g mason cadwell jr petitioner v commissioner of internal revenue respondent docket no filed date k an s_corporation percent owned by p’s spouse adopted and through its subsidiary ksm made contributions to a multiemployer welfare-benefit plan the plan through ksm k made a contribution to the plan part of which was used to purchase life_insurance coverage for p and k’s other employees and the remainder of which was an excess con- tribution the plan was amended and converted to a single- employer plan the plan’s qualification pursuant to sec_419a i r c is not in issue held r was not required to send p a day letter and the notice_of_deficiency ade- quately sets forth r’s position in this case and is therefore valid held further p’s interest in the plan became substan- tially vested upon the plan’s conversion from a multiemployer_plan to a single-employer_plan sec_1_402_b_-1 income_tax regs held further p must include in gross_income the cash_value of the life_insurance_policy on p’s life the value of the life_insurance_policy is the perc premiums earnings and reasonable charges pursuant to revproc_2005_25 2005_1_cb_962 p has not contended that we should deviate from the safe_harbor provision of revproc_2005_25 supra thus p may not reduce the perc value by the surrender charge under that provision held further p must include in his gross_income the excess_contributions pursuant to sec_1_402_b_-1 income_tax regs held further the current_year_cost of insurance protection is an accession to wealth which p must include in gross_income pursuant to sec_61 i r c held further where the fair_market_value of a life verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner insurance_policy has been determined using the perc method p must include in his gross_income as the cost of life_insurance protection an amount equal to the sum of mortality charges and other expenses held further p is liable for the accuracy-related_penalty for a substantial_understatement_of_income_tax pursuant to sec_6662 and b i r c richard h morton and kevin j ryan for petitioner kathleen tagni sherri wilder and betty clary specially recognized for respondent opinion wells judge this case is before the court on petitioner’s motion for summary_judgment and respondent’s cross-motion for summary_judgment pursuant to rule respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for tax_year and a penalty pursuant to sec_6662 of dollar_figure on date petitioner filed a motion for summary_judgment on date respondent filed a response to petitioner’s motion for sum- mary judgment and a cross-motion for summary_judgment on date petitioner filed a motion to amend his petition on date petitioner filed a response to respondent’s cross-motion for summary_judgment on date a hearing was held on the parties’ motions on date respondent filed a reply to petitioner’s response to respondent’s motion for summary_judgment and an objection to petitioner’s motion to amend his petition summary_judgment for summary and judgment are the issues to be decided as a consequence of petitioner’s motion for respondent’s cross-motion whether respondent was required to send a day letter to peti- tioner and whether the notice_of_deficiency adequately sets forth respondent’s position in the instant case whether petitioner must include in gross_income the cash_value of a life_insurance_policy held by a multiemployer welfare_benefit_plan that was converted to a single-employer welfare_benefit_plan during the year in issue whether petitioner unless otherwise indicated section references are to the internal_revenue_code_of_1986 code as amended and in effect for the year in issue and rule references are to the tax_court rules_of_practice and procedure by separate order we will deny petitioner’s motion to amend his petition verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports must include in his gross_income payments made by his employer in excess of the cost of current_year life_insurance protection excess_contribution whether petitioner must include in his gross_income the current_year_cost of life insur- ance protection paid_by his employer and whether peti- tioner is liable for the penalty under sec_6662 background the background facts are drawn from the pleadings the parties’ motions facts deemed established and stipulated exhibits and are not in dispute at the time of filing of the petition petitioner was a resi- dent of north carolina petitioner is married to jennifer k cadwell mrs cadwell petitioner and mrs cadwell have two daughters jennifer keady cadwell jennifer and miranda m cadwell miranda for hi sec_2002 through tax years petitioner filed form sec_1040 u s individual_income_tax_return claiming a filing_status of married_filing_separately for hi sec_2002 through tax years petitioner did not report any wages or salaries on line of form_1040 keady ltd keady is a pennsylvania s_corporation orga- nized during pursuant to sections keady is and has always been percent owned by mrs cadwell mrs cadwell is the sole director of keady during through petitioner served as the secretary of keady keady does not have any minutes of shareholders or direc- tors meetings for through during through keady’s only income was its share of income or loss from ksm limited_partnership ksm a pennsylvania limited_partnership formed during during through ksm was owned as follows percent by mrs cadwell percent by keady percent by petitioner percent by jennifer and percent by miranda keady is the general_partner of ksm during date petitioner and mrs cadwell decided to obtain employee welfare benefits for petitioner jennifer and miranda through the national benefit plan in the notice_of_deficiency respondent determined adjustments to petitioner’s personal ex- emption and itemized_deductions these adjustments are computational and will depend on the court’s resolution of the issues discussed herein certain facts were deemed established by separate order of the court verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner and trust the respective plan documents are hereinafter referred to as the plan and the respective trust created under the plan is hereinafter referred to as the trust according to its original terms the plan was organized as a multiemployer welfare_benefit_plan pursuant to sec_419a the documents describe the plan’s design and operation the primary purpose of the plan is to provide severance and death_benefits to eligible employees according to the plan each employer is to bear the full cost of the bene- fits provided assets held by the trust are protected from the claims of each employer’s creditors each employer enrolled in the plan is entitled to elect the amount of benefits to pro- vide and the period over which such benefits become vested upon termination of the plan or employer withdrawal from the plan an employee’s nonforfeitable benefits are deemed to be percent vested regardless of the vesting schedule set by the employer before joining the plan a prospective employer provides to the plan_sponsor niche plan sponsors niche employment information regarding the employees whom the employer chooses to include in the plan niche uses the employer’s information to create a package of information that contains a summary of the plan’s benefits to the employer and its employees according to the summary petitioner receives dollar_figure a year in wages from keady on date petitioner signed the document adopting the plan as secretary on behalf of keady petitioner wa sec_64 years old at the time keady adopted the plan the adoption_agreement identifies niche as the plan_sponsor national plan advisory as the plan_administrator wells fargo bank as the plan trustee and national benefit plan and trust as the record_owner of the trust’s assets keady elected to cover petitioner miranda and jennifer with death_benefits equal to times the covered employee’s compensa- tion severance benefits equal to percent of compensa- tion per year up to years not to exceed percent and a modified vesting schedule vesting schedule under the vesting schedule an employee is first vested in severance the parties agree that the trust was not exempt from tax under sec_501 whether the plan meets the requirements of sec_419a is not in issue the plan states the plan shall terminate upon delivery by the plan_sponsor to the trustee of a written and signed notice of termination verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports benefits pincite percent of the stated benefit after years of employment with vesting increasing to percent at year of employment life_insurance covering petitioner’s and his daughters’ lives was selected to fund the death and severance benefits pay- able under the plan to petitioner and his daughters for petitioner a universal life policy with an initial death_benefit of dollar_figure million that also accumulates cash_value hereinafter referred to as the life_insurance_policy was selected to fund his benefit the life_insurance_policy was issued by lincoln national life_insurance co lincoln life on date petitioner named miranda and jennifer as bene- ficiaries of the life_insurance_policy in his life_insurance_policy application petitioner listed himself as manager of keady for miranda and jennifer identical 10-year level term life_insurance policies on their lives with death_benefits of dollar_figure were selected to fund their benefits the annual combined premiums on those policies totaled dollar_figure on their life_insurance applications miranda and jennifer were identified as consultants for keady on date ksm paid dollar_figure by check to com- pass bank the plan trustee to cover keady’s obligation under the plan and dollar_figure for the plan fee both checks were drawn on ksm’s centennial bank account and were signed by petitioner lincoln life credited petitioner’s life_insurance_policy for a payment of dollar_figure for the month ending date petitioner did not include any income on hi sec_2002 form_1040 as a result of any life insur- the parties do not specify how the severance benefits are to be funded whether through the cash_value of the life_insurance_policy or some other option the adoption_agreement states the adopting employer shall contribute for each covered_employee the contribution necessary to fund a covered employee’s target severance benefit determined under the formula and rules set forth in this article there are many different kinds of life_insurance policies term life_insurance covers the insured only for a particular period and upon expiration of that period terminates without value whole_life_insurance covers an insured for life during which the insured pays fixed premiums accumulates savings from an invested portion of the premiums and receives a guaranteed benefit upon death to be paid to a named beneficiary universal_life_insurance is term life_insurance in which the premiums are paid from the in- sured’s earnings from a money-market fund variable life_insurance is life_insurance in which the premiums are invested in securities and whose