Cooper v. Commissioner

• Decision Date: 12 August 1975
• Docket Number: 7090-73.,Docket No. 6149-73
• Parties: Aileen Cooper v. Commissioner. Katie Lassiter v. Commissioner.
• Court: U.S. Tax Court

34 TCM (CCH) 1134

1975 TC Memo 263

T.C. Memo. 1975-263.

Aileen Cooper v. Commissioner.

Katie Lassiter v. Commissioner.

Docket Nos. 6149-73, 7090-73.

United States Tax Court.

Filed August 12, 1975.

Alan C. Housholder, 420 Stahlman Bldg., Nashville, Tenn., and Quentin L. Housholder for the petitioners. Wm. Robert Pope, Jr. for the respondent.

Memorandum Opinion

DAWSON, Chief Judge:

The Commissioner determined deficiencies in Federal income tax for 1971 in the following amounts:

                      Petitioner            Deficiency
                      Aileen Cooper ....... $1,091.67
                      Katie Lassiter ......    963.60
                

These cases were consolidated and submitted as fully stipulated under Rule 122, Tax Court Rules of Practice and Procedure. The sole issue for decision is whether the lumpsum distribution of the petitioners' total shares from an employees' profit sharing trust was ordinary income or capital gain under sections 402(a)(1) and (2).¹

The stipulation of facts filed by the parties, together with accompanying exhibits, are incorporated herein by reference.

Petitioner Aileen Cooper is an individual who resided in Joelton, Tennessee, at the time of filing the petition in this case. Petitioner Katie Lassiter is an individual who, at the time of filing the petition, maintained a residence in Nashville, Tennessee. For the taxable year 1971 each petitioner filed an individual Federal income tax return with the District Director of Internal Revenue, Memphis, Tennessee.

Petitioners were employees of the Kroger Company and participants in the Kroger Employees' Savings and Profit Sharing Plan (hereinafter the Plan), a qualified plan within the meaning of section 401(a). The Plan provided for a trust to administer funds coming into the plan; income earned by the trust was exempt from taxation under section 501(a).

The pertinent provisions of the Plan were as follows:

The Kroger Co.

Employees' Savings and Profit Sharing Plan

The Plan

The Kroger Co., an Ohio corporation, hereinafter called the "Company" does hereby establish and adopt the following Employees' Savings and Profit Sharing Plan, hereinafter called the "Plan."

2. Effective Date. The Plan shall become effective on January 1, 1952 . . .

3. Administration. (Trustees) The funds created hereunder shall be administered by three Trustees ... The duties and responsibilities of the Trustees are set forth in the Trust Agreement . . .

5. Membership. (Employee Deposits) Eligible employees may become members of the Plan by filing a written application authorizing the Company to withhold from applicant's pay and deposit with the Trustees an amount which shall not exceed 5% of the applicant's regular weekly salary . . .

(Withdrawal) A member may withdraw from the Plan at any time by filing . . . a notice of withdrawal. Retirement under the Kroger Retirement Program or separation from the employment after age 60 shall automatically constitute withdrawal from the Plan as of the last day of the year in which such retirement or separation occurs; provided that any member so retired or separated may withdraw from the Plan prior to the last day of such year by filing ... a notice of withdrawal. Death prior to retirement, total and permanent disability or separation from employment otherwise than in connection with the member's retirement under the Kroger Retirement Program or his separation after age 60 shall automatically constitute withdrawal from the Plan as of the date of such occurrence.

6. Employees' Savings Fund. (Fund A) The fund of cash and investments, the earnings thereon and the proceeds thereof, created by employee deposits, shall be known as "Fund A", and the amounts or share therein assigned to the members as hereinafter provided shall be known as "A Credits." In each year after 1952 the portion of Fund A attributable to current deposits in such year shall be segregated from the balance of Fund A until the close of such year.

