pizza pro equipment_leasing inc petitioner v commissioner of internal revenue respondent docket no filed date p adopted the plan a defined benefit pension_plan effective date the plan was a qualified_plan under sec_401 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 the plan provided that the participant’s accrued_benefits vested fully at death and were payable as a death_benefit to the participant’s des- ignated beneficiary the plan filed forms annual return report of employee_benefit_plan for each of the plan_year sec_2002 through which coincided with the calendar_year and the plan’s and p’s tax years however p never filed any forms 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 defi- ciencies and additions to tax related to nonpayment of the sec_4972 excise_taxes r asserted that portions of p’s contributions to the plan were nondeductible because the plan’s funding did not fully account for the proper reductions imposed by sec_415 for benefits beginning before age held r applied the correct method to reduce the maximum benefits under sec_415 to an actuarially equivalent value for a retirement age before age in the plan where the plan did not provide for forfeiture of the participant’s benefits at death held further p is liable for sec_4972 excise_taxes for nondeductible contribu- tions made to the plan for tax_year sec_2002 through because portions of the total contributions made were in excess of sec_404 limitations held further p did not make a valid election under sec_4972 to disregard certain nondeductible_contributions held further p is liable pizza pro equip leasing inc v commissioner for additions to tax under sec_6651 and for failing to file forms 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 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 opinion laro judge this case arises out of contributions made by petitioner in tax_year sec_2002 through to a defined ben- efit pension_plan called the pizza pro equipment_leasing inc retirement_plan plan the case was submitted fully stipulated for decision without trial see rule respondent determined deficiencies in petitioner’s federal excise_taxes due for tax_year sec_2002 through as follows year deficiency dollar_figure big_number big_number big_number big_number additions to tax sec_6651 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure sec_6651 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure we decide the following issues whether petitioner applied the correct method to reduce the maximum benefits under sec_415 for a retire- ment age before age where the plan does not provide for forfeiture of the participant’s benefits at death we hold that it did not whether petitioner is liable for excise_taxes under sec_4972 for nondeductible_contributions made to the plan for calendar_year sec_2002 through because the contribu- tions were in excess of the limitations imposed by sec_404 we hold that petitioner is so liable whether petitioner is liable for additions to tax pursu- ant to sec_6651 and for failure to timely file unless otherwise indicated section references are to the internal rev- enue code code applicable for the years at issue rule references are to the tax_court rules_of_practice and procedure united_states tax_court reports forms return of excise_taxes related to employee benefit plans and failure to timely pay the excise_taxes for calendar_year sec_2002 through we hold that petitioner is so liable and did not have reasonable_cause for not filing forms or not paying excise_taxes for the years at issue whether the statute_of_limitations bars the assessment and collection of excise_taxes pursuant to sec_4972 for nondeductible_contributions to the plan for calendar_year sec_2002 through we hold that it does not i overview background the parties submitted this case fully stipulated under rule the stipulations of fact and the facts drawn from stipu- lated 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 date 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 date the plan has been timely amended as required by all legislation enacted after sep- tember and throughout the years at issue contin- ued to be a qualified_plan pursuant to sec_401 specifi- cally on date petitioner amended the plan by adopting the jewell moser fletcher holleman a profes- sional association prototype defined_benefit_plan trust basic plan document which was in effect for the plan_year respondent on date issued an opinion letter finding the form of the plan to be acceptable under sec_401 on date 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 through plan years respondent on date issued an opinion letter finding the form of the plan to be acceptable under sec_401 pizza pro equip leasing inc v commissioner throughout the years at issue the plan maintained a cal- endar 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 or the fifth anniversary of the participa- tion date mr stevens was born in since mr stevens’ reaching age 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 the normal_retirement_benefit of of the participant’s average_annual_compensation under the plan was to be paid in the form of a straight-life annuity section a of the plan required that a vested_accrued_benefit be paid in the form of a qualified_joint_and_survivor_annuity per section of the plan if a benefit was not a straight-life annuity then the benefit must be adjusted to an 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 c 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 percent and not more than percent of the amount of the annuity which is pay- able 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 unless a different percentage is elected by the employer in the adoption_agreement section 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 sec_35 of the adoption_agreement the pre-retirement death_benefit was calculated to be t he qualified preretirement survivor citations of specific plan and adoption_agreement sections reflect those sections as they appear in the plan documents any amendments made on date and effective for years through were minor and do not substantively affect our analysis united_states tax_court reports 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 c of the plan provided if the benefit of a participant commences prior to age the defined benefit dollar limitation as established under sec_415 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 as deter- mined above reduced for each month by which benefits commence before the month in which the participant attains age effective for limita- tion years beginning on or after date the defined benefit dollar limitation applicable at an age prior to age is determined as the lesser_of the actuarial equivalent of the defined benefit dollar limitation for age computed using the interest rate and mortality_table or other tabular factor specified in sec_36 of the adoption_agreement that is a interest rate and the g e life_annuity table with five-year setback and the actuarial equivalent of the defined ben- efit dollar limitation for age computed using a percent interest rate and the applicable_mortality_table as defined in sec_1 of the plan any decrease in the defined benefit dollar limitation determined in accordance with this provision c shall not reflect a mortality decre- ment 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 through the first sentence of section c instead read if the benefit of a participant commences prior to age 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 as adjusted under a above if required the plan actuary reviewed and approved actuarial valu- ation work papers including amortization schedules for plan years through and valuation results for plan_year sec_2002 through the plan actuary an enrolled_actuary also signed schedules b actuarial information to the forms annual return report of employee_benefit_plan filed by the plan for each of the years at issue pizza pro equip leasing inc v commissioner iii audit and determination of deficiency the plan filed form_5500 for each of the plan_year sec_2002 through petitioner did not file any forms for any of the tax_year sec_2002 through respondent had audited the plan in but closed the audit with no adjustments however respondent began another audit in late on date respondent filed on behalf of peti- tioner a substitute form_5330 for each of the tax_year sec_2002 and with an attached sec_6020 certification respondent on date filed a similar form on behalf of petitioner for each of the tax years and respondent on date issued a notice of defi- ciency to petitioner for tax_year sec_2002 through deter- mining 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 sec_415 for benefits beginning before age the parties have stipulated the following comparison of the maximum benefits allowable under sec_415 with the sec_415 reduced benefit limits as determined by peti- tioner and respondent