Court Opinion

ID: 4481907
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:11.241914+00
Date Added: 2024-06-11T07:57:59.243581
License: Public Domain

Soott, J. dissenting: I respectfully disagree with the conclusion of the majority that petitioner is not entitled to treat the $12,291.66 lump-sum payment he received from the Vesting Benefit trust in the year 1967 as gain from the sale of a capital asset held for more than 6 months. The majority opinion in setting up the basis for its discussion states that whether petitioner is entitled to treat the payments which he received from the Vesting Benefit trust as long-term capital gain depends upon whether that trust was a part of a plan which meets the requirements of section 401. The opinion then states that the resolution of this issue necessitates considering two questions: (1) Must a plan qualifying under section 401 be funded, and (2) do the provisions of the 1966 agreement providing for vesting benefits establish a funded plan? At the outset I take issue with the questions which must be considered as stated in the majority opinion. The question here is whether the sum received by petitioner in 1967 from the Vesting Benefit trust was taxable under section 4021 as having been received from “an employee trust described in section 401(a).” Section 401(a)2 provides that a trust forming part of a pension plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust “if contributions are made to the trust by such employer * * * for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan.” Section 401(a)(2) through (8) sets forth various other criteria which must be satisfied by the trust and by the plan of which the trust forms a part in order for the trust to be a qualified trust under section 401. None of these other sections deals with payments or contributions to the trust. In this case respondent questioned whether the trust created by the Mechanization Agreement of 1966 met certain of the qualifications set forth in section 401(a) (2) through (8) and whether the plan of which the trust formed a part met certain of these qualifications. The majority opinion, concluding as it does that the trust does not as it must to be qualified form a part of a “funded plan,” does not reach these contentions of respondent. In my view for reasons which could be detailed, none of respondent’s objections to the trust or the plan of which it forms a part 'as failing to meet the requirements of section 401 (a) (2) through (8) are valid, but since the majority opinion does not reach these other issues I will not discuss them further. The majority opinion discusses funded plans in general and not specifically the question whether the trust here involved is one to which the employers who created the trust as part of a pension plan made contributions for the purpose of distributing to their employees or their beneficiaries the corpus and income of the fund accumulated by the trust. There are, of course, other qualifying pension plans provided for in other sections of the Code such as the custodial account provided for in section 401 (f). However, here we are not concerned with those plans. The majority opinion, relying on Rev. Rui. 71-91, 1971-1 C.B. 116, and Rev. Rui. 69-421,1969-2 C.B. 59,3 concludes that respondent seems to use the word “funded” to describe the accumulation of contributions to an entity beyond the employer’s control and prior to the payment of benefits. After citing a number of articles which deal with various suggestions for deferred compensation plans which will meet the requirements to receive approval by the Internal Revenue Service for deductibility of contributions, the majority opinion concluded that the term “funded” will be used in the opinion to mean the accumulation of funds in a person independent of the employer. Used in that sense, my primary disagreement with the majority (opinion is in its interpretation of the very lengthy and detailed Mechanization Agreement and particularly its provisions for accumulation and distribution of funds to the trusts created in connection with the agreement. In my view if we conclude that the combination of the provisions of the Mechanization Agreement and the trusts created as a part thereof provide for contributions to the trust by the employers for the purpose of distribution to the employees or their beneficiaries of the corpus of the fund accumulated by the trust, we must hold the trust here involved to be a qualified trust. This might be considered to be in a sense the requirement the majority opinion envisions when it uses the phrase, “the accumulation of the funds in a person independent of the employer.” Certainly the revenue rulings cited in the majority opinion, which deal with a corporate employer’s establishing a plan whereby payments are made to the employee directly upon Ms retirement, do not resolve the issue 'here involved even if they are accepted as a correct statement of the law. Because of the numerous employers who are members of PMA and the numerous employees who are represented by the union but who work for the various employers, the establishment of a Vesting Benefit trust to give an extra pension to these employees primarily upon early retirement and for periods of 4 or 5 