- 27 -
Additionally, respondent contends that the loan violated the
plan provision requiring the trustee to diversify the investments
of the plan so as to minimize the risk of large losses unless it
was clearly prudent not to do so. Respondent contends further
that Mr. Shedd failed to demonstrate that it was clearly prudent
not to diversify plan investments.
Whether a plan has been operated for the exclusive benefit
of employees and their beneficiaries is determined on the basis
of the facts and circumstances. See Feroleto Steel Co. v.
Commissioner, 69 T.C. 97, 107 (1977); sec. 1.401-1(b)(3), Income
Tax Regs.;11 see also Bernard McMenamy, Contractor, Inc. v.
Commissioner, 442 F.2d 359 (8th Cir. 1971), affg. 54 T.C. 1057
(1970); Time Oil Co. v. Commissioner, 258 F.2d at 238-239. If a
violation of the exclusive benefit rule is found, then we look to
the totality of the transgressions that occurred in assessing
whether it is an abuse of discretion for the Commissioner to
disqualify the plan. The discretion to disqualify a plan should
be exercised with restraint, however, because the DOL and the
Internal Revenue Service have a broad range of alternative
remedies available to ensure that a trust is properly
11 Sec. 1.401-1(b)(3), Income Tax Regs., states in
pertinent part as follows:
All of the surrounding and attendant circumstances and
the details of the plan will be indicative of whether
it is a bona fide stock bonus, pension, or profit-
sharing plan for the exclusive benefit of employees in
general. The law is concerned not only with the form
of a plan but also with its effects in operation. * * *
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