Logan Eng'g Co. v. Comm'r of Internal Revenue
| Decision Date | 26 May 1949 |
| Docket Number | Docket No. 16955. |
| Citation | 12 T.C. 860 |
| Parties | LOGAN ENGINEERING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, a solvent corporation on an accrual basis of accounting, issued and delivered its promissory notes worth their face amounts to an employees' trust which was tax-exempt under Section 165, I.R.C. These notes were paid during the following year. Held, petitioner was not entitled to deduct the amount of the notes in the year of issuance, under section 23(p), I.R.C. Frederick A. Thulin, Esq., for the petitioner.
Charles D. Leist, Esq., for the respondent.
The Commissioner determined deficiencies as follows:
+--------------------------------------------+
¦ ¦ ¦Declared ¦ ¦
+-----+----------+------------+--------------¦
¦Year ¦Income tax¦value excess¦Excess profits¦
+-----+----------+------------+--------------¦
¦ ¦ ¦profits tax ¦tax ¦
+-----+----------+------------+--------------¦
¦ ¦ ¦ ¦ ¦
+-----+----------+------------+--------------¦
¦1942 ¦$1,314.40 ¦$996.57 ¦$47,611.52 ¦
+-----+----------+------------+--------------¦
¦1943 ¦1,274.20 ¦ ¦10,588.74 ¦
+-----+----------+------------+--------------¦
¦1944 ¦ ¦ ¦18,634.26 ¦
+-----+----------+------------+--------------¦
¦1945 ¦2,823.83 ¦ ¦15,028.91 ¦
+-----+----------+------------+--------------¦
¦Total¦5,412.43 ¦996.57 ¦91,863.43 ¦
+--------------------------------------------+
The sole issue presented by the pleadings is whether the issuance and delivery of negotiable, interest-bearing promissory notes by petitioner corporation to an employees' trust constituted deductible payments within the meaning of section 23(p) of the Internal Revenue Code.
The facts were stipulated and we incorporate them herein by reference. We refer to only so much of the stipulation as is necessary to a full understanding of our decision.
Petitioner is a corporation, organized under the laws of the State of Illinois. It maintains its books of account and files its tax returns on the accrual basis. Its Federal income, declared value excess profits, and excess profits tax returns for the calendar years in question were filed with the collector for the first district of Illinois.
By an instrument dated December 1, 1942, the petitioner created a profit-sharing trust for the exclusive benefit of its employees, which is stipulated to be a valid tax-exempt trust within the meaning of section 165(a) of the Internal Revenue Code.
The trust instrument provided for contributions by the corporation as follows:
Contributions by the Company. The Company agrees to transfer and pay to the Trustees promptly after the execution of this Agreement certain sums of money, or to deliver to the Trustees legally enforceable, interest-bearing promissory notes obligating the Company to pay to the Trustees certain sums of money, and agrees thereafter, annually, to transfer and pay to the Trustees in each year, additional amounts, not in excess of fifteen (15%) percent of the compensation of the participants during the year, nor in excess of forty (40%) percent of the net earnings of the Company after providing for the payment of all federal and state taxes and dividends of six (6%) percent on outstanding capital stock, provided, the Board of Directors of the Company may, in its discretion, omit any payment whatever in any year in which, in their opinion, distribution of earnings would not be to the best interests of the Company, and consequently no dividends in excess of six (6%) percent on the stock are paid and the Company shall not be obligated to make up such omitted payments in any later year. Furthermore, the Company reserves the right to terminate, temporarily or permanently, this trust and all payments thereto at any time after ten (10) years from the date hereof.
The Company shall have no rights or claims in or to the funds or other property or assets of the trust in the hands of the Trustees, except the right to require the Trustees to hold, use, apply and pay funds, or other property in their hands, in accordance with the provisions of this trust agreement for the exclusive benefit of the company's employees.
The Company may also contribute to the trust such sums in cash or in other property as the Board of Directors may from time to time determine. The Trustees shall be under no duties nor shall they have the right to require the Company to make contributions to the trust or to inquire into the amounts contributed, or the method or the reason for determining the amount contributed.
