38

G. MASON CADWELL, JR., PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 15456–08. Filed January 3, 2011. 

K, an S corporation 100 percent owned by P’s spouse, 

adopted and, through its subsidiary KSM, made contributions 

to a multiemployer welfare-benefit plan (the plan). Through 

KSM, K made a contribution to the plan, part of which was 

used to purchase life insurance coverage for P and K’s other 

employees, and the remainder of which was an excess contribution. The plan was amended and converted to a singleemployer plan. The plan’s qualification pursuant to sec. 

419A(f)(6), I.R.C., is not in issue. Held: R was not required to 

send P a ‘‘30 day letter’’, and the notice of deficiency adequately sets forth R’s position in this case and is therefore 

valid. Held, further, P’s interest in the plan became substantially vested upon the plan’s conversion from a multiemployer 

plan to a single-employer plan. Sec. 1.402(b)–1(b)(1), Income 

Tax Regs. Held, further, P must include in gross income the 

cash value of the life insurance policy on P’s life. The value 

of the life insurance policy is the PERC (premiums, earnings, 

and reasonable charges) pursuant to Rev. Proc. 2005–25, 

2005–1 C.B. 962. P has not contended that we should deviate 

from the safe harbor provision of Rev. Proc. 2005–25, supra; 

thus, P may not reduce the PERC value by the surrender 

charge under that provision. Held, further, P must include in 

his gross income the excess contributions pursuant to sec. 

1.402(b)–1(b)(1), Income Tax Regs. Held, further, the current 

year cost of insurance protection is an accession to wealth 

which P must include in gross income pursuant to sec. 61(a), 

I.R.C. Held, further, where the fair market value of a life 

(38) CADWELL v. COMMISSIONER 39

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. 

insurance policy has been determined using the PERC 

method, P must include in his gross income as the cost of life 

insurance protection an amount equal to the sum of mortality 

charges and other expenses. Held, further, P is liable for the 

accuracy-related penalty for a substantial understatement of 

income tax pursuant to sec. 6662(a) and (b)(2), I.R.C. 

Richard H. Morton and Kevin J. Ryan, for petitioner. 

Kathleen Tagni, Sherri Wilder, and Betty Clary (specially 

recognized), for respondent. 

OPINION 

WELLS, Judge: This case is before the Court on petitioner’s 

motion for summary judgment and respondent’s cross-motion 

for summary judgment pursuant to Rule 121. 1 Respondent 

determined a deficiency of $33,057 in petitioner’s Federal 

income tax for tax year 2004 and a penalty pursuant to section 6662(a) of $6,611. On August 31, 2009, petitioner filed 

a motion for summary judgment. On October 5, 2009, 

respondent filed a response to petitioner’s motion for summary judgment and a cross-motion for summary judgment. 

On October 26, 2009, petitioner filed a motion to amend his 

petition. 2 On November 4, 2009, petitioner filed a response 

to respondent’s cross-motion for summary judgment. On 

November 16, 2009, a hearing was held on the parties’ 

motions. On November 19, 2009, respondent filed a reply to 

petitioner’s response to respondent’s motion for summary 

judgment and an objection to petitioner’s motion to amend 

his petition. 

The issues to be decided as a consequence of petitioner’s 

motion for summary judgment and respondent’s

cross-motion for summary judgment are: (1) Whether 

respondent was required to send a ‘‘30 day letter’’ to petitioner 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 

40 136 UNITED STATES TAX COURT REPORTS (38) 

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. 

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 section 6662. 3

Background

The background facts are drawn from the pleadings, the 

parties’ motions, facts deemed established, and stipulated 

exhibits and are not in dispute. 4

At the time of filing of the petition, petitioner was a 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 sections 1361–1375. Keady is, 

and has always been, 100 percent owned by Mrs. Cadwell. 

Mrs. Cadwell is the sole director of Keady. During 2002 

through 2004, petitioner served as the secretary of Keady. 

Keady does not have any minutes of shareholders or directors meetings for 2002 through 2004. During 2002 through 

2004, Keady’s only income was its share of income (or loss) 

from KSM, Limited Partnership (KSM), a Pennsylvania limited 

partnership formed during 1998. 

During 2002 through 2004, KSM was owned as follows: 90 

percent by Mrs. Cadwell; 5 percent by Keady; 2 percent by 

petitioner; 1.5 percent by Jennifer; and 1.5 percent by 

Miranda. Keady is the general partner of KSM. 

During December 2002, petitioner and Mrs. Cadwell 

decided to obtain employee welfare benefits for petitioner, 

Jennifer, and Miranda through the National Benefit Plan 

(38) CADWELL v. COMMISSIONER 41

5The parties agree that the trust was not exempt from tax under sec. 501(a). 

6Whether the Plan meets the requirements of sec. 419A(f)(6) is not in issue. 

7The Plan states: ‘‘The Plan shall terminate upon delivery by the Plan Sponsor to the Trustee 

of a written and signed notice of termination.’’

and Trust. 5 The respective plan documents are hereinafter 

referred to as the Plan, and the respective trust created 

under the Plan is hereinafter referred to as the Trust. 

According to its original terms, the Plan was organized as a 

multiemployer welfare benefit plan pursuant to section 

419A(f)(6). 6 The documents describe the Plan’s design and 

operation. The primary purpose of the Plan is to provide 

severance and death benefits to eligible employees. According 

to the Plan, each employer is to bear the full cost of the benefits provided. Assets held by the Trust are protected from the 

claims of each employer’s creditors. Each employer enrolled 

in the Plan is entitled to elect the amount of benefits to provide and the period over which such benefits become vested. 

Upon termination of the Plan or employer withdrawal from 

the Plan, an employee’s nonforfeitable benefits are deemed to 

be 100 percent vested, regardless of the vesting schedule set 

by the employer. 7

Before joining the Plan, a prospective employer provides to 

the Plan sponsor, Niche Plan Sponsors (Niche), employment 

information regarding the employees whom the employer 

chooses to include in the Plan. Niche uses the employer’s 

information to create a package of information that contains 

a summary of the Plan’s benefits to the employer and its 

employees. According to the summary, petitioner receives 

$50,000 a year in wages from Keady. 

On December 31, 2002, petitioner signed the document 

adopting the Plan as secretary on behalf of Keady. Petitioner 

was 64 years old at the time Keady adopted the Plan. The 

adoption agreement identifies Niche as the Plan sponsor, 

National Plan Advisory as the Plan Administrator, Wells 

Fargo Bank as the Plan Trustee, and National Benefit Plan 

and Trust as the Record Owner of the Trust’s assets. Keady 

elected to cover petitioner, Miranda, and Jennifer with death 

benefits equal to 20 times the covered employee’s 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 

42 136 UNITED STATES TAX COURT REPORTS (38) 

8The 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.’’

