- Highlights of This Issue
- Preface
- Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
- Part III. Administrative, Procedural, and Miscellaneous
- Definition of Terms and Abbreviations
- Numerical Finding List
- Effect of Current Actions on Previously Published Items
- How to get the Internal Revenue Bulletin
Internal Revenue Bulletin: 2006-22
May 30, 2006
These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.
Rev. Rul. 2006-28 Rev. Rul. 2006-28
LIFO; price indexes; department stores. The March 2006 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, March 31, 2006.
Rev. Proc. 2006-24 Rev. Proc. 2006-24
This procedure informs the trustee (or debtor in possession) representing the bankruptcy estate of the debtor of the procedure to be followed in obtaining a prompt determination by the Service of any unpaid tax liability of the estate incurred during the administration of the case. Rev. Proc. 81-17 obsoleted.
Notice 2006-49 Notice 2006-49
Weighted average interest rate update; 30-year Treasury securities. The weighted average interest rate for May 2006 and the resulting permissible range of interest rates used to calculate current liability and to determine the required contribution are set forth.
Rev. Proc. 2006-27 Rev. Proc. 2006-27
Administrative programs; correction programs. This procedure updates and expands upon the Service’s comprehensive Employee Plans Compliance Resolution System (EPCRS) of correction programs for retirement plans within the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. Rev. Proc. 2003-44 modified and superseded.
Rev. Rul. 2006-26 Rev. Rul. 2006-26
IRA, marital deduction. This ruling clarifies circumstances under which the surviving spouse is considered to have a qualifying income interest for life in an IRA where a marital trust is designated as the IRA beneficiary for purposes of electing to have the IRA treated as qualifying terminable interest property under section 2056(b)(7) of the Code. Rev. Rul. 2000-2 modified and superseded.
Rev. Proc. 2006-24 Rev. Proc. 2006-24
This procedure informs the trustee (or debtor in possession) representing the bankruptcy estate of the debtor of the procedure to be followed in obtaining a prompt determination by the Service of any unpaid tax liability of the estate incurred during the administration of the case. Rev. Proc. 81-17 obsoleted.
Rev. Proc. 2006-24 Rev. Proc. 2006-24
This procedure informs the trustee (or debtor in possession) representing the bankruptcy estate of the debtor of the procedure to be followed in obtaining a prompt determination by the Service of any unpaid tax liability of the estate incurred during the administration of the case. Rev. Proc. 81-17 obsoleted.
Rev. Proc. 2006-24 Rev. Proc. 2006-24
This procedure informs the trustee (or debtor in possession) representing the bankruptcy estate of the debtor of the procedure to be followed in obtaining a prompt determination by the Service of any unpaid tax liability of the estate incurred during the administration of the case. Rev. Proc. 81-17 obsoleted.
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The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are compiled semiannually into Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement).
Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period.
LIFO; price indexes; department stores. The March 2006 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, March 31, 2006.
The following Department Store Inventory Price Indexes for March 2006 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, March 31, 2006.
The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS (January 1941 = 100, unless otherwise noted) | ||||
---|---|---|---|---|
Groups | Mar. 2005 | Mar. 2006 | Percent Change from Mar. 2005 to Mar. 20061 | |
1. | Piece Goods | 465.1 | 442.9 | -4.8 |
2. | Domestics and Draperies | 536.8 | 495.7 | -7.7 |
3. | Women’s and Children’s Shoes | 685.9 | 703.1 | 2.5 |
4. | Men’s Shoes | 849.9 | 875.8 | 3.0 |
5. | Infants’ Wear | 571.0 | 569.9 | -0.2 |
6. | Women’s Underwear | 547.7 | 545.6 | -0.4 |
7. | Women’s Hosiery | 349.7 | 347.3 | -0.7 |
8. | Women’s and Girls’ Accessories | 607.0 | 583.1 | -3.9 |
9. | Women’s Outerwear and Girls’ Wear | 375.9 | 367.6 | -2.2 |
10. | Men’s Clothing | 564.8 | 542.9 | -3.9 |
11. | Men’s Furnishings | 587.0 | 571.3 | -2.7 |
12. | Boys’ Clothing and Furnishings | 445.9 | 408.0 | -8.5 |
13. | Jewelry | 882.1 | 854.9 | -3.1 |
14. | Notions | 777.7 | 792.2 | 1.9 |
15. | Toilet Articles and Drugs | 991.4 | 1008.3 | 1.7 |
16. | Furniture and Bedding | 604.2 | 603.6 | -0.1 |
17. | Floor Coverings | 602.4 | 619.5 | 2.8 |
18. | Housewares | 712.2 | 696.4 | -2.2 |
19. | Major Appliances | 205.0 | 204.2 | -0.4 |
20. | Radio and Television | 39.5 | 37.1 | -6.1 |
21. | Recreation and Education2 | 79.6 | 77.2 | -3.0 |
22. | Home Improvements2 | 137.3 | 139.5 | 1.6 |
23. | Automotive Accessories2 | 114.4 | 118.4 | 3.5 |
Groups 1-15: Soft Goods | 572.2 | 560.6 | -2.0 | |
Groups 16-20: Durable Goods | 381.1 | 374.7 | -1.7 | |
Groups 21-23: Misc. Goods2 | 94.0 | 93.5 | -0.5 | |
Store Total3 | 504.0 | 495.0 | -1.8 | |
1Absence of a minus sign before the percentage change in this column signifies a price increase. | ||||
2Indexes on a January 1986 = 100 base. | ||||
3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments. | ||||
IRA, marital deduction. This ruling clarifies circumstances under which the surviving spouse is considered to have a qualifying income interest for life in an IRA where a marital trust is designated as the IRA beneficiary for purposes of electing to have the IRA treated as qualifying terminable interest property under section 2056(b)(7) of the Code. Rev. Rul. 2000-2 modified and superseded.
If a marital trust described in Situations 1, 2, or 3 is the named beneficiary of a decedent’s individual retirement account (IRA) or other qualified retirement plan described in section 4974(c) that is a defined contribution plan, under what circumstances is the surviving spouse considered to have a qualifying income interest for life in the IRA (or qualified retirement plan) and in the trust for purposes of an election to treat both the IRA and the trust as qualified terminable interest property (QTIP) under § 2056(b)(7) of the Internal Revenue Code?
