Sears, Roebuck & Co. v. Commissioner , 17 B.T.A. 22 ( 1929 )

SEARS, ROEBUCK & CO. EMPLOYEES' SAVINGS AND PROFIT SHARING PENSION FUND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Sears, Roebuck & Co. v. Commissioner

Docket No. 16290.

United States Board of Tax Appeals

17 B.T.A. 22; 1929 BTA LEXIS 2365;

July 31, 1929, Promulgated

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The petitioner's Employees' Savings and Profit Sharing Pension Fund held to have been a trust during the years under consideration, and taxable as an entity.

Joseph D. Peeler, Esq., Charles Lederer, Esq., and Ward Loveless, Esq., for the petitioner.

A. H. Fast, Esq., for the respondent.

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MARQUETTE

This proceeding is for the redetermination of deficiencies in income taxes asserted by the respondent in the amounts of $786.58 for 1917; $19,705.37 for 1918; $52,972.75 for 1919, and $113,621.65 for 1920. They arise from dividends on stocks received by the Fund and held by it for the benefit of the members.

FINDINGS OF FACT.

The petitioner is an unincorporated organization created on July 1, 1916, as the result of the plan adopted by Sears, Roebuck & Co. for the purpose of providing a means of pensioning its employees.

The plan was adopted on July 1, 1916, at a meeting of the board of directors of Sears, Roebuck & Co. by the following resolution:

RESOLVED, That the plan of employees' saving and profit sharing fund, as set forth in the announcement dated July 1, 1916, signed by Julius Rosenwald, as president, and Albert H. Loeb, as vice-president, be, and the same is hereby in all respects confirmed, ratified and approved, and the officers of the company are hereby expressly authorized to credit to such fund the share of the profits of the company, as in said plan specified from time to time, and in general to carry into effect the terms and provisions of said plan.

RESOLVED FURTHER, That Julius Rosenwald, Albert H. Loeb, O. C. Deering, John H. Mullen, and Mrs. A. Rudd Brooker, are hereby selected and elected as the trustees of the Sears, Roebuck and Co.'s Employees' Saving and Profit Sharing Fund, to hold office as such trustees until further action of the Board, and subject to removal at any time by further action.

The plan mentioned in and adopted by said resolution is as follows:

PLAN.

Article I. Purpose

In order that employees may share in the profits of this business, and to encourage the habit of saving, the Company has decided to contribute annually a sum equal to five per cent of its net earnings (without deduction of dividends to stockholders), as shown by the annual audit of its books, to the fund known as Sears, Roebuck & Co.'s Employees' Savings and Profit Sharing Pension Fund.

It is intended that this plan will furnish to those who remain in the employ of the Company until they reach the age when they retire from active service, a sum sufficient to provide for them thereafter, and that even those who achieve a long service record, but who may not remain with the Company all of their business life, will have accumulated a substantial sum. This Savings and Profit Sharing Pension Fund will enable an employee to secure an income for himself after the close of his active business career or, in case of his death, for his family.

Article II. Eligibility.

Sec. 1. Participation will be entirely voluntary.

Sec. 2. Every employee of Sears, Roebuck and Co., regardless of position, will, after three years of service, be eligible to participate in this fund, so long as he remains an employee.

Article III. Contributions to the Fund.

Sec. 1. An employee in order to participate must deposit in the fund five per cent of his salary. The Company will contribute a sum equal to five per cent of its net earnings (without deduction for dividends paid stockholders) as shown by the annual audit of its books.

Sec. 2. No employee may deposit more than five per cent of his salary, and in no case more than $150 per annum; this limit being deemed advisable so that the higher salaried employees may not too largely participate in the fund.

Article IV. Participation in the Profits.

Sec. 1. The contributions of the Company will be made annually as soon after the first of each year as an audit of the books will permit, and will be credited pro rata to participating employees in the proportion which the amount deposited by each employee during the preceding year for which the Company has contributed bears to the total amount deposited by all employees during such year.

Article V. Withdrawals.

Sec. 1. A depositor who has completed ten years of service will be entitled to withdraw all money and securities credited to his account, including the Company's contributions, as hereinafter provided.

Sec. 2. A depositor who has not completed ten years of service will be entitled to withdraw only the amount he has deposited in cash, plus interest at five per cent per annum, compounded seminanually, and no more; except in the case of a woman depositor who, after five years' service leaves to become married, in which case she will be entitled to her full share in the fund in money and securities credited to her account, including the portion contributed by the Company; and except in the case of the death of a depositor while in the service of the Company, in which case his estate, or such beneficiaries as he may designate, will be entitled to the full amount credited, in money and securities, including the contributions of the Company, as hereinafter provided.

Sec. 3. A depositor shall withdraw upon ceasing to be an employee of the Company, or upon failing to regularly make his deposit.

Sec. 4. A depositor who once withdraws cannot re-enter the fund.

Sec. 5. In any case of withdrawals where a depositor is entitled to share in the contributions of the Company, he will receive either (a) the full amount to his credit, as shown by the accounting for the preceding year, plus interest at the rate of five per cent per annum, and plus such sums as the depositor may have deposited since December 31st of the preceding year, with interest at five per cent per annum, or (b) his full pro rata share of the securities and uninvested moneys of the fund, at the option of the Trustees.

