Curcio v. Comm'r of Internal Revenue ( 2012 )


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  • 10-3578-ag(L)
    Curcio v. Comm'r of Internal Revenue
    UNITED STATES COURT OF APPEALS
    FOR THE SECOND CIRCUIT
    August Term 2011
    (Argued: January 5, 2012                    Decided: August 9, 2012)
    Docket Nos. 10-3578-ag(L), 10-3585-ag(CON), 10-5004-ag(CON),
    10-5072-ag(CON)
    MARK CURCIO, BARBARA CURCIO, AMY L. SMITH, SAMUEL H. SMITH, JR.,
    STEPHEN MOGELEFSKY, ROBERTA MOGELEFSKY, RONALD D. JELLING, LORIE A.
    JELLING,
    Petitioners-Appellants,
    v.
    COMMISSIONER    OF   INTERNAL REVENUE,
    Respondent-Appellee.
    ON APPEAL   FROM   UNITED STATES TAX COURT
    Before:
    WINTER, HALL, and CHIN, Circuit Judges.
    Appeal from orders and decisions of the United
    States Tax Court (Cohen, J.) finding deficiencies in
    petitioners' income tax payments and assessing accuracy-
    related penalties under 
    26 U.S.C. § 6662
    .
    AFFIRMED.
    JOSEPH M. PASTORE III, Smith, Gambrell &
    Russell, LLP (Ira B. Stechel, John
    T. Morin, Jennifer L. Marlborough,
    Wormser, Kiely, Galef & Jacobs LLP,
    on the brief), New York, New York,
    for Petitioners-Appellants.
    RANDOLPH L. HUTTER, Attorney, Tax Division,
    Department of Justice, Appellate
    Section (Gilbert S. Rothenberg,
    Acting Deputy Assistant Attorney
    General, Thomas J. Clark, Attorney,
    Tax Division, on the brief),
    Washington, D.C., for Commissioner
    of Internal Revenue.
    CHIN, Circuit Judge:
    In these consolidated cases, petitioners were
    owners of four small businesses that enrolled in purported
    life insurance plans for employees.     Only the four principal
    owners and a stepson, however, were covered under the plans.
    The contributions to the plans -- amounting to hundreds of
    thousands of dollars -- were claimed as tax deductions by
    the businesses.
    The Commissioner of Internal Revenue (the
    "Commissioner") concluded that these contributions should
    not have been deducted because, inter alia, they were not
    -2-
    "ordinary and necessary" business expenses within the
    meaning of the Tax Code.   Disallowing the deductions
    resulted in additional passthrough income to petitioners on
    which they had not paid taxes.      Accordingly, the
    Commissioner issued notices of deficiency to petitioners and
    assessed accuracy-related penalties.
    Petitioners' cases were consolidated and tried
    before the United States Tax Court in March 2009.      After
    trial, the tax court ruled in favor of the Commissioner,
    finding that petitioners owed deficiency payments and
    accuracy-related penalties.   Petitioners appealed.    We
    affirm.
    BACKGROUND
    The following facts are drawn from the tax court's
    findings and the record on appeal, including stipulations of
    the parties, documentary evidence, and testimony of
    petitioners and their witnesses.
    A.   The Benistar Plan
    The Benistar 419 Plan (the "Plan") was established
    in 1997 by Daniel E. Carpenter.     It was designed to be a
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    multiple-employer welfare benefit plan under 26 U.S.C.
    § 419A(f)(6).    The "Plan provides death benefits funded by
    individual life insurance policies for a select group of
    individuals chosen by the Employer to participate in the
    Plan."   (Ex. 33-J (Benistar Plan Brochure)) (A 1824).      The
    only benefits "claimed to be provided by or through [the
    Plan] are pre-retirement death benefits for covered
    employees of participating employers."    (First Stip. of
    Facts ¶ 41).
    Businesses that enroll in the Plan contribute to a
    trust account maintained by the Plan.    The Plan uses these
    contributions to acquire one or more life insurance policies
    on the lives of employees covered by the Plan; it withdraws
    funds from the trust account to pay the premiums on these
    policies.    Each covered employee determines the type of
    insurance that the Plan will purchase on his behalf.
    Furthermore, the Plan allows participating businesses to
    choose the number of years for which contributions to the
    Plan will be required to fully pay for the death benefit or
    benefits provided through the Plan.    The Plan is listed as
    -4-
    the beneficiary on each insurance policy and passes on the
    death benefit to the covered employee.
    The Plan also allows participating businesses to
    withdraw from, or terminate, participation at any time.