A dies in 2004, at age 68, survived by spouse, B. Prior to death, A established an IRA described in § 408(a). A’s will creates a testamentary marital trust (Trust) that is funded with assets in A’s probate estate. As of A’s death, Trust is irrevocable and is valid under applicable local law. Prior to death, A named Trust as the beneficiary of all amounts payable from the IRA after A’s death. The IRA is properly included in A’s gross estate for federal estate tax purposes. The IRA is currently invested in productive assets and B has the right (directly or through the trustee of Trust) to compel the investment of the IRA in assets productive of a reasonable income. The IRA document does not prohibit the withdrawal from the IRA of amounts in excess of the annual required minimum distribution amount under § 408(a)(6). The executor of A’s estate elects under § 2056(b)(7) to treat both the IRA and Trust as QTIP.
Under Trust’s terms, all income is payable annually to B for B’s life, and no person has the power to appoint any part of the Trust principal to any person other than B during B’s lifetime. B has the right to compel the trustee to invest the Trust principal in assets productive of a reasonable income. On B’s death, the Trust principal is to be distributed to A’s children, who are younger than B. Under the trust instrument, no person other than B and A’s children has a beneficial interest in Trust (including any contingent beneficial interest). Further, as in Rev. Rul. 2000-2, 2000-1 C.B. 305, under Trust’s terms, B has the power, exercisable annually, to compel the trustee to withdraw from the IRA an amount equal to all the income of the IRA for the year and to distribute that income to B. If B exercises this power, the trustee is obligated under Trust’s terms to withdraw the greater of all of the income of the IRA or the annual required minimum distribution amount under § 408(a)(6), and distribute currently to B at least the income of the IRA. The Trust instrument provides that any excess of the required minimum distribution amount over the income of the IRA for that year is to be added to Trust’s principal. If B does not exercise the power to compel a withdrawal from the IRA for a particular year, the trustee must withdraw from the IRA only the required minimum distribution amount under § 408(a)(6) for that year.
The trustee of Trust provides to the IRA trustee a copy of A’s will (Trust’s governing instrument) before October 31, 2005, in accordance with A-6(b) of § 1.401(a)(9)-4 of the Income Tax regulations. Because the requirements of A-4 and A-5 of § 1.401(a)(9)-4 of the Income Tax regulations are satisfied and there are no beneficiaries or potential beneficiaries that are not individuals, the beneficiaries of the trust may be treated as designated beneficiaries of the IRA. In accordance with § 408(a)(6) and the terms of the IRA instrument, the trustee of Trust elects to receive annual required minimum distributions using the exception to the five year rule in § 401(a)(9)(B)(iii) for distributions over a distribution period equal to a designated beneficiary’s life expectancy. Because amounts may be accumulated in Trust for the benefit of A’s children, B is not treated as the sole beneficiary and, thus, the special rule for a surviving spouse in § 401(a)(9)(B)(iv) is not applicable. Accordingly, the trustee of Trust elects to have the annual required minimum distributions from the IRA to Trust begin in 2005, the year immediately following the year of A’s death. The amount of the annual required minimum distribution from the IRA for each year is calculated by dividing the account balance of the IRA as of December 31 of the immediately preceding year by the remaining distribution period. Because B’s life expectancy is the shortest of all of the potential beneficiaries of Trust’s interest in the IRA (including remainder beneficiaries), the distribution period for purposes of § 401(a)(9)(B)(iii) is B’s life expectancy, based on the Single Life Table in A-1 of § 1.401(a)(9)-9, using B’s age as of B’s birthday in 2005, reduced by one for each calendar year that elapses after 2005. On B’s death, the required minimum distributions with respect to any undistributed balance of the IRA will continue to be calculated in the same manner and be distributed to Trust over the remaining distribution period.
Situation 1—Authorized Adjustments Between Income and Principal. The facts and the terms of Trust are as described above. Trust is governed by the laws of State X. State X has adopted a version of the Uniform Principal and Income Act (UPIA) including a provision similar to section 104(a) of the UPIA providing that, in certain circumstances, the trustee is authorized to make adjustments between income and principal to fulfill the trustee’s duty of impartiality between the income and remainder beneficiaries. More specifically, State X has adopted a provision providing that adjustments between income and principal may be made, as under section 104(a) of the UPIA, when trust assets are invested under State X’s prudent investor standard, the amount to be distributed to a beneficiary is described by reference to the trust’s income, and the trust cannot be administered impartially after applying State X’s statutory rules regarding the allocation of receipts and disbursements to income and principal. In addition, State X’s statute incorporates a provision similar to section 409(c) of the UPIA providing that, when a payment is made from an IRA to a trust: (i) if no part of the payment is characterized as interest, a dividend, or an equivalent payment, and all or part of the payment is required to be distributed currently to the beneficiary, the trustee must allocate 10 percent of the required payment to income and the balance to principal; and (ii) if no part of the payment made is required to be distributed from the trust or if the payment received by the trust is the entire amount to which the trustee is contractually entitled, the trustee must allocate the entire payment to principal. State X’s statute further provides that, similar to section 409(d) of the UPIA, if in order to obtain an estate tax marital deduction for a trust a trustee must allocate more of a payment to income, the trustee is required to allocate to income the additional amount necessary to obtain the marital deduction.
For each calendar year, the trustee determines the total return of the assets held directly in Trust, exclusive of the IRA, and then determines the respective portion of the total return that is to be allocated to principal and to income under State X’s version of section 104(a) of the UPIA in a manner that fulfills the trustee’s duty of impartiality between the income and remainder beneficiaries. The amount allocated to income is distributed to B as income beneficiary of Trust, in accordance with the terms of the Trust instrument. Similarly, for each calendar year the trustee of Trust determines the total return of the assets held in the IRA and then determines the respective portion of the total return that would be allocated to principal and to income under State X’s version of section 104(a) of the UPIA in a manner that fulfills a fiduciary’s duty of impartiality. This allocation is made without regard to, and independent of, the trustee’s determination with respect to Trust income and principal. If B exercises the withdrawal power, Trustee withdraws from the IRA the amount allocated to income (or the required minimum distribution amount under § 408(a)(6), if greater), and distributes to B the amount allocated to income of the IRA.
