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T.C. Memo. 1998-443
UNITED STATES TAX COURT
MICHAEL MORRISSEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13074-97.
Filed December 16, 1998.
P borrowed money from the pension plans of his
wholly owned corporation. On Oct. 19, 1990, when P
owed the plans principal and interest totaling
$1,150,000, he "repaid" this debt by transferring to
one of the plans his 50-percent interest in two parcels
of unencumbered real estate. The market value of one
parcel was $628,000 on Sept. 23, 1991. The market
value of the other parcel was $1.45 million on Nov. 9,
1991.
Held: P's transfer of property to his plan was a
"sale or exchange" under sec. 4975(c)(1)(A), I.R.C.;
hence, it was a prohibited transaction under sec.
4975(a), I.R.C., that subjects P to the initial tax set
forth in sec. 4975(a), I.R.C.
Held, further, The prohibited transaction was
never "corrected" within the meaning of sec. 4975(b),
I.R.C.; hence, P also is liable for the additional tax
set forth in sec. 4975(b), I.R.C.
- 2 Held, further, P is not liable for the additions
to tax determined by R under sec. 6651(a)(1), I.R.C.,
for failure to file excise tax returns for 1990 through
1996; as of the respective due dates for these returns,
a reasonable person could have concluded that the
filing of an excise tax return was not required because
the transfer was not a prohibited transaction, or, if
it was, that it had been corrected.
Andrew I. Panken and Robert A. DeVellis, for petitioner.
Catherine R. Chastanet, for respondent.
MEMORANDUM OPINION
LARO, Judge:
without trial.
The parties submitted this case to the Court
See Rule 122.
Petitioner petitioned the Court to
redetermine respondent's determination of the following
deficiencies in Federal excise tax and additions thereto:
Year
First-tier
(initial) deficiency
Sec. 4975(a)
Second-tier
(additional) deficiency
Sec. 4975(b)
Additions to Tax
Sec. 6651(a)(1)
1990
1991
1992
1993
1994
1995
1996
$9,584
57,500
57,500
57,500
57,500
57,500
57,500
------------$1,150,000
$2,156
12,398
12,398
12,398
12,398
12,398
12,398
We decide the following issues:
1.
Whether petitioner's transfer of property to his pension
plan was a prohibited transaction under section 4975(a).
it was.
We hold
- 3 2.
Whether the prohibited transaction was "corrected"
within the meaning of section 4975(b).
3.
We hold it was not.
Whether petitioner is liable for the additions to tax
determined by respondent under section 6651(a)(1) for failure to
file Federal excise tax returns.
We hold he is not.
Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code.
Rule
references are to the Tax Court Rules of Practice and Procedure.
Dollar amounts are rounded to the nearest dollar.
Background
Most facts are stipulated.
The stipulated facts and
exhibits submitted therewith are incorporated herein by this
reference.
Petitioner resided in Southampton, New York, when he
petitioned the Court.
He is the president and secretary of
Westchester Plastic Surgical Associates, P.C. (Westchester
Associates), his wholly owned corporation.
Westchester Associates adopted a money purchase plan (the
MPP) effective as of January 15, 1972, and it adopted a defined
benefit pension plan (the DBP) effective as of November 1, 1976.
Both plans (collectively, the Plans) received favorable
determination letters from the Internal Revenue Service.
Petitioner has been the only trustee of the trusts (the Trusts)
associated with the Plans, and, as trustee, he has exercised
control over the management and disposition of the Plans' assets.
- 4 The DBP ceased benefit accruals in 1990.
When it did, the
DBP had three participants, including petitioner, all of whom
were 100 percent vested.
Each of these participants, except for
petitioner, was paid his or her benefits at that time.
The DBP
was formally terminated as of September 26, 1990.
The MPP was operational throughout its taxable year that
ended on October 31, 1990.
The MPP had two participants at the
beginning and end of that year.
participants.
Petitioner was one of these
The record does not identify the other
participant.
From November 14, 1979, to February 17, 1989, the Plans made
23 loans to petitioner.
Each of these loans, but one, was
evidenced by a "promissory note" or an "installment note" signed
by petitioner as the obligor.1
As stated on the notes, the dates
of the loans, the obligees, the original loan amounts, and the
interest rates for these loans, some of which were unsecured and
others of which were secured by petitioner's accounts in the
Plans, were as follows:
1
The record does not contain the signature page of one of
the 22 notes. Given the fact that petitioner signed each of the
other 21 notes, we find that he also signed the 22d note.
