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Has the Filing of IRS Disclosure Form 8275 to Contest Notice 2007-83 Backfired?

11 / 15 / 2019

Tax Form:  8886

Tax Form Troubles:  Filing disclosure Form 8275, to argue that a Form 8886 is not required, as to plans that are alleged to not fall under Notice 2007-83, Reportable Welfare Benefit Plans (Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits)(Notice 2007-83)

Govig & Associates v. United States, IRS, D. Arizona (September 16, 2019)

In this lawsuit, brought to set aside IR Notice 2007-83 pursuant to the Administrative Procedures Act (APA), does so, arguing that vague words like "purported" and unclear elements were revealed to them when the IRS proposed a Section 6707A penalty on a taxpayer that participated in a virtually identical plan adopted by Govig & Associates, Inc.  Essentially, the suit is seeking to enjoin enforcement of the reporting requirementsin Notice 2007-83, contending that it was a "legislative-type rule" that required the IRS to first comply with the mandatory notice-and-comment provisions of the APA, that Notice 2007-83 is arbitrary and capricious, ultra vires in nature, lacking underlying authority and the reasoned-analysis footing required by the APA, and that the notice cannot "take effect" based upon the failure of the IRS to comply with the APA's notice and comment requirements.  

Notice 2007-83 defines the term "qualified cost" in such a manner that it nullifies Regs. 1.409A-1(a)(5) for purposes of single employer welfare benefit plans providing a death benefit.  This regulation specifically excludes from the definition of "deferred compensation" a portion of a plan that provides a bona fide death benefit.  Through its enforcement of Notice 2007-83, the argument is that the IRS essentially determined that if a cash value life insurance product is used to fund a death benefit, no portioni of the plan is a bona fide death benefit and it may be deferred compensation.

As the Plaintiffs argue, based on cases litigated after Notice 2007-83 was issued, the IRS had argued that the "purported" welfare benefit funds were ones where the business owner or employee could obtain or have the right to obtain money that was accumulated inside a cash value life insurance policy.  The policies in these prior cases were often variable or universal life policies--which are essentially term life policies with an investment component.  The current cost of the insurance in those cases was the term premium, yet employers deducted substantially excess amounts that were contributed to the "purported" welfare benefit fund.  The owner or employee, however, did not pay tax on the accumulated cash he/she could obtain or had the right to obtain.

In 2012, certain taxpayers were participating in something called a Death Benefit Trust/Restricted Property Trust ("DBT/RPT") identical to the Govig & Associates, Inc. Benefits Trust.  At all times, the taxpayers were advised to, and most always did, attach a detailed Form 8275 (Disclosure Statement) to their timely filed corporate return, stating in detail, why Notice 2007-83 did not apply.  

A taxpayer that made a Form 8275 disclosure was examined for tax year 2013 and the IRS is alleged to have concluded the audit with no changes to the deductions disclosed on the Form 8275.  Most importantly, the allegation is made that the IRS did NOT determine that the transaction should be reported on Form 8886.

The allegation is that the IRS imposed the 6707A penalty despite the IRS not receiving the facts of the plan in response to an IDR, despite no deduction being taken on the Govig tax return for a contribution to the Death Benefit Trust and despite the fact that the IRS Revenue Agent originally imposing the penalty indicated that she would rescind the proposed penalty for which the plaintiffs ultimately received a bill.  They claim that the IRS audited dozens of other identical plans each containing a detailed 8275, and not once did the IRS take action or indicated that the Form 8886 is required. 

The plan in issue did not provide "cash and other property" to the owners or anyone else on a tax favored basis in 2015.  Nevertheless, on July 22, 2019, IRS issued a proposed adjustment, disallowing a deduction of $359,992 contributions to an "employee benefit plan" as reported on the company Form 1120S.  The IRS is apparently stil investigatng whether a Form 8886 was required.