Wilkins v. Commissioner

Ford E. Wilkins, Petitioner v. Commissioner of Internal Revenue, Respondent Wilkins v. Commissioner Docket No. 1848-69SC United States Tax Court 54 T.C. 362; 1970 U.S. Tax Ct. LEXIS 201; February 26, 1970, Filed *201 Decision will be entered for the respondent. Held, a distribution to petitioner from a qualified profit-sharing trust of a corporation, which was made at the request of a union representing hourly employees in labor negotiations and pursuant to an amendment of the trust on Aug. 23, 1966, effective as of Aug. 31, 1966, is taxable to petitioner as ordinary income and not as long-term capital gain since the fact that petitioner and other hourly employees of the corporation were on strike from June 1, 1966, to Aug. 4, 1966, was not a "separation from the service" of the corporation by petitioner and even were petitioner to be considered to have a "separation from the service" the distribution to him was not on account of such separation. Ford E. Wilkins, pro se. Charles B. Tetrick, for the respondent. Scott, Judge. SCOTT *363 Respondent determined a deficiency in petitioner's income tax for*203 the calendar year 1966 in the amount of $ 82.93. The only issue for decision is whether a distribution received by petitioner from a qualified profit-sharing trust is taxable as ordinary income or capital gain. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner, a married person, residing at the date of the filing of his petition in this case in St. Charles, Mo., filed his separate Federal income tax return for the calendar year 1966 with the district director of internal revenue, St. Louis, Mo. Petitioner became employed by Cupples Products Corp. (hereinafter referred to as the company) on April 1, 1957. At the time petitioner became employed by the company he had no written employment agreement. Petitioner applied to the company for work and was accepted by the company for employment and told the rules and regulations of the company with which he was expected to comply. On November 24, 1952, the company and St. Louis Trust Co. entered into a trust agreement under which the company's Profit Sharing and Retirement Trust (hereinafter referred to as the trust) was established for the benefit of company employees. The trust was noncontributory. *204 On August 17, 1964, after nine amendments to the trust, a complete revision of the trust as amended was effected. The trust or the trust as amended has always qualified under section 401(a), I.R.C. 1954, 1 for exemption from tax under section 501(a). Petitioner remained in the employ of the company and sometime in 1960 became eligible to participate in the trust, was informed of his eligibility, and given a copy of the trust agreement. Petitioner participated in the trust from the date of his eligibility to participate to August 31, 1966. Petitioner made no contributions to the trust. Neither petitioner nor any other employees of the company was represented by a union until the fall of 1965 at which time an election was held under the supervision of the National Labor Relations Board which resulted in the selection of the United Steel Workers of America, *364 AFL-CIO (hereinafter referred to as the union) to represent the hourly employees of the company*205 as their bargaining agent. The company accepted the union as the bargaining agent for its hourly employees and commencing about the first of the year 1966 the company and the union negotiated respecting wages and other matters involving employment of the company's hourly employees. At some time between the fall of 1965 and June of 1966 petitioner became a member of the union. The company and the union had not reached agreement with respect to the wages, working conditions, and other matters relating to the employment of the company's hourly employees by June 1, 1966, and on that date a strike was called by the union. The strike lasted from June 1, 1966, to August 4, 1966. During the period of the strike the production facilities of the company did not operate and petitioner and the other members of the union performed no work for the company. The striking employees were not paid by the company during the period they were on strike and, except for an automatic extension of their life insurance benefits provided by the company, until June 30, 1966, received no benefits of any kind from the company while on strike. On August 4, 1966, a collective-bargaining agreement was entered*206 into between the company and the union which was ratified by the union members. Petitioner and other members of the union returned to work for the company on the first working day following August 4, 1966. Immediately prior to petitioner's joining the union his position with the company was that of a first-class assembler working at the Maplewood plant. He was in this same position at the same plant at the time the strike was called on June 1, 1966. When petitioner returned to work after the execution of the collective-bargaining agreement on August 4, 1966, his position was that of a first-class assembler working at the Maplewood plant. Under the agreement of August 