Lukens Steel Co. v. Comm'r of Internal Revenue

• Decision Date: 07 August 1969
• Docket Number: Docket No. 4779-66.
• Citation: 52 T.C. 764
• Parties: LUKENS STEEL COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE RESPONDENT
• Court: U.S. Tax Court

52 T.C. 764

LUKENS STEEL COMPANY, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE RESPONDENT

Docket No. 4779-66.

Tax Court of the United States.

Filed August 7, 1969.

Seymour S. Mintz and Robert H. Kapp, for the petitioner.

Albert J. O'Conner, for the respondent.

Pursuant to a contract executed by petitioner and the union representing most of its employees, negotiated as to its important provisions by representatives of the major steel companies and of the United Steelworkers Union, petitioner, which kept its books on an accrual basis of accounting, agreed to make certain payments to a fund administered by a trust which would provide supplemental unemployment-benefit payments to its employees. A part of the payments to the trust was to be made immediately in cash and a part was to be made at some future time as the financial needs of the fund required. The amount of all of the payments to be made was determined by events occurring during the taxable years. The contract in existence during the taxable years provided that any ultimate excess of the noncash liabilities to the trust over the payouts to the employees by the trust should be used for other benefits to the employees. The amounts of these noncash liabilities were credited by petitioner to an account called contingent liability. They were accrued by petitioner as business expenses and deducted by it in its returns for the years in which such credits were made. While it is reasonably certain that these amounts t us credited to this account during the taxable years would be ultimately paid to petitioner's employees pursuant to the plan outlined by the contract, there was uncertainty during the taxable years with regard to the specific identity of the ultimate recipients of the benefits to be paid by the petitioner trust and the time of such payments. Held, that petitioner is entitled to accrue and deduct these amounts as business expenses incurred during the taxable years.

Respondent determined deficiencies in petitioner's income taxes for petitioner's fiscal years ending December 29, 1962, and December 28, 1963, in the respective amounts of $355,238.53 and $99,242.06, of which the respective sums of $321,084.40 and $63,646.96 are in dispute. The only issue for decision is whether the unpaid portion of petitioner's obligation at the end of fiscal years 1962 and 1963 to make contributions to an employee's trust established under a steel industry supplemental unemployment-benefit plan is then deductible as a business expense under the accrual method of tax accounting.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation, and the exhibits attached thereto, are incorporated herein by this reference.

Petitioner Lukens Steel Co. (hereinafter called petitioner or Lukens) was incorporated in 1917 under the laws of the Commonwealth of Pennsylvania. Its principal place of business, and sole production facility, is at Coatesville, Pa. Lukens, as a component company in the basic steel industry, was and is engaged in the manufacture, fabrication, and sale of heavy steel plates and related steel products for heavy industrial use. It is a publicly held company whose shares are listed on the New York Stock Exchange.

Lukens reports its Federal income tax liability under an accrual method of accounting and files its returns on the basis of a 52-53 week fiscal year ending on the Saturday nearest December 31. Its fiscal year has 13 accounting periods of 4 weeks each (hereinafter called accounting periods, and sometimes accounting months, or months). The same 52-53 week fiscal year, with 13 accounting periods, was incorporated into the supplemental unemployment-benefit plans entered into by Lukens which are described below.

The United Steelworkers of America (hereinafter sometimes called steelworkers union) is an international labor organization with over 1 million individual members who are organized into about 3,000 local unions. The Steelworkers Union functions principally in the basic steel industry in which it represents in collective bargaining workers in plants accounting for more than 90 percent of total national steel ingot capacity. It also functions in certain related industries including steel processing and fabricating, aluminum, copper, iron mining and ore shipping, containers, certain other transportation, and miscellaneous manufacturing.

During the period 1956-63, Lukens had an average of 5,012 employees, of whom approximately 3,500 were represented in collective bargaining by the Steelworkers Union and its local unions Nos. 1165 and 2295.

