.

The above One Hundred and Fifty Thousand ($150,000.00) Dollars is also to be paid to Party of the Second Part immediately upon signing of this instrument and the receipt is hereby acknowledged.

Signed this 10th day of November 1941.

Approved:

PIONEER CONTRACTING CO.

by [Signed] A. G. HALL FORCUM-JAMES CONSTR. Co.

by [Signed] C. B. FORD

FORCUM-JAMES CO.

Agent By [Signed] W. E. MOORE, Vice Pres.

CLARK KEARNEY STARK

By [Signed] L. B. CLARK

The books of account of petitioner show payment of $150,000 to Clark, Kearney & Stark on November 1, 1941.

Later in November 1941 Pioneer Contracting Co. and Forcum-James Construction Co. also desired to withdraw from the Charlestown Ordnance job and to be relieved from further responsibility in the performance thereof. It was agreed orally that petitioner take over the completion of the job, that Pioneer Contracting Co. and ForcumJames Construction Co. be relieved of further responsibility in respect thereto, and that each receive in full settlement payment of $300,000, which was in addition to the payments of $200,000 made to each on May 2 and June 24, 1941. The records of petitioner show payment of $300,000 to Pioneer Contracting Co. on November 26, 1941, and a payment of $300,000 to Forcum-James Construction Co. on November 29, 1941. In determining the payments in settlement to Clark, Kearney & Stark, Pioneer Contracting Co., and Forcum-James Construction Co., an allowance of $140,000 was made to petitioner for services rendered by it on the Charlestown Ordnance job.

The total billings, cost, and profit on the Charlestown Ordnance contract reported by petitioner on its Federal income tax return for the year ended November 30, 1942, were $5,144,685.05, $4,729,479.87, and $415,205.18, respectively, which billings included those for SLC-331, SLC-2540, another purchase order, SLC-48, and alteration orders. Cost of $4,729,479.87 included $140,000 charged for 1940–1941 service of petitioner and included as income in its income tax return for the period ended November 30, 1941, and payments in 1941 to Clark, Kearney & Stark of $350,000, to Pioneer Contracting Co. of $500,000, and to Forcum-James Construction Co. of $500,000.

For the taxable period January 1 to November 30, 1941, petitioner reported a net income of $53,037.06. In determining petitioner's taxable income the Commissioner added to reported net income the amount of $813,195.98, giving the following explanation therefor:

During the year, you engaged in a contract to do certain work in connection with the construction of an ordnance plant in Charlestown, Indiana. Joint participants with you in executing the contract were:

(1) Your active officers and controlling stockholders doing business as partners under the name of Forcum-James Construction Company;

(2) Pioneer Contracting Company, a partnership, fifty percent of the beneficial interest of which was owned by (1); and

(3) Clark, Kearney & Stark. Although the contract was not completed at the end of the taxable year, participants (1), (2) and (3) withdrew from participation on or about the close of the year. They were relieved of any further responsibility in connection with the contract and payments were made to them in complete and final settlement of all claims whatsoever which they had in connection therewith. Following withdrawal of the joint participants, completion of the contract was undertaken by you alone. Included in the payments made to the joint participants was $500,000.00 to (1). After all payments had been made to joint participants, there remained $313,195.98 of profit on the contract which was not included in income reported on your return. Neither was the amount of $500,000.00 distributed to (1) included in income reported on your return.

Under the authority of Section 45 of the Internal Revenue Code, gross income in the amount of $500,000.00 is allocated to and included in your taxable income. This allocation is necessary in order to clearly reflect your income and that of the partnership, Forcum-James Construction Company, owned and controlled by your active officers who also own, manage and control your business through ownership of your stock.

There is also included in your taxable income the amount of $313,195.98, profit on the contract, recorded on your books as deferred and not reported in your return. The withdrawal of your joint participants in the contract constituted a completed transaction giving rise to a taxable gain to the extent that it was realized to the date of withdrawal.

In determining the excess profits credit based on invested capital the Commissioner reduced invested capital as reported by petitioner on its excess profits tax return by $6,681.37, with the following explanation:

During this short taxable year there was distributed to your stockholders doing business as partners under the name of Forcum-James Construction Company the amount of $500,000.00, the last such distributions of $300,000.00 being made on November 29, 1941. It has been held herein that the amount distributed represented a dividend in that the partners of the distributee are your controlling stockholders. It has been further determined that of the total amount distributed, earnings and profits available for distribution totaled $276,842.14 and that the balance, $223,157.86 was a distribution not out of earnings of the taxable year. Invested capital is accordingly reduced by the daily average of the amount distributed not out of earnings and profits of the taxable year as follows:

1/334 X $223,157.86_.

