DocketNumber: Docket No. 2992-76
Citation Numbers: 68 T.C. 826, 1977 U.S. Tax Ct. LEXIS 55, 1 Employee Benefits Cas. (BNA) 1787
Judges: Scott
Filed Date: 8/31/1977
Status: Precedential
Modified Date: 1/13/2023
*55
*827 OPINION
Respondent determined a deficiency of $ 26,917 in petitioners' Federal income tax for the calendar year 1972. The sole issue for decision is whether amounts contributed on behalf of each petitioner to pension and profit-sharing plans of their wholly owned corporation should be included in petitioners' taxable income because of failure of the plans to qualify under
All of the facts have been stipulated and are found accordingly.
Petitioners, husband and wife, who resided in Los Angeles at the time of the filing of the petition in this case, filed a joint Federal income tax return for the calendar year 1972 with the Internal Revenue Service Center, Los Angeles, Calif. Petitioners keep their books and records and file their income tax returns on the cash basis*58 method of accounting.
Petitioners, during the period here involved, were officers of and each owned one-half of the outstanding stock of Albets Enterprises, Inc. (Albets), a corporation organized under the laws of California in 1966. Albets uses the cash basis method of accounting and has a fiscal year ending July 31. In 1967 Albets adopted a profit-sharing plan and trust for the benefit of its employees, and on October 6, 1967, the District Director of Internal Revenue issued a determination letter to Albets holding that the plan met the requirements of
Both the profit-sharing and pension plans adopted by Albets provided for participation by all persons employed on a permanent, full-time basis as of the dates of adoption of the plans. Permanent, full-time employees hired subsequent to the dates of adoption were *59 to become eligible to participate upon completion of 1 year of service. Amounts contributed by Albets to the plans were to be allocated to an account for each *828 participating employee in accordance with the ratio that the total regular compensation paid by Albets to that employee during the year bore to the total regular compensation paid to all participating employees during the year. Further, the plans provided that at the end of the year each participating employee would have a vested interest in 100 percent of the amount allocated to his account during that year. Additional provisions governed retirement and death benefits, forfeitures upon discharge, and benefits upon resignation prior to retirement.
Article VI of each plan provided for administration of the plans by a three-person managing committee designated by the company's board of directors. The committee so designated consisted of the petitioners herein and Edward Traubner, the owner of Edward Traubner & Co., Inc. (hereinafter the Traubner firm), an accounting firm. The managing committee delegated to Mr. Traubner the responsibilities for determining which employees were eligible to participate in the plans*60 and for determining the proper allocations of Albets' contributions among the employees' accounts. Mr. Traubner, in turn, delegated these duties to Wilbur Hoffman, an employee of the Traubner firm.
In 1970 Albets began production of a television series, "The Pet Set." Albets hired several employees in conjunction with this series, all but one of whom were discharged in May or June of 1972 when "The Pet Set" was discontinued. The one employee not discharged was Kathy Whitehead, a production secretary, who arranged with petitioner Allen Ludden to continue in Albets' employ at an annual salary of $ 7,275. Ms. Whitehead was not an officer of Albets. Having completed a full year's service with Albets during its fiscal year ended July 31, 1972, Ms. Whitehead became eligible for the first time to participate in Albets' pension and profit-sharing plans during Albets' 1972 fiscal year.
Two separate sets of books were maintained for Albets. One set was kept by the William Morris Agency, which collected the income and paid out the production expenses of the television series. The second set of records was kept by Mr. Hoffman of the Traubner firm. The books maintained by the William Morris*61 Agency disclosed that Ms. Whitehead was still an Albets employee at the close of Albets' fiscal year ended *829 July 31, 1972. On some records kept by the Traubner firm, Ms. Whitehead was carried as an Albets employee. The firm prepared the payroll tax returns for Albets for the period ended June 30, 1972, which returns showed Ms. Whitehead as an employee of Albets. However, the records that were kept by Mr. Hoffman did not list Ms. Whitehead as an employee, but showed that Allen Ludden, whose salary was $ 135,000, and Betty White Ludden, whose salary was $ 78,000, were Albets' only employees at the end of Albets' fiscal year 1972. Mr. Hoffman had no knowledge that Ms. Whitehead had not been terminated in May or June 1972 along with all the other "Pet Set" employees. Accordingly, he determined that for Albets' fiscal year ended July 31, 1972, the only persons eligible to participate in the profit-sharing and pension plans were the petitioners. Mr. Hoffman directed the trustee, City National Bank, to allocate Albets' $ 53,250 contribution between petitioners' accounts, 2 with nothing allocated to an account for Ms. Whitehead. Before the previous year's error was discovered, *62 Albets made a proper contribution to the plans on Ms. Whitehead's behalf for fiscal year 1973.
Upon an audit by the Internal Revenue Service, the error in administration of the plans was discovered. Mr. Hoffman, at the direction of Mr. Ludden, offered to rectify the error by reallocating Albets' 1972 contribution, with a portion thereof going to an account for Ms. Whitehead, 3 but this reallocation was never made. Respondent determined that because no contribution was allocated to Ms. Whitehead, the Albets plans did not qualify for Albets' fiscal year 1972 under
*63
The qualified status of a trust under
It is clear that the Albets plans as written met the requirements of
In order for a plan to be considered qualified, not only its terms but also its operations must meet the statutory requirements.
