Ma-Tran Corp. v. Comm'r of Internal Revenue
| Decision Date | 04 May 1978 |
| Docket Number | Docket Nos. 1074-76—-1077-76. |
| Parties | MA-TRAN CORPORATION, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A major portion of the assets of petitioner corporation's profit-sharing trust were lent to an employee, a trustee, and the corporation. The interest of a plan participant who died while employed by the corporation was not disbursed. The vested interests of persons who terminated employment were treated as forfeitures. Held, the profit-sharing trust is not qualified. Held, further, petitioner corporation did not comply with the substantiation requirements of sec. 274 with respect to use of an apartment, meals, or the travel expenses in issue. Held, further, these amounts constitute dividends to the shareholders benefiting therefrom. Perry Shields, for the petitioners.
John B. Harper, for the respondent.
Respondent, on November 11, 1975, issued statutory notices in which he determined deficiencies in, and additions to, the respective petitioners' Federal income taxes as follows:
Due to concessions made by the parties the following issues remain for our determination: (1) Whether the Ma-Tran Corp. profit-sharing trust was a qualified trust under section 401(a), I.R.C. 1954, during its fiscal years 1972 and 1973; (2) if so, whether Ma-Tran Corp.‘s contributions to the trust were deductible in its fiscal years 1972 and 1973 or in 1973 and 1974; (3) whether Ma-Tran Corp. is entitled to deductions for rental payments on an apartment; (4) whether Ma-Tran Corp. is entitled to a deduction for the cost of meals consumed locally by its officer-shareholders Walter D. Huffaker and Andy B. house; (5) whether Ma-Tran Corp. is entitled to deduct travel expenses in excess of the expenses for which Huffaker submitted vouchers; (6) whether Huffaker received dividends in the form of meals and travel expenses; (7) whether House received dividends in the form of meals and rents; (8) whether Ma-Tran Corp. is liable for the addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations.
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner Ma-Tran Corp. (hereinafter Ma-Tran) is a Tennessee corporation having its principal place of business in Knoxville, Tenn., on the date the petition was filed. Ma-Tran manufactures, sells, and services heavy construction equipment used primarily in road construction and related asphalt and cement industries. For its taxable years ended June 30, 1972 and 1973, Ma-Tran filed its corporate income tax returns at the Internal Revenue Service Center, Memphis, Tenn. Ma-Tran calculates its income on an accrual basis.
Petitioner Andy B. House (hereinafter House) resided in Knoxville on the date the petition herein was filed. For his taxable years 1971, 1972, and 1973 House filed his individual Federal income tax returns at the Internal Revenue Service Center, Memphis.
Petitioners Walter D. and Lois Simpson Huffaker, husband and wife, resided in Knoxville on the date the petition herein was filed. For his taxable year 1971 petitioner Walter D. Huffaker (hereinafter Huffaker) filed his individual Federal income tax return at the Internal Revenue Service Center, Memphis. For their taxable years 1972 and 1973 petitioners Huffaker and Lois Simpson Huffaker filed joint Federal income tax returns at the Internal Revenue Service Center, Memphis.
During the years in question Huffaker and House were the president and vice president, respectively, of Ma-Tran. Additionally, they were both on Ma-Tran's board of directors along with Carrie Lou Huffaker. Of the 285 shares of Ma-Tran stock which were outstanding during these years, 214 were owned by Huffaker, 17 by House, and 54 by five other individuals.
On June 30, 1971, the directors of Ma-Tran adopted a profit-sharing plan effective that day. Before issuing a favorable determination letter the Internal Revenue Service required an amendment to the plan which increased the vesting provision in the plan and corrected the formula used to allocate forfeitures. This amendment was adopted by the board of directors on May 15, 1972. A favorable determination letter was issued to the trustees of the profit-sharing plan on July 31, 1972. The trustees were Huffaker and House.
For its fiscal years 1971, 1972, and 1973 Ma-Tran contributed $18,383.44, $18,429.66, and $18,994.73, respectively, to the profit-sharing trust. Ma-Tran made its contributions to the profit-sharing trust for fiscal years 1972 and 1973 on September 15, 1972, and September 15, 1973, respectively. The fiscal 1972 and 1973 contributions were not announced to eligible employees prior to the close of Ma-Tran's fiscal years. No contributions have been made since fiscal year 1974.
On February 7, 1972, the profit-sharing trust made an unsecured loan of $2,000 at 10-percent interest to Steve Dillon (hereinafter Dillon), a Ma-Tran employee covered by the profit-sharing plan. At this time the balance in Dillon's profit-sharing account was $779.64. His vested interest was $77.96. Dillon repaid $350 of the loan. Shortly after the loan was made Dillon terminated his employment at Ma-Tran. At the time of termination Ma-Tran owed Dillon $1,398.86 in commissions. This amount was withheld in repayment of the loan. However, the $1,398.86 was not and has not been restored to the pension trust. The $251.14 balance has not been repaid to the profit-sharing trust or collected by the corporation. The profit-sharing trust has not attempted to obtain a judgment against Dillon for the unpaid balance on the note.
On May 8, 1972, the profit-sharing trust made an unsecured loan of $5,000 to Huffaker. At this time the balance in Huffaker's profit-sharing account was $4,945.05. His vested interest was $494.51. The note, with the interest which had accrued thereon, was renewed on May 8, 1973. At this time he had a balance of $10,367.80 and a vested interest of $2,073.56. The renewal was also, erroneously, signed by House. The renewal, due May 8, 1974, has never been repaid.
In fiscal 1973 the profit-sharing trust made the following unsecured loans at 6-percent interest to Ma-Tran:
+----------------------------+
¦Date ¦Amount ¦Due ¦
+--------+----------+--------¦
¦ ¦ ¦ ¦
+--------+----------+--------¦
¦9/8/72 ¦$5,000.00 ¦9/8/73 ¦
+--------+----------+--------¦
¦9/15/72 ¦18,379.66 ¦9/15/73 ¦
+--------+----------+--------¦
¦12/22/72¦10,000.00 ¦12/22/73¦
+--------+----------+--------¦
¦2/16/73 ¦7,000.00 ¦2/16/73 ¦
+----------------------------+
Ma-Tran made a repayment of $10,552.62 on its loans on September 26, 1972. However, no other payments have been made and no interest has been paid on these loans. The profit-sharing trust had no gross income for its taxable years ended June 30, 1972 and 1973.
In fiscal year 1972 Ma-Tran had 18 employees, 9 of whom were eligible to participate in the profit-sharing plan. In fiscal year 1973 Ma-Tran had 20 employees with 15 being eligible participants.
On August 13, 1971, Hugh Thorpe, an employee of Ma-Tran and a participant in the profit-sharing plan, died. He was survived by a wife and children by a previous marriage. Under the terms of the plan, unless the participant otherwise designates, the surviving spouse is sole beneficiary. The balance in his profit-sharing account at the time of his death was $1,470.46. The profit-sharing trust made no allocation of funds to the decedent's account for the fiscal year ended June 30, 1972. It has made no distribution of Thorpe's interest.
During fiscal year 1972 the interests of four participants in the profit-sharing plan were terminated due to the termination of their employment at Ma-Tran. By the terms of the plan all had vested interests of at least 10 percent. The total funds in their accounts at the time of termination were as follows:
No funds were distributed. The amount treated as a forfeiture as a result of these terminations was $3,268.29. This amount was allocated to other participants according to ratios based on their account balances.
During fiscal year 1973 the interests of three participants in the profit-sharing plan were terminated due to termination of their employment at Ma-Tran. Their vested interests and the total funds in their respective accounts at the time of termination were as follows:
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