An order and decision will be entered under
K, an S corporation 100 percent owned by P's spouse, adopted and, through its subsidiary KSM, made contributions to a multiemployer welfare-benefit plan (the plan). Through KSM, K made a contribution to the plan, part of which was used to purchase life insurance coverage for P and K's other employees, and the remainder of which was an excess contribution. The plan was amended and converted to a single-employer plan. The plan's qualification pursuant to
136 T.C. 38">*39 WELLS,
The issues to be decided as a consequence of Petitioner's motion for summary judgment and Respondent's cross-motion for summary judgment are: (1) Whether respondent was required to send a "30 day letter" to petitioner 2011 U.S. Tax Ct. LEXIS 2">*5 and whether the notice of deficiency adequately sets forth respondent's position in the instant case; (2) whether petitioner must include in gross income the cash value of a life insurance policy held by a multiemployer welfare benefit plan that was converted to a single-employer welfare benefit plan during the year in issue; (3) whether petitioner 136 T.C. 38">*40 must include in his gross income payments made by his employer in excess of the cost of current year life insurance protection (excess contribution); (4) whether petitioner must include in his gross income the current year cost of life insurance protection paid by his employer; and (5) whether petitioner is liable for the penalty under
The background facts are drawn from the pleadings, the parties' motions, facts deemed established, and stipulated exhibits, and are not in dispute. 4
At the time of filing of the petition, 2011 U.S. Tax Ct. LEXIS 2">*6 petitioner was a resident of North Carolina.
Petitioner is married to Jennifer K. Cadwell (Mrs. Cadwell). Petitioner and Mrs. Cadwell have two daughters, Jennifer Keady Cadwell (Jennifer) and Miranda M. Cadwell (Miranda). For his 2002 through 2004 tax years, petitioner filed Forms 1040, U.S. Individual Income Tax Return, claiming a filing status of married filing separately. For his 2002 through 2004 tax years, petitioner did not report any wages or salaries on line 7 of Form 1040.
Keady Ltd. (Keady), is a Pennsylvania S corporation organized during 1998 pursuant to
During 2002 through 2004, KSM was owned as follows: 90 percent by Mrs. Cadwell; 5 percent by Keady; 2 percent by petitioner; 1.5 percent by Jennifer; and 1.5 percent 2011 U.S. Tax Ct. LEXIS 2">*7 by Miranda. Keady is the general partner of KSM.
During December 2002, petitioner and Mrs. Cadwell decided to obtain employee welfare benefits for petitioner, Jennifer, and Miranda through the National Benefit Plan 136 T.C. 38">*41 and Trust. 52011 U.S. Tax Ct. LEXIS 2">*8 The respective plan documents are hereinafter referred to as the Plan and the respective trust created under the Plan is hereinafter referred to as the Trust. According to its original terms, the Plan was organized as a multiemployer welfare benefit plan pursuant to
Before joining the Plan, a prospective employer provides to the Plan sponsor, Niche Plan Sponsors (Niche), employment information regarding the employees whom the employer chooses to include in the Plan. Niche uses the employer's information to create a package of information that contains a summary of the Plan's benefits to the employer and its employees. According to the summary, petitioner receives $50,000 a year in wages from Keady.
On December 31, 2002, petitioner signed the document adopting the Plan as secretary on behalf of Keady. Petitioner was 64 years old at the time Keady adopted the Plan. The adoption agreement identifies Niche as the Plan sponsor, National Plan Advisory as the Plan Administrator, Wells Fargo Bank as the Plan Trustee, and National Benefit Plan and Trust as the Record Owner of the Trust's assets. Keady elected to cover petitioner, Miranda, and Jennifer with death benefits equal to 2011 U.S. Tax Ct. LEXIS 2">*9 20 times the covered employee's compensation, severance benefits equal to 14.847 percent of compensation per year up to 10 years (not to exceed 200 percent), and a modified 4-40 vesting schedule (vesting schedule). Under the vesting schedule, an employee is first vested in severance 136 T.C. 38">*42 benefits at 40 percent of the stated benefit after 4 years of employment, with vesting increasing to 100 percent at year 10 of employment.
