DocketNumber: Docket No. 3887-78R
Judges: Forrester
Filed Date: 2/15/1979
Status: Precedential
Modified Date: 10/19/2024
1979 U.S. Tax Ct. LEXIS 173">*173 Action for declaratory judgment under
Petitioner received a final adverse determination from the respondent stating that its profit-sharing plan did not satisfy the vesting requirements resulting from the application of
71 T.C. 824">*824 OPINION
This is an action for declaratory judgment pursuant to
On January 27, 1978, respondent issued a Final Adverse Determination Letter stating that the profit-sharing plan of petitioner did not satisfy the vesting requirements resulting from the application of
Following this final adverse determination, petitioner filed its petition for declaratory judgment with this Court on April 13, 1978. Petitioner also filed, on July 3, 1978, a motion to set case for trial. In response, on August 8, 1978, respondent filed a motion for order to show cause why the case should not be submitted on the administrative1979 U.S. Tax Ct. LEXIS 173">*178 record. On August 30, 1978, after a hearing on the motions, petitioner's motion was denied.
The issues presented for our decision are as follows:
(1) Whether petitioner's profit-sharing plan discriminates, or there is reason to believe it will discriminate, in the accrual of benefits or forfeitures, in favor of employees who are officers, shareholders, or highly compensated in violation of
(2) Whether this Court erred in refusing to grant petitioner a trial in this case.
This case was submitted for decision on the stipulated administrative record under
Petitioner Tamko Asphalt Products, Inc. of Kansas, formerly Royal Brand Roofing, Inc., was incorporated under the laws of the State of Kansas on May 17, 1962, and has its principal place of business at Phillipsburg, Kans. It was a wholly owned subsidiary of Tamko Asphalt Products, Inc. of Missouri. 1979 U.S. Tax Ct. LEXIS 173">*179 The 71 T.C. 824">*826 latter corporation had a qualified plan for its employees.
On November 29, 1975, petitioner adopted a profit-sharing plan and profit-sharing trust agreement to be effective May 1, 1975. Said plan provided, in relevant part:
ARTICLE II
2.1 Each employee who has completed one (1) year of service with the employer shall become a participant not later than the earlier of:
(a) The first day of the first plan year beginning after the date on which the employee has completed a year of service.
(b) The date six (6) months after the date on which the employee completed a year of service.
A participant who has at least a one (1) year break in service with the employer and who is re-employed by the employer shall not be eligible to participate until such employee has at least one (1) year of service following reemployment.
* * * *
ARTICLE IV
4.1 The employer's contributions for any taxable year shall be allocated among the participants as follows: Each participant shall be allocated one (1) point for each full One Hundred Dollars ($ 100.00) of the participant's annual compensation earned during the1979 U.S. Tax Ct. LEXIS 173">*180 plan year ending after the taxable year for which the contribution is made and two (2) points for each year of service. * * *
4.2 The employer's contribution shall be allocated to each participant in the ratio that the points allocated to each participant bears to the total points allocated to all participants.
* * * *
ARTICLE V
5.1 Each participant shall have a vested interest in his or her account based upon years of service as follows:
Years | Nonforfeitable |
of service | percentage |
5 | 25% |
6 | 30% |
7 | 35% |
8 | 40% |
9 | 45% |
10 | 50% |
11 | 60% |
12 | 70% |
13 | 80% |
14 | 90% |
15 or more | 100% |
71 T.C. 824">*827 * * * *
ARTICLE VI
* * * *
6.5 * * * that portion of a participant's account that is forfeited because not fully vested shall be allocated to the remaining participants in the ratio that the points allocated to each participant at the time of such forfeiture bears to the total points allocated to all participants at the time of such forfeiture.
