T.C. Memo. 1999-80

UNITED STATES TAX COURT

EDWARD CLASBY AND C.T. GARRAHAN INSURANCE AGENCY, INC., 

Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1616-97. Filed March 16, 1999.

Paul F. Markham, for petitioners.

Mark L. Hulse and Gary W. Bornholdt, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined that petitioners are

liable for deficiencies in the excise tax imposed on prohibited

transactions between retirement plans and disqualified persons by

section 4975(a) and (b) and additions to tax as follows:

 Deficiencies Additions to tax

 Sec. Sec. Sec. Sec.

Year 4975(a) 4975(b) 6651(a)(1) 6651(a)(2)

1982 $14,693 -0- $3,306 $3,673

1983 16,777 -0- 3,775 4,194

1984 30,969 -0- 6,968 7,742
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1985 32,156 -0- 7,235 8,039

1986 33,288 -0- 7,490 8,322

1987 34,355 -0- 7,730 8,589

1988 35,374 -0- 7,959 8,844

1989 35,374 -0- 7,959 8,844

1990 35,374 -0- 7,959 6,721

1991 35,374 -0- 7,959 4,599

1992 35,374 -0- 7,959 2,476

1993 21,624 $707,488 65,620 7,291

After concessions, the issues for decision are:

1. Whether petitioners are disqualified persons as

described in section 4975(e)(2). We hold that they are, and that

they are jointly and severally liable for the 5-percent excise

tax on prohibited transactions under section 4975(a) for 1982 to

1993.

2. Whether petitioners are liable for additions to tax

under section 6651(a)(1) for 1982 to 1993. We hold that they are

to the extent discussed below.

At trial, respondent conceded that petitioners are not

liable for the 100-percent excise tax under section 4975(b) for

1993 or the additions to tax under section 6651(a)(2) for 1982 to

1993. Respondent also conceded that the addition to tax under

section 6651(a)(1) for 1993 does not exceed $7,959.

References to petitioner are to Edward Clasby. References

to the Garrahan Agency are to the C.T. Garrahan Insurance Agency,

Inc. Section references are to the Internal Revenue Code in

effect for the years in issue. Rule references are to the Tax

Court Rules of Practice and Procedure.

I. FINDINGS OF FACT

Some of the facts have been stipulated and are so found.
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A. Petitioner Clasby

Petitioner lived in Framingham, Massachusetts, when he filed

his petition in this case.

Petitioner graduated from Boston College. He was

quarterback of the football team and is a member of the Boston

College Hall of Fame. After college, he taught at a preparatory

school in Massachusetts for 2 years. In 1952, he obtained a

master's degree in biology from Boston College. He coached

football at Boston College while attending graduate school. He

then attended Harvard Business School for 1 year.

Petitioner married Mary Garrahan in 1953. He worked for the

Travelers Insurance Co. (Travelers) from around 1954 to 1960 or

1961. He left Travelers to work for the C.T. Garrahan Insurance

Agency, Inc. (the Garrahan Agency), which was owned by his

father-in-law.

B. Petitioner Garrahan Agency

The Garrahan Agency is a Massachusetts corporation the

principal place of business of which was in Framingham,

Massachusetts, during the years in issue and when it filed its

petition in this case. The Garrahan Agency sold insurance to

individuals and businesses.

Petitioner was president of the Garrahan Agency during the

years at issue. Petitioner was a licensed insurance broker for

the Garrahan Agency. He solicited and acquired casualty

insurance business. Petitioner and his wife each received a

salary from the Garrahan Agency from 1982 to 1988. During the
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years in issue, petitioner owned a one-third interest, his wife

owned a one-third interest, and they jointly owned a one-third

interest in the Garrahan Agency.

Travelers authorized the Garrahan Agency to solicit

applications or proposals for insurance on behalf of Travelers in

1969. Travelers authorized the Garrahan Agency to solicit life

insurance contracts for Travelers during the years in issue.

C. Framingham Union Hospital, Inc.

During the years in issue, Framingham Union Hospital, Inc.

