Tax Court Drops The Hammer On Employee Welfare Plan
Whatever 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 involved in the Sterling Plan ended up with business entities being denied deductions, individual beneficiaries being required to recognize income and an enhanced 30% accuracy penalty for failing to adequately disclose a listed transaction. Total tax and penalty was over $3 million. The decisions on the small number of taxpayers will be applied to over 40 others. The decision covered plans that were run by C corporations and S corporations with and without life insurance involved.
Charity Begins At Home But Should Not End There
I’d like to draw a lesson from this story, but I’m not sure what it is. You can’t set up a not-for-profit to just benefit your own family is one rather obvious one. The really intriguing part to me is the “damages due to poor drafting”. I have to wonder whether somebody forgot about the generation skipping tax or maybe didn’t realize that the nephew and nieces were actually grand nephews and grand nieces. Maybe when the Schaller decision comes out all will be made clear.
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Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.