Lear Eye Clinic, Ltd. v. Comm'r of Internal Revenue, s. 13406–90
| Decision Date | 10 June 1996 |
| Docket Number | 19117–90,177–91.,Nos. 13406–90,s. 13406–90 |
| Citation | 106 T.C. No. 23,20 Employee Benefits Cas. 1345,106 T.C. 418 |
| Parties | LEAR EYE CLINIC, LTD., et al.,* Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.1 |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Gregory A. Robinson, Brad S. Ostroff, and Neil H. Hiller, Phoenix, AZ, for petitioners.
Anne W. Durning, Phoenix, AZ, for respondent.
SUPPLEMENTAL FINDINGS OF FACT AND OPINION
These cases are before the Court on remand from the U.S. Court of Appeals for the Ninth Circuit for further consideration consistent with that court's opinion. Citrus Valley Estates, Inc. v. Commissioner, 49 F.3d 1410 (9th Cir.1995), affg. in part and remanding in part 99 T.C. 379 (1992). Subsequent to the remand of these cases, the parties filed a stipulation of facts (supplemental stipulation of facts) and briefs relating to the issue on remand.
The issue for decision on remand is whether the plan participants properly counted their previous employment towards the section 415(b) maximum benefit limitations. We hold that the participant in the Lear Eye Clinic plan properly counted his previous employment, but the participant in the Brody Enterprises plan did not.
All section references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.
In this opinion, we incorporate by reference the facts set out in our opinion in Citrus Valley Estates, Inc. v. Commissioner, 99 T.C. 379 (1992). We set forth and discuss in this opinion findings of fact arising from the supplemented record. We also incorporate by reference the supplemental stipulation of facts.
In 1975, Samuel Pallin (Pallin) commenced practice as an ophthalmic physician in Phoenix, Arizona. His practice grew over the years, offering various medical procedures performed by Pallin or other physicians in the practice. He practiced as a sole proprietor from 1975 until October 1, 1979. From sometime in 1978 through October 1, 1979, the proprietorship employed Gerald Walman (Walman) as an associate physician. On October 1, 1979, Pallin and Walman incorporated Lear Eye Clinic, Ltd.2 (Lear). Pallin and Walman owned 51 percent and 49 percent, respectively, of the Lear stock. The administration of the medical practice and Pallin's duties and responsibilities did not change as a result of the formation of Lear. Nor did the practice's staff, physicians, or patients change due to the formation of Lear.
Effective October 1, 1984, Lear adopted a defined benefit plan (the Lear plan). Pallin was the only participant in the plan. The Lear plan's enrolled actuary used the following information for Pallin for purposes of the actuarial calculations:
+----------------------------------------+
¦¦Date of birth ¦5/8/41 ¦
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¦¦Date of spouse's birth ¦4/2/46 ¦
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¦¦Date of hire ¦10/1/79 3 ¦
++---------------------------+-----------¦
¦¦Date of entry into the plan¦10/1/84 ¦
+----------------------------------------+
On Form 5302, Census, attached to Form 5300, Application for Determination for Defined Benefit Plan (Form 5302), Lear declared that Pallin had 6 years of service with the employer as of September 30, 1985.
In 1985, Pallin and Walman decided to sever their individual medical practices. To accomplish this, Lear formed a subsidiary which held Walman's portion of the practice and then spun the subsidiary off to Walman. Pallin retained ownership of Lear.
On September 4, 1986, Lear received a favorable determination letter from respondent qualifying the Lear plan under section 401(a). As of September 30, 1986, Lear had 25 employees. Of those employees, all but Pallin were excluded or ineligible to participate in the Lear plan. The terms of the Lear plan limit the benefits payable under the plan to those allowable under section 415.
Lear adopted a money purchase plan effective October 1, 1979. The money purchase plan was restated in its entirety as of October 1, 1984, and again as of January 1, 1988.4
In the summer of 1969, Marvin D. Brody (Brody) began working as an estate and gift tax examiner for the Internal Revenue Service (IRS) in Chicago, Illinois. Brody worked with the IRS until May 1973. While employed with the IRS, Brody was covered by the Civil Service Retirement System. Brody was not covered by any other retirement plan from 1969 through September 1977.
From May 1973 to September 1977, Brody worked as an associate attorney with the law firm of Altheimer & Gray in Chicago, Illinois. In September 1977, Brody moved from Chicago to Phoenix, Arizona, and began working in the law firm of Ehmann & Waldman, P.C.
