Don't Become A Material Advisor



JULY 1, 2011


 Lance Wallach Council Member PresidentVEBA Plan

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. Their client will then probably sue them after having dealt with the
IRS.  

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 419 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 plans, 412i plans, and the
like, 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, and
other various professionals. 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
profusely 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 will fine them.
Very few accountants have had experience filing the forms, and the IRS instructions are
complicated and therefore 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
incorrectly, 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 failing to fill them out at all. Unfortunately, by then it is too late. If they don’t call me
then, then they call me when their clients sue them.

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, lawallach@aol.com or visit 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.


26 comments:


  1. In commercial litigation, many cases require some kind of expert. Whether it is a financial expert, an engineering expert, a fraud expert, a valuation expert, or some other type of expert witness, the process of selecting one cannot be taking lightly. The effectiveness of your expert witness could win or lose a case for you, so it is important to carefully consider what makes a good expert witness.

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    1. use the teacher not the student want the best google lancewallach for 419 sea nine veba 412i section 79 captive insurance IRS audits and lawsuits
      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



      Delete
    2. Part 4. Examining Process

      Chapter 76. Exempt Organizations Examination Guidelines

      Section 18. Voluntary Employees' Beneficiary Associations IRC 501(c)(9)

      4.76.18 Voluntary Employees' Beneficiary Associations IRC 501(c)(9)

      4.76.18.1 Introduction
      4.76.18.2 Background Information
      4.76.18.3 General Examination Guidelines
      4.76.18.4 Specific Examination Guidelines
      4.76.18.5 Unrelated Business Taxable Income
      4.76.18.6 Required Compliance Checks
      4.76.18.1 (06-21-2002)
      Introduction

      This IRM contains specific examination guidelines for an organization recognized as exempt from income tax under IRC section 501(a) as an organization described in IRC section 501(c)(9). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC section 501(c)(9) organization.

      These guidelines provide specific assistance for the examination of an IRC section 501(c)(9) organization and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM sections 4.75.2 through 4.75.6. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

      This IRM section does not contain detailed technical information regarding IRC section 501(c)(9) organizations. The examiner should review the technical information contained in IRM 7.25.9.

      4.76.18.2 (06-21-2002)
      Background Information

      IRC section 501(c)(9) exempts from Federal income tax voluntary employees' beneficiary associations (VEBAs):

      Whose organization is an association of employees.

      Whose membership in the association is voluntary.

      Whose purpose is to provide for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries, and substantially all of its operations are in the furtherance of providing such benefits, and

      Having no net earnings, other than payment of permitted benefits, inuring to any private shareholder or individual.

      This IRM section contains both general and specific examination guidelines, which apply to VEBAs

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  2. google lance wallach for 419 veba hlep
    User:Wallach,lance
    From TaxAlmanac, A Free Online Resource for Tax Professionals
    Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

    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 SEPTEMBER 2008 EXECUTIVE SUMMARY
    Some of the listed transactions CPA tax practitioners are most likely to encounter are employee benefit insurance plans that the I.

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  3. sea nine veba 419 IRS audits lawsuits

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  4. material advisor and 419 litigation lita www.taxaudit419.com google lance wallach for 419 plan lawsuits We have knowledge of many different welfare benefit plans and experience in representing taxpayers who participate in those plans before the IRS. A sampling of the plans that we know well include:

    Millennium Plan
    Insured Security Plan
    Corporate Benefit Services Plan
    Sea Nine Associates VEBA
    Niche National Benefit Plans
    Professional Benefit Trust (PBT)
    Koresko STEP Plan
    Bisys Plan
    Xelan Plan
    Sterling Plan


    Question. What is the IRS position on these plans?

    Answer. The IRS position appears to be that all multiple employer welfare benefit plans funded with permanent life insurance are abusive tax scams. Their history is to open promoter audits on every such plan and eventually to obtain the client lists from the promoters and then audit their clients. The IRS position on single employer welfare benefit plans that are spin-offs of the multiple employer plans appears to be the same. Similarly, the IRS position on single employer welfare benefit plans invested in permanent life insurance where the employer deducts more than the term cost of insurance is that those plans are also abusive tax scams.



    Question. Has the IRS approved any multiple or single employer welfare benefit plan invested in permanent life insurance?

    Answer. Though an IRS private letter ruling is not immediately public, it is my understanding that the IRS has never “approved” of any multiple or single employer welfare benefit plan where permanent life insurance was used as a funding vehicle and the participating employer took a deduction for anything other than the current term insurance cost.



    Question. Are the IRS audits coordinated?

