Nos. 13-4526-ag L , 13-4527-ag CON Prosser v. Comm’r In the 1 United States Court of Appeals 2 For the Second Circuit 3 4 5 August…

Nos. 13-4526-ag (L), 13-4527-ag (CON)
Prosser v. Comm’r
In the 1
United States Court of Appeals 2
For the Second Circuit 3
4
5
August Term, 2014 6
Nos. 13‐4526‐ag (L), 13‐4527‐ag (CON) 7
8
R OBERT L. PROSSER , III, MARY C. PROSSER , MCG EHEE F AMILY 9
C LINIC, P.A., 10
Petitioners‐Appellants, 11
12
v. 13
14
C OMMISSIONER OF INTERNAL R EVENUE, 15
Respondent‐Appellee. 16
17
18
Appeals from the United States Tax Court, Nos. 15646‐08, 15647‐08. 19
20
21
A RGUED: O CTOBER 8, 2014 22
D ECIDED: F EBRUARY 4, 2015 23
24
25
Before: JACOBS , S ACK, and D RONEY , Circuit Judges. 26
27
28
29

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2
Appeal from orders of the United States Tax Court upholding 1
accuracy‐related penalties against Petitioners under § 6662A of the 2
Internal Revenue Code for understatements attributable to their 3
involvement in the Benistar 419 Plan and Trust. The Tax Court held 4
that the Benistar Plan was substantially similar to the listed tax‐ 5
avoidance transaction described by the Internal Revenue Service in 6
Notice 95‐34. The Tax Court also held that Petitioners had adequate 7
notice of the penalties under § 6662A and that the increased penalty 8
rate under § 6662A(c) applied. We AFFIRM. 9
10
11
JOHN T. MORIN (Ira B. Stechel, on the 12
brief), Wormser, Kiely, Galef & Jacobs 13
LLP, New York, NY, for Petitioners‐ 14
Appellants. 15
16
R ANDOLPH L. H UTTER (Tamara W. 17
Ashford, Acting Assistant Attorney 18
General; Thomas J. Clark, on the 19
brief), Tax Division, Department of 20
Justice, Washington, D.C., for 21
Respondent‐Appellee. 22
23
24
D RONEY , Circuit Judge: 25
26
Robert and Mary Prosser (“the Prossers”) and the McGehee 27
Family Clinic (“the Clinic,” and collectively “Petitioners”) filed 28
petitions for redetermination in the United States Tax Court 29

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3
challenging the Commissioner of Internal Revenue’s 1
(“Commissioner”) determination of tax deficiencies and assessment 2
of penalties against them under § 6662A of the Internal Revenue 3
Code, 26 U.S.C. § 1 et seq. (“I.R.C.”). The Commissioner had 4
determined that Petitioners were deficient based on a contribution 5
by the Clinic to a multiple‐employer welfare benefit plan, the 6
Benistar 419 Plan and Trust (“the Benistar Plan” or “the Plan”), 7
which the Commissioner concluded was not an “ordinary and 8
necessary” business expense within the meaning of I.R.C. § 162(a). 9
The Commissioner also determined that the Benistar Plan was 10
“substantially similar” to the listed tax‐avoidance transaction 11
described by the Internal Revenue Service (“IRS”) in I.R.S. Notice 95‐ 12
34, 1995‐1 C.B. 309 (“Notice 95‐34”).1 Because the Prossers had an 13
understatement of income on their joint personal return attributable 14
1 Notice 95‐34 is one of thirty‐four currently recognized tax‐avoidance
transactions identified by the IRS in formal guidance pursuant to I.R.C.
§ 6707A(c)(2). See Recognized Abusive and Listed Transactions, IRS,
http://www.irs.gov/Businesses/Corporations/Listed‐Transactions‐‐‐LB&I‐Tier‐I‐
Issues (last visited February 3, 2015).

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4
to the Clinic’s contribution to the Benistar Plan, the Commissioner 1
assessed an accuracy‐related penalty against them under I.R.C. 2
§ 6662A, as well as an increased accuracy‐related penalty against the 3
Clinic. 4
Petitioners and other participants in the Benistar Plan who 5
had been assessed similar deficiencies by the Commissioner agreed 6
to be bound by the final resolution of a petition for redetermination 7
in Curcio v. Commissioner, 99 T.C.M. (CCH) 1478, 2010 WL 2134321 8
(2010). In Curcio v. Commissioner, 689 F.3d 217 (2d Cir. 2012), this 9
Court affirmed the Tax Court’s decision that employer contributions 10
to the Benistar Plan were not “ordinary and necessary” business 11
expenses within the meaning of the I.R.C. Id. at 225. As a result, the 12
Tax Court in these proceedings upheld the Commissioner’s 13
determination of tax deficiencies against Petitioners based on the 14
Clinic’s contribution to the Benistar Plan. The only issue in this 15

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5
consolidated appeal2 is whether the Tax Court was justified in 1
upholding the Commissioner’s imposition of additional accuracy‐ 2
related penalties under I.R.C. § 6662A, an issue not resolved in the 3
Curcio proceedings. 4
For the reasons set forth below, we hold that the Benistar Plan 5
is substantially similar to the listed tax‐avoidance transaction 6
identified by the IRS in Notice 95‐34. We therefore uphold the 7
Commissioner’s assessment of accuracy‐related penalties against the 8
Prossers and the Clinic under I.R.C. § 6662A. We also hold that 9
Petitioners had adequate notice of the potential for penalties under 10
§ 6662A and that the increased penalty rate under § 6662A(c) applies 11
to the Clinic. Accordingly, we AFFIRM the decisions of the Tax 12
Court. 13
2 The Prossers and the Clinic filed separate Tax Court petitions, which were
consolidated before the Tax Court. Separate notices of appeal were subsequently
filed.

