Greenlee v. Commissioner

T.C. Memo. 1996-378

UNITED STATES TAX COURT

GAYLORD W. GREENLEE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16615-94. Filed August 15, 1996.

P was the sole participant and plan administrator
of a pension plan for corporation A and owned 18
percent of an unrelated corporation, C. In 1982, P
requested the plan's independent trustee to consider
lending trust funds to C. The trustee had full
investment discretion under the plan's trust document
and authorized the loan.
Held: P is not subject to the 5-percent excise
tax of sec. 4975(a), I.R.C., because he did not engage
in a prohibited transaction under sec. 4975(c)(1)(E),
I.R.C.

Gaylord W. Greenlee, pro se.

Julia L. Wahl, for respondent.
 - 2 -

MEMORANDUM OPINION

LARO, Judge: Gaylord W. Greenlee petitioned the Court to

redetermine respondent's determinations of the following Federal

excise tax deficiencies and additions thereto.

Excise Tax Excise Tax Additions to Tax
Sec. Sec. Sec.
Year 4975(a) 4975(b) 6651(a)(1)1

1985 $1,711 --- $428
1986 2,364 --- 591
1987 3,084 --- 771
1988 3,872 --- 968
1989 4,721 --- 1,180
1990 5,599 $111,839 1,400

1
In the notice of deficiency, respondent determined the
additions to tax as follows:

Additions to Tax
Sec.
Year 6651(a)(1)

1985 $ 813
1986 1,123
1987 1,403
1988 1,529
1989 1,581
1990 1,539

Then, in her reply brief, she conceded that the correct additions
to tax are as stated in the text.

The primary issue for decision is whether petitioner engaged

in a prohibited transaction so as to be subject to the first-tier

excise tax under section 4975(a). We hold he did not. Based on

our holding, we also hold that petitioner is not subject to the
 - 3 -

second-tier excise tax under section 4975(b) and the additions to

tax under section 6651(a)(1). Unless otherwise indicated,

section references are to the Internal Revenue Code applicable to

the years in issue. Rule references are to the Tax Court Rules

of Practice and Procedure.

Background

This case has been submitted fully stipulated under

Rule 122. The stipulations and the exhibits attached thereto are

incorporated herein by this reference. Petitioner resided in

Prospect, Pennsylvania, when he filed his petition.

Petitioner is the sole participant and the plan

administrator of the Gaylord W. Greenlee, P.C., Profit Sharing

Plan and Trust (Plan).1 Article X of the Plan document sets

forth the following responsibilities for the plan administrator:

The Plan Administrator shall, as named fiduciary,
have exclusive authority to control and manage the
operation and administration of the Plan. The Plan
Administrator shall perform all general administration
duties under the Plan, including (but not limited to)
the following:

(a) To determine all questions relating to the
eligibility of Employees to participate or to continue
participation;

(b) To compute, certify and direct the Trustee
with respect to the amount and kind of benefits to
which any Participant or Beneficiary is entitled;

1
Petitioner is, and at all relevant times was, a lawyer
duly licensed to practice in Pennsylvania.
 - 4 -

(c) To authorize and direct the Trustee with
respect to all disbursements from the Trust Fund;

(d) To maintain all records and, if the Employer
has so elected in * * * [the Adoption Agreement], the
books of account necessary for the administration of
the Plan;

(e) To interpret the provisions of the Plan and
to make and publish such interpretive or procedural
rules as are not inconsistent with the Plan and
applicable law;

(f) To advise the Trustee regarding the short and
long term liquidity needs of the Plan in order that the
Trustee might accordingly manage the investment of Plan
assets;

(g) To advise and assist any Participant or
Beneficiary regarding any rights, benefits or elections
available under the Plan;

(h) To prepare and file such reports and
documents as may be required under ERISA, the Internal
Revenue Code, or other applicable law;

(i) To provide to Participants and Beneficiaries
such information and Plan descriptions, reports or
copies of Plan documents as may be required by law;

(j) To dispose of claims for benefits under the
Plan by Participants or Beneficiaries, pursuant to
* * * [the plan's "Claim Procedure" provision]

(k) To perform such other duties under the Plan
as may be assigned by the Employer.

