T.C. Mem o. 2 01 5- 24 4

UNITED STAT ES TAX COURT

JEREM IAH J. O'CONNOR AND MARY K. O'CONNOR, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 54 03 -0 8. Fi le d Dec em be r 16 , 20 15
.

In19 98 , P-H's wh ol ly owne d S co rp or at io n, H, b ecame a pa rti ci pa ti ng em

pl oyer inth e A Pla n, wh ic h p ur po rte d t o b e a "1 0 o r m or e em pl oyer" wel fare be ne fitpl anun de r I.R.C. s ec. 4 19 A(f)(6 ), pr ov id in g d eath b en efi ts to sel ect edem pl oyees o f anem

pl oyer pa rti ci pa ti ng inth e p lan. To fun d t he de ath b en efi ts for co ve red em pl oyees, ea chpa rti ci pa ti ng em pl oyer m ad e cas h c on tri bu ti on s t o a tru stass oc ia te d wi th th e A Pla n, wh ic h, b y an d t hr ou ghth e p lan tru st ee, u se d t he cas h t o fu ndpre m iu m s fo r a l ife in su ran ce p ol ic y on th e li fe o f eac h c ov eredem pl oyee. The tru st ee was bo th own er an d be ne fic iary

of t he po li ci es . InSep te m

be r 20 02 , B, th e p lan a dm in is tra to r, advi se d em pl oyer parti ci pa nt s tha t, u nd er an ti ci pa te d fi na l IR S reg ul at io ns , th ey wou ldlo se th ei r de du ct io ns forpa ym en ts to fun d i ns ur an ce po li cy pre m iu m s u nd er the A Plan an d t ha t i t i nt en de d t o t erm in at e th e A Pla n i n 2 00 3. InOcto be r an d No ve m be r 20 02 , P-H, onbe ha lf of H, att em pt ed , un su cces sf

ul ly, to term in at e H's p art ic ip at io n i n t he A Plan a ndhave th e p ol ic y on P-H's li fe tran sf

erre d d ire ct ly from

th e- 2 -

[* 2] A Plan t o t he BS Pl an , a se pa rat e I.R.C. s ec. 4 19 A(f)(6 ) wel fare be ne fit pl an . On s ev eral oc cas io ns durin g 2 00 3, B a dv is edH to vo lu nt ari ly te rm in at e it s p art ic ip at io n i n t he A Plan , whi ch , un de r th e te rm s o f th e pl an , wou lden ta il a di st rib ut io n o f th e p ol ic ie s t o c ov eredem pl oyees, ta xa ti on of e ach em

pl oyee on th e n etcas h s urren de r va lu e o f hi s o r he r po li cy , andth e em

pl oyee's t ran sf

er o f th e p ol ic y

to a ne w pl an . B st at edth atitco ul d n otall ow a d ire cttra ns fer o f anin suran ce p ol ic y fro m itto an othe r pl anadm in is tra to r. Purs uantto th atadvi ce, i n Oct ob er 2 00 3, H ex ecu te d a co rp or at e res ol ut io n t erm in at in g i ts parti ci pa ti oninth e A Pla n. Aft er rece iv in g t ha t re so lu ti on , B, onOcto be r 29 , 20 03 , m ai le d t o P -H a tra ns fer o f po li cy

own ers hi p fo rm , si gn edby the tru st ee und er the A Pl anas the "Ol d Own er" of P -H's p ol ic y , anda bl an k c ha ng e o f be ne fic iary

de si gn at io n fo rm . On Nov em be r 11 , 20 03 , a rep res en ta ti ve of t he BS Pl ansi gn edth e tr an sf er o f po li cy

own ers hi p fo rm as t he "New Owne r" o f th e p ol ic y . The ac tu al tra ns fer o f th e po li cy di d n otoc cu r un ti l J anua ry 20 04
. Ps arg ue th at(1) th ey

co ul d n otha ve rece iv edtax ab le in co m e with re sp ectto th e p ol ic y tra ns fer an y

earl ie r th an20 04 when P-H's po li cy was a ctua ll y

tra ns ferr edto th e BS Pl anan d (2 ) th attra ns fer was ex em ptfro m tax un de r I.R.C. s ec. 1 03 5, wh ic h p ro vi de s fo r no nr eco gn it io n o f ga in on anex ch an ge of l ife in su ran ce p ol ic ie s. R arg ue s tha t (1 ) Ps were t ax ab le in20 03 un de r I.R.C. s ec. 4 02 (b )(1 ) or (2 ), ei th er wh enH term in at edit s p art ic ip at io n i n t he A Plan or wh en B p ro vi de d t o P -H th e tr an sf er o f po li cy

own ers hi p fo rm

si gn edby th e A Pla n t ru st ee, wh ic h a ll owe d P -H to eit he r ret ai n t he po li cy or tra ns fer i t t o ane w own er, an d (2 ) I.R.C. s ec. 1 03 5 i s i napp li cab le be cau se th ere was no ex ch an ge of p ol ic ie s. R al so see ks to im po se a 20 % subs tant ia l u nd ers ta te m en t p en al ty und er I.R.C . sec . 66 62 (a). 1. Hel d: Ps ar e ta xabl e, un de r I.R.C. s ec. 4 02 (b )(1 ), on th e n et cas h o r "ac cu m

ul at io n" va lu e o f P-H's po li cy in20 03 , eit he r whe n H te rm in at edit s p art ic ip at io n i n t he A Plan or wh enB pr ov id edto P-H- 3 -

[* 3] th e tr an sf

er o f po li cy

own ers hi p fo rm

si gn edby the A Plan tru st ee. Glu ckm anv. Co m

m is si on er, T.C. Mem o. 2 01 2- 32 9, af f'd , 54 5 F
. App 'x 5 9 (2 d C ir. 2 01 3) , fol lo wed
. 2. Hel d, furth er, I.R.C. s ec. 1 03 5 i s i napp li cab le be cau se th ere was no ex ch an ge of l ife in su ran ce p ol ic ie s. 3. Hel d, furth er, I.R.C. s ec. 6 66 2( a) p en al ty sus ta in ed
.

Ira B . Ste ch el , forpe ti ti on ers . Bri anJ. Bi lh ei m er, Bri anE. Derdo wsk i, J r., an d Eu ge ne A. Korn el , for
res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HALPERN, Ju dg e: By

no ti ce o f de fic ie nc y

(no ti ce), re sp on de ntde te rm in ed a $ 14 2,4 16 de fic ie nc y

an d a$2 8,4 83 accu racy-rela te d p en al ty w ith re sp ectto pe ti ti on ers ' 20 03 Fed eral in co m e ta x. Res po nd en t's pri nc ip al ad jus tm en t i s a 1 $3 95 ,05 1 i nc reas e in pe ti ti on ers ' in co m e fo r 20 03 . The i ss ue s fo r de ci si on are (1 ) whe th er p et it io ne rs rece iv edtax ab le in co m e in 20 03 with re sp ectto a cas h

Unl es s o th erwi se st at ed , all sec ti on refe ren ces are t o the Int ern al Rev enue 1 Co de ineffe ctfor20 03 , andall Ru le refer en ces are t o the Tax C ou rt Rul es of Prac ti ce an d P ro cedur e. All do ll ar am ount s h av e b eenrou nd edto th e n eare st do ll ar.- 4 -

[* 4] va lu e li fe i ns ur an ce p ol ic y on Mr. O'Co nn or 's l ife he ldby a tru stadm in is te red
un de r a p lan kno wn as th e Adv an ta ge Death B en efi t Pl an(Adv an ta ge Pla n) sp on so redan d a dm in is te redby BISYS In su ran ce Se rv ic es , Inc . (BISYS) , and(2) if
so , whet he r pe ti ti on ers are l iabl e fo r th e acc ur acy-relate d p en al ty und er s ect io n 66 62 (a). 2 FINDINGS OF FACT Thi s ca se was s ub m it te d fu ll y st ip ul at edun de r Ru le 12 2. Pe ti ti on ers res id ed in Mas sa ch us et ts when th ey fil edth ei r pe ti ti on . Pet it io ne rs , who are m arri ed , ti m el y fil edth ei r joi ntFed eral in co m e ta x return fo r 20 03 on Apri l 1 3, 2 00 4. Pe ti ti on er J erem iah J . O'Con no r was an
em pl oyee of hi s wh ol ly owne d S co rp or at io n, J.P. O'Co nn orHardware, In c. 3 (Hardware) , th ro ug ho utth e rel ev an t p eri od s d is cu ss edhe rei n. Itis Hardware's pa rti ci pa ti on inan d wi th dr awal fro m th e Adv an ta ge Plan t ha t g iv es ris e to th e is su es inth is cas e.