Situation 2—Unitrust Income Determination. The facts, and the terms of Trust, are as described above. Trust is governed by the laws of State Y. Under State Y law, if the trust instrument specifically provides or the interested parties consent, the income of the trust means a unitrust amount of 4 percent of the fair market value of the trust assets valued annually. In accordance with procedures prescribed by the State Y statute, all interested parties authorize the trustee to administer Trust and to determine withdrawals from the IRA in accordance with this provision. The trustee determines an amount equal to 4 percent of the fair market value of the IRA assets and an amount equal to 4 percent of the fair market value of Trust’s assets, exclusive of the IRA, as of the appropriate valuation date. In accordance with the terms of Trust, trustee distributes the amount equal to 4 percent of the Trust assets, exclusive of the IRA, to B, annually. In addition, if B exercises the withdrawal power, Trustee withdraws from the IRA the greater of the required minimum distribution amount under § 408(a)(6) or the amount equal to 4 percent of the value of the IRA assets, and distributes to B at least the amount equal to 4 percent of the value of the IRA assets.
Situation 3—“Traditional” Definition of Income. The facts, and the terms of Trust, are as described above. Trust is governed by the laws of State Z. State Z has not enacted the UPIA, and therefore does not have provisions comparable to sections 104(a) and 409(c) and (d) of the UPIA. Thus, in determining the amount of IRA income B can compel the trustee to withdraw from the IRA, the trustee applies the law of State Z regarding the allocation of receipts and disbursements to income and principal, with no power to allocate between income and principal. As in Situations 1 and 2, the income of Trust is determined without regard to the IRA, and the income of the IRA is separately determined based on the assets of the IRA.
Section 2056(a) provides that the value of the taxable estate is, except as limited by § 2056(b), determined by deducting from the value of the gross estate an amount equal to the value of any interest in property that passes from the decedent to the surviving spouse, to the extent that interest is included in the value of decedent’s gross estate.
Under § 2056(b)(1), if an interest passing to the surviving spouse will terminate or fail, no deduction is allowed with respect to the interest if an interest in the property passes or has passed from the decedent to any person other than the surviving spouse (or the estate of the spouse), that may be possessed or enjoyed by such other person after termination of the spouse’s interest.
Section 2056(b)(7) provides that QTIP, for purposes of § 2056(a), is treated as passing to the surviving spouse and no part of the property is treated as passing to any person other than the surviving spouse. Section 2056(b)(7)(B)(i) defines QTIP as property that passes from the decedent, in which the surviving spouse has a qualifying income interest for life, and to which an election under § 2056(b)(7) applies. Under § 2056(b)(7)(B)(ii), the surviving spouse has a qualifying income interest for life if, inter alia, the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals.
Section 20.2056(b)-7(d)(2) provides that the principles of § 20.2056(b)-5(f), relating to whether the spouse is entitled for life to all of the income from the property, apply in determining whether the surviving spouse is entitled for life to all of the income from the property for purposes of § 2056(b)(7).
Section 20.2056(b)-5(f)(1) provides that, if an interest is transferred in trust, the surviving spouse is entitled for life to all of the income from the entire interest if the effect of the trust is to give the surviving spouse substantially that degree of beneficial enjoyment of the trust property during the surviving spouse’s life that the principles of the law of trusts accord to a person who is unqualifiedly designated as the life beneficiary of a trust. In addition, the surviving spouse is entitled for life to all of the income from the property if the spouse is entitled to income as determined by applicable local law that provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and that meets the requirements of § 1.643(b)-1.
Section 20.2056(b)-5(f)(8) provides that the terms “entitled for life” and “payable annually or at more frequent intervals” require that under the terms of the trust the income referred to must be currently (at least annually) distributable to the spouse or that the spouse must have such command over the income that it is virtually the spouse’s. Thus, the surviving spouse will be entitled for life to all of the income from the trust, payable annually, if, under the terms of the trust instrument, the spouse has the right exercisable annually (or at more frequent intervals) to require distribution to the spouse of the trust income and, to the extent that right is not exercised, the trust income is to be accumulated and added to principal.
Generally, § 1.643(b)-1 provides that, for purposes of various provisions of the Code relating to the income taxation of estates and trusts, the term “income” means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law. Under § 1.643(b)-1, trust provisions that depart fundamentally from traditional principles of income and principal generally will not be recognized. Under these traditional principles, items such as dividends, interest, and rents are generally allocated to income and proceeds from the sale or exchange of trust assets are generally allocated to principal.
However, under § 1.643(b)-1, the allocation of an amount between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year, including ordinary and tax-exempt income, capital gains, and appreciation. For example, a state statute providing that income is a unitrust amount of no less than 3 percent and no more than 5 percent of the fair market value of the trust assets, whether determined annually or averaged on a multiple year basis, is a reasonable apportionment of the total return of the trust. Similarly, under § 1.643(b)-1, a state statute that permits the trustee to make adjustments between income and principal to fulfill the trustee’s duty of impartiality between the income and remainder beneficiaries is generally a reasonable apportionment of the total return of the trust.
Rev. Rul. 2000-2, 2000-1 C.B. 305, concludes that a surviving spouse has a qualifying income interest for life under § 2056(b)(7)(B)(ii) in an IRA and in a marital trust named as the beneficiary of that IRA if the spouse has the power, exercisable annually, to compel the trustee to withdraw the income earned on the IRA assets and to distribute that income (along with the income earned on the trust assets other than the IRA) to the spouse. Therefore, assuming all other requirements of § 2056(b)(7) are satisfied, and provided the executor makes the election for both the IRA and the trust, the IRA and the trust will qualify for the marital deduction under § 2056(b)(7). The revenue ruling also concludes that the result would be the same if the terms of the trust require the trustee to withdraw an amount equal to the income earned on the IRA assets and to distribute that amount (along with the income earned on the trust assets other than the IRA) to the spouse.
In Situation 1, under section 104(a) of the UPIA as enacted by State X, the trustee of Trust allocates the total return of the assets held directly in Trust (i.e., assets other than those held in the IRA) between income and principal in a manner that fulfills the trustee’s duty of impartiality between the income and remainder beneficiaries. The trustee of Trust makes a similar allocation with respect to the IRA. The allocation of the total return of the IRA and the total return of Trust in this manner constitutes a reasonable apportionment of the total return of the IRA and Trust between the income and remainder beneficiaries under § 20.2056(b)-5(f)(1) and §1.643(b)-1. Under the terms of Trust, the income of the IRA so determined is subject to B’s withdrawal power, and the income of Trust, so determined, is payable to B annually. Accordingly, the IRA and Trust meet the requirements of § 20.2056(b)(7)(B)(ii) and therefore B has a qualifying income interest for life in both the IRA and Trust because B has the power to unilaterally access all of the IRA income, and the income of Trust is payable to B annually.
