                        T.C. Memo. 2010-174



                      UNITED STATES TAX COURT



             YARISH CONSULTING, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1611-09R.             Filed August 4, 2010.



     Harold A. Chamberlain, for petitioner.

     Roger P. Law and Shawn P. Nowlan, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   This is a declaratory judgment action under

section 74761 that petitioner filed in response to a final

revocation letter respondent issued in 2008 (revocation letter)



     1
      All section references are to the Internal Revenue Code
(Code), and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
                               - 2 -

stating that petitioner’s Employee Stock Ownership Plan (ESOP)

failed to meet the requirements under section 401(a) for 2000 to

2004 and that any related trust was not exempt from taxation

under section 501(a).   Petitioner brings this action to

invalidate respondent’s retroactive revocation of the favorable

determination letter he issued to it in 2001 (determination

letter).

     We must decide whether respondent may retroactively revoke

the determination letter issued to petitioner.   We hold that

respondent may retroactively revoke the determination letter.2

                            Background

     The parties have stipulated the administrative record under

Rules 122 and 217(b)(2).   The record is incorporated by this

reference.   Petitioner’s principal place of business was Houston,

Texas at the time it filed the petition.




     2
      Petitioner argued in its petition that the limitations
period under sec. 6501 bars assessment of tax. We consider this
argument unpersuasive as this is a declaratory judgment action
and does not concern the assessment of tax. See Roblene, Inc. v.
Commissioner, T.C. Memo. 1999-161 (no limitations period applies
to when a revocation of a qualification letter may be issued).
Petitioner also asserted in its petition that respondent
improperly denied it the right to use respondent’s employee plans
compliance resolution system (EPCRS). Petitioner did not raise
this argument in its opening brief and is therefore deemed to
have abandoned it. See, e.g., Nicklaus v. Commissioner, 117 T.C.
117, 120 n.4 (2001).
                                - 3 -

     Dr. R. Scott Yarish (Dr. Yarish), a successful plastic

surgeon, owned five medical practice entities.3   They were R.

Scott Yarish, M.D. PA, Crystal Outpatient Surgery Center, Inc.

(Houston), Crystal Outpatient Surgery Center, Inc. (Lake

Jackson), Skin Enrichment, Ltd., and Gulf Coast Plastic Surgery,

PA (Gulf Coast).   In 2000 Dr. Yarish received an offer from Dr.

Gregory Pisarki (Dr. Pisarki) to purchase Gulf Coast.    Dr. Yarish

consulted with his attorney Michael C. Riddle (Mr. Riddle) about

the sale.   Mr. Riddle devised a plan for Dr. Yarish to receive

significant tax savings from his business income.    He advised Dr.

Yarish to form an S corporation to manage his four medical

practice entities as well as the medical practice Dr. Pisarki

sought to purchase.    The medical practice entities would pay a

“consulting fee” to the S corporation and then deduct the fees as

management services.

     Mr. Riddle further recommended that the S corporation

sponsor an ESOP to defer income earned by the S corporation.4      It

was intended that the income of the S corporation would pass

through to the ESOP, and, because the ESOP would be tax exempt,

it would pay no tax on the income until it was distributed to the


     3
      Dr. Yarish held a greater-than-80-percent interest in each
of the five entities. The other owners included trusts for the
benefit of Dr. Yarish.
     4
      Dr. Yarish’s medical practice entities had to be owned by a
doctor under State law and therefore could not have sponsored an
ESOP.
                                - 4 -

ESOP participant.   Dr. Yarish would be the sole ESOP participant.

In effect, Dr. Yarish’s medical practice entities would divert

money to an entity owned by a tax-exempt trust, creating a

substantial cash and property benefit solely for Dr. Yarish.

     Dr. Yarish approved of the plan Mr. Riddle presented.     He

formed Yarish Consulting, Inc. (petitioner) as an S corporation

and the ESOP in 2000.    He also required Dr. Pisarki, as a

condition of acquiring Gulf Coast, to sign a consulting agreement

with petitioner that obligated Gulf Coast to pay consulting fees

to petitioner.   Dr. Yarish also caused the other four medical

entities to sign agreements to pay consulting fees to petitioner.

Dr. Yarish was named the ESOP’s beneficiary, and Mr. Riddle

served as the ESOP’s trustee.    Dr. Yarish was the sole

shareholder of petitioner, and shortly after forming the ESOP,

Dr. Yarish owned 10 percent of the stock with the ESOP owning the

remaining 90 percent.5   Dr. Yarish was the sole participant in

the ESOP.

