Meldrum & Fewsmith, Inc. v. Commissioner

Meldrum & Fewsmith, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Meldrum & Fewsmith, Inc. v. Commissioner Docket Nos. 30977, 35392 United States Tax Court 20 T.C. 790; 1953 U.S. Tax Ct. LEXIS 93; July 8, 1953, Promulgated *93 Decisions will be entered under Rule 50. 1. Held, the profits of a partnership which took over operation of the business previously conducted by the petitioner corporation cannot be attributed to the petitioner inasmuch as the partnership was a separate business entity organized for a valid reason. 2. Held, the petitioner is entitled to deductions for contributions made by it to an employee pension plan during the fiscal years ending March 31, 1943 and 1944. H. Melvin Roberts, Esq., for the petitioner. Clarence E. Price, Esq., and James A. Scott, Esq., for*94 the respondent. Van Fossan, Judge. VAN FOSSAN *791 The respondent determined deficiencies as follows: Year ending March 31 Docket Income tax Declared value Excess profits No. deficiency excess-profits tax deficiency tax deficiency [1943] 30977 $ 11,916.18 [1944] 30977 $ 713.75 $ 869.13 124,005.46 [1945] 30977 6,643.09 21,867.16 98,302.14 [1946] 30977 23,402.29 25,687.40 76,385.65 [1947] 35392 59,811.60 [1948] 35392 18,161.44 The questions presented, after concession and agreement upon other issues raised by the pleadings, are whether the respondent erred in allocating the profits of a partnership to the petitioner corporation as its income; whether the respondent erred in disallowing deductions paid by the petitioner for an employee pension plan in the years ending March 31, 1943, and March 31, 1944; and whether the petitioner is entitled to deductions for amounts paid to attorneys and accountants. FINDINGS OF FACT. Meldrum and Fewsmith, Inc., the petitioner, is an Ohio corporation, organized by Barclay Meldrum and Joseph Fewsmith in April 1930 for the purpose of conducting an advertising agency located in Cleveland, Ohio. The two persons*95 named above were officers and the only stockholders of the petitioner at that time. The only other employees were a bookkeeper, Richard Wagner, and an office clerk. The petitioner corporation has remained in existence since its incorporation and filed its income, declared value excess-profits and excess profits tax returns for the fiscal years ending March 31, 1943, to March 31, 1948, on the accrual basis of receipts and disbursements with the collector of internal revenue for the eighteenth district of Ohio. During the years 1930 to 1935, the petitioner's business was depressed and it was forced to borrow money from banks to maintain its operations. During the succeeding 5 years, business began to prosper with the acquisition of several large accounts advertising in national publications. The petitioner had obtained the services of Raymond Simmons, Ellis Morris, and Harry Guest during its early years and by 1940 about 25 persons were employed by the petitioner. When its business relations with national publications increased, the petitioner submitted semiannual financial reports to the Periodical Publishers *792 Association, hereinafter sometimes referred to as the Association, *96 listing its working capital and the volume of its business as disclosed by monthly billings. The Association consisted of several publishers of national circulation periodicals. It maintained data and information relating to the credit rating of advertising agencies dealing with the publishers belonging to the Association. This information was made available to its members. Publishers extended credit to advertising agencies rather than their clients and looked only to the agencies for payment. The Association determined the credit standing of the agencies by a comparison of working capital and the average monthly billings of the agency. Working capital was determined by a formula which resulted in a lesser amount than would be reflected on the agency's books. As the volume of petitioner's business increased during the years 1935 to 1941, the average monthly billings became greater but the working capital did not similarly increase. The Association recommended that an agency maintain its working capital at 75 to 100 per cent of its average monthly billings. In October 1941, the secretary of the Association wrote a letter to Barclay Meldrum expressing the hope that the petitioner's*97 working capital could be increased to bring it in line with the Association's recommendation. Enclosed with this letter was a chart showing the petitioner's working capital and average monthly billings from 1935 to 1941. Throughout this period, the petitioner's working capital averaged 42 3/4 per cent of the average monthly billings. An exchange of correspondence followed relating to the plans of the agency to increase its working capital, the petitioner assuring the Association that it would do everything it could to build up its capital structure. At the close of the fiscal year ending March 31, 1942, the petitioner increased its working capital from 31 1/3 per cent as of the prior year to 39 1/2 per cent of the average monthly billings. In the following year, the working capital ratio was increased to 41 per cent. In the summer of 1943, the secretary of the Association made a trip to Cleveland to discuss the problem of increasing the petitioner's working capital with Barclay Meldrum. The secretary informed the petitioner's officers that the Curtis Publishing Company, which was extending credit of $ 93,000 to the petitioner, had requested an inquiry to determine if special*98 arrangements could be made for a basis of credit. The petitioner's officers informed the secretary of the Association that a study had been made to see what could be done to increase working capital. The study resulted in the conclusion that capital could not be increased by sale of stock nor by contributions to capital by stockholders. The solution arrived at by the petitioner was to form a partnership to operate the business with the personal assets of the partners available to creditors. The assets of the stockholders of the *793 petitioner as of October 1, 1943, were valued in excess of $ 400,000. These stockholders were Barclay Meldrum and his wife, Nellie, Joseph Fewsmith and his wife, Edith, Mildred Morris, Dorothy Guest, Mildred Simmons, and Grace Wagner. The secretary of the Association was informed of the proposed plan to create a partnership to run the business and was shown the statement of stockholders' assets. The secretary advised that the personal liability of the individual partners