CITE AS: McManus v. Commissioner, 93 T.C. 79
CHARLES E. McMANUS, III (A PROFESSIONAL LAW CORPORATION), PETITIONER
v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 31784-84R. Filed July 24, 1989.
R has moved to dismiss this declaratory judgment action under sec.
7476, I.R.C. 1954, for lack of jurisdiction citing P's failure to exhaust
its administrative remedies. Held. In seeking initial qualification of its
retirement plans, P must demonstrate that it exhausted all administrative
remedies prior to the issuance of the final adverse determination letters.
Sec. 7476(b)(3). It did not do so. Held, further This Court lacks
jurisdiction under sec. 7476(b)(4) because some of the provisions of the
plans with respect to which P seeks a declaratory judgment had not been
put into effect prior to the filing of the petition. Arthur Sack, Pension
Paperwork, Inc. v. Commissioner, 82 T.C. 741 (1984), followed. R's motion
to dismiss for lack of jurisdiction will be granted.
Charles E. McManus, III, pro se.
Sarah A. Hall, for the respondent.
SCOTT, Judge: This case was assigned to Special Trial Judge Francis J.
Cantrel pursuant to the provisions of section 7443A(b)(1) and Rule 180 et
seq. <> After a review of the record, we agree with and adopt
his opinion which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
CANTREL, Special Trial Judge: By his motion, which we herein decide,
respondent requests the Court to dismiss this declaratory judgment action
for lack of jurisdiction.
FINDINGS OF FACT
On March 5, 1982, Charles E. McManus, III, a professional law
corporation (petitioner), applied to the District Director, Dallas, Texas
(District Director) for initial qualification under section 401(a) of
three retirement plans. Attached to the applications were copies of the
three plans as executed on January 19, 1981, and a one-page document which
amended the plans on December 18, 1981. The address appearing on the Forms
5300 and 5301, Applications for Determination for Defined Benefit and
Defined Contribution Plans, was: 404 DeWald Street, Lake Charles,
Louisiana, 70605 (Lake Charles address). The Internal Revenue Service
(IRS) acknowledged receipt of these three applications by letters dated
March 26, 1982, sent to petitioner at the Lake Charles address.
Patricia I. Islas (Ms. Islas), an IRS employee plans specialist,
located Mr. McManus, petitioner's representative, by telephone in Texas to
discuss the plans on September 21, 1982. During a second call to Mr.
McManus in Texas on October 12, 1982, Ms. Islas indicated that changes in
the plans were necessary and that she needed certain documents.
On October 13, 1982, Ms. Islas sent a letter to petitioner at the Lake
Charles address which read as follows:
Rather than wait for you to call me next week after you bring your plans
back from Louisiana, I have prepared a hand-written list of problems in
your three pension plans. This list only addresses items which are in the
plan; there are many other provisions which are completely missing.
To assist you in drafting correct amendments, I am also enclosing a set of
the worksheets which we use in reviewing a plan. Every item has to be
answered in the affirmative unless it can be shown that the provision is
not applicable. (There are a very few permissible "No's".)
I will look for the proposed amendments to be here in my office no later
than November 3, 1982.
The documents I requested in our conversation yesterday should be sent to
me sometime next week.
Additionally, because your applications were filed on forms which have
been revised, I am enclosing a questionnaire which is to be completed and
returned to me.
Please feel free to phone me.
This letter was never returned to Ms. Islas.
Having received no response from petitioner by November 8, 1982, Ms.
Islas prepared a letter stating petitioner had 10 days to provide the
requested amendments and information. The letter indicated that if the
requested material was not received within that time, petitioner's
applications would be processed based on the information presently in the
IRs's file which could result in a determination that the plans would not
qualify for favorable tax treatment. This letter was signed by the
District Director, dated November 8, 1982, and sent to petitioner at the
Lake Charles address. Likewise, this letter was never returned to the
District Director. In January, and then again in June of 1983, Ms. Islas
attempted to contact Mr. McManus in Texas but was told that he was no
longer employed there. After speaking with several different people, Ms.
Islas was referred to a woman, Mary Hollis, who said her office was still
sending mail to Mr. McManus at the Lake Charles address and that it was
not being returned.
Three proposed adverse determination letters were sent by certified
mail to petitioner at the Lake Charles address on September 23, 1983. Each
letter contained the paragraph:
If you do not agree, you can appeal within 30 days from the date of this
letter through this Key District Office. To file your appeal, please
follow the instructions in the enclosed Notice 402 under the heading
Regional Office Appeal. If we have not received an appeal within 30 days,
we will issue a final adverse determination letter.
