One of the more aggressively promoted types of shelters pushed onto small businesses related to purported 10 or more employer welfare benefit plans established pursuant to IRC §419A(f)(6).  In the case of Schechter v. Commissioner, TC Memo 2016-174 the Tax Court found that, regardless of the possible propriety of the plan, the taxpayer simply failed to produce evidence necessary to show compliance with the requirements that provision.

The issue involved a $450,000 payment made by the S corporation in which Mr. Schechter held a 100% interest for the year in question.  The $450,000 was paid to the company’s “Sickness, Accident & Disability Indemnity Trust 2007” of which $427,500 was used to purchase a single premium life insurance policy on Mr. Schechter’s life.

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Taxpayers who participate in a listed transaction or one similar to a described listed transaction and fail to disclose such participation face a penalty under IRC §6707A regardless of whether or not the transaction ends up resulting in a true understatement of tax.  And “similar” is interpreted broadly, as the taxpayer in the case of Vee’s Marketing, Inc. v. United States, CA7, Case No. 15-2441 discovered.

The penalty under §6707A for failure to disclose such a transaction is 75% of the claimed reduction in tax shown on the return (regardless of whether or not that deduction is ultimately found justified or not).  A minimum penalty of $5,000 for a natural person or $10,000 for any other taxpayer is triggered regardless of the level of savings, with the penalty similarly capped at $100,000 for a natural person and $200,000 for other taxpayers regardless of the claimed level of tax reduction.  The minimums and maximums are set at a lower figure for transactions that are “reportable transactions” rather than listed transactions (reportable transactions are defined by statute, not by direct IRS identification).