would be acceptable to the Association in lieu of an increase in working capital. No investigation of the statement of assets was made by the Association. The partnership *99 agreement was entered into and executed on October 1, 1943. Barclay Meldrum and Joseph Fewsmith were designated as the executive members of the partnership. The stockholders of the petitioner became partners with an interest in proportion to the number of shares they owned in the petitioner. The petitioner corporation, by special meeting held September 28, 1943, approved the plan of continuing the existence of the petitioner but discontinuing its active business operations and of leasing the assets to the partnership to carry on the business. A committee of officers who did not become partners was appointed to negotiate with the partnership with reference to a lease and the rent to be paid by the partnership. A lease of all the petitioner's assets was entered into on October 1, 1943. The petitioner also loaned the partnership $ 58,724.41 in cash for use in business operations. The rental for all the assets, valued at $ 75,000, was fixed at 4 per cent, or $ 3,000 yearly. The rental agreement was approved by the petitioner's board of directors and by the partners. On October 1, 1943, the partnership undertook the operation of the advertising agency and the petitioner limited *100 its activity to the receipt of rent and payments due from the partnership. This situation continued until July 9, 1947, when Barclay Meldrum died. During the period of October 1, 1943, to July 9, 1947, the partnership opened a new set of books and a new bank account and paid its own expenses. The Association raised no questions about the credit of the business after the formation of the partnership. The Curtis Publishing Company approved the credit advancement of $ 93,000 to the petitioner corporation. During the period of partnership operation from October 1, 1943, to July 9, 1947, the working capital of the partnership declined to an average of 16 per cent of average monthly billings. The Association did not question the credit of the partnership because it looked to the individual liabilities of the partners rather than the working capital of the firm. Without an increase in working capital or the creation of partnership liability, the Association would have recommended that its members require cash payment from the petitioner above an approved *794 credit limit. Such a requirement would have caused the petitioner to seek payment from its clients prior to the time it*101 would normally do so. The knowledge in the trade that the petitioner lacked sufficient credit would have caused it serious difficulties in its relations with clients and other publishers. Prior to the formation of the partnership on October 1, 1943, it was found that four of the key men in the business refused to become members of the partnership because they did not wish to lose their interest in the petitioner's pension plan by becoming partners. In April 1943, Richard Wagner, Raymond Simmons, Ellis Morris, and Harry Guest transferred the stock they held in the petitioner corporation to their respective wives. The first two men each held 8 shares of stock in the petitioner and the latter two held 25 shares each. The stock transferred to their wives prior to October 1, 1943, was one of the assets included in the computation of the value in excess of $ 400,000 of stockholders' assets as of that date. Dorothy B. Guest possessed assets which were greater in proportion to the stock interest received from her husband than was true in the instance of the other wives. The wives of these four men were willing to become members of the partnership and to subject their assets to the risk*102 of the business. Barclay Meldrum died on July 9, 1947, and the partnership automatically terminated. A new partnership was not formed. The assets of the petitioner were returned to it, the loan repaid, the lease between the petitioner and the partnership canceled, and the business operations of the partnership were terminated. The petitioner corporation approved the cancellation of the lease with the partnership and resumed the operation of the business as of July 10, 1947. The business of the advertising agency has been conducted by the petitioner since that date. While the partnership operated the business, salaries were paid to Barclay Meldrum and Joseph Fewsmith and the profits were divided among the partners in proportion to the shares of stock they held in the petitioner in accordance with the partnership agreement. The distributable shares of partnership profits were carried in drawing accounts. Only Barclay Meldrum and Joseph Fewsmith withdrew the major proportion of their shares. The other partners permitted the largest portion of their shares of profits to remain in the business, withdrawing amounts only to pay the income taxes on their shares. The sum of $ 129,000*103 in profits remained in the business when the partnership terminated. A large part of these profits was used to buy preferred shares in the petitioner corporation when it took over operation of the business. As a result, the petitioner's working capital was increased after July 10, 1947. The Association raised no question about the petitioner's working capital or credit after the termination of the partnership. *795 On March 26, 1943, the petitioner's board of directors established an employee pension plan. A pension trust was executed on March 31, 1943, and on the same day the petitioner paid the trustee under the trust agreement the sum of $ 10,186.95. On August 2, 1943, an amended trust was executed by the petitioner which was approved by the employees covered and became effective as of July 15, 1943. An explanation of the changes made by the amended trust was prepared by the representative of the insurance company which furnished the policies under the trust. The trust, as amended, liberalized the benefits for employees with respect to vesting provisions. The trust provided, in part, as follows: SECTION 3. Retirement Contracts. (a) Application for Retirement Contract. *104 Upon receipt of the written Request for Participation herein of any eligible employee, or as soon thereafter as practicable, the Trustee shall make application to an insurance company for the issuance, with respect to such eligible employee, of a retirement contract as defined in subsection 7 (a) (7). The Trustee's application for each such contract shall request the insurance company to which such application is directed to issue to the Trustee a retirement