Probate & Trust Law Section Conference Manual ... - Minnesota CLE

2. Proposed Regulations. The IRS issued proposed regulations for section
529 on August 24, 1998. Proposed regulations carry no legal weight as far
as the courts are concerned, but the IRS takes the position that taxpayers
may rely on proposed regulations. With respect to taxpayer and preparer
penalties, proposed regulations are relevant in determining whether there
is a “reasonable basis” or “substantial authority” for a position. Treas.
Regs. §§ 1.6664-4; 1.6662-1(a). Thus in general a taxpayer is protected in
following a proposed regulation, but may disregard a proposed regulation
in favor of an alternative construction of the statute.
3. Additional Guidance. The IRS has provided some additional guidance
by Notices.
a. Notice 2001-55 (2001-2 C.B. 299) dealt with guidance regarding
the statutory restriction against investment direction. It permits
changes of investment options without beneficiary changes with
certain restrictions.
b. Notice 2001-81 (2001-2 C.B. 617) provides guidance on
recordkeeping, reporting and other requirements applicable to
QTPs.
4. Advance Notice of Proposed Rulemaking. An Advance Notice of
Proposed Rulemaking on section 529 was published in the Federal
Register on January 18, 2008 (“Advance Notice”). The rules tentatively
proposed in the Advance Notice would generally become effective only
after the effective date of final regulations and would apply prospectively.
5. Abuse Concerns Articulated. In addition, the Pension Protection Act of
2006 added a new Code Section 529(f) authorizing the Secretary of the
Treasury to “prescribe such regulations as may be necessary or appropriate
to carry out the purposes of this section and to prevent abuse of such
purposes, including regulations under chapters 11, 12, and 13 of this title.”
a. Thus when final regulations are issued they will be legislative
regulations issued pursuant to a specific grant of authority from
Congress, and as such will be entitled to deference unless the
regulation is arbitrary, capricious, or manifestly contrary to the
statute. See Chevron U.S.A., Inc. v. National Resources Defense
Council, Inc., 467 U.S. 837 (1984).
b. The Advance Notice presages an anti-abuse rule, which may be
applied on a retroactive basis, that “will generally follow the steps
in the overall transaction by focusing on the actual source of the
funds for the contribution, the person who actually contributes the
cash to the section 529 account, and the person who ultimately
receives any distribution from the account.” The favorable tax
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