Elgin National Watch Co. v. Commissioner of Internal Revenue
| Decision Date | 19 September 1929 |
| Docket Number | Docket No. 19522. |
| Citation | 17 BTA 339 |
| Parties | ELGIN NATIONAL WATCH CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
John E. Hughes, Esq., Alfred T. Carton, Esq., and Flay L. Murphy C. P. A., for the petitioner.
Brooks Fullerton, Esq., and F. R. Shearer, Esq., for the respondent.
This proceeding was instituted for the redetermination of a deficiency of $112,019.98 in income and profits taxes for the fiscal year ended April 30, 1919, arising out of the rejection in part of a claim in abatement. The issues are whether the respondent erred in:
1. Adding to net income the sum of $5,886.30, representing net income of pension funds created by petitioner.
2. Refusing to allow as a deduction from gross income the amount of contributions of petitioner to the trustees of its pension funds.
3. Adding to the cost of inventories of merchandise in process and finished, a portion of the amount of bonuses paid to employees during the year.
4. Failing to increase invested capital by the amount of money expended to develop and construct capital assets.
5. Refusing to allow a deduction for the exhaustion of Patent No. 1,020,832 based upon its March 1, 1913, value.
6. Refusing to allow a deduction for the exhaustion of Patent No. 1,096,304 based upon the March 1, 1913, value of the patent application.
7. Declining to allow as a credit against income and profits taxes, the amount of certain income taxes assessed by Great Britain.
8. Refusing to assess petitioner's profits taxes under the provisions of section 328 of the Revenue Act of 1918.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office in Chicago. During the taxable year, and for many years prior thereto, it was engaged in the manufacture and sale of watch movements.
On September 3, 1918, the board of directors of petitioner adopted a resolution approving rules and regulations for the establishment, operation, and termination of a pension fund for the benefit of its officers and employees. The rules and regulations provided for (1) the creation of the fund; (2) the appointment of five trustees for the fund, consisting of the president, two directors, the factory superintendent and an employee of the petitioner; (3) the election of the trustees; (4) the organization of the board of trustees; and (5) for meetings of the trustees. In addition, the rules and regulations contained the following provisions as amended by the trustees on February 7, 1919, and April 18, 1919, with the approval of petitioner's directors:
SECTION IV — ORGANIZATION OF BOARD OF TRUSTEES
As soon as the full Board of Trustees for said Pension Fund has been elected as herein provided, said Board of Trustees shall meet and organize by electing from their number a President, Vice-President and a Secretary. The Comptroller of the Elgin National Watch Company shall be ex-officio treasurer of said Pension Fund. The President, Vice-President and Secretary of said Pension Fund shall hold their respective offices for one year, or until their successors are elected.
The duties of the several officers so elected shall be such as usually appertain to their respective offices.
Said Treasurer shall have the custody of all moneys, securities and obligations belonging to said Pension Fund, but he shall at all times deposit any cash coming to his hands in such bank in the City of Elgin, Kane County, Illinois, as shall be designated by said Board of Trustees. Said Treasurer shall also at all times deposit all securities of every kind or character belonging to said Pension Fund in some safety deposit vault to be designated by said Board of Trustees of said Pension Fund, and such securities belonging to said Pension Fund shall only be withdrawn from said safety deposit vault upon the written order of the Board of Trustees of said Pension Fund, or a majority thereof. If the securities and obligations belonging to said Pension Fund are left in the custody of said Treasurer, access to such securities and obligations may be had according to rules and regulations to be adopted from time to time by the Board of Trustees with the written approval of the President of the Elgin National Watch Company; or, if deemed advisable, upon the vote of the Board of Trustees, with the approval of the Board of Directors of the Elgin National Watch Company, any or all securities and obligations belonging to said Pension Fund may be deposited with some trust company located in Chicago, Illinois, as custodian. In the event of such securities and obligations being deposited with some trust company such trust company shall pay over to said Treasurer the income from such securities. The Treasurer shall deposit all moneys belonging to said Pension Fund in the name of "The Elgin Watch Company's Pension Fund."
