Martin Fireproofing Profit Sharing Plan & Trust v. Comm'r of Internal Revenue
| Decision Date | 31 May 1989 |
| Docket Number | Docket No. 37800-86. |
| Citation | 10 Employee Benefits Cas. 2686,92 T.C. 1173,92 T.C. No. 77 |
| Parties | MARTIN FIREPROOFING PROFIT SHARING PLAN AND TRUST, CHARLES A. MARTIN, JR., JOHN S. GAFFNEY AND GEORGE R. BOWMAN, TRUSTEES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P is a trust forming part of a profit-sharing plan. Allocations to a plan participant's account for 1976, 1977, and 1979 through 1981 exceeded the section 415(c)(1) limit. HELD: R did not abuse his discretion in not permitting a retroactive correction of section 415 violations. HELD FURTHER: Because of the excess allocations, P became disqualified and lost its exempt status until 1984, when remedial action became effective. HELD FURTHER: The statute of limitations bars assessment for 1980, but not for 1979. Donald C. Lubick, Daniel R. Sharpe, and Gavin L. Phillips, for the petitioner.
David Albert Mustone, for the respondent.
Respondent determined the following deficiencies and additions to tax against petitioner:
+--------------------------------------------+
¦Year¦Deficiency¦Sec. 6651(a)(1) 1 addition¦
+----+----------+----------------------------¦
¦1979¦$10,465.83¦$2,616.46 ¦
+----+----------+----------------------------¦
¦1980¦21,265.76 ¦5,316.44 ¦
+----+----------+----------------------------¦
¦1981¦19,433.96 ¦4,858.29 ¦
+----+----------+----------------------------¦
¦1982¦3,841.48 ¦960.37 ¦
+----+----------+----------------------------¦
¦1983¦44,469.37 ¦11,117.34 ¦
+--------------------------------------------+
Petitioner is a trust forming part of the Martin Fireproofing Profit Sharing Plan (‘the plan‘). Both petitioner and the plan utilize a calendar year accounting period. Petitioner was created by a trust agreement, effective January 1, 1960, between Martin Fireproofing Corporation (‘the employer‘) and Charles A. Martin, Jr. (‘Mr. Martin, Jr.‘), John S. Gaffney, and George R. Bowman (‘Mr. Bowman‘), who are petitioner's trustees. In a letter dated December 30, 1960, respondent determined that petitioner met the requirements of section 401(a) and was therefore exempt from taxation under section 501(a).
The plan and the trust agreement which created petitioner were ‘restated,‘ effective January 1, 1976, to comply with the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829 (‘ERISA‘). In a letter dated May 3, 1977, respondent determined that petitioner, as restated, qualified under section 401(a) and remained exempt under section 501(a).
Subsequent written amendments to the plan are dated May 11, 1977, May 7, 1979, and August 23, 1984. Additionally, on August 29, 1985, the employer and petitioner's trustees adopted a ‘1984 Restatement,‘ and, on May 9, 1986, they amended the 1984 Restatement. The last two modifications were made in order to comply with the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, and the Retirement Equity Act of 1984, Pub. L. 98-397, 98 Stat. 1426. On June 9, 1986, respondent issued another favorable determination letter, applicable to plan years beginning after December 31, 1983.
At all times, the plan was a ‘defined contribution plan,‘ as defined in section 414(i). Thus, the plan provided an individual account for each participant and for benefits based solely on the amount contributed to the participant's account (adjusted for any income, expenses, gains, and losses) and the portion of any forfeitures of the accounts of other participants which might be allocated to the account. Under the plan, the employer's board of directors determined the amount contributed to the plan by the employer. The plan also permitted voluntary contributions by participants, subject to the approval of the board of directors and petitioner's trustees.
For the years in issue, i.e., 1979 through 1983, the plan provided the following formula for allocating employer contributions and forfeitures:
For each Plan Year with respect to which a Company contribution is made, the Trustees shall allocate to each Qualified Participant, as hereafter defined, so much of the total contribution for such year and the amount in the forfeiture account available for redistribution at the close of such year as the compensation of such Participant bears to the total compensation of all Qualified Participants for such year.
Thus, the amounts allocated to a participant depended upon his ‘compensation.‘ For the years in issue, the plan defined compensation as follows:
The term ‘compensation‘ for any Plan Year means the total amount accrued on behalf of a Qualified Participant by the Company constituting ‘wages‘ as defined in Section 3401 of the Internal Revenue Code of 1954 with respect to such Plan Year excluding overtime, bonus or similar forms of extra or exceptional compensation for such year.
