The retailing giant is suing American International Group (AIG) and Hartford Life Insurance among others, alleging the defendants didn’t fully and accurately inform Wal-Mart of the tax-related and “insurable-interest” risks relating to the plans, according to Dow Jones.
Under the so-called COLI plans, companies took out life-insurance policies for their workers, using the plans as a source of cash flow and to achieve tax benefits. Between 1993 and 1996, a total of 356,626 Wal-Mart associates were covered by these plans.
The lawsuit alleges the insurers claimed the plans would minimize adverse effects to companies if the tax laws changed. Wal-Mart says it lost approximately $80 million in failed AIG COLI plans and $55 million on plans from Hartford, a unit of Hartford Financial Services Group Inc.
Companies have put millions of dollars into the company owned life insurance, or COLI, policies. These policies yield tax-free income as their investment value rises, just like conventional whole life policies, and companies can also borrow against the policies to raise cash. Meanwhile, the money placed in the policies grows tax-free – and when workers, and former workers, die, the proceeds paid to the employer are also tax-free.
Change in Plans
In 1996, Congress passed legislation that effectively did away with tax benefits associated with COLI plans. Subsequently, Wal-Mart began unwinding the plans, which were terminated in 2000.
Wal-Mart is also seeking to recover the value of tax deductions Wal-Mart originally received, but which were later disallowed by the Internal Revenue Service (IRS), and any potential liability from lawsuits in Texas and New Hampshire filed by relatives of Wal-Mart associates over the plans.
According to the lawsuit, Wal-Mart claims that AIG and Hartford profited by more than $100 million from fees, loan spreads, and other benefits associated with these plans.
“Wal-Mart is a large and sophisticated company,” the lawsuit says, but on the arcane intricacies of these plans, it relied on defendants’ expertise.
Reuters notes that more than half the Fortune 500 firms bought COLI plans, industry experts say, and according to evidence from the IRS in a court case two years ago, about 85 firms have tax liabilities of about $6 billion on COLI policies.
The US Third Circuit Court of Appeals recently upheld the imposition of penalties by the Internal Revenue Service against Camelot Music for improperly claiming loan interest deductions for corporate life insurance policies on its tax return – calling the deductions “shams in fact”.