Document: 429 U.S. 569 97 S.Ct. 850 51 L.Ed.2d 48 DON E. WILLIAMS COMPANY, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE. No. 75-1312. Argued Dec. 8, 1976. Decided Feb. 22, 1977. Syllabus Petitioner accrual-basis corporate taxpayer, by delivering fully secured promissory demand notes to the trustees of its qualified employees' profit-sharing trust, held not entitled income tax deductions therefor under § 404(a) Internal Revenue Code 1954, which allows a deduction for contributions "paid" an employer plan in taxable year "when paid," and further if contribution was "payment . made" within specified grace period following end employer's year. Pp. 574-583. (a) The statutory terms "payment," coupled with legislative history's reference "actually demonstrate that, regardless method accounting, all taxpayers must pay out cash or equivalent order qualify deduction. This accords apparent policy that receive full advantage any entitles benefit. Here petitioner's issuance delivery did make accrued ones were meaning 404(a). 574-579. (b) Though had value would as seller-recipient, notes, maker, even though secured, are still only promise do themselves constitute outlay other property. P. 579. (c) transactions question cannot be treated payments followed loans, evidenced return, since "a transaction is given effect accord what actually occurred might have occurred," Commissioner v. National Alfalfa Dehydrating, 417 134, 148, 94 2129, 2136-2137, 40 717. 579-580. (d) word assumed same it has 267(a) Code, disallows taxpayer certain items but yet paid related cash-basis payees. situation s whereby term been used insure between entities received consistent treatment, no counterpart 404(a), exempt from tax. 580-582. (e) A note properly equated check, note, when payable on pay, whereas check direction bank immediate payment, medium exchange, federal purposes conditional payment cash. 582-583. 527 F.2d 649, affirmed. Marvin L. Schrager, East Moline, Ill., petitioner. Keith A. Jones, Washington, D. C., respondent. Mr. Justice BLACKMUN delivered opinion Court. 1 issue this case whether 26 U.S.C. 404(a).1 2 * pertinent facts stipulated. Petitioner, Don Williams Company (taxpayer), Illinois corporation principal office at Moline State. It serves manufacturers' representative wholesaler factory tools supplies. keeps books files returns accrual accounting basis fiscal ended April 30. Williams, Jr., president owns 87.08% outstanding capital stock; Joseph W. Phillips, vice president, 4.17% thereof; Alice R. secretary-treasurer, 4.58%. 3 In November 1963, taxpayer's directors adopted Profit Sharing Plan Trust. three officers First Bank Moline. trust "qualified" 401(a) thus, 501(a), 4 Near each years 1967, 1968, 1969, authorized approximately $30,000 trust. amount expense liability close May, interest-bearing so accrued. 1967 1968 bore 6% interest 1969 8% interest. Each guaranteed officer-trustees individually and, addition, collateral consisting Williams' stock interests Phillips plan. plus net worth guarantor, greatly exceeded face note. 5 Within duly honored. 6 return filed claimed trustees. On audit, Revenue, respondent here, ruled accruals deliveries "paid," Accordingly, he disallowed instead, allowed checks2 respective they delivered. These adjustments resulted deficiencies $15,162.87, $1,360.64, $530.42, respectively, taxes years. 7 petition redetermination, United States Tax Court, reviewed dissents, upheld Commissioner. 62 T.C. 166 (1974). doing, adhered rulings 19493 form something therefore deductible, 1954 predecessor 23(p) 1939. With being subject appeal Court Appeals Seventh Circuit, issue, declined follow decisions Third, Ninth, Tenth Circuits disagreed earlier cases.4 T.C., 168. 8 appeal, Circuit also sister Circuits, 649 (1975). We granted certiorari resolve conflict. 426 919, 96 2622, 49 372 (1976). II 9 statute. Under 446 446, computed regularly utilized keeping books. Subject requirement, may compute income" receipts disbursements or, among others, "an method." As consequence, words "paid accrued" incurred" appear many Code's provisions.5 presence these phrases reveals Congress' general intent give system allow deduct appropriate accrue, incurred, unpaid during 10 Section however, quoted n. 1, supra, stands obvious contrast. provides "(i)f plan," contributions, limitation amount, shall deductible "(i)n " (emphasis supplied). usual alternative words, "or incurred," missing, their absence indicates congressional permit extent merely incurred Congress, way addendum, provided taxpayer. 404(a)(6) respect account time prescribed filing year's return.6 6072(b) period, petitioner-taxpayer, two one-half months after 30, year, July 15. 11 B. history. history, expected, theme statute's language. 