contract providing for a monthly retirement income as determined under subsection 3 (b) to become payable upon the attainment of retirement age as defined in subsection 5 (a) (having the type of automatic option provision commonly called "ten year certain and continuous annuity payment provision"). It is understood, however, that upon the approval of the Trustee, the contract applied for may have any other settlement option provision in addition to the "Ten year certain and continuous annuity payment provision" which will provide a guaranteed life income to the Participant, such as without, however, limiting the selection of options, a life annuity, an installment or cash refund annuity, or a joint and survivorship annuity, *105 payable in monthly payments, beginning with the maturity of the contract. * * * * (d) Effect of Decrease in Participant's Compensation. Whenever the monthly rate of compensation of a Participant is decreased, the Trustee shall either (1) assign all of the Trustee's right, title and interest in and to each contract then held by the Trustee in respect to such Participant, or (2) make application to the appropriate insurance company for a revision of such contract so as to reduce and conform the annual premium requirement under such contract, as revised, to the reduced monthly rate of compensation of such Participant and so as to conform the monthly payments to be due under such contract (under the so-called "ten year certain and continuous annuity payment plan") to such reduced monthly rate of compensation (it being intended that such contract as revised shall conform as nearly as practicable to the contract which would be applied for under subsection 3 (a) if such Participant were an eligible employee making Request for Participation herein and then employed at such reduced monthly rate of compensation). In the latter event, the Trustee shall request that the excess cash reserve, if*106 any, under such contract shall be left as a "paid up addition." Despite the foregoing *796 provisions of this subsection 3 (d), the Trustee may exercise any other right available to the Trustee under the terms of such contract if the Trustee deems such exercise to be to the best interests of the Participant. * * * * (g) Designation of Mode of Settlement and Contingent Beneficiary. All designations of beneficiaries and of modes of settlement in respect of contracts held by the Trustee shall be made by the Trustee, after consultation with the Participant concerned. The Trustee, with the advice of the Participant concerned, may, but shall not be required to, select such of the modes of settlement of the amounts payable to such Participant upon retirement as may be available under the terms and conditions of the contracts from time to time in force with respect to such Participant. The Trustee, with the advice of the Participant concerned, may, but shall not be required to, nominate the beneficiary or beneficiaries to whom the proceeds of the contract in respect of such Participant shall be paid in the event of such Participant's death. Such designation may be made concurrently*107 with the Trustee's application for a retirement contract in respect to such Participant. The Trustee, with the advice of the Participant concerned, may, but shall not be required to, request any change of any previously designated beneficiary or beneficiaries, if such change is consented to by the appropriate insurance company. The Trustee, with the advice of the Participant concerned, may, but shall not be required to, select the mode of settlement of any death benefits payable under any retirement contract held hereunder, provided said mode of settlement is consented to by the appropriate insurance company. The designation of such mode of settlement may be made concurrently with the Trustee's application for a retirement contract in respect to such Participant. The Trustee, with the advice of the Participant concerned, may, but shall not be required to, request any change of any previously designated mode of settlement, if such change is consented to by the appropriate insurance company. * * * * SECTION 4. Administration. (a) Company Contributions. The Company agrees, except as herein otherwise provided, to contribute the sum of $ 10,000.00 on or before March 31, 1943, and*108 thereafter to contribute annually to the Trustee an amount equal to the annual premium due or to become due on the retirement contracts purchased by the Trustee with respect to Participants. * * * * (c) Discontinuance of Contributions. Nothing contained in this Agreement shall be construed as imposing any continuing liability upon the Company to make contributions to the Trustee. The Company reserves the right to discontinue contributions to the Trustee in any year, from year to year, and for any period of time whatsoever without any liability to make such contributions at a later date. All contributions in respect of each Participant shall cease with such Participant's death or his attainment of retirement age, or with the termination of his employment by reason of resignation or dismissal. If a Participant's active employment has been terminated for lack of work, disability, participation in the military service of the United States or leave of absence, such Participant shall continue to be a Participant until his resignation, dismissal, attainment of *797 retirement age or prior death, and contributions in respect of premiums on any contracts in force with respect to such*109 Participant shall continue to be made by the Company, except as herein agreed, so long as the Company continues to apy [sic] compensation to such Participant [sic]; but such contribution shall cease with the termination of such compensation. * * * * (g) First Contribution Conditional. The Company's contribution made on or before March 31, 1943 shall be and hereby is made subject to the condition that such contribution shall be repaid to the Company, in whole or in part, by the Trustee, without any liability therefor to the Trustee or to any beneficiary or any other person, only in the event and to the extent that the Commissioner of Internal Revenue does not allow the amount thereof as a deduction for income tax purposes for the fiscal year of the Company ended March 31, 1943. Despite any of the other provisions of this agreement no Participant shall have any vested right in any asset of the trust fund prior to the trust's having been approved by the Commissioner of Internal Revenue as being in conformity with the requirements of Section 165 of the Internal Revenue