with the approval of the "Committee," may invest and reinvest the funds in any securities or real estate other than in shares of stock or obligations of petitioner or any subsidiary of the petitioner. This "Committee" was composed of three persons, named and so designated, of which the president of petitioner was a member ex officio. The other two members, officers of petitioner, were specifically named and designated. In the event of their inability to serve, successors were to be selected by petitioner's directors.

The trust is to continue for a period of ten years, unless distribution of all the share interests pursuant to its terms has been fully completed prior thereto. Other material provisions are as follows:

10. It is hereby provided that, except as specifically limited or restricted by Paragraphs 11 and 12 hereof, the time or times of segregation of assets hereunder and the disposition of such assets shall be in the sole discretion of the Committee.

11. If at any time the Committee shall have filed with the Trustee a written instrument setting forth the name of any Beneficiary and

(a) (if such Beneficiary be living at such time) instructing the Trustee to set aside all of such Beneficiary's share and dispose of such share, upon certain terms and conditions set forth in such instrument, to or for the benefit of such Beneficiary, with provisions whereby in case of his or her decease before such disposition shall have been completed the balance shall be disposed of, upon certain terms and conditions set forth in such instrument, to or for the benefit of some one or more or all of the following persons named in such instrument, to wit, the spouse of such Beneficiary, the children of such Beneficiary, and the executor or administrator of such Beneficiary, or (b) (if such Beneficiary be not living at such time) instructing the Trustee to set aside all of such Beneficiary's share and dispose of such share, upon certain terms and conditions set forth in such instrument, to or for the benefit of some one or more or all of the following persons named in such instrument, to wit, the spouse of such Beneficiary, the children of such Beneficiary, and the executor or administrator of such Beneficiary, then, in either such case, the Trustee shall thereupon set aside such share and shall thereupon or thereafter dispose of the same in accordance with such instructions. * ** The Committee shall have full power and authority to instruct the Trustee respecting the disposition of such share to or for the benefit of the person or persons so named in such instrument, including, but without limiting the generality hereof, power and authority to instruct the Trustee to invest and reinvest in any manner referred to in such instrument such share or any part thereof to be retained by the Trustee, and power and authority to restrict or prohibit or to require the Trustee to restrict or prohibit any person or persons from alienating, commuting, anticipating or encumbering or suffering the alienation, commutation, anticipation or encumbrance of any right, title or interest in or to (a) any income or principal of any part of such share or part thereof to be retained and disposed of by the Trustee, and/or (b) any income or principal of any proceeds or avails of any annuity contract which it may purchase pur. suant to such instructions.

12. In case the disposition of the Trust Estate shall not have been completely provided for under the provisions of the next preceding paragraph before the

thirty-first day of December, 1951, then on said date the Committee shall file with the Trustee written instruments setting forth the names of the Beneficiaries whose shares shall not have been segregated as provided for under the provisions of such paragraph and instructing the Trustee to segregate and dispose of such shares, such instructions to be limited in the same manner in all respects as provided in such paragraph as to the instructions provided to be filed under such paragraph.

*

14. The Trustee shall have power and authority with the written approval of the Committee, to make any division or distribution of the Trust Estate required under the provisions of this instrument, in cash or in kind, or partly in cash and partly in kind, according to the discretion of the Trustee and the Committee, any division or distribution in kind to be at such valuations as the Trustee may establish therefor with the written approval of the Committee. Any determination made as herein provided shall be final and conclusive upon all persons whomsoever.

16. The Committee shall be obligated to carry out the Plan as set forth in said resolutions of the 18th day of December -, 1941, but in no case shall the Trustee have any duty to inquire whether or not the Committee shall have complied with the Plan.

The beneficiaries were not informed by petitioner of the respective share or interest in the fund.

The purpose in the creation of the trust was to establish a fund from which petitioner, through the committee, could provide separation allowances to employees whom it anticipated it would be forced to drop from its employ after the termination of the emergency and the reduction in the volume of its production which would necessarily follow, and allowances to or for the benefit of families or estates of employees who died in service. As to the shares of the trust fund standing in the names of individuals who were retained in its employ and were living upon the termination of the trust, it was intended that payment, by direction of the committee, would be made to the Sun Life Assurance Co. to increase the amounts of the annuities of the several individuals under the existing annuity contract.

The cash bonus paid in the taxable year 1941 was authorized by the board of directors in a resolution adopted November 29, 1941, reading as follows:

RESOLVED, That this Company in addition to the regular rate of pay and all overtime earned by its employees to week ending November 30, 1941, pay as year end bonus, or added compensation, the sum of not to exceed $2,250,000.00, to be distributed by the President of the Company as he may determine. A resolution identical except as to amount was adopted on December 9, 1940. The amount authorized to be distributed in 1940 was $1,100,000.

The amounts paid as cash bonuses in 1940 and 1941 were allowed as deductions by the respondent.

No employee reported as income the respective amounts allocated to him or her out of the funds used to purchase annuity contracts in the taxable years 1940 and 1941. No employee reported as income in the year 1941 the amount of the share or interest allocated to him or her in the $1,000,000 fund paid into a trust established by petitioner in that year.

The amount of $400,008.84 appropriated by petitioner in the taxable year 1940 and the amount of $575,206.43 appropriated in 1941 and used for the purchase of funded annuity contracts for certain employees at retirement age were neither compensation paid for services actually rendered, ordinary and necessary expenses of petitioner within the purview of section 23 (a) of the Internal Revenue Code, nor a cost of goods sold to be reflected in the computation of gross income.

