Thursday, January 12, 2012
Michael S. Oros v. Commissioner, TC Memo 2012-4 , Code Sec(s) 162; 274; 6662; 7491.
MICHAEL S. OROS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Code Sec(s): 162; 274; 6662; 7491
Docket: Docket No. 19400-09.
Date Issued: 01/5/2012
Judge: Opinion by VASQUEZ
Reference(s): Code Sec. 162; Code Sec. 274; Code Sec. 6662; Code Sec. 7491
Official Tax Court Syllabus
II. Accuracy-Related Penalty Respondent determined that petitioner is liable for a section 6662(a) accuracy-related penalty for 2006. Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be liable for a penalty of 20 percent of the portion of an underpayment of tax attributable to (1) negligence or disregard of rules or regulations or (2) a substantial understatement of income tax. Negligence “includes any failure to make a reasonable attempt to comply with the provisions of this title”, and disregard “includes any careless, reckless, or intentional disregard.” Sec. 6662(c). “Negligence” includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. An “understatement” is the difference between the amount of tax required to be shown on the return and the amount of tax actually shown on the return. Sec. 6662(d)(2)(A). A “substantial understatement” of income tax exists if the understatement exceeds the greater of (1) 10 percent of the tax required to be shown on the return for a taxable year or (2) $5,000. See sec. 6662(d)(1)(A). The burden of production is on respondent to produce evidence that it is appropriate to impose the relevant See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, penalty. 446 (2001).
Because we have sustained respondent's adjustment, the amount of tax required to be shown on petitioner's 2006 return is $17,494. Petitioner reported total tax of $12,464 for 2006. Accordingly, petitioner understated his 2006 tax liability by $5,030. Petitioner's understatement constitutes a “substantial understatement” of income tax because it exceeded the greater of (1) 10 percent of the tax required to be shown on the return for the taxable year, or (2) $5,000. Respondent has therefore met his burden of production.
The accuracy-related penalty under section 6662(b)(1) or (2) is not imposed with respect to any portion of the underpayment as to which the taxpayer shows that he acted with reasonable cause and in good faith. Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448. Reliance on the advice of a tax professional may establish reasonable cause and good faith. See United States v. Boyle, 469 U.S. 241, 250 [55 AFTR 2d 85-1535] (1985). A taxpayer claiming reliance on professional advice must show that: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment. Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 [90 AFTR 2d 2002-5442] (3d Cir. 2002).
In preparing his 2006 tax return, petitioner consulted a tax return preparer with more than 36 years of experience. The preparer advised petitioner on the tax treatment of the expenses associated with his worldwide trip. Petitioner relied upon his return preparer's advice in claiming deductions on his Schedule C for his 2006 trip expenses. On the record before us, we find that petitioner has carried his burden of proving that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment in this case. Because the reasonable cause and good faith exception is a defense to both negligence and a substantial understatement of income tax, the section 6662 penalty does not apply. See sec. 6664(c)(1).
Accordingly, we hold that petitioner is not liable for an accuracy-related penalty under section 6662(a).
Neonatology Associates, P.A., et al. v. Commissioner, 115 TC 43, Code Sec(s) 162.
NEONATOLOGY ASSOCIATES, P.A., ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
[pg. 43] 115 T.C. No. 5
Code Sec(s): 162
Docket: Dkt. Nos. 1201-97; 1208-97; 2795-97; 2981-97; 2985-97; 2994-97; 2995-97; 4572-97.
Date Issued: 07/31/2000 .
7. Accuracy-Related Penalties
Respondent determined that each petitioner was liable for an accuracy-related penalty under section 6662(a) and (b)(1) 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. [pg. 98]
We disagree with all of petitioners' assertions as to the accuracy-related penalties determined by respondent under section 6662(a) and (b)(1). Section 6662(a) and (b)(1) imposes a 20-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(c). 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 secs. 1.6662-3(a), 1.6664-4(a), Income Tax Regs.
Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item. See United States v. Boyle, 469 U.S. 241 [55 AFTR 2d 85-1535] (1985); see also Hatfried, Inc. v. Commissioner, 162 F.2d 628, 635 [35 AFTR 1496] (3d Cir. 1947); Girard Inv. Co. v. Commissioner, 122 F.2d 843, 848 [27 AFTR 922] (3d Cir. 1941); Estate of Young v. Commissioner, 110 T.C. 297, 317 (1998). 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. 1.6664-4(b), Income Tax Regs.; see also Hatfried, Inc. v. Commissioner, supra at 635; Girard Inv. Co. v. Commissioner, supra at 848; Ewing v. Commissioner, 91 T.C. 396, 423 (1988), affd. without published opinion 940 F.2d 1534 (9th Cir. 1991). 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. 1.6664-4(c)(i), 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(c)(i), Income Tax Regs.; see also Leonhart v. Commissioner, 414 F.2d 749 [24 AFTR 2d 69-5452] (4th Cir. 1969), affg. T.C. Memo. 1968-98 [¶68,098 PH Memo TC]. 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 Goldman v. Commissioner, 39 F.3d 402 [74 AFTR 2d 94-6923] (2d Cir. 1994), affg. T.C. Memo. 1993-480 [1993 RIA TC Memo ¶93,480]; LaVerne [pg. 99] v. Commissioner, 94 T.C. 637, 652-653 (1990), affd. without published opinion 956 F.2d 274 (9th Cir. 1992), affd. in part without published opinion sub nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991); Marine v. Commissioner, 92 T.C. 958, 992-93 (1989), affd. without published opinion 921 F.2d 280 (9th Cir. 1991). 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(c), Income Tax Regs.
In sum, for a taxpayer to rely reasonably upon advice so as possibly to negate a section 6662(a) 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: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment. See Ellwest Stereo Theatres, Inc. v. Commissioner, T.C. Memo. 1995-610 [1995 RIA TC Memo ¶95,610]; see also Rule 142(a); Welch v. Helvering, 290 U.S. at 115. We are unable to conclude that any of petitioners has met any of these requirements. First, none of petitioners has established that he, she, or it received advice from a competent professional who had sufficient expertise to justify reliance. 38 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 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 [pg. 100]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 143(b) (statements on brief are not evidence). 39[pg. 101]
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 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 is 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 a test 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.
8. Addition to Tax for Failure to File Timely
Lakewood filed its 1992 tax return with the Commissioner on May 28, 1993. The unextended due date of the return was March 15, 1993, 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 section 6651(a) equal to 15 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 section 6651(a) for an addition to tax of 5 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(a)(1); see also Rule 142(a).
9. Penalties Under Section 6673(a)(1)(b)
Respondent moves the Court under section 6673(a)(1)(B) to impose a $25,000 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 [pg. 102]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 (1) respondent's motion to compel documents from AEGON USA, Mr. Smith's client, and (2) 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 section 6673(b)(2).
We disagree with respondent's assertion that we should order each petitioner to pay a penalty to the Government under section 6673(a)(1)(B). 40 Section 6673(a)(1)(B) provides this Court with the discretion to award to the Government a penalty of up to $25,000 when a taxpayer takes a frivolous or groundless position in this Court. The penalty under section 6673(a)(1)(B) is imposed against each taxpayer, see sec. 6673(a)(1), and a taxpayer's position is frivolous or groundless if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law, see Coleman v. Commissioner, 791 F.2d 68, 71 [57 AFTR 2d 86-1420] (7th Cir. 1986). Section 6673(a)(2)(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 [pg. 103]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 section 6673(a)(1)(B). Petitioners have reasonably relied on the advice of their trial counsel that their litigating positions had merit. See Murphy v. Commissioner, T.C. Memo. 1995-76 [1995 RIA TC Memo ¶95,076] (section 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 155 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. 4572-97, decisions will be entered under Rule 155 in all other dockets, and an appropriate order will be issued denying respondent's motion to impose penalties under section 6673(a)(1)(B).
Cases of the following petitioners are consolidated herewith: John J. and Ophelia J. Mall, docket No. 1208-97; Estate of Steven Sobo, Deceased, Bonnie Sobo, Executrix, and Bonnie Sobo, docket No. 2795-97; Akhilesh S. and Dipti A. Desai, docket No. 2981-97; Kevin T. and Cheryl McManus, docket No. 2985-97; Arthur and Lois M. Hirshkowitz, docket No. 2994-97; Lakewood Radiology, P.A., docket No. 2995-97; and Wan B. and Cecilia T. Lo, docket No. 4572-97.
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(c)(9).
Petitioners argue that these plans are welfare benefit funds within the meaning of sec. 419(e). Respondent argues to the contrary. We do not decide this issue.