404 virtually identical 1939 amended 162(b) Act 1942, 56 Stat. 863. Committee reports speak deferral paying compensation state done "under arrangement having deferring receipt compensation, will until H.R.Rep. 2333, 77th Cong., 2d Sess., 106 (1942); S.Rep. 1631, 141 (1942).7 This, created computational problem who wished maximum possible percentage limitations statute, see 404(a)(3)(A), able determine figure See Hearings before Senate Finance 465 (1942). Congress originally 60 days 23(p)(1)(E) amended, 865, 12 Six later House Ways Means recommended extension referred then-existing 60-day "contributions 2087, 80th 13 (1948). then go along. But lengthened coincide similar reference, makes payment," repeated 1622, 83d 55 (1954); U.S.Code Cong. & Admin.News p. 4629. See, id., 292, 1337, A151 4025. applicable Treasury Regulations 1942 consistently stressed Reg. 111, 29.23(p)-1 (1943); 118, 39.23(p)-1(d) (1953); 1.404(a)-1(c), CFR 1.404(a)-1(c) (1975).8 statute re-enacted administrative construction said approval. Lykes States, 343 127, 72 585, 590, L.Ed. 791 (1952). 14 thus have, life development unbroken pattern emphasis Indeed, here concedes more than mere necessary Tr. Oral Arg. 17. find requirement satisfied To aspect we now turn. III 15 light language just-mentioned concession, controversy us obviously comes down unaccompanied, discharge made one obligation existed, formally recognized acknowledged value. plan? 16 Two although concern taxpayers, helpful significance. first Eckert Burnet, 283 140, 373, 75 911 (1931). There endorsed issued became insolvent. his partner took up creditor replacing them own joint unanimously entitle bad-debt for, Board observed, 'merely exchanged primarily liable corporation's secondarily liable, without property value.' Id., 141, S.Ct., 374. second decision Helvering Price, 309 409, 673, 84 836 (1940). argued giving response guarantee gave rise observed "was deduction," concluded fact difference result. "(T)he payment. secure respondent's pay" "did transform into required loss year." 413-414, 675.9 17 reasoning apparent: never paid, "the parted nothing pay." Hart Commissioner, 54 848, 852 (CA1 1932). 18 If, suggested, places principle Price clearly controlling here. petitioner argues, course, persuaded. 19 accords, also, behind provision, namely, objective outlay-of-assets test integrity plan10 20 Other arguments advanced unconvincing: 21 1. argues because value, equal suggested such seller-recipient. Whatever recipient, pay. does itself argument availing there. Brief Respondent, O.T. 1939, 559, pp. 16-17. 22 2. suggests equates loan, advanced. 23 occurred. 24 ". repeatedly while free organize affairs chooses, nevertheless, once so, accept consequences choice, contemplated enjoy benefit some route chosen not." 148-149, 2137, 717 25 Central Tablet Mfg. Co. 690, 2516, 2526, 41 398 (1974).11 What place clear, accordingly. indulge speculating how recast different 3. Taxpayer heavily relies Courts courts level pass upon present came n.4, supra resolved adversely ignore those lightly by. stronger cases concerned somewhat lesser integrity, sense either lower rate all, less adequately secured. After careful review cases, conclude analytical structure rests errors: 27 Appeals, considering assumed, mistakenly feel, possesses 267(a).12 latter section analogy drew derives Anthony Miller, Inc. 164 268 (CA3 1947), cert. denied, 333 861, 68 741, 92 1140 (1948), Musselman Hub-Brake 139 65 (CA6 1943), where salary shareholder royalties effected 24(c) (the Code).13 interpretation necessarily desirability affording simultaneously treatment inclusion. purpose prevent avoidance result could claim item payee include ever. 1546, 75th 1st 29 (1937); 1242, 31 (1937). Because recipient receipt, disallowance maker sympathetically deemed serve underlying Code. Musselman, 68; Logan Engineering 860, 868 (1949). merely, insofar as, treatment. consideration call equivalence both sides ledger plainly present. And brought disclose information report 6047(a) 28 seemed equate check. line thin times, distinct. still, name implies, represent reduction assets. hand, come Estate Spiegel 524 (1949); Rev.Rul. 54-465, 1954-2 Cum.Bull. 93. factual illustrated revealed issuance. ourselves disagreement reached hereinabove cited. agree, uniform case. judgment 30 ordered. STEVENS, concurring. 32 BLACKMUN'S I join, construes require equivalent. my judgment, best protecting pension plans often controlled interests. 33 STEWART, whom POWELL joins, dissenting. 34 says "places trust." Ante, 578. assumption keystone today's decision, treating cash-method can apply rule "cash equivalent" just supported. 35 true, observes, ante, 574-577, committee reports, emphasize "paid";1 insufficient obtain case, requires part negotiable, interest-bearing, When responds stating baldly basis," begs rather answers question.2 36 question-begging odds long-accepted cash- should lumped together applying statutes one. (CA6), expressed ago. accrual-method sought business-expense patent notes. business expenses thereafter. 24(c). court permissible, noting "are point here" "(t)he premise decision." F.2d, 69. explicitly rejected contention actual "put restrictive unnecessary achieve purpose. 