All checks drawn upon said Elgin National Watch Company's Pension Fund shall be signed by the Treasurer and the Secretary of the Board of Trustees, or in the absence or inability to act of the Treasurer shall be signed by the Secretary and the President of the Board of Trustees, or in the absence or inability to act of the Secretary shall be signed by the Treasurer and the President of the Board of Trustees. Payments from said Pension Fund shall only be made after they have been approved by the Board of Trustees and ordered paid.
Said Trustees shall serve without compensation, but all necessary expenses incurred by any of the trustees in attending the meetings of said Board shall be paid out of said Pension Fund.
Three Trustees shall constitute a quorum of the Board for the transaction of business, and it shall require at least three affirmative votes to pass any motion or resolution voted upon by said Board.
SECTION VI — TITLE AND POWER OF BOARD OF TRUSTEES IN RELATION TO FUND.
At least three affirmative votes cast at a regular or special meeting of the Board of Trustees shall be required for the assignment, sale, or transfer of any real or personal property belonging to said fund.
The title, management, and distribution of the fund created hereby shall vest in said Board of Trustees, and said trustees are hereby vested with full power and authority to sell, transfer, invest and reinvest any and all securities or funds belonging to said fund and generally to manage and control the same, subject only to the limitations in these Rules and Regulations contained.
SECTION VII — CONTRIBUTIONS TO THE FUND.
Officers and employees of the Elgin National Watch Company shall contribute two per cent (2%) of the amount of their several salaries or wages in installments to be deducted by said Elgin National Watch Company at the time of their regular pay days, but no contributions shall be made on any portion of a salary or wage in excess of $4,000 and no pension shall be based or computed on any portion of a salary or wage exceeding $4,000.
Admission to the benefit of this fund shall be optional with those officers and employees who have reached the age, in the case of males, of twenty-one years, and in the case of females, of eighteen years, and who are in the service of the Elgin National Watch Company on the date this fund becomes operative, but all persons thereafter entering the service of the Elgin National Watch Company shall be obliged to join and contribute to the fund when they shall have reached the age, in the case of males, twenty-one years, and in the case of females, eighteen years, as herein provided, and their term of service for computation of pension shall be considered to commence at the time of their first contribution to the fund. The Board of Trustees is hereby empowered to waive the obligation to join and contribute to the fund in the case of persons of advanced age entering the service of the Company.
SECTION VIII — CONTRIBUTIONS BY ELGIN NATIONAL WATCH COMPANY TO PENSION FUND.
In order to enable the Board of Trustees of said Pension Fund hereby created to successfully carry out the plan of pensioning employees, as herein provided for, the Elgin National Watch Company will, as soon as said Board of Trustees for said Fund shall have been elected and shall have organized by the election of officers, turn over to said Board of Trustees $100,000.00, par value, of Liberty Bonds; and said Elgin National Watch Company will also, commencing one year from the date of the said initial payment to said Fund, contribute annually to said Fund an amount equal to the aggregate of the contributions thereto of the officers and employees of the Elgin National Watch Company who are contributors to said Fund.
The annual contributions above provided to be made by the Elgin National Watch Company to said Fund may be made at any time during any current year within which said payment should be made.
The provisions of this Section as to contributions to said Fund by said Elgin National Watch Company is made, however, subject to the right hereby expressly reserved by said Elgin National Watch Company, to discontinue said contributions at any time hereafter at its option, upon declaring said Fund terminated and providing for the liquidation thereof as herein provided.
When an officer or employe shall have been in the service of the Elgin National Watch Company continuously for twenty years, or upwards, and shall have attained the age of sixty-five years if male; or fifty-five years if female; and has contributed to said fund for ten years, or more, continuously, he or she as the case may be, shall be entitled to a pension hereunder, computed in accordance with the provisions of this section.
The pension allowed an officer or employe who has contributed to this fund shall be computed on the average annual salary or wage (not to exceed $4,000) which he or she received during the ten years immediately preceding the date of his or her superannuation. One-fiftieth (1-50th) of which...
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