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8th Circuit Affirms Tax Court on DB Plan Sponsor Penalties

The U.S. Court of Appeals for the 8th Circuit has upheld a ruling by the U.S. Tax Court in Pizza Pro Equipment Leasing, Inc. v. Commissioner of Internal Revenue that a defined benefit plan sponsor owed excise taxes and additions to tax related to its operation of the plan. The court issued its ruling on April 23.

The Facts

Pizza Pro Equipment Leasing, Inc., established a DB plan in 1995. The case involves a dispute about a limitation on the plan’s annual benefit, which, in turn, determines Pizza Pro’s deductible contributions to the plan.

The IRS concluded that from 2002 to 2006, Pizza Pro incorrectly calculated the limitation on the annual benefit, and therefore made nondeductible contributions to the plan. The IRS further imposed additions to tax for failure to file an excise tax return and failure to timely pay the excise tax owed.

Pizza Pro petitioned the U.S. Tax Court over the IRS determinations. That court upheld them, concluding that Pizza Pro did not make a valid election under Internal Revenue Code Section 4972(c)(7), which allows a taxpayer to disregard contributions to a DB plan under certain conditions. Pizza Pro appealed to the 8th Circuit.

Pizza Pro argued that the plan’s annual benefit never exceeded the applicable limitation. It said that the tax court erred in holding that the word “equivalent” in IRC Section 415(b)(2)(C) should be read as “actuarially equivalent.”

The 8th Circuit Weighs in

The tax court applied Treas. Reg. §1.415-3(e), which says that a plan benefit beginning before the normal retirement age is adjusted to “the actuarial equivalent” of a benefit beginning at the normal retirement age; the court noted that Pizza Pro did not challenge the validity of that regulation.

“Because this regulation does not define ‘actuarial equivalence,’’ said the 8th Circuit, “the Tax Court looked to general practice within the field of actuarial science to ascertain the proper method for determining the limitation on the annual benefit.” It continues that the Tax Court relied upon the IRS report — which an IRS actuary prepared — rather than Pizza Pro’s report, which was not prepared by an actuary. The 8th Circuit said that the Tax Court was correct in its finding that the method the IRS followed is in accordance with actuarial practice and that which Pizza Pro followed is not, and, consequently, “Pizza Pro’s challenge to the deficiencies and additions fails.”

The 8th Circuit went on to say that the Tax Court was correct in holding that Pizza Pro did not make a valid election regarding excess contributions. And it said that Pizza Pro had erroneously relied upon a recommendation to the IRS that the failure to file an excise tax form should be considered sufficient evidence of its election. The IRS, it noted, had never adopted the suggestion; further, the 8th Circuit said, the U.S. Court of Appeals for the 5th Circuit had rejected a similar argument.

“As the Commissioner points out, Pizza Pro’s failure to file the requisite form stemmed from its belief that it made no excess contributions and owed no excises taxes, not its intent to make an election,” said the 8th Circuit. It continued, “Because it failed to inform the Commissioner in any manner, Pizza Pro did not make an election. For these reasons, the judgment is affirmed.”