The no ti ce al so refl ect s a $ 63 ,15 6 re du ct io n i n p et it io ne rs ' it em iz ed 2 de du ct io ns for20 03 , whi chde riv es fro m th e p rin ci pa l ad

jus tm en t an d i s n ot di rect ly dis pu te d b y

pe ti ti on ers . The term "S co rp or at io n" is de fin edinsec . 13 61 (a)( 1) . In g en eral , an S 3 co rp or at io n h as no Fed eral in co m e ta x l iabi li ty, an d i ts it em s o f in co m e, de du ct io n, cr ed it , andsu chare p as se d t hr ou gh (i.e ., tak enin to acco un t b y it s sh areh ol de rs ). See s ecs . 13 63 (a), 1 36 6( a).- 5 -

[* 5] The Adv an ta ge Pla n The Adv an ta ge Pla n p ur

po rte d t o b e a "1 0- or -m or e-em pl oyer" wel fare be ne fitpl anun de r se ct io n 4 19 A(f)(6 ) pr ov id in g d eath b en efi ts to sel ect ed
em pl oyees o f anem

pl oyer parti ci pa ti ng inth e p lan. Th e Adv an ta ge Plan was
crea te d i n 1 99 6 a nd , beg in ni ng in20 01 , was ad m in is te redby BISYS. In o rd er t o fundth e d eath b en efi ts forco ve redem pl oyees, ea chparti ci pa ti ng em pl oyer m ad e
cas h c on tri bu ti on s t o t he tru stass oc ia te d wi th th e Adv an ta ge Plan, wh ic h, b y an d th ro ug h t he pl antru st ee, u se d t he cas h re cei ve d t o fu ndpre m iu m s fo r a l ife in su ran ce p ol ic y

on th e li fe o f eac h c ov eredem pl oyee. The l ife in su ran ce p ol ic y

4 ob ta in edon th e li fe o f eac h c ov eredem pl oyee pr ov id eda de ath b en efi t i n a n
am ountequa l t o t he de ath b en efi t p ro vi de d i n t he Ado pt io n Ag reem en t ex ecu te d by the em pl oyee's e m

pl oyer. Und er the term s o f th e Adv an ta ge Pla n, the pl an tru st ee was bo th th e o wne r an d t he be ne fic iary of t he li fe i ns ur an ce p ol ic y fora
co ve redem

pl oyee. The Adva nt ag e Pl andi d n otall ow an y rev ers io n o f pl anass et s to a pa rti ci pa ti ng em

pl oyer. Arti cl e VI o f th e Adv an ta ge Pla n d oc um en t, en ti tl ed"Di st rib ut io n o f Ben efi ts ", p ro vi de s as fol lo ws:

The Adv an ta ge Pla n t ru stwas n ev er a t ax -ex em pttru st . 4- 6 -

[* 6] Sect io n 6 .01 : Ev en ts Perm it ti ng Dis tri bu ti on . The Tru st ee sh al l, upo n a dv ic e o f th e Pl anSp on so r, withi n areas on ab le pe rio d o f ti m e aft er n ot ic e, m ak e a co m pl et e d is tri bu ti on of aCo ve red Em pl oyee's o r Part ic ip an t's in te res t o r co m m en ce t o d is tri bu te su ch in te res t upo n: (1 ) Not ifi cat io n b y

Em pl oyer of e nt it le m en t t o d eath b en efi ts by Cov eredEm

pl oyee orPart ic ip an t, t og ethe r with d eath cert ifi cat e an d o th er m at eri al s re qu ire d b y Pla n S po ns or , or (2 ) Dis co nt in uanc e o f th e Pl an , term in at io n, o r pa rti al te rm in at io n o f th e Tru st . The Co ve redEm

pl oyee orPart ic ip an t m ay purch as e, up on te rm in at io n o f em

pl oym en t, o r anev en t d es cri be d i n S ub se ct io n 6.0 1( 2) ab ov e, fro m

th e Tru st ee the be ne fit s p ro vi de d h ereu nd er, i f tra ns ferabl e und er ap pl ic ab le law. Th e p ur ch as e p ric e fo r th e b en efi ts sh al l b e th e am ou ntsetforth un de r Sec ti on 5.0 7. Th e Tru st ee s ha ll ta ke all ne ces sa ry

st ep s t o fa ci li ta te th e p ur ch as e b y th e Co ve red Em pl oyee orPart ic ip an t dur in g t he th irt y (30 ) da y pe rio d fo ll owi ng te rm in at io n o f em

pl oym en t o r ev en t d es cri be d i n S ub se ct io n 6 .01 (2 ) ab ov e. Duri ng su chth irt y da y pe rio d, al l Be ne fic iary

de si gn at io ns sh al l re m ai n i n fu ll for ce an d e ffec t. Inth e ev en t the Ins ur eddo es no t el ectto acqui re s uc h c ov erag e, th e Tru st ee m ay su rren de r su chpo li cy to th e In su rer. Th e p ro ceed s fr om th e sa le or s urren de r of

th e p ol ic y sh al l b e ad de d t o t he Trus t Fu ndan d a ll oc at edam on g P art ic ip an ts in pr op orti on to each Part ic ip an t's th encurren t s al ary as co m pa redto all Part ic ip an ts ' sa larie s. Inth e ev en t s uc h In su reddo es no t el ectto acqui re an y

in suran ce p ol ic y

an d d ie s p rio r to th e su rren de rin g o f th e po li cy by the Trus te e b utaft er the ex pi rat io n o f th e th irt y -d ay op ti on pe rio d, the Trus te e sh al l b eco m e th e b en efi ci ary an d t he de ath pr oc eed s the reo f sh al l b e ad de d t o t he Trus t Fu nd
. Sect io n 6 .02 : Ma nn er o f Dis tri bu ti ng Int eres ts . Paym en t o f su chbe ne fit s m ay

be eit he r:- 7 -

[* 7] (a) Paym en t d ire ct ly to the Co ve redEm pl oyee or Part ic ip an t; (b ) Paym en t t o o th er i nd iv idua l o r en ti ty for b en efi t o f th e Co ve redEm

pl oyee orPart ic ip an t atth e d ire ct io n o f th e Pl anSp on so r. (c) Upo n an Em

pl oyer's d et erm in at io n t o d is co nt in ue pa rti ci pa ti on inth e Pl an , th e Pl anSp on so r sh al l re ta in an actua ry to de te rm in e th atth ere a re s uf fic ie ntbe ne fit s rem ai ni ng inth e Pl anto m eetth e Tru st 's b en efi t requi rem en ts . If th os e li ab il it ie s h av e b eencurren tl y m et , th enth e Tru st ee i s p erm it te d t o d is tri bu te po li ci es to th e Co ve redEm

pl oyees o f th e Em

pl oyer. If th e Actua ry ret ai ne d b y

th e Pl anSp on so r an d/ orTrus te e d et erm in es th atth ere a re i ns uf

fic ie ntass et s t o m eetth e curren t li ab il ity , th enth ere s ha ll be no di st rib ut io n t o t he Co ve redEm

pl oyees o f th e wit hd rawi ng Em pl oyer. Term in at in g d is tri bu ti on sh al l b e in -k in d o r incas h. If in -k in d, s uc h d is tri bu ti on s m ay tak e th e fo rm

of t he cas h va lu e li fe i ns ur an ce p ol ic ie s m ai nt ai ne d b y th e Tru ston th e li fe o f th e Co ve redEm pl oyees wh o s ha ll rece iv e th e te rm in at in g d is tri bu ti on . Arti cl e VII o f th e Adv an ta ge Plan d oc um en t, en ti tl ed"Mi sc el lane ou s Pro vi si on s" , pro vi de s, i n p ert in en t p art , as fo ll ows :

Sect io n 7 .01 : Am en dm en t o r Term in at io n. Th e Pl anSp on so r res erv es th e ri gh t t o re tro act iv el y or p ro sp ect iv el y

m od ify, alte r, am en d o r te rm in at e th is Plan o r th e Tru st , at an y ti m e, by an in st ru m en t i n wri ti ng to be du ly execu te d a ndde li ve redto th e Trus te e, in th e cas e o f th e Tru st , andth atan y su chin stru m en t s ha ll no t re ve stinth e Em

pl oyer an y

co rp us or i nc om e o f th e Tru st . No m od ifi cat io n, am en dm en t o r te rm in at io n o f th e Pl ansh al l b e co ns tru eda te rm in at io n o f th e Tru stso as t o re qu ire th e Tru st ee t o m ak e a d is tri bu ti on of t he Trus t as se ts to an y Co ve redEm

pl oyee or- 8 -

[* 8] Part ic ip an t, ex cep t i n a cco rd an ce wi th Arti cl e VI, un le ss th e in st ru m en t ex pr es sl y so pro vi de s. Up on Em

pl oyer term in at io n u nd er 6 .02 , po li ci es m ay be di st rib ut edto Co ve redEm pl oyees o r su cces so r Pl an s p ro vi di ng si mil ar b en efi ts .

* * * * * * * Sect io n 7 .08 : Em

pl oyer's R ig htto Term in at e. EachEm pl oyer he reb y res erv es th e ri gh t t o t erm in at e it s p art ic ip at io n i n t he Pla n, at an y ti m e. An Em

pl oyer's t erm in at io n o f pa rti ci pa ti on inth e Pl ansh al l be ev id en cedby a certi fie d c op y of t he res ol ut io n o f th e Em pl oyer au th or iz in g s uc h t erm in at io n, wh ic h s ha ll be fil edwith t he Pla n Sp on so r atlea stsi xt y

