Small Business Council of America Postition Paper on 6707a Penalties

As I previously indicated, I do not think that the efforts in Congress will result in the elimination of 6707A penalties (as many brokers and promoters are representing to clients); however, I do think there is substantial likelihood that legislation will pass which will provide some relief to individuals and small businesses who are potentially subject to these penalties.

Attached below is the position paper of the SBC. It provides a good road map as to where this legislation is headed.

Read the Small Business Council of America Position Paper on 6707a Penalties (read the paper by clicking here)

As always, feel free to contact me at Chrish@PDKHlaw.com

More on Section 6707A Penalties

I receive quit a few calls about 412(i) plans and the subject of 6707A penalties seems to be an issue that is on the minds of almost every accountant, attorney, or individual who contacts me. It is for this reason that I wanted to post some additional information on this issue. Let me begin by saying that I am not an accountant or tax attorney.

I am a litigation attorney who represents individuals and small business against the entities or individuals involved in selling or promoting what I consider to be inappropriate, improper, or fraudulent plans. As part of that endeavor, I have come to learn quite a bit about 412(i) and 6707A penalties.

BACKGROUND ON 6707A

The American Jobs Creation Act of 2004 created Section 6707A of the Internal Revenue Code which was intended to stop the proliferation of multi-million-dollar abusive tax shelters. Pursuant to the Act, a strict liability penalty was imposed on "listed transactions" not reported to the IRS.

A listed transaction is a transaction the IRS has determined, through audits and reviews of other returns, has the potential for avoidance or evasion. The strict liability penalty applies if the taxpayer fails to disclose a listed transaction. The penalty is $100,000 per year for individuals and $200,000 per year for corporations and these penalties are stackable.

6707A penalties are in addition to the 30% accuracy related penalty imposed on the tax understatement under section 6662A. The 6707A penalties apply regardless of the amount of the understatement and regardless of whether the taxpayer can show a "reasonable cause" for the failure to make a disclosure AND regardless of whether the taxpayer amends prior to audit. Furthermore, the Commissioner of the IRS has no discretion to abate the listed transaction penalty. As if it could not get any worse, 6707A does not grant due process of law because there is no judicial review in the Tax Court.

WHAT IS BEING DONE ABOUT THIS PROBLEM

Currently, there are bills pending in both houses of Congress to address the 6707A problem. The National Taxpayer Advocate and the IRS Commissioner have both indicated the need for change and the IRS is currently in a stand down position on some of these penalties (for more information, see prior post http://412ilitigation.blogspot.com/2009/07/irs-suspends-6707a-penalites-until.html). The Small Business Council of America is releasing a position paper on the legislation and I will review and post it shortly.

In my opinion, despite what happens in Congress, Taxpayers need to understand that there are going to be penalties. There is not going to be a magic bullet. We are not going to wake up one day and these plans are going to be "legal" and the penalties are going to magically disappear. The penalties may become proportionate to the tax understatement, the pass- through penalties may be reduced, the Commissioner may be allowed discretion to review, and the taxpayer may get judicial review---BUT---taxpayers should not think that this is all simply going to go away.

Taxpayers who are confronted with these penalties need to evaluate a realistic strategy to include to include claims against the individuals responsible for promoting and selling of these plans, and the insurance companies who sold them after being advised of the ultimate result.

Chris Hellums can be reached at Chrish@pdkhlaw.com or toll free at 1-866-515-8880.

UBS UPDATE: Swiss & US Government Reach Confidential Settlement In Tax Evasion/Bank Secrecy Case Involving 52,000 Names

An agreement reached Friday between the Swiss and US governments prevents an interesting trial proceeding today. On Friday, U.S. District Judge Alan S. Gold told the parties at a hearing that it was the last chance for to strike a deal before trial would begin Monday.

Just a few weeks ago, the Swiss government made it clear that their long-standing bank secrecy laws do not allow UBS to disclose information wanted by the Americans; Swiss bank account holders who are American citizens.

"The US civil proceedings against UBS are to be settled out of court after Switzerland and the USA reached an Agreement in Principle on Friday," Swiss Federal Department of Foreign Affairs (FDFA) said in a statement on Friday.

The dispute involves about 52,000 Americans the U.S. believes are hiding billions of dollars of assets possibly evading taxes. Swiss government and the UBS bank say the names cannot be disclosed without violating long-standing Swiss bank secrecy laws.

In February, UBS had paid USD 780 million to the US government to settle criminal charges related allegations of the bank helping Americans in tax evasion.



Check out the LA Times article describing the time line of legal events this past year.
http://www.latimes.com/business/nationworld/wire/sns-ap-eu-ubs-timeline,0,7323298.story


May 2008: Authorities in the United States begin investigating the Switzerland-based services UBS offers to customers living in the United States. UBS manager Martin Liechti is detained as a witness in the United States.

June 19, 2008: Former UBS client adviser Bradley Birkenfeld admits to a U.S. District Court in Fort Lauderdale, Florida, to assisting tax evasion.

June 30, 2008: The U.S. Department of Justice applies to a U.S. court in Miami for the Internal Revenue Service to be allowed to issue a "John Doe" summons for the Swiss to provide information about American clients of UBS without singling them out by name. The court approves the request a day later.

July 17, 2008: The Swiss government receives a formal request for assistance from the IRS to help uncover UBS clients involved in tax fraud. UBS manager Mark Branson apologizes to a U.S. Senate panel for the bank's failings and announces that UBS will accelerate its withdrawal from
the U.S. cross-border business.

Nov. 12, 2008: A U.S. court in Miami charges senior UBS manager Raoul Weil with conspiracy to commit tax fraud.

Feb. 18, 2009: UBS reaches a settlement with the Justice Department and the U.S. Securities and Exchange Commission in a U.S. District Court, agreeing to pay $780 million dollars in fines, penalties, interest and restitution. On the same day Swiss officials give U.S. authorities files on 255 American clients suspected by the U.S. of tax fraud without allowing for the right of appeal required under Switzerland's banking secrecy law.

