Rollins v. Comm'r

T.C. Memo. 2004-260

UNITED STATES TAX COURT

JOSEPH R. ROLLINS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 598-03. Filed November 15, 2004.

P caused the 401(k) plan of his wholly owned company to
lend money to three entities in which P owned minority
interests. P’s company is the sole trustee of, and the
administrator of, the 401(k) plan. P also acted on the part
of the borrower entities in agreeing to the loans.

1. Held: Each of the loans was a “prohibited
transaction” within the meaning of sec. 4975(c)(1)(D),
I.R.C. 1986. P, a disqualified person, is liable for
excise taxes under sec. 4975(a) and (b), I.R.C. 1986;
amounts to be determined.

2. Held, further, P is liable for additions to tax
under sec. 6651(a)(1), I.R.C. 1986, for failure to file
excise tax returns; amounts to be determined.
 - 2 -

Joseph R. Rollins, pro se.

Denise G. Dengler, for respondent.

MEMORANDUM OPINION

CHABOT, Judge: Respondent determined deficiencies in excise

taxes under section 49751 (prohibited transactions) and additions

to tax under section 6651(a)(1) (failure to file tax return)

against petitioner as follows:

Year or Deficiencies Additions to Tax
Taxable Period Sec. 4975(a) Sec. 4975(b) Sec. 6651(a)(1)

1998 $5,231.80 --- $1,307.95
1999 14,576.97 --- 3,644.24
2000 24,448.50 --- 6,112.13
Period ending
Oct. 9, 2002 --- $164,228.39 ---

1
Unless indicated otherwise, all section and subtitle
references are to sections and subtitles of the Internal Revenue
Code of 1986 as in effect for the years and taxable period in
issue.
 - 3 -

After concessions by respondent,2 the issues for decision

are as follows:

(1) Whether any of petitioner’s company’s section

401(k) plan’s loans to entities partially owned by

petitioner constituted prohibited transactions within

the meaning of section 4975.

(2) If any of the loans were prohibited

transactions, then whether petitioner had reasonable

cause for any of his failures to file excise tax

returns for 1998, 1999, and 2000.

Background

The instant case was submitted fully stipulated; the

stipulations and the stipulated exhibits are incorporated herein

by this reference.

2
On brief, respondent concedes that there were “loan
interest payments, which reduce both the § 4975(a)&(b) excise
taxes.” At another point on brief, respondent concedes that
“Petitioner has established that the principal of the loans was
repaid; there is still an issue whether the interest was paid.”
We assume that, where these concessions affect the sec. 4975(a)
excise taxes, these concessions may have consequential effects on
the determinations of additions to tax under sec. 6651(a)(1).

The parties have not presented any specific dispute as to
the extent of these concessions, and thus the instant report does
not deal with matter. Any relevant unresolved dispute will be
dealt with in proceedings under Rule 155 or as may otherwise be
appropriate. See Medina v. Commissioner, 112 T.C. 51 (1999).

Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 4 -

When the petition was filed in the instant case, petitioner

resided in Atlanta, Georgia.

Petitioner is a certified public accountant and a registered

investment adviser; also, he holds various certifications in the

area of financial planning and investment managing, including

certified employee benefits specialist, certified financial

planner, and charter financial consultant.

1. The Plan

Petitioner owns 100 percent of Rollins & Associates, P.C., a

certified public accounting firm, hereinafter sometimes referred

to as Rollins. Rollins has a section 401(k) profit-sharing plan,

known as Rollins & Associates, P.C. 401(k) Profit Sharing Plan

hereinafter sometimes referred to as the Plan. The Plan’s

predecessor dates back at least to 1985.

At all times relevant herein, the Plan was tax-qualified

under section 401(a), and the Plan’s underlying trust was exempt

from tax under section 501(a).

Rollins has been the sole trustee under the Plan since 1985.

The trustee is responsible for the following items, as well as

other items listed in the Plan’s governing instrument:

investing, managing, and controlling the Plan’s assets (subject

to the direction of an investment manager if the trustee appoints

one); paying benefits required under the Plan at the direction of

the administrator; and maintaining records of receipts and
 - 5 -

disbursements. The trustee has the power to invest and reinvest

the Plan’s assets in such securities and property, real or

personal, wherever situated, as the trustee shall deem advisable.

Under the Plan, Rollins is to designate the Plan’s

administrator; if Rollins does not designate an administrator,

then Rollins is to function as the administrator. Rollins has

not designated an administrator.

Petitioner owns 100 percent of Rollins Financial Counseling,

Inc., a registered investment advisory company, hereinafter

sometimes referred to as Rollins Financial. In November 1993,

Rollins entered into an investment advisory agreement with

Rollins Financial whereby Rollins Financial was to provide

financial counseling services to Rollins. The agreement provides

that petitioner, as Rollins Financial’s CEO, “will make all

investment decisions on behalf of [Rollins] * * *. The

recommendations developed by [petitioner] are based upon the

professional judgment of [petitioner]”.

2. The Loans

a. Overall

As to each of the loans shown in table 1, petitioner made

the decision to lend the Plan’s money in the indicated amount to

the indicated borrower: Jocks & Jills Charlotte, Inc.,

hereinafter sometimes referred to as J & J Charlotte; Eagle Bluff

Golf Club, LLC, hereinafter sometimes referred to as Eagle Bluff;
 - 6 -

or Jocks and Jills, Inc. J & J Charlotte, Eagle Bluff, and Jocks

and Jills, Inc., are hereinafter sometimes referred to

collectively as the Borrowers.

