Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Archive for September, 2011

Tax Court Confirms that Surrender Charges Reduce Value of Life Insurance Policy

Posted by William Byrnes on September 30, 2011


The Tax Court recently determined that the fair market value (FMV) of a life insurance policy distributed by a terminated 419 welfare benefit plan is reduced by surrender charges. [Lowe v. C.I.R., T.C. Memo. 2011-106 (2011)].

This ruling strengthens the Tax Court’s position on surrender charges that was enunciated in Schwab v. Commissioner [Michael P. Schwab et ux. v. C.I.R., 136 T.C. No. 6 (2011)]. The IRS continues to challenge taxpayers who apply surrender charges to reduce or eliminate their tax liability when a policy is distributed to them by a welfare benefit plan. However, this ruling adds another degree of certainty to the FMV calculation.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Tax Court rulings in Advisor’s Journal, see Tax Court Revives Partnership Self-Employment Tax Debate (CC 11-56).

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FINRA Puts Disciplinary Histories on Web

Posted by William Byrnes on September 29, 2011


Disciplinary histories are becoming easier to access. Brokers’ disciplinary histories are now prominently displayed for the web savvy public; they’re no longer filed away at the Financial Industry Regulatory Authority (FINRA), where only the most diligent investors will find them. FINRA has made your disciplinary history freely and easily available to the public by launching a web-accessible discipline database.

Whether the easy accessibility of the information is a  beneficial will depend on a broker’s history. Those with a clean record will undoubtedly benefit from the easy accessibility of the information and the ease with which clients and prospects can search their record and compare it to others. Those with a negative history, whether deserved or not, may now find themselves on the defensive with prospects more often.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA complaint and disciplinary procedure in Advisor’s Journal, see FINRA Rule 45-30: Expansive New Complaint Report Requirements (CC 11-96) & Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08).

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Pensions Turn to Death Bonds

Posted by William Byrnes on September 28, 2011


It’s a given that most of us want to extend our lives as long as possible. But our ever-increasing life spans can financially strain pension funds and others that are contingent upon us dying to keep their books balanced.

Pension funds face severe longevity risk. If pensioners live longer than expected, payouts from the funds could eclipse the estimated cost of keeping the funds stable. Worldwide, $17 trillion of pension funds – $23 trillion in assets – is exposed to longevity risk.

But the big banks—including Goldman Sachs, JPMorgan Chase, and Deustsche Bank—are coming to the rescue by packaging that longevity risk and selling it to investors; and they’re counting on investors being interested in gambling on death.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance contracts in Advisor’s Journal, see IRS Guidance Provides Safe Harbor for Policies Maturing After Age 100 (CC 10-51).

For in-depth analysis of pension plans and other qualified employee plans, see Advisor’s Main Library: O – ERISA – FAQs.

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SEC Softening its Stance on Private Placements

Posted by William Byrnes on September 26, 2011


The Obama Administration’s 2012 federal budget proposal has revived two budget proposals that recent scandals have directed a slew of regulatory attention on private placement. Considering examinations of private placements recently being characterized by a FINRA executive as a “major, major initiative, it would seem strange for the Securities and Exchange Commission (“SEC”) to consider relaxing rules for marketing private placements.

Nevertheless, that’s exactly what SEC Chairman Mary Schapiro told members of Congress the agency is planning.

Speaking before the U.S. House of Representatives Committee on Oversight and Government Reform, Shapiro said that the SEC is going to “take a fresh look” at rules relating to private placements and other securities offerings, both public and private. Specifically, she said that the agency will reconsider the private placement public marketing ban and the 500-investor threshold that categorizes a company as “public.”

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of private placements in Advisor’s Journal, see Private Placements Becoming Much Riskier for Firms (CC 11-78) and Private Placements Becoming Much Riskier for Firms (CC 11-78).

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Dodd-Frank Whistleblowing—Rewarding the Robbers?

Posted by William Byrnes on September 13, 2011


Dodd-Frank’s whistleblower provisions may be more effective than originally anticipated, but will they lead to increased corporate compliance?

The whistle blower rules have received cristicism from some who believe the procedures will hinder compliance procedures rather than improve them. The liberal Whistleblower provisions have also raised concerns about the already overcommitted SEC being overwhelmed by frivolous claims by employees who view the program as a lottery with multi-million dollar payouts.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Dodd-Frank updates in Advisor’s Journal, see Is Barney Frank’s Resolve to Implement Dodd-Frank Weakening? (CC 11-95).

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Is the Contestability Period a Shield or a Sword in STOLI Disputes?

Posted by William Byrnes on September 12, 2011


Should insurance applicants and third-party investors be allowed to make material representations when applying for life insurance, if they can manage to hide misdeeds for at least two years? The United States District Court for the Southern District of New York thinks so.

In the latest STOLI case coming out of the federal courts, judge and jury discussed whether blatant fraud on a life insurance policy application is actionable to invalidate a policy after the contestability period has passed. The jury and court held for the investor in the $5 million case.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of STOLI in Advisor’s Journal, see STOLI Scheme Lands Insurance Agent in Jail (CC 11-92), New York Court of Appeals Upholds STOLI Arrangement (CC 10-106), & Recent STOLI Case Is a Big Win for Insurers (CC 10-59).

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Pensions Turn to Death Bonds

Posted by William Byrnes on September 8, 2011


It’s a given that most of us want to continue living as long as possible.  Exercising, eating healthy, and taking every precaution available to extend the gift of life to its limits. Nevertheless, even living a longer life is not exempt from the foreseeable strains it creates financially. Increasing life spans can create problems for pension funds and others that depend on us dying to keep their books balanced.

