DocketNumber: Docket No. 1073-64
Citation Numbers: 1966 U.S. Tax Ct. LEXIS 49, 46 T.C. 706
Judges: Tannenwald
Filed Date: 8/31/1966
Status: Precedential
Modified Date: 1/13/2023
*49
In January 1959 Worthington purchased all of the shares of Annin and in May 1959 Annin was liquidated into Worthington. At the latter time, petitioner's employment was changed from Annin to Worthington. In June 1959 Worthington adopted Annin's qualified profit-sharing plan and subsequently took certain actions with respect thereto, including making amendments and a contribution. On January 20, 1960, the plan was terminated, and thereafter a lump-sum distribution was made to petitioner.
*706 Respondent determined a deficiency in petitioners' 1960 Federal income tax in the amount of $ 702.52. The sole issue is the proper tax treatment of a distribution to petitioner from a corporate profit-sharing plan.
FINDINGS OF FACT
Some of the facts are stipulated and are found accordingly.
Petitioners reside at La Mirada, Calif. They filed a joint Federal income tax return for 1960 with the district director of internal revenue, Los Angeles, Calif. Norah Schlegel is a petitioner herein*51 only by reason of having joined in the 1960 return. Any reference herein to petitioner shall mean Jack E. Schlegel.
In 1955, Annin Corp. (hereinafter referred to as Annin) established an employee profit-sharing and retirement plan (hereinafter referred to as "the plan") and an accompanying trust. The plan contained the following provisions:
In the event of the dissolution, consolidation or merger of the Company, or the sale by the Company of its assets, the resulting successor person * * * may continue this Plan * * *. If, within ninety days from the effective date [thereof] such successor does not adopt this Plan, * * * this Plan shall automatically be terminated * * *.
The plan in section 1.4 defined "Company" as "THE ANNIN CORP. * * * or any successor in interest to it * * * which may expressly agree in writing to continue this Plan."
During the years in question, the plan and the trust through which it was implemented met the requirements of sections 401(a) and 501(a), respectively,
*707 On or about January 30, 1959, Worthington Corp. (hereinafter referred to as Worthington) purchased all of the*52 outstanding Annin shares. Worthington and its stockholders were in no way related to Annin or its stockholders.
On May 29, 1959, Worthington acquired all of the assets and assumed all of the liabilities of Annin. Two days later 1Annin was liquidated into Worthington and thereafter was continued as a division of Worthington with no substantial change in management or operating procedure.
On June 17, 1959, Worthington, pursuant to section 9.2, adopted the plan and authorized its president to take such action as would be necessary or desirable in connection therewith. On July 1, Worthington notified the trustee under the plan of its action. Worthington made the required contribution under the plan in 1959.
On *53 August 25, 1959, Worthington requested a favorable ruling from respondent in connection with its adoption of the plan, and respondent approved the action on November 25 of that year.
Prior to May 1959, Worthington considered various ways of handling the plan, including procedures for integrating it and the accumulated trust fund into Worthington's pension plan. Worthington felt that integration, with the concomitant inability of Annin's employees to obtain distributions from the plan, would encourage such employees to remain in Worthington's employ. On May 11, 1959, an analysis was submitted to Worthington by Marsh & McLennan, consultants, on how integration might be accomplished. By December 1959 Worthington concluded that integration was not feasible 2 and on December 16 determined to discontinue the plan as of December 31. On January 20, 1960, Worthington terminated the plan as of December 31, 1959.
*54 Between December 16, 1959, and January 20, 1960, Worthington made several amendments to the plan. Another, and last, amendment was adopted by Worthington on February 17, 1960.
Petitioner was an employee of Annin immediately prior to the acquisition by Worthington of the Annin shares and continued to be such an employee until the liquidation of Annin. He was transferred *708 to the Annin Division of Worthington after the acquisition of Annin's assets and liabilities in May 1959. His position and duties as an employee of Annin and of the Annin Division of Worthington were the same. Petitioner terminated his employment in November 1962.
On March 25, 1960, petitioner received a payment of $ 5,614.37 from the plan. Such payment constituted the total distributions payable to petitioner under the plan. In his Federal income tax return for that year he treated the payment as long-term capital gain. Respondent determined that the payment represented ordinary income.
