Inland Steel Co. v. United States

• Decision Date: 07 April 1982
• Docket Number: No. 481-76.,481-76.
• Citation: 677 F.2d 72
• Parties: INLAND STEEL COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

677 F.2d 72

INLAND STEEL COMPANY v. The UNITED STATES.

No. 481-76.

United States Court of Claims.

April 7, 1982.

Frederic W. Hickman, Chicago, Ill., attorney of record, for plaintiff; Lawrence M. Dubin, Michael F. Duhl, Michael M. Conway and Hopkins & Sutter, Chicago, Ill., of counsel.

Robert S. Watkins and Marc Levey, with whom was Acting Asst. Atty. Gen., John F. Murray, Washington, D. C., for defendant; Theodore D. Peyser, Jr., and Donald H. Olson, Washington, D. C., of counsel.

William P. McClure, Washington, D. C., attorney of record for amicus curiae Motion Picture Ass'n of America, Inc.; John D. Heckert, Robert Feldgarden, Howard J. Silverstone and McClure & Trotter, Washington, D. C., of counsel.

Before COWEN, Senior Judge, and DAVIS and SMITH, Judges.

OPINION

PER CURIAM:^*

Inland Steel Company, an integrated steel manufacturer, claimed refunds for taxes paid for calendar years 1964 and 1965 on four issues, two of which have been compromised and dismissed.¹ Two issues, the deductibility of certain accruals in Inland's Supplemental Unemployment Benefit plan (SUB) and credit for taxes paid pursuant to the Ontario Mining Tax Act (OMT), have been tried and are disposed of in this opinion, in Parts I and II respectively.

I

Supplemental Unemployment Benefit Plan — Revised Savings and Vacation Plan.

This court has twice considered whether certain accruals under Inland's Supplemental Unemployment Benefit (SUB) plan may be deducted under I.R.C. § 162.² Challenged accruals during calendar years 1962 and 1963 were found properly deductible in their entirety; accruals for calendar years 1964 and 1965 were found to be deductible insofar as they were not available for use in paying out benefits under a related savings and vacation plan, and the case was remanded (by order of May 19, 1978), for further proceedings as to accruals available for use in paying out such benefits.³ This opinion deals with that issue.

A. Background. A program to supplement benefits available to laid off steel workers from state unemployment benefit programs was first negotiated between the United Steelworkers of America (Steelworkers Union) and representatives of the major steel companies in 1956. The industrywide master settlement agreement was followed routinely by agreements with the individual companies, and nearly all companies in the basic steel industry established and put in operation virtually identical Supplemental Unemployment Benefit (SUB) plans. The 1956 SUB plan was financed by company contributions of 5 cents per hour worked by covered employees, of which 3 cents were cash payments to the trust and 2 cents were accruals to an account designated Contingent Liability (CL). The CL account was available to pay benefits if trust assets were insufficient, and, if in any month the trust funds and the CL exceeded maximum financing, as defined, the CL was canceled to the amount of the excess. The CL could be canceled in full on termination of the SUB plan.

In 1962, the SUB plan was revised to provide increased benefits, a larger contribution per hour worked, and accruals to CL were made noncancelable. As revised, the 1962 SUB plan required a contribution of 9.5 cents, of which 4.5 cents were cash payments to the trust, and 5 cents accrued to an account, which (although the accruals could not be canceled for any reason whatsoever) continued to be referred to as the Contingent Liability account. The definition of maximum financing was changed to permit expanded benefits, but the obligation to accrue 4.5 cents per hour worked per covered employee continued after maximum financing was reached. Accruals in excess of the requirements of maximum financing were a part of the CL account and were noncancelable except to pay benefits under the SUB plan; for convenience these accruals in excess of maximum financing were separately reported in Inland's accounts and were commonly referred to as Additional Contingent Liability (ACL).

In the 1962 negotiations, the Steelworkers Union contended the provisions of the 1956 SUB that permitted cancellation of CL deprived the plan of resources needed to pay SUB benefits. The union also complained that the steel companies took credit for a 5 cents per hour contribution that in fact was less because of the CL cancellation provisions. Insistence by the President of the United States on a 10 cent limit on collective bargaining benefits reduced the negotiators' flexibility, and led to the union's insistence that the 10 cent limit had to be a "hard dime." This objective was accomplished by the agreement to eliminate the cancellation feature of the prior plan and to make all the amounts the company was required to accrue to CL in excess of maximum financing noncancelable.

