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NCCPAP November                                                              


Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will
Probably Be Fined by the IRS Under Section 6707A

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 the taxpayer
does not necessarily have to make a contribution or claim a tax deduction to be deemed 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 a taxpayer can also be in
trouble if they file incorrectly. I have received numerous phone calls from business owners who filed and
still got fined. Not only does
the taxpayer 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 told me that the form was prepared 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
they 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 the deductions
taken in prior years. Logic and common sense dictate that a penalty should not apply if the taxpayer no
longer benefits from the arrangement.

Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the
taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance
identifying the transaction as a listed transaction or a transaction that is the same or substantially
similar to a listed transaction. Clearly, the primary benefit in the participation of these plans is the large tax
deduction generated by such participation. It follows that taxpayers who no longer enjoy the benefit of those
large deductions are no longer “participating” in the listed transaction.

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

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

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of
teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and
abusive tax shelters. He writes about 412(i), 419, and captive insurance plans; speaks at more than ten
conventions annually; writes for over fifty publications; is quoted regularly in the press; and has been
featured on TV and radio financial talk shows. Lance has written numerous books including Protecting
Clients from Fraud, Incompetence and Scams (John Wiley and Sons), Bisk Education’s CPA’s Guide to
Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books including
Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert
witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com
www.
lancewallack.com,
www.taxadvisorexperts.org or www.taxaudit419.com,  

www.vebaplan.com,



The information provided herein is not intended as legal, accounting, financial or any type of advice for any
specific individual or other entity. You should contact an appropriate professional for any such advice.
IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79
Scams

Article Biz                                            June
Lance Wallach


The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered
abusive, listed, or reportable transactions. Listed designated as listed in published IRS material available to the general
public or transactions that are substantially similar to the specific listed transactions. A reportable transaction is defined
simply as one that has the potential for tax avoidance or evasion.

In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-15), the Tax Court ruled that an investment in an
employee welfare benefit plan marketed under the name "Benistar" was a listed transaction in that the transaction in
question was substantially similar to the transaction described in
IRS Notice 95-34. A subsequent case, McGehee Family
Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by
Curcio on the issue of whether the amounts paid by McGehee in connection with the
Benistar 419 Plan and Trust were
deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion
(Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion
of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to
these arrangements. The IRS is cracking down on small business owners who participate in tax reduction insurance plans
and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans
with life insurance.

In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued in
response to trust arrangements sold to companies that were designed to provide deductible benefits such as life
insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer
contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits.
It was claimed that permissible tax deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict
limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6)
provides an exemption from Section 419 and Section 419A for certain "10-or-more employers" welfare benefit funds. In
general, for this exemption to apply, the fund must have more than one contributing employer, of which no single
employer can contribute more than 10% of the total contributions, and the plan must not be experience-rated with
respect to individual employers.

According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance
contracts on the lives of the covered employees. The problem is that the employer contributions are large relative to the
cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and
the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or
withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular employer’s
contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent
from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be
disproportionate to the economic realities of the arrangements.

Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction
described in Notice 95-34. The benefits of enrollment listed in its advertising packet included:
Virtually unlimited deductions for the employer;
Contributions could vary from year to year;
Benefits could be provided to one or more key executives on a selective basis;
No need to provide benefits to rank-and-file employees;
Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401
(k) plans;
Funds inside the plan would accumulate tax-free;
Beneficiaries could receive death proceeds free of both income tax and estate tax;
The program could be arranged for tax-free distribution at a later date;
Funds in the plan were secure from the hands of creditors.

The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times.

In rendering its decision the court heavily cited Curcio, in which the court also ruled in favor of the IRS. As noted in
Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large contributions relative to
the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement.
The Benistar Plan owned the insurance contracts.

Following Curcio, as the parties had stipulated, on the question of the amnesty  paid by Mcghee in connection with
benistar, the Court held that the contributions to Benistar were not deductible under section 162(a) because participants
could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of
benefits by Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As
long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a
policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be
no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy
lapses.

The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it
in 2002 and 2005. The returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar
disclosure.

The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to
include the $50,000 payment to the plan. The IRS also assessed tax deficiencies and the enhanced 30% penalty totaling
almost $21,000 against the clinic and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a
reasonable cause or good faith exception.

More you should know:

In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the
maximum death benefit a qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that can be paid as
a death benefit in the event of a participant’s death. Excess amounts would revert to the plan. Effective February 13,
2004, the purchase of excessive life insurance in any plan makes the plan a listed transaction if the face amount of the
insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the premiums
for the insurance.
A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412i plans.
An employer has not engaged in a listed transaction simply because it is in a 412(i) plan.
Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan is a listed
transaction. Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.

Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions
will not be available, and penalties will be assessed for lack of disclosure if the investment is similar to the investments
described in Notice 95-34. In addition, under IRC
6707A, IRS fines participants a large amount of money for not properly
disclosing their participation in listed or reportable or similar transactions; an issue that was not before the Tax Court in
either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need
to be properly filed even for years that no contributions are made. I have received numerous calls from participants who
did disclose and still got fined because the forms were not prepared properly. A plan administrator told me that he
assisted hundreds of his participants file forms, and they still all received very large IRS fines for not properly filling in the
forms.

IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life
insurance in them, and Section 79 plans.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching
professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate
planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten
conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on
television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance
has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley
and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA
best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.
He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit
www.taxadvisorexpert.com.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific
individual or other entity. You should contact an appropriate professional for any such advice.
Accounting Today

Don’t Become a ‘Material Advisor’
July 1, 2011

By Lance Wallach

Accountants, insurance professionals and others need to be careful that they don’t become what the IRS calls material advisors.
If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. They will then probably
be sued by their client, when the IRS finishes with their client
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement benefit plan administration firm’s files and
records. In McGehee Family Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee benefit plan marketed
under the name “Benistar” was a listed transaction because it was substantially similar to the transaction described in Notice 95-34 (1995-
1 C.B. 309). This is at least the second case in which the court has ruled against the
Benistar welfare benefit plan, by denominating it a
listed transaction.
The McGehee Family Clinic enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The
returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure. The IRS disallowed the latter
deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan.
The IRS assessed tax deficiencies and the enhanced 30 percent penalty under Section 6662A, totaling almost $21,000, against the clinic
and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.
In rendering its decision, the court cited Curcio v. Commissioner, in which the court also ruled in favor of the IRS. As noted in Curcio, the
insurance policies, which were overwhelmingly variable or universal life policies, required large contributions relative to the cost of the
amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned the
insurance contracts. The excessive cost of providing death benefits was a reason for the court’s finding in Curcio that tax deductions had
been properly disallowed.
As in Curcio, the McGehee court held that the contributions to Benistar were not deductible under Section 162(a) because the participants
could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar
seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing
to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates,
the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would
generally assume a reasonable rate of policy lapse.
Companies should carefully evaluate their proposed investments in plans such as the Benistar Plan. The claimed deductions will be
disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34,
that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps
not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or
evasion.
Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The
IRS went after them. They then evolved to single-employer
419(e) plans, which the IRS also went after. The latest scams may be the so-
called captive insurance plan and the so called Section 79 plan.
While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to
obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to
my IRS contacts, who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting
business owners who are being audited by the IRS with respect to these plans.
Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a
419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and
many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for
failure to file properly under 6707A. Niche then went out of business.
Millennium sold 419A(F)(6) plans and then 419(e) plans through insurance companies. They stupidly filed for a private letter ruling to the
effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a
listed transaction.
Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines
for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium
sought bankruptcy protection after a lot of lawsuits.
I have been an expert witness in a lot of the lawsuits in these 419, 412i, etc., plans, and my side has never lost a case. I have received
thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, etc. In the 1990's,
when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the
plan promoters.
In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice.
The IRS chief actuary Jim Holland also held a meeting, similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was
also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials
to discuss 419 issues in depth, which I did after the meeting.
The IRS then set up task forces and started going after 419 and 412i plans. I have been warning accountants to properly file under 6707A to
avoid the large fines, but most do not. Even if they file, if they  make a mistake on the forms the IRS fines. Very few accountants have had
experience filing the forms, and the IRS instructions are difficult to follow. I only know of two people who have been successful in  properly
filing the forms, especially after the fact. If the forms are filled out wrong they should be amended and corrected Most accountants call me a
few years later when they and their clients get the large fines, either after improperly filling out the forms or not doing them at all, but then it
is too late. If they don’t call me then, then they call me when their clients sue them.

Lance Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters, and writes about 412(i),
419 and captive insurance plans. He can be reached at (516) 938-5007, lawallach@aol.com, or visit
www.vebaplan.com.

For more information, please visit www.taxadvisorexperts.org Lance Wallach, National Society of Accountants Speaker of the Year and
member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial,
international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than
ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio
financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books
including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to
Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice
Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at
516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.com.

www.vebaplan.com



The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity.
You should contact an appropriate professional for any such advice.
Disbarred
Attorney
and embattled
benefit plan promoter
John
J. Koresko
was jailed
for ignoring court orders requiring
him to turn over $1.7 million and
certain real property.

The May 5 bench warrant follows a
seven-year litigation effort by the
Department of Labor, which seeks
to hold Koresko and associated
entities liable for mishandling
millions of dollars held by the
prototype welfare plans they sold
to employers. After Koresko failed
to show up at an April 26 contempt
hearing, Judge Wendy
Beetlestone issued a warrant for
his arrest and scheduled a
hearing for May 18.


John Koresko, Real VEBA, be
made
whole, get all your
money back from
the insurance company,fight
the IRS
!

Your Best Source For All
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JOHN KORESKO and Other
Vebas,419 plan section 79 and
Captive Insurance Scams