UNITED STATES TAX COURT
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042
T.C. Memo. 2004-260
UNITED STATES TAX COURT
JOSEPH R. ROLLINS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 598-03.
Filed November 15,
2004.
P caused the 401(k) plan of his wholly owned company to
lend money to three entities in which P owned minority
interests.
P's company is the sole trustee of, and the
administrator of, the 401(k) plan.
P also acted on the part
of the borrower entities in agreeing to the loans.
1.
Held: Each of the loans was a "prohibited
transaction" within the meaning of sec. 4975(c)(1) (D),
I.R.C. 1986.
P, a disqualified person, is liable for
excise taxes under sec. 4975(a) and (b), I.R.C. 1986;
amounts to be determined.
2.
Held, further, P is liable for additions to tax
under sec. 6651(a)(1), I.R.C. 1986, for failure to file
excise tax returns; amounts to be determined.
SERVED NOV 1 5 2004
- 2
-
Joseph R. Rollins, pro se.
Denise G. Dengler, for respondent.
MEMORANDUM OPINION
CHABOT, Judge: Respondent determined deficiencies in excise
taxes under section 49751 (prohibited transactions) and additions
to tax under section 6651(a)(1)
(failure to file tax return)
against petitioner as follows:
Year or
Taxable Period
1998
1999
2000
Deficiencies
Sec.
4975(a)
Sec.
Additions to Tax
4975(b)
Sec.
6651(a)(1)
$5,231.80
14,576.97
24,448.50
-------
$1,307.95
3,644.24
6,112.13
---
$164,228.39
---
Period ending
Oct.
9, 2002
¹ Unless indicated otherwise, all section and subtitle
references are to sections and subtitles of the Internal Revenue
Code of 1986 as in effect for the years and taxable period in
issue.
- 3
-
After concessions by respondent,2 the issues for decision
are as follows:
(1) Whether any of petitioner's company's section
401(k) plan's loans to entities partially owned by
petitioner constituted prohibited transactions within
the meaning of section 4975.
(2)
If any of the loans were prohibited
transactions, then whether petitioner had reasonable
cause for any of his failures to file excise tax
returns for 1998,
1999, and 2000.
Background
The instant case was submitted fully stipulated; the
stipulations and the stipulated exhibits are incorporated herein
by this reference.
2 On brief, respondent concedes that there were "loan
interest payments, which reduce both the § 4975(a)&(b) excise
taxes." At another point on brief, respondent concedes that
"Petitioner has established that the principal of the loans was
repaid; there is still an issue whether the interest was paid."
We assume that, where these concessions affect the sec. 4975(a)
excise taxes, these concessions may have consequential effects on
the determinations of additions to tax under sec. 6651(a)(1).
The parties have not presented any specific dispute as to
the extent of these concessions, and thus the instant report does
not deal with matter.
Any relevant unresolved dispute will be
dealt with in proceedings under Rule 155 or as may otherwise be
appropriate.
See Medina v. Commissioner, 112 T.C. 51 (1999).
Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
- 4
-
When the petition was filed in the instant case, petitioner
resided in Atlanta, Georgia.
Petitioner is a certified public accountant and a registered
investment adviser; also, he holds various certifications in the
area of financial planning and investment managing, including
certified employee benefits specialist, certified financial
planner, and charter financial consultant.
1.
The Plan
Petitioner owns 100 percent of Rollins & Associates, P.C., a
certified public accounting firm, hereinafter sometimes referred
to as Rollins.
Rollins has a section 401(k) profit-sharing plan,
known as Rollins & Associates, P.C. 401(k)
Profit Sharing Plan
hereinafter sometimes referred to as the Plan.
The Plan's
predecessor dates back at least to 1985.
At all times relevant herein, the Plan was tax-qualified
under section 401(a), and the Plan's underlying trust was exempt
from tax under section 501(a).
Rollins has been the sole trustee under the Plan since 1985.
The trustee is responsible for the following items, as well as
other items listed in the Plan's governing instrument:
investing, managing, and controlling the Plan's assets (subject
to the direction of an investment manager if the trustee appoints
one); paying benefits required under the Plan at the direction of
the administrator; and maintaining records of receipts and
- 5 disbursements.
The trustee has the power to invest and reinvest
the Plan's assets in such securities and property, real or
personal, wherever situated, as the trustee shall deem advisable.
Under the Plan, Rollins is to designate the Plan's
administrator; if Rollins does not designate an administrator,
then Rollins is to function as the administrator.
Rollins has
not designated an administrator.
Petitioner owns 100 percent of Rollins Financial Counseling,
Inc., a registered investment advisory company, hereinafter
sometimes referred to as Rollins Financial.
In November 1993,
Rollins entered into an investment advisory agreement with
Rollins Financial whereby Rollins Financial was to provide
financial counseling services to Rollins.
The agreement provides
that petitioner, as Rollins Financial's CEO,
"will make all
investment decisions on behalf of
* * *.
[Rollins]
The
recommendations developed by [petitioner] are based upon the
professional judgment of
2.
[petitioner]".
The Loans
a.
Overall
As to each of the loans shown in table 1, petitioner made
the decision to lend the Plan's money in the indicated amount to
the indicated borrower:
Jocks & Jills Charlotte, Inc.,
hereinafter sometimes referred to as J & J Charlotte; Eagle Bluff
Golf Club, LLC, hereinafter sometimes referred to as Eagle Bluff;
- 6
or Jocks and Jills, Inc.
-
J & J Charlotte, Eagle Bluff, and Jocks
and Jills, Inc., are hereinafter sometimes referred to
collectively as the Borrowers.
