Popular so-called "419 Insurance Welfare Benefit Plans," sold by most insurance professionals, are getting accountants and their clients into more and more trouble. A CPA who is approached by a client about one of the abusive arrangements and/or situations to be described and discussed in this article must exercise the utmost degree of caution, not only on behalf of the client, but for his/her own good as well. The penalties noted in this article can also be applied to practitioners who prepare and/or sign returns that fail to properly disclose listed transactions, including those discussed herein.
On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare benefit plans that the Service regards as listed transactions. Put simply, to be a listed transaction, a plan cannot rely on the union exception set forth in IRC Section 419A(f)(5), there must be cash value life insurance within the plan and excessive tax deductions for life insurance, in excess of what may be permitted by Sections 419 and 419A, must have been claimed.
In Notice 2007-84, the Service expressed concern with plans that provide all or a substantial portion of benefits to owners and/or key and highly compensated employees. The notice identified numerous specific concerns, among them:
1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-
retirement, as originally established.
4. Permitting the transfer of life insurance policies to participants.
Alternative tax treatment may well be in the offing for such arrangements, as the IRS intends to re-characterize such arrangements as dividends, non-qualified deferred compensation (under IRC Section 404(a)(5) or Section 409A), split-dollar life insurance arrangements, or disqualified benefits pursuant to Section 4976. Taxpayers participating in these listed transactions should have, in most cases, already disclosed such participation to the Service. Those who have not should do so at the earliest possible moment. Failure to disclose can result in severe penalties – up to $100,000 for
individuals and $200,000 for corporations.
Finally, Revenue Ruling 2007-65 focused on situations where cash value life insurance is purchased on owner employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419A (f)(6), and 419 plans. Life insurance premiums are not inherently tax deductible and authority must be found in Section 79 to justify such a deduction. Section 264(a), in fact, specifically disallows tax deductions for life insurance, at least in some cases. And moreover, the Service declared, interposition of a trust does not change the nature of the transaction.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He speaks at more than 70 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.taxadvisorexperts.org or call 516-938-5007.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Showing posts with label 419. Show all posts
Showing posts with label 419. Show all posts
Disclosures Notice 2007–85 This notice provides guidance to material advisors required to file a disclosure
Disclosures
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement.
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement.
Disclosures
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement by October 31, 2007, under
§ 301.6111–3 of the Procedure and Administration
Regulations.
BACKGROUND
On August 3, 2007, the Internal
Revenue Service and Treasury Department
published final regulations under
§ 301.6111–3 in the Federal Register
(72 FR 43157) providing the rules relating
to the disclosure of reportable transactions
by material advisors under section 6111
of the Internal Revenue Code. See T.D.
9351, 2007–38 I.R.B. 616. In general,
these regulations apply to transactions
with respect to which a material advisor
makes a tax statement on or after August
3, 2007. However, these regulations apply
to transactions of interest entered into on
or after November 2, 2006, with respect
to which a material advisor makes a tax
statement on or after November 2, 2006.
The regulations provide that each material
advisor, with respect to any reportable
transaction, must file a return as
described in § 301.6111–3(d). Section
301.6111–3(d) provides that each material
advisor required to file a disclosure
statement under § 301.6111–3 must file
a completed Form 8918, “Material Advisor
Disclosure Statement” (or successor
form). The Form 8918 must be filed with
the Office of Tax Shelter Analysis (OTSA)
by the last day of the calendar month that
follows the end of the calendar quarter
in which the advisor became a material
advisor with respect to the reportable
transaction or in which the circumstances
necessitating an amended disclosure occur.
Prior to the publication of the final regulations,
material advisors were required
to disclose reportable transactions on Form
8264, “Application for Registration of a
Tax Shelter.” Notice 2004–80, 2004–2
C.B. 963, and Notice 2005–22, 2005–1
C.B. 756, described the manner in which
the Form 8264 was to be completed.
INTERIM PROVISION
The next due date for disclosures by
material advisors is October 31, 2007. As
of the date of release of this notice, Form
8918 has not yet been published. The IRS
anticipates that the Form 8918 will be published
soon.
Due to the unavailability of Form 8918,
a material advisor required to file a completed
Form 8918 by October 31, 2007,
will be treated as satisfying the disclosure
requirement of § 301.6111–3(d) if the
material advisor files Form 8264 instead.
If Form 8918 is published on or before
October 31, 2007, material advisors may
choose to use either Form 8918 or Form
8264 for disclosures required to be filed by
October 31, 2007. For disclosures required
to be filed after October 31, 2007, material
advisors must use Form 8918 (or successor
form) unless instructed otherwise by the
IRS. Reportable transactions disclosed on
the Form 8264 should be disclosed in the
manner described in Notice 2004–80 and
Notice 2005–22.
EFFECTIVE DATE
This notice is effective October 16,
2007, the date this notice was released to
the public.
DRAFTING INFO
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement by October 31, 2007, under
§ 301.6111–3 of the Procedure and Administration
Regulations.
BACKGROUND
On August 3, 2007, the Internal
Revenue Service and Treasury Department
published final regulations under
§ 301.6111–3 in the Federal Register
(72 FR 43157) providing the rules relating
to the disclosure of reportable transactions
by material advisors under section 6111
of the Internal Revenue Code. See T.D.
9351, 2007–38 I.R.B. 616. In general,
these regulations apply to transactions
with respect to which a material advisor
makes a tax statement on or after August
3, 2007. However, these regulations apply
to transactions of interest entered into on
or after November 2, 2006, with respect
to which a material advisor makes a tax
statement on or after November 2, 2006.
The regulations provide that each material
advisor, with respect to any reportable
transaction, must file a return as
described in § 301.6111–3(d). Section
301.6111–3(d) provides that each material
advisor required to file a disclosure
statement under § 301.6111–3 must file
a completed Form 8918, “Material Advisor
Disclosure Statement” (or successor
form). The Form 8918 must be filed with
the Office of Tax Shelter Analysis (OTSA)
by the last day of the calendar month that
follows the end of the calendar quarter
in which the advisor became a material
advisor with respect to the reportable
transaction or in which the circumstances
necessitating an amended disclosure occur.
Prior to the publication of the final regulations,
material advisors were required
to disclose reportable transactions on Form
8264, “Application for Registration of a
Tax Shelter.” Notice 2004–80, 2004–2
C.B. 963, and Notice 2005–22, 2005–1
C.B. 756, described the manner in which
the Form 8264 was to be completed.
INTERIM PROVISION
The next due date for disclosures by
material advisors is October 31, 2007. As
of the date of release of this notice, Form
8918 has not yet been published. The IRS
anticipates that the Form 8918 will be published
soon.
Due to the unavailability of Form 8918,
a material advisor required to file a completed
Form 8918 by October 31, 2007,
will be treated as satisfying the disclosure
requirement of § 301.6111–3(d) if the
material advisor files Form 8264 instead.
If Form 8918 is published on or before
October 31, 2007, material advisors may
choose to use either Form 8918 or Form
8264 for disclosures required to be filed by
October 31, 2007. For disclosures required
to be filed after October 31, 2007, material
advisors must use Form 8918 (or successor
form) unless instructed otherwise by the
IRS. Reportable transactions disclosed on
the Form 8264 should be disclosed in the
manner described in Notice 2004–80 and
Notice 2005–22.
EFFECTIVE DATE
This notice is effective October 16,
2007, the date this notice was released to
the public.
DRAFTING INFO
TAX MATTERS: ABUSIVE INSURANCE PLANS GET RED FLAG by Lance Wallach
TAX
MATTERS: ABUSIVE INSURANCE PLANS GET RED FLAG
by Lance Wallach
Finance / Taxes
The IRS in Notice 2007-83 identified as listed transactions
certain trust arrangements involving cash-value life insurance policies.
Revenue Ruling 2007-65, issued simultaneously, addressed situations where the
tax deduction has been disallowed, in part or in whole, for premiums paid on
such cash-value life insurance policies. Also simultaneously issued was Notice
2007-84, which disallows tax deductions and imposes severe penalties for
welfare benefit plans that primarily and impermissibly benefit shareholders and
highly compensated employees. Taxpayers participating in these listed
transactions must disclose such participation to the Service by January 15.
Failure to disclose can result in severe penalties--- up to $100,000 for
individuals and $200,000 for corporations. Ruling 2007-65 aims at situations
where cash-value life insurance is purchased on owner/employees and other key
employees, while only term insurance is offered to the rank and file. These are
sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the
ruling may also be listed transactions. A business in such an arrangement
cannot deduct premiums paid for cash-value life insurance. A CPA who is
approached by a client about one of these arrangements must exercise the utmost
degree of caution, and not only on behalf of the client. The severe penalties
noted above could also be applied to the preparers of returns that fail to
properly disclose listed transactions. The IRS may challenge the claimed tax
benefits of these arrangements for various reasons:
· Some or all of the benefits or distributions provided to or for the benefit of owner-employees or key employees may be disqualified benefits for purposes of the 100-percent excise tax under IRC §4976.
