Gant v. Commissioner

T.C. Memo. 1998-440

UNITED STATES TAX COURT

FRANK GANT AND ROBERTA GANT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17090-95. Filed December 15, 1998.

G was the president, the sole shareholder, and a highly
compensated employee of O. O sponsored a defined benefit
plan and defined contribution plan for its employees which
were both qualified within the meaning of sec. 401(a),
I.R.C. Ps alleged that O terminated both plans in the June
30, 1988, plan year when it adopted a resolution to
terminate the plans immediately and distributed individual
annuity contracts to plan participants. Subsequently, R
disqualified both plans for the plan year ended June 30,
1991, for, among other reasons, their failure to meet the
participation requirements of sec. 401(a)(26), I.R.C. R
determined deficiencies in Ps' Federal income taxes for
their 1991, 1992, and 1993 taxable years due to their
failure to include in gross income G's vested accrued
benefit in the Pension Plan in 1991, G's account balance in
the Profit Plan in 1991, and accrued benefits under both
Plans in 1992 and 1993.

1. Held, for purposes of the Internal Revenue Code,
strict adherence to the requirements of ERISA sec. 4041 are
 - 2 -

the exclusive means of terminating a single-employer defined
benefit plan. Held, further, whether a defined
contribution plan is terminated is generally a question to
be determined with regard to all the facts and circumstances
in a given case. Secs. 1.411(d)-2(c)(3), 1.401-6(b)(1),
Income Tax Regs. Held, further, P must include the value of
his vested accrued benefits in gross income for 1991-93
taxable years.

Frank Gant and Roberta Gant, pro se.

Roger P. Law, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NIMS, Judge: Respondent determined the following

deficiencies and penalties with respect to the Federal income

taxes of petitioners Frank Gant (Gant) and Roberta Gant:

Year Deficiency Sec. 6663(a)

1991 $230,397 $172,798

1992 18,012 13,509

1993 21,978 16,484

Respondent filed an Amended Answer which asserted additions

to tax under section 6662(a) for the taxable years 1991, 1992,

and 1993 in the amounts of $46,079, $3,602, and $4,395,

respectively. In the Amended Answer respondent conceded the

section 6663(a) penalty for all years. At trial, respondent

conceded the section 6662(a) penalty for all years.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in
 - 3 -

issue. All Rule references are to the Tax Court Rules of

Practice and Procedure. All dollar amounts are rounded to the

nearest dollar.

After concessions by respondent, the sole issue remaining

for decision is whether, under section 402(b), petitioners must

include the aggregate vested accrued benefit of Gant's

participation in the Pension Plan and Profit Sharing Plan in

gross income for the 1991, 1992, and 1993 taxable years.

This dispute stems from Gant's participation in two

initially qualified, but subsequently disqualified, retirement

plans administered by his employer O.W.G. Products, Inc.

(Products). Respondent argues that petitioners must include the

aggregate vested accrued benefits of Gant's participation in

gross income for 1991, 1992, and 1993, because the retirement

plans were disqualified under section 401(a)(26), relating to

"additional participation requirements", on June 30, 1991, and

Gant was a highly compensated employee (within the meaning of

section 414(q)) during the 1991, 1992, and 1993, plan years.

Petitioners counter that said plans were terminated in the June

30, 1988 plan year, and, thus, the plans were not subsequently

required to meet the requirements of section 401(a)(26).

FINDINGS OF FACT

Petitioners are married and resided in California at the

time they filed their petition.
 - 4 -

Gant was the president and 100 percent shareholder of

Products from 1981 through 1994. Products adopted the O.W.G.

Products, Inc. Employees' Defined Benefit Plan and Trust (Pension

Plan) and the O.W.G. Products, Inc. Employees' Money Purchase

Plan and Trust (Money Purchase Plan), both effective July 1,

1980. Initially, both the Pension Plan and Money Purchase Plan

were qualified plans within the meaning of section 401(a). The

Money Purchase Plan was converted into the O.W.G. Products, Inc.

Employees' Profit Sharing Plan and Trust (Profit Sharing Plan)

effective July 1, 1988. Each plan had a plan year ending June

30.

Gant was the trustee of the Pension Plan, Money Purchase

Plan, and Profit Sharing Plan and also the Plan Fiduciary under

the Money Purchase Plan and Profit Sharing Plan.

