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.
Showing posts with label 412i litigation irs letter of determination for 8886. Show all posts
Showing posts with label 412i litigation irs letter of determination for 8886. Show all posts
Thursday, May 14, 2009
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 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.
Monday, May 11, 2009
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?
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?
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