UNITED STATES TAX COURT

T.C. Memo. 1998-36

UNITED STATES TAX COURT

NEIL M. BAIZER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21046-94.

Filed January 27, 1998.

Frederick A. Romero, for petitioner.

Clifton B. Cates III, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WRIGHT, Judge:

Respondent determined deficiencies in

petitioner's excise taxes imposed on prohibited transactions by

section 49751 and additions to tax2 as follows:

1

All section references are to the Internal Revenue Code

in effect for the years at issue, unless otherwise indicated.

All Rule references are to the Tax Court Rules of Practice and

(continued...)

-2Tax Year

Ended

First-Tier

Second-Tier

Deficiency

Deficiency

Sec.

Sec. 4975(a) Sec. 4975(b) 6653(a)(1)(A)

Additions to Tax

Sec.

Sec.

6653(a)(1)

6651(a)(1)

12/31/86

12/31/87

12/31/88

12/31/89

12/31/90

12/31/91

12/31/92

12/31/93

08/18/94

$11,215

11,215

11,215

11,215

11,215

11,215

11,215

11,215

--

--$560.75

-------

--------$224,298

$560.75

560.75

--------

$2,803.75

2,803.75

2,803.75

2,803.75

2,803.75

2,803.75

2,803.75

2,803.75

--

This case involves the question of whether an assignment of

accounts receivable by petitioner to a defined benefit plan was a

prohibited transaction giving rise to an excise tax under section

4975, which was added to the Code by section 2003(a) of the

Employee Retirement Income Security Act of 1974 (ERISA), Pub. L.

93-406, 88 Stat. 829, 971.

decision are:

More specifically, the issues for

(1) Whether the assignment of an employer's

accounts receivable to a defined benefit plan is a prohibited

transaction within the meaning of section 4975(c), resulting in

petitioner's being liable under section 4975(a); (2) whether the

assignment of accounts receivable was not corrected within the

meaning of section 4975(f)(5), resulting in petitioner's being

liable under section 4975(b); (3) whether petitioner is liable

1

(...continued)

Procedure.

2

Respondent concedes that petitioner is not subject to the

first-tier excise tax of sec. 4975(a) or any additions to tax for

the taxable years 1986 and 1987, as determined in the notice of

deficiency. Additionally, respondent concedes petitioner is not

subject to an addition to tax under sec. 6653(a)(1) for the

taxable year ended Dec. 31, 1988.

-3for an addition to tax under section 6651(a)(1) for failure to

file excise tax returns; and (4) whether respondent had authority

to issue a notice of deficiency in regard to a prohibited

transaction when the Department of Labor had previously entered

into a stipulation of consent judgment with petitioner.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein.

Neil M. Baizer (petitioner) resided in Los

Angeles, California, when the petition was filed.

Cohen & Baizer Accountancy Corp. (the Corporation) is a

California corporation that was incorporated on August 4, 1980.

Petitioner and M. Richard Cohen were officers and directors of

the Corporation, and together they were the majority shareholders

of the Corporation.

December 1987.

The Corporation has been inactive since

Although its corporate charter was suspended by

the California secretary of state's office on December 1, 1989,

the Corporation has not been dissolved.

Effective February 1, 1981, the Corporation adopted, for the

benefit of its employees and their beneficiaries, the Cohen &

Baizer Accountancy Corporation Defined Benefit Pension Plan and

associated Trust (collectively, the Plan).

At all times

relevant, the Plan was a qualified plan and an exempt trust

within the meaning of sections 401(a) and 501(a).

Both the

Corporation and the Plan maintained tax years ending January 31.

-4The Corporation had discretionary authority and responsibility in

the administration of the Plan.

Management of the Plan was

delegated to an administrative committee, which consisted of

petitioner and Mr. Cohen.

Participants in the Plan included

petitioner, Mr. Cohen, Harold Breslow, and Robert Levine.

Petitioner and Mr. Cohen were fiduciaries with respect to

the Plan, within the meaning of section 4975(e)(3).

At all times

relevant, the cotrustees of the Plan were petitioner and Mr.

Cohen.

Both petitioner and Mr. Cohen were "disqualified persons"

with respect to the Plan, within the meaning of section

4975(e)(2).

Under the minimum funding standards of section 412, the

Corporation was required to contribute $186,200 to the Plan for

the plan year ending January 31, 1984.3

While the Corporation

claimed a $186,200 deduction on its corporate income tax return

for its taxable year ending January 31, 1985, as of January 31,

1988, the Corporation had not paid the 1984 mandatory

contribution.

