Neonatology Associates, P.A. v. Commissioner, 299 F.3d 221

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299 F.3d 221 | 3rd Cir. | 2002

BEFORE: SCIRICA and GREENBERG, Circuit Judges ,(cid:13) and FULLAM, District Judge*(cid:13) (Filed: July 29, 2002)(cid:13) Neil L. Prupis(cid:13) Lampf, Lipkind, Prupis,(cid:13) Petigrow & LaBue(cid:13) 80 Main Street(cid:13) West Orange, NJ 07052(cid:13) Kevin L. Smith (argued)(cid:13) Hines Smith(cid:13) 3080 Bristol Street, Suite 540(cid:13) Costa Mesa, CA 92626(cid:13) David R. Levin(cid:13) Wiley Rein & Fielding(cid:13) 1776 K Street, N.W.(cid:13) Washington, D.C. 20006(cid:13) Attorneys for Appellants(cid:13) Eileen J. O’Connor(cid:13) Assistant Attorney General(cid:13) Kenneth L. Greene(cid:13) Robert W. Metzler (argued)(cid:13) Attorneys Tax Division(cid:13) Department of Justice(cid:13) Post Office Box 502(cid:13) Washington, D.C. 20044(cid:13) Attorneys for Appellee(cid:13) _________________________________________________________________(cid:13) * Honorable John P. Fullam, Senior Judge of the United States District(cid:13) Court for the Eastern District of Pennsylvania, sitting by designation.(cid:13) 3(cid:13) Steven J. Fram(cid:13) Archer & Greiner(cid:13) One Centennial Square(cid:13) Haddonfield, NJ 08033(cid:13) Attorneys for Amici Curiae Vijay(cid:13) Sankhla, M.D., Yale Shulman,(cid:13) M.D., Boris Pearlman, M.D., Marvin(cid:13) Cetel, M.D. and Barbara Schneider,(cid:13) M.D.(cid:13) OPINION OF THE COURT(cid:13) GREENBERG, Circuit Judge.(cid:13) I. INTRODUCTION(cid:13) This matter comes on before this court on appeal from(cid:13) decisions of the United States Tax Court entered April 9,(cid:13) 2001, in accordance with its opinion filed July 31, 2000,(cid:13) upholding the determination of the Commissioner of(cid:13) Internal Revenue that contributions made by appellants,(cid:13) two professional medical corporations, Neonatology(cid:13) Associates, P.A. and Lakewood Radiology, P.A., into(cid:13) Voluntary Employees Beneficiary Program (VEBA) plans in(cid:13) excess of the cost of term life insurance were taxable(cid:13) constructive dividends to the physicians owning the(cid:13) corporations and their spouses rather than employer(cid:13) deductible expenses. See Neonatology Assoc., P.A. v.(cid:13) Comm’r, 115 T.C. 43 (2000). We refer to the corporations(cid:13) and individuals collectively as "taxpayers." The(cid:13) consequences of the decisions were substantial for the(cid:13) taxpayers inasmuch as the professional medical(cid:13) corporations were denied deductions they had taken for the(cid:13) contributions and the individuals were charged with(cid:13) significant additional taxable dividend income. The court(cid:13) held further that the individual taxpayers were liable for(cid:13) accuracy-related negligence penalties under I.R.C.(cid:13) S 6662(a).(cid:13) Our examination of the record convinces us that the(cid:13) contributions at the heart of this dispute were so far in(cid:13) 4(cid:13) excess of the cost of annual life insurance protection that(cid:13) they could not plausibly qualify as ordinary and necessary(cid:13) business expenses in accordance with I.R.C. S 162. In(cid:13) essence, the physicians adopted a specially crafted(cid:13) framework to circumvent the intent and provisions of the(cid:13) Internal Revenue Code by having their corporations pay(cid:13) inflated life insurance premiums so that the excess(cid:13) contributions would be available for redistribution to the(cid:13) individual shareholders free of income taxes. As correctly(cid:13) recognized by the Tax Court, these contributions were(cid:13) taxable disguised dividends and not deductible expenses.(cid:13) Moreover, as the individual taxpayers could not in good(cid:13) faith avail themselves of the reliance-on-professional(cid:13) defense, the Tax Court duly held them liable for the(cid:13) accuracy-related negligence penalties. Accordingly, for the(cid:13) reasons we elaborate in more detail below, we will affirm(cid:13) the decisions of the Tax Court.(cid:13) II. BACKGROUND(cid:13) The evidence at the trial disclosed the following facts.(cid:13) Neonatology is a New Jersey professional corporation owned(cid:13) by Dr. Ophelia J. Mall. Lakewood is a New Jersey(cid:13) professional corporation owned equally at the times(cid:13) material here by Drs. Arthur Hirshkowitz, Akhilesh Desai,(cid:13) Kevin McManus, and Steven Sobo until his death on(cid:13) September 23, 1993. Subsequently Dr. Vijay Sankhla, who(cid:13) is not a party to this action, purchased Sobo’s interest. The(cid:13) spouses of the doctors, John Mall, Lois Hirshkowitz, Dipti(cid:13) Desai, Cheryl MacManus, and Bonnie Sobo, are parties to(cid:13) this action as the doctors and their spouses filed joint(cid:13) income tax returns. In addition, Bonnie Sobo is a party as(cid:13) executrix of her husband’s estate.(cid:13) Following the enactment of the Tax Reform Act of 1986(cid:13) (TRA), Pub.L. 99-514, 100 Stat. 2085, insurance salesmen(cid:13) Stephen Ross and Donald Murphy formed Pacific Executive(cid:13) Services (PES), a California partnership designed to(cid:13) provides services to retirement plan administrators and(cid:13) employee benefit advisors unfamiliar with the impact of the(cid:13) TRA. See App. at 377. Specifically, Ross and Murphy(cid:13) devised a program to allow closely held corporations to(cid:13) "create a tax deduction for [ ] contributions to [an] employee(cid:13) 5(cid:13) welfare benefit plan going in and a permanent tax deferral(cid:13) coming out." App. at 2672.(cid:13) To achieve this end, PES created two voluntary(cid:13) employees’ beneficiary associations, the Southern California(cid:13) Medical Profession Association VEBA (SC VEBA) and the(cid:13) New Jersey Medical Profession Association VEBA (NJ VEBA).1(cid:13) A VEBA, as defined in I.R.C. S 501(c)(9), is a tax-exempt(cid:13) program providing members, their dependents, or(cid:13) designated beneficiaries with life, sick, accident, or other(cid:13) benefits "if no part of the net earnings of such association(cid:13) inures (other than through such payments) to the benefit of(cid:13) any private shareholder or individual."(cid:13) Under the PES VEBA programs, each participating(cid:13) employer adopts its own plan, maintaining a trust account(cid:13) and designating a trust administrator with exclusive control(cid:13) over all assets. The plan adoption agreement obligates(cid:13) employers to make, whether in the form of group insurance(cid:13) policies or group annuities, contributions towards the life(cid:13) insurance benefits of employees and their beneficiaries,(cid:13) based on a multiple of each employee’s annual(cid:13) compensation. Benefits payable under any plan are paid(cid:13) solely from that plan’s allocable share of the trust fund,(cid:13) and the participating employer, administrator, and trustee(cid:13) are not liable for any shortfall in the funds required to be(cid:13) paid. Upon termination of a plan, all its remaining assets(cid:13) are distributed to the employer’s covered employees in(cid:13) proportion to their compensation. PES enlisted the services(cid:13) of Barry Cohen, a longtime insurance salesman with the(cid:13) Kirwan companies, to market the VEBA programs to(cid:13) medical professionals.