(q) Pension trusts.—An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees (if such trust is exempt from tax under section 165, relating to trusts created for the exclusive benefit of 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. Any deduction allowable under section 23 (q) of the Revenue Act of 1928 which under such section was apportioned to any taxable year subsequent to the taxable year 1931 shall be allowed as a deduction in the years to which so apportioned to the extent allowable under such section if it had remained in force with respect to such year.

ART. 271. Payments to employees' pension trusts.-An employer who adopts or has adopted a reasonable pension plan, actuarially sound, and who establishes, or has established, and maintains a pension trust for the payment of reasonable pensions to some or all of his employees (if the trust is exempt from tax under section 165, relating to trusts created for the exclusive benefit of employees) shall be allowed to deduct from gross income reasonable amounts paid to such trust, in accordance with the pension plan (or any reasonable amendment thereof), as follows:

(a) If the plan contemplates the payment to the trust, in advance of the time pensions are granted, of amounts to provide for future pension payments, then (1) amounts paid to the trust during the taxable year representing the pension liability applicable to such year, determined in accordance with the plan, shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years;

(b) If the plan does not contemplate the payment to the trust, in advance of the time pensions are granted, of amounts to provide for future pension payments, then (1) amounts paid to the trust during the taxable year representing the present value of the expected future payments in respect of pensions granted to employees retired during the taxable year shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in

Art. 271

§ 23 (q)

addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the present value of the expected future payments in respect of pensions granted to employees retired prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years.

Reasonable payments made by an employer during the taxable year directly to pensioners on account of pensions in respect of which no payment has been made to a pension trust shall be allowed as a deduction from gross income for such year as an ordinary and necessary business expense.

In no case will any amount be allowed as a deduction under this article which was allowable as a deduction from gross income for any prior year. Where a deduction from gross income is claimed on account of payments to an employees' pension trust, a copy of the pension plan (with amendments, if any) and of the actuarial computation upon which the deduction is based, together with a detailed statement of the receipts and disbursements of the trust, should be filed with the return.

The right to a deduction under section 23 (q) will be recognized in cases where the pension trust may not be perpetual, provided the trust is of such a character as to evidence good faith on the part of the employer actually to pay the amounts trusteed for employees' pension purposes. However, should any portion of the funds of a pension trust revert to the possession, ownership, or control of the employer by reason of the termination of the trust or otherwise, such amount (except to the extent that it represents a payment to the pension trust made by the employer in accordance with the pension plan and pursuant to paragraph (a) or (b) of this article, and not theretofore allowed as a deduction to the employer) shall be returned as income by the employer for the taxable year in which it so reverts, unless prior to the close of such year it shall be retrusteed for the benefit of employees under provisions satisfactory to the Commissioner.

A pension trust maintained by affiliated corporations for the exclusive benefit of their employees is within the scope of sections 23 (q) and 165.

Example-Accruals in advance of pensions granted: In 1932 the M Company adopted a reasonable pension plan and established a pension trust which was exempt from tax under section 165. During the year and upon the basis of an actuarial computation the com

pany paid $8,950,000 to the trust. At the time of the payment and in accordance with the pension plan of the company, the pension liability applicable to the years prior to 1932, in respect of employees then on the retired roll, for pensions to be paid in the future, was $2,000,000; the pension liability applicable to the years prior to 1932, in respect of employees on the active roll, for pensions to be paid in the future, was $6,500,000; the payment required to cover the pension liability applicable to the taxable year 1932 for pensions to be paid in the future, was $450,000. The amount paid to retired employees of the M Company by the pension trust as pensions during 1932 was $360,000.

The deduction for 1932 is computed as follows:

(a) Entire amount paid to pension trust representing the pension liability applicable to 1932 for pensions to be paid in the future____

(b) One-tenth of $8,500,000, amount transferred to pension trust to cover the pension liability applicable to the years prior to 1932, in respect of employees on either the retired roll or the active roll, for pensions to be paid in the future___

Total deduction_.

$450,000

850,000 1,300,000

The amount of $360,000 paid to pensioners is not allowable as a deduction for income tax purposes since it was paid by the pension trust and not by the M Company.

Example--Accruals on basis of pensions granted: In 1932 the N Company adopted a reasonable pension plan and established a pension trust which was exempt from tax under section 165. During the year and upon the basis of an actuarial computation the company paid $2,300,000 to the trust. At the time of the payment the present value of the expected future payments in respect of pensions granted to employees retired prior to 1932 was $2,000,000; the present value of the expected future payments in respect of pensions granted to employees retired during 1932 was $300,000. The amount paid to retired employees of the N Company by the pension trust as pensions during 1932 was $360,000.

