*24 Decision will be entered under Rule 50.
Petitioner made annual contributions to an association of its employees which provided sick and disability benefits, medical aid, burial expenses, group life, accident, and hospital insurance, and other benefits for members who paid dues. Petitioner contributed $ 12,000 in addition to its regular contribution for 1943. Held, the $ 12,000 payment is deductible as an ordinary and necessary business expense paid in 1943.
*874 The respondent determined a deficiency of $ 10,691 in excess profits tax for the year 1943. The sole adjustment challenged is the disallowance of a deduction of $ 12,000 taken on petitioner's return for *25 a contribution to the Weil Clothing Co. Employees' Aid Association as an ordinary and necessary business expense. Part of the facts are stipulated. Other facts are determined from the evidence adduced. Uncontested adjustments will require a computation under Rule 50.
FINDINGS OF FACT.
Petitioner is a corporation, organized under the laws of the State of Missouri, with its principal office in St. Louis, Missouri. It operates a retail clothing store in that city. It filed corporation income and excess profits tax returns for the calendar year 1943 with the collector of internal revenue at St. Louis.
The Weil Clothing Co. Employees' Aid Association, hereinafter referred to as the association, was created as a nonprofit organization in 1926 under the laws of Missouri. It was established and controlled by the employees. Its original stated purposes were to pay sick and disability benefits to its members, provide them with physicians, nurses, and necessary medicines, provide pecuniary aid to members in temporary need of assistance, pay all or part of the burial expenses of deceased members, and provide for the education, recreation, and amusement of members and for the maintenance*26 of indigent members who are aged and infirm. Subsequently, the purposes were extended to provide group life, accident, and hospital insurance for participating members. Membership is restricted to employees and persons under the jurisdiction of Weil Clothing Co. Every employee employed for 30 days is requested to join, but not all employees of petitioner are members. Funds are derived from voluntary contributions and assessments on the members. On July 31, 1939, the Commissioner of Internal Revenue held that the association was a welfare organization and was exempt, under section 101 (8) of the Internal Revenue Code, from income tax.
The officers and directors of the association are elected annually from its members in good standing. There were 39 members in 1943. Members pay weekly dues into the association. Petitioner is under no obligation to contribute to the association, but it has been petitioner's practice to contribute each year an amount equal to the dues collected from the members. Petitioner has also contributed part of the cost of group hospitalization for the members and part of the cost of the employees' annual picnic.
The following schedule shows the receipts*27 and disbursements of the association for the years 1940 to 1943, inclusive: *875
| 1940 | 1941 | |
| RECEIPTS | ||
| Balance January 1 | $ 451.62 | $ 59.05 |
| Life insurance premiums, employees | 809.40 | 857.41 |
| Dues, employees | 544.90 | 522.00 |
| Contributions, Weil Clothing Co | 544.90 | 522.40 |
| Sale of U. S. bond | 1,097.37 | |
| Interest collected | 148.04 | 147.50 |
| Lump sum contributions | ||
| Miscellaneous | 29.05 | 11.55 |
| Picnic contribution, Weil Clothing Co | 100.00 | 100.00 |
| Group hospital dues, Weil Clothing Co | 273.20 | 250.00 |
| Group hospital dues, employees | 440.55 | 429.65 |
| Accident insurance premiums, employees | 74.40 | |
| Loan, Weil Clothing Co | 200.00 | |
| Total | 3,341.66 | 4,271.33 |
| DISBURSEMENTS | ||
| Group life insurance premiums representing amounts | ||
| paid by employees for that purpose | 809.40 | 857.41 |
| Refund of amount advanced by Weil Clothing Co. for | ||
| group life insurance premiums on policies on | ||
| employees | 177.09 | |
| Group life insurance premiums paid by association | ||
| from dues and contributions of Weil Clothing Co | 683.21 | 474.90 |
| Accident insurance premiums paid by association | 122.20 | 105.20 |
| Sick benefits | 493.32 | 580.64 |