death_benefits thus depend on the securities’ performance though there is a minimum guaranteed death_benefit curcio v commis- sioner tcmemo_2010_115 the record does not reveal at what point compass bank assumed the role of plan trustee verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner ance premiums_paid by ksm the payments to the plan trustee were not claimed as a deduction on ksm’s or keady’ sec_2002 federal_income_tax return petitioner’s accountant robert w nicolini c p a mr nicolini was not aware of the payments or that ksm had a bank account with centen- nial bank on date ksm paid dollar_figure to plan adminis- trators the new plan_administrator to cover keady’s obligation under the plan of that amount dollar_figure was paid to cover the plan contribution and dollar_figure was paid as the plan fee the checks were drawn on the ksm limited part- nership escrow account c o crawford wilson and ryan llc ksm escrow account the ksm escrow account was main- tained at national penn bank when mr nicolini prepared ksm’s federal_income_tax return he discovered the dollar_figure in payments made to plan administrators mr nicolini was not aware that ksm or keady was participating in the plan mr nicolini asked miranda the tax_matters_partner of ksm about the payments miranda who was unable to verify the payments thought they were for a horse mr nicolini recorded the amounts as payments for horses and booked them as an asset on ksm’s balance_sheet mr nicolini never depreciated the horses on ksm’s balance_sheet and during the horses were distributed to the cadwells as a capital distribution lincoln life credited peti- tioner’s life_insurance_policy for an dollar_figure payment for the month ended date on date the internal_revenue_service irs issued notice_95_34 1995_1_cb_309 which described certain multiemployer plans meps that do not qualify under sec_419a in notice_2001_51 2001_2_cb_190 the irs des- ignated those transactions described in notice_95_34 supra as listed transactions subject_to enhanced disclosure requirements on date the american job sec_11 the record does not reveal when plan administrators became the plan_administrator ksm paid this amount using two checks one for dollar_figure dated date and the other for dollar_figure dated date the record does not reveal why petitioner’s life_insurance_policy was not credited with a dollar_figure payment or why petitioner’s payment in may was not credited until september peti- tioner’s life_insurance_policy was not credited with a payment for notice_2001_51 2001_2_cb_190 was supplemented and superseded by notice_2003_76 2003_2_cb_1181 which was supplemented and superseded by notice_2004_67 2004_2_cb_600 which was supplemented and superseded by notice_2009_59 2009_31_irb_170 notice continued verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports creation act of publaw_108_357 118_stat_1575 became law and instituted a new penalty for failure to disclose a listed_transaction see sec_6707a on date niche sent letters to the employers participating in the plan announcing that the plan had been split into single-employer welfare_benefit plans seps or individually sep the reasons stated in the letters for the conversion included more employer control_over plan assets and the concern that the plan might be subject_to listed_transaction penalties under sec_6707a niche’s letter acknowledged that the seps no longer qualified for treatment pursuant to sec_419a and therefore the deduct- ibility of the employer’s contributions would be limited keady’s employee welfare_benefit_plan was renamed the keady ltd welfare_benefit_plan and the assets were maintained by the national benefit trust ii on date niche and wells fargo as trustee entered into a new trust agreement for the national benefit trust ii by its terms the agreement is a complete amend- ment and restatement of the original trust agreement significantly the new agreement provides that the plan_administrator is now the employer unless the employer des- ignates another person or persons to be plan_administrator the new agreement provides that the employer keady can terminate the sep at any time in the event of keady’s with- drawal from the sep at the end of the 23-month period fol- lowing the date keady terminated the sep the 23-month period the trust has the option to distribute the life insur- ance policies to keady sell the life_insurance policies to any interested purchaser with an insurable interest in the employees or surrender the life_insurance policies to the insurance_company for their cash_surrender_value addition- ally the trust can sell petitioner his life_insurance_policy supra includes transactions described in notice_95_34 1995_1_cb_309 as listed transactions listed transactions are transactions that are the same as or substantially_similar to those transactions that have been determined by the irs to be tax_avoidance transactions and have been identified by notice regulation or other form of published guidance sec_1_6011-4 income_tax regs according to the letters the change was made effective retroactively to date how- ever we treat the change as actually occurring on date as this is the date of the actual conversion the new agreement setting up the sep appears to use employer withdrawal and employer termination interchangeably verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner during the 23-month period keady would be required to con- tinue paying the annual cost of the life_insurance if peti- tioner were to die before the end of the 23-month period he would still be eligible for the death_benefits under the sep keady ksm petitioner mrs cadwell miranda and jen- nifer were not consulted by niche before the split of the plan into separate seps keady ksm petitioner mrs cadwell miranda and jennifer did not attempt to access or use the plan benefits at any time during or petitioner did not include on his form_1040 for his tax_year any income resulting from the conversion of the plan from an mep to an sep during date the life_insurance_policy covering petitioner had a death_benefit value equal to dollar_figure a fund value equal to dollar_figure and a surrender_value equal to dollar_figure the fund value was determined by adding the premiums_paid dollar_figure dollar_figure dollar_figure and interest credited dollar_figure dollar_figure dollar_figure less mortality charges dollar_figure dollar_figure dollar_figure and other expenses dollar_figure dollar_figure dollar_figure the surrender_value was the amount of cash that petitioner would receive upon surrender of the life_insurance_policy to lincoln life and was calculated by sub- tracting a surrender charge of dollar_figure from the fund value of dollar_figure yielding a surrender_value of dollar_figure kevin ryan mr ryan petitioner’s counsel in this case prepared two legal opinions for niche dated date and date mr ryan began serving as counsel the death_benefit is the projected amount payable upon the death of the insured the fund value represents the equity in the life_insurance_policy and is also known as the cash_value of the life_insurance_policy mortality charges are also referred to as cost of insurance charges the irs provided the following explanation of mortality charges in priv ltr rul n date coi mortality charges are determined by multiplying a mortality rate which increases with the age of the insured by the net amount_at_risk the difference between the death_benefit and the cash_value ie the pure insurance element of the contract mortality rates are determined with reference to a particular mortality_table in other words the mortality charges approximate the term life_insurance component of a whole life or universal life policy however because of concerns that insurers might manipulate such rates the irs will not view the mortality charges as the actual premium rates for term life_insurance unless the insurer generally makes such rates available to those who apply for term_insurance coverage and the insurer regularly sells term_insurance coverage at such rates see notice_2002_8 2002_1_cb_398 the interest credits mortality charges and expenses are for and these dollar amounts are rounded down to the nearest whole number verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports to niche after petitioner was involved in the plan in mr ryan’s opinion letter of date he stated question will participants in the trust have income on the current value of the death_benefits provided under the trust equal to the lower_of the so-called p sec_58 rates or the insurance company’s term_insurance rates answer yes in his explanation of the taxation of plan benefits mr ryan stated the death_benefits are nontransferable therefore subject_to a substan- tial risk of forfeiture and employees have no right to any cash_value employees should not be taxed on the death_benefit as a transfer of a permanent life_insurance_policy nevertheless participating employees receive an economic benefit each year for the death_benefit coverage that is provided for that year thus in accordance with regulation sec_1_83-1 employees should be taxed each year on the cost of the life_insurance protection under code sec_61 and the regulations there- under in an amount which is equal to the reasonable net premium cost as determined by the commissioner of the current_life_insurance_protection as defined in regulation sec_1_72-16 provided by such contract the reasonable net premium costs of the current_life_insurance_protection as defined in regulation sec_1_72-16 is the same measure of value for life_insurance protection that qualified_retirement_plans use the service has determined the reasonable net premium costs and published those amounts as p sec_58 rates in revrul_66_110 1966_1_cb_12 the service held that an employer may use the current published premium rates charged by an insurer for individual one-year term life_insurance available to all standard risks for determining the costs of insurance in connection with individual policies instead of the p sec_58 costs table in notice_2001_10 an alternative table is set forth labeled table it is the firm’s opinion that participating employees in the trust receive an economic benefit for the death_benefit protection provided each year under the trust the annual tax for such benefits shall be determined in accordance with code sec_83 and the regulations thereunder and shall be the lower_of the p sec_58 table costs or the insured’s term_insurance rates in accordance with revrul_66_110 fn ref omitted on date respondent sent petitioner a notice_of_deficiency in which he determined that petitioner’s gross_income for should be increased by dollar_figure the unre- ported income determined by respondent consists of the fund value of the life_insurance_policy as of date of dollar_figure the excess_contribution to the plan of verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner dollar_figure and the cost of term life_insurance on peti- tioner’s life for of dollar_figure petitioner timely filed a peti- tion