Tallman Tool & Mach. Corp. v. Comm'r of Internal Revenue, Docket No. 60626.

• Decision Date: 27 November 1956
• Docket Number: Docket No. 60626.
• Citation: 27 T.C. 372
• Parties: TALLMAN TOOL & MACHINE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

27 T.C. 372

TALLMAN TOOL & MACHINE CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 60626.

Tax Court of the United States.

Filed November 27, 1956.

Charles S. Wilcox, Esq., for the petitioner.

John Potts Barnes, Esq., for the respondent.

PROFIT-SHARING TRUST— VALIDITY OF TRUST.— The petitioner, an accrual basis taxpayer, executed a profit-sharing plan and trust, and delivered its $20,000 demand promissory note to the trust on September 30, 1952, the last day of its fiscal year. $22,520 cash was paid within the following 60-day period allowed by the statute for actual payment, being payment of the note and an additional amount to fulfill the petitioner's obligation under the plan. The cash payment within the grace period and the note, which under New York law was issued for valuable consideration, provided the trust with a corpus during its fiscal year ended September 30, 1952. The petitioner is entitled to the deduction of the $22,520 for that year.

OPINION.

MURDOCK, Judge:

The Commissioner determined a deficiency of $15,731.20 in the petitioner's income tax for its fiscal year ended September 30, 1952. The petitioner contests the Commissioner's disallowance of $22,520 claimed as a deduction in the taxable year in question as a contribution to a profit-sharing plan and trust.

The facts have been stipulated.

The petitioner is a New York corporation doing business in Rochester, New York. It filed its Federal income tax returns on an accrual basis and has a fiscal year ending September 30.

The profit-sharing plan and trust was set forth in an instrument executed by the petitioner and the trustee under seal on September 30, 1952, which was stated to be its effective date. The instrument recited the payment of the $22,520 as the corporation's initial contribution to the trust.

The petitioner also executed its $20,000 demand promissory note and delivered it to the Central Trust Company, Rochester, New York, the corporate trustee, on September 30, 1952. The note contained no restrictions, direct or indirect, as to its negotiability. No collateral was deposited. The petitioner had sufficient cash on hand to pay the note on September 30, 1952, and at all times thereafter until the note was paid.

The $20,000 note was paid in full in cash on October 30, 1952, when $2,520 was also paid.

The Commissioner's disallowance of the claimed deduction is on the ground that, for the purposes of section 165(a) of the Internal Revenue Code of 1939, the profit-sharing trust did not have any existence on September 30, 1952, the last day of its fiscal year, because the demand note could not legally be regarded as its corpus, and a trust without a corpus is no trust at all. Both parties agree that the law of New York is controlling for the purpose of determining whether there is a valid trust under these circumstances and contend that the New York law sustains their respective positions. The Commissioner further contends that this defect could not be cured by the payment within the 60-day period provided in section 23(p)(1)(E) because that section is dealing with annual payments to existing trusts and not the creation of a trust.

The law of New York as it relates to the statute here in question has been recently stated by Judge Learned Hand in Dejay Stores v. Ryan, 229 F.2d 867, where the existence and validity of a pension trust was in issue because the trust instrument had been executed after the close of the tax year for which the deduction was sought. The court said:

The argument is that the relevant sections¹ require by implication that the trust be set up within the fiscal year, and that it is only the payment of the contribution that Sec. 23(p)(1)(E) allows to be made within sixty days thereafter. We can find nothing in either section or in the Regulations ² that so requires: the word used throughout the two sections is ‘trust,‘ or ‘pension trust,‘ except that under Sec. 165(a)(2) the phrase, ‘trust instrument’ once appears, and although that no doubt presupposes that such a document shall at some stage appear, there is not reason, so far as we can see, why it should be during the fiscal year, provided it is executed by the time the first contribution is made. Section 23(p)(1)(E) declares that a payment within sixty days after the end of the year ‘shall be deemed’ to be made within ‘the taxable year’, when the employer keeps its books on an ‘accrual’ basis; and we can see no reason, either express or implied, why it should be necessary that the ‘trust instrument’ should not have the same extended period. This does not mean that the ‘trust’ itself must not be set up within the fiscal year; we assume that it must; but in the case at bar every element of a trust came into existence before February first, if the contribution ‘be deemed’ to have been paid on January 31st, as the Act provided. There was (1) a trustee, (2) a res, (3) a transfer of the res to the trustee, (4) and a complete agreement upon all the terms on which the trustee should hold the res. What else was necessary we do not understand. It is true that...