136 T C. No 2 UNITED STATES TAX COURT G. MASON CADWELL, 2R ,9e itioner .

COMMISSIONER OF INTERNAL REVENUE Resþondent

Docket No. 15456 08. Filed January 3, *2011.

K, an S corporation 100 percent owned by P' s spouse? adòpted and, t hrough iÝs subsidiary KSlòda.de contributions to a multiemployer welfare-benefit plan (the ylan) . Through KSM K made a Montrib'ution to the plan, part of which was used to purchase life insurance coverage for P and K's other employees; and tihe remainder of which was an excess contribut.ion. The plan was amended and converted to a single-employer plan. The plan's qualification pursuant to sec.

419A(f) (6), I.R.C., is not i'n issue.

Held R was not required to send P a - "30 day lettër", and the notice of deficiency ade ùately sets forth R's position7in this case and is therefore valid. Held, further, P' s' interest in the plan became substantially vested upon the plan's conversion from a multiemployer plan to a single-employer plan. Sec.

1. 402 (b) -1 (b) (1) , Income Tax Regs .

SERVED JAN 3 2011

Held, further, P rust include in gross income the c sh value of the life insurance policy on P's life. T e value of the life insurance policy is the PERC (premiums, earnings, and reasonable charges) pursuant tb Rev. Proc. 2005-25, 2005-1 C.B. 962. P may not :

rŠduce the PERC value by the surrender charge, as it spould be disregarded for valuation purposes pursuant to Rev. Proc . 2005-25, lsupra.

Held, further, P must include in his gross income the excess contributiorls pursuant to sec. 1.402(b)-1 (b) (1) , Income Tax Recjs . Held, further, the' current year cost of insurance protection is an accesdion to wealth which P must i clude in gross income pursuant to sec. 61(a), I.R.C. Held, further, where the fair market value of a 1i.fe insurance policy låas been determined using the PERC method, P must include in his gross income as the c st- of life insurance protection an amount equal to the sum of mortality charges and other expenses.

Held, further, P is liable for the accuracyrelated penalty for a substantial understatement of -i come tax pursuant to sec. 6662(a) and (b) (2), I.R.C. R chard H. Morton and I evin J. Ryan, för petitioner. K thleen Tagni, Sherri Wilder, and Betty Clary (specially recognized) , f or respondent OPINION .

W LLS, Judge: This case is before the Court on petitioner' s motion for summary judgment anc respondent's cross-motion for summary judgment spursuant to Rule 121. Respondent determined a deficiency of $33,057 in petitioner's Federal rincome tax for tax year 2004 and a penalty pursuant to section -6662(a) of $6,611 On August 31, 2009, petitioner filed a motion-for summary judgment. On October 5,- 2009, respondent filed a response sto -petitioner's motion for summary judgment and a -cross-motion for summary-judgments On Octobero26, 2009; petitioner filed a motion to amendehis petition.3 i On November 4, 2009, petit ioner filed a response to respondent's cross-motion .for summary judgment. On November 16, 2009, a hearing wastheld onathe parties' motions. On November 19, 2009, respondent filed a reply to petitioner's response to respondent' s motion for summary judgment and anobjection to- petitioner s motion to amend hisopetition. The issues to be decided as a consequence of Petitioner's moti'on for summaryejudgmentiandaRespondent's cross-motionsfor summary judgment are: (1) Whether respondent was required to send a "30 day -letter" to petitioner and whether the notice of -deficiency adequately sets forthsrespondent's position inethe instant; case; (2)e whether petitioners must include in gross income the cash value of a life insurances policy held, by a multiemployer Unless otherwise indicated, -section refer.ences are to the Internal oRevenue Code o f . 198 6 ( Code ) as amende d and in e f f ec t for the year sin issue, andrRule- references are t o the Tax Court Rules of Practicemand Procedure.

By separate order we will deny petitioner s motionato amend his petition.

welfare benefit plan that wàs converted to a single-employer welfare benefit plan during?the year in issue; (3)*whether petit oner must include in his gross income payments made by his emplo er in excešs of the -cêst of current year life insurance prote$tion (excess contribut ion) ; (4) whether petitioner must includel "in his gross income the current year cost of life insurance protection paid b his employer; and (5) whether petiti ner is liable for the penalty under section 6662. ackground The abackground facts are drawn- from the pleadings, the parties' motions, facts deeãed established, and stipulated t exhibits, and are not in dispute.

t the time "of filing of the petitio , petitioner was a resident of North Carolina. 3-4 Petitioner is married tio Jennifer K. Cadwell (Mrs:. Cadwell) . Petitioner, and Mrs. Cadwell have two daughters, Jennifer Keady Cadwelt 1(Jennifer) and Miranda« M., Cadwell (Miranda) . For his 2002 through 2004 tax yearsy petitioner filed:Forms 1040 U.S. Individual Income Tax Return, claiming a filing status of married filinc separately. For his 2002 through 2004 tax yearsI, In the notice of deficiency, respondent determined adjust nents to petitioner's personal exemption and itemized deductions. These adjustmerits are computational and will depend on the Court' s resolution of thei issues discussed -herein. 4 -' 'Certain facts were deelned established by separate order of the Cohrt .

5 -petitioner did-not report any wages or salaries on line 7 of Form 1040 ræKeady Ltd -(Keady) , is a Pennsylvania, S corporation organized during 1998.pursuant to sections 1361-1375. Keady is, and has always been; 100 percent< owned by Mrs. Cadwell. Mrs. Cadwell is the sole director of Keady. During .20024through 2004, Mr. Cadwel-1-servedas the secretary of Keady. Keady does not have anyrminutes -of shareholders or directors meetings for 2002 through 2004. Durings:2002 ythrough 2004, Keady's only income-was its share of income (or loss) from÷KSM,aLimited Partnership (KSM) , a Pennsylvania limited partnership formed during 1998 . During 2002 through 2004, KSM was owned as follows: 90 percent by Mrs: Cadwell;- 5 percent ,by Keady; 2 percent by = petitioner;t 125 -percent. by Jennifer; and L.5 percent by Mirandas Keady is the general partner. of KSM.

During December- 2002, petit ioner and Mrs. Cadwell dec ded to obtain employee welfarerbenefits for petitioner, Jennifer, and Miranda through therNationalaBenefit; Plan and Trust,.5 The respective-plan documents- are hereinaftenreferred to as the Plan and the respective trust created under the Plan is hereinafter referred to as the Trust. According to its original terms, the Plan was organized as a multiemployer welfare benef t plan -^6 -pursuant to section 419A(f) (6) .' The documents describe the Plan' s design and operation The primary purpose of the Plan is to pro ide sevérance ánd death benéfits to eligible employees. According to the Pla'n, each(employer is to bear the full costrof the benefits provided. Assåts held by the Trust are 'protectéd from the claims of each employer's creditors. Each employer enrolled in the'Plan is entitlied to elect the ramount of benefits to pr ide and the per'iod oyer which such benefits become vested Upon termination of the Plar oí- employer withdrawal from the Plan n employee's nonforf itable benefits are deemedato be 100 percen vested, - regardless c f the vesting schedul'e "set by the employer B fore joiriing the Pla , a prospective employer proŸides to the "Plan sponsori Niche Plan ~Sponsors (Niche) , employment information regarding the enployees whom the employer chooses to¹ includh in the Plan. Niche uses the employer' s information to create a package of informat ion that contains a summary öf the Plan's b nefits to the employer änd its employées. According to the summåry, petitioner receives $50, 000 a year in wages from Keády.

.21"

6Ñhether the Plan is not in issue.

The Plan states:

by the P an Sponsor to of termination."

meets the requirements of sec . 419A ( f ) (6 )

"The Plan shall terminate upon lleli½ery the Trustee of a written and signed notice On Decembert 3!1; 2002, petitioner signed the document adopting the Plan as secretary"on behalf-'of Keady. Petitione'r was 64 years old at the time Keady adoptedt the Plan. The , adoption agreement identifies Nichegas the Plan sponsor ,National Plan .Advisory as the Plan Administrator, Wells Fargo Bank as the Plan Trustee, and «National Benefit Plahn and 'Trust as the Record Owner of the~ Trusthseassets.' Keady ,elected «toacover petitioner, Miranda, and Jennifer withodeath benefits equal -to 20 times the covered employee's compensation, .severance benefits equal to 14.847 percent of compensation peWyear :up to 10 years r(not to exceed 200 .percent) , sand a modified 4240 vesting schedules (vesting schedule) . Under the vesting schedule, an employee is first vested in severance benefits at 40 percent of the stated benefit after 4 years of employment, with vesting increasing to 100 percent at year 10 of employment.

