124 T.C. No. 12

UNITED STATES TAX COURT

CHARLES P. STEPNOWSKI, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE AND HERCULES INCORPORATED,

Respondents

Docket No. 8383-03R. Filed April 26, 2005.

Hercules amended its defined benefit plan in 2001. 

The amendment to the plan’s lump-sum payment option

replaced the interest rate assumption that had

previously been used to calculate the present value of

a participant’s accrued benefit with the annual

interest rate on 30-year Treasury securities.

Hercules filed a request for a determination that

the amended plan met all of the qualification

requirements that were in effect under sec. 401(a),

I.R.C. P, as an interested party, sent a letter to the

IRS regarding Hercules’ determination request. P

asserted that the amendment to the plan’s lump-sum

payment option violated the anti-cutback rule of sec.

411(d)(6), I.R.C. The IRS issued a favorable

determination letter to Hercules.

P filed a Petition for Declaratory Judgment

(Retirement Plan) pursuant to sec. 7476(a), I.R.C.,
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challenging RC’s determination. P also filed a Motion

for an Order to Calendar for Trial and a Motion for

Permission for Discovery with the Court. The Court

denied P’s motions.

1. Held: P did not show good cause either to

commence discovery in this case or for this case to be

set for trial. The case is to be decided solely on the

administrative record.

2. Held, further, respondent Commissioner did not

err in determining that the amendment to the plan’s

lump-sum payment option did not violate the anticutback rule of sec. 411(d)(6), I.R.C.

Mervin M. Wilf, for petitioner.

Brian M. Pinheiro, for respondent Hercules Incorporated.

Peter J. Gavagan, for respondent Commissioner of Internal

Revenue.

OPINION

COHEN, Judge: Respondent Commissioner of Internal Revenue

(respondent Commissioner) issued a favorable determination letter

to respondent Hercules Incorporated (Hercules) in which

respondent Commissioner determined that the Pension Plan of

Hercules Incorporated, as amended (the amended plan), met the

qualification requirements of section 401(a). Charles P.

Stepnowski, petitioner, filed a Petition for Declaratory Judgment

(Retirement Plan) pursuant to section 7476(a) challenging

respondent Commissioner’s determination. Hercules was joined as
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party/respondent to this case by Order dated August 20, 2003. 

See Rule 215(a)(2).

The principal issue for decision is whether respondent

Commissioner erred in determining that the amendment to the

plan’s lump-sum payment option did not violate the anti-cutback

rule of section 411(d)(6).

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

Background

The parties have stipulated the administrative record. That

record is incorporated herein by this reference. Petitioner’s

address was in Kennett Square, Pennsylvania, at the time that the

Petition for Declaratory Judgment (Retirement Plan) was filed. 

Hercules maintained its principal office in Wilmington, Delaware,

at the time that the Petition for Declaratory Judgment

(Retirement Plan) was filed.

The Pension Plan of Hercules Incorporated (the plan) is a

defined benefit plan as defined under the Employee Retirement

Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829. The

plan was established in 1913, and it uses the calendar year as

its plan year. On or about February 12, 1996, the Internal

Revenue Service (IRS) issued a favorable determination letter to
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Hercules with respect to the plan. This determination letter was

applicable to the amendments to the plan that were adopted on

October 27, 1994.

Hercules made additional amendments to the plan during 2001. 

Hercules executed the amended plan on January 28, 2002. The

amended plan’s effective date was January 1, 2001. As of

January 31, 2002, the amended plan had 31,301 participants.

Various “universal provisions” and three schedules of rights

and benefits--Schedule A, Schedule B, and Schedule C–-govern the

amended plan. As relevant here, Article VII of Schedule B sets

forth the payment provisions for those participants falling under

that schedule of the amended plan. Paragraph D of Article VII

provides that an eligible participant may elect to receive his or

her plan benefits as a “51% Partial Cash Payment,” pursuant to

which the present value of 51 percent of the participant’s

accrued benefit is payable as a lump sum (lump-sum payment

option). The remaining 49 percent of the participant’s accrued

benefit is payable in an annuity form.

Prior to amending the plan, Hercules used the published

interest rates used by the Pension Benefit Guaranty Corp. (PBGC)

to calculate an immediate annuity beginning on the first day of

the first month of the calendar quarter of payment for purposes

of calculating the present value of a participant’s accrued

benefit under the lump-sum payment option. As amended, however,
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the lump-sum payment option states, in pertinent part, as

follows:

Participants entitled to receive benefits under

Article II, III, IV, or V of this Schedule may apply

for a 51% partial cash payment in accordance with the

following provisions:

1. A Participant may elect to receive in a single

partial cash payment an amount equal to the

present value equivalent of 51% of the monthly

pension benefit that otherwise would be payable

over the Participant’s expected lifetime. The

amount shall be calculated using the factors set

forth in Paragraph 4., below, applied in a uniform

and consistent manner. * * *

2. A married Participant applying for a 51% partial

cash payment must present a written consent by his

spouse to this form of benefit with such consent

notarized.

* * * * * * *

4. a. With respect to payments made on and after

January 1, 2002, the payment shall be

computed on the basis of the following

factors:

(1) the 1983 Group Annuity Mortality Table,

using a blend of 50 percent male and

50 percent female described in Rev. Rul.

95-6 (1995-1 C.B. 80) (or such other

mortality table as may be prescribed by

the Treasury Secretary pursuant to its

authority under Code section 417(e)(3))

* * *; and

(2) the annual interest rate on 30-year

Treasury securities as specified by the

Commissioner of the Internal Revenue

Service for the second calendar month

prior to the calendar quarter that

contains the benefit payment date (or

such other rate as the Secretary of the

Treasury may prescribe by regulation

under section 417(e) of the Code) * * *
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which rate shall remain stable for the

entire calendar quarter.

b. With respect to payments made prior to

January 1, 2002, the payment shall be

computed on the basis of the actuarial life

expectancy tables (1983 Group Annuity

Mortality Table, using a blend of 50 percent

male and 50 percent female factors described

in Rev. Rul. 95-6 * * *) (or such other

mortality table as may be prescribed by the

Treasury Secretary pursuant to its authority

under Code section 417(e)(3)), and PBGC

interest rates to determine immediate annuity

rates applicable on the first business day of

the first month in the calendar quarter of

payment. Notwithstanding the foregoing, with

respect to payments made on or after

January 1, 2000 and prior to January 1, 2002,

the payment shall be computed on the basis of

the assumptions set forth in Article

VII.D.4a. or VII.D.4b., whichever produces

the higher payment.

