                                       ROBERT S. YARISH                AND     MARSHA M. YARISH, PETITIONERS v.
                                         COMMISSIONER                  OF INTERNAL    REVENUE, RESPONDENT
                                                    Docket No. 24096–08.                       Filed October 4, 2012.

                                                 P–H participated in an employee stock ownership plan
                                               (ESOP) that was disqualified for the 2000 to 2004 taxable
                                               years. P–H was a highly compensated employee and was fully
                                               vested in the ESOP from its start to its termination. The rel-
                                               evant limitations period lapsed for all years except 2004. The
                                               parties dispute the amount of P–H’s vested accrued benefit in
                                               the ESOP that Ps must include in income for 2004 under
                                               I.R.C. sec. 402(b)(4)(A). R argues that Ps must include in
                                               income for 2004 the entire amount of P–H’s vested accrued

                                     290




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                                     (290)                           YARISH v. COMMISSIONER                                       291


                                               benefit in the ESOP to the extent it has not been previously
                                               taxed to P–H. Ps argue that only the annual increase in P–
                                               H’s vested accrued benefit in the ESOP for 2004 is includible
                                               in Ps’ income for that year. Held: Ps must include in income
                                               for 2004 the entire amount of P–H’s vested accrued benefit in
                                               the ESOP.

                                        Harold A. Chamberlain and David D. Aughtry, for peti-
                                     tioners.
                                        M. Kathryn Bellis and Shawn P. Nolan, for respondent.

                                                                                  OPINION

                                        KROUPA, Judge: This case is before the Court on the par-
                                     ties’ cross-motions for partial summary judgment 1 under
                                     Rule 121. 2 Petitioner husband participated in an Employee
                                     Stock Ownership Plan (ESOP) that was retroactively disquali-
                                     fied for the period 2000 to 2004. The sole issue for decision
                                     is the amount of petitioner husband’s vested accrued benefit
                                     in the ESOP that petitioners must include in income for 2004
                                     under section 402(b)(4)(A). We hold that petitioners must
                                     include in income for 2004 the entire amount of petitioner
                                     husband’s vested accrued benefit in the ESOP.

                                                                               Background
                                        The following facts are based upon the pleadings, affidavits
                                     and exhibits in support of and in opposition to each of the
                                     motions for partial summary judgment. They are stated
                                     solely for the purpose of deciding the motions and not as
                                     findings of fact in this case. See Fed. R. Civ. P. 52(a)(3).
                                        Petitioners resided in Texas when they filed the petition.
                                        Petitioner husband, a plastic surgeon, owned several med-
                                     ical practice entities. In 2000 petitioner husband organized
                                     Yarish Consulting, Inc. (Yarish Consulting), an S corporation
                                     for Federal tax purposes, to manage these entities. Yarish
                                     Consulting sponsored an ESOP (Yarish ESOP). Petitioner hus-
                                     band participated in the Yarish ESOP. Petitioner husband
                                     was a highly compensated employee within the meaning of
                                        1 Each party moves for partial summary judgment on the same discrete issue of law. The par-

                                     ties agree that this Court’s resolving this issue will allow them to resolve the remaining issues
                                     here and in two related cases, Yarish Consulting, Inc. v. Commissioner, Docket No. 24095–08,
                                     and R. Scott Yarish MD, PA v. Commissioner, Docket No. 24094–08, by agreement.
                                        2 All Rule references are to the Tax Court Rules of Practice and Procedure, and all section

                                     references are to the Internal Revenue Code (Code) in effect for the year at issue.




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                                     section 414(q) and was fully vested from the start of the
                                     Yarish ESOP until its termination. Multiple contributions
                                     were made to the Yarish ESOP during 2000 to 2004. Peti-
                                     tioner husband’s account balance in the Yarish ESOP and
                                     vested accrued benefit within the meaning of section
                                     402(b)(4)(A) was $2,439,503 as of the end of 2004. None of
                                     that amount had been taxed to petitioners before the 2004
                                     plan year.
                                        The Yarish ESOP was terminated on the last day of 2004.
                                     Petitioner husband’s entire account balance in the Yarish
                                     ESOP was transferred to an individual retirement account
                                     that same day at his direction.
                                        Respondent retroactively disqualified the Yarish ESOP
                                     through a revocation letter for the 2000 through 2004 period.
                                     Respondent determined in the revocation letter that the
                                     Yarish ESOP did not meet the requirements under section
                                     401(a) for failing to satisfy section 410(b) and that the trust
                                     under the Yarish ESOP was not exempt from tax under sec-
                                     tion 501(a). This Court sustained respondent’s determination
                                     to retroactively disqualify the Yarish ESOP for the 2000 to
                                     2004 taxable years. See Yarish Consulting, Inc. v. Commis-
                                     sioner, T.C. Memo. 2010–174.
                                        The limitations period under section 6501 has lapsed for
                                     all years for which the Yarish ESOP was disqualified except
                                     2004.

