D. J. Powers Co., Inc. v. C.I.R., 102681 FEDTAX, 8082-77
|Opinion Judge:||NIMS, Judge:|
|Party Name:||D. J. POWERS COMPANY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|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|
MEMORANDUM FINDINGS OF FACT AND OPINION
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) (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.
FINDINGS OF FACT
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:
2.03 FAILURE OF INITIAL QUALIFICATION.
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:
|William E. Carter||President|
|William Allen Jennings||Vice-President|
|Ann L. Carter||Office-Manager|
|Donna Parks McGraw||Clerk|
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