1951 U.S. Tax Ct. LEXIS 127">*127 Decision will be entered under Rule 50.
1. A trust, forming part of a pension plan, was created by petitioner in 1933, within the meaning of section 165 (a), I. R. C., and the amendments made thereto by the Revenue Act of 1942.
2. The amount of deductions to which petitioner is entitled on account of its contributions to such trust pursuant to section 23 (p), I. R. C., as amended by the Revenue Act of 1942, determined for 1942, 1943, and 1944.
3. The amount of deductions to which petitioner is annually entitled for the years 1943 and 1944 as "normal cost" of the plan for those respective years under section 23 (p) (1) (A) (iii) is not to be reduced by any surplus resulting from the overfunding of liabilities under the plan in years prior to 1942.
1951 U.S. Tax Ct. LEXIS 127">*129 17 T.C. 27">*28 This proceeding involves deficiencies in Federal income taxes as follows:
| Year | Amount |
| 1942 | $ 104,644.68 |
| 1943 | 166,895.22 |
| 1944 | 42,817.05 |
By amended answer the respondent asks an increased deficiency for the year 1944 in an amount which will result from the reduction from $ 136,222.43 to $ 76,283 of the amount heretofore allowed as a deduction under section 23 (p) (1) of the Internal Revenue Code. The amount of the requested increased deficiency is not presently determinable, since the amount of petitioner's deduction for depletion depends upon the decision with respect to other issues involved.
The issues are:
1. Whether petitioner is entitled to deductions for the years 1942, 1943, and 1944 in the amounts of $ 299,572.44, $ 262,074.29, and $ 102,798.72, respectively, on account of payments to or deposits with the Equitable Life Assurance Society of the United States in the years 1933 to 1937, inclusive, with respect to services of petitioner's employees rendered prior to 1933, by apportioning such payments in equal parts over a period of 10 consecutive years beginning with the years in which payments or deposits were made, pursuant to section 23 (q) of the Revenue1951 U.S. Tax Ct. LEXIS 127">*130 Acts of 1932 and 1934 and section 23 (p) of the Revenue Act of 1936 and section 23 (p) (2) of the Internal Revenue Code.
2. Whether petitioner is entitled to deductions for the years 1943 and 1944 in the amounts of $ 144,865.44 and $ 146,478.99, respectively, or any lesser amounts, representing payments made by it to Equitable on account of the normal costs of the Equitable plan for those years, arising from services rendered by petitioner's employees subsequent to 1932.
3. Whether petitioner is entitled to additional deductions for depletion for the years 1942, 1943, and 1944, it being stipulated that the 17 T.C. 27">*29 amount of depletion deductions depends upon the decision as to the other issues and may be determined under Rule 50.
The case was submitted upon a partial stipulation of facts, and evidence. The facts as stipulated are so found.
FINDINGS OF FACT.
Petitioner is a Pennsylvania corporation having its principal office at Bradford, Pennsylvania. Its returns for the taxable years involved were filed with the collector of internal revenue for the twenty-third district of Pennsylvania. Petitioner kept its books and filed its tax returns on a calendar year basis and on an accrual1951 U.S. Tax Ct. LEXIS 127">*131 method of accounting.
For many years prior to 1933 petitioner maintained a plan for annuities without contribution to its cost by the employees, which provided life annuities for a large number of its employees. The cost of the plan steadily rose and it became evident to petitioner that it would be unable to meet the still larger outlays which a continuation of the plan would require.
At a meeting of petitioner's board of directors on January 3, 1933, the directors recommended to the stockholders a modification of the plan as set forth in a resolution adopted at that meeting.
A stockholders' meeting was held on January 17, 1933, approving the recommendations of the directors and authorizing and empowering the officers and directors to enter into a suitable contract with such responsible insurance company or trustee as they might select from time to time to carry into effect the proposed modifications or new plan for annuities substantially as outlined in their resolution of January 3, 1933.
Acting upon the authority of the stockholders and board of directors of petitioner, the plan existing prior to 1933 was terminated.
On March 1, 1933, petitioner issued and distributed among its1951 U.S. Tax Ct. LEXIS 127">*132 employees a booklet entitled "Contributory Plan for Annuities for the Employees of South Penn Oil Company." This plan for annuities (hereinafter referred to as the "plan") was effective January 1, 1933.
The principal features of the plan, as set forth in the letter of introduction included in the booklet, were as follows:
1. All employees in active service on December 31, 1932, who have completed one year of service and who are under age 64 1/2 if males or 60 if females and who were under age 45 when hired if after November 25, 1918, become Members of the Contributory Plan for Annuities. The Company will provide at the normal age of retirement for Members in the service at that time a monthly annuity equal to 1 1/2 per cent of the regular monthly pay of December, 1932, for each year of service prior thereto. The total cost of providing these past service annuities will be borne by the Company.
2. Employees who become Members of the Contributory Plan as of January 1, 1933, may at their own option become contributing Members. All employees with less than one year of service on December 31, 1932, and all employees 17 T.C. 27">*30 hired after January 1, 1933, must upon the completion of one1951 U.S. Tax Ct. LEXIS 127">*133 year's service become contributing Members. Only contributing Members may receive annuities in respect of service after January 1, 1933.
3. Contributing Members' payments will be accumulated at certain guaranteed rates of interest and will be applied at retirement to the purchase of an annuity of the kind selected by the employee.
4. The Company will provide, at the normal age of retirement, an annuity having exactly the same value as the annuity provided by the employee himself.
5. Although not stated in the Plan, employee contributions have been fixed so that the accumulations at the normal age of retirement, when doubled by the Company adding an equal amount, will purchase a life annuity equal on the average for all employees to 1 1/2 per cent of the average pay received while a contributor, for each year of service. Individual annuities, even on the life basis, will not have this exact relationship to pay. The assessments have been graduated by age at entry in order that the accumulations of employees entering the Plan at different ages would buy about the same amount of annuity relative to their pay and service. Compound interest is a major factor in accumulating funds and1951 U.S. Tax Ct. LEXIS 127">*134 the older the Member is when he joins the Plan, the shorter the period which compound interest works for him.
6. Members will normally retire on the first of the month after reaching their 65th birthday if men, or their 60th birthday if women. At the discretion of the Company, male Members may be retired as early as age 55 and female Members as early as age 50, with annuities mathematically adjusted.
7. Retiring Members may elect other forms of annuities, purchasable with the same amounts, providing for continuance of the annuity in whole or part to a surviving wife or husband. Contributing Members must specify before retirement the form of annuity toward the purchase of which their own contributions will be applied. Any contributing Member who so desires may elect an annuity form which will insure that the unpaid balance of his own accumulations applied to the purchase of the annuity be paid out to some beneficiary, or to his estate, should he die before the annuity payments received by him equal the full amount of his accumulations.
8. All employee contributions, and all the funds provided under this Contributory Plan by the Company, which for many years will greatly exceed the1951 U.S. Tax Ct. LEXIS 127">*135 total of the employee deposits, will be paid over to The Equitable Life Assurance Society of the United States, subject to a right of the Directors to substitute another insurance company or to appoint trustees in place of an insurance company. The Society will guaranty all annuities purchased from it under this Plan.
9. Any contributing Member who leaves the service or dies prior to retirement will have returned to him or his beneficiary by The Company all the money he has paid into the Plan, with interest credited monthly and compounded annually at the rate, for the next ten years at least, of 3 1/2 per cent per annum.
Section V (a) of the plan further provides as follows:
The Company will provide, at Normal Retirement Date, for each Member then surviving in the service who had been actively in service on December 31, 1932, a monthly Past Service Life Annuity equal to one and one-half per cent of his regular salary or wages for the month of December, 1932, multiplied by the number of years of continuous service prior to January, 1933. The funds estimated to be necessary to provide these annuities at Normal Retirement Date will be paid to the Insurance Company by the Company 1951 U.S. Tax Ct. LEXIS 127">*136 either in one lump sum or in instalments over a period of years.
* * * *
17 T.C. 27">*31 Section XII of the plan further provides as follows:
* * * Moreover, in event of discontinuance of this Plan, the Company will arrange with the Insurance Company or trustee to provide for each Member then in the Plan a Paid-up Deferred Life Annuity contract with income payments to commence at Normal Retirement Date of an amount to be determined by some just and fair formula for distributing all funds, not already applied to purchase annuities, arising from the money paid to the Insurance Company or trustee; PROVIDED, however, that no Member will receive Paid-up Deferred Life Annuities to exceed the sum of (a) the Past Service Regular Annuity and (b) two times the Paid-up Deferred Life Annuity purchasable by the Member's accumulated payments to date of such discontinuance.
* * * *
Pursuant to the plan, petitioner on December 27, 1933, entered into a contract with the Equitable Life Assurance Society of the United States (hereinafter referred to as "Equitable"). This contract contains the following introductory and general provisions:
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
A MUTUAL1951 U.S. Tax Ct. LEXIS 127">*137 COMPANY
ORGANIZED JULY 26, 1859
(herein called the Equitable)
HEREBY AGREES TO RECEIVE PREMIUM PAYMENTS IN ACCORDANCE WITH THE TERMS OF THIS CONTRACT
from the
SOUTH PENN OIL COMPANY
(herein called the Employer)
and to pay Annuities Purchased by Application of such Premium
Payments and Interest Thereon in Accordance with the following
GROUP ANNUITY PLAN
This contract is issued in consideration of the payment by the Employer to the Equitable as of the Register date hereof of Fifty Thousand and 00/100 Dollars, and the payment monthly thereafter of the premium payments described in the provision hereof entitled "Premium Payments," the amount so payable for each month being hereinafter referred to as the "aggregate monthly premium."
