Charles Blair, DDS
John McGill, MBA, CPA, JD
I have operated a profit-sharing plan for my corporation for more than 20 years. I recently discovered that not all of the plan amendments required by various tax laws have been implemented. I am afraid that the IRS will disqualify the entire plan and make me pay taxes on all of the income. What should I do?
Run, do not walk, to a law, accounting, or employee-benefit firm which specializes in the retirement-plan area. Fortunately, the IRS has issued Revenue Procedure 98-22, providing a uniform set of rules for correcting defects in the organization and operation of your retirement plan on a voluntary basis. Providing that you come forward before the IRS discovers the problem, you should be able to correct this by taking immediate action under the Employee Plan Compliance Resolution System outlined in the Revenue Procedure, and possibly paying a correction fee to the IRS.
I was recently approached by a life insurance agent who proposed a charitable split-dollar life insurance arrangement that simply sounded too good to be true. Under the arrangement, I would write a check to my favorite charity, with the understanding that the charity would use the funds to pay premiums on a cash value life insurance policy that benefitted both the charity and my family. Under this arrangement, most of the cash surrender value and death benefit would accrue to me and my family and, accordingly, I would be able to pay for life insurance with tax-deductible dollars. Doesn't this sound like a great idea?
No. The IRS is aware of this scheme and will not allow deductions for such "premium payments" disguised as charitable contributions. In IRS Notice 99-36, the IRS advised taxpayers (as well as all charities) that these types of charitable split-dollar life insurance transactions that purport to produce charitable contribution deductions for taxpayers will not produce the tax benefits advertised by the promoters and may lead to substantial penalties. Run away from this proposed transaction!
I was recently approached by a life insurance agent who recommended that I purchase a whole life insurance policy through my professional corporation and have the corporation borrow a substantial amount of money to fund the initial premium payment. The insurance agent claimed that the interest on the funds borrowed would be tax-deductible, while the money grows tax-free. Is this a good idea?
Run, do not walk, away from this deal! In a recent case - Winn-Dixie Stores, Inc. vs. Commissioner, 113 T.C. 254 (1999) - the Tax Court ruled that this type of program was entered into solely for tax purposes, lacked economic substance and a business purpose, and, accordingly, was a sham transaction for which all deductions were disallowed. Moreover, recent tax law changes have specifically outlawed this type of tax planning so that, in the event you entered into this arrangement and it was audited, you would be liable not only for additional taxes, but for substantial penalties and interest as well.
I am sending my children to a religious private school and have heard that a portion of my tuition payments may be deductible. Is this correct?
No. The IRS recently ruled that tuition payments to Jewish Day Schools are not deductible as charitable contributions, even though a portion of the children's education consisted of religious instruction. Since your children received a substantial benefit in return for the payments made to the religious private school, no deduction is allowed.
The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($177 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.