Table 1
Loan Date
May 29, 1996
June 7, 1996
June 12, 1996
July 8, 1996
Sept. 9,
1996
J
J
J
J
J
Borrower
Amount
&
&
&
&
$100,000
100,000
75,000
25, 000
J
J
J
J
Charlotte
Charlotte
Charlotte
Charlotte
& J Charlotte
. 25,000
May 20, 1997
Eagle Bluff
50,000
Sept. 2,
Nov. 20,
1998
1998
Jocks and Jills,
Jocks and Jills,
Inc.
Inc.
200,000
50,000
Dec. 31,
1998¹
Jocks and Jills, Inc.
25,000
Jan. 26,
1999
Jocks and Jills,
50,000
Inc.
1 The parties' stipulation states that the $25, 000 check is dated Nov.
20, 1998. However, the stipulated exhibit shows that the check is dated Dec.
31, 1998, and the check processing stamps are consistent with the latter date.
Our finding follows the stipulated exhibit rather than the stipulation.
b.
J & J Charlotte
J & J Charlotte is a sports theme restaurant located in
Charlotte, North Carolina.
When J & J Charlotte was
incorporated, in September 1994 , and on the dates shown supra in
table 1, petitioner was the only member of J & J Charlotte' s
board of directors and was J & J Charlotte's vice president,
secretary, and treasurer; on the table 1 dates petitioner also
was J & J Charlotte's registered agent.
When J & J Charlotte was incorporated, petitioner owned all
10,000 shares of J & J Charlotte's subscribed stock.
1996, 102,000 additional shares were outstanding.
By June 30,
On the dates
- 7 shown supra in table 1, petitioner had an 8.93-percent interest
in J & J Charlotte3, and his then-wife had a 6.70-percent
interest.
There were 28 other shareholders on June 30, 1996; the
next greatest percentage interest was 6.25 percent.
Petitioner signed the Plan's July 8 and September 9, 1996,
checks to J & J Charlotte.
(The record does not indicate who
signed the checks that effectuated the first three loans shown in
table 1.)
Petitioner signed all five of J & J Charlotte's
promissory notes to the Plan, on behalf of J & J Charlotte.
Each
of these promissory notes was a 12-percent-per-year demand note;
each stated that it was secured by all the machinery and
equipment at J & J Charlotte.
On January 11, 2000, petitioner paid $150,500 to the Plan as
a repayment on the J & J Charlotte loans.
All of the principal of the Plan's loans to J & J Charlotte
has been repaid.
c.
See supra note 2.
Eagle Bluff
Eagle Bluff was a golf club located in Chattanooga,
Tennessee.
From 1994 until Eagle Bluff was sold in 2000,
petitioner was Eagle Bluff's treasurer and its registered agent
in Georgia.
On May 20,
1997, the Plan lent $50,000 to Eagle
3 So stipulated. However, the stipulated stock register
shows that, on Aug. 28, 1996, before the date of the last loan
shown on table 1, petitioner acquired 2,500 shares from another
shareholder.
This raised pe.titioner's interest to 11.16 percent.
- 8 Bluff; at this time petitioner had a 26.8-percent interest in
Eagle Bluff; his equity amounted to $983,237.45 out of a total of
$3,667,212.45.
There were more than 80 other partners; the next
greatest percentage interest was that of a couple, who between
them and their IRA, held an aggregate 8.8197-percent interest.
Petitioner invested an additional $307,151.86 in Eagle Bluff
between 1997 and 1998, which increased his percent interest to
31.71.
Petitioner signed the Plan's check to Eagle Bluff.
Petitioner signed Eagle Bluff's promissory note to the Plan, on
behalf of Eagle Bluff.
The promissory note was a 12-percent-per-
year demand note; the note stated that it was secured by all the
property and equipment at Eagle Bluff.
At the time of the loan,
12-percent interest was greater than market rate interest.
During 1999, Rollins paid 'a total of $3,900 of Eagle Bluff's
interest obligations to the Plan, because Eagle Bluff was not
able to make the payments.
During November and December 1999,
petitioner paid a total of $20,000, Rollins Financial paid
$7,500, and Rollins paid $7,500 of Eagle Bluff's principal
obligations to the Plan, because Eagle Bluff was not able to make
the payments.
All $35,000 of these 1999 principal payments were
treated as petitioner's additional equity in Eagle Bluff.
Petitioner fully intended he would receive the funds back from
his equity when Eagle Bluff was sold.
- 9 All of the principal of the Plan's loan to Eagle Bluff has
been repaid.
d.
See supra note 2.
Jocks and Jills
Jocks and Jills, Inc., is a corporation located in Atlanta,
Georgia.
Petitioner was the secretary/treasurer of Jocks and
Jills, Inc.,
in 1998 and 1999, and its registered agent in
Georgia in 1998 and 1999.
On the dates shown supra in table 1
petitioner had a 33.165-percent interest in Jocks and Jills, Inc.
There were more than 70 other partners; the next greatest
percentage interest was of a partner who held 4.8809 percent.4
Petitioner signed the Plan's November 20,
1998, and January 26,
1998, December 31,
1999, checks effectuating the loans to
Jocks and Jills, Inc.5
(The record does not indicate who signed
the check or checks that effectuated the first loan shown supra
in table 1.)
Petitioner signed Jocks and Jills, Inc.'s
promissory notes to the Plan on behalf of Jocks and Jills, Inc.
The first promissory note, dated September 2,
amount of $200,000.
