Showing posts with label 412. Show all posts
Showing posts with label 412. Show all posts
Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under Section 6707A
Business Owners in
419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the
IRS Under Section 6707A
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 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 or
visit www.taxadvisorexperts.org or www.taxlibrary.us.
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.
419 and 412 Plan Fraud
You think you know what you are getting when you buy an insurance plan, but what do you do when you find out that your plan does not work they way you thought?
If you have been misled by your insurance broker, you may have been the victim of fraud. We protect the rights of the victims of 419 and 412 plan fraud.
· Have you purchased an IRC 419 Employee Welfare Benefit Plan after being told the contributions were fully deductible from federal and state income taxes, only to find out that this was not the case?
· Did you purchase a trust you may not have needed, funded with substantial amounts of life insurance because you were told you could build up cash value tax-free and then have use of the funds tax-free?
If you have been misled about information regarding your employee welfare benefits, you may have been the victim of 419 and 412 plan fraud.
When consumers are misled and given false information by insurance brokers, they have the right to sue the fraudulent agents and insurance company that sold the plan.
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, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.
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.
· Have you purchased an IRC 419 Employee Welfare Benefit Plan after being told the contributions were fully deductible from federal and state income taxes, only to find out that this was not the case?
· Did you purchase a trust you may not have needed, funded with substantial amounts of life insurance because you were told you could build up cash value tax-free and then have use of the funds tax-free?
If you have been misled about information regarding your employee welfare benefits, you may have been the victim of 419 and 412 plan fraud.
When consumers are misled and given false information by insurance brokers, they have the right to sue the fraudulent agents and insurance company that sold the plan.
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, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.
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.
IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A
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 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 also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. 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 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."
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. 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. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on television and financial talk shows including NBC, National Pubic Radio’s All Things Considered and others. Lance authored 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.
Contact him at:
516.938.5007,
wallachinc@gmail.com, or
www.taxadvisorexperts.org, or
www.taxlibrary.us.
International Tax, Transfer Pricing, FBAR Problems
The IRS dedicates enormous resources toward dealing with taxpayers who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property;
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements) .
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property.
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances.
The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved.
c) The credit standing of the borrower.
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements) .
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property.
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances.
The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved.
c) The credit standing of the borrower.
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
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.
Transfer Pricing FBAR International Tax Problems By Lance Wallach
Section 79 Plans: 412IPLANS.ORG
Section 79 Plans: 412IPLANS.ORG: 412IPLANS.ORG
Friday, May 16, 2014
Section 79 Plans: 412IPLANS.ORG
Section 79 Plans: 412IPLANS.ORG: 412IPLANS.ORG
#11
Thanks for all of the responses. I definitely didn't feel like the structure would be legitimate but wanted more substantial information to back up my assumption.
Springing Cash Value was very helpful.
The agent still lists revenue rulings 2005-25 to back this structure and the sale from the PSP to ilit for the PERC value, and saying that the PERC value of the policy at the end of year three is 10% of the original one time premium (he has the PERC from the insurance company). Basically, after the fact that the PSP is not being established for a business purposes, I still do not trust his sales value.
#12
Doesn't add up if you read the Rev Proc (not ruling). PERC is premium, earnings and REASONABLE charges for mortality and expense. Then you hit it with the surrender factor, which is probably 70% based on the quote below. for the policy to be worth 10 cents on the dollar in year 3 the supposedly reasonable mortality and expense charges would have to have consumed all earnings and 85% of the principal. If this is true, the charges are certainly not reasonable.
From Rev Proc 2005-25:
(2) Qualified plans. In the case of a distribution or sale from a qualified plan, if the contract provides for explicit surrender charges, the Average Surrender Factor is the unweighted average of the applicable surrender factors over the 10 years beginning with the policy year of the distribution or sale. For this purpose, the applicable surrender factor for a policy year is equal to the greater of 0.70 and a fraction, the numerator of which is the projected amount of cash that would be available if the policy were surrendered on the first day of the policy year (or, in the case of the policy year of the distribution or sale, the amount of cash that was actually available on the first day of that policy year) and the denominator of which is the projected (or actual) PERC amount as of that same date. The applicable surrender factor for a year in which there is no surrender charge is 1.00. A surrender charge is permitted to be taken into account under section 3.04 of this revenue procedure only if it is contractually specified at issuance and expressed in the form of nonincreasing percentages or amounts.
#13
#14
May have something to do with how he has structured the insurance. The first two years have insurance of about $6 million and then the insurance drops to $1.5 million. It's a weird illustration, and my friend was presented an email from the insurance company verifying the low Perc value, which is what they are quoting as the sale price from the qualified plan to the ILIT.
I think this sentence in 2005-25 may help me explain why this doesn't work as well "If the insurance contract has not been inforce for some time, the value of the contract is best established through the sale of the particular insurance contract by the insurance company (iei. as the premiums paid for that contract)." It also says "at no time are these rules to be interpreted in a manner that allows the use of these formulas to understate the FMV of the life insurance contracts and associated distributes and transfers."
