147 T.C. No. 14

UNITED STATES TAX COURT

PIZZA PRO EQUIPMENT LEASING, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13149-15. Filed November 17, 2016.

 P adopted the Plan, a defined benefit pension plan, effective Jan. 1,

1995. The Plan was a qualified plan under I.R.C. sec. 401(a)

throughout the years at issue. At all relevant times, the Plan had a

single participant, P’s president. The Plan’s normal retirement age

was set at age 45. The Plan provided that the participant’s accrued

benefits vested fully at death and were payable as a death benefit to

the participant’s designated beneficiary.

 The Plan filed Forms 5500, Annual Return/Report of Employee

Benefit Plan, for each of the plan years 2002 through 2006, which

coincided with the calendar year and the Plan’s and P’s tax years. 

However, P never filed any Forms 5330, Return of Excise Taxes

Related to Employee Benefit Plans. R filed substitute Form 5330

returns on behalf of P for the years at issue and subsequently

determined deficiencies and additions to tax related to nonpayment of

the I.R.C. sec. 4972 excise taxes. R asserted that portions of P’s

contributions to the Plan were nondeductible because the Plan’s
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funding did not fully account for the proper reductions imposed by

I.R.C. sec. 415(b)(2)(C) for benefits beginning before age 62.

 Held: R applied the correct method to reduce the maximum

benefits under I.R.C. sec. 415(b)(2)(C) to an actuarially equivalent

value for a retirement age before age 62 in the Plan where the Plan

did not provide for forfeiture of the participant’s benefits at death.

 Held, further, P is liable for I.R.C. sec. 4972 excise taxes for

nondeductible contributions made to the Plan for tax years 2002

through 2006 because portions of the total contributions made were in

excess of I.R.C. sec. 404 limitations.

 Held, further, P did not make a valid election under I.R.C. sec.

4972(c)(7) to disregard certain nondeductible contributions.

 Held, further, P is liable for additions to tax under I.R.C. sec.

6651(a)(1) and (2) for failing to file Forms 5330 and pay excise taxes. 

P did not have reasonable cause for those failures.

 Held, further, the statute of limitations does not bar the assessment

and collection of I.R.C. sec. 4972 excise taxes for nondeductible

contributions made to the Plan.

Samuel A. Perroni, for petitioner.

Peter J. Gavagan and Mark L. Hulse, for respondent.
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OPINION

LARO, Judge: This case arises out of contributions made by petitioner in

tax years 2002 through 2006 to a defined benefit pension plan called the Pizza Pro

Equipment Leasing, Inc. Retirement Plan (plan). The case was submitted fully

stipulated for decision without trial. See Rule 122.1

Respondent determined deficiencies in petitioner’s Federal excise taxes due

for tax years 2002 through 2006 as follows:

Additions to tax

 Sec. Sec.

Year Deficiency .6651(a)(1) 6651(a)(2)

2002 $10,081 $2,268.22 $2,520.25

2003 19,401 4,365.22 4,850.25

2004 26,498 5,962.05 6,624.50

2005 25,269 5,685.52 6,317.25

2006 23,894 5,376.15 5,973.50

Unless otherwise indicated, section references are to the Internal Revenue 1

Code (Code) applicable for the years at issue. Rule references are to the Tax

Court Rules of Practice and Procedure.
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We decide the following issues:

(1) whether petitioner applied the correct method to reduce the maximum

benefits under section 415(b)(2)(C) for a retirement age before to age 62, where

the plan does not provide for forfeiture of the participant’s benefits at death. We

hold that it did not;

(2) whether petitioner is liable for excise taxes under section 4972 for

nondeductible contributions made to the plan for calendar years 2002 through

2006 because the contributions were in excess of the limitations imposed by

section 404. We hold that petitioner is so liable;

(3) whether petitioner is liable for additions to tax pursuant to section

6651(a)(1) and (2) for failure to timely file Forms 5330, Return of Excise Taxes

Related to Employee Benefit Plans, and failure to timely pay the excise taxes for

calendar years 2002 through 2006. We hold that petitioner is so liable and did not

have reasonable cause for not filing Forms 5330 or not paying excise taxes for the

years at issue;

(4) whether the statute of limitations bars the assessment and collection

of excise taxes pursuant to section 4972 for nondeductible contributions to the

plan for calendar years 2002 through 2006. We hold that it does not.
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Background

I. Overview

The parties submitted this case fully stipulated under Rule 122. The

stipulations of fact and the facts drawn from stipulated exhibits are incorporated

herein. Petitioner is an Arkansas corporation maintaining a principal office in

Cabot, Arkansas. This case is appealable to the Court of Appeals for the Eighth

Circuit absent stipulation of the parties to the contrary.

II. The Pizza Pro Equipment Leasing, Inc. Retirement Plan

Petitioner adopted the plan, a defined benefit pension plan, effective

January 1, 1995. Petitioner did not fund a defined contribution plan during any of

the years at issue in this case. Respondent issued a favorable determination letter

for the plan on September 23, 1997. The plan has been timely amended as

required by all legislation enacted after September 23, 1997, and throughout the

years at issue continued to be a qualified plan pursuant to section 401(a). 

Specifically, on December 18, 2001, petitioner amended the plan by adopting the

Jewell, Moser, Fletcher & Holleman, A Professional Association, Prototype

Defined Benefit Plan & Trust Basic Plan Document, which was in effect for the

2002 plan year. Respondent on October 9, 2002, issued an opinion letter finding

the form of the plan to be acceptable under section 401. On November 28, 2003,
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petitioner further amended the plan by adopting the Jewell Law Firm, P.A.,

Prototype Defined Benefit Plan & Trust Basic Plan Document, which was in effect

for the 2003 through 2006 plan years. Respondent on July 31, 2003, issued an

opinion letter finding the form of the plan to be acceptable under section 401.

Throughout the years at issue, the plan maintained a calendar year and a

yearend valuation date. The plan had a single participant, Scott A. Stevens, who

was also petitioner’s president. Mr. Stevens further served as the plan’s trustee.

The normal retirement age (NRA) set forth in the plan was the later of age

45 or the fifth anniversary of the participation date. Mr. Stevens was born in

1961. Since Mr. Stevens’ reaching age 45 was the later of the two dates specified

in the plan, the parties have stipulated that for purposes of this case the NRA is

age 45. The normal retirement benefit of 100% of the participant’s average annual

compensation under the plan was to be paid in the form of a straight-life annuity. 

Section 7.5(a) of the plan required that a vested accrued benefit be paid “in the

form of a qualified joint and survivor annuity.” Per section 6.3.2 of the plan, if a 2

benefit was not a straight-life annuity, then the benefit “must be adjusted to an

Citations of specific plan and adoption agreement sections reflect those

2

sections as they appear in the 2002 plan documents. Any amendments made on

November 28, 2003, and effective for years 2003 through 2006, were minor and

do not substantively affect our analysis.
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actuarially equivalent straight life annuity” although no actuarial adjustment was

needed for “the value of a qualified joint and survivor annuity” and “the value of

benefits that are not directly related to retirement benefits (such as the qualified

disability benefit, pre-retirement death benefits, and post-retirement medical

benefits)”. Under section 7.5(c)4 of the plan, a qualified joint and survivor

annuity was

[a]n immediate annuity for the life of the Participant with a survivor

annuity for the life of the spouse which is not less than 50 percent and

not more than 100 percent of the amount of the annuity which is

payable during the joint lives of the Participant and the spouse and

which is the actuarial equivalent of the normal form of benefit, or, if

greater, an optional form of benefit. The percentage of the survivor

annuity under the plan shall be 50% (unless a different percentage is

elected by the employer in the Adoption Agreement).

Section 7.2 of the plan provided that a participant’s accrued benefits are

fully vested at the participant’s death before his retirement date and payable as a

death benefit to the participant’s designated beneficiary. Under section 35 of the

adoption agreement, the pre-retirement death benefit was calculated to be “[t]he

qualified preretirement survivor annuity plus the excess, if any, of the present

value of the participant’s accrued benefit minus the present value of the qualified

preretirement survivor annuity.” Section 6.3.11(c) of the plan provided:

If the benefit of a Participant commences prior to age 62, the Defined

Benefit Dollar Limitation [as established under section 415(d)]
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applicable to the Participant at such earlier age is an annual benefit

payable in the form of a straight life annuity that is the actuarial

equivalent of the Defined Benefit Dollar Limitation for age 62, as

determined above, reduced for each month by which benefits

commence before the month in which the Participant attains age 62. 

Effective for Limitation Years beginning on or after January 1, 1995,

the Defined Benefit Dollar Limitation applicable at an age prior to

age 62 is determined as the lesser of the actuarial equivalent of the

Defined Benefit Dollar Limitation for age 62 computed using the

interest rate and mortality table (or other tabular factor) specified in

Section 36 of the Adoption Agreement [that is, a 5% interest rate and

the G.E. Life Annuity Table with five-year setback], and the actuarial

equivalent of the Defined Benefit Dollar Limitation for age 62

computed using a 5 percent interest rate and the applicable mortality

table as defined in section 1.4 of the plan. Any decrease in the

Defined Benefit Dollar Limitation determined in accordance with this

provision (c) shall not reflect a mortality decrement if benefits are not

forfeited upon the death of the Participant. If any benefits are

forfeited upon death, the full mortality decrement is taken into

account.