    Upon termination, the Plan can distribute the underlying
    policies to the insured employees.    Until mid-2002, an
    underlying policy could be distributed at no cost to the
    covered employee.   From mid-2002 to mid-2005, the Plan
    required that the covered employee be charged 10% of the
    "cash surrender value" in exchange for the underlying
    policy.   (Carpenter Exam. at 274-76).   Starting in mid-2005,
    the Plan purportedly began to charge covered employees the
    "fair market value" of the underlying policy upon
    termination.   (Id. at 125).1
    The Plan advertises several "advantages,"
    including (1) "Virtually Unlimited Deductions for the
    Employer"; (2) "Benefits can be provided to one or more key
    Executives on a selective basis"; (3) "No need to provide
    1    Carpenter explained that the "fair market value"
    of the policy is equal to its "cash value." (Carpenter
    Exam. at 238).
    -5-
    benefits to rank and file employees"; and (4) "Funds inside
    the BENISTAR 419 Plan accumulate tax-free."    (Ex. 33-J)
    (A 1825).    Carpenter testified that "the beauty" of the Plan
    "is that you can put away extra money in good times and
    though the premium is not due, you can put away excess
    amounts of money, get a tax deduction today, and we don't
    put the premium in for years to come."    (Carpenter Dep. at
    262).
    B.   Curcio and Jelling
    Petitioners Marc Curcio and Ronald D. Jelling each
    own 50% of three car dealerships:    Dodge of Paramus, Inc.
    ("Dodge"), Chrysler Plymouth of Paramus, Inc. ("Chrysler
    Plymouth"), and JELMAC LLC ("JELMAC").
    In or about 2001, Curcio and Jelling decided to
    enter into a buy-sell agreement.2    The buy-sell agreement
    contemplated that if one partner died, the other would buy
    the deceased partner's 50% stake in the businesses.    When
    the buy-sell agreement was executed, it set the value of the
    2
    The agreement was not actually executed until
    2003.
    -6-
    businesses at $12,000,000.   To fund the purchase if it
    became necessary, each partner agreed to take out an
    insurance policy on the other's life.      In other words, each
    partner would list the other as the beneficiary of his death
    benefit and the death benefit would be used to purchase the
    deceased partner's share of the businesses.
    Instead of purchasing life insurance policies
    directly, however, Curcio and Jelling decided to insure
    themselves through the Plan.     Accordingly, Dodge enrolled in
    the Plan on December 28, 2001.       Curcio and Jelling were the
    only covered employees.   They did not choose to insure any
    of the other 75 people employed by Dodge.      Neither Chrysler
    Plymouth nor JELMAC enrolled, nor were any of their
    employees, other than Curcio and Jelling, covered.
    Curcio and his insurance agent, Robert Iandoli,
    selected a whole life policy with a $9,000,000 death
    benefit.   Jelling and his insurance agent, Alan Solomon,
    chose two policies -- one whole life policy and one
    universal (or adjustable) life policy -- totaling
    approximately $9,000,000 in coverage.      Curcio paid a
    -7-
    $200,000 annual policy premium to the Plan.    Jelling paid
    the same.
    Although Dodge was the only entity to enroll in
    the Plan, Dodge was not always the only entity to contribute
    to the Plan.    In fact, all three Curcio/Jelling business
    entities contributed to the Plan, with whichever entity
    having the highest cash balance at the end of the year doing
    so.   Dodge contributed $400,000 in 2001 and 2002.   JELMAC
    contributed $400,000 in 2003 and Chrysler Plymouth
    contributed $400,000 in 2004.    Each business claimed a tax
    deduction for the entirety of its contribution.    Jelling
    testified that he considered the contributions "as a funding
    for our buy sell agreement."    (Jelling Exam. at 581).
    Curcio and Jelling had asked their accountant,
    Stuart Raskin, about the deductibility of the contributions.
    Raskin consulted with his partners and, based on a letter
    from the law firm Edwards & Angell, LLP, concluded that a
    deduction was proper.3    Raskin advised Curcio and Jelling
    3
    At the request of Carpenter, Edwards & Angell
    issued a series of letters opining on whether contributions
    to the Plan were deductible and met the requirements of
    -8-
    that the deduction was proper, but also communicated that
    this opinion was derived solely from the Edwards & Angell
    letter, and not from any independent research or
    investigation.    Furthermore, Raskin did not offer Curcio or
    Jelling any assurances that the I.R.S. would approve the
    deductions.   Neither Raskin, nor anyone at his firm, was an
    expert in welfare benefit plans.
    C.   Smith
    Petitioner Samuel H. Smith was, at all relevant
    times, the sole owner of SH Smith Construction, Inc. ("Smith
    Construction").   Smith Construction enrolled in the Plan in
    2002.   Although Smith Construction had 35–40 employees, it
    chose to insure only Smith through the Plan.    On the
    § 419A. A November 2001 letter stated that it was "more
    likely than not" that a court would sustain deductions for
    contributions to the Plan. (Ex. 37-J at 2) (A 1959). It
    cautioned, however, that neither the Internal Revenue Code
    nor the tax regulations provided specific guidance on the
    issue. While deductions for life insurance were not per se
    improper, the I.R.S. could "challenge the amount deducted."