· Whenever the property distributed from a trust has not been properly valued by the taxpayer, the IRS intends to challenge the value of the distributed property, including life insurance policies.
· Under the tax benefit rule, some or all of an employer's deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based.
· An employer's deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in IRC §§419 and 419A, including the use of reasonable actuarial assumptions and the satisfaction of nondiscrimination requirements. Further, a taxpayer cannot obtain a deduction for reserves for post-retirement medical or life benefits unless the employer actually intends to use the contributions for that purpose.
· The arrangement may be subject to the rules for split-dollar arrangements, depending on the facts and circumstances.
· Contributions on behalf of an owner-employee may be characterized as dividends or as nonqualified deferred compensation subject to IRC §404(a)(5) or IRC §409A or both, depending on the facts and circumstances.
· Some or all of the benefits or distributions provided to or for the benefit of owner-employees or key employees may be disqualified benefits for purposes of the 100-percent excise tax under IRC §4976.
· Whenever the property distributed from a trust has not been properly valued by the taxpayer, the IRS intends to challenge the value of the distributed property, including life insurance policies.
· Under the tax benefit rule, some or all of an employer's deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based.
· An employer's deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in IRC §§419 and 419A, including the use of reasonable actuarial assumptions and the satisfaction of nondiscrimination requirements. Further, a taxpayer cannot obtain a deduction for reserves for post-retirement medical or life benefits unless the employer actually intends to use the contributions for that purpose.
· The arrangement may be subject to the rules for split-dollar arrangements, depending on the facts and circumstances.
· Contributions on behalf of an owner-employee may be characterized as dividends or as nonqualified deferred compensation subject to IRC §404(a)(5) or IRC §409A or both, depending on the facts and circumstances.
Lance Wallach speaks and writes about benefit plans, and has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007. Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker. Contact him at 516.938.5007, wallachinc@gmail.com or visithttp://www.taxaudit419.com.
The information provided herein is not intended as legal,
accounting, financial or any type of advice for any specific individual or
other entity. You should contact an appropriate professional for any such
advice.
419 Important Tax Court Case
Commentary
The court basically determined that the
Plan did not satisfy the requirements of Section 162(a). The court found
that Goyak could not deduct his contribution of $1.4 million into the
Millennium Plan because it is not an ordinary and necessary business expense
under section 162(a).
The next issue is that
the court determined that Goyaks $1.4 million contribution was taxable to Goyak
because it was a constructive dividend. (In essence the plan is set up so he
can get his money out)
T.C.
Memo. 2012-13
UNITED
STATES TAX COURT
JOHN
K. AND DANA G. GOYAK, Petitioners v.
COMMISSIONER
OF INTERNAL REVENUE, Respondent
JOHN
K. GOYAK & ASSOCIATES, INC., Petitioner v.
COMMISSIONER
OF INTERNAL REVENUE, Respondent
Docket
Nos. 12990-07, 13022-07. Filed January 11, 2012.
Mark
D. Allison and Kenneth M. Barish, for petitioners.
Alexander
D. Devitis, Anne W. Durning, Roger P. Law, and
Vanessa
M. Hoppe, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE,
Judge: With respect to John and Dana Goyak (Mr. and
Mrs.
Goyak), respondent determined deficiencies in Federal income
taxes
of $966,155, $1,848,500, and $1,217,910 for tax years 2002,
-
2 -
2003,
and 2004 respectively. Respondent also determined
penalties
under section 66621 of $193,231, $369,700, and $243,582
for
2002, 2003, and 2004, respectively, as well as an addition to
tax
under section 6551(a)(1) of $42,742 for 2002.
With
respect to John K. Goyak & Associates, Inc. (Goyak &
Associates),
respondent separately determined deficiencies in
Federal
income taxes of $199,503, $262,692, $297, $374,137,
$276,571,
and $556,223 for tax years 1997, 1998, 1999, 2000,
2001,
and 2002, respectively. Respondent also determined
penalties
under section 6662 of $55,314 and $111,245 for 2001 and
2002,
respectively, as well as additions to tax under section
6551(a)(1)
of $1,995, $11,820, $74, and $41,486 for 1997, 1998,
1999,
and 2001, respectively.
These
cases were consolidated for trial. As a result of
settlements
between the parties, all issues in taxable years
other
than 2002 have been resolved. The only remaining issues
relate
to a $1.4 million contribution Goyak & Associates paid in
2002
to the Millennium Multiple Employer Welfare Benefit Plan
(Millennium
Plan), a purported section 419A(f)(6) welfare benefit
fund.
The issues remaining for decision are:
(1)
Whether Goyak & Associates may deduct the $1.4 million
1Unless
otherwise indicated, all section references are to
the
Internal Revenue Code (Code) in effect for the years in
issue,
and all Rule references are to the Tax Court Rules of
Practice and Procedure.
IRS to Audit Sea Nine VEBA Participating Employers
Lance Wallach
In recent months, I have received phone calls from participants in the Sea Nine VEBA and have learned that the IRS may be auditing many more participating employers in the coming months. To better assist current Sea Nine clients and those that are now or may be under audit in the future, my associates who are CPAs, tax attys and former IRS employees will continue to help with the Sea Nine VEBA victims and others in 419, 412i captive insurance and section 79 scams and answer the following:
• What is the IRS’s position with respect to the Sea Nine VEBA, 419 captive insurance and section 79 scams?
• What will be the likely result of my audit?
• What if I don't agree with my audit results?
• What are other participants doing with respect to the audits?
• Will the IRS impose interest and penalties?
• What is a “listed transaction”?
• What is Form 8886, and what are the penalties for failing to file Form 8886?
• Will I be responsible even if I relied on my tax advisor?
What recourse do I have against those that promoted and sold the Sea Nine VEBA? Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.
The information provided herein is not intended as legal,
accounting, financial or any other type of advice for any specific individual
or other entity. You should contact an
appropriate professional for any such advice.
Reflections on Booth
By Koresko
During the last several years, practitioners interested in the future of multiple-employer VEBAs and other welfare benefit plans have waited somewhat anxiously for the Tax Court's decision in Booth v. Commissioner, 108 T.C. No. 25 (1997) ("Booth"). This author has written extensively about the issues raised by the Internal Revenue Service in that case. See, "'419' Welfare Benefit Plans Require Careful Drafting to Survive IRS Attack," 3 Journal of Taxation of Employee Benefits 147 (Nov./Dec. 1995); "Notice 95-34 Represents a Line in the Sand For '419' Plans," 3 Journal of Taxation of Employee Benefits 223 (Jan./Feb. 1996); "VEBAs Can Reduce Taxes and Preserve Wealth," 57 Taxation for Accountants 333 (Dec. 1996); "Current Developments in §419 Plans: Don't Call the Coroner Yet," (distributed by the American Society of CLU and ChFC Estate Planning Section during 1995); Life Insurance Answer Book for Qualified Plans and Estate Planning, Chapters 39, 40 (Panel Publishers 1997). The foregoing documented this author's view that Booth would probably be decided adversely to the taxpayers. Consequently, the decision by Tax Court Judge David Laro, issued in June 1997, came as no surprise.
Booth was the lead case in a series of test cases brought by IRS against employers who adopted the Prime Financial Partners Trust ("Prime"). Prime was designed to be a multiple employer welfare plan which would fit the definition of a Ten-Or-More Employer Plan ("TOME") pursuant to Internal Revenue Code §419A(f)(6). Prime offered two types of welfare benefits: Dismissal Wage Benefits ("DWB") and death benefits. The DWB were payable upon certain terminations of employment, both voluntary and involuntary. The death benefits were payable on death. The benefits were funded with various types of life insurance policies and with tax-free securities.
Comment: Multiple employer VEBAs and taxable welfare arrangements like the Prime plan intend to be 10-or-more employer plans, as defined in section 419A(f)(6) of the Internal Revenue Code. Section 419A(f)(6) provides as follows:
(6) EXCEPTION FOR 10-OR-MORE EMPLOYER PLANS --
(A) IN GENERAL -- This subpart shall not apply in the case of any welfare benefit fund which is part of a 10 or more employer plan. The preceding sentence shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers.
(A) IN GENERAL -- This subpart shall not apply in the case of any welfare benefit fund which is part of a 10 or more employer plan. The preceding sentence shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers.
The principal benefit of classification as a 10-or-more
employer plan is that an employer which contributes to the plan is not subject
to the deduction limitations of sections 419 and 419A [which comprise the
"subpart" of the Code referred to in sec. 419A(f)(6)]. Consequently,
pre-1985 law as applied to individual VEBAs would define the amount of a
contribution which is deductible by a contributing employer in a given year. In
many cases, the allowable deductions under pre-1985 law vastly exceed the
amount which would be allowed if sections 419 and 419A applied to a particular
plan.
