Robert S. Yarish and Marsha M. Yarish v. Commissioner

ROBERT S. YARISH AND MARSHA M. YARISH, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 24096–08. Filed October 4, 2012.
P–H participated in an employee stock ownership plan
(ESOP) that was disqualified for the 2000 to 2004 taxable
years. P–H was a highly compensated employee and was fully
vested in the ESOP from its start to its termination. The rel-
evant limitations period lapsed for all years except 2004. The
parties dispute the amount of P–H’s vested accrued benefit in
the ESOP that Ps must include in income for 2004 under
I.R.C. sec. 402(b)(4)(A). R argues that Ps must include in
income for 2004 the entire amount of P–H’s vested accrued
290
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00001 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
(290) YARISH v. COMMISSIONER 291
benefit in the ESOP to the extent it has not been previously
taxed to P–H. Ps argue that only the annual increase in P–
H’s vested accrued benefit in the ESOP for 2004 is includible
in Ps’ income for that year. Held: Ps must include in income
for 2004 the entire amount of P–H’s vested accrued benefit in
the ESOP.
Harold A. Chamberlain and David D. Aughtry, for peti-
tioners.
M. Kathryn Bellis and Shawn P. Nolan, for respondent.
OPINION
KROUPA, Judge: This case is before the Court on the par-
ties’ cross-motions for partial summary judgment 1 under
Rule 121. 2 Petitioner husband participated in an Employee
Stock Ownership Plan (ESOP) that was retroactively disquali-
fied for the period 2000 to 2004. The sole issue for decision
is the amount of petitioner husband’s vested accrued benefit
in the ESOP that petitioners must include in income for 2004
under section 402(b)(4)(A). We hold that petitioners must
include in income for 2004 the entire amount of petitioner
husband’s vested accrued benefit in the ESOP.
Background
The following facts are based upon the pleadings, affidavits
and exhibits in support of and in opposition to each of the
motions for partial summary judgment. They are stated
solely for the purpose of deciding the motions and not as
findings of fact in this case. See Fed. R. Civ. P. 52(a)(3).
Petitioners resided in Texas when they filed the petition.
Petitioner husband, a plastic surgeon, owned several med-
ical practice entities. In 2000 petitioner husband organized
Yarish Consulting, Inc. (Yarish Consulting), an S corporation
for Federal tax purposes, to manage these entities. Yarish
Consulting sponsored an ESOP (Yarish ESOP). Petitioner hus-
band participated in the Yarish ESOP. Petitioner husband
was a highly compensated employee within the meaning of
1 Each party moves for partial summary judgment on the same discrete issue of law. The par-
ties agree that this Court’s resolving this issue will allow them to resolve the remaining issues
here and in two related cases, Yarish Consulting, Inc. v. Commissioner, Docket No. 24095–08,
and R. Scott Yarish MD, PA v. Commissioner, Docket No. 24094–08, by agreement.
2 All Rule references are to the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code (Code) in effect for the year at issue.
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00002 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
292 139 UNITED STATES TAX COURT REPORTS (290)
section 414(q) and was fully vested from the start of the
Yarish ESOP until its termination. Multiple contributions
were made to the Yarish ESOP during 2000 to 2004. Peti-
tioner husband’s account balance in the Yarish ESOP and
vested accrued benefit within the meaning of section
402(b)(4)(A) was $2,439,503 as of the end of 2004. None of
that amount had been taxed to petitioners before the 2004
plan year.
The Yarish ESOP was terminated on the last day of 2004.
Petitioner husband’s entire account balance in the Yarish
ESOP was transferred to an individual retirement account
that same day at his direction.
Respondent retroactively disqualified the Yarish ESOP
through a revocation letter for the 2000 through 2004 period.