On or about February 15, 2002, Hercules filed a request with

the IRS for a determination that the amended plan met all of the

qualification requirements that were in effect under section

401(a). Hercules described its request in the following manner:

Specifically, pursuant to Revenue Procedure

2000-27, we request a “GUST II” letter with respect to

all changes made by the Uruguay Round Agreements Act of

1994, the Uniform Services Employment and Reemployment

Rights Act of 1994, the Small Business Job Protection

Act of 1996, the Taxpayer Relief Act of 1997, the

Internal Revenue Service Restructuring and Reform Act

of 1998 and the Community Renewal Tax Relief Act of

2000.

Included with Hercules’ request were, among other documents,

Form 5300, Application for Determination for Employee Benefit

Plan; Schedule Q (Form 5300), Nondiscrimination Requirement; and
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an executed copy of the amended plan. Line 12a of Form 5300

asked the following question: “Does any amendment to the plan

reduce or eliminate any section 411(d)(6) protected benefit?” In

response to this question, Hercules checked the “No” box. 

Hercules completed the Form 5300 on or about January 31, 2002.

On or about March 19, 2002, petitioner, as an interested

party, sent a letter to the IRS regarding the “Application for

Determination Letter Submitted February 15, 2002 by Hercules

Incorporated”. Petitioner made, in pertinent part, the following

statements in this letter:

I have been advised that the application for an

advance determination letter was filed on February 15,

2002 pursuant to the “Notice To Eligible Employees Of

Hercules Incorporated.”

The pension plan provides for the payment in a

lump sum of the actuarial value of 51% of a

participant’s monthly pension benefit. In 2001,

Hercules amended its plan to provide that the lump-sum

benefit will be computed based on the 30-year Treasury

bond rate for service prior to the date of that

amendment. Prior to the 2001 amendment, the value was

computed using the PBGC rate. I have been informed

that the use of the 30-year Treasury bond rate, instead

of the PBGC rate, is an illegal cutback under

Section 411(d)(6) of the Code and applicable

regulations and rulings. Accordingly, the pension plan

does not satisfy the requirements as a qualified plan. 

Therefore, a favorable determination letter should not

be issued until and unless the plan is changed to

provide the anticutback protection required by the

applicable regulations and rulings regarding the proper

interest rate to be used in determining the actuarial

equivalent value for service prior to the date of a

proper amendment.
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On or about November 6, 2002, an Employee Plans Specialist

at the IRS sent a letter to Hercules informing it that she had

been assigned to evaluate and review the determination letter

application that it had submitted. On or about January 18, 2003,

petitioner received a letter from the IRS that acknowledged the

receipt of his comments concerning the request for determination

that had been submitted by Hercules. On or about January 21,

2003, Hercules received a letter from the IRS informing it that

the IRS had received comments from an interested party concerning

the request for determination that had been submitted by

Hercules.

On or about March 3, 2003, the IRS issued a favorable

determination letter to Hercules with respect to the amended

plan. This determination letter was applicable to the amendments

that Hercules had executed on January 28, 2002. In this letter,

the IRS stated that the changes that were made to the

qualification requirements by the following public laws had been

considered in reaching its determination: The Uruguay Round

Agreements Act, Pub. L. 103-465, 108 Stat. 4809; the Uniformed

Services Employment and Reemployment Rights Act of 1994, Pub. L.

103-353, 108 Stat. 3149; the Small Business Job Protection Act of

1996, Pub. L. 104-188, 110 Stat. 1755; the Taxpayer Relief Act of

1997, Pub. L. 105-34, 111 Stat. 788; the Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat.
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685; and the Community Renewal Tax Relief Act of 2000, Pub. L.

106-554, 114 Stat. 2763A-587. The IRS sent a copy of this

determination letter to petitioner.

After the pleadings were filed, petitioner filed a Motion

for an Order to Calendar for Trial and a Motion for Permission

for Discovery. Petitioner sought discovery and trial concerning

his position that Hercules had falsely represented to the IRS

that the 2001 plan amendments were not a “cutback” of benefits.

On July 15, 2004, the Court issued an Order that denied

petitioner’s Motion for an Order to Calendar for Trial and

petitioner’s Motion for Permission for Discovery. The Court’s

Order explained:

Rule 217(a) states that the disposition of an

action for declaratory judgment involving the

qualification of a retirement plan “will ordinarily be

made on the basis of the administrative record, as

defined in Rule 210(b)(12). Only with the permission

of the Court, upon good cause shown, will any party be

permitted to introduce before the Court any evidence

other than that presented before the Internal Revenue

Service and contained in the administrative record as

so defined.” Only in very extraordinary circumstances

will the Court permit either party to supplement the

administrative record. See The Nationalist Movement v.

Commissioner, T.C. Memo. 1992-698, affd. 37 F.3d 216

(5th Cir. 1994).

Based upon the record as developed at the motions

hearing, we are not persuaded that petitioner has shown

good cause either to commence discovery in this case or

for this case to be set for trial. In short, the legal

issue in this case is whether a change in the interest

rate that Hercules, Inc. uses to compute the present

value of a lump-sum retirement benefit under its

retirement plan constituted an impermissible “cut-back”

within the meaning of section 411. Petitioner raised
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this legal issue during the administrative process by

submitting to respondent Commissioner of Internal

Revenue a comment letter discussing the point. 

Respondent Commissioner of Internal Revenue considered

petitioner’s assertion; however, respondent

Commissioner of Internal Revenue issued to respondent

Hercules, Inc. a favorable determination letter.

The pleadings place the legal issue as summarized

above squarely in dispute in this action. We do not

see any need to supplement the administrative record. 

Consequently, in the absence of extraordinary

circumstances that would otherwise justify discovery or

a trial herein, we shall deny petitioner’s motions.

Discussion

Section 401(a) lists the requirements that must be met by a

trust forming part of a pension or profit-sharing plan in order

for that trust to be eligible for favorable tax treatment under

the various sections of the Internal Revenue Code. 

Section 7476(a) confers jurisdiction on this Court to issue

declaratory judgments as to the initial or continuing

qualification of a retirement plan under section 401(a). 