Lifè insurance covering petitioner' s and his daughters' live's was selécted to fund the death and severance benefits payabl u der tta Plan to petÛïoner and his dailgÊters." For petitioner, a universal life policy with ari initial death benefit of $1 million that als accuniÚlktes cash value (héreinafter The parties» do not specify howethe severance -benefits are to be funded, whether through the cash value of 'the life insurance policy or some other: option. * The adoption agreement states: "The adopting employer shallscontribute, for each Covered Employee the contribution necessary to fund adCoveredi Employee' s Target Severance Benefit, determined under the formula and rules set forth in this Article."

referred to as the life .insurance policy) was selected to fund his benefit." The life insurance policy was issued by-Lincoln National Life Insürance Co. (Lincoln Life), on December 7, 2002. Petitioner named Miranda and Jennifer as beneficiaries, of the life i surance policy. In his lifeminsurances policy application, petit ner .listed himself as "Manager" of Keady.

For Miranda and Jennifer, identical 10-year, level: term life insurance policies on their lives with death benefits of $300,000 were s lected to fund. their benefits. The annual combined premiums ,on those policies t otaled $645. On their ]:ife insurance applications, Miranda and Jennifer were identified as "Consultánts" for Keady.

There are many differeht kinds of life insürance policies. Term life insuranc e covers the insured only for a particular period, and upon" expiration of that period t rminates without value. Whole life insurance covers an insured for life, duridg which the insured pays fixed p emiums, accumulates davings from an invested portion of the yremiums, and receives a guaranteed benefit upon death, t be paid to a named ßeneficiary. Universal life insurance is term life insurance in which the premi'ums are yáid from t e insured's earnings from a money-market fund. » Variable life insurance is lifeiinsurance in which the premiums are i vested in securitiesgand whose death benefits thus depend o the securities' performance, though there is "a minimum guarànteed death benefit.« * * * Curcio v. Commissioner, T.C. Memo. 2010-115.

9 -On December 31-, 20.02 KSM paida$75,000 byscheck to Compass Bank, the Plant Trustee; to acover Keady's obliaation under the Plan,. and $2,O50-for the¿Plan fee. Both checks were-dràwnion KSM' s Centennial sBank account and were signed by petitioner..a i Lincoln Life credit ed petitioner' s li'fe insurance apol-icy for a' payment of «$7:3>, OOO for thermontheending Januarye6, 2003.a a Petitioner 'did not include,any income -on liis 2002 Form 1040 as a result of any life insurance prentiums paid by KSM;aThe payments to the Plandrustee were not claimed as'a deduction on KSM' s or Keadyi' s -20 0 23 Federal income tax return . Petitioner' s accountant, Robert W.sNicolini,trC.iP..A.4 (Mr. Nicolini), Wassmoteaware of the paymentsi or that -KSM lhad a-bank saccount swith: Centennial Bank . -On - May~ 20 , 2004 , KSM paid $38, 800 to 419 Plan a 1 a ? Administrators , the snewe Plan Administrator ; to cover Keady' s obligation sunder ?the-21an'. y Of thats amount, $36, 000s wast paid to coverathe, Plan contribution and $2,800 was paid as the 'Plan fee. The checks were 'drawn on the, "KSM Limited Partnership Escrow -* Account, c o Crawford Wilson and Ryan LLC" s(KSM escrow T account),. The KSM sescrow account was maintained at National "The record does not reveal at what point Compass Bank assumed the role of Plan Trustee .

a EThe record adoes not reveal when 419 Plan Administdators became the Plan Administrator.

KSM paid this amount using two checks,l one for $38, 000, dated May 20, 2004, and the other for $800, datedrMay 20, 2004.

Penn Bank. - When Mr. Nicolini -prepared KSM's 2004,'Federal income. tax return,r he -discovered the =$38;800 in payments añade to 4194 Plan Administrators. Mr. Nicolini das not aware that'KSM ore Keady was participating in the Plan. Mr. Nicolini-asked Miranda, the tax matters partner ,of KSM, about the payments - " Miranda, who was unable to verify the payments, thought they were for a horse. Mr. N colini recorded the a ounts as payments for "horses" and "bookŠl"; them as an asset on KSM' s balance sheet . Mr .- Nicolini never epreciated the "horses"' on KSM' s balance .sheet / and during 2006,-;the "horses" wdre distributed to the Cadwells as a capital distribution. Lincoln Life credited petitioner's life insurance poiicy for an $18 000 payment for ithe month ended September 6, -2004.

» On Dune 5., 1995, the Internal Revenue Service (IRS) issued Notice 95 34, 1995-1 C.B. 309, which described certain multiemployer plans (MEPs) that do not qualify under section - , e 419A (f ) (6) .

desigr ated as "listed In Notice 2001g51, 2001-2 C.B. 190, the I-RS those transactions described ii Notice 95-34, supra, transactions" subject to enhanced disclosure The record does not rgveal why petitioner's life insurance policy was not credited with a $36, 000 payment or shy petitioner' s payment in May was not credited until September. Petitioner' s life insurance policy was not creditied with a payment for 2005.

- 11 requirements.4 On Octobere22 2004, t he American Jobs Creation Act of 2004, Ptib. L. 108-357 sec. 811(a),41182 Stat. 157/5, became law and instituted a new penalty for fallùre to -disclose a listed transaction. See sec. 6707A.

On- Novemb¯er 17, 2004, Niche sentalettets to the employers participating¿ in the Plan announcing* that the Plan had been split into singlse-employer welfare benefit plans SEPs or individually SEP) . 5 The feasons stated in the ietters for the donversion included more employer control over Plah rassets arid the concern that the Plan might be subject to listed trarisactiön penalties under Necti'on 6707A. Niche's letter acknowledged that the SEPs no longer quaelified for treatment pursuarituto section 419A(f) (6), and, therefore, the deductibility of the employer' s contfibutions would bes limited.« Keady's employees welsfare benefit plan was "Notice 2001-51 2001-2 C.B. 190, was supplemented and superseded -by Notice 2003-76, 2003-2 C.B. 1181 which was sa supplemented and superseded by Notice 2004-67, 2004-2 C.B. 600, which was .supplemented and supe,rseded by Notices 2009-59, 2009-31 I.R.B. 170. Notice 2009-59, subra, includes transactions desgribed in Notice 95-34, 1995-1 C.B. 309, as listed transactions.

Liste transactions are transactions that are the same as or substantially similar to those transactions that havegeen determined by the IRS to be tax avoidarice transactions and have been identified by notice, regulation, or other formeof ,published guidance . . Sec . 1. 6011-4 (b) (2) , Income- Tax Regs . asAccording to the letters, the change was made effective, retroactively to Jan 1, 2004. However, we treat the change as actually occurring ori-Nova. 17 2004, as this ais the date of the actual conversion.

a-12 -renam d the "Keady, s Ltd. We fare Benefit Plan't , and. the assets were maintained by the National Benefit Trust IIr.

Øn December 30, 2004, I iche and Wells Fargo, as Trustee, entered into a new trust agreement for the National Benefit Trust II. By its terms, the: agre ment ist a ,"complete amendment and restatement" of the original trust agreement. Significantly, the new agreement provides that the Plan Administrator is now the emplo er unless< the employeÊ designates another person or persons to be Plan Administrator. . The new agreement provides that the emplo er, Keady, scan terminate the SEP at any time. In-the event of Keady's withdrawalN fromithe SEP, at the send of the 123-month perioc-following the date Kéady terminated the SEP (the 23-month perioc ) , the Trust has the option to distribute the life insurance policies to «Keady sell the life insurance policies to any ir terested purchaser with an insurable interest in the employees, or surrender the life insurance policies to the insurance company for theiricash surrender salue. Additionally, the T ust can sell petition r his life insurance policy.' During the 2 month period, Keady ould be required to continué paying the annual cost of the lifeninsurance. If petitioner were to die beford the end of the 23-mo th period, he wòuld still be elig ble for- tlŠe death benefits undé the SEP.

The new agreement setting up the SEP appears to use emplo er "withdrawal" and eàployer "termination", interchangeably. !!