In late 1978 or early 1979, Ehmann, Waldman, and Brody formed Ehmann, Waldman & Brody, P.C. (EWB P.C.) with each owning one-third of the shares of the company. EWB P.C. had three retirement plans: (1) The Pension Plan, a money purchase pension plan adopted in 1971 and still in existence, (2) the Profit Sharing Plan, which merged with the Pension Plan on January 31, 1980, and (3) the Defined Benefit Plan (EWB P.C. Defined Benefit Plan). None of these plans is at issue in this case. In September 1978, after completing 1 year of service with EWB P.C., Brody became a participant in the Pension Plan. Brody was a participant in the EWB P.C. Defined Benefit Plan until its termination in 1984. The record does not reveal when Brody became a participant in the EWB P.C. Defined Benefit Plan. Brody has no other records or information concerning the EWB P.C. Defined Benefit Plan.
On January 31, 1983, Brody terminated his employment with EWB P.C., and EWB P.C. redeemed his stock therein.
On February 1, 1983, Brody incorporated Brody Enterprises, Inc.,5 with Brody as its sole shareholder and employee. On June 13, 1983, Brody Enterprises adopted the Brody Enterprises Defined Benefit Pension Plan (the Brody Enterprises plan), effective February 1, 1983. The Brody Enterprises plan is at issue in docket No. 177–91. The terms of the Brody Enterprises plan limit the benefits payable under the plan to those allowable under section 415.
On Form 5302, Brody Enterprises declared that Brody had 2 years of service with the employer as of May 31, 1985.
On November 1, 1986, Ehmann, Waldman & Brody, P.A. (EWB P.A.) was formed. Brody was not a shareholder or an officer of EWB P.A. The record does not reveal who formed EWB P.A. Sometime around November 1, 1986, Brody ceased employment with Brody Enterprises and entered into an employment contract with EWB P.A. On November 1, 1987, Brody terminated his employment with EWB P.A.
OPINIONEach of petitioners' plans was a small defined benefit pension plan. A defined benefit pension plan provides a participant at retirement with the benefit stated in the plan. The costs of benefits payable from such plans are funded incrementally on an annual basis over the preretirement period. Secs. 404, 412. Contributions made to the plans, within certain limits, are deductible. Sec. 404(a)(1). Earnings on the contributions are not taxed as they accumulate. Sec. 501(a). Plan assets are taxed to participants only as they are paid out as benefits. Sec. 402(a)(1). The payment of benefits under a qualified plan is limited. Sec. 415. These cases focus on the limitations in section 415.
Section 415 was added to the Internal Revenue Code by section 2004(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93–406, 88 Stat. 829, 979. The enactment of ERISA was a legislative attempt to assure equitable and fair administration of pension plans and to remedy problems that had arisen, which prevented many of those plans from achieving their full potential as a source for retirement income. Citrus Valley Estates, Inc. v. Commissioner, 99 T.C. at 399.
In conjunction with its effort to expand the number of employees participating in employer-financed plans, Congress also placed limits on the amounts of pension contributions and benefits available under those plans.
[I]t is not in the public interest to make the substantial favored tax treatment associated with qualified retirement plans available without any specific limitation as to the size of the contributions or the amount of benefits that can be provided under such plans. The fact that present law does not provide such specific limitations has made it possible for extremely large contributions and benefits to be made under qualified plans for some highly paid individuals. While there is, of course, no objection to large retirement benefits in themselves, your committee believes it is not appropriate to finance extremely large benefits in part at public expense through the use of the special tax treatment. * * *
* * *
Moreover, to prevent abuse, the full [section 415(b)(1) ] maximum benefit may be paid only to individuals who have 10 years or more service. Where an individual has served for less than 10 years, the maximum permissible benefit is reduced proportionately.
Section 415(a) precludes qualified plans from providing for payment of annual benefits in excess of an amount determined under subsection (b). Section 415(b)(1) establishes an annual benefit limitation as the lesser of a dollar amount ($75,000, as adjusted under section 415(b)(2), for the years at issue) or 100 percent of the participant's average compensation for his 3 highest paid years with the plan sponsor. For the years at issue, section 415(b)(5) reduced the subsection (b)(1) dollar limitation as follows:
(5) Reduction for service less than 10 years.—In the case of an employee who has less than 10 years of service with the employer, the limitation referred to in paragraph (1) * * * shall be the limitation determined under...
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