T.C. M em o . 2 0 1 8 -9 2

UNITED STATES TAX COURT
VAL LANES RECREATION CENTER CORPORATION, Pet it i on er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 4 8 87 -1 0 R. Fi l edJ u n e 2 6 , 2 0 1 8
.

J am es R. M o n ro e an dM i ch ael A. Gi l m er, fo r p et i t i o n er. Ni ch o l as D. Do uk as an dDav i dCo n rad , fo r res p o nd en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION PARIS, J u d g e: Inthi s d ecl arat ory ju d gm en tp ro ceed in g u n d er s ect i o n 7 4 7 6 , 1 p et i t i o n er ch al l en g es res p o n d en t ’ s Sep t em b er 2 9 , 2 01 0 , fi n al rev o cat i o n

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect atal l rel ev an tt i m es , an dal l Ru l e referen ces are t o th e Tax Co u rt ’ s Ru l es o f Pract ice an dPro cedu re.- 2
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[* 2 ] l et t er (FRL) ret ro act i v el y rev o k i n g res p o n d en t ’ s p ri o r fav o rab l e d et erm i n at i o n l et t er (FDL) fi n d i ng th atp et i ti o n er’ s em pl o y ee s t o cko wn ers hi p p lan (ESOP) was qu al i fi edu n d er s ect i o n 4 0 1 (a) an dth atth e ESOP’ s rel at edtru s t(ESOT) was
ex em p tfro m t ax at i o n u n d er s ect i o n 5 01 (a) fo r t h e ESOT’ s p l an y ear en d i n g M arch 3 1 , 2 0 0 1 , an d al l s ub s equ en tp lan y ears . Th e Co u rtco n cl u d es th atres p o n d en t ab u sedh i s d i scret i o n i n rev o k i n g th e FDL. 2 FINDINGS OF FACT Th e p art i es were u n ab le t o ag ree as t o t h e co m p l et en es s an daccu racy

o f t h e p u rp ort edad m i n i s trat iv e reco rd , an dth e Co urth el da h eari ng i n th i s m at ter t o d et erm i n e t h e co n ten t s o f t he ad m in i s trat i v e reco rd . Atth e h eari n g th e p art i es
s ub m i t t edad di t i o n al d o cu m en t s th atth ey ag reed were p arto f t h e ad m i n i s trat i v e
reco rd . Aft er t h e h eari n g th e p art i es s ubm i t t edth i s cas e p urs u an t t o Ru l e 1 2 2 , ag reei n g th atth e reco rdal s o i n cl u d edwi tn es s t es t i m o n y an d ad di t i o n al ex hi b i t s p res en t edat th e h eari n g . Inan act i o n fo r d ecl arat o ry ju d g m en t i n v o l vi n g th e
rev o cat i on o f a ret i rem en t p l an d et erm i n at i o n , th e Co u rt i s n o tl i m i t edt o th e ad m i n is trat i v e reco rdi n m ak in g i t s d eci s io n . Ru le 2 1 7 (a); RSWEn t ers . , In c. v . Co m m i s s i o n er, 1 4 3 T.C. 4 0 1 , 4 0 7 (2 0 1 4). Th erefo re, t h e Co u rti n co rp o rat es th e

2 Th i s o p i n i o n i s l i m i tedt o th e ESOP’ s qu al ifi cat i o n . Res p o n d en t h as rai s ed s ev eral i nco m e t ax i s s u es , b u tth e Co u rtd o es n o tad dres s m at ters h ere t h atare m o re ap pro p ri at el y ad dres s edi n a d efi ci en cy p ro ceed i n g .- 3
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[* 3 ] s t ip u l at edreco rdh erei n b y thi s referen ce an dm ak es ad d i t i o nal fi n d i n g s o n th e b as i s o f t h e i n fo rm at i o n p res en t eddu ri n g th e h eari n g . 3 Pet i t i o ner was i n co rp o rat edi n Io wa o n Au g us t2 1 , 1 9 9 0 , fo r p urp o s es o f
o p erat i n g a b o wl in g al l ey i n W es tDes M o i n es , Io wa. Pet i t i o n er was an S
co rp o rat i o n fo r Fed eral tax p urp o s es fro m i n co rp o rat i o n i n 1 9 9 0 t o atl eas t2 0 0 5
. Pat ri ck Es s y s erv edas p et i t i o n er’ s p res i d en t , treas u rer, an ds o l e d i rect o r. Ro s al ie Es s y , M r. Es s y ’ s wi fe, s erv edas p et i ti o ner’ s v i ce p res i d en t an d s ecret ary . Pet i t io n er h ad n o o th er o ffi cers . Befo re Oct o b er 2 00 0 M r. Es s y o wn edal l 5 ,0 0 0
s h ares o f p et i t i o n er. Beg i n n in g i n o r aro u n d2 0 0 0 p et i t i o n er ret ai n edSt ep h en Th i el k i n g an dth e
acco u n t in g fi rm Od en an dTh i el k i n g , C.P.A.s , P.C., t o p ro v i d e acco u n t i n g
s erv i ces . M r. Th i el ki n g h adb een a l icen sedcert i fi edp ub l i c acco u n t an t(CPA) i n

3 Onb ri ef res p o n d en ti n co rrect l y as s ert s th atp et i t i o ner wi th drew Ex h i b i t s 1 1 0 -P t h ro u gh 1 20 -P an d1 2 3 -P t h ro u g h 1 27 -P i n tro du ceddu ri ng th e h eari n g . On l y Ex h i bi t s 1 1 0-P t hro ug h 1 1 4 -P were wi thd rawn . Res p on d en tu sedth e rem ai n i n g ex hi b i t s du ri n g th e h eari n g d es pi t e o b j ect i n g t o th ei r adm i s s i bi l i ty . Th e Co u rtres erv edru l i n g o n Ex h i b i t s 1 1 5 -P t h ro u gh 1 2 0 -P an d1 2 3 -P t h ro u g h 1 2 7 -P t o al l o wth e p art i es t o b ri ef t hei r res pect iv e arg u m en t s t o res p o n den t ’ s o bject i o n s t o the ad m i s s i bi li ty

o f t h o s e ex h i b i t s . Th e Co urtn o w o verru l es res po n d en t ’ s o b ject i on s an d ru l es th atth e ex h i b i t s are ad m i t t edas s up pl em en t s t o th e ad m i n is trat i v e reco rd . Th e Co u rtrei t erat es th ati tm ay l oo kb ey o n dthe ad m i n is trat i v e reco rdi n m ak in g i t s d eci s io n an d m ay co ns i d er wi tn es s t es t i m o n y m ad e i n rel i an ce o n the ex h i b i t s . See s up ra p . 2
.- 4
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[* 4 ] Io wa s i n ce 1 9 78 an d h adkn o wn M r. an dM rs . Es s y s i n ce th e m i d t o l at e 1 9 9 0 s . 4 M r. Th i el k i n g ’ s fi rm p rep ared p et it io n er’ s Fo rm 1 1 2 0 S, U.S. In co m e Tax Retu rn fo r an S Co rp o rat i o n, each y ear b eg i n n i n g i n o r aro u n d 2 0 0 0 th ro u g h at l eas t 20 0 5
. In ad d i t i o n t o p ro vi d i n g s erv i ces t o p et i t io n er, M r. Th i el k i n g al so p rep ared
an d fi l edth e i n co rp o rat i o n d o cu m en t s fo r Es s y M an ag em en tCo rp . (Es s y M an ag em en t). Es s y M an ag em en twas i n co rp o rat edi n Io wa o n Sep t em b er 1 2 , 2 0 0 0 , an dwas an S co rp o rat i o n fo r Fed eral t ax p urp o ses fro m 2 00 0 t o at l eas t M arch 2 0 0 5
. Itwas creat edt o h o l dreal es t at e an di n ves t m en t s as wel l as t o p ro v id e m an ag em en t s erv i ces . M r. Es s y was th e p res i d en to f Es s y M an ag em en t
. M r. Th i el k i n g ’ s fi rm

p rep aredth e co rp o rat e t ax retu rn s an dco rp o rat e m in u t es fo r Es s y M an ag em en tb et ween 2 0 0 0 an d2 0 06
. 5 OnSep t em

b er 1 2 , 2 0 0 0 , up o n M r. Th i el k i n g ’ s reco m m en d at i o n , p et i t i o n er’ s b o ardo f d i rect o rs ad op t edth e ESOP an dth e ESOT wi th a p l an y ear en d i n g M arch 3 1 . M r. Th i el k i ng p rep aredth e p l an an dtru std o cu m en t s wi th th e b o ard ’ s

4 M r. Th i el k i n g p as s edaway i n Decem

b er 2 0 1 6 , aft er t h e h eari n g i n th i s m at t er b u tb efo re t h i s o p i n i o n was fi l ed
.

