The U.S. Department of Justice recently announced the conviction of two tax attorneys and a life insurance agent for conspiring to commit tax fraud through a fraudulent scheme known as the Gain Elimination Plan. The defendants, Michael Elliot Kohn, Catherine Elizabeth Chollet, and David Shane Simmons, worked together to create limited partnerships for clients, directing them to donate most of the partnerships to a favored charity. Fictitious royalty and management fees were then paid to the partnerships through clients’ businesses, resulting in significant tax deductions without corresponding tax liabilities.
Simmons, the life insurance agent, sold life insurance policies to the limited partnerships, with the death benefit supposedly going to the charity after a ten-year period. These policies generated substantial commissions for Simmons, with a large portion of the commissions being shared with Kohn and Chollet. The defendants assisted clients with fraudulent tax returns, promising opinion letters validating the transactions but failing to provide them in some cases. Kohn misrepresented his background and manipulated clients into using Simmons as their insurance agent.
The IRS uncovered the scheme through a sting operation involving undercover agents meeting with the defendants. Kohn and Chollet falsely claimed deductions for clients, while Simmons misled the life insurance company about the policies’ intent to lapse after ten years. The indictment contained 23 counts, including criminal conspiracy, aiding and assisting in false tax return filings, and wire fraud. The IRS estimated a tax loss of $4 million from the scheme, with Simmons earning over $2.3 million in commissions.
The fraudulent scheme highlighted a common issue with life insurance being used in tax transactions, creating conflicts of interest between tax planners and clients. Life insurance commissions, which can be significantly higher than legal fees, often lead to collaborations where agents and attorneys share commissions from policy sales. Clients may be steered towards specific insurance products to maximize commissions, rather than selecting the most efficient options.
To avoid falling victim to dishonest tax schemes, seeking a second opinion from an independent advisor is recommended. Life insurance agents are not required to disclose commissions, creating opportunities for conflicts of interest. Clients should ask for compensation disclosures and be wary of agents pushing high-commission products that may not be in their best interests. Greed and the promise of substantial tax savings can blind individuals to red flags in fraudulent schemes, leading to penalties and legal consequences.
The Gain Elimination Plan serves as a cautionary tale for individuals considering tax strategies involving life insurance and partnerships. Ignoring warning signs and pursuing dubious schemes can lead to financial loss, legal troubles, and stress. Seeking advice from reputable professionals and conducting due diligence can help avoid falling prey to fraudulent schemes promising too-good-to-be-true benefits.