Code, as amended by the Revenue Act of 1942. SECTION 5. Benefits. * * * * (b) Designation and Dismissal. *110 In the event of the termination of a Participant's employment by resignation or dismissal prior to attainment of the retirement age as defined in subsection 5 (a), he shall cease to be a Participant, and the Trustee (except as otherwise provided in subparagraph (vi) of this subsection 5 (b)) shall surrender for their cash proceeds the contracts then held by the Trustee with respect to such Participant and The rights of the participants and the procedure to be followed with respect to the disposition of the cash proceeds, dependent upon the length of participation, were specifically fixed in the then following subparagraphs. On August 13, 1943, petitioner paid $ 27,685.32 to the trustee which amount, together with the initial payment of $ 10,186.95 paid March 31, 1943, represented the normal cost of the policies of insurance for the initial year of the trust of $ 37,672.18. The petitioner took deductions in the amount of $ 10,186.95 for its fiscal year ending March 31, 1943, and $ 27,685.32 for the fiscal year ending March 31, 1944. These deductions were disallowed by the respondent. The trust began on March 31, 1943, and the normal cost of the plan for its first year began on*111 that date. The trustee under the pension trust paid the insurance company for the retirement and life insurance policies for the employees in the amount of $ 37,672.18 during the fiscal year ended March 31, 1944. Insurance policies were delivered to the trustee and photostat copies were given to each employee. The employees had been fully advised of the pension plan and its provisions. On October 21, 1943, the pension plan was filed in accordance with regulations published by the respondent. *798 After the partnership was organized and took over the operation of the petitioner's business, the partners took over the petitioner's pension plan and assumed all the obligations and duties of that plan. The partnership, which was on a fiscal year basis ending September 30, paid the annual premiums in September 1944 for the policies issued under the corporate plan to the trustee, who, in turn, paid the premiums to the insurance companies. On October 7, 1944, after the close of the partnership's first fiscal year, the respondent sent the petitioner a letter stating that the corporation's pension plan which had been submitted did not meet the requirements of section 165 (a) of the*112 Internal Revenue Code due to the fact that at the time of submission of the plan on October 21, 1943, the corporation no longer had any employees, the partnership having taken over the business. A new trust was executed by the partnership on November 24, 1944. By amendment, the effective date of the plan was changed to January 1, 1945. The plan provided, in part, as follows: SECTION 3. Retirement Contracts. (a) Application for Retirement Contracts. On the anniversary date as of which the written request for participation herein of any eligible employee becomes effective or as soon thereafter as practicable, the trustee shall make application to an insurance company for the issuance, with respect to such eligible employee, of a retirement contract as defined in subsection 7 (a) (7). The trustee's application for each such contract shall request the insurance company to which such application is directed to issue to the trustee a retirement contract providing for a monthly retirement income as determined under subsection 3 (b) to become payable upon the attainment of retirement age as defined in subsection 5 (a) (having the type of automatic option provision commonly called "five*113 year certain and continuous annuity payment provision"). It is understood, however, that upon the approval of the trustee, the contract applied for may have any other settlement option provision in addition to the "five year certain and continuous annuity payment provision" which will provide a guaranteed life income to the participant, such as without, however, limiting the selection of options, a life annuity, an installment or cash refund annuity, or a joint and survivorship annuity, payable in monthly payments, beginning with the maturity of the contract. * * * * (d) Effect of Decrease in Participant's Compensation. Whenever the monthly rate of compensation of a participant is decreased, the trustee upon the anniversary date next succeeding notice to that effect from the employer shall make application to the appropriate insurance company for a revision of such contract so as to reduce and conform the annual premium requirements under such contract as revised to the reduced monthly rate of compensation of such participant, and so as to conform the monthly payments to be due under such contract to such reduced monthly rate of compensation, it being intended that such contract *114 as revised shall conform as nearly as practicable to the contract which would be applied for under subsection 3 (a) if such participant were an eligible employee making request for participation herein, and then employed *799 at such reduced monthly rate of compensation; provided, however, that no reduction in any such contract with respect to any participant shall be made in case of any participant who has passed the one hundred eightieth (180th) day after his fifty-fifth birthday; provide further that the excess cash reserve, if any, under any reduced contract shall be left as a "paid up addition" for the benefit of the participant with respect to whom such contract was issued. Despite the foregoing provisions of this subsection 3 (d), the trustee may exercise any other right available to the trustee under the terms of such contract if the trustee deems such exercise to be to the best interest of the participant. * * * * (g) Designation of Beneficiary. Each participant from time to time may designate any person or persons to whom the benefits available under the policy or policies held by the trustee with respect to such participant, payable in case of such participant's death, *115 shall be paid. Such person or persons are referred to herein as the "beneficiary" of such participant. Each designation shall revoke all prior designations by the same participant and shall be by writing filed with the trustee. If a participant shall fail to designate a beneficiary as aforesaid, or if the beneficiary so designated predeceased such participant, then the legal representative or representatives of the estate of such participant shall be deemed and will be referred to herein as the "beneficiary" of such participant. The trustee shall cause the death benefits under the policies issued with respect to each participant to be made payable to the beneficiary designated by him in accordance with the provisions of this paragraph under any mode of settlement available under the policy or policies issued with respect to such participant. * * * * SECTION 5. Benefits. (b) Resignation or Dismissal. If any participant shall resign or be discharged from the employ of the employer after having been a participant four (4) years or less he shall have no further right, title or benefits hereunder. If, however, a participant shall resign or be discharged as aforesaid, after having*116 been a participant four (4) years or more the trustee shall make available to such participant a benefit which shall be the equivalent of the cash surrender value of the contracts issued with respect to such participant, based on the number of years he shall have been a participant, as follows: Percentage of Cash Surrender If a Participant: Value to Which Entitled 4 years, but less than 5 years [50] 5 years, but less than 6 years [60] 6 years, but less than 7 years [70] 7 years, but less than 8 years [80] 8 years, but less than 9 years [90] 9 years, or more [100] Such participant may elect to acquire all of the contracts at the time held by the trustee with respect to such participant by paying to the trustee an amount equal to the difference between (1) the then cash surrender of such contracts (2) the portion of the cash surrender value thereof to which such participant is entitled by virtue of this paragraph. All sums received by the trustee on account of the surrender of any such contracts or on account of the acquisition thereof by any participant, shall be available and used to pay the premium next due on contracts issued hereunder. *800 On October 3, 1945, *117 the respondent wrote the partnership, informing it that the new plan met the requirements of section 165 (a) of the Internal Revenue Code and that contributions to the trust would be allowed as deductions under section 23 (p) of the Internal Revenue Code. A later amendment was similarly approved in May 1945. During the period of partnership operation of the business, the partnership annually paid amounts to the trustee which were in turn paid to the insurance companies and life insurance and retirement policies for the employees. Deductions were taken from partnership income on its income tax returns in the amount of such payments. The respondent disallowed these deductions on the ground that the partnership was not a separate entity for tax purposes, but, on brief, conceded that the deductions are properly allowable if the Court determines that the partnership income is taxable to the petitioner. After the decision to adopt the new plan for the partnership was reached in 1944, the policies carried under the corporation's plan, except those held for Barclay Meldrum and Joseph Fewsmith, were surrendered for cancellation and receipt of their cash surrender value. New policies with*118 a new insurance company were acquired under the new plan. The contract carried with Barclay Meldrum at an annual premium at $ 6,363.63 was converted to a paid-up contract in November 1944. In April 1945, the contract was reinstated at an annual premium of $ 2,577.77. The excess portion of the contract was canceled and the proceeds of $ 2,102.65 were paid to the trustee. The contract originally carried for Joseph Fewsmith at an annual premium of $ 6,243.30 was released to the insured. The cash surrender value for the other participants under the old plan was paid to the trustee. After the death of Barclay Meldrum and the termination of the partnership in July 1947, the petitioner took over the pension plan approved by the respondent. In September 1947, the petitioner wrote to an agent of the respondent advising of this action by the petitioner. The respondent replied, stating that the pension plan and amendments met the requirements of section 165 (a) of the Internal Revenue Code. The petitioner paid the trustee, who, in turn, paid the insurance companies in January 1948 the sum of $ 43,153.45 which the petitioner took as a deduction on its income tax return for the fiscal *119 year ending March 31, 1948. The respondent disallowed this deduction but, on brief, concedes that the petitioner contributed $ 43,153.45 to the plan in the fiscal year ended March 31, 1948, and that the plan meets the requirements of section 165 (a) of the Internal Revenue Code and a deduction should be allowed under section 23 (p) of the Internal Revenue Code. A certified public accountant was employed by the petitioner in 1942 for the purpose of determining the advisability of a change of *801 accounting period and in connection with an estimate of corporate taxes under a personal service classification and partnership form of organization. Excess profits taxes were also a subject of inquiry by the accountant. The services were concluded on March 31, 1944, and the petitioner paid $ 2,000 to the accountant. The petitioner employed legal counsel in 1943 in relation to the pension plan trust and amendments thereto. This attorney was also employed in the determination of a solution of the working capital problem and the formation of the partnership. He was paid $ 15,000 on February 4, 1944. The petitioner took a deduction for legal and accounting fees in the amounts of $ 15,000*120 and $ 2,000 on its return for the fiscal year ending March 31, 1944. Two-thirds, or $ 10,000 of the attorney's fee, was paid by the petitioner with respect to services relative to the creation of the pension trust and the solution of the problem of the petitioner's working capital. One-third, or $ 5,000 of the attorney's fee, was paid for services relative to the organization of the partnership. The partnership formed on October 1, 1943, was created for a bona fide business purpose and operated the business of the advertising agency until July 9, 1947, as a valid separate business entity during the fiscal years between these two dates. OPINION. The initial question to be answered in these proceedings involves the respondent's determination that the income of the partnership should be attributed to the petitioner corporation. Our finding that the partnership was a separate entity for tax purposes is determinative that the respondent erred in this regard. The taxpayer has the right to choose the type of business organization which he prefers and is not required to adopt that form of organization which will result in the maximum tax upon business income. Moline Properties, Inc. v. Commissioner, 319 U.S. 436.