Mississippi River Fuel Corporation v. United States

• Decision Date: 05 April 1963
• Docket Number: No. 180-60.,180-60.
• Citation: 314 F.2d 953,161 Ct. Cl. 237
• Parties: MISSISSIPPI RIVER FUEL CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

161 Ct. Cl. 237, 314 F.2d 953 (1963)

MISSISSIPPI RIVER FUEL CORPORATION v. The UNITED STATES.

No. 180-60.

United States Court of Claims.

April 5, 1963.

Christian B. Peper, St. Louis, Mo., for plaintiff.

John B. Jones, Jr., Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner, Philip R. Miller, and George Willi, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and WHITAKER, LARAMORE, DURFEE, and DAVIS, Judges.

JONES, Chief Judge.

The plaintiff seeks as a business deduction from its gross income of 1953 amounts which it had contributed by transfer to an employees savings trust fund. These sums had been added over a 3-year period as a matching fund to a like amount voluntarily contributed by participating employees. The total accumulated funds were distributed and paid to the employees in the year 1953 on a percentage basis in proportion to their respective contributions. The sums had been contributed to the trust fund during the previous three years. No part of the funds were to be returned to the plaintiff. There is no dispute as to the expense incurred by the plaintiff. The defendant asserts that in the facts of this case and under the terms of the instrument and the wording of the applicable statute plaintiff is not entitled to a deduction. The plaintiff disputes this. Admittedly no deduction has been allowed at any time.

The plaintiff at all pertinent times was engaged in the sale of natural gas and operated an interstate pipeline transporting gas.

On January 4, 1950, the plaintiff duly established the Mississippi River Fuel Corporation Savings Trust with the Mercantile-Commerce Bank & Trust Company as trustee.

According to the terms of the duly authorized trust instrument,¹ any employee of the company with one year's service was given the privilege of permitting a deduction from his salary of any sum designated by such employee not exceeding $25 per month, and to have such amount transferred to the trust. A record was to be kept of the amount so contributed by each participating employee. It was agreed that the plaintiff would match any amount of any employee's contribution by contributing a like sum to the trust.

The trust was to terminate on December 31, 1952, and within 30 days thereafter each remaining participant was to be paid from the trust his own contributions plus the matching contributions by the plaintiff for his benefit, together with his pro rata share of the earnings of the trust. If the participant's employment were terminated because of death, retirement, disability, or lay-off, he was to receive from the trust the amount contributed by him plus the amount contributed by the plaintiff. If any participant voluntarily resigned, or was discharged for cause, or withdrew from the trust he was to receive only his own contributions to the trust. In that event the amount which the plaintiff had contributed to match his savings was to be added to the sum available for others who continued to comply with the terms of the trust instrument.

In no instance was the plaintiff to receive back any sums that had been contributed to the matching program.

According to the terms of the trust instrument, the trust was to be in effect through the years 1950, 1951, and 1952.

The funds were distributed to the remaining participants by the trustee on January 2, 1953. The parties have stipulated that all of the contributions made by the plaintiff were paid from the trust during the early part of 1953.

For the years 1950, 1951, and 1952, respectively, the plaintiff deducted the respective contributions made to the savings trust in each of those years. The Commissioner of Internal Revenue disallowed each of these deductions.

The plaintiff litigated the right to a deduction for its contribution in 1950 in the Tax Court which decided adversely to plaintiff in 29 T.C. 1248 (1958). It litigated its contributions for the years 1951 and 1952 in Mississippi River Fuel Corporation v. Koehler, D.C., 164 F. Supp. 844 (1958). The deductions were denied and the decision was affirmed by the United States Court of Appeals, 8th Circuit, 266 F.2d 190, cert. denied 361 U.S. 827, 80 S.Ct. 75, 4 L.Ed.2d 70 (1959). In each instance it was held that the deferred compensation was not deductible during the years 1950, 1951, and 1952. These cases involved only the immediate deductibility as the contributions were made in the three years mentioned.

The case of Wesley Heat Treating Co. v. Commissioner, 7 Cir., 267 F.2d 853 (1959), is clearly distinguishable on the facts from the case at bar.