Section 7476 “does not provide a broad grant of authority to the

Court to conduct a review of factual matters related to

controversies over retirement plans and to fashion equitable

remedies to resolve these controversies.” Simmons v.

Commissioner, T.C. Memo. 1995-422; see also Stevens v.

Commissioner, T.C. Memo. 1985-192; Wenzel v. Commissioner, T.C.

Memo. 1982-595, affd. 707 F.2d 694 (2d Cir. 1983). Rather, in a

declaratory judgment action under section 7476, we must decide

whether the Commissioner, in making a determination as to the
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initial or continuing qualification of a retirement plan under

section 401(a), properly applied the law to the facts presented

in the request for such determination. Thompson v. Commissioner,

71 T.C. 32, 36-37 (1978); see H. Rept. 93-807, at 108 (1974),

1974-3 C.B. (Supp.) 236, 343; S. Rept. 93-383, at 114 (1973),

1974-3 C.B. (Supp.) 80, 193; see also Wenzel v. Commissioner, 707

F.2d 694, 696 (2d Cir. 1983), affg. T.C. Memo. 1982-595; McManus

v. Commissioner, 93 T.C. 79, 87 (1989).

As a preliminary matter, we address petitioner’s contention

that the Court should reconsider its Order dated July 15, 2004,

and grant petitioner’s Motion for an Order to Calendar for Trial

and petitioner’s Motion for Permission for Discovery. Other than

making several conclusory statements as to the necessity of

“getting the facts”, petitioner has not discussed how discovery

and trial will assist the Court in reaching a decision on the

question of law that is before it in this case, i.e., whether

respondent Commissioner erred in determining that the amendment

to the plan’s lump-sum payment option did not violate the anticutback rule of section 411(d)(6). Rather, petitioner asserts

that Hercules misrepresented to the IRS the effect of the plan

amendment. Respondent Commissioner has maintained throughout

these proceedings that (1) respondent Commissioner was aware of

the amendment to the lump-sum payment option at the time that the

favorable determination letter was issued to Hercules and (2) the
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issue to be decided is whether respondent Commissioner correctly

interpreted and applied the law in determining that the amendment

did not violate the anti-cutback rule of section 411(d)(6).

Petitioner argues that, because Rule 217(a) does not make an

explicit reference to declaratory judgment actions involving the

continuing qualification of a retirement plan, the “good cause”

provision of that Rule must apply only to declaratory judgment

actions involving the initial qualification of a retirement plan. 

Rule 217(a) provides, in pertinent part, as follows:

(a) General: Disposition of an action for

declaratory judgment which involves the initial

qualification of a retirement plan * * * will

ordinarily be made on the basis of the administrative

record, as defined in Rule 210(b)(12). Only with the

permission of the Court, upon good cause shown, will

any party be permitted to introduce before the Court

any evidence other than that presented before the

Internal Revenue Service and contained in the

administrative record as so defined. * * *

By its terms, Rule 217(a) does not expressly preclude

discovery or introduction of extrinsic evidence in a declaratory

judgment action involving the continuing qualification of a

retirement plan. Nonetheless, to permit extrinsic evidence,

other than that present in the administrative record, in such an

action would convert the declaratory judgment proceeding to a

judicial trial de novo. See Tamko Asphalt Prods., Inc. v.

Commissioner, 71 T.C. 824, 837 (1979), affd. 658 F.2d 735 (10th

Cir. 1981); Houston Lawyer Referral Serv., Inc. v. Commissioner,

69 T.C. 570, 577 (1978); see also The Nationalist Movement v.
- 13 -

Commissioner, 37 F.3d 216, 219 (5th Cir. 1994), affg. 102 T.C.

558 (1994) and T.C. Memo. 1992-698. The legislative history of

section 7476 makes clear that Congress did not expect the Court

to conduct a trial de novo in declaratory judgment actions

arising under that section, no matter whether that action arose

with respect to the initial qualification or the continuing

qualification of a retirement plan. See Tamko Asphalt Prods.,

Inc. v. Commissioner, 658 F.2d 735, 738-739 (10th Cir. 1981),

affg. 71 T.C. 824 (1979); H. Rept. 93-807, at 108 (1974), 1974-3

C.B. (Supp.) 236, 343; S. Rept. 93-383, at 114 (1973), 1974-3

C.B. (Supp.) 80, 193; see also Wenzel v. Commissioner, 707 F.2d

at 696. Therefore, discovery or introduction of extrinsic

evidence in such cases is inconsistent with the legislative

intent that such cases be resolved without a trial based solely

on the materials contained in the administrative record. See

Dr. Erol Bastug, Inc. v. Commissioner, T.C. Memo. 1989-262 (“The

rule of law cited in Houston Lawyer Referral and Tamko Asphalt is

predicated upon the legislative concern that the Court not bypass

the administrative determination procedure without good cause.”);

see also Note to Rule 217(a), 68 T.C. 1048 (1977); Prefatory Note

to amendments to this Court’s Rules in respect of declaratory

judgments under section 7476, 64 T.C. 1177-1179 (1975). 

Consistent with this legislative intent, the Court has previously

held that it will not permit the administrative record to be
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supplemented in declaratory judgment actions involving the

qualification of a retirement plan unless very unusual

circumstances exist and good cause has been shown. See, e.g.,

Halliburton Co. v. Commissioner, T.C. Memo. 1992-533 (denying the

Commissioner’s motion to compel discovery in a declaratory

judgment proceeding relating to the partial termination of a

retirement plan); Dr. Erol Bastug, Inc. v. Commissioner, supra

(denying the taxpayer’s motion to calendar for trial in a

declaratory judgment proceeding relating to the initial

qualification of a retirement plan); cf. Tamko Asphalt Prods.,

Inc. v. Commissioner, 71 T.C. at 837 (upholding the Court’s

earlier refusal to grant the taxpayer’s request for a trial in a

declaratory judgment proceeding relating to the initial

qualification of a retirement plan). We see no reason to deviate

from the Court’s past practices in this case. Only in very

unusual circumstances and upon good cause shown will the Court

permit the administrative record to be supplemented in

declaratory judgment actions involving the initial or continuing

qualification of a retirement plan.

