Court Opinion

ID: 4594682
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:13:27.803459+00
Date Added: 2024-06-11T07:51:17.630536
License: Public Domain

W. F. PARKER AND ETHEL M. PARKER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Parker v. CommissionerDocket No. 89921.United States Board of Tax Appeals38 B.T.A. 989; 1938 BTA LEXIS 804; October 21, 1938, Promulgated *804  1.  A trust created primarily for the benefit of petitioner, as the controlling shareholder of a corporate employer, by whom petitioner was employed with others, is not within section 165 of the Revenue Act of 1934.  2.  Insurance premiums on a life insurance policy on the life of petitioner, payable to such trust to secure awards therefrom to petitioner or his nominees, paid by such trust with funds contributed by the corporation, are properly includable in petitioner's income for the year so paid.  H. H. Hoppe, Esq., and Ralph F. Mateer, C.P.A., for the petitioners.  Henderson A. Melville, Esq., and George F. James, Esq., for the respondent.  LEECH*989  The respondent determined a deficiency of $128.16 in petitioners' income tax for the calendar year, 1934.  This deficiency resulted from increasing, by the sum of $2,436.75, the income reported by petitioners in their joint return.  This added item of income reflected a premium on a life insurance policy upon the life of the petitioner, W. F. Parker, paid by a "Pension Trust Fund" created by the company of which he is president and majority stockholder.  The insurance policy was payable*805  to the trustee of the so-called pension trust fund and was in the amount necessary to maintain an award of compensation made by such pension trust fund to the petitioner, W. F. Parker.  FINDINGS OF FACT.  The petitioners are husband and wife, residents of Warren, Ohio.  The petitioner, W. F. Parker, hereinafter referred to as the petitioner, was during the taxable year and is now the president of the Standard Transformer Co. of Warren, Ohio, and was on October 25, 1934, the owner of 97 shares out of a total of 120 issued shares of the company's capital stock.  Of the balance of the stock, 19 shares were owned by T. G. Parker, petitioner's son, and one share stood *990  in each of the names of petitioner's wife and three other individuals, who, with the petitioner, constituted the board of directors of the company.  On the aforesaid date, by proper resolution, the board of directors of the company established a trust known as "The Standard Transformer Company Pension Trust Fund," hereinafter called the pension trust fund, with the Union Savings & Trust Co. of Warren, Ohio, as trustee.  The rules and regulations provided for the pension trust fund were as follows: 1. *806  There be and there is hereby created and established by The Standard Transformer Company "The Standard Transformer Company Pension Trust Fund," (sometimes hereinafter referred to as the Pension Fund), for the sole and exclusive benefit of such of the officers and employees of the company (sometimes hereinafter referred to as the Pensioners) who desire to take advantage thereof and who can qualify therefor under the rules and regulations hereinafter set forth.  2.  The Union Savings & Trust Company of Warren, Ohio, and its successors, be and they hereby are appointed Trustee of the Pension Fund and as such shall have all such powers, duties and obligations as are set forth in the Trust Agreement, a copy of which was presented to this meeting and which is hereby approved, and the President and Secretary of this company, in the name of and for and on behalf of this company, are hereby authorized and directed forthwith to execute the same.  3.  W. F. Parker, President of The Standard Transformer Company, and his successors in office, be and they hereby are appointed Manager of the Pension Fund and Adviser to the Trustee, and as such and in each capacity shall have all such powers, *807  duties and obligations as are hereinafter and in such trust agreement set forth.  4.  For the creation and establishment of the Pension Fund, and until the same is terminated as hereinafter provided, there shall be set aside annually from the earnings of the company and paid to the Trustee such an amount as the directors may determine, provided, however, that such payments shall not in the aggregate exceed two hundred and fifty thousand dollars ($250,000.00), and shall not extend over a period of more than twenty years from the date hereof.  Immediately upon the execution of the trust agreement referred to in paragraph 2 hereof the officers of this company are hereby authorized and directed to pay to the Trustee the sum of $1,000.00.  5.  For the maintenance of the Pension Fund, and until the same is terminated as hereinafter provided, the officers of the company are hereby authorized to pay to the Trustee from time to time such sums as may be necessary for the proper and successful operation of the Pension Fund.  6.  The payments to be made by the company as provided for in the two preceding paragraphs, 4 and 5, may be made by the company in cash, securities, premium receipts*808  evidencing payments made on annuities, or life insurance policies covering the lives of any one or more of the Pensioners, or in any other form that the Manager may dictate.  7.  