in this court discussion rule a allows a party to move for a summary adju- dication in the moving party’s favor upon all or any part of the legal issues in controversy rule b directs that a decision on such a motion shall be rendered if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law the moving party bears the burden of demonstrating that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law 98_tc_518 affd 17_f3d_965 7th cir facts are viewed in the light most favor- able to the nonmoving party id however where a motion for summary_judgment has been properly made and sup- ported the opposing party may not rest upon mere allega- tions or denials in that party’s pleadings but must by affida- vits or otherwise set forth specific facts showing that there is a genuine issue for trial rule d i caselaw concerning sec_419a plans the issues we must decide concern the income_tax con- sequences of employee welfare benefits generally contribu- tions to welfare_benefit plans are deductible by an employer when paid if they qualify as ordinary and necessary business_expenses but only to the extent allowed by sec_419 and sec_419a sec_162 sec_419 sec_419a in recent years adopted multiemployer plans have been claiming to satisfy sec_419a and purporting to generate deductions for the insurance benefits provided under the plans notice_95_34 supra this court has decided several cases regarding pur- ported sec_419a plans in the notice_of_deficiency respondent contends that the value of the excess_contribution was dollar_figure respondent concedes that of the dollar_figure contributed dollar_figure was for the plan fee and dollar_figure was for life_insurance premiums dollar_figure for petitioner and dollar_figure for miranda and jennifer therefore respondent contends that the excess_contribution of dollar_figure should be in- cluded in petitioner’s gross_income verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports the employer contributing in 108_tc_524 we held that the plan in issue did not meet the requirements of sec_419a because it was an aggregation of separate welfare_benefit plans each of which has an experience-rating arrangement with in 115_tc_43 affd 299_f3d_221 3d cir without deciding whether the plans in issue met the requirements of sec_419a we held that the corporate employer participants could not deduct contributions in excess of the cost of term life_insurance we also held that the disallowed deductions should be treated as dividend distributions to the employee- owners of the c corporations to the extent of earnings_and_profits id pincite in v r deangelis m d p c v commis- sioner tcmemo_2007_360 affd per curiam 574_f3d_789 2d cir similarly without ruling on whether the plan met the requirements of sec_419a we held that pay- ments for life_insurance were essentially a distribution of s_corporation profits rather than payments made with compen- satory intent in curcio v commissioner tcmemo_2010_115 again without ruling on whether the plan met the requirements of sec_419a we held that contributions were distributions of profits to the employee-owners and not deductible pursuant to sec_162 we did not address in any of the foregoing cases the tax consequences to a nonowner employee for contributions to a plan that purportedly met the requirements of sec_419a and subsequently was converted into a plan that no longer qualified we must decide the consequences to peti- tioner of contributions to such a plan ii whether respondent was required to send a day letter to petitioner and whether the notice_of_deficiency is invalid because respondent’s position is not ade- quately set forth in his petition and motion for summary_judgment peti- tioner contends that respondent failed to provide him with a 30-day_letter before issuing a notice_of_deficiency and failed to provide a specific theory of the case in the notice of defi- ciency generally we will not look behind a notice_of_deficiency to examine the evidence used the propriety of verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner the commissioner’s motives or administrative policy or procedure used in making the determination 62_tc_324 accordingly we will not look into respondent’s alleged failure to issue a 30-day_letter see id as to whether the notice_of_deficiency is invalid because it insufficiently sets forth respondent’s position sec_7522 requires that the notice describe the basis for and identify the amounts if any of the tax due interest additional_amounts additions to the tax and assessable_penalties included in such notice the purpose of sec_7522 is to provide the taxpayer with notice of the commissioner’s basis for determining a deficiency 112_tc_183 the notice needs to be sufficient to permit the taxpayer to comply with the requirement of rule b that the taxpayer make clear and concise assignments of every error alleged against the commissioner id pincite- we have held that sec_7522 does not require the commissioner to identify the specific statutory provision sup- porting each adjustment in the notice_of_deficiency 127_tc_200 affd 521_f3d_1289 10th cir rogers v commissioner tcmemo_2001_20 affd without published opinion 281_f3d_1278 5th cir additionally the commissioner is not required to lay out the factual basis for his determination in the notice_of_deficiency 132_tc_105 affd 613_f3d_1360 11th cir more- over even an inadequate description of the commissioner’s basis in the notice_of_deficiency will not invalidate the notice sec_7522 petitioner received a form 886-a explanation of items accompanying his notice_of_deficiency the form 886-a explains how the irs determined petitioner’s deficiency and states rule b requires that the petition contain clear and concise assignments of each and every error which the petitioner alleges to have been committed by the commissioner in the determination of the deficiency or liability the as- signments of error shall include issues in respect of which the burden_of_proof is on the commis- sioner any issue not raised in the assignment of error shall be deemed to be conceded each assignment of error shall be separately lettered clear and concise lettered statements of the facts on which petitioner bases the assign- ments of error except with respect to those assignments of error as to which the burden_of_proof is on the commissioner verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports a other income-niche conversion contribution it has been determined that you received income in the amount of dollar_figure in the taxable_year ending date under the provisions of sec_61 sec_72 sec_83 and sec_402 as a result of your participa- tion in the national benefit plan and trust plan and it’s sic companion trust and the keady ltd welfare_benefit_plan single employer plan and it’s sic companion trust accordingly your taxable_income is increased by dollar_figure for the taxable_year date the quoted explanation recites the code sections on which the irs relies even though specific citations are not required for the notice to be valid see wheeler v commissioner supra pincite rogers v commissioner supra in the instant case the explanation provides sufficient detail that petitioner should be able to understand that the plan’s conversion to an sep is the source of the income respondent determined accordingly we hold that the notice_of_deficiency with the accompanying form 886-a provides an adequate basis for understanding the irs’ determination of tax due con- sequently we hold that petitioner’s contention is without merit and the notice_of_deficiency is valid iii inclusion in petitioner’s income of the cash_value of the insurance_policy upon conversion from mep to sep we next address whether petitioner must include in his gross_income the cash_value of the insurance_policy upon conversion of the plan from an mep to an sep respondent contends that petitioner became substantially_vested in the plan upon its conversion from an mep to an sep pursuant to sec_1_402_b_-1 income_tax regs petitioner contends that he has no interest in the plan because the terms of the plan and the involuntary nature of the conversion of the plan from an mep to an sep preclude him from being substantially_vested in the plan or the plan assets see sec_402 sec_1_402_b_-1 income_tax regs addition- ally petitioner contends that the life_insurance_policy pre- miums were paid with mrs cadwell’s after-tax funds and therefore result in a gift to petitioner pursuant to sec_2523 in the alternative petitioner contends that if he has an interest in the plan respondent has overstated its value we address each of these issues below verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner a whether petitioner is substantially_vested in his interest in the plan sec_402 provides that employer contributions made to a nonexempt employee_trust are included in the gross_income of the employee to the extent that the employee’s interest in such contribution is substantially_vested within the meaning of sec_1_83-3 income_tax regs at the time the contribution is made sec_1 b - a income_tax regs if the rights of an employee under a nonexempt employee_trust become substantially_vested during a taxable_year of the employee and the taxable_year of the trust ends with or within such year the value of the employee’s interest in the trust on the date of such change is included in the employee’s gross_income for that taxable_year sec_1_402_b_-1 income_tax regs the value of an employee’s interest in a_trust means the amount of the employee’s beneficial_interest in the net fair_market_value of all of the assets in the trust as of any date on which some or all of the employee’s interest in the trust becomes substan- tially vested sec_1_402_b_-1 income_tax regs the net fair_market_value of all of the assets in the trust is the total amount of the fair market values determined without regard to any lapse_restriction as defined in sec_1 h income_tax regs of all of the assets in the trust less the amount of liabilities as of the date on which some or all of the employee’s interest in the trust becomes substantially_vested id if only a portion of an employee’s interest in the trust becomes substantially_vested during a taxable_year only the corresponding part of the trust value is includable in the employee’s gross_income sec_1_402_b_-1 income_tax regs an employee’s interest in property is substantially_vested when it is either transferable or not subject_to a substantial_risk_of_forfeiture sec_1_83-3 income_tax regs whether a risk of forfeiture is substantial depends on the facts and circumstances sec_1_83-3 income_tax regs a substantial_risk_of_forfeiture exists an employee_trust is a nonexempt trust if it is not exempt from taxation under sec_501 sec_402 verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports where rights in property that are transferred are conditioned directly or indirectly upon the future performance or refraining from performance of substantial services by any person or the occurrence of a condition related to a purpose of