Instead, for the plan year ending January 31,

1985, the Corporation set up on the Plan's book two notes

receivable from "H. Bogart" in the amounts of $181,474 and

$4,756.

These H. Bogart loans were fictitious.

Later, in an

adjusting journal entry for the year ending January 31, 1988, the

3

For each of the Plan years which ended Jan. 31, 1984

through 1994, inclusive, there was an accumulated funding

deficiency of $184,571.

-5H. Bogart notes receivable of $186,229.72 were eliminated and

replaced with a contribution receivable.

On or about May 31, 1988, the Corporation transferred

$273,558 (face value) of its accounts receivable to the Plan for

the purpose of satisfying, in part, the Corporation's funding

obligation under section 412.

At this time, the Corporation was

indebted to the Plan in the amount of $184,571 plus interest in

the amount of $24,609.47.

documents:

This transfer was implemented by two

"Assignment of Accounts Receivable" and "Agreement".

Both documents were dated May 31, 1988, and both were signed by

Mr. Cohen as President of the Corporation and by petitioner as

Secretary of the Corporation.

According to the agreement, the

Corporation assigned the accounts receivable without recourse.

Prior to the assignment, the Corporation did not attempt to

obtain an exemption for the transfer with the Department of Labor

(DOL).

Thereafter, the Corporation never replaced the accounts

receivable assigned to the Plan with cash.

While Dorothy Salata

was authorized on behalf of the Plan to collect the transferred

accounts receivable, there was no evidence presented regarding

the amount, if any, of actual collections.

With respect to the transfer of accounts receivable to the

Plan, no one with the Corporation or the Plan ever filed with

respondent a Form 5330, Return of Excise Taxes Related to

Employee Benefit Plans.

-6By letter dated December 6, 1991, the IRS notified the DOL

about its intent to disqualify the Plan for failing to satisfy

the exclusive benefit rule of section 401(a).

At this time, the

DOL was pursuing ERISA title I remedies against the Plan.

In

February 1993, petitioner (individually and as trustee of the

Plan) and the estate of Mr. Cohen entered into a "Stipulation for

Consent Judgment: Judgment" (Consent Judgment) with the DOL.

By

consenting to the Consent Judgment, "The parties have agreed to

the entry of this judgment as final adjudication of all claims,

obligations, penalties and remedies of the * * * [DOL] related to

the allegations in the complaint, without admitting or denying

any of the allegations contained therein."

Further, the Consent

Judgment provided that "The obligations imposed by this Judgment

are not binding on any government agency other than the United

States Department of Labor."

On August 18, 1994, respondent issued a notice of deficiency

to petitioner, in the amounts set forth above, determining excise

tax deficiencies pursuant to section 4975(a) and (b), as well as

additions to tax.

Respondent determined that petitioner was a

"disqualified person" and that he had participated in a

prohibited transaction under section 4975(c).

OPINION

We begin by noting that, as a general rule, the

Commissioner's determinations are presumed correct, and the

taxpayer bears the burden of proving otherwise.

Rule 142(a);

-7Welch v. Helvering, 290 U.S. 111, 115 (1933).

Respondent

determined deficiencies in petitioner's excise tax liability

under both subsections (a) and (b) of section 4975.

Section 4975 was added to the Internal Revenue Code by title

II of ERISA.

ERISA sec. 2003(a), 88 Stat. 971.

Section 4975(a)

and (b) imposes a two-tier excise tax on prohibited transactions.

The policy behind the enactment of section 4975 was to tax

disqualified persons who engage in self-dealing rather than

innocent employees, who were previously faced with

disqualification of the plan when a prohibited transaction

occurred.

S. Rept. 93-383, at 94-95 (1974), 1974-3 C.B. (Supp.)

80, 173-174.

In this area, congressional action has been largely

to protect participants and their beneficiaries by ensuring that

the plan's assets are held for their exclusive benefit.

H.

Conf. Rept. 93-1280, at 303 (1974), 1974-3 C.B. 415, 464.

I. Section 4975(a)

Section 4975(a) imposes a 5-percent tax on the "amount

involved"4 with respect to the "prohibited transaction".5

4

It

Sec. 4975(f)(4) provides that

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

(continued...)

-8provides that the tax shall be paid by any disqualified person

who participates in a prohibited transaction (other than a

fiduciary acting only as such).

Sec. 4975(a).