    Answer. Yes. The IRS audits are both targeted and coordinated. They are targeted meaning that the IRS obtains a list of the participating employers in a plan promotion and audits the participating employers (and owners) for the purpose of challenging the deductions taken with respect to the plan. The audits are coordinated meaning that there is an IRS Issue Management Team for each promotion that has responsibility for both managing the promoter audit(s) and also developing the coordinated position to be followed by the Examination Agents. Their intention is that all taxpayers under audit will receive the similar treatment in Exam. There are also IRS Offices that specialize in 419 audits. For example, IRS offices in upstate New York and in El Monte California will manage many audits of specific promotions

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  5. material advisors and 419 litigation
    Class action challenges propriety of 412(e)(3) annuities for ERISA defined benefit plans

    ReplyDelete
  6. 412i lawsuits
    Class action challenges propriety of 412(e)(3) annuities for ERISA defined benefit plans

    ReplyDelete
  7. 419 plan litetation 419 plan lititagion

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  8. google lance wallach 419plan litigation

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  9. he IRS and U.S. Department Justice Department have a special relationship with welfare benefit plan promoters and the brokers and insurance agents that sell them. They hate them. For over a decade, the IRS has declared that many welfare benefit plans are fraudulent and abusive tax shelters. Many of the promoters are now out of business or under criminal investigation (or both). Last month’s announcement by DOJ of new enforcement actions within the “industry” therefore comes as no surprise. The customers who bought these plans, however, might be in for a rude awakening. Huge taxes and maybe even criminal prosecution.

    Last month the government took action against Tracy L. Sunderlage and his wife, Linda Sunderlage, SRG International, Ltd., of Nevis, West Indies, and three related Illinois companies – SRG International U.S. LLC, Maven U.S. LLC and Randall Administration LLC . Prosecutors say they improperly helped high income taxpayers avoid taxes by funneling monies into phony welfare benefit plans. These pla

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  10. IRS to Audit Sea Nine VEBA Participating Employers | Finance
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  11. IRS to Audit Sea Nine VEBA Participating Employers | Finance
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    by Lance Wallach - in 48 Google+ circles
    Aug 7, 2012 - The company first marketed a 419A(F)(6) plan that the IRS audited. .... for 419 sea nine veba 412i section 79 captive insurance IRS audits and ...
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    by Lance Wallach - in 48 Google+ circles
    Jan 9, 2013 - Plan Administrator Frustrated With IRS Attacks on 412i, 412e Plans · IRS Auditing 412(i) ..... Sea Nine VEBA, 419,412i are all IRS audit targets.
    You +1'd thishe IRS and U.S. Department Justice Department have a special relationship with welfare benefit plan promoters and the brokers and insurance agents that sell them. They hate them. For over a decade, the IRS has declared that many welfare benefit plans are fraudulent and abusive tax shelters. Many of the promoters are now out of business or under criminal investigation (or both). Last month’s announcement by DOJ of new enforcement actions within the “industry” therefore comes as no surprise. The customers who bought these plans, however, might be in for a rude awakening. Huge taxes and maybe even criminal prosecution.

    ReplyDelete
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  12. CJA and associates 419 412i section 79 scam audits lawsuits
    seniorabuses.blogspot.com/.../cja-and-associates-419-412i-section-79.ht...‎
    by Lance Wallach - in 48 Google+ circles
    Nov 27, 2012 - 419 412i plans IRS audits lawsuits. Lance Wallach director at taxaudit419.com. Plan names: Benistar, SADI Trust,Beta 419,Millennium Plan ...
    You and one other person +1'd this
    IRS Audits,lawsuits from Benistar,Nova,Grist Mill,Sadie 419,WBP
    benistarabuses.com/‎
    Benistar's 419 plan, like others caused IRS audits, fines,Lawsuits to be assessed on their participants. Help with audits,lawsuits, Nova, Grist Mill, Sadie,benistar ...
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  13. Lance WallachFebruary 7, 2014 at 1:44 PM
    CJA and associates 419 412i section 79 scam audits lawsuits
    seniorabuses.blogspot.com/.../cja-and-associates-419-412i-section-79.ht...‎
    by Lance Wallach - in 48 Google+ circles
    Nov 27, 2012 - 419 412i plans IRS audits lawsuits. Lance Wallach director at taxaudit419.com. Plan names: Benistar, SADI Trust,Beta 419,Millennium Plan ...
    You and one other person +1'd this
    IRS Audits,lawsuits from Benistar,Nova,Grist Mill,Sadie 419,WBP
    benistarabuses.com/‎
    Benistar's 419 plan, like others caused IRS audits, fines,Lawsuits to be assessed on their participants. Help with audits,lawsuits, Nova, Grist Mill, Sadie,benistar ...
    You've visited this page many times. Last visit: 2/6/14

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  14. Expert Witness | Consulting | Advisory Services
    Consulting, and Advisory Services for §419A(f)(6) and §419(e) Welfare Benefit Plan Matters and VEBA Plan Matters address technical and complex issues involving:
    §419(e) and §419A(f)(6) Welfare Benefit Plans
    VEBA Plans
    Insurance Policies Held by the Plan
    Tax Issues: IRS and State Taxing Authority Audits; Tax Return and Tax Form Filings; Reportable Transactions; Listed Transactions; §6707A Penalties; Excise Tax
    Statute of Limitations: IRS Audit, State Taxing Authority Audit, and Tax Collection Issues
    Regulations and Compliance: Internal Revenue Code, State Revenue Code, ERISA
    Suitability, Non-Discrimination Rules, Fiduciary Duties
    Plan Administration
    Plan Contributions, Distributions, and Termination
    Liability Analysis
    Damage Analysis and Calculations