     Petitioner submitted an application to respondent for a

determination that the ESOP was a qualified employee benefit plan

(application) in 2000.   Petitioner was listed as the plan’s



     5
      Dr. Yarish sold 90 percent of petitioner’s shares to the
ESOP in exchange for a $900 promissory note and security
agreement. The ESOP repaid the promissory note to Dr. Yarish,
and the 900 shares of petitioner held by the ESOP were allocated
to Dr. Yarish’s account in the ESOP. All cash contributions to
the ESOP were allocated to Dr. Yarish’s account.
                               - 5 -

sponsor and employer.   Petitioner marked in its application that

it was not a member of an affiliated service group or a

controlled group of corporations under common control.

Respondent issued the determination letter in 2001 that allowed

the ESOP to be treated as an exempt trust under section 501(a).

The determination letter included a proviso that the plan’s

continued qualification would depend on the plan’s effect in

operation.

     Petitioner filed an annual return for the ESOP (annual

return) for each year from 2000 to 2004.    Dr. Yarish was the sole

participant in the ESOP during those years.    Petitioner’s annual

return for 2004 failed to alert respondent that a resolution had

been adopted to terminate the plan.    The ESOP terminated on

December 31, 2004, and petitioner rolled over the ESOP’s assets

totaling $2,439,503.05 into an individual retirement account

(IRA) for Dr. Yarish.

     Respondent audited the ESOP after the ESOP terminated.

Respondent’s examination concerned whether all eligible employees

of Dr. Yarish and his medical entities participated in the ESOP.

Respondent sought documents from petitioner regarding the ESOP.

Petitioner provided respondent with, among other things, a list

of related entities and a census of employees in the controlled

group or affiliated group.   These documents contradicted

petitioner’s statement in its application that it was not a
                               - 6 -

member of an affiliated service group or a controlled group of

corporations under common control.

     Respondent issued a summons to Mr. Riddle as the ESOP’s

trustee and also sent Mr. Riddle a letter and first version of

his “Explanation of Items Report.”     Mr. Riddle responded by

letter stating that the failure to disclose potential control

group issues on the ESOP’s application was a “scrivener’s error”

and that the ESOP was not part of an affiliated service group at

the time it filed its application.     Mr. Riddle requested that

petitioner be considered under respondent’s employee plans

compliance resolution system (EPCRS).6    Respondent informed

petitioner that he considered the ESOP to be a Management S

corporation ESOP that was not eligible for EPCRS.     Respondent

identified the Management S corporation ESOP as an abusive tax

avoidance transaction.   See “Abusive Transactions that Affect

Availability of Programs Under EPCRS,” Internal Revenue Service

Retirement Plans Community,

http://www.irs.gov/retirement/article/0,,id=156240,00.html; see

also Announcement 2005-80, 2005-2 C.B. 967.

     Respondent discovered on audit that Dr. Yarish was the only

employee participating in the ESOP.     Respondent therefore took

the position that the ESOP violated the coverage requirements.


     6
      EPCRS consists of three correction programs taxpayers may
use in certain circumstances to keep their retirement plans
compliant.
                                - 7 -

See sec. 410(b).7   Respondent found the rank and file employees

of Dr. Yarish and his medical entities received no benefit from

the ESOP while Dr. Yarish’s ESOP account increased by more than

$2.4 million.    Respondent determined that the ESOP was not

qualified as a retirement plan under section 401(a) and issued

the revocation letter to the ESOP retroactively revoking the

determination letter.8

     Petitioner filed this declaratory judgment action

challenging respondent’s retroactive revocation of the ESOP’s

qualification.


     7
      ESOPs receive favorable tax treatment to permit a large
percentage of the employees of a control group or affiliated
service group to receive the benefits of being part of a
qualified plan. See Weyher & Knott, ESOP, The Employee Stock
Ownership Plan 12 (2d ed. 1985). All employees of all
corporations in the group shall be treated as employed by a
single employer. Sec. 414(b).
     8
      There are three cases pending before this Court involving
deficiencies related to the present case’s declaratory judgment
action regarding the ESOP’s qualification. First, respondent
determined a $473,340 deficiency in petitioner’s income tax for
2004 and an accuracy-related penalty under sec. 6662 for that
year by classifying petitioner as a C corporation, not as an S
corporation, which is the subject of Docket No. 24095-08.
Respondent also determined that Dr. Yarish and his wife had a
$2,517,596 deficiency in income tax plus additional penalties for
tax years 2004 through 2006 related to the IRA rollover, which is
the subject of Docket No. 24096-08. Respondent also determined a
$146,200 deficiency and an accuracy-related penalty under sec.
6662 for 2004 by disallowing Dr. R. Scott Yarish, M.D. PA’s
deductions for paying any “consulting fee” to petitioner, which
is the subject of Docket No. 24094-08. Each of these three
deficiency cases is separate and apart from the pending
declaratory judgment proceeding. Our determination here on the
ESOP’s qualification, however, will be relevant in the three
pending deficiency cases.
                               - 8 -

