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www.taxaduit419.com for help with 419 plans IRS audits lawsuits of 419 412i captive insurance and section 79 plans|.

California Enrolled Agent

January 2, 2009

Abusive 412(i) Retirement Plans Can Get Accountants Fined $200,000

By Lance Wallach & Ira Kaplan

Most insurance agents sell 412(i) retirement plans!. The large insurance commissions generate some of the enthusiasm'. Unlike other retirement plans, the 412(i) plan must have insurance products as the funding mechanism". This seems to generate enthusiasm among insurance agents;. The IRS has been auditing almost all participants in 412(i) plans for the last few years,. At first, they thought all 412(i) plans were abusive. Many participants' contributions were disallowed and there were additional fines of $200,000 per year for the participants. The accountants who signed the tax returns (who the IRS called "material advisors") were also fined $200,000 with a referral to the Office of Professional Responsibility. For more articles and details, see www.vebaplan.com and www.irs.gov/.

On Friday February 13, 2004, the IRS issued proposed regulations concerning the valuation of insurance contracts in the context of qualified retirement plans.

The IRS said that it is no longer reasonable to use the cash surrender value or the interpolated terminal reserve as the accurate value of a life insurance contract for income tax purposes. The proposed regulations stated that the value of a life insurance contract in the context of qualified retirement plans should be the contract's fair market value.

The Service acknowledged in the regulations (and in a revenue procedure issued simultaneously) that the fair market value standard could create some confusion among taxpayers. They addressed this possibility by describing a safe harbor position.

When I addressed the American Society of Pension Actuaries Annual National Convention, the IRS chief actuary also spoke about attacking abusive 412(i) pensions.

A "Section 412(i) plan" is a tax-qualified retirement plan that is funded entirely by a life insurance contract or an annuity. The employer claims tax deductions for contributions that are used by the plan to pay premiums on an insurance contract covering an employee. The plan may hold the contract until the employee dies, or it may distribute or sell the contract to the employee at a specific point, such as when the employee retires.

"The guidance targets specific abuses occurring with Section 412(i) plans", stated Assistant Secretary for Tax Policy Pam Olson. "There are many legitimate Section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements." Or, to put it another way, tax deductions are being claimed, in some cases, that the Service does not feel are reasonable given the taxpayer's facts and circumstances.

"Again and again, we've uncovered abusive tax avoidance transactions that game the system to the detriment of those who play by the rules," said IRS Commissioner Mark W. Everson.

The IRS has warned against Section 412(i) defined benefit pension plans, named for the former IRC section governing them. It warned against certain trust arrangements it deems abusive, some of which may be regarded as listed transactions. Falling into that category can result in taxpayers having to disclose such participation under pain of penalties, potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans.

One reason for the harsh treatment of 412(i) plans is their discrimination in favor of owners and key, highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to the economic realities of these transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while simultaneously hoping to minimize the financial fallout from penalties.

The sponsor of an abusive plan can expect to be treated more harshly. Although in some situations something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which of course triggers the full extent of back taxes, penalties and interest on all contributions that were made, not to mention leaving behind no retirement plan whatsoever. In addition, if the participant did not file Form 8886 and the accountant did not file Form 8918 (to report themselves), they would be fined $200,000.

Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. Contact him at 516.938.5007 or visit www.vebaplan.com.

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.

Review about: Veba 419.

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Anonymous
Central Islip, New York, United States #1225792

Montgomery McCracken Settles ERISA Suit for $980K

Gina Passarella, The Legal Intelligencer

April 29, 2016 | 0 Comments

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REPRINTS Montgomery McCracken Walker & Rhoads has agreed to pay $980,000 to settle claims brought by a class of employee benefit plans that claimed the law firm received fees misappropriated from their plans by disbarred attorney and the operator of their trusts, John Koresko, according to a motion to approve the settlement.In a motion filed April 27, the plaintiffs in Kalan v.

Montgomery McCracken Walker & Rhoads said the law firm has denied any wrongdoing or legal liability but wanted to resolve the action through the settlement, which was negotiated through mediation before Diane Welsh of JAMS. The plaintiffs, more than 200 employee benefit plans with more than 500 participants, said Koresko misappropriated more than $35 million from two trusts that oversaw their plans, the REAL VEBA Trust and the Single Employer Welfare Benefit Plan Trust. Those trusts are now under court supervision, Koresko has been disbarred and a judgment against him for $38.4 million has been levied. According to the motion for preliminary approval of settlement in Kalan, Koresko made various expenditures and loans out of the trusts' assets, including an alleged improper payment to Montgomery McCracken in the amount of $1.3 million between 2011 and 2013.

Those payments were for legal work the firm was hired to do for the trusts, but for which ultimately was to the benefit of Koresko, the plaintiffs alleged in their complaint. The plaintiffs argued that under the Employee Retirement Income Security Act and state law, the law firm should be ordered to disgorge those payments. The plaintiffs hailed the settlement in their motion as an "excellent result" considering it represents 80 percent of the money Montgomery McCracken received from the Koresko parties. Class counsel, led by Ira B.

Silverstein of The Silverstein Firm in Philadelphia and David Lefkowitz of Wilshire Palisades Law Group in Santa Monica, California, will take its fees out of the settlement funds, according to the motion. Montgomery McCracken has agreed not to contest the plaintiffs' counsel's fee petition unless it exceeds 30 percent of the settlement fund, according to the settlement agreement. The motion for preliminary approval is now before U.S. District Judge Wendy Beetlestone of the Eastern District of Pennsylvania.

Michael O'Mara of Stradley Ronon Stevens & Young represented Montgomery McCracken and declined to comment on the motion. Silverstein did not return a call seeking comment. According to the complaint, Montgomery McCracken agreed to represent the trusts and its principals and affiliates in a suit filed against them by the U.S. Department of Labor.

But within days of the firm entering its appearance, the court entered partial summary judgment against three of the principals and affiliates, Koresko, Jeanne Bonney and PennMont Benefit Services, according to the complaint. The court had ruled Koresko, Bonney and PennMont had breached their fiduciary duties by transferring trust assets to nontrust accounts, according to the complaint. "Despite this finding, MMWR did not withdraw its appearance on behalf of any of the parties; nor did it limit itself to representing Mr. Koresko, his alleged coconspirators and his companies," the plaintiffs said in the complaint.

"It continued to claim to represent the two trusts ... and continued the representation with the expectation and understanding that all fees incurred, including fees incurred representing Koresko et al., were to be paid by the trusts. "Over the course of the next year, MMWR billed and accepted payment from the trusts for the representation of Koresko and his co-conspirators despite knowing that the interests of Koresko et al.

were directly adverse to the interests of the trusts and the trusts' beneficiaries," the complaint further alleged.The plaintiffs alleged Montgomery McCracken should have known the adverse interests were directly material to the manner in which the firm was handling the Koresko-related litigation.

Anonymous
#769913

googlelance

Law360 has implemented a new privacy policy. To view it, please click here.

US Says Benefit Plan Scheme Costs Millions In Taxes

Share us on:TwitterFacebookLinkedInBy Gavin Broady 0 Comments

Law360, New York (October 11, 2013, 2:38 PM ET) -- The U.S. government sued an insurance program marketer in California federal court Wednesday in an effort to shut down a purported scheme pushing small businesses to buy into employee benefits programs it claims are structured to cheat the government out of millions of dollars in taxes.

The government’s complaint accuses KAE Insurance Services Inc. and affiliated entities of hawking voluntary employee beneficiary association plans on the misleading promise that the participating businesses can legally write off plan contributions as federal income tax deductions while still recouping the full value of those contributions down the road, according to the complaint.

The defendants have long been well aware, however, that the plans as structured violate the Internal Revenue Code and regulations promulgated by the U.S. Department of the Treasury, and their activities must be halted via a court injunction, the government argues.

“Defendants have continued to falsely claim that the VEBA plans in fact comply with the tax laws, and manage and promote them to this day despite their documented knowledge of the illegality of the plans,” the government said. “The result is significant amounts of lost tax revenue to the treasury based on erroneously claimed tax deductions.”

