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Government Seeks Permanent Injunction Against Sea Nine

On October 9, 2013, United States Attorneys for the Central District of California and the United States Department of Justicefiled a complaint seeking to permanently enjoin Kenneth Elliott, Sea Nine Associates, and others from promoting participation in, or managing, voluntary employee beneficiary association (“VEBA”) plans.  According to the government, the defendants promoted “a scheme in which [the defendants] sell to customers owning small, often closely-held companies, participation in VEBA plans … and claim that customers can, through the contributions their businesses make to VEBA plan administered or operated by the Defendants, fund for their employees (and more often than not themselves) a valuable insurance-oriented welfare benefit while claiming all of the VEBA contributions as a federal income tax deduction.”  The government further alleges that the defendants “have continued to falsely claim that the VEBA plans in fact comply with the tax laws, and manage and promote them to this day despite their documented knowledge of the illegality of the plans.” According to the complaint, Defendant Kenneth Elliott has admitted that there are over 200 participants in Sea Nine VEBA plans. The government claims that it has completed audits of 41 taxpayers and, in those audits, it has assessed nearly $13.875 million in tax deficiencies. In addition to stopping the defendants’ promotion of the plan, the government is asking the federal district court to order the defendants to produce a list of all of their customers, including names, addresses, and social security numbers. Sea Nine VEBA participants who have not yet been subject to an IRS audit should seek the assistance.

if The IRS Contacts You...

Lance Wallach CLU, CHF

Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

Keep your mouth shut-take this advice seriously.If you give the agents any opening, you're dead. They'll start with soft background questions, but before you know it, will have trapped you. And many questions won't be genuine-that is, the agents already know the answers and are asking only to see if you will lie or confess.Questions typically asked by agents include:Have you reported all of your income?Where are your bank accounts and safe deposit boxes?Can you tell us about the cars, boats, planes, and real estate that you own?What is the procedure for reporting sales in your business?Do you keep a lot of cash on hand?Who are your business associates?Have you traveled out of the country recently?Have you or any of your businesses been audited?Faced with a barrage of questions from trained agents who show up unannounced, most people fall apart. They either blurt out a confession or a transparent lie within five minutes. This gives the Justice Department the rope to hang them with.Don't Let that happen to you. 

Abusive Insurance and Retirement Plans

Single-employer section 419 welfare benefit plans are the latest incarnation in insurance deductions the IRS deems abusive.


Some of the listed transactions CPA tax practitioners are most likely to encounter are employee benefit insurance plans that the IRS has deemed abusive. Many of these plans have been sold by promoters in conjunction with life insurance companies.

As long ago as 1984, with the addition of IRC §§ 419 and 419A, Congress and the IRS took aim at unduly accelerated deductions and other perceived abuses. More recently, with guidance and a ruling issued in fall 2007, the Service declared as abusive certain trust arrangements involving cash-value life insurance and providing post-retirement medical and life insurance benefits.

 The new "more likely than not" penalty standard for tax preparers under IRC § 6694 raises the stakes for CPAs whose clients may have maintained or participated in such a plan. Failure to disclose a listed transaction carries particularly severe potential penalties.

Many of the listed transactions that can get your clients into trouble with the IRS are exotic shelters that relatively few practitioners ever encounter. When was the last time you saw someone file a return as a Guamanian trust (Notice 2000-61)? On the other hand, a few listed transactions concern relatively common employee benefit plans the IRS has deemed tax-avoidance schemes or otherwise abusive. Perhaps some of the most likely to crop up, especially in small business returns, are arrangements purporting to allow deductibility of premiums paid for life insurance under a welfare benefit plan.

Some of these abusive employee benefit plans are represented as satisfying section 419 of the Code, which sets limits on purposes and balances of “qualified asset accounts” for such benefits, but purport to offer deductibility of contributions without any corresponding income. Others attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for separate welfare benefit funds under collective-bargaining agreements provided by IRC § 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined-benefit pension plans established pursuant to the former section 412(i) (still so-called, even though the subsection has since been redesignated section 412(e)(3)). See section below, “ Defined-Benefit 412(i) Plans Under Fire.”

Big Trouble Ahead For Many 419 Welfare Benefit Plan 
and 412i Retirement Plan Participants

​By Lance Wallach

Business owners and professionals who have adopted 419 welfare benefit plan
arrangements are in serious trouble. The IRS has attacked these arrangements as "listed transactions." Business owners who engage in a "listed transaction" must report such transactions on IRS Form 8886 
every year that they are participating in the transaction, and you are participating even in years when you do not make any contribution. Internal Revenue Code 6707A imposes severe penalties ($200,000 annually for a business and $100,000 per year for an individual) for failure to file Form 8886 with respect to a listed transaction. Tax Court, according to both
the IRS Appeals Office and its own decisions, does not have jurisdiction to abate or lower any penalties imposed by the IRS. Complaints caused Congress to impose a moratorium on collection of Section 6707A penalties.  On June 1, 2010, the moratorium ended, and the IRS immediately began sending out notices warning of possible imposition of 6707A penalties.
When you get this notice it should be taken very seriously.
Accountants were required to properly prepare and file Form 8918 (if they signed and/or prepare tax returns and got paid). The penalty for accountants for not properly filing the forms is $100,000, or $200,000 if they are incorporated. Businesses that were in some 419 welfare benefit plans or some 412i retirement as well as some 

Captive Insurance and Section 79 Plans, were supposed to properly file under IRC Section 
6707A each year with the IRS. Either the taxpayer or the accountant was responsible, though the ultimate, primary obligation falls on the taxpayer. The IRS has just begun sending the notices referred to above to participants in many of these plans. This is in addition
to any IRS audit you might have had or currently may be having. The large 6707A fine has nothing to do with any 
other IRS audit. The 6707A fine is for not having properly filed under 6707A with your returns. 
You are required to file each year with your tax return.
Not only were you required to file with your Federal return, but many states also require protective filings. Some participants in these types of plans have already received notices from the IRS. You must act immediately if you wish to avoid possible huge IRS penalties and interest that could put you out of business for good.

THE STATUTE OF LIMITATIONS IS NOT RUNNING. This means that the IRS can fine you at any time in the future for anything regarding past or present participation in an abusive 419 welfare benefit plan or an abusive 412i retirement plan. There is still time to
avoid the IRS penalties and interest. You need to take action immediately and find out right
away if the plan you are participating in is abusive by consulting with a professional and
experienced 419/412i plan expert.

Most accountants do not know how to properly prepare the appropriate forms.Accountants or 
other advisors will probably be fined as material advisors. This means that you may be subject to a large fine. Once you get the large fine, the IRS claims it is not subject to an appeal.

You should have filed protectively for every year your entity participated in the plan. Once again, for every year after 2003, the penalty for not properly filing is $200,000 a year for corporations and $100,000 a year for individuals. For example, it is possible an employer in the plan since 2004 could be subject to over one million dollars in penalties solely as a result of the failure to 
file. For all years in the plan, the Statute of Limitations will not begin to run until after the form is properly filed. In addition, certain individual plan participants should also file for every year of plan participation. Once again, none of this has anything to do with any other audit that you may currently be involved in or may previously have experienced.

It is abundantly clear that taxpayers who receive notices from the IRS regarding Section 6707A penalties should take these letters extremely seriously. These notices do not lend themselves to "do-it-yourself eye surgery".

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