).
(324) WEBBER v. COMMISSIONER 359

Finding that the taxpayers had ‘‘surrendered few of the
rights of ownership or control over the assets of the sub-
account,’’ the Court of Appeals for the Eighth Circuit held
that they were ‘‘the beneficial owners of the investment
funds’’ even though the insurance company ‘‘maintain[ed] the
shares in its name.’’ Christoffersen, 749 F.2d at 515 (citing
Clifford, 309 U.S. 331). In the court’s view, ‘‘[t]he payment of
annuity premiums, management fees and the limitation of
withdrawals to cash, rather than shares, d[id] not reflect a
lack of ownership or control.’’ Id. at 515–516. Quoting
Corliss, 281 U.S. at 378, the court reasoned that ‘‘taxation is
not so much concerned with the refinements of title as it is
with the actual command over the property taxed.’’
Christoffersen, 749 F.2d at 515. And citing Griffiths, 308 U.S.
at 358, the court found it immaterial that the taxpayers’
command over these assets was exercised by means other
than the ‘‘specific retention of legal title.’’ Christoffersen, 749
F.2d at 515. The court accordingly ruled that the
‘‘Christoffersens, and not * * * [the insurance company],
own the assets of the sub-account.’’ Id. at 516.
The only other case that has considered these matters is
the District Court opinion in Inv. Annuity, Inc. v.
Blumenthal, 442 F. Supp. 681 (D.D.C. 1977), rev’d, 609 F.2d
1 (D.C. Cir. 1979). The District Court held Revenue Ruling
77–85 invalid, but its opinion has no precedential force. It
was reversed because, under the Anti-Injunction Act and the
tax exception to the Declaratory Judgment Act, the District
Court lacked jurisdiction to consider the case ab initio. See
Inv. Annuity, Inc., 609 F.2d at 10 (remanding with instruc-
tions ‘‘to dismiss the complaint for lack of jurisdiction’’).
In any event, we agree with the Eighth Circuit’s assess-
ment in Christoffersen, 749 F.2d at 514: ‘‘[W]e cannot endorse
the approach of the district court in the Investment Annuity
case.’’ The District Court, ruling in 1977, was troubled by
what it regarded as the novelty of the position the IRS enun-
ciated in Revenue Ruling 77–85. As of today, the Commis-
sioner has enunciated that position consistently for 38 years.
The District Court appeared to believe that Revenue Ruling
77–85 had been undermined by an IRS private letter ruling,
erroneously issued a few months later, that was inconsistent
with the published ruling. See Priv. Ltr. Rul. 7747111 (Aug.
29, 1977). This private letter ruling was revoked as soon as
360 144 UNITED STATES TAX COURT REPORTS (324)

this error came to the Commissioner’s attention. See Priv.
Ltr. Rul. 7805020 (Sept. 13, 1977). For these reasons, and
because the District Court gave insufficient weight to rel-
evant Supreme Court precedent, we find its opinion
unpersuasive.
In sum, we conclude that the IRS revenue rulings enun-
ciating the ‘‘investor control’’ doctrine are entitled to weight
under Skidmore. Over four decades, they have reasonably
applied well-settled principles of Supreme Court jurispru-
dence to a complex area of taxation. In any event, the legal
framework urged by respondent is consistent with prior case
law, and we would adopt it regardless of deference.
D. Ownership of the Separate Account Assets
The investments in the separate accounts were titled to
the 1999 Fund, Boiler Riffle, Philtap, and other special-pur-
pose entities owned by Lighthouse but pledged to the Poli-
cies. Lighthouse, rather than petitioner, thus nominally
owned these assets during the tax years in issue. Respondent
contends that petitioner, under the ‘‘investor control’’ doc-
trine, should nevertheless be treated as their owner for Fed-
eral income tax purposes. We agree.
As drafted, the Policies allowed the policyholder to submit
only ‘‘general investment objectives and guidelines’’ to the
Investment Manager, who was supposed to build a portfolio
within those parameters by selecting individual securities for
purchase or sale. We need not decide whether Lighthouse
would be considered the owner of the separate account assets
if the parties to the arrangement had meticulously complied
with these strictures. They did not.
In determining whether petitioner owned the assets under-
lying the Policies, we consider whether he retained signifi-
cant incidents of ownership. In making this assessment,
‘‘[t]echnical considerations, niceties of the law * * *, or the
legal paraphernalia which inventive genius may construct as
a refuge from surtaxes should not obscure the basic issue.’’
Clifford, 309 U.S. at 334. We focus instead on the actual
level of ‘‘control over investment’’ that petitioner exercised.
Id. at 335.
The determination whether a taxpayer has retained signifi-
cant incidents of ownership over assets is made on a case-by-
case basis, taking into account all the relevant facts and cir-
(324) WEBBER v. COMMISSIONER 361

cumstances. See Clifford, 309 U.S. at 336. The core ‘‘incident
of ownership’’ is the power to select investment assets by
directing the purchase, sale, and exchange of particular secu-
rities. Other ‘‘incidents of ownership’’ include the power to
vote securities and exercise other rights relative to those
investments; the power to extract money from the account by
withdrawal or other means; and the power to derive, in other
ways, what the Supreme Court has termed ‘‘effective benefit’’
from the underlying assets. Griffiths, 308 U.S. at 358. Peti-
tioner enjoyed all of these powers.
1. Power To Direct Investments. Petitioner enjoyed the
unfettered ability to select investments for the separate
accounts by directing the Investment Manager to buy, sell,
and exchange securities and other assets in which petitioner
wished to invest. Although the Policies purported to give the
Investment Manager complete discretion to select invest-
ments, this restriction meant nothing in practice. We assess
the true nature of the agreement by looking to its substance,
as evidenced by the parties’ actual conduct. See Gregory v.
Helvering, 293 U.S. 465, 469 (1935); Sandvall v. Commis-
sioner, 898 F.2d 455, 458 (5th Cir. 1990), aff ’g T.C. Memo.
1989–189 and T.C. Memo. 1989–56. In reality, the Invest-
ment Manager selected no investments but acted merely as
a rubber stamp for petitioner’s ‘‘recommendations,’’ which we
find to have been equivalent to directives.
It is no coincidence that virtually every security Boiler
Riffle held (apart from certain brokerage funds) was issued
by a startup company in which petitioner had a personal
financial interest. Petitioner sat on the boards of most of
these companies, and he invested in each of them through
his personal accounts, through IRAs, and through private-
equity funds that he managed. He admitted that Boiler Riffle
could not have obtained access to any of these investment
opportunities except through him.
It is likewise no coincidence that every investment Boiler
Riffle made was an investment that petitioner had ‘‘rec-
ommended.’’ The Investment Manager took no independent
initiative and considered no investments other than those
petitioner proposed. The record overwhelmingly dem-
onstrates that petitioner directed what investments Boiler
Riffle should make, when Boiler Riffle should make them,
and how much Boiler Riffle should invest.
362 144 UNITED STATES TAX COURT REPORTS (324)

