Line Items

The Sixth Circuit Court of Appeals ruled in Negron v. U.S. (No. 07-4460 (6th Cir. 1/28/09)) that the IRS annuity tables of IRC § 7520 provide a realistic and reasonable estate valuation of a state lottery prize paid as a lump sum (for earlier proceedings see “Tax Matters: Ohio Court Turns the Table on Annuities,” JofA, Jan. 08, page 74). In so doing, it reversed a district court’s allowance of the actual amount of the payments—reflecting a present-value discount of 9% from state valuation tables—as their federal value. The Sixth Circuit also thereby joined the Fifth Circuit, which in Cook (349 F.3d 850 (5th Cir. 2003)) held similarly. District courts in Massachusetts (Estate of Donovan, No. Civ. A. 04-10594-DPW (D. Mass. 4/26/05)) and Louisiana (Anthony, No. Civ. A. 02-304-D-M1 (M.D. La. 6/17/05)) also have prescribed IRS table valuation in such cases. However, the Ninth Circuit in Shackleford (262 F.3d 1028 (9th Cir. 2001)) and the Second Circuit in Estate of Gribauskas (342 F.3d 85 (2d Cir. 2003)) have allowed alternate valuation methods.



The government withdrew its appeal before the Fifth Circuit of Donald James Vidalier v. U.S. (“Tax Matters: Late Returns, Late Wife,” JofA, Dec. 08, page 94). The Fifth Circuit dismissed the case in February at the government’s request. The U.S. District Court for the Western District of Louisiana (No. 07-545 (W.D. La. 8/29/08)) had held that Vidalier could use married filing jointly status for delinquent returns he filed after his wife’s death for tax years when she was still alive. IRC § 6013 and supporting regulations describe joint filing as available for a prior year when a spouse dies prior to the return due date for that year and no executor has been appointed for the deceased spouse’s estate. The government unsuccessfully argued that the provisions are meant to bar retroactive joint filing for previous years.



In REG-138326-07, the IRS issued proposed regulations that would allow it to convert partnership items arising from listed transactions to nonpartnership items that can be heard separately from unified partnership proceedings otherwise required by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).


Such a measure is needed for more effective and efficient tax law enforcement, the Service said, given changes in abusive tax shelters since the 1970s and early 1980s, when the TEFRA regime was enacted. Then, dozens or hundreds of investors reaped tax benefits from a single large partnership. Now, abusive shelters are more likely arranged in tiers to benefit one or a few investors, resulting in multiple proceedings under TEFRA.


Consequently, the proposed regulations would add listed transactions within the meaning of Treas. Reg. § 1.6011-4(b)(2) to items under IRC § 6231(b) that the Service may at its discretion adjust outside unified TEFRA proceedings. The IRS must send written notification to the partner, and the item must have been identified as a listed transaction before the notification date, although not necessarily before the taxpayer engaged in it. The proposed regulations would become effective immediately upon publication of final regulations. Written comments are requested by May 14. Descriptions of topics to be covered are requested by May 15 for a public hearing scheduled for June 4 at the IRS Building in Washington, D.C.



The Service issued final regulations on automatic contribution arrangements for 401(k) and other eligible plans. The regulations (TD 9447, issued Feb. 24) adopt with modifications the 2007 proposed regulations (REG-133300-07) providing guidance on implementing provisions of the Pension Protection Act of 2006 and the Worker, Retiree and Employer Recovery Act of 2008.


Under these provisions, when an employee who is otherwise eligible to participate in an employer’s cash or deferred arrangement (CODA) fails to make an election to do so, an employer may make automatic contributions to the plan on the employee’s behalf. Generally, such employees are automatically enrolled and a default percentage of their pay withdrawn, contributed and invested in a prescribed manner. Previous legal and practical hurdles to automatic enrollment had included nondiscrimination requirements, state laws prohibiting automatic paycheck deductions and concerns about fiduciary responsibility.


The final regulations clarify how automatic contribution amounts are determined in an employee’s initial period and when the employee has made an earlier affirmative election that is no longer in effect. They also:


  • Prescribe rules for a midyear increase in the default percentage of an automatic contribution.
  • Clarify that safe harbor nonelective and matching contributions made under a qualified automatic contribution arrangement (QACA) are subject to withdrawal restrictions. A QACA is a CODA that is deemed to meet nondiscrimination rules by conforming to the notice, automatic deferral, matching or nonelective contribution, and other requirements of section 401(k)(13).
  • Provide guidance for how a multiemployer plan may meet the uniformity requirement for a section 414(w) eligible automatic contribution arrangement (EACA). An EACA can allow an employee to make “permissible withdrawals” under section 414(w)(2)(A) within 90 days after the first elective contribution. Such withdrawals, although immediately includible in the gross income of the employee, are not subject to the usual 10% early withdrawal penalty.
  • Allow EACAs to set a deadline for permissible withdrawals earlier than 90 days.


The final regulations apply to plan years beginning on or after Jan. 1, 2008, with respect to QACAs and Jan. 1, 2010, with respect to EACAs.



The IRS’ Office of Professional Responsibility (OPR) was unaware of a significant number of licensed tax practitioners who had been assessed penalties, enjoined by federal courts or criminally sentenced for promoting abusive tax shelters, the Treasury Inspector General for Tax Administration (TIGTA) found in an audit. As a result, the practitioners were still able to represent taxpayers before the IRS. The OPR regulates the conduct of licensed tax professionals.


From IRS records, TIGTA identified 280 individuals who represented taxpayers and were assessed penalties in 2005 through 2007 for tax-shelter-related violations. More than half of them (143), currently representing 8,787 taxpayers, did not show up in OPR records of disciplinary proceedings. TIGTA was able to confirm that 73 were licensed preparers. Another 70 were listed as attorneys, CPAs or enrolled agents, but TIGTA could not confirm their licensure. Nine of the practitioners not in OPR disciplinary records had been enjoined by a court from promoting tax shelters, and eight had been criminally prosecuted.


OPR relies on other IRS employees to refer to it for discipline practitioners who violate Circular 230, the regulation that governs the practice of CPAs, attorneys and enrolled agents before the IRS. TIGTA had determined in an audit released in March 2006 that IRS operating divisions lacked records of referrals and that OPR had not recorded all cases that were referred. The current findings most likely stemmed from a continuing failure of IRS enforcement personnel to refer cases to OPR, TIGTA said.



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