Share on Facebook Share on Twitter 419,412i section 79 and other tax shelter scams Published on Published onFebruary 4, 2018 Edit article View stats Lance Wallach Lance Wallach Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker 755 articles Unlike 2 Comment 0
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The IRS Has Targeted Section 79 Plans of Southwest Financial Group (SFG) April 12, 2016
|
Dalton Harris
Insurance agents and related enterprising people have continually endeavored to concoct plans that make them a great deal of money. And when I say “plans,” I mean welfare benefit plans. These are insurance-based plans that employers can invest money into under the guise that the contributions are tax-deductible; likewise, they are represented as having the benefit of allowing withdrawals at some point in a non-taxable manner.
The IRS has never (as far as we are aware) agreed with one of these Plans. In other words, these types of Plans (and, oftentimes, their promoters) have been subject to extreme scrutiny by the IRS—and this, generally, has included not only an audit of the Plans, but also of participating employers/employees in the Plans.
As if this were not ominous enough (i.e. having the IRS audit participating employers/employees), almost invariably, these audits result in a requirement to pay not only back taxes, but overwhelming penalties of various types, as well as interest on these amounts - all of which can be staggering and even life-altering to participants who were innocently trying to plan for retirement.
One of the latest targets by the IRS is Southwest Financial Group, Inc. (“SFG”). SFG is a business located in Phoenix, Arizona, that created and/or promoted a number of “Section 79” Plans. These plans are now the focus of the IRS and their participants are beginning to receive audit notices.
We believe the participating employers/employees in the SFG “Section 79” Plans may have been exposed to severe and significant losses as a result of their participation in these suspect, scheme-based tax shelters.
Our firm has handled many cases relating to welfare benefit plans and we have helped a tremendous number of damaged employers and employees. I am confident we can help those damaged by Southwest Financial Group if given the opportunity. If you have any questions or concerns, please call our office at (214)956-7474.
In February 2014, proposed Treasury regulations were issued which, when finalized, will change the way in which most VEBA’s in the 6th Circuit (Michigan, Ohio, Kentucky and Tennessee) are taxed. Essentpcoming change to determine the applicability of the changes to the plan, the potential tax cost to the plan, and any action that may be warranted to prepare for the change. Unless a plan covers only collectively bargained participants, or is funded substantially by tax-exempt employers, action may be required to calculate and plan for this tax and reporting responsibility.
Issue and Discussion: Although they are generally tax-exempt entities, VEBA’s are subject to unrelated business income tax (UBIT) on income that is other than “exempt function income.” Exempt function income is generally defined as any fees, dues, and other charges received in exchange for the provision of the VEBA benefits to the members or their dependents. Hence, investment income is potentially taxable, subject to several additional rules that are specific to VEBA’s.
The UBIT definition is driven by the VEBA funding limits under Internal Revenue Code (IRC) Sections 419 and 419A, as well as by the existence of collectively bargained employees within the fund’s members. The Tax Reform Act of 1984 created limits on the amount of funding allowed for VEBA’s under IRC Sections 419 and 419A. This funding limit is roughly equal to claims paid, plus certain administrative expenses, plus the amount of claims that are incurred but not reported (IBNR). There is an exception to these funding limits for arrangements that include collectively bargained participants, but only to the exte.
The Tax Court disallowed deductions for premiums paid to a microcaptive insurance company because the arrangement did not constitute insurance under federal income tax law. This was a case of first impression—the Tax Court could find no other cases involving microcaptives and Secs. 162, 831(b), and 953(d)—and it may have broad-reaching implications for captive insurance arrangements.
Facts: Benyamin and Orna Avrahami owned a number of partnerships and S corporations. In 2007, the Avrahamis formed a captive insurance company, Feedback, with Orna Avrahami as the sole shareholder. Feedback elected to be taxed as a small insurance company under Sec. 831(b). The Avrahamis set target prices for the policies issued by Feedback to the Avrahamis' entities and retained an actuary to price the policies according to the targets.