(FUH), was a not-for-profit hospital in Framingham,

Massachusetts. Petitioner's father-in-law had been involved with

hospital activities since the 1940's or 1950's.

Petitioner began his association with FUH in the late 1960's

or early 1970's at the encouragement of his father-in-law. 

Petitioner initially helped FUH with fundraising. He became a

member of the executive committee of FUH in the early 1970's. 

Petitioner was a vice president of FUH from 1979 to 1982. In

1982, he was a member of FUH's board of trustees, executive

committee, and finance committee.

The board of trustees made policy for FUH, and the executive

committee implemented it. FUH had 18 to 22 trustees in 1981-82. 

Salaried officers of FUH reported to its executive committee and

attended executive committee meetings. FUH committees reported

to the executive committee. James Walckner (Walckner) was chief

executive officer and executive vice president of FUH when

petitioner became a trustee.
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Petitioner was elected president of FUH in 1983 and began

reporting to the board of trustees. As president of FUH,

petitioner became a member of each FUH committee, including the

pension committee. Petitioner was president or vice president, a

trustee, and a member of the executive committee of FUH from 1982

to 1988.

D. The FUH Retirement Plan

1. FUH Pension Plan

During the years at issue, FUH maintained a qualified

pension plan for its employees (the FUH plan). The FUH plan was

administered by the FUH pension committee, which consisted of

members of the board of trustees of FUH and the FUH

administration.

2. Use of Life Insurance To Fund the FUH Plan

In 1981, petitioner and Glenn Talbot (Talbot), then chief

financial officer of FUH and a member of its pension committee,

discussed an alternative program for funding the FUH plan. Under

the program, the plan would buy insurance policies on the lives

of FUH employees and the plan would be named the beneficiary.

David Player (Player) had been an insurance agent for

Connecticut Mutual Life Insurance Co. since 1976. Player first

heard of the concept of a pension plan buying life insurance on

its participants from petitioner.

Edgar Murray III (Murray) was a representative of Travelers. 

From January to June 1982, Murray and the pension committee met

several times to discuss the program. Petitioner introduced
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Player to Murray in the spring of 1982.

Andrew Fantasia (Fantasia) was the certified public

accountant for the FUH plan. In 1982, on the basis of

conversations between petitioner and Murray, Fantasia promoted

the program to FUH. In the summer of 1982, petitioner asked

Fantasia to do preliminary tax research regarding the program.

3. The July 15, 1982, Presentation to FUH

On July 15, 1982, Murray, Player, and Fantasia presented to

the FUH pension committee a proposal to invest FUH plan assets in

the program. Petitioner did not attend the July 15 presentation

because he wanted to avoid the appearance of a conflict of

interest. However, petitioner frequently met with Murray and

Player at petitioner's offices to discuss the July 15

presentation.

Petitioner helped to prepare a document describing the

program dated July 15, 1982, which was given to FUH at the July

15 presentation. The document contained information that was

discussed in the meetings with petitioner, Murray, and Player. 

Petitioner did not discuss the document with any representative

of FUH.

After the July 15, 1982, presentation, Player and petitioner

had many meetings at the Garrahan Agency to discuss the program. 

Murray attended some of these meetings. Player used the Garrahan

Agency's letterhead in correspondence sent to FUH about the

program. Petitioner did not tell Walckner or Talbot that he met

with Murray and Player before and after the July 15 presentation.
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In July 1982, Murray told petitioner that the Garrahan

Agency would receive commissions because FUH approved the

program. Petitioner was not surprised that the Garrahan Agency

was to receive the commissions.

4. Investment in the Program by the FUH Plan

On July 21, 1982, Walckner sent a memorandum to the FUH

finance committee, of which petitioner was a member, endorsing

the program.

FUH bought whole life insurance from Travelers for about 147

participants in the FUH plan. FUH was named as the beneficiary. 

On September 15, 1982, FUH assigned the insurance policies to the

FUH plan.

The Garrahan Agency signed the applications and underwrote

(i.e., assumed the risk of) and issued the policies for the

Travelers whole life insurance contracts purchased for the FUH

plan participants. Petitioner signed the FUH plan's insurance

policies; i.e., he accepted the policies for FUH.