13 -" Keady, KSM, pétitioner,' Mrs. Cadwell, Miranda, and Jenniffer were not consulted by Niche before the split of the Plan into separate $EPs . . Keady,a KSM, petitioner, Mrs . Cadwell;2 Miranda", and Jennifer did not attempt to access or use the Plan benefits at any time during *2004 or 2005. Petitioner. didGnot include on his Form 1040 for his 2004 tax year any income resulting from the conversion of the Plan from an MEP to an SEP -During December 2004, the life insurance policy hovering a petitioner had a death benefit value equal to $1,070,529, a "fund" value equal to $70 529 and a surrenders valuee equal to $25,237." The fund value was determined by adding the premiums paid ($91,000 = $73,000 + $18 000) and interest credited ($6,134 $3, 340 + $2;793) less. mortality chargesM ($16, 235 =2$7, 738 + "The death benefit is the projected amount payable upon the death of the insured. The "fund" value represents the equity in the life insurance~ policy and is also known as tife casl value "of the life insurance policy.

"Mortality charges are also referred to as "cost of insurance charges." The IRS provided the following explanation of mortality charges in Priv. Ltr. Rul. 2009206 001 n.5 (Oct 17, 2008) :

COI/mortality charges are sdetermined, by multiplying a mortality rate (which increases with the age of a the insured) by the "net amount ate risk" (theadifference between the death benefit and :the cash value, i.e., the pure insurance element of the contract). Mortality rates are determined with refei-ence to a particular mortality table * * *. In other words, the mortality charges approximate the term' life insurance component of a whole life or universal life policy. However, because of concerns that finsurers might manipulate such (cont inueds . . )

$8,497) and other expenses ($10,370 = $7,730 + $2,64;0) .9 The a surrer der value was the amount of cash that petitioner would recei e upon surrender of the ,life insurance policy to Lincoln Life nd ,was calculated by ubtracting a surrender charge of $45,2 1 from the fund valuedof $70,529, yielding a surrender value of $25,237/.

I evin Ryan (Mr . "Ryan) , petitioner' s .counse1 in this case prepa ed two legal opinionstfor Niche, dated December 6, - 2004 and J ne 16, 2005. Mr. Ryan began serving as counsel to Niche after etitioner was involved yin the Plan. In Mr. Ryan's opinion lette of December 6, 2004, he stated:

QUE$TION: Will p rticipants. in the Trust have iricome on the current value of the death benefits provided under tihe -Trust equal to the lower of the so-called ""PS 58 Rates" r the insurance company' s term insurance rates? * * * !

ANSWER: Yes * * *

In his explanation of the t xation of Plan benefits; Mr. Ryan stated:

( . . continued)

rates, the IRS will not view the mortality charges as the act ual premium rates for term life insurance unless the insure generally makes such rates Available to those who apply for term insurance coverage and the nsurer . regularly sells terin insurance cover e at such rates. See Notice 2002-8, 2002-1 C.B. 398, 398399. The interest credits, mortality charges, and expenses are for 20i03 and 2004.

These dollar amounts are rounded down to the nearest whole number a The death benefit are nontransferable, therefore subject to a substantial risk of forfeiture and employees haire no riïght to any cash value, employees should not be taxed on the death benefit as a transfer of a permanent life insurance policy. Nevertheless participating employees receive an economic benefit each year for the death benefit coverage that is provided for that year. Thus, in accordance with Regulation Section 1.83-14(a) (2), employees should be* taxed each year on the 'cost of the Yife insurance protection under Code Section 61 and the Regulations thereundea in an amount which is equal to the reasonable, net premium cost as determined by the Commissioner of the current-l'ife inéurance protection as defined fin Regulation Section 1.72-16(b) (3) provided by such contract. The reasonable net premium- costs of the current life insurance protection as defined in Regulation Section 1.72-16 (b) (3) is the samesmeasure of value fòrelife insurance protection that qualified retirement plans use. The Service has determined the reasonable net premium- costs and published those amounts as "PS 58 rates." In Rev. Rul; 66-110, 1966-1 C.B. 12, the Service held that an employer may use the current published premium rates charged by an insurer for individual. one-year term life-insurance availabl'e to all standard risks for determining the costs of insurance in connection with individualapo]icies instead òf the PS 58 costs table: In Notice 2001-10, an alternative table is set forth labeled Table 2001.

It tis the Firm' s opinion that þart cipating employees in the Trust receive an economic benefit for the death benefit4rotection provided each Cÿear under the-Trust . The annual tax for such benefits shall be determined in 3 accordance eith Code Section 83 and thea Regulations thereunder and shall be the lower of the PS 58 table costs or the insured's term insurance rates in accordance with Rev. Rul. 66-110. [Fn. ref. omitted.]

On April 2, 2008, respondent sent petitidner a notice of deficiency in which he determined that petitioner's gross income for 2004 should be increäsed by $102, 039. The unreported income det ermined by respondent consists of : (1) The f d value of the life insurance policy as of Decenber 6 Ô04, f 70 529 (2) the å - 16 -excess contribution to the Olan of $18,000," and ( ) the cost of term life insurance on petitioner's life for 2004 of $13,510. Petitifoner timely filed a petition in this Court.

Discussion

Rule 121(a) allows a party to move "for a summary adjudication in the moving party's favor upon all or any part of the 1 gal issues in controv rsy." Rule 121(b) directs that a decision on such a motion shall be rendered "if the pleadings, answe s to interrogatories, depositions, admissions, and any otSer acceptable materials, together with the affidavits, if any show that there is no genuir e issue as to any material fact and that d cision may be rendered as a matter of law."

The moving party«bears the burden of demonstrating.that no genuine issue of material fact exists and that the moving party is -ent itled to judgment as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994) . Facts are viewed in the light most favorable to the nohmoiring party. Id. However, where a motion for summary judgment has been properly made and supported, the opposing party may not est upon mere alle ations denials in that party' s In the notice of defiaiency, respondent contends that the value of the excess contribution was $18 , O O0 . Respondent -concedes that of the $38,800'contributed, $2,800 was for the Plan fee ar d $18, 645 was for life insurance premiums ($18, 000 for petitioner and $645 for MirÅncia and Jennifer) . Therefore, respondent contends that the excess contribution of $17, 355 should be included in petitioner' s gross income .

17 -pleadings· but must by affidavits or otherwise0 set forth specific facts showing that there is a genuinesissue fot trial Rule 121 (d) .

I Caselaw Concerning Section 419A (f) (6). Plans

The issues -wes must .decides concern the income tax consequences±of.employee we]:fare benefits;.« Generally contributions to welfare benefit planse are deductiblie bya an employer when paid if they qualify.as ordinary :and necessary business expenses, but only to the extents allowed byssections 419 and 419A. Secs . 1624a) / 419,319A (f) (6) In recent: years, a adopted -multiemployermplans have been claiming to satisfyrsection 419A(f) (6) and purporting:to generate de.ductionss for the e , insurance benefits ];>rovided underethe plans , "Notice 95 34, supra. This Court has decided several cases regarding purported section 419A ( f ) (6 ) plans .

2 In Booth v. Commissioner»<108, T.C. 524,a 565 (1997) we held that the plan in issue did not meet the requirementse of secti:on 419A (f) (6) because, it, was, "an aggregation of separateswelfare i benefituplans, each -of which has an experience-rating arrangement with the contributing employer." In Neonatology AssociatesoP.A. v. Commissioner, 115 T.C 43 (2000) affd. 299f.3d 221 (3d Cir. 2002) , without deciding whether the plans in issue met the requirements of section 419A(f) (6), we helde that the corporate employer/participants may not "deduct contributions in excess of the co t of .term life insurance-. We' also held that the -disallowed deductions shoul be treated as divi'dend distributions to the employee-owners of tl e C corporations to the extent- of earnings and profits. Id.. t 96-97. In V.R. DeAngelis M.D.P.C. v. Commissioner; T.C. Memo. 2007-360, affd. per curiam 574 F.3d 2 789 ( Cir. 2009) , similar]y without ruling on whether the plan met tl e requirements of- sect ions 419A(f) (6)', wes held that payments for life instirance were essentially a distribution of S corporation profits: rather t han payments inade with compensatory intent. In Curcio v. CommiÈsioner, T.C. Mem'o. 2010-115, aga~in r without ruling-on whether tlie plan met the requirements of -section 419A(f) (6) , we held that contributions were distributions of prc its to the employee-owners andonot deductible pursuant to section 162 (a) .

