# Frank F. And Judith J. Foil v. Commissioner of Internal Revenue

> Court of Appeals for the Fifth Circuit · December 26, 1990 · 920 F.2d 1196

URL: https://www.frixlaw.com/law-library/cases/9481123

## Case

- **Full name:** Frank F. and Judith J. FOIL, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent
- **Court:** Court of Appeals for the Fifth Circuit
- **Decided:** December 26, 1990
- **Citations:** 920 F.2d 1196; 13 Employee Benefits Cas. (BNA) 1495; 67 A.F.T.R.2d (RIA) 407; 1990 U.S. App. LEXIS 22318; 1990 WL 212132
- **Precedential status:** Published
- **Opinion:** Concurring in part by Brown
- **Judges:** Brown, Jolly, Davis
- **Cited by:** 77 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9481123

## How later opinions describe it (automated extraction)

- noting that revenue rulings are entitled to "respectful consideration," but will be disregarded if in conflict with the statute or its legislative history, or if otherwise unreasonable
- noting that revenue rulings are entitled to "respectful consideradon,” but will be disregarded if in conflict with the statute or its legislative history, or if otherwise unreasonable

## Opinion text

JOHN R. BROWN, Circuit Judge,
concurring and dissenting in part.
I concur in all of the Court’s opinion except the part “The Pick-up Provision.” As our differences compel affirmances rather than a reversal, I respectfully dissent:
Section 414(h)(2) lacks any specific explanation of what a “pick-up” plan is or how a State may go about establishing a pick-up plan, but it is clear that some action is necessary in order to establish such a plan. The legislative history clarifies these omissions:
DESIGNATED CONTRIBUTIONS— This provision provides that amounts that are contributed to a qualified plan are not to be treated as an employer contribution if they are designated as employee contributions. This provision gives effect to the source of the contributions ... if the appropriate committees of the Congress were to report legislation regarding employee contributions under the Federal Civil Service plan so that the present employee’s contributions would become employer contributions under the Federal Civil Service plan (and that legislation were to be enacted), then those contributions would constitute employer contributions to the plan, which would be excludable from the employee’s income when made. The same rule would apply to State and Local governmental plans which now designate contributions as employee contributions, if the appropriate governmental bodies change the provisions of their plans.
However, some State and local government plans designate certain amounts as being employee contributions even though statutes authorize or require the relevant governmental units or agencies to “pick-up ” some or all of what would otherwise be the employees’ contribution. In other words, the governmental unit pays all or part of the employees’ contribution but does not withhold this amount from the employees salary. In this situation, the portion of the contribution which is “picked-up’’ by the government is, in substance, an employer contribution for purposes of Federal tax law, notwithstanding the fact that for certain purposes of State law, the contribution may be designated as an employee contribution.
1
A pick-up plan, by the terms of the above discussion, requires that the governmental unit or agency pay all or part of the employees’ contribution but does not withhold this amount from the employees’ salary. Under the IRS interpretation, § 414(h)(2) requires the employer to specify that the contributions, although designated as employee contributions, are being paid by the employer in lieu of contributions by the employee. The IRS also requires that the employee must not be given an option of receiving the contributed amounts directly instead of having them paid by the employer to the pension plan. The IRS does not require that the contribution be paid directly to the employee, i.e. not withheld from the employee salary. 2
*1211 It is clear from the above explanation that the State must have a “pick-up” plan in effect before the participants can take advantage of § 414(h)(2). It makes no difference how it is accomplished, but merely that the appropriate framework exist.
Before 1984, a single check was issued to LASER which contained all employer and employee-participant 'contributions made under the La. Judicial Plan, and the contribution was mandatory. Foil did not have the right thereafter to receive the contributions directly, thus satisfying the IRS’s second criteria for a pick-up plan. After January 1, 1984, Foil’s employer reported to the Federal government that it was making the contributions previously designated as being made by Foil, and reported his salary thereby reduced. When the pick-up provision was adopted by LASER, the participants W-2 forms showed a reduction in salary of the participating judges, although in reality, there was no effect on the statutory salary or the basic methodology of disbursing the contributions into the LASER trust.
Foil maintains that since there was no change in the manner in which the deductions or transferred contributions were made, the Louisiana plan satisfied the prerequisites of a “pick-up” plan within the meaning of § 414(h)(2) prior to Louisiana’s formal enactment of § 42:697.12 and LASER’S adoption of its pick-up resolution. I am persuaded by this argument.
