The opinion
T.C. Memo. 2003-32
UNITED STATES TAX COURT
HOWARD E. CLENDENEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
HOWARD E. CLENDENEN, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 18153-96, 18154-96. Filed February 12, 2003.
Paul F. Christoffers, for petitioners.
John Q. Walsh, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: These cases are before the Court on
respondent’s motions for entry of decision under Rule 50.1
1
Unless otherwise indicated, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect at all
relevant times.
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Background
Petitioner Howard E. Clendenen, Inc. (the corporation), is a
corporation with a mailing address in Des Moines, Iowa. On May
22, 1996, respondent sent the corporation a notice of deficiency
determining the following deficiencies in the corporation’s
Federal income taxes:
Tax Year Ended Deficiency
6/30/87 $10,273
6/30/88 32,607
6/30/89 13,775
In this notice of deficiency, respondent determined that the
corporation’s employee stock ownership plan (the plan) was a
nonqualified plan because it did not meet the requirements of
section 401(a). On August 21, 1996, the corporation filed a
petition with the Court alleging error in respondent’s
determination that the plan is nonqualified.
On May 22, 1996, respondent sent petitioner Howard E.
Clendenen (Mr. Clendenen) a notice of deficiency determining
deficiencies in his Federal income taxes, an addition to tax, and
an accuracy-related penalty as follows:
Addition to Tax Penalty
Tax Year Deficiency Sec. 6653(a)(1) Sec. 6662(a)
1987 $13,641 — —
1988 34,071 $1,704 —
1989 1,187 — $237
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In this notice of deficiency, respondent based the determinations
on the plan’s being nonqualified. On August 21, 1996, Mr.
Clendenen filed a petition with the Court in which Mr. Clendenen
referred to the “erroneous allegation that said trust is not
qualified.”
On September 29, 1997, the parties in both cases each filed
a joint motion for continuance. The parties sought a continuance
in order to present the plan qualification issue to the Court in
a declaratory judgment action, Howard E. Clendenen, Inc. v.
Commissioner, docket No. 18155-96R, because the qualified status
of the plan was the significant issue in these cases. On October
2, 1997, the Court granted these motions.
On February 13, 1998, the corporation and Mr. Clendenen each
filed a Stipulation of Settled Issues. The corporation’s
stipulation of settled issues provided in part:
8. For the taxable year ended June 30, 1987, the
parties agree that the issue designated “ESOP Contribution
to Non-Qualified Plan” in the notice of deficiency is
consequential to the issue of plan qualification in related
docket 18155-96 “R”.
9. For the taxable year ended June 30, 1988, the
parties agree that the issue designated “Deductible
Dividends to ESOP” in the notice of deficiency is
consequential to the issue of plan qualification in related
docket 18155-96 “R”.
10. For the taxable year ended June 30, 1988, the
parties agree that the issue designated “Non-Qualified
Contribution - Allowed in Yr. included in 1040" in the
notice of deficiency is consequential to the issue of plan
qualification in related docket 18155-96 “R”.
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11. For the taxable year ended June 30, 1989, the
parties agree that the issues designated “ESOP Contribution
to Non-Qualified Plan” and “Deductible Dividends to ESOP” in
the notice of deficiency are consequential to the issue of
plan qualification in related docket 18155-96 “R”.
Respondent and the corporation signed this stipulation of settled
issues.
Mr. Clendenen’s stipulation of settled issues provided in
part:
9. For the taxable year 1987, the parties agree that
the issue designated “Employer Contribution” and “Deferred
Compensation” in the notice of deficiency are consequential
to the issue of plan qualification in related docket 18155-
96 “R”.
10. For the taxable year 1988, the parties agree that
this stipulation resolves all issues in dispute.
11. For the taxable year 1989, the parties agree that
the remaining issue, designated “Employer Contribution” in
the notice of deficiency is consequential to the issue of
plan qualification in related docket 18155-96 “R”.
Respondent and Mr. Clendenen signed this stipulation of settled
issues.
On February 13, 1998, the corporation and Mr. Clendenen also
each filed a Stipulation To Be Bound. The corporation’s
stipulation to be bound stated that the only remaining issues in
dispute relate to the plan qualification as asserted in
paragraphs 4(a) and (b) in the petition. Further, the
corporation’s stipulation to be bound provided in part:
2. The adjustments in respondent’s notice of
deficiency relating to the issues or items asserted in
paragraphs 4(a) and (b) of the petition, as specified in the
preamble, shall be determined by the resolution of the
qualified status of the Howard E. Clendenen, Inc., Employee
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Stock Ownership Plan in Docket No. 18155-96 “R” (whether
litigated or settled), with respect to the following
taxpayer:
Name of Case: Howard E. Clendenen, Inc. v. Commissioner
Tax Court Docket No.: 18155-96 “R”
(hereinafter the CONTROLLING CASE).
3. The petitioner in this case is the same as the
taxpayer in the CONTROLLING CASE.