The deduction for 1932 is computed as follows:

(a) Entire amount paid to the pension trust representing the present value of the expected future payments in respect of pensions granted to employees retired during 1932_-_.

(b) One-tenth of $2,000,000, the amount transferred to the pension trust to cover the present value of the expected future payments in respect of pensions granted to employees retired prior to 1932___

Total deduction____

$300,000

200, 000

500,000

The amount of $360,000 paid to pensioners is not allowable as a deduction for income tax purposes, since it was paid by the pension trust and not by the N Company.

[SEC. 23. DEDUCTIONS FROM GROSS INCOME.]

[In computing net income there shall be allowed as deductions:]
(r) Limitation on stock losses.-

(1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations).

(2) Losses disallowed as a deduction by paragraph (1), computed without regard to any losses sustained during the preceding taxable year, shall, to an amount not in excess of the taxpayer's net income for the taxable year, be considered for the purposes of this title as losses sustained in the succeeding taxable year from sales or exchanges of stocks or bonds which are not capital assets.

(3) This subsection shall not apply to a dealer in securities (as to stocks and bonds acquired for resale to customers) in respect of transactions in the ordinary course of his business, nor to a bank or trust company incorporated under the laws of the United States or of any State or Territory, nor to persons carrying on the banking business (where the receipt of deposits constitutes a major part of such business) in respect of transactions in the ordinary course of such banking business.

(s) Same-Short sales.-For the purposes of this title, gains or losses (A) from short sales of stocks and bonds, or (B) attributable to privileges or options to buy or sell such stocks and bonds, or (C) from sales or exchanges of such privileges or options, shall be considered as gains or losses from sales or exchanges of stocks or bonds which are not capital assets.

(t) Definition of stocks and bonds.-As used in subsections (r) and (s), the term "stocks and bonds" means (1) shares of stock in any corporation, or (2) rights to subscribe for or to receive such shares, or (3) bonds, debentures, notes, or certificates or other evidences of indebtedness, issued by any corporation (other than a government or political subdivision thereof), with interest coupons or in registered form, or (4) certificates of profit, or of interest in property or accumulations, in any investment trust or similar organization holding or dealing in any of the instruments mentioned or described in this subsection, regardless of whether or not such investment trust or similar organization constitutes a corporation within the meaning of this Act. ART. 272. Limitations on deductions for losses from sales and exchanges of stocks and bonds.—Section 23 (r) provides that losses from sales or exchanges of stocks and bonds, as defined in section 23 (t), which are not capital assets as defined in section 101 (see article 501) are deductible only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from

the retirement of his own obligations). Under section 23 (r), if the losses from sales or exchanges of stocks and bonds which are not capital assets exceed the gains from such transactions, such excess may be carried forward and applied against the gains from similar transactions in the succeeding taxable year, provided, first, that there is subtracted from such excess the amount of any losses brought forward from the preceding taxable year, and, second, that the remainder may not be carried forward in an amount exceeding the net income (as defined in section 21) of the taxpayer for the taxable year. Section 23 (r) does not apply to a dealer in securities (as to stocks and bonds acquired for resale to customers) in respect of transactions in the ordinary course of his business, nor to a bank or trust company incorporated under the laws of the United States or of any State or Territory, nor to persons carrying on the banking business (where the receipt of deposits constitutes a major part of such business) in respect of transactions in the ordinary course of such banking business. The term "dealer in securities" as used in this article means a dealer in securities as defined in article 105 (relating to inventories by dealers in securities).

Example (1): For the taxable year 1932 the net income of A (who was not a person described in section 23 (r) (8)) from salaries, dividends, and rents was $50,000. He had losses and gains from sales of stocks and bonds as follows:

Losses from sales of stocks and bonds which were not capital assets (computed without regard to any losses sustained during the preceding taxable year) ___

$200,000

Gains from sales of stocks and bonds which were not capital assets___ 100,000

Excess of losses over gains---100, 000 The amount allowable as a deduction for the taxable year 1932 for the losses from the sale of stocks and bonds is limited to $100,000. The excess of the losses over the gains ($100,000) is not deductible, but the amount of such excess not exceeding the net income of A for the taxable year 1932 ($50,000) may be carried forward and applied against the gains from similar transactions for the taxable year 1933.

Example (2): For the taxable year 1933 the net income of A (who was not a person described in section 23 (r) (3)) from salaries, dividends, and rents was $100,000. He had losses and gains from sales of stocks and bonds as follows:

Losses from sales of stocks and bonds which were not capital assets (computed without regard to any losses sustained during the preceding taxable year).

$175,000