For plan years 2003 through 2006, the first sentence of section 6.3.11(c) instead

read: “If the benefit of a Participant commences prior to age 62, the Defined

Benefit Dollar Limitation applicable to the Participant at such earlier age is an

annual benefit payable in the form of a straight life annuity beginning at the earlier

age that is the actuarial equivalent of the Defined Benefit Dollar Limitation at age

62, as adjusted under (a) above, if required.”

The plan actuary reviewed and approved actuarial valuation work papers

including amortization schedules for plan years 1996 through 2002 and valuation
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results for plan years 2002 through 2006. The plan actuary, an enrolled actuary,

also signed Schedules B, Actuarial Information, to the Forms 5500, Annual

Return/Report of Employee Benefit Plan, filed by the plan for each of the years at

issue.

III. Audit and Determination of Deficiency

The plan filed Form 5500 for each of the plan years 2002 through 2006. 

Petitioner did not file any Forms 5330 for any of the tax years 2002 through 2006.

Respondent had audited the plan in 1998 but closed the audit with no

adjustments. However, respondent began another audit in late 2005.

On October 29, 2012, respondent filed on behalf of petitioner a substitute

Form 5330 for each of the tax years 2002 and 2003, with an attached section

6020(b) certification. Respondent on February 28, 2013, filed a similar form on

behalf of petitioner for each of the tax years 2004, 2005, and 2006.

Respondent on March 11, 2015, issued a notice of deficiency to petitioner

for tax years 2002 through 2006, determining the deficiencies and additions to tax

identified in the opening paragraphs above. In the notice of deficiency respondent

determined that petitioner made nondeductible contributions to the plan because

the funding did not fully account for the proper reductions imposed by section

415(b)(2)(C) for benefits beginning before age 62. The parties have stipulated the
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following comparison of the maximum benefits allowable under section 415(b)

with the section 415(b)(2)(C) reduced benefit limits as determined by petitioner

and respondent, respectively:

 Sec. 415(b)

Year maximum Petitioner Respondent

2002 $160,000 $69,740 $52,935

2003 160,000 69,687 53,150

2004 165,000 71,633 54,811

2005 170,000 74,170 56,472

2006 175,000 76,352 58,133

In view of his computation pursuant to section 415(b)(2)(C) of lower reduced

benefit limits, respondent in the notice of deficiency further calculated allowable

deduction limits. Since respondent computed lower benefit limits than did

petitioner, respondent arrived at lower section 404 deductible limits, resulting in

nondeductible contributions as follows:

Original Allowable Excess

Year contribution amount contributions

2002 $292,470 $191,659 $100,811

2003 263,817 170,620 93,197

2004 283,406 212,433 70,973
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2005 225,352 237,641 (12,289)

2006 1,704 15,451 (13,747)

Applying the 10% excise tax of section 4972 on nondeductible contributions, and

accounting for carryover of excess contributions until they are used up or removed

from the plan, respondent calculated the following section 4972 excise tax

amounts:

 Excess Prior Sec. 4972

Year contributions year carryover Total tax due

2002 $100,811 -0- $100,811 $10,081

2003 93,197 $100,811 194,008 19,401

2004 70,973 194,008 264,981 26,498

2005 (12,289) 264,981 252,692 25,269

2006 (13,747) 252,692 238,945 23,894

IV. The Parties’ Calculations of Retirement Benefit Present Values

The parties have stipulated the following calculations of present values of

various pension plan payments, assuming: (1) an interest rate of 5.0%, (2) a life

expectancy of 23.5 years for a person aged 62, and (3) a life expectancy of 38.8

years for a person aged 45. The chart is subdivided into five segments, each
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reflecting different assumptions as to the annual payments for life at ages 45 and

62:

Annual 

 payment for life Beginning at age Present value

$160,000 62 $2,292,126

 69,740 45 1,243,922

 52,935 45 944,179

 160,000 62 2,292,126

 69,687 45 1,242,977

 53,150 45 948,014

 165,000 62 2,363,755

 71,633 45 1,277,687

 54,811 45 977,641

 170,000 62 2,435,384

 74,170 45 1,322,938

 56,472 45 1,007,267

 175,000 62 2,507,012

 76,352 45 1,361,876

 58,133 45 1,036,893
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In determining the permissible normal retirement benefit under the plan

each year, petitioner reduced the section 415 dollar limit by discounting the

maximum benefit by 5% interest for the 17 years between age 62 and age 45--that

is by applying a factor equal to (1/1.05) --to reach the present value at age 45 of 17

the permissible benefit payable at age 62.

On the other hand, respondent for the 2002 tax year reduced the section 415

dollar limit not only by discounting the maximum benefit by 5% interest for the 17

years between age 62 and age 45 as petitioner had done, but also multiplying the

resulting amount by 75.83%, a factor obtained by dividing the annuity purchase

rate (APR) at age 62 by the APR at age 45--that is, by dividing 12.45592 by

3

16.426--derived from the 1983 Group Annuity Mortality (GAM) blended table,

which is the “applicable mortality table” from Rev. Rul. 95-6, 1995-1 C.B. 80. 

For tax years 2003 through 2006, respondent followed a similar calculation,

except that he multiplied the resulting amount in the second step by 76.14%--a

factor obtained by dividing 12.68 by 16.654--computed using the 1994 Group

As Steven H. Klubock, respondent’s expert, explains: “The annuity

3

purchase rate is the present value of the series of payments for the employees life

based on given interest and mortality.” Its calculation, per Mr. Klubock, is based

on the summation of the product of (1) payment, (2) discount for interest to

payment, and (3) probability of living to receive payment (until the mortality table

ends).
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Annuity Reserving (GAR) blended table, which is the “applicable mortality table”

from Rev. Rul. 2001-62, 2001-2 C.B. 632. The following table summarizes

respondent’s calculation of the section 415(b)(2)(C) limit at age 62 reduced to age

45 for each of the years at issue:

 [1] [2] [3] [4] [5]

 Interest

discount

 for 17

Age 62 years at APR at APR at Age 45

Year limit 5% age 62 age 45 limit

2002 $160,000 0.4363 12.456 16.426 $52,936

2003 $160,000 0.4363 12.68 16.654 $53,150

2004 $165,000 0.4363 12.68 16.654 $54,811

2005 $170,000 0.4363 12.68 16.654 $56,472

2006 $175,000 0.4363 12.68 16.654 $58,133

Essentially, respondent applied a tripartite method to calculate the required

reduction in the section 415 dollar limitation with respect to a retirement age

earlier than 62.

(1) Determine the actuarial equivalent value of each year’s respective

limit payable at age 62 for life by converting that annual limit into a lump-sum

value, assuming 5% interest and the probability of living each year to receive this
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annual benefit, and multiplying the limit by the appropriate APR. In the table

above, this requires multiplying [1] by [3].

(2) Reduce the value derived in the first step from age 62 to age 45 by

discounting it for interest only for 17 years. In the table above, this entails

multiplying [[1] × [3]] by [2].

(3) Convert the value derived in the second step to a life annuity payable

at age 45. In the table above, this requires dividing [[1] × [2] × [3]] by [4], to

arrive at the final number in [5].

V. Petitioner’s Income Tax Returns

Petitioner filed Forms 1120, U.S. Corporation Income Tax Return, for tax

years 2002 through 2006. Throughout the years at issue, petitioner claimed the

following deductions for contributions to the plan:

Year Contribution deducted

2002 $292,470

2003 263,817

2004 283,406

2005 225,352

2006 1,704
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On January 16, 2008, respondent issued a notice of deficiency with respect

to petitioner’s 2004 income tax return, disallowing a portion of petitioner’s

claimed deduction for contributions to the plan. Respondent determined a

deficiency for the 2004 tax year of $38,871, plus interest of $9,253.55. Petitioner

filed a petition with this Court on March 24, 2008. On March 3, 2010, this Court

entered a stipulated decision in docket No. 7124-08, following petitioner’s

agreement with the deficiency determined by respondent.

On November 4, 2008, respondent issued another notice of deficiency, this

time with respect to petitioner’s 2005 income tax return, disallowing a portion of

petitioner’s claimed deduction for contributions to the plan. Respondent

determined a deficiency for the 2005 tax year of $48,804. Petitioner filed a

petition with this Court on December 4, 2008. On March 3, 2010, this Court

entered a stipulated decision in docket No. 29393-08, following petitioner’s

agreement with the determined deficiency.

VI. Expert Witnesses

Petitioner and respondent each sought to introduce one expert witness to

opine on certain matters relevant to this case. Although experts ordinarily are

proffered as witnesses at trial, there is precedent in this Court for allowing expert

testimony to be submitted in fully stipulated cases. See, e.g., Alumax Inc. v.
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Commissioner, 109 T.C. 133 (1997), aff’d, 165 F.3d 822 (11th Cir. 1999). Here,

the parties submitted their experts’ reports as exhibits to the first stipulation of

facts.

