t c no united_states tax_court robert d booth and janice booth et al petitioners v commissioner of internal revenue respondent docket nos filed date sec_419 and sec_419a i r c as enacted by the deficit_reduction_act_of_1984 publaw_98_369 sec_512 98_stat_494 limit an employer's deductions for contributions made to a welfare benefits fund for employees these limitations do not apply to a welfare benefits fund that is part of a 10_or_more_employer_plan described in sec_419a i r c under the prime plan in which p sec_1 cases of the following petitioners are consolidated herewith n l booth son inc docket no john n booth debra booth docket no young young ltd docket no howard s young elaine p young docket no bruce e traegde patricia traegde docket no billy j johnson ruth johnson docket no and johnson systems inc docket no participated each participating employer made a one-time nonrevertible contribution to a single trust equal to the amount necessary to fund the dismissal wage and death_benefits of its qualifying employees the trust segregated each contribution into a separate_account for payment of benefits to only the contributing employer's qualifying employees if an employer's account did not have enough assets to pay a promised benefit the trustee could supplement the account's assets with assets from a suspense_account that was funded primarily by actuarial gains and amounts forfeited from the employers' accounts in certain enumerated situations each employer selected options under the prime plan including participation and vesting requirements except through the suspense_account an employee had no right to receive benefits from other than his or her employer's account held the prime plan is a welfare_benefit_plan within the meaning of sec_419 i r c held further the prime plan is not within the scope of sec_419a i r c because it is an aggregation of separate plans each having an experience-rating arrangement with the related employer held further none of the corporate ps are liable for the accuracy-related_penalties determined by r charles a pulaski jr janet e barton and tim a tarter for petitioners katherine h ankeny anne w durning and randall p andreozzi for respondent laro judge the docketed cases consolidated for purposes of trial briefing and opinion consist of four groups of test cases selected by the parties to resolve their disputes concerning the prime financial benefits trust multiple employer welfare_benefit_plan and trust we hereinafter refer to this plan as the prime plan and the trust as the trust each of these four groups consists of a closely_held_corporation and one or more of its owner employees in regard to each group the commissioner of internal revenue the commissioner or respondent determined that the corporation could not deduct the amounts that it reported as contributions to the trust and that the individual s had income to the extent that the contributions benefited him or her or them each petitioner petitioned the court to redetermine the commissioner's determination of the resulting deficiencies in federal_income_tax penalties and in one case an addition_to_tax respondent's notices of deficiency listed the following deficiencies addition_to_tax and penalties we have obtained this name from the underlying trust agreement as originally drafted and as later amended on the first two occasions the third amended version of the trust agreement used the name prime financial benefits multiple employer welfare_benefit_plan and trust the fourth and fifth amended versions used the name prime financial multiple employer welfare_benefit_plan and trust our use of the original name refers to all of these versions although we use the word plan in the singular to refer to the prime plan we do not mean to suggest that the prime plan is a single_plan as discussed below we conclude it is not we use the word plan merely for clarity and convenience all of the years refer to the calendar_year except n l booth's and years refer to its taxable years ended date and respectively and systems' continued sec_6662 dollar_figure big_number sec_6662 dollar_figure big_number robert d booth janice booth r j booth docket no addition_to_tax penalty year deficiency a dollar_figure big_number --- --- sec n l booth son inc n l booth docket no addition_to_tax penalty year deficiency a dollar_figure big_number --- --- sec john n booth debra booth j d booth docket no addition_to_tax penalty sec year deficiency a a dollar_figure dollar_figure big_number --- big_number sec --- young young ltd young young docket no addition_to_tax penalty year deficiency a dollar_figure dollar_figure sec sec_6662 dollar_figure howard s young elaine p young the youngs docket no addition_to_tax penalty year deficiency a dollar_figure --- bruce e traegde patricia traegde the traegdes docket no addition_to_tax penalty sec sec sec_6662 dollar_figure sec_6662 dollar_figure year deficiency a dollar_figure --- continued year refers to its taxable_year ended date billy j johnson ruth johnson the johnsons docket no addition_to_tax penalty year deficiency a dollar_figure --- johnson systems inc systems docket no addition_to_tax penalty sec sec sec_6662 dollar_figure sec_6662 dollar_figure year deficiency a dollar_figure --- we decide the following issues whether the prime plan is a welfare_benefit_plan or a plan deferring the receipt of compensation we hold it is a welfare_benefit_plan whether the prime plan is a 10_or_more_employer_plan described in sec_419a we hold it is not in light of a concession by respondent that amounts attributable to contributions to the prime plan are not includable in the gross_income of the individual petitioners under sec_83 if the plan is determined to be a welfare_benefit_plan our holding on this issue makes it unnecessary to decide certain other issues in dispute namely whether the trust maintains separate_accounts for each employee under sec_404 whether the employees' rights are subject_to a substantial_risk_of_forfeiture under sec_83 whether the traegdes extended the period of limitation for assessment of tax on income recognizable under sec_83 and whether the petitioning individuals are liable for penalties under sec_6662 we express no opinion on these issues our holding on this issue moots another issue in dispute namely whether contributions to the prime plan are current or capital expenditures we express no opinion on this issue whether the corporate petitioners are liable for the penalties determined by respondent we hold they are not unless otherwise indicated section references are to the internal_revenue_code applicable to the relevant years rule references are to the tax_court rules_of_practice and procedure and dollar amounts are rounded to the nearest dollar findings_of_fact i background a prime financial partners l p prime prime is a master_limited_partnership that was traded on the american stock exchange during most of the relevant years prime was formed on date under the laws of the state of delaware to acquire the financial services and real_estate activities of a group of prime's affiliated entities prime's general_partner is prime partners limited_partnership limited an arizona limited_partnership whose general_partner is prime financial partners inc financial an arizona corporation on date the outstanding_stock of financial and the limited_partnership units of limited were held by thomas g cummings jerry p franks anthony l tominac marvin d brody and donald a waldman joel boyarsky and a corporation joined with respect to the addition_to_tax under sec_6651 the parties stipulated that young young filed its tax_return untimely given the additional fact that in petitioners' brief they do not challenge respondent's determination of this addition_to_tax we sustain respondent's determination without further discussion rule a this list of owners on date as did william g stalnaker on date mr tominac and the corporation terminated their ownership interests in both entities during and messrs franks and stalnaker terminated their ownership interests in the entities during on date the outstanding_stock of financial and the limited_partnership units of limited were held by messrs cummings brody waldman and boyarsky during the relevant years prime was an investment banking and financial services firm that earned revenues mostly by investing and placing money prime also earned revenues from commissions and administrative services generated by the prime plan prime researched developed and began marketing the prime plan in the prime plan provided death_benefits and dismissal wage benefits dwb's to qualifying employees of participating employers on date prime filed for protection under chapter of the u s bankruptcy code b development of the prime plan mr brody developed the concept of the prime plan in in response to and tax legislation that limited the tax benefits a small_business owner derived from a pension_plan mr brody expected that the prime plan would provide meaningful tax_deferral to small businesses with few employees the prime plan purported to enable business owners to make tax deductible contributions for employee_benefits while allowing them to accumulate wealth through the appreciation of assets purchased by the plan with their contributions the prime plan had some similarities to a defined benefit pension_plan but the prime plan had fewer limitations on funding benefits and accessibility to funds prime marketed the prime plan primarily to highly compensated small_business owners with five to six employees these business owners could expect to receive the following benefits from the prime plan as the plan was advertised to them the employer would currently deduct a one-time contribution that it made to the prime plan to fund dwb's and death_benefits and the contribution would not be taxable to the employer's employees until received as benefits the employer could contribute to pension plans as well as to the prime plan but in the case of the prime plan the employer would not be subject_to the rules limiting contributions to pension plans contributions to the prime plan would earn income tax-free because the trust although not a tax-exempt_entity would invest each employer's contributions in life_insurance and municipal_bonds the employee owners could reap personally most of the benefits offered by the prime plan by basing an employee's receipt of benefits on compensation and by using vesting_schedules to limit the benefits payable to employees other than the owners themselves trust assets would be insulated from creditors death_benefits would not be subject_to income_tax or with minimal planning estate_tax as of date approximately employers had participated in the prime plan on that date approximately of these employers continued to participate in the prime plan c david weiss mr weiss is an attorney who was employed during the relevant years by the law firms of streich lang and snell wilmer in early prime contacted mr weiss to help create a welfare_benefit_plan subject_to sec_419a and to draft a tax opinion that would be used to market the plan nationwide mr weiss initially refused believing there was insufficient guidance on sec_419a to allow him to create such a plan mr weiss later agreed to do so mr weiss was a principal architect of the prime plan and the trust and he wrote a series of tax opinion_letters related thereto these letters included opinions dated date date date date date and date d dr william l raby dr raby is an accountant with a national reputation in areas related to the prime plan and the trust at the behest of mr weiss streich lang engaged dr raby from date to the beginning of to assist mr weiss in forming the desired plan and to express a concurring opinion on mr weiss' tax opinions related thereto prime informed dr raby that it wanted to develop a plan that offered a front-end reduction of taxes for small employers and a deferral of income for their employees dr raby and mr weiss advised prime that the plan needed an element of risk-shifting to qualify for the desired benefits and that a suspense_account could be used to accomplish the required shifting of risk dr raby and mr weiss later presented prime with different provisions for the prime plan some of which prime found unacceptable for marketability purposes dr raby and mr weiss redrafted the unacceptable provisions and prime found the redrafted provisions more to their liking dr raby wrote an opinion concurring with mr weiss' tax opinion dated date and dr raby concurred with mr weiss' opinion dated date dr raby's concurrences were based on his understanding of the tax law including the possible purposes of sec_419a dr raby's concurrences as well as mr weiss' opinions that related thereto did not address any version of the prime plan that is at issue herein they discussed a hypothetical plan that evolved into the instant versions dr raby's name was used to promote versions of the prime plan that were marketed to the public at mr weiss' request dr raby performed services in may and date in connection with respondent's consideration of issues flowing from the prime plan dr raby's fees were paid from the suspense_account the suspense_account that was part of the trust the suspense_account served primarily as the depository for amounts forfeited by the employers and employee groups connected to the prime plan e the trust the trust was a separate taxable entity apart from prime and its affiliates the trust owned all of its assets and it was supervised by an independent_trustee the trust's assets consisted of the money and other_property contributed by the participating employers and any earnings or less any losses thereon less payments made by the trustee the trust's first trustee was northern trust bank of arizona n a northern northern was succeeded by security pacific bank arizona security pacific on or about date firstar metropolitan bank trust firstar succeeded security pacific effective date firstar's trustee fees included an asset management fee of percent of the market_value up to dollar_figure million