Since its creation in December 1997, the Benistar 419 Plan, has brought much scrutiny to the tax interpretation of 419 plans. Created by Daniel Carpenter, the purpose of the Benistar 419 Plan was to provide life insurance to employees through a company’s contributions to a multiple-employer welfare benefit plan. The Plan initially set itself apart by touting its fully deductible tax features. The IRS, however, has since determined that contributions to Benistar 419 plans do not fit the parameters of §419A(f)(6), as they ultimately maintain separate accounts for each employer enrolled in the plan, and therefore are not tax deductible. As a result, companies were forced to pay tens of thousands of dollars in back taxes, despite tax deduction promises, and the legal world has seen a surge in cases regarding the matter.
In one such case, Mark Curcio and Barbara Curcio, et al. v Commissioner of Internal Revenue, No. 1768-07, 2010 WL 2134321 (U.S. Tax Ct. May 27, 2010), the court set out to determine “whether payments to the Benistar 419 Plan & Trust for employee benefits are ordinary and necessary business expenses under section 162(a).” The court concluded that said contributions did not fulfill the definition of “ordinary and necessary” business expenses. This decision stemmed from the set up of the Plan. “[P]etitioners had the right to receive the value reflected in the underlying insurance policies purchased by Benistar Plan. Peitioners used Benistar Plan to funnel pretax business profits into cash-laden life insurance policies over which they retained control.” The Plan has since been continuously been referred to as an abusive tax shelter, causing plaintiffs in many 419 related cases to question whether Benistar knowingly made misrepresentations to clients.
In Stephen Ouwinga et al. v John Hancock Variable Life Insurance, No. 1:09-cv-60 2010 WL 4386931 (W.D. Mich. Oct. 29, 2010), the plaintiff claimed the Benistar 419 Plan violated RICO, the Racketeer Influenced and Corrupt Organizations Act, which the court subsequently shot down. In Arrow Drilling Co., Inc., et al. v Daniel Carpenter, et al., No. Civ.A. 2:02-CV-09097, 2003 WL 23100808 (E.D. Pa. Sept. 23, 2003), Plaintiffs alleged the Benistar 419 Plan violated ERISA, the Employee Retirement Income Securities Act. Here the court determined that “Plaintiffs are not employer-sponsors, but rather, employers who, acting on behalf of its employees, brought this suit pursuant to ERISA §503.” Since employers cannot sue under ERISA, the court dismissed all ERISA related claims made by Plaintiffs.
As the aforementioned cases have shown, it has been difficult to find an effective legal avenue when fighting Daniel Carpenter and the Benistar 419 Plan tax deficiencies. In Wally Jones v. Daniel Carpenter, Beinistar 419 Plan Services, Inc., and Benistar Admin Services, Inc., Civ. No. 11-2250, 2012 WL 3430719 (D. Minn. Aug. 15, 2012) Carpenter is described as “an attorney who specializes in tax and employee benefits.” It affirms Carpenter wrote a book guiding professionals through the Benistar 419 Plan and mentions a 1998 letter from Edwards & Angell, LLP. In this letter, the law firm opined Carpenter’s Benistar 419 Plan would host fully tax deductible features, pointing out several differences between Benistar and similar plans which lacked said features.
Additionally, this case mentions that “in 99 percent of the cases the client’s closest advisor, his accountant or CPA would have been reviewing the [Edwards & Angell] opinion letter.” It goes on to state Jones’ life insurance agent as well as his accountant/tax advisor reviewed all information provided by Carpenter before advising him to enroll in the Plan and that “neither investigated beyond the materials furnished by Defendants.” If Jones was “acting on advice from [his accountant]” as the case states, perhaps his accusations against Carpenter are misguided. After all, even in the legal world we openly acknowledge the choice of an attorney is an important one and should not be based solely on advertisements; investigative work and one’s own discretion is required.
So we’re left with the question, who is to blame in regards to the Benistar 419 Plan? Who should be held responsible for the thousands of dollars in back taxes many companies were forced to pay when the IRS declared the Plan to be non-tax deductible? A challenging case from either side.