Opinion
Docket Nos. 8765, 8766.
Promulgated December 27, 1945.
1. Certain sums paid into trust funds during the taxable years involved by two corporations of which petitioner was a stockholder and principal officer, held, not to have been made pursuant to a pension plan within the meaning of section 165 of the Internal Revenue Code and, on the facts, petitioner is taxable thereon under section 22 (a) of the code.
2. Respondent's allowance of depreciation at the rate of 2 percent on certain brick store buildings purchased second-hand by petitioner in the early 1920's is sustained.
L. W. Perrin, Esq., and L. C. Dodge, C. P. A., for the petitioners.
F. L. Van Haaften, Esq., for the respondent.
These consolidated proceedings have to do with income tax deficiencies as follows:
Year Amount Docket No. 8765 ......................... 1941 $11,784.86 Docket No. 8766 ......................... 1943 17,969.55 There are two issues. The first is whether the Commissioner erred in including in petitioners' gross income certain sums of money paid into trust funds for the benefit of petitioner David Watson Anderson by two manufacturing concerns of which he was an officer. Petitioners contend that the trusts were valid retirement trust funds for the benefit of David W. Anderson or his beneficiaries and that the payments made to the trusts in the taxable years are not taxable to petitioners because of the provisions of section 165 of the Internal Revenue Code relating to "Employees' Trusts," as amended by section 218 of the Revenue Act of 1939. In the alternative, it is contended that the moneys placed in the trust funds were beyond Anderson's control, were not constructively received by him during the years in question, and are therefore not taxable to the petitioners until actually received.The second issue is whether the Commissioner erred in allowing depreciation at the rate of only 2 percent on certain brick store buildings purchased second-hand by petitioner David Anderson several years prior to the taxable years in question. In the returns depreciation was taken at the rate of 3 percent, but petitioners now claim that 4 percent constitutes a proper allowance for depreciation.
FINDINGS OF FACT.
Petitioners are husband and wife, residing together in Spartanburg, South Carolina. In 1941 they filed a joint return with the collector for the district of South Carolina. In 1942 and 1943 David Watson Anderson (hereinafter referred to as petitioner) filed separate returns with the collector for the same district.
During the years in question petitioner was president and treasurer of Pacolet Manufacturing Co. (hereinafter referred to as Pacolet), a South Carolina corporation engaged in the manufacture of cotton goods. He was first associated with Pacolet in 1895 and became treasurer in 1933, succeeding V. M. Montgomery, who was, prior to 1933, president and treasurer. Montgomery remained president until his death in 1935, at which time petitioner also became president. Pacolet's capital stock consisted of 100,000 shares of common stock of a par value of $20 per share and 14,180 shares of preferred stock of a par value of $100 per share. Petitioner held from 200 to 400 shares of preferred and 1,000 shares of common during the period in controversy. Pacolet employed approximately 4,000 persons.
Since its organization in 1882 Pacolet has had but three treasurers, John H. Montgomery, Victor M. Montgomery, and petitioner. Until the date of his death John Montgomery received a salary of $12,000 a year. In 1933, V. M. Montgomery was drawing a salary of $25,000 a year. At that time, because of poor health, he resigned as treasurer, and his salary as president was reduced to $12,000. Pacolet has also had three secretaries, Goodlet, Lawson, and Madge. Goodlet retired in 1906, and the company voted him a pension of $50 a month for life. Lawson retired in January 1945, and the company voted him a pension of $300 a month for life.
Petitioner's salary from Pacolet in the years 1936 through 1941 was $15,000 a year. In 1941 he received an additional cash bonus of $5,000. His salary in 1942 was $20,000, and in 1943 and 1944 it was $22,500. In 1944 he received an additional cash bonus of $20,000, which was paid to him personally at his request after the Bureau of Internal Revenue had questioned the taxability of sums paid into a certain trust fund (hereinafter referred to) for the benefit of petitioner.
Until 1941 Pacolet operated on a fiscal year ending March 31. In that year it changed to a fiscal year ending November 30.
