Tax Archives - Page 15 of 34 - The National Law Forum

Same Sex Marriage Defined by IRS

Just before Labor Day weekend, the U.S. Department of Treasury and the Internal Revenue Service (IRS) released final regulations amending the definitions of “marriage” and “husband and wife” in the wake of the Supreme Court’s Obergefell v. Hodges decision, which legalized same-sex marriage, and the Windsor v. U.S. decision, which struck down Section 3 of the Defense of Marriage Act (DOMA). The proposed regulations, issued in October 2015, were followed by several comments and a request for a public hearing (at which the requestor did not attend, and at which no one else asked to speak). The comments prompted minor refinements to the proposed rules, with the final regulations providing the following:

For federal tax purposes, the terms “spouse,” “husband,” and “wife” are defined as an individual lawfully married to another individual. These terms do not include individuals who have entered into a registered domestic partnership, civil union, or other similar relationship if that relationship is not denominated as marriage under applicable law in the jurisdiction in which the relationship was entered into (regardless of where the couple lives (i.e., domicile)).
“Husband and wife” is defined as two individuals lawfully married to each other.

The definitions set forth above apply regardless of the taxpayers’ sexes or genders.

Building off of Revenue Ruling 2013-17, which adopted the “place of celebration” rule over the “place of domicile” rule for purposes of determining the validity of a same-sex marriage, the final regulations further provide:

A marriage between two individuals entered into in, and recognized by, any state, possession, or territory of the United States will be treated as a marriage for federal tax purposes (regardless of the married couple’s place of domicile). This standard applies regardless of the term used in the Internal Revenue Code.
Foreign marriages are discussed separately from domestic marriages to ensure clarity on how these foreign marriages are to be treated. Under the foreign marriage rule, two individuals entering into a relationship denominated as marriage under the laws of a foreign jurisdiction are married for federal tax purposes if the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the United States. Under this construction, it is sufficient for a couple who is married outside the United States to be treated as married for federal tax purposes in the United States if a single jurisdiction would recognize them as married; thus, a review of all pertinent laws of a state or territory within the United States will not be required.

Notably, the IRS declined to adopt certain suggestions submitted by commentators, including:

That the regulations specifically reference “same-sex marriage” such that they would be gender-neutral and to avoid any potential issues of interpretation. The IRS reasoned that the regulations were clear and did not present any potential for confusion; further, adopting this comment was deemed to potentially undermine the goal of eliminating distinctions in federal tax law based on gender.
That the regulations clarify that common-law marriages of same-sex couples will be recognized for federal tax purposes. While the statutes of certain states recognizing common law marriages only do so for opposite-sex couples, the Treasury and IRS opined that the Supreme Court’s holdings, coupled with prior IRS guidance, make clear that common law marriages are valid, lawful marriages for federal tax purposes. While the agencies did acknowledge that some states had laws “on the books” prohibiting same-sex marriage (including some states that allow common law marriage), since the government was “unaware” of any state enforcing those statutes or otherwise prohibiting same-sex couples from entering into common law marriages, the Treasury and IRS declined to make any further clarifications on this issue.

While employers who sponsor benefit plans should have already modified their plans and procedures to come into compliance with Obergefell, Windsor, and Revenue Ruling 2013-17, the finalization of these regulations brings refinements to the rules that should be captured by those working with benefit plans. For example, how are foreign marriages treated for imputation of income in a group health plan setting? In addition, how are same-sex common law marriages reviewed under the qualified plan joint and survivor rules? A careful review of the final regulations’ definitions as compared to current plan documents and administrative practices is recommended.

Written by Carrie E. Brynes and Jorge M. Leon of Michael Best & Friedrich LLP.

IRS Provides Benefit Plan Relief to Louisiana Flood Victims

On August 14, 2016, President Obama declared a major disaster in the State of Louisiana due to the severe storms and flooding that took place in several State parishes (“Louisiana Storms”). Following the declaration, the Internal Revenue Service (IRS) issued guidance postponing certain tax filings and payment deadlines for taxpayers who reside or work in the disaster area. The relief also provides qualifying individuals with expanded access to their retirement plan assets to alleviate hardships caused by the Louisiana Storms. Below is a summary of the filing extension for the Form 5500 series and administrative changes that employers can make to expedite plan loans and hardship distributions to Louisiana Storm victims.

Extension of Filing Deadlines

Plan sponsors in the affected parishes listed below now have until January 17, 2017, to file Form 5500 series returns, provided the return had an original or extended due date falling on or after August 11, 2016, and before January 17, 2017.

Relaxation of Hardship Distribution and Plan Loan Requirements

IRS Announcement 2016-30 (“Announcement”), issued on August 30, 2016, modifies certain verification procedures that may be required under retirement plans with respect to loans and hardship distributions. This relief allows qualifying individuals to quickly access assets in their “qualified employer plan” to alleviate hardships caused by the Louisiana Storms. Qualifying individuals include employees and former employees who have a principal residence or place of employment on August 11, 2016, located in one of the parishes identified below or who have a son, daughter, parent, grandparent, or other dependent with a principal residence or place of employment in one of the listed parishes on that date (“Qualifying Individuals”).