1998, was in the
On January 15, 1999, Jocks and Jills, Inc.,
4 So stipulated.
The stipulated exhibit that serves as the
foundation of the stipulated conclusions lists "Partners'
Allocation Percentages" for Jocks & Jills Restaurant, LLC, a
separate entity from Jocks and Jills, Inc.
In the absence of an
explanation by the parties, we have followed the language of the
parties, even to the use of the word "partner" rather than
"shareholder".
5 The two $50,000 checks are made out to Jocks and Jills,
Inc., but the $25,000 check is made out to Jocks & Jills
Restaurants, LLC.
See supra note 4.
- 10 -
made a $25,000 partial repayment of its second loan.
The second
promissory note, signed on February 22, 1999, was in the amount
of $100,000.
(From the dates of the loans and the repayment, we
gather that this promissory note was for the remaining amounts
due on the second, third, and fourth loans.
The record does not
indicate whether promissory notes had been issued at the times
the loans were made.)
Each of these promissory notes was a 12-
percent-per-year demand note; each stated it was secured by all
machinery and equipment at Jocks and Jills, Inc.
After a series of monthly Jocks and Jills, Inc.,
$5,000
checks to the Plan, on January 28, 2000, petitioner paid
$155,571.57 to the Plan as a repayment plus interest on the
$200,000 Jocks and Jills, Inc.,
loan.
On December 8, 1999, Jocks and Jills, Inc., paid $100,000 to
the Plan as a repayment "in full" on the February 22,
promissory note.
1999,
The check making this payment had petitioner's
stamped signature.
All of the principal of the Plan's loans to Jocks and Jills,
Inc., has been repaid.
3.
See supra note 2.
Tax Returns
Petitioner did not file any excise tax returns, Forms 5330,
Return of Excise Taxes Related to Employee Benefit Plans,
relevant taxable periods.
for the
The record does not indicate whether
- 11 the Plan filed any tax returns or information returns for any
taxable periods.
4.
U.S. Department of Labor
On April 16, 2002, respondent sent a letter to the
Department of Labor notifying the Department of Labor that
respondent was contemplating adjusting petitioner's section 4975
tax liability.
This letter was sent pursuant to section 3003(a)
of the Employee Retirement Income Security Act of 1974
1203(a)),
Pub. L. 93-406,
88 Stat.
829,
998
(29 U.S.C.
(ERISA '74).
On May
8, 2002, respondent sent another letter to the Department of
Labor, stating that the matter was now before respondent's
Appeals Office and asking for a response within 60 days.
-
12
-
Discussion6
I.
Excise Taxes
a.
Parties' Contentions
Respondent contends that petitioner is a disqualified person
with respect to the Plan in two capacities:
(a) A fiduciary of
the Plan (sec. 4975(e)(2) (A)), and (b) the 100-percent owner of
Rollins, the employer sponsoring the Plan (subpars.(E) and (H) of
sec. 4975(e)(2)).
Respondent contends that the Plan's loans to
6 Sec. 7491, relating to burden of proof, was not drawn in
issue by either side.
However, for completeness, and in light of petitioner's pro
se status, we note the following: Sec. 7491(a) provides for
shifting the burden of proof (if certain conditions have been
satisfied) with respect to "any factual issue relevant to
ascertaining the liability of the taxpayer for any tax imposed by
subtitle A or B".
Sec. 7491(a)(1).
The sec. 4975 taxes involved
in the instant case are imposed by subtitle D; the parties have
not suggested any subtitle A or B component. Accordingly, sec.
7491(a) cannot operate to shift the burden of proof in the
instant case.
See, e.g., Jos. M. Grey Pub. Acct., P.C. v.
Commissioner, 119 T.C. 121, 123, n.2 (2002), affd. 93 Fed. Appx.
473
(3d Cir. 2004).
Sec. 7491(b), relating to statistical information on
unrelated taxpayers, does not apply to the instant case.
Sec. 7491(c) imposes on respondent the burden of production
with respect to the additions to tax under sec. 6651(a)(1).
The
parties' stipulation that--"3.
Petitioner did not file any
excise tax returns, Forms 5330, Return of Excise Taxes Related to
Employee Benefit Plans, for the relevant taxable periods."
satisfies this obligation; petitioner still has the burden of
proving that the determined additions should not be imposed.
Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001).
But see
supra note 2.
Finally, the parties' presentation of the instant
case fully stipulated does not change the burden of proof.
Rule
122(b); Borchers v. Commissioner, 95 T.C. 82, 91 (1990), affd.
943 F.2d 22 (8th Cir. 1991).
- 13 -
entities in which petitioner had an interest were prohibited
transactions because (1) The loans were transfers of the Plan's
assets that benefited petitioner (sec. 4975(c) (1)(D)), and (2)
the loans were dealings with the Plan's assets in petitioner's
own interest (sec. 4975(c)(1)(E)).
Respondent contends that
petitioner benefited from the loans in that the loans enabled the
Borrowers--all entities in which petitioner owned interests--to
operate without having to borrow funds at arm's length from other
sources.
Respondent summarlzes the contentions regarding
petitioner's role as fiduciary, as follows:
No documentation was provided of any security interest
under the U.C.C. which would have protected the Plan
against other creditors of these companies.
(Stip.,
para. 23, 38, 41, 44, 47, 50, 61, 69)
Petitioner would
have had to authorize any actions the Plan took against
the companies and its officers to collect its loans.
Petitioner's ownership interest in these companies
created a conflict of interest between the Plan and the
companies, resulting in dividing his loyalties to these
entities.
This conflicting interest as a disqualified
person who is a fiduciary brought petitioner within the
prohibition against dealing "with the income or assets
of a plan in his own interest or for his own account".
