The Pension Protection Act imposed a new reporting rule on employers that own life insurance policies (issued after August 17, 2006) on their employees (including key-person, split-dollar, buy-sell, and deferred compensation plans).

Form 8925 (Report of Employer-Owned Life Insurance Contracts) should be filed with the employer's annual tax return for each tax year (ending after November 13, 2007) the policies are in effect. Form 8925 asks these four questions:

1. How many employees does the employer have;



2. How many employees are insured by employer- owned policies issued after August 17, 2006;



3. How much life insurance is in force for such policies; and



4. Does the employer have a valid consent for each insured employee.

For more details on the notice and consent requirements, see the lead article in our Winter 2007 Newsletter.

For more information regarding this topic, please e-mail your requests to Julius H. Giarmarco, or call Julius at (248) 457-7200.

Writing in the February 10, 2009, edition of The Wall Street Journal, Mike Spector suggests that, although investors aren't in a giving mood these days, the deepening recession and a low hurdle rate presents a rare opportunity for some people: the charitable lead trust.

The full text of this article is available free of charge for a limited time at:

http://online.wsj.com/article/SB123422865113365925.html

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

Under pre-2009 law, a single- member limited liability company ("SMLLC") that had not "checked the box" to elect to be treated as a corporation for federal tax purposes was disregarded as a separate entity for all federal tax purposes. Instead, its single owner was treated as directly owning all of the assets and liabilities of the SMLLC, and was responsible for reporting and paying tax on any income earned by the SMLLC. However, with respect to salary and wages paid by a disregarded SMLLC to its employees, the SMLLC could separately calculate, report and pay any employment tax obligations under its own name and taxpayer identification number, despite the fact that it was otherwise disregarded for federal tax purposes. Alternatively, the single owner of the SMLLC could report and pay under its name and TIN with respect to employment taxes attributable to the payment of employee compensation by the SMLLC. Starting as of January 1, 2009, the rules have changed.

On January 1, 2009, the Treasury Regulation Section 301.7701-2(c)(iv) became effective. This regulation treats an otherwise disregarded SMLLC as a separate legal entity for purposes of employment tax liabilities arising with respect to wages paid on or after 1/1/2009.

Thus, a disregarded LLC is now taxed as a corporation for employment tax purposes and, as a result, many of the issues surrounding the collection of a tax liability from a disregarded LLC are eliminated. For example, collection against the LLC may be pursued as if it were a corporation, and if an LLC transfers its assets to another entity, successor liability may apply under relevant state law.

The result of this change in treatment is that if an SMLLC has employees, it will now have to report and pay federal employment taxes under its own name and it must have its own TIN. If such an SMLLC does not currently have a TIN, it must obtain one. Generally, a TIN can be quickly obtained online through the IRS website.

For more information regarding this topic, please e-mail your requests to Randall A. Denha, or call Randy at (248) 457-7205.

In Reinhart v Commissioner, T.C. Summary Opinion 2008 163 filed December 23, 2008, the United States Tax Court held: (1) That, upon termination of a permanent life insurance policy by the insurer, taxable income inured to the policy owner where his policy loans exceeded the policy's surrender value; and (2) the policy owner was also liable for an accuracy-related penalty under IRC Section 6662(a) due to his underpayment of tax. This decision is not reviewable by any other court and the Summary Opinion cannot be used as precedent for any other case.

In 1958, Mr. Reinhart purchased a $10,000.00 life insurance policy which had a cash surrender value that continued to increase during his lifetime. Reinhart subsequently borrowed against the cash value. In 2005, the cash value of the policy was $29,933.78. At that time, the outstanding loan balance against the cash value (which included accrued interest) totaled $28,492.40. Mr. Reinhart paid premiums in an amount of $8,685.60. Reinhart refused to pay interest on the loans and the insurer, Northwestern Mutual, treated the interest on the loans as additional loans against the cash value of the policy. The terms of the policy provided that if the indebtedness equaled or exceeded the cash value at any time, the policy would terminate 31 days after a notice of termination was sent to the policy owner.

At the end of December 2004, Reinhart received a notice from NML advising him that the loan amount would soon exceed the cash value and that the policy would terminate. Reinhart refused to pay any interest or principal on the loan but instead wrote a letter to NML stating that the "involuntary termination" of the policy by NML would not be a "policy surrender" and, therefore, not be a taxable event.

Eventually, NML sent a form entitled "Surrender of Policy for Cash Value" along with a check payable to Reinhart in the amount of $1,269.57 representing the residual cash value after considering the outstanding loan balance. Reinhart signed the form and cashed the check. Consequently, the policy was terminated and Reinhart lost the $10,000.00 of coverage. NML then sent Reinhart a Form 1099-R, Distributions From Pensions, etc., for his 2005 tax year reflecting a taxable amount of $21,248.18 ($29,933.78 [total loans and interest + $1,269.57 check] - $8,685.60 in premiums paid).

Reinhart's primary argument was that the termination of the policy in this matter by NML was not a taxable event because the pertinent statutes and regulations expressly require the "surrender" of a policy. Essentially, Reinhart argued that a "surrender" of the policy would trigger taxable income to him, but an "involuntary termination" by NML would not. IRC Section 72 and Treasury Regulations 1.72-11(d)(1) provide for taxation of amounts received from a life insurance contract, not received as an annuity, to be taxable in an amount that exceeds the premiums paid by the taxpayer upon policy surrender. But, there is no reference in the legislative history supporting Reinhart's distinction between "termination" and "surrender".

Furthermore, the argument doesn't make sense. Beyond the fact that Reinhart signed a form entitled "Surrender of Policy for Cash Value", he did, in fact, receive $29,933.78 from the policy. The outstanding loans which he received from the policy totaled $28,664.21 and the check he received totaling $1,269.57 all were received by him from the cash value of the policy. To argue that because NML terminated the policy due to its terms (the indebtedness exceeded the cash surrender value), that he should only be taxed on the check he received (and that the IRS should simply ignore the other monies he received) fails under its own weight.

Finally, because Reinhart did not disclose the distributions he received from the life insurance policy since he started borrowing from it, nor did he provide any explanation as to why the amounts shown on the 1099-R were not reported on his 2005 return, a 20% penalty was imposed on the portion of the underpayment of tax attributed to his substantial understatement. IRC Section 6662(d)(2)(B).

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.

	Annual	Semi-Annual	Quarterly	Monthly
Short Term AFRs (Term 3 Years or Less)	0.72%	0.72%	0.72%	0.72%
Mid Term AFRs (Term More Than 3 Years and 9 Years or Less)	1.94%	1.93%	1.93%	1.92%
Long Term AFRs (Term More Than 9 Years)	3.52%	3.49%	3.47%	3.46%
Section 7520 Rate	2.4%