Court Opinion

ID: 4602338
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:29:29.547436+00
Date Added: 2024-06-11T07:52:39.207048
License: Public Domain

John T. Carson Co., Inc., an Oregon corporation in dissolution, Petitioner, v. Commissioner of Internal Revenue, RespondentJohn T. Carson Co. v. CommissionerDocket No. 89677United States Tax Court38 T.C. 481; 1962 U.S. Tax Ct. LEXIS 114; June 29, 1962, Filed 1962 U.S. Tax Ct. LEXIS 114">*114 Decision will be entered for the respondent.  The petitioner established for its employees a trusteed profit-sharing plan which the Internal Revenue Service determined met the requirements of sec. 401(a), I.R.C. 1954.  This plan was terminated prior to the end of 1957.  In 1957 the trustees determined that they would liquidate the trust and distribute all of its assets to the beneficiaries in cash as soon as administratively practicable.  In April 1958 the petitioner made a contribution to the trust for the year 1957 and immediately liquidated the trust.  This was done after the date on which petitioner's income tax return for 1957 was due.  Held, the petitioner is not entitled to a deduction in 1957 for its contribution to the trust.  Robert R. Hollis, Esq., for the petitioner.William M. Luff, Jr., Esq., and John D. Picco, Esq., for the respondent.  Fay, Judge.  FAY38 T.C. 481">*481  The Commissioner determined a deficiency in the petitioner's income tax for the taxable year 1957 in the amount of $ 8,000.86.  The only issue for decision is whether the petitioner is entitled to a deduction for a sum paid under a profit-sharing plan.38 T.C. 481">*482  FINDINGS OF FACT.Some of the facts are stipulated and are found as stipulated.The petitioner is a corporation formed under the laws of the State of Oregon.  It filed its Federal income tax return for the calendar year 1957 with the district1962 U.S. Tax Ct. LEXIS 114">*116  director of internal revenue, Portland, Oregon, on or about March 15, 1958.  It did not request an extension of time for filing its return for 1957.  It kept its books and prepared its returns on the accrual basis of accounting.The petitioner was in the business of distributing fuel oil in the taxable year with which we are concerned and for some years prior thereto.On December 18, 1956, the petitioner formed a profit-sharing trust for the benefit of its salaried employees.  Article III of the trust agreement provided, in part, for annual contributions to be made by the petitioner to trustees, as follows:ARTICLE IIICompany Contributions1. Each year, beginning with the taxable year ending December 31, 1956, the Company shall contribute to the Trust an amount equal to a percentage of its net profits as computed by the following formula:100% of net income in excess of $ 25,000 before Federal and State income taxes thereon and before any deduction for contributions to this trust, as stated in the Company's original Federal Income tax return for such year, but not more than 15% of the total compensation paid or accrued during the year to all eligible employees participating in the1962 U.S. Tax Ct. LEXIS 114">*117  Plan (including bonuses and the like but not including contributions under this Plan) plus the maximum amount deductible under the "carry-over" provisions of the Internal Revenue Code relating to contributions in previous years of less than the maximum amount permissible.The contribution shall be paid, in one or more installments, to the Trustees not later than the final date for filing the Company's Federal Income Tax return for the taxable year, including any extensions of time granted for such filing.The trust agreement provided generally for the use of contributed benefits to purchase annuity contracts for the benefit of the covered employees or their beneficiaries. It provided that distribution of an employee's interest would normally begin at age 65.  Earlier distributions were allowable in the event that death, disability, or severance of employment occurred before a participant reached the age of 65.  The agreement contained the following in regard to termination:In the event of termination of the Plan or of a discontinuance of contributions required hereunder the Participants shall have a fully vested interest in the amounts credited to their respective accounts at the1962 U.S. Tax Ct. LEXIS 114">*118  time of such termination or discontinuance.38 T.C. 481">*483  The trust agreement further provided as follows:Upon such termination of the Plan and Trust after payment of all expenses and proportional adjustment of accounts to reflect such expenses, fund losses or profits and reallocations to the date of termination, each Participating Employee, each retired Participant, each former Participant and each beneficiary of a deceased Participant shall be entitled to receive any amounts then credited to his account in the Trust Fund.  The Trustees may make payments of such amounts in cash or in assets of the Trust Fund or in the form of immediate or deferred annuities.On November 8, 1956, the district director of internal revenue, Portland, Oregon, sent the petitioner a letter ruling with regard to this trust agreement which stated, in part, as follows:The plan, as evidenced by the trust indenture and other relevant information submitted with the request for a determination, has been considered and this office is of the opinion that the plan meets the requirements of section 401(a) of the Internal Revenue Code, and that the trust established thereunder is entitled to exemption under the provisions1962 U.S. Tax Ct. LEXIS 114">*119  of section 501(a).  * * *A contribution of $ 15,075.93 was made by the petitioner to the trust for the taxable year ended December 31, 1956.In June or July 1957, John T. Carson, then president and owner of one-half of the outstanding stock of the petitioner, and Andrew J. Cook, owner of the remainder of the petitioner's stock (except qualifying shares), were approached by representatives of Arrow Transportation Company of Delaware, hereinafter referred to as Arrow, with a proposal to buy all of the stock of the petitioner.Negotiations looking toward the sale of the petitioner's stock to Arrow proceeded rapidly, and on November 7, 1957, shareholders of petitioner agreed to sell all of their stock in the petitioner to Arrow.  