respectively year sec_415 maximum dollar_figure big_number big_number big_number big_number petitioner respondent dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number in view of his computation pursuant to sec_415 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 sec_404 deductible limits resulting in nondeductible_contributions as follows united_states tax_court reports year original contribution dollar_figure big_number big_number big_number big_number allowable_amount dollar_figure big_number big_number big_number big_number excess_contributions dollar_figure big_number big_number big_number big_number applying the excise_tax of sec_4972 on nondeductible_contributions and accounting for carryover of excess con- tributions until they are used up or removed from the plan respondent calculated the following sec_4972 excise_tax amounts year excess_contributions prior year carryover dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number total dollar_figure big_number big_number big_number big_number sec_4972 tax due dollar_figure big_number big_number big_number big_number 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 an interest rate of a life expectancy of years for a person aged and a life expectancy of years for a person aged the chart is subdivided into five seg- ments each reflecting different assumptions as to the annual payments for life at age sec_45 and sec_62 annual payment for life beginning at age present_value dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number pizza pro equip leasing inc v commissioner annual payment for life beginning at age present_value big_number big_number big_number big_number big_number big_number in determining the permissible normal_retirement_benefit under the plan each year petitioner reduced the sec_415 dollar limit by discounting the maximum benefit by interest for the years between age and age 45-that is by applying a factor equal to 17-to reach the present_value at age of the permissible benefit payable at age on the other hand respondent for the tax_year reduced the sec_415 dollar limit not only by discounting the maximum benefit by interest for the years between age and age as petitioner had done but also multiplying the resulting amount by a factor obtained by dividing the annuity purchase rate apr at age by the apr at age 45-that is by dividing by 426-derived from the group annuity mortality gam blended table which is the applicable_mortality_table from revrul_95_6 1995_1_cb_80 for tax years through respondent followed a similar calculation except that he multiplied the resulting amount in the second step by -a factor obtained by dividing dollar_figure by 654-computed using the group annuity reserving gar blended table which is the applicable_mortality_table from revrul_2001_62 2001_2_cb_632 the fol- lowing table summarizes respondent’s calculation of the sec_415 limit at age reduced to age for each of the years at issue age limit dollar_figure big_number big_number year interest discount for years pincite apr at age dollar_figure dollar_figure apr at age age limit dollar_figure big_number big_number as steven h klubock respondent’s expert explains the annuity pur- chase 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 payment dis- count for interest to payment and probability of living to receive pay- ment until the mortality_table ends united_states tax_court reports age limit big_number big_number year interest discount for years pincite apr at age dollar_figure dollar_figure apr at age age limit big_number big_number essentially respondent applied a tripartite method to cal- culate the required reduction in the sec_415 dollar limita- tion with respect to a retirement age earlier than determine the actuarial equivalent value of each year’s respective limit payable at age for life by converting that annual_limit into a lump-sum value assuming interest and the probability of living each year to receive this annual_benefit and multiplying the limit by the appropriate apr in the table above this requires multiplying by reduce the value derived in the first step from age to age by discounting it for interest only for years in the table above this entails multiplying by convert the value derived in the second step to a life_annuity payable at age in the table above this requires dividing by to arrive at the final number in v petitioner’s income_tax returns petitioner filed forms u s_corporation income_tax return for tax_year sec_2002 through throughout the years at issue petitioner claimed the following deductions for contributions to the plan_year contribution deducted dollar_figure big_number big_number big_number big_number on date respondent issued a notice of defi- ciency with respect to petitioner’s income_tax return disallowing a portion of petitioner’s claimed deduction for contributions to the plan respondent determined a defi- ciency for the tax_year of dollar_figure plus interest of dollar_figure petitioner filed a petition with this court on date on date this court entered a stipulated decision in docket no following peti- pizza pro equip leasing inc v commissioner tioner’s agreement with the deficiency determined by respondent on date respondent issued another notice_of_deficiency this time with respect to petitioner’s income_tax return disallowing a portion of petitioner’s claimed deduction for contributions to the plan respondent deter- mined a deficiency for the tax_year of dollar_figure peti- tioner filed a petition with this court on date on date this court entered a stipulated decision in docket no 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 eg 109_tc_133 aff ’d 165_f3d_822 11th cir 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 mathe- matics from michigan state university professor wang has published many articles on various mathematical topics with recent publications focusing on the field of numerical anal- ysis 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 lan- guages and mathematical software programs before joining the faculty of the university of arkansas at little rock pro- fessor wang served as a professor at the university of cen- tral 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 united_states tax_court reports petitioner has offered professor wang’s report in support of two propositions firstly professor wang opines that as cal- culated by petitioner the present values of annual lifetime payments of certain amounts beginning at age are less than the present values of coordinate annual lifetime pay- ments of certain amounts beginning at age his report includes the calculations and the facts and data used to determine the present values and to make comparisons sec- ondly professor wang in an addendum report opines on the present values of certain smaller annual lifetime payments beginning at age 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 sec_415 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 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 col- lege of insurance in new york city he has been an enrolled_actuary since and a fellow of the society of actuaries since in the irs’ employ nearly all of his work involves defined benefit pension plans and his responsibil- ities 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 proce- pizza pro equip leasing inc v commissioner dures and notices updating annually the defined benefit schedules to form_5500 rendering actuarial assistance on plan qualifications and responding to questions from practi- tioners and irs employees before joining the irs in mr klubock spent 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 sec_415 respondent introduced mr klubock’s report to establish three propositions firstly mr klubock opines that the limitations for defined benefit plans under sec_415 were exceeded for the plan resulting in contributions exceeding the allowable deductions for contributions to an employee’s trust under sec_404 subject_to the excise_tax under sec_4972 secondly he contends that the information provided on forms by the plan could not possibly have allowed the irs to determine that nondeduct- ible 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 contribu- tions 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 contribu- tions 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 age sec_45 and sec_62 under the plan i overview discussion 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 united_states tax_court reports reduce the maximum benefits under sec_415 for a retirement age before age in the plan where the plan does not provide for forfeiture of the participant’s benefits at his death petitioner contends that the sec_415 limitation on annual benefits for defined benefit plans where the partici- pant’s benefits are not forfeited at death need only be dis- counted for the time value of money-that is for the appro- priate interest rate-between the plan’s early