Published By HG Experts.com April 24, 2012
By Lance Wallach, CLU, CHFC 419, 412i,
The facts in these cases are similar to those of Neonatology and V.R. DeAngelis M.D.P.C. The Indianapolis Life policies purchased with the contributions to the xélan 419 plan in 2001 and 2002 and to the Millennium plan in 2003 were nothing more than Dr. and Mrs. White’s personal investment in whole life insurance policies that primarily accumulated cash value for Dr. and Mrs. White personally.
Dr. White worked with Mr. Cline to develop an investment amount and strategy that was suitable to Dr. White. Dr. White determined the amount of contribution and coverage for himself, his spouse, and his children. Moreover, Dr. and Mrs. White believed that the investment would be “tax free in, tax free out”. Dr. White knew the investment was into a cash value life insurance product and expected that, in addition to tax savings, his after-tax return on investment would equal or exceed the amount that would have to be contributed. The cash value of the insurance policies was suppressed during the initial years with high surrender charges. In 2003 when the xélan 419 plan terminated the “cash value” of the policies was approximately $127,000 but the total “accumulation value” was $642,220.87.8 Dr. White’s decision to transfer the policies to the Millennium plan after the termination of the 8See supra note 4 and infra p. 52. - 46 - xélan 419 plan was to continue his original investment plan in order to “salvage the $800 thousand that * * * [he] had already pumped into Xélan.” The xélan 419 plan permitted the employer (Diogenes) to terminate its participation and to withdraw from the plan at any time. Upon termination, the underlying insurance policies could be distributed to the participating employees. Dr. White had complete control over Diogenes and thus had the ability to cause the policies to be distributed.
In 2003 when the xélan 419 plan terminated, Dr. White was presented with the option of receiving the policies by “purchasing” the policies or transferring them to Millennium. He was told that if he chose to purchase the policies he would have to pay the xélan 419 plan approximately $43,000, but that the $43,000 would be returned to him. Since by then Dr. White no longer trusted xélan, he chose to have the policies transferred to Millennium.
The Millennium plan was selected by Dr. White to continue his original investment plan, and its operation was similar to that of the xélan 419 plan. While there were subtle differences in the insureds’ ability to have the underlying insurance policies distributed to them upon the employer’s termination of participation, it is clear from the record that Millennium, at least through 2006, was willing to allow Dr.- 47 - White and Diogenes to “void” their participation in the Millennium plan and have the underlying insurance policies returned to them.
In Curcio v. Commissioner, T.C. Memo. 2010-115, and Goyak v. Commissioner, T.C. Memo. 2012-13, our decisions were largely based on the conclusion that the individual insureds always had the ability to receive the value of the underlying insurance policies purchased by the respective plans. Likewise, Dr. White had the ability to cause the policies to be distributed in these cases.
After considering the facts and weighing the evidence, we conclude, as we did in the previously cited cases, that Diogenes’ contributions to the xélan 419 plan in 2001 and 2002 and to the Millennium plan in 2003 were payments on behalf of Dr. and Mrs. White personally and were not ordinary and necessary business expenses. Because of our holding it is unnecessary for us to decide whether the contributions were subject to and limited by the rules of section 404(a)(5) or whether the arrangement was a welfare benefit fund to which the exceptions under section 419A(f)(6) apply.9
See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 9Although Diogenes may arguably be entitled to deduct the costs of current life insurance protection for term life insurance, see Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002), petitioners have not requested any such deductions.- 48 -43; V.R. DeAngelis M.D.P.C. v. Commissioner, T.C. Memo. 2007-360.
Constructive Dividends
Section 61(a) generally provides: “gross income means all income from whatever source derived”. The regulations under section 61 further provide that gross income “includes income realized in any form, whether in money, property, or services.” Sec. 1.61-1(a), Income Tax Regs.
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