T.C. Memo. 2020-5
UNITED STATES TAX COURT
ED THIELKING, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1870-16R. Filed January 9, 2020.
Michael A. Gilmer, for petitioner.
Pamela J. Sewell, David Conrad, and Shawn P. Nowlan, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Petitioner seeks a declaratory judgment under section
74761 that the Ed Thielking, Inc. Employee Stock Ownership Plan (ESOP) and the
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. -2-
[*2] Ed Thielking, Inc. Employee Stock Ownership Trust (ESOT) are qualified
under sections 401(a) and 501(a), respectively. Respondent determined that the
ESOP and the ESOT did not qualify for the plan year ended (PYE) February 28,
2007, and for all plan years thereafter. We sustain that determination.
Background
The parties filed a joint motion for leave to submit this case for decision
under Rule 122. We granted their motion and decide this case on the basis of the
pleadings and the administrative record. See Rule 217(a). We incorporate the
administrative record herein.
I. Petitioner
Petitioner is an S corporation incorporated in Iowa on March 10, 2006. It
reports its income and expenses on the basis of a fiscal year ending (FYE)
February 28. At incorporation, in exchange for a $10 promissory note, petitioner
issued 10 class A shares to Edmund Thielking, its sole shareholder, officer, and
director. Shortly thereafter, Mr. Thielking elected his spouse, Amy Thielking, as a
director and officer. Petitioner had a principal place of business in Iowa when it
petitioned this Court. Petitioner was and at all times remained a privately held
entity. -3-
[*3] On a date and in a manner that is not clear from the record, Mr. Thielking
transferred his 50% partnership interest in Gray Thielking Electric (GTE) to
petitioner. Petitioner’s primary asset during the years at issue was the 50%
partnership interest in GTE. For FYE 2007 and each subsequent year at issue,
GTE issued a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc.,
to petitioner in accordance with its 50% partnership interest in GTE.
II. The Plan
As part of a plan developed by Mr. Thielking’s father, Stephen Thielking of
Oden & Thielking, C.P.A.s, P.C. (O&T),2 petitioner established the ESOP on
March 31, 2006, with a purported effective date of March 10, 2006.3 Mr.
Thielking, acting as petitioner’s president, executed the ESOP agreement.
Petitioner also established the ESOT on March 31, 2006, again with a purported
effective date of March 10, 2006. Mrs. Thielking was named trustee of the ESOT.
2 Stephen Thielking is an accountant who has featured prominently in prior cases before this Court. See Val Lanes Recreation Ctr. Corp. v. Commissioner, T.C. Memo. 2018-92; Churchill, Ltd. Emp. Stock Ownership Plan & Tr. v. Commissioner, T.C. Memo. 2012-300; Hollen v. Commissioner, T.C. Memo. 2011-2, aff’d per curiam, 437 F. App’x. 525 (8th Cir. 2011). This case involves an S corporation--petitioner--that Stephen Thielking established as a holding company for his son’s electrical contracting business. 3 Petitioner adopted its FYE as the PYE for the ESOP. -4-
[*4] Article 2 of the ESOP agreement states in pertinent part that participation in
the ESOP begins immediately after one year of service, provided the participant is
at least 21 years old on that date. In addition to the year of service, article 4 of the
ESOP agreement states that employer contributions to the plan require at least
1,000 hours of service during a plan year. The ESOP agreement defines an hour
of service as an hour for which an employee is paid or entitled to payment by the
employer.
Further, article 4 of the ESOP agreement incorporates the limitations under
section 415(e). With regards to distributions, article 14 of the ESOP agreement
states in pertinent part:
If distribution has begun on or before the Required Beginning Date and if the Participant dies before his entire Accrued Benefit has been distributed to him the remaining portion of his Accrued Benefit which is not payable to a beneficiary designated by the Participant’s will shall be distributed within five years after the Participant’s death or over the life of the beneficiary or over a period certain not extending beyond the life expectancy of the beneficiary, commencing not later than the end of the calendar year following the calendar year in which the Participant would have attained the age 70 ½.
