*216 Decision will be entered for the petitioner.
Petitioner's employer's business was liquidated by transfer of its assets to its sole stockholder. Concurrently with the transfer, petitioner became an employee of the transferee corporation. Thereafter the pension plan of the transferor-corporation was terminated and petitioner received a lump-sum payment for the rights he had in the fund at the time of his separation from the service of his employer. Held, following Mary Miller, 22 T. C. 293, affd. 226 F. 2d 618, that the lump-sum payment is taxable as long-term capital gain under section 165 (b), I. R. C. 1939.
*100 This proceeding involves a deficiency of $ 339.02 in income tax for 1950. The issue is whether the distribution of $ 3,168.55 to the husband upon the discontinuance of an employees' pension trust, of which he was a member, is taxable as ordinary income or as long-term capital *218 gain.
FINDINGS OF FACT.
The facts set forth in the stipulation of facts are so found.
The petitioners, residents of Lancaster, Pennsylvania, filed a joint return for the taxable year with the collector of internal revenue for the first district of Pennsylvania. For convenience, the husband will be referred to as the petitioner.
From April 1937 to March 31, 1949, petitioner was employed by the Dellinger Manufacturing Company, a Pennsylvania corporation, now dissolved, hereinafter referred to as Dellinger.
On December 22, 1943, Dellinger created a pension trust for the benefit of its employees by the execution of a trust agreement. The pension trust at all times qualified as a tax-exempt trust under the provisions of section 165 (a), Internal Revenue Code of 1939.
The trust agreement provided for a pension board to manage and supervise the pension plan and for the appointment of a trustee by the members of that board. Other pertinent provisions of the trust agreement read in whole or in part as follows:
ARTICLE IV.
PAYMENTS FROM THE PENSION PLAN.
* * * *
Section 3. Payments to Beneficiaries: * * *
(a) Payments to employees terminating service with the corporation: As to the accumulated*219 credits of an employee terminating service with the *101 Corporation prior to retirement date, retain and improve the same with interest to provide a retirement based upon the accumulated reserves at age 65 or based upon such earlier retirement as may be approved by the Pension Board, or to pay or distribute to such employee the amount to which he or she is entitled under the Formula of Benefits, in cash or assign property, annuity or insurance contracts of an equivalent value, in one lump settlement or periodically over a period of years, and according to the applicable provisions of the Revenue Act pertaining to Pension Trusts or any Wage Stabilization or other legal governmental regulations now or then in effect, as directed by the Pension Board; * * *.
* * * *
ARTICLE VII.
DISCONTINUANCE OF THE PLAN, DISSOLUTION OR BANKRUPTCY OF THE CORPORATION.
* * * *
Section 2. Dissolution or Bankruptcy of the Corporation: In event the Corporation shall by action of the Board of Directors or stockholders discontinue the Plan or if the Corporation shall be dissolved or shall be adjudicated bankrupt, the balance remaining in the General Fund not assigned to the Employee Individual Accounts, *220 less all proper charges against the Fund, shall be allocated pro rata to all accounts of all employees, as the Pension Board shall determine, and such funds: (1) shall be accumulated, with the net interest thereon credited proportionately to such accounts until the commencement of the retirement period for each employee, and/or (2) the total corpus with income shall be distributed to each of the employees in one lump sum or by instalments over a period of years, as the Pension Board shall determine, and according to the legal provisions of any Federal statute pertaining to Employees Pension Trusts then in effect; whereupon, with the completion of such distribution, this Trust shall terminate.
The formula of benefits under the trust agreement included provisions reading as follows:
ARTICLE II.
BENEFITS.
