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Dave Baker

Tax Court: California Doctors Lose Deductions to Purported Pacific Exe

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Guest Jeff Kropp

Though I didn't read the entire opinion, the Court seemed to focus on Section 162 when disallowing the deductions for life insurance premiums. I would have thought that the focus would be on whether the plan constituted a legitimate VEBA and whether you could use a VEBA to provide whole life insurance policies (that allow reserves to build up in the policy).

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Guest nherkowitz

I agree with Jeff. It appears that the Tax Court decided that the plan was not a VEBA because they determined that the plan did not provide welfare benefits and was a sham. This appears to be a very extreme interpretation that appears to ignore previous precedents in this area. Even if the court determined that this was a whole life policy, previous precedent has allowed this in a Multiple Employer VEBA, as the discrimination rules have been passed based on amount of benefit, not the type of insurance policy.

The court seemed to blast right through sections 419 & 419A in its opinion without providing much reasoning as to why this was an illegitimate plan. Just because a plan is set up to take advantage of tax deductions, it does not mean it is illegitimate, as long as rules and precedents are followed.

This opinion appears to match the opinion of the IRS & puts the rules regarding Multiple Employer VEBAs in question. Which is probably what the IRS wants.

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Guest Matt Tuttle

The only thing this case does is show how not to structure a VEBA. The insurance policies were "speciously designed" to avoid taxes---the "continuous group" was a very expensive term insurance contract that included a premium conversion account---basically springing cash value, the plan itself was "deviously designed" and mantained experience rating, and some of the witnesses "consciously misrepresented facts", among other problems. Nothing to worry about for a properly designed VEBA.

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Guest John Koresko

See VEBA - 419 plan message board, page 5 or 6 for an article on the Neonatology case

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A summary and analysis of the Neonatology decision and its implications is contained at http://www.bsgbenefits.com/cgi-bin/articles/0035. Judge Laro did get it right.

However, even after this decision, there are several issues which have not been discussed in this forum:

1. If the plan wasn't a welfare benefit plan, why did the Judge allow a deduction for life insurance premiums (for employees)?

2. If a plan complies with IRC 419A(f)(6), can it fund a paid-up policy for a post-retirement death benefit?

3. Judge L. points out in footnotes 17 and 18 that the proper table for determining the amount of current income imputed to the employee is Table I under the Section 79 regs., not the PS58 Table. Will promoters of death benefit 419 plans and VEBAs continue to pretend that the PS58 rates are the correct ones to use?

4. It seems important to Judge Laro that multiple-employer plans make all funds available to pay all claims (liabilities) under the plans. It also seems that if an employer elects a certain benefit level, there is a cost of maintaining such a level of benefits. Yet all VEBA and 419 promoters still tell employers that making the annual contribution is optional. If the plan is a defined benefit type of plan, is the contribution really optional? Or is it an amount determined using generally accepted actuarial principles over the participants remaining years of service?

5. I'm tired of promoters of VEBAs and 419 plans making the unwarranted assertion (at least by implication) that an employer might be able to terminate its adoption of a plan and the assets will become distributable to the employees. This is not correct, for two reasons: (i) the withdrawal of an employer will not cause the termination of a multiple-employer plan or trust; (ii) nothing the employer can do can cause an employees welfare benefits to become payable; they are only payable upon unpredictable contingent events such as death, disability, involuntary termination of employment (a controlling shareholder cannot be involuntarily terminated) or incurring medical expenses.

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