In a recent case brought by the U.S. Department of Justice, two tax attorneys and a life insurance agent have been convicted by a jury for their involvement in a tax fraud scheme known as the Gain Elimination Plan. The defendants, Michael Elliot Kohn, Catherine Elizabeth Chollet, and David Shane Simmons, worked together to create a fraudulent scheme that involved setting up limited partnerships for clients, directing them to donate the majority of their partnership to a charity, and then generating fictitious royalty or management fees to create tax deductions for the clients while attributing the tax liability to the charity. Simmons sold life insurance policies to the limited partnerships, with the death benefit going to the charity to shelter taxes for the clients.
The scheme was uncovered when the IRS set up a sting operation involving undercover agents meeting with Kohn, Chollet, and Simmons. The agents were pitched the plan and were presented with fraudulent tax returns claiming deductions for fees that were fabricated. The evidence gathered from the investigation included emails between Kohn and Simmons, demonstrating the creation of bogus management fees and royalty agreements for clients. Simmons earned over $2.3 million in commissions from selling the insurance policies, sharing the commissions with Kohn and Chollet. The indictment included 23 counts related to the conspiracy to defraud the United States, false tax returns, and wire fraud.
The case highlighted the conflict of interest that arises when life insurance is used in tax transactions, as the commissions earned by agents are significantly higher than typical legal fees. The commission split between the tax planner and the insurance agent can lead to unethical practices, as was the case with Kohn, Chollet, and Simmons. The indictment revealed that commissions received by Simmons were disguised as fees for professional services, and false information was submitted to the insurance company to issue the policies without disclosing the true nature of the transactions.
Clients should be cautious when presented with tax strategies that involve life insurance and seek a second opinion from an independent advisor. The high commissions earned by agents for selling certain types of life insurance policies can create a conflict of interest that may not align with the best interests of the client. Asking the agent to disclose the commissions received from the sale of the product can help clients make informed decisions and avoid being misled into purchasing policies that may not be suitable for their financial needs.
The Gain Elimination Plan highlighted in this case was deemed to lack economic substance and was ultimately disallowed by the IRS, resulting in substantial penalties for the participants. In cases involving tax fraud schemes, greed and a desire to save taxes can blind individuals to warning signs and red flags. Seeking a second opinion, conducting due diligence, and being wary of deals that sound too good to be true can help individuals avoid falling victim to fraudulent schemes and facing legal consequences. This case serves as a cautionary tale for individuals seeking to minimize their tax liabilities and highlights the importance of ethical practices in tax planning and financial transactions.
