Pension Protection Plan of 2006

Nonqualified deferred comp (NQDC) funding restrictions for employers with troubled plans.
Transfers or other reservation of assets after Aug. 17, 2006 are treated as property transferred in connection with the performance of services under Code Sec. 83, whether or not the assets are available to satisfy the claims of general creditors, if:

(1) during any restricted period with respect to a single-employer defined benefit plan, assets are set aside or reserved (directly or indirectly) in a trust (or other arrangement as determined by IRS), or transferred to a trust or other arrangement, for purposes of paying NQDC of an applicable covered employee (e.g., CEO and the 4 highest-paid employees) under an NQDC plan of the plan sponsor or member of a controlled group that includes the plan sponsor; or

(2) a NQDC plan of the plan sponsor or member of a controlled group that includes the plan sponsor provides that assets will become restricted to the provision of benefits under the plan in connection with a restricted period (or other similar financial measure determined by IRS) of the defined benefit plan, or assets are so restricted. (Code Sec. 409A(b)(3), as amended by Act § 116)

Minimum present value rules.
The Act creates new rules for "applicable defined benefit plans," a new term that covers cash balance and other hybrid pension plans. For distributions after Aug. 17, 2006, an applicable defined benefit plan is not treated as failing to meet the Code Sec. 417(e) minimum present value rules solely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the plan’s terms, equal to the amount expressed as the balance in the hypothetical account or as an accumulated percentage of the participant’s final average compensation. (Code Sec. 411(a)(13)(C), as amended by Act § 701)

Regs on time and order of issuance of domestic relations orders.
By Aug. 17, 2007, the Department of Labor must issue regs providing that a qualified domestic relations order won’t fail to be treated as a QDRO merely because it is issued after, or revises, another order, or because of the time it is issued. (Act § 1001)

Entitlement of divorced spouses to railroad retirement annuities independent of actual entitlement of employee.
Effective Aug. 17, 2007, a divorced spouse is entitled to railroad retirement annuities independent of the actual entitlement of the employee. (Act § 1002)

Extension of Tier II railroad retirement benefits to surviving former spouses pursuant to divorce agreements.
Effective Aug. 17, 2007, the surviving spouse’s annuity under Tier II railroad retirement benefits, which he or she is receiving pursuant to a divorce decree, won’t be terminated because of the death of the participant (unless the divorce order so provides). (Act § 1003)

Distributions OK’d on account of beneficiary’s hardship or unforeseen financial emergency.
By Feb. 13, 2007 (the date that is 180 days after the date of enactment), IRS must revise the hardship/unforeseeable emergency regs relating to Code Sec. 401(k) plans, Code Sec. 403(b) annuities, Code Sec. 457 plans, and Code Sec. 409A nonqualified deferred compensation plans, to provide that an event that would be a hardship or unforeseeable emergency under the plan if it occurred with respect to the participant’s spouse or dependent, will, to the extent permitted under the plan, be treated as a hardship or unforeseeable emergency if it occurs with respect to any beneficiary under the plan. (Act § 826)

Payouts to called-up reservists aren’t subject to 10% premature withdrawal penalty tax.
For distributions after Sept. 11, 2001, the 10% early withdrawal penalty tax does not apply to a qualified reservist distribution. Those who receive a qualified reservist distribution may, at any time during the two-year period beginning on the day after the end of the active duty period, make one or more contributions to their IRAs in an aggregate amount not to exceed the amount of the distribution (i.e., they may make "pay back" contributions). The two-year period won't end before Aug. 17, 2008. The regular IRA dollar contribution limits don’t apply to "pay back" contributions, but a deduction can’t be claimed for these contributions. (Code Sec. 72(t)(2)(G), as amended by Act § 827) If refund or credit of any overpayment of tax resulting from these new rules would be prevented at any time before Aug. 17, 2007, by the operation of any law or rule of law (including res judicata), the refund or credit may nevertheless be made or allowed if a claim is filed before that date. (Act § 827(c))

Early pension plan distributions to public safety employees not subject to 10% penalty tax.
The 10% early withdrawal tax does not apply to post-Aug. 17, 2006 distributions from a governmental defined benefit pension plan to a qualified public safety employee who separates from service after age 50. ( Code Sec. 72(t)(10), as amended by Act § 828)

Treatment of certain pension plans of Indian tribal governments.
For any year beginning on or after Aug. 17, 2006, the defined benefit and defined contribution plans of Indian tribal governments are treated as governmental plans for plans covering workers doing governmental functions. (Code Sec. 414(d), as amended by Act § 906)

