News Notes
Rules Issued for Rebate Checks for Individuals with No Tax Liability • Interim Guidance Issued on Unbundling Trustee Fees • IRS Provides Sec. 1031 Personal Use Safe Harbor for Dwellings • Supreme Court Upholds 401(k) Participant’s Right to Sue • Supreme Court Declines to Review Check-the-Box Case
Alistair M. Nevius, J.D.
From the IRS
Rules Issued for Rebate Checks for Individuals with No Tax Liability
The IRS has issued rules for individuals to follow to claim their rebate checks under the Economic Stimulus Act of 2008, P.L. 110-185, if they do not owe taxes for 2007 (Notice 2008-28). Generally, taxpayers will receive checks in the amount of their 2007 tax liability or $600 ($1,200 for married couples), whichever is smaller. However, the Service has said that even individuals with no tax liability can receive the checks if they have at least $3,000 of qualifying income.
Qualifying income for these purposes includes Social Security benefits and monthly retirement, survivor, and disability benefits, as well as earned income. However, according to the IRS, supplemental security income payments do not count as qualifying income.
Individuals with no income tax liability should file Form 1040A, U.S. Individual Income Tax Return, in order to receive the rebate. Individuals with no income tax liability will receive a $300 rebate ($600 for married couples). When filing Form 1040A for these purposes, individuals should write “Stimulus Payment” in the blank space at the top of page 1. They should then complete the return, even though they owe no tax, and sign and date it under penalty of perjury.
In order to electronically file such a return, an individual with no income will be forced to enter $1 of adjusted gross income. The IRS has announced that it will not challenge the accuracy of such returns if they are filed for purposes of claiming the rebate (Rev. Proc. 2008-21).
On February 27, 2008, the IRS announced that for tax years beginning before January 1, 2008, nongrantor trusts and estates will not be required to unbundle their fiduciary fees to determine what portion is subject to the Sec. 67(a) 2% threshold for itemized deductions (Notice 2008-32).
Prop. Regs. Sec. 1.67-4 lists “unique” and “not unique” trust administrative expenses. Under the proposed regulations, only unique expenses are exempt from the 2% floor. The proposed regulations treat as unique only expenses that could not have been incurred by an individual. (The Supreme Court expressly rejected this treatment of trust expenses in Knight, S. Ct. Dkt. 06-1286 (U.S. 1/16/08).)
The proposed regulations also require that administrative fees that include both unique and nonunique expenses must be unbundled to identify the amount of each (Prop. Regs. Sec. 1.67-4(c)). Under the notice, this provision will not apply to tax years beginning before January 1, 2008.
The IRS will not issue final regulations until after May 27, 2008 (when the comment period on the proposed regulations expires), but it has said it will try to issue final regulations “without delay” after that date. The Service said in the notice that the final regulations may contain safe harbors for determining the allocation of bundled administrative expenses between costs that are subject to the 2% floor and those that are not. The notice requests comments on how such safe harbors might work.
IRS Provides Sec. 1031 Personal Use Safe Harbor for Dwellings
The IRS has provided a safe harbor, under which it will not challenge whether a dwelling unit qualifies as held for productive use in a trade or business or for investment purposes under Sec. 1031, governing like-kind exchanges (Rev. Proc. 2008-16).
Under Sec. 1031, taxpayers may exchange property held for productive use in a trade or business or for investment for property of like kind and not recognize any gain or loss from the exchange. The Service has previously ruled that principal residences are not eligible for this treatment because they do not qualify as property held for productive use in a trade or business or for investment (Rev. Rul. 59-229; Rev. Proc. 2005-14).
This has created a dilemma for taxpayers who own properties that they hold primarily as rental properties but that they occasionally use for personal purposes. How much personal use disqualifies a property for Sec. 1031 purposes?
The IRS has now created a safe harbor to provide guidance on this issue. Under the terms of Rev. Proc. 2008-16, the Service will not challenge whether a dwelling unit was held for productive use in a trade or business or for investment for Sec. 1031 purposes if the following conditions are met:
1. The relinquished dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange.
2. In each of the two 12-month periods that make up that 24-month period under condition (1), the taxpayer rents the dwelling unit to another person at a fair rental for at least 14 days and the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10% of the number of days that the dwelling unit was rented.
A similar safe harbor applies to the replacement property acquired in the exchange (but applicable to the 24 months immediately after the exchange).
The safe harbor applies only to the determination of whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of Sec. 1031. A taxpayer that meets the safe-harbor requirements must also meet all other requirements for a like-kind exchange.
