                          T.C. Memo. 1996-450



                       UNITED STATES TAX COURT



           THEODORE SOURIS, P.C., A DISSOLVED CORPORATION,
            AND THEODORE SOURIS, AS SUCCESSOR IN INTEREST
               OF THEODORE SOURIS, P.C., Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 639-95.               Filed October 2, 1996.



     Patricia D. White, for petitioners.

     Meso T. Hammoud, for respondent.



                          MEMORANDUM OPINION


     RAUM, Judge:    The Commissioner determined a $48,905

deficiency in petitioner corporation's 1988 income tax together

with a $9,781 section 6661(a)1 addition to tax for that year.

     1
         Unless otherwise indicated, all section references are to
                                                     (continued...)
                               - 2 -


The principal issue presented is whether the petitioner

corporation's $171,476 "employer reversion", section

4980(c)(2)(A), which is concededly includable in its gross

income, may be offset by a section 162(a)(1) deduction in the

same amount for compensation paid to its sole stockholder-

employee.   The facts have been stipulated.

     In 1981, Theodore Souris, an attorney, was a partner in the

Detroit, Michigan, law firm of Bodman, Longley & Dahling.    On

April 16, 1981, petitioner Theodore Souris, P.C., was

incorporated under the laws of Michigan.    It was wholly owned by

Mr. Souris.   Also on that day, Mr. Souris assigned his

partnership interest to petitioner corporation (the corporation

or the P.C.), and the law firm consented to its admission as a

partner in substitution for Mr. Souris.    An appendix to the

partnership agreement sets forth special provisions regarding

professional corporations as partners.    Among other things, the

appendix provides that no one other than the individual attorney

"shall at any time be a stockholder, director, officer or lawyer

employee of the professional corporation", that "the professional

corporation shall be entitled, without deduction, to all the

receipts of the individual attorney," and that "the individual

attorney shall guarantee to the Firm that the professional


     1
      (...continued)
the Internal Revenue Code in effect for the year at issue.
                               - 3 -


corporation will perform all its obligations as a partner in the

Firm."   In the foregoing assignment by Mr. Souris of his

partnership interest to his P.C., Mr. Souris in fact guaranteed

"to the Firm that Theodore Souris, P.C. will perform all its

obligations as a partner in the Firm."

     On August 27, 1981, Mr. Souris entered into an employment

agreement with his P.C.   He was to be paid a salary of a fixed

amount plus a bonus in an amount "determined by the Corporation's

Board" to make his total compensation "equal to the reasonable

value of his services."   The "Corporation's Board", as indicated

above, was none other than Mr. Souris himself.   The agreement

provided further that the P.C. would adopt a pension plan and a

profit sharing plan for the "Employee" as well as make provision

for his health and disability insurance and "such other fringe

benefits as the Board   shall approve."   The agreement was signed

for the P.C. by Mr. Souris as president and by Mr. Souris acting

on his own behalf as the employee.

     On September 1, 1981, the corporation adopted the Theodore

Souris, P.C. Pension Plan and Trust.   The plan was a defined

benefit plan.   As stipulated by the parties, it was "duly

qualified under the applicable provisions of the Internal Revenue

Code."   Mr. Souris was the sole plan participant.
                                 - 4 -


     Until August 31, 1987, the P.C. had a fiscal year ending

August 31.   However, beginning with the short year ending

December 31, 1987, it changed to a calendar year basis.

     The plan was terminated on March 31, 1988, and liquidated as

of December 31, 1988.   The P.C. itself was dissolved on October

26, 1988.    Upon the plan's liquidation, its assets in the amount

of $1,339,511 were distributed.    Of this distribution, $1,168,035

was rolled over to an Individual Retirement Account established

for the benefit of Mr. Souris.    The remaining $171,476 was

ineligible to be rolled over, and appears to be attributable to

overfunding the plan over the years due to what turned out to be

erroneous actuarial assumptions.    Thus, as stipulated by the

parties, that $171,476 "represented excess Plan assets which

reverted back to the Corporation."       The reversion was not

reported by the corporation in its 1988 return.       However, in the

1988 joint individual income tax return filed by Mr. Souris and

his wife, the reversion was reported as "other" or

"miscellaneous" income, which was explained in that return as

"Theodore Souris P.C. Pension Plan Reversion".

