Kirk Maldonado

BenefitsLawyer: You stated that only multiemployer plans (not multiple employer plans) are subject to statutory withdrawal liability. How do you square this position with the language of ERISA Section 4064?

Even the frozen initial liability method?

Kevin: You raise a good point; being did the second QDRO create any rights or just diminish a portion of existing rights? If all it did was reduce rights, why does that work? One response would be that, at the time the second one was entered, it automatically wiped out the first one, so that the alternate payee only has rights under the second one. Viewed from that perspective, the second QDRO creates (or resurrects) rights. The likelihood of this analysis being supported by the wording of the QDROs, though, would be pretty small. I don't think that the argument that you are creating a separate right to a smaller amount should work.

Kevin Wiggins: Thanks for questioning me on that point. As a result of your inquiry, I went back and re-read the Advisory Opinion. Upon further reflection, I withdraw my objection to it. You handled this situation very deftly; asking me what was my position, rather than just flatly saying that I was wrong. Your question was an opportunity to enter into a dialogue, not a confrontation. Also, phrasing it that way makes the other person must less defensive, so that they can admit that they are wrong without losing face. If you have been guilty of overstating positions in the past, I haven't noticed it. Taking an absolute position is fine, as long as you are right, or at least have done the research. Another point that I believe is, if you make a mistake, like I did in this thread, you need to admit it quickly and openly. That is particularly true if you have pointed out the errors in others reasonings, as I have. I will just as quickly point out that I was wrong as I will point out that others are wrong. Anybody who has read many of my posting will note that I have made my share of blunders too. Criticizing others, but being unwilling to admit one's own mistakes is a serious character flaw in my book. I believe that willingness to admit quickly and easily that you made a mistake can solve a lot of problems

papogi: Thank you for that detailed response. In particular, your insights on the situation were valuable. The situation that you are describing is exactly what I had heard of before.

I don't know what P.S. stands for, but those were the predecessors of Reveneue Rulings. (I believe that title was used before 1954.)

Belgarath: I must confess that I completely misunderstood your comment about dinner invitations. But now that you explained it, I think that it is very witty. Sometimes that degree of subtelty is lost on me. I disagree with the DOL's reasoning in DOL Advisory Opinion 2004-02A. I just don't see how you can read the statutory language in a way that reaches that result. While that might be the right result is from a policy perspective, I don't think that allow the agency to read into the language an exception that it wishes were there (but isn't). I wonder if the DOL would be as accomodating if an employer wanted to read into a statute an exception that isn't there, if the DOL disagreed with the result sought to be achieved by the employer. I believe that that statutes should be interpreted the way that they read, without regard to the agenda of the person interpreting them. Thus, agencies should have no more authority to interpret statutes in a way that forwards their political agendas than employers have. I also believe that is the way that the U.S. Supreme Court (at least as it is currently composed) interprets ERISA statutory provisions. DWL: You bring up a very good point that none of us seem to have focused on before. Unfortunately, trying to decide the underlying motives of the parties is a difficult task, at best.

