89 T.C. 689">*690 OPINION

Respondent determined the following deficiencies in petitioner's income taxes:

After concessions, the issues we are asked to1987 U.S. Tax Ct. LEXIS 138">*141 decide are: (1) Whether petitioner's intentional overfunding of both of its money purchase pension plans results in the disqualification of the plans under section 401(a); ² (2) if petitioner's pension plans are not qualified under section 401(a), whether petitioner is entitled to deductions under section 404(a)(5) for contributions made under one of its pension plans to the separate accounts of plan participants; and (3) whether respondent raised, in a fair manner, the issue of whether the intentional overfunding by petitioner under its pension plan during the plan year ended January 31, 1977, results in the disqualification of the plan.

This case was submitted fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference.

1987 U.S. Tax Ct. LEXIS 138">*142 Petitioner was incorporated under the laws of New Jersey, and had its principal place of business in Camden, New Jersey, at the time the petition in this case was filed. Petitioner is the parent corporation of an affiliated group of corporations, and uses a fiscal year ending January 31 as 89 T.C. 689">*691 its annual accounting period for tax purposes. Bryen, Bryen & Co. (B.B. & Co.) is a wholly owned subsidiary of petitioner, and is a member of petitioner's affiliated group.

On August 15, 1972, B.B. & Co., then named Cherry Hill Management Co., adopted what became the Bryen, Bryen & Co. Pension Plan (B.B. & Co. Plan). The B.B. & Co. Plan was a target benefit plan ³1987 U.S. Tax Ct. LEXIS 138">*143 and was considered a money purchase pension plan. ⁴ Under the B.B. & Co. Plan, separate accounts were maintained for each employee who was a plan participant, and there was full and immediate vesting of amounts credited to the accounts of the plan participants. The B.B. & Co. Plan used a plan year ending on January 31. On May 18, 1973, respondent issued a favorable determination letter with respect to the qualified status of the B.B. & Co. Plan ⁵ under section 401(a).

For the plan year ended January 31, 1976, petitioner determined that the contribution required according to the terms of the B.B. & Co. Plan was $ 291,634, which petitioner1987 U.S. Tax Ct. LEXIS 138">*144 contributed and allocated to the accounts of the plan participants.

During the plan year ended January 31, 1976, petitioner regularly made monthly contributions under the B.B. & Co. Plan. The amounts of these contributions varied with petitioner's financial ability to make them. Petitioner's annual liability under the B.B. & Co. Plan for the fiscal years ended January 31, 1974, 1975, and 1976, was $ 199,441, $ 218,781, and $ 291,634, respectively. Because petitioner's business is cyclical in nature, which often resulted in petitioner's being in a "limited cash position," in 89 T.C. 689">*692 1975 petitioner inquired of its pension consultant and actuary whether it would be permissible to make contributions under the plan in excess of its annual liability. It was petitioner's intention to make contributions in excess of its liability under the plan when possible to ensure that the plan was properly funded and because of concern over the newly enacted minimum funding standards, which would become effective in the following plan year ⁶ (these contributions that were intentionally made in excess of plan liabilities are hereinafter referred to as advance contributions). Petitioner was advised1987 U.S. Tax Ct. LEXIS 138">*145 by the actuary that advance contributions were permissible if kept within reasonable limits, and that limiting any advance contributions to "one year's contribution would be reasonable." Petitioner did not claim a deduction for contributions that represented advance contributions, but limited its deduction to the actuarial liability under the plan as determined by petitioner's actuary.

For the plan year ended January 31, 1976, the B.B. & Co. Plan had an actuarial liability of $ 291,634. The B.B. & Co. Plan had assets1987 U.S. Tax Ct. LEXIS 138">*146 having a market value of $ 1,337,589, and had trust liabilities of $ 1,070,204; the excess of assets over liabilities was therefore $ 267,385. As of January 31, 1976, contributions made in excess of petitioner's liability under the B.B. & Co. Plan for that year amounted to $ 267,385. Of that amount, $ 189,539 was attributable to advance contributions, ⁷ and was not allocated to the separate accounts of plan participants. ⁸

1987 U.S. Tax Ct. LEXIS 138">*147 89 T.C. 689">*693 On January 28, 1977, petitioner adopted the William Bryen Co. Money Purchase Plan (W.B. Co. Plan). Similar to the B.B. & Co. Plan, the W.B. Co. Plan was a money purchase pension plan (although it was not a target benefit plan), and used a plan year ending January 31.

