Slaymaker Lock Co. v. Comm'r of Internal Revenue
| Decision Date | 15 September 1952 |
| Docket Number | Docket No. 24648. |
| Citation | 18 T.C. 1001 |
| Parties | SLAYMAKER LOCK COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner, accounting on the accrual basis, executed and delivered to an exempt pension trust its demand negotiable promissory note on the last day of its taxable year. It thereafter made a partial payment and substituted its demand negotiable promissory note for the balance due on the original note, within 60 days after the close of its taxable year, but did not discharge either note by actual payment within that period. Held, delivery of such notes was not payment within 60 days after the close of the taxable year of the amount accrued in that year, as required by section 23(p)(1)(E) of the Internal Revenue Code, and therefore deduction may not be taken except to the extent of the actual payment made within the 60-day period already allowed by the respondent.
2. On the record it is held that expenditures by petitioner for purchase and improvement of a property conveyed to its foremen's association for the use of its employees for recreation purposes constituted reasonable and necessary expense in carrying on business, deductible for the years in which made. Richard S. Doyle, Seq., and Jules G. Korner, III, Esq., for the petitioner.
Edward Pesin, Esq., for the respondent.
The respondent determined deficiencies in petitioner's excess profits taxes as follows:
+----------------+
¦1943¦$40,273.30 ¦
+----+-----------¦
¦1944¦17,715.13 ¦
+----+-----------¦
¦1945¦24,055.83 ¦
+----------------+
Petitioner does not contest all of the adjustments contained in the statutory notice and the parties have stipulated the facts with respect to the deductibility of certain items as to which decision will be entered under Rule 50. The questions left for decision are: (1) whether delivery of petitioner's demand negotiable promissory note to the trustee of its employees' pension fund on December 31, 1943, constituted a deductible payment under section 23(p) of the Internal Revenue Code; and (2) whether amounts expended by petitioner during 1944 and 1945 for the purchase, renovation, and improvement of a recreation lodge which it conveyed to trustees of its foremen's association were deductible as ordinary and necessary expenses under section 23(a) of the Code.
Most of the facts were stipulated and are found accordingly.
The petitioner is a Pennsylvania corporation located at Lancaster, Pennsylvania. It kept its books and records on the accrual basis and filed its income and excess profits tax returns for the calendar years 1943, 1944, and 1945 with the collector of internal revenue at Philadelphia, Pennsylvania. On September 28, 1943, petitioner adopted an employees' pension plan and authorized the appointment of a pension board. On October 6, 1943, it approved the pension trust indenture submitted by the pension board and the appointment of John M. Kendig, treasurer of petitioner corporation, as trustee under the pension trust indenture, and authorized and directed the treasurer to assign and transfer as the corporation's irrevocable donation to the pension fund for the year ending December 31, 1943, a sum of not exceeding $55,000 pending determination of the exact amount according to the actuarial computations.
Information concerning the pension trust was filed with the Commissioner of Internal Revenue on November 19, 1943, together with copies of the by-laws, Formula of Benefits, and the Trust Agreement, and actuarial computations showing the amount necessary to cover the current year's service and one-tenth of the discounted past service reserve for the employees included in the plan, aggregating $54,326.30. By ruling dated January 11, 1944, the Commissioner held that the pension plan met the requirements of section 165(a) of the Internal Revenue Code, as amended, and that the trust was entitled to exemption from income tax thereunder.
On December 31, 1943, petitioner executed and delivered to the trustee of the pension fund its demand negotiable promissory note in the amount of $54,326.30, payable to the Slaymaker Lock Company Employees' Pension Fund. The ledger accounts of petitioner and the pension board reflect the giving and receiving of such note as of December 31, 1943.
At a meeting held January 4, 1944, the pension board authorized the trustee to purchase two United States 2 per cent Treasury Bonds, then owned by the corporation, at par plus accrued interest, and further authorized the trustee to make loans to the corporation conditioned that the same would be paid, upon demand, at such time as the opportunity to invest such funds on a more permanent basis might present itself.
On January 5, 1944, petitioner made a payment to the trustee of the pension fund in the amount of $10,500 on account of said $54,326.30 note, and $10,062.22 thereof was utilized by the trustee in the purchase of the two above-mentioned Treasury Bonds. The respondent has allowed that $10,500 as a deduction from gross income for the year 1943 under the provisions of section 23(p), Internal Revenue Code.