The complaint alleges that named defendant and California resident Kenneth Elliott has since 2001 used a network of businesses, independent certified public accountants and financial planners to sell companies on the VEBA plans on the promise they can provide “a lucrative and tax-advantaged method to accrue wealth.”

Promotion of those plans has led participating companies across the country to deduct millions in contributions, despite the fact that the IRS decided more than a decade ago — in a determination repeatedly upheld by federal courts — that massive tax write-offs under such plans are at odds with federal law, according to the complaint.

The government said one audit of some 41 customers who participated in the plans marketed by the defendants revealed a total tax deficiency of nearly $14 million, and further estimated the potential total loss to date to be over $70 million.

Elliot and his co-defendants are said to push the VEBA plans on wealthy customers with closely-held businesses such as medical practices, pitching the programs as a legal and tax-free means of providing medical or death benefits to employees, according to the complaint.

VEBA contributions are placed into a trust used to purchase insurance contracts, the premiums for which would otherwise be included as part of that employee’s gross income if purchased directly. Because such plans have in the past been used as tax shelters, federal law tightly regulates the ways in which plan contributions may be deducted, the government said.

The complaint noted that one common example of how such plans have been used as “vehicles for rampant tax abuse” involves paying excessive contributions to obtain cash value insurance policies set aside for future benefits to company owners that do not actually provide welfare benefits to employees but instead are a means of distributing excess corporate profits and softening current federal tax obligations.

The involvement of Sea Nine Associates Inc. — which sponsors the VEBA plans promoted by the instant suit defendants and is itself a named defendant — in a suit over those plans more than a decade ago serves as evidence that the defendants are well aware of the potential illegality of their enterprise, the government said.

“The core purpose and effect of the participation in a Sea Nine VEBA plan is to provide participants with a mechanism to accumulate wealth for their personal benefit, unlawfully protecting that income from federal taxation by treating it as a welfare benefit when it was that in name only,” the complaint said.

Representatives for the parties were not immediately available for comment Friday.

Counsel information for the defendants was not immediately available.

The case is United States of America v. Kenneth Elliott et al, case number 8:13-cv-01582 in the U.S. District Court for the Central District of California wallach for sea nine veba help

Anonymous
to Anonymous #1411662

VEBA crooks beware, Lance Wallach is going to finish you off.

John Hancock Life Insurance Co.

of New York and Nationwide Life Insurance Co. are in the crosshairs of a pair of lawsuits challenging their involvement with a disbarred attorney who mishandled millions of dollars of employer-sponsored cash value life insurance policies ( Hausknecht v. John Hancock Life Ins. Co.

of N.Y. , E.D. Pa., No. 2:17-cv-03911, complaint filed 8/31/17 ; Corman v.

Nationwide Life Ins. Co. , E.D. Pa., No.

2:17-cv-03912, complaint filed 8/31/17 ).

At issue in the case is the multiple-employer welfare arrangement designed and created by disbarred attorney John Koresko and his entities—commercially known as REAL VEBA. The arrangement drew multiple lawsuits by the Labor Department and participants who suffered losses due to Koresko’s mishandling of several aspects of the REAL VEBA.

John Hancock and Nationwide are accused of selling their life insurance products through the arrangement and encouraging their agents to recommend it despite allegedly knowing that its nature was misrepresented, according to two separate lawsuits filed Aug. 31 in federal court in Pennsylvania. The insurers also allowed Koresko to convert plan assets by authorizing loans in violation of ERISA, the lawsuits alleges.

Nationwide hasn’t been served with the lawsuit yet, Nationwide’s spokesman Ryan Ankrom told Bloomberg BNA Aug.

31 via email. “We’ll examine the allegations carefully and explore all our legal options,” Ankrom said.

The lawsuit against Nationwide was filed by James Corman, Energy Alternative Studies Inc., and its welfare benefit plan. Nationwide allegedly sold at least 13 policies through the REAL VEBA to at least 12 plans. The Ohio-based insurance company changed the owners and beneficiaries of 13 policies despite knowing that Koresko lacked the authority to make those changes, the lawsuit said.

In addition, Nationwide converted plan assets by allegedly making at least eight separate loans to Koresko for $2 million and concealing it from participants. The loans were secured by the cash value in policies owned by the plans. Aric D. Hausknecht, the Complete Medical Care Services of New York PC, and its welfare benefit plan filed the lawsuit against John Hancock.

They claim that John Hancock sold at least 31 policies through the arrangement to at least 21 plans. The Michigan-based insurer allegedly converted plan assets by making at least six separate loans to Koresko for $2.9 million, the lawsuit alleges. John Hancock didn’t immediately respond to Bloomberg BNA’s request for comment. Koresko in 2015 was ordered to pay more than $38 million for violating the Employee Retirement Income Security Act by transferring plan assets from plans that he sold to employers for his personal benefit or for the benefit of companies he owned and controlled.

Last year, a law firm agreed to pay $980,000 to settle a lawsuit challenging its involvement with the Koresko scheme. To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bna.com To contact the editor responsible for this story: Jo-el J.

Meyer at jmeyer@bna.com For More Information Text of the Nationwide lawsuit is at http://src.bna.com/r9C.Text of the John Hancock lawsuit is at http://src.bna.com/r9A.

Anonymous
#581320

HG.org

Legal

Participate in a 419 or 412i Plan or Other Abusive Tax Shelter You Could Be Fined $200000 Per Year

________________________________________

September 15, 2011 By Lance Wallach, CLU, CHFC

________________________________________

Did you get a letter from the IRS threatening to impose this fine?

If you haven’t already, you still may. Consider yourself lucky if you have not because this means that you have more time to straighten this situation out. Do not wait for this letter to come from the IRS before you call an expert to help you. Even if you have been audited already, you could still get the letter and/or fine. One has nothing to do with the other, and once the fine has been imposed, it is not able to be appealed.

Many businesses that participated in a 412i retirement plan or the IRS is auditing a 419-welfare benefit plan. Many of these plans were not in compliance with the law and are considered abusive tax shelters. Many business owners are not even aware that the welfare benefit plan or retirement plan that they are participating in may be an abusive tax shelter and that they are in serious jeopardy of huge IRS penalties for each year that they have been in this type of plan.

Insurance companies, CPAs, sellers of these 419 welfare benefit plans or 412i retirement plans, as well as anyone that gave tax advice or recommended participation in one or more of these plans, also known as a material advisor, is in danger of being sued, fined by the IRS, or both.

There is help available if you think you may be involved with one of these 419 welfare benefit plans, 412i retirement plans, or any abusive tax shelter. IRS penalty abatement is an option if you act now.

ABOUT THE AUTHOR: Lance Wallach

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 does expert witness testimony and has never lost a case.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Copyright Lance Wallach, CLU, CHFC

More information about Lance Wallach, CLU, CHFC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Anonymous
to e Plainview, New York, United States #603897

NSA: Member Link

Your link to accounting, tax and practice management ideas, tools, news and information.

Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly

By Lance Wallach May 14, 2008

Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.

Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.

The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.

Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.

While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.

Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.

Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit www.vebaplan.com.

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.

National Society of Accountants

Anonymous
to r Plainview, New York, United States #607298

TAX MATTERS

TAX BRIEFS

ABUSIVE INSURANCE PLANS GET RED FLAG

The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.

Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.

Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.

A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.

Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,

516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits.

Journal of Accountancy January 2008

Anonymous
to k Plainview, New York, United States #667470

FAST PITCH NETWORKING

IRS Hiring Agents in Abusive Transactions Group

Posted: Dec. 10, 2010

By Lance Wallach

Here it is. Here is your proof of my predictions. Perhaps you didn’t believe me when I told you the IRS was coming after what it has deemed “abusive transactions,” but here it is, right from the IRS’s own job posting. If you were involved with a 419e, 412i, listed transaction, abusive tax shelter, Section 79, or captive, and you haven’t yet approached an expert for help with your situation, you had better do it now, before the notices start piling up on your desk.

