Wooster Rubber Co. v. Commissioner of Internal Rev.

• Citation: 189 F.2d 878
• Decision Date: 08 June 1951
• Docket Number: No. 11255.,11255.
• Parties: WOOSTER RUBBER CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

189 F.2d 878 (1951)

WOOSTER RUBBER CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11255.

United States Court of Appeals Sixth Circuit.

June 8, 1951.

John C. Johnston, Jr., Wooster, Ohio (Critchfield, Critchfield & Critchfield, Robert Critchfield and John C. Johnston, Jr., all of Wooster, Ohio, on the brief), for petitioner.

Francis W. Sams, Washington, D. C. (Theron Lamar Caudle, Ellis N. Slack, and Francis W. Sams, all of Washington, D. C., on the brief), for respondent.

Before MARTIN, McALLISTER and MILLER, Circuit Judges.

MARTIN, Circuit Judge.

The petitioner seeks review of the decision of the Tax Court adjudging deficiencies in excess profits tax of the corporation for the fiscal years ended September 30, 1944, and 1945, in the amounts of $19,201.96 and $21,117.62 respectively.

The issue presented is the extent of the deductibility of contributions made by petitioner to a profit-sharing trust during the years 1944 and 1945. The Tax Court decided that the amounts paid by petitioner to the profit-sharing trust exceeded the amounts called for by the instrument creating the plan, and that amounts so paid were not deductible under Section 23(p) (1) (C) of the Internal Revenue Code, Title 26, U.S.C., Section 23(p) (1) (C).¹

Practically all pertinent facts have been stipulated by the parties. The petitioner, Wooster Rubber Company, is an Ohio corporation engaged in the manufacture of molded rubber products and rubber household ware. Its books are kept and its income tax returns are made on an accrual basis. The corporation's fiscal year ends September 30th.

On September 28, 1944, the Board of Directors of the petitioner authorized the creation of a profit-sharing plan. Pursuant to this authority, petitioner two days later entered into an agreement in writing with the National City Bank of Cleveland, as Trustee, whereby "The Wooster Rubber Company Profit Sharing Plan" was established. Only the relevant portions of this lengthy document will be quoted:

"Article II

"The Plan

"Section (4)—Contributions to Plan— Employee Shares —

"(a) Each year on, or within sixty (60) days after, each anniversary date (including the initial anniversary date), the Company will contribute to the Trustee hereunder for the purposes of this Plan and Trust a sum (1) Equal to fifteen (15%) per cent of the compensation otherwise paid or accrued during the Company's fiscal year to the Participants and employees eligible to become Participants as of the anniversary date of the contribution. (2) In no event, however, shall the amount of the annual contribution by the Company * * * d. be in such an amount as to reduce by more than twenty-five (25%) per cent the net profits as defined under sub-Paragraph (d) of Section (4) of this Article II after deducting therefrom an annual dividend commitment equal to six (6%) per cent per share on the preferred stock, and Six ($6.00) Dollars per share on the common stock outstanding as of the beginning of the last taxable year prior to the anniversary date as to which the contribution is to be made. * * * (d) For the purposes of this Agreement, the words `net profits' shall mean the net earnings of the Company for each fiscal year ending September 30, as determined by the Company's independent accountants. `Net earnings' shall be determined by said accountants on an accrual basis by deducting from the Company's gross earnings all current operating expenses, insurance, all state and local taxes and assessments, all Federal Taxes (including income, excess profits, declared value excess profits, and taxes on undistributed earnings, if any, and any Federal taxes levied or measured by income, now in effect or hereafter enacted), current repairs and maintenance, depreciation, inventory losses, together with such items as in a similar line of business and in accordance with proper accounting practice would be charged to expenses; provided, however, that for the purposes of determining the amount of the contribution to this Trust for any year, the amount of the contribution itself for such year shall not be included among the expenses." Emphasis supplied.

This original plan was submitted to the Bureau of Internal Revenue for approval. Representatives of the Bureau advised petitioner that certain changes in the plan would be required as a prerequisite to the Bureau's approval. Accordingly, on December 29, 1944, the Board of Directors of petitioner, by resolution, amended the Agreement and Declaration of Trust in several respects. We are concerned with only one amendment.