    (Id. at 3) (A 1960). Furthermore, an October 2003 letter
    noted that the determination of whether an expense is
    "ordinary and necessary" -- and therefore deductible -- "is
    quite subjective and dependent upon a totality of the facts
    and circumstances of a particular taxpayer." (Ex. 38-J
    at 5) (A 1968).
    -9-
    insurance application, Smith indicated that the purpose of
    the insurance was "retirement planning."    (Ex. 116-J at 3)
    (A 3125).    Smith chose a variable life policy with a death
    benefit of $5,000,000 and annual premium payments of
    $54,000.    In 2003, Smith Construction claimed a $54,000
    deduction for its contribution to the Plan.
    By September 2005, Smith Construction had paid a
    total of $171,500 in premiums, and the policy had an
    accumulated cash value of $152,259.
    By letter dated September 27, 2005, Smith
    requested that Benistar terminate his participation in the
    Plan.   Moreover, he stated that he "would like to purchase
    the policies . . . and take ownership of the[m]."       (Ex. 129-
    J) (A 3203).    The Plan provided that Smith could purchase
    his policy by paying "10% of the net cash surrender value of
    the policy."    (Ex. 175-J (Plan Termination and Policy
    Transfer Release Form)) (A 3372).     Smith paid $2,970.    This
    amount, however, equaled 10% of his policy's net cash
    surrender value on December 31, 2004, not 10% of the net
    cash surrender value in September 2005, when Smith
    -10-
    terminated his company's participation in the Plan and
    requested the transfer.   In fact, his policy's net cash
    surrender value in September 2005 was $83,158, 10% of which
    would be $8,316.   In April of 2006, Smith withdrew $77,300
    from his policy.   In January 2007, Smith borrowed $16,000
    from his policy.
    Smith testified at trial that he relied on his
    accountant's representation that contributions to the plan
    were deductible.   He could not recall whether this
    representation was made orally or by email.
    D.   Mogelefsky
    Petitioner Stephen Mogelefsky is the sole owner of
    Discount Funding Associates ("Discount"), a corporation that
    provides mortgage broker services.   Discount enrolled in the
    Plan in late 2002 to obtain life insurance for Mogelefsky
    and his stepson, an employee of the company.     Mogelefsky
    chose a $1,300,000 policy on his own life so that "in case
    something happened to [him, his] son could take over the
    business."   (Mogelefsky Exam. at 621).    He also chose a
    $350,000 policy to cover his stepson.     In December 2003,
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    Discount elected to provide Mogelefsky with additional life
    insurance benefits in the amount of $1,020,000.
    In early 2003, Discount contributed $398,597 to
    the Plan.    It claimed a deduction for this contribution in
    the 2002 tax year.    In early 2004, Discount contributed
    another $354,821.    It claimed a deduction for this amount in
    the 2003 tax year.
    In March 2006, Mogelefsky and his stepson decided
    to withdraw from the Plan.    To acquire his first policy,
    Mogelefsky paid $28,577.     To acquire his second policy,
    Mogelefsky paid $14,632.    By December 2005, the first policy
    had accumulated a cash value of $313,745 and had a net
    surrender value of $285,414.     When the second policy was
    transferred on March 16, 2006, it had accumulated a cash
    value of $255,089.    In December 2005, its net surrender
    value was $145,994.
    E.   Procedural History
    The Commissioner sent notices of deficiency to
    Curcio and Jelling on January 23, 2007, and to Smith and
    Mogelefsky on June 25, 2007.     Specifically, the Commissioner
    disallowed the deductions petitioners' business entities had
    -12-
    taken for contributions to the Plan because, inter alia, the
    contributions were not ordinary and necessary business
    expenses.    Accordingly, the Commissioner found that
    petitioners had additional passthrough income on which they
    had failed to pay income tax.    In addition to the
    deficiencies, the Commissioner assessed a 20% accuracy-
    related penalty on each petitioner.
    In the case of Discount's first contribution, the
    Commissioner could not disallow the corresponding deduction
    because the statute of limitations on the 2002 tax year had
    passed.   Instead, the Commissioner found that the
    contribution was 2003 income in the form of a constructive
    dividend or deferred compensation.
    The four cases were consolidated and tried before
    the tax court in March 2009.4    On May 27, 2010, the tax
    court issued a Memorandum Finding of Facts and Opinion (the
    "Memorandum Opinion").    In the Memorandum Opinion, the tax
    court agreed with the Commissioner, finding that the
    contributions made by petitioners' business entities were
    4
    Petitioners Barbara Curcio, Amy L. Smith, Lorie A.
