Crow-Burlingame Co. v. Commissioner

Crow-Burlingame Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Crow-Burlingame Co. v. Commissioner

Docket No. 19549

United States Tax Court

15 T.C. 738; 1950 U.S. Tax Ct. LEXIS 33;

November 29, 1950, Promulgated

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Decision will be entered under Rule 50.

1. On December 11, 1943, petitioner's directors passed a resolution approving the establishment of an employees' pension plan and trust and appropriated irrevocably $ 30,000 thereto. On December 15, 1943, a tentative trust agreement was executed. The plan and trust were to meet with the approval of the governmental units having jurisdiction over them. Petitioner's employees were notified of this action. On February 29, 1944, petitioner deposited its check for $ 30,000 as its first payment to the trust in accordance with the resolution and agreement. On December 11, 1944, petitioner's directors appropriated $ 30,000 as a contribution to the trust, subject to the conditions of the 1943 appropriations, and payment of this $ 30,000 was made on February 23, 1945. Ultimate compliance with all of the provisions of sections 23 (p) and 165 (a) was made within the grace period. Petitioner, on the accrual basis, deducted on its return for the year 1943, $ 30,000 as an accrued contribution to an employees' trust fund and deducted $ 27,015 for the year 1944. Held, respondent erred in determining that for the taxable years ended December 31, 1943, and December 31, 1944, petitioner's contributions were not deductible under sections 23 (p) and 165 (a) of the Internal Revenue Code. 555, Incorporated, 15 T.C. 671">15 T. C. 671, followed.

2. In 1938 and 1939, petitioner deducted certain amounts in connection with moving its warehouse. The moving of its warehouse was a consequence of a change in the manner of operation, size and condition of petitioner's business. Held, respondent did not err in failing to disallow these deductions in computing petitioner's excess profits credit.

3. In 1938 and 1939, petitioner suffered bad debt losses as a result of the repeal of an Arkansas statute. These deductions taken and allowed in 1938 and 1939, were of a class abnormal for petitioner and not a consequence of the limiting factors of section 711 (b) (1) (K). Held, respondent erred in failing to disallow these deductions in computing petitioner's excess profits credit for 1938 and 1939.

4. In 1939, petitioner suffered losses as a result of embezzlement and advances to a store manager. Petitioner has not proved that these losses were allowed as deductions. Held, petitioner not having proved that such deductions have been claimed and allowed has not established its right to have them disallowed in the computation of its excess profits tax credit.

5. In 1932, petitioner and two other automotive supply companies organized a corporation (O. C. Y.) for the purpose of consolidated buying which would reduce petitioner's cost of purchases. Prior to 1938, petitioner valued its inventory without taking into account the distributions received from OCY Co. In 1938, petitioner valued its closing inventory in a manner which endeavored to reflect 50 per cent of the total discount to be received by OCY Co. The remaining 50 per cent was reflected in the 1939 closing inventory. Held, even if these "deductions" were of the type contemplated by section 711 (b) (1) (J) they were, nevertheless, a consequence of a change in the manner of operation of petitioner's business and respondent did not err in failing to disallow them in computing petitioner's excess profits credit for 1938 and 1939.

E. Chas. Eichenbaum, Esq., for the petitioner.

John W. Alexander, Esq., for the respondent.

Black, Judge.

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BLACK

This proceeding involves deficiencies in declared value excess profits tax and excess profits tax, as follows:

	Declared value
	excess profits	Excess profits
Year	tax	tax
1943	$ 486.36	$ 25,701.97
1944		23,097.82
1945	1,816.98	20,395.98

The deficiencies result from numerous adjustments to petitioner's net income for each year; however, only one adjustment for each year is in controversy. For the year 1943, this was explained by respondent in a statement attached to the deficiency notice, as follows:

(c) It has been determined that the net income disclosed by your return for the taxable year should be increased $ 30,000.00 by the denial of the deduction claimed thereon as a contribution to an employee pension plan.