A portion of the exact announcement from the Department of the Treasury:

Job Title: INTERNAL REVENUE AGENT (ABUSIVE TRANSACTIONS GROUP)

Agency: Internal Revenue Service

Open Period: Monday, October 18, 2010 to Monday, November 01, 2010

Sub Agency: Internal Revenue Service

Job Announcement Number: 11PH1-SBB0058-0512-12/13

Who May Be Considered:

• IRS employees on Career or Career Conditional Appointments in the competitive service

• Treasury Office of Chief Counsel employees on Career or Career Conditional Appointments or with prior competitive status

• IRS employees on Term Appointments with potential conversion to a Career or Career Conditional Appointment in the same line of work

According to the job description, the agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries. They will be examining tax returns and will “determine the correct tax liability, and identify situations with potential for understated taxes.”

These agents will work in the Small Business/Self Employed Business Division (SB/SE) which provides examinations for about 7 million small businesses and upwards of 33 million self-employed and supplemental income taxpayers. This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.” Their examinations can contain “special audit features or anticipated accounting, tax law, or investigative issues,” and look to make sure that, for example, specialty returns are filed properly.

The fines are severe. Under IRC 6707A, fines are up to $200,000 annually for not properly disclosing participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them, but the new law virtually guarantees you will be fined. The fines had been $200,000 per year on the corporate level and $100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan and fail to properly disclose your participation.

You can possibly still avoid all this by properly filing form 8886 IMMEDIATELY with the IRS. Time is especially of the essence now. You MUST file before you are assessed the penalty. For months the Service has been holding off on actually collecting from people that they assessed because they did not know what Congress was going to do. But now they do know, so they are going to move aggressively to collection with people they have already assessed. There is no reason not to now. This is especially true because the new legislation still does not provide for a right of appeal or judicial review. The Service is still judge, jury, and executioner. Its word is absolute as far as determining what is a listed transaction.

So you have to file form 8886 fast, but you also have to file it properly. The Service treats forms that are incorrectly filed as if they were never filed. You get fined for filing incorrectly, or for not filing at all. The Statute of Limitations does not begin unless you properly file. That means IRS can come back to get you any time in the future unless you file properly.

If you don’t want these new IRS Agents, or any other IRS agents for that matter, to be earning their paychecks by coming after you, make sure you have done all you can to ensure that you have filed properly by reaching out for expert help today.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He gives expert witness testimony and his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxaudit419.com.

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

Anonymous
#577832

Section 79, captive insurance, 412i, 419, audits, problems and lawsuits

April 24, 2012 By Lance Wallach, CLU, CHFC

Captive insurance, section 79, 419 and 412i problems

WebCPA

The dangers of being "listed"

A warning for 419, 412i, Sec.79 and captive insurance

Accounting Today: October 25,

By: Lance Wallach

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in

big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices to

funnel tax deductible dollars to shareholders and classified these arrangements as "listed

transactions."

These plans were sold by insurance agents, financial planners, accountants and attorneys

seeking large life insurance commissions. In general, taxpayers who engage in a "listed

transaction" must report such transaction to the IRS on Form 8886 every year that they

"participate" in the transaction, and you do not necessarily have to make a contribution or

claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties

($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with

respect to a listed transaction.

But you are also in trouble if you file incorrectly.

I have received numerous phone calls from business owners who filed and still got fined. Not

only do you have to file Form 8886, but it has to be prepared correctly. I only know of two

people in the United States who have filed these forms properly for clients. They tell me that

was after hundreds of hours of research and over fifty phones calls to various IRS

personnel.

The filing instructions for Form 8886 presume a timely filing. Most people file late and follow

the directions for currently preparing the forms. Then the IRS fines the business owner. The

tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based

upon representations provided by insurance professionals that the plans were legitimate

plans and were not informed that they were engaging in a listed transaction.

Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section

6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from

these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A

penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending

out notices proposing the imposition of Section 6707A penalties along with requests for

lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of

these taxpayers stopped taking deductions for contributions to these plans years ago, and

are confused and upset by the IRS's inquiry, especially when the taxpayer had previously

reached a monetary settlement with the IRS regarding its deductions. Logic and common

sense dictate that a penalty should not apply if the taxpayer no longer benefits from the

arrangement.

Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed

transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described

in the published guidance identifying the transaction as a listed transaction or a transaction

that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in

the participation of these plans is the large tax deduction generated by such participation. It

follows that taxpayers who no longer enjoy the benefit of those large deductions are no

longer "participating ' in the listed transaction. But that is not the end of the story.

Many taxpayers who are no longer taking current tax deductions for these plans continue to

enjoy the benefit of previous tax deductions by continuing the deferral of income from

contributions and deductions taken in prior years. While the regulations do not expand on

what constitutes "reflecting the tax consequences of the strategy", it could be argued that

continued benefit from a tax deferral for a previous tax deduction is within the contemplation

of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make

contributions or claim tax deductions continue to pay administrative fees. Sometimes,

money is taken from the plan to pay premiums to keep life insurance policies in force. In

these ways, it could be argued that these taxpayers are still "contributing", and thus still

must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the

purpose of a particular transaction as described in the published guidance that caused such

transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e)

transactions, appears to be concerned with the employer's contribution/deduction amount

rather than the continued deferral of the income in previous years. This language may

provide the taxpayer with a solid argument in the event of an audit.

412i Plans attacked by IRS, lawsuits

April 24, 2012 By Lance Wallach, CLU, CHFC

IRS has been attacking abusive 412i plans for years. Business men have been suing the insurance agents who sold the plans.

The IRS has attacked 412i, 419 plans for years. As a result promoters are now promoting section 79 and captive insurance plans. They are just starting to be attacked by the IRS.

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.

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 adminstering the plans, the policies of insurance had high commissions. If they were cancelled within a few years of purchace the had very little cash value.

These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have very little (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 spring up with cash value, thus the name springing cash value policy. The insured would have cash value which he could withdraw almost tax free .

Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that the design of many of the plans met the requirements of section 412(i) of the tax code.

In the early 2000s, IRS officials began questioning the insurance representatives, brokers, promoters, and their attorneys 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. When I spoke at the annual national convention of the American Society of Pension Actuarys in 2002 I heard such a speech given by Jim Holland, IRS chief actuary.

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 very large amounts, and failure of insurance agents, accountants and others to file 8918 results in a $100,000 fine.

In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties. First the IRS would audit the business owner and deny the deduction. The business owner would also owe interest and penalities. Then another unit of the IRS would assess large additional fines for failure to properly file, or failure to file 8886 forms. The directions for these forms is very complicated, expecially if the forms are filed after the fact. Many business owners still got fined even if they filed the forms. If the forms were not filled in exactly right a fine was still assessed.

The IRS's response to these 412(i) plans was predictable. They made it clear that the IRS would not be gentle and even indicated that potential criminal liability existed. The IRS made speeches and people like me wrote articles about the problems.

Insurance company representatives attended these conferences and heard the IRS warnings. Many of them ignored them.

Neither the brokers, promoters, or Insurance companies relayed this information to their clients and insureds at this time. When I would speak about the problems of 412i and 419 plans I would be attacked by promoters and salesmen. When I testified againt a springing cash value policy in my first court case I was challenged by the defendants attorney as not being an expert. The judge allowed the jury to hear whether I was indeed an expert. The result was a huge loss for the defense.

On February 13, 2004, the IRS issued a press release, two revenue rulings, and proposed regulations to shut down abusive transactions involving specifically designed life insurance policies in retirement plans, section 412(i) plans and 419 plans etc.

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.

MDL stands for Multidistrict Litigation. It was created by Congress in 1968 – 28 U.S.C. §1407.

The act created an MDL Panel of judges to determine whether civil actions pending in different federal districts involve one or more common questions of fact such that the actions should be transferred to one federal district for coordinated or consolidated pretrial proceedings. In theory, the purposes of this transfer or “centralization” process are to avoid duplication of discovery, to prevent inconsistent pretrial rulings, and to conserve the resources of the parties, their counsel and the judiciary. Transferred actions which are not resolved in the MDL are remanded to their originating court or district by the Panel for trial. Lots of people who were audited sued the insurance companys, agents, accountants and others.

Then, Pacific Life, Hartford Life & Annuity moved for summary judgment in the MDL. The court granted the motions in part, and denied the motions in part. Specifically, the court dealt with the issue of the disclaimers contained within the policies and signed by various policyholders.