Life insurance covering petitioner's and his daughters' lives was selected to fund the death and severance benefits payable under the Plan to petitioner and his daughters. 82011 U.S. Tax Ct. LEXIS 2">*10 For petitioner, a universal life policy with an initial death benefit of $1 million that also accumulates cash value (hereinafter referred to as the life insurance policy) was selected to fund his benefit. 9 The life insurance policy was issued by Lincoln National Life Insurance Co. (Lincoln Life) on December 7, 2002. Petitioner named Miranda and Jennifer as beneficiaries of the life insurance policy. In his life insurance policy application, petitioner listed himself as "Manager" of Keady.
For Miranda and Jennifer, identical 10-year, level term life insurance policies on their 2011 U.S. Tax Ct. LEXIS 2">*11 lives with death benefits of $300,000 were selected to fund their benefits. The annual combined premiums on those policies totaled $645. On their life insurance applications, Miranda and Jennifer were identified as "Consultants" for Keady.
On December 31, 2002, KSM paid $75,000 by check to Compass Bank, 10 the Plan Trustee, to cover Keady's obligation under the Plan, and $2,050 for the Plan fee. Both checks were drawn on KSM's Centennial Bank account and were signed by petitioner. Lincoln Life credited petitioner's life insurance policy for a payment of $73,000 for the month ending January 6, 2003. Petitioner did not include any income on his 2002 Form 1040 as a result of any life insurance 136 T.C. 38">*43 premiums paid by KSM. The payments to the Plan Trustee were not claimed as a deduction on KSM's or Keady's 2002 Federal income tax return. Petitioner's accountant, Robert W. Nicolini, C.P.A. (Mr. Nicolini), was not aware of the payments or that KSM had a bank account with Centennial Bank.
On May 20, 2004, KSM paid $38,800 to 419 Plan Administrators, 11 the new Plan Administrator, to cover Keady's obligation under 2011 U.S. Tax Ct. LEXIS 2">*12 the Plan. Of that amount, $36,000 was paid to cover the Plan contribution and $2,800 was paid as the Plan fee. The checks were drawn on the "KSM Limited Partnership Escrow Account, c/o Crawford Wilson and Ryan LLC" (KSM escrow account). 122011 U.S. Tax Ct. LEXIS 2">*13 The KSM escrow account was maintained at National Penn Bank. When Mr. Nicolini prepared KSM's 2004 Federal income tax return, he discovered the $38,800 in payments made to 419 Plan Administrators. Mr. Nicolini was not aware that KSM or Keady was participating in the Plan. Mr. Nicolini asked Miranda, the tax matters partner of KSM, about the payments. Miranda, who was unable to verify the payments, thought they were for a horse. Mr. Nicolini recorded the amounts as payments for "horses" and "booked" them as an asset on KSM's balance sheet. Mr. Nicolini never depreciated the "horses" on KSM's balance sheet, and, during 2006, the "horses" were distributed to the Cadwells as a capital distribution. Lincoln Life credited petitioner's life insurance policy for an $18,000 payment for the month ended September 6, 2004. 13
On June 5, 1995, the Internal Revenue Service (IRS) issued
On November 17, 2004, Niche sent letters to the employers participating in the Plan announcing that the Plan had been split into single-employer welfare benefit plans (SEPs or individually SEP). 152011 U.S. Tax Ct. LEXIS 2">*15 The reasons stated in the letters for the conversion included more employer control over Plan assets and the concern that the Plan might be subject to listed transaction penalties under
On December 30, 2004, Niche and Wells Fargo, as Trustee, entered into a new trust agreement for the National Benefit Trust II. By its terms, the agreement is a "complete amendment and restatement" of the original trust agreement. Significantly, the new agreement provides that the Plan Administrator is now the employer unless the employer designates another person or persons to be Plan Administrator. The new agreement provides that the employer, Keady, can terminate the SEP at any time. In the event of Keady's withdrawal 16 from the SEP, at the end of the 23-month period following the date Keady terminated the SEP (the 23-month period), the Trust has the option to distribute the life insurance policies to Keady, sell the life insurance policies to any interested purchaser with an insurable interest in the employees, or surrender the life insurance policies to the insurance company for their cash surrender value. Additionally, the Trust can sell petitioner his life insurance policy. 136 T.C. 38">*45 During the 23-month period, Keady would be required to continue paying the annual cost of the life 2011 U.S. Tax Ct. LEXIS 2">*16 insurance. If petitioner were to die before the end of the 23-month period, he would still be eligible for the death benefits under the SEP.