Respondent determined in the revocation letter that the
Yarish ESOP did not meet the requirements under section
401(a) for failing to satisfy section 410(b) and that the trust
under the Yarish ESOP was not exempt from tax under sec-
tion 501(a). This Court sustained respondent’s determination
to retroactively disqualify the Yarish ESOP for the 2000 to
2004 taxable years. See Yarish Consulting, Inc. v. Commis-
sioner, T.C. Memo. 2010–174.
The limitations period under section 6501 has lapsed for
all years for which the Yarish ESOP was disqualified except
2004.
Discussion
I. Overview
We must decide for the first time the meaning of section
402(b)(4)(A). In general, section 402(b) sets forth the con-
sequences to participants in a plan under section 401(a)
when a trust associated with the plan is not exempt under
section 501(a). Section 402(b)(4)(A) provides a special rule
that applies when the trust tax exemption under section
501(a) does not apply due to a plan’s failure to meet certain
coverage or participation requirements under section 410(b)
or 401(a)(26). The special rule requires a highly compensated
employee to include in income ‘‘an amount equal to the
vested accrued benefit of such employee (other than the
employee’s investment in the contract).’’
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00003 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
(290) YARISH v. COMMISSIONER 293
The parties do not dispute that section 402(b)(4)(A) applies.
The parties do dispute, however, the amount of petitioner
husband’s vested accrued benefit that must be included in
income under section 402(b)(4)(A) for 2004. Both parties have
moved for partial summary judgment with respect to that
issue.
Petitioners argue that only the annual increase in peti-
tioner husband’s vested accrued benefit for 2004 is includible
in petitioners’ income for that same year under section
402(b)(4)(A). In contrast, respondent argues that the entire
amount of petitioner husband’s vested accrued benefit must
be included in petitioners’ income for 2004 under section
402(b)(4)(A). Accordingly, we must decide whether either
party is entitled to partial summary judgment.
II. Standard of Review
We now turn to the applicable standard for deciding a
motion for partial summary judgment. Either party may
move for partial summary judgment upon any part of the
legal issues in controversy. Rule 121(a). Partial summary
judgment is intended to expedite litigation and avoid
unnecessary and expensive trials. See, e.g., FPL Grp., Inc. &
Subs. v. Commissioner, 116 T.C. 73, 74 (2001). A motion for
summary judgment or partial summary judgment will be
granted if the pleadings and other acceptable materials,
together with the affidavits, if any, show that there is no
genuine dispute as to any material fact and that a decision
may be rendered as a matter of law. See Rule 121(b); Elec.
Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002).
III. Meaning of Section 402(b)(4)(A)
We now consider whether petitioners are required under
section 402(b)(4)(A) to include in income for 2004 petitioner
husband’s entire vested accrued benefit in the ESOP at the
end of 2004, as respondent contends, or only the annual
increase in the vested accrued benefit for 2004, as petitioners
contend. The parties’ dispute stems from their disagreement
over the meaning of the parenthetical ‘‘(other than the
employee’s investment in the contract)’’ (sometimes, disputed
parenthetical) in section 402(b)(4)(A) that modifies the
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00004 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
294 139 UNITED STATES TAX COURT REPORTS (290)
phrase ‘‘an amount equal to the vested accrued benefit of
such employee.’’
A. Parties’ Contentions
Petitioners argue that the phrase ‘‘investment in the con-
tract’’ is defined in section 72 and that we should apply that
meaning in interpreting section 402(b)(4)(A). Under section
72, employer contributions are treated as part of the ‘‘invest-
ment in the contract’’ to the extent they were previously
includible in income (i.e., could have been taxed). See sec.
72(f). Petitioners maintain that all of petitioner husband’s
vested benefit from 2000 to 2003 was previously includible in
income due to the disqualification of the Yarish ESOP and
therefore constitutes petitioner husband’s investment in the
contract for 2004. Petitioners therefore conclude that they
are required by section 402(b)(4)(A) to include in income for
2004 only the annual increase in petitioner husband’s vested
accrued benefit for that same year.
