106 T.C. 418 (T.C. 1996), 13406-90, Lear Eye Clinic, Ltd. v. Commissioner of Internal Revenue

Docket Nº:13406-90, 19117-90, 177-91
Citation:106 T.C. 418, 106 T.C. No. 23
Opinion Judge:CLAPP, Judge.
Party Name:LEAR EYE CLINIC, LTD., ET AL., [1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent [*]
Attorney:Gregory A. Robinson, Brad S. Ostroff, and Neil H. Hiller, for petitioners. Anne W. Durning, for respondent.
Case Date:June 10, 1996
Court:United States Tax Court

Page 418

106 T.C. 418 (T.C. 1996)

106 T.C. No. 23

LEAR EYE CLINIC, LTD., ET AL., [1] Petitioners



Nos. 13406-90, 19117-90, 177-91

United States Tax Court

June 10, 1996

Decision will be entered under Rule 155.


Held, for purposes of determining the limitation under sec. 415(b), I.R.C., on benefits of a plan, the term " service with the employer" shall include service with businesses that antedate the plan sponsor where the transition results in a mere technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business.

Held, further, in applying the foregoing to Lear, service with a sole proprietorship, which was incorporated and subsequently sponsored the plan, will count as service with the employer.

Held, further, in Brody Enterprises, service with an alleged sole proprietorship and a law firm, neither of which had any continuous relationship to the sponsor of the plan, does not constitute service with the employer.

Gregory A. Robinson, Brad S. Ostroff, and Neil H. Hiller, for petitioners.

Anne W. Durning, for respondent.



CLAPP, Judge.

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.

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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.

Lear Eye Clinic, Ltd.

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

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information for Pallin for purposes of the actuarial calculations:

Date of birth 5/8/41
Date of spouse's birth 4/2/46
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] Brody Enterprises, Inc. (Brody Enterprises) 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 Page 421 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...

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