THE PROVISIONS of the subsequent pages hereof form a part of this contract as fully as if recited at length over the signatures hereto affixed. This contract is executed at the Home Office of the Equitable in New York on its date of issue, the 27th day of December, 1933 .
* * * *
GENERAL PROVISIONS
MANNER OF PAYMENT OF ANNUITIES:
* * * *
17 T.C. 27">*32 Supplemental Certificate: Upon the date for commencement1951 U.S. Tax Ct. LEXIS 127">*138 of Annuity payments to the Employee, the Equitable will issue to the Employee a Supplemental Certificate or Certificates providing for the payment to him of the Annuity or Annuities to which he is entitled hereunder.
* * * *
PAYMENT OF PREMIUMS: Each aggregate monthly premium under this contract shall be payable by the Employer at the Home Office of the Equitable on or before the day upon which due.
GRACE: A grace of thirty-one days, subject to an interest charge at the rate of 6% per annum, will be granted for the payment of each aggregate monthly premium after the first. Except as herein otherwise expressly provided, the payment of the aggregate monthly premium for any month shall not maintain this contract in force beyond the date when the aggregate monthly premium for the next succeeding month becomes due.
BASIS OF RESERVE: The RESERVE for which funds are to be held on the Annuities under this contract shall be at least that computed upon the Combined Annuity Mortality Table using an interest rate of 4% .
CONTRACT: This contract together with the Employer's application therefor, copy of which is securely attached hereto, shall constitute the entire1951 U.S. Tax Ct. LEXIS 127">*139 contract between the parties. All statements made by the Employer, shall, in the absence of fraud, be deemed representations and not warranties, and no statement shall avoid this contract or be used in defense of a claim hereunder unless contained in a written application.
CONTRACT YEARS: The first contract year hereunder shall begin on the Register date stated on the back hereof and the second and subsequent contract years shall begin on the respective anniversaries of the Register date.
* * * *
PARTICIPATION: Commencing at the end of the third contract year this contract, prior to termination, shall participate annually in the surplus of the Equitable as determined and apportioned by it. Any surplus apportioned by the Equitable to this contract shall be payable to the Employer in cash, or, upon written notice to the Equitable by the Employer, may be applied toward the payment of the aggregate monthly premium for any month under this Group Annuity contract provided the balance of such premium is duly paid.
NOTE: The terms of this contract do not warrant the expectation that the surplus to be apportioned hereunder to the Employer will be great.
* * * *
The contract refers to three1951 U.S. Tax Ct. LEXIS 127">*140 classes of membership in the plan:
CLASS A -- Employees who retired prior to 1933.
CLASS B -- Employees who elected to become contributing members of the plan.
CLASS C -- Employees entitled to annuities in recognition of services rendered prior to 1933 (hereinafter referred to as "past service annuities") who did not elect to become contributing members of the plan.
The contract contains the following provisions as to "PREMIUM PAYMENTS":
II. CLASS II: The Employer may make premium payments, herein called "Class II premium payments," arising from contributions represented by the Employer as having been received by it from Class B Members at the rate of a 17 T.C. 27">*33 percentage of monthly earnings (as determined by the Employer) set forth in Column (2) below corresponding to such Employee's age (nearest birthday) at entry into the Plan.
It is understood and agreed that the amount of the Employer's Class II premium payments made on any monthly premium due date shall equal the total amount of contributions received by it from Class B Members during the calendar month immediately preceding such date. It is further understood and agreed that the Equitable shall not be responsible in any1951 U.S. Tax Ct. LEXIS 127">*141 way for the Employer's failure to make Class II premium payments in accordance with the foregoing understanding.
[Withholding Table]
III. CLASS III: The Employer may on monthly premium due dates make monthly and/or single sum premium payments, arising from the Employer's contributions toward the cost of Annuities to be purchased hereunder as credits for service rendered both prior to and after the Register date hereof by Employees included in the Plan, such premium payments to be of an amount to be determined upon the basis of estimates to be made and furnished by the Equitable to the Employer. Such premium payments are herein called "Class III premium payments." The Equitable shall not be required to make the estimates referred to in this paragraph more frequently than at intervals of three years.IV. PREMIUM FUND (A): Premium Fund (A) shall consist of all Class II premium payments made by the Employer to the Equitable, together with any interest transferred thereto in accordance with the provision entitled "Interest Transfers to Premium Fund (A)", except that any portion of such premium payments and interest after being applied to the purchase of Annuities under this contract or1951 U.S. Tax Ct. LEXIS 127">*142 after being allowed to the Employer in accordance with the provision entitled "Benefit upon Employees' Separation from Service Prior to Retirement," shall not thereafter constitute a part of the said Premium Fund.
V. PREMIUM FUND (B): Premium Fund (B) shall consist of all Class III premium payments made by the Employer to the Equitable and of any allowances to the Employer under the provision hereof entitled "Benefit upon Employees' Separation from Service Prior to Retirement" which are treated in accordance with Sub-Paragraph (c) of the third paragraph of provision, together with any interest that may be credited to such Fund in accordance with the provision entitled "Interest" hereinafter set forth, except that any portion of such premium payments, allowances and interest after being applied to the purchase of Annuities under this contract or after being transferred to Premium Fund (A) in the manner set forth in the provision hereof entitled "Interest Transfers to Premium Fund (A)" shall not thereafter constitute a part of such Premium Fund.VI. APPLICATION OF PREMIUM FUNDS: Premium Fund (A) -- Immediately prior to the attainment by an Employee while included in Class B Membership1951 U.S. Tax Ct. LEXIS 127">*143 of the Normal Retirement Age or any earlier duly elected Special Retirement Age, the Employer is to file written notice at the Home Office of the Equitable of the amount of the total Class II premium payments made by the Employer arising from contributions received by it from such Employee, in accordance with the records maintained by the Employer, accumulated to such Retirement Age at the interest rate or rates on the basis of which and in the manner by which interest was transferred to Premium Fund (A) from Premium Fund (B) during the period of such Employee's inclusion in this Plan. Provided such notice is duly received, together with any other facts which the Equitable shall deem pertinent for the purposes of this provision, upon the attainment by 17 T.C. 27">*34 such an Employee of the appropriate Retirement Age, while included in the Plan, a part of Premium Fund (A) (if then sufficient for the purpose under the terms of this contract) equal to the accumulated amount of Class II premium payments and interest with respect to such Employee as set forth in the Employer's notice to the Equitable shall, subject to the subsequent provisions hereof, be applied by the Equitable to the purchase1951 U.S. Tax Ct. LEXIS 127">*144 (on the basis of Tables IV, VII, VIII and IX on Pages 2 (v), 2 (aa) and 2 (bb) hereof) of an Annuity with respect to such Employee which shall be of the kind elected by the Employee in accordance with the provision entitled "Optional Annuity Forms" on Pages 2 (h) and 2 (i) hereof provided that the Equitable shall have the right to require proof of age of the Employee before making such application.
It is agreed between the Equitable and the Employer that the Employer shall file such notice with respect to all lives embraced in Class B Membership in this Plan on or prior to their attainment of the Normal Retirement Age or any earlier duly elected Special Retirement Age and that the Equitable shall apply the part of Premium Fund (A) (if then sufficient for that purpose under the terms of this contract) in accordance with this provision toward the purchase of the Annuities covering the retirement benefits with respect to all Employees embraced in such membership as to whom such notice is filed by the Employer, upon attainment of the respective retirement ages.
Premium Fund (B) -- Subject to the subsequent provisions hereof and while this contract is in force, upon attainment by an Employee1951 U.S. Tax Ct. LEXIS 127">*145 while included in Class B or Class C Membership in the Plan of the Normal Retirement Age or any earlier duly elected Special Retirement Age, such part of Premium Fund (B) as may be necessary (if then sufficient for that purpose under the terms of this contract) shall be applied by the Equitable to the purchase (on the basis of Table III on page 2 (u) hereof) of an Annuity with respect to such Employee which shall be of the kind and shall provide for monthly payments of an amount to be determined in accordance with the respective provisions entitled "Normal Retirement Benefit" and "Amount of Annuity Payments" on Page 2 (g) hereof. The Equitable shall have the right to require proof of age of the Employee before applying Premium Fund (B) as above set forth.
It is agreed between the Employer and the Equitable that the Employer shall report all lives embraced in Class B or Class C Membership in this Plan on or prior to their attainment of the Normal Retirement Age or any earlier duly elected Special Retirement Age and that the Equitable shall apply the appropriate part of Premium Fund (B) (if then sufficient for that purpose under the terms of this contract) in accordance with this provision1951 U.S. Tax Ct. LEXIS 127">*146 toward the purchase of the Annuities covering the retirement benefits with respect to all Employees embraced in either of such memberships who are so reported by the Employer upon attainment of the respective retirement ages.
