Ziegler v. Comm'r of Internal Revenue

• Decision Date: 02 May 1978
• Docket Number: Docket No. 10614-75.
• Citation: Ziegler v. Comm'r of Internal Revenue , 70 T.C. 139 (T.C. 1978)
• Parties: DONALD E. ZIEGLER and CLAUDIA J. ZIEGLER, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

70 T.C. 139

DONALD E. ZIEGLER and CLAUDIA J. ZIEGLER, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 10614-75.

United States Tax Court

Filed May 2, 1978.

P, who then practiced law alone, established a qualified retirement plan to which he made contributions on his own behalf. Subsequently, he joined a partnership for the practice of law and received a premature distribution of his interest in such plan. A new qualified retirement plan was established by the partnership, and contributions were made on behalf of P. Held, under sec. 401(d)(5)(C), I.R.C. 1954, P was prohibited from participating as an owner-employee in a qualified retirement plan for 5 years succeeding the year of the premature distribution, and as a result, he was not entitled to deduct the contributions during such period. William C. McClure and Robert G. MacAlister, for the petitioners.

David W. Otto and Michael A. Yost, Jr., for the respondent.

OPINION

SIMPSON, Judge:

The Commissioner determined deficiencies in the petitioners' Federal income taxes of $1,050 for 1971, $959.88 for 1972, and $1,017.73 for 1973. The only issue for decision is whether, under section 401(d)(5)(C) of the Internal Revenue Code of 1954,¹ an owner-employee who receives a premature distribution from a qualified retirement plan is prohibited from participating as an owner-employee in any qualified retirement plan for a period of 5 years.

All of the facts have been stipulated, and those facts are so found.

The petitioners, Donald E. Ziegler and Claudia J. Ziegler, husband and wife, resided at Pittsburgh, Pa., at the time they timely filed their petition in this case. They filed their joint Federal income tax returns for 1971, 1972, and 1973 with the Internal Revenue Service Center, Philadelphia, Pa. Mr. Ziegler will sometimes be referred to as the petitioner.

The petitioner is licensed to practice law in the Commonwealth of Pennsylvania. From the fall of 1962 through December 31, 1968, he practiced law as a sole practitioner in the Pittsburgh, Pa., area. On December 27, 1966, he established a retirement plan (the first plan) covering himself by executing a joinder to a master plan maintained by Pittsburgh National Bank, which acted as custodian under such plan. Thereafter, he made contributions to such plan in various amounts in 1966, 1967, and 1968. By January 1, 1969, he had contributed a total of $2,400 to such plan.

Effective January 1, 1969, the petitioner ceased practicing law alone and joined a law partnership known as Catalano, Ziegler, and Maloney (the partnership). On January 24, 1969, he requested and received from Pittsburgh National Bank a distribution of $2,886.24, which represented the entire value of his interest in the first plan. By requesting and receiving such distribution, the petitioner intended to terminate the first plan in anticipation that the partnership would create its own retirement plan to which he could forward the proceeds from the first plan. Nevertheless, such proceeds were deposited and commingled with his other funds. As of the date of such distribution, the petitioner was not disabled within the meaning of section 72 and had not yet reached 591;2 years of age. Accordingly, the distribution from the first plan was a premature distribution described in section 72(m)(5)(A) (i), and the petitioner agreed to and paid the penalty prescribed by section 72(m)(5)(B) for such distributions.

From January 24, 1969, to December 1969, the petitioner did not participate in any qualified retirement plan. In December 1969, the partnership signed a joinder to the master plan maintained by Pittsburgh National Bank and thereby established a retirement plan (the second plan), which was separate and distinct from the first plan. Thereafter, the partnership made yearly contributions of $2,500 to such plan on behalf of the petitioner in 1969, 1970, 1971, 1972, and 1973. The 1969 contribution was made in December 1969.

Solely for purposes of this case, the parties agreed that the first plan and the second plan met the requirements of and qualified under section 401 and that Pittsburgh National Bank was a bank which qualified as a custodian within the meaning of section 401. In addition, it was agreed that with respect to both plans, the petitioner was an owner-employee within the meaning of sections 72 and 401 through 404.

On their joint Federal income tax returns for 1971, 1972, and 1973, the petitioners deducted each year the $2,500 contribution to the second plan. In his notice of deficiency, the Commissioner disallowed such deductions under sections 401 and 404.

