1946 U.S. Tax Ct. LEXIS 110">*110 Decision will be entered for the respondent.
Petitioner's single payment to "bonus and profit sharing trust," for officer-stockholders and limited group of employees, under which employees' benefits are uncertain, held, not deductible under either section 23 (a) or (p), Internal Revenue Code.
7 T.C. 428">*428 This is a proceeding for the redetermination of deficiencies in income tax, declared value excess profits tax, and excess profits tax for the taxable year 1941 in the respective amounts1946 U.S. Tax Ct. LEXIS 110">*111 of $ 1,578.38, $ 1,040.35, and $ 1,912.40.
The sole issue raised by petitioner is whether a so-called "bonus and profit sharing trust," created by petitioner in December 1941, is exempt from tax under section 165 (a) of the Internal Revenue Code, thereby entitling petitioner to a deduction of $ 10,000 which it contributed to such trust in that year.
Substantially all of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner is a New Jersey corporation and since its organization in 1927 has engaged in business as a retail Chevrolet dealer and distributor.
In December 1941 petitioner's three directors were Norman Chapman, president and treasurer; his wife, Gertrude Chapman, vice president; and his brother Milton Chapman, secretary.
The original stock book of petitioner indicates that the following certificates were issued:
| Certificate number | Name | Shares | Date of issue |
| 1 | Norman Chapman | 85 | Jan. 31, 1927 |
| 2 | Milton Chapman | 2 | Jan. 31, 1939 |
| 3 | Norman Chapman | 30 | Jan. 21, 1930 |
| 4 | Norman Chapman | 90 | Jan. 31, 1930 |
| 5 | Harry Chapman (deceased), | ||
| father of Norman | 28 | Dec. 31, 1931 | |
| 6 | Milton Chapman | 50 | Dec. 31, 1931 |
| 7 | Gertrude Chapman | 204 | Apr. 18, 1930 |
1946 U.S. Tax Ct. LEXIS 110">*112 7 T.C. 428">*429 This record was not kept up to date. Norman Chapman owned or controlled all of the outstanding shares of stock of petitioner as of December 17, 1941.
In the latter part of November 1941 petitioner, its officers, and its employees received information of a prospective order banning the sale of Chevrolet automobiles.
On December 17, 1941, petitioner set up a "bonus and profit sharing trust fund" for the benefit of some of its employees and its officers, hereinbelow named, for the purpose, as recited in the instrument, of "inducing such persons to remain with it, even though the company's sales of automobiles probably will be necessarily and substantially curtailed in the future because of conditions connected with the National Defense":
| 1941 | Share of | ||||
| Years of | approx. | annual | |||
| Name | Age | Position | service | compensation | distribution |
| Norman Chapman | 41 | President, treasurer, | |||
| and general manager. | 15 | $ 12,000 | 66 2/3% | ||
| Gertrude Chapman | 32 | Vice president | |||
| and salesman | 5 | 3,000 | 4 1/6% | ||
| Louis Fink | 44 | Salesman | 12 | 3,000 | 8 1/3% |
| Louis Coven | 45 | Salesman | 13 | 3,000 | 8 1/3% |
| Jack Klien | 35 | Salesman | 10 | 3,000 | 8 1/3% |
| George Hanson | 43 | Manager of service dept | 8 | 3,000 | 4 1/6% |
1946 U.S. Tax Ct. LEXIS 110">*113 In arriving at the shares in the final column, the following percentages of compensation were taken into account:
5% for those in service 5 to 9 years
10% for those in service 10 to 14 years
20% for those in service for 15 years or over
Milton Chapman was excluded from the provisions of the trust agreement, since he was merely a qualifying director. He became the original trustee. In addition to the employees mentioned in the agreement, petitioner employed nine others -- three office workers, five mechanics, one parts man -- who were not included in the provisions of the trust agreement.
Pursuant to the terms of the agreement, petitioner transferred and delivered to the trustee $ 10,000, the only payment made by it, which was to be held by the trustee and to be paid over in the following sums on the specified dates:
Dec. 15, 1942, all of the net income and also one-fifth of the principal then in his hands;
Dec. 15, 1943, all of the net income and also one-fourth of the principal then in his hands;
Dec. 15, 1944, all of the net income and also one-third of the principal then in his hands;
Dec. 15, 1945, all of the net income and also one-half of the principal then in his hands;
1946 U.S. Tax Ct. LEXIS 110">*114 7 T.C. 428">*430 Dec. 15, 1946, all of the net income and also the balance of principal then in his hands.