OPINION
The parties have locked horns on the sole issue involved herein, i.e., whether the distribution to petitioner from the Plan was paid "on account of the employee's * * * separation from the service" within the*55 meaning of
Despite the bramblebush character of the decided cases and rulings on what constitutes a distribution paid "on account of * * * separation from the service," 4 it is possible to distill certain reasonably well-defined benchmarks which control our decision herein.
Obviously, there must be "a separation from the service." A transfer of the entire beneficial ownership of a business in and of itself is insufficient if the old employer continues as a separate entity and the employee continues in its service.
*709 The situation becomes more complicated when the taxpayer becomes an employee of the acquiring corporation and the new employer adopts and continues the plan. In such cases, separation from the service of the acquiring corporation has been held to be a prerequisite to capital gains treatment, with the result that distributions upon subsequent termination of the plan unaccompanied by severance of such employment have been considered made on account of termination of the plan and not on account of separation from the service.
In the instant case, there is no question that a new owner (Worthington), unrelated to the former owner (Annin), entered the picture and that at the end of May 1959 there was a change in petitioner's employment from Annin to Worthington. Clearly there was a "separation from the service" of Annin. The difficulty arises from the fact that Worthington thereafter expressly adopted the plan and became "the Company" under section 1.4. It subsequently took various actions with respect to the plan, including notification to the trustee, appointment of a committee, adoption of several amendments, and the making of the required contribution in 1959. It did not reach a decision as to how to handle the plan until December 16, 1959, and the termination was not finalized until January 20, 1960. As a result, since petitioner was an employee of Worthington and that employment continued after the distribution herein, there was no "separation from the service" as required by
*59 Petitioner seeks to avoid the impact of
*60 Assuming, without deciding, that the short timelag furnishes a valid basis for distinguishing
*61 The key to
We cannot practice petitioner's alchemy and, by a process of relation back, somehow create rights which never existed in order to make this case fit the pattern of
We recognize that petitioner in a sense is a victim of decisions over which he had no control -- it is possible that a more careful handling of the situation*62 could have produced the desired capital gain. 8 But, under the circumstances herein, we must conclude that the distribution to petitioner was made on account of the termination of the plan 9 and not on account of his separation from the employment of Annin. 10
*63
1. The stipulation so reads but it would appear, at least for tax purposes, that the liquidation occurred on May 29, 1959 (a Friday), and that May 31, 1959 (a Sunday), merely formalized the transaction as of the last day of the month. In any event, the discrepancy does not affect the issue involved herein.↩
2. There were three major obstacles to integration. Contributions to the plan were based on profits, while Worthington's plan provided for fixed contributions regardless of profits, i.e., a pension rather than a profit-sharing plan. It was also determined that Worthington could not provide within the framework of the Worthington plan, past service credits to which Annin employees would be entitled if the two plans were combined without resulting inequities to other members of the Worthington plan who were similarly situated from the points of view of compensation and past services. Finally, Worthington had a corporate policy of not disclosing the profitability of its divisions, yet the nature of the plan would have required such disclosure.↩
3. All references are to the Internal Revenue Code of 1954.↩
4. An excellent analysis in depth is contained in Judge Wilson's majority opinion in
5. We need not consider the problem where there is a change of employer accompanied by a transfer of the business not involving a substantial alteration of beneficial ownership. See
6. In
7. If Worthington had not adopted the plan and had timed the liquidation of Annin and the transfer of petitioner's employment to coincide with the termination of the plan, we would have been faced with a different and perhaps more difficult question. See
8. See fn. 7,
9. Under sec. 7.3(d) of the plan, distribution upon termination of employment other than by reason of death, total disability, or retirement was to be made in five annual installments or,
10. At the time of the enactment of the 1954 Code, Congress expressly rejected capital gains treatment for distributions on account of certain types of plan terminations except in a limited class of cases.
c-walter-rybacki-v-joseph-j-conley-district-director-of-internal , 340 F.2d 944 ( 1965 )
United States v. Ophelia Johnson and Ophelia R. Johnson, as ... , 331 F.2d 943 ( 1964 )
Commissioner of Internal Revenue v. Mary Miller. ... , 226 F.2d 618 ( 1955 )
Philip J. McGowan and Lorraine McGowan v. United States , 277 F.2d 613 ( 1960 )
United States v. Ben Martin and Rachel T. Martin , 337 F.2d 171 ( 1964 )
Nelson v. United States , 222 F. Supp. 712 ( 1963 )