Showing posts with label 419 plan litigation. Show all posts
Showing posts with label 419 plan litigation. Show all posts
Abusive Tax Shelters & 419 Plans Lawsuits: 412i-419 Plans: As an expert witness Lance Wallach
Abusive Tax Shelters & 419 Plans Lawsuits: 412i-419 Plans: As an expert witness Lance Wallach...: 412i-419 Plans: As an expert witness Lance Wallach side has never ... : As an expert witness Lance Wallach side has never lost a case: Somet...
Abusive Insurance and Retirement Plans
Abusive Insurance and Retirement Plans
Single-employer section 419 welfare
benefit plans are the latest incarnation in insurance deductions the IRS deems abusive.
benefit plans are the latest incarnation in insurance deductions the IRS deems abusive.
by Lance Wallach
Parts of this article are from the AICPA CPE self-study course Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess, authored by Lance Wallach.
Many of the listed transactions that can get your clients into trouble with the IRS are exotic shelters that relatively few practitioners ever encounter. When was the last time you saw someone file a return as a Guamanian trust (Notice 2000-61)? On the other hand, a few listed transactions concern relatively common employee benefit plans the IRS has deemed tax-avoidance schemes or otherwise abusive. Perhaps some of the most likely to crop up, especially in small business returns, are arrangements purporting to allow deductibility of premiums paid for life insurance under a welfare benefit plan.
Some of these abusive employee benefit plans are represented as satisfying section 419 of the Code, which sets limits on purposes and balances of “qualified asset accounts” for such benefits, but purport to offer deductibility of contributions without any corresponding income. Others attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit
the exception for separate welfare benefit funds under collective-bargaining agreements provided by IRC § 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined-benefit pension plans established pursuant to the former section 412(i) (still so-called, even though the subsection has since been redesignated section 412(e)(3). See sidebar “Defined-Benefit 412(i) Plans Under Fire”).
the exception for separate welfare benefit funds under collective-bargaining agreements provided by IRC § 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined-benefit pension plans established pursuant to the former section 412(i) (still so-called, even though the subsection has since been redesignated section 412(e)(3). See sidebar “Defined-Benefit 412(i) Plans Under Fire”).
Big Trouble Ahead For 412i and 419 Plan Participants - Lance Wallach
Big Trouble Ahead For 412i and 419 Plan Participants - Lance Wallach
What are 412(i) Plans and what are the problems with these plans
What are 412(i) Plans and what are the problems with these plans
412(i) is a provision of the tax code. A 412(i) plan is a defined pension plan. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products (insurance and annuities). It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. To create a 412(i) plan, there must be a plan to hold the assets. The employer funds the plan by making cash contributions to the plan, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.
The plan uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
Where did the problems start?
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions and high surrender charges.
These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would bloom like a rose, and the individual would have a policy with significant cash value which he or she could withdraw tax free.
Who signed off on the plan?
Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that many of the plans complied with the tax code.
So what is the problem?
In the early 2000s, IRS officials began questioning Richard Smith and others and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code.
In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of $100,000 per year, and corporations $200,000 per year. These penalties are often referred to as section 6707 penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand.
In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.
The plan uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
Where did the problems start?
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions and high surrender charges.
These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would bloom like a rose, and the individual would have a policy with significant cash value which he or she could withdraw tax free.
Who signed off on the plan?
Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that many of the plans complied with the tax code.
So what is the problem?
In the early 2000s, IRS officials began questioning Richard Smith and others and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code.
In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of $100,000 per year, and corporations $200,000 per year. These penalties are often referred to as section 6707 penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand.
In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.
Tax Court Drops The Hammer On Employee Welfare Plan
Tax Court Drops The Hammer On Employee Welfare Plan: For the last two decades Lance Wallach has been a voice crying out in the wilderness on the perils of 419(e) employee welfare plans. Lance is not an attorney, CPA or actuary. A graduate of Baruch College he trained as a financial planner with Mutual Benefit Life and then moved on [...]
Reportable Transactions & 419 Plans Litigation: CJA and associates 419 412i section 79 scam audits
Reportable Transactions & 419 Plans Litigation: CJA and associates 419 412i section 79 scam audits...: CJA and associates 419 412i section 79 scam audits lawsuits
Reportable Transactions & 419 Plans Litigation: CJA and associates 419 412i section 79 scam audits
Reportable Transactions & 419 Plans Litigation: CJA and associates 419 412i section 79 scam audits...: CJA and associates 419 412i section 79 scam audits lawsuits
Abusive Tax Shelters & 419 Plans Lawsuits: IRS to Audit Sea Nine VEBA Participating Employers
Abusive Tax Shelters & 419 Plans Lawsuits: 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
Form 8886 & 419 Plans Litigation: Re-entering The Tax System
Form 8886 & 419 Plans Litigation: Re-entering The Tax System: Taxlanta.org July 2011 by Lance Wallach Taxpayers who h...
