EBIA reports that in its opinion, the Tax Court said both the original loan and the replacement loan had to be considered outstanding on the date of the refinancing under the applicable IRS regulations because the replacement loan extended the term of the original loan beyond its original maximum term. This made the sum of the employee’s outstanding loans considerably greater than the applicable limit, which is half of the employee’s account balance.
The Tax Court further agreed with the IRS that the employee was subject to a 10% early withdrawal penalty on the excess. However, it gave the participant a break on the 20% penalty for underpayment of taxes, finding that the employee fully disclosed the facts to his tax preparer and reasonably relied on the preparer’s advice in good faith, according to EBIA.
The case involves a New York City Transit Authority employee who challenged an IRS determination that he owed additional taxes because of a refinanced qualified plan loan. The employee, who was a participant in the New York City Employees’ Retirement System (NYCERS), refinanced an outstanding loan balance of $27,013 by taking out a replacement loan of $39,643 (totaling $66,656 outstanding, according to the court, though NYCERS distributed only the difference to the employee.)
At the time of the refinancing the employee had an account balance of $52,863.
NYCERS reported a portion of the loan as a distribution on Form 1099-R, but the employee, on the advice of his accountant, designated that amount as a “rollover” on his tax return, according to the news report.
The opinion in U.S. Tax Court v. Billups is at http://www.ustaxcourt.gov/InOpHistoric/Billups.SUM.WPD.pdf .
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