HOW I BEAT THE NATIONAL OFFICE OF THE IRS ON A $1.7-MILLION DOLLAR TAX ASSESSMENT

Anyone who practices in the area of Trust Law knows that it happens to be an area seldom fought in court, particularly Retirement Trusts, because there is no guarantee that if the client prevails that attorney’s fees will be paid; and the participants and beneficiaries seldom have the requisite $150,000 often required to litigate. While the incidence of contested litigation in court is low for estate plans, there are some fairly large cases involving great sums money, and the cost associated with litigation is subject to a cost benefit analysis.

Many seasoned tax attorneys who practiced 30 years ago have heard something about the above entitled case, but as the details were sketchy back then I am now prepared to discuss the details of the case as privacy concerns are no longer relevant. When litigation concluded, Melanie Clark, Chief EP/EO in the Saint Petersburg Office, was fired for lying to Congress, and Terry Hallihan, Chief EP/EO, for the SE District of the US, her boss, was demoted and relocated afterwards, solely because she failed to verify the facts supporting the position the Saint Petersburg Office took (explained later.) Unlike the vast majority of American actuaries, I concentrated in litigation after 1990 , particularly after defined benefit plans lost popularity. I folded my TPA practice in 2001 and worked part-time in third party administration work to stay abreast of ERISA changes, and to maintain my federal license. This made me a better expert witness in court.

The subject of this case is the IRS v. William Parker Defined Benefit Pension Trust. I was the actuary and Bill Parker was my client in the 80s. I terminated his retirement plan in 1989 to avoid the increased cost of the Tax Reform Act of 1986 (“TRA,”) because plan changes required, beginning with plan years in 1989, transformed this Top Heavy plan to one where my client received fewer than 10% of the benefit. Fatigued by the high cost of termination, I urged him to pay an attorney to properly title real property that he rolled over to a profit-sharing trust, which I designed and created, and which advice he ignored. He had his CFO administer all aspects of the successor plan so the contact I had with him ended in 1989.

Before TRA '86, he had his own company that provided a Top Heavy Defined Benefit plan when he was minority shareholder of several Tampa Bay Companies. He acquired majority shareholder status in those companies around the time TRA '86 was signed into law. TRA '86 required that he cover each of those employees with a plan that provided comparable benefits to the benefits his plan provided prior to his majority shareholder position. TRA '86 gave him a three-year grace period, because his plan was in existence prior to the law change. We changed the definition of credited service, counting only service after he became majority shareholder, changed the definition of eligibility to participate to three years of credited service, and changed vesting in his plan from 20% per year to 100% immediate upon plan entry. All three changes made him immune to provide comparable benefits for the companies he acquired until plan years beginning in 1989. But because comparable benefits were required with the signing of TRA'86, compensation had to be aggregated for every plan participant covered in the prior plan. When we made these plan changes, I secured his understanding that we were able to do what we did only because his plan was in existence prior to 1986, compensation from all plans were aggregated, as required by TRA '86, to maximize benefits in his existing plan. Therefore, he would need to terminate his existing plan in 1989 before anyone from the newly acquired businesses accrued benefits. In 1989, I did a study to determine the best plan termination exit strategy and we followed the study. That was part of my recommendations in 1986 before we proceeded with the three-year plan.

When I met with him before his plan year began in 1989, I discovered that he purchased a seven-acre parcel of land with retirement funds only weeks before. That introduced so many unexpected complications. When I was angered and asked why he hadn’t discussed the matter with me before purchasing the land, I was told that the price was too good and that he had to act then if he was to secure the land. I did not know then that the land he purchased sat side by side with seven acres of other land which was part of his residence. This improved the overall value of the residence because now his house has 14 contiguous acres of prime land in this residential community, was a bedroom community of Tampa. This became a sore sticking point of the IRS during his audit three years later. Thus, this land was hardly purchased as an investment of the retirement plan; but it would later introduce exceptional challenges because the easy way to deal with it was to sell it, something that he was never going to do.

