Hamlin Development Company v. Commissioner, Docket No. 8324-90R.
| Decision Date | 15 March 1993 |
| Docket Number | Docket No. 8324-90R. |
| Parties | Hamlin Development Company v. Commissioner. |
| Court | U.S. Tax Court |
Richard E. Rosin, for the petitioner. Jacqueline M. Hotz, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined that the pension plan (Plan) operated by Hamlin Development Co. (petitioner) does not meet the requirements of section 401(a)1 for its plan years 1986, 1987, and 1988. Respondent also determined that the trust (Trust) that constituted a part of the Plan is consequently not exempt from taxation under section 501(a) for those same years. Following these determinations, respondent revoked a favorable determination letter previously issued to petitioner with respect to the Plan.
The case was submitted on the basis of a stipulated administrative record that the parties agree contains all the relevant facts. Rule 217(a). After our review of the foregoing, we hold for respondent.
Petitioner is attempting to invoke our jurisdiction under section 7476 and Rule 210(c), and obtain a declaratory judgment as to the qualifications of the Plan and the Trust under the provisions of sections 401(a) and 501(a), respectively.2 There are two principal issues for decision. First, we must decide whether petitioner has exhausted administrative remedies within the Internal Revenue Service (Service) so that it may invoke our jurisdiction under section 7476 and Rule 210(c) to make a declaratory judgment with respect to the qualification of the Plan. Second, we must decide whether the Plan, which respondent had previously approved in 1983, is disqualified for the Plan years 1986, 1987, and 1988, because, even though petitioner allegedly operated the Plan consistent with the requirements under section 401(a), petitioner failed to amend the written Plan to reflect extensive legislation that was enacted in 1982 and 1984, and that substantially affected the qualification of pension plans under section 401(a). Since we answer both issues in the affirmative, we must also decide whether, as petitioner contends, there are mitigating factors that otherwise avoid such a disqualification of the Plan and the Trust.3
Pursuant to Rule 122(a), the parties submitted this case to the Court without trial and on the basis of the pleadings and the facts recited in a jointly stipulated administrative record filed with the Court on March 17, 1992, and supplemented on June 15, 1992. The facts and accompanying exhibits contained in the administrative record and supplement are incorporated herein by this reference.
Petitioner is a corporation that was formed and/or began operations on March 20, 1980. Its sole shareholder was, and has always been, Charles F. Faulkender (Faulkender). At the time the petition was filed, petitioner's principal place of business and corporate office was located in Rochester, Michigan. Petitioner reports the results of its operations based on a fiscal year ending on March 31.
The Plan was established and became effective on April 1, 1980. The Plan also reports the results of its operations based on a fiscal year ending on March 31. The Trust constitutes part of the Plan. The trustee is Faulkender. In the spring of 1986, Faulkender suffered a ruptured blood vessel in his brain and was ill throughout the remainder of the years at issue.
The Plan is a defined benefit plan, within the meaning of section 414(j). Under the terms of the Plan as of March 31, 1985, all employees of petitioner that are at least 25 years old are eligible to enter the Plan on the date that is coincident with or next following their completion of 1 year of service. Further, all participants are eligible to retire from employment with their full retirement benefit upon reaching the age of 65. The normal retirement benefit generally equals a percentage of compensation, based on average salary during the highest 5 years of employment, less a percentage of the Social Security benefit that the participant receives at retirement. The normal retirement benefit is subject to certain minimum and maximum monthly pension amounts.
On March 31, 1983, the Service issued the following determination letter to petitioner with respect to the Plan:
Dear Sirs:
Based on the information supplied, we have made a favorable determination on your application * * * Please keep this letter in your permanent records.
Continued qualification of the plan will depend on its effect in operation under its present form. (See section 1.401-1(b)(3) of the Income Tax Regulations.) The status of the plan in operation will be reviewed periodically.
The enclosed document describes some events that could occur after you receive this letter that would automatically nullify it without specific notice from us. The document also explains how operation of the plan may affect a favorable determination letter, and contains information about filing requirements.
This letter relates only to the status of your plan under the Internal Revenue Code. It is not a determination regarding the effect of other Federal or local statutes.
