*2311 A contribution to a benefit fund for sick employees is deductible from gross income for the year as an ordinary and necessary expense of carrying on the petitioners' business, where the facts and circumstances connected with the creation and operation of the fund show that it is a trust.
*317 The Commissioner determined deficiencies for 1921 was follows:
| Lemuel Scarbrough | $744.80 |
| J. W. Scarbrough | 181.70 |
| Mrs. J. W. Scarbrough | 181.70 |
*318 The contention of petitioners is that the Commissioner erred in his refusal to allow as a deduction, in determining the net income of petitioners, $3,500 paid by the partnership of E. M. Scarbrough & Sons into a fund known as the "Scarbrough Employees Benefit Fund."
The partnership consisted of E. M. Scarbrough and his two sons, Lemuel Scarbrough and J. W. Scarbrough. Mrs. J. W. Scarbrough, the wife of J. W. Scarbrough, is involved because of her interest in community property under the laws of the State of Texas.
FINDINGS OF FACT.
The petitioners are residents of Austin, Tex.*2312 E. M. Scarbrough, J. W. Scarbrough, and Lemuel Scarbrough constituted the partnership carrying on the business of a department store. They kept their accounts on the cash receipts and disbursements basis.
There was a meeting of the partnership of E. M. Scarbrough & Sons on July 13, 1914, at which meeting all three partners were present. E. M. Scarbrough was elected president, J. W. Scarbrough, first vice president, Lemuel Scarbrough, second vice president, one R. E. Megee, secretary, and J. P. Hale, manager. The five persons then constituted the board of directors.
December 30, 1924, there was a special meeting of the board of directors, at which the following members of the board were present: E. M. Scarbrough, president, J. W. Scarbrough, vice president, J. P. Hale, manager, J. J. Yeates, advertising manager, and D. M. Moffatt, secretary.
The meeting was called for the purpose of considering a health fund for the employees.
Prior to that date there had been some investigation and discussion by members of the board touching provisions for payment of employees while absent due to sickness.
A motion was made by E. M. Scarbrough, seconded by J. W. Scarbrough and duly*2313 carried "that we deposit Thirty-five hundred ($3,500.00) dollars in the State National Bank as a sick fund for the employees."
A motion was made by E. M. Scarbrough, seconded by J. W. Scarbrough, and passed that D. M. Moffatt, an employee of the partnership, be made treasurer of this fund.
December 31, 1921, a check of E. M. Scarbrough & Sons for $3,500 was deposited in the State National Bank and an account in that amount was then opened in that bank in the name of "Scarbrough Employees Benefit Fund."
*319 The fund was placed as a savings account, but subject to withdrawal by the sue of a special check in the name of the fund, signed by the treasurer thereof.
A plan for the administration of the fund was orally agreed upon, which followed the plan outlined in one of the policies of the Aetna Life Insurance Co., requiring the employees who were absent on account of sickness to fill out a prescribed form indicating the cause of their disability, the date of illness, whether confined to their home or hospital, what physician attended the employee, the first and last call of a doctor, if any, etc., which form after being signed by the employee, was to be verified by the*2314 physician, if any attended. If none attended, then the treasurer of the fund was to satisfy himself by other means that the employee was entitled to the benefits flowing from the fund before receiving such benefits.
Employees of the firm were notified of the establishment of the fund and new employees were so informed at the time of their employment.
The fund was under the exclusive control of the treasurer thereof, who was himself an employee, and ever since its first establishment the treasurer thereof has maintained a bank account in the name of the fund.
Such fund was not commingled with any bank account of the partnership and has been used only for the purposes for which established, as heretofore indicated. Accounts kept for the fund were separate from the partnership accounts, and the partnership books at no time since the establishment of the fund have in any manner reflected any interest therein. In accordance with the plan adopted, payments from the fund have been made from time to time to employees entitled thereto, as follows:
| 1922 | $476.09 |
| 1923 | 369.26 |
| 1924 | 626.78 |
| 1925 | $1,593.05 |
| 1926 | 675.00 |
| 1927 | 850.00 |
Interest earned by the fund*2315 since its establishment has been added to the fund, and no part of such income has ever gone to the partnership.