per account with percent of the market_value on the balance plus a dollar_figure per item transaction charge f the administrator of the prime plan the prime plan was overseen by an administrator improved funding techniques inc ifti was the prime plan's first administrator on date financial's board_of directors approved a letter of intent with ifti under which ifti would assume all plan administration together with related overhead and expenses in return for existing and projected administration fees prime entered into an administrative services agreement with ifti in date in consideration for providing administrative services to the prime plan ifti billed participating employers directly in accordance with the following fee schedule new plan installation annual service_costs first participants to participants over dollar_figure dollar_figure per trustee's transaction fees per transaction participant individual benefit certification vested participants non-vested participants plan amendments plan terminations revised plan valuations special projects consulting dollar_figure per participant per hour junior per hour senior under the agreement with ifti prime received a percentage of profits equal to percent of ifti's fees for administration of each plan where the annual fees net of actuarial costs exceeded dollar_figure per plan and percent of the fees for administration of each plan where the fees net of actuarial costs exceeded dollar_figure in prime moved the bankruptcy court to terminate its agreement with ifti and to subcontract the administration services to william m mercer inc ii the trust agreements a overview the prime plan and the trust were established and operated pursuant to the prime plan and trust agreement effective date as subsequently amended and restated by various versions of the agreement dated date date date date and date the prime plan and trust agreement and each of these amended versions are collectively referred to as the trust agreement and separately referred to by the corresponding date most of the amendments were made to the language originally used in the date trust agreement in order to enhance the marketability of the prime plan by increasing an employer's control_over its contributions and income or loss thereon other amendments were made to comply with changes in the law employers became participants in the prime plan by completing an agreement adoption_agreement that enumerated the key specifications of the plan and allowed each employer to tailor the plan to its employees by selecting various options that would apply to its employees an employer could change the options that applied to its employees and modify the adoption_agreement in any other regard eg to increase dwb's death_benefits or both with the permission of prime and the trustee an employer's plan_year was the 12-month_period that was set forth in the adoption_agreement and the employer listed in its agreement the date that the prime plan became effective with respect to its employees once an employer executed an adoption_agreement the employer was bound to make a one-time contribution to the trust equal to the amount determined by the prime plan’s actuaries to be sufficient to fund the employer's employees' vested dwb's and level of death_benefits selected by the employer in the adoption_agreement as well as to pay miscellaneous charges on the transaction the employer’s initial contribution for dwb's was ascertained through actuarial assumptions developed by the prime plan's actuaries the actuaries generally employed the following assumptions prior to the prime plan's initial actuary was laventhol horwath deloitte touche replaced laventhol horwath as the prime plan's actuary in per annum compounded annually average annual salary increases of interest salary scale mortality pre-severance forfeiture age post-severance forfeiture age none assumed rates of mortality are based on the society of actuaries group annuity mortality_table terminations each employee was assumed to terminate before reaching the forfeiture age the trust used each employer's contributions to purchase insurance products to fund the dwb's and death_benefits promised under the prime plan the employer designated in its adoption_agreement the insurance_company from which the insurance products for its employees were to be purchased as well as the type and amount of these products the employer could designate in its adoption_agreement vesting periods and percentages which determined the amount of dwb's that would be paid to its employees the employer could designate in its adoption_agreement its employees' year_of_participation and year_of_service as those terms were defined in the trust agreement b the date trust agreement overview prime and northern trust entered into the date trust agreement establish ing a multiple employer welfare_benefit_fund and trust for the exclusive benefit of the participating employers their employees and in the case of life benefits their beneficiaries under this agreement each participating employer had its own employee group that consisted of its employees the covered employees who met the minimum_age_and_service_requirements set forth by the employer in the adoption_agreement the trust agreement designated each participating employer as a plan_administrator generally each plan_administrator exercised all discretionary and other authority to control and manage the operation and administration of the prime plan under the trust agreement each plan_administrator delegated to prime most of its duties and responsibilities with respect to the prime plan including applying rules determining eligibility calculating service and compensation credits preparing employee communication material benefit reports and reports required by governmental agencies calculating benefits advising employees on their rights and options applying contributions processing claims recommending decisions on the trust's administration and the maintenance of accounts and maintaining an account for each covered_employee prime received a fee for performing these services the trust agreement generally required the maintenance of separate_accounts for each covered_employee to assure each participating employer that any contributions that it made to the prime plan were segregated and considered assets of its employee group dwb's a covered_employee generally received a dwb upon termination of his or her employment for a reason other than cause the amount of the dwb which was set forth by the employer in the adoption_agreement was based on a percentage of the covered employee's compensation in the calendar_year immediately preceding termination as well as his or her years_of_service at the time of termination in no case could a dwb exceed two times compensation during the immediately preceding calendar_year and a dwb could not be greater than the amount shown in the vesting schedule set forth by the employer in the adoption_agreement if an employee had severed his or her employment when the employer made the initial contribution the employee's dwb generally equaled the amount shown as his or her vested severance benefit in that year's annual report prime had the sole discretion to pay the dwb in a lump sum or to pay the dwb in monthly installments not to exceed months after the covered employee's termination_date the payment of dwb's was secured_by the insurance_company that issued insurance policies on the life of each covered_employee a covered employee's dwb generally was forfeited to the suspense_account if he or she was discharged for cause terminated employment after attaining a stated age or died while employed under the date agreement employment meant working as an employee partner or proprietor in the same occupation or profession and a discharge for cause occurred when the discharge resulted from a proven dishonest or criminal act committed in the course of the employee's employment with the employer the same agreement defined the stated age as the forfeiture age which was defined as an age which is three years prior to a covered employee's normal_retirement_date the normal_retirement_date as a date set forth by the employer in the adoption_agreement and a termination of employment as the earliest of the date on which an employee become sic totally disabled resigns or is discharged without cause the normal_retirement_age generally was set forth by the employers as the later of age or completion of years of participation in the prime plan or if the participating employer had a qualified_plan the definition given that term under the qualified_plan dwb's that were forfeited due to death or the attainment of the forfeiture age were segregated into the suspense_account to be used to increase that employer's covered employees' dwb's or death_benefits to provide new welfare benefits to provide benefits for replacement employees or to distribute to the covered employees if and when the employer withdrew from the prime plan contributions made to fund dwb's were invested in flexible premium adjustable life policies universal life policies or in the case of a covered_employee who was determined to be uninsurable in a tax-exempt money market fund prime maintained commission-sharing arrangements with the insurance_companies that wrote these insurance policies prime usually earned a commission equal to percent of the amount_paid for life_insurance and percent of the amount_paid to fund dwb's employers typically contributed dollar_figure to the trust generally dollar_figure of this amount was used to purchase life_insurance and the balance dollar_figure to fund dwb's death_benefits if a covered_employee died while employed a death_benefit became payable to his or her beneficiary in the amount set forth by the employer in the adoption_agreement this amount was generally stated as a percentage of the covered employee's compensation or if higher a set minimum amount for a covered_employee who was other than a standard underwriting risk the death_benefit could be reduced or eliminated depending on the provisions of the employer's adoption_agreement death_benefits were typically funded through universal life policies under such a policy the premiums in excess of the amount necessary to fund current mortality and administrative expenses are typically invested by the carrier at a fixed rate of return this rate of return may vary over time although carriers generally guarantee a specified minimum return the amounts paid_by the trust for the universal life policies were generally separated into two amounts the target premium which was the cost of the life_insurance and the excess premium which was an amount placed into a side fund for payment of dwb's in the cases where second and subsequent year contributions were made by an employer the contributions were usually made to pay a renewal premium on the life_insurance or to increase the side fund contributions were also sometimes made in years subsequent to the first year to purchase additional insurance for newly eligible employees or to increase the amount of insurance for employees with salary changes so that the plan remained within the terms of the adoption_agreement and the provisions of the code that were believed related thereto if the employer failed to make the required contributions to keep the policy in force prime was required to make these contributions from assets allocable to the employer's employee group universal life policies offer a policy owner certain options regarding the cash_surrender_value of the policy under one option the policy's cash_surrender_value is included in the face_amount paid to the beneficiary upon the insured's death under a second option the carrier pays both the face_amount and cash_surrender_value to the beneficiary upon the insured's death under the trust agreement the trust had to elect the second option for each universal life policy that it acquired when the insured died the carrier paid the beneficiary the policy's face_amount thus discharging the prime plan's obligation to pay the deceased employee's vested death_benefit and the carrier paid the trust the cash_surrender_value associated with the policy under the universal life policies acquired by the trust the trust could obtain a policy's cash_surrender_value before the insured died by surrendering the policy the amount received was usually reduced by a surrender charge during the first several years of the policy a death_benefit was not payable if a covered_employee died on or after the date he or she terminated employment or was discharged for cause in the case of an owner employee a death_benefit was not payable when he or she terminated his or her employment a death_benefit also was not payable when the owner employee continued to work but reached the date that was the later of age or the 10th anniversary of his or her participation in the plan upon termination of employment a covered_employee could with prime's approval elect to convert to individual coverage or purchase his or her life_insurance_policy for its cash_surrender_value absent such an election the policy was surrendered or transferred to the life of another covered_employee the forfeited proceeds from the sale or surrender of life_insurance were segregated into the suspense_account and used to increase the employer's covered employee's dwb's or death_benefits to provide new welfare benefits to provide benefits for replacement employees or to distribute to the covered employees if and when the employer withdrew from the prime plan if an employee severed employment without a vested dwb the cash_surrender_value of his or her life_insurance_policy if surrendered was added to another policy in the employee group obligations and liabilities an employer that participated in the prime plan was required to make an actuarially determined contribution in any year in which one of its employees became eligible for a dwb or the employer elected to increase the amount payable to its covered employees under the adoption_agreement an employer