The Pension Plan's normal retirement benefit was 100 percent

of a participant's highest average monthly compensation. The

Money Purchase Plan maintained individual accounts for each

participant, contained a mandatory contribution formula, and

provided a retirement benefit equal to the participant's

accumulated account balance. The Profit Sharing Plan contained a

discretionary contribution formula and provided for a retirement

benefit equal to a participant's accumulated account balance.
 - 5 -

On October 13, 1987, Products' board of directors passed a

resolution to terminate the Pension Plan and Money Purchase Plan.

The resolution read as follows:

Immediately terminate the company pension plans
noted as the O.W.G. Products, Inc., Employees Defined
Benefit Pension Plan and the O.W.G. Products, Inc.,
Money Purchase Plan and to notify the pension
administrator, Pension Services Corporation of this
meeting and instruct that these plans be terminated
immediately in the current plan year and in accordance
with appropriate tax guidelines, as outlined under the
Internal Revenue Code and in accordance with the
provisions of the Pension Benefit Guaranty Corporation
for terminating plans and other laws regarding pension
benefit plans as required.

Gant wrote a letter dated October 15, 1987, to Pension Services

Corporation (Pension Services), the plans' third-party

administrator, requesting that the Pension Plan be discontinued.

Neither Products nor Gant gave written notice to plan

participants of the intent to terminate the Pension Plan and the

Money Purchase Plan during the Pension Plan and the Money

Purchase Plan years ended June 30, 1988. Furthermore, Products

did not give written notice to the Pension Benefit Guaranty

Corporation (PBGC) of its intent to terminate the Pension Plan.

On June 22, 1988, Gant, acting as trustee for both the

Pension Plan and Profit Sharing Plan (formerly the Money Purchase

Plan) purchased group annuity contracts for the participants in

these plans. On December 6, 1988, Gant distributed individual

annuity contracts to the plan participants. The present value of

vested accrued benefits for the Pension Plan's participants was
 - 6 -

$640,383 as of June 30, 1987. The cost and present value (as of

the time of purchase) of the group annuity contract was $382,467.

The aggregate value of the Profit Sharing Plan's accumulated

vested account balances was $413,746, as of June 30, 1988. The

cost and present value (as of the time of purchase) of the group

annuity contract was $56,031.

Products distributed annual benefits statements to Pension

Plan participants through the plan year ending June 30, 1991.

Annual benefits statements were not distributed thereafter.

Products filed Form 5500 for all plan years until the plan year

ending June 30, 1991. For the plan years ended June 30, 1988,

June 30, 1989, and June 30, 1990, Products stated on Form 5500

that the Pension Plan had not been terminated. On Form 5500 for

the plan year ended June 30, 1991, Products disclosed that the

Pension Plan had been terminated.

For the plan year ended June 30, 1988, Products stated on

Form 5500 that the Money Purchase Plan had not been terminated.

For the plan years ending on June 30, 1989 and June 30, 1990,

Products stated that the Profit Sharing Plan had not been

terminated. Products did not file Form 5500 for the Profit

Sharing Plan thereafter.

During the plan years ended June 30, 1991, only 15 of 66

eligible employees were benefiting under both the Pension Plan

and Profit Sharing Plan. Fifty-one eligible employees were
 - 7 -

excluded despite meeting both plans' age and service

requirements.

On January 27, 1992, Gant signed Form 500, Standard

Termination Notice, Single-Employer Plan Termination, for the

Pension Plan and sent it to the PBGC. This Form 500 disclosed

that the proposed Pension Plan termination date was June 30,

1992. The PBGC responded with a Notice of Non-compliance dated

March 5, 1992.

On February 10, 1992, Gant issued a letter to the Pension

Plan participants stating: "We are in the process of filing the

necessary documents to terminate the O.W.G. PRODUCTS, INC.

EMPLOYEES DEFINED BENEFIT PLAN."

On February 12, 1992, Products filed a Form 5310,

Application for Determination Upon Termination, for the Pension

Plan. The proposed date of the Pension Plan's termination was

June 30, 1991. On August 19, 1992, respondent issued a favorable

determination letter for the proposed termination. Products did

not file a Form 5310 for the Profit Sharing Plan. Respondent

disqualified both plans on February 7, 1997, effective for the

plan year ending June 30, 1991.

