PLR 1317017: IRS distinguishes reporting rules for IRA and 529 account bonuses

Plain-English summary

The IRS ruled on the information-reporting treatment of bonuses a financial-services group planned to pay when clients opened and funded IRA or section 529 accounts. Bonuses credited to an IRA were treated as interest or other earnings paid on an IRA, so they were not reportable under sections 6041, 6042, or 6049. A bonus paid in connection with a 529 plan was instead treated as income paid to the client, followed by the client's contribution to the 529 account. Those 529-plan payments are reportable under section 6041 when total payments reach $600 or more. The ruling therefore approved one reporting result for the IRA program and a different result for the 529 program.

Ruling snapshot

• Question: How should bonuses under the organization's IRA and 529 promotional plans be reported for federal tax purposes?
• Outcome: Mixed. IRA-plan bonuses are not reportable; 529-plan bonuses are reportable under section 6041 at the $600 threshold.
• Key authorities: IRC §§ 408, 529, 6041, 6042, 6049, 6110, and 7701(a)(37); Treas. Reg. §§ 1.6041-1(a)(1)(ii), 1.6042-1(b)(1)(vii), 1.6042-3(b)(1)(vii), 1.6049-1(a)(1)(i), and 1.6049-4(c)(1)(ii)(C); Announcement 2008-17.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201317017 Contact Person:
Release Date: 4/26/2013
Date: February 1, 2013 Identification Number:

UIL Code: 529.00-00 Telephone Number:

Employer Identification Number:

Legend:

529 Promotional Period
Amount 1

Amount 2

IRA Promotional Period
Principal 1

Principal 2

State

This is in response to your ruling request, dated ****, You are requesting rulings
with respect to the information reporting requirements under §§ 6049 and 6041 of the
Internal Revenue Code (“Code”) for bonus payments made or to be made by you
pursuant to your IRA bonus plan and your § 529 bonus plan.

Facts:

You are a common parent of a consolidated group of corporations which file annual
consolidated U.S. Corporation Income Tax Returns on an accrual method, calendar
year basis. We use the term “You” to refer to the consolidated group. You provide a full
range of banking, investment, asset management, and other financial and risk
management products and services. You have established two incentive payment
programs for your clients, the IRA Bonus Plan and the 529 Bonus Plan.

Under the IRA Bonus Plan, for your clients who open a new individual retirement
account (IRA), qualified under § 408, during the IRA Promotional Period, and fund the
account with $Principal 1 or more, you will credit $Amount 1 to the client's account.

Under the 529 Bonus Plan, for your clients who open a new State § 529 Bonus Plan
through you, fund the account with at least $Principal 2 within *** days of opening the

account and maintain that amount for a minimum of *** days, you will credit
$Amount 2 to the client's State § 529 plan account.

You provide these bonus payments to incentivize clients to invest with and through you
and to help clients save for retirement and educational costs. You state that you are
treating these bonus payments as income to your clients, but do not know whether
information reporting is required.

Ruling Requested:

1. Does the incentive you paid under your IRA Bonus Plan give rise to information
   reporting requirements under §§ 6041, 6049, or any other provisions of the
   Code?

2. Does the incentive you paid under your 529 Bonus Plan give rise to information
   reporting requirements under section 6041, 6049, or any other provisions of the
   Code?

Law:

Sections 408(a) and (b) respectively define individual retirement accounts and individual
retirement annuities, and specify their requirements.

Section 529 exempts from taxation a qualified tuition program, which includes a
program established and maintained by a state or agency or instrumentality thereof, to
which a person may make contributions to an account established for the purpose of
meeting the qualified higher education expenses of the designated beneficiary of the
account.

Section 6041 generally requires all persons engaged in a trade or business and making
certain specified payments of $600 or more in the course of such trade or business to
any other person during the calendar year to (1) make and file an information return with
the Service for each calendar year in which they make such payments, and (2) furnish a
copy of the information return to that person.

