The IRS Shines A Spotlight on Syndicated Conservation Easements
The IRS has ramped up its enforcement efforts on syndicated conservation easements. On September 10, 2018, the IRS announced five new Large Business and International Division (“LB&I”) compliance campaigns, including a campaign focused on syndicated conservation easement transactions. This intensified scrutiny comes roughly 18 months after the IRS identified syndicated conservation easement transactions as listed transactions that require disclosure statements to the IRS by both investors and material advisors. This new effort will enhance IRS enforcement of those disclosure requirements as well as the structure and easement valuation requirements of the transactions themselves.
Syndicated conservation easements have attracted increased IRS attention in recent years, prompting enhanced enforcement action. The IRS is concerned that allocations of contributions to investors may be based on investors’ abilities to reduce their tax liabilities rather than in accordance with their ownership interests. Inflated property appraisals that rely on development potential to show large increases in property values in short time frames in order to increase contribution amounts are another concern of the agency; because of the inclusion of lost development value in the valuation of the easement, the corresponding tax deduction is generally much higher than the initial investment to purchase the property. According to the IRS, in 2017 the average deduction return for each dollar invested in these transactions was $4.74.
In December of 2016 IRS Notice 2017-10 identified syndicated conservation easements as tax avoidance, or “listed,” transactions. This designation did not change the actual law governing syndicated conservation easements, but taxpayers participating in such transactions in any year since 2010 where the value of the deduction is at least 2.5 times the investment are now required to meet certain disclosure requirements. Investors face significant penalties for failure to disclose. Failure to disclose participation in a listed transaction will result in a penalty of 75% of the tax savings obtained through such transactions, with a minimum penalty of $5,000 for natural persons ($10,000 for other taxpayers). In addition, investors who fail to disclose the transactions will face heightened penalties for understating their tax liability.
Transaction material advisors also have disclosure obligations. A “Material Advisor” is defined as any person or entity that provides any material aid, assistance, or advice with respect to the listed transaction and directly or indirectly receives or expects to receive gross income in excess of $10,000 for a transaction that provides substantially all of the tax benefits to individuals or $25,000 for all other transactions. A material advisor that fails to properly disclose a listed transaction is subject to a penalty of the greater of (i) $200,000 or (ii) 50% of the advisor’s gross income attributable to aid, assistance, or advice provided with respect to the transaction before the date the information return that includes the transaction is filed (75% in the case of intentional disregard).
While conservation easements are already often subject to audit, the new compliance campaign can be expected to result in an increased rate of audits focused on disclosure requirements along with overvaluation of easements and potential violations of the economic substance doctrine, partnership anti-abuse rules, and other rules and doctrines. Along with increased examinations, the IRS has also identified other potential compliance treatments including soft notices/letters, voluntary self-correction, practitioner outreach, and, potentially, published guidance.
Get the Help You Need Today Contact Lance Wallach!Oct. 15 (Bloomberg )
— AT&T Inc., the biggest U.S. phone
company, and No. 2 Verizon Communications Inc. may follow
General Motors Corp. in trying to shift retiree health-care liabilities
to a union-run fund, a move that has helped boost GM’s shares 39
percent this year. The largest U.S. automaker reached a landmark agreement with
the United Auto Workers last month to transfer $50 billion in
such obligations to a Voluntary Employee Beneficiary Association,
or VEBA. The telecommunications companies, which will both
negotiate new contracts with their unions in the next two years,
reported a combined $71 billion in retiree liabilities last year.
“We’ll be watching” how the GM union-run fund develops,
said Alberto Canal, a spokesman for New York-based Verizon. He
declined to give additional details. Verizon spends $3.5 billion
a year for health-care coverage for 900,000 active workers,
retirees and dependents, he said. Verizon and AT&T both have a union that may set a precedent
for so-called VEBAs in separate talks with GM that started last
week. The Communications Workers of America’s industrial unit is
considering a union-run fund for a GM plant it represents in Ohio.
Michael Coe, a spokesman for San Antonio-based AT&T, declined
to comment. “Telecommunications are the next big group that will be
looking at VEBAs,” said Howard Silverblatt, an analyst at
Standard & Poor’s in New York. The ratings service estimates
companies in the S&P 500 had $387 billion in retiree health-care
and insurance commitments at the end of last year.