Article II, Section (4) (d) was amended by striking and substituting in lieu thereof the following:

"For the purposes of this Agreement, the words `net profits' shall mean the net earnings of the Company for each fiscal year ending September 30 as determined by the Company's independent accountants. 'Net earnings' shall be determined by said accountants on an accrual basis by deducting from the Company's gross earnings all current operating expenses, insurance, all state and local taxes and assessments, all Federal taxes (including the amount shown on the original income tax return for the year in question of all income, excess profits, declared value excess profits, and taxes on undistributed earnings, if any, and any Federal taxes levied or measured by income now in effect or hereafter enacted), current repairs and maintenance, interest, depreciation and amortization, inventory losses, and other losses sustained during such fiscal year, together with such items as in a similar line of business and in accordance with proper accounting practice would be charged to expense; provided, however, that gains realized upon the disposition of any property other than the stock in trade of the Company, or property held by the Company primarily for sale to customers in the ordinary course of its business, shall not be included in the gross earnings of the Company for such fiscal year; and, provided, further, that for the purposes of determining the amount of the contribution to this Trust for any year, the amount of the contribution itself for such year shall not be included among the expenses, but the amount of the contribution to the Pension Trust Plan shall be included among the expenses." Emphasis supplied.

Under the resolution of the Board of Directors, the amendments were made retroactive to September 30, 1944. On or about March 15, 1945, the Trust as thus amended was approved by the Commissioner of Internal Revenue as an exempt trust under the provisions of Section 165 (a) of the Internal Revenue Code.²

Petitioner's Board of Directors on August 29, 1945, by resolution further amended the Agreement and Declaration of Trust to delete in its entirety Section (4) (e), not relevant here. The plan as thus amended was again approved by the Commissioner and in this form constitutes the profit-sharing plan in effect for the petitioner's fiscal years ended September 30, 1944, and September 30, 1945.

The net earnings of petitioner before the contribution and taxes for the years in question were $281,413.18 in 1944 and $281,681.43 in 1945. The dividend requirement referred to in Article II, Section (4) (a) (2) (d) of the profit-sharing plan was $18,720.00 in each of the taxable years ending September 30, 1944 and 1945. The taxable year of the trust established under the plan coincided with the taxable year of the petitioner.

Petitioner made contributions to the plan of $40,082.22 for the year 1944 and $39,854.67 for 1945. In each year, the contribution equaled exactly fifteen per cent of the compensation otherwise paid or accrued during that year to all employees under the profit-sharing plan. The taxpayer claimed a deduction for the full amount of these contributions in computing its federal income and excess profits taxes for 1944 and 1945.

In ascertaining the amount deductible for contributions under Section 23(p) (1) of the Internal Revenue Code, the Commissioner determined such contributions to be limited by Article II, Section (4) (a) (2) (d) of the profit-sharing plan to the amount of $17,717.95 for the fiscal year ended September 30, 1944, and to $17,718.53 for the fiscal year ended September 30, 1945; thus disallowing $22,364.27 of the deduction for the 1944 contribution and $22,136.14 for the 1945 contribution.

On November 19, 1948, petitioner received from respondent a notice, which asserted the following claimed deficiencies in tax:

                  Income tax fiscal year ended
                    September 30, 1944 .........  $     18.37
                  Excess profits tax fiscal year
                    ended September 30, 1944 ...    19,201.96
                  Excess profits tax fiscal year
                    ended September 30, 1945 ...    21,117.62
                                                   __________
                      Total ....................   $40,337.95
                

Petitioner admitted a deficiency of $1,310.54 for the fiscal year ending in 1944, but contested the remaining portion attributable to the disallowance of a part of the contribution to the profit-sharing trust. It took the same position with respect to the year 1945 and admitted a deficiency of $5,128.19, but contested that portion of the deficiency resulting from the disallowance of its actual contributions to the profit-sharing plan.

The Tax Court, in an opinion reviewed by the court, upheld the Commissioner's position and entered its decision holding a deficiency for 1944 of $18.37 in income tax and deficiencies in excess profits taxes for 1944 and 1945 in the amounts stated in the opening sentence of this opinion. Inasmuch as the only issue before the Tax Court was the extent of the deductibility of the contributions of the taxpayer to the profit-sharing plan, and inasmuch as the Commissioner conceded that the amounts contributed to the plan were reasonable, ordinary and necessary expenses of doing business, the area of contention was narrowed until it encompassed little more than interpretation of the language contained in Article II, Section (4) of the profit-sharing...