Keady, KSM, petitioner, Mrs. Cadwell, Miranda, and Jennifer were not consulted by Niche before the split of the Plan into separate SEPs. Keady, KSM, petitioner, Mrs. Cadwell, Miranda, and Jennifer did not attempt to access or use the Plan benefits at any time during 2004 or 2005. Petitioner did not include on his Form 1040 for his 2004 tax year any income resulting from the conversion of the Plan from an MEP to an SEP.
During December 2004, the life insurance policy covering petitioner had a death benefit value equal to $1,070,529, a "fund" value equal to $70,529 and a surrender value equal to $25,237. 17 The fund value was determined by adding the premiums paid ($91,000 = $73,000 + $18,000) and interest credited ($6,134 = $3,340 + $2,793), less mortality charges 182011 U.S. Tax Ct. LEXIS 2">*18 ($16,235 = $7,738 + $8,497) and other expenses ($10,370 = $7,730 + $2,640). 19 The surrender value was the amount of cash that petitioner would receive upon surrender 2011 U.S. Tax Ct. LEXIS 2">*17 of the life insurance policy to Lincoln Life and was calculated by subtracting a surrender charge of $45,291 from the fund value of $70,529, yielding a surrender value of $25,237. 20
Kevin Ryan (Mr. Ryan), petitioner's counsel in this case, prepared two legal opinions for Niche, dated December 6, 2004, and June 16, 2005. Mr. Ryan began serving as counsel 136 T.C. 38">*46 to Niche after petitioner was involved in the Plan. In Mr. Ryan's opinion letter of December 6, 2004, he stated: QUESTION: Will participants in the Trust have income on the current value of the death benefits provided under the Trust equal to the lower of the so-called "PS 58 Rates" or the insurance company's term insurance rates? * * * ANSWER: Yes * * * The death benefits are nontransferable, therefore subject to a substantial risk of forfeiture and employees have no right to any cash value, employees should not be taxed on the death benefit as a transfer of a permanent 2011 U.S. Tax Ct. LEXIS 2">*19 life insurance policy. Nevertheless, participating employees receive an economic benefit each year for the death benefit coverage that is provided for that year. Thus, in accordance with It is the Firm's opinion that participating employees in the Trust receive an economic benefit for the death benefit protection provided each year under the Trust. The annual tax for such benefits shall be determined in accordance with Code
On April 2, 2008, respondent sent petitioner a notice of deficiency in which he determined that petitioner's gross income for 2004 should be increased by $102,039. The unreported income determined by respondent consists of: (1) The fund value of the life insurance policy as of December 6, 2004, of $70,529; (2) the excess contribution to the Plan of 136 T.C. 38">*47 $18,000, 212011 U.S. Tax Ct. LEXIS 2">*21 and (3) the cost of term life insurance on petitioner's life for 2004 of $13,510. Petitioner timely filed a petition in this Court.
The moving party bears the burden of demonstrating that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law.
The issues we must decide concern the income tax consequences of employee welfare benefits. Generally, contributions to welfare benefit plans are deductible by an employer when paid if they qualify as ordinary and necessary business expenses, but only to the extent allowed by
136 T.C. 38">*48 In
We did not address in any of the foregoing cases the tax consequences to a nonowner employee for contributions to a plan that purportedly met the requirements of
In his petition and motion for summary judgment, petitioner contends that respondent failed to provide him with a "30-day letter" before issuing a notice of deficiency and failed to provide a specific theory of the case in the notice of deficiency. Generally, we will not look behind a notice of deficiency to examine the evidence used, the propriety of 136 T.C. 38">*49 the Commissioner's motives, or administrative policy or procedure used in making the determination.
As to whether the notice of deficiency is invalid because it insufficiently sets forth respondent's position,
Petitioner received a Form 886-A, Explanation of Items, accompanying his notice of deficiency.