In 1984, the FUH plan converted its insurance policies from

whole life to universal life insurance. The Garrahan Agency

serviced and processed the universal life insurance contracts

with the FUH plan participants and received additional

commissions after the FUH plan converted its insurance policies.
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5. FUH's Payments to Travelers for the Life Insurance

Policies

The FUH pension committee paid the following amounts to

Travelers for the whole life insurance policies:

 Date Payments

8/20/82 $100,000

9/15/82 440,000

2/2/83 11,161

The FUH plan paid Travelers the following amounts for

renewal premiums:

Date Premiums

9/6/83 $549,699

7/23/84 556,843

9/6/85 554,390

8/26/86 554,390

8/28/87 530,650

8/31/88 526,325

6. Commissions Paid by Travelers to the Garrahan Agency

During the years at issue, the Garrahan Agency received the

following amounts as commissions from Travelers for the purchase

by the FUH plan of life insurance contracts:

 Year Commissions

 1982 $293,852

 1983 41,682

 1984 283,849

 1985 23,740

 1986 22,640

 1987 21,337

 1988 20,388

 Total 707,488

Player received about $70,000-$72,000 in 1982-83 from

petitioner and the Garrahan Agency for his role in promoting the

program to FUH.
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1 Petitioner also signed the FUH pension trust agreement in

his capacity as FUH plan trustee.

E. Petitioner's Activities as FUH President and FUH Plan

Trustee

As president of FUH from 1983 to 1988, petitioner presided

over meetings of the executive committee at which it approved

revisions to the FUH plan. These meetings included: (1) July

25, 1983, March 11, 1985, and October 28, 1985, at which the

committee approved the FUH plan; and (2) July 23, 1984, at which

the committee agreed to use $225,000 received from Travelers for

the first death under the plan to buy six or seven additional

policies.

As FUH president, petitioner signed various FUH plan

documents and documents on behalf of the plan, such as: (1) The

FUH pension trust agreement1 on July 14, 1983; (2) an amendment

to the FUH plan effective January 1, 1984; (3) a Form 2848, Power

of Attorney and Declaration of Representative, authorizing

Fantasia to represent FUH before the Internal Revenue Service

(IRS) for tax matters relating to the FUH plan on May 25, 1984;

(4) an amendment to the FUH plan effective January 1, 1985; and

(5) a revision of the FUH plan on March 12, 1985.

Petitioner became president of the FUH pension committee in

1983. As a member of the pension committee, he was also a plan

trustee. He resigned from the pension committee in September

1983 because the Garrahan Agency was writing insurance policies

for the FUH plan. Petitioner chose Robert Simmler to replace him
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on the committee.

Neither petitioner nor the Garrahan Agency filed a Form

5330, Return of Excise Tax Related to Employee Benefit Plans, for

any of the years at issue.

F. Notices of Deficiency

Respondent issued notices of deficiency determining that

petitioners are liable for excise tax deficiencies under section

4975(a) and (b) and additions to tax under section 6651(a)(1) for

1982 through 1993. Respondent determined that petitioners were

"disqualified persons" and that they had participated in

prohibited transactions under section 4975(c).

II. OPINION

A. Excise Tax on Prohibited Transactions

Section 4975(a) imposes an excise tax on prohibited

transactions between retirement plans and disqualified persons. 

Section 4975(a) imposes a 5-percent tax on the amount involved,

as defined by section 4975(f)(4), for each prohibited

transaction. Any disqualified person who participates in a

prohibited transaction is liable for the tax. Sec. 4975(a). A 
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2 Sec. 4975(e) provides:

SEC. 4975(e). Definitions.--

* * * * * * *

(2) Disqualified person.--For purposes of this

section, the term "disqualified person" means a person

who is--

(A) a fiduciary;

(B) a person providing services to

the plan;

(C) an employer any of whose

employees are covered by the plan;

(D) an employee organization any of

whose members are covered by the plan;