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6
BACKGROUND 1
I. The Benistar Plan 2
Petitioners and the Commissioner “stipulated into the record 3
in this case [Curcio’s] evidence and trial testimony.” McGehee Family 4
Clinic, P.A., v. Comm’r, 100 T.C.M. (CCH) 227, 2010 WL 3583386, at *1 5
(2010). We therefore rely on Curcio’s factual findings concerning the 6
Benistar Plan. 7
The Benistar Plan was established in 1997 and was designed 8
to be a multiple‐employer welfare benefit plan under I.R.C. 9
§ 419A(f)(6). Its stated purpose was to allow employers to provide 10
“death benefits funded by individual life insurance policies for a 11
select group of individuals chosen by the Employer.” Curcio, 689 12
F.3d at 220 (quoting the Benistar Plan brochure). While I.R.C. § 419 13
generally imposes limits on the amount an employer can deduct for 14
contributions to a welfare benefit fund, the Benistar Plan was 15
intended to fall within § 419A(f)(6)’s exemption from deduction 16

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7
limits for contributions made to “any welfare benefit fund which is 1
part of a 10‐or‐more employer plan.” I.R.C. § 419A(f)(6)(A). 2
Employers that were enrolled in the Benistar Plan contributed 3
to a trust account operated by the Plan that was used to pay 4
premiums on life insurance policies for certain employees, which 5
included “one or more key Executives on a selective basis.” Curcio, 6
2010 WL 2134321, at *2, *5. However, the individual employee 7
participants selected the insurance policies. Employers could also 8
contribute additional amounts above the amount the Benistar Plan 9
required to keep the underlying insurance policy active. Id. at *5. 10
These additional contributions “remain[ed] in the trust account,” 11
were “not used to make additional payments on the underlying 12
insurance policy,” and would have substantial cash value based on 13
the portion of the contributions not necessary for coverage. Id. 14
Claiming that the Plan fell within § 419A(f)(6)’s exemption from 15
deduction limits, the promoters of the Benistar Plan informed 16

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8
participating employers that tax deductions for these contributions, 1
which the plan separately recorded for each employer, were 2
“[v]irtually [u]nlimited.” Id. 3
Employers could terminate their participation in the Benistar 4
Plan at any time. Id. at *6. From mid‐2002 to mid‐2005, the Benistar 5
Plan distributed the underlying policies of terminated accounts to 6
the insured employees for ten percent of the cash surrender value of 7
the policy. Id. Beginning in mid‐2005, the Benistar Plan began to 8
charge covered employees the entire fair market value of their 9
underlying policy when the employer terminated participation. Id. 10
at *7. However, the Benistar Plan did not require this payment 11
immediately, but rather allowed the insured employee to borrow 12
from the trust the cost of the purchase, providing as collateral the 13
insurance policy itself. Id. In lieu of charging interest on the loan, 14
the Benistar Plan charged an insured employee ten percent of the 15
net surrender value of the policy, which had to be prepaid at the 16

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9
time the insured employee requested to withdraw the underlying 1
policy. Id. 2
To summarize, the Benistar Plan allowed employers to make 3
tax‐free contributions for life insurance policies for certain “key” 4
employees, and allowed additional contributions—also tax‐free— 5
above what was required to cover the potential death benefits of the 6
policies. Those employees could then “retrieve the value in those 7
policies with minimal expense” after participation in the Benistar 8
Plan was terminated. Id. at *20. 9
In Curcio, the Tax Court held that contributions to the Benistar 10
Plan by certain other businesses—a construction company, a 11
mortgage broker, and automobile dealerships—were not “ordinary 12
and necessary” business expenses eligible for deduction under I.R.C. 13
§ 162(a). Id. The Tax Court explained that taxpayers “used [the] 14
Benistar Plan to funnel pretax business profits into cash‐laden life 15
insurance policies over which they retained effective control. As a 16

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10
result, contributions to [the] Benistar Plan are more properly viewed 1
as constructive dividends to petitioners and are not ordinary and 2
necessary business expenses under [§] 162(a).” Id. at *13. According 3
to the Tax Court, the Benistar Plan was “a thinly disguised vehicle 4
for unlimited tax‐deductible investments.” Id. at *20. 5
This Court affirmed the Tax Court’s decision in Curcio, 6
explaining that “contributions [to the Benistar Plan] were made 7
solely for the personal benefit of petitioners,” and “were a 8
mechanism by which petitioners could divert company profits, tax‐ 9
free, to themselves, under the guise of cash‐laden insurance policies 10
that were purportedly for the benefit of the businesses, but were 11
actually for petitioners’ personal gain.” Curcio, 689 F.3d at 226. As a 12
result, we held that the Tax Court was correct in concluding that 13
contributions to the Benistar Plan were not deductible by those 14
businesses, and that the employees in whose name these 15
contributions were made should have listed the contributions as 16