Once in each of the four taxable years in question the board of directors of petitioner duly met and authorized contributions to the trust fund in the form of negotiable promissory notes of petitioner in the following amounts:
+---------------------------------+
¦ ¦Principal amount ¦
+-------------+-------------------¦
¦Board meeting¦of notes authorized¦
+-------------+-------------------¦
¦Dec. 14, 1942¦$32,655.00 ¦
+-------------+-------------------¦
¦Dec. 29, 1943¦53,370.00 ¦
+-------------+-------------------¦
¦Dec. 29, 1944¦53,759.54 ¦
+-------------+-------------------¦
¦Feb. 7, 1946 ¦59,900.18 ¦
+---------------------------------+
The $32,655 authorized as a contribution for 1942 was made by the issuance of four negotiable instruments of petitioner, which were delivered to the trust on December 14, 1942, and were paid in 1943. The pertinent information in regard to these four instruments is summarized as follows:
+-------------------------------------+
¦ ¦ ¦Maturity¦Date of¦
+------+-------------+--------+-------¦
¦Amount¦Interest rate¦date ¦payment¦
+------+-------------+--------+-------¦
¦ ¦ ¦ ¦ ¦
+------+-------------+--------+-------¦
¦$8,655¦3% ¦3/1/43 ¦3/3/43 ¦
+------+-------------+--------+-------¦
¦8,000 ¦3% ¦6/1/43 ¦6/1/43 ¦
+------+-------------+--------+-------¦
¦8,000 ¦3% ¦9/1/43 ¦9/2/43 ¦
+------+-------------+--------+-------¦
¦8,000 ¦3% ¦12/1/43 ¦12/2/43¦
+------+-------------+--------+-------¦
¦32,655¦ ¦ ¦ ¦
+-------------------------------------+
The $53,370 authorized as a contribution in 1943 was made by the issuance of ten negotiable instruments of petitioner, which were delivered to the trust on December 31, 1943, and were paid in 1944. The pertinent information in regard to these ten instruments is summarized as follows:
+--------------------------------+
¦ ¦Interest¦Maturity¦Date of¦
+------+--------+--------+-------¦
¦Amount¦Rate ¦date ¦payment¦
+------+--------+--------+-------¦
¦ ¦ ¦ ¦ ¦
+------+--------+--------+-------¦
¦$8,370¦ ¦Demand ¦1/12/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦1/31/44 ¦2/21/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦2/29/44 ¦2/28/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦3/31/44 ¦3/29/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦4/30/44 ¦4/27/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦5/31/44 ¦5/24/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦6/30/44 ¦6/27/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦7/31/44 ¦7/28/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦8/31/44 ¦8/30/44¦
+------+--------+--------+-------¦
¦5,000 ¦3% ¦9/30/44 ¦9/29/44¦
+------+--------+--------+-------¦
¦53,370¦ ¦ ¦ ¦
+--------------------------------+
The $53,759.54 authorized as the contribution for 1944 was made by the issuance of ten negotiable instruments of petitioner, which were delivered December 30, 1944, and were paid in 1945. The pertinent information in regard to these instruments is summarized as follows:
+------------------------------------+
¦ ¦Interest¦Maturity¦Date of ¦
+---------+--------+--------+--------¦
¦Amount ¦Rate ¦date ¦payment ¦
+---------+--------+--------+--------¦
¦ ¦ ¦ ¦ ¦
+---------+--------+--------+--------¦
¦$8,795.54¦ ¦Demand ¦1/23/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦2/28/45 ¦2/24/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦3/31/45 ¦2/24/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦4/30/45 ¦4/30/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦5/31/45 ¦5/29/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦6/30/45 ¦6/28/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦7/31/45 ¦7/31/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦8/31/45 ¦8/27/45 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦9/29/45 ¦10/23/45¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦10/31/45¦10/31/45¦
+---------+--------+--------+--------¦
¦53,759.54¦ ¦ ¦ ¦
+------------------------------------+
The $59,900.18 authorized as a contribution for 1945 was made by the issuance and delivery of twelve negotiable instruments of petitioner, which were dated December 31, 1945, and were paid in 1946. The pertinent information in regard to these instruments is summarized as follows:
+------------------------------------+
¦ ¦Interest¦Maturity¦Date of ¦
+---------+--------+--------+--------¦
¦Amount ¦Rate ¦date ¦payment ¦
+---------+--------+--------+--------¦
¦ ¦ ¦ ¦ ¦
+---------+--------+--------+--------¦
¦$8,355.18¦3% ¦Demand ¦1/28/46 ¦
+---------+--------+--------+--------¦
¦1,545.00 ¦ ¦Demand ¦2/14/46 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦2/28/46 ¦2/27/46 ¦
+---------+--------+--------+--------¦
¦5,000.00 ¦3% ¦3/28/46 ¦3/29/46 ¦
+---------+--------+--------+--------¦
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