1989 U.S. Tax Ct. LEXIS 81">*81
P is a trust forming part of a profit-sharing plan. Allocations to a plan participant's account for 1976, 1977, and 1979 through 1981 exceeded the
92 T.C. 1173">*1174 OPINION
Respondent determined the following deficiencies and additions to tax against petitioner:
| Year | Deficiency | Sec. 6651(a)(1) 1 addition |
| 1979 | $ 10,465.83 | $ 2,616.46 |
| 1980 | 21,265.76 | 5,316.44 |
| 1981 | 19,433.96 | 4,858.49 |
| 1982 | 3,841.48 | 960.37 |
| 1983 | 44,469.37 | 11,117.34 |
Respondent has conceded the additions. Thus, the instant case presents the following remaining issues: (1) Whether respondent should have permitted petitioner, a trust forming part of a profit-sharing plan, to retroactively correct violations of
Pursuant to Rule 122(a), the parties submitted this case to the Court without trial and on the basis of the pleadings and a stipulation of facts. The stipulation of facts and attached exhibits are hereby incorporated by reference.
Petitioner's legal residence 2 was in Buffalo, New York, when it filed its petition.
92 T.C. 1173">*1175 Petitioner is a trust forming part of the Martin Fireproofing Profit Sharing Plan (the plan). Both petitioner and the plan utilize a calendar year accounting period. Petitioner was created by a trust agreement, effective January 1, 1960, between Martin Fireproofing Corp. (the employer) and Charles A. Martin, Jr. (Mr. Martin, Jr.), John S. Gaffney, and George R. Bowman (Mr. Bowman), who are petitioner's trustees. In a letter dated December 30, 1960, respondent determined that petitioner met the requirements of
The plan and the trust agreement which created petitioner1989 U.S. Tax Ct. LEXIS 81">*84 were "restated," effective January 1, 1976, to comply with the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829 (ERISA). In a letter dated May 3, 1977, respondent determined that petitioner, as restated, qualified under
Subsequent written amendments to the plan are dated May 11, 1977, May 7, 1979, and August 23, 1984. Additionally, on August 29, 1985, the employer and petitioner's trustees adopted a "
At all times, the plan was a "defined contribution plan," as defined in section 414(i). Thus, the plan provided an individual account for each participant and for benefits based solely on the amount contributed to 1989 U.S. Tax Ct. LEXIS 81">*85 the participant's account (adjusted for any income, expenses, gains, and losses) and the portion of any forfeitures of the accounts of other participants which might be allocated to the account. Under the plan, the employer's board of directors determined the amount contributed to the plan by the employer. The plan also permitted voluntary contributions by participants, 92 T.C. 1173">*1176 subject to the approval of the board of directors and petitioner's trustees.
For the years in issue, i.e., 1979 through 1983, the plan provided the following formula for allocating employer contributions and forfeitures:
For each Plan Year with respect to which a Company contribution is made, the Trustees shall allocate to each Qualified Participant, as hereafter defined, so much of the total contribution for such year and the amount in the forfeiture account available for redistribution at the close of such year as the compensation of such Participant bears to the total compensation of all Qualified Participants for such year.
Thus, the amounts allocated to a participant depended upon his "compensation." For the years in issue, the plan defined compensation as follows:
The term "compensation" for1989 U.S. Tax Ct. LEXIS 81">*86 any Plan Year means the total amount accrued on behalf of a Qualified Participant by the Company constituting "wages" as defined in
For the years in issue, the plan also provided a mechanism for preventing violations of
1989 U.S. Tax Ct. LEXIS 81">*87 Charles A. Martin (Mr. Martin) founded the employer and was its chief executive officer until 1968. In 1968, the employer's board of directors elected Mr. Martin chairman 92 T.C. 1173">*1177 of the board and a vice president. Mr. Martin's annual compensation was fixed at $ 30,000, and Mr. Martin has continued to work for the employer since 1968. Mr. Martin, Jr., Mr. Martin's son, has served as the employer's president since at least 1976.