Acadia
Ascension
Avoyelles
East Baton Rouge
East Feliciana
Evangeline
Iberia
Iberville
Jefferson Davis
Lafayette
Livingston
Pointe Coupee
St. Helena
St. Landry
St. Martin
St. Tammany
Tangipahoa
Washington
West Feliciana
Vermilion

Other parishes may be added based on damage assessment by Federal Emergency Management Agency (FEMA).

The amount available for a hardship distribution is limited to the maximum amount permitted under the retirement plan and the IRS rules. However, Qualifying Individuals are permitted to use hardship proceeds for any hardship arising from the Louisiana Storms, for example, to repair or replace a home and to acquire food and shelter. Also, a Qualifying Individual may continue to make elective deferrals into the plan (the usual requirement to suspend deferrals for six months does not apply). Plan administrators may rely on the Qualifying Individual’s representations as to the need for and amount of the hardship distribution, unless the plan administrator has actual knowledge to the contrary. As soon as practicable the plan administrator can obtain any required documentation from the participant. Hardship distributions are includible in gross income and subject to the 10 percent excise tax that normally applies to a payment made before age 59-1/2 (unless Congress provides relief).

The IRS is also relaxing procedural and administrative rules that may apply to plan loans for a need arising from the Louisiana Storms. For example, if spousal consent is required for a plan loan or distribution and the employee claims his or her spouse is deceased, the plan may make the loan in the absence of a death certificate if it is reasonable to believe, under the circumstances, that the spouse is deceased, and the plan administrator makes reasonable efforts to obtain a copy of the death certificate as soon as practicable.

For purposes of the Announcement, a “qualified employer plan” includes a plan that meets the requirements of Code sections 401(a), 403(a), and 403(b), or a plan described in Code Section 457(b). Defined benefit plans and money purchase pension plans qualify, but only with respect to in-service hardship distributions from separate accounts, such as employee contributions or rollover amounts.

To qualify for relief, the plan loan or hardship distribution must be made no earlier than August 11, 2016, and no later than January 17, 2017.

If your retirement plan does not provide for loans or hardship distributions but you would like to allow storm victims to obtain loans or hardships, or if you would like to add flexibility to existing plan provisions, the plan must be amended no later than the end of the first plan year beginning after December 31, 2016 (December 31, 2017, for calendar year plans).

ARTICLE BY Timothy Brechtel, Susan Chambers & Ricardo X. Carlo of Jones Walker LLP

Profits Interest as Equity-Based Incentive: Keeping Your Team Motivated

Say you own one-half of an LLC that is taxed as a partnership. You and your partner invested the initial capital that was necessary to get the business up and running, and you both built the business with the help of a few key employees. With the business still in the growth phase, you want to make sure that you motivate and retain these key employees who are helping you grow your company. What should you do? You and your partner might want to consider causing the LLC to issue the key employees a profits interest in the LLC.

What is a Profits Interest?

From a tax-standpoint, an LLC can issue two basic types of membership interests: capital interests and profits interests. A capital interest is an interest in a partnership or LLC taxed as a partnership that entitles the recipient to share immediately in the proceeds of liquidation. A capital interest normally results from a capital investment and provides recipients with participation in current and future equity value, a share of income, and distributions. When someone receives a capital interest in an LLC in exchange for a corresponding capital contribution, this is typically a tax-free event. When someone receives a capital interest in exchange for services, this is taxable compensation to the service provider.

Profits interests are distinct from capital interests, providing no current right to share in the proceeds of liquidation as of the date of grant. Instead, they typically only provide a holder with the right to share in those profits of the business that arise after the recipient acquires the interest. The primary goal of issuing profits interests is typically to give a service provider the ability to participate in the growth of the enterprise without incurring tax on the receipt of the interest, and to enjoy at least some long-term capital gain treatment (instead of ordinary income treatment) on proceeds they receive on a sale of the LLC or similar liquidity event.

Structuring a Profits Interests

Usually, as long as the profits interest is structured properly and capital accounts are booked up on entrance of the profits interest member, the IRS should not treat the grant of a vested or unvested profits interest as a taxable event. Most practitioners design profits interests so that they meet IRS safe harbor standards for ensuring profits interest treatment. These standards include:

The profits interest must not relate to a substantially certain and predictable stream of income from the entity’s assets, such as income from high quality debt securities or a net lease,
The recipient of the profits interest must not dispose of it within two years of receipt, and
The profits interest may not be a limited partnership interest in a publically traded partnership.

The issuing entity’s partnership or operating agreement should be closely examined upon the issuance of a profits interest. Things to consider with respect to newly issued profits interests include whether such recipients should have voting rights similar to that of members who contributed capital to the enterprise. Additionally, the agreement should be updated to clearly define how the profits interests will be valued relative to capital interests under current buy-out or redemption provisions. Oftentimes, practitioners ensure that a profits interest has no right to share in liquidation proceeds on the grant date by valuing the company as of that date, and providing that a profits interest holder will not share in distributions except to the extent a threshold established based on the value is exceeded. Also, booking up capital accounts is generally critical to ensuring that the profits interest does not entitle the recipient to any proceeds of liquidation if the entity was liquidated on the grant date.

