Small Business Tax News
Strategic
Advice on the Tax Implications of Business Planning
Advice on the Tax Implications of Business Planning
March 2004
UPDATE ON IRS CRACKDOWN ON ABUSIVE 412(i) PLANS
By Lance Wallach & Ira Kaplan
On Friday, February 3, 2004 , the IRS issued
proposed regulations concerning the valuation of insurance contracts in the
context of qualified retirement plans.
proposed regulations concerning the valuation of insurance contracts in the
context of qualified retirement plans.
The IRS says that it is no longer reasonable to use the cash surrender
value or the interpolated terminal reserve as the accurate value of a life
insurance contract for income tax purposes.
The IRS issued proposed regulations stating that the value of a life
insurance contract in the context of qualified retirement plans should be the
contract’s fair market value.
value or the interpolated terminal reserve as the accurate value of a life
insurance contract for income tax purposes.
The IRS issued proposed regulations stating that the value of a life
insurance contract in the context of qualified retirement plans should be the
contract’s fair market value.
The Service acknowledged in the regulations (and in a revenue procedure
issued simultaneously) that the fair market value standard could create some
confusion among taxpayers. They
addressed this possibility by describing a safe harbor position.
issued simultaneously) that the fair market value standard could create some
confusion among taxpayers. They
addressed this possibility by describing a safe harbor position.
When I addressed the American Society of Pension Actuaries Annual National
Convention, the IRS chief actuary also spoke about attacking abusive 412(i)
pensions.
Convention, the IRS chief actuary also spoke about attacking abusive 412(i)
pensions.
A “Section 412(i) plan” is a tax-qualified retirement plan that is
funded entirely by a life insurance contract or an annuity. The employer claims tax deductions for
contributions that are used by the plan to pay premiums on an insurance
contract covering an employee. The plan
may hold the contract until the employee dies, or it may distribute or sell the
contract to the employee at a specific point, such as when the employee
retires.
funded entirely by a life insurance contract or an annuity. The employer claims tax deductions for
contributions that are used by the plan to pay premiums on an insurance
contract covering an employee. The plan
may hold the contract until the employee dies, or it may distribute or sell the
contract to the employee at a specific point, such as when the employee
retires.
“The guidance targets specific abuses occurring with Section 412(i)
plans”, stated Assistant Secretary for Tax Policy Pam Olson. “There are many legitimate Section 412(i)
plans, but some push the envelope, claiming tax results for employees and
employers that do not reflect the underlying economics of the
arrangements.” Or, to put it another
way, tax deductions are being claimed, in some cases, that the Service does not
feel are reasonable given the taxpayer’s facts and circumstances.
plans”, stated Assistant Secretary for Tax Policy Pam Olson. “There are many legitimate Section 412(i)
plans, but some push the envelope, claiming tax results for employees and
employers that do not reflect the underlying economics of the
arrangements.” Or, to put it another
way, tax deductions are being claimed, in some cases, that the Service does not
feel are reasonable given the taxpayer’s facts and circumstances.
“Again and again, we’ve uncovered abusive tax avoidance transactions
that game the system to the detriment of those who play by the rules,” said IRS
Commissioner Mark W. Everson.
that game the system to the detriment of those who play by the rules,” said IRS
Commissioner Mark W. Everson.
I
have been published by the AICPA and others for years about these and similar
abuses. Finally, the IRS is doing
something. If someone is in an abusive
412(i) plan, they had better seek counsel quickly.
have been published by the AICPA and others for years about these and similar
abuses. Finally, the IRS is doing
something. If someone is in an abusive
412(i) plan, they had better seek counsel quickly.
Editor's
note: The author and publisher are not rendering professional advice and assume
no liability in connection with its use.
Consult your tax adviser and accountant before making any investment or
tax-related decisions.·
note: The author and publisher are not rendering professional advice and assume
no liability in connection with its use.
Consult your tax adviser and accountant before making any investment or
tax-related decisions.·
Lance Wallach is a member of Small
Business Tax News’ Advisory Board. He is
a frequent speaker on tax-related subjects including VEBAs, pensions, and
tax-oriented strategies.·
Business Tax News’ Advisory Board. He is
a frequent speaker on tax-related subjects including VEBAs, pensions, and
tax-oriented strategies.·
Ira Kaplan, Esq., CPA, MBA, is a
national speaker and author. For
more information call Lance Wallach at (516)938-5007.
national speaker and author. For
more information call Lance Wallach at (516)938-5007.
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