Although nearly 100% of the investments in the separate
accounts consisted of nonpublicly traded securities, the
record contains no documentation to establish that Light-
house or the Investment Manager engaged in independent
research or meaningful due diligence with respect to any of
petitioner’s investment directives. Lighthouse exercised
barebones ‘‘know your customer’’ review and occasionally
requested organizational documents. But these activities
were undertaken to safeguard Lighthouse’s reputation, not to
vet petitioner’s ‘‘recommendations’’ from an investment
standpoint.
It was not uncommon for petitioner to negotiate a deal
directly with a third party, then ‘‘recommend’’ that the
Investment Manager implement the deal he had already
negotiated. Through directives to the Investment Manager,
petitioner invested in startup companies in which he was
interested; lent money to these ventures; sold securities from
his personal account to the Policies’ separate accounts; pur-
chased securities in later rounds of financing; and assigned
to Boiler Riffle rights to purchase shares that he would
otherwise have purchased himself. Without fail, the Invest-
ment Manager placed its seal of approval on each trans-
action.
Two deals that petitioner negotiated himself exemplify the
parties’ modus operandi. Without informing the Investment
Manager, petitioner began negotiations to acquire an interest
in Longboard Vineyards, a financially troubled winery, with
a $500,000 loan. On Mr. Lipkind’s advice, petitioner orga-
nized Signature, a domestic C corporation, as the vehicle for
making this loan. Mr. Lipkind reviewed the operating agree-
ment for Longboard and worked with it to draft the promis-
sory note and accompanying security agreement. Only after
the paperwork was completed did Mr. Lipkind notify the
Investment Manager, with instructions to ‘‘get this thing
done.’’ Within days Boiler Riffle lent Signature $450,000,
which enabled Signature to lend Longboard $500,000 as peti-
tioner wished.
There is no evidence that the Investment Manager per-
formed any due diligence for this transaction. Petitioner was
thus able to negotiate a complex deal with a financially trou-
bled winery, extract money from Boiler Riffle for the benefit
of an entity he owned, and have the security for the resulting
(324) WEBBER v. COMMISSIONER 363

promissory note be subordinated to a bank loan that
Longboard was having trouble paying, all without the Invest-
ment Manager’s raising a whisper. As if that were not
enough, petitioner proceeded to extract another $180,000
from Boiler Riffle via loans to Signature. The first $100,000
covered a second cash infusion for the winery. An email from
Ms. Chang explains the other loan: ‘‘Jeff needs to borrow
from Boiler Riffle $80,000 as soon as possible for a deposit
on the Canada Maximas lodge, to be purchased through Wild
Goose Investments.’’
Petitioner also wanted to acquire an interest in Post
Ranch, which was developing a luxury property in Big Sur.
He initially planned to make a $250,000 investment through
his IRA, but decided it was ‘‘not a wise use of onshore dollars
at this time given existing capital commitments and the
bank’s liquidity requirements.’’ As Ms. Chang explained, peti-
tioner was therefore ‘‘looking towards Boiler Riffle’’ for the
funds with which to invest. Mr. Lipkind advised petitioner
that a prudent investor would not make this investment, but
petitioner insisted on going ahead anyway. The Investment
Manager raised no question about this risky business. And
Lighthouse agreed to create Philtap, a new special-purpose
entity, for the sole purpose of implementing petitioner’s
wishes. The Post Ranch and Longboard deals vividly display
petitioner’s unfettered control over the investments in the
separate accounts.
Petitioner testified as to his belief that the Investment
Manager performed ‘‘an appropriate level of due diligence.’’
He cites no record evidence to support this proposition, and
we did not find his testimony credible. Employees of the
Investment Manager would be in the best position to explain
what due diligence and investment research they performed
in exchange for their $1,000 annual fee. Petitioner’s failure
to call them as witnesses creates an inference that their
testimony would not have assisted his position. See Am.
Police & Fire Found., Inc. v. Commissioner, 81 T.C. 699, 705
(1983) (citing Wichita Terminal Elevator Co. v. Commis-
sioner, 6 T.C. 1158 (1946), aff ’d, 162 F.2d 513 (10th Cir.
1947)). 15
15 Mr. Walker, outside general counsel for Lighthouse, testified that
Continued
364 144 UNITED STATES TAX COURT REPORTS (324)