In the Court’s Order of July 15, 2004, we concluded that

petitioner had not shown good cause either to commence discovery

in this case or for this case to be set for trial. There is no

reason to change the analysis or the result reached in that

Order. In particular, we emphasize that the issue in this case
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is a legal one, and neither discovery nor extrinsic evidence is

necessary or appropriate for its decision. Petitioner’s asserted

purpose for discovery is simply a disagreement with the position

taken by Hercules with respect to the effect of the 2001 plan

amendment.

We now turn to the question of whether respondent

Commissioner erred in issuing a favorable determination letter to

Hercules. As noted above, section 401(a) lists the requirements

that must be met by a trust forming part of a pension or profitsharing plan in order for that trust to be eligible for favorable

tax treatment under the various sections of the Internal Revenue

Code. Under section 401(a)(7), a trust shall not constitute a

qualified trust unless the retirement plan of which such trust is

a part satisfies the minimum vesting standards of section 411. 

Under section 411(a), a retirement plan must provide that, inter

alia, the requirements of section 411(a)(11) are met. Section

411(a)(11), as amended by the Uruguay Round Agreements Act, Pub.

L. 103-465, sec. 767(a)(1), 108 Stat. 5038, provides that, if the

present value of a participant’s nonforfeitable accrued benefit,

as determined under section 417(e)(3), exceeds a specified dollar

amount, the plan must provide that such benefit may not be

immediately distributed without the participant’s consent. See

sec. 411(a)(11)(A) and (B); see also sec. 1.411(a)-11(a), (d),

Income Tax Regs.
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In the case of a defined benefit plan, the term “accrued

benefit” means the employee’s accrued benefit determined under

the plan and expressed in the form of an annual benefit

commencing at normal retirement age. Sec. 411(a)(7)(A)(i); see

also sec. 1.411(a)-7(a)(1), Income Tax Regs. More generally, an

accrued benefit represents the progressively increasing interest

in a retirement benefit that an employee earns each year, under a

formula that is provided in the plan. Bd. of Trs. of the Sheet

Metal Workers’ Natl. Pension Fund v. Commissioner, 117 T.C. 220,

228 (2001), affd. 318 F.3d 599 (4th Cir. 2003); see also

Ashenbaugh v. Crucible Inc., 1975 Salaried Ret. Plan, 854 F.2d

1516, 1524 (3d Cir. 1988).

Under section 401(a)(11), a trust forming part of a defined

benefit plan will not constitute a qualified trust unless, inter

alia, the accrued benefit payable to a vested participant is

provided in the form of a qualified joint and survivor annuity

(QJSA). See sec. 401(a)(11)(A) and (B). Section 417 provides

special rules and definitions for purposes of applying section

401(a)(11). Sec. 401(a)(11)(F).

Section 417(e) provides rules for “cash-outs” (i.e., lumpsum payments) of a participant’s QJSA. If the present value of a

participant’s QJSA exceeds the amount that can be distributed

without the participant’s consent under section 411(a)(11),

section 417(e)(2) provides that the participant and the
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participant’s spouse must consent in writing before the plan may

distribute the present value of the participant’s QJSA. Under

section 417(e)(3), as amended by the Uruguay Round Agreements

Act, Pub. L. 103-465, sec. 767(a)(2), 108 Stat. 5038, the present

value of a participant’s QJSA shall not be less than the present

value calculated by using the applicable mortality table and the

applicable interest rate. See also sec. 1.417(e)-1(d)(1), Income

Tax Regs. Under section 417(e)(3)(A)(ii)(II), the term

“applicable interest rate” means the annual interest rate on

30-year Treasury securities for the month before the date of

distribution or such other time as the Secretary may by

regulations prescribe. See also sec. 1.417(e)-1(d)(3), Income

Tax Regs. Prior to its amendment by the Uruguay Round Agreements

Act, section 417(e)(3) required retirement plans to calculate the

present value of a participant’s QJSA using an interest rate

assumption based on the rate that would be used (as of the date

of distribution) by the PBGC for purposes of determining the

present value of a lump-sum distribution on plan termination

(PBGC interest rate). Section 417(e)(3), as amended, is

effective for plan years beginning after December 31, 1994. 

Uruguay Round Agreements Act, Pub. L. 103-465, sec. 767(d)(1),

108 Stat. 5040.

The amendment to section 417(e)(3) offered a financial

benefit to sponsors of defined benefit plans by allowing them to
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use a higher discount rate when calculating the present value of

a participant’s accrued benefit. See Myers-Garrison v.

Johnson & Johnson, 210 F.3d 425, 428 (5th Cir. 2000). Because

the use of a higher discount rate results in a lower present

value for a participant’s accrued benefit, the question that

arises is whether that reduction in present value violates the

anti-cutback rule of section 411(d)(6). That section provides,

in pertinent part, as follows:

(6) Accrued benefit not to be decreased by

amendment.--

(A) In general.–-A plan shall be treated as

not satisfying the requirements of this section if

the accrued benefit of a participant is decreased

by an amendment of the plan, other than an

amendment described in section 412(c)(8), or

section 4281 of the Employee Retirement Income

Security Act of 1974.

(B) Treatment of certain plan amendments.–-

For purposes of subparagraph (A), a plan amendment

which has the effect of–-

(i) eliminating or reducing an early

retirement benefit or a retirement-type

subsidy (as defined in regulations), or

(ii) eliminating an optional form of

benefit,

with respect to benefits attributable to service

before the amendment shall be treated as reducing

accrued benefits. In the case of a retirementtype subsidy, the preceding sentence shall apply

only with respect to a participant who satisfies

(either before or after the amendment) the

preamendment conditions for the subsidy. The

Secretary shall by regulations provide that this

subparagraph shall not apply to any plan amendment

which reduces or eliminates benefits or subsidies
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which create significant burdens or complexities

for the plan and plan participants, unless such

amendment adversely affects the rights of any

participant in a more than de minimis manner. The

Secretary may by regulations provide that this

subparagraph shall not apply to a plan amendment

described in clause (ii) (other than a plan

amendment having an effect described in

clause (i)).

The Uruguay Round Agreements Act, Pub. L. 103-465, sec.

767(d)(2), 108 Stat. 5040, provides that a participant’s accrued

benefit is not considered to be reduced in violation of section

411(d)(6) merely because the benefit is determined in accordance

with the applicable interest rate under section 417(e)(3)(A),

i.e., the annual interest rate on 30-year Treasury securities. 