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11
personal income. Id. Penalties under I.R.C. § 6662A, however, were 1
not at issue in Curcio because § 6662A penalties only applied to tax 2
returns filed after October 22, 2004, see American Jobs Creation Act 3
of 2004, Pub. L. No. 108‐357, § 812(f), 118 Stat. 1418, 1580, and Curcio 4
involved improper deductions in returns filed prior to October 2004, 5
see Curcio, 689 F.3d at 220‐22.3 6
II. Accuracy‐Related Penalties Against Petitioners Under 7
I.R.C. § 6662A 8
A. Factual Background4 9
Dr. Robert Prosser, a family medicine physician, was the sole 10
owner and an employee of the McGehee Family Clinic, a C 11
3 In Curcio, we upheld penalties against the petitioners under I.R.C. § 6662(b)(1)‐
(2), but those provisions require a determination of negligence. See Curcio, 689
F.3d at 229. Section 6662A, however, was enacted in 2004 and imposes penalties
on tax‐avoidance arrangements similar to “listed transaction[s]” as described in
the I.R.C. Only the penalties imposed on the Clinic and the Prossers under
§ 6662A are at issue here.
4 While most of the parties’ stipulation of facts involved Curcio’s record, the
parties also stipulated in the Tax Court to factual matters related to the Prossers’
and the Clinic’s involvement in the Benistar Plan, as described below.

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corporation5 and family medicine practice in McGehee, Arkansas. 1
The Clinic enrolled in the Benistar Plan in May 2001 and first 2
claimed a deduction for a contribution to the Plan on the tax return 3
it filed in 2002. The Clinic then made a $50,000 contribution to the 4
Benistar Plan during its 2004 tax year on behalf of Dr. Prosser, and 5
claimed a $45,833 deduction for that contribution.6 Although IRS 6
Form 8886, a “Reportable Transaction Disclosure Statement,” was 7
available to the Clinic, the Clinic did not file any document 8
disclosing its involvement in the Benistar Plan with its tax return for 9
the 2004 tax year. The Prossers did not include the amount of the 10
Clinic’s contribution to the Benistar Plan on Dr. Prosser’s behalf as 11
income in their joint personal tax return, which they filed in 2005 for 12
the tax year ending December 31, 2004. 13
5 A C corporation is a separate legal entity for tax purposes, which is governed
by subchapter C of the I.R.C. and functions as a conduit for attributing gains and
losses to its owner. See Sidell v. Comm’r, 225 F.3d 103, 105 (2d Cir. 2000).
6 We refer to the Clinic’s tax year ending March 31, 2005 as its 2004 tax year.
Only the contribution during the 2004 tax year is at issue here. It is undisputed
that the actual cost of term life insurance coverage for Dr. Prosser for that year
was much less than the amount of the deduction taken by the Clinic.

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13
On March 21, 2008, the Commissioner sent Notices of 1
Deficiency to the Clinic for deducting its contribution to the Benistar 2
Plan during its 2004 tax year, and to the Prossers for failing to report 3
the Clinic’s contribution as taxable income. The Commissioner also 4
imposed accuracy‐related penalties against Petitioners under I.R.C. 5
§ 6662A, which establishes a twenty‐percent penalty for “reportable 6
transaction understatement[s]” attributable to a “listed” tax‐ 7
avoidance transaction or a transaction “substantially similar” 8
thereto. I.R.C. §§ 6662A(a), (b)(2)(A); 6707A(c)(2). The penalty rate 9
is increased to thirty percent under § 6662A(c) for understatements 10
that do not meet the disclosure requirements of § 6664(d)(2)(A).7 11
The Commissioner imposed penalties at the rate of twenty percent 12
in the amount of $3,500 against the Prossers, and at the increased 13
7 Section 6664(d)(2)(A) was redesignated as § 6664(d)(3)(A) in 2010. See Health
Care and Education Reconciliation Act of 2010, Pub. L. No. 111‐152,
§ 1409(c)(2)(A), 124 Stat 1029, 1069. Although it does not appear Congress
updated § 6662A(c) to reflect the redesignation of § 6664(d)(2)(A) to
§ 6664(d)(3)(A), the redesignation was effective beginning March 30, 2010, well
after the tax years at issue and the petitions were filed in this case. All
subsequent citations to § 6664(d)(2)(A) in this opinion refer to § 6664(d)(2)(A) in
effect prior to its 2010 redesignation.