(60 ) da y s p rio r to th e eff ect iv e d at e th ereo f or su chles se r ti m e as m ay

be ag reedto by the Pla n S po ns or . Term in at io n o f anEm

pl oyers p art ic ip at io n i n t he Pla n s ha ll be effe ct iv e upo n t he da te sp eci fie d i n s uc h i ns tru m en t b utsu ch te rm in at io n s ha ll no t v es t i n t he Em pl oyer an y

rig ht , ti tl e o r in te res t i n orto th e fund s h el d h ereu nd er n or sh al l t erm in at io n b y

on e Em pl oyer affe ctth e p art ic ip at io n i n t he Pla n b y anot he r Em

pl oyer. Upo n te rm in at io n b y

anEm pl oyer of i ts pa rti ci pa ti on inth e Pl an , th e Pl an Sp on so r sh al l re qu es t the Trus te e to pe rfo rm a va lu at io n o f th e Tru st . The Pla n S po ns or , bas edup on su chva lu at io n, s ha ll de te rm in e (i ) th e po rti on of t he Trus t Fu ndatt rib ut ab le to be ne fit s fu nd edby the te rm in at in g Em

pl oyer, and(ii ) th e b al an ce o f sa idpo rti onrem ai ni ng aft er p ro vi si on for

pa ym en t o f th e p ro po rti on at e am ou ntof Tru st ex pe ns es an d l iabi li ti es att rib ut ab le to th e te rm in at in g Em pl oyer. Afte r sa ti sf

act io n o f th e ab ov e ex pe ns es an d l iabi li ti es , th e Tru st ee sh al l o fferth e p ol ic ie s o f in su ran ce the n h el d b y itto th e Co ve red Em pl oyees o n wh os e li ve s the po li ci es were i ss ue d i n t he m an ne r pr ov id edinSect io n 5 .07 . Ass et s the n re m ai ni ng sh al l b e d is tri bu te d am on g a ll th e th enli vi ng Co ve redEm pl oyees o f th e Em

pl oyer, who were em pl oyed b y th e Term in at in g Em

pl oyer withi n t he two -y ear pe rio d i m m ed iate ly prece di ng th e d at e o f te rm in at io n, i n t he same rat io th ateach sai d C ov eredEm pl oyees t ot al Co m

pe ns at io n re cei ve d du rin g t he Em

pl oyees p art ic ip at io n i n t he Pla n i s o f th e to ta l Co m pe ns at io n re cei ve d b y

all sai d C ov eredEm

pl oyees. If t he re s ha ll be no Co ve redEm

pl oyees e m

pl oyed b y th e Em pl oyer withi n t he- 9 -

[* 9] ab ov e-d es cri be d t wo- y ear p eri od , th enli vi ng , th e rem ai ni ng ex ces s as se ts sh al l b e tr eat edas a n e xp eri en ce g ai n. Sect io n 5 .07 , refer en cedinbo th sec ti on s 6 .01 an d 7 .08 of the Adv an ta ge Pl ando cu m en t, g iv es a co ve redem pl oyee th e ri gh t " to pu rch as e th e in suran ce po li cy ob ta in edby the Trus te e to pro vi de th e d eath b en efi t" for"anam ou ntequa l to th e n etcas h s urren de r va lu e o f th e p ol ic y ." Hardware's Part ic ip at io n i n a ndTerm in at io n o f It s Pa rti ci pa ti on inth e Adv an ta ge Pl an Hardware b ecame a part ic ip at in g e m pl oyer inth e Adv an ta ge Pla n wh enit ad op te d t he pl anpu rs ua ntto it s ex ecu ti on of a n " Adv an ta ge Death B en efi t Pl an Ado pt io n Ag reem en t" on Sep te m be r 21 , 19 98 . Mr. O'Co nn or , th ro ug h Har dwa re, be cam e a co ve redem

pl oyee inth e Adv an ta ge Pla n o n Oct ob er 2 , 19 98
. The reaf te r, on Octo be r 5, 1 99 8, a l ife in su ran ce p ol ic y in su rin g M r. O'Co nn or 's li fe (O'Co nn orpo li cy ) was sel ect edan d o bt ai ne d fr om Jef fers on Pil otFin an ci al In su ran ce Co . (Je ffer so n P il ot ). All pre m iu m s o n t he O'Co nn orpo li cy were fund edth ro ug h c on tri bu ti on s t o t he tru stby H ardware. By let te r da te d S ep te m

be r 20 , 20 02 , BISYS ad vi se d e m pl oyer parti ci pa nt s in th e Adv an ta ge Pla n, i nc lu di ng Hardware, o f en hanc edris ks th atth e In te rn al Rev enue Serv ic e (IR S), o n aud it , wou ldch al le ng e th e d educ ti bi li ty of th e am ou nt s pa idto fun d p rem iu m

pa ym en ts un de r th e p lan, an d i t o ffer edth e p art ic ip at in g- 10 -

[* 10 ] em pl oyers an op po rtu ni ty to p ur ch as e a Fi du ci ary Aud itPro te ct io n In su ran ce Po li cy . BISYS al so advi se d t ha t " [p ]end in g fi na l [I RS] regu la ti on s," it in te nd edto term in at e th e Adv an ta ge Pla n e arl y in20 03 . Sho rtl y

th erea fte r, on Octo be r 2, 2 00 2, M r. O'Co nn or , inhi s capa ci ty as a m em be r of Hardware's bo ard of di rect or s, ex ecu te d a"Re so lu ti on To Be Ado pt edBy Unan im ou s Writ te n Co ns en t o f Dire ct or s" , inwhi chitwas re so lv edth at(1) th e Adv an ta ge Pla n b e "t erm in at ed " an d t he "ex is ti ng Pla n B en efi t" be tra ns ferr ed"t o a no th er 4 19 A(f)(6 ) Sp on so r an d Tru st ee" an d (2 ) Hardware's off ic ers be "au th or iz edan d d ire ct edto
ex ecu te all do cu m en ts * * * n eces sa ry to effe ctua te " s ai d t erm in at io n a ndtra ns fer. The reaf te r, on Octo be r 16 , 20 02 , Mr. O'Co nn or , onbe ha lf o f Hardware, ex ecu te d a "C ert ifi cat e o f Res ol ut io n" to ad op t an d fu ndbe ne fit s fo r certa in [Hardware]
em pl oyees" th ro ug h " th e BENISTAR 4 19 Pla n & Trus t" (Ben is tar Pl an ) de sc rib ed th erei n a s " a Mu lt ip le Em pl oyer W el fare Ben efi t Fu nd* * * u nd er * * * [se ct io n 41 9A( f)(6 )]". On Octo be r 16 , 20 02 , Mr. O'Co nn or , onbe ha lf o f Hardware,
ex ecu te d a n " Ado pt io n Ag reem en t" , pu rs ua ntto whi chHardware p ur po rte d t o ad op t, joi n, an d a gr ee t o p art ic ip at e in th e Ben is tar Pl an . On Oct ob er 3 0, 2 00 2, Ja cque li ne Cam

pb el l, a BI SYS em

pl oyee, m ai le d t o Kat hl eenKeho e, ap pa ren tl y a Ben is tar Pl anem

pl oyee, tra ns fer o f own ers hi p fo rm s fo r Hardware an d atru st ee tra ns fer a gr eem en t fo rm , whi chpro vi de d t ha t Har dwa re an d t he Ben is tar Pl an- 11 -

[* 11 ] wou ldin de m

ni fy BISYS andth e Adv an ta ge Pla n fr om an y da m ag es or c os ts "ar is in g o utof o r rel at in g t o * * * [Hardware's ] pa rti ci pa ti on inth e Adv an ta ge Pl an ". On No ve m

be r 12 , 20 02 , Dani el E. Carp en te r, on be ha lf o f th e Ben is tar Pl an , si gn edth e tr an sf

er o f own ers hi p fo rm

tra ns ferr in g the O'Co nn orpo li cy to "Be ni st ar Adm in . Serv ic es " as th e "New Own er" of the po li cy . The fo rm was n ot si gn edby any on e o n b eh al f of BISYS a s the "Ol d Own er" of t he O'Co nn or po li cy . Mr. Ca rp en te r, as tru st ee o f th e Ben is tar Pl an , was u nwi ll in g t o s ig n t he tru st ee tra ns fer a gr eem en t wi th th e ab ov e-d es cri be d i nd em ni fic at io n c laus e. Thatrefu sa l de lay edth e actua l tran sf

er o f th e O'Co nn orpo li cy fro m th e Adv an ta ge Pla n t o t he Ben is tar Pl anun ti l J anua ry 20 04 , when Jef

fers on Pil otco nf

irmed th atitha d
reco rd edon it s b oo ks th atth e trus t u nd er the Ben is tar Pl anwas the ne w own er o f th e p ol ic y . Ina le tt er d at edJanua ry

20 , 20 03 (pu rp orte dl y

sen t t o a ll in su ran ce s el le rs
an d a ge nt s) , BISYS s ta te d t ha t (1 ) itex pe ct edth e p ro po se d re gu la ti on s i ss ue d i n 20 02 to be fin al iz ed"s ub st an ti al ly as pr op os ed ", (2 ) be cau se of the res ul ti ng adve rs e ta x e ffec ts on th e Adv an ta ge Pla n, i t wo ul d n o l on ge r acc ep t co ntrib ut io ns to th e p lan a fte r Decem

be r 31 , 20 02 , and(3) all em pl oyers' p art ic ip at io n i n t he pl an"m us t t erm in at e b y

th e la te r of

Decem be r 31 , 20 03 , or the da te th e IRS- 12 -

[* 12 ] fin al iz es th e p ro po se d re gu la ti on s"
. The l et te r th enst at es : 5 The refo re, em

pl oyers s ho ul d c on si de r ta ki ng st ep s t o v ol un taril y te rm in at e th ei r pa rti ci pa ti on inThe Advant ag e Pl anbe fo re Dece m be r 31 , 20 03 an d e le ct in g o ne of t he alt ern at iv es ou tl in edbe lo w. Oth erwi se , aft er Dece m

be r 31 , 20 03 , an e m

pl oyer's p art ic ip at io n i n The Adv an ta ge Pla n wi ll au to m at ic al ly term in at e, res ul ti ng inth e su rren de r of

an y po li ci es rem ai ni ng inth e Tru st , a real lo cat io n o f th e cas h s urren de r va lu es , anda di strib ut io n o f th e as se ts to pa rti ci pa nt s. Any em pl oyer th atha s n otvo lu nt ari ly term in at edit s p art ic ip at io n i n The Adv an ta ge Pla n o n o r be fo re Dece m be r 31 , 20 03 wil l n otha ve th e o pt io n o f el ect in g o ne of t he alt ern at iv es ou tl in edbe lo w. Alt ern at iv e One --Em

pl oyees R et ai n P ol ic ie s Fi rs t, the em

pl oyer term in at es it s p art ic ip at io n i n Th e Adv an ta ge Plan. Se co nd , th e p ol ic ie s' c as h s urren de r va lu es are r eal lo cat edinacco rd an ce wi th The Adva nt ag e Pl an do cu m en t. Thi rd , th e p ol ic ie s ar e ro ll ed -o utto th e em pl oyees an d t he em

pl oyees are t ax edon th e rea ll oc at edne t ca sh su rren de r va lu e. Alt ern at iv e Two-- Em

pl oyer Ado pt s Th e Adv an ta ge DBO Pla n Fi rs t, the em

pl oyer term in at es it s p art ic ip at io n i n Th e Adv an ta ge Plan. Se co nd , th e p ol ic ie s' c as h s urren de r va lu es are r eal lo cat edinacco rd an ce wi th The Adva nt ag e Pl an do cu m en t. Thi rd , th e p ol ic ie s ar e ro ll ed -o utto th e em pl oyees an d t he em

pl oyees are t ax edon th e rea ll oc at edne t ca sh su rren de r va lu e. Fo urth , th e em pl oyer ad op ts The Adva nt ag e DBO Pla n a ndth e ro ll ed -o utpo li ci es m ay be us edas afun di ng ve hi cl e fo r The Adv an ta ge DBO Pla n (" The DBO Pla n" or "Th e New Pl an "). We hav e at ta ch eda factsh eetreg ard in g the DBO Pla n. The IRS i ss ue d fi na l re gu la ti on s fo r 10 -o r-m or e em pl oyer pl an s i n J ul y 5 20 03 . See T.D. 90 79 , 20 03 -2 C.B. 7 29
.- 13 -