Table 1

Loan Date Borrower Amount

May 29, 1996 J & J Charlotte $100,000
June 7, 1996 J & J Charlotte 100,000
June 12, 1996 J & J Charlotte 75,000
July 8, 1996 J & J Charlotte 25,000
Sept. 9, 1996 J & J Charlotte 25,000

May 20, 1997 Eagle Bluff 50,000

Sept. 2, 1998 Jocks and Jills, Inc. 200,000
Nov. 20, 1998 Jocks and Jills, Inc. 50,000
Dec. 31, 19981 Jocks and Jills, Inc. 25,000
Jan. 26, 1999 Jocks and Jills, Inc. 50,000
1
The parties’ stipulation states that the $25,000 check is dated Nov.
20, 1998. However, the stipulated exhibit shows that the check is dated Dec.
31, 1998, and the check processing stamps are consistent with the latter date.
Our finding follows the stipulated exhibit rather than the stipulation.

b. J & J Charlotte

J & J Charlotte is a sports theme restaurant located in

Charlotte, North Carolina. When J & J Charlotte was

incorporated, in September 1994, and on the dates shown supra in

table 1, petitioner was the only member of J & J Charlotte’s

board of directors and was J & J Charlotte’s vice president,

secretary, and treasurer; on the table 1 dates petitioner also

was J & J Charlotte’s registered agent.

When J & J Charlotte was incorporated, petitioner owned all

10,000 shares of J & J Charlotte’s subscribed stock. By June 30,

1996, 102,000 additional shares were outstanding. On the dates
 - 7 -

shown supra in table 1, petitioner had an 8.93-percent interest

in J & J Charlotte3, and his then-wife had a 6.70-percent

interest. There were 28 other shareholders on June 30, 1996; the

next greatest percentage interest was 6.25 percent.

Petitioner signed the Plan’s July 8 and September 9, 1996,

checks to J & J Charlotte. (The record does not indicate who

signed the checks that effectuated the first three loans shown in

table 1.) Petitioner signed all five of J & J Charlotte’s

promissory notes to the Plan, on behalf of J & J Charlotte. Each

of these promissory notes was a 12-percent-per-year demand note;

each stated that it was secured by all the machinery and

equipment at J & J Charlotte.

On January 11, 2000, petitioner paid $150,500 to the Plan as

a repayment on the J & J Charlotte loans.

All of the principal of the Plan’s loans to J & J Charlotte

has been repaid. See supra note 2.

c. Eagle Bluff

Eagle Bluff was a golf club located in Chattanooga,

Tennessee. From 1994 until Eagle Bluff was sold in 2000,

petitioner was Eagle Bluff’s treasurer and its registered agent

in Georgia. On May 20, 1997, the Plan lent $50,000 to Eagle

3
So stipulated. However, the stipulated stock register
shows that, on Aug. 28, 1996, before the date of the last loan
shown on table 1, petitioner acquired 2,500 shares from another
shareholder. This raised petitioner’s interest to 11.16 percent.
 - 8 -

Bluff; at this time petitioner had a 26.8-percent interest in

Eagle Bluff; his equity amounted to $983,237.45 out of a total of

$3,667,212.45. There were more than 80 other partners; the next

greatest percentage interest was that of a couple, who between

them and their IRA, held an aggregate 8.8197-percent interest.

Petitioner invested an additional $307,151.86 in Eagle Bluff

between 1997 and 1998, which increased his percent interest to

31.71.

Petitioner signed the Plan’s check to Eagle Bluff.

Petitioner signed Eagle Bluff’s promissory note to the Plan, on

behalf of Eagle Bluff. The promissory note was a 12-percent-per-

year demand note; the note stated that it was secured by all the

property and equipment at Eagle Bluff. At the time of the loan,

12-percent interest was greater than market rate interest.

During 1999, Rollins paid a total of $3,900 of Eagle Bluff’s

interest obligations to the Plan, because Eagle Bluff was not

able to make the payments. During November and December 1999,

petitioner paid a total of $20,000, Rollins Financial paid

$7,500, and Rollins paid $7,500 of Eagle Bluff’s principal

obligations to the Plan, because Eagle Bluff was not able to make

the payments. All $35,000 of these 1999 principal payments were

treated as petitioner’s additional equity in Eagle Bluff.

Petitioner fully intended he would receive the funds back from

his equity when Eagle Bluff was sold.
 - 9 -

All of the principal of the Plan’s loan to Eagle Bluff has

been repaid. See supra note 2.

d. Jocks and Jills

Jocks and Jills, Inc., is a corporation located in Atlanta,

Georgia. Petitioner was the secretary/treasurer of Jocks and

Jills, Inc., in 1998 and 1999, and its registered agent in

Georgia in 1998 and 1999. On the dates shown supra in table 1

petitioner had a 33.165-percent interest in Jocks and Jills, Inc.

There were more than 70 other partners; the next greatest

percentage interest was of a partner who held 4.8809 percent.4

Petitioner signed the Plan’s November 20, 1998, December 31,

1998, and January 26, 1999, checks effectuating the loans to

Jocks and Jills, Inc.5 (The record does not indicate who signed

the check or checks that effectuated the first loan shown supra

in table 1.) Petitioner signed Jocks and Jills, Inc.’s

promissory notes to the Plan on behalf of Jocks and Jills, Inc.

