Armantrout v. Commissioner

67 T.C. 996 (1977), aff’d per curiam, 570 F.2d 210 (7th Cir. 1978)

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Nature of the Case

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Facts

Hamlin was engaged in the business of distributing, manufacturing and selling electronic components. Armantrout (D) was its VP in charge of marketing during the 1971-73 tax years. Educo, Inc. was engaged in the selling of college education benefit plans for corporate employers. Eventually, a party named Owens noticed Educo’s ads in the Wall Street Journal and suggested that such a plan be implemented by Hamlin. On September 2, 1969, Hamlin entered into a deal with the to be named Educo, Inc. Educo was to administer an education plan and provide funds for college expenses for the children of certain key Hamlin employees. Hamlin agreed to make contributions to a trust account as part of the terms of the agreement. The children of the employees were entitled to receive sums from the trustee to defray college expenses, and upon receipt of the information from Hamlin, Educo would direct the trustee to pay the expenses. The Hamlin plan allowed up to a max of $10,000 per employee but only up to $4,000 for each individual child. The goal was to make monies available for at least two children of each key employee to attend college and to provide a company benefit to employees. Selection of who could participate in the plan was based on employee value to the company. The employees’ children who participated in the plan had no right to claim any part of the benefits nor did the employees. The Commissioner determined that the amounts distributed by the trust were scholarships which formed part of employee compensation and were in direct relation to each employee’s pattern of employment and were, therefore, compensation for services performed and thus includable in gross income.