Daily Tax Update - June 20, 2012: IRS Issues Proposed Regs to Help Prevent Termination of Defined Benefit Plans in Bankruptcy Proceedings

IRS ISSUES PROPOSED REGS TO HELP PREVENT TERMINATION OF DEFINED BENEFIT PLANS IN BANKRUPTCY PROCEEDINGS: Today, the IRS and Treasury Department issued [REG-113738-12], proposed regulations that would provide guidance under the anti-cutback rules of section 411(d)(6) of the Internal Revenue Code (which, among other things, generally prohibit plan amendments that eliminate or reduce optional forms of benefit under qualified retirement plans). The proposed regulations would provide an additional limited exception to the anti-cutback rules to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan in order to help prevent the termination of the plan in bankruptcy, if certain specified conditions are satisfied.

Briefly, those conditions are that:

(1) the defined benefit plan is underfunded (as certified by the plan’s actuary);

(2) the plan sponsor is a debtor in a bankruptcy case (that is, a case under title 11, United States Code, or under similar Federal or State law);

(3) the court overseeing the bankruptcy case has issued an order, after notice to each affected party and a hearing, finding that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress termination of the plan pursuant to section 4041(c) of ERISA or an involuntary termination of the plan pursuant to section 4042 of ERISA before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed); and

(4) the Pension Benefit Guaranty Corporation (PBGC) has issued a determination that (a) the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress or involuntary termination of the plan before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed); and (b) the plan does not have sufficient assets to provide PBGC guaranteed benefits.

  • A public hearing on the proposed regulation is scheduled for Friday, August 24, 2012.
  • The regulations can be accessed here.
  • For additional information, contact Don Wellington – dwellington@steptoe.com or Misty Leon – mleon@steptoe.com

TAX BILLS INTRODUCED JUNE 19th:

1. [112th] H.R.5963: To amend the Internal Revenue Code of 1986 to extend for 1 year the deduction for expenses of elementary and secondary school teachers and to allow such deduction with respect to home school expenses.
Sponsor: Rep Cole, Tom [OK-4] (introduced 6/19/2012)  Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 6/19/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [112th] S.3312: A bill to amend the Internal Revenue Code of 1986 to reform the system of public financing for Presidential elections, and for other purposes.
Sponsor: Sen Udall, Mark [CO] (introduced 6/19/2012)  Cosponsors (None)
Committees: Senate Rules and Administration
Latest Major Action: 6/19/2012 Referred to Senate committee. Status: Read twice and referred to the Committee on Rules and Administration.

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.