*21 Decision will be entered for the respondent.
Sec. 165 (b), 1939 Code -- Ordinary Income or Capital Gain. -- Petitioner was employed by X corporation which had an employees' pension trust. Y corporation acquired all assets of X in 1946 in a reorganization, and petitioner became an employee of Y. Y had its own employees' retirement plan but it continued the pension trust of X for 5 years until, in 1951, it was terminated by Y. Upon termination of the pension trust originally created by X, petitioner received a lump-sum payment in 1951 of $ 20,000. Held, the distributive share of the pension trust which petitioner received in 1951 was ordinary income and not long-term capital gain.
*455 The Commissioner determined a deficiency in income tax for the taxable year 1951 and additions to tax under section 294 (d) (1) (A) and (d) (2), 1939 Code, as follows:
| Deficiency | Sec. 294 (d) (1) (A) | Sec. 294 (d) (2) |
| $ 3,599.16 | $ 586.07 | $ 405.74 |
The chief question is whether the net amount of $ 16,121.83, which was received in 1951 by the petitioner Clarence F. Buckley from an employees' pension trust*23 is taxable as ordinary income, or is taxable as long-term capital gain under section 165 (b), 1939 Code.
FINDINGS OF FACT.
The petitioners are residents of Overland Park, Kansas. They filed a joint income tax return for the taxable year 1951 with the collector of internal revenue for the district of Kansas.
*456 The chief question relates to Clarence F. Buckley. He is sometimes referred to herein as Buckley, or as the petitioner. Pauline Buckley is before us only because a joint return was filed.
Scharff-Koken Manufacturing Company, hereinafter referred to as Scharff-Koken, a Missouri corporation, had its plant and offices in St. Louis, Missouri. It was engaged in the business of manufacturing corrugated cardboard shipping cases. All of its stock was owned by Edward E. Scharff, Nicholas Scharff, Paul W. Newell, and Grace Newell. The officers were Edward Scharff, president; and Nicholas Scharff, vice president.
Buckley first was employed by Scharff-Koken in 1921 as a traveling salesman in its midwest territory. In 1940, he became sales manager. His headquarters was in St. Louis. His supervisor was Nicholas Scharff. Buckley had eight salesmen working under him.
In 1946, *24 and before, the compensation for Buckley's services was determined on the basis of a basic salary of $ 12,000 per year, or $ 1,000 per month, plus a bonus of 15 per cent of profits from business which he obtained. His annual compensation amounted to not less than about $ 14,500 and not more than about $ 18,000.
Effective June 1, 1943, Scharff-Koken established a noncontributory pension trust fund for its employees which provided life insurance as well as annuity contracts. Buckley was covered by the plan and was a "participant" therein.
The Commissioner determined on October 12, 1944, that the pension trust was exempt under the provisions of section 165 (a), 1939 Code.
The pension trust agreement and the amendments thereto made on October 10, 1944, are incorporated herein by this reference. The normal retirement age under the plan was 65 years. The relevant provisions of the trust agreement are as follows:
ARTICLE VII.
TERMINATION OF EMPLOYMENTVII: 1. Termination of Employment Prior to Normal Retirement Date: If a participant ceases to be an employee of the Company prior to normal retirement date, then, and in that event, there shall be distributed to him, if living, *25 otherwise to his beneficiaries, the contract or the amount of his interest, at the time he ceases to be an employee, in the contract issued in his name, using as a basis the cash value of the contract as provided therein, such distribution to be in whole or in part as follows:
(a) Upon Permanent Disability, such disability to be determined by the Committee, which shall be conclusive on all parties, in full amount;
(b) Upon Death, in full amount, payable to the beneficiaries designated by the participant in a written instrument addressed to the Committee, or in the absence of such designation, to the deceased participant's executors or administrators;
*457 (c) Upon Resignation or Dismissal, in part, depending upon the number of full years of continuous employment since he became a participant as set forth in the following schedule:
| First 2 years | Nothing |
| In excess of 2 years and not exceeding 6 years | 25% |
| In excess of 6 years and not exceeding 9 years | 50% |
| In excess of 9 years and not exceeding 12 years | 75% |
| In excess of 12 years | 100% |
* * * *
ARTICLE IX.
