Opinion
Docket Nos. 13167 13168 13169 13170.
1949-12-19
BERTRAM ALLENBERG, PETITIONER, ET AL.,* v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
J. Everett Blum, Esq., for the petitioners. W. J. McFarland, Esq., for the respondent.
Under the provisions of new subsection (d) of section 165 of the Internal Revenue Code, which was added by section 5(a) of Public Law No. 378 (approved Oct. 25, 1949), held that amounts which the employer of two of the petitioners contributed to an employees' pension trust in 1942 and 1943 shall not be included in the income of the petitioners for those years. J. Everett Blum, Esq., for the petitioners. W. J. McFarland, Esq., for the respondent.
The Commissioner has determined deficiencies in the income and victory tax liability of the petitioners for the year 1943 as follows:
+--+ ¦¦¦¦ +--+
Name Docket No. Deficiency Bertram Allenberg 13167 $7,854.01 Mildred Allenberg 13168 7,854.01 Phil Berg 13169 10,725.88 Leila Hyams Berg 13170 11,480.97
The question presented for decision relates to the income tax liability of Bertram Allenberg and Phil Berg, petitioners, who are residents of a community property state, which has required the filing of the petitions of their respective wives, the other petitioners, whose income tax liability is directly affected by the determination of the issue.
The petitioners concede that part of the deficiencies has been determined correctly.
The only question presented is whether Allenberg and Berg, respectively, are taxable on contributions which were made by their employer, the Phil Berg-Bert Allenberg corporation, to a pension trust which was created on June 30, 1940, for the benefit of employees of the corporation. Determination of the question depends upon whether or not the pension trust involved was exempt from income tax under section 165(a) of the Internal Revenue Code, as amended, in 1942 and 1943. The Commissioner has determined that the pension trust was not exempt. Both 1942 and 1943 are involved because of the provisions of the Current Tax Payment Act of 1943.
All of the petitioners filed their returns for 1942 and 1943 with the collector for the sixth district of California.
The record in this proceeding consists of an agreed statement of facts and various documents.
FINDINGS OF FACT.
The facts which have been stipulated are so found. Such facts as are necessary for an understanding of the question are set forth.
Phil Berg and Bertram Allenberg are officers, stockholders, and employees of a California corporation having the name of Phil Berg-Bert Allenberg, Inc., which has been in existence since at least 1938. The corporation is engaged in the business of representing artists in the radio and motion picture industry. The capital stock of the corporation consists of 120 shares, of which Berg has owned at all times 70 shares, and Allenberg has owned at all times 50 shares. Berg is the president and Allenberg is the vice president of the corporation. They held those offices in 1942 and 1943. Also, they are and were directors of the corporation. The success of the corporation's business has been due, in a large way, to the reputation and position of Berg and Allenberg in the business of representing motion picture and radio artists, and it has been due, also, to their contacts in the motion picture and the radio broadcasting industry. Berg has been engaged in the business of representing motion picture and radio artists for more than 20 years, and Allenberg has been engaged in the same business for more than 14 years.
Mildred Allenberg is the wife of Bertram Allenberg, and Leila Berg is the wife of Phil Berg.
In 1940 there were 16 employees of the corporation, including Berg and Allenberg. During 1941 there were 19 employees, and during 1942 and 1943 there were 17 employees.
On June 30, 1940, the corporation entered into a pension trust agreement with three trustees, Phil Berg, Robert M. Coryell, and Martin Gang. The pension trust was created for the benefit of all of the full time employees of the corporation. Under the terms of the trust agreement, the three trustees were to be selected in the following way: The officers of the Berg-Allenberg corporation were to select one trustee; those participants in the trust who were not officers of the corporation (i.e., who were employees only), were to select one trustee; and the two trustees who had been selected in the foregoing manner were to select the third trustee. Of the three trustees who were the acting trustees in 1942 and 1943, Berg was appointed by the officers of the corporation; Coryell, an employee of the corporation, was appointed by the non-officer employees who were trust participants; and Gang was selected by Berg and Coryell.