The amount of $1,000,000 appropriated by petitioner in 1941 and used to establish a profit-sharing trust was neither compensation paid for services actually rendered, an ordinary and necessary expense of petitioner within the purview of section 23 (a) of the code, nor a cost of goods sold to be reflected in the computation of gross income.

OPINION.

LEECH, Judge: The sole contested issue for the taxable year 1940 arises from respondent's disallowance, as a deduction from gross income, of the sum of $400,008.84 paid by petitioner in that year to the Sun Life Assurance Co. of Canada to purchase funded annuity contracts for certain of its officers and employees. The issues for 1941 arise from respondent's disallowance as a deduction (1) of the sum of $575,206.43 paid to purchase similar annuity contracts and (2) of the amount of $1,000,000 paid by petitioner to a so-called "employees' profit-sharing trust."

In the deficiency notices for the respective taxable years the respondent explained the disallowance of each of the above deductions as "not an allowable deduction within the provisions of Section 23 of the Internal Revenue Code." In the notice for the year 1941, the respondent set forth as additional grounds for the disallowance of the amounts of $575,206.43 and $1,000,000 that, to the extent set out in a schedule attached to the deficiency notice, the amounts were "considered unreasonable compensation and not allowable under the provisions of section 23 (a) of the Internal Revenue code." He attacks

1 SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions:

(a) EXPENSES.

(1) TRADE OR BUSINESS EXPENSES.

(A) IN GENERAL.-All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered:

there the reasonableness of the compensation paid to 438 out of a total of over 900 employees. In both taxable years the respondent has allowed as reasonable the total amount actually paid petitioner's employees, consisting of the base pay plus the cash bonus.

Respondent contends that the expenditures in the purchase of annuity contracts and the payment to the trust under the so-called profit-sharing plan did not constitute salaries or compensation paid for services actually rendered. As to the expenditures for annuity contracts, the grounds urged in support of such determination, briefly summarized, are: (1) The employees were not parties to the contract; (2) they had no vested rights to receive anything thereunder unless they survived the contingencies of forfeiture by death or severance from petitioner's employ and reached the retirement age of 60 years; (3) there was no contractual or legal obligation upon petitioner to make the payments in the respective years or to inake further payments; (4) the employees had already been adequately and fully compensated for the services rendered through the base pay and cash bonuses; (5) the employees were not informed of the respective interests allocated to them; and (6) no employee returned as income the amounts allocated in the respective taxable years. Substantially similar grounds are urged for disallowing the deduction of the expenditure of $1,000,000 to the "profit-sharing trust" in 1941.

Petitioner argues that such amounts are properly deductible either (a) as compensation paid for personal services actually rendered, or (b) if not such compensation, they are allowable as an "expense" of doing business, or (c) if they do not constitute a deduction from gross income, then they are merely a cost of goods sold, to be reflected in the computation of gross income, and that as to this respondent has no jurisdiction. We limit our discussion and decision to those contentions.

Petitioner's primary contention is that the questioned disbursements are allowable as deductions from gross income under the statute as compensation paid for services actually rendered. Such deductions, of course, are permissible only by legislative grace and, to sustain its position, petitioner must establish that the payments fall clearly within one of the statutory provisions authorizing their allowance. New Colonial Ice Co. v. Helvering, 292 U. S. 435. There are only two sections of the revenue laws granting deductions for payments of compensation made to an officer or employee in the years here involved. These are sections 23 (a) (1) (A) of the code, heretofore

set out, and section 23 (p) of the code,2 limited by section 165,3 as these sections read prior to amendment by the Revenue Act of 1942. It is conceded that sections 23 (p) and 165 do not apply. Petitioner rests its case on this point on section 23 (a). It is contended that the items in dispute constitute "compensation [paid]" within that section.

To be allowable as deductions of compensation, amounts paid to officers and employees for services must be compensation for services actually rendered to the employer. Section 23 (a), supra. If not of that character, no necessity of inquiring as to their reasonableness exists. Undoubtedly, as petitioner apparently concedes, the word "paid" used in the first clause of section 23 (a), supra, in connection with "expenses" in which "salaries or other compensation" are later included, must be treated as applying also to "salaries or other compensation." Considering the section as thus construed, were these disbursements in dispute "compensation [paid]"?

SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions :

(1) GENERAL RULE.-An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under subsection (a) of this section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowable as a deduction, and (2) is apportioned in equal parts over a period of ten consecutive years beginning with the year in which the transfer or payment is made..

(3) EXEMPTION OF TRUSTS UNDER SECTION 165.-The provisions of paragraphs (1) and (2) of this subsection shall be subject to the qualification that the deduction under either paragraph shall be allowable only with respect to a taxable year (whether the year of the transfer or payment or a subsequent year) of the employer ending within or with a taxable year of the trust with respect to which the trust is exempt from tax under section 165.

SEC. 165. EMPLOYEES' TRUSTS.

(a) EXEMPTION FROM TAX.-A trust forming part of a stock bonus, pension, or profitsharing plan of an employer for the exclusive benefit of some or all of his employees

(1) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and

(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees 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, shall not be taxable under section 161, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of interest specified in section 25 (a).

(b) TAXABLE YEAR BEGINNING PRIOR TO JANUARY 1, 1940.-The provisions of clause (2) of subsection (a) shall not apply to a taxable year beginning prior to January 1, 1940.