Brief Case
Pension Resource
U.S. Tax Court

Howard E. Clendenen, Inc. v. Commissioner

T.C. Memo. 1998-318 · Docket 18155-96R · Decided Sep 3, 1998 · Tannenwald · T.C. Memo.
Source ↗
Addresses I.R.C. § 415, I.R.C. § 401, Treas. Reg. § 1.415-2, I.R.C. § 1106
T.C. Memo. 1998-318
UNITED STATES TAX COURT
HOWARD E. CLENDENEN, INC., Petitioner v

.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18155-96R. Filed September 3, 1998.

Paul F. Christoffers

, for petitioner.

Lawrence H. Ackerman

, for respondent.

MEMORANDUM OPINION
TANNENWALD, Judge

: This is an action for a declaratory judgment regarding the qualification of petitioner's employee stock ownership plan and trust. On May 22, 1996, respondent issued a final revocation letter to petitioner stating that the Howard E. Clendenen, Inc. Employee Stock Ownership Plan (the after July 15, 1983, and amended the ESOP effective June 30, 1985, and July 1, 1989. Petitioner received favorable determination letters with respect to the ESOP and trust dated December 8, 1983, March 24, 1986, and March 22, 1990. The plan year and limitation year of the ESOP and the trust are the fiscal year ending June 30.

The trust is and has been petitioner's sole shareholder since petitioner's incorporation. Petitioner issued shares of its stock to the trust in payment of the contributions to the trust and in exchange for cash.

Howard E. Clendenen (Mr. Clendenen) is and has been petitioner's president. On June 28, 1986, petitioner's board of directors resolved:

That Howard E. Clendenen has advised the Corporation that he desires to forego [sic] one-half of his salary and bonuses for the fiscal year ended June 30, 1986 with the understanding that said one-half of his salary and bonuses shall be contributed to * * * [the trust]. It is further understood that this transaction shall be considered an employee contribution.

On June 29, 1987, petitioner's board passed a resolution identical to that of June 28, 1986, resolution except for the 1987 year.

The ESOP's records reflect the following contributions to the trust allocated to petitioner's employees as shown:

Plan Employer Employee
Year
Employee
Contribution
Contribution

1986 Howard E. Clendenen 0 $17,029.38 1987 Howard E. Clendenen $ 9,000.00 30,000.00 1988 Howard E. Clendenen 0 0 1989 Howard E. Clendenen 11,250.00 0 Paul Clendenen 1,949.820 1989 total 13,199.82 0 1990 Howard E. Clendenen 9,000.00 0 Paul Clendenen 3,299.880 1990 total 12,299.88 0 1991 Howard E. Clendenen 8,250.00 0 Paul Clendenen 3,975.000 1991 total 12,225.00 0 These contributions were reflected in the trust's Forms 5500-C Return/Report of Employee Benefit Plan for each of such years.

Petitioner reported the following expenditures on its U.S. Corporation Income Tax Returns:

Year
Total
Compensation of
Officers

Salaries and Wages Pension, profitsharing, etc., plans 1986 $34,058.76 0 n/a 1987 36,697.01 0 $9,000.00 1988 0 0 0 1989 0 $12,998.80 13,199.82 1990 0 21,999.20 12,299.88 1991 0 26,500.00 12,225.00 regardless of which amounts we use, the annual additions allocated to Mr. Clendenen during each of the plan years 1986, 1987, 1989, 1990, and 1991, exceed the section 415 limits. Petitioner has not argued or established that any corrective measures were taken to reduce these additions. See sec. 1.4156(b)(6), Income Tax Regs. We hold that the trust is not a qualified trust under section 401(a) beginning with the plan year 1986. Decision will be entered for respondent .

Footnotes

1 for the plan years beginning after June 30, 1985, and that its related trust (the trust) was not tax exempt under section 501(a) for those years. The issue for decision is whether amounts contributed to the trust and allocated to one of the ESOP's participants exceed the limitations in section 415, thereby causing the trust not to constitute a qualified trust under section 401(a). Background Petitioner is a corporation with its principal place of business located in West Des Moines, Iowa, at the time of the filing of the petition in this case. It filed its Federal tax returns for the years in issue with the Internal Revenue Service Center in Kansas City, Missouri. Petitioner utilizes the accrual method of accounting with a fiscal year ending June 30 as its taxable year. Petitioner was incorporated on July 15, 1983, and its principal business activity is insurance consulting. It is the employer and plan administrator with respect to the ESOP, a defined contribution plan. It established the ESOP and the trust on September 6, 1983, effective for plan years beginning on or

2 Mr. Clendenen's returns reflect the following: Wages, Business Year Salaries Income Type of Business 1986 $12,938 0 1987 30,000 0 1988 0 0 1989 0 $75,000 Insurance consulting 1990 0 60,000 Consultant 1991 0 55,000 Consultant For the plan year ending June 30, 1986, and his taxable year ending December 31, 1986, Mr. Clendenen treated $17,029.38 as an elective deferral of compensation into the ESOP. Discussion Section 401(a)(16) provides: A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part

3 ] or (B) 25 percent of the participant's compensation. Section 415(c)(2) provides that "annual addition" means the sum for any year of--(A) employer contributions,

4 ] and (C) forfeitures. The dispute in this case focuses on the amount of the contributions to the trust allocated to Mr. Clendenen. The parties disagree as to what constitutes participant compensation and as to whether elective deferral amounts constitute employee or employer contributions. It is petitioner's position that the amounts of elective deferrals are employee contributions and should be included in "participant's compensation". Petitioner also asserts that "participant's compensation" includes amounts petitioner paid as commissions and bonuses to Mr. Clendenen as an independent contractor. As a consequence, petitioner maintains that the limitations of section 415(c)(1) have not been exceeded with the result that the plan and trust were qualified during the years at issue. Respondent asserts that the amounts of elective deferrals constitute employer, not employee, contributions and that these amounts and the commissions and bonuses do not constitute

5 provides that compensation does not include "Contributions made by the employer to a plan of deferred compensation to the extent that, before the application of the section 415 limitations to that plan, the contributions are not includable in the gross income of the employee for the taxable year in which contributed." Furthermore, section 1.401(k)-1(a)(4)(ii), Income Tax Regs., provides: Except as provided in paragraph (f) of this section, [dealing with the correction of excess contributions] elective contributions under a qualified cash or deferred arrangement are treated as employer

6 We rejected the same argument presented herein and concluded that respondent's position was clearly supported by the statute and regulations. We reach the same conclusion herein and hold that the elective deferrals are employer contributions and not included in "participant's compensation". Consequently, the amounts of the elective deferrals are included in annual additions.

7 Sec. 415(c)(2). Petitioner also seeks to include in "participant's compensation" the amounts of the commissions or bonuses that

8 Income Tax Regs., provides: For purposes of applying the limitations of section 415, the term "compensation" includes * * * --(i) The employee's wages, salaries, fees for professional services, and other amounts received * * * for personal services actually rendered in the course of employment with the employer maintaining the plan to the extent that the amounts are includable in gross income * * * . [Emphasis added.]

9 We need not make any findings with respect to the exact figures, however, for

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