In Uncategorized on 08/28/2011 at 12:34

Back on 3/15/11, in my post “A Good Day for Taxpayers”, I gave scant space to the decision in Christy & Swan Profit Sharing Plan, 2011 T.C. Mem. 62, filed 3/15/11, largely because of my erroneous conclusion that the point was obvious–for a retirement plan to be qualified, it must comply with the Code, as amended, to the letter, whether the plan will actually do any of the acts to which the Code, as amended, pertains. Salvatore Bochicchio, CPA, however, brings me up short. Thanks, Mr. B.

That something is obvious to professionals doesn’t mean it’s obvious to everyone. The traps are set for the unwary, the “unwary” being the nonprofessional, like the unfortunate Mr. Swan, who ran a real estate business with an old-law qualified 401 (a) plan. For the years at issue, Mr Swan was the sole participant and trustee. He missed the amendments required by various subsequent Congressional tweaks, tried to cure them retroactively with a catch-all letter, and ended up with his plan being disallowed years later.

No matter that the amendments had nothing to do with the plan’s real-life operations. Judge Swift said Section 7476 tied his hands. “…(S)ection 7476 ‘does not provide a broad grant of authority to the Court to conduct a review of factual matters related to controversies over retirement plans and to fashion equitable remedies to resolve these controversies’.” 2011 T.C. Mem. 62, at p. 8. Abuse of discretion is the only standard of review. Since adherence to the letter of the law, whenever Congress tinkers with it, is what Congress required, IRS was right to disqualify the plan, and poor Mr. Swan does a swan-dive (sorry, guys).

Now we may worthily lament that the idea of an Internal Revenue Code, with year-to-year stability in place of annual Revenue Acts that left everything up in the air, such as was envisioned by the first Internal Revenue Code of 1939, has gone by the boards. We have instead annual tweaks, adjustments, revisions, automatic sunsets, cliffhanging extensions and non-extensions, and other agents of chaos that make tax planning more like gambling. But we’re stuck with this régime; so we must learn to stop worrying and love the annual Congressional bomb.

Note that IRS threw Swan a rope. Per Rev. Proc. 2008-50, 2008 I.R.B. 35-464, Swan could have made a deal with IRS, paid some money based upon the severity of his transgressions, and received plenary absolution. Swan chose to duke it out instead. Wrong!

Takeaway–Freedom is not free. If you want your plans to benefit from the largesse of Section 401 et. seq., have a professional review your plan. And if you blow it, make a Rev. Proc. 2008-50 deal with IRS. As Mr.Kipling said, “It ‘alves the gain, but safer you will find.”

Thanks again, Mr. Bochicchio.


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