1992 Tax Ct. Memo LEXIS 746">*746 Decision will be entered under Rule 155.
MEMORANDUM OPINION
FAY,
Additions to Tax | ||||
Year | Sec. | Sec. | Sec. | |
Ended | Deficiency | 6653(a)(1) | 6653(a)(2) | 6661(a) |
June 30, 1984 | $ 194,584 | $ 9,729 | 1 | $ 48,646 |
June 30, 1985 | 216,272 | -- | -- | 36,474 |
June 30, 1986 | 46,949 | -- | -- | -- |
All section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.
After concessions, the sole issue remaining for this Court to decide is whether petitioner's contributions to an employee benefit plan are deductible under
Petitioner, Harry A. Wellons, Jr., M.D., S.C., is a corporation organized on July 1, 1982, under the laws of the State of Illinois. Petitioner's business function consists of providing medical services to the public, specifically in the areas of thoracic and cardiovascular surgery. During the years at issue, Harry A. Wellons, Jr. (Dr. Wellons), a cardiovascular surgeon, was the sole shareholder and president of petitioner.
Petitioner's taxable year is a fiscal year ending on June 30. Petitioner employs the cash receipts and disbursements method of accounting.
Effective July 1, 1983, petitioner adopted the Harry A. Wellons, Jr., M.D., S.C. Employee Benefit Plan and Trust Agreement (the plan). The plan year is a fiscal year ending June 30. 1992 Tax Ct. Memo LEXIS 746">*748 The plan, essentially, purports to provide severance benefits to participating employees upon termination of employment with petitioner. 1
Section 3.1 of the plan provides, in part, that each participant is entitled to a severance benefit at termination of employment with petitioner, determined as follows:
Twenty-one weeks of average weekly compensation for each year of service with the employer over five [years].
Section 3.2 of the plan, however, limits the maximum severance benefit each participant can receive to "twice the Member's Annual Compensation during the year immediately1992 Tax Ct. Memo LEXIS 746">*749 preceding the termination". Article I of the plan provides the following definitions related to the provision of benefits:
* * *
* * *
Section 2.1 of the plan provides, 1992 Tax Ct. Memo LEXIS 746">*750 in part, that every full-time employee of the employer is eligible to participate in the plan.
At the beginning of the plan years ending June 30, 1984, and June 30, 1985, the plan had two participants, namely, Dr. Wellons and his wife, Florence L. Wellons. As of the end of the 1985 plan year, the plan had added two additional participants.
The following table contains a summary of all the employees of petitioner and their respective salaries for the fiscal years ending June 30, 1984 and 1985.
Date of | ||
1984 | Employment | Salary |
Harry A. Wellons, Jr. | 7/ 1/82 | $ 1,109,148.94 |
Florence L. Wellons | 7/ 1/82 | 3,637.86 |
Debbie Gardner | 3/30/84 | 5,262.32 |
Jamie L. Ealey | 6/25/84 | -0- |
Date of | ||
1985 | Employment | Salary |
Harry A. Wellons, Jr. | 7/ 1/82 | $ 1,180,000.00 |
Florence L. Wellons | 7/ 1/82 | 4,053.69 |
Debbie Gardner | 3/30/84 | 15,082.26 |
Jamie L. Ealey | 6/25/84 | 12,882.50 |
Joel A. Schneider | 10/ 1/84 | 99,000.00 |
During the years at issue, no employees terminated their employment with petitioner with accrued benefits. Therefore, no benefit payments were made under the plan to any participant during any of the taxable years before us.
1992 Tax Ct. Memo LEXIS 746">*751 Article IV of the plan provides that petitioner "shall from time to time, make contributions to the Trust for each Plan Year in an amount sufficient to provide the benefits expected to become payable under this Trust." Although the plan allowed for employee contributions, we find no evidence in the record of any employee contributions to the plan for the years before us.
Petitioner contributed $ 194,000 to the plan for each of the taxable years ending June 30, 1984, and June 30, 1985, by payment of these amounts to the trustee of the plan. All contributions made to the plan by petitioner were made from the profits of the corporation. The amounts contributed by petitioner to the plan were determined by consulting actuaries retained by petitioner to determine the funding necessary to provide the benefits offered by the plan.