the transfer and the possibility of forfeiture is substantial if such condition is not satisfied id property is not subject_to a substantial_risk_of_forfeiture if the employer must pay fair_market_value for its return or there is risk that the property’s value may decline id in instances where an employee of a corporation owns a signifi- cant amount of the total combined voting power or value of all classes of stock in the employer_corporation the issue of whether an employee’s interest is subject_to a substantial_risk_of_forfeiture also depends upon i the employee’s relationship to other stockholders and the extent of their control potential control and possible loss of control of the corporation ii the position of the employee in the corporation and the extent to which he is subordinate to other employees iii the employee’s relationship to the officers and directors of the corporation iv the person or persons who must approve the employee’s discharge and v past actions of the employer in enforcing the provisions of the restrictions sec_1 c income_tax regs both parties treat petitioner’s interest in the plan as sub- ject to a substantial_risk_of_forfeiture before the plan’s conversion to an sep on date as stated above the issue of whether the plan qualified pursuant to sec_419 before conversion is not in issue therefore for purposes of the instant motions we will assume that before the plan’s conversion from an mep to an sep the plan’s assets were subject_to a substantial_risk_of_forfeiture on date niche amended the plan to convert the plan from an mep to an sep keady’s sep received its proportional share of the plan’s assets following the conver- sion of the plan the assets in keady’s sep could be used only to pay the claims of keady employees the conversion of the plan from an mep to an sep eliminated the risk that keady’s assets could be used to pay other employers’ claims in other words a future condition that could have occurred under the original plan as an mep ie another company’s claim to the cash_value of keady’s life_insurance policies no longer existed under the plan as an sep see sec_1_83-1 income_tax regs verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner according to the terms of the sep keady could terminate the sep at any time in the event of an employer withdrawal from the sep the trust could distribute the life_insurance policies to keady sell the life_insurance policies to any interested purchaser with an insurable interest in the employees or surrender the life_insurance policies to the insurance_company for their cash_surrender_value addition- ally the trust could sell petitioner his life_insurance_policy while sec_1_83-1 income_tax regs is not directly applicable because petitioner does not own any of keady’s stock it is instructive under the circumstances of the instant case petitioner’s wife is the sole shareholder of keady at the time of the hearing petitioner and mrs cadwell were still married the record does not contain any evidence of strife in petitioner’s working or personal relation- ship with mrs cadwell petitioner listed his position as sec- retary of keady and the record does not include any information regarding other officers mrs cadwell is the only director accordingly we conclude that petitioner is the sole officer of keady and that he was not subordinate to any other employee see also pa cons stat ann sec a west every corporation must have a president a secretary and a treasurer and these offices may be held by the same person as the sole officer of keady he had control_over his own eligibility under keady’s sep additionally as the sole officer petitioner could terminate the plan and have the assets distributed to keady petitioner cites booth v commissioner t c pincite for the proposition that his power to terminate the plan does not require the inclusion of the cash_value of the life_insurance_policy in his income petitioner contends that if he were required to realize income based on his power to terminate the plan contributions would be taxable upon funding in booth the court determined whether the plan in issue was a deferred_compensation plan we stated although respondent is concerned that the ability of a participating employer to terminate voluntarily its participation in the plan allows the employer to control the timing of income to its employees we regard that concern as misplaced respondent’s concern could also be expressed with respect to the pension_plan of a corporation owned by a the parties do not contend that family_attribution_rules apply verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports single shareholder although the shareholder may be the only employee it does not necessarily follow that such a pension_plan provides for receipt of deferred_compensation merely because the owner shareholder has the ability to terminate the pension_plan at will id booth is distinguishable from the instant case as deferred_compensation is not in issue here moreover because the plan is a nonexempt trust the taxation of an employee on contributions made on his behalf turns on whether the employee’s interest is substantially_vested see sec_1 b - b income_tax regs whether an employee’s interest is substantially_vested depends upon all of the facts and cir- cumstances including the employer’s ability to terminate the plan see sec_1_83-3 income_tax regs petitioner also contends that the vesting schedule prevents him from having a vested interest in the sep during additionally petitioner contends that if any interest was vested mrs cadwell could fire him at will and therefore his benefits under the sep remained subject_to a substantial_risk_of_forfeiture we disagree we conclude that the vesting restrictions are illusory under the circumstances of the instant case when the trust’s assets came under keady’s exclusive control they became subject_to petitioner’s control as noted above peti- tioner could terminate the sep and have the plan assets or their cash_equivalent distributed to keady moreover if the vesting schedule were to apply the power to enforce the restrictions against petitioner would be in the hands of peti- tioner his wife or his daughters under such circumstances the restrictions on petitioner’s power to obtain the plan pro- ceeds are illusory petitioner relies upon olmo v commissioner tcmemo_1979_286 a case in which we held that the taxpayers’ interest in nonexempt trusts was substantially_vested only to the extent of the vesting schedule in olmo a professional_corporation owned by two unrelated taxpayers each a we note that according to its terms if the plan no longer qualifies as an mep pursuant to sec_419a the trustee was to terminate the plan upon termination the assets would be distributed to each covered_employee in an amount equal to his or her benefit balance addi- tionally each covered_employee would be percent vested in his or her benefits upon termi- nation however the plan could be amended at any time with the vesting schedule potentially remaining in effect the record is not sufficiently developed to determine whether the plan was properly amended before it was converted to an sep because we find the vesting restrictions illusory we need not address this argument verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner percent shareholder established a pension_trust and a profit- sharing trust the taxpayers were each percent vested to increase their vesting rights the taxpayers were required to complete future years_of_service and if they left the busi- ness they forfeited their rights to the nonvested portion of the plan upon termination of the trusts each participant would be percent vested additionally if a matter arose affecting an individual taxpayer’s status as a participating member of a_trust the taxpayer was automatically disquali- fied from participating in a decision as to that matter the court concluded that the taxpayers’ nonvested interests were subject_to a substantial_risk_of_forfeiture on account of the internal controls present id the facts of the instant case are distinguishable from those of olmo in the instant case the terms of the sep provide that the plan_administrator is the employer in effect peti- tioner as the only officer is the plan_administrator the plan_administrator decides all questions relating to the eligibility of employees to participate in the plan unlike in olmo the sep does not have a disqualification provision that would prevent petitioner from deciding questions regarding his own eligibility even if keady did elect to appoint another person as plan_administrator that person would be chosen by either petitioner as sole officer of keady or mrs cadwell as keady’s sole director therefore any decision regarding petitioner’s eligibility would be decided by someone with a potential interest in the life_insurance_policy ie mrs cadwell petitioner’s wife or petitioner himself we con- cluded above that any restrictions on petitioner’s right to control the disposition of the trust assets are illusory con- sequently we find the instant case is distinguishable from olmo petitioner’s contention that he could be fired and therefore lose his benefits is also without merit as of the hearing petitioner was still married to mrs cadwell who was the 100-percent shareholder of keady his employer petitioner argues only that there is a possibility that he could be fired by mrs cadwell under such circumstances we conclude that the threat that petitioner could be fired by his wife is illusory and his interest is not subject_to a substantial_risk_of_forfeiture verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports on the basis of the record we conclude that petitioner’s interest in the postconversion sep was no longer subject_to a substantial_risk_of_forfeiture ie was substantially_vested upon conversion of the plan to an sep b whether the contributions to the plan were a gift from mrs cadwell to petitioner alternatively petitioner contends that the contributions to the plan ie the payments for the life_insurance_policy were a gift from mrs cadwell to him pursuant to sec_2523 and that all payments were made using her after-tax_dollars petitioner contends that we should apply the substance_over_form_doctrine citing 324_us_331 to recognize such payments as a non- taxable gift sec_2523 allows a donor a deduction in computing tax- able gifts for purposes of computing the gift_tax as mrs cadwell would be the hypothetical donor in the scenario pos- ited by petitioner we conclude that sec_2523 does not apply petitioner may have meant to cite as support for his contention sec_102 which excludes from gross_income the value of property acquired by gift however for reasons discussed below sec_102 is inapplicable pursuant to the substance_over_form_doctrine although the form of a transaction may literally comply with the provi- sions of the code that form will not be given effect where it has no business_purpose and operates simply as a device to conceal the true character of a transaction see 