*15 Decisions will be entered under Rule 50.
In 1937 Phillips H. Lord, Inc., all of whose voting stock was owned by Phillips H. Lord, paid to the trustees of a pension trust which it had created on December 23, 1937, $ 14,769 for the purpose of the acquisition by the pension trust of annuity contracts from the Equitable Life Assurance Society. The president and treasurer and highest paid employee was Phillips H. Lord, for whom the trustees purchased the same kind of annuity contract as was purchased for other employees. Held, that the corporation is entitled to deduct from its gross income the $ 14,769 paid to the trustees of the pension trust in 1937; held, further, that petitioner Phillips H. Lord is not liable to income tax for 1937 upon any part of the amount paid by the trustees for an annuity contract in his behalf.
*286 These proceedings, consolidated for hearing, involve deficiencies in taxes for the calendar year 1937 as follows:
| Docket | |||
| No. | Petitioner | Tax | Deficiency |
| 107745 | Phillips H. Lord | Income | $ 7,503.06 |
| Income | 3,097.98 | ||
| 107746 | Phillips H. Lord, Inc | Excess profits | 383.82 |
| Personal holding company surtax | 6,533.60 |
*16 These proceedings present the following questions:
(1) Was Phillips H. Lord, Inc., entitled to deduct from its gross income for 1937 $ 14,769 paid in that year to the trustees of an employees' pension trust?
(2) Should the above referred to $ 14,769 be included in the undistributed adjusted net income of Phillips H. Lord, Inc., for the purpose of computing its personal holding company surtax liability?
(3) Was Phillips H. Lord taxable to the extent of $ 9,750 in connection with the foregoing payment of $ 14,769?
FINDINGS OF FACT.
1. Phillips H. Lord has his place of business at 501 Madison Avenue, New York City. He filed his Federal income tax return for the calendar year 1937 on the cash receipts and disbursements basis with the collector of internal revenue for the third district of New York.
*287 2. Phillips H. Lord, Inc., was organized under the laws of the State of New York on March 17, 1936, and also has its place of business at 501 Madison Avenue, New York City. It maintains its books of account and files its Federal income tax returns on the accrual basis with the collector of internal revenue for the third district of New York. It was incorporated to carry on a business*17 theretofore carried on by Phillips H. Lord individually.
3. Phillips H. Lord has been the president and treasurer, as well as a director, of the corporation from the date of its organization to the present time. The other officers of the corporation, who also constituted its remaining directors in 1937, were John O. Ives, who was vice president and secretary, and Dorothy E. Levy, assistant secretary.
4. At all times mentioned herein Phillips H. Lord, Inc., had issued and outstanding 1,000 shares of voting common stock, all of which was owned by Phillips H. Lord.
5. On December 23, 1937, pursuant to resolutions adopted by its board of directors on the day preceding, the corporation created and established the Phillips H. Lord, Inc., pension trust for the benefit of all of its permanent employees, in consideration of faithful services theretofore rendered and in order to create in the future on their part a greater interest in and loyalty to the corporation.
In 1937 it had 19 permanent employees who were employed on a regular salary basis and 30 employees who were employed on a per diem basis as their services were needed.
6. The permanent employees for whose benefit the trust was *18 created were all of the 10 employees who had been employed for six months or more prior to the date of the creation of the trust; the other permanent employees and new permanent employees under the terms of the trust agreement were to participate in the trust benefits after being employed for a period of one year.
7. The trust agreement provided, among other things, as follows:
(a) The corporation agreed to pay annually to the trustees an amount equal to 15 percent of the total annual salaries, as defined in the plan, of all employees eligible for benefits; no payments were to be made by employees.
(b) The trustees were to use the funds so received by them to purchase from a legal reserve life insurance company an annual premium retirement annuity for the benefit of each eligible employee, to mature upon the employee reaching the age of 65 years and then to be assigned by the trustees absolutely to such employee.
(c) An employee who resigned or who was discharged from such employment "without cause" was entitled to the assignment of the annuity contract purchased for his benefit.
(d) An employee discharged "for cause" lost his interest under the plan and the funds in which he had an*19 interest were thereafter *288 to be held for the benefit of the pension trust generally. The secretary of the corporation, who was named pension manager in the agreement, was to be the arbiter to determine in each case if the discharge of the employee beneficiary was a discharge "for cause."
(e) The corporation reserved the right to modify or amend the pension trust agreement, provided that no amendment was to be retroactive or to affect any contribution theretofore made by the corporation or the disposition of any annuity contract theretofore purchased.
(f) Under no circumstances or conditions whatsoever should any contribution of the corporate petitioner "ever revert to or inure to the benefit of" the corporation, and no funds ever held by the trustee should "ever revert to or be returned" to it.