9There 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. * * * [Curcio v. Commissioner, T.C. Memo. 2010–115.] 

10The record does not reveal at what point Compass Bank assumed the role of Plan Trustee. 

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. 8 For 

petitioner, a universal life policy with an initial death benefit 

of $1 million that also accumulates cash value (hereinafter 

referred to as the life insurance policy) was selected to fund 

his benefit. 9 The life insurance policy was issued by Lincoln 

National Life Insurance Co. (Lincoln Life) on December 7, 

2002. Petitioner named Miranda and Jennifer as 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 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 insurVerDate 0ct 09 2002 11:10 May 30, 2013 Jkt 372897 PO 20009 Frm 00005 Fmt 2847 Sfmt 2847 V:\FILES\CADWELL.136 SHEILA
(38) CADWELL v. COMMISSIONER 43

11The record does not reveal when 419 Plan Administrators became the Plan Administrator. 

12KSM paid this amount using two checks, one for $38,000, dated May 20, 2004, and the 

other for $800, dated May 20, 2004. 

13The 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 Notice 2001–51, 2001–2 C.B. 190, was supplemented and superseded by Notice 2003–76, 

2003–2 C.B. 1181, which was supplemented and superseded by Notice 2004–67, 2004–2 C.B. 

600, which was supplemented and superseded by Notice 2009–59, 2009–31 I.R.B. 170. Notice 

Continued

ance premiums paid by KSM. The payments to the Plan 

Trustee were not claimed as a deduction on KSM’s or Keady’s 

2002 Federal income tax return. Petitioner’s accountant, 

Robert W. Nicolini, C.P.A. (Mr. Nicolini), was not aware of 

the payments or that KSM had a bank account with 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 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). 12 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 

Notice 95–34, 1995–1 C.B. 309, which described certain 

multiemployer plans (MEPs) that do not qualify under section 

419A(f)(6). In Notice 2001–51, 2001–2 C.B. 190, the IRS designated those transactions described in Notice 95–34, supra, 

as ‘‘listed transactions’’ subject to enhanced disclosure 

requirements. 14 On October 22, 2004, the American Jobs 

44 136 UNITED STATES TAX COURT REPORTS (38) 

2009–59, supra, includes transactions described in Notice 95–34, 1995–1 C.B. 309, as listed 

transactions. 

Listed transactions are transactions that are the same as or substantially similar to those 

transactions that have been determined by the IRS to be tax avoidance transactions and have 

been identified by notice, regulation, or other form of published guidance. Sec. 1.6011–4(b)(2), 

Income Tax Regs. 

15 According to the letters, the change was made effective retroactively to Jan. 1, 2004. However, we treat the change as actually occurring on Nov. 17, 2004, as this is the date of the actual 

conversion. 

16The new agreement setting up the SEP appears to use employer ‘‘withdrawal’’ and employer 

‘‘termination’’ interchangeably. 

Creation Act of 2004, Pub. L. 108–357, sec. 811(a), 118 Stat. 

1575, became law and instituted a new penalty for failure to 

disclose a listed transaction. See sec. 6707A. 

On November 17, 2004, Niche sent letters to the employers 

participating in the Plan announcing that the Plan had been 

split into single-employer welfare benefit plans (SEPs or 

individually SEP). 15 The reasons stated in the letters for the 

conversion included more employer control over Plan assets 

and the concern that the Plan might be subject to listed 

transaction penalties under section 6707A. Niche’s letter 

acknowledged that the SEPs no longer qualified for treatment 

pursuant to section 419A(f)(6), and, therefore, the deductibility of the employer’s contributions would be limited. 

Keady’s employee welfare benefit plan was renamed the 

‘‘Keady, Ltd. Welfare Benefit Plan’’, and the assets were 

maintained by the National Benefit Trust II. 

On December 30, 2004, Niche and Wells Fargo, as Trustee, 

entered into a new trust agreement for the National Benefit 

Trust II. By its terms, the agreement is a ‘‘complete 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. 

(38) CADWELL v. COMMISSIONER 45

17The 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. 

18Mortality charges are also referred to as ‘‘cost of insurance charges.’’ The IRS provided the 

following explanation of mortality charges in Priv. Ltr. Rul. 2009–06–001 n.5 (Oct. 17, 2008): 

COI/mortality charges are determined by multiplying a mortality rate (which increases with the 

age of the insured) by the ‘‘net amount at risk’’ (the difference between the death benefit and 

the cash value, i.e., the pure insurance element of the contract). Mortality rates are determined 

with reference to a particular mortality table * * *.

In other words, the mortality charges approximate the term life insurance component of a whole 

life or universal life policy. However, because of concerns that insurers might manipulate such 

rates, the IRS will not view the mortality charges as the actual premium rates for term life 

insurance unless the insurer generally makes such rates available to those who apply for term 

insurance coverage and the insurer regularly sells term insurance coverage at such rates. See 

Notice 2002–8, 2002–1 C.B. 398, 398–399. 

19The interest credits, mortality charges, and expenses are for 2003 and 2004. 

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

During the 23-month period, Keady would be required to continue paying the annual cost of the life 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 18

($16,235 = $7,738 + $8,497) and other expenses ($10,370 = 

$7,730 + $2,640). 19 The surrender value was the amount of 

cash that petitioner would receive upon surrender of the life 

insurance policy to Lincoln Life and was calculated by 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 

46 136 UNITED STATES TAX COURT REPORTS (38) 

to Niche after petitioner was involved in the Plan. In Mr. 

Ryan’s opinion letter of December 6, 2004, he stated: 

QUESTION: Will participants in the Trust have income on the current 

value of the death benefits provided under the Trust equal to the lower 

of the so-called ‘‘PS 58 Rates’’ or the insurance company’s term insurance 

rates? * * *

ANSWER: Yes * * *

In his explanation of the taxation of Plan benefits, Mr. Ryan 

stated: 

The death benefits are nontransferable, therefore subject to a 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 life insurance policy. Nevertheless, participating employees 

receive an economic benefit each year for the death benefit coverage that 

is provided for that year. Thus, in accordance with Regulation Section 

1.83–1(a)(2), employees should be taxed each year on the cost of the life 

insurance protection under Code Section 61 and the Regulations thereunder in an amount which is equal to the reasonable net premium cost as 

determined by the Commissioner of the current life insurance protection 

as defined in Regulation Section 1.72–16(b)(3) provided by such contract. 

