The opinion
RSW ENTERPRISES, INC., PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT
KEY LIME INVESTMENTS, INC., PETITIONER v.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket Nos. 14820–11R, 14821–11R. Filed November 26, 2014.
Ps, domestic corporations, each established a retirement
plan and received a favorable determination letter from the
IRS regarding the plan’s qualified status under I.R.C. sec.
401(a). The IRS later revoked the plans’ qualified status on
the basis that each plan failed to satisfy the coverage require-
ments of I.R.C. secs. 401(a)(3) and 410(b) and also failed to
satisfy the minimum participation requirements of I.R.C. sec.
401(a)(26). Ps petitioned requesting declaratory judgments
that the plans’ qualified status should not have been revoked.
R seeks summary judgment in his favor. Held: R’s motion for
summary judgment will be denied because genuine disputes of
401
402 143 UNITED STATES TAX COURT REPORTS (401)
material fact remain. Held, further, the Court is not limited
to considering the administrative record alone in a proceeding
concerning a revocation where the parties disagree as to
whether the administrative record contains all the relevant
facts and as to whether those facts are in dispute.
June Waage (an officer), for petitioners.
Shawn P. Nowlan, for respondent.
OPINION
BUCH, Judge: Petitioners are before the Court seeking
declaratory judgments as to the revocation of their retire-
ment plans’ qualified status under section 401. 1 After ini-
tially issuing favorable determinations, the IRS issued subse-
quent revocation letters stating that the plans did not qualify
under section 401(a) because the plans did not meet the cov-
erage requirements of sections 401(a)(3) and 410(b) and also
failed to satisfy the minimum participation requirements of
section 401(a)(26). Respondent filed a motion for summary
judgment and a supporting memorandum. Petitioners oppose
the motion and filed a response and a supporting memo-
randum. After viewing the facts in the light most favorable
to petitioners as the nonmoving parties, we will deny
respondent’s motion because genuine disputes of material
fact still remain.
Background
The following facts are not in dispute and are stated solely
for the purpose of deciding respondent’s motion for summary
judgment. These are not findings of fact for this case. See
Estate of Roski v. Commissioner, 128 T.C. 113, 115 (2007);
see also Estate of Kahn v. Commissioner, 125 T.C. 227, 228
(2005) (citing Fed. R. Civ. P. 52(a) and Lakewood Assocs. v.
Commissioner, T.C. Memo. 1995–552).
Scott and June Waage were husband and wife at all rel-
evant times, and either one or both of them were involved in
all of the relevant entities. Mr. Waage was the sole share-
holder, CEO/president, chief financial officer, and secretary
of the Waage Law Firm from its incorporation until its dis-
1 Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
(401) RSW ENTERS., INC. v. COMMISSIONER 403
solution after the years in issue. The Waage Law Firm
employed tax attorneys, certified public accountants, actu-
aries, paralegals, and accountants. The Waage Law Firm
provided a section 401(k) plan for its employees. From 2001
through 2007 the section 401(k) plan offered coverage to
between 10 and 31 eligible employees.
RSW Enterprises, Inc., is a California corporation orga-
nized in June 1999. Ms. Waage is the president, secretary,
and chief financial officer, and Mr. Waage is the vice presi-
dent. RSW provided real estate and marketing services to the
Waage Law Firm. All of RSW’s stock is owned by the RSW
Irrevocable Trust, U.T.D. Ms. Waage, as the settlor of the
RSW Irrevocable Trust, transferred the stock into the trust,
the beneficiaries of which are the siblings of Ms. Waage. Ms.
Waage’s sister is the trustee.
RSW adopted the RSW Enterprises, Inc. Defined Benefit
Pension Plan (RSW plan). The IRS issued a favorable deter-
mination letter dated August 27, 2002, regarding the RSW
plan. During each year in issue RSW contributed money to
the RSW plan and deducted the contributed amount on its
return. During those years Mr. and Ms. Waage were the only
plan participants.
Key Lime Investments, Inc., is a Nevada corporation orga-
nized in December 2001. Ms. Waage is the president, sec-
retary, and chief financial officer, and Mr. Waage is the vice
president. Key Lime licensed intellectual property to the
Waage Law Firm. All of Key Lime’s stock is owned by the
Key Lime Irrevocable Trust, U.T.D. Ms. Waage, as the settlor
of the Key Lime Irrevocable Trust, transferred the stock into
the trust, the beneficiaries of which are the siblings of Ms.
Waage. Ms. Waage’s sister is the trustee.
Key Lime adopted the Key Lime, Inc. 412(i) Defined Ben-
efit Pension Plan (Key Lime plan). The IRS issued a favor-
able determination letter dated August 27, 2004, regarding
the Key Lime plan. During each year in issue Key Lime
contributed money to the Key Lime plan and deducted the
contributed amount on its return. During those years Mr.
and Mrs. Waage were the only plan participants.