(cid:13) The SC VEBA plans at issue in this case, the Neonatology(cid:13) Employee Welfare Plan and the Lakewood Employee Welfare(cid:13) Plan, shared a common feature: both purchased(cid:13) continuous group (C-group) term policy certificates from the(cid:13) Inter-American Insurance Co. of Illinois, Commonwealth(cid:13) _________________________________________________________________(cid:13) 1. Notwithstanding what might be regarded as a geographical anamoly,(cid:13) only the SC VEBA is involved here. There was, however, an additional(cid:13) petitioner in the Tax Court, not a party on this appeal, Wan B. Lo, d/b/a(cid:13) Marlton Pain Control and Acupuncture Center, who established a plan(cid:13) under the NJ VEBA.(cid:13) 6(cid:13) Life Insurance Co., and Peoples Security Life Insurance Co.(cid:13) The C-group product provided routine group term life(cid:13) insurance with an added component, a "special" conversion(cid:13) policy through which a covered employee, under certain(cid:13) circumstances,2 could opt to convert his or her policy to an(cid:13) individual policy, the C-group conversion universalife (UL)(cid:13) policy. By converting from a C-group to an individual UL(cid:13) policy, the employee could access funds paid by the(cid:13) employer to the group policy that exceeded the applicable(cid:13) mortality charge, i.e. the cost of insurance. The excess(cid:13) funds, depending on the year in which the conversion takes(cid:13) place,3 are paid out with interest as so-called "conversion(cid:13) credits."(cid:13) In addition to being able to access surplus amounts, a(cid:13) policyholder upon conversion to the UL policy may borrow(cid:13) any amounts against his or her policies not required to(cid:13) keep the policies in force.4 When the policyholder dies, the(cid:13) loans are to be repaid from the policy death benefits, which(cid:13) ordinarily are not subject to income tax. See I.R.C. S 101.(cid:13) Of course, by borrowing the money the taxpayer effectively(cid:13) would be withdrawing money the medical corporations paid(cid:13) for the conversion privilege on a tax free basis. Thus, as if(cid:13) _________________________________________________________________(cid:13) 2. Under the policies, conversion was allowed when group coverage(cid:13) ceased because (1) the employee ceased employment, (2) the employee(cid:13) left the class eligible for coverage, (3) the underlying contract terminated,(cid:13) (4) the underlying contract was amended to terminate or reduce the(cid:13) insurance of a class of insured employees, or (5) the underlying contract(cid:13) terminated as to an individual employer or plan. See App. at 1836, 1846.(cid:13) 3. Under the applicable schedule, none of the conversion credit balance(cid:13) is transferred to the C-group conversion UL policy if conversion occurs(cid:13) in the C-group term policy’s first year. However, if conversion takes place(cid:13) in the C-group term policy’s fourth year or beyond, 95% of the(cid:13) conversion credit balance is transferred to the C-group conversion UL(cid:13) policy. Policyholders could not receive more than 95% of their conversion(cid:13) credit balance because a five percent commission was paid automatically(cid:13) to the insurance agent upon conversion. See App. at 2161-62, 4710,(cid:13) 4713.(cid:13) 4. Notably, the interest due on any loan policy was equal to the interest(cid:13) credited on the asset accumulation. In other words, there were no out-(cid:13) of-pocket costs to the debtor-policyholder. See App. at 2164. To hedge(cid:13) the attendant C-group product risks, Inter-American and Commonwealth(cid:13) reinsured with a third party.(cid:13) 7(cid:13) by magic, cash derived from the corporations would be(cid:13) withdrawn without tax. Each of the physician taxpayers,(cid:13) other than Dr. Sobo, in fact converted at least one C-group(cid:13) term certificate to a special policy providing conversion(cid:13) credits. See App. at 426-29, 439-41.(cid:13) Neonatology, on the basis of conversations between its(cid:13) principal, Dr. Mall, and Cohen, established the Neonatology(cid:13) Plan under the SC VEBA on January 31, 1991, effective(cid:13) January 1, 1991. Under the plan, each covered employee(cid:13) was to receive a life insurance benefit equal to 6.5 times the(cid:13) employee’s compensation of the prior year. See App. at 434,(cid:13) 1807. John Mall, Dr. Mall’s husband, was not a paid(cid:13) employee of Neonatology and thus was not eligible to join(cid:13) the plan. Nevertheless, Dr. Mall and PES, the plan(cid:13) administrator, allowed Mr. Mall to join the plan, making(cid:13) him eligible to receive a death amount commensurate to(cid:13) that payable under life insurance that he had owned(cid:13) outside the plan ($500,000). See Supp. App. at 108-09. The(cid:13) Neonatology Plan purchased three C-group life insurance(cid:13) policies, two on Dr. Mall’s life and one on Mr. Mall’s life.(cid:13) See App. at 434-39. Neonatology contributed to the(cid:13) Neonatology Plan during each year from 1991 through 1993(cid:13) and, for each subject year, claimed a tax deduction for(cid:13) those contributions and other related amounts.(cid:13) Lakewood, on the basis of conversations between its(cid:13) principals and Cohen, established the Lakewood Plan under(cid:13) the SC VEBA on December 28, 1990, effective January 1,(cid:13) 1990. Under the plan, each covered employee was to(cid:13) receive a life insurance benefit equal to 2.5 times his or her(cid:13) prior-year compensation. See App. at 387. Lakewood(cid:13) amended its plan as of January 1, 1993, to increase the(cid:13) compensation multiple to 8.15. The Lakewood Plan(cid:13) purchased 12 C-group life insurance policies on the lives of(cid:13) Drs. Hirshkowitz, Desai, Sobo, McManus, and Sankhla and(cid:13) three group annuities toward future premiums on the(cid:13) policies. See App. at 400-26. Lakewood also purchased(cid:13) three C-group policies outside of the Lakewood Plan. The(cid:13) individual owners on their own behalf determined the(cid:13) amounts contributed by Lakewood to the SC VEBA. See(cid:13) App. at 1015-16, 3674-87. For each subject year, Lakewood(cid:13) claimed a tax deduction for those contributions and other(cid:13) related amounts.