A. Xiaoshen Wang, Ph.D.

Xiaoshen Wang is a professor of mathematics at the University of Arkansas

at Little Rock. He received bachelor of science and master of science degrees in

Mathematics from Jilin University in Changchun, China, and a Ph.D. in

mathematics from Michigan State University. Professor Wang has published

many articles on various mathematical topics, with recent publications focusing on

the field of numerical analysis. Aside from foundational courses in trigonometry,

algebra, calculus, and differential equations, Professor Wang has taught financial

mathematics, numerical analysis, and number theory. He is experienced in several

computer languages and mathematical software programs. Before joining the

faculty of the University of Arkansas at Little Rock, Professor Wang served as a

professor at the University of Central Arkansas and was an instructor at Michigan

State University. Professor Wang has not testified as an expert at trial or by

deposition in any other cases during the previous four years.

Petitioner has offered Professor Wang’s report in support of two

propositions. Firstly, Professor Wang opines that, as calculated by petitioner, the
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present values of annual lifetime payments of certain amounts beginning at age 45

are less than the present values of coordinate annual lifetime payments of certain

amounts beginning at age 62. His report includes the calculations and the facts

and data used to determine the present values and to make comparisons. 

Secondly, Professor Wang in an addendum report opines on the present values of

certain smaller annual lifetime payments beginning at age 45, as calculated by

respondent. Professor Wang’s addendum report includes his calculations and the

facts and data used to determine the values.

Notwithstanding the inclusion of Professor Wang’s report in the first

stipulation of facts, respondent objected to the report on the grounds that Professor

Wang is not a pension actuary, nor is he qualified to present expert testimony

regarding the specific methodology required to calculate the requisite reduction

for an early retirement age under section 415(b)(2)(C). Respondent further

objected on the grounds that the report compares present values of annuities

certain rather than life annuities, the latter of which are the specific subject of the

present case. In his opening and answering briefs, respondent argues that

Professor Wang’s report should be disregarded for these reasons and certain errors

contained therein. As we confront the questions presented in this case, we will
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consider Professor Wang’s report but give it no more than its due weight, as

discussed below.

B. Steven H. Klubock, F.S.A., E.A.

Steven H. Klubock is an actuary employed in the Tax Exempt and

Government Entities Division of the Internal Revenue Service (IRS). Mr.

Klubock holds a bachelor of science, magna cum laude, in actuarial science from

the College of Insurance in New York City. He has been an enrolled actuary since

1980 and a fellow of the Society of Actuaries since 1982. In the IRS’ employ,

nearly all of his work involves defined benefit pension plans, and his

responsibilities include: responding to taxpayers’ requests for private letter

rulings; providing technical assistance and writing publications; teaching and

preparing training materials; assisting with the development of regulations,

revenue procedures, and notices; updating annually the defined benefit schedules

to Form 5500; rendering actuarial assistance on plan qualifications; and

responding to questions from practitioners and IRS employees. Before joining the

IRS in 2009 Mr. Klubock spent 28 years working as an enrolled actuary at

national actuarial consulting firms, where he prepared minimum funding

requirements and maximum allowable tax deductions for defined benefit pension

plans and performed benefit calculations under section 415(b).
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Respondent introduced Mr. Klubock’s report to establish three propositions. 

Firstly, Mr. Klubock opines that the limitations for defined benefit plans under

section 415(b) were exceeded for the plan, resulting in contributions exceeding the

allowable deductions for contributions to an employee’s trust under section 404,

subject to the 10% excise tax under section 4972. Secondly, he contends that the

information provided on Forms 5500 by the plan could not possibly have allowed

the IRS to determine that nondeductible contributions were made and that the only

way the IRS could determine this would be by auditing of the data and

calculations. Thirdly, Mr. Klubock opines that the contributions exceeded the

plan’s full funding limitation and that the plan’s sponsor could have remedied the

tax deduction excess either by electing not to deduct a portion of the contributions

made or by electing a refund of the nondeductible contributions.

In addition to rendering his opinions, Mr. Klubock provides an overview of

defined benefit plan funding, including aspects of plan design, the role of an

enrolled actuary, the actuarial valuation process, and the applicable statutory and

regulatory regime. He also critiques Professor Wang’s expert report. Mr.

Klubock furthermore concludes that the IRS actuary who participated in the audit

of petitioner’s returns was correct in her calculations of the actuarially equivalent

values of amounts payable at ages 45 and 62 under the plan.
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Discussion

I. Overview

Even though the parties raise several issues in this matter, the key question

upon which the case turns is whether respondent applied mortality adjustments

appropriately to reduce the maximum benefits under section 415(b)(2)(C) for a

retirement age before age 62 in the plan, where the plan does not provide for

forfeiture of the participant’s benefits at his death.

Petitioner contends that the section 415(b) limitation on annual benefits for

defined benefit plans where the participant’s benefits are not forfeited at death

need only be discounted for the time value of money--that is, for the appropriate

interest rate--between the plan’s early retirement age and age 62. Respondent, on

the other hand, argues that the annual benefit limitation must be converted into a

lump sum using a factor accounting for both interest and mortality, then

discounted for the time value of money to the plan’s early retirement age, and then

reconverted into an annual benefit using again a factor accounting for both interest

and mortality. If respondent is correct, then the plan was overfunded and

petitioner’s contributions to the plan were partially nondeductible. If that is the

case, petitioner may be liable for excise taxes under section 4972 unless an

exception applies.
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We note that the years at issue in this case are 2002 through 2006 and that

the law has changed over the subsequent years, especially with the wholesale

repeal of the old regulations and introduction of a new regime under section 415 in

2007. It is axiomatic in our common law that we apply the law as it existed at the

time the alleged tax deficiencies arose. See, e.g., Anthes v. Commissioner, 81

T.C. 1, 7 (1983) (“We must apply the law as in effect during the taxable year in

issue.”), aff’d, 740 F.2d 953 (1st Cir. 1984). Accordingly, we will look to the

relevant statutes and regulations as they were effective during the tax years 2002

through 2006.

II. Appropriate Application of Mortality Adjustments Under Section 

 415(b)(2)(C)

The primary issue in this case is whether petitioner applied the appropriate

methodology in calculating the section 415 limitation on benefits for a defined

benefit plan that provides for a retirement age earlier than age 62 and where a

participant does not forfeit benefits upon death. We hold that petitioner did not.

A. Statutory Background

Section 404(a) provides that an employer’s contributions to a pension plan

are deductible under that section if they would otherwise be deductible, subject to

certain limitations. Thus, in computing the amount of an allowable deduction, “in
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the case of a defined benefit plan, there shall not be taken into account any

benefits for any year in excess of any limitation on such benefits under section 415

for such year”. Sec. 404(j)(1)(A).

Section 415(a)(1)(A) provides that a defined benefit plan pension trust

cannot qualify under section 401(a) if the plan provides for the payment of

benefits to a participant exceeding the limitations imposed by subsection 415(b). 

A benefit exceeds the limitation if, when expressed as an annual benefit, that

benefit is greater than the lesser of $160,000 (adjusted annually for cost of living

increases, sec. 415(d)) or 100% of the plan participant’s average compensation for

his high three years, sec. 415(b)(1). An “annual benefit” is one that is “payable

annually in the form of a straight life annuity (with no ancillary benefits)”. Sec. 4

415(b)(2)(A). If the benefit is in any other form, it must be adjusted so that it is

equivalent to a benefit payable annually in the form of a straight life annuity. Sec.

415(b)(2)(B). However, any ancillary benefit not directly related to retirement

income benefits is not taken into account, nor is any qualified joint and survivor

annuity as defined in section 417. Id. Section 417(b) defines a “qualified joint

A “straight life annuity” is “an annuity which pays the annuitant a 4

guaranteed amount every month for the annuitant’s lifetime.” Sipes v. Equitable

Life Assurance Soc’y of U.S., No. C-94-3868-VRW, 1996 WL 507308, at *2

(N.D. Cal. Aug. 13, 1996).
- 24 -

and survivor annuity” for purposes of section 417 and 401(a)(11) (which requires

joint and survivor annuities to be qualified) as an annuity “for the life of the

participant with a survivor annuity for the life of the spouse which is not less than

50 percent of (and is not greater than 100 percent of) the amount of the annuity

which is payable during the joint lives of the participant and the spouse,” and

“which is the actuarial equivalent of a single annuity for the life of the

participant.” Thus, even though certain joint and survivor annuities are not taken

into account under section 415(b)(2)(B), under section 417(b) they nonetheless

must be actuarially equivalent to straight life annuities.

If the retirement benefit under a plan begins before age 62, the $160,000

limitation should be reduced “so that such limitation (as so reduced) equals an

annual benefit (beginning when such retirement income benefit begins) which is

equivalent to a $160,000 annual benefit beginning at age 62.” Sec. 415(b)(2)(C).

