Boggs v. C.I.R.
| Decision Date | 27 February 1986 |
| Docket Number | Nos. 85-1049,85-1129,s. 85-1049 |
| Citation | 784 F.2d 1166 |
| Parties | -884, 86-1 USTC P 9257, 7 Employee Benefits Ca 1113 Henry T. BOGGS and Jeanne Boggs, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. Henry T. BOGGS and Jeanne Boggs, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
James R. Bailes and Howard R. Crews (Campbell, Woods, Bagley, Emerson, McNeer & Herndon, Huntington, W. Va., on brief), for Boggs.
David I. Pincus (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Gary R. Allen, Tax Div., Dept. of Justice, Washington, D.C., on brief), for Com'r.
Before HALL and SPROUSE, Circuit Judges, and BUTZNER, Senior Circuit Judge.
Henry T. Boggs and Jeanne Boggs, taxpayers, and the Commissioner of Internal Revenue appeal a judgment of the Tax Court that reduced a deficiency from $62,184 as assessed by the Commissioner to $6,520. 1 The Commissioner assessed the deficiency in 1978 after an audit of the taxpayers' 1976 income tax return disclosed that Henry T. Boggs had rolled over his share of the H.T. Boggs Company profit sharing trust into an individual retirement account (IRA). The taxpayers claim that the trust was qualified in 1976 and its assets were entitled to the favorable treatment accorded by I.R.C. Sec. 402(a)(5). 2 Consequently, they assert that the rollover was tax free. The Commissioner contends that in 1978 he properly retroactively revoked the trust's qualification effective December 1, 1974, that the assets of the trust were not entitled to favorable treatment in 1976, and that the rollover was subject to tax.
The Tax Court held that the Commissioner did not abuse his discretion when he retroactively revoked the qualified status of the company's trust. The taxpayers assign error to this ruling. The Tax Court also held that the portion of the distribution from the trust attributable to the company's contributions made prior to December 1, 1974, could be rolled over tax free into the IRA. The Commissioner assigns error to this ruling, contending that the entire amount of the rollover in 1976 was taxable because the trust had been disqualified since 1974. 3 In view of our disposition of this appeal, we do not address the Commissioner's assignment of error on this issue or several subsidiary assignments of error made by the parties.
We conclude that the Tax Court erred by upholding the Commissioner's retroactive revocation of the trust's qualified status because no material change of fact existed to support the Commissioner's action. Therefore, the trust was qualified at the time it was terminated and Boggs's share could be rolled over into his IRA without the imposition of a tax.
The Tax Court has set forth the facts, which were largely stipulated by the parties. See 83 T.C. at 133-39. The evidence pertaining to the retroactive revocation of the trust's qualified status can be briefly summarized. The company and the trust operated on a fiscal year beginning December 1 and ending November 30. In November 1962, the company established the trust for the benefit of its five salaried employees, including Henry T. Boggs, who was the majority stockholder and chief executive officer. The other 45 employees not covered by the trust were union members who were covered under a variety of union negotiated pension plans arrived at as a result of good faith collective bargaining. Pursuant to Treasury Regulation 26 C.F.R. Sec. 1.401-3(f), the company designated the trust and the union pension plans as one plan for the purpose of satisfying the coverage requirements of I.R.C. Sec. 401(a)(3). In December 1962, the Commissioner determined that the trust was qualified. It is this ruling that the Commissioner in 1978 retroactively revoked effective December 1, 1974.
The parties stipulated that the "trust continued in effect without amendment from 1962 until July of 1976, when the company determined that it should be terminated." They also stipulated that it A qualified trust does not discriminate in favor of officers, stockholders, supervisory personnel, or highly compensated employees--collectively referred to as the prohibited group--in terms of coverage, Sec. 401(a)(3), or contributions, Sec. 401(a)(4). 4 The parties' stipulation is unequivocal. The stipulated facts establish that the trust was qualified from 1962 through fiscal year 1973 with respect to both coverage and contributions. Relying on this stipulation, the taxpayers did not present evidence about contributions made to the trust or to the union pension funds prior to 1974.