    Jelling, and Roberta Mogelefsky are the wives of the
    business owners. They were named in this action only
    because they filed joint tax returns with their husbands.
    -13-
    not "ordinary and necessary" business expenses and,
    therefore, should not have been deducted.   Moreover, it
    approved the Commissioner's unique treatment of Discount's
    first contribution.   Finally, the tax court found that the
    improper deductions -– and petitioners' corresponding
    underpayment of tax -- were the result of negligence or
    disregard for the tax rules and regulations.   Accordingly,
    the court issued four decisions, ordering due the
    deficiencies and penalties assessed by the Commissioner.
    Curcio and Jelling appealed on August 24, 2010.
    Smith and Mogelefsky appealed on December 2, 2010.    The
    appeals were consolidated on December 17, 2010.
    DISCUSSION
    A.   Applicable Law
    1.   Ordinary & Necessary Business Expenses
    Section 162(a) of the Internal Revenue Code
    provides that a business may deduct "all the ordinary and
    necessary expenses paid or incurred" during the taxable year
    in carrying out that trade or business.   
    26 U.S.C. § 162
    (a).
    To qualify as an allowable deduction under § 162(a), an item
    must "(1) be paid or incurred during the taxable year, (2)
    -14-
    be for carrying on any trade or business, (3) be an expense,
    (4) be a 'necessary' expense, and (5) be an 'ordinary'
    expense."    Comm'r v. Lincoln Sav. & Loan Ass'n, 
    403 U.S. 345
    , 352 (1971) (some internal quotation marks omitted).
    An "ordinary" expense is one that is "normal,
    usual, or customary in the type of business involved."
    Int'l Trading Co. v. Comm'r, 
    275 F.2d 578
    , 585 (7th Cir.
    1960) (citing Deputy v. du Pont, 
    308 U.S. 488
    , 494-96
    (1940)); accord Sharon Herald Co. v. Granger, 
    195 F.2d 890
    ,
    895 (3d Cir. 1952).    An expense need not be habitual to be
    "ordinary," see Welch v. Helvering, 
    290 U.S. 111
    , 113-14
    (1933), but the transaction "must be of common or frequent
    occurrence in the type of business involved," du Pont, 
    308 U.S. at 495
    .    A "'necessary'" expense is one that is
    "'appropriate and helpful'" for the development of the
    taxpayer's business.    See INDOPCO, Inc. v. Comm'r, 
    503 U.S. 79
    , 85 (1992) (quoting Comm'r v. Tellier, 
    383 U.S. 687
    , 689
    (1966)).
    Put simply, "[e]xpenditures may only be deducted
    under § 162 if the facts and the circumstances indicate that
    -15-
    the taxpayer made them primarily in furtherance of a bona
    fide profit objective independent of tax consequences."
    Green v. Comm'r, 
    507 F.3d 857
    , 871 (5th Cir. 2007) (internal
    quotation marks omitted).    Purchasing or subsidizing
    benefits -- e.g., life insurance -- for employees might fall
    into this category to the extent it incentivizes employees
    to remain loyal to the business and perform to the best of
    their abilities.     See Schneider v. Comm'r, 
    63 T.C.M. (CCH) 1787
    , at *11 (1992).
    2.   Deductibility of Welfare Benefit Plan
    Contributions
    Contributions to welfare benefit plans are not
    deductible per se.    
    26 U.S.C. § 419
    (a)(1).   To be
    deductible, such a contribution must qualify under some
    other provision of the Code.     
    Id.
     § 419(a)(1)–(2).   In fact,
    the I.R.S. has explicitly opined that the deductibility of
    contributions to an employee trust for life insurance is
    governed by § 162(a) of the Code and § 1.162-10 of the
    Regulations.   See Rev. Rul. 69-478, 1969-
    2 C.B. 29
    (discussing deductibility of term life insurance for active
    -16-
    and retired employees); 
    26 C.F.R. § 1.162-10
     (1960)
    ("Amounts paid or accrued within the taxable year for . . .
    medical expense, recreational, welfare, or similar benefit
    plan, are deductible under section 162(a) if they are
    ordinary and necessary expenses of the trade or business.").
    Accordingly, if a welfare benefit plan
    contribution is ordinary and necessary, it is deductible.
    The deduction, however, is generally limited to "the welfare
    benefit fund's qualified cost for the taxable year."    
    26 U.S.C. § 419
    (b).   This limitation does not apply if the
    welfare benefit plan meets certain requirements set forth in
    § 419A(f)(6).