years necessitated a more complicated procedure for collection of contributions than direct payments by the employers to the trust. For this reason it is necessary to consider all the numerous provisions of the agreement in determining whether the trust had a corpus to be distributed within the meaning of section 401(a) (1). The complication of this plan was discussed at some length by the Supreme Court in Volkswagenwerk v. FMC, 390 U.S. 261 (1968). Actually the plan there under consideration was the 1961 plan which, as the Supreme Court noted at page 264, was in effect continued by the 1966 plan. The 1961 plan together with all of its amendments is in evidence in this case and insofar as it bears on the issue with which we are here concerned is substantially the same as the 1966 plan. The Supreme Court in that case pointed out, at page 277, that the agreement levied $29 million over 5 years and bound all principal carriers, stevedoring contractors, and terminal operators on tRe Pacific Coast. It referred to the agreement as specifically reserving to PMA alone the right to determine how to raise the Mechanization Fund from the members at the rate of some $5 million per year (p. 264). The Volkswagenwerk v. FMC case dealt with whether the method of placing an assessment on the automobiles which were imported by Volkswagenwerk on chartered vessels which were not common carriers was fair to the company. Volkswagenwerk had alleged that PMA was dominated by common carriers and had agreed upon an assessment formula to shift a disproportionate share of the Mechanization Fund onto companies which did not patronize those common carriers. Justice Harlan, in his concurring opinion (p. 287), stated: The assessment agreement was, of course, consequent upon the labor agreement committing PMA to raise the fund. The union side was concerned with a guarantee that the fund would be raised somehow, and the labor agreement guaranteed only that much. But whenever any multi-employer bargaining unit agrees to provide benefits for employees there arises a problem of how to allocate the costs among the various employers 'and (in consequence) among their customers. It is clear that much of the complication of the Mechanization Agreement arose because of the purpose of that agreement as discussed by the Supreme Court to absolutely guarantee a payment in the 1961 agreement of $29 million and in the 1966 agreement of $38 million into the Mechanization Fund for the benefit of the employees of the various members and principals of PMA but because PMA was to arrange the nature of assessments, to have many safeguards written into the plan. The plan provided primarily for a total collection of $7.4 million per year for a 5-year period. It did permit PMA, based on reports of the trustees of the Vesting Benefit trust and welfare fund, to alter somewhat the rate of collection of this $38 million. However, it was absolutely clear that this was merely an alteration of the rate and not of the total amount which the employers were required to pay into the Mechanization Fund. The agreement provided in this respect : 5.32. The provisions of Paragraphs 5.3 and 5.31 hereof [permitting adjustments in the rate of collection under certain circumstances] shall not be construed either as requiring the Member Companies to accumulate under this Agreement more than a total of Thirty Eight Million Fifty-Three Thousand Three Hundred and Eight and Forty-One-Hundredths Dollars ($38,053,308.40) in the Mechanization Fund 'or as relieving the Member Companies from accumulating in the Mechanization Fund less than said total sum and, if said total sum has not been accumulated and transferred to the respective trusts to be employed for effectuation of the Plan by June 30,1971, or when payment of the last death, disability and vesting benefit to an Employee, or his Designee, has been made or provided for hereunder, whichever date is later, the balance of said total shall be accumulated in the Mechanization Fund and used as the Union and Association may then mutually agree. 5.33. Whenever conditions require the Association to exercise the powers granted to it by Paragraphs 5.3, 5.31 and 5.32 hereof, the Association shall at all timéis inform the Union as to the provisions which the Association intends to make or has made to provide for the collection in the future of such portion of the annual Contributions to the Mechanization Fund which has been deferred by reason of exercise of such powers. It is therefore absolutely clear from this agreement that a total payment of $38 million was required to be made and no part of that amount could be used except for the benefit of the employees of the various members and principals of PMA. The agreement makes it absolutely clear that the employers who are member companies of PMA are to make contributions at the rate set forth in paragraphs of the agreement governing rate of accumulation and providing for the accumulation of the entire $38 million over the 5-year period. It then provides that employers who are not member companies of the association shall contribute to the Mechanization Fund at comparable rates and in a like fashion as other employers under an arrangement-to which the association and union consent in writing. It then carries the following provisions with respect to interest in the Mechanization Fund: 2.4. Interests in HecJicmization Fund: Neither the Union nor Employees shall have any right, title or interest, or any claim whatsoever, legal or equitable, in or to any portion of the Mechanization Fund. 2.41. No Trustee of any Trust employed for the effectuation of the Plan, or any beneficiary thereof, shall have any right, title or interest, or any claim whatsoever, legal or equitable, in or to any portion of the Mechanization Fund, except as is specifically set forth in and granted under this Agreement or any such respective Trust. 