DocketNumber: Docket No. 2371-75
Citation Numbers: 68 T.C. 366, 1977 U.S. Tax Ct. LEXIS 96
Judges: Simpson
Filed Date: 6/9/1977
Status: Precedential
Modified Date: 1/13/2023
*96
P's board of directors authorized a contribution to its profit-sharing trust before the close of the year in issue, although no record was made of such action. The contribution was paid within the statutory grace period provided in
*366 The Commissioner determined a deficiency of $ 9,376 in the petitioner's Federal corporate income taxes for its taxable year ending November 30, 1971. The sole issue for decision is whether the petitioner properly accrued, during the year in issue, a contribution to its profit-sharing plan.
FINDINGS OF FACT
Some of the facts have been stipulated, and those facts are so found.
The petitioner, Lozano, Inc. (Lozano), is a California corporation with its principal place of business in Mountain View, Calif.*98 It filed a Federal corporate income tax return for its 1971 taxable year with the Internal Revenue Service *367 Center, Fresno, Calif. The petitioner follows the accrual method of accounting.
The petitioner's business consists of a combination carwash and service station, which it has operated since 1961. Prior to that time, the business was conducted as a sole proprietorship. During the year in issue, the petitioner's stock was owned equally by Manuel Lozano, Sr., and his son, Manuel Lozano, Jr. Mr. Lozano, Sr., was also president of the corporation; his wife, Emily J. Lozano, was vice president; and his son, Manuel Lozano, Jr., was the secretary-treasurer.
The petitioner's board of directors during the year in issue consisted of Mr. Lozano, Sr., Mr. Lozano, Jr., and Frank Lee Crist, Jr. Mr. Crist, an attorney, is a longtime school friend of Mr. Lozano, Jr., and served as the attorney for the petitioner for many years. Although he served on the board of directors for a number of years, Mr. Crist was never actively involved in making the business decisions of the corporation; he always agreed with the decisions made by the Lozanos because he regarded the corporation as their*99 business. The Lozanos have always operated and managed the petitioner in an informal manner with the knowledge and acquiescence of Mr. Crist.
Prior to the close of the petitioner's fiscal year ending in 1965, it established a pension plan and a profit-sharing plan. The District Director of Internal Revenue issued favorable determination letters for both plans on March 1, 1968, and on March 20, 1968, certain amendments were made in the plan. During the year in issue, eight of the petitioner's employees participated in each plan. The profit-sharing plan does not contain a definite contribution formula. Article VII of the plan as amended provides:
The Company may on or before November 30th of each year determine the amount it will contribute to the Fund from its profit, and the Company shall announce the same to the participants of the Plan. The Company, however, for no fiscal year shall contribute any sum in excess of the allowable deduction from gross income under the Internal Revenue Code * * *
Ever since the profit-sharing plan has been in existence, it has been the business practice of Mr. Lozano, Sr., and Mr. Lozano, Jr., to have a meeting with their accountant sometime in*100 October, more than a month before the close of that fiscal year, to decide on the corporation's contribution to *368 the profit-sharing plan for that year. For every year up to and including the year in issue, as a result of such meeting, the Lozanos decided that the corporation would make the maximum contribution which would be deductible for tax purposes, and payment of such amount has always been made. Before the close of each taxable year, Mr. Crist was informed of such decision either by the accountant or by the bookkeeper employed by the petitioner. He has always acquiesced in that decision, even though he never formally executed documents attesting to that fact. The traditional pattern of such events occurred during the year in issue. Although the specific dollar amount of the contribution was not known at the time the Lozanos met with their accountant, they were generally aware of the approximate amount, and at the time of their decision, they authorized a contribution of the maximum deductible dollar amount.
The computation of such amount was carried out by the administrator of the petitioner's plan, Zischke Organization, Inc. (Zischke), based upon the payroll records*101 submitted to it by the petitioner. Zischke received such payroll information after the close of the petitioner's fiscal year because the complete payroll records were not available until that time. Upon receipt of such records, Zischke first determined the required contribution to the petitioner's pension plan; then, the amount of the contribution to the profit-sharing plan was computed in accordance with the instructions of the petitioner. During the year in issue and for many years prior thereto, the petitioner's bookkeeper submitted all the necessary papers to Zischke. Prior to the close of the taxable year in issue, she was told by Mr. Lozano, Jr., that the corporation had decided to make the maximum contribution, and she passed on such information to Zischke. As computed by Zischke, the maximum contribution the petitioner could make to its profit-sharing trust for the year in issue was $ 19,533, and such amount was paid into the trust within the statutory grace period as provided in
*102 *369 Although the bookkeeper was not specifically instructed by Mr. Lozano, Sr., or Mr. Lozano, Jr., to inform the employees participating in the profit-sharing plan that the petitioner had decided to make the maximum contribution, she did informally tell many of them about such decision, and most if not all of the participating employees were aware of that decision prior to the close of the year in issue. In addition, after the close of the fiscal year, when the amount of the contribution to the profit-sharing plan was determined, Zischke made up a certificate for each participating employee informing him of his interest in the trust. Such certificates were given to the employees each year.