Section 1.417(e)-1(d)(10), Income Tax Regs., explains the scope

of this relief from the anti-cutback rule of section 411(d)(6). 

See T.D. 8768, 1998-1 C.B. 1027, 1029-1030. Section

1.417(e)-1(d)(10)(i), Income Tax Regs., provides the general rule

that a plan amendment that changes the interest rate, the time

for determining the interest rate, or the mortality assumptions

used for the purposes described in section 1.417(e)-1(d)(1),

Income Tax Regs. (relating to the calculation of the present

value of a participant’s accrued benefit), is subject to section

411(d)(6). Subdivisions (ii) through (v) of section

1.417(e)-1(d)(10), Income Tax Regs., provide safe harbors from

the general rule of section 1.417(e)-1(d)(10)(i), Income Tax
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Regs. As relevant here, section 1.417(e)-1(d)(10)(iv), Income

Tax Regs., provides as follows:

(iv) Section 411(d)(6) relief for plan amendments

pursuant to changes to section 417 made by RPA ‘94

providing for prior determination date or up to two

months earlier. Notwithstanding the general rule of

paragraph (d)(10)(i) of this section, except as

provided in paragraph (d)(10)(vi)(B) of this section

[relating to the replacement of a non-PBGC interest

rate], a participant’s accrued benefit is not

considered to be reduced in violation of section

411(d)(6) merely because of a plan amendment that

changes any interest rate or mortality assumption used

to calculate the present value of a participant’s

benefit under the plan, if the following conditions are

satisfied–-

(A) The amendment replaces the PBGC interest

rate (or an interest rate or rates based on the PBGC

interest rate) as the interest rate used under the plan

in determining the present value of a participant’s

benefit under this paragraph (d); and

(B) After the amendment is effective, the

present value of a participant’s benefit under the plan

cannot be less than the amount calculated using the

applicable mortality table and the applicable interest

rate, but only if the applicable interest rate is the

annual interest rate on 30-year Treasury securities for

the calendar month that contains the date as of which

the PBGC interest rate (or an interest rate or rates

based on the PBGC interest rate) was determined

immediately before the amendment, or for one of the two

calendar months immediately preceding such month.

Hercules’ amendment to the lump-sum payment option fits

squarely within the safe harbor provided by section

1.417(e)-1(d)(10)(iv), Income Tax Regs. Specifically, the

amendment to the lump-sum payment option (1) replaces an interest

rate based on the PBGC interest rate; (2) provides that the

present value of a participant’s accrued benefit shall be no less
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than the amount calculated using the applicable mortality table

and the applicable interest rate; and (3) provides that the

applicable interest rate is the annual interest rate on 30-year

Treasury securities for the second calendar month preceding the

calendar month in which the PBGC interest rate would have

otherwise been determined before the amendment. (The amendment

to the lump-sum payment option also satisfies the requirements of

section 1.417(e)-1(d)(4), Income Tax Regs., by (1) providing for

a calendar quarter “stability period” with respect to the

applicable interest rate; (2) specifying that the “lookback

month” for determining the applicable interest rate is the second

calendar month preceding the stability period; and (3) applying

the time and method for determining the applicable interest rate

uniformly to all of the participants falling under Schedule B of

the amended plan. See sec. 1.417(e)-1(d)(4)(i) through (iii),

Income Tax Regs.)

Notwithstanding the amendment’s compliance with the safe

harbor provided by section 1.417(e)-1(d)(10)(iv), Income Tax

Regs., petitioner contends that the amended plan violates the

anti-cutback rule of section 411(d)(6) because the change in the

interest rate assumption used to calculate the present value of a

participant’s accrued benefit under the lump-sum payment option

occurred after the deadline specified in the following portion of

section 1.417(e)-1(d)(10)(i), Income Tax Regs.:
- 22 -

[A] plan amendment that changes the interest rate or

the mortality assumptions used for the purposes

described in paragraph (d)(1) of this section merely to

eliminate use of the interest rate described in

paragraph (d)(3) or paragraph (d)(9) of this section,

or the applicable mortality table, with respect to a

distribution form described in paragraph (d)(6) of this

section, for distributions with annuity starting dates

occurring after a specified date that is after the

amendment is adopted, does not violate the requirements

of section 411(d)(6) if the amendment is adopted on or

before the last day of the last plan year ending before

January 1, 2000. [Emphasis added.]

As discussed below, petitioner’s argument is unpersuasive.

According to the portion of section 1.417(e)-1(d)(10)(i),

Income Tax Regs., upon which petitioner relies, only those plan

amendments made with respect to distribution forms described in

section 1.417(e)-1(d)(6), Income Tax Regs., are subject to the

deadline specified in section 1.417(e)-1(d)(10)(i), Income Tax

Regs. Section 1.417(e)-1(d)(6), Income Tax Regs., provides as

follows:

(6) Exceptions. This paragraph (d) (other than

the provisions relating to section 411(d)(6)

requirements in paragraph (d)(10) of this section) does

not apply to the amount of a distribution paid in the

form of an annual benefit that–-

(i) Does not decrease during the life of the

participant, or, in the case of a QPSA [qualified

preretirement survivor annuity], the life of the

participant’s spouse; or

(ii) Decreases during the life of the

participant merely because of–-

(A) The death of the survivor annuitant

(but only if the reduction is to a level not below 50%

of the annual benefit payable before the death of the

survivor annuitant); or
- 23 -

(B) The cessation or reduction of Social

Security supplements or qualified disability benefits

(as defined in section 411(a)(9)).

Petitioner has not considered whether the amendment to the

interest rate assumption was made with respect to a distribution

form described in section 1.417(e)-1(d)(6), Income Tax Regs. In

particular, petitioner has not argued that the lump-sum payment

option provides for a “distribution paid in the form of an annual

benefit” described in section 1.417(e)-1(d)(6), Income Tax Regs. 

Even if petitioner had done so, such an argument would not

persuade us, because a lump-sum payment is not a distribution

form described in section 1.417(e)-1(d)(6), Income Tax Regs. 

Rather, section 1.417(e)-1(d)(6), Income Tax Regs., describes

distributions that are paid in certain annuity forms. This

conclusion is supported by the preamble accompanying the issuance

of the final regulations at section 1.417(e)-1(d), Income Tax

Regs. See T.D. 8768, 1998-1 C.B. 1027; see also Armco, Inc. v.