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rate of thirty percent in the amount of $4,812.47 against the Clinic. 1
B. Procedural History 2
On June 25, 2008, Petitioners filed petitions in the Tax Court 3
for redetermination of the deficiencies assessed by the 4
Commissioner in connection with their involvement in the Benistar 5
Plan. Petitioners also challenged the Commissioner’s assessment of 6
§ 6662A accuracy‐related penalties against them. 7
On the question of whether contributions to the Benistar Plan 8
were “ordinary and necessary” business expenses eligible for 9
deduction, Petitioners stipulated that they would be bound by the 10
outcome of Curcio. This Court in Curcio affirmed the Tax Court’s 11
conclusion that contributions to the Benistar Plan were not 12
“ordinary and necessary” business expenses within the meaning of 13
the I.R.C. Curcio, 689 F.3d at 225. After the Curcio decision, the Tax 14
Court in these proceedings upheld the Commissioner’s 15
determinations of deficiency and imposition of I.R.C. § 6662A 16

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penalties against Petitioners. The only issue appealed from the Tax 1
Court’s decision was whether the Commissioner properly imposed 2
penalties against Petitioners under § 6662A for understatements 3
attributable to a listed tax‐avoidance transaction. 4
In the Tax Court, the Commissioner argued that the Benistar 5
Plan was substantially similar to the tax‐avoidance transaction 6
identified by the IRS in Notice 95‐34, which describes certain welfare 7
benefit plans that improperly claim to satisfy the multiple‐employer 8
exemption from deduction limits. I.R.S. Notice 95‐34, 1995‐1 C.B. 9
309. Notice 95‐34 explains which plans fail to qualify for the 10
exemption under I.R.C. § 419A(f)(6) and why contributions to these 11
plans are not ordinary and necessary business expenses eligible for 12
deduction. Id. 13
Relying on the record in Curcio, the Tax Court issued a 14
Memorandum Opinion finding that the Benistar Plan “obtains 15
similar types of tax benefits and is factually similar to the listed 16

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transaction in Notice 95‐34.” McGehee Family Clinic, P.A., 2010 WL 1
3583386, at *4. The Tax Court explained that, like the arrangements 2
described in Notice 95‐34, the Benistar Plan “claimed to satisfy the 3
requirements for the 10‐or‐more‐employers‐plan exemption under 4
[§] 419A(f)(6) and offered life insurance.” Id. at *4. The “benefits of 5
enrollment listed in the packet sent to newly enrolled employers 6
included ‘virtually unlimited deductions.’” Id. at *3. The life 7
insurance policies administered by the Plan “required large 8
contributions relative to the cost of the amount of term insurance 9
that would be required to provide the death benefits under the 10
arrangement.” Id. at *4. Relatedly, the Plan “permit[ted] employers 11
to make contributions larger than those necessary to maintain the 12
policy,” and “the contribution [was] used only for the policy to 13
which it [was] allocated.” Id. 14
The Tax Court also explained that Benistar Plan participants 15
“had the right to receive the value reflected in the underlying 16

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insurance policies purchased by [the] Benistar Plan despite the fact 1
that the payment of benefits by [the] Benistar Plan seemed to be 2
contingent upon an unanticipated event.” Id. There was “no reason 3
ever to forfeit a policy to the plan” and the evidence showed that 4
“most participants in [the] Benistar Plan and their beneficiaries 5
receive their benefits despite the alleged contingency of those 6
benefits on the occurrence of an unanticipated event.” Id. Although 7
the Tax Court noted that the Benistar Plan did not reduce benefits if 8
the assets derived from an employer’s contributions were 9
insufficient to fund the benefits, as some of the plans described in 10
Notice 95‐34 do, the Benistar Plan did “maintain separate accounting 11
of the assets attributable to contributions made by each subscribing 12
employer in an internal spreadsheet.” Id. 13
Based on this analysis, the Tax Court found that the Benistar 14
Plan was expected to obtain the same type of tax benefits as, and 15
was factually similar to, the arrangements described in Notice 95‐34. 16

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Id. Thus, the Tax Court concluded that the Benistar Plan was 1
“substantially similar” to a listed tax‐avoidance transaction and 2
upheld the Commissioner’s assessment of § 6662A penalties against 3
Petitioners. The Tax Court also concluded that the Clinic “did not 4
disclose its participation in [the] Benistar Plan in accordance with 5
[§] 6664(d)(2)(A),” and consequently was subject to the increased 6
thirty‐percent penalty rate under § 6662A(c). Id. at *5. 7
After this Court issued its Curcio decision, the Tax Court 8
entered an Order and Decision on September 3, 2013, upholding the 9
Commissioner’s deficiency determinations and assessment of 10
penalties against Petitioners based on its Memorandum Opinion. 11
Petitioners appealed on November 29, 2013, and the appeals were 12
consolidated on January 24, 2014. 13
DISCUSSION 14
I. Standard of Review 15
This Court reviews the Tax Court’s “legal conclusions de novo 16

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and its factual findings for clear error.” Callaway v. Comm’r, 231 F.3d 1
106, 115 (2d Cir. 2000). Mixed questions of law and fact “are 2
reviewed de novo, to the extent that the alleged error is in the 3
misunderstanding of a legal standard.” Diebold Found., Inc. v. 4
Comm’r, 736 F.3d 172, 183 (2d Cir. 2013); see I.R.C. § 7482(a)(1) (“The 5
United States Courts of Appeals . . . shall . . . review the decisions of 6
the Tax Court . . . in the same manner and to the same extent as 7
decisions of the district courts in civil actions tried without a jury 8
. . . .”). 9
Whether the Benistar Plan is “substantially similar” to the tax‐ 10
avoidance transaction identified in Notice 95‐34, and whether the 11
Clinic “adequately disclosed” the relevant facts concerning its 12
contribution to the Benistar Plan, are mixed questions of law and 13
fact. They are questions of law to the extent this Court must review 14
the Tax Court’s interpretation of the legal standard. They are 15
questions of fact to the extent this Court must review the Tax 16

