Why You Should Stay Away from Section 79 Life Insurance Plans

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     By Lance Wallach, CLU, CHFC 

I’ve had several calls lately from doctors who are being pitched Section 79 plans and are wondering if these plans are any good. The doctors are being told that Section 79 plans are the best wealth-building tool they can use to reduce their income taxes and create a tax-free retirement income.

Unfortunately for these unsuspecting doctors, what they don’t know is that not only are Section 79 plans not the best wealth-building tool they can use, they are not even a good wealth-building tool. 

I have problems with Section 79 plans for several reasons: 

1. You have to lie to employees to implement them. Most try to exclude workers.

2. The life illustrations given by ignorant or crooked insurance agents are not realistic. Most use today’s historically low lending rates with 2 percent to 3 percent loan spreads on variable loans on EIUL policies (ones that do not have a fixed lending rate). 

3. You have to be a C-corporation to use them. Many agents don’t inform their clients of this.

4. The life policies sold in these plans are so bad that the companies don’t want them sold unless they are in Section 79 plans. (The policies are designed to have poor performance so the deduction is increased.) This is similar to the springing cash value problems with the 412i and 419 plans that got people audited and sued.

5. Another very good reason not to use these plans is because there are better alternatives. 

6. Another reason not to use a Section 79 plan is because when you run the real numbers, the client would be better off not funding the plan, taking his/her money home after taxes, and funding a good no load EIUL policy. 

7. The IRS audits many of them and unless you properly file under IRC 6707A the fines are very large.

ABOUT THE AUTHOR: Lance Wallach
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 more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC go to lancewallach.com

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Captive Insurance Plans, Want to Get Audited?

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     By Lance Wallach, CLU, CHFC 

The insurance industry have been conjuring ways to make life insurance premiums tax deductible. Over the years we have seen many schemes that have failed IRS scrutiny. Welfare benefit plans set up under I.R.C. section 419, 412(e) plans and Producer Owned Reinsurance Companies (PORCs) are all common examples.

When one scheme fails it isn’t long before a resourceful promoter comes up with a different product. Inevitably promoters find some lawyer or accountant to draft a favorable opinion letter and a new industry is born. In a few years, however, the IRS catches up and declares the arrangement to be a listed transaction and abusive tax shelter. As an expert witness I have never lost a case in this field. It is easy to beat the deep pockets of the insurance companies who provide product to these plans. Even though they have business owners sign fraudulent disclaimers saying that the owners will get their own tax advice. These disclaimers are then used when the inevitable happens, the IRS audits and the business owner sues the insurance company.
The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.

How do they work and what will the IRS do? Great questions.

Congress has long given special tax considerations to life insurance. IRC section 101(a) provides that life insurance death benefits can be paid to the beneficiaries’ tax free. The IRS also allows the investment gains of the policy to grow tax free on whole life policies until retirement. If a whole life policy is held until death, the gains are completely tax free.

Clearly Congress ‘legislative intent is to provide tax breaks on the back end. For some promoters, however, that isn’t enough. Unfortunately the IRS has been very diligent in shutting down life insurance products that provide tax benefits on both ends.
The newest product under scrutiny is a small business captive insurance company. The theory behind these CICs is that the business will form a captive to insure against some type of business risk. The CIC then invests its money by purchasing life insurance on the owner’s life. Even though the money is being invested in personal life insurance policies, promoters suggest that the funding of the captive is an ordinary and reasonable business expense (26 USC sec 162).

On paper, the transaction seems legitimate. The business is insuring itself against some type of risk. The CIC is using life insurance as an investment. While each component may be acceptable under the Internal Revenue Code, the practical reality is that the IRS still views them as a subterfuge and therefore void.

IRC sec. 264(a)(1) states the general proposition that life insurance premiums are not deductible if the taxpayer is a direct or indirect beneficiary under the policy. Notwithstanding the recent popularity of these and similar plans, the IRS has been quite assertive in rebuffing these attempts. To date, the courts usually side with the Service as well.

