(From the January 27, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)
IRS Announces 2003 Procedural Guidance on "No Rule" Areas, Pensions, and Determination Letters, et al.
As part of the IRS's annual package of revenue procedures relating to its procedures for providing guidance on the federal tax laws, the IRS issued Revenue Procedure 2003-3, 2003-1 I.R.B. 113, to specify issues on which it will not provide letter rulings or determination letters to taxpayers. These "no rule" areas include several issues relating to employment and employee benefit plans. The IRS also released Rev. Proc. 2003-4, 2003-1 I.R.B. 123, which provides guidance on ruling requests by pension plans, and Rev. Proc. 2003-6, 2003-1 I.R.B. 191, which explains procedures for requesting determination letters.
Relevant "No Rule" Areas
According to Revenue Procedure 2003-3, the IRS will not issue rulings or determination letters in the following areas relating to employment and employee benefit plans.
- Section 79.-- Group-Term Life Insurance Purchased for Employees.-- Whether a group insurance plan for 10 or more employees qualifies as group-term insurance, if the amount of insurance is not computed under a formula that would meet the requirements of Treas. Reg. Sec. 1.79-1(c)(2)(ii) if the group consisted of fewer than 10 employees.
- Section 105(h).-- Amount Paid to Highly Compensated Individuals Under Discriminatory Self-Insured Medical Expense Reimbursement Plan.-- Whether, following a determination that a self-insured medical expense reimbursement plan is discriminatory, that plan had previously made reasonable efforts to comply with tax anti-discrimination rules.
- Section 107.-- Rental Value of Parsonages.-- Whether amounts distributed to a retired minister from a pension or annuity plan should be excludible from the minister's gross income as a parsonage allowance under section 107.
- Section 117.-- Qualified Scholarships.-- Whether an employer-related scholarship or fellowship grant is excludible from the employee's gross income, if there is no intermediary private foundation distributing the grants, as there was in Rev. Proc. 76-47, 1976-2 C.B. 670.
- Section 119.-- Meals or Lodging Furnished for the Convenience of the Employer.-- Whether the value of meals or lodging is excludible from gross income by an employee who is a controlling shareholder of the employer.
- Section 125.-- Cafeteria Plans.-- Whether amounts used to provide group-term life insurance under section 79, accident and health benefits under sections 105 and 106, and dependent care assistance programs under section 129 are includible in the gross income of participants and considered "wages" for purposes of sections 3401, 3121, and 3306 when the benefits are offered through a cafeteria plan.
- Section 213.-- Medical, Dental, Etc., Expenses.-- Whether a capital expenditure for an item that is ordinarily used for personal, living, or family purposes, such as a swimming pool, has as its primary purpose the medical care of the taxpayer or the taxpayer's spouse or dependent, or is related directly to such medical care.
- Section 424.-- Substitution or Assumption of Incentive Stock Options.-- Whether the substitution of a new Incentive Stock Option ("ISO") for an old ISO, or the assumption of an old ISO, by an employer by reason of a corporate transaction constitutes a modification which results in the issuance of a new option by reason of failing to satisfy the spread test requirement of section 424(a)(1) or the ratio test requirement of Treas. Reg. Sec. 1.425-1(a)(4). The Service will continue to rule on the issue of whether the new ISO or the assumption of the old ISO gives the employee additional benefits not present under the old option within the meaning of section 424(a)(2).
- Section 451.-- General Rule for Taxable Year of Inclusion.-- The tax consequences of a non-qualified unfunded deferred compensation arrangement with respect to a controlling shareholder-employee eligible to participate in the arrangement.
- Section 451.-- General Rule for Taxable Year of Inclusion.-- The tax consequences of unfunded deferred compensation arrangements where the arrangements fail to meet the requirements of Rev. Proc. 92-65, 1992-2 C.B. 428, and Rev. Proc. 71-19, 1971-1 C.B. 698.