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Court’s findings of historical fact. Many of these facts are not in 1
dispute as the parties stipulated to various aspects of Petitioners’ 2
involvement in the Benistar Plan and to Curcio’s record regarding 3
the nature of the Benistar Plan. Nevertheless, application of the facts 4
to the legal standard in this case involves mixed questions of law 5
and fact, which this Court reviews de novo. Diebold Found., 736 F.3d 6
at 183. 7
II. Accuracy‐Related Penalties Under I.R.C. § 6662A 8
I.R.C. § 6662A provides: “If a taxpayer has a reportable 9
transaction understatement for any taxable year, there shall be 10
added to the tax an amount equal to 20 percent of the amount of 11
such understatement.” I.R.C. § 6662A(a). A “reportable transaction 12
understatement” includes any understatement attributable to a 13
“listed” transaction. Id. § 6662A(b)(2)(A). A listed transaction, in 14
turn, is a transaction that “is the same as, or substantially similar to, 15
a transaction specifically identified by the Secretary [of the Treasury] 16

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as a tax avoidance transaction.” Id. § 6707A(c)(2). Finally, IRS 1
regulations define a transaction to be “substantially similar to” a 2
listed tax‐avoidance transaction if it is “expected to obtain the same 3
or similar types of tax consequences and . . . is either factually 4
similar [to] or based on the same or similar tax strategy” as the listed 5
tax‐avoidance transaction.8 Treas. Reg. § 1.6011‐4(c)(4) (as amended 6
in 2010); see Tax Shelter Regulations, 68 Fed. Reg. 10,161, 10,167 7
(Mar. 4, 2003). 8
Thus, the question before us is whether the Benistar Plan was 9
expected to obtain similar tax consequences as, and is either 10
factually similar to or based on a similar tax strategy as, the tax‐ 11
avoidance arrangements described by the IRS in Notice 95‐34. For 12
8 Petitioners do not challenge the IRS’s authority to promulgate a regulation
interpreting the term “substantially similar to” as used in I.R.C. § 6707A(c)(2),
nor do they argue that the IRS’s interpretation of the I.R.C. is not entitled to
deference. We simply note that “[b]ecause Congress has delegated to the
Commissioner the power to promulgate ‘all needful rules and regulations for the
enforcement of [the Internal Revenue Code],’ 26 U.S.C. § 7805(a), we must defer
to his regulatory interpretations of the Code so long as they are reasonable.”
McNamee v. Dep’t of the Treasury, 488 F.3d 100, 106 (2d Cir. 2007) (quoting Cottage
Sav. Ass’n v. Comm’r, 499 U.S. 554, 560‐61 (1991)).

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the reasons set forth below, we hold that the Benistar Plan is 1
substantially similar to the arrangements described in Notice 95‐34. 2
We therefore uphold the Commissioner’s accuracy‐related penalties 3
against Petitioners under § 6662A. 4
A. The Tax‐Avoidance Transaction Identified in Notice 5
95‐34 6
The IRS published Notice 95‐34 as formal guidance in 1995 7
and classified the arrangements described therein as “listed” tax‐ 8
avoidance transactions in 2000. 9 See I.R.S. Notice 95‐34, 1995‐1 C.B. 9
309; I.R.S. Notice 2000‐15, 2000‐1 C.B. 826. Notice 95‐34 describes 10
welfare benefit trusts that ostensibly “provide benefits such as life 11
insurance, disability, and severance pay benefits” to employees. 12
I.R.S. Notice 95‐34, 1995‐1 C.B. 309. The trusts claim to be multiple‐ 13
9 The IRS originally published Notice 95‐34 after certain “Voluntary Employee
Beneficiary Associations” plans came to its attention. The IRS published Notice
95‐34 to make clear that it did not consider these plans to comply with the tax
code, and that deductions under such tax‐avoidance plans would be disallowed.
See generally Cetel v. Kirwan Fin. Grp., Inc., 460 F.3d 494, 502 (3d Cir. 2006). It was
not until 2004, however, that Congress created additional accuracy‐related
penalties under § 6662A for improper deductions attributable to listed tax‐
avoidance transactions, such as the transaction identified in Notice 95‐34. See
American Jobs Creation Act of 2004, Pub. L. No. 108‐357, 118 Stat. 1418 (2004).

