1995 Tax Ct. Memo LEXIS 7 | Tax Ct. | 1995
1995 Tax Ct. Memo LEXIS 7">*7 Decisions will be entered for respondent.
P, a corporation, established profit-sharing and pension plans (Plans) in July 1970. In September 1984, P received favorable determination letters from R stating that P's Plans were qualified under
MEMORANDUM OPINION
LARO,
1995 Tax Ct. Memo LEXIS 7">*9 The parties submitted this case under Rule 217(a) upon a stipulated administrative record, which was supplemented by evidence received at a hearing. 3 The issues relate to the timeliness of amendments made to petitioner's Plans as they affected the Plans' years ended June 30, 1986, 1987, 1988, and 1989, in order to bring the Plans into compliance with the requirements for tax-qualified status contained in
Petitioner attempts to invoke the Court's jurisdiction under
1995 Tax Ct. Memo LEXIS 7">*11
The parties submitted this case to the Court under Rule 122(a) without trial and on the basis of the pleadings and the facts recited in jointly stipulated administrative records, which were supplemented by evidence received at a hearing. The facts and accompanying exhibits contained in the administrative records are incorporated herein by this reference.
Petitioner's principal place of business was in Troy, Michigan, when its petition was filed with this Court. Petitioner is a corporation with Ronald R. Pawlak (Pawlak) as its president and sole shareholder. Pawlak is an attorney who practices products liability law. He is also a trustee and administrator of the Plans. Petitioner established the Plans, and they became effective as of July 1, 1970. The Plans report the results of their operations based on a fiscal year ending June 30.
On April 19, 1984, petitioner amended the Plans to comply with the requirements of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324, enacted September 3, 1982. On May 2, 1984, petitioner requested a determination from respondent regarding the Plans' qualification as individually designed1995 Tax Ct. Memo LEXIS 7">*12 plans by filing with respondent a Form 5301, Application for Determination for Defined Contribution Plan, for each Plan. On September 7, 1984, respondent issued favorable determination letters regarding the Plans. The determination letters, however, explicitly reserved an opinion on whether the Plans satisfied the provisions of DEFRA, enacted July 18, 1984.
On June 27, 1989, petitioner amended the Plans effective July 1, 1989. The firm of Corbel & Co. (Corbel) prepared these plan amendments. These amendments appeared to address the qualification requirements of the Acts and the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, enacted October 22, 1986. On June 29, 1990, petitioner requested a determination from respondent regarding the Plans' qualification by filing with respondent a Form 5302, Employee Census, and a Form 5307, Application for Determination for Adopter of Master or Prototype, Regional Prototype or Volume Submitter Plans, for each Plan. 5
1995 Tax Ct. Memo LEXIS 7">*13 Respondent began examining the Plans and on March 26, 1991, requested information on the Plans from petitioner. On April 18, 1991, respondent requested additional information and asked petitioner to adopt amendments, provided by respondent, to the Plans. Respondent informed petitioner that these amendments would retroactively amend the Plans to comply with the Acts for the subject years in an untimely manner. Petitioner adopted these amendments on April 25, 1991. On June 3, 1991, respondent again requested additional information on the Plans from petitioner.
On July 16, 1992, respondent mailed to petitioner letters stating that she proposed to disqualify the Plans for their years ended June 30, 1986, 1987, 1988, and 1989. The letters also stated that petitioner had 30 days in which to file an administrative appeal of respondent's proposed disqualification. On September 18, 1992, petitioner filed administrative appeals for the Plans with the District Director in Cincinnati, Ohio.
On July 29, 1992, respondent issued favorable determination letters regarding the Plans, effective for the Plans' years beginning July 1, 1989. On October 26, 1993, the Regional Director of Appeals1995 Tax Ct. Memo LEXIS 7">*14 for the Central Region mailed petitioner final revocation letters revoking respondent's September 7, 1984, determination letters because the Plans were not timely amended to meet the requirements of the Acts. The revocation letters stated that the Plans did not comply with the requirements of
Respondent determined that the Plans were not qualified for the years in issue because petitioner did not timely amend the Plans to comply with the Acts. Petitioner does not dispute that it did not timely amend the Plans but seeks relief from retroactive disqualification, asserting relief provisions contained in judicial decisions and claiming respondent's determination is an abuse of discretion.
