429 U.S. 569 (1977), 75-1312, Don E. Williams Co. v. Commissioner of Internal Revenue
|Docket Nº:||No. 75-1312|
|Citation:||429 U.S. 569, 97 S.Ct. 850, 51 L.Ed.2d 48|
|Party Name:||Don E. Williams Co. v. Commissioner of Internal Revenue|
|Case Date:||February 22, 1977|
|Court:||United States Supreme Court|
Argued December 8, 1976
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
Petitioner accrual basis corporate taxpayer, by delivering fully secured promissory demand notes to the trustees of its qualified employees' profit-sharing trust, held not entitled to income tax deductions therefor under § 404(a) of the Internal Revenue Code of 1954, which allows a deduction for contributions "paid" by an employer to a profit-sharing plan in the taxable year "when paid," and further allows the deduction if the contribution was a "payment . . . made" within a specified grace period following the end of the employer's taxable year. Pp. 574-583.
(a) The statutory terms "paid" and "payment," coupled with the grace period and the legislative history's reference to "paid" and "actually paid," demonstrate that, regardless of the method of accounting, all taxpayers must pay out cash or its equivalent by the end of the grace period in order to qualify for the § 404(a) deduction. This accords with the apparent statutory policy that the profit-sharing plan receive full advantage of any contribution that entitles the employer to a tax benefit. Here, the petitioner's issuance and delivery of [97 S.Ct. 852] the promissory notes did not make the accrued contributions ones that were "paid" within the meaning of § 404(a). Pp. 574-579.
(b) Though the notes had value and would qualify as income to a seller-recipient, the notes, for the maker, even though fully secured, are still only a promise to pay, and do not, in themselves, constitute an outlay of cash or other property. P. 579.
(c) The transactions in question cannot be treated as payments of cash to the trustees followed by loans, evidenced by the notes in return, since "a transaction is to be given its tax effect in accord with what actually occurred, and not in accord with what might have occurred," Commissioner v. National Alfalfa Dehydration, 417 U.S. 134, 148. Pp. 579-580.
(d) The word "paid" in § 404(a) cannot be assumed to have the same meaning it has in § 267(a) of the Code, which disallows deductions by an accrual basis taxpayer for certain items that are accrued but not yet paid to related cash basis payees. The situation under
§ 267(a) whereby the term "paid" has been used to insure that transactions between related entities received consistent tax treatment, has no counterpart under $404(a), for the qualified profit-sharing plan is exempt from tax. Pp. 580-582.
(e) A promissory note cannot properly be equated with a check, since a note, even when payable on demand and fully secured, is still only a promise to pay, whereas a check is a direction to the bank for immediate payment, is a medium of exchange, and is treated, for federal tax purposes, as a conditional payment of cash. Pp. 582-583.
527 F.2d 649, affirmed.
BLACKMUN J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, MARSHALL, REHNQUIST, and STEVENS, JJ., joined. STEVENS, J., filed a concurring statement, post, p. 583. STEWART, J., filed a dissenting opinion, in which POWELL, J., joined, post, p. 583.
BLACKMUN, J., lead opinion
MR. JUSTICE BLACKMUN delivered the opinion of the Court.
The issue in this federal income tax case is whether an accrual basis corporate taxpayer, by delivering its fully secured promissory demand note to the trustees of its qualified employees' profit-sharing trust, is entitled to a deduction therefor under § 404(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 404(a).1
The pertinent facts are stipulated. Petitioner, Don E. Williams Company (taxpayer), is an Illinois corporation with its principal office at Moline in that State. It serves as a manufacturers' representative and wholesaler for factory tools and supplies. It keeps its books and files its federal income tax returns on the accrual method of accounting and on the basis of the fiscal year ended April 30. Don E. Williams Jr., president of the taxpayer, owns 87.08% of its outstanding capital stock; Joseph W. Phillips, Jr., vice-president, owns 4.17% thereof; and Alice R. Williams, secretary-treasurer, [97 S.Ct. 853] owns 4.58%.
In November, 1963, the taxpayer's directors adopted the Don E. Williams Company Profit Sharing Plan and Trust. The trustees are the three officers of the taxpayer and the First National Bank of Moline. The trust was "qualified" under § 401(a) of the Code and thus, under § 501(a), is exempt from federal income tax.
