t cc no united_states tax_court neonatology associates p a et al petitioners v commissioner of internal revenue respondent docket nos filed date certain insurance salesmen formed two purported voluntary employees’ beneficiary associations veba’s to generate commissions on their sales of life and other insurance products purchased through the veba’s each employer participant contributed to its own plan formed under the veba’s and each plan generally provided that a covered_employee would receive current-- ' cases of the following petitioners are consolidated herewith john j and ophelia j mall docket no estate of steven sobo deceased bonnie sobo executrix and bonnie sobo docket no akhilesh s and dipti a desai docket no kevin t and cheryl mcmanus docket no arthur and lois m hirshkowitz docket no lakewood radiology p a docket no and wan b and cecilia t lo docket no -- - year term life_insurance on his or her life premiums on the underlying insurance policies were substantially greater than the cost of term life_insurance because they funded both the cost of term life_insurance and credits which would be applied to conversion universal life policies of the individual insureds the credits applied to a conversion policy were earned on that policy evenly over months meaning that policyholders generally could withdraw any earned amount or borrow against it with no out-of- pocket expense held the corporate employer participants n and l may not deduct contributions to their plans in excess of the cost of term life_insurance held further l may deduct payments made outside its plan for life_insurance on two of its employees to the extent the payments funded term life_insurance held further neither m a sole_proprietorship participant nor n may deduct contributions to its plan to purchase life_insurance for certain nonemployees held further sec_264 i r c precludes m from deducting contributions to its plan to purchase life_insurance for its two employees held further in the case of n and l the disallowed deductions are constructive dividends to their employee owners held further ps are liable for the accuracy- related penalties for negligence or intentional disregard of rules or regulations determined by r under sec_6662 i r c l also is liable for the addition_to_tax for failure_to_file timely determined by r under sec_665l a i r c held further no p is liable for a penalty under sec_6673 i r c neil l prupis kevin l smith and theresa borzelli for petitioners randall p andreozzi peter j gavagan mark a ericson and matthew i root for respondent laro judge the docketed cases consolidated for purposes of trial briefing and opinion represent three test cases selected by the parties to resolve their disagreements as to certain voluntary employees’ beneficiary association veba plans namely the southern california medical profession association veba sc veba and the new jersey medical profession association veba nj veba the parties in other cases pending before the court have agreed to be bound by the decisions we render herein as to these veba issues two of the test cases involve a corporate employer and one or more employee owners these employer employee groups are the neonatology associates p a neonatology group and the lakewood radiology p a lakewood group these groups relate to two purported welfare_benefit funds formed under the sc veba namely the neonatology employee welfare plan neonatology plan and the lakewood employee welfare plan lakewood plan the third test case involves an individual working as a sole_proprietor and two of his employees this group is the wan b lo ph d d o d b a marlton pain control and acupuncture we use the terms veba and plan for convenience and do not suggest that any or all of the subject arrangements are either bona_fide plans for federal_income_tax purposes or veba’s under sec_501 petitioners argue that these plans are welfare_benefit funds within the meaning of sec_419 respondent argues to the contrary we do not decide this issue q4e- center marlton group the marlton group relates to the marlton employee welfare plan marlton plan a purported welfare_benefit_fund formed under the nj veba in regard to each test case respondent determined that the employer or sole_proprietor could not deduct its or his contributions to the respective plan and in the case of neonatology and lakewood that the employee owners had income to the extent that he or she benefited from a contribution respondent determined that each petitioner was liable for deficiencies in federal_income_tax as a result of the veba determinations and that each petitioner was liable for a related accuracy-related_penalty under sec_6662 for negligence or intentional disregard of rules or regulations in the case of lakewood respondent also determined that it was liable for a percent addition_to_tax under sec_6651 for failure_to_file timely its federal_income_tax return and a sec_6621 increased rate of interest on its deficiency as to interest accruing after date rach petitioner petitioned the court to redetermine respondent’s determinations respondent’s notices of deficiency we do not decide whether this plan is a welfare_benefit_fund under sec_419 respondent also made certain other adjustments of income and expense petitioners concede these adjustments unless they are mathematical computations relating to the veba issues list the following deficiencies addition_to_tax and accuracy- related penalties neonatology group neonatology docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a dollar_figure - dollar_figure big_number - big_number john j and ophelia j mall docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a dollar_figure - dollar_figure big_number - big_number lakewood group lakewood docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a dollar_figure - dollar_figure - - - big_number dollar_figure big_number big_number - big_number estate of steven sobo deceased bonnie sobo bexecutrix and bonnie sobo docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a dollar_figure - dollar_figure big_number - big_number big_number - all years refer to the calendar_year except that in the case of lakewood the first year is a fiscal_year ended on date and the second year is a short taxable_year ended on date -- - akhilesh s and dipti a desai docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a dollar_figure - dollar_figure big_number - big_number big_number - big_number kevin t and cheryl mcmanus docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a sbig_number - dollar_figure big_number - big_number big_number - big_number arthur and lois m hirshkowitz docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a dollar_figure - dollar_figure big_number - big_number big_number - big_number marlton group wan b and cecilia t lo docket no addition_to_tax accuracy-related_penalty year deficiency sec_6651 a sec_6662 a dollar_figure - dollar_figure big_number - big_number we decide the following issues whether neonatology and lakewood may deduct contributions to their respective plans in excess of the amounts needed to purchase current-year term life_insurance for their covered employees we hold they may not whether lakewood may deduct payments made outside of its plan to purchase additional life_insurance for two of its - employees we hold it may to the extent that the payments funded term life_insurance whether neonatology may deduct contributions made to its plan to purchase life_insurance for john mall mr mall who was neither a neonatology employee nor a person eligible to participate in the neonatology plan we hold it may not whether marlton may deduct contributions to its plan to purchase insurance for its sole_proprietor dr lo who was neither a marlton employee nor a person eligible to participate in the marlton plan we hold it may not whether sec_264 precludes marlton from deducting contributions to its plan to purchase term life_insurance for its two employees we hold it does whether in the case of lakewood and neonatology the disallowed contributions payments are includable in the employee owners’ gross_income ’ we hold they are whether petitioners are liable for the accuracy-related_penalties for negligence or intentional disregard of rules or regulations determined by respondent under sec_6662 we hold they are ’ petitioners concede that the contributions are includable in the employees’ gross_income to the extent that they provided current--year life_insurance protection --- - whether lakewood is liable for the addition_to_tax for failure_to_file timely determined by respondent under sec_6651 we hold it is whether we should grant respondent’s motion to impose a dollar_figure penalty against each petitioner under sec_6673 a b we hold we shall not unless otherwise indicated section references are to the internal_revenue_code applicable to the relevant years rule references are to the tax_court rules_of_practice and procedure and dollar amounts are rounded to the dollar findings_of_fact i overview of petitioners neonatology is a professional medical corporation wholly owned by ophelia j mall m d dr mall its principal_place_of_business was in new jersey when we filed its petition dr mall and her husband mr mall collectively the malls resided in new jersey when we filed their petition neonatology reports its income and expenses for federal_income_tax purposes using the cash_receipts_and_disbursements_method and the calendar_year it reported the following relevant amounts on its and federal corporate_income_tax returns total income dollar_figure dollar_figure officer compensation big_number big_number salaries wages -q- -q- pension profit-sharing_plans -q- -q- employee benefit programs big_number big_number taxable_income loss big_number income_tax -o- -o- alt minimum_tax -o- -o- lakewood is a professional medical corporation owned equally by arthur hirshkowitz dr hirshkowitz akhilesh desai dr desai kevin t mcmanus dr mcmanus and steven sobo dr sobo until his death on date and by vijay sankhla dr sankhla afterwards when we filed the petitions of the various members of the lakewood group lakewood’s principal_place_of_business and the residence of each individual and his or her spouse was in new jersey lakewood reports its income and expenses for federal_income_tax purposes using the cash_receipts_and_disbursements_method and but for using the calendar_year its taxable years consist of a fiscal_year ended on date anda short taxable_year ended on date it reported the following relevant amounts on its federal corporate_income_tax returns for the subject years the members of the lakewood group are lakewood drs hirshkowitz desai and mcmanus and the estate of steven sobo deceased -- - as amended total income dollar_figure dollar_figure dollar_figure dollar_figure officers’ compensation big_number big_number big_number big_number salaries wages big_number big_number big_number big_number pension profit-sharing_plans big_number big_number big_number big_number employee benefit programs -0- -0- -o- -o- other deductions veba contribution -0- big_number big_number taxable_income loss big_number big_number big_number big_number income_tax big_number --0- -0- --0- alt minimum_tax --o- --o- --o- big_number it filed its federal corporate_income_tax return untimely on date marlton is a sole_proprietorship owned by wan b lo dr lo and he reports marlton’s income and expenses on his personal schedule c profit or loss from sole-proprietor business using the cash_receipts_and_disbursements_method and the calendar_year dr lo reported the following amounts for marlton on schedules c of his joint and federal individual income_tax returns gross_income dollar_figure dollar_figure wages big_number big_number pension profit-sharing_plans big_number big_number employee benefit programs big_number big_number net profit big_number big_number dr lo and his wife cecilia ms lo collectively the los resided in new jersey when we filed their petition il the subject veba’s pacific executive services pes was a california partnership formed by two insurancemen named stephen r ross mr ross and donald s murphy mr murphy ’ pes devised the idea of using a speciously designed life_insurance product in the setting of deviously designed veba’s to prosper financially from the enactment of the tax_reform_act_of_1986 tra publaw_99_ 100_stat_2085 pes believed that the tra restricted the ability of closely held businesses to reduce their tax_liabilities through contributions to retirement and employee benefit plans pes believed that the tra gave pes the opportunity to market aggressively to owners of such businesses a novel tax_avoidance scheme pes anticipated that few of the prospective investors in the scheme would be interested in purchasing life_insurance the subject matter of the scheme but that these persons would purchase the life_insurance c-group term product described below in order to get the advertised benefits pes united with barry cohen mr cohen a longtime insurance salesman to market the subject veba’s to medical professionals primarily through the kirwan cos kirwan mr cohen is an officer director and part owner of kirwan he is not an attorney or an accountant michael j kirwan mr kirwan pes dissolved on or about date and messrs ross and murphy each formed a sole_proprietorship under the respective names of sea nine associates and dsm inc sea nine associates and dsm inc divided up the participants in the veba’s for simplicity subsequent references to pes may include sea nine associates and dsm inc is kirwan’s president and other part owner mr kirwan is not an attorney or an accountant kirwan represented to prospective investors during its marketing of one or both of the subject veba’s that the veba’s let an investor make unlimited tax-deductible contributions to his or her separate plan and that each plan would give a covered_employee significant paid-up life_insurance when he or she left the plan pes represented to prospective investors that each of the subject veba’s gave investors the ability to park funds for several years while the funds continue to grow at interest in a tax free environment while most people would be happy to take accumulated funds pay the tax due at that time at ordinary rates sic we have created a plan which provides for a permanent deferral of all the taxes due either during ones sic lifetime or to the heirs in summary we create a tax deduction for the contributions to the veba going in anda permanent tax_deferral coming out rach individual employer establishes his own level of benefits and has his own trust account with a third party trustee the contribution goes into the