Depending upon the terms of Trust, the impact of State X’s version of sections 409(c) and (d) of the UPIA may have to be considered. State X’s version of section 409(c) of the UPIA provides in effect that a required minimum distribution from the IRA under Code section 408(a)(6) is to be allocated 10 percent to income and 90 percent to principal. This 10 percent allocation to income, standing alone, does not satisfy the requirements of §§ 20.2056(b)-5(f)(1) and 1.643(b)-1, because the amount of the required minimum distribution is not based on the total return of the IRA (and therefore the amount allocated to income does not reflect a reasonable apportionment of the total return between the income and remainder beneficiaries). The 10 percent allocation to income also does not represent the income of the IRA under applicable state law without regard to a power to adjust between principal and income. State X’s version of section 409(d) of the UPIA, requiring an additional allocation to income if necessary to qualify for the marital deduction, may not qualify the arrangement under § 2056. Cf. Rev. Rul. 75-440, 1975-2 C.B. 372, using a savings clause to determine testator’s intent in a situation where the will is ambiguous, but citing Rev. Rul. 65-144, 1965-1 C.B. 422, for the position that savings clauses are ineffective to reform an instrument for federal transfer tax purposes. Based on the facts in Situation 1, if B exercises the withdrawal power, the trustee is obligated under Trust’s terms to withdraw the greater of all of the income of the IRA or the annual required minimum distribution amount under § 408(a)(6), and to distribute at least the income of the IRA to B. Thus, in this case, State X’s version of section 409(c) or (d) of UPIA would only operate to determine the portion of the required minimum distribution amount that is allocated to Trust income, and (because Trust income is determined without regard to the IRA or distributions from the IRA) would not affect the determination of the amount distributable to B. Accordingly, in Situation 1, the requirements of § 2056(b)(7)(B)(ii) are satisfied. However, if the terms of a trust do not require the distribution to B of at least the income of the IRA in the event that B exercises the right to direct the withdrawal from the IRA, then the requirements of § 2056(b)(7)(B)(ii) may not be satisfied unless the Trust’s terms provide that State X’s version of section 409(c) of the UPIA is not to apply.
In Situation 2, the trustee determines the income of Trust (excluding the IRA) and the income of the IRA under a statutory unitrust regime pursuant to which “income” is defined as a unitrust amount of 4 percent of the fair market value of the assets determined annually. The determination of what constitutes Trust income and the income of the IRA in this manner satisfies the requirements of § 20.2056(b)-5(f)(1) and § 1.643(b)-1. The Trustee distributes the income of Trust, determined in this manner, to B annually, and B has the power to compel the trustee annually to withdraw and distribute to B the income of the IRA, determined in this manner. Accordingly, in Situation 2, because B has the power to unilaterally access all income of the IRA, and the income of Trust is payable to B annually, the IRA and Trust meet the requirements of § 20.2056(b)(7)(B)(ii). The result would be the same if State Y had enacted both the statutory unitrust regime and a version of section 104(a) of the UPIA and the income of Trust is determined under section 104(a) of the UPIA as enacted by State Y, and the income of the IRA is determined under the statutory unitrust regime (or vice versa). Under these circumstances, Trust income and IRA income are each determined under state statutory provisions applicable to Trust that satisfy the requirements of § 20.2056(b)-5(f)(1) and § 1.643(b)-1, and therefore B has a qualifying income interest for life in both the IRA and Trust.
In Situation 3, B has the power to compel the trustee to withdraw the income of the IRA as determined under the law (whether common or statutory) of a jurisdiction that has not enacted section 104(a) of UPIA. Under the terms of Trust, if B exercises this power, the trustee must withdraw the greater of the required minimum distribution amount or the income of the IRA, and at least the income of the IRA must be distributed to B. Accordingly, in Situation 3, the IRA and Trust meet the requirements of § 2056(b)(7)(B)(ii), and therefore B has a qualifying income interest for life in both the IRA and Trust, because B receives the income of Trust (excluding the IRA) at least annually and B has the power to unilaterally access all of the IRA income determined in accordance with § 20.2056(b)-5(f)(1). The result would be the same if State Z had enacted section 104(a) of the UPIA, but the trustee decided to make no adjustments pursuant to that provision.
In Situations 1, 2, and 3, the income of the IRA and the income of Trust (excluding the IRA) are determined separately and without taking into account that the IRA distribution is made to Trust. In order to avoid any duplication in determining the total income to be paid to B, the portion of the IRA distribution to Trust that is allocated to trust income is disregarded in determining the amount of trust income that must be distributed to B under § 2056(b)(7).
The result in Situations 1, 2, and 3 would be the same if the terms of Trust directed the trustee annually to withdraw all of the income from the IRA and to distribute to B at least the income of the IRA (instead of granting B the power, exercisable annually, to compel the trustee to do so). Furthermore, if, instead of Trust being the named beneficiary of a decedent’s interest in the IRA, Trust is the named beneficiary of a decedent’s interest in some other qualified retirement plan described in section 4974(c) that is a defined contribution plan, the same principles would apply regarding whether B is considered to have a qualifying income interest for life in the qualified retirement plan.
If a marital trust is the named beneficiary of a decedent’s IRA (or other qualified retirement plan described in section 4974(c) that is a defined contribution plan), the surviving spouse, under the circumstances described in Situations 1, 2, and 3 in this revenue ruling, will be considered to have a qualifying income interest for life in the IRA (or qualified retirement plan) and in the trust for purposes of an election to treat both the IRA (or qualified retirement plan) and the trust as QTIP under § 2056(b)(7). If the marital deduction is sought, the QTIP election must be made for both the IRA and the trust.
Taxpayers should be aware, however, that in situations such as those described in this revenue ruling in which a portion of any distribution from the IRA to Trust may be held in Trust for future distribution rather than being distributed to B currently, B is not the sole designated beneficiary of A’s IRA. As a result, both B and the remainder beneficiaries must be taken into account as designated beneficiaries in order to determine the shortest life expectancy and whether only individuals are designated beneficiaries. See A-7(c) of § 1.401(a)(9)-5.
Under the authority provided by § 7805, the principles illustrated in Situations 1 and 2 of this revenue ruling will not be applied adversely to taxpayers for taxable years beginning prior to May 30, 2006, in which the trust was administered pursuant to a state statute described in §§ 1.643(b)-1, 20.2056(b)-5(f)(1), and 20.2056(b)-7(d)(1) granting the trustee a power to adjust between income and principal or authorizing a unitrust payment in satisfaction of the income interest of the surviving spouse.
Rev. Rul. 2000-2, 2000-1 C.B. 305, is modified, and as modified, is superseded.