Similar adjustments in the amounts of $ 27,015 and $ 27,530 were made for the taxable years 1944 and 1945, respectively. By appropriate assignments of error petitioner contests these adjustments. Petitioner also assigns error, as follows:

(b) Respondent erred in failing to increase the amount of excess profits net income of the petitioner for its taxable years ended December 31, 1938 and December 31, 1939 by reason of abnormal deductions taken by the petitioner on its returns for those years. The amount of the excess profits net income for those years is used in determining the amount of the excess profits credit to which the petitioner is entitled and, in accordance with the provisions of Section 711 (b) (1) (J) of the Internal Revenue Code, is to be adjusted for any deductions which are abnormal to the taxpayer.

The abnormal deductions which petitioner claims should be disallowed in computing its excess profits credit are as follows:

(1) Wages covering moving (1938)	$ 913.00
General moving expenses (1938)	706.05
Additional rent on old location (1938)	1,891.42
Additional taxes (1938)	1,543.25
(2) Testing machinery loss (1938)	2,027.35
(1939)	2,800.34
(3) Embezzlement loss (1939)	1,537.66
(4) Advance to store manager (1939)	653.66
(5) Change in method of pricing inventory (1938)	10,853.64
(1939)	9,257.66

In his brief respondent concedes that in the taxable year ended December 31, 1945, petitioner had in effect an employees' pension plan and trust meeting the requirements of sections 23 (p) and 165 (a) of the Internal Revenue Code. Therefore, respondent's disallowance of the $ 27,530 payment to the pension trust in 1945 is no longer in issue.

We have left two issues for consideration: (1) The employees' pension plan deductions for 1943 and 1944, and (2) the claimed abnormal deductions.

FINDINGS OF FACT.

Some of the facts were stipulated and are so found and the stipulation is incorporated herein by reference.

Petitioner is a corporation organized under the laws of Arkansas with its principal offices and place of business in Little Rock, Arkansas. Petitioner is now and was during the calendar years 1943, 1944, and 1945 engaged in the business of distribution of automotive supplies and equipment. For all taxable years herein petitioner kept its books and filed its income and excess profits tax returns on the calendar year and accrual basis of accounting. Its returns were filed with the collector of internal revenue for the district of Arkansas.

Employees' pension plan. -- On December 13, 1943, petitioner's board of directors held a meeting and a portion of the minutes relating to that meeting is set out hereunder:

President Crow reported to the Board that the executives of the Company had been giving considerable thought to the establishment of a Trust Fund for the purpose of providing retirement and other benefits for the employees of Crow-Burlingame Company; the amount of the benefits to be based upon the length of service and compensation of the employee. He explained that the Company would profit from such an action in at least four ways:

1. The company's operation would be more efficient if it could retire those employees who had become old or were ill.

2. An employee is more efficient it [sic] he has assurance against dependency and want in his old age.

3. It would develop a feeling of greater loyalty on the part of the company's employees.

4. It would reduce employee turnover.

and he recommended that such a program be entered into and that an appropriation be made out of 1943 profits to start such a fund.

A motion was made, duly seconded and unanimously carried as follows:

1. That the recommendation be adopted.

2. That a trust should be created, to be known as "Crow-Burlingame Employee's Trust," for the purpose of providing retirement and other benefits for employees of Crow-Burlingame Company.

3. That the Company's executive officers be instructed to draft an appropriate Trust Agreement with the Trustees who are hereby appointed, to wit: George G. Worthen, Kimbro V. Browne and William R. James.

4. That there be appropriated out of 1943 profits the sum of $ 30,000.00, or such portion thereof as should be needed, which sum should be transferred irrevocably to the Trustees, subject to approval by the proper regulatory authorities of the Trust Agreement and of the said transfer as a deductible expense.

There being no further business the meeting was adjourned.

(S) W. R. Crow, President.

(S) Wm. R. James, Secretary.

The following is the trust agreement executed on December 15, 1943:

TRUST AGREEMENT.