The record contains no restatements or amendments to either the ESOP or
the ESOT agreements, despite respondent’s repeated requests for those documents
on January 28, 2010, October 26, 2011, and January 31, 2012. -5-
[*5] III. Plan Contributions
Petitioner’s primary source of income in FYE 2007 was an income
allocation from GTE. Petitioner did not report any compensation of officers or
salaries and wages as deductible expenses. Nothing in the record indicates that
petitioner filed employment and unemployment tax returns, or that it issued and
filed Forms W-2, Wage and Tax Statement, or Forms 1099-MISC, Miscellaneous
Income, for FYE 2007.
In FYE 2007 petitioner’s board of directors resolved to issue a dividend
payable in capital stock to the participants of the ESOP or at their election to their
ESOT accounts. The only plan participant, Mr. Thielking, elected for petitioner to
contribute the dividend to his ESOT account. Petitioner claimed a deduction with
respect to the ESOT contribution, which largely offset the income allocation to it
from GTE. With no material variance, petitioner followed this course of action for
all the years at issue. Petitioner issued share certificates representing the
following class B capital stock dividends to Mrs. Thielking, as trustee for the
ESOT: -6-
[*6] FYE 2/28 Quantity 2007 23,000 2008 20,800 2009 6,550 2010 700 2011 3,700
The only other contribution occurred on or about November 6, 2007, when
the ESOT received a purported rollover contribution of $15,634 from a section
401(k) account of Mrs. Thielking. Petitioner’s board of directors authorized the
purchase by the ESOT of an additional 15,635 class B shares with the funds
contributed in the section 401(k) rollover.4
IV. Plan Reporting
Petitioner reported on Form 5500, Annual Return/Report of Employee
Benefit Plan, for PYE February 28, 2007, only one participant, Mr. Thielking. Mr.
Thielking’s account consisted of 23,000 shares of petitioner’s stock. Stephen
Thielking prepared a written appraisal that valued each share of petitioner’s stock
at $1, resulting in a valuation of $23,000 for Mr. Thielking’s ESOT account. The
4 The board minutes indicate the meeting took place on November 6, 2006, but the rollover check is dated November 6, 2007. We assume that the meeting actually took place on November 6, 2007. -7-
[*7] appraisal, however, did not include Stephen Thielking’s signature or his
qualifications as an appraiser.
Petitioner also reported Mr. Thielking as the only participant in the ESOP5
on Form 5500 for PYE February 28, 2008. The plan received a rollover
contribution on behalf of Mrs. Thielking during PYE February 28, 2008, even
though she was not reported as a plan participant for that period. The plan
reported total assets of 59,434 shares of petitioner’s stock. Again, Stephen
Thielking valued each share at $1, resulting in a net plan asset value of $59,434,
but he again failed to sign the appraisal or include his qualifications.
Petitioner finally reported a second participant for the first time, Mrs.
Thielking, on its Form 5500 for PYE February 28, 2009. Once again petitioner
relied on an unsigned appraisal prepared by Stephen Thielking, valuing the 66,234
shares of petitioner held by the ESOT at $1 each, or $66,234.
The record does not include Forms 5500 or appraisals for PYE February 28,
2010, or any subsequent years.
5 In a summary annual report for PYE February 28, 2008, petitioner indicated the plan had two participants. In the Form 5500 for PYE February 28, 2008, however, petitioner indicated the plan had only one participant. -8-
[*8] Discussion
Section 7476(a) authorizes this Court to render a declaratory judgment
relating to the qualification of a retirement plan, subject to the limitations in
section 7476(b). Neither party contends that any of those limitations apply, and
we are satisfied that we have jurisdiction over the petition.
Respondent determined that the ESOP and the ESOT failed to qualify under
sections 401(a) and 501(a), respectively, because the ESOP had both operational
and form failures. Respondent determined that the operational failures included:
(1) allowing ineligible individuals to participate in the plan, (2) accepting
contributions in excess of the limitations imposed by sections 401(a)(16) and
415(c)(1), and (3) failing to have an independent appraiser value employer
securities as required by section 401(a)(28)(C). Respondent determined that the
plan failed to qualify in form because it did not conform to certain statutory and
regulatory requirements, and petitioner did not adopt timely amendments as
permitted by section 401(b).