Among the hundreds of investments that the separate
accounts made, petitioner cites only three occasions on which
the Investment Manager supposedly declined to follow his
recommendations. With respect to two of these investments—
a Lehman Brothers fund and Milphworld—the record shows
precisely the opposite. Boiler Riffle invested more than $1
million in the Lehman Brothers CIP Fund after Mr. Lipkind
expressed the desire to ‘‘splice this investment into an appro-
priate place in Jeff ’s universe.’’ Boiler Riffle invested in
Milphworld by purchasing from petitioner six Milphworld
promissory notes with an aggregate face value of $186,600.
And while Lighthouse initially discerned a ‘‘reputational
risk’’ regarding Safeview, it was petitioner, not the Invest-
ment Manager, who put this investment on a temporary
hold. There is no evidence that the Investment Manager ever
refused to implement one of petitioner’s ‘‘recommendations.’’
In sum, petitioner actively managed the assets in the sepa-
rate accounts by directing the Investment Manager (through
his agents) to buy, sell, and exchange securities and other
property as he wished. These facts strongly support a finding
that he retained significant incidents of ownership over those
assets. See Clifford, 309 U.S. at 335 (finding lack of absolute
control immaterial ‘‘since control over investment remained’’);
Rev. Rul. 77–85, 1977–1 C.B. at 14 (policyholder possesses
investment control when he ‘‘retains the power to direct the
custodian to sell, purchase or exchange securities, or other
assets held in the custodial account’’).
2. Power To Vote Shares and Exercise Other Options.
Besides directing what securities the separate accounts
would buy and sell, petitioner through his agents dictated
what actions Boiler Riffle would take with respect to its
ongoing investments. The Investment Managers took no
action without a signoff from Mr. Lipkind or Ms. Chang.
With respect to routine shareholder matters, these signoffs
may often have occurred by phone. As Mr. Lipkind noted to
petitioner: ‘‘We have relied primarily on telephone commu-
nications, not written paper trails (you recall our ‘owner con-

Lighthouse did not conduct due diligence regarding investments, but that
the ‘‘Investment Managers would.’’ Mr. Walker had no personal knowledge
of the Investment Manager’s daily activities, and we found his testimony
vague and unhelpful.
(324) WEBBER v. COMMISSIONER 365

trol’ conversations).’’ But examples from the email traffic dis-
play a revealing tip of the iceberg.
Petitioner repeatedly directed what actions Boiler Riffle
should take in its capacity as a shareholder of the startup
companies in which he was interested. He directed how
Boiler Riffle should vote concerning an amendment to
Lignup’s certificate of incorporation and participation in a
second financing round. With respect to Quintana Energy
and Lehman Brothers, he directed how Boiler Riffle should
respond to capital calls. With respect to Accept Software, he
directed whether Boiler Riffle should participate in a bridge
financing. With respect to PTRx, he directed whether Boiler
Riffle should take its pro-rata share of a series D financing.
With respect to Techtribenetworks, he directed whether
Boiler Riffle should convert its promissory notes to equity.
And with respect to Lignup, he directed whether Boiler Riffle
would exercise pro-rata rights that he had assigned to it.
These facts support a finding that petitioner retained signifi-
cant incidents of ownership over the separate account assets.
See Clifford, 309 U.S. at 332, 335 (power to vote shares was
a significant incident of ownership); Rev. Rul. 77–85, 1977–
1 C.B. at 13–14 (significant incidents of ownership included
powers to vote shares and exercise ‘‘any other right or option
relating to [the] assets’’).
3. Power To Extract Cash. Petitioner had numerous ways
to extract cash from the separate accounts, beginning with
the traditional mechanisms of life insurance policies. Each
Policy permitted the policyholder to assign it; to use it as
collateral for a loan; to borrow against it; and to surrender
it. Given how the Policies were constructed, however, the
amount petitioner could extract by surrender or policy loan
was limited to ‘‘premiums paid.’’ Because the investments
petitioner selected performed very well, no ‘‘premiums’’ had
to be paid after 2000; thereafter, ongoing mortality/adminis-
trative charges were defrayed by debiting the separate
accounts. Thus, even though the assets in the separate
accounts were worth $12.3 million by 2007, the amount of
cash petitioner could extract by surrender or policy loan was
capped at $735,046, the initial premiums paid during 1999
and 2000.
Petitioner urges that this restriction distinguishes the
instant case from Christoffersen, where the policyholder,
366 144 UNITED STATES TAX COURT REPORTS (324)

prior to the annuity starting date, could withdraw the full
value of the account on seven days notice. We need not
decide whether the type of restriction to which petitioner and
Lighthouse agreed, if it meaningfully limited the policy-
holder’s ability to extract cash, would be sufficient to render
an insurance company the owner of assets in a segregated
account. On the facts here, this restriction was trivial. Peti-
tioner was able to extract, and did extract, cash from the
separate accounts without any need to resort to policy loans.
One method was by selling assets to the separate accounts.
Shortly after the Policies were initiated, petitioner sold
shares of three startup companies to the 1999 Fund for
$2,240,000. Through these transactions, petitioner was able
to derive liquidity from assets that might otherwise have
been difficult to sell.
Petitioner extracted cash from the separate accounts in
numerous other ways. In November 2006 he extracted
$450,000 from Boiler Riffle by causing it to lend that amount
to Signature, his C corporation, for an investment he wished
to make in Longboard Vineyards. In 2006 petitioner
extracted $50,000 from Boiler Riffle by causing it to purchase
from him a Techtribenetworks promissory note. In February
2007 he extracted an additional $186,600 from Boiler Riffle
by causing it purchase from him six Milphworld promissory
notes. In early 2007 he extracted $200,000 from Boiler Riffle
by causing it to lend that sum to Techtribenetworks, which
enabled that company to repay its $200,000 promissory note
to him. In September 2007 he extracted $100,000 from Boiler
Riffle for a second cash infusion through Signature to
Longboard. And in fall 2007 he extracted $80,000 from Boiler
Riffle to cover a deposit he wished to make on a Canadian
hunting lodge.
Within the space of 12 months petitioner thus extracted
from Boiler Riffle more than $1 million in cash for personal
use. There is nothing in the record to suggest that he could
not have extracted more if he had wished. Given his ability
to withdraw cash at will, he had no need to surrender the
Policies or use policy loans to extract cash. The fact that
these latter mechanisms were capped at $735,046 is thus
immaterial.
As the Supreme Court emphasized in Clifford, 309 U.S. at
335, a taxpayer need not have absolute control over invest-
(324) WEBBER v. COMMISSIONER 367

