Attardo v. Commissioner
| Decision Date | 01 August 1991 |
| Docket Number | Docket No. 19732-88. |
| Citation | 62 T.C.M. 313 |
| Parties | Sebastian and Sharon Attardo v. Commissioner. |
| Court | U.S. Tax Court |
Bradley J. Davis and Victoria J. Alvarez, for the petitioners. Steve R. Johnson, for the respondent.
Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows:
Additions to Tax
---------------------------------
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2)
1984 ............................. $ 759 $ 38 50% of interest
due on $759
1985 ............................. 41,574 2.079 50% of interest
due on $37,361
After agreement as to other adjustments, the remaining issues for decision are (1) whether petitioners are entitled to a $39,788 deduction they claimed in 1985 for a contribution to petitioner Sebastian Attardo's defined benefit pension plan and (2) whether petitioners are liable for the additions to tax for negligence. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
All of the facts have been stipulated, and the stipulated facts are incorporated as our findings by this reference. Petitioners Sebastian and Sharon Attardo were husband and wife and filed joint Federal income tax returns for 1984 and 1985. At the time the petition was filed, petitioners resided in the State of Florida.
On December 28, 1976, Sebastian Attardo (petitioner) executed a document entitled "Adoption Agreement for Self Employed Retirement Plans" (the adoption agreement). Attached to the adoption agreement was a prototype defined benefit pension plan entitled "Combination Retirement Plan for the Self Employed" (the plan). Petitioner was the sole employee-participant in the plan. The adoption agreement and the plan were prepared by Planned Retirement Consultants & Administrators, Inc.
The plan provided that an employer desiring to adopt the plan:
shall do so by completing and executing the Adoption Agreement which forms a part of the Plan and by executing, together with a trustee selected by him, the Trust Agreement which also forms a part of the plan.
The plan contained the following definitions:
"Plan" shall mean the Retirement Plan adopted by the employer by completion and execution of the Adoption Agreement and by execution, together with the trustee, of the Trust Agreement which forms a part of the Plan.
* * *
"Adoption Agreement" shall mean the Adoption Agreement which the employer completed and executed to adopt the Plan and which forms a part of the Plan.
* * *
"Trust Agreement" shall mean the Trust Agreement which is executed by the employer, together with the trustee selected by the employer, and which forms a part of the Plan.
* * *
"Trust Fund" shall mean all contributions paid to the trustee under the Plan to be held in accordance with the Trust Agreement, together with any income therefrom and increment thereon.
Petitioner does not recall executing a separate trust agreement in connection with the implementation of the plan. At the time the adoption agreement was executed, petitioner relied on the representation of counsel that the plan complied with the requirements of the Internal Revenue Code.
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324, the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 494, and the Retirement Equity Act of 1984 (REA), Pub. L. 98-397, 98 Stat. 1426, required that deferred compensation plans be amended in order to maintain their qualified status. The plan was not amended to conform with the above acts or with subsequent legislation until sometime after January 1, 1989.
Petitioner believed that he was authorized to withdraw funds from the plan in the form of a loan. In 1987 and 1988, petitioner withdrew money from the plan accounts and intended that those withdrawals be treated as loans; as of the date of the stipulation, January 25, 1991, no repayments were made, and no loan agreements were prepared or executed with respect to those withdrawals.
As trustee of the plan, petitioner made several purchases of stock (the stock purchases). Petitioner purchased the stock from the Stuart James Company (Stuart James). As a stockbroker for Stuart James, petitioner earned a commission of approximately 1 percent on the stock purchases.
With respect to contributions, the plan provided that "the employer shall contribute that amount necessary to currently fund the plan on a level premium funding basis." The plan also provided that the amount contributed by an employer on behalf of a self-employed individual shall "not exceed seventy-five hundred dollars ($7,500)."
Petitioners' 1984 and 1985 Federal income tax returns were prepared by Scott Slayback (Slayback). Slayback was not an attorney or an accountant but was in the business of preparing tax returns. Although petitioner was aware that Slayback was in that business, petitioners did not otherwise investigate Slayback's credentials or expertise. Petitioners had no reason to believe that Slayback was or was not qualified to prepare their returns.
Petitioners provided Slayback with information as to their 1984 and 1985 tax returns. Prior to signing the returns that Slayback prepared, petitioners did not review them in detail and did not ascertain whether the amounts on the returns corresponded to the information petitioners had provided to Slayback.
Petitioner made contributions to the plan in 1985 and, based on Slayback's computation of the amount that was needed to fund the plan on a level premium funding basis, petitioners claimed a deduction of $39,788 on their 1985 return. Respondent disallowed the claimed deduction.
Petitioners' treatment of other items on their 1984 and 1985 returns form the basis of the additions to tax for negligence. The parties' agreement with respect to those items is as follows:
Amount per Proper Amount Amount Not Substantiated
Item Return per Agreement & Not Allowed
1984
Schedule C expenses .................. $11,283 $8,111 $ 3,172
Dependency exemptions ................ 3,000 0 --
Dividend income (omitted) ............ 0 139 --
Capital loss (overstated) ............ 60 0 --
1985
Schedule C expenses .................. 41,342 7,959 33,383
Dependency exemption ................. 1,040 0 --
Investment tax credit ................ 675 0 --
Alimony deduction .................... 3,300 1,405 1,895
Interest expense ..................... 5,000 3,299 1,701
The parties also agree that petitioners improperly used the income averaging method to compute their Federal income tax liability for 1985.
The first issue for decision is whether petitioners are entitled to a deduction for the 1985 contribution to the plan. Respondent's position is that the contribution is not deductible because:
(1) the Plan was not properly adopted in 1976 or at any time thereafter, (2) in substance, the Plan lacked economic reality, (3) in the alternative, the Plan was defective in form in 1976 and at all times thereafter, and (4) in addition, the Plan was formally defective in 1985 because amendments required by post-1976 legislation were not made.
Petitioners' position is that the facts:
indicate that Petitioner maintained and operated a qualified plan and trust. Petitioner operated the Plan in accordance with the prototype plan document as adopted, and reasonably relied on the prototype's sponsor with respect to the Plan's qualified status. Petitioner accounted for and invested the assets of the Plan separate and apart from his personal assets and investments, and managed the trust fund as Trustee of the Plan. Consequently, the contributions to the Plan for the 1985 taxable year are deductible under Section 404(a)(1) of the Internal Revenue Code.
Section 404(a) provides generally that an employer's contribution to a pension plan shall be deductible if it satisfies the conditions of section 162 or 212 and if it satisfies the additional limitations of section 404(a). Section 404(a)(1)(A) provides that contributions are deductible in the taxable year when paid if they are paid into a pension trust and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a). Section 501(a), in turn, provides that an organization described in section 401(a) shall be exempt from tax.
Section 401(a) lists various requirements that must be met by a trust forming part of a pension plan in order for that trust to be eligible for favored tax treatment under various sections of the Internal Revenue Code. In order for a plan to be qualified, both its terms and its operations must meet the statutory requirements. Buzzetta Construction Corp. v. Commissioner [Dec. 45,555], 92 T.C. 641, 646 (1989).
Respondent's first contention, that the plan was not properly adopted, is based on petitioner's failure to execute a trust agreement in accordance with the plan. Respondent acknowledges that "Many cases * * * have denied claimed deductions because, although a pension plan had been adopted, the associated trust was not in existence during the tax year in question." Respondent nevertheless...
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