Court Opinion

ID: 4484150
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:32.788888+00
Date Added: 2024-06-11T15:03:45.826091
License: Public Domain

Chabot, J., dissenting: The majority herein lead us down a new path in providing lump-sum distribution treatment to distributions from nonqualified plans — they bifurcate a single nonexempt trust into an exempt portion and a nonexempt portion. This bifurcation conflicts with the language of the statute, finds no support in the legislative history, waters down the Internal Revenue Code’s protections for rank-and-file employees, and creates complicated allocation problems. Respectfully, I refuse to join the majority on their lump-sum distribution trip. Section 402(b) (set forth in the majority opinion in n. 2 supra) provides that distributions from nonexempt trusts are to be treated under section 72, which generally provides ordinary income treatment. The parties agree that the trust that made the distributions in the instant case was not exempt at the time any of the distributions in issue herein were made. No other provision of the statute states an exception to, or modification of, section 402(b). The distributions herein should be taxed in accordance with the rules of section 402(b). Section 402(a)(2) (set forth in the majority opinion in n. 1 supra) provides that, if certain requirements are met, then a distribution may be taxed in accordance with special rules which would result in long-term capital gain treatment for the bulk of the distributions in the instant case. One of the requirements stated in the statute is that the distributing trust is part of a qualified plan and is tax-exempt. The trust that made the distributions in the instant case was not part of a qualified plan and was not exempt when it made the distributions in issue herein. No other provision of the statute states an exception to, or modification of, this requirement that the distributing trust be exempt and be part of a qualified plan. The distributions herein should not be taxed in accordance with the rules of section 402(a)(2). In the long history of the lump-sum distribution provisions,1 the Congress gave no indication, in the statute or the legislative history, that a distribution from a nonexempt trust might be allocated as between exempt periods and nonexempt periods. On the other hand, the Congress has provided time-allocation rules as to distributions from exempt trusts in both the Tax Reform Act of 19692 and the Employee Retirement Income Security Act of 1974.3 If the Congress had intended a time-allocation rule on the point dealt with in the instant case, then the Congress could have enacted such a rule or in some other way indicated that such a rule was intended. The Congress has not done so. Neither the statute nor the legislative history allows us room to create such a rule merely because the majority herein believe it would be more “equitable.” The majority herein create the concept of bifurcation of a single nonexempt trust into a qualified trust with “qualified assets” and a nonexempt trust with “nonqualified assets.” This is avowedly a rule of broad application regardless of “who did what” (majority opinion at p. 782 supra), created because of the majority’s view that otherwise the law “would penalize the innocent employee who had no say in the management of the trust” (majority opinion at p. 784 supra). With all due respect, I must conclude that the majority are engaged in unauthorized revisionism.4 They seek to weigh the probable effects of their view of what a properly drafted statute would have provided, against the probable effects of the statute that the Congress in fact enacted. In doing so, the majority proceed without the public hearings generally available to the Congress, without examination by another House or a committee of conference, and without examination by a President deciding whether to sign or veto a bill. The majority proceed without statistical or other analyses of effects. The majority ignore the fact that in every case that has come before us in which this issue has arisen at any stage (the instant case; Greenwald v. Commissioner, 366 F.2d 538 (2d Cir. 1966), revg. in part 44 T.C. 137 (1965); Epstein v. Commissioner, 70 T.C. 439 (1978)), the petitioner-employee was a decision maker and not one of the rank and file that the majority herein seek to protect. They ignore the implications of the fact that in the instant case, the plan lost its qualified status because “benefits were forfeited on partial termination of the plan and funds were diverted to purposes other than for the exclusive benefit of the participants” (majority opinion at p. 781 supra). These acts by the plan’s decision makers appear to be violations of section 401(a)(7)5 and the opening language of section 401(a),6 legislation enacted to protect the rank and file. The majority herein ignore the fact that the lesson of their opinion is that a decision maker who wishes to enhance his own fortune as a plan participant7 or as owner of the employer8 can do so with no risk of substantial loss of tax benefits (i.e., the decision maker who happens to get caught, as in the instant case, can still withdraw from the plan most of his account as a tax-favored lump-sum distribution). The responsible employer will no doubt continue to adhere to the statute’s requirements and the congressional concern for rank-and-file employees, but those who wish to divert as much as possible of their employees’ plan assets from the rank and file will find that the majority’s opinion affords them a valuable tool for tearing great holes in the protective scheme of sections 411(d)(3) (see n. 5 below) and 401(a). Indeed, the majority, by stressing the irrelevance of how the exemption may have been lost, and by specifically overruling Epstein (majority opinion at p. 786 supra), have pointed the way to great flexibility in so diverting assets. One need merely amend the plan to give the decision makers the necessary authority to make the diversion. The plan assets then may be withdrawn with only the minimal tax sanctions promised by the majority without regard to “who did what.” And all of this is done, the majority tell us, in the name of protecting the rank and file. The Congress has not been unmindful of the often-harsh effects of loss of exempt status. In the last decade, the Congress has explored methods of focusing sanctions more sharply and measuring them more appropriately to the violations.9 As to employees’ plans, the Congress took a number of steps along this line in the Employee