5 Beg i n n i n g s om e t i m e aft er 2 0 0 5 M r. Th i el k i ng ’ s fi rm s erv edas th e reg i s tered ag en t fo r b o th p et i t i o n er an dEs sy M an ag em en tb ecau s e M r. an dM rs . Es s y m ov edo u to f Io wa.- 5
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[* 5 ] ex p ect at i o n o f s ub m it t in g th e d o cu m en t s t o th e In t ern al Rev en ue Serv i ce (IRS) fo r a fav o rab l e d et erm i n at i on reg ard i n g th e ESOP’ s qu al i fi eds t atus . M r. Es s y was th e ESOP’ s ad m i ni s trat o r; M rs . Es s y was th e ESOT’ s tru s tee. Ad d i t i o n al l y , th e b oardo f d i rect o rs ad o p t eda res o l ut i o n res erv i n g t h e ri g h tt o
am en dthe ESOP ret ro act i v el y t o i t s effect i v e d at e (Sep t em b er 1 2 , 2 00 0 ) i f
n eces s ary t o recei ve a fav o rab l e d et erm i n at i o n fro m th e IRS. Aft er fo rm in g t he ESOP an d t h e ESOT, M r. Es s y tran s ferred al l 5 ,0 0 0
o u t s t an d i n g s h ares o f p et i t io ner’ s s t o ckt o the ESOT i n ex ch an ge fo r th e ESOT’ s
as s u m pt i o n o f a n o n -i n t eres t -b eari n g acco u ntp ay ab le o f $ 5,0 0 0 t o M r. Es s y ($ 1 / s h are). Th e ESOT al s o recei v ed1 0 s h ares o f Es s y M an ag em en t ’ s s t o cki n
ex ch an g e fo r th e ESOT’ s as s u m p t i o n o f a n o n-i n t eres t-b eari n g acco u n t p ay ab l e o f $ 1 0 t o Es s y

M an ag em en t($ 1 / s h are). 6 Pet i t i o ner ret ai n edM r. Th i el k i n g t o p rep are an d s ub m i t a Fo rm 5 30 0 , Ap p l i cat i o n fo r Det erm i nat i o n fo r Em p l o y ee Ben efi tPl an , fo r a fav o rab l e d et erm i n at i o n fro m

res p o n d en treg ard i n g th e ESOP’ s qu al i fi cat io n u nd er s ect i o n 4 0 1 (a). M r. Es s y

s i g n edFo rm 5 3 00 an dd at ed i tSep tem ber 1 2, 2 0 00 . OnM ay

5 ,

6 Th e p ay ab l es were reco rd edo n th e ESOT’ s b o o k s b u trem ai n edu np ai d
. Th e ESOT’ s Sch edu l e I, Fi n an ci al In fo rm at i o n -- Sm al l Pl an , at tach edt o i t s Fo rm 5 5 0 0 , An n ual Retu rn / Rep o rto f Em p l o y ee Ben efi tPl an , l i s ted“ $ 5 ,0 1 0” i n l i ab i l i t i es each y ear.- 6
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[* 6 ] 2 0 0 1 , ap p aren t l y

i n res p o ns e t o res po n d en t ’ s rev i ew o f p et i t i o n er’ s ap p li cat io n , p et i t i o ner s ub m i t t edan am en d edan dres t at edESOP p l an d o cu m en t refl ect i n g th e i n t en t t o h av e t h e d o cu m en tex ecu t ed up on recei pto f t h e FDL. Th e
am en d edp l an d o cu m en ti n cl ud ed l an g u ag e t o co m p ly wi th s ect i on 4 1 4 (u ) req u i ri n g qu al ifi edp l an s t o co nt ai n cert ai n l an gu ag e wi th res p ectt o p art ici p an t s wi th qual i fi ed m i l i t ary

s erv i ce. OnJ u ne 1 1 , 2 00 1 , p et i t i o n er s ub m i t t eds ev eral ad d it i on al am en d m en t s refl ect i n g th e i n t en t t o h av e t h em ex ecu t ed up o n recei p t o f th e FDL. OnJ u n e 2 1 , 2 0 0 1 , res p on den ti s s u edth e FDL t o p et i t i o n er wi th res p ectt o th e ESOP,
co n di t i o n edup o n p et i t i o n er’ s t i m el y ad op t i o n o f t h e am en d m en t s at t ach edt o th e M ay 5 an dJ u n e 1 1, 2 0 0 1 , l et t ers . 7 Pet i t i o n er ad op t ed th e am en dm en ts an dres t at ed p l an d ocu m en ts h ort ly

aft er recei v i n g th e FDL. 8 Fo r each p l any ear, p et i t i o n er ret ai n edM r. Th i el k i n g t o p rep are an dfi l e Fo rm 5 5 0 0 d et ai l i n g th e ESOT’ s as s et s as wel l as p et i t i o n er’ s co nt ri b u t i o n s t o th e ESOT. Becau se t h e ESOT was th e s o l e s h areh o l der o f b o th p et i t i on er an d Es s y M an ag em en t, al l n eti n co m e fro m b o th S co rp o rat i o n s fl o wedth ro u g h t o th e

7 Rev . Pro c. 2 0 0 1-5 5, 2 00 1 -2 C.B. 5 5 2, g en eral l y ex t en d edth e d ead l i n e fo r am en d i n g p l an s p urs u an tt o the s ec. 4 1 4 (u ) am en d m en t s u n t i l Feb ru ary 2 8 , 2 0 0 2
. 8 See i n fra p p . 2 4 -2 5 fo r fu rt h er ex p l an at i o n reg ard i n g th is fi n d i n g .- 7
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[* 7 ] ESOT i n acco rd an ce wi th th e S co rp o rat i on reg i m e i n effect at the t i m e. Th e ESOT’ s n etas s et s as o f t h e en d o f t he i n i t i al p l any ear en d in g M arch 3 1 , 2 00 1 , co n si s t edo f p et it i o n er’ s s t o ck , Es s y M an ag em en t ’ s s t o ck , i nco m e fro m p et i t i o n er
an d Es s y M an ag em en t , an dem

p l o y er co n tri b u t i o ns . 9 A p o rt io n o f t h e 5 ,0 0 0 s h ares o f p et i t i o ner’ s s t o ck an d al l 1 0 s h ares o f Es s y M an ag em en t’ s s t o ckwere al l o cat edt o M r. Es s y ’ s acco u nts o m e t i m e du ri n g th e i n i t i al p l an y ear. 1 0 Th e rem ai n i n g s hares o f p et i t i o n er’ s s t o ckwere al l o cat edt o th e th ree o th er em

pl o y ees d eem ed t o b e el i g i b l e p l anp art ici p an t s du ri n g th e i n i t i al

9 Th e Co urt b as es i t s fi n d i n g o n th e ESOT’ s Fo rm 5 50 0 fo r th e p lan y ear en d in g M arch 3 1, 2 0 0 1 ; th e ESOT’ s Sch edu l e K-1 , Sh areh o l d er’ s Sh are o f In co m e, Cred i ts , Dedu ct i o n s , et c., fo r p et i t i o ner fo r t h e p eri o d fro m Oct o b er 1 , 2 0 0 0 , t o M arch 3 1, 2 0 01 ; the ESOT’ s Sch edul e K-1 fo r Es s y M an ag em en t ; p et i t i o n er’ s Fo rm

1 1 20 S fo r t h e s h o rtp eri o dfro m Oct o ber 1 , 2 0 0 0 , t o M arch 3 1 , 2 0 0 1 ; an dEs s y

M an ag em en t ’ s Fo rm

1 1 2 0S fo r t he p eri odfro m Sep t em b er 1 2 , 2 0 0 0 , t o M arch 3 1, 2 0 01 . Th e reco rdd o es n o tco n t ai n s t o ckap p rai s al s fo r th e i n i t i al p l an y ear en di ng M arch 3 1 , 2 0 0 1
. Th e s t o ckv al u at i o n as o f t h atd at e i s b as edo n th e p art i ci p an t acco un tb al an ces fo r t h e p l an y ear en d i n g M arch 3 1 , 2 0 0 2 , wh i ch l i stb o th th e “ Cu rren t ” an d“ Accu m u lat i ve” am ou n t s fo r t h e “ Ch an ge i n Val u e o f Tru s tAs set s ” al l o cat edt o each p art i ci p an t ’ s acco u n t . Th e Co u rt cal cu l at edth e t o t al v al u e o f p et i t i o n er’ s s t o ck an dth e t o t al v al ue o f Es s y M an ag em en t’ s s t o ckas o f M arch 3 1 , 2 0 0 1 , b y s ub tract in g th e cu rren tam o u n tfro m th e accu m

