4975(a) Tax---is it negotiable?

[Guest Richard Tennenbaum]

An ESOP may have miscalculated the release of shares and as a result, the loan may not be exempt.

Does the Service have the authority to waive or reduce the 4975(a) prohibited transaction tax? Under ERISA Sec. 3003, they may waive the 4975(b) tax, but may they also waive the 4975(a) tax?

At first blush, GCM 38637 appears to be favorable, but it only applies to 'subsequent' 4975(a) taxes and not those already imposed.

Has anyone had any success negotiating a reduction or waiver of the (a) tax on the basis that the tax will hurt employees (reduce the value of the stock in the plan; it may also prohibit the employer from making discretionary contributions to other plans of the employer)??

Thanks

[BeckyMiller]

Richard - I have never negotiated the excise tax on this situation, but I have seen many instances where the government was willing to treat it as a clerical error requiring correction in the participant accounting and not a prohibited transaction. These were all situations where the loan documents were correct, it was just the calculation of the shares where the error occurred. As long as the participant accounting was redone back to the date of the error and no participant was, in fact, harmed, they would drop the issue.

Have they already written it up as a PT? Was the client unable or unwilling to correct the participant accounting?

[Guest Richard Tennenbaum]

Appreciate your response.

The sequence of events goes like this: dol audits the plan and notes the calculation error. They ask that the release be recalculated back to the error and participants credited properly (which the plan sponsor did). In its closing letter the dol provides for no sanction but that a PT may have occurred. IRS gets the referral and they state that the 4975 tax is owed from the inception of the loan through the correction.

This is a troubling outcome given that no participant was harmed and that generally a miscalculation would not be uncommon given the complexities involved.

Again, I appreciate your response and any additional commentary would be appreciated.

[BeckyMiller]

Interesting. This is only the second time that I have heard of this happening. Hope it is not an indicator of things to come. I suggest that you protest the IRS conclusion that it is a PT under the legal argument that the ACTUAL share release is controlled by the terms of the loan agreement (presumably those terms are appropriate), that the calculation was simply a clerical error which has nothing to do with the contractual release of the shares, when recognized the calculations were corrected to correspond to the documents appropriate terms.

There is only one court case that I have found that even mentions this matter. See , NATIONAL HEALTH CORP. (Plaintiff) v. UNITED STATES OF AMERICA(Defendant), (Mar. 23, 2004) IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION Mar. 23, 2004. But, the holding doesn't really answer the question - it goes to a purely procedural matter. The IRS required the taxpayer to pay the excise tax and they filed a refund claim. The IRS attempted to block the refund claim and the court overruled that attempt. But, I don't know if the company was successful in getting the refund or not.

It would be helpful to this community if you could keep us up to date on developments on this.

Good luck - Becky