Feb. 19, 2009: The IRS submits the John Doe summons in a civil lawsuit in Miami, asking for the details on 52,000 UBS clients to be handed over.

March 13, 2009: Threatened with international sanctions, the Swiss government agrees to drop the distinction between tax fraud and tax evasion when dealing with foreign requests for legal assistance. Until then Switzerland had refused to provide information to other countries in cases of alleged tax evasion, which is an administrative offense in Switzerland but not a felony.

June 18, 2009: Switzerland and the United States agree on a new double taxation accord to increase Swiss cooperation in U.S. tax evasion probes.

July 2009: UBS freezes the accounts of U.S. offshore clients who failed to act on a letter asking them to close their accounts or transfer funds to a U.S.-supervised unit of the bank.

July 7, 2009: The Swiss government announces that it may seize UBS customer files to prevent them from being handed over to the United States.

July 8, 2009: Federal Judge Alan Gold in Miami asks the U.S. government whether it would consider seizing the U.S. assets of UBS in order to enforce the outcome of the case.

July 13, 2009: Judge Gold postpones until Aug. 3 the trial at the request of the U.S. and Swiss government and UBS in order to give the governments more time to negotiate a settlement.

July 31, 2009: The U.S. and Swiss governments say they have agreed on most major disputes in the U.S. effort to get names of thousands of wealthy Americans suspected of evading taxes by hiding billions in assets with UBS. The trial is postponed.

LA TIMES: Tax penalty reprieve brings collective sigh of relief at firms

It appears that the movement to repeal or modify 6707(a) penalties has finally reached critical mass. This story from the Los Angeles Times illustrates the inherent problems with these penalties and the failure to give the IRS any discretion in imposing these penalties.

http://www.latimes.com/business/la-fi-smallbiz14-2009jul14,0,3018084.story

I recently met with a client who also illustrates this point. She was a long time employee. Her employer wanted to do something for her, and for himself. He purchased a 412(i). As the plan has collapsed, she is facing $100,000 per year in penalties for a plan she was not involved in purchasing or funding, and for which she was to receive relatively little benefit.

IRS SUSPENDS 6707a PENALITES UNTIL SEPTEMBER 30, 2009 AFTER CONGRESS & GAO URGE REFORM

Last week, IRS Commissioner Douglas Shulman agreed to temporarily suspended 6707a penalties until September 30, 2009 in his letter to Congress.

(See Shulman response letter here)

The IRS Commissioner acted in response to a June 12, 2009 letter from the Senate Finance Committee, which urged the IRS to suspend its efforts to collect penalties for some listed tax shelter transactions, or 6707a penalties. (See Congressional letter here.)

Last month, the IRS received a report with recommendations from the Government Accounting Office indicating that the IRS should develop a plan to better focus its penalty efforts (see the GAO report here.)

The report says the GAO conducted their work “from October 2007 through May 2009 in accordance with generally accepted government auditing standards."

The GAO recommended:

"The Commissioner of Internal Revenue should direct the Office of Servicewide Penalties (OSP) to evaluate penalty administration and penalties’ effect on voluntary compliance and develop a plan to focus its efforts. The Commissioner also should use IRS’s standard outreach methods to again alert taxpayers of the need to disclose reportable loss transactions. In commenting on a draft of this report, IRS concurred with GAO’s recommendations, and summarized the actions it plans to take."

Congressional Response : (See Press Release)

Sen. Grassley said “It’s good to have the reprieve from the IRS, though the suspension will probably need to be longer in order to get necessary changes through Congress.”

“The IRS should also do the right thing by studying why only small businesses have been hit with the penalties since they’re less likely to have the expensive lawyers that big corporations do. It’s a matter of tax fairness for both the IRS and Congress.”

Sen. Baucus also commented: “I’m pleased the IRS complied with our request so that Congress can do its part to ensure the Tax Code treats small businesses fairly.”

“Make no mistake, I will continue to go after tax cheats and tax shelter investments, but these are disproportionate and undue penalties on honest, hardworking American business owners and their employees. I appreciate the IRS’ help on this, and I will move this forward until the issue is resolved.”

“We are working — both sides of the aisle and the Capitol — to ensure assessed tax penalties fall in line with received tax benefits. Until we reach that goal, we require cooperation from the IRS so that millions of American small businesses don’t get another chip stacked against them in the lagging economy."

UBS Case Update: Judge Turns Heat Up on UBS to Get Disclosure

On Monday, July 13, 2009 we will know the Swiss response to the US governments demand to obtain approximately 52,000 Swiss Bank account holders names, that the IRS is accusing of skirting taxes and not reporting accurate financial information in violation of federal law.

The IRS believes that Americans shelter approximately 15 billion dollars in UBS Swiss Bank accounts, who have a strong US presence which the government argues subjects UBS to American law.

In February, the DOJ sued UBS for access to some 52,000 accounts belonging to it U.S. clients, widening a probe that initially had targeted an estimated 19,000 accounts.

A day earlier, the agency announced a settlement with UBS in which the bank agreed to pay $780 million in fines and give names and account information for a group of clients to avoid prosecution. Swiss authorities said that group numbers between 250 and 300 clients.

On Monday, the U.S. government is likely to make it clear that it expects UBS to comply with the summons, and that in the event they don't, a very hard line stance will follow.

The options available to the Government are: seizure of property, staggering fees, or potential arrests and imprisonment of UBS decision makers.

UBS might reach a settlement with U.S. regulators on the turning over of confidential client data, even as public positions harden between the Swiss and U.S. government days before the landmark court case begins in Florida.

Arguments between the parties and government have intensified this past week as reported in the media.