(cid:13) 8(cid:13) The IRS audited Neonatology’s tax returns for calendar(cid:13) years 1992 and 1993 and Lakewood’s tax returns for fiscal(cid:13) year 1991 (ending October 31, 1991) and calendar years(cid:13) 1992 and 1993. As a consequence of the audits, the(cid:13) Commissioner made the following determinations. First,(cid:13) with respect to the deductions claimed by Neonatology for(cid:13) amounts paid to the SC VEBA and by Lakewood for(cid:13) amounts paid to the SC VEBA and to the three non-plan C-(cid:13) group policies, he allowed only the cost of annual term life(cid:13) insurance protection and disallowed the excess amounts of(cid:13) $43,615 and $986,826 for Neonatology and Lakewood(cid:13) respectively. See App. at 2265-66, 2283-85. The(cid:13) Commissioner based his disallowance on alternative bases:(cid:13) (1) the excess contributions were not ordinary and(cid:13) necessary business expenses under I.R.C. S 162(a); (2) even(cid:13) if the amounts constituted ordinary and necessary business(cid:13) expenses, they nevertheless were not deductible under(cid:13) I.R.C. SS 404(a) and 419(a), which limit the deductibility of(cid:13) contributions paid to deferred compensation plans and(cid:13) welfare benefit plans. See App. at 2266, 2285.5(cid:13) Second, the Commissioner determined with respect to the(cid:13) individual owners that amounts paid to the SC VEBA(cid:13) program increased personal incomes by $39,343 for Dr.(cid:13) Mall and her husband, $219,806 for Dr. Desai, $56,107 for(cid:13) Dr. McManus, $601,849 for Dr. Hirshkowitz, and $101,314(cid:13) for Dr. Sobo (his estate). See App. at 2271, 2311, 2297,(cid:13) 2320. The Commissioner included the excess contributions(cid:13) as income to the individual taxpayers on alternative bases:(cid:13) (1) the amounts were deposited in the plans for the(cid:13) economic benefit of the individual taxpayers and as such(cid:13) constituted constructive dividends under I.R.C.SS 61(a)(7)(cid:13) and 301; (2) assuming that the Neonatology and Lakewood(cid:13) Plans constituted deferred compensation plans, the excess(cid:13) contributions were includible under section 402(b). See(cid:13) _________________________________________________________________(cid:13) 5. Specifically, the Commissioner ruled that as deferred compensation(cid:13) plans, the Neonatology and Lakewood Plans did not satisfy the I.R.C.(cid:13) S 404(a)(5) "separate account" requirement for the contributions to be(cid:13) deductible. If the plans were characterized as welfare benefit funds,(cid:13) I.R.C. S 419(b) limited the deductions as the plans could not qualify for(cid:13) the "10-or-more-employer plans" exception to section 419(b) in I.R.C.(cid:13) S 419A(f)(6).(cid:13) 9(cid:13) App. at 2271, 2297, 2311, 2320. Lastly, the Commissioner(cid:13) determined that by reason of the underpayment of taxes(cid:13) the individual taxpayers were subject to penalties under(cid:13) I.R.C. S 6662(a).(cid:13) Neonatology, Lakewood, and the individual owners(cid:13) petitioned the Tax Court challenging the IRS’s(cid:13) determinations. After a bench trial, the court sustained the(cid:13) Commissioner on the ground that:(cid:13) The Neonatology Plan and the Lakewood Plan are(cid:13) primarily vehicles which were designed and serve in(cid:13) operation to distribute surplus cash surreptitiously (in(cid:13) the form of excess contributions) from the corporations(cid:13) for the employee/owners’ ultimate use and benefit . . . .(cid:13) The premiums paid for the C-group term policy(cid:13) exceeded by a wide margin the cost of term life(cid:13) insurance . . . . What is critical to our conclusion is(cid:13) that the excess contributions made by Neonatology and(cid:13) Lakewood conferred an economic benefit on their(cid:13) employee/owners for the primary (if not sole) benefit of(cid:13) those employee/owners, that the excess contributions(cid:13) constituted a distribution of cash rather than a(cid:13) payment of an ordinary and necessary business(cid:13) expense, and that neither Neonatology nor Lakewood(cid:13) expected any repayment of the cash underlying the(cid:13) conferred benefit.(cid:13) Neonatology, 115 T.C. at 89-91.(cid:13) Without addressing the alternative grounds for the(cid:13) Commissioner’s conclusions, the court rejected taxpayers’(cid:13) arguments that the possibility of forfeiture in certain(cid:13) situations like policy lapse or death rendered all excess(cid:13) payments into de facto contributions to life insurance(cid:13) protection. Id. at 89-90 ("The mere fact that a C-group term(cid:13) policyholder may forfeit the conversion credit balance does(cid:13) not mean, as petitioners would have it, that the balance(cid:13) was charged or paid as the cost of term life insurance.").(cid:13) The court also rejected the idea that contributions which in(cid:13) fact did not fund term life insurance were paid as(cid:13) compensation for services, rather than dividends, because(cid:13) as a factual matter neither Neonatology nor Lakewood had(cid:13) the requisite compensatory intent when the contributions(cid:13) 10(cid:13) were made. Id. at 93. Lastly, the court agreed with the(cid:13) Commissioner that the individual taxpayers were in fact(cid:13) negligent and could not circumvent the accuracy-related(cid:13) penalties by asserting a good faith, reliance-on-professional(cid:13) defense nor could they do so by claiming that the case(cid:13) involved tax matters of first impression.(cid:13) The Tax Court entered its decisions on April 9, 2001.(cid:13) Taxpayers timely appealed on July 6, 2001. We have(cid:13) jurisdiction over this appeal pursuant to I.R.C.S 7482, and(cid:13) the Tax Court had jurisdiction over the petitions pursuant(cid:13) to I.R.C. SS 6213(a) and 7442.(cid:13) III. DISCUSSION(cid:13) There are three principal issues before us on appeal: (1)(cid:13) whether the Tax Court correctly determined that the(cid:13) amounts contributed in excess of the cost of per annum(cid:13) term life insurance were not ordinary and necessary(cid:13) business expenses and therefore not deductible; if yes, (2)(cid:13) whether those amounts constituted dividends, includible as(cid:13) taxable individual income, or compensation to the(cid:13) individual taxpayers; and, (3) whether the individual(cid:13) taxpayers were negligent. Our review of the Tax Court’s(cid:13) legal conclusions is plenary and is based on the"clearly(cid:13) erroneous" standard for its findings of fact. See ACM P’ship(cid:13) v. Comm’r, 157 F.3d 231, 245 (3d Cir. 1998); Pleasant(cid:13) Summit Land Corp. v. Comm’r, 863 F.2d 263, 268 (3d Cir.