Respondent’s determination to disqualify the plan is presumed correct, and
petitioner bears the burden of proving that respondent abused his discretion in
doing so. See Rule 142(a); Oakton Distribs. Inc. v. Commissioner, 73 T.C. 182,
188 (1979). To satisfy its burden of proof, petitioner must persuade the Court that -9-
[*9] respondent’s determination was unreasonable, arbitrary, or capricious. See
Buzzetta Constr. Corp. v. Commissioner, 92 T.C. 641, 648 (1989). Petitioner has
failed to do so.
Before we reach the merits of respondent’s determination to disqualify the
plan, we must address petitioner’s contention that respondent “erred in issuing its
revocation letter because the statute of limitations has run with respect to one or
more of the plan years at issue.” Petitioner’s limitations contention is misplaced.
Section 6501(a) limits only the assessment and collection of tax; it does not limit
respondent’s broad authority to audit retirement plans and, if appropriate, to issue
a final nonqualification letter. The period of limitations prescribed by section
6501(a), therefore, does not apply to proceedings under section 7476 or to
respondent’s determinations regarding the qualification of retirement plans under
section 401(a), as they do not involve the imposition of any tax. Christy & Swan
Profit Sharing Plan v. Commissioner, T.C. Memo. 2011-62, 2011 WL 913190,
at *3. Accordingly, respondent’s determination to disqualify the ESOP is not
barred by any period of limitations set forth in section 6501.
We turn then to the merits. Section 401(a) lists requirements that must be
met for a plan and its underlying trust to qualify for preferential tax treatment
under section 501(a). A plan must meet the section 401(a) requirements in both - 10 -
[*10] form and operation. Ludden v. Commissioner, 620 F.2d 700, 702 (9th Cir.
1980), aff’g 68 T.C. 826 (1977); sec. 1.401-1(b)(3), Income Tax Regs. In
addition, the terms of the plan must be in writing. Employee Retirement Income
Security Act of 1974, Pub. L. No. 93-406, sec. 402(a)(1), 88 Stat. at 875; see also
sec. 1.401-1(a)(2), Income Tax Regs. Congress established the writing
requirement so that every employee, on examining the plan document, may
determine exactly what his or her rights and obligations are under the plan and
who is responsible for operating the plan. See Curtiss-Wright Corp. v.
Schoonejongen, 514 U.S. 73, 83 (1995); H.R. Conf. Rept. No. 93-1280, at 297
(1974), 1974-3 C.B. 415, 458.
A qualification failure pursuant to section 401(a) is a continuing failure
because allowing a plan to requalify in subsequent years would allow a plan “to
rise phoenix-like from the ashes of such disqualification and become qualified for
that year.” Pulver Roofing Co. v. Commissioner, 70 T.C. 1001, 1015 (1978). For
this reason we focus our analysis primarily on failures affecting the ESOP’s
qualification under section 401(a) for PYE February 28, 2007. We do not
specifically discuss the qualification of the ESOT because the exemption of the
ESOT under section 501(a) follows from the qualification of the ESOP under
section 401(a). - 11 -
[*11] 1. Operational Failures
In making a determination of a plan’s qualification under section 401(a) the
plan’s operation is as relevant as its terms. Winger’s Dep’t Store, Inc. v.
Commissioner, 82 T.C. 869, 876 (1984); sec. 1.401-1(b)(3), Income Tax Regs. An
operational failure occurs when the operation of a plan fails to meet the
requirements of section 401(a) or comply with the terms of the plan document.
See, e.g., Hollen v. Commissioner, T.C. Memo. 2011-2, 2011 WL 13637, at *3-*4
(finding that a plan failed to qualify because it did not adhere to its own vesting
schedule), aff’d per curiam, 437 F. App’x 525 (8th Cir. 2011). We now address
the operational failures respondent identified.
a. Ineligible Individuals Permitted To Participate in the Plan
Respondent determined that petitioner caused an operational failure by
admitting participants who had not met the ESOP’s criteria for eligibility.