2.42. The Association’s status, including its right, title and interest, respecting the Mechanization Fund or any portion thereof, shall be only as a collecting agent for the various Employers making Contributions thereto for transferral to the respective Trusts, employed for effectuation of the Plan, of all or any portion of the Mechanization Fund coming into its possession in the form of Contributions. 2.43. No Employer, or its successor in interest, shall have any right, title or interest, or any claim whatsoever, legal or equitable, with respect to Contributions to the Mechanization Fund within the possession of the Association which were made by another Employer, and the interest of an Employer, or its successor in interest, in the Mechanization Fund shall be limited to that pro rata portion thereof attributable to Contributions made by it, computed on a “first-in, first-out” principle, and which have not already been transferred by the Association to the respective Trusts employed for the effectuation of the Plan. The majority opinion apparently relies to an appreciable extent on the statement that the association’s interest in the fund shall be only as collecting agents for the various employers making contributions thereto for transfer to the respective trusts employed for the effectuation of the plan and on the provision in paragraph 2.43 which suggests some remaining interest of the employers in contributions made which are within the possession of the association. However, a reading of the entire agreement requires the conclusion that paragraph 2.43 has no reference to payments made by PMA member companies plus collections from nonmembers except where some other provision of the trust would permit some return of payments. While paragraph 2.5 of the agreement provides for abatement of payments in the event of unauthorized work stoppages, the only provision allowing a return of funds by PMA to employers is the provision of paragraph 6.6 of the agreement. This paragraph reads as follows: 6.6. Taw Rulings: The parties hereto have entered into this Agreement and amendments thereto and established the various Trusts provided for hereunder in reliance on the letter rulings dated September 15,1961, of the Internal Revenue Service, and on their applicability to all Member 'Companies, to the effect that the Employers may take a tax deduction from gross income for their respective Contributions paid to the Association for the Mechanization Fund effective with the transfer by the Association from the Mechanization Fund of the same to the respective trusts to be employed for effectuation of the Plan, and to the effect that Principals may take a tax deduction from gross income for payments made by them to Employers on account of such Contributions in the year such payments are made or the responsibility to make such payments is incurred. If either of said tax consequences is defeated or nullified by construction, amendment, revision, or revocation of said rulings or by any other event whatsoever, the obligations under Article II hereof of the Association and its Member Companies to continue to accumulate the Mechanization Fund and of Employers to pay further Contributions to the Mechanization Fund shall be immediately suspended and the Association may make appropriate refunds to the respective Employers of their Contributions then held by the Association in the Mechanization Fund. Such obligations shall not be revised until and unless during the term of this Agreement the Member Companies shall have obtained a further effective ruling of the Internal Revenue Service reaffirming said tax consequences or until and unless an equivalent effective assurance of said tax consequences is obtained, either or both in a form satisfactory to the Association in its sole, absolute and unreviewable discretion. The Union agrees to assist the Association and Member Companies in obtaining such further ruling or equivalent assurance. However, this Court and other courts have consistently held that a trust or plan was not disqualified merely because retention of the payment by the trust or plan was contingent on the approval or qualification of the plan by the Internal Revenue Service. 555, Inc., 15 T.C. 671, 673 (1950); Meldrum & Fewsmith, Inc., 20 T.C. 790, 806 (1953); Surface Combustion Corporation, 9 T.C. 631, 654, 655 (1947), affd. 181 F. 2d 444 (C.A. 6, 1950). In affirming our holding in Surface Combustion Oorporation, the 'Sixth Circuit stated: We also reject the Commissioner’s contention that the taxpayer had not irrevocably parted with the funds, since they would be returned to it if the contributions were ultimately held to be nondeductible. Such a contingency was entirely within the control of the Commissioner. So far as the taxpayer was concerned, the payments were irrevocable by it. Oxford Institute, 33 B.T.A. 1136. For several years prior to March. 