                         T.C. Memo. 2003-32



                       UNITED STATES TAX COURT



               HOWARD E. CLENDENEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

            HOWARD E. CLENDENEN, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 18153-96, 18154-96.      Filed February 12, 2003.


     Paul F. Christoffers, for petitioners.

     John Q. Walsh, for respondent.


                         MEMORANDUM OPINION

     VASQUEZ, Judge:    These cases are before the Court on

respondent’s motions for entry of decision under Rule 50.1




     1
        Unless otherwise indicated, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect at all
relevant times.
                                 - 2 -

Background

     Petitioner Howard E. Clendenen, Inc. (the corporation), is a

corporation with a mailing address in Des Moines, Iowa.      On May

22, 1996, respondent sent the corporation a notice of deficiency

determining the following deficiencies in the corporation’s

Federal income taxes:

          Tax Year Ended                 Deficiency

                6/30/87                  $10,273
                6/30/88                   32,607
                6/30/89                   13,775

In this notice of deficiency, respondent determined that the

corporation’s employee stock ownership plan (the plan) was a

nonqualified plan because it did not meet the requirements of

section 401(a).     On August 21, 1996, the corporation filed a

petition with the Court alleging error in respondent’s

determination that the plan is nonqualified.

     On May 22, 1996, respondent sent petitioner Howard E.

Clendenen (Mr. Clendenen) a notice of deficiency determining

deficiencies in his Federal income taxes, an addition to tax, and

an accuracy-related penalty as follows:

                                  Addition to Tax       Penalty
     Tax Year       Deficiency    Sec. 6653(a)(1)     Sec. 6662(a)

       1987          $13,641              —              —
       1988           34,071             $1,704          —
       1989            1,187              —              $237
                              - 3 -

In this notice of deficiency, respondent based the determinations

on the plan’s being nonqualified.   On August 21, 1996, Mr.

Clendenen filed a petition with the Court in which Mr. Clendenen

referred to the “erroneous allegation that said trust is not

qualified.”

     On September 29, 1997, the parties in both cases each filed

a joint motion for continuance.   The parties sought a continuance

in order to present the plan qualification issue to the Court in

a declaratory judgment action, Howard E. Clendenen, Inc. v.

Commissioner, docket No. 18155-96R, because the qualified status

of the plan was the significant issue in these cases.   On October

2, 1997, the Court granted these motions.

     On February 13, 1998, the corporation and Mr. Clendenen each

filed a Stipulation of Settled Issues.   The corporation’s

stipulation of settled issues provided in part:

          8. For the taxable year ended June 30, 1987, the
     parties agree that the issue designated “ESOP Contribution
     to Non-Qualified Plan” in the notice of deficiency is
     consequential to the issue of plan qualification in related
     docket 18155-96 “R”.

          9. For the taxable year ended June 30, 1988, the
     parties agree that the issue designated “Deductible
     Dividends to ESOP” in the notice of deficiency is
     consequential to the issue of plan qualification in related
     docket 18155-96 “R”.

          10. For the taxable year ended June 30, 1988, the
     parties agree that the issue designated “Non-Qualified
     Contribution - Allowed in Yr. included in 1040" in the
     notice of deficiency is consequential to the issue of plan
     qualification in related docket 18155-96 “R”.
                              - 4 -

          11. For the taxable year ended June 30, 1989, the
     parties agree that the issues designated “ESOP Contribution
     to Non-Qualified Plan” and “Deductible Dividends to ESOP” in
     the notice of deficiency are consequential to the issue of
     plan qualification in related docket 18155-96 “R”.

Respondent and the corporation signed this stipulation of settled

issues.

     Mr. Clendenen’s stipulation of settled issues provided in

part:

          9. For the taxable year 1987, the parties agree that
     the issue designated “Employer Contribution” and “Deferred
     Compensation” in the notice of deficiency are consequential
     to the issue of plan qualification in related docket 18155-
     96 “R”.