In May 1939 petitioner was elected vice president and treasurer of Monarch Mills (hereinafter referred to as Monarch), another South Carolina corporation engaged in the manufacture of cotton goods. His salary was $15,000 a year. He resigned as vice president and treasurer on February 10, 1942, and was elected president. His salary was then reduced to $2,400 or $2,500. William A. L. Sibley was elected treasurer to succeed him.
During the period in question Monarch had outstanding 30,000 shares of stock of $100 par value, of which petitioner held from 150 to 400 shares. Approximately 2,000 persons were employed by Monarch. The company operated on a fiscal year ending November 30.
In the case of both Pacolet and Monarch the principal executive officer was the treasurer, and no other executive officer formulated policies or directed the work of the corporation.
In the taxable years G. H. Milliken was a director and a large stockholder in both Pacolet and Monarch. Sometime prior to September 1941 petitioner was in New York conferring with Milliken and at that time commented that his predecessors in the office of treasurer had suffered financial reverses in their old age and that it had been embarrassing to the companies or to the directors to ask for their resignation. He then stated he wished some kind of arrangement could be made to set aside a certain amount for him so that the directors would feel no hesitancy in asking for his resignation under similar circumstances. Milliken thereupon called in his personal attorney and a tax expert to discuss the matter.
Thereafter, on November 13, 1941, the directors of Pacolet held a meeting at which petitioner, Milliken, and others were present. After the transaction of some business and the voting of a bonus of $2,500 to M. C. Stone, the vice president, and a bonus of $1,000 to W. B. Lawson, the secretary, the directors adopted the following resolution:
Resolved, that Pacolet Manufacturing Company, in consideration of the efficient services rendered the Company by Mr. David W. Anderson, President and Treasurer of the Company, during the eight months ending November 30, 1941, shall pay to the Citizens Southern National Bank of South Carolina, Spartanburg, S.C., the sum of Ten thousand ($10,000.00) dollars, which together with any additions thereto, whether made by Pacolet Manufacturing Company or others, and the income earned thereon and on such additions, shall be held by said Bank (with full discretion regarding investments) irrevocably in trust as a retirement fund for Mr. David W. Anderson. Said fund shall be paid out to him, until exhausted, at the rate of $5,000.00 per annum, payable semiannually, payments to commence on January first of the year subsequent to the date of his retirement, with provision that from and after his death all amounts then in said trust fund, shall, until exhausted, be paid out at the rate of $5000.00 per annum, payable semiannually as follows: To Maude Crawford Anderson, his wife, during her life, and after her death, to such of his now living children as shall then be living, in equal shares.
Be it further Resolved, that Marshall C. Stone, as Vice President of the Corporation, be, and he hereby is authorized, directed and empowered to execute on behalf of the Company the Trust Agreement to be entered into with the Citizens Southern National Bank of South Carolina, Spartanburg, S.C.
Petitioner did not vote on the resolution.
On November 22, 1941, a trust agreement was entered into between Pacolet, as "creator," and the Citizens Southern National Bank of South Carolina, as "Trustee," which reads in material part as follows:
1. The Creator has designated The Citizens Southern National Bank of South Carolina, Spartanburg, S.C. as Trustee under the terms of this agreement and any amendments and additions thereto, and does hereby agree to pay to said Trustee simultaneously with the execution of this agreement the sum of Ten Thousand ($10,000.00) Dollars, in Trust, for the following uses and purposes, to-wit:
The Trustee shall receive, hold, manage, convert, sell, assign, alter, invest, reinvest, and otherwise deal with the said sum of Ten Thousand ($10,000.00) Dollars so deposited, together with additions thereto, whether made by Pacolet Manufacturing Company or others, as it in its discretion shall deem to be for the best interest of the beneficiaries hereunder. The Trustee hereunder is authorized and empowered to participate in the liquidation, reorganization, consolidation or other financial readjustment of any corporation or business in which the trust estate is or shall be financially interested; to add all income to the corpus of this trust and to invest and reinvest said income in exactly the same manner as herein provided for the principal; to invest the trust funds in such properties as it shall deem advisable without being restricted to securities designated by law as legal investments for fiduciaries in South Carolina; to compromise, arbitrate, or otherwise adjust claims in favor of or against the trust estate; to execute such deeds, mortgages, contracts, bills of sale, notes, and other instruments in writing as the Trustee may deem requisite in the business-like administration of this trust; and to receive all rents, profits, and income of every nature due the trust estate. Any one dealing with the Trustee is not required to see to the application the Trustee makes of the funds or other properties it receives. The Trustee shall not be liable for depreciation in the value of properties held in trust or for errors of judgment, or for any act, or failure to act, not amounting to negligence, bad faith, or positive wrongdoing.