- 5 -
Date Of loan
Obligee1
11/14/79
05/01/81
10/01/81
01/04/82
06/11/82
08/02/82
01/03/83
unstated
02/08/84
01/08/85
08/27/85
09/17/85
12/03/85
01/03/86
04/15/86
07/30/87
10/08/87
12/09/87
02/01/88
02/12/88
12/09/88
12/09/88
02/17/892
Total
MPPT
MPPT
MPPT
MPPT
MPPT
MPPT
MPPT
MPPT
Pension Plan
MPPT
Pension Plan
MPPT
Pension Trust
Pension
MPPT
MPPT
MPPT
MPPT
MPPT
BP Trust
Pension
MPPT
Original
loan amount
$4,500
10,000
10,000
145,000
7,000
30,000
60,000
6,000
13,000
153,687
50,000
20,000
5,500
14,500
5,000
50,000
25,000
25,000
15,000
20,000
2,000
8,000
2,000
681,187
Interest rate
12%
16
16
16
16
14
11
11
11
11
12
11
10
10.50
9
9.50
10
9.75
unstated
9.75
11.50
11.50
11.50
1
Each note references the obligee as "MPPT", "DBT Trust",
"Pension Plan", "Pension Trust", or "Pension". We believe that
"MPPT" and "DBP Trust" refer to the money purchase plan trust and
the defined benefit plan trust, respectively, and we so find. We
are unable to find which of the Trusts was the obligee where the
note listed the obligee as "Pension Plan", "Pension Trust", or
"Pension".
2
The record does not contain a note for the loan that was
made on Feb. 17, 1989. The parties have stipulated the
information shown on this line.
None of the loan amounts was ever included in petitioner's
gross income as a distribution.
On October 1, 1990, petitioner's obligations to repay the
loans from the Plans totaled 100 percent of the Trusts'
assets.2
2
Eighteen days later, when petitioner owed the Plans
Most of the Trusts' assets consisted of assets held by the
(continued...)
- 6 $1,150,000 (consisting of principal of $681,187 and interest of
$468,813), he transferred to the MPP his 50-percent interest in
two parcels of unencumbered real estate sited in Southampton,
New York.3
Petitioner's former wife owned the remaining
interests.
One parcel had a market value of $628,000 on
September 23, 1991.
The other parcel had a market value of
$1.45 million on November 9, 1991.
The record does not
disclose the market value of either parcel on any other date.
Petitioner has never filed a Form 5330, Return of Excise
Taxes Related to Employee Benefit Plans, with respect to his
transfer of the real estate to the MPP.
Discussion
We decide first whether petitioner's transfer of the real
estate to the MPP was a prohibited transaction under section
4975(a).
Respondent determined it was, and, relying primarily
on Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152
(1993), argues to the same effect in this proceeding.
Petitioner argues that the transfer was not a prohibited
2
(...continued)
money purchase plan trust. The DBP was terminated on Sept. 26,
1990, and its only asset on Oct. 1, 1990, was the right to
receive repayment from petitioner for the amounts it lent him.
3
Petitioner asserts in his brief that the real estate was
transferred to both pension plans. The record does not support
this assertion, and we decline to find it as a fact. See Rule
143(b). The record does not show that petitioner ever
transferred any asset to the DBP in repayment of moneys that he
borrowed from it.
- 7 transaction under section 4975(a).
According to petitioner,
the prohibited transaction rules do not apply to him because he
was the only beneficiary of the Plans at the time of the
transfer.
If he is subject to these rules, petitioner asserts,
the transfer was not a "sale or exchange" under the view of
this Court as stated in Wood v. Commissioner, 95 T.C. 364
(1990), revd. 955 F.2d 908 (4th Cir. 1992), and Keystone
Consol. Indus., Inc. v. Commissioner, T.C. Memo. 1990-628,
affd. 951 F.2d 76 (5th Cir. 1992), revd. 508 U.S. 152 (1993).
Petitioner recognizes that the Supreme Court disagreed with our
view in Commissioner v. Keystone Consol. Indus., Inc., 508 U.S.
152 (1993), but asserts that the Court's decision there applied
only to unencumbered property contributed in satisfaction of a
funding obligation.