    Lance WallachFebruary 7, 2014 at 1:45 PM
    Lance WallachFebruary 7, 2014 at 1:44 PM
    CJA and associates 419 412i section 79 scam audits lawsuits
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    by Lance Wallach - in 48 Google+ circles
    Nov 27, 2012 - 419 412i plans IRS audits lawsuits. Lance Wallach director at taxaudit419.com. Plan names: Benistar, SADI Trust,Beta 419,Millennium Plan ...
    You and one other person +1'd this
    IRS Audits,lawsuits from Benistar,Nova,Grist Mill,Sadie 419,WBP
    benistarabuses.com/‎
    Benistar's 419 plan, like others caused IRS audits, fines,Lawsuits to be assessed on their participants. Help with audits,lawsuits, Nova, Grist Mill, Sadie,benistar ...
    You've visited this page many times. Last visit: 2/6/14

    ReplyDelete

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  15. Material Advisors & 419 Plans Litigation: Class Action Challenges ...
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    by Lance Wallach - in 56 Google+ circles
    Nov 1, 2013 - Lance Wallach, expert witness. ... 412(e)(3) Plans and Annuities A 412(e)(3) plan is a tax-qualified, defined benefit pension plan that is funded ...
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    Mar 1, 2012 - Author/Moderator: Lance Wallach, CLU, CHFC, CIMC ... These plans are now technically called Section 412(e)(3) plans. ... on all contributions that were made, not to mention leaving behind no pension plan whatsoever.
    You've visited this page 5 times. Last visit: 3/4/14

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  17. er 2013
    UNCATEGORIZED
    NEW BANKRUPTCY OPINION: SOLIS V. KORESKO – DIST. COURT, ED PENNSYLVANIA, 2013
    SEPTEMBER 29, 2013 LEAVE A COMMENT





    HILDA SOLIS, SECRETARY OF LABOR, UNITED STATES DEPARTMENT OF LABOR

    v.

    JOHN J. KORESKO, V, et al.

    REGIONAL EMPLOYERS ASSURANCE LEAGUES VOLUNTARY EMPLOYEES’ BENEFICIARY ASSOCIATION TRUST

    v.

    ReplyDelete
  18. er 2013
    UNCATEGORIZED
    NEW BANKRUPTCY OPINION: SOLIS V. KORESKO – DIST. COURT, ED PENNSYLVANIA, 2013
    SEPTEMBER 29, 2013 LEAVE A COMMENT





    HILDA SOLIS, SECRETARY OF LABOR, UNITED STATES DEPARTMENT OF LABOR

    v.

    JOHN J. KORESKO, V, et al.

    REGIONAL EMPLOYERS ASSURANCE LEAGUES VOLUNTARY EMPLOYEES’ BENEFICIARY ASSOCIATION TRUST

    v.

    ReplyDelete
  19. RIZED
    NEW BANKRUPTCY OPINION: SOLIS V. KORESKO – DIST. COURT, ED PENNSYLVANIA, 2013
    SEPTEMBER 9, 2013 CHAPTER11CASES LEAVE A COMMENT





    HILDA SOLIS, SECRETARY OF LABOR, UNITED STATES DEPARTMENT OF LABOR,

    v.

    JOHN J. KORESKO, V, et al.

    Civil Action No. 09-988.

    United States District Court, E.D. Pennsylvania.

    August 28, 2013.

    MEMORANDUM

    MARY A. McLAUGHLIN, District Judge.

    This action by the Secretary of Labor arises out of alleged violations of fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., in connection with a multiple-employer employee death benefit arrangement run by attorney John Koresko through a number of entities controlled by him. [1] That same death benefit arrangement is at issue in nine other cases pending before this Court. [2]

    On July 23, 2013, six of the Koresko entities filed for bankruptcy pursuant to Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania. [3] Individual defendants John J. Koresko, V and Jeanne Bonney have not filed for bankruptcy. The Koresko Parties then filed a suggestion of bankruptcy on July 25, 2013 with regard to four cases before this Court. The Department of Labor (“DOL”) stated its position that the case should proceed because the DOL’s action is exempt from the automatic stay that resulted from the bankruptcy proceedings. The Court agreed, stating in a July 29, 2013 Order that the above-captioned case could proceed under the governmental regulation exception to the automatic stay, under 11 U.S.C. § 362(b)(4). The other three actions in which the suggestion of bankruptcy was filed were placed in civil suspense in response to the automatic stay.

    On July 30, 2013, the Koresko Parties filed a motion for reconsideration of the Court’s July 29, 2013 Order. Although the Koresko Parties’ motion is styled as a motion for reconsidera

    ReplyDelete