- Sections 451 and 457.-- General Rule for Taxable Year of Inclusion; Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations.-- The tax consequences to unidentified independent contractors in nonqualified unfunded deferred compensation plans. This applies to plans established under section 451 by employers in the private sector and to plans of state and local governments and tax-exempt organizations under section 457. However, a ruling with respect to a specific independent contractor's participation in such a plan may be issued.
- Section 457.-- Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations.-- The tax effect of provisions under the Small Business Job Protection Act affecting plans described in section 457(b), if such provisions do not comply with section 4 of Rev. Proc. 98-40, 1998-2 C.B. 134.
- Sections 3121, 3306, and 3401.-- Definitions.-- For purposes of determining prospective employment status, whether an individual will be an employee or independent contractor. A ruling with regard to prior employment status may be issued.
- Sections 3121, 3306, 3401.-- Definitions.-- For purposes of determining employment classification pursuant to the filing of Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, whether a worker is a bona fide partner and, therefore, not an employee of the business is at issue.
- Section 4980B.-- Failure to Satisfy Continuation Coverage Requirements of Group Health Plans.-- Whether an action is "gross misconduct" within the meaning of section 4980B(f)(3)(B). (See section 3.05 of Rev. Proc. 87-28, 1987-1 C.B. 770, 771.) [COBRA continuation coverage benefits do not have to be offered to employees terminated due to "gross misconduct." Courts generally will follow state law interpretation of "gross misconduct."]
Temporary "No Rule" Areas, et al.
Revenue Procedure 2003-3 also lists specific areas in which the IRS will not ordinarily issue rulings and determinations, and in which the IRS is temporarily not issuing rulings and determinations because those matters are under extensive study. According to IRS, "not ordinarily" means that unique and compelling reasons must be demonstrated to justify the issuance of a ruling or determination letter.
The relevant areas in which the IRS will not ordinarily issue rulings and determinations are as follows.
- Sections 83 and 451.-- Property Transferred in Connection with Performance of Services; General Rule for Taxable Year of Inclusion.-- When compensation is realized by a person who, in connection with the performance of services, is granted a nonstatutory option without a readily ascertainable fair market value to purchase stock at a price that is less than the fair market value of the stock on the date the option is granted.
- Sections 104(a)(2) and 3121.-- Compensation for Injuries or Sickness; Definitions.-- Whether an allocation of the amount of a settlement award (including a lump sum award) between back pay, compensatory damages, punitive damages, etc., is a proper allocation for federal tax purposes.
- Finally, IRS is temporarily not issuing determinations or rulings with respect to the tax treatment of any section 457 plan that provides a loan may be made from plan assets to any of the plan's participants or beneficiaries.
Other IRS Procedural Guidance
The package of revenue procedures in Internal Revenue Bulletin 2003-1 also includes guidance on requesting and obtaining rulings on employee benefit issues and determination letters for tax-qualified plans. Following is a brief summary of the relevant revenue procedures.
- Rev. Proc. 2003-4, 2003-1 I.R.B. 123-- Guidance on Items, Including Pensions-- Explains how the IRS gives guidance to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. This encompasses ruling requests by pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans. Includes general instructions for requesting letter rulings and information about the effect of rulings, among other things.
- Rev. Proc. 2003-6, 2003-1 I.R.B. 191-- Explains procedures for issuing determination letters on the qualified status of pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans (ESOPs) under sections 401, 403(a), 409 and 4975(e)(7), and the status for exemption of any related trusts or custodial accounts under section 501(a).
- Rev. Proc. 2003-1, 2003-1 I.R.B. 1-- General IRS Guidance-- Explains how IRS gives guidance to taxpayers on issues under the jurisdiction of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), among others. In general, these issues include those that involve income tax and other tax aspects of executive compensation and employee benefit programs (other than pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans.) The revenue procedure provides general instructions for requesting letter rulings and determination letters, outlines how the National Office handles requests, and explains the effect of letter rulings and determination letters, among other things.
- Rev. Proc. 2003-8, 2003-1 I.R.B. 236-- User Fees-- Provides guidance on user fees relating to letter ruling and determination letter requests on matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division.
|The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances.|
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Copyright 2003, Deloitte.
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