retirement age and age 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 over- funded and petitioner’s contributions to the plan were par- tially nondeductible if that is the case petitioner may be liable for excise_taxes under sec_4972 unless an exception applies we note that the years at issue in this case are through and that the law has changed over the subse- quent years especially with the wholesale repeal of the old regulations and introduction of a new regime under sec_415 in it is axiomatic in our common_law that we apply the law as it existed at the time the alleged tax deficiencies arose see eg 81_tc_1 we must apply the law as in effect during the taxable_year in issue aff ’d 740_f2d_953 1st cir accordingly we will look to the relevant statutes and regulations as they were effective during the tax_year sec_2002 through ii appropriate application of mortality adjustments under sec_415 the primary issue in this case is whether petitioner applied the appropriate methodology in calculating the sec_415 limitation_on_benefits for a defined_benefit_plan that provides for a retirement age earlier than age and where a participant does not forfeit benefits upon death we hold that petitioner did not pizza pro equip leasing inc v commissioner a statutory background sec_404 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 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 sec_415 for such year sec_404 sec_415 provides that a defined_benefit_plan pension_trust cannot qualify under sec_401 if the plan provides for the payment of benefits to a participant exceeding the limitations imposed by sub sec_415 a benefit exceeds the limitation if when expressed as an annual_benefit that benefit is greater than the lesser_of dollar_figure adjusted annually for cost of living increases sec_415 or of the plan participant’s average compensa- tion for his high_three_years sec_415 an annual ben- efit is one that is payable annually in the form of a straight life_annuity with no ancillary_benefits sec_415 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 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 sec_417 id sec_417 defines a qualified_joint_and_survivor_annuity for purposes of sec_417 and sec_401 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 percent of and is not greater than 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 sec_415 under sec_417 they a straight life_annuity is an annuity which pays the annuitant a guaranteed amount every month for the annuitant’s lifetime sipes v eq- uitable life assurance soc’y of u s no c-94-3868-vrw wl at n d cal date united_states tax_court reports nonetheless must be actuarially equivalent to straight life_annuities if the retirement benefit under a plan begins before age the dollar_figure limitation should be reduced so that such limitation as so reduced equals an annual_benefit begin- ning when such retirement income benefit begins which is equivalent to a dollar_figure annual_benefit beginning at age sec_415 there are several limitations on assumptions under sec_415 specifically in adjusting the benefit with certain excep- tions and the benefit limitation the interest rate assump- tion must be at least sec_415 in calculating such adjustments the mortality_table used should be one prescribed 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 for plan years beginning with the commissioner established a mortality_table based on a fixed blend of of the male mortality rates and of the female mortality rates from the group annuity mortality_table revrul_95_6 supra this is the mortality_table applicable to the sec_415 limitation_on_benefits for tax_year for distributions with annuity starting dates on or after date the commissioner promulgated an updated mortality_table based on the group annuity reserving table revrul_2001_62 supra this is the mortality_table applicable to the sec_415 limitation_on_benefits for tax years through b relevant regulations and guidance the secretary has also promulgated regulations under sec_415 for the years at issue sec_1 through income_tax regs published in the federal reg- ister on date t d fed reg were in effect these regulations were replaced entirely by sec_1_415_a_-1 through j -1 income_tax regs effective date t d fed reg although the for plan years beginning in and the minimum interest rate was increased to see pension funding equity act of pub_l_no sec_101 sec_118 stat pincite pizza pro equip leasing inc v commissioner parties have cited these later regulations in their briefs during the years at issue petitioner did not have the benefit of the new regulations accordingly we will look to the regu- lations and other guidance as they were in effect for the year sec_2002 through sec_1 e income_tax regs provides that where a retirement benefit under a defined_benefit_plan begins before age the plan benefit is adjusted to the actuarial equivalent of a benefit beginning at age in accordance with rules determined by the commissioner question-and- answer no in revrul_98_1 1998_1_cb_249 further clarifies that f or purposes of adjusting any limitation under sec_415 or d to the extent that a forfeiture does not occur upon death the mortality decrement may be ignored prior to age see also notice_83_10 1983_1_cb_536 otherwise i f the age at which the benefit is payable is less than the age- adjusted dollar limit is determined by reducing the age-adjusted dollar limit at age on an actuarially equivalent basis in general sec_415 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 equiva- lence for early retirement benefits under the plan and the amount com- puted using percent interest and the applicable_mortality_table rev_rul q a-7 c b pincite 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_cb_458 although the regulation refers to age by the years at issue the stat- ute had been amended to increase the age to while notices and revenue rulings are not entitled to the deference typically afforded to regulations they may have value proportional to their persuasive power 129_tc_131 during the years at issue in this case neither the code nor the reg- ulations provided that the mortality decrement may be ignored prior to age -this rule was found only in notices and revenue rulings see revrul_98_1 q a-6 1998_1_cb_249 see also notice_87_21 q a-5 1987_1_cb_458 notice_83_10 1983_1_cb_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 continued united_states tax_court reports c the parties’ arguments as discussed above petitioner and respondent applied dif- ferent methodologies to reduce the maximum benefit under sec_415 petitioner discounted the benefit by interest for the years between age and age respondent on the other hand converted the maximum benefit at age into a lump sum discounted that sum by interest for years and then reconverted the resulting figure into an annual_benefit respondent’s conversion from annuity to lump sum and vice versa used a factor derived from aprs which in turn were derived in part from the designated mor- tality 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 decre- ment 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 con- verting 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 to age 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 sec_1 e income_tax regs petitioner seeks simply to discount for interest to derive the reduced maximum benefit value emphasizing the equivalent por- tion of actuarial equivalent respondent argues that actu- arial equivalence essentially is a term of art different from simple equality placing greater weight upon the actuarial portion of criticizes respondent’s approach for reducing the maximum benefit twice and thereby allegedly deflating the figure petitioner contends that sec_415 requires only an equalization between what a participant will receive beginning at age with what a participant will receive at age while actuarial equivalent petitioner at ages earlier than 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 pizza pro equip leasing inc v commissioner respondent according to petitioner compares what a partici- pant will receive beginning at age with what a participant will receive at age if the participant started receiving the benefit at age d actuarial equivalence actuarial equivalence is an elusive concept not defined in the code however as the u s court_of_appeals for the dis- trict 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 644_f3d_437 d c cir 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 air- lines inc no 81-c-6770 wl at n d ill date 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 computa- tions 338_f3d_755 7th cir 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 sec_1 ‘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 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 and the g e life table with five-year setback respectively as specified in sec_36 of the adoption_agreement further the