     In the notice of deficiency the Commissioner determined that

"Theodore Souris, P.C. received $171,476 as a taxable reversion

from the Theodore Souris, P.C. Pension Plan and Trust during the

taxable year ended December 31, 1988."       The Commissioner
                               - 5 -


accordingly recomputed the corporation's taxable income by

including the $171,476 reversion in its gross income.

     Both petitioner corporation and respondent now agree that

the $171,476 should have been reported as gross income by the

corporation in its 1988 return.   However, the corporation does

contend that there was no resulting deficiency since its $171,476

taxable reversion income was fully offset by a deduction in the

same amount under section 162(a)(1) by reason of its contractual

obligation to Mr. Souris to pay him that $171,476 as compensation

for services rendered.

     We begin our analysis of this case with a sense of

unreality.   There are before us Theodore Souris, P.C., and Mr.

Souris, the individual.   Mr. Souris was the sole stockholder; he

was the sole officer-employee of the corporation; he was the sole

member of its Board of Directors; and he was the sole participant

in the P.C.'s pension plan.   The record contains no evidence that

anyone other than Mr. Souris held any office in, or played any

part whatsoever in, the affairs of the corporation or the plan or

served as trustee if in fact there was a trust.   In this

connection, this case is sharply distinguishable from Greenlee v.

Commissioner, T.C. Memo. 1996-378, where the trustee was an

independent bank and where the transaction in question was

"independently approved" by the Trust Investment Committee of the

bank--a circumstance that the Court emphasized and considered
                               - 6 -


crucial.   To speak of an agreement between Mr. Souris and his

P.C. authorized by its Board is to engage in discourse in a

never-never land.   In the real world there was only Mr. Souris

dealing with himself.2   Yet it has been well recognized that we

must accept such arrangements as real,3 and indeed the IRS has

treated the corporation as an independent entity that was engaged

in the transactions involved as though conducted at arm's length.

Moreover, although not specifically so articulated in the record,

it seems highly likely that the incorporation of the P.C. here

was intended to reduce Mr. Souris' taxes through the pension


     2
        The predicament with which the Lord Chancellor was faced
in Gilbert and Sullivan's Iolanthe, although in an entirely
different context, suggests a strikingly similar situation. The
Lord Chancellor explained his predicament as follows:

     The feelings of a Lord Chancellor who is in love with a
     Ward of Court are not to be envied. What is his
     position? Can he give his own consent to his own
     marriage with his own Ward? Can he marry his own Ward
without his own consent, can he commit himself for contempt of
his own court? And if he commit himself for contempt of his own
court, can he appear by counsel before himself, to move for
arrest of his own judgment? Ah, my Lords, it is indeed painful
to have to sit upon a woolsack which is stuffed with such thorns
as these! [The Complete Plays of Gilbert and Sullivan, p. 248.]
     3
        Moline Properties, Inc. v. Commissioner, 319 U.S. 436
(1943); cf. Burnet v. Commonwealth Improvement Co., 287 U.S. 415
(1932). In National Carbide Corp. v. Commissioner, 336 U.S. 422,
433 (1949), the Supreme Court stated:

     Undoubtedly the great majority of corporations owned by
     sole stockholders are "dummies" in the sense that their
     policies and day-to-day activities are determined not
     as decisions of the corporation but by their owners
     acting individually.   * * *
                               - 7 -


plan.   And such purpose would not appear to be fatal in these

circumstances, since this Court has held that where the

corporation was established to provide a pension plan for its

sole stockholder there was a sufficient business purpose to

justify giving full effect to the arrangement.   Keller v.

Commissioner, 77 T.C. 1014, 1029-1030 (1981), affd. 723 F.2d 58

(10th Cir. 1983).

     Accordingly, it is incumbent upon us to decide this case as

though we were dealing with an autonomous corporation and with

its independent employee, Mr. Souris.   In that context we agree

with petitioner corporation and hold that there was no deficiency

in its 1988 income tax.