In order to qualify this plan under the provisions of
The employee census reports and employee list formed, in part, a basis for respondent's ruling. An analysis of the employee census reports discloses that the following employees were among the highest paid participants and were either officers or shareholders of petitioner or the parent corporation:
Officer or | Years of | |||
Employee | shareholder | Compensation | service | Vested |
Humphreys, J. P. | X | $ 90,000 | 19 | X |
Ricketts, J. W. | X | 52,000 | 9 | X |
Allen, R. A. | X | 45,500 | 17 | X |
Kaumans, W. W. | X | 28,000 | 15 | X |
Carder, O. | X | 27,000 | 28 | X |
Ellis, L. F. | X | 18,333 | 2 | |
Humphreys, E. C. | X | 17,000 | 27 | X |
Plumb, S. V. | X | 16,850 | 28 | X |
Hosp, G. R. | X | 16,500 | 27 | X |
Anderson, M. J. | X | 16,000 | 25 | X |
Average | 19.7 |
1979 U.S. Tax Ct. LEXIS 173">*182 71 T.C. 824">*828 Of these employees, W. W. Kaumans was the only one employed by petitioner. In addition, this same employee had the greatest number of total allocated plan units in contrast to petitioner's long term, but less highly compensated employees under the plan, to wit:
Years | |||||
of | Total | ||||
Years of | service | Compensation | allocation | ||
Participants | service | Compensation | units | units | units |
W. W. Kaumans | 15 | $ 29,333.36 | 30 | 293 | 323 |
Melvin R. Gitchel | 15 | 15,556.39 | 30 | 155 | 185 |
Ernest H. Kearns | 15 | 12,802.96 | 30 | 128 | 158 |
Albert M. McCormack | 15 | 10,100.65 | 30 | 101 | 131 |
Daryl D. Snow | 15 | 11,288.97 | 30 | 112 | 142 |
Robert C. Reese | 16 | 12,599.89 | 32 | 125 | 157 |
Francis J. Goracke | 17 | 11,746.43 | 34 | 117 | 151 |
Jesse Smith | 17 | 12,736.05 | 34 | 127 | 161 |
Calvin W. Wisinger | 17 | 15,496.49 | 34 | 154 | 188 |
Jerry D. Hill | 18 | 15,306.55 | 36 | 153 | 189 |
John T. Novicki | 18 | 6,645.87 | 36 | 66 | 102 |
The record also indicates that the turnover rate for petitioner's rank-and-file employees was 13.43, 19.74, 19.32, 7.06, and 21.16 percent in the respective years of 1972, 1973, 1974, 1975, and 1976, with the average turnover rate of rank-and-file employees for that 5-year period1979 U.S. Tax Ct. LEXIS 173">*183 amounting to 16.14 percent. Furthermore, the turnover rate of the parent corporation's employees is essentially no different than the turnover rate of petitioner's employees.
Based upon the information that petitioner furnished respondent, he made a proposed determination on April 12, 1977, that petitioner's profit-sharing plan did not satisfy the requirements of
71 T.C. 824">*829 Respondent issued a Final Adverse Determination Letter to petitioner on January 27, 1978. The ruling states, in pertinent part:
We have made1979 U.S. Tax Ct. LEXIS 173">*184 this determination for the following reasons:
Article V, section 5.1, of your plan provides for vesting of an employee's accrued benefit attributable to employer contributions in accordance with the "5- to 15-year" vesting standard described in
(1) the plan complies with the tests contained in
(2) in the case of any plan which had previously been the subject of a favorable advance determination letter which has not been revoked, the percentage of vesting of each participant provided under the plan, as amended, is not less (at every point) than that provided under the vesting schedule of the plan upon which the most recent prior determination letter was based; or
(3) there is a demonstration, to the satisfaction of the Service, on the basis of all the facts and circumstances that there has not been, and that there is no reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of the prohibited group.
Although the vesting schedule in your plan satisfies one of the statutory minimum standards, the plan does not provide vesting as rapid as the 4-40 vesting schedule (see condition1979 U.S. Tax Ct. LEXIS 173">*186 (1) above) described in
71 T.C. 824">*830 Consequently, we are not satisfied that on the basis of the facts and circumstances there has not been, and there will not be, an accrual of benefits or1979 U.S. Tax Ct. LEXIS 173">*187 forfeitures which discriminate in favor of the prohibited group.
The initial question we must deal with in this action for declaratory judgment is whether petitioner's profit-sharing plan discriminates, or there is reason to believe it will discriminate, in the accrual of benefits or forfeitures, in favor of employees who are officers, shareholders, or highly compensated in violation of
1979 U.S. Tax Ct. LEXIS 173">*188
Pursuant to (d) Special Rules. -- (1) Coordination with (A) there has been a pattern of abuse under the plan (such as a dismissal of employees before their accrued benefits become nonforfeitable) tending to discriminate in favor of employees who are officers, shareholders, or highly compensated, or 71 T.C. 824">*831 (B) there have been, or there is reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of employees who are officers, shareholders, or highly compensated.
The parties are in agreement that petitioner's plan, under1979 U.S. Tax Ct. LEXIS 173">*189 article V, section 5.1, meets the minimum vesting standards of
In determining whether a plan meets the requirements of
On brief petitioner discussed respondent's revenue procedure in a cursory manner arguing that he was without any power to adopt such procedures. Petitioner cites no legal authority to support its argument and we have found none. To the contrary, we believe that respondent was clearly within his authority, as mandated by Congress, in prescribing certain administrative procedures1979 U.S. Tax Ct. LEXIS 173">*190 for the purpose of testing an employee benefit plan against the nondiscrimination standard of
Under the conference substitute the rules of the House bill are adopted with respect to the relationship of the minimum vesting standards of the bill to the antidiscrimination rules of present law (
In the past, however, the law in this area has been administered on a case-by-case basis, without uniform results in fact situations of a similar nature. As a result, except in cases where actual misuse of the plan occurs in operation, the
Pursuant to these congressional directives, respondent formulated
Sec. 3. Tests for Advance Determination Letters.