From the Courts
Supreme Court Upholds 401(k) Participant’s Right to Sue
The Supreme Court has held that an individual Sec. 401(k) plan participant had a right to sue the plan administrator for breach of fiduciary duty under ERISA §502(a)(2) (LaRue v. DeWolff, Boberg & Assocs., Inc., S. Ct. Dkt. 06-856 (U.S. 2/20/08)).
The petitioner participated in his employer’s defined-contribution 401(k) plan. He directed his employer—the plan administrator—to make certain changes to the investments in his account, but the administrator never carried out those changes. The petitioner alleged that this failure to follow his investment directions depleted his interest in the plan by approximately $150,000 and amounted to a breach of fiduciary duty under ERISA. (It is not clear whether the $150,000 represented a decline in the value of plan assets that the administrator should have sold or an increase in the value of assets that the administrator should have purchased.)
The ERISA breach-of-fiduciary-duty provision (§502(a)(2)) provides for suits to enforce plan administrators’ duties to properly manage and administer the plan and to invest plan assets to ensure that the benefits authorized by the plan are ultimately paid to plan participants. The plan administrator got the case dismissed in federal district court by arguing that the petitioner’s complaint was a claim for monetary relief and not a suit to enforce the administrator’s duties and was therefore not actionable under the equitable relief provisions of §502(a)(3) (LaRue v. DeWolff, Boberg & Assocs., Inc. (D.S.C. 2004)).
The Fourth Circuit, hearing the case on appeal, agreed with the district court, holding that §502(a)(2) concerns breaches of fiduciary duty that harm the entire plan, not individual participants in the plan (LaRue v. DeWolff, Boberg & Assocs., Inc., 450 F3d 570 (4th Cir. 2006)). The petitioner sought to have any recovery paid into his plan account, and the court was “skeptical” that the plaintiff’s individual interest could serve as a “legitimate proxy for the plan in its entirety” (450 F3d at 574).
The Supreme Court reversed, holding that although §502(a)(2) does not provide a remedy for individual injuries, it does authorize recovery by individual plan participants where an administrator’s breach of fiduciary duty has impaired the value of the assets in that individual’s account.
The majority opinion, by Justice Stevens, discussed the fact that defined-contribution plans now “dominate the retirement plan scene” (slip op. at 6). In the context of defined-benefit plans, a breach of fiduciary duty would not affect an individual’s entitlement to the benefit unless the breach created a risk of default by the entire plan. In a defined-contribution plan, on the other hand, fiduciary misconduct can reduce the amount that an individual plan participant will receive even though the plan itself is not threatened with insolvency (and even though other participants are unaffected).
The Court held that this “creates the kind of harms that concerned the draftsmen” of ERISA (slip op. at 7), vacated the Fourth Circuit’s decision, and remanded the case for further proceedings consistent with its holding.
Chief Justice Roberts concurred in the result but wrote his own opinion, in which he stated that this suit would have been better brought under ERISA §502(a)(1)(B), which allows an individual plan participant to “recover benefits due him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan” (Roberts, C.J., concurring, slip op. at 2). However, plan participants must exhaust various administrative remedies before they can sue under §502(a)(1)(B), and, the Chief Justice wrote, if the petitioner “may bring his claim under §502(a)(1)(B), it is not clear that he may do so under §502(a)(2) as well” (id.). The Chief Justice opined that the lower court, on remand, could consider the question of whether the petitioner could sue only under §502(a)(1)(B), even though that provision was not raised in any of the prior proceedings.
The Court’s decision may lead to a flood of breach-of-fiduciary-duty suits against plan administrators. It remains to be seen if the Chief Justice has provided a roadmap for plan administrators to defend against these suits.
The Supreme Court has refused to grant certiorari in Littriello, the first case to uphold the check-the-box regulations (Regs. Secs. 301.7701-1 through -3). (See News Notes, The Tax Adviser, p. 432 (August 2007).)
In Littriello, 484 F3d 372 (6th Cir. 2007), cert. denied, S. Ct. Dkt. 07-851 (U.S. 2/19/08), the Sixth Circuit held that the check-the-box regulations were a valid exercise of Treasury’s authority and that, because the taxpayer failed to elect to have his limited liability companies (LLCs) taxed as corporations, he was individually liable for the employment taxes due and owing from those LLCs. The Sixth Circuit also agreed with numerous courts that state laws of incorporation may affect, but do not control, federal tax provisions and held that state LLC laws did not abrogate the taxpayer’s federal tax liability.
The Supreme Court’s refusal to hear the case allows the Sixth Circuit’s decision to stand.