VII. SUFFICIENCY OF PREMIUM FUNDS: Premium Fund (A) -- It is expressly understood and agreed that the Equitable makes no representation and assumes no liability as to the sufficiency of Premium Fund (A) to purchase the Annuities described hereunder and/or to effect the allowances to the Employer as provided hereinafter under the provision entitled "Benefit upon Employees' Separation from Service Prior to Retirement;" that no Annuity shall be purchased at any time with respect to any Employee unless Premium Fund (A) (less the amount of any sums then to be allowed to the Employer under the provision entitled "Benefit upon Employees' Separation from Service Prior to Retirement") shall then be sufficient to purchase the appropriate Annuity with respect to each Employee then attaining retirement age as to whom notice is filed with the Equitable in accordance with this provision; and that the Equitable17 T.C. 27">*35 shall have fulfilled all its obligations hereunder in 1951 U.S. Tax Ct. LEXIS 127">*147 respect of the application of said Premium Fund in applying said Premium Fund in accordance with the record of Employees and with the written notices of the amounts of the accumulated Class II premium payments made with respect to them furnished it by the Employer and in following the instructions of the Employer as to the order in which said Premium Fund is to be applied in accordance with the appropriate provision or provisions of the contract in all cases where the terms of the contract would require simultaneous application of such Premium Fund with respect to two or more Employees; it being the intention of the parties to this contract that no Employee shall have any right against the Equitable with respect to any action or omission on its part hereunder.
Premium Fund (B) -- It is expressly understood and agreed that the Equitable makes no representation and assumes no liability as to the sufficiency of Premium Fund (B) to purchase the Annuities described in this contract with respect to Class B and Class C Members; that no Annuity shall be purchased with respect to any such Employee unless said Premium Fund shall then be sufficient to purchase with respect to him an Annuity of1951 U.S. Tax Ct. LEXIS 127">*148 the kind and providing for monthly payments of an amount determined in accordance with the said provision entitled "Normal Retirement Benefit;" and that the Equitable shall have fulfilled all its obligations hereunder in respect of the application of said Premium Fund in applying said Premium Fund in accordance with the record of Employees furnished it by the Employer and in following the instructions of the Employer as to the order in which said Premium Fund is to be applied in accordance with the appropriate provision or provisions of this contract in all cases where the terms of the contract would require simultaneous application of said Premium Fund with respect to two or more Employees; it being the intention of the parties to this contract that no Employee shall have any right against the Equitable with respect to any action or omission on its part hereunder.
Notwithstanding any of the foregoing reservations, the Equitable pledges that at all times while this contract remains in force the combined Premium Funds (A) and (B) shall be the total of the Class II and Class III premium payments paid to it by the Employer under this contract plus the interest credited to Premium Fund1951 U.S. Tax Ct. LEXIS 127">*149 (B) as hereinafter specified, less the amount of any sums paid to the Employer in cash or applied to the payment of premiums under the provision entitled "Benefit upon Employee's Separation from Service Prior to Retirement" and less any amounts applied to the purchase of Annuities under this contract for any Class B or Class C Members.
The contract contains the following provisions as to "INTEREST CREDITS TO PREMIUM FUND (B)":
INTEREST CREDITS: On each anniversary of the Register date of this contract, the Equitable shall credit interest to Premium Fund (B), at the annual rate determined on any such contract anniversary in accordance with the paragraph set forth below entitled "Interest Rate," on the amount of the combined Premium Funds determined as of the last preceding anniversary with appropriate allowance or deduction for increases or decreases in such combined Funds since said last anniversary. (For interest to Premium Fund (A) see next following provision entitled "Interest Transfers to Premium Fund (A)".)
INTEREST RATE: Subject to the paragraph below entitled "Minimum Interest Rate," the annual rate per centum at which interest on the combined Premium Funds is to be credited1951 U.S. Tax Ct. LEXIS 127">*150 to Premium Fund (B) on any contract anniversary in accordance with the immediately foregoing paragraph shall be that interest, taken to two places of decimals, which, when applied to the combined Premium 17 T.C. 27">*36 Funds in the manner described in said paragraph, will reproduce as nearly as may be an amount of interest determined as follows, such amount to be known as the "working amount of interest."
The "working amount of interest" shall be an amount of interest determined by the application to the combined Premium Funds in the manner described in the paragraph above entitled "Interest Credits" of the "modified Gain and Loss Exhibit interest rate," defined below, less the sum of $ 1,000, and less any state and/or federal taxes payable with respect to the contract year immediately preceding the said contract anniversary on the Premium Funds and/or on Annuities that have been purchased therewith. The "modified Gain and Loss Exhibit interest rate" shall be the net interest rate per centum earned by the Equitable during the calendar year next preceding such contract anniversary, determined as hereinafter stated, less a rate of .25%, subject, however, to the paragraph set forth below1951 U.S. Tax Ct. LEXIS 127">*151 entitled "Revision of Interest Rate." The net interest rate earned by the Equitable during any calendar year shall be determined to two places of decimals as the ratio of the net interest (including rents) earned on its investments for such year, corresponding to Item 12 of Page 8 of the Gain and Loss Exhibit of the Annual Statement in the form used for the year 1932, to its mean ledger assets for such year less one-half of such interest.
MINIMUM INTEREST RATE: Subject to the paragraph below entitled "Revision of Interest Rate" the annual rate per centum referred to above in the paragraph entitled "Interest Rate" at which interest on the combined Premium Funds is to be credited to Premium Fund (B) shall be not less than 3 1/2%.
REVISION OF INTEREST RATE: The Equitable reserves the right, by giving at least sixty days written notice to the Employer, to change from time to time at the commencement of any contract year beginning with the eleventh contract year the rate of the deduction (.25%) used in determining the "modified Gain and Loss Exhibit interest rate" referred to in the paragraph above entitled "Interest Rate" provided, however, that subsequent changes, if made, shall not1951 U.S. Tax Ct. LEXIS 127">*152 be effected at more frequent intervals than five years and that the change in such deduction at any time shall not exceed .05%.
The Equitable also reserves the right, by giving at least sixty days written notice to the Employer, to change from time to time at the commencement of any contract year beginning with the twenty-sixth contract year the minimum rate at which interest is to be credited annually in accordance with the paragraph above entitled "Minimum Interest Rate" provided, however, that subsequent changes, if made, shall not be effected at more frequent intervals than five years and that the change in the annual rate per centum at any time shall not exceed .25.
The contract contains the following provisions as to "INTEREST TRANSFERS TO PREMIUM FUND (A)":
INTEREST TRANSFERS: On the first day of each calendar month after the Register date of this contract, the Equitable shall transfer from Premium Fund (B) to Premium Fund (A), subject to the subsequent provisions hereof, an amount equal to interest for one month, at a monthly rate corresponding to the annual rate to be specified by the Employer as hereinafter provided, on the amount of said Premium Fund (A) determined as of1951 U.S. Tax Ct. LEXIS 127">*153 the last preceding such first day of the month with appropriate adjustment for any changes during the month. It is expressly understood and agreed that the Equitable makes no representation and assumes no liability as to the sufficiency of Premium Fund (B) to cover the interest transfers herein referred to and that no such interest transfer will be made on any first day of a calendar month unless Premium Fund (B) is then sufficient for that purpose.
17 T.C. 27">*63 INTEREST RATE: It is understood and agreed between the Equitable and the Employer that the interest rate on the basis of which the interest transfers in the foregoing paragraph are to be computed shall be 4 % per annum, compounded annually, for the first ten contract years and that the Employer may change such rate thereafter by written notice filed at the Home Office of the Equitable provided that such changes may not be effected at more frequent intervals than five years and that the change in the annual rate per centum at any one time may not exceed .25.
The balances in Premium Funds (A) and (B) appear on the balance sheets of Equitable as reserve liabilities.
The money paid as premiums by petitioner to Equitable is received1951 U.S. Tax Ct. LEXIS 127">*154 as any other money received by Equitable, deposited in bank or banks, and not segregated in any way from funds received from other customers of Equitable.
The contract contains the following provisions as to "TERMINATION OF CONTRACT":
I. MANNER OF TERMINATION OF CONTRACT: Subject to the terms of Section IV of this provision, this contract shall terminate upon the happening of any one of the events described in any one of the four following Sub-Paragraphs provided, however, that notwithstanding such termination, the Employer, the Employees and the Equitable shall have the rights set forth in either Section II or Section III (depending upon the manner of termination) and in Section VI of this provision:(1) Discontinuance by Employer: The Employer shall have the right at or prior to any monthly premium due date to elect to discontinue all premium payments under this contract, in which event this contract upon such date shall terminate and no further premium payments of any kind hereunder will be accepted by the Equitable.
(2) Default: If the Employer shall make no premium payment for any month on or before the day upon which the aggregate monthly premium for that month is due1951 U.S. Tax Ct. LEXIS 127">*155 such failure shall constitute a default hereunder as of such due date. Subject to the provision hereof entitled "Grace," upon such default this contract shall terminate.
(3) Failure to Maintain Premium Fund: This contract shall automatically terminate (a) on the date that, an Employee included hereunder having attained his Normal Retirement Age or any earlier duly elected Special Retirement Age, Premium Fund (B) is insufficient to provide for the purchase of the Life Annuity with respect to such Employee in accordance with the provision hereof entitled "Premium Payments," or
(b) on any anniversary of the Register date of this contract in event of either one of the following contingencies happening:
(i) If the sum of the Employer's Class III premium payments made during the twelve months' period preceding such anniversary under Section III of the provision entitled "Premium Payments" heretofore set forth amount to less than 25% of the sum of the premiums estimated to be required for such period in accordance with such section, or
(ii) If the sum of the Employer's Class III premium payments made during the period from the Register date of this contract up to such an anniversary, 1951 U.S. Tax Ct. LEXIS 127">*156 coincident with any one of those indicated below, under Section III of the provision entitled "Premium Payments" heretofore set forth is less 17 T.C. 27">*38 than the respective percentages stated below of the sum of the premiums estimated to be required for such period in accordance with such section:
| Anniversaries of register | |
| date of contract | Percentage |
| 6th | 75 |
| 12th | 80 |
| 18th | 85 |
| 24th and each subsequent sixth anniversary | 90 |
(4) Employer's Election to Obtain Benefits from Another Carrier: The Employer shall have the right, prior to termination in any one of the manners described in Sub-Paragraphs (1), (2) and (3) above, to elect to discontinue this contract as of any monthly premium due date subsequent to the exercise of such right and continue the Plan of retirement benefits by contractual arrangement with another carrier. In event of the Employer's exercise of such right this contract shall terminate upon the date stated in such election, or, if no date is stated, upon the first day of the calendar month next following the date upon which written notice of such election is received at the Home Office of the Equitable.
