IRS OFFERS GUIDANCE ON ARSWashington, D.C. - The Internal Revenue Service issued a revenue procedure that provides guidance on the treatment of taxpayers who accept certain types of settlements of potential legal claims relating to auction rate securities.

In February, auctions of ARS began to fail. Taxpayers may assert legal claims against another person or corporation for its conduct as it relates to ARS. In order to settle these claims, the corporation may make a settlement offer to the affected taxpayers, saying that if the taxpayer releases various claims, the taxpayer will have the right during a specified "window period" to cause the corporation to buy the taxpayer's ARS for the par amount.

The IRS said that it will not challenge the following positions for taxpayers within the scope of the revenue procedure:

* The position that the taxpayer continues to own the ARS upon "opting into" the settlement offer.

* The position that the taxpayer does not realize any income as a result of accepting the settlement offer and does not reduce the basis of the ARS from its original purchase price; and, A The position that the taxpayer's amount realized from the sale of the ARS during the window period is the full amount of the cash proceeds received.

Revenue Procedure 2008-58 applies to taxpayers who, before June 30, 2009, accept settlement offers that include window periods that do not extend beyond Dec. 31, 2012, and require that the taxpayer deliver an ARS that the taxpayer purchased on or before Feb. 13, 2008. However, it does not apply to taxpayers who accept a settlement offer with respect to an ARS, make the election described in the revenue procedure, and take the position that they continue to own the ARS following such an acceptance and election.


Washington, D.C. - The Internal Revenue Service has released Notice 2008-82, which protects reservists from losing funds in their health Flexible Spending Arrangement accounts after being called to active duty.

Legislation this year provided a special rule allowing "qualified reservist distributions" of unused amounts in a health FSA to reservists called to active duty. Under the existing rules, distributions could only be made to reimburse substantiated medical expenses, and any funds left unspent at the end of the plan year would be lost. This special rule allows reservists to make a distribution before leaving for active duty so as not to lose those savings.

The guidance clarifies that:

* The provision is optional for employers;

* Health FSAs must be amended if an employer wants to allow QRDs;

* QRDs are included in the income and wages for the reservist;

* Employees may request a QRD when they receive an order or call to active duty, and before the last day of the plan year (and grace period, if applicable); and,

* Employers may allow employees to continue to participate in the health FSA after the QRD if amounts remain in the health FSA.

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