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employer welfare benefit plans that qualify for I.R.C. § 419A(f)(6)’s 1
exemption from limits on the amount of plan contributions eligible 2
for deduction. Id. However, these plans “require large employer 3
contributions relative to the cost of the amount of term insurance 4
that would be required to provide the death benefits under the 5
arrangement.” Id. The plans also “often maintain separate 6
accounting of the assets attributable to the contributions made by 7
each subscribing employer,” which “pursuant to formal or informal 8
arrangements or practices . . . insulates the employer to a significant 9
extent from the experience of other subscribing employers.” Id. 10
Although “benefits may appear to be contingent on the occurrence 11
of unanticipated future events, in reality, most participants and their 12
beneficiaries will receive their benefits” because trust administrators 13
can “cash[] in or withdraw[] the cash value of the insurance 14
policies.” Id. 15
Notice 95‐34 concludes that these arrangements do not satisfy 16

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the requirements for § 419A(f)(6)’s exemption “for any one of several 1
reasons, including the following”: (1) the arrangements may be 2
providing deferred compensation; (2) the arrangements may be a 3
collection of separate plans rather than a single multiple‐employer 4
plan; (3) the arrangements may be “experience rated” with respect to 5
individual employers because the trusts maintain separate 6
accounting, and employers expect that their contributions will 7
benefit only their employees; and (4) contributions under the 8
arrangements may represent prepaid expenses that are 9
nondeductible. Id. 10
B. The Benistar Plan’s Substantial Similarity to the 11
Transaction Identified in Notice 95‐34 12
As mentioned, we base our substantial similarity analysis on 13
Curcio’s record, supplemented by the additional facts relevant to the 14
Clinic and the Prossers. That record reflects the following factual 15
and tax strategy similarities between the Benistar Plan and the 16
transaction identified in Notice 95‐34: 17

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1. The Benistar Plan claimed to satisfy the requirements for 1
the multiple‐employer exemption under I.R.C. § 419A(f)(6), and the 2
purported benefits of enrollment included “Virtually Unlimited 3
Deductions.” See Curcio, 2010 WL 2134321, at *5. 4
2. The Benistar Plan offered life insurance policies that 5
allowed large contributions relative to the cost of the amount of term 6
insurance required to provide the corresponding death benefits 7
under the arrangement. See id. at *21. 8
3. Benistar Plan participants acted as though they personally 9
owned the underlying policies, and the Benistar Plan was merely a 10
conduit to the policies rather than the actual insurer. See id. at *18. 11
4. The Benistar Plan maintained separate accounting of each 12
employer’s assets based on that employer’s contributions, which 13
helped insulate contributions and benefits from the participation of 14
other subscribing employers. See id. Correspondingly, contributions 15
were used only for the policies to which they were allocated. See id. 16

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at *5. 1
5. Benistar Plan participants had the right to receive—and 2
most participants did in fact receive—the value reflected in the 3
underlying insurance policies with minimal expense by terminating 4
participation in the Plan, despite payment of benefits supposedly 5
being contingent upon unanticipated events. See id. at *13, *20. 6
Daniel Carpenter, the creator of the Benistar Plan, acknowledged 7
that there was no reason to ever forfeit an underlying insurance 8
policy so long as Benistar Plan participants were willing to abide by 9
the Plan’s distribution policies. See id. at *20. 10
Based on these factual similarities and the common tax‐ 11
avoidance strategy of allowing (i) large tax‐free contributions far 12
exceeding the cost of maintaining the underlying insurance 13
coverage, (ii) individual funding and control of the policies, and (iii) 14
retrieval of the policies with minimal expense, we hold that the 15
Benistar Plan is substantially similar to the listed tax‐avoidance 16

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transaction identified in Notice 95‐34. The Commissioner therefore 1
properly assessed § 6662A penalties against Petitioners for 2
understatements attributable to the Clinic’s Benistar Plan 3
contribution. 10 We need not identify whether any one factor in 4
particular is necessary for determining that a transaction is 5
substantially similar to a listed tax‐avoidance transaction. Rather, it 6
is sufficient under the I.R.C. and IRS regulations that the Benistar 7
Plan replicates the primary mechanics of and shares a common tax‐ 8
avoidance strategy with the transaction identified in Notice 95‐34. 9
Petitioners principally argue that to be substantially similar to 10
a listed transaction, the Benistar Plan must fail to satisfy 11
§ 419A(f)(6)’s exemption requirements for all four of the reasons 12
explained in Notice 95‐34. However, Notice 95‐34 provides that 13
10 As we have noted in prior decisions, one might also consider “whether some
level of deference ought to be given to the Commissioner’s interpretation of the
Treasury’s own regulations” in analyzing whether the Benistar Plan is
substantially similar to the transaction identified in Notice 95‐34. Robinson Knife
Mfg. Co. v. Comm’r, 600 F.3d 121, 134 n.11 (2d Cir. 2010) (citing Auer v. Robbins,
519 U.S. 452, 461 (1997)). However, “we need not decide whether Auer deference
applies here” because “the Commissioner has not argued Auer deference,” and
“even if we were to apply Auer, we would not reach a different result.” Id.