The legislative history in connection with section 419A(f)(6) gives little guidance with respect to Congress' intent. The Conference Committee Report states the following:
The legislative history in connection with section 419A(f)(6) gives little guidance with respect to Congress' intent. The Conference Committee Report states the following:
10 or more employer plans. -- For a plan year in
which no employer (or employers related to an employer) are [is] required to
contribute more than 10 percent of the total contributions, the conference
agreement provides that the deduction limits to do not apply. The exclusion is
provided because under such a plan, the relationship of a participating
employer to the plan is often similar to the relationship of an insured to an
insurer...
The agreement provides however, that notwithstanding compliance with the 10-percent rule, and consistent with the discussion above on definition of a fund, a plan is not exempt from the deduction limits if the liability of any employer who maintains the plan is determined on the basis of experience rating because the employer's interest with respect to such a plan is more similar to the relationship of an employer to a fund that an insured to an insurer.
The agreement provides however, that notwithstanding compliance with the 10-percent rule, and consistent with the discussion above on definition of a fund, a plan is not exempt from the deduction limits if the liability of any employer who maintains the plan is determined on the basis of experience rating because the employer's interest with respect to such a plan is more similar to the relationship of an employer to a fund that an insured to an insurer.
Conference Committee Report on P.L. 98-369 (Tax Reform Act
of 1984), reprinted at CCH Standard Federal Tax Reports, Vol. 4, pg. 33708
(hereinafter referred to as the "1984 Committee Report").
Prime exhibited certain notable structural characteristics. First, each employer contributed to Prime an amount determined by the Plan Administrator to be necessary to fund benefits. These contributions were accounted for separately for each employer. The trust provided that none of the employer's contributions could be used to pay for benefits of employees of other employers. The trust also provided that in the event an employer's account did not have sufficient assets to pay the claim of an employee, then the Plan Trustee had the power to reduce the benefit payable consistent with the amount of assets available in the employer's account. The Prime Trust did, however, maintain a Suspense Account. The Suspense Account was comprised of experience gains and losses of the trust as a whole. The Suspense Account was theoretically available to pay certain claims to the extent an employer's account was short. However, if the Suspense Account and the Employer's Account were insufficient, neither Prime nor any other person or entity had any obligation to pay the shortfall in a claim.
The IRS attacked the Prime plan on the following grounds: (1) the plan was experience rated; (2) the plan was not a single plan; (3) the plan was one of deferred compensation, not welfare benefit; (4) the plan contained no substantial risk of forfeiture; and (5) the participants failed to include P.S. 58 costs in annual income.
As a result of the alleged violations of the experience rating and single plan requirements , positions 1 and 2, the IRS denied the deductions claimed by the participating employers because the plan was not qualified under section 419A(f)(6). Position 3, the allegation that the plan was really one of deferred compensation, was substantially the same argument against deductibility articulated in several previous cases. Position 4 related to exclusion by each employee under section 83 of the employer's payment for benefits. Position 5 was not a deductibility issue, but dealt with income each participant failed to recognize.
We will discuss the Tax Court's resolution of the principal arguments in Booth, and how the holding impacts welfare plans, generally, including REAL VEBA. In the process, we will provide a little background on the history and intended operation of section 419A(f)(6). We will also suggest alternative interpretations of the statute, to the extent there appears room for reasonable disagreement with Judge Laro's analysis.
Prime exhibited certain notable structural characteristics. First, each employer contributed to Prime an amount determined by the Plan Administrator to be necessary to fund benefits. These contributions were accounted for separately for each employer. The trust provided that none of the employer's contributions could be used to pay for benefits of employees of other employers. The trust also provided that in the event an employer's account did not have sufficient assets to pay the claim of an employee, then the Plan Trustee had the power to reduce the benefit payable consistent with the amount of assets available in the employer's account. The Prime Trust did, however, maintain a Suspense Account. The Suspense Account was comprised of experience gains and losses of the trust as a whole. The Suspense Account was theoretically available to pay certain claims to the extent an employer's account was short. However, if the Suspense Account and the Employer's Account were insufficient, neither Prime nor any other person or entity had any obligation to pay the shortfall in a claim.
The IRS attacked the Prime plan on the following grounds: (1) the plan was experience rated; (2) the plan was not a single plan; (3) the plan was one of deferred compensation, not welfare benefit; (4) the plan contained no substantial risk of forfeiture; and (5) the participants failed to include P.S. 58 costs in annual income.
As a result of the alleged violations of the experience rating and single plan requirements , positions 1 and 2, the IRS denied the deductions claimed by the participating employers because the plan was not qualified under section 419A(f)(6). Position 3, the allegation that the plan was really one of deferred compensation, was substantially the same argument against deductibility articulated in several previous cases. Position 4 related to exclusion by each employee under section 83 of the employer's payment for benefits. Position 5 was not a deductibility issue, but dealt with income each participant failed to recognize.
We will discuss the Tax Court's resolution of the principal arguments in Booth, and how the holding impacts welfare plans, generally, including REAL VEBA. In the process, we will provide a little background on the history and intended operation of section 419A(f)(6). We will also suggest alternative interpretations of the statute, to the extent there appears room for reasonable disagreement with Judge Laro's analysis.
I. Type of Plan: Welfare or Deferred Compensation.
A. IRS Argument that Prime Was Deferred Compensation
It is not surprising that IRS argued that the Prime plan
contained elements of deferred compensation [position 3]. This was the argument
raised in Harry A. Wellons, Jr. M.D., S.C. v. Commissioner, 31 F.3d 569
(7th Cir. 1994) which was decided not long ago. The Tax Court held, however,
that the Service's reliance on Wellons was misplaced. Wellons
involved a severance pay plan which was self-funded. It did not contain a death
benefit. The Wellons plan did not exclude retirement from the definition
of severance and permitted highly compensated employees to effectuate severance
for themselves at their discretion. Relying on the previous Federal Circuit
Court decision of Lima Surgical, the Seventh Circuit agreed with the IRS
that the Wellons plan displayed sufficient elements of deferred
compensation to cause the deductions to be governed by §404.
Comment: It should be clear that the elements in the Wellons plan are not present in a death benefit plan, or a plan which limits severance to non-key employees and excludes retirement from the definition of severance. Although Wellons was decided correctly, the case is of questionable authority beyond its facts.
Comment: It should be clear that the elements in the Wellons plan are not present in a death benefit plan, or a plan which limits severance to non-key employees and excludes retirement from the definition of severance. Although Wellons was decided correctly, the case is of questionable authority beyond its facts.
B. Reasoning of the Tax Court
In a move which surprised some, the Tax Court in Booth
held for the taxpayer on this issue. The Court confirmed that the Prime Plan
intended to provide real welfare benefits. Judge Laro said that "all
welfare plans have some indicia of deferred compensation." Judge Laro
added that the presence of certain features (like severance-type benefits,
vesting schedules, benefits measured by length of service and compensation)
"were swallowed up by the Prime Plan's valid welfare purpose so as to make
the deferred compensation features incidental and meaningless."
The Booth case hopefully put to bed a recurring theme in IRS arguments: that the power to terminate a plan is tantamount to deferred compensation. The Court effectively reiterated its previous holdings in Moser, 56 TCM 1604 (1989) and Schneider, 63 TCM 1787 (1992). In those cases, the Tax Court held that an employer must retain the ability to terminate a plan in order to respond to the changing needs of the employer or its employees. Judge Laro reasoned that since the ability of an employer to terminate a pension plan at will does not result in adverse consequences, the same should apply to welfare plans. Therefore, the Booth decision reaffirms that certain welfare plans should not be deemed plans of deferred compensation.
Comment: Having disposed of the deferred compensation issue, the Court did not need to address the issue of §83 substantial risk of forfeiture [position 4]. Additionally, the Court made no ruling on the issue of whether participants had to include P.S. 58 costs in income [position 5].
The Booth case hopefully put to bed a recurring theme in IRS arguments: that the power to terminate a plan is tantamount to deferred compensation. The Court effectively reiterated its previous holdings in Moser, 56 TCM 1604 (1989) and Schneider, 63 TCM 1787 (1992). In those cases, the Tax Court held that an employer must retain the ability to terminate a plan in order to respond to the changing needs of the employer or its employees. Judge Laro reasoned that since the ability of an employer to terminate a pension plan at will does not result in adverse consequences, the same should apply to welfare plans. Therefore, the Booth decision reaffirms that certain welfare plans should not be deemed plans of deferred compensation.
Comment: Having disposed of the deferred compensation issue, the Court did not need to address the issue of §83 substantial risk of forfeiture [position 4]. Additionally, the Court made no ruling on the issue of whether participants had to include P.S. 58 costs in income [position 5].
II. Single Plan.
A. Introduction
After disposing of the deferred compensation argument, the
Court went on the question of whether the Prime trust was a single plan for
purposes of §419A(f)(6). The Court noted that the Ten-or-More-Employer plan
("TOME") must be, in fact, a single plan, and not a collection of
individual plans using a common document. For years, we have been saying
that this is a requirement and are happy that Court has announced this
position. The reasoning of the Tax Court, however, made no reference to any
prior precedent or regulations. This is quite puzzling.