had no obligation to make additional contributions to provide for the payment of dwb's if there were insufficient assets in the trust allocable to its employee group an employee's right to a dwb extended only to his or her allocable share of employee group assets if there were insufficient assets allocable to an employee group to pay a covered employee's dwb procedures were set forth to pay a smaller benefit commensurate with the available assets the employer relinquished all rights to the contributions made to the trust and no amounts could revert to the employer or be used for purposes other than the benefit of the covered employees or for the payment of taxes and expenses of the trust's administration neither the employer plan_administrator prime or the trustee had any liability to pay any benefits provided under the plan beyond the assets in the trust allocable to the applicable employee group neither the employer plan_administrator prime or the trustee was responsible for contributions that were required for any other participating employer separate_accounting prime was required to maintain separate_accounts reflecting the share of each employee group and to determine the december value of the insurance contracts and tax-exempt money market bond fund allocable to each employee group prime was required to keep accurate and detailed accounts of all transactions investments receipts and disbursements prime was required to file a written report of this information with each employer within days after each december 31st at the end of each plan_year the prime plan's actuaries were required to calculate experience gains and losses with respect to each employee group whether or not any gains or losses had actually occurred experience gains and losses were measured by comparing each employee's theoretical compensation to actual compensation and by comparing the expected rate of return on the assets held in the employee group_account with the actual rate of return on these assets to the extent that the theoretical compensation exceeded actual compensation or the expected rate of return exceeded the actual rate of return an experience gain resulted and the amount of the experience gain had to be forfeited to the suspense_account neither prime nor its actuaries ever implemented the trust provisions requiring an annual calculation of experience gains and losses prime changed its method of calculating experience gains and losses effective date because the unexpected number of accounts which incurred experience gains created a significant concern among the plan participants and their advisers prime believed that this could potentially create non- recoverable suspense_account assets and alarm plan participants prime wanted to reduce the amount of experience gain subject_to forfeiture and find a way to allow suspense_account distribution on withdrawal employer withdrawal from the prime plan employers could withdraw from the prime plan at any time by submitting written notification to prime accompanied by documentation showing that the necessary ownership_interest of the employer had approved the withdrawal the necessary ownership_interest was the percentage listed by that employer in its adoption_agreement if an employer failed to pay prime's annual administrative fee prime had the sole discretion to force that employer to withdraw from the prime plan upon an employer's withdrawal assets were distributed to all living covered employees who were employed during the period that began months before prime's receipt of the notice excess_assets remaining in the trust allocable to the employee group after payment of all benefits and the employer's share of the trust's tax_liability were distributed pro_rata using the aggregate compensation received by each covered_employee over the period not to exceed years that was listed by the employer in the adoption_agreement for an owner employee who anticipated employment beyond the forfeiture age the trust agreement did not prohibit that owner from withdrawing his or her company from the prime plan and receiving a withdrawal distribution for an owner-employee who anticipated retiring the trust agreement did not prohibit that owner from withdrawing his or her company from the prime plan and receiving a withdrawal distribution prime's actuaries assumed that no employee would forfeit benefits upon retirement and no employee ever forfeited a dwb because he or she retired or stayed employed beyond the forfeiture age prime's actuaries assumed that no payments would come from the suspense_account to supplement the payment of benefits from the trust amendment and termination of the prime plan prime retained the right to amend modify or delete any provision of the trust agreement prime retained the right to terminate the prime plan in certain circumstances one of which was if the plan failed to satisfy sec_419a the trustee the trustee was compensated under the terms of a written_agreement that it entered into with prime all reasonable costs incurred by the trustee in performance of its duties were paid from the trust as was the case with all taxes levied or assessed against the trust the trustee and insurer withheld any taxes that were required to be withheld from any payment to a covered_employee and or beneficiary c the date trust agreement prime amended the trust agreement on or about date in relevant part the following amendments were made first prime deleted the requirement that forfeited dwb's and forfeited proceeds from the sale or surrender of life_insurance policies be segregated into the suspense_account to be used to provide benefits to the corresponding employer's covered employees prime replaced this requirement with a provision stating that these forfeitures would be experience gains subject_to the existing provisions except as otherwise modified by the amendments one of these amendments required experience gains to be allocated annually to the suspense_account and allowed prime to direct the trustee to invest these amounts in tax exempt securities or leave the amounts in each applicable employee group subject_to a lien second prime was given the power to use the suspense_account assets in any manner consistent with a purpose or objective of the prime plan including supplementing the payment of dwb's to an employee group with insufficient assets to pay projected benefits due to experience losses suffered by that employee group another new provision provided that neither prime nor the trustee had any liability to a covered_employee for the manner in which suspense_account assets were used or allocated among the employee groups third prime removed the obligation of an employer to make an actuarially determined contribution in any subsequent year in which an employee became eligible for a dwb prime replaced this obligation with an obligation to do so only if the employer notified prime that the employer intended to make such a contribution d the date trust agreement prime amended the trust agreement a second time on or about date prime made these amendments primarily to reflect matters affecting the trustee none of these amendments are relevant to our discussion herein e the date trust agreement prime amended the trust agreement a third time on or about date in relevant part prime made the following amendments first prime inserted security pacific as the successor trustee second prime added a provision allowing dwb's to be funded through the purchase of a second to die life_insurance_policy another new provision allowed the funding of death_benefits through the purchase of term_insurance and second to die life_insurance policies third prime added a requirement that an employer had to make actuarially determined contributions in any subsequent year in which the employer notified prime that the employer intended to make a contribution for an employee who was entitled to a greater vested percentage of his or her dwb than in the year the adoption_agreement was executed fourth prime expanded the trust's existing provisions to state that the trustee would not be liable to a covered_employee or beneficiary with respect to shortfalls in any of the benefits the existing provisions were further expanded to provide that neither prime nor the trustee would be liable to a covered_employee or beneficiary as to decisions on the use of suspense_account assets to supplement or not to supplement a dwb other new provisions reflected limits on the trust's liability and stated that prime's maintenance of separate_accounts was not a separate trust fund fifth prime replaced the term experience gain with the term asset gains liability gains and overfunded gains and set forth a measurable event method of allocating gains to the suspense_account prime defined a measurable event as a severance death or attainment of forfeiture age of one or more covered employees or the withdrawal of the employee group prime set forth another new provision that provided an objective formula under which prime was allowed to release a portion of the suspense_account when a measurable event occurred and an employee group had insufficient assets to pay dwb's or an employee group withdrew from the trust this formula was stated as follows fair market theoretical actuarial actual employer value of liability for employee group contributions suspense x theoretical actuarial x theoretical account on liability for trust employer valuation_date contributions prime added other provisions that defined the relevant terms in the formula and gave prime the absolute discretion not to use the formula if using it would be inconsistent with a purpose of the prime plan sixth prime added a provision that specified that a withdrawing employer's written notice must list a withdrawal date no later than days after prime received the notice prime added another new provision specifying that it would deliver to the employer within days of prime's receipt of the notice an accounting of the employer's account in the prime plan seventh prime listed the asset allocation procedures that it would use to distribute assets to employees of a withdrawing employer eighth prime listed the trustee's rights and duties to include the right to be reimbursed for the employment of experts that it considered necessary to carry out its obligations the right to be held harmless from and against any loss liability or expense incurred without gross negligence breach of trust or violation of the employee_retirement_income_security_act_of_1974 erisa publaw_93_406 88_stat_829 arising out of its administration of the trust and the ability to reimburse itself in certain circumstances from amounts held in the trust starting with the suspense_account f the date trust agreement prime amended the trust agreement a fourth time on or about date in relevant part the following amendments were made first prime inserted firstar as the successor trustee second prime added a provision requiring forfeiture of a dwb upon actual retirement rather than upon reaching the forfeiture age another new provision defined the term retirement to mean a covered employee's severance from service with an employer other than for cause death or total disability where such covered_employee cannot show proof of subsequent employment or an attempt to obtain subsequent gainful employment to prime another new provision set forth the allocation of employer withdrawal gains to the suspense_account g the date trust agreement prime amended the trust agreement a fifth time on or about date in relevant part the following amendments were made first prime added a provision stating that the amount of gains allocated to the suspense_account at the time of a measurable event would equal the total gains multiplied by the ratio of an employer's total contributions made to the prime plan as of december over the total of all contributions which the employer should have made to fully fund its employee group's benefits prime also amended the measurable event formula to read as follows fair market actual employer value of actual employer contributions contributions suspense x total employer contributions x theoretical account on to the trust employer valuation_date contributions another new provision gave prime the sole discretion not to use the measurable event formula wherever prime concluded that the formula would give a covered_employee a larger benefit upon an employer's withdrawal than he or she would have received as a dwb second prime replaced the phrase terminated his employment with the employer on account of retirement with the phrase remained in the employ of the employee group beyond his forfeiture age third prime added a provision allowing the use of suspense_account assets to pay all fees and costs incurred in litigating with the commissioner issues related to the prime plan permissible fees and costs included those of attorneys accountants actuaries and expert witnesses before this amendment prime had spent dollar_figure from the suspense_account to pay for legal services rendered mainly by mr weiss and mr brody in defense of the commissioner's challenge of the deductibility of employers' contributions to the prime plan mr weiss had authorized the payment of these amounts iii prime's duties in operation of the prime plan prime implemented the provisions of each employer's account in the prime plan issued annual reports and generated tax filings on each account and dealt with insurance providers prime's responsibilities also included tracking money by employee group reviewing advertisements and sales materials assisting with tax audits responding to legal issues and assisting in interpreting the trust's provisions prime computed each covered employee's vested dwb by multiplying that employee's compensation listed on his or her form_w-2 wage and tax statement for the year before the year the employer made the contribution by the accrual percentage by the years_of_service or the maximum accrual years if applicable by the employee's vesting percentage as determined in accordance with the vesting