As of January 31, 1977, the B.B. & Co. Plan was merged into the W.B. Co. Plan. As a result of the merger (or "pooling") of the two plans, the W.B. Co. Plan had assets with a market value of $ 2,070,865 and trust liabilities of $ 1,827,449. Thus, there was an excess of assets over liabilities of $ 243,416. ⁹1987 U.S. Tax Ct. LEXIS 138">*148 The excess amount was attributable to advance contributions, and was not allocated to the separate accounts of plan participants. ¹⁰

From February 1, 1977, through January 31, 1978, the funds under the W.B. Co. Plan in the amount of $ 243,416, which represented advance contributions, were completely absorbed. Therefore, as of January 31, 1978, there were no funds in excess of plan liabilities that were attributable to advance contributions made by petitioner in the W.B. Co. Plan trust. Amounts attributable to advance contributions were allocated to plan participants' accounts pursuant to relevant plan provisions during the plan year ended January 31, 1978. ¹¹

1987 U.S. Tax Ct. LEXIS 138">*149 On May 27, 1983, respondent (1) revoked the favorable determination letter that had been issued with respect to the B.B. & Co. Plan for the plan year ended January 31, 1976; (2) issued a final adverse determination letter with regard to the W.B. Co. Plan; and (3) issued a statutory notice of deficiency that disallowed petitioner's deductions for all contributions made under the B.B. & Co. Plan during petitioner's taxable year ended January 31, 1976, and disallowed petitioner's deductions for all contributions made under the W.B. Co. Plan during petitioner's taxable year 89 T.C. 689">*694 ended January 31, 1977. In response to these determinations by respondent, pursuant to section 7476, petitioner filed petitions with this Court for declaratory judgments concerning the qualified status of both the B.B. & Co. Plan and the W.B. Co. Plan. Subsequently, on August 15, 1983, petitioner also filed a petition with this Court for a redetermination of the deficiencies set forth in respondent's statutory notice of deficiency. On October 20, 1983, respondent moved to dismiss the declaratory judgment cases, arguing that the status of both the B.B. & Co. Plan and the W.B. Co. Plan under section 401(a)1987 U.S. Tax Ct. LEXIS 138">*150 would be determined in the deficiency action. On May 10, 1984, both declaratory judgment actions were dismissed.

The first issue we are asked to decide is whether the advance contributions made by petitioner under the B.B. & Co. Plan and the W.B. Co. Plan result in the failure of the trusts under those plans to qualify under section 401(a) for the plan years in issue. We first briefly summarize the relevant sections of the Code and Income Tax Regulations before discussing the parties' arguments.

Section 401(a) prescribes requirements for the qualification of a trust that is part of a stock bonus, pension, or profit sharing plan. If a trust that is part of one of those types of plans is qualified, (1) the employer may deduct contributions to the trust as soon as they are paid, pursuant to section 404(a), subject to certain limitations; (2) the trust is exempt from income tax pursuant to section 501(a); and (3) the beneficiaries of the trust are not required to pay income taxes on contributions to the trust until they actually receive those contributions -- even though the contributions may have become nonforfeitable -- pursuant to section 402(a)(1).

1987 U.S. Tax Ct. LEXIS 138">*151 The introductory language of section 401(a) provides, in relevant part, that a "trust created or organized * * * and forming part of a * * * pension * * * plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust" if certain requirements are satisfied. (Emphasis supplied.) Section 1.401-1(b)(1)(i), 89 T.C. 689">*695 Income Tax Regs., ¹² purports to define the term "pension plan," as that term is used in the Code. That section of the regulations provides that a pension plan is a "plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement." Section 1.401-1(b)(1)(i), Income Tax Regs., then provides that a money purchase pension plan will be considered a pension plan for purposes of section 401(a) if employer contributions under the plan are "fixed without being geared to profits."