    Therefore, in determining the deductibility of a
    welfare benefit plan contribution, the threshold question is
    whether the contribution is an ordinary and necessary
    business expense under § 162(a).    Only if a court determines
    that the contribution is ordinary and necessary would it
    proceed with an analysis under § 419A(f)(6) to determine
    whether any limitations on deductibility apply.
    -17-
    3.      Accuracy-Related Penalties
    Section 6662 of the Internal Revenue Code provides
    for a 20% accuracy-related penalty on any portion of an
    underpayment that is attributable to, inter alia,
    (1) "[n]egligence or disregard of rules or regulations" or
    (2) "[a]ny substantial understatement of income tax."        
    26 U.S.C. § 6662
    (b)(1)-(2).
    "'[N]egligence' . . . includes any failure to make
    a reasonable attempt to comply with the provisions of [the
    Code]."     
    Id.
     § 6662(c).   "'[D]isregard' includes any
    careless, reckless, or intentional disregard."      Id.
    Disregard of rules or regulations is careless "if the
    taxpayer does not exercise reasonable diligence to determine
    the correctness" of his position.      
    26 C.F.R. § 1.6662
    -
    3(b)(2) (2012).     Disregard of rules or regulations is
    reckless "if the taxpayer makes little or no effort to
    determine whether a rule or regulation exists, under
    circumstances which demonstrate a substantial deviation from
    the standard of conduct that a reasonable person would
    observe."     
    Id.
    -18-
    An understatement is "substantial . . . if the
    amount of the understatement for the taxable year exceeds
    the greater of -- (i) 10 percent of the tax required to be
    shown . . . or (ii) $5,000."     
    26 U.S.C. § 6662
    (d)(1)(A).       A
    taxpayer may avoid some or all of a "substantial
    understatement" penalty if (1) there was "substantial
    authority" supporting the taxpayer's ability to take the
    deduction; or (2) the relevant facts relating to the
    deduction were "adequately disclosed in the return" and
    there was a "reasonable basis" for the deduction.       See 
    id.
    § 6662(d)(2)(B).    "Substantial authority" exists "only if
    the weight of the authorities supporting the treatment is
    substantial in relation to the weight of authorities
    supporting contrary treatment."       
    26 C.F.R. § 1.6662
    -
    4(d)(3)(i) (2012).
    Finally, "no penalty shall be imposed . . . with
    respect to any portion of an underpayment if it is shown
    that there was a reasonable cause for such portion and that
    the taxpayer acted in good faith with respect to such
    portion."    
    26 U.S.C. § 6664
    (c)(1).     "Generally, the most
    -19-
    important factor [in determining whether a taxpayer acted
    with reasonable cause and in good faith] is the extent of
    the taxpayer's effort to assess the taxpayer's proper tax
    liability."    
    26 C.F.R. § 1.6664-4
    (b)(1).
    4.     Standard of Review
    We review the tax court's legal conclusions de
    novo and its factual findings for clear error.    Robinson
    Knife Mfg. Co. v. Comm'r, 
    600 F.3d 121
    , 124 (2d Cir. 2010).
    Whether an expense is "ordinary and necessary"
    within the meaning of § 162(a) is a "pure question[] of fact
    in most instances."    Comm'r v. Heininger, 
    320 U.S. 467
    , 475
    (1943); accord McCabe v. Comm'r, 
    688 F.2d 102
    , 104 (2d Cir.
    1982).    Unless "a question of law is unmistakably involved,"
    Heininger, 
    320 U.S. at 475
    , we review for clear error the
    tax court's determination that an expense was not an
    ordinary and necessary business expense, McCabe, 
    688 F.2d at
    104–05.    Compare Chenango Textile Corp. v. Comm'r, 
    148 F.2d 296
    , 298 (2d Cir. 1945) (although tax court cited appellate
    court opinions to justify its conclusion, its decision was a
    determination of fact) with Heininger, 
    320 U.S. at 475
     (tax
    -20-
    court mistakenly believed that denial was required as a
    matter of law).    The tax court's finding is clearly
    erroneous only when "the reviewing court on the entire
    evidence is left with the definite and firm conviction that
    a mistake has been committed."       Estate of Stewart v. Comm'r,
    
    617 F.3d 148
    , 164 (2d Cir. 2010) (internal quotation marks
    omitted).
    The determination that a taxpayer is liable for an
    accuracy-related penalty is also a factual determination
    reviewed for clear error.    See Nicole Rose Corp. v. Comm'r,
    
    320 F.3d 282
    , 284-85 (2d Cir. 2003) (citing Goldman v.
    Comm'r, 
    39 F.3d 402
    , 406 (2d Cir. 1994)).