Applying California law in evauating the disclosures and disclaimers, the Court ruled that the California Plaintiffs failed to raise issues of material fact that they reasonably relied on representations by Hartford and Pacific Life regarding the tax and legal issues related to their 412(i) plans.

Conversely, the court ruled that pursuant to Wisconsin law, the disclaimers were unenforceable. The court came to similar conclusion when applying Texas law to the Plaintiffs claims.

Plaintiffs have been more successful in suing 419 plan promoters, insurance companys, accountants ,etc. I have been an expert witness and my side has never lost a case.

I have been speaking with my IRS contacts about the newest abusive tax shelter trends, captives and section 79 plans. They have started auditing participants in these plans. The IRS has not yet decided if the plans are listed, abusive or similar to. I think that captive insurance companies and section 79 plans may become the next 412 and 419 problem for unsuspecting companies. Designed under IRS Code 831(b), these captive insurance companies are designed to insure the risks of an individual business. In theory and if properly designed, the premiums are deducted when paid to a related company, and depending on claims, profits can be paid out as dividends and when liquidated, the proceeds are taxed at capital gains rates.

The problem with Captives is that they are expensive to set up and operate. Captives must be opetate as a true risk assuming entity, not simply a tax avoidance vehicle. Some variations are to rent a cell captives that can work for a lot less money.

The IRS is looking into the sale of life insurance to fund Captives. They are also looking at most section 79 plans. This sounds very familiar.

Anonymous
to j Plainview, New York, United States #603791

NSA: Member Link

Your link to accounting, tax and practice management ideas, tools, news and information.

Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly

By Lance Wallach May 14, 2008

Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.

Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.

The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.

Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.

While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.

Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.

Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit www.vebaplan.com.

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.

National Society of Accountants

Anonymous
to [ #773394

sea nine veba cja and associates sue hartford lance wallach put them on notice in 2002 that the 419 would be audited

sea nine veba taxaudit419.com for help

sea nine veba taxaudit419.com for help logo

sea nine veba taxaudit419.com for help Summary

sea nine veba taxaudit419.com for help received their first complaint on 12/20/2012.

Information about sea nine veba taxaudit419.com for help was first submitted to Scambook on Dec 20, 2012.

Anonymous
to Anonymous #774406

Journal of Accountancy

September 2008

Abusive Insurance and Retirement Plans

Single-employer section 419 welfare 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”).

Promoters and Their Best-Laid Plans Sections 419 and 419A were added to the Code in 1984 by the Deficit Reduction Act of 1984 in an attempt to end employers’ acceleration of deductions for plan contributions. But it wasn’t long before plan promoters found an end run around the new Code sections. An industry developed in what came to be known as “10 or more employer plans.” The promoters of these plans, in conjunction with life insurance companies who just wanted premiums on the books, would sell people on the idea of tax-deductible life insurance and other benefits, and especially large tax deductions. It was almost, “How much can I deduct?” with the reply, “How much do you want to?” Adverse court decisions (there were a few) and other law to the contrary were either glossed over or explained away.

The IRS steadily added these abusive plans to its designations of listed transactions. With Revenue Ruling 90-105, it warned against deducting certain plan contributions attributable to compensation earned by plan participants after the end of the taxable year. Purported exceptions to limits of sections 419 and 419A claimed by 10 or more multiple-employer benefit funds were likewise proscribed in Notice 95-34. Both positions were designated listed transactions in 2000.

At that point, where did all those promoters go? Evidence indicates many are now promoting plans purporting to comply with section 419(e). They are calling a life insurance plan a welfare benefit plan (or fund), somewhat as they once did, and promoting the plan as a vehicle to obtain large tax deductions. The only substantial difference is that these are now single-employer plans.

And again, the IRS has tried to rein them in, reminding that listed transactions include those substantially similar to any that are specifically described and so designated. On Oct. 17, 2007, the IRS issued notices 2007-83 and 2007-84. In the former, the IRS identified certain trust arrangements involving cash-value life insurance policies, and substantially similar arrangements, as listed transactions.

The latter similarly warned against certain post-retirement medical and life insurance benefit arrangements, saying they might be subject to “alternative tax treatment.” The IRS at the same time issued related Revenue Ruling 2007-65 to address situations where an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund is denied in whole or part for premiums paid by the trust on cash-value life insurance policies. It states that a welfare benefit fund’s qualified direct cost under section 419 does not include premium amounts paid by the fund for cash-value life insurance policies if the fund is directly or indirectly a beneficiary under the policy, as determined under section 264(a). Notice 2007-83 is aimed at promoted arrangements under which the fund trustee purchases cash-value insurance policies on the lives of a business’s employee/owners, and sometimes key employees, while purchasing term insurance policies on the lives of other employees covered under the plan. These plans anticipate being terminated and that the cash-value policies will be distributed to the owners or key employees, with very little distributed to other employees.

The promoters claim that the insurance premiums are currently deductible by the business, and that the distributed insurance policies are virtually tax-free to the owners. The ruling makes it clear that, going forward, a business under most circumstances cannot deduct the cost of premiums paid through a welfare benefit plan for cash-value life insurance on the lives of its employees. The IRS may challenge the claimed tax benefits of these arrangements for various reasons: ■ Some or all of the benefits or distributions provided to or for the benefit of owner-employees or key employees may be disqualified benefits for purposes of the 100% excise tax under section 4976. ■ Whenever the property distributed from a trust has not been properly valued by the taxpayer, the IRS said in Notice 2007-84 that it intends to challenge the value of the distributed property, including life insurance policies.

■ Under the tax benefit rule, some or all of an employer’s deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based. ■ An employer’s deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in sections 419 and 419A, including reasonable actuarial assumptions and nondiscrimination. Further, a taxpayer cannot obtain a deduction for reserves for post-retirement medical or life benefits unless the employer intends to use the contributions for that purpose. ■ The arrangement may be subject to the rules for split-dollar arrangements, depending on the facts and circumstances.

■ Contributions on behalf of an owner-employee may be characterized as dividends or as nonqualified deferred compensation subject to section 404(a)(5), section 409A or both, depending on the facts and circumstances. Higher Risks for Practitioners Under New Penalties The updated Circular 230 regulations and the new law (IRC § 6694, preparer penalties) make it more important for CPAs to understand what their clients are deducting on tax returns. A CPA may not prepare a tax return unless he or she has a reasonable belief that the tax treatment of every position on the return would more likely than not be sustained on its merits. Proposed regulations issued in June 2008 spell out many new implications of these changes introduced by the Small Business and Work Opportunity Act of 2007.

The CPA should study all the facts and, based on that study, conclude that there is more than a 50% likelihood (“more likely than not”) that, if the IRS challenges the tax treatment, it will be upheld. As an alternative, there must be a reasonable basis for each position on the tax return, and each position needs to be adequately disclosed to the IRS. The reasonable-basis standard is not satisfied by an arguable claim. A CPA may not take into account the possibility that a return will not be audited by the IRS, or that an issue will not be raised if there is an audit.

It is worth noting that listed transactions are subject to a regulatory scheme applicable only to them, entirely separate from Circular 230 requirements, regulations and sanctions. Participation in such a transaction must be disclosed on a tax return, and the penalties for failure to disclose are severe—up to $100,000 for individuals and $200,000 for corporations. The penalties apply to both taxpayers and practitioners. And the problem with disclosure, of course, is that it is apt to trigger an audit, in which case even if the listed transaction were to pass muster, something else may not.

Need for Caution Should a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former 419A(f)(6) promoters and therefore will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client far riskier and more likely.

Defined-Benefit 412(i) Plans Under Fire The IRS has warned against so-called section 412(i) defined-benefit pension plans, named for the former IRC section governing them. It warned against certain trust arrangements it deems abusive, some of which may be regarded as listed transactions. Falling into that category can result in taxpayers having to disclose such participation under pain of penalties, potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans.

One reason for the harsh treatment of 412(i) plans is their discrimination in favor of owners and key, highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to the economic realities of these transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while simultaneously hoping to minimize the financial fallout from penalties.

The sponsor of an abusive plan can expect to be treated more harshly. Although in some situations something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which of course triggers, the full extent of back taxes, penalties and interest on all contributions that were made, not to mention leaving behind no retirement plan whatsoever. EXECUTIVE SUMMARY ■ Some of the listed transactions CPA tax practitioners are most likely to encounter are employee benefit insurance plans that the IRS has deemed abusive. Many of these plans have been sold by promoters in conjunction with life insurance companies.