The IRS issued revocation letters regarding both the RSW
plan and the Key Lime plan. On April 5, 2011, the IRS
mailed RSW a final revocation letter notifying it that the
RSW plan did not meet the qualification requirements of sec-
404 143 UNITED STATES TAX COURT REPORTS (401)
tion 401(a) for the plan year ending June 30, 2002, and all
subsequent plan years. The IRS issued a similar letter on the
same day to Key Lime notifying it that the Key Lime plan
did not meet the qualification requirements of section 401(a)
for the plan year ending November 30, 2002, and all subse-
quent plan years. In essence, the IRS asserts that the
Waages are the true owners of both RSW and Key Lime and
that because Mr. Waage owns the Waage Law Firm, all three
entities are all part of the same controlled group. The IRS
also asserts that RSW, Key Lime, and the Waage Law Firm
are part of the same affiliated service group because the
Waages own RSW and Key Lime and a significant portion of
RSW’s and Key Lime’s business is the performance of serv-
ices for the Waage Law Firm. Accordingly, because the
Waages were the only participants in the RSW plan and the
Key Lime plan and the plans were not offered to the
employees of the Waage Law Firm, the plans were no longer
qualified under section 401(a). Both RSW and Key Lime,
while maintaining their principal places of business in Cali-
fornia, petitioned this Court. These cases were later consoli-
dated.
Discussion
I. Summary Judgment
The purpose of summary judgment is to avoid unnecessary
and expensive trials. Fla. Peach Corp. v. Commissioner, 90
T.C. 678, 681 (1988). However, summary judgment is not a
substitute for trial, and it should not be invoked in pro-
ceedings where there are disputed facts. Shiosaki v. Commis-
sioner, 61 T.C. 861, 862 (1974). Summary judgment may be
granted ‘‘if the pleadings, answers to interrogatories, deposi-
tions, admissions, and any other acceptable materials,
together with the affidavits or declarations, if any, show that
there is no genuine dispute as to any material fact and that
a decision may be rendered as a matter of law.’’ Rule 121(b).
The party moving for summary judgment bears the burden
of demonstrating that a genuine dispute does not exist as to
any material fact. Sundstrand Corp. v. Commissioner, 98
T.C. 518, 520 (1992), aff ’d, 17 F.3d 965 (7th Cir. 1994).
Because the moving party bears this burden, any factual
inferences will be treated in a manner that is most favorable
(401) RSW ENTERS., INC. v. COMMISSIONER 405
to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C.
812, 821 (1985). While the burden falls on the moving party,
the nonmoving party ‘‘may not rest upon the mere allega-
tions or denials of such party’s pleading, but such party’s
response * * * must set forth specific facts showing that
there is a genuine dispute for trial.’’ Rule 121(d). The ques-
tion of whether there is a dispute for trial in this declaratory
judgment proceeding concerning a plan revocation is further
complicated by another issue: whether we can go beyond the
administrative record.
II. Tax Court Jurisdiction
Section 401(a) provides the requirements that must be met
for a trust forming part of a stock bonus, pension, or profit-
sharing plan to be eligible for favorable tax treatment. This
Court has jurisdiction to issue a declaratory judgment with
respect to a determination by the Secretary regarding the
initial or continuing qualification of a retirement plan under
section 401(a). Sec. 7476(a). A determination relating to a
continuing qualification includes a revocation. Id.
Both parties point us to Rule 217. Rule 217(b)(2) provides
that resolution by summary judgment may be appropriate in
actions for declaratory judgment. And respondent argues
that summary judgment is appropriate because our review is
limited to the administrative record. Respondent cites
Stepnowski v. Commissioner, 124 T.C. 198 (2005), aff ’d, 456
F.3d 320 (3d Cir. 2006), as support for the proposition that
we are limited to the administrative record; however,
respondent’s position is contradicted by our Rules, which pro-
vide that disposition of an action for declaratory judgment
involving a revocation ‘‘may be made on the basis of the
administrative record alone only where the parties agree that
such record contains all the relevant facts and that such
facts are not in dispute.’’ Rule 217(a) (emphasis added).
Because Stepnowski did not involve a revocation, it is not
controlling here.
In Stepnowski, a corporation requested a determination
letter after amending its plan to comply with a change in the
law. The corporation received a favorable determination, but
a plan participant petitioned this Court in response to the
favorable determination because that participant believed
406 143 UNITED STATES TAX COURT REPORTS (401)
that the amendment was an impermissible cutback.
Although the parties stipulated to the administrative record,
the plan participant sought to conduct additional discovery.
In discussing the Court’s rationale in denying the request,
the Court stated:
The legislative history of section 7476 makes clear that Congress did not
expect the Court to conduct a trial de novo in declaratory judgment
actions arising under that section, no matter whether that action arose
with respect to the initial qualification or the continuing qualification of
a retirement plan. See Tamko Asphalt Prods., Inc. v. Commissioner, 658
F.2d 735, 738–739 (10th Cir. 1981), affg. 71 T.C. 824 (1979); H. Rept.
