Catawba Indus. Rubber Co.  v. Comm'r of Internal Revenue

• Decision Date: 09 September 1975
• Docket Number: Docket No. 4046-74.
• Citation: 64 T.C. 1011
• Parties: CATAWBA INDUSTRIAL RUBBER CO., INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

64 T.C. 1011

CATAWBA INDUSTRIAL RUBBER CO., INC., PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4046-74.

United States Tax Court

Filed September 9, 1975.

Romulus S. Watson, for the petitioner.

Wright Tisdale, Jr., for the respondent.

Petitioner is an accrual basis taxpayer with a fiscal year ending Apr. 30. On Apr. 25, 1972, petitioner's directors approved a proposed profit-sharing plan and authorized the creation of a trust to administer the plan. A plan and trust agreement were executed on June 24, 1972, and petitioner's first contribution to the trust was made on July 13, 1972. Respondent subsequently ruled that the trust was qualified under sec. 401(a), I.R.C. 1954. Held, a qualified profit-sharing trust was not in existence in petitioner's fiscal year 1972. Held, further, petitioner's contribution to the trust made July 13, 1972, was not an accruable item in 1972 and is not deductible in that year under sec. 404(a) or 404(a)(6), I.R.C. 1954.

OPINION

DRENNEN, Judge:

Respondent determined a deficiency in petitioner's corporate income tax for its fiscal year ending April 30, 1972, in the amount of $9,484.45. The issues for decision are: (1) Whether petitioner established a profit-sharing trust, qualified under section 401(a), I.R.C. 1954,¹ by April 30, 1972, the final day of its taxable year 1972; and (2) whether the contribution of $19,759.25 made by petitioner to the profit-sharing trust on July 13, 1972, was deductible on petitioner's corporate income tax return for its taxable year 1972.

All of the facts have been stipulated and the stipulation of facts together with the exhibits attached thereto are hereby incorporated by reference. Only the facts necessary for an understanding of this opinion are herein summarized.

Petitioner Catawba Industrial Rubber Co., Inc. (sometimes referred to as petitioner or Catawba), is a North Carolina corporation whose office is located in Charlotte, N.C., and which is engaged in the business of sales of rubber and related products. An accrual basis taxpayer, petitioner reports its taxable income based on a fiscal year ending April 30.

Petitioner filed its tax return, Form 1120, for the taxable year ending April 30, 1972, with the Southeast Service Center at Memphis, Tenn. On line 24 of said return $19,759.25 was claimed as a deductible contribution to a profit-sharing plan. Respondent determined that the claimed deduction was not allowable for petitioner's taxable year ended April 30, 1972, for the stated reason that no valid profit-sharing plan was in existence as of April 30, 1972, and no written trust instrument, which precluded the prohibited diversion of funds, had been executed as of April 30, 1972. Accordingly, respondent issued a notice of deficiency on March 29, 1974, in the amount of $9,484.45

On April 25, 1972, the board of directors of Catawba held a special meeting to consider the establishment of a profit-sharing plan. The minutes of that meeting contain the following recitations:

The directors of the corporation have for some period of time considered the feasibility of establishing a Profit-Sharing Plan and several discussions have been had concerning same. These discussions have been formalized and documented in a Corporate Profit-Sharing Plan which was exhibited to all directors and studied by the said directors.

The board of directors unanimously approved the plan and instructed all appropriate parties to take what action necessary in order to have this plan duly qualified as provided under the appropriate sections of the Internal Revenue Code.

It was brought to the attention of the board of directors that it was necessary to execute a Trust in connection with this Corporate Profit-Sharing Plan, said Trust to have certain administrative functions in connection with the plan. The Trust document was discussed and reviewed by all directors and the directors unanimously approved the provisions of the Trust and in addition authorized the disbursement of $100.00 to said Trust in order to make the Trust operative.

It was also pointed out to the board of directors that a disbursement equal to approximately 15% of the gross annual payroll out of the profits of the corporation was to be made to the Trust each year. The directors unanimously approved a resolution directing the corporate officers to make the appropriate disbursement to the Trust as provided by the Corporate Profit-Sharing Plan.