To the extent the profits interest issued is unvested at the time of issuance, most practitioners opt to make an 83(b) election to ensure tax-free treatment upon receipt. When a profits interest is issued, it has no value. If the profits interest is vested, there is no question that it is taxed at the time of receipt, at $0. Unvested property is taxed at the time of vesting, on the property’s value at the time of vesting. Hence, if the profits interest has appreciated in value since the time of grant, then there would be ordinary income at the time of vesting. To avoid this treatment, recipients of profits interests can make an 83(b) election, which is an election to treat the profits interest as vested for tax purposes at the time of grant and to be taxed on the value of the profits interest at the time of grant. There is some IRS guidance that states that an 83(b) election is not necessary. However, that issue is beyond the scope of this article and a so-called “protective 83(b) election” is usually still made to assist in easing the minds of profits interest holders who want to ensure that the interest is not taxable when it vests.

Tax Consequences of a Profits Interest

The recipient of a properly structured profits interest is not taxed on receipt because the IRS views the profits interest’s value as $0. Because the profits interest is treated as having no value, there is no deduction that corresponds to the issuance of the profits interest for the entity. The profits interest will be treated as having a $0 basis, and no capital account. Going forward, the recipient should be treated as an equity owner under the terms of the governing partnership or operating agreement for the entity starting on the date on which the profits interest was granted. The recipient should receive a K-1 and pay taxes on income that is passed through from the entity. Capital accounts should be adjusted accordingly, just as is the case for any other member.

The Future of Profits Interests

The history of how profits interests are taxed is riddled with controversy. In addition, politicians continue to discuss the desirability of profits interests (also sometimes called “carried interests”), in the context of private equity and hedge funds. However, the foregoing analysis reflects the IRS’ stated position on profits interests based on several Revenue Procedures that were issued to address the topic pending additional guidance. Until the IRS or Department of Treasury issues additional guidance, the current rules will generally remain applicable to small businesses and startups who are issuing profits interests.

Overall, profits interests are a unique and creative way to give people who are rendering services to the LLC or partnership a stake in the enterprise. They can generally be viewed as similar to options, except that they also provide the holder with a stake in the losses of the entity. With the increasing use of LLCs for startup operations, the use of profits interests as an incentive compensation mechanism has grown in the past years.

ARTICLE BY Katie K. Wilbur of Varnum LLP

IRS Tax Treatment of Wellness Program Benefits

The IRS Office of Chief Counsel recently released a memorandum providing guidance on the proper tax treatment of workplace wellness programs. Workplace wellness programs cover a range of plans and strategies adopted by employers to counter rising healthcare costs by promoting healthier lifestyles and providing employees with preventive care. These programs take many forms and can encompass everything from providing certain medical care regardless of enrollment in health coverage, to free gym passes for employees, to incentivized participation- based weight loss programs. Due to the wide variation in such plans the proper tax treatment can be complicated. However, the following points from the IRS memo can help business owners operating or considering a wellness program evaluate their tax treatment.

First, the memo confirmed that coverage in employer-provided wellness programs that provide medical care is generally not included in an employee’s gross income under section 106(a), which specifically excludes employer-provided coverage under an accident or health plan from employee gross income. 26 USC § 213(d)(1)(A) defines medical care as amounts paid for “the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,” transportation for such care, qualified long term care services, and insurance (including amounts paid as premiums).

Second, it was made clear that any section 213(d) medical care provided by the program is excluded from the employee’s gross income under section 105(b), which permits an employee to exclude amounts received through employer-provided accident or health insurance if it is paid to reimburse expenses incurred by the employee for medical care for personal injuries and sickness. The memo emphasized that 105(b) only applies to money paid specifically to reimburse the employee for expenses incurred by him for the prescribed medical care. This means that the exclusion in 105(b) does not apply to money that the employee would receive through a wellness program irrespective of any expenses he incurred for medical care. 26 CFR 1.105-2.

Third, any rewards, incentives or other benefits provided by the wellness program that are not medical care as defined by section 213(d) must be included in an employee’s gross income. This means that cash prizes given to employees as incentives to participate in a wellness program are part of the employee’s gross income and may not be excluded by the employer. However, non-money awards or incentives might be excludable if they qualify as de minimis fringe benefits (ones that are so small and infrequent that accounting for them is unreasonable or impracticable). 26 USC § 132(a)(4). The memo gives the example of a t-shirt provided as part of a wellness program as such an excludable fringe benefit, and notes that money is never a de minimis fringe benefit.

Fourth, payment of gym memberships or reimbursement of gym fees is a cash benefit, even when received through the wellness program, and must be included in gross income. This is because cash rewards paid as part of the wellness program do not qualify as reimbursements of medical care and cannot be a fringe benefit.

Fifth, where an employee chooses a salary reduction to pay premiums for healthcare coverage and the employer reimburses the employee for some or all of the premium amount under a wellness program, the reimbursement is gross income.

These points laid out in the IRS memo provide a solid foundation for understanding the tax treatment of workplace wellness programs and should be kept in mind by business owners deciding how to structure new wellness plans for their employees, or ensuring the tax compliance of existing plans.