          10. For the taxable year 1988, the parties agree that
     this stipulation resolves all issues in dispute.

          11. For the taxable year 1989, the parties agree that
     the remaining issue, designated “Employer Contribution” in
     the notice of deficiency is consequential to the issue of
     plan qualification in related docket 18155-96 “R”.

Respondent and Mr. Clendenen signed this stipulation of settled

issues.

     On February 13, 1998, the corporation and Mr. Clendenen also

each filed a Stipulation To Be Bound.   The corporation’s

stipulation to be bound stated that the only remaining issues in

dispute relate to the plan qualification as asserted in

paragraphs 4(a) and (b) in the petition.   Further, the

corporation’s stipulation to be bound provided in part:

          2. The adjustments in respondent’s notice of
     deficiency relating to the issues or items asserted in
     paragraphs 4(a) and (b) of the petition, as specified in the
     preamble, shall be determined by the resolution of the
     qualified status of the Howard E. Clendenen, Inc., Employee
                               - 5 -

     Stock Ownership Plan in Docket No. 18155-96 “R” (whether
     litigated or settled), with respect to the following
     taxpayer:
     Name of Case: Howard E. Clendenen, Inc. v. Commissioner
     Tax Court Docket No.: 18155-96 “R”
     (hereinafter the CONTROLLING CASE).

          3. The petitioner in this case is the same as the
     taxpayer in the CONTROLLING CASE.

     Mr. Clendenen’s stipulation to be bound provided that the

only remaining issues in dispute involve the issues asserted in

paragraph 4(a) of the petition that relate to the plan’s

qualification.   Further, Mr. Clendenen’s stipulation to be bound

provided in part:

          2. The adjustments in respondent’s notice of
     deficiency relating to the issues or items asserted in
     paragraph 4(a) of the petition, as specified in the
     preamble, shall be determined by the resolution of the
     qualified status of the Howard E. Clendenen, Inc., Employee
     Stock Ownership Plan in Docket No. 18155-96 “R” (whether
     litigated or settled), with respect to the following
     taxpayer:
     Name of Case: Howard E. Clendenen, Inc. v. Commissioner
     Tax Court Docket No.: 18155-96 “R”
     (hereinafter the CONTROLLING CASE).

          3. All issues involving the above adjustments shall be
     resolved as if the petitioner in this case were the same as
     the taxpayer in the CONTROLLING CASE.

     Both stipulations to be bound also provided:

          4. A decision shall be submitted in this case when the
     decision in the CONTROLLING CASE (whether litigated or
     settled) becomes final under I.R.C. § 7481.

          5. Upon entry of the decision in the CONTROLLING CASE,
     petitioner consents to the assessment and collection of the
     deficiencies attributable to the adjustments formulated by
     reference to the Tax Court’s opinion, notwithstanding the
     restrictions under I.R.C. § 6213(a).

          The parties agree to this STIPULATION TO BE BOUND.
                               - 6 -

Respondent and the corporation signed the corporation’s

stipulation to be bound, and respondent and Mr. Clendenen signed

Mr. Clendenen’s stipulation to be bound.

     On September 3, 1998, the Court published its opinion,

Howard E. Clendenen, Inc. v. Commissioner, T.C. Memo. 1998-318

(docket No. 18155-96R) (the declaratory judgment), affd. 207 F.3d

1071 (8th Cir. 2000).   We held that the trust was not a qualified

trust under section 401(a) beginning with the plan year 1986

because the annual additions exceeded the limitations of section

415(c) when we found that the elective deferrals were employer

contributions and that those amounts and the amounts paid by the

corporation to Mr. Clendenen as an independent contractor were

not includable in compensation under section 415.   We stated:

     the annual additions allocated to Mr. Clendenen during each
     of the plan years 1986, 1987, 1989, 1990, and 1991, exceed
     the section 415 limits. Petitioner has not argued or
     established that any corrective measures were taken to
     reduce these additions. See sec. 1.415-6(b)(6), Income Tax
     Regs.