4

(...continued)

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

In sec. 4975(c)(1), Congress enumerated six categories of

prohibited transactions. Sec. 4975(c)(1) provides that

(1) General Rule. For purposes of this section, the

term "prohibited transaction" means any direct or

indirect -(A) sale or exchange, or leasing, of any

property between a plan and a disqualified

person;

(B) lending of money or other extension of

credit between a plan and a disqualified

person;

(C) furnishing of goods, services, or

facilities between a plan and a disqualified

person;

(D) transfer to, or use by or for the

benefit of, a disqualified person of the

income or assets of a plan;

(E) act by a disqualified person who is a

fiduciary whereby he deals with the income ro

assets of a plan in his own interest or for

his own account; or

(F) receipt of any consideration for his own

personal account by any disqualified person

who is a fiduciary from any party dealing

with the plan in connection with a

transaction involving the income or assets of

the plan.

-9A prohibited transaction includes any direct or indirect

sale or exchange, or leasing, of any property between a plan and

a disqualified person.

Sec. 4975(c)(1)(A).

Section 4975(e)(1)

defines "plan" as a trust described in section 401(a) which forms

part of a plan.

The parties stipulated that the Plan was a

qualified plan and an exempt trust within the meaning of sections

401(a) and 501(a).

A disqualified person includes a fiduciary,

or an owner, direct or indirect, of 50 percent or more of the

stock of a corporation whose employees are covered by the plan.

Sec. 4975(e)(2)(A), (E).

The parties stipulated that petitioner

was a "disqualified person" with respect to the Plan, within the

meaning of section 4975(e)(2).

A disqualified person also

includes an employer any of whose employees are covered by the

plan.

Sec. 4975(e)(2)(C).

Therefore, the Corporation is a

disqualified person within the meaning of section 4975(e)(2).

The issue is whether the contribution of the accounts

receivable to the Plan constituted a prohibited transaction under

section 4975(c)(1).

In Commissioner v. Keystone Consol. Indus.,

Inc., 508 U.S. 152, 158 (1993), the Supreme Court analyzed

whether the transfer of property was a "sale or exchange" within

the reach of section 4975(c)(1)(A).

The Court held that section

4975(c)(1)(A) prohibits the transfer of property in satisfaction

of an employer's obligation to fund a qualified defined benefit

plan.

Id. at 159.

In construing section 4975(c)(1)(A), the

Court accepted the already-settled meaning of the phrase "sale or

-10exchange" to include the transfer of property in satisfaction of

such a monetary obligation.

Id. at 158-159.

Furthermore, the

Court noted that section 4975(c)(1)(A) not only barred a "sale or

exchange" but also "any direct or indirect * * * sale or

exchange."

Id. at 159.

The Court concluded that "The

contribution of property in satisfaction of a funding obligation

is at least both an indirect type of sale and a form of exchange,

since the property is exchanged for diminution of the employer's

funding obligation."

Id.

In this case the record shows that the Corporation was

indebted to the Plan.

For the plan year ended January 31, 1984,

the Corporation was required to contribute $186,200 to the Plan

to satisfy the minimum funding standard of section 412.

The

Corporation created two fictitious notes receivable from "H.

Bogart" and then claimed a deduction of $186,200 on its corporate

income tax return for its taxable year ended January 31, 1985.

However, as of January 31, 1988, the Corporation had not made the

1984 mandatory contribution.

Later in 1988, the Corporation

assigned $273,558 of its accounts receivable for the purpose of

satisfying the Corporation's funding obligation under section

412.

The assignment was implemented through two documents,

signed by both Mr. Cohen and petitioner, dated May 31, 1988:

"Agreement" and "Assignment of Accounts Receivable".

Through the

assignment of accounts receivable, the Corporation sought to be

relieved of its funding obligation to the Plan.

-11The assignment of the accounts receivable, whether they were

encumbered or unencumbered,6 to satisfy the Corporation's funding

obligation under section 412 was a "sale or exchange".

See

Commissioner v. Keystone Consol. Indus., Inc., supra; Zabolotny

v. Commissioner, 7 F.3d 774, 776-777 (8th Cir. 1993), affg. in

part and revg. in part on other ground 97 T.C. 385 (1991).

Therefore, we hold that the assignment of the accounts receivable

by the Corporation, a disqualified person, to the Plan was a

prohibited transaction under section 4975(c)(1)(A).7

Section 4975(a) imposes a 5-percent excise tax, which shall

be paid by any disqualified person who participates in a

prohibited transaction.

