Janpol v. Comm'r of Internal Revenue, s. 5586–92
| Decision Date | 07 December 1993 |
| Docket Number | Nos. 5586–92,5587–92.,s. 5586–92 |
| Citation | 17 Employee Benefits Cas. 1873,101 T.C. No. 34,101 T.C. 518 |
| Parties | Arthur S. JANPOL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. v. Donald BERLIN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John N. Lieuwen and Patricia Tucker, for petitioners.
Thomas F. Eagan, for respondent.
Respondent determined deficiencies against petitioners individually and as transferees of Art Janpol Volkswagen, Inc. (AJVW), as follows:
By amendments to the answer, respondent claimed increased amounts under sections 4975(a) and 6651(a)(1). Respondent, however, has conceded that petitioners are not liable for so-called second tier taxes under section 4975(b). Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision in this Opinion are whether certain loans by petitioners to the Imported Motors Profit Sharing Trust (the trust) and guarantees by petitioners of lines of credit extended by a third party to the trust are prohibited transactions within the meaning of section 4975(c)(1)(B); whether the liquidation and dissolution of AJVW as of December 31, 1986, prevented it from being liable for the tax on prohibited transactions under section 4975(a) with respect to advances made during 1987; and whether respondent has correctly computed the excise tax under section 4975(a) with respect to the prohibited transactions. Petitioners' liability for the additions to tax under section 6651(a)(1) because of their failure to file excise tax returns will be decided separately after further briefs from the parties. Petitioners have conceded that a separate loan of money by the trust to a partnership in which AJVW was a general partner was a prohibited transaction subject to excise tax.
At the time their petitions were filed, petitioner Arthur S. Janpol (Janpol) resided in New Mexico, and petitioner Donald Berlin (Berlin) resided in California. Janpol was a certified public accountant who actively practiced accounting from 1954 to 1960.
AJVW was incorporated on January 1, 1955, under the laws of the State of New Mexico and had its principal place of business in Albuquerque, New Mexico. AJVW owned and operated an automobile dealership in Albuquerque. On May 12, 1986, the inventory, equipment, and franchises of AJVW were sold to an unrelated third party.
Janpol and Berlin were each 50–percent shareholders in AJVW, were each members of the board of directors, and held the offices of president and vice president, respectively.
On January 1, 1962, AJVW established a defined contribution profit-sharing plan for its employees. The plan was known as the Imported Motors Profit Sharing Plan (the plan). Janpol and Berlin were participants in the plan.
The trust was created under the laws of the State of New Mexico to hold and administer the assets of the plan. Janpol and Berlin were trustees of the trust and beneficiaries of the trust. The trust was determined by the Secretary of the Treasury to be a trust described in section 401(a), exempt from tax under section 501(a).
From approximately 1963 to October 31, 1991, the trust held a license from the State of New Mexico to do business as a finance company and financed installment purchases of automobiles.
Paragraphs 11.02(g) and 11.02(i) of the plan and trust provided as follows:
11.02 Investment of Fund. The Trustee shall be authorized and empowered and in his discretion, but not by way of limitation to:
(g) Borrow or raise money, with the approval of the Board of Directors of the Employer, for the purposes of the Trust from the Employer or from others to the extent and upon such terms and conditions as the Trustee may deem desirable or proper; and for any sum so borrowed to issue his promissory note, as Trustee, and to secure the repayment thereof by pledging all or any part of the Trust Fund, except for segregated accounts or employee contribution accounts; and no person lending money to the Trustee shall be bound to supervise the application of the money borrowed, or to inquire into the validity, expediency or propriety of any borrowing;
* * *
(i) Require indemnity from the Employer, to the Trustee's satisfaction, before taking any action with respect to which the Trustee may have reasonable ground for requesting such indemnification;
On January 22, 1980, the Administrator of Pension and Welfare Benefit Programs, U.S. Department of Labor, sent a letter to the trustees of the trust. The letter stated, among other things, the conclusion that the plan's purchase of customer notes from AJVW, leasing of real property to AJVW, and receipt of loans from Berlin and Janpol gave rise to violations of the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93–406, 88 Stat. 829 (). The letter stated in part:
With regard to the loans, we understand that the plan has regularly borrowed large amounts of money from Berlin and Janpol, usually pursuant to six-month notes at interest rates ranging from 7–9% and secured by plan assets. Rather than requiring repayment, the lenders have generally allowed issuance of new notes upon expiration of the six month terms. From January 1, 1975, through December 31, 1977, the plan borrowed a total of more than $600,000 from Janpol. The amount owed by the plan to Janpol has steadily declined in recent years, from an amount in excess of $126,000 at the end of 1975, to $30,000 as of April 1978. The amount owed by the plan to Berlin has likewise declined over the past years, from $87,000 at the end of 1975, to $44,000 as of April 1978.
* * *
Although the loans described earlier are from Berlin and Janpol to the plan, they are prohibited by sec. 406(a)(1)(B), which makes the “lending of money or other extension of credit between the plan and a party in interest” a per se violation of ERISA. Similarly, the loans give rise to violations of sec. 406(b)(2), which prohibits a fiduciary from acting in a transaction on behalf of a party whose interests are adverse to those of the plan.
Janpol disagreed with the conclusion stated in the letter.
The Department of Labor did not institute any enforcement action against AJVW or petitioners prior to or during the years in issue. Although the Internal Revenue Service (IRS) audited AJVW on other matters, the loans from petitioners to the trust were not issues raised by the IRS prior to or during the years in issue. Relying on his own analysis of statutory definitions of prohibited transactions, Janpol failed to file excise tax returns with respect to the loan made by him to the trust. Berlin failed to file returns with respect to the loans made by him to the trust.
Until the sale of the assets of AJVW in May 1986, the trust financed automobile purchases almost exclusively for the customers of AJVW. At the time of the sale of the assets of AJVW, the trustees of the trust decided to finance automobile purchases for the customers of other automobile dealers in Albuquerque and the State of New Mexico. On April 10, 1986, Sunwest Bank of Albuquerque (Sunwest) agreed to lend the principal amount of $5 million to the trust to finance automobile installment loans. Loan agreements were executed on May 21, 1986, between Sunwest and the trust. Janpol and AJVW executed joint and several guarantees of the trust's obligations under the loan agreements.
On November 3, 1986, AJVW adopted a plan of complete liquidation under section 337. AJVW was dissolved on or about December 31, 1986. On the date of dissolution, AJVW transferred as liquidation distributions assets with a fair market value of $809,775 to, or for the benefit of, Janpol and $732,355 to, or for the benefit of, Berlin. By reason of the transfer of its assets to petitioners, AJVW was rendered insolvent within the meaning of N.M.Stat.Ann. sec. 56–10–16A (Michie 1983).
Of the liquidation distributions received by them, Janpol and Berlin each transferred $500,000 to the trust as a loan. The trust thereafter continued its existence, holding and administering the assets of the plan for the benefit of the participants. By March 31, 1987, with minor exceptions, all participants in the plan except Janpol and Berlin had received their distributions from the trust.
During 1986, 1987, and 1988, petitioners loaned money to the trust in addition to the amounts loaned at the time of liquidation of the corporation. From time to time during those years, the trust made repayments of the loans, with interest, to petitioners.
After the dissolution of AJVW, Janpol continued to manage and operate the automotive finance business of the trust and received a monthly fee for his services.
On September 25, 1987, the May 21, 1986, loan agreement between Sunwest and the trust was amended to increase the line of credit available to the trust to $10 million. Berlin was substituted as the joint and several guarantor of the line of credit, along with Janpol, in place of AJVW. AJVW...
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