1

1 Cases of the following petitioners are consolidated herewith: Thomas P. 

Blake and Cynthia S. Blake, docket No. 25765–10; Netversity, Inc., docket 

No. 11520–11; Juan Carlo Mejia and Yvette Mejia, docket No. 11521–11; 

Richard J. Abramo and Catherine S. Abramo, docket No. 12744–11; Robert 

V. Brown and Andrea Yogel-Brown, docket No. 12745–11; and John A. 

Tomassetti and Cathy C. Tomassetti, docket No. 12746–11. 

OUR COUNTRY HOME ENTERPRISES, INC., ET AL., 1

PETITIONERS v. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT

Docket Nos. 25764–10, 25765–10, Filed July 13, 2015. 

11520–11, 11521–11, 

12744–11, 12745–11, 

12746–11. 

SP is a purported welfare benefit plan consisting of the 

respective separate plans that each participating employer 

customizes to apply to its employees alone. SP pays death, 

medical, and disability benefits with respect to a participating 

employee to the extent that his or her participating employer 

selects. Each employer selects the general provisions, the 

participation requirements, and the vesting schedule 

applicable to its plan. Each employee designates to whom SP 

will pay the benefits with respect to him or her. The death 

benefit that SP agrees to pay as to a participating employee 

is the face amount of an insurance policy that SP purchases 

on the employee’s life. The employer effectively pays the premiums on the insurance policy through its payments to SP, 

and the insurance policy usually has a cash value component 

that increases annually. SP’s payment of any nondeath benefit as to an employee is generally limited to the cash value 
2 145 UNITED STATES TAX COURT REPORTS (1) 

2 Unless otherwise indicated, section references are to the Internal Revenue Code (Code) applicable to the relevant years, Rule references are to 

of the insurance policy related to that employee. An employer 

may terminate its participation in SP and cause each of its 

employees to be fully vested in his or her policy (including its 

cash value). A participating employee, upon retiring, may take 

his or her insurance policy in satisfaction of any postretirement death benefit payable as to the employee. O and N are 

C corporations, each wholly owned by a single individual; E 

is an S corporation owned equally by three other individuals; 

and each of those five individuals was employed by the corporation he owned. O and E each participated in SP and 

caused SP to purchase insurance on the lives of their shareholder/employees. N participated in SP but did not cause SP 

to purchase insurance on an employee’s life. Held: The life 

insurance policies that were issued on the lives of the four 

shareholder/employees incident to their corporations’ participation in SP were part of a split-dollar life insurance arrangement. Held, further, the economic benefit provisions of sec. 

1.61–22(d) through (g), Income Tax Regs., are not invalid, and 

the four shareholder/employees with insurance on their lives 

realized income (compensation for O’s shareholder and 

guaranteed payments for E’s shareholders) as to the splitdollar life insurance arrangements in amounts as ascertained 

from those provisions. The economic benefit provisions are 

inapplicable to N and its owner because no life insurance was 

issued in those cases. On the basis of Neonatology Assocs., 

P.A. v. Commissioner, 115 T.C. 43 (2000), aff ’d, 299 F.3d 221 

(3d Cir. 2002), and its progeny, N’s owner realized dividend 

income to the extent of the payments that N made to SP. 

Held, further, none of the corporate employers may deduct its 

payments to SP. Held, further, Ps are liable for the accuracyrelated penalties that R determined under I.R.C. sec. 6662(a). 

Held, further, Ps are liable for the accuracy-related penalties 

that R determined under I.R.C. sec. 6662A, to the extent 

stated. 

Steven S. Brown, Denis John Conlon, Allen James White, 

and William G. Sullivan, for petitioners. 

Angela B. Reynolds, David S. Weiner, and K. Elizabeth 

Kelly, for respondent. 

LARO, Judge: These seven cases are before the Court 

consolidated for purposes of trial, briefing, and opinion. 

Petitioners petitioned the Court to redetermine the following Federal income tax deficiencies and accuracy-related 

penalties that respondent determined: 2
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 3

the Tax Court Rules of Practice and Procedure, and dollar amounts are 

rounded to the nearest dollar. We interchangeably use the terms ‘‘insurance contract’’ and ‘‘insurance policy’’ for convenience and do not intend to 

signify a distinction by our use of either term. We also use the terms ‘‘welfare benefit plan’’ and ‘‘plan’’ for convenience and do not intend to suggest 

for Federal income tax purposes that any of the subject arrangements are 

either bona fide plans or welfare benefit plans. We use the name ‘‘Sterling 

Plan’’ to refer to both the plan and the trust that make up the Sterling 

Plan. 

Our Country Home Enterprises, Inc., docket No. 25764–10 

Accuracy-related penalties 

Year Deficiency Sec. 6662(a) Sec. 6662A 

2005 $114,549 $22,910 -0- 

2006 193,029 38,606 -0- 

2007 45,184 -0- $15,750 

Blakes, docket No. 25765–10

Accuracy-related penalties 

Year Deficiency Sec. 6662(a) Sec. 6662A 

2005 $276,032 $55,206 -0- 

2006 402,643 80,529 -0- 

2007 428,303 -0- $85,660 

Netversity, Inc., docket No. 11520–11

Accuracy-related penalty 

Year Deficiency Sec. 6662(a) 

2006 $9,872 $1,974 

Mejias, docket No. 11521–11

Accuracy-related penalty 

Year Deficiency Sec. 6662(a) 

2006 $14,000 $2,800 

Abramos, docket No. 12744–11

Accuracy-related penalties 

Year Deficiency Sec. 6662(a) Sec. 6662A 

2005 $92,218 $18,444 -0- 
4 145 UNITED STATES TAX COURT REPORTS (1) 

Abramos, docket No. 12744–11

Accuracy-related penalties 

Year Deficiency Sec. 6662(a) Sec. 6662A 

2006 116,844 23,369 -0- 

2007 123,201 651 $40,920 

Browns, docket No. 12745–11

Accuracy-related penalties 

Year Deficiency Sec. 6662(a) Sec. 6662A 

2005 $96,299 $19,260 -0- 

2006 133,582 26,716 -0- 

2007 136,910 -0- $45,584 

Tomassettis, docket No. 12746–11

Accuracy-related penalties 

Year Deficiency Sec. 6662(a) Sec. 6662A 

2005 $90,543 $18,109 -0- 

2006 122,376 24,475 -0- 

2007 125,325 -0- $42,593 

The deficiencies stem from petitioners’ participation in the 

Sterling Benefit Plan (Sterling Plan), a purported welfare 

benefit plan. The parties have selected these seven cases to 

serve as test cases for issues related to the Sterling Plan. 

The parties in approximately 40 other cases pending before 

the Court have agreed to be bound by one or more of the 

final decisions in these cases. 

Petitioners in two of these test cases are Mr. Blake and his 

wholly owned C corporation, Our Country Home Enterprises, 

Inc. (Our Country). Respondent disallowed deductions of 

$450,000, $450,000, and $150,000 that Our Country claimed 

for 2005, 2006, and 2007, respectively (subject years), with 

respect to payments that it made to the Sterling Plan. 

Respondent determined that the Blakes realized income of 

$765,692, $1,127,853, and $1,199,727 for the subject years 

from Mr. Blake’s participation in the Sterling Plan. 

Petitioners in two of the other test cases are Mr. Mejia and 

his wholly owned C corporation, Netversity, Inc. (Netversity). 

Respondent disallowed a $50,000 deduction that Netversity 

claimed for 2006 with respect to a payment that it made to 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 5

3Former secs. 6241–6245 generally required that the shareholders of an 

S corporation challenge the Commissioner’s adjustments to an S corporation’s income in a single, corporate-level proceeding. However, the Small 

Business Job Protection Act of 1996, Pub. L. No. 104–188, sec. 1307(c)(1), 

110 Stat. at 1781, repealed those provisions for taxable years beginning 

after December 31, 1996. Respondent’s adjustments to Environmental’s income are therefore properly before us in this proceeding as adjustments to 

the income of Environmental’s owners. 

the Sterling Plan. Respondent determined that the Mejias 

realized $50,000 of income for 2006 from Mr. Mejia’s participation in the Sterling Plan. 

Petitioners in the remaining three test cases are Mr. 

Abramo, Mr. Brown, and Mr. Tomassetti, the equal owners 

of Code Environmental Services, Inc. (Environmental), an S 

corporation. Respondent disallowed deductions of $220,588, 

$236,667, and $237,309 that Environmental claimed for 

2005, 2006, and 2007, respectively, with respect to payments 

that it made to the Sterling Plan and increased each 

Environmental owner’s income by his share of the deductions. 3 For the subject years, the owners’ shares of the disallowed deductions were $73,529, $78,889, and $79,102 in 

the case of Mr. Abramo; $73,529, $78,889, and $79,103 in the 

case of Mr. Brown; and $73,529, $78,889, and $79,103 in the 

case of Mr. Tomassetti. Respondent also determined that 

each owner realized income from his participation in the 

Sterling Plan. For the respective years, this income was 

$188,797, $266,299, and $302,968 in the case of Mr. Abramo; 

$222,089, $304,978, and $346,515 in the case of Mr. Brown; 

and $199,454, $279,637, and $318,594 in the case of Mr. 

Tomassetti. 

We decide the following issues: 

(1) whether the life insurance policies issued on the lives 

of the shareholder/employees incident to their participation 

in the Sterling Plan were part of a split-dollar life insurance 

arrangement. We hold they were; 

(2) whether the corporate employers may deduct their 

payments to the Sterling Plan. We hold they may not; 

(3) whether the shareholder/employees must recognize 

income from their participation in the Sterling Plan. We hold 

they must to the extent stated; 
6 145 UNITED STATES TAX COURT REPORTS (1) 

(4) whether petitioners are liable for the accuracy-related 

penalties that respondent determined under section 6662(a). 

We hold they are; and 

(5) whether Our Country, the Abramos, the Browns, and 

the Tomassettis are liable for the accuracy-related penalties 

that respondent determined under section 6662A. We hold 

they are. 

FINDINGS OF FACT 

I. Background 

Some of the facts have been stipulated. The stipulations of 

fact and the facts drawn from stipulated exhibits are incorporated herein, and we find those facts accordingly. The parties have stipulated that an appeal of any or all of these 

cases would be to the Court of Appeals for the Seventh Circuit. 

II. Petitioners and Related Entities 

A. Our Country 

Our Country is a C corporation. Its business involves the 

manufacture and sale of store fixtures and the sale of 

antiques. It had eight full-time employees in each subject 

year. It had a post office box in Indiana that was its mailing 

address when its petition was filed. 

B. Blakes 

The Blakes are husband and wife. They resided in Ohio 

when their petition was filed. 

Mr. Blake was born on June 11, 1949, and graduated from 

college in 1971 with a degree in American history and 

government. He later worked for 24 years as a high school 

teacher, teaching American history, government, geography, 

psychology, sociology, and world history. He also worked in 

various nonprofessional jobs (e.g., as an antique dealer and 

as an auctioneer) during the summers of those 24 years. 

Mr. Blake started Our Country’s business incident to his 

dealing in antiques. He began working for Our Country on 

March 8, 1985, the day it was incorporated. He was the sole 

owner and president of Our Country during the subject 

years. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 7

C. Netversity 

Netversity is a C corporation. It had a mailing address in 

California when its petition was filed. Netversity is in the 

business of computer programming and consulting with 

respect to Internet applications. It had one to three full-time 

employees in 2006. 

D. Mejias 

The Mejias are husband and wife. They resided in California when their petition was filed. 

Mr. Mejia has a bachelor of science degree in electrical 

engineering. He worked in both the restaurant and banking 

businesses upon graduating from college. He later worked in 

an information systems management business. 

Mr. Mejia established Netversity in 1998, and he has 

worked there since. He was Netversity’s sole owner and 

president during 2006. 

E. Environmental 

Environmental is an S corporation. It is an environmental 

remediation company that cleans up contaminated sites. 

Mr. Abramo, Mr. Tomassetti, and Mr. Brown equally own 

Environmental. Mr. Tomassetti generally manages the financial side of Environmental’s business. Environmental’s other 

two owners manage its sales and nonfinancial operations. 

During the subject years Environmental employed approximately 25 individuals, including its owners. Fifteen of 

Environmental’s employees, including the owners, participated in the Sterling Plan. 

F. Abramos 

The Abramos are husband and wife. Mr. Abramo was born 

in August 1958. They resided in New Jersey when their petition was filed. 

G. Tomassettis 

The Tomassettis are husband and wife. They resided in 

New Jersey when their petition was filed. 

Mr. Tomassetti was born on September 23, 1956. He holds 

both a bachelor of science and a master’s degree in geology. 

He began working for Environmental in 1989. Before that, he 
8 145 UNITED STATES TAX COURT REPORTS (1) 

4 A third-party administrator administers benefit plans. 

worked as a geologist in the environmental industry and for 

two years worked as a financial planner. 

H. Browns 

The Browns are husband and wife. They resided in New 

Jersey when their petition was filed. 

Mr. Brown was born on December 18, 1952. 

III. Mr. Snyder and His Related Entities 

A. Mr. Snyder 

Ronald H. Snyder graduated from law school in 1982 and 

is admitted to the Utah State Bar. He is also licensed in various States to work as a third-party administrator and as an 

insurance salesman. 4 He was both a licensed and enrolled 

actuary from 1975 until recently. 

Mr. Snyder has worked with pension plans for over 30 

years, and he holds himself out as a specialist in, among 

other things, welfare benefit plans and the tax and labor 

aspects of employee benefit plans. Mr. Snyder was the 

actuary for the Sterling Plan from its inception, and he performed annual calculations, including valuations, for the plan 

which he shared with its participating employers. None of 

these valuations was peer reviewed. 

B. BCA and BSGLLC 

During the subject years Mr. Snyder and his family owned 

Benefits for Corporate America, Inc. (BCA), of which Mr. 

Snyder was president. Mr. Snyder and his wife, Christine, 

also owned a limited liability company named Benefit Strategies Group, LLC (BSGLLC). BSGLLC is a third-party 

administrator firm of which Mr. Snyder is the managing 

member. 

Benefit Strategies Group, Inc. (BSG), was Sterling Plan’s 

administrator from at least January 1, 2003, through the end 

of 2004. Mr. Snyder was BSG’s president. Between January 

1, 2005, and the end of the first quarter of 2007, BSGLLC 

purchased some of BSG’s assets, and BCA was Sterling 

Plan’s administrator from on or about January 1, 2005, 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 9

5The medical benefits under the Sterling Plan covered medical expenses 

that were not covered by Medicare, by an employer-provided health insurance policy, or by any other plan of health insurance. 

through 2007. BCA was also Sterling Plan’s sponsor during 

the subject years. 

IV. Sterling Plan 

A. Background 

In the early 1990s Mr. Snyder and two other attorneys 

began looking for a way for employers to fund greater benefits than pension plans allowed. Mr. Snyder established the 

Sterling Plan in October 2002 as a way for employers to fund 

and receive those greater benefits. During the first part of 

the subject years, the Sterling Plan’s trustee was Fifth Third 

Bank of Florida. National Advisers Trust was the Sterling 

Plan’s trustee during the rest of the subject years. 

The Sterling Plan ostensibly operates as a single welfare 

benefit plan which is an aggregation of separate multiple 

single employer welfare benefit plans under section 419(e). 

The Sterling Plan offers to pay various benefits, primarily 

death, medical, and disability benefits, during a participating 

employee’s current employment and/or retirement. 5 The 

Sterling Plan lets each participating employer select the 

extent of those benefits to be provided under a personal plan 

that the employer establishes to apply to its employees alone 

as part of the Sterling Plan. The Sterling Plan lets the 

employer select the general provisions applicable to its plan 

(e.g., the normal and early retirement dates, the number of 

annual hours that its employees must work to earn benefits 

under the plan), the participation requirements (e.g., minimum age, minimum number of years that its employees 

must work for the employer), and the vesting schedule for 

the benefits payable under the employer’s plan. 

A participating employer makes payments to the Sterling 

Plan that are used to fund the benefits that the Sterling Plan 

promises to pay to the employer’s participating employees. 

The payments may revert to the employer only in the 

atypical case where the payment results from a mistake of 

fact. Each employer singlehandedly sets the amount and the 

frequency of its payments to the Sterling Plan and the eligibility requirements for its employees to participate in the 
10 145 UNITED STATES TAX COURT REPORTS (1) 

Sterling Plan. Employees may (but are not required to) make 

payments to the Sterling Plan if their employer lets them, 

and any such payment that an employee makes is credited 

to his or her personal account that is maintained under the 

plan. 

B. Operation 

BSG and BCA executed revised and restated master plan 

documents for the Sterling Plan as of January 1, 2003, September 1, 2005, January 1, 2006, January 1, 2007, and 

August 1, 2007. These documents stated that employers 

established or adopted welfare benefit plans pursuant to the 

terms of the documents by executing adoption agreements. 

The adoption agreements let the employers set the specific 

provisions that applied to their plans. 