| Picnic | 218.63 | 211.31 |
| Dinner | 93.06 | |
| Wedding presents | 81.98 | |
| Flowers | 38.76 | 32.34 |
| Miscellaneous | 58.80 | 20.40 |
| Group Hospital Service, Inc | 683.25 | 667.70 |
| U. S. bonds purchased | ||
| Loan repaid Weil Clothing Co | 200.00 | |
| Balance, December 31 | 59.05 | 944.34 |
| Total | 3,341.66 | 4,271.33 |
| 1942 | 1943 | |
| RECEIPTS | ||
| Balance January 1 | $ 944.34 | $ 1,055.49 |
| Life insurance premiums, employees | 887.25 | 788.34 |
| Dues, employees | 563.75 | 518.70 |
| Contributions, Weil Clothing Co | 563.75 | 518.70 |
| Sale of U. S. bond | 1,000.00 | |
| Interest collected | 328.13 | |
| Lump sum contributions | 112.50 | 12,000.00 |
| Miscellaneous | 1.50 | |
| Picnic contribution, Weil Clothing Co | 100.00 | |
| Group hospital dues, Weil Clothing Co | 250.00 | 210.80 |
| Group hospital dues, employees | 461.20 | 400.55 |
| Accident insurance premiums, employees | 109.50 | 98.20 |
| Loan, Weil Clothing Co | ||
| Total | 3,893.09 | 17,020.41 |
| DISBURSEMENTS | ||
| Group life insurance premiums representing amounts | ||
| paid by employees for that purpose | 886.65 | 788.94 |
| Refund of amount advanced by Weil Clothing Co. for | ||
| group life insurance premiums on policies on | ||
| employees | 150.25 | 279.17 |
| Group life insurance premiums paid by association | ||
| from dues and contributions of Weil Clothing Co | 518.55 | 476.85 |
| Accident insurance premiums paid by association | 108.20 | 98.30 |
| Sick benefits | 210.35 | 414.64 |
| Picnic | ||
| Dinner | 129.75 | |
| Wedding presents | ||
| Flowers | 5.10 | 20.20 |
| Miscellaneous | 43.50 | 43.50 |
| Group Hospital Service, Inc | 693.00 | 586.25 |
| U. S. bonds purchased | 222.00 | 1,500.00 |
| Loan repaid Weil Clothing Co | ||
| Balance, December 31 | 1,055.49 | 12,682.81 |
| Total | 3,893.09 | 17,020.41 |
*29 The disbursements were made in accordance with the bylaws of the association.
Petitioner's capital stock issued and outstanding and fully paid for amounted to $ 300,000, divided into 3,000 shares with a par value of $ 100 each. The dividends paid on each share during each year and the surplus account of the petitioner on December 31 of each year were as follows:
| Dividends | Surplus | |
| Year | per | Dec. 31 -- |
| share | ||
| 1927 | $ 15.00 | $ 50,407.98 |
| 1928 | 10.00 | 55,113.59 |
| 1929 | 2.50 | 51,139.45 |
| 1930 | 2.50 | 7,270.58 |
| 1931 | - 7,155.94 | |
| 1932 | - 58,238.69 | |
| 1933 | 17,302.78 | |
| 1934 | 5.00 | 12,631.02 |
| 1935 | 3.00 | 29,648.23 |
| 1936 | 9.00 | 29,760.12 |
| 1937 | 8,814.70 | |
| 1938 | - 9,970.53 | |
| 1939 | - 9,687.08 | |
| 1940 | 2,158.85 | |
| 1941 | 6.00 | 15,626.87 |
| 1942 | 6.00 | 24,720.33 |
| 1943 | 6.00 | 33,282.77 |
On November 15, 1943, at a special meeting of the board of directors of petitioner the following proceedings occurred:
Mr. Ralph Weil stated that the officers of the Company had been giving consideration for several months to the necessity of augmenting the reserves of the *876 Weil Clothing Company Employees' Aid Association because of the fact that a good number of the*30 members of the Association are up in years and it is to be reasonably anticipated that they will be more subject to illness than when they were younger and that the older members seem to be fearful that there will not be sufficient funds to enable them to receive the benefits that they feel they are entitled to receive from the Association. Mr. Weil further stated that in his opinion it would be to the benefit of the Company if these fears of the employees were in a measure allayed, that the feeling on the part of the employee that he will receive some benefit from the Association should illness overtake him gives him a sense of security. He stated that in his opinion it would be a good business move for the Company to contribute about $ 12,000.00 to the Association and though this sum would not result in the Association having as great a reserve as it should have for its purposes according to actuarial statistics, still it would put the Association's finances on a much sounder basis.
Upon motion duly made, seconded and carried, it was
Resolved, That Weil Clothing Company contribute to Weil Clothing Company Employees' Aid Association the sum of Twelve Thousand Dollars ($ 12,000.00).