Since 1962, the Internal Revenue Service has challenged unsuccessfully, on different theories, the deductibility of accruals to the Contingent Liability accounts of the 1962 SUB plans. This court, in Inland I, held that accruals to CL in 1962 and 1963 met the "all events" test of I.R.C. § 461; Inland II so holds for 1964 and 1965. Lukens Steel holds that the CL accruals were deductible when accrued in 1962 and 1963 because they were irrevocably committed to pay for benefits even though the time of payment was indefinite, so also with Reynolds Metals for 1962 and 1963; Cyclops for 1962 through 1966; and Timken for 1962 and 1963.⁴ Now we are concerned with the separate issue, raised by the Government, whether I.R.C. § 404 (relating to deferred compensation) bars deductions under § 162 for accruals that could be transferred for pay-outs under a new (in 1962-3) savings and vacation plan.

The 1962 negotiations included institution of a plan to provide additional savings and vacation benefits. The 1962 Savings and Vacation Plan (SVP) was financed by an accrual of 3 cents per hour worked by employees covered by the plan into a Financial Availability Account (FAA). The negotiators recognized the 1962 SVP was inadequate to have a substantial effect on the unemployment rate, and viewed it as an interim device, to be renegotiated in 1963.

The 1962 SVP, in addition to the 3 cent accrual, provided that up to 4.5 cents per hour worked by covered employees (which were the same employees covered by the SUB plan) could be transferred from ACL to the FAA to the extent required to provide SVP benefits.⁵ The SVP benefits were (1) retirement units — one week's pay for each 5 years of service prior to January 1, 1961, to be paid at time of retirement, and, (2) vacation units — one week's pay for each employee for every 2 years of continuous service. Vacation units could, by option, be taken as vacation or by a cash payment into the trust to be paid on retirement. The 1962 SVP did not provide for transfer back to ACL of amounts that became available to the FAA and used for SVP benefits. This relationship between the ACL and the FAA was not found by the court in Inland I to bar deductibility of CL accounts, pursuant to I.R.C. § 162, under the SUB plan for calendar years 1962 and 1963. Inland's 1962 SVP was almost identical with the savings and vacation plan provisions reported and approved in Lukens Steel.⁶

Inland's agreement with the Steelworkers Union was amended June 29, 1963, to provide a Revised Savings and Vacation Plan (RSVP) which was effective for a 5-year term from January 1, 1964, through December 31, 1968. In the 1963 negotiations, the union and the steel industry agreed that all Contingent Liability in excess of maximum financing (ACL) that arose prior to 1964 would not be available for transfer to the FAA. October 31, 1963, was the last entitlement date on which pre-1964 CL potentially could be transferred to the FAA under the 1962 SVP. After December 31, 1963, the entire balance of CL, including any amounts in excess of maximum financing, was irrevocably committed to the payment of benefits under the SUB plan.

The restructured RSVP that became effective on January 1, 1964, was financed from accruals to the FAA, which were increased (from the SVP's 3 cents) to 12.5 cents per hour worked by covered employees after December 31, 1963. The 12.5 cents per hour accrual was established jointly by the negotiators as adequate to assure payment over the 5-year term of the significantly expanded list of basic benefits the companies were obligated to provide. In order to accelerate provision of basic benefits to the senior group, which otherwise would be spaced over 5 years, and increase job openings by earlier and additional vacations, the RSVP authorized transfers of ACL from the SUB plan to the FAA. ACL so transferred, referred to as "spillover", amounted to 3.125 cents per hour worked after December 31, 1963; in exceptional circumstances (which did not occur) up to 4.5 cents could spillover. The RSVP also provided that all spillover amounts would be returned to ACL after all basic benefits had been financed and the 12.5 cents accrual to the FAA exceeded current RSVP requirements. The amounts returned, referred to as "splashback," ranged from 6.5 cents to 3.5 cents per hour worked and continued until all spillover was exactly offset by splashback.

Basic benefits guaranteed in the RSVP included both vacation benefits that could be taken currently and financial benefits that could be put in a trust and deferred until retirement.

In fiscal year 1964, Inland accrued $1,331,270 in the CL account, of which $1,321,719 was in excess of SUB maximum financing (ACL). In fiscal year 1965, Inland accrued $1,346,527 in the CL account, of which $1,338,440 was in excess of SUB maximum financing (ACL).

Accruals to the CL account that were required to attain maximum financing were not available for paying out benefits under the RSVP and plaintiff was granted summary judgment in Inland II that such amounts qualified for deduction under I.R.C. § 162. Amounts of ACL that spilled over to the FAA between January 1, 1964, and April 30, 1965, were immediately...