Retirement Income Security Act of 1974.10 Other attempts were made in the vesting area,11 but the Congress — after further considering the matter — concluded that it had not yet found an appropriate solution and so left the sanction for insufficient vesting as loss of exempt status. The attempt of the majority herein to alleviate by fiat the alleged “harshness” and “inequity” of the statute (see majority opinion at p. 786 supra) may be as wide of the mark as the attempt portrayed in Gilbert and Sullivan’s “Mikado” to “let the punishment fit the crime.” See “The Complete Plays of Gilbert and Sullivan,” at 382-384 (Random House, Inc.). The majority herein seek to supply an alleged omission in the statute, on the basis of no examination of alternatives, no opportunity for public comment, and no articulation of the method by which the time-allocation of assets is to be made. The majority state that they follow the Court of Appeals opinion in Greenwald. However, the Court of Appeals at least provided a workable method for making the allocation in a defined contribution plan. In Greenwald, the Court of Appeals allowed long-term capital gain treatment only to the amount in Mr. Greenwald's account as of the date the trust therein lost its exempt status. The balance of the distribution to Mr. Greenwald was given ordinary income treatment, without regard to whether this balance consisted of (a) subsequent employer contributions or (b) subsequent earnings on either (1) the previous balance or (2) the subsequent employer contributions. In the instant case, the majority appear to provide the favored tax treatment to some part of the earnings after the trust lost its exempt status. The majority offer no explanation for this deviation from the Greenwald rule nor guidance for the next case. The majority, not faced with a case involving a defined benefit plan, also have given us no clue as to how their universal rule is to allocate assets in the case of such a plan. Is it to be on the basis of the time of employer contributions? the value, as of the date of the loss of exempt status, of the benefits accrued as of that date? the date-of-distribution value of benefits accrued as of the date of loss of exempt status? True, it is not required that any one case present the world with a neatly phrased uniform field theory, but when the majority stress the universality of their approach, one might have expected them to provide some clues as to how they wish the job to be accomplished. The majority stress their concern that we must pay attention to the “melody” of the statute, in quoting Judge Learned Hand (majority opinion in n. 5 supra). Regrettably, the majority appear to have listened to the melody, not of the statute, but of a siren song, and they have done so without taking the precautions that Odysseus took. The wreckage created by this decision is apt to foul up the already-complicated lump-sum distribution area for a long time to come, putting rank-and-file employees’ unvested benefits beyond the protection of the Internal Revenue Code. As in Odysseus’ case, the master of the ship may gain the pleasure of hearing the sirens’ song; however, many a deck hand will, I fear, find his or her retirement voyage wrecked on the rocks to which his or her employees’ plan has been drawn by the majority herein. Tannenwald and Simpson, JJ., agree with this dissenting opinion.  These provisions were first enacted in see. 162(a) of the Revenue Act of 1942 (Pub. L. 77-753, 56 Stat. 862), which amended sec. 165 of the Internal Revenue Code of 1939.   Sec. 515 of Pub. L. 91-172, 83 Stat. 643.    Sec. 2005 of Pub. L. 93-406, 88 Stat. 987.   See United States v. Rutherford, 442 U.S. 544 (1979), where the Supreme Court, in a different context, noted that “Under our constitutional framework, federal courts do not sit as councils of revision, empowered to rewrite legislation in accord with their own conceptions of prudent public policy. See Anderson v. Wilson, 289 U.S. 20, 27 (1933). Only when a literal construction of a statute yields results so manifestly unreasonable that they could not fairly be attributed to congressional design will an exception to statutory language be judicially implied. See TVA v. Hill, 437 U.S. [153], at 187-188 [1978].”   SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS, (a) Requirements for Qualification.— * * * [[Image here]] (7) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees’ accounts are nonforfeitable. * * * This provision was repealed by sec. 1016(a)(2)(C) of Pub. L. 93-406, 88 Stat. 929, but substantially the same language was placed by sec. 1012(a) of that act (88 Stat. 901, 912) into sec. 411(d)(3) of the Code.   SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS. (a) Requirements for Qualification. — A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section—   By forfeitures allocated to fully vested decision makers, on the Tontine principle.   By forfeitures in pension plans or by use of plan assets for the benefit of the employer rather than the benefit of the participants.   In the Tax Reform Act of 1969, several excise taxes, some imposed on the person responsible for the violation, replaced the loss-of-exemption provisions of former secs. 503 and 504 in the case of private foundations. See H. Rept. 91-413 (Part 1) pp. 20-40,1969-3 C.B. 200,214r-226; S. Rept. 91-552, pp. 23-56,1969-3 C.B. 423,442-160; H. Rept. 91-782 (Conf.) pp. 278-288,1969-3 C.B. 644-651. In the Tax Reform Act of 1976, similar steps were taken with respect to the "excess lobbying" provisions that had been in the statute since 1934. See H. Rept. 94-1210, (to accompany H.R. 13500), pp. 7-8,1976-3 C.B. (Vol. 3) 31,37-38; S. Rept. 94-938 (Part 2) pp. 79-80,1976-3 C.B. (Vol. 3) 643,721-722; S. Rept. 94-1236 (Conf.) pp. 532-533,1976-3 C.B. (Vol. 3) 807,936-937.   In particular, the Congress established separate taxes as to excess contributions to “H.R. 10 plans” (sec. 4972, replacing loss-of-exemption provisions of former sec. 401(d)(8)), and self-dealing (sec. 4975, replacing the loss-of-exemption provisions of former sec. 503). Also, the Congress established separate taxes as to underfunding (sec. 4971), replacing provisions in Treasury regulations (sec. 1.401-6(c)(2), Income Tax Regs.) that treated underfunding as a discontinuance of the plan.   See sec. 241(a) of the Senate amendment to H.R. 2, which became the Employee Retirement Income Security Act of 1974. That section of the Senate amendment would have added a new sec. 4973 to the Code entitled “Taxes on Failure To Meet Minimum Vesting Standards.”