The Form 886-A explains how the IRS determined petitioner's deficiency and states: 136 T.C. 38">*50 7.a. Other Income - Niche Conversion/Contribution: It has been determined that you received income in the amount of $102,339.00 in the taxable year ending December 31, 2004, under the provisions of
We next address whether petitioner must include in his gross income the cash value of the insurance policy upon conversion of the Plan from an MEP to an SEP. Respondent contends that petitioner became substantially vested in the Plan upon 2011 U.S. Tax Ct. LEXIS 2">*28 its conversion from an MEP to an SEP pursuant to
An employee's interest in property is substantially vested when it is either transferable or not subject to a substantial risk of forfeiture. 136 T.C. 38">*52 where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if such condition is not satisfied. * * * (i) the employee's relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation, (ii) the position of the employee in the corporation and the extent to which he is subordinate to other employees, (iii) the employee's relationship to the officers and directors of the corporation, (iv) the person or persons who must approve the employee's discharge, and (v) past actions of the employer in enforcing the provisions of the restrictions. * * *
Both parties treat petitioner's interest in the Plan as subject to a substantial risk of forfeiture before the Plan's conversion to an SEP on November 17, 2004. As stated above, the issue of whether the Plan qualified pursuant to
On November 17, 2004, Niche 2011 U.S. Tax Ct. LEXIS 2">*32 amended the Plan to convert the Plan from an MEP to an SEP. Keady's SEP received its proportional share of the Plan's assets. Following the conversion of the Plan, the assets in Keady's SEP could be used only to pay the claims of Keady employees. The conversion of the Plan from an MEP to an SEP eliminated the risk that Keady's assets could be used to pay other employers' claims. In other words, a future condition that could have occurred under the original Plan as an MEP, i.e., another company's claim to the cash value of Keady's life insurance policies, no longer existed under the Plan as an SEP. See
136 T.C. 38">*53 According to the terms of the SEP, Keady could terminate the SEP at any time. In the event of an employer withdrawal from the SEP, the Trust could distribute the life insurance policies to Keady, sell the life insurance policies to any interested purchaser with an insurable interest in the employees, or surrender the life insurance policies to the insurance company for their cash surrender value. Additionally, the Trust could sell petitioner his life insurance policy.
While
Petitioner cites Although respondent is concerned that the ability of a participating employer to terminate voluntarily its participation in the * * * [plan] allows the employer to control the timing of income to its employees, we regard that concern as misplaced. Respondent's concern could also be expressed with respect to the pension plan of a corporation owned by a 136 T.C. 38">*54 single shareholder. Although the shareholder may be the only employee, it does not necessarily follow that such a pension plan provides for receipt of deferred compensation merely because the owner/shareholder has the ability to terminate the pension plan at will.
Petitioner also contends that the vesting schedule prevents him from having a vested interest in the SEP during 2004. Additionally, petitioner contends that, if any interest was vested, Mrs. Cadwell could fire him at will, and, therefore, his benefits under the SEP remained subject to a substantial risk of forfeiture. We disagree.
We conclude that the vesting restrictions are illusory under the circumstances of the instant case. 25 When the Trust's assets came under Keady's exclusive control, they became subject to petitioner's control. As noted above, petitioner could terminate the SEP and have the plan assets or their cash equivalent distributed to Keady. Moreover, if the vesting schedule were to apply, the power to enforce the restrictions against petitioner would be in the hands of petitioner, his wife, or his daughters. Under such circumstances, the restrictions on petitioner's power to obtain the Plan proceeds 2011 U.S. Tax Ct. LEXIS 2">*36 are illusory.
Petitioner relies upon
The facts of the instant case are distinguishable from those of
Petitioner's contention that he could be fired and therefore lose his benefits is also without merit. As of the hearing, petitioner was still married to Mrs. Cadwell who was the 100-percent shareholder of Keady, his employer. Petitioner argues only that there is a possibility that he could be fired by Mrs. Cadwell. Under such circumstances, we conclude that the threat that petitioner could be fired by his wife is illusory and his interest is not subject to a substantial risk of forfeiture.
136 T.C. 38">*56 On the basis of the record, we conclude that petitioner's interest in the postconversion SEP was no longer subject to a substantial risk of forfeiture; i.e., was substantially vested upon conversion of the Plan to an SEP.
