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| by Lance Wallach |
IRS has been attacking abusive 412i plans for years. Business men have been suing the insurance agents who sold the plans. The IRS has attacked 412i, 419 plans for years. As a result promoters are now promoting section 79 and captive insurance plans. They are just starting to be attacked by the IRS.
A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products.
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
Moral of the story? Don't go at this alone. Retirement plans are tricky. Be reasonable. Remember, the "reasonable tax court judge" is looking at your plan.
ReplyDeleteThe U.S. Tax Court finally slammed illegal 412(i) plans. No mercy rule was installed in Soni v. Commissioner, and all penalties were placed on the plan [6662(a) and 6664(d)]. If you read the case, the court stressed the importance of review by a CPA or attorney.
Seek counsel
"Soni Inc. obtained neither legal advice nor tax advice from a CPA with expertise in the area of defined benefit plans regarding the tax implications of operating the plan."
Avoid Traps
The problem is that the taxpayer failed to send a timely 8886 and did not know it needed to be sent to two places: the IRS and the OTSA. (By the way, they sent it to the IRS but not the OTSA — a nasty trick by our friends at the IRS. Many taxpayers did not know this form needed to be sent to two places.) What did the court say about this?
"Ignorance of the law is not excuse for noncompliance with the applicable law," citing McGehee family Clinic P.A. v. Commissioner.
So the taxpayer asked to rely on the determination letter. What did the court say?
"The determination letter only addresses the qualified status of the plan under section 401(a) and does not address plan operation. A determination letter does not address whether actuarial assumptions are reasonable for funding purposes or whether a specified contribution is deductible," citing IRS Publ'n 794 (rev. July 2001).
I found it interesting that the court cited an IRS publication as the law. In the future, they may cite this case (not discussing it came from an IRS publication).