Respondent argues that under section 402(b)(4)(A) an
‘‘employee’s investment in the contract’’ equals the portion of
the employee’s vested accrued benefit that has previously
been taxed to the employee. Respondent therefore maintains
that petitioners must include in income for 2004 the entire
amount of petitioner husband’s vested accrued benefit in the
Yarish ESOP, given that no portion of it was previously
taxed. 3
B. Statutory Interpretation Analysis
We now consider the meaning of section 402(b)(4)(A). In
interpreting section 402(b)(4)(A) our principal task is to
ascertain and give effect to the intent of Congress. The statu-
tory text is the most persuasive evidence of Congress’ intent.
United States v. Am. Trucking Ass’ns, Inc., 310 U.S. 534,
542–543 (1940). The plain language of a statute is ordinarily
to be given effect unless to do so would produce an absurd
or futile result, or an unreasonable result that plainly con-
3 Respondent also argues in the alternative that the duty of consistency estops petitioners
from asserting that the Yarish ESOP was disqualified before 2004 and therefore from arguing
that petitioner husband’s vested accrued benefit in the Yarish ESOP is includible in income in
any year other than 2004. We need not address respondent’s alternative argument because we
hold under our interpretation of sec. 402(b)(4)(A) that petitioners must include the entire
amount of petitioner husband’s vested accrued benefit in the Yarish ESOP in income for 2004.
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00005 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
(290) YARISH v. COMMISSIONER 295
flicts with legislative intent. See United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 242 (1989); Domulewicz v.
Commissioner, 129 T.C. 11, 24 (2007), aff ’d in part,
remanded in part sub nom. Desmet v. Commissioner, 581
F.3d 297 (6th Cir. 2009); Wadlow v. Commissioner, 112 T.C.
247, 266 (1999). We may look to legislative history to
ascertain congressional intent if a statute is silent or ambig-
uous. Burlington N. R. Co. v. Oklahoma Tax Comm’n, 481
U.S. 454, 461 (1987); Mississippi Poultry Ass’n, Inc. v. Mad-
igan, 992 F.2d 1359, 1364 n.28 (5th Cir. 1993). It is these
general principles of statutory interpretation that guide us in
determining the meaning of section 402(b)(4)(A).
We first review the text of section 402(b)(4)(A), which pro-
vides in pertinent part:
[A] highly compensated employee shall * * * include in gross income for
the taxable year with or within which the taxable year of the trust ends
an amount equal to the vested accrued benefit of such employee (other
than the employee’s investment in the contract) as of the close of such tax-
able year of the trust.
As previously noted, the parties dispute the meaning of the
parenthetical ‘‘(other than the employee’s investment in the
contract)’’ used to modify the phrase ‘‘an amount equal to the
vested accrued benefit of such employee.’’ Accordingly, we
focus our attention on the meaning of the disputed par-
enthetical. The disputed parenthetical is not defined in whole
or part in section 402 or in the corresponding regulations,
nor is any definition supplied by a cross reference to another
section in the Code. Additionally, neither the disputed par-
enthetical nor any of its words or phrases are terms of art.
See infra p. 296.
We find the disputed parenthetical ambiguous in that it is
susceptible of at least two different meanings. It may mean
that only direct contributions by the employee constitute ‘‘the
employee’s investment in the contract.’’ It may also mean
that ‘‘the employee’s investment in the contract’’ includes
other contributions made on the employee’s behalf, i.e.,
employer contributions.
Accordingly, we look to the legislative history of section
402(b)(4)(A) as an aid in discerning its meaning. 4 The legis-
4 The current version of sec. 402(b)(4)(A) was previously included in sec. 402(b)(2)(A) and (B).
Continued
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00006 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
296 139 UNITED STATES TAX COURT REPORTS (290)
lative history indicates that the general purpose of section
402(b)(4)(A) is to penalize highly compensated individuals.