u l at i v e am o un tfo r each p l an p art i ci p an t
. 1 0 Res p o nd en td et erm i n edi n h i s Ap ri l 1 7 , 2 0 0 8, Fo rm 8 8 6 -A, Ex p l an at i o n o f It em s , th ato n th e b as i s o f t h e p art i ci p an tacco u n ts t at em en t s fo r t h e p l an y ear en d in g M arch 3 1, 2 0 0 2 , al l 1 0 s h ares o f Es s y M an ag em en t ’ s s t o ckan db et w een 7 5 % an d 8 0% o f th e s h ares o f p et i t i o n er’ s s t o ckwere al l ocat edt o M r. Es s y ’ s acco u n t so m e t i m e du ri n g the i n i t i al p l an y ear en di n g M arch 3 1 , 2 0 0 1 . Up o n rev i ew o f th e reco rdth e Co u rtag rees .- 8
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[* 8 ] p l an y ear. 1 1 M r. Es s y ’ s wag es were $ 4 1 ,5 57 an d$ 4 0,0 0 0 i n 2 0 0 0 an d2 0 0 1 , res p ect i vel y . Pet i t i on er co nt ri b u t ed$ 1 ,6 2 6
. 9 2 t o M r. Es s y ’ s acco un tfo r t he p l an y ear en d i n g M arch 3 1 , 2 0 01 , an d$ 5 0 0 fo r t h e p l any ear en d in g M arch 3 1 , 2 0 0 4. Pet i t io n er m ad e n o co n tri b u t i o ns du ri n g t h e p l an y ears en d i n g M arch 3 1 , 2 0 0 2 an d 2 0 0 3 . M r. Es s y ’ s acco u n tb al an ce as o f t h e en do f each y ear i n cl ud edh i s s h are o f th e ESOT’ s i n co m e/ l o ss , h i s s hare o f t h e ch an g e i n v al u e o f t h e ESOT’ s as s et s , em pl o y er co n tri bu t i o n s (i f an y ), an dh i s s hare o f ex p en s es (i f an y ). Al l o cat i o n s t o M r. Es s y ’ s acco u n twere $ 1 3 8 , 5 2 3.9 4 , $ 25 5 , 9 3 9 .1 4 , an d$ 1 6 7,0 60 .8 5 i n t h e p l an y ears en d i n g i n 2 0 0 1 , 2 0 0 2 , an d2 00 4 , res p ect i v el y , an da l o s s o f $ 1 5 5 ,2 6 8.5 8 i n th e p l an y ear en d i n g i n 2 0 0 3
. In ad d i t i o n t o p rep ari n g Fo rm 5 5 00 , M r. Th i el k i n g p erfo rm edan ds ub m i t t ed ap p rai s al s v al u i n g p et it i on er’ s s t o ckan dEs s y M an ag em en t ’ s s t o ckas o f t h e en do f th e p l an y ear. Each ap p rai s al i n cl u d edthe fo l l owi n g d ecl arat i o n: 1 2 Th e u n d ers i g n edh o l d s h i m s el f o u tt o b e an ap p rai s er.

1 1 Th e FRL d i dn o tch al l en g e t h e al l ocat i o n s o f i n co m e t o th e o th er p l an p art i ci p an t s ’ acco u n t s.

1 2 Al th o u g h the reco rdd o es n o t co n t ai n s i g n edco p ies o f t h e ap p rai s al s , M r. Th i el k i n g cred i b l y

t es t i fi edth ati twas h is p ract i ce t o s ub m itFo rm 5 5 0 0 an dth e o ri g i nal , s i g n edap p rai s al t o th e Dep art m en to f Lab o r i n acco rd an ce wi th y earl y rep o rt i n g req u i rem en t s, s ee Em p l o y ee Ret i rem en t In co m e Secu ri ty Acto f 1 9 7 4 , Pub . L. No . 9 3 -4 0 6 , s ec. 1 0 4 , 8 8 St at . at8 4 7 , i n fo rm at i on th at was co nv ey edt o th e IRS ex am i ner.- 9
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[* 9 ] Th e u n d ers i g n edi s a cert i fi edp ub l i c acco u n t an twh o i s fam i l i ar wi th th e as set s b ei n g ap p rai s ed
. Th e u n d ers i g n edi s n ota p art y t o an y tran sact i o n rel at edt o th is ap p rai s al
. Th e u n d ers i g n edu n d ers t an d s th ata fal s e o r frau du l en to v ers t at em en t o f t h e v al ue o f t he p ro p ert y b ei ng ap p rai s edm ay s ub ject th e ap prai s er t o a ci v i l p en al ty

u n d er In t ern al Rev en u e Co d e s ect i o n 6 7 01 fo r ai d i n g an dab et t i n g an u n d ers t at em en to f t ax l i ab i l i ty , an d co n s equ en t l y , th e ap p rai s er m ay h av e ap p rai s al s d i s reg ard ed p u rs u an t t o 3 1 U.S.C. 3 3 0 (c). Th e fee ch arg edfo r thi s ap p rai s al i s n o t b as edup o n a p ercen t ag e o f th e ap prai s al v al u e o f t h e p ro p ert y . Ap p rai s al s p rep aredb y

th e ap p rai s er are n o tb ei n g d i s reg ard ed p u rs uan tt o 3 1 U.S.C. 3 3 0 (c) o n th e d at e t h e ap p rai s al s u m m ary i s s i gn ed
. OnM ay 1 2 , 2 0 0 5 , res p o n d en tn o t ifi edp et i ti o n er t h atth e ESOP was s el ect ed fo r ex am i n at i o n fo r t h e p l an y ear en d i n g M arch 3 1 , 2 0 0 3. Pet i t i o ner ret ai nedM r. Th i el k i n g t o rep res en t i tthro ug h o u t th e ex am i n at i o n . OnFeb ru ary 8 , 2 0 0 7 , du ri n g
ex am i n at i o n o f t h e ESOP, res p o n d en treq u es tedex ecu tedco p i es o f th e p lan
am en d m en t s at t ach edt o the M ay 5 an dJ u n e 1 1, 2 0 01 , l et t ers . OnM arch 7 an d ag ai n o n Ap ri l 1 7 , 2 0 0 7 , res po nd en ts en t p et i t io n er a Fo rm 8 8 6 -A i d en t i fy in g fi v e i s su es co n s t i tu t i ng p os s i b l e g ro u n d s fo r rev o cat i o n o f t h e ESOP’ s qu al ifi eds t atu s, i n cl u d i n g th at p et i t i o ner m ad e ex ces s co n tri bu t io n s t o th e ESOT, fai l edt o u s e an i n d ep en den tap p rai s er, an d fai l edt o t i m el y am en d t h e ESOP fo r req ui red- 1 0 -

[* 1 0 ] l an g u ag e. OnAp ri l 1 7 , 2 0 0 8 , res p o n d en ts en tp et i t i o n er an o th er Fo rm 8 8 6
- A p ro po s i n g t o d i s qu al i fy th e ESOP b ecau s e o f ex ces s co n tri b u ti o n s an d/ o r fai l u re t o u s e an i n d ep en d en t ap p rai ser b u tn o t fai l u re t o t i m el y am en dth e ESOP fo r req u i redl an gu ag e. OnM ay 2 8 , 2 0 0 8 , o n p et i t i o n er’ s b eh al f M r. Th i el ki n g s ub m i tt eda p ro t es t t o the p ro p o s edd is qual i fi cat i o n . Th e p ro t es tl i s t edM r. Th iel k in g ’ s qu al i fi cat i o n s i n cl u d i n g h i s educat i o n al b ack g ro u n di n acco u n t i n g, h i s CPA l i cen s ure, h i s
m em b ers h i p i n p ro fes s i o n al o rg an i zat i o n s , h i s ex peri en ce t each in g co u rs es o n ESOPs an dap p rai s al s o f cl os el y h el dco rp o rat i on s , h i s ex p eri en ce p erfo rm i n g ap p rai s al s , an d h i s fi rm ’ s ad v ert i s em en tt o t h e p ub l i c as an ap p rai s er o f b u s i n es s es
an d es tat es . Th e p ro t es tal s o i n cl u d eda co p y o f a Des M o i nes Yel l ow Pag es l i st i n g i n wh i ch M r. Th i el k i n g ’ s fi rm i d en ti fi ed“ Bu s in es s & Es t at e Ap p rai s al s ”
am on g i t s av ai l ab le s erv i ces . OnSep t em

b er 2 9 , 2 0 1 0 , fo l l o wi n g th e ex am i nat i on , res p o n d en ti s s u edth e FRL t o p et i t i o n er ret ro act i v el y rev o k i ng th e FDL an dd et erm i ni n g th atth e ESOP d i dn o t m eetth e req u i rem en t s o f s ect i o n 4 0 1 (a) fo r t h e p l an y ear en di n g M arch 3 1 , 2 0 0 1 , an dal l s ub s equ en tp lan y ears an dth atth e ESOT was therefo re n o t ex em p t- 1 1 -