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“[i]n general, these arrangements and other similar arrangements do 1
not satisfy the requirements of the [§] 419A(f)(6) exemption and do 2
not provide the tax deductions claimed by their promoters for any 3
one of several reasons.” I.R.S. Notice 95‐34, 1995‐1 C.B. 309 (emphases 4
added). By using “in general” and “for any one of several reasons,” 5
Notice 95‐34 clearly indicates it is not necessary that an arrangement 6
fail to satisfy § 419A(f)(6)’s exemption requirements for every one of 7
the reasons provided. Indeed, Notice 95‐34 itself identifies a fifth 8
reason: contributions to such plans may not qualify as “ordinary and 9
necessary business expenses of the taxpayer [under I.R.C. § 162(a)].” 10
Id. That is the very reason contributions to the Benistar Plan are not 11
deductible. See Curcio, 689 F.3d at 226 (describing the Benistar Plan 12
as “a mechanism by which [owners of participating businesses] 13
could divert company profits, tax‐free, to themselves, under the 14
guise of cash‐laden insurance policies”). Nor do the reasons 15
provided constitute an exhaustive list as to why plans like these do 16

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not satisfy the requirements for § 419A(f)(6)’s exemption. 1
At any rate, the record shows that the Benistar Plan is, like the 2
transaction described in Notice 95‐34 in both its earlier paragraphs 3
and in reason three, “experience rated” in that the Plan maintained, 4
“formally or informally, separate accounting for each employer and 5
the employers ha[d] reason to expect that, at least for the most part, 6
their contributions [would] benefit only their own employees.” 7
I.R.S. Notice 95‐34, 1995‐1 C.B. 309. The record establishes that the 8
Benistar Plan maintained separate accounting for each participating 9
employer, and that contributions were used only for the policies to 10
which they were allocated. Curcio, 2010 WL 2134321, at *5, *18. 11
We also reject Petitioners’ argument that the substantial 12
similarity analysis cannot rely on the paragraphs in Notice 95‐34 that 13
precede the four listed “reasons” contained in the Notice. 14
Petitioners describe these preceding paragraphs as “introductory” 15
and as a “preamble.” However, Petitioners misrepresent the nature 16

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of these paragraphs and their relationship to the “reasons” that 1
follow them. These paragraphs describe the particular factual 2
characteristics of the typical tax‐avoidance transaction considered by 3
Notice 95‐34 and include a substantial description of their common 4
elements. By describing the factual characteristics of these schemes, 5
these paragraphs are especially relevant to whether a plan is 6
substantially similar to the arrangements identified in Notice 95‐34. 7
The “reasons” that follow merely explain why contributions to the 8
plans described in the preceding paragraphs do not constitute 9
“ordinary and necessary” expenses under I.R.C. § 162(a), and why 10
the plans do not qualify as multiple‐employer welfare benefit trusts 11
under § 419A(f)(6). 12
III. Increased Penalty Rate Under § 6662A(c) 13
I.R.C. § 6662A generally imposes accuracy‐related penalties at 14
a rate of twenty percent of the amount of the understatement 15
attributable to the listed transaction. I.R.C. § 6662A(a). However, 16

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§ 6662A increases the penalty rate to thirty percent when disclosure 1
requirements under § 6664(d)(2)(A)11 are not satisfied. Id. 2
§ 6662A(c). Section 6664(d)(2)(A) requires “adequate[] disclosure” of 3
“the relevant facts affecting the tax treatment” of the transaction in 4
accordance with IRS regulations. Id. § 6664(d)(2)(A). These 5
disclosures are intended to provide the IRS with information needed 6
to evaluate potentially abusive transactions. See Modification of Tax 7
Shelter Rules III, 67 Fed. Reg. 41,324, 41,325 (June 18, 2002). 8
A taxpayer has participated in a listed transaction and must 9
therefore disclose the relevant facts affecting the tax treatment of 10
that transaction “if the taxpayer’s tax return reflects tax 11
consequences or a tax strategy described in the [IRS’s] published 12
guidance” or “if the taxpayer knows or has reason to know that the 13
taxpayer’s tax benefits are derived directly or indirectly from tax 14
consequences or a tax strategy described in published guidance.” 15
11 As discussed previously, § 6664(d)(2)(A) was redesignated as § 6664(d)(3)(A) in
2010 after the tax years at issue in this case.

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Treas. Reg. § 1.6011‐4(c)(3)(i)(A). These facts must be disclosed on 1
Form 8886, a “Reportable Transaction Disclosure Statement.” Id. 2
§ 1.6011‐4(a), (d). The information provided on Form 8886 must 3
“describe the expected tax treatment and all potential tax benefits 4
expected to result from the transaction, describe any tax result 5
protection . . . with respect to the transaction, and identify and 6
describe the transaction in sufficient detail for the IRS to be able to 7
understand the tax structure of the reportable transaction.” Id. 8
§ 1.6011‐4(d). 9
The Commissioner determined that the increased thirty‐ 10
percent penalty under § 6662A(c) applied to the Clinic because its 11
understatement was attributable to a listed transaction, and the 12
Clinic did not disclose the relevant facts affecting the Benistar Plan’s 13
tax treatment on Form 8886. We agree with the Commissioner’s 14
determination. The parties stipulated that the Clinic did not disclose 15
its participation in, or the facts surrounding its participation in, the 16