In consideration of their mutual promises it is hereby agreed by and between Crow-Burlingame Company and George G. Worthen, Kimbro V. Browne and William R. James, Trustees, as follows to wit:

That the Board of Directors of the Crow-Burlingame Company has, in a regular monthly meeting held in the office of the company on December 13, 1943, voted unanimously to create a trust fund, for the purpose of providing old age and disability retirement, death and other benefits for the employees of Crow-Burlingame Company and appropriated out of 1943 earnings $ 30,000.00 for the purpose of starting such a trust fund; said benefits to be based on length of service and annual remuneration and upon the attainment by the employee of the proper retirement age or by suffering death or disability in accordance with rules to be subsequently set out; provided that the maximum retirement benefits to be received by any employee shall be not more than 50% of his average annual remuneration with commensurate benefits at interim periods, all to be determined by legal and actuarial consultants;

That the final draft of this Trust Agreement will require a large amount of study and numerous consultations and revisions in order to accomplish the purpose of the Company and to meet the requirements of the various governmental units or agencies having jurisdiction over same;

That this Agreement shall serve to create the Trust and shall remain in full force and effect until a final Trust Agreement has been prepared and executed and approved by the proper governmental unit;

That the parties hereto agree that the funds so appropriated and transferred, or that may be in the future appropriated and transferred, by the Company for this purpose shall be placed in the W. B. Worthen Company, bankers, to be held by the Trustees until final agreement shall be executed and approved.

As evidence of their agreement hereto the parties above hereinafter affix their signature on this the 15th day of December, 1943.

Trustees:

(S) George G. Worthen.

(S) Kimbro V. Browne.

(S) William R. James.

Crow-Burlingame Company;

(S) W. R. Crow, President.

(S) Wm. R. James, Secretary.

In general all petitioner's employees were advised of the execution of the pension plan by the board of directors on December 13, 1943. Petitioner deposited with W. B. Worthen Co., Bankers, of Little Rock, Arkansas, on February 29, 1944, a check in the amount of $ 30,000 payable to the order of "Crow-Burlingame Employees Trust." The endorsement of this check reads "For Deposit to Crow-Burlingame Employees Trust By Wm. R. James." During the calendar year 1944 numerous conferences were held with the representatives of the Bureau of Internal Revenue, Pension Trust Section and Agents Office, regarding provisions of the trust agreement for the purpose of qualifying the same under section 165 (a) of the Internal Revenue Code, as amended by the Revenue Act of 1942. At their regular monthly meeting petitioner's directors on December 11, 1944, appropriated $ 30,000 as a contribution to the trust subject to the same conditions as were applied to the 1943 payment to the trust. Following up this authorization of December 11, 1944, petitioner deposited with W. B. Worthen Co., Bankers, of Little Rock, Arkansas, on February 23, 1945, a check in the amount of $ 30,000 payable to the order of "Crow-Burlingame Employees Trust." The endorsement of this check reads: "For Deposit to Crow-Burlingame Employees Trust by Wm. R. James."

On May 29, 1945, petitioner's directors approved the final form of the trust agreement and on May 30, 1945, petitioner sent a copy of the completed plan to respondent asking his approval. The minutes of petitioner's directors meeting of June 11, 1945, recite that the board has been advised of a verbal approval of the pension trust by the Treasury Department, subject to some slight amendments which had been agreed upon and which were thereupon submitted to the board and unanimously approved. In a letter dated June 23, 1945, respondent approved petitioner's pension trust plan. This letter reads as follows:

Crow-Burlingame Company,

Little Rock, Arkansas.

Gentlemen: Reference is made to the trust established under an indenture executed by you on 13 December 1943, and which forms a part of your employees' pension plan. You desire a ruling as to whether such trust is exempt from income tax under the provisions of section 165 (a) of the Internal Revenue Code, as amended.

The plan, as evidenced by the trust indenture and other relevant information submitted with the request for a ruling, has been considered and this office is of the opinion that the plan meets the requirements of section 165 (a) of the Internal Revenue Code, as amended, and that the trust established thereunder is entitled to exemption under the provisions of that section.

Contributions made to the trust will be allowable as deductions from gross income in accordance with section 23 (p) of the Internal Revenue Code, as amended, subject, however, to verification upon examination of your return.

A copy of this letter has been forwarded to Mr. E. Chas. Eichenbaum, 1122 Boyle Building, Little Rock, Arkansas, in accordance with the authorization contained in a power of attorney on file in this office.

Very truly yours,

(Signed) Joseph D. Nunan, Jr.,

Commissioner.