                                                                                Discussion
                                     I. Overview
                                       We must decide for the first time the meaning of section
                                     402(b)(4)(A). In general, section 402(b) sets forth the con-
                                     sequences to participants in a plan under section 401(a)
                                     when a trust associated with the plan is not exempt under
                                     section 501(a). Section 402(b)(4)(A) provides a special rule
                                     that applies when the trust tax exemption under section
                                     501(a) does not apply due to a plan’s failure to meet certain
                                     coverage or participation requirements under section 410(b)
                                     or 401(a)(26). The special rule requires a highly compensated
                                     employee to include in income ‘‘an amount equal to the
                                     vested accrued benefit of such employee (other than the
                                     employee’s investment in the contract).’’




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                                     (290)                           YARISH v. COMMISSIONER                                       293


                                        The parties do not dispute that section 402(b)(4)(A) applies.
                                     The parties do dispute, however, the amount of petitioner
                                     husband’s vested accrued benefit that must be included in
                                     income under section 402(b)(4)(A) for 2004. Both parties have
                                     moved for partial summary judgment with respect to that
                                     issue.
                                        Petitioners argue that only the annual increase in peti-
                                     tioner husband’s vested accrued benefit for 2004 is includible
                                     in petitioners’ income for that same year under section
                                     402(b)(4)(A). In contrast, respondent argues that the entire
                                     amount of petitioner husband’s vested accrued benefit must
                                     be included in petitioners’ income for 2004 under section
                                     402(b)(4)(A). Accordingly, we must decide whether either
                                     party is entitled to partial summary judgment.
                                     II. Standard of Review
                                       We now turn to the applicable standard for deciding a
                                     motion for partial summary judgment. Either party may
                                     move for partial summary judgment upon any part of the
                                     legal issues in controversy. Rule 121(a). Partial summary
                                     judgment is intended to expedite litigation and avoid
                                     unnecessary and expensive trials. See, e.g., FPL Grp., Inc. &
                                     Subs. v. Commissioner, 116 T.C. 73, 74 (2001). A motion for
                                     summary judgment or partial summary judgment will be
                                     granted if the pleadings and other acceptable materials,
                                     together with the affidavits, if any, show that there is no
                                     genuine dispute as to any material fact and that a decision
                                     may be rendered as a matter of law. See Rule 121(b); Elec.
                                     Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002).
                                     III. Meaning of Section 402(b)(4)(A)
                                       We now consider whether petitioners are required under
                                     section 402(b)(4)(A) to include in income for 2004 petitioner
                                     husband’s entire vested accrued benefit in the ESOP at the
                                     end of 2004, as respondent contends, or only the annual
                                     increase in the vested accrued benefit for 2004, as petitioners
                                     contend. The parties’ dispute stems from their disagreement
                                     over the meaning of the parenthetical ‘‘(other than the
                                     employee’s investment in the contract)’’ (sometimes, disputed
                                     parenthetical) in section 402(b)(4)(A) that modifies the