On paper, CICs are the perfect tax shelter. The business can set up a captive insurance company to insure against a legitimate business risk. That means the premiums are a valid business expense and thus deductible. The captive can exclude over a million dollars a year of premiums. And the captive has the ability to invest its premium money to earn a return.

Where things can get dicey is when the captive invests in life insurance on the business owner’s life. Remember, those dollars are still pre-tax.

It all sounds perfect and there are some promoters out there ready to tell you exactly how perfect and legitimate it really is.
If you think this article ends here, it doesn’t. Before going the captive route – and there are legitimate captives – speak to a good CPA or tax attorney. If created for legitimate insurance purposes, a captive insurance company offers many benefits; including tax minimization, lower insurance costs and even the unavailability of certain types of coverage. Use premiums to purchase life insurance on the owner’s life and trouble will follow.

Why? Here are some reasons.

The IRS looks to see if a transaction is arm’s length, if the purpose is tax avoidance and if there is a legitimate business purpose for the transactions.

Second, the IRS strongly holds on to its policy of no deductions for life insurance premiums. We have seen several 419 welfare benefit plans fail despite great sounding legal opinion letters.

For many years, promoters have marched out slick new products designed to allow individuals to deduct life insurance premiums. Since at least 1995, the IRS has warned that these devices are potential abusive tax shelters and listed transactions. A captive insurance company can be an important and legitimate money saving tool for business. Extreme caution must be used if the captive and its owners decide to invest in certain life insurance contracts, however.

Although deducting life insurance premiums for business owners is still doubtful, a very recent U.S. The tax Court opinion suggests that the courts are willing to be open minded if a captive is properly structured.

In the 2014 Rent-A-Center, Inc. case, a majority of the court ruled that payments by a parent company’s wholly owned subsidiaries to a wholly owned captive were deductible insurance expenses. Previously the Tax Court upheld the IRS’ determination that such expenses were not deductible in “brother sister” captive insurance arrangements.

I have helped hundreds of business owners who have had IRS problems with 419 welfare benefit plans, 412i and section 79 plans. I am just starting to get phone calls on captive insurance plans.

If you are planning to create a captive for the sole purpose of investing in life insurance, contact someone that knows what they are doing and file under IRS code 6707A to reduce fines. Failure to report a listed transaction can involve huge civil penalties. These penalties are in addition to any other tax, interest and penalties attributable to disallowed deductions and accuracy penalties.

ABOUT THE AUTHOR: Lance Wallach
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.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents

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     By Lance Wallach, CLU, CHFC 

If you sold, advised on or had anything to do with a listed transaction you will be fined by the IRS. For those that bought listed transactions like, 419 welfare benefit plans or 412i plans, you have been or will also be fined.

On July 30, 2014, the Internal Revenue Service issued final regulations regarding the imposition of penalties under Internal Revenue Code section 6707 against material advisors who fail to file true, complete or timely disclosure returns with respect to reportable or listed transactions. The effective date of the final regulations is July 31, 2014.

Material advisors generally include any advisors who make or provide a tax statement with respect to any reportable or listed transaction, and directly or indirectly receive certain threshold levels of gross income in connection with such advice. Reportable transactions include listed transactions, transactions of interest, section 165 loss transactions, confidential transactions, and contractual protection transactions.

The final regulations make several changes to the proposed regulations that were published in 2008. The changes include:

• The applicable penalty under section 6707 for a transaction qualifying as both reportable and listed is limited to a single penalty, which is the greater of $200,000 or 50 percent of the gross income derived by the material advisor (75 percent if the failure is international). 

• In cases where there is a failure to disclose more than one reportable or listed transaction, a separate section 6707 penalty will be imposed for each transaction. 

• For purposes of computing the penalty in the case of a listed transaction, the gross income derived from the listed transaction only includes fees earned in connection with the listed transaction for which the advisor was a material advisor. 

