This webinar will help you navigate some of the ethical minefields inherent in practice today, especially under Circular 230Understand many of the abusive insurance and annuity based products being marketed to your clients and how to alleviate IRS scrutiny. Identify potentially abusive deductions claimed on tax returns, which include many popular retirement and welfare benefit plans. Learn about various disclosure requirements and how to avoid large penalties, both to yourself and your client. Protect your senior clients from abusive life settlements, reverse mortgages, annuities and more. Discover opportunities available under the Pension Protection Act and new regulations, and how to use them correctly. This webinar will give you expertise in tax shelters, listed transactions, captive insurance, 419 and 412i plans, premium finance, and other potentially abusive products and strategies. Visit www.expertwitness.tax to learn more.

1. Ethics: Insider SecretsEthics: Insider Secrets
to Avoid Malpractice and Hugeto Avoid Malpractice and Huge
PenaltiesPenalties
Presented by Lance Wallach, CLU, CHFC, CIMC,
a frequent speaker on pensions, VEBAs, financial
and estate planning, practice management, and
tax-oriented strategies at accounting and financial
planning conventions.

2. This webinar will help you navigate some of the
ethical minefields inherent in practice today,
especially under Circular 230. Understand many of the abusive insurance and annuity based
products being marketed to your clients and how to alleviate
IRS scrutiny.
 Identify potentially abusive deductions claimed on tax returns,
which include many popular retirement and welfare benefit
plans. Learn about various disclosure requirements and how to
avoid large penalties, both to yourself and your client.
 Protect your senior clients from abusive life settlements, reverse
mortgages, annuities and more.
 Discover opportunities available under the Pension Protection
Act and new regulations, and how to use them correctly.
 This webinar will give you expertise in tax shelters, listed
transactions, captive insurance, 419 and 412i plans, premium
finance, and other potentially abusive products and strategies.

3. DisclaimerDisclaimer
The information provided herein is not intended as legal,The information provided herein is not intended as legal,
accounting, financial, or any other type of advice for anyaccounting, financial, or any other type of advice for any
specific individual or other entity. You should contact anspecific individual or other entity. You should contact an
appropriate professional for any such advice.appropriate professional for any such advice.
Notice Pursuant to IRS Circular 230Notice Pursuant to IRS Circular 230
Any tax advice expressed in this communicationAny tax advice expressed in this communication
(including any attachments) is not intended to be used,(including any attachments) is not intended to be used,
and cannot be used, for the purpose of avoidingand cannot be used, for the purpose of avoiding
penalties imposed on the taxpayer by any governmentalpenalties imposed on the taxpayer by any governmental
taxing authority or agency.taxing authority or agency.

4.  Insurance agents often sell ways to deductInsurance agents often sell ways to deduct
life insurance premiumslife insurance premiums
 This is usually done in 419 plansThis is usually done in 419 plans
 Most of these deductions are disallowed onMost of these deductions are disallowed on
auditaudit
 Notice 2007-83 was issued on 10/17/2007Notice 2007-83 was issued on 10/17/2007
 It identified certain trust arrangementsIt identified certain trust arrangements
involving cash value life insurance as listedinvolving cash value life insurance as listed
transactions.transactions.

5.  Revenue Ruling 2007-65 was issuedRevenue Ruling 2007-65 was issued
simultaneouslysimultaneously
 It is now clear that an employer usuallyIt is now clear that an employer usually
cannot claim deductions for cash value lifecannot claim deductions for cash value life
insurance inside of 419 plans, especially ifinsurance inside of 419 plans, especially if
the plan is a listed transactionthe plan is a listed transaction
 Persons participating in a listed transactionPersons participating in a listed transaction
have disclosure obligationshave disclosure obligations
 They must file Form 8886 with their taxThey must file Form 8886 with their tax
returnsreturns