The trust agreement and pension plan executed by petitioner in final form on May 29, 1945, is recognized by respondent in this proceeding insofar as the taxable year 1945 is concerned as conforming with the requirements of sections 23 (p) and 165 (a) of the Internal Revenue Code and with the regulations promulgated by the Commissioner in respect to the sections.

On January 28, 1946, checks were deposited in W. B. Worthen Co., Bankers, in the respective amounts of $ 27,530, $ 960, and $ 1,510. Following approval by the Commissioner, the petitioner published a printed pamphlet explaining its pension plan to its employees.

It has been stipulated by the parties that:

The actuarial data heretofore submitted to the Commissioner with reference to the deduction of contributions made to the Crow-Burlingame Pension Trust for the fiscal years 1943, 1944, and 1945 is made a part of the record and shall be available to either party for computation under Rule 50 in accordance with the statutory requirements and limitations as to deductions and carry-overs.

Abnormal deductions. -- The claimed abnormalities as heretofore set out in our preliminary statement relate to moving expenses, loss attributable to the repeal of an Arkansas statute, embezzlement loss and loss resulting from advances to store manager and the correction of an alleged abnormality due to a change in method of pricing inventory. For the sake of clarity the facts relating to each claimed abnormality will be stated separately. Petitioner's gross sales for the years 1933 through 1939, were as follows:

Year	Amount
1933	$ 531,355.87
1934	611,179.01
1935	695,668.05
1936	846,365.34
1937	988,335.82
1938	901,870.07
1939	930,006.93

Moving expenses. -- Petitioner carried on its business operations prior to 1936 through twelve branch stores that engaged in the retail sale of automotive supplies. Prior to 1936 it had eleven such stores located in Arkansas and one in Texas. During the period January 1, 1936, to January 1, 1940, petitioner established nine additional branches throughout the State of Arkansas and was engaged in an expansion program. All of these branch stores were, for the most part, supplied from the inventory kept by petitioner at its business location in Little Rock, Arkansas. As the number of stores increased it was necessary for petitioner to maintain a larger inventory and consequently to secure greater warehouse space and larger numbers of warehouse employees.

By reason of the fact that petitioner needed more space to store its inventory so as to service the increasing number of branch stores, it was necessary for petitioner to move into a new location in Little Rock, Arkansas. In the old location at Fourth and Spring Streets petitioner had only 15,750 square feet of floor space while in the new one at Capitol and Arch Streets it had 35,000. Petitioner commenced moving in December 1937 and was settled in its new location by the end of March 1938. Petitioner incurred general moving expenses of $ 706.05 in 1938 which was for items such as truck hire, meals for employees, supplies and small tools, and wooden trays for moving small parts. Petitioner's warehouse salaries for the 6 months immediately preceding its moving and for the 6 months immediately thereafter averaged $ 792.28 per month. Petitioner's warehouse salaries for the months during moving were as follows: December 1937, $ 1,196.37; January 1938, $ 1,274.06; February 1938, $ 971.45; March 1938, $ 930.10. This constituted a monthly warehouse salary expense above the average of the 6 months before and after moving as follows: December 1937, $ 304.09; January 1938, $ 481.78; February 1938, $ 179.17; March 1938, $ 137.82; (a total of $ 304.09 for 1937 and $ 798.77 for 1938).

Petitioner paid rent on two locations in 1937 and 1938. The claimed amount of the additional rent resulting from moving is shown in the following table:

ADDITIONAL RENT.
OLD LOCATION -- 1938.
Fourth and Spring Streets.
RENT EXPENSE	$ 3,096.84
INCOME:
Sub-lease of premises	1,205.42
Net Loss	1,891.42
NEW LOCATION -- 1937.
Capitol and Arch Streets.
RENT EXPENSE:
Monthly payments of $ 375	$ 1,825.00
Insurance and repairs	313.40
Taxes	1,543.25
Total	3,681.65
INCOME:
Sub-lease to S. R. Thomas Auto Co	2,291.68
Net Loss for year	1,389.97

Petitioner claims the loss of $ 1,389.97 as an abnormal deduction for 1937 and the $ 1,891.42 loss as an abnormal deduction for 1938. Petitioner's auditor failed to accrue in 1937 the taxes owed under the lease, however, they were accrued and paid in 1938.

