Allen Ludden and Betty White Ludden v. Commissioner of Internal Revenue

The Luddens’ corporation established IRS-approved pension and profit-sharing plans for the benefit of its employees. Due to an inadvertent operational error by an accountant, the corporation made contributions to the plans on behalf of Mr. and Mrs. Ludden in fiscal 1972, but not on behalf of the only other eligible employee, secretary Whitehead! Therefore, the Commissioner determined that the plans failed in 1972 to qualify under I.R.C. § 401(a), and asserted a deficiency against the Luddens for income tax on the contributions made in their behalf in that year. I.R.C. §§ 402(b), 83. The Tax Court upheld the Commissioner, 68 T.C. 826 (1977). We affirm.

To gain the tax benefits of qualification, plans must satisfy § 401(a) in their operation as well as in their terms. See Myron v. United States, 550 F.2d 1145 (9th Cir. 1977). In operation, the 1972 plans benefited only 67% of the employees (not 70%) and 67% of the eligible employees (not 80%), so the plans were disqualified under I.R.C. § 401(a)(3)(A). Moreover, the 1972 plans discriminated, in operation, in favor of officers/shareholders/highly compensated employees (the Luddens), so the plans were disqualified under I.R.C. §…