I.R.C.
§ 4975(c)(1)(E).
Petitioner maintains that, as to each of the loans:
interest rate was above market interest and was paid,
(1) The
(2) the
collateral was safe and secure and the principal was repaid, and
(3) the Plan's assets were thereby diversified and thus the
Plan's portfolio's risk level was "significantly lowered".7
7 The record does not indicate (1) either the magnitude or
(continued...)
- 14 -
Petitioner acknowledges that he is a disqualified person with
regard to the Plan because he.owns Rollins, but he contends that
(1) none of the Borrowers was a disqualified person,
(2) none of
the loans was a transaction between him and the Plan, and (3) he
"did not benefit from these loans, either in income or in his own
account".
We agree with respondent's conclusion as to section
4975(c)(1) (D).
Because of our concerns about how the statute should be
applied to the evidence of record, our conclusion that all of the
opinions relied on by both sides are fairly distinguishable, and
the absence of applicable Treasury regulations,8 we first
consider the background of section 4975.
b.
Background:
Sec. 503
(I.R.C. 1954); Sec. 4941
(TRA '69)
The Internal Revenue Code of 1954, as originally enacted,
provided that if a charitable organization (sec. 501(c)(3)) or a
trust which is part of an employees plan (sec. 401(a)) engaged in
a prohibited transaction, then the entity lost its section 501(a)
7(...continued)
the nature of the Plan's other assets, or (2) either the
magnitude or the timing of the Plan's obligations.
8 We note that sec. 53.4941(d)-2(f), Private Foundation
Excise Tax Regs., interprets sec. 4941(d)(1)(E), which is almost
exactly the same as sec. 4975(c)(1)(D). Neither side cites this
regulation for any purpose. Under the circumstances we do not
explore in the instant opinion whether this regulation provides
any insight into the meaning of sec. 4975(c) (1)(D).
- 15 -
exempt status.
Sec. 503(a) (1).'
"Prohibited transaction" was
defined as any of certain types of transactions between the
entity and certain related persons; the types of transactions
involved case-by-case analyses of arm's-length standards-determinations of reasonableness, adequacy, or preferential
basis.
Sec. 503(c).
In 1969, the Congress concluded that, as applied to private
foundations,
(1) The arm's-length standards of then-existing law
required disproportionately great enforcement efforts,
(2)
violations of the law often resulted in disproportionately severe
sanctions, and (3) at the same time, the law's standards often
permitted those who controlled the private foundations to use the
foundations' assets for personal noncharitable purposes without
any significant sanctions being imposed on those who thus misused
the private foundations.
(1969),
See H. Rept. 91-413
1969-3 C.B 202, 214; S. Rept. 91-552,
(Part 1), 4, 20-21
6, 28-29
(1969),
1969-3 C.B. 426, 442-443; also see Staff of the Joint Committee
on Internal Revenue Taxation, General Explanation of the Tax
Reform Act of 1969 (hereinafter sometimes referred to as the TRA
'69 Blue Book)
3, 30-31.
The Senate Finance Committee described
its conclusions as follows:
9 Sec. 503 of the Internal Revenue Code of 1954 was derived
from sec. 3813 of the Iñternal Revenue Code of 1939; that
provision had been enacted in 1950.
- 16 To minimize the need to apply subjective arm'slength standards, to avoid the temptation to misuse
private foundations for noncharitable purposes, to
provide a more rational relationship between sanctions
and improper acts, and to make it more practical to
properly enforce the law, the committee has determined
to generally prohibit self-dealing transactions and to
provide a variety and graduation of sanctions, as
described below.
The committee's decisions generally in accord with
the House bill, are based on the belief that the
highest fiduciary standards require that self-dealing
not be engaged in, rather than that arm's-length
standards be observed.
S. Rept. 91-552,
29
see H. Rept. 91-413
(1969),
1969-3 C.B. 443.
(Part 1), 21
(1969),
To the same effect,
1969-3 C.B. 214; see
also TRA '69 Blue Book 30-31.
As a result,
83 Stat. 487
in the Tax Reform Act of 1969, Pub. L. 91-172,
(TIUA '69), the Congress removed private foundations
from the old arm's-length self-dealing requirements (sec.
101(j) (7) of TRA '69) and enacted section 4941 (sec. 101(b) of
TRA '69, relating to taxes on self-dealing).
(Part 1),
21
(1969),
See H. Rept. 91-413
1969-3 C.B. 214; S. Rept. 91-552, 29
(1969),
1969-3 C.B. 443; see also TRA '69 Blue Book 31.
Section 4941(d)(1) provided the following general definition
of self-dealing:
SEC. 4941.
*
(d)
*
TAXES ON SELF-DEALING.
*
*
*
*
*
Self-Dealing.--
(1) In general.--For purposes of this section,
the term "self-dealing" means any direct or indirect--
- 17 -
(A)
sale or exchange, or leasing, of property
between a private foundation and a disqualified
person;
(B)
lending of money or other extension of
credit between a private foundation and a
disqualified person;
(C)
furnishing of goods, services, or
facilities between a private foundation and a
disqualified person;
(D)
payment of compensation (or payment or
reimbursement of expenses) by a private foundation
to a disqualified person;
(E)
transfer to, or use by or for the benefit of,
a disqualified person of the income or assets of a
private foundation; and
(F)
agreement by a private foundation to make any
payment of money or other property to a government
official (as defined in section 4946(c)), other than an
agreement to employ such individual for any period
after the termination of his government service if such
individual is terminating his government service within
a 90-day period.