The so-called pension trust was carried out and operated under the terms of the original trust agreement, dated June 30, 1940, from that date through 1942 and 1943. A clarifying amendment of the trust was executed on December 30, 1943, effective that date, but it is not material in this proceeding. The trust agreement was further amended on October 10, 1944, December 30, 1944, and March 25, 1945. All of these amendments were retroactive to and effective as of December 31, 1943. Of these three amendments, the chief one in importance was that of October 10, 1944. None of these amendments are material in this proceeding except that they were made during the grace period which was given by section 162 (d) of the 1942 Revenue Act, and by further legislation which extended the grace period ultimately to June 30, 1945; and they brought the pension trust into conformity with the provisions and requirements of all of the provisions and subsections of section 165 (a) of the Internal Revenue Code, as enacted by section 162 (a) of the 1942 Revenue Act, and, in particular, with the new subsections (3), (4), (5), and (6).
The parties have stipulated that the Commissioner of Internal Revenue has ruled that the pension trust, as amended, is a tax-exempt pension trust under section 165 of the Internal Revenue Code, as amended, ‘commencing January 1, 1944.‘
The provisions of the original pension trust agreement of June 30, 1940, which are material to the question in this proceeding, which relates to the years 1942 and 1943, are as follows:
The trust was called a ‘Pension Trust For The Employees of Phil Berg-Bert Allenberg, Inc.‘
The trust was irrevocable; the grantor-corporation retained no beneficial interest in the trust estate; and it was expressly declared in the agreement that it ‘shall be impossible at any time for any of the principal or income of the trust estate to be used for, or diverted to, purposes other than those specified * * * for the exclusive benefit of the participants * * * of the trust.‘
The trust was created to provide annuity benefits for employees, payable upon their reaching the age of 50 years if they had qualified as participants, and for their designated beneficiaries.
A participant in the trust could not sell, assign, hypothecate, or transfer his interest in the trust; and a beneficiary of a participant could not do any of the above things.
No corporation could be designated by any participant as a beneficiary of the trust.
The trust is to terminate upon the death of the last original surviving participant in the trust who was living on June 30, 1940, the date of its creation.
Upon the termination of the trust, the trustees shall distribute the total trust estate among the cestuis que trustent according to their respective interests.
Contributions to the trust were to be made only by the grantor-corporation (the employer), and it was intended that no contributions would be required of any of the employees. This plan was carried out, and only the Berg-Allenberg corporation has made contributions to the trust. All contributions have been paid to the trustees. For each participant in the trust, the corporation agreed to make contributions to the trust for a period of 12 years from the date of the commencement of the contributions for each employee-participant.
The only qualification for participation in the pension trust by an employee is one year's continuous employment by the corporation, irrespective of whether the employee was in the employment of the corporation at the time the pension trust was created.
The pension plan provides for the payment of an annuity annually in an amount equivalent to 16 2/3 per cent of ‘the annual salary rate,‘ as defined in the agreement, of each employee over a period of 15 years, or for the lifetime of the employee, or until the trust funds were exhausted, whichever first occurs. The ‘annual salary rate‘ of each participant was the annual salary rate at the time of an employee's becoming a participant.
Such pension annuities are to be paid to employees upon the happening of all of three contingencies, namely:
(i) The participant shall have reached the age of fifty (50) years, and
(ii) Shall have survived after twelve (12) years as a qualified participant under this trust, and
(iii) The participant shall no longer be in the employ of the Trustor.
The agreement provided that:
All qualified participants under this trust shall, immediately upon becoming qualified, designate in writing the beneficiary or beneficiaries to whom the death benefits herein provided are to be paid and shall file the same with the Trustees. Any such participant shall have the privilege of revoking such designation or changing it at his or her discretion by filing such revocation or new designation with the Trustees. If the name of no beneficiary shall be filed or if filed the death of such beneficiary precedes the death of such participant, such death benefits shall lapse, it being the intention hereunder that no one shall have any claim for or be entitled to such death benefits or any part thereof except such designated beneficiary or beneficiaries surviving such participant.
