Halliburton Co. v. Comm'r of Internal Revenue

• Decision Date: 24 March 1993
• Docket Number: Nos. 26290–90R,2397–91R.,s. 26290–90R
• Citation: 16 Employee Benefits Cas. 1929,100 T.C. 216,100 T.C. No. 15
• Parties: HALLIBURTON COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.HALLIBURTON COMPANY, by Ken NASH, Employee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

100 T.C. 216

100 T.C. No. 15

16 Employee Benefits Cas. 1929

HALLIBURTON COMPANY, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.HALLIBURTON COMPANY, by Ken NASH, Employee, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 26290–90R

2397–91R.

United States Tax Court

March 24, 1993.

Donald F. Wood, Douglas E. Hamel, and Miriam M. Burke, for petitioner in docket No. 26290–90R.^*

Ken Nash, pro se in docket No. 2397–91R.

James W. Lessis, for respondent.^**

OPINION

WELLS, Judge:

The instant case is before us on a petition for declaratory judgment under section 7476. The issue presented for decision is whether a profit sharing plan sponsored by Halliburton Co. (Halliburton) experienced a partial termination under section 411(d)(3) for the plan year ending on December 31, 1986.

Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Background

The instant case was submitted for declaratory judgment on a stipulated administrative record pursuant to Rule 217.

Halliburton is a corporation with its principal place of business in Dallas, Texas. Ken Nash (Mr. Nash) resided in Houston, Texas, at the time he filed his petition. The plans whose qualified status is in issue are the Halliburton Profit Sharing and Savings Plan (the Halliburton Plan or Plan) and the IMCO Profit Sharing and Savings Plan (the IMCO Plan).

The Halliburton Plan was established in 1944 and is a defined contribution profit sharing plan. The Plan received favorable determination letters with respect to all amendments through January 16, 1986. From 1944 through 1985, Halliburton contributed approximately 10 percent of annual profits to the Plan, totaling $575 million, and the Plan has paid out over $600 million in benefits. No contribution was made in 1986 because Halliburton had no profits in such year.

Eligible plan participants employed by Halliburton on the last day of the year, or who terminated participation during the year due to retirement, death, or disability, were entitled to a share of Halliburton's annual contribution to the Plan. Such contribution was allocated to each participant's account based on the ratio of such participant's basic earnings to the total basic earnings for all participants. Employer contributions were subject to a 5–to–15–year graded vesting schedule, as permitted by section 411(a) for 1986; ¹ account balances vested upon death, normal retirement at age 65, early retirement, disability, or attaining age 50.

On April 27, 1987, Halliburton submitted an application to respondent's Dallas, Texas, Key District for determination that the Plan continued to qualify under section 401(a). On the same date, Halliburton submitted an application to such office for an initial determination for the IMCO Plan, a spinoff ² of the Halliburton Plan. On September 7, 1988, respondent issued a proposed adverse determination letter which concluded that the Halliburton Plan had experienced a partial termination in 1986 due to the large workforce decline which caused a drop in participation in the Plan during such year, and that, because affected employees had not been vested in their accrued benefits as required by section 411(d)(3), the Plan no longer qualified under section 401(a). Respondent also issued a proposed adverse initial determination letter with respect to the IMCO Plan, holding that it failed to qualify because the Halliburton Plan, of which the IMCO Plan was a spinoff, did not qualify.

After additional correspondence and administrative conferences, Halliburton filed the instant declaratory judgment action disputing and seeking review of respondent's proposed determination. Mr. Nash, a former employee of Halliburton who had been laid off in 1986, filed a petition in support of respondent's proposed determination. Respondent filed a motion to dismiss both petitions for lack of jurisdiction, claiming that each petitioner had failed to exhaust administrative remedies. We denied such motion. Halliburton Co. v. Commissioner, 98 T.C. 88 (1992). Subsequently, respondent filed a second motion to dismiss, claiming that Halliburton had failed to notify affected parties of the request for determination, which motion we also denied. Halliburton Co. v. Commissioner, T.C.Memo. 1992–534. Additionally, in Halliburton Co. v. Commissioner, T.C.Memo. 1992–533, we denied respondent's motion to compel discovery to supplement the administrative record.