The Senate Finance Committee illustrated the application of
042
these provisions, in pertinent part, as follows:
A self-dealing transaction may occur even though
there has been no transfer of money or property between
the foundation and any disqualified person.
For
example, a "use by, or for the benefit of, a
disqualified person of the income or assets of a
private foundation" may consist of securities purchases
or sales by the foundation in order to manipulate the
prices of the securities to the advantage of the
disqualified person.
*
*
*
*
*
*
*
It has been suggested that many of those with whom
a foundation "naturally" deals are, or may be,
disqualified persons. However, the difficulties that
prompted this legislation in many cases arise because
- 18 -
foundations "naturally" deal with their donors and
their donors' businesses.
If a substantial donor owns an office building,
the foundation should look elsewhere for its office
space.
(Interim rules provided in the case of existing
arrangements are discussed below.) A recent issue (May
1969) of the American Bar Association Journal
discussing an instance of an attorney purchasing assets
at fair market value from an estate he was representing
suggests the problems even in "fair market value" selfdealing:
The Ethics Committee said that it is
generally "improper for an attorney to
purchase assets from an estate or an executor
or personal representative, for whom he is
acting as attorney. Any such dealings
ordinarily raise an issue as to the
attorney's individual interest as opposed to
the interest of the estate or personal
representative whom he is representing as
attorney. While there may be situations in
which after a full disclosure of all the
facts and with the approval of the court, it
might be proper for such purchases to be made
* * * in virtually all circumstances of this
kind, the lawyer should not subject himself
to the temptation of using for his own
advantage information which he may have
personally or professionally * * *"
S. Rept. 91-552, 29, 30-31
same effect,
c.
(1969),
1969-3 C.B. 443, 444.
To the
see also TRA '69 Blue Book 31, 32.
Sec. 4975
(ERISA '74)
By 1974, the Congress reached similar conclusions about the
same sorts of transactions involving employees plans.
- 19 Section 4975¹°, enacted by section 2003(a) of ERISA '74,
imposes taxes on a disqualified person who participates in a
¹° Sec. 4975 provides, in pertinent part, as follows:
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
*
(c)
*
*
*
*
*
Prohibited Transaction.--
(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 pèrson who
is a fiduciary whereby he deals with the
income or 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.
- 20 -
prohibited transaction between a plan and a disqualified
person."
The close relationship between the Congress' reaction to the
private foundations problems in TRA '69 and the employees plans
problems in ERISA '74 is evident in (1) the general structures of
sections 4941 (private foundations) and 4975 (employees plans)
and (2)
the identity of many elements of the definitions of
"prohibited transaction"
(sec. 4941(d)(1)).
(sec. 4975(c)(1)) and "self-dealing"
The opening language of the definitions and
many of the elements in the definitions (subpars.
(A),
and (E) of sec. 4941(d) (1) and subpars.
(C), and (D) of
(A),
sec. 4975(c)(1)) are word-for-word identical.
(B),
(B),
(C),
The ERISA '74
conference joint statement of managers confirms, at numerous
points, the TRA '69 private foundations origins of much of
section 4975.
H. Conf. Rept.
93-1280
(1974),
1974-3 C.B. 415:
" Sec. 4975(h) requires respondent to notify the Department
of Labor before issuing a notice of deficiency with respect to
taxes imposed by.sec. 4975(a) or (b).
Our findings include the
parties' stipulations as to two such notifications.
Sec. 4975(i)
is a cross-reference to coordination procedures under sec. 3003
of ERISA.
Petitioner does not contend that the notification was
insufficient or that any action of the Department of Labor under
ERISA secs. 406 (relating to prohibited transactions), 408
(relating to exemptions from prohibited transactions), 3003
(relating to procedures in connection with prohibited
transactions), or 3004 (relating to coordination between the
Treasury Department and the Labor Department) affects the instant
case.
See 29 U.S.C. 1106, 1108, 1203, 1204. Accordingly, we
assume that all requirements as to notification of, and
coordination with, the Labor Department have been complied with.
- 21 Fiduciary responsibility rules,
in general
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 ùnder 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 self-dealing that apply to private
foundations.
[Id at 295, 1974-3 C.B. 456.]
*
*
*
*
*
*
*
Prohibited transactions
In general.--The conference substitute prohibits plan
fiduciaries and parties-in-interest from engaging in a
number of specific transactions.
Prohibited
transaction rules are included both in the labor and
tax provisions of the substitute.
Under the labor
provisions (title I), the fiduciary is the main focus
of the prohibited transaction rules.
This corresponds
to the traditional focus of trust law and of civil
enforcement of fiduciary responsibilities through the
courts.
On the other hand, the tax provisions (title
II) focus on the disqualified person.
This corresponds
to the present prohibited transaction provisions
relating to private foundations.2
The prohibited transactions, and exceptions therefrom, are nearly identical in the labor and tax
provisions. However, the labor and tax provisions
differ somewhat in establishing liability for violation
of prohibited transactions. Under the labor
provisions, a fiduciary will only be liable if he knew
or should have known that he engaged in a prohibited
- 22 -
transaction.
Such a knowledge requirement is not
included in the tax provisions. This distinction
2 Generally, the substitute defines a prohibited transaction as
the same type of transaction that constitutes prohibited selfdealings with respect to private foundations, with differences
that are appropriate in the employee benefit area. As with the
private foundation rules, under the substitute, both direct and
indirect dealings of the proscribed type are prohibited.
conforms to the distinction in present law in the
private foundation provisions (where a foundation's
manager generally is subject to a tax on self-dealing
if he acted with knowledge, but a disqualified person
is subject to tax without proof of knowledge) . [];d.._ at
306-307, 1974-3 C.B. at 467.)