In 1956, labor contract negotiations in the steel industry were conducted on several different levels. In the first instance, a group of 10 or 11 major steel companies, being among the largest in the industry, bargained jointly with the Steelworkers Union on major economic issues. These joint negotiations were actually conducted on behalf of the steel companies by a four-man negotiating team, composed of two representatives from the United States Steel Corp. and one each from Bethlehem Steel and Republic Steel, with the understanding that the economic settlement agreed upon would be applied uniformly among the group of 10 or 11 participating companies. At the same time, the steel companies bargained individually with the Steelworkers Union on local issues and on problems peculiar to their particular company.

Among the Steel workers Union's 1956 contract demands was a proposal for the establishment of a supplemental unemployment-benefit program. This proposal was one of the economic issues on which the major steel companies bargained jointly with the Steelworkers Union in 1956. As a result of the joint negotiations, each of the major steel companies agreed to establish a supplemental unemployment-benefit plan (hereinafter sometimes referred to as the SUB plan). The terms of the SUB plans adopted by each of the major producers of steel participating in the joint negotiations were virtually identical. After agreement on the terms of the SUB plan had been reached in the joint negotiations, the remaining companies in the basic steel industry whose employees were represented by the Steelworkers Union also adopted SUB plans on substantially identical terms. Thus, separate, virtually identical SUB plans were placed in operation in practically all companies in the industry.

Lukens, being one of the smaller companies in the basic steel industry, did not participate in the joint negotiations involving the major producers of steel. After the pattern of the ‘economic package’ had been established for the industry by the joint negotiations, including the terms of the SUB plan, the Steelworkers Union presented the entire package to Lukens as its proposal for settlement. Lukens had no practical alternative but to accept; and it did accept the entire economic package, including the SUB plan, negotiated by the major companies.

By contract dated July 29, 1956, Lukens agreed with the Steelworkers Union to adopt a SUB plan (in the form adopted by the major producers of steel) effective upon execution and to continue in effect until July 31, 1959.

The purpose of the SUB plan was to ameliorate the effects of cyclical unemployment in the steel industry by supplementing the benefits available to laid-off covered employees under State-system unemployment-benefit programs. The objective, as envisioned in 1956, was to provide laid-off employees (with 2 or more years service) with 65 percent of their after tax take-home pay, taking into account State benefits, for periods up to 52 weeks.

The principal provisions of the 1956 SUB Plan, as agreed to by Lukens were as follows:

(a) Lukens agreed (for the 3-year term of the SUB plan agreement) to furnish the funds, in an amount computed on the basis of monthly labor hours, to provide ‘eligible employees' with cash benefits during periods of total and partial unemployment resulting from layoffs. An ‘eligible employee’ was, generally speaking an employee who is laid off before he quits, strikes, or is discharged, and who had continuously been employed for 2 years prior to such layoff. An employee who was laid off was required to report in person weekly at a time and place designated by Lukens and must have received State unemployment insurance or be able to work.

(b) Lukens agreed to establish a trust fund (hereinafter referred to as SUB Plan Trust or Trust), with a corporate trustee for the payment of unemployment benefits provided under the SUB plan. Its agreed contribution was to be made to the SUB Plan Trust, which in turn was to be the exclusive source of benefit payments conferred under the SUB plan. The provisions of the 1956 SUB plan with regard to the SUB Plan Trust were similar to those of the 1962 SUB plan relating to the trust called for by that document which are set forth verbatim later in these findings of fact.

(c) The weekly benefits payable to employees on layoff were fixed at 65 percent of their after-tax straight-time weekly wage (reduced by the amount of any State unemployment benefits to which they were entitled) subject, however, to prescribed maximums. The ‘maximum weekly benefit’ was set at $25 (plus $2 for each of not more than four dependents) for weeks in which State unemployment benefits were received; and $47.50 (plus $2 for each of nor more than four dependents) for weeks after State benefits were discontinued. In addition, provision was made for the reduction of weekly benefits by a percentage factor where the total finances of the SUB plan dropped below prescribed levels.¹ The duration for which benefits would be continued for any particular employee on layoff was dependent upon the number of his ‘credit units' (earned at prescribed rates during periods when working), but could in no event exceed 52 weeks.

(d) Lukens' monthly financial obligation under the 1956 SUB Plan (during the term of the SUB plan agreement)...