II. RIGHTS OF EMPLOYEES AND EMPLOYER UPON TERMINATION1951 U.S. Tax Ct. LEXIS 127">*157 IN MANNER DESCRIBED IN ANY ONE OF SUB-PARAGRAPHS (1), (2), OR (3) OF SECTION I: If this contract terminates in the manner described in any one of Sub-Paragraphs (1), (2) or (3) of Section I of this provision, the Equitable as of the date of termination
Employees' Rights:
(a) will grant to each Employee included in Class B Membership in the Plan at the date of termination and with respect to whom no benefit shall previously have become due under this contract, the Non-Participating Paid-up Annuity contract described in Paragraph (1) of the sub-section hereinafter entitled "Employees' Non-Participating Annuities;"
(b) will grant to each Employee included in Class B or Class C Membership in the Plan on the date of said termination, exclusive of Employees who shall have attained, on or prior to such date of termination, their respective Normal Retirement Ages or any earlier duly elected Special Retirement Age, a Non-Participating Annuity contract of the kind and with payments of the amount and commencing at the date determined in accordance with Paragraph (2) of the said sub-section hereinafter entitled "Employees' Non-Participating Annuities;"
(c) will grant to each Employee included1951 U.S. Tax Ct. LEXIS 127">*158 in Class B or Class C Membership then surviving with respect to whom the first Annuity payment shall have become due on or prior to said date of termination under an Annuity purchased by the application of Premium Fund (B) and with respect to which no Supplemental Certificate shall have been issued, a Supplemental Certificate entitling such Employee to receive any of such Annuity payments becoming due and payable on or after said date of termination; and
Employer's Rights: will grant to the Employer the Cash Surrender Value, if any, to which it may be entitled as hereinafter provided.
All rights of the Employer under this contract, except with respect to any such Cash Surrender Value, shall cease as of the date of the termination, and the granting to the Employees of the Non-Participating Annuities above mentioned shall be in lieu of all benefits, except such Cash Surrender Value, to either the Employees or Employer under this contract.
* * * *
Employer's Cash Surrender Value: In the event that there shall be any balance remaining in Premium Fund (B) after providing all eligible Employees 17 T.C. 27">*39 with the maximum Annuity determined as provided in the sub-paragraph hereof 1951 U.S. Tax Ct. LEXIS 127">*159 entitled "Maximum Annuity" or "Maximum Annuity Where Termination Is Due to Enactment of Pension Law," 95% of such remaining balance shall be returned to the Employer in a single sum in cash as a Cash Surrender Value. The Equitable reserves the right to defer payment of said Cash Surrender Value for a period of ninety days after the date of termination.
III. PROCEDURE UPON TERMINATION IN MANNER DESCRIBED IN SUB-PARAGRAPH (4) OF SECTION I: * * * On and after the date of termination in the manner described in Sub-Paragraph (4) of Section I of this provision, the Equitable shall be discharged of all liability under this contract except (1) with respect to Annuities under which Annuity payments shall have commenced at the date of termination, and (2) for the payment of the Transfer Values in accordance with this Section, and shall be under no responsibility whatsoever to the Employer or any Employee as to the application of such Transfer Values by the other carrier.* * * *
Amount of Transfer Values: The combined Transfer Values with respect to the Premium Funds as of the date of termination shall be equal to a percentage of the combined amounts of the respective Premium Funds as1951 U.S. Tax Ct. LEXIS 127">*160 of the date of termination, dependent upon the contract year during which termination in the manner described in Sub-Paragraph (4) of Section I of this provision occurs, and to be determined in accordance with the following schedules:
| Percentage of combined | ||
| amounts of premium funds | ||
| On portion up | On portion in | |
| to and including | excess of | |
| $ 1,000,000 | $ 1,000,000 | |
| If contract terminates on, or during the | ||
| contract year prior to -- | ||
| First anniversary of register date | 95% | 97 1/2% |
| Second anniversary of register date | 97 | 97 1/2% |
| Third and subsequent anniversaries | 97 1/2 | 97 1/2% |
* * * *
VI. OUTSTANDING SUPPLEMENTAL CERTIFICATES AT TERMINATION: Termination of this contract shall not affect any rights or privileges to which Employees have become entitled under Supplemental Certificates duly issued to them hereunder and which are then outstanding but on and after such termination the Equitable shall be under no obligation to the Employer or Employees of the Employer other than to carry out the obligations theretofore assumed by it pursuant to the terms hereof, and shall be under no obligation whatsoever by virtue of this contract to any Employees1951 U.S. Tax Ct. LEXIS 127">*161 who shall not have theretofore received a Supplemental Certificate and who do not then become entitled to receive a Supplemental Certificate, a Paid-up Non-Participating Annuity or Annuities, or a cash payment in lieu of such an Annuity or Annuities, under the terms of Section II of this provision.
The contract has not yet terminated, either under the foregoing provisions or otherwise.
The contract contains the following provisions as to "REVISION OF RATES":
The Equitable reserves the right, by giving at least sixty days written notice to the Employer, to change the rates used as the bases of Tables V, VI, VII, VIII, IX and X and the rates of interest to be used in determining the amount of the Death Benefit and the cash payment on surrender under the Paid-up Deferred Annuities described in the provisions hereof entitled "benefit upon Employees' Separation from Service Prior to Retirement," "Employee's Election to Pay Premiums Direct to Equitable," and in Paragraph (1) of Section II of the provision 17 T.C. 27">*40 hereof entitled "Termination of Contract," from time to time on any anniversary of the Register date of this contract beginning with the fifth such anniversary with respect to1951 U.S. Tax Ct. LEXIS 127">*162 Annuities to be purchased for Employees entering or re-entering the Plan on or after such fifth anniversary.
The Equitable also reserves the right, by giving at least sixty days written notice to the Employer, to change the rates used as the basis of Tables III and IV on any anniversary of the Register date of this contract beginning with the fifth such anniversary with respect to Annuities to be purchased hereunder on and after such fifth anniversary subject to the limitation that in any event the following Tables III-A and IV-A shall apply in lieu of Tables III and IV, respectively, to any Annuities purchased on and after such fifth anniversary with respect to Employees entering or re-entering the Plan before such fifth anniversary.
Table III of the contract shows the single sum premium payment, based upon the attained age at the date of purchase, required to purchase an immediate life annuity with monthly annuity payments of $ 1 each, first payment one month after the respective attained ages stated. Table III-A is the same except that the rates set forth range from 3 per cent to 12 per cent higher.
On April 23, 1936, the following modification of the plan was announced in a letter1951 U.S. Tax Ct. LEXIS 127">*163 to petitioner's employees, which was to be inserted between pages 14 and 15 of the booklet entitled "Contributory Plan for Annuities for the Employees of South Penn Oil Company."
* * * This additional benefit is effective as of March 1, 1936, and will apply to all employees leaving service after that date who at time of termination have rendered five or more years of continuous service with the Company. The details of this additional benefit are as follows:
1. Such employees will on termination receive from the Equitable a paid-up annuity contract providing for annuity payments to commence at the employee's normal retirement date equal to the past service annuity credited to the employee for service rendered the Company before January, 1933. This amounts to 1 1/2% of the employee's regular salary or wages for the month of December, 1932, multiplied by the number of years of continuous service prior to January, 1933.
2. With respect to service rendered the Company after March 1, 1933, such employees may elect to receive the benefits heretofore provided under the Plan, that is, either a cash payment of his own contributions with interest or paid-up annuity to begin at normal retirement1951 U.S. Tax Ct. LEXIS 127">*164 date purchased with his own contributions and interest that can be cashed in for cash surrender value at any time before retirement. Such an employee may, however, elect to receive a special paid-up annuity in lieu of the withdrawal benefits heretofore provided under the Plan. This special paid-up annuity will provide at normal retirement date a life income equal to the annuity income purchased not only with the employee's contributions and interest but also a like annuity income purchased out of Company funds. * * *
The contract was amended June 29, 1936, to effectuate as of March 1, 1936, the foregoing modification.
