Citrus Valley Estates, Inc. v. Comm'r of Internal Revenue

• Citation: 99 T.C. 379,99 T.C. No. 21,15 Employee Benefits Cas. 2521
• Decision Date: 29 September 1992
• Docket Number: Nos. 12900–89,22599–89,13406–90,177–91 and 15473–91.,13449–90,13407–90,19654–90,19716–90,19117–90,6505–90,24352–90,s. 12900–89
• Parties: CITRUS VALLEY ESTATES, INC., et al.,1 Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

15 Employee Benefits Cas. 2521

99 T.C. 379

99 T.C. No. 21

CITRUS VALLEY ESTATES, INC., et al.,1 Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 12900–89

22599–89

6505–90

13406–90

13407–90

13449–90

19117–90

19654–90

19716–90

24352–90

177–91 and 15473–91.

United States Tax Court

Sept. 29, 1992.

Gregory A. Robinson, Neil H. Hiller, Brad S. Ostroff, and John F. Daniels, for petitioners.^*

Anne W. Durning, Susan T. Mathew, James S. Stanis, and Andrew J. Gottlieb, for respondent.

TABLE OF CONTENTS

Factual background .......................................... 7Law ......................................................... 25Certifying actuaries ........................................ 38Experts ..................................................... 39Interest rate   Background ............................................... 42   Petitioners' expert ...................................... 49      Long-term rates of return ............................. 50      Adjustments for plan size ............................. 52         Pre-retirement adjustments .......................... 53         Post-retirement adjustments ......................... 55      Comparison to actuarial experience .................... 56      Regulatory and legal guidance ......................... 58      Conclusion ............................................ 60   Respondent's actuarial expert ............................ 60   Discussion ............................................... 62Retirement age   General background and retirement trends ................. 73   Segregation provisions ................................... 74   Davis .................................................... 77   Lear ..................................................... 78   Stephan .................................................. 79   Fox ...................................................... 82   Brody Enterprises ........................................ 84Mortality assumptions   Citrus Valley ............................................ 85   Fox ...................................................... 87   Brody Enterprises ........................................ 88Post-retirement expense load assumptions   Brody Enterprises ........................................ 89Unit Credit Funding Method .................................. 91Timing of plan amendments   Citrus Valley ............................................ 109   Davis .................................................... 111   Lear ..................................................... 112   Fox ...................................................... 115Change in valuation date   Boren Steel .............................................. 117Hours of service   Citrus Valley ............................................ 119   Old Frontier ............................................. 120   Boren Steel .............................................. 121Section 4972 excise tax ..................................... 121Section 6651 failure to file addition to tax ................ 122Section 6659A additions to tax .............................. 124Conclusions ................................................. 126

OPINION

CLAPP, Judge:

Respondent determined the following deficiencies in and additions to petitioners' Federal income tax:

                                                            Additions to Tax                                                          ---------------------                                                            Sec.                                     Docket     Year                       6651     Sec.      Petitioner             No.       Ended      Deficiency     (a)(1)    6659ACitrus Valley        12900“89   12/31/82  $  6,182.00             “           “  Estates, Inc. et  al.                                                                                                         12/31/83      5,737.00             “           “                               12/31/85     22,462.00             “           “                     24352“90  12/31/88      4,265.00                $ 1,280.00Robert J. & Janice   22599“89  12/31/85     57,246.00             “           “  A. Davis                               12/31/86    173,975.00             “   52,193.00Old Frontier          6505“90  12/31/83      7,869.00             “    2,361.00  Investment, Inc.,  of Arizona                               12/31/84      7,183.00             “    2,155.00                               12/31/85      6,302.00             “    1,891.00                               12/31/86        909.00             “           “Lear Eye Clinic,     13406“90  09/30/86     69,136.00             “           “  Ltd.                                                                                              19117“90  09/30/87     62,055.00             “   14,567.00Robert Stephan,      13407“90  07/31/87     89,807.00  1          “   26,942.00  Jr., P.C.                                                                    Boren Steel          13449“90  03/31/87     26,561.00             “    5,303.00  Consultants, Inc.                                                                                           12/31/87      2,647.00             “           “                               12/31/88      1,802.00             “           “                     15473“91  12/31/87      8,105.00     $2,026.25           “                               12/31/88     10,806.00      2,701.50           “Arizona Orthopedic   19654“90  04/30/87    139,909.00             “   32,699.00  Institute of  Traumatic and  Reconstructive  Surgery, P.C.                                                                                               12/31/87     45,507.00             “    2,623.00Jonathan R. & Renee  19716“90  12/31/86     13,750.00             “    4,125.00  K. FoxBrody Enterprises,     177“91  01/31/86     64,054.78             “   19,216.50  Inc.                                                                                                        01/31/87     32,334.00             “    9,700.20