See H.R. Conf. Rept. No. 99–841 (Vol. II), at II–416 to II–417
(1986), 1986–3 C.B. (Vol. 4) 1, 416–417. The conference
report also sheds light on the portion of a highly com-
pensated employee’s vested accrued benefit that Congress
intended to tax under section 402(b)(4)(A). It provides that
‘‘[h]ighly compensated employees * * * are taxable on the
value of their vested accrued benefit attributable to employer
contributions and income on any contributions to the extent
such amounts have not previously been taxed to the
employee.’’ Id.Based on our reading of section 402(b)(4)(A) in the context
of the statutory scheme as a whole, we understand Congress’
intent in using the disputed parenthetical was to exclude
that portion of the vested accrued benefit from taxation that
had previously been taxed to the employee so as to avoid
double taxation of it. We therefore hold that under section
402(b)(4)(A) the vested accrued benefit of a highly com-
pensated employee must be included in income to the extent
it has not been previously taxed to the employee. Thus, we
agree with respondent.
As previously mentioned, petitioners contend that we must
give ‘‘investment in the contract’’ the same meaning that it
has in section 72. Petitioners make two main arguments in
support of their position. Neither persuades us.
First, petitioners argue that ‘‘investment in the contract’’
as defined in section 72 is an established term of art that
applies universally throughout the Code and thus we should
look to section 72 for its definition. We recognize that where
Congress uses a term of art that has had an established spe-
cific meaning over long periods, Congress presumably incor-
The initial version of sec. 402(b)(2)(A)(ii) enacted as part of the Tax Reform Act of 1986, Pub.
L. No. 99–514, sec. 1112(c)(1), 100 Stat. at 2445, required a highly compensated employee to
include in income ‘‘the vested accrued benefit (other than employee contributions).’’ That par-
enthetical was changed to ‘‘(other than the employee’s investment in the contract)’’ in the Tech-
nical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100–647, sec. 1011(h)(4), 102 Stat.
at 3465, before Congress eventually divided sec. 402(b) into four paragraphs, shifting para. (2)
to para. (4) in the Unemployment Compensation Amendments of 1992, Pub. L. No. 102–318, sec.
521(a), 106 Stat. at 300.
Petitioners argue that we should disregard the 1986 conference report because the change of
the parenthetical modifying vested accrued benefit to ‘‘other than the employee’s investment in
the contract’’ occurred after the 1986 conference report. We disagree. We find that the change
does not conflict with Congress’ established intent in the 1986 conference report, nor does any
legislative history indicate that Congress intended to negate such an intent.
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00007 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
(290) YARISH v. COMMISSIONER 297
porates that meaning when it uses the term. See, e.g.,
Morissette v. United States, 342 U.S. 246, 263 (1952). We dis-
agree, however, that the phrase ‘‘investment in the contract’’
is an established term of art.
While section 72 defines the phrase ‘‘investment in the con-
tract,’’ nowhere in that section or its accompanying regula-
tions is there any indication that the definition applies out-
side the context of section 72. Moreover, the definition of
‘‘investment in the contract’’ in section 72 that petitioners
argue applies for purposes of section 402(b)(4)(A) is expressly
limited in scope to specific subsections of section 72. See sec.
72(c)(1), (e)(6), (f). Thus, we are not convinced that the
phrase ‘‘investment in the contract’’ as defined in section 72
is an established term of art that applies throughout the
Code.
Second, petitioners argue that the phrase ‘‘investment in
the contract’’ as used in section 402(b)(4)(A) should be inter-
preted in pari materia with section 72. Statutes may be
considered in pari materia when they relate to the same sub-
ject matter or have the same purpose. See 2B Norman J.
Singer & J.D. Shambie Singer, Sutherland Statutory
Construction, sec. 51:3, at 222 (7th ed. 2012). The Supreme
Court has recognized, however, that identical terms or
phrases used in the Code need not be interpreted to have the
same meaning where the sections in which they are found
serve different legislative purposes. See Don E. Williams Co.
v. Commissioner, 429 U.S. 569, 580–582 (1977). We are not
persuaded that the doctrine of in pari materia applies.