The trust agreement referred to in the April 25 meeting was finalized and executed by the appropriate parties on June 14, 1972, as was the written corporate profit-sharing plan of Catawba. That same day an application for determination that the plan and trust qualified under section 401(a), together with supporting documents and information, was forwarded to the District Director, Internal Revenue Service. In the application it was stated that the plan was adopted April 25, 1972, with an effective date of April 30, 1972, and that the trust was executed April 28, 1972. On May 30, 1972, the profit-sharing plan was communicated to petitioner's employees by petitioner in writing.

Petitioner received a favorable determination letter from the District Director of Internal Revenue, Greensboro, N.C., dated July 3, 1972. That determination letter specified June 14, 1972, as the adoption date of the plan and thus the date of qualification. That date was based upon the date of the execution of the trust instrument. Despite the authorization given at the April 25 directors meeting, petitioner did not make its first contribution to the profit-sharing plan trust until July 13, 1972, when it deposited $19,759.25 into a bank account, opened that same day, in the name of the trust.

No other relevant facts were stipulated and we must assume that petitioner and its officers and directors took no additional actions toward creating the profit-sharing trust prior to April 30, 1972. We have no evidence of what was specifically considered by the board of directors at its meeting on April 25, 1972. The preamble in the trust agreement does recite that the ‘Board of Directors has adopted this Trust Agreement.’ It also recites that ‘the Company has delivered to the Trustees $100.00 to be applied to the initial profit-sharing contribution,‘ which appears to be inconsistent with the stipulation.

Based on the recited facts the questions to be determined are first, whether a profit-sharing trust, qualified under section 401(a), was in existence as of April 30, 1972; and second, whether the contribution of $19,759.25 made by petitioner to the profit-sharing trust on July 13, 1972, was deductible by petitioner for its taxable year ended April 30, 1972.

Section 404(a), in pertinent part, provides that if contributions are paid by an employer to a profit-sharing plan on account of an employee, such contributions shall be deductible under this section subject to the limitations following. Paragraph (3)(A) provides that such contributions shall be deductible in the taxable year when paid if they are paid into a profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 501(a), in an amount not in excess of 15 percent of the compensation otherwise paid or accrued during the taxable year to all employees under the profit-sharing plan. Paragraph (6), however, makes an exception to the above rule, providing that for purposes of paragraph (3), a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year.

Section 501(a) provides in the only part applicable here, that an organization described in section 401(a) shall be exempt from taxation under this subtitle, with certain exceptions not relevant here.

Under these rather convoluted provisions of the law, we must determine whether petitioner's contribution was paid to a profit-sharing trust which qualified under section 401(a) (and was thus exempt under section 501(a)) for its taxable year in which petitioner's taxable year 1972 ends, as required by section 404(a)(3), see 555, Inc., 15 T.C. 671 (1950); Crow-Burlingame Co., 15 T.C. 738 (1959); Dejay Stores v. Ryan, 229 F.2d 867 (2d Cir. 1956); Tallman Tool & Machine Corp., 27 T.C. 372 (1956), and also, since petitioner's contribution was not paid within its taxable year ending April 30, 1972, whether the contribution was an accruable item for petitioner in its fiscal year 1972, so it can be considered deemed paid on April 30, 1972, under section 404(6), see Abingdon Potteries, Inc., 19 T.C. 23 (1952); Barrett Timber & Dunnage Corp., 29 T.C. 76 (1957).

Section 401(a) provides that a United States trust forming part of a profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust if the various requirements set forth therein are met. The first requirement, set out in paragraph (1), is that contributions are made by an employer entitled to deduct his contributions under section 404(a)(3)(B) for the purpose of distributing to such employees and their beneficiaries the corpus and income of the trust fund in accordance with such plan. Paragraph (2) provides, ‘if under the trust instrument it is impossible,‘ prior to satisfaction of all liabilities with respect to employees and beneficiaries, for any of the corpus or income of the trust to be used for purposes other than for the exclusive benefit of the employees and beneficiaries.

Paragraph (3) requires that certain specified percentages or classifications of the employees of the employer be entitled to benefits under the plan, and paragraph (4) requires that the benefits do not discriminate in favor of employees who are officers, shareholders, supervisory, or highly...