On December 17, 1957, Arrow formed a new corporation called John Carson Oil Co., Inc., to acquire the stock of the petitioner.  Arrow assigned the contract for the purchase of the stock of petitioner to the new corporation and transferred cash to it and received 7,500 shares of its stock in return.  On December 30, 1957, the new corporation purchased all of the stock of the petitioner pursuant to the contract.As early as September or October 1957 the negotiating1962 U.S. Tax Ct. LEXIS 114">*120  representatives of Arrow made it clear to Carson that they would not continue the profit-sharing arrangement if they acquired the petitioner.  Carson and Cook, together with Harold Davidson, were the trustees under the trust agreement. Carson ultimately undertook to do the work and make the decisions required of the trustees with respect to the termination of the plan.  On December 31, 1957, those employees covered by the plan who continued in the employ of the new corporation were informed that contributions under the plan would be terminated as of that date.38 T.C. 481">*484  The books of the petitioner were closed in the middle of January 1958 for the calendar year 1957.  Carson was immediately informed that $ 15,386.27 was the amount of the contribution to be made to the trust for the year 1957, and that sum was accrued on the books of the petitioner as of December 31, 1957.Immediately upon learning the amount of the contribution to be made for 1957, Carson took steps to determine the manner in which the trust corpus should be distributed to the beneficiaries. On several occasions he spoke with a representative of the district director of internal revenue in order to be certain that1962 U.S. Tax Ct. LEXIS 114">*121  his plans for distribution of the corpus were not violative of the Internal Revenue Code and regulations thereunder.  Carson's efforts to establish an appropriate schedule for the distribution of the trust assets consumed the period from the middle of January to the end of March 1958.On April 2, 1958, the sum accrued for 1957 under the provisions of the trust agreement was paid to the trust by check.  On the same day checks were drawn and distributed to the beneficiaries of the trust transferring all of the assets of the trust to them.OPINION.The respondent contends that the petitioner is not entitled to a deduction in 1957 for the contribution made to the profit-sharing trust for the year 1957 because it was paid neither in that year nor within the period prescribed in section 404(a)(6) of the Internal Revenue Code of 1954.  Section 404(a) provides, in part, as follows:If contributions are paid by an employer to or under a * * * profit-sharing * * * plan, * * * they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year: * * * *(3) Stock bonus and profit-sharing trusts.  -- (A) Limits on deductible1962 U.S. Tax Ct. LEXIS 114">*122  contributions.  -- In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, * * ** * * *(6) Taxpayers on accrual basis. -- * * * a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof.)The petitioner, on the other hand, contends that section 404 of the Internal Revenue Code of 1954 does not apply to contributions under a plan which has been terminated and therefore does not apply to its final contribution to the trust.  We must agree with the respondent.38 T.C. 481">*485  We cannot agree with the petitioner's assumption that its obligation to set aside a portion of its yearly profits for its employees, a duty which was terminated in 1957, is the "plan" which is referred to in section 404. Section 404 applies to "contributions * * * paid * * * under a * * * profit-sharing * * * plan." At first glance it would seem that the "profit-sharing * * * plan" referred to in the statute would mean a program by which1962 U.S. Tax Ct. LEXIS 114">*123  an employer gives to his employees some share of his profits on a continuing basis.  This, however, is not the meaning of the term as used in that section.  In Produce Reporter Co., 18 T.C. 69">18 T.C. 69 (1952), affd.  207 F.2d 586 (C.A. 7, 1953), this Court held that sums paid under a current payment profit-sharing plan ("i.e. where the amount of the bonus is determined toward the end of one year and payments to the employees are made during the year following," Wesley Heat Treating Co., 30 T.C. 10">30 T.C. 10, 30 T.C. 10">23 (1958), affd.  267 F.2d 853 (C.A. 7, 1959)), were deductible as ordinary and necessary business expenses.  Deductibility of the payments in that case was not limited by section 23(p) of the Internal Revenue Code of 1939, the predecessor of section 404.  The Commissioner has ruled that section 404 is not applicable to a current payment profit-sharing plan, Rev. Rul. 57-88, 1957-1 C.B. 88. Thus, it is clear that a scheme under which an employer gives some of his profits to his employees is not alone or in itself a "profit-sharing plan" in 1962 U.S. Tax Ct. LEXIS 114">*124  the sense in which that term is used in section 404.Since this is so, it must be concluded that the term "profit-sharing * * * plan" as used in section 404 means the plan under which profits that have been set aside by an employer are to be distributed to his employees on a deferred basis.In this sense, the plan here in question was not terminated in 1957.  Since there was no evidence that the plan was ever amended, we must conclude that the plan was not terminated until the trust was liquidated. There is no doubt that the plan as originally written was subject to the provisions of section 404.  Therefore, since the contribution which the petitioner seeks to deduct was made prior to the liquidation of the trust, it must be considered a contribution paid under a profit-sharing plan within the meaning of section 404 and subject to all of the limitations of that section.  The petitioner's return was due and filed on March 15, 1958, and its contribution to the trust was made on April 2, 1958, which was not within the time limits prescribed in section 404.  Thus, it is not entitled to a deduction for the contribution in 1957.Decision will be entered for the respondent.