Opinion
Docket No. 4677-62.
1964-04-30
SHERWOOD SWAN AND COMPANY, LTD., EMPLOYEES' BENEFIT FUND, OAKLAND BANK OF COMMERCE, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
James F. Crafts, Jr., for the petitioner. John O. Hargrove, for the respondent.
James F. Crafts, Jr., for the petitioner. John O. Hargrove, for the respondent.
The petitioner was created in 1943 under a trust agreement which, as amended, provided that the employer-party to the agreement would make annual contributions to the petitioner, if the employer's annual income after all charges, including reserves for taxes, exceeded 10 percent of the combined capital and surplus of the employer. Such contributions were to be in an amount equal to one-third of such excess income, except that in no event would the contribution for any year exceed 15 percent of the total compensation otherwise paid or payable by the employer for such year to the beneficiaries under the trust agreement. In 1945, the Commissioner ruled that the petitioner was entitled to exemption from income tax. The employer continued to make, for its taxable years through 1947, annual contributions to petitioner. Solely because its income for each of its taxable years since 1947 has been less than the minimum amount specified in the agreement, the employer has made no further contributions to petitioner. Held, that under the circumstances presented the employer's failure to make contributions for its taxable years after 1947 did not prevent petitioner for its taxable years in issue from being a qualified trust within the meaning of section 401(a), I.R.C. 1954, and from being exempt from income tax under section 501(a) of that Code.
WITHEY, Judge:
Deficiencies in the income tax of petitioner for the fiscal years ended March 31, 1959, 1960, and 1961, in the respective amounts of $1,084.28, $1,355.62, and $1,114.87 have been determined by the Commissioner.
The sole issue for decision is whether, during such fiscal years, petitioner was a qualified profit-sharing trust under section 401(a), I.R.C. 1954.
FINDINGS OF FACT
All of the facts of record have been agreed upon and are found as stipulated.
Sherwood Swan & Co., hereinafter referred to as the company, is a California corporation which carried on a grocery and department store business in Oakland, Calif., at all times material hereto.
Sherwood Swan has been president of the company since its organization in 1924. He has been controlling stockholder of the company at all times material hereto. At least since 1952, Swan and members of his immediate family have owned all of the common stock of the company. At all times material hereto, he has also been a member of the company's board of directors.
On January 31, 1943, the company and Frank G. Short entered into a declaration of trust agreement, hereinafter referred to as the agreement, which provided for the creation of a trust called ‘Sherwood Swan and Company, Ltd., Employees' Benefit Fund.’ The trust is the petitioner in the instant case. On July 6, 1953, the Oakland Bank of Commerce, a California corporation, succeeded Frank G. Short as trustee of petitioner, and the bank is presently the trustee.
The petitioner's fiscal year ends on March 31, while the company's fiscal year ends January 31. Hereinafter, fiscal years are usually referred to by the year only.
The agreement, as amended, was ruled entitled to exemption by the Commissioner in his letter dated January 6, 1945. The ruling was issued on the basis of the provisions of the agreement and information contained in a proof of exemption submitted to the Internal Revenue Service by petitioner's representatives.
The agreement, as approved by the Commissioner, provided that the company would make contributions to the trust for its fiscal years ending after January 31, 1945, if the income of the company after all charges, including reserves for taxes, was in excess of 10 percent of the combined capital and surplus of the company. If the company's income exceeded such amount, it would make contributions in an amount equal to one-third of all additional net income of the company, except in no event would the total amount contributed exceed 15 percent of the total compensation otherwise paid or payable by the company to the beneficiaries under the trust for such year.
All persons in the employ of the company on the last day of each fiscal year of the company for which the company made a contribution to the trust and who on such date had been continuously in the employ of the company for a period of 2 years prior thereto (or would have been but for leave of absence for service in the U.S. Armed Forces) were eligible to receive benefits under the plan. Contributions made by the company were credited to the accounts of eligible employees in proportion to the compensation otherwise paid to them by the company.
Beneficiaries' rights to corpus of the trust (i.e., company contributions) vested at the rate of 10 percent for each year of service after the contribution was made so that a beneficiary's rights to corpus were fully vested after 10 years of service after the most recent contribution.
A beneficiary's right to income of the trust vests at age 60, or upon his death, or incapacity prior to reaching age 60. In the event that employment is terminated for reasons other than those set forth in the preceding sentence prior to age 60, such beneficiary's income benefits are apportioned among other remaining beneficiaries at the close of the plan's fiscal year on the same basis used in allocating contributions among beneficiaries.