The chief executive of UBS, Oswald J. Grubel, sent a memo on Thursday to the bank's top executives saying that disclosing the names of the account holders would require UBS to violate Swiss criminal law, and that it couldn't comply.

On Wednesday, the Swiss government said it would block any move by UBS to turn over the names.

Meanwhile, Swiss bank account holders have been turning themselves in to the Internal Revenue Service in the past months, in hopes of finding leniency under a voluntary disclosure program at the agency. This is true especially since the IRS has a civil penalty deal on the table right now that for some people may be too good to pass up, and it expires in nine weeks.

The IRS is cracking down on people who hold U.S. securities in offshore accounts but don't declare the accounts or pay taxes on income from the securities.

http://online.wsj.com/article/BT-CO-20090710-712796.html

http://www.thisislondon.co.uk/standard-business/article-23717478-details/US+judge+turns+up+the+heat+in+UBS+disclosure+case/article.do

http://www.bloomberg.com/apps/news?pid=20601085&sid=a5YQivGDnNjA

UBS Case Update: Justice Department Continues Its Pursuit to Obtain American Swiss Bank Account Holders Who Evaded Taxes

In the case U.S. v. UBS AG, 09-cv-20423, the Justice Department argued in U.S. District Court, Southern District of Florida (Miami), that UBS should be forced to divulge the private and long-time regarded secret account information of Americans with Swiss Bank accounts who are evading taxes.

The DOJ argues approximately 52,000 names should no longer be held secret since UBS violated US laws on American soil, providing jurisdiction to authorities to pursue legal action in American courts against the tax evaders.

Justice Department filling stated “UBS has systematically and deliberately violated the laws of the United States on U.S. soil.” It further said UBS “regularly conducted business in secret” in the U.S. and routinely sent private bankers into the U.S. to solicit business." The UBS business “cost the U.S. Treasury hundreds of millions of dollars in unpaid taxes.”

Contrary to reports earlier this week about a settlement, the DOJ pushed forward with a lawsuit to force the Swiss bank giant to identify offshore clients since the estimated 52,000 Americans are suspected of using secret foreign accounts to hide nearly $15 billion in assets from the IRS.

The DOJ filing says UBS earned more than $100 million in fees in helping US clients set up secret offshore accounts and that the business cost the US Treasury hundreds of million of dollars in unpaid taxes.

UBS has resisted the request because it says it would violate Swiss bank secrecy laws. The lawsuit against UBS is being closely watched by the offshore banking industry amid a global crackdown on tax cheats.

UBS and the Swiss government have argued that any exchange of confidential banking information should be handled through existing legal treaties rather than in the courts. The Swiss government has said the lawsuit would “seriously jeopardize” efforts to revise a 1996 tax treaty. Under that treaty, Switzerland can turn over account data only on a reasonable suspicion of “tax fraud or the like,” according to a UBS court filing.

Unlike the U.S., the Swiss don’t view tax evasion as a crime.

UBS is facing a first court hearing July 13.

UBS agreed in February to pay $780m to avert criminal charges related to the tax dispute while UBS admitted it helped taxpayers hide money in Swiss accounts and provided the IRS more than 250 clients’ names. UBS also admitted that its private bankers marketed securities and banking services in the U.S., even though it didn’t have the required license from the Securities and Exchange Commission. Those bankers, UBS admitted, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.

The Justice Department filing stated “UBS must disclose the identity of every U.S. taxpayer with an undisclosed UBS account” so they can “get right with their government." It further said “the United States has a strong national interest in making sure that all U.S. taxpayers comply with the tax laws.”

UBS is hoping for a settlement, which would be the bank's second with US authorities and would allow the world's biggest wealth manager to concentrate on a badly needed restructuring after it lost billions of dollars in the global financial crisis and had to be rescued by the Swiss state.

Sources:
Bloomberg News

Gulf DailyNews

Former Promoter of Abusive Trusts Pleads Guilty To Tax Evasion

Roderick Prescott, the former principal of National Trust Services (NTS) in San Jose, Calif., and later Selma, Ore., pleaded guilty today to tax evasion. Prescott admitted to evading at least $550,000 in personal income taxes for 1998 and 1999.

Prescott was scheduled to begin trial on July 7, 2009, before Chief U.S. District Judge Ann Aiken in Eugene, Ore.

According to the indictment, the plea agreement and the government’s trial brief, Prescott and his former business partner Leroy Fritts (now deceased) earned significant income from the nationwide promotion and sale of abusive trusts through NTS, which they founded in 1988.

Prescott and Fritts deposited approximately $3.5 million into various bank accounts through the sale of such trusts. They also earned income from recruiting clients of NTS to invest in Fountainhead Global Trust (FGT), a purported offshore investment that promised returns as high as 50 percent per year.

According to the government’s trial brief, FGT was a Ponzi scheme which collected approximately $20 million in investors’ funds from 1995 through 1999.

FGT transferred some of the money to an offshore account in the Cayman Islands at the Bank of Bermuda, ostensibly to be invested in high-interest debt through a Florida entity called “Cash 4 Titles.”

Prescott and Fritts then funneled part of the money in the account back to themselves. They also took large sums of investors’ funds without ever sending the money offshore.

The government asserts that instead, they spent the funds often by direct payments from FGT bank accounts on luxury goods and real estate. Eventually the scheme broke down and the vast majority of investors lost their full investments.

According to the government’s trial brief, despite making significant income from NTS and FGT, neither Prescott nor Fritts filed any individual federal income tax returns for 1998 or 1999. Prescott last filed a tax return in 1991.

Prescott and Fritts used FGT money to purchase, among other items, a nearly $3 million ranch near Grants Pass, Ore., on which they began construction of two custom-built luxury log homes.

The construction budget was approximately a combined $2 million, and they spent over $465,000 before halting construction in 1999.

Prescott and Fritts also purchased solar panels for the ranch for over $328,000, frozen food in anticipation of a year 2000 apocalypse for over $1.1 million and numerous vehicles and other personal items.