(cid:13) 1988). Moreover, taxpayers bear the burden of refuting the(cid:13) IRS’s determinations. See Welch v. Helvering, 290 U.S. 111,(cid:13) 115, 54 S.Ct. 8, 9 (1933).6(cid:13) A. The Deficiencies(cid:13) Section 162(a) of the Internal Revenue Code7 allows for(cid:13) _________________________________________________________________(cid:13) 6. The burden of proof may be shifted to the Commissioner in certain(cid:13) circumstances for audits conducted after July 22, 1998. See I.R.C.(cid:13) S 7491. These modifications to the Internal Revenue Code have no(cid:13) bearing on this case.(cid:13) 7. The Internal Revenue Code, I.R.C. S 162(a), provides that "[t]here shall(cid:13) be allowed as a deduction all the ordinary and necessary expenses paid(cid:13) or incurred during the taxable year in carrying on any trade or(cid:13) business."(cid:13) 11(cid:13) the deduction of all ordinary and necessary expenses(cid:13) incurred in carrying on a trade or business providing five(cid:13) requirements are met: the item claimed as deductible (1)(cid:13) was paid or incurred during the taxable year; (2) was for(cid:13) carrying on a trade or business; (3) was an expense; (4) was(cid:13) a necessary expense; and (5) was an ordinary expense. See(cid:13) Comm’r v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352, 91(cid:13) S.Ct. 1893, 1898 (1971). Beyond peradventure, employee(cid:13) benefits like life insurance are a form of compensation(cid:13) deductible by the employer.8 See Treas. Reg. S 1.162-10(a);(cid:13) see also Joel A. Schneider, M.D., S.C. v. Comm’r, 1992 T.C.(cid:13) Memo. 992-24, 63 T.C.M. (C.C.H.) 1787. To the extent,(cid:13) however, that Neonatology’s and Lakewood’s expenditures(cid:13) did not fund term life insurance, the Tax Court found that(cid:13) they did not meet the five requirements delineated above(cid:13) and therefore were not deductible. This factual finding was(cid:13) not clearly erroneous. See Comm’r v. Heininger , 320 U.S.(cid:13) 467, 475, 64 S.Ct. 249, 254 (1943).(cid:13) The record amply supports the conclusion that taxpayers(cid:13) paid artificially inflated premiums in a creative bookkeeping(cid:13) ploy conceived by their insurance specialists to exploit what(cid:13) they thought were loopholes in the tax laws. Indeed, we do(cid:13) not see how a court examining this case could conclude(cid:13) otherwise. Charles DeWeese, the Commissioner’s expert,(cid:13) testified that amounts paid into the C-group policies(cid:13) exceeded conventional life insurance premiums by nearly(cid:13) 500%. See App. at 804-08, 2156.9 Evidence at trial(cid:13) _________________________________________________________________(cid:13) 8. Of course, the mere fact that the benefit is a form of deductible(cid:13) compensation does not necessarily mean that it is taxable to the(cid:13) employee. See I.R.C. S 79. We note that the parties do not treat section(cid:13) 79 as significant here.(cid:13) 9. It should be noted that the Tax Court made certain credibility(cid:13) determinations, finding DeWeese, an independent consulting actuary, to(cid:13) be a "reliable, relevant, and helpful" witness whose testimony was(cid:13) bolstered by a voluminous record with stipulations to more than 2,000(cid:13) facts and with more than 1,500 exhibits. See Neonatology, 115 T.C. at(cid:13) 86-87. By the same token, the court found that the opinions expressed(cid:13) by taxpayers’ sole expert, Jay Jaffe, were of minimal help, considering(cid:13) his close relationship to one of the insurance companies that provided(cid:13) the C-group product at issue in the case. See id. (experts who act as(cid:13) advocates, "can be viewed only as hired guns of the side that retained(cid:13) 12(cid:13) demonstrated that Dr. Mall knew that term life insurance(cid:13) was substantially more expensive to buy through the SC(cid:13) VEBA than through other plans offered to her under the(cid:13) auspices of the American Medical Association and the(cid:13) American Academy of Pediatrics. She nevertheless opted to(cid:13) form the Neonatology Plan because she believed that it(cid:13) offered her the best tax benefits. See App. at 1025. Dr.(cid:13) Hirshkowitz testified that Lakewood intentionally paid more(cid:13) expensive premiums on the C-group policies than it would(cid:13) have for conventional life insurance protection. See App. at(cid:13) 998. Dr. Desai, another Lakewood owner, testified that his(cid:13) independent personal life insurance cost him substantially(cid:13) less than the policies issued pursuant to the SC VEBA. See(cid:13) App. at 1047. Like Dr. Mall, the Lakewood owners(cid:13) nevertheless invested in the SC VEBA program because of(cid:13) Cohen’s representation of tax benefits and cash returns(cid:13) that they could anticipate receiving. See App. at 1014-15.(cid:13) The record also reveals that excess premium amounts did(cid:13) not pay for actual current year life insurance protection but(cid:13) rather paid for conversion credits. The compliance manager(cid:13) of the Providian Corporation, the parent of the(cid:13) Commonwealth Life Insurance Company which issued(cid:13) policies involved here, stated in a letter to the IRS that the(cid:13) "premiums paid for the term policy are higher than the(cid:13) traditional term policy because of the conversion privilege(cid:13) and the costs of conversion credits." App. at 3690.(cid:13) DeWeese, belying taxpayers’ claim that C-group premiums(cid:13) were higher than those under ordinary term life policies(cid:13) because they were calibrated to the higher risks of longer(cid:13) _________________________________________________________________(cid:13) them, and this not only disparages their professional status but(cid:13) precludes their assistance to the court in reaching a proper and(cid:13) reasonably accurate conclusion") (quoting Jacobson v. Comm’r, T.C.(cid:13) Memo. 1989-606, 58 T.C.M. (C.C.H.) 645)). The court also found that(cid:13) some of taxpayers’ fact witnesses "testified incredibly with regard to(cid:13) material aspects of this case" and that their testimony, for the most part,(cid:13) was "self-serving, vague, elusive, uncorroborated, and/or inconsistent(cid:13) with documentary or other reliable evidence." Id. These types of(cid:13) credibility determinations are ensconced firmly within the province of a(cid:13) trial court, afforded broad deference on appeal. See Dardovitch v.(cid:13) Haltzman, 190 F.3d 125, 140 (3d Cir. 1999).(cid:13) 13(cid:13) term employees in small markets,10 testified that the bulk of(cid:13) the gross premiums went to accumulate assets for(cid:13) distribution to the individual participants upon conversion.