6.  Failure to file and disclose results in penaltiesFailure to file and disclose results in penalties
of up to $200,000of up to $200,000
 These penalties can also be imposed uponThese penalties can also be imposed upon
agents, advisors, and other professionalsagents, advisors, and other professionals
 Taxpayers who otherwise would be requiredTaxpayers who otherwise would be required
to file a disclosure statement prior to Jan. 15,to file a disclosure statement prior to Jan. 15,
2008, as a result of Notice 2007-83 had until2008, as a result of Notice 2007-83 had until
Jan. 15, 2008, to make the disclosureJan. 15, 2008, to make the disclosure
 Revenue Ruling 2007-65 has the same targetRevenue Ruling 2007-65 has the same target
as Notices 2007-83 and 2007-84as Notices 2007-83 and 2007-84

7.  The target is those arrangements where cashThe target is those arrangements where cash
value life insurance is purchased on employeesvalue life insurance is purchased on employees
who are owners of the businesswho are owners of the business
 Sometimes it is also purchased on keySometimes it is also purchased on key
employeesemployees
 Term insurance is then purchased on the livesTerm insurance is then purchased on the lives
of other employeesof other employees
 These plans are currently sold as 419(e),These plans are currently sold as 419(e),
419A(f)(6), or 419 plans419A(f)(6), or 419 plans

8.  Sometimes they are sold as single employerSometimes they are sold as single employer
plansplans
 It is anticipated that the plan will be terminatedIt is anticipated that the plan will be terminated
with the cash value policies being distributed towith the cash value policies being distributed to
owners or key employeesowners or key employees
 Little if anything goes to the other employeesLittle if anything goes to the other employees
 Promoters claim the insurance premiums are aPromoters claim the insurance premiums are a
current deductioncurrent deduction
 The ruling makes it absolutely clear that this isThe ruling makes it absolutely clear that this is
not the casenot the case

9.  Most businesses cannot deduct the cost ofMost businesses cannot deduct the cost of
premiums paid through a 419 (welfarepremiums paid through a 419 (welfare
benefit) plan for cash value life insurancebenefit) plan for cash value life insurance
 The ruling also describes arrangements thatThe ruling also describes arrangements that
may be listed transactionsmay be listed transactions
 These plans are usually sold by insuranceThese plans are usually sold by insurance
agents and financial plannersagents and financial planners
 They are also sometimes sold by accountantsThey are also sometimes sold by accountants
and attorneysand attorneys

10.  There is an excellent chance that theThere is an excellent chance that the
accountant with a client or clients in these plansaccountant with a client or clients in these plans
will be deemed a “material advisor” to thesewill be deemed a “material advisor” to these
plansplans
 You are a material advisor if the clientYou are a material advisor if the client
participated in the plan, you gave the client taxparticipated in the plan, you gave the client tax
advice with respect to the transaction, andadvice with respect to the transaction, and
yourself and/or a related entity received $10,000yourself and/or a related entity received $10,000
or more in compensationor more in compensation

11.  The material advisor must file Form 8918. AsThe material advisor must file Form 8918. As
with the 8886 form (for taxpayers) failure to filewith the 8886 form (for taxpayers) failure to file
or even incomplete, misleading, or inaccurateor even incomplete, misleading, or inaccurate
filings can lead to penalties of $100,000 forfilings can lead to penalties of $100,000 for
individuals or $200,000 for corporationsindividuals or $200,000 for corporations
 A filing on a protective basis is possible if theA filing on a protective basis is possible if the
advisor believes, in good faith, either that headvisor believes, in good faith, either that he
does not meet the income threshold or that thedoes not meet the income threshold or that the
transaction in question is not a listed one.transaction in question is not a listed one.

12. Professional discipline is evenProfessional discipline is even
possible in connection with thispossible in connection with this
area, as is indirect (as a witness)area, as is indirect (as a witness)
or even direct (as a defendant)or even direct (as a defendant)
involvement in legal proceedingsinvolvement in legal proceedings

13.  There are many reasons why the IRS mayThere are many reasons why the IRS may
challenge the claimed tax benefits of thesechallenge the claimed tax benefits of these
arrangementsarrangements
 The Section 4976 100 percent excise tax mayThe Section 4976 100 percent excise tax may
disqualify benefits provided to owner-disqualify benefits provided to owner-
employees or key employeesemployees or key employees
 Where property, including life insuranceWhere property, including life insurance
policies, is not properly valued, the IRS willpolicies, is not properly valued, the IRS will
challenge the valuechallenge the value