Here, petitioner asserts, he transferred
unencumbered property to repay a loan.
Petitioner asserts that
repaying the loan was more beneficial to the Plans than leaving
it outstanding.
We disagree with petitioner's assertion that he is not
subject to the prohibited transaction rules.
Nor do we agree
with his assertion that the transfer was not a prohibited
transaction.
We start our inquiry with the relevant text.
See Calvert Anesthesia Associates-Pricha Phattiyakul, M.D.,
P.A. v. Commissioner, 110 T.C. 285, 289 (1998); Venture
Funding, Ltd. v. Commissioner, 110 T.C. 236 (1998); Trans City
- 8 Life Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996); see
also Garcia v. United States, 469 U.S. 70, 76 n.3 (1984).
text is as follows:
SEC. 4975.
TAX ON PROHIBITED TRANSACTIONS.
(a) Initial Taxes on Disqualified Person.-There is hereby imposed a tax on each prohibited
transaction. The rate of tax shall be equal to 5
percent of the amount involved with respect to the
prohibited transaction for each year (or part
thereof) in the taxable period. The tax imposed by
this subsection shall be paid by any disqualified
person who participates in the prohibited transaction
(other than a fiduciary acting only as such).
(b) Additional Taxes on Disqualified Person.-In any case in which an initial tax is imposed by
subsection (a) on a prohibited transaction and the
transaction is not corrected within the taxable
period, there is hereby imposed a tax equal to 100
percent of the amount involved. The tax imposed by
this subsection shall be paid by any disqualified
person who participated in the prohibited transaction
(other than a fiduciary acting only as such).
(c)
Prohibited Transaction.--
(1) General rule.--For purposes of
this section, the term "prohibited
transaction" means any direct or indirect-(A) sale or exchange * * *
of any property between a plan
and a disqualified person;
*
(e)
*
*
*
*
*
*
Definitions.--
(1)
Plan.--For purposes of this
section, the term "plan" means a trust
described in section 401(a) which forms a
part of a plan, or a plan described in
section 403(a), which trust or plan is
exempt from tax under section 501(a), * * *
This
- 9 (2)
Disqualified person.--For
purposes of this section, the term
"disqualified person" means a person who
is—(A) a fiduciary;
*
*
*
*
*
*
*
(3) Fiduciary.--For purposes of this
section, the term "fiduciary" means any
person who—(A) exercises any
discretionary authority or
discretionary control respecting
management of such plan or
exercises any authority or
control respecting management or
disposition of its assets,
*
*
*
*
*
*
*
(f) Other Definitions and Special Rules.--For
purposes of this section—*
*
*
*
*
*
*
(2) Taxable period.--The term "taxable period"
means, with respect to any prohibited transaction,
the period beginning with the date on which the
prohibited transaction occurs and ending on the
earliest of—(A) the date of mailing a notice of
deficiency with respect to the tax imposed
by subsection (a) under section 6212,
(B) the date on which the tax imposed
by subsection (a) is assessed, or
(C) the date on which correction of
the prohibited transaction is completed.
(3) Sale or exchange; encumbered property.--A
transfer of real or personal property by a
disqualified person to a plan shall be treated as a
sale or exchange if the property is subject to a
- 10 mortgage or similar lien which the plan assumes or if
it is subject to a mortgage or similar lien which a
disqualified person placed on the property within the
10-year period ending on the date of the transfer.
(4) Amount involved.--The term "amount
involved" means, with respect to a prohibited
transaction, the greater of the amount of money and
the fair market value of the other property given or
the amount of money and the fair market value of the
other property received; * * * For purposes of the
preceding sentence, the fair market value—(A) in the case of the tax imposed by
subsection (a), shall be determined as of
the date on which the prohibited
transaction occurs; and
(B) in the case of the tax imposed by
subsection (b), shall be the highest fair
market value during the taxable period.
(5) Correction.--The terms "correction" and
"correct" mean, with respect to a prohibited
transaction, undoing the transaction to the extent
possible, but in any case placing the plan in a
financial position not worse than that in which it
would be if the disqualified person were acting under
the highest fiduciary standards.
Section 4975 was added to the Code in 1974 by the Employee
Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406,
sec. 2003(a), 88 Stat. 829, 971.
See also Commissioner v.
