Plan loans - and repayment with property - violated tax rules

Article Abstract:

The IRS explained through TAM 9713002 the two types of errors discovered in a qualified pension plan in relation to plan loans. The first offense of the scheme is that it made substantial loans to the employer's sole owner, resulting in non-compliance with the exclusive benefit rule. The second error is that it accepted property in repayment for the loans, and thereby participated in a forbidden transaction. The IRS reported that both the exclusive benefit rule and the prudent person rule were violated because evidence that the loans were secured by collateral or otherwise was absent. Also, although the promissory notes indicated a stated interest rate, they did not report the frequency of interest payment and the due date when the principal was to be repaid. Other reasons given by the IRS were the failure to consider the borrower's ability to repay the loans and the inadequate diversification of plan assets.

Pension, health, and welfare funds, Pension Funds & Benefit Plans, Pension Funds, Employee loans

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Distributions to shareholder are not part of split-up

Article Abstract:

The Tax Court held in 'Praegitzer' that the withdrawals of a taxpayer from a completely owned corporation that was spun off to him in a divorce settlement were considered dividends since they were autonomous of the division of marital property. The IRS recognized that the exchange of the old shares for new shares by the taxpayer was not taxable as part of a divisive reorganization, as provided by Sec. 355 and Sec. 368(a)(1)(D). However, it found that the withdrawal of $103,000 and the cancellation of the debt were dividends. The taxpayer invoked Sec. 1041 in defense against income recognition. However, this was not accepted since the transfer was not made on behalf of the ex-spouse. Therefore, subsequent distributions were distinct from transactions between a wholly owned corporation and its shareholder and stood on their own.

Spouse's share

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QDRO rules do not require use of buzzwords

Article Abstract:

The Court decided on the 'Hawkins' case that a divorce decree met the requirements of a qualified domestic relations order (QDRO) in governing the prompt transfer of $1 million from the husband's qualified pension plan to his wife despite the fact that it did not include the exact terminology of Sec. 414(p). The wife, therefore, should be taxed on the whole distribution. The Tax Court held that the agreement was not clear and concise enough to qualify as a QDRO because it did not actually refer to the wife as an alternative payee and, despite its identification of the plan as the source of distribution, did not really assign this to her. Moreover, it was not able to unmistakably indicate that she was taxable on the distribution. However, the Tenth Circuit reversed because this was too narrow an interpretation.

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