The agreement made detailed provisions to cover the various exigencies which could arise under (i), (ii), and (iii) quoted above, to the end that the employee-participant would receive living pension benefits under the pension trust; provisions covering the payment of benefits to beneficiaries of an employee who died before he had received all of the pension benefits to which he had become entitled but did not survive to receive in full; and provisions relating to the termination of an employee's service prior to serving in the corporation's employment for the entire 12 years under (ii), above. All of these provisions required the trustees to make payment of accrued benefits to beneficiaries of the employee, in case of death, or modified benefits to the employee whose employment had been terminated, whether the employment was terminated for cause, by mutual consent, or otherwise.
In the event that an employee-participant dies before receiving all of the pension payments provided for— i.e., for 15 years, or until the trust is exhausted— then death benefits shall be paid to the employee's beneficiary or beneficiaries in the form of an annuity in the same amount as the participant would have received if he had survived, from the date of the participant's death until the end of the 15-year period which covered him, or until the trust was exhausted. If the trust should terminate, then the balance of the unpaid death benefits are to be paid to beneficiaries upon termination of the trust.
If an employee-participant's employment by the corporation should end, then he shall be entitled to receive modified living benefits— annuities— under the agreement; i.e., annuities will be paid when the former employee either becomes 50 years old or reaches the end of 12 years from the date when he became a qualified participant under the trust, whichever last occurs.
The agreement authorized trustees to purchase a separate annuity contract for each participant. All payments made by an annuity company under an annuity contract shall be paid directly to the trustees of the pension trust, and shall in turn be paid by the trustees to the participants. The entire contributions paid by the employer-corporation to the trustees shall be invested in annuity contracts issued by life insurance companies and policies of life insurance taken upon the lives of the participants which, in the opinion of the trustees, will enable them to carry out the purposes of the trust. However, the annuity contracts or insurance policies are not to be assigned to any trust participant, it being the intention of the trust that all payments to any participant shall be made by the trustees and not by any third person, firm, or corporation.
Where a trustee of the trust is also a participant under the trust (an employee of the corporation) and is claiming living benefits under the pension trust, such trustee shall not act with his fellow trustees in exercising any discretion with respect to the payment of such living benefits to himself; but the remaining trustees shall have the power to act for and on behalf of all of the trustees.
Under the qualifications provisions of the pension trust agreement, the full time employees of the corporation who had served the required one year in the employment of the corporation numbered 12 in 1942, and 13 in 1943, including the 2 officers, Berg and Allenberg.
During the entire operation of the trust after June 1940, the only employees who were not covered by the pension trust were part time workers and those who had not been employed for one year.
The following schedule sets forth the names of the employees who were covered by the trust in 1942 and 1943, and their salaries:
+--------------------------------------------------+ ¦Trust participants ¦Year ¦1942 ¦1943 ¦ +---------------------+----------+--------+--------¦ ¦ ¦ ¦salaries¦salaries¦ +---------------------+----------+--------+--------¦ ¦1. Phil Berg ¦1942, 1943¦$128,510¦$52,166 ¦ +---------------------+----------+--------+--------¦ ¦2. Bertram Allenberg ¦1942, 1943¦94,333 ¦102,666 ¦ +---------------------+----------+--------+--------¦ ¦3. Robert Coryell ¦1942, 1943¦7,500 ¦9,508 ¦ +---------------------+----------+--------+--------¦ ¦4. W. P. White ¦1942, 1943¦2,750 ¦3,362 ¦ +---------------------+----------+--------+--------¦ ¦5. Jane G. Waldbott ¦1942,1943 ¦2,525 ¦3,183 ¦ +---------------------+----------+--------+--------¦ ¦6. J. Wilson Hogg ¦1942, 1943¦960 ¦3,485 ¦ +---------------------+----------+--------+--------¦ ¦7. Margaret Parker ¦1942, 1943¦1,950 ¦2,187 ¦ +---------------------+----------+--------+--------¦ ¦8. Francis Davis ¦1942, 1943¦1,852 ¦2,050 ¦ +---------------------+----------+--------+--------¦ ¦9. T. C. Jackson ¦1942 ¦10,775 ¦ ¦ +---------------------+----------+--------+--------¦ ¦10. J. O. Smith ¦1942 ¦3,450 ¦ ¦ +---------------------+----------+--------+--------¦ ¦11. Rose Norton ¦1942 ¦1,275 ¦ ¦ +---------------------+----------+--------+--------¦ ¦12. K. Robertson ¦1942 ¦1,195 ¦ ¦ +---------------------+----------+--------+--------¦ ¦13. James F. Townsend¦1943 ¦ ¦26,333 ¦ +---------------------+----------+--------+--------¦ ¦14. Z. Wayne Griffin ¦1943 ¦ ¦13,475 ¦ +---------------------+----------+--------+--------¦ ¦15. Earl Taylor ¦1943 ¦ ¦2,000 ¦ +---------------------+----------+--------+--------¦ ¦16. Ethel Englehart ¦1943 ¦ ¦1,897 ¦ +---------------------+----------+--------+--------¦ ¦17. Mary Cooper ¦1943 ¦ ¦1,626 ¦ +---------------------+----------+--------+--------¦ ¦Total ¦ ¦257,076 ¦223,938 ¦ +---------------------+----------+--------+--------¦ ¦1942 participants ¦12 ¦ ¦ ¦ +---------------------+----------+--------+--------¦ ¦1943 participants ¦13 ¦ ¦ ¦ +--------------------------------------------------+
During 1942 and 1943 the corporation paid $50,000 and $57,072, respectively, to the trustees of the pension trust to meet the requirements thereof for the purchase of retirement benefits and insurance protection for the employee-participants.
The trustees of the trust expended $44,553 in payment of premiums on retirement annuity contracts for the benefit of the trust participants in 1942 and $50,206 in 1943.
The following schedule shows the amounts of the premiums which were paid in 1942 and 1943 by the trustees out of the contributions made by the corporation to the trustees in each of those years for retirement annuity contracts for each employee who was covered by the pension trust in 1942 and 1943:
+-----------------------------------------------+ ¦Participants ¦1942 annuity¦1943 annuity¦ +---------------------+------------+------------¦ ¦ ¦premium ¦premium ¦ +---------------------+------------+------------¦ ¦1. Phil Berg ¦$23,504 ¦$23,504 ¦ +---------------------+------------+------------¦ ¦2. Bertram Allenberg ¦17,034 ¦17,034 ¦ +---------------------+------------+------------¦ ¦3. Robert Coryell ¦768 ¦712 ¦ +---------------------+------------+------------¦ ¦4. W. P. White ¦203 ¦156 ¦ +---------------------+------------+------------¦ ¦5. Jane G. Waldbott ¦223 ¦183 ¦ +---------------------+------------+------------¦ ¦6. J. Wilson Hogg ¦679 ¦679 ¦ +---------------------+------------+------------¦ ¦7. Margaret Parker ¦310 ¦199 ¦ +---------------------+------------+------------¦ ¦8. Francis Davis ¦266 ¦266 ¦ +---------------------+------------+------------¦ ¦9. T. C. Jackson ¦842 ¦ ¦ +---------------------+------------+------------¦ ¦10. J. O. Smith ¦294 ¦ ¦ +---------------------+------------+------------¦ ¦11. Rose Norton ¦169 ¦ ¦ +---------------------+------------+------------¦ ¦12. K. Robertson ¦259 ¦ ¦ +---------------------+------------+------------¦ ¦13. James F. Townsend¦ ¦4,342 ¦ +---------------------+------------+------------¦ ¦14. Z. Wayne Griffin ¦ ¦2,274 ¦ +---------------------+------------+------------¦ ¦15. Earl Taylor ¦ ¦351 ¦ +---------------------+------------+------------¦ ¦16. Ethel Englehart ¦ ¦310 ¦ +---------------------+------------+------------¦ ¦17. Mary Cooper ¦ ¦194 ¦ +---------------------+------------+------------¦ ¦Total ¦44,553 ¦50,206 ¦ +-----------------------------------------------+
Of the contribution paid by the corporation to the trust on account of premiums to be paid by the trustees for retirement annuity contracts in 1942 for the employees who were covered by the pension trust in that year, 52.7 per cent represented the contribution paid on behalf of Phil Berg; 38.2 per cent represented the contribution paid on behalf of Bertram Allenberg; and 9.1 per cent represented the contribution paid on behalf of the remaining 10 employees, who were not stockholders of the corporation.