Sections 412(b)(5)(B) and 412(l)(7)(C)(i) of the Internal Revenue Code generally provide that the interest rates used to calculate current liability for purposes of determining the full funding limitation under § 412(c)(7) and the required contribution under § 412(l) must be within a permissible range around the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year.
Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Code.
Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.
The rate of interest on 30-year Treasury securities for April 2006 is 5.06 percent. The Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2036.
The following 30-year Treasury rates were determined for the plan years beginning in the month shown below.
For Plan Years Beginning in: | 30-Year Treasury Weighted Average | 90% to 105% Permissible Range | 90% to 110% Permissible Range | |
---|---|---|---|---|
Month | Year | |||
May | 2006 | 4.82 | 4.34 to 5.06 | 4.34 to 5.30 |
The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:30 a.m. and 4:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 1-202-283-9703. Mr. Montanaro may be reached at 1-202-283-9714. The telephone numbers in the preceding sentences are not toll-free.
The purpose of this revenue procedure is to inform the trustee (or debtor in possession) representing the bankruptcy estate of the debtor of the procedure to be followed in obtaining a prompt determination by the Service of any unpaid tax liability of the estate incurred during the administration of the case.
.01 During the administration of a bankruptcy estate, the trustee is required to file tax returns for the estate and pay the tax shown thereon. Under section 505(b)(2) of Title 11 of the United States Code (hereinafter referred to as the ‘Bankruptcy Code’), the trustee may request a determination of any unpaid liability of the estate for any tax incurred during the administration of the case, by submitting a tax return for the tax and a request for prompt determination to the Service as prescribed by section 3 of this revenue procedure.
.02 For cases commenced under the Bankruptcy Code on or after October 17, 2005, the effective date of the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, unless the return is fraudulent or contains a material misrepresentation, the estate, the trustee, the debtor, and any successor to the debtor, will be discharged from any liability for the tax shown on a return submitted in accordance with section 2.01 of this revenue procedure upon:
payment of the tax shown on the return unless (a) the Service notifies the trustee, within 60 days after the request, that the return has been selected for examination, and (b) the Service completes the examination and notifies the trustee of any tax due, within 180 days (or any additional time as permitted by the bankruptcy court) after the request;
payment of the tax as finally determined by the bankruptcy court; or
payment of the tax as finally determined by the Service.
For cases commenced under the Bankruptcy Code before October 17, 2005, the same discharge rules apply, except that section 505(b) of the Bankruptcy Code does not discharge the bankruptcy estate from liability.
.01 To request a prompt determination of any unpaid tax liability of the estate, the trustee must file a signed written request, in duplicate, with the Centralized Insolvency Operation, Post Office Box 21126, Philadelphia, PA 19114 (marked, “Request for Prompt Determination”). To be effective, the request must be filed with an exact copy of the return (or returns) for a completed taxable period filed by the trustee with the Service and must contain the following information:
a statement indicating that it is a request for prompt determination of tax liability and specifiying the return type and tax period for each return for which the request is being filed;
the name and location of the office where the return was filed;
the name of the debtor;
the debtor’s Social Security number, taxpayer identification number (TIN) and/or entity identification number (EIN);
the type of bankruptcy estate;
the bankruptcy case number; and
the court where the bankruptcy is pending.
Once a request package is received by the Centralized Insolvency Operation, the request will be assigned to a Field Insolvency office.
.02 It is imperative that the copy of the return(s) submitted with the request be an exact copy of a valid return. A request will be considered incomplete and returned to the trustee if it is filed with a copy of a document that does not qualify as a valid return. A document that does not qualify as a valid return includes a return form filed by the trustee with the jurat stricken, deleted, or modified. A return must be signed under penalties of perjury to qualify as a return. See Rev. Rul. 2005-59, 2005-37 I.R.B. 505 (September 12, 2005).
.03 Within 60 days after the date the request is received, the Service will notify the trustee whether the return filed by the trustee is being selected for examination or is being accepted as filed.
.04 If the return is selected for examination, it will be examined on an expedited basis. The Service will notify the trustee of any tax due within 180 days after the date the request is received, or within any additional time as permitted by the bankruptcy court.
.05 If the request is incomplete, all the documents received will be returned to the trustee by the Field Insolvency office assigned the request with an explanation identifying the missing item(s) and asking that the request be refiled once corrected. An incomplete request includes one submitted with a copy of a return form, the original of which does not qualify as a valid return. Once corrected, the request must be filed with the Service at the Field Insolvency address specified in the correspondence returning the incomplete request. In the case of an incomplete request submitted with a copy of an invalid return document, the trustee must file a valid original return with the appropriate Internal Revenue Service office and submit a copy of that return with the corrected request when the request is refiled.
.06 The 60-day period for notifying the trustee whether the return filed by the trustee is being selected for examination or is being accepted as filed does not begin to run until a complete request package is received by the Service.
.07 If an incomplete request is received by the Service, the 60-day period for notifying the trustee whether the return filed by the trustee is being selected for examination or is being accepted as filed does not begin to run until a complete request is received by the Field Insolvency office specified by the Service in its correspondence returning the incomplete request.
This revenue procedure is applicable to all cases commenced under the Bankruptcy Code where the bankruptcy estate is required to file a tax return, with the exception of chapter 9 municipal debt adjustment cases and chapter 15 ancillary and cross-border cases. For the procedure governing the prompt audit of bankruptcy estates in bankruptcy proceedings commenced under the Bankruptcy Act, see Rev. Proc. 76-23, 1976-1 C.B. 562.
.01 Purpose. This revenue procedure updates the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of § 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code (the “Code”), but that have not met these requirements for a period of time. This system, the Employee Plans Compliance Resolution System (“EPCRS”), permits plan sponsors to correct these failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self-Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), and the Audit Closing Agreement Program (“Audit CAP”).
.02 General principles underlying EPCRS. EPCRS is based on the following general principles:
Sponsors and other administrators of eligible plans should be encouraged to establish administrative practices and procedures that ensure that these plans are operated properly in accordance with the applicable requirements of the Code.
Sponsors and other administrators of eligible plans should satisfy the applicable plan document requirements of the Code.
Sponsors and other administrators should make voluntary and timely correction of any plan failures, whether involving discrimination in favor of highly compensated employees, plan operations, the terms of the plan document, or adoption of a plan by an ineligible employer. Timely and efficient correction protects participating employees by providing them with their expected retirement benefits, including favorable tax treatment.