There are several limitations on assumptions under section 415. 

Specifically, in adjusting the benefit (with certain exceptions) and the benefit

limitation, the interest rate assumption must be at least 5%. Sec. 415(b)(2)(E)(i). 5

In calculating such adjustments, the mortality table used should be one prescribed

For plan years beginning in 2004 and 2005, the minimum interest rate was 5

increased to 5.5%. See Pension Funding Equity Act of 2004, Pub. L. No. 108-218,

sec. 101(b)(4), 118 Stat. at 598.
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by the Secretary and “be based on the prevailing commissioners’ standard table

* * * used to determine reserves for group annuity contracts issued on the date the

adjustment is being made”. Sec. 415(b)(2)(E)(v). For plan years beginning with

1995, the Commissioner established a mortality table based on a fixed blend of

50% of the male mortality rates and 50% of the female mortality rates from the

1983 Group Annuity Mortality Table. Rev. Rul. 95-6, supra. This is the mortality

table applicable to the section 415 limitation on benefits for tax year 2002. For

distributions with annuity starting dates on or after December 31, 2002, the

Commissioner promulgated an updated mortality table based on the 1994 Group

Annuity Reserving Table. Rev. Rul. 2001-62, supra. This is the mortality table

applicable to the section 415 limitation on benefits for tax years 2003 through

2006.

B. Relevant Regulations and Guidance

The Secretary has also promulgated regulations under section 415. For the

years at issue, sections 1.415-1 through 1.415-10, Income Tax Regs., published in

the Federal Register on January 7, 1981, T.D. 7748, 46 Fed. Reg. 1697, were in

effect. These regulations were replaced entirely by sections 1.415(a)-1 through

1.415(j)-1, Income Tax Regs., effective April 5, 2007, T.D. 9319, 72 Fed. Reg.

16895. Although the parties have cited these later regulations in their briefs,
- 26 -

during the years at issue petitioner did not have the benefit of the new regulations. 

Accordingly, we will look to the regulations and other guidance as they were in

effect for the years 2002 through 2006.

Section 1.415-3(e), Income Tax Regs., provides that where a retirement

benefit under a defined benefit plan begins before age 55, “the plan benefit is

6

adjusted to the actuarial equivalent of a benefit beginning at age 55 in accordance

with rules determined by the Commissioner.” Question-and-answer No. 6 in Rev.

Rul. 98-1, 1998-1 C.B. 249, further clarifies that “[f]or purposes of adjusting any

limitation under § 415(b)(2)(C) or (D), to the extent that a forfeiture does not

occur upon death, the mortality decrement may be ignored prior to age 62”. See

also Notice 83-10, 1983-1 C.B. 536. Otherwise, 

[i]f the age at which the benefit is payable is less than 62, the

age-adjusted dollar limit is determined by reducing the age-adjusted

dollar limit at age 62 on an actuarially equivalent basis. In general,

§§ 415(b)(2)(E)(i) and (v) require that the reduced age-adjusted dollar

limit be the lesser of the equivalent amount computed using the plan

rate and plan mortality table (or plan tabular factor) used for actuarial

equivalence for early retirement benefits under the plan and the

amount computed using 5 percent interest and the applicable

mortality table * * *

Although the regulation refers to age 55, by the years at issue the statute

6

had been amended to increase the age to 62.
- 27 -

Rev. Rul. 98-1, Q&A-7, 1998-1 C.B. at 251. Put another way, “in determining

actuarial equivalence for this purpose, it is generally necessary to use a reasonable

mortality table. However, the mortality decrement may be ignored to the extent

that a forfeiture does not occur at death.” Notice 87-21, Q&A-5, 1987-1 C.B. 458,

460.7

C. The Parties’ Arguments

As discussed above, petitioner and respondent applied different

methodologies to reduce the maximum benefit under section 415. Petitioner

discounted the benefit by 5% interest for the 17 years between age 62 and age 45. 

Respondent, on the other hand, converted the maximum benefit at age 62 into a

lump sum, discounted that sum by 5% interest for 17 years, and then reconverted

the resulting figure into an annual benefit. Respondent’s conversion from annuity

While notices and revenue rulings are not entitled to the deference typically 7

afforded to regulations, they may have value proportional to their persuasive

power. PSB Holdings, Inc. v. Commissioner, 129 T.C. 131, 142 (2007). During

the years at issue in this case, neither the Code nor the regulations provided that

“the mortality decrement may be ignored prior to age 62”--this rule was found

only in notices and revenue rulings. See Rev. Rul. 98-1, Q&A-6, 1998-1 C.B.

249, 251; see also Notice 87-21, Q&A-5, 1987-1 C.B. 458, 459; Notice 83-10,

1983-1 C.B. 536. Accordingly, the rule and its interpretation by the

Commissioner have value as evidence of the actuarial practice to disregard

mortality decrements for benefits beginning at ages earlier than 62, but are not

dispositive on the issue (and at any rate are too vague to speak definitively on the

appropriate methodology to be employed in the discounting calculation).
- 28 -

to lump sum and vice versa used a factor derived from APRs, which in turn were

derived in part from the designated mortality tables. 

Since the plan at issue here provided for survivor benefits and also provided

that accrued benefits were fully vested at death, there was no forfeiture on death. 

Accordingly, under guidance issued by the Commissioner, no mortality decrement

was to be applied in calculating the reduced maximum benefit. Petitioner

contends that this precludes the use of mortality tables entirely and that respondent

erred in converting the annuities to lump sums and back. Respondent’s position is

that the lack of a mortality decrement applies only to the calculation discounting

the maximum benefit’s value from age 62 to age 45, but not to the conversion

between the annuities and corresponding lump sums.

We resolve the dispute between the parties by determining whether their

methods are “actuarially equivalent” as required by section 1.415-3(e), Income

Tax Regs. Petitioner seeks simply to discount for interest to derive the reduced

maximum benefit value, emphasizing the “equivalent” portion of “actuarial

equivalent.” Respondent argues that actuarial equivalence essentially is a term of

art different from simple equality, placing greater weight upon the “actuarial”

portion of “actuarial equivalent.” Petitioner criticizes respondent’s approach for

reducing the maximum benefit twice and thereby allegedly deflating the figure. 
- 29 -

Petitioner contends that section 415 requires only an equalization between what a

participant will receive beginning at age 45 with what a participant will receive at

age 62, while respondent, according to petitioner, compares what a participant will

receive beginning at age 45 with what a participant will receive at age 62 if the

participant started receiving the benefit at age 45.

D. Actuarial Equivalence

Actuarial equivalence is an elusive concept not defined in the Code. 

However, as the U.S. Court of Appeals for the District of Columbia Circuit has

observed: “[A]lthough ERISA does not further define actuarial equivalence, we

assume Congress intended that term of art to have its established meaning.”

Stephens v. U.S. Airways Grp., Inc., 644 F.3d 437, 440 (D.C. Cir. 2011). “Two

modes of payment are actuarially equivalent when their present values are equal

under a given set of actuarial assumptions.” Id.; see also Dooley v. Am. Airlines,

Inc., No. 81-C-6770, 1993 WL 460849, at *11 (N.D. Ill. Nov. 4, 1993) (“The term

‘actuarially equivalent’ means equal in value to the present value of normal

retirement benefits, determined on the basis of actuarial assumptions with respect

to mortality and interest which are reasonable in the aggregate.”). Actuarial

equivalence ultimately relies on what is being compared and how, and special

attention must be paid to the actuarial assumptions underlying the computations. 
- 30 -

Berger v. Xerox Corp. Ret. Income Guarantee Plan, 338 F.3d 755, 759 (7th Cir.

2003) (“There is no single actuarial equivalence, because there is no single

discount rate.”).

This definition is similar to that provided for in the plan at section 1.3:

“‘Actuarial Equivalent’ means having an equal present value when computed

using the same actuarial assumptions underlying the funding of the plan as of the

most recent actuarial valuation.” In section 7.11(a) the plan states that “[a]ctuarial

equivalence will be determined on the basis of the interest rate and mortality table

specified in the Adoption Agreement,” which are 5% and the G.E. Life Table with

five-year setback, respectively, as specified in section 36 of the adoption

agreement. Further, the plan in section 7.11(c) takes care to incorporate by

reference the Commissioner’s mortality table: “The section 417 applicable

mortality table is set forth in Rev. Rul. 95-6, 1995-1 C.B. 80.” 

Respondent has not challenged the plan’s actuarial assumptions as

unreasonable, cf. sec. 412(c)(3), and at any rate the plan was restricted by the 8

Petitioner cites heavily the decisions by this Court in Vinson & Elkins v.

8

Commissioner, 99 T.C. 9 (1992), aff’d, 7 F.3d 1235 (5th Cir. 1993), and Citrus

Valley Estates, Inc. v. Commissioner, 99 T.C. 379 (1992), aff’d in part, remanded

in part, 49 F.3d 1410 (9th Cir. 1995), for putative support for its position on

actuarial equivalence. For example, petitioner makes much of the following

excerpt from Vinson & Elkins v. Commissioner, 99 T.C. at 47-48: 

(continued...)
- 31 -

limitations on certain assumptions in section 415(b)(2)(E). The outstanding

question is how to parlay these assumptions into an actuarially equivalent amount. 