The distributions were to be made to the beneficiaries "who are living and still in the service of the Company as an employee or officer on the 1st day of December in the year in question and to the executor, administrator or designated relative of any Beneficiary, who may have died during the continuance of this Trust and subsequent to 1941 while still an officer of the Company. Inchoate and contingent rights of any Beneficiary to participate in distributions hereunder shall, in the event of his death while still an officer of the Company, become thereby fixed and vested not merely as to the distribution for the year of death but for all distributions hereunder in subsequent years and the Trustee shall annually pay all subsequent shares pertaining to such Beneficiary, to his executor, administrator or designated relative."
Provision was made that if any beneficiary left petitioner's service, was dismissed, or, if not an officer, died, his rights and interest in the trust fund were defeated. It was further provided that petitioner could, but was not required to, appoint substitute 1946 U.S. Tax Ct. LEXIS 110">*115 beneficiaries, and, lacking such substitution, the share of any ineligible beneficiary was to be distributed in accordance with their proportion to the remaining beneficiaries.
By its terms the trust agreement was made irrevocable and provided that petitioner should:
* * * under no circumstances have any right to obtain possession or control of any portion of the funds hereby or subsequently transferred by it to the Trustee, nor does the Company reserve any right to alter, amend, modify, cancel or terminate this Trust Agreement or the Trust fund herein provided.
Respondent disallowed as a deduction the entire sum of $ 10,000 contributed by petitioner to the trust fund.
OPINION.
Only two provisions could entitle petitioner to the claimed deduction for its contribution to a putative "profit sharing trust." The first, section 23 (a), requires, among other things, the element of "compensation [to employees] for personal services actually rendered," or at least of "ordinary and necessary" business expense.
At the close of the tax year, no employee had more than an expectancy in the so-called trust or in the payment made to it. It was specified that:
If any of the Beneficiaries named in1946 U.S. Tax Ct. LEXIS 110">*116 Schedule A shall * * * be dismissed * * * or, if any Beneficiary, who is not an officer of the Company shall die, such Beneficiaries shall thereupon immediately lose all rights and interests in the Trust fund * * *.
7 T.C. 428">*431 As if to remove any element of compensation for past services, it is emphasized that:
The benefits provided for the Beneficiaries under this Trust have no relation whatever to the determination of the amount of compensation to be paid to an employee or officer of the Company by way of salary or commission or to any of the terms of employment, but are in addition thereto. The Company [petitioner] may terminate the employment of any Beneficiary as freely and with the same effect as if this Trust had never been created and the same shall not be construed as giving any Beneficiary the right to be retained in the service of the Company or any right, in the event of his discharge, to claim any interest under this Trust Agreement.
As in Lincoln Electric Co., 6 T.C. 37, 53-54:
* * * we think that the benefits to the employees upon the payment to the trust in 1941 were so uncertain, indefinite, and intangible as not to constitute "compensation1946 U.S. Tax Ct. LEXIS 110">*117 [paid]" to the employees. Admittedly, petitioner cannot recapture this fund, but the practical effect of its action appears to us to be little more than the creation of a reserve for use in future years in making payments to or for deserving employees * * *
* * * The employer can not retain the substance and grant only the shadow. The benefit to the employee, when such disbursements are made, must be less illusory and more certainly tangible and definite than those here in dispute. * * *
And that the payments to the trust might be "appropriate and helpful" in retaining the loyalty of petitioner's employees -- a premise of which on this record we are by no means convinced -- wouldyet "not establish them as necessary within the purview of section 23 (a) * * *." Lincoln Electric Co., supra, pp. 55, 56.
The ground principally relied on here, however, although concededly inapplicable in the Lincoln Electric case, is section 23 (p). But that section envisages a continuity of program which is lacking here. It requires that a deductible payment be "apportioned in equal parts over a period of ten consecutive years * * *." Much that has already been1946 U.S. Tax Ct. LEXIS 110">*118 said would serve to demonstrate the inapplicability of the provisions of section 165 to this trust, which is a further prerequisite. But it suffices to note that only the single payment was ever made, and that the terms of the trust instrument even limit its operation to a five-year period.
No possibility of encompassing the plan before us within the entirely specific conditions of the statutory allowance seems to us even remotely conceivable. If petitioner is granted periodic deductions in subsequent years for payments actually made to specific employees, see Lincoln Electric Co., supra, -- a speculation upon which we express no opinion -- it will have gained the outer limit of tax benefit to which the facts appear to entitle it.
Decision will be entered for the respondent.