1987 U.S. Tax Ct. LEXIS 138">*152 Respondent argues that the advance contributions made by petitioner should result in the disqualification of the B.B. & Co. Plan and W.B. & Co. Plan trusts under section 401(a) for the plan years in issue, because the advance contributions made under the plans were not fixed without being geared to profits, as required by section 1.401-1(b)(1)(i), Income Tax Regs.¹³ Petitioner contends that the plans are not disqualified because there is no judicial, regulatory, or statutory support for respondent's argument, and that respondent's position is inconsistent with section 404(a)(1)(D). We agree with respondent that petitioner's contributions under the pension plans were not fixed without being geared to profits, and that the plan trusts therefore fail to qualify under section 401(a). ¹⁴

1987 U.S. Tax Ct. LEXIS 138">*153 89 T.C. 689">*696 It is our task in this case to construe the regulatory requirement that contributions be fixed without being geared to profits. Respondent argues that through the use of the term "fixed," the regulation prohibits an employer from exercising discretion over the amount of contributions that will be made under a money purchase pension plan, and that the language "without being geared to profits" prohibits an employer from varying annual contributions under a money purchase pension plan depending upon the employer's profitability during a plan year.

The meaning of the regulatory language requiring that employer contributions made under a money purchase pension plan be fixed without being geared to profits is not clear. The word "fixed" does suggest, however, that contributions must not be "subject to change or fluctuation" or must be "established definitely." Websters Third International Dictionary 861 (1981). Thus, we read section 1.401-1(b)(1)(i), Income Tax Regs., to require that money purchase pension plan provisions establish the level of employer contributions under the plan. We also read that section as a prohibition against granting the employer any discretion to1987 U.S. Tax Ct. LEXIS 138">*154 vary the level of contributions so established. Moreover, once the level of employer contributions under the plan is established by the plan provisions, the employer should not then be able to intentionally contribute an amount in excess of that established level. To allow the employer to make advance contributions would be inconsistent with the language of the regulation. The use of the word "fixed" does not suggest, as petitioner posits, that it was meant to serve only as a requirement that the employer contribute a minimum level of contributions. While the regulatory language in issue could have been clearer, ¹⁵ we read it to mean that plan provisions must establish the employer's obligation under the plan in a manner that does not grant the employer the authority to exercise discretion when making contributions. We also read the regulatory language to prohibit the employer from intentionally making contributions 89 T.C. 689">*697 in excess of the employer's liability under the plan. ¹⁶ Obviously, the other part of the phrase in issue, "without being geared to profits," modifies the term "fixed" and means that the plan provisions that establish the employer's liability may 1987 U.S. Tax Ct. LEXIS 138">*155 not be geared to the employer's profits.

Our reading of the 1987 U.S. Tax Ct. LEXIS 138">*156 regulatory language in issue is supported by respondent's own prior construction of the regulatory section. While it is well-settled that revenue rulings merely state respondent's position with respect to specific fact situations, and are not binding on this Court ( Stubbs, Overbeck & Associates, Inc. v. Commissioner, 445 F.2d 1142">445 F.2d 1142, 445 F.2d 1142">1146-1147 (5th Cir. 1971); Stark v. Commissioner, 86 T.C. 243">86 T.C. 243, 86 T.C. 243">250-251 (1986), and cases cited therein), the Supreme Court has indicated that an agency's construction of its own regulations is due considerable respect (e.g., Jewett v. Commissioner, 455 U.S. 305">455 U.S. 305, 455 U.S. 305">318 (1982); Ford Motor Credit Co. v. Milhollin, 444 U.S. 555">444 U.S. 555, 444 U.S. 555">556 (1980); Hanover Bank v. Commissioner, 369 U.S. 672">369 U.S. 672, 369 U.S. 672">686-687 (1962)).