Even though I dont quite follow the math behind the sales value 2005-25 sets out, i'm pretty sure common sense point me that those two sentences are very relevant in this transaction.
#15
- Registered
- 3,051 posts
Registered User
Posted 06 July 2010 - 11:04 AM
I'd also think the client, and the client's tax counsel, should take note of the "recurring and substantial" contribution requirement for a profit sharing plan, found in 1.401-1(b)(2). This whole arrangement seems improper to me.
#11 
- Registered
- 4 posts
Registered User
Posted 07 July 2010 - 12:11 PM
Bird, on Jul 1 2010, 07:45 PM, said:
QuoteTEN PERCENT of the premium? How can this possibly comply with the FMV guidance in Rev Proc 2005-25? Ask the insurance company for a calculation of the FMV pursuant to the Rev Proc.
Amen. Google "springing cash value" while you're at it.
Thanks for all of the responses. I definitely didn't feel like the structure would be legitimate but wanted more substantial information to back up my assumption.
Springing Cash Value was very helpful.
The agent still lists revenue rulings 2005-25 to back this structure and the sale from the PSP to ilit for the PERC value, and saying that the PERC value of the policy at the end of year three is 10% of the original one time premium (he has the PERC from the insurance company). Basically, after the fact that the PSP is not being established for a business purposes, I still do not trust his sales value.
#12
- Registered
- 144 posts
Registered User
Posted 07 July 2010 - 01:03 PM
GTigers, on Jul 7 2010, 10:11 AM, said:
The agent still lists revenue rulings 2005-25 to back this structure and the sale from the PSP to ilit for the PERC value, and saying that the PERC value of the policy at the end of year three is 10% of the original one time premium (he has the PERC from the insurance company). Basically, after the fact that the PSP is not being established for a business purposes, I still do not trust his sales value.
Doesn't add up if you read the Rev Proc (not ruling). PERC is premium, earnings and REASONABLE charges for mortality and expense. Then you hit it with the surrender factor, which is probably 70% based on the quote below. for the policy to be worth 10 cents on the dollar in year 3 the supposedly reasonable mortality and expense charges would have to have consumed all earnings and 85% of the principal. If this is true, the charges are certainly not reasonable.
From Rev Proc 2005-25:
(2) Qualified plans. In the case of a distribution or sale from a qualified plan, if the contract provides for explicit surrender charges, the Average Surrender Factor is the unweighted average of the applicable surrender factors over the 10 years beginning with the policy year of the distribution or sale. For this purpose, the applicable surrender factor for a policy year is equal to the greater of 0.70 and a fraction, the numerator of which is the projected amount of cash that would be available if the policy were surrendered on the first day of the policy year (or, in the case of the policy year of the distribution or sale, the amount of cash that was actually available on the first day of that policy year) and the denominator of which is the projected (or actual) PERC amount as of that same date. The applicable surrender factor for a year in which there is no surrender charge is 1.00. A surrender charge is permitted to be taken into account under section 3.04 of this revenue procedure only if it is contractually specified at issuance and expressed in the form of nonincreasing percentages or amounts.
I'm addicted to placebos. I could quit, but it wouldn't matter.
#13
- Registered
- 96 posts
Registered User
Posted 07 July 2010 - 03:54 PM
VebaGuru is correct Agents cant use the plans below, so now they are up to new scams, like section 79 and probably the plan described.
PRODUCERSWEB.com
For Smart Advisors
Get Sued
By Lance Wallach Wednesday, April 8, 2009
The IRS is cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, I am always approached by many people who have questions about tax reduction plans that they have heard about. Below are the most common.
419 tax reduction insurance plans
These come in various versions, and most of them have or will get the participant audited and the salesman sued. They purportedly allow the business owner to make a large tax-deductible contribution, and some or all of the contribution pays for a life insurance product. The IRS has been disallowing most versions of these plans for years, yet they continue to be sold. After everyone gets into trouble and the insurance agents get sued, the promoters of the abusive versions sometimes change the name of their company and call the plan something else. The insurance companies whose policies are sold are legitimate companies. What usually is not legitimate is the way that most of the plans are operated. There can also be a $200,000 IRS fine facing the insurance agent who sold the plan if Form 8918 has not been properly filed. I've reviewed hundreds of these forms for agents and have yet to see one that was filled out correctly.
When the IRS audits a participant in one of these plans, the tax deductions are lost. There is also the interest and large penalties to consider. The business owner can also be facing a $200,000-a-year fine if he did not properly file Form 8886. Most of these forms have been filled out improperly. In my talks with the IRS, I was told that the IRS considers not filling out Form 8886 properly almost the same as not filing at all.
412(i) retirement plans
The IRS has been auditing participants in these types of retirement plans. While there is generally nothing wrong with many of the newer plans, the IRS considered most of the older abusive plans. Forms 8918 and 8886 are also required for abusive 412(i) plans.
I have been an expert witness in a lot of these 419 and 412(i) lawsuits and I have not lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents that have sold these types of plans. Don't let them learn on the job, with your career and money at stake.