Sec. 6. Loans will be made to depositors in cases of actual necessity and when in the opinion of the Trustees the circumstances warrant it.

Article VI. Management.

Sec. 1. The fund will be handled, entrustee, and invested under the direction of a Board of five Trustees, to be selected by the Board of Directors of the Company, three to be officers or directors and two employees (not officers or directors) of Sears, Roebuck and Co.

Sec. 2. It is intended that so far as practicable and advisable the fund will be invested in shares of stock of Sears, Roebuck and Co., to the end that the depositors may, in the largest measure possible, share in the earnings of the Company.

Sec. 3. The Board of Trustees may, from time to time, adopt rules to carry out the purposes of this plan, and may adopt amendments to the plan; but no change shall be made in the plan as above outlined unless the same is ratified by the vote of a majority of the depositors. All questions of interpretation of this plan, or amendments thereto, or the rules pertaining thereto or relating to any matter of accounting, values, profits, or any other matters or differences which may arise shall be determined solely by the Board of Trustees, and the decision of the Board shall be final and conclusive upon all concerned.

Article VII. Discontinuance.

Sec. 1. The fund may be discontinued at any time by announcement of the Company, made at least six months before its final yearly contribution. After such announcement no new depositors will be eligible to join, and upon the payment into the fund of such final contribution, the fund shall be distributed among all the depositors pro rata in proportion to their interests as ascertained by the Board of Trustees.

The contributions of the employees were effected by withholding 5 per cent from their salary and turning such amounts over to the Fund. In addition, Sears, Roebuck & Co. contributed to the fund each year 5 per cent of its net income. A card record for each employee was kept by the trustees of the Fund, showing the amount contributed during each year by the employee. There was also credited to the account of each employee for each year a proportionate part of the contribution made by Sears, Roebuck & Co. The balance at the close of the year was expressed in terms of shares of stock, and in addition to the contributions made by the employee and a pro rata share of the contributions made by Sears, Roebuck & Co., credits were also made each year for dividends applicable to such shares of stock.

The entire contributions to the Fund were invested by the trustees in stock of Sears, Roebuck & Co., and at the close of the year the account of each employee showed a certain number of shares of stock standing to his credit on the books of the trust. The credits were based on the assumption that the employee would remain with Sears, Roebuck & Co. for at least 10 years. If the employee did not remain in the service for 10 years, he got back only the amount he had contributed, plus interest at the rate of 5 per cent. The remainder of the credit to his account became a part of the general Fund and was reapportioned among the other contributors.

The greater part of the aggregate amount shown as credits to the respective accounts, with the exception of such amounts as were actually contributed by the employee, was never paid to the respective employees, but upon the resignation or dismissal of any employee, was reapportioned among those remaining. No part of the credits to the employees' accounts belonged to Sears, Roebuck & Co., and no part of such amounts was ever paid back to that company.

Of the eligible employees, approximately 97 per cent took advantage of the plan offered. Less than 25 per cent of the employees of Sears, Roebuck & Co. remain with the company for a period of 10 years or more.

The entire contributions to the Fund were invested by the trustees in stock of Sears, Roebuck & Co., and the only income of the Fund was dividends received upon such shares of stock. The shares were purchased at various times during the course of the year - if possible at advantageous times when the price of the stock appeared cheap on the market, and in order to effect such purchases advances were often made to the Fund by Sears, Roebuck & Co., for which interest at the rate of 5 per cent was charged. At the close of the year Sears, Roebuck & Co. turned over to the Fund an amount equal to its agreed percentage of net income, less and interest charges on amounts advanced to the Fund during the year.

At the close of each year a statement was sent to each employee by the trustees showing the number of shares standing to the credit of his account on the records of the Fund.

No shares of stock or certificates of interest were issued by the Fund. When the employee wished to take advantage of the pension plan offered, he signed an application accepting the terms and conditions of the plan. He had no further voice or part in the management of the Fund, his rights being defined by the Fund plan. The Fund was handled by the trustees, chosen by Sears, Roebuck & Co., whose duties were to invested the moneys and to carry out the purposes of the plan under which the Fund was created.

No part of the Fund, either contributions or earnings, could, under the terms of the plan, be turned back to Sears, Roebuck & Co., and no part thereof was ever turned back to that company.

The notice of deficiency mailed to the petitioner on April 5, 1926, was addressed by the respondent as follows: "Employees' Savings & Profit Sharing Pension Fund, c/o Sears, Roebuck and Co., Chicago, Illinois."

The respondent has determined that the Fund is a trust and is taxable as an entity on its net income.

OPINION.

MARQUETTE: The decision in this proceeding depends upon the status of the Savings and Profits Sharing Pension Fund of the employees of Sears, Roebuck & Co. On behalf of the Fund it is urged (1) that it is an association taxable as a corporation and therefore no tax is due because the income of the Fund was derived entirely from dividends of a corporation which was taxable on its net income; (2) that if it is not an association it is a joint adventure not taxable as an entity, and (3) that if it is a trust the income should be taxed to the trustees or to the beneficiaries and that, no deficiency notice having been sent to the trustees or to the beneficiaries, assessment and collection of the tax was barred by the statute of limitation. The respondent's contention is that we are dealing with a trust which is taxable as an entity.