The Commissioner has issued several rulings since 1972 that have interpreted the word "fixed," as used in section 1.401-1(b)(1)(i), Income Tax Regs., by applying that section of the regulations to various plan formulae for determining the required annual contributions under the plans in issue in those rulings. 1987 U.S. Tax Ct. LEXIS 138">*157 See Rev. Rul. 74-385, 1974-2 C.B. 130; Rev. Rul. 73-379, 1973-2 C.B. 124; Rev. Rul. 72-302, 1972-1 C.B. 110. ¹⁷ In each of these rulings, the analysis focuses on 89 T.C. 689">*698 whether the plan formula for determining the required annual contribution gives the employer the authority to exercise discretion with respect to contributions under the plan. In fact, Rev. Rul. 74-385, supra, clearly states, "Thus, in a money purchase pension plan, if the contributions on behalf of each participant are made in accordance with a stipulated formula that is not subject to the discretion of the employer, the requirements of section 1.401-1(b)(1)(i) of the regulations are satisfied." These revenue rulings are consistent with our reading of the regulatory language in issue in this case, and they represent a consistent interpretation by the Internal Revenue Service of the regulations it administers.

1987 U.S. Tax Ct. LEXIS 138">*158 Congress also has interpreted section 1.401-1(b)(1)(i), Income Tax Regs., consistent with our above reading of that section. The report of the Conference Committee, H. Rept. 93-1280, contains the following statement in a discussion of the minimum funding standards: ¹⁸

It is intended that plans generally are to be considered money purchase pension plans which meet the "definitely determinable" standard where the employer's contributions are fixed by the plan, even if the employer's obligation to contribute for any individual employee may vary based on the amount contributed to the plan in any year by the employee. For example, it is expected that a matching plan which provides that an employer will annually contribute up to 6 percent of an employee's salary, but that this contribution will be no more than the employee's own (nondeductible) contribution, will meet the "definitely determinable" criteria. In this case, the employer's contributions are set by the plan, will not vary with profits, and cannot be varied by the employer's action (other than by a plan amendment). (Of course, the plan must meet the nondiscrimination and other requirements of the Code to be qualified.) 1987 U.S. Tax Ct. LEXIS 138">*159 [H. Rept. 93-1280 (Conf.)(1974), 1974-3 C.B. 415, 453. Emphasis supplied. See also H. Rept. 93-770 (1974), 1974-3 C.B. 244, 332-333; H. Rept. 93-807 (1974), 1974-3 C.B. (Supp.) 236, 325-326. (These committee reports contain similar language to that contained in the report of the Conference Committee.)]

As noted, petitioner makes two arguments in this case concerning the qualified status of the B.B. & Co. Plan and 89 T.C. 689">*699 the W.B. & Co. Plan under section 401(a). First, petitioner argues that there is no judicial, regulatory, or statutory support for respondent's argument in this case. As we have demonstrated above, however, the regulatory language in issue supports respondent's argument concerning advance contributions. We therefore disagree with petitioner's first argument.

Second, petitioner argues that respondent's argument is inconsistent1987 U.S. Tax Ct. LEXIS 138">*160 with section 404(a)(1)(D), ¹⁹ which provides that contributions made by employers in excess of the amount deductible under section 404(a)(1) shall be deductible in succeeding taxable years "to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year under the * * * limitations [contained in section 404(a)(1)]." Petitioner further argues that section 404(a) does not indicate that a money purchase pension plan is disqualified when an employer makes advance contributions.

Section 404(a) provides, in relevant part, 1987 U.S. Tax Ct. LEXIS 138">*161 that contributions paid by an employer under a pension plan are not deductible under section 162 or 212, but instead are deductible under section 404 if certain limitations under section 404 are satisfied. If a pension trust is in issue, section 404(a)(1)²⁰ sets forth several limitations that must 89 T.C. 689">*700 be satisfied before contributions are deductible under that section. The limitation under section 404(a)(1) that is relevant to our inquiry in the present case provides that a contribution under a pension trust is deductible "[in] the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a)." Sec. 404(a)(1); emphasis supplied. (The structure of sec. 404(a)(1) was different for each of the two 89 T.C. 689">*701 plans in issue, but the relevant language was the same.) See also sec. 1.404(a)-3(a), Income Tax Regs. (repeating the same requirement).