The reasonable net premium costs of the current life insurance protection 

as defined in Regulation Section 1.72–16(b)(3) is the same measure of 

value for life insurance protection that qualified retirement plans use. The 

Service has determined the reasonable net premium costs and published 

those amounts as ‘‘PS 58 rates.’’ In Rev. Rul. 66–110, 1966–1 C.B. 12, the 

Service held that an employer may use the current published premium 

rates charged by an insurer for individual one-year term life insurance 

available to all standard risks for determining the costs of insurance in 

connection with individual policies instead of the PS 58 costs table. In 

Notice 2001–10, an alternative table is set forth labeled Table 2001. 

It is the Firm’s opinion that participating employees in the Trust receive 

an economic benefit for the death benefit protection provided each year 

under the Trust. The annual tax for such benefits shall be determined in 

accordance with Code Section 83 and the Regulations thereunder and shall 

be the lower of the PS 58 table costs or the insured’s term insurance rates 

in accordance with Rev. Rul. 66–110. 

[Fn. ref. omitted.] 

On April 2, 2008, respondent sent petitioner a notice of 

deficiency in which he determined that petitioner’s gross 

income for 2004 should be increased by $102,039. The 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 

(38) CADWELL v. COMMISSIONER 47

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. 

$18,000, 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. 

Discussion

Rule 121(a) allows a party to move ‘‘for a summary adjudication in the moving party’s favor upon all or any part of 

the legal issues in controversy.’’ Rule 121(b) directs that a 

decision on such a motion shall be rendered ‘‘if the pleadings, 

answers to interrogatories, depositions, admissions, and any 

other acceptable materials, together with the affidavits, if 

any, show that there is no genuine issue as to any material 

fact and that a decision may be rendered as a matter of law.’’

The moving party bears the burden of demonstrating that 

no genuine issue of material fact exists and that the moving 

party is entitled to judgment as a matter of law. Sundstrand 

Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 

965 (7th Cir. 1994). Facts are viewed in the light most favorable to the nonmoving party. Id. However, 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. Rule 121(d). 

I. Caselaw Concerning Section 419A(f)(6) Plans

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 sections 419 and 

419A. Secs. 162(a), 419, 419A(f)(6). In recent years, adopted 

multiemployer plans have been claiming to satisfy section 

419A(f)(6) and purporting to generate deductions for the 

insurance benefits provided under the plans. Notice 95–34, 

supra. This Court has decided several cases regarding purported section 419A(f)(6) plans. 

48 136 UNITED STATES TAX COURT REPORTS (38) 

In Booth v. Commissioner, 108 T.C. 524, 565 (1997), we 

held that the plan in issue did not meet the requirements of 

section 419A(f)(6) because it was ‘‘an aggregation of separate 

welfare benefit plans, each of which has an experience-rating 

arrangement with the contributing employer.’’ In 

Neonatology Associates P.A. v. Commissioner, 115 T.C. 43 

(2000), affd. 299 F.3d 221 (3d Cir. 2002), without deciding 

whether the plans in issue met the requirements of section 

419A(f)(6), we held that the corporate employer/participants 

could not deduct contributions in excess of the cost of term 

life insurance. We also held that the disallowed deductions 

should be treated as dividend distributions to the employeeowners of the C corporations to the extent of earnings and 

profits. Id. at 96–97. In V.R. DeAngelis M.D.P.C. v. Commissioner, T.C. Memo. 2007–360, affd. per curiam 574 F.3d 789 

(2d Cir. 2009), similarly without ruling on whether the plan 

met the requirements of section 419A(f)(6), we held that payments for life insurance were essentially a distribution of S 

corporation profits rather than payments made with compensatory intent. In Curcio v. Commissioner, T.C. Memo. 2010–

115, again without ruling on whether the plan met the 

requirements of section 419A(f)(6), we held that contributions 

were distributions of profits to the employee-owners and not 

deductible pursuant to section 162(a). 

We did not address in any of the foregoing cases the tax 

consequences to a nonowner employee for contributions to a 

plan that purportedly met the requirements of section 

419A(f)(6) and subsequently was converted into a plan that 

no longer qualified. We must decide the consequences to petitioner of contributions to such a plan. 

II. Whether Respondent Was Required To Send a ‘‘30 day 

letter’’ to Petitioner and Whether the Notice of Deficiency 

Is Invalid Because Respondent’s Position Is Not Adequately Set Forth

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 

(38) CADWELL v. COMMISSIONER 49

22 Rule 34(b) requires that the petition contain:

(4) Clear and concise assignments of each and every error which the petitioner alleges to have 

been committed by the Commissioner in the determination of the deficiency or liability. The 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 of proof 

is on the Commissioner. 

the Commissioner’s motives, or administrative policy or 

procedure used in making the determination. Greenberg’s 

Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). 

Accordingly, we will not look into respondent’s alleged failure 

to issue a 30-day letter. See id.

As to whether the notice of deficiency is invalid because it 

insufficiently sets forth respondent’s position, section 7522(a) 

requires that the notice ‘‘describe the basis for, and identify 

the amounts (if any) of, the tax due, interest, additional 

amounts, additions to the tax, and assessable penalties 

included in such notice.’’ The purpose of section 7522 is to 

provide the taxpayer with notice of the Commissioner’s basis 

for determining a deficiency. Shea v. Commissioner, 112 T.C. 

183, 196 (1999). The notice needs to be sufficient to permit 

the taxpayer to comply with the requirement of Rule 34(b) 

that the taxpayer make clear and concise assignments of 

every error alleged against the Commissioner. 22 Id. at 196–

197. We have held that section 7522(a) does not require the 

Commissioner to identify the specific statutory provision supporting each adjustment in the notice of deficiency. Wheeler 

v. Commissioner, 127 T.C. 200, 205 (2006), affd. 521 F.3d 

1289 (10th Cir. 2008); Rogers v. Commissioner, T.C. Memo. 

2001–20, affd. without published opinion 281 F.3d 1278 (5th 

Cir. 2001). Additionally, the Commissioner is not required to 

lay out the factual basis for his determination in the notice 

of deficiency. Ocmulgee Fields, Inc. v. Commissioner, 132 T.C. 

105, 113 (2009), affd. 613 F.3d 1360 (11th Cir. 2010). Moreover, even an inadequate description of the Commissioner’s 

basis in the notice of deficiency will not invalidate the notice. 

Sec. 7522(a). 

Petitioner received a Form 886–A, Explanation of Items, 

accompanying his notice of deficiency. The Form 886–A 

explains how the IRS determined petitioner’s deficiency and 

states: 

50 136 UNITED STATES TAX COURT REPORTS (38) 

7.a. Other Income—Niche Conversion/Contribution:

It has been determined that you received income in the amount of 

$102,339.00 in the taxable year ending December 31, 2004, under the 

provisions of I.R.C. §§ 61, 72, 83 and 402(b) as a result of your participation in the National Benefit Plan and Trust Plan and it’s [sic] companion 

Trust and the Keady Ltd Welfare Benefit Plan Single Employer Plan and 

it’s [sic] companion Trust. Accordingly, your taxable income is increased by 

$102,039.00 for the taxable year December 31, 2004. 