B. Precedents Supporting IRS Argument
In GCM 39284 (Sept. 14, 1984), IRS stated that in the
context of a multiple employer VEBA, rules similar to those in §413(c) should
apply. The same rules were apparently applicable to non-VEBA welfare plans,
like Prime. Section 413 instructs us as to the requirements of a "more
than one employer pension plan." The Section commands that such a plan be
a "single plan" and directs us to §414 for guidance. Reg.
§1.414(l)-1(b)(1) says that a plan may have many employers contributing,
allocated insurance contracts, separate accounting, and differing benefit
structures among participating employers, yet still qualify as a single plan. There
is, however, one axiom: all assets must be available for all claims. If any
part of the trust is not available for the payment of any claim, the plan is
not a single plan. Accordingly, if it is not a single plan, it cannot be a
TOME. And if the plan is not a TOME, the deduction limits of §§ 419 and 419A
apply.
C. Reasoning of the Tax Court
The Court in Booth made no reference to GCM 39284 or
the pension provisions of the Code. However, Judge Laro conducted an analysis
which substantially resembled an examination under Reg. §1.414(l)-1(b)(1). The
Judge concluded as a matter of fact and law that Prime did not make all assets
of the trust available for all claims. The judge reiterated that a portion of
the plan was not available for the payment of certain claims. The impregnable
segregation of the employers' accounts created an amalgamation of separate
plans under a single trustee, but did not give rise to a single plan. Because
Prime was not a single plan, it was not a TOME. And since the plan was not a TOME,
the deduction limits of §419 and 419A applied.
Comment: Our structural premise in drafting multiple-employer VEBAs has always been that all assets must be available for all claims. [See the 1995 and 1996 articles noted above.] We always believed that the structure of a welfare plan should respect the pension rules in the absence of contrary guidance. The plan documents should say so expressly. A VEBA should be structured in this fashion, yet contain a unique feature to substantially reduce, but not eliminate, the risk of cross-invasion of the assets related to different employers' contributions. Of course, the funding of a VEBA exclusively with insurance contracts eliminates the pitfalls which prompted Prime to insist on absolute segregation of accounts. The Prime severance benefit was not insured and created the possibility that some employees might collect more than their employer contributed. Obviously, in a plan touted as a "substitute for a pension plan" this risk was unacceptable to the participating employers who made the contributions.
Comment: Our structural premise in drafting multiple-employer VEBAs has always been that all assets must be available for all claims. [See the 1995 and 1996 articles noted above.] We always believed that the structure of a welfare plan should respect the pension rules in the absence of contrary guidance. The plan documents should say so expressly. A VEBA should be structured in this fashion, yet contain a unique feature to substantially reduce, but not eliminate, the risk of cross-invasion of the assets related to different employers' contributions. Of course, the funding of a VEBA exclusively with insurance contracts eliminates the pitfalls which prompted Prime to insist on absolute segregation of accounts. The Prime severance benefit was not insured and created the possibility that some employees might collect more than their employer contributed. Obviously, in a plan touted as a "substitute for a pension plan" this risk was unacceptable to the participating employers who made the contributions.
III. Experience Rating.
A. Introduction to Issue
After concluding that Prime was not a single plan, the Court
tackled the issue of whether Prime engaged in experience rating. Neither the
Code nor Treasury regulations define the term "experience rating."
Early documents filed in the Prime case showed that the Service was relying on
Black's Law Dictionary for support of its definition of experience rating. This
argument required that a court disregard the Supreme Court's decision in American
Bar Endowment v. United States, 477 U.S. 105 (1986) (experience rating
means that the cost of insurance to the group is based on that group's claims
experience rather than general actuarial tables), as well as the definition of
experience rating supplied by Congress in the legislative history to §419.
B. Precedents
Under the American Bar Endowment test, a plan is not
experience-rated if contributions are not determined on the basis of employer
experience. Contributions to Prime, for example, were determined by reference
to the cost of life insurance policies, and these are based on general
actuarial tables. In its legislative history, Congress said that pure
experience rating means (1) a rebate is automatically payable to an employer if
the trust's claims experience is favorable, and (2) the employer has an
automatic liability if the claims experience is unfavorable. These definitions
were pretty much in accord with one another.
C. Reasoning of the Tax Court
In Booth, Judge Laro apparently rejected the
definitions of experience rating suggested by the Supreme Court and Congress.
The Judge noted that applying these definitions might cause the Court to reach
a result which he felt was inconsistent with the intent of the statute. The Judge
opined that the statute referred to "experience-rated arrangements"
nor just "experience rating." He decided that the concept of
"experience-rated arrangement" went far beyond the definitions or
"experience-rating" contained in the available authorities. Thus, he
went out on his own. He said that "the essence of experience rating is the
charging of employer accounts." Prime accomplished this, said Judge Laro,
by giving the Trustee the unilateral authority to reduce benefits to the amount
in an employer's account, and by prohibiting payment of benefits from Trust
assets beyond the employer's contributions.
Booth effectively injected a new element into the experience rating argument which first appeared in Notice 95-34. It implies that compliance with the "single plan" requirement will satisfy the inquiry regarding experience rating. If the contributions of another employer are available for the payment of benefits to an employer's employees, the employer's liability cannot be experience rated because the liability is not limited to the experience of that employer group.
Comment: Again, we have been saying this for years. All assets of the trust are theoretically available for all claims of all employees of all participating employers. In the Single Plan and Experience Rating portions of the Booth opinion, Judge Laro emphasized not less than NINE TIMES that assets outside an employer's contributions must be available for the payment of employee claims.
Booth effectively injected a new element into the experience rating argument which first appeared in Notice 95-34. It implies that compliance with the "single plan" requirement will satisfy the inquiry regarding experience rating. If the contributions of another employer are available for the payment of benefits to an employer's employees, the employer's liability cannot be experience rated because the liability is not limited to the experience of that employer group.
Comment: Again, we have been saying this for years. All assets of the trust are theoretically available for all claims of all employees of all participating employers. In the Single Plan and Experience Rating portions of the Booth opinion, Judge Laro emphasized not less than NINE TIMES that assets outside an employer's contributions must be available for the payment of employee claims.
D. Problems with the Tax Court Analysis
It is very possible that another court may not agree with
the reasoning of Booth on the issue of experience-rating. It is a
serious stretch of intellectual honesty to conclude that the terms
"experience-rating" and "experience-rated arrangements"
mean different things. After all, the Congressional Committee Report states
clearly:
The agreement provides however, that notwithstanding
compliance with the 10-percent rule, and consistent with the discussion above
on definition of a fund, a plan is not exempt from the deduction limits if the
liability of any employer who maintains the plan is determined on the basis
of experience rating because the employer's interest with respect to such a
plan is more similar to the relationship of an employer to a fund that an insured
to an insurer.
Conference Committee Report on P.L. 98-369 (Tax Reform Act
of 1984), reprinted at CCH Standard Federal Tax Reports, Vol. 4, pg. 33708
(hereinafter referred to as the "1984 Committee Report").
E. Concession by IRS that a fully-insured Death Benefit
Plan is probably not an experience-rated arrangement.
It is important to note that the Service attacked the
severance benefit in Booth. Only the severance benefit was at issue throughout
the case, even though there was a death benefit. Many practitioners may not
know this, but IRS attorney Anne W. Durning, Esquire conceded in her Memorandum
of Issues submitted to the Tax Court that the death benefit arrangement
provided by the Prime Plan was NOT an experience-rated arrangement. I
obtained a copy of that Memorandum from the Tax Court, and refer to Ms.
Durning's argument on page 9 where she distinguishes between the severance
benefit and the death benefit:
An experience-rated plan is one with significant elements of
self-insurance. Within certain limits, the insured (in this case, the employee
group) assumes some of the risks of experience variations that might otherwise
be assumed by the insurer (in this case, the Trust). The severance benefit in
this case is self-insured in that the benefits are paid only from assets in the
employee group account.
Experience rating is an intermediate form of group benefits funding between self insurance, in which an employer takes all the risks of its employees' claims experience, and guaranteed cost or pure insurance, where the insurer assumes that risk. The death benefit associated with the Trust is an example of a guaranteed cost contract; if the employee dies the day after the policy is issued the insurer must pay the face amount, so long as the agreed premium has been paid. No accounting is made back to the employer of the cost of providing that death benefit. An experience-rated arrangement is like self insurance in that the employer's account ultimately pays the cost of its employees' claims. (emphasis added).
Experience rating is an intermediate form of group benefits funding between self insurance, in which an employer takes all the risks of its employees' claims experience, and guaranteed cost or pure insurance, where the insurer assumes that risk. The death benefit associated with the Trust is an example of a guaranteed cost contract; if the employee dies the day after the policy is issued the insurer must pay the face amount, so long as the agreed premium has been paid. No accounting is made back to the employer of the cost of providing that death benefit. An experience-rated arrangement is like self insurance in that the employer's account ultimately pays the cost of its employees' claims. (emphasis added).