The appropriate methodology for doing so is not apparent from the face of the

definition of actuarial equivalence, nor from the statute or regulations as in effect

during the years at issue. Therefore, reducing under section 415 the maximum

benefit to its actuarially equivalent value at a retirement age younger than 62

requires reference to practice within the field of actuarial science.

It is on the point of defining actuarial equivalence that expert testimony is

useful to the Court in deciding this case. Respondent’s expert, Mr. Klubock,

(...continued) 8

The language of section 415 provides for an adjustment to the

maximum annual benefit of $90,000, depending upon when such

benefit commences. If the benefit commences before the Social

Security retirement age, a reduction is to be made to the benefit so

that it equals the actuarial equivalent of the $90,000 annual benefit,

which would have begun at the Social Security retirement age. 

Although a plan participant would receive a reduced benefit, the

benefit would be payable for a longer period, and therefore he or she

would receive ultimately at least the same total amount of benefits. 

Unfortunately, petitioner’s reliance on these cases is misplaced. Firstly, the

concept of equivalence as discussed therein refers to the necessity of making sums

paid at different times actuarially equivalent by discounting for that time interval,

an axiom that is at the heart of actuarial equivalence but which does not inform the

specific method to be used to achieve it. Secondly, both Vinson & Elkins and

Citrus Valley Estates addressed the requirement under sec. 412(c)(3)--presently

codified at sec. 433(c)(3)--that the actuarial assumptions made by plans’ enrolled

actuaries be reasonable, a question not at issue in this case.
- 32 -

although employed by the IRS and therefore not independent, is an experienced

actuary with an extensive background in defined benefit pension plans. 

Petitioner’s expert, Professor Wang, although independent and qualified as a

mathematician, is not an actuary. Therefore, we must afford his opinions on

actuarial principles limited weight.

Furthermore, we agree with respondent’s criticism that Professor Wang’s

report erroneously treats the plan’s pension payments as annuities certain. An

annuity certain “is an annuity whose payments are certain to be made, and are not

contingent on any events or subject to any risk.” Angus S. Macdonald,

“Annuities”, in 1 Encyclopedia of Actuarial Science 74 (Jozef L. Teugels & Bjørn

Sundt eds., 2004). Professor Wang took the annuity amounts (which for each year

at issue were the section 415 benefit limit at age 62 and a smaller value that was

computed by petitioner by discounting that benefit limit by 5% interest for 17

years) as given. He then determined the number of payments for life at age 45 and

age 62 using a life expectancy table to arrive at corresponding expectancies of

38.8 years and 23.5 years, respectively. Finally, he factored in 5% interest. In his

calculations, Professor Wang incorporated the assumption that the payments will

be made for a specific number of years without regard to any contingencies--which

is the textbook definition of an annuity certain. See id. Yet, as noted above,
- 33 -

sections 415 and 417 require that the annuity be contingent on the continued

survival of either the plan’s participant or his survivor. In other words the annuity

must be a contingent one, “an annuity whose payments are not certain to be made,

but are contingent on specified events,” such as those “events that are certain to

occur but whose timing is uncertain (such as death).” Id. The latter describes a

life annuity, which is “a contingent annuity depending on the survival of one or

more persons.” Id. Professor Wang’s failure to recognize this distinction between

annuities certain and life annuities further circumscribes the applicability of his

conclusions to this case.

Finally, Professor Wang opines only on a retroactive comparison of the

present values of two different numbers. The numbers themselves, which

petitioner provided to him, he took as given. Petitioner’s purpose in introducing

Professor Wang’s report was to establish that the reduced age 45 annual benefit

limits calculated by petitioner were “actuarially equivalent” to the section 415

benefit limits for age 62 because the present values of the age 45 amounts were

smaller than the present values of the age 62 amounts. While these comparisons

may be mathematically accurate, they do not speak to the proper method for

computing actuarially equivalent values, nor does Professor Wang’s approach

address the validity of the underlying amounts supplied by petitioner. In view of
- 34 -

this, we are compelled to look elsewhere for corroboration of the appropriate

methodology to determine actuarial equivalence.

Thus we turn to Mr. Klubock’s expert report. Mr. Klubock is qualified as

an expert in actuarial science and has many years of experience in that field, with

nearly all his work devoted to defined benefit pension plans. The parties have

stipulated the inclusion of his report in the record of this case. We find Mr.

Klubock’s expert report credible and reliable. Mr. Klubock explains that

discounting an annual benefit by a certain number of years, as Professor Wang did

in his report, erroneously “compares a value of benefits payable at two different

points of time: one at age 62, the other at age 45. In order to be actuarially

equivalent they must be compared at age 45.” This requires the conversion of the

annual benefit at age 62 into a lump sum, followed by discounting for interest only

(since no mortality decrement is to be applied) for 17 years, with the resulting

value converted from a lump sum into an annual benefit at age 45. Absent the

bookend conversions from annual benefit to lump sum and back, Mr. Klubock

explains, the “calculation does not correctly reflect life contingencies”.

We note that life contingencies are different from a mortality decrement,

which, if it were applied here, would require the discounting of the lump sum at

age 62 by not only interest but the risk of death as well. Using mortality tables to
- 35 -

convert annual benefit payments into lump sums does not mean that a mortality

decrement was applied. A mortality decrement is “a discount factor based on the

probability that the participant will forfeit the annuity benefit on account of

death.” Lyons v. Ga.-Pac. Corp. Salaried Emps. Ret. Plan, 196 F. Supp. 2d 1260,

1269 (N.D. Ga. 2002). Mortality tables are necessary to any computation of

actuarially equivalent annuity values, because failure to apply the tables would

lead to the anomalous implication that the annuity in question is perpetual. Thus,

mortality tables are necessary to account for the probability that a plan’s

participant will die. A mortality decrement, on the other hand, accounts for the

probability that a plan’s participant will forfeit the annuity benefit upon his death. 

Therefore, if a mortality decrement were to apply, it would be applied to the

calculation discounting the lump sum at age 62 to age 45. Since no mortality

decrement was necessary, however, respondent in this case properly omitted it

from the discounting computation.

Mr. Klubock employed the following calculation of the actuarially

equivalent value of an annuity at age 62 discounted to age 45 (assuming no

forfeiture at death and thus no mortality decrement): multiply (1) the value at age

62 by (2) the APR at age 62 and by (3) the interest discount for 17 years, then (4)

divide the product by the APR at age 45.
- 36 -

When this formula is applied for tax year 2002 in the present case, for

example, then: (1) the value at age 62 is the age 62 benefit limit of $160,000, (2)

the APR at age 62 is 12.456, (3) the interest discount for 17 years at 5% is 0.4363,9

and (4) the APR at age 45 is 16.426. Therefore, for the 2002 plan year the age 45

benefit limit is calculated as follows: $160,000 × 12.456 × 0.4363 ÷ 16.426 =

$52,936. This is the same result reached by respondent with respect to the plan’s

age 45 benefit limit for 2002. The application of this methodology for plan years

2003 through 2006 corroborated respondent’s determinations for those years as

well.

The methodology is also identical to that contemplated by section 1.415(b)-

1(d), Income Tax Regs., which, while promulgated after the years at issue, does

reflect amendments to section 415 following the issuance of section 1.415-3,

Income Tax Regs., and can serve as an insight into actuarial practice. Thus,

section 1.415(b)-1(d)(2)(i), Income Tax Regs., provides with respect to mortality

adjustments:

For purposes of determining the actuarially equivalent amount

described in paragraph (d)(1)(i) of this section, to the extent that a

This figure is rounded for brevity. Any rounding error is immaterial, since

9

the result does not change if the unrounded figure derived from the calculation of

(1/1.05) is used. At any rate, since 0.4363 is rounded up from (1/1.05) , any 17 17

rounding error would be to petitioner’s benefit.
- 37 -

forfeiture does not occur upon the participant’s death before the

annuity starting date, no adjustment is made to reflect the probability

of the participant’s death between the annuity starting date and the

participant’s attainment of age 62, unless the plan provides for such

an adjustment. * * *

The new regulation, section 1.415(b)-1(d)(7), Income Tax Regs., offers several

examples, one of which describes a situation analogous to that in this case.