schedule selected by the employer in the adoption_agreement the accrual percentage was a plug in that the percentage was based on how much money the employer believed it could afford to spend for a certain benefit iv the trust's financial information a overview the trust began accepting contributions from employers in date as of date the trust had received dollar_figure in contributions broken down as follows dollar_figure in dollar_figure in dollar_figure in dollar_figure in and dollar_figure in prime never valued the trust as a whole and prime never filed a form_5500 annual return report of employee_benefit_plan for the prime plan as a whole neither the prime plan nor the trust had a form_1041 u s fiduciary income_tax return filed on its behalf norstar trust co of rochester new york filed and form sec_1041 that reported the following items of income and expense for a complex_trust named prime financial benefits trust--new york e i n the new york trust tax-exempt_income total income fiduciary fees total deductions taxable_income total_tax dollar_figure dollar_figure - - - - big_number - - - - - - - - - - - - security pacific filed through form sec_1041 that reported the following items of income and expense for the trust listed on the forms as a complex_trust named prime financial benefits trust e i n --- --- big_number --- --- --- interest_income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- --- other income forfeitures other income refund trustee fees --- big_number tax exempt_income big_number big_number big_number big_number big_number total income big_number big_number big_number big_number big_number taxes big_number - - big_number - - big_number fiduciary fees big_number big_number big_number - - - - attorney accountant big_number big_number big_number big_number big_number other deductions big_number - - big_number big_number other deductions mgmt admin fees - - - - big_number big_number big_number exemption taxable_income big_number big_number big_number big_number big_number total_tax big_number big_number - - - - - - the trust paid no benefits in from through the trust paid dollar_figure in employer withdrawal benefits and dwb's as shown below total dwb's number withdrawal dist dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dwb's amount big_number big_number big_number big_number big_number big_number total big_number big_number big_number big_number big_number big_number big_number b suspense_account transactions the first suspense_account transaction was a deposit of a dollar_figure death forfeiture on date the following chart is a summary of all suspense_account activity through date we are unable to determine whether the new york trust is the same entity as the trust the entities have different e i n 's and the new york trust's form sec_1041 reported that it was created on date while the trust's form sec_1041 reported that it was created on date the form_1041 filed for the trust also reported that the old name of fiduciary was northern trust bank of arizona n a our opinion is not affected by whether the new york trust and the trust are the same or different entities total out total in --- dollar_figure --- dollar_figure accounting fees actuarial gains administrative fees big_number death_benefit big_number death forfeitures expense allocations interest earned legal fees miscellaneous trustee fees big_number --- unrealized_loss totals big_number big_number --- big_number big_number big_number big_number --- big_number --- --- --- --- big_number --- mr weiss approved of the use of suspense_account assets to pay legal fees administrative fees and trustee fees approximately dollar_figure of the legal fees were paid to snell wilmer and streich lang v young young a overview the youngs are husband and wife and they resided in sedona arizona when they petitioned the court the youngs owned percent of the stock of young young a corporation providing medical_care in and around sedona during the relevant years young young's principal_place_of_business was in arizona when it petitioned the court during the relevant years howard young was a radiologist working out of a hospital through a partnership in which young young was a 50-percent partner elaine young was a dermatologist with her own practice carleen garcia was the nurse and office manager of elaine young's practice young young reported its operations for federal_income_tax purposes on a calendar_year and it used the cash_receipts_and_disbursements_method on its relevant federal_income_tax returns these returns reported the following information total income compensation of officers salaries wages big_number big_number big_number big_number - - pension profit-sharing_plans big_number big_number big_number big_number big_number employee benefit programs big_number big_number big_number big_number big_number taxable loss big_number big_number big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number of the reported compensation howard young received dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure during the respective years the youngs filed timely a joint federal_income_tax return on date the commissioner mailed them a notice_of_deficiency reflecting a determination that the youngs' taxable_income was increased by dollar_figure on account of a taxable transfer of property from young young under sec_83 the notice also stated that the youngs were liable for a dollar_figure accuracy-related_penalty under sec_6662 because the underpayment_of_tax was due to negligence on the same day the commissioner mailed young young a notice_of_deficiency reflecting a determination that its taxable_income was increased by dollar_figure because its contribution to the trust was governed by subpart ddollar_figure young young had subpart d refers to subpart d of subchapter_d of chapter continued filed its tax_return on date days after the due_date the notice_of_deficiency also stated that young young was liable for a dollar_figure addition_to_tax for delinquency under sec_6651 and a dollar_figure accuracy-related_penalty under sec_6662 because its underpayment of income_tax was due to a substantial_understatement b young young's introduction to the prime plan donald a waldman was the youngs' tax adviser in date mr waldman introduced the youngs to the prime plan advising howard young that the plan provided life_insurance as well as tax_deferral howard young viewed the prime plan as a wise business investment for the company because it provided life_insurance which he needed at that time and because of the tax deferment howard young relied on mr waldman in choosing to participate in the prime plan and in reporting the tax ramifications that flowed therefrom mr waldman was competent to give an opinion on the prime plan c young young's adoption of the prime plan young young joined the prime plan by executing an adoption_agreement dated and effective as of date and by making a dollar_figure contribution to the trust approximately days later young young's dollar_figure contribution was applied to the full accrual of dwb's for its covered employees dollar_figure and the continued i of subtitle a of the code cost of their death_benefits dollar_figure young young deducted the full contribution on its tax_return young young's three employees the youngs and carleen garcia became covered employees under the prime plan as of date on date elaine young executed an addendum to young young's adoption_agreement electing retroactively to waive her right to participate in the prime plan in all young young executed the following adoption agreements during its participation in the prime plan date effective dwb percentage not listed not listed years_of_service not listed not listed vesting schedule normal_retirement_age death_benefit multiple not listed not listed date executed d administration of young young's account in the prime plan improved funding techniques inc ifti prepared the annual report for young young's account in the prime plan and ifti delivered the report to howard young on date the report included an actuarial valuation signed by deloitte touche and provided the following calculation of vested dwb's for young young's covered employees accrual years of vesting vested compensation percentage service percent dwb howard young dollar_figure carleen garcia big_number dollar_figure - - - - the report addressed only young young's employee group and it did not provide any information concerning the trust as a whole the report used a accrual percentage for the dwb's which had been unstated in any of the adoption agreements executed by young young before the report was prepared on date young young executed an adoption_agreement allowing for the percent accrual percentage other annual reports prepared for young young's account reported the following relevant information fund value at yearend dollar_figure dollar_figure dollar_figure policy values - - big_number big_number surrender_value n a big_number big_number additional_contribution available big_number big_number date of report on date prime forwarded to young young a copy of the summary_plan_description required by sec_102 of erisa the description was later restated to reflect the amendments to the trust agreement through date e forms 5500-c r return report of employee_benefit_plan forms 5500-c r filed with the commissioner for young young's account in the prime plan included the following information yearend assets income expenses contributions dollar_figure big_number dollar_figure big_number big_number - - dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number - - - - - - these forms also reported the payment of insurance commissions of zero dollar_figure zero zero and zero in the respective years from through f young young's withdrawal from the prime plan on date howard young requested that an estimate be calculated for young young's withdrawal from the prime plan vi n l booth a overview robert and janice booth r j booth are husband and wife and they resided in scottsdale arizona when they petitioned the court john and debra booth j d booth are husband and wife and they resided in scottsdale arizona at the time of their petition during the relevant years robert booth was vice president and secretary of n l booth a corporation engaged in the construction business in phoenix arizona and he owned percent of n l booth's stock john booth was n l booth's president and treasurer and he owned percent of n l booth's stock n l booth's remaining stock was owned by phyllis booth the mother of john and robert booth n l booth's principal_place_of_business was in arizona when it petitioned the court n l booth reported its operations for federal_income_tax purposes on a fiscal_year ending july and it used an accrual_method on its relevant tax returns these returns reported the following information taxable_year ended total income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure compensation of officers big_number big_number big_number big_number big_number big_number big_number salaries wages big_number big_number big_number pension profit-shar plans big_number big_number big_number big_number big_number - - - - employee benefit programs - - big_number big_number big_number big_number big_number taxable_income big_number big_number of the reported compensation robert booth received dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure during his through taxable years respectively and john booth received dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure during the same respective years r j booth filed timely joint and federal_income_tax returns on date the commissioner mailed them a notice_of_deficiency reflecting a determination that r j booth's taxable_income for and was increased by dollar_figure and dollar_figure respectively on account of taxable transfers of property from n l booth under sec_83 the notice also stated that r j booth were liable for dollar_figure and dollar_figure in accuracy-related_penalties under sec_6662 for the respective years on the same day the commissioner mailed to j d booth a notice_of_deficiency reflecting her determination that j d booth's and taxable_income was increased by dollar_figure and dollar_figure respectively on account of taxable transfers of property from n l booth under sec_83 j d booth had timely filed a joint federal_income_tax return for each of these years the notice also stated that j d booth were liable for dollar_figure and dollar_figure in accuracy-related_penalties under sec_6662 for the respective years the commissioner also mailed a notice_of_deficiency to n l booth on that date reflecting a determination that its and taxable_income was increased by dollar_figure and dollar_figure respectively the notice stated that n l booth's contribution to the prime plan was governed by subpart d the notice also stated that n l booth was liable for dollar_figure and dollar_figure in accuracy-related_penalties under sec_6662 for the respective years because its underpayments of income_tax were due to substantial understatements n l booth filed timely and tax returns b n l booth's introduction to the prime plan barclay d schultz was n l booth's insurance agent for the prime plan on date mr schultz contacted prime about n l booth's possible participation in the prime plan sixteen days later joseph p waters n l booth's certified_public_accountant furnished n l booth with computations of projected_earnings from participating in the prime plan robert and john booth collectively the booths individually and in their capacity as officers of n l booth relied upon competent and informed tax and investment advisers before joining the prime plan and in reporting the tax ramifications that flowed therefrom c n l booth's adoption of the prime plan n l booth joined the prime plan by executing an adoption_agreement dated and effective as of date and by contributing dollar_figure to the trust days later n l booth was required to make a remaining contribution of dollar_figure to the trust by date n l booth made this contribution without interest