As Ms. Durning admitted in her argument, and her expert
witness Charles DeWees admitted in his testimony at trial, the death benefit is
a guaranteed cost contract. See also, §419(e)(4) (qualified
nonguaranteed contract is not a fund; § 419 does not apply). It is not an
experience-rated benefit. The same is true in the case of the any taxpayer who
funds VEBA benefits out of insurance policies instead of limiting payment of
the benefit to the cash in an employer's account. It would be patently
unreasonable for IRS to take a position in any future case which is contrary to
that which the Service conceded in the biggest litigation to date over these
issues. Such a contrary position could give a taxpayer very good ammunition for
an award of attorney fees under Section 7430.
E. Impact
Regardless of Judge Laro's reasoning, we still believe
that a properly structured VEBA program does not maintain experience rating
because there is no possibility of reversion to an employer, regardless of
claims experience. Secondly, the REAL VEBA trust has no legal ability to compel
a contribution in the event of unfavorable experience. Finally, if we examine
the trust in light of the new test articulated in Booth and the
concession made by IRS in its Memorandum of Issues, a properly structured VEBA
would survive scrutiny. The trustee should have no ability to unilaterally
decrease the amount of a promised benefit and the plan should be fully insured.
These were the damning characteristics of the Prime trust.
IV. Penalties.
A. Issue and Decision
The last thing before the Court was whether the taxpayers in
Booth were liable for accuracy related penalties because they took a
position that the Prime plan qualified under §419A(f)(6). This issue was resolved
in favor of the taxpayers. The Tax Court held that the issues of §419A(f)(6)
were novel issues of law. The Service has issued no regulations or rulings,
consequently there was no real substantial authority contrary to the taxpayers'
position. Penalties were properly expunged.
B. Impact of REAL VEBA
The decision in Booth is a victory for all welfare
plans. It confirms the existence of substantial authority for plans which seek
to fall within the §419A(f)(6) exemption. Moreover, it recognizes that taxpayers
will not have to suffer penalties because IRS has refused to issue regulations
or rulings in the area. Employers who adopt plans which incorporate the
structural requirements Judge Laro found lacking in Prime should enjoy
protection from accuracy related penalties.
V. The Amount of the Deduction
A. Reaction to the result in Booth
Many people have expressed concern that only one of the
taxpayers in the Booth set of cases was allowed a deduction for its
contribution to the Prime plan. This deduction totalled $11.00. Some companies
which do not participate in the welfare plan market have seized upon this fact
as a point of propaganda. For example, Northwestern Mutual Life recently
published a newsletter which says that an owner [of a business which contributes
to a welfare plan] can anticipate a deduction of "two thousandths of one
cent deduction for every dollar contributed," and goes on to predict a
cumulative deduction of $1,846 out of $92,300,000 contributed to the Prime
trust. This is utter nonsense.
B. Explanation of the small deduction
The reason the Tax Court allowed an $11.00 deduction is
because of a legal position taken by the lawyers for Prime, and not because of
any application of the statute by the Court. My friend, Charles Pulaski, Esquire,
tried the case and explained this to me. Prime never submitted any evidence
to refute the Service's calculation of the qualified direct costs and qualified
asset additions which would be deductible under §419 in the absence of the
§419A(f)(6) exception. Mr. Pulaski advised that their legal strategy was to
live or die with the Ten-Or-More-Employer Plan exception, and they did not want
to muddy the waters (or perhaps compromise the strength of their main argument)
by arguing another alternative basis for the deduction. In the absence of a
competing computation, the Tax Court simply affirmed the IRS' computation
without any discussion of its correctness.
C. The result could have been different
In view of the special attributes of the Prime plan and the
circumstances surrounding the legal strategy and arguments employed by the Booth
attorneys, it is grossly inaccurate to say that all deductions for welfare
plans will be limited as in this case. This is especially true because the
legislative history under section 419 states that insurance costs are
qualified direct costs. This analysis was confirmed in Private Letter
Ruling 9325050 (3/30/93). In addition, section 419 of the Code permits a
qualified asset addition with respect to life insurance. There is no apparent
fixed limitation on the addition because the IRS has failed to issue
regulations. Thus a full deduction may be available under §419, even if a plan
does not qualify for §419A(f)(6) treatment. The IRS expert witness in Booth
testified that all components of an insurance premium, including the so-called
"pure insurance" and "cash value build-up," constitute
insurance under the Code. If the contribution required by the VEBA consists of
the insurance premium, it will be very difficult to credibly argue that section
419 would not permit the deduction. It is a shame that the Tax Court did not
get the opportunity to opine upon this alternative basis for the deduction; but
the odds are good that we will get clarification from a court in the future.
Comment on "commentators" who assail welfare plans: It is no surprise that certain insurance companies and individual agents are attempting to seize an opportunity to discredit all welfare plans, regardless of differences of particular plans from Prime. Such a view may be consistent with a particular company's long-standing policy. Please remember that these companies and people are in the vast minority in this regard; we are aware of many major financial institutions and professional firms who do not share this view. In many instances, the position papers being issued by the nay-sayers are, unfortunately, written by persons with an obvious competitive agenda and without sufficient (or any) practical and technical experience in the trenches of real-world legal practice and plan draftsmanship with respect to welfare benefit plans.
Comment on "commentators" who assail welfare plans: It is no surprise that certain insurance companies and individual agents are attempting to seize an opportunity to discredit all welfare plans, regardless of differences of particular plans from Prime. Such a view may be consistent with a particular company's long-standing policy. Please remember that these companies and people are in the vast minority in this regard; we are aware of many major financial institutions and professional firms who do not share this view. In many instances, the position papers being issued by the nay-sayers are, unfortunately, written by persons with an obvious competitive agenda and without sufficient (or any) practical and technical experience in the trenches of real-world legal practice and plan draftsmanship with respect to welfare benefit plans.
* * * * *
I hope the foregoing clarifies the true meaning of Booth to those who use REAL VEBA and others interested in this very challenging area of the law. The case substantially confirms the accuracy of the legal assumptions we made in creating the REAL VEBA program. Consequently, we are not very upset that the Tax Court has publicly commented upon the issues. The Booth decision does not provide all the answers about how to draft a welfare plan in conformity with §419A(f)(6). In truth, the Tax Court's opinion in the case raises many new questions. The Booth decision will undoubtedly make uninformed people feel discomfort about welfare benefit trusts and VEBAs. To a certain extent, given the Cardozoan tone of the opinion, I believe Judge Laro had this in mind.
In the context of the §419A(f)(6) exception, the reader must remember that Congress specifically and intentionally placed this in the law in 1984. Tax lawyers did not create this tax planning opportunity -- Congress did. We have the right to use it, and IRS has no right to interfere with the unequivocal tax policy articulated by elected representatives of the people.
A properly designed VEBA program offers clients incredible opportunities for tax-advantaged financial planning. It offers creditor protection and relief from onerous rules impacting substantial pension plans which suffer from probable confiscatory taxation. It offers a better alternative than putting insurance in a retirement plan. It offers flexibility and a methodology for rewarding employee loyalty. It is one of the most powerful estate planning mechanisms available in the law. Most of all, it is backed by 66 years of statutory, judicial and regulatory precedent.
APPENDIX
THE ANALYSIS UNDER THE "SINGLE PLAN" REGULATIONS WHICH JUDGE LARO CHOSE NOT TO EMPLOY IN BOOTH
THE ANALYSIS UNDER THE "SINGLE PLAN" REGULATIONS WHICH JUDGE LARO CHOSE NOT TO EMPLOY IN BOOTH
Section 413(c) of the Code tells us what constitutes a plan maintained by more than one employer (i.e., a multiple employer plan). The regulations under section 413 tell us that such a plan is a "single plan" and refer us to the regulations under section 414(l) for a definition. Reg. section 1.414(l)-1(b) defines a "single plan:"
(1) Single plan. A plan is a "single plan" if
and only if, on an ongoing basis, all of the plan assets are available to
pay benefits to employees who are covered by the plan and their beneficiaries.
For purposes of the preceding sentence, all the assets of a plan will not fail
to be available to provide all the benefits of a plan merely because the plan
is funded in part or in whole with allocated insurance instruments. A
plan will not fail to be a single plan merely because of the following:
(i)
|
The plan has several distinct benefit structures which
apply either to the same or different participants,
|
|
(ii)
|
The plan has several plan documents,
|
|
(iii)
|
Several employers, whether or not affiliated,
contribute to the plan,
|
|
(iv)
|
The assets of the plan are invested in several
trusts...,
|
|
(v)
|
Separate accounting is maintained for purposes of cost
allocation but not for purposes of providing benefits under the plan.1
|
However, more than one plan will exist if a portion of the plan assets is not available to pay some of the benefits. This will be so even if each plan has the same benefit structure or plan document, or if all or part of the assets are invested in one trust with separate accounting with respect to each plan.