The first issue we must decide is whether the Court has jurisdiction 1995 Tax Ct. Memo LEXIS 7">*15 to render a declaratory judgment regarding the qualification of the Plans under
1995 Tax Ct. Memo LEXIS 7">*17 Petitioner has satisfied the five jurisdictional limitations of
1995 Tax Ct. Memo LEXIS 7">*20 An employer's reliance on a determination letter cannot be absolute because respondent has broad authority to revoke retroactively a determination letter. Sec. 7805(b); see also Except in rare or unusual circumstances, the revocation or modification of a ruling will not be applied retroactively with respect to the taxpayer to whom the ruling was originally issued or to a taxpayer whose tax liability was directly involved in such ruling if (i) there has been no misstatement or omission of material facts, (ii) the facts subsequently developed are not materially different from the facts on which the ruling was based, (iii) there has been no change in the applicable law, (iv) the ruling was originally issued with respect to a prospective or proposed transaction, and (v) the taxpayer directly involved in the ruling acted in good faith in reliance upon the ruling and the retroactive revocation would be to his detriment. 1995 Tax Ct. Memo LEXIS 7">*21 * * *
The Acts extensively changed the requirements that must be met for an employee benefit plan to constitute a qualified plan under
The Service at various times extended the deadlines for making the required amendments because of the extensive changes to existing plans required by the Acts.
Plan Year | |
Ended | Compliance Date |
June 30, 1986 | June 30, 1986 |
June 30, 1987 | June 30, 1987 |
June 30, 1988 | June 30, 1988 |
June 30, 1989 | June 30, 1989 |
Petitioner's Plans missed the noted compliance dates because it did not amend the Plans to comply with the requirements of the Acts for the subject years until April 25, 1991. Thus, the provisions in the written Plans that1995 Tax Ct. Memo LEXIS 7">*24 should have been amended are defective. See
a.
Relying on the1995 Tax Ct. Memo LEXIS 7">*25
1995 Tax Ct. Memo LEXIS 7">*26 Subsequent cases, however, have made clear that the holding in the
Petitioner has failed to satisfy the second requirement of the
Further, the 7-year period that elapsed between the enactment of the Acts and the date on which petitioner finally amended the Plans to satisfy the Acts for the subject years also demonstrates petitioner's1995 Tax Ct. Memo LEXIS 7">*28 failure to exercise reasonable diligence. Our prior holdings indicate that such a period of time does not show the exercise of reasonable diligence. See
b.
Petitioner next argues that under section 601.201(1)(5), Statement of Procedural Rules, respondent has abused her discretion by retroactively disqualifying its Plans. 11 In effect, petitioner contends that it should not be punished for its failure to amend the Plans timely because no one was hurt by the Plans' objectionable provisions. According to petitioner, its employees will be harmed if respondent is allowed to disqualify the Plans retroactively because the Trusts will become liable for income tax in the years in which the Plans are not qualified. This in turn will lessen1995 Tax Ct. Memo LEXIS 7">*29 the benefits that the Trusts will be able to pay in the future.
This Court may not substitute its judgment for that of the Commissioner when reviewing discretionary administrative acts.
