Rutland v. Comm'r of Internal Revenue
| Decision Date | 08 December 1987 |
| Docket Number | 42540-84.,42538-84,42539-84,Docket Nos. 42535-84,42536-84,42537-84 |
| Citation | 89 T.C. 1137,9 Employee Benefits Cas. 1147,89 T.C. No. 80 |
| Parties | HULAN E. RUTLAND, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
M Corp. maintained a retirement plan for the benefit of its employees. Ps were officers, directors, and employees of M Corp. and participants in such plan. In 1976, Ps sold property owned by them to the plan for $430,000. The plan paid cash, assumed an outstanding mortgage on the property, and issued a promissory note to Ps as consideration for the purchase. In 1977, the plan leased such property to M Corp. for use as its corporate headquarters. The plan failed to report such transactions as prohibited transactions under sec. 4975(c), I.R.C. 1954. In 1978, Ps filed an application for exemption from the prohibited transaction restrictions with the Department of Labor and the IRS. After such application was denied, two of the Ps purchased the property from the plan for $430,000 in June 1980. Such individuals paid an additional $20,000 to the plan as additional consideration for such purchase in Dec. 1982. HELD:
(1) All remaining Ps are disqualified persons under sec. 4975(e), I.R.C. 1954; Ps can avoid liability for excise tax imposed on prohibited transactions only by correcting such transactions.
(2) Transactions prohibited by sec. 4975(a), I.R.C. 1954, are not mutually exclusive; therefore, despite the fact that the sale and issuance of the promissory note arose from the same event, all transactions still in dispute are prohibited transactions.
(3) The application for exemption filed by Ps is not a return sufficient to start the running of the statute of limitations under sec. 6501(a), I.R.C. 1954.
(4) This Court has no jurisdiction to determine whether sec. 4975 imposes a penalty referred to in sec. 6601(e)(3), I.R.C. 1954, since resolution of the issue has no effect on amount of deficiency owed by Ps. Katherine W. King and William G. Whatley, for the petitioners.
J. Darrel Knudtson, for the respondent.
The Commissioner determined identical deficiencies in each of the individual petitioner's Federal excise taxes as follows:
+----------------+
¦Year¦Deficiency ¦
+----+-----------¦
¦1976¦$21,508.32 ¦
+----+-----------¦
¦1977¦23,028.47 ¦
+----+-----------¦
¦1978¦24,548.62 ¦
+----+-----------¦
¦1979¦25,426.67 ¦
+----+-----------¦
¦1980¦24,131.43 ¦
+----+-----------¦
¦1981¦21,500.00 ¦
+----------------+
The Commissioner also determined a deficiency in the Federal excise taxes of petitioner Matthews-McCracken-Rutland Corporation as follows:
+-------------------------+
¦TYE May 31--- ¦Deficiency¦
+--------------+----------¦
¦1977 ¦$750 ¦
+--------------+----------¦
¦1978 ¦2,550 ¦
+--------------+----------¦
¦1979 ¦4,350 ¦
+--------------+----------¦
¦1980 ¦6,150 ¦
+--------------+----------¦
¦1981 ¦6,150 ¦
+-------------------------+
The issues for our decision are: (1) Whether the sale of property by the individual petitioners to an employee stock bonus plan and the subsequent lease of such property by such plan to the corporate petitioner constituted prohibited transactions under section 4975(c), Internal Revenue Code of 1954 2; (2) whether the petitioners are disqualified persons under section 4975(a); (3) whether the Commissioner's calculations of the excise taxes owed by the petitioners are proper and accurate; (4) whether the Commissioner is barred by the statute of limitations from assessing the deficiencies in Federal excise taxes determined by him with respect to the petitioners; and (5) whether section 4975 imposes a penalty referred to in section 6601(e)(3) 3 so as to delay the accrual of interest on any deficiency until after the Commissioner has issued a notice and demand for payment of such deficiency.
Some of the facts have been stipulated, and those facts are so found.
At the time the petitions were filed in this case, petitioners Hulan E. Rutland, Robert P. McCracken, and James B. Rutland resided in Baton Rouge, Louisiana; petitioner Leonard A. Matthews resided in Prairieville, Louisiana; and petitioner J. David Woodard resided in Atlanta, Georgia. Petitioner Matthews-McCracken-Rutland Corporation (MMR) was formed under the laws of the State of Louisiana and maintained its principal place of business in Baton Rouge, Louisiana. All the individual petitioners reported their income on a calendar year basis. MMR reported its income using a tax year ending May 31. We shall identify a tax year by the calendar year in which it ends.