* * * *
(1) the plan complies with the tests contained in
(2) in the case of any plan which had previously been the subject of a favorable advance determination letter which has not been revoked, the percentage of vesting of each participant provided under the plan, as amended is not less (at every point) than that provided under the vesting schedule of the plan upon which such most recent prior determination letter was based; or
(3) there is a demonstration, to the satisfaction of the Service, on the basis of all the facts and circumstances that there has not been, and that there is no reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of the prohibited group.
Since petitioner meets the minimum vesting standard of 71 T.C. 824">*833
Petitioner contends that the application of the turnover test to its plan will not result in discrimination in favor of a1979 U.S. Tax Ct. LEXIS 173">*195 prohibited group. We disagree.
The requirements of the turnover test are satisfied if the rank-and-file turnover rate, meaning the annual rate of turnover for employees other than those in a prohibited group, for the 60-month period ending on the last day of the preapplication year, does not exceed the greater of 6 percent or the applicable percentage of the prohibited group turnover rate for such period. In the instant case, the "applicable percentage" is 200 percent since the number of months in the relevant employment period exceeds 60. See
Before the turnover test is applied, however, the relevant employee groups, comprised of rank-and-file and prohibited members, must be determined. As a wholly owned subsidiary, petitioner asserts that only the participating employees in its profit-sharing plan are the pertinent group. Under this analysis, petitioner would have us exclude from the relevant group those employees of the parent corporation who were officers, shareholders, 71 T.C. 824">*834 and highly compensated, since it had a qualified plan of its own1979 U.S. Tax Ct. LEXIS 173">*196 which covered this group.
At first blush petitioner's argument seems to make a great deal of sense; nevertheless,
(b) Employees of Controlled Group of Corporations. -- For purposes of
While this section is not altogether clear on the application of the minimum vesting standards to affiliated employers with multiple plans, the Senate report, which tracks the House report, is support for respondent's position that the employees of the parent corporation and petitioner must be treated as if employed by a single employer.
It provides, in relevant part, at S. Rept. 93-383, 1974-3 C.B. (Supp.) 122:
We believe that a fair reading of
Furthermore, the mere fact that Congress has not passed a 71 T.C. 824">*835 statute to petitioner's liking is not ground for asserting that a "common-sense" approach should prevail. It is well settled that deductions are a matter of legislative grace.
The congressional purpose that underlies
In any event, it appears that petitioner is attempting to bootstrap its failure to offer any evidence in the administrative record of the parent corporation's rank-and-file employees by arguing that
Respondent's determination found that petitioner does not 71 T.C. 824">*836 meet the turnover test of section 3.01(b)(1) of
Pursuant to section 3.01(b)(3) of
As set out earlier in this opinion, the prohibited group members' average length of service was 19.7 years. Of the 10 group members only 1 was not vested. Because the1979 U.S. Tax Ct. LEXIS 173">*202 allocation of the employer's contribution to the profit-sharing plan was weighted according to years of service, those employees with longer tenure received proportionately greater amounts of the employer's contributions. See, e.g.,
Forfeitures were reallocated on a similar basis. Because of the rapid turnover rate among eligible plan participants who were nonvested, there will be substantial forfeitures of the employer's contributions enriching those vested employees with longer years of service, and, in particular, those members of the prohibited group. This Court has found that the manner in which 71 T.C. 824">*837 forfeitures were reallocated to the remaining participants in a profit-sharing plan was discriminatory since the plan's formula used for allocating them resulted in a consistent pattern of favoring the prohibited group members.
Petitioner further argues that
Moreover, it is clear that Congress did not expect the Tax Court to conduct a trial de novo and make an independent examination of the1979 U.S. Tax Ct. LEXIS 173">*205 facts to determine if the subject plan was qualified. H. Rept. 93-807, 1974-3 C.B. (Supp.) 299, 342-343. See also
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954.↩
2.
(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 --
* * * * (4) if the contributions or the benefits provided under the plan do not discriminate in favor of employees who are -- (A) officers, (B) shareholders, or (C) highly compensated.↩
3. We also note that petitioner, a fortiori, fails the turnover test suggested in the congressional committee reports. That is, Congress indicated that more rapid vesting would not be required except in a case where the rate of likely turnover for a prohibited group was substantially less (perhaps as much as 50 percent less) than the rate of likely turnover for rank-and-file employees. Conf. Rept. 93-1280,
4. We do not reach the question raised in petitioner's brief of whether respondent had a sufficient "reason to believe" its plan discriminated in favor of a particular group. Petitioner contends that the phrase "reason to believe," employed in