ment assets to be deemed their owner. The taxpayer there
could not ‘‘make a gift of the corpus to others’’ or ‘‘make loans
to himself ’’ for five years. But the Court found this ‘‘dilution
in his control [to be] insignificant and immaterial, since con-
trol over investment remained.’’ Petitioner’s ability to with-
draw cash at will from the separate accounts supports a
finding that he retained significant incidents of ownership.
4. Power To Derive Other Benefits. Petitioner used Boiler
Riffle to finance investments that may have been a source of
personal pleasure, including a winery, a Big Sur resort, and
a Canadian hunting lodge. More tangible benefits flowed
from the fact that the investments in the separate accounts
mirrored or complemented the investments in his own per-
sonal portfolio and the portfolios of the private-equity funds
he managed. Petitioner regularly used the separate accounts
synergistically to bolster his other positions.
After making an early stage investment, petitioner sought
to find new investors for his startup ventures, aiming to
enhance their prospects and move them closer to a ‘‘liquidity
event.’’ Boiler Riffle provided a readily available source of
new investment funds. Petitioner often made personal finan-
cial commitments to these fledgling ventures, then had Boiler
Riffle discharge those commitments on his behalf. When peti-
tioner lacked the desire (or liquidity) to exercise pro-rata
offering rights on his own shares, he assigned those rights to
Boiler Riffle for exercise, thus avoiding dilution in his overall
position. Boiler Riffle sometimes provided the critical missing
piece of the puzzle, as when petitioner structured a $1.2 mil-
lion financing for JackNyfe and needed Boiler Riffle ‘‘to be on
point for the first $400,000.’’ In all these ways, petitioner
derived ‘‘effective benefit’’ from the separate accounts. See
Griffiths, 308 U.S. at 358.
‘‘[W]here the head of the household has income in excess
of normal needs, it may well make but little difference to him
(except income-tax-wise) where portions of that income are
routed—so long as it stays in the family group.’’ Clifford, 309
U.S. at 336. Petitioner used Boiler Riffle as a private invest-
ment account through which he actively managed a portion
of his family’s securities portfolio. Formalities aside, he main-
tained essentially the same rights of ownership over those
assets, apart from current receipt of income, that he would
have possessed had he chosen to title the assets in his own
368 144 UNITED STATES TAX COURT REPORTS (324)

name. 16 Since petitioner owned the separate account assets
for Federal income tax purposes, all dividends, interest, cap-
ital gains, and other income received by Boiler Riffle during
the tax years in issue were includible in petitioner’s gross
income under section 61. 17
E. Petitioner’s Counterarguments
1. ‘‘Constructive Receipt.’’ Petitioner contends that he may
not be taxed on the income realized by Boiler Riffle during
2006–2007 because he was not in ‘‘constructive receipt’’ of
this income. The ‘‘constructive receipt’’ doctrine prevents cash
basis taxpayers from manipulating the annual accounting
principle by artificially deferring receipt of income to a later
tax year. See generally Boris I. Bittker & Lawrence Lokken,
Federal Taxation of Income, Estates and Gifts, para. 105.3.3,
at 105–61 (3d ed. 2012). Under this doctrine, ‘‘[i]ncome
although not actually reduced to a taxpayer’s possession is
constructively received by him in the taxable year during
which it is credited to his account, set apart for him, or
otherwise made available so that he may draw upon it at any
time.’’ Sec. 1.451–2(a), Income Tax Regs. ‘‘[I]ncome is not
constructively received,’’ however, ‘‘if the taxpayer’s control
over its receipt is subject to substantial limitations or restric-
16 Petitioner contends that his position differed in one respect from that
of an actual owner: Because the death benefit could be paid in cash rather
than in kind, Lighthouse conceivably could keep, rather than distribute to
him, the stock of the startup companies he caused it to buy. But the Poli-
cies provided that Lighthouse would pay the death benefit ‘‘in cash to the
extent of liquid assets and in kind to the extent of illiquid assets.’’ Since
the shares held by the separate accounts were not publicly traded, they
were presumably illiquid; the Policies thus explicitly anticipated that the
death benefit would to this extent be paid in kind. Although Lighthouse
nominally had discretion to reject in-kind payment, it rubber-stamped all
of petitioner’s other ‘‘recommendations.’’ There is no reason to believe it
would countermand his preference as to the form of the death benefit. In
any event, the Eighth Circuit in Christoffersen, 749 F.2d at 516, held that
the ‘‘limitation of withdrawals to cash, rather than shares, d[id] not reflect
a lack of ownership or control’’ by the policyholders over the mutual fund
shares in the segregated account.
17 Petitioner is the tax owner of the underlying assets even though the

Policies are nominally owned by the Trusts. If the Trusts were deemed to
be the owners of the underlying assets, it appears that their income would
be attributable to petitioner under the grantor trust rules. See secs. 671,
677, 679.
(324) WEBBER v. COMMISSIONER 369

tions.’’ Ibid. Petitioner contends that he could enjoy actual
receipt of Boiler Riffle’s income only by surrendering the
Policies for their (relatively puny) cash surrender value of
$735,046. In his view this constituted a ‘‘substantial limita-
tion or restriction’’ that precludes constructive receipt.
Although the Eighth Circuit in Christoffersen, 749 F.2d at
516, briefly mentioned the ‘‘doctrine of constructive receipt,’’
that principle has no necessary application here. ‘‘As summa-
rized by a much-quoted metaphor, constructive receipt means
that ‘a taxpayer may not deliberately turn his back upon
income and thus select the year for which he will report it.’ ’’
Bittker & Lokken, supra, at 105–62 (quoting Hamilton Nat’l
Bank v. Commissioner, 29 B.T.A. 63, 67 (1933)). The
‘‘investor control’’ doctrine addresses a different problem, and
a finding of ‘‘constructive receipt’’ is not a prerequisite to its
application.
It is undisputed that the owner of the separate account
assets during 2006–2007 actually received the income at
issue. The question we must decide is whether petitioner or
Lighthouse was that ‘‘owner.’’ If petitioner was the true
owner, he is treated as having actually received what the
separate accounts actually received; resort to ‘‘constructive
receipt’’ is not necessary. The taxpayer in Clifford, 309 U.S.
at 355, could not access the trust income for five years, yet
the Supreme Court held that he nevertheless owned the
assets titled to the trust. We reach the same conclusion
here. 18
2. Application to Life Insurance. Petitioner contends that
the ‘‘investor control’’ doctrine, if it applies to anything,
should not be applied to life insurance contracts. As he points
out, Revenue Ruling 77–85 and its immediate successors
addressed segregated asset accounts supporting variable
annuity contracts. In 2003 the Commissioner applied the
same principles to segregated asset accounts supporting vari-
able life insurance contracts. See Rev. Rul. 2003–91; Rev.
Rul. 2003–92. Citing Skidmore, 323 U.S. at 140, petitioner
18 In any event, we reject petitioner’s premise that the $735,046 limita-