The quoted explanation recites the Code sections on which 

the IRS relies even though specific citations are not required 

for the notice to be valid. See Wheeler v. Commissioner, supra

at 205; Rogers v. Commissioner, supra. In the instant case, 

the explanation provides sufficient detail that petitioner 

should be able to understand that the Plan’s conversion to an 

SEP is the source of the income respondent determined. 

Accordingly, we hold that the notice of deficiency, with the 

accompanying Form 886–A, provides an adequate basis for 

understanding the IRS’ determination of tax due. Consequently, we hold that petitioner’s contention is without 

merit and the notice of deficiency is valid.

III. Inclusion in Petitioner’s Income of the Cash Value of the

Insurance Policy Upon Conversion From MEP to SEP

We next address whether petitioner must include in his 

gross income the cash value of the insurance policy upon 

conversion of the Plan from an MEP to an SEP. Respondent 

contends that petitioner became substantially vested in the 

Plan upon its conversion from an MEP to an SEP pursuant to 

section 1.402(b)–1(b), Income Tax Regs. Petitioner contends 

that he has no interest in the Plan because the terms of the 

Plan and the involuntary nature of the conversion of the 

Plan from an MEP to an SEP preclude him from being 

‘‘substantially’’ vested in the Plan or the Plan assets. See sec. 

402(b)(1); sec. 1.402(b)–1(a)(1), Income Tax Regs. Additionally, petitioner contends that the life insurance policy premiums were paid with Mrs. Cadwell’s after-tax funds and, 

therefore, result in a gift to petitioner pursuant to section 

2523. In the alternative, petitioner contends that, if he has 

an interest in the Plan, respondent has overstated its value. 

We address each of these issues below.

(38) CADWELL v. COMMISSIONER 51

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

Sec. 402(b)(1). 

A. Whether Petitioner Is Substantially Vested in His

Interest in the Plan

Section 402(b)(1) provides that employer contributions 

made to a nonexempt employee trust 23 are included in the 

gross income of the employee to the extent that the 

employee’s interest in such contribution is substantially 

vested (within the meaning of section 1.83–3(b), Income Tax 

Regs.) at the time the contribution is made. Sec. 1.402(b)–

1(a)(1), Income Tax Regs. If the rights of an employee under 

a nonexempt employee trust become substantially vested 

during a taxable year of the employee and the taxable year 

of the trust ends with or within such year, the value of the 

employee’s interest in the trust on the date of such change 

is included in the employee’s gross income for that taxable 

year. Sec. 1.402(b)–1(b)(1), Income Tax Regs. The ‘‘value of 

an employee’s interest in a trust’’ means the amount of the 

employee’s beneficial interest in the net fair market value of 

all of the assets in the trust as of any date on which some 

or all of the employee’s interest in the trust becomes substantially vested. Sec. 1.402(b)–1(b)(2)(i), Income Tax Regs. The 

net fair market value of all of the assets in the trust is the 

total amount of the fair market values (determined without 

regard to any lapse restriction, as defined in section 1.83–

3(h), Income Tax Regs.) of all of the assets in the trust, less 

the amount of liabilities, as of the date on which some or all 

of the employee’s interest in the trust becomes substantially 

vested. Id. If only a portion of an employee’s interest in the 

trust becomes substantially vested during a taxable year, 

only the corresponding part of the trust value is includable 

in the employee’s gross income. Sec. 1.402(b)–1(b)(4), Income 

Tax Regs. 

An employee’s interest in property is substantially vested 

when it is either transferable or not subject to a substantial 

risk of forfeiture. Sec. 1.83–3(b), Income Tax Regs. Whether 

a risk of forfeiture is substantial depends on the facts and 

circumstances. Sec. 1.83–3(c)(1), Income Tax Regs. A 

substantial risk of forfeiture exists: 

52 136 UNITED STATES TAX COURT REPORTS (38) 

where rights in property that are transferred are conditioned, directly or 

indirectly, upon the future performance (or refraining from performance) 

of substantial services by any person, or the occurrence of a condition 

related to a purpose of the transfer, and the possibility of forfeiture is 

substantial if such condition is not satisfied. * * * [Id.] 

Property is not subject to a substantial risk of forfeiture if 

the employer must pay fair market value for its return or 

there is risk that the property’s value may decline. Id. In 

instances where an employee of a corporation owns a significant amount of the total combined voting power or value of 

all classes of stock in the employer corporation, the issue of 

whether an employee’s interest is subject to a substantial 

risk of forfeiture also depends upon: 

(i) the employee’s relationship to other stockholders and the extent of their 

control, potential control and possible loss of control of the corporation, (ii) 

the position of the employee in the corporation and the extent to which he 

is subordinate to other employees, (iii) the employee’s relationship to the 

officers and directors of the corporation, (iv) the person or persons who 

must approve the employee’s discharge, and (v) past actions of the 

employer in enforcing the provisions of the restrictions. * * * [Sec. 1.83–

3(c)(3), Income Tax Regs.] 

Both parties treat petitioner’s interest in the Plan as 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 section 

419(A)(f)(6) before conversion is not in issue. Therefore, for 

purposes of the instant motions, we will assume that before 

the Plan’s conversion from an MEP to an SEP, the Plan’s 

assets were subject to a substantial risk of forfeiture. 

On November 17, 2004, Niche amended the Plan to convert 

the Plan from an MEP to an SEP. Keady’s SEP received its 

proportional share of the Plan’s assets. Following the 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 sec. 1.83–1(c)(1), 

Income Tax Regs. 

(38) CADWELL v. COMMISSIONER 53

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

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 section 1.83–1(c)(3), Income Tax Regs., is not 

directly applicable because petitioner does not own any of 

Keady’s stock, it is instructive under the circumstances of the 

instant case. Petitioner’s wife is the sole shareholder of 

Keady. 24 At the time of the hearing, petitioner and Mrs. 

Cadwell were still married. The record does not contain any 

evidence of strife in petitioner’s working or personal relationship with Mrs. Cadwell. Petitioner listed his position as ‘‘Secretary’’ of Keady, and the record does not include any 

information regarding other officers. Mrs. Cadwell is the only 

director. Accordingly, we conclude that petitioner is the sole 

officer of Keady and that he was not subordinate to any other 

employee. See also 15 Pa. Cons. Stat. Ann. sec. 1732(a) (West 

1995) (every corporation must have a president, a secretary, 

and a treasurer and these offices may be held by the same 

person). As the sole officer of Keady, he had control over his 

own eligibility under Keady’s SEP. Additionally, as the sole 

officer, petitioner could terminate the Plan and have the 

assets distributed to Keady. 