individual trust account for each employer and the benefits provided under the plan are paid for out of the individual accounts each employer receives reports which apply only to his account the sc veba and the nj veba were formed by the southern california medical profession association and the new jersey we use the term paid-up in this context to mean that the insured did not have to make any additional premium payments on the underlying policy medical profession association respectively pes established manages and controls both of these associations neither of which is a valid or operating professional association pes established both associations for the sole purpose of forming the subject veba’s and of furthering its veba scheme by misleading targeted investor medical professionals into believing that respectable established medical associations were sponsoring an investment in the veba’s pes named the veba’s after the medical profession to attempt further to legitimize its sale of the advertised tax benefits with the targeted investors pes paid an established medical society the medical society of new jersey a voluntary society of physicians and surgeons operating in the state of new jersey approximately dollar_figure to endorse the sc veba as a final attempt to legitimize its scheme pes represented to the medical society of new jersey that the sc veba provided medical professionals with tax-deductible payments for high policy limits of life_insurance and the potential to convert some or all of those payments into annuities or cash_value life_insurance which would allow the policyholders ultimately to withdraw that cash_value tax free the subject veba’s are structured so that each participating employer establishes its own plan thereunder executes its own plan document and has a plan name that bears itss own name each employer with the aid of an insurance salesman primarily mr cohen selects its plan_administrator the members of the committee administering its plan and the level of benefits offered under its plan the only employee benefit provided under the subject veba’ss is a current-year death_benefit payable at a specified multiple of prior-year compensation each employer_generally funds its plan with a limited number of group_insurance policies and or group annuities owned by its plan for the benefit of its employees all group_life_insurance policies must provide explicitly that the insured individual may convert his or her policy without medical examination to an individual policy upon termination of eligibility for coverage rach employer has its own trust account maintained under its plan for its covered employees and each plan is accounted for separately a covered_employee has no recourse for benefits other than first from insurance contracts on his or her life and second from any assets held in the employer’s plan employees covered by one plan cannot reach assets of another plan and occurrences in one plan do not affect another plan’s operation each plan prepares its own separate summary_plan_description each employer may amend its plan at any time and each employer may terminate its plan at any time by delivering the committee members of the neonatology plan and the lakewood plan are messrs murphy cohen and kirwan and the committee members of the marlton plan are mr ross daniel sonnelitter and timothy s lo pes administered all three plans at all times relevant herein -- - written notice of termination to the trustee when an employer terminates its plan assets remaining in that plan are distributed to the employer’s covered employees in proportion to their compensation independent entities serve as trustees of the respective trusts underlying the subject veba’s and each trust’s terms are the same except for the sponsor’s name under the trusts’ terms each participating employer agrees to make the contributions required by the administrator to provide benefits under the plan and neither the participating employer nor another employer is liable for a participating employer’s contributions any benefits payable under one plan are paid solely from that plan’s allocable share of the trust fund and neither the participating employer administrator nor trustee is liable for the inadequacy of funds required to be paid each plan and corresponding trust account benefit exclusively the related employer’s covered employees and their beneficiaries and no part of that trust account may be used for or diverted to purposes other than the exclusive benefit of those employees tiil the insurance_companies the inter-american insurance co of illinois inter- american specializes in providing to small closely held corporations products such as gualified pension and profit sharing plans and group_life_insurance plans when inter- -- - american was formed in the late 1970’s it was owned indirectly by beaven inter-american cos inc beaven inter-american the wholly owned company of raymond g ankner mr ankner who has worked in the insurance industry for more than years inter- american liquidated on date pursuant to a court order to do so and beaven inter-american changed its name to beaven cos inc mr ankner currently markets the life_insurance products described herein through a company of his called cja associates capital holding agency group inc capital holding underwrites life and health insurance annuities and other insurance products offered for sale through certain of its affiliated insurance_companies eg commonwealth life_insurance co commonwealth and peoples security life_insurance co peoples security sometimes referred collectively with commonwealth as commonwealth capital holding changed its name to providian agency group inc in and years later aegon nv acquired providian agency group inc commonwealth and peoples security commonwealth and peoples security merged with the monumental life_insurance co in and all three companies are currently part of the aegon usa insurance group aegon usa iv the life_insurance products inter-american and commonwealth both issue a virtually identical conventional group term life_insurance product known as the millennium group mg-5 policy premiums on an mg-5 policy are generally commensurate with the life_insurance risk assumed by the issuing company and do not present policyholders with asset accumulation the mg--5 policies allow policyholders to convert their policies to 5-year level annual renewable term universal or whole life products which do not have any accumulated value or conversion credits as that term is described below inter-american and commonwealth both issue a second virtually identical innovative life_insurance product known as the continuous group c-group product the c-group product is a novel product designed by inter-american and later adopted by commonwealth to masquerade as a policy that provides only term life_insurance benefits in order to make the product marketable to targeted investors and to allow inter-american to make life_insurance purchases from it more attractive than purchases from its larger competitors the c-group product is actually a universal life product consisting of two related policies the first policy the accumulation_phase of the c-group product is a group term life_insurance_policy known as the c-group term policy the second policy the payout phase of the c-group -- - product is an individual universal_life_insurance policy known as the c-group conversion universalife ul policy the c-group conversion ul policy is referenced in the c-group term contract and the c-group conversion ul contract as a special conversion policy the c-group term policy provides covered employees with a life_insurance death_benefit while they work and a cash_value that they may access by converting the term policy to the c-group conversion ul policy commonwealth and inter-american assumed that percent of the c-group term policyholders would ultimately convert their policies to c-group conversion ul policies and they priced both policies together as two components of a single policy premiums on the c-group term policy are paid annually and these premiums are approximately four to six times greater than premiums for a conventional life_insurance group term policy eg the mg--5 policy as discussed infra premiums on the c-group term policy fund both preconversion death_benefits and postconversion credits conversion credits anticipated to be applied to the c-group conversion ul policy if a premium is not paid timely on the c- group term policy the policy terminates ie lapses upon its lapsing an individual policyholder has a guaranteed right e without evidence of insurability to convert his or her policy to an individual policy eg the c-group conversion ul policy a covered_employee converts from a c-group term policy to a c-group conversion ul policy merely by filing an application the c-group conversion ul policy was specially designed for employees converting from the c-group term policy to individual coverage and absent an additional expense it is issued only to individuals who convert from the c-group term policy to individual coverage an insured employee has the right to convert generally without expense from the c-group term policy to a c-group conversion policy with equal or less face value if group coverage ceases because the employee ceases employment the employee leaves the class eligible for coverage the underlying contract terminates the underlying contract is amended to terminate or reduce the insurance of a class of insured employees or the underlying contract terminates as to an individual employer or plan upon conversion conversion credits are transferred from the c-group term policy to the c- group conversion ul policy in a total amount that would approximate the cash_value that would have been present if a typical universal life policy had been purchased when the c-group term policy was first issued inter-american and commonwealth ‘2 as discussed below many of the individual petitioners ultimately received a c-group conversion ul policy by converting a c-group term policy each of these conversions occurred although none of these five conditions was met the parties to the c-group product expected and understood that a c-group term policy could be converted at any time at the election of the insured - - developed and used tables to reference the amount of conversion credits which would accumulate under the c-group term policy and be transferred to the c-group conversion ul policy upon conversion and the table amounts were referenced in marketing materials provided to prospective customers no c-group term policyholder who converted to a c-group conversion ul policy ever received anything less than the appropriate amount referenced in the tables upon conversion the c-group conversion ul policy is generally fully funded and c-group conversion ul policyholders need not pay additional premiums on the c-group conversion ul policy a converting policyholder may if he or she desires pay additional premiums on the c-group conversion ul policy none of the individual petitioners chose to do so mr ankner designed the concept of conversion credits to allow the c-group term policy to operate in tandem with the c- group conversion ul policy while preserving the appearance and argument that the two policies were separate and distinct conversion credits generally work as follows with respect to each premium paid on the c-group term policy the portion that exceeds the applicable mortality charge cost of insurance is set_aside in a conversion credit account bearing interest pincite percent per annum for transfer to the c-group conversion ul policy upon conversion thereto upon conversion the conversion credits which have accumulated up to that time conversion credit --- - balance are generally transferred to the c-group conversion ul policy in accordance with a schedule under which none of the conversion credit balance is transferred to the c-group conversion ul policy if conversion occurs in the c-group term policy’s first year percent of the conversion credit balance is transferred to the c-group conversion ul policy if conversion occurs in the c-group term policy’s second year dollar_figure percent of the conversion credit balance is transferred to the c-group conversion ul policy if conversion occurs in the c- group term policy’s third year and percent of the conversion credit balance is transferred to the c-group conversion ul policy if conversion occurs in the c-group term policy’s fourth or later year ’ policyholders never receive more than percent of their conversion credit balance because the insurance salesperson upon conversion is paid a commission egual to percent of that balance conversion credits transferred from the c-group term policy to the c-group conversion ul policy are applied to the cash_value in the c-group conversion ul policy 1ie they are earned by the policyholder and made available to him or her in monthly installments for c-group term policies issued after date percent of the conversion credit balance is transferred to the c- group conversion ul policy if conversion occurs in the policy’s first years and percent of the conversion credit balance is transferred to the conversion policy if conversion occurs at any other time -- - beginning with the month of conversion c-group conversion ul policyholders may borrow against their policies up to the net loan value e cash_value less any prior outstanding loans and after the fourth year any loans are at the same interest rate as is credited to the conversion credit balance statutory_reserves are maintained for the c-group term policies in an amount that equals the greater of the minimum statutory reserve for group term life_insurance which excludes consideration of the conversion benefits or the present_value of expected future payments under the policies including both death_benefits and applied conversion credits less the present_value of expected future premiums ’ present values are calculated using best-estimate assumptions as to interest mortality lapses and expenses inter-american and commonwealth reinsured with a third party certain amounts of the risk associated with the c-group product the c-group term policy provides an annual experience refund to the policyholder interest of percent per annum is an insurance_company usually imposes a surrender charge upon a policyholder who surrenders his or her policy before the insurance_company recovers its costs as to that policy the c- group conversion ul policy was generally designed without surrender charges by treating portions of the conversion credit balance as earned and unearned depending