                            Discussion

     We must decide whether respondent may retroactively revoke

the determination letter issued to petitioner regarding the ESOP.

Petitioner argues that respondent may not retroactively revoke

the determination letter because the ESOP had terminated and all

its assets had been distributed when respondent issued his

revocation.   Essentially, petitioner argues that respondent must

catch the ESOP scheme while the ESOP is still in existence.     We

disagree.   We begin by discussing our jurisdiction in declaratory

judgment actions regarding the qualification of retirement plans.

I. Jurisdiction

     This Court is a court of limited jurisdiction and may

exercise jurisdiction only if conferred by statute.   Naftel v.

Commissioner, 85 T.C. 527, 529 (1985).   We have jurisdiction to

make a declaratory judgment regarding an actual controversy

involving a retirement plan’s initial or continuing tax qualified

status.   Sec. 7476; Loftus v. Commissioner, 90 T.C. 845, 855

(1988), affd. without published opinion 872 F.2d 1021 (2d Cir.

1989); Shedco, Inc. v. Commissioner, T.C. Memo. 1998-295.     The

declaratory judgment proceedings under section 7476 were added to

the Code to allow this Court to review a determination letter

without a deficiency notice being issued or tax being assessed.

See Shut Out Dee-Fence, Inc. v. Commissioner, 77 T.C. 1197, 1203

(1981).
                                   - 9 -

     We are puzzled by petitioner’s argument that no actual

controversy exists because it was petitioner, as the plan

sponsor, who filed the petition “with respect to an actual

controversy” asking the Court to reverse respondent’s revocation

letter.       We have already ruled that an actual controversy exists

and that we have jurisdiction in this case.       Order dated Oct. 5,

2009.       We stand by our ruling.9

II. Revoking a Prior Favorable Determination Letter Retroactively

        We now consider whether respondent may revoke his prior

determination letter retroactively.        Generally, the

Commissioner’s administrative rulings have both prospective and

retroactive effect.       Sec. 7805(b)(8); Manhattan Gen. Equip. Co.

v. Commissioner, 297 U.S. 129, 134 (1936); Oakton Distribs., Inc.

v. Commissioner, 73 T.C. 182, 195 (1979); Harwood Associates,

Inc. v. Commissioner, 63 T.C. 255, 263 (1974); see Rev. Proc.

2008-4, sec. 14.02, 2008-1 C.B. 121, 151 (revocation or

modification of a letter ruling applies to all years open under



        9
      Petitioner filed a second motion to dismiss while this case
was under advisement. We will similarly deny this second motion
as our jurisdiction remains intact. See Rule 60(c); see also
Tex. Bus. Corp. Act Ann., art. 7.12(A) (West 2003); Tex. Bus.
Orgs. Code Ann. sec. 11.052 (West 2009) (Texas corporations may
prosecute or defend an action after dissolution). Moreover, we
distinguish the sole case upon which petitioner relies. See
Natl. Republican Found. v. Commissioner, T.C. Memo. 1988-336
(case commenced under sec. 7428). Unlike cases under sec. 7428,
we are not concerned about the deductibility of charitable
contributions to the donees. See Urantia Found. v. Commissioner,
684 F.2d 521, 524 (7th Cir. 1982), affg. 77 T.C. 507 (1981).
                               - 10 -

the limitations period).    The Commissioner may, however, limit

the retroactive effects of a determination letter.    Sec.

7805(b)(8).   Allowing the Commissioner to apply rulings

prospectively was intended to avoid inequity for persons who had

completed transactions in reliance upon existing practices.    See

H. Rept. 704, 73d Cong., 2d Sess. 38 (1934), 1939-1 C.B. (Part 2)

554, 583; S. Rept. 558, 73d Cong., 2d Sess. 48 (1934), 1939-1

C.B. (Part 2) 586, 623.    We apply an abuse of discretion standard

in reviewing the Commissioner’s decision to revoke a

determination retroactively.    Auto. Club of Mich. v.

