The double-dip call that ended in an attorney letter

Last week I had a call with a double dip vendor, their producer, and their attorney that ended when they could not justify their reimbursement mechanics. Then I got the attorney’s opinion letter. It is worse than the call.

You’ve seen these programs before. A pretax $1,200 deduction, some nominal participation activity, no claims to reimburse, a $200 vendor fee and a $1,000 tax-free payment to the employee each month, all sold as saving the employer $600 per employee per year in FICA at no cost to anyone.

These are what the IRS calls “promoted abusive tax shelters.”

The question that ended the call was simple. What is the basis in law for a reimbursement that is not tied to an incurred expense? The attorney confirmed the employee pays nothing out of pocket.

Then I read the letter, and I pulled every source in it.

The most egregious error is a block quotation to a named IRS Chief Counsel memorandum. But that sentence is not in that document.

It comes from a different memorandum, with one phrase changed. The IRS wrote that medical care provided by the program is excluded. The letter’s version says reimbursement or payments for medical care is excluded.

That substitution is the entire question in this matter, and the letter resolves it by editing the quotation. The memorandum the letter actually names concludes the amounts are income and wages.

There is no version of legal practice where that is acceptable.

The rest holds up no better.

- The letter paraphrases Section 105(b) and drops the words “incurred by him,” which are the only words in dispute.
- It invokes Loper Bright, says the enacted text governs, then never construes the enacted text.
- Eight IRS authorities decide this question, spanning 1969 to 2023. Six do not appear at all, and the two that do are cited for propositions they do not support. Treas. Reg. 1.105-2, the 1956 regulation that resolves the matter, is not quoted, cited, or discussed anywhere in nineteen sections.

The letter claims substantial authority, a term of art. Its only two sections captioned as confirming IRS support are Publication 15 and Publication 502. Publications are not on the exclusive list in Treas. Reg. 1.6662-4(d)(3)(iii), which is the standard the letter itself invokes.

I have asked the author to show me which part of this is wrong, and I will correct it in writing to the same people.

The takeaway: if someone hands you a letter on a program like this and there is no opposing authority, run, don’t walk away from that vendor.