Pursuant to the plan and contract petitioner made payments to or deposits with Equitable on account of past service annuity costs, in the years and amounts as follows: 17 T.C. 27">*41
| Year | Amount |
| 1933 | $ 374,981.48 |
| 1934 | 1,592,755.65 |
| 1935 | 695,866.78 |
| 1936 | 197,274.54 |
| 1937 | 134,845.93 |
| Total | $ 2,995,724.38 |
The following schedule shows (1) the total amount allocable to each year if each such payment is apportioned over a 10-year period beginning with the year in which the payment was made; (2) the amounts claimed as deductions in petitioner's income tax returns1951 U.S. Tax Ct. LEXIS 127">*165 on account of past service annuity costs; (3) the amounts allowed as deductions by respondent; and (4) the net income (or loss) set forth in petitioner's returns:
| 1 | 2 | 3 | 4 | |
| Total amount | ||||
| allocable to each | ||||
| year if each such | ||||
| Year | payment is | Amounts claimed | Net income or | |
| apportioned over | as deductions | Amounts allowed | (loss) set forth | |
| a 10-year period | in petitioner's | as deductions | in petitioner's | |
| beginning with | income tax | by respondent | returns | |
| the year in | returns | |||
| which the payment | ||||
| was made | ||||
| 1933 | $ 37,498.15 | $ 374,981.48 | $ 374,981.48 | ($ 649,608.13) |
| 1934 | 196,773.71 | 195,608.58 | 195,608.58 | (415,424.11) |
| 1935 | 266,360.39 | 273,238.26 | 273,238.26 | (422,520.65) |
| 1936 | 286,087.85 | 298,907.95 | 286.087.85 | 1,360,737.45 |
| 1937 | 299,572.44 | 299,572.44 | 299,572.44 | 2,131,837,34 |
| 1938 | 299,572.44 | 299,572.44 | 299,572.44 | (387,545.50) |
| 1939 | 299,572.44 | 299,572.44 | 299,572.44 | 1,059,837.64 |
| 1940 | 299,572.44 | 299,572.44 | 299,572.44 | 644,943.37 |
| 1941 | 299,572.44 | 299,572.44 | 299,572.44 | 2,372,993.81 |
| 1942 | 299,572.44 | 299,572.44 | 0 | 4,197,899.94 |
| 1943 | 262,074.29 | 265,569.63 | 0 | 2,798,135.19 |
| 1944 | 102,798.72 | 94,755.70 | 0 | 1,340,290.05 |
1951 U.S. Tax Ct. LEXIS 127">*166 Petitioner has never exercised the right, reserved in the plan and in the contract, to reduce interest rate for the computation of interest transfers to Premium Fund (A). On January 24, 1948, petitioner's directors resolved to continue the 4 per cent rate until March 1, 1953, and thereafter until further action by the board of directors.
As of February 28, 1942, however, it was reasonable to assume that petitioner would exercise this right.
In carrying out the provisions of the agreement to the effect that if an employee desires to make an election as to the type of annuity he wants, about five years prior to his eligibility for retirement petitioner mails to such employee a letter informing him of his rights under the plan and requesting him to make his election.
Other than the booklet hereinbefore referred to, the employees do not, prior to retirement, obtain any certificate of any kind from 17 T.C. 27">*42 Equitable showing their benefits under the plan. Equitable does not know the identities of petitioner's employees prior to eligibility for retirement and notification thereof. Equitable does not keep any individual cards or records on the individual employees of petitioner. Petitioner1951 U.S. Tax Ct. LEXIS 127">*167 keeps all records with respect to its individual employees and maintains an individual record for each employee. The first notice Equitable has as to the identity of an employee of petitioner or that said employee is coming up for retirement is after the employee has elected the particular type of annuity he desires. The next communication to the employee is shortly before reaching the retirement age, anywhere from six to twelve weeks, when the employee is notified of his eligibility for retirement. Equitable is then notified that an employee is eligible for retirement and the amount of money to the employee's credit in the fund. Equitable is requested to specify what the employee's annuity will be. A form is furnished to Equitable, setting forth the information with respect to the particular employee. At this point Equitable purchases the annuity and the funds on deposit with Equitable are used for that purpose. Equitable then furnishes to such employee a certificate showing what annuity the employee will receive, the type of annuity and the employee's name and address. This agreement is then one between Equitable and the employee, and the deposits thereafter made by petitioner1951 U.S. Tax Ct. LEXIS 127">*168 to Equitable are unaffected by subsequent payments to the retiring employee.
Petitioner has never exercised its right to remove the fund from Equitable and turn it over to another carrier or trustee.
Beginning in 1933 and for all subsequent periods, Equitable kept records showing amounts on deposit at the end of each month in each of the funds, Premium Fund (A), the employee's fund, and Premium Fund(B), the employer's fund. Equitable furnished petitioner annually with statements showing the amount of funds theretofore deposited by petitioner and remaining on deposit with Equitable at the end of each month. Equitable likewise periodically furnished statements showing the funds in the employees' account, Premium Fund (A).
The following amounts were on deposit with Equitable at the end of 1942, 1943 and 1944, before interest credits which were credited at the end of each year:
| In premium | In premium | |
| Date | fund (A) employees' | fund (B) employer's |
| fund | fund | |
| Dec. 31, 1942 | $ 1,380,173.44 | $ 3,184,263.84 |
| Dec. 31, 1943 | 1,509,510.26 | 3,152,515.46 |
| Dec. 31, 1944 | 1,642,122.48 | 3,173,787.99 |
17 T.C. 27">*43 The following schedule shows the amount on deposit with Equitable in Premium1951 U.S. Tax Ct. LEXIS 127">*169 Fund (B) including interest, the liability for accrued future service benefits, the liability for past service benefits, and the surplus in that fund on the dates indicated:
| Liability | Liability for | |||
| Date | Premium | for accrued | past service | Surplus |
| fund (B) | future service | benefits | ||
| benefits | ||||
| Dec. 31, 1941 | $ 3,254,233 | $ 1,143,549 | $ 2,023,620 | $ 87,064 |
| Feb. 28, 1942 | 3,271,122 | 1,169,835 | 2,000,783 | 100,504 |
| Dec. 31, 1942 | 3,316,689 | 1,289,082 | 1,886,599 | 141,008 |
| Dec. 31, 1943 | 3,288,495 | 1,402,335 | 1,725,378 | 160,782 |
The amounts paid by petitioner to Equitable during the respective taxable years in controversy on account of costs of the plan arising from services rendered subsequent to December 31, 1932, amounts with respect to such payments claimed by petitioner as deductions, and amounts allowed and disallowed by respondent are as follows:
| 1942 | 1943 | 1944 | |
| Paid | $ 150,135.29 A | $ 144,865.44 | $ 146,478.99 |
| Claimed | 150,135.29 | 144,865.44 | 146,478.99 |
| Allowed | 150,135.29 | 0 | 136,222.43 |
| Disallowed | 0 | 144,865.44 | 10,256.56 |
(Total disallowed: $ 155,122).
1951 U.S. Tax Ct. LEXIS 127">*170 The normal cost of the plan for services rendered subsequent to December 31, 1932, without regard to gains of the preceding year, was as follows:
| Year | Normal cost |
| 1943 | $ 159,787 |
| 1944 | 159,511 |
The gains of the preceding year were as follows:
| Gains of | |
| Year | preceding year |
| 1943 | $ 61,827 |
| 1944 | 25,125 |
Amounts paid to or deposited with Equitable by petitioner during the years 1933 to 1944, inclusive, on account of costs of the plan arising from services rendered both before and after January 1, 1933, when added to other amounts paid to employees as compensation for such services, do not exceed reasonable compensation for such services.
Petitioner's employees numbered between 1,900 and 2,000 in the years 1942, 1943, and 1944, and 98 1/2 per cent of these employees were covered by the plan and the plan was not discriminatory. All employees were advised of the plan, and the contents of the agreement with Equitable, and continued to work thereunder and contribute in accordance therewith.
17 T.C. 27">*44 OPINION.
The first issue is whether petitioner is entitled to deductions for the taxable years 1942, 1943, and 1944 in the amounts of $ 299,572.44, $ 262,074.29, and $ 102,798.72, 1951 U.S. Tax Ct. LEXIS 127">*171 respectively, on account of payments to or deposits with Equitable in the years 1933 to 1937, inclusive, with respect to services of petitioner's employees rendered prior to 1933.
The amounts of these contested deductions are not in dispute. Nor is the right thereto contested if the payments of the amounts basing these deductions were made to a trust which was within the meaning of "trust" as used in section 1651 of the pertinent statutes. (See section 23 (p) (2) of the Internal Revenue Code hereinafter set out as footnote 3.) The crux of the case, therefore, is whether the agreement of petitioner and Equitable in 1933 and the payments thereunder in effectuating the provisions of the plan of petitioner created such a trust.
1951 U.S. Tax Ct. LEXIS 127">*172 The respondent argues that the agreement between petitioner and Equitable was not a trust, but created a mere debtor-creditor relationship or a simple contractual liability. In support of his position the respondent argues that no trust was created because there was no trust res; the payments made by petitioner to Equitable were commingled with other funds of Equitable; Equitable agreed to pay interest on the funds; the contract provided that the employees of petitioner could not bring any action against Equitable; that Equitable dealt with itself when it purchased annuities from itself, as petitioner agrees; and it has not been shown that Equitable, under its charter, could act as trustee.
Under the agreement in question, Equitable was to "receive" certain payments denominated "premium payments," which consisted of contributions by petitioner and its eligible employees under the plan to provide pensions in the form of annuities when the employees reached the age of retirement. The payments were made to and received by Equitable for the purpose specifically set forth in the agreement, and Equitable was bound to keep them intact for the benefit and security 17 T.C. 27">*45 of petitioner's1951 U.S. Tax Ct. LEXIS 127">*173 employees. These payments so made constituted a res sufficient to meet the requirement that a trust must have a res. In the circumstances existing here, the fact that Equitable commingled these funds with its own funds did not destroy their identity as trust funds since these funds were segregated and identified on the books of Equitable. See cases cited at 54 Am. Jur., sec. 256, p. 199.
