*228 Decision will be entered for the respondent.
Payments made by petitioner in 1943 and 1944 to another corporation held not deductible as contributions by an employer to a profit-sharing trust, as required by 1942 amendments to section 23 (p) (1) (C), covering the years involved, notwithstanding subsequent creation of trust and its approval by respondent and irrespective of the statutory grace provisions of Revenue Act of 1942, section 162 (d), which do not waive trust requirement and are inapplicable to trusts having no existence on September 1, 1942.
*544 This proceeding seeks a redetermination of deficiencies in tax as follows:
| Fiscal year | Fiscal year | |
| ended | ended | |
| June 30, 1943 | June 30, 1944 | |
| Income tax | $ 16.90 | |
| Declared value excess profits tax | $ 552.52 | 1,383.27 |
| Excess profits tax | 7,037.17 | 7,771.49 |
Our question is whether petitioner is entitled to deductions of $ 8,371.60 and $ 10,479.38 for its taxable years ended June 30, 1943 and 1944, respectively, as payments made by it in connection with a profit-sharing plan.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner is a New York corporation, with its principal office in New York City. Its returns for the years in question were filed with the collector for the third district of New York.
On April 24, 1941, petitioner, as "party of the second part," by written agreement set up a profit-sharing plan for the benefit of its employees. Three persons, two of them officers of petitioner, signed *545 the contract as "parties of the first part" and were described therein as "duly accredited representatives of certain employees."
By *230 the terms of this agreement, petitioner's employees were to form an employees' corporation, and petitioner was to pay to the new corporation the sum of 75 cents per watch for every watch shipped, less $ 1.50 for every watch returned by customers, which amounts were limited, however, to the amount of petitioner's net earnings in excess of a 5 per cent return on its net capital at the beginning of the year in which the percentage was computed. In the new corporation, the employees were to be credited with a pro rata of the amount paid in by petitioner, which credits were to be in the proportion which their salaries bore to the total of all the employees' salaries. The employees were to receive stock in the new corporation after they had been employed by petitioner for a period of at least five years. For every $ 300 credited to an employee's account, he was to receive a share of stock in the new corporation.
In paragraph II (a) of the agreement of April 24, 1941, it is stated that:
* * * it is the intention of this agreement and one of its purposes that the party of the second part shall offer as an inducement and an incentive to the said employees to produce a better product to satisfy*231 customers of the party of the second part and to reduce complaints as evidenced by watches returned * * *
Paragraph V of the agreement of April 24, 1941, provides that "all the funds received by the corporation shall be retained by it in accordance with the terms of this agreement; the sum shall be invested and reinvested by the directors in such manner as in their best discretion is to the best interests of the corporation with due regard to the purposes for which the corporation is formed."
Paragraph VIII of the agreement of April 24, 1941, provides:
The directors of the corporation to be formed shall be the parties of the first part and such others as they may select, and such directors shall act as directors of the corporation until such time as at least twenty (20) shares of capital stock shall have been issued; thereafter, regular meetings of stockholders of the corporation shall be called and elections had of directors in accordance with the laws of the State of New York, and the by-laws of the corporation.
By paragraph XI of the agreement, the agreement was to be adopted by the corporation and all rights thereunder were to be assigned to the corporation; such by-laws were *232 to be adopted as would meet the terms of the agreement, "but other than this assignment" the corporation was to have no right to assign, hypothecate, pledge, or pass on to any successor in interest or any other assignee any of the rights created by the agreement.
By paragraph XII, the agreement was to terminate upon the dissolution or liquidation of petitioner, or upon the dissolution or liquidation *546 of the new corporation, or by mutual agreement of petitioner and the new corporation.
Tavannes Associates, Inc., the new corporation, was organized on June 12, 1941, pursuant to the April 24, 1941, agreement. Its certificate of incorporation extensively specified the purposes for which it was organized. They were, inter alia, to import, export, manufacture, or deal in all kinds of goods, wares, and merchandise; to acquire and continue any kind of business; to acquire, hold, and encumber and deal in real estate and personal property, including securities; and to borrow money. It, expressly, was not to be authorized to engage in banking, insurance, public transportation, or educational activities.
In accordance with the plan, petitioner made contributions to Tavannes Associates, *233 Inc., as follows:
| June 26, 1941 | $ 6,285.50 |
| August 29, 1941 | 459.25 |
| July 22, 1942 | 9,570.75 |
These contributions were allowed by respondent as deductions on petitioner's income tax returns for its fiscal years ended June 30, 1941 and 1942, respectively.