on the number of months that the policy was held a policyholder forfeits the unearned portion upon surrender of the policy ' statutory_reserves were maintained separately for the c- group conversion ul policies - - credited to the conversion credit balance at or about the end of each certificate year and to the extent that the interest on the funds reflected in the balance actually exceeds the credited amount the excess is returned to the policyholder as an experience refund the experience refund is credited to the policyholder as a reduction of the next premium due on the policy v the neonatology plan mr cohen introduced dr mall to the sc veba and she decided on her own without seeking the advice of an independent knowledgeable professional to cause neonatology to invest therein dr mall knew that term life_insurance was substantially more expensive to buy through the sc veba than through other plans offered to her by the american medical association and the american academy of pediatrics she believed that the sc veba was the best investment for neonatology because it offered her the proffered tax benefits and accumulated value dr mall received correspondence on the sc veba but generally chose not to read it before investing in the sc veba neonatology established the neonatology plan under the sc veba on date effective date and the malls were the only persons covered by that plan during the relevant years mr mall was not a paid employee of neonatology and he was not eligible to join the plan dr mall and pes the - plan_administrator allowed mr mall to join the plan and they made him eligible to receive a death_benefit in an amount commensurate with the death_benefit payable under other life_insurance that he had owned outside the plan dr mall falsified and backdated documents in an attempt to legitimize mr mall’s participation in the neonatology plan and to attempt to legitimize the plan with various governmental agencies and regulatory bodies the neonatology plan’s adoption_agreement provides that all employees covered by the plan will receive a death_benefit equal to times his or her prior-year compensation defined by the plan to exclude nontaxable fringe benefit items neonatology paid dr mall compensation of dollar_figure dollar_figure and dollar_figure during and respectively neonatology did not pay mr mall any compensation during those years neonatology contributed to the neonatology plan during each year from through and for each subject year claimed a deduction for those contributions and other related amounts in neonatology contributed dollar_figure to the plan on behalf of dr mall it also paid the plan’s trustee and its administrator dollar_figure each in neonatology contributed dollar_figure to the plan on behalf of dr mall and dollar_figure on behalf of mr mall it deducted the dollar_figure on its federal corporate_income_tax return as an employee benefit program expense and it deducted on - - that return another dollar_figure that was paid to pes for its administrator services in neonatology contributed dollar_figure to the plan on behalf of dr mall and dollar_figure for a veba set-up fee it deducted those amounts on its federal corporate_income_tax return as an employee benefit program expense and it deducted on that return dollar_figure that it contributed to the plan and dollar_figure that it paid pes for its administrator services during the relevant years the neonatology plan purchased three life_insurance policies two on the life of dr mall and the third on the life of mr mall the attributes of these policies are as follows dr mall’s inter-american c-group term policy effective date inter-american issued a dollar_figure c-group term policy certificate no on the life of dr mall age the first-year premium was dollar_figure and the cost of insuring dr mall for that year was dollar_figure the neonatology plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been the neonatology plan also purchased one annuity during those years on or about date inter-american issued to the neonatology plan a plus ii group annuity c15576 for an initial premium of dollar_figure - - transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year this policy lapsed on date dr mall’s commonwealth c-group term policy effective date commonwealth issued a dollar_figure c- group term policy certificate no on the life of dr mall age the first-year premium was dollar_figure and the cost of insuring dr mall for that year was dollar_figure the neonatology plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the neonatology plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr mall for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its second year dollar_figure x the neonatology plan continued to pay the premiums on this policy net of the applicable experience refund through bffective date dr mall converted this policy toa fully paid individually owned c-group conversion ul policy in the face_amount of dollar_figure at the time of conversion the c- group term policy’s conversion credit balance was dollar_figure and dollar_figure of that amount dollar_figure x was transferred to the c-group conversion ul policy for potential earning dr mall will earn these credits in equal monthly installments beginning date the conversion credit balance of dollar_figure equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date female issue age duration of years months and dollar_figure death_benefit mr mall’s commonwealth c-group term policy effective date commonwealth issued a dollar_figure c- group term policy certificate no on the life of mr mall age the first-year premium was dollar_figure and the cost of insuring mr mall was dollar_figure the neonatology plan paid - - the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the neonatology plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring mr mall for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its second year dollar_figure x the neonatology plan continued to pay the premiums on this policy net of the applicable experience refund through effective date mr mall converted this policy toa fully paid individually owned c-group conversion ul policy in - the face_amount of dollar_figure at the time of conversion the c- group term policy’s conversion credit balance was dollar_figure and dollar_figure of that amount dollar_figure x was transferred to the c-group conversion ul policy for potential earning mr mall will earn these credits in equal monthly installments beginning date the conversion credits of dollar_figure equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date male issue age duration of years months and dollar_figure death_benefit the neonatology plan paid no benefits during the relevant years and the and forms w-2 wage and tax statements that neonatology issued to dr mall did not report any life_insurance benefits provided to her under the plan on their joint and federal individual income_tax returns the malls reported dollar_figure and dollar_figure respectively as p s income ’ ‘7 the term p s refers to the rates deemed by the commissioner to be acceptable in determining the cost of life_insurance protection includable in gross_income for a participant covered by a life_insurance_contract held in a qualified_pension plan see revrul_55_747 1955_2_cb_228 see also sec_1_72-16 income_tax regs cf sec_1_79-3 income_tax regs rules generally used to determine the cost of group term life_insurance provided to employee by employer see generally sec_79 employee’s gross_income generally does not include the cost of the first dollar_figure of group term life_insurance on his or continued -- - during the subject years commonwealth paid the following commissions on the c-group products issued on the malls’ lives period beginning kirwan mr ankner mr murphy dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure ‘these commissions were paid to mr ankner either indirectly through one of his companies or directly kirwan also received in or about commissions equal to percent of the conversion credit balances both earned and unearned which were applied to the malls’ c-group conversion ul policies these commissions totaled dollar_figure dollar_figure x dollar_figure x respondent determined that neonatology could not deduct its excess_contributions to the neonatology plan and increased neonatology’s income by dollar_figure in and dollar_figure in to reflect the following adjustments contributions to the neonatology plan dollar_figure dollar_figure administrator’s fees big_number big_number nol from plan contributions big_number subtotal big_number big_number less p s costs included in income big_number big_number adjustment big_number big_number respondent determined primarily that the disallowed contributions were not deductible under sec_162 because they did not continued her life - - provide current-year life_insurance protection ' respondent determined alternatively that the excess_contributions were not deductible under sec_404 respondent determined that the neonatology plan was not a welfare_benefit_fund under sec_419 but a nonqualified_plan of deferred_compensation subject_to the rules of sec_404 respondent determined as a second alternative that assuming the neonatology plan is a welfare_benefit_fund any deduction of the excess_contributions was precluded by sec_419 for this alternative respondent determined that the sc veba was not a 10-or-more employer plan under sec_419a as asserted by petitioners as to the malls respondent determined they had other income of dollar_figure in neonatology’s adjustment of dollar_figure less the nol of dollar_figure and dollar_figure in respondent determined that the other income was either constructive_dividend income under sec_301 or nonqualified_deferred_compensation under sec_402 as to the latter position respondent determined that dr mall was taxable on the disallowed ‘8 although respondent’s determination acknowledges that neonatology may deduct any contribution that is attributable to current-year life_insurance protection respondent has not determined as to the neonatology group or the lakewood group as discussed infra the cost of that current-year protection as to the neonatology group respondent’s determination merely takes into account the fact that the malls recognized p s income for the subject years as mentioned supra note p s income relates to life_insurance contracts held in a qualified_pension plan - - contributions when they were made because she received in connection with services property not subject_to a substantial_risk_of_forfeiture under sec_83 vi the lakewood plan mr cohen introduced drs hirshkowitz and desai to the sc veba in drs hirshkowitz and desai both knew that the premiums_paid on the c-group product were more expensive than the cost of term life_insurance they caused lakewood to invest in the sc veba anyway because as they understood it the sc veba ultimately allowed lakewood’s principals to withdraw the excess premiums from the plan tax free by way of policy_loans all of lakewood’s principals are physicians and dr hirshkowitz on the basis of his conversations with mr cohen understood that the sc veba allowed policyholders to convert their c-group term policies to individual policies which allowed the withdrawal of the cash_value at no additional expense dr desai on the basis of his conversations with mr cohen understood that premiums on the c- group product covered both term_insurance and conversion credits and in his capacity as a member of lakewood’s board_of directors would have spoken against the sc veba had the conversion credits not been available drs hirshkowitz and desai both relied on the word of mr cohen as to the validity of the sc veba seeking no independent competent professional advice - - and neither requesting nor reading any of the literature on the plan lakewood established the lakewood plan under the sc veba on date effective date the only employees covered by the plan during the subject years were drs hirshkowitz desai sobo mcmanus and sankhla ’ during the respective years from through lakewood paid dr desai compensation of dollar_figure dollar_figure dollar_figure and dollar_figure it paid dr sobo compensation of dollar_figure dollar_figure dollar_figure and dollar_figure it paid dr mcmanus compensation of dollar_figure dollar_figure dollar_figure and dollar_figure and it paid dr sankhla compensation of dollar_figure dollar_figure dollar_figure and dollar_figure during the respective years from through lakewood paid dr hirshkowitz compensation of dollar_figure dollar_figure and dollar_figure under the terms of the lakewood plan as in effect through date a covered_employee received a death_benefit egqual to times his or her prior-year compensation lakewood amended its plan as of date effective date to increase the death_benefit to dollar_figure times prior-year compensation drs hirshkowitz desai and mcmanus each elected on date not to accept this additional coverage drs bharat patel and chadru jain were also employees of lakewood the record indicates that they joined the lakewood plan after the subject years - -- no lakewood employee covered by the lakewood plan if he or she had died would ever have received a death_benefit equal to times or dollar_figure times his or her prior-year compensation each of lakewood’s employee owners decided the amount that lakewood would contribute to the sc veba on his or her behalf and lakewood wrote separate checks for each employee owner’s contribution noting on the check the name of the person for whom the contribution was made on its federal corporate_income_tax return for its taxable_year ended date lakewood claimed a dollar_figure deduction for veba contributions made to the lakewood plan for the following persons’ benefits trustee’s fees dollar_figure dr hirshkowitz dollar_figure dr d sal eee eee dollar_figure dr sobo dollar_figure dr mcmanus dollar_figure dollar_figure on its federal corporate_income_tax return lakewood claimed a dollar_figure deduction for veba contributions made for the following persons’ benefits dr hirshkowitz dollar_figure dr desal dollar_figure dr sobo dollar_figure dr mcmanus dollar_figure dollar_figure this deduction consists of contributions to the lakewood plan and dollar_figure that lakewood paid directly to peoples security for c- group term policies purchased outside of the lakewood plan for - - drs hirshkowitz and desai of the dollar_figure paid to peoples security dollar_figure was attributable to the coverage of dr hirshkowitz and dollar_figure was attributable to the coverage of dr desai on its federal corporate_income_tax