For each participating employer’s plan, the Sterling Plan 

maintains individual personal accounts for each of the 

employer’s participating employees. An employer’s payments 

to the Sterling Plan are apportioned into each of these 

accounts to provide benefits to the corresponding employee, 

to his or her dependent, and to his or her beneficiary. An 

employer may allow its employees to direct the investments 

of the funds in their accounts, and the balance in each 

account is adjusted as of each valuation date to reflect the 

investment earnings or losses with respect to the funds in 

the account. The amount in a nonvested account of any 

employee who terminates his or her employment with the 

employer is reallocated to the accounts of the employer’s 

remaining participating employees. The Sterling Plan will 

pay an employee the death, medical, and disability benefits 

that his or her employee selects only to the extent of the 

amount in the employee’s account. 

The Sterling Plan purchases a variety of life insurance 

products, including individual policies, group policies, cash 

value policies, and term policies in order to fund any benefit 

payable to the employees. Typically, the employer selects the 

insurance policies that it wants to use to fund the benefits 

payable to its employees, and each insurance policy that is 

purchased funds all of the benefits that are payable as to the 

employee covered by that policy. As of each valuation date, 

the administrator adds to an employee’s personal account the 

increase in cash value of any insurance policy that the Ster-
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 11

ling Plan holds with respect to the employee. The Sterling 

Plan does not set aside any specific amount as reserves for 

the postretirement benefits, and the Sterling Plan does not 

keep any payment that it receives for post-retirement benefits in a separate bank account. 

A participating employee may designate the beneficiary or 

beneficiaries to receive the death benefits payable under the 

Sterling Plan and the death proceeds of any life insurance 

policy maintained on the life of the employee. The amount of 

the death benefit payable as to an employee is the face 

amount of the insurance policy on the employee’s life, and 

that death benefit is payable in accordance with the terms of 

the insurance policy. An employee upon retiring from 

employment with the employer may elect to receive the paidup life insurance policy in satisfaction of a retirement death 

benefit. 

An employer at any time may discontinue making payments to the Sterling Plan or otherwise may terminate its 

participation in the Sterling Plan. If an employer does either, 

all amounts credited to an employee’s personal account 

become fully vested and the employer may not receive a 

refund or any other benefit. In the case of a termination, the 

administrator may distribute the assets in the employer’s 

plan to the participants or to their beneficiaries or generally 

direct that the assets remaining in the plan be applied to 

provide the employees or their beneficiaries with the benefits 

selected by the employer. If an employer stops making payments to the Sterling Plan, the employer may direct that the 

trustee (1) retain the plan assets for the employees pursuant 

to the provisions of the plan, (2) transfer the plan assets to 

a successor trustee, or (3) retain the assets for the benefit of 

the employees. 

Employers adopting the Sterling Plan were advised in 

writing that they might want to consult with various professionals (including attorneys and accountants) regarding their 

participation in the plan. 
12 145 UNITED STATES TAX COURT REPORTS (1) 

6 Among other things, Mr. Penner helped Mr. Blake start a family foundation. 

V. Our Country and the Blakes 

A. Mr. Blake’s Learning of the Sterling Plan 

1. Mr. Ringger and Mr. Reckard 

Steven R. Ringger is a certified public accountant (C.P.A.) 

who prepared the Blakes’ and Our Country’s income tax 

returns for the subject years. Mr. Ringger recommended the 

Sterling Plan to Mr. Blake before 2003. Mr. Blake disregarded that recommendation because Mr. Ringger was not 

a financial planner. 

Mr. Blake eventually invested in the Sterling Plan upon 

the recommendations of Corey Reckard, a C.P.A., who 

worked as an insurance agent/financial planner, and one of 

Mr. Reckard’s colleagues, Daniel Weilbaum. Mr. Blake and 

Mr. Reckard had been discussing Mr. Blake’s potential 

investment in life insurance (or in a similar product), and 

Mr. Reckard stressed to Mr. Blake that the Sterling Plan 

would allow him to accumulate value with favorable tax consequences and receive life insurance at no cost. Mr. Blake 

considered the Sterling Plan primarily to be a good financial 

investment and a way to defer taxes. Mr. Blake also viewed 

the Sterling Plan as a way to obtain long-term life insurance 

for himself and for his employees. 

Mr. Blake invested in the Sterling Plan, relying to a 

significant extent on his belief that Mr. Reckard was a 

licensed insurance agent who would not sell him an illegitimate product. Mr. Blake also presumed that Guardian Life 

Insurance Co. of America (Guardian), the insurance company 

that would issue the insurance on the lives of Our Country’s 

participating employees, was a licensed insurance company. 

Mr. Ringger did not advise either Our Country or the Blakes 

concerning their participation in the Sterling Plan. 

2. Mr. Penner 

Ted Penner is an experienced lawyer/C.P.A. and Mr. 

Blake’s longtime acquaintance. Mr. Penner specializes to a 

significant extent in estate planning. Mr. Penner had a history of rendering legal and business consulting services to 

Mr. Blake and Our Country, respectively, 6 when Mr. Blake 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 13

7 At or about the same time or shortly thereafter, Mr. Blake was told 

that the Sterling Plan was a ‘‘listed transaction’’ (discussed infra) and that 

the main purpose of the plan was to generate the payment of commissions 

on the sale of the related insurance policies. Mr. Blake discussed the matter with Mr. Ringger, Mr. Reckard, and at least one other individual. Mr. 

Blake considered terminating Our Country’s participation in the Sterling 

Plan but decided to stay with the plan. 

told Mr. Penner that he had invested in the Sterling Plan 

and wanted his advice as to that investment. Mr. Blake and 

Mr. Penner briefly discussed the Sterling Plan at that time. 

Mr. Penner is not an expert in welfare benefit plans; he does 

not purport to be an expert in welfare benefit plans; and he 

did not tell Mr. Blake that he was an expert in welfare benefit plans or in employee benefits. Mr. Penner has a limited 

knowledge and understanding of welfare benefit plans, and 

he considers them to be complex. 

In October 2004 after Mr. Blake had been in the Sterling 

Plan for approximately one year, Mr. Blake gave Mr. Penner 

certain documents relating to the Sterling Plan and they 

again discussed the plan but this time in more depth. Their 

discussion in 2004 occurred after Mr. Blake was contacted by 

both Mr. Reckard and promoters of other plans. 7 In or 

around October 2004 Mr. Penner informed Mr. Blake that 

his investment in the Sterling Plan would give him tax 

deductions and eventually lead to his receipt of his life insurance policy, but Mr. Penner did not tell Mr. Blake that the 

tax deductions were legitimate or whether the right to 

receive his insurance policy came with any unfavorable consequences. Mr. Penner advised Mr. Blake that the Sterling 

Plan from a conceptual point of view was beneficial to his 

long-term estate plans but was a risky venture. Mr. Penner 

did not review the actuarial computations or the annual 

reports that the Sterling Plan gave to Our Country, and he 

did not perform any reference checks on the Sterling Plan. 

B. Adoption Agreements 

1. Background 

Our Country adopted the Sterling Plan as of December 2, 

2003, and participated in the plan throughout the subject 

years. Our Country’s single employer plan was called the 

Our Country Home, Inc. Employee Welfare Benefit Plan. 
14 145 UNITED STATES TAX COURT REPORTS (1) 

8During the subject years no Our Country employee received from the 

Sterling Plan any payment for medical expenses. 

During 2004 and 2005 the trustee of Our Country’s plan was 

Fifth Third Bank of Florida. During 2007 and most (if not 

all) of 2006 the trustee of Our Country’s plan was National 

Advisors Trust. The trust underlying Our Country’s plan was 

neither a voluntary employee beneficiary association under 

section 501(c)(9) nor a grantor trust under sections 671–679. 

Our Country elected to make payments to the Sterling 

Plan in amounts that it desired. Our Country’s funding 

policy as to the Sterling Plan allowed its portion of the plan’s 

funds to be invested in the cash values of permanent life 

insurance policies and in variable annuities, mutual funds, 

interest-bearing checking and savings accounts, and stocks 

and bonds. Our Country employees did not make any payment to the Sterling Plan. 

2. Initial Adoption Agreement 

In its adoption agreement Our Country selected the preand the post-retirement death benefit options. Our Country 

selected a preretirement death benefit of 20 times compensation and did not provide a formula for determining the postretirement death benefit. Our Country set the normal retirement age at 59, with 5 years of participation. Mr. Blake 

selected his wife as his beneficiary under the Sterling Plan. 

3. Second Adoption Agreement 

On December 28, 2005, Our Country completed a second 

adoption agreement with an effective date of January 1, 

2005. Our Country selected pre- and post-retirement death 

benefit options and pre- and post-retirement death benefits of 

20 times compensation. 

4. Third Adoption Agreement 

On July 30, 2006, Our Country completed a third adoption 

agreement with an effective date of January 1, 2005. Our 

Country selected pre- and post-retirement death benefit 

options and the medical benefit option. 8 Our Country 

selected pre- and post-retirement death benefits of 20 times 

compensation. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 15

9To the extent that the employer’s payments to the Sterling Plan exceeded the cost of the insurance, the Sterling Plan invested those excess 

proceeds as directed by the employer. 

In the third adoption agreement Our Country changed the 

normal retirement age to 57, with 15 years of participation. 

Mr. Blake was then 57 years old, and the Sterling Plan 

reported him as 100% vested in his benefits following the 

change to the retirement age. By virtue of this change, Mr. 

Blake, upon retiring, was considered entitled to receive his 

paid-up life insurance policy from the Sterling Plan in full 

settlement of the life insurance benefits payable under the 

Sterling Plan. 

C. Life Insurance Policies 

1. Background 

Our Country Home, Inc. Employee Welfare Benefit Plan 

Trust purchased life insurance policies on the lives of Our 

Country’s employees, including Mr. Blake, with the payments that Our Country made to the Sterling Plan (for the 

benefit of the Our Country Home, Inc. Employee Welfare 

Benefit Plan). 9 Those policies were purchased from 

Guardian. Mr. Reckard was the insurance agent who 

arranged the purchases of the policies. 

2. Blake Policy 

One insurance policy was taken out on the life of Mr. 

Blake (Blake policy). This insurance policy was issued on 

January 27, 2004, as a whole life insurance policy with a face 

amount of $6.9 million. Both the owner and the beneficiary 

of this insurance policy were stated to be Fifth Third Bank 

of Florida, as trustee of the Sterling Plan. 

On the application for life insurance, Mr. Blake was 

required to, and did, answer various personal questions such 

as whether he intended to travel outside the United States; 

whether he had smoked or used tobacco products within the 

last two years; whether he had been charged with any motor 

vehicle moving violation or had had his driver’s license suspended or revoked within the last five years; and whether 

within the last three years he had participated in any highadventure activity such as piloting an aircraft, scuba diving, 

rock or mountain climbing, hang gliding, parachuting, or 
16 145 UNITED STATES TAX COURT REPORTS (1) 

10While the record does not establish the meaning of a class 6 rating, 

we understand it to be lower than a rating of preferred or preferred plus. 

motor vehicle racing. Mr. Blake also had to answer questions 

about his and his family’s medical history and to support 

those answers with the signature of a medical examiner. 

Guardian further required that Mr. Blake undergo a medical 

examination and that the results of that examination, as well 

as a copy of Mr. Blake’s driving record, be submitted as part 

of the application for the insurance policy. Guardian rated 

(e.g., as preferred, preferred plus, and class 6) Mr. Blake 

(and Our Country’s other employees who applied for insurance) for purposes of setting the premium payable on his 

(and their respective) insurance policy. Guardian rated Mr. 

Blake as a ‘‘class 6’’ 10 and offered to shop for reinsurance to 

lower the premium that would be attributable to that rating. 

On or about April 11, 2006, the owner of the Blake policy 

was changed from the trust for the Sterling Plan to the trust 

for the Our Country Home, Inc. Welfare Benefit Plan. 

3. Other Policies 

From 2005 through 2007 seven of Our Country’s employees 

(including Mr. Blake) participated in the Sterling Plan 

through the Our County Home, Inc. Welfare Benefit Plan. 

The other employees were Cindy Blake, Hope Holley, Sasha 

Hullinger, Chris Rohrbaugh, Randel Straka, and Elizabeth 

Krohn. The Sterling Plan purchased cash value life insurance 

policies for each of these employees but for Cindy Blake. 

D. Payments and Valuation 

1. 2005 

On December 28, 2005, Our Country paid $450,000 to Fifth 

Third Bank of Florida. The Sterling Plan treated this payment as an employer contribution to the Our County Home, 

Inc. Welfare Benefit Plan. On or after August 3, 2006, Mr. 

Snyder gave Mr. Blake, in his capacity as Our Country’s 

president, an ‘‘amended annual valuation report’’ showing 

that the amount of the allowable contribution was $450,000. 

The Sterling Plan initially used $32,061 of the $450,000 to 

pay the premium on additional paid-up insurance on the 

Blake policy. The Sterling Plan later used $417,245 of the 

$450,000 to pay the premiums on the life insurance policies 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 17

covering all of Our Country’s employees (including Mr. 

Blake). Of the $417,245, $323,606 was paid on the Blake 

policy. 

Under the Sterling Plan, as of December 31, 2005, both the 

pre- and the post-retirement death benefits payable on the 

Blake policy were $6.9 million. As of December 10, 2005, the 

cash value of the Blake policy was $90,694. 

2. 2006 

On December 27, 2006, Our Country paid $450,000 to 

National Advisors Trust, Inc. The Sterling Plan treated this 

payment as an employer contribution to the Our County 

Home, Inc. Welfare Benefit Plan. On March 21, 2008, Mr. 

Snyder gave Mr. Blake, in his capacity as Our Country’s 

president, an ‘‘amended annual valuation’’ for the 2006 plan 

year showing that the amount of the allowable contribution 

was $325,590. 

The Sterling Plan initially used $59,268 of the $450,000 

paid in 2006 to pay the premium on additional paid-up insurance on the Blake policy. The Sterling Plan later used 

$390,732 of the $450,000 to pay the premiums on the life 

insurance policies covering all of Our Country’s employees, 

including Mr. Blake. Of the $390,732, $323,606 was paid on 

the Blake policy. 

Under the Sterling plan, as of December 31, 2006, both the 

pre- and the post-retirement death benefits payable on the 

Blake policy were $6.9 million. As of December 10, 2006, the 

cash value of the Blake policy was $331,364. 

3. 2007 

On December 27, 2007, Our Country paid $150,000 to 

National Advisors Trust. The Sterling Plan treated $124,179 

of the $150,000 as an employer contribution to the Our 

County Home, Inc. Welfare Benefit Plan. On March 21, 2008, 

Mr. Snyder gave Mr. Blake, in his capacity as Our Country’s 

president, an ‘‘annual valuation’’ for the 2007 plan year 

showing that the amount of the allowable contribution was 

$124,179. 

The Sterling Plan did not use any of the $150,000 to pay 

a life insurance premium. Instead, an insurance policy loan 

was extended to cover the premium. The Plan eventually 
18 145 UNITED STATES TAX COURT REPORTS (1) 

used the $150,000 payment to repay a portion of the insurance policy loan on the Blake policy. 

Under the Sterling plan, as of December 31, 2007, both the 

pre- and the post-retirement death benefits payable on the 

Blake policy were $6.9 million. As of December 10, 2007, 

the cash value of the Blake policy was $616,612. 

E. Death Benefits of Employees Other Than Mr. Blake 

Our Country employees other than Mr. Blake also were 

entitled to pre- and post-retirement death benefits in each 

subject year. The death benefits for those employees were the 

same amount in each year and equaled the face amount of 

the life insurance policy taken out on his or her life as to 

each employee. Hope Holley’s benefit was $575,000. Sasha 

Hullinger’s benefit was $969,600. Chris Rohrbaugh’s benefit 

was $880,000. Randel Straka’s benefit was $946,000. Elizabeth Krohn’s benefit was $467,600. 

F. Tax Return Information 

1. Our Country 

a. 2005 

Our Country filed a Form 1120, U.S. Corporation Income 

Tax Return, for 2005. In that return Our Country claimed a 

$450,000 deduction for ‘‘employee benefit programs’’. Our 

Country did not disclose its participation in the Sterling 

Plan. Our Country reported that it had a taxable loss of 

$113,091 and that its Federal income tax was zero. 

b. 2006 

Our Country filed a Form 1120 for 2006. In that return 

Our Country deducted $450,000 for pension (or similar type 

of ) plans. Our Country did not disclose its participation in 

the Sterling Plan. Our Country reported taxable income of 

$14,378 and Federal income tax of $2,157. 

c. 2007 

Our Country filed a Form 1120 for 2007. In that return 

Our Country deducted $150,000 for pension (or similar type 

of ) plans. Our Country did not disclose its participation in 

the Sterling Plan. Our Country reported taxable income of 

$14,310 and Federal income tax of $2,147. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 19

On January 25, 2010, Our Country filed a Form 1120X, 

Amended U.S. Corporation Income Tax Return, for 2007. The 

only change reported on the amended return was the addition of a Form 8886, Reportable Transaction Disclosure 

Statement, disclosing as a ‘‘Protective Filing’’ Our Country’s 

participation in the Sterling Plan. 

