Stepnowski v. C.I.R.

Decision Date27 July 2006
Docket NumberNo. 05-3665.,05-3665.
Citation456 F.3d 320
PartiesCharles P. STEPNOWSKI, Appellant v. COMMISSIONER OF INTERNAL REVENUE; Hercules Incorporated.
CourtU.S. Court of Appeals — Third Circuit

Mervin M. Wilf, Esquire (Argued), Mervin M. Wilf, Ltd., Philadelphia, PA, for Appellant.

Eileen J. O'Connor, Assistant Attorney General, Kenneth L. Greene, Esquire, Steven W. Parks, Esquire (Argued), United States Department of Justice Tax Division, Washington, DC, David S. Fryman, Esquire (Argued), Brian M. Pinheiro, Esquire, Ballard Spahr Andrews & Ingersoll, Philadelphia, PA, for Appellees.

Before AMBRO, FUENTES and NYGAARD, Circuit Judges.

AMBRO, Circuit Judge.

Congress changed the applicable interest rate for the present-value calculation of pension plans' lump-sum payments to retirees. Hercules Inc. later amended its pension plan to match the changed interest rate, but that amendment resulted in a lower lump-sum payment to Charles Stepnowski, who retired several months after the amendment. To determine whether Hercules' amendment was valid, we decide whether the Commissioner of the Internal Revenue Service extended the deadline for this amendment. We hold that the Commissioner did so, and that Hercules' amendment was timely and valid. We therefore affirm.

I. Factual Background and Procedural History

Stepnowski worked at Hercules from 1973 to December 2002. He participated in Hercules' retirement plan, which allows participants to take a lump-sum payment upon retirement. This payment is the present-value equivalent of 51 % of the retiree's expected lifetime monthly pension benefits. Pension Plan of Hercules Inc., sched. B., art. VII, § D.1. The present-value amount is calculated using the federally prescribed mortality table and a specified interest rate. Id. § D.4.

Hercules has a defined-benefit plan under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. It was established in 1913 and uses the calendar year as its plan year. Hercules made amendments to the plan in October 2001.1

The amendments to Hercules' plan changed the interest rate used to calculate lump-sum payments. For payments made on or after January 1, 2002, the present-value amount is calculated using the interest rate on 30-year Treasury securities. Pension Plan, sched. B., art. VII, § D.4.a(2). The Treasury rate took the place of the interest rate published by the Pension Benefit Guaranty Corporation (PBGC).2

Interest rates bear an inverse relationship to present-value amounts; a higher interest rate results in a lower present-value payment, and vice versa.3 The Treasury rate has historically been higher than the PBGC rate, so — because he retired after January 2002 (i.e., after the amendment) — Stepnowski's lump-sum payment was lower than it would have been had Hercules kept the PBGC rate.4

In February 2002, Hercules requested a determination from the Commissioner that its pension plan met all of the statutory qualification requirements. In March 2002, Stepnowski sent the Commissioner a letter contending that the amendment precluded the Hercules plan from so qualifying. In March 2003, the Commissioner issued Hercules a favorable determination letter on the plan. Stepnowski then filed a petition in the United States Tax Court for a declaratory judgment that the Hercules plan was not qualified.

The Tax Court held in favor of Hercules and the Commissioner, Stepnowski v. Comm'r, 124 T.C. 198, 220, 2005 WL 950119 (2005), and Stepnowski appeals.5

II. Discussion
A. Statutory and regulatory background

Section 401(a) of the Internal Revenue Code describes the qualification requirements for pension plans. (Only qualified plans are tax exempt under I.R.C. § 501(a).) One of the requirements in § 401(a) is that, "except as provided in section 417," the plan must pay out a vested participant's accrued benefit "in the form of a qualified joint and survivor annuity." I.R.C. § 401(a)(11)(A). Section 417 allows plan participants to waive these annuity payments in favor of a "cashout" — that is, a lump-sum payment of the participants' annuity benefits. See id. § 417(a).

Plan participants can therefore choose to take a lump-sum cash-out payment of the present value of their annuity, and § 417(e) governs the determination of that present-value amount. Specifically, § 417(e)(3)(A)(i) provides that the present value of a participant's benefits "shall not be less than the present value calculated by using the applicable mortality table and the applicable interest rate."

The "applicable interest rate" is a statutorily defined term. Before 1994, it meant the PBGC interest rate. Tax Reform Act of 1986, Pub.L. No. 99-514, § 1139(b), 100 Stat.2085, 2487. In 1994, Congress changed the definition in § 417(e)(3)(A)(ii)(II); it now means "the annual rate of interest on 30-year Treasury securities." (The change was made as part of the Retirement Protection Act of 1994, which was itself part of the Uruguay Round Agreements Act. Pub.L. No. 103-465, tit. VII, subtit. F, § 767(a)(2), 108 Stat. 4809, 5038.)