Petitioner challenges this finding without pointing to any evidence in the record
supporting its contention.
Eligibility to participate in the ESOP began “immediately after one year of
service”. Eligibility for contributions also required the purported participant to
complete at least 1,000 hours of service within the plan year. Petitioner was - 12 -
[*12] incorporated on March 10, 2006, and reported Mr. Thielking as a plan
participant on its Form 5500 for PYE February, 28, 2007.
Petitioner had not been incorporated for one full year when it reported Mr.
Thielking as a plan participant; therefore, it is impossible for Mr. Thielking to
have attained a year of service as of February 28, 2007. Moreover, the record
contains no credible evidence establishing that Mr. Thielking performed services
for petitioner that met the 1,000 hours of service requirement. The ESOP
agreement defines an hour of service as each hour for which an employee is paid
for the performance of duties. Petitioner did not report as deductions either officer
compensation or salaries and wages for FYE February 28, 2007, and failed to
otherwise provide any evidence that it compensated Mr. Thielking for any duties
performed for petitioner. Because Mr. Thielking failed both prongs of the test for
eligibility, his admission as a plan participant in PYE February 28, 2007, created
an operational failure.
Additionally, the ESOT accepted a rollover contribution from Mrs.
Thielking during PYE February 28, 2008, but petitioner did not report Mrs.
Thielking as a participant until PYE February 28, 2009. Because Mrs. Thielking
was not a participant when the ESOT accepted the rollover contribution, an
operational failure occurred. - 13 -
[*13] We are not persuaded by petitioner’s perfunctory contention that both Mr.
and Mrs. Thielking performed substantial services for petitioner and were
compensated in the form of yearend bonuses only if circumstances permitted. In
the absence of any credible evidence in the record of the services performed or any
material yearend bonuses paid in PYE February 28, 2007, we conclude that neither
individual performed the requisite 1,000 hours of service.
b. Excess Contributions Under Sections 401(a)(16) and 415(c)
Respondent determined that petitioner, in operating the ESOP, exceeded the
contribution limits under sections 401(a)(16) and 415(c) for PYE February 28,
2007. Petitioner contends that the dividend paid to the ESOT represented
compensation for services rendered by Mr. Thielking. We find this contention
unconvincing given the complete lack of evidence of any services rendered by Mr.
Thielking.
Employee stock option plan contributions and other additions with respect
to a participant are limited to the lesser of $40,000 (adjusted for inflation, see sec.
415(d)) or 100% of the participant’s compensation. Secs. 401(a)(16), 415(c)(1).
As mentioned above, petitioner did not claim as deductions either officer
compensation or salaries and wages for FYE February 28, 2007. See sec.
415(c)(3). Additionally, it failed to provide any evidence that Mr. Thielking - 14 -
[*14] performed any duties for petitioner. Consequently, Mr. Thielking’s
contribution limit for PYE February 28, 2007, was zero.
Because petitioner contributed6 property with an alleged value of $23,000 to
the ESOT for the account of Mr. Thielking, it exceeded the contribution limit
under sections 401(a)(16) and 415(c). This excess contribution constitutes an
operational failure for PYE February 28, 2007.
c. Failure To Satisfy the Independent Appraiser Requirement
Respondent determined that petitioner’s ESOP failed to satisfy the
independent appraiser requirement of section 401(a)(28)(C). Petitioner contends
that: (1) Stephen Thielking was an independent appraiser, (2) the doctrine of
substantial compliance applies, and (3) this Court in Val Lanes Recreation Ctr.
Corp. v. Commissioner, T.C. Memo. 2018-92, already found Stephen Thielking to
be an independent appraiser. For the reasons that follow, we conclude that
Stephen Thielking was not an independent appraiser with respect to petitioner’s
stock.
In the case of an employee stock ownership plan and its corresponding trust,
all employer securities which are not readily tradable on an established securities
6 Under sec. 402(e)(3) a contribution made by the employer to a trust pursuant to an election by the participant shall not be treated as an employee contribution. - 15 -
[*15] market must be valued by an independent appraiser. Sec. 401(a)(28)(C).
