Christy & Swan Profit Sharing Plan, TC Memo 2011-62
The Tax Court has ruled that where a single participant profit sharing plan was never amended to comply with Code changes enacted by Congress in 2000 and 2001, IRS properly revoked the plan's tax-exempt status retroactively to 2001, even though the plan accepted no new contributions or participants after 2000. The plan trustee's argument that any new statutory requirements could not possibly affect or be applicable to the plan was flatly rejected.
Background. There are several tax benefits available to qualified employee pension, profit-sharing, stock bonus and annuity plans established by employers, including a current deduction to the employer for contributions to the plan and tax deferral to the employee for his share of contributions made by the employer and on the plan's earnings on the employer's and his own contributions. Code Sec. 401(a) sets forth the basic requirements that must be met by a trust forming part of a profit-sharing plan in order for the trust to be eligible for favorable tax treatment.
The Community Renewal Tax Relief Act of 2000 (CRA; P.L. 106-554) and the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), enacted in 2000 and 2001 respectively, made a number of changes relating to qualified retirement plans and required that plans be amended appropriately in order to maintain their tax-exempt status. Specifically, the CRA required that a plan broaden its definition of compensation to include qualified transportation fringe benefits under Code Sec. 132(f), and EGTRRA required qualified plans to amend their definition of an eligible retirement plan to include eligible deferred compensation plans under Code Sec. 457(b) and annuity contracts under Code Sec. 403(b).
Facts. The Christy & Swan Profit Sharing Plan (the plan) was established in’76 by a real estate business (David S. Swan, Jr., P.A.). David Swan was the only participant, and he served as plan trustee. In’86, the plan received a favorable determination letter from IRS as a qualified tax-exempt retirement plan under Code Sec. 401(a). However, the plan wasn't amended to comply with the new requirements added by CRA or EGTRRA.
In 2006, the plan filed its Form 5500-EZ (“Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan”) for its 2005 plan year. In June 2007, IRS initiated an audit of the plan with an examination of the 2005 Form 5500-EZ filing. In August, the plan trustee signed and provided IRS with a declaration stating generally that the plan was “amended” by general reference to incorporate all statutory and regulatory amendments necessary to retain qualified status under Code Sec. 401(a). However, IRS informed the plan that, in IRS's opinion, the plan had not been amended to reflect required statutory changes, and informed the plan about its closing agreement program.
During a series of exchanges, the plan's trustee declined to participate in the closing agreement program, argued that plan had ceased to exist and that the plan had matured into a “Repository Trust,” and told IRS that he would take the matter to Court. Ultimately, in July 2009, IRS sent the trustee a letter informing him that disqualification of the plan was necessary because the plan had failed to timely amend, regardless of whether the plan still permitted contributions or admission of new participants, and sent the trustee a final revocation letter with regard to the plan's tax-exempt status.
In August 2009, the trustee sent IRS a letter explaining that the plan was so simple that any new statutory requirements could not possibly affect or be applicable to the plan. IRS responded in September with a second final revocation letter stating that the plan's qualified status for the plan year ending December 31, 2001, and for later years was revoked. In October 2009, the plan filed a petition with the Tax Court, seeking a declaratory judgment that the plan had not lost its status as a qualifying plan.
Tax Court's decision. On IRS's motion for summary judgment, the Tax Court affirmed IRS's revocation of the plan's tax-exempt status. The Court concluded that the requirements that a plan must satisfy for qualification under Code Sec. 401(a) must be strictly met, and that vague, general references in plan correspondence to such requirements are insufficient.
Among other things, the Court specifically dismissed the plan's substantive arguments. First, the Court treated the Repository Trust issue as implying that the plan had terminated in or around 2001, and therefore was not required to amend for CRA and EGTRRA. However, plan termination is a formal event with distinct requirements, including that termination dates must be established, benefits must be determined with respect to the termination date, and all plan assets must be distributed to satisfy those liabilities in accordance with the terms of the plan as soon as administratively feasible after the termination date. Since there was no evidence showing that the plan had been formally terminated, there was nothing to take forward to a trial. The Court concluded that while termination of a retirement plan will always cause a discontinuance of contributions, a discontinuance of contributions might occur without a formal termination of the plan.
The Court also dismissed the plan's argument that there was no meaningful purpose to amend the plan for statutory changes that would have had no effect on the operation of the plan. The Court noted that a qualified profit-sharing plan must meet statutory requirements both by its terms and in its operations, and that the evaluation of the plan's failure to be amended to meet statutory changes must be made in the context of what could have happened (and not what actually occurred) during the years in issue.
Accordingly, the Court reviewed some of the changes required by CRA and EGTRRA, determined that the plan was never amended to make those changes, and awarded IRS summary judgment.
References: For the advantages to and requirements of qualified plans, see FTC 2d/FIN ¶H-5300 et seq.; United States Tax Reporter ¶4014 et seq.; TaxDesk ¶280,101 et seq.; TG ¶8000 et seq.