(cid:13) See App. at 2173. In addition, the record supports the(cid:13) conclusion that payments made to the Lakewood Plan for(cid:13) annuities were made not to fund current life insurance(cid:13) protection for employees but rather were made as an(cid:13) investment for the trustee to pay premiums on future C-(cid:13) group premiums. See App. at 976, 993-94, 1041-42.(cid:13) In sum, the evidence fully supports, indeed compels, the(cid:13) finding that the contributions in excess of the amounts(cid:13) necessary to pay for annual term life insurance protection(cid:13) were distributions of surplus cash and not ordinary and(cid:13) necessary business expenses. Considering the sound(cid:13) reasoning of the Tax Court and our own intensive review of(cid:13) the facts here, we conclude that it is implausible that the(cid:13) owners of Neonatology and Lakewood, educated and highly(cid:13) trained medical professionals, knowingly would have(cid:13) overpaid substantially for term life insurance unless they(cid:13) contemplated receiving an added boon such as a tax-free(cid:13) return of the excess contributions.(cid:13) Taxpayers advance two arguments to the effect that the(cid:13) court erred by not limiting its consideration to the written(cid:13) plan documents and life insurance contracts rather than(cid:13) relying on extraneous evidence like the plan marketing(cid:13) materials which discuss the availability of conversion(cid:13) credits. First, they maintain that the Neonatology and(cid:13) Lakewood SC VEBA programs were employee benefit plans(cid:13) under the Employee Retirement Income Security Act, 29(cid:13) U.S.C. S 1001 et seq., (ERISA). Thus, they contend that(cid:13) representations made outside of the plan documents(cid:13) cannot be used to consider rights and obligations arising(cid:13) out of the plans. See Br. of Appellants at 35. Second, they(cid:13) argue that under governing state insurance law, the tax(cid:13) implications of a group term life insurance policy are(cid:13) determined only on the basis of the policy language itself.(cid:13) As the literal provisions of the plans discuss only insurance(cid:13) benefits -- that is, a death benefit and an option to convert(cid:13) to an individual policy upon termination of employment --(cid:13) _________________________________________________________________(cid:13) 10. See Br. of Appellants at 44 and n.30.(cid:13) 14(cid:13) but say nothing about excess contributions returning as(cid:13) conversion credits, taxpayers claim that the Tax Court was(cid:13) compelled to conclude from the strict form of their plans(cid:13) that all contributions in fact went to providing insurance(cid:13) benefits.(cid:13) Inasmuch as taxpayers did not raise the ERISA issue(cid:13) before the Tax Court, we need not consider it on this(cid:13) appeal. See Visco v. Comm’r, 281 F.3d 101, 104 (3d Cir.(cid:13) 2001). While we recognize that in some exceptional(cid:13) circumstances an appellate court may review a defaulted(cid:13) argument, in this case there are compelling reasons(cid:13) militating against our overlooking procedural norms to(cid:13) consider whether ERISA governed the SC VEBA programs(cid:13) as our determination may prejudice persons not parties to(cid:13) this case.11(cid:13) In any event, even assuming for purposes of argument(cid:13) that the plans were employee benefit plans under ERISA,(cid:13) the fact remains that under well-established tax principles(cid:13) a court is not limited to plan documents in determining the(cid:13) tax consequences of a transaction. See, e.g., Comm’r v.(cid:13) Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708(cid:13) (1945) ("The incidence of taxation depends upon the(cid:13) substance of a transaction."); ACM P’ship, 157 F.3d at 247(cid:13) ("we must look beyond the form of the transaction to(cid:13) determine whether it has the economic substance that its(cid:13) form represents") (citations omitted); Lerman v. Comm’r,(cid:13) 939 F.2d 44, 54 (3d Cir. 1991) (Commissioner and courts(cid:13) have "the power and duty . . . to look beyond the mere(cid:13) forms of transactions to their economic substance and to(cid:13) _________________________________________________________________(cid:13) 11. An amicus brief has been filed in this case on behalf of five(cid:13) physician-participants in the VEBA program who have filed a civil(cid:13) complaint against the insurance companies that wrote the C-group(cid:13) policies, Sankhla v. Commonwealth Life Ins. Co. et al., No. 01-CV-4761(cid:13) (U.S.D.C. N.J.). Amici have an interest in the outcome of this case(cid:13) because the extent to which we address whether the plans are governed(cid:13) by ERISA could affect resolution of the issue of whether their state law(cid:13) claims against the insurance companies are preempted. See Amicus Br.(cid:13) at 1-2. Rather than needlessly prejudice the rights of litigants in(cid:13) separate proceedings, we do not discuss the applicability of ERISA to the(cid:13) VEBA plans.(cid:13) 15(cid:13) apply the tax laws accordingly.").12 The cases cited by(cid:13) taxpayers,13 on the other hand, involve only disputes over(cid:13) _________________________________________________________________(cid:13) 12. Taxpayers, conflating the so-called "substance-over-form" doctrine(cid:13) with the "economic substance" or "sham transaction" doctrine,(cid:13) mistakenly argue as well that a court may not disregard the form of an(cid:13) arrangement until it determines that the arrangement lacks any(cid:13) economic substance other than obtaining tax deductions. See Br. of(cid:13) Appellants at 41 ("If . . . there is any economic substance to the(cid:13) arrangement apart from the alteration of tax liabilities, then the form of(cid:13) the arrangement must be respected, even if the arrangement was(cid:13) motivated by tax avoidance or minimization."). In actuality, the two(cid:13) doctrines are distinct. The substance-over-form doctrine is applicable to(cid:13) instances where the "substance" of a particular transaction produces tax(cid:13) results inconsistent with the "form" embodied in the underlying(cid:13) documentation, permitting a court to recharacterize the transaction in(cid:13) accordance with its substance. The economic substance doctrine, in(cid:13) contrast, applies where the economic or business purpose of a(cid:13) transaction is relatively insignificant in relation to the comparatively(cid:13) large tax benefits that accrue (that is, a transaction "which actually(cid:13) occurred but which exploit[s] a feature of the tax code without any(cid:13) attendant economic risk," Horn v. Comm’r, 968 F.2d 1229, 1236 n.8(cid:13) (D.C.Cir. 1992)); in that situation, where the transaction was an(cid:13) attempted tax shelter devoid of legitimate economic substance, the(cid:13) doctrine governs to deny those benefits. See generally Rogers v. United(cid:13) States, 