Stephen H. Cypen, Esq., Editor

1. FREE LOAN FROM SOCIAL SECURITY:

When to claim Social Security is one of the most important decisions Americans make when approaching retirement.  Currently, retirees can choose between claiming at the Full Retirement Age and receiving full benefits, claiming as early as age 62 but receiving reduced benefits, or delaying retirement to as late as age 70 and collecting higher monthly benefits. (Full Retirement Age increases from age 65 to age 67 by 2022.)  The reductions and delayed retirement credits are approximately actuarially fair for the person with average life expectancy.  Early retirement benefits are lowered by an amount that offsets the longer period for which they will be received.  Delayed retirement option offers higher benefits but for a shorter remaining lifetime.  Thus, on average, workers will receive the same lifetime benefits regardless of when they claim between the ages of 62 and 70.  According to a new Issue in Brief released by Center for Retirement Research at Boston College, several unconventional claiming strategies have recently come to light, which have the potential to pay higher lifetime benefits to some individuals and increase system costs.  The brief focuses on one of these strategies, called the “Free Loan from Social Security” strategy.  The first section outlines the procedure and incentives for employing this strategy.  The second section presents estimates of the cost to Social Security and the three different scenarios and describes who would gain.  The final section concludes that the estimated annual $5.5 Billion to $11.0 Billion cost of allowing free loans from Social Security is likely to increase substantially over time for the following reasons.  One, as the population ages, there will be more people claiming Social Security.  Two, rise in the Full Retirement Age reduces benefits, which also reduces the amount that individuals would need to pay back if adopting the strategy.  Three, due largely to the shift to 401(k) plans, future cohorts will have more liquid assets available to take advantage of the strategy.  In short, the potential cost of the strategy will continue to rise and Social Security will be left with the bill.  Who said there’s no free lunch (make that “loan”)? 

2. FORMER EMPLOYEE HAS NO STANDING TO BRING ERISA CLAIMS:

Gipson, a former employee of Wells Fargo & Company, filed suit against Wells Fargo, claiming that the company’s retirement plan’s investments constituted a prohibited transaction in violation of ERISA and that investments were a breach of the retirement plan committee’s fiduciary duties under ERISA.  Wells Fargo moved to dismiss on the ground that Gipson did not have standing to bring her claims.  In granting the motion to dismiss, a federal district judge cited a prior binding appellate case involving breach-of-fiduciary-duty claims arising out of a welfare benefit plan, in which the court determined that former employees were no longer “participants” under ERISA, and thus lacked standing to bring their claims.  The district court was not convinced that the recent United States Supreme Court decision in LaRue v. DeWolff, Boberg & Associates (see C&C Newsletter for February 28, 2008, Item 1) determined that all former plan participants had standing to bring claims for breach of fiduciary duty under ERISA.  Gipson v. Wells Fargo & Company, Case No. 08-4546 (D. Minn., March 12, 2009). 

3. CHANGES TO FDIC COVERAGE:

Federal Deposit Insurance Corporation’s Transaction Account Guarantee Program is available through December 31, 2009, unless extended.  All non-interest bearing transaction accounts covered by TAGP are fully guaranteed by FDIC for the entire cash balance held in the account.  This additional coverage fully insures all U.S. dollar balances held in U.S. Demand Deposit bank accounts.  Banks that choose to receive the additional insurance benefits by participating in the TAGP program will be assessed an annualized fee of 10 basis points on all quarter- end spot balances in excess of $250,000.  At least one large custodian bank has notified customers of its intent to allocate this expense to customers for balances in demand deposit accounts resulting from intentionally-placed deposits and administrative errors on the part of customers or their agents (for example, investment managers).  Trustees may want to dispute such additional costs or advise their investment managers to take steps to avoid any would-be charges.  Please note that U.S. dollar deposits held in interest-bearing accounts are covered under FDIC’s general deposit rules, which have increased in amount of general coverage to $250,000 through December 31, 2009, under a separate program not part of TAGP (see C&C Newsletter for October 8, 2008, Item 1). 