293_us_465 if however the substance of a transaction accords with its form that form will be upheld and given effect for tax purposes see 361_f2d_93 5th cir affg 42_tc_1137 additionally it is well settled that a transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred 417_us_134 petitioner’s contention regarding substance over form is misplaced the record reveals that the dollar_figure payment made during was paid from an account held in the name of ksm the dollar_figure in payments made during verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner was paid out of the ksm escrow account in his declaration filed after the hearing on the instant motions petitioner con- tends that the premium payments were made with after-tax funds distributable to mrs cadwell as primary owner of ksm in other words petitioner claims that the funds belonged to ksm but were distributable to mrs cadwell as the payments were not distributed to mrs cadwell therefore they would have been made by funds still owned by ksm consistent with natl alfalfa we shall give effect to the transaction as it actually occurred as opposed to revising the transaction to create a gift on the basis of the record we conclude that the substance and the form of the contributions were payments by ksm not mrs cadwell consequently sec_102 is inapplicable c whether the cash_value is income to petitioner where his employer did not claim corresponding deductions for its contributions to the policy we next address petitioner’s contention that the cash_value of the life_insurance_policy is not income to him because nei- ther keady nor ksm claimed deductions for contributions made during and petitioner contends that because a deduction is available under sec_83 the cash_value of the life_insurance_policy was not income to him since keady would have claimed a corresponding deduction for the premium payments petitioner’s contention is mis- placed sec_402 does not condition the inclusion in income on an employer’s deduction of the payment rather inclusion in gross_income is based upon whether the trust is not exempt and whether the taxpayer’s interest is substan- tially vested see sec_402 sec_1_402_b_-1 b income_tax regs moreover while sec_83 allows a deduction it is not required for a contribution to be included in gross_income pursuant to sec_83 therefore whether keady or ksm claimed a deduction for the contributions is immaterial accordingly we hold that the cash_value of the life insur- ance policy must be included in petitioner’s gross_income for his tax_year pursuant to sec_1_402_b_-1 income_tax regs verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports d the amount to be included in petitioner’s gross_income respondent contends that the cash_value of the life insur- ance policy is the fund value of dollar_figure petitioner contends that if he must include any amount in his gross_income only the cash_surrender_value of the life_insurance_policy after deducting surrender charges of dollar_figure should be so included ie dollar_figure sec_1_402_b_-1 income_tax regs provides that the value of an employee’s interest is the amount of the employee’s beneficial_interest in the net fair_market_value of all the assets in the trust as of any date on which some or all of the employee’s interest in the trust becomes substan- tially vested the net fair_market_value is the total fair_market_value determined without regard to any lapse restrictions as defined in sec_1_83-3 income_tax regs less the amount of liabilities to which such assets are subject sec_1_402_b_-1 income_tax regs sec_1_83-3 income_tax regs defines a nonlapse_restriction as a restriction that will never lapse a nonlapse_restriction is a permanent limitation on the transferability of property and requires the transferee to sell or offer to sell the property at a price determined under a formula and the restriction will continue to apply against the transferee or any subsequent holder id for example a permanent right_of_first_refusal in a particular person at a price deter- mined under a formula would be a nonlapse_restriction id see also sec_1_83-5 example income_tax regs a lapse_restriction is any restriction other than a nonlapse_restriction and includes but is not limited to a restriction that carries a substantial_risk_of_forfeiture sec_1_83-3 income_tax regs the sec_1_83-3 income_tax regs cites limitations imposed by registration requirements of state or federal security laws as examples of restrictions that are not nonlapse restrictions revproc_2005_25 2005_1_cb_962 provides a safe_harbor for determining the fair_market_value of a life insur- ance policy for purposes of applying sec_402 and peti- tioner has not suggested any reason for deviating from the formula it provides for a nonvariable or variable life language of flush revproc_2005_25 2005_1_cb_962 is applicable to nonexempt employees’ trusts for pur- verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner insurance_contract the safe-harbor fair_market_value is the greater of a the sum of the interpolated terminal reserve and any unearned pre- miums plus a pro_rata portion of a reasonable estimate of dividends expected to be paid for that policy year based on company experience and b the product of the perc amount the amount based on pre- miums earnings and reasonable charges and the applicable average sur- render factor id sec_3 c b pincite the perc amount is the aggregate of the premiums_paid from the date_of_issue through the valuation_date without reduction for dividends that offset those premiums plus divi- dends applied to purchase paid-up insurance prior to the valuation_date plus any amounts credited or otherwise made available to the policy- holder with respect to premiums including interest and similar income items whether credited or made available under the contract or to some other account but not including dividends used to offset premiums and dividends used to purchase paid up insurance minus explicit or implicit reasonable mortality charges and reasonable charges other than mortality charges but only if those charges are actually charged on or before the valuation_date and those charges are not expected to be refunded rebated or otherwise reversed at a later date minus any dis- tributions including distributions of dividends and dividends held on account withdrawals or partial surrenders taken prior to the valuation_date id for variable_contracts the revenue_procedure defines the fair_market_value in a substantially_similar manner as for a non- variable_contract id sec_3 as the valuation methods are substantially_similar we need not decide whether the life_insurance_policy is a variable or nonvariable life_insurance_contract according to revproc_2005_25 supra the surrender charge should be disregarded for valuation purposes the surrender charges apply in decreasing amounts beginning in the life_insurance policy’s first year and are reduced to zero in the life_insurance policy’ sec_15th year in other words any holder of the life_insurance_policy beyond years could redeem the life_insurance_policy for its stated cash_value with poses of sec_402 for periods on or after date revproc_2005_25 sec_5 c b pincite for variable_contracts the only difference occurs in step for step all adjustments whether credited or made available under the contract or to some other account that reflect the investment return and the market_value of segregated_asset accounts are added or sub- tracted to determine the perc value revproc_2005_25 sec_3 c b pincite verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports no penalty accordingly it will be disregarded for the pur- pose of valuing petitioner’s interest in the life_insurance_policy see revproc_2005_25 sec_3 c b pincite the average surrender factor for purposes of b for which no adjustment for potential surrender charges is permitted i sec_1 on date ksm paid dollar_figure to the plan trustee to cover keady’s initial contribution and dollar_figure to cover the mep fee of the dollar_figure payment dollar_figure was credited to petitioner’s life_insurance_policy on date ksm contributed dollar_figure for the plan’s premiums and dollar_figure to cover the plan fee of the dollar_figure contribution dollar_figure was credited to petitioner’s life_insurance_policy during and petitioner’s life_insurance_policy was also increased by interest payments of dollar_figure for a total of dollar_figure petitioner’s life_insurance_policy was decreased during and for mortality charges of dollar_figure and other expenses of dollar_figure respectively for a total of dollar_figure as noted above petitioner’s interest in the life_insurance_policy is not reduced by any surrender charges accordingly we conclude that the perc value of petitioner’s interest in the life_insurance_policy is dollar_figure neither party contends that the alternative valuation measure allowed pursuant to revproc_2005_25 supra would result in a higher valuation additionally neither party contends that petitioner’s life_insurance_policy is sub- ject to any liabilities see sec_1_402_b_-1 income_tax regs accordingly we hold that petitioner must include in gross_income the cash_value of the life_insurance_policy of dollar_figure iv whether petitioner must include in gross_income the excess_contributions during ksm contributed life_insurance_policy pre- miums of dollar_figure petitioner’s life_insurance_policy was cred- ited with a payment of dollar_figure respondent concedes that dollar_figure of the remaining dollar_figure was used to pay the annual premium on miranda’s and jennifer’s policies respondent contends that the excess_contribution dollar_figure should be petitioner does not contend that the premiums interest credits mortality charges or other expenses should be prorated accordingly we deem this argument conceded verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner included in petitioner’s gross_income pursuant to sec_1_402_b_-1 income_tax regs as discussed above the parties treat petitioner’s interest in the plan before conversion as being subject_to a substantial_risk_of_forfeiture ie not substantially_vested we concluded above that following the conversion of the plan to an sep petitioner’s id additionally neither party contends that the excess contribu- tion is subject_to any liabilities sec_1_402_b_-1 income_tax regs the net fair_market_value of a taxpayer’s interest in the trust is the fair_market_value of all the assets less any liabilities to which such assets are subject interest was substantially_vested see petitioner makes the same contentions with respect to the inclusion of the excess_contributions in gross_income as he did with respect to the cash_value of the life_insurance_policy ie the plan contributions were a gift from mrs cadwell and he has no interest in the plan we apply the same anal- ysis as we did above and conclude that petitioner’s conten- tions are without merit petitioner also contends that the excess_contributions have been accounted for in the cash_value of the