Of the contribution paid by the corporation to the trust on account of premiums to be paid by the trustees for retirement annuity contracts in 1943 for the employees who were covered by the pension trust in that year, 46.8 per cent represented the contribution paid on behalf of Phil Berg; 33.9 per cent represented the contribution paid on behalf of Bertram Allenberg; and about 19.3 per cent represented the contribution paid on behalf of the remaining 11 employees who were not stockholders of the corporation.
The differentiation between the percentages of the contributions paid on behalf of the two stockholder-employees and the percentages paid on behalf of the other nonstockholder-employees was occasioned by the fact that higher salaries were paid to Berg and Allenberg than were paid to the other employees.
Since 1936 Berg and Allenberg have enjoyed substantial earnings from their efforts in the radio and motion picture industries. Their earnings from 1936 through 1943 which they received from the Berg-Allenberg corporation from 1938 through 1943 and from predecessor corporations, were as follows:
+------------------------+ ¦Year¦Phil Berg¦Bertram ¦ +----+---------+---------¦ ¦ ¦ ¦Allenberg¦ +----+---------+---------¦ ¦ ¦ ¦ ¦ +----+---------+---------¦ ¦1936¦$94,240 ¦$53,560 ¦ +----+---------+---------¦ ¦1937¦145,250 ¦104,000 ¦ +----+---------+---------¦ ¦1938¦132,000 ¦96,000 ¦ +----+---------+---------¦ ¦1939¦127,187 ¦94,000 ¦ +----+---------+---------¦ ¦1940¦136,812 ¦99,500 ¦ +----+---------+---------¦ ¦1941¦148,790 ¦108,210 ¦ +----+---------+---------¦ ¦1942¦128,510 ¦94,333 ¦ +----+---------+---------¦ ¦1943¦52,166 ¦102,666 ¦ +----+---------+---------¦ ¦ ¦ ¦ ¦ +------------------------+
In 1943 Phil Berg entered the armed services and his salary was reduced to $1,000 per week.
The retirement annuity contracts have been in the possession of the trustees at all times.
The Berg-Allenberg corporation has been allowed deductions in the years 1940, 1941, 1942, 1943, and 1944 for the contributions which it made in each of those years to the pension trust by the Commissioner of Internal Revenue upon audit of the corporation's income, declared value excess profits tax, and excess profits tax returns.
The respondent has allowed the corporation deductions from its income for 1942 and 1943 for contributions to the pension trust as allowable deductions for compensation of employees, and in respect of Berg and Allenberg has treated as reasonable compensation for the services of each to the corporation in 1942 and 1943 the sums paid them as salaries, plus the sums contributed to the pension trust for their benefit under the terms of the trust.
Petitioners Berg and Allenberg did not include in incomes in their individual income tax returns for 1940, 1941, 1942, 1943, and 1944, any sum as representing the amount contributed by the corporation in each of the above years to the pension trust for their benefit. The Commissioner of Internal Revenue audited the individual returns of the petitioners for the above years and he did not determine that petitioners were taxable, respectively, upon any such contribution of the corporation in the years 1940, 1941, and 1944; but he included in the income of Berg and Allenberg for 1942 and 1943 the sums which the corporation paid to the trustees in both years to pay premiums on retirement annuity contracts for each petitioner, to wit: In the income of Phil Berg, $23,504 for 1942 and 1943; and in the income of Bertram Allenberg, $17,034 for 1942 and 1943.
OPINION.
HARRON, Judge:
The chief question presented by the pleadings is whether petitioners Berg and Allenberg should have included in income for 1942 and 1943 the amounts which their employer, the Berg-Allenberg corporation, contributed in 1942 and 1943 to the trustees of the pension trust for payment of annuity contract premiums under the trust agreement of June 30, 1940, which contributions were applied by the trustees for the purchase of annuity contracts for their benefit. In the petition of Berg, the additional, alleged income in question is $23,504 in each of the years 1942 and 1943; and in the petition of Allenberg, the amount in question is $17,034 in each of those years.
These proceedings were submitted to the Court for decision prior to the enactment of Public Law No. 378, ‘An Act to amend certain provisions of the Internal Revenue Code,‘ which was approved on October 25, 1949.