According to the government’s trial brief, Prescott and Fritts used an array of purported trusts and related bank accounts, including numerous offshore bank accounts at the Bank of Bermuda in the Cayman Islands, to conceal their income from the IRS. Prescott and Fritts also used false or fictitious taxpayer identification numbers and offshore credit cards in fake names issued to them by the Bank of Bermuda in the Cayman Islands.

Judge Aiken scheduled sentencing for Sept. 9, 2009. Prescott faces a maximum sentence of five years in prison and a maximum fine of $250,000.

Acting Assistant Attorney General John A. DiCicco commended the IRS-Criminal Investigation special agents who investigated the case, as well as Tax Division trial attorneys Jay Nanavati and Timothy Stockwell who prosecuted the case.

Source: Department of Justice


http://www.usdoj.gov/tax/Aldridge_PermInj.pdf


http://www.usdoj.gov/tax/RRenfrow_Memo_and_Recommend.pdf

SEC Staying Busy: Files Lawsuit Over Excessive Investment Fees and Charge Brokers With Fraudulent Sales of Variable Annuities to Elderly

SEC files Lawsuit Over Excessive Investment Fees

The SEC accused Omaha investment adviser, Ryan Jindra, of improperly charging at least $773,000 in fees to clients since last August, while approximately $250,000 remains missing.

The SEC filed a federal lawsuit June 30 against Ryan Jindra and his company to recover the improper fees. Regulators also asked for an order freezing Jindra's assets and his investors' accounts.

The SEC says Jindra used some of the fee money to pay business debts at his company, some for personal benefit, and some to repay investors who had been charged fees earlier.

The SEC says the fees charged in the past year exceeded what's allowed under the agreements Jindra's investors signed.

Source: http://www.ketv.com/news/19907156/detail.html

SEC accuses Prime Capital Services of Fraudulent
Variable Annuity Sales Practices

Yesterday, The Securities and Exchange Commission instituted an enforcement action against Prime Capital Services (PCS), a Poughkeepsie, N.Y.-based firm that is a registered broker-dealer and wholly-owned subsidiary of Gilman Ciocia, Inc. (G&C), an income tax preparation business.

The SEC allege several representatives and supervisors engaged in fraudulent and unsuitable sales of variable annuities to senior citizens who were lured through free-lunch seminars at restaurants in south Florida.

Prime Capital Services (PCS) and its parent company recruited elderly investors to attend the seminars, after which the seniors were encouraged to schedule private appointments with PCS representatives who then induced them to buy variable annuities.

The sales pitches allegedly concealed high costs, lock-in periods, and other material information. While the firm and its representatives earned millions of dollars in sales commissions, the SEC alleges that many of the variable annuities were unsuitable investments for the customers due to their age, liquidity, and investment objectives.

"They used free lunches as the low-tech bait for their high-scale scheme," said Robert Khuzami, Director of the SEC's Division of Enforcement. "These con men lured elderly and retired investors into purchasing highly unsuitable variable annuities, enriching themselves with commissions while ignoring the financial goals of their victims."

James Clarkson, Acting Director of the SEC's New York Regional Office, added, "No investor should be misled into investing in unsuitable products, but fraud against the elderly is especially egregious because they often never recover financially from ill-advised investments that devastate their retirement savings."

SEC enforcement action: http://www.sec.gov/news/press/2009/2009-145.htm


Pittman Dutton Kirby & Hellums currently represents individuals and small businesses against brokers, promoters, accountants, and in some cases attorneys, regarding the sale of 412(i) plans. If you have purchased a 412(i) or have any questions about this litigation, please do not hesitate to contact us.

Guardian named in latest 412(i) case

Henry Norris and Norris and Associates filed suit in the Circuit Court of Escambia County Florida on June 18th against Guardian Life Insurance Company of America, Webb Financial Group, O'Shields and Associates, Adams and Associates, and Creative Consultants, LLC.

In addition to the usual claims which are made in 412 cases, including unsuitability, etc. the plaintiff directly challenges the promotional materials provided to him by Guardian. According to the complaint, the Guardian promotional material presented to the plaintiff provided the following:

a. The IRS permits older business owners to make higher annual contributions to this plan than to virtually any other type of qualified plan.

b. The Fully Insured PLan (the 412(i)) can be an excellent solution for those ages 35 or older.

c. You work hard for your money. Why pay any more in taxes than is necessary? Wouldn't you rather reduce taxes and have that money growing tax deferred to provide for your family's security at retirement?

d. With a Fully Insured Plan it can. Every dollar you contribute is tax deductible to your business. You can use the money you'd normally lose in taxes to fund your own retirement.

e. The Fully Insured Plan can provide you with many thousands of dollars in tax deductions now...and leave your with many thousands of dollars more later, when you retire.

f. Advantages for Older Business Owners including:

*Maximum Benefits and Contributions;
*Guarantee Asset Growth;
*Contributions-100% Tax Deductible;
*Pre-Tax Dollars Lowers Life Insurance Cost;
*Dividends Can Lower Contributions;
*Higher Level of Family Protection



In addition, the plaintiff claims that the defendants recommended and set up a separate benefit fund on behalf of his employees by the name of United Employee Benefit Fund. James E. Holland, Chief Actuary for the Internal Revenue Service has referred to these funds as "the phony Union Scam."

The plaintiff also claims the defendants also unilaterally took loans against the policy, triggering an automatic disqualification of the plan under Section 412(i).

In discussions with Guardian representatives about the filing of a form 8886 the Plaintiff claims that he was advised that such action was "harsh and unnecessary" by Guardian Defined Benefit Analyst Peter Debruel. Plainiff also claims that Debruel and fellow Guardian Benefit Analyst John Paulis informed him that although the loan disqualified the plan, there was no taxable event because there was no distribution.