on date n l booth's tax_return claimed a dollar_figure deduction for accrued contributions owed the trust n l booth's tax_return claimed a dollar_figure deduction for accrued contributions owed the trust on date n l booth paid firstar metropolitan bank trust firstar dollar_figure of this amount n l booth never paid the remaining dollar_figure generally the dollar_figure contribution was applied as follows an increase in dwb's resulting from the change in the accrual percentage an increase in vesting and the cost of a death_benefit in all n l booth executed the following adoption agreements relating to its participation in the prime plan date effective dismissal wage benefit_percentage dollar_figure dollar_figure years_of_service vesting schedule normal_retirement_age same a sec_401 same same same death_benefit multiple date executed d administration of n l booth's account in the prime plan on date ifti forwarded the annual report for n l booth's account in the prime plan to john booth the report pertained only to n l booth's employee group the report included an actuarial valuation signed by deloitte touche and provided the following calculations of vested dwb's accrual years of vesting vested compensation percent service percent dwb john booth robert booth andrew alvis thomas geary trevor naugle dollar_figure big_number big_number big_number big_number - - dollar_figure big_number - - big_number big_number the report did not provide any information on the trust as a whole on date ifti forwarded the annual report for n l booth's account to john booth this report included another actuarial valuation signed by deloitte touche in order to accommodate the contribution the accrual percentage for dwb's was increased to dollar_figure percent in all the annual reports for n l booth's account in the prime plan included the following information dollar_figure dollar_figure dollar_figure fund value at yearend - - - - big_number contribution in transit big_number - - big_number policy values big_number surrender_value n a big_number additional contrib available big_number big_number big_number date of report dollar_figure dollar_figure - - - - big_number big_number big_number big_number big_number big_number e forms 5500-c r forms 5500-c r for n l booth's account in the prime plan included the following information yearend assets income expenses contributions dollar_figure dollar_figure big_number - - big_number big_number big_number dollar_figure big_number big_number - - dollar_figure big_number big_number - - these forms did not list any insurance commissions paid from through vii systems a overview the johnsons are husband and wife and they resided in waco texas when they petitioned the court systems' principal_place_of_business was in waco texas when it petitioned the court since systems' only employees have been the johnsons and robert j carr mr carr a certified_public_accountant c p a is systems' controller mr johnson initially owned percent of systems' common_stock and mrs johnson owned the rest on date systems canceled the shares of stock initially issued to the johnsons and reissued shares to mr carr shares to mr johnson and shares to mrs johnson on date mr johnson held shares of systems' stock through a partnership known as chief smokey ltd and mr carr owned the remaining shares systems reported its operations for federal_income_tax purposes on a fiscal_year ending on september and it used the cash_method on its relevant tax returns these returns included the following information taxable_year ended dollar_figure dollar_figure total income dollar_figure big_number big_number compensation of officers - - big_number big_number salaries wages big_number - - - - pension profit-sharing_plans - - big_number employee benefit programs big_number - - taxable_income loss big_number big_number big_number dollar_figure big_number big_number - - big_number big_number of the reported compensation mr johnson received zero dollar_figure dollar_figure dollar_figure and dollar_figure during his respective taxable years from through and ms johnson received zero dollar_figure dollar_figure dollar_figure and dollar_figure during the same respective years johnson roofing inc roofing is an affiliate of systems roofing's relevant tax returns included the following information taxable_year ended total income compensation of officers salaries wages pension profit-sharing_plans - - employee benefit programs taxable_income loss dollar_figure dollar_figure big_number big_number big_number big_number - - - - big_number big_number big_number dollar_figure dollar_figure big_number big_number - - - - big_number big_number - - big_number - - - - of the reported compensation mr johnson received dollar_figure dollar_figure and dollar_figure in his respective taxable years from through ms johnson received dollar_figure dollar_figure and dollar_figure during the same respective years neither of the johnsons received any compensation from roofing during their through taxable years the johnsons filed timely their joint federal_income_tax return on date the commissioner mailed them a notice_of_deficiency reflecting a determination that the johnsons' taxable_income was increased by dollar_figure on account of a taxable transfer of property from systems under section dollar_figure the notice also stated that the johnsons were liable for a dollar_figure accuracy-related_penalty under sec_12 the notice also increased the johnsons' income by dollar_figure on account of agreed items a because the underpayment_of_tax attributable to sec_83 was due to negligence on the same day the commissioner mailed systems a notice_of_deficiency reflecting a determination that its taxable_income was increased by dollar_figure because its contribution to the trust was governed by subpart d systems filed timely its tax_return the notice also stated that systems was liable for a dollar_figure accuracy-related_penalty under sec_6662 because its underpayment of income_tax was due to a substantial_understatement b systems' introduction to the prime plan max chapman systems' independent c p a introduced the johnsons to the prime plan stating that it would be useful in tax planning mr carr was also involved in meetings concerning systems' decision to join the prime plan and he reviewed some of the plan's literature one of the main selling features of the prime plan from mr carr's perspective was the very thick opinion letter mr johnson individually and on behalf of systems relied upon competent and informed tax and investment advisers before joining the prime plan and in reporting the tax ramifications that flowed therefrom c systems' adoption of the prime plan systems joined the prime plan by executing an adoption_agreement dated and effective as of date and by making a dollar_figure contribution to the trust days later the contribution funded the full accrual of dwb's for systems' three employees dollar_figure as well as their death_benefits dollar_figure when mr johnson made that contribution he believed the money could not be lost to an employee of another employee group systems' three employees became systems' covered employees in on date mr johnson on behalf of systems amended the adoption_agreement effective as of date to change the dwb accrual percentage to percent and the years_of_service multiple to one no change was made to the vesting schedule in all systems submitted the following adoption agreements relating to its participation in the prime plan date effective dismissal wage benefit_percentage years_of_service vesting schedule immediate immediate immediate normal_retirement_age not listed not listed death_benefit multiple date executed not not not executed executed dated on date ifti sent systems copies of substitute page sec_1 and for its adoption_agreement these pages changed the employer yearend to september the normal_retirement_date to and the death_benefit multiple to d administration of systems' account in the prime plan the annual report on systems' account in the prime plan pertained only to systems' employee group and it did not provide any information regarding the trust as a whole on date ifti forwarded the annual report for systems' account to mr johnson the report included an actuarial valuation signed by deloitte touche and provided the following calculations of vested severance benefits for systems' covered employees accrual years of vesting vested compensation percent service percent severance mr johnson ms johnson mr carr dollar_figure big_number big_number dollar_figure big_number big_number in the annual report the prime plan's actuary used a dwb of percent year_of_service percent vesting and a death_benefit multiple these numbers were different from those set forth in the adoption agreements adoption agreements with the percentages and multiples used in the annual report were prepared but never executed by systems ifti contacted systems on numerous occasions in and stating that systems needed to provide the executed adoption agreements mr carr executed but failed to date an adoption_agreement with the correct percentages and multiples the annual reports for systems' account in the prime plan included the following information fund value at yearend policy values surrender_value additional_contribution available - - date of report dollar_figure - - n a dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number e forms 5500-c r forms 5500-c r filed with the commissioner on systems' account in the prime plan reported the following information yearend assets dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure income big_number big_number big_number big_number expenses - - big_number big_number big_number big_number contributions big_number - - - - - - - - these forms also reported the payment of zero dollar_figure zero zero and zero in insurance commissions during the respective years viii on-site project management inc on-site a overview the traegdes are husband and wife and they resided in tempe arizona when they petitioned the court on-site is an s_corporation that was incorporated on date mr traegde was its president and he owned percent of its stock on date ms traegde was on-site's vice president and she owned the rest of its stock on that date the federal_income_tax returns of on-site and the traegdes were filed timely on-site reported its operations for federal_income_tax purposes on a calendar_year and it used the cash_method on its relevant tax returns these returns included the following data total income big_number big_number compensation of officers salaries wages big_number big_number pension profit-sharing_plans big_number big_number employee benefit programs - - - - big_number big_number ordinary_income loss dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number - - big_number - - - - big_number big_number big_number big_number big_number of the reported compensation mr traegde received dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure during the respective years b on-site's introduction to the prime plan thomas j connelly was the prime plan's sales agent for on-site mr connelly introduced mr traegde to the prime plan in late mr connelly had observed that mr traegde did not have a succession plan for his business or any estate_planning that the prime plan offered death_benefits for mr traegde and that the prime plan would give mr traegde a source of funds to close his business when he decided to leave on date mr connelly wrote to on-site's c p a thomas p joynt explaining the prime plan on date mr joynt replied with certain questions about the prime plan as well as on-site's possible participation therein on date mr connelly responded to mr joynt's letter mr connelly discussed the prime plan with mr traegde based on these conversations and after reading the promotional literature on prime mr traegde concluded that the risks involved in the prime plan were minimal mr traegde expected to get his dwb if he sold or closed his business and he knew that he could withdraw on-site from the prime plan at any time mr traegde also discussed mr weiss' opinion letter on the prime plan with mr joynt and mr traegde relied on mr joynt's advice with respect thereto c on-site's adoption of the prime trust on-site joined the prime plan by executing an adoption_agreement on date effective as of date and by contributing dollar_figure to the trust on the same day on-site's contribution was applied primarily as follows dollar_figure to the full accrual of dwb's for its covered employees and dollar_figure to the cost of their death_benefits as of date on-site's covered employees were mr traegde and four other employees other on-site employees became covered employees during and still others became covered employees in subsequent years on date on-site made an additional_contribution of dollar_figure to the prime plan on-site made no contributions to the prime plan in or on-site submitted the following adoption agreements relating to its participation in the prime plan date effective dwb percentage dollar_figure dollar_figure n a dollar_figure years_of_service n a vesting schedule n a normal_retirement_date same a sec_401 same a sec_401 same a sec_401 same a sec_401 death_benefit multiple dollar_figure dollar_figure dollar_figure date executed date effective dwb percentage dollar_figure years_of_service vesting schedule n a normal_retirement_date same a sec_401 same a sec_401 same a sec_401 death_benefit multiple n a dollar_figure dollar_figure date executed on-site's agreement dated date also reduced the minimum death_benefit from dollar_figure to dollar_figure d administration of on-site's account in the prime plan on date prime forwarded to on-site a actuarial valuation for on-site's account in the prime plan signed by laventhol horwath on date ifti forwarded a annual report for on-site's account in the prime plan to mr traegde this report included an actuarial valuation signed by deloitte touche and provided the following calculations of vested severance benefits for on-site's covered employees employee