Court Opinion

ID: 4483472
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:07.653392+00
Date Added: 2024-06-11T08:48:54.675719
License: Public Domain

Simpson, J., dissenting: In my judgment, the majority has embraced conclusions which are out of step with the decisions of this and other courts. It is well settled that although a formula for determining eligibility to participate in an employee plan may not be discriminatory on its face, it must be tested in operation, and if in operation the formula results in the prohibited discrimination, the plan does not qualify. Here, substantially all of the benefits accrued to members of the prohibited group; nevertheless, the Court has held the plan to be qualified, and I must dissent from that conclusion. The predecessor of section 401(a) was first enacted in 1942. Sec. 162(a), Revenue Act of 1942, ch. 619, 56 Stat. 862. This provision was designed to correct prior abuses by insuring that employee plans were operated for the welfare of the employees in general, rather than for the benefit of shareholders, officers, or highly compensated employees. H. Rept. 2333, 77th Cong., 2d Sess. (1942), 1942-2 C.B. 372, 413, 450-451; S. Rept. 1631, 77th Cong., 2d Sess. (1942), 1942-2 C.B. 504, 541, 606-607. In addition to providing automatic qualification for plans which satisfied the mechanical percentage of coverage test, Congress provided that more restrictive plans might also qualify, if the Commissioner found that the plan did not discriminate in favor of the prohibited group. Significantly, the report of the Senate Finance Committee provided: If a plan fails to qualify under the * * * percentage requirements it may still qualify under section * * * [401(a)(3)(B)], provided always that (as required by paragraphs (3) and (4)) the plans eligibility conditions, benefits, and contributions do not discriminate in favor of employees who are officers, shareholders, supervisory employees, or highly compensated employees. * * * [S. Rept. 1631, supra, 1942-2 C.B. at 606; emphasis supplied.] Since the enactment of this provision, the regulations have always provided that the law is concerned not only with whether a plan is discriminatory in form, but also with its effects in operation. Sec. 1.401-l(b)(3), Income Tax Regs.; sec. 39.165-1(a)(3), Regs. 118; sec. 29.165-l(a), Regs. 111. For example, section 401(a)(5) makes clear that a plan limited to salaried employees may qualify; that is, the use of a salaried-only classification is not inherently discriminatory. Yet, the courts have consistently held that when a plan is limited to salaried employees, its operation must be examined, and the courts have uniformly struck down such plans when discrimination in operation was found. Commissioner v. Pepsi-Cola Niagara Bottling Corp., 399 F.2d 390 (2d Cir. 1968), revg. 48 T.C. 75 (1967); Wisconsin Nipple & Fabricating Corp. v. Commissioner, 67 T.C. 490 (1976), on appeal (7th Cir., June 27, 1977); Babst Services, Inc. v. Commissioner, 67 T.C. 131 (1976); Liberty Machine Works, Inc. v. Commissioner, 62 T.C. 621 (1974), affd. per curiam 518 F.2d 554 (8th Cir. 1975), Loevsky v. Commissioner, 55 T.C. 1144 (1971), affd. per curiam 471 F.2d 1178 (3d Cir. 1973), cert. denied 412 U.S. 919 (1973); Ed & Jim Fleitz, Inc. v. Commissioner, 50 T.C. 384 (1968). There is no reason to apply different legal principles to plans in which eligibility depends upon length of service, a minimum age, or a maximum age. Indeed, the Senate Finance Committee report stated with respect to the predecessor of section 401(a)(5): The acceptable provisions mentioned in the law are not intended to be exclusive; for example, there would also be permitted to qualify under section * * * [401(a)(3)(B)] plans limited to employees who have reached a designated age or have been in the employer’s employment for a designated number of years or are employed in certain designated departments or are in other classifications, provided that the effect of covering only such employees does not discriminate in favor of officers, shareholders, supervisory employees, or highly compensated employees. [S. Rept. 1631, supra, 1942-2 C.B. at 606; emphasis supplied.] See also sec. 1.401-3(d), Income Tax Regs. There may be reasons for limiting a plan to salaried employees, such as the fact that other plans have been created for nonsalaried employees; yet, it has been held that the existence of such justification does not relieve the plan of the requirement of operating in a nondiscriminatory manner. Babst Services, Inc. v. Commissioner, supra at 140-141; Loevsky v. Commissioner, 55 T.C. at 1151; but see sec. 410(b)(2)(A) (added by sec. 1011, Employee Retirement Income Security Act of 1974, Pub. L. 93^06, 88 Stat. 900). In like manner, there may be reasons to include minimum age or service requirements as conditions of eligibility or to exclude employees who have passed a maximum age. Yet, the use of such conditions — singularly or in combination — may cause the benefits of the plan to flow to the prohibited group, and when that is the result, the plan has failed to meet the essential condition of qualification, that is, it has failed to benefit employees generally- The majority places great reliance on Ryan School Retirement Trust v. Commissioner, 24 T.C. 127 (1955). However, that case involved unusual facts, and it has been limited to its facts. McMenamy v. Commissioner, 54 T.C. 1057 (1970), affd. 442 F.2d 359 (8th Cir. 1971); Ed & Jim Fleitz, Inc. v. Commissioner, supra; John Duguid & Sons, Inc. v. United States, 278 F. Supp. 101 (N.D. N.Y. 1967). In the Ryan School Retirement Trust case, the drastic reduction in employment was not foreseeable; whereas, here, the effect of the eligibility requirements was to be anticipated. Finally, the fact that the Commissioner initially approved of this plan does not entitle it to qualification for the years at issue. The information submitted to the Commissioner in connection with the request for qualification showed that the plan was on the borderline of qualification. That information contained an error, which was slight, but in view of the marginal nature of the plan, we cannot assume that such error was insigifnicant. Thus, the ruling was based upon information which never did exist in fact. The U.S. District Court for the Eastern District of Louisiana recently had occasion to consider a somewhat similar situation in the case of Pittman Construction Co. v. United States, 436 F. Supp. 1215 (E.D. La. 1977). In that case, the taxpayer inadvertently misrepresented the age of its president and 50-percent shareholder. An initial favorable determination letter was revoked when the misrepresentation was discovered. The court found that the Commissioner’s initial approval of the plan did not preclude its later disqualification, for the ruling was valid “only if the facts presented by the taxpayer at the time the ruling was requested were accurate.” 436 F. Supp. at 1218. Moreover, the efficacy of a ruling continues only so long as there are no material changes in the facts upon which it is based. Wisconsin Nipple & Fabricating Corp. v. Commissioner, 67 T.C. at 496 and cases cited therein. Here, the facts did change-coverage of the prohibited group increased year by year. Of the participating employees, 67 percent were in the prohibited group the first year, 75 percent the second year, and 83.3 percent the third year. Under section 7805(b), revocation of a ruling is applicable retroactively, unless the Commissioner provides otherwise, and his failure to make the revocation prospective only must be sustained unless he acts arbitrarily. Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957); see Dixon v. United States, 381 U.S. 68 (1965). Under the circumstances of this case, it was surely not arbitrary for the Commissioner to revoke his ruling. Were we to hold that a taxpayer acquires an irrevocable right to a favorable ruling issued without knowledge of what facts may develop, the Commissioner might well conclude that it would be inadvisable for him to issue rulings in such a situation. Raum, Dawson, and Quealy, JJ., agree with this dissenting opinion.