Henry Norris and Norris & Associates are represented in this case by the firms of Pittman Dutton Kirby & Hellums and Whatley Drake & Kalis.

For more information, contact Chris Hellums at ChrisH@pdkhlaw.com.

IRS cracking down on offshore tax shelters: notably UBS and Swiss Bank Accounts

The Department of Justice yesterday released a statement about UBS client, Steven Michael Rubinstein, a chartered accountant living in Boca Raton, Fla., who pleaded guilty to filing a false tax return for tax year 2004. Rubinstein was charged with filing a false tax return that intentionally failed to disclose the existence of a Swiss bank account maintained by UBS of which he was the beneficial owner and failed to report any income earned on that account.

The IRS Commissioner Doug Shulman says combating offshore tax evasion by wealthy taxpayers continues to be one of the IRS top priorities.

The UBS indictment and investigation highlights the IRS' commitment to vigorously pursuing those who illegally hide their money offshore as well as the financial institutions which help them.

In December 2007, a billionaire California real estate developer (Igor Olenicoff) and his banker (Birkenfeld) pleaded guilty to tax crimes. With evidence from this case, U.S. prosecutors have been able to penetrate the veil of financial invisibility that Switzerland guards as a national treasure.

To avoid immediate prosecution, UBS, which is Switzerland’s second- largest bank by stock market value, agreed in February to pay the U.S. $780 million. UBS also renewed a pledge to stop unlicensed recruiting of customers in the U.S. and agreed to cooperate with investigators during 18 months of probation. The bank admitted in court that it had helped American clients dodge taxes from 2000 to 2007.

The bank did provide information on more than 250 customers -- an unprecedented breach of Switzerland’s bulwark of secrecy.

The IRS is suing UBS in federal court in Miami to get the names of 52,000 American account holders who may have broken U.S. tax laws. This is causing a battle between UBS, Swiss governmetn and the US. The bank said in April 30 court filings that the U.S. efforts would force bank employees to violate Swiss criminal laws barring disclosure of secret account information. The Swiss government says the U.S. is trampling on its sovereignty.

If the bank fails to convince a federal judge that it shouldn’t turn over the names to the IRS, the court can fine UBS for civil contempt. The Justice Department, under the deferred- prosecution agreement, could seek criminal indictment of the bank, says tax attorney Robert Fink of Kostelanetz & Fink LLP in New York.

Since April 2, prosecutors have charged two UBS clients in Florida with filing false tax returns. Hundreds of UBS clients in the U.S. may face prosecution and Edward Robbins Jr., a California, tax lawyer who represented Olenicoff, said “this may be the biggest criminal tax investigation ever because of the dollars involved coupled with the vast number of criminal defendants, both at the UBS level and the American account holder level.”

U.S. prosecutors say UBS earned $200 million a year managing $20 billion in assets for American customers.

The Justice Department last week denied allegations they would drop the lawsuit against UBS and we will know more on June 30, when the Department said they would file a brief seeking an enforcement of the summons.

Sources:
Bloomberg News / Reuters

412(i) Lawsuit Filed in New Jersey

A second 412(i) lawsuit has been filed in Essex County Superior Court in New Jersey.

It is believed to be the second lawsuit filed in New Jersey against the following defendants : Indianapolis Life Insurance Company, Matt Lang, Lorac Financial Services, Inc., Summit Enterprises, Economic Concepts, Inc., Kenneth R. Hartstein, Harold Dischino and Dischino & Associates.

In this transaction, Lang acted as the agent and Dischino was the accountant for the plaintiff.

The complaint asserts the Defendants not only engaged in a pattern and practice of misrepresentations and omissions relating to life insurance policies promoted and represented as suitable products to be used as part of a comprehensive retirement plan, but also engaged in racketerring activity in violation of New Jersey's RICO statute.

The complaint further alleges Defendants knowingly sold Plaintiffs an abusive tax shelter causing them to incur significant financial losses by working in concert with one another and devised a scheme to sell, promote and administer abusive and illegal tax shelters as retirement plans under the auspices of Section 412(i) of the Internal Revenue Code.

The complaint states Defendants knew or should have known that these arrangements would be heavily scrutinized by the IRS, be deemed abusive tax avoidance transactions by the IRS, and expose those participating in such arrangement to costly IRS audits, including substantial tax liabilities, penalties, and interest.

Moreover, Plaintiffs assert Defendants knew or should have known that their continuing representations and omissions they made after the issuance of an IRS ruling in 2004 regarding the tax-related consequences of 412(i) plans and how the policies should be funded in the future were intentionally misleading, deceptive and fraudulent.

For a copy of the complaint, contact Chris Hellums @ Chrish@pdhklaw.com

Pittman Dutton Kirby & Hellums currently represents individuals and small businesses against brokers, promoters, accountants, and in some cases attorneys, regarding the sale of 412(i) plans. If you have purchased a 412(i) or have any questions about this litigation, please do not hestitate to contact us.

CHAIRMEN OF HOUSE AND SENATE TAX COMMITTEES ASK IRS TO STAND DOWN ON 6707 PENALTIES

Senators Grassley, R-Iowa and Max Baucus, D-Mt, who are members of the Senate Finance Committee, along with John Lewis, D-Ga. and Charles Boustany, R-La of the House Ways and Means Oversight Committee have asked the IRS to cease efforts to collect penalties from small businesses who bought certain employee-benefit plans branded tax shelters by the IRS.

In a letter to IRS Commissioner Doug Shulman, they advised that they intend to pass legislation reducing the penalties for such tax shelter transactions. In the meantime, they want IRS to suspend collection efforts in cases where the penalty exceeds the actual tax benefit realized.

At issue are the 6707 penalties for "listed" transactions, which the IRS considers the most egregious.
.
Failure to disclose such a transaction to the IRS now automatically draws a penalty of $100,000 per year for individuals and $200,000 per year for businesses. The penalties are stackable so that a small business owner would be subject to a $300,000 penalty for a single year's participation in the tax shelter.