Could this be the case? Albert Lemishow v. Commissioner, 110 TC 110, 1993. TANNENWALD, Judge: OPINION P received distributions from individual retirements accounts (IRA's) and Keogh accounts consisting solely of money. P purchased stock with a portion of the distributions. Thereafter, P opened a new IRA and placed the stock in that IRA within 60 days of receipt of the distributions. [1] Held, secs. 408(d)(3) and 402©, I.R.C., both require that a rollover contribution, from a distribution of money, consist only of money. Thus, P's reinvestments of his IRA and Keogh distributions do not constitute rollover contributions and such distributions are includable in income. [2] Held, further, the portion of the distributions not invested in the stock, including the amounts for taxes withheld, are includable in P's income. Respondent determined a deficiency in petitioner's Federal income tax in the amount of $170,968 and an accuracy-related penalty under section 6662(a) 1 in the amount of $34,194 for the taxable year 1993. The issues for decision are: (1) Whether petitioner's use of distributions from Keogh and individual retirement accounts (IRA's) to purchase stock which was contributed to an IRA constitutes a tax-free rollover contribution; (2) whether petitioner received a taxable distribution of money not contributed to an IRA; and (3) whether petitioner is liable for the accuracy-related penalty under section 6662(a). This case was submitted fully stipulated under Rule 122. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in Flushing, New York, at the time he filed the petition in this case. During 1993, petitioner was a self-employed accountant. On December 13, 1993, petitioner completed a subscription agreement to purchase 30,000 shares of GP Financial Corp. stock at $15 a share for a total purchase price of $450,000. The Green Point Savings Bank (Green Point) was responsible for taking the stock orders and payments for the subscription offering. As of December 1993, petitioner maintained Keogh accounts and IRA's with Green Point and Apple Bank for Savings (Apple). On December 14, 1993, petitioner's account balances in the Keogh accounts and IRA's at Green Point totaled $327,252 and those at Apple totaled $165,695. On December 14, 1993, petitioner made the following withdrawals from his Keogh and IRA accounts (amounts rounded down to the nearest whole dollar): Type of Bank Amount Account ---- ------ ------- Green Point $250,651 Keogh Green Point 50,130 Keogh Green Point 13,939 IRA Apple 153,828 Keogh Apple 6,377 IRA Apple 5,489 IRA ------- Total $480,414 Green Point and Apple withheld Federal income tax from the distributions of $50,130.00 and $153,828.00, respectively, in the amounts of $12,532.58 and $30,765.62, respectively. Petitioner used the net Keogh and IRA distributions ($437,117) plus $12,883 of his own funds to pay the $450,000 purchase price of the GP Financial Corp. stock. On January 28, 1994, petitioner received 25,193 shares of GP Financial Corp. stock, not the 30,000 shares as per the subscription agreement. The 25,193 shares (the stock) at $15 per share cost $377,895. On January 29, 1984, petitioner received a stock purchase refund of $72,105 plus interest from Green Point. On February 11, 1994, petitioner opened an IRA with Smith Barney Shearson (the Smith Barney IRA). On[pg. 112] February 11, 1994, petitioner deposited the stock into the Smith Barney IRA. Petitioner did not report any of the Keogh and IRA distributions on his 1993 Federal income tax return. Petitioner claimed a credit for the $43,298.20 in Federal income tax withheld by Green Point and Apple. Respondent determined that all $480,414 of the 1993 distributions (the net amount distributed plus withholding) from petitioner's Green Point and Apple and Keogh accounts were includable in petitioner's 1993 income. Generally, any amount paid or distributed out of an IRA is included in gross income by the payee or distributee, as the case may be, in the manner provided in section 72. Sec. 408(d)(1). Rollover contributions, however, are not includable in gross income. Sec. 408(d)(3)(A). One type of rollover contribution consists of any amount paid or distributed out of an IRA to the individual for whose benefit the IRA is maintained if “the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity *** for the benefit of such individual not later than the 60th day after *** [the individual] receives the payment or distribution”. Sec. 408(d)(3)(A)(i). If any amount would meet these requirements except that the entire amount was not rolled over into the new IRA, the portion rolled over within the time limit will be considered as a rollover contribution. Sec. 408(d)(3)(D). As with IRA distributions, amounts distributed out of Keogh accounts generally are taxable in the year received under section 72. Sec. 402(a). However, to the extent