The following rules and regulations shall govern all such officers and employees of the company who desire to participate in the Pension Fund: *991  (a) Any officer or employee who has been continuously employed by the company for six or more months, who has attained the age of twenty-one years and is not over forty years of age, may apply to the Manager for participation in the Pension Fund.  Such application shall be made on blanks to be furnished by the Manager.  (b) Any application may be accepted or rejected by the Manager and his decision shall be final.  (c) The Manager may request an applicant to undergo a physical examination and such request must be complied with before the application can be accepted.  (d) At the time of accepting an application the Manager shall fix the amount, if any, that the applicant shall contribute to the Pension Fund, which amount shall be deducted from the salary or pay of the applicant at such time or times as the Manager may direct and paid by the company*809  to the Trustee.  At the same time the Manager shall fix the amount of the monthly pension to be received by the applicant, which shall be not less than ten dollars ($10.00) per month, nor more than the applicant's salary or pay at the time the application is made or at the time of retirement, whichever is greater, and/or the amount of any annuity or life insurance to be purchased from the Pension Fund for the benefit of the applicant, giving due and proper consideration to the loyalty, value and ability of the applicant and all other factors which in the sole discretion of the Manager tend to establish a fair and equitable ratio of participation for the applicant in the Pension Fund.  The amount so fixed shall never be decreased but in the sole discretion of the Manager it may at any time be increased, but not beyond the limits hereinabove established.  (e) Copies of all applications accepted by the Manager and all annuity contracts and life insurance policies purchased shall be deposited with and kept by the Trustee.  (f) The payment of the pension of all employees shall start on the first day of the month following the completion of fifteen years of continuous employment by the*810  company from and after November 1, 1934.  The payment of the pension of all officers shall start on the first day of the month following the completion of ten years of continuous service with the company from and after November 1, 1934.  Annuity contracts and life insurance policies shall be payable according to their terms.  (g) In the event that any officer or employee shall resign, be discharged or for any other cause leave the employ of the company within five years from and after the day upon which his application is accepted he shall thereupon forfeit all rights whatsoever in and to the Pension Fund, including any and all annuity contracts and/or policies of life insurance purchased on his account therefrom, save and except that if such applicant contributed to the Pension Fund the amount of such contributions shall be returned to him by the Trustee without interest, less any amount which such officer or employee may then be owing to the company, or in the event that an annuity or life insurance was purchased for such officer or employee, then upon paying to the Trustee an amount equal to the difference between the amount contributed and the amount paid on account of such contracts, *811  the Trustee shall deliver such contracts to such retiring officer or employee.  In default of such payment such contracts shall be surrendered by the Trustee and any moneys realized therefrom shall be deposited to the credit of the Pension Fund.  (h) In the event that any officer or employee shall resign, be discharged or for any other cause leave the employ of the company after five years but *992  before ten years from and after the date upon which his application is accepted, he shall be entitled to receive and the Trustee shall deliver to him one-third of the investments purchased by the Pension Fund on his account and/or one-third of the cash values of any annuity or life insurance contracts purchased on his account, the balance of any investments purchased to remain in and the remaining cash values of any annuity or life insurance contracts to be credited to the Pension Fund.  (i) In the event that any officer or employee shall resign, be discharged or for any other cause leave the employ of the company after ten years but before fifteen years from and after the date upon which his application is accepted, he shall be entitled to receive and the Trustee shall deliver*812  to him two-thirds of the investments purchased by the Pension Fund on his account and/or two-thirds of the cash values of any annuity or life insurance contracts purchased on his account, the balance of any investments purchased to remain in and the remaining cash values of any annuity or life insurance contracts to be credited to the Pension Fund.  (j) In the event that any officer or employee shall resign, be discharged or for any other cause leave the employ of the company after fifteen years from and after the date upon which his application is accepted, he shall be entitled to receive and the Trustee shall pay to him his pension as set forth in the acceptance of his application or as the same may have been at any time increased, and shall deliver to him any and all annuity contracts and/or life insurance policies purchased on his account.  (k) In the event that any officer or employee shall die before becoming entitled to a pension hereunder, then any funds or investments which have accrued to his benefit shall be paid or delivered to such person or persons as are designated by such officer or employee in his application or in the policy of any life insurance purchased on*813  his behalf.  (l) The pensions and/or annuities and/or life insurance granted to the officers and/or employees shall not be alienated or disposed of or in any manner encumbered while in the possession and control of the Trustee.  If any Pensioner should, at the time when or before his pensions and/or rights under annuity contracts and/or life insurance policies have matured, have alienated, charged, disposed of or encumbered, or shall at any time thereafter alienate, charge, dispose of or encumber his pension or any part thereof, or if by reason of his bankruptcy or other event at any time happening, his pension and/or rights under annuity contracts and/or life insurance policies shall wholly or in part cease to be enjoyed by him, then the amount of such pension and/or rights under annuity contracts and/or life insurance policies shall be held and distributed by the Trustee during the life of the pensioner accordingly as the Trustee in its absolute discretion may see fit, paying the same either to the pensioner for his maintenance or support or to his wife or to any child or children of his, the amount of such payments to be left to the absolute and unqualified discretion of the Trustee. *814  (m) In the event that the company shall at any time liquidate either voluntarily or otherwise, or shall sell all of its assets and go into liquidation, the fund created hereby and the securities held by the Trustee shall in no manner be affected thereby but each pensioner may withdraw from the trust such securities, annuity contracts and life insurance policies which the Trustee holds and/or has accumulated on behalf of such pensioner, or any pensioner may allow accumulations to continue and at maturity receive a pension in an amount made possible by such accumulations, or any pensioner may continue the trust by voluntarily continuing to make payments thereto on his own account.  *993  (n) The fiscal year of the Pension Fund shall be the year beginning on the first day of November of each year beginning November 1, 1934, and ending on the 31st day of October of the following year.  (o) The company may terminate its responsibility for further payments to the Pension Fund at the end of any fiscal year by giving six months written notice of its intention so to do to the Trustee and to all of the Pensioners, whereupon the Trustee shall distribute the Pension Fund to each Pensioner*815  as each Pensioner shall elect.  Such election shall be made as hereinabove in paragraph (m) provided.  (p) The company may at any time by resolution of its Board of Directors amend or revise the foregoing rules and regulations of "The Standard Transformer Company Pension Trust Fund," immediate notice of which shall be given to all Pensioners and the Trustee.  In no event shall the rights acquired by any Pensioner be alienated, nor shall the rules and regulations be so amended or revised as to enable the company to recover or maintain any interest in any part of the Pension Fund.  Immediately upon the creation of the pension trust, the petitioner, as president, treasurer, and general manager of the company, made application to himself as the designated manager of the pension trust fund for participation and award of benefits.  As manager of the pension trust fund, in the exercise of his absolute discretion to grant or reject the application and to determine the amount of the award to be made, petitioner awarded himself, in the event of his death before attaining the age of 65, the sum of $25,000 and, in the event he lived to attain the age of 65, the sum of $250 a month as long*816  as he might live, with 120 such monthly payments guaranteed.  In the event of his death before attaining the age of 65, or after 65 before receiving 120 such monthly payments, then the amounts so awarded him were to be paid by the trustee of the pension trust fund to such persons as he might in writing designate.  In addition to petitioner, three employees of the company made application for participation in the pension trust fund, which applications were accepted and awards made as follows: To Lealdas W. Haig, chief of the engineering staff, and Harlan E. Greenwalt, production manager, identical awards were made of $5,000 each in case of death prior to the age of 65, or $50 a month in the event that they attained such age, with 120 monthly payments guaranteed.  In the event either of them died before attaining the age of 65 or after that age and before receiving the guaranteed payments, the amounts so awarded were to be paid by the trustee of the pension trust fund to such persons as they may designate.  To Marabelle Sutton, secretary of the company, was awarded an annuity for life of $50 a month commencing on the 10th day of September 1958, if she be then living.  In the event of*817  her death during the continuance of the annuity payments the excess, if any, of the amount of the payments made, without interest, to purchase such annuity over the sum of the annuity payments *994  made, was payable to such persons as this beneficiary may in writing designate.  