281 F.3d 1108, 1113-18 (10th Cir. 2002). The Tax Court in this(cid:13) case, however, based its decision solely on the substance-over-form(cid:13) doctrine, finding that the form of the VEBA was not reflective of its(cid:13) genuine substance. In addition to the evidence we have set forth, the Tax(cid:13) Court’s determination further is reinforced, inter alia, by the fact that(cid:13) taxpayers were allowed to convert the C-group term policies to individual(cid:13) C-group conversion UL policies even though none of the five required(cid:13) conditions for conversion were present, see Supp. App. at 106, 111-12,(cid:13) and by the fact that the amount of life insurance taken on the Lakewood(cid:13) principals did not correspond to the amount of benefits for which they(cid:13) were eligible under the plan documents. See, e.g., App. at 389, 400-03(cid:13) (Dr. Hirshkowitz had C-group certificates on his life for over a million(cid:13) dollars even though he was eligible for life benefits of less than $500,000(cid:13) -- 2.5 times his 1991 compensation of $181,199.09). Moreover, even(cid:13) under the economic substance doctrine taxpayers would be hard-pressed(cid:13) to argue that the transactions involving the excess term life insurance(cid:13) payments had sufficient economic substance to be respected for tax(cid:13) purposes.(cid:13) 13. See Br. of Appellants at 29-36 (citing Gruber v. Hubbard Bert Karle(cid:13) Weber, Inc., 159 F.3d 780 (3d Cir. 1998); Haberern v. Kaupp Vascular(cid:13) Surgeons Ltd. Defined Benefit Pension Plan, 24 F.3d 1491 (3d Cir. 1994);(cid:13) Schoonejongen v. Curtiss-Wright Corp., 18 F.3d 1034 (3d Cir. 1994);(cid:13) Henglein v. Informal Plan for Plant Shutdown Benefits, 974 F.2d 391 (3d(cid:13) Cir. 1992)).(cid:13) 16(cid:13) ERISA benefits between private parties, not disputes over(cid:13) tax liabilities between private parties and the(cid:13) Commissioner. While the cases lay out certain principles for(cid:13) determining rights and obligations under an ERISA plan,(cid:13) including the standard contract theory that the literal(cid:13) terms of a plan document must guide all analysis, the(cid:13) cases say nothing about the proper evidentiary protocol for(cid:13) evaluating the tax ramifications of an employer benefit(cid:13) plan. In sum, we have no intention of importing ERISA(cid:13) principles into this tax dispute.(cid:13) Moreover, we reject taxpayers’ contention that the Tax(cid:13) Court erred by not limiting its evaluation to the plan(cid:13) documents in light of state insurance law. The court did(cid:13) not construe or interpret the terms of the individual(cid:13) taxpayers’ life insurance policies, but rather characterized(cid:13) the contributions made towards those policies for purposes(cid:13) of determining tax liabilities. While the former endeavor(cid:13) indeed would implicate state law,14 the latter is singularly a(cid:13) question of federal law. See, e.g., Thomas Flexible Coupling(cid:13) Co. v. Comm’r, 158 F.3d 828, 830 (3d Cir. 1946).(cid:13) In view of our conclusion that the contributions in(cid:13) dispute were not ordinary and necessary business expenses(cid:13) under I.R.C. S 162(a), we next consider whether the district(cid:13) court erred in determining that the contributions(cid:13) constituted dividends rather than compensation to the(cid:13) individual taxpayers and thus deductible to the(cid:13) corporations on that basis.15 Under I.R.C. S 316(a), a(cid:13) dividend is a distribution of property made by a corporation(cid:13) to its shareholders out of its earnings and profits. See(cid:13) Comm’r v. Makransky, 321 F.2d 598, 601-03 (3d Cir. 1963).(cid:13) _________________________________________________________________(cid:13) 14. Curiously, taxpayers fail to specify which state’s insurance law(cid:13) applies: New Jersey, where all of the physicians reside, or Pennsylvania,(cid:13) where the insurance agents who promoted the VEBA were located.(cid:13) 15. In their brief, taxpayers indicate that the Tax Court erred in(cid:13) characterizing the "disallowed contributions as constructive dividends(cid:13) rather than deductible compensation." Br. at 46 (emphasis added). See(cid:13) King’s Ct. Mobile Home Park, Inc. v. Comm’r, 98 T.C. 511, 512 (1992)(cid:13) ("The first question is whether the diversion of $58,365 of petitioner’s(cid:13) income by its controlling shareholder for personal use constitutes the(cid:13) payment of deductible wages or the distribution of a dividend.") (footnote(cid:13) omitted).(cid:13) 17(cid:13) Dividends are taxed as a component of gross income. See(cid:13) I.R.C. S 61(a)(7). A shareholder, even if the corporation has(cid:13) dispensed with the formalities of declaration, may be(cid:13) charged with a disguised or constructive dividend if the(cid:13) corporation confers a direct benefit on him from available(cid:13) earnings and profits without expectation of repayment. See,(cid:13) e.g., Crosby v. United States, 496 F.2d 1388-89 (5th Cir.(cid:13) 1974); Noble v. Comm’r, 368 F.2d 439, 443 (9th Cir. 1966);(cid:13) see also Magnon v. Comm’r, 73 T.C. 980, 993-94 (1980)(cid:13) ("Where a corporation confers an economic benefit on a(cid:13) shareholder without the expectation of repayment, that(cid:13) benefit becomes a constructive dividend, taxable to the(cid:13) shareholder, even though neither the corporation nor the(cid:13) shareholder intended a dividend.").(cid:13) In this case, the record fully supports the conclusion of(cid:13) the Tax Court that the individual taxpayers were chargeable(cid:13) with constructive dividends. Indeed, Neonatology and(cid:13) Lakewood, by design surrendering any expectation of(cid:13) remuneration, purchased products that generated a(cid:13) considerable economic bounty for their shareholders in the(cid:13) form of conversion credits. Furthermore, nothing in the(cid:13) record illustrates that taxpayers diverted these corporate(cid:13) assets with the requisite "compensatory intent." See King’s(cid:13) Ct. Mobile Home Park, Inc. v. Comm’r, 98 T.C. 511, 514-15(cid:13) (1992) (business expense may be deducted as(cid:13) compensation only if the payor intends at the time that the(cid:13) payment is made to compensate the recipient for services(cid:13) performed).16 Moreover, support for a conclusion, though(cid:13) certainly not dispositive, that the excess contributions were(cid:13) not paid as compensation for services rendered is supplied(cid:13) by the fact that the Neonatology and Lakewood plans were(cid:13) made available only to those individuals who owned the(cid:13) corporations and not to their non-equity employees.