Section 6042 generally requires all persons making payments of dividends aggregating
$10 or more to any other person during the calendar year to (1) make and file an
information return with the Service for each calendar year in which they make such
payments, and (2) furnish a copy of the information return to that person.

Section 6042(b)(2)(B) carves out from the term dividends distributions and payments
made to a person described in § 6049(b)(4), unless otherwise provided in regulations.

Section 6049 generally requires all persons who make payments of interest aggregating
$10 or more to any other person during the calendar year to (1) make and file an
information return with the Service for each calendar year in which they make such
payments, and (2) furnish a copy of the information return to that person. See §
6049(a)(1); Treas. Reg. § 1.6049-1(a)(1)(i).

Section 6049(b)(2)(B) provides that except to the extent otherwise provided in
regulations, an amount paid to a person described in section 6049(b)(4) is excepted
from reporting. Individual retirement plans are included as persons described in section
6049(b)(4), and the regulations do not provide otherwise. The regulations provide that
an individual retirement plan, as defined in section 7701(a)(37), is an exempt recipient.
See § 6049(b)(4)(B); § 1.6049-4(c)(1)(ii)(C).

Section 7701(a)(37) defines the term “individual retirement plan” to mean an individual
retirement account in § 408(a) and an individual retirement annuity in § 408(b).

Section 1.6041-1(a)(1)(ii) provides that payments reportable under that section do not
include payments of amounts with respect to which an information return is required by,
or may be required under authority of, §§ 6042 or 6049.

Section 1.6042-1(b)(1)(vii) excludes from the term “dividend” with respect to amounts
paid or credited after December 31, 1982, any amount paid or credited to any person
described in § 1.6049-4(c)(1)(ii), unless certain circumstances occur.

Section 1.6049-4(c)(1)(ii)(C) exempts from information return requirements payments
made to an individual retirement plan as defined in § 7701(a)(37).

In Announcement 2008-17, 2008-9 I.R.B. 512, an advance notice of proposed
rulemaking, the Service notes that “the IRS and the Treasury Department also have
considered the possibility that employers may consider funding section 529 accounts for
employees’ children or that a debtor may fund an account for the lender’s child. Section
529 does not override (or permit avoidance of) federal taxes otherwise applicable to
payments that are not in the nature of gifts.” “Guidance on Qualified Tuition Programs
Under Section 529; Advance notice of proposed rulemaking,” 73 Federal Register 13
(18 January 2008), pp 3441 - 3446, 3444.

Analysis:

1. Section 6049 provides generally that all persons who make payments of interest
   aggregating $10 or more to any other person during the calendar year must (1) file an
   information return for each calendar year in which they make such payments, and (2)
   furnish a copy of the information return to that person. See § 6049(a)(1); § 1.6049-
   1(a)(1)(i). Interest payments made to exempt recipients, as set forth in § 6049(b)(4),
   are excluded from the information reporting requirements of § 6049 unless regulations
   provide otherwise. See § 6049(b)(2). Individual retirement plans, as defined in

§ 7701(a)(37) to mean individual retirement accounts under § 408(a) and individual
retirement annuities under § 408(b), are exempt recipients under § 6049(b)(4)(B) and

§ 1.6049-4(c)(1)(ii)(C). Therefore, if the incentives (i.e. $Amount 1) paid pursuant
to the IRA Bonus Plan are payments of interest to individual retirement accounts under
§ 408, they are not subject to the information reporting requirements of § 6049.

If the incentives paid pursuant to the IRA Bonus Plan constitute dividends paid on the
individual retirement accounts, rather than interest, they are not subject to the
information reporting requirements of § 6042 for similar reasons. Payments made to an
exempt recipient under § 6049(b)(4), including an IRA under § 6049(b)(4)(B), are
excluded from the term “dividend” for purposes of information reporting under § 6042,
unless otherwise provided in regulations. See §§ 6042(b)(2)(B). The regulations under
§ 6042 do not provide otherwise. Therefore, dividends paid to an IRA under the IRA
Bonus Plan are excluded from the information reporting requirements of § 6042. See
§§ 1.6042-3(b)(1)(vii); § 1.6049-4(c)(1)(ii)(C).

