Daily Tax Update - August 8, 2006

SEVENTH CIRCUIT REVERSES LOWER COURT RULING IN COOPER v. IBM THAT HAD FOUND CASH BALANCE PLANS INHERENTLY AGE DISCRIMINATORY:
Yesterday, in Cooper v. IBM Personal Pension Plan and IBM Corporation, a three- judge panel of the United States Court of Appeals for the Seventh Circuit reversed a lower-court decision that had found cash balance pension plans inherently age discriminatory. The defined benefit plan at issue had a typical cash balance formula that promised participants the value of an account consisting of annual contributions of a percentage of the participant's pay plus interest credits. The lower court had agreed with the plaintiffs' arguments that because the value of the account would be greater for a younger person who would receive more years of contributions and interest until retirement at age 65 than for an older person, the plan failed the technical requirement of ERISA and the Code prohibiting defined benefit plans from reducing the rate of benefit accrual because of the attainment of any age.

  • The Seventh Circuit, noting that the terms of the plan formula were age neutral, rejected this analysis. It held that the term "benefit accrual" can be interpreted in a manner similar to that of an allocation of contributions in a defined contribution plan. The court further observed that the plaintiffs' approach treated the time value of money as age discrimination and that "[n]othing in the language or background of ยง204(b)(1)(H) (i)suggests that Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus a greater opportunity to earn interest on each year's retirement savings."
  • Although this holding is helpful to employers with cash balance plans, its long-term impact is unclear. The court in fact noted that IBM had closed its cash balance plan to new participants and substituted a defined contribution plan, which is an approach that has been taken by other employers. In addition, in some cases, there are other technical objections that plaintiffs can make regarding certain cash balance plans' practices. Finally, the newly passed Pension Protection Act does provide that cash balance plans that meet certain requirements involving vesting and interest crediting would not be deemed to be age discriminatory, although that legislation has "no inference" language with respect to periods prior to its effective date.
  • For additional information, contact Anne E. Moran.

ADMINISTRATION VOWS TO PUSH FOR PASSAGE OF ESTATE TAX REFORM AND TAX EXTENDERS:
Yesterday, a Treasury Department spokesman said that the Administration would continue to work with Congress in an effort to pass estate tax reform and the tax extenders by the end of the year. The Treasury spokesman said that the Administration was "still optimistic" that estate tax reform could be enacted this year. The spokesman added, "We absolutely want to see estate tax relief, at worst, extended, and at best, see permanent estate tax relief." Congress will return after Labor Day.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read  more information on Steptoe's tax practice