[* 1 1 ] u n d er s ect i o n 5 0 1 (a). 1 3 Res p on d en ti d en t i fi edth e fo l l o wi n g th ree g ro u n d s
as b as es fo r th e FRL: (1 ) an nu al ad d i t i o n s i n ex ces s o f th e d ol l ar l i m i ti n s ect i o n 4 1 5 (c)(1 )(A) were al lo cat edt o M r. Es s y ’ s acco u n tdu ri n g th e p lan y ears en d i n g i n 2 0 0 1 , 2 0 0 2 , an d 2 0 0 4; (2 ) t h e ESOP fai l edt o u s e an i n d ep en den tap p rai ser as req u i redb y

s ect i o n 4 0 1 (a)(2 8)(C) t o p erfo rm an n ual v al uat i o ns o f t h e em p l o y er
s ecu ri t i es th e ESOT h el d ; an d/o r (3 ) p et i ti o ner fai l ed t o t i m el y am en d th e ESOP t o i n cl u d e m an d at o ry

p ro v i s i o n s s etfo rt h i n s ect i on 4 1 4 (u ) as req u ired b y s ect i o n 4 0 1 (a). 1 4 Pet i t i o n er t i m el y fi l eda p et i t i o n fo r d ecl arat o ry ju d g m en t
. OPINION Sect io n 7 4 7 6 (a) au th o ri zes th i s Co u rtt o ren d er a d ecl arat o ry ju d g m en t , s ub jectt o t h e l i m i t at i o n s l i s t edi n s ect i o n 7 4 7 6 (b ). Nei th er p art y d i s p ut es th at

1 3 Th e FRL i n co rrect l y s tat edth e ESOP d i d n o tm eetth e req u i rem en t s o f s ec. 4 0 1 (a) “ fo r p l an y ears en d i n g Sep t em b er 1 2 , 2 0 0 0 ”. Ho wev er, t h e d et erm i n at i o n reg ard i n g th e ESOP’ s qu al i fi cat i o n was fo r t h e p l an y ear en d i n g M arch 3 1 , 2 0 0 1 , an d al l s ub s equ en tp l an y ears .

1 4 Fo rm s 8 8 6 -A s en tt o p et i ti o n er o n M arch 7 an d Ap ri l 1 7 , 2 00 7 , d i d n o t co n tai n an y

fact s , l aw, o r an al y s i s wi th res pect t o p et i t i o n er’ s al l eg edfai l u re t o t i m el y am en d t h e ESOP wi th th e req u i red s ec. 4 14 (u ) l an g uag e, i n s t ead l i s t i n g b ro ad l y as an i s s u e “ Sh o u l dthe p l an b e d i s qu al ifi edfo r fai lu re t o t i m el y am en dfo r req u i redp l an l an g u ag e? ”. Fo rm 8 8 6 -A s en tt o p et it io n er o n Ap ri l 1 7 , 2 0 0 8 , d i d n o tl i s t fai l u re t o t i m el y

am en das an i s s u e. It was n o tu n t i l the FRL t hat res p o n d en t l i s t ed fai l u re t o t i m el y am en dth e p l an an ds p eci fi edth e ab s en ce o f t h e s ec. 4 1 4(u ) l an g u ag e as a g ro u n dfo r rev o cat io n.- 1 2 -

[* 1 2 ] th o s e l i m i t at i on s h av e b een m et , an dth e Co u rti s s at i s fi edi th as juri s d i ct i o n
o v er t h e p et i t i o n . See Efco To o l Co . v . Co m m i ss i o ner, 8 1 T.C. 9 7 6 (1 9 8 3 ). Pet i t i o ner b ears th e b u rd en o f p ro vi n g th at res p on d en tab u s edh i s d i s cret i o n i n d et erm i n i n g th at th e ESOP was n o tqu al i fi edu n d er s ect io n 4 01 (a). To d o s o , p et i t i o n er m

u s tp ers u ad e t h e Co u rtth atres p o n d en t ’ s d et erm in at i o n was
u n reas o nab l e, arb i trary , o r cap ri ci o u s . See Bu zzet t a Co ns tr. Co rp . v . Co m m i s s i o n er, 9 2 T.C. 6 41 , 6 4 8 (1 9 8 9 ). Pet i t io n er h as m eti t s b u rd en . AnESOP i s a ret i rem en tp l an d es i g nedt o i n ves tp ri m ari ly i n qu al i fi ed
em pl o y er s ecu ri t i es p l aced i n a rel at edtru s t . Fo r t h e t ru s t t o recei ve fav o rab l e t ax treat m en tu n d er s ect i o n 5 0 1 (a), t h e ESOP m u s t b e co n s i d ered a “ qu al i fi edp l an ” b y
m eet i n g th e req u i rem en t s s et fo rt h i n s ect io n 4 01 (a). Fo r a p l an t o b e qu al i fi ed

“ b o th i t s t erm s an di t s o p erat i o n s m us t m eetth e s t atu t ory

req ui rem en t s.” Bu zzet t a Co n s tr. Co rp . v . Co m

m i s s i o n er, 9 2 T.C. at6 46 . Befo re 1 9 9 8 ESOPs were n o t el i g i b l e S co rp o rat i o n s h areh o l d ers . Effect i v e J an u ary

1 , 1 9 9 8 , Co n g res s am en d eds ect io n 1 36 1 (c) t o al l o w ESOPs an do th er t ax -ex em p to rg an i zat i o n s t o b e el i gi b le S co rp o rat io n
s h areh o ld ers . Sm al l Bu s i n es s J o b Pro t ect i o n Acto f 1 9 96 (SBJ PA), Pub . L. No
. 1 0 4 -1 8 8 , s ec. 1 3 1 6 (a), 1 1 0 St at . at1 7 8 5 -1 7 8 6 . Al s o effect i v e J an u ary 1 , 1 9 9 8 , Co n g res s am en d ed s ect i o n 5 1 2 s o th atan ESOP’ s p ro rat a s h are o f S co rp o rat i o n- 1 3 -

[* 1 3 ] earn i n gs d i dn o tco n s t i tu t e “ u n rel at edb u s i n es s t ax ab l e i n co m e”. See Tax pay er Rel i ef Acto f 1 9 9 7 , Pub . L. No
. 1 0 5 -3 4 , s ec. 1 5 2 3, 1 1 1 St at . at1 0 7 0
- 1 0 7 1 . Th es e p ro v i s i o n s creat eda fram ewo rku n d er wh i ch an ESOP co u ldo wnal l
o u t s t an d i n g s h ares o f an S co rp o rat i o n , d eferri n g t ax o n the S co rp o rat i o n ’ s i n co m e atb o th th e en t i ty

l ev el an dth e s h areh o ld er l ev el . Th ats tru ctu re rem ai n ed
u n ch an g edfo r t h e n ex tth ree y ears . In 2 0 0 1 Co n g res s am en d eds ect io n 4 0 9 (p ) t o p ro h i b i tal l o cat i o n s o f S
co rp o rat i o n s t o ck h el d b y an ESOT t o cert ai n p ers o n s d eem edt o o wn atl eas t5 0 %
o f t h e n u m

b er o f s h ares o f s t o cki n th e S co rp o rat i on . See Eco n o m i c Gro w th an d Tax Rel i ef Reco n ci l i at i o n Acto f 2 0 0 1 (EGTRRA), Pub . L. No . 1 0 7 -1 6 , s ec. 6 5 6 , 1 1 5 St at . at1 3 1 -1 3 5 . An y s u ch p ro h i b i t edal l o cat i o n wo u l dres u l ti n an ex ci s e t ax t o the ESOP an di nco m e reco g n i t i o n t o th e p ers o n s d eem edt o o wnatl eas t5 0 % o f th e s h ares o f s to cki n th e S co rp o rat io n . In am en d i n g s ect i on 4 0 9 (p ), Co n g res s
reco g n izedthat“ th e i n co m e o f an S co rp o rat i o n al l o cab l e t o an ESOP * * * [was ]
n o ts ub jectt o cu rren tt ax at i o n.” H.R. Co n f. Rep t . No . 1 0 7 -8 4, at2 7 4 (2 00 1 ), 2 0 0 1 -3 C.B. 1 2 3 , 3 9 7. Th e ch an g e g en eral l y ap p li edt o p l an y ears b eg i n n i n g aft er 2 0 0 4 fo r an ESOP th atex i s t edb efo re M arch 1 4, 2 0 0 1 . EGTRRA s ec. 6 5 6(d ); s ee al s o Au s t i n v . Co m

m i ss io n er, T.C. M em o . 2 0 1 7 -6 9 , at* 32 -* 3 3 (ad dres s i n g th e fram ewo rk

fo r cert ai n ESOT-o wn edS co rp orat io n s th at ex i s t edb et ween 1 9 9 8 an d- 1 4 -