93–807, at 108 (1974), 1974–3 C.B. (Supp.) 236, 343; S. Rept. 93–383,
at 114 (1973), 1974–3 C.B. (Supp.) 80, 193; see also Wenzel v. Commis-
sioner, * * * [707 F.2d 694, 696 (2d Cir. 1983), aff ’g T.C. Memo. 1982–
595]. Therefore, discovery or introduction of extrinsic evidence in such
cases is inconsistent with the legislative intent that such cases be
resolved without a trial based solely on the materials contained in the
administrative record. * * * [Stepnowski v. Commissioner, 124 T.C. at
206.]
Consistent with Stepnowski, absent good cause (for
example, when the administrative record is incomplete) we
limit ourselves to the administrative record in cases
involving the initial qualification of a retirement plan or the
initial qualification or classification of an exempt organiza-
tion, private foundation, or private operating foundation.
Rule 217(a). While the presumption in those cases is that we
are limited to the administrative record, the presumption
contemplated by our Rule is the opposite in the case of a rev-
ocation. In cases involving a revocation, we are limited to the
administrative record ‘‘only where the parties agree that
such record contains all the relevant facts and that such
facts are not in dispute.’’ Id. When promulgating this Rule,
we went so far as to highlight the distinction in our notes to
the Rule, stating:
The distinction in treatment under this Rule for cases involving a rev-
ocation results from the difference in processing of such cases by the
Internal Revenue Service, which usually bases its determination of rev-
ocation on its own investigation rather than by accepting the facts
asserted by the applicant and which go into the administrative record
in other cases. * * * [Rule 217(a) note, 68 T.C. 1048.]
We made this distinction because ‘‘[i]n those cases, there may
be unresolved factual disputes’’. Rule 213(b) note, 68 T.C.
(401) RSW ENTERS., INC. v. COMMISSIONER 407
1045. ‘‘A trial, therefore, may be necessary to resolve these
factual disputes.’’ Rule 213(a) note, 68 T.C. 1043.
In short, a revocation case typically involves an audit and
likely involves fact disputes, as is the case here. And because
this case involves a revocation, we presumptively can go
beyond the administrative record. Cf. Animal Prot. Inst., Inc.
v. United States, 1978 U.S. Ct. Cl. LEXIS 804, 1978 WL 4201
(Ct. Cl. 1978); Partners in Charity, Inc. v. Commissioner, 141
T.C. 151, 161–162 (2013).
Neither Stepnowski nor the cases it cites fall within this
latter rule for the simple reason that they do not involve plan
revocations. As discussed above, in Stepnowski, the plan was
held by the IRS to continue to qualify; it did not involve a
revocation. Likewise, in Wenzel v. Commissioner, 707 F.2d at
695, the plan participants challenged the IRS’ favorable
determination as to the plan’s continuing qualification after
a merger; it did not involve a revocation. Tamko Asphalt
Prods., Inc. v. Commissioner, 658 F.2d at 736–739, involved
an initial determination that the plan at issue did not
qualify. In short, neither Stepnowski nor the cases it relied
upon addressed the question of a plan revocation.
The instant cases present a revocation, the situation in
which Rule 217(a) contemplates going beyond the adminis-
trative record. RSW and Key Lime argue that the Waage
Law Firm, RSW, and Key Lime are not one controlled group
because the Waages did not own the stock of RSW and Key
Lime because the trusts owned the stock. Respondent
counters that the trusts are shams and the Waages are the
true owners of RSW and Key Lime. RSW and Key Lime fur-
ther argue that they are not an affiliated service group with
the Waage Law Firm because they did not perform the nec-
essary activities to be considered part of such a group and
because the record does not support such a finding. Again,
respondent disagrees.
Although RSW and Key Lime do not dispute the genuine-
ness of the items in the administrative record, they maintain
that the administrative record contains facts that are con-
flicting and in dispute. Further, respondent’s own motion
states that respondent lacks evidence regarding the actions
of the trustee and the stock transfers. The filings from RSW
and Key Lime indicate that such evidence is available.
408 143 UNITED STATES TAX COURT REPORTS (401)
Nothing in our Rules precludes RSW and Key Lime from pro-
ducing this evidence or using it at trial.
Accordingly, when viewing factual inferences in the light
most favorable to RSW and Key Lime as the nonmoving par-
ties, we find that genuine disputes of material fact exist. The
parties argue about the meaning of Rule 217. We hold that
under that Rule, we are not limited to the administrative
record in this proceeding concerning plan revocations because
the parties do not agree that the administrative record con-
tains all of the relevant facts and that those facts are not in
dispute.
To reflect the foregoing,
An appropriate order will be issued
denying respondent’s motion.
f