In a recent U.S. Tax Court case, some taxpayers suffered a double loss. The taxpayers, consisting of four couples, had purchased welfare benefit plans marketed by Benistar 419 Plan Services. Under the plan, Benistar provided pre-retirement life insurance to select employees of companies enrolled in the plan.
Small employers like the plans because they allow pretax contributions to be shielded from taxation. The plan was marketed through seminars geared towards insurance agents. Benistar did not sell directly to the participants. Ultimately, the court decided that contributions to the plan were not tax deductible.
The loss of the deduction is not the only loss suffered by the taxpayers in this case. In addition to losing the tax deduction on the plan contributions, and the resulting hefty tax bill, the taxpayers were also assessed with penalties. The taxpayers argued that they acted in good faith and with reasonable cause stating they had relied on professional advice. While the taxpayers claimed they relied on their accountants, the court found that there was no evidence the accountants had any particular expertise in welfare benefit plans or that the taxpayers thought their accountants possessed such expertise.