The contention of the respondent that no trust was created because Equitable was required to pay interest is without merit. Equitable did not agree to pay "interest" to petitioner. The agreement is that the combined premium funds, (A) and (B), will produce an amount designated as "working amount of interest," which Equitable guaranteed would be not less than 3 1/2 per cent and which amount was to be credited annually to Fund (B). Any excessive earnings of Equitable, above a certain minimum, were to be treated likewise. Petitioner then agreed that an amount called "interest" would be periodically charged to Fund (B) and credited to Fund (A). Four per cent was the amount so charged and credited. Since the agreement between the parties otherwise evidences their intention that the fund1951 U.S. Tax Ct. LEXIS 127">*174 is to be held in trust, the fact that Equitable has contracted to pay a fixed income called "interest" is not controlling and does not preclude the existence of a trust relationship. Conley v. Johnson, 101 Mont. 376">101 Mont. 376, 54 P.2d 585; People v. Illinois Bank & Trust Co. of Benton, 290 Ill. App. 521">290 Ill. App. 521, 8 N.E.2d 953; Andrews v. Hood, Com. of Banks, 207 N. C. 499, 177 S.E. 636. The case of Pittsburgh National Bank of Commerce v. McMurray, 98 Pa. 538">98 Pa. 538, relied upon by the respondent, does not hold to the contrary.
The contention of respondent that no trust was created because it was provided that employees of petitioner could not bring any action against Equitable is baseless. The agreement contains no general provision limiting the right of employees to sue Equitable. The respondent's argument is premised solely on a provision contained in paragraph VII, Sufficiency of Premium Funds, which provides, with respect to both Funds (A) and (B), in substance, that Equitable makes no representation and assumes1951 U.S. Tax Ct. LEXIS 127">*175 no liability as to the sufficiency of either Fund (A) or (B), to purchase the annuities provided by the agreement, etc., and that it is "the intention of the parties to this contract that no employee shall have any right against the Equitable with respect to any action or omission on its part hereunder." This limitation is applicable solely to the provision relating to the sufficiency of the funds. Equitable was merely to "receive" the funds and apply them to the purposes set forth. Since Equitable had not agreed to undertake that sufficient funds would be provided to carry out the plan as agreed between petitioner and its employees, it is obvious that it could not be held responsible for petitioner's failure to make sufficient payments. 17 T.C. 27">*46 We think it does not and was not intended to prevent an employee from enforcing in equity any right belonging to him under the contract.
The argument that the fact that Equitable, in effect, purchased annuities from itself and was thus dealing with itself in such a manner as to contradict the existence or intended existence of a trust status, is not impressive. The general rule is, of course, that a trustee can not legally deal with itself. 1951 U.S. Tax Ct. LEXIS 127">*176 But this rule is not applicable where, as here, the contract creating the relationship specifically permitted such dealing. Worcester Bank & Trust Co. v. Nordblom, 285 Mass. 22">285 Mass. 22, 188 N.E. 492, 494. Moreover, the beneficiaries, employees, were advised of the contents of that contract and by continuing to work under that contract acquiesced in those terms.
The final contention of the respondent that no trust has been established because it has not been shown that Equitable under its charter has the right to act as trustee, is also without merit. The general rule of law is that there is a presumption that an act of a corporation is not ultra vires. See cases cited in Fletcher on Corporations, vol. 6, sec. 2505, 1931 ed. In the absence of evidence to rebut the presumption, it prevails. Equitable is a New York corporation. An insurance company's right to hold funds in trust is clearly recognized in that state. See section 15, Personal Property Law, N. Y.
The test as to whether a trust or a debt is created depends upon the intention of the parties. Restatement of the Law of Trusts, sec. 12. A trust has been authoritatively 1951 U.S. Tax Ct. LEXIS 127">*177 defined as a holding of property subject to the duty of employing it or applying its proceeds according to the directions given by the person from whom it was derived. Thus in Hibbard, Spencer, Bartlett & Co., 5 B. T. A. 464, we discussed at considerable length the elements necessary to constitute a valid trust. See also Elgin National Watch Co., 17 B. T. A. 339; Appeal of Rodgers, 361 Pa. 51">361 Pa. 51, 62 A.2d 900; Coparo v. Propati, 127 N. J. E. 419, citing with approval Kane v. Bloodgood, 7 Johns. Ch. 90">7 Johns. Ch. 90; 11 Am. Dec. 47">11 Am. Dec. 47.
Section 165 (a) provides for a pension trust but does not define such term. In the recent case of Tavannes Watch Co. v. Commissioner, 176 F.2d 211, in considering the term "trust" as used in section 165 (a) the court said:
* * * The issue thus distilled from the complicated collection of statutes involved is the meaning of the word "trust" in Section 165 (a). That section must, of course, be interpreted in the light of the whole1951 U.S. Tax Ct. LEXIS 127">*178 statutory scheme and of the purpose of Congress in enacting and amending the statute. "Trust" is not a term of art or of fixed content, and its meaning for the purposes of this section is not necessarily the same as under state law or as under other sections of the Internal Revenue Code. * * *
See also 555, Inc., 15 T.C. 671; Crow-Burlingame Co., 15 T.C. 738.
17 T.C. 27">*47 Has petitioner established a pension trust within the meaning of section 165 of the pertinent statutes?
This record establishes that in 1933 petitioner's board of directors, with the approval of its stockholders, resolved to put into effect a pension plan known as a "Contributing Annuity Plan." It advised its employees of the purposes of the plan, as to its operation, of the obligations of the employer and employees as to the contributions to be made thereunder, and the rights, interests, and privileges of the employees under the plan. On December 27, 1933, petitioner entered into an agreement with Equitable for the administration of the plan, which covers 98 1/2 per cent of petitioner's employees and does not discriminate in favor of any officer, stockholder1951 U.S. Tax Ct. LEXIS 127">*179 or employee.
When an employee reaches the retirement age, Equitable is to apply sufficient of the funds to the purchase of an annuity for such retiring employee. Equitable, however, makes no commitment as to the sufficiency of the funds to purchase the annuities to be provided. Equitable keeps no records with respect to the individual employees and does not know the names or ages of the individual employees until immediately prior to their eligibility for retirement. Except in those instances where employees, about five years prior to retirement, have elected to have purchased for them a joint and survivor annuity, Equitable does not know the type of annuity which will be purchased for the employees until such employees are eligible for retirement. Equitable, from time to time, renders accounts to petitioner showing the amounts on deposit in the respective funds to purchase the annuities for the employees eligible for retirement, the amounts of interest credited, and the balance remaining in the funds.
Pursuant to the agreement with Equitable, petitioner has made periodic payments to Equitable and, although it can at any time withdraw these funds and place them with another administrator1951 U.S. Tax Ct. LEXIS 127">*180 of the plan, no part of these payments or the income therefrom may be diverted for any purpose outside the plan or be recovered by petitioner prior to the satisfaction of all liabilities to the employees and their beneficiaries.
We think it is clear that in executing the agreement here in question the parties intended to and did in fact create a fiduciary and not a mere debtor and creditor or simple contractual relationship.
Our decision in Reginald H. Parsons, 15 T.C. 93, furnishes no authority for holding otherwise. We there held that sums paid by the taxpayer to provide paid-up annuities to certain employees in consideration of their past services were not deductible over a 10-year period as amounts transferred or paid into a pension trust within the meaning of section 23 (p) of the Internal Revenue Code. The facts basing that holding show that the taxpayer in 1940 paid the sum of 17 T.C. 27">*48 $ 11,592.37 for the purchase of paid-up annuities for 10 of his regular employees. Each employee personally made application for his own annuity and received a contract in his own name. It did not appear from the evidence that the taxpayer at any time prior1951 U.S. Tax Ct. LEXIS 127">*181 to the actual purchase of the paid-up annuities irrevocably set aside any funds for that purpose or had adopted any definite plan. The recited facts clearly distinguish that case from the instant case. Here petitioner had a definite, detailed, formal plan in writing, to provide pensions when its eligible employees were retired. It made irrevocable contributions which were to be used to purchase annuities when the employee reached the retirement age. No immediate purchase of paid-up annuity policies was made or contemplated. Under the contract the funds could have been withdrawn from Equitable at any time and delivered to another administrator of the plan.
During the years 1934 to 1941, inclusive, petitioner claimed deductions on account of its payments to Equitable. Each such payment was apportioned over the following 10 years, pursuant to section 23 (p) of the Internal Revenue Code, and prior revenue acts. This treatment must have been on the ground that the contract we are now considering created such a pension trust. 2
1951 U.S. Tax Ct. LEXIS 127">*182 On the basis of the entire record, we conclude that petitioner has established the existence of a valid pension trust within section 165 (a) of the Internal Revenue Code as amended, and prior revenue acts.
The parties have stipulated that if the amounts paid to Equitable in the years 1933 to 1937, inclusive, on account of costs arising from services rendered prior to 1933, are apportioned over 10-year periods, the amounts of $ 299,572.44, $ 262,074.29, and $ 102,798.72 are allocable to the respective taxable years 1942, 1943, and 1944. We hold that such amounts constitute proper deductions in those years, and, therefore, sustain petitioner on the first issue.
