Pension Plan Advances Novel Challenge to IRS Program

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By Jacklyn Wille

March 4 — A novel lawsuit accusing the Internal Revenue Service of mismanaging its Voluntary Correction Program is moving forward after a federal judge denied the service's motion to dismiss.

The lawsuit—which accuses the IRS of refusing to consider a retirement plan's attempt to maintain tax-qualified status—appears to be the first lawsuit challenging the IRS's administration of its Voluntary Correction Program (VCP) in this way. The VCP allows retirement plans to identify and correct errors in plan design and operation that would jeopardize their tax-qualified status.

Brian D. Netter, the attorney suing the IRS on behalf of Information Systems and Networks Corp., said that the lawsuit appears to be unprecedented.

“As far as we can tell, it's the first of its kind, although there has been a growth in challenges against the IRS on administrative law grounds,” Netter told Bloomberg BNA March 4.

On March 2, Judge Richard J. Leon of the U.S. District Court for the District of Columbia denied the service's motion to dismiss the lawsuit. Leon issued this order without an accompanying written opinion explaining his reasoning.

First of Its Kind

Netter, a partner in Mayer Brown's Washington office, said the lawsuit came about because his client wanted to correct some mistakes in its retirement plan, but the IRS “isn't willing to play ball.”

Because the VCP allows plans to avoid the costly consequences of failing to maintain tax-qualified status, Netter said that a win for his client would benefit both retirement plans and their participants.

In contrast, “a win for the IRS would mean that the IRS could arbitrarily prevent companies from bringing their plans into compliance, which I think would be contrary to the interests of both companies and their participants,” Netter said.

Because this case appears to be the first of its kind, Netter said he wasn't sure whether similar suits by other companies would follow.

“As this case develops, we'll see more about whether there are other companies in similar circumstances and whether others are interested in filing similar suits,” he said. “From that perspective, whenever you file the first case of a kind, understanding how courts are going to process those claims helps everybody to understand whether it makes sense to file similar claims in the future.”

Netter added that it was “surprising” that the IRS wouldn't want to work with a company attempting to bring its retirement plan into compliance with the tax code.

“Here you have a company that is trying to turn the page and be diligent in honoring its legal obligations,” Netter said. “It's surprising in many respects that the IRS doesn't want to help a company like that. We're looking forward to seeing how the case can be resolved now that the district court has ruled that we have stated a claim.”

A spokeswoman for the Department of Justice's Tax Division declined to comment on the lawsuit.

VCP Dispute

According to the company's complaint, it filed a VCP application with the IRS in 2012 in an attempt to correct missteps allegedly related to the plan's court-appointed independent fiduciary. The fiduciary was appointed in the course of a long-running dispute with the Department of Labor over prior fiduciaries' alleged failure to make required plan contributions .

Although the service was receptive to some of the company's correction efforts, it eventually told the company that it couldn't rule on the VCP application because it involved fiduciary issues that should be addressed to the Department of Labor, the complaint alleged.

The company argued that this move by the IRS violated the Administrative Procedure Act and threatened the plan's tax-qualified status.

In response, the IRS argued that the company lacked standing to bring these claims because it hadn't been injured by any conduct of the service. In addition, the service argued that it hadn't issued a final agency action that could form the basis of a lawsuit.

Judge Leon's March 2 order denying the service's motion to dismiss means that the case will continue.

Netter represents the company, along with William G. McGarrity of Mayer Brown's Chicago office. Ann E. Nash and Olga L. Tobin of the Department of Justice's Tax Division represent the IRS.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com