Although Mr. Martin's annual compensation was fixed at $ 30,000 for 1968 and indefinitely thereafter, Mr. Martin waived his entire salary for each year from 1969 through 1981, except 1973. The employer did not deduct Mr. Martin's "accrued" but unpaid salary on its returns, nor did Mr. Martin report such salary on his returns.
In 1968, the employer's board of directors had approved the following resolution:
Upon motion duly made and carried, it was resolved that as Consultant and Chairman of the Company, Chas. A. Martin participate in any profit sharing disbursement on the basis of his last annual salary.
Thus, for each year from 1969 through 1981 that the employer made a contribution to the plan, a portion of the contribution was allocated to Mr. 1989 U.S. Tax Ct. LEXIS 81">*88 Martin's account, regardless of whether Mr. Martin received compensation currently includable in his income. The employer made no contributions for 1969, 1971, or 1978. The employer did make contributions in 1982 and 1983, but no portions of those contributions were allocated to Mr. Martin's account.
The following table sets forth contributions made by the employer for years 1976 through 1983, the dates contributions were made, and the portions allocated to Mr. Martin's account:
| Plan | Amount of | Amount allocated | |
| year | contribution | Date made | to Mr. Martin's account |
| 1976 | $ 47,983.40 | 3/14/77 | $ 4,500 |
| 1977 | 53,021.75 | 3/14/78 | 4,500 |
| 1978 | |||
| 1979 | 51,244.37 | 3/10/80 | 4,500 |
| 1980 | 52,390.98 | 3/10/81 | 4,500 |
| 1981 | 58,274.32 | 3/11/82 | 4,500 |
| 1982 | 57,397.80 | 3/11/83 | |
| 1983 | 57,926.70 | 3/12/84 |
No forfeitures were allocated to Mr. Martin's account for any of the foregoing years, nor did Martin ever make an 92 T.C. 1173">*1178 employee contribution. Mr. Martin has received no benefits under the plan.
In August 1983, respondent began an audit of the plan. Respondent's audit disclosed the possibility that allocations made to Martin's account exceeded the
Further negotiations resulted in the August 23, 1984, plan amendment previously mentioned. That amendment added the following language to the plan:
(d)
The effective date of this Amendment is January 1, 1984. In all other respects, Martin Fireproofing Profit Sharing Plan shall remain unchanged.
The foregoing language is based upon a corrective measure described in
In a letter to respondent's National Office dated June 1, 1986, the employer requested technical advice and relief from retroactive disqualification of the plan. The employer cited
1989 U.S. Tax Ct. LEXIS 81">*91 On July 30, 1986, respondent issued a "final revocation letter" which denied the requested relief and advised the employer that petitioner had lost its exempt status for the years 1976 through 1983, because of violations of
Respondent concedes that except for the alleged violations of
Petitioner filed no returns for years 1979 through 1983. Respondent concedes that the failure to file was due to reasonable cause. The employer filed a duly-completed "Form 5500-C, Annual Return/Report of Employee Benefit Plan" 1989 U.S. Tax Ct. LEXIS 81">*92 for each of those years. The returns filed for 1979 and 1980 did not contain "Schedule P," which contains a statement by the trustee of a qualified trust. The 1979 and 1980 forms, however, were signed by Mr. Bowman when he was both an officer of the employer and one of petitioner's trustees.
Prior to discussing the respective arguments of the parties regarding the qualification of petitioner as exempt from taxation, a brief summary of the pertinent statutes is beneficial. Section 501(a) provides that a trust described in
Further,
(c) Limitation for Defined Contribution Plans. -- (1) In general. -- Contributions and other additions with respect to a participant exceed the limitation of this subsection if, when expressed as an annual addition (within the meaning of paragraph (2)) to the participant's account, such annual addition is greater than the lesser of -- (A) $ 25,000 4 or (B) 25 percent of the participant's compensation.