compensation percent service percent severance accrual years of vesting vested dollar_figure mr traegde big_number larry french erik kallstrom big_number big_number jeanne sharon - - norman burke - - richard murphy - - michael brandt k diane small - - - - denise minix steve boyles - - dollar_figure dollar_figure dollar_figure dollar_figure n a dollar_figure n a dollar_figure n a dollar_figure dollar_figure n a n a dollar_figure dollar_figure n a - - - - - - n a n a n a n a n a n a dollar_figure - - - - - - n a n a n a n a n a n a the report did not refer to another participating employee group and it did not provide any information on the trust as a whole the report related only to the on-site's employee group on date ifti forwarded the annual report for on-site's account in the prime plan to mr traegde this report included an actuarial valuation signed by deloitte touche and it listed nine other employees of on-site none of whom qualified for a vested severance benefit in order to accommodate on- site's contribution the accrual percentage for dwb's was increased from dollar_figure percent to percent the report acknowledged a dollar_figure contribution from on-site and applied the dollar_figure amount to the increase in dwb's allowed because of the change in the accrual percentage the increase due to the increased vesting of mr traegde and the increase due to the cost of death_benefits the annual reports for on-site's account in the prime plan listed the following relevant data fund value at yearend dollar_figure dollar_figure dollar_figure dollar_figure policy values big_number big_number big_number big_number surrender_value unstated unstated big_number big_number addit contr available big_number big_number date of report fund value at yearend dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure policy values big_number big_number big_number big_number big_number surrender_value big_number big_number big_number big_number big_number addit contr available big_number big_number big_number big_number big_number date of report on date prime forwarded to on-site its summary_plan_description on date prime forwarded to on-site its summary_plan_description on date prime forwarded to on-site its summary_plan_description with amendments through date e forms 5500-c r forms 5500-c r filed with the commissioner on on-site's account in the prime plan included the following information yearend assets dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number income expenses big_number big_number - - contributions big_number big_number big_number big_number - - big_number big_number - - these forms also reported the payment of dollar_figure dollar_figure dollar_figure zero and zero in insurance commissions during the respective years opinion we must determine the tax consequences flowing from the prime plan a purported multiple employer welfare_benefit_plan that has been marketed nationwide by its promoters as a viable tax planning device and subscribed to by hundreds of entities whose employee owners have sought primarily the promised tax benefits the designers of the prime plan struggled to comply with sec_419a's exception to the applicability of subpart d the designers followed the evolution of subpart d through the congressional committees and they aspired to create a valid welfare_benefit_plan that met the legislative intent for sec_419a the designers were familiar with the tax and labor provisions of employee benefit law based on their understanding of the genesis of subpart d the drafters concluded that sec_419a covered their design for the prime plan one of the designers mr weiss requested a ruling from the commissioner that the prime plan qualified under sec_419a the commissioner did not issue a ruling in reply to mr weiss' ruling_request and to date the commissioner has not issued regulations construing sec_419a on date the commissioner released notice_95_34 the notice 1995_1_cb_309 to provide guidance on the significant tax problems raised by certain trust agreements being promoted as multiple employer welfare_benefit funds exempt from the limits of sec_419 and sec_419a id although the notice did not mention the prime plan by name the notice indicated that the commissioner disagreed with prime that its plan was within sec_419a having failed in their attempt to receive the commissioner's assurance that the prime plan was a 10_or_more_employer_plan under sec_419a prime nevertheless began marketing the plan in relying on the designers' opinions as to the validity of the promised tax benefits that prime believed flowed from the prime plan the commissioner now challenges these tax benefits in the instant litigation the commissioner argues primarily that the prime plan is a plan of deferred_compensation petitioners argue that the prime plan provides merely welfare benefits the commissioner argues alternatively that the prime plan is actually an aggregation_of_plans that is outside the scope of sec_419a petitioners argue that the prime plan is a single 10_or_more_employer_plan within sec_419a we must resolve these disputes we do so with the benefit of a comprehensive and detailed evidentiary record developed by the parties up to including and after trial as well as with the aid of the parties' briefs and other voluminous submissions that have focused on issues which have been in dispute at one time or another throughout this proceeding we analyze the law that applies to the issues at hand giving due regard to all arguments made by the parties with respect to these issues type of plan welfare_benefit or deferred_compensation we pass first on whether the prime plan is a plan of welfare_benefit or deferred_compensation if the prime plan is a deferred_compensation plan sec_404 prohibits a participating employer from deducting a contribution until the year in which an amount attributable to the contribution is includable in the gross_income of employees participating in the plan assuming that separate_accounts are maintained for each employee if a separate_account is not maintained for each employee sec_404 does not allow an employer to deduct the contribution even in the year in which an attributable amount is included in the gross_income of an employee see also sec_1_404_a_-12 income_tax regs if on the other hand the prime plan is a welfare_benefit_plan subpart d generally limits the employer's deduction for its contributions to the amount that would have been deductible had it provided the benefits directly to its employees subpart d's limitations are inapplicable when sec_419a applies sec_419a generally lets an employer fully deduct its contributions in the year made although its employees may not have to report these contributions as income until a later year we agree with petitioners that the prime plan was a welfare_benefit_fund see sec_419 b b sec_1_162-10 income_tax regs see also schneider v commissioner tcmemo_1992_24 moser v commissioner tcmemo_1989_142 affd on other grounds 914_f2d_1040 8th cir mr weiss testified credibly that he designed the prime plan intending entirely to provide employees with real welfare benefits that would not be subject_to abuse and we read the record to support his testimony the dwb's under the trust agreement also are not payable upon the happening of a certainty but more closely resemble insurance payable only in the case of an uncertainty see harry a 31_f3d_569 7th cir affg tcmemo_1992_704 although the prime plan had features of deferred_compensation eg the payment of dwb's upon an employee's termination from employment based on his or her compensation and length of service the presence of vesting_schedules these features were swallowed up by the prime plan's valid welfare_benefit purpose so as to make the deferred_compensation features incidental and meaningless for purposes of our analysis respondent argues that this court's jurisprudence provides that the dwb's were deferred_compensation citing mainly 73_tc_700 50_tc_391 40_tc_882 and harry a wellons jr m d s c v commissioner tcmemo_1992_704 we disagree the plan at issue in each of the cases cited by respondent is distinguishable from the prime plan such is also true with respect to the benefits provided under each plan nor do we agree with respondent's reading of the seventh circuit's opinion in harry a 31_f3d_569 7th cir to provide that the dwb's were deferred_compensation because the prime plan had some indicia of a deferred_compensation plan all welfare_benefit plans bear some element of deferred_compensation see 768_f2d_1333 fed cir 698_f2d_1196 fed cir and respondent's reading of the seventh circuit's opinion emasculates the right of a taxpayer to avail itself of the tax_attributes of a welfare_benefit_plan unlike the prime plan the plan at issue in wellons was more akin to a deferred_compensation plan than the sort of 'welfare benefits' arrangement contemplated by the regulations harry a wellons jr m d s c v commissioner f 3d pincite nor do we agree with respondent's claim that the dwb's were deferred_compensation because an employer could voluntarily terminate its participation in the prime plan we are unable to find any requirement in the applicable statutory and regulatory provisions that would limit welfare benefits to cases in which an employer could not voluntarily terminate its participation in a plan we find in the statutory text that the congress knew how to say involuntary separation when it wanted see eg sec_501 which is referenced in sec_419a in the absence of a legislative pronouncement that limits severance benefits to cases where an employer could not voluntarily terminate its participation in a plan we refuse to adopt such a pronouncement here although respondent is concerned that the ability of a participating employer to terminate voluntarily its participation in the prime plan allows the employer to control the timing of income to its employees we regard that concern as misplaced respondent's concern could also be expressed with respect to the pension_plan of a corporation owned by a single shareholder although the shareholder may be the only employee it does not necessarily follow that such a pension_plan provides for receipt of deferred_compensation merely because the owner shareholder has the ability to terminate the pension_plan at will we hold for petitioners on this issue 10_or_more_employer_plan experience-rating agreements we turn to the second issue namely whether the prime plan is a 10_or_more_employer_plan that lacks experience-rating arrangements with respect to individual employers see sec_419a petitioners assert that the prime plan is within sec_419a ie the prime plan is a single_plan that covers more than employers no one of which made more than percent of the trust's total contributions and the plan has no experience-rating arrangements with respect to individual employers respondent asserts that the prime plan is outside the scope of sec_419a ie the prime plan is an aggregation_of_plans that has experience-rating arrangements with respect to all participating employers we agree with respondent that the prime plan does not meet the requirements of sec_419a the prime plan is an aggregation of separate welfare_benefit plans each of which has an experience-rating arrangement with the contributing employer we start our analysis with a discussion of the history of subpart ddollar_figure subpart d which consists of sec_419 and sec_419a was enacted by the congress as part of deficit_reduction_act_of_1984 publaw_98_369 and sec_512 98_stat_484 in 104_tc_559 and 103_tc_216 supplemented by 104_tc_248 this court addressed other issues under subpart d subpart d limits an employer's deduction for contributions to a welfare_benefit_plan the congress enacted subpart d because it was concerned with the law under which employers received current deductions for contributions to welfare_benefit plans while the benefiting employees excluded these amounts from their current income as stated by the house ways_and_means_committee in proposing a change to the prior_law the committee has concluded that the favorable tax treatment of employer contributions to welfare_benefit plans as compared with employer payments of wages and salary is inappropriate in view of the favorable tax treatment already provided to employees ie the exclusion of many of these benefits from adjusted_gross_income in addition the committee believes that the current rules under which employers may take deductions for plan contributions far in advance of when the benefits are paid allows excessive tax-free accumulation of funds the committee's concern has been caused by recent discussion among tax practitioners as to the tax- shelter potential of welfare_benefit plans commentators have pointed out that the combination of advance deductions for contributions and the availability of tax exemption for certain employee_benefit_organizations such as the voluntary employees' beneficiary association or veba provides tax treatment very similar to that provided to qualified_pension plans but with far fewer restrictions in one article on the use of employee benefit plans as a tax_shelter an example is given of how a small professional_corporation may utilize the tax benefits of a severance_pay plan funded by a veba in this example the employees of the corporation are two doctors age sec_50 and sec_55 with annual salaries of dollar_figure and dollar_figure respectively and three other workers ages to with annual salaries of dollar_figure to dollar_figure the example indicates that the corporation could make tax deductible annual contributions to a tax-exempt veba of more than dollar_figure annually under terms that would make it unlikely that the three lower- paid employees would receive substantial benefits from the plan thus the committee is concerned that substantial advance funding of welfare benefits will ultimately lead to an unacceptable tax burden for many taxpayers who do not participate in these programs h rept part pincite6 as reflected in the report of the conference the congress enacted subpart d with the