    B.   Application
    We review three of the tax court's rulings:
    first, the tax court determined that contributions to the
    Plan were not ordinary and necessary business expenses;
    second, the tax court ruled that Discount's first
    contribution on behalf of Mogelefsky was taxable as a
    constructive distribution; and third, the tax court
    concluded that accuracy-related penalties were warranted.
    -21-
    We review the first and third rulings for clear error.     The
    standard of review applicable to the second ruling is less
    clear, and the parties have provided no guidance on the
    issue.   We need not resolve the issue, however, because even
    applying de novo review, the tax court's second ruling was
    not erroneous.
    1.    Ordinary and Necessary Business Expenses
    The tax court did not clearly err when it found
    that the contributions by petitioners' business entities to
    the Plan were not ordinary and necessary business expenses.
    The record supports the conclusion that the contributions
    were not normal, usual, or "helpful for the development of
    the [taxpayers'] business," see Tellier, 
    383 U.S. at 689
    (internal quotation marks omitted); they were not made in
    furtherance of a profit objective or for any viable business
    purpose, see Green, 
    507 F.3d at 871
    .    Rather, the evidence
    demonstrates that the contributions were made solely for the
    personal benefit of petitioners.    The contributions were a
    mechanism by which petitioners could divert company profits,
    tax-free, to themselves, under the guise of cash-laden
    -22-
    insurance policies that were purportedly for the benefit of
    the businesses, but were actually for petitioners' personal
    gain.
    Indeed, the Plan was designed to benefit only
    owners and their families and not the businesses generally.
    Carpenter, who conceived of the Plan, admitted that the Plan
    was meant to cover only owners and their families.
    Moreover, he testified that "most of the people in the plan
    are looking for estate planning advantages."    (Carpenter
    Dep. at 156).    The Plan was essentially touted as a way for
    "Key Executives" to avoid paying taxes on business income by
    diverting it into a vehicle in which funds could accumulate
    tax-free.    (See Ex. 33-J (Benistar Plan Brochure) (noting
    that "Plan Advantages" included "unlimited deductions,"
    "tax-free" accumulation, and "tax-free distribution at a
    later date")).
    Evidence pertaining to the individual owners also
    demonstrates that contributions to the plan were for their
    personal benefit, not the benefit of their respective
    business entities.    Dodge, for example, enrolled in the Plan
    -23-
    so that Curcio and Jelling could fund the buy-sell agreement
    between them.    The contributions to the Plan were not made
    in furtherance of a business objective, but rather to
    relieve Curcio or Jelling from having to use personal funds
    to pay for his partner's share of the business in the event
    the partner died.    See Petersen v. Comm'r, 
    74 T.C.M. (CCH) 90
    , 98 (1997).   Dodge employed approximately 75 other
    people, none of whom were covered under the plan.
    Smith admitted that he enrolled his company in the
    Plan for the purpose of "retirement planning."    (A 3125).
    None of the other 35–40 employees of Smith Construction were
    covered under the Plan.    In late 2005, Smith paid
    approximately $3,000 to acquire ownership of his underlying
    life insurance policy.    At the time, the policy had a cash
    value of over $150,000 and a net surrender value of over
    $83,000.   He subsequently withdrew $77,300 from the policy
    and took out a $16,000 loan against it.    Therefore, the
    record supports the conclusion that Smith's contributions to
    the Plan were not business expenses; they funded a life
    -24-
    insurance policy from which Smith himself later realized a
    significant personal monetary benefit.
    Mogelefsky's company, Discount, deducted a total
    of over $750,000 in Plan contributions for the 2002 and 2003
    tax years.    In 2006, Mogelefsky paid less than $45,000 in
    exchange for ownership of the two underlying insurance
    policies.    Around the time the policies were transferred,
    they had accumulated a total cash value of over $560,000 and
    a total net surrender value of over $430,000.    Therefore,
    the record demonstrates that Mogelefsky, like Smith,
    diverted business profits, tax-free, into what eventually
    became a personal asset with a significant cash component.
    To be sure, paying for life insurance for one's
    employees can be an ordinary and necessary business expense
    if the purpose is to compensate, incentivize, and retain key
    employees.    See Schneider, 
    63 T.C.M. (CCH) 1787
    , at *11.
    But it is neither ordinary nor necessary when the insurance
    policies are purchased as investment -- or "estate planning"
    (see Carpenter Dep. at 156) -- vehicles for the sole benefit
    of the owners of the company.    See V.R. DeAngelis v. Comm'r,
    -25-
    
    94 T.C.M. (CCH) 526
    , at *23 (2007) ("While employers are not
    generally prohibited from funding term life insurance for
    their employees and deducting the premiums . . . as a
    business expense . . . , employees are not allowed to
    disguise their investments in life insurance as deductible
    . . . when those investments accumulate cash value for the
    employees personally."), aff'd, 
    574 F.3d 789
     (2d Cir. 2009)
    (per curiam).