■ As long ago as 1984, with the addition of IRC §§ 419 and 419A, Congress and the IRS took aim at unduly accelerated deductions and other perceived abuses. More recently, with guidance and a ruling issued in fall 2007, the Service declared as abusive certain trust arrangements involving cash-value life insurance and providing post-retirement medical and life insurance benefits. ■ The new “more likely than not” penalty standard for tax preparers under IRC § 6694 raises the stakes for CPAs whose clients may have maintained or participated in such a plan. Failure to disclose a listed transaction carries particularly severe potential penalties.

___________________________________________________________________ Lance Wallach, CLU, ChFC, CIMC, is the author of the AICPA’s The Team Approach to Tax, Financial and Estate Planning. He can be reached at lawallach@aol.com or on the Web at www.vebaplan.com or at (516) 938-5007. The information in this article is not intended as accounting, legal, financial or any other type of advice for any specific individual or other entity. You should consult an appropriate professional for such advice.

AICPA RESOURCES CPE ■ Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess, a CPE self-study course (#733720) ■ Sid Kess’ Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future, a CPE self-study course (#733730) For more information or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077. AICPA PFP Center and PFS Credential The AICPA Personal Financial Planning (PFP) Center provides a range of valuable resources that CPAs need for professional and ethical financial planning. The center also contains information about the AICPA Personal Financial Specialist (PFS) credential and PFP section membership.

For more information go to http://pfp.aicpa.org.OTHER RESOURCES Law, rulings and guidance ■ Internal Revenue Code §§ 264, 419, 419A, 6111 and 6112 ■ News Releases IR 2007-170 and IR 2004-21 ■ Revenue Ruling 2007-65 ■ Notices 2007-83 and 2007-84 :x :( :? :upset :eek ,) :grin

Anonymous
to [ New York City, New York, United States #776346

sea

Patel et al v.Sea Nine Associates, Inc.

et al

Defendant: Ramesh Sarva, Gaurang Parikh, Sean Kath, Kenneth Elliott, Prudential Insurance Company, Comerica Bank, Ramesh Sarva, CPA, PC and Sea Nine Associates, Inc.

Plaintiff: MVP Consulting Plus, Inc., Naren Patel and Ilakumari Patel

http://dockets.justia.com/

Search Justia.com Find a Lawyer Legal Answers Law More ▾Sign In Justia > Dockets & Filings > Fifth Circuit > Texas > Texas Northern District Court > Patel et al v. Sea Nine Associates, Inc. et al NEW - Receive Justia's FREE Daily Newsletters of Opinion Summaries for the US Supreme Court, all US Federal Appellate Courts & the 50 US State Supreme Courts and Weekly Practice Area Opinion Summaries Newsletters. Subscribe Now Patel et al v.

Sea Nine Associates, Inc.

et al Defendant: Ramesh Sarva, Gaurang Parikh, Sean Kath, Kenneth Elliott, Prudential Insurance Company, Comerica Bank, Ramesh Sarva, CPA, PC and Sea Nine Associates, Inc.Plaintiff: MVP Consulting Plus, Inc., Naren Patel and Ilakumari Patel Case Number: 3:2013cv04491 Filed: November 8, 2013sea nine veba help get money back as an expert witness lance wallach has never lost a case ramesh sarva sold lots of them sue him

vebaplan2
to j Plainview, New York, United States #619619

This is about the Benistar 419 plan and has nothing to do with the health plan that they sell to non profits and others.

TAX MATTERS

TAX BRIEFS

ABUSIVE INSURANCE PLANS GET RED FLAG

The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.

Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.

Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.

A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.

Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,

516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits.

Journal of Accountancy January 2008

Anonymous
to vebaplan2 New York City, New York, United States #774410

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

UNITED STATES OF AMERICA

Petitioner,

v.

PRICEWATERHOUSECOOPERS, LLP Respondent.

Civil No. 12-mc-0009 (PJS/JJG) ORDER TO SHOW CAUSE Upon the United States’ Petition to Enforce IRS Summonses Issued to PricewaterhouseCoopers, LLP (Doc. No. 1) and the Declaration of Revenue Agent Delvin Fischer, including the exhibits attached thereto (Doc.

No. 2), IT IS HEREBY ORDERED that respondent PricewaterhouseCoopers, LLP appear on April 12, 2012, at 9:30 a.m. before the Honorable Jeanne J. Graham in Courtroom 3B, Warren E.

Burger Federal Building and United States Courthouse, 316 North Robert Street, St. Paul, Minnesota 55101, to show cause why the respondent should not be compelled to obey both of the Internal Revenue Service summonses issued to PricewaterhouseCoopers, LLP, on October 5, 2011. IT IS FURTHER ORDERED that: 1. A copy of this Order, together with the petition and its supporting affidavit and exhibits, shall be served in accordance with Federal Rule of Civil Procedure 4(h) upon the respondent within thirty (30) days of the date that this Order is served upon counsel for the United States or as soon thereafter as possible.

Pursuant to Rule 4.1(a), CASE 0:12-mc-00009-PJS-JJG Document 3 Filed 02/06/12 Page 1 of 32 the Court hereby appoints Revenue Agent Delvin Fischer, or any other person designated by the IRS, to effect service in this case. 2. Proof of any service done pursuant to paragraph 1, above, shall be filed with the Clerk as soon as practicable. 3.

Because the file in this case reflects a prima facie showing that the investigation is being conducted for a legitimate purpose, that the inquiries may be relevant to that purpose, that the information sought is not already within the Commissioner=s possession, and that the administrative steps required by the Internal Revenue Code have been substantially followed, the burden of coming forward has shifted to the respondent to oppose enforcement of the summonses. 4. If the respondent has any defense to present or opposition to the petition, such defense or opposition shall be made in writing, filed with the Clerk, and copies served on counsel for the United States, at the address on the petition, at least fourteen (14) days prior to the date set for the show cause hearing. The United States may file a reply memorandum to any opposition at least five (5) days prior to the date set for the show cause hearing.

5. At the show cause hearing, only those issues brought into controversy by the responsive pleadings and factual allegations supported by affidavit will be considered. Any uncontested allegation in the petition will be considered admitted. 6.

Respondent may notify the Court, in a writing filed with the Clerk and served on counsel for the United States, at the address on the petition, at least fourteen (14) days prior to the date set for the show cause hearing, that the respondent has no CASE 0:12-mc-00009-PJS-JJG Document 3 Filed 02/06/12 Page 2 of 33 objection to enforcement of the summonses. The respondent=s appearance at the hearing will then be excused. The respondent is hereby notified that a failure to comply with this Order may subject it to sanctions for contempt of court. Dated: February 6, 2012 s/ Jeanne J.

Graham JEANNE J.GRAHAM United States Magistrate Judg

Anonymous
to j Plainview, New York, United States #636253

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Section 79, Captive Insurance, IRS Audits and Lawsuits

--------------------------------------------------------------------------------

By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

Call Lance Wallach at (516) 938-5007

--------------------------------------------------------------------------------

Section 79 and captive insurance plans with life insurance in them are being looked at by the IRS. We have received calls from people that are being audited. - The dangers of being "listed" - A warning for 419, 412i, Sec.79 and captive insurance. Accounting Today: October 25, 2010, By: Lance Wallach

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as "listed transactions."

These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a "listed transaction" must report such transaction to the IRS on Form 8886 every year that they "participate" in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction.

But you are also in trouble if you file incorrectly.

I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it has to be prepared correctly. I only know of two people in the United States who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over fifty phones calls to various IRS personnel.

The filing instructions for Form 8886 presume a timely filing. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction.

Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS's inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the

arrangement.

Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. It follows that taxpayers who no longer enjoy the benefit of those large deductions are no longer "participating ' in the listed transaction. But that is not the end of the story.

Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes "reflecting the tax consequences of the strategy", it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still "contributing", and thus still must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e) transactions, appears to be concerned with the employer's contribution/deduction amount rather than the continued deferral of the income in previous years. This language may provide the taxpayer with a solid argument in the event of an audit.