37 underlies it, approved connection analogous provisions e. g., Fetzer Refrigerator 437 577 (CA6); Wasatch Chemical 313 843 (CA10); Time Oil 258 237 (CA9); Sachs 208 (CA3); Mundet Cork Corp., 173 757 (CA2); Celina 142 449 accord, Advance Constr. 356 F.Supp. 1267 (ND Ill.). 831-852 (CA1). Sixth considered doctrine most recently Patmon, Young Kirk 536 (1976), decided affirms today. Patmon relying denied contributed careful, distinguish 'paid' (must) defined context particular used." 144. 38 short, appellate ever use identically.3 unanimity soundly supported long-established law "harmony scheme purpose." Hutchings, 312 393, 398, 61 653, 654, 85 909. principle, there reason suppose means thing methods, every not. 39 requiring equivalent," premised taxpayers' method. Eckert, U.S., 374 ("For basis, 1925"); 413, 675 ("As 1932 .").4 focus explains thrust inquiry determining surrendered. They them, inconsistent fundamental principles deductions. seeking basis; focused surrenders think That is, normal rules governing except Since protect fund ensure receives "full advantage" contribution, 579, received. tangible, concededly obtained local bank. "income" such. 582. tendered company, transfer Colorado Nat. Denver 933. Plainly, then, neither nor suggest deny period. says, "insure benefit." wholly served bearing, notes.5 42 reverse Appeals. Technical Amendments 1958, 1623, reads part: "(a) General rule. "If bonus, pension, profit-sharing, annuity plan, 162 (relating trade expenses) 212 production income); but, satisfy conditions sections, section, subject, amounts year: "(3) Stock bonus trusts. "(A) Limits contributions. "In ends excess percent otherwise employees ." Respondent acknowledges solvent 28-31. Dick Bros. 205 64 1953). 860 (Kern, J., dissents), dismissed (CA7 1949); Slaymaker Lock 1001 (1952) (Bruce, J.), rev'd sub nom. 1953); 1061 (1956) (Withey, remanded, (CA9 1958), supplemental opinion, 294 667 (1961); 817 (1962) (Fay, (CA10 1963). Memorandum Freer Motor Transfer TCM 507 (1949), P 49,124 P-H Memo J.); 882 (1952), 52,256 TC (LeMire, Lancer Clothing Corp. 776 (1975), 75,180 (Scott, Second 76-4012; Coastal Electric 1007 75,231 (Goffe, Fourth 75-2184. 71-95, 1971-1 130; 55-608, 1955-2 546, 548. 1976), concerning 1953) (negotiable notes); 237, 240 1958) (non-interest-bearing "close" question); 1963) (unsecured five-year notes). Accord, (NDIll.1972) (secured note). persistence Government pursuing position, noted before. Foster Lumber Co., 54-55, 216 (dissenting opinion). time, Government's position accepted encountered judicial rejection over substantial issue. §§ 162(a), 163(a), 164(a), 174(a)(1), 175(a), 177(a), 180(a), 182(a), 212, 216(a), 217(a). 7701(a)(25). 404(a)(6), read prior 1974 amendment, provided: "(6) Taxpayers basis. "For paragraphs (1), (2), (3), last day (including thereof)." 1013(c)(2) Employee Retirement Income Security 1974, 88 923, afford At least witness aptly described "drafted corporations put trusts." Statement Richard Sturtevant 1.404(a)-1 reads: "Deductions generally allowable accounting. Exceptions extensions thereof). provision intended accrual, thereof) applied situations Cleaver 158 342 1946), 330 849, 67 1093, 91 1293 (1947) (interest); Jenkins Bitgood, 101 (CA2), 307 636, 59 1033, 83 1518 (1939) (loss); Baltimore Dairy Lunch, 231 870, 875 (CA8 1956) Guren 66 118 (1976)(charitable contribution); Petty 521, (1963) (Atkins, seven judges, concurring) (charitable contribution). applies charitable 170(a) deductions, too, limited year," H.R.Rep.No.1860, 3d (1938), referring 23(o ) (q) 1938, 52 463, 464. By 2003(a) 971, 4975 added "prohibited transaction" penalty. 4975(a), (b), (c)(1)(B). H.R.Conf.Rep. 93-1280, 308 (1974); 4639. penalty imposition, reaffirmed actual-payment strengthened enforceability. 267 relates Deductions disallowed. "No "(2) Unpaid expenses, interest, 163, If 21/2 thereof (i) (ii) includible gross person made; "(B) made, not, unless ends; "(C) thereafter, persons subsection (b). "(b) Relationships. "The are: "(4) grantor fiduciary .." concerns specifically precluded 212. 1944); (CA2 Akron Welding Spring 715 effect. instances see, (1948) added), 576, embellishment adds substance. thread support finds statement puts "on 575 n.7. gossamer quality kind Ernst Hochfelder, 425 185, 204 n.24, 1375, 47 668. invocation "re-enactment doctrine" Court's today, 576-577, dramatically misplaced. "administrative construction" supposedly approval enacted rehash illumine meaning. regulation, Treas.Reg. refers simply "actual payments" restates requirements had. course bear situations. answer "no." Thus, fails cuts strongly against it. correctly bad debts, losses, 578 n.9, cites involved taxpayers. analysis 267(a). 267(a), acknowledges, "merely, as" accomplish section's ensuring entities. implication continue application purpose, hold. (CA6). why logic inform

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