return lakewood claimed a dollar_figure deduction for veba contributions made for the following persons’ benefits trustee’s fees dollar_figure dr hirshkowitz dollar_figure dr desai dollar_figure dr sobo dollar_figure dr sankhla dollar_figure dr mcmanus dollar_figure dollar_figure ‘the lakewood plan returned this dollar_figure to lakewood in date this deduction consists of contributions to the lakewood plan and dollar_figure that lakewood paid directly to peoples security for c- group term policies purchased outside of the lakewood plan for drs hirshkowitz sankhla and desai of the dollar_figure paid to peoples security dollar_figure was attributable to the coverage of dr hirshkowitz dollar_figure was attributable to the coverage of dr sankhla and dollar_figure was attributable to the coverage of dr desai during the relevant years the lakewood plan purchased insurance policies on the lives of lakewood’s principals the attributes of these policies are as follows - - dr hirshkowitz’ inter-american c-group term policy effective date inter-american issued a dollar_figure million c-group term policy certificate no on the life of dr hirshkowitz age the first-year premium was dollar_figure and the cost of insuring dr hirshkowitz for that year was dollar_figure the lakewood plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year this policy lapsed on date dr desai’s inter-american c-group term policy effective date inter-american issued a dollar_figure million c-group term policy certificate no on the life of dr desai age the first-year premium was dollar_figure and the cost of insuring dr desai for that year was dollar_figure the lakewood plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit - - balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its first year this policy lapsed on date dr sobo’s inter-american c-group term policy effective date inter-american issued a dollar_figure million c-group term policy certificate no on the life of dr sobo age the first-year premium was dollar_figure and the cost of insuring dr sobo for that year was dollar_figure the lakewood plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year this policy lapsed on date dr hirshkowitz’ commonwealth c-group term policy effective date commonwealth issued a dollar_figure c-group term policy certificate no on the life of dr hirshkowitz age the first-year premium was dollar_figure and the cost of insuring dr hirshkowitz for that year was dollar_figure the lakewood plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - - - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr hirshkowitz for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its second year dollar_figure x the third-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr hirshkowitz for the third year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - - - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c- group conversion ul policy upon conversion thereto because the c-group term policy was in its third year dollar_figure x the lakewood plan continued to pay the premiums on this policy net of the applicable experience refund through bffective date dr hirshkowitz converted this policy to a fully paid individually owned c-group conversion ul policy in the face_amount of dollar_figure at the time of conversion the balance in the c-group term policy’s conversion credit account was dollar_figure and dollar_figure of that amount dollar_figure x was transferred to the c-group conversion ul policy for potential earning mr hirshkowitz will earn these credits in equal monthly installments beginning date the conversion credit balance of dollar_figure equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date male issue age duration of years and dollar_figure death_benefit -- - dr desai’s commonwealth c-group term policy effective date commonwealth issued a dollar_figure c-group term policy certificate no on the life of dr desai age the first-year premium was dollar_figure and the cost of insuring dr desai for that year was dollar_figure the lakewood plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr desai for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group al -- conversion ul policy upon conversion thereto because the c- group term policy was in its second year dollar_figure x the third-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr desai for the third year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its third year dollar_figure x the lakewood plan continued to pay the premiums on this policy net of the applicable experience refund through effective date dr desai converted this policy to a fully paid individually owned c-group conversion ul policy in the face_amount of dollar_figure at the time of conversion the c- group term policy’s conversion credit balance was dollar_figure and dollar_figure of that amount dollar_figure x was transferred to the c-group conversion ul policy for potential earning dr desai will earn this amount in equal monthly installments beginning date the conversion credit balance of dollar_figure - equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date male issue age duration of years and dollar_figure death_benefit dr sobo’s dollar_figure commonwealth c-group term policy effective date commonwealth issued a dollar_figure c-group term policy certificate no on the life of dr sobo age the first-year premium was dollar_figure and the cost of insuring dr sobo for that year was dollar_figure the lakewood plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure -- dollar_figure the cost of insuring dr sobo for the second year was dollar_figure - - dr sobo died on date on date the lakewood plan paid dollar_figure to bonnie w sobo ms sobo as the beneficiary of this policy dr mcmanus’ commonwealth c-group term policy effective date commonwealth issued a dollar_figure million c-group term policy certificate no on the life of dr mcmanus age the first-year premium was dollar_figure and the cost of insuring dr mcmanus for that year was dollar_figure the lakewood plan paid the first-year premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c- group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr mcmanus for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its second year dollar_figure x the third-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr mcmanus for the third year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its third year dollar_figure x the lakewood plan continued to pay the premiums on this policy net of the applicable experience refund through effective date dr mcmanus converted this policy to a fully paid individually owned c-group conversion ul policy in the face_amount of dollar_figure at the time of conversion the c- group term policy’s conversion credit balance was dollar_figure and - - dollar_figure of that amount dollar_figure x was transferred to the c-group conversion ul policy for potential earning dr mcmanus will earn these credits in equal monthly installments beginning date the conversion credit balance of dollar_figure equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date male issue age duration of years and dollar_figure million death_benefit dr hirshkowitz’ commonwealth c-group term policy effective date commonwealth issued a dollar_figure million c-group term policy certificate no on the life of dr hirshkowitz age the premium for the 10-month period from date through date was dollar_figure and the cost of insuring dr hirshkowitz for the 10-month period was dollar_figure the lakewood plan paid the 10-month premium and at the end of that 10-month period the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure -- dollar_figure x x sdollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year - the premium for the next 12-month_period before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr hirshkowitz for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its second year dollar_figure x the third-year premium for the next 12-month_period before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr hirshkowitz for the third year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure -- dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy - upon conversion thereto its third year because the c-group term policy was in dollar_figure x the lakewood plan continued to pay the premiums on this policy effective date dr to a fully paid in the face_amount of dollar_figure at the time of conversion net of the applicable experience refund through hirshkowitz converted this policy individually owned c-group conversion ul policy the c-group term policy’s conversion credit balance was dollar_figure and dollar_figure of that amount to the c-group conversion ul policy for potential earning dollar_figure x was transferred dr hirshkowitz will earn these credits in equal monthly installments beginning date the conversion credit balance of dollar_figure equaled the amount referenced in commonwealth’s table of conversion business following variables credit values for the issued before february duration of years male issue age months and dollar_figure million death_benefit dr desai’s commonwealth c-group term policy effective date million c-group term policy of dr desai age the premium date through october the cost of insuring dr desai for dollar_figure the lakewood plan paid certificate no commonwealth issued a dollar_figure on the life for the 10-month period from was dollar_figure and this 10-month period was the 10-month premium and at - 4g - the end of that 10-month period the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year the premium for the next 12-month_period before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr desai for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its second year dollar_figure x the third-year premium for the next 12-month_period before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of - insuring dr desai for the third year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure -- dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure --- dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its third year dollar_figure x the lakewood plan continued to pay the premiums on this policy net of the applicable experience refund through effective date dr desai converted this policy toa fully paid individually owned c-group conversion ul policy in the face_amount of dollar_figure at the time of conversion the c- group term policy’s conversion credit balance was dollar_figure and dollar_figure of that amount dollar_figure x was transferred to the c-group conversion ul policy for potential earning dr desai will earn these credits in equal monthly installments beginning date the conversion credit balance of dollar_figure equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date male issue age duration of years months and dollar_figure million death_benefit -- - dr sobo’s commonwealth c-group term policy effective date commonwealth issued a dollar_figure million c-group term policy certificate no on the life of dr sobo age the premium for the 10-month period from date through date was dollar_figure and the cost of insuring dr sobo for this 10-month period was dollar_figure the lakewood plan paid the 10-month premium and at the end of that 10-month period the conversion credit balance was dollar_figure dollar_figure -- dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year the premium for the next 12-month_period before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and the lakewood plan paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr sobo for the second year was dollar_figure on date the lakewood plan paid ms sobo dollar_figure million as the beneficiary of this policy pursuant to the plan dr sobo’s death_benefit should have been dollar_figure prior-year compensation of dollar_figure multiplied by the lakewood plan had assets from which it could have paid ms sobo more than the - - dollar_figure that it did the dollar_figure million on this policy and the dollar_figure on certificate no the lakewood plan retained those assets for the remaining covered employees dr sankhla’s commonwealth mg-5 policy effective date commonwealth issued a dollar_figure mg-5 policy on the life of dr sankhla age for a 1-year premium of dollar_figure the policy was renewed for a second year at a premium of dollar_figure and for a third year at a premium of dollar_figure the lakewood plan paid all three of these premiums dr hirshkowitz’ commonwealth c-group term policy effective date commonwealth issued a dollar_figure c-group term policy certificate no on the life of dr hirshkowitz age the premium for the 10-month period from date through date was dollar_figure and the cost of insuring dr hirshkowitz for that 10-month period was dollar_figure the lakewood plan paid the 10-month premium and at the end thereof the conversion credit balance was dollar_figure dollar_figure -- dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x x dollar_figure none of the conversion credit balance could have been transferred at this time to the c- group conversion ul policy upon conversion thereto because the c-group term policy was in its first year - - in addition to its purchase of these life_insurance policies the lakewood plan during the subject years purchased three group annuities designated for certain lakewood employees none of these annuities funded the life_insurance provided under the plan the lakewood plan generally purchased these annuities to accumulate wealth to pay future premiums on the c-group term policies the attributes of these annuities are as follows plus ii group annuity effective date inter-american issued to the lakewood plan a plus ii group annuity c15518 c91063 the lakewood plan deposited dollar_figure into the annuity on the day it was effective and dollar_figure in the lakewood plan closed the annuity in date withdrawing dollar_figure the dollar_figure difference between the total deposits dollar_figure and the amount withdrawn dollar_figure represents interest commonwealth sygqnet group annuity effective in effective date commonwealth issued to the lakewood plan a sygnet group annuity d10120 d90039 this annuity is designed for asset accumulation over a long period of time and has surrender charges that grade off over years the lakewood plan deposited dollar_figure into the annuity on the day it was effective dollar_figure in and dollar_figure in the lakewood plan withdrew dollar_figure from the annuity on date and dollar_figure on date in closing it the - - lakewood plan used both withdrawals to pay c-group term policy premiums for drs