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Sportscaster Paul Maguire, television anchor Don Postles and developer Frank Ciminelli have million-dollar life insurance policies whose initial cost is so reasonable -- nothing -- that some insurance agents call it too good to be true.

With similar insurance costing $20,000 a year or more, word of the bargain spread so rapidly through a local country club and a grapevine of construction and food executives that a local agent has sold $35 million worth of the insurance to well-heeled clients.

Called arbitrage life, the insurance is financed through an investment trust designed to pay all but a small percentage of premium and loan costs for customers. Depending on the policy, it could mean savings of $15,000 or more a year.

Arbitrage life has proved so popular here in the last four years that Amherst insurance agent John Smaldone has sold a third of the $100 million in arbitrage policies written in the country.

But the policy also has attracted state Insurance Department regulators, who suspended its sale in April. They say it is not approved for sale in the state.

And Internal Revenue Service agents, a spokesman confirmed, are looking at what other insurance agents call a modern-day version of the free lunch. The IRS has a list of more than two dozen prominent residents who bought the policy here, sources said.

IRS spokesman Terry Dunford declined to say what agents are seeking. But other life insurance agents who have talked to IRS agents say the concerns center on whether arbitrage life customers are paying enough taxes on the economic benefits gained from the policies.

Some of those who signed up for arbitrage life are having second thoughts.

"I think this is going to come back and haunt us," Russell Salvatore, owner of Salvatore's Italian Gardens in Depew, said after reviewing his $3 million policy with his accountant. "I'm pretty sure we're going to have to pay back taxes. We're going to have to pay back maybe $15,000, $20,000."

"I'm glad I wasn't stupid and said, 'if it's for nothing, give me $10 million,' " Salvatore added.

But others say they feel confident about the policy because it was checked out thoroughly by accountants and attorneys of those who bought it.

"Obviously, anyone involved had a lot of people look at it," said Raymond "Skip" Wardynski of F.W. Wardynski & Sons, who has a $1 million policy. "They did a lot of checking."

And the creator of arbitrage life, Chicago attorney David B. Simon of S.T.P. Enterprises, said the concept meets all IRS codes and was reviewed favorably by some of the largest banks and law firms in the country.

A spokeswoman for First Transamerica Life, the insurance carrier that S.T.P. had most recently sold through in New York, expressed confidence that arbitrage life would be offered for sale again once the state Insurance Department completed its review of the policy.

Simon blames the attention from the IRS and insurance regulators on life insurance agents losing business because they are unable to match his product.

"That's why other agents are upset," he said. "They've just had their shirt handed to them."

Robert DiGiore of DiGiore Insurance Services denied that was the reason he steered his customers away from arbitrage life.

"If it's so good -- these people are not the only sophisticated people in the country -- why isn't anyone else doing it?" he said. "It's the old saying, 'if it sounds too good to be true, it probably is.' "

The state Insurance Department said it believes customers are not given enough information about possible future costs.

"We're concerned about the inadequacy of disclosure," said John Calagna, a spokesman. "The matter of payments after 10, 20 years and the cash value, we didn't feel, were sophisticated enough (explanations)."

He said the Insurance Department also has questions about how the policies were sold.

Calagna said Smaldone and Simon Bernstein of Chicago, both licensed to sell insurance in New York State, sold an earlier version for a Chicago insurer, Bankers United, not licensed as required to sell insurance in New York.

The department also has questions, he said, about whether Buffalo customers signed contracts here that said they actually were in Chicago for the sale.

And the Buffalo Life Underwriters, the trade organization of life insurance agents in Buffalo, has an ethics charge pending against Smaldone on the same allegations.

A.J. Block, chairman of the ethics committee, said the charges were not technicalities.

"I think they're very important matters," he said. "The State of New York has one of the most stringent, if not the most stringent, regulations of all 50 states in the licensing of life insurance. No one in New York State has lost a penny because a life insurance company has gone out of business."

Smaldone could not be reached to comment. Calls to his office were answered by Simon, his Chicago attorney, and Richard T. Sullivan, a Buffalo lawyer who also represents Smaldone.

S.T.P. Enterprises and S.B. Lexington Cos. East, the Amherst affiliate headed by Smaldone, have undertaken an aggressive defense of arbitrage life.

Sullivan said he has filed a lawsuit on Smaldone's behalf against Eli Glassman, one of the top selling life insurance salesmen in Buffalo, contending he called Smaldone's customers and warned them against arbitrage life.

"I will confirm there is litigation on this action pending," said Irving M. Shuman, Glassman's attorney. "There is absolutely no merit to their claims."

Other agents say they, too, have problems with arbitrage life and have warned their best customers against it, saying it could end up an expensive version of yearly term insurance. Simon disputes the charge.

They also say tax questions about arbitrage life could be cleared up through what is called a private letter ruling. An insurance company requests the IRS to rule on a policy, and the answer is then published for all to see.

Michael W. Halloran, general agent for Northwestern Mutual Life Insurance Co. in Buffalo, said there is no record of such a ruling for arbitrage life.

"If they do have it, you're going to see everybody and their mother coming out with (arbitrage life)," Halloran said.

Simon said his company would seek such a ruling for any client who asked -- he said no one has -- but also said it wasn't necessary.

"We have over $100 million in force," Simon said. "Thirty-five of the most prestigious law firms in the country have approved it. It's black-and-white law."

"Anyone who tells you a private letter ruling is good for everything is lying," he said.

And how does he answer critics who say Simon never asked for an IRS ruling for fear of being turned down?

"That's absolutely ludicrous," he said. "That's business slander. Anyone who says that I will meet them in court."

Simon said customers are sent a yearly IRS form from his company, telling them how much taxes they owe.

Joseph B. Fornasiero, a certified public accountant who reviewed arbitrage life for Russell Salvatore, said he recently was informed that tax statements will be issued to customers.

"But the amount seemed low, $5,000 for $1 million," Fornasiero said.

Smaldone's client list, obtained by The Buffalo News with an arbitrage life kit, is a life insurance agent's dream come true, a who's who of prominent customers.

Wardynski said he and Postles learned of the insurance through Smaldone at the Park Country Club. Postles, citing a WGRZ-TV policy against commenting to The Buffalo News, declined to comment.

Others said they learned of the policies through friends in the construction and food industries.

"You look at that list, they're all successful people," Russell Salvatore said. "This is what happened. One guy knew another. Smaldone knows all of us."

Others on the list include Savino Nanula of Tops Friendly Markets; Carl J. Montante of Uniland Development Corp.; Thomas M. Montante, Unibrand Tire & Product; supermarket owner Frank Perna; Louis Perna of the Transit Lanes, and Salvatore and Samuel Savarino of ADF Construction Corp.

Others who signed up were Michael Burke of Buffalo Hospital Supply; Louis Ciminelli of Ciminelli Construction Corp.; William Magavern of the law firm of Magavern & Magavern; Richard Tesmer of Tesmer Builders; Richard Anastasi of Anastasi Trucking & Paving Co., and Joseph P. Mosey of Great Lakes Collection Bureau.

Daniel J. Dellasalla, an agent for State Mutual Assurance Cos., predicted it was only a matter of time for the IRS to catch up with arbitrage life.

"You can't get something for nothing in anything in life. And this is something for nothing," he said. "You buy an insurance policy, you pay a premium. If you don't, they change the rules."

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