*117 Decision will be entered under Rule 50.
Sums expended by the taxpayer in 1940 to provide his employees with paid-up annuities 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.
*93 Respondent has determined deficiencies in income tax for the calendar years 1944 and 1945 in the amounts of $ 2,033.84 and $ 1,270.18, respectively. Petitioner concedes the existence and has consented to the assessment of deficiencies in income tax of $ 955.74 for the taxable year 1944 and $ 353.80 for the taxable year 1945.
The sole question presented is whether the petitioner in 1940 established a pension trust within the meaning of section 23 (p) and section 165 of the Internal Revenue Code, entitling him to a deduction in each of the years 1944 and 1945 equal to one-tenth of $ 11,592.37, representing the total amount paid by the petitioner in 1940 as part of the cost of purchasing single premium annuity contracts for his employees in consideration of their past services.
This case was submitted upon a complete stipulation of facts which we hereby adopt.
FINDINGS OF FACT.
Petitioner is an individual with offices at 2303 Northern Life Tower, Seattle, Washington, whose returns for the taxable years 1944 and 1945 were filed with the collector of internal revenue*119 for the district of Washington.
Since sometime prior to 1940 petitioner has been continuously engaged in the operation of three separate farming properties located in the States of Washington and Oregon, known as the Hillcrest Orchard, Mountcrest Ranch, and Pleasant Hill Farm. During the year 1940 petitioner employed ten regular full-time employees in the operation of these properties.
In September 1929, petitioner had organized a corporation under the laws of the State of Washington known as General Industries Corporation, for the purpose of providing a medium for the participation of his employees in investment in diversified industries.
All of the common stock of General Industries was subscribed by, paid for, and issued to petitioner and his wife. Four of the petitioner's ten regular employees purchased shares of the preferred stock of General *94 Industries and were given additional shares of such stock from time to time prior to 1940. Other persons employed by the petitioner in non-business occupations as well as employees of corporations controlled by the petitioner were also purchasers and donees of the stock of General Industries.
Rights and preferences for the preferred*120 and common stock of General Industries were provided as follows:
Preferred stock. Preferred Stock shall be entitled to receive dividends of One Dollar ($ 1.00) annually, payable semi-annually or quarterly as the trustees may determine, which dividends shall be non-cumulative but shall be paid before any dividends are paid on Common Stock. After the Preferred Stock has received said preference dividend for any current period, Common Stock shall be entitled to a dividend at the same rate, then Preferred and Common Stock shall share equally in further dividends at the same rate per share. In the event of liquidation Preferred Stock shall be entitled to receive Twenty Dollars ($ 20.00) per share before any distribution is made to the holders of Common Stock, and after Twenty Dollars ($ 20.00) has been paid for each share of outstanding Preferred Stock the holders of Common Stock shall be paid Twenty Dollars ($ 20.00) per share, and thereafter both Common and Preferred Stock shall participate equally at the same rate per share in any further distribution. Preferred Stock shall be non-voting.
In the latter part of 1940 petitioner decided that he would provide retirement annuities for*121 the ten regular employees and addressed a letter to each explaining his intentions in regard to such annuities. To those employees who were owners of General Industries preferred stock petitioner wrote in part as follows:
One feature of the present contemplated plan, which I approve, is to convert the value of the stock which you now own in General Industries Corporation into a paid-up annuity contract, probably with the Metropolitan Life Insurance Company. * * *
The liquidating value of General Industries Corporation preferred stock, as determined by the market value of its assets on October 1, 1940, was approximately $ 9.40 per share. I shall undertake to realize $ 10.00 per share for your stock, * * *. It is my wish to supplement the sum realized from your General Industries Corporation stock with enough additional to purchase a paid up contract in an amount having some relation to the number of years of your past service and other factors. I hope to discuss this feature with you later.
* * * *
In addition to this paid up annuity contract for past service, I am willing to join with you in a program during possible years of future service for saving and providing*122 additional income to you at age 65. Without any definite commitment as to liability, my present willingness is to contribute up to approximately 5% of your salary for the purchase of an annuity or endowment contract maturing at age 65 for your benefit, provided you agree to set aside and pay a like amount.
Petitioner's letter to those of his regular employees who held no stock in General Industries read in part as follows:
Referring further to the matter of retirement annuity insurance, which will provide some measure of income to you in later years, I am indicating herein what *95 I am willing to do in your case. In a general way this conforms with the steps taken in respect to other employees who have been with me for a number of years.
* * * *
In your case, you have worked for me approximately eighteen years. In recognition of your faithful and loyal service during this time, I now propose to establish with the Northern Life Insurance Company a paid up contract, which will guarantee to pay you when you shall have reached the age of 65, $ 15.00 per month for the remainder of your life. The contract will have substantial other lump sum benefits in the event of your prior*123 death. This is in recognition of your past service.
Now in respect to your future service, if you wish to take out additional life insurance which will provide further monthly income to you at age 65, I am at the present time willing to pay one-half the cost of such additional benefits for you up to a maximum of $ 25.00 a month, during such time as you remain in my employ. I shall leave it to you how such [sic] additional retirement income insurance you may wish to apply for over and above the $ 15.00 per month first mentioned, which I will pay for entirely.