(Assignment of A Credits) As of the close of 1952 Fund A shall be appraised by the Trustees and A Credits equivalent to such appraised value shall be assigned to the members in proportion to the amounts deposited by each in such year. As of the close of each succeeding year Fund A, excluding the segregated portion thereof attributable to current deposits, shall be appraised, taking into account the earnings thereon and capital gains and losses, whether or not such capital gains and losses have been realized. The aggregate of A Credits assigned and adjusted as of the close of the preceding year and still outstanding shall then be divided into such appraised value. The quotient, expressed in terms of percentage, shall then be applied to each member's A Credits, assigned and adjusted as of the close of the preceding year, and each member's A Credit account shall be adjusted upward or downward accordingly. The segregated portion of Fund A attributable to current deposits shall then be appraised as of the close of such year and additional A Credits equivalent to such appraised value shall be assigned to the members in proportion to the amounts deposited by each in such year.

7. Company Contribution. (Profit Sharing Formula).

(Determination) Within sixty days following the close of each year, the Company shall deliver to the Trustees its contribution, if any, for such year . . .

8. Company Contribution Fund. (Fund B) The fund of cash and investments, the earnings thereon and the proceeds thereof, created by Company contributions, shall be known as "Fund B," and the amounts or shares therein assigned to the members as hereinafter provided shall be known as "B Credits."

(Assignment of B Credits) As of the close of 1952, B credits equivalent to the Company contribution for such year, after deducting all costs of administration chargeable thereto, shall be assigned to the members in proportion to the amounts deposited in Fund A by each in such year. As of the close of each succeeding year Fund B, excluding therefrom the Company contribution, if any, for the current year, shall be appraised by the Trustees, taking into account the earnings thereon and capital gains and losses, whether or not such capital gains and losses have been realized. The aggregate of B Credits assigned and adjusted as of the close of the preceding year, reduced by the preceding year-end value of the vested B Credits redeemed during the year, shall then be divided into such appraised value. The quotient, expressed in terms of percentage, shall then be applied to each member's B Credit account assigned and adjusted as of the close of the preceding year and still outstanding, excluding forfeited credits, and each such account shall be adjusted upward or downward accordingly. Additional B Credits equivalent to the Company contribution for the current year, if any, after deducting all costs of administration charegable thereto, plus the amount of such appraised value properly allocable to provisional B Credits forfeited by withdrawals during the year, shall then be assigned to the members in proportion to the amounts deposited in Fund A by each in such year.

(Vesting Provisions) The assignment of B Credits shall be provisional until the same become vested. The amount of each member's B Credits which shall be "vested", and therefore subject to payment or redemption on withdrawal, shall be determined in accordance with the following provisions:

(a) If withdrawal shall result from the member's death, total and permanent disability, retirement under the Kroger Retirement Plan or separation from the employment after age sixty . . . all "B" Credits theretofore provisionally assigned to the member shall immediately become vested . . .

9. Redemption of Credits. (Withdrawal at close of year) Upon withdrawal from the Plan on the last day of any year, the assignment of the member's credits as of the close of such year shall proceed as hereinbefore provided as though he had not withdrawn, and as promptly as possible after the close of such year, the member, or in the case of his death or legal disability his beneficiary or personal representative, shall be paid in one sum the amount of his A Credits and vested B Credits assigned as of the close of such year.

(Withdrawal during year) Upon withdrawal from the Plan during any year and prior to the last day thereof, the member, or in the case of his death or legal disability his beneficiary or personal representative, shall be paid in one sum the amount of his A Credits and vested B Credits assigned as of the close of the preceding year, subject to adjustment as hereinafter provided, plus his deposits for the current year. Upon such withdrawal, the member shall receive no credit, provisional or vested, in the Company contribution, if any, for the current year, or for any provisional B Credits forfeited upon the withdrawal of other members during the current year. . . .

12. Termination. The Company reserves the right to terminate the Plan and its obligation to make contributions thereto as of the close of any month. Written notice of such termination shall be filed with the Trustees . . . not less than thirty days before the termination date . . .

(Liquidation) The A and B Credits to which each participating member is entitled shall be finally determined as of the date of termination. The Trustees shall thereupon proceed with the orderly liquidation of the two funds and shall make distribution thereof in cash, either at one time or installments over a period not to exceed five years, among the members as of the date of termination, the A Fund in proportion to such A credits, and the B Fund in proportion to such B Credits without regard to whether the same are vested or provisional. . . .

In December of 1969 members of the Plan were informed that termination of the Plan was under serious consideration. At its meeting on September 18, 1970, the Kroger Company Board of Directors approved termination of the Plan effective January 2, 1971. Petitioners had no right...