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.

ABOUT THE AUTHOR: Lance Wallach

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case.

Copyright Lance Wallach, CLU, CHFC

More information about Lance Wallach, CLU, CHFC

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Anonymous
to j Plainview, New York, United States #667450

FAST PITCH NETWORKING

IRS Hiring Agents in Abusive Transactions Group

Posted: Dec. 10, 2010

By Lance Wallach

Here it is. Here is your proof of my predictions. Perhaps you didn’t believe me when I told you the IRS was coming after what it has deemed “abusive transactions,” but here it is, right from the IRS’s own job posting. If you were involved with a 419e, 412i, listed transaction, abusive tax shelter, Section 79, or captive, and you haven’t yet approached an expert for help with your situation, you had better do it now, before the notices start piling up on your desk.

A portion of the exact announcement from the Department of the Treasury:

Job Title: INTERNAL REVENUE AGENT (ABUSIVE TRANSACTIONS GROUP)

Agency: Internal Revenue Service

Open Period: Monday, October 18, 2010 to Monday, November 01, 2010

Sub Agency: Internal Revenue Service

Job Announcement Number: 11PH1-SBB0058-0512-12/13

Who May Be Considered:

• IRS employees on Career or Career Conditional Appointments in the competitive service

• Treasury Office of Chief Counsel employees on Career or Career Conditional Appointments or with prior competitive status

• IRS employees on Term Appointments with potential conversion to a Career or Career Conditional Appointment in the same line of work

According to the job description, the agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries. They will be examining tax returns and will “determine the correct tax liability, and identify situations with potential for understated taxes.”

These agents will work in the Small Business/Self Employed Business Division (SB/SE) which provides examinations for about 7 million small businesses and upwards of 33 million self-employed and supplemental income taxpayers. This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.” Their examinations can contain “special audit features or anticipated accounting, tax law, or investigative issues,” and look to make sure that, for example, specialty returns are filed properly.

The fines are severe. Under IRC 6707A, fines are up to $200,000 annually for not properly disclosing participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them, but the new law virtually guarantees you will be fined. The fines had been $200,000 per year on the corporate level and $100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan and fail to properly disclose your participation.

You can possibly still avoid all this by properly filing form 8886 IMMEDIATELY with the IRS. Time is especially of the essence now. You MUST file before you are assessed the penalty. For months the Service has been holding off on actually collecting from people that they assessed because they did not know what Congress was going to do. But now they do know, so they are going to move aggressively to collection with people they have already assessed. There is no reason not to now. This is especially true because the new legislation still does not provide for a right of appeal or judicial review. The Service is still judge, jury, and executioner. Its word is absolute as far as determining what is a listed transaction.

So you have to file form 8886 fast, but you also have to file it properly. The Service treats forms that are incorrectly filed as if they were never filed. You get fined for filing incorrectly, or for not filing at all. The Statute of Limitations does not begin unless you properly file. That means IRS can come back to get you any time in the future unless you file properly.

If you don’t want these new IRS Agents, or any other IRS agents for that matter, to be earning their paychecks by coming after you, make sure you have done all you can to ensure that you have filed properly by reaching out for expert help today.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He gives expert witness testimony and his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxaudit419.com.

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

Anonymous
to j #774222

Federal Claims Court Finds That VEBA Can't Avoid Limitation On Exempt Function Income

Northrop Corp.v.

U.S., (Ct Fed Cl 6/28/2011) 107 AFTR 2d ¶ 2011-998

The U.S. Court of Federal Claims, following the precedent in the Federal Circuit, has held that a voluntary employees' beneficiary association (VEBA) couldn't avoid the limitation on exempt function income in Code Sec. 512(a)(3)(E)(i) by allocating investment income to the payment of member benefits.

Background. A Code Sec.

501(c)(9) VEBA providing for the payment of life, sick, accident or other benefits is exempt if no part of net earnings inures to the private benefit of any person. Under Code Sec. 512(a)(3)(E)(i), the amount of income that may be set aside to provide benefits under a VEBA and treated as exempt function income can't exceed the qualified asset account limit under Code Sec. 419A(c) for the tax year (without taking into account any reserve for post-retirement medical benefits).

The Code Sec. 419A(c) account limit for any qualified asset account for any year is the amount reasonably and actuarially necessary to fund the claims for account benefits incurred but unpaid as of the close of the year, and the related administrative costs. Accordingly, a VEBA's income is exempt from tax only to the extent that it does not result in a year-end account balance in excess of the amount necessary to satisfy incurred but unpaid member claims.

Under Reg. §1.512(a)-5T, Q&A-3, a VEBA will owe tax on the lesser of its investment income or the amount by which its year-end account balance exceeds this statutory account limit.

Under Code Sec.

419, an employer's contribution to a welfare benefit fund is deductible only for the tax year paid, and only to the extent the contribution doesn't exceed the qualified cost of the plan for its tax year that relates to (ends with or within) the employer's tax year. Qualified cost generally equals amounts expended on benefits plus any addition to the VEBA for the year, to the extent that the addition doesn't result in an account balance in excess of the account limit specified in Code Sec. 419A. A VEBA's qualified cost is then reduced by its after-tax income.

In late 2009, the U.S. Court of Appeals for the Federal Circuit, affirming the Court of Federal Claims, held that a VEBA couldn't avoid the limitation on exempt function income by allocating investment income to the payment of member benefits. (CNG Transmission Management VEBA, (CA Fed Cir 12/14/2009) 104 AFTR 2d 2009-7699) The Federal Circuit concluded that because CNG's investment income caused its total fund balances to exceed the statutory account limit, that investment income couldn't be classified as exempt function income. It rejected CNG's contention that its investment income didn't result in any account overage because it spent that income during the year on member benefits.

The Court also found that Code Sec. 419 limits the extent to which an employer can deduct contributions to a VEBA by limiting the deduction to the VEBA's qualified cost for the year; it does not indicate that in determining the amount of tax-exempt set-aside available under Code Sec. 512(a)(3)(E)(i), investment income must be the first source used to pay member benefits. The Court similarly rejected CNG's reliance on Sherwin-Williams Co.

Employee Health Plan Trust v. Comm., (CA 6, 2003) 91 AFTR 2d 2003-2302, which it found was clearly distinguishable on its facts. In addition, the Court disagreed with the Sixth Circuit's conclusion in that case that Code Sec. 512(a)(3)(E)(i) imposes a limit on a VEBA's accumulated funds, rather than its set-aside funds.

Issue before Court of Federal Claims. Northrop argued, as did CNG, that Code Sec. 512(a)(3)(E)(i) allowed a VEBA to allocate its investment income to the payment of member benefits and to avoid taxes on that investment income. It was undisputed that at the end of each relevant tax year, Northrop's assets exceeded the account limit under Code Sec.

419A by an amount greater than the investment income for the year. Observation: The Court of Claims noted that Northrop (which was represented by the counsel that represented CNG) apparently wished to present a full record to the Court of Claims and Federal Circuit, so that the U.S. Supreme Court could eventually consider any and all of taxpayer's arguments against the Federal Circuit's interpretation of Code Sec. 512(a)(3).

The Court noted that the taxpayer intended to seek a writ of certiorari if that becomes appropriate. Court's conclusion. The Court of Federal Claims, concluding that it was bound by the precedent of the CNG decision, determined that a VEBA can't avoid the limitation on exempt function income in Code Sec. 512(a)(3)(E)(i) merely by allocating, or purporting to allocate, investment income toward the payment of welfare benefits during the course of the tax year.

The Court granted IRS summary judgment and held that Northrop wasn't entitled to the tax refunds it sought. The Court found that because it was bound by the Federal Circuit's decision in CNG, it specifically couldn't adopt a conflicting interpretation of Code Sec. 512(a)(3)(E)(i), adopt the reasoning in Sherwin-Williams that was rejected by the Federal Circuit, or consider Reg. §1.512(a)-5T to be other than a reasonable interpretation of Code Sec.

512(a)(3)(E)(i). The Court further reasoned that since it was bound by the Federal Circuit's holding that because Code Sec. 512(a)(3)(E)(i) was unambiguous, the status of Reg. §1.512(a)-5T as invalid or arbitrary was immaterial to the resolution of Northrop's case.