14.  A particular target here would be "springingA particular target here would be "springing
cash value" life insurancecash value" life insurance
 This type of insurance features temporarilyThis type of insurance features temporarily
artificially depressed policy values, the goalartificially depressed policy values, the goal
being to reduce tax owed on the value of thebeing to reduce tax owed on the value of the
life insurance when said insurance islife insurance when said insurance is
removed from the planremoved from the plan

15.  In a proper arrangement, deductions areIn a proper arrangement, deductions are
limited by IRC Sections 419 and 419Alimited by IRC Sections 419 and 419A
 Depending on facts and circumstances, theDepending on facts and circumstances, the
rules for split-dollar arrangements may applyrules for split-dollar arrangements may apply
 Again depending on facts and circumstances,Again depending on facts and circumstances,
contributions on behalf of an owner-employeecontributions on behalf of an owner-employee
may be characterized as dividends or asmay be characterized as dividends or as
deferred compensation pursuant to IRCdeferred compensation pursuant to IRC
404(a)(5) or 409A, or both404(a)(5) or 409A, or both

16.  Be especially cautious should a clientBe especially cautious should a client
approach you with any 419 plan, for bothapproach you with any 419 plan, for both
yourself and the clientyourself and the client
 The Government has the names of mostThe Government has the names of most
former 419 A(f)(6) promoters, as manyformer 419 A(f)(6) promoters, as many
current 419 promoters werecurrent 419 promoters were
 This leads to increased scrutiny of suchThis leads to increased scrutiny of such
promoters, making audits far riskier and morepromoters, making audits far riskier and more
likelylikely

17. More on listed transactionsMore on listed transactions
 Listed transactions are those deemed by theListed transactions are those deemed by the
IRS to be structured for the significantIRS to be structured for the significant
purpose of tax avoidance or evasionpurpose of tax avoidance or evasion
 Participants in listed transactions must attachParticipants in listed transactions must attach
Form 8886 to their tax returnsForm 8886 to their tax returns
 There are severe penalties for failure to fileThere are severe penalties for failure to file
Form 8886 disclosing such participationForm 8886 disclosing such participation
 There are also severe penalties for those whoThere are also severe penalties for those who
aid and abet participation in listedaid and abet participation in listed
transactionstransactions

18. CPE Code Word #1CPE Code Word #1
LanceLance
For CPE, you will be asked to recallFor CPE, you will be asked to recall
this code word in the online evaluationthis code word in the online evaluation

19. Abusive 412(i) and otherAbusive 412(i) and other
Retirement PlansRetirement Plans
On Feb. 13, 2004, the Treasury DepartmentOn Feb. 13, 2004, the Treasury Department
and Internal Revenue Service issued guidanceand Internal Revenue Service issued guidance
to shut down abusive transactions involvingto shut down abusive transactions involving
specially designed life insurance policies inspecially designed life insurance policies in
retirement plans, Section “412(i) plans.” Theretirement plans, Section “412(i) plans.” The
guidance designates certain arrangements asguidance designates certain arrangements as
““listed transactions” for tax-shelter reportinglisted transactions” for tax-shelter reporting
purposespurposes

20.  A “Section 412(i) plan” is a tax qualifiedA “Section 412(i) plan” is a tax qualified
retirement plan that is funded entirely by a liferetirement plan that is funded entirely by a life
insurance contract or an annuity. Theinsurance contract or an annuity. The
employer claims tax deductions foremployer claims tax deductions for
contributions that are used by the plan to paycontributions that are used by the plan to pay
premiums on an insurance contract coveringpremiums on an insurance contract covering
an employee. The plan may hold the contractan employee. The plan may hold the contract
until the employee dies, or it may distribute oruntil the employee dies, or it may distribute or
sell the contract to the employee at a specificsell the contract to the employee at a specific
point, such as when the employee retires.point, such as when the employee retires.