* * * *
Procedure Upon Discontinuance of the Plan. Dissolution or Bankruptcy of Dellinger Manufacturing Company
In event Dellinger Manufacturing Company during any year or at any time or times, shall be unable to contribute to the Pension Trust Plan, or in the event of the dissolution or bankruptcy of Dellinger Manufacturing Company, the Pension Fund, at the option of the Pension Board, *221 shall continue, and the interests of the employee beneficiaries shall be invested and reinvested and the net income therefrom added to the principal of each employee's share in the Fund, and such amount as may be accumulated upon the employee reaching retirement age shall be paid as an annuity as may be actuarially provided, or in a lump sum or in kind, but under the same terms and conditions as though the corporation's contributions had continued, or at the discretion of the Pension Board each employee's net interest therein may be distributed in one lump sum or by instalments over a period of years, in cash or in kind, as the Pension Board in its sole discretion shall determine, and subject to the provisions of any Federal statute pertaining to Employees Pension Trusts, wage stabilization or any other legal governmental regulations then in effect.
* * * *
*102 2. Reserve Accumulations for Employees Terminating Service with the Corporation: Reserves accumulated for employees under the adopted formula after the employees attain eligibility, as defined in the preceding paragraphs, are set aside and earmarked for such employees' credit from the Corporation's annual donation and*222 improved at the rate of 3%. Provided an employee discontinues employment with the Corporation prior to pension age, for any cause whatsoever except services in the Armed Forces of the United States or in the event of disability or except when given a leave of absence, the Pension Board will dispose of the accumulated credits as authorized by the Federal statute pertaining to Employees Pension Trusts, and will direct the Trustee to dispose of such accumulations previously credited to such employee's reserves in the following manner:
(a) Direct the Trustee to pay to such employee in one lump sum or in instalments over a period of years, an amount depending upon the total years of service to the Corporation as follows, to-wit:
For the first 4 years of service, 10% of accumulated credits;
For the first 5 years of service, 20% of accumulated credits;
For the first 6 years of service, 30% of accumulated credits;
For the first 7 years of service, 40% of accumulated credits;
For the first 8 years of service, 60% of accumulated credits;
For the first 9 years of service, 80% of accumulated credits;
Upon furnishing 10 years or more of service, 100% accumulated credits; or the amount represented*223 by such accumulated credits, plus interest credited thereon, upon the discretion of the Pension Board, shall be applied to provide a pension at the attained age when such employee terminates his service with the Corporation, or any time thereafter on or before the time such employee reaches the age of 65 years, for such an amount annually as shall be determined by actuarial computations based upon the accumulated reserves to which such employee is entitled under the foregoing formula; * * *
* * * *
4. Provisions for Earlier or Later Retirement:
(a) Earlier Retirement: Where an employee desires to retire, with the permission of the Employer, or his services are terminated by the Employer, prior to his reaching the age of 65, or the normal retirement age, provided such employee has completed ten (10) years or more of service, such employee, upon application, shall be entitled to receive a proportionate pension as may be actuarially provided at the attained age of such employee based on the accumulated values at the time such employee desires his or her pension to commence, or such accumulation may remain in the Fund and be accumulated at interest to provide a larger pension*224 to commence at age 65.
On December 22, 1943, the board of directors of Dellinger approved the bylaws adopted by the pension board for the regulation of its activities under the pension plan. The bylaws authorized the pension board to pay pensions or other benefits to beneficiaries of the pension plan.
On September 18, 1948, the Sperry Corporation, hereinafter referred to as Sperry, purchased all of the issued and outstanding stock of Dellinger under an option granted on July 16, 1948, and thereafter, until March 31, 1949, operated it as a subsidiary. The pension plan remained in full force and effect during that period of operation. *103 Within 60 days after the close of 1948 Dellinger contributed $ 10,456.32 to the pension trust for the cost of the plan for the year 1948.
On March 22, 1949, the board of directors of Dellinger passed a resolution to liquidate and dissolve the corporation and on the same day Sperry ratified the action so taken. Pursuant to such action, on April 1, 1949, Dellinger was liquidated and all of its assets were transferred to Sperry. On the same day all of Dellinger's employees, including petitioner, who was a participant in the pension plan throughout*225 its existence and at that time had had more than 10 years of service with Dellinger, became employees of Sperry, and their employment with Dellinger terminated. Thereafter Dellinger had no employees and the business formerly conducted by Dellinger was carried on by Sperry. Subsequently, in due course, Dellinger was dissolved under the laws of Pennsylvania. Sperry did not take over and continue the pension plan of Dellinger because it had a pension plan of its own.
