The Fargo Medical Clinic, a co-partnership of thirty-three doctors, established a pension plan for its 165 employees on January 1, 1963.1 The plan was of the unit benefit type and provided for the vesting of retirement benefits after fifteen years of service and the attainment of age fifty. The plan was approved by the Internal Revenue Service on July 5, 1963.

On October 1, 1963, the Clinic established a pension plan for the partners. It was of the money-purchase variety and provided for immediate vesting.

In 1964, the taxpayer — one of the partners2 — contributed $2,500 to the partners' pension plan and claimed a deduction of $1,250 on his 1964 federal income tax return.

In December of 1965, the Commissioner ruled that the partnership plan, when considered with the employee plan, was discriminatory because it provided more liberal vesting provisions for the partners3 and disallowed the deduction.4

The taxpayer paid the resulting assessment of $512.50 and filed a claim for a refund. He subsequently instituted this action. The United States District Court for the District of North Dakota held that the partnership plan was not discriminatory and that the taxpayer was entitled to a judgment in the amount of the assessment, plus interest.

The first question is whether a pension plan is discriminatory solely because it provides for immediate vesting for partners and deferred vesting (age fifty and fifteen years of service) for other employees.5 We answer this question in the negative.

The government's position that inequality in vesting, in and of itself, renders a plan discriminatory is posited on its interpretation of § 401 of the Internal Revenue Code of 1954,6 Treasury Regulations7 and rulings of the Commissioner.8

The parties state that the question is one of first impression in the courts.

We have reviewed the regulations and rulings and find that the regulations do not deal with this question and that the rulings, with one exception, are generally concerned with situations where all employees are covered by the same or identical unit benefit plans but the vesting provisions operate to effectively preclude all but a favored group from becoming eligible for pension benefits. Under such circumstances, it is obvious that discrimination results.9

A 1965 ruling, however, dealt with a fact situation similar to the one here, except that employee benefits did not vest until death or termination of the plan.

"[1] The employer is a partnership, without any `owner-employees,' which has a number of common-law employees. The partnership established a unit benefit pension plan for its common-law employees and a money purchase pension plan for the partners. * * *

"[2] The employees' plan is non-contributory and provides that all employees, age 30 or more, with 1 year of service, who have commenced employment prior to age 55, are eligible to participate in the plan. The plan provides retirement benefits of 1 percent of the first $4,800 of annual salary averaged over the last 10 years of service plus 1 2/3 percent of such salary in excess of $4,800 times years of service not to exceed 30 years.10 The employees' plan further provides that benefits do not vest prior to retirement except upon death or plan termination.

"[3] The partners' plan provides for the same eligibility requirements as the employees' plan. Five percent of the employer's annual earned income is contributed to the partners' plan, to be allocated to each partner's account in the proportion each partner's share of earned income bears to the total earned income. The benefits are based on all funds accumulated in each partner's separate account. Vesting is immediate and full.

* * * * * *

"[4] Because the employees' plan is of the unit benefit type, while the partners' plan is of the money purchase type, it is difficult to compare the benefits provided under each plan. Usually, in cases of this type, if it can be satisfactorily demonstrated that the contributions under the money purchase plan, on the basis of factors applicable to the unit benefit plan, do not result in the prohibited discrimination, the benefits under each plan may be accepted as similar. However, one of the factors to be considered in arriving at such a conclusion is that of vesting.

"[5] Plan benefits cannot be compared unless there is some provision insuring that these benefits are made available to eligible participants under the same conditions. * * * [T]he difference between the immediate full vesting provided for partners under the instant partners' plan and the lack of such vesting provisions under the employees' plan constitutes discrimination of the type prohibited by section 401(a) (4) of the Code. This is so in this situation because under no circumstances will a participant in the partners' plan forfeit any of his benefits while a common-law employee may very well forfeit his benefits.

* * * * * *

"[6] Accordingly, it is held that where a partnership has two pension plans, one of the unit benefit type for common-law employees, the other of the money purchase type for partners, none of whom are `owner-employees,' and where the benefits under the employees' plan do not vest prior to retirement, except upon death or termination of the plan, but the benefits under the partners' plan are fully vested immediately, then the disparity in the vesting provisions will cause the partners' plan to fail to qualify because of the prohibited discrimination within the meaning of section 401(a) (4) of the Code. The fact that a partner may be taxed on a portion of the employer's contribution, which under section 404(a) (10) of the Code is not allowable as a deduction, is to be disregarded in determining whether the plan's vesting provisions are discriminatory."

Rev.Rul. 65-266, 1965-2 Cum.Bull. 138.