*31 It was stipulated that employees' aid or welfare associations exist as adjuncts of certain large retail stores in St. Louis, namely, the Famous-Barr Co., Stix, Baer & Fuller, and Sonnenfeld's, whereby benefits similar to those provided through the Weil Clothing Co. Employees' Aid Association, primarily health or sickness benefits, are provided; that employees of such stores pay dues to the respective associations; that in each case the employer makes an annual contribution to the association; and that such associations have been functioning for many years.
Petitioner's corporation income and declared value excess profits tax return for 1943 reported gross sales of $ 1,464,965.16; cost of goods sold, $ 976,887.94; and gross profit from sales, $ 488,077.22. Total income was reported as $ 499,425.30. Total deductions were claimed of $ 442,711.96, including compensation of officers, $ 21,908.74; and other salaries and wages, $ 137,897.38. Net income of $ 56,713.34 and tax of $ 9,778.46 were reported. The schedule of "other deductions" included an item of $ 12,729.50 for "Weil Welfare Association (Employees)." The excess profits tax return showed a tax of $ 23,279.24.
The pay roll *32 of the petitioner for 1943 was approximately $ 200,000.
The bylaws of the association provided a schedule of sick benefits, and for group life insurance and group hospital service, and prescribed the dues to be paid therefor. The cost of these services in excess of the dues was paid from the association's treasury. The rates for group life insurance increased as the ages of the employees increased. Some of the older employees complained to petitioner's officers that the association's funds were not sufficient to assure continuation of this group insurance.
The payment of $ 12,000 made by petitioner to the association in 1943 was an ordinary and necessary expense of petitioner's business.
*877 OPINION.
Petitioner is engaged in the retail clothing business in St. Louis, Missouri. Its employees formed an employees' aid association in 1926 to provide certain benefits for members. In 1943 most of petitioner's employees were members. For many years petitioner contributed to the association amounts equal to the general dues paid in by members, as well as certain group hospital dues, and made contributions for employees' picnics. Petitioner claimed and was allowed deductions in*33 its corporation income tax returns for such payments. In the taxable year 1943 petitioner, in addition to paying $ 829.50 for these purposes, made a contribution of $ 12,000 to the association. Respondent allowed the deduction of $ 829.50, but disallowed the deduction of $ 12,000, stating that this "extraordinary contribution does not qualify as an allowable deduction under section 23 (a) or any other section of the Internal Revenue Code."
Petitioner's argument is that in 1943 it was difficult to keep experienced employees; that some 13 of its employees had been with petitioner for 18 years or more, and some 29 had been employed for over 6 years; that the Employees' Aid Association, with the benefits it provided for disability, hospitalization, group insurance, and medical care, was an important factor in retaining the loyalty and good will of its employees; that the loss of some of these employees would be costly to petitioner; that the association did not have the resources to guarantee the payment of the benefits it had undertaken to pay; and that the contribution of $ 12,000 was made for a business purpose -- that of improving and maintaining the morale and loyalty of its employees*34 and providing the association additional funds to meet its undertakings on a basis that was more nearly sound actuarially.
In Lemuel Scarbrough, 17 B. T. A. 317, a payment into a sick benefit fund for employees of the taxpayer was held to be an ordinary and necessary business expense where the employer completely parted with control over the fund. In W. M. Ritter Lumber Co., 30 B. T. A. 231, 246-248, payments to employees' committees for welfare work among the employees, the employer having no control over the expenditure of the money, were held deductible as ordinary and necessary business expenses.
In Gisholt Machine Co., 4 T. C. 699, a payment in 1941 into a retirement trust for the benefit of certain employees was held deductible under section 23 (a) as within reasonable compensation for their services. Although the employer named the trustees administering the trust, the employees had specified shares in the fund. In Surface Combustion Corporation, 9 T.C. 631">9 T. C. 631, (on appeal, CA-6) the employer made contributions to profit-sharing trusts in which the employees*35 had *878 stated shares payable to them under certain contingencies, but which were forfeitable if they left the employment or were discharged for cause. The employer named the trustees to administer the fund and could modify the trust if two-thirds of the beneficiaries consented. We held that the payment was deductible under section 23 (a) as reasonable additional compensation for services.
We think that, in accordance with the foregoing cases, the payment here is deductible under section 23 (a) as an ordinary and necessary business expense. The evidence of the length of service of petitioner's employees, the difficulties of procuring and training new employees, the ratio of the questioned payment to the total pay roll for the year, and the apparent need of the funds by the employees' organization to assure the benefits it had undertaken to provide, or to increase those benefits, convince us of that fact.