The Impact of Recently Proposed Regulations on Ineligible Nonqualified Plans Under Internal Revenue Code § 457(f)

The Treasury Department and the Internal Revenue Service recently issued comprehensive proposed regulations governing nonqualified plans subject to tax under Internal Revenue Code § 457. Code § 457 prescribes the tax rules that apply to “eligible” and “ineligible” nonqualified deferred compensation plans. Code § 457(b) defines the requirements to be an “eligible” nonqualified plan; a deferred compensation plan that does not satisfy the requirements of Code § 457(b) is an “ineligible” plan under Code § 457(f). Eligible and ineligible plans may be maintained only by state or local governments or organizations exempt from tax under Code § 501(c). The proposed regulations make the following changes:

Eligible plans (Code § 457(b))

The proposed regulations would amend the final regulations issued in 2003 to reflect subsequent statutory changes made to Code § 457.

Ineligible plans(Code § 457(f))

The proposed regulations make good on the Service’s promise, made in Notice 2007-62, to issue “guidance regarding a substantial risk of forfeiture for purposes of § 457(f)(3)(B) under rules similar to those set forth under § 1.409A-1(d).” This promise prompted much concern amount ineligible plan sponsors and their advisors. Notice 2007-62 was aimed squarely at the interaction between Code § 457(f) and the then recently issued final regulations under Code § 409A. It was clear to many that the latter would have some consequences for the former. To what extent would Code § 409A force unwelcome changes to the rules governing ineligible plans of deferred compensation? When maintained by private sector tax-exempt entities, these plans are restricted to covering only senior management (or, in the parlance of ERISA, the “top-hat group”), which in many institutions, meant the chief executive officer. In particular, sponsors and their advisors worried about three, broad issues:

Will the narrower definition of ‘substantial risk of forfeiture” set forth in Code § 409A be applied to arrangements governed by Code § 457(f)?
Will elective deferrals continue to be allowed?
Will a non-compete agreement continue to operate to defer vesting (and hence the imposition of tax)?

Though not addressed in Notice 2007-62, sponsors of ineligible plans had the following additional worries relating to the interaction between Code § 457 and Code § 409A:

Code § 457 includes a carve-out for bona fide severance plans; Code § 409A similarly includes a carve-out for severance plans, but only for terminations based on an involuntary termination. It was only a matter of time they surmised, before the regulators intervened to “harmonize” the two provisions of the Code.
The final Code § 409A regulations contained detailed rules governing what constitutes an “involuntary termination of employment.” Whether a termination of employment is also (critically) important for purposes of Code §457, since only an involuntary termination can defer vesting. Will the same definition apply in each case?
How “constructive termination” actions (often referenced as “good reason” provisions) would operate as a basis for vesting of benefits for ineligible plans?

In this post, we examine the impact of the proposed regulations on ineligible plans under Code § 457(f) with a particular emphasis on the issues raised above. As a result—or at least it so appears—of comments received in response to Notice 2007-62, the worst fears of sponsors and advisors alike have not materialized. Once these rules are made final, however, there will be a “new” far more constrained “normal.” These regulations will introduce a new level of rigor into the design, maintenance and operation of ineligible deferred compensation plans.

Background

A “plan” for purposes of Code § 457 includes “any plan, agreement, method, program, or other arrangement, including an individual employment agreement, of an eligible employer under which the payment of compensation is deferred. There are, however, certain plans that are not subject to Code § 457. These include bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, and death benefit plans, plans paying solely length of service awards to bona fide volunteers (or their beneficiaries), and bona fide severance pay plans. While these exceptions apply to eligible and ineligible plans alike, the exception for bona fide severance pay plans is of particular interest to sponsors of ineligible plans…

ARTICLE BY Alden J. Bianchi, Tyrone P. Thomas & David R. Lagasse of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

A Whole New World for Qualified Plans: Internal Revenue Procedure 2016-37

The Internal Revenue Service (IRS) announced changes to the determination letter program for individually designed qualified plans in IRS Announcement 2015-19 and IRS Notice 2016-03, which we have discussed in prior posts. In our June 2016 we described the report made to the IRS by the Advisory Committee on Tax Exempt and Government Entities, which provided recommendations to the IRS regarding changes to the determination letter program.

The IRS issued Revenue Procedure 2016-37 on June 29, 2016, which clarifies, modifies and supersedes Revenue Procedure 2007-44 and is generally effective January 1, 2017. Revenue Procedure 2016-37 provides additional guidance on changes to the determination letter program and ongoing plan compliance, extends the remedial amendment period for individually designed qualified plans, revises the remedial amendment cycle system for pre-approved qualified plans in accordance with the changes made to the determination letter program and delays the beginning of the 12-month submission period for pre-approved qualified plans to request opinion and advisory letters. This Client Alert addresses the modifications to the determination letter program and ongoing compliance for individually designed qualified plans. A subsequent post will address the modifications in Revenue Procedure 2016-37 that apply to pre-approved qualified plans.

