Engineered Timber Sales, Inc. v. Comm'r of Internal Revenue

• Citation: 2 Employee Benefits Cas. 2071,74 T.C. 808
• Decision Date: 22 July 1980
• Docket Number: Docket No. 10262-77.
• Parties: ENGINEERED TIMBER SALES, INCORPORATED, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

2 Employee Benefits Cas. 2071

74 T.C. 808

ENGINEERED TIMBER SALES, INCORPORATED, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 10262-77.

United States Tax Court

Filed July 22, 1980.

Held, for calendar year 1974, petitioner's collection of written documents fails to create a qualified profit-sharing plan within the dimensions of sec. 401(a), I.R.C. 1954. Held, further, in 1974, these writings do not constitute a nonqualified profit-sharing plan within the meaning of secs. 401 through 415 of the Code. Held, further, section 401(b), as amended by the Employee Retirement Income Security Act of 1974, does not permit retroactive adoption of an original profit-sharing plan. Held, further, petitioner is not entitled in 1974 to a deduction under sec. 404(a) for contributions made on behalf of its employees to a nonexempt profit-sharing trust. Sherwin P. Simmons and William Kalish, for the petitioner.

Roger D. Osburn, for the respondent.

SCOTT, Judge:

Respondent determined deficiencies in petitioner corporation's income taxes for calendar years 1974 and 1975 in the amounts of $7,739.04 and $363.39, respectively.

Some of the issues raised by the pleadings have been disposed of by the parties, leaving for our decision (1) whether in the year 1974 petitioner established a profit-sharing plan within the meaning of section 401(a), I.R.C. 1954,¹ so as to be entitled to deduct, under section 404(a), contributions made in that year to an exempt trust; and (2) in the alternative, whether petitioner is entitled to deduct in 1974, under section 404(a), a contribution made on behalf of its employees to a nonexempt profit-sharing trust.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Engineered Timber Sales, Inc. (ETS), a closely held corporation, was incorporated in Florida on December 7, 1967. Its principal place of business at the time of filing its petition in this case was Tampa, Fla. As a cash basis taxpayer, petitioner timely filed its Federal income tax return for each of the calendar years 1974 and 1975 with the Internal Revenue Service Center, Chamblee, Ga.

Throughout 1974 and 1975, John B. Pugh and his wife, Jane N. Pugh, each owned 50 percent of the outstanding capital stock of ETS. Mr. and Mrs. Pugh were the sole members of the ETS board of directors, and as corporate officers, Mr. and Mrs. Pugh served as president and secretary-treasurer, respectively.

The primary business activities of ETS are the retail sale to, and installation for, commercial customers of such wood products as heavy timber beams and wood roof decking. Generally, products are installed at a jobsite by laborers subcontracted for the specific project. These workers are supervised by the ETS full-time, permanent employees. This operation limits the need for a large staff of ETS full-time employees.

On December 30, 1974, ETS employed five full-time workers. At that time, Mr. Pugh, who had 7 years of service with ETS, was responsible for ETS sales and the securing and supervising of all subcontract agreements and laborers. Mrs. Pugh, who had worked for ETS 5 years prior to December 30, 1974, was responsible for the fiscal operations of ETS, including establishing credit lines, collecting and disbursing funds, assisting in project bidding, purchasing materials, scheduling employees on projects, and maintaining the general personnel and payroll records. Estle A. Tate, employed by petitioner beginning January 24, 1974, was a foreman and additionally performed carpentry work at jobsites. James R. Patterson, employed by ETS commencing June 4, 1974, was the ETS project manager, responsible for assuring the availability of supplies and materials at jobsites. Bill Clark, a college student, commenced employment with ETS on October 8, 1974, as a part-time shop laborer during academic semesters and full time during school vacations, including his Christmas holiday. Messrs. Tate, Patterson, and Clark were unrelated to one another or to Mr. and Mrs. Pugh.

On December 5, 1974, Mr. and Mrs. Pugh met with petitioner's accountant, Mr. Hurst, in order to preliminarily review the corporation's tax position for 1974. During that meeting, they asked Mr. Hurst about some form of profit-sharing plan, and he recommended that Mr. and Mrs. Pugh consider instituting a profit-sharing plan effective in 1974 on behalf of the ETS full-time employees. After advising Mr. and Mrs. Pugh that ETS probably could establish a profit-sharing plan qualified under the Internal Revenue Code, Mr. Hurst suggested that Mr. and Mrs. Pugh contact an attorney for detailed advice and the drafting of necessary documents.