8. During the year 1937 the corporation paid to Lloyd G. Wilson and Donald O. Lincoln, as trustees under the pension trust agreement dated December 23, 1937, the sum of $ 14,769, which was used by the trustees to pay the annual premiums on the following contracts issued by the Equitable Life Assurance Society on the life of the following employees of the corporation:
| Amount | ||
| Employee | Policy No. | paid |
| Leonard L. Bass | 10,533,683 | $ 254 |
| Stella Blumenthal | 10,533,682 | 195 |
| May Bolhower | 10,533,689 | 215 |
| Althea D Hoffman | 10,533,686 | 195 |
| Harry H. Hoffman | 10,533,685 | 215 |
| John O. Ives | 10,533,681 | 3,060 |
| Edmund F. Kahn | 10,533,688 | $ 273 |
| Dorothy F. Levy | 10,533,687 | 351 |
| Phillips H. Lord | 10,533,684 | 9,750 |
| Robert M. Reuschle | 10,533,690 | 261 |
| Total | 14,769 |
*20 9. The contract so purchased by the trustees were retirement annuity contracts and had no life insurance feature.
10. The terms of the pension trust agreement have been meticulously observed since December 23, 1937, and six additional employees have become eligible for benefits under the plan and have received such benefits. The corporation has annually paid to the trustees under the agreement the percentage of annual salaries of the employee beneficiaries required to be paid. From time to time as employees have left the employ of the corporation the annuity contracts held by the trustees for their benefit have been transferred to them and ten such employees have received their contracts in this manner. No participant in the plan has ever been discharged "for cause." All of the contracts, except those delivered to persons who have left the employ of the company, have at all times been in the possession of the trustees under the plan. At the time the last payment (prior to the taking of testimony in these proceedings) was made pursuant to the trust agreement for the fiscal year ended August 31, 1941, there were 11 participants in the plan.
*289 11. The individual petitioner*21 occupies a prominent position in radio programs. In 1937 he originated, sold, wrote, cast, directed, acted in, and produced the radio programs "We, The People" and "Gangbusters." These programs were successful nationwide programs. In 1937 the gross income of the corporation, which was solely from these two radio programs, was $ 337,118.
12. Since at least as early as 1930 Phillips H. Lord has enjoyed substantial earnings from his efforts in the radio field. His earnings therefrom, as shown on his individual tax returns, were as follows:
| 1930 | $ 63,184.25 |
| 1931 | 119,688.23 |
| 1932 | 56,148.09 |
| 1936 | 74,838.14 |
The individual petitioner did not work full time during the years 1933 to 1935, inclusive, but during the portions of those years in which he worked he received gross payments of from $ 4,200 to $ 4,800 per week for the broadcast of his programs.
13. For the years 1937 to 1941, the individual petitioner was paid by Phillips H. Lord, Inc., a salary of $ 1,250 per week for his full time services and, in accordance with the terms of the pension trust agreement, the amount paid to the trustees by the corporate petitioner in the year 1937 included 15 percent of a sum equal to *22 the said salary of the individual petitioner, to wit, $ 9,750. In 1937 the corporation paid Phillips H. Lord $ 65,000 as salary and contributed $ 9,750 to the pension fund for his benefit. The sum of these two amounts, $ 74,750 was not in excess of reasonable compensation for services rendered by Phillips H. Lord in 1937.
14. John O. Ives, vice president and secretary of the corporate petitioner in 1937 and a participant in the pension fund, was the administrative officer of the corporate petitioner and did "everything in the office outside of directing and writing and producing these scripts," and negotiated the various contracts of the company with the radio services. The amounts paid by the corporation to him and other officers and employees in 1937, together with the 15 percent additional paid to the pension trust, were not in excess of reasonable compensation for services performed.
OPINION.
We consider the first question whether Phillips H. Lord, Inc., is entitled to deduct from its gross income of 1937 $ 14,769 paid to the Phillips H. Lord, Inc., pension trust. In the deficiency notice the respondent disallowed the deduction "for the reason that it is not deductible under*23 any provision of the Revenue Act of 1936, as *290 amended." In his brief he relies upon the following points in support of his claim that the amount is not a legal deduction:
(a) Phillips H. Lord was the petitioner corporation's President and Treasurer, as well as one of its three Directors.
(b) Phillips H. Lord owned all of the petitioner corporation's issued and outstanding voting stock.
(c) Phillips H. Lord was the principal beneficiary under the so-called pension trust.
(d) The so-called pension trust fund was not for the exclusive benefit of the employees.
The substance of his argument is that the pension trust:
* * * was not created for the exclusive benefit of the corporation's employees within the meaning of section 165. From the date of its incorporation in 1936, Phillips H. Lord has been the corporation's President and Treasurer as well as one of its three directors. In addition, Phillips H. Lord owned at all times all of the corporation's issued and outstanding voting stock.