On October 27, 1944, Tavannes Associates, Inc., had the following assets on hand: Cash in bank, $ 701.94, and U. S. Treasury certificate, $ 45,000.
The plan, which was designed to make its employees more satisfied with their remuneration, was communicated to the employees at its inception. They were also duly apprised of amendments.
At the time of the incorporation of Tavannes Associates the appointment of trustees was considered and discussed. The trust form with regular trustees was rejected because of the costs and "red tape" involved, the amount of fees demanded by the fiduciary bank consulted by petitioner, the difficulty of employee trustees due to uncertain tenure, and because a corporation could acquire stock in the petitioner company, and a trust could not. Petitioner hoped that the latter would be done.
On August 17, 1944, petitioner submitted to respondent a proposed amended profit-sharing plan, seeking approval*234 of the plan in accordance with section 162 of the Revenue Act of 1942, amending Internal Revenue Code, section 165. Petitioner received no reply until October 3, 1944.
On October 27, 1944, an amended plan and trust indenture was executed by petitioner with trustees; further amendments thereto were made on November 10, 1944, and June 18, 1945.
As amended, the instrument recited that the plan was in operation and provided:
First: The agreement dated the 24th day of April, 1941 is hereby declared to *547 be null and void, to the extent that the said agreement deals with the details of operation of the Plan but not with the intent thereof. For the purposes of clarity, the clauses and paragraphs contained hereinafter shall be deemed to be, for all purposes, in lieu of the said agreement dated the 24th day of April, 1941, and to the extent that any provision contained in the said agreement is in conflict with this agreement, the clauses and paragraphs contained herein shall be of full force and effect.
On December 7, 1944, all of the assets of Tavannes Associates, Inc., aggregating $ 45,701.04, were transferred by it to the trustees under the amended plan.
On December 19, 1944, respondent*235 approved the amended profit-sharing trust plan of petitioner pursuant to Internal Revenue Code, section 165 (a). On June 14, 1945, respondent approved the amended profit-sharing plan under the provisions of the Stabilization Act of October 2, 1942, Public Law No. 729 (77th Cong., 2d sess.), as amended.
Other than holding of cash and the payment of expenses with respect to its incorporation, Tavannes Associates, Inc., did no business whatever from the time of its incorporation to the time it transferred its assets to the trustees under the profit-sharing trust plan, as amended October 27, 1944. Tavannes Associates, Inc., paid no rent, purchased no stationery, had no salaried employees, had no telephone listed in its name, held no stockholders' meetings, issued no capital stock, and received no funds other than the contributions from petitioner and interest on investment of such contributions. It held a meeting of its board of directors for the purpose of electing officers and for the purpose of filling a vacancy in the directorate, and depositing petitioner's contribution to it in its bank account, and using such moneys to make investments in United States bonds and 90-day interest-bearing*236 loans.
Tavannes Associates, Inc., filed corporation income and declared value excess profits tax returns (Form 1120) for its fiscal years ended November 30, 1942 and 1943, whereon it classified itself as an "Employees' Association." On these returns it reported its receipts from petitioner as "Royalties." It also reported a small amount of interest from United States securities. There were balancing deductions of "Bonuses Accrued" and incidental expenses, resulting in $ 9.12 tax for the year ended November 30, 1943. The return for the year ended November 30, 1942, listed among its assets "Loans Receivable" of $ 5,000. This return listed as liabilities "Stock Purchase Credits" of $ 6,588.63. In the return for the year ended November 30, 1943, the latter was noted to be $ 16,159.38. No claims were made for exemption under section 165 (a) in either of the returns.
On one occasion Tavannes Associates loaned money to petitioner for a short time, for which it was paid interest.
Tavannes Associates, Inc., was declared to be legally dissolved by the Secretary of State of the State of New York on May 29, 1945.
*548 The amounts placed in issue by the petitioner are $ 8,371.60 out *237 of $ 13,104 contributed for the fiscal year ended June 30, 1943, and $ 10,479.38 out of some $ 16,000 contributed for the fiscal year ended June 30, 1944. The excess amounts represent amounts not allowed by reason of the 15 per cent limitations contained in the amended profit-sharing plan.
OPINION.
For the years prior to those in issue, respondent raised no objection to petitioner's deduction of contributions made by it to Tavannes Associates, Inc. However, upon the remodeling of the statutes relating to employee pension and profit-sharing trusts, the deductions were disallowed because the contributions were made to a corporation and not a trust.