Key Points for Individually Designed Qualified Plans:

The current five-year determination letter program for individually designed qualified plans described in Revenue Procedure 2007-44 is eliminated effective January 1, 2017, consistent with prior recent IRS guidance.
Effective January 1, 2017, sponsors of individually designed qualified plans may submit determination letter applications only for initial plan qualification, qualification on plan termination and certain other circumstances to be determined annually by the IRS.
The IRS intends to publish annually a “Required Amendments List” of disqualifying provisions that arise as a result in a change in qualification requirements.
The remedial amendment period for a disqualifying provision related to a change in qualification requirements which is on the Required Amendments List generally will be the end of the second calendar year following the year the list is issued.
The remedial amendment period for a disqualifying provision related to an amendment to an existing plan which is not on the Required Amendments List generally will be the end of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later.
To assist plan sponsors with operational plan compliance, the IRS intends to issue an Operational Compliance List annually to identify changes in qualification requirements that are effective during a calendar year.

Elimination of the Five-Year Remedial Amendment Cycle

Effective January 1, 2017, the staggered five-year remedial amendment cycle system for individually designed plans is eliminated. Cycle A plans (plan sponsors with employer identification numbers ending in 1 or 6) may submit determination letter applications during the period beginning on February 1, 2016, and ending on January 31, 2017. Controlled groups and affiliated service groups that maintain one or more plan may submit determination letter applications for such plans during Cycle A in accordance with prior valid Cycle A election(s). Also effective January 1, 2017, individually designed plan sponsors are no longer required to adopt interim plan amendments as described in Revenue Procedure 2007-44 with adoption deadlines on or after such date.

When May a Determination Letter Application Be Submitted?

Initial Plan Qualification. A plan sponsor may submit a plan for initial plan qualification on a Form 5500 if a favorable determination letter has never been issued for the plan.
Qualification Upon Plan Termination. A plan sponsor may submit a plan to obtain a favorable determination letter upon plan termination if the filing is made no later than the later of (i) one year from the effective date of the termination; or (ii) one year from the date on which the action terminating the plan is taken, but in any case not later than 12 months after the date that substantially all plan assets have been distributed in connection with the plan termination.
Other Circumstances. The IRS will consider annually whether determination letter applications will be accepted for individually designed plans under circumstances other than initial qualification or plan termination. Factors that may affect such consideration include:
- Significant law changes
- New approaches to plan design
- Inability of certain plans to convert to a pre-approved format
- IRS case load and resources available to process applications

Additional situations in which plan sponsors will be permitted to request determination letters will be announced in the Internal Revenue Bulletin. Comments will be requested on a periodic basis as to the additional situations in which a determination letter application may be appropriate. The only determination applications that will be accepted during the 2017 calendar year are for initial plan qualification, qualification upon plan termination and Cycle A submissions.

Extension of Remedial Amendment Period

Generally, a disqualifying provision is a provision or the absence of a provision in a new plan or a provision in an existing plan that causes a plan to fail to satisfy the requirements of the Internal Revenue Code (Code) as of the date the plan or amendment is first effective. Additionally, a disqualifying provision includes a plan provision that has been designated by the IRS as a disqualifying provision by reason of a change in those requirements. For disqualifying provisions that are first effective on or after January 1, 2016, the remedial amendment period for plans (other than governmental plans) is extended as follows:

New Plan. The remedial amendment period ends the later of (i) the 15th day of the 10th calendar month after the end of the plan’s initial plan year; or (ii) the “modified Code Section 401(b) expiration date.”
Amendment to Existing Plan. The remedial amendment period for a disqualifying provision (other than those in the Required Amendments List) is the end of the second calendar year after the amendment is adopted or effective, whichever is later.
- Plan Not Maintained by a Tax-Exempt Employer: The modified Code Section 401(b) expiration date is generally the due date for the employer’s income tax return, determined as if the extension applies.
- Plan Maintained by a Tax-Exempt Employer: The modified Code Section 401(b) expiration date is generally the due date for the Form 990 series, determined as if the extension applies or, if no Form 990 series filing is required, the 15th day of the 10th month after the end of the employer’s tax year (treating the calendar year as the tax year if the employer has no tax year).
Change in Qualification Requirements. The remedial amendment period for a disqualifying provision that relates to a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendment List on which the change in qualification requirements appears.

Example: Remedial Amendment Period for Amendment to an Existing Plan.

Employer maintains an individually designed plan that received a favorable determination letter in 2014. Effective January 1, 2018, Employer amends the plan’s vesting schedule. The plan amendment, which is signed on January 1, 2018, results in a disqualifying provision. During its annual plan compliance review in March 2019, Employer realizes that the plan amendment resulted in an impermissible vesting schedule. To maintain the plan’s qualification, Employer must: (i) adopt a remedial amendment to correct the disqualifying plan provision no later than December 31, 2020 – the last day of the second calendar year after the plan amendment was adopted and effective; (ii) make the remedial amendment retroactively effective as of January 1, 2018; and (iii) correct the plan’s operation to the extent necessary to correct the disqualifying provision.

Example: Remedial Amendment Period for Change in Qualification Requirements.