The moving expenses including additional rents and taxes, all enumerated above, incurred and claimed to be abnormal were a consequence of a change in the manner and size of the operation of petitioner's business.

Testing machinery loss. -- An Arkansas State Law, enacted in 1937, required specific testing of brakes and other working parts of automobiles. As a result of the enactment of this statute, petitioner sold some thirty-odd sets of specialized equipment for the purpose of making the tests by the statute, which equipment normally was used by only the largest garages and automobile agencies.

The Arkansas automobile testing statute was partially repealed in 1938, and enforcement thereof at once ceased. Complete repeal of this Act was made by the 1939 General Assembly in January of that year. As a direct result of the repeal of the Act, sets of this special equipment, otherwise required by only a few large garages, were not paid for and had to be taken, stored, and disposed of as and when possible by petitioner.

Apart from salvage and other recoveries, petitioner wrote off as a loss on such testing equipment the sum of $ 2,027.35 in the year 1938 and $ 2,352.94 in the year 1939. Also in the latter year $ 447.50 was expended by petitioner in an effort to sell some of this equipment in the State of South Carolina which had just passed such an automotive testing act, making the total loss in 1939 $ 2,800.44. This type of bad debt loss is unusual in petitioner's line of business. The sale of this special equipment was, as a result of the Arkansas Act, made to many who were not regular customers of petitioner. Petitioner's practice in handling the bookkeeping of these losses was to write off a third of the unpaid balance on each set of equipment in the year 1938 and another third in the year 1939. These losses represent deductions of a "class abnormal" for petitioner as that term is used in section 711 (b) (1) (J) (i) of the Internal Revenue Code.

This abnormality was not a consequence of an increase in the gross income of petitioner in its base period or a decrease in the amount of some other deduction in its base period, and was not a consequence of a change at any time in the type or manner of operation, size, or condition of the business engaged in by petitioner.

Embezzlement loss and loss resulting from advances to store manager. -- In 1939, the manager of petitioner's Newport, Arkansas, store embezzled $ 1,145.63 from petitioner. This embezzlement, plus a merchandise shortage of $ 631.18 and advances against commissions of $ 542.70, was reduced by commissions earned of $ 716.85 and a repayment in 1939 of $ 65, leaving a total loss of $ 1,537.66. Petitioner did not claim a deduction on its 1939 tax return in Item No. 23 which provides for losses "By fire, storm, shipwreck, or other casualty or theft." The evidence is not sufficient to show us where and how petitioner took this deduction as a loss in 1939 nor that it has ever been allowed by the Commissioner.

In 1938, petitioner advanced to the manager of its store at Arkadelphia, Arkansas, several hundred dollars on a drawing account. He left the company during the year 1939 owing it $ 653.56. Petitioner was unable to collect this overdraft. The return filed by the petitioner for the year 1939 does not reflect a deduction in that year of an item amounting to $ 653.56. The evidence is not sufficient to show us where and how petitioner took this deduction as a loss in 1939, nor that it has ever been allowed by the Commissioner.

Change in method of pricing inventory. -- In 1932, petitioner, Ozburn-Abston Co. of Memphis, Tennessee, and Crow Automotive, Inc., of Fort Smith, Arkansas, formed a corporation known as Ozburn, Crow and Yantis, Inc., (hereinafter called O. C. Y.) for the purpose of purchasing at wholesale and in large quantities various automobile supplies which were handled by the three companies.

Petitioner, Ozburn-Abston Co., and Crow Automotive, Inc., each owned one-third of O. C. Y., each having paid in $ 12,500, making the operating capital of the new concern $ 37,500. From the date of incorporation of O. C. Y. until the end of 1938, the petitioner valued its inventory on the cost basis and used as its cost the invoice price of the merchandise purchased, less cash discounts. By reason of yearly volume purchases, O. C. Y. would receive from manufacturers certain trade discounts which often times were on a sliding scale and could not be computed until after the close of the calendar year. After O. C. Y. received rebates from the various manufacturers it would distribute such rebates to the petitioner and to the other two companies based upon their percentage of the purchases which resulted in the manufacturers making the rebates to O. C. Y. The amounts of these distributions received by petitioner from O. C. Y. for the years 1934 through 1937, were as follows:

Year	Amount
1934	$ 11,924.20
1935	14,813.32
1936	19,803.82
1937	26,882.06

At the end of the year 1938, petitioner changed its method of valuing its closing inventory from the method used since 1932 and reduced the cost of the closing inventory by reducing the invoice cost figure to a lower figure. This lower figure endeavored to take into account the various discounts that were to be received by O. C. Y. Only roughly 50 per cent of the total estimated adjustment was taken at the end of 1938, the remaining 50 per cent being taken at the end of 1939. As a result of this adjustment in the method of pricing inventories, petitioner claims that its closing inventory for 1938 was reduced by $ 10,752.09, and that the closing inventory for 1939 was reduced by $ 9,783.91. Such adjustments resulted in a tax savings for petitioner in the years 1938 and 1939.

The adjustments made by petitioner to its closing inventory in 1938 and 1939 could have been made in 1932 or in any year between 1932 and 1938. Petitioner did not get permission from the Commissioner of Internal Revenue prior to making the change in the method of pricing its inventory. Petitioner did not claim a deduction on its tax returns for 1938 and 1939 by reason of changing its method of valuing its inventory, it simply decreased its taxable income through a decrease of its closing inventory for each year. Petitioner's closing inventories for the years 1933 to 1939 were as follows:

Year	Amount
1933	$ 216,493.97
1934	210,068.30
1935	222,498.73
1936	239,474.64
1937	288,712.96
1938	276,502.94
($ 287,254.93, Total of inventory without alleged adjustments.)
1939	274,273.79
($ 284,057.70, Total of inventory without alleged adjustments.)

The inventory figures given for the years 1938 and 1939 were the amounts remaining after petitioner made the alleged reductions under consideration.

The adjustment for inventory was a consequence of a change in the manner of operation of petitioner's business.

OPINION.

Employees' pension plan. -- Under this issue the question is whether respondent erred in determining that petitioner was not entitled to deduct its contributions to a claimed employees' pension trust for the years 1943 and 1944. Respondent contends that petitioner did not have in effect during the taxable years ended December 31, 1943, and December 31, 1944, an employees' pension plan and trust within the meaning of those terms as used in sections 23 (p) and 165 (a) of the Internal Revenue Code. Petitioner contends that its contributions are deductible under sections 23 (p) and 165 (a).

The parties recognize that in accordance with the Revenue Act of 1942, contributions to an employees' pension plan must be brought within section 23 (p) if they are to be allowable deductions. Tavannes v. Commissioner, 176 Fed. (2d) 211; Times Publishing Co., 13 T. C. 329, affd. (CA-3) 184 Fed. (2d) 376. Among other things, section 23 (p) provides that the contribution must be to an employees' trust exempt under section 165 (a), and it is to such a trust that petitioner contends its contributions were made. For the taxable years herein it was not necessary that at the time of petitioner's contributions that the trust conform with all of the subsections of 165 (a) for the Revenue Act of 1942, as finally amended by Section 2 of Public Law 511, December 20, 1944, provides as follows:

1942 ACT, SEC. 162. PENSION TRUSTS.

(d) Taxable Years to Which Amendments Applicable. -- The amendments made by this section shall be applicable as to both the employer and employees only with respect to taxable years of the employer beginning after December 31, 1941, except that --

* * * *

(2) A stock, pension, profit-sharing, or annuity plan --

(A) put into effect after September 1, 1942, and prior to January 1, 1945, shall be considered as satisfying the requirements of section 165 (a) (3), (4), (5), and (6) for the period beginning with the date on which it was put into effect and ending with June 30, 1945, if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been made effective for all purposes with respect to the portion of such period after December 31, 1943;

It is, therefore, plain that immediate compliance with subsections (3) through (6) of section 165 (a) was not necessary if ultimate compliance was within the grace period, and such was the case in this proceeding. The question is, therefore, somewhat narrower as we must determine only whether there was a plan within the meaning of section 23 (p) and whether the trust complied with subsections (1) and (2) of section 165 (a). ^{*58 On December 13, 1943, petitioner's directors appropriated $ 30,000 as an irrevocable contribution to an employees' pension plan and on December 15, 1943, a trust agreement was executed. Although there was no res until February 29, 1944, and hence no trust as such in 1943, sections 23 (p) and 165 (a) the trust is deemed to have been in existence as of the close of the taxable year 1943 because section 23 (p) (1) (E)555, Incorporated, 15 T. C. 671.}

