Court Opinion

ID: 4483701
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:14.760863+00
Date Added: 2024-06-11T15:04:10.788470
License: Public Domain

Drennen, J., dissenting: I respectfully dissent from the majority opinion which approves what was in effect respondent’s retroactive revocation of his ruling that the profit-sharing plan here involved qualified under the provisions of section 401(a)(3), I.R.C. 1954. Petitioner’s profit-sharing plan was adopted in 1958 and was amended in 1961. Under the plan as amended all employees were eligible to participate except: (1) Participants in the labor union pension plan, established through collective bargaining, to which petitioner makes contributions, and (2) Employees who customarily work 20 or fewer hours per week or 5 or fewer months per year. At the time the profit-sharing plan was adopted, petitioner had 76 employees, 26 of whom were ineligible due to union membership and 41 of whom were ineligible due to minimum compensation.1 The remaining nine employees were eligible and covered. Of those covered two were stockholders, four (including the stockholders) were supervisory employees, and the compensation ranged from $1,719 to $3,380, except for the chief executive officer, whose compensation was $19,700. On February 28, 1961, respondent issued a letter stating that the profit-sharing trust qualified under section 401(a), I.R.C. 1954. Due to changing conditions in petitioner’s business in the mid or later 1960’s, there was a decline in the number of petitioner’s nonunion employees eligible to participate in the plan. As a result there were four employees covered by the plan for fiscal 1970, five for 1971, eight for 1972, and five for 1973. There is no finding with regard to the number of nonunion employees, if any, that were not eligible to participate in the years in issue because of the part-time and minimum hours provisions. Of the covered employees, only one in 1970 and 1973, two in 1971, and four in 1972 were paid less than $10,000, but in all 4 years, one was paid only slightly more than $10,000. Three of the covered employees were officers of petitioner in 1970 and a fourth became an officer in 1971. In the notices of deficiency issued in 1975 and 1976 respondent determined that the profit-sharing plan discriminated in favor of the prohibited group for each of the years 1970-73 in violation of section 401(a)(3) and (4) of the Code. The majority concluded that the classification set up by the petitioner and previously found by the respondent to be nondiscriminatory had become discriminatory in operation for the years in issue under section 401(a)(3)(B), and found no need to consider section 401(a)(4). My principal objection to the majority view is that it approves a retroactive revocation of a ruling that the plan was qualified because unforeseen changing conditions in petitioner’s business which were beyond petitioner’s control reduced the number of employees not in the prohibited class who were eligible to participate. I will discuss this more in detail later. But at the outset I should state that I fail to understand how the classification set up by the petitioner, which was approved by respondent and remained unchanged, could in and of itself have become discriminatory, or how petitioner could have changed it in any reasonable way that would not have produced the same alleged discrimination. Section 401(a)(3)(B) relates to eligibility for coverage; section 401(a)(4) relates to discrimination by virtue of contributions and benefits. Perhaps a perusal of this plan during the years in issue under section 401(a)(4) would better justify a finding of discrimination, see Bernard McMenamy, Inc. v. Commissioner, 54 T.C. 1057 (1970), affd. 442 F.2d 359 (8th Cir. 1971), but the majority found it unnecessary to follow that course. The classification set up by petitioner made ineligible only those employees who were members of the union and presumably eligible for coverage under the union plan to which petitioner contributed, or were employees who customarily worked not more than 20 hours per week or not more than 5 months in a calendar year. Certainly neither of these requirements is discriminatory per se. Section 401(a)(3)(A) recognizes that part-time employees need not be considered in the head count. And respondent’s original ruling in this case recognized that exclusion of the union members was not discriminatory. See also sec. 401(a)(5).2 Yet under the majority opinion petitioner could not have adopted a classification for its nonunion employees that excluded part-time employees without being discriminatory. The majority suggests that petitioner might have made adjustments in the contributions formula or to equalize benefits in either this plan or the union plan which would have enabled it to have the two plans considered in combination and thereby satisfy the requirements of section 401(a). As noted before, an analysis of contributions and benefits seems to me to be a function of section 401(a)(4) which the majority failed to consider. But in any event, the union plan was a negotiated plan and petitioner could not change it ex parte. Yet the majority concludes that the union members must be considered in determining whether there was discrimination in favor of the prohibited group just as though they were not covered by any plan. Consequently, under the majority opinion, petitioner could not have a qualified plan for its regular nonunion employees. I do not believe Congress intended any such result when it provided in section 401(a)(3)(B) that an employer