*121 There is no evidence that the parties were motivated by possible tax avoidance or any improper purpose. It follows that the profits of the partnership cannot be attributed to the petitioner corporation for any of the years involved. Turning to the second issue, the respondent conditionally concedes that the pension plan executed by the partnership in November 1944 and made effective as of January 1, 1945, met the requirements of the statute and that deductions should be allowed for the contributions made to that pension trust. The issue as to the deductions taken by the partnership is not before us and the respondent's conditional concession would have been important in these proceedings only if we had determined that the profits of the partnership should be attributed to the petitioner. The condition attached to the respondent's concession *802 is, in effect, that if the Court determines that the profits of the partnership are not taxable to the petitioner, the respondent does not concede the amount of pension trust deductions to which the partnership would be entitled. Any issue with respect to the partnership must be determined in a proceeding relating to it. Only the*122 petitioner corporation is before us in these proceedings. The respondent further concedes that the petitioner is entitled to a deduction for its contribution to the pension trust in the fiscal year ended March 31, 1948. This leaves for determination only the pension trust deductions taken by the petitioner in the fiscal years ending March 31, 1943 and 1944. The respondent disallowed as deductions contributions in the amounts of $ 10,186.95 and $ 27,685.32, respectively, in the fiscal years ending March 31, 1943 and 1944, which contributions were made to the pension trust created by the petitioner in March 1943. The respondent contends that the pension trust did not meet the requisites of section 165 (a) of the Internal Revenue Code1*124 and that contributions *803 thereto cannot be deducted under section 23 (p), Internal Revenue Code. 2 The petitioner asserts that the respondent is estopped *804 from basing his disallowance of the deductions taken in the years ending March 31, 1943 and 1944, on the ground that the pension trust did not meet the qualifications of section 165 (a), Internal Revenue Code, because the only reason given for disallowance in the letter of October*123 7, 1944, was to the effect that the petitioner no longer had any employees on October 21, 1943, when the plan was submitted to the respondent. We find no basis for the application of estoppel in the instant case. The respondent determined the deficiency without specification of the reason why the deductions were disallowed. The petitioner must bear the burden of proving its right to the deductions upon all the evidence presented irrespective of the reasons *805 assigned by respondent. Standard Oil Co., 43 B. T. A. 973, affd. 129 F. 2d 363. *125 The respondent initially contends that the trust created by the petitioner in March 1943 does not qualify under section 165 (a), Internal Revenue Code, because of the provisions of section 3 (g) of the plan. That section provides that the trustee, with the advice of the participant, may, but shall not be required to, nominate the beneficiary or beneficiaries to whom the proceeds of the contract in respect of the participant shall be paid if the participant dies. It also provides that the trustee, with the advice of the participant, may, but shall not be required to, request any change of any previously designated beneficiary or beneficiaries. The respondent argues that this provision conflicts with the statutory declaration that the pension plan be for the exclusive benefit of the employees or the beneficiaries. He also relies upon the fact that this provision of the plan was amended in the later partnership plan. We do not agree with his construction of the statute. It does not specify who shall be the beneficiary or how one shall be nominated. Nor do we agree that the respondent's regulation, Regulations 111, section 29.165-1, which states substantially that the term "beneficiaries" *126 includes the employee's estate, dependents, and persons who are the natural objects of the employee's bounty, as well as persons designated by the employee, precludes the inclusion of persons nominated by the trustee with the advice of the participant. The regulation does not purport to be all inclusive nor exclusive of such persons designated in the manner provided in the instant plan. Neither the statute nor the regulation bars the nomination by the trustee, with the employee's advice, of the employee's beneficiary. The respondent objects also to section 3 (d) of the 1943 plan which provided that the trustee had the option to assign all of the trustee's right, title, and interest in and to each contract held in respect to each participant whenever the monthly rate of compensation of the participant was decreased. An alternative option to apply for a revision of the insurance contract to reduce the annual premium could also be exercised by the trustee. The later plan issued by the partnership in November 1944 eliminated the option to which the respondent objects but we do not find that this provision was potentially discriminatory, as respondent argues, so as to preclude the *127 plan from meeting the requisites of section 165 (a), Internal Revenue Code. The trustee's option to assign his interest in the participant's contract cannot affect the obligation of the company under section 4 (a) to contribute annually an amount equal to the premium due on the retirement contracts purchased. Section 4 (c) is construed to set forth the only conditions under which the company may discontinue *806 contributions with respect to participants and the company is limited to the events there specified. If the trustee, upon the reduction of compensation of the participant, elects the option under section 3 (d) of the 1943 plan, we discern no method by which the company can rid itself of its incurred obligation or otherwise "squeeze out" or eliminate a participant from the benefits of the pension trust. The plan does not clearly set forth the result of the trustee's election of the first option but we construe the plan in its entirety to preclude the elimination of any participant from the benefits of the plan by operation of section 3 (d). The company's obligation will continue in all respects. The fact that the trustee is given the option is not a sanction