Attorney-at-Law

TEN LITTLE EMPLOYERS

In Uncategorized on 09/19/2016 at 23:57

No, not the 1939 Agatha Christie classic best-seller of all time. Rather, this is another of the multi-employer Section 419A(f)(6) scams, popular in the last decade.

And the only one standing as this one unravels is Jay D. Schechter, 2016 T.C. Memo. 174, filed 9/19/16, Judge Morrison completing my trifecta for today.

Jay D.’s “pension guy” suggests Jay D. sign up with an outfit called Nova Benefit Plans, LLC. So Jay D. signs a 21-page agreement that Nova never signs, hands Nova $450K via his Sub S, which takes a big deduction therefor and passes it through to Jay D. Jay D. supposedly is insured against most of the ills that flesh is heir to. He is the only employee of his Sub S.

“It is Schechter’s position that [Sub S’s] $450,000 payment was a contribution by an employer to a welfare-benefit fund that is part of a 10-or-more- employer plan which does not maintain experience-rating arrangements with respect to individual employers. Therefore, Schechter takes the position that under section 419A(f)(6) [Sub S’s] deduction for the payment is not limited by section 419(b). Schechter concedes on brief that if [Sub S’s] deduction were limited by section 419(b), then the fund’s qualified cost for the year would be zero. Therefore, if the deduction is limited by section 419(b) to the fund’s qualified cost, Schechter concedes that [Sub S] would not be entitled to any deduction.” 2016 T. C. Memo. 174, at p. 6. [Name omitted).

So if there are ten (count ‘em, ten) or more employers in the Nova deal, Jay D. gets his $450K write-off. If not, his deduction is toast.

IRS says there aren’t ten employers, and even if there are, this is a Section 404 deferred comp deal and carries a zero deductibility. Anyway, this isn’t a business expense under Section 162.

Judge Morrison doesn’t have to deal with all IRS’s argy-bargy.

Although the written plan looks good, the problem is the recordkeeping. The plan required Nova to maintain records for inspection by IRS and any employer in the deal, showing there were at least ten employers in the deal.

Jay D. says that since Nova was required to do the recordkeeping, that’s sufficient.

Judge Morrison: “The mere fact that a party was required to do something does not mean that the party did it. The question is not whether Nova Benefit Plans, LLC, was obligated to make sure there were 10 employers or more contributing to the plan but whether there actually were 10 employers or more contributing to the plan. The natural source of evidence as to the number of employers in the plan is the records of Nova Benefit Plans, LLC, the plan administrator. Schechter introduced none of these records. He admitted that he knew of no other employers enrolled in the plan. It appears that Schechter’s dealings with Nova Benefit Plans, LLC, were handled by [Pension Guy]. [Pension Guy] did not testify. Schechter did not explain [Pension Guy’s] failure to testify, other than to make the following stipulation: ‘On April 12, 2011, [Pension Guy] was permanently enjoined by order of the United States District Court for the Central District of California from, among other things, “[m]arketing, preparing, selling, organizing or administering any welfare-benefit plan” and from “[p]roviding any advice or assistance regarding the tax treatment of pension plans or welfare-benefit plans.’” 2016 T. C. Memo. 174, at p. 10. (Name omitted).

Judge Morrison is pardonably unimpressed with that one.

“Under these circumstances we cannot find that there were 10 or more employers contributing to the plan merely because the plan document said that Nova Benefits Plans, LLC, was obligated to keep 10 employers in the plan.” 2016 T. C. Memo. 174, at p. 10.

Besides, since the plan limits the amount of death benefit payout to the extent of any disability payout, that’s experience-rating, and that also torpedoes the deduction.

Jay D. has a letter from a lawyer, to whom I’ll refer as JR, that says the plan is not experience-rated, but the letter is contradicted by the literal terms of the plan.

So Judge Morrison goes to town on this blunder, in a footnote, yet.

“Either JR did not read the 21-page document when he wrote the letter, or his letter is a form letter that discusses some other plan or plans. JR’s letter is also potentially significant because it seems to contain information about the number of employers involved in [Sub S’s] plan. The letter states that the plan sponsor, Nova Benefit Plans, LLC, ‘represents that the Plan has over 60 participating as of the date of this letter.’ This alone does not persuade us that there were 60 employers in [Sub S’s] plan. We wonder how many plans Nova Benefits Plans, LLC, administered. Perhaps Nova Benefit Plans, LLC, aggregated the employers in several plans in calculating that the number of employers was 60. We also have questions about the role of JR.Who was his client? Was it Schechter? Was it Nova Benefit Plans, LLC? Why did JR choose to rely on the representations of Nova Benefit Plans, LLC, instead of reviewing its records? These and other questions about the letter were left unanswered at the end of trial. Schechter did not call JR to testify. Nor did he call anyone from Nova Benefit Plans, LLC, to testify. Schechter did not introduce any records kept by either JR or by Nova Benefits Plans, LLC. Under these circumstances we find that JR’s letter lacks credibility, and we accord it little weight. The letter does not alter our view that it is more likely than not that [Sub S] was the only employer in the relevant plan and that the relevant plan maintained experience-rating arrangements.” 2016 T. C. Memo. 174, at p. 13, footnote 3.

IRS didn’t object to the introduction of this letter, for obvious reasons.

Makes me wonder why anyone would introduce a document that (a) is hearsay, and (b) only makes your case look worse. But then again, remember Mory Bahar? No? Then see my blogpost “A Joy Forever? – Not Hardly,” 3/31/14.

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: