Dejay Stores v. Ryan, 17

• Decision Date: 23 January 1956
• Docket Number: No. 17,Docket 23301.,17
• Citation: 229 F.2d 867
• Parties: DEJAY STORES, Inc., Dejay Central Stores, Inc., Dejay Eastern Stores, Inc., Dejay Western Stores, Inc., Dejay West Virginia Stores, Inc., Horman's Inc., Kay-Selly Stores, Inc., Plaintiffs-Appellants, v. Raymond F. RYAN, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

229 F.2d 867 (1956)

DEJAY STORES, Inc., Dejay Central Stores, Inc., Dejay Eastern Stores, Inc., Dejay Western Stores, Inc., Dejay West Virginia Stores, Inc., Horman's Inc., Kay-Selly Stores, Inc., Plaintiffs-Appellants, v. Raymond F. RYAN, Defendant-Appellee.

No. 17, Docket 23301.

United States Court of Appeals Second Circuit.

Argued November 18, 1955.

Decided January 23, 1956.

On Petition for Rehearing February 20, 1956.

COPYRIGHT MATERIAL OMITTED

Jesse Climenko, Gallop, Climenko & Gould, New York City, for appellants.

Arthur S. Ecker, New York City, for appellee.

Before HAND, FRANK and MEDINA, Circuit Judges.

HAND, Circuit Judge.

The plaintiffs appeal from a judgment, summarily dismissing their complaint to recover income taxes, erroneously assessed for their fiscal year, 1943. They are a group of corporations that we shall call collectively "Dejay." All their interests are the same; their accounts were on an accrual basis, and their fiscal year began on February first and ended on January 31st. After deliberations beginning in June 1943, and after detailed consultation with actuaries and legal counsel their officers and directors had by the first of January 1944 settled all the terms and conditions of a pension trust for the benefit of their employees, and had agreed with the proposed trustee, a bank, upon the terms of a trust instrument that the bank would accept. The directors met on January 17, 1944, and adopted a "Plan," complete in all details; and directed the fiscal officers to "accrue" upon the books as of January 31, 1944, the contributions due for the year 1943, computed in accordance with its provisions. They advised a number of the beneficiary employees that the "Plan" had been adopted, and the contribution for 1943, amounting to $25,498, was duly "accrued" upon the books. However, no formal instrument or deed of trust to the bank was executed until March 27, 1944, when all the plaintiffs did execute and deliver a deed in the form agreed upon and paid to the bank the contribution just mentioned. Those passages in the "Plan" on which we think that the case turns were the following.

"All contributions made by the Company to the Plan shall be voluntary and the Company shall be under no legal liability to make any such contributions. Nothing herein contained shall entitle any person to any payment except out of the Trust herein provided for."

"Anything contained herein to the contrary notwithstanding, if a ruling satisfactory to the Company shall not have been received by August 1, 1944, or by such later date as the Company may specify, from the Commissioner of Internal Revenue that the Plan as herein set forth or as amended prior to the receipt of such ruling qualifies under Section 165 of the Internal Revenue Code or any amendments thereto, or if the stockholders of the Company at its next Annual Meeting to be held on May 17, 1944 do not approve the adoption of the Plan, the Company shall be entitled to withdraw all contributions theretofore made by it and the Plan shall terminate and all rights of the employees thereunder shall cease and come to an end."

The shareholders met on May 17, 1944, and did "approve the adoption of the Plan"; and on October 26, 1944, the Commissioner sent "Dejay" a letter, which we shall speak of later, declaring that the Plan "qualifies under Section 165 of the Internal Revenue Code." In accordance with this approval "Dejay" deducted the contribution from its income for 1943, and paid the tax as so compiled. Upon a review of "Dejay's" income tax return in 1947 a subsequent Commissioner changed this ruling and disallowed the deducted contribution upon the ground that, although it had been paid within sixty days after the end of the fiscal year, the deed of trust had not been executed during that year; and that for this reason the "Plan" did not fall within § 165 of the Internal Revenue Code, 26 U.S.C. § 165. "Dejay" paid the deficiency resulting from the disallowance of the deduction, and brought this action.