The following examples illustrate the application of this paragraph

(d). For purposes of these examples, it is assumed that the dollar

limitation under section 415(b)(1)(A) for all relevant years is

$180,000, that the normal form of benefit under the plan is a straight

life annuity payable beginning at age 65, and that all payments other

than a payment of a single sum are made monthly, on the first day of

each calendar month. The examples are as follows:

Example 1. (i) Plan A provides that early retirement benefits are

determined by reducing the accrued benefit by 4 percent for each year

that the early retirement age is less than age 65. Participant M retires

at age 60 with exactly 30 years of service with a benefit (prior to the

application of section 415) in the form of a straight life annuity of

$100,000 payable at age 65, and is permitted to elect to commence

benefits at any time between M's retirement and M's attainment of age

65. For example, M can elect to commence benefits at age 60 in the

amount of $80,000, can wait until age 62 and commence benefits in

the amount of $88,000, or can wait until age 65 and commence

benefits in the amount of $100,000. Plan A provides a QPSA to all

married participants without charge. Plan A provides (consistent with

paragraph (d)(2)(ii) of this section) that, for purposes of adjusting the

dollar limitation under section 415(b)(1)(A) for commencement

before age 62 or after age 65, no forfeiture is treated as occurring

upon a participant's death before retirement and, therefore, in

computing the adjusted dollar limitation under section 415(b)(1)(A),

no adjustment is made to reflect the probability of a participant's
- 38 -

death after the annuity starting date and before age 62 or after age 65

and before the annuity starting date.

(ii) The age-adjusted section 415(b)(1)(A) dollar limit that applies for

commencement of M's benefit at age 60 is the lesser of the section

415(b)(1)(A) dollar limit multiplied by the ratio of the annuity

payable at age 60 to the annuity payable at age 62, or the straight life

annuity payable at age 60 that is actuarially equivalent, using 5

percent interest and the applicable mortality table effective for that

annuity starting date under section 417(e)(3)(A)(ii)(I) and § 1.417(e)-

1(d)(2), to the deferred annuity payable at age 62 of $180,000 per

year. In this case, the age-adjusted section 415(b)(1)(A) dollar limit

at age 60 is $156,229 (the lesser of $163,636 ($180,000*

$80,000/$88,000) and $156,229 (the straight life annuity at age 60

that is actuarially equivalent to a deferred annuity of $180,000

commencing at age 62, determined using 5 percent interest and the

applicable mortality table, without a mortality decrement for the

period between 60 and 62)).

Restating the facts of the above example concisely and incorporating the APR

calculations by Mr. Klubock for this particular example: (1) the annual benefit

payable at age 62 is $180,000; (2) the APR, at age 62 at 5% interest and using the

1994 GAR blended mortality table, is 152.157; (3) the interest discount only with

no mortality decrement from ages 62 to 60 at 5% is equal to (1/1.05) , or 2

approximately 0.907; and (4) the APR, at age 60 at 5% interest and using the

10

1994 GAR blended mortality table, is 159.010. Applying the formula derived

Note that this figure is rounded for brevity. The rounded number, when

10

used in the formula, yields a slightly lower result: $156,224. The accurate result

of $156,229 is achieved when the exact interest discount of (1/1.05) is plugged

2

into the formula instead.
- 39 -

above to calculate the actuarially equivalent benefit payable at age 60, one arrives

at the same result as reached by the regulations: $180,000 × 152.157 × (1/1.05) ÷2

159.010 = $156,229.

We have found Mr. Klubock’s expert report credible and reliable, and, in

view of the above, we accept respondent’s method to be appropriate for

calculating the required reduction in the section 415 dollar limitation. 

Accordingly, inasmuch as respondent applied this method to calculate the reduced

benefit limitation under section 415(b)(2)(C) for the plan, his calculations of the

age 45 limits for tax years 2002 through 2006 are correct.

III. Petitioner’s Liability for Section 4972 Excise Taxes

Having established that petitioner incorrectly calculated the benefit

limitation under section 415, and that the lower benefit amounts calculated by

respondent are correct, we now turn to the question of petitioner’s liability for

excise taxes under section 4972.

A. Statutory Background

Section 4972(a) imposes a tax of 10% on an employer’s nondeductible

contributions to a qualified employer plan. Nondeductible contributions include

the excess of an employer’s contributions to such a plan over the amount

allowable as a deduction under section 404 (determined without regard to
- 40 -

subsection (e) thereof), plus any amounts determined to be nondeductible

contributions for the preceding tax year, reduced by the portion of the amount

returned to the employer during the tax year or determined deductible under

section 404. Sec. 4972(c)(1). For computing nondeductible contributions, the

amount allowable as a deduction under section 404 for a tax year is treated as

coming first from any carryforwards from preceding years in chronological order--

that is, on a first-in, first-out basis--and second from contributions made during the

current year. Sec. 4972(c)(2).

For plan years beginning before 2007, there was an exception applicable to

defined benefit plans under section 4972(c)(7), however, which reduced the

amount of nondeductible contributions for the year: “In determining the amount

of nondeductible contributions for any taxable year, an employer may elect for

such year not to take into account any contributions to a defined benefit plan

except to the extent that such contributions exceed the full-funding limitation (as

defined in section 412(c)(7), determined without regard to subparagraph (A)(i)(l)

thereof).” After the years at issue in this case, the full-funding limitation threshold

was limited to multiemployer plans only; following this amendment, employers

effectively could elect to treat all their contributions to single-employer plans as

deductible. Pension Protection Act of 2006 (PPA), Pub. L. No. 109-280, sec.
- 41 -

114(e)(5), 120 Stat. at 855 (replacing “except to the extent that such contributions

exceed the full-funding limitation (as defined in section 412(c)(7), determined

without regard to subparagraph (A)(i)(I) thereof)” with “except, in the case of a

multiemployer plan, to the extent that such contributions exceed the full-funding

limitation (as defined in section 431(c)(6))”); see also Worker, Retiree, and

Employer Recovery Act of 2008, Pub. L. No. 110-458, sec. 101(d)(3), 122 Stat. at

5099 (providing that the 2006 amendments apply to taxable years beginning after

2007). As indicated by the plan’s Form 5500 returns, it is a single-employer plan.

As we noted above, contributions by employers to pension plans are not

deductible except to the extent provided for in section 404. Sec. 404(a). Section

404(a)(1)(A)(i), before its amendment on August 17, 2006, effective for years

beginning after December 31, 2007, under PPA sec. 801(a), 120 Stat. at 992,

limited the allowable deduction to “the amount necessary to satisfy the minimum

funding standard provided by section 412(a) for plan years ending within or with

such taxable year (or for any prior plan year),” unless the amount of the remaining

unfunded cost of employees’ service credits or the normal cost of the plan was

greater. The 2006 amendment limited this rule to multiemployer plans and

11

Respondent’s expert, Mr. Klubock, has pointed out that the minimum 11

funding standard “was the applicable limit for the years under examination.”
- 42 -

established a more generous limit for single-employer plans at new section 404(o),

which capped the deduction at the greater of either (1) the excess of the funding

target, target normal cost, and cushion amount over the value of the plan’s assets

or (2) the sum of the minimum required contributions under section 430.

During the years at issue, section 412(a) provided that a plan satisfied the

minimum funding standard if, at the end of the plan year, the plan did not have an

accumulated funding deficiency--that is, the plan should not have an excess of

total charges to the funding standard account for all plan years over the total

credits to such account for such years.

12

As we observed above, section 404(j)(1)(A) provides that in computing the

amount of an allowable deduction, “in the case of a defined benefit plan, there

shall not be taken into account any benefits for any year in excess of any limitation

on such benefits under section 415 for such year”. Therefore, by simple

arithmetic, the more significant the limitation on benefits under section 415, the

Effective for plan years beginning after December 31, 2007, new sec. 430 12

was added to the Code by the Pension Protection Act of 2006, Pub. L. No. 109-

280, sec. 112(a), 120 Stat. at 826, which provided for minimum required

contributions by single-employer defined benefit plans. A minimum required

contribution is, (1) if the plan’s assets are less in value than the plan’s funding

target, the sum of the plan’s target normal cost and shortfall or waiver

amortization charge or (2) if the value of the plan’s assets is equal to or greater

than the funding target, the target normal cost of the plan reduced (but not below

zero) by such excess. Sec. 430(a).
- 43 -

smaller a plan’s minimum funding standard becomes. A reduced minimum

funding standard implies a smaller allowable deduction on contributions to that

plan.

B. Petitioner’s Section 4972 Excise Tax Liabilities

In view of the lower section 415 benefit limitation he calculated, respondent

computed, during the course of his audit for petitioner’s tax years 2002 through

2006, correspondingly lower limits on the deductibility of petitioner’s

contributions to the plan for each of those years. Those lower limits on deductible

contributions in turn resulted in excess contributions subject to the 10% excise tax

under section 4972.

Besides challenging respondent’s recalculation of the plan’s section 415

benefit limitation, petitioner has not assailed the accuracy of respondent’s

computations of petitioner’s excess contributions and corresponding excise tax

amounts. Accordingly, unless petitioner can demonstrate the applicability of an

exception to the excise tax, such as under section 4972(c)(7), we must hold

petitioner liable for the tax.
- 44 -

C. Applicability of the Section 4972(c)(7) Defined Benefit Plan

 Exception

As we noted earlier in our discussion of the statutory background to the

section 4972 excise tax, section 4972(c)(7) provides an exception applicable to

defined benefit plans under which an employer may elect to disregard

nondeductible contributions for purposes of the excise tax, except inasmuch as

those contributions exceed the full-funding limitation, as defined in section

412(c)(7) without regard to subparagraph (A)(i)(I) thereof. Effective for tax years

after 2007, the full-funding limitation with respect to the election no longer

applies to single-employer plans, of which the plan is one.