We did not address in any of the foregoing cases the taxe conseduences to- a nonowner m];Šloyee for contributions to a plan that rportedly met "the recuirements of section 419A(f)?(6) and subsecuently was converted nto a splan that no longer qual-ified We mus decide the consequei ces to spetitioner of cont ibutions to such a plan. - C II. Whethei Respòhdent Was Rdquired- To Sènd a "30 day letter" to etitioner and Whether the Notice of Deficiency Is Invalid Because Respondent' s Posi-tion Is Not Adequately Set Forth his petition and mot ion for summary "judgment, petitioner conterds that respondent failed to provide him with a "30-day 19 -letter", befores issuing a notice 'of deficiency and failed to provide a speciTic theory of the''case in the notice of r deficiency. Generally, we wïll not look behind a notice of deficiency to examine the 'evidencé used', the proprietys of the. Commissioner's motives, of administrative policy or procedure usedein making the determination. Greenberq'á Express, Inc. v. Commissioner, 62 T.C. 324,2 327 '(1-974) . Accordingly, we will' not look into respondèntis .alleged failure to issues a 30-day letter, NId.

As to whether the notice of deficiency; is invalid behause it insufficiently sets forth respondent s pdsitior section 7522(a) requires that the notice "describe the basis for, änd identify the amoiints (if any) of, the taxsdue interest, additional amounts, additioris to the tax, and -assessable penalties included in such no'tice"." Theepurposes:of section 7-522 is ito provide the taxpayer with notice of the Commissioner's basis for determining a deficiency. Shea v. Commissioner, 112 T.C. 183, 196 (1999) . The notice needs to be sufficient to permit the taxpayer to comply with the requirement of Rule 34 (b) that ,the taxpayer make clear arid côncise ässignmerits of every error älleged against the Cömniissioner." id.' at i96 197 We há.Yë held ,that section "Rule 34 (b) requires that the petition contain:

4) Cleaf and concisë assignments of each and every -error which the petitioner alleges to have been committed by (continued. . . )

20 -7522 ( ) does not require th Commissioner, to identify the speci ic statutory provisior supporting each adjustment in the notice of deficiency. Wheeler v. Commissioner, 127 T,.C.. 200, 205 (20 06) , af f d. 521 F . 3d 128 9 (10th Cir . - 2008) ; Rogers v . Commi sioner, T.C. Memo. 2001-20, affd. without published opinion 281 F.3d 1278 (5th Cir. 2001) . Additionally, the Commissioner is not r uired to lay out the afactual basis for his determination in the notice of deficiency Ocmulgee" Fields,- Inc. v. Commissioner, 132 T.C. 105, 113 (2009) , affd. 613 F.3d 1360 (11th Cir.- 2010) . Moreover, evendan inadequate description of the Commi sioner's basis in the notice of deficiency will not invalidate the notice . Sec 7522 (a) .

etitioner received a I orm 886-A, Explanation ofaItems, accom anying his notice of deficiency.

7 a e OthersIncome - Niche,Conversion/Contribution It has been determined ethat you received income in the amount of $102,339.00 in the taxable year ending December 31, 2004, unders the provisions .of I.R. C.- §§ 61 72 83 and 402 (b) as a result of your participation in the National Benefit-Plan and :Trust -Plan..and it's- [sic] companion Trust and the Keady Ltd Welfare Benefit Plan Single Employer Plan and it's [sic] companioniTrusta.» Accordingly, your taxable income is increased by $102,039.00 for the taxable year , a December -31 2004.

The quoted explanation -recites -the Code sections .on which the IRS relies even though -specific citations are not required for the notice to beavalids. See Wheeler v.- Commissioner, supra at 205; Rogers v. Comniissioner, supra., Ins therinstant case, the a , explanation provides suf ficient, detail- that petitioner should be able tosunderstand thate the Plan s conversion to an SEP is the source of the income respondent determined. Accordingly, we hold that the notice of deficiency, with the accompanying Form 886-A, provides an adequate basis for understanding the IRS' determination of tax due . Consequently we hold that petitioner' s contention is without merit and the notice of deficiency is valid.

III. Inclusion in Petitioner's Income of the Cash Value of the Insurance Policy Upon Conversions From MEP-to SEP «We next address whetherapetitioner must include inshist gross income the, cash- value of- the insurance: policy upon conirersionhof the Plan from an MEP to an SEP. Respondentecontends that petitioner became substantially vested in the-Plan -upon-its doriVer'sion from an MEP to "an SEP pursuan tå se26ion 1.4 2 (b) a 1 (b) , Income Tax *Regs . Petitioner contends' that he has no interest in the Plan because the terms "of the Plan and the involuntary nature of the cònversion of the Plan from an'MEP to an SE preclude him from being "substantiially" vested in the Plan or the Plan assets . See se . 402 (b) (1) ; sec . 1. 402 (b) a l (a) (1) , Incomd Tax Regs. Additionally, petitioner contends that the life insurance policy premiums were. paid with Mrs: Cadwell's after2tax funds and, therefore, .result in a gift to Mr. Cadwell pursuant to section 2523. In the alterAative, petitioner contends that,« if he has an interest in the, P an, respondent has overstated itsa value. We address each of hese issues below.

hether PetitioneÝ Is Substantially Vested in His Interest in the Plan S ction 402(b) (1) provides that employer contributions made to a onexempt employee truât" are included in the gross income of the eit1ployee to the extent that the employee' s interest in such contribution is substantially vested (within the meaning of section 1.83-3(b), Income Tax Regs.) at the time the contribution is made . Sec . 1. 402 (b) -1 (a) (1) , Income Tax Regs . If the rights of an employee under a none empt employee trust become substantially vested duringsa tiaxable year of the employee and the' taxable year of the trust ends with ~or withinasuch yeaf, the value oft the employee' s inter'est iF the trust on the "date f buch n employee trust is ä nonexempt trust if it is not exempt from taxation under sec. 501(a). Sec. 402(b) (1).

23 -change is included sin thee employee's g oss incdme for that taxable year . Sec . 1. 4 0 2 (b) 1 (b) (1) Income Tax Regs . The "value of an employee' s interest in a trust" means the amount of the employee' beneficial interest in: the, net fair market value of all of tihe isset's in thettrust 'as ofs~any date on which some or all of the employee' s intérest in, the' trusts becomes substanti-ally vested. Sec . 1 40 2 (b) 1 (b) (2) (i) , Income Tax Regs The "net <f air market v¯alue cof all of the assets in the trust is the total -amount of the fairamarket valu s r(deteianined without regard to any lapse restrictiori, asadefined? in sectilon K.83 3 (h) ,2 Inchmen Tax Regs.) of all of the assets in the trust lessAthe amount of liabilities, as of the date orr which some ör all of the a employee' s interest in the trust becoines substantially vested. Id. If only a portion of an employee' s interest in thei trust becomes, substant'ial];y avested during a taxable year, only the corresponding part of the trust valùe is incladable in the employee' s gros s income .« Sec . 1. 402 (b) -1 (b) (4) , Income Tax Regs . An employee' s interest in property is substantially vested when it is either transferable or not subjëct to a substantiial risk of f orf eiture . Sec . 1. 83 -3 (b) , Income Tax Regs . Whether a risk of forfeiture is substantial depends on the facts and circumstances. Sec. 1.83-3(c) (1), Income Tax Regs. A substantial bisk of forfeiture exists:

where rights in property that are transferred are conditioned, directly or indirectly, upon the future erformance (or refrai ing from performance) of substantial services by any person or the occurrence of a condition elated to a purpose o the transfer, and the possibility of forfeiture is substantial if such condition is not e satisfied. * * * Id. , Property is not subjects to a substantial risk of forfeitùre if the employer must pay fair market value for its return or . there is risk that the property'ssvalue may decline. Id. In instances= where an employee of a corporation owns a significant amount of the total combined voting power or value of all classes of st ck in the employer coiporation, the issue of whether an s employee' s interest is, subj ct to a substantial risk of forfeiture -also depends upon:

i) the employee' s relätionship to other stockholders and t he extent of their coiitrol, potential control and possible ]oss of control of the corporation, (ii) the position of the mployee in the corporåtion and the extent to which he is -subordinate to other employees, (iii) the employee' s elationship to the of(icers and directors of the corporation, (iv) the yerson or persons who must approve the employee' s discharcje, and (v) past actions of-the employer in enforcing he provisions of the restrictions; * * * Sec. 1.83-3(c) (3), Income T x Regs.

