Disclosures Notice 2007–85 This notice provides guidance to material advisors required to file a disclosure

Disclosures
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement.

Disclosures
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement by October 31, 2007, under
§ 301.6111–3 of the Procedure and Administration
Regulations.
BACKGROUND
On August 3, 2007, the Internal
Revenue Service and Treasury Department
published final regulations under
§ 301.6111–3 in the Federal Register
(72 FR 43157) providing the rules relating
to the disclosure of reportable transactions
by material advisors under section 6111
of the Internal Revenue Code. See T.D.
9351, 2007–38 I.R.B. 616. In general,
these regulations apply to transactions
with respect to which a material advisor
makes a tax statement on or after August
3, 2007. However, these regulations apply
to transactions of interest entered into on
or after November 2, 2006, with respect
to which a material advisor makes a tax
statement on or after November 2, 2006.
The regulations provide that each material
advisor, with respect to any reportable
transaction, must file a return as
described in § 301.6111–3(d). Section
301.6111–3(d) provides that each material
advisor required to file a disclosure
statement under § 301.6111–3 must file
a completed Form 8918, “Material Advisor
Disclosure Statement” (or successor
form). The Form 8918 must be filed with
the Office of Tax Shelter Analysis (OTSA)
by the last day of the calendar month that
follows the end of the calendar quarter
in which the advisor became a material
advisor with respect to the reportable
transaction or in which the circumstances
necessitating an amended disclosure occur.
Prior to the publication of the final regulations,
material advisors were required
to disclose reportable transactions on Form
8264, “Application for Registration of a
Tax Shelter.” Notice 2004–80, 2004–2
C.B. 963, and Notice 2005–22, 2005–1
C.B. 756, described the manner in which
the Form 8264 was to be completed.
INTERIM PROVISION
The next due date for disclosures by
material advisors is October 31, 2007. As
of the date of release of this notice, Form
8918 has not yet been published. The IRS
anticipates that the Form 8918 will be published
soon.
Due to the unavailability of Form 8918,
a material advisor required to file a completed
Form 8918 by October 31, 2007,
will be treated as satisfying the disclosure
requirement of § 301.6111–3(d) if the
material advisor files Form 8264 instead.
If Form 8918 is published on or before
October 31, 2007, material advisors may
choose to use either Form 8918 or Form
8264 for disclosures required to be filed by
October 31, 2007. For disclosures required
to be filed after October 31, 2007, material
advisors must use Form 8918 (or successor
form) unless instructed otherwise by the
IRS. Reportable transactions disclosed on
the Form 8264 should be disclosed in the
manner described in Notice 2004–80 and
Notice 2005–22.
EFFECTIVE DATE
This notice is effective October 16,
2007, the date this notice was released to
the public.
DRAFTING INFO

419 Important Tax Court Case

Commentary

The court basically determined that the Plan did not satisfy the requirements of Section 162(a).  The court found that Goyak could not deduct his contribution of $1.4 million into the Millennium Plan because it is not an ordinary and necessary business expense under section 162(a).

 The next issue is that the court determined that Goyaks $1.4 million contribution was taxable to Goyak because it was a constructive dividend. (In essence the plan is set up so he can get his money out)

T.C. Memo. 2012-13

UNITED STATES TAX COURT

JOHN K. AND DANA G. GOYAK, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

JOHN K. GOYAK & ASSOCIATES, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 12990-07, 13022-07. Filed January 11, 2012.

Mark D. Allison and Kenneth M. Barish, for petitioners.

Alexander D. Devitis, Anne W. Durning, Roger P. Law, and

Vanessa M. Hoppe, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: With respect to John and Dana Goyak (Mr. and

Mrs. Goyak), respondent determined deficiencies in Federal income

taxes of $966,155, $1,848,500, and $1,217,910 for tax years 2002,

- 2 -

2003, and 2004 respectively. Respondent also determined

penalties under section 66621 of $193,231, $369,700, and $243,582

for 2002, 2003, and 2004, respectively, as well as an addition to

tax under section 6551(a)(1) of $42,742 for 2002.

With respect to John K. Goyak & Associates, Inc. (Goyak &

Associates), respondent separately determined deficiencies in

Federal income taxes of $199,503, $262,692, $297, $374,137,

$276,571, and $556,223 for tax years 1997, 1998, 1999, 2000,

2001, and 2002, respectively. Respondent also determined

penalties under section 6662 of $55,314 and $111,245 for 2001 and

2002, respectively, as well as additions to tax under section

6551(a)(1) of $1,995, $11,820, $74, and $41,486 for 1997, 1998,

1999, and 2001, respectively.