21.  There are many legitimate Section 412(i) plans,There are many legitimate Section 412(i) plans,
but some push the envelope, claiming taxbut some push the envelope, claiming tax
results for employees and employers that doresults for employees and employers that do
not reflect the underlying economics of thenot reflect the underlying economics of the
arrangements,” according to the IRS.arrangements,” according to the IRS.
 One of the main abuses is that any lifeOne of the main abuses is that any life
insurance contract transferred from aninsurance contract transferred from an
employer or a tax-qualified plan to an employeeemployer or a tax-qualified plan to an employee
must be taxed at its full fair market value.must be taxed at its full fair market value.
Some firms have promoted an arrangementSome firms have promoted an arrangement
where an employer establishes a Section 412(i)where an employer establishes a Section 412(i)
plan under which the contributions made to theplan under which the contributions made to the
plan are used to purchase a specially designedplan are used to purchase a specially designed
life insurance contract.life insurance contract.

22.  The insurance contract is designed so thatThe insurance contract is designed so that
the cash surrender value is temporarilythe cash surrender value is temporarily
depresseddepressed
 These contracts are sometimes calledThese contracts are sometimes called
springing cash value insurancespringing cash value insurance
 These abuses also occur in other types ofThese abuses also occur in other types of
retirement plansretirement plans

23.  The 2004 regulation has led to numerous IRSThe 2004 regulation has led to numerous IRS
audits of 412(I) plansaudits of 412(I) plans
 While many plans are substantially inWhile many plans are substantially in
compliance, the Service regards others ascompliance, the Service regards others as
abusiveabusive
 The ones that are regarded as abusive areThe ones that are regarded as abusive are
listed transactions, which trigger thelisted transactions, which trigger the
disclosure requirements necessitating thedisclosure requirements necessitating the
filing of Forms 8886 and 8918, and of coursefiling of Forms 8886 and 8918, and of course
the possible penalties therethe possible penalties there

24.  As for the plans themselves, plan sponsors ofAs for the plans themselves, plan sponsors of
listed transactions (those that deemedlisted transactions (those that deemed
abusive), are treated as if the plans neverabusive), are treated as if the plans never
existed, and are forced to pay the incomeexisted, and are forced to pay the income
taxes that would have been due and owingtaxes that would have been due and owing
had the plan never existed, together withhad the plan never existed, together with
interestinterest
 The Service, in conducting these audits, isThe Service, in conducting these audits, is
critically concerned with compliance with non-critically concerned with compliance with non-
discrimination rules and applicable deductiondiscrimination rules and applicable deduction
limits. Failures in either or both of these areaslimits. Failures in either or both of these areas
are more likely to lead to being regarded asare more likely to lead to being regarded as
abusive and therefore being denominated aabusive and therefore being denominated a
listed transactionlisted transaction

25.  Large Companies have long used captiveLarge Companies have long used captive
insurers to reduce premiums paid for propertyinsurers to reduce premiums paid for property
and casualty insurance.and casualty insurance.
 The amount of money necessary to fund self-The amount of money necessary to fund self-
insured risks associated with tangible andinsured risks associated with tangible and
intangible assets is also reduced.intangible assets is also reduced.
 Large companies commonly establish singleLarge companies commonly establish single
parent captives.parent captives.
 However, for small and medium sizedHowever, for small and medium sized
businesses, the group captive structure and itsbusinesses, the group captive structure and its
protected cell variation can realize cost savingsprotected cell variation can realize cost savings
at a cost far less than establishing a singleat a cost far less than establishing a single
parent captive.parent captive.

26.  So it is a win-win situation – you save moneySo it is a win-win situation – you save money
while saving moneywhile saving money
 The accountant can use the group captive andThe accountant can use the group captive and
captive cell structures to introduce new costcaptive cell structures to introduce new cost
saving opportunities to business clientssaving opportunities to business clients
 These opportunities can be enhanced by incomeThese opportunities can be enhanced by income
tax and succession planning techniquestax and succession planning techniques
commonly used by estate planning professionalscommonly used by estate planning professionals

27. What requirements must be met toWhat requirements must be met to
obtain a legitimate tax deductionobtain a legitimate tax deduction
while using captive insurance?while using captive insurance?
 Risk sharingRisk sharing
 Risk distributionRisk distribution
 Using group captives makes it significantlyUsing group captives makes it significantly
cheaper to satisfy these requirement,cheaper to satisfy these requirement,
especially the risk distribution requirementespecially the risk distribution requirement
 More on the risk distribution requirementMore on the risk distribution requirement