Petitioner’s stock is not traded on an established securities market, and so the
ESOT’s holdings of that stock required a valuation by an independent appraiser.
An “independent appraiser” means any appraiser meeting the requirements
of a “qualified appraiser” under the section 170(a)(1) regulations. Sec.
401(a)(28)(C). The regulations provide a list of persons who cannot serve as a
“qualified appraiser”. Sec. 1.170A-13(c)(5)(i)(C), Income Tax Regs. Specifically,
the regulations exclude the donor of the property, any party to the transaction in
which the donor acquired the property, and the donee of the property from the list
of persons eligible to serve as “qualified appraisers”. Sec. 1.170A-13(c)(5)(iv)(A),
(B), and (C), Income Tax Regs. Any person related to any of the above within the
meaning of section 267(b) is also excluded as a qualified appraiser (the
constructive ownership rules of section 267(c) apply to this determination). See
sec. 267(c); sec. 1.170A-13(c)(5)(iv)(E), Income Tax Regs.
Under section 267(c), stock owned by a trust is considered owned
proportionately by its beneficiaries. Sec. 267(c)(1). Stock owned by an individual
is constructively owned by his family members, including ancestors and lineal
descendants. Sec. 267(c)(2), (4). Finally, stock owned by a corporation is - 16 -
[*16] considered owned by any individual owning more than 50% of the stock of
the corporation. Sec. 267(b)(2).
As a starting point, petitioner, the donor of the property, is an excluded
person. Mr. Thielking, as the sole beneficiary of the ESOT (in PYE February 28,
2007), constructively owned all of petitioner’s stock. See sec. 267(c)(1). Stephen
Thielking, as Mr. Thielking’s father, constructively owns all the stock of petitioner
that his son owns. See sec. 267(c)(2), (4). Because Stephen Thielking
constructively owns more than 50% of petitioner, he is a related person and is not
an independent appraiser.
In addition to the independence requirement the regulations impose certain
collateral requirements: (1) the appraisal must include a declaration that the
individual holds himself out to the public as an appraiser and (2) the qualified
appraiser who signs the appraisal must list his or her background, experience,
education, and membership, if any, in professional appraisal associations. Sec.
1.170A-13(c)(5)(i)(A) and (B), Income Tax Regs. The appraisal letters covering
PYE February 28, 2007, through PYE February 28, 2009, state that “[t]he
undersigned holds himself out to be an appraiser.” However, because there is no
signature below that statement or elsewhere on the letters, the appraisals fail the
first collateral requirement. See Hollen v. Commissioner, 2011 WL 13637, at *4; - 17 -
[*17] see also K.H. Co., LLC Emp. Stock Ownership Plan v. Commissioner, T.C.
Memo. 2014-31, at *27-*32. The appraisals fail the second collateral requirement
because Stephen Thielking did not list his qualifications. See Churchill, Ltd. Emp.
Stock Ownership Plan & Tr. v. Commissioner, T.C. Memo. 2012-300, at *20-*23.
Petitioner contends that the substantial compliance doctrine applies to
excuse both the independence and collateral requirement failures. The doctrine of
substantial compliance generally applies only when the requirement is procedural
or directory and does not relate to the essence of the statute. Taylor v.
Commissioner, 67 T.C. 1071, 1077-1078 (1977). Petitioner relies on Bond v.
Commissioner, 100 T.C. 32 (1993), where the Court found the regulations under
section 170(a) are directory and not mandatory with respect to the section 170
statutory purpose. In Bond the Court did not, however, address the independence
requirement of section 401(a)(28)(C). We conclude that the independence
requirement of section 1.170A-13(c)(5)(iv), Income Tax Regs., which bars certain
related people from serving as qualified appraisers, relates to the essence of
section 401(a)(28)(C)--therefore the doctrine of substantial compliance cannot
excuse the independence requirement.
Petitioner’s reliance on Bond with respect to the collateral requirements is
also misplaced. While in Bond v. Commissioner, 100 T.C. at 41, the Court did - 18 -
[*18] excuse a failure to include the appraiser’s qualifications with the appraisal,
the taxpayer promptly provided the information at the administrative level and it
was included in the record. The record here does not include any information
from which we could assess Stephen Thielking’s qualifications. Bond is
distinguishable.
