Xcel Energy was the first pre-1986 “leveraged COLI” case to be disputed by the IRS. Although the IRS had successfully attacked the tax deductibility of post TRA 86 leveraged COLI cases, they had previously not attempted to pursue these earlier, grandfathered plans. Xcel had prevailed in a preliminary court matter, but submitted a formal offer to settle the dispute on September 20, 2007.
Xcel is to pay $64 million for tax, penalty and interest (the IRS was seeking $583 million). The settlement also provided for Xcel to surrender all of the policies in question without recognizing taxable gain on surrender.
On October 22, the IRS issued Notice 2007-86, extending transition relief through 2008 for IRC Section 409A. This represents a significant easing of the limited transition relief granted last month. The IRS also announced partial reporting relief with the issuance of Notice 2007-89 on Oct. 23. The Groom Law Group authored an excellent overview of both IRS notices.