IRS Notes Nonacquiesence with Court Holding an Interest in a Defined Benefit Pension Plan Was not an Asset for Insolvency Test

In Action on Decision AOD 2021-01 the IRS announced that the agency will not acquiesce in a decision that treated an interest in a defined benefit pension plan in which the taxpayer only had rights to monthly payment was not an asset for computation of the insolvency exception to the exclusion of cancellation of debt income from tax under IRC §108(a)(2).

The case in question is the case of Schieber v. Commissioner, TC Memo 2017-32.  As the court opinion noted:

The sole issue in this case is whether the Schiebers’ interest in a California Public Employees’ Retirement System (CalPERS) defined benefit pension plan is considered an asset in determining (1) whether they were insolvent on June 30, 2009, the date the debt was canceled, and (2) the amount of their insolvency.[1]

The Tax Court held that this asset should not be counted in determining if the taxpayer was solvent at the time the debt was cancelled:

[T]he IRS contends the Schiebers’ interest in the pension plan should be considered an asset because they can use their monthly payments to pay liabilities. But the test in Carlson v. Commissioner, 116 T.C. at 104-105, is whether the asset gives the taxpayer the ability to pay an “immediate tax on income” from the canceled debt—not to pay the tax gradually over time. In Carlson, we held that a commercial fishing license could be an asset because the license could be used, in combination with other assets, to immediately pay the income tax on canceled-debt income. Id. By contrast, the Schiebers’ interest in the pension plan cannot be used to immediately pay the income tax on canceled-debt income. Therefore, we hold that the Schiebers’ interest in the pension plan is not an asset within the meaning of section 108(d)(3).[2]

In a footnote, the Tax Court considered and rejected the IRS argument that the Court’s prior decision in the Shepherd case supported including this asset in computing the taxpayer’s solvency.

The IRS contends that Shepherd v. Commissioner, T.C. Memo. 2012-212, a nonprecedential case, supports its view that the Schiebers' interest in the CalPERS pension plan is an asset. The taxpayer in Shepherd was a township employee who had a pension with the New Jersey Public Employees Retirement System. Id., slip op. at 12. The Court found that he could borrow from his pension against his accumulated contributions. Eat 13-14. It held that the amount that he could borrow was an asset under sec. 108(d)(3). Eat 14. The Schiebers, by contrast, could not borrow from the pension. Shepherd is therefore distinguishable.[3]

The IRS has now decided to go on the record with its disagreement with this decision by noting its nonacquiesence.  The AOD describes the impact of such a holding as follows:

“Nonacquiescence” signifies that, although no further review was sought, the Service does not agree with the holding — of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a “nonacquiescence” indicates that the Service — will not follow the holding on a nationwide-basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.[4]

Thus, the IRS is putting taxpayers and advisers on notice that the agency will be willing to challenge a position that relies on this case where a taxpayer has only a right to a current monthly payout from the retirement plan, but no current right to otherwise access funds in the plan.

Specifically, the AOD holds:

The Commissioner does NOT ACQUIESCE in the following decision:

Schieber v. Commissioner, T.C. Memo. 2017-32, T.C. Docket No. 21690-14.[5]

In a footnote the IRS provides the specific holding it will not follow:

Nonacquiescence to the holding that an interest in a defined benefit pension plan is not an asset for purposes of applying the insolvency exclusion in I.R.C. § 108.