Finally, petitioner contends that, in Val Lanes Recreation Ctr. Corp. v.
Commissioner, at *23-*24, this Court previously found that Stephen Thielking
was an independent appraiser. But see Churchill, Ltd. Emp. Stock Ownership
Plan & Tr. v. Commissioner, at *24-*25 (finding that Stephen Thielking was not
an independent appraiser because, inter alia, he failed to sign the appraisals and
include his qualifications). Val Lanes, however, is distinguishable on multiple
grounds. First, Stephen Thielking had no familial relationship with the primary
beneficiary of the employee stock option plan in Val Lanes. Second, while the
appraisals in the record did not include a signature, the Court there found on the
basis of credible testimony--absent here--that signed appraisals were in fact
provided to the Department of Labor. In contrast, here, Stephen Thielking valued
stock beneficially owned by his son, and nothing in the record indicates that the
appraisals were ever signed. - 19 -
[*19] Because Stephen Thielking’s appraisal did not satisfy the independence and
collateral requirements of section 1.170A-13(c)(5)(i)(A), (B), and (C), Income Tax
Regs., we conclude that petitioner’s stock held by the ESOP was not valued by an
“independent appraiser”, and we hold that the ESOP fails to meet the requirements
of section 401(a)(28)(C).
Although these operational failures alone are sufficient for us to uphold
respondent’s determination, we nonetheless address the form failures respondent
determined.
2. Form Failures
A plan must be continually amended to comport with subsequent changes to
the requirements under section 401(a). Ronald R. Pawlak, P.C. v. Commissioner,
T.C. Memo. 1995-7, 1995 WL 7510, at *5. “A form failure occurs when a plan
document does not contain required language or terms.” Family Chiropractic
Sports Injury & Rehab Clinic, Inc. v. Commissioner, T.C. Memo. 2016-10, at *12.
A form failure may result from a statutory or regulatory change that renders the
existing plan terms deficient. Sec. 1.401(b)-1(b)(3)(i), Income Tax Regs. The
Commissioner, at his discretion, may designate a provision that fails to conform to
a change in the law as a disqualifying provision. Id. Lastly, a plan may
retroactively qualify under section 401(a) if remedial amendments are made during - 20 -
[*20] the remedial amendment period with respect to each statutory or regulatory
change. Sec. 401(b); sec. 1.401(b)-1(d), Income Tax Regs.
Because the record contains no amendments to the ESOP agreement, we
conclude that petitioner never amended the plan and consequently do not address
remedial amendments under section 401(b). We turn instead to an analysis of the
ESOP’s form failures.
a. Small Business Job Protection Act of 1996
Congress repealed section 415(e) for plan years beginning after December
31, 1999. Small Business Job Protection Act of 1996, Pub. L. No. 104-188, sec.
1452(a), (d)(1), 110 Stat. at 1816. The Commissioner designated any provision
that failed to reflect the repeal of section 415(e) as a disqualifying provision under
section 1.401(b)-1(b), Income Tax Regs. Rev. Proc. 99-23, sec. 4, 1999-1 C.B.
920, 923. Because the ESOP agreement incorporates section 415(e) by reference
in article 4, article 4 is a disqualifying provision.
b. Economic Growth and Tax Relief Reconciliation Act of 2001
Congress made certain changes to the definitions of “key employee” and
“top-heavy plan” under section 416(i)(1) and (g), respectively. Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. L. No. 107-16,
sec. 613(a), (d), 115 Stat. at 100, 101. The changes were effective for plan years - 21 -
[*21] beginning after December 31, 2001. EGTRRA sec. 613(f), 115 Stat. at 102.
The Commissioner designated any provisions that fail to satisfy the qualification
requirements due to the EGTRRA changes as disqualifying provisions. Notice
2001-42, sec. III, 2001-2 C.B. 70, 71; see also sec. 401(a)(10)(B).
