Bolinger v. Comm'r of Internal Revenue
| Citation | 77 T.C. 1353,3 Employee Benefits Cas. 1364 |
| Decision Date | 23 December 1981 |
| Docket Number | Docket Nos. 9508-77,9509-77. |
| Parties | MAURICE G. BOLINGER and ZENITH A. BOLINGER, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTMAURICE G. BOLINGER, JR., and RITA BOLINGER, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
During 1965, G entered into a written pension plan and pension trust agreement. During the years in issue (1971 through 1973), the trust agreement did not contain a provision prohibiting forfeitures from being applied to increase the benefits that any employee would otherwise receive under the plan.
In November 1974, G applied for the first time for a determination of the qualified status of the plan. An initial favorable determination was revoked by the respondent in May of 1975.
In December 1975, the plan was amended in the hope of curing any defects. The amendment purported to be retroactive to the date of the original adoption of the plan. Held, G's pension plan is not qualified because it fails to provide that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan. Sec. 401(a)(8), I.R.C. 1954. Held, further, no retroactive effect may be given to a plan amendment where the provisions of sec. 401(b) are not met and where over 9 years were allowed to elapse following the original adoption of the plan before a determination letter was sought. Jack R. Mendenhall Corp. v. Commissioner, 68 T.C. 676 (1977), followed. Aero Rental v. Commissioner, 64 T.C. 331 (1975), distinguished. John D. Brown, for the petitioners.
Warren R. Calvert, for the respondent.
Respondent determined deficiencies in petitioners'1 Federal income tax returns as follows:
The sole issue presented for our decision is whether the Pension Plan and Trust Agreement adopted by Gladstone Laboratories, Inc., constituted a qualified plan under section 4012 for the taxable years 1971, 1972, and 1973. If the plan was not so qualified, deductions claimed by Gladstone for contributions made to the plan during those years were improper. Accordingly, there would be an increase to the corporation's undistributed taxable income, which, in turn, increases the petitioners' taxable income for each of those years (Gladstone being a subchapter S corporation).
This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and the attached exhibits are incorporated herein by this reference. A summary of the relevant facts is set forth below.
Maurice G. and Zenith A. Bolinger filed joint Federal income tax returns for the taxable years 1971, 1972, and 1973. At the time of the filing of the petition in this case, the petitioners were residents of Cincinnati, Ohio.
Maurice G., Jr., and Rita Bolinger filed joint Federal income tax returns for the taxable years 1971, 1972, and 1973. At the time of the filing of the petition in this case, the petitioners were residents of Cincinnati, Ohio.
Gladstone Laboratories, Inc. (hereinafter Gladstone), is a corporation organized under the laws of Ohio and taxed under the provisions of subchapter S of the Internal Revenue Code. During the taxable years here in issue, petitioners Maurice G. Bolinger and Maurice G. Bolinger, Jr., each owned 50 percent of the stock of Gladstone.
On August 26, 1965, Gladstone entered into a written Pension Plan and Pension Trust Agreement. This agreement was amended on December 31, 1971. At no time during the taxable years here in issue (1971 through 1973) did the trust agreement provide that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan, nor did it contain a provision requiring that an employee's average annual compensation must be computed as his annual compensation averaged over a period of at least 5 consecutive years.
In actual operation from the date of the plan's inception through the taxable year 1973, all forfeitures were used to reduce contributions to the plan by the employer, and no amounts forfeited were used or applied to increase the benefits any employee would otherwise receive under the plan. Furthermore, no employee covered by the plan retired under the plan during this period of time.
In November of 1974, Gladstone submitted to the Service an application for a determination of the qualified status of its plan, no application having been submitted prior to that time.3 On January 28, 1975, a favorable determination was made by the respondent, applicable only to the years 1974 and 1975. On May 16, 1975, the respondent revoked his prior favorable determination on the ground that the data submitted in the application was outdated and did not properly reflect the current status of the plan.
In December of 1975, a second amendment to the plan was executed, apparently in the hope that it would cure the defects in the existing plan. This amendment states that it is to be effective as of August 26, 1965, the date of the original adoption of the plan.
On its Federal income tax returns, Gladstone claimed deductions for contributions made to the plan of $2,207.70, $4,149.32, and $3,612.32 for the tax years 1971, 1972, and 1973, respectively. On June 9, 1977, statutory notices of deficiency were sent to the respective petitioners based on the respondent's disallowance of these deductions by Gladstone, which, in turn, resulted in an understatement of income by the petitioners on their individual income tax returns due to the operation of the provisions of subchapter S. 4
The parties agree that the sole question presented is whether Gladstone is entitled to take the deductions claimed in 1971, 1972, and 1973 for contributions made to its employee pension plan during those years. It is further agreed that the deductions in issue turn on whether the plan was qualified during those years.
Section 404(a)(1)(A) permits an employer who makes contributions to a qualified pension trust to deduct these contributions on its Federal income tax return. Respondent takes the position that the Gladstone pension plan fails to qualify because the requirements of section 401(a) have not all been met. Petitioners contend that those provisions are effectively satisfied; or, alternatively, that any defects were cured retroactively by the 1975 amendment. We agree with the respondent.
Section 401(a)(8) provides that “A trust forming part of a pension plan shall not constitute a qualified trust under this section unless the plan provides that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan.” This requirement is amplified by the regulations which state in pertinent part:
the plan must expressly provide that forfeitures arising from severance of employment, death, or for any other reason, must not be applied to increase the benefits any employee would otherwise receive under the plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions thereunder. The amounts so forfeited must be used as soon as possible to reduce the employer's contributions under the plan.* * * [[[Sec. 1.401-7(a), Income Tax Regs. Emphasis added.]
The parties have stipulated that during the years here in issue, the pension agreement failed to specifically provide that forfeitures must not be applied to increase the benefit any employee would otherwise receive under the plan. While conceding that the plan did not make specific provision as to the use of forfeitures, petitioners urge that a thorough reading of the plan clearly shows that forfeitures could not possibly be applied to increase the benefits any employees would otherwise receive. Their argument is predicated upon Rev. Rul. 67-68, 1967-1 C.B. 87 which, in discussing section 1.401-7(a), Income Tax Regs., concludes:
It is not necessary for a pension plan, intended to qualify under section 401(a) of the Code, to contain a specific statement regarding the application of forfeitures, provided that the plan makes it otherwise clear that forfeitures must not be applied to increase the benefits any employee would otherwise receive thereunder.
Despite the respondent's broad interpretation of the regulations,5 the agreement as a whole fails to make it clear that forfeitures cannot be applied to increase the benefits any employee would otherwise receive.
Under the Gladstone pension agreement, retirement benefits are to be provided to each participant based on a fixed percentage of his basic compensation. In order to provide these benefits, a life insurance contract is to be purchased for each participant which provides a death benefit prior to the normal retirement date equal to 100 times the monthly benefits to which the employee is entitled. The entire cost of the plan is to be borne by the employer (Gladstone). To take into account future increases in compensation, the plan provides for an annual review and recomputation of benefits. Subject to a de minimis exception, additional life insurance contracts are required to be purchased to take into account such changes in benefits.
Finally, the agreement creates an auxiliary fund for the purpose of purchasing, at retirement, an additional insurance contract in order to pay any increased income benefits to which the participant is entitled. The fund is to be accumulated prior to retirement, from contributions made by the employer, in amounts calculated as necessary by the trustees from information as to rates of interest and mortality supplied by the employer. Unlike the contributions discussed above which call for...
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