2. The Blakes 

a. 2005 

The Blakes filed a joint Federal income tax return for 

2005. They did not report any income related to Mr. Blake’s 

participation in the Sterling Plan, and they did not disclose 

his participation in the Sterling Plan. The Blakes reported 

taxable income of $534,612 and total Federal income tax of 

$160,645. 

b. 2006 

The Blakes filed a joint Federal income tax return for 

2006. They did not report any income related to Mr. Blake’s 

participation in the Sterling Plan, and they did not disclose 

his participation in the Sterling Plan. The Blakes reported 

taxable income of $632,633 and total Federal income tax of 

$194,034. 

c. 2007 

The Blakes filed a joint Federal income tax return for 

2007. They did not report any income related to Mr. Blake’s 

participation in the Sterling Plan, and they did not disclose 

his participation in the Sterling Plan. The Blakes reported 

taxable income of $1,699,092 and total Federal income tax of 

$562,277. 

G. Deficiency Notices 

On August 19, 2010, respondent mailed a deficiency notice 

to the Blakes for the subject years. On the same day 

respondent mailed a deficiency notice to Our Country for the 

same years. The deficiency notice mailed to Our Country 

stated in relevant part that respondent had disallowed Our 

Country’s claimed deductions of the $450,000, $450,000, and 

$150,000 payments for 2005, 2006, and 2007, respectively, 

that it made to the Sterling Plan because the life insurance 
20 145 UNITED STATES TAX COURT REPORTS (1) 

arrangement was a split-dollar insurance arrangement subject to the ‘‘economic benefit regime rules’’, which disallow 

those deductions. The deficiency notice mailed to the Blakes 

stated in relevant part that the Blakes realized income of 

$765,692, $1,127,853, and $1,199,727 for the subject years 

from Mr. Blake’s participation in the Sterling Plan and that 

the authority for that income was sections 61, 72, 83, and 

402(b). 

VI. Netversity and the Mejias 

A. Learning of the Sterling Plan 

Javier Morgan is a C.P.A. He also is Mr. Mejia’s uncle. Mr. 

Morgan has been Mr. Mejia’s accountant since 1995 or 1996. 

Mr. Morgan told Mr. Mejia in 2005 or 2006 that he should 

invest in the Sterling Plan as part of his retirement plans. 

Mr. Mejia (1) did not ask Mr. Morgan whether he was an 

expert on welfare benefit plans, (2) did not ask Mr. Morgan 

what he reviewed to recommend the Sterling Plan, and (3) 

did not receive from Mr. Morgan any written opinion on the 

Sterling Plan. Mr. Mejia ‘‘blindly expected’’ that he was going 

to invest money in the Sterling Plan without any tax consequences. 

B. Adoption Agreement 

1. Background 

Netversity adopted the Sterling Plan as of January 1, 

2006. Netversity’s single employer plan was called the 

Netversity, Inc. Sterling Benefit Plan. The trust underlying 

Netversity’s single employer plan was neither a voluntary 

employee beneficiary association under section 501(c)(9) nor 

a grantor trust under sections 671–679. Netversity elected to 

make discretionary payments to the Sterling Plan, and Mr. 

Mejia was the only Netversity employee who participated in 

the Sterling Plan during 2006. 

2. Elections 

In its adoption agreement Netversity selected the pre- and 

post-retirement death benefit options as well as medical 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 21

11During 2006 no Netversity employee received from the Sterling Plan 

any payment for medical expenses. 

benefits. 11 Netversity selected a pre- and post-retirement 

death benefit of seven times annual compensation. 

C. Payment and Valuation 

On December 21, 2006, Netversity paid $50,000 to Fifth 

Third Bank of Florida, noting that the payment related to 

the Netversity, Inc. Sterling Benefit Plan. The Sterling Plan 

treated this payment as an employer contribution to the 

Netversity account maintained as part of the Sterling Plan. 

On or after July 6, 2007, Mr. Snyder gave Mr. Mejia on 

behalf of Netversity an annual valuation report showing that 

the amount of the allowable contribution was $50,000. 

Under the Sterling Plan, as of December 31, 2006, there 

was neither a pre- nor post-retirement death benefit payable 

upon Mr. Mejia’s death because the Sterling Plan had not yet 

purchased an insurance policy on his life. 

D. Tax Return Information 

1. Netversity 

Netversity filed a 2006 Form 1120 claiming a $50,000 

deduction for ‘‘employee benefit programs’’. Netversity did 

not disclose its participation in the Sterling Plan. Netversity 

reported taxable income of $23,715 and total Federal income 

tax of $3,557. 

2. Mejias 

The Mejias filed a joint Federal income tax return for 

2006. Mr. Morgan prepared the return. The Mejias did not 

report any income related to Mr. Mejia’s participation in the 

Sterling Plan, and they did not disclose his participation in 

the Sterling Plan. The Mejias reported taxable income of 

$486,388 and total Federal income tax of $151,304. 

E. Deficiency Notices 

On February 14, 2011, respondent mailed a deficiency 

notice to the Mejias for 2006. On the same day, respondent 

mailed a deficiency notice to Netversity for 2006. 

The deficiency notice mailed to Netversity stated in relevant part that respondent had disallowed Netversity’s 
22 145 UNITED STATES TAX COURT REPORTS (1) 

claimed deduction of the $50,000 payment that it made to 

the Sterling Plan during 2006 because the life insurance 

arrangement was a split-dollar insurance arrangement subject to the ‘‘economic benefit regime rules’’, which disallow 

that deduction. The deficiency notice mailed to the Mejias 

stated in relevant part that the Mejias realized income of 

$50,000 in 2006 on account of Mr. Mejia’s participation in the 

Sterling Plan and that the authority for that income was sections 61, 72, 79, 83, and 402(b). 

VII. Environmental and Its Owners 

A. Learning of the Sterling Plan 

1. Background 

a. Mr. Scutellaro 

Joseph Scutellaro is a C.P.A. and a general tax practitioner. He has prepared the tax returns of Environmental’s 

owners since 1994 or 1995. He also gave them tax advice 

during that period. Mr. Tomassetti relied upon Mr. 

Scutellaro to file his and Environment’s tax returns with the 

understanding that they were in compliance. 

b. Mr. Deavers 

In or about 1995 or 1996 Mr. Scutellaro was introduced to 

Doug Deavers, a benefits consultant in Naples, Florida, and 

to the concept of welfare benefit plans. Shortly thereafter, 

Mr. Tomassetti asked Mr. Scutellaro about ways to provide 

pretax benefits to employees. Mr. Scutellaro knew that Mr. 

Deavers offered his clients welfare benefit plans which provided pretax benefits, and Mr. Scutellaro introduced Mr. 

Tomassetti to Mr. Deavers as a potential investor in one of 

those plans. Environmental eventually joined one of Mr. 

Deavers’ plans. 

On or after July 31, 2000, while Environmental was 

participating in one of Mr. Deavers’ plans, Mr. Deavers concluded from the release of Neonatology Assocs., P.A. v. 

Commissioner, 115 T.C. 43, 98–99 (2000), aff ’d, 299 F.3d 221 

(3d Cir. 2002), and of other then-recent judicial opinions that 

his plans were no longer or had never been acceptable. Mr. 

Deavers subsequently contacted Mr. Tomassetti and 

informed him that he was no longer going to be admin-
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 23

istering his plans and introduced Mr. Tomassetti to Mr. 

Snyder. Mr. Tomassetti then learned about the Sterling Plan. 

Mr. Tomassetti believed that Mr. Snyder was a recognized 

professional in the matter of welfare benefit plans, and Mr. 

Tomassetti and Environmental’s other two owners contemplated investing in the Sterling Plan through Environmental. 

c. Environmental’s Owners’ Interest in the Sterling Plan 

Mr. Tomassetti was the point person for the Environmental owners regarding their potential investment in the 

Sterling Plan, and Mr. Tomassetti asked Mr. Scutellaro 

about the plan before investing in it. Mr. Scutellaro was not 

an expert in welfare benefit plans, and he did not represent 

to Mr. Tomassetti that he had expertise with welfare benefit 

plans. Mr. Scutellaro summarily reviewed the Sterling Plan 

documents and what he considered to be the applicable provisions of the Code and recommended to Mr. Tomassetti that 

Environmental switch to the Sterling Plan because Mr. 

Deavers was no longer supporting the plan that Environmental was then in. Mr. Scutellaro made that recommendation relying primarily on Mr. Snyder’s credentials and on certain written information that Mr. Snyder gave to him as to 

the plan. Mr. Scutellaro knew that the judiciary had sustained the Internal Revenue Service’s (IRS) disallowance of 

employer deductions in ‘‘a lot’’ of similar cases which involved 

welfare benefits but concluded on the basis of the materials 

that Mr. Snyder gave him that those cases were factually 

distinguishable. Mr. Scutellaro never received any tax 

opinion from anyone other than Mr. Snyder regarding the 

validity of the Sterling Plan or of the deductibility of the 

contributions. Mr. Scutellaro never gave to any of 

Environmental’s owners a written tax opinion regarding the 

validity of the Sterling Plan or of the deductibility of the contributions. 

Mr. Tomassetti relied solely on Mr. Scutellaro for advice 

and did not do any further investigation into the tax consequences of the Sterling Plan. In deciding to participate in 

the Sterling Plan, Mr. Tomassetti and Mr. Scutellaro relied 

on representations that Mr. Snyder made. 
24 145 UNITED STATES TAX COURT REPORTS (1) 

12 In 2007 Mr. Scutellaro learned that certain welfare benefit plans were 

‘‘listed transactions’’, discussed infra, participation in which had to be disclosed on Federal income tax returns. Mr. Snyder gave Mr. Scutellaro a 

memorandum stating why the Sterling Plan was not a listed transaction 

subject to that requirement. Mr. Scutellaro and Environmental’s owners 

opted not to disclose their participation in the Sterling Plan solely on the 

basis of the memorandum. 

13During the subject years no Environmental employee received from 

the Sterling Plan any payment for medical expenses. 

B. Adoption Agreements 

1. Background 

Environmental adopted the Sterling Plan as of November 

16, 2004. 12 Environmental’s single employer plan was called 

the Code Environmental Services, Inc. Employee Welfare 

Benefit Plan. Environmental elected to make payments to 

the Sterling Plan in amounts that Environmental selected. 

In 2004 and 2005 the trustee of the Code Environmental 

Services, Inc. Employee Welfare Benefit Plan was Fifth Third 

Bank of Florida. By March 2006 the trustee was National 

Advisors Trust. The trust underlying Environmental’s single 

employer plan was neither a voluntary employee beneficiary 

association under section 501(c)(9) nor a grantor trust under 

sections 671–679. 

2. Initial Adoption Agreement 

In its initial adoption agreement Environmental selected a 

preretirement death benefit option but did not specify the 

formula for determining the benefit. 

3. Second Adoption Agreement 

On November 28, 2006, Environmental completed a second 

adoption agreement, amending its earlier adoption agreement, with an effective date of January 1, 2005. In the 

second adoption agreement Environmental elected to make 

discretionary payments to the Sterling Plan. Environmental 

selected pre- and post-retirement death benefits and medical 

benefits. 13 Environmental selected pre- and post-retirement 

death benefits of five times compensation. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 25

C. Life Insurance Policies 

1. Mr. Abramo 

Fifth Third Bank of Florida purchased a Minnesota Mutual 

Life Insurance Co. (Minnesota Life) insurance policy on the 

life of Mr. Abramo (Abramo policy) for the Code Environmental Services, Inc. Employee Welfare Benefit Plan’s trust. 

The Abramo policy was issued on November 13, 1998, and 

reissued on March 13, 2004, and on January 13, 2005. The 

Abramo policy as reissued on March 13, 2004, was a variable 

adjustable life insurance policy with a face amount of $1 million. The beneficiary of the Abramo policy was the Sterling 

Trust. 

On the application for life insurance Mr. Abramo was 

required to, and he did, answer various personal questions 

such as whether he intended to travel outside the United 

States; whether within the last year he had missed any work 

on account of illness or injury; whether he had been charged 

with any motor vehicle moving violation or had had his 

driver’s license restricted or revoked within the last five 

years; and whether within the last five years he had participated in any high-adventure activity such as piloting an aircraft, underwater diving, mountain climbing, hang gliding, or 

motor vehicle racing. At the end of each subject year, Minnesota Life gave the Sterling Plan ‘‘tax information’’ for that 

year stating in part that ‘‘[o]ur records indicate that the 

[Abramo] policy listed above provided the insured with life 

insurance protection as part of a split-dollar arrangement in 

2005 [or 2006 or 2007, as applicable]. The IRS requires that 

the ‘‘economic benefit’’ of this coverage be reported as income 

for the tax year 2006 [or 2007 or 2008, as applicable].’’ 

As of November 13, 2005, 2006, and 2007, the cash values 

of the Abramo policy were $174,550, $238,799, and $298,659, 

respectively. 

2. Mr. Brown 

Fifth Third Bank of Florida purchased a Minnesota Life 

insurance policy on the life of Mr. Brown (Brown policy) for 

the Code Environmental Services, Inc. Employee Welfare 

Benefit Plan’s trust. The Brown policy was issued on 

November 13, 1998, and reissued on March 13, 2004, and 

December 13, 2004. The Brown policy as reissued on March 
26 145 UNITED STATES TAX COURT REPORTS (1) 

13, 2004, was a variable adjustable life insurance policy with 

a face amount of $1 million. The beneficiary of the Brown 

policy was the Sterling Trust. 

On the application for life insurance, Mr. Brown was 

required to, and he did, answer various personal questions 

such as whether he intended to travel outside the United 

States; whether within the last year he had missed any work 

on account of illness or injury; whether he had been charged 

with any motor vehicle moving violation or had had his 

driver’s license restricted or revoked within the last five 

years; and whether within the last five years he had participated in any high-adventure activity such as piloting an aircraft, underwater diving, mountain climbing, hang gliding, or 

motor vehicle racing. At the end of each subject year, Minnesota Life gave the Sterling Plan ‘‘tax information’’ for that 

year stating in part that ‘‘[o]ur records indicate that the 

[Brown] policy listed above provided the insured with life 

insurance protection as part of a split-dollar arrangement in 

2005 [or 2006 or 2007, as applicable]. The IRS requires that 

the ‘‘economic benefit’’ of this coverage be reported as income 

for the tax year 2006 [or 2007 or 2008, as applicable].’’ 

As of November 13, 2005, 2006, and 2007, the cash values 

of the Brown policy were $205,689, $276,082, and $341,847, 

respectively. 

3. Mr. Tomassetti 

Fifth Third Bank of Florida purchased a Minnesota Life 

insurance policy on the life of Mr. Tomassetti (Tomassetti 

policy) for the Code Environmental Services, Inc. Employee 

Welfare Benefit Plan’s trust. The Tomassetti policy was 

issued on October 24, 1998, and reissued on November 13, 

1998, March 13, 2004, and December 13, 2004. The 

Tomassetti policy as reissued on March 13, 2004, was a variable adjustable life insurance policy with a face amount of $1 

million. The beneficiary of the Tomassetti policy was the 

Sterling Trust. 

On the application for life insurance, Mr. Tomassetti was 

required to, and he did, answer various personal questions 

such as whether he intended to travel outside the United 

States; whether within the last year he had missed any work 

on account of illness or injury; whether he had been charged 

with any motor vehicle moving violation or had had his 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 27

driver’s license restricted or revoked within the last five 

years; and whether within the last five years he had participated in any high-adventure activity such as piloting an aircraft, underwater diving, mountain climbing, hang gliding, or 

motor vehicle racing. Mr. Tomassetti also had to answer 

questions about his and his family’s medical history. At the 

end of each subject year, Minnesota Life gave the Sterling 

Plan ‘‘tax information’’ for that year stating in part that ‘‘Our 

records indicate that the [Tomassetti] policy listed above provided the insured with life insurance protection as part of a 

split-dollar arrangement in 2005 [or 2006 or 2007, as 

applicable]. The IRS requires that the ‘‘economic benefit’’ of 

this coverage be reported as income for the tax year 2006 [or 

2007 or 2008, as applicable].’’ 

As of November 13, 2005, 2006, and 2007, the cash values 

of the Tomassetti policy were $184,629, $251,559, and 

$314,120, respectively. 

4. T. Tomassetti 

Thomas Tomassetti (T. Tomassetti) was a nonshareholder 

employee of Environmental. He was born on February 15, 

1963. 

Fifth Third Bank of Florida purchased a Minnesota Life 

insurance policy on the life of T. Tomassetti for the Code 

Environmental Services, Inc. Employee Welfare Benefit 

Plan’s trust. This insurance policy was issued on October 28, 

1998, and reissued on March 13, 2004, and on April 13, 2006. 