hirshkowitz and desai the lakewood plan paid dollar_figure of charges on its deposits and dollar_figure of surrender charges on its withdrawals the dollar_figure difference between the total deposits into the account dollar_figure and sum of the charges dollar_figure plus total withdrawals dollar_figure represents interest commonwealth syqnet group annuity effective in effective date commonwealth issued to the lakewood plan a second sygnet group annuity d11794 d90214 the lakewood plan deposited dollar_figure into the annuity on the day it was effective and closed the annuity on date withdrawing dollar_figure the lakewood plan paid a dollar_figure charge on its deposit anda dollar_figure surrender charge on its withdrawal the dollar_figure difference between the deposit dollar_figure and sum of the charge dollar_figure plus withdrawal dollar_figure represents interest beginning in lakewood purchased outside of the sc veba three peoples security c-group term policies lakewood owned these policies and deducted the underlying premiums as veba contributions the attributes of these policies are as follows dr desai’s peoples security c-group term policy effective date peoples security issued a dollar_figure c-group term policy certificate no on the - - life of dr desai age the first-year premium was dollar_figure and the cost of insuring dr desai for that year was dollar_figure lakewood paid this premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and lakewood paid the net premium of dollar_figure dollar_figure - dollar_figure the cost of insuring dr desai for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its second year dollar_figure x - -- lakewood continued to pay the premiums on this policy net of the applicable experience refund through effective date dr desai converted this policy to a fully paid individually owned c-group conversion ul policy in the face_amount of dollar_figure at the time of conversion the c-group term policy’s conversion credit balance was dollar_figure and dollar_figure of that amount dollar_figure x was transferred to the c-group conversion ul policy for potential earning dr desai will earn these credits in equal monthly installments beginning date the conversion credit balance of dollar_figure equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date male issue age duration of years months and dollar_figure death_benefit dr hirshkowitz’ peoples security c-group term policy effective date peoples security issued a dollar_figure c-group term policy certificate no on the life of dr hirshkowitz age the first-year premium was dollar_figure and the cost of insuring dr hirshkowitz for that year was dollar_figure lakewood paid this premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance - - dollar_figure -- dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year the second-year premium before any experience refund was dollar_figure the policy was credited with an experience refund of dollar_figure and lakewood paid the net premium of dollar_figure dollar_figure -- dollar_figure the cost of insuring dr hirshkowitz for the second year was dollar_figure and at the end of that year the conversion credit balance was dollar_figure dollar_figure dollar_figure -- dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure of the conversion credit balance dollar_figure could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its second year dollar_figure x lakewood continued to pay the premiums on this policy net of the applicable experience refund through effective date dr hirshkowitz converted this policy to a fully paid individually owned c-group conversion ul policy in the face_amount of dollar_figure at the time of conversion the c- group term policy’s conversion credit balance was dollar_figure and dollar_figure of that amount dollar_figure x was - - transferred to the c-group conversion ul policy for potential earning dr hirshkowitz will earn these credits in equal monthly installments beginning date the conversion credit balance of dollar_figure equaled the amount referenced in commonwealth’s table of conversion credit values for the following variables business issued before date male issue age duration of year sec_2 months and dollar_figure death_benefit dr sankhla’s peoples security c-group term policy effective date peoples security issued a dollar_figure c-group term policy certificate no on the life of dr sankhla age the first-year premium was dollar_figure and the cost of insuring dr sankhla for that year was dollar_figure lakewood paid this premium and at the end of that year the conversion credit balance was dollar_figure dollar_figure - dollar_figure dollar_figure the dollar_figure is the interest of percent earned on the conversion credit balance dollar_figure - dollar_figure x dollar_figure none of the conversion credit balance could have been transferred at this time to the c-group conversion ul policy upon conversion thereto because the c-group term policy was in its first year during the relevant years commonwealth inter-american and peoples security paid kirwan mr murphy and mr ankner either indirectly through one of his companies or directly commissions - -- of dollar_figure dollar_figure and dollar_figure respectively on the c- group products and sygnet group annuities sold to the lakewood plan kirwan also received in or about commissions equal to percent of the conversion credits both earned and unearned which were applied to the c-group conversion ul policies of drs hirshkowitz desai and mcmanus these commissions totaled dollar_figure dollar_figure x dollar_figure x dollar_figure x dollar_figure x dollar_figure dollar_figure dollar_figure x the and forms w-2 issued by lakewood to drs hirshkowitz desai sobo mcmanus and sankhla did not report any taxable life_insurance benefits provided to them under the lakewood plan dr hirshkowitz reported dollar_figure dollar_figure and dollar_figure as p s income on his joint and federal individual income_tax returns respectively drs desai sobo mcmanus and sankhla did not report on their or federal individual income_tax returns any income from the life_insurance benefits provided to them by lakewood respondent determined that lakewood could not deduct the amounts claimed as contributions to the lakewood plan in its date and its and taxable years and disallowed the related claimed deductions of dollar_figure dollar_figure and dollar_figure respectively in contrast with the neonatology adjustments respondent’s lakewood adjustments do not reflect the - - fact that an employee owner dr hirshkowitz reported p s income as to the benefits that he received from the lakewood plan consistent with the neonatology determination respondent determined primarily that lakewood’s contributions to its plan were not deductible under sec_162 to the extent they did not provide current-year life_insurance protection respondent determined alternatively that the contributions were not deductible under sec_404 respondent determined that the lakewood plan was not a welfare_benefit_fund under sec_419 but a nonqualified_plan of deferred_compensation subject_to the rules of sec_404 respondent determined as a second alternative that assuming that the lakewood plan is a welfare_benefit_fund any deduction of the contributions was precluded by sec_419 for this purpose respondent determined that the sc veba was not a 10-or-more employer plan under sec_419a as asserted by petitioners as to the petitioning individuals of the lakewood group respondent determined that each group of petitioning individuals had additional income in the following amounts for the respective years from through dr and ms hirshkowitz----dollar_figure dollar_figure and dollar_figure dr and ms desai- -dollar_figure dollar_figure and dollar_figure dr and ms mcmanus--dollar_figure dollar_figure and dollar_figure and the estate of steven sobo deceased -- - and ms sobo--dollar_figure dollar_figure and dollar_figure respondent determined that the additional income was either constructive_dividend income under sec_301 or nonqualified_deferred_compensation under sec_402 as to the latter position respondent determined that the petitioning employee owners of the lakewood group were taxable on their shares of the contributions when made because they received in connection with services property not subject_to a substantial_risk_of_forfeiture under sec_83 vii the marlton plan marlton established the marlton plan under the nj veba on date effective date marlton contributed dollar_figure and dollar_figure to the plan during and respectively and dr lo deducted those respective amounts on his and schedules c as employee benefit program expenses marlton also paid a dollar_figure veba fee in which dr in summary respondent determined that the disallowed contributions were attributable to the following persons dr hirshkowitz dollar_figure dollar_figure dollar_figure dr desai big_number big_number big_number dr mcmanus big_number big_number big_number dr sobo big_number big_number big_number dr sankhla - - trustee’s fees big_number big_number big_number big_number big_number - - lo deducted on his joint federal individual_income_tax_return the marlton plan provides in relevant part that each person covered by the plan is entitled to a death_benefit equal to eight times his or her prior-year compensation an employee’s spouse may not join the plan and a proprietor may join the plan only if percent or more of the plan’s total participants are employees of marlton on day of each quarter of the plan_year the only persons covered by the marlton plan are dr lo ms lo and edward lo ’ and during the marlton plan purchased a separate insurance_policy on the life of each of these persons none of these persons had he or she died would have received a death_benefit under the plan equal to eight times his or her prior-year compensation ms lo was a marlton employee during and it paid her ostensibly as employee compensation dollar_figure dollar_figure and dollar_figure during the respective years from to edward lo was an employee of marlton during and it paid him ostensibly as employee compensation dollar_figure dollar_figure and dollar_figure during the years through dr lo was never a marlton employee and he was not eligible to participate in the plan during any of the - the record does not reveal edward lo’s relationship if any to dr lo - - relevant years dr lo’s participation in the plan was inconsistent with the terms thereof on date the marlton plan purchased from southland life_insurance co southland a dollar_figure million flexible premium adjustable life_insurance_policy certificate no on the life of dr lo age and it paid southland a dollar_figure premium on the policy during that year dr lo’s death beneficiary was an irrevocable_trust by and between him and ms lo as grantors and edward lo as trustee the policy’s cash_value ie its accumulation value’ less surrender charges could be obtained by surrendering the policy but the product was designed to access that value by borrowing it through a wash loan ie a loan for which the interest rate charged thereon equaled the interest rate earned on the policy the southland policy’s accumulated value was dollar_figure on date its surrender charge for that year was dollar_figure and the interest credited to the policy during that year approximated dollar_figure for a dollar_figure million term_insurance policy on the life of dr lo would have cost approximately dollar_figure under the terms of the policy after southland received an initial premium payment of dollar_figure a minimum monthly premium payment of dollar_figure was required to prevent the policy from lapsing during the first years the accumulation value equaled the total premiums_paid plus commercial interest less the cost of term_insurance and administrative expenses - - also during the marlton plan purchased from the first colony life_insurance co first colony a dollar_figure graded premium policy on the life of ms lo age and a dollar_figure graded premium policy on the life of edward lo age the marlton plan paid first colony a dollar_figure annual premium on ms lo’s policy and a dollar_figure annual premium on edward lo’s policy the beneficiary of both policies was the marlton plan trustee the annual premium on these two policies remained constant for the first years and then increased substantially unless the policyholder provided evidence of insurability to begin another 10-year period of reduced level premiums the marlton plan paid no benefits during the subject years on their joint federal individual_income_tax_return the los reported no p s income they reported p s income of dollar_figure on their joint federal individual_income_tax_return respondent determined that marlton could not deduct its contributions to the marlton plan and increased the los’ income by dollar_figure in and dollar_figure in to reflect the following adjustments contributions to the marlton plan dollar_figure dollar_figure administrator’s fees big_number subtotal big_number big_number less p s costs included in income -q- big_number adjustment big_number - - respondent determined primarily that the contributions were not deductible under sec_162 respondent determined alternatively that the contributions were not deductible under sec_404 respondent determined that the marlton plan was not a welfare_benefit_fund under sec_419 but a nonqualified_plan of deferred_compensation subject_to the rules of sec_404 respondent determined as a second alternative that assuming that the marlton plan is a welfare_benefit_fund any deduction of the contributions was precluded by sec_419 for this purpose respondent determined that the nj veba was not a 10-or-more employer plan under sec_419a as asserted by petitioners respondent determined as a third alternative that any deduction of the contributions was precluded by sec_264 for this purpose respondent determined that each life_insurance_policy issued under the marlton plan covered the life of a person financially interested in dr lo’s trade_or_business and that dr lo was directly or indirectly a beneficiary under the policy opinion we must determine the tax consequences flowing from the subject veba’s which petitioners claim are 10-or-more employer plans entitled to the favorable tax treatment set forth -- - in sec_419a the vebas’ framework was crafted by the insurance salesmen mentioned herein and marketed to professional small_business owners as a viable tax planning device the vebas’ scheme was subscribed to by varied small businesses whose employee owners sought primarily the advertised tax benefits and the term 10-or-more