On May 29, 1992, Gant, as trustee for both the Pension Plan

and Profit Sharing Plan, collected all the individual annuity

certificates previously distributed to plan participants and

redeemed them for cash. Upon redemption, the cash value of the
 - 8 -

Pension Plan annuity contracts was $491,904. The Profit Sharing

Plan annuity contracts were redeemed for $69,231. Gant deposited

the redemption proceeds into each plan's respective trust.

After June 30, 1991, Gant's benefits increased. His accrued

benefits in the Pension Plan increased due to his additional

service with Products and his Profit Sharing Plan vested account

balance increased due to his pro rata share of income from the

Profit Sharing Plan.

OPINION

The central issue for decision is whether petitioners must

include Gant's vested accrued benefits in Products' Pension Plan

and Profit Sharing Plan in gross income for petitioners' 1991,

1992, and 1993 taxable years.

Section 402(b) provides for a variety of consequences to the

participants in a plan under section 401(a) when the trust

associated with the plan is not exempt under section 501(a).

Section 402(b)(2) and (4), as in effect for the years in issue,

contain a special rule when the trust tax exemption is lost due

to coverage violations in the plan.

Section 402(b)(2)(A) provides that if one of the reasons a

trust is not exempt from tax under section 501(a) is the failure

of the plan of which it is a part to meet the employee

participation or minimum coverage requirements of section

401(a)(26) or 410(b), respectively, then a highly compensated
 - 9 -

employee (as defined in section 414(q)) shall, in lieu of the

amount determined under paragraph (1) of section 402(b), include

in gross income for the taxable year with or within which the

taxable year of the trust ends an amount equal to the vested

accrued benefit of such employee (other than the employee's

investment in the contract) as of the close of such taxable year

of the trust.1

Gant was a participant in both plans from their inception in

1980. In a "Schedule of Benefits" for the Pension Plan for the

plan year ending June 30, 1987, Gant is listed as 100 percent

vested. Gant was also 100 percent vested in his account balance

in the Profit Sharing Plan since that Plan (into which the Money

Purchase Plan was converted) recognized all service with the

employer and utilized a 7-year vesting schedule.

Thus, determination of the central issue to be decided

hinges upon our analysis of three subissues: (1) Whether both the

Pension Plan and Profit Sharing Plan were ongoing plans as of the

1
Sec. 402(b)(2) was added by the Tax Reform Act of 1986
(TRA), Pub. L. 99-514, sec. 1112(c)(2), 100 Stat. 2445, effective
for plan years beginning after Dec. 31, 1988. Sec. 402(b)(2)(A)
was amended by the Technical and Miscellaneous Revenue Act of
1988 (TAMRA), Pub. L. 100-647, sec. 1011(h)(4), 102 Stat. 3342,
3464, effective as if included in the TRA. Sec. 402(b)(2) was
amended again by the Unemployment Compensation Amendments of
1992, 106 Stat. 299. No substantive change was made to former
sec. 402(b)(2). It was merely renumbered as sec. 402(b)(4),
effective for distributions occurring after Dec. 31, 1992. Secs.
401(a)(26)(A), 402(b)(2) (1988 amendment), 410(b)(1), and
414(q)(1), are reproduced in the appendix.
 - 10 -

plan year ended June 30, 1991; (2) if so, whether one of the

reasons both plans were not exempt from tax was the failure of

the plans to meet the requirements of either section 401(a)(26)

or section 410(b); and (3) whether Gant was a highly compensated

employee under section 414(q) during the taxable years at issue.

For the reasons stated below, we agree with respondent.

I. Plan Disqualification in Plan Year Ending June 30, 1991

As stated, the first subissue is whether the Pension Plan

and Profit Sharing Plan were ongoing plans as of June 30, 1991.

Petitioners assert that Products terminated both the Pension Plan

and Money Purchase Plan (predecessor of the Profit Sharing Plan)

during their respective Plan years ended June 30, 1988.

Petitioners point to the fact that the Products board of

directors adopted a resolution on October 13, 1987, to

immediately terminate both the Pension Plan and Money Purchase

Plan. Furthermore, they argue, Gant wrote a letter on October

15, 1987, to Pension Services requesting that the Pension Plan be

discontinued as of November 1, 1987. It follows from

petitioners' assertions that under their theory the plans were

not required to cover employees employed by Products after the

plan year ending June 30, 1988. Thus, petitioners appear

ultimately to argue that the plans could not have violated the

participation requirements of section 401(a)(26) or coverage
 - 11 -

requirements of section 410(b) in the plan year ended June 30,

1991, since they were no longer in existence.