The first promissory note, dated September 2, 1998, was in the

amount of $200,000. On January 15, 1999, Jocks and Jills, Inc.,

4
So stipulated. The stipulated exhibit that serves as the
foundation of the stipulated conclusions lists “Partners’
Allocation Percentages” for Jocks & Jills Restaurant, LLC, a
separate entity from Jocks and Jills, Inc. In the absence of an
explanation by the parties, we have followed the language of the
parties, even to the use of the word “partner” rather than
“shareholder”.
5
The two $50,000 checks are made out to Jocks and Jills,
Inc., but the $25,000 check is made out to Jocks & Jills
Restaurants, LLC. See supra note 4.
 - 10 -

made a $25,000 partial repayment of its second loan. The second

promissory note, signed on February 22, 1999, was in the amount

of $100,000. (From the dates of the loans and the repayment, we

gather that this promissory note was for the remaining amounts

due on the second, third, and fourth loans. The record does not

indicate whether promissory notes had been issued at the times

the loans were made.) Each of these promissory notes was a 12-

percent-per-year demand note; each stated it was secured by all

machinery and equipment at Jocks and Jills, Inc.

After a series of monthly Jocks and Jills, Inc., $5,000

checks to the Plan, on January 28, 2000, petitioner paid

$155,571.57 to the Plan as a repayment plus interest on the

$200,000 Jocks and Jills, Inc., loan.

On December 8, 1999, Jocks and Jills, Inc., paid $100,000 to

the Plan as a repayment “in full” on the February 22, 1999,

promissory note. The check making this payment had petitioner’s

stamped signature.

All of the principal of the Plan’s loans to Jocks and Jills,

Inc., has been repaid. See supra note 2.

3. Tax Returns

Petitioner did not file any excise tax returns, Forms 5330,

Return of Excise Taxes Related to Employee Benefit Plans, for the

relevant taxable periods. The record does not indicate whether
 - 11 -

the Plan filed any tax returns or information returns for any

taxable periods.

4. U.S. Department of Labor

On April 16, 2002, respondent sent a letter to the

Department of Labor notifying the Department of Labor that

respondent was contemplating adjusting petitioner’s section 4975

tax liability. This letter was sent pursuant to section 3003(a)

of the Employee Retirement Income Security Act of 1974 (29 U.S.C.

1203(a)), Pub. L. 93-406, 88 Stat. 829, 998 (ERISA ‘74). On May

8, 2002, respondent sent another letter to the Department of

Labor, stating that the matter was now before respondent’s

Appeals Office and asking for a response within 60 days.
 - 12 -

Discussion6

I. Excise Taxes

a. Parties’ Contentions

Respondent contends that petitioner is a disqualified person

with respect to the Plan in two capacities: (a) A fiduciary of

the Plan (sec. 4975(e)(2)(A)), and (b) the 100-percent owner of

Rollins, the employer sponsoring the Plan (subpars.(E) and (H) of

sec. 4975(e)(2)). Respondent contends that the Plan’s loans to

6
Sec. 7491, relating to burden of proof, was not drawn in
issue by either side.

However, for completeness, and in light of petitioner’s pro
se status, we note the following: Sec. 7491(a) provides for
shifting the burden of proof (if certain conditions have been
satisfied) with respect to “any factual issue relevant to
ascertaining the liability of the taxpayer for any tax imposed by
subtitle A or B”. Sec. 7491(a)(1). The sec. 4975 taxes involved
in the instant case are imposed by subtitle D; the parties have
not suggested any subtitle A or B component. Accordingly, sec.
7491(a) cannot operate to shift the burden of proof in the
instant case. See, e.g., Jos. M. Grey Pub. Acct., P.C. v.
Commissioner, 119 T.C. 121, 123, n.2 (2002), affd. 93 Fed. Appx.
473 (3d Cir. 2004).

Sec. 7491(b), relating to statistical information on
unrelated taxpayers, does not apply to the instant case.

Sec. 7491(c) imposes on respondent the burden of production
with respect to the additions to tax under sec. 6651(a)(1). The
parties’ stipulation that--“3. Petitioner did not file any
excise tax returns, Forms 5330, Return of Excise Taxes Related to
Employee Benefit Plans, for the relevant taxable periods.”
satisfies this obligation; petitioner still has the burden of
proving that the determined additions should not be imposed.
Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). But see
supra note 2. Finally, the parties’ presentation of the instant
case fully stipulated does not change the burden of proof. Rule
122(b); Borchers v. Commissioner, 95 T.C. 82, 91 (1990), affd.
943 F.2d 22 (8th Cir. 1991).
 - 13 -

entities in which petitioner had an interest were prohibited

transactions because (1) The loans were transfers of the Plan’s

assets that benefited petitioner (sec. 4975(c)(1)(D)), and (2)

the loans were dealings with the Plan’s assets in petitioner’s

own interest (sec. 4975(c)(1)(E)). Respondent contends that

petitioner benefited from the loans in that the loans enabled the

Borrowers--all entities in which petitioner owned interests--to

operate without having to borrow funds at arm’s length from other

sources. Respondent summarizes the contentions regarding

petitioner’s role as fiduciary, as follows:

No documentation was provided of any security interest
under the U.C.C. which would have protected the Plan
against other creditors of these companies. (Stip.,
para. 23, 38, 41, 44, 47, 50, 61, 69) Petitioner would
have had to authorize any actions the Plan took against
the companies and its officers to collect its loans.
Petitioner’s ownership interest in these companies
created a conflict of interest between the Plan and the
companies, resulting in dividing his loyalties to these
entities. This conflicting interest as a disqualified
person who is a fiduciary brought petitioner within the
prohibition against dealing “with the income or assets
of a plan in his own interest or for his own account”.
I.R.C. § 4975(c)(1)(E).

Petitioner maintains that, as to each of the loans: (1) The

interest rate was above market interest and was paid, (2) the

collateral was safe and secure and the principal was repaid, and

(3) the Plan’s assets were thereby diversified and thus the

Plan’s portfolio’s risk level was “significantly lowered”.7

7
The record does not indicate (1) either the magnitude or
(continued...)
 - 14 -

Petitioner acknowledges that he is a disqualified person with

regard to the Plan because he owns Rollins, but he contends that

(1) none of the Borrowers was a disqualified person, (2) none of

the loans was a transaction between him and the Plan, and (3) he

“did not benefit from these loans, either in income or in his own

account”.