The Court of Appeals for the Eighth Circuit affirmed our opinion.

Howard E. Clendenen, Inc. v. Commissioner, 207 F.3d 1071 (8th

Cir. 2000), affg. T.C. Memo. 1998-318.

     On March 5, 2002, respondent filed a motion for entry of

decision in each of these cases, moving that the Court enter a

decision pursuant to the stipulations filed by the parties.2


     2
         Respondent did not file a motion for entry of decision in
                                                    (continued...)
                              - 7 -

     After concessions,3 the issue for decision is how the

stipulations of settled issues and the stipulations to be bound

affected the corporation and Mr. Clendenen (collectively,

petitioners).

Discussion

     The parties dispute the effect of the stipulations.

Respondent argues that the stipulations of settled issues and the


     2
      (...continued)
a related case, Howard E. Clendenen, Inc. Employee Stock
Ownership Trust v. Commissioner, docket No. 18156-96. Respondent
intends to file such motion for entry of decision after the
resolution of the instant motions for entry of decision.
     3
        For the corporation, the parties agreed: (1) The
corporation’s contribution limit shall be increased by $829 for
the taxable year ended June 30, 1987; (2) the corporation’s
deductible interest expense shall be increased by $3,734 for the
taxable year ended June 30, 1989; (3) the corporation is entitled
to an additional deduction for employment taxes of $3,605 for the
taxable year ended June 30, 1989; and (4) certain issues are
computational in nature and determinable upon final resolution of
all issues in dispute. Further, for the corporation, respondent
conceded: (1) The increase to taxable income of $7,582 for
“Imputed Interest Income” for the taxable year ended June 30,
1988; and (2) the increase to taxable income of $7,498 for
“Imputed Interest Income” for the taxable year ended June 30,
1989.

     Mr. Clendenen conceded: (1) Increases to taxable income of
$11,088 for “Dividend Income - Imputed Interest” and $4,761 for
“Interest Income” for 1988; (2) the adjustment of $2,873 for
“Itemized Deductions” for 1988; and (3) increases to taxable
income of $7,681 for “Dividend Income - Imputed Interest” and
$3,605 for “Dividend Income - FICA Tax” for 1989. Respondent
conceded for Mr. Clendenen: (1) The increase to taxable income
of $92,712 for “Capital Gains and Losses” for 1988; (2) the
addition to tax of $1,704 under sec. 6653(a)(1) for 1988; and (3)
the addition to tax of $237 under sec. 6662(a) for 1989.
Respondent and Mr. Clendenen agreed that this stipulation of
settled issues resolved all issues in dispute for 1988.
                              - 8 -

stipulations to be bound are dispositive of all issues concerning

the qualified status of the plan.   Respondent contends that the

parties “effectively agreed that the party that prevailed with

respect to the issue of plan qualification in docket No. 18155-

96R will also prevail in this case”.    Petitioners do not dispute

that they are bound by the stipulations.4   Instead, petitioners

dispute the calculations that result from the declaratory

judgment, arguing that while the plan was disqualified for the

taxable year ended June 30, 1986, the plan was qualified for all

years ending thereafter.

     The stipulations of settled issues and the stipulations to

be bound provide that all of the remaining issues in these cases

shall be resolved on the same basis as those issues are finally

resolved in the declaratory judgment.   We concluded in the

declaratory judgment, and the Court of Appeals for the Eighth

Circuit affirmed, that the annual additions allocated to Mr.

Clendenen during each of the plan years 1987 and 1989, the years

in dispute in the instant case, exceeded the section 415 limits;




     4
        Even if petitioners sought relief from the stipulations,
they would not prevail because they have not shown that
settlement was the result of mutual mistake or that manifest
injustice will result if we enforce the stipulations. See Rule
91(e); Stamm Intl. Corp. v. Commissioner, 90 T.C. 315, 321
(1988); Adams v. Commissioner, 85 T.C. 359, 375 (1985); Korangy
v. Commissioner, T.C. Memo. 1989-2, affd. 893 F.2d 69 (4th Cir.
1990).
                               - 9 -

i.e., the plan is not qualified.    Sec. 415(a)(1)(B), (c)(1);

Howard E. Clendenen, Inc. v. Commissioner, T.C. Memo. 1998-318.