[* 13 ] Pl eas e n ot e th ata trus te e-t o- tru st ee tran sf er (i .e., fro m

The Adva nt ag e Pl anto an ot he r wel fare be ne fitpl ansu chas Th e DBO Pl an ) is no t pe rm it te d und er ap pl ic ab le IRS re gu la ti on s. InApri l, J un e, Ju ly, Aug us t, an d Oct ob er 2 00 3, BI SYS p ro vi de d e m pl oyer pa rti ci pa nt s wi th ad di ti on al co rres po nd en ce re it erat in g t he ir n eedto termin at e pa rti ci pa ti on inth e Adv an ta ge Plan b y Decem be r 31 , 20 03 , andadvi si ng as t o t he
m ech an ic s an d t ax res ul ts of s uc h t erm in at io n. On Fe brua ry

8 an d 1 1, 2 00 3, M s. Ca m pb el l, o n b eh al f of

BISYS, s en t t o M r. O'Co nn or , rep res en ti ng Hardware, i de nt ic al let te rs ackno wled gi ng rece ip t o f hi s reque stto tra ns fer t o a no th er p lan a dm in is tra to r; s he rei te rat edBISYS p os it io n i n earl ie r co rres po nd en ce (e .g., the Jan ua ry 20 , 20 03 , let te r to em

pl oyer parti ci pa nt s in th e Adv an ta ge Pla n) th atBISYS " can no t al lo w a tra ns fer t o a no th er p lan adm in is tra to r * * * [a s] su cha tr an sf er m ay pu t the in te gr ity

of t he en ti re p lan a t ris k." The l et te rs th enoff eredto Hardware the alt ern at iv e o pt io ns of s tay in g i n t he Adv an ta ge Plan a ndpa y in g i ts sh are o f th e fi du ci ary au di t fe e ref erre d t o i n i ts Sep te m be r 20 , 20 02 , let te r to em pl oyer parti ci pa nt s o r te rm in at in g t he pl an . Ass um in g M r. O'Co nn or 's d eci si on to term in at e, th e le tt ers reque st eda cert ifi ed
co py of Hardware's co rp or at e res ol ut io n t o t erm in at e it s p art ic ip at io n i n the pl an
us in g a n e nc lo se d fo rm

of c or po rat e res ol ut io n a s a g ui de
.- 14 -

[* 14 ] On Ap ril 1, 2 00 3, M s. Cam pb el l, o n b eh al f of

BISYS, s en t M r. O'Co nn ora le tt er ac kn owl ed gi ng hi s d eci si on no t t o p art ic ip at e inth e fi du ci ary au di t o f th e Adv an ta ge Plan, ag ai n re qu es ti ng hi s s ub m is si on of acert ifi edco py of Hardware's
co rp or at e res ol ut io n t o t erm in at e it s p art ic ip at io n i n t he pl an(with ane w sam pl e
res ol ut io n att ach ed ) an d re qu es ti ng th athe als o s ub m itsi gn edtra ns fer o f
own ers hi p (o f th e p ol ic y

with J effe rs on Pil oton hi s l ife ) an d c ha ng e o f be ne fic iary de si gn at io n fo rm s (a ls o e nc lo se d) to BISYS. Th e le tt er s ta te d t ha t, upo n te rm in at io n, ea chem

pl oyee co ve redby H ardware's pa rti ci pa ti on inth e Adv an ta ge Pl anwou ldbe en ti tl edto th e n etsu rren de r va lu e o f th e p ol ic y co ve rin g t he
em pl oyee's l ife
. 6 Notha vi ng rece iv edan y

res po ns e fro m

Mr. O'Co nn or , onbe ha lf o f Hardware, t o i ts Apri l 1 , 20 03 , let te r, on Octo be r 9, 2 00 3, BI SYS s en t M r. O'Co nn ora le tt er re it erat in g the urg en cy of Hardware's termin at in g i ts pa rti ci pa ti on inth e Adv an ta ge Plan a ndwithd rawi ng fro m itth e p ol ic ie s co ve rin g hi m an d M r. Ash e. The l ette r st at edBISYS' i nt en t t o d is so lv e th e p lan t ru stby Decem be r 31 , 20 03 , andto di rectth e trus te e, be gi nn in g Dec em be r 1, 2 00 3, " to

Mr. O'Co nn or

an d ano ns ha reh ol de r em pl oyee of Hardware, Dav idAsh e, 6 were i ns ur edun de r th e Adv an ta ge Pla n, an d B ISYS fu rn is he d tran sf er o f own ers hi p a ndch an ge of b en efi ci ary de si gn at io n fo rm s fo r bo th
.- 15 -

[* 15 ] be gi n s urren de rin g a ny life in su ran ce p ol ic ie s tha t ar e st il l o wne d b y th e Trus t i n o rd er t o fu ll y

li qu id at e th e Tru stan d m ak e fi na l d is tri bu ti on s." 7 On Oct ob er 7 , 20 03 , Mr. O'Co nn or , onbe ha lf o f Hardware, ex ecu te d t he te rm in at io n o f pa rti ci pa ti on inth e Adv an ta ge Pla n re so lu ti on (Hardware's te rm in at io n re so lu ti on ) pr ev io us ly forward edto hi m , inbl an k, b y BISYS, Hardware's withd rawal fro m th e p lan t o b e eff

ect iv e as of t ha t s am e d at e. Hardware's term in at io n re so lu ti on was s en t t o F ran k P rag os a o f BISYS on Octo be r 20 , 20 03
. On Oct ob er 2 9, 2 00 3, s ho rtl y aft er re cei vi ng Hardware's term in at io n
res ol ut io n, M r. Prag os a m ai le d t o M r. O'Co nn ortra ns fer o f po li cy own ers hi p a nd ch an ge of b en efi ci ary de si gn at io n fo rm s fo r bo th Mr. O'Co nn oran d M r. Ash e. The trans fer o f po li cy

own ers hi p fo rm s wer e si gn edon be ha lf o f BB& T as tru st ee of th e Adv an ta ge Plan u nd er a d at e o f Oct ob er 2 8, 2 00 3. Th e res t o f th e fo rm , es se nt ia ll y

pro vi di ng forth e n am e, ad dr es s, an d s ig na tu re o f th e n ew po li cy
own er, was lef

t b lank . Mr. Prag os a al so en cl os edanAdo pt in g Em pl oyer Ackno wled ge m en t fo rm , to be co m pl et edan d e xe cu te d b y

Mr. O'Co nn oron be ha lf

Co ns is te ntwith t ha t ad vi ce, the BISYS b oa rdof d ire ct or s, o n Oct ob er 1 5, 7 20 03 , res ol ve d t o t erm in at e th e Adv an ta ge Pla n " effe ct iv e as of De cem be r 31 , 20 03 ", an d, i n a cco rd an ce wi thsec . 7.0 8 o f th e p lan, p erm itpa rti ci pa ntem pl oyers to withd raw fro m

th e p lan.- 16 -

[* 16 ] of Hardware, ac kn owl ed gi ng th atHardware's co ve redem pl oyees h ad"fi ll ed
ou t" th e tr an sf

er o f own ers hi p a ndch an ge of b en efi ci ary fo rm s. Th e tr an sf er o f po li cy own ers hi p fo rm

forth e p ol ic y

on Mr. O'Co nn or 's l ife with t he Ben is tar Pl an sh own as t he ne w po li cy

own er was co m

pl et edan d e xe cu te d b y

Mr. Car pe nt er o n be ha lf o f th e Ben is tar 41 9 P lan o n No ve m be r 11 , 20 03 . The Ad op ti ng Em pl oyer Ackno wled ge m en t fo rm

was e xe cute d b y

Mr. O'Co nn oronbe ha lf o f Hardware
an d m ark edrece iv edby BISYS onNov em be r 20 , 20 03 . As no te d s up ra, the actua l tra ns fer o f own ers hi p o f th e p ol ic y on Mr. O'Co nn or 's l ife fro m BISYS t o B en is tar di d n otoc cu r un ti l J anuary 20 04
. The Not ic e Inth e "Ex pl an at io n o f It em s" po rti on of t he no ti ce, res po nd en t fi rs t s ta te s: "Th e p orti on of t he pa ym en ts [co nt rib ut io ns to th e Adv an ta ge Pla n] * * * u se d t o pa y th e co stof p ro vi di ng li fe i ns ur an ce * * * [fo r 20 03 ] is in cl ud ib le iny ou r in co m e p ur su an t t o S ect io n 6 1 * * * an d Tre as ury Reg ul at io n s ect io n 1 .61
- 2( d) (2 )(i i)." In a dd it io n, re sp on de ntst at es : "Th e p orti on of t he pa ym en ts in
ex ces s o f th e am ou nt* * * u se d t o p ay th e co stof p ro vi di ng li fe i ns ur an ce pr ot ect io n fo r y oufor* * * [2 00 3] was m ad e fo r y our eco no m ic be ne fit* * * [a nd is in cl ud ab le inin co m e as de ferr edco m pe ns at io n u nd er ei th er s ect io ns 30 1 a nd61- 17 -