*
*
*
*
*
*
*
The substitute prohibits the direct or indirect
transfer of any plan income or asset to or for the
benefit of a party-in-interest.
It also prohibits the
use of plan income or assets by or for the benefit of
any party-in-interest. As in other situations, this
prohibited transaction may occur even though there has
not been a transfer of money or property between the
plan and a party-in-interest.
For example, securities
purchases or sales by a plan to manipulate the price of
the security to the advantage of a party-in-interest
constitutes a use by or for the benefit of a party-ininterest of any assets of the plan.
[Id. at 308, 19743 C.B. at 469.]
*
*
*
*
*
*
*
The substitute also prohibits a fiduciary from
receiving consideration for his own personal account
from any party dealing with the plan in connection with
the transaction involving the income or assets of the
plan. This prevents, eg., "kickbacks" to a fiduciary.
In addition, the labor provisions (but not the tax
provisions) prohibit a fiduciary from acting in any
transaction involving the plan on behalf of a person
(or representing a party) whose interests are adverse
to the interest of the plan or of its participants or
beneficiaries. This prevents a fiduciary from being
put in a position where he has dual loyalties, and,
- 23 -
therefore, he cannot act exclusively for the benefit of
a plan's participants and beneficiaries.
(This
prohibition is not included in the tax provisions,
because of the difficulty in determining an appropriate
measure for an excise tax.)
[Iji at 309, 1974-3 C.B. at
470.)
*
*
*
*
*
*
*
Following present law with respect to private
foundations, under the substitute where a fiduciary
participates in a prohibited transaction in a capacity
other than that, or in addition to that, of a
fiduciary, he is to be treated as other disqualified
persons and subject to tax.
Otherwise, a fiduciary is
not to be subject to the excise tax.
[Id. at 321,
1974-3 C.B. at 482.]
After enacting ERISA '74, the Congress took a similar
approach in section 4951, enacted by section 4(c)(1) of the Black
Lung Benefits Revenue Act of 1977,
Pub. L.
95-227,
92 Stat. 11,
18.
d.
Prohibited Transactions
Each of the transactions, listed supra in table.1, was a
loan.
Respondent does not contend that any of the transactions
fits under section 4975(c)(1)(B)
("any direct or indirect--(B)
lending of money or other extension of credit between a plan and
a disqualified person"), but focuses only on subparagraphs
and (E) of section 4975(c)(1).
(D)
We consider first whether any of
the transactions fits under section 4975(c)(1)(D)--"any direct or
indirect--(D) transfer to, or use by or for the benefit of, a
disqualified person of the income or assets of a plan".
- 24
-
Petitioner was a disqualified person with respect to the
Plan because (1) he was a fiduciary (sec. 4975(e)(2) (A)),
(2) he
owned Rollins (sec. 4975(e)(2)(E)), and (redundant in the instant
case)
(3) he owned at least 10 percent of Rollins (sec.
4975(e)(2) (H)).
The transactions were uses by petitioner or for
petitioner's benefit, of assets of the Plan.
Plan were not transferred to petitioner.
These assets of the
As to each of the
transactions before us, petitioner sat on both sides of the
table.
Petitioner made the decisions to lend the Plan's funds,
and petitioner signed the promissory notes on behalf of the
Borrowers.
This flies in the face of the general thrust of this
legislation to stop disqualified persons from dealing with the
relevant employees plans or the plans' assets.
The Congress
replaced prior laws' arm's-length standards and put in their
place prohibitions on certain kinds of dealings (with exceptions
not relevant to the instant case).
The prohibitions were backed
up by excise taxes, to be imposed without regard to whether the
transactions benefited the employees plans.
However, the Congress chose to carry out this "general
thrust" by enacting a series of detailed prohibitions.
The
question before us at this point is whether petitioner violated
one of these detailed prohibitions--direct or indirect use of a
plan's assets or income by petitioner or for petitioner's
benefit.
- 25 From the stipulations and stipulated exhibits we learn that
petitioner held the largest interest in each borrower whenever
that borrower received a loan from the Plan.
8.93-percent interest in J & J Charlotte.
had a 6.70-percent interest.
Petitioner had an
Petitioner's then-wife
Their combined holdings were 2-1/2
times as great as the next-largest holding.
Petitioner had a
26.8-percent interest in Eagle Bluff--three times as great as the
next-largest holding.
Petitioner had a 33.165-percent interest
in Jocks and Jills, Inc.--6-1/2 times as great as the nextlargest holding.12
When Eagle Bluff was not able to make its
payments to the Plan, petitioner made some of the payments,
intending (the parties stipulated) that he would receive his
money back when the golf club was sold.
,
The ERISA '74 conference joint statement of managers states:
"this prohibited transaction [use of plan assets for the benefit
of a disqualified person] may occur even though there has not
been a transfer of money or property between the plan and a
party-in-interest [disqualified person]."
The statement of
managers goes on to illustrate that use of a plan's assets to
¹² On brief, petitioner states that his "ownership
interest[s] in the entities to which loans were made were roughly
9%, 13% and 24%." Petitioner is correct as to J & J Charlotte.
However, his statement on brief substantially conflicts with the
parties' stipulations--and the stipulated exhibits--as to Eagle
Bluff and Jock and Jills, Inc. Our findings are in accord with
the parties' stipulations.
Petitioner does not enlighten us as
to the source of his statement regarding his ownership interests
in Eagle Bluff and Jock and Jills, Inc.
- 26 -
manipulate the price of a security to the advantage of a
disqualified person constitutes a prohibited transaction.