Petitioner cites Booth v. Commissioner, 108 T.C. at 564, for 

the proposition that his power to terminate the Plan does not 

require the inclusion of the cash value of the life insurance 

policy in his income. Petitioner contends that if he were 

required to realize income based on his power to terminate, 

the Plan contributions would be taxable upon funding. In 

Booth, the Court determined whether the plan in issue was 

a deferred compensation plan. We stated: 

Although respondent is concerned that the ability of a participating 

employer to terminate voluntarily its participation in the * * * [plan] 

allows the employer to control the timing of income to its employees, we 

regard that concern as misplaced. Respondent’s concern could also be 

expressed with respect to the pension plan of a corporation owned by a 

54 136 UNITED STATES TAX COURT REPORTS (38) 

25We note that according to its terms, if the Plan no longer qualifies as an MEP pursuant 

to sec. 419A(f)(6), the Trustee was to terminate the Plan. Upon termination, the assets would 

be distributed to each covered employee in an amount equal to his or her benefit balance. Additionally, each covered employee would be 100 percent vested in his or her benefits upon termination. However, the Plan could be amended at any time with the vesting schedule potentially 

remaining in effect. The record is not sufficiently developed to determine whether the Plan was 

properly amended before it was converted to an SEP. Because we find the vesting restrictions 

illusory, we need not address this argument. 

single shareholder. Although the shareholder may be the only employee, 

it does not necessarily follow that such a pension plan provides for receipt 

of deferred compensation merely because the owner/shareholder has the 

ability to terminate the pension plan at will. [Id.] 

Booth is distinguishable from the instant case as deferred 

compensation is not in issue here. Moreover, because the 

Plan is a nonexempt trust, the taxation of an employee on 

contributions made on his behalf turns on whether the 

employee’s interest is substantially vested. See sec. 1.402(b)–

1(b)(1), Income Tax Regs. Whether an employee’s interest is 

substantially vested depends upon all of the facts and circumstances, including the employer’s ability to terminate the 

Plan. See sec. 1.83–3(c)(1), Income Tax Regs. 

Petitioner also contends that the vesting schedule prevents 

him from having a vested interest in the SEP during 2004. 

Additionally, petitioner contends that, if any interest was 

vested, Mrs. Cadwell could fire him at will, and, therefore, 

his benefits under the SEP remained subject to a substantial 

risk of forfeiture. We disagree. 

We conclude that the vesting restrictions are illusory 

under the circumstances of the instant case. 25 When the 

Trust’s assets came under Keady’s exclusive control, they 

became subject to petitioner’s control. As noted above, 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 are illusory. 

Petitioner relies upon Olmo v. Commissioner, T.C. Memo. 

1979–286, a case in which we held that the taxpayers’ 

interest in nonexempt trusts was substantially vested only to 

the extent of the vesting schedule. In Olmo, a professional 

corporation owned by two unrelated taxpayers, each a 50-

(38) CADWELL v. COMMISSIONER 55

percent shareholder, established a pension trust and a profitsharing trust. The taxpayers were each 40 percent vested. To 

increase their vesting rights, the taxpayers were required to 

complete future years of service, and, if they left the business, they forfeited their rights to the nonvested portion of 

the plan. Upon termination of the trusts, each participant 

would be 100 percent vested. Additionally, if a matter arose 

affecting an individual taxpayer’s status as a participating 

member of a trust, the taxpayer was automatically disqualified from participating in a decision as to that matter. The 

Court concluded that the taxpayers’ nonvested interests were 

subject to a substantial risk of forfeiture on account of the 

internal controls present. Id.

The facts of the instant case are distinguishable from those 

of Olmo. In the instant case, the terms of the SEP provide 

that the Plan Administrator is the employer. In effect, petitioner, as the only officer, is the Plan Administrator. The 

Plan Administrator decides all questions relating to the 

‘‘eligibility of employees to participate’’ in the Plan. Unlike in 

Olmo, the SEP does not have a disqualification provision that 

would prevent petitioner from deciding questions regarding 

his own eligibility. Even if Keady did elect to appoint another 

person as Plan Administrator, that person would be chosen 

by either petitioner, as sole officer of Keady, or Mrs. Cadwell, 

as Keady’s sole director. Therefore, any decision regarding 

petitioner’s eligibility would be decided by someone with a 

potential interest in the life insurance policy; i.e., Mrs. 

Cadwell, petitioner’s wife; or petitioner himself. We concluded above that any restrictions on petitioner’s right to 

control the disposition of the Trust assets are illusory. Consequently, we find the instant case is distinguishable from 

Olmo. 

Petitioner’s contention that he could be fired and therefore 

lose his benefits is also without merit. As of the hearing, 

petitioner was still married to Mrs. Cadwell who was the 

100-percent shareholder of Keady, his employer. Petitioner 

argues only that there is a possibility that he could be fired 

by Mrs. Cadwell. Under such circumstances, we conclude 

that the threat that petitioner could be fired by his wife is 

illusory and his interest is not subject to a substantial risk 

of forfeiture. 

56 136 UNITED STATES TAX COURT REPORTS (38) 

On the basis of the record, we conclude that petitioner’s 

interest in the postconversion SEP was no longer subject to 

a substantial risk of forfeiture; i.e., was substantially vested 

upon conversion of the Plan to an SEP. 

B. Whether the Contributions to the Plan Were a Gift From 

Mrs. Cadwell to Petitioner

Alternatively, petitioner contends that the contributions to 

the Plan, i.e., the payments for the life insurance policy, were 

a gift from Mrs. Cadwell to him pursuant to section 2523 and 

that all payments were made using her after-tax dollars. 

Petitioner contends that we should apply the substance over 

form doctrine, citing Commissioner v. Court Holding Co., 324 

U.S. 331, 334 (1945), to recognize such payments as a nontaxable gift. 

Section 2523 allows a donor a deduction in computing taxable gifts for purposes of computing the gift tax. As Mrs. 

Cadwell would be the hypothetical donor in the scenario posited by petitioner, we conclude that section 2523 does not 

apply. Petitioner may have meant to cite as support for his 

contention section 102(a), which excludes from gross income 

the value of property acquired by gift. However, for reasons 

discussed below, section 102(a) is inapplicable. 

Pursuant to the substance over form doctrine, although the 

form of a transaction may literally comply with the 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 true character of a transaction. See Gregory v. 

