Fazi v. Comm'r of Internal Revenue

Decision Date19 December 1995
Docket NumberNo. 13874–93.,13874–93.
Citation105 T.C. 436,105 T.C. No. 29
PartiesJohn U. FAZI and Sylvia Fazi, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Paul A. Kasicky, Pittsburgh, PA, for petitioners.

Julia L. Wahl, Pittsburgh, PA, and Janine H. Bosley, Alexandria, VA, for respondent.

P, a dentist, incorporated C and established three pension plans. P was an employee of C. Plan 2 was frozen in 1982. Plan 2 was merged into plan 1 in 1986. P dissolved C in 1986 and distributed all of the assets in the plan 1 trust to employees, including P, in 1987. We held in Fazi v. Commissioner, 102 T.C. 695 (1994) (Fazi I), that plan 1 was not qualified and its related trust was not exempt during 1985, 1986, and 1987. We also held that, except for amounts conceded by R, P was taxable in 1987 on the assets distributed to P from plan 1. In Fazi I, R conceded on brief that the taxable distribution to P from plan 1 for 1987 had to be reduced by contributions made on P's behalf for 1985 and 1986, including P's share of the amount merged from plan 2 to plan 1 during 1986. This concession was accepted without review or analysis of the underlying substantive issues related to the concession.

R determined that P is taxable in 1986 on the amounts contributed to plans 1 and 3 on his behalf for that year, including the amount merged from plan 2 into plan 1. R's notice of deficiency was mailed more than 3 years, but less than 6 years, after the filing of P's 1986 tax return. R now admits that, but for judicial estoppel, P should not be taxed in 1986 on his share of the merged amount, but rather when it was distributed to him in 1987. P argues that judicial estoppel does not apply and that R is barred by the statute of limitations from asserting a deficiency for 1986.

Held, P's share of the merged amount is not taxable to P in the year of merger; Fazi I clarified. Held, further, judicial estoppel does not prevent P from denying liability. Held, further, the 1986 tax year is not open for redetermination.

OPINION

VASQUEZ, Judge:

Respondent determined a deficiency in petitioners' 1986 Federal income tax in the amount of $160,904. The deficiency is attributable to the merger of plan 2, a qualified pension plan, into plan 1, an unqualified pension plan, and actual corporate contributions made to unqualified pension plans 1 and 3 on petitioners' behalf.1 The 1986 tax year is only open for redetermination if section 6501(e)(1),2 the 6–year statute of limitations, applies. Section 6501(e)(1) can only apply if the amount merged from the qualified pension plan to the unqualified pension plan (the merged amount) is properly includable in petitioners' income in the year of the merger, 1986. Consequently, we must first decide whether the merged amount is properly includable in petitioners' 1986 income as a contribution or by application of the doctrine of judicial estoppel.3 If the year is open for redetermination, we must also decide whether contributions made by the corporation to unqualified pension plans in 1986 on behalf of petitioners are taxable to petitioners when contributed and whether an increase in the vested account balance of petitioners in an unqualified pension plan is taxable to petitioners in 1986, the year of the increase.

Background

This case was submitted fully stipulated. All of the facts are stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Petitioners were married to each other at all relevant times and resided in Weirton, West Virginia, at the time the petition was filed. Petitioners, John U. Fazi (Mr. Fazi) and Sylvia Fazi (Mrs. Fazi), were employees of Dr. J.U. Fazi, Dentist, Inc. (corporation), a West Virginia corporation.

The corporation established and operated three employee pension benefit plans: (1) The Dr. J.U. Fazi, Dentist, Inc. Employees Pension Plan, a money purchase pension plan (plan 1); (2) the Dr. J.U. Fazi, Dentist, Inc. Employee Profit Sharing Plan (plan 2); and (3) the Dr. J.U. Fazi, Dentist, Inc. Retirement Plan, a defined benefit plan (plan 3).

Plan 1, when originally adopted by the corporation in 1972, was qualified 4 under section 401, and the accompanying trust was a qualified, tax-exempt trust under section 501. Plan 1 and its trust maintained their qualified status until the plan year ending August 31, 1985. We held in Fazi v. Commissioner, 102 T.C. 695 (1994) (Fazi I), that plan 1 was not qualified, and its employee trust was not exempt, for the plan years ending in 1985, 1986, and 1987 due to the corporation's failure to adopt formally a plan complying with changes made in the applicable law by 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.