Voluntary compliance is promoted by providing for limited fees for voluntary corrections approved by the Service, thereby reducing employers’ uncertainty regarding their potential tax liability and participants’ potential tax liability.
Fees and sanctions should be graduated in a series of steps so that there is always an incentive to correct promptly.
Sanctions for plan failures identified on audit should be reasonable in light of the nature, extent, and severity of the violation.
Administration of EPCRS should be consistent and uniform.
Sponsors should be able to rely on the availability of EPCRS in taking corrective actions to maintain the tax-favored status of their plans.
.03 Overview. EPCRS includes the following basic elements:
Self-correction (SCP). A Plan Sponsor that has established compliance practices and procedures may, at any time without paying any fee or sanction, correct insignificant Operational Failures under a Qualified Plan or a 403(b) Plan, or a SEP or a SIMPLE IRA Plan, provided the SEP or SIMPLE IRA Plan is established and maintained on a document approved by the Service. In addition, in the case of a Qualified Plan that is the subject of a favorable determination letter from the Service or in the case of a 403(b) Plan, the Plan Sponsor generally may correct even significant Operational Failures without payment of any fee or sanction.
Voluntary correction with Service approval (VCP). A Plan Sponsor, at any time before audit, may pay a limited fee and receive the Service’s approval for correction of a Qualified Plan, 403(b) Plan, SEP or SIMPLE IRA Plan. Under VCP, there are special procedures for anonymous submissions and group submissions.
Correction on audit (Audit CAP). If a failure (other than a failure corrected through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and pay a sanction. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.
.01 Effect on programs. This revenue procedure modifies and supersedes Rev. Proc. 2003-44, 2003-1 C.B. 1051, which was the prior consolidated statement of the correction programs under EPCRS. The modifications to Rev. Proc. 2003-44 that are reflected in this revenue procedure include:
providing that if the Plan Sponsor corrects the failures in accordance with the requirements of this revenue procedure, the plan will be treated as satisfying § 401(a), § 403(b), § 408(k), or § 408(p), as applicable, for purposes of applying § 3121(a)(5) (FICA taxes) and § 3306(b)(5) (FUTA taxes) (section 3.01)
revising the requirements for submitting a determination letter application when correcting certain Qualification Failures by plan amendment (sections 4.06, 10.08, and 11.03(3))
clarifying that an egregious failure includes providing more favorable benefits to an owner based on a purported collective bargaining agreement where there has in fact been no good faith bargaining (section 4.11)
providing rules relating to the availability of programs under EPCRS in cases where the plan or plan sponsor is a party to an abusive tax avoidance transaction (sections 4.13 and 11.02(11))
updating the definition of Favorable Letter (section 5.01(4))
revising provisions affecting 403(b) plans by revising the definition of Excess Amounts (section 5.02(3))
updating the definition of Under Examination (section 5.03)
expanding VC and Audit CAP to terminating Orphan Plans and, with respect to those plans, providing for a possible exception to the requirement for full correction and a waiver of the VCP fee in appropriate circumstances (sections 5.06, 6.02(5)(f), and 12.02(3))
adding a correction method for certain plan loan failures (sections 6.02(6) and 6.07), including adding a correction method for a plan that permits plan loans operationally but does not have the appropriate plan loan language (Appendix B 2.07(2))
revising the correction method for a failure to include an eligible employee in a cash or deferred arrangement under § 401(k) (section 6.02(7), Appendix A .05, and Appendix B 2.02)
adding an alternative correction method for a failure to obtain spousal consent (section 6.04(2)(c))
revising provisions affecting 403(b) plans by eliminating the term Total Sanction Amount and replacing it with the term “Maximum Payment Amount” and eliminating correction by retention of Excess Amounts (sections 5.02(4) and 6.06(2))
providing that as part of both VCP and Audit CAP, if the failure involves the failure to satisfy the minimum required distribution requirements of § 401(a)(9), the Service will waive the excise tax requirements of § 4974 in appropriate cases (section 6.09(2))
expanding excise taxes that the Service may not pursue (section 6.09(3) and (4))
clarifying the scope of a compliance statement issued with respect to certain nonamender failures
clarifying submission procedures for Anonymous Submissions (section 10.10), and Group Submissions (section 10.11)
revising the acknowledgement procedures of receipt of a submission (section 11.11 and new Appendix E — Acknowledgement Letter)
providing a submission assembly procedure (section 11.14)
reducing the compliance fee for a plan where the sole failure is the failure to satisfy the minimum distribution rules for 50 or fewer employees (section 12.02(2))
reducing the compliance fee for a plan where the sole failure is the failure to timely adopt certain plan amendments (section 12.03)
reducing the general compliance fee for SEPs and SIMPLE IRAs (section 12.05)
adding a fee schedule for plans in the determination letter process found to be nonamenders of tax law changes (section 14.04)
providing that if a nonamender failure is discovered during an Employee Plans Examination, then it is expected that the applicable sanction will be greater than the applicable fee under section 14.04 (section 14.02)
providing a streamlined submission procedure for certain nonamender failures (Appendix F)
.02 Future enhancements. (1) It is expected that the EPCRS revenue procedure will continue to be updated from time to time, including, as noted above, further improvements to EPCRS based on comments previously received. In addition, the Service and Treasury continue to invite further comments on how to improve EPCRS. Comments should be sent to:
Internal Revenue ServiceAttention: SE:T:EP:RA:VC
1111 Constitution Avenue, NW
Washington, D.C. 20224
(2) Comments are requested for certain specific issues under EPCRS. First, comments are requested regarding methods to correct a failure to provide an eligible employee the opportunity to make a catch-up contribution that is permitted under the terms of the plan and § 414(v). (See 6.02(7) and Appendix B 2.02.) Second, given that § 402A permits a § 401(a) or 403(b) plan to offer employees the opportunity to designate elective deferrals as Roth contributions for taxable years beginning after December 31, 2005, comments are requested regarding methods to correct a failure to provide an eligible employee with the opportunity to make elective deferrals for a plan that permits an eligible employee to designate elective deferrals as Roth contributions. Third, the correction mechanism in current §1.415-6(b)(6) of the Income Tax Regulations is not included in the regulations that were proposed under § 415 (70 FR 31214) and published on May 31, 2005. The preamble to the proposed regulations provides that the correction mechanism (for excess annual additions) will be included in EPCRS in the future. It is expected that correction mechanism will in any event continue to be available under EPCRS, including under SCP where correction of a significant operational failure is permitted. Accordingly, comments are requested regarding the applicable correction methods for this failure. Comments are also requested on whether the correction mechanisms provided for in current §1.415-6(b)(6), including the maintenance of suspense accounts, should be retained as options under EPCRS, or whether correction of excess annual additions should be treated as excess amounts under this revenue procedure (i.e., distributed or forfeited, as appropriate). Fourth, comments are requested regarding whether additional correction methods are needed in order for plans to take advantage of the fiduciary safe harbor recently issued by the Department of Labor for Orphan Plans (71 FR 20820) where the plan is subject to the requirements of §§ 401(a)(11) and 417 in light of the ability to satisfy those requirements by purchase of a commercial annuity contract.
