Wasatch Chemical Company v. CIR

• Decision Date: 26 February 1963
• Docket Number: No. 7062.,7062.
• Citation: 313 F.2d 843
• Parties: WASATCH CHEMICAL COMPANY, a Utah corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Tenth Circuit

313 F.2d 843 (1963)

WASATCH CHEMICAL COMPANY, a Utah corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 7062.

United States Court of Appeals Tenth Circuit.

February 26, 1963.

Frank J. Allen, Salt Lake City, Utah (Edward W. Clyde, Salt Lake City, Utah, on the brief), for petitioner.

Michael A. Mulroney, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Melva M. Graney, Washington, D. C., on the brief), for respondent.

Before BREITENSTEIN, HILL and SETH, Circuit Judges.

SETH, Circuit Judge.

The petitioner adopted a profit sharing pension plan and made contributions to the trust by delivery of its own unsecured, interest-bearing promissory notes with stated maturity dates. The question on this appeal is whether the delivery of such notes constituted "payment" to allow them as deductions on the petitioner's income tax returns under Section 404 of the Internal Revenue Code of 1954.

More particularly the issues relate to asserted deficiencies in petitioner's income tax for 1955 and 1956. The contribution to the trust administering the pension plan claimed as a deduction for 1955 was made by delivery of the corporation's own unsecured promissory note in the face amount of $41,412.77 due in five years with interest at six per cent. For 1956 the contribution was again petitioner's unsecured promissory note, due in five years with six per cent interest, this time in the face amount of $36,702.93. Both notes were discharged in December 1958. In its income tax returns filed under the accrual method of accounting, petitioner claimed the face amount of these notes as deductible, but the Commissioner disallowed the deductions on the ground that the contributions were not "paid" by the delivery of these notes. The Tax Court also held that these notes were not contributions "paid" to the trust to permit petitioner to deduct them, and consequently upheld the Commissioner's determination. The matter is here on the petition to review the decision of the Tax Court.

Section 404(a) of the Internal Revenue Code of 1954 provides in part:

"If contributions are paid by an employer to or under a * * * profit-sharing, or annuity plan, * * such contributions * * * shall be deductible under this section * * in the taxable year when paid, if the contributions are paid into a pension trust * * *" etc.,

and in (a) (6):

"For purposes of paragraphs (1), (2), and (3), a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made * * *."

The statute uses the words "paid" and "payment." Petitioner urges that the delivery and the acceptance of the notes constituted "payment" when considered as an ordinary commercial transaction, because the profit-sharing plan provides that contributions may be made in money, other assets, or contractual obligations, and because the authorities have held that demand notes constitute payment and for these purposes term notes are no different.

The present Section 404 originated in Section 23(q) of the Revenue Act of 1928, which read in part:

"An employer establishing or maintaining a pension trust * * shall be allowed as a deduction * * a reasonable amount transferred or paid into such trusts * * * beginning with the year in which the transfer or payment is made."

Thus the phrase "transfer or payment" was used in the original act which was devised to allow deductions for funds transferred to pension trusts from corporate pension reserve funds. There appears to be no significant legislative history relating to the use of the phrase "transfer or payment."¹ This wording was retained in the 1936 Act as Section 23(p),² and also in the 1939 Act. The 1942 Act³ dropped the word "transferred" and left the word "paid" as it now is. The deletion of "transferred" is not explained in the available legislative history. The Senate Finance Committee Report⁴ uses the word "paid" and refers to contributions "paid," but makes no reference to the deletion of "transferred," nor does it define "paid." The petitioner urges that this silence shows a lack of concern on the part of Congress as to how or in what manner the contribution was to be paid. Further it argues that the word "transferred" was dropped because it was redundant. The Government urges that "transferred" was used to permit a transfer of cash from the old pension reserves of the corporations and the word "paid" likewise meant cash — thus both terms referred to cash payments.

It appears that by 1942 there was no further need to refer to the corporate pension reserves and consequently no need to refer to this "transfer" to pension trusts and the term was dropped from the statute. The word "paid" remains, and its meaning was not thereby altered. The argument as advanced by the Government that the transfers from the corporate reserves would be "transfers" in cash and therefore the word "paid" also meant cash, has no basis in the legislative history nor in the authorities to support it. Unfortunately, the available legislative history of Section 404 does not assist us in the solution of our problem.

There are several significant cases which treat comparable fact situations under this and similar sections of the Revenue Act. The first to be considered is Anthony P. Miller, Inc. v. Comm'r, 164 F.2d 268, 4 A.L.R.2d 1219 (3d Cir., 1947), cert. denied 333 U.S. 861, 68 S.Ct. 741, 92 L.Ed. 1140. This case concerned the then Section 24(c) (1), and the question whether demand promissory notes given by a corporation to one of its officers as salary constituted payment of the salary. The Government argued that "paid" meant the giving of cash or its equivalent. The court there held that the officer's salary was "paid" by the delivery of the notes, and so agreed with the Sixth Circuit in Musselman Hub-Brake Co. v. Comm'r, 139 F.2d 65 (1943). In the Miller decision the court referred to the basic law of negotiable instruments and considered it as an ordinary commercial transaction. The court said:

"The legal rule is well recognized that the giving and acceptance of the negotiable instrument is conditional payment of the debt and the creditor cannot proceed against the debtor on the original obligation until the instrument is either surrendered or dishonored. If the parties agree, the acceptance of the negotiable paper will discharge the original debt altogether."

The court then observed that the solvent corporation's demand notes were negotiable and were like checks, that is "payable at once." The holding was that there was payment and the deductions should be allowed.

Musselman Hub-Brake Co. v. Comm'r, supra, accepted by the court in the Miller case, was concerned with the question whether the corporation had "paid" interest and royalties to its principal stockholder by the delivery to him of the corporation's demand promissory notes. This again concerned Section 24(c) of the Code which contained only the word "paid." It read in part as follows: "* * no deduction shall be allowed * * * if such expenses or interest are not paid within the taxable year * * *." As to the section's legislative history the court concluded that the test should be whether and when the recipient received income, and the deductions were allowable when and if the creditor received "property" having a cash value equal to the claimed deduction. The court found that the notes in question had such a value readily realizable, and held the demand notes to be payment under the code section there concerned. The Musselman case is significant because the statute there construed was one which attempted to correlate the tax consequences on both sides of transactions involving the payment of compensation. Under this situation the court considered the event from the recipient's side, found there was income there, and this gave an assist to the finding of payment by the other side. The same method could be applied to the case at bar; that is from the recipient's side it could be determined whether something had been received of value and if received it must have been delivered and paid by the other party.

The next case which is pertinent is Sachs v. Comm'r, 208 F.2d 313 (3d Cir., 1953). Here the court had two separate cases in each of which the taxpayer had delivered its own demand notes to the trustee of its pension fund. The notes were negotiable and payable at a bank. It would appear from the opinion that the parties intended that an immediate demand be not made. The court held that there had been payment and deduction was allowed to Slaymaker Lock Co. as there was evidence that the corporation was solvent and that the note was worth its face amount at the time of delivery. As to Sachs, however, the court felt the record did not show whether the maker was solvent nor show the value of this note at the time of delivery; consequently it remanded the Sachs case for...