Respondent argues that the Pension Plan was not terminated

as of June 30, 1988, because statutory requirements were not

followed, and the Money Purchase Plan was not terminated as of

the end of the same year because Products did not intend to

terminate it then. Thus, according to respondent, it follows

that both the Pension Plan and the Money Purchase Plan

(predecessor of the Profit Sharing Plan) were ongoing plans

through the plan year ending June 30, 1991, and were required to

meet the requirements of sections 401(a)(26) and 410(b).

A. Pension Plan Termination

For purposes of the Internal Revenue Code, if a plan is

covered by title IV of the Employee Retirement Income Security

Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829, such plan is

"considered terminated on a particular date if, as of that date--

(i) The plan is voluntarily terminated by the plan administrator

under section 4041 of the Employee Retirement Income Security Act

of 1974". Sec. 1.411(d)-2(c)(2), Income Tax Regs. (Emphasis

added.) ERISA governs pension plan terminations. ERISA sec.

4021, 29 U.S.C. sec. 1321(a), provides that title IV covers a

plan which "is an employee benefit pension plan * * * [or] is, or

has been determined by the Secretary of the Treasury to be, a

plan described in section 401(a) of title 26". In this case, the
 - 12 -

Pension Plan received determination letters from the Internal

Revenue Service finding that the plan qualified under section

401(a).

The term "employee pension benefit plan" or "pension plan"

means:

any plan, fund, or program which * * * is hereafter
established or maintained by an employer * * * to the extent
that by its express terms or as a result of surrounding
circumstances such plan, fund, or program--

(i) provides retirement income to employees, or

(ii) results in a deferral of income by employees for
periods extending to the termination of covered employment
or beyond,

regardless of the method of calculating the contributions
made to the plan, the method of calculating the benefits
under the plan or the method of distributing benefits from
the plan. [ERISA sec. 3(2), 29 U.S.C. sec. 1002(2)(A).]

Title IV does not cover a plan "which is an individual

account plan." ERISA sec. 4041(b)(1), 29 U.S.C. sec. 1321(b)(1).

An "individual account plan" or "defined contribution plan" means

a pension plan which provides for an individual account
for each participant and for benefits based solely upon
the amount contributed to the participant's account,
and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may
be allocated to such participant's account. [ERISA sec.
3(34), 29 U.S.C. sec. 1002(34).]

The Pension Plan is not an individual account plan because

it does not maintain individual accounts for each participant and

bases a participant's retirement benefit upon 100 percent of the

participant's average monthly compensation. Thus, the Pension
 - 13 -

Plan is covered by title IV of ERISA and is subject to the

termination provisions thereunder.

Strict adherence to statutory requirements is the exclusive

means of single-employer plan termination. ERISA sec.

4041(a)(1), 29 U.S.C. sec. 1341(a)(1) provides that "a single-

employer plan may be terminated only in a standard termination

* * * or a distress termination". See also Phillips v. Bebber,

914 F.2d 31, 34 (4th Cir. 1990) ("strict compliance with * * *

[29 U.S.C. sec. 1341] is the sole means by which a pension plan

subject to the provisions of ERISA may be terminated."); Pension

Benefit Guar. Corp. v. Mize Co., Inc., 987 F.2d 1059, 1063 (4th

Cir. 1993) ("The statutory provisions governing terminations of

single-employer plans are exclusive."). A "single-employer plan"

is a plan "which is not a multiemployer plan." ERISA sec. 3(41),

29 U.S.C. sec. 1002(41). A "multi-employer plan" means a plan:

(i) to which more than one employer is required to
contribute,

(ii) which is maintained pursuant to one or more
collective bargaining agreements between one or more
employee organizations and more than one employer, and

(iii) which satisfies such other requirements as the
Secretary may prescribe by regulation. [ERISA sec. 3(37),
29 U.S.C. sec. 1002(37).]

Because Products was the only employer contributing to the plan,

the Pension Plan was not a multiemployer plan, and by definition

was a single-employer plan.
 - 14 -

Since the Pension Plan was a single-employer plan, the

question then becomes whether it was terminated in accordance

with ERISA sec. 4041(a)(1), 29 U.S.C. sec. 1341(a)(1). As

stated, a single-employer plan may be terminated only in a

standard or distress termination. ERISA sec. 4041(a)(1), 29

U.S.C. sec. 1341(a)(1). A distress termination requires that the

PBGC determine whether any of the criteria for a distress

termination have been met. ERISA sec. 4041(c)(2)(B), 29 U.S.C.

sec. 1341(c)(2)(B). In this case, the PBGC has made no such

finding. Thus, the remaining question is whether the Pension

Plan was terminated as of June 30, 1988, by a standard

termination.