Section 412(c)(7), before its amendment effective for plan years beginning

after December 31, 2007, PPA sec. 111(a), 120 Stat. at 820, and disregarding

subparagraph (A)(i)(I) thereof as instructed by section 4972(c)(7), defined “fullfunding limitation” as the excess of “the accrued liability (including normal cost)

under the plan (determined under the entry age normal funding method if such

accrued liability cannot be directly calculated under the funding method used for

the plan)” over the lesser of the plan’s assets’ fair market value or their value as

determined on the basis of a reasonable actuarial method of valuation accounting

for fair market value.
- 45 -

However, neither the statute nor the regulations provide any guidance on

how to make the election under section 4972(c)(7). Petitioner contends that in the

absence of any guidance, not filing an excise tax return on Form 5330 should be

considered tantamount to making the election. In support of its argument,

petitioner points out that in Feinberg v. Commissioner, 377 F.2d 21, 24 n.2 (8th

Cir. 1967), aff’g 45 T.C. 635 (1966), the U.S. Court of Appeals for the Eighth

Circuit noted that “[a] taxpayer need not make an affirmative election regarding

the nonrecognition of gain under § 1033(a) of the 1954 Code.” But what

petitioner neglects to mention is that the following sentence in that decision reads:

“The regulations explicitly state that a failure to include gain on an involuntary

conversion in gross income reported on a tax return will be deemed an election to

have the nonrecognition provisions of § 1033(a) apply.” Id. There is no such

regulation in this case.

There is no clear precedent for what constitutes a valid election where the

Code calls for an election but there is no regulation or guidance specifying how it

is to be made. We have approached the question case by case. In some instances

we have held that an affirmative election in a timely filed income tax return is

required. See, e.g., Commons v. Commissioner, 20 T.C. 900, 903 (1953)

(“Judicial decisions have generally required taxpayers to make an affirmative
- 46 -

election in a timely filed income tax return in order to elect to report a sale of

property on the installment method under section 44(b), I.R.C.”). In others, we

have been skeptical of inferring a requirement to make a formal election. See,

e.g., Griffin v. Commissioner, T.C. Memo. 1965-91, 24 T.C.M. (CCH) 467, 472

(“The Commissioner has been given rather broad rulemaking authority by section

453 and it would seem that if he considered it to be a reasonable and valid

requirement under the statute that an affirmative election to use the installment

method be made in an original and timely filed return for the year of sale, he

would so provide in his regulation.”).

In this case, what we find particularly troublesome with petitioner’s

assertion that its not filing a Form 5330 is tantamount to making a section

4972(c)(7) election is that it is untimely and self-serving. A taxpayer cannot claim

sufficient intent to make the election without something more concrete to evince

such intent than its pinky-promise well after the fact that it really did intend to

make it. Petitioner’s retroactive assertion of an intended election is especially

unconvincing in view of petitioner’s agreement to pay the income tax deficiencies

arising out of respondent’s disallowance of a portion of petitioner’s claimed

deductions for contributions to the plan in tax years 2004 and 2005. This Court

entered stipulated decisions on March 3, 2010, to that effect in docket Nos. 7124-
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08 and 29393-08. Notwithstanding the six years that have passed since that time,

petitioner to date has not filed any Forms 5330 for those years nor for any of the

others at issue in this case. Had petitioner done so timely, it would have been able

to evidence its section 4972(c)(7) election by completing the appropriate line on

the Form 5330. Petitioner did none of the above and instead claims in its 13

opening brief that “the settlement of the Tax Court cases was intended as a

temporary step and not a concession.” This Court is hardly a waystation for

taxpayers waiting for Godot: Our decisions, if not appealed, are final. See sec.

7481(a)(1).

In the light of the above, we find that petitioner has failed to make a valid

election for any of the tax years 2002 through 2006 under section 4972(c)(7) to

disregard certain nondeductible contributions. We need not reach the question of

the proper calculation of the full-funding limitation. The maximum tax-deductible

contribution under section 404 is equal to the minimum funding standard under

The line is for “Nondeductible section 4972(c)(6) or (7) contributions 13

exempt from excise tax”. This line is 13j in Part II of the November 2002 and

October 2003 revisions of Form 5330; line 14j in Part II of the August 2004 and

March 2007 revisions; and line 10 in Schedule A of the January 2008 and

subsequent revisions. Indicating a value in this line of the excise tax return

necessarily presupposes that the taxpayer made the election. A taxpayer may also

evidence its election by submitting a protective election with the Form 5500 filed

on behalf of its pension plan.
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section 412(a), the computation of which, as respondent’s expert has explained,

depends on the section 415 benefit limitation. We have found in favor of

respondent with respect to the reduction in the section 415 limitation and so hold

petitioner liable for section 4972 excise taxes.

IV. Additions to Tax

Respondent has determined against petitioner additions to tax under section

6651(a)(1) and (2) for failure to file tax returns and to pay tax. While the

calculation and imposition of such additions is an objective computation,

petitioner contends that it had reasonable cause for its failures timely to file and

pay tax. We disagree.

A. Additions to Tax for Failure To File Tax Returns and To Pay Tax

Section 6011(a) requires that any person made liable for a tax or with

respect to its collection “shall make a return or statement according to the forms

and regulations prescribed by the [Treasury] Secretary.” “The return or statement

shall include therein the information required by the applicable regulations or

forms.” Sec. 1.6011-1, Income Tax Regs. Specifically, an employer liable for tax

under section 4972 “shall file an annual return on Form 5330 and shall include

therein the information required by such form and the instructions issued with

respect thereto.” Sec. 54.6011-1(a), Pension Excise Tax Regs.
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Section 6651(a)(1) provides that if a taxpayer fails to file when due a return

required by one of several listed subchapters, including subchapter A of chapter 61

(within which section 6011 falls), “unless it is shown that such failure is due to

reasonable cause and not due to willful neglect, there shall be added to the amount

required to be shown as tax on such return 5 percent of the amount of such tax if

the failure is for not more than 1 month, with an additional 5 percent for each

additional month or fraction thereof during which such failure continues,” but not

to exceed 25% in the aggregate.

Section 6651(a)(2) further requires in the case of a taxpayer’s failure “to pay

the amount shown as tax on any return specified in paragraph (1) on or before the

date prescribed for payment of such tax” an addition to tax of “0.5 percent of the

amount of such tax if the failure is for not more than 1 month, with an additional

0.5 percent for each additional month or fraction thereof during which such failure

continues, not exceeding 25 percent in the aggregate.” As with the addition to tax

for failure to file, a showing that the failure was due to reasonable cause and not

willful neglect may serve as a defense. Id.

In the case of returns prepared by the Secretary under section 6020(b),

which authorizes the Secretary to prepare a return on behalf of a taxpayer which

fails to timely file a required return, such returns are disregarded for purposes of
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determining the addition to tax for failure to file a return under section 6651(a)(1). 

Sec. 6651(g)(1). However, returns prepared by the Secretary are treated as if they

were filed by the taxpayer for purposes of determining the amount of the addition

under section 6651(a)(2) for failure to pay the tax shown on a return. Sec.

6651(g)(2).

Petitioner failed to file Forms 5330 for tax years 2002 through 2006, and

instead respondent prepared a substitute for return for each of the years at issue. 

Furthermore, petitioner neglected to make any payments of the excise tax due for

any of the years at issue. There is no evidence in the record to demonstrate that

petitioner paid any amounts of excise tax, even after arriving at a stipulated

decision with respondent for tax years 2004 and 2005 with respect to petitioner’s

disallowed deductions for contributions to the plan. Since we have determined

respondent’s assessment of the excise tax in this case to be proper, we find that

unless petitioner is able to demonstrate reasonable cause for failing to file the

Forms 5330 and to pay the excise tax due, petitioner is liable for the additions to

tax determined by respondent.

B. Reasonable Cause for Failure To File or Pay

The regulations require that a taxpayer have exercised “ordinary business

care and prudence” and nevertheless been unable to file a return within the time
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prescribed or to provide for the payment of the taxpayer’s liability. Sec.

301.6651-1(c)(1), Proced. & Admin. Regs. Petitioner has not asserted inability to

file the Forms 5330, however, nor has petitioner claimed financial inability or

undue hardship to excuse its failure to pay the section 4972 excise taxes due. Cf.

id. Rather, petitioner argues that it reasonably relied on the advice of its attorney

that it was unnecessary to file returns. See United States v. Boyle, 469 U.S. 241,

250-251 (1985) (“Courts have frequently held that ‘reasonable cause’ is

established when a taxpayer shows that he reasonably relied on the advice of an

accountant or attorney that it was unnecessary to file a return, even when such

advice turned out to have been mistaken. * * * This Court also has implied that,

in such a situation, reliance on the opinion of a tax adviser may constitute

reasonable cause for failure to file a return.”); see also Zabolotny v.