The most recent company contribution to the trust was made for the fiscal year of the company ended January 31, 1947. Accordingly, all persons who were beneficiaries of the plan during the years here in question have fully vested rights with respect to corpus.
Contributions have not been made since the fiscal year ended January 31, 1947, because the company's income has been less than the minimum amount specified in the plan during all intervening years.
There were 11 active employees who were beneficiaries of the trust on March 31, 1959, and 7 active employees who were beneficiaries on March 31, 1960, and on March 31, 1961. Sherwood Swan, who is president of the company and who, together with members of his family, owns all of the common stock of the company, was credited with more than 50 percent of the total corpus and income credited to the seven active employees who were beneficiaries of the trust on March 31, 1961.
During the company's fiscal year 1943, and as represented to the Internal Revenue Service on the proof of exemption, all of the company's employees received compensation in the total amount of $322,830.99. In 1943, all of the employees covered by the plan received compensation in the total amount of $160,188.34. During the same year, Swan received compensation in the amount of $10,000. Swan's share of the employer's contribution in 1943, allocated in proportion to his compensation, was 6.2 percent of the total contribution.
At the end of petitioner's fiscal years 1959, 1960, and 1961, the amounts of petitioner's assets contained in the profit-sharing trust account of Sherwood Swan were as follows:
+-----+ ¦___ ¦ +-----¦ ¦ ¦ ¦ ¦ +-----+
Sherwood Trust account Swan's percent Fiscal year balance of age of total Sherwood Swan 1 beneficiaries' equities 1 ________________________________________ 1959 $62,546.14 45.65 1960 66,314.87 54.92 1961 69,662.04 54.91 ________________________________________
During petitioner's fiscal years 1959, 1960, and 1961, three of the company's employees who were members of the ‘prohibited class,‘ as defined by the Code, were Sherwood Swan, president, operating manager, and controlling stockholder; Florence (McDonough) Downs, manager and buyer for women's lingerie, etc.; and Elia Milisich, manager and buyer for liquor and tobacco, etc. The amounts of petitioner's assets contained in the profit-sharing trust accounts of these three employees during the above years were as follows:
+--+ ¦¦¦¦ +--+
Prohibited Trust account class's percentage Fiscal year balances of of total prohibited class 1 beneficiaries' equities 1 1959 $84,185.40 61.44 1960 89,001.16 73.71 1961 93,278.25 73.52 SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.(a) EXEMPTION FROM TAXATION.— An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502, 503, or 504.
Not including unrealized appreciation.
and exempt from imposition of income tax under section 501(a) of that Code.
1Not including unrealized appreciation.
The income portion of Sherwood Swan's trust account became vested in 1947, the company's list contribution year. Swan's share of accumulated income was $60,979.97 on March 31, 1961.
In the petitioner's fiscal year 1959, W. L. Fowler was severed from employment by the company prior to his reaching 60. He thus forfeited accumulated income in the amount of $23,605.95. Of this amount, $10,720.31 was allocated to Sherwood Swan.
In petitioner's fiscal year 1943, Swan was allocated 6.2 percent of the employer contribution. On March 31, 1961, Swan's trust account contained 54.91 percent of total beneficiaries' equities in trust assets valued at cost.
Trust assets have been valued at cost at all times. Income and appreciation of trust assets realized on the sale of trust assets have been credited as income to participating employees' accounts annually in proportion to their account balances as of the beginning of the fiscal year.
Appreciation not realized by the sale of trust assets has never been allocated to participating employees' accounts. The amounts of unrealized appreciation on preferred and common stocks in petitioner was $53,986 on March 31, 1963.
The agreement provides that the appreciation shall be divided among the remaining beneficiaries on the termination of the trust, in proportion to their account balances on March 31 preceding the date of termination. The trust shall terminate when only three beneficiaries remain.
As of March 31, 1963, only six beneficiaries remained.
ULTIMATE FINDINGS
The company's failure to contribute to petitioner during its fiscal years subsequent to 1947 is attributable solely to its lack of profits for those years within the clear provisions of its profit-sharing plan.
In the operation of the plan there has been no discrimination in favor of employees of the company who are officers, shareholders, supervisory employees, or highly compensated employees.
OPINION
There is no dispute here but that petitioner is and has been from its inception a valid and subsisting profit-sharing trust. The issue between the parties is whether, during the years at issue, it was qualified as such within the meaning of section 401(a) of the 1954 Code