Court Opinion

ID: 4609883
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:45:40.739737+00
Date Added: 2024-06-11T07:53:58.311243
License: Public Domain

THE CAXTON PRINTERS, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Caxton Printers, Ltd. v. CommissionerDocket No. 62142.United States Board of Tax Appeals27 B.T.A. 1110; 1933 BTA LEXIS 1253; April 6, 1933, Promulgated *1253  1.  PENSION TRUST FUND - REQUIREMENTS FOR DEDUCTIBILITY OF PAYMENTS THERETO UNDER SECTION 23(Q), REVENUE ACT OF 1928.  Where petitioner's stockholders and directors in 1929 passed resolutions to create a pension fund to pension its employees and during the taxable year set up as a liability on its books a reserve of $8,000 labeled "Pension Reserve Fund," this book entry was not such a transfer or paying into a pension trust fund as is contemplated by section 23(q), Revenue Act of 1928, to make such amounts deductible.  Merrill Trust Co.,21 B.T.A. 1409">21 B.T.A. 1409, followed 2.  INSURANCE RESERVE.  Where the petitioner set up a reserve as a life insurance fund to protect its president, who was too old to take out life insurance at anything like a reasonable rate, instead of purchasing life insurance, said fund is not deductible in the taxable year as no liability was incurred nor payment made therefrom.  Spring Canyon Coal Co.,13 B.T.A. 189">13 B.T.A. 189, followed.  3.  DEPRECIATION.  Evidence examined and respondent's findings approved.  S. Ben Dunlap, Esq., for the petitioner.  George E. Adams, Esq., for the respondent.  BLACK*1111 *1254  The respondent determined a deficiency of $1,196.93 in income taxes against the petitioner for the year 1929.  In seeking redetermination, petitioner alleges that the respondent erred, (1) in not allowing as a deduction the sum of $8,000 which petitioner claims it set aside during the taxable year as a pension trust fund; (2) in not allowing the sum $600of which petitioner claims it set aside as a trust insurance fund; and (3) in reducing depreciation claimed by it on printing plant, machinery and fixtures from $5,400 to $3,015.66.  FINDINGS OF FACT.  The petitioner is a corporation, organized under the laws of Idaho, with its principal office and place of business at Caldwell, in that state.  It is engaged in the printing and binding business, and in the sale of school books and supplies.  Petitioner owned and used in its business during the taxable year printing machinery and fixtures necessary for its business of printing, binding, and publication, the total cost of which was carried on petitioner's books as of December 31, 1929, at the sum of $59,070.14.  Of this amount respondent determined that certain items aggregating $25,059.92 had been fully depreciated in prior years. *1255  This amount representing the exhausted assets was deducted by respondent from the amount carried on petitioner's books, viz., $59,070.14, leaving $34,010.22 subject to depreciation.  This $34,010.22 included $7,705.21 additions of machinery and fixtures made in 1929.  On these additions respondent has computed depreciation on a half yearly basis in accordance with his regulations.  The rate which respondent used was a composite rate of 10 per cent, resulting in a total allowance for depreciation on machinery, fixtures and plant equipment of $3,015.66.  This amount we find to be just and reasonable.  On December 23, 1929, at meetings of the stockholders and directors, resolutions were adopted authorizing the creation and adoption of a suitable pension plan for the employees of petitioner and to provide a fund out of the annual earnings to be known and designated as "The Caxton Printers, Ltd., Pension Trust Fund," which was to be used solely to pay pensions.  The resolution adopted by the board of directors provides: Now, THEREFORE, BE IT RESOLVED By the Board of Directors of The Caxton Printers, Ltd.; That this Board of Directors does hereby create and provide a fund to be known*1256  and designated as The Caxton Printers, Ltd., Pension Trust Fund to be kept, segregated and set aside from the other funds of the corporation *1112  and to be used together with the interest earnings, profits and income therefrom entirely and solely to pay pensions to employees of said corporation.  BE IT FURTHER RESOLVED: That all employees of the corporation, regardless of the character of their employment, who have been in the employment of this corporation or its predecessors in interest for a period of 35 years, shall be entitled to be paid out of said pension fund of this corporation, an annual pension which shall equal 25% of one-fifth of the total amount paid by the corporation to the person entitled thereto, for the 5 years service of such person to the corporation immediately preceding the date to which it shall be determined said employee shall be placed upon the pension list of said corporation; PROVIDED, HOWEVER, That the directors of said corporation may at their discretion, award and cause to be paid out of said pension fund, pensions to employees after 25 years' service.  BE IT FURTHER RESOLVED: That there be set aside annually, from the earnings of the corporation*1257  and until said pension fund shall equal $100,000.00, an annual sum of not more than $10,000.00, the amount to be set aside annually to depend upon the annual earnings of the corporation and determined annually by the directors of this corporation.  