who did not meet the head count under section 401(a)(3)(A) could still have a plan that qualified by establishing a classification that is not discriminatory. See Lansons, Inc. v. Commissioner, 69 T.C. 773, a Court-reviewed opinion of this Court released February 27,1978; Sherwood Swan & Co. v. Commissioner, 42 T.C. 299 (1964); Ryan School Retirement Trust v. Commissioner, 24 T.C. 127 (1955). Turning now to the principal disagreement I have with the majority opinion, I think it was arbitrary and unreasonable for respondent to, in effect, retroactively revoke his favorable ruling in this case. The majority, in discussing its two-part approach to the issue in this case, says that (secondly) in cases involving changes in coverage due to unforeseen circumstances, we analyze the effect of the provisions in both prior years and the years in issue to determine whether those changes were sufficient to justify the conclusion that respondent did not err in revoking his earlier determination. I believe, under the circumstances of this case, that the last clause of the above sentence should read, “did not err in retroactively revoking his earlier determination.” See Lansons, Inc. v. Commissioner, supra. The question is not whether respondent has the authority to retroactively revoke his ruling. I recognize that he has that authority. Sec. 7805(b), I.R.C. 1954. The question is whether he abused that authority in this case. I would hold that he did. As the majority recognizes, respondent has publicly announced that a ruling will, in the absence of unusual circumstances, not be retroactively revoked. See Statement of Procedural Rules, 26 C.F.R. sec. 601.201 (1977); Rev. Proc. 67-1, sec. 13.05,1967-1 C.B. 544,553. What are the unusual circumstances here that justify a retroactive revocation? I perceive none, and the majority points to none. Petitioner had established its profit-sharing plan in 1958 and relied on respondent’s favorable ruling for at least 14 years (1961-75). Suddenly, in a notice of deficiency issued in 1975, respondent decided to change his position with respect to qualification of this plan as of 1970. The discrimination that the majority finds was admittedly the. result of changing conditions in petitioner’s business. The' majority suggests that petitioner could have foreseen the change and should have amended (or abandoned) its plan. It is not clear when the changes became so pronounced as to produce the so-called discrimination in this plan — but apparently it was not until shortly before the first year in issue here, 1970. But was the change of such certain permanency to justify amending the plan? As pointed out in Judge Wilbur’s dissenting opinion, the classification produced no more discrimination in 1972 than it did in 1961. Is an employer expected to amend the classification in his plan every- year to meet changing conditions, whether permanent or not? And more in point, is the respondent justified in changing his position retroactively without discussing possible amendments to the plan with the employer first? So far as we know there was no material misstatement or omission of any facts on which the ruling was based, there was no change in the law, petitioner had acted in good faith in reliance on the prior ruling, and there was apparently no evidence of an intent to siphon off profits to the prohibited group. While none of these factors individually may be determinative, I believe they all should be given consideration in determining whether respondent’s action was arbitrary. The reason for respondent’s announced position in Rev. Proc. 67-1, supra, is to provide some certainty for taxpayers and permit them to rely on respondent’s rulings. Without such assurance there would be little reason to obtain a ruling. This is particularly true in the pension and profit-sharing area where a taxpayer’s good faith reliance on a ruling that his plan is qualified will produce unfavorable tax consequences not only to the taxpayer but others as well if the ruling is retroactively changed. Here, the result of respondent’s change in position makes the profit-sharing trust subject to tax, disallows to petitioner a deduction for part of its contributions to the trust, and subjects the participating employees to tax on a part of the contributions made in their behalf, I realize that respondent’s revocation should not be disturbed unless he has clearly abused his discretion, but I think the courts have a right to make that determination. In this instance, I would conclude that respondent’s retroactive revocation was arbitrary and an abuse of his discretion. See Lansons, Inc. v. Commissioner, supra. In closing I will add that, despite much language in the majority opinion attempting to distinguish it, I do not find this case distinguishable from Lansons, Inc. v. Commissioner, supra, particularly in the conceptual approach to determining whether respondent’s retroactive revocation of a favorable ruling on a pension plan was arbitrary. Yet that case was decided just 5' months ago in a Court-reviewed opinion of this . Court. Fay, Sterrett, Goffe, Hall, Wiles, and Wilbur, JJ., agree with this dissenting opinion.   A $1,000 minimum compensation requirement was eliminated by the 1961 amendment. The findings of fact do not reveal how many employees would have been eligible and covered without the minimum compensation requirement, but there would have been at least the same nine.    Sec. 401(a)(5) provides: A classification shall not be considered discriminatory * * * merely because it is limited to salaried or clerical employees. * * *