Changed tax treatment of certain payments to controlling exempt organizations.
For returns the due date (determined without regard to extensions) of which is after Aug. 17, 2006, a tax-exempt organization that receives interest, rent, annuity, or royalty payments from a controlled entity must report them on its annual information return as well as any loans made to any controlled entity and any transfers between such organization and a controlled entity. ( Code Sec. 6033(h) , as amended by Act § 1205(b)(1))

Provisions to encourage real property contributions for conservation purposes.
For contributions made in tax years beginning in 2006 and 2007, the Act adds various provisions to encourage real property contributions for conservation purposes (Act § 1206) including (1) for an individual who is a qualified farmer or rancher for the tax year in which the contribution is made, a qualified conservation contribution is allowable up to 100% of the excess of the taxpayer’s contribution base over the amount of all other allowable charitable contributions (Code Sec. 170(b)(1)(E)(iv)(I)) and (2) for a non-publicly traded corporation that is a qualified farmer or rancher for the tax year in which the contribution is made, any qualified conservation contribution is allowable up to 100% of the excess of the corporation’s taxable income (as computed under Code Sec. 170(b)(2)) over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100% limitation. (Code Sec. 170(b)(2)(B)) As an additional condition of eligibility for the 100% limitation, with respect to any contribution of property in agriculture or livestock production, or that is available for such production, by a qualified farmer or rancher, the qualified real property interest must include a restriction that the property remain generally available for such production. The additional condition doesn’t apply to contributions made after 2005 and on or before Aug. 17, 2006. (Code Sec. 170(b)(2)(B)(i)(II))

Reporting life insurance contracts.
The Act includes a temporary reporting requirement with respect to the acquisition of interests in certain life insurance contracts by certain exempt organizations, together with a Treasury study. For reportable acquisitions occurring after Aug. 17, 2006 and on or before Aug. 17, 2008, an applicable exempt organization that makes a reportable acquisition must file an information return (Code Sec. 6050V, as added by Act § 1211(a)(1)) or face a penalty (Code Sec. 6724(d)(1)(B)(xiv), as amended by Act § 1211(b)(1))

Fines and penalties increased.
For tax years beginning after Aug. 17, 2006, the Act doubles the amount of excise taxes applicable to certain activities by charities, social welfare organizations, private foundations and exempt organization managers. (Code Sec. 4941, Code Sec. 4942, Code Sec. 4943, Code Sec. 4944, Code Sec. 4945, Code Sec. 4958, as amended by Act § 1212)

Contributions of facade easements.
For any contribution relating to a registered historic district made in a tax year beginning after Aug. 17, 2006, taxpayers must include with the return for the tax year of the contribution a qualified appraisal of the qualified real property interest (irrespective of the claimed value of the interest) and attach the appraisal with the return, photographs of the entire exterior of the building, and descriptions of all current restrictions on development of the building, including, for example, zoning laws, ordinances, neighborhood association rules, restrictive covenants, and other similar restrictions. For contributions made [after] Feb. 13, 2007 (180 days after the enactment date, Act § 1213(e)(3)), taxpayers claiming a deduction for a qualified conservation contribution with respect to the exterior of a building located in a registered historic district in excess of $10,000 must pay a $500 fee to IRS or the deduction is not allowed. (Code Sec. 170(f)(13), as amended by Act § 1213(c)) For contributions made after Aug. 17, 2006, the Act also clarifies that the charitable deduction is reduced if a rehabilitation tax credit has been claimed with respect to the donated property. (Code Sec. 170(f)(14), as amended by Act § 1213(d))

Recapture of tax benefit for charitable contributions of exempt use property not used for an exempt use.
For contributions made after Sept. 1, 2006, there is a "recovery" of the tax benefit for charitable contributions of tangible personal property for which a FMV deduction is claimed and which is not used for exempt purposes. Under the Act, if a donee organization disposes of "applicable property" within three years of the contribution of the property, the donor is subject to an adjustment of the tax benefit arising from the contribution. However, there is no adjustment if the donee organization makes a proper certification regarding the property to IRS. (Code Sec. 170(e)(1)(B)(i)(II), Code Sec. 170(e)(7), Code Sec. 6720B, as amended by Act § 1215) For identifications made after Aug. 17, 2006, there’s a $10,000 penalty for fraudulent identification of exempt use property. (Code Sec. 6720B, as added by Act § 1215(c))

Donations of clothing and household items
For contributions made after Aug. 17, 2006, in general, no deduction is allowed for contributions of clothing and household items that are not in good used condition or better. (Code Sec. 170(f)(16), as amended by Act § 1216)

Modification of recordkeeping requirements for certain charitable contributions.
For contributions made in tax years beginning after Aug. 17, 2006, the Act disallows a deduction for any contribution of a cash, check, or other monetary gift unless the donor maintains as a record of the contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. ( Code Sec. 170(f)(17), as amended by Act § 1217(a))

