Penn Mutual, co-defendants, ask court to dismiss lawsuit alleging tax scam

Defendants are asking a California court to dismiss a lawsuit alleging a tax-avoidance scam around Penn Mutual whole life insurance policies.

A group of 29 plaintiffs claim that Penn Mutual Life Insurance Co. and several co-defendants ran a tax-avoidance scam around whole life insurance policies.

In March, plaintiffs filed a complaint in U.S. District Court for the Central District of California, alleging fraud and negligence, as well as violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Plaintiffs come from states around the country and ask the court for $23.5 million in damages.

“Unbeknownst to the Plaintiffs, these tax avoidance and related scams were a sham and their purported tax advantages illusory and/or illegal,” write attorneys from the Los Angeles firm, Holmes, Athey, Cowan & Mermelstein.

Plaintiffs describe a coordinated sales system in which Penn Mutual whole life policies were aggressively marketed as offering “significant tax advantages.”

The lawsuit alleges that Penn Mutual teamed with advisor Randall Scott Boll, and several other law, lending, accounting and financial planning firms also named as defendants. Together, they constituted a “High-Premium Insurance Enterprise,” plaintiffs claim.

Boll pleaded guilty to one count of conspiracy to cause a financial institution to fail to file currency transaction reports and to structure financial transactions. He was sentenced to one day behind bars in California, court records say, and two years of supervised release.

‘Would not be enough’

Most of the defendants filed motions to dismiss in recent days. Plaintiffs fail in their bid to establish a RICO claim, reads the motion filed by Wintrust Life Finance. Wintrust claims to be “the largest traditional life insurance premium finance lender in North America,” with more than $5.9 billion in outstanding loans.

A 1970 federal law, the RICO statute was created to thwart criminal enterprises, specifically mob bosses. Wintrust attorneys say plaintiffs are overreaching by claiming a criminal enterprise.

“Even if one accepts Plaintiffs’ conclusory allegation that Wintrust knew Boll misrepresented the tax benefits to Plaintiffs, this still would not be enough to allege that Wintrust (and all other identified defendants) shared a common purpose to defraud the Plaintiffs,” the motion states.

In its motion to dismiss, Penn Mutual attorneys say plaintiffs “falsely inflated their net worths on their policy applications to circumvent Penn Mutual’s underwriting standards.”

Plaintiffs allege that “Boll and other members and associates of the enterprise would reap high commissions (as much as 75-125% of the initial annual premium paid by the policyholder) for each HPI policy sold.”

One type of “sham tax avoidance strategy” incorporated premium financing life insurance loans to finance the policies, the lawsuit alleges.

“The HPI Enterprise Defendants took advantage of plaintiffs’ lack of sophistication and convinced them that such policies were affordable due to the tax deductions they would generate—in essence promising them that the HPI policies would pay for themselves,” the lawsuit says.

Premium financing claims

Using life insurance in a premium financing strategy to manage tax obligations remains a controversial tactic within the industry.

Penn Mutual attorneys say the company provided multiple warnings and disclosures on how premium financing works and the risks involved.

“Notwithstanding the warnings and disclosures, Plaintiffs went forward with their policy purchases in connection with the premium financing and tax strategies they were allegedly trying to execute on Boll’s advice,” their motion reads. “They now claim that, after circumventing the safeguards that Penn Mutual had in place to avoid such issues, they are left with unaffordable policies, premium financing loans and, apparently, failed tax strategies.”

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