The annual addition referenced in the foregoing limitation consisted of allocations attributable to an employer's contribution and forfeitures, as well as a portion of an employee's contribution.
Respondent1989 U.S. Tax Ct. LEXIS 81">*94 contends that allocations made to Martin's account for the years 1976, 1977, and 1979 through 1981 exceeded the
Petitioner contends that allocations to Martin's account did not violate
92 T.C. 1173">*1181 At the outset, we reject petitioner's argument that allocations to Martin's account did not exceed the
the amounts allocated to the account of Charles A. Martin, Sr. during the plan years in issue exceeded the prescribed limitations for annual additions allowed for under Code
The employer made the same admission in the declaratory relief action.
Furthermore, petitioner first argued compliance with
Petitioners' next argument is that respondent abused his discretion in not permitting petitioner to correct retroactively any
(6)
(i) The excess amounts in the participant's account must be allocated and reallocated to other participants in the plan. However, if the allocation or reallocation of the excess amounts pursuant to the provisions of the plan causes the limitations of
The foregoing regulation provides for retroactive relief in three circumstances. An excess allocation must result from either (1) forfeitures, (2) a "reasonable error in estimating" compensation, or (3) "other limited facts and circumstances" to be determined by respondent. Petitioner argues that1989 U.S. Tax Ct. LEXIS 81">*98 the last two grounds support relief in the instant case. We hold that petitioner has failed to demonstrate that it is entitled to relief.
First, the excess allocations to Mr. Martin's account were not the result of "reasonable error in estimating" Mr. Martin's compensation. Petitioner's trustees were never required to estimate Mr. Martin's compensation. Mr. Martin's authorized salary had been fixed at $ 30,000 in 1968 for an indefinite period. Rather, the excess allocations resulted from the trustees' failure to take into account Martin's waivers of his authorized salary.
Further, such failure was not "reasonable," even if the error was one of estimation. At least two of petitioner's trustees, Mr. Bowman and Mr. Martin, Jr., were also officers of the employer and should have known, or at least have been able to ascertain, what compensation Mr. Martin actually received in a given year. Mr. Martin waived his salary for each year from 1969 through 1981, except 1973. The employer's contributions and the trustees' allocations of those contributions were made after the end of the calendar year, and, presumably, after Mr. Martin had 92 T.C. 1173">*1183 waived his salary. The employer's failure1989 U.S. Tax Ct. LEXIS 81">*99 to deduct Mr. Martin's waived salary further evidences that the trustees should have known of the waivers. Although the plan provided a mechanism for ensuring compliance with
The other ground for relief advanced by petitioner, "other limited facts and circumstances which the Commissioner finds justify the availability of the rules set forth in this subparagraph," is a matter that petitioner concedes is within respondent's discretion. In reviewing the exercise of that discretion, we refrain from substituting our judgment for that of respondent. Rather, petitioner must demonstrate an abuse of discretion, and its burden of proof is greater than that of the usual preponderance of the evidence.
We find no abuse of discretion. 1989 U.S. Tax Ct. LEXIS 81">*100 As noted, petitioner's trustees did not act reasonably in allocating portions of the employer's contributions to Mr. Martin, given Mr. Martin's practice of waiving salary. On brief, petitioner argues that any violations of
Petitioner points out that respondent accepted an amendment to the plan conforming to
Petitioner next argues that disqualification should be limited to 1979, 1980, and 1981, the years for which excess allocations were made to Mr. Martin's account. Petitioner argues that disqualification for 1982 and 1983 is improper, because no excess allocations were made to Mr. Martin's account for those years.