life_insurance_policy of the dollar_figure contribution for life_insurance protec- tion made during dollar_figure was credited towards miranda’s and jennifer’s life_insurance policies in the perc calculation set forth above dollar_figure of the dollar_figure was credited towards the cash_value of petitioner’s life_insurance_policy the dollar_figure excess_contribution was not credited toward the cash_value of the life_insurance_policy covering petitioner dis- cussed in the perc valuation above consequently the inclu- sion of the excess_contribution in petitioner’s income would not be double-counting accordingly we hold that the excess_contribution of dollar_figure must be included in petitioner’s gross_income for his tax_year petitioner contends that respondent has overstated the value of the excess_contributions where a motion for summary_judgment has been properly made and supported the opposing party may not rest upon mere allegations or denials in that party’s pleadings but must by affi- davits or otherwise set forth specific facts showing that there is a genuine issue for trial rule d respondent’s motion was properly made and supported petitioner has not offered spe- cific facts to show that there is a genuine issue for trial regarding the value of the excess con- tributions accordingly we conclude that summary_judgment is appropriate on this issue verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports v whether petitioner must include the cost of the life_insurance protection in his gross_income gross_income respondent contends that the cost of life_insurance protec- tion keady provided to petitioner during was an eco- nomic benefit and therefore should be included in his gross_income under sec_402 or sec_61 petitioner con- tends that neither section is applicable we agree with respondent that the value of the cost of life_insurance protec- tion is included in petitioner’s gross_income under sec_61 income from whatever source derived including income for services sec_61 the term gross_income is construed broadly as opposed to exclusions from gross_income which are construed narrowly commis- sioner v schleier 515_us_323 generally life_insurance premiums_paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of the employee are included in the gross_income of the employee sec_1_61-2 income_tax regs includes we note that sec_1_61-2 income_tax regs does not apply because pursuant to sec_1_83-3 income_tax regs current_life_insurance_protection is not property as noted above sec_402 is inapplicable moreover the cost of life_insurance protection generally is taxable under sec_61 and the regulations pursuant to sec_61 sec_1_83-1 income_tax regs petitioner received life_insurance protection pursuant to the payments made by ksm to purchase the life_insurance_policy on petitioner’s life that life_insurance protection was a valuable benefit and significant accession to petitioner’s wealth ie dollar_figure million payable to his daughters if he were to die during see 504_us_229 congress intended through sec_61 to bring within the definition of income any ‘accession to wealth’ quoting 348_us_426 in v r deangelis m d p c v commissioner tcmemo_2007_360 a group of doctors com- bined to form a_trust purportedly qualified pursuant to sec_419a whose purpose was to fund the purchase of life_insurance policies in discussing the tax consequences of the premium payments in v r deangelis m d p c we verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner stated that the payments of the premiums were indeed accessions to the doctors’ wealth similarly the premium payments are accessions to petitioner’s wealth and should be included in his gross_income pursuant to sec_61 petitioner offers the same theories regarding the current_year_cost of life_insurance protection as he did for the inclu- sion of the cash_value of the life_insurance_policy and the excess similarly unpersuasive regarding the inclusion of the current_year_cost of life_insurance in his gross_income accordingly we hold that petitioner must include in his gross_income for his tax_year the current_year_cost of life_insurance protection contributions those theories are petitioner contends that the fair_market_value of the cost of life_insurance is dollar_figure ie the mortality charges respondent contends that the value of the life_insurance protection is dollar_figure ie the annual cost according to notice_2001_10 table 2001_1_cb_459 for dollar_figure million worth of life_insurance for an individual who i sec_66 years old the regulations provide little guidance in deter- mining the cost of life_insurance protection that is included in gross_income pursuant to sec_61 accordingly it is helpful to examine how other parts of the code including provisions governing the taxation of split-dollar_life_insurance and group term life_insurance calculate the cost of year of life_insurance protection generally split-dollar_life_insurance is any arrangement between an owner and a nonowner of a life_insurance con- tract where one party pays the premiums and is entitled to recover all or a portion of such premiums from the proceeds of the life_insurance_contract and the arrangement is not group term life_insurance sec_1_61-22 income_tax regs revrul_64_328 1964_2_cb_11 provides that an employee must include in gross_income the annual value of the benefit the employee receives under a split-dollar arrangement which is an amount equal to the 1-year term cost of life_insurance protection to which the employee i sec_30 in v r deangelis m d p c v commissioner tcmemo_2007_360 we held that the pre- mium payments were essentially a distribution to the doctors of corporate profits rather than a payment that the pcs made to the doctors with a compensatory intent because the doctor- employees were also the owners of the s_corporations that provided them with benefits see also 115_tc_43 premium payments are a divi- dend to the extent of earnings_and_profits to employee-owners of a c_corporation affd 299_f3d_221 3d cir verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports entitled from year to year less the portion if any the employee provides see also 74_tc_1316 we note that revrul_64_328 supra is not an attempt to include in gross_income the entire life_insurance premium but rather only the cost of the cur- rent year’s life_insurance protection the 1-year cost of life_insurance protection is the amount to be determined in the instant case revrul_64_328 supra provides that the cost of life_insurance protection should be calculated using the p s rates found in revrul_55_747 1955_2_cb_228 notice_2001_10 supra revoked revrul_55_747 supra and pro- vided table as a substitute for the p s rates in curcio v commissioner tcmemo_2010_115 we used the rates in sec_1_79-3 income_tax regs as a rough estimate of the cost of life_insurance protection to decide whether the taxpayer’s expenses for life_insurance were deductible pursuant to sec_162 table is an updated version of the rates found in sec_1_79-3 income_tax regs see notice_2001_10 c b pincite table is based on the mortality experience reflected in the table of uniform premiums promulgated under sec_79 of the code see sec_1_79-3 of the regulations with extensions for ages below and above and the elimi- nation of the five-year age brackets see also notice_2002_8 2002_1_cb_398 accordingly we conclude that for pur- poses of the instant case table is a reasonable estimate of the cost of year of life_insurance protection pursuant to table the cost of dollar_figure million worth of life_insurance coverage for a 66-year-old is dollar_figure as neither party has argued that the life_insurance_policy in issue is split-dollar_life_insurance we need not address any issue regarding the effect of split-dollar_life_insurance on the cal- culation of the cost of the life_insurance_policy in issue additionally neither party contends that petitioner paid for such life_insurance coverage we note that if we were to include the entire dollar_figure amount income there would be double counting petitioner’s gross_income already includes the cash in petitioner’ sec_31 the life_insurance_policy in issue may qualify as split-dollar_life_insurance pursuant to sec_1_61-22 income_tax regs however the outcome would be the same if we classified the life_insurance_policy in issue as split-dollar_life_insurance verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner value of the life_insurance_policy calculated under the perc method that method takes into account the premiums_paid and any other income the life_insurance_policy earns but it subtracts mortality charges and other expenses to include the entire dollar_figure in addition to the perc value would par- tially double count a portion of the premium payment that has already been included in the perc amount instead the value for current_year life_insurance protection should be calculated by adding the mortality charge dollar_figure and other expenses dollar_figure the sum of dollar_figure reflects the charges for current_year life_insurance that were already sub- tracted from the fair_market_value calculation determined using the perc amount pursuant to revproc_2005_25 supra therefore we conclude that when the perc formula has been used to calculate the fair_market_value of the policy the cost of insurance may be calculated by adding the mor- tality charges and other expenses petitioner contends that we should consider only the cur- rent mortality charges rather than the table rates petitioner in essence contends that the current mortality charges are the insurer’s published premium rates for one- year term_insurance pursuant to revrul_66_110 1966_1_cb_12 pursuant to notice_2002_8 c b pincite the insurer’s published premium rates may be used only if the taxpayer can show that the insurer generally makes the availability of such rates known to persons who apply for term_insurance coverage from the insurer and the insurer regularly sells term_insurance at such rates to individuals who apply for term_insurance coverage through the insurer’s normal distribution channels petitioner does not argue that the requirements of notice_2002_8 supra are unreasonable or incorrect furthermore on a motion for summary judg- ment that is properly made and supported the opposing under the perc method for petitioner’s policy was credited with an dollar_figure premium payment and was credited with dollar_figure in interest yielding a total of dollar_figure however peti- tioner’s life_insurance_policy incurred a mortality charge of dollar_figure and other expenses of dollar_figure for a net value for his tax_year of dollar_figure including the entire dollar_figure from notice_2001_10 table 2001_1_cb_459 would include in petitioner’s gross_income an amount equal to dollar_figure dollar_figure dollar_figure in other words including the entire dollar_figure would double count the cost of life_insurance protection by an amount equal to dollar_figure dollar_figure or dollar_figure dollar_figure - dollar_figure or