4980 Reversion tax

[Guest planwizard]

I'm looking for a little heads up info on the potential application of the 4980 Tax on Reversion of Qualified Plan Assets to Employer. A client has been presented with a proposal to have an unrelated company "purchase" a newly formed subsidiary which will have become the plan sponsor of the client's currently substantially overfunded pension plan. Third party will pay to client to purchase the subsidiary approximately 75% of overfunding.. Upon closing, third party will spinoff "back" to client assets, sans overfunding, to cover benefits as originally accrued. Third party them "markets" overfunded shell plan to underfunded plan.

I find it hard to believe that the IRS would not or has not taken the position (successfully if challenged) that the payment of the purchase price is an indirect reversion, taxable under 4980.

Anybody know of any IRS position on this? To say nothing about DOL

[mbozek]

There are financial intermediaries who have purchase surplus assets of terminated plans for years. I have received their sales literature and are they subsidaries of investment banks. The plan sponsor usually sells the shell corp with plan surplus as the only asset to the financial intermedary who resells the plan assets to a underfunded plan after collecting a finders fee. The plan sponsor is paid for the sale of stock of the corp which is taxed as a capital gian. These type of transactions have been done for years in a gray market, i.e, no specific prohibition but concern that the IRS would subject the sale to the step transaction doctrine, but I am not aware of any taxation of such sales. Clients use counsel to negotiate such sales and are aware of the uncertainties.

This is a new twist with the transaction being used to transfer assets of an ongoing plan which I have never seen. The real question is does the employer really want to give up the surplus assets if fmv of plan assets declines-- and the er has to make additonal contributions.

[mwyatt]

Something in the back of my head recalls that this (or a similiar) situation was posed at ASPA conference in the last year or two. Quite negative response by the IRS. Will try to find the cite tonight.

[mbozek]

I would like to the cite. But remember negative response by the IRS isnt enough. They need a statutory basis.

[mwyatt]

mbozek:

I was going on my boss's recollection from last fall's ASPA meeting in the Q&A session with Jim Holland/Dick Wickersham. Not sure if I can find cite (nor am I sure, given past track record of these two, that they can either;) ).

I looked through the Gray Book archives from the 2001 EA meeting and couldn't find anything that explicitly addressed the situation, so I'm pretty sure that this was a question posed at the ASPA meeting orally.

Take it as you will; probably one of those things that they would react to as immediately wrong (smells like a duck theory...).

Was anyone else at that seminar who could confirm/deny? I'm sure we've all seen these proposals sent to us from clients who've been ID'd off of Judy Diamond searches. Anyone's experience pro or con would be greatly appreciated.

[Mike Preston]

mbozek: The surviving plan can be left with excess assets. Just not as much as they started with. I am aware of at least 3 reputable firms that each have many transactions on the books. I have acted as a consultant in some cases, to preseve anonymity until client or client's counsel is satisfied with the details. To date, the IRS has not challenged any that I'm aware of. As you point out, this is an area where competent counsel is a must. The transaction is not for the squeamish. At some point, they may bar the door. While not exactly like S-Corp ESOP's, it is felt by some that it is just as unlikely that they will attempt to bar the door retroactively. But there is always a discussion of statute of limitations.

[mbozek]

Mike: I concur with your assessment. I have advised clients on sales of surplus assets and there have been no reactons from the IRS. But u are right - it is only for risk oriented clients given the uncertainties. I have never heard of the IRS enforcing the step transaction doctrine against any of these transactions.