Both parties treat petitioner' s interest in the Plan as subjedt to a substantial risk of forfeiture before the Plan' s conversion to an SEP on November 17, 2004. As stated above, the issue f whether the Plan qùalified pursuant to section 419 (A) (f) (6) before conversion is not in issue. Therefore, for purpo es of the instant motions, we will assume that before the 25 -PlÃn' s onŸersion from' an -MEP to an "SEP; the Plan' s assets wére subject to a substantial*êisklof forfeitur'e.

On November 1 2004,I Niáhe imeñded dhe lan to eonvert the

Plan 'fróm an MEPito an ŠEP. Kèady' ÈEP YeceíÝed its proportional shanè of 4the Olan' s assŠ€s FolloNing i the Eolverdion öf the Plan, 4tn assets ain*Keady' s SEP could be used only to pay e cl'aitúa of 'Keady emplóÿees The econversion of the Pl'an from an MEP to an SEP eliminated the r s that Keady' s assetis båuld be used to pay othef èmÿloyers' claims . In oEher words, a future conditi'on that cotild náve occurred undêrathe original Plan ad ar MËÈ i . e . , another côtåpany' s å laimr to the ' cash4Ÿalue of Keady life insurance policies, no "longer existed uhder thè Plan as añ SEP. See sec. l 83-1 (c) (1) , IncomeGTax a * Regs .

According to it terms, Káady could terminate the "SEP' at any time. In the event- of ari ehþloye withdrawal from*the SEP, the Trust-could distribute the life sinsuiance policies to Keady, sell the life insurance pòËicieå to any interested purchaser with an insurable interest in the emplófees, or eurrendeEthe life * insurance policies to- the insuí-ance company- för their cash surrender value'. Additionally, the iTruste could sell petitioner his life insurancé policy.

While section 1.83-1(c) (3), Income Tax Regs., is not direct-ly applicable because petitioner does not own any of 26 -Keady' s stock, it is instructive under the circumstances of the instant case . Petitioner' s ife is the sole shareholder of Keady." At the time of the hearing, petitioner and Mrs. Cadwell were still married. The recòrd does not contain any evidence of strife in petitioner's working or personal rélat ionship with Mrs. Cadwel . Petitioner listed Îlis position as "Secretary" of Keady, and th record does not include any information regarding other of f icers . Mrs . Cadwell r is the only direc tor . Ac cordingly ,- we conclude that petitioner is Åhe sole officer of Keady and that he was not subordinate to any oÊher employee. See also 15 Pa. Cons. Stat. nn. sec. 1732(a) (Wesp 1995) (every corporation must have a pres dent, a secretary, an a treasurer and these offices mgy -be hel by the same person) . As the sole officer of Keady, hê had coÀtrol over his own eligibility under Keady's SEP. -Additi nally, as the sole officer, petitioner could terminate the Plan a d have the assets distributed to Keady.

Petitioner cites Booth v. Commissioner, 108 T.C. at 564,<for the pr position that his power to terminate the Plan does not requir the inclusion of the cash value of the life insurance policy in his income. Petitioner contends that if he were required to realize income based on his power to Plan contributions would be taxable upon funding.

terminate, the In Booth, the I'he parties do not colitend that fainily attribution rule's apply e 27 -Court determined whether the plan in issuerwas deferred compensation plan. We stated:

Although frespondent is concerned that, the ability of a' -participating employer to terminate voluntarily its participation in the, * * * [planl allows the employer too control the timing of income to its employees, we regard that concern as-misplaced. Respondent ' s cóncern could also be expressed with respect to the pension plan of a corporation owned by a single ,shareholder.. Although the shareholder may be the only employee, it does not necessarily follow that such a þension plan provides -for receipt of deferred compensation merely because the owner/shareholder has the" ability to terminate theapension plan at will.

Id. Booth is distinguishable from the instant case as deferred compensation is not in issue here. Moreover, because the Plan is a nonexempt trust, the taxation of an employee on contributions ;

made .on his behalf turns on whether the employee's interest is substantially vested. See sec . 1. 402 (b) -1 (b) (1) , Income Tax Regs . Whether an employee' s interest is substantially vested depends-upon all of the fact s .and circumstances, .including the employer's ability to terminate the Plan. See sec. 1.83-3(c) (1), Income Tax Regs.

Petitiòner, also contends that the vesting schedule prevents him from having a vest ed inderes in the P during Š00 . Additionally, petitionei- contends thay, if aby intei-est was vested, Mrs. Cadwell could fire him at will, and, the efore, hi.s benefits under the SEP remained su ec tó a sub tantial risk of fårfeitu e. W disagi-e .

28 -We conclude that- the vestings restrictions are illusory under the c-ircumstances of the instant case.2s When the Trust's assets came under Keady's exclusivé control, they became subject -to petitiloner's control. As nåted above, petitioner could terminate the SEP and have the plan assets or their cash: equivalent distrrbuted to Keady. Moreðver, if the vesting schedule were to apply the power to enforce the restrictions against pet:itioner would be in the hands of pet itioner, his wife, or hi-s daughters. Under such circumstances, the restrictions to obt ain the Plan proceeds are illusory.

on petitioner's power Petitioner relies upon Olmo v. Commissioner, T.C. Memo. 1979-286, a case in which we held that the taxpayers' interest in nonexempt trusts was substantially vested only to the extent of the vesting schedule. In Olmo, a professional corporation owned by tw unrelated taxpayers, each a 50 percent shareholder, establis d a pension trust and profit-sharing trust. The taxpayers were each 40 percènt vested. To increase their vesting We note that according to its terms, if the Plan no longer qualifies as an MEP pursuant to sec. 419A(f) (6), the Trustee was to tejmihate the Plan. Upog termination,- the assets would be distributed to each coveredli employee' in an amount, equal to h'is òr her b nefit balance. Additionally, each covered employee ,would be 10 percent vested in hiil or her benefits upon termination Howev r, the Plan could be, àmended at, any time with the, vesting sched le potentially remainirig in effect. The record iå not suffidiently developed to determine whether the iPlan was properly amended before it was converted to an SEP. Because we find the vestir g restrictions illusory, we need not address this argument.

29 -rights, ethe taxpayers wereerequired to complete future years of service and, if theyeleft the business they-forfeited their rightse to the nonvested portion of -the plan: Upon termination of the trusts, each participant wouldebe 100 percent vested. Additionally,aif a matter aroses affecting an individual a taxpayer's status as a participating; member of a trust, the y taxpayer wassautomatically disqualified from participating in a decision as to that niatter,.a The Court concluded thats the taxpayers'· nonvestedainterests were subject to a substantial risk of forfeiture onsaccount-of the internal controls present. d. The-facts of the i:nstant case are distinguishable "from those of Olmo. a ;In the instant case-, the terms of the-SEP provide that the : Plan Administrator is the employer . In ef f ec t , pe t it ioner , as the.onlysoffic.er, is the Plan Administrator,. The Plan Administratór ,decides all questionsz relating to the "eligibility of employees to participate" in the : Plan Unlike in Olmo, etheSEP does "not have a disqualification provision that would prevent petitioner from deciding questions regarding his own eligibility. Even if Keady did elect to appoint another person as Plan Administrator, that person would be chosen by either petitioner, as sole officer of Keady, or Mrs. Cadwell, as Keady's sole director. Therefore any decision regarding petitioner's eligibility would be decided by someone with a potential interest in the li f e insurance policy , i . e . , Mrs . Cadwell , -pe t it ioner' s wife; or petitioner himself We concluded above that any -restr' ctions on 'petitioner' right to control the disposition3of the Trust assets are illuso y - Consequently, we find the instant case s distinguishable froà'Olmo v. Commissioner, supra: etitioner's contention that he could be fired and therefore lose is benefits is also w thout merit. As of the hearing, petit oner was stiill married to Mrs. Cadwell who was: the 100percent shareholder of Keady, his employer. Petitioner argues only. that there is a possib..lity that he could be fired by Mrs. Cadwe]l. Under such circumÙtances, we conclude that the thréat that etitioner could be fired by his wife is illusory and his interest is not subject to a substantial risk ofi forfeiture. n the basis of the re ord, we conclude that petitioner's inter si äin the postconvers on SEP was no longer subject to a substàntial:risk of forfeitä.re; i.e-.", was substantially vested upon conversion of the Plan to an SEP.

B. Ñhether the,Contributioris to the Plan Were a Gift From Mrs. Cadwell to Petitioner Alternatively, petitioner contends that the contributions to the Plan, i.e., the payment for the life insurance policy, were a gift from Mrs. Cadwell to him pursuant to section 2523 and that all p yments were made using her after-tax dollars. Petitioner conter ds that we should apply the substance over form doctrine, citing Commissioner v. Court Holding Co. , 324 U.S. 331, 334 (1945) to recognize such payments as a nontaxable gift.

