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Buy insurance from an insurance guy; buy your tax advice from a tax advisor

January 21, 2010

A Peoria, Illinois business appears to have learned a hard lesson: don't take tax advice from somebody who gets a commission as a result.

Mr. Johnson got some unorthodox advice from an insurance salesman, according to an Illinois federal judge:

Craig Johnson is the owner of Galesburg Electric/Industrial Supply, Inc., a supplier of electrical products. In 1996, Gerald Koenning and Lou Delpierre, the director and owner, respectively, of Employers Benefits, Inc., approached Johnson with the suggestion that he unionize the employees of Galesburg Electric for the purpose of providing life insurance to the employees (including himself) under an arrangement that would yield favorable tax consequences. Koenning and Delpierre apparently told Johnson that establishing a union as a vehicle through which to procure life insurance for the employees -- specifically, by way of a death benefits employee welfare plan -- would ensure that the insurance premium payments would be tax deductible. Specifically, Koenning and Delpierre promoted a death benefits plan that, they claimed, was organized as a tax-exempt voluntary employees' benefit association (VEBA) under 26 U.S.C. § 501(c)(9). Additionally, Koenning and Delpierre either supplied to Johnson or arranged for him to receive marketing materials pertaining to the death benefits plan. These materials were produced by the "Master Contract Group" (a multi-employer association formed for purposes of collective bargaining), and the documents purportedly paralleled Koenning's and Delpierre's representations.

The judge noted one little problem with the plan:

The specific type of arrangement to which Johnson and Galesburg Electric had subscribed was specifically disavowed by the IRS in a notice published in April 2001. See IRS Notice 2003-24 (April 11, 2003). As such, the IRS did not allow the income tax deductions...

Even so, the judge ruled that the taxpayer couldn't sue the insurance guys in federal court under ERISA. There may be state law remedies, but none of this would be necessary if the taxpayer had gone to a competent and disinterested party to check out the sales claims.

The Moral: life insurance premiums are rarely deductible, no matter how you slice them. Honest and capable insurance brokers (the vast majority of them) won't tell you otherwise. If a broker promises you a tax deduction life premiums, talk to a real tax pro before you pay a dime.

Cite: Craig M. Johnson et al. v. Security Mutual Life Insurance Co. of New York et al.; No. 1:08-cv-01267 (link not yet available)

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