The second issue is the respective amounts deductible by the petitioner in the taxable years 1943 and 1944 on account of deposits made with Equitable in accordance with its annuity plan, under the provisions of section 23 (p) as amended by the Revenue Act of 1942, section 162 (b). 3
1951 U.S. Tax Ct. LEXIS 127">*183 17 T.C. 27">*49 During the years 1943 and 1944 petitioner deposited with Equitable the respective amounts of $ 144,865.44 and $ 146,478.99, to cover the "normal cost" of the Equitable plan arising from services of petitioner's employees rendered subsequent to December 31, 1932. Petitioner claimed these respective amounts as deductions for those years under section 23 (p) (1) (A) (iii) (see footnote 3) and, as appears in the determinations of the deficiencies, respondent disallowed the entire deduction for 1943, and $ 10,256.56 of the amount thus claimed as a deduction for 1944. 4
The respondent argues only that petitioner's "normal cost" for each of those years, 1943 and 1944, is "the amount that is reasonably necessary to complete the funding of all liability under the Plan." In other words, his position is that the surplus in the trust fund which 17 T.C. 27">*50 1951 U.S. Tax Ct. LEXIS 127">*184 arose in years prior to the effective date of the 1942 amendments must first be applied in reducing the amount required for the annuities arising out of the service for 1943 in determining the amount of the deduction for "normal cost" for that year, and, similarly, for 1944. Part of the pending deficiencies resulted from such application of this surplus. 5 Petitioner contends that respondent erred in so using this surplus. That presents the only question for decision. We agree with petitioner.
1951 U.S. Tax Ct. LEXIS 127">*185 The issue is resolved by the meaning of "normal cost" as used in the controlling statute. 6 Also see Saalfield Publishing Co., 11 T.C. 756, for background and history of this section.
The statute does not define "normal cost." The deductions under subsection 23 (p) (1) (A) (i) and (ii) are expressly restricted to the amount necessary to provide the remaining unfunded cost of liability under the plan. Petitioner, however, claims under subsection 23 (p) (1) (A) (iii). The deductions permitted under that subsection are "in lieu of" and are not limited by subsections (i) and (ii). Saalfield case, supra. And subsection (iii) contains no such limitation.
There is no apparent reason why the term "normal cost" should not be given its ordinary meaning. Webster defines "normal" as "according to, constituting, or not deviating from, an established norm, rule or principle; conformed to a type, standard or regular form; performing the proper functions; regular; natural." 1951 U.S. Tax Ct. LEXIS 127">*186 This definition of the adjective was approved in Railroad Commissioner v. Konowa Operating Co., 174 S.W.2d 605, 609, in its holding that the term meant "according to, constituting, or not deviating from, an established norm, rule or principle." "Cost" is the amount of money or its equivalent paid or given or charged or engaged to be paid or given for anything bought or taken in barter or services rendered. Webster's New International Dictionary. So, applying these definitions, "normal cost" for any year would mean the amount of money charged or required to be paid normally (as contrasted with abnormally) to 17 T.C. 27">*51 Equitable by petitioner to meet its liability under the contract for annuities arising from services in such year.
Section 23 (p) of the Internal Revenue Code as amended by the Revenue Act of 1942, as it appeared in the taxable years, was not retroactive. For 1942, petitioner seems to have claimed and was allowed to deduct 5 per cent of the aggregate compensation paid or accrued during that year for the benefit of all its employees under the plan, because this payment was made before September 1, 1942, and this payment is1951 U.S. Tax Ct. LEXIS 127">*187 not in dispute. Section 162 (d) (1) (C) (i), Revenue Act of 1942.
Section 23 (p) (1) (A) (iii), under which the petitioner claims, permits the deduction, in the taxable year when paid, of "an amount equal to the normal cost of the plan, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, plus, if past service or other supplementary pension or annuity credits are provided by the plan, an amount not in excess of 10 per centum of the cost which would be required to completely fund or purchase such pension or annuity credits as of the date when they are included in the plan, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, except that in no case shall a deduction be allowed for any amount (other than the normal cost) paid in after such pension or annuity credits are completely funded or purchased. [Emphasis added.]" The statute thus places a limitation on the deduction for "past service or other supplementary pension or annuity credits" which were provided by the present plan, but explicitly excepts the "normal cost," 7 from the effect of that limitation.
1951 U.S. Tax Ct. LEXIS 127">*188 Regulations 111, section 29.23 (p)-7, 8 issued under the authority of 17 T.C. 27">*52 the statute, in defining "normal cost," as used in the statute, clearly supports the position of the petitioner. The regulation first provides that "* * * normal cost for any year is the amount actuarially determined * * *." This would seem to effectively exclude any adjustment to such "actuarially determined" figure unless allowed in some other language of the regulation, and assuming the requirement of such adjustment was within the authority granted to the respondent by the statute. It is the cost so determined "which would be required * * * in such year to maintain the plan if the plan had been in effect from the beginning of service of each then included employee and if such costs for prior years had been paid and all assumptions as to interest, mortality, time of payment, etc., had been fulfilled. * * *" That provision bars the Commissioner from adjusting this actuarially determined figure by any amount.
1951 U.S. Tax Ct. LEXIS 127">*189 We think, therefore, that neither the statute nor the regulation defining "normal cost" authorizes or permits the adjustment of the actuarially determined figure of "normal cost" under the plan by any amount. This construction of the law and regulations is supported by the Report of the Senate Finance Committee with respect to the bill which later became the Revenue Act of 1942. 9 In connection with the amendments of section 23 (p) this report contains, inter alia, the statement that "normal cost in any year is the amount required by the insurance company for the annuity arising out of that year's service. [Emphasis added.]"
1951 U.S. Tax Ct. LEXIS 127">*190 17 T.C. 27">*53 Respondent cites as authority for his contention the following excerpt from Regulations 111, section 29.23 (p)-5, as amended by T. D. 5666:
Pension and Annuity Plans -- Limitations under Section 23 (p) (1) (A) (i).
* * * *
* * * the amount reasonably necessary to provide the remaining unfunded cost of past and current service credits of all employees under the plan * * * may be determined as the sum of (a) the unfunded past service cost as of the beginning of the year, and (b) the normal cost for the year, all determined by methods, factors, and assumptions appropriate as a basis of limitations under clause (iii). * * *
It is to be noted, however, that this section of the regulation is construing subsection 23 (p) (1) (A) (i), whereas subsection (iii) is controlling here. Thus, aside from our doubt that the quoted regulation indicates an intention on the part of the respondent to lay down any such rule as that for which he now contends, no limitation of the deductions under subsection (i) can limit the deductions allowable under subsection (iii). Saalfield case, supra.
The fallacy of the respondent's position is apparent. It is this. 1951 U.S. Tax Ct. LEXIS 127">*191 Despite the undoubted increase in risks, the liability of Equitable to meet which arose under the plan during 1943, he has determined that there was no "normal cost" for the assumption of these increased liabilities.
It may be well at this point to consider just what constituted this "surplus" which respondent seeks to use in computing the "normal cost" for the years 1943 and 1944. In prior years, petitioner made contributions to the trust, as part of the plan. Deductions with respect to these contributions were legally computed, so far as the record reveals. They were allowed or are being allowed under the amortization provisions of section 23 (q) of the Revenue Act of 1932, and similar provisions of succeeding revenue acts. Section 23 (p) (2) of the Internal Revenue Code, as added by the Revenue Act of 1942. In some years the amounts of these contributions were proved by experience to exceed the cost of the risk maturing in such year. In other years such contributions were insufficient for that purpose. As a result, this book "surplus" arose. It is a variable figure. In future years it may be increased, decreased, or eliminated, and any part of such surplus which may be1951 U.S. Tax Ct. LEXIS 127">*192 later restored to petitioner upon the discontinuance of the pension plan and the payment of all its obligations would be an income-determining factor to petitioner in the year of that restoration. See White Bros. Co. v. Commissioner, 180 F.2d 451, certiorari denied 340 U.S. 825">340 U.S. 825.
The meaning of "normal cost" as used in the statute is a question of law. The correct computation of "normal cost" within that meaning 17 T.C. 27">*54 is a question of fact. It is an actuarial computation resting on certain factors and assumptions. See Regulations 111, section 29.23 (p) -- 4. 10 These factors and assumptions may vary from year to year -- based on experience.
1951 U.S. Tax Ct. LEXIS 127">*193 In determining the deficiency, the respondent might have actuarially computed "normal cost" by using factors and assumptions other than those basing the computation of the petitioner. But, apparently, he did not do this. (See footnote 5, supra.) And he offered no evidence at the hearing as to any actuarial computation of "normal cost" for either of the taxable years 1943 and 1944.
The uncontradicted testimony of a qualified insurance actuary at the trial, which was received without objection, was that, computed by the use of the assumptions and factors prescribed by the regulations, the normal cost of the plan for the year 1943 was $ 159,787, and for 1944 $ 159,511. Accordingly we have found the facts in accordance with that testimony.
The amounts deposited by petitioner in those years to meet the respective costs of the plan for those years were each less than such respective normal costs. Therefore, under section 23 (p) (1) (A)17 T.C. 27">*55 (iii), supra, petitioner's deductions are limited to the amounts actually paid to the trust in the taxable years 1943 and 1944, to wit, for 1943, $ 144,865.44, and for 1944 $ 146,478.99.
The respondent erred in disallowing deductions 1951 U.S. Tax Ct. LEXIS 127">*194 for the taxable years 1943 and 1944 in any part of such amounts.
The parties have stipulated that the depletion deductions to which petitioner is entitled for the taxable years 1942, 1943, and 1944 are dependent on our decision as to the other issues presented. Therefore the amount of the depletion deductions will be computed in accordance herewith in the recomputations under Rule 50.
Decision will be entered under Rule 50.
Footnotes
A. The entire amount of $ 150,135.29 was paid prior to September 1, 1942.↩
1. REVENUE ACT OF 1932.
SEC. 165. EMPLOYEES' TRUSTS.