Attached to each letter was a detailed determination explanation
outlining the plan provisions which violated specific sections of the
Code. All three were returned to the District Director on October 4, 1983,
marked "UNDELIVERABLE AS ADDRESSED/UNABLE TO FORWARD."
Mr. McManus sold his Lake Charles house on October 25, 1983. At some
time subsequent to September 23, 1983, but prior to June 7, 1984, Mr.
McManus gave the Louisiana post office a forwarding address for petitioner
in Easton, Maryland.
On June 7, 1984, the District Director sent three final adverse
determination letters to petitioner at the Lake Charles address by
certified mail. These letters read as follows:
This is a final adverse determination letter indicating that this plan
does not meet the requirements of Section 401 of the Internal Revenue Code
for the plan year ending December 31, 1981, and subsequent years. The
explanation of our determination is reflected in the enclosed
administrative decision.
Since we have no record of receiving a written appeal for Regional and
National Office consideration, we believe that you did not exhaust
available administrative remedies. As indicated in Notice 402 previously
sent to you, Internal Revenue Code Section 7476(b)(3) provides, in part,
that "The Tax Court shall not issue a declaratory judgment or decree under
this section in any proceeding unless it determines that the petitioner
has exhausted administrative remedies available to him within the Internal
Revenue Service." However, if you believe you have exhausted your
administrative remedies and want a declaratory judgment, your petition
must be filed before 92 days after the date this letter was mailed to you.
If you have any questions, please contact the person whose name and
telephone number are shown above.
Detailed determination explanations accompanied each letter. These letters
were not returned to the District Director. At no time prior to June 7,
1984, or on any date thereafter, did Mr. McManus give either Ms. Islas or
the District Director notice that petitioner's address was other than the
Lake Charles address.
Mr. McManus timely mailed and thus timely filed a petition in this
Court on September 7, 1984, on petitioner's behalf, requesting declaratory
judgment pursuant to section 7476 with respect to the initial
qualification of the three retirement plans as "adopted on 19 January 1981
and amended on 18 December 1981." The petition alleges the IRS erred by
not allowing petitioner the opportunity to correct drafting errors, to
amend "nitpicking objections," and to adopt other amendments in
conformance with the requirements of sections 401, 410, 411, and the
regulations thereunder. Petitioner argues that the plans as amended on an
unspecified date in the past and as intended to be amended on an
unspecified date in the future are entitled to favorable determinations.
Additionally, Mr. McManus admits to receiving from the IRS only the
acknowledgment of the applications, two phone calls from Ms. Islas and the
final adverse determination letters.
OPINION
Section 7476 creates a judicial remedy for taxpayers seeking
determinations of qualification of retirement plans under section 401(a),
which latter section lists the characteristics required of retirement
plans to receive favorable tax treatment under the Code. Upon the filing
of an appropriate pleading, the Tax Court may make a declaratory judgment
on the initial or continuing qualification of such plans. Sec. 7476(a).
There are two limitations on this Court's authority which are relevant to
the present case. They are contained in section 7476(b):]
(3) Exhaustion of administrative remedies.--The Tax Court shall not
issue a declaratory judgment or decree under this section in any
proceeding unless it determines that the petitioner has exhausted
administrative remedies available to him within the Internal Revenue
Service. A petitioner shall not be deemed to have exhausted his
administrative remedies with respect to a failure by the Secretary to make
a determination with respect to initial qualification or continuing
qualification of a retirement plan before the expiration of 270 days after
the request for such determination was made.
(4) Plan put into effect.--No proceeding may be maintained under this
section unless the plan (and, in the case of a controversy involving the
continuing qualification of the plan because of an amendment to the plan,
the amendment) with respect to which a decision of the Tax Court is sought
has been put into effect before the filing of the pleading. * * *
Congress explained these requirements in S. Rept. 93-383 (1973), 1974-3
C.B. (Supp.) 80, 193:
Exhaustion of administrative remedies required--For a petitioner to
receive a declaratory judgment from the Tax Court under this provision, he
must demonstrate to the court that he has exhausted all administrative
remedies which are available to him within the Internal Revenue Service.
Thus, in the case of an employer (or a plan trustee) he must demonstrate
that he has made a request to the Internal Revenue Service for a
determination and that the Internal Revenue Service has either failed to
act, or has acted adversely to him, and that he has appealed any adverse
determination by a district office to the national office of the Internal
Revenue Service, or has requested or obtained through the district
director technical advice of the national office. To exhaust his
administrative remedies a party must satisfy all procedural requirements
of the Service. For example, the Service may decline to make a
determination if an employer fails to supply the Service with the
necessary information on which to make a determination. * * *
In addition to exhausting administrative remedies, an employer must
have placed a plan into effect prior to the petition of the Tax Court for
a declaratory judgment. * * * [Emphasis added.]