In determining whether there was in existence an employees' pension plan and a trust within the meaning of sections 23 (p) and 165 (a) we give full effect to the expressed intention as set out in the minutes of petitioner's directors and the trust agreement. The appropriation was, by its terms, irrevocable, and the trust and plan were to be ones which would "meet the requirements of the various governmental units or agencies having jurisdiction over same." A contribution to an otherwise valid plan contingent on respondent's approval is nonetheless an irrevocable and deductible contribution. Surface Combustion Corporation, 9 T. C. 631, affd., 181 Fed. (2d) 444. Tavannes Watch Co. v. Commissioner, supra, the court held that a "trust" as used in section 165 (a) was to be given a meaning consistent with the purpose of the statute. We have done this here, and we likewise give to the word "plan" a meaning consistent with the purpose of section 23 (p). When, as here, there is an irrevocable contribution for the purpose of establishing an employees' pension plan and trust, which plan and trust are to conform with the regulations governing same (sections 23 (p) and 165 (a)), we believe that a plan is established and a trust is created ^{section 23 (p) and section 165 (a) (1) and (2). This, of course, is on the assumption that compliance with all of section 165 (a) is ultimately made within the grace period which was the case herein.}

We think the facts in the instant case with reference to the pension trust deductions are essentially the same as in 555, Incorporated, , and following our decision in that case this issue is decided in favor of the petitioner.

The parties have stipulated that certain actuarial data previously submitted to respondent shall be available to either party in a recomputation under Rule 50.

Abnormal deductions in base period years. -- Petitioner has assigned as error respondent's failure to disallow certain claimed abnormal deductions for the years 1938 and 1939 in computing petitioner's excess profits credit. Petitioner contends that these claimed deductions were of a class abnormal for petitioner within the meaning of section 711 (b) (1) (J) (ii) of the Internal Revenue Code as limited by section 711 (b) (1) (K) of the Internal Revenue Code. The pertinent provisions of these sections are printed in the margin. *62 Moving expenses. -- From December 1937 through March 1938, petitioner was engaged in moving its warehouse to larger quarters and in connection with this move incurred expenses which were abnormal deductions and, therefore, petitioner claims that under section 711 (b) (1) (J) these expenses should be disallowed in computing its excess profits credit.

Petitioner cites Wentworth Manufacturing Co., 6 T.C. 1201">6 T. C. 1201. It is not enough that these expenses were abnormal, but petitioner must also show that they were not a consequence of any of the limiting factors of section 711 (b) (1) (K) (ii). Petitioner has failed to show that these deductions were not a consequence of these limiting factors, Williams Leveen Corporation, 3 T.C. 593">3 T. C. 593. On the contrary, we have found that the deductions were a consequence of a change in the manner and size of the operation of petitioner's business which precludes the disallowance of these deductions, section 711 (b) (1) (K) (ii). These expenditures were directly due to the growth and expansion of petitioner's business; as to this we think there can be no doubt.

Testing machinery loss. -- Under this issue petitioner claims that the losses resulting from the repeal of an Arkansas statute should be disallowed for 1938 and 1939. These losses, though taken and allowed as bad debt losses, are entitled to separate classification under section 711 (b) (1) (J). Green Bay Lumber Co., 3 T. C. 824; Denman Tire & Rubber Co., 14 T. C. 706. These were losses of a class abnormal to petitioner, and we have so found. Petitioner has also proved that they were not a consequence of any of the limiting factors of section 711 (b) (1) (K) (ii) and are, therefore, to be disallowed in computing its excess profits credit. William Leveen Corporation, supra.

Embezzlement loss and loss from advances to store manager. -- Petitioner claims that these losses should be disallowed under section 711 (b) (1) (J) as they represent deductions abnormal for petitioner. But before petitioner can have these deductions disallowed, it must first prove satisfactorily that they have been allowed. This, we think, petitioner has failed to do. The record does not satisfy us that petitioner claimed the loss in 1939, or whether it recovered through insurance or otherwise the loss resulting from the embezzlement.