The corporation contributed $29,152 to the plan 1 account of Mr. Fazi and $3,950 to the plan 1 account of Mrs. Fazi for the year ending August 31, 1986. Mr. Fazi was 100 percent vested in his plan 1 account during the 1985 and 1986 plan years. Mrs. Fazi was 60 percent vested in her plan 1 account in 1985 and 80 percent vested in 1986. Consequently, Mrs. Fazi's vested interest in the 1986 contribution was $3,160. Mrs. Fazi's increased vesting from 1985 to 1986 resulted in her becoming vested in an additional $750 from contributions made to her account in plan 1 for years prior to the plan year ending August 31, 1986.

Plan 2, when originally adopted by the corporation in 1972, was qualified under section 401, and the accompanying trust was a qualified, tax-exempt trust under section 501. Plan 2 was frozen as of August 31, 1982, and was subsequently merged into plan 1 on or about May 31, 1986. (This merger will hereinafter be referred to as the plan merger.) The plan 2 assets were transferred to the plan 1 trust. Mr. Fazi's account under plan 1 increased by $277,138 as a result of the plan merger (the amount of his account in plan 2). Mr. Fazi was 100 percent vested in his plan 2 account at the time of the plan merger.

Plan 3, when originally adopted by the corporation in 1979, was qualified under section 401, and the accompanying trust was a qualified, tax-exempt trust under section 501. Plan 3 and its trust were disqualified by respondent, for the same reasons plan 1 was disqualified, for the plan years ending August 31, 1985, August 31, 1986, and August 31, 1987.

The corporation contributed $10,300 to the plan 3 account of Mr. Fazi for the year ending August 31, 1986. Mr. Fazi was 100 percent vested in his account during the 1985 and 1986 plan years.

Petitioners received no distributions from plans 1, 2, or 3 in 1986. In 1987, petitioners' accounts in plan 1 were distributed to them. This distribution included the $277,138 amount merged into plan 1 from plan 2, the merged amount.

All of the plans were operated in compliance with the amendments required by TEFRA, DEFRA, and REA for all relevant plan years.

Petitioners filed their 1986 Federal income tax return on April 15, 1987. The amount of gross income stated in petitioners' 1986 Federal income tax return and their share of income from pass-through entities totals $395,108. Petitioners' 1986 Federal income return made no references to the plan merger or the merged amounts. Respondent mailed petitioners a notice of deficiency on March 31, 1993.

Fazi I

A review of the arguments and our holding of Fazi I is necessary to understand the issues in this case. Fazi I dealt with the taxability of the distributions from disqualified plan 1 in 1987. Mr. Fazi dissolved the corporation in 1986 and distributed all of the assets in the plan 1 trust to the employees during 1987. Mr. Fazi timely attempted to roll over his distribution to an individual retirement account. Although plan 1 was in operational compliance at all times, we held that petitioners are taxable on the distributions received to the extent they exceed contributions made for or by them for 1985 and 1986, including the amount merged from plan 2 to plan 1 during 1986.” Fazi I, 102 T.C. at 714. In so holding, we overruled our decision in Baetens v. Commissioner, 82 T.C. 152 (1984), revd. 777 F.2d 1160 (6th Cir.1985), which would have allowed distributions attributable to amounts contributed while plan 1 was qualified to be rolled over, tax free, into an individual retirement account.

The rationale for exempting amounts contributed to the unqualified plan in 1985 and 1986 from taxation when distributed in 1987 was that those amounts were taxable to petitioners when the contributions were made: respondent has conceded that the taxable distribution for 1987 should not include those contributions made during 1985 or 1986 because they would be taxable to petitioners in the years contributions were made to an unqualified trust and not at the time of distribution.” Faze I, supra at 713.

Respondent conceded in Fazi I that the merged amount would be taxable in 1986, rather than 1987. Petitioners, in Fazi I, argued for taxing the merged amounts prior to 1987, rather than in 1987, albeit on different theories. 5 We accepted respondent's concession in Fazi I as to the timing of the taxability of the merged amount without analysis of the underlying substantive issues.

Discussion

Whereas Fazi I dealt with the taxability to petitioners of distributions made in 1987 from a nonexempt trust, this case deals with the taxability to petitioners of contributions to a nonexempt trust by the corporation in 1986 and whether the merged amount should be taxed in the same manner as a contribution. We must first decide if petitioners should be taxed on the merged amount in 1986. Only if the merged amount is properly includable in petitioners' gross income in 1986 is the 6–year limitations period applicable and the year open to adjustment. If the merged amount is not properly includable...

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