We agree with respondent’s conclusion as to section

4975(c)(1)(D).

Because of our concerns about how the statute should be

applied to the evidence of record, our conclusion that all of the

opinions relied on by both sides are fairly distinguishable, and

the absence of applicable Treasury regulations,8 we first

consider the background of section 4975.

b. Background: Sec. 503 (I.R.C. 1954); Sec. 4941 (TRA ‘69)

The Internal Revenue Code of 1954, as originally enacted,

provided that if a charitable organization (sec. 501(c)(3)) or a

trust which is part of an employees plan (sec. 401(a)) engaged in

a prohibited transaction, then the entity lost its section 501(a)

7
(...continued)
the nature of the Plan’s other assets, or (2) either the
magnitude or the timing of the Plan’s obligations.
8
We note that sec. 53.4941(d)-2(f), Private Foundation
Excise Tax Regs., interprets sec. 4941(d)(1)(E), which is almost
exactly the same as sec. 4975(c)(1)(D). Neither side cites this
regulation for any purpose. Under the circumstances we do not
explore in the instant opinion whether this regulation provides
any insight into the meaning of sec. 4975(c)(1)(D).
 - 15 -

exempt status. Sec. 503(a)(1).9 “Prohibited transaction” was

defined as any of certain types of transactions between the

entity and certain related persons; the types of transactions

involved case-by-case analyses of arm’s-length standards--

determinations of reasonableness, adequacy, or preferential

basis. Sec. 503(c).

In 1969, the Congress concluded that, as applied to private

foundations, (1) The arm’s-length standards of then-existing law

required disproportionately great enforcement efforts, (2)

violations of the law often resulted in disproportionately severe

sanctions, and (3) at the same time, the law’s standards often

permitted those who controlled the private foundations to use the

foundations’ assets for personal noncharitable purposes without

any significant sanctions being imposed on those who thus misused

the private foundations. See H. Rept. 91-413 (Part 1), 4, 20-21

(1969), 1969-3 C.B 202, 214; S. Rept. 91-552, 6, 28-29 (1969),

1969-3 C.B. 426, 442-443; also see Staff of the Joint Committee

on Internal Revenue Taxation, General Explanation of the Tax

Reform Act of 1969 (hereinafter sometimes referred to as the TRA

‘69 Blue Book) 3, 30-31. The Senate Finance Committee described

its conclusions as follows:

9
Sec. 503 of the Internal Revenue Code of 1954 was derived
from sec. 3813 of the Internal Revenue Code of 1939; that
provision had been enacted in 1950.
 - 16 -

To minimize the need to apply subjective arm’s-
length standards, to avoid the temptation to misuse
private foundations for noncharitable purposes, to
provide a more rational relationship between sanctions
and improper acts, and to make it more practical to
properly enforce the law, the committee has determined
to generally prohibit self-dealing transactions and to
provide a variety and graduation of sanctions, as
described below.

The committee’s decisions generally in accord with
the House bill, are based on the belief that the
highest fiduciary standards require that self-dealing
not be engaged in, rather than that arm’s-length
standards be observed.

S. Rept. 91-552, 29 (1969), 1969-3 C.B. 443. To the same effect,

see H. Rept. 91-413 (Part 1), 21 (1969), 1969-3 C.B. 214; see

also TRA ‘69 Blue Book 30-31.

As a result, in the Tax Reform Act of 1969, Pub. L. 91-172,

83 Stat. 487 (TRA ‘69), the Congress removed private foundations

from the old arm’s-length self-dealing requirements (sec.

101(j)(7) of TRA ‘69) and enacted section 4941 (sec. 101(b) of

TRA ‘69, relating to taxes on self-dealing). See H. Rept. 91-413

(Part 1), 21 (1969), 1969-3 C.B. 214; S. Rept. 91-552, 29 (1969),

1969-3 C.B. 443; see also TRA ‘69 Blue Book 31.

Section 4941(d)(1) provided the following general definition

of self-dealing:

SEC. 4941. TAXES ON SELF-DEALING.

* * * * * * *

(d) Self-Dealing.--

(1) In general.--For purposes of this section,
the term “self-dealing” means any direct or indirect--
 - 17 -

(A) sale or exchange, or leasing, of property
between a private foundation and a disqualified
person;

(B) lending of money or other extension of
credit between a private foundation and a
disqualified person;

(C) furnishing of goods, services, or
facilities between a private foundation and a
disqualified person;

(D) payment of compensation (or payment or
reimbursement of expenses) by a private foundation
to a disqualified person;

(E) transfer to, or use by or for the benefit of,
a disqualified person of the income or assets of a
private foundation; and

(F) agreement by a private foundation to make any
payment of money or other property to a government
official (as defined in section 4946(c)), other than an
agreement to employ such individual for any period
after the termination of his government service if such
individual is terminating his government service within
a 90-day period.

The Senate Finance Committee illustrated the application of

these provisions, in pertinent part, as follows:

A self-dealing transaction may occur even though
there has been no transfer of money or property between
the foundation and any disqualified person. For
example, a “use by, or for the benefit of, a
disqualified person of the income or assets of a
private foundation” may consist of securities purchases
or sales by the foundation in order to manipulate the
prices of the securities to the advantage of the
disqualified person.

* * * * * * *

It has been suggested that many of those with whom
a foundation “naturally” deals are, or may be,
disqualified persons. However, the difficulties that
prompted this legislation in many cases arise because
 - 18 -

foundations “naturally” deal with their donors and
their donors’ businesses.