For the years in issue, the plan also provided a mechanism for preventing violations of section 415, which essentially limits the amount which may be allocated to a participant for a given year. The limit is the lesser of a dollar amount or a percentage of the participant's compensation. The plan required the trustees to determine the ‘tentative annual addition‘ to each participants account, before the employer paid its contribution for a year. If the tentative annual addition for an employee exceeded the section 415(c)(1) limit, the trustees were required to refund any employee contribution to the extent necessary. If refunding the entire amount of any employee contribution would not reduce the tentative annual addition sufficiently, then the plan required a reduction of the portion of the employer's contribution to be allocated to the employee's account.
Charles A. Martin (‘Mr. Martin‘) founded the employer and was its chief executive officer until 1968. In 1968, the employer's board of directors elected Mr. Martin chairman of the board and a vice president. Mr. Martin's annual compensation was fixed at $30,000, and Mr. Martin has continued to work for the employer since 1968. Mr. Martin, Jr., Mr. Martin's son, has served as the employer's president since at least 1976.
Although Mr. Martin's annual compensation was fixed at $30,000 for 1968 and indefinitely thereafter, Mr. Martin waived his entire salary for each year from 1969 through 1981, except 1973. The employer did not deduct Mr. Martin's ‘accrued‘ but unpaid salary on its returns, nor did Mr. Martin report such salary on his returns.
In 1968, the employer's board of directors had approved the following resolution:
Upon motion duly made and carried, it was resolved that as Consultant and Chairman of the Company, Chas. A. Martin participate in any profit sharing disbursement on the basis of his last annual salary.
Thus, for each year from 1969 through 1981 that the employer made a contribution to the plan, a portion of the contribution was allocated to Mr. Martin's account, regardless of whether Mr. Martin received compensation currently includable in his income. The employer made no contributions for 1969, 1971, or 1978. The employer did make contributions in 1982 and 1983, but no portions of those contributions were allocated to Mr. Martin's account.
The following table sets forth contributions made by the employer for years 1976 through 1983, the dates contributions were made, and the portions allocated to Mr. Martin's account:
+---------------------------------------------------+
¦Plan¦Amount of ¦ ¦Amount allocated ¦
+----+------------+---------+-----------------------¦
¦year¦contribution¦Date made¦to Mr. Martin's account¦
+----+------------+---------+-----------------------¦
¦1976¦$47,983.40 ¦3/14/77 ¦$4,500 ¦
+----+------------+---------+-----------------------¦
¦1977¦53,021.75 ¦3/14/78 ¦4,500 ¦
+----+------------+---------+-----------------------¦
¦1978¦--- ¦--- ¦--- ¦
+----+------------+---------+-----------------------¦
¦1979¦51,244.37 ¦3/10/80 ¦4,500 ¦
+----+------------+---------+-----------------------¦
¦1980¦52,390.98 ¦3/10/81 ¦4,500 ¦
+----+------------+---------+-----------------------¦
¦1981¦58,274.32 ¦3/11/82 ¦4,500 ¦
+----+------------+---------+-----------------------¦
¦1982¦57,397.80 ¦3/11/83 ¦--- ¦
+----+------------+---------+-----------------------¦
¦1983¦57,926.70 ¦3/12/84 ¦--- ¦
+---------------------------------------------------+
No forfeitures were allocated to Mr. Martin's account for any of the foregoing years, nor did Martin ever make an employee contribution. Mr. Martin has received no benefits under the plan.THE AUDIT
In August 1983, respondent began an audit of the plan. Respondent's audit disclosed the possibility that allocations made to Martin's account exceeded the section 415(c)(1) limit on contributions to a qualified profit-sharing plan. In the course of negotiations, petitioner and the employer proposed to reallocate amounts that had been allocated to Martin's account, but only if respondent would consider such reallocation a retroactive correction of any section 415 violations, permitting petitioner to maintain its qualified status for the years in issue. Petitioner and the employer cited section 1.415-6(b)(6)(i), Income Tax Regs., as authority for a retroactive correction. Respondent rejected the proposal, and petitioner made no reallocation.
Further negotiations resulted in the August 23, 1984, plan amendment previously mentioned. That amendment added the following language to the plan:
(d) SECTION 415 RESTORATION PROVISIONS. Notwithstanding any other provision of this Plan, there shall be no allocations of company contributions, forfeitures or voluntary contributions to the...
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