DocketNumber: Docket No. 13874-93.
Citation Numbers: 105 T.C. 436, 1995 U.S. Tax Ct. LEXIS 64, 105 T.C. No. 29
Judges: VASQUEZ
Filed Date: 12/19/1995
Status: Precedential
Modified Date: 1/13/2023
*64 Decisions will be entered for petitioners.
P, a dentist, incorporated C and established three pension plans. P was an employee of C. Plan 2 was frozen in 1982. Plan 2 was merged into plan 1 in 1986. P dissolved C in 1986 and distributed all of the assets in the plan 1 trust to employees, including P, in 1987. We held in
R determined that P is taxable in 1986 on the amounts contributed to plans 1 and 3 on his behalf for that year, including the amount merged from plan 2 into plan 1. R's notice of deficiency was mailed more than 3 years, but*65 less than 6 years, after the filing of P's 1986 tax return. R now admits that, but for judicial estoppel, P should not be taxed in 1986 on his share of the merged amount, but rather when it was distributed to him in 1987. P argues that judicial estoppel does not apply and that R is barred by the statute of limitations from asserting a deficiency for 1986.
*437 OPINION
VASQUEZ,
This case was submitted fully stipulated. All of the facts are stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioners were married to each other at all relevant times and resided in Weirton, West Virginia, at the time the petition was filed. Petitioners, John U. Fazi (Mr. Fazi) and Sylvia Fazi (Mrs. Fazi), were employees of Dr. J.U. Fazi, Dentist, Inc. (corporation), a West Virginia corporation.
The corporation established and operated three employee *68 pension benefit plans: (1) The Dr. J.U. Fazi, Dentist, Inc. Employees Pension Plan, a money purchase pension plan (plan 1); (2) the Dr. J.U. Fazi, Dentist, Inc. Employee Profit Sharing Plan (plan 2); and (3) the Dr. J.U. Fazi, Dentist, Inc. Retirement Plan, a defined benefit plan (plan 3).
Plan 1, when originally adopted by the corporation in 1972, was qualified 4 under section 401, and the accompanying trust was a qualified, tax-exempt trust under section 501. Plan 1 and its trust maintained their qualified status until the plan year ending August 31, 1985. We held in
*69 The corporation contributed $ 29,152 to the plan 1 account of Mr. Fazi and $ 3,950 to the plan 1 account of Mrs. Fazi for the year ending August 31, 1986. Mr. Fazi was 100 percent *439 vested in his plan 1 account during the 1985 and 1986 plan years. Mrs. Fazi was 60 percent vested in her plan 1 account in 1985 and 80 percent vested in 1986. Consequently, Mrs. Fazi's vested interest in the 1986 contribution was $ 3,160. Mrs. Fazi's increased vesting from 1985 to 1986 resulted in her becoming vested in an additional $ 750 from contributions made to her account in plan 1 for years prior to the plan year ending August 31, 1986.
Plan 2, when originally adopted by the corporation in 1972, was qualified under section 401, and the accompanying trust was a qualified, tax-exempt trust under section 501. Plan 2 was frozen as of August 31, 1982, and was subsequently merged into plan 1 on or about May 31, 1986. (This merger will hereinafter be referred to as the plan merger.) The plan 2 assets were transferred to the plan 1 trust. Mr. Fazi's account under plan 1 increased by $ 277,138 as a result of the plan merger (the amount of his account in plan 2). Mr. Fazi was 100 percent vested in his plan*70 2 account at the time of the plan merger.
Plan 3, when originally adopted by the corporation in 1979, was qualified under section 401, and the accompanying trust was a qualified, tax-exempt trust under section 501. Plan 3 and its trust were disqualified by respondent, for the same reasons plan 1 was disqualified, for the plan years ending August 31, 1985, August 31, 1986, and August 31, 1987.
The corporation contributed $ 10,300 to the plan 3 account of Mr. Fazi for the year ending August 31, 1986. Mr. Fazi was 100 percent vested in his account during the 1985 and 1986 plan years.
Petitioners received no distributions from plans 1, 2, or 3 in 1986. In 1987, petitioners' accounts in plan 1 were distributed to them. This distribution included the $ 277,138 amount merged into plan 1 from plan 2, the merged amount.
All of the plans were operated in compliance with the amendments required by TEFRA, DEFRA, and REA for all relevant plan years.
Petitioners filed their 1986 Federal income tax return on April 15, 1987. The amount of gross income stated in petitioners' 1986 Federal income tax return and their share of income from pass-through entities totals $ 395,108. Petitioners' 1986*71 Federal income return made no references to *440 the plan merger or the merged amounts. Respondent mailed petitioners a notice of deficiency on March 31, 1993.
A review of the arguments and our holding of Fazi I is necessary to understand the issues in this case. Fazi I dealt with the taxability of the
The rationale for exempting amounts contributed to the unqualified plan in 1985 and 1986 from taxation when distributed in 1987 was that those amounts were taxable to petitioners when the contributions were made: "respondent has conceded that the taxable distribution for 1987 should not include those contributions made during 1985 or 1986 because they would be taxable to petitioners in the years contributions were made to an unqualified trust and not at the time of distribution."