A standard termination requires the plan administrator to

(1) provide a "60-day advance notice of intent to terminate to

affected parties", (2) notify the PBGC as soon as practicable

after notice of intent to terminate has been sent to affected

parties, and (3) give notice, not later than the date on which

notice is sent to the PBGC, to each participant or beneficiary

under the plan specifying the amount of his or her benefit as of

the proposed termination date and the data used to determine the

benefit such as length of service, age of the participant or

beneficiary, wages, assumptions, including the interest rate, and

any other information required by the PBGC. ERISA sec.

4041(b)(2)(B), 29 U.S.C. sec. 1341(b)(2)(B). The plan
 - 15 -

"administrator" is the plan sponsor if no person is designated as

plan administrator in the plan instrument. ERISA sec. 3(16)(A),

29 U.S.C. sec. 1002(16)(A). The "plan sponsor" is the employer

in the case of a single-employer defined benefit plan. ERISA

sec. 3(16)(B), 29 U.S.C. sec. 1002(16)(B). Since Products is the

employer, Products is the plan administrator.

In this case, Products did not comply with the statutory

requirements cited above. It did not issue written notice to

participants in fiscal year 1988, within 60 days, of the intent

to terminate the Pension Plan. It did not notify the PBGC of its

intent to terminate. And it did not give the required notice to

each participant or beneficiary under the plan specifying the

amount of his or her benefit as of the proposed termination date.

Accordingly, we hold that the Pension Plan was not

terminated as of June 30, 1988. We further hold that since the

Pension Plan was not terminated in accordance with ERISA sec.

4041, 29 U.S.C. sec. 1341, the Pension Plan was an ongoing plan

for purposes of the Internal Revenue Code.

B. Money Purchase Plan Termination and Profit Sharing Plan
Disqualification

Petitioners assert that the Money Purchase Plan was

terminated as of the plan year ending June 30, 1988, because

Products adopted a resolution to terminate the Money Purchase

Plan in the 1988 fiscal year, and Products distributed annuities

to plan participants evidencing its intent to terminate the plan.
 - 16 -

ERISA's title IV termination provisions do not cover

individual account plans. ERISA sec. 4041(b)(1), 29 U.S.C. sec.

1321(b)(1). Here, the Money Purchase Plan maintains a separate

account for each participant and provides that an employee's

benefit will be based on the value of his or her account.

Therefore, the Money Purchase Plan is an individual account and

not covered by title IV of ERISA.

For purposes of the Internal Revenue Code, a plan not

subject to title IV is "terminated on a particular date if, as of

that date, the plan is voluntarily terminated by the employer

* * * maintaining the plan." Sec. 1.411(d)-2(c)(3), Income Tax

Regs. Voluntary termination of a defined contribution plan "is

generally a question to be determined with regard to all the

facts and circumstances in a particular case." Sec. 1.401-

6(b)(1), Income Tax Regs.

The key determining factor is whether Products intended to

terminate the plan as of June 30, 1988. See J.P. Jeter Co., Inc

v. Commissioner, T.C. Memo. 1993-231 (holding that a money

purchase pension plan was not terminated where the facts did not

indicate an intent on the part of taxpayer to terminate the

plan). Disclosures on Federal tax forms, notice of termination

to plan participants, and action by the plan administrator's

board of directors are relevant to this determination. See id.
 - 17 -

In J.P. Jeter Co., Inc. v. Commissioner, supra, the

Commissioner determined that taxpayer was liable for excise taxes

imposed by section 4971(a) and (b) due to a section 412

accumulated funding deficiency in its money purchase pension

plan. Taxpayer's money purchase pension plan was effective

beginning January 1, 1981. Due to taxpayer's business

circumstances, taxpayer failed to make contributions to the plan

after the plan year ending December 31, 1982. Taxpayer requested

a funding waiver in September of 1985. The request stated that

taxpayer anticipated contributions to resume in 1986 or 1987.

Attached to the waiver request was a Form 5500-R for the plan

year 1983 which stated that the plan was not terminated in 1983.