* * * *
The plan finally adopted by the petitioner was to provide pension benefits for past services in the approximate amount of 1 per cent of the current monthly rate of compensation multiplied by the number of years of service, and to provide benefits for future services in the amount of 1 1/2 per cent of the current monthly salary.
Each of the regular employees indicated his willingness to enter into the suggested arrangement, whereupon the petitioner arranged with an agent of Metropolitan Life Insurance Company to call upon each of the employees to have such employee sign applications for separate annuity policies, *124 one being a fully paid policy covering past services and the other being a currently payable premium policy covering future services, which applications were signed by the employees. All policies for past services were issued by Metropolitan Life Insurance Company but in some instances policies covering current benefits were issued by Northern Life Insurance Company under similar terms.
The employees who held General Industries stock transferred such stock to the petitioner and were credited on the petitioner's books for the value thereof at $ 10 a share. Petitioner paid all premiums on policies covering past service benefits for the employees in question. The net amount of such premiums paid from petitioner's funds in 1940 was $ 11,592.37, which amount represented the total premiums paid in 1940 covering the regular employees less credit for the transfers of General Industries stock previously owned by such employees.
All annuity contracts covering past services were delivered to the petitioner and thereafter forwarded to the employees for inspection with a letter requesting that the contracts be returned to the petitioner, which in each instance was done. Petitioner retained *125 the possession of all annuity contracts until they were delivered to the Seattle Trust & Savings Bank, as trustee, under a trust agreement dated December 30, 1944.
*96 In 1944 the petitioner requested that the respondent approve his actions with respect to the annuities as constituting a pension trust exempt from taxation under section 165 of the Internal Revenue Code and was advised by the respondent that the plan should be formalized by the appointment of a trustee and a formal trust instrument. Thereupon the petitioner executed the trust agreement of December 30, 1944, with the Seattle Trust & Savings Bank, which agreement was subsequently amended on January 29, 1945. Respondent in a letter dated January 27, 1945, approved the plan as set forth in the original trust instrument as an exempt pension trust under section 165 and thereafter on April 11, 1945, approved the amendment to the plan. Prior to the execution of the trust agreement in 1944, there was no written document relating to the annuity plan except the various letters written by the petitioner to his employees in respect to the annuities.
At the end of the year 1944 journal entries were made on the books of Hillcrest*126 Orchard, Mountcrest Ranch, and Pleasant Hill Farm setting up the amounts of the premiums paid in 1940 upon policies issued to the regular employees covering past services and setting up amortization of the premiums paid in 1940 over a 10-year period. Petitioner did not claim a deduction in 1940 for the premiums paid by him for the annuity policies covering past services and has not claimed any deduction of this amount except by way of amortization upon the basis of a 10-year period.
Respondent in disallowing deductions claimed for the amortization of such annuity payments in petitioner's 1944 and 1945 income tax returns held "that the payments of annuity premiums directly paid by you or your employee to the issuing company made during 1940 * * * for past service benefits purchased for business employees were not contributions to a pension trust within the meaning of section 23 (p) of the Internal Revenue Code, prior to its amendment by section 162 of the Revenue Act of 1942," and therefore that such payments could not be apportioned to subsequent years.
The plan whereby petitioner purchased from insurance companies paid-up annuity contracts for his regular employees in consideration*127 of their past services and contracted for currently payable annuity policies covering their future services did not result in the establishment of a pension trust within the meaning of sections 23 (p) and 165 of the Internal Revenue Code, as applicable to the taxable year 1940.
OPINION.
The law as applicable to the taxable year 1940 permitted employers to deduct reasonable amounts paid to provide pensions for employees in consideration of their past services as ordinary *97 and necessary business expense under section 23 (a), 1*128 Lincoln Electric Co. v. Commissioner, 162 Fed. (2d) 379, or as amounts transferred or paid into a pension trust over and above contributions made to the trust for the current year under section 23 (p). 2Tavannes Watch Co., Inc. v. Commissioner, 176 Fed. (2d) 211.
*129 The parties are agreed that the petitioner expended the total sum of $ 11,592.37 in 1940 for the purchase of paid-up annuities for ten of his regular employees, and respondent is willing to concede that the petitioner could have deducted this entire amount as ordinary and necessary business expense on his 1940 income tax return. However, we need not consider the question of whether the petitioner was so entitled to deduct the entire amount as ordinary and necessary business expense in 1940. It was not until the taxable year 1944 that the petitioner claimed any deduction in respect to the amount he expended in 1940 for the purchase of the paid-up annuities, at which time it was too late for him to reopen his 1940 income tax liability because of the statute of limitations. In his return for 1944, petitioner claimed a deduction equal to 10 per cent of the total amount expended in 1940 on the theory that the $ 11,592.37 constituted a reasonable amount transferred to a pension trust under section 23 (p) which might be apportioned by him in equal deductions over a 10-year period.