Alternatively, petitioner contends that the contributions to the Plan, i.e., the payments for the life insurance policy, were a gift from Mrs. Cadwell to him pursuant to
Pursuant to the substance over form doctrine, although the form of a transaction may literally comply with the provisions of the Code, that form will not be given effect where it has no business purpose and operates simply as a device to conceal the 2011 U.S. Tax Ct. LEXIS 2">*40 true character of a transaction. See
Petitioner's contention regarding substance over form is misplaced. The record reveals that the $75,000 payment made during 2002 was paid from an account held in the name of KSM. The $38,800 in payments made during 2004 136 T.C. 38">*57 was paid out of the KSM escrow account. In his declaration filed after the hearing on the instant motions, petitioner contends that the premium payments were made with "after-tax funds distributable to [Mrs. Cadwell], as primary owner of KSM." In other words, petitioner claims that the funds belonged to KSM, but were "distributable" to Mrs. Cadwell. As the payments were not distributed to Mrs. Cadwell, 2011 U.S. Tax Ct. LEXIS 2">*41 therefore, they would have been made by funds still owned by KSM. Consistent with
On the basis of the record, we conclude that the substance and the form of the contributions were payments by KSM, not Mrs. Cadwell. Consequently,
We next address petitioner's contention that the cash value of the life insurance policy is not income to him because neither Keady nor KSM claimed deductions for contributions made during 2002 and 2004. Petitioner contends that, because a deduction is available under
Accordingly, we hold that the cash value of the life insurance policy must be included in petitioner's gross income for his 2004 tax year pursuant to
Respondent contends that the cash value of the life insurance policy is the fund value of $70,529. Petitioner contends that if he must include any amount in his gross income, only the cash surrender value of the life insurance policy after deducting surrender charges of $45,291 should be so included; i.e., $25,238.
A) the sum of the interpolated terminal reserve and any unearned premiums plus a (1) the premiums paid from the date of issue through the valuation date without reduction for dividends that offset those premiums, plus (2) dividends applied to purchase paid-up insurance prior to the valuation date, plus (3) any amounts credited (or otherwise made available) to the policyholder 2011 U.S. Tax Ct. LEXIS 2">*45 with respect to premiums, including interest and similar income items (whether credited or made available under the contract or to some other account), but not including dividends used to offset premiums and dividends used to purchase paid up insurance, minus (4) explicit or implicit reasonable mortality charges and reasonable charges (other than mortality charges), but only if those charges are actually charged on or before the valuation date and those charges are not expected to be refunded, rebated, or otherwise reversed at a later date, minus (5) any distributions (including distributions of dividends and dividends held on account), withdrawals, or partial surrenders taken prior to the valuation date.
According to
On December 31, 2002, KSM paid $75,000 to the Plan Trustee to cover Keady's 2011 U.S. Tax Ct. LEXIS 2">*47 initial contribution and $2,050 to cover the MEP fee. Of the $75,000 payment, $73,000 was credited to petitioner's life insurance policy. On May 20, 2004, KSM contributed $36,000 for the Plan's premiums and $2,800 to cover the Plan fee. Of the $36,000 contribution, $18,000 was credited to petitioner's life insurance policy. During 2003 and 2004, petitioner's life insurance policy was also increased by interest payments of $6,134, for a total of $97,134. Petitioner's life insurance policy was decreased during 2003 and 2004 for mortality charges of $16,235 and other expenses of $10,370, respectively, for a total of $26,605. As noted above, petitioner's interest in the life insurance policy is not reduced by any surrender charges. Accordingly, we conclude that the PERC value of petitioner's interest in the life insurance policy is $70,529. 28
Neither party contends that the alternative valuation measure allowed pursuant to
During 2004, KSM contributed life insurance policy premiums of $36,000. Petitioner's life insurance policy was credited with a payment of $18,000. Respondent concedes that $645 of the remaining $18,000 was used to pay the annual premium on Miranda's and Jennifer's policies. Respondent contends that the excess contribution, $17,355, should be 136 T.C. 38">*98 included in petitioner's gross income pursuant to
As discussed above, the parties treat petitioner's interest in the Plan before conversion as being subject to a substantial risk of forfeiture, i.e., not substantially vested. We concluded above that, following the conversion of the Plan to an SEP, petitioner's interest was substantially vested. See
Petitioner makes the same contentions with respect to the inclusion of the excess contributions in gross income as he did with respect to the cash value of the life insurance policy; i.e., the Plan contributions were a gift from Mrs. Cadwell, and he has no interest in the Plan. We apply the same analysis as we did above and conclude that petitioner's contentions are without merit.
Petitioner also contends that the excess contributions have been accounted for in the cash value of the life insurance policy. Of the $36,000 contribution for life insurance protection made during 2004, $645 was credited towards Miranda's and Jennifer's life insurance policies. In the PERC calculation set forth above, $18,000 of the $36,000 was credited towards the cash value of petitioner's life insurance policy. The $17,355 excess contribution was not credited toward the cash value of the life insurance policy covering petitioner discussed in the PERC valuation above. Consequently, the inclusion of the excess contribution in petitioner's income would 2011 U.S. Tax Ct. LEXIS 2">*50 not be "double-counting".
