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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.
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