The 1942 amendment explicitly states that deductions for contributions by an employer to a stock bonus, pension, profit-sharing, or annuity plan shall only be deductible under section 23 (p); and under section 23 (p) (1) (C), the contributions must be paid into "a stock bonus or profit-sharing trust," which is exempt under section 165 (a). 1
*238 Section 165 (a) provides that a "trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees * * * shall not be taxable under this supplement * * *."
On its face there would be a failure by petitioner to comply with the *549 statute, were it not for the grace provisions of the 1942 amendment. These provide that the amendments shall be applicable with respect to taxable years of the employer beginning after December 31, 1941, except that:
(1) In the case of a stock bonus, pension, profit-sharing, or annuity plan in effect on or before September 1, 1942,
(A) such a plan shall not become subject to the requirements of section 165 (a) (3), (4), (5), and (6) until the beginning of the first taxable year beginning after December 31, 1942,
(B) such a plan shall be considered as satisfying the requirements of section 165 (a) (3), (4), (5), and (6) for the period beginning with the beginning of the first taxable year following December 31, 1942, and ending December 31, 1943, if the plan satisfies such requirements by December 31, 1943,
* * * *
[Revenue Act of 1942, section 162 (d).]
By further legislation the latter*239 date was extended ultimately to June 30, 1945, in substantially the same language.
The requirements of section 165 (a) (1) and (2), however, and particularly the necessity that payments be made to a trust, were not permitted retroactive compliance in any degree by these grace provisions. And the trust which petitioner ultimately established was not in existence in the tax years, and hence can not be relied on as justifying the deductions at that time.
Even the grace provisions as to 165 (a) (3), (4), (5), and (6) do not apply to petitioner. The subject is a technical one at best, where scope for respondent's regulatory supervision must be allowed. Regulations 103, amended in 1943, deal expressly with this situation when they state: "A plan which requires the use of a trust is not in effect as of September 1, 1942, if there was no valid trust in existence at that time." Sec. 19.165 (a) (4)-2, as amended July 8, 1943, T. D. 5278. These regulations are of more than usual significance, not only because they were in effect when the ultimate extension of the grace period was enacted and hence can be treated as expressing the legislative view, Helvering v. Reynolds Tobacco Co., 306 U.S. 110">306 U.S. 110,*240 but also because they should have served notice upon petitioner that its contributions for all of the period in controversy were being channeled through an unacceptable medium. The regulations in question were filed with the Division of the Federal Register July 8, 1943. 1943 C. B., 499. Petitioner did not make its contribution for the first taxable year in issue until July 20 following. The conclusion seems inescapable that, unless there was a trust in existence prior to September 1, 1942, the approval ultimately given by respondent did not operate retroactively to sanction the deductions now claimed.
Petitioner insists in the alternative that the abandoned corporation itself constituted a trust. Without considering the difficulties of imputing *550 trust duties and beneficiaries to an organism never so conceived, the insurmountable obstacle to that view is that the corporation never complied at any time with the added requirements of the amendments. In sum, the trust which ultimately so conformed to the specifications of 23 (p) and 165 did not exist in the period when the contributions under consideration were made, and, of course, could not *241 have received them in those years; and the actual recipient of the contributions never conformed to the requirements at all. Since both conditions are requisite to authorize the deductions, the deficiency must be sustained.
Decision will be entered for the respondent.
Footnotes
1. SEC. 165. EMPLOYEES' TRUSTS.
(a) Exemption From Tax. -- A trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall not be taxable under this supplement and no other provision of this supplement shall apply with respect to such trust or to its beneficiary --
(1) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan;
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries;
(3) if the trust, or two or more trusts, or the trust or trusts and annuity plan or plans are designated by the employer as constituting parts of a plan intended to qualify under this subsection which benefits either --
(A) 70 per centum or more of all the employees * * * or
(B) such employees as qualify under a classification set up by the employer and found by the Commissioner not to be discriminatory * * *
and(4) if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.
(5) A classification shall not be considered discriminatory within the meaning of paragraphs (3) (B) or (4) of this subsection merely because it excludes employees the whole of whose remuneration constitutes "wages" under section 1426 (a) (1) (relating to the Federal Insurance Contributions Act) or merely because it is limited to salaried or clerical employees. * * *
(6) A plan shall be considered as meeting the requirements of paragraph (3) of this subsection during the whole of any taxable year of the plan if on one day in each quarter it satisfied such requirements.↩