[* 1 4 ] 2 0 0 5 ). Pet i t i o n er an dEs s y M an ag em en twere S co rp orat i o n s, an d t h ei r ESOP an d ESOT ex i s t edb efo re M arch 1 4 , 2 0 0 1
. Pl an Co n tri b u ti o n s Sect io n 4 1 5 (c)(1 ) l i m i t s th e an n u al ad di t i o n t o a p art i ci p an t ’ s acco u n tt o th e l es s er o f (1 ) $ 3 0 ,0 0 0 (ad

ju s t ed an n u al l y

fo r i n fl at i o n) o r (2 ) 2 5 % o f t h e p art i ci p an t ’ s co m

p en s at i o n . 1 5 “ An n u al ad d i ti o n ” i n cl u des em p lo y er co n tri b u t i o n s , em pl o y ee co n tri b u t io n s , an dfo rfei tu res . Sec. 4 1 5 (c)(2 ). Sect i o n 4 01 (a)(1 6 ) p ro v id es th ata “ tru sts h al l n o t co n s t i tu t e a qu al i fi edtru s tu n d er t hi s s ect i o n i f t h e p l an o f wh ich s u ch tru sti s a p artp ro v i d es fo r b en efi t s o r co n tri b u t i o n s wh i ch
ex ceed th e l i m it at i o n s o f s ect i o n 4 1 5 .” In th e FRL res p on d en t d et erm i n edth atth e ESOP fai l edt o m eetth e req u i rem en t s o f s ect i o n 4 0 1 (a)(1 6 ) fo r t h e p l an y ears en d i n g i n 2 00 1 , 2 0 0 2 , an d 2 0 0 4 . Res p o n den td et erm i n edth atth e am o u nt s al lo cat edt o M r. Es s y ’ s acco u n t du ri n g th o s e p l an y ears s h o u l db e rech aract eri zedas an n u al ad d it i on s u nd er
s ect i on 1 .4 1 5 -6 (b )(2 ), In co m e Tax Reg s . Sect i on 1 .4 1 5 -6 (b )(2 ), In co m e Tax Reg s., p ro v i des :

1 5 Th i s was th e l i m i tdu ri n g th e ESOP’ s fi rs ttw o p l an y ears . Fo r p l an y ears b eg in n i n g aft er Decem

b er 3 1 , 2 0 0 1, the l i m i twas th e l es s er o f (1 ) $ 40 ,0 0 0 o r (2 ) 1 0 0 % o f t h e p art i ci p an t ’ s co m p en s at i on .- 1 5 -

[* 1 5 ] [T] h e t erm

“ an n u al ad di ti o n s ” i n cl ud es em p l oy er co nt ri bu t i o n s wh i ch are m ad e u n d er t h e p l an . Fu rt h erm o re, t h e Co m m i s s i o n er m ay

i n an ap p ro p ri at e cas e, co n s i d eri n g al l o f t h e fact s an dci rcu m s t an ces treat tran s act i o ns b et ween th e p l an an dth e em p lo y er o r cert ai n al l ocat i on s t o p art i ci p an t s ’ acco u n t s as g i v i n g ri s e t o an nu al ad d i t i o n s . In th e FRL res p on d en t s t at edthatth e al l o cat i o n s s h o u l d b e rech aract eri zed b ecau s e th e “ d iv i d en d am o u n t s p ai do n em p l o y er s t o ck h el db y

th e t ru s t ” were treat ed as i nco m e i ns t eado f b ei n g treat edas co n tri b u t i o n s , an d“ th e effect o f t h i s fi nan ci n g was t o tran s fer” p et it i o n er’ s earn in gs an dEs sy M an ag em en t ’ s earn i n g s t o the ESOT p ri m ari l y

fo r M r. Es s y ’ s b en efi t
. Pet i t i o ner h as es t ab li s hedth atb o th i tan d Es s y M an ag em en twere S
co rp o rat i o ns (an dh adb een s i n ce i n co rp o rat i o n). Pet i t i o n er h as s h o wnthatth ere
were n o d i s tri b u t i o ns fro m i t o r Es s y

M an ag em en t t o th e ESOT. Th e Co u rtfi n d s th atco n traryt o res p o n d en t ’ s p o s i t io n i n th e FRL, n ei th er p et it i o n er n o r Es s y M an ag em en t p ai d“ d i v i d en ds ” o n i t s s t ockb ecau s e b o th were S co rp orat i o n s fro m i n co rp o rat io n th ro u g h atl eas t 20 0 5
. Ad d i t i o nal l y , th e Co u rtfi n d s th at th e ESOT’ s
earn i n g s were n o t th e res u l to f a fi n an ci ng arran g em en tan dd i dn o tco n st i tu t e a tran s fer o f fu n d s . Rat her, i n co m e an dl o s s es p ro p erl y fl o wedth ro u g h fro m p et i t i o n er an dEs s y

M an ag em en tt o th e ESOT, th e s o l e s h areh o l d er o f b o th- 1 6 -

[* 1 6 ] co rp o rat io n s . 1 6 W i th ou tan y fact s o r ci rcu m s t an ces t o ju s t i fy th e ap p l i cat i o n
o f s ect i o n 1 .4 1 5 -6 (b )(2 ), In co m e Tax Reg s ., the Co u rt co ncl u d es th atres p o n d en t act edarb i trari l y b y

rech aract eri zi n g al l o cat i o n s t o M r. Es s y ’ s acco u n tas p l an
co n tri b u t i o n s i n th e p l an y ears en d i n g i n 2 0 0 1 , 2 0 0 2 , an d2 0 0 4
. In th e FRL res p on d en t al s o ad dres s edth e i n i t i al al lo cat io n o f Es s y M an ag em en t s t o ck t o M r. Es s y b u td i dn o tm ak e cl ear t h e rel at i o n s h i p b et ween th e i n i t i al s t o ckal l o cat i o n an dres p o n d en t ’ s d et erm i n at i o n o f ex ces s co n tri b u t i o n s . In h i s an s weri n g b ri ef res p on d en t cl ari fi es th atth e i n it i al tran s fer o f s t o ckt o th e ESOT wi th o u tco n s i d erat i o n co n st i tu t ed a p l an co n tri b u t i on equ al t o t h e v al u e o f th e s t o cku n d er s ect i on 1 .4 1 5 -6 (b )(4 ), In co m e Tax Reg s . 1 7 Res po n d en targ u es th at th e l arg e i n creas e i n M r. Es sy ’ s acco u n t b al an ce du ri n g t h e i n i t i al s h o rtp lan y ear fro m Sep t em b er 1 2 , 2 0 0 0 , t o M arch 3 1 , 2 0 0 1 , d em o ns trat es th at the s t o ck m u s t h av e b een wo rt h m ore t h an th e p u rp o rt edv al u e o f $ 5 ,0 1 0 at th e t i m e o f i t s

1 6 Th e Co u rtrei t erat es th ata u n i qu e fram ewo rkex is tedfo r a s h ortp eri o d du ri n g wh i ch an ESOT-o wn edS co rp orat i o n co ul dd efer i n co m e t ax atb o th th e en t i ty an d s h areh ol der l ev el s wi th o u ttri g g eri n g ad d it i o n al t ax co n seq u en ces t o p ers o n s i n a p o s i t io n s i m i l ar t o M r. Es s y ’ s . See s up ra p p . 1 2 -1 4 . Th e ESOP’ s p l an y ears en d i n g i n 2 0 0 1 , 2 0 0 2 , an d2 00 4 fel l wi th i n th at p eri o d
.

1 7 Onb ri ef res p o n den tm en t i o n s th atth e i n i t i al tran s fer o f s to ckwas al s o a p ro h ib i t edtran s act i o n . Th e Co u rtd o es n o t ad dres s an y i n co m e t ax o r ex ci s e t ax co n seq u en ces fo r p urp os es o f t h i s d ecl arat ory ju d g m en tp ro ceed in g .- 1 7 -

[* 1 7 ] co nt ri bu t i o n t o the ESOT; th erefo re, res p o n d en targ u es , th e i n i t i al
co n tri b u t i o n o f s t o ckex ceed edth e co n tri b u t i o n l im i t du ri n g th e i n i t i al s ho rtp l an y ear. Pet i t i o ner co n ten d s th atth e ESOT p urch as edth e s t ockth ro ug h an acco u n t p ay ab l e fro m

th e ESOT t o M r. Es sy . Pet i t i o ner fu rth er arg u es th atev en i f t h e
s t ocktran s fer was wi tho u tco n s i d erat i o n , th e t o t al s t o ckwas v al u edat $ 5 ,0 1 0 ($ 1 / s h are) at th e t im e o f i ts co n tri b u t i on t o th e ESOT. Becau s e t h e 1 0 s h ares o f Es s y M an ag em en ts t o ck

an d a p o rt i o n o f p et it i o n er’ s s to ckwere al lo cat edt o M r. Es s y ’ s acco u n t , h i s t ot al s t o ckal l o cat i o n was wo rth n o m o re t h an $ 5,0 10 . Ev en wh en co m

b i n edwi th th e $ 1 ,6 2 6 .9 2 p l an co n tri b u t i o n m ad e t o M r. Es s y ’ s acco u nt , th e t o t al d i dn o tex ceed th e p l an l i m i t at i o n fo r 2 0 0 1
. Pet i t i o ner h as d em o n s trat edthatM r. Es s y ’ s acco un tb al an ce i n creas edfro m Sep tem b er 1 2 , 2 0 0 0, t o M arch 3 1 , 2 0 0 1 , b ecau s e o f p et i ti o n er’ s i n co m e earn ed du ri n g th e i n i t i al p l an y ear, Es s y M an ag em en t ’ s i n co m e earn ed du ri n g the i n i t i al p l an y ear, an d an i n creas e i n t h e v al ue o f p et it i on er’ s s t o ckal l o cat edt o M r. Es s y ’ s
acco u n t
. 1 8 Th erefo re, th e i n creas e i n M r. Es s y ’ s acco u n tb al an ce d o es n o ts h o w