Because Code Sec.

512(a)(3)(E)(i) was clear and unambiguous under precedent binding on the Circuit, the reg's status, however firm or unfirm, wouldn't alter the analysis.References: For VEBAs, see FTC 2d/FIN ¶D-4400; United States Tax Reporter ¶5014.18; TaxDesk ¶672,001; TG ¶20777.

Anonymous
#577831

Section 79, captive insurance, 412i, 419, audits, problems and lawsuits

April 24, 2012 By Lance Wallach, CLU, CHFC

Captive insurance, section 79, 419 and 412i problems

WebCPA

The dangers of being "listed"

A warning for 419, 412i, Sec.79 and captive insurance

Accounting Today: October 25,

By: Lance Wallach

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in

big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices to

funnel tax deductible dollars to shareholders and classified these arrangements as "listed

transactions."

These plans were sold by insurance agents, financial planners, accountants and attorneys

seeking large life insurance commissions. In general, taxpayers who engage in a "listed

transaction" must report such transaction to the IRS on Form 8886 every year that they

"participate" in the transaction, and you do not necessarily have to make a contribution or

claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties

($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with

respect to a listed transaction.

But you are also in trouble if you file incorrectly.

I have received numerous phone calls from business owners who filed and still got fined. Not

only do you have to file Form 8886, but it has to be prepared correctly. I only know of two

people in the United States who have filed these forms properly for clients. They tell me that

was after hundreds of hours of research and over fifty phones calls to various IRS

personnel.

The filing instructions for Form 8886 presume a timely filing. Most people file late and follow

the directions for currently preparing the forms. Then the IRS fines the business owner. The

tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based

upon representations provided by insurance professionals that the plans were legitimate

plans and were not informed that they were engaging in a listed transaction.

Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section

6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from

these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A

penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending

out notices proposing the imposition of Section 6707A penalties along with requests for

lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of

these taxpayers stopped taking deductions for contributions to these plans years ago, and

are confused and upset by the IRS's inquiry, especially when the taxpayer had previously

reached a monetary settlement with the IRS regarding its deductions. Logic and common

sense dictate that a penalty should not apply if the taxpayer no longer benefits from the

arrangement.

Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed

transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described

in the published guidance identifying the transaction as a listed transaction or a transaction

that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in

the participation of these plans is the large tax deduction generated by such participation. It

follows that taxpayers who no longer enjoy the benefit of those large deductions are no

longer "participating ' in the listed transaction. But that is not the end of the story.

Many taxpayers who are no longer taking current tax deductions for these plans continue to

enjoy the benefit of previous tax deductions by continuing the deferral of income from

contributions and deductions taken in prior years. While the regulations do not expand on

what constitutes "reflecting the tax consequences of the strategy", it could be argued that

continued benefit from a tax deferral for a previous tax deduction is within the contemplation

of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make

contributions or claim tax deductions continue to pay administrative fees. Sometimes,

money is taken from the plan to pay premiums to keep life insurance policies in force. In

these ways, it could be argued that these taxpayers are still "contributing", and thus still

must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the

purpose of a particular transaction as described in the published guidance that caused such

transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e)

transactions, appears to be concerned with the employer's contribution/deduction amount

rather than the continued deferral of the income in previous years. This language may

provide the taxpayer with a solid argument in the event of an audit.

412i Plans attacked by IRS, lawsuits

April 24, 2012 By Lance Wallach, CLU, CHFC

IRS has been attacking abusive 412i plans for years. Business men have been suing the insurance agents who sold the plans.

The IRS has attacked 412i, 419 plans for years. As a result promoters are now promoting section 79 and captive insurance plans. They are just starting to be attacked by the IRS.

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.

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 adminstering the plans, the policies of insurance had high commissions. If they were cancelled within a few years of purchace the had very little cash value.

These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have very little (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 spring up with cash value, thus the name springing cash value policy. The insured would have cash value which he could withdraw almost tax free .

Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that the design of many of the plans met the requirements of section 412(i) of the tax code.

In the early 2000s, IRS officials began questioning the insurance representatives, brokers, promoters, and their attorneys 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. When I spoke at the annual national convention of the American Society of Pension Actuarys in 2002 I heard such a speech given by Jim Holland, IRS chief actuary.

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 very large amounts, and failure of insurance agents, accountants and others to file 8918 results in a $100,000 fine.

In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties. First the IRS would audit the business owner and deny the deduction. The business owner would also owe interest and penalities. Then another unit of the IRS would assess large additional fines for failure to properly file, or failure to file 8886 forms. The directions for these forms is very complicated, expecially if the forms are filed after the fact. Many business owners still got fined even if they filed the forms. If the forms were not filled in exactly right a fine was still assessed.

The IRS's response to these 412(i) plans was predictable. They made it clear that the IRS would not be gentle and even indicated that potential criminal liability existed. The IRS made speeches and people like me wrote articles about the problems.

Insurance company representatives attended these conferences and heard the IRS warnings. Many of them ignored them.

Neither the brokers, promoters, or Insurance companies relayed this information to their clients and insureds at this time. When I would speak about the problems of 412i and 419 plans I would be attacked by promoters and salesmen. When I testified againt a springing cash value policy in my first court case I was challenged by the defendants attorney as not being an expert. The judge allowed the jury to hear whether I was indeed an expert. The result was a huge loss for the defense.

On February 13, 2004, the IRS issued a press release, two revenue rulings, and proposed regulations to shut down abusive transactions involving specifically designed life insurance policies in retirement plans, section 412(i) plans and 419 plans etc.

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.

MDL stands for Multidistrict Litigation. It was created by Congress in 1968 – 28 U.S.C. §1407.

The act created an MDL Panel of judges to determine whether civil actions pending in different federal districts involve one or more common questions of fact such that the actions should be transferred to one federal district for coordinated or consolidated pretrial proceedings. In theory, the purposes of this transfer or “centralization” process are to avoid duplication of discovery, to prevent inconsistent pretrial rulings, and to conserve the resources of the parties, their counsel and the judiciary. Transferred actions which are not resolved in the MDL are remanded to their originating court or district by the Panel for trial. Lots of people who were audited sued the insurance companys, agents, accountants and others.

Then, Pacific Life, Hartford Life & Annuity moved for summary judgment in the MDL. The court granted the motions in part, and denied the motions in part. Specifically, the court dealt with the issue of the disclaimers contained within the policies and signed by various policyholders.

Applying California law in evauating the disclosures and disclaimers, the Court ruled that the California Plaintiffs failed to raise issues of material fact that they reasonably relied on representations by Hartford and Pacific Life regarding the tax and legal issues related to their 412(i) plans.

Conversely, the court ruled that pursuant to Wisconsin law, the disclaimers were unenforceable. The court came to similar conclusion when applying Texas law to the Plaintiffs claims.

Plaintiffs have been more successful in suing 419 plan promoters, insurance companys, accountants ,etc. I have been an expert witness and my side has never lost a case.

I have been speaking with my IRS contacts about the newest abusive tax shelter trends, captives and section 79 plans. They have started auditing participants in these plans. The IRS has not yet decided if the plans are listed, abusive or similar to. I think that captive insurance companies and section 79 plans may become the next 412 and 419 problem for unsuspecting companies. Designed under IRS Code 831(b), these captive insurance companies are designed to insure the risks of an individual business. In theory and if properly designed, the premiums are deducted when paid to a related company, and depending on claims, profits can be paid out as dividends and when liquidated, the proceeds are taxed at capital gains rates.

The problem with Captives is that they are expensive to set up and operate. Captives must be opetate as a true risk assuming entity, not simply a tax avoidance vehicle. Some variations are to rent a cell captives that can work for a lot less money.

The IRS is looking into the sale of life insurance to fund Captives. They are also looking at most section 79 plans. This sounds very familiar.

Anonymous
to h #774424

Daniel E.Carpenter, Benistar 419 Plan Services, Inc., Benistar Admin Services, Inc.

and Benistar Employer Services Trust Corporation v.USA :( :cry :? :upset :eek

Anonymous
#566731

Advisers staring at a new ‘slew' of litigation from small-business clients

Five-year-old change in tax has left some small businesses and certain benefit plans subject to IRS fines; the advisers who sold these plans may pay the price

By Jessica Toonkel Marquez

October 14, 2009

Financial advisers who have sold certain types of retirement and other benefit plans to small businesses might soon be facing a wave of lawsuits — unless Congress decides to take action soon.