This insurance policy as reissued on March 13, 2004, was a 

variable adjustable life insurance policy with a face amount 

of $600,000. 

On the application for life insurance, T. Tomassetti was 

required to, and he did, answer various personal questions 

such as whether he intended to travel outside the United 

States; whether within the last year he had missed any work 

on account of illness or injury; whether he had been charged 

with any motor vehicle moving violation or had had his 

driver’s license restricted or revoked, within the last five 

years; and whether within the last five years he had participated in any high-adventure activity such as piloting an aircraft, underwater diving, mountain climbing, hang gliding, or 

motor vehicle racing. T. Tomassetti also had to answer questions about his and his family’s medical history. At the end 
28 145 UNITED STATES TAX COURT REPORTS (1) 

of each subject year, Minnesota Life gave the Sterling Plan 

‘‘tax information’’ for that year stating in part that ‘‘Our 

records indicate that the [T. Tomassetti] policy listed above 

provided the insured with life insurance protection as part of 

a split-dollar arrangement in 2005 [or 2006 or 2007, as 

applicable]. The IRS requires that the ‘‘economic benefit’’ of 

this coverage be reported as income for the tax year 2006 [or 

2007 or 2008, as applicable].’’ 

As of November 13, 2005, 2006, and 2007, the cash values 

of this insurance policy were $72,212, $90,021, and $105,685, 

respectively. 

5. Other Policies 

In addition to the policies on the lives of Mr. Abramo, Mr. 

Tomassetti, Mr. Brown, and T. Tomassetti, the Sterling Plan 

purchased cash value life insurance policies for some of 

Environmental’s other employees. These other employees 

included Frederick Andlauer, John McGinty, Martin Brubaker, William Dauber, and Warren Libutti. 

D. Payments and Valuations 

1. 2005 

On November 25, 2005, Environmental paid $96,621 to 

Fifth Third Bank of Florida, as trustee for the benefit of 

Environmental. On December 9, 2005, Environmental paid 

$123,967 to Fifth Third Bank of Florida, as trustee for the 

benefit of Environmental. The Sterling Plan treated the 

$220,588 in payments ($96,621 + $123,967) as employer contributions. On or after November 15, 2006, Mr. Snyder gave 

Mr. Tomassetti, on behalf of Environmental, an amended 

annual valuation report showing that the amount of the 

allowable contribution for 2005 was $220,588. 

The amended annual valuation report states that Environmental paid Mr. Abramo, Mr. Brown, and Mr. Tomassetti 

$144,000 compensation each for 2005. According to the formula in the second adoption agreement, Mr. Abramo, Mr. 

Brown, and Mr. Tomassetti were each entitled to a pre- and 

post-retirement death benefit in 2005 of $720,000 (i.e., five 

times their compensation of $144,000). Under the Sterling 

Plan, as of December 31, 2005, both the pre- and post-retire-
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 29

ment death benefits payable on each of the Abramo, Brown, 

and Tomassetti policies were $1 million. 

2. 2006 

On November 17, 2006, Environmental paid $170,639 to 

Fifth Third Bank of Florida, as trustee of the Sterling Plan 

for the benefit of Environmental. On December 15, 2006, 

Environmental paid $66,028 to Fifth Third Bank of Florida, 

as trustee of the Sterling Plan for the benefit of Environmental. The Sterling Plan treated the $236,667 in payments 

($170,639 + $66,028) as employer contributions. On or after 

May 15, 2007, Mr. Snyder gave Mr. Tomassetti, on behalf of 

Environmental, an annual valuation report showing that the 

amount of the allowable contribution for 2006 was $236,667. 

The amended annual valuation report states that Environmental paid Mr. Abramo, Mr. Brown, and Mr. Tomassetti 

$125,000 compensation each for 2006. According to the formula in the second adoption agreement, Mr. Abramo, Mr. 

Brown, and Mr. Tomassetti were each entitled to a pre- and 

post-retirement death benefit in 2006 of $625,000 (i.e., five 

times their compensation of $125,000). Under the Sterling 

Plan, as of December 31, 2006, both the pre- and post-retirement death benefits payable on each of the Abramo, Brown, 

and Tomassetti policies were $1 million. 

3. 2007 

On December 27, 2007, Environmental paid $237,309 to 

Fifth Third Bank of Florida, as trustee for the benefit of 

Environmental. The Sterling Plan treated the $237,309 payment as an employer contribution. On or after May 20, 2008, 

Mr. Snyder gave Mr. Tomassetti, on behalf of Environmental, 

an annual valuation report showing that the amount of the 

allowable contribution for 2007 was $237,309. 

The annual valuation report states that Environmental 

paid Mr. Abramo, Mr. Brown, and Mr. Tomassetti each 

$235,000 compensation for 2007. According to the formula in 

the second adoption agreement, Mr. Abramo, Mr. Brown, and 

Mr. Tomassetti were each entitled to a pre- and post-retirement death benefit in 2007 of $1,175,000 (i.e., five times 

their compensation of $235,000). Under the Sterling Plan, as 

of December 31, 2007, both the pre- and post-retirement 
30 145 UNITED STATES TAX COURT REPORTS (1) 

14While the formula in the second adoption agreement set Mr. Abramo’s, 

Mr. Brown’s, and Mr. Tomassetti’s death benefits for 2007 at $1,175,000, 

their death benefits were limited to $1 million because the face value of 

their life insurance policies was $1 million. 

death benefits payable on each of the Abramo, Brown, and 

Tomassetti policies were $1 million. 14

4. Payment of Premiums 

During the subject years the payments that Environmental 

made to the Code Environmental Services, Inc. Employee 

Welfare Benefit Plan were used, in part, to pay the premiums on the Abramo, Brown, and Tomassetti policies. 

E. Death Benefits of Nonshareholder Employees 

Environmental employees other than the three owners 

were entitled to pre- and post-retirement death benefits in 

each subject year. The death benefits for the following 

employees were the same amount as to each employee in 

each year and equaled the face amount of the life insurance 

policy taken out on his or her life: Frederick Andlauer’s benefit—$430,000; T. Tomassetti’s benefit—$600,000; Sharon 

Jarmon’s benefit—$165,555; John McGinty’s benefit— 

$450,000; David Runyon’s benefit—$178,000; Lino Ferrara’s 

benefit—$200,000; Ivona Cwiek’s benefit—$146,000; Martin 

Brubaker’s benefit—$850,000; and William Dauber’s benefit—$520,000. 

In addition to the just-mentioned Environmental 

employees, Warren Libutti was an Environmental employee 

from August 1, 1999, through October 21, 2005. For 2005 Mr. 

Libutti was entitled to pre- and post-retirement death benefits of $475,000. These benefits equaled the face amount of 

the life insurance policy taken out on his life. 

F. Tax Return Information 

1. Background 

Mr. Scutellaro’s accounting firm prepared Environmental’s 

and its owners’ Federal income tax returns for the subject 

years. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 31

2. Environmental 

a. 2005 

Environmental filed a 2005 Form 1120S, U.S. Income Tax 

Return for an S Corporation. Environmental deducted the 

$220,588 in payments that it made to the Sterling Plan 

during 2005 and did not disclose its participation in the Sterling Plan. 

b. 2006 

Environmental filed a 2006 Form 1120S. Environmental 

deducted $236,667 for contributions that it made to the Sterling Plan and did not disclose its participation in the Sterling 

Plan. 

c. 2007 

Environmental filed a 2007 Form 1120S. Environmental 

deducted $237,309 for contributions that it made to the Sterling Plan and did not disclose its participation in the Sterling 

Plan. 

3. Abramos 

a. 2005 

The Abramos filed a joint Federal income tax return for 

2005. In that return the Abramos did not report any income 

related to Mr. Abramo’s participation in the Sterling Plan 

and they did not disclose his participation in the plan. The 

Abramos reported ordinary business income of $191,556 as 

Mr. Abramo’s distributive share of income from Environmental. That business income was computed deducting the 

payments to the Sterling Plan. The Abramos reported taxable income of $170,051 and total Federal income tax of 

$37,426. 

The Abramos filed two Forms 1040X, Amended U.S. Individual Income Tax Returns, for 2005. Neither the first nor 

the second amended return reflected any change related to 

Mr. Abramo’s participation in the Sterling Plan. 

b. 2006 

The Abramos filed a joint Federal income tax return for 

2006. The Abramos did not report any income related to Mr. 

Abramo’s participation in the Sterling Plan, and they did not 
32 145 UNITED STATES TAX COURT REPORTS (1) 

disclose his participation in the plan. The Abramos reported 

ordinary business income of $209,871 as Mr. Abramo’s 

distributive share of income from Environmental. That business income was computed deducting the payments to the 

Sterling Plan. The Abramos reported taxable income of 

$405,147 and total Federal income tax of $119,088. 

The Abramos filed a 2006 Form 1040X. The 2006 amended 

return did not reflect any change related to Mr. Abramo’s 

participation in the Sterling Plan. 

c. 2007 

The Abramos filed a joint Federal income tax return for 

2007. In that return the Abramos did not report any income 

related to Mr. Abramo’s participation in the Sterling Plan 

and they did not disclose his participation in the plan. The 

Abramos reported ordinary business income of $422,074 as 

Mr. Abramo’s distributive share of income from Environmental. That business income was computed deducting the 

payments to the Sterling Plan. The Abramos reported taxable income of $378,954 and total Federal income tax of 

$116,457. 

The Abramos filed a 2007 Form 1040X. The 2007 amended 

return did not reflect any change related to Mr. Abramo’s 

participation in the Sterling Plan. 

4. Browns 

a. 2005 

The Browns filed a joint Federal income tax return for 

2005. The Browns did not report any income related to Mr. 

Brown’s participation in the Sterling Plan, and they did not 

disclose his participation in the plan. The Browns reported 

ordinary business income of $191,556 as Mr. Brown’s 

distributive share of income from Environmental. That business income was computed deducting the payments to the 

Sterling Plan. The Browns reported taxable income of 

$95,192 and total Federal income tax of $19,863. 

The Browns filed a 2005 Form 1040X. The 2005 amended 

return did not reflect any change related to Mr. Brown’s 

participation in the Sterling Plan. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 33

b. 2006 

The Browns filed a joint Federal income tax return for 

2006. The Browns did not report any income related to Mr. 

Brown’s participation in the Sterling Plan, and they did not 

disclose his participation in the plan. The Browns reported 

ordinary business income of $209,872 as Mr. Brown’s 

distributive share of ordinary business income from Environmental. That business income was computed deducting the 

payments to the Sterling Plan. The Browns reported taxable 

income of $376,541 and total Federal income tax of $109,079. 

The Browns filed a 2006 Form 1040X. The 2006 amended 

return did not reflect any change related to Mr. Brown’s 

participation in the Sterling Plan. 

c. 2007 

The Browns filed a joint Federal income tax return for 

2007. The Browns did not report any income related to Mr. 

Brown’s participation in the Sterling Plan, and they did not 

disclose his participation in the plan. The Browns reported 

ordinary business income of $422,074 as Mr. Brown’s 

distributive share of income from Environmental. That business income was computed deducting the payments to the 

Sterling Plan. The Browns reported taxable income of 

$366,691 and total Federal income tax of $112,176. 

The Browns filed a 2007 Form 1040X. The 2007 amended 

return did not reflect any change related to Mr. Brown’s 

participation in the Sterling Plan. 

5. Tomassettis 

a. 2005 

The Tomassettis filed a joint Federal income tax return for 

2005. In that return, the Tomassettis did not report any 

income related to Mr. Tomassetti’s participation in the Sterling Plan and they did not disclose his participation in the 

plan. The Tomassettis reported ordinary business income of 

$191,556 as Mr. Tomassetti’s distributive share of income 

from Environmental. That business income was computed 

deducting the payments to the Sterling Plan. The 

Tomassettis reported taxable income of $132,286 and total 

Federal income tax of $31,949. 
34 145 UNITED STATES TAX COURT REPORTS (1) 

The Tomassettis filed a 2005 Form 1040X. The 2005 

amended return did not reflect any change related to Mr. 

Tomassetti’s participation in the Sterling Plan. 

b. 2006 

The Tomassettis filed a joint Federal income tax return for 

2006. The Tomassettis did not report any income related to 

Mr. Tomassetti’s participation in the Sterling Plan, and they 

did not disclose his participation in the plan. The 

Tomassettis reported ordinary business income of $209,872 

as Mr. Tomassetti’s distributive share of ordinary business 

income from Environmental. That business income was computed deducting the payments to the Sterling Plan. The 

Tomassettis reported taxable income of $377,428 and total 

Federal income tax of $110,928. 

The Tomassettis filed a 2006 Form 1040X. The 2006 

amended return did not reflect any change related to Mr. 

Tomassetti’s participation in the Sterling Plan. 

c. 2007 

The Tomassettis filed a joint Federal income tax return for 

2007. In that return the Tomassettis did not report any 

income related to Mr. Tomassetti’s participation in the Sterling Plan and they did not disclose his participation in the 

plan. The Tomassettis reported ordinary business income of 

$422,076 as Mr. Tomassetti’s distributive share of income 

from Environmental. That business income was computed 

deducting the payments to the Sterling Plan. The 

Tomassettis reported taxable income of $357,456 and total 

Federal income tax of $112,849. 

The Tomassettis filed a 2007 Form 1040X. The 2007 

amended return did not reflect any change related to Mr. 

Tomassetti’s participation in the Sterling Plan. 

G. Deficiency Notices 

On March 2, 2011, respondent mailed deficiency notices for 

the subject years to the Abramos, the Browns, and the 

Tomassettis. 

Each deficiency notice stated in relevant part that 

respondent had disallowed for the subject years 

Environmental’s claimed deductions of $220,588, $236,667, 

and $237,309, respectively, for payments that it made to the 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 35

Sterling Plan because the life insurance arrangement was a 

split-dollar insurance arrangement subject to the ‘‘economic 

benefit regime rules’’, which disallow those deductions. The 

notices further stated as to this point that respondent had 

increased the income of each of Environmental’s owners by 

his share of the disallowed deductions and that, for the 

respective years, the owners’ shares of the disallowed deductions were $73,529, $78,889, and $79,103, respectively, in the 

case of Mr. Abramo; $73,529, $78,889, and $79,103, in the 

case of Mr. Brown; and $73,529, $78,889, and $79,103 in 

the case of Mr. Tomassetti. 

The deficiency notices also stated in relevant part that 

each of the three owners had realized income on account of 

his participation in the Sterling Plan and that the authority 

for that income was sections 61, 72, 79, 83, 402(b), and 

707(c). The notices further stated as to this point that for the 

respective years, that income was $188,797, $266,299, and 

$302,968, respectively, in the case of Mr. Abramo; $222,089, 

$304,978, and $346,515 in the case of Mr. Brown; and 

$199,454, $279,637, and $318,594 in the case of Mr. 

Tomassetti. 

OPINION 

I. Overview 

Our Nation’s Federal income tax laws, coupled with the 

reality that all accessions to wealth are generally reduced 

significantly by the amount of Federal income taxes imposed 

thereon, sometimes inspire taxpayers to seek out ways to 

shelter their income from taxation. Taxpayers have no patriotic responsibility to pay an amount of Federal income tax 

greater than that which Congress imposes, and taxpayers 

may structure their business and personal affairs to take 

advantage of legitimate tax shelters that will reduce the 

amounts of Federal income tax that they would otherwise 

pay absent the use of the shelters. See Helvering v. Gregory, 

69 F.2d 809, 810 (2d Cir. 1934), aff ’d, 293 U.S. 465 (1935). 

Promoters of tax shelters obviously know that taxpayers 

generally desire to pay less Federal income tax rather than 

more, and such promoters regularly devise novel (and on 

many occasions highly technical) tax shelters which they represent are legitimate tax-saving strategies. As is true when 
36 145 UNITED STATES TAX COURT REPORTS (1) 

seeking to enter into any novel or atypical venture, taxpayers 

seeking to implement a novel or an atypical tax-saving 

strategy should proceed with caution and with proper independent professional guidance. ‘‘[T]hat which we call a rose 

[b]y any other name would smell as sweet’’, William Shakespeare, Romeo and Juliet, act 2, sc. 2, 43–44, but a taxpayer’s use of an illegitimate tax shelter marketed as a legitimate tax shelter will not. A taxpayer who uses an illegitimate tax shelter may, for example, eventually be called 

upon to pay not only the Federal income tax that the taxpayer would have paid had the tax shelter not been used, but 

significant amounts of interest and penalties to boot. While 

it would be nice if all tax shelters advertised as legitimate 

tax shelters were indeed legitimate, the fact of the matter is 

that not all marketed tax shelters are legitimate. Taxpayers 

who invest in tax shelters should be mindful that the statements of promoters as to the legitimacy of tax shelters carry 

no weight in the final say as to the true tax consequences 

that flow from the shelters. For it is only the judiciary that 

can say definitively that the tax consequences that flow from 

a promoted tax-savings strategy are indeed legitimate. Cf. 

Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803) (‘‘It 

is emphatically the province and duty of the judicial department to say what the law is.’’). 

