Kane Chevrolet Co.
Comm'r of Internal Revenue

Tax Court of the United States.Jun 8, 1959
32 T.C. 596 (U.S.T.C. 1959)
32 T.C. 596T.C.

Docket No. 57296.



Robert S. Judge, Esq., for the petitioner. Chester M. Howe, Esq., for the respondent.

Robert S. Judge, Esq., for the petitioner. Chester M. Howe, Esq., for the respondent.

Petitioner's termination of pension plan within first year of operation, held, on the facts, to have been due to a ‘business reason’ so as not to bar pension trust from qualifying under section 165(a), I.R.C. 1939, by reason of lack of ‘bona fides.’

Respondent determined deficiencies in petitioner's income tax of $965.06 and $3,238.51 for the years 1950 and 1951, respectively. The sole issue is whether petitioner is entitled to deduct a contribution made to an ‘employee's pension plan’ in 1951. The deficiency for 1950 arises out of the effect that the denial of this deduction has on the computation of an unused excess profits credit carryback.


The stipulated facts are found.

Petitioner, a corporation, has its principal office in Boston, Massachusetts, and filed its income tax returns for the years in issue with the collector of internal revenue for the district of Massachusetts.

On August 24, 1951, petitioner executed an agreement, termed a ‘Retirement Income Plan and Trust,‘ with the Old Colony Trust Company, hereafter called the trustee. The agreement was to be effective September 1, 1951. Petitioner contributed $6,349.60 to the trust in 1951 but claimed a deduction of $6,381.30 on its return for that year.

Participation in the plan was optional on the part of petitioner's employees. The only ones eligible for membership in the plan were those who had been in petitioner's continuous employ for at least 3 years and who had attained the age of 25 but who were not over 60. Normal retirement age was 65.

The benefits payable under the plan were 3/4 of 1 per cent of base pay times number of years of service prior to joining the plan, plus 1 per cent times number of years of future service. These benefits were funded by the purchase by the trustee of individual retirement annuities from an insurance company, and they vested at the rate of 5 per cent per annum for years of service, the per cent of vesting for years prior to joining the plan being limited to 75 per cent. The employees' nonforfeitable rights were limited to a portion of the cash value of the policies purchased. They were permitted to add a life insurance feature at their own expense, and in 1951 petitioner's employees paid $685.71 to cover the life insurance element.

In 1951, petitioner employed 41 persons, one of whom had 5 years employment with petitioner, 9 of whom had 4 years, one 3 years, and 30 less than 3 years. The 11 employees who immediately qualified became participants in the plan in 1951.

The agreement permitted petitioner to terminate the plan at its will. Petitioner terminated it on August 12, 1952. Several of petitioner's employees were not in favor of the plan, preferring additional remuneration instead.

Petitioner's president and principal shareholder, William J. Kane, did not participate in the plan, and neither he nor petitioner received any amount upon its termination.

The total contribution made by petitioner and its employees was $7,025.31. It was distributed as follows when the plan was terminated: The insurance company retained $3,788.72 and distributed $957.16 to the trustee, which represented the cash surrender value of contracts purchased for the benefit of 3 employees who left petitioner's employ prior to the termination of the plan; the insurance company distributed $2,279.43 to the 8 remaining participating employees, and the trustee distributed $239.29 of the $597.16 turned over to it to the 3 employees who had left petitioner's employment and $717.87, plus $10 which it had on hand, to the 8 remaining participating employees. One of the employees elected to retain his annuity and left his distribution with the insurance company for that purpose.

Of the 11 employees who originally participated in the plan, 5 were supervisory personnel. Upon the termination of the plan, the received benefits equal to 6.56 per cent of their compensation, or a total of 53 per cent of the fund distributed. The remaining 6 nonsupervisory employees received benefits equal to 6.93 per cent of their compensation, or a total of 47 per cent of the fund distributed.

Petitioner sought to obtain respondent's approval of the application of section 165(a), I.R.C. 1939, to the trust. Such approval has never been obtained. In an attachment to his deficiency notice, respondent stated that ‘the trust created under the plan does not qualify as an exempt trust under the provisions of Sec. 165(a) * * * due to its termination for a cause other than business necessity after being in operation for less than one year.’

For sometime prior to 1951 petitioner had been concerned about losing its employees. The pension plan was adopted in an effort to satisfy the employees and thereby to reduce the employee turnover. In spite of the adoption of the plan, and within 9 months thereafter, 3 additional employees resigned and several other expressed dissatisfaction with the plan and communicated to petitioner's officers that they would prefer elimination of the plan in favor of increased compensation. Because the plan was not accomplishing its purpose of satisfying the employees and reducing resignations, petitioner's officers decided to and did abandon it.

The termination of the plan was due to business necessity. From its inception, petitioner's plan was a bona fide program for the exclusive benefit of employees in general.


OPPER, Judge:

For present purposes we need not quarrel with the main thrust of respondent's regulations that

(t)he term ‘plan’ implies a permanent as distinguished from a temporary program. While the employer may reserve the right to * * * terminate the plan, and to discontinue contributions thereunder, if the plan is abandoned for any cause other than business necessity within a few years after it has taken effect, this will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. * * * (Regs. 111, sec. 29.165-1(a).)

And indeed it is not clear that petitioner does so either.

The true question, at least before we reach the issue of the invalidity of the regulation, see McClintock-Trunkey Co. v. Commissioner, (C.A. 9) 217 F.2d 329, reversing 19 T.C. 297, is whether petitioner's discontinuance of its plan within a year was as a matter of fact due to ‘business necessity.’ This is the only ground upon which respondent attacks the plan, and if petitioner sustains its burden of proof in this respect and thus demonstrates the bona fides of the arrangement, see Blume Knitwear, Inc., 9 T.C. 1179, no other question will remain.

Respondent has himself thrown light on his interpretation of ‘business necessity’ as being synonymous with ‘the existence of a valid reason for the termination.’ Mim. 61.36, 1947-1 C.B. 58. See also Rev. Rul. 57-163, 1957-1 C.B. 128, 133. The evidence which is the basis for our factual and ultimate findings in this respect leaves little doubt that dissatisfaction with the plan existed among the very employees for whose benefit and goodwill the program was undertaken. Lack of achievement of its objectives seems to us an entirely reasonable demonstration of ‘the existence of a valid reason for the termination.’ Our ultimate finding, accordingly, disposes of this issue in petitioner's favor. To reconcile an unexplained conflict in amounts,

Our ultimate finding to this effect, while not directly stated in the record, is an inference of fact drawn from the presentation of the argument of both parties and the evidentiary facts appearing in the record.

Decision will be entered under Rule 50.