1 8 Th e Co u rtrev i ewedth e ESOT’ s Fo rm 5 5 00 fo r t h e i n i t i al p l an y ear; p art i ci p an tacco u ntb al an ces fo r t h e p l an y ear en d i n g M arch 3 1 , 2 0 0 2 ; p et i t i o n er’ s Fo rm 1 1 2 0 S fo r t h e s h o rtp eri o dfro m Oct o b er 1 , 2 0 0 0 , t o M arch 3 1 , 2 0 0 1 ; an d Es s y M an ag em en t ’ s Fo rm

1 1 2 0 S fo r t h e p eri odfro m Sep t em b er 1 2 , 2 0 0 0 , t o (co n ti n u ed ...)- 1 8 -

[* 1 8 ] th atth ere was a m i s v al uat i o n o f s t o ckatth e t i m e o f i t s co n tri b u t i o n t o th e ESOT o r atth e t i m e o f i t s al l o cat i o n du ri n g the i n i t i al p l an y ear. Th e Co urtd o es
n o td eci d e fo r p u rp o ses o f thi s p ro ceed in g wh et h er t h e i n i t i al s t o cktran s fer was wi th o u tco n si d erat i o n an dth us co n s t i tut eda p l an co n tri bu t i o n u n d er s ect i o n 1 .4 15 -6 (b )(4 ), In co m e Tax Reg s . Ev en i f t h e t ran s fer d i d co n st itu t e a co n tri b u t i o n , th e t o t al co n tri b ut i o n d i dn otex ceed th e co nt ri bu t i o n l i m i tfo r t h e i n it i al p l an y ear. 1 9

1 8 (...co n t i nu ed ) M arch 3 1 , 2 0 0 1 . Onthe b as i s o f t ho s e d o cu m en t s , th e Co u rt fi n ds th atM r. Es s y ’ s acco u n t bal an ce as o f M arch 3 1 , 2 0 0 1 , co n s i s t edo f an em p lo y er co n tri b ut i o n t o h i s acco u n t , Es s y

M an ag em en t ’ s i n co m e, a p ort i o n o f p et it i o n er’ s i nco m e, an da p o rt i on o f t h e i n creas e i n th e v al u e o f p et i ti o n er’ s s t o ck
. Th e rem ai nd er o f t h e i n creas e i n p et i t i o n er’ s s t o ckv al u e an dp et i t i o ner’ s i n co m e was al l ocat edt o th e o th er p l an p art i ci p an t s . Th e t o t al o f t h e p art i ci pan tacco u n tb al an ces as o f th e en d o f t h e i n i t i al p lan y ear m at ch es th e ESOT’ s n etas s et s as rep o rt edo n i t s Fo rm 5 5 0 0 fo r t h e i ni t i al p l an y ear.

1 9 Un d er s ec. 4 15 (c), t h e co n tri b u t i o n l i m i tfo r th e i n i t ial p l any ear was th e l es s er o f $ 3 0 , 0 0 0 o r 2 5 % o f t h e p art i ci p an t ’ s co m p en s at i o n . Fo r p urp o ses o f co m p u t i n g th e s ec. 4 15 l i m i t at i o n , “ co m p en s at i o n ” i n cl ud es M r. Es sy ’ s wag es b et ween Ap ri l 1 , 2 0 0 0 , an d M arch 3 1 , 2 00 1 (d efi n edas the p l an y ear an d l i m i tat i on y ear i n th e ESOP’ s p l an d o cu m en t). M r. Es s y recei v ed$ 4 1 ,5 5 7 an d $ 4 0 ,0 0 0 i n wag es i n th e 2 00 0 an d2 0 0 1 cal en d ar y ears , res p ect i v el y . Th ere i s n o i n fo rm at i o n reg ard i n g th e am o u n tM r. Es s y s p eci fi cal l y

earn eddu ri n g t h e 1 2
- m o nt h l i m i t at i o n y ear fro m Ap ri l 1 , 2 0 0 0 , t o M arch 3 1 , 2 0 0 1 , b u t i ti s reas o n ab l e t o as s u m e th at i twas s o m ewh ere b et ween $ 4 0,0 00 an d$ 4 1,5 5 7 . Ad d i t i o nal l y , n ei th er p art y

arg u es th atM r. Es s y ’ s co m p en s at i o n fo r p u rp o s es o f co m p u t i n g th e s ec. 4 1 5(c) l im i tat i o n was l es s th an $ 4 0 ,0 0 0 du ri n g th e i n i t i al p l an y ear. Us i n g $ 4 0 ,0 0 0 as M r. Es s y ’ s co m p en s at i o n , the s ec. 4 1 5 (c) l i m it at i o n was $ 1 0 ,0 0 0
.- 1 9 -

[* 1 9 ] Res p o n d en t ’ s p o s it i o n i s th atth e ex ces s co nt ri bu t i o n i n th e i n i ti al p lan y ear i s a co n t i n ui n g fai l u re i n fu tu re y ears . See M art i n Fi rep ro ofi n g Pro fi t -Sh ari n g Pl an & Tr. v . Co m

m i s s i o n er, 9 2 T.C. 1 1 7 3 , 1 1 8 4 -1 1 89 (1 9 8 9 ). Becau s e t h e Co u rt d o es no tfi n d th at th e s t ockv al u e ex ceed edth e co n tri b u ti o n l i m i t , the Co u rtfi n d s
res p o n d en t’ s arg u m en t reg ard i n g th e effect o n s ub s equen t p l any ears t o fai l i n th i s
cas e. Th e Co u rtfi n d s th atres p o n d en tab u s edh i s d i scret i o n b y ret ro act i v el y
rev o k i n g th e FDL o n th e b as i s o f ex ces s co n tri b ut i o n s t o t h e ESOT. In d ep en den tAp p rai s er Fo r an ESOP t o b e co n s i d ereda qu al ifi edp l an , s ect i o n 4 0 1 (a)(2 8 )(C) req u i res th atan i n d ep en d en tap p rai s er p erfo rm al l v al u at i on s o f em

p l o y er
s ecu ri t i es th atare n o tread i l y trad ab l e o n an es t ab l i s h eds ecu ri t i es m ark et . Sect i o n 4 0 1 (a)(2 8 )(C) d efi n es “ in d ep en d en tap p rai s er” as an y ap p rai ser m eet i n g req u i rem en t s s i m il ar t o th e requ i rem en t s o f th e reg u lat i o n s p res cri b edu n d er
s ect i on 1 7 0 (a)(1 ) reg ard i n g “ qu al i fi edap p rai s ers ”. Th o s e reg u lat i o n s s p eci fy
s ev eral req u irem en t s fo r a “ qu al i fi edap p rai s er” i ncl u d in g th atth e i n d i v i du al p ro v id e a d ecl arat i o n o n th e ap p rai s al s u m m ary thatth e i nd i v i du al h o l d s h i m s el f
o r h ers el f o u tt o th e p ub l i c as an ap p rai s er o r p erfo rm s ap p rai s al s reg u larl y an di s qu al i fi edt o m ak e ap p rai s al s o f th e t y p e o f p ro p ert y

b ei n g v al u edb as edo n h i s o r- 2 0 -

[* 2 0 ] h er b ack g ro u nd , ex p eri en ce, edu cat i o n , an d m em bers h i p , i f an y , i n p ro fes s i on al o rg an i zat i o n s. Sec. 1 .1 7 0 A-1 3 (c)(3 )(i i )(F), (c)(5 ), In co m e Tax Reg s . Th e reg u l at i o n s ex cl u d e t h e fo ll o wi n g p ers o n s fro m b ei n g “ qu al i fi ed ap p rai s ers ” wi th res p ectt o th e p ro p ert y b ei n g ap prai sed : (1 ) t h e d o n or o f t h e p ro p erty , (2 ) a p art y

t o th e tran s act i o n i n wh i ch th e d on o r acq u i redth e p ro pert y , (3 ) t h e d o n ee o f t he p ro p erty , (4 ) an y p ers o n em

p l o y edb y the d o n o r o r t he d o n ee, (5 ) an y p ers on co n s i d ereda rel at edp art y (wi th i n th e m ean i n g o f s ect i o n 2 6 7 (b )) wi th res p ect t o an y on e d es cri b edab ov e, an d(6 ) anap p rai ser reg u larl y u s edb y t h e d o n o r, d o n ee, o r an em

p l o y ee o f t h e d o no r o r d o n ee wh o d o es n o tp erfo rm a
m ajo ri ty o f h i s o r h er ap p rai s al s m ad e duri n g th e t ax ab l e y ear fo r o th er p ers o n s . Sec. 1 .1 7 0 A-1 3 (c)(5 )(i v ), In co m e Tax Reg s . In th e FRL res p on d en t co n cl u d edth atM r. Th iel k i n g was n o tan i n d ep en den tap p rai s er b ecau se h e p erfo rm edn um ero u s s erv i ces fo r t h e ESOP an d ESOT each y ear, “ i n cl u d i n g p rep arat i o n o f t h e Fo rm 5 50 0 ; p art i ci p an tacco u n t
s t at em en t s an do th er reco rdk eep i n g fu n ct io ns ” i n ad d i t i o n t o recei v i n g a reg u l ar i n co m e fro m

p et i t i o n er. Res p on d en tal s o n ot edth at M r. Th i el ki n g d i dn o t ad v ert i s e h i s s erv i ces as an ap prai s er o f s ecu ri t i es an dd i dn o ts i g n th e ap p rai s al s . Al th o u g h th e reco rdd o es n o t co n t ai n s i g n edco p i es o f t h e ap prai s al s , M r. Th i el k i n g cred i b l y

t es t i fi edth ati twas h is p ract i ce t o s ub m itth e o ri g i nal , s i g n ed- 2 1 -