Petitioner claimed the $ 194,000 payments as Federal income tax deductions for the taxable years ending June 30, 1984, and June 30, 1985, respectively.
Under section 3.5 of the plan, participants could forfeit their accrued severance benefits only upon occurrence of the following:
(1) Termination of employment "due to theft, dishonesty, embezzlement, 1992 Tax Ct. Memo LEXIS 746">*752 fraud or misappropriation of Employer's property * * *"; or
(2) Termination of employment "because of leave of absence or conversion to part-time employment".
The plan funds were paid to a trustee who was responsible for the safekeeping and administration of the assets of the trust in accordance with the provisions of the plan. The plan was operated in accordance with its terms.
Respondent disallowed the entire $ 194,000 claimed by petitioner as a deduction on each of petitioner's 1984 and 1985 Federal income tax returns. Respondent asserts that the plan at issue is one of deferred compensation and, therefore, the deductions arising out of petitioner's contributions to such a plan are governed by
1992 Tax Ct. Memo LEXIS 746">*753 Petitioner contends that the plan at issue is a welfare benefit plan, the contributions to which are currently deductible under
The sole issue for decision is whether
(a)
* * *
(5)
(a) * * * There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *
The regulations under
(a)
At the outset, we note that the rules governing the timing of an employer's deduction for contributions paid or accrued to a welfare benefit fund were changed with the enactment of sections 419 and 419A by the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 511, 981992 Tax Ct. Memo LEXIS 746">*756 Stat. 494, 854. The new provisions, however, are not effective for the years before us. 3
In
Similarly, in
In
1992 Tax Ct. Memo LEXIS 746">*759 Petitioner's plan provides that: (1) Participants only begin to accrue benefits after 5 years of service (at which time they become fully vested in the benefits accrued); (2) the amount of benefits is directly linked to the employee's weekly salary and increases with each additional year of service; and (3) benefits commence upon termination of employment. 5 We find these provisions to be characteristics of a pension plan which defers receipt of compensation within the meaning of
A pension plan is generally defined as a plan:
established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years * * * after retirement. Retirement benefits generally are measured by, and based1992 Tax Ct. Memo LEXIS 746">*760 on, such factors as years of service and compensation received by the employees. * * *
Here, the benefits accrued to participants on the basis of years of service, and the final amount of benefit payable was dependent on the number of years the participants performed services. The plan itself calculates the benefits to be paid based on each participant's compensation and, finally, the receipt of benefits by a participant would not begin until after termination.
As with all deductions, petitioner bears the burden of establishing that it is entitled to the deductions claimed on the return.
In light1992 Tax Ct. Memo LEXIS 746">*761 of these factors, we hold that deductions arising from contributions to the plan at issue are governed by
1. Fifty percent of interest due on the deficiency.↩
1. The plan also allows for the provision of other benefits as set out in sec. 501(c)(9) and the regulations promulgated thereunder. We note that petitioner intended the plan to be exempt from tax as a voluntary employees beneficiary association (VEBA), under sec. 501(c)(9). The exempt status of petitioner's plan, however, is not properly before this Court and therefore we express no opinion on this issue.↩
2.
If petitioner's plan is found to be one deferring the receipt of compensation, then petitioner's deductions for amounts contributed to the plan will be subject to
As to the additional requirements for deductibility under
3. The new rules apply to contributions paid or accrued after Dec. 31, 1985, in taxable years of employer's ending after that date. Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 511(e)(1), 98 Stat. 862. The contributions made by petitioner under the plan were paid prior to Dec. 31, 1985. In general, sec. 419 and 419A limit the amount which an employer can deduct under
4. In
(1) * * * If --
(A) there is no plan, but
(B) there is a method or arrangement of employer contributions or compensation which has the effect of a stock bonus, pension, profit-sharing, or annuity plan, or other plan deferring the receipt of compensation, (including a plan described in paragraph (2)),
subsection (a) shall apply as if there were such a plan.↩
5. The fact that the benefits accrued thereunder are forfeitable in certain limited circumstances does not require a different result.
6. In so holding, we need not consider respondent's alternate argument that, because petitioner's sole shareholder and his wife stand to receive most of the benefits under the plan, this Court should apply