of some*128 method of discrimination in favor of any group of employees. We find no means or method of diversion of corpus or income from the exclusive benefit of the employees or their beneficiaries. The assignment of the trustee's right and title could not alter the rights to which the employee or his beneficiary might be entitled. The respondent objects also to an alleged discrimination in the actual operation of the plan arising from section 4 (g) of the 1943 plan. That provision declares that no participant shall have any vested right in any asset of the trust fund prior to the approval by the respondent of the pension plan, as being in conformity with the requirements of section 165, Internal Revenue Code. This provision alone is not a basis for disqualification. Surface Combustion Corporation, 9 T. C. 631, affd. 181 F. 2d 444. It is argued by respondent, however, that discrimination in favor of the petitioner's principal stockholders, Joseph Fewsmith and Barclay Meldrum, occurred, in fact, when, in November 1944, the trustee released their insurance contracts to them with only a portion of the cash surrender value being received. *129 The insurance contracts for the other participants were converted at the same time into paid-up contracts and surrendered for cancellation and their cash surrender values. This distinction is said by respondent to discriminate in favor of the two principal stockholders since the participants in the plan were not to have vested rights in the fund prior to 5 years, nor did any provision of the plan allow a participant to acquire his contract. The new partnership plan eliminated section 4 (g) and added a new subsection 5 (b) with regard to a withdrawing participant. The 1943 plan was disapproved on October 7, 1944, and as a result of this act a new plan was drawn up in November 1944, effective as of the beginning of the following year. Neither Barclay Meldrum nor Joseph Fewsmith could participate in the new pension plan inasmuch as they were partners rather than employees in the newly created organization. The release of the insurance contracts to these two men did not occur as part of the operation of the original corporate pension plan *807 but as an intermediate step between the termination of the initial plan after the respondent's disapproval and the commencement of the*130 later plan. Inasmuch as Barclay Meldrum and Joseph Fewsmith could not participate in the new plan, the release of their contracts was merely an equitable method of disposing of them when it became known that they would be unable to participate. The fact that the initial pension plan remained in operation only a short period cannot be used as a basis for discounting its validity. Its termination was due to the respondent's disapproval on the ground that the petitioner no longer had any employees. As demonstrated above, the objections raised by the respondent to the petitioner's pension plan adopted in 1943 are not well founded. The deductions claimed by the petitioner in the amounts of $ 10,186.95 and $ 27,685.32 in the fiscal years ending March 31, 1943 and 1944, must be allowed. The final issue to be determined, the parties having eliminated by agreement the question of a capital stock deduction, is the deductibility of fees in the total amount of $ 17,000 in the fiscal year ending March 31, 1944. A fee of $ 2,000 was paid to an accountant who investigated the advisability of a change in the petitioner's accounting and also examined the tax consequences of a change in form *131 of organization. The expenses incurred in determining the advisability of a change of organization have been held deductible as ordinary and necessary business expenses. Francis A. Parker, 6 T. C. 974. Similar treatment must be accorded to the accountant's fee here. A fee of $ 15,000 was paid to an attorney who was originally employed with regard to the creation of the original pension trust and its amendments. This undertaking was directly related to the business carried on by the petitioner and any payment therefor is a deductible business expense. Kornhauser v. United States, 276 U.S. 145. This attorney was also engaged in an effort to determine a solution to the petitioner's working capital problem and aided in the formation of the partnership. That portion of the attorney's services rendered with respect to the solution of the petitioner's credit problem must be deemed an ordinary and necessary business expense incurred in an attempt to maintain the agency's ability to continue operation. The remainder of the attorney's services, rendered with respect to the organization of the partnership in October 1943, *132 must be classified as a capital expenditure. On the whole record, we have found that two-thirds of the attorney's fee was paid with respect to services relating to the creation of the pension trust and the solution of the working capital problem and represents a deductible business expense. The remaining one-third of the fee is allocated to the services relating to the organization of the partnership and represents a capital expense. Mill's Estate, Inc., 17 T. C. 910. Decisions will be entered under Rule 50. 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; (3) if the trust, or two or more trusts, or the trust or trusts and annuity plan or plans are designated by the employer as constituting parts of a plan intended to qualify under this subsection which benefits either -- (A) 70 per centum or more of all the employees, or 80 per centum or more of all the employees who are eligible to benefit under the plan if 70 per centum or more of all the employees are eligible to benefit under the plan, excluding in each case employees who have been employed not more than a minimum period prescribed by the plan, not exceeding five years, employees whose customary employment is for not more than twenty hours in any one week, and employees whose customary employment is for not more than five month in any calendar year, or (B) such employees as qualify under a classification set up by the employer and found by the Commissioner not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees; and (4) if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. (5) A classification shall not be considered discriminatory within the meaning of paragraphs (3) (B) or (4) of this subsection merely because it excludes employees the whole of whose remuneration constitutes "wages" under section 1426 (a) (1) (relating to the Federal Insurance Contributions Act) or merely because it is limited to salaried or clerical employees. Neither shall a plan be considered discriminatory within the meaning of such provisions merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees, or merely because the contributions or benefits based on that part of an employee's remuneration which is excluded from "wages" by section 1426 (a) (1) differ from the contributions or benefits based on employee's remuneration not so excluded, or differ because of any retirement benefits created under State or Federal law. (6) A plan shall be considered as meeting the requirements of paragraph (3) of this subsection during the whole of any taxable year of the plan if on one day in each quarter it satisfied such requirements.