1987 U.S. Tax Ct. LEXIS 138">*162 As we have already discussed, in order for a pension trust to be exempt under section 501(a), the plan trust must satisfy section 401(a). The regulations under section 401(a) (e.g., sec. 1.401-1(b)(1)(i), Income Tax Regs.) set forth certain requirements that must be satisfied in order to qualify a pension plan and its related trust under section 401(a). Section 404(a)(1) therefore makes qualification under section 401(a) and the regulations under section 401(a) a threshold issue for purposes of determining whether an employer may deduct, under section 404(a)(1), contributions paid under a pension plan. If the plan trust is not qualified under section 401(a), contributions paid to the plan trust are not deductible under section 404(a)(1), and section 404(a)(1)(D) never applies to amounts contributed to that plan trust.

Furthermore, accepting respondent's position in this case would not render section 404(a)(1)(D) superfluous, as petitioner seems to suggest; it is clear that not all contributions in excess of the limitations contained in section 404(a)(1) are due to intentional contributions made by employers in excess of the employers' liabilities under money purchase pension plans. 1987 U.S. Tax Ct. LEXIS 138">*163 We therefore reject petitioner's argument concerning section 404(a)(1)(D).

Based upon the foregoing analysis, we hold that section 1.401-1(b)(1)(i), Income Tax Regs., requires that a money purchase pension plan contain provisions that establish the level of employer contributions required under the plan in a manner that does not grant the employer authority to exercise discretion when making contributions, and is not related to the profits of the employer. We also hold that section 1.401-1(b)(1)(i), Income Tax Regs., prohibits an employer from exercising discretion by intentionally making contributions that exceed the liability established under the plan.

In the present case, provisions contained in the B.B. & Co. Plan and the W.B. & Co. Plan fixed petitioner's liability under the plans. Nevertheless, petitioner made advance contributions under the plans and, in effect, maintained 89 T.C. 689">*702 suspense accounts for these advance contributions. ²¹ Under these facts, petitioner has exercised the very discretion we read section 1.401-1(b)(1)(i), Income Tax Regs., to prohibit. We therefore hold that both the B.B. & Co. Plan and the W.B. & Co. Plan were disqualified for the plan years1987 U.S. Tax Ct. LEXIS 138">*164 in issue.

The next issue we are asked to decide is whether petitioner is entitled to deductions under section 404(a)(5) for contributions that were made under the B.B. & Co. Plan and allocated to the separate accounts of plan participants. ²²

1987 U.S. Tax Ct. LEXIS 138">*165 If an employer makes contributions under a money purchase pension plan that is not qualified under section 401(a), the employer is nevertheless entitled to a deduction for those contributions if the requirements of section 404(a)(5)²³ are satisfied. Sec. 404(a) and sec. 404(a)(5); sec. 1.404(a)-12(a), sec. 1.404(a)-12(b)(1), and sec. 1.404(a)-12(b)(3), Income Tax Regs.

1987 U.S. Tax Ct. LEXIS 138">*166 Under section 404(a)(5), a deduction by the employer is postponed until the taxable year of the employer in which, or with which, ends the taxable year of an employee in which an amount attributable to the employer's contribution 89 T.C. 689">*703 is includable in the employee's gross income as compensation. ²⁴Sec. 1.404(a)-12(b)(1), Income Tax Regs.Section 404(a)(5) also requires that separate accounts be maintained for each employee if more than one employee participates in the plan. Section 1.404(a)-12(b)(3), Income Tax Regs., interprets the "separate accounts" requirement as follows:

(3) Separate accounts for funded plans with more than one employee. In the case of a funded plan under which more than one employee participates, no deduction is allowable under section 404(a)(5) for any contribution unless separate accounts are maintained for each employee. The requirement of separate accounts does not require that a separate trust be maintained for each employee. However, a separate account must be maintained for each employee to which employer contributions under the plan are allocated, along with any income earned thereon. In addition, such accounts must be sufficiently 1987 U.S. Tax Ct. LEXIS 138">*167 separate and independent to qualify as separate shares under section 663(c). Nothing shall preclude a trust which loses its exemption under section 501(a) from setting up such accounts and meeting the separate account requirement of section 404(a)(5) with respect to the taxable years in which such accounts are set up and maintained.