The parties dispute the tax consequences that flow from 

the Sterling Plan, a plan that promotes the purchase of life 

insurance products and the payment of commissions thereon 

in the setting of a coupled tax-saving and tax-deferral 

strategy. The shareholder/employees generally caused their 

corporations to invest in the Sterling Plan with the assurance that the investments would safeguard their designated 

beneficiaries if the shareholder/employees died during the 

insurance policy year and allow the shareholder/employees to 

receive the significant cash value of the policies if, as they 

more likely expected, they did not die during that time. The 

corporations essentially deducted the payments of the premiums on the life insurance policies through their deductions 

of their payments to the Sterling Plan, and the shareholder/ 

employees recognized no income corresponding to those 

deductions. The shareholder/employees, in fact, recognized no 

income at all from their participation in the Sterling Plan. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 37

15 Respondent does not assert that Netversity’s and Mr. Mejia’s participation in the Sterling Plan was part of a split-dollar life insurance arrangement. This is most likely because Netversity during or before 2006 

did not cause life insurance to be issued as to any of its employees. As discussed infra, a split-dollar life insurance arrangement requires the 

issuance of life insurance. 16 Respondent argues secondarily that the Sterling Plan is generally a 

shareholder arrangement under sec. 1.61–22(b)(2)(iii), Income Tax Regs. 

We need not and do not address that argument. 

Respondent determined that the corporations were not 

entitled to deduct their payments to the Sterling Plan. Further, respondent determined, the shareholder/employees 

failed to recognize income from their participation in the 

Sterling Plan. Petitioners disagree with those determinations 

and have brought the matter before this Court. In addition, 

the parties agree that petitioners bear the burden of proof 

except with respect to the accuracy-related penalties that 

respondent determined applied to the noncorporate petitioners. Further, the parties agree that the noncorporate 

petitioners bear the burden of persuasion as to the accuracyrelated penalties related to them but that respondent first 

bears a burden of production as to those items. 

II. Compensatory Split-Dollar Life Insurance Arrangements 

A. Overview 

Respondent determined that Our Country’s participation 

and Environmental’s participation in the Sterling Plan are 

parts of split-dollar life insurance arrangements. 15 To that 

end, respondent primarily asserts each life insurance 

arrangement underlying that participation meets the threeprong definition of a ‘‘compensatory arrangement’’ set forth 

in the special rule of section 1.61–22(b)(2)(ii), Income Tax 

Regs. 16 Petitioners argue that the life insurance arrangements fail all of those prongs. As petitioners see it, the Sterling Plan is a permissible welfare benefit plan that holds the 

funds and administers the benefits for its participating 

employers’ single employer welfare benefit plans. Petitioners 

add that a finding that the Sterling Plan is not a permissible 

welfare benefit plan may result in unfavorable tax consequences to the nonparty employees of Our Country and of 

Environmental. Petitioners invite the Court to construe the 

applicable law taking that possibility into account. We con-
38 145 UNITED STATES TAX COURT REPORTS (1) 

17Sec. 1.61–22(b)(1), Income Tax Regs., provides: 

A split-dollar life insurance arrangement is any arrangement between 

an owner and a non-owner of a life insurance contract that satisfies the 

following criteria— 

(i) Either party to the arrangement pays, directly or indirectly, all or 

any portion of the premiums on the life insurance contract, including a 

payment by means of a loan to the other party that is secured by the 

life insurance contract; 

(ii) At least one of the parties to the arrangement paying premiums 

under paragraph (b)(1)(i) of this section is entitled to recover (either conditionally or unconditionally) all or any portion of those premiums and 

such recovery is to be made from, or is secured by, the proceeds of the 

life insurance contract; and 

(iii) The arrangement is not part of a group term life insurance plan 

described in section 79 unless the group term life insurance plan provides permanent benefits to employees (as defined in § 1.79–0). 

clude on the basis of a plain meaning application of the law 

(and with no need to consider or to discuss the consequences 

of our conclusion for the nonparty employees) that Our Country’s participation and Environmental’s participation in the 

Sterling Plan are compensatory arrangements that make 

them split-dollar life insurance arrangements. 

In general, a split-dollar life insurance arrangement is any 

arrangement between an owner and a nonowner of a life 

insurance contract that meets the rules set forth in section 

1.61–22(b)(1), Income Tax Regs. 17 See sec. 1.61–22(b)(1), 

Income Tax Regs. These rules essentially describe a splitdollar life insurance arrangement as any arrangement 

between an owner and a nonowner of a life insurance contract, other than an arrangement that is group term life 

insurance, where one party pays the premiums and is entitled to recover all or a portion of the premiums from the proceeds of the life insurance contract. See generally Cadwell v. 

Commissioner, 136 T.C. 38, 63–64 (2011), aff ’d, 483 F. App’x 

847 (4th Cir. 2012). Section 1.61–22, Income Tax Regs., is 

effective for split-dollar life insurance arrangements entered 

into after September 17, 2003, and an arrangement that is 

‘‘materially modified’’ after that date is generally considered 

to be ‘‘entered into’’ after that date. Sec. 1.61–22(j)(1) and 

(2)(i), Income Tax Regs. The parties agree that the life insurance arrangements at hand were entered into after September 17, 2003, for purposes of section 1.61–22, Income Tax 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 39

18On September 18, 2013, the Court ordered each party to file a memorandum that set forth their and his understanding of, and positions as to, 

the issues of fact and law to be decided in these cases. The order stated 

that the parties were precluded from advancing positions not included in 

the memorandums. Petitioners filed their memorandum on February 12, 

2014, and supplemented their memorandum on March 6, 2014. Petitioners’ 

memorandum, as supplemented, does not challenge the applicability of sec. 

1.61–22, Income Tax Regs., to these cases. To the contrary, petitioners’ 

supplement informs the Court that ‘‘[p]etitioners agree with Respondent 

that the arrangements were entered into after September 17, 2003’’, for 

purposes of sec. 1.61–22, Income Tax Regs. Petitioners in their opening 

brief now invite the Court to decide whether the life insurance arrangements involving Environmental were entered into after September 17, 

2003, for purposes of the effective date provision. We decline that invitation. Petitioners did not in their memorandum raise the applicability of the 

referenced regulations as an issue with respect to Environmental, and we 

therefore consider petitioners to have waived or otherwise to have abandoned any such argument. 

Regs., and that section 1.61–22, Income Tax Regs., applies to 

these cases. 18

As an exception to the general rule of section 1.61–22(b)(1), 

Income Tax Regs., an arrangement between an owner and a 

nonowner of a life insurance contract is a split-dollar life 

insurance arrangement if it is either a compensatory 

arrangement or a shareholder arrangement under the special 

rules of section 1.61–22(b)(2)(ii) and (iii), Income Tax Regs., 

respectively. See id. subdiv. (i). An arrangement is a compensatory arrangement if it meets each prong of a three-prong 

test. See id. subdiv. (ii). The first prong requires that the 

arrangement be ‘‘entered into in connection with the 

performance of services and * * * not [as] part of a group 

term life insurance plan described in section 79’’. Id. subdiv. 

(ii)(A). The second prong requires that ‘‘[t]he employer or 

service recipient pays, directly or indirectly, all or any portion of the premiums’’. Id. subdiv. (ii)(B). The third prong 

requires that either ‘‘(1) The beneficiary of all or any portion 

of the death benefit is designated by the employee or service 

provider or is any person whom the employee or service provider would reasonably be expected to designate as the beneficiary; or (2) The employee or service provider has any 

interest in the policy cash value of the life insurance contract.’’ Id. subdiv. (ii)(C). A compensatory (or shareholder) 

arrangement that falls within the special rule is a split-dollar 

life insurance arrangement even if it does not meet the gen-
40 145 UNITED STATES TAX COURT REPORTS (1) 

eral rule of section 1.61–22(b)(1), Income Tax Regs. See id. 

subdiv. (i). 

B. Owner of Policies 

The owner of a life insurance contract is generally the person that the insurance contract names as the owner. See id. 

para. (c)(1)(i). Notwithstanding this general rule, however, an 

employer is considered to be the owner of a life insurance 

contract under a split-dollar life insurance arrangement 

entered into in connection with the performance of services 

if the insurance policy is owned by, inter alia, a trust 

described in section 402(b) or a welfare benefit fund 

described in section 419(e)(1). See id. subdiv. (iii)(A), (C). 

A nonowner is any person other than an owner of the life 

insurance policy who has a direct or indirect interest in the 

insurance policy. See sec. 1.61–22(c)(2), Income Tax Regs. 

The parties agree that the relevant corporate employers here, 

Our Country and Environmental, are treated as the owners 

of the life insurance policies at hand for purposes of section 

1.61–22(b)(2)(i), Income Tax Regs. 

C. Our Country and Environmental Single Employer Plans 

The life insurance arrangements related to the Our 

Country and the Environmental single employer plans are 

split-dollar life insurance arrangements in that they are 

compensatory arrangements within the meaning of the special rule. They fall within the special rule because each prong 

of the three-prong test is met as to the arrangements. First, 

each of those single employer plans provided life insurance 

benefits to the employees in exchange for their performance 

of services, and the benefits were not provided as part of a 

group term life insurance plan described in section 79. 

Second, each single employer plan paid the premiums on the 

life insurance policies through the employer’s payments to 

the Sterling Plan. Third, the employees participating in the 

single employer plans designated the beneficiaries of the 

death benefits payable under the plans, which in substance 

were the death benefits payable under the insurance policies. 

We also find as to the third prong that the employees in each 

single employer plan had an interest in the cash value of the 

respective life insurance policies that covered them. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 41

19Sec. 1.79–1(a), Income Tax Regs., provides: 

(a) What is group-term life insurance?—Life insurance is not groupterm life insurance for purposes of section 79 unless it meets the following conditions: 

(1) It provides a general death benefit that is excludable from gross 

income under section 101(a). 

(2) It is provided to a group of employees. 

(3) It is provided under a policy carried directly or indirectly by the 

employer. 

(4) The amount of insurance provided to each employee is computed 

under a formula that precludes individual selection. This formula must 

be based on factors such as age, years of service, compensation, or position. This condition may be satisfied even if the amount of insurance 

provided is determined under a limited number of alternative schedules 

that are based on the amount each employee elects to contribute. However, the amount of insurance provided under each schedule must be 

computed under a formula that precludes individual selection. 

Petitioners argue that the first prong of the three-prong 

test fails to be met because, they assert, the Sterling Plan is 

part of a group term life insurance plan within the meaning 

of section 79. To that end, petitioners assert that the amount 

of life insurance is based on the compensation paid to the 

employee, without regard to any employee’s health. We disagree with petitioners’ assertion that the Sterling Plan’s life 

insurance benefit is part of a group term life insurance plan 

within the meaning of section 79. 

The life insurance policies are not group term life insurance policies for Federal income tax purposes. Section 1.79– 

1(a), Income Tax Regs., sets forth the conditions that must 

be met for life insurance to be characterized as group term 

life insurance, 19 and at least one of those conditions is not 

met. Specifically, the record does not establish that ‘‘[t]he 

amount of insurance provided to each employee is computed 

under a formula that precludes individual selection.’’ Id. 

subpara. (4). 

The regulations do not define the term ‘‘individual selection’’ for purposes of section 1.79–1(a)(4), Income Tax Regs. 

As petitioners see it, the amount of insurance that the Sterling Plan provided to each participating employee was computed under a formula that precluded individual selection 

because the formula mechanically ascertained the amount of 

that insurance on the basis of each participating employee’s 

compensation. Respondent argues that the amount of insur-
42 145 UNITED STATES TAX COURT REPORTS (1) 

ance that the Sterling Plan provided to each participating 

employee depended on individual selection. To that end, 

respondent asserts the death benefits provided to the shareholder/employees were on many occasions larger than the 

death benefits as ascertained by the formula. Respondent 

also states that individual selection is found in the fact that 

the issuance of the life insurance policies as to each shareholder/employee was based upon the underwriting criteria for 

that employee. 

We conclude that the issuance of the insurance policies on 

the lives of Our Country and Environmental shareholder/ 

employees (and as it appears on the lives of all of the Our 

Country and the Environmental participating employees) 

was based on individual selection. While the employers 

participating in the Sterling Plan formally set the amount of 

life insurance provided to their employees as a multiple of 

compensation, the mere fact that the Sterling Plan stated on 

its face that it would pay death benefits in amounts that 

turn on employee compensation does not necessarily mean 

that the underlying life insurance is group term life insurance. The life insurance issued as to the Our Country and 

the Environmental shareholder/employees was not group 

term life insurance given our finding above that the multipleof-compensation formula did not actually correspond to death 

benefits payable and otherwise failed to always limit the 

amount of insurance that actually was provided to those 

shareholder/employees. Cf. Towne v. Commissioner, 78 T.C. 

791 (1982) (holding that an insurance policy was not part of 

a group term life insurance plan because it individually 

selected only the company’s president as a participant to 

receive excess insurance). 

We also agree with respondent’s argument that the life 

insurance related to Our Country and Environmental was 

not group term life insurance because the issuance of the 

insurance took into account the personal risks characteristics 

of at least those corporations’ shareholder/employees (and 

most likely all of those corporations’ participating 

employees). In Towne v. Commissioner, 78 T.C. at 799–800, 

the Court discussed the genesis of the ‘‘individual selection’’ 

test and noted that individual selection has never been 

allowed to occur in the case of group term life insurance. The 

Court explained: 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 43

20The life insurance polices related to Our Country also fail to qualify 

as group term life insurance because the insurance was not provided in 

any of the subject years to at least 10 of Our Country’s full-time employees. See sec. 1.79–1(c)(1), Income Tax Regs. (stating that life insurance 

fails to qualify as group term life insurance under sec. 79 where the 

Continued 

The reason why the insurance industry has traditionally defined group 

insurance as not including policies of insurance providing for individual 

selection is that a group insurer has less opportunity to exercise underwriting judgment with respect to particular persons in the group. Group 

insurance is usually issued without medical examination or other evidence of insurability. If there were no requirement that the amount of 

insurance per participant be determined under some formula applicable 

to all the employees, there would necessarily be adverse selection 

against the insurance company because the older employees and those 

in poor health would naturally take disproportionately large amounts of 

insurance. * * * [Id. at 799 n.5; citations omitted.] 

Guardian and Minnesota Life required that the Our 

Country and Environmental shareholder/employees tender 

information on their health, traveling tendencies, and/or 

driving traits. The need to submit that type of personal 

information as a condition to receiving the insurance strongly 

suggests, and we find, that the insurers were exercising 

underwriting judgment with respect to at least the Our 

Country and Environmental shareholder/employees in 

connection with the issuance of the life insurance related to 

them. This finding is further strengthened by the fact that, 

in the case of Guardian at least, Guardian specifically rated 

each of Our Country’s participating employees for purposes 

of setting the premiums payable on their policies and offered 

to try to find a way to reduce the premium attributable to 

the Blake policy. The mere fact that an insurer such as 

Guardian or Minnesota Life may add up the premiums that 

apply to separate policies that it sells on a specific group of 

insureds and then tender the total as the amount due on a 

‘‘group policy’’ does not necessarily recharacterize the separate policies as part of a single group term life insurance 

plan. Instead, as we have stated, the exercise of underwriting 

judgment with respect to the specific persons in a group is 

indicative of the issuance of individual insurance policies 

rather than group policies. We hold that the insurance policies at hand are not group term life insurance policies for 

Federal income tax purposes. 20
44 145 UNITED STATES TAX COURT REPORTS (1) 

insurance is not provided during the calendar year to 10 or more full-time 

employees). While the regulations go on to state that this 10-or-more employee rule may be avoided where coverage is provided to all full-time 

employees, see sec. 1.79–1(c)(2), Income Tax Regs., the record fails to establish that all of Our Country’s full-time employees were covered by the Sterling Plan. 

Petitioners make no specific argument as to the second 

prong of the three-prong test. They argue that the third 

prong is not met because, they assert, the employees do not 

designate the beneficiaries. Petitioners also assert that the 

employees have no direct or indirect interest in the life insurance policies, including the cash values thereof. We disagree 

on both points. 

The third prong is met if the employees who participated 

in the Sterling Plan either designated the beneficiaries of the 

life insurance policies or had an interest in the cash value of 

those policies. Our Country and Environmental shareholder/ 

employees both designated the beneficiaries of the death benefit payable under the policies on their lives and had 

interests in those policies. 