We reject petitioner's argument that respondent has abused her discretion in retroactively revoking the favorable determination letters. Petitioner's argument must fail. The applicable law changed, and petitioner has not proven its reasonable reliance on Corbel. The enactment of the Acts necessitated the amendment of petitioner's Plans within the applicable compliance dates. See
Petitioner failed to prove its reasonable reliance on Corbel. Petitioner asserts that at all times it relied on Corbel to ensure the Plans' compliance with the law. The record does not contain any evidence supporting this assertion other than statements made by Pawlak on behalf of petitioner. Rule 142(a). Even if petitioner could demonstrate reliance on Corbel, our prior opinions1995 Tax Ct. Memo LEXIS 7">*31 indicate that we will not excuse an employer's failure to maintain a plan's qualified status because of reliance on others. See, e.g.,
Finally, we note that petitioner implicitly argues that we should excuse its failure to amend the Plans in a timely manner because of the Plans' small size. The Plans' covered two employees of a small law practice during the years in issue. Petitioner claims that because none of the objectionable provisions of the Plans came into operation, nobody was hurt by the Plans' failure to comply with the technical requirements of the Acts. We cannot accept petitioner's view. Congress establishes the requirements that a plan must meet for qualification under
We have considered all other arguments made by petitioner and find them to be without merit.
To reflect the foregoing,
Footnotes
1. These cases were consolidated for purposes of briefing and opinion.↩
2. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. The primary purpose of this hearing was to determine the timeliness of petitioner's petitions. At the hearing, we allowed petitioner the opportunity to introduce other evidence to supplement the administrative records on various matters such as notice to interested persons and its asserted reliance on a plan sponsor. Rule 217(a).↩
4. Petitioner did not present any separate arguments with respect to
sec. 501(a) because there is no dispute that exemption of the Trusts undersec. 501(a) would follow automatically in this case from the qualification of the Plans undersec. 401(a) . Thus, onlysec. 401(a)↩ need be considered.5. A master plan is a plan that is made available by a sponsoring organization for adoption by employers and for which a single funding medium is established for the joint use of all adopting employers.
Rev. Proc. 84-23, 1 C.B. 457">1984-1 C.B. 457 , 459. A prototype plan is the same as a master plan except that a separate funding medium is established for each adopting employer.Id. The sponsoring organization must submit a request for an opinion letter relating to a master or prototype plan to the Internal Revenue Service's (IRS) National Office, whereupon the Internal Revenue Service will issue an opinion letter as to the acceptability undersec. 401 of the form of the plan and any related trust or custodial account. . An opinion letter issued to a sponsoring organization does not constitute a ruling or determination as to either the qualification of the plan as adopted by a particular employer or in the case of a prototype plan the exempt status of a related trust or custodial account.Id. , 1984-1 C.B. at 462Id.↩ 6.
SEC. 7476 . DECLARATORY JUDGMENTS RELATING TO QUALIFICATIONS OF CERTAIN RETIREMENT PLANS.* * *
(b) Limitations. --
(1) Petitioner. A pleading may be filed under this section only by a petitioner who is the employer, the plan administrator, an employee who has qualified under regulations prescribed by the Secretary as an interested party for purposes of pursuing administrative remedies within the Internal Revenue Service, or the Pension Benefit Guaranty Corporation.
(2) Notice. For purposes of this section, the filing of a pleading by any petitioner may be held by the Tax Court to be premature, unless the petitioner establishes to the satisfaction of the court that he has complied with the requirements prescribed by regulations of the Secretary with respect to notice to other interested parties of the filing of the request for a determination referred to in subsection (a).
(3) Exhaustion of administrative remedies. The Tax Court shall not issue a declaratory judgment or decree under this section in any proceeding unless it determines that the petitioner has exhausted administrative remedies available to him within the Internal Revenue Service. A petitioner shall not be deemed to have exhausted his administrative remedies with respect to a failure by the Secretary to make a determination with respect to initial qualification or continuing qualification of a retirement plan before the expiration of 270 days after the request for such determination was made.
(4) Plan put into effect. No proceeding may be maintained under this section unless the plan (and, in the case of a controversy involving the continuing qualification of the plan because of an amendment to the plan, the amendment) with respect to which a decision of the Tax Court is sought has been put into effect before the filing of the pleading. A plan or amendment shall not be treated as not being in effect merely because under the plan the funds contributed to the plan may be refunded if the plan (or the plan as so amended) is found to be not qualified.