Do not wait for IRS to come and get you, or for your client to sue you. Time is of the essence. Most insurance professionals need help to correct their improperly completed Form 8918 or to fill it out properly in the first place. If you have not previously filled out the form it is late, and therefore you should immediately seek assistance. There are plenty of legitimate tax reduction insurance plans out there. Just make sure that you know the history of the people with whom you conduct business.
Remember, if something looks too good to be true, it usually is. Be careful.
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, is quoted regularly in the press, 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.
PRODUCERSWEB.com
For Smart Advisors
Get Sued
By Lance Wallach Wednesday, April 8, 2009
The IRS is cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, I am always approached by many people who have questions about tax reduction plans that they have heard about. Below are the most common.
419 tax reduction insurance plans
These come in various versions, and most of them have or will get the participant audited and the salesman sued. They purportedly allow the business owner to make a large tax-deductible contribution, and some or all of the contribution pays for a life insurance product. The IRS has been disallowing most versions of these plans for years, yet they continue to be sold. After everyone gets into trouble and the insurance agents get sued, the promoters of the abusive versions sometimes change the name of their company and call the plan something else. The insurance companies whose policies are sold are legitimate companies. What usually is not legitimate is the way that most of the plans are operated. There can also be a $200,000 IRS fine facing the insurance agent who sold the plan if Form 8918 has not been properly filed. I've reviewed hundreds of these forms for agents and have yet to see one that was filled out correctly.
When the IRS audits a participant in one of these plans, the tax deductions are lost. There is also the interest and large penalties to consider. The business owner can also be facing a $200,000-a-year fine if he did not properly file Form 8886. Most of these forms have been filled out improperly. In my talks with the IRS, I was told that the IRS considers not filling out Form 8886 properly almost the same as not filing at all.
412(i) retirement plans
The IRS has been auditing participants in these types of retirement plans. While there is generally nothing wrong with many of the newer plans, the IRS considered most of the older abusive plans. Forms 8918 and 8886 are also required for abusive 412(i) plans.
I have been an expert witness in a lot of these 419 and 412(i) lawsuits and I have not lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents that have sold these types of plans. Don't let them learn on the job, with your career and money at stake.
Do not wait for IRS to come and get you, or for your client to sue you. Time is of the essence. Most insurance professionals need help to correct their improperly completed Form 8918 or to fill it out properly in the first place. If you have not previously filled out the form it is late, and therefore you should immediately seek assistance. There are plenty of legitimate tax reduction insurance plans out there. Just make sure that you know the history of the people with whom you conduct business.
Remember, if something looks too good to be true, it usually is. Be careful.
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, is quoted regularly in the press, 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.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 50 national conventions annually and writes for more than 30 publications. For more information and additional articles on these subjects, visit www.vebaplan.com or call 516-938-5007.
#14
- Registered
- 4 posts
Registered User
Posted 07 July 2010 - 04:38 PM
Jim Norman, on Jul 7 2010, 02:03 PM, said:
GTigers, on Jul 7 2010, 10:11 AM, said:The agent still lists revenue rulings 2005-25 to back this structure and the sale from the PSP to ilit for the PERC value, and saying that the PERC value of the policy at the end of year three is 10% of the original one time premium (he has the PERC from the insurance company). Basically, after the fact that the PSP is not being established for a business purposes, I still do not trust his sales value.
Doesn't add up if you read the Rev Proc (not ruling). PERC is premium, earnings and REASONABLE charges for mortality and expense. Then you hit it with the surrender factor, which is probably 70% based on the quote below. for the policy to be worth 10 cents on the dollar in year 3 the supposedly reasonable mortality and expense charges would have to have consumed all earnings and 85% of the principal. If this is true, the charges are certainly not reasonable.
May have something to do with how he has structured the insurance. The first two years have insurance of about $6 million and then the insurance drops to $1.5 million. It's a weird illustration, and my friend was presented an email from the insurance company verifying the low Perc value, which is what they are quoting as the sale price from the qualified plan to the ILIT.
I think this sentence in 2005-25 may help me explain why this doesn't work as well "If the insurance contract has not been inforce for some time, the value of the contract is best established through the sale of the particular insurance contract by the insurance company (iei. as the premiums paid for that contract)." It also says "at no time are these rules to be interpreted in a manner that allows the use of these formulas to understate the FMV of the life insurance contracts and associated distributes and transfers."
Even though I dont quite follow the math behind the sales value 2005-25 sets out, i'm pretty sure common sense point me that those two sentences are very relevant in this transaction.
#15
- Registered
- 96 posts
Registered User
Posted 12 July 2010 - 01:47 PM
I was an expert witness in a Federal Court case on point. The Plaintiffs, my side won a lot of money. They went into a similar scam. Lance Wallach
Help with Common IRS Problems: Section 79 Plans: 412IPLANS.ORG
Help with Common IRS Problems: Section 79 Plans: 412IPLANS.ORG: Section 79 Plans: 412IPLANS.ORG : 412IPLANS.ORG Registered User Registered 3,051 posts Posted 06 July 2010 - 11:04 AM I'd al...
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