*****
(8) Separate accounting of assets. The term "separate accounting of assets means the maintenance of an asset account with respect to a given group of participants which is:
(i)
|
Credited with contributions made to the plan on behalf
of the participants and with its allocable share of investment income, if
any, and
|
|
(ii)
|
Charged with benefits paid to the participants and with
its allocable share of investment losses or expenses.
|
The regulations tell us conclusively that it is not illegal
to maintain separate accounting for the various employees of employers
participating in the trust. The main thrust of the regulations is this:
notwithstanding separate accounting, allocation of income and expenses, and
procurement of allocated insurance instruments, ALL ASSETS OF THE PLAN MUST
ULTIMATELY BE AVAILABLE FOR ALL CLAIMS. This means that the trust cannot limit the
benefits of a particular employer group to the contributions and assets of that
group. If such a limitation exists, the plan is not a "single plan."
In contrast, it would be many plans using the same document, similar to a
prototype retirement plan. If the plan is not a single plan, it is not a 10 or
more employer plan described in §419A(f)(6).
Most multiple employer plans in the country would be described in clauses (i), (ii), (iii) and (v) above, but the Regulations state that these characteristics do not prevent classification as a single plan. The foregoing provisions show clearly that the key question for determining the existence of a single plan is whether all plan assets are available to pay benefits to covered employees or their beneficiaries. Reg. sec. 1.414(l)-1(b)(1). The Regulations contain an example in section 1.414(l)-1(c)(1) in which an attempted merger of two plans provides that the assets of each plan are separately accounted for and are not available to pay benefits of the other plan. Because the assets of each plan are not available to pay all benefits, there are still two plans, and, therefore, a merger did not occur.
Most multiple employer plans in the country would be described in clauses (i), (ii), (iii) and (v) above, but the Regulations state that these characteristics do not prevent classification as a single plan. The foregoing provisions show clearly that the key question for determining the existence of a single plan is whether all plan assets are available to pay benefits to covered employees or their beneficiaries. Reg. sec. 1.414(l)-1(b)(1). The Regulations contain an example in section 1.414(l)-1(c)(1) in which an attempted merger of two plans provides that the assets of each plan are separately accounted for and are not available to pay benefits of the other plan. Because the assets of each plan are not available to pay all benefits, there are still two plans, and, therefore, a merger did not occur.
1 The Service conveniently overlooks this portion
of the regulations in its attack on Prime. It tries to bolster its view that
Prime is really a group of plans, not a single plan, by reference to Prime's
maintenance of separate accounts. As the regulation makes clear, the method of
accounting does not determine the existence of a single plan. The pertinent
inquiry is whether any account in the trust can be invaded, at least
theoretically, for payment of another person's claim for benefits.
Lance Wallach says that while I do not agree with some of
this excellent article I do hope that John Koresko one day beats the IRS.
The information provided herein is not intended as
legal, accounting, financial or any type of advice for any specific individual
or other entity. You should contact an appropriate professional for any such
advice.
The IRS is Attacking All 419 Welfare Benefit Plans
The IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them, and Section 79 plans. The IRS is aggressively auditing various plans and calling them 'listed transactions' 'abusive tax shelters,' or 'reportable transactions,'participation in any of which must be disclosed to the Service. The result has been IRS audits, disallowances, and huge fines for not properly reporting under IRC 6707A.
http://lancewallach.biz/
A warning for 419, 412i, Sec.79 and captive insurance
WebCPA
The dangers of being "listed"
Accounting Today: October 25, 2010
By: Lance Wallach
Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in
big trouble.
In recent years, the IRS has identified many of these arrangements as abusive devices to
funnel tax deductible dollars to shareholders and classified these arrangements as "listed transactions."
These plans were sold by insurance agents, financial planners, accountants and attorneys
seeking large life insurance commissions. In general, taxpayers who engage in a "listed
transaction" must report such transaction to the IRS on Form 8886 every year that they
"participate" in the transaction, and you do not necessarily have to make a contribution or
claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties
($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with
respect to a listed transaction.
But you are also in trouble if you file incorrectly.
I have received numerous phone calls from business owners who filed and still got fined. Not
only do you have to file Form 8886, but it has to be prepared correctly. I only know of two
people in the United States who have filed these forms properly for clients. They tell me that
was after hundreds of hours of research and over fifty phones calls to various IRS
personnel.
The filing instructions for Form 8886 presume a timely filing. Most people file late and follow
the directions for currently preparing the forms. Then the IRS fines the business owner. The
tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.
Many business owners adopted 412i, 419, captive insurance and Section 79 plans based
upon representations provided by insurance professionals that the plans were legitimate
plans and were not informed that they were engaging in a listed transaction.
Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section
6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from
these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A
penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending
out notices proposing the imposition of Section 6707A penalties along with requests for
lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of
these taxpayers stopped taking deductions for contributions to these plans years ago, and
are confused and upset by the IRS's inquiry, especially when the taxpayer had previously
reached a monetary settlement with the IRS regarding its deductions. Logic and common
sense dictate that a penalty should not apply if the taxpayer no longer benefits from the
arrangement.
Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed
transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described
in the published guidance identifying the transaction as a listed transaction or a transaction
that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in
the participation of these plans is the large tax deduction generated by such participation. It
follows that taxpayers who no longer enjoy the benefit of those large deductions are no
longer "participating ' in the listed transaction. But that is not the end of the story.
Many taxpayers who are no longer taking current tax deductions for these plans continue to
enjoy the benefit of previous tax deductions by continuing the deferral of income from
contributions and deductions taken in prior years. While the regulations do not expand on
what constitutes "reflecting the tax consequences of the strategy", it could be argued that
continued benefit from a tax deferral for a previous tax deduction is within the contemplation
of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make
contributions or claim tax deductions continue to pay administrative fees. Sometimes,
money is taken from the plan to pay premiums to keep life insurance policies in force. In
these ways, it could be argued that these taxpayers are still "contributing", and thus still
must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the
purpose of a particular transaction as described in the published guidance that caused such
transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e)
transactions, appears to be concerned with the employer's contribution/deduction amount
rather than the continued deferral of the income in previous years. This language may
provide the taxpayer with a solid argument in the event of an audit.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the
AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial
and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive
insurance plans. He speaks at more than ten conventions annually, writes for over fifty
publications, is quoted regularly in the press and has been featured on television and radio
financial talk shows including NBC, National Public Radio's All Things Considered, and
others. Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's
Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling
books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots. He does expert witness testimony and has never lost a case. Contact
him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com or www.taxlibrary.
us.
The information provided herein is not intended as legal, accounting, financial or any
other type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.
419 Welfare Benefit Plans
HG EXPERTS
Legal Experts Directory
May 9, 2012 By Sam Susser
A view from a former IRS Agent, CPA, College Professor
Welfare Benefit Plans (WBP), also known as Welfare Benefit
Trusts and Welfare Benefit Funds are vehicles by which employers may offer
their employees and retirees with certain types of insurance coverage (e.g.,
life insurance, health insurance, disability insurance, and long-term care), as
well as other benefits such as severance payments and educational funding. If
properly designed and in compliance with IRC sections 419 and 419A, WBPs offer
employers with a valid tax deduction. However, as is the case with many plans
that offer opportunities for deductibility, some WBPs fail to comply with Code
standards, invite abuse, and otherwise are used inappropriately as a basis to
reduce taxable income.
It is, therefore, not surprising that the Internal Revenue Service (IRS) has targeted WBP, designating many such plans as “listed transactions.” The IRS’ attack arsenal includes, but is not limited to: Notice 2007-83 (where the IRS intends to challenge claimed tax benefits meeting the definition of a “listed transaction”); Notice 2007-84 (where the IRS may challenge trust arrangements purporting to provide non-discriminatory medical and life insurance benefits, if such plans are, in substance, discriminatory); Revenue Ruling 2007-65 (where the IRS will not disallow deductions for such arrangements for prior year tax years, except to the extent that deductions have exceeded the amount of insurance included on the participant’s Form W-2 for a particular year), and IR-2007-170 (the IRS’ guidance position on WBPs). Accordingly, taxpayers who have claimed deductions pursuant to Internal Revenue Code (Code) Section 419 are receiving letters from the IRS inviting them to an audit.
THE GOOD:
Let’s start off with a proposition that may surprise many of you – the IRS is generally good. No, that’s not an oxymoron. The rest of this article is in the words of Sam Susser:
For over 35 years, I have had the privilege of representing the IRS and the US taxpayers on tax audits. Our goal was to always determine the correct tax –whether the outcome was a deficiency or a refund. The bottom line, which the IRS supported, was to “do the right thing.” Over these years, I have met and befriended many competent and exemplary agents. As with all industries, there are a few who simply go through the motions, and there are a few who are simply incompetent. Fortunately, the latter two groups are in the minority. Now that I represent clients who are being audited by IRS, my objectives have not changed. The right thing must still be done. I only hope to get a well-versed agent who knows the law and can make a determination based on facts and circumstances, and not by preconceived notions.