1, 1945 the Commissioner approved profit sharing and pension plans and allowed deductions therefor where such payments were so conditioned. Montgomery, Federal Taxes, Yol. 1, p. 533, 1948-1949 Edition. The agreement as a whole is clear that funds once transferred to PMA. are outside the control of the contributors except for the one contingency set forth in paragraph 6.6 heretofore quoted. Paragraph 2.43 of the agreement even limits the rights of employers to recover their payments to PMA under this contingency. The agreement also makes it clear that the trusts have a definite interest in the funds in the hands of PMA. The trust agreement provides in this respect: 4.5. Powers and Duties of Trustees: The Trustees of each of the aforementioned Trusts may demand payment by the Association from. Contributions receives by it for the Mechanization Fund of such moneys: to which 'the Trusts under their respective administrations may be entitled under this Agreement and may proceed at law or equity to enforce such demand if the Association fails to make any such payment within a reasonable period. 4.51. The Trustees of each of said respective Trusts are hereby empowered to enforce the rights derived hereunder by the Trust under their respective administrations against any Employer or Principal to the extent that the Association certifies to such Trustees that an Employer or Principal is in default of its obligations or responsibilities under the Plan, and such Trustees may proceed at law or equity or under the bankruptcy laws to enforce such rights. These rights of the trustees in the fund are substantial and are part of the rights “specifically set forth in 'and granted” under the agreement referred to in paragraph 2.41 of the agreement heretofore quoted. In my view considering the agreement as a whole calls for the conclusion that the funds held by PMA which had been collected from the employers were held for the benefit of the trusts created as part of the Mechanization Agreement and formed the corpus of those trusts. PMA was obligated to collect over basically a 5-year period the total of $38 million, none 'of which sum would ever revert to the employers, except on a contingency which we have consistently held not to disqualify the trust. See William D. O’Brien, 46 T.C. 583 (1966), where we again reaffirmed our holding in Surface Combustion Corporation, supra, and quoted at length from our opinion in that case. Each payment made by an employer to PMA was placed outside the employer’s control and the total payments were $38 million. It is also clear from the agreement as a whole that PMA would always have and be holding some funds for transfer to the trust and that each trust could enforce the transfer of the funds to it. Therefore, in my view, even though the agreement refers to PMA as being appointed the “collecting agent acting for and on behalf of employers in accumulating their respective contributions to the Mechanization Fund” and further refers to PMA as “a conduit for transferring the whole or portions of the Mechanization Fund received by it to the respective trusts employed for effectuation of the plan,” it is clear that PMA also held, and by the agreement was required to hold, the funds collected by it for transfer to the trusts. In my view the provisions of the Mechanisation Agreement properly interpreted show that once PMA had collected the funds, and was holding such funds for the benefit of the trusts, PMA was not authorized to use the funds for any purpose but transfer to the trusts. Therefore, in my view, the funds being held by PMA were contributions to the trusts by employers for the purpose of distributing to employees or their beneficiaries the corpus of the fund accumulated on behalf of the trusts. I agree with petitioner’s statement in his brief that PMA “holds the 'funds in trust for the purpose of the Trust Indenture.” In a number of cases we have recognized an employee pension trust as qualified because of its having a corpus when the facts showed less clearly than here a fund accumulated for the trust. The majority opinion disposes of such cases as Tallman Tool & Machine Corporation, 27 T.C. 372 (1956), by stating that the issue in such oases was not whether the trust was a qualified trust under section 401. In Tallman Tool & Machine Corporation, supra, we held that a promissory note of the employer provided the trust there involved with a corpus during its fiscal year ended September 30, 1952, the demand promissory note having been delivered to the trust on September 30,1952. The taxpayer in that ca'se was an accrual basis taxpayer which had deducted an amount paid in cash to the trust in the following calendar year for its fiscal year ended September 30, 1952. Although the opinion dealt with whether the trust had a corpus so as to be a legal trust in its fiscal year 1952, the ultimate question necessarily was whether the trust qualified so as to permit the deduction. Certainly if a promissory note for $20,000 is sufficient to constitute the corpus of a trust, a binding obligation on employers to pay $38 million is sufficient to constitute such corpus. The agreement provides for transfer by PMA to the trusts of the funds which are to be paid out by the trusts to employees or their beneficiaries, the transfer being of all or portions of the $38 million of payments collected by PMA from the employers for the trusts. Therefore, contributions made to the trusts by the employers were made for the purpose Of distributing to employees the corpus of the fund accumulated by the trusts. Before the trusts paid out the funds, they had to accumulate the funds. Accepting the definition of the majority of a “funded plan” the trusts here involved provided for a funded plan. Since PMA acted as the collecting agent for employers for funds to be turned over to the trusts, there are some aspects of the agreement which give a superficial indication of a pay-as-you-go pension plan. However, it ia certainly not the direct pay-as-you-go pian referred to in respondent’s revenue ruling to which the majority appears to equate it. Here there was a qualified trust which made the payment to petitioner. The trustees of that trust made the decision of whether the employee was entitled to receive his pension where such a question arose and decided which employees might receive a lump-sum payment. Under the plans referred to in the revenue rulings and to which the majority equates the situation in this case, the employer decides who will receive payment under the plan. The distinction between a pay-as-you-go pension plan and the facts in this case is that here we have the qualified trust referred to in section 402(a) (2). Also, under the pay-as-you-go plans, the employer assumes no liability and makes no payment until the employee retires. Here, the employers made an absolute and unconditional commitment to the payment of $38 million for the benefit of the two trusts. The system of collection was left to PMA. In fact the origination of the case of Volkswagenwerk v. FMC, supra, was set forth by the Supreme Court ’as follows: The petitioner [Volkswagenwerk] refused to pay any additional charge resulting from the Association’s [PMA’s] levy, and Terminals [a PMA member who had contracted to unload Volkswagenwerk’s cars], while continuing to unload Volkswagen automobiles for the petitioner, did not pay its resulting assessment to the Association. The Association sued Terminals in a federal court in California for its failure to pay the Mech Fund assessments; Terminals admitted all the allegations of the complaint and impleaded the petitioner as a defendant. The petitioner then obtained a stay of that action to permit it to invoke the primary jurisdiction of the Federal Maritime Commission, in order to determine the following issues: The issues brought before the Maritime Commission dealt with whether the assessments as levied by PMA were subject to approval by the Maritime Commission, whether these assessments discriminated against Volkswagenwerk, and whether the assessments claimed from Volkswagenwerk constituted an unreasonable practice as compared to assessments from association members. If the payments by PMA members and principals were payments which the employers could obtain back as in the case of a reserve fund, there would have been no requirement that the payments be made by Volkswagenwerk and Terminals as Volkswagen cars were unloaded, and the entire Supreme Court case would have been moot. A reasonable interpretation of the entire Mechanization Agreement does not in my view support the final conclusion on which the majority opinion is based, that the effect of the arrangement between employers and PMA under the Mechanization Agreement was as if the employers merely set aside the funds in a reserve account which they maintained. In fact the whole agreement is geared to just the opposite result, that of binding the employers as a whole to an unequivocal payment of $38 million over a 5-year period but leaving the method of specific assessment of each employer’s prorata share to a formula selected by PMA. Certainly, because of leaving the method of collection and proration of assessments to the discretion of PMA, the provisions of the agreement are complicated. However, in my view the Vesting Benefit trust did have a corpus and was a qualified trust under section 401(a) so that petitioner properly reported his lump-sum payment received in 1961 as gain from a capital asset held for more than 6 months. The majority concludes its opinion by disposing of petitioner’s argument that since the employers are allowed to deduct their contributions to the Vesting Benefit trust, the employees should be allowed capital gain treatment with the statement that “there are situations in which an employer may deduct his contributions to a pension plan even though it does not qualify under section 401. See sec. 404(a) (5).” In my view the inference from the recitation of the railing of the Internal Revenue Service set forth in paragraph 6.6 heretofore quoted is that the trust was a qualified trust. Plowever, I agree that such a holding by the Revenue Service in case of the employer does not as a matter of law bind respondent to accord comparable