Elsewhere in the Code lurks § 411, which controls vesting standards; a plan cannot be qualified unless it satisfies this section. I.R.C. §§ 401(a)(7), 411(a). Specifically, § 411(d)(6) — known as the "anti-cutback provision" — blocks plan amendments that decrease participants' accrued benefits. See id. § 411(d)(6)(A); see also id. § 411(d)(6)(B) ("[A] plan amendment which has the effect of ... eliminating or reducing an early retirement benefit ... with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits.").

As noted, because the Treasury interest rate is generally higher than the PBGC rate, the normal result is a lower lump-sum payout (as happened here). Once the Retirement Protection Act changed the statutory rate, plan amendments following that change could have been in danger of triggering the anti-cutback provision. Congress accordingly provided that "[a] participant's accrued benefit shall not be considered to be reduced in violation of section 411(d)(6) ... merely because ... the benefit is determined in accordance with section 417(e)(3)(A) ..., as amended by this Act." Retirement Protection Act § 767(d), 108 Stat. at 5040. The Department of the Treasury followed suit, providing that plan amendments replacing the PBGC rate with the Treasury rate were not cutbacks. Treas. Reg. § 1.417(e)1(d)(10)(iv).6

B. Does Treasury Regulation § 1.417(e)-1(d)(10)(i) contain an amendment deadline?

Stepnowski's unhappiness with the Treasury rate, as compared to the PBGC rate, is ultimately due to an act of Congress. He cannot complain that Hercules amended its plan to match the statutory interest rate, so he is forced to argue about when Hercules amended the plan. Stepnowski concedes that Hercules could have amended the plan without penalty on or before December 31, 1999, but he claims that the Treasury Regulations imposed that date as a deadline on such interest-rate amendments and that it was not extended.

The Regulation at issue is Treas. Reg. § 1.417(e)1(d)(10)(i), which provides that a prospective plan amendment that "changes the interest rate or the mortality assumptions used for the [present-value calculation] merely to eliminate use of the [PBGC] interest rate ..., or the applicable mortality table, with respect to a distribution form described in paragraph (d)(6) of this section," is not a cutback if it is adopted by December 31, 1999.

Stepnowski therefore argues that paragraph (d)(10)(i) requires interest-rate amendments like Hercules' to be in place on or before December 31, 1999. The Commissioner argues — and the Tax Court held — that the December 1999 deadline did not apply to the Hercules amendment. Both parties' arguments turn on whether the phrase "with respect to a distribution form described in paragraph (d)(6) of this section" modifies "mortality table" alone or both "interest rate" and "mortality table." The distribution form described in paragraph (d)(6) is a nondecreasing annual benefit — in other words, not a lump-sum payment like in Hercules' plan. Thus, if the phrase modifies both "mortality table" and "interest rate," this provision does not apply to amendments like Hercules'.

The debate is between the last-antecedent rule of construction and its grammatical corollary. The last-antecedent rule generally holds "that qualifying words, phrases, and clauses are to be applied to the words or phrase immediately preceding and not to others more remote." United States v. Hodge, 321 F.3d 429, 436 (3d Cir.2003) (internal quotation marks omitted). The corollary rule of grammar generally states that, where there is a comma before a modifying phrase, that phrase modifies all of the items in a series and not just the immediately preceding item. See, e.g., Elliot Coal Mining Co. v. Dir., 17 F.3d 616, 630 (3d Cir.1994) ("Th[e] use of a comma to set off a modifying phrase from other clauses indicates that the qualifying language is to be applied to all of the previous phrases and not merely the immediately preceding phrase."); Nat'l Sur. Corp. v. Midland Bank, 551 F.2d 21, 34 (3d Cir.1977); see also Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 186 F.3d 210, 215, 216 n. 1 (2d Cir.1999), abrogated in part on other grounds by Sarhank Group v. Oracle Corp., 404 F.3d 657, 660 n. 2 (2d Cir.2005); Bingham, Ltd. v. United States, 724 F.2d 921, 925 n. 3 (11th Cir. 1984).7

But neither of these aids in construction is dispositive; they serve only as guides. Moreover, the only other sentence in paragraph (d)(10)(i) fails to use this grammatical construction — in a situation where the modifying phrase almost certainly applies to all three elements in a series.8 Our confidence in paragraph (d)(10)(i)'s correct comma placement is thereby diminished. Thus we express no opinion on whether the deadline applied to Hercules. But our subsequent analysis makes clear...

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