TERMINATION AND MODIFICATIONIX: 1. Termination of the Plan. The Company by resolution of the*26 Board, may terminate this plan in its entirety. The Company shall notify the Committee and the Trustee of such termination, the notice to be accompanied by a copy of the resolution of the Board and thereupon the Committee shall direct the Trustee (a) to assign and deliver to each participant the contract or contracts issued in his name and held by the Trustee hereunder, and (b) to pay to the participating employees in the ratio of the premiums last paid on the contracts issued in their names the funds then held by the Trustee. No part of such funds shall in any event be paid to or for the benefit of the Company.
* * * *
IX: 3.A. Termination of the Plan Prior to November 23, 1953: Notwithstanding the provisions of Section VII: 1 and Section IX: 1, if at any time prior to November 23, 1953, the Plan is terminated or the full current costs thereof have not been met, the retirement benefits of any of the participants listed on Exhibit B attached hereto, including any death or survivor's benefits payable on behalf of any such employee who dies after retirement, shall not exceed the unrestricted benefits at the time. Unrestricted benefits are those which have been provided by the*27 Company contributions not exceeding the amounts shown on Exhibit B.
B. Termination of Employment Prior to November 23, 1953: If a participant listed on Exhibit B leaves the employ of the Company or withdraws from participation in the Plan when the full current costs have been met, the funds or benefits which he may receive from the Company's contributions (including any funds or benefits he has already received) shall not, at any time prior to November 23, 1953, exceed the amounts specified in Section IX: 3.A.
* * * *
D. Distribution of Benefits in Excess of Unrestricted Benefits: Any funds or benefits in excess of the unrestricted benefits shall be distributed to participants, other than those listed on Exhibit B, who have been continuously employed by the Company for at least eight (8) years, distribution to be made to them in the ratio of the annual retirement benefits that would have been paid to such participants had the Plan not been terminated, such annual retirement benefits to be determined on the basis of the contracts then in force.
Scharff-Koken paid all of the annual premiums for the employees' retirement annuity and life insurance contracts, which were issued*28 by the Equitable Life Assurance Company; the employees made no contributions to the pension trust fund and, therefore, Buckley made no payments to the fund at any time. However, under section 29.165-6 of Regulations 111, so much of the premiums as were paid *458 each year by the employer for life insurance protection constituted income to each employee for the year in which premiums were paid.
International Paper Company, henceforth called International, is a New York corporation which is engaged in the business of manufacturing and selling paper and paper products. It has a general office in New York City and a plant in Kansas City, Kansas.
On June 11, 1946, but as of June 30, 1946, International acquired all of the assets of Scharff-Koken in a reorganization which came within section 112 (b) (4), 1939 Code. Scharff-Koken was dissolved on June 11, 1946, and a certificate of dissolution was issued on October 31, 1946.
William Davis, the general manager of the container division of International, had a meeting with employees of Scharff-Koken in July 1946, including Buckley, when he asked them to become employees of International. International continued the same business as*29 had been carried on by Scharff-Koken. Davis discussed salary and work arrangements with Buckley; Buckley agreed to work for International and to accept a fixed salary without any bonus payments. Buckley became an assistant sales manager at an annual salary of $ 13,750. His supervisor was Nicholas Scharff who became a sales manager of International. The location of Buckley's office continued to be the same as it was when Scharff-Koken was in existence, in St. Louis, and he continued his sales activities. He began work for International on July 10, 1946.
Buckley's duties, as described above, continued until November 1947, when he became manager of International's plant in Kansas City, Kansas, with his office there, at the same salary.
International had its own employees' retirement plan which had been created on January 1, 1945, and had been approved by the Commissioner. However, employees of International were required to work for 5 years before they could become participants in the retirement plan, so that former employees of Scharff-Koken, when they became employees of International in 1946, could not go under its pension plan until 1951.
By letter dated June 2, 1946, International*30 requested the Commissioner to advise whether the Scharff-Koken pension trust plan could be continued along with International's retirement, pension plan. The Commissioner, by letter dated August 29, 1947, approved the continued status of both pension plans under section 165 (a) of the 1939 Code.