[* 17 ] or s ect io ns 40 2( b) an d 8 3]". Thu s, the no ti ce s eek s t o t ax pe ti ti on ers on all pa ym en ts m ad e o n t he ir b eh al f to th e Adv an ta ge Pla n t ru st . 8 OPINION I. Bu rd enof P ro of Pet it io ne rs arg ue th atth ey ha ve sat is fie d a ll of t he requi rem en ts of s ect io n 74 91 ne ces sa ry

to sh iftth e b ur de n o f pr oo f to res po nd en t p ur su an t t o t ha t s ect io n; i.e., the y ha ve "i nt ro du ce[d ] cred ib le ev id en ce wi th res pe ctto an y factua l i ss ue rel ev an t t o a sc ert ai ni ng th e li ab il ity " i n t hi s ca se , see sec . 74 91 (a)( 1) , andth ey ha ve m ai nt ai ne d p ro pe r bo ok s an d re co rd s an d t ho ro ug hl y co op erat edwith
res po nd en t's reque st s fo r "wi tn es se s, i nf orm at io n, d oc um en ts , m eet in gs an d in te rv ie ws" inco m

pl ianc e wit h s ect io n 7 49 1( a)(2 ). Res po nd en t d is ag rees an d arg ue s tha t, i n a ny even t, the st ip ul at edfact s an d e xh ib it s " sh ou ldbe m or e th an
en ou ghto sh ow tha t p et it io ne rs fai le d t o re po rt i nc om e fro m th ei r rec ei ptof l ife

The pa rti es ha ve st ip ul at edth at , if we fi ndth atth ere was a ta xabl e ev en t b y 8 whi chth e O'Co nn orpo li cy is in cl ud ab le inpe ti ti on ers ' in co m e fo r 20 03 , th e pr op er m eas ur e o f th atva lu e is th e p ol ic y 's " accu m ul at io n v al ue " an d tha t tha t va lu e in 20 03 was $ 41 5,7 12 . Thatst ip ul at io n app aren tl y rep res en ts a co nc es si on by pet it io ne rs th at , if the O'Co nn orpo li cy is pro pe rly inc lu dabl e in pe ti ti on ers ' 20 03 in co m e, th e p ro pe r in co m e ad jus tm en t ar is in g o utof tha t i nc lu si on is $4 15 ,71 2, n otth e in co m e ad jus tm en t i n the no ti ce o f $3 95 ,05 1. Re sp on de ntha s no t s ou gh t a c orres po nd in g i nc reas e in th e am ou ntof t he de te rm in ed20 % sec
. 66 62 (a) p en al ty.- 18 -

[* 18 ] in su ran ce p ol ic ie s fr om * * * [t he Adv an ta ge Pla n] inth e 2 00 3 year, an d t ha t pe ti ti on ers are s ub

ject t o ape na lty

un de r se ct io n 6 66 2( a)." Bec au se we de ci de th is cas e o n t he ba si s o f a p rep on de ran ce o f th e
ev id en ce, the ass ig nm en t o f th e b ur de n o f pr oo f he rei n i s i m m at eri al . See Kean v. Co m m is si on er, 9 1 T.C. 5 75 , 60 1 n .40 (19 88 ) ("Ou r de te rm in at io ns have be en
m ad e o n t he ba si s o f th e p rep on de ran ce o f th e ev id en ce; acco rd in gl y , itis imm at eri al * * * wh o b ears th e b ur de n o f pr oo f. Desk in s v . Comm is si on er, 8 7 T.C. 30 5, 3 23 n.1 7 (1 98 6) ."). II. Res po nd en t's Inc om e Adju st m en t A. The Part ie s' Arg um en ts 1. Pet it io ne rs ' Argu m en ts Pet it io ne rs fir starg ue th atMr. O'Co nn orwas n otinco ns tru ct iv e rec ei ptof hi s p ol ic y in20 03 (i.e ., th e p ol ic y

was n ot"s etap artforhi m , or o th erwi se m ad e
av ai labl e", s ee s ec. 1 .45 1- 2( a), In co m e Tax Reg s.) b ecau se "Mr . O'Con no r was
un ab le to co ll ectan yth in g fr om BISYS i n 2 00 3 due to th e im pa ss e cre at edin20 02 by BISYS' in si st en ce upo n i nd em ni fic at io n fr om

Ben is tar be fo re en ga gi ng inan y tra ns fer o f as se ts an d B en is tar's fla t re fu sa l t o d o s o." Pet it io ne rs furth er s ta te th at "the tra ns fer o f th e O'Co nn or po li cy on th e in surer's bo ok s an d re co rd s an d t he
reco gn it io n o f Ben is tar as th e n ew own er an d b en efi ci ary of th e O'Co nn orpo li cy- 19 -

[* 19 ] * * * [o ccu rred ] in20 04 , no t i n 2 00 3." Pet it io ne rs als o a rg ue th atth e po ol in g o f ri skam on g a ll em pl oyers p art ic ip at in g i n t he pl anpre cl ud edMr. O'Co nn orfro m

co ns tru ct iv el y

rece iv in g the po li cy

un ti l i ts actua l tran sf

er i n 2 00 4. Pet it io ne rs als o arg ue th at(1) sec ti on 10 35 (a)( 1) , whi chpro vi de s fo r
no nr eco gn it io n o f ga in on an"ex ch an ge " o f li fe i ns ur an ce p ol ic ie s, ap pl ie s t o pr ecl ud e rec og ni ti on of g ai n t o t he m on th e tr an sf

er o f th e O'Co nn orpo li cy fro m th e Adv an ta ge Pla n t o t he Ben is tar Pl an , and(2) un de r se ct io ns 83 an d 4 02 (b ) th ey
are n otrequi redto in cl ud e inin co m e fo r 20 03 th e v al ue of M r. O'Co nn or 's i nt eres t in th e Adv an ta ge Pla n b ecau se th atin te res t was no t s ub st an ti al ly ves te d i n 2 00 3. Last ly, pe ti ti on ers arg ue th atth ere was no co ns tru ct iv e d iv id en d d is tri bu ti on by Hardwar e to Mr. O'Co nn orwith re sp ectto th e fo rm er's in te res t i n e ithe r th e Adv an ta ge Plan o r th e Ben is tar Pl anbe cau se "the re was ne ithe r an y co nt rib ut io n in 20 03 m ad e b y

Hardware t owa rd s a p ol ic y pre miu m to eit he r * * * [p lan] on be ha lf o f Mr. O'Co nn ordurin g * * * [th aty ear] no r was th ere a ny unres tri ct ed rig htto eit he r de m an d o r rec ei ve a be ne fitpa ym en t fr om eit he r * * * [p lan]". 2. Res po nd en t's Argu m en ts On b rie f, res po nd en t s pe ci fic al ly esch ews rel ianc e o n t he co ns tru ct iv e
rece ip t d oc tri ne an d, b y

no t ad dr es si ng iton bri ef, h e al so ig no res th e n ot ic e's al te rn at iv e arg um en t tha t M r. O'Co nn orrece iv eda co ns tru ct iv e d iv id en d t ax ab le- 20 -

[* 20 ] to pe ti ti on ers un de r se ct io ns 61 an d 3 01 . Rath er, o n b rie f, res po nd en t pr em is es hi s i nc om e ad

jus tm en t fo r 20 03 pri m ari ly on h is arg um en t tha t M r. O'Co nn orwas v es te d i n h is po li cy in20 03 , eit he r whe n Har dwa re t erm in at edit s pa rti ci pa ti on inth e Adv an ta ge Plan b y subm it ti ng it s co rp or at e res ol ut io n t o t ha t effe ctto BISYS o r whe n B ISYS p ro vi de d atra ns fer o f po li cy own ers hi p fo rm , si gn edby the tru st ee, t o M r. O'Co nn or , whi chall owe d M r. O'Co nn orto tra ns fer th e p ol ic y to a ne w own er, i n e ithe r ev en t, the reb y be co m in g t ax ab le on th e n et
cas h v al ue of t he po li cy

un de r se ct io ns 40 2( b) (1 ) an d 8 3. Th eref or e, we res tri ct
ou r an al y si s t o ade te rm in at io n o f th e m eri ts of tha t ar gu m en t b y res po nd en t. 9 Res po nd en t al so reject s p et it io ne rs ' arg um en t tha t the po li cy tra ns fer fr om th e Adv an ta ge Pla n t o t he Ben is tar Pl anco ns ti tu te d ano nt ax ab le tra ns act io n u nd er
se ct io n 1 03 5, wh ic h p ro vi de s tha t n o g ai n o r lo ss sh al l b e rec og ni zedonth e "ex ch an ge " o f on e co nt ractof l ife in su ran ce fo r an ot he r co nt ractof l ife in su ran ce. See s ec. 1 03 5( a)(1 ). Res po nd en t ar gu es , iness en ce, tha t, b ecau se th ere was no "ex ch an ge " o f po li ci es by Mr. O'Con no r, se ct io n 1 03 5 i s i napp li cab le
.

