IRS Hearing on Definition of Governmental Plan
Key Topic: IRS hears testimony from attorneys on federalism principle
and need to respect state and local authority in crafting a regulation.
Key Takeaway: Practitioners say clear rules are necessary to avoid an
avalanche of requests for private letter rulings.
By Florence Olsen
The Internal Revenue Service should avoid asking public retirement system
administrators to enforce IRS rules that are unclear, uncertain, and
impractical, public pension attorneys told IRS and Treasury Department officials
at a regulatory hearing July 9.
“As a practical matter, public retirement system administrators cannot be the
police for IRS in enforcing uncertain rules,” Judith W. Boyette, a partner at
Hanson Bridgett in San Francisco, testified at the hearing.
Boyette was among more than a dozen speakers at a rulemaking hearing aimed at
clarifying the definition of “governmental plan” under Section 414(d) of the tax
code, as well as related terms in that section, such as “state,” “political
subdivision” of a state, and “agency or instrumentality” of a state or political
subdivision of a state. In November 2011, IRS released a draft proposal
(REG-157714-06) as a preliminary step in the rulemaking process (216 PBD,
11/8/11; 38 BPR 2082, 11/15/11).
Public retirement system administrators are most concerned that any IRS rules
that would draw a brighter line between governmental and nongovernmental plans
be “clear, certain, and practical,” Boyette said. She and other attorneys said
that IRS has taken on a challenging project in trying to draw a clear line
between the two.
Boyette also recommended that IRS change its draft rules “to better recognize
the fundamental principle of federalism,” a comment echoed by others who
“While we certainly understand that the service cannot blindly accept any
statement that an entity is a governmental entity, if that statement is
supported by sound state or local government authority, that authority must be
respected and accepted,” she said.
Another attorney, speaking on behalf of the State Bar of Texas Section of
Taxation, said the draft document that IRS released was a useful first step in
the rulemaking process. “It's helpful to have something so detailed,” said
Stephanie Schroepfer, a partner at Fulbright & Jaworski in Houston.
Schroepfer said her suggestions on behalf of the state bar mostly involve
“possible tweaks” that would expand or clarify the list of possible factors to
be used in a facts-and-circumstances determination of an entity's governmental
“For example, it would be very helpful if the factors could be modified to
specify that an entity may be a governmental entity if it possesses 'some'
sovereign powers,” rather than “sovereign powers,” Schroepfer said.
Schroepfer suggested that IRS treat its list of factors in the draft proposal
as a nonexclusive list and, in the next step in the rulemaking process, add
language to the effect that “no inference should be drawn necessarily from the
failure to satisfy one or more of the factors.”
If IRS were to make those changes, many government entities would “get
comfortable” and would not feel a need to apply for private letter rulings on
their plans' governmental status, Schroepfer said. “We see a real potential for
you to be swamped with ruling requests if there is not some expansion and some
implementation of safe harbors,” she added.
Another attorney, also speaking on behalf of the state bar section, said that
some universities are concerned about what might happen under the draft proposed
regulation to many governmental entities that are “creatures of state law.”
Attorney Henry Talavera, a shareholder at Polsinelli Shughart in Dallas,
asked IRS to consider broadening its draft definition of instrumentality. If a
university or other entity identifies certain individuals as “part of us and our
instrumentality,” that should govern, he said. “I understand that that's a broad
expansion of the rules, but that's what we would like,” he added.
The rulemaking that IRS has undertaken is especially difficult because of
changes in the delivery of essential governmental services, notably the
outsourcing of some of those services to the private sector, Mary Beth Braitman,
a partner at Ice Miller in Indianapolis, testified at the hearing. “We think
those present some of the most difficult and challenging areas for this
project,” Braitman said.
Meanwhile, she added, IRS should keep on track with its determination letter
program submission cycle for governmental plans, which opens in fewer than seven
months. Governmental plans should be permitted to “self identify” themselves for
the next Cycle C submissions, she said, “so we don't create some logjam waiting
for final regulations that are still in the offing and get really far