Under the circumstances, International decided to continue the Scharff-Koken pension trust so that, inter alia, those former employees of Scharff-Koken who had become employees of International would be covered by a pension plan until they became eligible for participation in International's pension plan; i. e., International decided *459 to continue the Scharff-Koken plan for 5 years from June 30, 1946. International, therefore, paid the premiums on the annuity and life insurance contracts under the Scharff-Koken plan and, otherwise, made contributions to that plan, in the manner and in the amounts prescribed in that plan, from June 30, 1946, until July 1, 1951. Buckley and other employees of International who had been employed formerly by Scharff-Koken became eligible for membership in the retirement plan of International on June 30, 1951.
On July 17, 1951, International forwarded*31 a letter to the Commissioner requesting a ruling as to whether the termination of the Scharff-Koken pension trust plan as of June 30, 1951, or as soon thereafter as was practicable, was permissible, and also a ruling on a contemplated method of distribution.
By letter dated July 31, 1951, the Commissioner advised International that the prior status of Scharff-Koken pension trust plan under section 165 (a) would not be adversely affected if the termination was carried out in accordance with the details set forth in International's letter of July 17, 1951.
The board of directors of International, at a meeting held on June 26, 1951, adopted a resolution authorizing termination of the Scharff-Koken pension trust plan on July 1, 1951, or as soon thereafter as practicable. The Scharff-Koken plan was terminated as of July 1, 1951. Distribution was made as of June 30, 1951, of the contracts and cash in the hands of the trustee to the participants.
The cash value as of June 30, 1951, of the contract held by the trustee in the name of Buckley amounted to $ 25,259.85. However, under article IX: 3.A of the plan, as amended, the maximum amount distributable to Buckley was $ 20,000, which amount*32 was distributed to him during 1951. The remaining amount, $ 5,259.85, was distributed to other participants in the Scharff-Koken plan, in accordance with the provisions of article IX: 3.D of the plan, as amended.
During the years 1943-1946, inclusive, and 1947-1950, inclusive, the portions of the premiums payable each year on the annuity and life insurance policies under the Scharff-Koken pension plan, which were paid first by Scharff-Koken and then by International and which were attributable to the maintenance of life insurance on Buckley's life, were the amounts set forth below, which amounts Buckley included in income in his income tax returns for each of the years 1943-1950, inclusive, and paid income tax thereon:
| Life insurance | |
| Year | premiums |
| 1943 | $ 728.55 |
| 1944 | 699.85 |
| 1945 | 671.85 |
| 1946 | 647.55 |
| 1947 | 230.37 |
| 1948 | $ 321.75 |
| 1949 | 302.40 |
| 1950 | 275.85 |
| Total | 3,878.17 |
*460 In 1946, Buckley was 51 years old. He had a heart attack in May 1950, and was unable to work for 3 months. He was in an automobile accident in March 1951, which incapacitated him for 3 months. On January 13, 1953, when he was 58 years old, International terminated his employment.
From July*33 1, 1951, until January 1953, when his employment with International was terminated, Buckley was a participant in International's retirement plan, and he made periodic contributions to that plan. When his employment by International was terminated, he had not yet reached the retirement age of 65 years under International's plan. Therefore, all of his contributions to the International's plan were refunded to him in January 1953.
As noted above, petitioner Buckley had included in income in his returns for the years 1943-1950, inclusive, the total amount of $ 3,878.17, the taxable portion of premium payments which represented premiums on insurance on his life. In the joint return for 1951, with respect to his receipt of $ 20,000 under the Scharff-Koken plan, he reported a long-term capital gain in the amount of $ 16,121.83, which was the net amount by which $ 20,000 exceeded $ 3,878.17, upon which income tax had been paid, and he included in taxable income one-half, $ 8,060.92, as long-term capital gain.
Respondent determined that the sum of $ 16,121.83 represented ordinary income, taxable in full. Respondent determined, also, that a deduction taken in the return for State sales *34 tax was excessive to the extent of $ 81.52. This latter determination is not contested.
Petitioners did not file a declaration of estimated tax for 1951.
The stipulated facts are found as stipulated; the stipulation of facts is incorporated herein by this reference.
OPINION.