The stipulated facts disclose that in 1974 the company's aggregate contributions to the trust were $15,291.17 and its contributions to a representative union pension fund were $34,134.99. The parties also stipulated that in 1975 and 1976 the company contributed nothing to the trust. Its contribution to the union pension fund aggregated $43,358.20 in 1975 and $29,783.62 in 1976.
The Commissioner contends that the combined plan was discriminatory in 1974 because contributions on behalf of the prohibited group were 19.2% of their total compensation while contributions for union employees averaged only 10% of their compensation. The taxpayers contend that the disparate ratio of contributions to compensation was a temporary aberration that was fully remedied in 1975 and 1976 when 100% of the company's contributions were made to the union pension funds.
The Tax Court held that the combined plan satisfied the coverage requirements of Sec. 401(a)(3) because at all times 100% of the employees were covered. With respect to contributions, it accepted the Commissioner's position that in 1974 the disparity in the ratio of contributions to compensation between the prohibited group and the union employees established that the plan discriminated against the union employees in violation of Sec. 401(a)(4). Consequently, the plan was not qualified in fiscal year 1974. In reaching this decision, the Tax Court noted:
This profit-sharing plan seems to fall within the harsh situation this Court has often alluded to in commenting on the difficulty, if not impossibility, for a small company most of whose employees are union members covered by union pension plans to set up a qualified plan for salaried employees, most of whom fall within the prohibited group.... Most of that difficulty has been eliminated prospectively by ERISA, but unfortunately those changes in the law cannot help [the taxpayers].
The Tax Court found that H.T. Boggs relied on the Commissioner's ruling of 1962 and believed that the trust was qualified in 1976 when he rolled over his share into his IRA upon termination of the trust. The Tax Court, however, upheld the Commissioner's 1978 retroactive revocation of the qualification of the trust effective December 1, 1974. It ruled, therefore, that the trust was disqualified when its assets were distributed in 1976.
We sustain the Tax Court's decision that although the trust was qualified with respect to coverage, it was disqualified with respect to contributions in fiscal year 1974. The critical question remains whether the Commissioner abused his discretion when in 1978 he retroactively revoked his 1962 ruling effective December 1, 1974.
The Commissioner has authority to revoke retroactively a ruling. See I.R.C. Sec. 7805(b); Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 183-84, 77 S.Ct. 707, 709-10, 1 L.Ed.2d 746 (1957). The Commissioner has limited his discretion to take such action in Statement of Procedural Rules, 26 C.F.R. Sec. 601.201(1)(5) (1985), which provides:
Except in rare or unusual circumstances, the revocation or modification of a ruling will not be applied retroactively with respect to the taxpayer to whom the ruling was originally issued or to a taxpayer whose tax liability was directly involved in such ruling if (i) there has been no misstatement or omission of material facts, (ii) the facts subsequently developed are not materially different from the facts on which the ruling was based, (iii) there has been no change in the applicable law, (iv) the ruling was originally issued with respect to a prospective or proposed transaction, and (v) the taxpayer directly involved in the ruling acted in good faith in reliance upon the ruling and the retroactive revocation would be to his detriment.
Relying on the condition designated as (ii) in the rule, the Commissioner contends that retroactive revocation was permissible because the facts subsequently developed are materially different from the facts on which the ruling was based.
The only change of fact that the Commissioner identifies as being material is the departure in 1972 of two salaried employees who were participants in the trust and who were not members of the prohibited group. In 1962, when the trust was established, five employees were covered three of whom were members of the prohibited group. Upon the departure of the two employees in 1972, all of the participants in the trust were members of the prohibited group. The Commissioner argues: "[T]his change constituted a material change that warranted the Commissioner's retroactive revocation of his prior ruling." Brief at 29.
The Tax Court, accepting the Commissioner's reason for retroactively revoking the 1962 ruling, held:
It is clear that respondent has the statutory authority to revoke a ruling retroactively. Sec. 7805(b). We will not disturb respondent's decision to make the revocation retroactive unless he has abused his discretion.... Respondent has announced that a ruling will not, in the absence of rare and unusual circumstances, be revoked retroactively if certain...
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