tion on cash surrender value constituted a ‘‘substantial limitation[ ] or
restriction[ ],’’ sec. 1.451–2(a), Income Tax Regs., that would preclude con-
structive receipt. As noted previously, petitioner was able to withdraw un-
limited amounts of cash from the separate accounts in other ways. See
supra pp. 365–367.
370 144 UNITED STATES TAX COURT REPORTS (324)

contends that the latter two rulings ‘‘are not entitled to def-
erence as they are not ‘thoroughly considered’ * * * as to the
application of investor control to life insurance.’’
We disagree. The statutory text fully supports the Commis-
sioner’s position that variable life insurance and variable
annuities should be treated similarly in this (and in other)
respects. As pertinent here, section 817(d)(2) defines a ‘‘vari-
able contract’’ as a contract that is supported by a segregated
asset account and that ‘‘(A) provides for the payment of
annuities [or] (B) is a life insurance contract.’’ If ‘‘investor
control’’ principles apply to the former, they would seem to
apply to the latter by a parity of reasoning.
Petitioner contends that fundamental differences exist
between annuity and insurance contracts because, under the
latter, ‘‘the insurance company has assumed a significant
obligation to pay a substantial death benefit.’’ In petitioner’s
view, the ‘‘investor control’’ doctrine should apply only where
the policyholder occupies essentially the same position that
he would have occupied if he had purchased the assets in the
separate account directly. Here, petitioner says that his posi-
tion differs because Lighthouse’s obligation to pay the min-
imum death benefit ‘‘substantially shifts the risks between
the parties.’’
The existence of an insurance risk, standing alone, does
not make Lighthouse the owner of the separate account
assets for Federal income tax purposes. Lighthouse agreed to
assume the mortality risk in exchange for premiums that it
(or its reinsurer, Hannover Re) actuarially determined to be
commensurate with this risk. After 2000 these premiums
were replaced by mortality and administrative charges deb-
ited to the separate accounts. Unless the Trusts continued to
pay the actuarially determined mortality charges, directly via
premiums or indirectly via debits to the separate accounts,
the Policies would have lapsed and Lighthouse would have
had no more insurance risk.
During the tax years in issue the insurance risk borne by
Lighthouse was almost fully reinsured with Hannover Re
and was actually quite small. As of yearend 2006 and 2007,
the values of the assets in the separate accounts exceeded
the Policies’ minimum death benefit by at least $1.7 million
and $6.8 million, respectively. In any event, whatever mor-
tality risk existed was fully compensated by mortality risk
(324) WEBBER v. COMMISSIONER 371

charges ($12,327 for the years in issue) paid directly or
indirectly by the policyholder. Under these circumstances,
the insurer’s obligation to pay a minimum death benefit does
not tell us who owns the separate account assets, any more
than the insurer’s obligation to pay an annuity benefit deter-
mined who owned the separate account assets in Revenue
Ruling 77–85. To the extent the ‘‘investor control’’ doctrine
seeks to limit misuse of tax-favored investment assets, there
is no good reason to limit its application to annuities. In the
case of both annuities and insurance contracts, ownership is
determined by which party has ‘‘significant incidents of
ownership’’ over the underlying assets. Here that party was
petitioner.
3. Section 7702. In 1984 Congress created a statutory defi-
nition of the term ‘‘life insurance contract’’ for Federal
income tax purposes. Under section 7702(a), a policy will be
treated as a ‘‘life insurance contract’’ only if it satisfies either
the ‘‘cash value accumulation’’ test or both the ‘‘guideline pre-
mium’’ test and the ‘‘cash value corridor’’ test. These tests
require complex calculations involving the relationships
among premium levels, mortality charges, interest rates,
death benefits, and other factors. Respondent does not con-
tend that the Policies fail these tests or that they otherwise
fail to qualify as ‘‘life insurance contracts’’ within the
meaning of section 7702(a).
After enacting section 7702 Congress continued to examine
the use of insurance contracts as investment vehicles. This
led to the 1988 enactment of section 7702A, which defines a
‘‘modified endowment contract.’’ Congress concurrently
directed the Secretary of the Treasury to study ‘‘the effective-
ness of the revised tax treatment of life insurance and
annuity products in preventing the sale of life insurance pri-
marily for investment purposes.’’ Technical and Miscella-
neous Revenue Act of 1988, Pub. L. No. 100–647, sec.
5014(a), 102 Stat. at 3666; see H.R. Conf. Rept. No. 100–
1104, 1988 U.S.C.C.A.N. 5048, 5159 (Oct. 21, 1988).
Sections 7702 and 7702A impose quantitative restrictions
on life insurance and endowment contracts that have signifi-
cant investment aspects. From this premise, petitioner con-
cludes that the ‘‘investor control’’ doctrine cannot be applied
to an insurance policy that satisfies the statutory definition.
This is a variation on petitioner’s preceding argument—that
372 144 UNITED STATES TAX COURT REPORTS (324)