-- 31 -- Section 2523 allows a donor a deduction in computing taxable gifts for purposes of computing the gift tax As Mrs. Cadwell would be the' hypotlietical' donorain' thé scehario posited by petitioner, we conclude that section 2523^ does not" apply. -Petiltionery may have meantato ácite as support for his contention sec tion 102 (a) , which exc ludes f rom- gros s income the value of property acquired by Égift However, fori reasons discessed below, section 102 (a) is inapplicable . A Pursuants tó* the substancenover form doctrine, although the form of a transaction may literally áomplyawith the'provisions of the Code, thataform will not be given 'effects where it has no i business purpose and operates simplys as a device; to conceal the true character of a transaction. See Gregory v.SHelveritig, 293 eU:S. -465, 4692470 (1935) . f, however, the ssubstance of a e transaction accords with its fortn that forms wi]:L:be: upheld and gi"yén-effëct for stax purpogeš*. See Blueberri Land Co v. Commissioner, 361 F 2d 93, 1002101. (5th Cir. 1966) affg. 42 T.C. 1137 (1964) . Additionally, it is welal settled that "a e , transaction is to be agiven its, tax effect in abcord with what actua-llymoccurred andonot in accord with what might have- e occurred.2" Commissioner v.s NatldAlfalfa Deh drating E Milling Co., 417 Ü;S. 134 148 (1974)i.

Petitioner' s contention rëgarding "substance over foirmnis misplaced./The record reveals that tlie $75, 000Epayment made 32 -during 2002 was paid from a account held in the name of KSM. The $38, 800 in payments made during 2004 was paid out of the KSM escro account-. In his declaration filed after the hearing ,on the instant- motions,, petitioner contends that the premium paymer ts were made with "aft er-tax funds distributable to [Mrs. Cadwe 1) , as primary owner of KSM." In other words, petitioner claims that the funds belonged to KSM,sbut were "distributable" to Mrs. Cadwell. As the payments were not distributed to Mrs. Cadwe 1, therefore, they would have been made by funds still owned by KSM: Consistent with -Natl. Alfalfa, we shall give: effect to the transaction a it actually occurred as opposed to revising the transaction .to create a gift.

On the basis of the record, we- conclude that the substance and tl e form of the contribàtions were payments by KSM, not Mrs. Cadwe 1. Consequently, section 102 (a) is inapplicable . C. hether the Cash Value Is Income to Petitioner Where His e Émployer Did Not Claim Corresponding Deductions for Its dontributions to the Policy We next address petitioner' s contention that the cash value of the life sinsurance policy is, not income to him because neither Keady nor KSM claimed deductions for contri-butions made during 2002 a;nde 2004. Petitioner contends that, because a deductions is avail ble under section 83 (1 ) , the cash value of the .lif e insurance policy was not income. to him since Keady would have claim d a corresponding dedúction for the premium payments .

- 3 33 -Petitioner' s dontention is emisplaced Section 402 (b) (1) doe not condition the inclusion ainancome on angemployer' s deduction of the payment Katherginclusion in gross Tiincome is basedaupon whether- the trust isanot exempt and whethe thè taxpayer? s interesti-isusubstantiainly vested. . See s~ec. 402;(b)"(1) ; sec. 1. 402 (b) -1 (a) (1) , (b); (1) , Income Max Rege. Moreover, shïle. section 83 (h) allows a deduction, it is not required for a a contribution to :be included in gross income pursuant to sect-ion 83 (a) . Therefore, whethenKeady or :KSM claimed a deduction for. the contributions is immaterial e Accordingly, we hold 5thattthe cash values of the life insurance spolitcy must, be sincluded rin etit ioner' s grossfincome for.,his 12004 tax year pursuant to section 1.4020(b)-1(b)S(1), Income Tax ,Regs. a . Mt d a e D. 4 The AmountuTo Be Included in Petitioner's Gross Income Respondent contends that the cashavalue ofethe lifet a insurance apolicy fi's the afund value of :$7,0 , 52 9 . Pe t it ioner contends that if ;hemmust includes any amount in his gross income, only thetcash,surre'nderavalues of the life insurance-policy after deducting surrender charges of $45, 291- shóùId be so included; i e . , ,$25, 2382 e: e o Section 1.7402 (b) 1(b) (2)t(i) Income TaxeRegst, provides that the value of an-employee's intefest-is ethe amount of the employee's beneficial interest in the net fai'ramarkets value of all' the assets in the, trust as of many adate ,on which' some nor "all of the emúloyee's interest inithe trust becomesgsubstantiàlly vested." The net fair market "va-lue is the totals fair market : value etermined without rešard 'to any "lapse -restrictions" as defindd in section, 1.83-3(h), Income Tax Regs. less the amount of liabilities to which suc1 assets, are subject Sec. 19402(b)-1(b) ( ) (i) , Income Tax Regs Sectional.83±3(h), Income Tax Regs., defines a "nonlapse restriction" as a restrictión that will never lapse .- A nonlapse restr ction is "a permanent limitation on the transferability of prope ty" ande žequires the transferee to se]"l, or offer to sell, the p perty at a price determined under; as formula, andethe restri t'ion will, continue t apply against the stransferee or iny subsequent holder. Id. For example, a permanent right of first refusad in a particula person, atf price dêtermined under a formula would' be , a nonlapse y restriction. -Id. ; see alsö sec . 1.83 (c) Example (.;t), Income Tax Regs. A "lapse restriction" is an restriction other than a .nonlapse restrictioni and includes,abut is not limiteckto, a restriction that carries a substantial -risk of forfeitÚre. Sec. 1.83-3(i),1 Income "Tax Règs The f]ush language of sectiön 1.83-3(h), Income Tai Regs., .cites limit ions imposed "by registration requirements of Stahe or Federa security laws as ex mples of 'restrictions that ga're not nonlapsea restrictions .

35 -Rev. Proc. 2005-25, 2005-1 C.B. 962, provides a safe harbor for determining the fair market value of a life insurance policy for purposes of applying section 402(b), and petitionerchas not suggested any reason for deviating from the formula its a provides. For a nonvariable-or variable life insurance s contract the safe-harbor fair market value is the greater-of: A).the,sum of the interpolated terminal reserver and any unearned premiumš plus a pro rata portion of a reasonable : estimate of dividends expected to be paid for that policy year based on company experience, and B) the product of the PERC amount (the amount * * * based on premiums earnings, and reasonable charges) and the applicable Average Surrender Factor * * * _Id. sec. 3.02 2005-1a C.B. at 963-964. The PERG amount ,is the aggregate of :

(1) the premiums paid from the date ,of issue through the valuation date without reduction for dividends that offset those premiums, plus (2).dividends applied to purchase paidùp insurande prior to the valuation date, plus (3) any amounts credited (or otherwise madesavailable) sto the policyholder with respect to premiums, including interest and similaraincome items (whether credited oramade available under the contract or to some other account), but not including dividends used to offsetspremiums andsdividends used to purchase paid up insurance; minus (4) explicit or implicit reasonable mortality charges sand reasonable charges (other than mortality charges) , but only if those charges are actually charged on or before the valuation date and those charges are not expected to be refunded, rebated or otherwise reversed at a later date, minus (5) any distributions (including distributions of dividends and dividends held on account), withdrawals, or partial surrenders taken prior to the valuation date.

Rev. Proc. 2005-25 2005-1 C.B. 962, is applicable to e nonexempt employees' t-rusts for purposes of sec. 402(b): for periods on or after Feb. 13, 2004. Rev. Proc. 2005-25,asec 5, 2005-1 C.B. at 965.

Id. For variable contracts the revenue procedure defines fair narket value' in a subs antially similar mannei 'as for || nonvariable contrac t . " Id . se~c . 3 . 0 3 . As the valuat ion the methods are substantially similar, we need not decide whether the life nsurance policy is a ariable or nonvariable life insurance contr ct.

ccording to Rev. Proc. 2005-25, supra, the surrender charge should be disregarded for váluation- purposes. The surrender charg s apply in decreasing amounts beginning in the life insur nce policy's first year and are reduced to zero in'the life insur nce policy' s 15th yeá½. In other words, any holder of the life nsurance policy beyond 15 years could redeem therlife insurance policy for its stäted cash value with no penalty. Accorclingly, it will be dis egarded for purpose of valuing petitioner' s interest -in th life insurance policy. See Rev. Proc. 2005-25, sec. 3.04(1) 2005-1 C.B. at 964 ("The Average Surrender' Factor for purposes of § * * * 402 (b) (for which no -adjust ment for potential suírender charges is permitted) 1.00.") .¹⁸

For variable contractå, the only difference occurs in step

3. Fór step 3, "all adjuståents (whether credited or made -available under the contraci or to some other account) that reflec t the investment retuên änd the market value of segregated asset accounts" are added or subtracted to determine the PERC value. Rev. Proc. 2005-25, sec. 3.03, 2005-1 C.B. at 964.