(E) an owner, direct or indirect, of

50 percent or more of--

(i) the combined voting power

of all classes of stock entitled to

vote or the total value of shares of

all classes of stock of a

corporation,

(ii) the capital interest or

the profits interest of a

partnership, or

(iii) the beneficial interest

of a trust or unincorporated

enterprise, which is an employer or

an employee organization described in

subparagraph (C) or (D);

* * * * * * *

(G) a corporation, partnership, or

trust or estate of which (or in which) 50

percent or more of--

(i) the combined voting power of

(continued...)

disqualified person2 includes an owner of 50 percent or more
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2(...continued)

all classes of stock entitled to vote

or the total value of shares of all

classes of stock of such corporation,

(ii) the capital interest or

profits interest of such partnership, or

(iii) the beneficial interest of such

trust or estate,

is owned directly or indirectly, or held by

persons described in subparagraph (A), (B), (C),

(D), or (E);

(H) an officer, director (or an

individual having powers or

responsibilities similar to those of

officers or directors), a 10 percent or

more shareholder, or a highly compensated

employee (earning 10 percent or more of

the yearly wages of an employer) of a

person described in subparagraph (C), (D),

(E), or (G); * * *

of the stock of a corporation which is an employer any of whose

employees are covered by the plan. Sec. 4975(e)(2)(C), (E).

Petitioners contend that they were not disqualified persons

and did not engage in prohibited transactions.

B. Whether Petitioner Was a Disqualified Person

Petitioner is a disqualified person if he was a fiduciary of

the FUH plan, section 4975(e)(2)(A), or if he was an officer or

director of FUH, or person having similar powers. Sec.

4975(e)(2)(H).

1. Whether Petitioner Was a Fiduciary of the FUH Plan

Petitioner argues that he was not a fiduciary of the FUH

plan under section 4975(e)(2)(A), and thus was not a disqualified

person, because he did not exercise discretionary authority or
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control regarding the management or disposition of FUH plan

assets and because his involvement in the daily operations of FUH

was minimal. Petitioner points out that he resigned from the

pension committee shortly after it was formed and argues that the

committee had exclusive authority and control over the FUH plan.

We disagree. Petitioner had discretionary authority and

control over the management of the FUH plan, over the disposition

of FUH plan assets, and in the administration of the FUH plan

when the prohibited transactions occurred; he need not have

exercised that authority to be a fiduciary of the FUH plan. Sec.

4975(e)(3)(A), (C).

During the years at issue, petitioner was at various times

vice president or president of FUH, a member of the executive and

finance committees of FUH, a trustee of the FUH plan, and,

briefly, president of the pension committee of FUH. The pension

committee reported directly to the executive committee when FUH

decided to invest plan assets in the program. He was also a

member of the finance committee when, on July 21, 1982, Walckner

sent a memorandum to members of that committee advising them

that, unless they opposed the program within 10 days, the FUH

plan would go ahead with the investment in the program. 

Petitioner thus had a direct role in deciding whether FUH would

adopt the program. He exercised discretionary authority and

control regarding management of the FUH plan or disposition of

its assets. Sec. 4975(e)(3)(A).

Petitioner exercised authority over the FUH plan. As
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3 Petitioner also signed the FUH plan pension trust

agreement as a trustee of the FUH plan.

4 Sec. 4975(e)(3)(A) provides:

(3) Fiduciary. For purposes of this section,

the term "fiduciary" means any person who--

(A) exercises any

discretionary authority or

discretionary control respecting

management of such plan or

exercises any authority or control

respecting management or

disposition of its assets,

president of FUH, petitioner presided over four meetings of the

executive committee of FUH where the committee approved revisions

to the FUH plan and agreed to use FUH plan assets to buy

additional policies under the program. From 1983 to 1985, as

president of FUH, petitioner signed various FUH plan documents,

including the FUH plan pension trust agreement,3 several

amendments to the FUH plan, a revision of the FUH plan, and a

Form 2848 authorizing Fantasia to represent FUH before the IRS

for tax matters relating to the FUH plan.