Helvering, 293 U.S. 465, 469–470 (1935). If, however, the 

substance of a transaction accords with its form, that form 

will be upheld and given effect for tax purposes. See Blueberry Land Co. v. Commissioner, 361 F.2d 93, 100–101 (5th 

Cir. 1966), affg. 42 T.C. 1137 (1964). Additionally, it is well 

settled that ‘‘a transaction is to be given its tax effect in 

accord with what actually occurred and not in accord with 

what might have occurred.’’ Commissioner v. Natl. Alfalfa 

Dehydrating & Milling Co., 417 U.S. 134, 148 (1974). 

Petitioner’s contention regarding substance over form is 

misplaced. The record reveals that the $75,000 payment 

made during 2002 was paid from an account held in the 

name of KSM. The $38,800 in payments made during 2004 

(38) CADWELL v. COMMISSIONER 57

was paid out of the KSM escrow account. In his declaration 

filed after the hearing on the instant motions, petitioner 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, therefore, they would have been made by funds still 

owned by KSM. Consistent with Natl. Alfalfa, we shall give 

effect to the transaction as it actually occurred as opposed to 

revising the transaction to create a gift. 

On the basis of the record, we conclude that the substance 

and the form of the contributions were payments by KSM, not 

Mrs. Cadwell. Consequently, section 102(a) is inapplicable. 

C. Whether the Cash Value Is Income to Petitioner Where

His Employer Did Not Claim Corresponding Deductions 

for Its Contributions to the Policy

We next address petitioner’s contention that the cash value 

of the life insurance policy is not income to him because neither Keady nor KSM claimed deductions for contributions 

made during 2002 and 2004. Petitioner contends that, 

because a deduction is available under section 83(h), the cash 

value of the life insurance policy was not income to him, 

since Keady would have claimed a corresponding deduction 

for the premium payments. Petitioner’s contention is misplaced. Section 402(b)(1) does not condition the inclusion in 

income on an employer’s deduction of the payment. Rather, 

inclusion in gross income is based upon whether the trust is 

not exempt and whether the taxpayer’s interest is substantially vested. See sec. 402(b)(1); sec. 1.402(b)–1(a)(1), (b)(1), 

Income Tax Regs. Moreover, while section 83(h) allows a 

deduction, it is not required for a contribution to be included 

in gross income pursuant to section 83(a). Therefore, whether 

Keady or KSM claimed a deduction for the contributions is 

immaterial. 

Accordingly, we hold that the cash value of the life insurance policy must be included in petitioner’s gross income for 

his 2004 tax year pursuant to section 1.402(b)–1(b)(1), 

Income Tax Regs.

58 136 UNITED STATES TAX COURT REPORTS (38) 

26 Rev. Proc. 2005–25, 2005–1 C.B. 962, is applicable to nonexempt employees’ trusts for purD. The Amount To Be Included in Petitioner’s Gross 

Income

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. 

Section 1.402(b)–1(b)(2)(i), Income Tax Regs., provides that 

the value of an employee’s interest is ‘‘the amount of the 

employee’s beneficial interest in the net fair market value of 

all the assets in the trust as of any date on which some or 

all of the employee’s interest in the trust becomes substantially vested.’’ The net fair market value is the total fair 

market value determined without regard to any ‘‘lapse 

restrictions’’ as defined in section 1.83–3(h), Income Tax 

Regs., less the amount of liabilities to which such assets are 

subject. Sec. 1.402(b)–1(b)(2)(i), Income Tax Regs. 

Section 1.83–3(h), Income Tax Regs., defines a ‘‘nonlapse 

restriction’’ as a restriction that will never lapse. A nonlapse 

restriction is ‘‘a permanent limitation on the transferability 

of property’’ and requires the transferee to sell, or offer to 

sell, the property at a price determined under a formula, and 

the restriction will continue to apply against the transferee 

or any subsequent holder. Id. For example, a permanent 

right of first refusal in a particular person at a price determined under a formula would be a nonlapse restriction. Id.; 

see also sec. 1.83–5(c), Example (1), Income Tax Regs. A 

‘‘lapse restriction’’ is any restriction other than a nonlapse 

restriction and includes, but is not limited to, a restriction 

that carries a substantial risk of forfeiture. Sec. 1.83–3(i), 

Income Tax Regs. The flush language of section

1.83–3(h), Income Tax Regs., cites limitations imposed by 

registration requirements of State or Federal security laws 

as examples of restrictions that are not nonlapse restrictions. 

Rev. Proc. 2005–25, 2005–1 C.B. 962, provides a safe 

harbor for determining the fair market value of a life insurance policy for purposes of applying section 402(b), and petitioner has not suggested any reason for deviating from the 

formula it provides. 26 For a nonvariable or variable life 

(38) CADWELL v. COMMISSIONER 59

poses of sec. 402(b) for periods on or after Feb. 13, 2004. Rev. Proc. 2005–25, sec. 5, 2005–1 

C.B. at 965. 

27For 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. Rev. Proc. 2005–25, sec. 3.03, 2005–1 C.B. at 964. 

insurance contract the safe-harbor fair market value is the 

greater of: 

A) the sum of the interpolated terminal reserve and any unearned premiums plus a pro rata portion of a reasonable estimate of dividends 

expected to be paid for that policy year based on company experience, and 

B) the product of the PERC amount (the amount * * * based on premiums, earnings, and reasonable charges) and the applicable Average Surrender Factor * * * [Id. sec. 3.02, 2005–1 C.B. at 963–964.] 

The PERC amount is the aggregate of: 

(1) the premiums paid from the date of issue through the valuation date 

without reduction for dividends that offset those premiums, plus (2) dividends applied to purchase paid-up insurance prior to the valuation date, 

plus (3) any amounts credited (or otherwise made available) to the policyholder 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. [Id.] 

For variable contracts, the revenue procedure defines the fair 

market value in a substantially similar manner as for a nonvariable contract. 27 Id. sec. 3.03. As the valuation methods 

are substantially similar, we need not decide whether the life 

insurance policy is a variable or nonvariable life insurance 

contract. 

According to Rev. Proc. 2005–25, supra, the surrender 

charge should be disregarded for valuation purposes. The 

surrender charges apply in decreasing amounts beginning in 

the life insurance policy’s first year and are reduced to zero 

in the life insurance policy’s 15th year. In other words, any 

holder of the life insurance policy beyond 15 years could 

redeem the life insurance policy for its stated cash value with 

60 136 UNITED STATES TAX COURT REPORTS (38) 

28Petitioner does not contend that the premiums, interest credits, mortality charges, or other 

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

no penalty. Accordingly, it will be disregarded for the purpose of valuing petitioner’s interest in the life insurance 

policy. See Rev. Proc. 2005–25, sec. 3.04(1), 2005–1 C.B. at 

964 (‘‘The Average Surrender Factor for purposes of § * * * 

402(b) (for which no adjustment for potential surrender 

charges is permitted) is 1.00.’’). 

