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419(e) Welfare Benefit Trusts In October 2007, the IRS issued certain guidance for welfare benefit trusts formed under IRC § 419(e). While many 419(e) welfare benefit trusts were unaffected, those 419(e) welfare benefit trusts funded with cash value life insurance could be significantly and adversely affected. Evaluation of Existing 419(e) Plans The firm evaluates existing 419(e) welfare benefit trusts against the IRS's guidance and suggests alternatives for remediating or terminating such plans. The firm has developed certain strategies for rescuing some 419(e) arrangements that have run afoul of the new regulations. Litigation of Abusive 419(e) Plans Some allegedly abusive 419(e) Plans have been sold by promoters, advisors and life insurance companies. The firm evaluates and conducts fraud or negligence litigation against or in defense of these parties.
http://www.irs.gov/irs/article/0,,id=174844,00.html
IRS Warns Taxpayers About Certain Trust Arrangements
Sold As Welfare Benefit Funds
IR-2007-170, Oct. 17, 2007
WASHINGTON – The Internal Revenue Service and the
Treasury Department cautioned taxpayers about
participating in certain trust arrangements being
sold to professional corporations and other small
businesses as welfare benefit funds and identified
some of the arrangements as listed transactions.
There are many legitimate welfare benefit funds that
provide benefits, such as health insurance and life
insurance, to employees and retirees. However, the
arrangements the IRS is cautioning employers about
primarily benefit the owners or other key employees
of businesses, sometimes in the form of
distributions of cash, loans, or life insurance
policies.
“The guidance targets specific abuses involving a
limited group of arrangements that claim to be
welfare benefit funds,” said Donald L. Korb, Chief
Counsel for the IRS. “Today’s action sends a strong
signal that these abusive schemes must stop.”
The guidance explains that, depending on the facts
and circumstances, a particular arrangement could be
providing dividends to the owners of a business that
are includible in the owners’ income and not
deductible by the business. The arrangement could
also be a plan of nonqualified deferred
compensation. Even some arrangements providing
welfare benefits may have tax consequences different
than what is claimed.
In Notice 2007-83, the IRS identified certain trust
arrangements involving cash value life insurance
policies, and substantially similar arrangements, as
listed transactions.
If a transaction is designated as a listed
transaction, affected persons have disclosure
obligations and may be subject to applicable
penalties.
Taxpayers who otherwise would be required to
file a disclosure statement prior to Jan. 15, 2008,
as a result of Notice 2007-83 have until Jan. 15,
2008, to make the disclosure.
In Notice 2007-84, the IRS cautioned taxpayers that
the tax treatment of trusts that, in form, provide
post-retirement medical and life insurance benefits
to owners and other key employees may vary from the
treatment claimed.
The IRS may issue further guidance to address
these arrangements, and taxpayers should not assume
that the guidance will be applied prospectively
only.
Today, the IRS also issued related Revenue Ruling
2007-65 to address situations where an arrangement
is considered a welfare benefit fund but the
employer’s deduction for its contributions to the
fund is denied in whole or part for premiums paid by
the trust on cash value life insurance policies.
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