Petitioner was a fiduciary of the FUH plan because he

exercised discretionary authority and control regarding the

management of the FUH plan and the management and disposition of

its assets. Sec. 4975(e)(3)(A).4

2. Whether Petitioner Was an Officer or Director or

Individual Having Similar Powers

Petitioner argues that he is not a disqualified person under

section 4975(e)(2)(H) because, as president of FUH, he did not

have or exercise powers or responsibilities similar to those of
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an officer or director. We disagree.

Any individual who is an officer or director (or any

individual who has powers or responsibilities similar to those of

officers or directors) of an employer any of whose employees are

covered by the plan is a disqualified person. Sec.

4975(e)(2)(H); Rutland v. Commissioner, 89 T.C. 1137, 1144

(1987). Petitioner was vice president of FUH and a member of its

board of trustees and its executive committee from 1981 to July

1982, when FUH bought the insurance policies from Travelers, and

was an officer of FUH from 1982 to 1988. See, e.g., Zabolotny v.

Commissioner, 97 T.C. 385, 392 (1991) (the taxpayer was a

disqualified person under section 4975(e)(2)(H) because he was an

officer of the corporation whose employees participated in the

plan), affd. in part and revd. in part on another ground 7 F.3d

774 (8th Cir. 1993); Kadivar v. Commissioner, T.C. Memo. 1989-404

(the taxpayer was held to be a disqualified person under section

4975(e)(2)(H) because he was the president of the corporation

sponsoring the plan).

Petitioners argue that a person's actions, and not his or

her job title, determine whether that person is a fiduciary or

other disqualified person under section 4975. Petitioners rely

on two District Court cases involving petitioners and others at

FUH. In Framingham Union Hosp., Inc. v. Travelers Ins. Co., 721

F. Supp. 1478 (D. Mass. 1989), FUH alleged that Walckner,

petitioner, the Garrahan Agency, and others violated the

prohibitions of the Employee Retirement Income Security Act of
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1974 (ERISA), Pub. L. 93-406, sec. 3, 88 Stat. 833, 29 U.S.C.

section 1109(a), against self-dealing by fiduciaries. The

complaint against Walckner for breach of fiduciary duties was

dismissed because it contained no factual allegations that he was

a fiduciary. The District Court made no finding as to Walckner's

status as a fiduciary; rather, it noted that the complaint

alleged no facts to support the assertion that Walckner possessed

or exercised fiduciary powers. Id. at 1488. The complaints

against petitioner and the Garrahan Agency for breach of

fiduciary duty were not dismissed. The District Court held that

FUH and the FUH plan could sue petitioner and the Garrahan

Agency, among others, under ERISA for breach of fiduciary duty. 

Petitioners rely on this case to show that petitioner was not a

disqualified person. We disagree. Walckner's relationship to

the FUH plan is irrelevant here. Petitioner was a fiduciary

within the meaning of section 4975(e)(2)(A) because he exercised

authority and control regarding management of the FUH plan or

disposition of its assets. Further, as an officer of FUH and

trustee of the FUH plan, petitioner was a disqualified person

under section 4975(e)(2)(H).

In Framingham Union Hosp., Inc. v. Travelers Ins. Co., 744

F. Supp. 29, 31-32 (D. Mass. 1990), the Secretary of Labor

alleged that petitioner and the Garrahan Agency knowingly

participated in prohibited transactions and other breaches of

fiduciary duty. The complaint was dismissed because it did not

allege that petitioner or the Garrahan Agency was a fiduciary. 
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The District Court held that nonfiduciaries are not liable for

knowingly participating in a breach of fiduciary duty. Id. at

33. Petitioners' reliance on that case is misplaced because the

basis for liability of a disqualified person for the section 4975

excise tax differs from the basis for liability of a fiduciary

under ERISA section 406(a), 88 Stat. 879. See O'Malley v.

Commissioner, 96 T.C. 644, 650-651 (1991), affd. 972 F.2d 150

(7th Cir. 1992). A fiduciary is liable under ERISA section

406(a) if he or she knowingly caused the plan to engage in a

transaction described in ERISA section 406(a)(1). A fiduciary

need not participate in the transaction to be liable under ERISA

section 406(a). In contrast, a disqualified person is liable for

the section 4975(a) excise tax if he or she participates in the

transaction even if that person may have acted innocently or in

good faith or otherwise did not know or understand the nature of

the transaction. O'Malley v. Commissioner, supra at 651; Rutland

v. Commissioner, 89 T.C. 1137 (1987). We have found above at

paragraphs II-B-1 and II-B-2 that petitioner was a disqualified

person because he participated in a prohibited transaction.