Commissioner, 87 T.C. 865, 868 (1986) (“A preamble will

frequently express the intended effect of some part of a

regulation. As a statement of intent that represents an

institutional viewpoint, such a document might be helpful in

interpreting an ambiguity in a regulation.”). The preamble to

those final regulations states, in pertinent part, as follows:

Exceptions from the requirements of section 417(e)(3)

The temporary regulations provided an exception

from the requirements of section 417(e)(3) and sec.
- 24 -

1.417(e)-1T(d) for the amount of a distribution under a

nondecreasing annuity payable for a period not less

than the life of the participant or, in the case of a

QPSA, the life of the surviving spouse. For purposes

of this exception, a nondecreasing annuity included a

QJSA, a QPSA, and an annuity that decreased merely

because of the cessation or reduction of Social

Security supplements or qualified disability payments

(as defined in section 411(a)(9)). This exception was

identical to the exception provided under former final

regulations. Several commentators pointed out that

this exception did not cover several other types of

annuity forms of distribution that were nondecreasing

during the life of the participant, and suggested that

the regulations be changed to provide additional

exceptions for these additional annuity forms of

distribution.

The IRS and Treasury have determined that it is

appropriate to provide additional exceptions for these

benefit forms. Accordingly, under the final

regulations, section 417(e)(3) and sec. 1.417(e)-1(d)

do not apply to the amount of a distribution paid in

the form of an annual benefit that does not decrease

during the life of the participant, or, in the case of

a QPSA, the life of the participant’s spouse; or that

decreases during the life of the participant merely

because of the death of the survivor annuitant (but

only if the reduction is to a level not below 50% of

the annual benefit payable before the death of the

survivor annuitant) or merely because of the cessation

or reduction of Social Security supplements or

qualified disability benefits. * * * [T.D. 8768,

1998-1 C.B. 1027, 1028.]

This conclusion is further supported by the commonsense notion

that, because section 417(e) specifically deals with the

calculation of the present value of a participant’s accrued

benefit for purposes of determining the amount of a lump-sum

payment to that participant, lump-sum payments would not be

excepted from the present value requirements of section

1.417(e)-1(d), Income Tax Regs. Therefore, because the lump-sum
- 25 -

payment option does not provide for a distribution form described

in section 1.417(e)-1(d)(6), Income Tax Regs., the deadline

specified in section 1.417(e)-1(d)(10)(i), Income Tax Regs., is

not applicable to the amendment at issue in this case.

While there is no deadline specified in section 1.417(e)-1,

Income Tax Regs., for adopting plan amendments to which the

present value requirements of section 1.417(e)-1(d), Income Tax

Regs., actually apply, the Commissioner has issued a series of

revenue procedures in which the deadline to adopt such plan

amendments was set and then extended. The first of these revenue

procedures was Rev. Proc. 99-23, 1999-1 C.B. 920. Rev. Proc.

99-23, supra, provides, in pertinent part, as follows:

SECTION 1. PURPOSE

.01 This revenue procedure extends until the last

day of the first plan year beginning on or after

January 1, 2000, the remedial amendment period under

sec. 401(b) of the Code for amending plans that are

qualified under sec. 401(a) or sec. 403(a) for changes

made by the Small Business Job Protection Act of 1996,

Pub. L. 104-188 (“SBJPA”) and for other recent changes

in the law. * * *

* * * * * * *

.03 This revenue procedure also provides that the

extension of the remedial amendment period applies to

the time for adopting amendments of defined benefit

plans to provide that benefits will be determined in

accordance with the applicable interest rate rules and

applicable mortality table rules of sec. 1.417(e)-1(d)

of the Income Tax Regulations. However, such a plan

amendment must provide that, with respect to

distributions with annuity starting dates that are on

or after the effective date of the amendment but before

the adoption date of the amendment, the distribution
- 26 -

will be the greater of the amount that would be

determined under the plan without regard to the

amendment and the amount determined under the plan with

regard to the amendment.

* * * * * * *

SECTION 2. BACKGROUND

* * * * * * *

.07 Under sec. 417(e)(3), as amended by sec. 767

of the Retirement Protection Act of 1994 (“RPA 94,”

which is part of GATT), and sec. 1.417(e)-1(d), a

defined benefit plan must provide that the present

value of any accrued benefit and the amount of any

distribution must not be less than the amount

calculated using the applicable interest rate described

in sec. 1.417(e)-1(d)(3) and the applicable mortality

table described in sec. 1.417(e)-1(d)(2). * * *

Section 767 of RPA 94 and sec. 1.417(e)-1(d) are

generally effective for distributions with annuity

starting dates in plan years beginning after

December 31, 1994. However, sec. 417(e)(3)(B) provides

a transition rule for plans adopted and in effect as

of December 7, 1994 (“pre-GATT plans”). In general,

under this rule, the present value of a distribution

from a pre-GATT plan that is made before the earlier of

(i) the first plan year beginning after December 31,

1999, or (ii) the later of the adoption or effective

date of a plan amendment applying the changes made to

sec. 417(e)(3) to the plan is to be determined under

the plan’s pre-GATT terms. Thus, for pre-GATT plans,

amendments applying the changes to sec. 417(e)(3) to

plan years beginning before January 1, 2000, could not

be adopted retroactively, and these plans could not be

operated in accordance with the changes prior to plan

amendment.

.08 Section 767(d)(2) of RPA 94 provides that a

participant’s accrued benefit is not considered to be

reduced in violation of sec. 411(d)(6) merely because

the benefit is determined in accordance with the

applicable interest rate rules and the applicable

mortality table rules of sec. 417(e)(3)(A), as amended

by RPA 94. Section 1.417(e)-1(d)(10) explains the

scope of relief from the requirements of sec.

411(d)(6). A plan amendment to comply with the
- 27 -

applicable interest rate rules and the applicable

mortality table rules of sec. 417(e)(3)(A), as amended

by RPA 94, must apply to all distributions with annuity

starting dates that occur in plan years beginning after

December 31, 1999.

.09 Section 1.401(b)-1T(c)(3) authorizes the

Commissioner to impose limits and provide additional

rules regarding the amendments that may be made within

the remedial amendment period with respect to a plan

provision that has been designated by the Commissioner

as a disqualifying provision under sec. 401(b).