Union National Bank of Pittsburgh (Union National Bank) is

the sole trustee of the Plan's trust. Article XI of the Plan

document sets forth the following provisions concerning the

trustee's responsibilities:

The Employer establishes with the Trustee a trust
consisting of such sums of money, and such property
acceptable to the Trustee, as shall from time to time
 - 5 -

be contributed under the Plan and paid or delivered to
the Trustee. All such money and property, all
investments and reinvestments made therewith and
proceeds thereof, and all earnings and profits therein,
less any losses thereon, and less the payments which at
the time of reference shall have been made by the
Trustee as authorized herein are referred to as the
"Trust Fund." The Trustee shall hold, invest, and deal
with the Trust Fund in accordance with this Prototype
Plan and Trust Agreement, the Adoption Agreement and
ERISA.

* * * * * * *

Except to the extent the Trustee is directed under
* * * [the provision on "Investment in Life Insurance
Contracts"] to invest in life insurance contracts, the
Trustee shall invest and reinvest the Trust Fund,
without distinction between principal and income, and
without liability for the payment of interest thereon,
in such property as the Trustee in its sole discretion
deems advisable, except that such discretion shall be
exercised in compliance with any funding-policy
guidelines communicated to the Trustee pursuant to
* * * [the provision on "Plan Funding Policy"]. The
Trustee shall not be obligated to restrict Trust Fund
investments to property of a character authorized for
investment by trustees under the law of any state,
district or territory.

* * * * * * *

The Trustee shall not engage in or cause the Trust to
engage in any transaction if it knows or should know,
through normal business sources (excepting information
received by any of its departments other than the Trust
Department, which shall not be imputed to the Trustee),
that such transaction constitutes a prohibited
transaction under ERISA which has not been exempted by
the Secretary of Labor from the restrictions otherwise
imposed upon prohibited transactions by ERISA.

The Employer shall provide the Trustee with such
information concerning the relationship between any
person or organization and the Plan or the Employer as
the Trustee may reasonably request in order to
determine whether or not such person or organization is
a party-in-interest with respect to the Plan.
 - 6 -

* * * * * * *

Except as otherwise provided in * * * [the Adoption
Agreement](relating to accounting duties), the Trustee
shall not be responsible for administration or
interpretation of the Plan, but shall be responsible
solely for the investment and safekeeping of the Trust
Fund.

On August 28, 1982, petitioner, as plan administrator,

requested the trustee, Union National Bank, to lend $60,000 to

Tag Land, Inc. (Tag Land). In connection with this loan, Tag

Land executed a note and granted the Plan a first lien on a tract

of land in Pennsylvania with a value of at least $375,000. On

September 3, 1982, the Trust Investment Committee of Union

National Bank approved this investment and forwarded the $60,000

to petitioner to send to Tag Land. When the Plan lent the

$60,000 to Tag Land, petitioner owned 18 percent of Tag Land's

stock. Petitioner has owned this 18-percent interest since 1982.

The loan bore interest at the rate of 15 percent per year

and was payable quarterly, until September 1, 1985, when the

principal was due. Since the execution of the loan, Tag Land has

made the following payments on the loan:

Oct. 4, 1982: quarterly interest payment
Feb. 25, 1983: quarterly interest payment
July 21, 1989: $2,000
Apr. 30, 1990: $5,643

Petitioner has never filed a Form 5330, Return of Excise Taxes

Related to Employee Benefit Plans.
 - 7 -

Discussion

The primary issue we must decide is whether petitioner

engaged in a prohibited transaction so as to be subject to the

first-tier excise tax under section 4975(a). Section 4975(a)

imposes a 5-percent excise tax on any disqualified person who

participates in a prohibited transaction.

Respondent determined that petitioner is a disqualified

person under section 4975(e)(2)(A), (E), and (H) who engaged in a

prohibited transaction under section 4975(c)(1)(D) and (E).

Respondent's determination is presumed correct, and the burden is

on petitioner to disprove her determination. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Laird v.

Commissioner, 85 F.2d 598, 599 (3d Cir. 1935), affg. 29 B.T.A.

196 (1933). Petitioner argues that he is not a disqualified

person who engaged in a prohibited transaction or, alternatively,

that he should be exempt from the excise tax.

A. "Disqualified Person"

The term "disqualified person" includes fiduciaries and

people owning 50 percent or more of the corporation sponsoring

the Plan. Sec. 4975(e)(2)(A), (E). "Fiduciaries" include

persons who exercise discretionary authority over the management

of a plan or its assets. Sec. 4975(e)(3). A plan administrator

is a fiduciary where he or she has the day-to-day administrative
 - 8 -

responsibilities for the plan and the duty to notify

beneficiaries and participants on plan matters. Landry v. Air

Line Pilots Association Intl., 901 F.2d 404, 420 (5th Cir. 1990).

Petitioner is a disqualified person under section

4975(e)(2)(E) because he owned 100 percent of the corporation

sponsoring the pension plan. Petitioner is also a disqualified

person under section 4975(e)(2)(A). The Plan document gives the

plan administrator general administrative duties including the

discretion to interpret plan provisions, provide participants and

beneficiaries with plan information, and dispose of benefit

claims. Since petitioner has discretion to manage the

administrative aspects of the Plan, he is a fiduciary and a

disqualified person. See sec. 4975(e)(2)(A) and (3).

B. "Prohibited Transaction"

Respondent determined that petitioner engaged in a

prohibited transaction under section 4975(c)(1)(D) and (E).

However, in her posttrial briefs, respondent claims only that

petitioner engaged in a prohibited transaction under section

4975(c)(1)(E). Where the Commissioner fails to address an issue

in her opening or reply brief, we may deem that she waived that

issue. See Levert v. Commissioner, T.C. Memo. 1989-333, affd.

without published opinion 956 F.2d 264 (5th Cir. 1992).

Accordingly, we find that respondent conceded the section
 - 9 -

4975(c)(1)(D) issue, and we limit our discussion to section

4975(c)(1)(E).

Under section 4975(c)(1)(E), a disqualified person engages

in a prohibited transaction when, as a fiduciary, he or she

"deals with the income or assets of a plan in his [or her] own

interest or for his [or her] own account". The regulations

provide that "A fiduciary does not engage in an act described in

section 4975(c)(1)(E) if the fiduciary does not use any of the

authority, control or responsibility which makes such person a

fiduciary to cause a plan to [perform the act in question]".

Sec. 54.4975-6(a)(5)(ii), Qualified Pension Plan Excise Tax Regs.

A fiduciary does not "[deal] with * * * assets of a plan in his

[or her] own interest" when he or she absents himself or herself

from all consideration of the investment proposal and the

trustees make an independent investment decision. See sec.

54.4975-6(a)(6), Example (7), Qualified Pension Plan Excise Tax

Regs.

The policy behind the enactment of section 4975 was to tax

fiduciaries who engage in self-dealing rather than "innocent

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

80, 174. Before the enactment of section 4975, prohibited

transactions would lead to the disqualification of a pension

plan. Id. at 94, 1974-3 C.B. (Supp.) at 173. This
 - 10 -

disqualification would result in the denial of favorable tax

consequences, such as an employee's deferral of taxation. Id.

Congressional activity in this area is largely designed to

protect participants against the "detrimental operation of the

plan." See Pawlak v. Commissioner, T.C. Memo. 1995-7. The

regulations incorporate this policy by suggesting that

fiduciaries must act with "undivided loyalty" to the plan.2 The

general rationale behind these provisions is "to make sure that

those who do participate in such [qualified pension] plans do not

lose their benefits as a result of unduly restrictive forfeiture

provisions." H. Rept. 93-807, at 1, 2 (1974), 1974-3 C.B.

(Supp.) 236, 237. Instead, the sanctions should be imposed

ultimately on the trustee because "trustees generally are to have

2
See sec. 54.4975-6(a)(5)(i), Qualified Pension
Plan Excise Tax Regs., which provides:

The prohibitions of [section] 4975(c)(1)(E)
and (F) supplement the other prohibitions of
section 4975(c)(1) by imposing on
disqualified persons who are fiduciaries a
duty of undivided loyalty to the plans for
which they act. These prohibitions are
imposed upon fiduciaries to deter them from
exercising the authority, control, or
responsibility which makes such persons
fiduciaries when they have interests which
may conflict with the interests of the plans
for which they act. In such cases, the
fiduciaries have interests in the
transactions which may affect the exercise of
their best judgment as fiduciaries. * * *
 - 11 -

the exclusive authority to manage and control plan assets."

H. Conf. Rept. 93-1280, at 294 (1974), 1974-3 C.B. 415, 455

(emphasis added); S. Rept. 93-383, supra at 95, 1974-3 C.B.

(Supp.) at 173.

Petitioner did not use any of the "authority, control, or

responsibility which makes [him] a fiduciary" to lend the $60,000

to Tag Land. See sec. 54.4975-6(a)(5), Qualified Pension Plan

Excise Tax Regs. Petitioner was absent at the trustee's

discussions regarding the advisability of the loan to Tag Land,

and the Trust Investment Committee of the trustee independently

approved the investment. See sec. 54.4975-6(a)(6), Example (3),

Qualified Pension Plan Excise Tax Regs. Accordingly, the

trustee, rather than the plan administrator, "[dealt] with" the

"income or assets" of the Plan in the subject transaction.

The Plan explicitly states that the trustee should not cause

the trust to engage in any prohibited transaction under the

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

93-406, 88 Stat. 829, provisions.3 It requires the employer to

3
The Plan document provides that it is the trustee that

shall not engage in or cause the Trust to
engage in any transaction if it knows or
should know, through normal business sources
* * * that such transaction constitutes a
prohibited transaction under ERISA which has
not been exempted by the Secretary of Labor
(continued...)
 - 12 -

provide the trustee "with such information concerning the

relationship between any person or organization and the Plan or

the Employer as the Trustee may reasonably request in order to

determine whether or not such person or organization is a

party-in-interest with respect to the Plan." Although the Plan

document refers to prohibited transactions under ERISA rather

than the Internal Revenue Code (Code) specifically, the Code

provisions at issue were included in ERISA. See H. Conf. Rept.

93-1280, supra at 294, 1974-3 C.B. at 415.

Further, the Plan document provides that the plan

administrator shall make administrative decisions and the trustee

shall make independent investment decisions. Petitioner

requested the independent trustee of the Plan to make a loan from

the pension trust to a corporation in which he had an 18-percent

stock ownership interest. Although petitioner suggested the

transaction to the trustee, the trustee had exclusive discretion

to make investment decisions for the Plan. Petitioner's

recommendations were simply suggestions. Under the Plan

document, the plan administrator's responsibilities were

described as "general administrative duties". This

administration included interpreting the Plan provisions,

(...continued)
from the restrictions otherwise imposed upon
prohibited transactions by ERISA.
 - 13 -

determining eligibility of employees, and maintaining all Plan

records.

In contrast, the trustee had "sole discretion" to make

investment decisions for the Plan. The trustee was "responsible

solely for the investment and safekeeping of the Trust Fund."

The trustee had the broad power to "invest and reinvest the Trust

Fund, without distinction between principal and income, and

without liability for the payment of interest thereon, in such

property as the Trustee in it sole discretion deems advisable".

This power included the power to withdraw funds from the Plan's

trust, the power to diversify its investments, the power to

invest in mortgages and evidences of indebtedness, and the power

to value its investments. The trustee would generally not be

liable for "any loss sustained by the Trust Fund".

The trustee had the discretion and authority to accept or

reject petitioner's recommendation. When the Trust Investment

Committee of the trustee approved the loan, it did so

independently of petitioner's suggestion. It conditioned its

decision on petitioner's forwarding of the recorded mortgage and

appraisal. Petitioner did not "[deal] with the income or assets

of a plan in his own interest or for his own account" and

accordingly, did not engage in a prohibited transaction. See

sec. 4975(c)(1)(E).
 - 14 -

Since petitioner did not engage in a prohibited transaction,

he is not liable for the first tier excise-tax, the second-tier

excise tax, or the additions to tax determined by respondent.

See secs. 4975(a) and (b), 6651(a)(1). We have

considered all arguments made by respondent for a contrary

holding and, to the extent not discussed above, find them to be

without merit.

To reflect the foregoing,

Decision will be entered

for petitioner.