If a substantial donor owns an office building,
the foundation should look elsewhere for its office
space. (Interim rules provided in the case of existing
arrangements are discussed below.) A recent issue (May
1969) of the American Bar Association Journal
discussing an instance of an attorney purchasing assets
at fair market value from an estate he was representing
suggests the problems even in “fair market value” self-
dealing:

The Ethics Committee said that it is
generally “improper for an attorney to
purchase assets from an estate or an executor
or personal representative, for whom he is
acting as attorney. Any such dealings
ordinarily raise an issue as to the
attorney’s individual interest as opposed to
the interest of the estate or personal
representative whom he is representing as
attorney. While there may be situations in
which after a full disclosure of all the
facts and with the approval of the court, it
might be proper for such purchases to be made
* * * in virtually all circumstances of this
kind, the lawyer should not subject himself
to the temptation of using for his own
advantage information which he may have
personally or professionally * * *”

S. Rept. 91-552, 29, 30-31 (1969), 1969-3 C.B. 443, 444. To the

same effect, see also TRA ‘69 Blue Book 31, 32.

c. Sec. 4975 (ERISA ‘74)

By 1974, the Congress reached similar conclusions about the

same sorts of transactions involving employees plans.
 - 19 -

Section 497510, enacted by section 2003(a) of ERISA ‘74,

imposes taxes on a disqualified person who participates in a

10
Sec. 4975 provides, in pertinent part, as follows:

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

* * * * * * *

(c) Prohibited Transaction.--

(1) General rule.--For purposes of this
section, the term “prohibited transaction”
means any direct or indirect--

(A) sale or exchange, or leasing,
of any property between a plan and a
disqualified person;

(B) lending of money or other
extension of credit between a plan
and a disqualified person;

(C) furnishing of goods, services,
or facilities between a plan and a
disqualified person;

(D) transfer to, or use by or for
the benefit of, a disqualified person of
the income or assets of a plan;

(E) act by a disqualified person who
is a fiduciary whereby he deals with the
income or assets of a plan in his own
interest or for his own account; or

(F) receipt of any consideration for
his own personal account by any disqualified
person who is a fiduciary from any party
dealing with the plan in connection with a
transaction involving the income or assets of the
plan.
 - 20 -

prohibited transaction between a plan and a disqualified

person.11

The close relationship between the Congress’ reaction to the

private foundations problems in TRA ‘69 and the employees plans

problems in ERISA ‘74 is evident in (1) the general structures of

sections 4941 (private foundations) and 4975 (employees plans)

and (2) the identity of many elements of the definitions of

“prohibited transaction” (sec. 4975(c)(1)) and “self-dealing”

(sec. 4941(d)(1)). The opening language of the definitions and

many of the elements in the definitions (subpars. (A), (B), (C),

and (E) of sec. 4941(d)(1) and subpars. (A), (B), (C), and (D) of

sec. 4975(c)(1)) are word-for-word identical. The ERISA ‘74

conference joint statement of managers confirms, at numerous

points, the TRA ‘69 private foundations origins of much of

section 4975. H. Conf. Rept. 93-1280 (1974), 1974-3 C.B. 415:

11
Sec. 4975(h) requires respondent to notify the Department
of Labor before issuing a notice of deficiency with respect to
taxes imposed by sec. 4975(a) or (b). Our findings include the
parties’ stipulations as to two such notifications. Sec. 4975(i)
is a cross-reference to coordination procedures under sec. 3003
of ERISA. Petitioner does not contend that the notification was
insufficient or that any action of the Department of Labor under
ERISA secs. 406 (relating to prohibited transactions), 408
(relating to exemptions from prohibited transactions), 3003
(relating to procedures in connection with prohibited
transactions), or 3004 (relating to coordination between the
Treasury Department and the Labor Department) affects the instant
case. See 29 U.S.C. 1106, 1108, 1203, 1204. Accordingly, we
assume that all requirements as to notification of, and
coordination with, the Labor Department have been complied with.
 - 21 -

Fiduciary responsibility rules, in general

The conference substitute establishes rules
governing the conduct of plan fiduciaries under the
labor laws (title I) and also establishes rules
governing the conduct of disqualified persons (who are
generally the same people as “parties in interest”
under the labor provisions) with respect to the plan
under the tax laws (title II). This division
corresponds to the basic difference in focus of the two
departments. The labor law provisions apply rules and
remedies similar to those under traditional trust law
to govern the conduct of fiduciaries. The tax law
provisions apply an excise tax on disqualified persons
who violate the new prohibited transaction rules; this
is similar to the approach taken under the present
rules against self-dealing that apply to private
foundations. [Id. at 295, 1974-3 C.B. 456.]

* * * * * * *

Prohibited transactions

In general.--The conference substitute prohibits plan
fiduciaries and parties-in-interest from engaging in a
number of specific transactions. Prohibited
transaction rules are included both in the labor and
tax provisions of the substitute. Under the labor
provisions (title I), the fiduciary is the main focus
of the prohibited transaction rules. This corresponds
to the traditional focus of trust law and of civil
enforcement of fiduciary responsibilities through the
courts. On the other hand, the tax provisions (title
II) focus on the disqualified person. This corresponds
to the present prohibited transaction provisions
relating to private foundations.2
The prohibited transactions, and exceptions there-
from, are nearly identical in the labor and tax
provisions. However, the labor and tax provisions
differ somewhat in establishing liability for violation
of prohibited transactions. Under the labor
provisions, a fiduciary will only be liable if he knew
or should have known that he engaged in a prohibited
 - 22 -

transaction. Such a knowledge requirement is not
included in the tax provisions. This distinction
__________
2
Generally, the substitute defines a prohibited transaction as
the same type of transaction that constitutes prohibited self-
dealings with respect to private foundations, with differences
that are appropriate in the employee benefit area. As with the
private foundation rules, under the substitute, both direct and
indirect dealings of the proscribed type are prohibited.

conforms to the distinction in present law in the
private foundation provisions (where a foundation’s
manager generally is subject to a tax on self-dealing
if he acted with knowledge, but a disqualified person
is subject to tax without proof of knowledge). [Id. at
306-307, 1974-3 C.B. at 467.]