plan in section c takes care to incorporate by reference the commis- sioner’s mortality_table the sec_417 applicable_mortality_table is set forth in revrul_95_6 1995_1_cb_80 united_states tax_court reports respondent has not challenged the plan’s actuarial assumptions as unreasonable cf sec_412 and at any rate the plan was restricted by the limitations on certain assumptions in sec_415 the outstanding ques- tion 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 sec_415 the maximum benefit to its actuarially equivalent value at a retirement age younger than 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 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 inde- pendent and qualified as a mathematician is not an actuary petitioner cites heavily the decisions by this court in 99_tc_9 aff ’d 7_f3d_1235 5th cir and 99_tc_379 aff ’d in part remanded in part 49_f3d_1410 9th cir for putative support for its position on actuarial equivalence for example petitioner makes much of the following excerpt from vinson elkins v commissioner t c pincite the language of sec_415 provides for an adjustment to the maximum annual_benefit of dollar_figure depending upon when such benefit com- mences if the benefit commences before the social_security_retirement_age a reduction is to be made to the benefit so that it equals the actu- arial equivalent of the dollar_figure 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 pe- riod 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 equiva- lence 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 -presently codified at sec_433 -that the actuarial assumptions made by plans’ enrolled actuaries be reasonable a question not at issue in this case pizza pro equip leasing inc v commissioner 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 encyclopedia of actuarial science jozef l teugels bjorn sundt eds pro- fessor wang took the annuity amounts which for each year at issue were the sec_415 benefit limit at age and a smaller value that was computed by petitioner by dis- counting that benefit limit by interest for years as given he then determined the number of payments for life at age and age using a life expectancy table to arrive at corresponding expectancies of years and years respectively finally he factored in interest in his cal- culations 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 sec_415 and sec_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 contin- gent 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 uncer- tain 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 recog- nize this distinction between annuities certain and life annu- ities 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 pro- fessor wang’s report was to establish that the reduced age annual_benefit limits calculated by petitioner were actuari- ally equivalent to the sec_415 benefit limits for age because the present values of the age amounts were smaller than the present values of the age amounts united_states tax_court reports 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 sup- plied by petitioner in view of 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 reli- able mr klubock explains that discounting an annual ben- efit 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 the other at age in order to be actuarially equivalent they must be compared at age this requires the conversion of the annual_benefit at age into a lump sum followed by dis- counting for interest only since no mortality decrement is to be applied for years with the resulting value converted from a lump sum into an annual_benefit at age 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 mor- tality decrement which if it were applied here would require the discounting of the lump sum at age by not only interest but the risk of death as well using mortality tables to 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 prob- ability that the participant will forfeit the annuity benefit on account of death 196_fsupp2d_1260 n d ga mor- tality 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 pizza pro equip leasing inc v commissioner 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 dis- counting the lump sum at age to age since no mor- tality 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 dis- counted to age assuming no forfeiture at death and thus no mortality decrement multiply the value at age by the apr at age and by the interest discount for years then divide the product by the apr at age when this formula is applied for tax_year in the present case for example then the value at age is the age benefit limit of dollar_figure the apr at age i sec_12 the interest discount for years pincite is and the apr at age is therefore for the plan_year the age benefit limit is calculated as follows dollar_figure dollar_figure this is the same result reached by respondent with respect to the plan’s age benefit limit for the application of this methodology for plan years through corroborated respondent’s determinations for those years as well the methodology is also identical to that contemplated by sec_1_415_b_-1 income_tax regs which while promulgated after the years at issue does reflect amend- ments to sec_415 following the issuance of sec_1 income_tax regs and can serve as an insight into actu- arial practice thus sec_1_415_b_-1 income_tax regs provides with respect to mortality adjustments for purposes of determining the actuarially equivalent amount described in paragraph d i of this section to the extent that a 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 attain- ment of age unless the plan provides for such an adjustment this figure is rounded for brevity any rounding error is immaterial since the result does not change if the unrounded figure derived from the calculation of is used at any rate since is rounded up from any rounding error would be to petitioner’s benefit united_states tax_court reports the new regulation sec_1_415_b_-1 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 sec_415 for all relevant years is dollar_figure that the normal form of benefit under the plan is a straight life_annuity payable beginning at age 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 i plan a provides that early retirement benefits are deter- mined by reducing the accrued_benefit by percent for each year that the early retirement age is less than age participant m retires at age with exactly years_of_service with a benefit prior to the applica- tion of sec_415 in the form of a straight life_annuity of dollar_figure pay- able at age and is permitted to elect to commence benefits at any time between m’s retirement and m’s attainment of age for example m can elect to commence benefits at age in the amount of dollar_figure can wait until age and commence benefits in the amount of dollar_figure or can wait until age and commence benefits in the amount of dollar_figure plan a provides a qpsa to all married participants without charge plan a provides consistent with paragraph d ii of this section that for purposes of adjusting the dollar limitation under sec_415 for commencement before age or after age no for- feiture is treated as occurring upon a participant’s death before retire- ment and therefore in computing the adjusted dollar limitation under sec_415 no adjustment is made to reflect the probability of a participant’s death after the annuity_starting_date and before age or after age and before the annuity_starting_date ii the age-adjusted sec_415 dollar limit that applies for commencement of m’s benefit at age is the lesser_of the sec_415 dollar limit multiplied by the ratio of the annuity payable at age to the annuity payable at age or the straight life_annuity payable at age that is actuarially equivalent using percent interest and the applicable_mortality_table effective for that annuity_starting_date under sec_417 and sec_1_417_e_-1 to the deferred_annuity payable at age of dollar_figure per year in this case the age- adjusted sec_415 dollar limit at age is dollar_figure the lesser_of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure the straight life_annuity at age that is actuarially equivalent to a deferred_annuity of dollar_figure commencing at age determined using percent interest and the applicable_mortality_table without a mortality decrement for the period between and restating the facts of the above example concisely and incor- porating the apr calculations by mr klubock for this par- ticular example the annual_benefit payable at age is pizza pro equip leasing inc v commissioner dollar_figure the apr at age pincite interest and using the gar blended mortality_table i sec_152 the interest discount only with no mortality decrement from age sec_62 to pincite is equal to or approximately and the apr at age pincite interest and using the gar blended mortality_table is applying the for- mula derived above to calculate the actuarially equivalent