At no time before or after the purchase of the stock of Dellinger by Sperry was an officer or director of the former an officer or director of the latter. Prior to July 16, 1948, no officer or director of Sperry was an officer or director of Dellinger.
At a meeting of the pension board on March 28, 1949, the chairman notified the other members of the action taken by the directors of Dellinger and Sperry, its sole stockholder, to liquidate and dissolve Dellinger, and that Sperry would not make payments to the pension trust after Dellinger was liquidated. The pension board concluded that, under the circumstances, the pension plan could be continued without further contributions or liquidated and the proceeds of sale of*226 assets distributed to the beneficiaries of the trust. The chairman of the pension board notified the participants in the plan on April 1, 1949, of the action so taken.
Thereafter the pension board sought advice of counsel on the course of action it should take. Counsel recommended that the trust be liquidated and the interests of the participating employees be paid in a lump sum.
On August 4, 1949, the pension board, after receiving a letter from the Commissioner of Internal Revenue that termination of the pension trust would not affect its prior exempt status under section 165 (a), adopted a resolution reading as follows:
Resolved that the Trustee be authorized to dispose of the present investments at such time as he deems advisable so that complete liquidation of funds can be made on or about February 15, 1950. A letter shall be written by the Trustee within the next few days to all participants in the plan to inform them of the Board's decision regarding liquidation.
The action of the pension board was taken pursuant to the authority granted by the provisions of section 2 of article VII of the trust agreement. *104 In connection therewith it decided that the terms of section*227 3 (a) of article IV of the trust agreement applied only to individual cases of termination of service by resignation or discharge for cause.
Thereafter, in pursuance of the resolution, the trustee of the pension plan liquidated all of the assets of the trust.
On August 15, 1949, the pension board sent a letter to each member of the pension plan reading in part as follows:
The above-mentioned plan in which you still have a credit, has been terminated by the present owners of the Company. Permission has just been received from the Pension Division of the Internal Revenue Department to liquidate the assets of the fund. This will be done about February 1, 1950, at which time the assets will be distributed to all members in one lump sum.
This payment will be based on the amount credited to your account as of December 31, 1948, plus interest earned, less any losses that might be incurred in liquidating.
On March 2, 1950, the trustee distributed all of the assets of the trust, which at that time consisted entirely of cash, to the participants of the pension plan. The amount of the lump sum distributed to each participant, with the exception of certain former employees whose employment*228 with Dellinger had terminated prior to December 31, 1948, was 100 per cent of his accumulated credits in the contributions made by Dellinger to the trust, together with the increment accumulated thereon to the date of distribution, irrespective of the number of years of service rendered by the participant to Dellinger. The amount distributed to petitioner was $ 3,168.55, which he received in cash on March 2, 1950. The amount was the only distribution received by him under the pension plan. Each of the former employees whose employment had terminated prior to December 31, 1948, received the amount which had been set aside for his benefit at the time his employment terminated. The amount received by each former employee ranged from 10 per cent to 100 per cent of his accumulated credits.
Petitioner never made any contribution to the trust established under the pension plan. The directors of Dellinger never took any action with respect to discontinuance of the pension plan, the termination of the trust, or the distribution of the assets of the trust.
The participants in the plan other than petitioner had worked for Dellinger for periods ranging from 3 to 10 or more years.
Petitioner*229 reported the amount received under the distribution in his return for 1950, taxable as long-term capital gain. In his determination of the deficiency respondent taxed the amount as ordinary income received pursuant to the provisions of sections 165 (b) and 22 (b) (2).
OPINION.
The disagreement under the issue is whether the distribution was made "on account of the employee's separation from *105 the service" within the meaning of section 165 (b), Internal Revenue Code of 1939. 1
*230 Petitioner was a participating member of a tax-exempt pension plan of Dellinger. All of the corporation's assets were transferred to Sperry, its sole stockholder, on April 1, 1949, in liquidation proceedings and the transferor was, in due course, dissolved. On that date all of the employees of Dellinger became employees of Sperry, and it carried on the business previously conducted by Dellinger.