In our opinion the petitioner is not an association within the meaning of the revenue acts. The term "association" as used in the several revenue acts was discussed by the Supreme Court of the United States in the case of . The court said:

The word "association" appears to be used in the Act in its ordinary meaning. It has been defined as a term "used throughout the United States to signify a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise." 1 Abb. Law Dict. 101 (1879); 1 Bouv. Law Dict. (Rawle's 3d Rev.) 269; 3 Am. & Eng. Enc. Law (2 Ed.) 162; and , in which this definition was cited with approval as being in accord with the common understanding.

Other definitions are:

In the United States, as distinguished from a corporation, a body of persons organized, for the prosecution of some purpose, without a charter, but having the general form and mode of procedure of a corporation. (Webst. New Internat. Dict.)

(U.S.) An organized but unchartered body analogous to but distinguished from a corporation. (Pract. Stand. Dict.)

Article 1504 of Regulations 69, which is retroactive as to the years 1920, 1921, and 1922, also provides in effect that a trust is an association if the beneficiaries have positive control. A similar implication is found in . In the instant case the evidence discloses that there were no certificates or other evidence of ownership issued; there were no officers elected or meetings of the owners of the beneficiary interests held. The trustees of the Fund held and managed the property of the Fund and used it in accordance with the terms of the plan under which the Fund was created. The operations of the Fund were not conducted upon the methods and forms used by incorporated bodies for the conduct of a common enterprise, and there was present none of the indicia of an association as defined by the Supreme Court. The Fund is not an association.

Nor do we agree with the petitioner that the Fund is a joint adventure. A joint adventure is a business organization similar in its nature to a partnership and limited in its scope and duration. Obviously, the Fund has none of the requisites necessary to either a joint adventure or a partnership.

We are of opinion that the Fund is a trust and that it is a single trust established for the benefit of many beneficiaries and not a collection of separate trusts for each employee, as suggested by the petitioner. The fund in question is strikingly similar to the employees' pension fund which was considered by this Board in , and which we held to be a trust and a separate taxable entity.

Whether income from a trust fund is taxable to the beneficiaries, or to the fiduciary, is to be determined by the circumstances and conditions under which the trust was created. Section 2(b) of the Revenue Act of 1916, provides that:

Income received by estates of deceased persons during the period of administration or settlement of the estate, shall be subject to the normal and additional tax and taxed to their estates, and also such income of estates or any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be: Provided, That where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries, the rate of tax and method of computing the same shall be based in each case upon the amount of the individual share to be distributed.

Provisions of substantially the same effect are found in the Revenue Acts of 1918 and 1921.

These statutes have been considered and applied by this Board in the cases of ; ; and . In these three cases we held that income which was properly accumulated under the trust instrument was taxable to the fiduciary, and that income properly distributable was taxable to the beneficiary. To the same effect is the decision of the Circuit Court of Appeals in . In the latter case the court held that "distribution" as used in these Revenue Acts,

does not necessarily mean passing into the uncontrolled possession or disposition of the beneficiary. It means separation and segregation from the trust fund so that it no longer forms any part or parcel thereof. The test set up by the statute is whether the income passes from the trust estate which produced it and ceases to be subject to the terms and control of that trust.

In the instant proceeding we find that, although the earnings of the Fund were credited at the end of each year to the participants, pro rata, there was a condition attached. The pro rata shares of earnings did not become the property of the respective beneficiaries until and unless they remained in the service of the company for ten years, and were at the time participants in the Fund. The mere book entries, crediting the earnings of the Fund in varying proportions to the then members, did not constitute a distribution within the meaning of the statutes. The facts are that the personnel of participating members was constantly changing; that never, at the time the bookkeeping credits were made, was it certain that the amounts credited to the various beneficiaries would or could be drawn by such individual. Thus, the amounts were not, at the time of making the credits, determined or determinable, nor were the beneficiaries certain. It is possible that during each of the taxable years some of the beneficiaries had fulfilled the required condition and that the amounts credited to them were fixed and final, but the record is silent upon that point and we must consider it as non-existent. We are of opinion that the income in question should be taxed to the Fund.

It is urged that, as the deficiency notice was addressed to the Fund, and not to the trustees, and that as the fiduciaries are the persons properly taxable as to trusts, no notice was given as required by the statute. We are not impressed by this argument. The notice evidently reached the trustees, for in response thereto a petition was filed with this Board within the time allowed by statute. In , the Board held that a deficiency notice which erroneously stated the year involved but did not mislead the taxpayer, was not invalid. In the present proceeding it is not claimed that anyone has been mislead, nor that any rights have been jeopardized, nor that any different proof would have been required or offered, because of the manner in which the deficiency letter was addressed. The petitioner's contention as to this point can not be sustained.

Judgment will be entered for the respondent.