¹ This figure includes a net operating loss carryover from 1986 which takes into account the 1986 pension plan deduction. Respondent also determined a 10–percent excise tax under section 4972 in Boren Steel Consultants, Inc. (docket No. 15473–91) for the years 1987 and 1988.

The issues for decision are:

(1) Whether the actuarial assumptions used by the certifying actuaries for petitioners' small defined benefit pension plans (plans) were reasonable in the aggregate and represented the actuaries' best estimates of anticipated experience under the plans as required by section 412(c)(3), specifically: (a) Whether the 5–percent pre and postretirement interest rate assumptions used in all of the plans were reasonable, (b) whether the age 55 retirement assumption used in some of the plans was reasonable, (c) whether the mortality assumptions for some of the plans were reasonable, and (d) whether the postretirement expense load used in one of the plans was reasonable;

(2) whether the certifying actuaries, for the plans using the unit credit funding method, funded within allowable limits and made reasonable allocations of costs; (3) whether certain formal requirements relating to plan amendments and terms were met, specifically: (a) Whether plan amendments for some of the plans were timely adopted, and whether the proper elections were made for them to have retroactive effect, (b) alternatively, whether the timing of the plan amendments was relevant, (c) whether proper notice was filed for automatic approval of a change in valuation date for one plan, and (d) whether three of the plan participants completed 1,000 hours of service for each year of service claimed as required by the plans; and

(4) whether certain additions to tax and excise taxes are applicable, specifically: (a) Whether one petitioner is liable for the excise tax on nondeductible pension plan contributions prescribed by section 4972, (b) whether that petitioner is liable for additions to tax under section 6651(a)(1) for failure to file excise tax returns, and (c) whether all petitioners are liable for additions to tax for overstatement of pension liabilities under section 6659A.

All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise specified.

Factual Background

We incorporate by reference the stipulation of facts and attached exhibits.

Citrus Valley Estates, Inc./Citrus Valley Estates, Inc., An Arizona Corporation (Citrus Valley)

Citrus Valley was incorporated in 1977 under the laws of the State of Arizona. Citrus Valley was in the business of acquiring and developing real estate in the Phoenix metropolitan area and selling the lots to developers and individuals. Citrus Valley timely filed its Forms 1120, United States Corporate Income Tax Returns, for its taxable years 1982 through 1988. Citrus Valley's taxable year for Federal income tax purposes was a calendar year, and it employed the accrual method of accounting.

Everett L. King (King) was the president and sole employee of Citrus Valley during the years in issue, and he owned 1 percent of the stock of Citrus Valley. During the years 1977 through 1984, King received no salary from Citrus Valley. King's salary, on the accrual basis, from Citrus Valley for the years 1985 through 1988 was $67,400, $80,000, $87,200, and zero, respectively.

In 1985, Citrus Valley adopted a defined benefit pension plan. King was the only participant in the plan during the years 1985 through 1988. On May 9, 1986, Citrus Valley received a favorable determination letter from respondent qualifying the plan under section 401(a). Citrus Valley's plan was amended twice.

The enrolled actuary for the plan was John W. Lawrence, Jr. (Lawrence). In making the annual actuarial computations of funding requirements and...