.01 Effect of EPCRS on retirement plans. For a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, if the eligibility requirements of section 4 are satisfied and the Plan Sponsor corrects a failure in accordance with the applicable requirements of SCP in section 7, VCP in sections 10 and 11, or Audit CAP in section 13, the Service will not treat the retirement plan as failing to meet § 401(a), § 403(b), § 408(k), or § 408(p), as applicable. Thus, for example, if the Plan Sponsor corrects the failures in accordance with the requirements of this revenue procedure, the plan will be treated as satisfying § 401(a), § 403(b), § 408(k), or § 408(p), as applicable, for purposes of applying § 3121(a)(5) (FICA taxes) and § 3306(b)(5) (FUTA taxes).
.02 Compliance statement. If a Plan Sponsor or Eligible Organization receives a compliance statement under VCP, the compliance statement is binding upon the Service and the Plan Sponsor or Eligible Organization as provided in section 10.09.
.03 Other taxes and penalties. See section 6.09 for rules relating to other taxes and penalties.
.04 Reliance. Taxpayers may rely on this revenue procedure, including the relief described in section 3.01.
.01 EPCRS Programs. (1) SCP. SCP is available only for Operational Failures. Qualified Plans and 403(b) Plans are eligible for SCP with respect to significant and insignificant Operational Failures. SEPs and SIMPLE IRA Plans are eligible for SCP with respect to insignificant Operational Failures only.
(2) VCP. Qualified Plans, 403(b) Plans, SEPs and SIMPLE IRA Plans are eligible for VCP. VCP provides general procedures for correction of all Qualification Failures: Operational, Plan Document, Demographic, and Employer Eligibility.
(3) Audit CAP. Audit CAP is available for Qualified Plans, 403(b) Plans, SEPs and SIMPLE IRA Plans for correction of all failures found on examination that have not been corrected in accordance with SCP or VCP.
(4) Eligibility for other arrangements. The Service may extend EPCRS to other arrangements.
.02 Effect of examination. If the plan or Plan Sponsor is Under Examination, VCP is not available and SCP is only available as follows: while the plan or Plan Sponsor is Under Examination, insignificant Operational Failures can be corrected under SCP; and, if correction has been completed or substantially completed before the plan or Plan Sponsor is Under Examination, correction of significant Operational Failures can be completed under SCP.
.03 Favorable Letter requirement. The provisions of SCP relating to significant Operational Failures (see section 9) are available for a Qualified Plan only if the plan is the subject of a Favorable Letter. The provisions of SCP relating to insignificant Operational Failures (see section 8) are available for a SEP but only if the plan document consists of either (i) a valid Model Form 5305-SEP or 5305A-SEP adopted by an employer in accordance with the instructions on the applicable form (see Rev. Proc. 2002-10, 2002-1 C.B. 401), or (ii) a prototype SEP that has a current favorable opinion letter which has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10. The provisions of SCP relating to insignificant Operational Failures (see section 8) are available for a SIMPLE IRA Plan but only if the plan document consists of either (i) a valid Model Form 5305-SIMPLE or 5304-SIMPLE adopted by an employer in accordance with the instructions on the applicable form (see Rev. Proc. 2002-10), or (ii) a current favorable opinion letter for a Plan Sponsor that has adopted a prototype SIMPLE IRA Plan which has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10.
.04 Established practices and procedures. In order to be eligible for SCP, the Plan Sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with applicable Code requirements. For example, the plan administrator of a Qualified Plan that may be top-heavy under § 416 may include in its plan operating manual a specific annual step to determine whether the plan is top-heavy and, if so, to ensure that the minimum contribution requirements of the top-heavy rules are satisfied. A plan document alone does not constitute evidence of established procedures. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and an Operational Failure must have occurred through an oversight or mistake in applying them. In addition, SCP may also be used in situations where the operational failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure. In the case of a failure that relates to Transferred Assets or to a plan assumed in connection with a corporate merger, acquisition, or other similar employer transaction between the Plan Sponsor and sponsor of the transferor plan or the prior plan sponsor of an assumed plan, the plan is considered to have established practices and procedures for the Transferred Assets if such practices and procedures are in effect for the Transferred Assets by the end of the first plan year that begins after the corporate merger, acquisition, or other similar transaction.
.05 Correction by plan amendment. (1) Availability of correction by plan amendment in VCP and Audit CAP. A Plan Sponsor may use VCP and Audit CAP for a Qualified Plan to correct Plan Document, Demographic, and Operational Failures by a plan amendment, including correcting an Operational Failure by plan amendment to conform the terms of the plan to the plan’s prior operations, provided that the amendment complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6). In addition, a Plan Sponsor may correct an Operational Failure by plan amendment to amend the plan to the extent necessary to reflect the corrective action. For example, if the plan failed to satisfy the average deferral percentage (“ADP”) test required under § 401(k)(3) and the Plan Sponsor must make qualified nonelective contributions not already provided for under the plan, the plan may be amended to provide for qualified nonelective contributions. Except as provided in section 4.06, the issuance of a compliance statement does not constitute a determination as to the effect of any plan amendment on the qualification of the plan.
(2) Availability of correction by plan amendment in SCP. A Plan Sponsor may use SCP for a Qualified Plan to correct an Operational Failure by a plan amendment in order to conform the terms of the plan to the plan’s prior operations only to correct Operational Failures listed in section 2.07 of Appendix B. These failures must be corrected in accordance with the correction methods set forth in section 2.07 of Appendix B. SCP is not otherwise available for a Plan Sponsor to correct an Operational Failure by a plan amendment. Any plan amendment must comply with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6).