Commissioner, 97 T.C. 385, 400-401 (1991) (“[R]easonable cause within the

meaning of section 6651(a)(1) can be shown by proof that the taxpayer supplied

all relevant information to a competent tax adviser and relied in good faith on the

incorrect advice of the adviser that no return was required to be filed.”), aff’d in

part, rev’d in part on other grounds, 7 F.3d 774 (8th Cir. 1993).

Petitioner contends that it relied on its former counsel, Barry Jewell, whose

defined benefit plan prototype documents it used for the plan. Respondent
- 52 -

counters that Mr. Jewell was the promoter of the plan and therefore petitioner

could not have reasonably relied upon his advice.

This Court has held that to prove that reliance on the advice of a tax

professional constitutes reasonable cause, the taxpayer must demonstrate by a

preponderance of the evidence that it meets the following three requirements: 

“(1) The adviser was a competent professional who had sufficient expertise to

justify reliance, (2) the taxpayer provided necessary and accurate information to

the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s

judgment.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000),

aff’d, 299 F.3d 221 (3d Cir. 2002). “Reliance may be unreasonable when it is

placed upon insiders, promoters, or their offering materials, or when the person

relied upon has an inherent conflict of interest that the taxpayer knew or should

have known about.” Id. at 98. While Neonatology Assocs. dealt with section

6662 accuracy-related penalties, we have applied its tripartite analysis to section

6651 additions to tax as well. See, e.g., Charlotte’s Office Boutique, Inc. v.

Commissioner, 121 T.C. 89, 109 (2003), aff’d, 425 F.3d 1203 (9th Cir. 2005); see

also Curet v. Commissioner, T.C. Memo. 2016-138, at *2; Hovind v.

Commissioner, T.C. Memo. 2012-281, at *13.
- 53 -

Petitioner has not adduced evidence as to any of the three Neonatology

Assocs. factors. The record does not demonstrate Mr. Jewell’s professional

qualifications or expertise. It is therefore impossible to determine whether

petitioner’s reliance could be justified under the first prong. As to the second

prong, there is nothing in the record to establish what information petitioner

provided to Mr. Jewell. Finally, as to the third prong, we find that the evidence

corroborates respondent’s assertion that Mr. Jewell was a promoter of the plan. 

The adoption agreement for the plan executed on December 18, 2001, noted the

following: “Furthermore, this plan is proprietary to and a trade secret of Jewell,

Moser, Fletcher & Holleman, A Professional Association, and may not be used for

more than sixty (60) days after the Employer’s relationship with Jewell, Moser,

Fletcher & Holleman, A Professional Association, has terminated.” Similarly, the

adoption agreement executed on November 28, 2003, and in effect for the

remaining tax years at issue, contained a similar sentence: “Furthermore, this plan

is proprietary to and a trade secret of Jewell Law Firm, P.A., and may not be used

for more than sixty (60) days after the Employer’s relationship with Jewell Law

Firm, P.A., has terminated.” Since Mr. Jewell--as the creator of, seller of, and

holder of proprietary rights to the plan--was not an “independent advisor

unburdened with a conflict of interest”, see Mortensen v. Commissioner, 440 F.3d
- 54 -

375, 387 (6th Cir. 2006), aff’g T.C. Memo. 2004-279, petitioner could not have

relied in good faith upon Mr. Jewell’s judgment. Accordingly, petitioner has

failed to demonstrate reasonable cause for its failure to timely file the required

returns and to timely pay tax and is therefore liable for the additions to tax under

section 6651(a)(1) and (2).

V. Statute of Limitations

Finally, we must address petitioner’s argument that the statute of limitations

bars respondent’s assessment. We hold that it does not.

Section 6011(a) requires that any person made liable for a tax or with

respect to its collection “shall make a return or statement according to the forms

and regulations prescribed by the [Treasury] Secretary.” “The return or statement

shall include therein the information required by the applicable regulations or

forms.” Sec. 1.6011-1, Income Tax Regs. Specifically, an employer liable for tax

under section 4972 “shall file an annual return on Form 5330 and shall include

therein the information required by such form and the instructions issued with

respect thereto.” Sec. 54.6011-1(a), Pension Excise Tax Regs.
- 55 -

Generally, the Commissioner has three years after a return is filed to assess

a tax. Sec. 6501(a). To start the running of the period of limitations, the return

14

must be one “required to be filed by the taxpayer” and not “a return of any person

from whom the taxpayer has received an item of income, gain, loss, deduction, or

credit”. Id. If the taxpayer fails to file the required return, then the Commissioner

may assess the tax at any time. Sec. 6501(c)(3).

Although respondent had prepared substitutes for returns for the years at

issue pursuant to his authority under section 6020(b)(1) (“If any person fails to

make any return required by any internal revenue law or regulation made

thereunder at the time prescribed therefor * * * the Secretary shall make such

return from his own knowledge and from such information as he can obtain

through testimony or otherwise.”), petitioner to date has not filed any Forms 5330

for any of those years. The substitutes for returns prepared by respondent do not

start the running of limitations period. See sec. 6501(b)(3). Therefore, since

petitioner is liable for the section 4972 excise taxes and has not filed the forms

required by law, respondent’s assessment is not time barred.

Petitioner did not file a return “on which an entry has been made with

14

respect to” an excise tax, see sec. 6501(b)(4), nor did petitioner file “a return of a

tax imposed under” the excise tax provisions of the Code omitting a substantial

amount of such tax, see sec. 6501(e)(3), and therefore the special provisions of

sec. 6501 relating to excise taxes do not apply here.
- 56 -

Petitioner argues, however, that the plan’s filing of Forms 5500 for the years

at issue should be deemed the filing of a return required for purposes of the section

4972 excise tax, ostensibly because respondent could have gleaned therefrom all

the information necessary to make an assessment. It is true that “[p]erfect

accuracy is not required for the document to constitute a return.” Appleton v.

Commissioner, 140 T.C. 273, 285 (2013). This Court has in the past applied a

quadripartite test to determine whether a filed document qualifies as a valid return

under section 6501: “(1) the document must contain sufficient data to calculate

tax liability; (2) the document must purport to be a return; (3) there must be an

honest and reasonable attempt to satisfy the requirements of the tax law; and (4)

the taxpayer must have executed the document under penalties of perjury.” Id.

(citing Beard v. Commissioner, 82 T.C. 766, 774-779 (1984), aff’d, 793 F.2d 139

(6th Cir. 1986)).

We agree with respondent that the Forms 5500 fail the Beard factors. The

first and third criteria are the most problematic for petitioner. The Forms 5500

were valid returns and were signed by petitioner under penalty of perjury, albeit on

behalf of the plan and not petitioner itself: The second and fourth criteria of the

Beard test thus are satisfied. However, with respect to the first Beard criterion,

respondent was unable to calculate petitioner’s tax liabilities from the data
- 57 -

provided on the Forms 5500 and attached Schedules B without undertaking an

audit of petitioner’s returns to gather additional information. Form 5330 and Form

5500 were developed with different purposes in mind and are not interchangeable. 

Furthermore, with respect to the third Beard criterion, judging by

petitioner’s pleadings and ongoing failure to file any Forms 5330 even after

respondent began his audit, petitioner’s failure to file the required forms was due

not to its mistaken belief that the Forms 5500 were the appropriate returns to be

filed but rather to its erroneous position that it did not owe the section 4972 excise

taxes for the years at issue. To be sure, there is no evidence to suggest that the

plan’s filing of the Forms 5500 was anything but an honest and reasonable attempt

to satisfy its legal obligation to file such a return. But we cannot go so far as to

conclude that the filing of the Forms 5500 was an attempt to satisfy petitioner’s

responsibility to file Forms 5330. The Form 5500 is not “a document which on its

face plausibly purports to be in compliance” with a taxpayer’s obligation to file a

Form 5330. Cf. Badaracco v. Commissioner, 464 U.S. 386, 396-397 (1984). 

Accordingly, the statute of limitations has not begun to run and therefore does not

bar respondent’s assessment.
- 58 -

VI. Conclusion

Petitioner neglected to apply the correct method to reduce the maximum

benefits under section 415(b)(2)(C) for a retirement age before age 62 under its

plan, where the plan did not provide for forfeiture of the participant’s benefits at

death. By virtue of this error, portions of petitioner’s contributions to the plan

during tax years 2002 through 2006 were nondeductible, resulting in liability for

section 4972 excise taxes. Petitioner is further liable for additions to tax under

section 6651(a)(1) and (2) for its failure to file Forms 5330 and to pay the excise

taxes. Petitioner did not have reasonable cause for this failure. Finally, since

petitioner never filed the Forms 5330, the statute of limitations does not bar the

assessment and collection of the excise taxes and additions to tax.

We have considered all of the parties’ arguments, and to the extent not

discussed above, conclude that those arguments are irrelevant, moot, or without

merit.

To reflect the foregoing,

Decision will be entered for

respondent.