PMD Sues over IRS-Invalid Pension Plan

FRANKLIN COUNTY, OH – After years of courtroom battles with its dealers and licensees over alleged bait-and-switch tactics and fraud claims, Power Marketing Direct, Inc. (PMD) is taking on some new unsuspecting opponents, life insurers and financial planners.

The franchisor has now filed a lawsuit against several large life insurance and financial executive benefit planning firms for recommending and placing its company into a 412(i) pension plan, which has been considered invalid by the Internal Revenue Service. The purpose of the plan was to give the company favorable tax treatment. The conclusion reached by the IRS threatens to cost PMD well in excess of $1 million in taxes, penalties and interest. 

According to attorneys on both sides, this is a big deal.

Rex H. Elliott of Cooper & Elliott LLC, representing PMD said, “The company obviously sought guidance on a good solid retirement plan and then found out a couple of years later that the plan is being rejected by the IRS as a valid retirement plan. It is a shocker when you talk about the kind of money PMD has allocated to its employees for their retirement plan. All of a sudden non-taxable retirement benefits become taxable, so that’s a big problem.”

Elliott said PMD discovered there was a problem in 2007, and at that time hired a lawyer to begin the process of talking to the IRS to find out if the plan would really be rejected and what it could cost the company.

Because the situation has been going on for the past two and a half years, Elliott said his client had no choice but to proceed with the lawsuits. “We have to determine who is going to take care of this problem that was created for PMD,” he explained.  While they do not have clear answers yet or precise numbers, they are pretty confident that the IRS has taken the position that the pension plan is not valid.

The entities named in the lawsuit are Economic Concepts Inc. (ECI), ECI Pension Services, LLC, Money Concepts Capital Corp., and Hartford Life Insurance Company. One individual is also named, Craig Sutherland, who was employed by Money Concepts.

The complaint alleges that the defendants conspired with one another to misrepresent the deductibility of premiums paid on life insurance policies used to fund defined benefit plans created under Section 412(i) of the IRS code. PMD claims that each profited from the marketing and sale of the “invalid and unenforceable 412(i) plan” recommended to PMD.

In its lawsuit, filed in Ohio Common Pleas Court on June 7, Power Marketing Direct asserts certain causes of action, negligent misrepresentation, common law fraud, civil conspiracy, and breach of fiduciary duty.

But the insurance and pension plan marketers/consultants are vigorously disputing the accusations.

ECI’s attorney Robert J. D’Anniballe, Jr. of Pietragallo Gordon Alfano Bosick & Raspanti LLP, argues for his clients in his motion to dismiss that this case is one among a series of cases that are pending across the country. He declares that the claims are asserted on alleged misrepresentation about tax deductibility of premiums paid on life insurance policies used to fund defined benefit plans created under the 412(i) IRS code. D’Anniballe states that three federal court decisions addressing similar claims have been rejected. In certain cases the court made it clear that employers “may not rely upon an insurance company or its agents for advice regarding the tax consequences of their employee benefit plans and that fraud-based claims predicated on this theory fail as a matter of law.”

D’Anniballe also argues that PMD’s claim that the plan was adopted in 2005 is not accurate, that the plan was implemented in December 2003. This fact is pertinent to the case as all defendants are arguing that PMD’s claims are barred by the applicable four-year statute of limitations.

ECI defends itself in the case stating it is a licensed life insurance producer specializing in qualified plan markets whose representative have over 40 years of experience. It is not a third party administrator in these types of plans. Instead, it served as the design coordinator and collector of information that was provided to ECI from PMD through the producer, Craig Sutherland of Money Concepts, to the plan’s third-party administrator, Pension Strategies, and the preparer of the documents, law firm Bryan Cave LLP.

Although PMD alleges that ECI and other defendants sold the concept by emphasizing that the premiums would be tax deductible and offered extraordinary retirement benefits, D’Anniballe claims that written documents show otherwise. In 2003, PMD allegedly counter-signed one such document acknowledging that it understood ECI does not provide tax advice and that, instead, it acknowledged that it would rely on its own tax and legal advisors in evaluating the deductibility of premium payments made in the pension plan. PMD also acknowledged that any tax benefits at the start of the plan may be modified by the passage of future legislation or changes in the law, according to his motion to dismiss.

But Economic Concepts rebuts that Power Marketing Direct’s claims all fail and should be dismissed because it has no damages resulting from ECI’s alleged conduct.  PMD affirms that following the IRS ruling, Congress enacted Section 6707A of the code in 2004, which imposes harsh penalties ($100,000 per tax year for individuals and $200,000 per tax year for all other taxpayers) for failing to file Form 8886 regarding participation in a listed transaction. Economic Concepts further states that because PMD failed to file Form 8886, any harm was caused by its tax preparer, not ECI, as was instructed by the third-party administrator Pension Strategies and the Bryan Cave law firm. 

N. Trevor Alexander of Calfee, Halter & Griswold LLP, representing Money Concepts Capital Corp. and Craig Sutherland, said they do not wish to comment on the case because his clients did not create the plan. “As to the facts of the case, we don’t particularly want to get into that. We do stand by our pleadings and we think the case should be dismissed as we have laid out in our pleadings.”

John M. Kuhl of Vorys, Sater, Seymour and Pease LLP representing Hartford Life and Annuity Insurance Company did not return a phone call to comment on the lawsuit.

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