Taxation- Federal Income Tax – Deductible Contributions to Nonqualified Profit-Sharing Plans

In 1942 plaintiff employer adopted a profit-sharing plan under which a percentage of each year’s profits was to be deposited in irrevocable trusts for distribution to its employees in succeeding years. The plan was not “qualified” under the Internal Revenue Code. Although under the terms of the trusts each employee’s rights in the fund vested at the time the contribution was made by the employer, these rights would be forfeited by voluntary resignation prior to a fixed date. In 1945 plaintiff deducted the amount contributed to the trust in that year as a contribution to a non-qualified profit-sharing plan under subsection (D) of section 23 (p) (1), but the Commissioner of Internal Revenue disallowed any deduction in that or any other year for amounts contributed to or paid from any of the funds, alleging that at the time the contribution was made to the trust the rights of the employees were forfeitable. In an action to recover overpayment of income and excess profits taxes, held, Commissioner’s determination overruled, and recovery allowed, one judge dissenting. Under subsection (D) of section 23 (p) (1), plaintiff is allowed to deduct in 1945 not the amount contributed to the trust in that year, but rather the amount actually paid from the trust to the employee-beneficiaries in that year, because nonforfeitability in that subsection refers to the time of payment from the trust, and not to the time of payment to the trust. Russell Manufacturing Co. v. United States, (Ct. Cl. 1959) 175 F. Supp. 159.