In its 1971 Federal corporate income tax return, the petitioner deducted its contribution to the profit-sharing trust in the amount of $ 19,533.18. The Commissioner disallowed such deduction in his notice of deficiency on the ground that the petitioner did not incur a liability for such contribution within the year in issue.
OPINION
We must decide whether the petitioner properly accrued during its 1971 taxable year the maximum deductible contribution it could make to its profit-sharing*103 trust. Generally, to obtain a deduction for a contribution to such a trust, it is necessary for a taxpayer to make such contribution within the taxable year for which the deduction is sought. See
(6) Taxpayers on accrual basis. -- For purposes of paragraphs (1), (2), and (3), a taxpayer on the accrual basis shall be deemed to have made a payment*104 on the last day of the year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).
Thus, as long as an accrual method taxpayer accrues within a taxable year the obligation to make the maximum deductible contribution to its profit-sharing plan, it will be entitled to deduct such amount when it is finally computed, if it is paid within the statutory grace period provided in
*105 In connection with
this provision is not applicable unless, during the taxable year on account of which the contribution is made, the taxpayer incurs a liability to make the contribution, the amount of which is accruable under
For tax accounting purposes, an obligation is properly accruable as a liability by a taxpayer in the year when all events have occurred which fix the fact of liability and the amount thereof can be determined with reasonable accuracy.
The Commissioner contends that a number of such requirements have not been met by the petitioner: First, he argues that the petitioner's board of directors never authorized its contribution to the profit-sharing plan within its 1971 taxable year because*107 there was no formal meeting of the board in which Mr. Crist participated, nor was there any written authorization. The corporate petitioner is archetypical of a closely held corporation: the Lozanos were the sole shareholders, its primary officers, and two of the three members of the board of directors. They ran the corporation, usually in an informal manner. Mr. Crist, a longtime school friend of Mr. Lozano, Jr., was never actively involved in the management or operation of the business; he always acquiesced in their management decisions. For the years beginning after 1965, Mr. Crist knew that before the close of the taxable year, the Lozanos sat down with their accountant and decided on the contribution to be made to the petitioner's profit-sharing plan; and he also knew of and acquiesced in their decision to make the maximum deductible contribution in every year before the year in issue. We have found that before the end of the year in issue, he again acquiesced in their decision to make a similar contribution.
*372 California allows the directors of closely held corporations to make a corporate decision in an informal manner, if all the directors participate or acquiesce*108 in such decision.
Nor is the authorization any less effective because it was oral and not memorialized in writing before the end of such taxable year. Cf.
Finally, the Commissioner claims that the petitioner did not inform its covered employees of its decision to make the maximum deductible contribution to its profit-sharing trust prior to the close of its 1971 taxable*111 year. Although the Commissioner has not explained his reason for requiring notice in order to have an accruable liability, 4 the facts of record make plain that prior to the close of the petitioner's 1971 taxable year, all, or virtually all, of the covered employees were aware of the petitioner's decision with respect to the contribution, even though they learned of it informally. Under the circumstances, such notice seems sufficient. 5 Cf.
*112 In support of his position, the Commissioner relies upon
In summary, we find that the petitioner has not fully complied with the conditions of
*114
1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the year in issue.↩
2. The Employee Retirement Income Security Act of 1974, 88 Stat. 923 (ERISA), amended
3. See also
4. In some situations, notice to the beneficiaries of the trust may have legal significance. See
5. See also
6. See also
Commissioner of Internal Revenue v. H. B. Ives Company , 297 F.2d 229 ( 1961 )
Poirier & McLane Corporation v. Commissioner of Internal ... , 547 F.2d 161 ( 1976 )
Commissioner of Internal Revenue v. Champion Spark Plug ... , 266 F.2d 347 ( 1959 )
subscription-television-inc-successor-by-merger-to-john-blue-company , 532 F.2d 1021 ( 1976 )
Fred J. Tabery and Leone M. Tabery, on Review v. ... , 354 F.2d 422 ( 1965 )
Brainard v. De La Montanya , 18 Cal. 2d 502 ( 1941 )
Coachella Valley Lumber & Supply Co. v. Hollenbeck , 145 Cal. App. 2d 722 ( 1956 )