The salaries of the four parties awarded benefits, as described, were during the year 1934 as follows: Lealdas W. Haig$2,160Marabelle Sutton2,820H. E. Greenwalt1,500W. F. Parker16,000To cover the awards so made, the petitioner, as manager of the pension trust fund, procured annuity policies of insurance upon the lives of each of the beneficiaries, providing annuities payable to the trustee in the amounts as awarded the beneficiaries.  The amount of the premiums upon these policies was paid by the Standard Transformer Co. to the pension trust fund as representing its contribution to that fund, with which amounts the pension trust fund paid the premiums.  The total premiums thus paid in the year 1934 amounted to $3,000.40.  In addition thereto, the company paid to the trustee the sum of $1,000 for establishment of the pension trust fund, as provided in the trust agreement*818  and in paragraph 4 of the rules and regulations heretofore set out.  The individual premiums upon the several policies of insurance were in the following amounts: Lealdas W. Haig$247.65Marabelle Sutton193.65H. E. Greenwalt122.35W. F. Parker2,436.753,000.40OPINION.  LEECH: The award to petitioner, secured by the insurance policy on his life, upon which the contested premium was paid by the pension trust fund, was patently made as compensation for his services to the corporation.  The amount of this premium was thus taxable income to petitioners, when paid, unless section 165 of the Revenue Act of 1934 postpones the tax incidence.  ; . Petitioners apparently concede this.  Thus, their position rests wholly upon the contention that the pension trust fund here is within section 165 of the Revenue Act of 1934.  That section provides: SEC. 165.  EMPLOYEES' TRUSTS.  A trust created by an employer as a part of a stock bonus, pension, or profitsharing plan for the exclusive benefit of some or all of his employees, to which contributions are made*819  by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated *995  by the trust in accordance with such plan, shall not be taxable under section 161, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him.  Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of dividends and interest specified in section 25(a).  This provision, in almost identical form, has appeared in every Revenue Act beginning with that of 1921.  See . Its entirely proper purpose, complemented by section 23(q), undoubtedly, is to encourage employers to share profits with their employees and to provide some measure of security for their employees by means of pensions, when the earning power of the employees has decreased or ended. It may be said that this act should be liberally construed in accomplishing*820  this laudable purpose.  But the title of section 165 is "Employees' Trust." Section 23(q), in complementing section 165, allows an additional deduction to: An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees (if such trust is exempt from tax under section 165, relating to trusts created for the exclusive benefit of employees) * * *.  [Emphasis supplied.] Sharing profits, as applying to stockholders, would be meaningless since that is their right, alone, as stockholders.  And, provisions for the security of stockholders of the corporation was, just as obviously, not intended.  This is strikingly apparent from the wording of section 165.  Thus, assuming the present pension trust fund was not only a juristic trust but, assuming also, the doubtful premise that it was a pension trust within the section, was it created "by an employer * * * for the exclusive benefit of some or all of his employees * * *"?  We think not.  The term "exclusively" under comparatively similar circumstances has been strictly construed.  *821 , and cases cited therein.  Its companion term "exclusive", used in section 165, should be likewise interpreted. The present pension trust fund is described in resolution of the board of directors of the Standard Transformer Co., authorizing its creation, as being "for the sole and exclusive benefit of such of the officers and employees of the company (sometimes hereinafter referred to as the Pensioners) who desire to take advantage thereof and who can qualify therefor under the rules and regulations hereinafter set forth." The trust instrument referred to this resolution.  The rules and regulations of the pension trust fund included the same statement.  But that nomenclature can not and does not, alone, establish the crucial fact that the pension trust fund here was created *996  for the exclusive benefit of some or all of its employees. ; ; . That fact is determinable from the instrument creating the trust, the rules*822  and regulations controlling its administration, the circumstances surrounding both, and what was actually done pursuant thereto.  ; First National Bank in , affirming ; certiorari denied, ; ; ; affd., ; . What does the record disclose? The petitioner, admittedly, was an employee.  But he was a stockholder, as well.  At the creation of the pension trust fund and throughout 1934, he owned 97, and his son 19, of the 120 issued shares of stock in the company.  Beyond question, he dominated and controlled the actions of the Standard Transformer Co.  