In a press release, Senator Grassley said "[w]hen I advanced the legislation to shut down tax shelters, I did not intend to bankrupt small businesses that had no ill intent," ... "The penalty should be commensurate with the transgression."

Perhaps the focus here is in the wrong place. I would submit that if the insurance companies, brokers, promoters, and attorneys who create such plans were held accountable with the fines, penalties, and perhaps criminal liability for creating such plans, the would cease being hatch every five or so years.

Chris Hellums represents numerous individuals and small businesses in litigation against the brokers and promoters of such plans. He can be reached by e-mail at Chrish@PDKHLAW.com

Latest Information on 6707 Penalties

I recently found this blog which tracks the latest developments regarding the current status of legislation to reform 6707 penalties.

I think it is a great resource for anyone who is potentially subject to those penalties.

Yesterday, I was told that legislation is expected out of the Finance Committee which will reduce the penalties to a percentage of the taxes owed (20-30%) rather than a flat amount of $100,000 per year for individuals and $200,000 per year for corporate entities, that the IRS may be given some discretion on levying these penalties, and that the IRS may stand down on these penalties pending the outcome of the legislation.

http://6707a.wordpress.com/

Lawyers and others Indicted on Charges of Marketing Phony Tax Shelters

Bloomberg News and the Dallas Morning News are reporting that seven individuals, including attorneys at the now defunct Jenkens & Gilchrist law firm and executives at BDO Seidman LLP were among seven defendants indicted Tuesday on criminal charges of marketing phony tax shelters. The allegations included conspiracy and tax evasion in the marketing of fraudulent tax shelters


John DiCiccio, the acting assistant attorney general in the Justice Department's Tax Division, had this to say:


"Dishonest and fraudulent tax professionals, including accountants, attorneys and bankers, should stand up and take note of today's indictment,"

In 2007, Jenkens & Gilchrist admitted it developed and marketed tax shelters that generated more than $1 billion in phony losses. Jenkens and Gilchrist no longer exists, but most of the remaining lawyers and staff joined Hunton & Williams, a national law firm based in Richmond, Va., in April 2007, including Henry Gilchrist.

One of the attorneys indicted, Paul Daugerdas, 58 denies any wrongdoing. Source: http://amlawdaily.typepad.com/.a/6a00e55044cbaf883401156ff27763970c-pi



"Paul Daugerdas firmly believes that the tax advice provided to his clients was well within the scope of then-existing federal tax law," Margarite Wypychowski said in a statement. "He categorically denies any participation in or approval of any wrongdoing in connection with his rendering of professional legal services."

How many times have we seen such a statement from attorneys make massive sums of money marketing and promoting abusive tax shelters only to see them blow up in the faces of their clients who relied on their "expertise" in this area.

In January 2005, Jenkens agreed to pay $81.6 million to clients who had sued over its tax shelter advice.

I suspect that more indictments will be forthcoming on this sort of conduct.

Chris Hellums can be reached via email : ChrisH@pdkhlaw.com

Federal Authorities indict three, claim to have uncovered one of the largest tax schemes ever.

The Los Angeles Times is reporting from Seattle that U.S. attorneys have indicted two executives and a Los Angeles attorney in what could be one of the largest tax fraud schemes ever.

According to the article, two principals of the Quellos Group created 1.3 billion in fraudulent losses for clients. The clients did not know of the fraud, and had been offered tax opinion letters from well-known law firms and their tax attorneys that the transactions were legal.

The indicted are accused of setting up a complex series of sham transactions through a shell company on the Isle of Man. Gains of wealthy investors' earnings were offset with an equal number of stock losses to avoid owing capital gains taxes. According to the indictment, the losing stocks didn't exist, and that the company that acquired the stocks had no employees or earnings and the blended investment vehicles were a fraud.

The participants reportedly received tax opinion letters from the law firms of Cravath, Swaine & Moore of New York, the second-oldest law firm in the U.S., and Bryan Cave, an international firm that specializes in corporate transactions. Their written opinions affirmed that it was "more likely then not" that the plan would produce favorable tax consequences.

According to a 2006 investigation by the U.S. Senate's permanent subcommittee on investigations, Bryan Cave made more than $1 million in fees but disavowed knowledge of how the paper portfolio was formed.

To read the article in its entirety, see http://www.latimes.com/business/la-fi-quellos5-2009jun05,0,3888434.story

Court Enters $1,640,000 Judgment in 419 Case

The Honorable Judge Charles E. Robinson entered a judgment in favor of the plainiff in a 419 case. The court awarded $440,000 in compensatory damages and $1,200,000 in punitive damages for a total verdict of $1,640,000.

The case involved a Bysis plan that was later converted into a plan administered by The Arrowhead Trust.

The plaintiff in the case was represented by Chris Hellums of the law firm of Pittman Dutton Kirby & Hellums

West Virginia farmers claim MassMutual and their accountants engaged in fraudulent conduct involving 412(i) plan

MassMutual has recently been sued in a 412(i) case in West Virginia. According to published reports, an elderly farming family in West Virginia has filed suit against MassMutual, several of it’s agents, and a West Virginia accounting firm.

In their suit, they claim that the accountants and MassMutual agents set up a 412(i) pension plan that included policies and annuities that generated hundreds of thousands dollars in commissions to the MassMutual agents and their accountants (who did not disclose that they would benefit as well). In their suit, the plaintiffs claim they were not qualified for the plan, that the agents and accountants allegedly falsified information, forged signatures on insurance and annuity documents, and fraudulently amended tax returns.

Unfortunately, this type of conduct is not uncommon. I represented a client in a single person ESOP who made similar allegations against another insurance company and broker and I am currently representing a physician with a 412(i) plan who is making similar allegations.