The issue presented is whether the $ 11,592.37 was paid to a "trust" within the meaning of section 23 (p).
*130 Petitioner concedes that section 23 (p) required payments to be made to a "trust", but contends that the surrender to him of the General Industries stock by four of the ten regular employees as part payment for the annuities and the representations made by him in letters to all of his employees expressing his willingness to contribute whatever amounts were necessary to provide them with paid-up annuities in *98 recognition of their past services, gave rise to a technical trust of which the petitioner was trustee and qualified the arrangement as a "trust" within the meaning of section 23 (p). In the alternative, petitioner asks us to find "that the payments to the life insurance company, either in the aggregate or as to each individual annuity policy, constituted a trust of which the life insurance company was trustee."
In respect to petitioner's first contention, we are of the opinion that the intentions and proposals expressed by the petitioner in his letters to his employees and his conduct in connection with the purchase of the paid-up annuities did not constitute the creation of a permanent and irrevocable trust arrangement as contemplated by section 23 (p). It does not*131 appear from the evidence that the petitioner at any time prior to the actual purchase of the annuities irrevocably set aside any funds for that purpose. The tenor of the correspondence cited by petitioner falls far short of a technical declaration of trust, but at most reflects petitioner's general sentiments with respect to the establishment of pension benefits. Nor do we find any evidence in the present record that the petitioner intended to act as a trustee for his employees in paying over funds to the insurance company for the purchase of the annuities. Each employee personally made application for his own annuity and received a contract issued in his own name. We are convinced the petitioner had no intention of assuming any role in the purchase of the annuities other than that of an employer contributing an adequate amount to discharge an obligation to compensate his employees for what he believed to be the real value of their past services. It may well be that the petitioner did assume some fiduciary relationship to those of his employees who turned over their stock in General Industries to him in contemplation of the plan and that he would have been liable for an accounting*132 to such employees had he used the proceeds from the sale of such stock for any other purpose. However, in our judgment neither this possibility nor the statements made by petitioner in the course of his discussion of the proposed pension plan with his employees were sufficient to establish him as the trustee of a legally enforceable pension trust as envisioned by the statute. Cf. Merrill Trust Co., 21 B. T. A. 1409; Caxton Printers, Ltd., 27 B. T. A. 1110.
Petitioner raises the alternative contention that his payment of $ 11,592.37 to the insurance company for the purpose of providing a paid-up annuity for each of his regular employees upon reaching the age of 65 constituted the insurance company a trustee of a pension trust within the meaning of section 23 (p). Petitioner points out that the funds he expended for the paid-up annuity contracts were to be retained by the insurance company, to be invested by it, and the earnings accumulated for the payment of an annuity commencing upon an employee's reaching the retirement age.
*99 While it may be recognized that the relation of the insurance company to a policyholder*133 may be in the nature of a trust under certain circumstances, it is our opinion that an employer's purchase of a paid-up annuity contract for his employee does not serve to establish a pension trust within the purview of section 23 (p). It is significant to note that subsection (3) of section 23 (p) refers to the "taxable year of the trust" which would indicate that Congress contemplated a separate taxable entity whose right to exemption from the tax imposed by section 161 could be determined in accordance with the principles outlined in section 165. The paid-up annuities which petitioner would have us regard as trusts could not possess taxable years unless we were to assume that the insurance company undertook to segregate, retain, and invest the funds paid in by the petitioner for the annuities in question separate and distinct from other premiums it received in the general course of business and regarded such annuities as a separate trust or trusts requiring individual administration. Certainly this was not the case. The only conclusion we can reach on the basis of the present record is that nothing more than the customary contractual relationship was intended to exist and did*134 exist between the insurance company and the petitioner's employees in respect to the paid-up annuities. In our opinion this did not constitute the establishment of a pension trust within the meaning of sections 23 (p) and 165.
Petitioner chiefly relies upon the decision of the Court of Appeals for the Second Circuit in Tavannes, supra.In that case it was recognized that a "trust" was required under the provisions of section 23 (p). It was held, however, that a separate corporation established to receive, invest, and administer the contributions of the employer for the benefit of its employees constituted a "trust" within the meaning of the statute. The Court's reasoning in Tavannes, supra, has no application here, for no comparable separate entity vested with trust powers and responsibilities, denominated as a trust or otherwise, can be found from the facts of the instant case.
Therefore, the respondent's determination is approved.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
(1) Trade or business expenses. --
(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *.↩
2. Sec. 23. (p) Pension Trusts. --
(1) General rule. -- An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under subsection (a) of this section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowable as a deduction, and (2) is apportioned in equal parts over a period of ten consecutive years beginning with the year in which the transfer or payment is made.
* * * *
(3) Exemption of trusts under section 165. -- The provisions of paragraphs (1) and (2) of this subsection shall be subject to the qualification that the deduction under either paragraph shall be allowable only with respect to a taxable year (whether the year of the transfer or payment or a subsequent year) of the employer ending within or with a taxable year of the trust with respect to which the trust is exempt from tax under section 165↩.