Procedures for obtaining determination letters for qualification of
retirement plans appear in section 601.201(o) of the Statement of
Procedural Rules (Procedural Rules), 26 C.F.R. Part 601 (1983). The
actions necessary for applicants to complete in order to be deemed to have
exhausted the available administrative remedies within the meaning of
section 7476(b)(3) are contained in section 601.201(o)(10) of the
Procedural Rules. These are: (1) Filing a completed application with the
appropriate district director, (2) complying with certain notice
requirements, and (3) making an appeal to the Appeals Office in the event
of a notice of proposed adverse determination from the district director.
Sec. 601.201(o)(10)(i) of the Procedural Rules. Instructions for
requesting appeals office consideration are contained in section
601.201(o)(6) of the Procedural Rules, as well as the statement that a
failure by the applicant to follow these steps will constitute a failure
to exhaust administrative remedies as required by section 7476(b)(3) and
preclude the applicant from seeking declaratory judgment thereunder.
The exhaustion requirement has been the subject both of cases involving
section 7476 and its counterpart in the area of exempt organizations,
section 7428. Failure to satisfy this jurisdictional limitation results in
dismissal of the declaratory judgment action. Efco Tool Co. v.
Commissioner, 81 T.C. 976, 978 (1983). See Gladstone Foundation v.
Commissioner, 77 T.C. 221 (1981); BBS Associates, Inc. v. Commissioner, 74
T.C. 1118 (1980), affd. without published opinion 661 F.2d 913 (3d Cir.
1981); B.H.W. Anesthesia Foundation v. Commissioner, 72 T.C. 681 (1979);
Prince Corp. v. Commissioner, 67 T.C. 318 (1976).
We have not yet considered the exhaustion requirement in an initial
qualification case in which the IRS has made a final adverse
determination. The issue has arisen most frequently in conjunction with
the second sentence of section 7476(b)(3) which states that a petitioner
will not be deemed to have exhausted administrative remedies where the IRS
has failed to make a determination with respect to initial or continuing
qualification of a retirement plan before the expiration of 270 days after
the request for a determination was made.
The petitioner in Prince Corp. was unsuccessful in arguing that it
automatically met the exhaustion requirement upon the expiration of 270
days. The Court held that the mere lapse of 270 days is not a per se test
of the exhaustion requirement under section 7476(b)(3). Rather, after that
time, "a petitioner need only demonstrate that progress is severely
hampered due to causes beyond its control." Prince Corp. v. Commissioner,
supra at 328. This Court examined the record in BBS Associates to find
that "[p]etitioner diligently pressed its application for 21 months before
filing this action" under section 7476. BBS Associates, Inc. v.
Commissioner, supra at 1121. In B.H.W. Anesthesia Foundation, this Court
held that it had jurisdiction under section 7428 after determining that
"Petitioner had completed the normal progression through administrative
channels." B.H.W. Anesthesia Foundation v. Commissioner, supra at 682 n.
2. Thus, even where the IRS has failed to make a determination within 270
days, petitioner must establish that it took all the applicable procedural
steps before this Court will find the exhaustion requirement satisfied.
The issue in the present case is whether petitioner has sufficiently
availed itself of the procedural opportunities during the administrative
process which culminated in the issuance of final adverse determinations.
In Efco Tool Co., we found the purpose of the jurisdictional limitation of
section 7476(b)(3) satisfied in a revocation case once the IRS had issued
a final revocation letter. We considered there the need for the IRS to
have sufficient information upon which to base its determination as well
as the need to prevent interruption of the administrative process. We
decided these purposes were satisfied where a final revocation letter had
been issued. Efco Tool Co. v. Commissioner, supra at 981.
Although the same need exists in an initial qualification case, the
administrative process in a revocation situation differs because the
latter is initiated by the IRS. This Court will examine closely the IRs's
actions when respondent raises the exhaustion requirement as a bar to
jurisdiction in a revocation case where the administrative record is
derived largely from the IRs's own investigation of the facts. Issuance of
a final revocation letter is evidence that the administrative record was
sufficiently complete for the IRS to make a determination. The holding of
Efco Tool Co., however, does not mean that issuance of a final adverse
determination letter in an initial qualification case obviates the need
for petitioner to demonstrate that it exhausted its remedies any more than
does the passage of 270 days where the IRS has failed to make a
determination.