The trust agreement and concomitant formula of benefits contain provisions for payment of benefits to qualified employees upon the termination of their service with Dellinger and the termination of the plan because of dissolution of the corporation. Section 3 (a) of article IV of the trust agreement provides that in the event an employee terminates service with the corporation prior to retirement date he shall be entitled to receive, in the discretion of the pension board, retirement payments based upon age, or payment in a lump sum, or by installments of the amount provided for in the formula of benefits. Section 2 of article VII of the trust agreement, under which the pension board acted, provides that upon dissolution the net amount in the general fund shall be allocated pro rata to*231 the accounts of the participating employees and held until the commencement of the retirement period of each employee, or the total corpus distributed to employees in a lump sum or by installments, as the pension board shall determine.
Section 7 of article II of the formula of benefits provides that if the pension plan is continued on dissolution by exercise of an option granted the pension board, the fund shall be held for payment when the employee reaches retirement age as an annuity or in a lump sum.
Section 2 of article II of the formula of benefits provides that when an employee discontinues employment with the employer prior to pension age for any cause except for specified reasons not applicable here, he shall be entitled to receive in a lump sum or in installments over a period of years a specified percentage of his accumulated credits ranging from 10 per cent for 4 years of service to 100 per cent for 10 or more years of service, or a pension in the discretion of the pension board. Petitioner had had more than 10 years of service at *106 the time of liquidation of Dellinger and therefore had a right to receive the maximum allowances.
It thus appears that petitioner *232 was entitled to receive the same benefits whether his employment was terminated or the pension plan was discontinued. Only the method of payment remained for determination and that was within the discretion of the pension board. Respondent argues that the term "service" in the statute should be construed to mean separation from the business or enterprise in which the employees were engaged when they became participants of a pension plan. We have held to the contrary. In Edward Joseph Glinske, Jr., 17 T. C. 562, we held that the phrase "on account of the employee's separation from the service" means his separation from the service of his employer. That interpretation of the statute was followed in Mary Miller, 22 T. C. 293, affd. 226 F.2d 618">226 F. 2d 618.
In Mary Miller, supra, the taxpayer's employer transferred its assets and business to another corporation in a reorganization and was dissolved a few days later. After the transfer the former business of the transferor was operated by the transferee under the same name and the taxpayer had the same job with it. We held*233 from those facts that there had been a "separation from the service" of the transferor-employer when the taxpayer became an employee of the transferee. Here, liquidation of Dellinger on April 1, 1949, terminated petitioner's employment by it. Thereafter he was in the employment of Sperry, a different employer.
Respondent nevertheless argues that if there was a separation from the service within the meaning of the statute, as we have held, the distribution was not made "on account" of that separation but because of the dissolution of Dellinger and termination of the plan.
The liquidation of Dellinger on April 1, 1949, resulted in a mass termination of the services of its employees. At that time petitioner's rights under the plan 2 were fixed subject only to the discretionary power of the pension board to determine the method and time of payment. The decision of the pension board to discontinue the plan and distribute the trust corpus to participating employees in lump-sum payments was made after such rights matured. Dissolution of Dellinger did not occur until after that date. Here, as in Mary Miller, supra, the petitioner's rights arose on account*234 of his separation from the service of his employer. Payment under his rights was made only in the course of termination of the fund.
We fail to find any material difference between the facts here and in Mary Miller, supra. Accordingly, following that case, we find that the distribution is taxable as long-term capital gain.
Decision will be entered for the petitioner.
Footnotes
1. SEC. 165. Employees' Trusts.
(b) Taxability of Beneficiary. -- The amount actually distributed or made available to any distributee by any such trust shall be taxable to him, in the year in which so distributed or made available, under section 22 (b) (2)↩ as if it were an annuity the consideration for which is the amount contributed by the employee, except that if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's separation from the service, the amount of such distribution to the extent exceeding the amounts contributed by the employee, shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. * * *
2. The fact that some of the other employees might have had less beneficial rights at that time is immaterial in deciding the issue here.↩