court my name is paul pfeiffer i'm here on behalf of pizza pro equipment leasing i am here to argue the brief that was written and argued below by mr prodi unfortunately he was not able to be here because of medical disability and so i am here to argue and the first thing that i think that we need to understand when we're dealing with this issue occasions and every amendment was also approved it had one participant which was the president of the company i think that's important to understand this is in a large plan didn't have more than one participant the thing that they skate is dealing with is it playing provided a benefit for somebody or for the benefit of an early retirement of forty five years old and under the statute the statute says if you have a reduce or if you have a benefit that starts at forty five and at this time at least i know the statute been amended several times but at the time an issue you reduce it and make it equivalent to a benefit that was payable or that's paid at the age of sixty two the benefit under the statute is limited at that time it was limited between one hundred and sixty thousand at the first year up to one hundred seventy five thousand in the last year now a defined benefit plan generally is the plan will pay this amount of money whether it's one hundred sixty thousand dollars from age sixty two until the time that you die this plan that the benefits did not cease at death they were paid out many benefit plans large plans mainly  there is a when you die your your benefits go away and so the use of a mortality decorah is absolutely necessary otherwise the plan will be over funded because we all know the government points out that we all agree that not everybody is going to live forever and not everybody is even going to live to two that the age that the plan calls for it wasn't to play out pay out forever wasn't i mean it isn't absolutely not yes so when these i mean a second person a spouse or something lifetime yeah it will just get paid to the beneficiary so at that point in time when somebody dies are fully vested so we're not dealing with the issue of whether this person is vested or not it's he's fully vested at all times and it gets paid out upon his death there's no forfeiture so it says equivalent brief saying that that regulation was an improper interpretation of the statute no he did not and and but we have paper it reminds me of wh a child in ronald reagan put the i r s code and we're here today there's hundreds and hundreds and hundreds of pages to argue with what equivalent m actuarially equivalent means and i don't think that's necessary i think that if you step back and try to figure out what's this plan supposed to accomplish it was approved in fact it had been previously audited and with no findings of problems the other clients in fact mr peroni was audited for the exact same issue and the government didn't find any problems with it either so i think if you step back and try to figure out try to understand what this plan supposed to do it makes sense the the well i'm not an accountant and i have i am struggle with understanding this but maybe in my overly simple it's simplistic view of it it seems to me that you are actually told what white expectancy tables are you sure all your told what discount rate to use which is five percent right it would seem to me that if an actuary could say at age sixty two to purchase an annuity with a five percent discount rate that would that would last a person's lifetime which is what their i r s allows right costs one million dollars to pay a benefit a hundred sixty thousand the first year putting the event that they die before it's all paid out to get the money the a part of money back and next year we could figure out using a five percent discount rate what that number is could they not well that's what the plan did it just reduced the amount by five percent and and the expert that was hired by the plan in this case produced numbers that showed what is the present value of the benefit that the plan agreed to pay at forty five versus what's the present val value of the pool what the plan was supposed to pay if you started at sixty two and all those numbers show that the plan was actually less than what the the what was allowed under the statute and  was done that way i think strategically by mr prodi for exactly the reason that you just pointed out it's very simple you reduce a prop present value and the the but my you don't ending is that the response from the government is it's not really that simple that you are sort of assuming a fixed static time period based just on life expectancy rather than looking on a year by year basis what are the odds that this person is going to pass away you know a person who's eighty five is more likely to pass away in a given year than a person who is forty five right but the statute says that if it's if if if the plan if the benefits do not get forfeited you don't use a decorative well that's a that they say they're not using a document i know what they say but when you look at it and the their expert report even says that when it's when you're dealing with annuity purchase rate automatically assume a death i mean he doesn't use that term he tries to distinguish it but it's the same thing it's a decrease based on somebody step it's important to have that in the in in in plans by the way we're not saying that you can't always do it that way but in this plane where there's one person and it's not forfeited it's not necessary the plan and the regulations say that you do not decrease it based on a death deck are met the reason why if you have a plan of the three of you all you're not all going to die at the same age we and so there is an actuarial analysis that does and if you die and your your benefits get forfeited to the plan which happens in a lot of plans then the plan will automatically be over funded because not everybody is going to die at the age that the mortality table says that they're going to die we agree with that and this plan did use a mortality table to come up with the benefits so it's said and i'm not an actuary but there are actual real reports in the it reduced it back to an amount that needed to be paid in to accomplish that because what you don't want in a plan is to have it under funded the plane would be in trouble