Accordingly, we hold that the excess contribution of $17,355 must be included in petitioner's gross income for his 2004 tax year. 29
Respondent contends that the cost of life insurance protection Keady provided to petitioner during 2004 was an economic benefit and, therefore, should be included in his gross income under
Gross income includes income from whatever source derived, including income for services.
We note that
Petitioner received life insurance protection pursuant to the payments made by KSM to purchase the life insurance policy on petitioner's life. That life insurance 2011 U.S. Tax Ct. LEXIS 2">*52 protection was a valuable benefit and significant accession to petitioner's wealth; i.e., $1 million payable to his daughters if he were to die during 2004. See
Petitioner offers the same theories regarding the current year cost of life insurance protection as he did for the inclusion of the cash value of the life insurance policy and the excess contributions. Those theories are similarly unpersuasive regarding the inclusion of the current year cost of life insurance in his gross income. Accordingly, we hold that petitioner must include in his gross income for his 2004 tax year the current year cost of life insurance protection.
Petitioner contends that the fair market value of the cost of life insurance is $8,496; i.e., the 2004 mortality charges. Respondent contends that the value of the life insurance protection is $13,510; i.e., the annual cost, according to
Generally, split-dollar life insurance is any arrangement between an owner and a nonowner of a life insurance contract where one party pays the premiums and is entitled to recover all or a portion of such premiums from the proceeds of the life insurance contract and the arrangement is not group term life insurance.
In
Pursuant to Table 2001, the cost of $1 million worth of life insurance coverage for a 66-year-old is $13,510. As neither party has argued that the life insurance policy in issue is split-dollar life insurance, we need not address any issue regarding the effect of split-dollar life insurance on the calculation of the cost of the life insurance policy in issue. 31 Additionally, neither party contends that petitioner paid for such life insurance coverage.
We note that, if we were to include the entire $13,510 amount in petitioner's income, there would be double counting. Petitioner's gross income already includes the cash 136 T.C. 38">*65 value of the life insurance policy calculated under the PERC method. That method takes into account the premiums paid and any other income the life insurance policy earns, 2011 U.S. Tax Ct. LEXIS 2">*57 but it subtracts mortality charges and other expenses. To include the entire $13,510 in addition to the PERC value would partially double count a portion of the premium payment that has already been included in the PERC amount. 322011 U.S. Tax Ct. LEXIS 2">*58
Instead, the value for current year life insurance protection should be calculated by adding the mortality charges ($8,496) and other expenses ($2,640). The sum of $11,136 reflects the charges for current year life insurance that were already subtracted from the fair market value calculation determined using the PERC amount, pursuant to
Petitioner contends that we should only consider the current mortality charges rather than the Table 2001 rates. Petitioner in essence contends that the current mortality charges are the "insurer's published premium rates for one-year term insurance" pursuant to
Respondent contends that petitioner is liable for the accuracy-related penalty pursuant to
A substantial understatement of income tax is an understatement that is greater than 10 percent of the tax required to be shown on the return for the taxable year or $5,000.
The record reveals that petitioner's understatement will be greater than $5,000. Petitioner has failed to establish any defense to the accuracy-related penalty.
Consequently, we hold that petitioner is liable for the accuracy-related penalty under
We shall therefore grant respondent's cross-motion for summary judgment and deny petitioner's motion for summary judgment.
We have considered all of the issues raised by the parties, and, to the extent they are not discussed herein, we conclude that they are without merit, unnecessary to reach, or moot.
136 T.C. 38">*67 To reflect the foregoing,
1. Unless otherwise indicated, section references are to the Internal Revenue Code of 1986 (Code), as amended and in effect for the year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. By separate order, we will deny petitioner's motion to amend his petition.↩
3. In the notice of deficiency, respondent determined adjustments to petitioner's personal exemption and itemized deductions. These adjustments are computational and will depend on the Court's resolution of the issues discussed herein.↩
4. Certain facts were deemed established by separate order of the Court.↩
5. The parties agree that the trust was not exempt from tax under
6. Whether the Plan meets the requirements of
7. The Plan states: "The Plan shall terminate upon delivery by the Plan Sponsor to the Trustee of a written and signed notice of termination."↩
8. The parties do not specify how the severance benefits are to be funded, whether through the cash value of the life insurance policy or some other option. The adoption agreement states: "The adopting employer shall contribute for each Covered Employee the contribution necessary to fund a Covered Employee's Target Severance Benefit, determined under the formula and rules set forth in this Article."
