IRS Audits Focus on Captive Insurance Plans April 2012 Edition
By Lance Wallach
The IRS started auditing § 419 plans in the 1990s, and then continued going after § 412(i) and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions. If an IRS audit disallows the § 419 plan or the § 412(i) plan, not only does the taxpayer lose the deduction and pay interest and penalties, but then the IRS comes back under IRC 6707A and imposes large fines for not properly filing.
Insurance agents, financial planners and even accountants sold many of these plans. The main motivations for buying into one were large tax deductions. The motivation for the sellers of the plans was the very large life insurance premiums generated. These plans, which were vetted by the insurance companies, put lots of insurance on the books. Some of these plans continue to be sold, even after IRS disallowances and lawsuits against insurance agents, plan promoters and insurance companies.
In a recent tax court case, Curcio v. Commissioner (TC Memo 2010-115), 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 conta
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IRS Audits Focus on Captive Insurance Plans
April 2012 Edition
By Lance Wallach
The IRS started auditing § 419 plans in the 1990s, and then continued going after § 412(i) and other plans that they
considered abusive, listed, or reportable transactions, or substantially similar to such transactions. If an IRS audit disallows
the § 419 plan or the § 412(i) plan, not only does the taxpayer lose the deduction and pay interest and penalties, but then
the IRS comes back under IRC 6707A and imposes large fines for not properly filing.
Insurance agents, financial planners and even accountants sold many of these plans. The main motivations for buying into
one were large tax deductions. The motivation for the sellers of the plans was the very large life insurance premiums
generated. These plans, which were vetted by the insurance companies, put lots of insurance on the books. Some of these
plans continue to be sold, even after IRS disallowances and lawsuits against insurance agents, plan promoters and
insurance companies.
In a recent tax court case, Curcio v. Commissioner (TC Memo 2010-115), 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 conta