Participation, under section 4975,

occurs any time a disqualified person is involved in a

transaction in a capacity other than as a fiduciary acting only

as such.

Sec. 4975(a); O'Malley v. Commissioner, 96 T.C. 644,

6

The record does not reveal whether the accounts

receivable were encumbered. If they were encumbered, sec.

4975(f)(3) would be applicable: "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 mortgage or

similar lien which the plan assumes". Even if the accounts

receivable were not encumbered, the transfer constitutes a sale

or exchange because it was in satisfaction of a debt.

Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159

(1993).

7

This is consistent with Congress' goal in implementing

ERISA and sec. 4975. In enacting ERISA in 1974, "Congress' goal

was to bar categorically a transaction that was likely to injure

the pension plan." Commissioner v. Keystone Consol. Indus.,

Inc., supra at 160. In this case, the contribution of accounts

receivable presents concern over valuation and imposes collection

duties on the Plan.

-12651 (1991); sec. 53.4941(a)-1(a)(3), Foundation Excise Tax Regs.

Further, those who participate in a section 4975 prohibited

transaction are liable for the excise tax notwithstanding that

they may have acted innocently or in good faith.

Commissioner, 89 T.C. 1137, 1146 (1987).

Rutland v.

In signing the

Agreement and Assignment of Accounts Receivable as a corporate

officer, petitioner, along with Mr. Cohen, implemented the

transfer of accounts receivable to the Plan.

In doing this, we

find that petitioner, a disqualified person, participated in the

prohibited transaction, which results in petitioner's being

liable for the excise tax of section 4975(a).

Section 4975(a) imposes an excise tax of 5 percent of the

"amount involved" with respect to the prohibited transaction for

each year during the "taxable period".

Under section 4975(f)(2),

the taxable period is the period beginning on the date of the

prohibited transaction and ending on the earlier of (A) the date

of mailing a notice of deficiency, (B) the date on which the

section 4975(a) tax is assessed, or (C) the date on which

correction of the prohibited transaction is completed.

Therefore, the taxable period is May 31, 1988 (date of the

prohibited transaction), to August 18, 1994 (date of mailing the

notice of deficiency).

The amount involved is the greater of the amount of money

and the fair market value of the property given or the amount of

money and the fair market value of the property received.

Sec.

-134975(f)(4).

Since the prohibited transaction was the assignment

of the accounts receivable by the Corporation to the Plan, the

amount involved is the fair market value of the accounts

receivable on May 31, 1988.

In the notice of deficiency,

respondent determined the fair market value of the accounts

receivable assigned to the Plan to be $224,298.

Because

petitioner has not provided any contrary evidence, respondent's

determination of the fair market value of the receivables will

stand.

Therefore, petitioner is liable for the first-tier tax.

We

sustain respondent's determination.

II. Section 4975(b)

Section 4975(b) imposes a second-tier tax equal to 100

percent of the amount involved where the prohibited transaction

is not corrected within the taxable period.

Section 4975(f)(5)

provides that

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.

In this case, the taxable period began on the date that the

prohibited transaction occurred, May 31, 1988, and ended on the

-14date of mailing of the notice of deficiency, August 18, 1994.8

Sec. 4975(f)(2)(A).

The statute mandates that a correction must occur which

undoes the transaction to the extent possible.

Sec. 4975(f)(5).

The temporary regulations under section 4975 provide that, in the

absence of permanent regulations for section 4975(f)(4) and (5),

8

Petitioner contends that the second-tier tax of sec.

4975(b) is not applicable because of ERISA sec. 502(i), 29 U.S.C.

1132(i) (1988). ERISA sec. 502(i) provides the following:

In the case of a transaction prohibited by section 1106

of this title by a party in interest with respect to a

plan to which this part applies, the Secretary may

assess a civil penalty against such party in interest.

The amount of such penalty may not exceed 5 percent of

the amount involved in each such transaction * * * for

each year or part thereof during which the prohibited

transaction continues, except that, if the transaction

is not corrected * * * within 90 days after notice from

the Secretary * * * such penalty may be in an amount

not more than 100 percent of the amount involved. * * *

[Emphasis added.]

Petitioner argues that the 100-percent excise tax is applicable

only if the transaction is not corrected within 90 days from the

notice from the Secretary. According to petitioner, the notice

mentioned is the notice of deficiency. Petitioner argues that

the filing of the petition with the Tax Court within the 90-day

period makes the 100-percent second-tier penalty inapplicable.