Keystone Consol. Indus., Inc., 508 U.S. at 160 (section
4975(c)(1)(A) contains "broad language").
The Congress enacted
section 4975 to effectuate its intent to tax disqualified
persons who engage in self-dealing rather than innocent
employees who were previously faced with plan disqualification
on account of a prohibited transaction.
S. Rept. 93-383, at
- 11 94-95 (1973), 1974-3 C.B. (Supp.) 80, 173-174; see also
Greenlee v. Commissioner, T.C. Memo. 1996-378.
Disqualification penalized employee/plan participants in that
they were denied favorable tax consequences such as deferral of
taxation.
S. Rept. 93-383, supra at 94, 1974-3 C.B. (Supp.) at
173; see also Hamlin Dev. Co. v. Commissioner, T.C. Memo.
1993-89, for a discussion of the favorable tax consequences
that flow from a pension plan.
The Congress' intent in
enacting pension plan legislation has primarily been to protect
participants and their beneficiaries by ensuring that plan
assets are held for their exclusive benefit.
H. Conf. Rept.
93-1280, at 303 (1974), 1974-3 C.B. 415, 464.
Petitioner does not contest respondent's determination
that petitioner was a disqualified person under section 4975 on
the date of the transfer.
the Plans' trustee.
He was by virtue of his status as
See sec. 4975(e)(2)(A) and (3)(A).
Nor
does petitioner contest respondent's determination that each of
the Trusts was a "plan" under section 4975(e)(1).
Petitioner's
dispute with respondent begins with petitioner's assertion that
he is excepted from the prohibited transaction rules because,
he contends, he was the only beneficiary of the Plans.
We disagree with petitioner that he is excepted from the
prohibited transaction rules.
He was not the MPP's only
beneficiary when he transferred the real estate to it.
Even if
- 12 he had been, in at least one prior case, a Court of Appeals has
held a beneficiary of a one-person pension plan liable under
section 4975.
1992).
See Wood v. Commissioner, 955 F.2d 908 (4th Cir.
Petitioner attempts to distinguish Wood by arguing that
the issue there related to a satisfaction of a funding
obligation, whereas here he transferred the real estate to the
MPP in repayment of a loan.4
We do not believe that this bare
difference in fact leads to a different result.
The repayment
of a loan, like the honoring of a funding obligation, satisfies
a debt owed by the transferor.
We see no meaningful
distinction that may be drawn from the fact that the obligation
in one case stems from a borrowing, whereas the obligation in
the other stems from a contractual promise to set aside a
stated sum of money for the benefit of plan participants.
In both cases, a transfer is made to satisfy an obligation.
For present purposes, the former obligation is
indistinguishable from the latter.
The Congress' goal in enacting section 4975 "was to bar
categorically a transaction that was likely to injure the
pension plan."
4
Commissioner v. Keystone Consol. Indus., Inc.,
Generally, any lending money between a plan and a
disqualified person is a prohibited transaction. Sec.
4975(c)(1)(B). Sec. 4975(d)(1), however, carves out an exception
in the case of certain loans that meet the criteria set forth
therein. Respondent does not assert that petitioner's loans from
the Plans were outside this exception.
- 13 508 U.S. at 160 (citing S. Rept. 93-383, supra at 95-96, 1974-3
C.B. (Supp.) at 174-175).
Before ERISA, a transfer of property
to a pension plan either to satisfy a funding obligation or to
repay a loan presented the potential for abuse.
The transferor
could transfer nonliquid assets to the plan, or he or she could
otherwise "sell" the assets to the plan at a price that was not
indicative of their true worth.
Id.
By adding section 4975 to
the Code, the Congress endeavored to bar any transfer of
property in payment of a transferor's obligation to his or her
plan.
Id.
The type of abusive property transfer that the Congress
was concerned about appears to be present in the instant case,
where petitioner transferred a nonliquid asset to the MPP, and
the transfer was most likely injurious to the MPP.
The benefit
that the MPP would have enjoyed from a cash repayment of the
loan far exceeded any benefit that it received upon receipt of
the property.
The MPP and the DBP are separate entities, and
the fact that petitioner transferred the real estate only to
the MPP means that the MPP now owes him an amount equal to the
real estate value that exceeded his debt to the MPP before the
transfer.