* * * * * * *

SECTION 3. EXTENSION OF REMEDIAL AMENDMENT PERIOD

.01 The remedial amendment period described in

Rev. Proc. 97-41 and Rev. Proc. 98-14, hereafter

referred to as the “GUST” remedial amendment period,

is, in the case of nongovernmental plans, hereby

extended to the last day of the first plan year

beginning on or after January 1, 2000. * * *

* * * * * * *

.06 Finally, the extension of the remedial

amendment period also applies to the time for adopting

amendments of defined benefit plans to provide that

benefits will be determined in accordance with the

applicable interest rate rules and applicable mortality

table rules of sec. 1.417(e)-1(d). Thus, such a plan

amendment may be adopted at any time up to the last day

of the extended remedial amendment period, provided the

amendment is made effective for distributions with

annuity starting dates occurring in plan years

beginning after December 31, 1999. However, pursuant

to the Commissioner’s authority in sec.

1.401(b)-1T(c)(3), if such a plan amendment is adopted

after the last day of the last plan year beginning

before January 1, 2000, the amendment must provide

that, with respect to distributions with annuity

starting dates that are after the last day of that plan

year but before the date of adoption of the amendment,

the distribution will be the greater of the amount that

would be determined under the plan without regard to

the amendment and the amount determined under the plan
- 28 -

with regard to the amendment. [Rev. Proc. 99-23,

1999-1 C.B. at 920-923.]

Rev. Proc. 99-23, supra, was subsequently modified by Rev.

Proc. 2000-27, 2000-1 C.B. 1272. Rev. Proc. 2000-27, supra,

provides, in pertinent part, as follows:

SECTION 1. PURPOSE

.01 * * * This [revenue] procedure * * * extends

until the last day of the first plan year beginning on

or after January 1, 2001, the remedial amendment period

under sec. 401(b) of the Code for amending plans for

GUST * * *

.02 The term “GUST” refers to the following:

1 the Uruguay Round Agreements Act, Pub. L.

103-465 (“GATT”);

2 the Uniformed Services Employment and

Reemployment Rights Act of 1994, Pub. L. 103-353

(“USERRA”);

3 SBJPA;

4 the Taxpayer Relief Act of 1997, Pub. L. 105-34

(“TRA ‘97"); and

5 the Internal Revenue Service Restructuring and

Reform Act of 1998, Pub. L. 105-206 (“RRA ‘98").

SECTION 2. BACKGROUND

* * * * * * *

.03 Under sec. 401(b), plan sponsors have a

remedial amendment period in which to adopt GUST plan

amendments. Rev. Proc. 99-23, 1999-16 I.R.B. 5,

provides that the GUST remedial amendment period for

nongovernmental plans ends on the last day of the first

plan year beginning on or after January 1, 2000. * * *

The end of the GUST remedial amendment period is the

deadline for making all GUST plan amendments, including

plan amendments reflecting the repeal of sec. 415(e)
- 29 -

and other plan amendments specifically enumerated in

Rev. Proc. 99-23. * * *

* * * * * * *

SECTION 4. EXTENSION OF THE REMEDIAL AMENDMENT PERIOD

.01 The GUST remedial amendment period for

nongovernmental plans is extended to the last day of

the first plan year beginning on or after January 1,

2001. * * *

.02 In general, all plan provisions that either

cause a plan to fail to satisfy the qualification

requirements of the Code because of changes to those

requirements made by GUST or are integral to a

qualification requirement changed by GUST are

disqualifying provisions under sec. 1.401(b)-1(b) of

the regulations. Thus, this extension of the GUST

remedial amendment period applies to all GUST plan

amendments, including all those specifically enumerated

in Rev. Proc. 99-23. * * * [Rev. Proc. 2000-27,

2000-1 C.B. at 1272-1273.]

Rev. Proc. 2000-27, supra, was subsequently modified by Rev.

Proc. 2001-55, 2001-2 C.B. 552. Rev. Proc. 2001-55, supra,

provides, in pertinent part, as follows:

SECTION 1. PURPOSE

This revenue procedure extends the GUST remedial

amendment period under sec. 401(b) of the Code for

qualified retirement plans. First, the revenue

procedure extends the GUST remedial amendment period

for all plans to February 28, 2002, if the period would

otherwise end before then. * * *

SECTION 2. BACKGROUND

.01 Under sec. 401(b), plan sponsors have a

remedial amendment period in which to adopt plan

amendments for GUST. The end of the GUST remedial

amendment period is the deadline for making all GUST

plan amendments and other plan amendments specifically

enumerated in Rev. Proc. 99-23 (1999-1 C.B. 920). 

* * *
- 30 -

.02 Rev. Proc. 2000-27 (2000-26 I.R.B. 1272)

provides that the GUST remedial amendment period for

nongovernmental plans ends on the last day of the first

plan year beginning on or after January 1, 2001. * * *

* * * * * * *

.05 Section 1.401(b)-1(f) of the Income Tax

Regulations provides that, at his discretion, the

Commissioner may extend the remedial amendment period

or may allow a particular plan to be amended after the

expiration of its remedial amendment period and any

applicable extension of such period. In determining

whether such an extension will be granted, the

Commissioner shall consider, among other factors,

whether substantial hardship to the employer would

result if such an extension were not granted, whether

such an extension is in the best interest of plan

participants, and whether the granting of the extension

is adverse to the interests of the government.

SECTION 3. GENERAL EXTENSION OF REMEDIAL AMENDMENT

PERIOD TO FEBRUARY 28, 2002

.01 The GUST remedial amendment period is

extended to February 28, 2002, if the period would

otherwise end before then. This extension applies to

all GUST plan amendments, including all those plan

amendments specifically enumerated in Rev. Proc. 99-23. 

* * * [Rev. Proc. 2001-55, 2001-2 C.B. at 552-553; fn.

ref. omitted.]

With the publication of Rev. Proc. 2001-55, supra, the

Commissioner extended the deadline for plan sponsors to adopt the

amendments enumerated in Rev. Proc. 99-23, 1999-1 C.B. 920, until

February 28, 2002. The amendments enumerated in Rev. Proc.