However, ERISA sec. 502(i) establishes the time in which the

Secretary of Labor (not the Secretary of the Treasury) can assess

a civil penalty (not the tax penalty under sec. 4975). The

second-tier tax of sec. 4975(b) applies if a prohibited

transaction is not corrected within the "taxable period", which

is defined under sec. 4975(f)(2). In this case, the taxable

period ended on the date of the mailing of the notice of

deficiency. Therefore, the second-tier tax is applicable if we

find that the transaction was not corrected within the taxable

period. See sec. 4961 (providing abatement of second-tier taxes

if the taxable event is corrected within the "correction period"

as provided in sec. 4963).

-15section 53.4941(e)-1, Foundation Excise Tax Regs., may be relied

upon in interpreting terms appearing both in section 4941(e) and

section 4975(f).

Sec. 141.4975-13, Temporary Excise Tax Regs.,

41 Fed. Reg. 32890 (Aug. 6,

1976); see also Leib v.

Commissioner, 88 T.C. 1474, 1482 (1987). The regulations under

section 4941, which relate to self-dealings involving private

foundations, are instructive in deciding whether a prohibited

transaction has been properly corrected.

Section

53.4941(e)-1(c)(3), Foundation Excise Tax Regs., provides the

following:

"in the case of the sale of property to a private

foundation by a disqualified person for cash, undoing the

transaction includes, but is not limited to, requiring rescission

of the sale where possible."

(Emphasis added.)

The prohibited transaction was the assignment of the

accounts receivable by the Corporation to the Plan.

With this

exchange, the Corporation's funding obligation was satisfied.

While this was not a straight cash sale of the accounts

receivable to the Plan, the transaction is economically similar

when the following two steps are combined:

First, sale of

accounts receivable for cash; second, the Corporation's

contributing the cash to discharge its funding obligation.

A rescission could occur if the Corporation replaced the

assigned accounts receivable with cash.

While this was feasible,

the Corporation has never replaced the accounts receivable

contributed to the Plan with cash.

-16While section 4975 and its corresponding regulations first

look to a rescission of the transaction, a correction may

nevertheless occur even when a rescission is not possible.

sec. 53.4941(e)-1(c)(3), Foundation Excise Tax Regs.

See

For

example, the transaction could have been "undone" by the Plan's

collection of the assigned accounts receivable.

In collecting

the accounts, the Plan would have had cash, which does not have

the same potential for abuse as the accounts receivable.

Petitioner offered no evidence regarding the collection of the

accounts receivable.

The parties stipulated that Dorothy Salata

was employed by the Plan to collect the transferred accounts

receivable.

However, there was no evidence submitted to

determine any amounts actually collected on the $273,558 accounts

receivable.

Petitioner argues that each participant was paid in full

with the lump-sum equivalent of the participant's benefits, and

thus, there was a correction.

According to petitioner, any

payments to the Plan would result in a refund to the corporation,

since the plan participants, Harold Breslow and Robert Levine,

received their full benefit and petitioner signed an irrevocable

waiver of his rights to Plan benefits.

We reject petitioner's argument.

Examining the record, we

find no documentary evidence that all rank and file employees

were paid their full vested interest, especially in light of Mr.

Levine's testimony that he did not receive the full present value

-17of his accrued benefits.

Even if the participants had received

their full benefits, this would not have "undone" the prohibited

transaction as intended by the statute.

We find that petitioner has not proven that the transaction

was corrected within the meaning of section 4975(f)(5).

We hold

that the second-tier tax under section 4975(b) was properly

determined.

III. Additions to Tax:

Section 6651(a)(1)

Next, we turn to the additions to tax under section

6651(a)(1).

Section 6651(a)(1) imposes a tax for the failure to

file a required return unless it is shown that the failure is due

to reasonable cause and not due to willful neglect.

Under section 6011 and section 54.6011-1(b), Pension Excise

Tax Regs., every disqualified person liable for the tax imposed

under section 4975(a) with respect to a prohibited transaction

shall file an annual return on Form 5330 for each taxable year in

the taxable period.9

500 (1994).

See Janpol v. Commissioner, 102 T.C. 499,

It is undisputed that no one ever filed with the IRS

a Form 5330 with respect to the transfer of the Corporation's

accounts receivable to the Plan.

Petitioner has not presented

any evidence or argument on brief regarding the section

9

In this case, the taxable period is the period commencing

May 31, 1988, and ending Aug. 18, 1994.

