Tag: Lambos v. Commissioner

Lambos v. Commissioner, 91 T. C. 257 (1988)

Leases between a profit-sharing plan and disqualified persons are prohibited transactions unless the leased properties qualify as geographically dispersed employer real property under ERISA.

Summary

In Lambos v. Commissioner, the Tax Court ruled that leases between a profit-sharing plan and the plan’s disqualified persons (Anton and Olga Lambos) were prohibited transactions under section 4975 of the Internal Revenue Code because the leased properties did not meet ERISA’s geographic dispersion requirement for qualifying employer real property. The Lamboses leased properties from the plan, which they argued were geographically dispersed and adaptable for multiple uses. However, the court found the properties were located too closely together in Stark County, Ohio, to satisfy the geographic dispersion requirement. This decision underscores the strict interpretation of ERISA’s geographic dispersion standard for exempting transactions from being classified as prohibited.

Facts

Anton Lambos owned Kendall House, Inc. , which maintained a profit-sharing plan. The plan owned three properties in Canton, Ohio, each leased to a Kentucky Fried Chicken franchise. Anton and Olga Lambos, as disqualified persons, leased two of these properties from the plan. Anton owned 94-100% of Kendall House stock during the relevant years, and Olga was his spouse. The IRS determined that these lease transactions were prohibited under section 4975, imposing excise taxes on the Lamboses as disqualified persons. The Lamboses argued the leases were exempt under ERISA because the properties were qualifying employer real property.

Procedural History

The IRS issued statutory notices of deficiency for excise taxes under section 4975 to Anton and Olga Lambos for the years 1976-1981. The Lamboses petitioned the Tax Court, challenging the determination. The court reviewed the case, focusing on whether the leased properties qualified as employer real property under ERISA.

Issue(s)

1. Whether the leased properties were qualifying employer real property under section 407(d)(4) of ERISA, which requires geographic dispersion and adaptability for multiple uses.
2. Whether the amount involved for the excise tax should be calculated based on the aggregate rental payments or by considering each lease transaction as a separate prohibited transaction for each year within the taxable period.

Holding

1. No, because the leased properties were not geographically dispersed as required by section 407(d)(4)(A) of ERISA.
2. Yes, because the IRS’s method of calculating the amount involved by considering each lease transaction as a separate prohibited transaction each year was consistent with the statute and regulations.

Court’s Reasoning

The court interpreted ERISA’s requirement for qualifying employer real property, emphasizing the need for geographic dispersion to protect plan investments from localized economic downturns. The court found that the properties leased by the Lamboses, despite being in different neighborhoods within Stark County, were not sufficiently dispersed to meet this standard. The court also noted that the properties’ economic characteristics were too similar to qualify as geographically dispersed. Regarding the amount involved for the excise tax, the court upheld the IRS’s method of calculating the tax annually, citing consistency with the statute and regulations governing self-dealing in private foundations.

Practical Implications

This decision clarifies the strict interpretation of ERISA’s geographic dispersion requirement for qualifying employer real property. Practitioners advising clients on ERISA plans must ensure that leased properties are genuinely dispersed across different economic regions to avoid prohibited transaction status. The ruling also affirms the IRS’s method of calculating excise taxes on prohibited transactions, which could impact how similar cases are handled. This case has been cited in subsequent rulings involving the classification of employer real property and the calculation of excise taxes under section 4975.

88 T.C. 1440 (1987)

To qualify for an exemption from prohibited transaction rules under ERISA and IRC section 4975, employer real property held by a profit-sharing plan must be geographically dispersed to protect plan assets from localized economic downturns.

Summary

In Lambos v. Commissioner, the Tax Court addressed whether lease transactions between a profit-sharing plan and the owners of the sponsoring company constituted prohibited transactions under IRC § 4975. Anton Lambos, owning over 50% of KendallHouse, Inc., and his wife Olga leased properties from the company’s profit-sharing plan. The IRS assessed excise taxes, arguing these were prohibited transactions. The Lamboses contended the leases were exempt as they involved “qualifying employer real property.” The Tax Court held that the leased properties, all located in Stark County, Ohio, were not geographically dispersed as required by ERISA § 407(d)(4)(A), thus the leases were prohibited transactions subject to excise taxes. This case clarifies the geographic dispersion requirement for the qualifying employer real property exemption.

