Attorney Suggests Expansion Of Regs On Plan Loans.

Carl E. Johnson Jr. of Robinson, Bradshaw & Hinson, Charlotte, N.C., has commented on the regs under section 72(p) on plan loans to plan participants.

In earlier comments, Johnson said that no further guidance on the effect of a deemed distribution on the tax treatment of subsequent distributions was necessary. According to him, the proper tax treatment is obvious: recognize basis in the plan equal to the deemed taxable amount. (For a summary of Johnson's prior letter, see Tax Notes, Feb. 26, 1996, p. 1229; for the full text, see Doc 96- 5092.) He now reiterates that it is appropriate to recognize basis and says that, absent statutory authority, not recognizing basis would be a "draconian approach to the bona fide loan program problem."

Johnson also suggests that the regulations be expanded to clarify when the 50 percent determination under section 72(p)(2)(A)(ii)(I) is made. He says that, as a practical matter, it is not possible to make the determination on the date of the loan. Rather, he asserts, the regs should provide that if the 50 percent requirement is satisfied on the date the loan is approved by the appropriate plan representative, then the requirement will be deemed satisfied so long as the loan is actually made as soon as reasonably practical after it is approved.

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February 26, 1996

(Signed Original and Eight copies)

CC:DOM:COPR:R (EE-106-82)

Re: Written comments on Proposed Regulation section 1.72(p)-1

Ladies & Gentlemen:

[1] This is to supplement our letters of January 14, 1996, and February 1, 1996 offering comments on the proposed regulations.

TAX TREATMENT OF SUBSEQUENT DISTRIBUTIONS

[2] You ask whether further "guidance" should be provided on "the effect of a deemed distribution on the tax treatment of subsequent distributions." Our letter of January 14 said that it was obvious that the proper tax treatment was to recognize basis in the plan equal to the deemed taxable amount, and that therefore no further guidance was necessary.

[3] Since then, we have learned (I think I read it in the BNA compensation planning Journal) that you believe that it may not be appropriate to recognize basis because to do so would encourage the taking of loans as a way to receive a distribution from the plan. That is, if the participant is allowed to have basis equal to the taxable amount, he's no worse off than if he received a distribution.

[4] We stand by our earlier comment. We understand your argument, but do not believe, absent express statutory authority, that you should undertake such a draconian approach to the bona fide loan program problem. If a plan is permitting participants to take "loans" in form but generally administering the program in way that is resulting in distributions to participants, then you may, and should, disqualify the plan.

SECTION 72(p)(2)(A)(ii)(I) -- 50% OF VESTED BENEFIT LIMITATION

[5] The regulations should be expanded to make clear when the 50% determination is made. As a practical matter, particularly under defined contribution plans with "daily" accounting systems it is not possible to make the determination on the date of the loan, that is, the date that the loan check is written. The regulation should be expanded to make clear that if the 50% requirement is satisfied on the date the loan is approved by the appropriate plan representative (e.g., plan administrator, plan committee, or trustee, or agent of any of the foregoing, as applicable), then the requirement will be deemed satisfied as long as the loan is actually made as soon as reasonably practical thereafter, taking into account the plan's normal routine and procedures for making loans.

Very truly yours,

Carl E. Johnson, Jr.