Respondent conceded in Fazi I that the merged amount would be taxable in 1986, rather than 1987. Petitioners, in Fazi I, argued for taxing the merged amounts prior to 1987, rather than in 1987, albeit on different theories. 5 We accepted respondent's concession in Fazi I as to the timing of the taxability of the merged amount without analysis of the underlying substantive issues.
*73 *441
Whereas Fazi I dealt with the taxability to petitioners of distributions made in 1987 from a nonexempt trust, this case deals with the taxability to petitioners of contributions to a nonexempt trust by the corporation in 1986 and whether the merged amount should be taxed in the same manner as a contribution. We must first decide if petitioners should be taxed on the merged amount in 1986. Only if the merged amount is properly includable in petitioners' gross income in 1986 is the 6-year limitations period applicable and the year open to adjustment. If the merged amount is not properly includable in 1986, the 6-year limitations period will not apply and the other adjustments set forth in the notice of deficiency will be barred since the sum of those other adjustments does not exceed 25 percent of petitioners' gross income. The Court, in Fazi I, did not purport to decide the taxability of amounts in 1986; it could only determine tax liability for 1987. Sec. 6214(b).
In this case, respondent originally argued that the merged amount was taxable to petitioners in the year of merger, 1986. She now concedes that the merged amount should*74 have been taxed in 1987, the year it was distributed to petitioners. 6 Respondent states on brief that: Upon reconsideration, however, respondent's interest in sound tax administration requires that she inform the Court that she has reached a different conclusion. The correct result in Fazi I would have been to include the full amount of Plan 002 assets in petitioners' income for 1987. In respondent's view, the merger of Plan 002, a qualified plan, with Plan 001, a nonqualified plan, resulted in the immediate disqualification of Plan 002. The 1986 merger did not represent a "contribution" to Plan 001, but rather a pooling of nonqualified assets all of which should have been taxed on distribution in 1987, consonant with the remainder of the Court's opinion in Fazi I and with I.R.C.
*75 Plan 1 became unqualified and its accompanying trust became nonexempt starting with its plan year ending August 31, 1985. Plan 2 was merged into plan 1 in May of 1986. The single plan and trust remaining after the merger was plan 1, the survivor of the merger. (b) TAXABILITY OF BENEFICIARY OF NONEXEMPT TRUST.--Contributions to an employees' trust made by an employer during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee's interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section. * * *
The employer, the corporation, had already contributed the assets to the frozen plan, plan 2, prior to 1983; it could not contribute assets that it did not own. In Contributions to qualified plans are held and invested by the trustee or insurance company until the time of distribution to the employee. The assets contributed to the trustee or insurance company cease to be assets of the employer and are not subject to the debts, obligations, and creditors of the employer. * * *
*443 A review of the law applicable to plan mergers is necessary*77 to determine if a plan beneficiary should be taxed when pension plans merge. The regulations define a merger of plans to mean a "combining of two or more plans into a single plan."
The case closest to point is
In our case, if the merged amount were a contribution by the corporation, then plan 1 would have been grossly overfunded for 1986. The parties have stipulated that the plans*78 were in operational compliance; i.e., not overfunded.
As respondent acknowledges, the merger, or pooling, of an exempt trust into a nonexempt trust is not a contribution. Therefore, a plan merger is not a contribution that creates income for the beneficiaries of a surviving trust. Mr. Fazi did not receive a net increase in his account balances; his account balance in plan 1 increased by the same amount that his account balance in plan 2 decreased. Contrary to respondent's claims, the Court in Fazi I merely accepted respondent's incorrect concession that the merged amount was not taxable in 1987; we did not hold that the merged amount was a contribution to the surviving plan. 7
*79 *444 It is within this Court's discretion to accept or reject a concession. However, acceptance of a concession does not mean that the Court has evaluated and accepted the underlying substantive issues or legal principles supporting the concession. We may accept a concession or choose to decide the underlying substantive issues as justice requires.
To the extent, if any, that Fazi I states that a merger of a frozen pension plan into an unqualified plan is taxable to the beneficiaries in the year*80 of merger, it is dicta. However, the issue of whether the merged amount is taxable to petitioners in 1986 does not end here.
Respondent, on brief, attempts to raise the doctrine of judicial estoppel against petitioners. Petitioners correctly point out that Rule 39 requires avoidance or affirmative defenses, including estoppel, to be set forth in a party's pleadings. Respondent, in violation of Rule 39, did not plead judicial estoppel. Therefore, respondent cannot raise the doctrine of judicial estoppel for the first time in her briefs.
Respondent argues that petitioners are judicially estopped from arguing that the merged amounts are not taxable as contributions in 1986 because, in Fazi I, petitioners successfully asserted the position that the merged amount was taxable prior to 1987. Petitioners argue that judicial estoppel does not apply since they never maintained the position that the merged amount was a contribution, their position was not accepted by the Court since respondent conceded it, and references in Fazi I to the 1986 tax year are just dicta. For the reasons explained below, we believe that petitioners have the better argument.
