LEACH CO. v. Commissioner, Docket No. 7176-79R.
| Decision Date | 26 February 1981 |
| Docket Number | Docket No. 7176-79R. |
| Citation | 41 TCM (CCH) 988,1981 TC Memo 91 |
| Parties | G & W Leach Co., a Pennsylvania Corporation v. Commissioner. |
| Court | U.S. Tax Court |
Howard A. Minsky, 728 Fifth Ave., Pittsburgh, Pa., for the petitioner. Robert W. Lynch, for the respondent.
This case involves an action for declaratory judgment under section 74761 whereby petitioner has asked this Court to determine whether its profit sharing plan and trust qualify under section 401 for the taxable years ended September 30, 1975 and 1976. Respondent issued final adverse determination letters on February 26, 1979, which stated that a plan and trust satisfying the requirements of sections 1.401-1(a)(2) and 1.401-2(a)(2), Income Tax Regs., did not exist during those years.
On March 11, 1980, respondent filed a certified administrative record in this case pursuant to Rule 217(b)(1), Tax Court Rules of Practice and Procedure, after he and petitioner were unable to agree on a stipulated administrative record. The certified administrative record is incorporated herein by reference. The pertinent facts are summarized below.
The petitioner (sometimes hereinafter referred to as the Corporation) is a Pennsylvania corporation whose taxable year ends September 30. On August 20, 1974, its directors and shareholders signed a document entitled "Consent Actions by Directors and Shareholders in Lieu of Regular Meeting," and thereby gave their consent to certain specified actions to be taken by the Corporation. Paragraph 8 of the document contained the following resolution:
RESOLVED that immediate steps be taken to implement a profit sharing plan for the Corporation to cover all officers and employees who qualify. The Treasurer of the Corporation is authorized to issue out a check to establish an independent profit sharing account to be independently administered.
On November 25, 1974, Howard A. Minsky, who is the Corporation's attorney and is not an officer or director thereof, executed a standard form supplied by the Mellon Bank, N.A., entitled "Certified Resolutions of Board of Directors", which established an account at the bank in the name of "G & W Leach Company, Profit Sharing Trust" (hereinafter the Mellon account). The resolution authorized withdrawals from the account by any two of the following persons. William B. Leach, President and Treasurer of the Corporation; Alphonse G. Chesnos, Vice President of the Corporation; and Howard A. Minsky.
The Corporation made several deposits to the Mellon account, as follows:
Date Amount
November 1974 ......... $20,000
December 1975 ......... 30,000
November 1976 ......... 32,000
These funds were variously invested in United States Treasury Bills, Special Mellon Bank Passbook Accounts, Ford Motor Credit Company Notes, and Mellon Bank Savings Certificates. These investments were purchased and held in the name of G & W Leach Company Profit Sharing Trust.
In January 1975 Howard A. Minsky met with the Corporation's employees and informed them of the Corporation's intent to establish a profit sharing plan. He discussed in general with them the provisions of a copy of another company's profit sharing plan which had been supplied to him by the Corporation's accountant. The plan had been drafted prior to the enactment of the Employee Retirement Income Security Act of 1974 (ERISA) and did not comply with its provisions.
Also in January 1975 a Trustee Bond was procured from the Hartford Insurance Company to cover William B. Leach, Alphonse G. Chesnos, and Howard A. Minsky, all of whom had agreed to act as trustees of the proposed profit sharing trust. The Trustee Bond was to be effective from January 1, 1975, to January 1, 1978.
Preliminary and final Forms EBS-1 pertaining to the proposed profit sharing plan were filed by the Corporation with the United States Department of Labor on August 29, 1975 and July 30, 1976, respectively. On May 28, 1976, the Corporation distributed to its employees a written notice which provided, in part, as follows:
Sincerely yours (S) Howard A. Minsky
On October 29, 1976, an agreement entitled "G & W Leach Company Profit Sharing Plan and Trust Agreement" was executed by the Corporation and by trustees William B. Leach, Alphonse G. Chesnos, and Howard A. Minsky. Article II, paragraph 2.6 of the plan states that its effective date is August 20, 1974. The plan was modeled after both the pre-ERISA plan discussed in the January 1975 meeting and a prototype plan which Howard A. Minsky obtained at an American Bar Association Pension and Profit Sharing Seminar in Arizona in February 1974, and was intended to comply with the ERISA standards.
By letter dated October 30, 1976, Howard A. Minsky requested a determination from respondent as to the qualified status of its profit sharing plan and trust under sections 401(a) and 501(a). Attached to the letter was a Power of Attorney (Form 2848) executed by the petitioner in favor of Howard A. Minsky, and an Application for Determination for Defined Contribution Plan (Form 5301) executed by Howard A. Minsky on October 29, 1976.
On February 17, 1977, the District Director for the Internal Revenue Service in Baltimore, Maryland issued a proposed adverse determination letter for the taxable years ended September 30, 1974 and 1975, on the ground that the plan document was not executed prior to the close of those taxable years. Petitioner appealed the adverse determination and on May 20, 1977 the Assistant Regional Commissioner, Employee Plans and Exempt Organizations, upheld the adverse determination and also determined that the profit sharing plan did not qualify for the taxable year ended September 30, 1976. Petitioner then appealed the adverse determinations to respondent's National Office. On February 26, 1979, respondent, through its Associate Chief, Appeals Office, Philadelphia, Pennsylvania, issued final adverse determination letters for the taxable years ended September 30, 1974, 1975, and 1976, stating that the plan did not qualify because (1) it was not adopted or communicated to petitioner's employees before the close of those taxable years as required by section 1.401-1(a)(2), Income Tax Regs., and (2) there was no trust agreement in existence during those years prohibiting the diversion of funds for purposes other than the exclusive benefit of the employees or their beneficiaries as required by section 1.401-2(a)(2), Income Tax Regs. Having exhausted all administrative remedies as required by section 7476(b)(3), petitioner then sought a declaratory judgment in this Court concerning the qualification of the plan and trust for the 1975 and 1976 fiscal years.
The issue in this case is whether the profit sharing plan and trust were in existence prior to the close of the taxable years in issue.2 In order to qualify under section 401(a) () a profit sharing trust must be "part of a stock bonus, pension, or profit sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries." Section 1.401-1(a)(2), Income Tax Regs., provides in part that the plan must be "a definite written program and arrangement which is communicated to the employees." With respect to the trust itself, section 401(a)(2) provides that the trust will not qualify unless:
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries;
This requirement of section 401(a)(2) is further explained in section 1.401-2(a)(2), Income Tax Regs., which provides, in part, as follows:
(2) As used in section 401(a)(2), the phrase "if under the trust instrument it is impossible" means that the trust instrument must definitely and affirmatively make it impossible for the nonexempt diversion or use to occur, whether by operation or natural termination of the trust, by power of revocation or amendment, by the happening of a contingency, by collateral arrangement, or by any other means. * * *
Respondent makes essentially two arguments in this case. First, he argues that during the taxable years in question there did not exist a definite written profit sharing plan which had been communicated to petitioner's employees as required by section 1.401-1(a)(2), Income Tax Regs. Second, he argues that a valid trust containing language making it impossible to divert income or corpus to purposes other than the exclusive benefit of petitioner's...
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