$6, 681. 37

On November 15, 1941, a written agreement, or plan, effective as of November 1, 1941, was entered into by petitioner, Forcum-James Construction Co., Pioneer Contracting Co., L. O. Brayton & Co., and W. R. Aldrich & Co. for the establishment of a pension trust, styled "Forcum-James Associates Pension Trust," for the "exclusive benefit of

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some or all of the employees of each member of the group The plan provided that beginning with November 1941, and on or before December 30 of each year thereafter, each member of the group was to notify the trustees of the "reasonable and fair Pension deposit voted to the employees," payment thereof to be made to the trustees within two months; that in determining the amount of the deposit each group member had the exclusive right to determine the amount, if any, for each of its employees, taking into consideration "such factors * *"; as responsibility of position, salary, age, period of service that any payment into the fund was in no event to be less, in any one year, than $50 for any employee who participated; that the participating employees were not required to match any funds deposited with the trustees by any of the group members; that all present employees who had been in the employ of any of the group members for at least 1 month out of each of the preceding 5 years prior to June 30, 1941, and who were still employed as of November 1, 1941, were eligible for participation in the plan; that participants were eligible for retirement pension payments on the first day of the month following either the age of 60 if employed for a period of not less than 15 years, or the age of 65 if employed for a period of less than 15 years; that upon retirement a participant would be entitled to 1 per cent per month of his individual account until exhausted and in the event of his death his designated beneficiary should receive the balance of payments when due; that in the event of death before retirement age the account balance was distributable to any beneficiary previously indicated by the employee; that the trustees were to invest the funds in the manner set out in the declaration of trust and the earnings therefrom were to belong to the individual employee participants and credited to their separate accounts annually within a reasonable time after the close of the fiscal year of the fund; that in the event of loss of his job through his own acts which resulted in the donors suffering any damage, the participant was to forfeit all fund earnings credited to his account, but those earnings were to be added to the earnings for the year in which the loss of job took place and redistributed to the remaining participants on the same basis as all other earnings for that year, and the balance remaining in such account was to be distributed to him immediately or retained by the trustees until the former employee reached retirement age and then distributed to him.

The plan further provided that it was entirely voluntary on the part of the donors and was not to be construed as creating a contractual relationship or a guaranty between the donors and an eligible employee; that the donors could amend or terminate the plan,

provided, however, that no amendment was to be retroactive, nor was any amendment or termination to affect benefits created for individual participants; that in case of a termination of the plan and a liquidation of the fund, "anything else to the contrary notwithstanding, title to all monies or properties held for the benefit of each participant on the date of termination shall pass to such participant"; that it was to be impossible, at any time prior to the satisfaction of all liability with respect to employees, for any part of the corpus or income to be used for or diverted to purposes other than the exclusive benefit of participating employees. Also, under the plan the trustees were to maintain a separate account for each participating employee showing, among other things, the pension deposits made by the donors for participants' accounts, the aliquot share of the fund earnings, pension payments, balances remaining, and contingent beneficiaries, and were to make settlements with the participants in accordance with the plan. The plan was actuarily sound.

The declaration of trust executed on the same date as the plan named, as trustees, Vern Forcum, W. E. Moore, C. B. Ford, R. M. Ford, Alvin Hall, L. O. Brayton, W. R. Aldrich, and F. B. Liddell, all of whom were officers of petitioner or members of the partnerships, except Liddell, who was comanager with two others of petitioner's Memphis office. It provided that the trustees should have complete management and control of the trust fund, including powers of investment, but they were to have no authority to take action impairing the established benefits of qualified participants. It also provided that the trust "shall continue until all funds trusteed hereunder are paid out and disbursed in accordance with the terms of the Plan * * *" (italics supplied) unless sooner amended or terminated by majority action of the trustees and the donor companies, but such action should not have retroactive effect nor affect current benefits created for individual participants in accordance with the plan. The declaration of trust also contained provisions similar to those in the plan prohibiting the impairment of created rights of participants or the use of corpus or income for purposes other than for the exclusive benefit of participant employees.

The pension plan and trust agreement were printed in booklet form and distributed to all the employees of Forcum-James Associates. The funds of the trust were kept separate from any funds of the donors to the trust fund.

During the taxable period ended November 30, 1941, petitioner contributed $72,900 to the fund for the benefit of its employees who were also receiving annual compensation, and has since continued to make contributions. The contributions and compensation during the period ended November 30, 1941, were as follows:

All the above named were employees of petitioner and were eligible under the plan. Forcum, the two Fords, and Wade E. Moore were directors of petitioner, and all, except R. M. Ford, were officers of petitioner. Forcum, the two Fords, and Moore devoted all their time to petitioner's business. Estes, Liddell, and Sander were comanagers of petitioner's Memphis office. Sander was also general superintendent on the Charlestown Ordnance job. Carter, Cooper, Courter, and Stehle were superintendents. Cooper participated in the profits on work over which he had supervision. The other parties for whom contributions were made were working in various capacities. Donald Forcum, the son of Vern Forcum, was about 21 years of age. He was eligible under the plan, having worked for petitioner during the five years prior to June 30, 1941.

In determining the amount to be contributed to each employee, the employees eligible under the plan were first grouped into classes, such as day laborers, foremen, machine operators, timekeepers, superintendents, executives, and so on. The officials, in determining the amount to be contributed to each employee, took into consideration the value of his services rendered, the responsibility of his position, and the rate or scale of his regular compensation. Due to bad weather in some locations, some of the employees were unable to earn as much as others doing similar work in areas where work was not interrupted by bad weather. Under some contracts and in certain areas the wage scale was higher than in others. To equalize compensation between employees doing similar work of approximately the same value to peti

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