Employer maintains an individually designed plan with a calendar year plan year. The IRS publishes guidance in the Internal Revenue Bulletin in July 2016 that changes a qualification requirement under the Code. The guidance, which is effective for the first plan year beginning on or after January 1, 2017, is included on the 2017 Required Amendments List (issued in December 2016). To maintain the plan’s qualification, Employer must: (i) adopt an amendment to the plan reflecting the guidance no later than December 31, 2019 – the last day of the second calendar year that begins after the issuance of the Required Amendments List on which the qualification change appear; and (ii) ensure that the plan is operationally compliant with the guidance as of January 1, 2017.

Note that the remedial amendment periods differ for new and existing plans of governmental entities.

Extended Remedial Amendment Period Transition Rule

The remedial amendment period for certain disqualifying provisions identified in Revenue Procedure 2007-44 was set to expire as of December 31, 2016, as a result of the elimination of the five-year remedial amendment cycle system. The remedial amendment period for such provisions is extended to December 31, 2017, except that with respect to any disqualifying provision that is on the 2016 Required Amendments List, the remedial amendment period will end on the last day of the second calendar year that begins after the issuance of the Required Amendments List.

Terminating Plans

Generally, the termination of a plan ends the plan’s remedial amendment period. Retroactive remedial plan amendments or other required plan amendments must be adopted in connection with the plan termination even if such amendments are not on the Required Amendments List.

Plan Amendment Deadline

For disqualifying provisions, the plan amendment deadline is generally the date on which the remedial amendment period expires, unless otherwise provided. For discretionary amendments (i.e., any amendment not related to a disqualifying provision) to any plan that is not a governmental plan, unless otherwise provided, the amendment deadline is the end of the plan year in which the amendment is operationally put into effect. An amendment is operationally put into effect when the plan is administered in a manner consistent with the intended plan amendment (rather than existing plan terms).

Required Amendments List

The Treasury and IRS intend to publish a Required Amendments List annually, beginning with changes in qualification requirements that become effective on or after January 1, 2016. The Required Amendments List will provide the date that the remedial amendment period expires for changes in qualification requirements. An item will appear on the Required Amendments List after guidance (including any model amendment) has been provided in regulations or in other guidance published in the Internal Revenue Bulletin, except as otherwise determined at the discretion of the IRS.

Operational Compliance List

The deadline for amending a plan retroactively to comply with a change in plan qualification requirements is the last day of the remedial amendment period. However, a plan must be operated in compliance with a change in qualification requirements as of the effective date of the change. The IRS intends to issue annually an Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year. The Operational Compliance List is intended to assist plan sponsor in operational compliance, but plan sponsors are required to comply with all relevant qualification requirements, even if not on the list.

Scope of Plan Review

The IRS will review plans submitted with determination letter applications based on the Required Amendments List issued during the second calendar year preceding the submission of the application. The review will consider all previously issued Required Amendments Lists (and Cumulative Lists prior to 2016). Terminating plans will be reviewed for amendments required to be adopted in connection with plan termination. Plans submitted for initial qualification in 2017 will be reviewed based on the 2015 Cumulative List. With the exception of a terminating plan, individually designed plans must be restated to incorporate all previously adopted amendments when a determination letter application is submitted.

Reliance on Determination Letters

As provided in Revenue Procedure 2016-6, effective January 4, 2016, determination letters issued to individually designed plans no longer contain expiration dates, and expiration dates in determination letters issued prior to January 4, 2016, are no longer operative. A plan sponsor that maintains a qualified plan for which a favorable determination letter has been issued and that is otherwise entitled to rely on the determination letter may not continue to rely on the determination letter with respect to a plan provision that is subsequently amended or is subsequently affected by a change in law. However, the plan sponsor may continue to rely on such determination letter for plan provisions that are not amended or affected by a change in the law.

Action Steps for Sponsors of Individually Designed Qualified Plans

Conduct an annual compliance review to assess compliance with the current Operational Compliance List and correct any failures detected in accordance with the IRS guidance.
Periodically conduct a more in depth compliance review to assess compliance with all prior Operational Compliance Lists.
Review plan documents annually to assess compliance with the current Required Amendments List and determine whether plan amendments are required within the applicable remedial amendment period.
Review plan documents annually to determine whether all discretionary plan amendments have been timely adopted.
For any new individually designed qualified plan, determine the timing of the IRS submission request for an initial favorable determination letter.
For any terminating individually designed qualified plan, determine: (i) whether a favorable determination letter will be requested in connection with the plan termination; (ii) whether plan amendments are required in connection with the plan termination; and (iii) the timing of the submission to the IRS for a favorable letter on the qualification upon plan termination.
Annually, determine whether an IRS submission is permissible for an existing individually designed qualified plan, based on current IRS guidance.

ARTICLE BY Lori L. Shannon & Monica A. Novak of Drinker Biddle & Reath LLP

Tax Treatment of Bitcoin Has Many Open Questions

It has been over two years since the IRS came out with its initial position on the tax treatment of Bitcoin and other virtual currencies, but there has yet to be any follow-up on questions that this initial position has raised. The American Institute of Certified Public Accountants has written a letter to the IRS urging the Service to publish additional guidance to provide more certainty on these open issues.