[* 2 1 ] ap prai sal s t o th e Dep art m en to f Lab o r, i n fo rm at i o n th atwas co n v ey edt o th e IRS ex am i ner. Th e Co u rtm ay l o o kb ey o n d t h e ad m i n i st rat i v e reco rd i n thi s
m at t er, s ee s upra p . 2 , an dfi n d s th atM r. Th iel k i n g d i ds i g n t h e ap p rai s al s . In th e FRL res p on d en t ch al l en g edM r. Th i el k i n g’ s qu al ifi cat i o n s b ecau s e h e d i dn o t h o l dh i m s el f o u tt o th e p ub l i c as an ap p rai s er o f s ecu ri t i es . Res po n d en t
s p eci fi cal l y

referen ced h i s l i st i n g i n th e Des M o i n es t el ep ho n e d i rect o ry , wh i ch
o n l y ad v ert i s edM r. Th i el k i n g as a CPA. Ho wev er, t he reco rdal s o co n t ai ns a Des M o i n es Yel l ow Pag es l i s t i n g i n wh i ch M r. Th i el k i n g ’ s fi rm i den t i fi ed“ Bu s i n es s & Es t at e Ap p rai s al s ” as o n e o f i t s av ai l ab l e s erv i ces . Ad d i t i o n al l y , th ere i s n o req u i rem en ti n th e reg ul at i o n fo r an ad v ert i s em en t t o th e p ub l ic. Rat h er, t h e reg u l at i o n req ui res th atth e i nd i v i du al h o l dh i m s el f o utt o th e p ub l ic as an ap p rai s er o r p erfo rm

ap p rai s al s reg u l arl y . Sec. 1 .1 7 0 A-1 3 (c)(5 )(i )(A), In co m e Tax Reg s. In th e M ay

2 8 , 2 0 0 8 , p ro t es t t o res po n d en t’ s p ro p o s edrev o cat i o n o f t h e FDL, p et i t i o n er ex p l ai n edM r. Th ei l k in g ’ s b ack g ro u n dan deducat i on . Pet i t i o n er al s o s p eci fi edth atM r. Th i el k i n g t au g h t co u rs es o n the ap p rai s al o f cl o s el y h el d
co rp o rat i o ns an dp erfo rm ed“ l i t eral l y th o us an d s o f ap p rai s al s o f al l s o rt s .” Du ri n g th e h eari n g p et i ti o n er i n tro du cedev i d en ce t h atM r. Th i el k in g an n ual l y p erfo rm ed ap p ro x i m at el y 4 0 ap p rai s al s o f ESOT-o wn edcl o s el y h el db u s i nes s s t o ck . Th e- 2 2 -

[* 2 2 ] Co u rtfi n d s th atM r. Th i el k i n g d i d h av e t he ap p ro p ri at e b ack g ro un d , edu cat i o n , an dex peri en ce t o v al u e p et it i o n er’ s s t o ckan dEs s y M an ag em en t ’ s
s t ock
. Res p o n d en td et erm i n edi n th e FRL t h atM r. Th i el k in g co u l dn o tb e
co n si d ered“ i n d ep en d en t of ei th er t h e ESOP s p o n s o r o r t h e ad m i n i s trat io n o f t h e ESOP” b ecau se h e p erfo rm edv ari ou s s erv i ces fo r t he ESOP t hro u g h ou tth e y ear. Th e reg u lat i on s reg ard i n g “ qual i fi edap prai s ers ” s p eci fi cal l y ex cl u d e t h o s e wh o were d o n o rs o r d o n ees o f t h e p ro p ert y (o r t h ei r em

p l o y ees ), p art ies t o th e tran s act io n i n wh i ch th e d on o r acq u i redth e p ro p ert y , rel at ed p art i es wi th i n t h e
m ean i n g o f s ect i o n 2 6 7 (b ), o r anap p rai s er wh o i s reg u l arl y u s edb y an y p ers o n l i st edab o v e wh o d o es n o t p erfo rm a m ajo ri ty

o f h i s o r h er ap p rai s al s m ad e du ri n g h i s o r h er t ax ab l e y ear fo r o th er p ers o n s . Sec. 1 .1 7 0A-1 3 (c)(5 )(i v ), In co m e Tax Reg s. Res p o n d en tap p ears t o arg u e i n fav o r o f a b ro ad er read i n g o f t h e reg u l at i o n s , ci t i n g M r. Th i el k i ng ’ s s erv i ces as a CPA an do v eral l i n v ol v em en t wi th th e ESOP as ev i d en ce as t o h is l acko f i n d ep en den ce. Res p o n d en tas k s th e Co u rtt o fi nd d i s p o s i t i v e i n thi s cas e t h i s Co u rt ’ s co n cl us i o n i n Ch u rch i l l , Lt d
. Em p . St o ckOwn ers h i p Pl an & Tr. v . Co m m i s s i o ner (Ch u rch i l l ), T.C. M em o . 2 0 1 2 -3 0 0 , at* 24 , th atM r. Th i el k i ng was n o tan “ i n d ep en d en tap p rai s er” b ecau s e th e Co u rts t at edthat“ o n th e b as i s o f t h e ad m i n i s trat iv e reco rd , i tap pears th at- 2 3 -

[* 2 3 ] Th iel k i n g was n o t i n d ep en d en tas h e was th e au th o r an dp rep arer o f m o s to f th e t ru streco rd s an d retu rn s .” In Ch u rch i l l , at *2 1 -* 2 4 , th e Co urtfi rs tfo u ndth atth e ad m in i s trat i ve reco rd
co n tai n edi n s u ffi ci en tev i d en ce as t o M r. Th i el k in g ’ s b ack g ro u n d , edu cat i o n , an d
ex p eri en ce i n v al u i n g th e t y p e o f b u s i n es s ati s s u e i n th e cas e ev enb efo re s t at i n g th atM r. Th i el k i n g w as n o ti n d ep en d en t . Th e Co u rti n Ch u rch i l l , th erefo re, d i dn o t
an al y ze s ect i o n 1 .1 70 A-1 3(c)(i v ), In co m e Tax Reg s., ex cl u di n g cert ai n p ers o n s as

“ qu al i fi edap p rai s ers ”, n o r d i di tu l t i m at el y rel y o n i ts s tat em en treg ard i n g M r. Th i el k i n g ’ s i n v o l vem en ti n th e p l an an dtru s t
. Here, t h e Co u rtrev i ews th e ad d i t i on al ex h ib i t s an dt es ti m o n y p et i t i o n er i n tro du cedi n th is cas e an d fi n d s th atM r. Th i el ki n g was qu al i fi edt o v al ue p et i t i o n er’ s s t o ck an dEs s y M an ag em en t ’ s s t o ck . Th erefo re, t h e Co u rtm u st
co n si d er wh eth er s ect i on 1
. 1 7 0 A-1 3 (c)(i v ), In co m e Tax Reg s ., ex cl u d es p ers o n s b ey o n d tho s e s p eci fi cal l y l i s tedan d fi n d s th ati td oes n o t
. Sect i o n 4 0 1(a)(2 8 )(C) p ro v id es th atth e t erm “ i n d ep en d en tap p rai s er” i s s i m i l ar t o th e req u i rem en t s o f t h e reg u l at i o n s fo r s ect i o n 1 7 0 (a)(1 ), wh i ch i n turn d efi n e “ qu al i fi edap p rai s er”. Sect i o n 1 .1 7 0 A-1 3 (c)(i v), In co m e Tax Reg s ., ex cl ud es cert ai n p ers o ns fro m b ei ng ap p rai s ers b ecau s e o f t h ei r i n h eren tl acko f i n d ep en d en ce. Pet it i on er h as
es t ab l i s h edth atM r. Th iel ki n g was n o td i s qu al i fi edu n der an y o f t h e ex cl us i o n s .- 2 4 -