     Preliminarily, there is no dispute that under Michigan law,

even though petitioner corporation was dissolved, it remained in

existence for the purpose of winding up its affairs and continued

to function in the same manner as if dissolution had not

occurred.   Mich. Comp. Laws Ann. sec. 450.1833 (West 1970); cf.

United States v. Adams Bldg. Co., 531 F.2d 342 (6th Cir. 1976).

However, upon the P.C.'s dissolution, the Board of Directors

(i.e., Mr. Souris) resolved that Mr. Souris would be the

successor plan sponsor of the P.C.'s "Employees' Pension Plan".

Moreover, as indicated by the caption itself in this case, Mr.

Souris individually is the "successor in interest of Theodore

Souris, P.C."   Since the corporation had already been dissolved
                               - 8 -


when the excess pension funds reverted to the corporation, Mr.

Souris received the $171,476 reversion in his capacity as

successor in interest of the corporation.   Under the terms of the

employment agreement between Mr. Souris and the P.C., the

corporation, or Mr. Souris standing in its place as successor,

was required to pass that $171,476 to himself as the employee-

beneficiary.

     To understand the situation more fully, we must delve deeper

into the morass resulting from Mr. Souris' 1981 employment

agreement with his wholly owned corporation, the P.C.   Pursuant

to that agreement the P.C.'s earnings from the law partnership

may be considered as separated in the P.C.'s hands into three

parts payable in the aggregate to or for the benefit of Mr.

Souris:   (1) Compensation in a fixed amount, (2) bonus in the

amount of whatever remains after (3) payments into the pension

plan for Mr. Souris.   But the amount payable into the pension

plan was limited by section 404, and that limit was exceeded here

by reason of excessive employer contributions to the plan due to

what turned out to be faulty actuarial assumptions.   Accordingly,

to the extent that such amounts were excessive, the excess

automatically increased the bonus payable to Mr. Souris as the

employee under his 1981 agreement with his P.C.   But, as noted

above, it was first paid to him as successor in interest of the
                                 - 9 -


corporation, standing in its shoes, as an "employer reversion"--a

term that is defined in section 4980(c)(2) as follows:

     The term "employer reversion" means the amount of cash
     and the fair market value of other property received
     (directly or indirectly) by an employer from the
     qualified plan. [Emphasis added.]

Then, in his capacity as successor in interest of his employer,

Mr. Souris passed that employer reversion to himself as the

employee pursuant to the 1981 employment agreement.     To be sure,

these steps were telescoped into a single payment to Mr. Souris,

who mistakenly reported the reversion in his individual return

rather than amending the corporate returns and then reporting the

same amount as additional compensation on his individual return.

However, Mr. Souris' failure to follow this procedure in separate

steps does not detract from the essence of the situation if we

are to treat the corporation and Mr. Souris as separate taxpaying

entities, as we are required to do.

     We conclude that the $171,476 reversion represents

additional compensation (increased bonus) paid by the

corporation.     Further, the corporation's income from the law

partnership was equal to the value of Mr. Souris' services, and,

as passed through to him by the corporation, it became the basis

for a deduction by the corporation under section 162(a)(1)4 as "a

     4
         Sec. 162.   Trade or business expenses.

           (a)    In general.--There shall be allowed as a
                                                      (continued...)
                               - 10 -


reasonable allowance for * * * compensation for personal services

actually rendered".   There is no dispute between the parties that

the amount was "reasonable".

     The Government challenges the argument that the reversion

was paid to Mr. Souris as compensation.   It contends that the

reversion, being gross income to the corporation, was paid to Mr.