Section 165 (b) provides that the amount actually distributed or made available to a distributee out of an employees' pension trust shall be taxable to him under section 22 (b) (2) as if it were an annuity, but if such distribution to a distributee is paid to him on account of his "separation from the service," then such distribution shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. The question here is whether the distribution to Buckley in 1951 from the Scharff-Koken pension trust fund comes within the exception set forth in section 165 (b), 1 so as to be taxable as capital gain.
*35 *461 The phrase "separation from the service" means separation from the service of "his employer." . Buckley became an employee of International in July 1946 and was not paid for his services thereafter by Scharff-Koken, which was dissolved. There is no difficulty in concluding that Buckley's employment by Scharff-Koken was terminated in June 1946, and that there was a "separation from the service" of that employer. . Also, the lump-sum payment of $ 20,000 which Buckley received in 1951 was such payment, within 1 taxable year of Buckley, the distributee, as is required by section 165 (b). That the distribution of $ 20,000 was not made during the same year in which Buckley's services to Scharff-Koken were terminated would not prevent, in and of itself, bringing into play here the latter part of section 165 (b) which allows capital gains treatment of a distribution from an employees' pension fund. See , where the taxpayer's services to his employer were terminated in 1949, when, *36 also, the taxpayer's rights to a distribution from an employees' pension fund became fixed, but a lump-sum payment was not made to the former employer until 1950. Cf. , affirmed per curiam .
In spite of the above, the question here turns on the fact that International elected to, and did, take over and continue the Scharff-Koken pension trust as of June 30, 1946. International continued that plan for 5 years, making contributions to the plan, and during those 5 years, Buckley was an employee of International. Buckley continued to be an employee of International after it terminated the pension trust which had been originally created by Scharff-Koken. Under these facts and circumstances, we cannot conclude that the distribution in 1951 of $ 20,000 to Buckley was, in fact, made "on account of the employee's separation from the service" as the latter part of section 165 (b) provides.
The issue in this case must be decided against the petitioner as was done in The facts here are different from those in *37 The rationale of the Mary Miller case cannot be applied here, nor can the Glinske case be distinguished, as was done in the Mary Miller case. Here as in the *462 Glinske case, the new transferee-employer, International, assumed the Scharff-Koken plan and retained it for 5 years thereafter, and when payment was made to Buckley, the payment was made on account of termination of the plan; it was not made on account of termination of the services of Buckley to International, which did not occur until 1953. In the Glinske case the new employer continued a plan for 50 days.
It is held, on the basis of the facts of this case, that the distribution in 1951 to Buckley, to which he did not make any contribution, constituted ordinary income to him. Respondent's determination is sustained.
Petitioners did not file a declaration of estimated tax for 1951. Such declaration was required under section 58 (a), 1939 Code, at least on or before September 15, 1951, because in June petitioners received gross income of more than $ 100 from sources other than wages, and their total gross income could reasonably be expected to exceed $ 600. Petitioners offered no evidence under*38 this issue and did not attempt to establish that their failure to make and file a declaration of estimated tax was due to reasonable cause and not willful neglect. It is held that petitioners are liable for an addition to tax for 1951 under section 294 (d) (1) (A) for failure to file a declaration of estimated tax.
The Commissioner also made addition to the tax for 1951 under section 294 (d) (2) for substantial underestimation of estimated tax. Petitioners presented no evidence in opposition to the respondent's determination.
Section 294 (d) (2) prescribes an addition to the tax where 80 per cent of the tax exceeds the estimated tax. Regulations 111, section 29.294-1 (b) (3) (A), provides that in the event no declaration of estimated tax is filed where the filing of such declaration is required, the amount of the estimated tax is considered to be zero. The failure of petitioners to file a declaration of estimated tax necessarily resulted in a substantial understatement of estimated tax and, therefore, an addition to the tax under the mandatory provisions of section 294 (d) (2) is required. ; ,*39 affirmed on other grounds ; .
The amounts of the additions to tax under section 294 (d) (1) (A) and (d) (2) determined by the respondent do not have to be adjusted because of our holding under the main issue. The additions to tax under section 294 (d) (1) (A) and (d) (2) are sustained.
Decision will be entered for the respondent.
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. * * *↩