28.  If done properly, premium finance allows largeIf done properly, premium finance allows large
amounts of life insurance to be obtained with aamounts of life insurance to be obtained with a
small dollar outlaysmall dollar outlay
 Various problems occur if it is done wrongVarious problems occur if it is done wrong
 It is not a free way to obtain life insurance, andIt is not a free way to obtain life insurance, and
should not be sold as suchshould not be sold as such
 What spread over the loan interest rate must theWhat spread over the loan interest rate must the
client earn to make this work?client earn to make this work?

29.  Is the loan commitment reasonable?Is the loan commitment reasonable?
 How long is the loan renewable for? Does itsHow long is the loan renewable for? Does its
term exceed life expectancy?term exceed life expectancy?
 Is the loan secured by the cash value of theIs the loan secured by the cash value of the
life insurance?life insurance?
 Is it a life expectancy program? Such aIs it a life expectancy program? Such a
program would assume dying at the IRS lifeprogram would assume dying at the IRS life
expectancyexpectancy

30.  Problem – if the client lives beyond that, theProblem – if the client lives beyond that, the
loan amount begins to exceed cash value,loan amount begins to exceed cash value,
and the program unravelsand the program unravels
 If policy cash values do not grow faster thanIf policy cash values do not grow faster than
the loan amount, the design will failthe loan amount, the design will fail
 Caution – there is little IRS guidance onCaution – there is little IRS guidance on
whether a personally owned or businesswhether a personally owned or business
owned policy falls under an investmentowned policy falls under an investment
interest situation, allowing loan interest to beinterest situation, allowing loan interest to be
deducted. In general, interest on a loan todeducted. In general, interest on a loan to
acquire a life insurance policy is consideredacquire a life insurance policy is considered
personal interest and is not deductiblepersonal interest and is not deductible

31.  Using this strategy sometimes leads to estateUsing this strategy sometimes leads to estate
tax problemstax problems
 Investor or stranger owned life insurance isInvestor or stranger owned life insurance is
different from premium finance and shoulddifferent from premium finance and should
not be confused with itnot be confused with it
 IOLI or STOLI often involve financing theIOLI or STOLI often involve financing the
purchase of a policy. The policy is then soldpurchase of a policy. The policy is then sold
as an investment to a strangeras an investment to a stranger
 STOLI may be illegal in some jurisdictionsSTOLI may be illegal in some jurisdictions

32.  In a life settlement, an unneeded policy is soldIn a life settlement, an unneeded policy is sold
to a third party, usually an institutional investorto a third party, usually an institutional investor
 They originated with the viatical settlementsThey originated with the viatical settlements
formerly used by AIDS patientsformerly used by AIDS patients
 It is projected that the industry may ultimatelyIt is projected that the industry may ultimately
grow to an annual volume of $160 billiongrow to an annual volume of $160 billion
 There are licensing and commission disclosureThere are licensing and commission disclosure
requirements in some jurisdictionsrequirements in some jurisdictions

33. Tax considerations and otherTax considerations and other
insurance issuesinsurance issues
• Surrendering a life insurance policy can resultSurrendering a life insurance policy can result
in a taxable gain, but no deduction is allowedin a taxable gain, but no deduction is allowed
in the event of a lossin the event of a loss
• Clients can benefit from the Section 1035Clients can benefit from the Section 1035
exchange and the insurance swapoutexchange and the insurance swapout
process, but, depending on the situation,process, but, depending on the situation,
there can be reasons not to use thesethere can be reasons not to use these
strategiesstrategies

34.  One reason is if the client’s health hasOne reason is if the client’s health has
declined, making it impossible to obtain a newdeclined, making it impossible to obtain a new
policy at favorable ratespolicy at favorable rates
 The client may have to enter a new surrenderThe client may have to enter a new surrender
charge period, which would affect cash valuecharge period, which would affect cash value
liquidity. Or the client may simply beliquidity. Or the client may simply be
unsuitable for a new productunsuitable for a new product
 The accountant should be aware thatThe accountant should be aware that
sometimes the objective of transactions suchsometimes the objective of transactions such
as this is to generate commissionsas this is to generate commissions