Nothing further was done in 1929 toward the establishment of this pension trust fund, except to set up a reserve of $8,000 as a liability on the books of the corporation designated "Reserve for Employees Pension Fund." No assets of any kind were segregated from the general assets of the corporation in 1929, to make up this reserve.  It was not until July 25, 1931, that a trust agreement was drawn up between The Caxton Printers, Ltd., as party of the first part and James H. Gipson, W. Earl Norton and Mabel S. Clore, parties of the second part, making full detailed provisions for the establishment of the trust to carry out the pension arrangement.  The balance sheet introduced in evidence by the petitioner purports to show the accounts of petitioner as reflected by petitioner's books on December 31, 1928, and December 31, 1929, and among the assets shown on the balance sheet as at December 31, 1929, are cash in the amount of $3,654.34 and*1258  cash reserve for bond retirement, $1,500.  On the liability side of the balance sheet is shown a reserve for employees' pensions of $8,000.  In the year 1930 an additional entry of $2,480 was added to the reserve fund account for employees' pensions, $480 of which was calculated as interest on the $8,000 placed in the reserve account in 1929, computed at the rate of 6 per cent per annum.  No assets of any kind were segregated from the general assets of the corporation in 1930 at the time this $2,480 was credited to pension fund reserve account.  At a meeting of the stockholders of petitioner held on December 23, 1929, the directors were authorized to contract for group insurance on certain of petitioner's employees and a reserve of $600 was set up for that purpose and appears as a liability on the balance sheet as of December 31, 1929.  This $600 was intended to include premiums *1113  of $114.73 to be paid to the Prudential Life Insurance Company for writing the group policy, and the balance to cover insurance on the life of petitioner's president, who was at that time 80 years of age, and which insurance petitioner carried itself because the president was too old to secure*1259  regular insurance, and to carry the group insurance on the employees between December 23, 1929, and January 3, 1930, the effective date of the group policy.  The group policy written by the Prudential Insurance Company was not written until early in January, 1930, and there was no liability for premiums on this policy, either accrued or paid in 1929.  None of petitioner's officers or employees died in 1929 and no death claims or other payments were made in 1929 from said insurance fund of $600 set up as a reserve fund on the books of petitioner.  OPINION.  BLACK: In order for petitioner to be entitled to deductions of donations or payments made to a pension trust fund, such payments or donations must be made in compliance with the terms of the statute.  We do not think that the facts connected with petitioner's setting up on its books as a liability in 1929 a reserve designated "Pension Trust Fund" of $8,000 are sufficient to entitle petitioner to have such fund allowed as a deduction.  Section 23(q) of the Revenue Act of 1928 provides: An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees (if such trust is*1260  exempt from tax under section 165, relating to trusts created for the exclusive benefit of employees) shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under subsection (a) of this section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten consecutive years beginning with the year in which the transfer or payment is made.  Section 165, referred to in the above quoted section, provides in substance that a trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the benefit of its employees shall not be taxable, but shall be taxable to the distributee when distributed.  We think it clear that under these sections of the 1928 Act, before payments or donations made by an employer to a pension trust fund can be allowed as deductions from gross income, it must be shown that such payments or transfers claimed were made to*1261  a valid, existing trust.  Even if it be conceded that the resolutions adopted by the stockholders and directors on December 23, 1929, were within *1114  themselves sufficient to establish a valid trust to receive and administer a trust fund to pay pensions to petitioner's employees, nothing was paid or transferred to the trust in 1929.  A mere setting up of a reserve liability on a taxpayer's books is not a paying into or transfer of funds to the trust.  The statute allows a deduction of "a reasonable amount transferred or paid into such trust" during the taxable year in excess of any contributions made to take care of the pension liability accruing during the year.  There is no evidence that petitioner made any contributions to take care of any pension liability accruing during the year and which would be deductible under section 23(a) as a business expense.  If petitioner is entitled to a deduction of the $8,000 claimed it must come under section 23(q) above quoted, and we hold there was no such payment or transfer of funds to a pension trust as is contemplated by the terms of said section.  