Raymond Ankner -Expected to be the biggest life insurance failure in Illinois : Captive Insurance & 419 Plans Litigation
Raymond Ankner -Expected to be the biggest life insurance failure in Illinois : Captive Insurance & 419 Plans Litigation: Septembe...: Captive Insurance & 419 Plans Litigation: September 2013
6707A Penalties & 419 Plans Litigation: Court CaseSea Nine Veba
6707A Penalties & 419 Plans Litigation: Court CaseSea Nine Veba: As an expert witness in this case the claims against Lance Wallach’s client was dismissed. Lance Wallach’s side has never lost a case.
Captive Insurance & 419 Plans Litigation: September 2013
Captive Insurance & 419 Plans Litigation: September 2013
Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan.
Non-discrimination
Section 79 plans are employee benefits plans. As such, employers are not supposed to discriminate in favor of key employees or business owners.
As you know, Section 79 plans are implemented so business owners can take a business deduction for the purchase of an individually owned life insurance policy that the owner can borrow from tax free in retirement.
It sounds great until you break down the math and understand that a client would be better off paying taxes on his/her money, taking it home, and funding a good cash value life policy rather than the low cash accumulation Section 79 Plan policy.
Notwithstanding the math behind Section 79 plans, let's talk about the benefits for employees. The employee owner is going to buy a "permanent" policy that will carry cash and can be borrowed from tax free in retirement.
That same policy must be offered to all employees. If that actually happened in a full-disclosure manner, virtually all the employees would opt for the same permanent policy; and if that happened, the finances of the plan would really go out the window because of the tremendous costs for the employees.
How do you "work around" this issue?
The work around of this issue is a bit clever and deceptive. The employees will be scared into voluntarily opting for $50,000 of term insurance instead of the full-benefit policy (term or permanent).
Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan.
Non-discrimination
Section 79 plans are employee benefits plans. As such, employers are not supposed to discriminate in favor of key employees or business owners.
As you know, Section 79 plans are implemented so business owners can take a business deduction for the purchase of an individually owned life insurance policy that the owner can borrow from tax free in retirement.
It sounds great until you break down the math and understand that a client would be better off paying taxes on his/her money, taking it home, and funding a good cash value life policy rather than the low cash accumulation Section 79 Plan policy.
Notwithstanding the math behind Section 79 plans, let's talk about the benefits for employees. The employee owner is going to buy a "permanent" policy that will carry cash and can be borrowed from tax free in retirement.
That same policy must be offered to all employees. If that actually happened in a full-disclosure manner, virtually all the employees would opt for the same permanent policy; and if that happened, the finances of the plan would really go out the window because of the tremendous costs for the employees.
How do you "work around" this issue?
The work around of this issue is a bit clever and deceptive. The employees will be scared into voluntarily opting for $50,000 of term insurance instead of the full-benefit policy (term or permanent).
Captive Insurance & 419 Plans Litigation: December 2013
Captive Insurance & 419 Plans Litigation: December 2013
Chau v. Aviva Life and Annuity, No. 3:09-cv-2305-B, 2011 WL 1990446 (N.D. Tex. May 20, 2011)
Doctors and dentists alleged that Indianapolis Life Insurance Company advertised, marketed, and consummated fraudulent business transactions, resulting in damages. Plaintiffs originally filed their complaint in April of 2009 in Washington state court and after Aviva removed the case to federal district court, the MDL Panel ordered the case transferred to the Northern District of Texas. Prior to the case being transferred, Plaintiffs filed their second amended complaint and subsequently, Aviva filed its motion to dismiss Plaintiff‘s second amended complaint on February 5, 2010. Plaintiffs allege that the insurer knew that the IRS had looked askance at the legality of similar tax-shelter arrangements (welfare benefit trusts) and indicated that these arrangements may be deemed abusive tax shelters, yet continued to market its § 419 Plan as a tax-avoidance plan.
Plaintiffs‘ motion for a suggestion of remand to the Judicial Panel of Multidistrict Litigation was filed on March 3, 2011 and was subsequently denied by the district court.