Commissioner, 353 U.S. 180, 184 (1957); see Dixon v. United

States, 381 U.S. 68 (1965).    We will reverse the Commissioner’s

determination only if we determine it to be arbitrary and

capricious.   Auto. Club of Mich. v. Commissioner, supra at 184.

      We now focus on whether respondent’s retroactive revocation

of the ESOP’s qualification was arbitrary or capricious.

Taxpayers may request that the Commissioner limit a revoked

ruling’s retroactive effect by filing a technical advice request.

Rev. Proc. 2008-4, sec. 14.02.    Taxpayers must include a written

statement that the claim is being made under section 7805(b).

Id.   The request must include a statement of the facts and the

relief sought.   Id.   It must also include legal support for the

claim and any documents bearing on the request.    Id.   In

addition, any request for section 7805(b) relief must be
                                - 11 -

considered by the Commissioner’s National Office.   Internal

Revenue Manual pt. 1.2.53.3 (Dec. 2, 1996) (Delegation Order 96

(Rev. 13)).

     Here, petitioner failed to make a formal request for section

7805(b) relief.   Mr. Riddle’s letter to respondent did not

formally request that the examiner seek technical advice from

respondent’s National Office.    Nor does the administrative record

contain evidence that petitioner took any procedural steps that a

formal request for section 7805(b) relief requires.    Petitioner

failed to take the required steps to request section 7805(b)

relief.   Accordingly, we find that it is not entitled to section

7805(b) relief.

     The Commissioner has also prescribed certain limitations on

his ability to retroactively revoke a determination.   See Ronald

R. Pawlak, P.C. v. Commissioner, T.C. Memo. 1995-7; sec.

601.201(l)(5), Statement of Procedural Rules.   A revocation will

have only prospective effect if the Commissioner determines that

there has been no misstatement or omission of material facts, the

facts subsequently developed are not materially different from

the facts on which the ruling was based, there has been no change

in the applicable law, the ruling was originally issued with

respect to a prospective or proposed transaction, and the

taxpayer directly involved in the ruling acted in good faith

reliance upon the ruling and the retroactive revocation would be
                                - 12 -

to his detriment.    Sec. 601.201(l)(5), Statement of Procedural

Rules.   When petitioner submitted its application, the revenue

procedure then governing a request for a determination letter

made clear that failure to disclose material facts or provide all

material information on an application would prevent an applicant

from relying on any resulting determination letter.     See Rev.

Proc. 2000-6, sec. 6.15, 2000-1 C.B. 187, 199.     Petitioner must

prove that it complied with these requirements, including the

requirement that there be no omission of material fact, as a

predicate to its claim that the revocation letter should have

only prospective effect.     Sec. 601.201(l)(5), Statement of

Procedural Rules.

     Petitioner concedes that it erroneously marked the box

stating that it was not part of an affiliated service group or

control group when it submitted its application.     Petitioner

continued to make the same misstatement on each of its four

annual returns.     Petitioner claims nonetheless that these

misstatements were inadvertent “scrivener’s errors” and should be

disregarded.

     The “scrivener’s error” defense is a common law doctrine

that allows parties to reform an instrument that uses words that

do not reflect the parties’ clear agreement.     See 7-28 Corbin on

Contracts, sec. 28.39 (2010).     The scrivener’s error defense does

not apply, however, where a mistaken term was added to the plan
                              - 13 -

through a unilateral mistake by the drafter.     Humphrey v. United

Way of the Tex. Gulf Coast, 590 F. Supp. 2d 837, 847 (S.D. Tex.

2008).   Here, there was no mutual mistake of understanding

between respondent and petitioner.     Rather, petitioner failed to

disclose its affiliated service group status on its application

and continued to omit references to its affiliated service group

status in its annual return filings over the next four years.     We

hold that the scrivener’s error defense does not apply.

     Accordingly, we hold that petitioner has not shown that

respondent abused his discretion by retroactively revoking the

ESOP’s qualification.   We find no requirement that respondent

must catch the scheme while the ESOP is still in existence.

Moreover, petitioner has not shown that it is entitled to section

7805(b) relief.

     We have considered all remaining arguments the parties made

and, to the extent not addressed, we find them to be irrelevant,

moot, or meritless.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent, and an appropriate

                                 order will be issued regarding

                                 petitioner’s second motion to

                                 dismiss.