IRS Notice 2014-21 stated that virtual currencies are to be treated as property, not as currency. This was potentially good news to Bitcoin investors, since it would allow them to pay the lower long-term capital gains tax rate on profits if they held the Bitcoin for over a year. On the other hand, this position was inconvenient for consumers and merchants who use and accept virtual currencies as a means of exchange, because each transaction, no matter how small, must be reported in order to determine the amount of gain or loss every time a consumer uses the virtual currency as a means of exchange, and every time the merchant converts the virtual currency received in a transaction into U.S. currency.

In the two years since the IRS published Notice 2014-21, this classification of virtual currencies as property rather than a currency, many other questions have been raised, but have not been addressed. The letter from the AICPA sets them out:

(1) Determining Fair Market Value of the Virtual Currency: The IRS should publish guidance on whether a taxpayer can use any published exchange rate to determine the fair market value of virtual currencies, and whether the taxpayer must use the same published exchange rate for all other transactions. The letter notes that there are wide variance in the fair market value of Bitcoin on four Bitcoin published rates (Google, Bitcoin exchange rate, Bitstamp, CEX and Winkdex), citing an example selected at the same time, reflecting a range of value from a low of $227.84 to a high of $231.14.

(2) Expenses of Obtaining Virtual Currencies: Are the expenses to mine virtual currencies currently deductible, or are they to be added to the basis of the mined currency? This would normally be an easy call – costs would normally be added to the basis of the property that is manufactured – but the 2014 guidance intimates that this might not be the case.

(3) Tracking Basis of Virtual Currency: Because virtual currencies are treated as property, the taxpayer must track the cost of purchasing each unit acquired, in order to determine the taxable gain when it is sold (including every time a consumer uses it to purchase goods and services). The AICPA letter says that tracking the basis for virtual currency is virtually impossible when it is used in everyday commerce, and asked for the IRS to consider alternative means to determine basis.

(4) General Transaction Rules Applicable to Property: The AICPA letter asks whether the general tax rules applicable to property (rather than currencies) would apply to virtual currencies. For example, the letter asks whether a taxpayer would be able to take advantage of the tax free like-kind exchange rules of section 1031 if one type of virtual currency is exchanged for a different type of virtual currency (for example, a Bitcoin for Ethereum exchange).

(5) Character of Virtual Currencies Held By Merchants: How should virtual currencies that are accepted by a merchant be classified for tax purposes – as a capital asset or as an ordinary income asset?

(6) Charitable Contributions: Does a contribution of virtual currencies to a charitable organization require a formal appraisal? The general rule is that if a taxpayer donates property worth more than $5,000 to a charitable organization, the taxpayer must obtain a formal appraisal to support the amount to be deducted as a charitable contribution. There is an exception, where an appraisal is not needed for the donation of securities that are traded on a published exchange. The letter asks whether the donation of virtual currency should be subject to the same exception, since they are traded on published exchanges.

(7) Is Virtual Currency a Commodity: If virtual currencies are treated as a commodity, would it be subject to the mark-to-market rules for commodity traders?

(8) How About a De Minimus Exception For Small Transactions: The letter asks the IRS for an exception to the rule requiring a taxpayer to report each virtual currency transaction as a taxable sale of property when used to make small consumer purchases.

(9) Retirement Accounts: Can virtual currencies be held as an investment in a qualified retirement plan (like a 401(k) plan)? The rules for eligible investments in such plans limit the types of property than can be held in a qualified retirement plan.

(10) Foreign Reporting Requirements: Are virtual currencies subject to Foreign Bank Account Reports (FBAR) and/or Foreign Bank Account Tax Compliance Act (FATCA) reporting?

As these issues get worked out, others are likely to arise. Until they are addressed by the IRS, the uncertainty will likely inhibit the growth of virtual currencies in the U.S. economy.

To see a copy of the AICPA letter to the IRS, please click here.

ARTICLE BY Marvin A. Kirsner of Greenberg Traurig, LLP

In Wake of Panama Papers Scandal Obama Calls for Stricter Bank Regulations, Tax Rules

In a news conference today President Obama addressed rules and proposed regulations announced Thursday intended to help the U.S. fight tax evasion and other crimes connected to anonymous offshore companies and accounts. The announcements come after a month of intense review by the administration following the first release of the so-called Panama Papers, millions of documents stolen or leaked from Panamanian law firm Mossack, Fonseca. The papers have revealed a who’s who of international politicians, business leaders, sports figures and celebrities involved with financial transactions accomplished through anonymous shell corporations.

The new regulations include a “customer due diligence” rule requiring banks, mutual funds, securities brokers and other financial institutions to determine, verify and keep records about the actual ownership of the companies with whom they do business. The administration has also proposed regulations requiring owners of foreign-owned “single-member limited liability companies” to obtain employer identification numbers from the IRS. In an effort to increase transparency and address “the problem of global tax avoidance,” both rules are intended to make more easily discoverable the actual ownership of offshore companies and accounts, allowing for easier investigation of suspected fraud, tax evasion and money laundering. Currently, companies can do business in the U.S. anonymously by registering in states that do not require full disclosure of actual ownership.

The new rules create regulatory obligations for a broad array of financial institutions, and potential new obligations for off-shore investors. A further release of Panama Papers is expected on Monday, with the identities of many U.S. companies and individuals involved in such “anonymous” shell corporations likely to be revealed, and greater scrutiny of such transactions and the financial institutions involved with them likely to follow.