In September 1972, Mr. McCracken acquired a controlling interest in MMR, which provided instrumentation and electrical engineering services to the construction industry. All individual petitioners were officers and employees of MMR at some time.
After Mr. McCracken acquired control of MMR, the company developed into a successful business. As MMR grew, Mr. McCracken decided to build an office and factory complex in a highly visible area, so that industrial clients could become familiar with the company. For such reason, he, along with the other individual petitioners, purchased approximately three acres of land in Baton Rouge. They built an office building, a warehouse building, and a shop building and set up an equipment yard on such land (the property). After its completion, the property was used to house the corporate offices of MMR.
On May 31, 1975, MMR established the Matthews-McCracken-Rutland Corporation Employee Stock Bonus Plan (the bonus plan). Such plan was amended in September 1977, to conform to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. No. 93-406, 88 Stat. 829, and its name was changed to the Matthews- McCracken-Rutland Corporation Employee Stock Ownership plan (the ESOP). For convenience, we shall refer to both the bonus plan and the ESOP as the plan. On March 27, 1978, the Commissioner issued a determination letter stating that the plan was a trust under section 401(a) which is exempt from taxation under section 501(a).
The plan participants were all employees of MMR. The plan provided for an individual account for each participant and for benefits based solely on the amount contributed to such participant's account.
On December 17, 1976, a special meeting of the board of directors of MMR was held to grant the plan the authority to invest in ‘qualifying employer real property‘ and ‘qualifying employer securities‘ and to allow plan participants to designate investments for the plan assets in their account. The plan was also amended to provide that an administrative committee, consisting of all officers and employees of MMR who were plan participants, be appointed to administer the plan.
On December 30, 1976, the individual petitioners sold the property to the plan. Before doing so, the petitioners hired three independent appraisers to prepare estimates of the fair market value of the property. Based upon such appraisals, the plan paid $430,000 for the property. It is stipulated that the fair market value of the property on the date of purchase was $430,000.
The plan purchased the property for a cash payment of $100,000.00 and a promissory note and mortgage issued by the plan in favor of the sellers for $189,363.64. Further, the plan assumed a note and mortgage on the property which originally had been executed by the individual petitioners. Such note and mortgage had an outstanding balance of $140,636.36 at the time of the purchase.
On January 3, 1977, the plan leased the property to MMR. Under such lease, MMR paid rent of $3,000 per month to the plan and paid the taxes, insurance premiums, and maintenance on the property. The lease was granted for a 3-year term, beginning on January 3, 1977, with options to renew at the same rent. The plan received total rental income from MMR of $123,000 from January 1977 through May 1980.
No person received any commission for arranging the sale of the property to the plan. On May 31, 1977, the book value of all the assets in the plan was $507,536.43. On such date, the plan had total liabilities of $328,472.66.
In 1978, the petitioners became aware of the possibility that the sale and lease of the property were prohibited transactions. On October 23, 1978, they mailed to the Department of Labor and to the IRS an application for exemption from the prohibited transaction restrictions of ERISA.
The application contained information as to the nature and circumstances of the transaction. It indicated that the individual petitioners sold the property to the plan and that such individuals were members of the plan's administrative committee. It disclosed the purchase price of the property and the fact that the plan acquired such property by paying cash, issuing a promissory note to the sellers, and assuming the outstanding mortgage on the property. Such application also disclosed the terms of the lease between MMR and the plan. The application concluded by stating that all such transactions may constitute prohibited transactions and that the petitioners were disqualified persons under ERISA. Such application was received by the IRS on November 24, 197S.
In a letter dated April 10, 1980, the Labor Department notified the petitioners' counsel that such application for exemption was formally denied. Such letter indicated that the application was denied because the transactions involved a high percentage of plan assets and because the ‘inherent conflict of interest‘ raised by the transaction creates ‘the potential for possible abuse.‘
On June 4, 1980, the sale of the property was rescinded at the suggestion of the Labor Department. At such time, the property was returned to Mr. McCracken and James Rutland in exchange for $430,000. There is no evidence in the record as to the fair market value of the property at such...
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