Opinion ID: 185503
Heading Depth: 2
Heading Rank: 2

Heading: Appellants' Challenge to the IRS's Favorable Determination

Text: 9 Appellants are former employees of the International Union of Operating Engineers (the Union), which established the International Headquarters Pension and Beneficiaries Plan of the International Union of Operating Engineers (the plan) in 1947. Flynn, 80 T.C.M. (CCH) at 92. Around January 6, 1999, the Union filed an application with the IRS, seeking a determination that the pension plan would continue to qualify for favorable tax treatment after the adoption of certain amendments. See Application for Determination for Employee Benefit Plan, reprinted in Deferred Appendix (App.) 35. The Union also sent appellants a notice on Union letterhead, entitled Notice to Interested Parties. Notice to all participants of application for determination of the International Headquarters Pension and Beneficiaries Plan of the International Union of Operating Engineers. Notice to Interested Parties, reprinted in App. 13. The notice explained that the Union was applying to the IRS for a determination that its amended pension plan was eligible for taxqualified status. Id. It also stated that the recipient had the right to submit comments to the IRS as to whether the plan met the qualification requirements under the I.R.C. Id. 10 Appellants responded to the notice by submitting critical comments to the IRS. They argued that while the amended plan complied with ERISA's backloading requirements, the old version of the plan -which governed appellants' benefits -did not. The plan was supposed to satisfy one of the statutorily available mathematical formulae, known as the 3percent method. See I.R.C. 411(b)(1)(A). That method requires that the accrued benefit to which each worker is entitled on leaving the employer is not less than 3% of the normal retirement benefit to which that worker would be entitled if he or she began participation in the plan at the earliest possible entry age and served continuously until the earlier of age 65 or normal retirement age, multiplied by the number of years of that worker's participation in the plan. Id. According to appellants, the amended plan satisfied the 3% rule, because it allowed vested employees with less than 20 years of service to accrue benefits at the rate of 4% of final pay for each year of service. Preliminary WrittenComments of John J. Flynn ... and James H. Thomas p 6, reprinted in App. 15-19. Appellants alleged that the version governing their benefits, however, had only allowed them to accrue benefits at a rate of 2.25% of final pay, in violation of the backloading requirement. Even worse, according to appellants, the amended plan apparently did not go back and correct the alleged violation with respect to former employees. Id. As a result, appellants argued that they were vitally affected by the potential ... violations committed by the Plan. Id. 11 The IRS issued a favorable determination to the Union regarding the amended plan, apparently without addressing appellants' comments. Letter from IRS to Int'l Union of Operating Eng'rs (Oct. 8, 1999), reprinted in App. 37-38. Appellants responded by filing a petition in the Tax Court seeking a declaration, under I.R.C. 7476, that the plan was not entitled to continuing qualification because it violated the I.R.C. Petition (T.C. Dec. 2, 1999), reprinted in App. 3-8. The IRS moved to dismiss the petition, arguing, inter alia, that appellants lacked standing because they were former employees and therefore not interested parties. Motion to Dismiss for Lack of Jurisdiction, Docket No. 18090-99R (T.C. Feb. 4, 2000), reprinted in App. 23-32. Appellants, in opposing the motion to dismiss, argued that they qualified as interested parties by virtue of the fact that the Union had sent them a notice addressed to interested parties or, alternatively, because the regulations excluding former employees were arbitrary and capricious. Notice of Petitioners' Opposition to Respondent's Motion to Dismiss, Docket No. 1809099R (T.C. Feb. 29, 2000), reprinted in App. 39-57. 12 The Tax Court dismissed the petition and held that appellants lacked standing and were not interested parties. Order of Dismissal for Lack of Jurisdiction, Docket No. 18090-99R (T.C. July 31, 2000), reprinted in App. 67; Flynn, 80 T.C.M. (CCH) at 93-94. The court held that under Treas. Reg. 1.7476-1(b), only present employees qualified as interested parties. Flynn, 80 T.C.M. (CCH) at 93. Contrary to appellants' argument, the Union could not confer jurisdiction on the Tax Court by sending appellants a notice. Id. The Tax Court also upheld the regulations under 7476 as valid legislative regulations. Id. at 93-94. Appellants appealed the decision of the Tax Court.