    Indeed, this case falls into the latter category.
    Petitioners' business entities employed scores of other
    individuals, but with the exception of Mogelefsky's stepson,
    none was offered life insurance coverage under the Plan.
    Petitioners cannot claim that they enrolled in the Plan to
    incentivize or retain themselves as employees, as they were
    the owners of the businesses.
    We do not hold that purchasing a life insurance
    policy with a cash component can never be an ordinary and
    necessary business expense.   Such a determination is fact
    intensive and must be made on a case by case basis.   In this
    case, however, where petitioners could withdraw from the
    -26-
    Plan at any time and obtain personal control over cash-laden
    policies, and where other evidence in the record
    demonstrates that the taxpayers contributed to the Plan
    solely for their personal benefit, the tax court did not
    clearly err in finding that the contributions were not
    ordinary and necessary business expenses.
    Petitioners argue that all contributions to a plan
    satisfying the requirements of § 419A(f)(6) are deductible
    in their entirety, without regard to whether those
    contributions are ordinary and necessary business expenses.
    (Pet. Br. at 57; Pet. Reply Br. at 6).      Petitioners,
    however, cite no authority for this position and it is
    belied by the statutory scheme.      Section 419(a) states that
    plan contributions "shall not be deductible" unless they
    would otherwise be deductible under another section of the
    Tax Code, such as § 162(a).   Section 419(b) provides that if
    a contribution is deductible under another section of the
    Code, such a deduction is limited to the fund's qualified
    cost for the taxable year.    Section 419A(f)(6), upon which
    petitioners rely, only supplies an exemption -- if certain
    -27-
    requirements are met -- to § 419(b)'s limit on
    deductibility.   It does not provide that such contributions
    are deductible in the first instance.5
    Thus, the threshold question is whether plan
    contributions are deductible under another section of the
    Code -- here, § 162(a).   Because we find no clear error in
    the tax court's ruling that the plan contributions were not
    deductible under § 162(a) -- i.e., they were not ordinary
    and necessary business expenses –- we do not reach the issue
    of whether the Plan meets the requirements of § 419A(f)(6).6
    5
    Under petitioners' reading of the statute, a
    company enrolled in a plan that satisfies the requirements
    of § 419A(f)(6) could contribute and deduct the entire
    amount of its profits, avoiding its entire tax burden.
    Obviously, this was not what Congress contemplated.
    6
    On appeal, petitioners argue that if their entire
    contributions cannot be deducted, they should at least be
    able to deduct an amount equal to the annual "qualified
    cost" of the welfare benefit fund. See 
    26 U.S.C. § 419
    (b),
    (d). It does not appear, however, that petitioners raised
    this argument below, and thus we do not consider it.
    -28-
    2.      The Tax Court's Treatment of Discount's
    Contributions Was Not Improper
    Discount –- on behalf of Mogelefsky -- made its
    first contribution to the Plan in early 2003, for which it
    claimed a deduction on its 2002 tax return.        It made a
    second contribution to the Plan in early 2004, for which it
    claimed a deduction on its 2003 tax return.        The
    Commissioner disallowed the 2003 deduction on the ground
    that the second contribution was not an ordinary and
    necessary business expense, creating additional passthrough
    income for Mogelefsky in 2003.        The Commissioner, however,
    did not have jurisdiction over the 2002 deduction, as the
    statute of limitations had run on the 2002 tax year.
    Instead of disallowing the 2002 deduction, the Commissioner
    classified the first contribution as "constructive dividend
    income" or "deferred compensation" to Mogelefsky in the 2003
    tax year.    (A 1317).   The tax court affirmed, finding that
    the first contribution was a constructive distribution.
    Petitioners contend that the manner in which the
    tax court treated Discount's two contributions was
    -29-
    inconsistent and resulted in "double taxation."     (Pet. Br.
    at 78).   Moreover, they argue that the 2003 "distribution"
    accrued to Mogelefsky in the 2002 tax year, so it should not
    have been counted as income for 2003.    (Id. at 75-78).
    Petitioners' argument is without merit.
    Mogelefsky was not taxed twice on either of the two
    contributions.   The tax court treated Discount's second
    contribution (for which a deduction was claimed in the 2003
    tax year) like the contributions made by the other
    petitioners' business entities.     It found that the
    contribution was not an ordinary and necessary business
    expense, disallowed the deduction, and included the amount
    as taxable passthrough income to Mogelefsky.     The record
    does not reflect that this contribution was taxed at any
    other point.