The final regulations also modify the factors considered by the IRS for rescission of a material advisor penalty. The final regulations now allow consideration of facts and circumstances relating to whether a material advisor’s failure to timely file the Form 8918, Material Advisor Disclosure Statement, was unintentional. However, if an unintentionally delinquent Form 8918 was filed either after the IRS had taken steps to identify the person as a material advisor or after the taxpayer disclosed a reportable transaction on Form 8886, Reportable Transaction Disclosure Statement, such a filing will not weigh in favor of rescission.

Lastly, the final regulations include additional examples to help clarify the application of the material advisor penalties.
Attorneys, accountants, financial and investment consultants and others advising on reportable or listed transactions should remain conscious of the applicable gross income thresholds for each type of transaction, as well as the timing of reporting obligations. The severe penalties and narrow provisions for rescission of such penalties require careful planning and awareness of compliance obligations.

Companies should carefully evaluate their proposed investments in plans such as the 419, 412i, section 79 or captive insurance plan with life insurance.. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or evasion.

Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to single-employer 419(e) plans, which the IRS also went after. The latest scams may be the so-called captive insurance plan and the so-called Section 79 plan.

While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to my IRS contacts who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting business owners who are being audited by the IRS with respect to these plans.

Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for failure to file properly under 6707A. Niche then went out of business.

Millennium sold 419 plans through insurance companies. They stupidly filed for a private letter ruling to the effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a listed transaction. Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium sought bankruptcy protection after a lot of lawsuits.

I have been an expert witness in a lot of the lawsuits in these 419 plans, 412i plans, and the like, and my side has never lost a case. I have received thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, and other various professionals. In the 1990's, when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the plan promoters.

In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a meeting similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did after the meeting.

The IRS then set up task forces and started going after 419 and 412i plans. I have been profusely warning accountants to properly file under 6707A to avoid the large fines, but most do not. Even if they file, if they make a mistake on the forms, the IRS will fine them. Very few accountants have had experience filing the forms, and the IRS instructions are complicated and therefore difficult to follow.

ABOUT THE AUTHOR: Lance Wallach
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 more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Serving Clients Nationwide

516-938-5007

Lance Wallach Expert Witness

Don't Get Caught in Section 79 Trap One doctor almost lost everything.....

Don’t Get Caught in Section 79 Trap
One doctor almost lost everything ………..




In 2006 Doctor X found himself in what he thought was 
the pleasant position of having a substantial amount of 
cash on hand that was not essential to the operation of 
his practice. That comfortable feeling did not last long. 
He quickly fell prey to a predatory insurance agent who 
sold him on the idea of Section 79 scam as a vehicle to 
obtain tax deductions. Of course what really interested 
the insurance agent was the funding vehicle, a large 
life insurance contract with American General as the 
insurance carrier, which just happened to net the 
agent a large commission.


Unfortunately, the large, questionable tax deductions 
claimed by Doctor X indeed attracted the attention of 
the IRS. As a result of their audit, the IRS not only 
disallowed all of the tax deductions, but also imposed 
back taxes, an array of penalties, and interest, turning 
the doctor’s anticipated investment vehicle into 
something that could cost him everything he was 
saving and more. As if that weren’t bad enough, even 
that Draconian action was not the end of the story.


None of his so-called financial advisors had told Doctor 
X about IRC Section 6707A. Under this section of the 
Code, huge fines can be imposed on those who fail to 
inform the Service about participation in listed or 
reportable transactions, or transactions substantially 
similar to listed transactions. Loosely defined, a 
reportable transaction is any transaction that has the 
potential for tax avoidance or evasion. Since he had no 
knowledge of this requirement, the doctor did not make 
the proper filings under Section 6707A, and is now 
also being threatened with monstrous fines for that 
failure to submit the proper forms in the proper format.