2. The Trustee shall administer this trust for the following uses and purposes:
After the payment of all taxes and expenses incident to the administration of said trust, the Trustee shall pay to David W. Anderson, of Spartanburg, South Carolina, until the funds in its hands hereunder have been exhausted, the sum of Five Thousand ($5,000.00) Dollars per year, payable semi-annually, payments to commence on January first of the year subsequent to the date of his retirement as an Executive Officer of Pacolet Manufacturing Company, with provision that from and after his death all amounts then in said trust fund shall, until exhausted, be paid out by the Trustee at the rate of Five Thousand ($5,000.00) Dollars per annum, payable semi-annually, as follows: To Maude Crawford Anderson, his wife, during her life, and after her death, to such of his now living children as shall then be living, in equal shares.
3. The fund deposited in this trust by Creator shall be held by said Trustee irrevocably in trust for the purposes herein stated.
At a directors' meeting on May 4, 1942, petitioner, Milliken, and others being present, a resolution was adopted providing for the payment of an additional $10,000 to the trustee to be held in the trust fund for the benefit of petitioner or his beneficiaries. Again, on July 15, 1942, the directors held a meeting and ordered the payment of a "bonus" of $10,000 into the trust fund. Bonuses of $2,500 to Stone and $2,000 to Lawson were also voted at that time. Finally, on July 29, 1943, the directors held a meeting and, among other things, voted "bonuses" of $2,000 to Lawson, $7,500 to Stone, and ordered that $20,000 "be paid to the irrevocable Pension Trust Agreement" for the benefit of petitioner. Petitioner, although present at all these meetings, did not vote upon the resolutions or orders concerning payments to the trust fund.
The sums referred to in the said resolutions and orders of the directors of Pacolet were duly paid into the trust fund for the benefit of petitioner.
On September 29, 1941, the directors of Monarch held a meeting at which petitioner, Milliken, and others were present. After a discussion of the operations of the company, the directors adopted the following resolution:
RESOLVED, that Monarch Mills in consideration of the efficient services rendered the Company by Mr. David W. Anderson, Treasurer of the Company, during the fiscal year ending September 30, 1941, shall pay to The Citizens Southern National Bank of South Carolina, Spartanburg, S.C. the sum of Ten Thousand ($10,000) Dollars, which together with any additions thereto, whether made by Monarch Mills or others, and the income earned thereon and on such additions, shall be held by said Bank (with full discretion regarding investments) irrevocably in trust as a retirement for Mr. David W. Anderson. Said fund shall be paid out to him, until exhausted, at the rate of $5,000 per annum, payable semi-annually, payments to commence on January first of the year subsequent to the date of his retirement, with provision that from and after his death all amounts then in said trust fund shall, until exhausted, be paid out at the rate of $5,000 per annum, payable semi-annually, as follows: To Maude Crawford Anderson, his wife, during her life, and after her death, to such of his now living children as shall then be living, in equal shares.
Thereafter, on October 11, 1941, Monarch, as "Creator," entered into a trust agreement with the Citizens Southern National Bank of South Carolina, as "Trustee," for the benefit of petitioner or his beneficiaries. The body of the trust agreement is identical with that of the trust agreement between Pacolet and the bank, set out hereinabove.