Because these incentive payments could be subject to information reporting under the
authority of §§ 6042 or 6049, they are not subject to information reporting under § 6041.
§ 1.6041-1(a)(1)(ii). The payments are not subject to any other information reporting
requirements.

2. Section 529 exempts from taxation a qualified tuition program, which
   includes a program established and maintained by a state or agency or
   instrumentality thereof, to which a person may make contributions to an account
   established for the purpose of meeting the qualified higher education expenses
   of the designated beneficiary of the account (“QTP”). Whether payments to such
   accounts by persons other than the account owner are subject to § 6041 or

§ 6049 information reporting requirements depends on whether those payments
are payments of interest or payments of income to the account owner.

Your payment of $Amount 2 in connection with the 529 Bonus Plan is not
properly characterized as interest on a 529 plan account because it is paid by
you of your own accord as a bank and brokerage, and not by or on behalf of
State as an establisher and maintainer of the QTP program. Section 529(b)(1)
requires QTPs be established and maintained by a state or agency or
instrumentality thereof. Under State law, all investment amounts in the 529
Plan are held by State, and not you. Since your payment of $Amount 2 is of your
own accord and not by the State, treatment of the payment as interest would be
inconsistent with the requirements of § 529.

Your payment of $Amount 2 in connection with the 529 Bonus Plan is properly
characterized as a payment by you to the client, followed by a contribution by the
client to their 529 Plan account. This is consistent with the tax treatment of
payments that are not in the nature of gifts, such as employer funding of § 529
accounts. See 73 Federal Register 13 at 3444. Your paying $Amount 2 is
similar to non-gift funding of a § 529 account by a third party who is not the
account owner. Your payment is also similar to the Service's proposed treatment
of a change in beneficiary which the Service deems a taxable distribution
to the account owner followed by a new gift. Id. at 3443.

Section 6041 provides generally that all persons engaged in a trade or business
who, in the course of that business, pay another person fixed and determinable
gains, profits and income aggregating $600 or more in any taxable year must (1)
file an information return for each calendar year in which they make such
payments, and (2) furnish a copy of the information return to that person. See §
6041(a); § 1.6041-1(a)(1). Since the incentives paid under your 529 Bonus Plan
are payments of income to the client, followed by a contribution of the same
amount by the client to the § 529 account, the payments are subject to the
information reporting requirement to the extent that they total $600 or more.
These payments are not subject to any exception under § 6041, and are not
subject to any other information reporting requirement.

Ruling:
Based on the foregoing, we rule as follows:

1. Because the incentive payment under the IRA Bonus Plan is characterized as
   interest or other earnings (e.g. dividend) paid on an IRA, it is not subject to the
   information reporting requirements of sections 6042 or 6049. It is also not
   reportable under section 6041 or any other information reporting requirements of the
   Code.

2. Because the incentive payment under the 529 Bonus Plan is characterized as a
   payment of income to the client, and not as interest, it is subject to the
   information reporting requirements of section 6041, to the extent that the total
   payments equal or exceed $600.

This ruling will be made available for public inspection under section 6110 of the Code
after certain deletions of identifying information are made. For details, see enclosed
Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we
intend to make available for public inspection is attached to Notice 437. If you disagree
with our proposed deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that
there will be no material changes in these facts. This ruling does not address the
applicability of any section of the Code or regulations to the facts submitted other than
with respect to the sections described. Because it could help resolve questions
concerning your federal income tax status, this ruling should be kept in your permanent
records.

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

In accordance with the Power of Attorney currently on file with the Internal Revenue
Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Theodore R. Lieber

Manager, Exempt Organizations
Technical Group 3

Enclosure

Notice 437

Redacted ruling letter.

This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal
Revenue Code.