Pension funds are exposed to severe longevity risk. If pensioners live longer than expected, payouts from the funds could exceed the estimated cost of keeping the funds solvent. Worldwide, $17 trillion of pension funds – $23 trillion in assets – is exposed to longevity risk.

But the big banks—including Goldman Sachs, JPMorgan Chase, and Deustsche Bank—are coming to the rescue by packaging that longevity risk and selling it to investors; and they’re counting on investors being interested in wagering on your death.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance contracts in Advisor’s Journal, see IRS Guidance Provides Safe Harbor for Policies Maturing After Age 100 (CC 10-51).

For in-depth analysis of pension plans and other qualified employee plans, see Advisor’s Main Library: O – ERISA – FAQs.

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FINRA Changes the Rules on How Low-Price Equities Are Traded

Posted by William Byrnes on September 7, 2011


The Financial Industry Regulatory Authority (“FINRA”) has issued a regulatory notice addressing price volatility concerns associated with low-priced equity securities in customer margin and firm proprietary accounts. The notice advises that special attention be given to low-priced equity securities; price volatility is usually associated with low-priced equities because they are inherently volatile.

But what does FINRA consider a“low-price equity,” and what is the impact for you and your clients?

FINRA advises firms to weigh the risks that come with low-priced equity securities before extending credit in strategy-based or portfolio margin accounts. FINRA cautions firms to consider “volatility and concentrated positions in a single customer account and across all customer accounts, as well as the daily volume and market capitalization of each security when imposing ‘house’ maintenance margin requirements.”

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA-issued guidance in Advisor’s Journal, see Getting Your Feet Wet in the Social Media Market (CC 11-79) & SEC Says “Not So Fast” to Advisor Social Media Marketing (CC 11-40).

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Administration Defends Proposed Insurance Limitations

Posted by William Byrnes on September 6, 2011


The Obama Administration’s 2012 federal budget proposal has revived two budget proposals that will impact the life insurance business – one affecting Corporate-Owned Life Insurance (“COLI”) and the other affecting carriers’ Dividends-Received Deduction (“DRD”).

In response to concern that the proposals tamper threaten the tax preferred status of life insurance, the Treasury recently issued a letter clarifying that these proposals have relevance only to tax arbitrage issues, not the tax treatment of death benefits.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of corporate life insurance in Advisor’s Journal, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC 11-41).

For in-depth analysis of taxation affecting corporations, see Advisor’s Main Library: A – The Corporate Income Tax.

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Life Settlements—Savior of Municipal Finance?

Posted by William Byrnes on September 5, 2011


Life settlements provide a unique source of revenue because their returns are not contingent on the market’s success.

But are they still lucrative in comparison to other municipal finance? Rancho Mirage California City Councilman Scott Hines thinks so.

Under Hines’ plan, the city would issue bonds, with most of the issue proceeds being used to finance city projects. The remaining funds would be invested in life settlements with an aggregate face value equal to the face value of the bond issue. Payouts on the life settlements would then be used to pay back bond principal.

Instead of the typical municipal bond financing arrangement, where tax dollars utilized to pay back both principal and interest on an issue, Hines’ plan would leave taxpayers with only a bill for interest payments.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life settlements in Advisor’s Journal, see Life Settlement Provider Accused of Falsifying Life Span Reports (CC 11-23).

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FINRA Rule 45-30: Expansive new Complaint Report Requirements

Posted by William Byrnes on September 2, 2011


FINRA is digging deep into your customer comment box, and starting July 21, nothing will be off limits to the regulator.

Brokerages often expand beyond securities activities to diversify their income streams and broaden the scope of services they offer their clients. Keeping up with the assorted regulators and what are often cumbersome and confusing combinations of rules has always been a chore for those firms.

Not long ago, firms at least have been able to keep their professions separated, dealing, for instance, with securities and insurance regulators as isolated entities with little overlap in their bailiwicks. But increasingly, regulators like FINRA are erasing this dichotomy, peaking into all of a firm’s activities, even activities that are unrelated to the subject of the regulator’s jurisdiction.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA rulemaking in Advisor’s Journal, see FINRA Plans New Power Grab as SEC Falter (CC 11-67), Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08), and SEC Approves FINRA Suitability and Know-Your-Customer Rules (CC 11-17).

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Is Barney Frank’s Resolve to Implement Dodd-Frank Weakening?

Posted by William Byrnes on September 1, 2011


Facing the onslaught of Republican legislative attempts to weaken Dodd Frank, Barney Frank (D-MA) seems unconcerned. His unwillingness to push for the prompt implementation of Dodd-Frank suggests that his resolve is weakening. And in recent weeks, Representatives have used the implementation lull to introduce a handful of bills that, if passed, would repeal or delay parts of the Dodd-Frank Wall Street Reform Act.

Dodd-Frank implementation was originally scheduled to launch July 21, but Mr. Frank has no reservations against allowing agencies more time to translate the abundant volume of provisions of the  reform into regulations. “There’s no gun at their heads. Nobody gets fired,” he stated.

However, by allowing for this delay, Mr. Frank risks giving the Republicans time to repeal Dodd-Frank one provision at a time.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Dodd-Frank financial reform in Advisor’s Journal, see Republicans Look to Erode Dodd-Frank (CC 11-75).

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