employer plan is defined by sec_419a which provides as follows exception for 10-or-more employer plans --- a in general --this subpart ie the rules of subpt d that generally limit an employer’s deduction for its contributions to a welfare_benefit_fund to the amount that would have been deductible had it provided the benefits directly to its employees shall not apply in the case of any welfare_benefit_fund which is part of a 10_or_more_employer_plan the preceding sentence shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers b 10_or_more_employer_plan --for purposes of subparagraph a the term 10_or_more_employer_plan means a plan-- to which more than employer contributes and to which no employer normally contributes more than percent of the total contributions contributed under the plan by all employers see generally 108_tc_524 for a discussion of the tax consequences which flow from a 10-or-more employer plan vis-a-vis another type of welfare_benefit_fund on the one hand or a plan of deferred_compensation on the other hand -- - tax-free asset accumulation the subject veba’s were not designed marketed purchased or sold as a means for an employer to provide welfare benefits to its employees cf 108_tc_524 designers of welfare_benefit funds intended to provide employees with real welfare benefits that would not be subject_to abuse the small_business owners at bar namely the petitioning physicians invested in the veba’s through their businesses and caused their businesses to purchase the c-group product from the insurance salesmen the insurance salesmen guided by the designer of the c-group product represented to the physicians that favorable tax consequences would flow from an investment in the veba’s and the purchase of the c-group product before turning to the issues at hand we pause to pass on our perception of the trial witnesses we observe the candor sincerity and demeanor of each witness in order to evaluate his or her testimony and assign it weight for the primary purpose of finding disputed facts we determine the credibility of each witness weigh each piece of evidence draw appropriate inferences and choose between conflicting inferences in finding the facts of a case the mere fact that one party presents unopposed testimony on his or her behalf does not necessarily mean that the elicited testimony will result ina finding of fact in that party’s favor we will not accept the testimony of -- - witnesses at face value if we find that the outward appearance of the facts in their totality conveys an impression contrary to the spoken word see 326_us_287 316_us_164 see also 372_us_108 322_f2d_725 3d cir affg tcmemo_1962_132 petitioners called eight fact witnesses and one expert witness petitioners’ fact witnesses were drs desai hirshkowitz and mall messrs ankner mall and ross and akgon usa employees paula jackson and timothy vance petitioners’ expert witness was jay m jaffe f s a m a a a mr jaffe mr jaffe is the president and sole consultant of actuarial enterprises ltd and we generally recognized him as an expert on the characterization of an insurance_policy as term_insurance we recognized him as such but expressed concern as to whether he was actually an unbiased expert who could help us mr jaffe generally testified that the c-group term policy and the c-group conversion ul policy were separate insurance products with no interrelationship respondent called two fact witnesses and one expert witness respondent’s fact witnesses were mr cohen and vincent maressa the latter of whom is the executive director and general counsel of the medical society of new jersey respondent’s expert -- - witness was charles deweese f s a m a a a mr deweese mr deweese is an independent consulting actuary and we recognized him as an expert on among other things the difference between group term_insurance and universal_life_insurance mr deweese generally testified that the c-group term policy and the c-group conversion ul policy were one insurance product ie both policies were parts of a single life_insurance product we have broad discretion to evaluate the cogency of an expert’s analysis sometimes an expert will help us decide a case see eg booth v commissioner supra pincite 106_tc_274 see also m i c ltd v commissioner tcmemo_1997_96 proios v commissioner tcmemo_1994_442 other times he or she will not see eg estate of scanlan v commissioner tcmemo_1996_331 affd without published opinion 116_f3d_1476 5th cir mandelbaum v commissioner tcmemo_1995_255 affd without published opinion 91_f3d_124 3d cir we weigh an expert’s testimony in light of his or her qualifications and with due regard to all other credible_evidence in the record see estate of kaufman v commissioner tcmemo_1999_119 we may embrace or reject an expert’ss opinion in toto or we may pick and choose the portions of the opinion we choose to adopt see 304_us_282 538_f2d_927 2d cir - - affg tcmemo_1974_285 97_tc_496 86_tc_547 see also pabst brewing co v commissioner tcmemo_1996_506 we are not bound by an expert’s opinion and will reject an expert’s opinion to the extent that it is contrary to the judgment we form on the basis of our understanding of the record as a whole see 813_f2d_837 7th cir affg 85_tc_56 silverman v commissioner supra pincite 227_f2d_753 6th cir affg tcmemo_1954_139 it s of iowa inc v commissioner supra pincite 84_tc_722 see also gallick v baltimore o r co supra pincite 193_f3d_613 3d cir mr deweese is no stranger to this court he testified in 108_tc_524 as an expert on multiple employer plans we find him to be reliable relevant and helpful we credit his opinion as set forth in his report and as clarified at trial we rely on his opinion in making our findings_of_fact and reaching the conclusions we draw therefrom -- jo - mr jaffe helped us minimally he admitted at trial that he works with commonwealth in its everyday business operation including helping it develop an innovative term life_insurance product and rendering critical advice to it on an unrelated litigation matter an expert witness loses his or her impartiality when he or she is too closely connected with one of the parties see eg estate of kaufman v commissioner supra the commissioner’s expert was inherently biased because he was the commissioner’s employee an expert witness also is unhelpful when he or she is merely a biased spokesman for the advancement of his or her client’s litigating position when we see and hear an expert who displays an unyielding allegiance to the party who is paying his or her bill we need not and generally will not hesitate to disregard that testimony as untrustworthy see 94_tc_570 92_tc_101 see also jacobson v commissioner tcmemo_1989_606 when experts act as advocates the experts can be viewed only as hired guns of the side that retained them and this not only disparages their professional status but precludes their assistance to the court in reaching a proper and reasonably accurate conclusion in addition to the reasons stated infra mr jaffe’s knowledge of critical facts was generally influenced by his relationship with commonwealth he relied incorrectly on erroneous data to reach otherwise unsupported conclusions and he concededly did not review all pertinent facts - 7jl1- we also do not find the testimony of most of the fact witnesses to be helpful as to the critical facts underlying the issues at hand drs desai hirshkowitz and mall and messrs ankner mall and ross testified incredibly with regard to material aspects of this case they all seemed coached and frequently displayed during cross-examination or in response to guestions asked by the court a loss of memory or hesitation with respect to their testimony each of them with the exception of dr desai and mr mall also acknowledged that he or she had on prior occasions consciously misrepresented material facts in order to achieve a personal goal their testimony as well as the testimony of mr cohen was for the most part self-serving vague elusive uncorroborated and or inconsistent with documentary or other reliable evidence under circumstances such as these we are not reguired to and we do not rely on the bald or otherwise unreliable testimony of these named fact witnesses to support our decision herein see 322_f2d_725 pincite see also 87_tc_74 we rely mainly on the testimony of mr deweese and the voluminous record built by the parties through their stipulation of approximately big_number facts and approximately big_number exhibits in fact petitioners’ counsel neil l prupis mr prupis even acknowledged to the court that the testifying physicians had selective memories - j2 - we turn to the nine issues for decision and address each of these issues seriatim contributions to the neonatology and lakewood plans we decide first the guestion of whether sec_162 a allows neonatology and lakewood to deduct their contributions to their plans sec_162 generally provides a deduction for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business a taxpayer must meet five requirements in order to deduct an item under this section the taxpayer must prove that the item claimed as a deductible business_expense was paid_or_incurred during the taxable_year was for carrying on his her or its trade_or_business was an expense was a necessary expense and was an ordinary_expense see 403_us_345 290_us_111 a determination of whether an expenditure satisfies each of these reguirements is a question of fact see 320_us_467 petitioners argue that neonatology and lakewood meet all five requirements with respect to their contributions to their plans and hence petitioners assert those contributions are fully deductible under sec_162 petitioners contend that the contributions were paid as compensation because they assert the contributions funded a fringe benefit in the form of term -- - life_insurance petitioners assert that the contributions all were made to the plans to pay premiums on term life_insurance and that the premiums entitled the insureds to nothing more respondent argues that sec_162 does not allow neonatology and lakewood to deduct their contributions in full respondent concedes that neonatology and lakewood may deduct their contributions to their plans to the extent that the contributions funded term life_insurance see sec_1_162-10 income_tax regs see also joel a schneider m d s c v commissioner tcmemo_1992_24 moser v commissioner tcmemo_1989_142 affd on other grounds 914_f2d_1040 8th cir as to the excess_contributions respondent asserts those amounts are not deductible under sec_162 respondent argues primarily that the excess_contributions are distributions of surplus cash and not ordinary and necessary business_expenses respondent points to the fact that the only benefit provided explicitly under the plans was term life_insurance and asserts that the excess_contributions did not fund this benefit we agree with respondent that the excess_contributions which neonatology and lakewood made to their plans are nondeductible distributions of cash for the benefit of their employee owners and do not constitute ordinary or necessary business_expenses ’ we need not and do not decide the correctness of respondent’s alternative determinations disallowing deductions of continued -- the neonatology plan and the lakewood plan are primarily vehicles which were designed and serve in operation to distribute surplus cash surreptitiously in the form of excess_contributions from the corporations for the employee owners’ ultimate use and benefit although the plans did provide term life_insurance to the employee owners the excess_contributions simply were not attributable to that current-year protection the excess_contributions which represent the lion’s share of the contributions were paid to inter-american commonwealth or peoples security as the case may be to be set_aside in an interest-bearing account for credit to the c-group conversion ul policy upon conversion thereto and it was the holders of these policies namely the employee owners who benefited from those excess_contributions by way of their ability to participate in the c-group products we find incredible petitioners’ assertion that the employee owners of neonatology and lakewood each of whom is an educated physician would have caused their respective corporations to overpay substantially for term life_insurance with no promise or expectation of receiving the exce sec_27 continued these excess_contributions the distributing corporations neonatology and lakewood on the other hand received little if any benefit from the excess_contributions to the plans - - contributions back the premiums_paid for the c-group term policy exceeded by a wide margin the cost of term life_insurance we recognize that the conversion credit balance in a c-group term policy would be forfeited completely were the policy to lapse and not be converted such was the case for example when neonatology let dr mall’s inter-american c-group term policy lapse on date in that case dr mall forfeited the conversion credit balance of dollar_figure petitioners focus on the possibility and actual occurrence of such a forfeiture and conclude therefrom that the premiums are all attributable to current_life_insurance_protection we disagree with this conclusion the mere fact that a c-group term policyholder may forfeit the conversion credit balance does not mean as petitioners would have it that the balance was charged or paid as the cost of term life_insurance the current-year insurance purchased from inter-american on the life of dr mall cost only dollar_figure for the certificate year then ended and the fact that neonatology choose to deposit with inter-american an additional dollar_figure dollar_figure premium less dollar_figure cost of insurance expecting that dr mall would eventually receive that deposit other c-group term policies which lapsed during the neonatology and lakewood subject years without conversion were the other two inter-american c-group term policies ie the ones owned by drs hirshkowitz and desai although petitioners do not explain why these policies were allowed to lapse without conversion we note that the lapse of these policies occurred right after inter-american’s forced liquidation -- - with commercial interest does not recharacterize the deposited funds as the cost of term_insurance simply because neonatology ultimately decided to abandon the funds although it is true that neonatology and the insurancemen represented in form that neonatology paid the entire dollar_figure to inter-american as a premium on term life_insurance the fact of the matter is that neither neonatology nor inter-american actually considered the excess premium to fund