4. IRS RELEASES GUIDANCE ON “PONZI” SCHEMES: 

A. In Revenue Ruling 2009-9, Internal Revenue Service deals with proper income tax treatment for losses resulting from Ponzi schemes.  The Revenue Ruling resolves the following issues: 

(1)            A loss from criminal fraud or embezzlement in a transaction entered into for profit is a theft loss, not a capital loss, under IRC § 165.

(2)            A theft loss in a transaction entered into for profit is deductible under § 165(c)(2), not § 165(c)(3), as an itemized deduction that is not subject to the personal loss limits in § 165(h), or the limits of itemized deductions in §§ 67 and 68. 

(3)            A theft loss in a transaction entered into for profit is deductible in the year the loss is discovered, provided that the loss is not covered by a claim for reimbursement or recovery with respect to which there is a reasonable prospect of recovery. 

(4)            The amount of the theft loss in a transaction entered into for profit is generally the amount invested in the arrangement, less amounts withdrawn, if any, reduced by reimbursement or recoveries, and reduced by claims as to which there is a reasonable prospect of recovery.  Where an amount is reported to the investor as income prior to discovery of the arrangement and the investor includes that amount in gross income and reinvests this amount in the arrangement, the amount of the theft loss is increased by the purportedly reinvested amount. 

(5)            A theft loss in a transaction entered into for profit may create or increase  net operating loss under § 172 that can be carried back up to three years and forward up to twenty years.  An eligible small business may elect either a three, four or five-year net operating loss carryback for an applicable 2008 net operating loss. 

(6)            A theft loss in a transaction entered into for profit does not qualify for the computation of tax provided by § 1341. 

(7)            A theft loss in a transaction entered into for profit does not qualify for the application of §§ 1311-1314 to adjust tax liability in years that are otherwise barred by the period of limitations on filing a claim for refund under § 6511. 

Got it? 

B. In Revenue Procedure 2009-20, Internal Revenue Service provides an optional safe harbor treatment for taxpayers that experienced losses in certain investment arrangements discovered to be criminally fraudulent.  In order to qualify for the safe harbor provision, a taxpayer must agree not to file amended returns excluding or recharacterizing income reported with respect to the investment arrangement for years preceding the year of discovery.  The taxpayer must also agree not to claim an alternative tax computation under a claim of right and not to claim any refunds from the period that is otherwise barred by the statute of limitations under any mitigation provision.  There is a special procedure available for taxpayers who have already filed amended returns to claim refunds of previously reported income.  Such taxpayers must basically agree to drop their amended return claims in order to participate in the relief available under the Revenue Procedure.  The deductible loss is limited to 95% of the taxpayer’s basis in the investment arrangement, reduced by any recovery actually received and by the amount of coverage provided by the Securities Investors Protection Corporation.  Taxable income previously reported from the investment and reinvestment in the arrangement increases the taxpayer’s deductible basis.  Taxpayers asserting a claim against third parties (such as a broker or money manager that recommended the investment arrangement) in connection with their loss must use 75% instead of 95% when determining how much they can deduct in 2008.  The Revenue Procedure also describes how IRS will treat a return that claims a deduction for such a loss and does not use the safe harbor treatment described in the Revenue Procedure.  (Basically, a taxpayer that chooses not to apply the safe harbor treatment provided by the Revenue Procedure to a claimed theft loss is subject to all of the generally applicable provisions governing deductibility of losses under IRC § 165.)  If you don’t get it now, hopefully your accountant will. 