* * * * * * *

The substitute prohibits the direct or indirect
transfer of any plan income or asset to or for the
benefit of a party-in-interest. It also prohibits the
use of plan income or assets by or for the benefit of
any party-in-interest. As in other situations, this
prohibited transaction may occur even though there has
not been a transfer of money or property between the
plan and a party-in-interest. For example, securities
purchases or sales by a plan to manipulate the price of
the security to the advantage of a party-in-interest
constitutes a use by or for the benefit of a party-in-
interest of any assets of the plan. [Id. at 308, 1974-
3 C.B. at 469.]

* * * * * * *

The substitute also prohibits a fiduciary from
receiving consideration for his own personal account
from any party dealing with the plan in connection with
the transaction involving the income or assets of the
plan. This prevents, eg., “kickbacks” to a fiduciary.

In addition, the labor provisions (but not the tax
provisions) prohibit a fiduciary from acting in any
transaction involving the plan on behalf of a person
(or representing a party) whose interests are adverse
to the interest of the plan or of its participants or
beneficiaries. This prevents a fiduciary from being
put in a position where he has dual loyalties, and,
 - 23 -

therefore, he cannot act exclusively for the benefit of
a plan’s participants and beneficiaries. (This
prohibition is not included in the tax provisions,
because of the difficulty in determining an appropriate
measure for an excise tax.) [Id. at 309, 1974-3 C.B. at
470.]

* * * * * * *

Following present law with respect to private
foundations, under the substitute where a fiduciary
participates in a prohibited transaction in a capacity
other than that, or in addition to that, of a
fiduciary, he is to be treated as other disqualified
persons and subject to tax. Otherwise, a fiduciary is
not to be subject to the excise tax. [Id. at 321,
1974-3 C.B. at 482.]

After enacting ERISA ‘74, the Congress took a similar

approach in section 4951, enacted by section 4(c)(1) of the Black

Lung Benefits Revenue Act of 1977, Pub. L. 95-227, 92 Stat. 11,

18.

d. Prohibited Transactions

Each of the transactions, listed supra in table 1, was a

loan. Respondent does not contend that any of the transactions

fits under section 4975(c)(1)(B) (“any direct or indirect--(B)

lending of money or other extension of credit between a plan and

a disqualified person”), but focuses only on subparagraphs (D)

and (E) of section 4975(c)(1). We consider first whether any of

the transactions fits under section 4975(c)(1)(D)--“any direct or

indirect--(D) transfer to, or use by or for the benefit of, a

disqualified person of the income or assets of a plan”.
 - 24 -

Petitioner was a disqualified person with respect to the

Plan because (1) he was a fiduciary (sec. 4975(e)(2)(A)), (2) he

owned Rollins (sec. 4975(e)(2)(E)), and (redundant in the instant

case) (3) he owned at least 10 percent of Rollins (sec.

4975(e)(2)(H)). The transactions were uses by petitioner or for

petitioner’s benefit, of assets of the Plan. These assets of the

Plan were not transferred to petitioner. As to each of the

transactions before us, petitioner sat on both sides of the

table. Petitioner made the decisions to lend the Plan’s funds,

and petitioner signed the promissory notes on behalf of the

Borrowers. This flies in the face of the general thrust of this

legislation to stop disqualified persons from dealing with the

relevant employees plans or the plans’ assets. The Congress

replaced prior laws’ arm’s-length standards and put in their

place prohibitions on certain kinds of dealings (with exceptions

not relevant to the instant case). The prohibitions were backed

up by excise taxes, to be imposed without regard to whether the

transactions benefited the employees plans.

However, the Congress chose to carry out this “general

thrust” by enacting a series of detailed prohibitions. The

question before us at this point is whether petitioner violated

one of these detailed prohibitions--direct or indirect use of a

plan’s assets or income by petitioner or for petitioner’s

benefit.
 - 25 -

From the stipulations and stipulated exhibits we learn that

petitioner held the largest interest in each borrower whenever

that borrower received a loan from the Plan. Petitioner had an

8.93-percent interest in J & J Charlotte. Petitioner’s then-wife

had a 6.70-percent interest. Their combined holdings were 2-1/2

times as great as the next-largest holding. Petitioner had a

26.8-percent interest in Eagle Bluff--three times as great as the

next-largest holding. Petitioner had a 33.165-percent interest

in Jocks and Jills, Inc.--6-1/2 times as great as the next-

largest holding.12 When Eagle Bluff was not able to make its

payments to the Plan, petitioner made some of the payments,

intending (the parties stipulated) that he would receive his

money back when the golf club was sold.

The ERISA ‘74 conference joint statement of managers states:

“this prohibited transaction [use of plan assets for the benefit

of a disqualified person] may occur even though there has not

been a transfer of money or property between the plan and a

party-in-interest [disqualified person].” The statement of

managers goes on to illustrate that use of a plan’s assets to

12
On brief, petitioner states that his “ownership
interest[s] in the entities to which loans were made were roughly
9%, 13% and 24%.” Petitioner is correct as to J & J Charlotte.
However, his statement on brief substantially conflicts with the
parties’ stipulations--and the stipulated exhibits--as to Eagle
Bluff and Jock and Jills, Inc. Our findings are in accord with
the parties’ stipulations. Petitioner does not enlighten us as
to the source of his statement regarding his ownership interests
in Eagle Bluff and Jock and Jills, Inc.
 - 26 -

manipulate the price of a security to the advantage of a

disqualified person constitutes a prohibited transaction.