Res po nd en t al so arg ue s tha t the O'Co nn or po li cy was, i n s ub st an ce, 9 "ac tu al ly dis tri bu te d o r m ad e av ai labl e" t o M r. O'Co nn orin20 03 , cau si ng pe ti ti on ers to be tax ab le un de r se c. 40 2( b) (2 ). Becaus e we fi ndpe ti ti on ers tax ab le fo r 20 03 un de r se c. 40 2( b) (1 ), we do no t ad dr es s re sp on de nt 's s ec. 4 02 (b )(2 ) arg um en ts .- 21 -

[* 21 ] B. App li cab le Law Purs uantto sec ti on 40 2( b) (1 ), em pl oyer co nt rib ut io ns to a no ne xe m pt
em pl oyee tru stare i nc lu de d i n t he em pl oyee's g ro ss in co m e to th e ex te ntth atth e
em pl oyee's i nt eres t i n s uc h c on tri bu ti on s i s s ub st an ti al ly ves te d (wi th in th e
m ean in g o f se ct io n 1 .83 -3 (b ), In co m e Tax Reg s.) a t the ti m e th e co nt rib ut io ns are
m ad e. See s ec. 1 .40 2( b) -1 (a)( 1) , Inc om e Tax Reg s. If an e m pl oyee's r ig ht s u nd er
a n on ex em

ptem pl oyee tru stbe co m e subs tant ia ll y ve st eddu rin g atax ab le y ear o f th e em pl oyee, andth e ta xabl e y ear o f th e trus t en ds with o r withi n s uc h year, th e
va lu e o f th e em

pl oyee's i nt eres t i n t he tru stonth e d at e o f su chve st in g i s i nc lu de d in th e em pl oyee's g ro ss in co m e fo r th attax ab le y ear. Se e id . par a. (b )(1 ). An em pl oyee's i nt eres t i n p ro pe rty is s ub st an ti al ly ves te d " whe n i t i s ei th er tra ns ferabl e o r no t s ub

ject t o asubs tant ia l ri skof f or fei tu re." Se c. 1.8 3- 3( b) , In co m e Tax Reg s. Whethe r a ri skof f or fei tu re i s s ub st an ti al de pe nd s o n t he fact s
an d c irc um st an ces . Id. p ara. (c )(1 ). A subs tant ia l ri skof f or fei tu re ex is ts wher e "ri gh ts inpro pe rty tha t ar e tr an sf erre d a re co nd it io ne d * * * up on th e fu ture pe rfo rm an ce (o r refr ai ni ng fro m pe rfo rm an ce) o f subs tant ia l s erv ic es by any pe rs on , or the oc cu rren ce o f a co nd it io n re la te d t o apu rp os e o f th e tr an sf er, an d th e p os si bi li ty of fo rfei tu re i s s ub st an ti al if s uc h c on di ti on is no t s at is fie d." Id.- 22 -

[* 22 ] C. Ana lysis an d C on cl us io n

1. App li cat io n o f Sec ti on 40 2( b) (1 ) InGlu ckm anv. Co m

m is si on er, T.C. Mem o. 2 01 2- 32 9, af f'd , 54 5 F . App 'x 59 (2dCir . 20 13 ), we co ns id eredth e ta x ra m ifi cat io ns of asi m il ar d is tri bu ti on to
em pl oyees wh os e em

pl oyer, li ke Hardware, t erm in at edit s p art ic ip at io n i n t he Adv an ta ge Plan t ru stin20 03 . In Gl uc km an , th e m arri edtax pa y ers an d t he ir t wo ch il dr enwere the so le sh areh ol de rs of ( an d o ne or m or e o f th em was e m pl oyed b y ) th e em pl oyer co rp or at io n. Aft er re cei vi ng th e em pl oyer's c or

po rat e res ol ut io n
au th or iz in g i ts withd rawal fro m th e Adv an ta ge Pla n, BI SYS, o n No ve m be r 6, 20 03 , sen t t o t he em

pl oyer, care o f th e ta xp ay er h us ba nd , parti al ly com pl et ed ch an ge of o wne rs hi p a ndbl an k c ha ng e o f be ne fic iary de si gn at io n fo rm s, as well
as dupl ic at e co pi es of the un de rlyin g l ife in su ran ce p ol ic ie s o n t he li ve s o f th e ta xp ay er em

pl oyees. Th e o rig in al in su ran ce p ol ic ie s wer e p ro vi de d t o t he ta xp ay ers ' in su ran ce ag en t. The ch an ge of p ol ic y own ers hi p fo rm s h adalr eady be enen do rs edby the Adv an ta ge Pla n t ru st ee as th e cu rren t o wne r of th e p ol ic y . The co m pl et io n o f th e ch an ge of o wne rs hi p fo rm s an d t he actua l tran sf er o f th e po li ci es to a ne w pl andi d n otoc cu r un ti l 2 00 4. Id . at * 9- *1 0, * 16
. The tax pa y ers arg ue d t ha t, "b ecau se th ey ne ve r own edth e p ol ic ie s [i .e., be cau se th ere was , iness en ce, a tru st ee-t o- tru st ee tran sf er], the y di d n otco nt ro l- 23 -

[* 23 ] th e p ol ic ie s, an d t he ir i nt eres ts inth e p ol ic ie s wer e atall ti m es subjec t t o a
subs tant ia l ri skof f

or fei ture." Id . at * 12 . W e reject edth e ta xp ay ers ' arg um en t. W e n ot ed , firs t, tha t, b ecau se of the Adv an ta ge Pla n re qu ire m en t tha t co ve red
em pl oyees re m ai n e m

pl oyed b y th e p art ic ip at in g e m

pl oyer to rem ai n e li gi bl e fo r be ne fit s, the pa rti es ag reedth atth e ta xp ay er em pl oyees' i nt eres ts inth e p lan wer e
subjec t t o asubs tant ia l ri skof f or fei tu re thr ou gh20 02 . Id. at*1 4. We th enno te d th atwhen th e ta xp ay er h us ba nd 's e m pl oyer "s ub m it te d i ts res ol ut io n i n Oct ob er 20 03 , ho wev er, the si tu at io n was m ark ed ly diff eren t" be cau se "[c]on ti nu ed
em pl oym en t was no lo ng er a re qu ire m en t" an d, u nd er the Adv an ta ge Plan, the pl anco ul d (1 ) of

fer the po li ci es forpu rch as e b y th e em pl oyees, (2 ) di st rib ut e th e po li ci es to th e co ve redem pl oyees, o r (3 ) tr an sf

er the po li ci es to an ot he r wel fare be ne fitpl an . Id. at*1 5. As no te d s up ra, BIS YS, inNov em be r 20 03 , di d, i n fa ct , di st rib ut e to th e ta xp ay er h us bandbo th dupl ic at e co pi es of t he po li ci es an d pa rti al ly com

pl et edtrans fer o f own ers hi p fo rm s l ack in g o nl y th e n ew own er in fo rm at io n. Onth e b as is of t ho se fact s we s ta te d: The se act io ns pl acedpe ti ti on ers ' un de rlyin g p ol ic ie s s qu arel y withi n th ei r co nt ro l b ecau se pe ti ti on ers were the n fr ee t o n am e th e p ol ic ie s' ne w own er an d b en efi ci ary, whi chco ul d h av e b eenth em se lv es or an ot he r wel fare be ne fitpl an . Whe n atax pa y er h as do m in io n a nd co nt ro l o ve r pr op erty , th e v al ue of s uc h p ro pe rty gen eral ly w il l b e in cl ud edinhi s o r he r gr os s i nc om e. See C adwell v. Co m m is si on er, 13 6 T.C. 3 8, 5 2- 56 (20 11 ), aff'dwitho utpubl is he d o pi ni on , 10 9- 24 -

[* 24 ] A.F.T.R.2d(RIA) 2 01 2- 26 93 (4t h C ir. 2 01 2) ; Ch am be rs v. Co m m is si on er, T.C. Mem o. 2 01 1- 11 4. Glu ckm anv. Co m

m is si on er, at*1 6. We cit edCadwell , whi chin vo lv edth e
co nv ers io n o f a wel fare be ne fitpl anfro m a m ul ti pl e-em

pl oyer pl anto a si ng le
em pl oyer pl an , forth e p ro po si ti on th atth e ta xp ay er's in te res t i n t he lat te r be cam e
ve st ed"b ecau se he ga in edth e ab il ity to co nt ro l the pl anass et s wh enth e p lan was
co nv ert edto a si ng le -em

pl oyer pl an ." Id . at * 18 . W e th enco nc lu de d: "Here , ei th er atth e ti m e * * * [th e em pl oyer] subm it te d i ts co rp or at e res ol ut io n withd rawi ng fro m

th e p lan o r whe n t he ch an ge of o wne rs hi p a ndbe ne fic iary fo rm s wer e se ntto th em , pet it io ne rs ga in edth e ab il ity to co nt ro l the ir u nd erl y in g po li ci es ." Id
. Pet it io ne rs m ak e th e p oi ntth atMr. Pra go saof B ISYS, i n ade po si ti on tak en in co nn ect io n wi th th is cas e an d re la te d c as es in vo lv in g the same iss ue , tes ti fie d th atno twi th st an di ng BISYS' s ta te d p os it io n p ro hi bi ti ng an y tru st -to -trus t tran sf

ers , itdi d i n fa ctall ow a n um be r of su chtra ns fers in20 03 . W e d is po se d o f a s im il ar cl ai m inGlu ckm an , st at in g: [E]venif tru st ee-t o- tru st ee tran sf ers to ot he r pl an s wer e st il l b ei ng do ne by the Adv an ta ge Pla n, s uc h atra ns fer s im pl y di d n otoc cu r he re. BISYS di st rib ut edth e ch an ge of o wne rs hi p a ndch an ge of be ne fic iary

de si gn at io n fo rm s t o p et it io ne rs , th e co ve redem pl oyees, in care of * * * [th e em

pl oyer] an d t o p et it io ne rs ' in su ran ce ag en t, n ot to an ot he r pl antru st ee.- 25 -