benefit payable at age one arrives at the same result as reached by the regulations dollar_figure dollar_figure in the sec_415 dollar 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 reduc- tion limitation accordingly inasmuch as respondent applied this method to calculate the reduced benefit limitation under sec_415 for the plan his calculations of the age limits for tax_year sec_2002 through are correct iii petitioner’s liability for sec_4972 excise_taxes having established that petitioner incorrectly calculated the benefit limitation under sec_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 sec_4972 a statutory background sec_4972 imposes a tax of on an employer’s non- deductible contributions to a qualified_employer_plan non- deductible contributions include the excess of an employer’s contributions to such a plan over the amount allowable as a deduction under sec_404 determined without regard to 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 sec_404 sec_4972 for computing nondeductible note that this figure is rounded for brevity the rounded number when used in the formula yields a slightly lower result dollar_figure the ac- curate result of dollar_figure is achieved when the exact interest discount of is plugged into the formula instead united_states tax_court reports contributions the amount allowable as a deduction under sec_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 con- tributions made during the current_year sec_4972 for plan years beginning before there was an excep- tion applicable to defined benefit plans under sec_4972 however which reduced the amount of nondeduct- ible 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 limita- tion as defined in sec_412 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 amend- ment employers effectively could elect to treat all their con- tributions to single-employer plans as deductible pension_protection_act of ppa pub_l_no sec_114 sec_120 stat pincite replacing except to the extent that such contributions exceed the full-funding_limitation as defined in sec_412 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 sec_431 see also worker retiree and employer recovery act of pub_l_no sec_101 sec_122 stat pincite providing that the amendments apply to taxable years beginning after 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 sec_404 sec_404 sec_404 before its amendment on date effective for years beginning after date under ppa sec_801 sec_120 stat pincite limited the allowable deduction to the amount nec- essary to satisfy the minimum_funding_standard provided by sec_412 for plan years ending within or with such tax- able year or for any prior plan_year unless the amount of the remaining unfunded cost of employees’ service credits or pizza pro equip leasing inc v commissioner the normal_cost of the plan was greater the amend- ment limited this rule to multiemployer plans and estab- lished a more generous limit for single-employer plans at new sec_404 which capped the deduction at the greater of either the excess of the funding target target_normal_cost and cushion amount over the value of the plan’s assets or the sum of the minimum required contributions under sec_430 during the years at issue sec_412 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 as we observed above sec_404 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 sec_415 for such year therefore by simple arithmetic the more significant the limitation_on_benefits under sec_415 the smaller a plan’s minimum_funding_standard becomes a reduced minimum_funding_standard implies a smaller allowable deduction on contribu- tions to that plan b petitioner’s sec_4972 excise_tax liabilities in view of the lower sec_415 benefit limitation he cal- culated respondent computed during the course of his audit for petitioner’s tax_year sec_2002 through correspondingly lower limits on the deductibility of petitioner’s contribution sec_11 respondent’s expert mr klubock has pointed out that the minimum_funding_standard was the applicable limit for the years under examina- tion effective for plan years beginning after date new sec_430 was added to the code by the pension_protection_act of pub_l_no sec_112 sec_120 stat pincite which provided for minimum required contributions by single-employer defined benefit plans a min- imum required_contribution is 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 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 united_states tax_court reports to the plan for each of those years those lower limits on deductible contributions in turn resulted in excess contribu- tions subject_to the excise_tax under sec_4972 besides challenging respondent’s recalculation of the plan’s sec_415 benefit limitation petitioner has not assailed the accuracy of respondent’s computations of petitioner’s excess_contributions and corresponding excise_tax amounts accord- ingly unless petitioner can demonstrate the applicability of an exception to the excise_tax such as under sec_4972 we must hold petitioner liable for the tax c applicability of the sec_4972 defined_benefit_plan exception as we noted earlier in our discussion of the statutory back- ground to the sec_4972 excise_tax sec_4972 pro- vides an exception applicable to defined benefit plans under which an employer may elect to disregard nondeductible con- tributions for purposes of the excise_tax except inasmuch as those contributions exceed the full-funding_limitation as defined in sec_412 without regard to subparagraph a i i thereof effective for tax years after the full- funding limitation with respect to the election no longer applies to single-employer plans of which the plan is one sec_412 before its amendment effective for plan years beginning after date ppa sec_111 sec_120 stat pincite and disregarding subparagraph a i i thereof as instructed by sec_4972 defined full- funding 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 reason- able actuarial method of valuation accounting for fair_market_value however neither the statute nor the regulations provide any guidance on how to make the election under sec_4972 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 377_f2d_21 n 8th cir pizza pro equip leasing inc v commissioner aff ’g 45_tc_635 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 sec_1033 of the 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 sec_1033 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 eg 20_tc_900 judicial decisions have generally required taxpayers to make an affirmative election in a timely filed income_tax return in order to elect to report a sale of property on the installment_method under sec_44 i r c in others we have been skeptical of inferring a requirement to make a formal election see eg griffin v commissioner tcmemo_1965_91 24_tcm_467 the commissioner has been given rather broad rulemaking authority by sec_453 and it would seem that if he considered it to be a reasonable and valid require- ment 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 tanta- mount to making a sec_4972 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 retro- active assertion of an intended election is especially uncon- vincing 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 and this court entered united_states tax_court reports stipulated decisions on date to that effect in docket nos and notwithstanding the six years that have passed since that time petitioner to date has not filed any forms 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 sec_4972 election by completing the appropriate line on the form_5330 peti- tioner did none of the above and instead claims in its 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 in the light of the above we find that petitioner has failed to make a valid election for any of the tax_year sec_2002 through under sec_4972 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 sec_404 is equal to the minimum_funding_standard under sec_412 the computation of which as respondent’s expert has explained depends on the sec_415 benefit limitation we have found in favor of respondent with respect to the reduc- tion in the sec_415 limitation and so hold petitioner liable for sec_4972 excise_taxes iv additions to tax respondent has determined against petitioner additions to tax under sec_6651 and for failure_to_file tax returns and to pay tax while the calculation and imposition of such additions is an objective computation petitioner con- tends that it had reasonable_cause for its failures timely to file and pay tax we disagree the line is for nondeductible sec_4972 or contributions exempt from excise_tax this line is 13j in part ii of the date and date revisions of form_5330 line 14j in part ii of the date and date revisions and line in schedule a of the date 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 pizza pro equip leasing inc v commissioner a additions to tax for failure_to_file tax