You can contact Chris Hellums at ChrisH@PDKHLAW.com

Are Captives the new 412, 419 and the One Man ESOP

I read recently where some believe that captive insurance companies may become the next 412 and 419 problem for unsuspecting companies. Designed under IRS Code 831(b), these captive insurance companies are designed to insure the risks of an individual business. In theory and if properly designed, the premiums are deducted when paid to a related company, and depending on claims, profits can be paid out as dividends and when liquidated, the proceeds are taxed at capital gains rates.

The problem with Captives is that the are expensive to set up and operate. When I last looked into this issue, I was told that in order to set up a captive, you needed at least $1,000,000.00 per year in premium spent to make it worth the administrative cost. Captives must be opetate as a true risk assuming entity, not simply a tax avoidance vehicle.

Reports indicate that the IRS is looking into the sale of life insurance to fund Captives. This sounds very familiar.

Chris Hellums can be contacted at Chrish@PDKHLaw.com

What is MDL and what is the status of the 412i MDL

MDL stands for Multidistrict Litigation. It was created by Congress in 1968 – 28 U.S.C. §1407.

The act created an MDL Panel of judges to determine whether civil actions pending in different federal districts involve one or more common questions of fact such that the actions should be transferred to one federal district for coordinated or consolidated pretrial proceedings. In theory, the purposes of this transfer or “centralization” process are to avoid duplication of discovery, to prevent inconsistent pretrial rulings, and to conserve the resources of the parties, their counsel and the judiciary. Transferred actions which are not resolved in the MDL are remanded (sent back) to their originating court or district by the Panel for trial.

Recently, Pacific Life, Hartford Life & Annuity moved for summary judgment in the MDL. The court granted the motions in part, and denied the motions in part. Specifically, the court dealt with the issue of the disclaimers contained within the policies and signed by various policyholders.

Applying California law in evauating the disclosures and disclaimers, the Court ruled that the California Plaintiffs failed to raise issues of material fact that they reasonably relied on representations by Hartford and Pacific Life regarding the tax and legal issues related to their 412(i) plans.

Conversely, the court ruled that pursuant to Wisconsin law, the disclaimers were unenforceable. The court came to similar conclusion when applying Texas law to the Plaintiffs claims.

Here Comes the Internal Revenue Service

The IRS's response to these 412(i) plans was predictable. The IRS had long criticized the features that characterized 412(i) plans. When the proliferation of these plans hit critical mass, the IRS honed in on these plans and gave fair warning of what was about to come.

The IRS does not make law. Its job is collection, enforcement and interpretation of existing law.

In 2002 and and early 2003 IRS officials began giving speeches at benefits conferences advising that 412(i) plans met neither the spirit nor the letter of the Code. They made it clear that the IRS would not be gentle and even indicated that potential criminal liability existed.

Insurance company representatives attended these conferences.

Neither the brokers, promoters, or Insurance companies relayed this information to their clients and insureds at this time.


On February 13, 2004, the IRS issued a press release, two revenue rulings, and proposed regulations to shut down abusive transactions involving specifically designed life insurance policies in retirement plans, section 412(i) plans. See http://www.irs.gov/pub/irs-utl/ir-04-021.pdf


In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.



In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.

Who is Richard Smith and the Bryan Cave law firm and where do they fit into the puzzle?

According to their website, Bryan Cave is a law firm with over 1100 attorneys and 19 offices worldwide. Richard C. Smith is a partner in this mega firm. His webpage states that "[h]is practice has a particular emphasis in the employee benefits area including the design, implementation and other aspects of pension, profit sharing and other qualified plans." His bio says that he graduated summa cum laude from Syracuse University College of Law.

What did Bryan Cave and Richard Smith provide Kenneth Hartstein necessary to sell his Pendulum Plan ---In one word---Credibility.

To sell this plan to wealthy individuals and their advisors, Hartstein had to have more than a fancy sale pitch and marketing materials. He had to have credibility. That is exactly what Richard Smith and Bryan Cave delivered. These plans were more complicated than most could comprehend. In fact, most accountants and even tax attorneys don't have the expertise to understand the nuances of these plans and whether they past muster with the IRS. Who would challenge a partner in a thousand plus member law firm that specializes in the design, implementation and other aspects of pension plans!

This is not the first time I have come across the Bryan Cave law firm. Several years ago, I represented a client who purchased a "One Man ESOP." It was a similar type tax shelter--hatched where---Phoenix---and guess who provided the tax opinion letter to the promoters of that plan---you guessed it---Bryan Cave attorneys.

The Bryan Cave tax opinion letter issued in September of 1999 opined that pursuant to Section 412(i) of the code, the Pendulum Plan would "more likely than not" be considered a qualified plan and "should not be considered a tax shelter." As we now know, this turned out to be dead wrong---just as they were wrong on the "One Man ESOP." How could Richard Smith and Bryan Cave been so wrong? Any research would have indicated that the characteristics of these plans were contrary to federal tax laws and regulations. What was their incentive? A complaint filed in Federal Court in Texas, which lists Bryan Cave as a "related party", alleges that they conspired with insurance companies and consultants to design 412(i) plans. I suspect when individuals are required raise their hands and testify under oath, we will find out much more about the involvement of Bryan Cave and their incentives to promote and defend these plans.

If that was not enough, Richard Smith was directly challenged by IRS officials who advised him that these plans were abusive tax shelters. In writings believed to be created in the early part of 2003, Richard Smith acknowledged that Richard J. Wickersham, who was a representative of the Tax Exempt/Government Entities Division of the Service, warned sponsors and administrators of 412(i) plans and indicated that the Service had assigned a high priority to plans that misused section 412(i) of the code.

Stay tuned for more postings on Bryan Cave.

What did Indianapolis Life know and when did they know it?

