Daily Tax Update - February 15, 2007

STEPTOE ATTORNEYS URGE KEY TAX OFFICIALS TO OPPOSE CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE AND RELATED 40 PERCENT "NO FAULT" PENALTY: In a February 13th letter to the House Ways and Means and Senate Finance Committees as well as to top Treasury and IRS officials, Mark J. Silverman, Aaron P. Nocjar, and Gregory N. Kidder reiterated their belief that the economic substance doctrine should not be (and need not be) codified. The letter further stated that the authors believe that the related proposal to impose a 40 percent strict liability penalty represents poor tax policy.

TREASURY, IRS ISSUE GUIDANCE HELPING EMPLOYEES TRANSITION TO HSAs: Today, the Treasury Department and the IRS issued guidance regarding how employers can rollover their health Flexible Spending Arrangements (health FSAs) and Health Reimbursement Arrangements (HRAs) to Health Savings Accounts (HSAs) for their employees. The Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, enacted December 20, 2006, allowed employers to amend their health FSAs or HRAs, with balances on September 21, 2006, for a one-time roll over to an HSAs by 2012. The guidance clarifies the requirements for making these rollovers, which must be made directly to the custodian or trustee of the HSA.

  • Under the guidance, a health FSA with a grace period or HRA must be amended and a rollover selected by an employee before year end. The balance amount must be transferred to the HSA by March 15 of the following year. The ability to make these transfers will facilitate the transition to an HSA-eligible health plan when employees are covered by an HRA or FSA. In addition, the guidance provides a special transition rule for transfers for 2006.  Under the transition rule, the amendment, election and transfer must take place by March 15, 2007.
  • For additional information, contact - Anne E. Moran - amoran@steptoe.com
  • The notice can be accessed via:


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.

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