This determination is subject to your adoption of the proposed amendments submitted in your or your representative's letter dated Feb. 23, 1982. The proposed amendments should be adopted on or before the date prescribed by the regulations under Code section 401(b).
This determination applies to plan year(s) beginning after Mar. 31, 1981.
We have sent a copy of this letter to your representative as indicated in the power of attorney.
This determination letter does not apply to any provisions of the Tax Equity and Fiscal Responsibility Act of 1982.
If you have any questions, please contact * * *.
Sincerely yours
/S/
District Director
Enclosure(s)
Publication 794
Lmsa 645
On January 24, 1985, petitioner executed an amendment to the Trust agreement.4 This amendment consisted solely of a change to one paragraph in the agreement entitled Contributions, Retirement Benefits, and Optional Modes of Payment. Following this amendment, the amended paragraph read as follows:
The Corporation shall contribute into the account of each participant, a certain percentage of the participant's compensation as defined in paragraph 2.3(a) determined by the age of the participant as of the first fiscal year end he has qualified for participation, in order to provide for each participant a monthly pension, commencing at his normal retirement date which monthly pension shall be an amount equal to one-twelfth (1/12) of 38.56% of the participant's final average compensation, reduced by 74.074% of the Social Security benefits received by a participant at retirement. The minimum monthly pension to be provided a participant under this plan will be Five Hundred ($500.00) Dollars per month and the maximum monthly pension to be provided a participant will be Seven Thousand Five Hundred ($7,500.00) Dollars per month, and the minimum contract coverage will be for One Thousand ($1,000.00) Dollars of insurance or Twenty ($20.00) Dollars per month, if any retirement annuity.
For purposes of this plan, the assumed retirement benefit shall be derived from using a 6% per year compounded annually interest assumption and be based upon the contributions of the corporation for each participant as set forth above. The actuarial methods to be employed for purposes of determining the corporation's contribution for each participant, shall be the attained age level premium cost method.
Payment of the corporation's contribution to the trust under the terms hereof will be made to the trustee within the time prescribed by law, including, if applicable, any extension of time for the filing of federal income tax return for such year, or within such other period as is provided in Section 404(a)(6) of the 1954 Internal Revenue Code, as amended, or in any other statute of similar import.
The contribution under this paragraph 5.1 shall only be made if the participant is employed by the corporation on the last day of the fiscal year of the corporation, and during such fiscal year has either completed the requisite number of hours within one of the periods specified in paragraph 2.1(d) whether or not such employment period, employment year or plan year overlaps two fiscal years, or completes not less than One Thousand (1,000) hours of service during such fiscal year.
On October 23, 1985, National Benefit Consultants, Inc. (National), an actuarial firm, prepared a written report on the actuarial valuation of the Plan covering the plan year beginning April 1, 1984. The actuarial certification included in this written report stated, in part, that the report was prepared relying on "(a) information on employees provided by [petitioner], which maintains records for the plan, and (b) information regarding plan assets as provided by [Faulkender]." Similar written reports on the Plan (including similar actuarial certifications) for each of the following 3 Plan years were also prepared by National in 1986, 1987, and 1988, respectively.
On March 31, 1988, petitioner ceased doing business and stopped making contributions to the Plan. On November 30, 1988, each participant's accrued benefit in the Plan was as follows:
Charles Faulkender ............... $212,811
Timothy Faulkender ............... 2,599
Albert Fitchett .................. 5,622
D. Wayne Fitzgerald .............. 1,134
David Wayne Fletcher ............. 660
Ruth McKenzie .................... 238
Terri White ...................... 1,513
________
TOTAL ..................... $224,577
========
In or about December 1988, petitioner distributed to the participants their respective accrued benefits in the Plan.
Before these distributions, on October 25, 1988, resp...
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Call v. Ameritech Management Pension Plan
...to recite the statute (as distinct from having to be amended to comply with a statutory requirement, Hamlin Development Co. v. Commissioner, 65 T.C.M. 2071, 1993 WL 69569, at *9 (T.C. 1993)), this could not help the petitioner, because section 12.1 does not track the statute. The petition a......