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                                     phrase ‘‘an amount equal to the vested accrued benefit of
                                     such employee.’’
                                           A. Parties’ Contentions
                                        Petitioners argue that the phrase ‘‘investment in the con-
                                     tract’’ is defined in section 72 and that we should apply that
                                     meaning in interpreting section 402(b)(4)(A). Under section
                                     72, employer contributions are treated as part of the ‘‘invest-
                                     ment in the contract’’ to the extent they were previously
                                     includible in income (i.e., could have been taxed). See sec.
                                     72(f). Petitioners maintain that all of petitioner husband’s
                                     vested benefit from 2000 to 2003 was previously includible in
                                     income due to the disqualification of the Yarish ESOP and
                                     therefore constitutes petitioner husband’s investment in the
                                     contract for 2004. Petitioners therefore conclude that they
                                     are required by section 402(b)(4)(A) to include in income for
                                     2004 only the annual increase in petitioner husband’s vested
                                     accrued benefit for that same year.
                                        Respondent argues that under section 402(b)(4)(A) an
                                     ‘‘employee’s investment in the contract’’ equals the portion of
                                     the employee’s vested accrued benefit that has previously
                                     been taxed to the employee. Respondent therefore maintains
                                     that petitioners must include in income for 2004 the entire
                                     amount of petitioner husband’s vested accrued benefit in the
                                     Yarish ESOP, given that no portion of it was previously
                                     taxed. 3
                                           B. Statutory Interpretation Analysis
                                       We now consider the meaning of section 402(b)(4)(A). In
                                     interpreting section 402(b)(4)(A) our principal task is to
                                     ascertain and give effect to the intent of Congress. The statu-
                                     tory text is the most persuasive evidence of Congress’ intent.
                                     United States v. Am. Trucking Ass’ns, Inc., 310 U.S. 534,
                                     542–543 (1940). The plain language of a statute is ordinarily
                                     to be given effect unless to do so would produce an absurd
                                     or futile result, or an unreasonable result that plainly con-
                                       3 Respondent also argues in the alternative that the duty of consistency estops petitioners

                                     from asserting that the Yarish ESOP was disqualified before 2004 and therefore from arguing
                                     that petitioner husband’s vested accrued benefit in the Yarish ESOP is includible in income in
                                     any year other than 2004. We need not address respondent’s alternative argument because we
                                     hold under our interpretation of sec. 402(b)(4)(A) that petitioners must include the entire
                                     amount of petitioner husband’s vested accrued benefit in the Yarish ESOP in income for 2004.




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                                     (290)                              YARISH v. COMMISSIONER                                          295


                                     flicts with legislative intent. See United States v. Ron Pair
                                     Enters., Inc., 489 U.S. 235, 242 (1989); Domulewicz v.
                                     Commissioner, 129 T.C. 11, 24 (2007), aff ’d in part,
                                     remanded in part sub nom. Desmet v. Commissioner, 581
                                     F.3d 297 (6th Cir. 2009); Wadlow v. Commissioner, 112 T.C.
                                     247, 266 (1999). We may look to legislative history to
                                     ascertain congressional intent if a statute is silent or ambig-
                                     uous. Burlington N. R. Co. v. Oklahoma Tax Comm’n, 481
                                     U.S. 454, 461 (1987); Mississippi Poultry Ass’n, Inc. v. Mad-
                                     igan, 992 F.2d 1359, 1364 n.28 (5th Cir. 1993). It is these
                                     general principles of statutory interpretation that guide us in
                                     determining the meaning of section 402(b)(4)(A).
                                        We first review the text of section 402(b)(4)(A), which pro-
                                     vides in pertinent part:
                                     [A] highly compensated employee shall * * * include in gross income for
                                     the taxable year with or within which the taxable year of the trust ends
                                     an amount equal to the vested accrued benefit of such employee (other
                                     than the employee’s investment in the contract) as of the close of such tax-
                                     able year of the trust.

                                     As previously noted, the parties dispute the meaning of the
                                     parenthetical ‘‘(other than the employee’s investment in the
                                     contract)’’ used to modify the phrase ‘‘an amount equal to the
                                     vested accrued benefit of such employee.’’ Accordingly, we
                                     focus our attention on the meaning of the disputed par-
                                     enthetical. The disputed parenthetical is not defined in whole
                                     or part in section 402 or in the corresponding regulations,
                                     nor is any definition supplied by a cross reference to another
                                     section in the Code. Additionally, neither the disputed par-
                                     enthetical nor any of its words or phrases are terms of art.
                                     See infra p. 296.
                                       We find the disputed parenthetical ambiguous in that it is
                                     susceptible of at least two different meanings. It may mean
                                     that only direct contributions by the employee constitute ‘‘the
                                     employee’s investment in the contract.’’ It may also mean
                                     that ‘‘the employee’s investment in the contract’’ includes
                                     other contributions made on the employee’s behalf, i.e.,
                                     employer contributions.
                                       Accordingly, we look to the legislative history of section
                                     402(b)(4)(A) as an aid in discerning its meaning. 4 The legis-
                                           4 The   current version of sec. 402(b)(4)(A) was previously included in sec. 402(b)(2)(A) and (B).
                                                                                                        Continued