Accordingly, we now reach the merits of the partial termination issue. If we decide that a partial termination of the Halliburton Plan occurred in 1986, the Plan may be disqualified because participants affected by such partial termination have not been vested in their accrued benefits. In respondent's response to the amicus brief filed by the Profit Sharing Committee of the Halliburton and IMCO Plans, respondent stated that, if such affected participants were immediately vested in accrued benefits, respondent would issue a favorable determination letter retroactive to the date of the partial termination. Furthermore, if we decide that a partial termination occurred, both the Profit Sharing Committee and respondent ask that we identify the affected participants entitled to immediate vesting of accrued benefits. A decision as to the status of the Halliburton Plan will resolve the IMCO Plan's qualified status.

Halliburton and its controlled group constitute one of the world's largest and most diversified oil field services and engineering and construction organizations. Halliburton's business is divided into three principal categories: Oil field services and products; industrial engineering and construction services; and marine engineering and construction services. During 1986, the oil field services and products business was a major provider of products and services, both onshore and offshore, to the exploration and production segments of the petroleum industry. The engineering and construction categories of Halliburton's business provided services to the petroleum industry, as well as to other types of customers. The marine engineering group performed services predominantly for the petroleum industry, including the design, fabrication, and installation of offshore structures. Approximately three-quarters of the consolidated net revenues of the Halliburton controlled group is derived from services performed for the petroleum industry.

During 1986, however, a sharp decline in the oil business occurred, which severely disrupted Halliburton's business. During December 1985, the price of oil began to collapse due to overproduction in the Middle East and slack demand in oil-consuming countries. During the period beginning December 1985 to August of 1986, the price of oil fell from $27 per barrel to $10 per barrel. The U.S. oil production rate also dropped to its lowest level since 1977. As a consequence of tumbling prices, oil exploration and drilling fell drastically. Reinvestment in exploration and production fell to their lowest levels since World War II. The steepest decline occurred during the first 7 months of 1986. The rotary rig count fell from 1,950 during December 1985 to 686 during July 1986, which was the fewest in the 46 years such data had been compiled. Halliburton's profit is closely tied to the domestic rotary rig count. As drilling operations shut down, demand for oil field services virtually disappeared. A report by the National Petroleum Council, a Federal advisory committee to the Secretary of Energy, stated:

While the recent oil price decline has affected all segments of the industry, it has been particularly onerous for the oil field service industry. Eighty percent of the recent increase in unemployment in the oil and gas extraction industry has occurred in this area. [“Factors Affecting U.S. Oil & Gas Outlook”, Report of the National Petroleum Council 23 (February 1987).]

The report went on to state that employment in the oil service industry dropped from 315,000 during December 1985 to 206,000 during December 1986. Id. at 135.

Halliburton was faced with two options: Cut costs or go out of business. Halliburton responded to the crisis with a broad array of cost-cutting measures and did not merely attempt to reduce its staffing levels. The capital budget was slashed, and the dividend was cut by 44 percent. In December 1985, before taking other measures to reduce personnel, Halliburton announced that, during the period beginning January through March 1986, the age at which an employee was eligible to take early retirement would be lowered from 55 to 50. The letter announcing such program stated that:

This temporary change in the retirement policy is being made due to our existing work load and business forecasts for the immediate future. * * * It is for the purpose of encouraging early retirements at this time in our attempts to reduce our workforce in line with our business. While we had hoped that normal attrition would accomplish our objectives, additional reductions may be necessary. For those of you who have been contemplating early retirement, we urge your serious consideration during this period which might possibly save the job of another employee.

Two additional 3–month “window periods” for early retirement were subsequently announced for April through June and October through December 1986. Early retirees could take advantage of certain benefit distribution options not available to vested terminees and could participate in a retiree health plan not available to vested terminees. Employees who took early retirement did so voluntarily and were not forced out of their jobs. Halliburton also implemented a wage freeze during March 1986 and a furlough program during June 1986 under which many employees, including Halliburton's executives, were asked to take every eighth week off without pay. The furlough program permitted Halliburton to...