Following the transfer, the MPP had minimal assets,
but for the real estate, and, in order to restore its position
and satisfy its obligation to petitioner, the MPP was required
to convert the real estate into cash.
Such a conversion is
- 14 generally problematic and costly, especially in the instant
setting where petitioner's 50-percent interest would most
likely have had to be partitioned before it could be sold.
To the extent that the excess value remained in the MPP, it
would constitute an overfunding of the MPP, which, under basic
principles of pension law, would have to be given back to the
transferor to avoid plan termination.
See sec. 1.415-9(a)(1),
Income Tax Regs.; see also Buzzetta Constr. Corp. v.
Commissioner, 92 T.C. 641 (1989).
The mere fact that the value
that petitioner transferred to the MPP may have equaled the
amount that he owed both the Plans, a fact that petitioner
asserts but which the record disproves, does not mean that both
debts are satisfied as a result of the transfer.
Indeed, it
appears that petitioner continues to owe the DBP the money
(with interest) that it lent to him because he has never
transferred any value to the DBP to repay these amounts.
The
record suggests that petitioner attempted to satisfy his
$1,150,000 obligation to the Plans by surrendering property of
inadequate value.
The property had been appraised at a total
of $2,078,000 shortly after the transfer, and the record does
not support a finding that petitioner's 50-percent interest in
the property was worth more than $1,039,000 on the date of the
transfer (i.e., 50% x $2,078,000).
Of course, it would be an
unusual case where petitioner's 50-percent undivided interest
- 15 actually equaled 50 percent of the value of the real estate in
fee.
We also disagree with petitioner's assertion that his
transfer to the MPP was not a "sale or exchange".
In
Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. at 159,
the Supreme Court faced an analogous issue with respect to
property that had been transferred to satisfy an employer's
obligation to fund a qualified defined benefit plan.
In
holding that the transfer was a sale or exchange subject to the
rules of section 4975, the Court noted that the meaning of the
term "sale or exchange" was well settled for income tax
purposes to include any transfer of property in satisfaction of
a monetary obligation.
Id. at 158-159.
The Court stated that
the Congress' use of that term in section 4975 generally
encompassed all "sales or exchanges", whether they be "direct
or indirect".
Id. at 159.
The Court, by way of example,
described a situation where a transfer of property to a plan
was outside the reach of that term by virtue of an exception
prescribed in section 4975(f)(3).
The Court's example covered
an employer who transferred unencumbered property to a plan,
without satisfaction of an obligation to it.
Id. at 161 n.2.
As stated by the Court with respect thereto:
"A transfer of
encumbered property, like the transfer of unencumbered property
to satisfy an obligation, has the potential to burden a plan,
- 16 while a transfer of property that is neither encumbered nor
satisfies a debt presents far less potential for causing loss
to the plan."
Id. at 162.
Contrary to petitioner's assertion, the Court's decision
in Keystone governs our decision here.
Petitioner owed the
Plans money which they had lent to him, and he transferred the
real estate to the MPP in payment of his debt to it.
Under the
Court's holding in Keystone, the fact that petitioner's
transfer to the MPP was in repayment of his debt is enough to
categorize the transfer as a "sale or exchange" for purposes of
section 4975(c)(1)(A).
Petitioner's reliance on our decisions
in Wood and Keystone to support a contrary result is misguided.
As the Supreme Court recently stated:
When this Court applies a rule of federal law to the
parties before it, that rule is the controlling
interpretation of federal law and must be given full
retroactive effect in all cases still open on direct
review and as to all events, regardless of whether
such events predate or postdate our announcement of
the rule. [Harper v. Virginia Dept. of Taxation,
509 U.S. 86, 97 (1993).]
On the basis of the Supreme Court's opinion in Commissioner v.
Keystone Consol. Indus., Inc., 508 U.S. 152 (1993), we sustain
respondent's determination that petitioner is liable for excise
taxes under section 4975(a).
As to respondent's determination under section 4975(b),
petitioner argues that this determination is wrong because "the
tremendous appreciation in the subject real estate since the
- 17 date of transfer (October 19, 1990) made the transaction
self-correcting * * *.
See Zabolotny v. Commissioner, 7 F.3d
774 (8th Cir. 1993)", affg. in part and revg. in part 97 T.C.
385 (1991).
Respondent argues that petitioner never corrected
the transfer, and, to the extent that the Court of Appeals for
the Eighth Circuit held in Zabolotny that a transaction could
self-correct, this holding is wrong and should not be followed.
