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Guest Article


(From the December 12, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Abusive Transaction Settlement Initiative Open Until January 23, 2006

The IRS recently announced a one-time opportunity for taxpayers to voluntarily disclose and resolve certain listed and potentially abusive transactions. Announcement 2005-80. Among the 21 transactions that can be settled pursuant to this initiative, four relate to retirement plans and at least three others may be of interest to the retirement plans community. This settlement initiative is open until January 23, 2006.

Eligible Transactions Related to Retirement Plans

According to a December 1, 2005 special edition of the IRS's "employee plans news," the four retirement plan-related transactions eligible for settlement are as follows:

  1. Rev. Rul. 2004-20, Situation 1: Pension plan fails to satisfy IRC § 412(i) where amounts accumulated under life insurance contracts and annuities held by the plan exceed benefits payable under plan terms; and Situation 2: Employer contributions to pension plan are not currently deductible when used to pay premiums on life insurance contracts that provide for death benefits in excess of the participant's death benefit under the terms of the plan. Also, Rev. Rul. 2004-21: Pension plan fails to satisfy nondiscrimination requirements due to differences in the value of participants' rights to purchase life insurance contracts from the plan;
  2. Rev. Rul. 2004-4: Transactions that involve segregating the business profits of an employee stock ownership plan (ESOP)-owned S corporation in a qualified subchapter S subsidiary, so that rank-and-file employees do not benefit from participation in the ESOP;
  3. Rev. Rul. 2003-6: Certain arrangements involving the transfer of ESOPs that hold stock in an S corporation for the purpose of claiming eligibility for the delayed effective date of section 409(p); and
  4. Management S Corporation ESOP Transactions: Transactions where the taxpayer has claimed that it is entitled to exclude income of an operating business by asserting, incorrectly, that the taxpayer had established, on or before March 14, 2001, an ESOP entitled to an exemption from unrelated business income and an S corporation that is a management corporation, and whatever actions that were taken to attempt to establish an ESOP and a management S corporation were taken on or before March 14, 2001.
Other eligible transactions that might be of interest include:
  1. Notice 2004-8: Abusive Roth IRA transactions;
  2. Notice 2003-24: Tax Problems Raised by Certain Trust Arrangements Seeking to Qualify for Exception for Collectively Bargained Welfare Benefit Funds under section 419A(f)(5); and
  3. Notice 95-34: Tax Problems Raised by Certain Trust Arrangements Seeking to Qualify for Exemption from IRC § 419.

Settlement Terms

Participants in the settlement initiative will be required to pay 100 percent of the taxes owed, interest and, depending on the transaction, either a quarter or a half of the accuracy-related penalty the IRS would otherwise seek on the underpayment of tax related to the transaction. There is penalty relief for transactions properly disclosed to the IRS under Announcement 2002-2 or in certain circumstances where the taxpayer received and relied on a tax opinion from an independent tax advisor. Transaction costs, including promoter fees and fees paid for accounting, appraisal, and legal services, actually paid by the taxpayer who settles under this initiative will be allowed to be treated as a loss. The loss will be limited to the amount of transaction costs less the tax benefits claimed in earlier years barred by the statute of limitations.

The IRS is advising eligible taxpayers to take advantage of this settlement initiative rather than face more substantial penalties in the future. Carol Gold, Director of Employee Plans, stated, "Failure to participate in this one-time settlement initiative will likely result in additional tax liabilities and penalties as well as additional costs associated with the audit process and potential litigation. I strongly recommend that eligible taxpayers apply for this settlement initiative."

For More Information...

Additional information about the settlement initiative is available on the IRS's Web site, at (From the menu at the top of the main page select "Tax Professionals," and then "Compliance & Enforcement" under "IRS Resources." Then select "Compliance & Enforcement News.") Available resources include the text of Announcement 2005-80, a fact sheet on the settlement initiative, a series of "frequently asked questions" about the settlement initiative, and links to forms needed to participate in the settlement initiative.

For more details about the listed transactions relating to employee benefit plans, see the "Examinations/Enforcement" section of the IRS's Retirement Plans Community Web site (

DeloitteThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2005, Deloitte.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.
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