↩ 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (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: (A) In the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 165 (a), in an amount determined as follows: (i) an amount not in excess of 5 per centum of the compensation otherwise paid or accrued during the taxable year to all the employees under the trust, but such amount may be reduced for future years if found by the Commissioner upon periodical examinations at not less than five-year intervals to be more than the amount reasonably necessary to provide the remaining unfunded cost of past and current service credits of all employees under the plan, plus (ii) any excess over the amount allowable under clause (i) necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of each such employee, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, but if such remaining unfunded cost with respect to any three individuals is more than 50 per centum of such remaining unfunded cost, the amount of such unfunded cost attributable to such individuals shall be distributed over a period of at least 5 taxable years, or (iii) in lieu of the amounts allowable under (i) and (ii) above, an amount equal to the normal cost of the plan, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, plus, if past service or other supplementary pension or annuity credits are provided by the plan, an amount not in excess of 10 per centum of the cost which would be required to completely fund or purchase such pension or annuity credits as of the date when they are included in the plan, as determined under regulations prescribed by the Commissioner with the approval of the Secretary, except that in no case shall a deduction be allowed for any amount (other than the normal cost) paid in after such pension or annuity credits are completely funded or purchased. (iv) Any amount paid in a taxable year in excess of the amount deductible in such year under the foregoing limitations shall be deductible in the succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year in accordance with the foregoing limitations. (B) In the taxable year when paid, in an amount determined in accordance with subparagraph (A) of this paragraph, if the contributions are paid toward the purchase of retirement annuities and such purchase is a part of a plan which meets the requirements of section 165 (a), (3), (4), (5), and (6), and if refunds of premiums, if any, are applied within the current taxable year or next succeeding taxable year towards the purchase of such retirement annuities. (C) In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 165 (a), in an amount not in excess of 15 per centum of the compensation otherwise paid or accrued during the taxable year to all employees under the stock bonus or profit-sharing plan. If in any taxable year beginning after December 31, 1941, there is paid into the trust, or a similar trust then in effect, amounts less than the amounts deductible under the preceding sentence, the excess, or if no amount is paid, the amounts deductible, shall be carried forward and be deductible when paid in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any such succeeding taxable year shall not exceed 15 per centum of the compensation otherwise paid or accrued during such succeeding taxable year to the beneficiaries under the plan. In addition, any amount paid into the trust in a taxable year beginning after December 31, 1941, in excess of the amount allowable with respect to such year under the preceding provisions of this subparagraph shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this subparagraph shall not exceed 15 per centum of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan. The term "stock bonus or profit-sharing trust", as used in this subparagraph, shall not include any trust designed to provide benefits upon retirement and covering a period of years, if under the plan the amounts to be contributed by the employer can be determined actuarily as provided in subparagraph (A). If the contributions are made to two or more stock bonus or profit-sharing trusts, such trusts shall be considered a single trust for the purposes of applying the limitations in this subparagraph. (D) In the taxable year when paid, if the plan is not one included in paragraphs (A), (B), or (C), if the employees' rights to or derived from such employer's contribution or such compensation are nonforfeitable at the time the contribution or compensation is paid. (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. (F) If amounts are deductible under subparagraphs (A) and (C), or (B) and (C), or (A), (B), and (C), in connection with two or more trusts, or one or more trusts and an annuity plan, the total amount deductible in a taxable year under such trusts and plans shall not exceed 25 per centum of the compensation otherwise paid or accrued during the taxable year to the persons who are the beneficiaries of the trusts or plans. In addition, any amount paid into such trust or under such annuity plans in a taxable year beginning after December 31, 1941, in excess of the amount allowable with respect to such year under the preceding provisions of this subparagraph shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this subparagraph shall not exceed 30 per centum of the compensation otherwise paid or accrued during such taxable years to the beneficiaries under the trusts or plans. This subparagraph shall not have the effect of reducing the amount otherwise deductible under subparagraphs (A), (B), and (C), if no employee is a beneficiary under more than one trust, or a trust and an annuity plan.↩ If there is no plan but a method of employer contributions or compensation has the effect of a stock bonus, pension, profit-sharing, or annuity plan, or similar plan deferring the receipt of compensation, this paragraph shall apply as if there were such a plan.