Contributions of fractional interests in tangible personal property.
For contributions, bequests, and gifts made after Aug. 17, 2006, the Act limits the allowance of a charitable deduction for fractional interest contributions, provides rules for valuing the donor’s additional fractional interest contributions, and provides for recapture of the charitable deduction under certain circumstances. (Code Sec. 170(o), Code Sec. 2055(g), Code Sec. 2522(e), as amended by Act § 1218)

Valuation and appraisal reform.
For returns filed after Aug. 17, 2006, the Act tightens the accuracy-related penalties imposed on taxpayers. ( Code Sec. 6662, as amended by Act § 1219) For appraisals prepared with respect to returns or submissions filed after Aug. 17, 2006, the Act establishes a civil penalty on any person who prepares an appraisal that is to be used to support a tax position if such appraisal results in a substantial or gross valuation misstatement. (Code Sec. 6695A(a), as added by Act § 1219(b)(1))

Credit counseling organization reforms.
 For tax years beginning after Aug. 17, 2006 (for organizations not in existence) and for tax years beginning after Aug. 17, 2007 (for existing organizations), the Act establishes standards that a credit counseling organization must satisfy, in addition to pre-Act law requirements, in order to be organized and operated as an organization described in Code Sec. 501(c)(3) or Code Sec. 501(c)(4). (Code Sec. 501(q), as amended by Act § 1220)

Private foundation net investment income excise tax.
For tax years beginning after Aug. 17, 2006, the Act amends the definition of gross investment income to include capital gains, notional principal contracts, annuities, and other substantially similar investment income. (Code Sec. 4940(c), as amended by Act § 1221)

Encourage IRS information-sharing with state charity officials.
Upon a written request by an appropriate state official on or after Aug. 17, 2006, IRS may disclose information regarding organizations for which it has denied or revoked tax-exempt status, certain other actions it may have taken, and returns filed by tax-exempt organizations. (Code Sec. 6104(c), as amended by Act § 1224)

Public disclosure of information relating to unrelated business income tax returns.
For returns filed after Aug. 17, 2006, the Act extends the public inspection and disclosure requirements and penalties applicable to Form 990 to the unrelated business income tax return (Form 990-T) of organizations described in Code Sec. 501(c)(3). (Code Sec. 6104(d)(1)(A)(ii), as amended by Act § 1225)

Treasury study on donor-advised funds and supporting organizations.
 IRS must undertake a study, to be submitted not later than Aug. 17, 2007, on the organization and operation of donor-advised funds and of supporting organizations. (Act § 1226)

Toughened rules for deducting contributions to donor advised funds.
For contributions made after Feb. 13, 2007 (180 days after the enactment date), contributions to certain sponsoring organizations for maintenance in a donor advised fund aren’t eligible for a charitable deduction and those that remain deductible are subject to additional substantiation rules. (Code Sec. 170(f)(18)(A), as amended by Act § 1234(a))

Improved accountability of donor advised funds.
For transactions after Aug. 17, 2006, the Act applies an excess benefits transaction tax on any grant, loan, compensation or other similar payments from a donor-advised fund to a person that with respect to such fund is a donor, donor adviser, or a related person, and from a supporting organization to a substantial contributor or a related person. (Code Sec. 4958(f), as amended by Act § 1232) For tax years beginning after Aug. 17, 2006, subject to transition rules, the Act imposes excess business holdings rules on donor-advised funds and Type III supporting organizations. (Code Sec. 4943(e), as amended by Act § 1233)

Treatment of death benefits from corporate-owned life insurance (COLI).
Generally for contracts issued after Aug. 17, 2006, subject to exceptions, businesses must treat proceeds from COLI as income with the policyholder excluding as a death benefit only the premiums and other amounts it paid for the contract. (Code Sec. 101(j)(1), as amended by Act § 863(a))

Tax Court jurisdiction.
For determinations after Oct. 16, 2006 (the date which is 60 days after the enactment date), the Act modifies the jurisdiction of the Tax Court by providing that all appeals of collection due process are to be made in the Tax Court. (Code Sec. 6330(d)(1), as amended by Act § 855)

Employment status cases in Tax Court.
For actions or proceedings that have not become final before Aug. 17, 2006, the Act clarifies that the Tax Court may authorize its special trial judges to enter decisions in employment status cases that are subject to small case proceedings under Code Sec. 7436(c). (Code Sec. 7443A(b)(5), as amended by Act § 857)

Equitable recoupment in Tax Court.
For decisions that have not become final as of Aug. 17, 2006, the Act confirms statutorily that the Tax Court may apply equitable recoupment principles to the same extent as District Courts and the Court of Federal Claims. (Code Sec. 6214(b), as amended by Act § 858)