(cid:13) Furthermore, Dr. Mall directed Neonatology to purchase the(cid:13) C-group product on her husband, a non-employee third-(cid:13) party who did not perform any services for the corporation.17(cid:13) _________________________________________________________________(cid:13) 16. To qualify as deductible compensation, a payment also need be(cid:13) reasonable. See Treas. Reg. S 1.162-7(a). We do not need to address this(cid:13) point, as the Tax Court correctly determined as a matter of fact that(cid:13) taxpayers did not demonstrate compensatory intent.(cid:13) 17. We are satisfied that the mere fact that Dr. Mall partially diverted the(cid:13) benefits to her husband should not change our result.(cid:13) 18(cid:13) In the circumstances, it is therefore not surprising that Dr.(cid:13) Desai at trial made the matter-of-fact statement that the(cid:13) money contributed by Lakewood to fund insurance(cid:13) premiums and conversion credits is "our money. It’s not(cid:13) Lakewood[‘s]." App. at 1055.(cid:13) Taxpayers again rely on non-tax ERISA jurisprudence for(cid:13) the exaggerated proposition that payments made pursuant(cid:13) to an employee benefit plan are necessarily compensatory.18(cid:13) However, the plain language of I.R.C. S 419(a)(2) explicitly(cid:13) contemplates situations where contributions paid or(cid:13) accrued by an employer to a welfare benefit fund are not(cid:13) deductible (deductions allowed only if "they would(cid:13) otherwise be deductible"); see also Treas. Reg. S 1.162-10(a)(cid:13) (contributions to employee benefit plans deductible only if(cid:13) "they are ordinary and necessary business expenses."). To(cid:13) read otherwise inexplicably creates a shelter loophole by(cid:13) allowing taxpayers to transform disbursements into(cid:13) deductible business expenses merely by funneling them(cid:13) through an ERISA plan.(cid:13) We recognize that it is axiomatic that taxpayers lawfully(cid:13) may arrange their affairs to keep taxes as low as possible.19(cid:13) Nevertheless, at the same time the law imposes certain(cid:13) threshold duties which a taxpayer may not shirk simply by(cid:13) manipulating figures or maneuvering assets to conceal their(cid:13) real character. See Court Holding Co., 324 U.S. at 334, 65(cid:13) S.Ct. at 708 ("[t]o permit the true nature of a transaction to(cid:13) be disguised by mere formalisms . . . would seriously(cid:13) impair the effective administration of the tax policies of(cid:13) Congress."); see also Saviano v. Comm’r, 765 F.2d 643, 654(cid:13) (7th Cir. 1985) ("The freedom to arrange one’s affairs to(cid:13) minimize taxes does not include the right to engage in(cid:13) _________________________________________________________________(cid:13) 18. Taxpayers misread Pediatric Surgical Assoc., P.C. v. Comm’r, 81(cid:13) T.C.M. (CCH) 1474, 1479 (2001), for the proposition that anything paid(cid:13) by a corporation for an employee’s benefit is presumed legally to be(cid:13) compensation. Rather, Pediatric Surgical clearly iterates that intent to(cid:13) pay compensation "is a factual question to be decided on the basis of the(cid:13) particular facts and circumstances of the case." Id. at 1480.(cid:13) 19. See Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 267(cid:13) (1935) ("The legal right of a taxpayer to decrease the amount of what(cid:13) otherwise would be his taxes, or altogether avoid them, by means which(cid:13) the law permits, cannot be doubted.").(cid:13) 19(cid:13) financial fantasies with the expectation that the Internal(cid:13) Revenue Service will play along."). Thus, we conclude that(cid:13) the Tax Court correctly held that the inflated premiums(cid:13) were not allowable corporate business expenses but rather(cid:13) allocations in the nature of dividends and thusly taxable.(cid:13) B. The Penalties(cid:13) Finally, we must consider the aptness of the penalties(cid:13) assessed by the Commissioner and upheld by the Tax(cid:13) Court. The Internal Revenue Code imposes a 20% tax on(cid:13) the portion of an underpayment attributable, among other(cid:13) things, to negligence or the disregard of rules and(cid:13) regulations. I.R.C. SS 6662(a) and (b)(1)."Negligence" can(cid:13) include any failure to make a reasonable attempt to comply(cid:13) with the provisions of the Code, to exercise ordinary and(cid:13) reasonable care in the preparation of a tax return, to keep(cid:13) adequate books and records, or to substantiate items(cid:13) properly. I.R.C. S 6662(c); Treas. Reg. S 1.6662-3(b)(1).(cid:13) Generally speaking, the negligence standard as in the tort(cid:13) context is objective, requiring a finding of a lack of due care(cid:13) or a failure to do what a reasonable and prudent person(cid:13) would do under analogous circumstances. See, e.g., Schrum(cid:13) v. Comm’r, 33 F.3d 426, 437 (4th Cir. 1994).(cid:13) On the basis of the record, the Tax Court was justified in(cid:13) concluding as a matter of fact that the individual taxpayers(cid:13) were liable for the section 6662 accuracy-related penalties(cid:13) because they did not meet their burden of proving due care.(cid:13) See Hayden v. Comm’r, 204 F.3d 772, 775 (7th Cir. 2000)(cid:13) (the Commissioner’s determination of negligence is(cid:13) presumed to be correct, and the taxpayer has the burden of(cid:13) proving that the penalties are erroneous); accord Pahl v.(cid:13) Comm’r, 150 F.3d 1124, 1131 (9th Cir. 1998) (burden of(cid:13) disproving negligence on taxpayer); Goldman v. Comm’r, 39(cid:13) F.3d 402, 407 (2d Cir. 1994) (once the Commissioner(cid:13) determines that a negligence penalty is appropriate, the(cid:13) taxpayer bears the burden of establishing the absence of(cid:13) negligence). The physician-owners caused their(cid:13) corporations to overpay considerably for term life insurance(cid:13) knowing that the money could be rerouted circuitously to(cid:13) their personal coffers with a net tax savings. Yet,(cid:13) notwithstanding the extraordinary financial implications of(cid:13) the SC VEBA arrangement, the individual taxpayers did not(cid:13) 20(cid:13) make a proper investigation or exercise due diligence to(cid:13) verify the program’s tax legitimacy. See David v. Comm’r, 43(cid:13) F.3d 788, 789-90 (2d Cir. 1995); see also Pasternak v.(cid:13) Comm’r, 990 F.2d 893, 903 (6th Cir. 1993) (holding that a(cid:13) reasonably prudent person should investigate claims when(cid:13) they are likely "too good to be true") (quoting McCrary v.(cid:13) Comm’r, 92 T.C. 827, 850 (1989)).(cid:13) Taxpayers argue that their negligence should have been(cid:13) excused because they relied on the advice of professionals.(cid:13) While it is true that actual reliance on the tax advice of an(cid:13) independent, competent professional may negate a finding(cid:13) of negligence, see, e.g., United States v. Boyle, 469 U.S.