3. Conclusion

We conclude that petitioner was a disqualified person under

section 4975(e)(2), and that he is liable for the 5-percent

excise tax imposed by section 4975(a).

C. Whether the Garrahan Agency Was a Disqualified Person

The Garrahan Agency is a disqualified person if it provided

services to the plan, section 4975(e)(2)(B), or if 50 percent or
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more of its voting stock was owned directly or indirectly by

persons described in section 4975(e)(2)(A), (B), (C), (D), or

(E). Sec. 4975(e)(2)(G).

1. Whether the Garrahan Agency Provided Services to the

Plan

Petitioners contend that the Garrahan Agency was not a

disqualified person under section 4975(e)(2)(B) because it did

not provide services to the plan. Petitioners claim that

Travelers provided services to the plan. We disagree. The

Garrahan Agency serviced and processed the life insurance

policies purchased by the FUH plan. The Garrahan Agency is thus

a disqualified person under section 4975(e)(2)(B).

2. Whether Petitioner Owned 50 Percent or More of the

Garrahan Agency

Petitioners argue that the Garrahan Agency is not a

disqualified person under section 4975(e)(2)(G) because 50

percent or more of its voting stock was not owned by a

disqualified person described in section 4975(e)(2)(A), (B), (C),

(D), or (E). We disagree.

A disqualified person includes any corporation 50 percent or

more of which is owned directly or indirectly by persons

described in section 4975(e)(2)(A), (B), (C), (D), or (E). Sec.

4975(e)(2)(G). For purposes of section 4975(e)(2)(G)(i), an

individual is deemed to own stock owned directly or indirectly by

or for his family. Secs. 267(c), 4975(e)(4). For purposes of

section 4975(e)(4), the term "family" includes the individual's

spouse. Sec. 4975(e)(6). Thus, any interest in the Garrahan
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5 Petitioner stated at trial that he and the Garrahan Agency

had paid $345,000 to settle a civil suit brought in the U.S.

District Court in Boston against petitioners and others by the

Department of Labor, FUH, and the FUH plan. Petitioners did not

argue in their posttrial brief that this affects their liability

for tax under sec. 4975(a).

Agency owned by petitioner's wife is attributed to petitioner for

purposes of section 4975(e)(2)(G). Since petitioner and his wife

owned 100 percent of the Garrahan Agency, and since petitioner is

a disqualified person under section 4975(e)(2)(A), the Garrahan

Agency is a disqualified person under section 4975(e)(2)(G).

3. Conclusion

The Garrahan Agency is a disqualified person under section

4975(e)(2), and thus it and petitioner are jointly and severally

liable for the 5-percent excise tax imposed by section 4975(a).5

D. Whether Petitioners Are Liable for Additions to Tax Under

Section 6651(a)(1)

Disqualified persons liable for the tax under section

4975(a) must file an annual return on Form 5330 for each

prohibited transaction. Sec. 6011; sec. 54.6011-1(b), Pension

Excise Tax Regs. Neither petitioner filed Forms 5330 for the

years at issue. Petitioners' failure to file Forms 5330 renders

each petitioner liable for the addition to tax under section

6651. See Janpol v. Commissioner, 102 T.C. 499, 500 (1994).

Petitioners do not contend that they are not liable for the

additions to tax under section 6651(a)(1). We treat this as

petitioners' concession of this issue. See Rothstein v.

Commissioner, 90 T.C. 488, 497 (1988). Respondent concedes that
- 20 -

petitioners are not liable for the additions to tax under section

6651(a)(2) and that the addition to tax under section 6651(a)(1)

for 1993 is not larger than $7,959. We sustain respondent's

determination that petitioners are liable for additions to tax

under section 6651(a)(1), except as conceded by respondent.

Decision will be entered

under Rule 155.