35.  New surrender chargeNew surrender charge
 New suicide and contestability periodNew suicide and contestability period
 Tax consequences are possible if the existingTax consequences are possible if the existing
loan is not paid off prior to the exchangeloan is not paid off prior to the exchange
 The accountant receiving compensation fromThe accountant receiving compensation from
the transaction should disclose that in writing,the transaction should disclose that in writing,
detailing any possible conflicts of interestdetailing any possible conflicts of interest
arising from the receipt of compensation.arising from the receipt of compensation.
Reasons for the transaction should also be setReasons for the transaction should also be set
forth in writingforth in writing
 Fill out all state regulatory forms. Go the extraFill out all state regulatory forms. Go the extra
mile in the regulatory arena, as appropriatemile in the regulatory arena, as appropriate

36.  The accountant, even if not initiating orThe accountant, even if not initiating or
suggesting the transaction, must besuggesting the transaction, must be
knowledgeable and well versed about the issuesknowledgeable and well versed about the issues
involvedinvolved
 There are abusive sales practices that haveThere are abusive sales practices that have
targeted and victimized seniorstargeted and victimized seniors
 One is inducing seniors into reverse mortgages.One is inducing seniors into reverse mortgages.
Unnecessary annuity products of questionableUnnecessary annuity products of questionable
benefit to the senior are then sold, and purchasedbenefit to the senior are then sold, and purchased
with the mortgage proceedswith the mortgage proceeds

37.  These annuities tend to feature abusive highThese annuities tend to feature abusive high
commissions and long surrender periodscommissions and long surrender periods
 But the accountant should bear in mind that notBut the accountant should bear in mind that not
all annuities are bad, and that reverseall annuities are bad, and that reverse
mortgages can serve a useful purposemortgages can serve a useful purpose
 The real trick is separating the good from theThe real trick is separating the good from the
badbad

38. CPE Code Word #2CPE Code Word #2
InstructorInstructor
For CPE, you will be asked to recall this codeFor CPE, you will be asked to recall this code
word in the online evaluationword in the online evaluation

39. What is the accountant’sWhat is the accountant’s
role in all this?role in all this?
 The accountant should never engage inThe accountant should never engage in
“dabbling”. That is accepting professional“dabbling”. That is accepting professional
engagements that you are unable to handleengagements that you are unable to handle
competently, perhaps featuring the selling,competently, perhaps featuring the selling,
buying, or use of products with which you arebuying, or use of products with which you are
not familiar.not familiar.

40.  Should you consider being your client’sShould you consider being your client’s
contractor?contractor?
 Learn to use opportunities created by theLearn to use opportunities created by the
Pension Protection Act wisely and correctly,Pension Protection Act wisely and correctly,
notably the cash balance plan.notably the cash balance plan.

41. Questions?Questions?
ADDITIONAL RESOURCESADDITIONAL RESOURCES
 www.vebaplan.comwww.vebaplan.com
The NSA MemberLinkThe NSA MemberLink
NSA 63NSA 63RDRD
Annual MeetingAnnual Meeting
The NSA Tax TalkThe NSA Tax Talk
The CPA’s Guide to Life Insurance byThe CPA’s Guide to Life Insurance by
Lance Wallach published by Bisk cpeasyLance Wallach published by Bisk cpeasy
Various published articles included withVarious published articles included with
this webinarthis webinar

42. I welcome your calls and emails to discussI welcome your calls and emails to discuss
these issues. I spend most days speakingthese issues. I spend most days speaking
with accountants like you anyway and Iwith accountants like you anyway and I
don’t have a life. No, seriously, contactdon’t have a life. No, seriously, contact
me so that we can try to help you.me so that we can try to help you.
• Lance Wallach 516-938-5007Lance Wallach 516-938-5007
• Fax 516-938-6330Fax 516-938-6330
• EmailEmail lawallach@aol.comlawallach@aol.com
• www.vebaplan.comwww.vebaplan.com