On February 29, 1944, petitioner executed and delivered to the trustee of the pension fund its demand negotiable promissory note in the amount of $43,826.30 made payable to the Slaymaker Lock Company Employees' Pension Fund, and the trustee canceled and returned to petitioner the note dated December 31, 1943, in the amount of $54,326.30. Neither note required the payment of interest and both were without security. The principal amount due on the note of February 29, 1944, was paid by petitioner as follows:
+-------------------------+
¦Oct. 20, 1944 ¦$10,000.00¦
+--------------+----------¦
¦Nov. 28, 1944 ¦25,000.00 ¦
+--------------+----------¦
¦Nov. 28, 1944 ¦7,500.00 ¦
+--------------+----------¦
¦Nov. 28, 1944 ¦1,326.30 ¦
+--------------+----------¦
¦Total ¦$43,826.30¦
+-------------------------+
Petitioner also paid the following sums as interest on the two notes:
+-------------------------+
¦Sept. 30, 1944 ¦$997.75 ¦
+---------------+---------¦
¦Dec. 16, 1944 ¦185.48 ¦
+---------------+---------¦
¦Total ¦$1,183.23¦
+-------------------------+
Neither the note of December 31, 1943, in the amount of $54,326.30 nor the note of February 29, 1944, in the amount of $43,826.30, constituted payment within the meaning of section 23(p) of the Internal Revenue Code so as to entitle petitioner to deduction of the amount thereof from its gross income for the year 1943.
In September 1944, petitioner purchased 5 1/2 acres of farm land near the city of Lancaster, Pennsylvania, on which an old stone house was located, for a total cost of $1,802.61. Thereafter petitioner expended $9,606.59 in the year 1944 and $26,694.47 in the year 1945 in improving said property, including the installation of a power line for which application was approved by the War Production Board on December 7, 1944. By fee simple deed dated December 30, 1944, petitioner conveyed said property to certain trustees selected by The Foremen's Association of the Slaymaker Lock Company, an organization comprised of certain supervisory employees and officers of the company previously in existence. On the same date, December 30, 1944, the petitioner and the foremen's association entered into a trust agreement with said trustees for the operation and maintenance of said property for the exclusive use and enjoyment of all employees of the Slaymaker Lock Company under rules and regulations to be prescribed by the association.
During World War II petitioner entered into a number of contracts connected with the war effort. Its volume of business increased from an average of $452,000 per year in 1938 and 1939 to an average of $2,025,000 in 1944 and 1945, and its working force increased from an average of 207 employees in 1943 to a peak of 407 in 1944 and an average employment of 374 in 1945. In increasing its working force petitioner was compelled to compete with other industries in the area likewise engaged in increased activities due to the war effort, some of which were larger and had higher wage bases. Payroll costs for 1944 and 1945 aggregated $1,436,533.95.
Petitioner deducted from gross income in its income and excess profits tax returns for the years 1944 and 1945, respectively, as ordinary and necessary expenses, the cost of said property ($1,802.61 in 1944) and the amounts expended in renovation and improvements ($9,606.59 in 1944 and $26,694.47 in 1945). Respondent disallowed those items as deductions from gross income.
The contributions consisting of the cost of the foremen's lodge and the improvements thereto, constituted ordinary and necessary expenses clearly connected with the operation of its business, so as to entitle petitioner to deductions therefor from its gross income for the years indicated, within the meaning of section 23(a) of the Internal Revenue Code.
The first question for decision is whether or not the delivery of petitioner's demand negotiable promissory note to the trustee of its employees' pension fund, in and of itself, constituted a deductible payment under section 23(p) of the Internal Revenue Code. There is no question but that the payment of $10,500 made by petitioner to the trustee on January 5, 1944, on account of said note, coming within the 60-day period allowed by section 23(p)(1)(E), was deductible, and the Commissioner so held.
Deductions are granted to taxpayers by the legislative grace of Congress, and in order to secure deductions taxpayers must clearly show that they are within the terms of the statute as written. New Colonial Ice Co. v. Helvering, 293 U.S. 435; Lake v. Commissioner, 148 F.2d 898, certiorari denied 326 U.S. 732.
Section 23(p)1 allows the deduction of contributions of an employer to an employees' trust in the year when ‘paid.‘ Section 23(p)(1)(E) provides that a...
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