(5) Time for bringing action. If the Secretary sends by certified or registered mail notice of his determination with respect to the qualification of the plan to the persons referred to in paragraph (1) (or, in the case of employees referred to in paragraph (1), to any individual designated under regulations prescribed by the Secretary as a representative of such employee), no proceeding may be initiated under this section by any person unless the pleading is filed before the ninety-first day after the day after such notice is mailed to such person (or to his designated representative, in the case of an employee).↩
7. On Oct. 7, 1994, in an oral opinion we held that petitioner had timely filed its petitions with the Court.↩
8. In general, three favorable tax consequences flow from a qualified trust. First, in connection with the taxation of the plan, income earned by a plan that meets the requirements of
sec. 401(a) is not subject to taxation while the plan's assets are held in a trust that is tax exempt undersec. 501(a) .Sec. 401(a) . Second, from the employer's point of view, subject to certain limitations, the employer receives an immediate tax deduction for contributions to a qualified plan. Sec. 404(a). Third, with respect to the employees, employees are not taxed on any employer contributions that are made on their behalf until the benefits are actually distributed (or otherwise made available) to them from the plan. Sec. 402(a). By comparison, if a plan does not meet the requirements ofsec. 401(a)↩ , the earnings of the plan are subject to tax, employer deductions for contributions may be deferred or eliminated, and employees are taxed on the value of the employer contributions under the rules of sec. 83. See, e.g., sec. 402(b).9. The compliance date for an individually designed plan could have been satisfied after June 30, 1986, if such a plan adopted a master or prototype plan.
Notice 87-80 ,2 C.B. 388">1987-2 C.B. 388 , further modifiedNotice 86-3 ,1 C.B. 388">1986-1 C.B. 388 , by extending to Jan. 14, 1988, the period within which an individually designed pension, profit-sharing, stock bonus, or annuity plan that was not timely amended could be replaced by the adoption of a master or prototype plan qualifying under sec. 12 ofRev. Proc. 84-23, 1 C.B. 457">1984-1 C.B. 457↩ , 464. This provision is not applicable here, however, because petitioner on June 27, 1989, adopted volume submitter plans, which were effective for the Plans' years beginning July 1, 1989.10.
Sec. 1.401(b)-1(a), Income Tax Regs. , explains the operation ofsec. 401(b) as follows:Under
section 401(b) a * * * pension, [or] profit-sharing * * * plan which does not satisfy the requirements ofsection 401(a) on any day solely as a result of a disqualifying provision * * * shall be considered to have satisfied such requirements on such date if, on or before the last day of the remedial amendment period * * *, all provisions of the plan which are necessary to satisfy all requirements ofsection 401(a) * * * are in effect and have been made effective for all purposes for the whole of such period. * * *Sec. 1.401(b)-1(b)(2), Income Tax Regs. , defines the term "disqualifying provision". A plan provision which results in the failure of the plan to satisfy the qualification requirements of the Internal Revenue Code by reason of a change in such requirements effected by DEFRA and the Retirement Equity Act of 1984 (REA), Pub. L. 98-397, 98 Stat. 1426, enacted Aug. 23, 1984, is not a disqualifying provision. See ;Mills, Mitchell & Turner v. Commissioner , T.C. Memo. 1993-99 . Thus, petitioner does not argue thatKollipara Rajsheker, M.D., Inc. v. Commissioner , T.C. Memo 1992-628">T.C. Memo. 1992-628sec. 401(b)↩ applies in this case.11. Petitioner also relies on
sec. 1.401(b)-1(e), Income Tax Regs. , for its argument that respondent abused her discretion. Petitioner's reliance on this provision is misplaced.Sec. 1.401(b)-1(e), Income Tax Regs. , states that it "applies to disqualifying provisions". We previously discussed that the retroactive relief provisions ofsec. 401(b) and the regulations thereunder do not apply in this case. Seesupra↩ note 10.