Respondent asserts that we should follow our opinion in
Zabolotny to the effect that a "correction" requires an
affirmative act that undoes the transfer.
Contrary to the parties' assertion, we do not believe that
our decision here is controlled by either opinion in Zabolotny.
The facts of that case are significantly different than the
facts at hand.5
In Zabolotny v. Commissioner, 97 T.C. 385
(1991), the taxpayers, after discovering oil on their farmland,
leased the mineral rights in the land.
During the following
4-year period, the lease generated annual royalty income of
approximately $1 million to $1.5 million.
On May 20, 1981,
approximately 4 years after the start of the lease, the
taxpayers sold their interest in the land, including the lease,
5
In fact, the Court of Appeals for the Eighth Circuit
explicitly recognized the uniqueness of the facts in Zabolotny,
stating: "The Zabolotnys have presented a highly unusual set of
circumstances, which are unlikely to appear in combination in a
single case". Zabolotny v. Commissioner, 7 F.3d at 774, 778 (8th
Cir. 1993), affg. in part and revg. in part 97 T.C. 385 (1991).
- 18 to an employee stock ownership plan (ESOP) that benefited the
employees of a corporation formed by the taxpayers to conduct
their farming operation.
In return for the taxpayers' interest
in the land, the ESOP agreed to pay the taxpayers a private
annuity of $478,615 per year.
Respondent determined that the sale of the farmland to the
ESOP was a prohibited transaction under section 4975(c)(1)(A)
and that the taxpayers were liable for excise tax deficiencies
under section 4975(a) and (b).
We agreed.
Zabolotny v.
Commissioner, 97 T.C. at 399.
We held in relevant part that:
(1) The sale was a prohibited transaction, and (2) this
transaction was not "corrected", even if the transaction had
been favorable to the ESOP from the start.
Id.
We reasoned
that a "correction" occurs when the transaction is rescinded
through an affirmative act.
Id.
Upon appeal, the Court of Appeals for the Eighth Circuit
agreed with us only as to the first issue; to wit, that the
transaction was a prohibited transaction.
Commissioner, 7 F.3d at 777.
Zabolotny v.
As to the second issue, the Court
of Appeals held that a correction may occur absent an
affirmative act of rescission.
Id. at 777-778.
The court
found that the transaction in Zabolotny corrected itself at the
end of 1981 because, at that time, the ESOP was in exceptional
financial condition and no plan beneficiary risked losing plan
- 19 benefits as a result of the prohibited transaction.
court noted that:
Id.
The
(1) The taxpayers were both the disqualified
persons and the ESOP's sole beneficiaries, (2) the prohibited
transaction proved highly productive for the ESOP from the
beginning, leaving it with assets of far greater value than it
would have accumulated from employer contributions alone, and
(3) the ESOP purchased extraordinarily valuable property that
had a 4-year history of producing royalties in the millions of
dollars.
Id.
In contrast with Zabolotny, we are unable to find here
that the Plans were in exceptional financial condition, or that
a plan beneficiary did not risk losing plan benefits, as a
result of the prohibited transaction.
Unlike the transfer in
Zabolotny, which left the plan with assets of far greater value
than it would have accumulated from employer contributions
alone, the transfer here did not increase the assets held by
the Plans.
The transfer replaced one asset (an account
receivable) with another asset (real estate), and the asset
received by the MPP needed to be sold by it to satisfy its
obligation to petitioner (thus resulting in additional plan
expenditures).
The Plans also did not receive extraordinarily
valuable property that had a solid history of producing income
in the millions of dollars, nor did the prohibited transaction
prove highly productive for the Plans from the start.
- 20 Petitioner, the disqualified person, also was not the MPP's
sole beneficiary.
Because the MPP was not "in a financial
position not worse than that in which it would be if the
disqualified person were acting under the highest fiduciary
standards", see sec. 4975(f)(5), we sustain respondent's
determination that petitioner is liable for the second-tier
excise tax under section 4975(b).
In so doing, we note that
sections 4961(a) and 4963(e)(1) generally allow for the
abatement of a section 4975(b) second-tier tax if the
prohibited transaction giving rise thereto is corrected within
90 days after our decision sustaining the tax becomes final.