Mr. Clendenen’s stipulation to be bound provided that the
only remaining issues in dispute involve the issues asserted in
paragraph 4(a) of the petition that relate to the plan’s
qualification. Further, Mr. Clendenen’s stipulation to be bound
provided in part:
2. The adjustments in respondent’s notice of
deficiency relating to the issues or items asserted in
paragraph 4(a) of the petition, as specified in the
preamble, shall be determined by the resolution of the
qualified status of the Howard E. Clendenen, Inc., Employee
Stock Ownership Plan in Docket No. 18155-96 “R” (whether
litigated or settled), with respect to the following
taxpayer:
Name of Case: Howard E. Clendenen, Inc. v. Commissioner
Tax Court Docket No.: 18155-96 “R”
(hereinafter the CONTROLLING CASE).
3. All issues involving the above adjustments shall be
resolved as if the petitioner in this case were the same as
the taxpayer in the CONTROLLING CASE.
Both stipulations to be bound also provided:
4. A decision shall be submitted in this case when the
decision in the CONTROLLING CASE (whether litigated or
settled) becomes final under I.R.C. § 7481.
5. Upon entry of the decision in the CONTROLLING CASE,
petitioner consents to the assessment and collection of the
deficiencies attributable to the adjustments formulated by
reference to the Tax Court’s opinion, notwithstanding the
restrictions under I.R.C. § 6213(a).
The parties agree to this STIPULATION TO BE BOUND.
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Respondent and the corporation signed the corporation’s
stipulation to be bound, and respondent and Mr. Clendenen signed
Mr. Clendenen’s stipulation to be bound.
On September 3, 1998, the Court published its opinion,
Howard E. Clendenen, Inc. v. Commissioner, T.C. Memo. 1998-318
(docket No. 18155-96R) (the declaratory judgment), affd. 207 F.3d
1071 (8th Cir. 2000). We held that the trust was not a qualified
trust under section 401(a) beginning with the plan year 1986
because the annual additions exceeded the limitations of section
415(c) when we found that the elective deferrals were employer
contributions and that those amounts and the amounts paid by the
corporation to Mr. Clendenen as an independent contractor were
not includable in compensation under section 415. We stated:
the annual additions allocated to Mr. Clendenen during each
of the plan years 1986, 1987, 1989, 1990, and 1991, exceed
the section 415 limits. Petitioner has not argued or
established that any corrective measures were taken to
reduce these additions. See sec. 1.415-6(b)(6), Income Tax
Regs.
The Court of Appeals for the Eighth Circuit affirmed our opinion.
Howard E. Clendenen, Inc. v. Commissioner, 207 F.3d 1071 (8th
Cir. 2000), affg. T.C. Memo. 1998-318.
On March 5, 2002, respondent filed a motion for entry of
decision in each of these cases, moving that the Court enter a
decision pursuant to the stipulations filed by the parties.2
2
Respondent did not file a motion for entry of decision in
(continued...)
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After concessions,3 the issue for decision is how the
stipulations of settled issues and the stipulations to be bound
affected the corporation and Mr. Clendenen (collectively,
petitioners).
Discussion
The parties dispute the effect of the stipulations.
Respondent argues that the stipulations of settled issues and the
2
(...continued)
a related case, Howard E. Clendenen, Inc. Employee Stock
Ownership Trust v. Commissioner, docket No. 18156-96. Respondent
intends to file such motion for entry of decision after the
resolution of the instant motions for entry of decision.
3
For the corporation, the parties agreed: (1) The
corporation’s contribution limit shall be increased by $829 for
the taxable year ended June 30, 1987; (2) the corporation’s
deductible interest expense shall be increased by $3,734 for the
taxable year ended June 30, 1989; (3) the corporation is entitled
to an additional deduction for employment taxes of $3,605 for the
taxable year ended June 30, 1989; and (4) certain issues are
computational in nature and determinable upon final resolution of
all issues in dispute. Further, for the corporation, respondent
conceded: (1) The increase to taxable income of $7,582 for
“Imputed Interest Income” for the taxable year ended June 30,
1988; and (2) the increase to taxable income of $7,498 for
“Imputed Interest Income” for the taxable year ended June 30,
1989.
Mr. Clendenen conceded: (1) Increases to taxable income of
$11,088 for “Dividend Income - Imputed Interest” and $4,761 for
“Interest Income” for 1988; (2) the adjustment of $2,873 for
“Itemized Deductions” for 1988; and (3) increases to taxable
income of $7,681 for “Dividend Income - Imputed Interest” and
$3,605 for “Dividend Income - FICA Tax” for 1989. Respondent
conceded for Mr. Clendenen: (1) The increase to taxable income
of $92,712 for “Capital Gains and Losses” for 1988; (2) the
addition to tax of $1,704 under sec. 6653(a)(1) for 1988; and (3)
the addition to tax of $237 under sec. 6662(a) for 1989.
Respondent and Mr. Clendenen agreed that this stipulation of
settled issues resolved all issues in dispute for 1988.