We do not decide whether this plan is a welfare benefit fund under sec. 419(e).
Respondent also made certain other adjustments of income and expense. Petitioners concede these adjustments, unless they are mathematical computations relating to the VEBA issues.
All years refer to the calendar year, except that, in the case of Lakewood, the first 1991 year is a fiscal year ended on Oct. 31, 1991, and the second 1991 year is a short taxable year ended on Dec. 31, 1991.
Petitioners concede that the contributions are includable in the employees' gross income to the extent that they provided current-year life insurance protection.
The members of the Lakewood group are Lakewood, Drs. Hirshkowitz, Desai, and McManus, and the Estate of Steven Sobo, Deceased.
PES dissolved on or about Nov. 11, 1992, 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.
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.
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.
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.
For C-group term policies issued after Jan. 31, 1993, 0 percent of the conversion credit balance is transferred to the C-group conversion UL policy if conversion occurs in the policy's first 4 years, and 95 percent of the conversion credit balance is transferred to the conversion policy if conversion occurs at any other time.
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.
The Neonatology Plan also purchased one annuity during those years. On or about Mar. 15, 1991, Inter-American issued to the Neonatology Plan a Plus II Group Annuity (#C15576/91079) for an initial premium of $69.
The term “P.S. 58” 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 Rev. Rul. 55-747, 1955-2 C.B. 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(a)(1) (employee's gross income generally does not include the cost of the first $50,000 of group term life insurance on his or her life).
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. 58 income for the subject years. As mentioned supra note 17, P.S. 58 income relates to life insurance contracts held in a qualified pension plan.
Drs. Bharat Patel and Chadru Jain were also employees of Lakewood. The record indicates that they joined the Lakewood Plan after the subject years.
In summary, respondent determined that the disallowed contributions were attributable to the following persons:
1991 1992 1993
---- ---- ----
Dr. Hirshkowitz $254,051 $136,678 $211,120
Dr. Desai 122,750 42,056 55,000
Dr. McManus 20,000 17,921 18,186
Dr. Sobo 83,100 13,214 5,000
Dr. Sankhla -- -- 5,750
Trustee's fees 1,000 -- 1,000
------- ------- -------
480,901 209,869 296,056
------- ------- -------
The record does not reveal Edward Lo's relationship (if any) to Dr. Lo.
Under the terms of the policy, after Southland received an initial premium payment of $98,859, a minimum monthly premium payment of $3,738.33 was required to prevent the policy from lapsing during the first 5 years.
The accumulation value equaled the total premiums paid plus commercial interest less the cost of term insurance and administrative expenses.
The term “10-or-more employer plan” is defined by sec. 419A(f)(6), which provides as follows:
(6) Exception for 10-or-More Employer Plans. —
(A) In general. — This subpart [i.e., 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 —
(i) to which more than 1 employer contributes, and
(ii) to which no employer normally contributes more than 10 percent of the total contributions contributed under the plan by all employers.
See generally Booth v. Commissioner, 108 T.C. 524, 562-563 (1997), 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.
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.
In fact, petitioners' counsel Neil L. Prupis (Mr. Prupis) even acknowledged to the Court that the testifying physicians had selective memories.
We need not and do not decide the correctness of respondent's alternative determinations disallowing deductions of 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.
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; i.e., 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.
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.
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 Enoch v. Commissioner, 57 T.C. 781, 793 (1972) (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 dividend treatment. Nor is it precluded because the corporations did not formally distribute the cash directly to the owner/employees. See Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1214 [42 AFTR 2d 78-5637] (5th Cir. 1978); Crosby v. United States, 496 F.2d 1384, 1388 [34 AFTR 2d 74-5371] (5th Cir. 1974).
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.
Sec. 264(a)(1) provides:
SEC. 264.CERTAIN AMOUNTS PAID IN CONNECTION WITH INSURANCE CONTRACTS.
(a) General Rule. — No deduction shall be allowed for —
(1) 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.
For the purpose of our inquiry, we view Marlton, a sole proprietorship, as an alter ego of Dr. Lo, the sole proprietor.
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.
Sec. 83 provides in relevant part:
Sec. 83. Property Transferred in Connection With Performance 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 —
(1) 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
(2) 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 is applicable. ***
We note at the start that we heard no testimony from Dr. McManus or Lo, their respective wives, or Ms. Sobo.
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.
We also decline petitioners' invitation to sanction respondent's counsel.
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