the cost of term life_insurance the substance of the purported premium payment outweighs its form and after closely scrutinizing the facts and circumstances of this case including especially the interrelationship between the two policies underlying the c-group product and the expectations and understandings of the parties to the contracts underlying that product we are left without any doubt that the amount credited to the conversion account balance was neither charged nor paid as the cost of current_life_insurance_protection the parties to those contracts have always expected and understood that the conversion credit balance would be returned to the insured in the future by way of no-cost policy_loans we also recognize that the conversion credit balance would not be paid in addition to the underlying policy’s face value when the insured died and if the insured had borrowed from the balance that the death_benefit would be reduced by the amount of any outstanding loan in the case of dr sobo for example his - beneficiary ms sobo received upon his death only the face value of the two c-group term policies which were then outstanding on his life neither she nor anyone else was entitled to or actually received the conversion credit balance on either policy for the reasons stated immediately above we do not believe that this forfeiture provision changes the fact that the amount credited to the conversion credit balance was simply a deposit that could either grow with interest or in the case of dr sobo dissipate and that this deposit was insufficiently related to the current_life_insurance_protection to label it as such we conclude that the excess_contributions are disguised constructive distributions to the petitioning employee owners of neonatology and lakewood see 14_f3d_923 3d cir affg tcmemo_1993_43 321_f2d_598 3d cir affg 36_tc_446 89_tc_1280 see also 279_us_716 individual taxpayer constructively received income to the extent corporate employer agreed to pay his tax bill which means in turn that the neither party has suggested that dr sobo upon death is entitled to deduct a loss equal to the conversion credit balance and we do not decide that issue --- - distributing corporations cannot deduct those payments the fact that neither lakewood nor neonatology formally declared these excess_contributions as cash distributions does not foreclose our finding that the excess_contributions were distributions-in-fact see commissioner v makransky supra pincite truesdell v commissioner supra pincite see also 577_f2d_1206 5th cir 496_f2d_1384 5th cir 368_f2d_439 9th cir affg tcmemo_1965_84 what is critical to our conclusion is that the excess_contributions made by neonatology and lakewood conferred an economic benefit on their employee owners for the primary if not sole benefit of those employee owners that the excess_contributions constituted a distribution of cash rather than a payment of an ordinary and necessary business_expense and that neither neonatology nor lakewood expected any repayment of the cash underlying the conferred benefit see noble v s in addition to the deeply ingrained principle that a corporation may not deduct a distribution made to its shareholder the subject distributions neither funded a plan benefit nor are viewed as passing directly from the corporation to the plan see 57_tc_781 distributions deemed to have passed from the distributing_corporation to the recipient shareholder and then to the third- party actual recipient that the distributing corporations and or the employee owners may not have intended that the excess_contributions constitute a taxable_distribution does not preclude continued - jq - commissioner supra pincite see also loftin woodard inc v united_states supra pincite5 crosby v united_states supra pincite 73_tc_980 petitioners argue that the excess_contributions were paid to the employee owners as compensation_for their services we disagree whether amounts are paid as compensation turns on the factual determination of whether the payor intends at the time that the payment is made to compensate the recipient for services performed see 733_f2d_191 1st cir affg 81_tc_505 98_tc_511 58_tc_1055 affd without published opinion 474_f2d_1345 5th cir the intent is not found as petitioners would have it at or after the time that respondent challenges the payment’s characterization as something other than compensation see king’s ct mobile home park inc v commissioner supra pincite paula constr co v commissioner supra pincite0 42_tc_628 drager v commissioner tcmemo_1987_483 the mere fact that petitioners now choose continued dividend treatment nor is it precluded because the corporations did not formally distribute the cash directly to the owner employees see 577_f2d_1206 5th cir 496_f2d_1384 5th cir -- - to characterize the excess_contributions as compensation does not necessarily mean that the payments were compensation in fact the facts of this case do not support petitioners’ assertion that neonatology and lakewood had the requisite compensatory intent when they made the contributions to their plans we find nothing in the record except for petitioners’ assertions on brief that would support such a finding see rule b statements on brief are not evidence indeed all reliable evidence points to the contrary conclusion that we reach as to this issue on the basis of our review of the record we are convinced that the purpose and operation of the neonatology plan and the lakewood plan was to serve as a tax-free savings device for the owner employees and not as asserted by petitioners to provide solely term life_insurance to the covered employees to be sure some of the plans even went so far as to purchase annuities for designated employee owners lakewood’s payments made outside of its plan lakewood made payments outside of the lakewood plan for additional life_insurance for two of its employees lakewood argues that these payments are deductible in full under sec_162 as ordinary and necessary business_expenses we disagree for the reasons stated above we hold that these payments are nondeductible constructive distributions to the extent they did not fund term life_insurance the payments are deductible to the -- - extent they did fund term life_insurance for the relevant employees neonatology contributions as to mr mall neonatology contributed money to the neonatology plan for the benefit of mr mall mr mall was neither an employee of neonatology nor an individual who was eligible to participate in neonatology’s plan we conclude that these contributions served no business_purpose of neonatology and hence that they were not ordinary and necessary expenses paid to carry on neonatology’s business see sec_1_162-10 income_tax regs see also joel a schneider m d s c v commissioner tcmemo_1992_24 moser v commissioner tcmemo_1989_142 the contributions are nondeductible constructive distributions to dr mall marlton contributions as to dr lo and its two employees marlton contributed money to the marlton plan to purchase life_insurance on the lives of three individuals namely dr lo ms lo and edward lo as to dr lo he was neither a marlton employee nor an individual who was eligible to participate in marlton’s plan we conclude that the contributions made on his behalf served no legitimate business_purpose of marlton and we view dr mall neonatology’s sole shareholder as having directed her corporation to make these contributions on behalf of her husband accordingly we view these contributions as passing first through dr mall on the way to the neonatology plan - - hence that they were not ordinary and necessary expenses paid to carry on marlton’s business see sec_1_162-10 income_tax regs see also joel a schneider m d s c v commissioner supra moser v commissioner supra in contrast with neonatology’s contributions to purchase insurance on the life of mr mall which we have just held were a constructive distribution to dr mall the contributions which marlton made on behalf of dr lo are not a constructive distribution to him because marlton is not a corporation as to ms lo she was a marlton employee under sec_264 however a taxpayer may not deduct life_insurance premiums to the extent that the taxpayer is directly or indirectly a beneficiary of the underlying policy sec_264 respondent argues that sec_264 applies to disallow marlton’s deduction of the contributions that it made to pay the premiums on ms lo’s term life_insurance_policy because sec_264 provides sec_264 certain amounts paid in connection with insurance contracts a general_rule --no deduction shall be allowed for-- premiums_paid on any life_insurance_policy covering the life of any officer_or_employee or of any person financially interested in any trade_or_business carried on by the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy - -- respondent asserts the policy’s beneficiary was a grantor_trust formed by the los we agree with respondent’s conclusion that sec_264 a prevents marlton from deducting the contributions which it made to its plan to pay the premiums on ms lo’s term life_insurance_policy we do so however for reasons different from the reason espoused by respondent as we see it marlton’s deduction of its contributions for ms lo’s life_insurance_policy turns on whether marlton was directly or indirectly a beneficiary of that policy within the meaning of sec_264 if it was the premiums are not deductible regardless of whether they would otherwise be deductible as a business_expense see 83_tc_356 and cases cited thereat affd 777_f2d_662 11th cir 43_tc_713 affd per curiam 360_f2d_33 3d cir sec_1_264-1 income_tax regs respondent asserts that the policy’s beneficiary was the los’ grantor_trust we are unable to find that such was the case as we view the record and as we found supra the beneficiary of ms lo’s term life_insurance_policy was the marlton plan although the trust to which respondent refers was indeed the beneficiary of dr lo’s policy we find nothing in the for the purpose of our inquiry we view marlton a sole_proprietorship as an alter ego of dr lo the sole_proprietor - -- record to suggest that the same trust also was the beneficiary of ms lo’s policy nor has respondent pointed us to any part of the record that would support such a finding we ask whether dr lo is a direct or indirect beneficiary of ms lo’s term life_insurance_policy given the fact that the marlton plan is the named beneficiary we conclude that he is in the event of ms lo’s death the face value of her life_insurance_policy would be paid to the marlton plan for which dr lo and edward lo would be the remaining beneficiaries although dr lo would not be the sole beneficiary of those death_benefits sec_264 regquires only that he be a beneficiary in order to render the premiums nondeductible see 15_tc_947 nor does it matter for purposes of sec_264 that he was not expressly listed on ms lo’s policy as the beneficiary thereof see 25_f2d_453 3d cir dr lo as opposed to edward lo also stood to gain the most from the plan assets were ms lo to have died whereas edward lo had a fairly inexpensive term life_insurance_policy dr lo had a fairly expensive universal life policy ms lo’s life_insurance_proceeds also could be used to pay the premiums on the for the same reasons as stated infra we also conclude that dr lo is a direct or indirect beneficiary of edward lo’s term life_insurance_policy and hence that marlton may not deduct the contributions that it made to its plan to pay his premiums - - policies thus satisfying the obligation of marlton to do so see 53_tc_287 benefit requirement of sec_264 is satisfied where the insurance would ultimately satisfy an obligation of the taxpayer glassner v commissioner supra same disallowed payments a corporate distribution is taxed as a dividend to the recipient shareholder to the extent of the corporation’s earnings_and_profits the portion of the distribution that is not a dividend is a nontaxable return_of_capital to the extent of the shareholder’s stock basis the remainder of the distribution is taxed to the shareholder as gain from the sale_or_exchange of property see sec_301 57_tc_781 see also commissioner v makransky f 2d pincite petitioners do not challenge respondent’s determination that lakewood and neonatology had sufficient earnings_and_profits to characterize the subject distributions as dividends we sustain respondent’s determination that all the distributions are taxable dividends to the recipient employee owners see rule a welch v helvering u s pincite petitioners challenge the timing of that income however arguing that it is not taxable to the employee owners in the year determined by respondent ie the year in which neonatology and lakewood contributed the excess amounts to their plans or in the -- - three instances where the insurance was purchased directly from peoples security in the year that lakewood paid peoples security for that insurance petitioners assert that the income is not taxable to the employee owners until after the subject years because the conversion credit balance would be forfeited if the underlying policy lapsed or if the insured died petitioners observe that the employee owners’ ability to withdraw the conversion credit balance was limited to the percentage of that balance that was transferred to the c-group conversion ul policy petitioners observe that the transferred credits could be reached by an insured only if a c-group term policy was converted to a c- group conversion ul policy and then only in equal increments over months petitioners observe that an insured would forfeit the transferred credits in the event of his or her death petitioners rely primarily on sec_83 respondent argues that the income is taxable currently respondent asserts that the excess_contributions purchased insurance contracts and annuities for the benefit of the employee owners respondent asserts that the employee owners had the unfettered ability to withdraw the conversion credit balances at their whim we agree with respondent that the dividends are taxable in the years that he determined as mentioned supra we view neonatology and lakewood’s excess_contributions to their plans as -- - passing first through the employee owners we view likewise the excess payments which lakewood made directly to peoples security accordingly in both cases the employee owners are considered for purposes of the federal tax law to have received the excess_contributions or payments when the contributions or payments were first made petitioners rely mistakenly on sec_83 to argue that the individual petitioners may not be taxed currently on the excess_contributions ’ sec_83 has no application