DECEMBER 05, 2013 Court Rules That Section 419A(f)(6) Plan Sponsor Made Taxable Distribution of Life Insurance Policies By: Category: Tax Share on stumbleuponShare on bloggerShare on gmailShare on deliciousMore Sharing Services 0 Executive Capital Resources December, 2013
Friends & Clients:
Today's Washington report talks about how a plan sponsor for a 419 plan distributed life insurance policies that were found to be taxable.
TOPIC: Court Rules That Section 419A(f)(6) Plan Sponsor Made Taxable Distribution of Life Insurance Policies
Scroll to read the full report or click here to download a printable pdf.
SUMMARY: The Second Circuit upheld a Tax Court decision that the insured taxpayers, a husband and wife, received a taxable distribution of life insurance policies from a Section 419A multi-employer welfare benefit plan. The court found in favor of the IRS even though the policies were transferred directly to a second welfare benefit plan and not to the taxpayers. Because the taxpayers were the majority shareholders, the only directors and one served as President of the plan sponsor, the court found that, once the plan was terminated and withdrawal authorized by plan administrator, the taxpayers exercised actual control over the policies with no "substantial risk of forfeiture."
FACTS: The Gluckmans ("taxpayers") were majority shareholders of Fownes Brothers & Co., Inc. ("corporation"). The taxpayers each owned 28.94% of the stock of the corporation, with the balance shared equally by the taxpayers' two children. The taxpayers were the only directors of the corporation and Mr. Gluckman was also the corporate President. In 1999, the corporation adopted a "10 or more employer" welfare benefit plan ("the initial plan") under IRC Section 419A(f)(6) offering pre-retirement life insurance to employees. The initial plan was not a tax-exempt trust. The taxpayers were covered employees under the initial plan.
In 2003, the IRS issued regulations under Section 419A that necessitated restructuring of the initial plan. During 2003, the administrator of the initial plan advised participating employers to terminate their participation in the initial plan, notifying them of their options. The letter from the administrator specifically stated that "a trustee-to-trustee transfer . . . is not permitted under the applicable IRS regulations."
In October 2003, the corporation sent the plan administrator a resolution authorizing a distribution of the policies, effective November 28, 2003. The administrator sent the corporation change of ownership forms, endorsed by the administrator, listing the initial plan administrator as the "current owner" and leaving a blank for the new owner(s). The administrator asked the taxpayer as corporate President to fill in the blank specifying the new owner(s) and forward the completed forms to the insurance carrier.
On December 17, 2003, the corporation entered into an agreement (signed by the taxpayer) to participate in a ne
DECEMBER 05, 2013
ReplyDeleteCourt Rules That Section 419A(f)(6) Plan Sponsor Made Taxable Distribution of Life Insurance Policies
By:
Category: Tax
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Executive Capital Resources
December, 2013
Friends & Clients:
Today's Washington report talks about how a plan sponsor for a 419 plan distributed life insurance policies that were found to be taxable.
TOPIC: Court Rules That Section 419A(f)(6) Plan Sponsor Made Taxable Distribution of Life Insurance Policies
CITES: Gluckman v. Comm'r, No. 13-761, 2013 WL 6124391 (2nd Cir. Nov. 22, 2013); Gluckman v. Comm'r, T.C.M. 2012-329, 2012 WL 5951351 (T.C. Nov. 28, 2012); I.R.C. § 419A(f)(6) (2012); I.R.C. § 6662(b)(2) (2012); Schwab v. Comm'r, 111 AFTR-2d 2013-667 (9th Cir. 2013).
Scroll to read the full report or click here to download a printable pdf.
SUMMARY: The Second Circuit upheld a Tax Court decision that the insured taxpayers, a husband and wife, received a taxable distribution of life insurance policies from a Section 419A multi-employer welfare benefit plan. The court found in favor of the IRS even though the policies were transferred directly to a second welfare benefit plan and not to the taxpayers. Because the taxpayers were the majority shareholders, the only directors and one served as President of the plan sponsor, the court found that, once the plan was terminated and withdrawal authorized by plan administrator, the taxpayers exercised actual control over the policies with no "substantial risk of forfeiture."
FACTS: The Gluckmans ("taxpayers") were majority shareholders of Fownes Brothers & Co., Inc. ("corporation"). The taxpayers each owned 28.94% of the stock of the corporation, with the balance shared equally by the taxpayers' two children. The taxpayers were the only directors of the corporation and Mr. Gluckman was also the corporate President. In 1999, the corporation adopted a "10 or more employer" welfare benefit plan ("the initial plan") under IRC Section 419A(f)(6) offering pre-retirement life insurance to employees. The initial plan was not a tax-exempt trust. The taxpayers were covered employees under the initial plan.
In 2003, the IRS issued regulations under Section 419A that necessitated restructuring of the initial plan. During 2003, the administrator of the initial plan advised participating employers to terminate their participation in the initial plan, notifying them of their options. The letter from the administrator specifically stated that "a trustee-to-trustee transfer . . . is not permitted under the applicable IRS regulations."
In October 2003, the corporation sent the plan administrator a resolution authorizing a distribution of the policies, effective November 28, 2003. The administrator sent the corporation change of ownership forms, endorsed by the administrator, listing the initial plan administrator as the "current owner" and leaving a blank for the new owner(s). The administrator asked the taxpayer as corporate President to fill in the blank specifying the new owner(s) and forward the completed forms to the insurance carrier.
On December 17, 2003, the corporation entered into an agreement (signed by the taxpayer) to participate in a ne