Footnotes

¹ for the plan years beginning after June 30, 1985, and that its related trust (the trust) was not tax exempt under section 501(a) for those years. The issue for decision is whether amounts contributed to the trust and allocated to one of the ESOP's participants exceed the limitations in section 415, thereby causing the trust not to constitute a qualified trust under section 401(a). Background Petitioner is a corporation with its principal place of business located in West Des Moines, Iowa, at the time of the filing of the petition in this case. It filed its Federal tax returns for the years in issue with the Internal Revenue Service Center in Kansas City, Missouri. Petitioner utilizes the accrual method of accounting with a fiscal year ending June 30 as its taxable year. Petitioner was incorporated on July 15, 1983, and its principal business activity is insurance consulting. It is the employer and plan administrator with respect to the ESOP, a defined contribution plan. It established the ESOP and the trust on September 6, 1983, effective for plan years beginning on or

² Mr. Clendenen's returns reflect the following: Wages, Business Year Salaries Income Type of Business 1986 $12,938 0 1987 30,000 0 1988 0 0 1989 0 $75,000 Insurance consulting 1990 0 60,000 Consultant 1991 0 55,000 Consultant For the plan year ending June 30, 1986, and his taxable year ending December 31, 1986, Mr. Clendenen treated $17,029.38 as an elective deferral of compensation into the ESOP. Discussion Section 401(a)(16) provides: A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part

³ ] or (B) 25 percent of the participant's compensation. Section 415(c)(2) provides that "annual addition" means the sum for any year of--(A) employer contributions,

⁴ ] and (C) forfeitures. The dispute in this case focuses on the amount of the contributions to the trust allocated to Mr. Clendenen. The parties disagree as to what constitutes participant compensation and as to whether elective deferral amounts constitute employee or employer contributions. It is petitioner's position that the amounts of elective deferrals are employee contributions and should be included in "participant's compensation". Petitioner also asserts that "participant's compensation" includes amounts petitioner paid as commissions and bonuses to Mr. Clendenen as an independent contractor. As a consequence, petitioner maintains that the limitations of section 415(c)(1) have not been exceeded with the result that the plan and trust were qualified during the years at issue. Respondent asserts that the amounts of elective deferrals constitute employer, not employee, contributions and that these amounts and the commissions and bonuses do not constitute

⁵ provides that compensation does not include "Contributions made by the employer to a plan of deferred compensation to the extent that, before the application of the section 415 limitations to that plan, the contributions are not includable in the gross income of the employee for the taxable year in which contributed." Furthermore, section 1.401(k)-1(a)(4)(ii), Income Tax Regs., provides: Except as provided in paragraph (f) of this section, [dealing with the correction of excess contributions] elective contributions under a qualified cash or deferred arrangement are treated as employer

⁶ We rejected the same argument presented herein and concluded that respondent's position was clearly supported by the statute and regulations. We reach the same conclusion herein and hold that the elective deferrals are employer contributions and not included in "participant's compensation". Consequently, the amounts of the elective deferrals are included in annual additions.

⁷ Sec. 415(c)(2). Petitioner also seeks to include in "participant's compensation" the amounts of the commissions or bonuses that

⁸ Income Tax Regs., provides: For purposes of applying the limitations of section 415, the term "compensation" includes * * * --(i) The employee's wages, salaries, fees for professional services, and other amounts received * * * for personal services actually rendered in the course of employment with the employer maintaining the plan to the extent that the amounts are includable in gross income * * * . [Emphasis added.]

⁹ We need not make any findings with respect to the exact figures, however, for