to a case such a sec_57 sec_83 provides in relevant part sec_83 property transferred in connection with prrformance of services a general_rule --if in_connection_with_the_performance_of_services property is transferred to any person other than the person for whom such services are performed the excess of-- the fair_market_value of such property determined without regard to any restriction other than a restriction which by its terms will never lapse at the first time the rights of the person having the beneficial_interest in such property are transferable or are not subject_to a substantial_risk_of_forfeiture whichever occurs earlier over the amount if any paid for such property shall be included in the gross_income of the person who performed such services in the first taxable_year in which the rights of the person having the beneficial_interest in such property are transferable or are not subject_to a substantial_risk_of_forfeiture whichever continued -- - this where a corporation makes a cash distribution for the benefit of a shareholder even when as is the case here that shareholder is also an employee of the distributing_corporation sec_83 requires a transfer of property in_connection_with_the_performance_of_services see sec_83 and as explained supra such a requirement is not met in the case of a distribution accuracy-related_penalties respondent determined that each petitioner was liable for an accuracy-related_penalty under sec_6662 and b for negligence or intentional_disregard_of_rules_and_regulations petitioners argue that none of them are so liable petitioners assert that they were approached by various professionals who introduced petitioners to the veba’s and that they invested in the veba’s relying on tax opinion_letters written by tax attorneys and accountants and discussions with insurance brokers petitioners assert that the accountants who prepared their returns agreed with the reporting position taken as to the contributions as evidenced by the fact that the accountants prepared the returns in the manner they did petitioners assert that many of the issues at bar are matters of first impression which petitioners conclude means they cannot be liable for an accuracy-related_penalty for negligence s7 continued is applicable - - we disagree with all of petitioners’ assertions as to the accuracy-related_penalties determined by respondent under sec_6662 and b sec_6662 and b imposes a percent accuracy-related_penalty on the portion of an underpayment that is due to negligence or intentional disregard of rules or regulations negligence includes a failure to attempt reasonably to comply with the code see sec_6662 disregard includes a careless reckless or intentional disregard see id an underpayment is not attributable to negligence or disregard to the extent that the taxpayer shows that the underpayment is due to the taxpayer’s reasonable_cause and good_faith see sec_1_6662-3 sec_1_6664-4 income_tax regs reasonable_cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item see 469_us_241 see also 162_f2d_628 3d cir 122_f2d_843 3d cir 110_tc_297 the good_faith reliance on the advice of an independent competent professional as to the tax treatment of an item may meet this requirement see united_states v boyle supra sec_1 b income_tax regs see also hatfried inc v commissioner supra pincite girard inv co v commissioner supra pincite -- - 91_tc_396 affd without published opinion 940_f2d_1534 9th cir whether a taxpayer relies on advice and whether such reliance is reasonable hinge on the facts and circumstances of the case and the law that applies to those facts and circumstances see sec_1 c income_tax regs a professional may render advice that may be relied upon reasonably when he or she arrives at that advice independently taking into account among other things the taxpayer’s purposes for entering into the underlying transaction see sec_1_6664-4 income_tax regs see also 414_f2d_749 4th cir affg tcmemo_1968_98 reliance may be unreasonable when it is placed upon insiders promoters or their offering materials or when the person relied upon has an inherent conflict of interest that the taxpayer knew or should have known about see 39_f3d_402 2d cir affg tcmemo_1993_480 94_tc_637 affd without published opinion 956_f2d_274 9th cir affd in part without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir 92_tc_958 affd without published opinion 921_f2d_280 9th cir reliance also is unreasonable when the taxpayer knew or should have known that the adviser lacked the requisite expertise to opine on the tax --- - treatment of the disputed item see sec_1_6664-4 income_tax regs in sum for a taxpayer to rely reasonably upon advice so as possibly to negate a sec_6662 accuracy-related_penalty determined by the commissioner the taxpayer must prove by a preponderance_of_the_evidence that the taxpayer meets each requirement of the following three-prong test the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment see ellwest stereo theatres inc v commissioner tcmemo_1995_610 see also rule a welch v helvering u s pincite we are unable to conclude that any of petitioners has met any of these regquirements first none of petitioners has established that he she or it received advice from a competent professional who had sufficient expertise to justify reliance ’ the professional to whom petitioners refer is their insurance agent mr cohen mr cohen is not a tax professional nor do we find that he ever represented himself as such petitioners’ mere reliance on mr cohen was unreasonable given the primary fact that he was known by most of them to be involved intimately with we note at the start that we heard no testimony from dr mcmanus or lo their respective wives or ms sobo - -- and to stand to gain financially from the sale of both the subject veba’s and the c-group product given the magnitude of petitioners’ dollar investment in the c-group product and the favorable consequences which mr cohen represented flowed therefrom any prudent taxpayer especially one who is as educated as the physicians at bar would have asked a tax professional to opine on the tax consequences of the c-group product the represented tax benefits of the c-group product were simply too good to be true such is especially so when we consider the fact that the physicians who testified admitted that they knew that term_insurance was significantly less expensive than the premiums purportedly paid under the c-group product solely for term_insurance petitioners assert on brief that they also relied on tax opinion_letters written by tax attorneys and accountants we do not find that such was the case the record contains neither a credible statement by one or more of the individual petitioners to the effect that he or she saw and relied on a tax opinion letter nor a tax opinion letter written by a competent independent tax professional in fact petitioners have not even proposed a finding of fact that would support a finding that such a tax opinion letter exists let alone that any of them ever read - - or relied on one see rule b statements on brief are not evidence we also are unpersuaded by petitioners’ assertion that they relied reasonably on the correctness of the contents of their returns simply because their returns were prepared by certified public accountants the mere fact that a certified_public_accountant has prepared a tax_return does not mean that he or she has opined on any or all of the items reported therein in this regard the record contains no evidence that possibly with the exception of dr hirshkowitz any of petitioners asked a competent accountant to opine on the legitimacy of his her or its treatment for the contributions or that an accountant in fact did opine on that topic in the case of dr hirshkowitz the record does reveal that he showed his accountant something on the sc veba and that the accountant expressed some reservations as to the advertised tax treatment of the sc veba but no reservations which dr hirshkowitz considered major as he put it the record does not reveal what exactly dr hirshkowitz showed his accountant as to the sc veba or the particular reservations which the accountant expressed nor do we know whether a reasonable person would consider those reservations to because petitioners have failed the first prong of the three-prong test set forth above we do not set forth a copious discussion of our holdings as to the other two prongs suffice it to say that none of petitioners has met his her or its burden_of_proof as to those prongs - - be major from the point of view of accepting mr cohen’s representations of the tax consequences which flowed from the sc veba we also are not persuaded by petitioners’ assertion that the accuracy-related_penalties are inapplicable because they claim the issues at bar are matters of first impression it 1s not new in the arena of tax law that individual shareholders have tried surreptitiously to withdraw money from their closely held corporations to avoid paying taxes on those withdrawals the fact that the physicians at bar have attempted to do so in the setting of a speciously designed life_insurance product does not negate the fact that the underlying tax principles involved in this case are well settled nor does the application of the negligence accuracy-related_penalty turn on the fact that this case is a test case as to the tax consequences flowing from a taxpayer’s participation in the subject veba’s when the requirements for the negligence accuracy-related_penalty are met a taxpayer in atest case is just as negligent as the taxpayers who have agreed to be bound by the resolution of the test case we conclude that each of petitioners is liable for the accuracy-related_penalties determined by respondent addition_to_tax for failure_to_file timely lakewood filed its tax_return with the commissioner on date the unextended due_date of the return was march -- - and lakewood neither requested nor received an extension from that date respondent determined that lakewood’s untimely filing made it liable for an addition_to_tax under sec_6651 equal to percent of the underpayment and lakewood has not shown reasonable_cause for its untimely filing we sustain respondent’s determination and hold that lakewood is liable under sec_6651 for an addition_to_tax of percent for each month during which its failure continued or in other words a 15-percent addition_to_tax as determined by respondent see sec_6651 see also rule a penalties under sec_6673 a b respondent moves the court under sec_6673 b to impose a dollar_figure penalty against each petitioner asserting that petitioners’ positions in this proceeding are frivolous and groundless respondent asserts that the c-group product is a deceptive subterfuge that was designed to deceive on its face respondent asserts that petitioners have not proven the critical allegations set forth in their petitions as to the operation of the c-group product and that at trial petitioners through their counsel mr prupis and kevin smith mr smith contested unreasonably the admissibility of documents that respondent obtained from third parties as to the workings of the c-group product respondent asserts that petitioners through messrs prupis and smith failed to comply fully with discovery -- - requests forcing respondent to attempt to obtain the vast majority of the documentary_evidence in this case from third parties respondent asserts that petitioners were unreasonable by calling witnesses at trial to testify in support of petitioners’ proposed findings_of_fact that the c-group term policy’s only benefit is current_life_insurance_protection respondent asserts that it was unreasonable for mr smith to defend against respondent’s motion to compel documents from aegon usa mr smith’s client and respondent’s offer of evidence as to certain marketing materials and other evidence petitioners argue that their positions are meritorious petitioners assert that respondent’s motion to impose sanctions against each of them is frivolous and that the court should sanction respondent’s counsel under sec_6673 we disagree with respondent’s assertion that we should order each petitioner to pay a penalty to the government under sec_6673 b sec_6673 b provides this court with the discretion to award to the government a penalty of up to dollar_figure when a taxpayer takes a frivolous or groundless position in this court the penalty under sec_6673 is imposed against each taxpayer see sec_6673 anda taxpayer’s position is frivolous or groundless if it is contrary we also decline petitioners’ invitation to sanction respondent’s counsel - - to established law and unsupported by a reasoned colorable argument for change in the law see 791_f2d_68 7th cir sec_6673 b provides this court with the discretion to sanction respondent’s counsel if he or she unreasonably and vexatiously multiples any proceedings before us the mere fact that petitioners are defending the position that was advertised to them in connection with their investment in the subject veba’s is insufficient grounds to penalize each petitioner under the facts herein petitioners are not directly responsible for most of the actions listed by respondent in support of his motion to impose penalties those actions are best traced to petitioners’ counsel and given the facts of this case we decline to impute the actions of petitioners’ counsel to petitioners themselves for the purposes of imposing a penalty under sec_6673 petitioners have reasonably relied on the advice of their trial counsel that their litigating positions had merit see murphy v commissioner tcmemo_1995_76 sec_6673 penalty against taxpayer was inappropriate where serious failure to present credible_evidence at trial was attributable to her counsel we conclude our report directing the parties to prepare computations under rule in all but one of the docketed cases taking into account the cost of term life_insurance for those -- -- employees who were eligible to receive that protection in reaching our holdings we have considered all of petitioners’ arguments for contrary holdings those arguments not discussed herein are irrelevant or without merit we also have considered respondent’s arguments as to his determinations to the extent necessary to reject or sustain each determination we also have considered all of respondent’s arguments as to his motion to impose a penalty against each petitioner as mentioned supra decision will be entered for respondent in docket no decisions will be entered under rule in all other dockets and an appropriate order will be issued denying respondent’s motion to impose penalties under sec_6673 a b