For Hartstein and Economic Concepts to sell their Pendulum Plan, they had to have specially designed policy. Enter Indianapolis Life. Upon information and belief, in early 1999 Hartstein contacted representatives of Indianapolis Life. Indy Life had a product that they believed would work. It was the Executive VIP. It was developed in the early to mid 1990’s to allow the transfer of money from pension plans or corporations with excess retained earnings.

What made the Executive VIP policy a perfect fit for the Pendulum Plan was the blooming of the cash value as the surrender charge burned off. The problem with these policies was the position the IRS had been taking back to the 80’s on springing cash value policies. In fact, the Executive VIP policy had originally been marketed to fund multiple employer welfare plans under 419A(f)(6) of the Code. These plans worked much like the Pendulum Plan. The IRS targeted these plans in the mid 90’s and designated plans with the characteristics outlined in Notice 95-34 a “listed transactions” in 2000.

It has been reported that Indianapolis Life had internally discussed the springing cash value risk associated with its Executive VIP policies throughout the 90’s and was concerned that the IRS could successfully challenge the policies and create “adverse tax consequences” for the pension plans and individual policyholders.

With 419A(f)(6) effectively shut down, enter Hartstein, his 412(i) plan, and the lure of money.

In late March 1999, Hartstein proposes to Indy Life that the Executive VIP policy be the exclusive product for his Pendulum Plan. In return, Hartstein wanted to control the distribution of the plan for which he promised millions of dollars of new commissionable premium. The policy was renamed the PenPro to co-brand with Hartstein’s Pendulum Plan.

In June of 1999, Hartstein meets with Indy Life representatives. At this meeting, they discussed the springing cash value risks of the policy. Knowing these risks, it is believed that Indy Life agreed to marked the Pendulum Plan through its agents and represent that the Pendulum Plan as a qualified 412(i) plan, that the premiums were fully deductable, and that the insured could purchase the policy after a few years for it's suppressed value.

At no time did they agree to disclose the tax risks.

Hartstein then presents the plan to Bryan Cave attorneys, requesting a tax opinion letter to be used for marketing purposes. More on Bryan Cave in future postings.

Indy Life, on the other hand, seeks an opinion from Robert G. Thurlow, a nationally recognized expert in the pension industry. In early December of 1999, Mr. Thurlow warned Indy Life that the Pendulum Plan would not qualify and the premiums would not be deductible. It is also believed that internally, there were serious reservations about these plans.
Despite these warnings, the lure of money was just too great, and Indy Life dispatched its agents and producers out to sell--not insurance, but a tax deductible plan loaded not only with excessive fees, loads, and expenses, but also a known risk of audit to its policyholders.

Not surprisingly, these plans were enormously successful. So successful, in fact, that other insurance companies began looking to take advantage of this niche market. More on other insurance companies in future postings.

Is there any hope in sight for taxpayers facing § 6707 penalties

As anyone who is currently facing 6707 penalties knows, those penalties are $100,000 per year for the individual and $200,000 per year for the corporation. These penalties are stackable, which means that S-corporations are often hit with the penalties at both the individual and corporate level simultaneously.


Under a bill passed by Congress in 2004, the IRS does not have the ability to waive the fines for listed tax shelters.


Currently, there is legislation pending both in the House and Senate which would lessen penalties and give the IRS discretion in handing down those penalties. The bill introducted last year by Sens. Nelson (D., Neb.) and Evan Bayh (D., Ind.), would allow the Treasury Secretary to waive the current mandatory penalties if the taxpayer acted in good faith. Many taxpayers, caught by these penalties, never knew they were purchasing a tax shelter, and were advised by financial planners not to file a form 8886 after the revenue ruling in 2004.

To read more on the status of the legislation, see:


http://news.morningstar.com/newsnet/ViewNews.aspx?article=/DJ/200904281511DOWJONESDJONLINE000765_univ.xml


http://online.wsj.com/article/SB123311144767422917.html

If you have any questions or comments, please free to contact Chris Hellums at Chrish@PDKHLaw.com

What are participants in 412(i) plans saying!

Participants in these plans generally report the same story.



No one told me I was purchasing a tax shelter. I was making good money at the time and looking to supplement my 401(k). I was told this was the perfect plan. I was told that I could fund the plan over a 5 year period of time, and then have flexability to take money out of the plan as I needed it.



I was told (or provided) with a tax opinion letter which said the plan was in compliance with IRS regulations.



I was provided with an IRS letter of Determination which I was told indicated that the IRS had blessed the plan. What they were not told was that the letter of determination only applied to the plan documents, not the operation of the plan.



I was told in 2004 that the IRS had issued guidance but that my plan was not an abusive plan and that I should continue to fund the plan.



I was told that since my plan was not an abusive plan, I was not required to file a form 8886 on my tax return, and that if I did, I was asking for an audit by the IRS.



I have been audited by the IRS.



I have been assessed or will be assessed section 6707 penalties.

Is there any recourse against the people who sold me the plan?

What is 412(i) and what are the problems with these plans

412(i) is a provision of the tax code. A 412(i) plan is a defined pension plan. 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 (insurance and annuities). It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. To create a 412(i) plan, there must be a plan to hold the assets. The employer funds the plan by making cash contributions to the plan, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.

The plan uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.

Where did the problems start?

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.

These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with adminstering the plans, the policies of insurance had high commissions and high surrender charges.

These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would bloom like a rose, and the individual would have a policy with significant cash value which he or she could withdraw tax free.

Who signed off on the plan?

Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that the design of many of the plans met the requirements of section 412(i) of the tax code.


So what is the problem?

In the early 2000s, IRS officials began questioning the insurance representatives, brokers, promoters, and their attorneys and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code.

In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of $100,000 per year, and corporations $200,000 per year. These penalties are often referred to as section 6707 penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand.

In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.

In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.

Please return for more information. You may contact Chris Hellums at Chrish@pdkhlaw.com