Babst Servs., Inc. v. Comm'r of Internal Revenue
| Decision Date | 04 November 1976 |
| Docket Number | Docket No. 842—75. |
| Citation | 67 T.C. 131 |
| Parties | BABST SERVICES, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held: Eligibility requirements of taxpayer corporation's profit-sharing plan operated so as to discriminate in favor of officers, shareholders, and highly compensated employees within the meaning of sec. 401(a)(3)(B). Accordingly, the Commissioner's disallowance of a deduction for the corporation's contributions to the plan's trust is sustained. R. Richardson King, for the petitioner.
Deborah R. Jaffe, for the respondent.
The Commissioner determined a deficiency of $5,458.33 in petitioner's Federal corporate income tax for the fiscal year ended May 31, 1971. At issue is the deductibility of $11,325 petitioner contributed to a profit-sharing plan established for its employees.
The parties have filed a stipulation and supplemental stipulation of facts, along with exhibits, which are incorporated herein by this reference.
Petitioner Babst Services, Inc., was incorporated under the laws of the State of Louisiana on June 23, 1969. At the time it filed the petition herein its principal office was located in Metairie, La. Petitioner filed its U.S. Corporation Income Tax Return for the taxable year with the District Director of Internal Revenue at New Orleans, La.
Petitioner is a mechanical and plumbing contractor. In the conduct of that business it employs both salaried and hourly paid personnel. The latter, which are far greater in number, are all union members. During the calendar year 1970 petitioner employed at one time or another 101 such employees.
On May 13, 1971, petitioner adopted a profit-sharing plan, to be effective retroactively from June 1, 1970. The plan extended coverage only to salaried employees with at least 1 year of service who had attained the age of 25. At the time the plan was adopted petitioner had 51 employees. Of these, 44 were hourly paid employees, ineligible for coverage. Three salaried employees were excluded from coverage because they did not have at least 1 year of service. The remaining four employees were covered.
The four employees covered under the plan during the taxable year were Emile M. Babst III, Z. Harry Kovner, Lola R. Babst, and Robert Thompson. Emile Babst owned 60 percent of petitioner's outstanding voting stock. He was its president and had been employed by it since its incorporation. Harry Kovner owned 20 percent of petitioner's voting stock. He had been employed by the corporation since July 1969, and was its vice president. Lola Babst, Emile's wife, had been employed by petitioner since January 1970, and was a designated officer of the corporation, its secretary. Mrs. Babst did not attend board meetings or prepare minutes thereof, but, in her capacity as secretary, did sign the minutes prepared by others. She was primarily responsible for various tasks such as posting accounts and paying bills, and had authority to sign checks on behalf of the corporation without a cosignature. She did not supervise other employees. The Babsts were married at the time Emile acquired stock in petitioner, and the stock was acquired with community funds. The remaining participant in the profit-sharing plan, Robert Thompson, was petitioner's ‘Field Representative.’ He had been employed by the corporation since September 1969, and was neither an officer nor shareholder.1
During the fiscal year ended May 31, 1971, the four employees covered under petitioner's profit-sharing plan received salaries and ‘direct payments' from petitioner as follows:
+-----------------------------------------------------+
¦ ¦Base ¦Direct ¦ ¦
+-------------------+--------+-------------+----------¦
¦ ¦salary ¦payments 2 ¦Total ¦
+-------------------+--------+-------------+----------¦
¦Emile M. Babst III.¦$30,000 ¦$9,881.48 ¦$39,881.48¦
+-------------------+--------+-------------+----------¦
¦Z. Harry Kovner ¦20,000 ¦3,738.49 ¦23,738.49 ¦
+-------------------+--------+-------------+----------¦
