United States v. Hall

• Decision Date: 12 July 1968
• Docket Number: No. 18951.,18951.
• Citation: 398 F.2d 383
• Parties: UNITED STATES of America, Appellant, v. George Howard HALL and Ruth Hall, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

398 F.2d 383 (1968)

UNITED STATES of America, Appellant, v. George Howard HALL and Ruth Hall, Appellees.

No. 18951.

United States Court of Appeals Eighth Circuit.

July 12, 1968.

Stuart A. Smith, Atty., Tax Division, Dept. of Justice, Washington, D. C., for appellant; Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Harry Baum, Attys., Dept. of Justice, Washington, D. C., and John O. Garaas, U. S. Atty. Fargo, N. D., on the brief.

Philip Vogel, Fargo, N. D., for appellees; Wattam, Vogel, Vogel, Bright & Peterson, Fargo, N. D., on the brief.

Before MATTHES, GIBSON and HEANEY, Circuit Judges.

HEANEY, Circuit Judges.

The Fargo Medical Clinic, a co-partnership of thirty-three doctors, established a pension plan for its 165 employees on January 1, 1963.¹ The plan was of the unit benefit type and provided for the vesting of retirement benefits after fifteen years of service and the attainment of age fifty. The plan was approved by the Internal Revenue Service on July 5, 1963.

On October 1, 1963, the Clinic established a pension plan for the partners. It was of the money-purchase variety and provided for immediate vesting.

In 1964, the taxpayer — one of the partners² — contributed $2,500 to the partners' pension plan and claimed a deduction of $1,250 on his 1964 federal income tax return.

In December of 1965, the Commissioner ruled that the partnership plan, when considered with the employee plan, was discriminatory because it provided more liberal vesting provisions for the partners³ and disallowed the deduction.⁴

The taxpayer paid the resulting assessment of $512.50 and filed a claim for a refund. He subsequently instituted this action. The United States District Court for the District of North Dakota held that the partnership plan was not discriminatory and that the taxpayer was entitled to a judgment in the amount of the assessment, plus interest.

The first question is whether a pension plan is discriminatory solely because it provides for immediate vesting for partners and deferred vesting (age fifty and fifteen years of service) for other employees.⁵ We answer this question in the negative.

The government's position that inequality in vesting, in and of itself, renders a plan discriminatory is posited on its interpretation of § 401 of the Internal Revenue Code of 1954,⁶ Treasury Regulations⁷ and rulings of the Commissioner.⁸

The parties state that the question is one of first impression in the courts.

We have reviewed the regulations and rulings and find that the regulations do not deal with this question and that the rulings, with one exception, are generally concerned with situations where all employees are covered by the same or identical unit benefit plans but the vesting provisions operate to effectively preclude all but a favored group from becoming eligible for pension benefits. Under such circumstances, it is obvious that discrimination results.⁹

A 1965 ruling, however, dealt with a fact situation similar to the one here, except that employee benefits did not vest until death or termination of the plan.

"1 The employer is a partnership, without any `owner-employees,\' which has a number of common-law employees. The partnership established a unit benefit pension plan for its common-law employees and a money purchase pension plan for the partners. * * *

"2 The employees\' plan is non-contributory and provides that all employees, age 30 or more, with 1 year of service, who have commenced employment prior to age 55, are eligible to participate in the plan. The plan provides retirement benefits of 1 percent of the first $4,800 of annual salary averaged over the last 10 years of service plus 1 2/3 percent of such salary in excess of $4,800 times years of service not to exceed 30 years.¹⁰ The employees\' plan further provides that benefits do not vest prior to retirement except upon death or plan termination.

"3 The partners\' plan provides for the same eligibility requirements as the employees\' plan. Five percent of the employer\'s annual earned income is contributed to the partners\' plan, to be allocated to each partner\'s account in the proportion each partner\'s share of earned income bears to the total earned income. The benefits are based on all funds accumulated in each partner\'s separate account. Vesting is immediate and full.

* * * * * *

"4 Because the employees\' plan is of the unit benefit type, while the partners\' plan is of the money purchase type, it is difficult to compare the benefits provided under each plan. Usually, in cases of this type, if it can be satisfactorily demonstrated that the contributions under the money purchase plan, on the basis of factors applicable to the unit benefit plan, do not result in the prohibited discrimination, the benefits under each plan may be accepted as similar. However, one of the factors to be considered in arriving at such a conclusion is that of vesting.