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Benistar Plan on Form 8886 or any similar document. Thus, the 1
Clinic is liable for the increased thirty‐percent penalty rate under 2
§ 6662A(c) for failing to make such disclosures. 3
IV. Fair Warning 4
Petitioners also argue that they had no “fair warning” of 5
accuracy‐related penalties under § 6662A because the section is 6
unclear and the application of § 6662A in the context of the Benistar 7
Plan is difficult to understand. We disagree. 8
Due process “requires that before a[n] . . . administrative 9
penalty attaches, an individual must have fair warning of the 10
conduct prohibited by the statute or the regulation that makes such 11
a sanction possible.” Cnty. of Suffolk v. First Am. Real Estate Solutions, 12
261 F.3d 179, 195 (2d Cir. 2001). In the context of administrative 13
penalties for failure to pay a tax, the Due Process Clause’s fair 14
warning requirement “is satisfied through the notice provided by 15
the statute that establishes the obligation to pay” the underlying tax. 16

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Id.; cf. United States v. Mfrs. Nat’l Bank of Detroit, 363 U.S. 194, 200 1
(1960) (explaining that IRS “regulations gave the insured fair notice 2
of the likely tax consequences” of a taxable event). 3
Notice 95‐34 was promulgated in June 1995, see I.R.S. Notice 4
95‐34, 1995‐1 C.B. 309, and the transaction identified by Notice 95‐34 5
was formally classified as a “listed” tax‐avoidance transaction in 6
March 2000, see I.R.S. Notice 2000‐15, 2000‐1 C.B. 826. Penalties 7
under § 6662A were enacted on October 22, 2004, and made effective 8
for tax years ending after that date. See American Jobs Creation Act 9
of 2004, Pub. L. No. 108‐357, § 812(f), 118 Stat. 1418, 1580. Section 10
6707A, which defines a listed transaction as one that is “substantially 11
similar to” a tax‐avoidance transaction, was also enacted on October 12
22, 2004. See id. § 811, 118 Stat. at 1575. The IRS regulation defining 13
“substantially similar” as “factually similar [to] or based on the same 14
or similar tax strategy” was promulgated on March 4, 2003. See 15
Treas. Reg. § 1.6011‐4(c)(4) (as amended in 2010); Tax Shelter 16

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Regulations, 68 Fed. Reg. 10,161, 10,167 (Mar. 4, 2003). Disclosures 1
of listed transactions on Form 8886 were required beginning March 2
4, 2003, as well. See Treas. Reg. § 1.6011‐4(d) (as amended in 2010); 3
Tax Shelter Regulations, 68 Fed. Reg. at 10,168. Finally, the relevant 4
tax years in this case ended on December 31, 2004, for the Prossers, 5
and March 31, 2005, for the Clinic. 6
Because the relevant statutes and regulations, as well as 7
Notice 95‐34, were all in effect prior to the end of the tax years at 8
issue, we hold that Petitioners had adequate notice of accuracy‐ 9
related penalties under § 6662A. “The principle that ignorance of 10
the law is no defense applies whether the law be a statute or a duly 11
promulgated and published regulation.” United States v. Int’l 12
Minerals & Chem. Corp., 402 U.S. 558, 563 (1971). To the extent 13
Petitioners attempt to rely on a legal opinion letter asserting that the 14
Benistar Plan qualifies as a proper § 419A(f)(6) multiple‐employer 15
benefit fund, we explained in Curcio that the law firm’s letter “made 16

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36
no guarantees as to the deductibility of Plan contributions.” Curcio, 1
689 F.3d at 229. Indeed, “the letters specifically warned” Petitioners 2
that Benistar Plan contributions may not be deductible. Id. 3
While this Court has not previously held that the Benistar Plan 4
was “substantially similar” to a listed tax‐avoidance transaction, this 5
is not a case resolving ambiguous statutory language. None of the 6
relevant provisions in I.R.C. §§ 419, 419A, 6662A, 6664, or 6707A, or 7
Notice 95‐34 are unclear or difficult to apply. When it is clear that a 8
transaction is substantially similar to a listed tax‐avoidance 9
transaction under the I.R.C. and IRS regulations, participants have 10
fair warning of § 6662A penalties even if a court has not held the 11
transaction to be substantially similar to a listed transaction. 12
V. The Commissioner’s Burden of Proof 13
Finally, Petitioners argue that for the reasons set forth in their 14
brief, the Commissioner failed to meet his burden of proof to 15
demonstrate that § 6662A penalties were appropriate. The IRS has 16

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“the burden of production in any court proceeding with respect to 1
the liability of any individual for any [tax] penalty.” I.R.C. § 7491(c). 2
For the reasons set forth in this opinion, we hold that the 3
Commissioner met his burden of proof. 4
CONCLUSION 5
For the foregoing reasons, we hold that the Benistar Plan is 6
substantially similar to the listed tax‐avoidance transaction 7
identified by the IRS in Notice 95‐34. We therefore uphold the 8
Commissioner’s assessment of accuracy‐related penalties against the 9
Prossers and the Clinic under I.R.C. § 6662A. We also hold that 10
Petitioners had adequate notice of the potential for penalties under 11
§ 6662A and that the increased penalty rate under § 6662A(c) applies 12
to the Clinic. Accordingly, we AFFIRM the decisions of the Tax 13
Court. 14

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