In light of the legislative history illustrating the meaning
of this statutory provision, it is apparent that the evidentiary
record is consistent with a conclusion that petitioner derived a
benefit (as significant part owner of each of the Borrowers)
from the Borrowers' securing financing without having to deal
with independent lenders.
That is,
petitioner derived a benefit.
it is possible that
However, it also is possible that
petitioner did not derive a benefit.
From the evidentiary record
herein, we cannot determine which of these possibilities is the
more likely one. .
When we examine the record for evidence that petitioner did
not derive a benefit (e.g., did not receive any money, or did not
enhance the values of his investments in the Borrowers), we find
nothing.¹³
Petitioner has the burden of proving by a preponderance of
the evidence that the loans, or any of them, did not constitute
uses of the Plan's income or assets for his own benefit.
142(a); Welch v. Helvering, 290 U.S. 111
Commissioner,
95 T.C. 82,
91
Rule
(1933); Borchers v.
(1990), affd. 943 F.2d 22
¹³ Petitioner's denials on brief are not evidence.
143(b); Evans v. Commissioner, 48 T.C. 704,
F.2d 1047 (9th Cir. 1969).
709
(8th Cir.
Rule
(1967), affd. 413
- 27
1991).
-
On the record before us, petitioner has failed to carry
this burden.
Petitioner contends that the loans were good for the Plan,
providing diversification and a good return with "safe, secure
collateral."
In Leib v. Commissioner, 88 T.C.
1474
(1987), the
taxpayer sold stock to the employees' pension trust of the
professional corporation that he owned.
The taxpayer contended
that the trust's purchase "would qualify as a prudent investment
if judged under the highest fiduciary standards."
Id. at 1477.
We concluded on that issue as follows:
After a review of the statutory framework and
legislative history of section 4975 and the case law
interpreting ERISA section 406, we conclude that the
prohibited transactions contained in section 4975(c)(1)
are just that. The fact that the transaction would
qualify as a prudent investment when judged under the
highest fiduciary standards is of no consequence.
Furthermore, the fact that the plan benefits from the
transaction is irrelevant.
Good intentions and a pure heart
are no defense.
* * *
[Id. at 1481).
Thus, prudence of the investment and actual benefit to the
Plan are not sufficient to excuse petitioner from imposition of
tax under section 4975(a)
if petitioner participated in a
prohibited transaction with respect to the Plan.
Respondent directs our attention to O'Malley v.
Commissioner,
96 T.C.
644
(1991), affd.
972 F.2d 150
(7th Cir.
1992), in which we held that a transaction violated section
4975(c)(1) (D) even though the taxpayer "did not receive any
direct payments from the Plan".
Petitioner correctly points out
- 28 -
that the instant case is distinguishable from O'Malley.
In
O'Malley, the record showed that the plan paid the taxpayer's
legal fees, and the taxpayer did not dispute the Commissioner's
contention that this use of the plan's assets benefited the
taxpayer and thus constituted a prohibited transaction.
v. Commissioner, 96 T.C. at 650.
O'Malley
Petitioner states on brief that
in the instant case "there were no expenses paid by the Plan on
behalf of the Petitioner."
Firstly, petitioner's statement on
brief cannot substitute for petitioner's failure to provide
evidence of record.
Secondly, as the ERISA '74 conference
statement of managers extract shows, even the use of a plan's
assets to enhance the price of a security can constitute a
benefit within the meaning of section 4975(c)(1)(D).
Rept. 93-1280, supra at 303, 1974-3 C.B. at 469.
H. Conf.
The record in
the instant case does not enable us to find that the loans did
not enhance, or were not intended to enhance, the values of
petitioner's equity interests in the Borrowers.
Petitioner contends that Etter v. J. Pease Const. Co., Inc.,
963 F.2d 1005
(7th Cir. 1992), is "a critical case in this area".
The cited Court of Appeals opinion deals with a number of issues.
We assume petitioner intends us to focus on that part of the
Etter opinion dealing with whether an employees plan's investment
in a joint venture "constituted a use of the * * *[employees
plan's] assets for the benefit of a party in interest
[in the tax
- 29 -
law, a 'disqualified person'] and, thus, is prohibited by 29
U.S.C. § 1106(a)(1)(D)
[sec. 4975(c)(1)(D)]."
963 F.2d at 1010.
The Court of Appeals summarized as follows the parties'
contentions on that issue, and the Court of Appeals' conclusions,
idem.:
Etter [the plan participant] argues that Pease and
Miller [the plan trustees] benefitted from the Plan's
investment in that they secured various tax advantages
while not risking as much of their personal assets.
Conversely, appellees [the plan trustees] argue, as the
district court found, that by contributing less than
100% of the purchase price Pease and Miller enabled the
Plan to take advantage of a valuable opportunity.
These two views of the evidence, as different as
they may be, are both permissible, and the district
court's account is plausible.
Therefore, the finding
of the district court "cannot be clearly erroneous."
Anderson v. City of Bessemer City, 470 U.S. 564, 574
(1985).
We agree with petitioner that Etter is significant.
The Court of
Appeals makes it plain that an employees plan's assets could be
used for the benefit of a disqualified person,
in violation of
section 4975(c)(1) (D), even though none of the employees plan's
assets were transferred to the disqualified person.
The
resolution of.the benefit issue depends on whether the party
having the burden of proof has carried that burden on the basis
of the evidence in the record.
Our evaluation of the sparse
evidence in the record of the instant case, consistent with
Etter, convinces us that petitioner has failed to carry his
.
- 30 burden of proving that he did not use the Plan's assets for his
own benefit.