Focusing on section 1.404(a)-12(b)(3), Income Tax Regs., respondent states on brief, "Because the quoted regulation states that no deduction is allowable for 'any contribution' unless separate accounts are maintained to which contributions are allocated, petitioner's failure to allocate the excess funding to participant accounts in 1976 results in noncompliance with [that regulation]." (Emphasis in original.)

Respondent's reading of section 1.404(a)-12(b)(3), Income Tax Regs., is strained in that it would disallow a deduction for amounts paid under an employee plan because a suspense account1987 U.S. Tax Ct. LEXIS 138">*168 was maintained under the plan. The relevant portion of section 1.404(a)-12(b)(3), Income Tax Regs., first requires that a separate account be maintained for each employee. As we read the first sentence of the regulation, the separate account requirement can be satisfied even if a suspense account is maintained under the plan. The third sentence of the quoted regulation states that "a separate account must be maintained for each employee to which employer contributions are allocated, 89 T.C. 689">*704 along with any income earned thereon." We do not read the third sentence to require that all employer contributions be made to the separate accounts. That sentence, instead, suggests that the employer contributions for which the employer is claiming a deduction must be allocated to the separate accounts. Since separate accounts were maintained under the B.B. & Co. Plan for each employee participating in the plan, and petitioner only claimed deductions for the required contributions that were allocated to the separate accounts under that plan, we hold that petitioner is entitled to deductions under section 404(a)(5) for its contributions to those separate accounts. ²⁵

On July 13, 1979, respondent sent a letter to petitioner stating that a proposed determination was made that the W.B. Co. Plan was not qualified under section 401(a) for the plan year ended January 31, 1977 (this letter is hereinafter referred to as the 30-day letter). The following grounds were given by respondent for the proposed determination:

(1) Bryen, Bryen Co. * * * effected a transfer of the assets of the Bryen, Bryen Co. Pension Plan to the trust under your Money Purchase Pension Plan where they are held for the Bryen, Bryen Co. participants in segregated accounts until an event calling for distribution occurs.

* * * *

The transfer of assets from the Bryen, Bryen Co. Pension Plan to your plan is in effect a pooling of assets of the plans (trusts). Revenue Ruling 56-267, CB 1956-1, 206, specifies conditions under which pooling of trusts is permitted if the pooled trust is to qualify under section 401(a) of the Internal Revenue Code and be exempt from tax under section 501(a).

One of those conditions is that the pooled trust expressly limit participation to Pension and Profit Sharing Trusts which are exempt under section 501(a) by reason1987 U.S. Tax Ct. LEXIS 138">*170 of qualifying under section 401(a) of the Code.

The presence in your trust of assets of the non-qualified * * * Bryen, Bryen Co. Pension Plan Trust violates that condition.

(2) Information submitted by Paul A. Tanker & Associates (Your Representative) indicates that there was advanced funding of $ 243,236 with respect [to] this plan.

89 T.C. 689">*705 That amount * * * constitutes a significant contingency reserve. Revenue Ruling 70-421, CB 1970-2 and Revenue Ruling 60-33 indicate that establishment of such reserve adversely affects the qualification of the plan under section 401(a) and [the] exempt status of the trust under section 501(a) of the code.

[Emphasis supplied.]

On May 30, 1980, respondent sent a letter to petitioner stating that technical advice was being requested from respondent's National Office, and enclosing a copy of the request for technical advice (hereinafter sometimes referred to as the request). The request for technical advice contained essentially the same arguments made by respondent in the 30-day letter that was issued with respect to the W.B. Co. Plan. ²⁶ The request also set forth arguments 1987 U.S. Tax Ct. LEXIS 138">*171 that had been made by petitioner in response to respondent's arguments. ²⁷

1987 U.S. Tax Ct. LEXIS 138">*172 On October 8, 1981, respondent sent a copy of the Technical Advice Memorandum (TAM) to petitioner. The TAM indicates that the existence of an excess funds account results in the disqualification of the plan maintaining the account.