In light of the legislative history illustrating the meaning

of this statutory provision, it is apparent that the evidentiary

record is consistent with a conclusion that petitioner derived a

benefit (as significant part owner of each of the Borrowers)

from the Borrowers’ securing financing without having to deal

with independent lenders. That is, it is possible that

petitioner derived a benefit. However, it also is possible that

petitioner did not derive a benefit. From the evidentiary record

herein, we cannot determine which of these possibilities is the

more likely one.

When we examine the record for evidence that petitioner did

not derive a benefit (e.g., did not receive any money, or did not

enhance the values of his investments in the Borrowers), we find

nothing.13

Petitioner has the burden of proving by a preponderance of

the evidence that the loans, or any of them, did not constitute

uses of the Plan’s income or assets for his own benefit. Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933); Borchers v.

Commissioner, 95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir.

13
Petitioner’s denials on brief are not evidence. Rule
143(b); Evans v. Commissioner, 48 T.C. 704, 709 (1967), affd. 413
F.2d 1047 (9th Cir. 1969).
 - 27 -

1991). On the record before us, petitioner has failed to carry

this burden.

Petitioner contends that the loans were good for the Plan,

providing diversification and a good return with “safe, secure

collateral.” In Leib v. Commissioner, 88 T.C. 1474 (1987), the

taxpayer sold stock to the employees’ pension trust of the

professional corporation that he owned. The taxpayer contended

that the trust’s purchase “would qualify as a prudent investment

if judged under the highest fiduciary standards.” Id. at 1477.

We concluded on that issue as follows:

After a review of the statutory framework and
legislative history of section 4975 and the case law
interpreting ERISA section 406, we conclude that the
prohibited transactions contained in section 4975(c)(1)
are just that. The fact that the transaction would
qualify as a prudent investment when judged under the
highest fiduciary standards is of no consequence.
Furthermore, the fact that the plan benefits from the
transaction is irrelevant. Good intentions and a pure heart
are no defense. * * * [Id. at 1481].

Thus, prudence of the investment and actual benefit to the

Plan are not sufficient to excuse petitioner from imposition of

tax under section 4975(a) if petitioner participated in a

prohibited transaction with respect to the Plan.

Respondent directs our attention to O’Malley v.

Commissioner, 96 T.C. 644 (1991), affd. 972 F.2d 150 (7th Cir.

1992), in which we held that a transaction violated section

4975(c)(1)(D) even though the taxpayer “did not receive any

direct payments from the Plan”. Petitioner correctly points out
 - 28 -

that the instant case is distinguishable from O’Malley. In

O’Malley, the record showed that the plan paid the taxpayer’s

legal fees, and the taxpayer did not dispute the Commissioner’s

contention that this use of the plan’s assets benefited the

taxpayer and thus constituted a prohibited transaction. O’Malley

v. Commissioner, 96 T.C. at 650. Petitioner states on brief that

in the instant case “there were no expenses paid by the Plan on

behalf of the Petitioner.” Firstly, petitioner’s statement on

brief cannot substitute for petitioner’s failure to provide

evidence of record. Secondly, as the ERISA ‘74 conference

statement of managers extract shows, even the use of a plan’s

assets to enhance the price of a security can constitute a

benefit within the meaning of section 4975(c)(1)(D). H. Conf.

Rept. 93-1280, supra at 303, 1974-3 C.B. at 469. The record in

the instant case does not enable us to find that the loans did

not enhance, or were not intended to enhance, the values of

petitioner’s equity interests in the Borrowers.

Petitioner contends that Etter v. J. Pease Const. Co., Inc.,

963 F.2d 1005 (7th Cir. 1992), is “a critical case in this area”.

The cited Court of Appeals opinion deals with a number of issues.

We assume petitioner intends us to focus on that part of the

Etter opinion dealing with whether an employees plan’s investment

in a joint venture “constituted a use of the * * *[employees

plan’s] assets for the benefit of a party in interest [in the tax
 - 29 -

law, a ‘disqualified person’] and, thus, is prohibited by 29

U.S.C. § 1106(a)(1)(D) [sec. 4975(c)(1)(D)].” 963 F.2d at 1010.

The Court of Appeals summarized as follows the parties’

contentions on that issue, and the Court of Appeals’ conclusions,

idem.:

Etter [the plan participant] argues that Pease and
Miller [the plan trustees] benefitted from the Plan’s
investment in that they secured various tax advantages
while not risking as much of their personal assets.
Conversely, appellees [the plan trustees] argue, as the
district court found, that by contributing less than
100% of the purchase price Pease and Miller enabled the
Plan to take advantage of a valuable opportunity.

These two views of the evidence, as different as
they may be, are both permissible, and the district
court’s account is plausible. Therefore, the finding
of the district court “cannot be clearly erroneous.”
Anderson v. City of Bessemer City, 470 U.S. 564, 574
(1985).

We agree with petitioner that Etter is significant. The Court of

Appeals makes it plain that an employees plan’s assets could be

used for the benefit of a disqualified person, in violation of

section 4975(c)(1)(D), even though none of the employees plan’s

assets were transferred to the disqualified person. The

resolution of the benefit issue depends on whether the party

having the burden of proof has carried that burden on the basis

of the evidence in the record. Our evaluation of the sparse

evidence in the record of the instant case, consistent with

Etter, convinces us that petitioner has failed to carry his
 - 30 -

burden of proving that he did not use the Plan’s assets for his

own benefit.

