Pulver Roofing Co. v. Comm'r of Internal Revenue
| Citation | 70 T.C. 1001,1 Employee Benefits Cas. 1981 |
| Decision Date | 19 September 1978 |
| Docket Number | 903–77.,Docket Nos.–10703–75 |
| Parties | PULVER ROOFING CO., INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
In 1961, petitioner obtained a ruling from respondent that its profit-sharing plan, which did not cover its union employees, was a qualified plan under sec. 401(a), I.R.C.1954. Ostensibly unforeseen business conditions caused a decline in the number of nonunion employees covered by the plan who were not officers, shareholders, supervisors, or highly compensated. In his notices of deficiency, respondent retroactively determined that the plan was discriminatory and therefore not qualified during the taxable years involved. Held, during those years, petitioner's plan did not satisfy the coverage requirements of sec. 401(a)(3)(B), I.R.C.1954. Held, further, respondent's retroactive determination was not an abuse of discretion and, therefore, petitioner's contributions under the plan are not deductible. Donald J. Aquilio, Henry H. Melchor, and George C. Shattuck, for the petitioner.
Louis J. Zeller, Jr., for the respondent.
Respondent determined the following deficiencies in petitioner's Federal income tax:
The sole issue remaining for decision is whether petitioner is barred from deducting, under section 404(a)(3),1 payments made to a profit-sharing trust on the ground that the plan discriminates in favor of employees in the prohibited group.2
Most of the facts have been stipulated and are found accordingly. The stipulation of facts and the exhibits attached thereto are incorporated herein by reference.
Petitioner is a New York corporation which had its principal place of business at Utica, N.Y., at the time of the filing of the petitions herein. It filed its Federal income tax returns for the taxable years in question with the North Atlantic Service Center, Andover, Mass.
At all times pertinent, petitioner was in the commercial, industrial, and residential roofing and siding business.
During each of the taxable years involved, petitioner's president and sole stockholder was Owen J. Owens. Margaret Owens, his wife, was petitioner's secretary, and Richard Owens, their son, was its treasurer during each of these years. William Owens, another son, became petitioner's vice president during the fiscal year ending October 31, 1971, and continued to serve in that capacity through September 30, 1973.
Petitioner adopted a profit-sharing plan effective November 1, 1958, and simultaneously created a trust to receive the contributions to be made pursuant to the plan. On January 27, 1961, petitioner adopted the first amendment to its profit-sharing plan. The plan, as amended, provided for:
(1) Coverage for all employees except—
(a) Participants in a labor union pension, profit-sharing, or welfare plan, established through collective bargaining, to which petitioner makes contributions, and
(b) Employees who customarily work 20 or fewer hours per week or 5 or fewer months per calendar year;
(2) Contributions to the trust of a percentage of “net income” of petitioner as defined in the plan, up to, but not exceeding, 15 percent of the aggregate compensation of all participants in the plan;
(3) Full vesting upon retirement, disability, or death;
(4) Vesting where employment is terminated for other reasons, according to the following schedule:
+--------------------------------------------+
¦ ¦Vested interest ¦
+--------------------------+-----------------¦
¦Years as member of plan ¦(percent) ¦
+--------------------------+-----------------¦
¦ ¦ ¦
+--------------------------+-----------------¦
¦Less than 2 ¦0 ¦
+--------------------------+-----------------¦
¦At least 2 and less than 3¦15 ¦
+--------------------------+-----------------¦
¦At least 3 and less than 4¦30 ¦
+--------------------------+-----------------¦
¦At least 4 and less than 5¦45 ¦
+--------------------------+-----------------¦
¦At least 5 and less than 6¦60 ¦
+--------------------------+-----------------¦
¦At least 6 and less than 7¦80 ¦
+--------------------------+-----------------¦
¦7 or more ¦100 ¦
+--------------------------------------------+
That portion of a participant's account not vested as of the time of termination is forfeited, deemed an additional contribution by petitioner, and allocated to the remaining participants in proportion to their compensation for the year of forfeiture.