I have been resolving the WBP issue mostly at the Revenue Agent (RA) level. Most RAs are knowledgeable in the area of WBP, and it it a pleasure dealing with them. My clients became involved with both abusive plans as well as what I determined to be non-abusive plan. Because most clients have sought the opinions of an independent professional tax attorney, CPA, Enrolled Agent , or other independent professionals who the IRS deems to be knowledgeable and capable of rendering an opinion on a Plan, Prior to 2007 I had a good case for abating the penalty and any interest thereon due to the reasonable cause exception. The RAs accepted my briefs for penalty relief and I usually resolved the case agreed at the agent’s level. The right thing was being done by both sides. Since 2007 the bar has been raised in meeting the reasonable cause exception. Simply put, if taxpayers failed to file Forms 8886 with their tax returns, the penalty could no longer be abated due to reasonable cause. If we do not come to an agreement, the case would, at taxpayer’s additional expense, proceed to the Appeals Division. This would normally be a good strategy in nebulous circumstances. With rare exceptions this is not a good strategy under these circumstances as explained later.
Just as there are good and bad IRS agents, there are good and bad WBPs. The abusive plans that have been sold should not affect those plans that adhere to the spirit of the tax laws. Thus, of the many plans sold to taxpayers, some can be considered “good.” The “bad” WBPs should not taint the “good” ones.
IR-2007-170, Oct. 17, 2007, recognizes that “[t]here are many legitimate welfare benefit funds that provide benefits, such as health insurance and life insurance, to employees and retirees. However, the arrangements the IRS is cautioning employers about is primarily benefits the owner or other key employees of businesses, sometimes in the form of distributions of cash, loans, or life insurance policies.”
THE BAD:
A persistent pattern that I see with WBPs is that the IRS appears to presumptively hold such plans as improper contrary to the statement in IR-2007-170. From what I have indirectly encountered, it appears that the IRS may interview the plan administrator, with the primary objective of securing the plan’s participants (and audit targets) rather than determining whether the limitations of a Code Section 419 deduction were satisfied. No determination is made as to whether the plan meets or fails to meet Code requirements. The plan participants then receive audit letters: one to the entity claiming the deduction, and the other to the owner(s) of such entity. These audit letters are generally accompanied by a lengthy “canned” Information Document Request (IDR) ostensibly written by IRS attorneys.
During my decades with the IRS, IDRs are usually focused documents seeking very specific documents and information to determine whether further action is required. However, my review of IDRs on the subject of WBPs shows them to be akin to document production demands in a civil litigation. The IRS basically wants everything associated with the WBP – there is no specific focus. Moreover, they have a very expansive definition of documents, and seek them whether they are in the taxpayer’s possession, or in the possession of the taxpayer’s “attorneys, accountants, affiliates, advisers, representatives, or other persons directly or indirectly employed by you, hired by you, or connected with you, or your representatives, and anyone else subject to your control.”
What was most disturbing about these IDRs that I have seen is the fact that the RAs also have, on a number of occasions, requested copies of the tax returns for the tax year(s) under audit. This indicated to me, especially since the name of the WBP is repeatedly mentioned in the IDR, that my client was selected from the list provided by the plan administrator to the IRS. This in itself is not necessarily bad since this is a useful tool for the IRS in obtaining names of participants of plans that might not meet the muster of the Code and IRS pronouncements. However, I would think that the “give me everything from everybody” approach should not be the first step in an IRS inquiry into the validity of a WBP.
Other clients received audit letters with a similar IDR requesting information including copies of the returns under examination. These clients, however, had stopped participating in the plan many years prior to the audit years. Nonetheless, since the client's name was still on the Plan’s list of participants, the client was going to be audited. The IRS takes the position that the cash surrender value of any life insurance policy in the plan is available to the client and is therefore income to that client for the year the IRS has decided to audit Accordingly, the RAs are proposing adjustments in years in which no deduction to the WBP have been taken.
THE … ?
To rub salt into the wound, the RA has enclosed an explanation as to why the deduction is disallowed, and has proposed a statutory underpayment penalty. The tax law provides for a penalty to be imposed where a taxpayer makes a substantial understatement of their tax liability. For individual taxpayers, a substantial underpayment exists when the understatement for the year exceeds the greater of ten percent of the tax required to be shown on the return, or $5,000. This is a relatively low threshold and is easily met by most taxpayers. The penalty is twenty percent of the tax underpayment.
Following the RA’s review, the taxpayer can expect to receive a 20 – 40 page “boiler-plated” or “canned” write-up, which will wind up as the Revenue Agent Report (RAR). The RARs that I’ve seen appear obviously drafted by IRS attorneys. Sometimes the RAR is shortened as a result of “cut and paste” procedures assembled by the RA. The RARs also contain alternative positions for these proposed disallowances. Taxpayers and representatives can take little comfort when all indications lead to the conclusion that the IRS has made a determination prior to assessing all the facts and circumstances of any given case standing on its own merits. My concern is that the WBP that meet IRS requirements are swept together with those that do not, and are unjustly branded as “bad.” The participants of these “good” plans must now overcome the preconceived notions of the RA. This becomes a difficult task as RAs won't deviate from the “boiler-plated” positions, forcing the taxpayer to expend funds in seeking further relief . The Appeals Division has similarly received a directive to sustain the RA RAR thus effectively eliminating the appeals right the taxpayers normally have. The only "appeals" route a taxpayer can take is to petition the Courts for a hearing. The time, expense, and outcome in defending a WBP under this scenario are enigmatic (hence the “…?”), and well, simply put, can really become downright UGLY!
CONCLUSION:
The IRS needs to examine WBPs on a plan by plan basis, and make a determination based on the facts and circumstances of each plan. Specifically, they should be charged with independently evaluating whether a particular WBP generally adheres to the Code and the IRS’s issued pronouncements. The RA and those in charge of this project should be cognizant of the statement issued by Donald L. Korb (Chief Counsel for the IRS): “The guidance targets specific abuses involving a limited group of arrangements that claim to be welfare benefit funds.” (emphasis provided). He continues to state that: “[T]oday’s action sends a strong signal that these abusive schemes must stop.” (emphasis provided). For those plans that the IRS deems to be abusive, the IRS can concentrate its resources in auditing the plan participants. The IRS hierarchy needs to eliminate the UGLY, recognize the GOOD, and pursue the BAD.
ABOUT THE AUTHOR: Sam Susser
Sam Susser began his IRS career on 2/1/71, and spent most the succeeding years as an international examiner with brief stints in the Review Section and the Appeals Division. He closed out his IRS tenure spending four years as International Team Manager for South Florida. Currently Sam is in private practice and can be reached at 561-742-1005
It is, therefore, not surprising that the Internal Revenue Service (IRS) has targeted WBP, designating many such plans as “listed transactions.” The IRS’ attack arsenal includes, but is not limited to: Notice 2007-83 (where the IRS intends to challenge claimed tax benefits meeting the definition of a “listed transaction”); Notice 2007-84 (where the IRS may challenge trust arrangements purporting to provide non-discriminatory medical and life insurance benefits, if such plans are, in substance, discriminatory); Revenue Ruling 2007-65 (where the IRS will not disallow deductions for such arrangements for prior year tax years, except to the extent that deductions have exceeded the amount of insurance included on the participant’s Form W-2 for a particular year), and IR-2007-170 (the IRS’ guidance position on WBPs). Accordingly, taxpayers who have claimed deductions pursuant to Internal Revenue Code (Code) Section 419 are receiving letters from the IRS inviting them to an audit.
THE GOOD:
Let’s start off with a proposition that may surprise many of you – the IRS is generally good. No, that’s not an oxymoron. The rest of this article is in the words of Sam Susser:
For over 35 years, I have had the privilege of representing the IRS and the US taxpayers on tax audits. Our goal was to always determine the correct tax –whether the outcome was a deficiency or a refund. The bottom line, which the IRS supported, was to “do the right thing.” Over these years, I have met and befriended many competent and exemplary agents. As with all industries, there are a few who simply go through the motions, and there are a few who are simply incompetent. Fortunately, the latter two groups are in the minority. Now that I represent clients who are being audited by IRS, my objectives have not changed. The right thing must still be done. I only hope to get a well-versed agent who knows the law and can make a determination based on facts and circumstances, and not by preconceived notions.
I have been resolving the WBP issue mostly at the Revenue Agent (RA) level. Most RAs are knowledgeable in the area of WBP, and it it a pleasure dealing with them. My clients became involved with both abusive plans as well as what I determined to be non-abusive plan. Because most clients have sought the opinions of an independent professional tax attorney, CPA, Enrolled Agent , or other independent professionals who the IRS deems to be knowledgeable and capable of rendering an opinion on a Plan, Prior to 2007 I had a good case for abating the penalty and any interest thereon due to the reasonable cause exception. The RAs accepted my briefs for penalty relief and I usually resolved the case agreed at the agent’s level. The right thing was being done by both sides. Since 2007 the bar has been raised in meeting the reasonable cause exception. Simply put, if taxpayers failed to file Forms 8886 with their tax returns, the penalty could no longer be abated due to reasonable cause. If we do not come to an agreement, the case would, at taxpayer’s additional expense, proceed to the Appeals Division. This would normally be a good strategy in nebulous circumstances. With rare exceptions this is not a good strategy under these circumstances as explained later.