returns and to pay tax sec_6011 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 sec_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 pension excise_tax regs sec_6651 provides that if a taxpayer fails to file when due a return required by one of several listed sub- chapters including subchapter_a of chapter within which sec_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 percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues but not to exceed in the aggre- gate sec_6651 further requires in the case of a tax- payer’s failure to pay the amount shown as tax on any return specified in paragraph on or before the date pre- scribed for payment of such tax an addition_to_tax of percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues not exceeding 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 sec_6020 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 determining the addition_to_tax for failure_to_file a return under sec_6651 sec_6651 however return sec_147 united_states tax_court reports prepared by the secretary are treated as if they were filed by the taxpayer for purposes of determining the amount of the addition under sec_6651 for failure to pay the tax shown on a return sec_6651 petitioner failed to file forms for tax_year sec_2002 through and instead respondent prepared a substitute for return for each of the years at issue furthermore peti- tioner 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 and with respect to peti- tioner’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 peti- tioner is able to demonstrate reasonable_cause for failing to file the forms 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 prescribed or to pro- vide for the payment of the taxpayer’s liability sec_301_6651-1 proced admin regs petitioner has not asserted inability to file the forms however nor has petitioner claimed financial inability or undue_hardship to excuse its failure to pay the sec_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 469_us_241 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 97_tc_385 r easonable cause within the meaning of sec_6651 can be shown by proof that the taxpayer supplied all relevant information to a competent tax adviser pizza pro equip leasing inc v commissioner 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_f3d_774 8th cir petitioner contends that it relied on its former counsel barry jewell whose defined_benefit_plan prototype docu- ments it used for the plan respondent 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 evi- dence that it meets the following three requirements the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided nec- essary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judg- ment 115_tc_43 aff ’d 299_f3d_221 3d cir reliance may be unreasonable when it is placed upon insiders pro- moters 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 pincite while neonatology assocs dealt with sec_6662 accuracy-related_penalties we have applied its tripartite analysis to sec_6651 additions to tax as well see eg 121_tc_89 aff ’d 425_f3d_1203 9th cir see also curet v commis- sioner tcmemo_2016_138 at hovind v commissioner tcmemo_2012_281 at 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 reli- ance 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 date noted the following furthermore this plan is proprietary to and a trade secret of jewell moser fletcher holleman a professional association and may united_states tax_court reports not be used for more than sixty days after the employer’s relationship with jewell moser fletcher holleman a professional association has terminated simi- larly the adoption_agreement executed on date and in effect for the remaining tax years at issue con- tained a similar sentence furthermore this plan is propri- etary to and a trade secret of jewell law firm p a and may not be used for more than sixty 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 440_f3d_375 6th cir aff ’g tcmemo_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 sec_6651 and 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 sec_6011 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 sec_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 pension excise_tax regs generally the commissioner has three years after a return is filed to assess a tax sec_6501 to start the petitioner did not file a return on which an entry has been made with respect to an excise_tax see sec_6501 nor did petitioner file a re- turn of a tax imposed under the excise_tax provisions of the code omitting a substantial amount of such tax see sec_6501 and therefore the spe- pizza pro equip leasing inc v commissioner running of the period of limitations the return 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 although respondent had prepared substitutes for returns for the years at issue pursuant to his authority under sec_6020 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 other- wise petitioner to date has not filed any forms for any of those years the substitutes for returns prepared by respondent do not start the running of the limitations_period see sec_6501 therefore since petitioner is liable for the sec_4972 excise_taxes and has not filed the forms required_by_law respondent’s assessment is not time barred petitioner argues however that the plan’s filing of forms for the years at issue should be deemed the filing of a return required for purposes of the sec_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 140_tc_273 this court has in the past applied a quad- ripartite test to determine whether a filed document qualifies as a valid_return under sec_6501 the document must contain sufficient data to calculate tax_liability the docu- ment must purport to be a return there must be an honest and reasonable attempt to satisfy the requirements of the tax law and the taxpayer must have executed the document under penalties of perjury id citing 82_tc_766 aff ’d 793_f2d_139 6th cir we agree with respondent that the forms fail the beard factors the first and third criteria are the most problematic for petitioner the forms were valid returns and were signed by petitioner under penalty of per- cial provisions of sec_6501 relating to excise_taxes do not apply here united_states tax_court reports jury 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 provided on the forms 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 even after respondent began his audit peti- tioner’s failure_to_file the required forms was due not to its mistaken belief that the forms were the appropriate returns to be filed but rather to its erroneous position that it did not owe the sec_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 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 was an attempt to satisfy peti- tioner’s responsibility to file forms 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 464_us_386 accordingly the statute_of_limitations has not begun to run and therefore does not bar respondent’s assessment vi conclusion petitioner neglected to apply the correct method to reduce the maximum benefits under sec_415 for a retire- ment age before age 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 con- tributions to the plan during tax_year sec_2002 through were nondeductible resulting in liability for sec_4972 excise_taxes petitioner is further liable for additions to tax under sec_6651 and for its failure_to_file forms and to pay the excise_taxes petitioner did not have reasonable_cause for this failure finally since petitioner never filed the forms the statute_of_limitations does pizza pro equip leasing inc v commissioner 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 argu- ments are irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent f


