Appeal from a Decision of the Tax Court of the United States
Before Pell and Tone, Circuit Judges, and Grant, Senior District Judge.*fn*
The issue before us is whether the Commissioner of Internal Revenue abused his discretion in retroactively applying his determination that the taxpayer's profit-sharing plan was not entitled to qualified status under 26 U.S.C. §§ 401(a)(3)(B) and 501(a). The Tax Court sustained the Commissioner, Wisconsin Nipple and Fabricating Corp. v. Commissioner of Internal Revenue, 67 T.C. 490 (1976), and we affirm.
In 1960 the taxpayer, Wisconsin Nipple and Fabricating Corporation, sought and obtained from the IRS District Director in Milwaukee a determination letter to the effect that a profit-sharing plan the company proposed to institute for certain of its employees met the requirements of §§ 401(a)(3)(B) and 501(a) of the Code. The plan covered only full-time, salaried employees with at least one year's employment with the company, the hourly-wage employees having indicated to the company that they preferred to receive the cash bonuses the company had been paying instead of participating in the plan.*fn1 Four employees, who were the company's four highest paid employees and two of whom were officers, met the plan's criteria. The non-salaried employees ineligible to participate were fifteen in number. The plan was instituted in 1960 following receipt of the IRS determination letter.*fn2
In 1962, after amending the forfeiture provisions of the plan,*fn3 the taxpayer sought and obtained a second IRS determination letter stating that the plan continued to be qualified. None of the eligibility provisions were changed by the amendment. In 1962 the same four employees remained eligible for benefits under the plan, to the exclusion of fifteen non-salaried employees. The lowest-paid participant, however, by then earned less than one of the non-salaried employees.*fn4
During an audit in the summer of 1973 of the taxpayer's returns for the taxable years ending April 30, 1972 and 1973, the Internal Revenue Service informed the taxpayer that the qualification of the profit-sharing plan was being reexamined by IRS. This led the company to amend the plan on December 28, 1973, retroactively to May 1, 1973,*fn5 to include all full-time employees with one year's experience, including those paid on an hourly basis.
During the taxable years 1971 and 1972, six employees met the plan's eligibility criteria: the four who were originally eligible, the chairman of the board of directors,*fn6 and a foreman, who had been continuously employed by the company since the plan's inception but was not a salaried employee until after the 1962 taxable year. During the 1971 and 1972 taxable years, sixteen employees were ineligible to participate in the plan solely because they failed to satisfy the salaried-only criterion.*fn7
On March 27, 1974, IRS informed the taxpayer that it was revoking, retroactively effective to May 1, 1971, its prior determination that the plan, as it stood before the 1973 amendment, was qualified. The reason given for the retroactive revocation was that the plan discriminated in favor of the officers, shareholders, supervisors, and highly-paid employees contrary to § 401(a)(3)(B).*fn8
The taxpayer filed an action in the Tax Court to set aside the asserted deficiencies. The Tax Court sustained the disallowance of deductions under § 404(a)(3)(B), while allowing a deduction under § 404(a)(5), which applies to nonqualified plans, for most of the amount in issue for the second of the two taxable years. The resulting deficiencies amount to about $6,000 for the year ending April 30, 1971 and $500 for the second taxable year.*fn9
The taxpayer does not question the correctness of the Commissioner's determination that the plan as it existed in the 1971 and 1972 taxable years did not meet the requirements of § 401(a)(3)(B), a determination which, in view of the statutory phrase "found by the Commissioner," should "be given a shade more than its usual substantial weight," Commissioner v. Pepsi-Cola Niagara Bottling Co., 399 F.2d 390, 393-394 (2d Cir. 1968). Moreover, it is conceded that the Commissioner could properly have determined in either 1960 or 1962 that the plan was not qualified, which is consistent with the taxpayer's position that no material changes occurred between 1962 and the end of the 1972 taxable year. In short, the taxpayer's argument is that the Commissioner changed his legal position when, in 1974, he revoked the earlier approval, and that he could do so only prospectively.
The Commissioner's argument is that the taxpayer could not reasonably rely upon the 1960 and 1962 determination letters in the light of a later revenue ruling published before the 1971 taxable year, Rev.Rul. 69-398, 1969-2 Cum.Bull. 58, and that in any event there was a material change in the facts, as a result of which the taxpayer could not reasonably rely on the earlier approvals.
Section 7805(b) of the Internal Revenue Code, 26 U.S.C. § 7805(b), ...