Based on the information submitted by petitioner, which was clearly
insufficient to warrant a favorable determination of its plans, the IRS
issued final adverse determination letters. The fact that such
determinations were issued, however, is not a per se test of exhaustion in
an initial qualification case. Where petitioner initiates the
administrative process and then seeks to invoke the jurisdiction of this
Court to redetermine whether its retirement plans qualify, petitioner must
demonstrate that it availed itself of every procedural opportunity in
pursuit of favorable determinations. We must therefore examine closely
what actions were taken on petitioner's behalf.
Subsequent to submitting the applications for initial qualification,
Mr. McManus, on petitioner's behalf, did absolutely nothing to further
participate in the administrative determination proceeding. He moved from
Louisiana to Texas after filing the applications without notifying the IRS
of a change in petitioner's address or telephone number; and moved again
to Maryland after the conversations with Ms. Islas. From those
conversations Mr. McManus was aware that the retirement plans as submitted
were defective yet he made no attempt to amend them. Petitioner did not
avail itself of the right to file an appeal with the key district office.
Its failure to receive the proposed adverse determination letters advising
of the appeals process was precipitated by Mr. McManus' failure to notify
the IRS of petitioner's current address as of September 23, 1983.
The record shows without equivocation, and despite petitioner's
protestations to the contrary, that petitioner received all of the written
correspondence from the IRS except the three proposed adverse
determination letters. The IRS properly mailed all correspondence to
petitioner's address as it appeared on the applications for determination.
That is all that is required of the IRS under section 1.7476-3(b), Income
Tax Regs. Furthermore, Ms. Islas' affidavit indicates she made every
attempt to notify Mr. McManus of the impending proposed adverse
determination letters before their issuance to petitioner.
Failure to appeal a proposed adverse determination was held to be a
failure to exhaust administrative remedies under section 7428(b)(2) in
Change-All Souls Housing Corp. v. United States, 229 Ct.Cl. 380, 671 F.2d
463 (1982). The Court of Claims reasoned that the arguments presented to
the court might have persuaded the IRS to change its view had the
interested party filed a protest. We agree with the reasoning in
Change-All Souls in that the purpose of the exhaustion requirement is best
served if a petitioner is required to fully exploit the administrative
process before seeking relief in this Court.
The petition avers that the objectionable provisions have been amended.
We have before us only the original plans as executed and amended in 1981.
The IRS had before it only the original plans as executed and amended in
1981. The administrative record as stipulated by petitioner contains only
the original plans as executed and amended in 1981. In its petition,
petitioner asks us to make a declaration with respect to plans it never
submitted to the IRS. This Court's function in a declaratory judgment
proceeding is to review the reasons provided by the IRS in its notice to
the party requesting qualification, and thereupon make a redetermination
of the IRs's determination, not a general examination of the provisions of
the plan. H. Rept. 93-807 (1974), 1974-3 C.B. (Supp.) 236, 343. Petitioner
would have us go outside the scope of the IRs's determinations to review
plans that are not contained in the administrative record. This we cannot
do. Houston Lawyer Referral Serv. v. Commissioner, 69 T.C. 570 (1978).
The administrative process as promulgated in section 601.201(o) of the
Procedural Rules is designed to afford applicants every opportunity to
present their arguments and amend their plans. At no time during the
administrative determination proceeding did Mr. McManus attempt to present
arguments or submit amended plans. On this record, petitioner has failed
the exhaustion requirement of section 7476(b)(3) and we so hold.
Furthermore, the petition indicates that some of the corrective
amendments to the retirement plans have not yet been made. No proceeding
may be maintained under section 7476 unless the plan with respect to which
a decision of the Tax Court is sought has been put into effect prior to
filing of the pleading. Sec. 7476(b)(4). In Arthur Sack, Pension
Paperwork, Inc. v. Commissioner, 82 T.C. 741 (1984), this Court dismissed
an action for lack of jurisdiction because the administrative record and
petitioner's briefs demonstrated that petitioner sought a favorable
declaratory judgment with respect to the plan as it would exist if the
proposed amendments were adopted. We agree with the holding in Arthur Sack
and note that our decision here does not preclude petitioner from
submitting new applications to the IRS for determinations of the
qualification of its amended plans.
In closing and consistent with Mr. McManus' refusal to act on behalf of
petitioner, he requested an extension of time for the filing of its brief,
yet no brief was filed.
Respondent's motion to dismiss for lack of jurisdiction will be
granted.
An order of dismissal for lack of
jurisdiction will be entered.
<>
1/ Unless otherwise indicated, all section references are to the
Internal Revenue Code of 1964 as amended, and all Rule references are to
the Tax Court Rules of Practice and Procedure.