¦Robert Thompson ¦17,000 ¦1,677.36 ¦18,677.36 ¦
+-------------------+--------+-------------+----------¦
¦Lola R. Babst ¦8,500 ¦780.00 ¦9,280.00 ¦
+-----------------------------------------------------+
The positions and salaries of the three salaried employees not covered under the plan during the taxable year were as follows:
+--------------------------------+
¦ ¦ ¦Salary ¦
+-------------+--------+---------¦
¦ ¦Weekly ¦through ¦
+-------------+--------+---------¦
¦Position ¦salary ¦5/26/71 ¦
+-------------+--------+---------¦
¦Estimator ¦$230 ¦$9,970 ¦
+-------------+--------+---------¦
¦Expediter ¦230 ¦8,570 ¦
+-------------+--------+---------¦
¦Clerk/typist ¦90 ¦2,518 ¦
+--------------------------------+
The 44 hourly employees excluded from coverage under the profit-sharing plan all belonged to unions which maintained their own pension plans. Petitioner made contributions to these plans on behalf of each such employee for each hour that he was employed. The job titles, union affiliations, hourly rates of compensation, and hourly rates of contribution to the applicable union pension plans for these employees were as follows:
Eleven of those 44 hourly employees had been employed by petitioner for 1 year or more, as of May 13, 1971. These employees, their job titles, hourly rates of pay, and their total compensation for fiscal year ended May 31, 1971, were as follows:
+----------------------------------------------------------+
¦Hourly employees ¦ ¦Hourly ¦ ¦
+-------------------+----------+--------+------------------¦
¦with at least ¦Job ¦rate ¦Compensation for ¦
+-------------------+----------+--------+------------------¦
¦1 year of service ¦title ¦of pay ¦FYE 5/31/71— ¦
+-------------------+----------+--------+------------------¦
¦J. McGinnis ¦foreman ¦$7.30 ¦$16,423.02 ¦
+-------------------+----------+--------+------------------¦
¦G. Barr ¦journeyman¦6.80 ¦15,861.71 ¦
+-------------------+----------+--------+------------------¦
¦C. Burkenstock ¦foreman ¦7.30 ¦14,984.91 ¦
+-------------------+----------+--------+------------------¦
¦G. Lumetta ¦foreman ¦7.30 ¦14,220.69 ¦
+-------------------+----------+--------+------------------¦
¦E. A. Coon, Jr. ¦foreman ¦7.30 ¦13,425.72 ¦
+-------------------+----------+--------+------------------¦
¦K. Madere ¦foreman ¦7.30 ¦13,399.08 ¦
+-------------------+----------+--------+------------------¦
¦M. Gourgues ¦journeyman¦6.80 ¦13,301.34 ¦
+-------------------+----------+--------+------------------¦
¦D. Stauder ¦foreman ¦7.30 ¦13,155.49 ¦
+-------------------+----------+--------+------------------¦
¦R. Gremillion ¦journeyman¦6.80 ¦12,944.75 ¦
+-------------------+----------+--------+------------------¦
¦E. Gremillion ¦laborer ¦4.01 ¦9,242.37 ¦
+-------------------+----------+--------+------------------¦
¦R. Bauer ¦journeyman¦6.80 ¦8,291.65 ¦
+----------------------------------------------------------+
J. McGinnis was the highest paid of all the employees excluded from participation in petitioner's profit-sharing plan.
On June 1, 1971, petitioner submitted its application for determination of qualification under section 401(a), I.R.C. 1954, of its profit-sharing plan to the District Director of Internal Revenue at New Orleans, La. On April 13, 1972,3 following notification that it had been determined that the plan was not qualified, petitioner amended the plan by reducing the minimum service requirement from 1 year to 60 days and lowering the minimum age for eligibility from 25 to 21. On June 7, 1972, petitioner was notified by the District Director that the plan as amended qualified under section 401. Petitioner was also notified that it had been determined that the plan was not qualified for plan years ending prior to June 1, 1971.
For the fiscal year ended May 31, 1971, petitioner contributed $11,325 to its profit-sharing plan. The contribution was allocated as follows:
On its Federal income tax return for that fiscal year petitioner deducted the full amount of this contribution from its gross income. In his...
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