Employee Benefits-Eighth Circuit Upholds IRS Determinations That Excise Taxes On Nondeductible Contributions And Additions To Tax For Failure To File A Required Return Are Due

In Pizza Pro Equipment Leasing, Inc. v. Commissioner of Internal Revenue, No. 17-1297 (8th Cir. 2018) (Unpublished Opinion), Pizza Pro Equipment Leasing, Inc. (“Pizza Pro”) appeals a tax court decision upholding determinations by the Commissioner of Internal Revenue that it owes excise taxes and additions to tax related to its defined benefit pension plan.  After reviewing the case, the Eighth Circuit Court of Appeals (the “Court”) affirmed the district court’s ruling.

In this case, in 1995, Pizza Pro established a defined benefit pension plan (the “Plan”).  This case involves a dispute about a limitation on the Plan’s annual benefit, see I.R.C. § 415(b)(2)(C), which in turn determines Pizza Pro’s deductible contributions to the Plan.  The Commissioner concluded that from 2002 to 2006 Pizza Pro incorrectly calculated the limitation on the annual benefit and therefore made nondeductible contributions to the Plan. See I.R.C. § 404(j)(1)(A).  Section 4972 of the Internal Revenue Code imposes “a tax equal to 10 percent of the nondeductible contributions.”  The Commissioner further imposed additions to tax for failure to file a return of excise taxes and to timely pay the excise tax owed. See I.R.C. § 6651(a)(1) & (a)(2).

Pizza Pro petitioned the tax court, challenging the excise tax and additions.  The tax court decided the case without trial based on the parties’ stipulated facts and expert reports, and it upheld the Commissioner’s determinations.  It also concluded that Pizza Pro did not make a valid election under I.R.C. § 4972(c)(7), which allows a taxpayer to disregard contributions to a defined benefit plan under certain conditions, thereby avoiding the excise tax on nondeductible contributions.  Pizza Pro timely appealed.

Pizza Pro contends in this appeal that the Plan’s annual benefit never exceeded the applicable limitation.  Pizza Pro argues that the tax court erred in holding that the word “equivalent” in I.R.C. § 415(b)(2)(C) should be read as “actuarially equivalent.”  However, determined the Court, the tax court merely applied the Treasury Department regulation issued pursuant to the statute, see Treas. Reg. § 1.415-3(e) (stating that a plan benefit beginning before the normal retirement age is adjusted to “the actuarial equivalent” of a benefit beginning at the normal retirement age), the validity of which Pizza Pro has not challenged.

Because this regulation does not define actuarial equivalence, the tax court looked to general practice within the field of actuarial science to ascertain the proper method for determining the limitation on the annual benefit.  Crediting the Commissioner’s report, which was prepared by an actuary employed by the IRS, and discounting Pizza Pro’s report, which was not prepared by an actuary, the tax court found that the Commissioner’s method accords with actuarial practice while Pizza Pro’s does not.  The Court concluded that, because the tax court did not clearly err in this finding, Pizza Pro’s challenge to the excise tax and additions fails. In light of the tax court’s thorough and well-reasoned opinion, further discussion of this question would have no precedential value. See 8th Cir. R. 47B.

Moreover, the Court decided that the tax court correctly held that Pizza Pro did not make a valid election regarding excess contributions.  Under I.R.C. § 4972(c)(7), “[i]n determining the amount of nondeductible contributions for any taxable year, an employer may elect for such year not to take into account any contributions to a defined benefit plan except to the extent that such contributions exceed the full-funding limitation.”  As the Commissioner points out, Pizza Pro’s failure to file the requisite form for making the election stemmed from its belief that it made no excess contributions and owed no excises taxes, not its intent to make an election. Because it failed to inform the Commissioner in any manner, Pizza Pro did not make an election.