In Uncategorized on 09/21/2016 at 01:47

Ernie Ryder, Esq., is in IRS’ sights as a dodge-flogger, selling variations on employer-sponsored insurance deals, which IRS claims are non-deductible deferred compensation, taxable to the employee.

I’ve blogged the ongoing saga elsewhere.

In this episode, IRS confronts the redoubtable Marnie W. Barnhorst, Esq., widow of the late Howard, in Estate of Howard J. Barnhorst, II, Deceased, Marnie W. Barnhorst, Successor in Interest and Marnie W. Barnhorst, 2016 T. C. Memo. 177, filed 9/20/16.

Ernie sold the late Howard’s law firm an insurance policy from Ernie’s client, a Turks and Caicos based insurance company never licensed in the US of A. The policy is a supposed health-and-accident, alleged to be compliant with Section 105.

Marnie strives mightily to prove that it is, but Ernie’s deft draftsmanship thwarts her,

The problems are that the policy’s payout has nothing to do with actual medicals, and that a 97% payout is guaranteed, no matter what happens. The remaining 3% just happens to be Ernie’s fee.

And here’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indomitable, Illustrious and Incontrovertible Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, to undo Ernie’s handiwork.

The late Howard had cancer, and suffered much, so no doubt he met the triggering event for payment under the policy. But the guaranteed payout is where the deal unravels.

“He would, for example, be entitled to the same amount if he lost hearing in one ear or the use of both his kidneys. Medical expenses for these two conditions would quite likely be different, but payout under the policy would be the same.

“That’s a crucial distinction. The cases tell us to ask whether a plan pays for actual medical expenses, not whether its payee suffers from some triggering condition.” 2016 T. C. Memo. 177, at p. 12.

And Judge Holmes pounds the essential point. “Most important, Howard (or his beneficiaries in the event of death) was guaranteed to get the 98% cash value no matter what happened.” 2016 T. C. Memo. 177, at p. 16. (Emphasis by the Court).

Even if he was never ill, Howard could convert the policy to a life insurance policy with the same 98% cash value. And the payout wasn’t determined by the nature of the injury.

So although the late Howard’s cancer and surgery would qualify his payout to be excluded from taxable income, permanency of injury is not the deciding factor; the amount of the payout must vary with the injury. If he got paid no matter what happened, it’s deferred compensation.

IRS drops the Section 6662(i) economic substance chop, but Marnie gets hit with substantial understatement.

Ernie’s handiwork is an example of really clever dodging. Don’t do it.

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