Setting the Stage
The GM agreement sets the stage for companies such as AT&T,
Verizon and aircraft maker Boeing Co. to also restructure
billions of dollars in retiree benefits, clearing out balance
sheets and capping health-care costs that rose by an average of
8.4 percent last year in the U.S. Like GM, AT&T and Verizon might also get a share-price boost
from union-run funds, said George Foley, who oversees $1.1
billion in assets at Glenmede Trust Co. in Philadelphia. While
the gains may be smaller, “the opportunity to move long-term
legacy liabilities off the balance sheet is dramatic,” he said.
AT&T shares have risen 18 percent, and Verizon has gained 22
percent so far this year. Several companies are already looking into union-run funds,
according to Andy Kramer, a partner and labor lawyer for Jones
Day in Washington, who has helped GM, Goodyear Tire & Rubber
Co. and auto-parts maker Dana Corp. establish such funds in the last
two years. He said he has received calls from telecommunications
companies, auto-parts makers, and rubber and aluminum producers.
He declined to name them.
2005, when GM set up a $3 billion fund that it controlled with
the United Auto Workers as part of a plan to require union
retirees to pay health-care premiums for the first time, said
Lance Wallach, who runs VEBA Plan LLC , a consulting
company in Plainview, New York .
About a third of Wallach’s business is talking to private-
equity investors and venture capitalists about the risks of
retiree health-care liabilities and the potential for unlocking
their value from companies’ balance sheets, he said. “These are
venture-capital guys looking for an edge.”
New accounting rules this year force companies to add
retiree health-care costs as a liability on their balance sheets,
a shift that turned GM and Ford Motor Co. shareholder value
negative, Kramer said. Offloading the funds to the union will
reverse the shortfalls.
Exelon Corp., the largest U.S. utility owner by market value,
is considering a retiree health-care trust fund, said Jennifer
Medley, a spokeswoman for the Chicago-based company.
Exelon had $3.3 billion in retiree health-care liabilities
at the end of last year, according to S&P.
The company’s workers are represented by the International
Brotherhood of Electrical Workers. Jim Spellane, a spokesman for
the union, said in an e-mailed statement that “a number of
utilities have VEBAs to cover retiree health-care costs.” He
declined to comment on Exelon.
Prospects that AT&T and Verizon might follow GM and Exelon
could get a boost from the negotiations between GM and the
International Union of Electronic Workers-Communication Workers
The industrial bargaining unit of the CWA is seeking a new
agreement for 2,300 active workers and 21,000 retirees and
surviving spouses at GM’s Moraine, Ohio, sport-utility vehicle
plant that may include a union-run fund, local President Jim
Clark, 52, said in an interview. The current agreement expires
The union will consider a fund for the plant if GM provides
sufficient funding, he said. That may set a precedent for
telecommunications companies, too. “Anything we do in the labor
area has an impact on all unions, not just the CWA,” he said.
The Washington-based telecommunications union also
represents workers at AT&T, Verizon and Qwest Communication
International Inc. in Denver, the second-, fourth- and 13th-
largest companies ranked by retiree obligations in the S&P 500.
The union will negotiate with Verizon and Qwest next year and
AT&T in 2009.
“We’ve watched developments regarding the VEBA,” said
Qwest spokesman Robert Toevs.
The telecommunications industry is similar to the automotive
business in that it has large union retiree-health obligations
plus “readily available assets that you could contribute without
killing your cash flow,” S&P’s Silverblatt said.
Verizon, AT&T and Qwest had combined profits of $14.1
billion last year, compared with losses of $15 billion at the
three U.S.-based automakers.
Credit-default swaps tied to Verizon bonds, used to
speculate on the company’s ability to repay its debt, have fallen
3 basis points to about 18 basis points this year, according to
CMA Datavision in London. A decline in the five-year contracts
suggests improvement in the perception of credit quality; an
increase suggests the opposite.
Contracts tied to AT&T have risen 5 basis points to about 23
basis points, CMA prices show.
For unions, the funds are a chance to lock in benefits
before they are cut or eliminated.
Even a union at a healthy company is more likely to consider
a VEBA now that GM has one, said Harry Katz, dean of the School
of Industrial and Labor Relations at Cornell University in Ithaca,
“Unions don’t have the bargaining power they once had, and
this is one way to defend existing benefits and avoid less
agreeable concessions,” he said. “The relative power of labor
is lowered in both healthy and unhealthy industries.”
Employers may be more willing to come up with the funds to
create a retiree trust than they are willing to guarantee
benefits far into the future, said Katz, who has studied
The new UAW fund for GM takes effect in January 2010. It
will cover 412,356 active workers, retired members and surviving
spouses and is designed to pay benefits for at least another 80
years, union President Ron Gettelfinger said. GM will contribute
$24.1 billion in cash and a $4.3725 billion bond convertible to
GM shares and pledge as much as $1.6 billion over 20 years to
help prevent a shortfall.
“One of the real benefits to the retiree in this whole deal
is that sum of money is forever allocated; it can’t be taken
away,” said Kramer, who has represented companies for Jones Day
The UAW has already run a retiree health-care fund at
truckmaker Navistar International Corp. since 1994. Gettelfinger
last week won an agreement with Chrysler LLC similar to the GM
deal and is seeking one with Ford.
Unions also stand to gain greater influence over public and
corporate policy as they invest in health-care funds, said Ron
Blackwell, chief economist for the AFL-CIO, a federation of U.S.
unions representing 10 million workers.
“They are going to be activist investors,” Blackwell said.
The International Association of Machinists & Aerospace
Workers at Lockheed Martin Corp. might consider a VEBA if one
were proposed, said union spokesman Frank Larkin. The Society of
Professional Engineering Employees in Aerospace at Boeing hasn’t
ruled out a VEBA, union spokesman Bill Dugovitch said.
Boeing spokesman Todd Blecher and Scott Lusk, a spokesman
for Bethesda, Maryland-based Lockheed, both declined to comment
on potential future bargaining issues.
The unions also take a risk by assuming responsibility for
health care, said Susan Helper, an economics professor who
focuses on labor issues at Case Western Reserve University in
The UAW has negotiated at least one union-controlled fund
that failed. Six years after Caterpillar Inc., the world’s
biggest maker of earth-moving equipment, handed over control of a
$32.3 million trust to the union as part of a 1998 agreement, the
fund ran out of money. Retirees who lost health-care benefits
sued the company, receiving class-action status for the case in a
federal court in Nashville in July.
The UAW applied lessons from the Caterpillar experience in
making the GM deal, said Sean McAlinden, an analyst at the Center
for Automotive Research in Ann Arbor, Michigan.
“The-life-and-death cycle of companies is getting more
finite,” McAlinden said. “We cannot in this economy make long-
term promises, and so these independent trusts will have to stand
in their place.” –With reporting by Crayton Harrison in Dallas; James
Gunsalus in Seattle; Rachel Layne, Christopher Condon and
Edmond Lococo in Boston; Mike Ramsey, Jeff Bennett and
Bill Koenig in Southfield, Michigan; Shannon Harrington,
Linda Shen, Jim Polson, Heather Burke, Courtney Dentch and Jack
Kaskey in New York; and Dale Crofts and Joe Carroll in Chicago.