Respondent makes no contention that section 23 (p) of the Internal Revenue Code applies. This is not a payment under a stock bonus, pension, profit-sharing, or annuity plan or a plan deferring the receipt of compensation. Cf. Times Publishing Co., 13 T. C. 329.*36
Respondent cites and relies upon Roberts Filter Manufacturing Co., 10 T.C. 26">10 T. C. 26; affd., 174 Fed. (2d) 79, in which we held that a payment to create a trust fund to provide certain benefits for the taxpayer's employees, the fund to be administered by a board of managers having wide powers in determining the benefits and their recipients, was not deductible as an ordinary and necessary expense of the taxpayer's business. There are several important differences between the cited case and the present case. The payment here was to an organization formed and controlled by the employees, who could themselves determine what benefits were to be paid. In the cited case the payment was made to create a trust in which the employer dominated the board of managers controlling the expenditure of the fund and reserved power to modify the trust agreement. The contribution here was but 6 1/2 per cent of the year's pay roll, as compared with about one-third of the pay roll in the Roberts Filter case. The petitioner had contributed lesser amounts to the employees' organization for many years, while in the Roberts Filter case the payment*37 was the first of such a nature. The petitioner's employees were all eligible for membership in the association and all members were eligible for benefits. In the Roberts Filter case employees were not eligible for benefits until they had served for five years. As the Court of Appeals for the Third Circuit pointed out in affirming the Tax Court's decision in the Roberts Filter case, the company there:
* * * did little more than promise that, at some time in the indefinite future, it would distribute a fund of uncertain size, in undetermined proportions or amounts, among a fraction of its employees.
*879 In the present case the petitioner in the taxable year parted irrevocably with $ 12,000, which its employees, through their own organization, may expend for their own benefit as they see fit, and pursuant to the bylaws of that organization. We think this case is not controlled by the Roberts Filter case.
Respondent also cites our decision in Lincoln Electric Co., 6 T. C. 37 (reversed (CCA-6), 162 Fed. (2d) 375), where we held that a payment of $ 1,000,000 into a profit-sharing trust to provide separation*38 allowances, death benefits, or annuities for employees or their families, disbursement being under the orders of a committee named by the employer, was not deductible as an ordinary and necessary business expense or as compensation paid for services rendered. We consider that case inapplicable here. The trust there was created to establish a fund from which the employer, through a committee, could provide separation allowances to employees whom it anticipated it would be forced to drop from its employ. The rights of the employees in that fund we considered too nebulous and uncertain to support a conclusion that they had received compensation in the year of the contribution. We said the action of the employer appeared to be little more than the creation of a reserve for use in future years in making payments to or for such deserving employees as it might choose to benefit. This is not the situation in the present case.
In Robertson v. Steele's Mills, 172 Fed. (2d) 617; certiorari denied, 338 U.S. 848">338 U.S. 848, the Court of Appeals for the Fourth Circuit held that a payment to establish a trust fund from which a committee named*39 by the employer could make loans to the employees in its discretion, the fund to be distributed at the end of 20 years among employees of 5 years' service as determined by the committee, was not deductible as an ordinary and necessary expense of the taxpayer's business. This decision was in accord with Roberts Filter Manufacturing Co., supra. It is not applicable here.
An important distinguishing feature in these cases is the element of control retained by the employer over the use and distribution of the fund. Another is the right and interest in the fund accruing to the individual employee. In the present case no control whatever was retained by the petitioner. While the individual employee acquired no such fixed and measurable interests as in Gisholt Machine Co., supra, and Surface Combustion Corporation, supra, where their rights were deemed sufficient, despite a measure of control by the employer over the expenditure of the fund, to support the deductibility of the payment the employees here, collectively, had complete control over the allotment and use of the fund.
The respondent*40 argues that the payment here should be treated as a capital investment rather than a deductible expense, as its benefits *880 to petitioner's employees are not confined to the taxable year, and may apply to employees subsequently hired. However, any such application would not be by the petitioner, as the fund was controlled by the employees. The payment did not result in the acquisition of an asset by petitioner, but actually reduced its resources. It was not a capital investment. While petitioner derived a benefit through the increased good will of its employees likely to result from the contribution, this is not a benefit which should be capitalized. See Elgin National Watch Co., 17 B. T. A. 339; affd., 66 Fed. (2d) 344.
The payment of $ 12,000 made by the petitioner in 1943 is deductible as an ordinary and necessary expense of petitioner's business.
Decision will be entered under Rule 50.
Footnotes
-. (Minus sign) indicates deficit.↩