99-23, supra, included amendments of defined benefit plans to

provide that the present value of a participant’s accrued benefit

would be determined in accordance with the applicable interest

rate rules and applicable mortality table rules of section
- 31 -

1.417(e)-1(d), Income Tax Regs. Thus, it follows that plan

sponsors had until February 28, 2002, to adopt plan amendments

falling under the safe harbors provided by section

1.417(e)-1(d)(10)(ii) through (v), Income Tax Regs. Accordingly,

Hercules had until February 28, 2002, to adopt amendments to the

lump-sum payment option in accordance with the safe harbor

provided by section 1.417(e)-1(d)(10)(iv), Income Tax Regs.

In an effort to avoid this conclusion, petitioner contends

that, because “the continuing use of the PBGC interest rate

cannot be a ‘disqualifying provision’” within the meaning of the

Treasury regulations promulgated under section 401(b), “the

series of Revenue Procedures relating to the remedial amendment

period with respect to the extensive GUST I or GUST II amendments

did not extend the period during which Hercules could amend the

plan to provide that the 30-year Treasury bond rate would be

used”. As discussed below, petitioner’s contention is

unpersuasive.

Section 1.401(b)-1, Income Tax Regs., explains the operation

of section 401(b) and provides, in pertinent part, as follows:

(a) General rule. Under section 401(b) a * * *

pension * * * plan which does not satisfy the

requirements of section 401(a) on any day solely as a

result of a disqualifying provision * * * shall be

considered to have satisfied such requirements on such

date if, on or before the last day of the remedial

amendment period * * * with respect to such

disqualifying provision, all provisions of the plan

which are necessary to satisfy all requirements of

* * * [section] 401(a) * * * are in effect and have
- 32 -

been made effective for all purposes for the whole of

such period. * * *

(b) Disqualifying provisions. For purposes of

this section, with respect to a plan described in

paragraph (a) of this section, the term “disqualifying

provision” means:

* * * * * * *

(3) A plan provision designated by the

Commissioner, at the Commissioner’s discretion, as a

disqualifying provision that either–-

(i) Results in the failure of the plan

to satisfy the qualification requirements of the

Internal Revenue Code by reason of a change in those

requirements; or

(ii) Is integral to a qualification

requirement of the Internal Revenue Code that has been

changed.

(c) Special rules applicable to disqualifying

provisions–-

* * * * * * *

(2) Method of designating disqualifying

provisions. The Commissioner may designate a plan

provision as a disqualifying provision pursuant to

paragraph (b)(3) of this section only in revenue

rulings, notices, and other guidance published in the

Internal Revenue Bulletin. * * *

(3) Authority to impose limitations. In the

case of a provision that has been designated as a

disqualifying provision by the Commissioner pursuant to

paragraph (b)(3) of this section, the Commissioner may

impose limits and provide additional rules regarding

the amendments that may be made with respect to that

disqualifying provision during the remedial amendment

period. The Commissioner may provide guidance in

revenue rulings, notices, and other guidance published

in the Internal Revenue Bulletin. * * *
- 33 -

Paragraphs (b)(3), (c)(2), and (c)(3) of section 1.401(b)-1,

Income Tax Regs., were promulgated as temporary regulations on

August 1, 1997, and adopted without substantive change as final

regulations on February 4, 2000. See T.D. 8871, 2000-1 C.B. 641;

T.D. 8727, 1997-2 C.B. 47.

Under section 1.401(b)-1(b)(3), Income Tax Regs., the

Commissioner has discretion to designate certain plan provisions

as disqualifying provisions. As implied by Rev. Proc. 99-23,

sec. 3.06, 1999-1 C.B. at 923, and Rev. Proc. 2000-27, sec. 4.02,

2000-1 C.B. at 1273, the Commissioner designated plan provisions

providing for the determination of the present value of a

participant’s accrued benefit as disqualifying provisions because

they were integral to a qualification requirement that had been

changed. Consequently, the Commissioner subjected these plan

provisions to the remedial amendment period set forth in those

revenue procedures. Because the lump-sum payment option is such

a plan provision, it was subject to the remedial amendment

period. Therefore, petitioner cannot avoid the conclusion that

Hercules had until February 28, 2002, to adopt amendments to the

lump-sum payment option in accordance with the safe harbor

provided by section 1.417(e)-1(d)(10)(iv), Income Tax Regs.

In addition to subjecting plan provisions providing for the

determination of the present value of a participant’s accrued

benefit to the remedial amendment period, the Commissioner also
- 34 -

exercised the Commissioner’s authority under section

1.401(b)-1(c)(3), Income Tax Regs., in Rev. Proc. 99-23, supra,

by establishing an additional requirement for plan sponsors that

adopted amendments to those plan provisions in plan years

beginning after December 31, 1999. Specifically, Rev. Proc.

99-23, sec. 3.06, 1999-1 C.B. at 923, added the following

requirement: If the sponsor of a defined benefit plan, which

uses the calendar year as its plan year, adopted an amendment to

a plan provision providing for the determination of the present

value of a participant’s accrued benefit on or after January 1,

2000, the amendment had to be made effective for distributions

with annuity starting dates occurring on or after January 1,

2000, and had to provide that, with respect to distributions with

annuity starting dates occurring on or after January 1, 2000, but

before the date of the adoption of the amendment, the amount of

any such distributions would be the greater of the amount

determined under the plan without regard to the amendment and the

amount determined under the plan with regard to the amendment.

As discussed above, the amendment that Hercules made to the

lump-sum payment option falls squarely within the safe harbor

provided by section 1.417(e)-1(d)(10)(iv), Income Tax Regs. 

Because Hercules amended the lump-sum payment option in 2001, the

amendment occurred before the February 28, 2002, deadline to

adopt such plan amendments had passed. Furthermore, the 2001
- 35 -

amendment to the lump-sum payment option satisfied the additional

requirement established by the Commissioner in Rev. Proc. 99-23,

sec. 3.06, 1999-1 C.B. at 923, by offering the greater of the

accrued benefit calculated using the PBGC interest rate or the

annual interest rate on 30-year Treasury securities for payments

occurring on and after January 1, 2000, but before January 1,

2002.

In sum, we conclude that respondent Commissioner did not err

in determining that the amendment to the plan’s lump-sum payment

option did not violate the anti-cutback rule of section

411(d)(6).

We have considered the arguments of the parties that were

not specifically addressed in this opinion. Those arguments are

either without merit or irrelevant to our decision.

To reflect the foregoing,

Decision will be entered

for respondents.