17
However, the court noted that plaintiffs may motion again, should there be further developments in the case. Aviva‘s motion to dismiss the second amended complaint was granted in part and denied in part on May 20, 2011. In its motion, Aviva claimed that Plaintiffs‘ common law fraud/negligent misrepresentation claim did not meet the heightened pleading requirements of Rule 9(b), in addition to failing to state a claim, and the court agreed. However, on the breach of contract claim, the court found that under the applicable law governing the contract, plaintiff‘s claim was not due to be dismissed. The court elaborated on its reasoning, noting that allegations concerning oral representations made about the policies, specifically, their ability to obtain substantial tax savings with the 419 Plan. Plaintiffs asserted in their second amended complaint that those representations were false and resulted in ―substantial tax penalties and interest‖ due to an IRS audit. Thus, the court found that
Chau v. Aviva Life and Annuity, No. 3:09-cv-2305-B, 2011 WL 1990446 (N.D. Tex. May 20, 2011)
Doctors and dentists alleged that Indianapolis Life Insurance Company advertised, marketed, and consummated fraudulent business transactions, resulting in damages. Plaintiffs originally filed their complaint in April of 2009 in Washington state court and after Aviva removed the case to federal district court, the MDL Panel ordered the case transferred to the Northern District of Texas. Prior to the case being transferred, Plaintiffs filed their second amended complaint and subsequently, Aviva filed its motion to dismiss Plaintiff‘s second amended complaint on February 5, 2010. Plaintiffs allege that the insurer knew that the IRS had looked askance at the legality of similar tax-shelter arrangements (welfare benefit trusts) and indicated that these arrangements may be deemed abusive tax shelters, yet continued to market its § 419 Plan as a tax-avoidance plan.
Plaintiffs‘ motion for a suggestion of remand to the Judicial Panel of Multidistrict Litigation was filed on March 3, 2011 and was subsequently denied by the district court.
17
However, the court noted that plaintiffs may motion again, should there be further developments in the case. Aviva‘s motion to dismiss the second amended complaint was granted in part and denied in part on May 20, 2011. In its motion, Aviva claimed that Plaintiffs‘ common law fraud/negligent misrepresentation claim did not meet the heightened pleading requirements of Rule 9(b), in addition to failing to state a claim, and the court agreed. However, on the breach of contract claim, the court found that under the applicable law governing the contract, plaintiff‘s claim was not due to be dismissed. The court elaborated on its reasoning, noting that allegations concerning oral representations made about the policies, specifically, their ability to obtain substantial tax savings with the 419 Plan. Plaintiffs asserted in their second amended complaint that those representations were false and resulted in ―substantial tax penalties and interest‖ due to an IRS audit. Thus, the court found that
Severe Penalties for Accountants: 419 Welfare Benefit 412i Retirement Plans
Severe Penalties for Accountants: 419 Welfare Benefit 412i Retirement Plans
What are 412(i) Plans and what are the problems with these plans
What are 412(i) Plans and what are the problems with these plans
412(i) is a provision of the tax code. A 412(i) plan is a defined pension plan. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products (insurance and annuities). It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. To create a 412(i) plan, there must be a plan to hold the assets. The employer funds the plan by making cash contributions to the plan, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.
The plan uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
Where did the problems start?
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions and high surrender charges.
These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would bloom like a rose, and the individual would have a policy with significant cash value which he or she could withdraw tax free.
Who signed off on the plan?
Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that many of the plans complied with the tax code.
So what is the problem?
In the early 2000s, IRS officials began questioning Richard Smith and others and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code.
In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of $100,000 per year, and corporations $200,000 per year. These penalties are often referred to as section 6707 penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand.
In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.
The plan uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
Where did the problems start?
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions and high surrender charges.
These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would bloom like a rose, and the individual would have a policy with significant cash value which he or she could withdraw tax free.
Who signed off on the plan?
Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that many of the plans complied with the tax code.
So what is the problem?
In the early 2000s, IRS officials began questioning Richard Smith and others and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code.
In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of $100,000 per year, and corporations $200,000 per year. These penalties are often referred to as section 6707 penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand.
In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.
412i, 419 Plans: Lance Wallach Life Insurance: complex scams involve
412i-419 Plans: Lance Wallach Life Insurance: complex scams involv...: Lance Wallach Life Insurance: complex scams involving life insurance policies : There are a lot of complex scams involving life insurance
Welfare Benefit Plans & 419 Plans Litigation: Can you or your business afford to pay the IRS
Welfare Benefit Plans & 419 Plans Litigation: Can you or your business afford to pay the IRS $20...: Did You Participate in a 419 Plan, 412i Plan, Or Abusive Tax Shelter? You Could Be Fined, Or Sued! Ezine Articles Lance Wallach
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