In 2009 and 2010, the years at issue in this case, the Avrahamis' entities paid insurance premiums to Feedback of $730,000 and $810,000, respectively. American Findings, one of the Avrahamis' entities, also purchased terrorism-risk insurance from Pan American, which was then reinsured through other companies, including Feedback. Pan American was a th
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Published on Published onFebruary 4, 2018
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Lance Wallach
Lance Wallach
Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker
755 articles
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HOME
ABOUT THE FIRM
OUR ATTORNEYS
PRACTICE AREAS
NEWS & RESOURCES
CONTACT
Call Now: 214-956-7474
The IRS Has Targeted Section 79 Plans of Southwest Financial Group (SFG)
April 12, 2016
|
Dalton Harris
Insurance agents and related enterprising people have continually endeavored to concoct plans that make them a great deal of money. And when I say “plans,” I mean welfare benefit plans. These are insurance-based plans that employers can invest money into under the guise that the contributions are tax-deductible; likewise, they are represented as having the benefit of allowing withdrawals at some point in a non-taxable manner.
The IRS has never (as far as we are aware) agreed with one of these Plans. In other words, these types of Plans (and, oftentimes, their promoters) have been subject to extreme scrutiny by the IRS—and this, generally, has included not only an audit of the Plans, but also of participating employers/employees in the Plans.
As if this were not ominous enough (i.e. having the IRS audit participating employers/employees), almost invariably, these audits result in a requirement to pay not only back taxes, but overwhelming penalties of various types, as well as interest on these amounts - all of which can be staggering and even life-altering to participants who were innocently trying to plan for retirement.
One of the latest targets by the IRS is Southwest Financial Group, Inc. (“SFG”). SFG is a business located in Phoenix, Arizona, that created and/or promoted a number of “Section 79” Plans. These plans are now the focus of the IRS and their participants are beginning to receive audit notices.
We believe the participating employers/employees in the SFG “Section 79” Plans may have been exposed to severe and significant losses as a result of their participation in these suspect, scheme-based tax shelters.
Our firm has handled many cases relating to welfare benefit plans and we have helped a tremendous number of damaged employers and employees. I am confident we can help those damaged by Southwest Financial Group if given the opportunity. If you have any questions or concerns, please call our office at (214)956-7474.
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In February 2014, proposed Treasury regulations were issued which, when finalized, will change the way in which most VEBA’s in the 6th Circuit (Michigan, Ohio, Kentucky and Tennessee) are taxed. Essentpcoming change to determine the applicability of the changes to the plan, the potential tax cost to the plan, and any action that may be warranted to prepare for the change. Unless a plan covers only collectively bargained participants, or is funded substantially by tax-exempt employers, action may be required to calculate and plan for this tax and reporting responsibility.
ReplyDeleteIssue and Discussion:
Although they are generally tax-exempt entities, VEBA’s are subject to unrelated business income tax (UBIT) on income that is other than “exempt function income.” Exempt function income is generally defined as any fees, dues, and other charges received in exchange for the provision of the VEBA benefits to the members or their dependents. Hence, investment income is potentially taxable, subject to several additional rules that are specific to VEBA’s.
The UBIT definition is driven by the VEBA funding limits under Internal Revenue Code (IRC) Sections 419 and 419A, as well as by the existence of collectively bargained employees within the fund’s members. The Tax Reform Act of 1984 created limits on the amount of funding allowed for VEBA’s under IRC Sections 419 and 419A. This funding limit is roughly equal to claims paid, plus certain administrative expenses, plus the amount of claims that are incurred but not reported (IBNR). There is an exception to these funding limits for arrangements that include collectively bargained participants, but only to the exte.
The Tax Court disallowed deductions for premiums paid to a microcaptive insurance company because the arrangement did not constitute insurance under federal income tax law. This was a case of first impression—the Tax Court could find no other cases involving microcaptives and Secs. 162, 831(b), and 953(d)—and it may have broad-reaching implications for captive insurance arrangements.
ReplyDeleteFacts: Benyamin and Orna Avrahami owned a number of partnerships and S corporations. In 2007, the Avrahamis formed a captive insurance company, Feedback, with Orna Avrahami as the sole shareholder. Feedback elected to be taxed as a small insurance company under Sec. 831(b). The Avrahamis set target prices for the policies issued by Feedback to the Avrahamis' entities and retained an actuary to price the policies according to the targets.
In 2009 and 2010, the years at issue in this case, the Avrahamis' entities paid insurance premiums to Feedback of $730,000 and $810,000, respectively. American Findings, one of the Avrahamis' entities, also purchased terrorism-risk insurance from Pan American, which was then reinsured through other companies, including Feedback. Pan American was a th