This ruling is entitled to weight in the interpretive process, K. Davis, Administrative Law Treatise, § 5.01. Cf., Volkswagenwerk Aktiengesellschaft v. FMC, 390 U.S. 261, 88 S. Ct. 929, 19 L. Ed. 2d 1090 (1968) (preliminary print); Whittemore v. United States, 383 F.2d 824, 830 n. 9 (8th Cir. 1967). But cf., Biddle v. Commissioner of Internal Revenue, 302 U.S. 573, 58 S. Ct. 379, 82 L. Ed. 431 (1938) ("[R]ulings * * * are of little aid in interpreting a tax statute."), but as it was neither contemporaneous nor of long standing, its value is limited, K. Davis, supra at § 5.06; Griswold, A Summary of the Regulations Problem, 54 Harv.L.Rev. 398, 404-11 (1940), and it cannot be given the force of law as a result of a reenactment after its issuance. See generally, Brown, Regulations, Reenactment and the Revenue Acts, 54 Harv.L. Rev. 377 (1940), Griswold, supra at 398-404. It is further weakened by the cautionary statement in the Treasury Department's Cumulative Bulletins:

"Revenue Rulings and Revenue Procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations (including Treasury Decisions), but are published to provide precedents to be used in the disposition of other cases, and may be cited and relied upon for that purpose. * * *"

While it is unnecessary for us to determine the validity of the ruling as applied to a situation in which employee benefits do not vest until retirement, we do not believe that the Code permits its application to every situation in which there are inequalities in vesting.

It is evident from paragraph [4] of the ruling that the Commissioner is of the view that differences in benefits, other than vesting, do not necessarily make a plan discriminatory if there is no discrimination in contributions.

Vesting is an important benefit in any pension plan and is one which must be considered in reaching a decision as to whether a plan is discriminatory as to benefits. We are unable, however, to find support in the language of the statute or its legislative history to support the Commissioner's view that differences in some benefits are permissible but any inequalities in vesting (a benefit) are discriminatory.

No compelling reasons have been called to our attention for treating vesting as a benefit to be singled out for the unique treatment advocated by the Commissioner. Indeed, recent studies and legislative recommendations indicate that vesting is a highly desirable objective but one which must be considered in the light of other meritorious ones.

President Kennedy appointed a Cabinet Committee, in 1962, to review pension plan growth and to make recommendations for federal control. This Committee reported on January 29, 1965.11 It gave serious attention to the problem of vesting and recommended fifty per cent vesting after fifteen years of employment and full vesting after twenty years. This recommendation was rejected by a Presidential Advisory Committee who stated it would be unwise to require any minimum standards of vesting.

While efforts are currently being made in Congress to establish minimum standards of vesting before any plan can be approved, no legislation to this end has been enacted.12 The Labor and Treasury Departments have agreed on a bill sponsored by Senator Ralph W. Yarborough (D-Texas) (S. 3421) and Representative Carl D. Perkins (D-Kentucky) (H.R. 17046) which would require vesting at age twenty-five after ten years of service. No legislation has been proposed requiring immediate vesting. The most liberal proposal being that of the AFL-CIO who have recommended mandatory vesting after ten years of service. 67 LRR 327.

If absolute equality of vesting is required in pension plans established for partners and their employees, it seems probable that money purchase plans providing for immediate vesting will be the result. While it is argued that this would be a desirable development, arguments to the contrary are also advanced. Those who oppose a policy of requiring immediate vesting take the position that such policy would mean lower benefits, particularly for those approaching retirement, reduced coverage and fewer new plans.

We recognize that neither of the Presidential Committees nor the Congress considered the question presented to this Court, but it is clear that all recognized that early vesting is a highly important and desirable objective but one to be balanced against others of merit.

We do not find support for the Commissioner's view in the legislative history of § 401. That section was adopted in 1942 to (1) prevent pension plans from being used as a method of tax avoidance by deferring income for highly compensated employees and (2) prevent pension plans from being used to provide retirement benefits for highly paid employees only rather than for employes generally. Tavannes Watch Co. v. Commissioner of Internal Rev., 176 F.2d 211 (2d Cir. 1949); Gordon, Discrimination Problems in the Drafting and in the Operation of Pension and Profit-Sharing Plans, 14 N.Y.U. Institute on Federal Taxation, 1153, 1170 (1956). Cf., Pepsi-Cola Niagara Bottling Corp., 48 T.C. 75 (1967). Insistence on identical vesting provisions will not, in our view, necessarily accomplish either objective.

In the light of the language of the statute13 and absent a clear Congressional intent, we reject the government's position that any difference in vesting between partners and employees is necessarily discriminatory. Nonetheless, inequalities in vesting are discriminatory (even if contributions are comparable) if they operate, alone or with eligibility requirements, to effectively exclude so many employees from the practical benefits of the plan that its value to the employee group as a whole is illusory.

We realize the difficulty of applying this test, but in the absence of a carefully drawn regulation, the courts have no alternative but to adopt a standard and apply it to the best of their ability on a case-to-case basis.

We also make clear that inequalities in vesting are discriminatory if the other benefits in the plan are similar. Our holding is not intended to modify the rulings of the Commissioner that vesting provisions, even though identical, that operate to effectively exclude all but the prohibited group from the benefits of the plan are discriminatory. P.S. 22, Rev.Rule. 57-163, 1957-1 Cum.Bull. 128, 139, 142, 145, 146. See generally, Greenwald v. C. I. R., 366 F.2d 538 (2d Cir. 1966); John Duguid & Sons, Inc. v. United States, D.C., 278 F. Supp. 101 (1967); Pepsi-Cola Niagara Bottling Corp., supra.