The waiver was granted in February of 1986. Taxpayer sent a

request for a determination letter on termination of the plan in

March of 1987. Attached to this letter was a copy of a

resolution adopted by taxpayer's board of directors on June 16,

1986 "to terminate the J.P. Jeter Company, Inc. Money Purchase

Plan as of December 31, 1984." The Commissioner sent a favorable

determination letter on October 21, 1987, declaring that it

applied as to the proposed termination date of June 16, 1986.

Taxpayer in the above case argued that the plan was

terminated in 1982 when it ceased making contributions to the

plan, thereby ceasing to meet the plan's funding requirements at

such time. We held that the plan was terminated "around June 16,
 - 18 -

1986" because "The evidence presented does not show that

petitioner desired or intended to terminate the plan in 1983."

This holding rested primarily upon application of the following

facts: (1) Form 5500-R stated that the plan was not terminated in

1983; (2) the waiver request indicated that contributions were to

resume in 1986 or 1987; (3) notice of termination was not sent to

any of the plan participants; and (4) the board's resolution to

terminate the plan was not adopted until June 16, 1986.

In this case, Products stated on Form 5500-R for the Money

Purchase Plan's June 30, 1988, plan year that the plan was not

terminated. Form 5500-R filed for the Profit Sharing Plan's

fiscal 1989 and 1990 plan years also stated that the plan was not

terminated. There is no evidence that Products notified plan

participants of its intent to terminate the Money Purchase Plan

during the plan year ending on June 30, 1988.

Gant's testimony suggests that he believed participants of

the Profit Sharing Plan received some notice of termination in

the latter part of calendar year 1988. At trial, Gant stated on

direct examination:

The plans were stopped by the corporation and
everything, and we advised the Pension Services
Corporation to stop the plans at that time.

At that time they came back, and we got bids and
we bought annuities for all participants of the plan,
with the * * * [exceptions] of ones that wanted to be paid
off.
 - 19 -

We paid off the ones that wanted to be paid off,
and bought annuities for everyone else, and had them
sent to their homes.

However, the participants' accumulated vested account balances

were valued at $413,746, while the group annuity contract

purchased and distributed by Gant was valued at only $56,031.

Even if the plan participants had received some notice of

termination, the substantial discrepancy in value between

benefits and distribution is inconsistent with a plan

termination.

Finally, although Products' board of directors resolution

stated an intent to terminate the Money Purchase Plan by the end

of the plan year ended June 30, 1988, the subsequent conversion

of the Money Purchase Plan into the Profit Sharing Plan on

September 1, 1988, is inconsistent with the board's stated

intent.

We hold that the Money Purchase Plan was not terminated in

the plan year ended June 30, 1988, because the evidence fails to

show that Products intended to or did terminate it. We further

hold that the Profit Sharing Plan was not terminated and was an

ongoing plan until June 30, 1991.
 - 20 -

II. The Plans Fail to Meet the Requirements of Sec.
401(a)(26)(A)

Since we have held that the Pension Plan and Profit Sharing

Plan were both ongoing plans, the next subissue is whether the

plans failed to meet the requirements imposed by either section

401(a)(26) or 410(b).

To satisfy the requirements of section 401(a)(26)(A), a plan

generally must benefit the "lesser of--(i) 50 employees of the

employer, or (ii) 40 percent or more of all employees of the

employer." It has been stipulated that the plans excluded from

participation 51 of the 66 eligible employees for the plan year

ended June 30, 1991. It has further been stipulated that only 15

eligible employees were participating in the plans for the plan

years ended June 30, 1991. Forty percent of the 66 eligible

employees is 26 employees. Since only 15 eligible employees were

participating and therefore benefiting under the plans, both

plans fail to meet the participation requirements of section

401(a)(26)(A). Since the plans fail to meet the participation

requirements of section 401(a)(26), we need not consider whether

the plans meet the minimum coverage requirements of section

410(b).

III. Highly Compensated Employee

Section 402(b)(2) requires that if a plan fails to satisfy

section 401(a)(26), a highly compensated employee must include in

gross income his "vested accrued benefit" determined as of the
 - 21 -

close of the taxable year of the trust which ends with or within

the employee's taxable year. The term "highly compensated

employee" is defined to include "any employee who, during the

year or the preceding year--(A) was at any time a 5-percent

owner". Sec. 414(q)(1)(A). An employee is treated as a 5-

percent owner if he or she was a 5-percent owner as defined in

section 416(i)(1). Under section 416(i)(1)(B), if the employer

is a corporation, a 5-percent owner means "any person who owns

(or is considered as owning within the meaning of section 318)

more than 5 percent of the outstanding stock of the corporation".