Our conclusion as to section 4975(c)(1)(D) makes it

unnecessary for us to determine whether the loans also violated

section 4975(c)(1)(E). In particular, we do not decide whether

we agree with respondent’s contention on brief that petitioner’s

ownership interests in the Borrowers--

created a conflict of interest between the Plan and the
companies, resulting in dividing his loyalties to these
entities. This conflicting interest as a disqualified
person who is a fiduciary brought petitioner within the
prohibition against dealing “with the income or assets
of a plan in his own interest or for his own account”.
I.R.C. § 4975(c)(1)(E).

We note that the regulation on which respondent relies on

this issue--section 54.4975-6(a)(5)(i), Pension Excise Tax Regs.-

-deals with “the furnishing of office space or a service” and

prohibits a fiduciary from causing “a plan to pay an additional

fee to such fiduciary* * * to provide a service”, and prohibits

an arrangement “whereby such fiduciary * * * will receive

consideration from a third party in connection with such

transaction.” None of these elements is suggested on the record

herein, and so it is not readily apparent that this regulation is

relevant to this issue.

Also, an analysis of the effect of conflict of interest,

without more, as a basis of violation of section 4975(c)(1)(E)

should take into account the statutory differences between the
 - 31 -

ERISA ‘74 labor law provisions and the tax law provisions.

Section 406(b)(1) and (3) of ERISA ‘74 (codified as 29 U.S.C.

1106(b)(1) and (3)) corresponds to subparagraphs (E) and (F) of

section 4975(c)(1). However, the tax law does not have an

equivalent of section 406(b)(2) of ERISA ‘74:

(b) A fiduciary with respect to a plan shall not--

* * * * * * *

(2) in his individual or in any other capacity act
in any transaction involving the plan on behalf of a
party (or represent a party) whose interests are
adverse to the interests of the plan or the interests
of its participants or beneficiaries * * *.

The statement of managers, H. Conf. Rept. 93-1280, supra at

309, 1974-3 C.B. at 470, explains this difference between the

labor and tax titles as follows:

In addition, the labor provisions (but not the tax
provisions) prohibit a fiduciary from acting in any
transaction involving the plan on behalf of a person
(or representing a party) whose interests are adverse
to the interests of the plan or of its participants or
beneficiaries. This prevents a fiduciary from being
put in a position where he has dual loyalties, and,
therefore, he cannot act exclusively for the benefit of
a plan’s participants and beneficiaries. (This
prohibition is not included in the tax provisions,
because of the difficulty in determining an appropriate
measure for an excise tax.)

Thus, it appears that a conflict of interest involving a

fiduciary’s obligations to the other party in a transaction may

be actionable under the labor title, but it may be that such a

conflict of interest by itself may not be actionable under

section 4975(c)(1)(E).
 - 32 -

We shall deal with such matters under section 4975(c)(1)(E)

when confronted with a record in which we must decide the matters

in order to resolve the case.

We hold, for respondent, that each of the loans (supra table

1) constituted a use of the Plan’s assets for petitioner’s

benefit, in violation of section 4975(c)(1)(D).

II. Failure To File Tax Returns

In the portion of his brief dealing with the additions to

tax for failure to file tax returns, petitioner contends that--

Nothing in this case indicates that there was abuse of
any kind to the Plan or its participants, nor was there
any economic benefit to the Petitioner himself. The
Petitioner has significant experience in administering
and managing benefit plans, and substantial experience
in the asset management of plans. When a taxpayer
cannot rely upon the statutory authority itself to
support his actions, then the taxing system becomes
sheer folly. * * * As the record will show, the
Petitioner totally relied upon the statutory integrity
of the transaction, and to assert there was any abuse
or that any assessment of penalties is warranted is an
outrage.

Respondent maintains: (1) Petitioner was obligated to file

tax returns for the section 4975(a) taxes; (2) petitioner failed

to do so; (3) petitioner did not have reasonable cause for his

failure to file tax returns; and (4) such failures result in

additions to tax under section 6651(a)(1).

We agree with respondent.
 - 33 -

The relevant legal analysis about the application of section

6651(a)(1) to failures to file returns for section 4975 taxes is

set forth in Janpol v. Commissioner, 102 T.C. 499 (1994), and

need not be repeated here.

Relying on his own understanding of the law, petitioner

chose to sit “on both sides of the table in each transaction.”

Yamamoto v. Commissioner, 73 T.C. 946, 954 (1980), affd. 672 F.2d

924 (9th Cir. 1982). Relying on his own understanding of the

law, petitioner did not see any need to file section 4975 tax

returns to report any of the transactions. Relying again on his

own understanding of the law, petitioner chose to submit the

instant case fully stipulated without including evidence to show

that he did not benefit from the transactions. In Etter v. J.

Pease Const. Co., Inc., 963 F.2d 1005 (7th Cir. 1992), the

trustees succeeded in persuading the trial judge that they did

not benefit from the employee plan’s investment in the joint

venture. In the instant case, petitioner failed to persuade the

Court that he did not benefit from the transactions.

Petitioner’s good-faith belief that he was not required to

file tax returns does not constitute reasonable cause under

section 6651(a)(1) unless bolstered by advice from competent tax

counsel who has been informed of all the relevant facts. Stevens

Bros. Foundation, Inc. v. Commissioner, 39 T.C. 93, 133 (1962),
 - 34 -

affd. on this point 324 F.2d 633, 646 (8th Cir. 1963). There is

no such evidence in the record in the instant case.

We hold for respondent on this issue.

To take account of the foregoing, including respondent’s

concessions,

Decision will be entered

under Rule 155.