Facts

Anton Lambos owned 100% of KendallHouse, Inc. during 1976-1979 and over 94% during 1980-1981.
KendallHouse, Inc. maintained a profit-sharing plan for its employees.
The plan owned three properties in Canton, Ohio, each housing a Kentucky Fried Chicken restaurant.
Two of these properties, located on Hills and Dales Road and West Tuscarawas Avenue, were leased to Anton and Olga Lambos.
The IRS determined these leases were prohibited transactions and assessed excise taxes under IRC § 4975.

Procedural History

The Commissioner of Internal Revenue issued notices of deficiency to Anton and Olga Lambos for excise taxes related to prohibited transactions.
The Lamboses petitioned the Tax Court for redetermination of these deficiencies.

Issue(s)

1. Whether Anton and Olga Lambos were disqualified persons within the meaning of IRC § 4975(e)(2)?
2. Whether the lease transactions between the Lamboses and the profit-sharing plan were prohibited transactions under IRC § 4975(c)?
3. Whether the leased properties constituted “qualifying employer real property” under ERISA § 407(d)(4), thus exempting the transactions under IRC § 4975(d)(13)?
4. How is the “amount involved” in these prohibited transactions determined for excise tax purposes?

Holding

1. Yes, Anton and Olga Lambos were disqualified persons because Anton owned more than 50% of the sponsoring company and Olga is his spouse.
2. Yes, the lease transactions were prohibited transactions because they were leases between a plan and disqualified persons, and no exemption applied unless the property was “qualifying employer real property.”
3. No, the leased properties were not “qualifying employer real property” because they were not geographically dispersed, as all were located in Stark County, Ohio. Geographic dispersion is necessary to protect plan assets from localized economic downturns.
4. The “amount involved” is determined by considering the leases as separate and continuing prohibited transactions on the day they occur and on the first day of each taxable year within the taxable period.

Court’s Reasoning

The court determined Anton and Olga Lambos were disqualified persons under IRC § 4975(e)(2)(E) and (F). The leases were considered prohibited transactions under IRC § 4975(c)(1)(A) unless exempted.

The Lamboses argued for exemption under IRC § 4975(d)(13), which incorporates ERISA § 408(e), exempting transactions involving “qualifying employer real property.” “Qualifying employer real property” is defined in ERISA § 407(d)(4) and requires, among other things, that “a substantial number of the parcels are dispersed geographically.”

The court emphasized the legislative intent behind the geographic dispersion requirement, quoting the House Conference Report: “It is intended that the geographic dispersion be sufficient so that adverse economic conditions peculiar to one area would not significantly affect the economic status of the plan as a whole.”

The court found that properties located within Stark County, Ohio, did not meet the geographic dispersion requirement. “In our view, the Hills and Dales Road property and the West Tuscarawas Avenue property are not dispersed geographically. An adverse economic condition peculiar to Stark County, Ohio, would significantly affect the economic status of the plan as a whole.”

Regarding the “amount involved,” the court upheld the IRS’s “pyramiding method,” treating the lease as a new prohibited transaction on the first day of each taxable year. This approach, derived from regulations under IRC § 4941 (private foundations self-dealing rules, which Congress intended to parallel § 4975), was deemed a reasonable interpretation of the statute.

Practical Implications

Lambos highlights the importance of geographic dispersion when a retirement plan invests in employer real property intended to qualify for an exemption from prohibited transaction rules. Plans must ensure real property holdings are spread across different geographic areas to mitigate risks associated with localized economic downturns. This case serves as a reminder that merely having multiple properties is insufficient; they must be genuinely dispersed to provide economic diversification for the plan. For practitioners, this case underscores the need for careful due diligence regarding the location of employer real property investments within ERISA plans and the potential excise tax consequences of non-compliance with the geographic dispersion rule. Subsequent cases and IRS guidance would further refine the interpretation of “geographic dispersion,” but Lambos remains a key precedent for understanding this requirement.