This brings us to the question as to whether the Fargo Clinic plan is discriminatory. This determination, like that of what is reasonable under 1954 Int.Rev.Code § 167, is one for the trier of fact. See, Standard Asbestos Mfg. & Insulating Co. v. C. I. R., 276 F.2d 289 (8th Cir.), cert. denied 364 U.S. 826, 81 S. Ct. 63, 5 L. Ed. 2d 54 (1960); Twin City Tile & M. Co. v. Commissioner of Internal Rev., 32 F.2d 229 (8th Cir. 1929). The burden of proving that the plan is nondiscriminatory is on the taxpayer. Perlmutter v. C. I. R., 373 F.2d 45 (10th Cir. 1967).

No evidence as to the discriminatory nature of the plan was presented by the Commissioner. He took the position that the law required that the vesting provisions be identical and they were not. "Both [should] have vested rights or both [should] have unvested rights, * * *."

The taxpayer offered evidence: (1) that the eligibility requirements were identical, (2) that current contributions to the employees' plan (7¾ per cent of payroll) were a greater per cent of payroll than contributions to the partners' plan (6½ per cent of payroll),14 (3) that the Clinic Manager (salary $26,000 per year) was satisfied with the employee plan and believed other employees to be "elated" with, and not critical of it, (4) that the employee plan was designed, when integrated with Social Security benefits, to insure that retiring employees would receive a retirement benefit of from fifty per cent to sixty-five per cent of their "wage," (5) that the past service liability for employees was being funded over an undisclosed period of years — perhaps eight or nine, (6) that the employee plan compared favorably with those of other clinics, (7) that while employees were permitted to contribute, none of them had seen fit to do so, (8) that the annual turnover among employees under thirty years of age was approximately forty per cent, and for employees over thirty years of age was four per cent, (9) that forty-eight employees were covered by the employee plan in 1965, (10) that if the employee plan were amended to provide full and immediate vesting, the long term cost to the employer would be increased by twenty to twenty-five per cent above current levels, and (11) that an actuary was of the opinion that the plan was sound and not discriminatory because long service employees would receive larger pension benefits under the benefit formula of the employees' plan than under the formula of the partners' plan.

No testimony was introduced from which the trial court could determine the number of employees who could reasonably be expected to meet the combined eligibility and vesting requirements and thus qualify for retirement benefits.

"The plaintiffs offered the testimony of a Consulting Actuary, a Certified Public Accountant, and the Manager of the Fargo Clinic, that the two pension plans do not discriminate against the employees of Fargo Clinic, a co-partnership and Fargo Clinic, Inc., a corporation. Their uncontradicted testimony was to the effect that the two plans favor the employees rather than the physician partners. The defendant offered no testimony to the contrary.

"The Court specifically finds that the employees of Fargo Clinic, a co-partnership, and Fargo Clinic, Inc. are well satisfied with their pension plan and do not feel that they are discriminated against. The partner physicians would if they had the opportunity, come under the employees' pension plan, but this they cannot do because of the statute and the regulations.

"The Court specifically finds that the two pension plans do not discriminate against the employees. They favor the employees."

The trial court's conclusion that the partners were prohibited by statutes and regulations from coming under the employees' plan is erroneous.

The manager's testimony that the employees were satisfied with the plan is not persuasive and is irrelevant.

Our primary concern is with the lack of evidence as to the number of employees that can be reasonably expected to gain a vested interest in pension benefits. If the eligibility and vesting requirements are read together, it is clear that employees who are hired in their late teens or early twenties will have to work for twenty-five years or more to gain vested rights.

The record indicates that many young men and women will be employed at that early age. It is equally clear, on the other hand, that the partners will be at or near thirty years of age when they are accepted in that status.

Under such circumstances, it may well be that the vesting provisions and eligibility clauses will operate to effectively exclude so many employees from the practical benefits of the plan that its value to the employee group as a whole is illusory. If this is the case, the plan is discriminatory within the meaning of the statute even if the contributions to the employees' plan are and will continue to be greater than to the partners' plan.

In view of the importance of the issue, in light of the fact that the government's case was presented on what we consider to be an erroneous view of the law, as the trial court considered factors in reaching its decision that we do not feel to be relevant and as insufficient evidence was introduced on other factors which we consider to be relevant, we reverse and remand. 28 U.S.C. § 2106 (1964 ed.); American Range Lines v. Commissioner of Int. Rev. (2d Cir. 1952) (see cases cited in note 4); Kastel v. Commissioner of Internal Revenue, 136 F.2d 530 (5th Cir. 1943). Cf., Marcella v. Commissioner of Internal Revenue, 222 F.2d 878 (8th Cir. 1955). The record may be reopened so that the parties will have an opportunity to present additional evidence in the light of this opinion. Stock Yards Nat. Bank v. Comm. of Internal Revenue, 153 F.2d 708 (8th Cir. 1946). Accord, United States v. Third Nat. Bank., 390 U.S. 171, 88 S. Ct. 882, 19 L. Ed. 2d 1015, 1032 (1968).