Tax Court Hammers Tax Payers in 419 Ruling
Before I get into this interesting newsletter, I wanted to remind everyone that it’s less than two weeks away from the www.pomplanning.net two-day Las Vegas seminar. At this seminar, three of the tactical money managers will be speaking (ones that avoided the recent stock market crash). The seminar is almost sold out. If you were thinking of signing up at the last minute, now would be a good time. To download the agenda/sign up form, click on the following link: www.pomplanning/training.
I’m not sure why this 419 case hasn’t been talked about much, but when it came across my desk the other day, it certainly got my attention.
If you’ll remember, 419 Plans were the darling of the life insurance industry for years. The plans were sold as a way to buy cash value life insurance in a 100% tax-deductible manner where the death benefit would pay tax-free. Additionally, individuals (usually business owners) could terminate from the plans at which time the cash value life insurance policy would be distributed to the individuals, at which time they could borrow from the policies tax-free in retirement.
If you know the history of 419 Plans, you know that the IRS has despised them for over a decade. Court cases for the most part have gone against tax payers and the IRS has acted several times to curb their use. The IRS essentially killed multi-employer plans which spawned the use of single employer plans which were subsequently killed (or so we thought).
Scorpion and the Frog–if you have never read the story of the scorpion and the frog, I highly recommend it. To do so, click on the following link: www.pomplanning.net/scorpion.frog
Many 419 administrators (like Section 79 Plan administrators) are scorpions. They do what they do, no matter the consequences to clients or the advisors recommending them.
Tax court puts death nail in 419 Plans?
On July 13, 2015, the same tax court that issued the landmark 419 case back in the day (Neonatology), came down hard on one of the few remaining 419 Plans in the industry. It seems Judge Laro was trying to send a message and hopefully it will be received loud and clear. To read the actual opinion recently issued by Judge Laro, click on the following link: http://www.thewpi.org/pdf_files/419.plan.decision.OurCountryHome.pdf
The case involved several tax payers who were in a 419 Plan called the Sterling Benefit Plan administered by Ron Snyder’s companies.
Like usual, employers took deductions when their businesses paid premiums for “welfare benefits” to the Sterling Plan. The money was used mainly to purchase life insurance (which provided death benefits and other living benefits to covered employees). Employees who retire can elect to receive their life policy from the plan in satisfaction of a retirement death benefit.
What did the court hold?
1) It denied the deductions (meaning the individuals who were in the plan had to recognize premium payments as income).
2) It hit taxpayers with a 30% penalty for not disclosing that they were involved in a listed tax transaction.
The following is from the conclusion of the opinion and should tell you everything you need to know:
We conclude and hold that petitioners significantly underreported income on their Federal income tax returns for each subject year. In addition, the evidence shows (and we find) that petitioners consciously participated in a plan that, as advertised to them, they should have known (and probably knew) was too good to be true.
Why is this court case important?
For the select few still selling these plans or some version of them, they should worry about what could happen to their client and hopefully they will stop peddling this nonsense.
This case is important to me because it can be used as a reminder that many 3rd party administrators of tax plans are scorpions (meaning they only care about selling their plans/making money, not what’s best for your clients).
Section 79 Plans are another plan where overly aggressive marketers got the IRS’s attention which subsequently moved the IRS to go after them. Click on the following link to read my article about the IRS going after Section 79 Plans: http://strategicmp.net/lsw-suspends-section-79-plan-sales/
Captive Insurance Companies (CICs) are another tool that is coming under scrutiny because of aggressive marketing and poor administration. I’ll have a newsletter shortly about the proposed changes to CICs.
In any event, I knew that few in the industry were aware of this recent 419 Plan case and I thought it was worth bringing to reader’s attention.
Roccy DeFrancesco, JD
Founder, The Wealth Preservation Institute