The shareholder/employees named the beneficiaries of the 

death benefits payable under their insurance policies by designating through the Sterling Plan the individuals who 

would receive the death benefits under the plan, which, in 

turn were the death benefits under the policy. In addition, 

those shareholder/employees were assured that their designated beneficiaries would receive any death benefits payable on those policies to the extent that the shareholder/ 

employees died while participants in the plan. Petitioners 

seek a contrary holding essentially by looking at the life 

insurance policies through the wider end of a telescope 

towards its narrower end and seeing that the Sterling Plan 

is named as the beneficiary on the policies. They conclude 

from this view that none of the individuals who the participating employees designate to receive the death benefits payable by the Sterling Plan is ‘‘[t]he beneficiary of all or any 

portion on the death benefit’’ for purposes of section 1.61– 

22(b)(2)(ii)(C), Income Tax Regs. We, on the other hand, look 

telescopically at the life insurance benefit from the narrower 

end towards the wider end, as one commonly does, and see 

the ultimate recipient of the death proceeds as the person 

designated by the shareholder/employees. The fact that the 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 45

death proceeds from the life insurance policies are funneled 

through the Sterling Plan to each of the ultimate recipients 

does not blur our view (or our conclusion) that each of those 

recipients is the beneficiary of the death benefit for purposes 

of section 1.61–22(b)(2)(ii)(C), Income Tax Regs. Cf. Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945) (‘‘To 

permit the true nature of a transaction to be disguised by 

mere formalisms * * * would seriously impair the effective 

administration of the tax policies of Congress.’’); Minn. Tea 

Co. v. Helvering, 302 U.S. 609, 613 (1938) (‘‘A given result at 

the end of a straight path is not made a different result 

because reached by following a devious path.’’). The light at 

the end of the tunnel brightly illuminates our conclusion, 

given that the Sterling Plan would pay no death benefit were 

it not for the life insurance policies, and the employee to 

whom a policy relates, rather than the Sterling Plan, is 

assured of receiving the entire amount that is payable under 

the terms of the policy. 

We also conclude that the shareholder/employees of Our 

Country and Environmental had interests in the their life 

insurance policies and the cash values thereof. This conclusion is supported by at least five facts. First, each life insurance policy and any funds related thereto were intended to 

be received by the corresponding employee or his or her designee(s) and no one else, and those employees were the only 

ones who had the right to receive or otherwise to redirect to 

someone else the cash value of the life insurance policies 

related to them. Second, the employees could elect to receive 

their policies upon retiring from employment with the 

employer. Third, the funds in the Sterling Plan could not be 

accessed by either the employer or by the employer’s creditors, and Our Country and the Environmental employees, 

upon retiring or alternatively upon their employers’ ceasing 

participation in the Sterling Plan, were certain to get those 

funds in the form of the policies that then passed to the 

employees. Fourth, a participating employee, before actually 

receiving the funds in his or her account, could be allowed 

to direct the investment of those funds and thus enjoy the 

benefit of any investment gain or suffer the detriment of any 

investment loss. Fifth, if the participating employee were to 

die while his or her insurance policy was in force, then the 

death benefit under that policy would ultimately be paid to 
46 145 UNITED STATES TAX COURT REPORTS (1) 

21Minnesota Life concluded similarly as to the Environmental policies 

that it issued on the lives of Environmental’s owners. Minnesota Life reported to the Sterling Plan that each of those insurance policies was part 

of a split-dollar life insurance arrangement. 

his or her beneficiary in accordance with the terms of the 

policy. 

We also find important to our just-stated conclusion that 

the plan benefits were set to be fully vested either when a 

shareholder/employee satisfied the vesting requirements that 

he or she chose (or possibly could choose) in the name of the 

employer or when the employer terminated the plan. And as 

to vesting, the shareholder/employees were not necessarily 

bound by the vesting requirements that were initially set in 

their plans. Instead, at their whim they could accelerate or 

otherwise change the vesting requirements to their preference. In the case of Mr. Blake, for example, he executed an 

adoption agreement on July 30, 2006, retroactive to January 

1, 2005, that lowered the normal retirement age for the 

employee participants in the Our Country plan and accelerated his complete vesting to the then-present time. 

We conclude that the life insurance contracts relating to 

the Our Country and the Environmental single employer 

plans were part of split-dollar life insurance arrangements. 21

D. Netversity Single Employer Plan 

No life insurance was purchased or outstanding during the 

subject years as to the Netversity plan. Any arrangement 

involving Netversity and the Sterling Plan, therefore, was 

not a split-dollar life insurance arrangement during those 

years. 

III. Deductions 

A. Overview 

Respondent argues that the corporate employers may not 

deduct the payments that funded the life insurance premiums. Petitioners argue that the corporate employers may 

deduct the payments as ordinary and necessary business 

expenses under section 162(a). We agree with respondent. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 47

B. Section 162(a) 

Section 162(a) is generally the primary hurdle that a taxpayer must clear to deduct a business expense. Section 

162(a) lets taxpayers deduct ‘‘all the ordinary and necessary 

expenses paid or incurred during the taxable year in carrying 

on any trade or business’’. Under that section, an expenditure is deductible if it is: (1) an expense, (2) an ordinary 

expense, (3) a necessary expense, (4) paid (in the case of a 

cash method taxpayer) or incurred (in the case of an accrual 

method taxpayer) during the taxable year, and (5) made to 

carry on a trade or business. See Commissioner v. Lincoln 

Sav. & Loan Ass’n, 403 U.S. 345, 352–353 (1971); Lychuk v. 

Commissioner, 116 T.C. 374, 386 (2001). 

C. Our Country and Environmental 

Our Country and Environmental must clear another 

hurdle in addition to section 162(a). We have held that the 

life insurance policies related to Our Country and to 

Environmental are split-dollar life insurance arrangements 

because they are compensatory arrangements. In the light of 

this holding, Our Country and Environmental may deduct an 

expense related to the arrangements only if the deduction 

meets the rules of section 1.83–6(a)(5), Income Tax Regs. See 

sec. 1.61–22(f)(2)(ii), Income Tax Regs. Section 1.83–6(a)(5), 

Income Tax Regs., provides that the amount of an allowable 

deduction in such a situation equals the sum of the amount 

of income that the employee recognizes under section 1.61– 

22(g)(1), Income Tax Regs., plus the amount determined 

under section 1.61–22(g)(1)(ii), Income Tax Regs. Section 

1.61–22(g)(1), Income Tax Regs., explains that an employee 

generally must recognize income upon the transfer to the 

employee of the ownership of the life insurance policy. Section 1.61–22(g)(1), Income Tax Regs., explains that the 

amount of that income equals the excess of the fair market 

value of the life insurance contract over the sum of the 

amount that the employee pays to the employer to obtain the 

insurance contract plus the amount of all economic benefits 

already included in income by the employee. 

Our Country and Environmental did not transfer any life 

insurance policy to their participating employees during the 

subject years. Nor did the shareholder/employees recognize 
48 145 UNITED STATES TAX COURT REPORTS (1) 

any income from their participation in the Sterling Plan. We 

conclude that Our Country and Environmental may not 

deduct their payments to the Sterling Plan. 

D. Netversity 

As previously discussed, Netversity’s $50,000 payment to 

the Sterling Plan is not related to a split-dollar life insurance 

arrangement. While the same rules that apply to Our Country’s and to Environmental’s deductions of their payments to 

the Sterling Plan therefore do not apply to Netversity, the 

result in all three instances is the same. 

The Court has repeatedly held in settings similar to 

Netversity’s setting here that section 162(a) does not allow 

an employer to deduct its payments to a purported welfare 

benefit plan where the participating employees could receive 

the value reflected in insurance policies purchased by those 

plans. See Neonatology Assocs., P.A. v. Commissioner, 115 

T.C. at 90–92; see also White v. Commissioner, T.C. Memo. 

2012–104, 103 T.C.M. (CCH) 1560, 1571–1572 (2012) (and 

cases cited thereat). The Court found in those cases that the 

employers’ payments were for the personal benefit of the 

shareholder/employees, that the plans were not intended to 

provide welfare benefits to the employees, and that the purported welfare benefit plans were a means to transfer funds 

from the corporations to their shareholders tax free. The 

Court held that the employers failed to establish that the 

payments to the plans were ordinary and necessary business 

expenses deductible under section 162(a). 

Although those referenced cases involved the actual purchase of life insurance and Netversity’s case does not, the 

holdings in those cases apply here with equal force. The Sterling Plan was never intended primarily to provide welfare 

benefits. Instead, as we find, the purpose and the operation 

of the Sterling Plan were to serve as a tax-free savings device 

for the shareholder/employees under the guise of possibly 

providing welfare benefits. Accord Neonatology Assocs., P.A. 

v. Commissioner, 115 T.C. at 92. While the framer(s) of the 

Sterling Plan apparently intended that the plan would allow 

a shareholder to accumulate substantial amounts of cash 

value tax-free in life insurance policies, while at the same 

time allowing the corporation to deduct the premium payments with no recognition of income by the employees, the 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 49

plan was more transparently designed to serve as a vehicle 

for distributing corporate earnings to the shareholders without the occurrence of an event that would trigger the payment of a welfare benefit. The fact that employees who were 

not owners were allowed to participate in the Sterling Plan 

does not change our view. The benefits payable to those 

employees were insignificant when viewed in the light of the 

benefits flowing to the shareholder/employees. We conclude 

that Netversity may not deduct its $50,000 payment to the 

Sterling Plan. 

IV. Income 

A. Our Country and Environmental Employees 

1. Background 

Respondent argues that the Our Country and the Environmental shareholder/employees must include in income all of 

the economic benefits that the Sterling Plan provided to 

them through the life insurance policies related to them. 

Petitioners argue that none of these employees received an 

economic benefit during the subject years in excess of the 

consideration that he or she paid for the benefit. In this vein, 

petitioners assert, the employees did not have a current or 

future right to the cash value of the life insurance policies 

related to them, either by direct receipt of the cash or by 

causing the cash to be used to pay other benefits provided 

under the plan. Petitioners also assert that the employees 

could not cause any of the life insurance policies to be 

distributed to them. We agree with respondent that the Our 

Country and the Environmental shareholder/employees must 

include in income all of the economic benefits that the Sterling Plan provided to them through the life insurance policies 

related to them. 

2. Economic Benefit Provisions 

a. Overview 

The Federal income tax consequences of a split-dollar life 

insurance arrangement are generally determined either 

through the economic benefit and accompanying provisions of 

section 1.61–22(d) through (g), Income Tax Regs. (collectively, 

economic benefit provisions), or through the loan provisions 
50 145 UNITED STATES TAX COURT REPORTS (1) 

22We agree as well. No split-dollar loan is present in these cases because 

neither the Our Country nor the Environmental employees made payments to their employers for which they expected to be repaid. See sec. 

1.7872–15(a)(2), Income Tax Regs. 

of section 1.7872–15, Income Tax Regs. (loan provisions). See 

sec. 1.61–22(a)(2), (b)(3)(i), Income Tax Regs. In general, the 

loan provisions apply where this is a ‘‘split-dollar loan’’ 

within the meaning of section 1.7872–15(b)(1), Income Tax 

Regs. Sec. 1.61–22(b)(3)(i), Income Tax Regs. As exceptions to 

this general rule, the economic benefit provisions apply 

where there is a split-dollar loan if (1) the employer owns the 

life insurance contract and the arrangement is entered into 

in connection with the performance of services or (2) a donor 

and a donee enter into the arrangement and the donor owns 

the life insurance contract. See id. subdiv. (ii). The economic 

benefit provisions also apply where there is not a split-dollar 

loan unless the nonowner of the life insurance contract 

makes premium payments on the insurance contract as other 

than consideration for economic benefits. See sec. 1.61– 

22(b)(3)(i), (5), Income Tax Regs. In the case of this latter 

exception concerning the nonowner’s payment of premiums, 

general tax principles apply to set the Federal tax treatment 

of the premium payments. See id. subpara. (5). 

The parties agree that the loan provisions do not apply to 

these cases. 22 The parties dispute the applicability of the 

economic benefit provisions, as previously stated. When 

applicable, the value of the economic benefits provided to a 

nonowner in a taxable year equals the sum of (1) the cost of 

current life insurance protection that the nonowner receives 

during the year; (2) the amount of the insurance policy cash 

value to which the nonowner has current access during the 

year (to the extent the amount was not previously included 

in income), and (3) any other economic benefit provided to 

the nonowner (to the extent not previously included in 

income). See id. para. (d)(2). The nonowner is treated as 

having current access to that portion of the insurance policy’s 

cash value (1) to which the arrangement gives the employee 

a current or future right and (2) that is directly or indirectly 

currently accessible by the employee, inaccessible by the 

employer, or inaccessible by the employer’s general creditors. 

See id. subpara. (4)(ii). 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 51

b. Applicability 

The economic benefit provisions apply to these cases 

because no split-dollar loans are involved and the employees 

did not make any premium payments on the insurance contracts. The employers, as the owners of the life insurance 

contracts, have therefore provided economic benefits to their 

employees, as the nonowners of the insurance contracts. See 

id. subpara. (1). The employees must recognize the full value 

of the economic benefits, net of any consideration that the 

employees paid to their employers for the benefits. See id. 

Where, as here, the arrangement underlying the split-dollar 

life insurance arrangement is a ‘‘compensatory arrangement’’ 

within the meaning of the applicable regulations, an 

employer’s provision of the economic benefits to its employees 

generally is deemed to be the payment of compensation 

except where the employer is an S corporation that provides 

the benefits to a 2% shareholder in consideration for services 

rendered. See sec. 1.61–22(d)(1), Income Tax Regs. In the 

case of such an S corporation, the 2% shareholder is treated 

as a partner for purposes of applying the employee fringe 

benefit rules, the economic benefits are categorized as 

guaranteed payments under section 707(c), and the 2% 

shareholder must recognize the amount of the guaranteed 

payments as gross income under section 61(a). See secs. 

707(c), 1372. 

Petitioners argue that the economic benefit provisions are 

inapplicable because, petitioners state, those provisions are 

invalid. According to petitioners, the Secretary lacked the 

authority to prescribe those provisions in that the provisions 

are inconsistent with ‘‘fundamental principles of federal tax 

law’’. Petitioners assert that these fundamental principles 

require, contrary to the economic benefit provisions, that 

employees be able to compel current distributions of the cash 

values of the insurance policies in order to have an interest 

in the values. Petitioners conclude that the shareholder/ 

employees have therefore not realized any of the cash value 

and need not include that value in income. We disagree that 

the economic benefit provisions are invalid. 

Petitioners’ challenge to the economic benefit provisions 

requires that we apply the two-step analysis of Chevron, 

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 
52 145 UNITED STATES TAX COURT REPORTS (1) 

842–844 (1984). The U.S. Supreme Court has recently confirmed that this analysis applies to Treasury regulations 

such as we have here. See Mayo Found. for Med. Educ. & 

Research v. United States, 562 U.S. 44 (2011). The first step 

of the analysis requires that we decide whether Congress has 

spoken directly on the matter to which the economic benefit 

provisions relate. See Chevron, U.S.A., Inc., 467 U.S. at 842– 

844. If Congress has spoken directly on that matter, then 

that is the beginning and the end of our inquiry for we must 

interpret and apply the statute in accordance with the 

unambiguously expressed intent of Congress. See id. We turn 

to the second step, however, if Congress has not spoken 

directly on the matter. The second step requires that we 

decide whether the economic benefit provisions are a reasonable interpretation of the statute which they construe. See id. 

The economic benefit provisions are invalid under the second 

step only if they are ‘‘arbitrary or capricious in substance, or 

manifestly contrary to the statute.’’ Mayo Found. for Med. 

Educ. & Research, 562 U.S. at 53 (quoting Household Credit 

Servs., Inc. v. Pfennig, 541 U.S. 232, 242 (2004)). 

We start with Chevron’s first step. The statutory provision 

to which the economic benefit provisions primarily relate is 

section 61(a), which generally defines gross income as ‘‘all 

income from whatever source derived’’. That section ‘‘sweeps 

broadly’’ to encompass any accession to a taxpayer’s wealth 

and reflects Congress’ use of the full measure of its taxing 

power. See United States v. Burke, 504 U.S. 229, 233 (1992). 

While our reading of section 61(a) in the light of its broad 

construction supports the issuance of equally far-reaching 

regulations on the subject of gross income, we do not find the 

term ‘‘economic benefit’’ anywhere in section 61(a). We conclude that Congress has not directly spoken on the matter at 

hand. Accord Perez v. Commissioner, 144 T.C. 51, 58–59 

(2015) (holding that Congress had not spoken on the definition of a word where the word was undefined in the Code). 

We turn to Chevron’s second step. The economic benefit 

provisions, which operate in part to tax accessions to wealth 

resulting from split-dollar life insurance arrangements, fit 

reasonably within the wingspan of the broad definition of 

‘‘gross income’’ set forth in section 61(a). We find instructive 

that the economic benefit provisions track longstanding 

judicial jurisprudence related to section 61(a). Respondent 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 53

argues, and we agree, that the economic benefit provisions 

are reasonably tailored from the economic benefit doctrine 

applied in cases such as Brodie v. Commissioner, 1 T.C. 275 

(1942), and Sproull v. Commissioner, 16 T.C. 244 (1951), 

aff ’d, 194 F.2d 541 (6th Cir. 1952). Those cases hold that the 

benefit derived from an employer’s irrevocable set-aside of 

money or property as compensation for services rendered is 

includible in the service provider’s gross income at the time 

of the set aside, where the money or property is beyond the 

reach of the employer’s creditors. See also Pulsifer v. 