On May 27, 1983, respondent sent a final adverse determination letter (final adverse letter) to petitioner concerning the W.B. Co. Plan. ²⁸ The final adverse letter provided that the W.B. Co. Plan was not qualified because of (1) the merger of the B.B. & Co. Plan (which respondent determined was not qualified) into the W.B. Co. Plan and (2) 89 T.C. 689">*706 the establishment of an excess funds account with respect to the W.B. Co. Plan. ²⁹

1987 U.S. Tax Ct. LEXIS 138">*173 A statutory notice of deficiency (hereinafter sometimes referred to as the statutory notice) was also sent to petitioner on May 27, 1983. The statutory notice stated, in pertinent part, that an adverse determination was being made concerning the qualified status of the W.B. Co. Plan because "its trust [held] assets of [the] nonqualified [B.B. & Co.] plan." ³⁰ Respondent failed to specifically base the determination of deficiencies upon the argument that the maintenance of an account for advance contributions under the W.B. Co. Plan caused the W.B. Co. Plan to be disqualified under section 401(a). Respondent also failed to specifically assert in his answer that the W.B. Co. Plan improperly maintained an account for advance contributions during the plan year ended January 31, 1977.

The issue before us is whether respondent has failed to give petitioner proper notice of respondent's intention to raise the issue of whether the maintenance of an account1987 U.S. Tax Ct. LEXIS 138">*174 for advance contributions by petitioner under the W.B. Co. Plan for the plan year ended January 31, 1977, results in 89 T.C. 689">*707 the plan's failing to qualify under section 401(a) for that plan year. Petitioner argues that because respondent did not raise in the statutory notice of deficiency or his answer the issue concerning the existence of advance contributions under the W.B. Co. Plan as it relates to that plan's qualification under section 401(a), respondent should be precluded from raising that argument on brief. Respondent argues that petitioner was given fair notice of this issue, and that respondent should therefore be allowed to rely on the advance contributions argument. We agree with respondent for the reasons discussed below.

Respondent may rely on a particular theory if he has provided petitioner with "fair warning" of his intention to proceed under that theory. Schuster's Express, Inc. v. Commissioner, 66 T.C. 588">66 T.C. 588, 66 T.C. 588">593 (1976), affd. per curiam 562 F.2d 39">562 F.2d 39 (2d Cir. 1977); Rubin v. Commissioner, 56 T.C. 1155">56 T.C. 1155, 56 T.C. 1155">1163 (1971), affd. 460 F.2d 1216">460 F.2d 1216 (2d Cir. 1972).1987 U.S. Tax Ct. LEXIS 138">*175 Fair warning means that respondent's failure to give petitioner notice of his intention to rely on a particular theory in the statutory notice of deficiency, or the pleadings, must not have caused harm or prejudice to petitioner in petitioner's ability to prepare its case. 66 T.C. 588">Schuster's Express v. Commissioner, supra at 593-594; 56 T.C. 1155">Rubin v. Commissioner, supra at 1163.

In 56 T.C. 1155">Rubin v. Commissioner, supra at 1162-1164, the taxpayer argued that the Commissioner was precluded from relying upon section 482 because neither the notice of deficiency, nor the pleadings, set forth the Commissioner's intention to rely on that section. We rejected the taxpayer's argument, holding that the Commissioner had given the taxpayer fair warning because the Commissioner's representatives informed the taxpayer of the Commissioner's intention to rely on section 482 during a conference held well in advance of trial.