treatment to the employee. It is, however, bothersome to find an agreement which can be held to provide favorable tax treatment to everyone except the employees for whose benefit it was created. Furthermore, the fact that respondent distinguishes in his ruling between employers and principals and permits the former a deduction only when PMA transfers funds to the trusts but allows the latter to deduct these contributions when payment is made does not require a conclusion that such treatment is correct. Apparently both the employers and PMA -were satisfied with the ruling they received from the Internal Revenue Service as to deductions of contributions to the Mechanization Fund.4 If the issue were before us, we might well hold that the contributions were deductible by the employers when paid to PMA. This issue is not before us and I do not feel it necessary to decide it. However, in my view petitioner properly treated his payment in 1967 from the Vesting Benefit trust as capital gain. Fay, Hoyt, Iewin, and Gopee, JJ., agree with this dissent.   SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES’ TRUST (a) Taxability of Beneficiary of Exempt Trust.— ******* (2) Capital gains treatment foe certain distributions. — In the case of an employees’ trust described in section 401(a), which is exempt from tax under section 501(a), if the total distributions payable with respect to any employee are paid to the distributee within 1 taxable year of the distributee on account of the employee’s death or other separation from the service, or on account of the death of the employee after his separation from the service, the amount of such distribution to the extent exceeding the amounts contributed by the employee (determined by applying section 72(f)), which employee contributions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. Where such total distributions include securities of the employer corporation, there shall be excluded from such excess the net unrealized appreciation attributable to that part of the total distributions which consists of ithe securities of the employer corporation so distributed. The amount of such net unrealized appreciation and the resulting adjustments to basis of the securities of the employer corporation so distributed shall be determined in accordance with regulations prescribed by the Secretary or his delegate. This paragraph shall not apply to distributions paid to any distributee to the extent such distributions are attributable to contributions made on behalf of the employee while he was an employee within the meaning of section 401(c) (1).    SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS (a) Requirements foe Qualification. — A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section— (1) if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a) (3) (B) (relating to deduction for contributions to profit-sharing and stock bonus plans), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan ; (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries; (3)if the trust, or two or more trusts, or the trust or trusts and annuity plan or plans are designated by the employer as constituting parts of a plan intended to qualify under this subsection which benefits either — ■ (A) 70 percent or more of all the employees, or 80 percent or more of all the employees who are eligible to benefit under the plan If 70 percent or more of all the employees are eligible to benefit under the plan, excluding in each case employees who have been employed not more than a minimum period prescribed by the plan, not exceeding 5 years, employees whose customary employment is for not more than 20 hours in any one week, and employees whose customary employment is for not more than 5 months in any calendar year, or (B) such employees as qualify under a classification set up by the employer and found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees; and (4) if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. (5) A classification shall not be considered discriminatory within the meaning of paragraph (3) (B) or (4) merely because it excludes employees the whole of whose remuneration constitutes “wages” under section 3121(a)(1) (relating to the Federal Insurance Contributions Act) or merely because it is limited to salaried or clerical employees. Neither shall a plan be considered discriminatory within the meaning of such provisions merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees, or merely because the contributions or benefits based on that part of an employee’s remuneration which is excluded from “wages” by section '3121(a) (1() differ from ithe contributions or benefits based on employee’s remuneration not so excluded, or differ because of any retirement benefits created under State or Federal law. For purposes of this paragraph and paragraph (10), the total compensation of an individual who is an employee within the meaning of subsection (c) (1) means such individual’s earned income (as defined in subsection (c) (2)), and the basic or regular rate of compensation of such an individual shall be determined, under regulations prescribed by the Secretary or his delegate, with respect to that portion of his earned income which bears the same ratio to his earned