It is clear in reviewing the legislative history of section 414(h)(2) that the Congressional drafters sought to create and legitimate a fiction into a fact by allowing certain governmental employees participating in a pick-up plan to benefit for federal income tax purposes. Louisiana had established the framework of a “pick-up” plan prior to formally designating the amounts as “picked-up”, as evidenced by the direct payment into the fund by Foil’s employer and the lack of any substantive procedural changes required by the IRS in order to effectuate the existence of a pick-up plan. There is nothing in the legislative history or the terms of the statute to indicate that a state statute or system which satisfies the Federal framework for a pick-up plan must also make a formal specification of that fact.
I am not persuaded by the reasoning of the IRS that the State must intervene in order for Congress to effectively grant its citizens a federal tax advantage. I further disagree with the holding in Howell v. U.S., 775 F.2d 887 (7th Cir.1985) that nominalism should control over substance. The court in Howell , addressing an identical argument, held that the contributions made prior to the employer’s formal specification remained employee contributions for Federal tax purposes, stating:
The employee is stuck with the employer’s designation, no matter what it is. Until 1981, Illinois by statute called the contributions to the Judges’ retirement System employees’ contributions.... This exalts form over substance, no doubt. In tax, however, form and substance often coincide. The election between employers’ and employees’ contributions is nothing but form, and the new designation option in § 414(h)(2) simply continues the practice. A court must apply an empty distinction with the same fidelity as it applies any other.
Howell, 775 F.2d at 890 .
I reject as unsound the proposition that the court must apply an empty distinction in this context with the same fidelity as it applies any other. Section 414(h) and its legislative history neither compels nor justifies the result sought by the IRS in this case. The drafters of § 414(h)(2) recognized that various State governments already designate such *1212 contributions as employee contributions and sought to protect the State’s designation for State income tax purposes.
As H.Rept. 93-807 clearly indicates, Congress was aware that some State and local government plans designate certain amounts as being employee contributions “even though statutes authorize or require the ... governmental units ... to ‘pick up’ some or all of what would otherwise be the employees contribution” (emphasis added). This and subsequent statements within § 414(h)’s legislative history reflect Congressional concern for pick-up plans; specifically, plans in which “the governmental unit pays all or part of the employees contribution but does not withhold this amount from the employees salary” (emphasis added). Further, H.Rept. 93-807 explicitly states that the “picked-up” portion is, in substance, an employer contribution for purposes of Federal tax law, notwithstanding the fact that ... for State law, the contribution may be designated as an employee contribution.” This terminology indicates that Congress sought to protect the State’s designation, while at the same time, piercing through this designation in order to grant these individuals a federal tax advantage. The reasoning behind the Seventh Circuit’s “empty distinction” analysis requiring an employer designation has significance in many contexts of federal and state tax law, but not in the context of § 414(h)(2).
The statute and legislative history are silent concerning any requirement for a formal announcement by the State, rather focusing on the substance of the plan, not employer designations. The statute and legislative history omits any requirement that the State engage in a formal process of official designation for the purposes of § 414(h)(2) and federal income tax law by statutorily or otherwise announcing that they are actually paying the contribution.
I would not impose on the clear language of § 414(h)(2), a requirement mandating an affirmative legislative act by the States or governmental units without a clear indication from Congress that such action was either an intended prerequisite of a pick-up plan or that it would serve any useful purpose. I also would not read into § 414(h)(2) prior IRS regulatory precedent regarding private pension plans since the legislative history and statutory language clearly establishes a benefit specifically directed toward State and local government employees and not private employees.
I therefore respectfully DISSENT.
. House Ways and Means Committee Report, H.Rept. 93-807 (1974), U.S. Code Cong. & Admin. News 1974, pp. 4639, 1974-3 C.B. (Supp. 236, 380).
. Rev. Rui. 81-35, 1981-1 Cum. Bull. 255, Rev. Rui. 81-36, 1981-1 Cum. Bull. 256. According to the conference report, the contribution is paid by the government but is not withheld from the individual’s salary. Although this is another method of describing an "employer contribution", the IRS has established additional criteria for implementing a pick-up plan *1211 which do not require that the contributions be paid to the employee, i.e. not withheld from the employees’ salary. Since the distinction between withholding and nonwithholding does not effect the IRS’s recognition of a “pick-up” plan, in deference to the IRS, there is no reason that it should now.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9481123. Public record. Not legal advice.