9. There are many different kinds of life insurance policies. Term life insurance covers the insured only for a particular period, and upon expiration of that period, terminates without value. Whole life insurance covers an insured for life, during which the insured pays fixed premiums, accumulates savings from an invested portion of the premiums, and receives a guaranteed benefit upon death, to be paid to a named beneficiary. Universal life insurance is term life insurance in which the premiums are paid from the insured's earnings from a money-market fund. Variable life insurance is life insurance in which the premiums are invested in securities and whose death benefits thus depend on the securities' performance, though there is a minimum guaranteed death benefit. * * *
10. The record does not reveal at what point Compass Bank assumed the role of Plan Trustee.↩
11. The record does not reveal when 419 Plan Administrators became the Plan Administrator.↩
12. KSM paid this amount using two checks, one for $38,000, dated May 20, 2004, and the other for $800, dated May 20, 2004.
13. The record does not reveal why petitioner's life insurance policy was not credited with a $36,000 payment or why petitioner's payment in May was not credited until September. Petitioner's life insurance policy was not credited with a payment for 2005.↩
14.
Listed transactions are transactions that are the same as or substantially similar to those transactions that have been determined by the IRS to be tax avoidance transactions and have been identified by notice, regulation, or other form of published guidance.
15. According to the letters, the change was made effective retroactively to Jan. 1, 2004. However, we treat the change as actually occurring on Nov. 17, 2004, as this is the date of the actual conversion.
16. The new agreement setting up the SEP appears to use employer "withdrawal" and employer "termination" interchangeably.↩
17. The death benefit is the projected amount payable upon the death of the insured. The "fund" value represents the equity in the life insurance policy and is also known as the cash value of the life insurance policy.↩
18. Mortality charges are also referred to as "cost of insurance charges." The IRS provided the following explanation of mortality charges in Priv. Ltr. Rul. 2009-06-001 n.5 (Oct. 17, 2008): COI/mortality charges are determined by multiplying a mortality rate (which increases with the age of the insured) by the "net amount at risk" (the difference between the death benefit and the cash value,
19. The interest credits, mortality charges, and expenses are for 2003 and 2004.↩
20. These dollar amounts are rounded down to the nearest whole number.↩
21. In the notice of deficiency, respondent contends that the value of the excess contribution was $18,000. Respondent concedes that of the $38,800 contributed, $2,800 was for the Plan fee and $18,645 was for life insurance premiums ($18,000 for petitioner and $645 for Miranda and Jennifer). Therefore, respondent contends that the excess contribution of $17,355 should be included in petitioner's gross income.
22. (4) Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability. The assignments of error shall include issues in respect of which the burden of proof is on the Commissioner. Any issue not raised in the assignment of error shall be deemed to be conceded. Each assignment of error shall be separately lettered. (5) Clear and concise lettered statements of the facts on which petitioner bases the assignments of error, except with respect to those assignments of error as to which the burden proof is on the Commissioner.↩
23. An employee trust is a nonexempt trust if it is not exempt from taxation under
24. The parties do not contend that family attribution rules apply.↩
25. We note that according to its terms, if the Plan no longer qualifies as an MEP pursuant to
26.
27. For variable contracts, the only difference occurs in step 3. For step 3, "all adjustments (whether credited or made available under the contract or to some other account) that reflect the investment return and the market value of segregated asset accounts" are added or subtracted to determine the PERC value.
28. Petitioner does not contend that the premiums, interest credits, mortality charges, or other expenses should be prorated. Accordingly, we deem this argument conceded.↩
29. Petitioner contends that respondent has overstated the value of the excess contributions. Where a motion for summary judgment has been properly made and supported, the opposing party may not rest upon mere allegations or denials in that party's pleadings but must by affidavits or otherwise set forth specific facts showing that there is a genuine issue for trial.
30. In
31. The life insurance policy in issue may qualify as split-dollar life insurance pursuant to
32. Under the PERC method for 2004, petitioner's policy was credited with an $18,000 premium payment and was credited with $2,793 in interest, yielding a total of $20,793. However, petitioner's life insurance policy incurred a mortality charge of $8,496 and other expenses of $2,640, for a net value for his 2004 tax year of $9,657. Including the entire $13,510 from