Our conclusion as to section 4975(c) (1) (D) makes it
unnecessary for us to determine whether the loans also violated
section 4975(c)(1) (E).
In particular, we do not decide whether
we agree with respondent's contention on brief that petitioner's
ownership interests in the Borrowers-created a conflict of interest between the Plan and the
companies, resulting in dividing his loyalties to these
entities.
This conflicting interest as a disqualified
person who is a fiduciary brought petitioner within the
prohibition against dealing "with the income or assets
of a plan in his own interest or for his own account".
I.R.C.
§ 4975(c)(1) (E).
We note that the regulation on which respondent relies on
this issue--section 54.4975-6(a)(5)(i), Pension Excise Tax Regs.-deals with "the furnishing of office space or a service" and
prohibits a fiduciary from causing "a plan to pay an additional
fee to such fiduciary* * * to provide a service", and prohibits
an arrangement "whereby such fiduciary * * * will receive
consideration from a third party in connection with such
transaction."
None of these elements is suggested on the record
herein, and so it is not readily apparent that this regulation is
relevant to this issue.
Also, an analysis of the effect of conflict of interest,
without more, as a basis of violation of section 4975(c)(1) (E)
should take into account the statutory differences between the
- 31 -
ERISA '74 labor law provisions and the tax law provisions.
Section 406(b)(1) and (3)
of ERISA '74
(codified as 29 U.S.C.
1106(b)(1) and (3)) corresponds to subparagraphs (E) and (F) of
section 4975(c)(1).
However, the tax law does not have an
equivalent of section 406(b)(2) of ERISA '74:
(b)
A fiduciary with respect to a plan shall not--
(2) in his individual or in any other capacity act
in any transaction involving the plan on behalf of a
party (or represent a party) whose interests are
adverse to the interests of the plan or the interests
of its participants or beneficiaries * * *.
The statement of managers, H. Conf. Rept. 93-1280, supra at
309, 1974-3 C.B. at 470, explains this difference between the
labor and tax titles as follows:
In addition, the labor provisions (but not the tax
provisions) prohibit a fiduciary from acting in any
transaction involving the plan on behalf of a person
(or representing a party) whose interests are adverse
to the interests of the plan or of its participants or
beneficiaries. This prevents a fiduciary from being
put in a position where he has dual loyalties, and,
therefore, he cannot act exclusively for the benefit of
a plan's participants and beneficiaries.
(This
prohibition is not included in the tax provisions,
because of the difficulty in determining an appropriate
measure for an excise tax.)
Thus,
it appears that a conflict of interest involving a
fiduciary's obligations to the other party in a transaction may
be actionable under the labor title, but it may be that such a
conflict of interest by itself may not be actionable under
section 4975(c)(1)(E).
- 32 -
We shall deal with such matters under section 4975(c)(1)(E)
when confronted with a record in which we must decide the matters
in order to resolve the case.
We hold, for respondent, that each of the loans (supra table
1) constituted a use of the Plan's assets for petitioner's
benefit,
II.
in violation of section 4975(c)(1) (D).
Failure To File Tax Returns
In the portion of his brief dealing with the additions to
tax for failure to file tax returns, petitioner contends that-Nothing in this case indicates that there was abuse of
any kind to the Plan or its participants, nor was there
any economic benefit to the Petitioner himself. The
Petitioner has significant experlence in administering
and managing benefit plans, and substantial experience
in the asset management of plans. When a taxpayer
cannot rely upon the statutory authority itself to
support his actions, then the taxing system becomes
sheer folly.
* * * As the record will show, the
Petitioner totally relied upon the statutory integrity
of the transaction, and to assert there was any abuse
or that any assessment of penalties is warranted is an
outrage.
Respondent maintains:
(1) Petitioner was obligated to file
tax returns for the section 4975(a) taxes;
to do so;
(2) petitioner failed
(3) petitioner did not have reasonable cause for his
failure to file tax returns; and (4) such failures result in
additions to tax under section 6651(a)(1).
We agree with respondent.
- 33 -
The relevant legal analysis about the application of section
6651(a)(1)
to failures to file returns for section 4975 taxes is
set forth in Janpol v. Commissioner, 102 T.C. 499 (1994), and
need not be repeated here.
Relying on his own understanding of the law, petitioner
chose to sit "on both sides of the table in each transaction."
Yamamoto v. Commissioner,
924
(9th Cir. 1982).
73 T.C. 946, 954
(1980), affd. 672 F.2d
Relying on his own understanding of the
law, petitioner did not see any need to file section 4975 tax
returns to report any of the transactions.
Relying again on his
own understanding of the law, petitioner chose to submit the
instant case fully stipulated without including evidence to show
that he did not benefit from the transactions.
Pease Const. Co.,
Inc.,
963 F.2d 1005
In Etter v. J.
(7th Cir. 1992), the
trustees succeeded in persuading the trial judge that they did
not benefit from the employee plan's investment in the joint
venture.
In the instant case, petitioner failed to persuade the
Court that he did not benefit from the transactions.
Petitioner's good-faith belief that he was not required to
file tax returns does not constitute reasonable cause under
section 6651(a) (1) unless bolstered by advice from compete.nt tax
counsel who has been informed of all the relevant facts.
Bros. Foundation,
Inc. v. Commissioner,
39 T.C. 93,
133
Stevens
(1962),
- 34 affd. on this point 324 F.2d 633,
646
(8th Cir. 1963).
There is
no such evidence in the record in the instant case.
We hold for respondent on this issue.
To take account of the foregoing, including respondent's
concessions,
Decision will be entered
under Rule 155.
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