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TESTIMONIALS FROM SATISFIED CLIENTS:

Letter to Lance Wallach from Ford Motor benefits representative:

Fri, 11 Jan 2008
Subject: VEBAs

Dear Mr. Wallach,

It as a pleasure speaking with you this afternoon. I appreciate the time you spent
listening and the giving of your advice.

Next week, we, a small splinter union (IAM) within a large Ford Motor facility, at
Cleveland Casting Plant will be negotiating our contract. This site is mostly represented
by the UAW who have already consummated their contract with Ford Motor Company,
and has accepted the VEBA option for their retirees. Their VEBA will be run by the
UAW and whoever they decide to confide in to execute the health care benefit and the
investments with the millions that Ford Motor will hand over to them, and then Ford will
wash their hands of any more health care responsibilities.

Our IAM negotiations start Jan. 14th. The small group of individuals that will be across
the table from the experts representing Ford Motor, are comprised of a few elected
people that are Pattern Maker/Machinist by trade. We have no one of any particular
expertise in finance, healthcare, or investment. We are expected to come to terms with
little, to no knowledge or leverage of the task set before us. We have 1300 people's
lives that will be affected by these negotiations. It is a shame that the larger unions will
not step up to the plate and help with the terms that we are faced with. Ford Motor will
use this to their advantage to squeeze a few more dollars out of our pockets.

Thank you again for your generous contribution of foresight and knowledge to the
concerns facing the American workers in this globalistic battle for the bottom line.

Sincerely,
Mark A. Gwynn
IAM Benefits Rep.
Ford Motor
Cleveland Casting Plant

Sep 18, 2007

Subject: Re: VEBA education

Mr. Wallach,
Thank you so much. I will read this material and if I have any questions I will call. I do
have one very important question that comes to mind - Have you ever seen a VEBA
go bad and if so, how could it have been prevented? I know like some mutual funds
do not last and if this program is based on investment, there is a very real possibility
that the funds could loose significant amounts. Is there a safe guard to this problem?

Dixie Price
U.A.W. Communication Coordinator
270.745.8141
U.A.W. Local 2164
712 Plum Springs Loop
Bowling Green, KY 42101

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Articles:
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Audit
Insurance Agents: 412i Fines Can
Exceed $200K
Finding the Right Experts
Abusive Insurance and Retirement
Plans
A Few Successful Resolutions
Red Flagged insurance Plans
Foreign Swiss Accounts Deadline
Fines on Small Businesses and
Benefit Plans
Get Sued!
How to Get Fined by the IRS
Abusive Welfare Benefit Plans
IRS Small Business & Self
Employed
Listed Transactions
IRS Attacks Small Businesses
Regaining Lost Confidentiality
Offshore Trusts

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“abusive tax shelter help” "tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707a "form 8886" "listed transactions" "abusive
tax shelter assistance" "irs penalty abatement" "expert witness irs" veba "expert witness services" "expert witness irs help" "pension audit"
“abusive tax shelter help” “abusive tax shelter assistance” "Grist Mill Trust" Benistar "SADI Trust" "Beta 419" "Millennium Plan" Bisys "Creative
Services Group" "Sterling Benefit Plan" "Compass 419" Niche "Sea Nine Veba" 419 412i 419e "expert witness insurance" "welfare benefit plans"
"419 plan help" "expert witness irs"

IRS Audits 419, 412i, Captive Insurance Plans With Life
Insurance, and Section 79 Scams

Article Biz June 2011
Lance Wallach

The IRS started auditing 419 plans in the ‘90s, and then continued going
after 412i and other plans that they considered abusive, listed, or
reportable transactions. Listed designated as listed in published IRS
material available to the general public or transactions that are substantially
similar to the specific listed transactions. A reportable transaction is defined
simply as one that has the potential for tax avoidance or evasion.

In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-15),
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 contain an exhaustive
analysis and discussion of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the Service has
disallowed deductions for contributions to these arrangements. The IRS is
cracking down on small business owners who participate in tax reduction
insurance plans and the brokers who sold them. Some of these plans
include defined benefit retirement plans, IRAs, or even 401(k) plans with life
insurance.

In order to fully grasp the severity of the situation, one must have an
understanding of Notice 95-34, which was issued in response to trust
arrangements sold to companies that were designed to provide deductible
benefits such as life insurance, disability and severance pay benefits. The
promoters of these arrangements claimed that all employer contributions
were tax-deductible when paid, by relying on the 10-or-more-employer
exemption from the IRC § 419 limits. It was claimed that permissible tax
deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible
when paid. Sections 419 and 419A impose strict limits on the amount of tax-
deductible prefunding permitted for contributions to a welfare benefit fund.
Section 419A(F)(6) provides an exemption from Section 419 and Section
419A for certain "10-or-more employers" welfare benefit funds. In general,
for this exemption to apply, the fund must have more than one contributing
employer, of which no single employer can contribute more than 10% of the
total contributions, and the plan must not be experience-rated with respect
to individual employers.

