DB Plan Sponsor Owes Taxes for Miscalculating Annual Benefit Limitation

The 8th U.S. Circuit Court of Appeals has affirmed a tax court’s decision that Pizza Pro Equipment Leasing owes excise taxes and additions to tax related to its defined benefit (DB) plan.

The Commissioner of Internal Revenue concluded that from 2002 to 2006, Pizza Pro incorrectly calculated the limitation on the plan’s annual benefit and therefore made non-deductible contributions to the plan. The Commissioner charged the plan an excise tax of 10% of the non-deductible contributions and then imposed additions to tax for Pizza Pro’s failure to file a return of excise taxes and timely pay the excise tax.

The appellate court noted that, in finding that the plan’s annual benefit exceeded the applicable limitation, the tax court applied a Treasury Department regulation that states a plan benefit beginning before the normal retirement age is adjusted to the “actuarial equivalent” of a benefit beginning at normal retirement age. According to the 8th Circuit’s opinion, Pizza Pro has not challenged the validity of this regulation.

Because the regulation does not define actuarial equivalence, the tax court looked to general practice in the field of actuarial science to determine the proper method for determining the limitation on the annual benefit. It found that the Commissioner’s report, which was prepared by an actuary, was in line with actuarial practice, while Pizza Pro’s report, not prepared by an actuary, was not. The appellate court agreed with this.

The 8th Circuit also agreed that Pizza Pro did not make an election under Internal Revenue Code Section 4972(c)(7), which says, “in determining the amount of non-deductible 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.” Pizza Pro points out that two actuarial groups suggested to the Internal Revenue Service (IRS) that a taxpayer’s failure to file the excise tax form should be considered sufficient evidence that it made such an election, but the appellate court noted that the IRS did not adopt this suggestion and the 5th U.S. Circuit Court of Appeals rejected a similar argument in a different case.

The 8th Circuit agreed with the Commissioner of Internal Revenue’s conclusion that Pizza Pro’s failure to file the form stemmed from its belief that it made no excess contributions and owed no excise taxes.