[* 25 ] Onc e th e ch an ge of o wne rs hi p a ndch an ge of b en efi ci ary de si gn at io n fo rm s wer e rec ei ve d, p et it io ne rs ha d t he ab il ity to na m e th em se lv es or ano th er wel fare be ne fitpl anas t he own er an d be ne fic iary

of t he un de rlyin g p ol ic ie s. Be cau se th e p ol ic ie s wer e subjec t t o p et it io ne rs ' di rectco nt ro l, the tra ns act io n was no t a t ru st eeto -trus te e tr an sf

er. * * * Id . at * 19
. W e h el d t ha t the tax pa y ers ' in te res ts inth e Adv an ta ge Pla n, re pr es en te d b y th ei r un de rlyin g p ol ic ie s, were subs tant ia ll y ve st edun de r se ct io n 4 02 (b )(1 ) in 20 03 . Id. at*2 1. Pet it io ne rs see k t o d is ti ng ui shGlu ckm anfro m th is cas e o n t wo g ro un ds
. Fi rs t, Mr . O'Con no r ha d e ss en ti al ly enro ll edHardware i n t he Ben is tar Pl anin 20 02 , th e y ear b efo re an y reque stto BISYS fo r a tran sf er o f th e O'Co nn or

po li cy he ldby the Adv an ta ge Pla n t o t he Ben is tar Pl anto okpl ace. M or eo ve r, th at reque stactua ll y

em an at edfro m

th e Ben is tar Pl an , no t fr om Mr. O'Co nn or . Seco nd , inGlu ckm an , bu t n otinth is cas e, BISYS tra ns ferr ed"the ori gi na l co pi es of th e in su ran ce p ol ic ie s t o t he tax pa y er's in su ran ce ag en t wi th dupl ic at e co pi es to th e ta xp ay er." Pe ti ti on ers arg ue : "Ha vi ng th e o rig in al po li cy inhand , to ge th er with t he pa rti al ly com

pl et edpo li cy

tra ns fer fo rm , canbe sai d t o p ro du ce d om in io n
an d c on tro l, wh erea s the O'Co nn orpo li cy rem ai ne d a t al l t im es withi n t he- 26 -

[* 26 ] do m in io n a ndco nt ro l o f th e in su ran ce co m pa ny andth e Adv an ta ge Plan"
. Neit he r of

pe ti ti on ers ' att em

pt s t o d is ti ng ui shGlu ckm anwiths tand s s cru ti ny. It i s cl ear t ha t Har dwa re's 20 02 att em pt s t o t erm in at e it s p art ic ip at io n i n t he Adv an ta ge Plan, ad op t an d p art ic ip at e in th e Ben is tar Pl an , andha ve BISYS tra ns fer the O'Co nn orpo li cy to th e Ben is tar Pl anwere u ns uc ces sf ul . The tran sf

er of po li cy own ers hi p fo rm

for tra ns ferr in g t he O'Co nn orpo li cy fro m th e Adv an ta ge Pl anto th e Ben is tar Pl anwas n otsi gn edby any on e o n b eh al f of BISYS a s the "Ol d Own er" of t ha t p ol ic y . W itho utth atsi gn atur e (i .e., th e Adv an ta ge Pla n tru st ee's ag reem en t t o tran sf er the O'Co nn orpo li cy ), Mr. O'Co nn orwas p owe rle ss to tra ns fer i t t o t he Ben is tar Pl an . Mor eo ve r, be cau se th e trus te e tr an sf er ag reem en t re qu ire d t he Ben is tar Pl anto in de m ni fy BISYS andth e Adv an ta ge Pla n fo r an y li ab il it ie s ar is in g o utof Hardware's parti ci pa ti on inth e la tt er p lan, M r. Carp en te r refu se d t o s ig n tha t ag reem en t o n b eh al f of th e Ben is tar Pl an . As a
res ul t, the re was no rig htto requi re a tran sf er an d n o a ctua l tran sf

er o f th e O'Co nn orpo li cy

in20 02 . Furt he rm or e, we su rm is e th atMr. O'Co nn orkn ew th at hi s at te m pt s t o e ffec t a 2 00 2 d ire cttru st -to -trus t tran sf er o f hi s p ol ic y

were
un su cces sf

ul . Oth erwi se , he wo ul d n othave ag ai n, i n Oct ob er 2 00 3, s ub m it te d t o BISYS Hardware's co rp or at e res ol ut io n t o t erm in at e it s p art ic ip at io n i n t he Adv an ta ge Plan a s d ire ct edby BISYS an d, the n, wh enhe rece iv edth em fro m- 27 -

[* 27 ] BISYS, s en t the ne w cha ng e o f po li cy own ers hi p a ndch an ge of b en efi ci ary de si gn at io n fo rm s, al read y si gn edby BB&T as tru st ee o f th e Adv an ta ge Pla n, t o Mr. Ca rp en te r, who si gn edth em on be ha lf o f th e Ben is tar Pl an . It i s al so cle ar tha t o urde ci si on inGlu ckm andi d n otde pe ndon th e fac t tha t dupl ic at e co pi es of t he in su ran ce p ol ic ie s wer e tr an sm it te d t o t he tax pa y ers an d t he
or ig in al s t o t he ir i ns ur an ce ag en t. The lynchpi n o f ou r de ci si on inGlu ckm anwas
ou r de te rm in at io n t ha t " [o ]nce the ch an ge of o wne rs hi p andch an ge of b en efi ci ary de si gn at io n fo rm s wer e rec ei ve d, p et it io ne rs ha d t he ab il ity to na m e th em se lv es or
an ot he r wel fare be ne fitpl anas t he own er an d b en efi ci ary of th e und erl y in g po li ci es ." Glu ckm anv. Co m m is si on er, at*1 9. 1 0

As n ot edsupr a, we st at edinGlu ckm anv. Co m m is si on er, T.C. Mem o. 1 0 20 12 -3 29 , at * 18 , aff'd , 54 5 F . App 'x 5 9 (2 d C ir. 2 01 3) , th atth e ta xp ay ers be cam e ve st edinth e und erl y in g p ol ic ie s " ei th er atth e ti m e * * * [th e em pl oyer] subm it te d it s co rp or at e res ol ut io n wi th dr awin g fr om th e p lan o r whe n t he ch an ge of own ers hi p a ndbe ne fic iary form s wer e se ntto th em ". Glu ckm anv. Co m m is si on er, at*1 8. Itwas u nn eces sa ry inGlu ckm anto sel ectbe twee n t ho se two alt ern at iv es be cau se bo th oc curredinth e sa m e ta xabl e y ear, 2 00 3. Here to o, b ot h e ve nt s oc cu rredin20 03 . There fo re, we fi nditun ne ces sa ry to de ci de whethe r Hardware's subm is si on of i ts res ol ut io n t erm in at in g i ts pa rti ci pa ti on inth e Adv an ta ge Plan was , by it se lf, s uf

fic ie ntto ve stMr. O'Co nn or inth e o wne rs hi p o f hi s l ife in su ran ce p ol ic y . W e n ot e, ho wev er, tha t, i n a ffi rm in g o urde ci si on inGlu ckm an , th e Co urt o f App eal s fo r th e Sec on d C irc ui t ap pe ars to ha ve sel ect edth e ti m e at whi chth e ch an ge of o wne rs hi p andbe ne fic iary form s wer e se ntto th e ta xp ay ers as th e ti m e atwhi chth ey

be cam e subs tant ia ll y

ve st edinth e und erl y in g p ol ic ie s. See id ., 54 5 F . App 'x a t 6 3.- 28 -

[* 28 ] W e se e n o re as on to de pa rt f ro m ou r an al y si s an d c on cl us io n i n Gl uc km an , an d we h ol d t ha t p et it io ne rs were s ub st an ti al ly ves te d i n the O'Co nn orpo li cy in 20 03 un de r se ct io n 4 02 (b )(1 ).

2. App li cat io n o f Sec ti on 10 35 W e ag ree wi th res po nd en t tha t s ect io n 1 03 5 i s i napp li cab le to th e tr an sf er o f th e O'Co nn orpo li cy

fro m th e Adv an ta ge Pla n t o t he Ben is tar Pl an . As res po nd en t po in ts ou t, the re was no "ex ch an ge " o f po li ci es as r equi redun de r se ct io n 10 35 (a)( 1) . Rath er, the same po li cy was m erel y

tra ns ferr edfro m

on e o wne r to
an ot he r, th e o nl y

is su e b ei ng whet he r Mr. O'Co nn or , who ha d arig htto ke ep th e po li cy in st eadof o pt in g t o h av e ittra ns ferr edto th e Ben is tar Pl an , hadin co m e ari si ng ou t o f th atrig ht . The fo reg oi ng tra ns act io n s im pl y is no t co ve redby
se ct io n 1 03 5, as th ere m

us t b e anactua l o r, atlea st , a co ns tru ct iv e ex ch an ge of o ne po li cy foran ot he r. See Gre en e v . Comm is si on er, 8 5 T.C. 1 02 4 (1 98 5)
. III. Accu racy-Rel at edPen al ty A. The Not ic e By th e n ot ic e, res po nd en t d et erm in edth e 2 0% a ccu racy-rela te d p en al ty
un de r se ct io n 6 66 2( a) ag ai ns t p et it io ne rs on th e g ro un d t ha t the y "h adan
un de rp aym en t at tri bu tabl e to subs tant ia l u nd ers ta te m en t o f in co m e ta x a nd* * * [th ey ] ha ve no t s ho wn * * * [th ey ] ha d re as on ab le cau se forth e und erp aym en t o f- 29 -

