Compliance June 10, 2011

ASPPA Offers IRS Ways to Simplify Retirement Plan Filings

The American Society of Pension Professionals and Actuaries (ASPPA) submitted a letter to the Internal Revenue Service (IRS) suggesting improvements for submitting pre-approved defined contribution plans.
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ASPPA acknowledged the success of these plans and noted how most plan sponsors use pre-approved plans. But it said there is still room for improvements.ASPPA’s three recommendations are:

1. Reduce ‘Protective’ Determination Letter Filings: The IRS should modify its procedures to lessen the need for ‘protective’ determination letter applications, including providing limited audit relief, adopting a plan document registration program, allowing for certification on Form 5500, and providing for certification of adoption of amendments by the pre-approved document sponsor. Changes such as these could significantly reduce the number of determination letter applications.

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2. Modify the Approval of Trust Documents: The IRS should modify its existing program to allow approval of trust documents separate from the plan document. This would avoid multiple IRS reviews of the same identical trust language just because it is associated with more than one plan document.

3. Strengthen Reliance on Opinion and Advisory Letters in Bankruptcy: The IRS should clarify and strengthen the wording used in opinion and advisory letters to align with the wording in Revenue Procedures (‘Rev. Proc.’) 2005-16 and 2011-6. Plan sponsors will be less likely to file for determination letters if they are comfortable that the opinion or advisory letter for their plan will be treated as favorable determination under Internal Revenue Code section 7805 in the event a participant files for bankruptcy protection.

The complete letter sent to the IRS is available here.

 

Compliance June 10, 2011

Tax Court Catches Phony ESOP

Mark Warmoth created two corporations since 1988, which manufactured nothing except tax-saving retirement plans for their founder, according to the U.S. Tax Court. 
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In 1988, Warmoth founded his first company, Weekend Warrior Trailers, and incorporated it in 1995.  In 2002, Warmoth incorporated his second company, Leading Edge and received all 10,000 of Leading Edge’s shares of stock. He was its only board member, Chief Executive Officer, and President.

According to the Tax Court memorandum, Warmoth established a deferred compensation plan (NQDC), an employee-stock ownership plan (ESOP), and a 401(k) plan – even though it was discovered that the companies did not have any legitimate business purpose.

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The IRS argued that Leading Edge should not be considered for federal income tax purposes because it lacked any substance and was formed solely for the purpose of obtaining tax benefits. Warmoth argued that there were “potential” legitimate reasons for incorporating Leading Edge, but the court did not agree.

The case is Weekend Warrior Trailers, Inc., et al, Petitioners v. Commissioner of Internal Revenue. The memorandum is available here. 

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