For years, advisers and insurance brokers have sold the 412(i) plan, a type of defined-benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of providing such benefits to their employees, while also receiving a tax break.

However, in 2004, Congress changed the law to require that companies file with the Internal Revenue Service if they had these plans in place. The law change was intended to address tax shelters, particularly those set up by large companies.

Many companies and financial advisers didn't realize that this was a cause for concern, however, and now employers are receiving a great deal of scrutiny from the federal government, according to experts.

The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.

So advisers who sold these plans to small business are now slowly starting to become the target of litigation from employers who are subject to these fines.

“There is a slew of litigation already against advisers that sold these plans,” said Lance Wallach, an expert on 412(i) and 419 plans. “I get calls from lawyers every week asking me to be an expert witness on these cases.”

Mr. Wallach declined to cite any specific suits. But one adviser who has been selling 412(i) plans for years said his firm is already facing six lawsuits over the sale of such plans and has another two pending.

“My legal and accounting bills last year were $864,000,” said the adviser, who asked not to be identified. “And if this doesn't get fixed, everyone and their uncle will sue us.”

Currently, the IRS has instituted a moratorium on collecting these fines until the end of the year in the hope that Congress will address the issue.

In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and Charles Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand that Congress is still considering this issue and that a bipartisan, bicameral bill may be in the works … To give Congress time to address the issue, I am writing to extend the suspension of collection enforcement action through Dec. 31.”

But with so much of Congress' attention on health care reform at the moment, experts are worried that the issue may go unresolved indefinitely.

“If Congress doesn't amend the statute, and clients find themselves having to pay these fines, they will absolutely go after the advisers that sold these plans to them,” .

Anonymous
to g Plainview, New York, United States #686017

419 tax abuse plan

Anonymous
to Anonymous New York City, New York, United States #748003

sea

Anonymous
to Anonymous #1124374

Am I At Risk?

Captive Insurance

if you use one of the following, you may be

Sadi Trust

Professional Benefits Trust PBI

​Sea Nine VEBA Bisys The Beta Plan The Millennium Plan Benistar Niche The Ridge Plan The Compass Welfare Benefit Plan Section 79 Plans Captive Insurance The Grist Mill Trust Other similar 412(i) retirement plans and 419 welfare benefit plans ​​ National Offices of Lance Wallach Plainview, NY 11803 www.lancewallach.com Phone : 516-938-5007 Email : lance@expertwitness.tax Avoid Paying nondeductible FINES OR PENALTIES The IRS is attacking captive insurance plans.The IRS fines Are Substantial And Once You Get Them They Cannot be Appealed An expert can make a difference with any captive insurance problem You Have Options With the right expert you could: * Get back all the money you put into the plan in the first place Robert Thomas Resident Insurance Producer, Independent Consulting “Lance is a wonderful resource not just in regards to VEBAs, 412's, abusive plans and IRS codes, but also who and what he knows about certain broker-dealers.

I called him about recent changes to 412, and got on the subject of broker-dealers, and he lent so much of his time to inform me about making the right choice. He is a really great, personable colleague to people working in the financial services business.” Corman G. Franklin ​Office of the Assistant Secretary for Policy U.S. Department of Labor ..."Mr.

Wallach, thanks so much for taking the time to talk to me ..today about VEBAs.Any information you can send me would be helpful. Hopefully, we can work together in the future as interest in VEBAs increase." Amanda J. Andrews ​ Associate Counsel, Legal Division ​Arkansas Insurance Department ..."Thank you for providing me with this information.

I will review it next week and I'm sure we will be in touch.I very much appreciate

Anonymous
to g #796095

IRS tax relief firm, Lance Wallach, speaking

Monday, March 10, 2014

412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important

412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important: KENNETH ELLIOT: Sea Nine VEBA Important : As of August 23,2013, the IRS has closed audits of 12 Sea Nine VEBA plan-participating taxpayers w...

RAMESH SARVA: SARVA

6707A Penalties & 419 Plans Litigation: Court Case...Participated in a Sea Nine VEBA plan_Contact Lanc...

Participated in a Sea Nine VEBA Posted by Lance Wallach at 11:42 AM Email This BlogThis!Share to Twitter Share to Facebook Share to Pinterest 3 comments: Lance WallachMarch 17, 2014 at 9:06 AM Trust,Beta 419,Millennium Plan,Bisys,Creative Services Group,Sterling Benefit Plan,Compass 419,Niche 419,CRESP,Sea Nine Veba, American Benefits Trust, National Benefit Plan and Trust, ABT, Professional Benefits Trust Benistar 419 Plan, nova trust, Grist mill trust, Sadi Trust IRS raids, Millennium 419 Plan,Bisys 419,Creative Services Group 419 Plan,Sterling Benefit 419 Plan,CRESP 419,Sea Nine Veba 419, National Benefit Plan and Trust 419, American Benefits Trust 419,ABT 419,Old Mutual, Allmerica Financial, American Heritage Life, Commer

vebaplan2
to j Plainview, New York, United States #619586

TAX MATTERS

TAX BRIEFS

ABUSIVE INSURANCE PLANS GET RED FLAG

The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.

Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.

Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.

A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.

Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,

516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits.

Journal of Accountancy January 2008

Anonymous
to k Plainview, New York, United States #641874

Lance

419 412i plans IRS audits lawsuits

Plan names:

Benistar, SADI Trust,Beta 419,Millennium Plan,Bisys,Creative Services Group,Sterling Benefit Plan,Compass 419,Niche 419,CRESP,Sea Nine Veba, American Benefits Trust, National Benefit Plan and Trust, ABT, Professional Benefits Trust

Benistar 419 Plan, nova trust, Grist mill trust, Sadi Trust IRS raids, Millennium 419 Plan,Bisys 419,Creative Services Group 419 Plan,Sterling Benefit 419 Plan,CRESP 419,Sea Nine Veba 419, National Benefit Plan and Trust 419, American Benefits Trust 419,ABT 419,Old Mutual, Allmerica Financial, American Heritage Life, Commercial Union Life, National Life of Vermont, Old Line Life, Security Mutual Life, West Coast Life

"Grist Mill Trust" "Real Veba""Section 79 GEAR" GEAR" "United Financial Group" "Kenny Hartstein" "Millennium Plan" Kenny Hartstein" "Millennium Plan" "Tom Crosswhite" "Greg Roper""captive insurance" cresp "Ridge Plan" "Professional benefits Trust" "PBT " "Professional Planning Associates" "National Pension Associate" "NPA""Heritage Plan" ""Insurance fraud""pension and benefit plan fraud""insurance company fraud""ECI Pension Services""Pension Professionals of America""ABI""Hartford""AIG""Indy Life""Indianapolis Life""Advantage"

Names of People who SOLD:

"Kenny Hartstein""Dennis Cunning""Steve Toth""Michael Sonnenberg"Larry Bell""Scott Ridge""Randall Smith""Greg Roper""Tracy Sunderlage""Warren Trust""Joseph Donnelly""Norm Bevan""Judy Carsrud""Dan Carpenter""Ed Waesche" "Tom Crosswhite""David Struckman""George Huff" "Tom Crosswhite" "Greg Roper""Christopher Jarvis" David Mandell" Gen Von Oder

Insurance Companies -- need to be 412 AND 419:

Hartford 419, Pacific Life 419, PAC Life 419, AVIVA, 419, Indianpolis Life, Penn Mutual419,Bankers Life 419, John Hancock 419, Security Mutual 419, Transamerica 419,Prudential 419, Kansas City Life 419, Mass Mutual419, Guardian 419, Amerus 419, Wells Fargo 419, Fifth Third Bank 419, Arrow Head Trust 419, U.S. Benefits Group, Benefit Plan Advisors, Rex Insurance Service,Advantage,AIG, Old Mutual, Allmerica Financial, American Heritage Life, Commercial Union Life, National Life of Vermont, Old Line Life, Security Mutual Life, West Coast Life

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