     Further, when a plan is disqualified under section 415, the

disqualification continues until remedial action is taken.

Martin Fireproofing v. Commissioner, 92 T.C. 1173, 1188 (1989).

Corrective action of the sort set forth in the regulations is a

prerequisite to requalification of a plan following a violation

of section 415.   Id. at 1184; Van Roekel Farms v. Commissioner,

T.C. Memo. 2000-171.   As we stated in the declaratory judgment,

the corporation had not argued or established that any corrective

measures were taken, citing section 1.415-6(b)(6), Income Tax

Regs.5   Howard E. Clendenen, Inc. v. Commissioner, supra.

     Petitioners argue that Rev. Rul. 72-368, 1972-2 C.B. 220,

and Rev. Rul. 73-79, 1973-1 C.B. 194, support their contention

that disqualification in a prior year does not prevent the plan

from being qualified in a future year when it meets the

requirements of section 401(a).    We disagree.   In Martin

Fireproofing, we stated that (1) Rev. Rul. 72-368, supra,

predates section 415, which was enacted in 1974, and (2) Rev.

Rul. 72-368, supra, does not require respondent to qualify a plan



     5
        Sec. 1.415-6(b)(6), Income Tax Regs., provides for
retroactive relief when an excess allocation results from (1)
forfeitures, (2) a “reasonable error in estimating” compensation,
or (3) “other limited facts and circumstances” to be determined
by respondent. See Martin Fireproofing v. Commissioner, 92 T.C.
1173, 1182 (1989).
                               - 10 -

in the absence of corrective action.    Martin Fireproofing v.

Commissioner, supra at 1188.   The second point is emphasized in

Rev. Rul. 73-79 in which a plan requalified only after amendment

of the plan and a reallocation of contributions made for the

years of violation.    Id.

     Petitioners also contend that Zabolotny v. Commissioner, 7

F.3d 774 (8th Cir. 1993), affg. and revg. 97 T.C. 385 (1991), is

analogous to their situation and supports their argument.      We

disagree.   First, Zabolotny involved a different section of the

Code, section 4975.6   Second, section 4975 did not impose a

requirement that a disqualified person must take affirmative

action before a transaction may be “corrected”.    Id. at 777.       In

the instant case, the applicable regulations and caselaw require

that corrective actions must be taken to requalify a plan that

has violated section 415.    Martin Fireproofing v. Commissioner,

supra at 1184; sec. 1.415-6(b)(6), Income Tax Regs.

     Petitioners provided calculations to establish that the plan

was qualified as of the taxable year ending June 30, 1987.      In

their calculations, petitioners have ignored findings from the

declaratory judgment; i.e., $30,000 treated as an employee



     6
        Sec. 4975 imposes excise taxes on persons who entered
into “prohibitive transactions” with employee pension and benefit
plans qualified under the Employment Retirement Income Security
Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829. Zabolotny v.
Commissioner, 7 F.3d 774, 776 (8th Cir. 1993), affg. and revg. 97
T.C. 385 (1991).
                              - 11 -

contribution and $9,000 treated as an employer contribution for

taxable year ended June 30, 1987.   The source of many of

petitioners’ calculations; i.e., figures for taxable years ended

June 30, 1984 and 1985, is unclear, and such figures are not

reflected in the instant records.   The declaratory judgment

clearly examined the years at issue.   We do not question those

calculations.   We therefore shall grant respondent’s motions for

entry of decision.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not herein

discussed, we conclude them to be irrelevant or without merit.

     To reflect the foregoing,

                                         Appropriate orders and

                                    decisions will be entered.