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                                     lative history indicates that the general purpose of section
                                     402(b)(4)(A) is to penalize highly compensated individuals.
                                     See H.R. Conf. Rept. No. 99–841 (Vol. II), at II–416 to II–417
                                     (1986), 1986–3 C.B. (Vol. 4) 1, 416–417. The conference
                                     report also sheds light on the portion of a highly com-
                                     pensated employee’s vested accrued benefit that Congress
                                     intended to tax under section 402(b)(4)(A). It provides that
                                     ‘‘[h]ighly compensated employees * * * are taxable on the
                                     value of their vested accrued benefit attributable to employer
                                     contributions and income on any contributions to the extent
                                     such amounts have not previously been taxed to the
                                     employee.’’ Id.
                                        Based on our reading of section 402(b)(4)(A) in the context
                                     of the statutory scheme as a whole, we understand Congress’
                                     intent in using the disputed parenthetical was to exclude
                                     that portion of the vested accrued benefit from taxation that
                                     had previously been taxed to the employee so as to avoid
                                     double taxation of it. We therefore hold that under section
                                     402(b)(4)(A) the vested accrued benefit of a highly com-
                                     pensated employee must be included in income to the extent
                                     it has not been previously taxed to the employee. Thus, we
                                     agree with respondent.
                                        As previously mentioned, petitioners contend that we must
                                     give ‘‘investment in the contract’’ the same meaning that it
                                     has in section 72. Petitioners make two main arguments in
                                     support of their position. Neither persuades us.
                                        First, petitioners argue that ‘‘investment in the contract’’
                                     as defined in section 72 is an established term of art that
                                     applies universally throughout the Code and thus we should
                                     look to section 72 for its definition. We recognize that where
                                     Congress uses a term of art that has had an established spe-
                                     cific meaning over long periods, Congress presumably incor-
                                     The initial version of sec. 402(b)(2)(A)(ii) enacted as part of the Tax Reform Act of 1986, Pub.
                                     L. No. 99–514, sec. 1112(c)(1), 100 Stat. at 2445, required a highly compensated employee to
                                     include in income ‘‘the vested accrued benefit (other than employee contributions).’’ That par-
                                     enthetical was changed to ‘‘(other than the employee’s investment in the contract)’’ in the Tech-
                                     nical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100–647, sec. 1011(h)(4), 102 Stat.
                                     at 3465, before Congress eventually divided sec. 402(b) into four paragraphs, shifting para. (2)
                                     to para. (4) in the Unemployment Compensation Amendments of 1992, Pub. L. No. 102–318, sec.
                                     521(a), 106 Stat. at 300.
                                       Petitioners argue that we should disregard the 1986 conference report because the change of
                                     the parenthetical modifying vested accrued benefit to ‘‘other than the employee’s investment in
                                     the contract’’ occurred after the 1986 conference report. We disagree. We find that the change
                                     does not conflict with Congress’ established intent in the 1986 conference report, nor does any
                                     legislative history indicate that Congress intended to negate such an intent.




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                                     (290)                           YARISH v. COMMISSIONER                                       297


                                     porates that meaning when it uses the term. See, e.g.,
                                     Morissette v. United States, 342 U.S. 246, 263 (1952). We dis-
                                     agree, however, that the phrase ‘‘investment in the contract’’
                                     is an established term of art.
                                        While section 72 defines the phrase ‘‘investment in the con-
                                     tract,’’ nowhere in that section or its accompanying regula-
                                     tions is there any indication that the definition applies out-
                                     side the context of section 72. Moreover, the definition of
                                     ‘‘investment in the contract’’ in section 72 that petitioners
                                     argue applies for purposes of section 402(b)(4)(A) is expressly
                                     limited in scope to specific subsections of section 72. See sec.
                                     72(c)(1), (e)(6), (f). Thus, we are not convinced that the
                                     phrase ‘‘investment in the contract’’ as defined in section 72
                                     is an established term of art that applies throughout the
                                     Code.
                                        Second, petitioners argue that the phrase ‘‘investment in
                                     the contract’’ as used in section 402(b)(4)(A) should be inter-
                                     preted in pari materia with section 72. Statutes may be
                                     considered in pari materia when they relate to the same sub-
                                     ject matter or have the same purpose. See 2B Norman J.
                                     Singer & J.D. Shambie Singer, Sutherland Statutory
                                     Construction, sec. 51:3, at 222 (7th ed. 2012). The Supreme
                                     Court has recognized, however, that identical terms or
                                     phrases used in the Code need not be interpreted to have the
                                     same meaning where the sections in which they are found
                                     serve different legislative purposes. See Don E. Williams Co.
                                     v. Commissioner, 429 U.S. 569, 580–582 (1977). We are not
                                     persuaded that the doctrine of in pari materia applies.
                                        Section 402(b)(4)(A) and section 72 serve different pur-
                                     poses. The purpose of section 402(b)(4)(A) is to discourage
                                     highly compensated employees from participating in a plan
                                     that fails to satisfy certain coverage requirements. See H.R.
                                     Conf. Rept. No. 99–841, supra at II–416 to II–417, 1986–3
                                     C.B. (Vol. 4) at 416–417. In contrast, the purpose of section
                                     72 is to provide the rules for taxation of distributions from
                                     annuity and similar contracts. See generally sec. 72.
                                        Petitioners also contend that under general tax accounting
                                     principles only the annual increase in petitioner husband’s
                                     vested accrued benefit in the Yarish ESOP for 2004 is includ-
                                     ible in income for that year. Petitioners rely on the
                                     uncontroversial principle that generally income is includible
                                     for the taxable year in which the ‘‘accession to wealth’’