Respondent argues that Congress' purpose in enacting
We agree with respondent. Petitioner's interpretation of
Moreover, the language of
(a) General Rule. -- (1) Trusts. -- A trust which is part of a pension, profit-sharing, or stock bonus plan shall not constitute a qualified trust under * * * * 92 T.C. 1173">*1185 (B) in the case of a defined contribution plan, contributions and other additions under the plan with respect to any participant
Assuming, however, that
The legislative history of ERISA sets forth one of Congress' purposes in enacting
Your committee recognizes the importance of tax incentives in creating a strong private pension system. At the same time, however, your committee believes it is appropriate to provide some limitations
Thus, Congress sought to limit the "accumulation of corporate pensions out of tax-sheltered dollars." Limiting plan disqualification to the years excess allocations are made would run afoul of and defeat that purpose, as excess allocations would be permitted to earn tax-deferred income in an exempt trust. Consistent with and in furtherance of Congress' stated intent, we read
As further evidence that Congress sought to limit the extent to which funds contributed to a plan could earn tax-deferred income in an exempt trust, we note
Finally, we have held that a plan's violation of
Although petitioner cites the regulations in support of its interpretation (see
Moreover, petitioner's interpretation of the regulations becomes unworkable when a limitation year falls within two plan years, a contingency contemplated by
Petitioner cites
Our holding does not require permanent disqualification of a plan which violated
1989 U.S. Tax Ct. LEXIS 81">*111 92 T.C. 1173">*1189 Also, in certain cases it may be too harsh a sanction to disqualify a plan until an excess allocation is corrected. For example, a multimillion dollar plan covering the employees of a large corporation may make some nominal excess allocation that remains undiscovered for a period of years. In such a case, however, it may well constitute an abuse of discretion for respondent to deny the relief afforded by
In sum, we construe
Finally, petitioner argues that assessments for 1979 and 1980 are barred by the periods of limitation on assessments and collection under section 6501(a). That section provides the general rule that requires assessment within 3 years of the date a return is filed. Petitioner1989 U.S. Tax Ct. LEXIS 81">*112 concedes that it filed no returns for 1979 and 1980 but cites a number of statutory and administrative provisions in support of its position that the periods of limitation nonetheless have expired for those 2 years.
Petitioner argues that section 6501(g)(2) provides authority for treating the Form 5500-C, Annual Return/Report of Employee Benefit plan, as its return, thus starting the running of the applicable periods of limitation. Section 6501(g)(2) states as follows:
(2) Exempt organizations. -- If a taxpayer determines in good faith that it is an exempt organization and files a return as such under
Under the foregoing provision, if petitioner made a goodfaith determination that it was exempt from taxation for 1979 and 1980, then the filing of information returns under 92 T.C. 1173">*1190
Petitioner contends that information returns filed by the employer for 1979 and 1980 satisfied petitioner's
in the discretion of the Secretary any organization described in
Pursuant to the foregoing grant of authority, respondent relaxed considerably the filing requirements of qualified trusts. For example,
Subsequently, respondent issued
To commence the running of the statute of limitations for any trust described in
* * * *
For 1979 and later years the statutory period during which the Service may assess taxes under section 6501(a) of the Code (other than taxes for unrelated business income) against a trust which was believed to be tax 92 T.C. 1173">*1191 exempt but later was determined not to be so exempt, expires three years after the later of: 1) the date an employer or administrator files its Form 5500 series return, with the 1989 U.S. Tax Ct. LEXIS 81">*115 trust statement attached; or 2) the last day allowed by law or regulation for filing the returns (with the trust statement attached). If the trust statement is not filed, the statute of limitations will not begin to run for the trust.
The instructions to an employer's information returns for 1979 and 1980 also advised that the optional trust statement had to accompany the returns in order to commence the statute of limitations. The instructions to Form 5500-C set forth the following form for the required statement:
This statement constitutes the annual information return required under
Under penalties of perjury, I declare that I am the (trustee) (custodian) of the
Date
Thus, if the employer had attached the optional trust statement to its information returns for 1979 and 1980, petitioner would have met the
Respondent has the authority to specify the forms and other requirements of returns. Secs. 6011(a), 6033. In
The purpose is not alone to get tax information in some form but also to get it with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished.