4, 1966, petitioner's seniority for retention of employment was computed from April 1, 1957, and his seniority for pension rights was computed from January 1, 1960. As a part of the union negotiations a memorandum of understanding was executed by the company and the union on August 18, 1966. Insofar as here pertinent this memorandum states: In the negotiation of a new Collective Bargaining Agreement between the parties becoming effective August 4, 1966, among the requests made by the Union for certain changes in *207 the terms and conditions of employment for the employees represented by the Union, was a request for the termination of the Company's Profit-Sharing Plan with respect to those employees represented by the Union *365 and the pay-out by the Trustee to those employees who are participants under such Plan of whatever amount may then be held for the account of the respective employee participants. The Company acceded to such request on the basis of certain understandings: (a) that arrangements for effectuating the termination of said Profit-Sharing Plan with respect to the employees in the bargaining unit represented by the Union would be handled as soon as it may be convenient and practicable to do so in order to cause such pay-out or distribution to occur within a period of approximately the next succeeding four weeks, subject of course, to the convenience of the Trustee; and (b) that the amount of the individual employee's participation in said Plan would be based on its value at or about the time of termination of participation thereunder. On August 23, 1966, the trust was amended, effective August 31, 1966, to exclude from the trust employees covered by a written employment contract*208 or a collective-bargaining agreement which does not specifically and affirmatively provide for such employees' inclusion in the trust and to provide for payment to a "Participating Employee" who becomes covered by such an employment contract or collective-bargaining agreement of the full amount credited to his account as of the month end following his becoming so covered. The collective-bargaining agreement of August 4, 1966, between the company and the union did not provide for union members, including petitioner, to be included in the trust but did provide that a pension plan would be established for such members effective August 4, 1966. The union negotiators did not consider the trust as stable as a fixed income plan for the union members and for that reason wanted its members terminated from the trust. Pursuant to the amendment to the trust effective August 31, 1966, the St. Louis Union Trust Co. distributed over $ 1 million to approximately 400 previously participating employees who had become covered by the collective-bargaining agreement and therefore terminated from the trust. The trust remained in force as to employees of the company not covered by the collective-bargaining*209 agreement and therefore not affected by the amendment. On September 22, 1966, the St. Louis Union Trust Co. made a distribution of $ 837.40 to petitioner which represented the total amount of petitioner's interest in the trust as of August 31, 1966. Petitioner on his Federal income tax return for the calendar year 1966 reported the $ 837.40 distribution from the trust as capital gain includable in his taxable income only to the extent of $ 418.70. Respondent in his notice of deficiency increased petitioner's income as reported by $ 418.70 with the explanation that the full amount of the distribution to petitioner from the trust was includable in his taxable income. *366 OPINION Section 402(a)2 provides that amounts actually distributed to a person by an employees' trust qualified under section 401(a) as exempt from tax under section 501(a) shall be taxable to him in the year of distribution under section 72 relating to annuities, except that if the total distributions payable to any employee are paid within 1 year "on account of the employee's death or other separation from the service," such distribution shall be considered as long-term capital gain. *210 The record here shows that the total distributions payable to petitioner were paid at one time, on September 22, 1966. Petitioner contends that the payment was "on account" of his "other separation from the service" of the company. Petitioner states that on June 1, 1966, he became separated from the company's service. Petitioner further notes that this separation was because of a strike called by the union in connection with negotiations of a collective-bargaining agreement, which agreement when effected on August 4, 1966, resulted in the distribution to him from the trust. Petitioner concludes from these statements that the payment to him from the trust was "on account of" his "separation from the service" of the company. Respondent contends that petitioner's not working for the company for the approximately 9-week period from June 1, 1966, to August 4, 1966, was not a "separation from the service" of the company by petitioner *367 within the meaning of section 402(a)(2) since during the entire time petitioner was on strike he remained