internal_revenue_service number release date cc dom fs it a tl-n-3004-99 uilc internal_revenue_service national_office field_service_advice date memorandum for from deborah a butler assistant chief_counsel cc dom fs subject entitlement to use sec_1341 this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend a b year year product a year product b year product c year product d x issues whether sec_1341 applies to payments made by a to settle various actions brought on behalf of the united_states government for alleged overcharges and violations of federal statutes including the false claims act whether sec_1341 precludes a’s use of sec_1341 with respect to items included in gross_income in prior years attributable to the sale of property held by a primarily_for_sale_to_customers in the ordinary course of its business conclusions sec_1341 requires an appearance of an unrestricted right to income this requirement is not met where repayment of the income item is necessitated by fraud or intentional wrongdoing which is apparantly the case with each settlement discussed infra if a were not otherwise precluded from using sec_1341 the inventory exception would bar its use for settlement sec_1 and facts a has submitted claims for refund for some of the taxable years between year and year claiming tax benefits under sec_1341 relating to payments made to settle various lawsuits filed by or on behalf of the united_states government and to settle claims in which a made voluntary disclosures of wrongdoing former employees and the government alleged that a engaged in various deceptive practices regarding contracts for manufactured goods a subsequently entered into numerous settlement agreements with the u s both to settle the various allegations of wrongdoing as well as allegations of wrongdoing voluntarily disclosed by a and not related to a lawsuit there were approximately x settlement agreements between a and the u s we will discuss five of the settlement agreements which are a fair representation of all of them all of the lawsuits and voluntary disclosures to be discussed occurred between year and year the prohibited practices at issue took place between year and year settlement a lawsuit was filed against a under the provisions of the false claims act a manufactured and sold product a and was required to comply with a rigorous testing program to ensure product reliability the complaint alleged a knowingly falsified testing information and submitted fabricated test results to the government to cover up the routine failures under the mandatory testing an amended complaint alleged a’s misuse of marks owned by the u s and protected by the lanham act specifically a sold a number of product a bearing a registered mark owned by the u s and the use of the mark by entities such as a represents that the goods were manufactured in accordance with standard government specifications thus a sold product a representing that it was appropriately tested in addition a knowingly falsified testing information and submitted fabricated test results and of course failed to report the occurrence of many failures and such failures were required to be reported to the u s under the terms of a settlement agreement a paid a sum of money and in exchange the u s released a from all claims and causes of action under the false claims act the lanham act and any other statutes or common_law theories the agreement did not constitute an admission by either party settlement this involved another lawsuit filed against a under the provisions of the false claims act the complaint alleged that a in its capacity as either a prime or subcontractor failed to negotiate procurement contracts in good_faith specifically violating the truth in negotiations act the act requires a contractor to submit cost and pricing data to the u s with its contract proposal and to update that information throughout the negotiating process a contract pricing proposal must be submitted and state that the party is providing the government with its best estimate and or its actual costs for work to be performed and certifies that all cost and pricing data is accurate complete and current the complaint alleged that a schemed to defraud the government by falsely representing that the cost estimates were true costs of the work to be done a’s practice was to add to estimated costs various undisclosed amounts termed reserve or negotiation loss factor these added on costs were concealed under the labor cost estimate deemed to be the least likely factor to be questioned by the government thus cost estimates were inflated by substantial amounts a withheld original documentation prepared for developing the true labor cost estimates an amended complaint alleged false estimates of cost and price in all fixed price contracts negotiation of contracts based on false estimates and making claims and receiving payments at inflated prices the cost estimates were alleged to be inflated by the settlement agreement required a to pay a fixed amount to the u s and a was released from liability under various federal statutes and the common_law settlement a in its capacity as either a prime or a subcontractor notified b of certain testing practices for product b sold to the government that did not satisfy applicable specifications a’s own investigation subsequent to an employee’s report determined that a failed to comply with all testing requirements in accordance with specifications for its sales of product b in addition testing reports were falsified and thus a had overcharged for products which failed to meet requirements the parties entered into a settlement agreement whereby a paid the u s a fixed amount and in return the u s compromised any and all statutory or common_law claims the settlement amount was apparently a reimbursement for the overcharges on sales of product b settlement a sought admission into the voluntary disclosure program administered by b the voluntary disclosure report revealed a discrepancy in material handling procedures involving product c product c had been approved by a’s engineers for installation even though it did not satisfy all of the product c specifications and this practice violated requirements of the government contracts in a settlement agreement a agreed to pay the u s a fixed amount and to conduct a recall screening and repair of all units alleged to be not in conformity with contract requirements accordingly the government released a from all claims and causes of action under either statutory or common_law settlement suit was filed against a alleging that a failed to properly establish and maintain a property management system over government furnished property thereby misappropriating product d which it was hired to repair a’s contract required it to establish and maintain a property administration system to fully account for and trace all government parts sent to a for repairs a invoiced the government for the full contract fee knowing that it had not provided all of the work and services required under the contracts namely properly establishing and maintaining a property administration system a was supposed to accurately track parts from receipt through repair and ultimate return of the repaired part a was simultaneously involved in repair work for commercial customers when parts were shipped to a they were accompanied by forms specifying the quantity and type of parts being shipped when government parts were used to make commercial repairs procedures existed to document the borrowing so that they were properly replaced and accounted for a used government parts for commercial repairs without replacing them and in addition a’s employees stole government parts and sold them to private companies or distributors of such parts a was aware that there were shortages in the parts on hand and a concealed such shortages from the government by destroying and altering government forms the settlement agreement released a from all statutory or common_law claims provided that a expressly denied all allegations and provided for the payment of a fixed amount of money to the government law sec_1341 was enacted to eliminate the inequity occasioned by such claim of right cases as 286_us_417 and 340_us_590 in north american the supreme court held that if a taxpayer receives earnings under a claim of right without restriction as to its disposition it has received income which it is required to report even though it may later be adjudged liable to restore it u s pincite sec_1341 enables taxpayers to ameliorate the sometimes harsh result of the claim_of_right_doctrine which requires reporting the income in the year of receipt if it is later determined that the income must be repaid or restored sec_1341 gives taxpayers the ability in the year of restoration to put themselves in the same position as if the income had never been reported the legislative_history of sec_1341 indicates that it was enacted to adequately compensate a taxpayer for the tax it paid for a prior year when it subsequently has been obliged to restore amounts included in gross_income in the prior year because it appeared that it had an unrestricted right to such amount h_r rep no 83d cong 2d sess s rep no 83d cong 2d sess see also cong rec s22531 daily ed date statement of senator kerr thus the purpose of sec_1341 was to place such a taxpayer at least in no worse a tax position than he would have been had he never received the income originally revrul_72_551 1972_2_cb_508 sec_1341 provides that if an item was included in gross_income for a prior taxable_year or years because it appeared that the taxpayer had an unrestricted right to such item and a deduction is allowable for the current taxable_year because it was established after the close of such prior year or years that the taxpayer did not have an unrestricted right to such item and the amount of such deduction exceeds dollar_figure then the tax_liability is the lesser_of i the tax for the taxable_year computed with such deduction or ii the tax for the taxable_year computed without such deduction