Section 402(b)(4)(A) and section 72 serve different pur-
poses. The purpose of section 402(b)(4)(A) is to discourage
highly compensated employees from participating in a plan
that fails to satisfy certain coverage requirements. See H.R.
Conf. Rept. No. 99–841, supra at II–416 to II–417, 1986–3
C.B. (Vol. 4) at 416–417. In contrast, the purpose of section
72 is to provide the rules for taxation of distributions from
annuity and similar contracts. See generally sec. 72.
Petitioners also contend that under general tax accounting
principles only the annual increase in petitioner husband’s
vested accrued benefit in the Yarish ESOP for 2004 is includ-
ible in income for that year. Petitioners rely on the
uncontroversial principle that generally income is includible
for the taxable year in which the ‘‘accession to wealth’’
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00008 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
298 139 UNITED STATES TAX COURT REPORTS (290)
occurs. See, e.g., Greene Motor Co. v. Commissioner, 5 T.C.
314, 316 (1945). Petitioners argue that because the Yarish
ESOP was disqualified for 2000 through 2004 and petitioner
husband was fully vested in it for those years, his vested
accrued benefit was includible in income as it vested. Peti-
tioners therefore conclude that only the annual increase in
petitioner husband’s vested accrued benefit in the Yarish
ESOP for 2004 is taxable for that year.
We are not persuaded. The principle that amounts must be
included in income for the taxable year the ‘‘accession to
wealth’’ occurs is not absolute. Congress has consistently
made exceptions to achieve various public policy objectives.
For example, Congress defers taxation of amounts contrib-
uted to qualified retirement plans to encourage individuals to
save for their retirement and thereby supplement the general
public retirement security system. See secs. 401(a), 501(a);
The President’s Committee on Corporate Pension Funds and
Other Private Retirement and Welfare Programs, Public
Policy and Private Employee Retirement Plans 50–51 (1965).
So too has Congress carved out an exception in section
402(b)(4)(A). The purpose of section 402(b)(4)(A) is to
penalize highly compensated participants in plans that fail to
satisfy certain coverage and participation requirements. To
that end, it requires (where applicable) that a highly com-
pensated employee include in income his or her vested
accrued benefit to the extent it has not been previously taxed
to the employee. Because we hold that section 402(b)(4)(A) is
one of several exceptions to the principle that income is only
includible in income for the year the ‘‘accession to wealth’’
occurs, we reject petitioners’ argument.
IV. Application of Section 402(b)(4)(A)
Now we apply our interpretation of section 402(b)(4)(A) to
the undisputed facts of this case. As we previously held,
when section 402(b)(4)(A) applies (as here), an employee
must include in income that portion of his or her vested
accrued benefit on which he or she has not previously been
taxed.
Here we are satisfied that there is no genuine dispute of
material fact as to whether petitioner husband’s vested
accrued benefit (his account balance in the Yarish ESOP as of
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00009 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE
(290) YARISH v. COMMISSIONER 299
the end of 2004) had been previously taxed. Put simply, it
had not. Accordingly, we find that the entire amount of peti-
tioner husband’s vested accrued benefit as of the end of 2004
must be included in income for that same year under section
402(b)(4)(A). We therefore will grant respondent’s motion for
partial summary judgment and deny petitioners’ motion.
We have considered all arguments made in reaching our
decision and, to the extent not mentioned, we conclude that
they are moot, irrelevant or without merit.
To reflect the foregoing,
An appropriate order granting respondent’s
motion for partial summary judgment and
denying petitioners’ motion for partial sum-
mary judgment will be issued.
f
VerDate Nov 24 2008 10:55 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00010 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\YARISH.OCT JAMIE