an employee of the company on a "non-pay" status. Respondent contends that the strike was merely a temporary interruption of petitioner's*211 continuous employment by the company from April 1, 1957, until the date of the trial of this case. Respondent further contends that even if the fact that petitioner, along with other members of the union, stayed away from work at the company's plant for the 9-week strike period might be considered to be a "separation from the service" of the company by petitioner within the meaning of section 402(a)(2), the distribution to petitioner was not "on account of" this separation but rather "on account of" the amendment to the trust made August 23, 1966, pursuant to the request of the union during the negotiations of the collective-bargaining agreement. We agree with respondent in both his contentions. The phrase "separation from the service" contained in section 402(a)(2) and the comparable section of the Internal Revenue Code of 1939 has been interpreted to mean that the employee dies, retires, or "severs his connection" with his employer. Estate of Frank B. Fry, 19 T.C. 461 (1952), affd. 205 F. 2d 517 (C.A. 3, 1963); Edward Joseph Glinkse, Jr., 17 T.C. 562 (1951); and United States v. Johnson, 331 F. 2d 943*212 (C.A. 5, 1964). In the instant case petitioner did not "sever his connection" with his employer when he went out on strike. In fact during the strike period the union continued to actively negotiate with his employer on his behalf. Even if petitioner's remaining away from working for the company during the strike period could be considered as a severance of his connection with his employer, that connection was reestablished on the first working day after August 4, 1966, when petitioner returned to work. The trust was not amended to provide for distribution to petitioner until August 23, 1966, and the amendment was not effective until August 31, 1966. On both of these dates petitioner was an employee of the company. However, even if we were to consider that petitioner was because of the strike "separated from the service" of the company, the evidence is clear that the payment to him was not on account of that separation but was on account of the agreement between the company and the union providing for employees covered by the collective-bargaining agreement to be terminated from the trust as of August 31, 1966. Therefore, the distribution to petitioner was "on account of" the*213 agreement between the company and the union and not any "separation" of petitioner from the service of the company during the strike period. Whiteman Stewart, 53 T.C. 344 (1969). See also Estate of George E. Russell, 47 T.C. 8 (1966), and E. N. Funkhouser, 44 T.C. 178, 184-185 (1965), affd. 375 F. 2d 1 (C.A. 4, 1967). Decision will be entered for the respondent. Footnotes 1. All references are to the Internal Revenue Code of 1954.↩ 2. SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST. (a) Taxability of Beneficiary of Exempt Trust. -- (1) General rule. -- Except as provided in paragraph (2) and (4), the amount actually distributed or made available to any distributee by an employees' trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to him, in the year in which so distributed or made available, under section 72 (relating to annuities). The amount actually distributed or made available to any distributee shall not include net unrealized appreciation in securities of the employer corporation attributable to the amount contributed by the employee. Such net unrealized appreciation and the resulting adjustments to basis of such securities shall be determined in accordance with regulations prescribed by the Secretary or his delegate. (2) Capital gains treatment for certain distributions. -- In the case of an employees' trust described in section 401(a), which is exempt from tax under section 501(a), if the total distributions payable with respect to any employee are paid to the distributee within 1 taxable year of the distributee on account of the employee's death or other separation from the service, or on account of the death of the employee after his separation from the service, the amount of such distribution, to the extent exceeding the amounts contributed by the employee (determined by applying section 72(f)), which employee contributions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. Where such total distributions include securities of the employer corporation, there shall be excluded from such excess the net unrealized appreciation attributable to that part of the total distributions which consists of the securities of the employer corporation so distributed. The amount of such net unrealized appreciation and the resulting adjustments to basis of the securities of the employer corporation so distributed shall be determined in accordance with regulations prescribed by the Secretary or his delegate. This paragraph shall not apply to distributions paid to any distributee to the extent such distributions are attributable to contributions made on behalf of the employee while he was an employee within the meaning of section 401(c)(1)↩.