income as the basic or regular compensation of the employees under the plan bears to the total compensation of such employees. (6) A plan shall be considered as meeting the requirements of paragraph (3) during the whole of any taxable year of the plan if on one day in each quarter it satisfied such requirements. (7) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees’ accounts are nonforfeitable. This paragraph shall not apply to benefits or contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary or his delegate to preclude the discrimination prohibited by paragraph (4), may not be used for designated employees in the event of early termination of the plan. (8) A trust forming part of a pension plan shall not constitute a qualified trust under this section unless the plan provides that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan. (9) In the case of a plan which provides contributions or benefits for employees some or all of whom are employees within the meaning of subsection (c) (1), a trust forming part of such plan shall not constitute a qualified trust under this section unless, under the plan, the entire interest of each employee— (A) either win be distributed to him not later than his taxable year in which he attains the age of 70% years, or, in the case of an employee other than an owner-employee (as defined in subsection (c)(3)), in which he retires, whichever is the later, or (B) will be distributed, commencing not later than such taxable year, (i) in accordance with regulations prescribed by the Secretary or his delegate, over the life of such employee or over the lives of such employee and his spouse, or (ii) in accordance with such regulations, over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and his spouse. A trust shall not be disqualified under this paragraph by reason of distributions under a designation, prior to the date of enactment of this paragraph, by any employee under the plan of which such trust is a part of a method of distribution which does no* meet the terms of the preceding sentence.    Rev. Rul. 71-91,1971-1 C.B. 116: A corporate employer established a noncontributory pension plan providing for a normal retirement benefit of $100 per month, for each employee upon his retirement after the attainment of age 65. The plan provides that no contributions will be made on behalf of any employee prior to retirement. At retirement the employer will pay the monthly pension directly to the retiree. This type of arrangement is sometimes referred to as a “pay as you go” plan. A plan may meet the requirements of section 401(a) of the Code only if contributions are used to establish a trust of the type described in that section or to establish a custodial account of the type described in section 401(f) of the Code. For the purposes of sections 403(a) and 404(a) (2) of the Code, contributions may be used for the purchase of an annuity contract of the type described in those sections. Furthermore, for the purposes of sections 401, 402, 403, and 404 of the Code, contributions may be used for the purchase of face-amount certificates of the type described in section 401(g). In addition, in the ease of bond purchase plans, contributions may be used for the purchase of retirement bonds of the type described in section 40'5'(b) of the Code. All of these plans are funded arrangements. Thus, a qualified plan must be a funded plan. It may not provide for direct payments by an employer to his employees, as in the case of the pay-as-you-go pension plan described in this case. Rev. Rul. 69-421, 1969-2 C.B. 59, 62 : (b) Funded Plans. — A qualified plan must be a funded plan. Contributions may be made to a trust or under a custodial account, or may be used to pay premiums on insurance contracts, or to purchase face-amount certificates or used to buy retirement bonds. A qualified plan does not provide for direct payments by an employer to his employees, as in the case of a pay-as-you-go pension plan. However, employer contributions to or under a recognized funding medium may, under appropriate circumstances, be delayed pursuant to an established funding method. Thus, a qualified pension plan may provide that current contributions be made by employees only, but that the employer is obligated to pay the full amount of the stipulated benefits to each retired employee-participant after the funds in the trust forming a part of such plan have been fully exhausted. See Rev. Rui. 54-152, C.B. 1954-1, 149. The employer may also make contributions in any year to substitute for the otherwise required employee contributions. Rev. Rui. 6S-25, 1968-1 C.B. 151. It should be observed, however, that minimum funding requirements must be maintained even if contributions axe made by employees only. See part 6(d) hereof.    Par. 3.3 of the Mechanization Agreement provides that PMA is authorized “to take all reasonable action, necessary to compel Employers and Principals who are Member Companies to comply with their respective obligations or responsibilities under the Plan.” Apparently from the origin of Volkswagenwerk v. FMC, 390 U.S. 261 (1968), this included suing a defaulting employer. A collection suit against an employer could hardly be considered as the act of an agent for that employer.