DNA Pro Ventures, Inc. v. Commissioner
2017 U.S. App. LEXIS 8189
8th Cir.2017Background
- Dr. Daniel Prohaska and his wife formed DNA Pro Ventures, Inc. and established an ESOP and trust in November 2008; Dr. Prohaska was the Plan Trustee.
- DNA issued Class A stock to the Prohaskas on incorporation; later, the Trust received 1,150 shares of Class B stock on December 31, 2008 which were allocated to Dr. Prohaska’s ESOP account.
- The IRS audited the ESOP, requested documents the ESOP did not produce, and issued an Explanation of Items in Nov. 2012 and a final non-qualification letter in June 2014.
- The IRS concluded the ESOP violated (i) plan-document requirements (failed annual appraisal) and (ii) I.R.C. § 415 by making 2008 contributions to Dr. Prohaska that exceeded the annual addition limit (he had no compensation from DNA in 2008).
- The ESOP petitioned the Tax Court; the Tax Court, on a stipulated record, sustained the IRS’s disqualification based on both grounds but the Eighth Circuit affirmed based solely on the § 415 violation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the ESOP exceeded the § 415 annual-addition limit in 2008 | ESOP: no contribution or allocation to Dr. Prohaska occurred in 2008; shares were purchased with a loan and allocated in 2009 | IRS: 1,150 Class B shares were issued to the ESOP and allocated to Prohaska in 2008; value constituted an annual contribution that exceeded the § 415 limit | Held: Court upheld that the 2008 allocation of 1,150 shares to Prohaska exceeded § 415 limits; plan disqualified |
| Whether the Tax Court erred by relying on IRS Explanation of Items as factual basis | ESOP: Tax Court relied on extra-record documents and misread facts | IRS: Explanation of Items was part of the stipulated record and uncontested; ESOP failed to submit contrary evidence | Held: Court may rely on the uncontested Explanation of Items; ESOP bore burden to produce contrary evidence and did not do so |
| Whether failure to obtain annual stock appraisals violated plan document | ESOP: (argued but not necessary to decide on appeal) | IRS: plan violated its terms by not having annual appraisals | Held: Tax Court found plan-document violation; sufficient alternative ground for disqualification (affirmed but appellate opinion rests on § 415 ground) |
| Whether disqualification continued for subsequent years absent corrective action | ESOP: no remedial action was taken or proven | IRS: disqualification under § 415 persists until corrected | Held: Disqualification continued for subsequent years because no corrective action was shown |
Key Cases Cited
- Martin v. Feilen, 965 F.2d 660 (8th Cir. 1992) (defines ESOPs and qualification principles)
- Transp. Labor Contract/Leasing, Inc. v. Comm’r, 461 F.3d 1030 (8th Cir. 2006) (standards of appellate review for Tax Court decisions)
- Howard E. Clendenen, Inc. v. Comm’r, 207 F.3d 1071 (8th Cir. 2000) (taxpayer bears burden of proof challenging Commissioner)
- Anuforo v. Comm’r, 614 F.3d 799 (8th Cir. 2010) (appellate review limited to Tax Court record)
- Hull v. I.R.S., 656 F.3d 1174 (10th Cir. 2011) (contrast on corrective action and relief from disqualification)
- Martin Fireproofing Profit-Sharing Plan & Trust v. Comm’r, 92 T.C. 1173 (1989) (treatment of operational failures and disqualification remediability)