Commissioner, 64 T.C. 245 (1975) (applying Sproull to hold 

that taxpayers were currently taxable on prize money that 

they would receive in the future but which was irrevocably 

set aside for their benefit). The economic benefit provisions 

state similarly that a nonowner of a life insurance policy has 

current access to the portion of the insurance policy’s cash 

value (1) to which the arrangement gives the employee a current or future right and (2) that is directly or indirectly currently accessible by the employee, inaccessible by the 

employer, or inaccessible by the employer’s general creditors. 

See sec. 1.61–22(d)(4)(ii), Income Tax Regs.; see also id. 

subpara. (6), Example (2) (demonstrating that the split-dollar 

provisions apply there because the employer and the 

employer’s general creditors cannot access a portion of the 

cash value). We conclude that the economic benefit provisions 

are not arbitrary or capricious in substance or manifestly 

contrary to the statute. 

c. Value of Economic Benefits 

The value of the economic benefits provided to a nonowner 

in a taxable year equals the sum of (1) the cost of current 

life insurance protection that the nonowner receives during 

the year, (2) the amount of the insurance policy cash value 

to which the nonowner has current access during the year (to 

the extent the amount was not previously included in 

income), and (3) any other economic benefit provided to the 

nonowner (to the extent not previously included in income). 

See sec. 1.61–22(d)(2), Income Tax Regs. The cost of the current life insurance protection takes into account the life 

insurance premium factors that the Commissioner publishes 

for this purpose. See id. subpara. (3)(ii). The amount of the 

current life insurance protection is the death benefit of the 
54 145 UNITED STATES TAX COURT REPORTS (1) 

life insurance contract (including paid-up additions) reduced 

by the sum of the amount payable to the owner plus the portion of the cash value taxable to (or paid for by) the nonowner. See id. subdiv. (i). The amount of the insurance policy 

cash value is determined disregarding surrender charges or 

other similar charges or reductions and including insurance 

policy cash value attributable to paid-up additions. See id. 

subpara. (4)(i). 

We have found supra that the relevant nonowners of the 

life insurance policies, namely, Mr. Blake, Mr. Abramo, Mr. 

Brown, and Mr. Tomassetti, were the only ones who had a 

right to the cash value of the policies that related to them. 

In addition, we have concluded supra that those individuals 

must recognize income for each subject year from their 

participation in the Sterling Plan. We hold that the amount 

of the income that they must recognize equals the value of 

their economic benefits as ascertained through the rules we 

have just discussed. The parties shall apply those rules in 

their calculation(s) of the decisions to be entered under Rule 

155. 

B. Mr. Mejia 

Respondent argues that Mr. Mejia, Netversity’s sole 

employee, realized income of $50,000 on account of 

Netversity’s $50,000 payment to the Sterling Plan. We agree. 

We have found that Netversity’s $50,000 payment to the 

Sterling Plan is not an ordinary and necessary business 

expense deductible under section 162(a). Given that the payment is not a deductible business expense under section 

162(a) and that it conferred an economic benefit on Mr. Mejia 

for his primary (if not sole) benefit, we conclude that the payment was a constructive distribution from Netversity to Mr. 

Mejia. See Neonatology Assocs., P.A. v. Commissioner, 115 

T.C. at 91–92; see also White v. Commissioner, 103 T.C.M. 

(CCH) at 1572. In that the parties do not dispute that 

Netversity had sufficient earnings and profits to characterize 

the distribution as a dividend under section 301(c)(1) (and it 

appears from the record that it did), we hold that the distribution is a taxable dividend to Mr. Mejia. 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 55

V. Accuracy-Related Penalties 

A. Overview 

Respondent determined that each petitioner is liable for 

one or more accuracy-related penalties under sections 

6662(a) and 6662A. As to section 6662(a), respondent determined that it applied to the Abramos for each subject year; 

to the Blakes, the Browns, the Tomassettis, and Our Country 

for 2005 and 2006; and to the Mejias and Netversity for 

2006. As to section 6662A, respondent determined that it 

applied to the Blakes, the Abramos, the Browns, the 

Tomassettis, and Our Country for 2007. Respondent has 

since conceded that section 6662A does not apply to the 

Blakes. 

Except in the cases of Our Country and Netversity, 

respondent bears the burden of production as to the applicability of these accuracy-related penalties. See sec. 7491(c). 

Section 7491(c) does not apply either to Our Country or to 

Netversity because they are C corporations. See NT, Inc. v. 

Commissioner, 126 T.C. 191, 195 (2006) (holding that section 

7491(c) does not apply to a C corporation’s liability for a penalty, an addition to tax, or an additional amount). 

B. Section 6662(a) 

1. Background 

Respondent determined that the 20% accuracy-related penalty under section 6662(a) applies on account of substantial 

understatements of income tax, or alternatively, of negligence or of disregard of rules and regulations. Section 

6662(a) and (b)(1) and (2) imposes a 20% accuracy-related 

penalty on the part of an underpayment of tax required to 

be shown on a return that is due to, among other reasons, 

negligence, disregard of rules or regulations, or a substantial 

understatement of income tax. These accuracy-related penalties do not apply to any portion of an underpayment for 

which a taxpayer had reasonable cause and acted in good 

faith. See sec. 6664(c)(1). 

Petitioners argue that section 6662(a) is inapplicable 

because, they state, there was no substantial understatement 

of income tax, no negligence, and no disregard of rules or 

regulations. In addition, petitioners assert, they had substan-
56 145 UNITED STATES TAX COURT REPORTS (1) 

23The amount of a reportable transaction understatement, however, is 

added when determining whether the understatement is substantial. See 

sec. 6662A(e)(1)(A). 

tial authority for their positions, the items in question were 

adequately disclosed, and they had a reasonable basis for 

their tax treatment of the items in question. Finally, petitioners assert, they reasonably relied in good faith on the 

advice of their professional advisers. 

2. Substantial Understatement 

An individual’s understatement of Federal income tax is 

‘‘substantial’’ if the understatement exceeds the greater of 

10% of the tax required to be shown on the return or $5,000. 

Sec. 6662(d)(1)(A). A corporation’s understatement of Federal 

income tax is ‘‘substantial’’ if the understatement exceeds the 

lesser of 10% of the tax required to be shown on the return 

(or, if greater, $10,000) or $10 million. Sec. 6662(d)(1)(B). 

An understatement generally exists to the extent that the 

correct tax exceeds the tax reported on the corresponding 

income tax return. See sec. 6662(d)(2)(A). In calculating this 

excess, items to which section 6662A applies are disregarded. 23 See sec. 6662(d)(2). The portion of the understated tax that is attributable to an item for which the taxpayer has substantial authority, or which the taxpayer adequately disclosed with a reasonable basis for the tax treatment thereof, also is not included in the understatement. See 

sec. 6662(d)(2)(B); see also sec. 1.6662–4(d)(3)(i), Income Tax 

Regs. (stating that a taxpayer has substantial authority 

where the weight of authority supporting the tax treatment 

of the item is substantial in relation to the contrary 

authority). Where understatements are attributable to tax 

shelters, the exceptions supported by substantial authority 

and adequate disclosure are not available. See sec. 

6662(d)(2)(C). A tax shelter is any plan or arrangement 

where a significant purpose of the plan or arrangement is the 

avoidance or evasion of Federal income tax. See sec. 

6662(d)(2)(C)(ii). 

3. Negligence 

Negligence includes any failure to make a reasonable 

attempt to comply with the provisions of the Code or to exer-
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 57

cise ordinary and reasonable care in the preparation of a tax 

return. See sec. 6662(c); sec. 1.6662–3(b)(1), Income Tax 

Regs. The term ‘‘negligence’’ also has been defined as a ‘‘lack 

of due care or failure to do what a reasonable and ordinarily 

prudent person would do under the circumstances.’’ Neely v. 

Commissioner, 85 T.C. 934, 947 (1985) (quoting Marcello v. 

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), aff ’g in 

part, remanding in part 43 T.C. 168 (1964), and T.C. Memo. 

1964–299). ‘‘[N]egligence is strongly indicated where * * * 

[a] taxpayer fails to make a reasonable attempt to ascertain 

the correctness of a deduction, credit or exclusion on a return 

which would seem to a reasonable and prudent person to be 

‘too good to be true’ under the circumstances’’. Sec. 1.6662– 

3(b)(1)(ii), Income Tax Regs. 

A taxpayer is not negligent as to an item for which the 

return position has a reasonable basis. See id. subpara. (1). 

An application of this reasonable basis exception is a relatively high standard of tax reporting that requires more 

than simply showing that the position taken on the return is 

not frivolous or patently improper. See id. subpara. (3). This 

high standard is not met by a return position that is 

arguably correct or merely a colorable claim. See id. 

4. Disregard 

Disregard includes any careless, reckless, or intentional 

disregard. See sec. 6662(c). 

C. Section 6662A 

1. Background 

Respondent determined that the 30% accuracy-related penalty under section 6662A applies because the Sterling Plan 

is substantially similar to the transactions identified as listed 

transactions in Notice 2007–83, 2007–2 C.B. 960. Petitioners 

argue that this accuracy-related penalty does not apply 

because the Sterling Plan is not a listed or reportable transaction. In addition, petitioners argue, this accuracy-related 

penalty does not apply because the transaction was adequately disclosed. 
58 145 UNITED STATES TAX COURT REPORTS (1) 

2. Overview 

Congress enacted section 6662A as part of the American 

Jobs Creation Act of 2004 (AJCA), Pub. L. No. 108–357, sec. 

812(a), 118 Stat. at 1577. Section 6662A imposes a 20% 

accuracy-related penalty on reportable transaction understatements and is effective for taxable years ending after 

October 22, 2004. See sec. 6662A(a); see also AJCA sec. 

812(f ), 118 Stat. at 1580. The penalty increases to 30% if the 

taxpayer does not adequately disclose the transaction. See 

sec. 6662A(c); see also sec. 6664(d)(3)(A). A ‘‘reportable transaction understatement’’ is the sum of— 

(A) the product of— 

(i) the amount of the increase (if any) in taxable income which 

results from a difference between the proper tax treatment of an item 

to which this section applies and the taxpayer’s treatment of such item 

(as shown on the taxpayer’s return of tax), and 

(ii) the highest rate of tax imposed by section 1 (section 11 in the 

case of a taxpayer which is a corporation), and 

(B) the amount of the decrease (if any) in the aggregate amount of 

credits determined under subtitle A which results from a difference 

between the taxpayer’s treatment of an item to which this section 

applies (as shown on the taxpayer’s return of tax) and the proper tax 

treatment of such item. [Sec. 6662A(b)(1).] 

A transaction is a reportable transaction for purposes of 

section 6662A if it is either a ‘‘reportable transaction’’ or a 

‘‘listed transaction’’ as those terms are defined in section 

6707A(c). See sec. 6662A(b)(2), (d). As to the latter term, section 6707A(c)(2) generally defines a ‘‘listed transaction’’ as a 

transaction that is the same as, or substantially similar to, 

a transaction that the Commissioner has identified as a taxavoidance transaction for purposes of section 6011. See sec. 

6707A(c)(2). Regulations under section 6011 provide that a 

listed transaction is a transaction that is the same as or 

substantially similar to any transaction that the IRS identifies as such in a ‘‘notice, regulation, or other form of published guidance’’. Sec. 1.6011–4(b)(2), Income Tax Regs. The 

regulations provide that a substantially similar transaction is 

a transaction ‘‘that is expected to obtain the same or similar 

types of tax consequences and that is either factually similar 

or based on the same or similar tax strategy.’’ Id. para. (c)(4). 

The Commissioner published Notice 2007–83, 2007–2 C.B. 

at 960, to alert taxpayers and their representatives that 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 59

[t]he Internal Revenue Service (IRS) and Treasury Department are 

aware of certain trust arrangements claiming to be welfare benefit funds 

and involving cash value life insurance policies that are being promoted 

to and used by taxpayers to improperly claim federal income and 

employment tax benefits. This notice informs taxpayers and their representatives that the tax benefits claimed for these arrangements are 

not allowable for federal tax purposes. This notice also alerts taxpayers 

and their representatives that these transactions are tax avoidance 

transactions and identifies certain transactions using trust arrangements involving cash value life insurance policies, and substantially 

similar transactions, as listed transactions for purposes of § 1.6011– 

4(b)(2) of the Income Tax Regulations and §§ 6111 and 6112 of the 

Internal Revenue Code. This notice further alerts persons involved with 

these transactions of certain responsibilities that may arise from their 

involvement with these transactions. 

* * * * * * * 

1. Promoted Arrangements 

Trust arrangements utilizing cash value life insurance policies and 

purporting to provide welfare benefits to active employees are being promoted to small businesses and other closely held businesses as a way to 

provide cash and other property to the owners of the business on a taxfavored basis. The arrangements are sometimes referred to by persons 

advocating their use as ‘‘single employer plans’’ and sometimes as 

‘‘419(e) plans.’’ Those advocates claim that the employers’ contributions 

to the trust are deductible under §§ 419 and 419A as qualified cost, but 

that there is not a corresponding inclusion in the owner’s income. 

A promoted trust arrangement may be structured either as a taxable 

trust or a tax-exempt trust, i.e., a voluntary employees’ beneficiary 

association (VEBA) that has received a determination letter from the 

IRS that it is described in § 501(c)(9). The plan and the trust documents 

indicate that the plan provides benefits such as current death benefit 

protection, self-insured disability benefits, and/or self-insured severance 

benefits to covered employees (including those employees who are also 

owners of the business), and that the benefits are payable while the 

employee is actively employed by the employer. The employer’s contributions are often based on premiums charged for cash value life insurance 

policies. For example, contributions may be based on premiums that 

would be charged for whole life policies. As a result, the arrangements 

often require large employer contributions relative to the actual cost of 

the benefits currently provided under the plan. 

Under these arrangements, the trustee uses the employer’s contributions to the trust to purchase life insurance policies. The trustee typically purchases cash value life insurance policies on the lives of the 

employees who are owners of the business (and sometimes other key 

employees), while purchasing term life insurance policies on the lives of 

the other employees covered under the plan. 

It is anticipated that after a number of years the plan will be terminated and the cash value life insurance policies, cash, or other property 
60 145 UNITED STATES TAX COURT REPORTS (1) 

held by the trust will be distributed to the employees who are plan 

participants at the time of the termination. While a small amount may 

be distributed to employees who are not owners of the business, the 

timing of the plan termination and the methods used to allocate the 

remaining assets are structured so that the business owners and other 

key employees will receive, directly or indirectly, all or a substantial portion of the assets held by the trust. 

Those advocating the use of these plans often claim that the employer 

is allowed a deduction under § 419(c)(3) for its contributions when the 

trustee uses those contributions to pay premiums on the cash value life 

insurance policies, while at the same time claiming that nothing is 

includible in the owner’s gross income as a result of the contributions 

(or, if amounts are includible, they are significantly less than the premiums paid on the cash value life insurance policies). They may also 

claim that nothing is includible in the income of the business owner or 

other key employee as a result of the transfer of a cash value life insurance policy from the trust to the employee, asserting that the employee 

has purchased the policy when, in fact, any amounts the owner or other 

key employee paid for the policy may be significantly less than the fair 

market value of the policy. Some of the plans are structured so that the 

owner or other key employee is the named owner of the life insurance 

policy from the plan’s inception, with the employee assigning all or a 

portion of the death proceeds to the trust. Advocates of these arrangements may claim that no income inclusion is required because there is 

no transfer of the policy itself from the trust to the employees. 

Notice 2007–83, 2007–2 C.B. at 961, further states that 

any transaction that has all of the following elements, and 

any transaction that is substantially similar to such a transaction, are listed transactions for purposes of sections 6111 

and 6112 and section 1.6011–4(b)(2), Income Tax Regs., effective October 17, 2007: 

(1) The transaction involves a trust or other fund described 

in § 419(e)(3) that is purportedly a welfare benefit fund. 

(2) For determining the portion of its contributions to the trust or 

other fund that are currently deductible the employer does not rely on 

the exception in § 419A(f)(5)(A) (regarding collectively bargained plans). 

(3) The trust or other fund pays premiums (or amounts that are purported to be premiums) on one or more life insurance policies and, with 

respect to at least one of the policies, value is accumulated either: 

(a) within the policy (for example, a cash value life insurance policy); 

or 

(b) outside the policy (for example, in a side fund or through an agreement outside the policy allowing the policy to be converted to or 

exchanged for a policy which will, at some point in time, have accumulated value based on the purported premiums paid on the original 

policy). 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 61

(4) The employer has taken a deduction for any taxable year for its 

contributions to the fund with respect to benefits provided under the 

plan (other than post-retirement medical benefits, post-retirement life 

insurance benefits, and child care facilities) that is greater than the sum 

of the following amounts: 

(a) With respect to any uninsured benefits provided under the plan, 

(i) an amount equal to claims that were both incurred and paid during 

the taxable year; plus 

(ii) the limited reserves allowable under § 419A(c)(1) or (c)(3), as 

applicable; plus 

(iii) amounts paid during the taxable year to satisfy claims incurred 

in a prior taxable year (but only to the extent that no deduction was 

taken for such amounts in a prior year); plus 

(iv) amounts paid during the taxable year or a prior taxable year for 

administrative expenses with respect to uninsured benefits and that are 

properly allocable to the taxable year (but only to the extent that no 

deduction was taken for such amounts in a prior year). 