the distribution meets the following requirements, such distribution is not includable in gross income: (A) any portion of the balance to the credit of an employee in a qualified trust is paid to the employee in an eligible rollover distribution, (B) the distributee transfers any portion of the property received in such distribution to an eligible retirement plan, and © in the case of a distribution of property other than money, the amount so transferred consists of the property distributed, [sec. 402©(1).] Respondent concedes that petitioner's IRA and Keogh distributions were eligible to be rolled over and that the Smith Barney IRA was an eligible plan. [pg. 113] It is clear from the above provisions that to the extent that petitioner did not reinvest the IRA and Keogh distributions ($480,414 received less $377,895 in stock, or $102,519), those portions are taxable, and we so hold. Whether the portions of the IRA and Keogh distributions used to purchase the stock are excludable from income turns on whether the respective rollover provisions of sections 408(d)(3) and 402© require, since the distributions consisted of money, that petitioner transfer money to the Smith Barney IRA. Both rollover provisions were enacted as part of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, sec. 2002(b), (g)(5), 88 Stat. 829, 959-964, 968-969. 2 The purpose of allowing a tax- free rollover from a retirement plan to an IRA was to facilitate portability of pensions. Conf. Rept. 93-1280 (1974), 1974-3 C.B. 415, 502; H. Rept. 93-807 (1974), 1974-3 C.B. (Supp.) 236, 265. The purpose of the IRA-to-IRA transfers was to permit flexibility with respect to the investment of an IRA. H. Rept. 93-807, supra, 1974-3 C.B. (Supp.) at 374; S. Rept. 93-383 (1973), 1974-3 C.B. (Supp.) 80, 214. With respect to rollovers, the legislative history repeatedly speaks in terms of “this same money or property” and “the same amount of money (or the same property)”, both for distributions from an IRA and from a qualified plan. H. Rept. 93-807, supra, 1974-3 C.B. (Supp.) at 374-375; Conf. Rept. 93-1280, supra, 1974-3 C.B. at 502. Section 1.408-4(b), Income Tax Regs., describing rollovers from IRA to IRA, uses the language “if the entire amount received (including the same amount of money and any other property) is paid into an” IRA. Based on the language of the statutory provisions and the legislative histories of those provisions, we hold that petitioner's use of the distributions from his Keogh and IRA's to purchase stock which he then contributed to the Smith Barney IRA does not constitute a tax-free rollover contribution under section 402© or 408(d)(3), respectively. 3[pg. 114] Section 6662(a) imposes a penalty of 20 percent of the underpayment due to negligence or disregard of rules and regulations. “Negligence” includes any failure to make a reasonable attempt to comply with the provision of the internal revenue laws; “disregard” includes any careless, reckless, or intentional disregard. Sec. 6662©. The negligence penalty is inappropriate where an issue to be resolved by the Court is one of first impression involving unclear statutory language. Hitchins v. Commissioner, 103 T.C. 711, 720 (1994). Since this is the first time we have considered the rollover requirements as to the specific character of the property to be transferred, we find for petitioner as to the negligence penalty imposed on the portion of the underpayment attributable to the distributions used to purchase the stock. The record contains no facts pertaining to petitioner's failure to report any portion of the distributions. Thus, we find petitioner liable for the negligence penalty imposed on the portion of the underpayment attributable to the $102,519 not used to purchase the stock. In keeping with the above holdings, Decision will be entered under Rule 155. -------------------------------------------------------------------------------- 1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. -------------------------------------------------------------------------------- 2 These provisions enacted sec. 402(a)(5), which is the predecessor of sec. 402©. -------------------------------------------------------------------------------- 3 We note that a limited exception to the requirement of a tax-free rollover, that the same property distributed be contributed by the recipient to a qualified plan, was enacted in 1978. See sec. 402(a)(6)(D)(now sec. 402©(6)), added by the Revenue Act of 1978, Pub. L. 95- 600, sec. 157(f)(1), 92 Stat. 2763, 2806. This exception permitted property distributed to be sold and the proceeds contributed during the 60- day period. The narrow scope of this section is reflected in Staff of Joint Comm. on Taxation, General Explanation of the Revenue Act of 1978, Pub. L. 95-600, at 110 (J. Comm. Print 1979). See also Rev. Rul. 87-77, 1987-2 C.B. 115.