On the other hand, letter-perfect compliance with respondent's requirements is not always required. Thus, in 92 T.C. 1173">*1192
Perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such * * * and evinces an honest and genuine endeavor to satisfy the law. This is 1989 U.S. Tax Ct. LEXIS 81">*117 so though at the time of filing the omissions or inaccuracies are such as to make amendment necessary.
See also
In
In the optional trust statement, the trustee must declare, under penalty of perjury, that he is the trustee of an identified trust which forms part of an identified plan. The 1980 Form 5500-C filed by the employer contained, in essence, the required statement, albeit not in the form prescribed by respondent. On line 23, the employer listed petitioner's trustees, and on line 5, the related plan was named. Furthermore, the return was signed, under penalty of perjury, by one of the named trustees, Mr. Bowman, albeit in his capacity as secretary of the employer. Mr. Bowman's failure to sign in his capacity as trustee does not prevent petitioner from complying with the
We hold that the 1980 Form 5500-C satisfied the requirements of
The employer's information return for 1979, however, failed to disclose the identity of petitioner's trustees. We will not second-guess respondent's need for this information.
To reflect the foregoing,
Whalen,
It is clear that the annual limitation set out in
1989 U.S. Tax Ct. LEXIS 81">*122 92 T.C. 1173">*1195 The statutory scheme for application of such limitation is also clear. On one hand,
On the other hand, it is
In this case, annual additions consisting of employer contributions were made to the account of one participant, Mr. Martin, 1989 U.S. Tax Ct. LEXIS 81">*123 for each year 1979, 1980, and 1981. Each annual addition exceeded the applicable limitation under
For the years 1982 and 1983, no employer contribution was allocated to Mr. Martin's account nor was any other addition made to his account. There was, accordingly, no "annual addition," as that term is defined by
92 T.C. 1173">*1196 Unlike the majority, I believe that the Congressional intent "to prevent the accumulation of corporate pensions out of tax-sheltered dollars" is1989 U.S. Tax Ct. LEXIS 81">*124 enforced under
I find nothing in the language of
Treasury regulations confirm that disqualification is required only in the "year" for which the limitations of
The regulations provide, in the case of a single defined contribution plan, that, if excess annual additions are made to the account of any participant "for any particular 92 T.C. 1173">*1197 limitation year," the plan is "disqualified in that limitation year."
if the employer only maintains a single defined contribution plan under which annual additions (as defined in
The regulations thus conform to the statute and require disqualification of the plan in the "limitation year" in which an operational violation of
Annual additions (as defined in
Significantly, the above regulation does not provide that the existence of excess annual additions from a prior limitation1989 U.S. Tax Ct. LEXIS 81">*127 year is a "condition" requiring disqualification.
The majority's analysis of the regulations focuses on
92 T.C. 1173">*1198 The purpose of that regulation is to make it clear that disqualification for a particular limitation year will implicate whatever plan years are involved, "as of the first day of the first plan year." The rule is essential in those cases where the limitation year differs from the plan year, and it is specifically contemplated by the grant of authority to the Secretary1989 U.S. Tax Ct. LEXIS 81">*128 of the Treasury in
The majority's treatment of the regulation, on the other hand, is both inconsistent and confusing. At first, it finds "a fair, if not strong, inference" that the regulation requires "indefinite" disqualification of a plan following a
It is noteworthy that the majority does not contend that an annual addition in excess of the limitation of
The majority seizes upon and misreads1989 U.S. Tax Ct. LEXIS 81">*130 the phrase "any taxable year" to justify its position that petitioner is disqualified under
The majority's reading of
1989 U.S. Tax Ct. LEXIS 81">*132 After misconstruing the phrase "any taxable year," the majority reasons that a defined contribution plan must be disqualified in later years if there has been a violation of
Furthermore, under the majority's interpretation of
The majority denies that its position requires permanent disqualification for violation of
Moreover, "remedial action" cannot be taken until an operational violation of
To justify its position, the majority hypothesizes that employers may intentionally violate the
I agree with the majority that Congress was concerned with limiting the tax-deferred accumulation of income in exempt trusts. As the majority points1989 U.S. Tax Ct. LEXIS 81">*136 out, this concern is demonstrated by
First,
Second, in considering
under the bill a nondeductible excise tax is to be imposed on contributions to individual retirement accounts and annuities in excess of the amounts deductible as retirement savings, unless these amounts (with earnings) are timely distributed from the account. This tax is to prevent the unwarranted tax deferral that would exist from income on excess contributions, and is to be 6 percent of the amount of the excess contributions. The excise tax is to be paid by the individual who made the excess contributions.