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stipulations to be bound are dispositive of all issues concerning
the qualified status of the plan. Respondent contends that the
parties “effectively agreed that the party that prevailed with
respect to the issue of plan qualification in docket No. 18155-
96R will also prevail in this case”. Petitioners do not dispute
that they are bound by the stipulations.4 Instead, petitioners
dispute the calculations that result from the declaratory
judgment, arguing that while the plan was disqualified for the
taxable year ended June 30, 1986, the plan was qualified for all
years ending thereafter.
The stipulations of settled issues and the stipulations to
be bound provide that all of the remaining issues in these cases
shall be resolved on the same basis as those issues are finally
resolved in the declaratory judgment. We concluded in the
declaratory judgment, and the Court of Appeals for the Eighth
Circuit affirmed, that the annual additions allocated to Mr.
Clendenen during each of the plan years 1987 and 1989, the years
in dispute in the instant case, exceeded the section 415 limits;
4
Even if petitioners sought relief from the stipulations,
they would not prevail because they have not shown that
settlement was the result of mutual mistake or that manifest
injustice will result if we enforce the stipulations. See Rule
91(e); Stamm Intl. Corp. v. Commissioner, 90 T.C. 315, 321
(1988); Adams v. Commissioner, 85 T.C. 359, 375 (1985); Korangy
v. Commissioner, T.C. Memo. 1989-2, affd. 893 F.2d 69 (4th Cir.
1990).
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i.e., the plan is not qualified. Sec. 415(a)(1)(B), (c)(1);
Howard E. Clendenen, Inc. v. Commissioner, T.C. Memo. 1998-318.
Further, when a plan is disqualified under section 415, the
disqualification continues until remedial action is taken.
Martin Fireproofing v. Commissioner, 92 T.C. 1173, 1188 (1989).
Corrective action of the sort set forth in the regulations is a
prerequisite to requalification of a plan following a violation
of section 415. Id. at 1184; Van Roekel Farms v. Commissioner,
T.C. Memo. 2000-171. As we stated in the declaratory judgment,
the corporation had not argued or established that any corrective
measures were taken, citing section 1.415-6(b)(6), Income Tax
Regs.5 Howard E. Clendenen, Inc. v. Commissioner, supra.
Petitioners argue that Rev. Rul. 72-368, 1972-2 C.B. 220,
and Rev. Rul. 73-79, 1973-1 C.B. 194, support their contention
that disqualification in a prior year does not prevent the plan
from being qualified in a future year when it meets the
requirements of section 401(a). We disagree. In Martin
Fireproofing, we stated that (1) Rev. Rul. 72-368, supra,
predates section 415, which was enacted in 1974, and (2) Rev.
Rul. 72-368, supra, does not require respondent to qualify a plan
5
Sec. 1.415-6(b)(6), Income Tax Regs., provides for
retroactive relief when an excess allocation results from (1)
forfeitures, (2) a “reasonable error in estimating” compensation,
or (3) “other limited facts and circumstances” to be determined
by respondent. See Martin Fireproofing v. Commissioner, 92 T.C.
1173, 1182 (1989).
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in the absence of corrective action. Martin Fireproofing v.
Commissioner, supra at 1188. The second point is emphasized in
Rev. Rul. 73-79 in which a plan requalified only after amendment
of the plan and a reallocation of contributions made for the
years of violation. Id.
Petitioners also contend that Zabolotny v. Commissioner, 7
F.3d 774 (8th Cir. 1993), affg. and revg. 97 T.C. 385 (1991), is
analogous to their situation and supports their argument. We
disagree. First, Zabolotny involved a different section of the
Code, section 4975.6 Second, section 4975 did not impose a
requirement that a disqualified person must take affirmative
action before a transaction may be “corrected”. Id. at 777. In
the instant case, the applicable regulations and caselaw require
that corrective actions must be taken to requalify a plan that
has violated section 415. Martin Fireproofing v. Commissioner,
supra at 1184; sec. 1.415-6(b)(6), Income Tax Regs.
Petitioners provided calculations to establish that the plan
was qualified as of the taxable year ending June 30, 1987. In
their calculations, petitioners have ignored findings from the
declaratory judgment; i.e., $30,000 treated as an employee
6
Sec. 4975 imposes excise taxes on persons who entered
into “prohibitive transactions” with employee pension and benefit
plans qualified under the Employment Retirement Income Security
Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829. Zabolotny v.
Commissioner, 7 F.3d 774, 776 (8th Cir. 1993), affg. and revg. 97
T.C. 385 (1991).
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contribution and $9,000 treated as an employer contribution for
taxable year ended June 30, 1987. The source of many of
petitioners’ calculations; i.e., figures for taxable years ended
June 30, 1984 and 1985, is unclear, and such figures are not
reflected in the instant records. The declaratory judgment
clearly examined the years at issue. We do not question those
calculations. We therefore shall grant respondent’s motions for
entry of decision.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and, to the extent not herein
discussed, we conclude them to be irrelevant or without merit.
To reflect the foregoing,
Appropriate orders and
decisions will be entered.