Disqualified Entity

[DMcGovern]

Anyone had experience with the IRS disqualifying an entity that sponsored a DB plan?

DB plan was established in 2012, funded in December 2012. The IRS reviewed the company in 2013 and determined that the entity was a nullity for tax reporting purposes due to changes in tax law requirements. They went through a Voluntary Disclosure program for the entity to make the corrections, pay taxes and penalties.

Not sure if 1099's need to be issued for the gains in 2012 (very nominal amount), and 2013 (large amount)? Taxed as ordinary income or can it include capital gains?

Any thoughts/guidance on this issue appreciated!

[Flyboyjohn]

If a purported entity was "nullified" by the IRS I have to assume that somebody else was required to pick up the business income & deductions and pay the resulting tax. Can't that "somebody else" take over sponsorship of the DB plan nunc pro tunc?

Or if you have what you thought was a tax exempt DB trust that wasn't ever qualified you need to file trust income tax returns (1041s) and let the income tax chips fall as they may.

[DMcGovern]

As a part of the closing agreement in the Voluntary Correction program for the non-entity, they are reversing the deduction taken in 2012 and paying income taxes on the personal tax return.

The "somebody else" would not be able to sponsor the plan since there is no entity - only an individual. And not sure if would follow to file a 1041 for a trust that also essentially never existed. All of the assets become the property of one individual as a result of this nullification.

I should have provided more details before - sorry!

[Flyboyjohn]

I don't see why an individual who had business earned income couldn't sponsor a qualified DB plan, happens all the time.

That being said it sounds like some $$ was put into an investment account that was "supposed" to be owned by a qualified trust but which turned out to be nothing more than an investment account for the "individual". So I would pick up the investment activity on the individuals 1040 even though the 1099s issued by the investment place had some other taxpayer name and EIN attached.

[DMcGovern]

My fault again for not providing all the data - as a part of the closing agreement in the correction program, the IRS said that what was originally claimed as income for the entity was to be passed through directly to the individual as unearned income.

Makes sense about picking up the amounts previously reported on the 1099s.

Thanks!