In 1972 contributions were made*66 on behalf of only two of Albets' three eligible employees. Consequently, the 70-80-percent minimum coverage requirements of
Petitioners rely on
Here while hard justice might befit Time Oil Company's officers, yet prospective consequences of injury to the employees from the commissioner's position here are quite possible as contrasted with the lack of injury shown to them in the shortcomings of the errant taxpayer. [Fn. ref. omitted.]
Thus, not only was the type of deviation in the
The Court of Appeals for the Ninth Circuit recently considered the question whether innocent deviations from the terms of employee plans should constitute a basis for disqualification under
In the
We do not read the
*70 *834 In the
Petitioners contend that respondent's refusal to rule the plans qualified upon retroactive reallocation is arbitrary and unreasonable. There is no provision in the Internal Revenue Code governing the retroactive correction of errors in the administration of employee plans. 7 We therefore have no statutory criteria for determining under what circumstances, if any, respondent might be considered to have abused his discretion in refusing to deem a plan qualified if a retroactive correction of an inadvertent error in its operation were made. The record here is clear that no such correction was in fact made. Therefore, we reserve our judgment on the question whether and under what circumstances respondent would be justified in refusing to confer qualified status on a plan when an inadvertent error in administration, such as the one involved in this case, had been in fact voluntarily rectified by *835 those charged with operating the plan. This Court has no power to compel petitioners*72 to reallocate Albets' 1972 contribution. The exclusion of Ms. Whitehead from participation in the plans in 1972 was clearly discriminatory and, given petitioners' failure to correct their error themselves, we sustain respondent's findings that Albets' trusteed plans failed to qualify under
The final question to be decided is whether the amounts allocated to petitioners' accounts in 1972 were subject to a "substantial risk of forfeiture" within the meaning of
*74 The plans in this case provided that each employee had a vested interest of 100 percent in the amount allocated to his account at the end of each year of employment. Article IV, section 4, of both plans provided:
Section 4. If a participating employee has been discharged by the Company for cause, such as any intentional act of proven dishonesty or any other intentional act which would injure the Company, such participating employee shall forfeit the entire amount allocated to his account, whether or not any part thereof shall have been previously vested, and he shall be entitled to no benefits under this Plan. The Committee shall determine, on the basis of facts given to it by the Company, whether the discharge of a participating employee is for cause. A discharged participating employee shall have the right, within ten (10) days after being notified by the Committee that he has been discharged for cause, to request arbitration of the matter. * * *
We hold that the probability that either of the petitioners would be discharged for cause from their wholly owned corporation, thereby forfeiting benefits under the Albets plans, is too remote to constitute a substantial risk of forfeiture. *75 10
*76
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect in the year in issue.↩
2. $ 33,750 was allocated to petitioner Allen Ludden's account, and $ 19,500 was allocated to petitioner Betty White Ludden's account.↩
3. Mr. Hoffman proposed to reallocate the $ 53,250 contribution as follows: $ 32,635.35 to petitioner Allen Ludden's account; $ 18,855.97 to petitioner Betty White Ludden's account; and $ 1,758.68 to Kathy Whitehead's account.↩
4.
(a) Requirements for Qualification. -- A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section -- * * * (3) if the trust, or two or more trusts and annuity plan or plans are designated by the employer as constituting parts of a plan intended to qualify under this subsection which benefits either -- (A) 70 percent or more of all the employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all the employees are eligible to benefit under the plan, excluding in each case employees who have been employed not more than a minimum period prescribed by the plan, not exceeding 5 years, employees whose customary employment is for not more than 20 hours in any one week, and employees whose customary employment is for not more than 5 months in any calendar year, or (B) such employees as qualify under a classification set up by the employer and found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees; and (4) if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.↩
5. See n. 4
6. The only other case that we have found concerning inadvertent errors in the operation of an employee plan is
"Finally, it is true that in 1964, petitioner inadvertently failed to invite 3 eligible employees to participate. We do not think, however, that an inadvertent omission disqualifies a plan."
Since in
"Appellant cites
"While it might seem harsh to deny retroactive qualification of any plan where a claim of innocence had been accepted, this Court is not prepared to say that consideration of the degree of failure, even innocent failure in coverage is an improper basis for denying qualification."
The concurring opinion stated as follows:
"I concur in the judgment. Contrary to the situation in
The dissent stated:
"The above notwithstanding, I cannot with firm conviction hold that
7.
8. The stipulated facts are not clear on this point but indicate that the deduction for the contribution to the plans by Albets was not disallowed, presumably because respondent considered such deduction proper as additional compensation to the Luddens.↩
9.
(a) General Rule. -- If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of -- (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) the amount (if any) paid for such property, * * * (c) Special Rules. -- For purposes of this section -- (1) Substantial risk of forfeiture. -- The rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.↩
10. This holding is consistent with Proposed
* * *
(c)
Alfred E. Gallade v. Commissioner , 106 T.C. No. 20 ( 1996 )
Shedco, Inc. v. Commissioner , 76 T.C.M. 267 ( 1998 )
Austin v. Comm'r , 141 T.C. 551 ( 2013 )
Family Chiropractic Sports Injury & Rehab Clinic v. Comm'r , 111 T.C.M. 1046 ( 2016 )