Souris as a constructive dividend, which, although representing

taxable income to Mr. Souris, was not deductible by the

corporation.   And the Government relies upon the well-established

line of cases holding that to be deductible as compensation the

payment must be "made with the intent to compensate".     Paula

Constr. Co. v. Commissioner, 58 T.C. 1056, 1058 (1972), affd.

without published opinion 474 F.2d 1345 (5th Cir. 1973); King's

Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 514

(1992).   The argument is superficially persuasive here since the

payment was not reported by Mr. Souris as compensation; he

instead described the payment merely as a "reversion".    However,

the argument falls apart upon further reflection.   As was

indicated above, Mr. Souris obviously, but mistakenly, reported

     4
      (...continued)
          deduction all the ordinary and necessary
          expenses paid or incurred during the taxable
          year in carrying on any trade or business,
          including--

                (1) a reasonable allowance for salaries
                or other compensation for personal
                services actually rendered;
                                - 11 -


the payment in his own income tax return, rather than in the

return of the corporation, as a "reversion".    The real intent of

the payment to Mr. Souris is found in his agreement with the

corporation, which existed long before the events with which we

are concerned here.    We conclude that the payment from the

corporation to Mr. Souris is deductible by the corporation as

reasonable compensation under section 162(a)(1).



     Finally, a word about "employer reversion", which is defined

in section 4980(c)(2), and which is treated by both parties as

applicable here in connection with whether the employer reversion

is includable in the gross income of the employer for purposes of

the income tax.    However, section 4980 literally relates solely

to an excise tax.     Subsection (a) of section 4980 now imposes "a

tax of 20 percent of the amount of any employer reversion from a

qualified plan."    And in defining the term "employer reversion"

subsection (c) begins with the words "For purposes of this

section".   Yet, as just indicated, both parties in this case

treat the section 4980(c)(2) definition as applicable here for

purposes of the income tax.     Indeed this Court has so indicated.

Lee Engineering Supply Co. v. Commissioner, 101 T.C. 189, 194

(1993); cf. S. Rept. 1567, 75th Cong. 3d Sess. at 24 (1938),

1939-1 C.B. (Part 2) 779, 796.
                                - 12 -


     Section 4980 was introduced into the Code by section 1132(a)

of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085,

2478.    The excise tax there enacted was at the rate of 10

percent, which has since been increased to 15 percent5 and then

finally to 20 percent.6    The reason for imposing that excise tax

has been explained as follows:

        To the extent that amounts in such plans are not used
        for retirement purposes and revert to an employer,
        Congress believed that the tax treatment of reversions
        should recognize that the tax on earnings on pension
        funds is deferred and, thus, the benefits of this tax
        treatment should be recaptured. Although Congress
        believed that it might be possible to determine the
        particular year or years in which contributions
        resulting in a reversion arose and to recoup the
        resulting tax benefit attributable to a reversion on
        that basis, Congress was concerned that such a
        computation would involve undue complexity. Under the
        circumstances, therefore, Congress determined that a
        nondeductible excise tax should be imposed on
        reversions at a uniform rate. [Staff of Joint Comm. on
        Taxation, General Explanation of the Tax Reform Act of
        1986 at 751 (J. Comm. Print 1987)]

        The record in this case does not disclose whether any such

excise was proposed or assessed against petitioner corporation

here.     And it has been indicated that the imposition of the

excise tax on the employer reversion does not preclude the

inclusion of the employer reversion in the employer's gross

     5
        The amendment was adopted in 1988. See Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3704.
     6
        Sec. 4980 was amended in 1990 to 20 percent. See Omnibus
Budget Reconciliation Act of 1990, Pub. L. 101-508, sec. 12001,
104 Stat. 1388-562.
                              - 13 -


income for income tax purposes as well.   Indeed, in H. Rept. 101-

881, 51 (1990) it is stated that "assets that revert to the

employer upon such termination are includible in the gross income

of the employer and are subject to an excise tax (sec. 4980 of

the Code)."   (Emphasis added.)   Certainly, it would seem highly

unlikely that Congress could have intended a mere 10 percent

excise tax to replace the tax on income at a substantially higher

rate, and there is nothing in the legislative history relating to

the increase in the excise rate from 10 to 15 and then to 20

percent to suggest that the intention of Congress changed.

     We express no opinion here as to petitioner corporation's

liability for the excise.   And since we have concluded that there

is no deficiency in income tax, we need not consider whether

there is any liability for the section 6661(a) addition to tax.

                                          Decision will be entered

                                     for petitioner.