"5 Plan benefits cannot be compared unless there is some provision insuring that these benefits are made available to eligible participants under the same conditions. * * * The difference between the immediate full vesting provided for partners under the instant partners\' plan and the lack of such vesting provisions under the employees\' plan constitutes discrimination of the type prohibited by section 401(a) (4) of the Code. This is so in this situation because under no circumstances will a participant in the partners\' plan forfeit any of his benefits while a common-law employee may very well forfeit his benefits.

* * * * * *

"6 Accordingly, it is held that where a partnership has two pension plans, one of the unit benefit type for common-law employees, the other of the money purchase type for partners, none of whom are `owner-employees,\' and where the benefits under the employees\' plan do not vest prior to retirement, except upon death or termination of the plan, but the benefits under the partners\' plan are fully vested immediately, then the disparity in the vesting provisions will cause the partners\' plan to fail to qualify because of the prohibited discrimination within the meaning of section 401(a) (4) of the Code. The fact that a partner may be taxed on a portion of the employer\'s contribution, which under section 404(a) (10) of the Code is not allowable as a deduction, is to be disregarded in determining whether the plan\'s vesting provisions are discriminatory."

Rev.Rul. 65-266, 1965-2 Cum.Bull. 138.

This ruling is entitled to weight in the interpretive process, K. Davis, Administrative Law Treatise, § 5.01. Cf., Volkswagenwerk Aktiengesellschaft v. FMC, 390 U.S. 261, 88 S.Ct. 929, 19 L.Ed.2d 1090 (1968) (preliminary print); Whittemore v. United States, 383 F.2d 824, 830 n. 9 (8th Cir. 1967). But cf., Biddle v. Commissioner of Internal Revenue, 302 U.S. 573, 58 S.Ct. 379, 82 L.Ed. 431 (1938) ("Rulings * * * are of little aid in interpreting a tax statute."), but as it was neither contemporaneous nor of long standing, its value is limited, K. Davis, supra at § 5.06; Griswold, A Summary of the Regulations Problem, 54 Harv.L.Rev. 398, 404-11 (1940), and it cannot be given the force of law as a result of a reenactment after its issuance. See generally, Brown, Regulations, Reenactment and the Revenue Acts, 54 Harv.L. Rev. 377 (1940), Griswold, supra at 398-404. It is further weakened by the cautionary statement in the Treasury Department's Cumulative Bulletins:

"Revenue Rulings and Revenue Procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations (including Treasury Decisions), but are published to provide precedents to be used in the disposition of other cases, and may be cited and relied upon for that purpose. * * *"

While it is unnecessary for us to determine the validity of the ruling as applied to a situation in which employee benefits do not vest until retirement, we do not believe that the Code permits its application to every situation in which there are inequalities in vesting.

It is evident from paragraph 4 of the ruling that the Commissioner is of the view that differences in benefits, other than vesting, do not necessarily make a plan discriminatory if there is no discrimination in contributions.

Vesting is an important benefit in any pension plan and is one which must be considered in reaching a decision as to whether a plan is discriminatory as to benefits. We are unable, however, to find support in the language of the statute or its legislative history to support the Commissioner's view that differences in some benefits are permissible but any inequalities in vesting (a benefit) are discriminatory.

No compelling reasons have been called to our attention for treating vesting as a benefit to be singled out for the unique treatment advocated by the Commissioner. Indeed, recent studies and legislative recommendations indicate that vesting is a highly desirable objective but one which must be considered in the light of other meritorious ones.

President Kennedy appointed a Cabinet Committee, in 1962, to review pension plan growth and to make recommendations for federal control. This Committee reported on January 29, 1965.¹¹ It gave serious attention to the problem of vesting and recommended fifty per cent vesting after fifteen years of employment and full vesting after twenty years. This recommendation was rejected by a Presidential Advisory Committee who stated it would be unwise to require any minimum standards of vesting.

While efforts are currently being made in Congress to establish minimum standards of vesting before any plan can be approved, no legislation to this end has been enacted.¹² The Labor and Treasury Departments have agreed on a bill sponsored by Senator Ralph W. Yarborough (D-Texas) (S. 3421) and Representative Carl D. Perkins (D-Kentucky) (H.R. 17046) which would require vesting at age twenty-five after ten years of service. No legislation has been proposed requiring immediate...