D. J. Powers Co., Inc. v. C.I.R., 102681 FEDTAX, 8082-77

Docket Nº:8082-77.
Opinion Judge:NIMS, Judge:
Attorney:Nedom A. Haley and Joseph A. Odom, for the petitioner. Mark W. Nickerson, for the respondent.
Case Date:October 26, 1981
Court:United States Tax Court

42 T.C.M. (CCH) 1524

D. J. POWERS COMPANY, INC., Petitioner



No. 8082-77.

United States Tax Court

October 26, 1981

Nedom A. Haley and Joseph A. Odom, for the petitioner.

Mark W. Nickerson, for the respondent.


NIMS, Judge:

Respondent determined deficiencies in petitioner's income taxes for the taxable years ending June 30, 1973, 1974 and 1975 in the respective amounts of $18,565.43, $24,132.21 and $1,704.71. The issues for decision are: (1) whether petitioner's plan, as originally adopted in 1972, satisfied the eligibility requirements of section 401(a)(3)[1] (prior to amendment by P.L. 93-406) for purposes of comprising a qualified plan; and (2) whether a 1975 amendment to the plan can be given retroactive effect.

On April 18, 1980, respondent, with leave of the Court, amended his answer to raise another legal theory supporting the determination that petitioner's pension plan is unqualified; to wit, that the pension plan became unqualified due to a premature termination under section 1.401-1(b)(2), Income Tax Regs.


At the time the petition in this case was filed, petitioner's business office was in Savannah, Georgia.

Petitioner is in the import-export business; it handles ocean freight and customs duties for both individuals and companies. Petitioner operates on the cash basis method of accounting. Between July, 1969 and July, 1971, the business subsequently conducted by petitioner was operated as a sole proprietorship by William E. Carter (" Carter" ). On July 1, 1971, petitioner was incorporated in the State of Georgia.

In 1972, petitioner was in a good financial situation and had excess funds available. Carter had several meetings with Mickey Greenfield (" Greenfield" ), an agent of Confederation Life Insurance Co. (" Confederation" ), during which the tax advantages of a pension plan were explored.

On May 17, 1972, petitioner executed a joinder agreement whereby it adopted a prototype pension plan offered by Confederation. Under this joinder agreement (which incorporates by reference the terms and provisions of the prototype pension plan), petitioner established a noncontributory, defined benefit plan to be fully funded by insurance pension policies on the lives of the participants. The pension plan was to be effective as of May 17, 1972. The entry date was specified as the first day of June. Petitioner was designated as the employer, and the D.J. Powers Company, Inc. Pension Trust (" Trust" ), was designated as the Trust.

Under the agreement, the requirements of eligibility to become a participant under the plan were as follows:

a. Length of Employment:

Shall have been continuously employed by the Employer for at least 3 year(s) (not to exceed 3 years).

b. Age Requirements:

(i) Shall have attained at least age 25 (cannot exceed 30) years nearest birthday.

* * *

c. Job Classification (check as appropriate):

[x] All job classifications.

* * *

According to the prototype pension plan, the term " continuous employment' is defined as " an Employee's uninterrupted period of employment with the Employer." Section 1.12 of the plan further states: " Service performed as a proprietor or partner shall not be taken into consideration for any purpose under the Plan."

Carter, a Trustee and President of petitioner, read the joinder agreement that he signed. He also had read the prototype pension plan and found it understandable. Section 2.03 of the prototype pension plan provided, in part:


Upon its execution of the Joinder Agreement the Employer shall cause the Trust to be submitted to the Internal Revenue Service for a determination of its status as a qualified employee pension plan and trust * * *. If the Internal Revenue Service shall determine that the Trust as adopted or amended does not qualify for the first Trust Year, the Employer shall promptly so notify the Trustee in writing. Upon direction of the Employer the Trustee shall terminate the Trust * * *.

In the event that the Internal Revenue Service shall determine that the Trust does qualify for the first Trust Year, this Section shall be inoperative and of no effect * * *.

Greenfield did not advise petitioner's officers to have the plan reviewed by petitioner's attorney or advisers. Greenfield informed Carter that no additional action was needed to qualify the plan and Carter relied on such advice.