Article By Raymond C. Marshall & David S. Cannon of Sheppard, Mullin, Richter & Hampton LLP

Senate Takes on Business Tax Reform; Treasury to Have “Intense Comment Period” for Inversion Regulations

Legislative Activity

Senate to Consider Business Tax Reform Proposals

Following multiple hearings on tax reform thus far this year in the House Ways and Means Committee, this week the Senate Finance Committee will hold a hearing on business tax reform. During the hearing, the difference between Republican and Democrat approaches to taxing corporate income, including what the top rate on corporations should be, will be on full display. In advance of the hearing, the Joint Committee on Taxation (JCT) has released an overview of various proposals for business tax reform, including: (1) the President’s framework; (2) reforms that both maintain and change the structure of the current business tax regime; and (3) proposals to shift to a consumption-based regime. As part of the Committee’s efforts on business tax reform, Senator Orrin Hatch (R-UT) last week reaffirmed his commitment to move forward with his “corporate integration” proposal by the end of June, noting that he is still awaiting a score from JCT before proceeding. For his part, Senate Finance Committee Ranking Member Ron Wyden (D-OR) this week is expected to introduce a proposal that would modify current corporate depreciation schedules – something former Senate Finance Committee Chairman Max Baucus (D-MT) also did during his time in the Senate.

As for tax reform efforts in the House, Ways and Means Committee Chairman Kevin Brady (R-TX) has announced his plans to release a comprehensive tax reform “blueprint” by June of this year as part of Speaker Paul Ryan’s (R-WI) Tax Reform Task Force efforts, while Representative Charles Boustany (R-LA) is expected to continue with his efforts on international tax reform – though whether we will see any action this year on his plan remains to be seen.

Notably, as both House and Senate tax-writers debate the best path forward for tax reform, Republicans lawmakers are pushing for the adoption of Representative Bob Goodlatte’s (R-VA) plan (H.R. 29, Tax Code Termination Act) that would repeal the Internal Revenue Code by 2019 and require Congress to approve a new system of taxation by July of that year. While the future of this legislation is uncertain – and no Senate counterpart exists – there are presently more than 130 co-sponsors in the House.

This Week’s Hearings:

Tuesday, April 26: The Senate Finance Committee will hold a hearing titled “Navigating Business Tax Reform.”

Regulatory Activity

Treasury Open to “Intense Comment Period” on Inversion Regulations

Following intense scrutiny and pushback from industry, last week Treasury Deputy Assistant Secretary Bob Stack acknowledged that Treasury “may have missed things” in its latest rulemaking targeting inversions and the ability of multinational corporations to engage in so-called “earnings-stripping” practices. This acknowledgement comes at the same time that 18 former Treasury officials sent a strongly-worded letter to Treasury Secretary Jack Lew urging his Department to focus on reforming the tax Code, not on inversions as a standalone issue.

In looking ahead, Mr. Stack has promised that Treasury “will have an intense comment period, [and] be listening to taxpayers.” He also suggested that Treasury “want[s] to do things that are both right from a policy point of view and also minimize burdens on companies…[but] [t]he answer to inversions is not to join the race to the bottom so that we have ultimately a zero tax rate.” Notably, Internal Revenue Service (IRS) Commissioner John Koskinen has indicated that the IRS does not intend to put out any “significant” regulations past Labor Day, which creates a rather tight timeframe for Treasury to digest the responses to its proposed regulations and still finalize the regulations this year.

Separately, partly spurred by fallout from the “Panama Papers” fiasco, the Treasury Department has announced that it also soon plans to finalize rules proposed in 2014 that would require the beneficial owners of single-member LLCs to identify themselves to the IRS. According to Treasury Secretary Lew, this, along with widespread implementation of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project and its proposal to require country-by-country reporting of certain tax information by large multinational corporations will help combat tax evasion.

Article By Brandon C. Roman & Stephanie L. Shaker of Squire Patton Boggs (US) LLP

Six Biofuel Trade Associations Write Congress To Extend Advanced Biofuel Tax Credits

On April 5, 2016, the biofuel trade associations Advanced Biofuels Business Council, Algae Biomass Organization, Biotechnology Innovation Organization (BIO), Growth Energy, National Biodiesel Board, and Renewable Fuels Association sent a letter to House and Senate Leaders asking for a multiyear extension of advanced biofuel tax credits. The six organizations are specifically asking that the Second Generation Biofuel Producer Tax Credit, the Special Depreciation Allowance for Second Generation Biofuel Plant Property, the Biodiesel and Renewable Diesel Fuels Credit, the Alternative Fuel and Alternative Fuel Mixture Excise Tax Credit, and the Alternative Fuel Vehicle Refueling Property through the Protecting Americans From Tax Hikes Act of 2015 are extended before they expire at the end of 2016. Other energy production tax credits have been extended, and the biofuel trade associations argue that extending certain energy tax provisions and not others creates investment uncertainty across the energy sector, and puts biofuel producers at a disadvantage.

Article By Kathleen M. Roberts of Bergeson & Campbell, P.C.

Category: Tax

Same Sex Marriage Defined by IRS

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