understanding that subpart d's principal purpose was to prevent employers from taking premature deductions for expenses that have not yet been incurred by interposing an intermediary organization which holds assets which are used to provide benefits to the employees of the employer h conf rept pincite 1984_3_cb_1 the conference_report states that while in many cases welfare_benefit funds are designed to function in a manner similar to insurance arrangements the conference was concerned that there were no clear standards of limitations applicable to such funds that prevented their utilization for substantial nonqualified_deferred_compensation funding outside the general pension_plan funding accrual and vesting rules id pincite the conference_report commented as follows on the meaning of the term funds a retired life reserve or premium stabilization account ordinarily is to be considered a fund or part of a fund since such an account is maintained for an individual employer and that employer has a determinable right to have the amount in such an account applied against that employer's future costs of benefit claims or insurance premiums a similar situation exists with respect to premium arrangements under which an employer may in some cases pay an insurance_company more in a year than the benefit costs incurred in that year and the employer has an unconditional right in a later year to a refund_or_credit of the excess of payments over benefit costs in contrast an ordinary disability_income policy under which an employer pays a premium so that employees who become disabled in that year may collect benefit payments for the duration of disability is not a fund since the employer has no right to recover any part of the premium payment and the future benefit payments to an employee whose disability occurs during the period for which the premium is paid is not contingent on any further payments by the employer id pincite the rules of subpart d however do not apply to a multiemployer_plan described in sec_419a sec_419a provides exception for 10-or-more employer plans -- a in general --this subpart shall not apply in the case of any welfare_benefit_fund which is part of a 10_or_more_employer_plan the preceding sentence shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers b 10_or_more_employer_plan --for purposes of subparagraph a the term 10_or_more_employer_plan means a plan-- i to which more than employer contributes and ii to which no employer normally contributes more than percent of the total contributions contributed under the plan by all employers according to the conferees this exception was prescribed because under such a plan the relationship of a participating employer to the plan often is similar to the relationship of an insured to an insurer h conf rept pincite c b vol pincite the conferees went on to explain that notwithstanding compliance with the 10-percent rule and consistent with the discussion above on definition of a fund a plan is not exempt from the deduction limits if the liability of any employer who maintains the plan is determined on the basis of experience rating because the employer's interest with respect to such a plan is more similar to the relationship of an employer to a fund than an insured to an insurer id pincite petitioners argue that the prime plan is within this exception and that any uncertainty should be resolved in their favor because respondent has not issued proper guidance under sec_419a petitioners assert that mr weiss asked the commissioner for a ruling on the prime plan and that the commissioner refused to accommodate him petitioners assert that mr weiss was forced to withdraw his request_for_ruling months after he submitted it because he was led to believe that the commissioner would never rule on his request we understand petitioners to argue that the commissioner should have issued mr weiss guidance under sec_419a and that the commissioner should now be penalized for failing to do so petitioners rely on 245_us_151 for the proposition that any doubts as to the reach of sec_419a must be resolved in their favor we do not agree with petitioners that any ambiguity is to be resolved in their favor see 293_us_84 subsequent to the gould case the supreme court stated as follows we are not impressed by the argument that as the question here decided is doubtful all doubts should be resolved in favor of the taxpayer it is the function and duty_of courts to resolve doubts we know of no reason why that function should be abdicated in a tax case more than in any other 305_us_281 see 311_us_60 those who seek an exemption from a tax must rest it on more than a doubt or ambiguity exemptions from taxation cannot rest upon mere implications exemptions from taxation are not to be enlarged by implication if doubts are nicely balanced citations and internal quotation marks omitted sec_419a may be interpreted in light of all pertinent evidence textual and contextual as to its meaning see 506_us_168 331_us_1 284_us_552 see also 106_tc_274 a statute speaks for itself and its legislative_history will help us discern the meaning of the words therein when the words are 'inescapably ambiguous' 469_us_70 n quoting 341_us_384 jackson j concurring see also 337_us_55 legislative_history will also help us to discern text which is otherwise unambiguous when the text's plain meaning defeats the statute's stated purpose as observed recently by the court_of_appeals for the ninth circuit the circuit in which an appeal of this case lies we may not adopt a plain language interpretation of a statutory provision that directly undercuts the clear purpose of the statute in 699_f2d_1010 9th cir we refused to adopt a plain language interpretation of a statute governing pension funds we reasoned that the court must look beyond the express language of a statute where a literal interpretation 'would thwart the purpose of the overall statutory scheme or lead to an absurd or futile result ' brooks f 2d pincite quoting 518_f2d_913 9th cir in reaching our conclusion we followed the supreme court's approach in 310_us_534 60_sct_1059 84_led_1345 there the court noted that w hen a given meaning has led to absurd results this court has looked beyond the words to the purpose of the act frequently however even when the plain meaning did not produce absurd results but merely an unreasonable one 'plainly at variance with the policy of the legislation as a whole ' this court has followed that purpose rather than the literal words american trucking associations u s pincite 42_f3d_537 9th cir affg 95_tc_415 accordingly in interpreting sec_419a we look to the statute as written by the legislators and we consult the statute's legislative_history to learn its intended purpose and to resolve ambiguity in the words used therein 511_us_244 447_us_102 petitioners must prove that the prime plan falls within the scope of sec_419a which as they read it removes the prime plan's participating employers from the bowels of subpart d rule a 290_us_111 see also 319_us_590 deductions are strictly construed and allowed only when a 'clear provision' allows for one 503_us_79 quoting 292_us_435 308_us_488 petitioners argue that the prime plan is a single_plan petitioners assert that the word plan is construed broadly and that the need for the trust to have a single pool of funds would make the phrase experience-rating arrangements with respect to individual employers surplusage petitioners assert that the congress enacted sec_419a to encourage small employers to provide on a tax-advantaged basis welfare benefits to their employees who generally speaking had not received such benefits in the past petitioners assert that the prime plan satisfies congressional intent petitioners also argue that the prime plan lacked experience-rating arrangements with respect to individual employers petitioners define the relevant phrase by reference to a footnote in the house committee report the footnote indicates that the term purely experience-rated means the employer is entitled to an automatic rebate if the amount_paid exceeds the benefit claims and is liable if the benefit claims exceed the amount_paid h rept part supra pincite n petitioners also look to section a b of the tax_reform_act_of_1986 publaw_99_514 100_stat_2860 which describes an experience-rated insurance_policy to mean the employer has a contractual right to a refund or dividend based solely upon the experience of such employer petitioners assert that the conferees' use of the word often in their explanation of sec_419a means that the prime plan did not have to function as a risk-distributing insurer in order to fall within that section petitioners assert that the suspense_account satisfied any risk shifting requirement inherent in sec_419a because actuarial gains were pooled to supplement underfunded benefits of other employers we disagree with petitioners' assertion that the prime plan is a single_plan for purposes of subpart d the prime plan is nothing more than an aggregation of individual unique plans formed by separate employers who have delegated to a common administrator their the employers' duties and responsibilities with respect to the respective plans that each employee owner has tailored personally for his or her business and contributed funds to a_trust overseen by a common trustee that was required to disburse each employer's contributions and earnings thereon primarily for the benefit of the contributing employer's employees the fact that prime structured the prime plan to have one administrator one trust and a suspense_account with some commonality among all employers does not change the fact that each of the employers separately had the unbridled authority to select many of the relevant terms under which its employees would collect benefits from the prime plan that no employee group had a right to any contributions or earnings thereon which had been made by the employer of another employee group and that a severed employee could end up receiving less than his or her promised benefit even though the prime plan as a whole had enough assets to compensate the employee for this shortage we reject petitioners' claim that the prime plan is a 10_or_more_employer_plan based on the language and congressional purpose of subpart d and sec_419a we interpret the word plan to mean that there must be a single pool of funds for use by the group as a whole eg to pay the claims of all participants and we interpret the phrase 10_or_more_employer_plan to mean that or more employers must contribute to this single pool we do not interpret the statutory language to include a program like the instant one where multiple employers have contributed funds to an independent party to hold in separate_accounts until disbursed primarily for the benefit of the contributing employer's employees in accordance with unique terms established by that employer we are unpersuaded that the word plan as it appears in sec_419a is satisfied by prime's attempt to aggregate multiple plans as a single_plan in arguing that the prime plan is a unitary plan for or more employers within the scope of sec_419a petitioners rely on the following features the prime plan had a common administrator and the trust had a single trustee neither of whom was accountable to or controlled by any one participating employer participating employers irrevocably delegated to prime the responsibility for a variety of administrative and other functions prime exercised unreviewable authority over the calculation of employer contributions as well as the determination of benefit distributions and forfeitures to the suspense_account prime was responsible for determining the amount of all disbursements from the suspense_account in accordance with an objective formula set forth in the trust agreement and the suspense_account served a limited common interest of all participating employers we conclude however that the foregoing features are outweighed by the following features that point to the result that we reach today prime was required to maintain separate_accounts and a separate_accounting for each employee group the trust agreement limited an employee's right to benefits under the prime plan to the assets of his or her employee group an annual valuation was performed for each employee group's account and an annual valuation has never been performed for the trust as a whole the summary_plan_description required by sec_102 of erisa was prepared separately for each employee group the arrangement and the adoption_agreement signed by each employer were very similar to an arrangement and adoption_agreement used by separate employers' establishing a separate plan under the terms of a master_plan each employer selected its employees' level of benefits vesting schedule and minimum participation requirements separate and apart from the selections made by the other employers each employer's contribution benefited primarily its employees and not the employees of other employers the trust agreement provided rules under which an employee's benefits would be reduced in the event of a shortfall and without subsidy from the trust as a whole and the prime plan did not pool all claim risks within the trust petitioners' argument focuses mainly on the fact that a single trust serviced multiple employers their argument ignores the fact that the account of each participating employer was kept separate from that of every other employer and most importantly that an employer's contributions benefited primarily its own employee group the applicability of sec_419a does not rest on whether more than nine employers contribute to a single trust sec_419a requires a single_plan the existence of which is not established by prime's sponsorship of a program under which multiple employers contribute to a single trust but for the fact that a single promoter formed a common trust and offered many employers the ability to enroll in a program that was administered by a common overseer we find little meaningful commonality among each participating employer's participation