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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Participants in a terminated nonqualified plan were required under Code Sec. 402(b) to pay tax on the fair market value of the life insurance policies distributed to them, but the surrender charges of the policies, as well as other factors, could be considered in determining FMV, the U.S. Tax Court has ruled in Schwab v. Commissioner of Internal Revenue. Thus, the taxable value of the policies was approximately $2,700, rather than approximately $80,000, as determined by the IRS.
The distributions stemmed from an ill-fated effort to create a multiple employer welfare benefit trust designed to conform with Code Sec. 419A(f)(6). The assets of the trust consisted of variable universal life insurance policies, under which premium payments were placed in accounts whose value fluctuated with the S&P 500 stock index. Both the death benefit and the cash-surrender value depended upon market fluctuations.
After it was determined that the trust would not qualify under Code Sec. 419A in 2003, the plan was terminated, with the life insurance policies distributed to the two participants. As the market was at a low point in 2003, both policies were underwater at the time of distribution --that is, their surrender charges were greater than their stated policy value.
The participants took the position that they should be taxed only to the extent of the net cash surrender value of the policies. As this value was zero, they reported no income from the distribution. The Commissioner in contrast argued that the stated policy value of both policies --about $80,000 --should have been included in income (thus disregarding the amount of surrender charges) and issued a notice of deficiency.
Under Code Sec. 402(b)(2), the "amount actually distributed" is the amount taxable. As there was no regulatory guidance on point under Code Sec. 402(b), the court held that the "amount actually distributed" refers to the fair market value of the distribution. The court disagreed with both the Commissioner's assertion that surrender charges should never be included in the value and the taxpayer's assertion that they should constitute the only measure of value. The court calculated the policies' value, based in part on the small amount of insurance coverage available due to premiums paid. The court determined that the taxpayers should have included in income approximately $2,700 dollars. (No underpayment penalty was assessed --the particpants made a reasonable attempt to comply and the understatement was less than $5,000.)
For more information, visit http://www.wolterskluwerlb.com/rbcs.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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