BenistarAduits.com ctions tend to be disproportionate to the economic realities of the arrangements.
Benistar advertised that enrollees should expect the same type of tax benefits as listed in the transaction described in Notice 95-34. The advertising packet listed the following benefits of enrollment: · Virtually unlimited deductions for the employer. · Contributions could vary from year to year. · Benefits could be provided to one or more key executives on a selective basis. · No need to provide benefits to rank-and-file employees. · Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans. · Funds inside the plan would accumulate tax-free. · Beneficiaries could receive death proceeds free of both income tax and estate tax. · The program could be arranged for tax-free distribution at a later date. · Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times. In rendering its decision, the court heavily cited Curico, in which the court also ruled in favor of the IRS. As noted in Curico, the insurance policies, which were overwhelmingly variable or universal life policies, required large contributions compared 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.
Following Curico, the Court held that the contributions to Benistar were not deductible under section 162(a) because participants could receive the value reflected in the underlying insurance policies purchased by Benistar. This is despite the fact that payment of benefits by Benistar seemed 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 never a reason to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curico assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 andclaimed 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 2005 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan. The IRS also assessed tax deficiencies and the enhanced 30% penalty 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.
More You Should Know
· In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to ptact an appropriate professional for any such advice.
BenistarAduits.com
ReplyDeletections tend to be disproportionate to the economic
realities of the arrangements.
Benistar advertised that enrollees should expect the same type of tax
benefits as listed in the transaction described in Notice 95-34. The
advertising packet listed the following benefits of enrollment:
· Virtually unlimited deductions for the employer.
· Contributions could vary from year to year.
· Benefits could be provided to one or more key executives on a
selective basis.
· No need to provide benefits to rank-and-file employees.
· Contributions to the plan were not limited by qualified plan rules
and would not interfere with pension, profit sharing or 401(k) plans.
· Funds inside the plan would accumulate tax-free.
· Beneficiaries could receive death proceeds free of both income
tax and estate tax.
· The program could be arranged for tax-free distribution at a later
date.
· Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans
described in Notice 95-34 at all relevant times. In rendering its
decision, the court heavily cited Curico, in which the court also ruled in
favor of the IRS. As noted in Curico, the insurance policies, which were
overwhelmingly variable or universal life policies, required large
contributions compared 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.
Following Curico, the Court held that the contributions to Benistar were
not deductible under section 162(a) because participants could receive
the value reflected in the underlying insurance policies purchased by
Benistar. This is despite the fact that payment of benefits by Benistar
seemed 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 never a reason to
forfeit a policy to the plan. In fact, in estimating life insurance rates, the
taxpayers’ expert in Curico assumed that there would be no forfeitures,
even though he admitted that an insurance company would generally
assume a reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May
2001 andclaimed 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 2005 return
of shareholder Robert Prosser and his wife to include the $50,000
payment to the plan. The IRS also assessed tax deficiencies and the
enhanced 30% penalty 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.
More You Should Know
· In recent years, some section 412(i) plans have been funded with
life insurance using face amounts in excess of the maximum death
benefit a qualified plan is permitted to ptact an
appropriate professional for any such advice.