Doctor's 419 Plan Deduction Denied

Roccy DeFrancesco, JD

Even now people are still experiencing the fallout from using 419 plans years ago. And the lessons seems to be that if a structure sounds too good to be true, it just might be.

Some of you may remember the good old days of using 419 welfare benefit plans to help business owners (and doctors specifically) take massive 162 deductions where the money ultimately went into cash value life insurance.

These plans were sold as a “benefit plan,” but they were really discriminatory deferred compensation plans in sheep’s clothing. For a while there was a legitimate use of 419 plans with life insurance, but it didn’t take long for the industry to come crashing down due to the abuses that took place.

Unfortunately, for many, the fallout from those who used 419 plans is still happening today.

Jerald W. White v. Commissioner (April 2012)

This is a case that recently came down where a doctor who took large deductions for 419 plan contributions lost his audit and ended up not only paying back taxes, but also was hit with interest and penalties.

What’s interesting about this case, besides the reminder that bad tax structures can be financially devastating for clients, is the discussion about back taxes and penalties.

independent counsel

The defendant tried to get out of back taxes and penalties by stating that the deductions he took were based on reasonable cause and reliance on a substantial authority for such deductions. The court pointed out that at no time did the doctor seek out on the authority, and that he relied on the promises of interested parties even though it was clear that the promises seemed too good to be true.

What we all can learn from this case is that, if a structure sounds too good to be true, it just might be.

Additionally, if you are going to use a tax-favorable structure to reduce your taxes and build wealth, make sure you have an uninterested CPA or attorney look at the plan.

Reputable income tax planning

Honestly, there are not many reputable income tax planning tools left. The IRS has killed most of them. However, one viable tool that is becoming more main stream is the use of a Captive Insurance Company (CIC). Over 24 states have CIC legislation, and, when “done right,” a CIC can be a risk-management tool that has tremendous other benefits such as tax reduction and wealth building.

The problem with many CICs is that the administrators who set them up and run them do not do the proper underwriting necessary to create valid structures. Many fudge the numbers to get to deductions that are not warranted by the client’s income or type of business.

Many CIC administrators also do not have proper risk-shifting structures which can cause deductions taken by clients to be disallowed. (Learn more about CICs)

Roccy DeFrancesco, JD, is author of

, and founder of The Wealth Preservation Institute. The

has recently been approved for up to 21 AMA PRA Category 1 CME Credits™ in a self-study format. If you would like to purchase the book at a 33% discount as benefit for being a reader of

so you can earn CME credits in the comfort of your home, or if you have any questions about this article, e-mail

.

To read Roccy’s other books visit www.roccy.org.

The Doctor's Wealth Preservation GuideDWPGPhysician’s Money Digestinfo@thewpi.org