According to the Notice, these arrangements typically involve an investment
in variable life or universal life insurance contracts on the lives of the
covered employees. The problem is that the employer contributions are
large relative to the cost of the amount of term insurance that would be
required to provide the death benefits under the arrangement, and the trust
administrator may obtain cash to pay benefits other than death benefits, by
such means as cashing in or withdrawing the cash value of the insurance
policies. The plans are also often designed so that a particular employer’s
contributions or its employees’ benefits may be determined in a way that
insulates the employer to a significant extent from the experience of other
subscribing employers. In general, the contributions and claimed tax
deductions tend to be disproportionate to the economic realities of the
arrangements.

Benistar advertised that enrollees should expect to obtain the same type of
tax benefits as listed in the transaction described in Notice 95-34. The
benefits of enrollment listed in its advertising packet included:
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 Curcio, in which the court
also ruled in favor of the IRS. As noted in Curcio, the insurance policies,
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.

Following Curcio, as the parties had stipulated, on the question of the
amnesty paid by Mcghee in connection with benistar, 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—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 lapses.

The McGehee Family Clinic had 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 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 pay. Ideally, the plan should limit the proceeds
that can be paid as a death benefit in the event of a participant’s death.
Excess amounts would revert to the plan. Effective February 13, 2004, the
purchase of excessive life insurance in any plan makes the plan a listed
transaction if the face amount of the insurance exceeds the amount that
can be issued by $100,000 or more and the employer has deducted the
premiums for the insurance.
A 412(i) plan in and of itself is not a listed transaction; however, the IRS has
a task force auditing 412i plans.
An employer has not engaged in a listed transaction simply because it is in
a 412(i) plan.
Just because a 412(i) plan was audited and sanctioned for certain items,
does not necessarily mean the plan is a listed transaction. Some 412(i)
plans have been audited and sanctioned for issues not related to listed
transactions.

Companies should carefully evaluate proposed investments in plans such
as the Benistar Plan. The claimed deductions will not be available, and
penalties will be assessed for lack of disclosure if the investment is similar to
the investments described in Notice 95-34. In addition, under IRC 6707A,
IRS fines participants a large amount of money for not properly disclosing
their participation in listed or reportable or similar transactions; an issue that
was not before the Tax Court in either Curcio or McGehee. The disclosure
needs to be made for every year the participant is in a plan. The forms
need to be properly filed even for years that no contributions are made. I
have received numerous calls from participants who did disclose and still
got fined because the forms were not prepared properly. A plan
administrator told me that he assisted hundreds of his participants file
forms, and they still all received very large IRS fines for not properly filling in
the forms.

IRS has been attacking all 419 welfare benefit plans, many 412i retirement
plans, captive insurance plans with life insurance in them, and Section 79
plans.

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, wallachinc@gmail.com or visit www.taxadvisorexpert.
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.

Massachusetts Society of Certified Public Accounts, Inc.
Winter 2010

IRS Attacks Business Owners in 419, 412, Section 79 and Captive
Insurance Plans Under Section 6707A
`
By Lance Wallach

Taxpayers who previously adopted 419, 412i, captive
insurance or Section 79 plans are in big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax
deductible dollars to shareholders and classified these arrangements as listed transactions." These
plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life
insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such
transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do
not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of
the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But
you are also in trouble if you file incorrectly. I have received numerous phone calls from business
owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be
prepared correctly. I only know of two people in the U.S. who have filed these forms properly for
clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various
IRS personnel. The filing instructions for Form 8886 presume a timely filling. Most people file late and
follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax
court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the
benefit of previous tax deductions by continuing the deferral of income from contributions and
deductions taken in prior years."

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon
representations provided by insurance professionals that the plans were legitimate plans and were not
informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked
when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of
dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on
assessment of Section 6707A penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out
notices proposing the imposition of Section 6707A penalties along with requests for lengthy
extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers
stopped taking deductions for contributions to these plans years ago, and are confused and upset by
the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the
IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the
taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a
taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences
or a tax strategy described in the published guidance identifying the transaction as a listed transaction
or a transaction that is the same or substantially similar to a listed transaction.

Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by
such participation. Many taxpayers who are no longer taking current tax deductions for these plans
continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from
contributions and deductions taken in prior years. While the regulations do not expand on what
constitutes “reflecting the tax consequences of the strategy,” it could be argued that continued benefit
from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of
the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions
continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to
keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still
“contributing,” and thus still must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of
a particular transaction as described in the published guidance that caused such transaction to be a
listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be
concerned with the employer’s contribution/deduction amount rather than the continued deferral of
the income in previous years. Another important issue is that the IRS has called CPAs material
advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax
advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To
avoid the fine, the CPA has to properly file Form 8918.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA
faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and
estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on
television and financial talk shows including NBC, National Pubic Radio’s All Things Considered and
others. Lance authored 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 AICPA best-selling books including Avoiding Circular 230 Malpractice Traps and Common
Abusive Small Business Hot Spots.
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.

Contact him at:
516.938.5007,

wallachinc@gmail.com, or
www.taxadvisorexperts.org, or
www.taxlibrary.us.