é 37 -On December 31, 2002, AKSM paidt $75, 000 to the Plan Trustee to cover Keady' s initial contribution and $2, 050 to cover the MEP fee. Of the $75,000 payment, $73;000 was credited to petitioner's life insurance policy. On May 20, 2004, KSM contributed $36, 000 for the Plan' s premiums and $2, 800 to cover the Plan fee. Of the $36,000 contribution, $18,000 was credited to petitioner's life insurance policy. During 2003 and 2004, petitioner' s life insurance policy was also increased by interest payments of $6,134, for a total of $97,134. Petitioner's life insurance policy was decreased during 2003 and 2004 for mortality charges of $16,235 and other expenses of $10,370, respectively, for a total of $26, 605. As noted above, petitioner' s interest in the life insurance policy is not' reduced by any surrender charges . Accordingly, we conclude that the PERC value of petitioner's interest in the life insurance policy is $70,529. Neither party contends that the alternative valuation measure allowed pursuant to ReÝ. Proc. 2005-25, supra, would result in a higher valuation. Additionally, neither party contends that petitioner's life insurance policy is subject to any liabilities . See sec . 1. 402 (b) -1 (b) (2) (i) , Income Tax Regs . Accordingly, we hold that petitioner must include in gross income the cash value- of the life insurance policy of $70,529. "Petitioner does not contend that the premitimà, iriterest credits, mortality charges, or other expenses should he prorated. Accordingly, we deem this argument conceded.

!

IV. Whether Petitioner Must Include in Gross Income the Excess Contributions During 2004, KSM contributed ]ife insurance policy premiums of $36 000. Petit-ioner's lífe insurance policy was credited with a payment of $18,000. Respondent concedes that $645 of the remair ing $18, 000 was used to pay the annual premium on Miranda' s and Jennifer's policies. Respondent contends that the excess contribution, $17, 355, should be included in petitioner' s gross income pårsuant to section 1. 40 2 (b) -1 (b) (1) , Income Tax Regs . És discussed above, the parties treat petitioner' s interes n the P an before conversi n as being subject to a substantial risk of forfeiture, i.e., not substantially vested. We concluded above hat, following the conversion of the Plan to an SEP, petitioner' s interest was stíbstantially vested. See id Additionally, neither party contends that the excess contribution is sul j ec t to any liabilities . Sec . 1. 402 (b) -1 (b) (2) (i) , Income Tax R gs. (the net fair market value of a taxpayer's interest iri the trüst is the fair market value of all the assets less any liabilities to which such assets are subject)

Petitioner makes the same contentions with respect to 'the inclusion of the excess contributions in gróss income as he did with respect to the cash value of the life insurance policy i.e., the Plan contributions were a-gift from Mrs. Cadwell, and he has no interest in the Plan. We apply the same analysis as we 39 -did above and conclude ethat petitioner s contentions are without merit.

Petitioner also contends that the excess contributions have been accounted for in the cash value of the life insurance policy. Of the $36, 000 contribution for life insurance protection made during 2004, $645 was credited towards Miranda's and Jennifer's life insurance policies. In the PERC calculation set forth above, $18,000 of thee$36,000 was credited towards the cash value of petitioner' s life insurance policy. The $17, 355 excess contribution was not credited toward the cash value of the life insurance policy covering petitioner discussed in the PERC valuation above . Consequently, the inclusion of the excess contribution in petitioner' s inconie would not be "doublec ount ing" . Accordingly, we hold that the excess contribution of $17, 355 must be included in petitioner s gross income for his 2004 tax year Petitioner cont rids that respondent has overitatedOhe value of the excess contributions. Where a motion for summary judgment has*been proberly niade and súp½orted, the onposing pärty may no,t rest upon mere, allegations or, denials in that,party's pleadincjs but must by afficiavits or othei-wise set forth'specific facts showing that there is a genuine issue for trial. Rule 121(d) . Nespondent's motioå was properly made and supported Petitioner has not offered specific facts to show that there is a genuine issue" för" trial begarding' the Nalue of the excess contributions . Accordingly, we sconclude that summary judgment is appropriate on this issue.

V. 3 Whether Petitioner Must Include the Cost of

Ínsurance Protection iå His Gross Income the Life Respondent contends thÅt the cost of life insurance proteòtion Keady provided to petitioner during 2004 was an economic benefit and, therefore, should be included in -his gross income under section 402 (b) or section 61. Petitioner contends that neither section is applicable . We agree with respondent that dhe value of the cost of life insurance protection is included in petitioner' s gross income under section 61. Gross income includes income from whatever source derived, including income for services. Sec. 61(a). The term "gross income" is construed broadly, as opposed to exclusions from gross income, which are construed narrowly. Commissioner v. Schleier, 515 U S. 323, 328 (1995) . Generally, life insurance premiums paid y an employer on the life of his employee, where the proce s of such insurance are payable to the beneficiary of the emplo ee, are included in the gross income of the employee. Sec. 1.61- (d) (2) (ii) (A) , Income Tax Regs.

We note that section 1 61-2 (d) (6) , Income Tax Regs . , does li not a ply, because, pursuant to section 1.83-3 (e) ,. Income Tax Regs . , current life insuranae protection is not "property" / As noted bove, section 402(b) 1) is inapplicable. Moreove , the cost f life insurance protection generally is taxable under section 61 and the regulations pursuant to section 61. Sec. 1.83- (a) (2), Income Tax Re s.

Pèt-itióner rede ved life insurance -protection pursuant to the payments mades by KSM to purch'ase the life "insúrance policy on þetitioner's lifes That life insurance proteetion wasaarvaluable benefit ande significant accession to þetitioner's wealth; i.e., $1 millaion- payable to' his2daughters if he were' ato die during 2004. leSee Uh'ited States Burke, 504-U.S: .229, 2233 (1992) ("Conejresi-intèrided throughã§-61(a) * * * to bring within the -definition of income Iany a cession to wealth " (quoting Coinmissio~rièr' v.a Glenshaw Glass Co . ,E348 U. S 426, 431 (1955) ) ) . In V R. DeAngelis M.D.P.C Y. Commissioner, T.C. Mema. 2007-360, a group of doctors aombined-to form"a~trúst,spurportedly quali'f ied pur'suant to seet ion 41ŠA ( f ) :(6 ) , whose purpose* was to fund the" purchase of li<fe insùrance poLicies". 'Inidiscussïng the tai conse uences i of- the premium payments int V. R.« DeAngelis M.D.P/C., we steted that t e "payments of the premiums were indeed accessions to athe doctors' wealth" ° NSiinilarly the -pre nium paymerfts are accessions to petitio'ner' se wealth and should be incl~uded irChïs g os's income þursuant to section 61.-3°In V.R. DeAngelis M.D.P.C. v. Commissioner, T.C. Memo. 2007-360, we held that the premium payments were "essentially a distribution to the doctors of corporate profits rather, than a payment that the PCs made to the doctors with a compensatory intent", because -the doctor-employees were also the owners of the S corporations that provided them with benefits. See also Neonatology Associates P.A. v. Commissioner, 115 T..C., 43 (2000) (premium payments are a dividend to the extent of earnirigs and profits to employee-owners of a C corporation) , affd. 299 f.3d, 221 (3d Cir. 2002) .

P titioner:offers the sáme-theories regarding the current year.cost of life insuranceoprotection as he-did for the inclusion of the cash value cof the life insurance policy and the excess contributions. Thoses theories, are si'milarly unpersuasive I regarding the inclusion of the current year cost of lif.e -insura ce in his gross income . s Accordingly, e hold thati petiti ner must include in his gross income for-his 2004 tax year the current- year cost of .life insurance, protection. Pétitioner contends that the fair market value of the cost of lif insurance is $8,496; i.e., the 2004 mortality charges3 ResponÈl.ent contends that the value of the life insurance protecNon is $13,510; i.e., -the annual cost, according to Not ice 2001-10, Table,2001, 2001;-1 C.B. 459, 463, for $1 mi-llion worth of lif insurance for an individual who is 66 years old. The regulations provide little guidance .in determining the cost of life insurance protection that is included in gross income pursuant to section 61. Accordingly, it is helpful, to examine how ot er parts of the Code, including provisions governing the ta:¿ati >n of split-dollar life insurance and .group 2term, life insurance, calculate the cost of l' year of life insurance protection.