[* 2 4 ] Th e Co u rtfi n d s thatp et it i o n er h as p ro v en th at th e ESOP m etth e

“ i n dep en d en tap p rai s er” req u i rem en t s . Th erefo re, t h e Co u rtfi n d s th atres p o n d en t ab u sedh i s d i scret i o n fo r p u rp o s es o f t h i s d ecl arat ory ju d gm en tp ro ceed i n g b y
rev o k i n g th e FDL o n th e b as i s o f p et i t i o n er’ s fai l u re t o u s e an i n d ep en d en t ap p rai s er. Pl an Am en d m en t Th e FRL l i s t edam o n g the b as es fo r rev o cat io n o f t h e FDL p et i t i o n er’ s fai l u re t o am en dth e ESOP i n acco rd an ce wi th th e l an g u ag e req u i redu n d er s ect i on 4 1 4 (u ). In 1 9 9 6 Co n g res s am en d eds ect i o n 4 1 4 (u ) t o req ui re qu al i fi edp l an s t o i n cl u d e l an g u ag e reg ard i n g s p eci al ru l es fo r em p l o y ees wi th “ qu al i fi edm i l i t ary
s erv i ce.” SBJ PA s ec. 1 7 03 (n ), 1 1 0 St at
. at1 8 8 6 . Th e req u i rem en t s were effect iv e fo r al l p lan y ears b eg in n i n g aft er Decem b er 1 2 , 1 9 9 4 . Id
. Th e reco rdi n th is cas e co n t ai n s an u ns i g n edco p y o f a res t at edp l an d o cu m en tth ati n cl u d es th e req u i s it e s ect i o n 4 1 4 (u ) l an g u ag e, ad d i t io n al p ro p o s ed
am en d m en t s t o t h e ESOP, an d co rres po n d en ce b et ween M r. Th i el ki n g an d
res p o n d en t du ri n g th e FDL ap p l i cat i o n p ro ces s . Th e FDL was co nd i ti o n edup o n p et i t i o n er’ s ad op t i o n o f t h e p ro p o s edp l an d o cu m en t an dam en d m en t s . Du ri n g th e h eari n g , M r. Th i el k in g cred i b ly t es t i fi edth at , t o th e b es t o f h i s kn o wl ed g e, t h e res tat edp lan am en d m en t s were s i g n eds h o rt l y aft er recei p to f t h e- 2 5 -

[* 2 5 ] FDL an dthatp et i t i o ner ret ai n edth e o ri g i n al s . M r. Es sy cred ib l y t es t i fi ed th at“ ev ery

d ocu m en t* * * [M r. Th i el k i n g] s en tm e I s i g n ed .” Up o n rev i ewi n g th e am en d m en t s an d res tat edp l an d o cu m en t , h e rei terat edth ath e wo u l d h av e
s i gn edth em

i f M r. Th i el k in g h ads en tthem . M r. Es s y fu rt h er ex p l ai nedth ati n ei th er 2 0 0 7 o r 2 0 08 weat h er d am ag e cau s edth e ro o f o f p et i t i o n er’ s faci l i ty t o fai l , res u l ti n g i n ex t en s i v e wat er d am ag e t o th e faci l i ty , i n cl ud i ng t o d o cu m en t s rel at ed t o p et i ti o n er an dEs s y

M an ag em en t
. 2 0 Th e Co u rtm ay

l o o kb ey o n dthe ad m i ni s trat i v e reco rdt o d et erm i ne t h e fact s i n thi s m at t er. See s up ra p . 2 . Gi ven th e ex i s ten ce o f t h e p rev i o u sl y ap pro v ed
res t at ed pl an d o cu m en tan dam en d m en t s an d th e cred i b l e ex p l an at i o n as t o t h e ab s en ce o f ex ecu tedco p i es i n th e reco rd , th e Co u rtfi n d s t h atp et i t i o n er h as
es t ab l i s h edth ati tad o p t edth e am en dm en t s s o on aft er J u n e 2 1 , 2 0 0 1, up on recei v i ng th e FDL. Th e Co u rt fi n d s s i g n i fi can t the fact th atres po n d en td i dn o tl i s t fai l u re t o am en dth e p l an wi th res p ectt o the s ect io n 4 14 (u ) l an g uag e as a p ro p o s ed g ro u ndfo r rev o cat i on i n th e Ap ri l 1 7 , 2 0 0 8, Fo rm 8 8 6 -A, s ug g es t i n g thatth ere

2 0 Ad d i t i on al l y , a wi tn es s fo r res p o n d en tt es t i fi edth ati n Sep t em b er 2 0 1 2 s ev eral Dep art m en to f Lab or an dIRS ag en t s s ei zedd o cu m en t s an dco m p u t ers fro m M r. Th i el k i n g ’ s h o m e, h o m e o ffi ce, an db u s in es s o ffi ce p urs u an t t o a s earch warran t . M r. Th i el ki n g cred i b l y t es t i fi edth ath e was u n cert ai n wh et h er t h e p u rp ort edad m i n i s trat iv e reco rdco n t ai nedal l d o cu m en ts rel at edt o p et it i o n er, Es s y M an ag em en t, an dthe ESOP an dESOT b ecau s e h e was u n ab le t o acces s al l o f h i s reco rd s aft er t he co m

p ut ers were ret u rn ed
.- 2 6 -

[* 2 6 ] was ev i d en ce p ro v i d eddu ri ng th e ex am i n at i o n p ro ces s as t o th e ad o p t i o n o f th e req u i s i t e l an g u ag e. Th e ab s en ce o f fai l u re t o t i m el y am en das a g ro u n dfo r
rev o cat i on i n t h e Ap ri l 1 7 , 2 00 8 , Fo rm 8 8 6-A al s o p recl ud edp et i t i o n er fro m ad dres s i n g th e s ect io n 4 14 (u ) l an g u ag e du ri n g th e ap p eal s t ag e b efo re recei v i n g th e FRL. Res p o n d en tas ks th e Co u rtt o co n s i d er t h e Ho l l enan d Ch u rch il l cas es i n wh i ch th i s Co u rth el d t h atp l an s were n o tqu al i fi edb ecau s e t h ey d i dn o tco n t ai n th e s ect i o n 4 1 4 (u ) l an g u ag e, b utth ere are s i g ni fi can t d i fferen ces b et ween th e fact p at t ern s o f t h o s e cas es an dth i s cas e. In Ho l l en v . Co m m i s s io n er, T.C. M em o . 2 0 1 1 -2 , 2 0 1 1 Tax Ct . M em o LEXIS 1 3 , * 7 -* 8 , th e p l an ad o p t ed am en d m en t s b efo re t h e ex p i rat i o n o f t h e rem ed i al p eri o d, b u tth e am en d m en twas n oteffect i v e fo r al l req u i redy ears . In Ch u rch i l l, at* 1 0 -* 1 1 , th e p l an ad o p t edth e req u i red
am en d m en t s b uto n l y

fo r t h e p l an y ears g o i n g fo rward . Becau se t he am en d m en t s
were n o t effect i v e fo r al l req ui redy ears , th e p l an d idn o t qu al i fy u n d er s ect i o n 4 0 1 (a). Here, b ecau s e o f t h e res o l u t i o n al l owi n g p et i ti o n er’ s b oardo f d i rect o rs t o
am en dthe ESOP ret ro act i v el y t o i t s effect i v e d at e an dth e fact th atth e p ro po s ed
am en d m en t s were p rev i o u s l y ap p ro v eddu ri n g t h e FDL p ro ces s , th e o n l y i ss u e fo r
co n si d erat io n i s wh eth er t h e am en dm en ts t o th e ESOP were ad o pt ed . Res p o n d en t- 2 7 -

[* 2 7 ] d o es n o tqu es t i o n th e s u ffi ci en cy o f t h e s ect i o n 4 1 4 (u ) l an g u ag e co n t ai n edi n th e res t at edp l an d o cu m en tb u t i n s t ead arg u es th atth e d o cu m en t was n ev er ad o pt ed
. Becau se t h e Co u rtfi n d s th e res t at edp lan d o cu m en tan dam en d m en t s were ad op t eds h o rt ly

aft er p et i t i o n er recei vedth e FDL, th e Co u rtfi n ds th at
res p o n d en t ab us edh i s d is cret i o n fo r p u rp o s es o f t h i s d ecl arat o ry ju d g m en t p ro ceed in g b y

d et erm i n i n g th atth e p l an h adn o tb een t i m el y am en d edfo r req u ired l an g u ag e u n d er s ect i o n 4 1 4 (u ). Th e Co u rth as co n s i d eredal l o f t h e arg um en t s m ad e b y th e p art i es , an dt o th e ex t en tth ey

are n o tad dres s edh erei n , th ey are co ns i d eredu nn eces s ary , m o o t , i rrel ev an t , o r wi th o u tm eri t
. To refl ectthe fo reg o i n g ,

Deci s i o n wi ll b e en t ered fo r p et i ti o n er.