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Auner v. United States

March 3, 1971

PHILIP M. AUNER ET AL., PLAINTIFFS-APPELLEES
v.
UNITED STATES OF AMERICA, DEFENDANT-APPELLANT



Duffy and Hastings, Senior Circuit Judges, and Fairchild, Circuit Judge.

Author: Fairchild

FAIRCHILD, Circuit Judge.

This appeal presents the question whether a particular profit sharing plan met the non-discrimination requirement of 26 U.S.C. § 401(a)(4) so that the trust which implemented the plan was a qualified trust under § 401.

The allocation formula under the plan was heavily weighted in favor of employees with seniority, previous experience in similar work, and professional or vocational training. The government contends that under the particular circumstances the plan, with this formula, was discriminatory, failing to fulfil the condition prescribed by § 401(a)(4), as follows:

"If the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees."

This is an action for refund of income taxes, brought by participating employees and their spouses and the trustees of the trust.*fn1 The district court decided that the plan did not discriminate under § 401(a)(4) and gave judgment for plaintiffs. The government appealed.

The employer was the Medical-Surgical Clinic of East St. Louis. During the years in question the clinic was a professional association organized under the laws of Illinois. The association created a profit sharing plan and trust as of July 1, 1959, calling originally for allocation of the association's contributions among the accounts of participating employees in proportion to their respective total amounts of compensation. A contribution was made which provided each employee with an allocation of 5% of his compensation. An employee became eligible after three years of employment by the association or the partnership which preceded it.

Our problem arose out of an amendment a year later creating a new allocation formula. Under it each participating employee was assigned Seniority Points and Training and Experience Points. His total of Seniority Points was multiplied by the total of his Training and Experience Points. The product of the two was used as a percentage figure, and there was credited to him that percentage of his total compensation in each fiscal year. In practice, and as implied by the formula, the association contributed each year an amount sufficient to make such allocations in full. The number of Seniority Points ranged from one to five, depending on years of continuous service (up to 13) with the association and its predecessor partnership. Training and Experience points depended on the number of years' experience in previous similar employment and time spent in specific types of training.

During the years in question, the association had some thirty employees. The participating employees were Drs. Goldenberg, Bryan Auner, and Doubek, and eight supporting personnel, some of whom were not employed or did not participate throughout these years. We here set forth Exhibit 3, which covers all the participating employees except two who were participants for less than 9 months. Exhibit 3 shows the percentage allocation for each employee, his total compensation, and the amount of contributions allocated to him in the fiscal years ending June 30, 1962, 1963, and 1964.

Status as of June 30

1961

Years of Education

&

Service Experience

Officers Service Points Points Allocation

Max Goldenberg 14 5X 4 = 20%

Theodore Bryan 7 2X 6 = 12%

Philip Auner 7 2X 1 = 2%

William Doubek 4 1X 6 = 6%

Total 8

Other personnel

Eleanor Pyatt 14 5X 1 1/2 = 7 1/2%

Freda Stroud 9 2X 2 1/2 = 5%

Beverly Kraft 3 1X? = 1%

Edna Holden 2 3/4 none

less

Loretta Kozar than ...


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