if the plan was under funded and this court's probably heard plenty of cases where plans are underfunded and planted ministre toure's and actuaries may get sued for not doing what they're supposed to do so you are correct the statute says what the statute says it reminds me of what i told my kids i have an eight year old and a four year old you mean which is saying you say what you mean the statute says that the benefit has to be equivalent at forty five to the benefit that you would take if you're sixty two and and that's what the pizza pro did in this case now and again as simply as possible how do you think you compute that it's when you're got a benefit at sixty two that says one hundred sixty of the five percent which is what is called for in the statute the plan didn't reduce to the exact same way as the continuing education materials that is in the record that the i r s gave to its own agents to figure out how to do this with a plan if you read their their and that's what the appendix for twenty five through for twenty seven that's exactly the way that pizza pro did it in this case you know you can get an actuary there's a lot of actuarial jokes out there and you have you have a lawyer you have a an account and you have an actuary if you asked what two plus two is the the c p a is going to say for the lawyers going to say well it seems to be four but i may need to go review the rules about maddux the actuarial say what do you want the answer to be and that's not what we did here did the deal it's a very simple process and it doesn't need to it doesn't need to have an expert issue a twenty five page report trying to argue that you do this analysis and then you take a ratio it just you know all you need to do is do it to present value reduce it to amount and then what the what the petitioner or what the pizza pro did in this case was hire a mathematician to explain that if you look at these two benefits that present value less than the present value of the the full amount that would have been paid out of sixty two oscars and puts our standard of review on what method  used it's a question of law so it's been over you either decide was a statute clear when it said equal or was the statute not clear or clear as far as what the governor wants the regulation and is the method it has to be that you have to show deference to the plan and the the tax court showed no deference to the plan it just said that that you didn't you didn't have an actuary so no the commissioners expert you know forty years of expertise and doing these particular calculations talked about how actuaries do with it and you know as we've been talking about that is the question what is actuarial equivalen regulation requires and he explained to this three step process and i'm in a try to put it in sort of more of a lay person's language how i have been thinking about it so the statute and the regulation together tell us that a defined benefit plan that pays early like this one does has to be equivalent to the actuarial equivalents two hundred sixty thousand dollars per year starting at age sixty two so the first question is well what is one hundred sixty thousand dollars starting at age sixty two worth and mr clue tells us that until the tech support that actuaries figure that out by terminating how much it would cost to buy a congress required plus an interest rate so you take you know the benefit times the a p r and get a lump sum that should be a neat that's that is a mathematical copy and that's it there's there's is there any talk about that for a moment the concept of the mortality document and whether or not it should be used in the years at issue here comes from i r s guidance there's a couple of notices in an i r s revenue ruling that talk about what should be used in making these calculations and bad administrative guidance says you generally are usually must use a mortality table but under the circumstances present here where the benefits are not forfeit at death you don't use a mortality document so that alone makes clear that these are two different concepts so step one of this calculation to get back to that question is you know this question of how much does it cost to buy that annuity at age sixty two you get a lump sum then discount that lump sum for a five percent interest per year over seventeen years that difference between forty five and sixty two then we have it a new lump sum this discount of lump sum and the question of bad point is well how much of an annuity can i buy for a forty five year old with this so it's the opposite of the first step and the first step you start with the benefit you get a lump sum you discounted at the second step at  rates to figure out how much of an annual benefits one could buy with that discounted lump sum isn't that may be the crux of the dispute here is when you use the mortality  r so to speak going to unwind the lump sum number at since this one is life of him life of spouse and then they get whatever's left i guess the estate gets whatever's annuity which i think is what you're talking about this plan like many defined benefit plans does have that survivor annuity provided for but in section i believe that section four seventeen of the internal revenue code which i  believe we talked about in our brief the congress provided that way or that benefit is included in the plan that's qualify joined survivor annuity that the value of that also has to be the actuarial equivalence of annuity for the plan participant so this is why i've come across this in my personal life very often where there's a qualified joined survivor annuity that selected the pension played to the plan paid to the plan is often less than it would be if they did not elect the qualified to answer ever annuity and the reason for that is because that extra benefit that may be paid to the spouse or other beneficiary has to be the actual equivalence of just a straight life annuity on the president but help yeah i mean i think i understand that but in this case isn't there also a kicker at the end that when they both die of that the remaining money goes to their state but your honor that that issue would again require more actuarial calculations and it's not something that the parties really talked about in the tax court and so that particular piece was not before the tax