Garland v. Comm'r of Internal Revenue , Docket No. 9956-78R.

• Decision Date: 04 October 1979
• Docket Number: Docket No. 9956-78R.
• Parties: LLOYD M. GARLAND, M. D., F. A. C. S., P. A., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

1 Employee Benefits Cas. 1614

73 T.C. 5

LLOYD M. GARLAND, M. D., F. A. C. S., P. A., PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 9956-78R.

United States Tax Court

Filed October 4, 1979.

Petitioner, a professional medical corporation, formed a partnership with a doctor. Each partner owned a 50-percent interest in the partnership. The corporation adopted a pension plan which did not cover the employees of the partnership. Petitioner was not required by either sec. 414(b), I.R.C. 1954, or sec. 414(c), I.R.C. 1954, to cover the partnership employees under the plan. Nevertheless, respondent determined that the plan did not qualify under sec. 401(a), I.R.C. 1954, because it did not comply with the antidiscrimination provisions of secs. 401(a)(4) and 410(b)(1), I.R.C. 1954. Held, secs. 414(b) and 414(c) are the exclusive means for determining whether the employees of affiliated entities should be aggregated for purposes of applying the antidiscrimination provisions. Held, further, since petitioner did not control the partnership employees, they were properly excluded from participation in the plan. Thomas Kiddie, M. D., Inc. v. Commissioner, 69 T.C. 1055 (1978), followed. Clarence P. Brazill, Jr., and Gary A. Ward, for the petitioner.

Deborah A. Butler, for the respondent.

OPINION

DAWSON, Judge:

This is an action for declaratory judgment pursuant to section 7476(a). ¹ Respondent has determined that petitioner's pension plan does not qualify under section 401 because it does not comply with the antidiscrimination provisions of section 401(a)(4) and section 410(b)(1). Having exhausted all administrative remedies as required by section 7476(b)(3), petitioner asks this Court to review respondent's adverse determination.

This case was submitted with a fully stipulated administrative record pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The administrative record is incorporated herein by this reference. The pertinent facts are summarized below.

The petitioner, Lloyd M. Garland, M. D., F. A. C. S., P. A. (hereinafter the association), is a professional association organized under the laws of Texas and incorporated on February 1, 1973. The sole employee and shareholder of the association throughout its existence has been Dr. Lloyd M. Garland. Prior to the formation of the professional association, Dr. Garland had practiced medicine in partnership with Dr. Jack Dunn, Jr., in Lubbock, Tex. On February 1, 1973, their partnership was dissolved and the association and Dr. Dunn entered into a partnership known as the Neurosurgical Unit (hereinafter the partnership), in which each partner owned a 50-percent interest in profits.

The association adopted a pension plan which qualified under section 401 on February 1, 1973. Thereafter, the association made contributions to a pension fund on behalf of Dr. Garland and the employees of the partnership. ² Subsequent to the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), however, the association made a number of amendments to the plan. The amended plan did not cover the partnership employees, and the association requested a ruling from the National Office, Technical Services Branch, Washington, D. C., in May 1976 to determine if the exclusion of those employees would adversely affect the plan's qualified status. On July 8, 1976, the National Office issued a ruling which stated that the association and partnership were not under common control as defined in section 414(c) and the regulations thereunder. Consequently, the partnership employees were not to be considered the employees of the association in determining whether the association's plan met the coverage requirements of sections 401(a)(4) and 410(b)(1). However, on September 30, 1976, the National Office limited the scope of the ruling by stating that it was directed only at the specific issue of whether the plan ran afoul of sections 401(a)(4) and 410(b)(1) by virtue of section 414(c), and that it did not consider the effect of Revenue Ruling 68-370, 1968-2 C.B. 174.³

On March 15, 1977, the association submitted an application for determination of the plan's qualified status under section 401. The District Director of the Dallas Key District subsequently issued a proposed adverse determination for the 1976 taxable year because the plan did not cover the partnership's employees. The Regional Office sustained this proposed determination, the National Office declined to reconsider the matter, and on August 15, 1978, the District Director issued a final adverse determination. The association has petitioned this Court for a review of that determination.