minus the decrease in tax under ch of the code for the prior year or years that would result solely from the exclusion of such item from gross_income for such prior taxable_year or years sec_1341 therefore enunciates five basic conditions that must be satisfied the item was included in gross_income in a previous taxable_year the inclusion was made under a claim of right and the taxpayer appeared to have an unrestricted right to the item in a later taxable_year the taxpayer is entitled to a deduction on account of the repayment of the item the deduction is allowable because it was established after the close of the year of inclusion that the taxpayer did not have an unrestricted right to the item and the amount of the deduction exceeds dollar_figure sec_1341 provides an exception to sec_1341 sec_1341 does not apply to any deduction allowable with respect to an item which was included in gross_income by reason of the sale_or_other_disposition of stock_in_trade of the taxpayer or other_property of a kind which would properly have been included in the inventory of the taxpayer if on hand at the close of the prior taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business analysis item included under a claim of right did a appear to have an unrestricted right to the item sec_1_1341-1 defines income included under a claim of right to mean an item included in gross_income because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to the income this section further notes that sec_1341 requires that it be established after the year of inclusion that the taxpayer did not have an unrestricted right to the item_of_income in the year of inclusion by requiring that it be established that the taxpayer ‘did not have an unrestricted right ’ the statutory language indicates that the lack of the right to the item_of_income must be a condition in existence in the taxable_year of inclusion it is only a determination or establishment that the taxpayer lacks an unrestricted right that occurs after the close of the taxable_year furthermore if the taxpayer’s right to the income is absolute and undermined by facts arising in a year subsequent to the year the income was received the taxpayer does not satisfy the appearance of an unrestricted right test also of course sec_1341 does not apply if a taxpayer has no right whatsoever to income in the taxable_year it is included in the taxpayer’s gross_income nor does it apply if the taxpayer voluntarily pays the income back in a subsequent taxable_year thus for example although the proceeds of embezzlement constitute gross_income in the year of embezzlement they are held without any semblance of entitlement whatsoever and therefore a restoration of embezzled amounts does not come within the general_rule of sec_1341 revrul_68_153 1968_1_cb_371 revrul_65_254 1965_1_cb_50 sec_1341 does not apply to any ill-gotten gains see eg 863_f2d_417 5th cir for example in 574_f2d_1240 5th cir cert_denied 439_us_1072 taxpayer embezzled from his employer repaid the money and sought to take advantage of sec_1341's tax recomputation in holding against the taxpayer the court noted that when the item was embezzled funds it is clear that it could not appear to the taxpayer that he had any right to the funds much less an unrestricted right to them f 2d pincite see also revrul_68_153 supra revrul_65_254 supra similarly in parks v united_states u s t c big_number w d pa the court stated that i f the taxpayer commits fraud to obtain income this court would not accept that such conduct can create the appearance of an unrestricted right to an item_of_income id at big_number based on the facts as we understand them in each instance a entered the settlement due to knowing misconduct reports and tests were falsified cost estimates were inflated products were approved that did not satisfy contract specifications and shortages of parts were concealed from the government fraudulent misconduct by a either willfully or with knowledge of wrongdoing precludes a’s use of sec_1341 revrul_68_153 1968_1_cb_371 sec_1341 requires income inclusion under a claim of right because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to the income therefore a’s knowledge that it was violating federal statutes and regulations and or various provisions of its government contracts fails to meet the unrestricted right test and sec_1341 does not apply to any of the settlement payments was the settlement payment deductible because it was established after the year of the item’s inclusion in income that a did not have an unrestricted right to the item sec_1341 requires that there be a legal_obligation to restore the funds before a taxpayer is entitled to use the tax recomputation the code states that it was established that the taxpayer did not have an unrestricted right to such item thus voluntary repayments are outside the scope of sec_1341 647_fsupp_1083 u s d c e d cal the service accepts a settlement in lieu of a judgment as sufficiently involuntary and as meeting the established requirement of sec_1341 in general a payment is considered involuntary for purposes of sec_1341 if the repayment is based on a potential claim that if pursued would be resolved adversely to the taxpayer 44_tc_787 acq 1968_2_cb_2 nevertheless as discussed supra the facts indicate that a cannot use sec_1341 because the settlement payments are due to a’s intentional wrongdoing was the payment in settlement a restoration of the same income item the determining factor when characterizing damages received in the settlement of a claim or cause of action is the nature of the basic claim from which the compromised amount was realized 1_tc_952 aff’d 144_f2d_110 1st cir cert_denied 323_us_779 we agree with your view that a’s payment in settlement is factually related to parts shortages and therefore is not a repayment of the income that a received for repairing product d sec_1341 inventory exception applicable regulations have construed the special rule_of sec_1341 as disqualifying for sec_1341 relief deductions with respect to adjustments of stock_in_trade or similar items made to customers treas reg f provides in part this section is therefore not applicable to sales returns and allowances and similar items a argues that the inventory exception applies only to matters involving sales returns and allowances the argument is not supported by the language of the statute the first sentence of sec_1341 provides that sec_1341 does not apply where a deduction is allowable with respect to an item that was included in gross_income by reason of the sale_or_other_disposition of inventory however the second sentence in sec_1341 provides that this paragraph shall not apply if the deduction arises out of refunds or repayments with respect to rates made by a regulated_public_utility if such refunds are required to be made by the government refunds with respect to public_utility rates do not involve sales returns or allowances therefore it cannot be said that the inventory exception in the first sentence applies only to sales returns and allowances because if it were so the second sentence regarding refunds by regulated public_utilities would be superfluous killeen v united_states u s t c u s d c s d cal involved an income_splitting arrangement in which one party failed to pay over the correct share of the profits to the other party because the correct amount was not paid over the taxpayer later had to restore to his joint venturer money which was due him from the profits once the funds were received by the taxpayer and should have been sent to the other party the funds were no longer considered included in the income of the taxpayer due to the sale_or_other_disposition of stock_in_trade or other_property includible in inventory rather the income at issue was withheld in contravention of an income_splitting agreement consequently in this case the taxpayer was permitted to use sec_1341 the present case does not involve an income_splitting arrangement and is thus distinguishable from killeen also we do not believe that the inventory exception of sec_1341 is limited to situations involving sales returns and allowances and similar items rather the language of sec_1341 is sufficiently broad to encompass other situations not involving sales returns and allowances and similar items the relief provided by sec_1341 should be denied where the deduction arises out of an adjustment made to the stock_in_trade or similar items within the limiting provisions of sec_1_1341-1 inventory_items stock_in_trade accordingly we believe that if a were not otherwise precluded from using sec_1341 the inventory exception would bar its use for settlement sec_1 and each settlement involves products manufactured by a and sold either to the government or in its capacity as a subcontractor to a prime contractor who in turn sold to the government case development hazards and other considerations deborah a butler by