Citrus Valley Estates, Inc. v. Commissioner

Appellees (collectively, “Taxpayers”) are all small businesses or professional corporations. Each had in place a qualified individual defined benefit (“IDB”) pension plan for employees. In 1989, the Internal Revenue Service audited Taxpayers’ IDB plans as part of the Service’s so-called Small Plan Audit Program. The Small Plan Audit Program represented the. Service’s attempt to crack down on what it believed were abusive tax practices.

As part of the Small Plan Audit Program, the Service audited thousands of IDB plans. Many plan sponsors were assessed deficiencies in and additions to their federal income tax. Several petitioned the Tax Court for review. See 26 U.S.C. § 6213 . Three cases were selected and tried by the Tax Court as test cases. Two involved, defined benefit pension plans for partners of prominent law firms. In both, the Tax Court found for the plan sponsors, and the court of appeals affirmed. See Wachtell, Lipton, Rosen & Katz v. Commissioner, 26 F.3d 291 (2d Cir.1994) (affirming the Tax Court); Vinson & Elkins v. Commissioner, 7 F.3d 1235 (5th Cir.1993) (same).

The third case is the subject of this appeal. It includes 12 consolidated petitions, often referred to…