When the plan was established on May 17, 1972, the employees of petitioner were as follows:

Employee Position
William E. Carter President
William Allen Jennings Vice-President
William Conaway Secretary
Ann L. Carter Office-Manager
Donna Parks McGraw Clerk
The first four of the above-named individuals were the officers and/or directors of petitioner. Carter held 100 percent of the stock of petitioner. On June 20, 1972, petitioner issued a check in the amount of $10,217.72 to Carter as Trustee of the Trust, to cover the 1972 premium. Carter endorsed the check over to Greenfield, the general agent of Confederation. On June 20, 1973, petitioner issued a check to Confederation in the amount of $35,784.69 to cover the 1973 premium. Sometime in early July, 1973, Carter discovered that Greenfield had never forwarded petitioner's joinder agreement to Confederation and had misappropriated the 1972 premium payment. Following a stormy meeting with Carter and Greenfield, Confederation executed the joinder agreement on July 10, 1973, and issued three insurance pension policies in the names of three of petitioner's employees. Some time in late 1973 or early 1974, Michael Bart, petitioner's accountant, traveled to Atlanta to confer with representatives of the Internal Revenue Service in order to ascertain whether a determination letter for the plan had been issued. At a meeting with the Service's representatives, Bart was informed that no determination letter had been issued. On June 14, 1974, petitioner wrote Confederation authorizing the release of any information respecting petitioner's pension program to Personal Insurance Consultants, Inc. (" Consultants" ), a firm that had been brought in to assist petitioner in this matter. By letter dated June 18, 1974, Consultants broached with Confederation the problem of what to do about the misappropriation by Confederation's agent. From July through September, 1974, the above parties argued over the effect to be accorded the misappropriation by Greenfield. By letter dated July 3, 1974, petitioner demanded, inter alia: (1) that credit be given for the 1972 premium payment; (2) that petitioner have the option of renegotiating the amount and method of coverage; and (3) that the plan be dated and have the accrued benefits applicable as of the date of the initial premium payment. Confederation finally agreed to accept the 1972 payment to Greenfield as a payment of premiums and to provide a number of options as to the size of the coverage based on various amounts of premium payments. After some consideration, petitioner decided to continue its present coverage under the plan. This was to be accomplished by the issuance of three new policies effective June 20, 1972, in the original amounts of coverage in lieu of the policies issued in September, 1973. On August 14, 1974, Albert Green (" Green" ) of Consultants confirmed by letter petitioner's agreement with Confederation. Green also noted that Donna McGraw was to be included in the pension plan, effective June, 1974, at a coverage of $9,000. Green requested " any materials that will be needed by the C.P.A. for D.J. Powers Company, Inc. to obtain a favorable determination for tax deductions." In the middle of August, 1974, Confederation received two checks on behalf of the Trust, one in the amount of $29,050.26 and the other in the amount of $11,617.84. The first check related to the premium due in June, 1974, as computed on the employer's statement of premiums due. The second check in the amount of $11,617.84 reflected the settlement reached by the parties with respect to the misappropriation of the first premium. Both of these checks were dated June 28, 1974. On September 9, 1974, Confederation acknowledged, by letter, petitioner's decision as to the reissuance of the three old policies and the issuance of a new policy to McGraw. However, Confederation indicated: Mr. Bennion has already discussed with you the fact that a Joinder Agreement backdated two years is unorthodox. I must confirm that Confederation Life does not hold itself or any of its employees to be expert in this area and therefore we cannot be certain that the action will be viewed favorably by the I.R.S. On September 23, 1974, Confederation issued insurance pension policies on Carter, Jennings, Conaway and McGraw. Issuance of any policies was inconsistent with the eligibility requirements set forth in the original joinder agreement, since as of the issue date no individual could have met the three year length-of-employment requirement. On April 10, 1975, petitioner mailed an Application for Determination of qualification of the plan to the Director of Internal Revenue, Atlanta, Georgia. The application stated the eligibility requirements as " 3 years of service; 25 years of age minimum; no job class." Although the application listed total employees of eight as of June 1, 1974, there were actually 11 employees. The application did not provide coverage data for earlier years. After the application was received by respondent on April 25, 1975, the...

To continue reading