In view of those facts and since $ 9,750 out of the said $ 14,769.00 was used to purchase contracts for the benefit of Phillips H. Lord, it becomes apparent that the trust was created primarily*24 for his benefit and that, therefore, it was not for the exclusive benefit of the corporation's employees as prescribed by section 165. * * *
It will be noted that the respondent does not now contend that the entire amount of $ 14,769 should be disallowed as a deduction from gross income, but only $ 9,750 thereof. The respondent's argument appears to be that, since Lord owned all of the stock of the corporation, it is not entitled to deduct from gross income the $ 9,750 which was used by the trustees of the pension trust to acquire an annuity contract for Lord.
There is no question in these proceedings but that Phillips H. Lord, Inc., is a separate taxable entity from Phillips H. Lord. The respondent does not contend otherwise. The corporation reported a net income for 1937 of $ 41,438.56. The respondent has simply added to this net income certain amounts in producing a net income adjusted of $ 57,746.56, upon which the tax deficiency of the corporation has been determined.
Phillips H. Lord was an employee of the corporation. He was its principal employee and received the largest amount of compensation. The total amount of compensation paid him in 1937 was $ 65,000. We have *25 found that the $ 9,750 paid by the corporation to the trustees of the pension trust for the acquisition by them of an annuity contract for Lord, when added to the $ 65,000 salary paid, was not in excess of reasonable compensation for services actually rendered by him to the corporation for 1937.
Under section 23 (a) of the Revenue Act of 1936 a taxpayer is entitled to deduct from gross income "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or *291 other compensation for personal services actually rendered." Section 23 (p) permits the deduction from gross income of an additional amount paid to a pension trust and provides that such amounts shall be "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." The provision of this subdivision for additional allowances is not apposite in this case. Section 165 of the Revenue Act of 1936 is as follows:
SEC. 165. EMPLOYEES' TRUSTS.
A trust created by an employer as a part of a stock bonus, *26 pension, or profit sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made 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, 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).
In support of his contention that the $ 9,750 here in question is not a legal deduction from the corporation's gross income, the respondent cites W. F. Parker, 38 B. T. A. 989, which involved the taxability to W. F. Parker of amounts paid by a corporation to trustees and used by them to purchase annuity and insurance contracts for his benefit. Parker was president of that corporation and*27 owned 97 shares out of a total of its 120 shares of stock issued and outstanding. The Board held in the circumstances of the case that the trust was created primarily for the benefit of Parker, the controlling stockholder of the corporation. He had the entire say as to who should come within the provisions of the pension plan. As manager of the pension trust and in the exercise of his absolute discretion, Parker awarded to 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 as he might live, with 120 such payments guaranteed. The Board held that this was not a pension trust within the meaning of section 165 of the Revenue Act of 1934. The facts in the instant proceedings are entirely different. Under the pension trust agreement Lord was to be compensated upon exactly the same basis as all of the other permanent employees. An amount equaling 15 percent of the annual salary of each employee was paid to the insurance company as a premium on the annuity contract.
In Raymond J. Moore, 45 B. T. A. 1073, the Board held that a pension trust*28 which provided for the benefits to be paid to officer stockholders of the corporation may be a true pension trust within the meaning of section 165 of the Revenue Act of 1936. In that case the *292 R. E. Funsten Co. adopted a pension trust for its officers and employees in 1937, under which payments were to be made annually by the company to the trustee for the payment of annuities to its officers and employees who had arrived at the age of 65 years. Ten of the officers and employees comprising the executive personnel of the company were selected for participation in the plan. The Board held that the total amount paid to the trustee of the pension trust, so far as it related to annuities to be paid to superannuated employees, was deductible from the gross income of the corporation, but not the amount which was paid to the trustee for the purpose of acquiring insurance for the employees. In the instant proceedings no part of the amount which went to purchase annuity contracts was for life insurance. We hold that the respondent erred in disallowing the deduction from the gross income of the corporation of any part of the $ 14,769 paid to the trustees of the pension trust during*29 the year 1937.
Since we hold that the entire amount of $ 14,769 is a legal deduction from the corporation's gross income under section 23 (a) of the Revenue Act of 1936, we likewise hold that the petitioner erred in including in undistributed net income of the corporation the $ 14,769 in question.
The third question is whether Phillips H. Lord, individually, is taxable upon $ 9,750 of the income of the corporation which was used by the trustees of the pension trust in acquiring an annuity contract for Phillips H. Lord. Did he receive taxable income in 1937 of the $ 9,750 in question? We hold that he did not. Lord was an employee of the corporation throughout the year 1937. The annuity contract that was purchased by the trustees of the pension trust for his benefit was not turned over to him in 1937. Under section 165 it is specifically provided that "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." Since no amount was distributed to Lord or made available to him in 1937, in addition to his salary of $ 65,000 per year, he *30 is not taxable in 1937 upon any part of the $ 9,750 in question.
Decisions will be entered under Rule 50.