Sponsor Cannot Rely on Speculation of Future Tax Treatment

According to the California Court of Appeals Fourth Appellate District, the plaintiffs—principals of Dealer Management Group Inc.—failed to allege the statements by agents of Economic Concepts Inc. (ECI) concerning the favorable tax treatment of Dealer Management’s 412(i) plan were false when made. In addition, the court said, even if they could be construed as false, it was not reasonable for the plaintiffs to rely on representations concerning how the IRS would treat their pension plan in the future.    

The court pointed out that both ECI’s marketing materials and the 2010 settlement agreement between the IRS and the plaintiffs’ defined benefit pension plan reflect the plaintiffs would—and did—receive opinion letters stating their plan “‘more likely than not’” qualified for favorable tax treatment.    

In addition, ECI’s representations concerning favorable tax treatment for the plaintiffs’ 412(i) plan occurred in 2002 and 2003, when the pension was established, but the IRS did not audit the plan and conclude it failed to qualify for favorable tax treatment until 2006, and the IRS’s decision was based on a February 2004 revenue ruling—Rev. Rul. 2004-20—dealing with the deductibility of 412(i) plans.  

The principals of Dealer Management Group sued agents of ECI, alleging that by representing contributions to the plan were tax deductible under the Internal Revenue Code, ECI persuaded the principals to establish a pension plan. Subsequently, the IRS determined the pension plan failed to qualify for favorable tax treatment, resulting in Dealer Management Group paying back taxes and penalties. The complaint alleges fraud, negligent misrepresentation, breach of fiduciary duty, negligence and a violation of California’s unfair competition law.