On November 3, 1959, petitioner requested the District Director to determine whether the profit-sharing plan satisfied the requirements of section 401(a). The tax information schedule attached to the request showed employee coverage for the fiscal year ending October 31, 1959, as follows:
+------------------------------------------------------+
¦Employees ineligible due to union membership ¦26¦
+---------------------------------------------------+--¦
¦Employees ineligible due to minimum compensation3 ¦41¦
+---------------------------------------------------+--¦
¦Total ineligible employees ¦67¦
+---------------------------------------------------+--¦
¦Eligible and covered ¦9 ¦
+---------------------------------------------------+--¦
¦Total employees ¦76¦
+------------------------------------------------------+
Relevant data contained in the information schedule concerning the eligible and covered employees was as follows:
+------------------------------------------------------------------+
¦ ¦ ¦Percent ¦ ¦ ¦
+---------------+---------+-----------+-------------+--------------¦
¦ ¦ ¦of stock ¦Supervisory ¦ ¦
+---------------+---------+-----------+-------------+--------------¦
¦Name ¦Officer ¦ownership ¦duties ¦Compensation ¦
+---------------+---------+-----------+-------------+--------------¦
¦ ¦ ¦ ¦ ¦ ¦
+---------------+---------+-----------+-------------+--------------¦
¦Owen Owens ¦Yes ¦50 ¦Yes ¦$19,700.00 ¦
+---------------+---------+-----------+-------------+--------------¦
¦Margaret Owens ¦No ¦0 ¦Yes ¦3,380.00 ¦
+---------------+---------+-----------+-------------+--------------¦
¦Elizabeth Owens¦Yes ¦50 ¦Yes ¦3,120.00 ¦
+---------------+---------+-----------+-------------+--------------¦
¦John Burnett ¦No ¦0 ¦No ¦4,698.55 ¦
+---------------+---------+-----------+-------------+--------------¦
¦Morris Park ¦No ¦0 ¦Yes ¦3,300.00 ¦
+---------------+---------+-----------+-------------+--------------¦
¦David Thomas ¦No ¦0 ¦No ¦4,845.60 ¦
+---------------+---------+-----------+-------------+--------------¦
¦Francis Alsante¦No ¦0 ¦No ¦1,407.21 ¦
+---------------+---------+-----------+-------------+--------------¦
¦Adam Kozinski ¦No ¦0 ¦No ¦1,964.56 ¦
+---------------+---------+-----------+-------------+--------------¦
¦Robert Terry ¦No ¦0 ¦No ¦1,719.35 ¦
+------------------------------------------------------------------+
Respondent, on February 28, 1961, issued a letter stating that the trust was a qualified trust under section 401(a) and that it was exempt from income tax under section 501(a). This letter contained the following caveat:
Attention, however, is invited to section 1.401–1(b)(3) of the 1954 Regulations which states in part: “The law is concerned not only with the form of a plan but also with its effects in operation.”
At the time the plan was adopted and during the early 1960's, the residential roofing business accounted for approximately one-half of petitioner's business. Subsequently, residential roofing accounted for a declining share of petitioner's operation, to the point that, during the taxable years involved herein, it represented less than 10 percent of the business. This decline was due, in large part, to the tendency of residential roofers theretofore employed by petitioner to go into business for themselves.
Petitioner's employees who worked in the nonresidential portion of the business generally were not eligible to participate in the profit-sharing plan because of their participation in labor union pension plans. Residential roofers did not participate in such plans and were thus eligible to become members of petitioner's plan. The decline in petitioner's residential roofing business was accompanied by a decline in the number of roofers eligible to become members of the plan.
The participants in petitioner's profit-sharing plan during the taxable years at issue and their compensation 4 were as follows:
1 Petitioner changed its fiscal year in 1973.Eleanor Miller and Isabelle Hoffman were employed in clerical positions. Philip Schremmer and Nandor Sarus were roofers.
Employees who participated in labor union pension plans were compensated as follows:
+-------------------------------------------------------------------------+
¦ ¦Number of employees ¦ ¦ ¦ ¦
+------------------+---------------------+----------+----------+----------¦
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