These cases were consolidated for trial. As a result of

settlements between the parties, all issues in taxable years

other than 2002 have been resolved. The only remaining issues

relate to a $1.4 million contribution Goyak & Associates paid in

2002 to the Millennium Multiple Employer Welfare Benefit Plan

(Millennium Plan), a purported section 419A(f)(6) welfare benefit

fund. The issues remaining for decision are:

(1) Whether Goyak & Associates may deduct the $1.4 million

1Unless otherwise indicated, all section references are to

the Internal Revenue Code (Code) in effect for the years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

419 Welfare Benefit Plans

HG EXPERTS

Legal Experts Directory

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May 9, 2012     By  Sam Susser

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A view from a former IRS Agent, CPA, College Professor

Welfare Benefit Plans (WBP), also known as Welfare Benefit Trusts and Welfare Benefit Funds are vehicles by which employers may offer their employees and retirees with certain types of insurance coverage (e.g., life insurance, health insurance, disability insurance, and long-term care), as well as other benefits such as severance payments and educational funding. If properly designed and in compliance with IRC sections 419 and 419A, WBPs offer employers with a valid tax deduction. However, as is the case with many plans that offer opportunities for deductibility, some WBPs fail to comply with Code standards, invite abuse, and otherwise are used inappropriately as a basis to reduce taxable income.
It is, therefore, not surprising that the Internal Revenue Service (IRS) has targeted WBP, designating many such plans as “listed transactions.” The IRS’ attack arsenal includes, but is not limited to: Notice 2007-83 (where the IRS intends to challenge claimed tax benefits meeting the definition of a “listed transaction”); Notice 2007-84 (where the IRS may challenge trust arrangements purporting to provide non-discriminatory medical and life insurance benefits, if such plans are, in substance, discriminatory); Revenue Ruling 2007-65 (where the IRS will not disallow deductions for such arrangements for prior year tax years, except to the extent that deductions have exceeded the amount of insurance included on the participant’s Form W-2 for a particular year), and IR-2007-170 (the IRS’ guidance position on WBPs). Accordingly, taxpayers who have claimed deductions pursuant to Internal Revenue Code (Code) Section 419 are receiving letters from the IRS inviting them to an audit.
THE GOOD:
Let’s start off with a proposition that may surprise many of you – the IRS is generally good. No, that’s not an oxymoron. The rest of this article is in the words of Sam Susser:

For over 35 years, I have had the privilege of representing the IRS and the US taxpayers on tax audits. Our goal was to always determine the correct tax –whether the outcome was a deficiency or a refund. The bottom line, which the IRS supported, was to “do the right thing.” Over these years, I have met and befriended many competent and exemplary agents. As with all industries, there are a few who simply go through the motions, and there are a few who are simply incompetent. Fortunately, the latter two groups are in the minority. Now that I represent clients who are being audited by IRS, my objectives have not changed. The right thing must still be done. I only hope to get a well-versed agent who knows the law and can make a determination based on facts and circumstances, and not by preconceived notions.
I have been resolving the WBP issue mostly at the Revenue Agent (RA) level. Most RAs are knowledgeable in the area of WBP, and it it a pleasure dealing with them. My clients became involved with both abusive plans as well as what I determined to be non-abusive plan. Because most clients have sought the opinions of an independent professional tax attorney, CPA, Enrolled Agent , or other independent professionals who the IRS deems to be knowledgeable and capable of rendering an opinion on a Plan, Prior to 2007 I had a good case for abating the penalty and any interest thereon due to the reasonable cause exception. The RAs accepted my briefs for penalty relief and I usually resolved the case agreed at the agent’s level. The right thing was being done by both sides. Since 2007 the bar has been raised in meeting the reasonable cause exception. Simply put, if taxpayers failed to file Forms 8886 with their tax returns, the penalty could no longer be abated due to reasonable cause. If we do not come to an agreement, the case would, at taxpayer’s additional expense, proceed to the Appeals Division. This would normally be a good strategy in nebulous circumstances. With rare exceptions this is not a good strategy under these circumstances as explained later.
Just as there are good and bad IRS agents, there are good and bad WBPs. The abusive plans that have been sold should not affect those plans that adhere to the spirit of the tax laws. Thus, of the many plans sold to taxpayers, some can be considered “good.” The “bad” WBPs should not taint the “good” ones.
IR-2007-170, Oct. 17, 2007, recognizes that “[t]here are many legitimate welfare benefit funds that provide benefits, such as health insurance and life insurance, to employees and retirees. However, the arrangements the IRS is cautioning employers about is primarily benefits the owner or other key employees of businesses, sometimes in the form of distributions of cash, loans, or life insurance policies.”
THE BAD:
A persistent pattern that I see with WBPs is that the IRS appears to presumptively hold such plans as improper contrary to the statement in IR-2007-170. From what I have indirectly encountered, it appears that the IRS may interview the plan administrator, with the primary objective of securing the plan’s participants (and audit targets) rather than determining whether the limitations of a Code Section 419 deduction were satisfied. No determination is made as to whether the plan meets or fails to meet Code requirements. The plan participants then receive audit letters: one to the entity claiming the deduction, and the other to the owner(s) of such entity. These audit letters are generally accompanied by a lengthy “canned” Information Document Request (IDR) ostensibly written by IRS attorneys.
During my decades with the IRS, IDRs are usually focused documents seeking very specific documents and information to determine whether further action is required. However, my review of IDRs on the subject of WBPs shows them to be akin to document production demands in a civil litigation. The IRS basically wants everything associated with the WBP – there is no specific focus. Moreover, they have a very expansive definition of documents, and seek them whether they are in the taxpayer’s possession, or in the possession of the taxpayer’s “attorneys, accountants, affiliates, advisers, representatives, or other persons directly or indirectly employed by you, hired by you, or connected with you, or your representatives, and anyone else subject to your control.”
What was most disturbing about these IDRs that I have seen is the fact that the RAs also have, on a number of occasions, requested copies of the tax returns for the tax year(s) under audit. This indicated to me, especially since the name of the WBP is repeatedly mentioned in the IDR, that my client was selected from the list provided by the plan administrator to the IRS. This in itself is not necessarily bad since this is a useful tool for the IRS in obtaining names of participants of plans that might not meet the muster of the Code and IRS pronouncements. However, I would think that the “give me everything from everybody” approach should not be the first step in an IRS inquiry into the validity of a WBP.
Other clients received audit letters with a similar IDR requesting information including copies of the returns under examination. These clients, however, had stopped participating in the plan many years prior to the audit years. Nonetheless, since the client's name was still on the Plan’s list of participants, the client was going to be audited. The IRS takes the position that the cash surrender value of any life insurance policy in the plan is available to the client and is therefore income to that client for the year the IRS has decided to audit Accordingly, the RAs are proposing adjustments in years in which no deduction to the WBP have been taken.
THE … ?
To rub salt into the wound, the RA has enclosed an explanation as to why the deduction is disallowed, and has proposed a statutory underpayment penalty. The tax law provides for a penalty to be imposed where a taxpayer makes a substantial understatement of their tax liability. For individual taxpayers, a substantial underpayment exists when the understatement for the year exceeds the greater of ten percent of the tax required to be shown on the return, or $5,000. This is a relatively low threshold and is easily met by most taxpayers. The penalty is twenty percent of the tax underpayment.
Following the RA’s review, the taxpayer can expect to receive a 20 – 40 page “boiler-plated” or “canned” write-up, which will wind up as the Revenue Agent Report (RAR). The RARs that I’ve seen appear obviously drafted by IRS attorneys. Sometimes the RAR is shortened as a result of “cut and paste” procedures assembled by the RA. The RARs also contain alternative positions for these proposed disallowances. Taxpayers and representatives can take little comfort when all indications lead to the conclusion that the IRS has made a determination prior to assessing all the facts and circumstances of any given case standing on its own merits. My concern is that the WBP that meet IRS requirements are swept together with those that do not, and are unjustly branded as “bad.” The participants of these “good” plans must now overcome the preconceived notions of the RA. This becomes a difficult task as RAs won't deviate from the “boiler-plated” positions, forcing the taxpayer to expend funds in seeking further relief . The Appeals Division has similarly received a directive to sustain the RA RAR thus effectively eliminating the appeals right the taxpayers normally have. The only "appeals" route a taxpayer can take is to petition the Courts for a hearing. The time, expense, and outcome in defending a WBP under this scenario are enigmatic (hence the “…?”), and well, simply put, can really become downright UGLY!
CONCLUSION:
The IRS needs to examine WBPs on a plan by plan basis, and make a determination based on the facts and circumstances of each plan. Specifically, they should be charged with independently evaluating whether a particular WBP generally adheres to the Code and the IRS’s issued pronouncements. The RA and those in charge of this project should be cognizant of the statement issued by Donald L. Korb (Chief Counsel for the IRS): “The guidance targets specific abuses involving a limited group of arrangements that claim to be welfare benefit funds.” (emphasis provided). He continues to state that: “[T]oday’s action sends a strong signal that these abusive schemes must stop.” (emphasis provided). For those plans that the IRS deems to be abusive, the IRS can concentrate its resources in auditing the plan participants. The IRS hierarchy needs to eliminate the UGLY, recognize the GOOD, and pursue the BAD.


ABOUT THE AUTHOR: Sam Susser
Sam Susser began his IRS career on 2/1/71, and spent most the succeeding years as an international examiner with brief stints in the Review Section and the Appeals Division. He closed out his IRS tenure spending four years as International Team Manager for South Florida. Currently Sam is in private practice and can be reached at 561-742-1005

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.


Copyright Lance Wallach, CLU, CHFC