The taxpayer in 66 T.C. 588">Schuster's Express, Inc. v. Commissioner, supra at 593-594, argued that it was not given sufficient notice of the Commissioner's intention to rely on section 4811987 U.S. Tax Ct. LEXIS 138">*176 because this notice was not set forth in the notice of deficiency or the pleadings filed prior to trial. We held, however, that the taxpayer was given fair warning 89 T.C. 689">*708 because he was apprised of the Commissioner's intention several months prior to trial.

In the present case, petitioner was given notice of respondent's intention to rely upon his advance contributions argument with respect to the plan year ended January 31, 1977, several times prior to both the time the statutory notice of deficiency was sent to petitioner and the time the parties submitted this case fully stipulated. Respondent's 30-day letter, request for technical advice, and TAM ³¹ provided this notice. Moreover, the final adverse letter gave petitioner notice of respondent's intention to rely on the advance contributions argument for the plan year ended January 31, 1977, contemporaneously with the sending of the notice of deficiency by respondent and prior to the submission of this case. It is clear that petitioner was given fair warning, consistent with our holdings in Rubin and Schuster's Express, Inc., of respondent's intention to rely upon the advance contributions argument with respect to1987 U.S. Tax Ct. LEXIS 138">*177 the W.B. Co. Plan for the plan year ended January 31, 1977.

1987 U.S. Tax Ct. LEXIS 138">*178 Petitioner quotes Rollert Residuary Trust v. Commissioner, 80 T.C. 619">80 T.C. 619, 80 T.C. 619">636 (1983), affd. on other issues 752 F.2d 1128">752 F.2d 1128 (6th Cir. 1985), where we stated that "[time] and time again this Court has reiterated that we will not consider issues not raised in the pleadings." In Rollert Residuary Trust, the taxpayer was precluded from raising his argument because it was raised for the first time on brief. In the present case, however, respondent raised his argument several times well in advance of the submission of this case as fully stipulated. Therefore, the language quoted from Rollert Residuary Trust is not controlling in the present case.

89 T.C. 689">*709 Petitioner also cites Markwardt v. Commissioner, 64 T.C. 989">64 T.C. 989, 64 T.C. 989">997 (1975), and Estate of Mandels v. Commissioner, 64 T.C. 61">64 T.C. 61, 64 T.C. 61">73 (1975), as support for his position. In 64 T.C. 989">Markwardt v. Commissioner, supra, the Commissioner argued that the taxpayer should be precluded from raising a casualty loss deduction argument under section 165(c)(3) because it was raised for the first time in the1987 U.S. Tax Ct. LEXIS 138">*179 taxpayer's brief. We stated that the circumstances of the case showed that the taxpayer "never gave notice of such issue to the Commissioner."

In 64 T.C. 61">Estate of Mandels v. Commissioner, supra at 73, the Commissioner argued that the taxpayer should be precluded from arguing that a gift tax return was incorrect in listing gifts as being made during 1962, rather than during 1961, because the taxpayer raised the argument for the first time during the trial. We determined that we would not consider the taxpayer's argument because the issue raised was factual, and it was "clear from respondent's reaction at trial he was unaware of [the taxpayer's] position until the time of trial." 64 T.C. 61">Estate of Mandels v. Commissioner, supra at 73.

Markwardt and Estate of Mandels do not support petitioner's position in the present case because, as noted above, respondent gave petitioner notice of his intention to rely upon the advance contributions argument with respect to the W.B. Co. Plan several times prior to the submission of this case. Moreover, it is clear from a reading of the request for technical advice that petitioner had, in fact, 1987 U.S. Tax Ct. LEXIS 138">*180 responded to the advance contributions argument prior to the submission of this case. Petitioner, therefore, cannot now claim that it has been harmed in its ability to prepare its case.

In summary, we hold that respondent has provided petitioner with fair warning of his intention to rely upon the advance contributions argument with respect to the W.B. Co. Plan for the plan year ended January 31, 1977; petitioner has not been harmed or prejudiced in its ability to prepare its case due to respondent's failure to set forth that theory in the statutory notice of deficiency or the pleadings. To the contrary, petitioner should have anticipated that the argument would be raised in respondent's brief.

89 T.C. 689">*710 To reflect the foregoing,

Decision will be entered under Rule 155.