Plaintiff filed a timely claim for refund of taxes paid in 1953 on the ground that the contributions were deductible because the actual payment was made during that year.

The latter issue is now before the court for determination. The applicable portion of the statute in relation to deductions is set out in the footnote.² The parties have agreed that the contributions made by plaintiff to the Mississippi River Fuel Corporation Savings Trust in the years 1950-1952, inclusive, constituted deferred compensation reasonable in amount for the services actually rendered by that employee.

It will be noted that generally speaking all ordinary and necessary expenses incurred during the taxable year are normally allowed as a business deduction. However, under the terms of section 23 (p) of the 1939 Code (26 U.S.C. § 23 (1952 ed.)) certain specific provisions or modifications are made for trust or annuity plans and deferred payment plans. In such cases deductions are to be permitted under the terms of section 23(p) (1) (A), (B), (C), or (D). The deductions under the provisions of section 23 (p) (1) (A), (B), and (C) for the current years 1950, 1951, and 1952 have been decided adversely to the plaintiff in the cases to which reference is made above.

This leaves a sole issue in this case: whether a deduction is permitted under subparagraph (D) which stipulates that deduction may be allowed in cases of deferred payment plans under the following conditions:

"(D) In the taxable year when paid, if the plan is not one included in paragraphs (A), (B), or (C), if the employees\' rights to or derived from such employer\'s contribution or such compensation are nonforfeitable at the time the contribution or compensation is paid."

This court held in the case of Russell Manufacturing Company v. United States, 146 Ct.Cl. 833, 175 F.Supp. 159 (1959), involving this issue, that the payment became nonforfeitable as to participating employees in the year when payment by distribution is actually made to the employee. The defendant asks that we overrule our decision in Russell Manufacturing Company, but after consideration we adhere to the principles enunciated in that case. It is not only in accord with the wording of the law, but produces a just and non-discriminatory result.

We held in the Russell Manufacturing Company case that the payments, whether or not nonforfeitable during the current or accumulating years, became nonforfeitable during the year when the funds were actually paid to the employees. By that time all the rights of the employees to participate in the funds had matured, and all the contingencies had been met. There was nothing left but to make payment, and necessarily the obligations of the instrument were then nonforfeitable. That was the time actual payment was made.

In the instant case 1953 was the year when payment was made by distribution and the trust was liquidated. It is true two other similar trust instruments followed serially in two subsequent periods of three years each, but each was a complete program in itself and no one program was in any way dependent upon the other, even though all employees had the privilege of participation on an equal basis in any or all of them.

If the defendant prevails the plaintiff would not be entitled to any deduction for contributions to this fund for the employees no matter how worthy the plan might be. To offer incentives or rewards for loyal, faithful, and efficient service is in accord with the best traditions of a free country. In addition, this method of cultivating good will and good public relations is frequently used in different forms by many successful business concerns.

To refuse to allow any deduction whatever for money spent in such a fashion would be to deny ordinary expenses to a business concern that was utilizing progressive methods of business. It would put a premium on a concern that selfishly refused to adopt an incentive plan and a penalty on the more advanced business organization which was willing to make such a provision. Such a deduction for expenditures actually made for a worthy business purpose should not be denied unless the language of the statute compelled such a course. We do not think it does.

In fact, we think it rather clear that the provisions of section 23(D) were inserted by the Congress for the purpose of caring for such a situation. It specifically provides that the expenditure shall be the basis for deductions in the year when paid. On this particular phase we quote from our opinion in Russell Manufacturing Company v. United States, supra, 146 Ct.Cl. at page 839, 175 F.Supp. at page 162, as follows:

"The language of the statute bears out this construction. Section 23(p) (1) (D) provides that `compensation\' paid an employee under a nonqualifying plan (as distinct from a `contribution\' paid by an employer to a stock-bonus, pension, profit-sharing, or annuity plan) shall be deductible:

"`In the taxable year when paid * * *, if the employees\' rights to or derived from * * * such compensation are nonforfeitable at the time the * * * compensation is paid.\' Emphasis supplied.

No one will deny that the compensation involved in the case at bar was nonforfeitable at the time it was paid to employee-beneficiaries. The defendant, however, takes the position that the phrase, `in the

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