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                                     298                 139 UNITED STATES TAX COURT REPORTS                                    (290)


                                     occurs. See, e.g., Greene Motor Co. v. Commissioner, 5 T.C.
                                     314, 316 (1945). Petitioners argue that because the Yarish
                                     ESOP was disqualified for 2000 through 2004 and petitioner
                                     husband was fully vested in it for those years, his vested
                                     accrued benefit was includible in income as it vested. Peti-
                                     tioners therefore conclude that only the annual increase in
                                     petitioner husband’s vested accrued benefit in the Yarish
                                     ESOP for 2004 is taxable for that year.
                                        We are not persuaded. The principle that amounts must be
                                     included in income for the taxable year the ‘‘accession to
                                     wealth’’ occurs is not absolute. Congress has consistently
                                     made exceptions to achieve various public policy objectives.
                                     For example, Congress defers taxation of amounts contrib-
                                     uted to qualified retirement plans to encourage individuals to
                                     save for their retirement and thereby supplement the general
                                     public retirement security system. See secs. 401(a), 501(a);
                                     The President’s Committee on Corporate Pension Funds and
                                     Other Private Retirement and Welfare Programs, Public
                                     Policy and Private Employee Retirement Plans 50–51 (1965).
                                        So too has Congress carved out an exception in section
                                     402(b)(4)(A). The purpose of section 402(b)(4)(A) is to
                                     penalize highly compensated participants in plans that fail to
                                     satisfy certain coverage and participation requirements. To
                                     that end, it requires (where applicable) that a highly com-
                                     pensated employee include in income his or her vested
                                     accrued benefit to the extent it has not been previously taxed
                                     to the employee. Because we hold that section 402(b)(4)(A) is
                                     one of several exceptions to the principle that income is only
                                     includible in income for the year the ‘‘accession to wealth’’
                                     occurs, we reject petitioners’ argument.
                                     IV. Application of Section 402(b)(4)(A)
                                       Now we apply our interpretation of section 402(b)(4)(A) to
                                     the undisputed facts of this case. As we previously held,
                                     when section 402(b)(4)(A) applies (as here), an employee
                                     must include in income that portion of his or her vested
                                     accrued benefit on which he or she has not previously been
                                     taxed.
                                       Here we are satisfied that there is no genuine dispute of
                                     material fact as to whether petitioner husband’s vested
                                     accrued benefit (his account balance in the Yarish ESOP as of




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                                     (290)                           YARISH v. COMMISSIONER                                       299


                                     the end of 2004) had been previously taxed. Put simply, it
                                     had not. Accordingly, we find that the entire amount of peti-
                                     tioner husband’s vested accrued benefit as of the end of 2004
                                     must be included in income for that same year under section
                                     402(b)(4)(A). We therefore will grant respondent’s motion for
                                     partial summary judgment and deny petitioners’ motion.
                                        We have considered all arguments made in reaching our
                                     decision and, to the extent not mentioned, we conclude that
                                     they are moot, irrelevant or without merit.
                                        To reflect the foregoing,
                                                                     An appropriate order granting respondent’s
                                                                   motion for partial summary judgment and
                                                                   denying petitioners’ motion for partial sum-
                                                                   mary judgment will be issued.

                                                                               f




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