Near the end of each of its fiscal years 1967, 1968, and 1969, the taxpayer's directors authorized a contribution of approximately $30,000 to the trust. This amount was accrued as an expense and liability on the taxpayer's books at the close of the year. In May, the taxpayer delivered to the trustees its interest-bearing promissory demand note for the amount of the liability so accrued. The 1967 and 1968
notes bore 6% interest, and the 1969 note bore 8% interest. Each note was guaranteed by the three officer-trustees individually and, in addition, was secured by collateral consisting of Mr. Williams' stock of the taxpayer and the interests of Mr. Williams and Mr. Phillips under the plan. The value of the collateral plus the net worth of Alice R. Williams, a guarantor, greatly exceeded the face amount of each note.
Within a year following the issuance of each note the taxpayer delivered to the trustees its check for the principal amount of the note plus interest. Each check was duly honored.
In its federal income tax return filed for each of the fiscal years 1967, 1968, and 1969, the taxpayer claimed a deduction under § 404(a) for the liability accrued to the trustees. On audit, the Commissioner of Internal Revenue, respondent here, ruled that the accruals and the deliveries of the notes to the trustees were not contributions that were "paid," within the meaning of § 404(a). Accordingly, he disallowed the claimed accrual deductions and, instead, allowed deductions only for the checks2 for the respective fiscal years in which they were delivered. These adjustments resulted in deficiencies of $15,162.87, $1,360.64, and $530.42, respectively, in the taxpayer's income taxes for the three years.
On petition for redetermination, the United States Tax Court, in a reviewed opinion with three dissents, upheld the Commissioner. 6 2 T.C. 166 (1974). In so doing, it adhered to its consistent rulings since 19493 to the effect that an
accrual basis employer's contribution to its qualified employees' profit-sharing plan in the form of the employer's promissory note was not something "paid," and therefore deductible, under § 404(a) of the 1954 Code or under the predecessor § 23(p) of the Internal Revenue Code of 1939. With the taxpayer's case being subject to an appeal to the United States Court of Appeals for the Seventh Circuit, which had not yet ruled on the issue, the Tax Court declined to follow decisions of the Third, Ninth, and Tenth Circuits [97 S.Ct. 854] that had disagreed with the Tax Court in earlier cases.4 62 T.C. at 168.
On appeal, the Seventh Circuit also declined to follow its sister Circuits, and affirmed. 527 F.2d 649 (1975). We granted certiorari to resolve the conflict. 426 U.S. 919 (1976).
A. The statute. Under § 446 of the Code, 26 U.S.C. § 446, taxable income is computed under the accounting method regularly utilized by the taxpayer in keeping its books. Subject to that requirement, "a taxpayer may compute taxable income" under the cash receipts and disbursements method or, among others, under "an accrual method." As a consequence, the words "paid or accrued" or "paid or incurred" appear in many of the Code's deduction provisions.5 The presence of these phrases reveals Congress' general intent to give full meaning to the accrual system and to allow the accrual basis taxpayer to deduct appropriate items that accrue, or are incurred, but are unpaid during the taxable year.
Section 404(a), however, quoted in n. 1, supra, stands in obvious contrast. It provides that, "[i]f contributions are paid by an employer to . . . a . . . profit-sharing . . . plan," the contributions, subject to a specified limitation in amount, shall be deductible "[i]n the taxable year when paid" (emphasis supplied). The usual alternative words, "or accrued" or "or incurred," are missing, and their absence indicates congressional intent to permit deductions for profit-sharing plan contributions only to the extent they are actually paid, and not merely accrued or incurred during the year. Congress, however, by way of addendum, provided a grace period for the accrual basis taxpayer. Section 404(a)(6) allowed a deduction for the taxable year with respect to a contribution on account of that year if it was a "payment
. . . made" within the time prescribed for filing that year's return.6 Under § 6072(b) of the Code, this period, for petitioner taxpayer, was two and one-half months after April 30, the close of its fiscal year, or July 15.
B. The legislative history. This history, as is to be expected, is consistent with the theme of the statute's language. Section 404 is virtually identical with § 23(p) of the 1939 Code, as amended by § 162(b) of the Revenue Act of 1942, 56 Stat. 863. Committee reports at that time speak of an accrual basis taxpayer's deferral of paying compensation, and state that, if this was done
under an arrangement having the effect of a . . . profit-sharing . . . plan . . . deferring the receipt of compensation, he will not be allowed a deduction...
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