During the three years following my involvement, one of his Tampa companies was caught dumping dangerous industrial chemicals. It was reported to the EPA, where he was fined heavily for his misconduct. Afterwards, an interagency referral was made to the IRS as punishment. He was audited in each of the companies he owned and he was audited personally. After those audits concluded, the service noticed the parcel of land worth about $500,000 that appeared distributed to him from his retirement, because it wasn’t properly titled; and as no tax had ever been paid on that suspected transaction, it thought it found a significant underpayment of personal tax liability. It caused the auditor to make an interoffice referral to the Employee Plans/Exempt Organizations division of the IRS for plan audit, where the local office in Saint Petersburg had jurisdiction.

This period was in the early 90s when Tampa was selected as part of a new IRS program that randomly selected retirement plans for audit, examining the actuarial assumptions used to fund the plan. To meet that upcoming demand, each office in the targeted area added staff. It transferred tax collections people, gave them quick training in ERISA in a 10 week or so program, but only taught them the law that applied to plans after 1989 because their training was designed to meet plan assumptions audits, not general plan audits. Pulled from the pool of collections people, these auditors were very aggressive, and after receiving the new training, they saw this as wonderful opportunity to advance their career. When the audit was scheduled in late January of 1992, my client’s CPA, who referred me the client in the mid-80s, asked me to attend the audit as a courtesy to him. I did so but only because he had referred me a good chunk of my client base.

No doubt that because this was not random, and it was an inter IRS referral, this figured heavily in the way the audit was conducted. When the auditor walked into the room when the audit began, she greeted us with “haven’t we been cheating lately”. Caught entirely off guard by the greeting, I knew what was coming. We spent a full day where point by point I educated this agent over what the law had been prior to 1989 to correct the misinformation she had. Nothing was resolved nor was the audit concluded that day.??I instructed my client that he was in for a world of hurt and that this auditor intended to score. As this was likely her first case coming directly out of the new training program, I recommended that he offer $10,000 in a closing program, higher if needed, and that it would be the cheapest and the least aggravating remedy for him. He responded that he was wasn’t going to give this “expletive” government entity one penny and this was my “expletive” fault because he did nothing wrong, even though I spent an entire day there free of charge and despite the fact that he was victimized with an interoffice referral because he chose to illegally dump industrial chemicals in the first place and saved $500 to properly title the land in the profit sharing trust. I discussed the matter with his CPA, and I was excused from further representing him.

He showed at my office in late October that year, plopped a notice of adjustment in Taxes of $1.7 million and also put on my desk a rather large retainer check and pleaded with me to help extricate him from the mess he created by not listening. The notice of adjustment listed 13 counts of IRS infractions based on tax law.

Most of the counts were preposterous so I expeditiously eliminated all but two in a short period of time. But those two still accounted for over $1.5 million in assessed taxes. My retainer was replenished in amount several times.??The two counts that the IRS would go to their grave with were plan disqualification, which with penalties and interest comprised $1 million of the assessed tax and the second involved a prohibited transaction . Unbeknownst to me, after he purchased the land, he built a storage facility where he housed heavy equipment that he used to beautify his land. Based on that I agreed that created unrelated business income and an excise tax was due. I agreed therefore that it involved a prohibited transaction, the amount of which was based on the fair market rental value of that facility, which generated a few thousand dollars in back taxes. The IRS argued the value of the land itself was unrelated business income, which was preposterous. Therefore the service used the purchase price to determine the tax, and because they at the same time sought plan disqualification of the plan the 100% tax rate applied.

Similarly, the service sought disqualification based on nonsense, but I could not persuade them that it was nonsense. Fortunately, I was able to find a case with identical facts and an identical IRS ruling that the tax court reversed, presented them with that case under the belief that that would dispose of that matter. It didn’t. They maintained their position by targeting the exact same amount of money based on their opinion that the rollover to the newly created profit sharing plan was disqualified. Good fortune was with me then because I found in the tax law an identical argument it made which was similarly defeated by the tax court. I provided them that case and thought surely it would dispose of that issue. Instead, I was informed that they would considering settling the matter, but that they would not accept a settlement of less than $40,000 to dispose of that issue, because they clocked $40,000 in their time to date, advancing the audit. Having rejected my recommendation to offer the service $10,000 in a closing program, I knew my client was never going to give them $40,000. Besides, it even rubbed me as extortion because they had nothing on him to justify plan disqualification. A few weeks later they proposed a third theory targeting the exact same tax deficiency by proposing disqualifying the plan into which the rollover went, reiterating their settlement position and disclosed that that was their final position.