Notice 2007–83, 2007–2 C.B. at 962, states: 

Whether a taxpayer has participated in the listed transaction described 

in this notice will be determined under § 1.6011–4(c)(3)(i)(A). However, 

an individual who is not the employer will be treated as a participant 

for a taxable year if, and only if the individual owns, directly or 

indirectly, 20 percent or more of an entity, other than a C corporation, 

that is a participant in the listed transaction for the taxable year. For 

this purpose, indirect ownership is determined under rules similar to the 

rules of § 318 but without regard to the family attribution 

rules of § 318(a)(1). 

D. Section 7491(c) 

1. Overview 

As previously stated, the Commissioner bears the burden 

of production with respect to an individual taxpayer’s 

liability for a section 6662(a) or 6662A accuracy-related penalty. This burden requires that respondent produce sufficient 

evidence indicating that it is appropriate to impose either or 

both penalties in these cases. See sec. 7491(c); Higbee v. 

Commissioner, 116 T.C. at 438, 446–447 (2001). Once the 

Commissioner meets his burden of production, the taxpayer 

must come forward with persuasive evidence that the 

Commissioner’s determination is incorrect or that the taxpayer had reasonable cause or substantial authority for the 

position. See Higbee v. Commissioner, 116 T.C. at 446–447. 
62 145 UNITED STATES TAX COURT REPORTS (1) 

2. Application 

a. Determinations Under Section 6662(a) 

i. Our Country and the Blakes 

A substantial majority of Our Country’s payments to the 

Sterling Plan went toward the payment of premiums on the 

Blake policy, a cash value life insurance policy. Our Country 

deducted the full amount of its payments to the Sterling Plan 

even though the amounts of the payments were significantly 

greater than the current benefits provided by the plan and 

bore no relationship to the benefits that the plan provided. 

Mr. Blake, in his individual capacity and as Our Country’s 

sole shareholder, participated in the Sterling Plan as an 

investor in a good investment, rather than as a participant 

in a bona fide welfare benefit plan. The Blakes failed to 

report any income resulting from Mr. Blake’s participation in 

the plan although Mr. Blake maintained control over the 

funds that Our Country paid to the Sterling Plan, e.g., he 

could receive his policy by causing Our Country, his wholly 

owned employer, to terminate its participation in the plan, 

and he could change the criteria for vesting at his desire. Mr. 

Blake also knew that he could access the Blake policy and 

the cash value that inhered therein, as evidenced by the fact 

that he caused Our Country to lower the retirement age 

applicable to its plan and fully vest him in the insurance 

policy taken out on his life. 

ii. Environmental and Its Owners 

Environmental deducted the full amount of its payments to 

the Sterling Plan even though the amounts of the payments 

were significantly greater than the current benefits provided 

by the plan and bore no relationship to the benefits that the 

plan provided. Environmental paid amounts to the Sterling 

Plan and deducted those payments without relying on the 

valuation reports from Mr. Snyder that purportedly showed 

the allowable and deductible contribution amounts. Environmental failed to take the steps that a prudent taxpayer 

would take in determining the tax effects of participation in 

the Sterling Plan. 

None of Environmental’s owners reported any income as to 

his participation in the Sterling Plan, and the record shows 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 63

that they each failed to take the steps that a prudent taxpayer would have taken in determining the tax effects of 

participation in the Sterling Plan. They (through Mr. 

Tomassetti) relied on information provided by Mr. Snyder, an 

insider to the Sterling Plan, to the effect that the plan was 

legitimate. 

iii. Netversity and the Mejias 

Netversity deducted the full amount of its payments to the 

Sterling Plan even though the amounts of the payments were 

significantly greater than the current benefits the plan provided and bore no relationship to the benefits that the plan 

provided. The Mejias did not report any income as to Mr. 

Mejia’s participation in the Sterling Plan, and the record 

shows that they failed to take the steps that a prudent taxpayer would have taken in determining the tax effects of 

participation in the Sterling Plan. 

iv. Conclusion 

We conclude and hold that petitioners significantly underreported income on their Federal income tax returns for each 

subject year. In addition, the evidence shows (and we find) 

that petitioners consciously participated in a plan that, as 

advertised to them, they should have known (and probably 

knew) was too good to be true. A reasonable person in the 

position of petitioners also would not have been oblivious to 

the fact that the judiciary had rejected the use of cash value 

life insurance to fund welfare benefits in similar settings, see 

Neonatology Assocs., P.A. v. Commissioner, 299 F.3d 221; id., 

115 T.C. 43, and would have looked for more concrete guidance on the Sterling Plan before investing significant funds 

in it, as petitioners did. 

We hold as to the noncorporate petitioners that respondent 

has met his burden of producing evidence showing that section 6662(a) penalties for underpayments of tax attributable 

to negligence or disregard of rules or regulations are appropriate with respect to the portions of the underpayments 

resulting from the unreported income. The actions of Mr. 

Blake during the first two subject years constituted ‘‘negligence’’ for purposes of section 6662(a), and those actions 

also were in disregard of the rules pertaining to welfare benefit plans. Likewise, the actions of Environmental’s owners 
64 145 UNITED STATES TAX COURT REPORTS (1) 

24We disagree with petitioners that their reporting of items stemming 

from the Sterling Plan meets the adequate disclosure or substantial authority test, and that this in turn leads to a reduction of their understatements for purposes of sec. 6662(d). We note, however, that to the extent 

that petitioners did meet one or both of those tests, they would still not 

prevail on this point. This is because the Sterling Plan falls within the definition of a ‘‘tax shelter’’ under sec. 6662(d)(2)(C)(ii). See sec. 6662(d)(2)(C) 

(stating that those grounds do not reduce an understatement of tax attributable to a tax shelter). 

during the first two subject years, and also of Mr. Abramo 

during the last subject year as well, constituted ‘‘negligence’’ 

for purposes of section 6662(a), and those actions also were 

in disregard of the rules pertaining to welfare benefit plans. 

Likewise, the actions of Mr. Mejia during 2006 constituted 

‘‘negligence’’ for purposes of section 6662(a), and those 

actions also were in disregard of the rules pertaining to welfare benefit plans. 

We further hold as to the noncorporate petitioners that 

respondent has met his burden of producing evidence 

showing that a section 6662(a) penalty for a substantial 

understatement of income tax applies to the extent that the 

tax, as determined on the basis of this Opinion, results in a 

‘‘substantial understatement’’ as previously defined. 24

b. Determinations Under Section 6662A 

We have found that the Sterling Plan ostensibly operated 

as a welfare benefit plan, that Our Country and Environmental made payments to the Sterling Plan that were used 

to pay the premiums on cash value life insurance policies, 

and that the Sterling Plan used those policies to fund the 

‘‘welfare benefits’’ that it promised to pay under the Sterling 

Plan. We also have found that those corporate employers 

deducted the full amounts of the payments that they made 

to the Sterling Plan and that neither of those corporations 

nor any of Environmental’s owners disclosed its or his 

participation in the Sterling Plan. We conclude that Our 

Country and Environmental participated in transactions that 

were substantially similar to the transaction described in 

Notice 2007–83, supra. We also conclude that each of 

Environmental’s owners participated in the described transactions in that each owned at least 20% of Environmental, 

their employer, and participated in the transactions as 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 65

25 A sec. 6662 accuracy-related penalty generally may not be imposed on 

the portion of an underpayment to which an accuracy-related penalty 

under sec. 6662A also is imposed. See sec. 6662(b) (flush language). Exceptions to this general rule are found in sec. 6662A(e)(1) and (2)(B). See id. 

The sec. 6662(a) accuracy-related penalty that respondent determined for 

the Abramos’ 2007 taxable year therefore applies only to the extent that 

it fits within the flush language or one of the referenced exceptions. 

employees covered by the Sterling Plan. In the light of these 

conclusions, we hold as to Environmental’s owners that 

respondent has met his burden of producing evidence 

showing the appropriateness of the section 6662A penalties 

that he determined applied to them. 25

E. Reasonable Cause 

1. Section 6662(a) 

a. Overview 

An accuracy-related penalty under section 6662(a) is not 

appropriate in a case where a taxpayer demonstrates that 

reasonable cause existed for an underpayment of tax and 

that the taxpayer acted in good faith with respect to the 

underpayment. See sec. 6664(c)(1). A taxpayer’s reliance on 

professional advice may sometimes meet this standard. See 

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 98– 

99; see also sec. 1.6664–4(b)(1), Income Tax Regs. Reliance on 

a tax professional will generally meet this standard where 

the facts and circumstances coupled with the applicable law 

establish that (1) the taxpayer selected a competent tax 

adviser, (2) supplied the adviser with all relevant information, and (3) relied in good faith on the adviser’s professional 

judgment. See Neonatology Assocs., P.A. v. Commissioner, 

115 T.C. at 98–99. Reliance tends to be unreasonable when 

it is based on insiders, promoters, or their offering materials 

or when the person relied upon has an inherent conflict of 

interest that the taxpayer knew or should have known about. 

See id. 

b. Our Country and the Blakes 

We do not find that the three-prong Neonatology test has 

been met either as to Our Country or as to Mr. Blake. Mr. 

Blake caused Our Country to invest in the Sterling Plan 

upon the recommendation of Mr. Reckard, who, while a 
66 145 UNITED STATES TAX COURT REPORTS (1) 

26Previously, Mr. Blake had disregarded the recommendation of another 

C.P.A., Mr. Ringger, to invest in the Sterling Plan, because Mr. Ringger 

was not a financial planner. 27We infer from the record, however, that Mr. Penner reached his conclusions as to the Sterling Plan relying mainly (if not solely) upon the 

statements and views of individuals connected with the Sterling Plan. 

C.P.A., was then acting in his capacity as an insurance 

agent/financial planner. 26 Mr. Blake considered the investment primarily to be a good financial investment and a way 

to defer taxes, and he effected the investment relying to a 

significant extent on his perception of the reputation of 

Guardian, the insurance company selling the life insurance 

that pertained to Our Country’s employees. While Mr. Blake 

eventually sought out the advice of Mr. Penner, his longtime 

friend who was an estate planning attorney, as to the appropriateness of his already-made investment in the Sterling 

Plan, the record does not establish the extent of their discussion(s) or the professional advice that Mr. Penner gave Mr. 

Blake as to this matter. 27 Nor does the record establish 

whether Mr. Blake left their discussion(s) with the necessary 

foundation to rely in good faith upon any advice that Mr. 

Penner gave him. We do know, however, that the proffered 

benefits of the Sterling Plan were too good to be true and 

that Mr. Penner advised Mr. Blake that an investment in the 

Sterling Plan was risky. We also know that the Sterling Plan 

explicitly warned potential investors in the plan that they 

might want to consult with a professional as to the consequences of such an investment and that while the record 

establishes that petitioners (either directly or indirectly 

through their owners or representatives) discussed the Sterling Plan with accountants and/or attorneys, the record does 

not establish the specifics or breadth of those discussions. 

We hold that Our Country and Mr. Blake have failed to 

demonstrate that reasonable cause existed for their underpayments of tax or that they acted in good faith with respect 

to the underpayments. 

c. Environmental’s Owners 

We do not find that the three-prong Neonatology test has 

been met as to any of Environmental’s owners. As to Mr. 

Abramo and Mr. Brown, the record contains no information 

regarding any steps that they personally took to determine 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 67

their proper tax liabilities. The actions of Mr. Tomassetti, the 

point person for the other two owners, were equally unclear. 

The record does not establish whether and to what extent 

Mr. Tomassetti sought the advice of Mr. Scutellaro, testifying 

that he did not ‘‘specifically recall’’ whether he asked Mr. 

Scutellaro to advise him on whether the contributions would 

be deductible to the corporation or would result in income to 

the shareholders. 

The mere fact that Mr. Tomassetti relied upon Mr. 

Scutellaro, a C.P.A., to file his and Environmental’s tax 

returns correctly does not necessarily mean that Mr. 

Tomassetti or any of Environmental’s other owners had 

reasonable cause and acted in good faith with respect to 

those returns. Moreover, to whatever extent the Environmental owners relied on Mr. Scutellaro’s advice, it is not 

sufficient to relieve them of liability for the accuracy-related 

penalties. Mr. Scutellaro was not an expert in welfare benefit 

plans, he did not purport to be such an expert, he did not 

prepare or seek a tax opinion regarding the validity of the 

Sterling Plan or of the deductibility of the contributions, and 

he relied entirely or almost entirely on information from the 

promoter, Mr. Snyder, in providing any advice he gave. In 

fact, as we find, Mr. Scutellaro for the most part simply 

relayed to Mr. Tomassetti the view of Mr. Snyder as to the 

tax consequences flowing from the Sterling Plan. 

We hold that each of Environmental’s owners has failed to 

demonstrate that reasonable cause existed for his underpayments of tax or that he acted in good faith with respect to 

the underpayments. 

d. Netversity and the Mejias 

We do not find that the three-prong Neonatology test has 

been met either as to Netversity or as to Mr. Mejia. While 

the record establishes that Mr. Morgan told Mr. Mejia that 

he should invest in the Sterling Plan, the record does not 

establish that Mr. Morgan gave Mr. Mejia any advice as to 

the tax consequences of any such investment. In fact, the 

record leads to a contrary conclusion. Mr. Mejia, by his own 

admission, acknowledged that he ‘‘blindly expected’’ that he 

was going to invest money in the Sterling Plan without any 

tax consequences. 
68 145 UNITED STATES TAX COURT REPORTS (1) 

28We are not unmindful that Our Country amended its tax return for 

2007 to include a statement disclosing its participation in the Sterling 

Plan. We do not consider that action to be adequate disclosure for purposes 

of this defense. See sec. 1.6011–4(e)(1), Income Tax Regs. (requiring that 

a taxpayer such as Our Country attach a disclosure statement to its tax 

return for each taxable year for which it participates in a reportable transaction and to each amended return that reflects that participation and 

send a copy of the disclosure statement to the IRS Office of Tax Shelter 

Analysis). Petitioners do not argue in their brief that the amended return 

was a ‘‘qualified amended return’’ within the meaning of sec. 1.6664– 

Moreover, even if Mr. Morgan did give Mr. Mejia tax 

advice as to the Sterling Plan, the mere fact that Mr. Morgan 

was a C.P.A. does not necessarily mean that he was a competent tax adviser, especially on the subject of the tax consequences flowing from Mr. Mejia’s participation in the Sterling Plan. Nor does the record establish that Mr. Mejia supplied Mr. Morgan with all relevant information or that Mr. 

Mejia relied in good faith on the adviser’s professional judgment. 

We hold that Netversity and Mr. Mejia have failed to demonstrate that reasonable cause existed for their underpayments of tax or that they acted in good faith with respect to 

the underpayments. 

2. Section 6662A 

a. Overview 

A taxpayer may avoid a section 6662A penalty if there is 

reasonable cause for the taxpayer’s treatment of the transaction and the taxpayer acted in good faith. See sec. 6664(d). 

In this context, a taxpayer has reasonable cause and acted 

in good faith if: (1) the taxpayer followed the disclosure 

provisions of the section 6011 regulations, (2) the taxpayer 

has substantial authority for his or her position, and (3) the 

taxpayer reasonably believed that the position was more 

likely than not the proper treatment. See sec. 6664(d)(2). If 

the transaction was not adequately disclosed, the reasonable 

cause and good faith defense is not available and the taxpayer is liable for a higher 30% penalty. 

b. Application 

None of the relevant petitioners adequately disclosed his or 

its participation in the Sterling Plan. 28 The reasonable cause 
(1) OUR COUNTRY HOME ENTERS., INC. v. COMMISSIONER 69

2(c)(3), Income Tax Regs., and we therefore do not consider the applicability of that section to this issue. See Swords Trust v. Commissioner, 142 

T.C. 317, 339 n.30 (2014) (holding that the Commissioner decided to forgo, 

or otherwise waived, an argument that he did not make in his opening 

brief ); cf. Griffin v. Bell, 694 F.3d 817, 822 (7th Cir. 2012) (stating that 

‘‘arguments raised for the first time in a reply brief are deemed waived’’). 

and good faith defense is therefore not available to any them. 

Each of these petitioners is liable for the 30% penalty. 

VI. Conclusion 

We have considered all of the arguments that petitioners 

made, and to the extent not discussed above, conclude that 

those arguments not discussed herein are irrelevant, moot, or 

without merit. We have considered respondent’s arguments 

only to the extent stated herein. 

To reflect the foregoing, 

Decisions will be entered under Rule 155

f 

.