The same situation exists as to the claimed loss from making an advance of $ 653.66 to a store manager in 1939. The return of petitioner for the year 1939 which is in evidence as Exhibit G and which has been carefully examined, does not contain a deduction in the amount of either the embezzlement loss or the claimed advance to the store manager, nor did petitioner claim a deduction under either item 16 entitled "Salaries and Wages (not deducted elsewhere)," or under item 23 entitled "Loss by fire, storm, shipwreck, or other casualty, or theft." Since petitioner has failed to meet its burden of proof regarding these two claimed deductions, it is not proper that they should be added to the income reported on its 1939 return for the purpose of computing petitioner's credit for excess profits tax purposes.

Change in method of pricing inventory. -- The final issue herein relates to a claimed abnormal "deduction" resulting from a change in the method of pricing petitioner's inventory. In 1932, petitioner purchased merchandise from O. C. Y. Co. of which petitioner was a one-third stockholder. From 1934 through 1937, petitioner received from O. C. Y. Co. distributions ranging from $ 11,924 to $ 26,882.06 a year. In 1938, petitioner changed its method of valuing its ending inventory in such a way that the lower cost of its merchandise would be reflected directly in inventory. Roughly one-half of the total estimated adjustment was made in 1938 and the remaining one-half in 1939. Petitioner claims these to be abnormal deductions within the meaning of section 711 (b) (1) (J) and should, therefore, be disallowed. As a matter of fact, these adjustments in inventory were not deductions at all. Even if it could be said that these were abnormal deductions within section 711 (b) (1) (J), which we do not think they are ( Universal Optical Co., 11 T. C. 608), these inventory adjustments were a consequence of the change in manner of operation of petitioner's business and, therefore, may not be disallowed. Section 711 (b) (1) (K) (ii).

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 165. EMPLOYEES' TRUSTS.

  (a) Exemption From Tax. -- A trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall not be taxable under this supplement and no other provision of this supplement shall apply with respect to such trust or to its beneficiary --

  (1) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan;

  (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;

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• 2. Cf. McKee v. Paradise, 299 U.S. 119">299 U.S. 119↩

• 3. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  In computing net income there shall be allowed as deductions:

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  (p) Contribution of an Employer to an Employees' Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan.

  (1) General rule. -- If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under subsection (a) but shall be deductible, if deductible under subsection (a) without regard to this subsection, under this subsection but only to the following extent:

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  (E) For the purposes of subparagraphs (A), (B), and (C), a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made within sixty days after the close of the taxable year of accrual.↩

• 4. See also IT: PS No. 47, February 20, 1945, for payments prior to March 2, 1945, contingent on respondent's approval or stockholder ratification.↩

• 5. See section 23 (p) (1) (E), footnote 3, supra↩, for accrual taxpayers making payment within 60 days of the close of the taxable year.

• 6. SEC. 711. EXCESS PROFITS NET INCOME.

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  (b) Taxable Years in Base Period. --

  (1) General rule and adjustments. -- The excess profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 13 (a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January 1, 1940, shall be the special-class net income, as defined in section 14 (a) of the applicable revenue law. In either case the following adjustment shall be made (for additional adjustments in case of certain reorganizations, see section 742 (e)):

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  (J) Abnormal Deductions. -- Under regulations prescribed by the Commissioner, with the approval of the Secretary, for the determination, for the purposes of this subparagraph, of the classification of deductions --

  (i) Deductions of any class shall not be allowed if deductions of such class were abnormal for the taxpayer, and

  (ii) If the class of deductions was normal for the taxpayer, but the deductions of such class were in excess of 125 per centum of the average amount of deductions of such class for the four previous taxable years, they shall be disallowed in an amount equal to such excess.

  (K) Rules for Application of Subparagraphs (H), (I), and (J). -- For the purposes of subparagraphs (H), (I), and (J) --

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  (ii) Deductions shall not be disallowed under such subparagraphs unless the taxpayer establishes that the abnormality or excess is not a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period, and is not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer.↩