Since Gant was the 100-percent shareholder of Products from 1981

through 1994, he was a highly compensated employee for purposes

of the taxable years at issue.

The House conference report to accompany the Tax Reform Act

of 1986, Pub. L. 99-514, 100 Stat. 2085, as a part of which

section 402(b)(2) was enacted, states that "Highly compensated

employees * * * are taxable on the value of their vested accrued

benefit attributable to employer contributions and income on any

contributions to the extent such amounts have not previously been

taxed to the employee." H. Conf. Rept. 99-841, at II-416 to II-

417 (1986), 1986-3 C.B. (Vol. 4), 416-417. The parties

stipulated that as of June 30, 1991, Gant had a benefit under the

Pension Plan of "at least" $353,762, and an account balance in

the Profit Sharing Plan of $353,688, for a total benefit under
 - 22 -

both plans as of that date of at least $707,451. On brief,

respondent states that the deficiencies were determined using the

$353,762 figure under the Pension Plan. We accept $353,762 as

Gant's Pension Plan vested accrued benefit as of June 30, 1991,

since neither party has urged a different amount, the "at least"

modifier in the stipulation notwithstanding.

There is no indication in the record, and we have no reason

to believe, that Gant's vested accrued benefit under the Pension

Plan as of June 30, 1991, and his account balance under the

Profit Sharing Plan as of that date, have been taxed prior to

petitioners' 1991 taxable year. Petitioners do not challenge

respondent's computation of the 1992 and 1993 accruals. We

accordingly hold that petitioners must include in 1991 gross

income Gant's $707,451 total vested accrued benefits under the

Pension Plan and Profit Sharing Plan as of June 30, 1991, and

must include in gross income the additional accrued benefits

under both plans in 1992 and 1993, respectively, as determined by

respondent.

To reflect the foregoing,

Decision will be entered

under Rule 155.
 - 23 -

Appendix

Section 401(a)(26)(A)

(26) Additional participation requirements.--

(A) In general.--A trust shall not constitute a
qualified trust under this subsection unless such trust is
part of a plan which on each day of the plan year benefits
the lesser of --

(i) 50 employees of the employer, or

(ii) 40 percent or more of all employees of the
employer.

Section 402(b)(2)(A)

(b) Failure to meet requirements of section 410(b).--

(A) Highly compensated employees.--If 1 of the reasons
a trust is not exempt from tax under section 501(a) is the
failure of the plan of which it is a part to meet the
requirements of section 401(a)(26) or 410(b), then a highly
compensated employee shall, in lieu of the amount determined
under paragraph (1), include in gross income for the taxable
year with or within which the taxable year of the trust ends
an amount equal to the vested accrued benefit of such
employee (other than the employee's investment in the
contract) as of the close of such taxable year of the trust.

* * * * * * *

(C) Highly compensated employee.--For purposes of this
paragraph, the term "highly compensated employee" has the
meaning given such term by section 414(q).
 - 24 -

Section 410(b)(1)

(b) Minimum coverage requirements.--

(1) In general. A trust shall not constitute a
qualified trust under section 401(a) unless such trust is
designated by the employer as part of a plan which meets 1
of the following requirements:

(A) The plan benefits at least 70 percent of
employees who are not highly compensated employees.

(B) The plan benefits--

(i) a percentage of employees who are not
highly compensated employees which is at least 70
percent of

(ii) the percentage of highly compensated
employees benefiting under the plan.

(C) The plan meets the requirements of paragraph
(2).

Section 414(q)(1)

(q) Highly compensated employee.--

(1) In general.--The term "highly compensated
employee" means any employee who, during the year or the
preceding year --

(A) was at any time a 5-percent owner,

(B) received compensation from the employer in
excess of $75,000,

(C) received compensation from the employer in
excess of $50,000 and was in the top-paid group of
employees for such year, or

(D) was at any time an officer and received
compensation greater than 50 percent of the amount in
effect under section 415(b)(1)(A) for such year.
 - 25 -

The Secretary shall adjust the $75,000 and $50,000 amounts
under this paragraph at the same time and in the same manner
as under section 415(d).