[* 29 ] tax an d t ha t * * * [th ey ] act edingo odfai th ." The no ti ce g oe s o n t o s ta te th atth e und ers ta te m en t am ou ntis reduc edwher e th ere was subs tant ia l au th or ity fo r th e ta x t reat m en t o f anit em , ade qu at e d is cl os ur e o f th e it em , anda reas on ab le ba si s fo r it s t ax tre atm en t, b utth atcav eatap pe ars to be in ap pl ic ab le bo il erp la te as th e am ou ntof t he pe na lty , $2 8,4 83 , is ex act ly 20% o f th e n ot ic e's de te rm in edtax de fic ie nc y

of $ 14 2,4 16
. B. App li cab le Law Sect io n 6 66 2( a) an d (b )(1 )-(3 ) pr ov id es foranaccuracy-rela te d p en al ty (the pe na lty ) inth e am ou ntof 2 0% o f th e p orti on of a ny un de rp aym en t at tri bu tabl e to , am on g o th er thi ng s, n eg li ge nc e o r in te nt io na l d is reg ardof r ul es or r eg ul at io ns (wit ho utdi st in ct io n, n eg li ge nc e), an y subs tant ia l u nd ers ta te m en t o f in co m e ta x, o r
an y subs tant ia l v al ua ti on m is st at em en t. A subs tant ia l u nd ers ta te m en t o f in co m e ta x e xi st s fo r anin di vi du al if the
am ountof t he un de rs ta te m en t ex ceed s the gre at er o f 10 % of t he tax requi redto be sh own on th e return o r $5 ,00 0. Se e se c. 66 62 (d )(1 )(A). Res po nd en t h as
es tabl is he d t ha t p et it io ne rs ' un de rs ta te m en t o f in co m e ta x fo r 20 03 is subs tant ia l as itex ceed s 1 0% o f th e co rrec t t ax ($1 42 ,41 6 i s m or e th an10 % of the co rrec t 2 00 3 ta x, as ad jus te d b y res po nd en t, o f $5 38 ,55 8) , whi chis gre at er tha n $ 5,0 00
. The refo re, we n eedno t co ns id er the m eri ts of r es po nd en t's arg um en t tha t- 30 -

[* 30 ] pe ti ti on ers were n eg li ge ntan d d is reg ard edrul es an d re gu lati on s i n n ot rep orti ng th e in co m e fo r 20 03 equa l t o t he va lu e o f th e O'Co nn orpo li cy for th at y ear. Sect io n 6 66 4( c)(1 ) pr ov id es th atth e p en al ty sha ll no t b e im po se d wi th
res pe ctto an y

po rti onof a n u nd erp aym en t i f a t ax pay er s ho ws tha t the re was
reas on ab le cau se for , andth atth e ta xp ay er ac te d i n g oo d fa ith wi th res pe ctto , th at po rti on . The de te rm in at io n o f whe th er a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t al l p ert in en t fa ct s an d c irc um st an ces . * * * Ci rcu m st an ces th atm ay in di cat e rea so nabl e cau se an d g oo d fa ith i nc lu de anho ne st m is un de rs tand in g o f * * * l aw th atis reas on ab le inli gh t o f al l o f th e fact s an d c irc um st an ces , in cl ud in g t he ex pe rie nc e, kn owl ed ge , and educ at io n o f th e ta xp ay er. * * * Rel ianc e * * * on th e advi ce o f a pr of es si on al tax advi so r * * * d oe s n otne ces sa ril y de m on st rat e reas on ab le cau se an d g oo d fa ith. * * * Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Rea so nabl e cau se ha s b eenfou ndwhen a ta xp ay er s el ect s a c om pe te nttax advi se r, supp li es th e advi se r with a ll rel ev an t i nf orm at io n a nd , ina m an ne r
co ns is te ntwith o rd in ary bu si ne ss care an d p ru de nc e, rel ie s o n t he advi se r’s pr of es si on al jud gm en t as to th e ta xp ay er's tax ob li ga ti on s. See Neon at ol og y Ass oc s., P.A. v. C omm is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff'd , 29 9 F .3d22 1 (3 d Ci r. 20 02 ); s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s.; cf. Uni te d S ta te s v . Boyle, 4 69- 31 -

[* 31 ] U.S. 24 1, 2 51 (19 85 ). A tax pa y er m ay rel y on th e advi ce o f an y

tax advi se r, lawy er, o r acc ou nt an t. See Bo y le , 46 9 U.S. at25 1. Re li an ce o n apro fes si on al tax advi se r wil l n otbe co ns id eredreas on ab le , ho wev er, i f th e advi se r is a pr om ot er o f th e tr an sa ct io n o r su ffer s fr om "a co nf li ctof i nt eres t * * * th atth e ta xp ay er kne w of or s ho ul d h av e kno wn ab ou t." Neon at ol og y Ass oc s., P.A. v. C omm is si on er, 29 9 F .3dat 2 34 ; Pa st ern akv. Co m m is si on er, 9 90 F.2d89 3, 9 03 (6th C ir. 1 99 3) , aff'g Don ah ue v. Co m

m is si on er, T.C. Mem o. 1 99 1- 18 1. " [T]he ta xp ay er's educ at io n, s op hi st ic at io n a ndbu si ne ss ex pe rie nc e wil l b e rel ev an t i n d et erm in in g whe th er the tax pa y er's rel ianc e o n t ax advi ce was reas on ab le an d m ad e ingo od fai th ." Sec . 1.6 66 4- 4( c)(1 ), In co m e Tax Reg s. C. Ana lysis an d C on cl us io n Und er s ect io n 7 49 1( c), res po nd en t b ears th e b ur de n o f pr oduc ti on , bu t n ot th e o ve ral l b ur de n o f pr oo f, with re sp ectto pe ti ti on ers ' li ab il ity forth e se ct io n 66 62 (a) p en al ty. See Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 47 (20 01 ). W e h av e p rev io us ly stat edth atth e "b ur de n i m po se d b y sec ti on 74 91 (c) i s o nl y

to
co m e fo rwardwith e vi de nc e reg ard in g t he ap pr op ria te ne ss of app lying a pa rti cu lar ad di ti on to tax or p en al ty to the tax pa y er." Weir v . Comm is si on er, T.C. Mem o. 20 01 -1 84 , 20 01 WL 82 98 81 , at * 5. By dem on st rat in g t ha t p et it io ne rs '
un de rs ta te m en t o f in co m e ta x e xc eed s the th res ho ld s fo r a fi nd in g o f "s ub st an ti al- 32 -

[* 32 ] un de rs ta te m en t o f in co m e ta x" un de r se ct io n 6 66 2, re sp on de ntha s s at is fie d hi s b ur de n o f pr oduc ti on . Res po nd en t ar gu es th atpe ti ti on ers ha ve fai le d t o e st ab li sheit he r rea so nabl e
cau se or g oo d- fai th rel ianc e o n p ro fes si on al advi se rs as ju st ifi cat io n fo r th ei r
subs tant ia l u nd ers ta te m en t o f in co m e ta x. Pe ti ti on ers arg ue th at , bec au se of t he
co m pl ex ity of t he is su es in vo lv edinth is cas e, th ey were jus ti fie d, as ne op hytes with re sp ectto "the nu an ces an d s ub tl et ie s o f Fed eral tax law" , inrel y in g o n " th ei r pr of es si on al s' i nt erp ret at io n o f th e rel ev an t p ro vi si on s." They furthe r cl ai m th at th ere was subs tant ia l au th or ity for th ei r return p os it io n and"n o d ire ctauth or ity * * * t o the co ntrary." In re jecti ng pe ti ti on ers ' arg um en ts , res po nd en t n ot es th at BISYS warn edMr. O'Co nn orrep eat ed ly tha t co ve redem pl oyees o f em

pl oyers te rm in at in g t he ir p art ic ip at io n i n t he Adv an ta ge Pla n wer e ta xabl e o n t he va lu e o f th ei r po li ci es . Res po nd en t al so no te s tha t the re i s n o e vi de nc e th atan y of t he advi se rs th atpe ti ti on ers m ay have co ns ul te d wer e qua li fie d t ax advi se rs fam il iar with t he tax asp ect s o f th e tr an sa ct io ns at i ss ue inth is cas e. W e ag ree wi th res po nd en t. Alt ho ug h p et it io ne rs ' 20 03 return was pre pa red by Frede ric k A. Ci am

pa , a cert ifi edpubl ic acco un tant , th ere i s n o e vi de nc e th athe
rev ie wedor wa s atall fam il iar with t he ev en ts oc cu rri ng in20 03 th atres ul te d i n Hardware's term in at io n o f it s p art ic ip at io n i n t he Adv an ta ge Pla n andth e ev en tu al- 33 -

[* 33 ] tra ns fer (a t M r. O'Co nn or 's d ire ct io n) of t he O'Co nn orpo li cy to th e Ben is tar Pl an . The rec or d i nd ic at es on ly that M r. Ci am pa , onor b efo re Oct ob er 3 , 20 02 , advi se d t ha t M r. O'Co nn or 's " cu rren t em pl oyee be ne fitpl an s" be tra ns ferr edto Ben is tar; i .e., he r eco m

m en de d p ur su in g the di recttru st -to -trus t tran sf er tha t d id
no t t ak e p la ce i n e ithe r 20 02 or 2 00 3. Mo reo ve r, th ere i s n o e vi de nc e th atMr. O'Co nn orm ad e Mr. Ci am pa(or an y ot he r pr of

es si on al tax advi se r) awar e o f BISYS ' advi ce tha t the pl anterm in at io n a ndpo li cy tra ns fer e ve nt s o f 20 03 wou ld
res ul t i n t ax ab le in co m e to em pl oyees c ov eredby the Adv an ta ge Pla n. W e su st ai n re sp on de nt 's d et erm in at io n o f th e 2 0% p en al ty und er s ect io n 66 62 (a).
Deci si on wil l b e en te redun de r Ru le 15 5.