Section 5 (a) of this act added a new subsection, (d), to section 165 of the Internal Revenue Code ‘to provide that contributions to certain employee annuity trusts by employers shall not be included in the income of the employees in the year in which the contributions were made, despite the fact that such trusts are not qualified under section 165 (a).‘ Report No. 831, Committee on Finance of the Senate, 81st Cong., 1st sess., p. 4. Section 5 (b) of this act makes new subsection (d) applicable to taxable years beginning after December 31, 1938.
H. R. 5268, known as the ‘Technical Changes Bill.‘
Although the petitioners have contended at all times that the pension trust involved qualified in 1942 and 1943 under section 165 (a) of the Internal Revenue Code as a tax-exempt employees' trust, so as to relieve them from having to include in their individual income for 1942 and 1943 any sum which their employer contributed to the pension trust for purchase by the trustees of retirement annuity contracts for their benefit, they now rely upon subsection (d) of section 165 of the Internal Revenue Code, which was added by section 5 (a) of Public Law No. 378, as affording them relief from the respondent's determination in these proceedings. The provisions of the new subsection (d) of section 165 are set forth in the margin.
(d) CERTAIN EMPLOYEES ANNUITIES.— Notwithstanding subsection (c) or any other provision of this chapter, a contribution to a trust by an employer shall not be included in the income of the employee in the year in which the contribution is made if—(1) such contribution is to be applied by the trustee for the purchase of annuity contracts for the benefit of such employee;(2) such contribution is made to the trustee pursuant to a written agreement entered into prior to October 21, 1942, between the employer and the trustee, or between the employer and the employee; and(3) under the terms of the trust agreement the employee is not entitled during his lifetime, except with the consent of the trustee, to any payments under annuity contracts purchased by the trustee other than annuity payments.The amount so contributed by the employer shall not constitute consideration paid by the employee for such annuity contract in determining the amount of annuity payments required to be included in his gross income under section 22 (b) (2); except that if the tax imposed by this chapter for any taxable year beginning before January 1, 1949, has been paid by the employee with respect to such contribution for such year, and not credited or refunded, the amount so contributed for such year shall constitute consideration paid by the employee for such annuity contract. This subsection shall have no application with respect to amounts contributed to a trust after June 1, 1949, if the trust on such date was exempt under subsection (a). For the purposes of this subsection, amounts paid by an employer for the purchase of annuity contracts which are transferred to the trustee shall be deemed to be contributions made to a trust or trustee and contributions applied by the trustee for the purchase of annuity contracts; the term ‘annuity contracts purchased by the trustee‘ shall include annuity contracts so purchased by the employer and transferred to the trustee; and the term ‘employee‘ shall include only a person who was in the employ of the employer, and was covered by the agreement referred to in paragraph (2), prior to October 21, 1942.
The pleadings permit our giving consideration to this contention of the petitioners, which has been made in a memorandum supplementing their briefs.
The facts show that the three conditions of subsection (d) which are the chief prerequisite for the relief given were compiled with: The contributions of the Berg-Allenberg corporation which are in question in these proceedings were applied by the trustees for the purchase of annuity contracts for Berg and Allenberg; and they were made pursuant to a written agreement entered into prior to October 21, 1942, between the employer and the trustees. The petitioners, Berg and Allenberg, were not entitled during their lifetime to any payments under the annuity contracts purchased by the trustees other than annuity payments. A further condition is met: The petitioners, Berg and Allenberg, were not entitled during their lifetime to any payments under the annuity contracts purchased by the trustees other than annuity payments. A further condition is met: The petitioners, Berg and Allenberg, were in the employ of the corporation and were covered by the pension trust agreement prior to October 21, 1942.
It is concluded, therefore, that the chief question in these proceedings is disposed of by the provisions of subsection (d) of section 165. Under the provisions thereof, the amount of $23,504 shall not be included in the income of Berg in 1942 or in 1943; and the amount of $17,034 shall not be included in the income of Allenberg in 1942 or in 1943. The respondent's determination is reversed.
Under the above holding it is unnecessary to consider other questions which have been presented which relate to whether the pension trust was tax-exempt in 1942 and 1943 under section 165 (a) (1) and (2).
Decisions will be entered under Rule 50.