Q I was recently approached by a life insurance agent who recommended that I purchase a whole life insurance policy through my professional corporation and have the corporation borrow a substantial amount of money to fund the initial premium payment. The insurance agent claimed that the interest on the funds borrowed would be tax-deductible, while the money grows inside the policy tax-free. Is this a good idea?
A No: Run, do not walk, away from this recommendation. In a noteworthy case, Winn-Dixie Stores, Inc., v. Commissioner, 113 T.C. 254 (1999), the tax court ruled that this type of program was entered into solely for tax purposes, lacked economic substance and a business purpose, and accordingly was a sham transaction for which all deductions were disallowed. In addition, recent tax law changes have specifically outlawed this type of tax planning, so if you were to enter into this type of arrangement and then got audited, you would be liable not only for additional taxes, but also for substantial penalties and interest.
Q Recently another doctor told me he had been advised to set up a Subchapter S corporation so he could transfer his practice into the corporation and begin taking all of his practice profit out in the form of a dividend, with no salary. He claimed this strategy would allow him to legally avoid all payroll taxes on his practice profits. Is he correct?
A No. The Internal Revenue Service has recently won a number of cases involving this issue. Under current tax law, the IRS has the right to re-characterize amounts paid out as dividends to salary when no salary has been paid.
Q I am sending my children to a religious private school and have heard that a portion of my tuition payments may be deductible. Is this true?
A No. The IRS recently ruled that tuition payments to Jewish day schools are not deductible as charitable contributions even though a portion of the children’s education consisted of religious instruction. Since your children received a substantial benefit (their education) in return for the payments made to the religious school of your choosing, no deduction is allowed.