IRS Settlement Initiative for Transactions Considered Abusive

Internal Revenue Service officials yesterday announced a "broad-based, limited-in-time" opportunity for taxpayers to come forward and settle certain transactions that the IRS considers abusive. (Sixteen of the transactions are "Listed Transactions" and five are not per this link.) Taxpayers who…

Internal Revenue Service officials yesterday announced a “broad-based, limited-in-time” opportunity for taxpayers to come forward and settle certain transactions that the IRS considers abusive. (Sixteen of the transactions are “Listed Transactions” and five are not per this link.) Taxpayers who undertook one of the “covered” deals will have until January 23, 2006 to submit their settlement papers to the IRS.

The initiative, described in Announcement 2005-80, identifies 21 transactions eligible for the program. The ones which relate to benefits are as follows:

  • Rev. Rul. 2004-98, 2004-42 I.R.B. 664 (“Reimbursements” for parking expenses previously paid by an employer or previously paid by an employee through salary reduction)
  • Rev. Rul. 2004-20, 2004-1 C.B. 546, Situation 1 (Pension plan fails to satisfy § 412(i) where amounts accumulated under life insurance contracts and annuities held by the plan exceed benefits payable under plan terms) and Situation 2 (Employer contributions to pension plan are not currently deductible when used to pay premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit under the terms of the plan), and Rev. Rul. 2004-21, 2004-1 C.B. 544 (Pension plan fails to satisfy nondiscrimination requirements due to differences in the value of participants’ rights to purchase life insurance contracts from the plan)
  • Notice 2004-8, 2004-1 C.B. 333 (Abusive Roth IRA Transactions)
  • Rev. Rul. 2004-4, 2004-1 C.B. 414 (Transactions that involve segregating the business profits of an employee stock ownership plan (ESOP)-owned S corporation in a qualified subchapter S subsidiary, so that rank-and-file employees do not benefit from participation in the ESOP)
  • Notice 2003-24, 2003-1 C.B. 853 (Tax Problems Raised by Certain Trust Arrangements Seeking to Qualify for Exception for Collectively Bargained Welfare Benefit Funds under § 419A(f)(5))
  • Rev. Rul. 2003-6, 2003-1 C.B. 286 (Certain arrangements involving the transfer of ESOPs that hold stock in an S corporation for the purpose of claiming eligibility for the delayed effective date of § 409(p))
  • Rev. Rul. 2002-3, 2002-1 C.B. 316; Rev. Rul. 2002-80, 2002-2 C.B. 925 (“Reimbursements” of employees for salary reduction amounts previously excluded from gross income under § 106; “Advance reimbursements” or “loans” without regard to whether an employee has incurred medical expenses)
  • Notice 2000-60, 2000-2 C.B. 568 (Stock Compensation Corporate Tax Shelter)
  • Management S Corporation ESOP Transactions (Transactions where the taxpayer has claimed that it is entitled to exclude income of an operating business by asserting, incorrectly, that the taxpayer had established, on or before March 14, 2001, an employee stock ownership plan entitled to an exemption from unrelated business income and an S corporation that is a management corporation, and whatever actions that were taken to attempt to establish an employee stock ownership plan and a management S corporation were taken on or before March 14, 2001)

This document here provides information on what the IRS will require as part of the settlement for some of the transactions. Taxpayers will be exempt from penalties if they meet certain requirements, one of which is that the taxpayer obtained “a written tax opinion before filing the tax return that (1) was not an opinion that was part of the package sold by the promoter, but was given by a tax adviser meeting certain tests, and (2) was a ‘more likely than not’ opinion, that is, it concluded at a confidence level greater than 50% that the significant tax issues would be resolved in the taxpayer’s favor.”

For more details of the program:

Announcement
Fact Sheet 2005-17
Attachment to Fact Sheet 2005-17
Announcement 2005-18 [pdf]
Announcement 2005-80 Transaction-Specific Settlement Provisions [pdf]

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