Although these issues had the potential for great 
disaster and great financial loss for this doctor, all the 
anxiety and stress he has been suffering over this 
matter may soon have a happier ending than he 
expected at its onset because he had the sense to 
contact us for help, perhaps just in the nick of time. As 
a result of putting experts with a great deal of 
experience on his case, he now stands an excellent 
chance of having at least some of the penalties from 
the original audit abated. He will probably be able to 
recover the money that he sank into that large 
American General life insurance contract as well. 
Sometimes a properly worded letter to the insurance 
company is all it takes. Last, but certainly not least, 
Doctor X also has an excellent chance of avoiding the 
large Section 6707A penalties, as our experts in the art 
of filing late without paying fines are currently at work 
on that as well.


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.

Serving Clients Nationwide

516-938-5007

Lance Wallach Expert Witness

419, 412i, captive insurance and section 79 problems

419, 412i, captive insurance and section 79 problems

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April 4, 2013     By Lance Wallach, CLU, CHFC 

Call (516) 938-5007

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Sometimes the IRS might disagree with planning you did with other advisors and you need to find help to ensure that your rights are protected, the facts are interpreted accurately and the law applied correctly.

Lance Wallach is among the few in this country who fully understand the mechanics and legal issues surrounding what has become known as "419 Plans," 412i plans, captive insurance and section 79 programs. He wrote the book, that others read for CPE on these subjects. For that reason taxpayers throughout the country seek his services in dealing with the Internal Revenue Service in audits, appeals and in the Tax Court with his associates. As an expert witness Lance Wallach's side has never lost a case. Sometimes it is easy to get your money back with a letter.

Expert Witness

Frankly, not everybody does it right. Whether through ignorance or ill-intent, some folks sell insurance based programs with tax benefits, such as 419 Plans and 412(i) Plans, or promote premium financing or STOLI programs to unsuspecting consumers leaving the consumer to be attacked, either by the IRS or by a turn in the economy, when all goes wrong. But the opposite is also true. Some 419 Plans and 412(i) Plan are very well designed and flawlessly implemented but the IRS just shoots first and aims second. Some legitimate premium financing might miscue. Using Lances knowledge of life insurance and the many ways life insurance has been and can be used in tax and wealth planning, lawyers for both plaintiffs and defendants throughout the US seek Lances services as an expert witness in cases between consumers and those who sold them these programs that develop after the IRS, right or wrong, initiates an audit or the investment goes under water. In looking for an expert witness examine credentials: Use the man that wrote the book on this. Use the man's team that has never lost a case. Why use an attorney or CPA who will learn on the job. Why use an atty. or CPA that learned from one of Lance Wallach's books or conventions. Want to win. Want to be made whole. Want this problem to go away. Google Lance Wallach and anyone else and you decide who is see who is the true expert.

Give us a call and see how we can protect your present and plan for your future.

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.

ABOUT THE AUTHOR: Lance Wallach
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.

Copyright Lance Wallach, CLU, CHFC


Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

The Dangers of being "listed"

The Dangers of being "listed"

A warning for 419, 412i, Sec.79 and captive insurance 

Accounting Today: October 25, 2010 

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
($200,000 for a business and $100,000 for an individual) 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 has to be prepared correctly. I only know of two
people in the United States who have filed these forms properly for clients. They tell me that
was after hundreds of hours of research and over fifty phones calls to various IRS
personnel.

The filing instructions for Form 8886 presume a timely filing.  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 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.  It
follows that taxpayers who no longer enjoy the benefit of those large deductions are no
longer "participating ' in the listed transaction.   But that is not the end of the story.
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.  This language may
provide the taxpayer with a solid argument in the event of an audit.

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, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive
insurance plans. He speaks at more than ten conventions annually He does expert witness testimony and has never lost a case. Contact
him at 516.938.5007

The information provided herein is not intended as legal, accounting, financial or any
other type of advice for any specific individual or other entity.  You should contact an
appropriate professional for any such advice.