Showing posts with label abusive tax shelters. Show all posts
Showing posts with label abusive tax shelters. Show all posts
FBAR/OVDI LANCE WALLACH: FBAR-What are You Hiding
FBAR/OVDI LANCE WALLACH: FBAR-What are You Hiding: The collapse of Swiss bank secrecy, the IRS settlement with UBS, the criminal investigation of HSBC and the related IRS voluntary disclo...
Facebooks insiders escape 200 million in taxes.
Lance Wallach
As
I discuss in my Estates and Trusts book the Facebook insiders are using a GRAT
to avoid estate and gift taxes. A grantor retained annuity trust is a legal
way, if done properly, to avoid taxes. The strategy is a great way to shift
wealth to others at almost no tax cost. GRATS are a way for the rich to avoid
estate and other taxes. These trusts, which are easy to structure, transfer
asset appreciation from one taxpayer to others almost tax-free. The benefits
are huge. To be done successfully this strategy must use realistic appraisal
feels. A valuation must be done in an unbiased way. Business Valuations can be
a key to this strategy. Over the life of the trust the person who set it up
gets payments plus a return. The result is usually no gift or estate tax on the
appreciation of the asset. This is true even though the asset had been
transferred.
Be
sure that whoever sets this up knows what he is doing. A realistic business
valuation is a must, or a valuation of the asset.
Lance Wallach, National Society of
Accountants Speaker of the Year and member of the American Institute of CPAs
faculty of teaching professionals, is a frequent speaker on retirement plans,
financial and estate planning, and abusive tax shelters. He speaks at more than ten conventions
annually and writes for over fifty publications. 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. Mr. Wallach may be reached at 516/938.5007,
wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.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.
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
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/
FBAR/OVDI LANCE WALLACH: FBAR-What are You Hiding
FBAR/OVDI LANCE WALLACH: FBAR-What are You Hiding: The collapse of Swiss bank secrecy, the IRS settlement with UBS, the criminal investigation of HSBC and the related IRS voluntary disclo...
Reportable Transactions .com: 419 Plan, 412i Plan
Reportable Transactions .com: 419 Plan, 412i Plan, Welfare benefit plan assistan...: 419 Plan, 412i Plan, Welfare benefit plan assistance, audits & Abusive tax shelters
Small Business Retirement Plans Fuel Litigation
Maryland Trial Lawyer
Dolan Media Newswires January
Small businesses facing audits and potentially huge tax penalties over certain types of retirement plans are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for small business owners to set up retirement or welfare benefits plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more recently focused audits on them.
The penalties for such transactions are extremely high and can pile up quickly.
There are business owners who owe taxes but have been assessed 2 million in penalties. The existing cases involve many types of businesses, including doctors’ offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.
A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a “springing cash value,” meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.
Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums – 80 to 110 percent of the first year’s premium, which could exceed million.
Technically, the IRS’s problems with the plans were that the “springing cash” structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.
Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or “listed transaction,” penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren’t told that they had to file Form 8886, which discloses a listed transaction.
According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.
Another reason plaintiffs are going to court is that there are few alternatives – the penalties are not appeasable and must be paid before filing an administrative claim for a refund.
The suits allege misrepresentation, fraud and other consumer claims. “In street language, they lied,” said Peter Losavio, a plaintiffs’ attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.
In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs’ lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.
“Insurance companies were aware this was dancing a tightrope,” said William Noll, a tax attorney in Malvern, Pa. “These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn’t any disclosure of the scrutiny to unwitting customers.”
A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that “nobody can predict the future.”
An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions – which in one of his cases amounted to 400,000 the first year – as well as the costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but “criminal.” A judge dismissed the case against one of the insurers that sold 412(i) plans.
The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.
In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a “seven-figure” sum in penalties and fees paid to the IRS. A trial is expected in August.
But tax experts say the audits and penalties continue. “There’s a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens,” Wallach said. “Thousands of business owners are being hit with million-dollar-plus fines. … The audits are continuing and escalating. I just got four calls today,” he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.
“From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount.”
Lance Wallach can be reached at: WallachInc@gmail.com
For more information, please visit www.taxadvisorexperts.org 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, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, 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 the 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.taxadvisorexperts.com.
Lance Wallach
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
No Shelter Here, Backlash on too-good-to-be-true insurance plan
Remodeling Hanley / Wood
September 2011
By: Lance Wallach
During the past few years, the Internal Revenue Service (IRS) has fined many business owners hundreds of thousands of dollars for participating in several particular types of insurance plans.
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, if your accountant does not confidentially inform on you, he or she will get fined $100,000 by the IRS. Further, the IRS can freeze assets if you don’t pay and can fine you on a corporate and a personal level despite the type of business entity you have.
Legal Wrangling
Currently, small businesses facing audits and potentially huge tax penalties over these plans are filing lawsuits against those who marketed, designed, and sold the plans. Find out promptly if you have one of these plans and seek advice from a knowledgeable accountant to help you properly file Form 8886.
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, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, 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 the 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, lawallach@aol.com or visit www.taxaudit419.com, www.vebaplan.org, www.section79.plan
This article is for informational purposes only and should not be construed as specific legal or financial advice.
Captive Insurance
As I have been warning for the last few years some captive insurance plans are being looked at and audited. If you are in a captive, which may be legal, you still may have to file under IRS 6707A. Most people who file do it wrong and then you have compounded the problem by lying to the IRS. Make one mistake on the forms and you have another problem.
On November 1, 2016, the Internal Revenue Service (“IRS”) issued Notice 2016-66 identifying certain transactions relating to small captive insurance companies as a “transaction of interest.” Prior to this notice, the IRS had identified certain small captives as amongst its list of “Dirty Dozen Tax Scams.” Also, the IRS has been actively examining captives and their owners and litigating cases in the U.S. Tax Court. The new “transaction of interest” designation throws small captive insurance company transactions into a tax reporting regime that can potentially lead to significant penalties and IRS income tax and promoter examinations.
On November 1, 2016, the Internal Revenue Service (“IRS”) issued Notice 2016-66 identifying certain transactions relating to small captive insurance companies as a “transaction of interest.” Prior to this notice, the IRS had identified certain small captives as amongst its list of “Dirty Dozen Tax Scams.” Also, the IRS has been actively examining captives and their owners and litigating cases in the U.S. Tax Court. The new “transaction of interest” designation throws small captive insurance company transactions into a tax reporting regime that can potentially lead to significant penalties and IRS income tax and promoter examinations.
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