court but for fifteen butu which we mentioned in a footnote says that where there's some part of the plan that is not a single avenue waiting for the all kinds of things at retirement and whatever the plan provides has to be that actuarial equivalence maybe go back to where you were before i interrupted you you had the lump sum and then what happens so so we're talking about at how did he factor in did he use a straight life annuity analysis as one of these i can quite understand did he use straight life or did he factor in the survivorship benefit because as you said if there's a survivorship benefit  so in mr clip i did the calculations he was looking at at maximum annual benefit question and in doing his calculations the mortality table he used is the one specified by the secretary for a single life must be the one prescribed by the secretary so we know from that that congress expected people to use a mortality table and making these calculation and then what ok so you get once you get that number then how do you decide what the the taxable or nontaxable model subject to the excise taxes sure so it it might be helpful just to briefly walk through how these statutes intersect with contributions so the question is how does one know whether or not there's an excess deduction section for zero four deals with that question and deals with the deductibility of contributions to defined benefit plans and in one of the subsections of four zero four j one a congress required that annual contributions may not be based on a maximum annual benefit that exceeds the four fifteen limits so that's how we'll get deduction the plan could take was the same as the minimum required contribution so the point of a defined benefit plan is to fund the plan over time so that when it comes of the time to pay out the benefits the plan will be fully funded so there's this calculation of how much should be contributed per year this minimum annual contribution and that involves a number of things that involves how long it will be before the benefits are paid out you know we're talking twenty years in the future or three years in the future the assets that are already in the plan the value of those assets what's expected to happen with those assets and then of course the central question here which is what's the pension that this plan needs to pay and so that's how the maximum annual benefit plays into that calculation it's a core piece of figuring out how much must be contributed per year for the plan to be funded  i think though the question here really it is a specific and narrow one which she is did the tax court clearly error in crediting the commissioner's expert rather than the report provided by a pizza pro and i think the question or the answer to that has to be no the tykes were to not clearly heard from the text or its point of view i'm not aware that this judge is an actuary either so indeed the parties provided him with some reports about what that phrase means i think the method used here is and is a fact question they clearly  in the nature of a factual decision which which of these experts you know is more qualified or more helpful to the court and should be reviewed for clear  i'd like to say one word if i may about the arguments at the end of piece of prose brief regarding the election under forty nine seventy two c seven that they claim pizza pro made pizza pro does not point to any affirmative step but it took at all to make an election under that provision it's unclear what pizza proclaims was the election what it can do what is that election i mean it it sounds like it just magically makes this all go away if you if they would have done something to we'll act of this that that can't be right right so i have picked the brains of my colleagues at the i r s who live in this pension plan world about that very question and i think for many taxpayers the beneficial answer would be to make that election there may be some tax payers where for very complicated reasons that would not make sense for them but i think for most taxpayers it would make sides to make that election under four hundred seventy two maybe seven action you don't have to do any of these calculations and this whole analysis goes out the window no no your hon r so the forty nine seventy seven allows for an election to not take an account contributions up to what is called the full funding limit of a plan and the commissioners expert determined that in fact the full funding limit had been exceeded by pizza pro it's an issue that the tax were did not reach because the tax court determined that they did not make an election and didn't need to reach that question of the full funding limitation but there still are limitations on what a company can contribute to the plan and all of these calculations still need to be done to determine is it my time is almost up are there any other questions from the panel thank you very much honour's very briefly when you're talking about mortality tables in the mortality decorah you know i'm glad i'm not the only one that started reading this and my head was spending a little bit but i looked it up started does not apply if the participants benefit is not forfeited upon death you don't need to do what the government's expert did for twenty pages or so to try to figure this out in this plan some planes you have to do that and that is on the appendix page four twenty five and it very simply describes the math that the same math that pizza pro used in this case was to which was to determine going back to you're allowed is there some the taxpayer acquiesced in that paid the tax and interest but only a only fight the excise tax so why isn't the number that they paid the follow where those numbers those were the i r s numbers and like it was like a moving target i believe the answer to your question is or one of the issues is that pizza pro paid the income taxes years ago is in a settlement and i think they were hopeful this issue would just go away and then all of a sudden years later they get this notice on excise tax and i think that that answers that question thank you very well it's a challenging case we appreciate your briefing in an argument thank you very much are we totally understand if it's a case of no submitted and we'll do our best to figure out an issue an opinion in due cour