With respect to the definition of a key employee, EGTRRA: (1) eliminated
a four year look-back provision; (2) changed the salary threshold for an officer to
be considered a key employee from 50% of the amount in effect under section
145(b)(1)(A) to $130,000; and (3) eliminated the largest interests test in section
416(i)(1)(A)(ii). EGTRRA sec. 613(a). Petitioner failed to incorporate these
changes into the definition of a key employee in the ESOP agreement.
With respect to the definition of a top-heavy plan, EGTRRA reduced the
five year look-back period under section 416(g)(4)(E) to one year. EGTRRA sec.
613(c)(2). Petitioner failed to incorporate this change into the top-heavy plan
definition in the ESOP agreement.
The ESOP agreement’s definitions of “key employee” and “top-heavy plan”
are disqualifying provisions.
c. Final Regulations: Section 401(a)(9)
In general, plan documents must be amended to the extent necessary to
comply with the requirements of the final regulations under section 401(a)(9) by - 22 -
[*22] the end of the first plan year beginning after January 1, 2003. Rev. Proc.
2002-29, sec. 3.01, 2002-1 C.B. 1176, 1177. By way of example, the ESOP
agreement does not provide for the correct distribution rules should a participant
die after distributions have begun but before his entire interest has been
distributed. Section 401(a)(9)(B)(i) specifies that the remaining interest must be
distributed at least as rapidly as under the method of distribution being used as of
the date of death. The ESOP agreement incorrectly allows for distributions over
the life of the beneficiary. It also includes outdated references to the proposed
regulations under section 401(a)(9) and makes no mention of the final regulations.
Both of these are disqualifying provisions.
d. Petitioner’s Contentions
Petitioner contends that the plan document had no form failures because:
(1) the IRS issued a favorable determination letter with respect to another
taxpayer’s identical plan, (2) the plan was amended as required, and (3) the
Department of Labor and the IRS seized the ESOP’s records from its accountant.
We do not find any of these arguments convincing.
Under section 6110(k)(3), determination letters may not be used or cited as
precedent, and this Court has refused to consider determination letters proffered
by taxpayers. See Derby v. Commissioner, T.C. Memo. 2008-45, 2008 WL - 23 -
[*23] 540271, at *20 (concluding that a taxpayer could not rely on a determination
letter issued to another taxpayer); see also Reserve Mech. Corp. v. Commissioner,
T.C. Memo. 2018-86, at *49 (refusing to consider 39 determination letters because
they cannot be used as precedent under section 6110(k)(3)). Consistent with
section 6110(k)(3) and our precedent, petitioner cannot rely on a determination
letter issued to a different taxpayer. Moreover, petitioner has failed to actually
identify the determination letter on which it attempts to rely; even if it had
identified it, petitioner failed to provide any evidence that both plans were
identical.
Petitioner contends that it amended the ESOP agreement as required.
Petitioner stated that it failed to provide respondent with the amendments because
respondent did not request them and later because the Government seized its
accountant’s records. These contentions are unsupported by the record. First, the
plan documents and all amendments were repeatedly requested on at least three
occasions--January 28, 2010, October 26, 2011, and January 31, 2012. Second,
O&T’s records were not seized until September 12, 2012, months after the third
request for the amendments. Finally, a taxpayer has a responsibility under section
6001 to maintain adequate records. Petitioner’s reliance on its accountant to - 24 -
[*24] maintain records does not relieve it of its responsibility to maintain its own
records.
3. Conclusion
Because of the operational and form failures set forth above, we find no
abuse of discretion in respondent’s determination that the plan does not qualify
under section 401(a) for PYE February 28, 2007, and because it is a continuing
failure, all subsequent plan years. See, e.g., Martin Fireproofing Profit Sharing
Plan & Tr. v. Commissioner, 92 T.C. 1173, 1184 (1989). We sustain respondent’s
determination that the ESOP and the ESOT were disqualified for the 2007 plan
year and for all plan years thereafter. We have considered all arguments made by
petitioner for holdings contrary to those expressed herein and reject these
arguments not discussed herein as irrelevant or without merit.
To reflect the foregoing,
Decision will be entered for
respondent.