If an excess amount is contributed to an individual retirement account (or annuity) in one year and the excess is not eliminated in later years, the excise tax is to be owed on the excess amount for the year of contribution and for each successive year until the excess is eliminated. (The amount of the excess is to be determined as of the1989 U.S. Tax Ct. LEXIS 81">*138 end of the individual's taxable year.) However, an individual may eliminate an excess contribution in later years if he does not take his maximum allowable deduction for retirement savings in the later years. Under the bill, if an individual takes less than the maximum amount allowed as a retirement savings deduction in any year after the excess contribution is made, the difference between the maximum allowed deduction and the amount taken is to reduce a prior excess contribution. [H. Rept. 93-779 (1974),
Accordingly, sections 4972 and 4973, as enacted by ERISA, expressly provided that excess contributions to an H.R. 10 plan or individual retirement account from prior years are taken into account in computing the excess contribution for a given subsequent year for purposes of the excise tax thereon. In formulating a contribution limitation for corporate plans, however, Congress imposed a year-by-year limitation in
Third, the majority assumes that continuing disqualification under 1989 U.S. Tax Ct. LEXIS 81">*139
The unambiguous statute and a dispositive legislative regulation require limitation of disqualification under
And so we have one of those problems in the reading of a statute wherein meaning is sought to be derived not from specific language but by fashioning a mosaic of significance1989 U.S. Tax Ct. LEXIS 81">*140 out of the innuendos of disjointed bits of a statute. At best this is subtle business, calling for great wariness lest what professes to be mere rendering becomes creation and attempted interpretation of legislation becomes legislation itself. [
1. Unless specified otherwise, all section references are to the Internal Revenue Code of 1954 as amended and in effect at the relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Sec. 7482(b)(1)(A) establishes venue for appeal in the case of a petitioner other than a corporation. While the parties stipulated that petitioner's principal office was in Buffalo, New York, we assume that its legal residence also was in Buffalo, New York.↩
3. In response to the final revocation letter, the employer petitioned this Court for declaratory relief under sec. 7476,
4. Sec. 235(a) of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, 505, substituted $ 30,000 as the dollar limitation. Further, the amount of the dollar limitation in effect during the years in issue varied due to cost-of-living adjustments made pursuant to
5. Congress required that only a portion of an employee contribution be considered, because employee contributions do not receive the other tax benefit that accompanies contributions to qualified plans, i.e., the deferral of compensation. H. Rept. 93-807, 1974-3 C.B. (Supp.) at 356 ("the employee receives one of the two tax advantages generally associated with contributions to a qualified plan -- deferral of the taxes on the earnings on the contributions -- but does not receive a tax deduction for the amount of the contribution when it is made."). Incidentally, for years beginning after 1986, the
6. Although
7. The requirements of
1. Congress recognized the importance which the definition of the term "year" would play in applying the
2. This problem of applying
SEC. 4. LIMITATIONS FOR DEFINED CONTRIBUTION PLANS.
.01
.02 If a participant is credited with annual additions or employee contributions in only one plan, in determining whether the requirements of
.03 For purposes of determining whether the requirements of Section 4 of
3. Most plans, and perhaps the overwhelming majority of plans, including the subject plan, could not be operated in this "abusive" manner without violating the exclusive benefit and nondiscrimination rules. See