The basis for the adverse determination is that the plan does not comply with the coverage requirements of section 401(a)(4) and section 410(b)(1). Section 401(a)(4) provides that a plan will fail to qualify if the contributions or benefits provided thereunder discriminate in favor of employees who are officers, shareholders, or highly compensated. Section 410(b)(1) sets forth certain minimum standards relating to the eligibility of employees for coverage under the plan, as follows:

SEC. 410. MINIMUM PARTICIPATION STANDARDS.

(b) ELIGIBILITY.—

(1) IN GENERAL.—A trust shall not constitute a qualified trust under section 401(a) unless the trust, or two or more trusts, or the trust or trusts and annuity plan or plans are designated by the employer as constituting parts of a plan intended to qualify under section 401(a) which benefits either—

(A) 70 percent or more of all employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all the employees are eligible to benefit under the plan, excluding in each case employees who have not satisfied the minimum age and service requirements, if any, prescribed by the plan as a condition of participation, or

(B) such employees as qualify under a classification set up by the to be discriminatory in favor of employees who are officers, shareholders, or highly compensated. Although the partnership did have employees, the record does not reveal their number. It is clear, however, that during the year in issue, Dr. Garland was the only individual eligible to participate under the plan. Since the burden of proof is on petitioner, we must assume that if the partnership employees are to be viewed as employees of the association, then the plan does not satisfy either section 401(a)(4) or section 410(b)(1) because it discriminates in favor of a shareholder. Thus, the only issue we must decide is whether the partnership employees must be considered employees of the association for the purposes of sections 401(a)(4) and 410(b)(1).

The parties agree that section 414(c)⁴ does not apply in this case. Section 414(c) was enacted as part of ERISA and provides that the employees of two or more business entities which are under common control shall be treated as employed by a single employer for purposes of section 401. Although Congress did not provide a statutory definition of “common control,” it did require that the regulations under section 414(c) be based on principles similar to those which are applicable in the case of section 414(b). Section 414(b)⁵ states that all employees of corporations belonging to a controlled group (as defined in section 1563(a)) must be treated as employed by a single employer for section 401 purposes. Thus, the temporary regulations which define common control under section 414(c) are modeled after the controlled group provisions in section 1563(a). See sec. 11.414(c)-2, Income Tax Regs., adopted as temporary regulations under sec. 414(c) by T.D. 7388, 1975-2 C.B. 180, and not yet made permanent. ⁶

Section 11.414(c)-2, Income Tax Regs., lists three general situations when affiliated entities will, under certain circumstances, be deemed to be under common control: (1) A parent-subsidiary group, (2) a brother-sister group, (3) and a combined group.⁷ Petitioner clearly does not belong to any of these groups.⁸ Therefore, the employees of the partnership and the association are not required by section 414(c) to be aggregated for purposes of sections 401 and 410(b)(1).

Petitioner contends that section 414(c) was intended to be the exclusive test for determining whether the employees of a related business entity should be considered in applying the antidiscrimination provisions. In the alternative, petitioner contends that even if section 414(c) was not intended to supplant prior law on this point, the association nevertheless does not control the partnership employees under the principles set forth in Thomas Kiddie, M. D., Inc. v. Commissioner, 69 T.C. 1055, 1060-1061 (1978).

Respondent, on the other hand, maintains that section 414(c) was not intended to be the exclusive test for determining whether the employees of affiliated entities should be aggregated for section 401 purposes. He then asks us to overrule our opinion in Thomas Kiddie, M. D., Inc. v. Commissioner, supra, and hold that the employment relationship between the partnership and its employees must be attributed to each partner notwithstanding the possibility that his interest in partnership profits or capital may not exceed 50 percent. We agree with petitioner.

On brief, respondent repeatedly makes the assertion that section 414(c) was not intended to be the exclusive test for employee attribution where affiliated entities are involved. Yet he is unable to advance a single cogent argument in support of that claim. The mere fact that the statute does not explicitly state that it is the exclusive test does not necessarily imply that the reverse is true. We think sections 414(b) and 414(c) were intended to provide a definitive answer to the question of whether the employees of related entities should be aggregated for purposes of evaluating plan discrimination. The accompanying committee report states the following (H. Rept....