dollar_figure dollar_figure dollar_figure consequently we deem the dollar_figure an amount already contributed by petitioner for purposes of such calculation and accordingly sub- tract that amount from the dollar_figure in costs therefore petitioner must include in his gross in- come the value of the current_year life_insurance protection as a taxable benefit to him of dollar_figure verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila united_states tax_court reports party must set forth specific facts showing that there is a genuine issue for trial rule d petitioner does not allege that he has any evidence that would satisfy that require- ments of notice_2002_8 supra furthermore petitioner does not suggest that there is a material factual issue that could be resolved at trial accordingly we conclude that summary_judgment is appropriate on this issue and that the require- ments of notice_2002_8 supra have not been met therefore we hold that petitioner must include in his gross_income for his tax_year the cost of current_year life_insurance protection of dollar_figure vi whether petitioner is liable for the sec_6662 penalty respondent contends that petitioner is liable for the accuracy-related_penalty pursuant to sec_6662 on account of a substantial_understatement of tax or in the alternative on account of negligence or disregard of rules and regulations see sec_6662 and a substantial_understatement_of_income_tax is an under- statement that is greater than percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 an understatement is the excess of the amount required to be shown on the return for the taxable_year over the amount actually shown on the return sec_6662 the record reveals that petitioner’s understatement will be greater than dollar_figure petitioner has failed to establish any defense to the accuracy-related_penalty consequently we hold that petitioner is liable for the accuracy-related_penalty under sec_6662 we shall therefore grant respondent’s cross-motion for summary_judgment and deny petitioner’s motion for sum- mary judgment we have considered all of the issues raised by the parties and to the extent they are not discussed herein we conclude that they are without merit unnecessary to reach or moot verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila cadwell v commissioner to reflect the foregoing an order and decision will be entered under rule f verdate 0ct date jkt po frm fmt sfmt v files cadwell sheila


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-105388-99 date date purchaser target sellers date a date b date c state x state y state z tax professionals authorized representatives plr-105388-99 this responds to your authorized representatives’ letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election purchaser and sellers are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations the election with respect to purchaser's acquisition of target on date a additional information was received in a letter dated date the material information received is summarized below purchaser is a state x corporation and a common parent of an affiliated_group_of_corporations which files a consolidated federal_income_tax return purchaser uses the calendar_year as its taxable_year and uses the accrual_method of accounting target was a state y subchapter_s_corporation within the meaning of sec_1361 target used the calendar_year as its taxable_year and used the accrual_method of accounting sellers owned all of the stock of target and reside in state z on date a sellers and purchaser entered into a stock purchase agreement for purchaser to acquire all of sellers’ target stock for cash in a fully taxable transaction it is represented that purchaser’s acquisition of target stock qualified as a qualified_stock_purchase within the meaning of sec_338 purchaser and sellers intended to make the election as evidenced by the stock purchase agreement the election was due on date b a partially completed form_8023 was delivered at closing but was never completed despite continuing correspondence between the tax professionals the failure_to_file the election was discovered on date c after the date the election was due subsequently authorized representatives submitted a request for relief under procedure and administration regulations sec_301 on behalf of purchaser and sellers the statute_of_limitations on assessment under sec_6501 has not expired for purchaser’s target’s or seller’s taxable_year in which the transaction occurred or for any taxable_year s that would have been affected had the election been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of one corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in plr-105388-99 the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of the stock included in the qualified_stock_purchase generally is ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qualified_stock_purchase of the target_corporation stock sec_1_338_h_10_-1 and provides that if a sec_338 election is made for the target_corporation it is irrevocable and a sec_338 election is deemed made for the target_corporation sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by purchaser and the s_corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs the instructions to form_8023 provide that if a sec_338 election is made for an s_corporation form_8023 must be signed by each s_corporation shareholder who sells target stock in the qualified_stock_purchase the instructions further provide that the signatures dates and titles if applicable of those persons must be provided in a signature attachment to form_8023 sec_1_338-2 provides that if an election under sec_338 is made for target old target is deemed to sell target’s assets and new target is deemed to acquire those assets sec_1_1502-77 provides that the common parent for all relevant purposes shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability of the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i provided the taxpayer demonstrates to plr-105388-99 the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government in this case purchaser was required by sec_1_338_h_10_-1 to file the election by date b however for various reasons the election was not filed subsequently purchaser and sellers filed this request under sec_301_9100-1 for an extension of time to file the election the time for filing the election is fixed by the regulations sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser to file the election provided purchaser shows that it acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser sellers and tax professionals explain the circumstances that resulted in the failure_to_file a valid election the information also establishes that tax professionals were responsible for the election that purchaser and sellers relied on them to timely make the election that purchaser and sellers will report the transaction consistent with the election and requested relief before the omission was discovered by the service that they are not under audit or examination and that the government will not be prejudiced if relief is granted see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that purchaser and sellers have shown that they acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for parent and sellers to file the election with respect to purchaser's acquisition of target stock as described above the above extension of time is conditioned on purchaser and sellers signing the election purchaser and sellers treating the acquisition sale of target stock as a sec_338 transaction the taxpayers’ tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money purchaser target and sellers agreeing to extend the statute_of_limitations with respect to the sec_338 transaction to the date ending three years immediately following the issuance of this letter purchaser and sellers must file the election in accordance with plr-105388-99 sec_1_338_h_10_-1 ie a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions on the form a copy of this letter should be attached to the election form purchaser and sellers must file or amend as applicable their returns to report the transaction as a sec_338 transaction and attach a copy of the election and the information required therewith and a copy of this letter we express no opinion as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district directors' offices upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 we express no opinion regarding whether the acquisition sale of target stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target stock qualifies for sec_338 treatment and if sec_338 is applicable as to the amount and character of gain_or_loss if any recognized by target and thus by sellers on target’s deemed asset sale in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we have relied on certain statements and representations made by purchaser and sellers however the district_director s should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely yours plr-105388-99 assistant chief_counsel corporate by bernita l thigpen deputy assistant chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc tege eb qp2-plr-124637-01 date date legend taxpayer company esop brokerage firm law firm this responds to your letter requesting a ruling on behalf of the above-named taxpayer that upon the timely filing of the taxpayer’s u s individual_income_tax_return under the facts described below the taxpayer will have substantially complied with the requirements of sec_1042 of the internal_revenue_code_of_1986 code and the applicable regulations in connection with the sale of stock of the company to the employee_stock_ownership_plan esop maintained by the company the company is a domestic_corporation with only one class of common_stock outstanding at the time of the sale to the esop and at present the company has never had any stock outstanding that was readily_tradable on an established_securities_market the company maintains an esop which qualifies under sec_401 and meets the requirements of sec_4975 of the code the esop has received a favorable determination_letter from the internal_revenue_service on date the taxpayer sold shares of common_stock of the company to the esop for a purchase_price of dollar_figure as a result of the sale the taxpayer realized a gain the taxpayer had held the common_stock for more than years and had not received the stock in a distribution from a plan described in sec_401 or in a transfer pursuant to an option or other right to acquire stock to which sec_83 sec_422 or sec_423 applied after the transaction the esop held more than plr-124637-01 of the total value of the outstanding_stock of the company the taxpayer represents that at all times before and after the transaction the taxpayer intended to defer recognition of the gain on the sale under sec_1042 in date the taxpayer and the current officers of the company entered into an agreement which generally obligated the parties to use their best efforts to cause the esop to purchase the