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Tax Court Drops The Hammer On Employee Welfare PlanContributorPeter J ReillyFor the last two decades Lance Wallach has been a voice crying out in the wilderness on the perils of 419(e) employee welfare plans. Lance is not an attorney, CPA or actuary. A graduate of Baruch College he trained as a financial planner with Mutual Benefit Life and then moved on to New England Life where he was a top producer selling life insurance as part of sophisticated plans. Now he speaks and serves as an expert witness helping to repair the damage done by insurance companies who promoted abusive tax plans.The Plan That Should Have Stood Up?Somehow or other Lance and I became facebook buds and when I saw the decision inOur Country Home Enterpise Inc, I immediately contacted him. I thought he would view the decision as vindication of his view on these plans. I was surprised when he told me that he thought the decision was wrong. His assessment of the situation was that Ron Snyder, whose Sterling Plan was about the only 419 plan which should have worked, was too frugal when it came to hiring lawyers to defend the plan. This might be understandable, because being much less aggressive, the plan was not as lucrative for the sponsor and Ron, according to this letter was having trouble getting people to chip in for the defense.Lance told me that he had met with the IRS in 2002 and explained the abuse to them and pointed out the most abusive promoters. Ron Snyder had come along and had tweaked his plan based on informal IRS feedback making him optimistic that he would be successful in Tax Court.What Can Be Abusive About These Plans?In the extreme version a closely held corporation makes contributions to the plan. Rank and file employees do not get any benefits. The contributions are deducted by the corporation. The contributions go to fund whole dollar life insurance whose beneficiaries are designated by the principals. The principals are able to access the cash surrender value of the insurance contracts. The beneficiaries do not recognize any income.What really drove these plans was that they allowed insurance companies to sell much larger policies than people, not motivated by tax savings, would have been willing to buy. Lance indicated that all the major life insurance companies, with the notable exception ofNorthwestern Mutual promoted the plans. The companies tried to avoid responsibility when the IRS cracked down on them.The Country Home DecisionWhatever the merits of the Sterling Plan might have been relative to other 419 plans, the Tax Court came down hard on it. In Our Country Home Enterprise Inc several taxpayers