the ‘‘investor control’’ doctrine should not be applied to life
insurance.
As we explained previously, petitioner’s conclusion does not
follow from his premise. The fact that the Policies constitute
‘‘life insurance contracts’’ within the meaning of section
7702(a) does not determine, for Federal income tax purposes,
who owns the separate account assets that support the Poli-
cies. The latter inquiry depends on who has substantial
‘‘incidents of ownership’’ over those assets. Section 7702, with
its focus on quantitative relationships among premiums,
interest rates, and mortality charges, does not purport to
address this question.
Petitioner alternatively contends that, if the ‘‘investor con-
trol’’ doctrine is applied to treat him as the owner of the
separate account assets, the tax results should be dictated by
section 7702(g). Subsection (g) provides that, in specified cir-
cumstances, the policyholder shall be treated as receiving
‘‘the income on the contract’’ accrued during a particular
year. The ‘‘income on the contract’’ is defined as ‘‘the increase
in the net surrender value,’’ plus ‘‘the cost of life insurance
protection provided,’’ minus ‘‘the premiums paid.’’ Sec.
7702(g)(1)(B). Here, there was no increase in the Policies’
cash surrender value during 2006–2007, and there were no
‘‘premiums paid.’’ Petitioner accordingly contends that sec-
tion 7702(g) limits his income inclusion to ‘‘the cost of life
insurance protection provided’’ during the years in issue.
According to petitioner, that cost would be $12,327, the mor-
tality charges paid by the separate accounts during 2006–
2007.
Petitioner’s argument fails at the threshold. Section
7702(g) dictates the annual income inclusion for a policy-
holder ‘‘[i]f at any time any contract which is a life insurance
contract under the applicable law does not meet the defini-
tion of life insurance contract under subsection (a).’’ Both
parties agree that the Policies meet the definition of ‘‘life
insurance contract’’ in section 7702(a). Given the statute’s
express terms, section 7702(g) is thus inapplicable.
Under the ‘‘investor control’’ doctrine, the separate account
assets are treated for tax purposes as being owned by the
policyholder, not by the insurance company. Consistently
with this premise, Revenue Ruling 77–85 and its successors
uniformly treat the policyholder as taxable on the ‘‘inside
(324) WEBBER v. COMMISSIONER 373

buildup,’’ that is, on the dividends, interest, capital gains,
and other income realized on those assets annually. It would
be illogical to find that petitioner owns the underlying assets,
then tax the income earned on those assets as if they were
owned by the insurance company. Petitioner’s reliance on
section 7702(g) is accordingly misplaced.
4. Section 817(h). In 1984 Congress amended the Code to
include section 817(h), captioned ‘‘Treatment of Certain
Nondiversfied Contracts.’’ It provides that a variable contract
based on a separate account ‘‘shall not be treated as an
annuity, endowment, or life insurance contract for any period
* * * for which the investments made by such account are
not, in accordance with regulations prescribed by the Sec-
retary, adequately diversified.’’ Id. In authorizing the Depart-
ment of the Treasury to prescribe diversification standards,
Congress stated its intention that
the standards [should] be designed to deny annuity or life insurance
treatment for investments that are publicly available to investors and
investments which are made, in effect, at the direction of the investor.
Thus, annuity or life insurance treatment would be denied to variable
contracts (1) that are equivalent to investments in one or a relatively
small number of particular assets (e.g., stocks, bonds, or certificates of
deposits of a single issuer); (2) that invest in one or a relatively small
number of publicly available mutual funds; (3) that invest in one or a
relatively small number of specific properties (whether real or personal);
or (4) that invest in a nondiversified pool of mortgage type investments.
* * * [H.R. Conf. Rept. No. 98–861, at 1055 (1984), 1984–3 C.B. (Vol.
2) 1, 309.]

Citing this language, petitioner contends that Congress
intended section 817(h) to eliminate the ‘‘investor control’’
doctrine altogether. Petitioner’s reliance is again misplaced.
Congress directed that the new diversification standards
should govern situations where the investments in the sepa-
rate account ‘‘are made, in effect, at the direction of the
investor.’’ H.R. Conf. Rept. No. 98–861, supra at 1055,
1984–3 C.B. (Vol. 2) at 309. This would be true, Congress
noted, where the investments, though actually selected by
the insurance company, are so narrowly focused and
undiversified as to be a proxy for mutual funds or other
‘‘investments that are publicly available to investors.’’ Ibid.
In adopting a regulatory regime to identify situations in
which investments ‘‘are made, in effect, at the direction of
374 144 UNITED STATES TAX COURT REPORTS (324)

the investor,’’ Congress expressed no intention to displace the
‘‘investor control’’ doctrine. That doctrine identifies situations
in which investments are made at the actual direction of the
investor, such that he exercises actual control over the
investment account. See Rev. Rul. 77–85, 1977–1 C.B. at 14
(policyholder possesses investment control when he ‘‘retains
the power to direct the custodian to sell, purchase or
exchange securities, or other assets held in the custodial
account’’). 19
Apart from one safe harbor in section 817(h)(2), Congress
left the diversification requirements to be implemented
through ‘‘regulations prescribed by the Secretary.’’ Sec.
817(h)(1). The Secretary issued temporary and proposed
regulations outlining diversification standards in 1986. 51
Fed. Reg. 32633 (temporary), 32664 (proposed) (Sept. 15,
1986). The preamble stated, 51 Fed. Reg. at 32633:
The temporary regulations * * * do not address any issues other than
the diversification standards[.] * * * In particular, they do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets
in the account. For example, the temporary regulations provide that in
appropriate cases a segregated asset account may include multiple sub-
accounts, but do not specify the extent to which policyholders may direct
their investments to particular sub-accounts without being treated as
owners of the underlying assets. Guidance on this and other issues will
be provided in regulations or revenue rulings under section 817(d),
relating to the definition of variable contract.

Final regulations concerning diversification standards were
issued in 1989. T.D. 8242, 1989–1 C.B. 215; see sec. 1.817–
5, Income Tax Regs. Since issuing those final regulations, the
IRS has continued to issue both public and private rulings
invoking the ‘‘investor control’’ doctrine to determine owner-
ship of assets in segregated asset accounts. See, e.g., Rev.
19 As commentators have noted, the section 817(h) diversification stand-
ards may supersede some aspects of the pre-1984 revenue rulings that dis-
cuss publicly available investments held by segregated asset accounts. See,
e.g., David S. Neufeld, ‘‘The ‘Keyport Ruling’ and the Investor Control
Rule: Might Makes Right?,’’ 98 Tax Notes 403, 405 (2003). But Congress
did not, expressly or by implication, indicate any intention that section
817(h) should displace the bedrock ‘‘investor control’’ principles enunciated
in Revenue Ruling 77–85, which address situations where the policyholder
exercises actual control over the investments in the separate accounts.
(324) WEBBER v. COMMISSIONER 375

Rul. 2003–91, 2003–2 C.B. 349–350; Rev. Rul. 2003–92,
2003–2 C.B. 351–352; Priv. Ltr. Rul. 201105012 (Feb. 4,
2011); Priv. Ltr. Rul. 200420017 (May 14, 2004); Priv. Ltr.
Rul. 9433030 (Aug. 19, 1994); see also C.C.A. 200840043
(October 3, 2008). As the Commissioner has explained: ‘‘[T]he
final regulations do not provide guidance concerning the
extent to which policyholders may direct the investments of
a segregated asset account without being treated as the
owners of the underlying assets.’’ Priv. Ltr. Rul. 9433030. 20
In sum, by enacting section 817(h), Congress directed the
Commissioner to promulgate standards for determining when
investments in a segregated asset account, though actually
selected by an insurance company, ‘‘are made, in effect, at
the direction of the investor.’’ H.R. Conf. Rept. No. 98–861,
supra at 1055, 1984–3 C.B. (Vol. 2) at 309. It would be
wholly contrary to Congress’ purpose to conclude that the
enactment of section 817(h) disabled the Commissioner from
determining, under the ‘‘investor control’’ doctrine, that
investments in a segregated asset account are made, in
actual reality, at the direction of the investor. The Secretary
clearly stated, when promulgating the new diversification
standards, that the ‘‘investor control’’ doctrine would con-
tinue to apply, and the Commissioner’s public and private
rulings during the ensuing 30 years confirm his view that
this doctrine remains vital. Congress has certainly evidenced
no disagreement with that position. 21 For all these reasons,
20 In Private Letter Ruling 9433030, for example, the taxpayer sought a
ruling that assets held in a separate account would be treated as owned
by the insurance company and not the policyholder. The taxpayer rep-
resented that the separate accounts would be adequately diversified under
section 817(h). The Commissioner then proceeded to consider whether the
policyholder or the insurance company should be treated as the owner of
the separate account assets under Christoffersen, 749 F.2d 513, Revenue
Ruling 77–85, and other authorities. The Commissioner followed the same
path in Revenue Rulings 2003–91 and 2003–92.
21 Congress in one respect has expressed its disagreement with the Com-

missioner’s implementation of section 817(h), countermanding a provision
of the 1986 proposed regulations that would have deemed all Government
securities to be issued by a single entity. See 134 Cong. Rec. 29723 (1988).
Congress then revised the statute by adding section 817(h)(6), which pro-
vides that, ‘‘[i]n determining whether a segregated asset account is ade-
quately diversified * * *, each United States Government agency or in-
strumentality shall be treated as a separate issuer.’’ See Technical and
Continued
376 144 UNITED STATES TAX COURT REPORTS (324)

we conclude that the enactment of section 817(h) did not dis-
place the bedrock ‘‘investor control’’ principles enunciated in
Revenue Ruling 77–85.
IV. Subsidiary Issues
A. Webify Stock Basis
The bulk of the income realized by Boiler Riffle during the
tax years in issue consisted of capital gain on the sale of
Webify stock. IBM purchased these shares in 2006 for more
than $3 million, of which $2,731,087 was paid in 2006 and
$212,641 in 2007. The parties disagree as to the basis of
these shares.
We have found as a fact that the basis of the Webify
shares when sold was $838,575. Petitioner was unable to
locate copies of wire transfers or similar documents covering
the numerous transactions in which these shares were
acquired. However, Butterfield Bank’s financial statements
for Boiler Riffle provide a consistent picture. Although
Butterfield Bank did not provide robust investment manage-
ment services, no one has criticized its bookkeeping or
accounting. Indeed, both parties relied, in numerous respects,
on the integrity of the financial statements and other docu-
ments that it prepared. In determining the long-term capital
gain in 2006 and 2007 on the sale of Webify stock, therefore,
the parties shall use a basis of $838,575. See secs. 1001,
1221. 22

Miscellaneous Revenue Act of 1988, Pub. L. No. 100–647, sec. 6080, 102
Stat. at 3710 (Nov. 10, 1988). Since Congress has revisited section 817(h)
to revise one aspect of the Commissioner’s implementation of the diver-
sification standards, the fact that it has left undisturbed the Commis-
sioner’s continuing invocation of ‘‘investor control’’ principles is not without
significance. Courts ordinarily are slow to attribute significance to Con-
gress’ failure to act on particular legislation, Aaron v. SEC, 446 U.S. 680,
694 n.11 (1980), but in some situations Congress’ inaction may provide a
‘‘useful guide,’’ see Bob Jones Univ. v. United States, 461 U.S. 574, 600–
602 (1983). The latter would seem to be true here.
22 Petitioner appears to argue that all of the basis should be allocated

to payments received in 2006. If there is any disagreement on this point,
the parties can resolve it as part of the Rule 155 computations.
(324) WEBBER v. COMMISSIONER 377