taxpayer’s shares of the company and stated that it was the intention of the parties that the purchase would satisfy the requirements of sec_1042 on the date of the esop transaction the company executed a statement of consent pursuant to sec_1042 whereby the company consented to be bound by the terms of sec_4978 and sec_4979a the taxpayer deposited the sales proceeds that he intended to reinvest in qualified_replacement_property with the brokerage firm into an account segregated from taxpayer’s other investments and designated as the taxpayer’s esop transaction account the brokerage firm was fully informed that the taxpayer intended to invest the sales proceeds from the esop transaction so as to comply with the requirements of sec_1042 prior to the esop transaction the taxpayer was represented by law firm in his business and personal affairs law firm advised the company when it established the esop and currently represents the taxpayer for purposes of the esop transaction law firm represented the company and the taxpayer retained special counsel to avoid any potential conflict of interest in correspondence leading up to the esop transaction law firm advised the taxpayer of the general requirements of a sec_1042 election while this correspondence advised the taxpayer of the requirement to complete a notarized statement of purchase for qualified_replacement_property qrp it did not specify that a separate statement of purchase must be completed within days of each date on which qrp is purchased based on this letter the taxpayer formed the erroneous belief that only one comprehensive statement of purchase was required within days after all qrp had been purchased on the date of the esop transaction law firm provided the taxpayer’s special counsel the forms required for a election and advised special counsel that the taxpayer should have a separate statement of purchase form notarized within days of each date on which qrp is purchased the taxpayer’s special counsel is a business lawyer who is not a esop specialist and did not appreciate the importance of the day requirement further immediately after the closing the taxpayer advised special counsel that his representation was completed and that the taxpayer intended to resume representation by law firm therefore special counsel did not provide the required forms or instructions to the taxpayer or maintain continuing contact with the taxpayer law firm did not follow up with the taxpayer regarding compliance with sec_1042 believing that special counsel was providing guidance to the taxpayer in this matter as part of his representation on the esop transaction plr-124637-01 thus the taxpayer relied on the earlier correspondence from law firm he intended to purchase his entire portfolio of qrp by date and complete one comprehensive statement of purchase within days from the date of his final purchase in twenty-three separate transactions during august the taxpayer purchased securities intended to be qrp at a total cost of dollar_figure the taxpayer advised his broker that these securities were intended to be qrp when they were purchased the taxpayer has additional realized gain with which he intends to purchase qrp before date therefore believing he was to wait until he purchased his entire portfolio of qrp he did not complete a timely statement of purchase for the purchase made in august in anticipation of the preparation of his u s individual_income_tax_return for the taxable_year the taxpayer contacted law firm to discuss his progress in purchasing qrp at that time law firm informed the taxpayer of the requirement to complete a notarized statement of purchase within days of each purchase thereafter law firm completed this private_letter_ruling request on behalf of the taxpayer and the taxpayer promptly completed the statement of purchase for qrp purchased in date the taxpayer has requested extensions of time to file his u s individual_income_tax_return for the taxable_year and will file timely by the extended due_date the taxpayer will elect under sec_1042 to defer recognition of gain from the sale of the taxpayer’s stock to the esop the taxpayer will submit the following documents with the taxpayer’s income_tax return i a statement of election as described in q a-3 of sec_1_1042-1t of the temporary income_tax regulations ii a notarized statement of purchase with respect to the qualified_replacement_property purchased in date as described above and notarized statements of purchase for any other qrp purchased within the replacement_period and iii a verified written_statement of the company consenting to the application of sec_4978 and sec_4979a as required in sec_1042 you have requested a ruling that based on the specific facts of this case the taxpayer will be treated as having substantially complied with the requirements for an election for the nonrecognition of gain under sec_1042 and that the election will be treated as having satisfied the requirements of sec_1_1042-1t of the temporary income_tax regulations upon the filing of his individual_income_tax_return sec_1042 of the code provides that a taxpayer or executor may elect in certain cases not to recognize long-term_capital_gain on the sale of qualified_securities to an esop as defined in sec_4975 or eligible worker owned cooperative if the taxpayer purchases qualified_replacement_property as defined in sec_1042 within the replacement_period of sec_1042 and the requirements of sec_1042 and sec_1_1042-1t of the temporary income_tax regulations are plr-124637-01 satisfied a sale of qualified_securities meets the requirements of sec_1042 if the qualified_securities are sold to an esop as defined in sec_4975 or an eligible worker owned cooperative the plan or cooperative owns after application of a immediately after the sale at least percent of - a each class of outstanding_stock of the corporation other than stock described in sec_1504 which issued the securities or b the total value of all outstanding_stock of the corporation other than stock described in sec_1504 the taxpayer files with the secretary a verified written_statement of the employer whose employees are covered by the esop or an authorized officer of the cooperative consenting to the application of sec_4978 and sec_4979a with respect to such employer or cooperative and the taxpayer’s holding_period with respect to the qualified_securities is at least years determined as of the time of the sale for taxable years beginning after date sec_1042 provides that the term qualified_securities means employer_securities as defined in sec_409 which are issued by a domestic c_corporation that has no stock outstanding that is readily_tradable on an established_securities_market and were not received by the taxpayer in a distribution from a plan described in sec_401 or in a transfer pursuant to an option or other right to acquire stock to which sec_83 sec_422 or sec_423 applied the taxpayer must purchase qualified_replacement_property within the replacement_period which is defined in sec_1042 as the period which begin sec_3 months before the date on which the sale of qualified_securities occurs and end sec_12 months after the date of such sale sec_1042 defines qualified_replacement_property qrp as any security issued by a domestic operating_corporation which did not for the taxable_year preceding the taxable_year in which such security was purchased have passive_investment_income as defined in sec_1362 in excess of percent of the gross_receipts of such corporation for such preceding_taxable_year and is not the corporation which issued the qualified_securities which such security is replacing or a member of the same controlled_group_of_corporations within the meaning of sec_1563 as such corporation sec_1_1042-1t q a-3 of the temporary income_tax regulations states that the election shall be made in a statement of election attached to the taxpayer’s income_tax return filed on or before the due_date including extensions of time for the taxable_year in which the sale occurs sec_1_1042-1t q a-3 of the temporary income_tax regulations states that the statement of election shall provide that the taxpayer elects to treat the sale of securities as a sale of qualified_securities under sec_1042 and shall contain the following information plr-124637-01 a description of the qualified_securities sold including the type and number of shares the date of the sale of the qualified_securities the adjusted_basis of the qualified_securities the amount_realized upon the sale of the qualified_securities the identity of the esop or worker-owned cooperative to which the qualified_securities were sold if the sale was part of a single interrelated transaction under a prearranged agreement between taxpayers involving other sales of qualified_securities the names and taxpayer identification numbers of the other taxpayers under the agreement and the number of shares sold by the other taxpayers sec_1_1042-1t q a-3 of the temporary income_tax regulations further provides that if the taxpayer has purchased qualified_replacement_property at the time of the election the taxpayer must attach as part of the statement of election a statement of purchase describing the qualified_replacement_property the date of the purchase and the cost of the property and declaring such property to be qualified_replacement_property with respect to the sale of qualified_securities the statement of purchase must be notarized no later than days after the purchase literal compliance with procedural directions in treasury regulations on making elections is not always required see 67_tc_736 acq in result 1979_1_cb_1 regulatory requirements that relate to the substance or the essence of the statute on the other hand must be complied with strictly with respect to the present ruling_request the taxpayer requested relief before the expiration of the time for filing the return on which the election must be made the taxpayer relied on tax professionals to advise him as to the requirements necessary to complete the sec_1042 election in a timely and correct manner promptly upon discovering that the statements of purchase were not notarized in a timely manner and prior to the expiration of the time to file the taxpayer’s income_tax return the taxpayer completed a notarized statement of purchase for qrp purchased in august therefore based on the specific facts of this case and representations made by the taxpayers we conclude that the taxpayer will have substantially complied with the requirements for an election under sec_1042 of the code and that the election will be treated as having satisfied the requirements of sec_1042 and of sec_1 1t of the temporary income_tax regulations upon the timely filing of the taxpayer’s u s individual_income_tax_return plr-124637-01 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination enclosures copy of this letter copy for purposes sincerely yours robert d patchell acting chief qualified_plans branch division counsel associate chief_counsel tax exempt and government entities