papogi: I've heard of employers trying to design eligibility conditions for health plans that being covered or not being covered under your spouse's employer's health plan affects your ability to participate in your employer's health plan. The inclusion or exclusion rule might have been designed to only apply to dependents, my memory is very fuzzy on this point. In fact, I honestly don't remember precisely what the configuration was or what objetive the employer was trying to achieve. Have you heard of any such arrangements? Do you have an opinion as to whether they are legally permissible? Do they achieve their desired results? Actually, I would like to hear from anybody that has any experience and/or insight regarding the legality and/or efficacy of such plan design features.

One caveat. I just had some notes on my computer that I stored some time ago. I didn't do any research. That being said, my guess is that if the IRS had reversed courses, I would have heard about it or somebody else would have posted a correction. But don't bet the house on this one cite that I don't even know where I got.

Here it is. I've not read it, so I can't say whether it comports with the summary of it that I had stored on my computer. Private Letter Ruling 9010007 Date: December 14, 1989 Taxpayer's Name: *** Taxpayer's Address: *** Taxpayer's Identification Number: *** Years Involved: 1986 and 1987 Date of Conference: None ISSUES (1) Is the $1500 to be treated as a premature distribution subject to early withdrawal penalty? (2) Would the redeposit be considered as an excess contribution subject to penalty? (3) Can an individual withdraw funds from his Individual Retirement Arrangement (IRA) for personal use and this be considered a rollover as long as he redeposits it back into the same account or into another account at the same bank within 60 days? 1. Facts On April 11, 1986, the taxpayer deposited $2000 into his IRA for the taxable year of 1985. On May 1, 1986, the taxpayer withdrew $1500 of this amount for his personal use. On June 27, 1986, the taxpayer redeposited the $1500 to the same IRA. The bank issued a 1099-R showing the distribution of $1500. A letter from the bank indicates that the 1099-R was issued in error. In 1987 the taxpayer made a similar withdrawal. A withdrawal of $1500 was made on October 21, 1987 and the same amount was redeposited on November 4, 1987. The taxpayer showed on the deposit slip “replacement of temporary withdrawal”. The bank deposited this into a certificate of deposit (CD) under the same customer number but into a new separate CD. They treated this as a rollover and apparently did not issue a 1099-R. For purposes of our response, we are assuming that this separate CD funds the original IRA. 2. Applicable Law Section 72(t) of the Internal Revenue Code provides for a ten percent additional tax on early distributions from qualified retirement plans, including IRAs. Section 72(t)(1) provides that if any taxpayer receives any amount from an IRA, the taxpayer's tax for the taxable year in which such amount is received shall be increased by an amount equal to ten percent of the portion of such amount which is includible in gross income. Section 4973(a) of the Code provides for a tax on excess contributions to IRAs. In general, in the case of an IRA, there is imposed for each taxable year a tax in an amount equal to 6 percent of the amount of the excess contributions to such individual's IRA (determined as of the close of the taxable year). Section 4973(b) of the Code provides, in pertinent part, that in the case of IRAs, the term “excess contributions” means the sum of the excess (if any) of (1) the amount contributed for the taxable year to the IRA (other than a rollover contribution described in section 408(d)(3)), over (2) the amount allowable as a deduction under section 219 for such contributions, and the amount determined under this subsection for the preceding taxable year, reduced by the sum of (1) the distributions out of the IRA for the taxable year which were included in the gross income of the payee under section 408(d)(1), (2) the distributions out of the IRA for the taxable year to which section 408(d)(5) applies (certain distributions of excess contributions after the due date for the taxable year), and (3) the excess (if any) of tee maximum amount allowable as a deduction under section 219 for the taxable year over the amount contributed to the IRA for the taxable year. Section 408(d)(1) of the Code provides general rules for the tax treatment of distributions from an IRA. Generally, any amount distributed out of an individual retirement plan is included in gross income by the payee or distributee as provided under section 72. Section 408(d)(3)(A)(i) of the Code provides, in general, that the general rule described in section 408(d)(1) does not apply to any amount paid or distributed from an IRA, to the individual for whose benefit the IRA is maintained, if the entire amount received is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution. The individual may make such a rollover of a distribution only once a year. ANALYSIS In both cases the taxpayer returned the funds to his IRA within the 60 day time period provided for in section 408(d)(3)(A) of the Code, meeting the rules for a tax-free rollover. Pursuant to section 72(t) of the Code, the early distribution penalty applies to the portion of a distribution which is includible in gross income. Since the taxpayer's distribution will not be includible in gross income for the taxable years covered in this analysis, such distribution would not be subject to the early withdrawal penalty. Since section 4973(b) of the Code provides that rollover contributions described in section 408(d)(3) are not included in the definition of the term “excess contributions”, the taxpayer's rolled over amounts are not considered part of an excess contribution to which a penalty applies. Finally, IRA distributions are tax-free in the year of distribution if the rollover rule under section 408(d)(3) are met. As long as the IRA distribution is redeposited into the same or another qualifying IRA within 60 days of receipt of the distribution, such distribution would constitute a qualified rollover. 3. Conclusion (1) The $1500 is to be treated as a tax-free rollover not subject to the early withdrawal penalty. (2) The redeposit is not considered as an excess contribution subject to penalty. (3) An individual may withdraw funds from his IRA for personal use and this may be considered a rollover as long as he redeposits it back into the same IRA or into another qualified IRA within 60 days.