B. Boiler Riffle Distributions
Respondent argues that the distributions Boiler Riffle
made to Lighthouse in 2006–2007 to cover the Policies’
annual mortality and administrative charges should be
included in petitioner’s income. These payments were derived
from income Boiler Riffle realized on the separate account
investments. We have held that petitioner, as the owner of
these investments, is taxable in full on the income they gen-
erated. If petitioner were separately taxed as the deemed
beneficiary of the payments made from this income, as
respondent asks us to hold, petitioner in effect would be sub-
ject to double taxation. We decline that request. 23
V. Accuracy-Related Penalty
Section 6662 imposes a 20% accuracy-related penalty upon
the portion of any underpayment of tax that is attributable
(among other things) to a substantial understatement of
income tax. See sec. 6662(a), (b)(2). An understatement is
‘‘substantial’’ if it exceeds the greater of $5,000 or 10% of the
tax required to be shown on the return for that year. Sec.
6662(d)(1)(A). The Commissioner bears the burden of produc-
tion with respect to a section 6662 penalty. Sec. 7491(c). If
respondent satisfies his burden, petitioner then bears the
ultimate burden of persuasion. See Higbee v. Commissioner,
116 T.C. 438, 446–447 (2001).
The section 6662 penalty does not apply to any portion of
an underpayment ‘‘if it is shown that there was a reasonable
cause for such portion and that the taxpayer acted in good
faith with respect to * * * [it].’’ Sec. 6664(c)(1). The decision
whether the taxpayer acted with reasonable cause and in
good faith is made on a case-by-case basis, taking into
account all pertinent facts and circumstances. Sec. 1.6664–
4(b)(1), Income Tax Regs. A taxpayer may be able to dem-
23 As an alternative to his ‘‘investor control’’ position, respondent con-
tends that the Chalk Hill Trust in effect owned Boiler Riffle, with the re-
sult that petitioner, as the owner of that grantor trust, would be taxable
on Boiler Riffle’s income under subpart F. See sec. 1.958–1(b), Income Tax
Regs. (providing that a CFC owned by a foreign grantor trust is treated
as owned by the grantor). Whereas we have found petitioner to be the
owner of the assets in the separate accounts, Lighthouse was the owner
of Boiler Riffle and other special-purpose entities it created. Because Boiler
Riffle had no U.S. shareholders, the CFC rules do not apply.
378 144 UNITED STATES TAX COURT REPORTS (324)

onstrate reasonable cause and good faith by showing reliance
on professional tax advice. Sec. 1.6664–4(c)(1), Income Tax
Regs.; see Neonatology Assocs., P.A. v. Commissioner, 115
T.C. 43, 99 (2000), aff ’d, 299 F.3d 221 (3d Cir. 2002).
‘‘Advice’’ must take the form of a ‘‘communication’’ that
sets forth the adviser’s ‘‘analysis or conclusion.’’ Sec. 1.6664–
4(c)(2), Income Tax Regs. In assessing whether the taxpayer
reasonably relied on advice, we consider whether the adviser
was competent; whether the adviser received accurate and
complete information from the taxpayer; and whether the
taxpayer actually relied in good faith on the advice he was
given. Neonatology Assocs., P.A., 115 T.C. at 99.
Petitioner urges that he reasonably relied on Mr. Lipkind’s
advice. Mr. Lipkind was clearly a competent tax adviser. He
is an expert in income and estate tax, and he diligently
researched the relevant legal issues. He also received
accurate and complete information about the Lighthouse
arrangements because he set up petitioner’s estate plan.
Mr. Lipkind provided petitioner with ‘‘advice.’’ Mr. Lipkind
did not himself render a written legal opinion, but he
reviewed and considered written opinion letters from rep-
utable law firms addressing the relevant issues. Three of
these opinion letters specifically addressed the ‘‘investor con-
trol’’ doctrine; they concluded that the Lighthouse policies, as
structured, would comply with U.S. tax laws and avoid
application of this doctrine. By informing petitioner that he
concurred in these opinions, Mr. Lipkind provided petitioner
with professional tax advice on which petitioner actually
relied in good faith.
We likewise conclude that petitioner’s reliance was
‘‘reasonable.’’ Petitioner made multiple filings with the IRS
setting forth details about the Trusts and Lighthouse,
including gift tax returns filed for 1999 and 2003 and Form
3520 filed when the Policies were transferred to an offshore
trust. Petitioner did not attempt to hide his estate plan from
the IRS. This supports his testimony that he believed this
strategy would successfully withstand IRS scrutiny, as Mr.
Lipkind had advised.
The revenue rulings discussing the ‘‘investor control’’ doc-
trine adopted consistent positions and ultimately set forth a
‘‘safe harbor.’’ Rev. Rul. 2003–91, 2003–2 C.B. at 347. How-
ever, the outer limits of the doctrine were not definitively
(324) WEBBER v. COMMISSIONER 379

marked when Mr. Lipkind rendered his advice in 1998.
Whether an investor exercises impermissible ‘‘control’’ pre-
sents a factual issue, and Mr. Lipkind dictated the ‘‘Lipkind
protocol’’ as a mechanism for keeping petitioner on the sup-
posed right side of the line. Although the ‘‘Lipkind protocol’’
was formalistic and ultimately unsuccessful, we do not fault
petitioner, who had no expertise in tax law, for following his
lawyer’s advice on this point. Cf. Van Camp & Bennion v.
United States, 251 F.3d 862, 868 (9th Cir. 2001) (‘‘Where a
case is one ‘of first impression with no clear authority to
guide the decision makers as to the major and complex
issues,’ a negligence penalty is inappropriate.’’ (quoting
Foster v. Commissioner, 756 F.2d 1430, 1439 (9th Cir.
1985))); Montgomery v. Commissioner, 127 T.C. 43, 67 (2006);
Williams v. Commissioner, 123 T.C. 144, 153–154 (2004)
(reasonable cause may be found where return position
involves issues that were novel as of the time that return
was filed). 24
For these reasons, we conclude that petitioner is not liable
for the accuracy-related penalty for any of the years in issue.
To reflect the foregoing,
Decision will be entered under Rule 155.

f

24 We disagree with respondent’s submission that Mr. Lipkind was a
‘‘promoter’’ upon whom petitioner could not reasonably rely. See 106 Ltd.
v. Commissioner, 136 T.C. 67, 79–80 (2011), aff ’d, 684 F.3d 84 (D.C. Cir.
2012). Mr. Lipkind has maintained a continuous attorney-client relation-
ship with petitioner for more than a dozen years. Mr. Lipkind had no stake
in petitioner’s estate plan apart from his normal hourly rate, and Mr.
Lipkind received no remuneration or other benefit from Lighthouse, Boiler
Riffle, or the Investment Manager. Mr. Lipkind did not plan the private
placement life insurance structure, but only advised petitioner to purchase
such a policy after thoroughly vetting Lighthouse, an unrelated insurance
company. The evidence established that Mr. Lipkind recommended the
Lighthouse estate plan only to his wife, to petitioner, and to a small num-
ber of other clients.