(cid:13) 241, 250, 105 S.Ct. 687, 692 (1985), the reliance itself(cid:13) must be objectively reasonable in the sense that the(cid:13) taxpayer supplied the professional with all the necessary(cid:13) information to assess the tax matter and that the(cid:13) professional himself does not suffer from a conflict of(cid:13) interest or lack of expertise that the taxpayer knew of or(cid:13) should have known about. See Treas. Reg.S 1.6664-4(c);(cid:13) Ellwest Stereo Theatres, Inc. v. Comm’r, T.C. Memo. 1995-(cid:13) 610, 70 T.C.M. (C.C.H.) 1655; see also Zfass v. Comm’r,(cid:13) 118 F.3d 184, 189 (4th Cir. 1997).(cid:13) The Tax Court concluded that taxpayers could not prevail(cid:13) on a reliance-on-professional defense because they received(cid:13) advice only from Cohen, an insurance agent who stood to(cid:13) profit considerably from the participation of Neonatology(cid:13) and Lakewood in the VEBA program, rather than from a(cid:13) competent, independent tax professional with sufficient(cid:13) expertise to warrant reliance. The circumstances here,(cid:13) including the facts that certified public accountants(cid:13) prepared taxpayers’ returns, the New Jersey Medical(cid:13) Society -- a group with dubious tax code proficiency which(cid:13) in fact received royalties to endorse the SC VEBA 20 --(cid:13) purportedly endorsed the program, and the engagement(cid:13) agreement between PES and the employers stated that PES(cid:13) would submit the trust to the IRS for qualification, 21 do not(cid:13) _________________________________________________________________(cid:13) 20. See App. at 570-71.(cid:13) 21. Notably, the agreement does not say that the IRS did qualify the(cid:13) plan. In fact, as the government points out, the IRS expressly disavowed(cid:13) any opinion as to whether contributions to the plan were deductible. See(cid:13) App. at 1410.(cid:13) 21(cid:13) suffice for us to disturb the Tax Court’s negligence finding(cid:13) on a clear error basis. See Merino v. Comm’r, 196 F.3d 147,(cid:13) 154 (3d Cir. 1999).(cid:13) In reaching our result, we acknowledge that Dr.(cid:13) Hirshkowitz deviated from the thoroughly head-in-the-sand(cid:13) posture of his fellow taxpayers by soliciting his(cid:13) accountant’s opinion of the SC VEBA. See App. at 6666-67.(cid:13) Nevertheless, the record supports the court’s finding with(cid:13) respect to Dr. Hirshkowitz, considering that he did not(cid:13) introduce into evidence precisely what information he(cid:13) showed to his accountant, precisely what advice his(cid:13) accountant gave him, and, more generally, the(cid:13) qualifications of his accountant.(cid:13) We also add the following. When, as here, a taxpayer is(cid:13) presented with what would appear to be a fabulous(cid:13) opportunity to avoid tax obligations, he should recognize(cid:13) that he proceeds at his own peril. In this case, PES devised(cid:13) a program which it marketed as "creat[ing] a tax deduction(cid:13) for the contributions to the employee welfare benefit plan(cid:13) going in and a permanent tax deferral coming out." As(cid:13) highly educated professionals, the individual taxpayers(cid:13) should have recognized that it was not likely that by(cid:13) complex manipulation they could obtain large deductions(cid:13) for their corporations and tax free income for themselves.22(cid:13) In a final attempt to skirt the additional penalties,(cid:13) taxpayers argue that a finding of negligence could not in(cid:13) fairness arise out of a case resolving tax issues of first(cid:13) impression. In this regard, we point out that the parties(cid:13) have indicated that this case is indeed without direct(cid:13) precedent and that other cases are awaiting our disposition.23(cid:13) _________________________________________________________________(cid:13) 22. It well may be that reliance on the advice of a professional should(cid:13) only be a defense when the professional’s fees are not dependent on his(cid:13) opinion. For example, it is not immediately evident why a taxpayer(cid:13) should be able to take comfort in the advice of a professional promoting(cid:13) a tax shelter for a fee. After all, that professional would have an interest(cid:13) in his opinion. Consideration of this point, however, will have to wait for(cid:13) another day.(cid:13) 23. The Tax Court observed that this case is a test case with the result(cid:13) resolving other cases involving SC VEBA and NJ VEBA plans and that(cid:13) the parties in 19 other cases pending before the Tax Court have agreed(cid:13) to be bound by the decision here. See Neonatology, 115 T.C. at 44.(cid:13) 22(cid:13) This argument, however, does not sway us for this case(cid:13) does not involve novel questions of law but rather is(cid:13) concerned with the application of well-settled principles of(cid:13) taxation to determine whether certain expenditures made(cid:13) by close corporations are deductible as ordinary and(cid:13) necessary business expenses or taxable as constructive(cid:13) dividends. While the setting in which these principles have(cid:13) come to bear is no doubt unusual with its VEBAs, C-group(cid:13) policies, and conversion credits, the law was nevertheless(cid:13) pellucid that taxpayers should have endeavored to verify(cid:13) the validity of their deductions before claiming them.24(cid:13) Moreover, they should have been apprehensive when they(cid:13) examined the scheme, for experience shows that when(cid:13) something seems too good to be true that probably is the(cid:13) case. Overall, we are satisfied that taxpayers now must(cid:13) abide the consequences of the Commissioner’s audit as(cid:13) sustained by the Tax Court, including the finding of liability(cid:13) for accuracy-related penalties under section 6662.(cid:13) IV. CONCLUSION(cid:13) For the foregoing reasons, we will affirm the decisions of(cid:13) the Tax Court.(cid:13) A True Copy:(cid:13) Teste:(cid:13) Clerk of the United States Court of Appeals(cid:13) for the Third Circuit(cid:13) _________________________________________________________________(cid:13) 24. We recognize that courts have overlooked negligence penalties in(cid:13) cases of first impression that involve unclear statutory language. See,(cid:13) e.g., Mitchell v. Comm’r, T.C. Memo. 2000-145, 79 T.C.M. (C.C.H.) 1954(cid:13) (recognizing exception in a case of first impression involving the unclear(cid:13) application of an amendment to the Internal Revenue Code); Hitchins v.(cid:13) Comm’r, 103 T.C. 711, 720 (1994) (first impression exception applies to(cid:13) issue not previously considered by the court where the statutory(cid:13) language is not entirely clear). But nothing in this case hinges on the(cid:13) interpretation of vague statutory text.(cid:13) 23