5. NEW WITHHOLDING TABLES FOR PENSION PLAN ADMINISTRATORS:

Internal Revenue Service has issued IRS Pub. 15-T, Wage Withholding and Advance Earned Income Credit Payment Tables (For Wages Paid Through December 2009).  According to CCH, the publication contains new wage-bracket and percentage method withholding tables, as well as all other federal withholding tables.  The tables are to be implemented as soon as possible, but no later than April 1, 2009.  They are effective through December 31, 2009.  The same tables were also released in advance in IRS Notice 1036.  The tables have been revised as a result of the tax credits contained in the American Recovery and Reinvestment Act (see C&C Newsletter for February 19, 2009, Item 1).  Newly-released IRS Pub. 15-T advises administrators to use the new tables for calculation of income tax withholding on pension distributions.  Generally, periodic payments are pension or annuity payments made for more than one year that are not eligible for rollover distributions.  Periodic payments include substantially equal payments made at least once a year over life of the employee/beneficiary or for ten years or more.  For wage withholding purposes, these payments are treated as if they are wages.  Plan administrators calculate withholding by using the recipient’s Form W-4P and the federal income tax withholding tables and methods in Pub. 15, Circular E, Employer’s Tax Guide.  Recipients can elect not to have any income tax withheld. 

6. SEC OFFICIAL ADDRESSES INVESTMENT COMPANY INSTITUTE CONFERENCE:

On March 23, 2009, Andrew J. Donohue, United States Securities and Exchange Commission Division of Investment Management Director, gave the keynote address at the 2009 Investment Company Institute Mutual Funds and Investment Management Conference.  Part of Mr. Donohue’s talk dealt with rulemaking developments.  In this regard, Mr. Donohue discussed some of the key initiatives in the Division of Investment Management: 

• Summary Prospectus.  The Commission’s vote to adopt a Summary Prospectus in 2008 was one of the most significant accomplishments for mutual funds and their investors.  This development represents a revolutionary change in mutual fund disclosure, providing fund investors key information they need in user-friendly format.   Use of a Summary Prospectus will require the industry to make significant system adjustments in order to implement the rule’s requirements, particularly those concerning tagging and risk return and signature requirements.  Mr. Donohue wants this rule to be implemented. 

• Money Market Funds.  In addition to experiencing the first "breaking the buck" by a widely-held money market fund, over 120 money market funds faced their own credit or liquidity challenges.  To allow the asset purchase or credit support arrangements for funds facing such challenges, over 30 firms sought and promptly received no-action relief from SEC staff.  The Division actively worked with managers of money market funds as they coped with events during this period.  In addition, the Division took a number of important actions to assist various liquidity facilities and other government programs to assist money market funds, including consulting closely with the Treasury Department on development, documentation and implementation of the Treasury Temporary Guarantee Program. 

• Auction Rate Preferred Securities.  Division staff was also instrumental in issuing no-action letters regarding development of liquidity protected preferred stock as a substitute for auction rate preferred securities.  Division staff played a leading role in development of the Commission's regulatory actions relating to the freeze in the auction rate preferred securities market.

• Director Guidance on Soft Dollars.  Mr. Donohue hopes to move forward on a proposal the Commission issued in July 2008 to provide guidance to fund directors with respect to their responsibility to oversee investment advisers' trading of fund portfolio securities.  The guidance would not impose any new requirements on fund directors or advisers, but instead proposes to provide a flexible framework to assist directors in fulfilling existing oversight obligations. 

• 12b-1.  Two years ago, Mr. Donohue told the same conference that reform of rule 12b-1 was a priority of the Division and an issue that would be addressed. Interestingly, the basis for the Division’s determination that it was time to reconsider the rule was that when it was adopted in 1980, the fund industry was in a very different state than it was in 2007.  There had been a period of net redemptions, and there was concern that if funds were not permitted to use a small portion of their assets to facilitate distribution, they might not survive.  In 2007, fund assets were over $10 trillion, and the industry had not been through a period of sustained net redemptions.  Extinction certainly did not seem to be a threat.  Now, the fund industry has evolved further and is in a different state than it was in 2007.  Thus, Mr. Donohue believes it would be wise in the current market environment for the Commission to defer consideration of rule 12b-1 reform for this year. 

Mr. Donohue concluded by noting it was a “very interesting time to be working in financial services, and in particular the fund industry.”  With the ingenuity, entrepreneurship and investor-focus that characterize this area of financial services, Mr. Donohue looks forward to watching how the industry responds and evolves to these unprecedented market events.

7. NEW STOCK MARKET RELATED TERMS: 

BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius. 

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry and the husband gets no sex.

8. QUOTE OF THE WEEK:

“Love looks through a telescope; envy through a microscope.”  Josh Billings