Generally, split dollar li e insurance is any arrang ment betweeÈ an owner and a nonodner oÈ a life" insurance contract where one party pays the prèmiums and is entitled o recove al 43 -or a portion pf such premiums from the proceeds of othe life irisurance "contract and the arrangem'ent s not group term life insurances. Sec 1. 61222 (b) (1) , Incomë Taxe Regs : RRev . Rul 64 328, -1964±2: C.B. 11 provides that an employee amust include in gross income etheaannual value of the benefit theaemployee receives under a split-dollar arrangement,a which is an amount equal to «the 1-year term cost of life*'insurance protections to which the employee isv eittitled :from yearNto y'ear, less the portion, "if any, thetemployee p-rovides.»MSee also Johnson v. Commissioner; 74 T C 1316 1322 (1980) . AWeenote that Rev. Rul. 64-328, supra, is not an attempt to include in gross income the entire- life -insurance premium but rather only the- costrof the current year' s life insu ance protection. The 1-year cost of lifezinsurance protection is. the amount- to be determined in the instarit case.

«Rev. Rul. 64-328, supra, provides; that the cost3 of life -insurance protectionnshould be balculated «using the P.S 58 rates found in Rev . Rule. e55 -747, 1955 -2 C. B/228d Notice 20 01-10 , supra, revoked Rev. Rul. 55-747, supra, and provided Table 2001 as a substitute for the P.S. 58 rates In, Curc io-v . Commis s ioner , T . C . Memo 2010 -115 , we used the rates in section 1.79-3 (d) , Income Tax Regs. as a "rough estimate" of'the cs c life insurance protection to. decide whether the taxpayer s expenses for fife iËsuranck Were deductible pursuanti to section 162 (a) . Table 2001 is an updated versi n o the rates found inesection 1.79-3(d), Income. Tax Regs. See Nc$tice 2001.-10, 2001-1 .B. at 462 ("Table 2001 is based on the mortality experience reÈlected in the y table of uniform . premiums promulgated under lection 7.9 (c) of the Code (see § 1.793 (d) ( ) of the regulations) with extensions for ages below 25 and a ove 70, and the elimination of the five-year age i brack ts") ; see also Notice 2002 8, 2002-1 C.B. 398. « -AccordingjLy, we conclude that for purposes of the instant^ case, Table 001 .is a reasonable estimate oft the cost of 1 year of life insurance protection.

ursuant to Table 2001 the cost of $1 million worth of life insurance coverage for a 66 year-old .is $13, 510 . As neither party hasi arguedithat the life insurance policy in issue is split do).lar life insurance we need not address any issue regarding' the effect of split-dollar life insurance on the calcu ation of the cost of the life insurance policy in issue." + Addit onally, neither party contends that petitioner paid for such ife insurance coverage.

J:

We note that, if we were to include the entire .$13, 510 -amount in petitioner's incoše, there would be double counting. The life insurance po .icy in issue may qualify as splitdolla life insurance pursuant to sec. 1.61-22 (b) (2) , Income Tax Regs. However, the outcome would be the same if we classified the life insurance policy id issue as split-dollar life insurance .

Petitioner'.s gìosk incometalready includes ethe cash valüe of the life insurance policy calculated under the-PERC method. That method takes into account the premiums paid and any :other income thealife insurance policy earns, buti it subtracts mortelity charges and other expenses. To' include the entire $13,510cin -additaion ato- the PERC tvalue would partiall double count a portion o .the premium paymentsthat hast already beèneincluded in the PERC amount .

Instead,àthe value for currerit year lifet insürance protect-ion should be calculatedebyyaddingethe inortality charges ($8 4296) ,and othera expenses ($2, 640) . The sum of $11;136 reflects the -charges zfore currentayearolifeminsurance: that were already subtractedyfrom theefair market value calcu]:ation : 4 determineduusing-the PERCuamount, pursuant to Reve Proc-. 2005/25, supras : Therefore,. we conclude that when thesPERC formula has "Under the PERC method for 2004, petitioner' s policy yas credited~ eith an" $18 000 premium payment and Nas credÏted with $2,793 in interest, yielding a total ofs$20,793. ,However, petitioner'â ]'ife insurance policy incurred a mortality charge of $8, 496 and other expenses of $2, 640, for, a net value for his 2004 tax yRr of $9 è$7 Indludidg the entire $1C510 from Notice 2001-10, Table 2001, 2001-1 C.B. 459, 463, would include .in petitiorfer's cfrösis irc9me an amount equal to $23~,T67 ($9,657 + $13 , 510 ) . In ot-her words , , inc luding the entire $13 , 510. would double count the cost of life insurarice protîction by an amount equal to $2, 373 . ($23, 161 (or $13, 510 + $9, 657) minus. $20 , 7.93 (or Šl8, 000 + $2, 793) éqifals $2, 37 . ) Consequently, we deem the, $2, 373 an amount al eady contributed by peti ioner for purposes of such calcùlatri'on and, accordingry sübtract that amount from the $13, 510 in costs . Therefore,, petitioner musta .include in his gross incoine the valde f Ehe cÏirrent yeak life iniurance protection as a taxable benefit to him of $11,136.

4-46 -been used to calculated the fair market value of. the ,policy, the cost f insurance may be ¡cal.culated by -adding the mortality charges and other expenses .

i etitioner contends thät we should only sconsider the current !.

morta ity chargesurather than the Table 2001 rates. Petitioner in es ence contends that the current mortality charges sareuthe "insu er's published premiudi rates for one-year termeinsurance" pursuant to Rev. Rul. 66-110, 1966-1 C.B. 12. Pursuant to Notice 2002-8, .2002-1 C.B. at 9398 99, the insurer'ss published premium rates may be used only if tl e taxpayer can showsthat the insurer gener fly makes the availability 'of sucherates known to persons who a ply for term insuranc coverage from tihe insurér and ithe insurer regularly sells tera insurance at such ratestto individuals who apply for term insurance coverage athrough the insurer'es normal distributionachannels. Petitioner does not argue that the requirements of Notice 2002-8 supra,-are unrêasonable or incorrect. Furthermore, on a motion f r summary judgm t thàt is prð];>erly'm de and supported, the o poeing party must 9et forth specific facts showing that there is a genuine issue fo trial. Rule 121(d) . Petitioner does not allege thathe has any evidence that wo ld sat-isfy 'that requirements of Notice 2002-8, supra. Furthermore, petitioner does not suggest that there is a "material ifa tual issue t hat c ul be resölvec at trial. Accordingly, we con lude that summa udgment is 47 -appropriate on this issue and that the requirements sof Notice 2002-8, supra; have not been met. Therefore, w hold that petitioner must include in his gross income for his 2004etaxgear the cost of cuirent year life insurance -protection of $113/136. VI. - Whether Petitioner Is Liableifor the Sectiona6662 Penalty Respondent contends thatupetitioner is liable for the s accuracy-related penalty pursuant rto section 6662 (a) on account of a substantial understatement of tax, or in the alternative, on account of negligence or disregard of rules and regulations . See sec . 6662 (b) (1) and (2) .

A substantial understatement of income tax is an understatement that is greater than 10 percent of the tax required to be shown on the return for the taxable year or $5, 000. Sec. 6662 (d) (1) (A) . An understatement" is the excess of the amount required to, be shown on the return for the taxable year over the amount actually shown on the return. Sec. 66623(d) (2) .

The record reveals that petitioner' s understatement will be greater than $5, 000 . Petitioner has failed to establish any defense to the accuracy-related penalty.

Consequently, we hold that petitioner is liable for the accuracy-related penalty under 6662 (b) (2) ;

e shall therefore graNt respondent's cross-motion for summar judgment and deny petitioner's motion for summary judgm nt .

e have considered allaof the issues raised by the parties, and, that t the extent they are anot discussed herein, we conclude t hey are without merit, unnecessary to reach, or moot . o reflect the foregoi g An order and decision will be entered under Rule 155. s -1