in the prime plan contrary to petitioners' assertion our interpretation of the term 10_or_more_employer_plan does not make surplusage of the phrase experience-rating arrangements with respect to individual employers the phrase has meaning for example when a multiple employer trust maintains a single pool of assets from which all claims could be paid and charges each group of participants a different premium if one were to look solely at physicians and construction workers two of the vocations of employees covered by the prime plan and assume that the turnover rate of these two groups is different the prime plan if structured with a single pool of assets would almost certainly have to charge different premiums to the different groups based on each group's turnover rate in order to lure them into and retain them in the plan in the context of the prime plan however a single pool was simply not desirable because prospective participating employers did not want to accept the risk that their contributions would be used to pay the severance claims of other employers' employee groups that possessed different levels of severance risk we find additional support for our interpretation in the testimony of charles c deweese f s a m a a a an expert on multiple employer plans who concluded that each employee group was a separate plan mr deweese testified that the typical multiple employer trust allows a participant to collect benefits from percent of the trust's assets and petitioners' expert e paul barnhart f s a m a a a did not disagreedollar_figure mr barnhart testified that the attributes described by mr deweese were found typically in a multiple employer trust and that except for the trust he mr barnhart had never seen a multiple employer trust that did not possess those attributes mr deweese and mr barnhart both testified that the prime plan was dissimilar to a traditional multiple_employer_plan mainly because of its lack of these attributes we disagree with petitioners' reading of the legislative_history to indicate that the congress enacted sec_419a to encourage plans such as the prime plan we read this history to point to a legislative intent that is contrary to the intent espoused by petitioners the house committee articulated its concern about the tax-shelter potential of welfare_benefit plans and about the ability of small_business owners to achieve the effect of a qualified_pension plan but with fewer limitations h rept part supra pincite the committee also noted that substantial advance funding of welfare benefits will we were not impressed with the testimony of petitioners' other expert kenneth d klingler f s a we find his testimony at trial unpersuasive and unhelpful and we do not rely on it 838_f2d_330 9th cir affg in part and revg in part on another issue tcmemo_1986_318 christ's 480_f2d_171 9th cir affg 54_tc_493 106_tc_274 ultimately lead inappropriately to an unacceptable tax burden for many taxpayers who do not participate in these programs id pincite bearing these expressions of legislative intent in mind we are unable to agree with petitioners that the congress was encouraging the type of tax planning techniques promoted in the prime plan we also disagree with petitioners' assertion that the prime plan lacked experience-rating arrangements with respect to individual employees the legislative_history of subpart d sets forth the house committee's intent to disallow the tax benefits which petitioners claim flow from the prime plan and the examples of abuse that the house committee cited in its report describe precisely what prime is attempting to accomplish through the prime plan the legislative_history states that sec_419a was enacted because the relationship of a participating employer to a 10_or_more_employer_plan typically resembles the relationship of an insured to an insurer h conf rept supra pincite c b vol pincite the legislative_history states further that a 10_or_more_employer_plan is outside the scope of sec_419a if the liability of any employer who maintains the plan is determined on the basis of experience rating because the employer's interest with respect to such a plan is more similar to the relationship of an employer to a fund than an insured to an insurer h conf rept supra pincite c b vol pincite the term experience-rated means generally that premiums contributions are adjusted to reflect experience see also 477_us_105 experience rated means that the cost of insurance to the group is based on that group's claims experience rather than general actuarial_tables the congress knew this as evidenced by the fact that the house committee defined the term purely experience-rated in its report yet the congress declined to inscribe the term experience-rated in sec_419a choosing instead to use the term experience-rating arrangements we believe that the scope of the term experience-rating arrangements is wider than that of experience-rated the conferees stated that a plan is outside the scope of sec_419a if any employer's liability is determined on the basis of experience rating if the conferees had meant to equate the term experience-rating arrangements with the term experience rated they could and we believe would have said that a plan is outside the scope of sec_419a if any employer's liability is experience rated the conferees did not nor did the congress provide in sec_419a that the first sentence therein shall not apply to any plan that is experience rated with respect to individual employers the essence of experience rating is the charging back of employee claims to the employer's account the prime plan accomplished the same result by adjusting the employees' benefits to equal its employer's contributions the prime plan charged back the employees' claims to their employers' accounts by carrying the accounts' yearend balances over to future years and limiting an employee's benefits to the amount in his or her employer's account this was an experience-rating arrangement mr deweese concluded that experience-rating may occur by adjusting benefits rather than premiums and mr barnhart agreed mr barnhart also acknowledged that the term experience-rating means that over time the premiums less expenses equal the benefits this credible expert testimony supports our view that the prime plan had experience-rating arrangements with respect to all participating employers we also conclude that the prime plan had experience-rating arrangements because each employer's relationship to the trust was more akin to the relationship of an employer to a fund than of an insurer to an insured in the typical setting of a self- funded_welfare_benefit_plan an employer contributes to a fund from which all of its employees' claims are paid another employer's employees may not recover amounts from the first employer's fund an insurer in the typical insurer insured relationship on the other hand usually collects premiums from many employers and pays the claims of each of the employer's employees the insurer typically spreads the risk of claims among all employers by charging each employer a premium commensurate with its covered risk the relationship of the trust to each participating employer more closely mirrored self-funding than insurance as a matter of fact the trust agreement provided that each employee's claim could be funded only from the account of the employee's employer and that an employee did not have recourse against the employer the trust or any other person to the extent of any shortfall it also is relevant that prime accounted for each employer's account separately the trust agreement provided rules under which an employee's benefits would be reduced in the event of a shortfall the trust held and invested an employer's contributions until benefits had to be paid to its employees the prime plan did not pool all claim risk within the trust and an employer's contributions to the trust could pay its employees' claims after the year's end while an insurer will not return an insured's premiums to it at the end of the policy petitioners argue that the suspense_account provided the risk shifting necessary for the prime plan to qualify under sec_419a we do not agree notwithstanding the reasons asserted by petitioners for the suspense_account the record shows clearly that the suspense account's primary purpose was to pay fees and expenses and that only a de_minimis amount of funds was actually disbursed from the suspense_account to satisfy employee claims the record also demonstrates that amounts were not transferred into the suspense_account based on exposure to risk and that the suspense_account did not serve to spread among the participating employers the risk of incurring dwb's even if one were to assume arguendo that the suspense_account did serve to shift some risk our view would not change we are unable to find that any such shift would have been meaningful as a point of fact the risk of severance never shifted from the employers to the trustdollar_figure the trust never assumed any risk of loss for any amount placed therein contributions never provided a meaningful benefit to persons other than the contributing employer's employees although it is true that actuarial gains were pooled in the suspense_account to supplement underfunded benefits of other employers we do not believe that this pooling technique shifted risk significantly as a point of fact less than percent of the benefits came from the suspense_account accordingly we hold that the prime plan is not within the requirements of sec_419a thus the participating in this regard we disagree with mr barnhart who testified that he believed the suspense_account operated to share the risk of severance among employers relying on this belief mr barnhart concluded that the suspense_account operated to make the prime plan a single_plan mr barnhart agreed however that absent the shift of severance through the suspense_account the prime plan would be an aggregation of separate plans employers are subject_to subpart d under sec_419 each employer's deduction for its contribution to its separate plan is limited to the plan's qualified_cost for the year less the plan's after-tax_income sec_419 b and c see also 104_tc_559 an employer's qualified_cost equals the qualified_direct_cost for the taxable_year plus an addition to a qualified_asset_account sec_419 respondent has proffered to the court calculations of each corporation's qualified_cost and allowable deduction with respect to its plan these calculations show that young young is entitled to deduct dollar_figure for and that no other corporation is allowed a deduction with respect to its plan petitioners do not dispute the mechanics of respondent's calculations and petitioners have not supplied the court with alternative calculations of qualified_cost petitioners' position which we have rejected is that the corporations can deduct their contributions in full we have reviewed respondent's calculations and we are satisfied that they are correct accordingly we sustain respondent's determination that the corporations are not allowed any deduction for the subject years with respect to their contributions to the prime plan except for young young which may deduct dollar_figure for dollar_figure penalties respondent determined that each corporate petitioner was liable for a penalty under sec_6662 because it substantially understated its federal_income_tax see sec_6662 as relevant herein sec_6662 imposes an accuracy-related_penalty equal to percent of an underpayment that is due to a substantial_understatement_of_income_tax in the case of a corporation a substantial_understatement exists if its income_tax was understated by the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 for this purpose tax is not understated to the extent that the treatment of an item is based on substantial_authority or is adequately disclosed in the return or in a statement attached to the return sec_6662 substantial_authority exists when the weight of authority supporting the treatment of an item is substantial when compared to the weight of authority supporting contrary treatment sec_1_6662-4 income_tax regs to determine whether substantial_authority is present all authorities which are respondent determined and petitioners do not dispute that young young was a qualified_personal_service_corporation taxable at a single rate of percent see sec_11 accordingly young young's dollar_figure deduction reduces its deficiency by dollar_figure relevant to the tax treatment of an item including those authorities pointing to a contrary result are taken into account id examples of authority include statutory and regulatory provisions legislative_history and administrative interpretations of the commissioner sec_1_6662-4 income_tax regs legal opinions are not authority the authorities underlying a legal opinion however may give rise to substantial_authority for the tax treatment of an item id we conclude that the corporate petitioners are not liable for the penalties in dispute we have agreed with petitioners that the prime plan is not a plan of deferred_compensation and whether the prime plan is within the scope of sec_419a is a novel question although we decide the latter question in favor of respondent we are persuaded that petitioners' position is supported by a well-reasoned construction of the relevant statutory provisions sec_1_6662-4 income_tax regs we decline to uphold respondent's determination of the penalties against the corporate petitioners in the circumstances herein we have considered all arguments made by the parties for contrary holdings and to the extent not discussed above find them to be irrelevant or without merit to reflect the foregoing decision will be entered for petitioners in docket nos and decision will be entered for respondent with respect to the deficiencies and for petitioners with respect to the penalties in docket nos and an appropriate decision for respondent will be entered in docket no as to the deficiency and the addition_to_tax under sec_6651 and for petitioner with respect to the penalty