-186651(a)(1) addition to tax.10

We sustain respondent's

determination.

IV. Authority

Reorganization Plan No. 4 of 1978

Seeking to avoid liability for a prohibited transaction

under section 4975, petitioner contends that the Reorganization

Plan No. 4 of 1978 (Reorganization Plan), 3 C.F.R. 332 (1979), 5

U.S.C. app. at 1582 (1994), 92 Stat. 3790 (1978), delegated

exclusive authority to the DOL to determined prohibited

transaction violations and thus prevents the IRS from separately

determining whether a prohibited transaction occurred.

According

to petitioner, the IRS has authority under section 4975

"generally only in those circumstances where the Department of

Labor initially has determined the violation to have occurred or

in those circumstances where the Department of Labor has not

undertaken a response."

ERISA was enacted in 1974, setting up an administrative

system for employee benefit plans.

ERISA section 2(b), 88 Stat.

829, 833, provides that

the policy of this Act [is] to protect interstate

commerce and the interests of participants in employee

benefit plans and their beneficiaries, by requiring the

disclosure and reporting to participants and

beneficiaries of financial and other information with

respect thereto, by establishing standards of conduct,

10

The only argument that petitioner made was that since no

prohibited transaction occurred, there was no requirement to file

a Form 5330.

-19responsibility, and obligation for fiduciaries of

employee benefit plans, and by providing for

appropriate remedies, sanctions, and ready access to

the Federal courts.

To implement these goals, ERISA divided the statutory

responsibilities among three agencies:

Benefit Guaranty Corporation (PBGC).

DOL, IRS, and the Pension

The Code and ERISA vested

jurisdiction with the DOL and the IRS in the area of prohibited

transactions.

Four years later, to eliminate overlap and duplication in

administration, the Reorganization Plan (which was entitled

"Employee Retirement Income Security Act Transfers") was enacted

and went into effect on December 31, 1978, under Executive Order

No. 12108, 3 C.F.R. 275 (1979).

The Reorganization Plan11 was

expected to reduce delays in two areas:

(1) Processing

exemptions and (2) issuing regulations pursuant to ERISA.

These

responsibilities were specifically delegated to the DOL, which is

primarily responsible for fiduciary standards.

Reorg. Plan sec.

102(a).

In granting authority to the DOL, Reorganization Plan

section 102(a) provides:

Except as otherwise provided in Section 105 of

this Plan, all authority of the Secretary of the

Treasury to issue the following described documents

11

Reorganization Plan sec. 107 denotes the interim nature

of the reorganization plan by calling for an evaluation by Jan.

31, 1980. Reorganization Plan No. 4 of 1978 (Reorganization

Plan), 3 C.F.R. 332 (1979), 5 U.S.C. app. at 1582 (1994), 92

Stat. 3790 (1978).

-20pursuant to the statutes hereinafter specified is

hereby transferred to the Secretary of Labor:

(a) regulations, rulings, opinions, and exemptions

under section 4975 of the Code,

EXCEPT for (i) subsections 4975(a), (b),

(c)(3), (d)(3), (e)(1), and (e)(7) of the

Code; (ii) to the extent necessary for the

continued enforcement of subsections 4975(a)

and (b) by the Secretary of the Treasury,

subsections 4975(f)(1), (f)(2), (f)(4),

(f)(5) and (f)(6) of the Code; and (iii)

exemptions with respect to transactions that

are exempted by subsection 404(c) of ERISA

from the provisions of Part 4 of Subtitle B

of Title 1 of ERISA; and

(b) regulations, rulings, and opinions under

subsection 2003(c) of ERISA.

EXCEPT for subsection 2003(c)(1)(B).

In applying Reorganization Plan section 102, Reorganization

Plan section 105 provides the following in regard to enforcement

by the Secretary of the Treasury:

The transfers provided for in Section 102 of this

Plan shall not affect the ability of the Secretary of

the Treasury, subject to the provisions of Title III of

ERISA relating to jurisdiction, administration, and

enforcement, (a) to audit plans and employers and to

enforce the excise tax provisions of subsections

4975(a) and 4975(b) of the Code, to exercise the

authority set forth in subsections 502(b)(1) and 502(h)

of ERISA, or to exercise the authority set forth in

Title III of ERISA, including the ability to make the

interpretations necessary to audit, to enforce such

taxes, and to exercise such authority * * *. However,

in enforcing such excise taxes and, to the extent

applicable, in disqualifying such plans the Secretary

of the Treasury shall be bound by the regulations,

rulings, opinions, and exemptions issued by the

Secretary of Labor pursuant to the authority

transferred to the Secretary of Labor as provided in

Section 102 of this Plan.