    The tax court treated Discount's first
    contribution (for which a deduction was claimed in the 2002
    tax year) as a "distribution"7 to Mogelefsky, to be taxed
    7
    This Court has affirmed the treatment of welfare
    benefit plan contributions as "distribution[s] of corporate
    profits" where, as here, the contributions were used to
    -30-
    under 
    26 U.S.C. §§ 1366-68
    .   See also 
    26 U.S.C. § 301
    (c).8
    Because Discount claimed a deduction in the 2002 tax year
    for the amount of this contribution -- and that deduction
    has not been disallowed -- Mogelefsky has not been taxed
    twice on the amount of the contribution.
    Petitioners have not pointed to any authority
    prohibiting the Commissioner from recognizing these two
    contributions under separate sections of the Tax Code.
    purchase life insurance policies with large cash components
    that were accessible to the insured. See DeAngelis, 
    94 T.C.M. (CCH) 526
    , at *25.
    8
    Under § 1368, a distribution is not included in
    income if the taxpayer has sufficient "basis" in his
    corporation against which he can apply the distribution. 
    26 U.S.C. § 1368
    (b)(1). Under such circumstances, his basis is
    reduced by the amount of the distribution, 
    id.
    § 1367(a)(2)(A), increasing the amount of his tax burden
    when he sells his shares in the corporation. On the other
    hand, to the extent there is insufficient basis against
    which the distribution may be applied, the distribution is
    to be treated as a gain from the sale of property. Id.
    § 1368(b)(2).
    In Mogelefsky's case, the record did not reflect
    his basis in Discount. Therefore, the tax court treated the
    entire distribution as being "in excess of basis" and taxed
    it as gain from the sale or exchange of property. See id.
    -31-
    Furthermore, the tax court did not err in finding
    that the distribution accrued to Mogelefsky in 2003 --
    rather than 2002 -- because that is when it was
    "unqualifiedly made subject to [his] demands."      See 
    26 C.F.R. § 1.301-1
    (b).    Indeed, while Discount may have
    committed to making the contribution in 2002, it did not
    actually transfer the money to the Plan until 2003.      It was
    only at that point that Mogelefsky could have terminated
    Discount's participation in the Plan and obtained the policy
    along with its cash component.
    3.   Accuracy-Related Penalties
    Finally, we affirm the imposition of accuracy-
    related penalties.     Specifically, the tax court did not
    clearly err in finding that petitioners were "negligent" and
    acted in "disregard" of the tax rules and regulations.
    Section 162(a) of the Tax Code is clear:      To deduct a
    business expense, that expense must be "ordinary and
    necessary."   
    26 U.S.C. § 162
    (a).     It is also clear that
    neither § 419 nor § 419A provides an independent ground for
    deducting welfare benefit plan contributions.      See 26 U.S.C.
    -32-
    § 419 ("Contributions paid or accrued by an employer to a
    welfare benefit fund . . . shall not be deductible under
    this chapter [unless] they would otherwise be deductible
    . . . .").   Petitioners' respective decisions to deduct the
    Plan contributions in the face of such clear statutory
    language could reasonably be classified as negligent
    behavior.9
    Petitioners argue that they relied in "good faith"
    on the advice of their accountants.   Reliance on
    professional advice, however, is not, by itself, an absolute
    defense to negligence.   Freytag v. Comm'r, 
    89 T.C. 849
    , 888-
    89 (1987).   Indeed, there was little reason for petitioners
    to believe that their accountants were authorities on the
    tax treatment of welfare benefit plan contributions or that
    they had sufficiently researched the issue.   The accountants
    9
    Part of Mogelefsky's accuracy-related penalty was
    assessed on a constructive-dividend theory, but the tax
    court did not disaggregate that aspect of the deficiency
    when imposing penalties. Mogelefsky, however, does not
    provide any argument on appeal that he should not have been
    assessed an accuracy-related penalty for failing to report
    Discount's 2003 contribution as a constructive dividend to
    him. We therefore do not need to consider the matter. See
    Norton v. Sam's Club, 
    145 F.3d 114
    , 117 (2d Cir. 1998).
    -33-
    for Curcio, Jelling, and Mogelefsky told them that they had
    solely relied on the Edwards & Angell letter.
    Moreover, the record does not reflect that
    petitioners conducted an investigation sufficient to avail
    themselves of a "good faith" defense.   See 
    26 C.F.R. § 1.6664
    (c).   Had petitioners reviewed the Edwards & Angell
    letters upon which their accountants so heavily relied, they
    would have learned that Edwards & Angell made no guarantees
    as to the deductibility of Plan contributions.   In fact, the
    letters specifically warned that the Commissioner could
    disallow petitioners' deductions based on a finding that the
    amount of the contributions was not ordinary and necessary.
    CONCLUSION
    For the reasons stated above, the decisions of the
    tax court are affirmed.
    -34-