I’m not sure why this 419 case hasn’t been talked about much, but it certainly got my attention when it came across my desk.
If you’ll remember, 419 plans were the darling of the life insurance industry for years. The plans were sold as a way to buy cash-value life insurance in a 100 percent tax-deductible manner in which the death benefit would pay out tax-free. Additionally, individuals (usually business owners) could exit from the plans, at which time the cash-value life insurance policies would be distributed to the individuals. The individuals then could borrow from the policies tax-free in retirement.
If you know the history of 419 plans, you know that the Internal Revenue Service has despised them for over a decade. For the most part, the courts have ruled against taxpayers in cases involving 419 plans, and the IRS has acted several times to curb their use. The IRS essentially killed multi-employer plans, which spawned the use of single employer plans which were subsequently killed (or so we thought).
Scorpion and the frog — If you have never read the story of the scorpion and the frog, I highly recommend it. Many 419 administrators (such as Section 79 plan administrators) are scorpions. They do what they do, no matter the consequences to clients or to the advisors who recommend them.
Tax court sounds death knell on 419 plans?
On July 13, the same tax court that issued the landmark 419 case back in the day (Neonatology Associates v. Commissioner of Internal Revenue) came down hard on one of the few remaining 419 plans in the industry. It seems the judge was trying to send a message in his opinion, and I hope it will be received loud and clear.