115 T.C. 43 (T.C. 2000), 1201-97, Neonatology Associates, P.A. v. Commissioner of Internal Revenue

Docket Nº:1201-97, 1208-97, 2795-97, 2981-97, 2985-97, 2994-97, 2995-97, 4572-97
Citation:115 T.C. 43, 115 T.C. No. 5
Opinion Judge:Laro, David, Judge.
Party Name:NEONATOLOGY ASSOCIATES, P.A., ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Neil L. Prupis, Kevin L. Smith, and Theresa Borzelli, for petitioners. Randall P. Andreozzi, Peter J. Gavagan, Mark A. Ericson, and Matthew I. Root, for respondent.
Case Date:July 31, 2000
Court:United States Tax Court
 
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Page 43

115 T.C. 43 (T.C. 2000)

115 T.C. No. 5

NEONATOLOGY ASSOCIATES, P.A., ET AL., Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 1201-97, 1208-97, 2795-97, 2981-97, 2985-97, 2994-97, 2995-97, 4572-97

United States Tax Court

July 31, 2000

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).

SYLLABUS

Certain insurance salesmen formed two purported voluntary employees' beneficiary associations (VEBA's) to generate commissions on their sales of life and other insurance products purchased through the VEBA's. Each employer/participant contributed to its own plan formed under the VEBA's, and each plan generally provided that a covered employee would receive current-year (term) life insurance on his or her life. Premiums on the underlying insurance policies were substantially greater than the cost of term life insurance because they funded both the cost of term life insurance and credits which would be applied to conversion universal life policies of the individual insureds. The credits applied to a conversion policy were " earned" on that policy evenly over 120 months, meaning that policyholders generally could withdraw any earned amount or borrow against it with no out-of-pocket expense.

HELD: The corporate employer/participants (N and L) may not deduct contributions to their plans in excess of the cost of term life insurance.

HELD, FURTHER, L may deduct payments made outside its plan for life insurance on two of its employees to the extent the payments funded term life insurance.

HELD, FURTHER, neither M, a sole proprietorship/participant, nor N may deduct contributions to its plan to purchase life insurance for certain nonemployees.

HELD, FURTHER, sec. 264(a)(1), I.R.C., precludes M from deducting contributions to its plan to purchase life insurance for its two employees.

HELD, FURTHER, in the case of N and L, the disallowed deductions are constructive dividends to their employee/owners.

HELD, FURTHER, Ps are liable for the accuracy-related penalties for negligence or intentional disregard of rules or regulations determined by R under sec. 6662(a), I.R.C.; L also is liable for the addition to tax for failure to file timely determined by R under sec. 6651(a), I.R.C.

HELD, FURTHER, no P is liable for a penalty under sec. 6673(a)(1)(B), I.R.C.

Neil L. Prupis, Kevin L. Smith, and Theresa Borzelli, for petitioners.

Randall P. Andreozzi, Peter J. Gavagan, Mark A. Ericson, and Matthew I. Root, for respondent.

OPINION

Page 44

Laro, David, Judge.

The docketed cases, consolidated for purposes of trial, briefing, and opinion, represent three test cases selected by the parties to resolve their disagreements as to certain voluntary employees' beneficiary association (VEBA) plans; namely, the Southern California Medical Profession Association VEBA (SC VEBA) and the New Jersey Medical Profession Association VEBA (NJ VEBA). [2] The parties in 19 other cases pending before the Court have agreed to be bound by the decisions we render herein as to these VEBA issues.

Two of the test cases involve a corporate employer and one or more employee/owners. These employer/employee groups are the Neonatology Associates, P.A (Neonatology), group and the Lakewood Radiology, P.A. (Lakewood), group. These groups relate to two purported welfare benefit funds formed under the SC VEBA; namely, the Neonatology Employee Welfare Plan (Neonatology Plan) and the Lakewood Employee Welfare Plan (Lakewood Plan). [3]

The third test case involves an individual working as a sole proprietor and two of his employees. This group is the Wan B. Lo, Ph.D., D.O., d.b.a. Marlton Pain Control and Acupuncture Center (Marlton) group. The Marlton group relates to

Page 45

the Marlton Employee Welfare Plan (Marlton Plan), a purported welfare benefit fund formed under the NJ VEBA. [4]

In regard to each test case, respondent determined that the employer or sole proprietor could not deduct its or his contributions to the respective plan and, in the case of Neonatology and Lakewood, that the employee/owners had income to the extent that he or she benefited from a contribution. [5] Respondent determined that each petitioner was liable for deficiencies in Federal income tax as a result of the VEBA determinations and that each petitioner was liable for a related accuracy-related penalty under section 6662(a) for negligence or intentional disregard of rules or regulations. In the case of Lakewood, respondent also determined that it was liable for a 15-percent addition to tax under section 6651(a) for failure to file timely its 1992 Federal income tax return and a section 6621 increased rate of interest on its 1991 deficiency as to interest accruing after July 20, 1995.

Each petitioner petitioned the Court to redetermine respondent's determinations. Respondent's notices of deficiency list the following deficiencies, addition to tax, and accuracy-related penalties: [6]

NEONATOLOGY GROUP

Neonatology, docket No. 1201-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _____________ __________________
1992 $ 1,620 -- $ 324
1993 6,262 -- 1,252
John J. and Ophelia J. Mall, docket No. 1208-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _______________ _________________
1992 $ 6,186 -- $ 1,237
1993 7,404 -- 1,481
LAKEWOOD GROUP Lakewood, docket No. 2995-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _______________ ______________________
1991 $ 169,437 -- $ 33,887
1991 --
--
1992 71,110 $ 10,667 14,222
1993 93,111 -- 18,622
Estate of Steven Sobo, Deceased, Bonnie Sobo, Executrix, and Bonnie Sobo, docket No. 2795-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _______________ ________________________
1991 $ 27,729 -- $ 5,546
1992 5,107 -- 1,021
1993 3,018 -- 604
Akhilesh S. and Dipti A. Desai, docket No. 2981-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _______________ ______________________
1991 $ 42,047 -- $ 8,409
1992 15,751 -- 3,150
1993 25,016 -- 5,003
Kevin T. and Cheryl McManus, docket No. 2985-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _______________ __________________
1991 $ 6,821 -- $ 1,364
1992 6,146 -- 1,229
1993 8,214 -- 1,643
Arthur and Lois M. Hirshkowitz, docket No. 2994-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _______________ ___________________
1991 $ 82,933 -- $ 16,587
1992 45,233 -- 9,047
1993 79,853 -- 15,971
MARLTON GROUP Wan B. and Cecilia T. Lo, docket No. 4572-97

Tax Accuracy-Related Penalty
Year Addition to Deficiency Sec. 6651(a)(1) Sec. 6662(a)
____ __________ _______________ _____________________
1993 $ 41,807 -- $ 8,361
1994 49,970 -- 9,994
Page 46 We decide the following issues: 1. Whether Neonatology and Lakewood may deduct contributions to their respective plans in excess of the amounts needed to purchase current-year (term) life insurance for their covered employees. We hold they may not. Page 47 2. Whether Lakewood may deduct payments made outside of its plan to purchase additional life insurance for...

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