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Blinky the 3-eyed Fish

DB Offset Plans and the IRS

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This is ironic since the large consulting companies lobbied the IRS and treasury to create the bright line tests so as to avoid complex, expensive disputes over the plan formulas under the revised non discrimination requirements of the 86 act. The argument was that plan sponsors should not have to continuiously defend the plan formula to different IRS agents who changed their intrepretations of the rules and should be able to rely on a favorable determination letter which would reduce the amount of resources spent by IRS agents on qualfied plans and promote efficient administration. The preamble to the final a4 regs states that the regs allowed the IRS to reduce the frequency of testing qual plans and descriptions of the quality of data that may be used to substantiate compliance with the a4 regs.

Dispite what the IRS says, complaince will not depend on what a good plan advisor would do in applying the rules but what a good IRS agent would do in applying vague and inarticulate regs that use terms such reasonable, significant, etc. If you read between the lines lines the IRS is saying that it does not have the resources to write detailed regs because of budget cuts. As an example, the recent proposed regs on 403(b) annuites require a written plan document to state all of the material terms of the plan but does not describe what constitutes material terms.

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It is very unlikely, in my opinion, that any amount of detailed regulation will be enough to deter those individuals that want to push beyond the "edge of the envelope." On the other hand, failing to give clear guidance in the hope of relying on standard of "what a good person would do" seems doomed to failure.

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I have a very cynical view. I have been watching the tax shelter related arena for quite a number of years, probably starting in 1989 after seeing the surge in activity caused by '86.

I watched how the IRS approached split dollar, reverse split dollar, springing cash value, 419 plan designs and many financial services industry concepts etc before BOSS etc came to the fore. This caused me to also be conversant with the preparer penalties etc and what is now called the tax shelter regulations.

It seems that someone decided that the IRS needs more power after realizing that many taxpayers would test the IRS in court and probably win many cases. After this became a reality the threat emerged that more would challenge the IRS and the IRS might not be able to handle the volume.

So IMHO the decison was made to "load the dice" for the future. How? No more "bright line" no more definitions, no more clarification. That way everything was subject to question and interpretation, that way many taxpayers might be willing to compromise rather than to head for court.

To further "load the dice" there would be fewer Treas Regs and fewer Rev Rulings. Notice the number of Notices that have been issued . In some cases a short non commital Rev Ruling is issued alongside a lengthy Notice. Why a Notice? A Notice has next to no standing.

IMHO the decision to use Notices was so as not to be held to anything hard and fast. It was necessary because the number of courts and cases that have been ignoring or setting aside Rev Rulings and GCMs etc has been increasing, and courts have been moving towards accepting the use of PLRs not as precedent but as explanations of the IRS position on an issue. The result is that the courts have been leaning towards preventing the IRS from espousing a position (PLR or otherwise) then striding to the podium to espouse a different position. Add to this the Supreme Court's decision in MEAD or the many cases such as Grande v Allison regarding Proposed Regulations and agency rulings.

In other words, much that the IRS previously relied on has either come into question or failed them. So they had need for a new approach using attacks based on different support rationale, namely vagueness and subjective opinion.

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