That company, which was the employer, could amend the rules and regulations, at any time, and in any way, except to deprive a beneficiary of a benefit awarded.  It could cause the liquidation of the trust and the distribution to the beneficiaries, including the petitioner, of*823  the policies of insurance held by the trustee.  The petitioner was the manager of the pension trust fund, with the absolute right to grant or refuse any application for benefits and to fix, increase or decrease, within certain limits, the amount of the benefits awarded.  The original application for insurance on the life of the petitioner, signed by him as manager of the pension trust fund, shows that the original request was for a policy of $100,000, requiring a total annual premium payment of $9,747.  A policy of $25,000 was issued on this application.  But its cost to the pension trust fund was more than 81 percent of the total disbursement by the pension trust fund for all the benefits awarded.  The petitioner testified that the pension trust fund was created for the purpose of providing the salaried employees of the company, who, possessing nothing but such salaries and having no interest in the corporation and would thus not be benefited by its future growth or prosperity, something in the nature of a saving which would inure to them when they became too old to work or lost their employment after years of service.  If this was the purpose of the organization of the pension*824  trust fund, then the award of more than 81 percent of its benefits to the petitioner is clearly not within that purpose.  The petitioner stands outside such class of employee for which the pension trust fund was purportedly formed, because he owned 97 of the 120 issued shares of stock of the corporation and *997  thus stands in a position to enjoy, financially, any future prosperity of the company.  During the four years of the existence of the pension trust fund, the only awards made were those to the petitioner and three others upon the organization of the trust.  The rules and regulations of the pension trust fund provided that "Any officer or employee who has been continuously employed by the company for six or more months, who has attained the age of twenty-one years and who is not over forty years of age, may apply to the Manager for participation in the Pension Fund.  Such application shall be made on blanks to be furnished by the Manager." There is no indication that any other of the 17 employees in question ever knew of the organization of the pension trust fund, although petitioner testified that, so far as he knew, all of the other employees were eligible for membership. *825  Three of the four employees, including petitioner, beneficiaries of the pension trust fund, were ineligible for benefits under the rules and regulations, as then constituted, since they were all more than 40 years of age.  In June 1937, the rules and regulations of the pension trust fund were amended, nunc pro tunc, to change the limit from 40 to 55 years.  The explanation for this was that the original age limit was in error.  The rules and regulations, adopted in an attempt to bring the pension trust fund within the statute, were not followed.  They provided specifically that the payment of pensions awarded all employees should begin "on the first day of the month following the completion of fifteen years of continuous employment by the company from and after November 1, 1934", and that for all officers should start "on the first day of the month following the completion of ten years of continuous service with the company from and after November 1, 1934." These regulations were violated in every award made by the pension trust fund.  Thus, it is indicated that Haig was under 50 years of age and his pension was awarded to begin at 65.  Greenwalt at the time of the hearing was*826  "30 or 35 years old" and must have been little over 30 years of age when awarded a pension of $50 per month to begin approximately 35 years hence when he reached the age of 65.  Miss Sutton, an officer of the company, entitled under the rules to a pension beginning December 31, 1934, if her application was accepted, was awarded a pension of $50 per month, to begin 24 years in the future, on the 10th day of September 1958, should she then be living.  This inconsistency is not explained by the provision in the regulations that "Annuity contracts and life insurance policies shall be payable according to their terms", since the petitioner and the three other employees, to whom awards were made direct by the pension trust fund, were not the beneficiaries of the life insurance policies.  The pension trust fund was the beneficiary of those policies and had merely invested its funds therein.  *998  The conclusion is inescapable that, whatever be the proper designation for the pension trust fund, it was created by the Standard Transformer Co., primarily, for the purpose of benefiting petitioner, W. F. Parker, as the majority stockholder of that company.  It follows that the pension*827  trust fund here was not created for the exclusive benefit of any or all of its employees, as such.  The action of the respondent in including the contested premium payment in petitioners' income, as additional compensation to petitioner, W. F. Parker, is affirmed.  Decision will be entered for the respondent.