The directors of Monarch, at a meeting held on September 30, 1942, at which petitioner, Milliken, and others were present, voted, as "additional compensation for services rendered," $10,000 to Wm. A. L. Sibley, the treasurer, $1,000 to J. Roy Fant, the assistant treasurer, and $2,500 to petitioner, the president, the latter sum to be paid into the trust fund for petitioner.
Petitioner did not vote on either of the resolutions or orders concerning the creation of, and the payments to, the trust fund. The sums referred to were duly paid into the trust fund.
In 1942 Monarch discontinued paying money into the trust fund after petitioner resigned as treasurer and became president.
No changes or amendments have been made to either Monarch's or Pacolet's trust agreement for the benefit of petitioner. Petitioner has never withdrawn any sums deposited in either trust fund. Neither Monarch nor Pacolet has ever executed for the benefit of its other employees any documents or agreements similar to the trust instruments for the benefit of petitioner.
The amounts paid to each trust fund by Pacolet and Monarch were deducted on the respective income and excess profits tax returns of those companies, and thus far the Commissioner has not questioned their deductibility.
Respondent has added to petitioner's gross income for 1941 the sum of $10,000 paid by Pacolet into petitioner's trust fund and the sum of $10,000 paid by Monarch into petitioner's trust fund; to his gross income for 1942 the sum of $20,000 paid by Pacolet and $2,500 paid by Monarch into the respective trust funds; and to his gross income for 1943 the sum of $20,025 as unreported compensation from Pacolet, $20,000 of which was paid into the trust fund by Pacolet.
No explanation is offered as to why this sum exceeds by $25 the amount provided for in the resolution of Pacolet's board of directors adopted on July 29, 1943. In the pleadings petitioner alleges error on the part of respondent in adding the entire sum of $20,025 to income.
During the period in question petitioner owned two brick store buildings at Gainesville, Georgia, in one of which there were two stores. He purchased one of the buildings in 1921 or 1922 and the other in 1924 or 1925. Both buildings were old at the time petitioner purchased them, one 30 or more years old and the other several years old. Both buildings had brick walls and a tar and gravel roof. One had terrazzo floors and the other wooden floors. Since purchasing the buildings, petitioner has been taking depreciation at the rate of 3 percent. For the taxable years in question respondent has reduced the rate to 2 percent and restored the excessive depreciation to income.
OPINION.
Petitioner contends that the trusts to which Pacolet and Monarch made payments during the taxable years involved formed a part of a "pension * * * plan of an employer for the exclusive benefit of some or all of his employees" within the meaning of section 165 of the Internal Revenue Code, as amended by the Revenue Act of 1939. For this reason, he urges, the payments should not be taxable to him. Alternatively, he contends that the payments were not received by him as compensation in any form, that they were never available to him, that they were not subject to his "unfettered command," and that therefore he should not be taxed under the doctrine of constructive receipt.
SEC. 165. EMPLOYEES' TRUSTS.
(a) EXEMPTION FROM TAX. — A trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of some or all of his employees —
(1) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees 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,
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 interest specified in section 25 (a).
* * * * * * *
The Revenue Act of 1942, which also amended section 165, provided that in the case of a plan in effect on or before September 1, 1942, the amendments would not be applicable until the beginning of the first taxable year beginning after December 31, 1942. In this case the first taxable year of both Pacolet and Monarch beginning after December 31, 1942, was that beginning on December 1, 1943. All the controverted payments to the trust funds were made before that date.
We think petitioner's first contention is untenable. We are unable to find from the evidence that either of petitioner's employers ever formulated or adopted such a pension plan as is contemplated by the statute. The mere fact that the companies, on two or three widely separated occasions, voted small pensions to retiring officers at the dates of their respective retirements is not sufficient to show the existence of such a plan. During the period in question Pacolet had approximately 4,000 employees and Monarch had approximately 2,000 employees. Neither has ever made for the benefit of its other employees any arrangement similar to that for the benefit of petitioner. At the times the payments were made into the trust funds petitioner owned stock in both companies and was the principal executive officer of both.