-21As a result, Reorganization Plan section 102(a) provides the

DOL with "all authority" for "regulations, rulings, opinions, and

exemptions under section 4975" subject to specified exceptions,

including the exception that Reorganization Plan section 102(a)

does not grant the DOL authority over section 4975(a) and (b).

The IRS retains control over the enforcement of the section 4975

excise tax.

Reorg. Plan secs. 102(a), 105.

Pursuant to its

authority to enforce the excise taxes of section 4975(a) and (b),

the IRS made a determination that petitioner participated in a

transaction prohibited under section 4975(c)(1).

Petitioner contends that the DOL has exclusive authority to

make the determination whether a transaction is prohibited under

section 4975(c)(1).12

In enacting section 4975(c)(1), Congress

specifically enumerated six categories of prohibited

transactions.

Leib v. Commissioner, 88 T.C. at 1478.

This

provides a detailed definition of a prohibited transaction, and

we are satisfied that the IRS, in the exercise of its power to

enforce the excise tax, had authority to determine that

petitioner engaged in such a transaction.

12

In making his argument, petitioner relies on ERISA sec.

502(i), 29 U.S.C. sec. 1132(i) (1988), which provides that the

Secretary of Labor may assess a civil penalty against a party in

interest.

While this clearly gives the DOL authority over the

civil penalties for violation of the rules in ERISA against

prohibited transactions, sec. 4975 deals with an excise tax, not

a civil penalty.

-22ERISA and the Code provide for interagency communication and

coordination between the DOL and the IRS regarding prohibited

transactions.

ERISA section 3003(a), 29 U.S.C. section 1203(a)

(1988), provides that

Unless the Secretary of the Treasury finds that the

collection of a tax is in jeopardy, in carrying out the

provisions of section 4975 of Title 26 (relating to tax

on prohibited transactions) the Secretary of the

Treasury shall, in accordance with the provisions of

subsection (h) of such section, notify the Secretary of

Labor before sending a notice of deficiency with

respect to the tax imposed by subsection (a) or (b) of

such section, and, in accordance with the provisions of

subsection (h) of such section, afford the Secretary an

opportunity to comment on the imposition of the tax in

any case.

A corresponding coordination provision is contained in section

4975(h), which requires that before sending a notice of

deficiency, the Secretary of the Treasury must notify the

Secretary of Labor and provide him with a reasonable opportunity

to obtain a correction of the prohibited transaction or to

comment on the imposition of the tax.

In the provisions of section 4975(h) and ERISA section 3003,

there is no statement that the DOL must first determine that

there was a prohibited transaction before the IRS can determine a

section 4975 excise tax.

Rather, the IRS, before sending a

notice of deficiency in section 4975 excise tax, is to notify the

DOL and to provide the DOL with an opportunity to correct the

prohibited transaction or to comment on the imposition of the

tax.

-23Further, the DOL and the IRS have differing roles in the

area of prohibited transactions.

The DOL's primary function is

to protect the rights of workers, while the IRS' primary function

is to protect the revenue.

Winger's Dept. Store, Inc. v.

Commissioner, 82 T.C. 869, 888 (1984); see H. Conf. Rept. 931280, supra at 306, 1974-3 C.B. at 467.

Under the labor

provisions, a fiduciary is personally liable to the plan for

losses attributable to a breach of fiduciary duty, as well as

restoring any profits made on the transaction.13

On the other

13

The legislative history of ERISA reflects the

congressional understanding that the perspectives of the DOL and

IRS are different:

The conference substitute establishes rules governing

the conduct of plan fiduciaries under the labor laws

(title I) and also establishes rules governing the

conduct of disqualified persons (who are generally the

same people as "parties in interest" under the labor

provisions) with respect to the plan under the tax laws

(title II). This division corresponds to the basic

difference in focus of the two departments. The labor

law provisions apply rules and remedies similar to

those under traditional trust law to govern the conduct

of fiduciaries. The tax law provisions apply an excise

tax on disqualified persons who violate the new

prohibited transaction rules; this is similar to the

approach taken under the present rules against selfdealing that apply to private foundations.