.06 Submission for a determination letter. (1) Under VCP and Audit CAP, a determination letter will be issued to correct a nonamender failure. In addition, a determination letter may be issued (a) to correct a failure in a plan that is either submitted under VCP or that is being examined during the last 12 months of the plan’s remedial amendment cycle, as defined in section 13 of Rev. Proc. 2005-66, 2005-37 I.R.B. 509 (an “on-cycle” filing), or (b) to correct a failure in either a VCP filing submitted for a terminating plan or a terminating plan under examination. For this purpose, the term “nonamender failure” means a failure to amend the plan to reflect a change in a qualification requirement within the plan’s applicable remedial amendment period, as set forth in Rev. Proc. 2005-66. A change in a qualification requirement includes a change arising from a statutory change, or a change in the requirements provided in regulations or other guidance published in the Internal Revenue Bulletin. A determination letter issued under VCP with respect to a nonamender failure will include only a determination on all applicable laws with respect to which the remedial amendment period has expired. Notwithstanding the above, a determination letter will not be issued with respect to a failure to amend a plan timely for (a) good faith plan amendments for the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 (EGTRRA), within the period described in Notice 2001-42, 2001-2 C.B. 70, including those changes listed in Notice 2005-5, 2005-3 I.R.B. 337, (b) plan amendments for the final and temporary regulations under §401(a)(9) as they appeared in the April 1, 2003, edition of 26 CFR Part 1 (the § 401(a)(9) final and temporary regulations) within the period described in Rev. Proc. 2002-29, 2002-1 C.B. 1176, as modified by Rev. Proc. 2003-10, 2003-1 C.B. 259, and (c) interim amendments as provided in section 5 of Rev. Proc. 2005-66. The preceding sentence is not applicable if (i) the failure is submitted in a VCP filing made during an on-cycle year, (ii) the plan is being examined during an on-cycle year, (iii) the failure is submitted in a VCP filing for a terminating plan, or (iv) the plan is a terminating plan Under Examination. Except as provided in section 10.08, in cases where a determination letter is not issued with respect to failures corrected through plan amendment, the issuance of a compliance statement or closing agreement will constitute a determination as to the effect of any plan amendment on the qualification of the plan. Notwithstanding any other provision of this section 4.06, the Service reserves the right to require the submission of a determination letter application with respect to any amendment proposed or adopted to correct any Qualification Failure under VCP or Audit CAP.
(2) In the case of any correction of an Operational Failure through plan amendment under SCP, as permitted under section 4.05(2), a Plan Sponsor must submit a determination letter application. The determination letter application must be submitted before the end of the plan’s applicable remedial amendment period described in Rev. Proc. 2005-66. As part of the determination letter submission, the amendment under SCP must be identified as such in the cover letter.
.07 Availability of correction of Employer Eligibility Failure. SCP is not available for a Plan Sponsor to correct an Employer Eligibility Failure.
.08 Availability of correction of a terminated plan. Correction of Qualification Failures in a terminated plan may be made under VCP and Audit CAP, whether or not the plan trust is still in existence.
.09 Availability of correction of an Orphan Plan. An Orphan Plan that is terminating may be corrected under VCP and Audit CAP, provided that the party acting on behalf of the plan is an Eligible Party, as defined in section 5.06(2).
.10 Availability of correction of § 457 plans. Submissions relating to § 457(b) eligible governmental plans will be accepted by the Service on a provisional basis outside of EPCRS through standards that are similar to EPCRS.
.11 Egregious failures. SCP is not available to correct Operational Failures that are egregious. For example, any of the following would be considered egregious: (a) a plan has consistently and improperly covered only highly compensated employees; (b) a plan provides more favorable benefits for an owner of the employer based on a purported collective bargaining agreement where there has in fact been no good faith bargaining between bona fide employee representatives and the employer (see Notice 2003-24, 2003-1 C.B. 853, with respect to welfare benefit funds); or (c) a contribution to a defined contribution plan for a highly compensated employee is several times greater than the dollar limit set forth in § 415. VCP is available to correct egregious failures; however, these failures are subject to the fees described in section 12.06. Audit CAP also is available to correct egregious failures.
.12 Diversion or misuse of plan assets. SCP, VCP, and Audit CAP are not available to correct failures relating to the diversion or misuse of plan assets.
.13 Abusive tax avoidance transactions. (1) Effect on Programs. (a) SCP. With respect to SCP, in the event that the plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction (as defined in section 4.13(2)), SCP is not available to correct any Operational Failure that is directly or indirectly related to the abusive tax avoidance transaction.
(b) VCP. With respect to VCP, if the Service determines that a plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as defined in section 4.13(2)), then the matter will be referred to the Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. Upon receiving a response from the Tax Shelter Coordinator, the Service may determine that the plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction, and that the failures addressed in the VCP submission are related to that transaction. In those situations, the Service will conclude the review of the submission without issuing a compliance statement and will refer the case for examination. However, if the Tax Shelter Coordinator determines that the plan failures are unrelated to the abusive tax avoidance transaction or that no abusive tax avoidance transaction occurred, then the Service will continue to address the failures identified in the VCP submission, and may issue a compliance statement with respect to those failures. In no event may a compliance statement be relied on for the purpose of concluding that the plan or Plan Sponsor was not a party to an abusive tax avoidance transaction. In addition, even if it is concluded that the failures can be addressed pursuant to a VCP submission, the Service reserves the right to make a referral of the abusive tax avoidance transaction matter for examination.
(c) Audit CAP and SCP (for plans Under Examination). For plans Under Examination, if the Service determines that the plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction, the matter may be referred to the Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. With respect to plans Under Examination, an abusive tax avoidance transaction includes a transaction described in section 4.13(2) and any other transaction that the Service determines was designed to facilitate the impermissible avoidance of tax. Upon receiving a response from the Tax Shelter Coordinator, (i) if the Service determines that a failure is related to the abusive tax avoidance transaction, the Service reserves the right to conclude that neither Audit CAP nor SCP is available for that failure and (ii) if the Service determines that satisfactory corrective actions have not been taken with regard to the transaction, the Service reserves the right to conclude that neither Audit CAP nor SCP is available to the plan.
(2) Definition. For purposes of section 4.13(1) (except to the extent otherwise provided in section 4.13(1)(c)), an abusive tax avoidance transaction means any listed transaction under § 1.6011-4(b)(2) and any other transaction identified as an abusive transaction in the IRS website entitled “EP Abusive Tax Transactions.”
The following definitions apply for purposes of this revenue procedure:
.01 Definitions for Qualified Plans. The definitions in this section 5.01 apply to Qualified Plans.
(1) Qualified Plan. The term “Qualified Plan” means a plan intended to satisfy the requirements of § 401(a) or § 403(a).
(2) Qualification Failure. The term “Qualification Failure” means any failure that adversely a