Petitioner cites in support of its contention, *1262 ; ; , and . These were cases which were decided under prior acts which did not contain any such provision as section 23(q) of the Revenue Act of 1928, which defines and limits the deductions which can be made of payments and contributions to a pension trust fund.  However, we do not think there is any conflict between what we held in those cases and what we now hold in the instant case.  In those cases we ruled that amounts actually paid into a fund by an employer during each year for pensioning its employees are deductible from gross income for the year as ordinary and necessary expenses of carrying on the employer's business, where the facts and circumstances connected with the creation and operation of the fund show that it is a valid, existing trust.  And here as there, we hold that such deductions are only allowable where there is an actual payment or transfer of funds to a legal, enforceable trust. *1263  Cf. . For reasons we have already stated, there was no such payment or transfer of the $8,000 in question as to entitle petitioner to deduct it from gross income.  On this issue we hold for respondent.  The reserve of $600, which petitioner set up as an insurance fund and claimed as a deduction from 1929 income, was for the purpose of paying for a group insurance premium on certain employees, to provide for payment of insurance liability between December 23, 1929, when the insurance was authorized and January 3, 1930, when the group policy by the insurance company was actually issued, and to cover insurance on the life of petitioner's president, which petitioner proposed to carry itself.  This reserve was disallowed by the *1115  respondent on the ground that it was a contingent liability and not allowable as a deduction, which we think was correct.  ; ; *1264 ; affd., ; certiorari denied, . It seems clear that the $114.73 policy premium charged by the Prudential Insurance Company for writing the group policy was both incurred and paid in 1930.  Therefore, whether petitioner kept its books on the cash receipts and disbursements basis, or whether it kept them on the accrual basis, this $114.73 premium expense would only be deductible in 1930.  The only basis for allowing the $600 reserve as a deduction for 1929 would be on the theory that petitioner was entitled to set up and take as a deduction such a reserve to carry its own insurance on its president for an indefinite length of time and insurance on its employees from the date of December 23, 1929, to January 3, 1930, the date when the group policy was written.  From the cases already cited, we have seen that such a contingent reserve is not an allowable deduction under the provisions of the statute.  On this issue, we hold for respondent.  The remaining issue concerns depreciation.  An examination of the revenue agent's report upon which respondent's deficiency notice is based*1265  shows that for the year 1929 petitioner claimed depreciation deductions aggregating $7,166.54 and these were reduced by the revenue agent to $6,120.93, resulting in a net disallowance of $1,045.61 of the depreciation claimed by petitioner.  This adjustment was made by increasing the depreciation on buildings $948 over the amount claimed by petitioner, and increasing the depreciation on autos and trucks $390.63 over the amount claimed by petitioner and by decreasing the amount claimed on machinery and fixtures $2,384.34.  Petitioner does not of course contest respondent's action in increasing the amount of depreciation allowance on buildings and on autos and trucks, but does contest his action in reducing depreciation on machinery and fixtures.  An examination of the revenue agent's report with respect to this decrease shows that it is based upon the determination that of the total value of machinery, equipment, fixtures, etc., carried on petitioner's books in 1929, $25,602.27 thereof had been fully exhausted by prior deductions for depreciation.  A complete detailed schedule was furnished petitioner by the revenue agent, showing how respondent's depreciation computation was made, *1266  and at the hearing petitioner offered no satisfactory evidence to combat the correctness of respondent's determination.  The determination made by respondent is presumably correct and the burden of proof to show the contrary is upon petitioner.  As *1116  said by the court in  (certiorari denied, ), "nor is there a burden on the Commissioner, when he has formally determined an amount of depreciation to prove it right as a condition to sustaining the assessment by showing the investigation he has pursued and the matters that have influenced his judgment, for having found the depreciation and having made an assessment based on it, the law presumes his action right and the assessment prima facie valid." Petitioner further contends that it is entitled to depreciation of 15 per cent annually on its machinery and plant equipment, which would mean a life of only 6 2/3 years.  We think the evidence would not sustain such a short life as that.  The rate allowed petitioner by respondent in the current year, as well as in prior years, was 10 per cent, and we think that rate is just and reasonable and should*1267  not be disturbed.  Reviewed by the Board.  Decision will be entered for the respondent.