Petitioner asserts that the statutory requirement that the plan be "for the exclusive benefit of some or all of his [an employer's] employees" is satisfied if one or more employees are covered. Further asserting that the trusts were irrevocable and that it was impossible for any part of the corpus or income to be devoted to purposes other than for his exclusive benefit, he contends that all the statutory elements have been complied with. But it is inconceivable, we think, that Congress could have intended any such arrangement as we have before us to qualify as tax exempt under section 165 of the statute.
Much the same argument as that advanced by petitioner has been answered adversely to him in Hubbell v. Commissioner, 150 F.2d 516, affirming 3 T.C. 626. There it was contended that employee trusts for the exclusive benefit of two principal executive officers of a corporation were within the protection of section 165 as it existed in 1941, because the word "some" meant "two or more"; but the argument was unsuccessful. In that case it was said that a pension plan, in order to qualify under section 165:
* * * must be bona fide for the exclusive benefit of employees in the provision of retirement benefits; and must not be merely a device to pay employees additional compensation with the tax on the same deferred to a later date, especially when the plan provides retirement benefits to only a few key executives or officers.
We conclude that section 165 of the code is of no aid to petitioner.
On the alternative contention, petitioner argues that he had nothing to do with the creation of the trusts, that the payments were not received by him as compensation in any form, and that the money was never available to him. We think the argument is without merit. The facts show that petitioner, in conversation with Milliken, a director and large stockholder of each company, made the initial suggestion which led to the trust arrangements. Although not voting on the particular orders and resolutions, petitioner was present at every meeting of the boards of directors at which any action with respect to the trusts was taken. Furthermore, it is clear that each of the payments made to the trusts was intended as additional compensation for petitioner. In some of the resolutions or orders of the directors the payments were characterized as "bonuses"; in others they were stated to be "in consideration of the efficient services rendered" by petitioner for a period of time falling within the particular taxable year; and in one instance the payment was expressly stated to be "additional compensation for services rendered." It is observed also that in 1944, after the Bureau of Internal Revenue questioned the taxability of the trust payments, petitioner requested that his bonus be paid to him in cash, and it was done, the amount of the cash bonus being the same as the amount which had been paid into the trust fund in 1942 and 1943.
In the Revenue Act of 1942 Congress extensively amended section 165 of the code to provide, in general, that in order for a plan to qualify thereunder a definite stated percentage of all the employees of an employer must be covered, and that the plan must not be discriminatory in favor of officers, shareholders, supervisors, or highly compensated employees. In section 165 (b) it was provided that in the case of an exempt trust the amount actually distributed or made available to the employee-beneficiary should be taxable to him, in the year in which so distributed or made available, as an annuity under section 22 (b) (2); but in section 165 (c) it was provided that in the case of a nonexempt trust the amount contributed by the employer should be included in the gross income of the employee for the taxable year in which the contribution was made if the employee's beneficial interest in the contribution was nonforfeitable.
The present statutory scheme of taxing the employee on the employer's contribution in the year made, when the trust is not exempt, is but in accord with the result reached in the Hubbell case, supra, which arose under the prior law. Furthermore, in that case the court said that the 1942 amendment presented "no apparent change in Congressional purpose." Cf. Renton K. Brodie, 1 T.C. 275, a case involving the year 1938, in which we held employees taxable under section 22 (a) on sums expended by their employer for the purchase of retirement annuity contracts for their benefit, even though the contracts were nonassignable and had no cash surrender value, and even though the employees had no election to receive the sums in cash.
Under the circumstances, we conclude that respondent did not err in taxing the disputed sums to petitioner under section 22 (a) of the code.
On the depreciation issue the evidence is meager. We have set out in our findings substantially all there is in the record relating thereto. Respondent's determination that an allowance of 2 percent constitutes a reasonable allowance for depreciation is attended with the presumption of correctness, which we think petitioner has failed to overcome. We therefore sustain respondent on this issue.
Decision will be entered for the respondent.