On December 31, 2002, KSM paid $75,000 to the Plan 

Trustee to cover Keady’s initial contribution and $2,050 to 

cover the MEP fee. Of the $75,000 payment, $73,000 was 

credited to petitioner’s life insurance policy. On May 20, 

2004, KSM contributed $36,000 for the Plan’s premiums and 

$2,800 to cover the Plan fee. Of the $36,000 contribution, 

$18,000 was credited to petitioner’s life insurance policy. 

During 2003 and 2004, petitioner’s life insurance policy was 

also increased by interest payments of $6,134, for a total of 

$97,134. Petitioner’s life insurance policy was decreased 

during 2003 and 2004 for mortality charges of $16,235 and 

other expenses of $10,370, respectively, for a total of $26,605. 

As noted above, petitioner’s interest in the life insurance 

policy is not reduced by any surrender charges. Accordingly, 

we conclude that the PERC value of petitioner’s interest in the 

life insurance policy is $70,529. 28

Neither party contends that the alternative valuation 

measure allowed pursuant to Rev. Proc. 2005–25, supra, 

would result in a higher valuation. Additionally, neither 

party contends that petitioner’s life insurance policy is subject to any liabilities. See sec. 1.402(b)–1(b)(2)(i), Income Tax 

Regs. Accordingly, we hold that petitioner must include in 

gross income the cash value of the life insurance policy of 

$70,529. 

IV. Whether Petitioner Must Include in Gross Income the 

Excess Contributions

During 2004, KSM contributed life insurance policy 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 

(38) CADWELL v. COMMISSIONER 61

29Petitioner 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. Rule 

121(d). Respondent’s motion was properly made and supported. Petitioner has not offered specific facts to show that there is a genuine issue for trial regarding the value of the excess contributions. Accordingly, we conclude that summary judgment is appropriate on this issue.

included in petitioner’s gross income pursuant to section 

1.402(b)–1(b)(1), Income Tax Regs. 

As discussed above, the parties treat petitioner’s interest in 

the Plan before conversion as being subject to a substantial 

risk of forfeiture, i.e., not substantially vested. We concluded 

above that, following the conversion of the Plan to an SEP, 

petitioner’s interest was substantially vested. See id.

Additionally, neither party contends that the excess contribution is subject to any liabilities. Sec. 1.402(b)–1(b)(2)(i), 

Income Tax Regs. (the net fair market value of a taxpayer’s 

interest in the trust is the fair market value of all the assets 

less any liabilities to which such assets are subject). 

Petitioner makes the same contentions with respect to the 

inclusion of the excess contributions in gross income as he 

did with respect to the cash value of the life insurance policy; 

i.e., the Plan contributions were a gift from Mrs. Cadwell, 

and he has no interest in the Plan. We apply the same 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 

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

62 136 UNITED STATES TAX COURT REPORTS (38) 

V. Whether Petitioner Must Include the Cost of the Life

Insurance Protection in His Gross Income

Respondent contends that the cost of life insurance protection Keady provided to petitioner during 2004 was an economic benefit and, therefore, should be included in his gross 

income under section 402(b) or section 61. Petitioner contends that neither section is applicable. We agree with 

respondent that the value of the cost of life insurance protection is included in petitioner’s gross income under section 61. 

Gross income includes income from whatever source 

derived, including income for services. Sec. 61(a). The term 

‘‘gross income’’ is construed broadly, as opposed to exclusions 

from gross income, which are construed narrowly. Commissioner v. Schleier, 515 U.S. 323, 328 (1995). Generally, life 

insurance premiums paid by an employer on the life of his 

employee, where the proceeds of such insurance are payable 

to the beneficiary of the employee, are included in the gross 

income of the employee. Sec. 1.61–2(d)(2)(ii)(A), Income Tax 

Regs. 

We note that section 1.61–2(d)(6), Income Tax Regs., does 

not apply because, pursuant to section 1.83–3(e), Income Tax 

Regs., current life insurance protection is not ‘‘property’’. As 

noted above, section 402(b)(1) is inapplicable. Moreover, the 

cost of life insurance protection generally is taxable under 

section 61 and the regulations pursuant to section 61. Sec. 

1.83–1(a)(2), Income Tax Regs. 

Petitioner received life insurance protection pursuant to 

the payments made by KSM to purchase the life insurance 

policy on petitioner’s life. That life insurance protection was 

a valuable benefit and significant accession to petitioner’s 

wealth; i.e., $1 million payable to his daughters if he were 

to die during 2004. See United States v. Burke, 504 U.S. 229, 

233 (1992) (‘‘Congress intended through § 61(a) * * * to 

bring within the definition of income any ‘accession to 

wealth’ ’’ (quoting Commissioner v. Glenshaw Glass, Co., 348 

U.S. 426, 431 (1955))). In V.R. DeAngelis M.D.P.C. v. 

Commissioner, T.C. Memo. 2007–360, a group of doctors combined to form a trust, purportedly qualified pursuant to section 419A(f)(6), whose purpose was to fund the purchase of 

life insurance policies. In discussing the tax consequences of 

the premium payments in V.R. DeAngelis M.D.P.C., we 

(38) CADWELL v. COMMISSIONER 63

30 In V.R. DeAngelis M.D.P.C. v. Commissioner, T.C. Memo. 2007–360, we held that the premium payments were ‘‘essentially a distribution to the doctors of corporate profits rather than 

a payment that the PCs made to the doctors with a compensatory intent’’, because the doctoremployees were also the owners of the S corporations that provided them with benefits. See also 

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000) (premium payments are a dividend to the extent of earnings and profits to employee-owners of a C corporation), affd. 299 F.3d 

221 (3d Cir. 2002). 

stated that the ‘‘payments of the premiums were indeed 

accessions to the doctors’ wealth’’. 30 Similarly, the premium 

payments are accessions to petitioner’s wealth and should be 

included in his gross income pursuant to section 61. 

Petitioner offers the same theories regarding the current 

year cost of life insurance protection as he did for the 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 

Notice 2001–10, Table 2001, 2001–1 C.B. 459, 463, for $1 

million worth of life insurance for an individual who is 66 

years old. The regulations provide little guidance in determining the cost of life insurance protection that is included 

in gross income pursuant to section 61. Accordingly, it is 

helpful to examine how other parts of the Code, including 

provisions governing the taxation of split-dollar life insurance 

and group term life insurance, calculate the cost of 1 year of 

life insurance protection. 