The labor provisions deal with the structure of

plan administration, provide general standards of

conduct for fiduciaries, and make certain specific

transactions "prohibited transactions" which plan

fiduciaries are not to engage in. The tax provisions

include only the prohibited transaction rules and apply

only to disqualified person, not fiduciaries * * *. To

the maximum extent possible, the prohibited transaction

rules are identical in the labor and tax provisions, so

they will apply in the same manner to the same

(continued...)

-24hand, the tax provisions of section 4975 impose a two-tier excise

tax on the disqualified person who participated in the prohibited

transaction.

See Rutland v. Commissioner, 89 T.C. at 1146.

Under the Reorganization Plan, the IRS retained its authority to

enforce the excise tax of section 4975, and the DOL retained its

authority to bring civil actions.

Reorg. Plan secs. 104 and 105.

Considering the role established in Reorganization Plan

sections 102 and 105 and the legislative history, we hold that

the DOL does not have sole jurisdiction to determine whether a

prohibited transaction occurred.

The Code and ERISA provide that

the IRS must notify the DOL before issuing the notice of

deficiency and afford the DOL an opportunity to comment on the

imposition of the tax, but they do not require that the notice of

deficiency be based on a the DOL determination that the

transaction was a prohibited transaction under section

4975(c)(1)(A).

In order to enforce the excise taxes under

section 4975(a) and (b), respondent has the authority to

determine whether a transaction is a prohibited transaction under

section 4975(c)(1) and respondent duly exercised that authority

in this case.

See Reorg. Plan sec. 102(a)(i) and (ii).

13

(...continued)

transaction.

H. Conf. Rept. 93-1280, at 295-296 (1974), 1974-3 C.B. 415, 456457.

-25Effect of the Consent Judgment

Petitioner contends that the Consent Judgment was tantamount

to a ruling, opinion, or exemption issued pursuant to authority

that was delegated solely to the DOL under Reorganization Plan

section 102.

As a result, petitioner argues that the IRS "cannot

come to a conclusion concerning a prohibited transaction contrary

to a ruling previously made by the DOL."

Reorganization Plan section 102 gives the DOL the authority

to issue "rulings, opinions, and exemptions".

Reorganization

Plan section 105 provides that in enforcing the excise tax

provisions the IRS is bound, "to the extent applicable," by the

regulations, rulings, opinions, and exemptions issued by the DOL

as provided in Reorganization Plan sections 102 and 105.

In December 1991, the IRS notified the DOL about its intent

to disqualify the Plan.

At this time, the DOL was pursuing ERISA

title I remedies against the Plan.

In February 1993, petitioner

(individually and as trustee of the Plan) and the estate of Mr.

Cohen entered into the Consent Judgment with the DOL.

Paragraph

10 of the Judgment specifically provides that "The obligations

imposed by this Judgment are not binding on any Government agency

other than the United States Department of Labor."

In August

1994, respondent issued to petitioner a notice of deficiency

determining an excise tax.

Petitioner states that the DOL concluded that a prohibited

transaction had not occurred (a "non-violation" according to

-26petitioner).

However, the Consent Judgment contains no mention

of the assignment of the accounts receivable.

Further, there is

no evidence in the record regarding the degree of scrutiny of the

DOL's investigation into the assignment.

The parties to the

Consent Judgment agreed that the entry of the judgment was a

final adjudication of all claims, obligations, penalties and

remedies related to the allegations in the complaint, but they

did not admit or deny any of the allegations.

We find that the

DOL in the Consent Judgment did not rule on whether a prohibited

transaction occurred.

Therefore, the IRS' position is not

contrary to the DOL's position in the Consent Judgment.

Furthermore, the Consent Judgment expressly provided that it

was not binding on any government agency other than the DOL.

By

its terms, the Consent Judgment did not limit respondent's

authority to determine excise tax deficiencies regarding the

assignment of accounts receivable.

Thoburn v. Commissioner, 95

T.C. 132, 143 (1990).14

We hold that the Consent Judgment does not prevent

respondent from determining an excise tax under section 4975(a)

and (b) against petitioner.

As previously indicated, we sustain

respondent's determination.

14

In Thoburn v. Commissioner, 95 T.C. 132, 143 (1990), the

Court, in interpreting the DOL settlement at issue, noted that it

was a contract, and its effect should be governed by the

principles applicable to contracts. Therefore, the Court looked

to the objectively manifested intent of the parties. Id.

-27To reflect respondent's concessions and our conclusions with

respect to the disputed issues,

Decision will be entered

under Rule 155.