The Tax Court unequivocally*82 accepted the doctrine of judicial estoppel in We hold that the doctrine of judicial estoppel is available in the Tax Court to be used in appropriate cases, such as the one before us, to prevent parties from taking positions that are inconsistent with those previously asserted by the parties and accepted by courts and that would result in inappropriate and prejudicial consequences to the courts.
We used judicial estoppel in
Petitioners cite Acceptance by a court does not mean that the party being estopped prevailed in the prior proceeding with regard to the ultimate matter in dispute, but rather only that a particular position or argument asserted by the party in the prior proceeding was accepted by the court. [
Judicial estoppel is*84 a doctrine adopted to protect the Court; the Court has discretion as to when it should be used: "Estoppel is an equitable concept, and its application is therefore within the court's sound discretion."
We explained the mechanics of how the burden of going forward with the evidence works and when it shifts in The bar of the statute of limitations is an affirmative defense, and the party raising it must specifically plead it and carry the burden of proof with respect thereto. Rules 39, 142(a). Where the party pleading such issue makes a showing that the statutory notice was issued beyond the normally applicable statute of limitations, however, such party has established a prima facie case. At that point, the burden of going forward with the evidence shifts to the other side, and the other party has the burden of introducing evidence to show that the bar of the statute is not applicable. Where the other party makes such a showing, the burden of going forward with the evidence then shifts back to the party pleading the statute, to show that the alleged exception is invalid or *87 otherwise not applicable. The burden or proof, i.e., the burden of ultimate persuasion, however, never shifts from the party who pleads the bar of the statute of limitations. See
Petitioners filed their 1986 Federal income tax return on April 15, 1987. Respondent issued her notice of deficiency on March 31, 1993. Consequently, the deficiency is timely only if the 6-year statute of limitations applies.
Petitioners plead the 3-year statute of limitations as a bar to respondent's deficiency determination. Respondent pleads the 6-year statute of limitations in her answer. Petitioners argue that respondent has failed to meet her burden to show a greater than 25-percent omission from gross income of an amount properly includable in gross income. Petitioners also *448 argue that they have adequately disclosed the omitted amount in the corporation's Forms 5500 and 5310 filings. Respondent counters by alleging that the disclosure needs to be in the individual tax return itself, that the disclosure was inadequate, and that petitioners are estopped from arguing*88 against the 6-year statute of limitations.
We need not decide the disclosure issue since respondent has failed to meet her initial burden of going forward with the evidence to show that the bar of the 3-year statute of limitations is not applicable. The parties agree as to the amount of gross income reported on petitioners' 1986 individual Federal income tax return. There is no question that petitioners omitted the merged amount from gross income. The merged amount is clearly greater than 25 percent of the gross income amount. Consequently, the only issue is whether respondent has established, by a preponderance of the evidence, that the merged amount is "properly includable" in petitioners' gross income for 1986.
Respondent asserts that petitioners are estopped from arguing that the merged amount is not properly includable in their gross income for 1986. We have held that petitioners are not estopped from asserting that the merged amount is not taxable in 1986. Petitioners have made the required prima facie case; they have established that the deficiency notice was issued beyond the normally applicable statute of limitations. The burden of showing, by a preponderance of the evidence, *89 that the merged amount is properly includable in petitioners' gross income for 1986 is on respondent.
Respondent has conceded in her briefs that, but for the doctrine of judicial estoppel, the merged amount is properly taxable in 1987, the year of distribution. We have accepted respondent's concession, for the reasons described above. We hold that respondent has failed to make the showing necessary to avail herself of the 6-year statute of limitations. Consequently, petitioners' 1986 individual Federal income tax return is not open for redetermination. Therefore, we need not consider the remaining issues.
We are aware that petitioners will escape taxation of the contributions made on their behalf in 1986 and on the merged amount. However, this result is a consequence of respondent's failure to issue a deficiency notice before the limitations period ran.
*449 To reflect the foregoing,
1. Plan 1 and its related trust were retroactively disqualified in
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. Respondent determined in the notice of deficiency that the merged amount should be treated as a contribution. Respondent's briefs argue that petitioner should be judicially estopped from denying that the merged amount is taxable as a contribution. We are not ruling on, and express no opinion on, whether the merged amount could constitute a distribution.↩
4. Throughout the relevant statutes, regulations, and opinions of the courts, the terms "qualified" and "exempt" have occasionally been used synonymously, and the terms "unqualified" and nonexempt" have also been synonymously used. For convenience, the terms "qualified" and "unqualified" may be used in situations where they refer to or modify the employee trust, rather than the plan.↩
5. Petitioners argued that secs. 83 and 402(b) combined to make incremental increases in their interests in the nonexempt trusts taxable, though not because they were "contributions" in the traditional usage of the word. Petitioners also argued that the merged amount would be taxable in years prior to 1987 because, under
6. Respondent, in Fazi I, originally argued that the merged amount was taxable to petitioners in 1987, but later conceded that it was properly taxable in 1986. Hence, respondent's position on this issue has come full circle.↩
7. In
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