On December 10, 1974, Mrs. Pugh conferred with an attorney (who was not an attorney representing petitioner in this case) concerning the possibility of creating some type of retirement plan qualifying under the Internal Revenue Code for ETS full-time employees. This attorney reviewed with Mrs. Pugh the basic provisions of defined benefit and money purchase pension plans and discussed the requirements of a qualified profit- sharing plan. The attorney indicated alternative eligibility provisions, vesting schedules, potential trustees, and contribution schemes. Mrs. Pugh and the attorney each wrote notes during the discussion of matters covered. Upon completion of the December 10 meeting, the attorney used his handwritten notes as a guide to dictate a memorandum to his file concerning his discussion with Mrs. Pugh. The attorney's secretary typed that memorandum, dated December 10, 1974, which states in pertinent part:

At the beginning of the conference, I asked Mrs. Pugh how many employees were involved in the corporation and what she expected (the number) to be for the year. At the present time, there are three employees including Mr. and Mrs. Pugh. The third employee has been with them for something less than a year. The other employees of the company are hired for particular jobs and apparently a number of people are hired during the summer to work on particular projects. I explained to Mrs. Pugh that under the new law, if an individual worked more than 1000 hours during a twelve month period he had to be considered as a full-time employee for purposes of any qualified benefit plan. She indicated that all of their employees were paid on an hourly basis and that it would be easy for them to determine whether or not the employee had worked more than 1000 hours. She indicated that she did not believe that any of the part-time employees would meet the 1000 hour requirement.

On the profit-sharing plan, I explained to her that the company's contribution could be left to the complete discretion of the Board of Directors. The amount of the contribution varying from zero to 15% of the participating employees compensation to the extent that the company had either current or accumulated profit.

We also reviewed the alternatives for the eligibility provisions, vesting schedule and employee voluntary contributions. On the eligibility provisions, I pointed out that the plan could provide that the employee would become eligible to participate when he or she reached 25 and/or had completed one year of service. On the vesting schedule, I explained to Mrs. Pugh the three alternative maximum vesting schedules contained in the new pension bill. However, I pointed out to her that in light of the small number of employees involved in their plan, it would probably be impossible to get a vesting schedule longer than two or three years. I pointed out to her that the reason for the rapid vesting requirement was to avoid their using the plan for their exclusive benefit by dismissing the employees before they had obtained any significant vesting.

In the area of trustees, I suggested that Mr. and Mrs. Pugh consider the possibility of having a bank act as the trustee of their plan. The purpose of this would be to relieve them of the responsibility and obligations connected with being trustee. I checked with the First National Bank and informed Mrs. Pugh that they would charge a flat fee of $250 if the funds were invested in their employee benefits co-mingle trust fund and $500 if the funds were invested in any other type of investment. She said that she would discuss the matter with her husband and that they would probably want to get together with representative of the various banks before they reached a decision on this matter.

I told her that we would be able to prepare a trust agreement to get the fund started this year, but that we felt that it would be advisable to defer drawing the plan until such time as the regulations were issued under the Pension Bill and we had an understanding of what would be required by those regulations.

Based upon their current salary schedule, it appears that they could contribute approximately $14,000 to the trust this year assuming they used the full 15%. Mrs. Pugh indicated that this amount would not present any problem with their cash flow or profit position.

(Reproduced literally.)

On December 10 and 11, 1974, Mrs. Pugh discussed with Mr. Pugh what had transpired at her meeting with the attorney. Mrs. Pugh used the notes she had written during her December 10, 1974, conference to guide her discussion. ² Mr. and Mrs. Pugh determined that ETS should create a profit-sharing plan and telephoned the attorney on December 12 or 13, 1974, to inform him of that decision. During that telephone conversation, the attorney reviewed the requirements of a qualified profit-sharing plan. The attorney proposed plan requirements, including: eligibility upon attainment of age 25 and 1-year minimum service to ETS equivalent to 1,000 working hours, plan entry dates for eligible employees of June 30 and December 31 of each year, a 5-year vesting schedule at 20 percent per year, annual contribution requirements for ETS of zero to 15 percent, and the possibility of voluntary contributions by employees. Also, the...