Abusive 412(i) Tax Shelter Litigation

by Lance Wallach
by Lance Wallach

Parties: Typically, these transactions will include an Insurance company, accountant, tax attorney, and a promoter (someone with an insurance background, perhaps an actuary, who knows how to structure the policy itself). These groups will use insurance brokerages and sub-agents (licensed in the various states) to sell the policies themselves.

Insurance Companies

• American General Life Insurance Company
• Indianapolis Life Insurance Company
• Hartford Life And Annuity Insurance Company
• Pacific Life Insurance Company Met Life

Promoters/Attorneys/Accountants

• Kenneth Hartstein Economic Concepts, Inc.
• Pension Services, Llc
• Bryan Cave Llp (National Law Firm That Provided Generic Tax Opinion Letters)
• Richard Smith (Attorney With Bryan Cave)

How These Plans Work:

In the late 1990’s, the individuals and groups above devised a scheme to sell abusive tax shelters under the auspices of Section 412(i) of the tax code. A 412(i) is a defined benefit pension plan. It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. 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. To create a 412(i) plan, there must be a trust to hold the assets.

The employer funds the plan by making cash contributions to the trust, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount. The trust uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the trust will usually sell the policies for their present cash value and purchase annuities with the proceeds.

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