Upon the defendant's motion for summary judgment the only point that it raised or the judge considered was that "Dejay" had executed the deed after January thirty-first, 1944, and that therefore the trust had not been created in the fiscal year for which the deduction was claimed. The argument is that the relevant sections¹ require by implication that the trust be set up within the fiscal year, and that it is only the payment of the contribution that § 23(p) (1) (E) allows to be made within sixty days thereafter. We can find nothing in either section or in the Regulations² that so requires: the word used throughout the two sections is "trust," or "pension trust," except that under § 165(a) (2) the phrase, "trust instrument" once appears, and although that no doubt presupposes that such a document shall at some stage appear, there is no reason, so far as we can see, why it should be during the fiscal year, provided it is executed by the time the first contribution is made. Section 23 (p) (1) (E) declares that a payment within sixty days after the end of the year "shall be deemed" to be made within "the taxable year", when the employer keeps its books on an "accrual" basis; and we can see no reason, either express or implied, why it should be necessary that the "trust instrument" should not have the same extended period. This does not mean that the "trust" itself must not be set up within the fiscal year; we assume that it must; but in the case at bar every element of a trust came into existence before February first, if the contribution "be deemed" to have been paid on January 31st, as the Act provided. There was (1) a trustee, (2) a res, (3) a transfer of the res to the trustee, (4) and a complete agreement upon all the terms on which the trustee should hold the res. What else was necessary we do not understand. It is true that under the law of New York, where the contract was made, a contract to make a trust is "void," when it is not in writing;³ but the transaction had passed beyond a contract, if we assume, as we must, that the contribution was to be treated as though it had in fact been paid on January 31st. It made no difference that the terms on which the trustee was to hold the res were oral, for the law of New York does not make "void" an executed trust,⁴ and the "trust instrument" however eventually necessary, was not one of the constituents of the "trust."

We should therefore feel obliged to reverse the judgment for this reason, were it not for a point not raised below: i. e. the language that we have already quoted from § VIII (7) of the "Plan" which made it conditional upon whether the shareholders approved it at a meeting to be held on May 17, 1944. Moreover, as has appeared, "Dejay," not only expressly provided in § VIII (7) of the "Plan" that all "contributions" were to be "voluntary," and that it should be "under no legal liability to make any"; but also that the "Plan" should entitle no "person to any payment except out of the Trust herein provided for." Thus, by virtue of the reserved right under § VIII (7) to "withdraw all contributions theretofore made," if the shareholders did not approve the "Plan," there was no unconditional payment made within sixty days after January 31, 1944. We cannot agree that contributions which could be so withdrawn were paid "in the taxable year," even with the aid of § 23 (p) (1) (E); they were no more than a provisional deposit until the power to withdraw them ended on May 17, 1944. "Dejay" answers this argument in two ways. First, it says that the point was not raised below, which is apparently true; and second, that the Commissioner's withdrawal in 1947 of his approval of October 26, 1944 was invalid. The first objection is clearly unsound, for it is abundantly settled that an appellee may support the judgment by any reasoning from facts disclosed in the record, no matter when the objection is raised, although the appellant must of course have an opportunity to answer.⁵ The second point requires more consideration. It is true that, when the "Plan" was presented to the Commissioner for his approval, the request was, not only for his general approval, but for "a ruling to the effect that the deductions from gross income claimed * * * for the fiscal year ended January 31, 1944, be allowed in accordance with Section 23(p) (1) (A) of the Internal Revenue Code, subject to audit." The answering letter of October 26, 1944 said "that the plan, as amended, meets the requirements of § 165(a) * * * and * * * the trust established thereunder is entitled to exemption. * * * Contributions made to...