Just as there are good and bad IRS agents, there are good and bad WBPs. The abusive plans that have been sold should not affect those plans that adhere to the spirit of the tax laws. Thus, of the many plans sold to taxpayers, some can be considered “good.” The “bad” WBPs should not taint the “good” ones.
IR-2007-170, Oct. 17, 2007, recognizes that “[t]here are many legitimate welfare benefit funds that provide benefits, such as health insurance and life insurance, to employees and retirees. However, the arrangements the IRS is cautioning employers about is primarily benefits the owner or other key employees of businesses, sometimes in the form of distributions of cash, loans, or life insurance policies.”
THE BAD:
A persistent pattern that I see with WBPs is that the IRS appears to presumptively hold such plans as improper contrary to the statement in IR-2007-170. From what I have indirectly encountered, it appears that the IRS may interview the plan administrator, with the primary objective of securing the plan’s participants (and audit targets) rather than determining whether the limitations of a Code Section 419 deduction were satisfied. No determination is made as to whether the plan meets or fails to meet Code requirements. The plan participants then receive audit letters: one to the entity claiming the deduction, and the other to the owner(s) of such entity. These audit letters are generally accompanied by a lengthy “canned” Information Document Request (IDR) ostensibly written by IRS attorneys.
During my decades with the IRS, IDRs are usually focused documents seeking very specific documents and information to determine whether further action is required. However, my review of IDRs on the subject of WBPs shows them to be akin to document production demands in a civil litigation. The IRS basically wants everything associated with the WBP – there is no specific focus. Moreover, they have a very expansive definition of documents, and seek them whether they are in the taxpayer’s possession, or in the possession of the taxpayer’s “attorneys, accountants, affiliates, advisers, representatives, or other persons directly or indirectly employed by you, hired by you, or connected with you, or your representatives, and anyone else subject to your control.”
What was most disturbing about these IDRs that I have seen is the fact that the RAs also have, on a number of occasions, requested copies of the tax returns for the tax year(s) under audit. This indicated to me, especially since the name of the WBP is repeatedly mentioned in the IDR, that my client was selected from the list provided by the plan administrator to the IRS. This in itself is not necessarily bad since this is a useful tool for the IRS in obtaining names of participants of plans that might not meet the muster of the Code and IRS pronouncements. However, I would think that the “give me everything from everybody” approach should not be the first step in an IRS inquiry into the validity of a WBP.
Other clients received audit letters with a similar IDR requesting information including copies of the returns under examination. These clients, however, had stopped participating in the plan many years prior to the audit years. Nonetheless, since the client's name was still on the Plan’s list of participants, the client was going to be audited. The IRS takes the position that the cash surrender value of any life insurance policy in the plan is available to the client and is therefore income to that client for the year the IRS has decided to audit Accordingly, the RAs are proposing adjustments in years in which no deduction to the WBP have been taken.
THE … ?
To rub salt into the wound, the RA has enclosed an explanation as to why the deduction is disallowed, and has proposed a statutory underpayment penalty. The tax law provides for a penalty to be imposed where a taxpayer makes a substantial understatement of their tax liability. For individual taxpayers, a substantial underpayment exists when the understatement for the year exceeds the greater of ten percent of the tax required to be shown on the return, or $5,000. This is a relatively low threshold and is easily met by most taxpayers. The penalty is twenty percent of the tax underpayment.
Following the RA’s review, the taxpayer can expect to receive a 20 – 40 page “boiler-plated” or “canned” write-up, which will wind up as the Revenue Agent Report (RAR). The RARs that I’ve seen appear obviously drafted by IRS attorneys. Sometimes the RAR is shortened as a result of “cut and paste” procedures assembled by the RA. The RARs also contain alternative positions for these proposed disallowances. Taxpayers and representatives can take little comfort when all indications lead to the conclusion that the IRS has made a determination prior to assessing all the facts and circumstances of any given case standing on its own merits. My concern is that the WBP that meet IRS requirements are swept together with those that do not, and are unjustly branded as “bad.” The participants of these “good” plans must now overcome the preconceived notions of the RA. This becomes a difficult task as RAs won't deviate from the “boiler-plated” positions, forcing the taxpayer to expend funds in seeking further relief . The Appeals Division has similarly received a directive to sustain the RA RAR thus effectively eliminating the appeals right the taxpayers normally have. The only "appeals" route a taxpayer can take is to petition the Courts for a hearing. The time, expense, and outcome in defending a WBP under this scenario are enigmatic (hence the “…?”), and well, simply put, can really become downright UGLY!
CONCLUSION:
The IRS needs to examine WBPs on a plan by plan basis, and make a determination based on the facts and circumstances of each plan. Specifically, they should be charged with independently evaluating whether a particular WBP generally adheres to the Code and the IRS’s issued pronouncements. The RA and those in charge of this project should be cognizant of the statement issued by Donald L. Korb (Chief Counsel for the IRS): “The guidance targets specific abuses involving a limited group of arrangements that claim to be welfare benefit funds.” (emphasis provided). He continues to state that: “[T]oday’s action sends a strong signal that these abusive schemes must stop.” (emphasis provided). For those plans that the IRS deems to be abusive, the IRS can concentrate its resources in auditing the plan participants. The IRS hierarchy needs to eliminate the UGLY, recognize the GOOD, and pursue the BAD.
ABOUT THE AUTHOR: Sam Susser
Sam Susser began his IRS career on 2/1/71, and spent most the succeeding years as an international examiner with brief stints in the Review Section and the Appeals Division. He closed out his IRS tenure spending four years as International Team Manager for South Florida. Currently Sam is in private practice and can be reached at 561-742-1005
The information provided herein is not intended as legal,
accounting, financial or any type of advice for any specific individual or
other entity. You should contact an appropriate professional for any such
advice.
Copyright Lance Wallach, CLU, CHFC
Copyright Lance Wallach, CLU, CHFC
Backlash on too-good-to-be-true insurance plan
No Shelter Here September 2011
Backlash on too-good-to-be-true insurance plan
By: Lance Wallach
The 412(i), 419, captive insurance, and section 79 plans were marketed as a way for small-business owners to set up retirement, welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings, but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc., and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these plans, and many big-name insurance companies are still encouraging participation in them.
Seems Attractive
The plans are costly up-front, but your money builds over time, and there’s a large payout if the money is removed before death. While many business owners have retirement plans, they also must care for their employees. With one of these plans, business owners are not required to give their workers anything.Gotcha
Although small business has taken a recessionary hit and owners may not be spending big sums on insurance now, an IRS task force is auditing people who bought these as early as 2004. There is no statute of limitations.The IRS also requires participants to file Form 8886 informing the IRS of participation in this “abusive transaction.” Failure to file or to file incorrectly will cost the business owner interest and penalties. Plus, you’ll pay back whatever you claimed for a deduction, and there are additional fines — possibly 70% of the tax benefit you claim in a year. And,
How Hartford Life and Other Insurance Companies Tricked their Agents and Got People in Trouble with the IRS - HG.org
How Hartford Life and Other Insurance Companies Tricked their Agents and Got People in Trouble with the IRS - HG.org
Agents from Hartford and other insurance companies were shown ways to sell large life insurance policies. This “Welfare Benefit Trust 419 plan or 412i plan should be shown to their profitable small business owners as a cure for paying too much taxes.
A Welfare Benefit Trust 419 plan essentially works like this:
• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
Read more by clicking the link above!
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans CPA’s Guide to Life Insurance
Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Below is an excerpt from one of Lance Wallach’s new books.
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans
One popular type of listed transaction is the so-called “welfare benefit plan,” which once relied on IRC §419A(f)(6) for its authority to claim tax deductions, but now more commonly relies on IRC §419(e). The IRC §419A(f)(6) plans used to claim that the section completely exempted business owners from all limitations on how much tax could be deducted. In other words, it was claimed, tax deductions were unlimited. These plans featured large amounts of life insurance and accompanying large commissions, and were thus aggressively pushed by insurance agents, financial planners, and sometimes even accountants and attorneys. Not to mention the insurance companies themselves, who put millions of dollars in premiums on the books and, when confronted with questions about the outlandish tax claims made in marketing these plans, claimed to be only selling product, not giving opinions on tax questions.
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans CPA’s Guide to Life Insurance
Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Below is an excerpt from one of Lance Wallach’s new books.
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans
One popular type of listed transaction is the so-called “welfare benefit plan,” which once relied on IRC §419A(f)(6) for its authority to claim tax deductions, but now more commonly relies on IRC §419(e). The IRC §419A(f)(6) plans used to claim that the section completely exempted business owners from all limitations on how much tax could be deducted. In other words, it was claimed, tax deductions were unlimited. These plans featured large amounts of life insurance and accompanying large commissions, and were thus aggressively pushed by insurance agents, financial planners, and sometimes even accountants and attorneys. Not to mention the insurance companies themselves, who put millions of dollars in premiums on the books and, when confronted with questions about the outlandish tax claims made in marketing these plans, claimed to be only selling product, not giving opinions on tax questions.
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