Because the issue of whether petitioner will or would qualify
for an abatement is not yet ripe for decision, we express no
opinion on this issue at this time.
Turning to the additions to tax determined by respondent
under section 6651(a)(1), petitioner argues that these
additions do not apply because the law governing a transfer of
property to a pension plan in repayment of a loan was uncertain
when he transferred the real estate to the MPP, and it is still
uncertain today.
Respondent agrees that the law governing a
transfer of property to a pension plan was uncertain before
Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152
(1993), but points out that the Commissioner, in recognition of
this uncertainty, published rules under which taxpayers could
- 21 avoid the additions to tax under section 6651(a)(1) and (2).
Respondent argues that petitioner is liable for the additions
to tax at issue because he failed to follow these rules, and he
failed otherwise to exercise ordinary business care and
prudence.
We hold that petitioner is not liable for the additions to
tax.
Again, we start our inquiry with the relevant text:
SEC. 6651.
(a)
FAILURE TO FILE TAX RETURN OR TO PAY TAX.
Additions to the Tax.--In case of failure--
(1) to file any return required under
authority of subchapter A of chapter 61
(other than part III thereof) * * * on the
date prescribed therefor (determined with
regard to any extension of time for
filing), unless it is shown that such
failure is due to reasonable cause and not
due to willful neglect, there shall be
added to the amount required to be shown as
tax on such return 5 percent of the amount
of such tax if the failure is for not more
than 1 month, with an additional 5 percent
for each additional month or fraction
thereof during which such failure
continues, not exceeding 25 percent in the
aggregate * * *
From this text, we understand that a taxpayer who is
required to file an excise tax return, but who does not do so
timely, is generally liable for a monthly addition to tax equal
to 5 percent of the amount of tax that should have been shown
on the return, up to a maximum charge of 25 percent.
Janpol v. Commissioner, 102 T.C. 499, 500 (1994).
See also
We also
understand that the addition to tax does not apply where the
- 22 failure to file was due to reasonable cause and not due to
willful neglect.
See also United States v. Boyle, 469 U.S.
241, 245 (1985); Janpol v. Commissioner, supra at 504.
Reasonable cause is present where the taxpayer exercised
ordinary business care and prudence but was unable to file the
return within the prescribed time.
United States v. Boyle,
supra at 245; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Willful neglect means a conscious, intentional failure or
reckless indifference.
United States v. Boyle, supra at 245.
Whether a taxpayer acts with reasonable cause, and without
willful neglect, is decided on the basis of the entire record.
Estate of Duttenhofer v. Commissioner, 49 T.C. 200, 204 (1967),
affd. 410 F.2d 302 (6th Cir. 1969).
A disqualified person who engages in a prohibited
transaction is required to file an excise tax return for each
taxable year in the taxable period.
Secs. 4975(f)(2), 6011;
sec. 54.6011-1(b), Pension Excise Tax Regs.; see also Janpol v.
Commissioner, supra at 500.
Because petitioner was a
disqualified person who engaged in a prohibited transaction on
October 19, 1990, and the transaction remained uncorrected upon
issuance of the notice of deficiency, he was required to file
an excise tax return for 1990 and for each taxable year
thereafter up to and including 1996.
See sec. 4975(f)(2)
(absent a prior correction or a prior assessment of excise tax
- 23 on a prohibited transaction, the taxable period ends upon
issuance of a notice of deficiency).
Petitioner did not file
an excise tax return for any of these years.
With respect to the excise tax returns which were due for
1990 and 1991, we believe that petitioner's failure to file
these returns was reasonable.
The Supreme Court had not yet
decided Keystone by the due dates for these returns; i.e.,
July 31, 1991 and 1992, respectively.
See sec. 54.6011-1(b),
Pension Excise Tax Regs.; see also Instructions to Form 5330,
at 2 ("For taxes due under sections * * * 4975 * * *, file
Form 5330 by the last day of the 7th month after the end of the
tax year of the employer or other person who must file this
return.").
Although Keystone later became the law that we
apply herein, we do not impute the knowledge of this law to
petitioner with respect to 1990 and 1991.
Reasonable cause
and the absence of willful neglect are gauged at the time that
a return is due, and we bear in mind only the information that
the taxpayer knew (or could have known) on that date.
See
Ellwest Stereo Theatres, Inc. v. Commissioner, T.C. Memo.