A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of its 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. * * *
[The corresponding sections of the Revenue Acts of 1934 and 1936 are the same as the above section of the Revenue Act of 1932, which are all pertinent to this proceeding by virtue of the provisions of section 23 (p) (2) of the Internal Revenue Code↩ hereinafter set out as footnote 3.]
2. Incidentally, all of those deductions -- for 1934 to and including 1941 -- were allowed by the respondent, who makes no explanation for his present apparent change of this long-existing position.↩
3. The material parts of section 23 (p), as amended by the Revenue Act of 1942, are as follows:
In computing net income there shall be allowed as deductions:
(p) Contributions of an Employer to an Employees' Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan. --
(1) General rule. -- If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under subsection (a) but shall be deductible, if deductible under subsection (a) without regard to this subsection, under this subsection but only to the following extent:
(A) In the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 165 (a), in an amount determined as follows:
(i) an amount not in excess of 5 per centum of the compensation otherwise paid or accrued during the taxable year to all the employees under the trust, but such amount may be reduced for future years if found by the Commissioner upon periodical examinations at not less than five-year intervals to be more than the amount reasonably necessary to provide the remaining unfunded cost of past and current service credits of all employees under the plan, plus
(ii) any excess over the amount allowable under clause (i) necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of each such employee, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, but if such remaining unfunded cost with respect to any three individuals is more than 50 per centum of such remaining unfunded cost, the amount of such unfunded cost attributable to such individuals shall be distributed over a period of at least 5 taxable years, or
(iii) in lieu of the amounts allowable under (i) and (ii) above, an amount equal to the normal cost of the plan, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, plus, if past service or other supplementary pension or annuity credits are provided by the plan, an amount not in excess of 10 per centum of the cost which would be required to completely fund or purchase such pension or annuity credits as of the date when they are included in the plan, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, except that in no case shall a deduction be allowed for any amount (other than the normal cost) paid in after such pension or annuity credits are completely funded or purchased.
* * * *
(B) In the taxable year when paid, in an amount determined in accordance with subparagraph (A) of this paragraph, if the contributions are paid toward the purchase of retirement annuities and such purchase is a part of a plan which meets the requirements of section 165 (a) (3), (4), (5), and (6), and if refunds of premiums, if any, are applied within the current taxable year or next succeeding taxable year towards the purchase of such retirement annuities.
* * * *
(2) Deductions under prior income tax acts. -- Any deduction allowable under section 23 (q) of the Revenue Act of 1928 (45 Stat. 802), or the Revenue Act of 1932 (47 Stat. 182), or the Revenue Act of 1934 (48 Stat. 691), under section 23 (p)↩ of the Revenue Act of 1936 (49 Stat. 1661), or the Revenue Act of 1938 (52 Stat. 464), or the Internal Revenue Code for a taxable year beginning before January 1, 1942, which under such section was apportioned to any taxable year beginning after December 31, 1941, shall be allowed as a deduction for the years to which so apportioned to the extent allowable under such section if it had remained in force with respect to such year. [Emphasis added.]
4. By amended answer respondent asks for an increased deficiency for 1944 on the ground that he erred in allowing too large a deduction for "normal cost" for that year.↩
5. In computing the contested deficiencies for 1943 and 1944 respondent apparently accepted the amount of $ 144,865.44 deposited with Equitable by petitioner in that year as having been deposited on account of normal cost of the plan for that year. Respondent also accepted the new stipulated figure of $ 155,122 as the surplus, as of January 1, 1943, that is, the amount of Premium Fund (B), in excess of the amount necessary to meet all the liabilities of Equitable under the plan, including those for annuities arising from the services rendered in that year. Since $ 155,122 exceeds $ 144,865.44 by the amount of $ 10,256.56, respondent apparently determined there was no "normal cost" of the plan for 1943. He then apparently accepted the amount of $ 146,478.99 deposited with Equitable in 1944 as having been deposited on account of "normal cost" of the plan for that year and reduced such amount by the $ 10,256.56, remaining in surplus at the beginning of January 1944, thus leaving $ 136,222.43 which respondent apparently determined was the amount deductible for "normal cost" of the plan for that year, and so allowed that sum.↩
6. See footnote 3.↩
7. Here the past service annuity credits, as provided by the plan, had been completely funded before 1942, and no amount was claimed by petitioner for funding any annuity credits arising from those past service credits.↩
8. REGULATIONS 111.
Sec. 29.23 (p)-7. Pension and Annuity Plans -- Limitations under Section 23 (p) (1) (A) (iii). -- Subject to the applicable general conditions and limitations (see section 29.23 (p)-4), under section 23 (p) (1) (A) (iii), in lieu of amounts deductible under the limitations of clause (i) and clause (ii), deductions may be allowed to the extent of limitations based on normal and past service or supplementary costs of providing benefits under the plan. "Normal cost" for any year is the amount actuarially determined which would be required as a contribution by the employer in such year to maintain the plan if the plan had been in effect from the beginning of service of each then included employee and if such costs for prior years had been paid and all assumptions as to interest, mortality, time of payment, etc., had been fulfilled. Past service or supplementary cost at any time is the amount actuarially determined which would be required at such time to meet all the future benefits provided under the plan which would not be met by future normal costs and employee contributions with respect to the employees covered under the plan at such time.
The limitation under clause (iii) for any taxable year is the sum of normal cost for the year plus an amount not in excess of one-tenth of the past service or supplementary cost as of the date the past service or supplementary credits are provided under the plan, all determined under regulations prescribed by the Commissioner with the approval of the Secretary. For this purpose the normal costs may be determined by any generally accepted actuarial method and may be expressed either as (a) the aggregate of level amounts with respect to each employee covered under the plan, (b) a level percentage of payroll with respect to each employee covered under the plan, or (c) the aggregate of the single premium or unit costs for the unit credits accruing during the year with respect to each employee covered under the plan, provided, in any case, that the method is reasonable in view of the provisions and coverage of the plan, funding medium, and other applicable considerations. The limitation may include one-tenth of the past service or supplementary cost as of the date the provisions resulting in such cost were put into effect, but is subject to adjustments for prior favorable experience. See section 29.23 (p)-4. In any case past service or supplementary costs shall not be included in the limitation for any year when the amount required to fully fund or purchase such past service or supplementary credits has been deducted and no deduction is allowable for any amount (other than the normal cost) which is paid in after such credits are fully funded or purchased.↩
9. Under another class, in lieu of the level amount or level percentage basis already referred to, the employer may elect to provide during each year of an employee's active employment the cost of the actual pension credit arising out of that year of employment. As that cost for a given amount of pension or annuity credit for a given employee increases as he becomes older, it is obvious that the cost is not distributed as a level amount or level percentage over the remaining future service, but as an increasing amount or percentage. Whether the aggregate amount or percentage for all employees increases, decreases, or remains unchanged from one year to another depends upon the effect of changes in personnel, etc., during the period in question. This particular method is used for most annuity plans under which the employer sets up an employee retirement plan under a master group annuity contract issued by an insurance company. In such case it is obvious that the normal cost in any year is the amount required by the insurance company for the annuity arising out of that year's service. [Emphasis added.] [S. Rept. No. 1631, 77th Cong., 2nd Sess., 1942-2 C. B. 608↩]
10. REGULATIONS 111.
Section 29.23 (p)-4. Contributions of an Employer to or under an Employees' Pension Trust or Annuity Plan that Meets the Requirements of Section 165 (a) -- Application of Section 23 (p) (1) (A) -- In General. --
* * * *
In determining costs for the purpose of limitations under section 23 (p) (1) (A), the effects of expected mortality and interest must be discounted and the effects of expected withdrawals, changes in compensation, retirements at various ages, and other pertinent factors may be discounted or otherwise reasonably recognized. A properly weighted retirement age based on adequate analyses of representative experience may be used as an assumed retirement age. Different basic assumptions or rates may be used for different classes of risks or different groups where justified by conditions or required by contract. In no event shall costs for the purpose of section 23 (p) (1) (A) exceed costs based on assumptions and methods all of which are reasonable in view of the provisions and coverage of the plan, funding medium, reasonable expectations as to the effects of mortality and interest, reasonable and adequate regard for other factors such as withdrawal and deferred retirement, whether or not discounted, which can be expected to reduce costs materially, reasonable expenses of operation, and all other relevant conditions and circumstances. In any case, in determining the costs and limitations an adjustment shall be made on account of any experience more favorable than that assumed in the basis of limitations for prior years, and, unless such adjustments are consistently made every year by reducing the limitations otherwise determined by any decrease in liability or cost arising from experience in the next preceding taxable year more favorable than the assumed experience on which the costs and limitations were based, the adjustment shall be made by some other method approved by the Commissioner.
[Petitioner contends that, if valid at all, the last sentence of the quoted portion of this regulation applies not to "normal cost" but only to the computation of the deduction of the cost of past service credits, which is not here involved. The respondent contends that this provision is valid but says that it is inapplicable because, according to his theory, the determination of "normal cost" by deducting surplus therefrom would automatically eliminate the applicability of this provision. It might be argued that the "adjustment" mentioned in the sentence, if meant to apply to the computation of "normal cost," means only an adjustment to the factors and assumptions used in the computation. In any event, if the provision be contradictory to our conclusion here that "normal cost" is not to be adjusted by any amount, it is invalid as in conflict with the statute and the regulation defining "normal cost" quoted in footnote 8.]↩