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CCH® PENSION — 10/20/09

Penalty for failure to disclose listed transaction involving Roth IRA applies only to participating spouse

The IRS Chief Counsel has advised in IRS Letter Ruling 200938022 (Chief Counsel Advice) that the penalty for the failure to disclose a listed transaction involving the avoidance of contribution limits for Roth IRAs as required by IRS Notice 2004-8 should not be treated as a joint and several liability of a husband and wife who file joint tax returns where only one of the spouses engaged in the transaction.

Notice 2004-8, a listing notice, requires individuals who have engaged in abusive Roth IRA transactions to disclose the involvement in the transactions. When a husband and wife file a joint return and the return "reflects the tax consequences or tax strategy described in the" listing notice, IRS Reg. §1.6011-4(c)(3)(A) generally operates to determine that each spouse has participated in the listed transaction for purposes of making a disclosure, unless the applicable listing notice specifically provides otherwise.

Code Sec. 6707A imposes a penalty on any person who fails to make a required disclosure under Code Sec. 6011 of a listed transaction. Notice 2004-8, which was issued before the enactment of Code Sec. 6707A, does not include an inactive spouse in the list of individuals with a disclosure obligation. In addition, Code Sec. 408(g) provides that the IRA rules are applied without regard to community property law. Therefore, IRAs are treated as the sole property of the participating individual.

The Chief Counsel has determined that it would be inappropriate to impose a disclosure obligation on an inactive spouse now that a penalty may apply. If only one spouse engaged in a Notice 2004-8 transaction, it would reasonable for the IRS to assess a penalty only against the participating spouse. The Chief Counsel notes, however, that where there was income from the transaction, liability for the income tax would be joint and several for the husband and wife.

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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