After the deposit of said fund in the State National Bank it failed, and thereafter, in 1926, the treasurer of the fund received as a dividend about 85 per cent of the amount of the fund on deposit at the time of the failure.
The dividend was deposited by the treasurer in the American National Bank, where the fund has been since kept. The bank was advised of the nature and purpose of the fund. No one except the treasurer of the fund has ever had any right to withdraw any portion of it, or make any disbursement therefrom for any purpose.
*320 No fiduciary or income-tax returns have ever been made of the income from the fund, because in each year the income has not been sufficient to require it.
Additional contributions to the fund have been made from time to time by the partnership as follows: 1922, $476.90; 1923, $600; 1925, $765.48; 1927, $1,106.44.
E. M. Scarbrough, one of the partners, died in 1925. The inventory of his estate for Federal tax purposes reflected no interest in the fund in showing the interest of the estate in the partnership.
*2316 The partnership has been continued since the death of E. M. Scarbrough by his two sons, J. W. and Lemuel Scarbrough.
The partnership has made and makes no claim of title to the fund, nor of any interest therein, and it was originally and has since been the intention of the partnership in establishing the fund and in making further contributions thereto to part with all right or title to the moneys paid in to it to the end that the same would become permanently set aside for the benefit of its employees.
OPINION.
LITTLETON: The Commissioner appears to have disallowed as a deduction a contribution to the Scarbrough Employees Benefit Fund, upon the ground that no trust fund was established and the amount claimed was nothing more than a part of the funds of the partnership. He relies in support of his action upon the determination of the Board in , in which the Board, in distinguishing , said:
* * * There is no evidence in the instant case, as there was in that case, of an agreement, either written or oral, between the petitioner and its employees, looking toward*2317 the establishment of a trust fund, nor can we find from the act of the petitioner in establishing the said fund that there was any intent to create a trust of the amount set aside pursuant to the order of the industrial commission of Utah. * * * The fact that the Industrial Commission, as a protective measure, directs the establishment of a reserve does not make that fund a trust fund, thus divesting the employer of legal title thereto, nor place it under the control of said commission.
* * *
In the Hibbard, Spencer, Bartlett & Co. case the amount of the pension fund was in no manner reflected in the books of the taxpayer. In the instant case the amount was carried in the balance sheet of the petitioner as an asset, which was offset by a corresponding reserve for workmen's compensation insurance. * * *
The petitioners insist, and we agree, that the facts in these proceedings bring them within the principle announced by the Board in , and . There are some differences in the *321 form of the plan adopted by Hibbard, Spencer, Bartlett & Co. and the*2318 one here involved, but in principle and purpose they are very similar. The facts in these proceedings show that the partnership completely parted with claim to or control over the funds; that it was administered by one of the employees of the partnership; and all employees of the partnership and new ones coming in were notified of the creation, existence and purpose of the benefit fund. The fund has continued to the present time and payments, as benefits, to employees have been regularly made therefrom by the treasurer of the fund and additional contributions have been made from time to time by the partnership. In , the Board said:
In the case we are considering the money paid or contributed by the employer, together with the other money paid into the fund and all accretions, was to be and was held and dealt with for the benefit of the employees under the terms of the agreement. Immediately there was a separation of the legal and equitable estates in the money. So long, at least, as the fund was not liquidated, the employer ceased to be the beneficial owner of the part it had contributed. The respondent argues the "the*2319 employer had the same power with reference to this fund, in so far as its own contributions were concerned, as it had with reference to its other funds." But this is not so. For the reasons just stated, as soon as it made a payment to the fund it ceased to have any rights in that payment except a possibility of reversion upon liquidation of the fund. The money could be used for certain purposes prescribed in the regulations and for no other purpose. A court of equity could restrain any attempt to use the fund otherwise than for the purposes of the trust.
We are of opinion that the fund here involved was a trust and that the contributions thereto by the partnership of E. M. Scarbrough & Sons constitute a proper deduction from gross income.
Reviewed by the Board.
Judgment will be entered under Rule 50.