Generally, split-dollar life insurance is any arrangement 

between an owner and a nonowner of a life insurance 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. Sec. 1.61–22(b)(1), Income Tax 

Regs. Rev. Rul. 64–328, 1964–2 C.B. 11, provides that an 

employee must include in gross income the annual value of 

the benefit the employee receives under a split-dollar 

arrangement, which is an amount equal to the 1-year term 

cost of life insurance protection to which the employee is 

64 136 UNITED STATES TAX COURT REPORTS (38) 

31The life insurance policy in issue may qualify as split-dollar life insurance pursuant to sec. 

1.61–22(b)(2), Income Tax Regs. However, the outcome would be the same if we classified the 

life insurance policy in issue as split-dollar life insurance. 

entitled from year to year, less the portion, if any, the 

employee provides. See also Johnson v. Commissioner, 74 

T.C. 1316, 1322 (1980). We note that Rev. Rul. 64–328, 

supra, is not an attempt to include in gross income the entire 

life insurance premium, but rather only the cost of the current year’s life insurance protection. The 1-year cost of life 

insurance protection is the amount to be determined in the 

instant case. 

Rev. Rul. 64–328, supra, provides that the cost of life 

insurance protection should be calculated using the P.S. 58 

rates found in Rev. Rul. 55–747, 1955–2 C.B. 228. Notice 

2001–10, supra, revoked Rev. Rul. 55–747, supra, and provided Table 2001 as a substitute for the P.S. 58 rates. 

In Curcio v. Commissioner, T.C. Memo. 2010–115, we used 

the rates in section 1.79–3(d), Income Tax Regs., as a ‘‘rough 

estimate’’ of the cost of life insurance protection to decide 

whether the taxpayer’s expenses for life insurance were 

deductible pursuant to section 162(a). Table 2001 is an 

updated version of the rates found in section 1.79–3(d), 

Income Tax Regs. See Notice 2001–10, 2001–1 C.B. at 462 

(‘‘Table 2001 is based on the mortality experience reflected in 

the table of uniform premiums promulgated under section 

79(c) of the Code (see § 1.79–3(d)(2) of the regulations), with 

extensions for ages below 25 and above 70, and the elimination of the five-year age brackets’’); see also Notice 2002–

8, 2002–1 C.B. 398. Accordingly, we conclude that, for purposes of the instant case, Table 2001 is a reasonable estimate 

of the cost of 1 year of life insurance protection. 

Pursuant to Table 2001, the cost of $1 million worth of life 

insurance coverage for a 66-year-old is $13,510. As neither 

party has argued that the life insurance policy in issue is 

split-dollar life insurance, we need not address any issue 

regarding the effect of split-dollar life insurance on the 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 

(38) CADWELL v. COMMISSIONER 65

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 Notice 2001–

10, Table 2001, 2001–1 C.B. 459, 463, would include in petitioner’s gross income an amount 

equal to $23,167 ($9,657 + $13,510). In other words, including the entire $13,510 would double 

count the cost of life insurance protection by an amount equal to $2,373. ($23,167 (or $13,510 

+ $9,657) – $20,793 (or $18,000 + $2,793) = $2,373.) Consequently, we deem the $2,373 an 

amount already contributed by petitioner for purposes of such calculation and, accordingly subtract that amount from the $13,510 in costs. Therefore, petitioner must include in his gross income the value of the current year life insurance protection as a taxable benefit to him of 

$11,136. 

value of the life insurance policy calculated under the PERC

method. That method takes into account the premiums paid 

and any other income the life insurance policy earns, but it 

subtracts mortality charges and other expenses. To include 

the entire $13,510 in addition to the PERC value would partially double count a portion of the premium payment that 

has already been included in the PERC amount. 32

Instead, the value for current year life insurance protection 

should be calculated by adding the mortality charge ($8,496) 

and other expenses ($2,640). The sum of $11,136 reflects the 

charges for current year life insurance that were already subtracted from the fair market value calculation determined 

using the PERC amount, pursuant to Rev. Proc. 2005–25, 

supra. Therefore, we conclude that when the PERC formula 

has been used to calculate the fair market value of the policy, 

the cost of insurance may be calculated by adding the mortality charges and other expenses. 

Petitioner contends that we should consider only 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 oneyear term insurance’’ pursuant to Rev. Rul. 66–110, 1966–1 

C.B. 12. Pursuant to Notice 2002–8, 2002–1 C.B. at 398–399, 

the insurer’s published premium rates may be used only if 

the taxpayer can show that the insurer generally makes the 

availability of such rates known to persons who apply for 

term insurance coverage from the insurer and the insurer 

regularly sells term insurance at such rates to individuals 

who apply for term insurance coverage through the insurer’s 

normal distribution channels. Petitioner does not argue that 

the requirements of Notice 2002–8, supra, are unreasonable 

or incorrect. Furthermore, on a motion for summary judgment that is properly made and supported, the opposing 

66 136 UNITED STATES TAX COURT REPORTS (38) 

party must set forth specific facts showing that there is a 

genuine issue for trial. Rule 121(d). Petitioner does not allege 

that he has any evidence that would satisfy that requirements of Notice 2002–8, supra. Furthermore, petitioner does 

not suggest that there is a material factual issue that could 

be resolved at trial. Accordingly, we conclude that summary 

judgment is appropriate on this issue and that the requirements of Notice 2002–8, supra, have not been met. Therefore, 

we hold that petitioner must include in his gross income for 

his 2004 tax year the cost of current year life insurance 

protection of $11,136. 

VI. Whether Petitioner Is Liable for the Section 6662 Penalty

Respondent contends that petitioner is liable for the 

accuracy-related penalty pursuant to section 6662(a) on 

account of a substantial understatement of tax, or in the 

alternative, on account of negligence or disregard of rules 

and regulations. See sec. 6662(b)(1) and (2). 

A substantial understatement of income tax is an understatement that is greater than 10 percent of the tax required 

to be shown on the return for the taxable year or $5,000. Sec. 

6662(d)(1)(A). An understatement is the excess of the amount 

required to be shown on the return for the taxable year over 

the amount actually shown on the return. Sec. 6662(d)(2). 

The record reveals that petitioner’s understatement will be 

greater than $5,000. Petitioner has failed to establish any 

defense to the accuracy-related penalty. 

Consequently, we hold that petitioner is liable for the 

accuracy-related penalty under section 6662(b)(2). 

We shall therefore grant respondent’s cross-motion for 

summary judgment and deny petitioner’s motion for 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.

(38) CADWELL v. COMMISSIONER 67

To reflect the foregoing, 

An order and decision will be entered 

under Rule 155

f.