1995-610; see also Industrial Indem. v. Snyder, 54 AFTR 2d
84-5127, 84-1 USTC par. 9507 (E.D. Wash. 1984).
The mere fact
that an individual never files a return for a given year does
not necessarily mean that he or she is liable under section
6651(a)(1) for an addition to that year's tax.
Although
- 24 a predecessor of section 6651(a)(1) provided explicitly that
reasonable cause could not be present where, as is the case
here, the taxpayer never filed a return, see Revenue Act of
1928, ch. 852, sec. 291, 45 Stat. 857,6 section 406 of the
Revenue Act of 1935, ch. 829, 49 Stat. 1027, removed the
prerequisite of a return for a finding of reasonable cause, and
it ceases to be a prerequisite today, see sec. 6651(a)(1); see
also Bowlen v. Commissioner, 4 T.C. 486, 494 (1944); Estate of
Kirchner v. Commissioner, 46 B.T.A. 578 (1942).
The knowledge that we do impute to petitioner with respect
to 1990 and 1991 is that this Court had held twice before
July 31, 1991, that a transfer of unencumbered property to a
pension plan in satisfaction of a funding obligation was not
reportable on a Federal excise tax return.
Although the Court
of Appeals for the Fourth Circuit reversed one of these
decisions before July 31, 1992, see Wood v. Commissioner,
955 F.2d 908 (4th Cir. 1992), the Court of Appeals for the
Fifth Circuit affirmed the other decision 2 months before that
6
Sec. 291 of the Revenue Act of 1928, ch. 852, 45 Stat.
857, provides:
In case of any failure to make and file a return
required by this title, within the time prescribed by
law * * *, 25 per centum of the tax shall be added to
the tax, except that when a return is filed after such
time and it is shown that the failure to file it was
due to reasonable cause and not due to willful neglect
no such addition shall be made to the tax.* * *
- 25 reversal, see Keystone Consol. Indus., Inc. v. Commissioner,
951 F.2d 76 (5th Cir. 1992).
With the state of the law as such
on the due dates of the 1990 and 1991 returns, we believe that
petitioner had reasonable cause for failing to file those
returns.
Although the Commissioner, 2 years after the Supreme
Court's holding in Keystone, generally reminded taxpayers that
they needed to file excise tax returns for all transfers of
property to their pension plans and provided rules under which
the Government would not impose additions to tax for failing to
file these returns timely, see Announcement 95-14, 1995-8
I.R.B. 47, we are unable to conclude that this announcement had
any bearing on additions to tax relating to returns which were
due before the date on which the announcement was published.
We repeat, for emphasis, that reasonable cause and the absence
of willful neglect must be gauged at the time that a return is
due, and the fact that a reasonable person may learn after that
time that his or her position is incorrect does not mean that
the position was unreasonable on the due date.
See Ellwest
Stereo Theatres, Inc. v. Commissioner, supra; see also
Industrial Indem. v. Snyder, supra.
As to the remaining years, i.e., 1992 through 1996, we
also do not believe that it was unreasonable for petitioner to
have failed to file excise tax returns.
On the basis of the
state of the law on the relevant filing dates, a reasonable
- 26 person in petitioner's shoes could have concluded that excise
tax returns were not required for those years.
The law
governing a transfer of unencumbered property to a pension plan
in satisfaction of a loan was, up until today, not squarely
addressed by a court, and we believe that a reasonable person
could have concluded on the basis of existing case law that an
excise tax return was not required in such a situation.
We
also take into account Zabolotny and the issue of whether a
prohibited transaction can correct itself absent an affirmative
act of rescission.
Although we held in that case that the
prohibited transaction could not correct itself without
rescission, our decision was reversed upon appeal.
The Court
of Appeals concluded that section 4975 applied only to the
first year in issue because the transaction self-corrected.
We conclude that a reasonable person in the position of
petitioner as of the respective due dates of the 1992 through
1996 excise tax returns could have concluded that the relevant
transfer was not a prohibited transaction, or, if it was, that
it had been corrected earlier.
We have carefully considered all remaining arguments made
by the parties for holdings contrary to those expressed herein,
and, to the extent not discussed above, find them to be
irrelevant or without merit.
To reflect the foregoing,
- 27 Decision will be entered for
respondent as to the deficiencies
and for petitioner as to the
additions to tax.
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