That angered me immensely. I wrote Congressman JJ Pickle, a democrat from Texas, who chaired the committee charged with IRS oversight. In the letter I explained that he was not in a legitimate audit because each theory proposed by the IRS resulted in an identical amount of tax. I provided the facts to support it.

?Congressman Pickle wrote the IRS Ombudsman providing him with the details of my complaint requiring the National Office timely respond. This was the ombudsman’s response: He was informed by Terry Hallihan, E.P./E.O. for the SE District of the US that IRS sought their latest plan disqualification theory based on a ruling it made that the rollover occurred before the funding of the profit sharing trust, and therefore disqualified the trust. I have always disagreed with the ruling, provided that the funding occurred the first year and within a reasonable proximity of the date the rollover occurred. But I was very familiar with that ruling and would never have placed my client’s interest in harm's way. Therefore, I required that he made a very substantial first year’s contribution to the profit sharing trust before rolling over the funds or the land.??I furnished proof that he complied via faxed transmission after I was retained, showing that the trust was funded before the rollover was made. Melanie Clark, who ran that office, either didn’t know about the proof furnished, or she was so eager to protect the time invested in the audit that she didn’t review what she had, but simply passed that false information onto Terry Hallihan, who in turn passed it on to the National Office in DC, and which turned it over to Congress, as required by the chair. When I read the official national office response, I immediately faxed over proof to the oversight committee that the information the service relied upon was incorrect and they had in their possession that proof, a stamped receipt showing the date of transmission one year earlier. The IRS immediately withdrew the $million tax assessment after the embarrassment, fired Melanie Clark, and demoted Terry Hallihan. After the incident I learned when dealing with that Saint Petersburg office afterward, that any subsequent new client audit was automatically closed the second it learned I was the actuary for that plan. If I hadn’t been so aggravated by the case I won so decisively, I might have used that in marketing back then. Rest assured, I didn’t want to deal with that office any more than it wanted to deal with me; and I was reluctant to be involved with any IRS audit on behalf of any client afterward.

I want to take this opportunity to announce that I beat the national actuarial firm, Gabriel, Roeder and Smith in Fritz v. the City of Pembroke Pines a few years ago, upheld on appeal in 2019. (winning report attached) I also won the matter of In Re; The Estate of Erwin Bendit in 2021, a sizable estate involving many beneficiaries, each with unit trust interests, interdependent on each other, which had to be valued for Florida's elective share statute because one of the beneficiaries made an elective share interest election. The expert I defeated was imported from Atlanta, GA., and he charged almost double per hour what I charged. He did not follow Florida's statute, which required an actuarial valuation using assumptions laid out in the statute, but instead valued it as a marketable security when the trust's non-assignment clause prevented its sale on the open market, and, therefore, it had no market value. In short, I won over 80% of the time in court on contested trust matters. Naturally, the vast majority is resolved favorably without the need to litigate.??I created much of the most important pension rulings here in Florida, either by framing the issue later appealed and help defend it, or when necessary, by writing or helping write the appellate brief. Two thirds of all appellate briefs involving my assistance were reversed on appeal. I specialize in liquidation of irrevocable trusts requiring all beneficiaries approve the method and its results before any court will approve it. In 2011, I liquidated a trust with more than 10 beneficiaries. As most of them were in their mid-80s, or older, I employed the method of determining the cost of long-term care for each beneficiary, utilizing a recent Society of Actuaries study showing the probability of needing the care based on attained age. Of course actual cost depends on events yet unknown. But by using the study I determined expected cost based on attained age. With retirement plans, my forte is with plan design . I design the plan based on studies I do utilizing corporate goals and experience. After the plan is adopted, I monitor performance by doing studies every few years to determine if plan changes are needed.

?Thank you for your time.

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Sincerely

?Jerry Reiss

Enrolled Actuary 20-3608

Listed Best Experts in America For Family Law 2007 - 2012

Employment Law 2006-2012

AAML 1995-1996

#Tax #EstatePlans #RetirementPlans #TaxLaw #TaxAudits #Audits

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