Pax: I don't, but something tells me I may end up regreting having used that phrase. Could you tell us in what context somebody else used that phrase?

I've not read the ruling, but I have notes stored on my computer that say that the IRS blessed such an arrangement in PLR 9010007.

I agree with Belgarath.

Belgarath: I must admit that I am much more reluctant to take firm positions in my postings than many people on BenefitsLink. I try to ask questions, rather than to state facts. Also, when I do take a position, unless I am 1000% (not a typo) sure that I am right, I tend to caveat my responses so that I don't have to eat crow (or at least avoiding having to eat the beak and claws) if I'm wrong. Go back and read a number of my postings and you will see this pattern in my postings. Correspondingly, I must confess that I am very surprised at the number of posters that take black and white positions without doing the necessary research and/or thinking things through first. When you take rigid positions that produce absurd results, you have to anticipate that people will point them out. I will admit, that I could have have been gentler. Similarly, Pension Newbee could have expressed those views in a less outspoken manner, such as by using one the following approaches to get exactly the same idea across: Does anybody think that the plan could take the position that the subsequent marriage invalidates the prior divorce? Would it is be reasonable to the position that the subsequent marriage invalidates the prior divorce? What about the view that the subsequent marriage invalidates the prior divorce? Does anybody think that this makes sense? If others think that I've made an error in judgment in any of my posting, please correct me. I wholeheartedly encourage others point out any fallacies in my logic that they spot, because I'd much rather be corrected here on BenefitsLink than by a judge or by the IRS.

PensionNewbee: Why do you think the subsequent remarriage "invalidates" the prior divorce? What if the person had married spouse 2 after the divorce from spouse 1, and then divorced spouse 2 and later remarried spouse 1 again? Are you saying that because the divorce from spouse 1 was invalidated, then the person could be charged with bigamy for having married spouse 2? By the way, this isn't a hypothetical set of facts; I have two friends who fit these facts exactly.

RLL's position was also contained in the legislative history to the Tax Reform Act of 1986.

Appleby: If you were really dedicated, you would get a tatoo that says that. On your forehead.

It seems to me that there is another issue, in addition to those that were mentioned in mbozek's reply. Because it is a multiemployer plan, I assume that the person is a member in a collective bargaining unit. Thus, I think that the requirement to participate in the plan originates with the collective bargaining agreement, not with the employer. As an ERISA (not a labor) lawyer, it seems to me that this issue involves labor law at least as much as it involves ERISA.

WDIK: I was relieved to find out that PS wasn't a shorter version of PMS.

JerseyGirl: Funny you should mention the timing of the child's birth. I have boy/girl twins that were the first babies born in the year. While they made the front page of the paper the day they were born, that was far from the optimal tax result.

Mike Preston: I hadn't heard of anybody saying that QNECs could only be added on a prospective basis. Do you recall what argument they propounded supporting that position?

AndyH: I think your posting on 412(i) has become out of date with the new IRS releases. I think that 412(i) now means "Prepare to pay big tax bill."

That client is in for serious trouble with the IRS. If it took a deduction for a payment that it knows it didn't make, that sounds like tax fraud to me.

How do you overcome the statute and the regulations? In other words, what are you going to say to the IRS for them to justify ignoring their own regulations and what Congress enacted? Why won't the IRS just say, if you think your theory is compelling, go tell it to Congress and get them to rewrite Section 105(h)?