Editor: Langeland (sjp/dsv/tla)
Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans
By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable
Transaction Expert Witness IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans
Under Section 6707A – By Lance Wallach – Taxpayers who previously adopted 419,
412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS
has identified many of these arrangements as abusive devices to funnel tax deductible
dollars to shareholders and classified these arrangements as listed transactions.” These plans were sold by insurance agents, financial planners, accountants and
attorneys seeking large life insurance commissions. In general, taxpayers who engage
in a “listed transaction” must report such transaction to the IRS on Form 8886 every
year that they “participate” in the transaction, and you do not necessarily have to make a
contribution or claim a tax deduction to participate. Section 6707A of the Code imposes
severe penalties for failure to file Form 8886 with respect to a listed transaction. But you
are also in trouble if you file incorrectly. I have received numerous phone calls from
business owners who filed and still got fined. Not only do you have to file Form 8886,
but it also has to be prepared correctly. I only know of two people in the U.S. who have
filed these forms properly for clients. They tell me that was after hundreds of hours of
research and over 50 phones calls to various IRS personnel. The filing instructions for
Form 8886 presume a timely filling. Most people file late and follow the directions for
currently preparing the forms. Then the IRS fines the business owner. The tax court
does not have jurisdiction to abate or lower such penalties imposed by the IRS. “Many taxpayers who are no longer taking current tax deductions for these plans
continue to enjoy the benefit of previous tax deductions by continuing the deferral of
income from contributions and deductions taken in prior years.” Many business owners adopted 412i, 419, captive insurance and Section 79 plans
based upon representations provided by insurance professionals that the plans were
legitimate plans and were not informed that they were engaging in a listed transaction.
Upon audit, these taxpayers were shocked when the IRS asserted penalties under
Section 6707A of the Code in the hundreds of thousands of dollars. Numerous
complaints from these taxpayers caused Congress to impose a moratorium on
assessment of Section 6707A penalties. The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started
sending out notices proposing the imposition of Section 6707A penalties along with
requests for lengthy extensions of the Statute of Limitations for the purpose of
assessing tax. Many of these taxpayers stopped taking deductions for contributions to
these plans years ago, and are confused and upset by the IRS’s inquiry, especially
when the taxpayer had previously reached a monetary settlement with the IRS regarding
its deductions. Logic and common sense dictate that a penalty should not apply if the
taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i)
provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax
return reflects tax consequences or a tax strategy described in the published guidance
identifying the transaction as a listed transaction or a transaction that is the same or
substantially similar to a listed transaction. Clearly, the primary benefit in the participation of these plans is the large tax deduction
generated by such participation. Many taxpayers who are no longer taking current tax
deductions for these plans continue to enjoy the benefit of previous tax deductions by
continuing the deferral of income from contributions and deductions taken in prior
years. While the regulations do not expand on what constitutes “reflecting the tax
consequences of the strategy,” it could be argued that continued benefit from a tax
deferral for a previous tax deduction is within the contemplation of a “tax consequence”
of the plan strategy. Also, many taxpayers who no longer make contributions or claim
tax deductions continue to pay administrative fees. Sometimes, money is taken from
the plan to pay premiums to keep life insurance policies in force. In these ways, it could
be argued that these taxpayers are still “contributing,” and thus still must file Form 8886. It is clear that the extent to which a taxpayer benefits from the transaction depends on
the purpose of a particular transaction as described in the published guidance that
caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which
classifies 419(e) transactions, appears to be concerned with the employer’s
contribution/deduction amount rather than the continued deferral of the income in
previous years. Another important issue is that the IRS has called CPAs material
advisors if they signed tax returns containing the plan, and got paid a certain amount of
money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the
CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918. Lance Wallach, National Society of Accountants Speaker of the Year and member of the
AICPA faculty of teaching professionals, is a frequent speaker on retirement plans,
abusive tax shelters, financial, international tax, and estate planning. He writes about
412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten
conventions annually, writes for more than 50 publications, is quoted regularly in the
press and has been featured on television and radio financial talk shows including
NBC, National Public Radio’s “All Things Considered” and others. Lance has written
numerous books including “Protecting Clients from Fraud, Incompetence and Scams,”
published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance
and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books,
including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots.” He does expert witness testimony and has never lost a case.
Contact him at 516.938.5007, firstname.lastname@example.org or visit www.taxadvisorexpert.
The information provided herein is not intended as legal, accounting, financial or any
type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice. While every effort has been made to ensure the accuracy of this publication, it is not
intended to provide legal advice as individual situations will differ and should be
discussed with an expert and/or lawyer. For specific technical or legal advice on the
information provided and related topics, please contact the author.
Wednesday, June 18
Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly
By Lance Wallach
NSA: Member Link; May 14, 2008.
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings.
The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion.
For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme. Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company.
Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains. While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies.
Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above. Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.