The issue for decision is whether an owner-employee, within the meaning of section 401(c), who received a premature distribution from a qualified retirement plan is thereafter ineligible to participate in another qualified retirement plan for a 5-year period under section 401(d)(5)(C). There is a question of whether such provision prohibits participation in any type of qualified retirement plan or whether it applies only to participation as an owner-employee. The petitioner in the case before us seeks to participate as an owner-employee, and consequently, we shall confine our decision as to whether he can participate as such.

The Self-Employed Individuals Tax Retirement Act of 1962, Pub. L. 87-792, 76 Stat. 809, was designed to encourage self-employed persons (such as lawyers practicing alone or in partnerships) to provide for their own retirement. Under such statute, a self-employed individual can establish a qualified retirement plan, can make contributions to such plan for his own benefit within specified limits, and can receive tax benefits analogous to those already available to employers and employees under qualified corporate retirement plans. H. Rept. 378, 87th Cong., 1st Sess. (1961), 1962-3 C.B. 261; S. Rept. 992, 87th Cong., 1st Sess. (1961), 1962-3 C.B. 303.² However, the statute provided that for a plan covering a self-employed individual to qualify, it had to meet certain additional requirements not applicable to corporate plans.

Some of the additional requirements were designed to assure that the funds set aside under the plan would, in fact, be used for the retirement of the self-employed individual and that such funds would not be withdrawn prematurely. H. Rept. 378 at 273; S. Rept. 992 at 324-325. Section 401(d)(4)(B) ³ provides that the plan must prohibit distribution of benefits to an owner-employee prior to the time such owner-employee attains 591;2 years of age, except in the case of disability. H. Rept. 378 at 272-273, 280; S. Rept. 992 at 323-324, 334. In the event an owner-employee receives a distribution from the plan in contravention of section 401(d)(4)(B), section 72(m)(5) ⁴ imposes an additional tax on the distribution. Section 401(d)(5)(C) also provides:

(d) ADDITIONAL REQUIREMENTS FOR QUALIFICATION OF TRUSTS AND PLANS BENEFITING OWNER-EMPLOYEES. —-A trust * * * shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the following requirements of this subsection are met by the trust and by the plan of which such trust is a part:

(5) The plan does not permit—-

(C) if a distribution under the plan is made to any employee and if any portion of such distribution is an amount described in section 72(m)(5)(A)(i), contributions to be made on behalf of such employee for the 5 taxable years succeeding the taxable year in which such distribution is made.

The petitioner points to the words “the plan” and argues that section 401(d) (5)(C) is clear and only prevents an owner-employee from participating in the plan from which he received a premature distribution. On the other hand, the Commissioner refers us to statements in the legislative history setting forth the purpose of these requirements and contends that the statute is unclear and must be given a broader interpretation to carry out the declared legislative purpose. In describing the deterrents to premature distributions, H. Rept. 378 at 273, states:

A penalty is imposed by the bill in cases where a premature distribution of all or part of the retirement fund is made before the owner-employee reaches age 591;2. In these cases, if the premature distribution amounts to $2,500 or more, the tax imposed would not be less than 110 percent of the increase in tax that would have resulted if the income had been received ratably over the 5 years ending with the year of distribution. * * * If the premature distribution amounts to less than $2,500, the tax due would be 110 percent of the increase in tax resulting from inclusion of the entire amount of the premature distribution in gross income for the current year. * * * As a further penalty in case of a premature distribution, the owner-employee is disqualified from participating in a retirement plan on his own behalf for 5 years following the year in which the total distribution is made. These penalties are imposed in order to prevent retirement plans from, in effect, becoming income-averaging plans under which deductible contributions would be made to the plan in high-income, high-tax years and the assets would be drawn down in low-income or loss years when little or no tax would be due. It is the purpose of this bill to provide means for financing retirement; these penalties are designed to insure that retirement plans will not be used for other purposes.

For a similar statement, see S. Rept. 992 at 324-325.

The statute is, of course, the most authoritative expression of the legislative will, and the legislative history may not be used in derogation of an unequivocal expression of the legislative purpose. However, it has been our experience that the English language is rarely so precise that words can have only one reasonable meaning, and the language used in section 401(d)(5)(C) is another example of such imprecision. The statute merely provides that when there has...