Court Opinion

ID: 4485961
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:06.108558+00
Date Added: 2024-06-11T15:03:48.274900
License: Public Domain

Leech, J., dissenting: The majority holds that the contributions to the employees’ trusts were deductible as “compensation” under section 23 (a) of the Internal Eevenue Code. I respectfully dissent. The benefits of the trusts were to inure to the beneficiaries only because of the mutual relationship of employer and employee between those beneficiaries and the petitioner. The contributions to the trusts were, therefore, intended to be and were compensation to the employees. And, if not deductible as “compensation,” they were not deductible under that section at all. Monarch Life Insurance Co., 38 B. T. A. 801;1 Lincoln Electric Co., 6 T. C. 37; reversed, 162 Fed. (2d) 379.2 See also section 23 (p). The applicability of section 23 (p) was not pleaded, discussed, or decided and could not, I think, possibly be involved. Admittedly, these contributions, if they had been made to “Employees’ Trusts” as defined by section 165, “to cover * * * [a] pension liability accruing during the year,” would have been deductible under section 23 (a) (1) (A), as “compensation for personal services actually rendered.” See sec. 23 (p). But there was here no “pension liability.” And, more important, these trusts were not “Employees’ Trusts” within section 165. Lincoln Electric Co., supra. Regulations 103, sec. 19.165-1. Even the maj ority opinion does not so identify them. They were not part of any “plan” at all. The contributions in the taxable year were merely isolated transactions. They were made without any semblance of obligation for their continuance. Thus we are left, as the majority opinion reveals, with the naked question of whether these payments were deductible as “compensation for personal services actually rendered” under section 23 (a) (1) (A), alone.3 The affirmative answer of the majority to this question is based upon the following simple ultimate conclusion of law and fact: The total compensation paid by petitioner in 1941 to each participant under the two trusts, including the amount credited to such participant under the trusts, constituted reasonable compensation for services rendered to petitioner in 1941 by each such'participant. Of course such conclusion, if supported by the law and the record, disposes of the issue respecting the contributions to the employees’ trusts and their allocation to the participants therein. Gisholt Machine Co., 4 T. C. 699. I am, however, unable to accept this conclusion. I believe it to be directly and conclusively contradicted by both the law and the record. Section 23 (a) (1) (Á), quoted in footnote 3 of the opinion, supra, limits the deduction of compensation payments thereunder to those made for “services * * * rendered.” [Italics supplied.] So, in the Lincoln Electric case, supra, we held that, in order to be deductible as “compensation” under section 23 (a) (1) (A) the payments must have been made for past services. Since this conclusion was based on the direct holding of the Supreme Court in Old Colony Trust Co. v. Commissioner, 279 U. S. 716, nothing inconsistent therewith said by this Court in Gisholt Machine Co., mpra, upon which the majority here primarily relies, or by any court other than the Supreme Court, could be effective. The majority opinion includes the finding that the trust indentures contained among their provisions the following: * * * Payments to participating employees were to be made from each such allocated amount in the event the participant’s salary and earned commissions for any fiscal year ending November 30 fell below 90 per cent of his average yearly salary and earned commissions for the preceding five years (or years of employment if less than five), in which event distribution was to be made to bring his compensation up to the 90 per cent level; * * * Under this provision the employer could reduce salaries in any current year and make up the 90 per cent of the preceding five-year average from the trust funds contributed in a prior year, thus increasing its net income for such current year. The employer, petitioner, had enjoyed very large profits during 1941, the year involved. Taxes were high. It sets aside in these trusts a portion of such profits. Under the last quoted provision of the trusts, it proposes to deduct as “compensation” under section 23 (a) (1) (A) of the code, alone, that portion of 1941 profits in computing its net income for 1941 — and thus escape those high taxes thereon. It does this with the frankly stated purpose of using them in later years to pay compensation to employees for services rendered, not in the year of the contributions to the trusts and the allocation thereof to the employees, but for services rendered by the employees in those later years. This, I think, in itself prevents the contested deduction. Another condition necessarily precedent to the right of an employer to a deduction for “compensation” under section 23 (a) (1) (A) of the code, alone, is that the “compensation” must have been irrevocably paid by the employer and irrevocably received by the employees. Let us assume, contrary to the precise and deliberate wording of the trusts, that the contributions were to be used only for the payment of compensation for past services and, therefore, under Gisholt Machine Co., 4 T. C. 699, upon which the majority relies, even though the trusts were not within section 165 of the code, the contributions, if reasonable, could legally be deductible as “compensation” under section 23 (a) (1) (A) alone. That assumption might support the premise that the present contributions when made and allocated were likewise deductible. I say “might” because it would do so only if the contributions were made irrevocably in the tax year, as they were in the Gisholt case. But that is not so here. The contributions now in dispute were revocable and not irrevocable at the close of the taxable year. That conclusion of law, it seems to me, inevitably follows from another equally clearly and precisely worded provision of the trusts. That provision, as the majority finds, was: * * * The trust was irrevocable on the part of petitioner except that in the event the Commissioner of Internal Revenue ruled that the trust fund did not qualify under section 165 of the Internal Revenue Code, the petitioner reserved the privilege of electing to terminate the trusts upon giving notice to the trustees, who should then repay the fund to the company and all rights and obligations under the trusts should thereupon terminate * * * [Italics supplied.] The determination of the validity of this provision here does not leave the pending controversy presenting only a moot question, as was so in Commissioner v. Procter, 142 Fed. (2d) 824. After answering the question of the validity of this provision here, we are still left with a live and continuing controversy, i. e., the tax deficiency. The provision expressly making the contributions to the present trusts revocable, I think, was valid. And, since the trusts obviously did not “qualify under section 165 of the Internal Revenue Code,” a conclusion not disputed by the majority, the contributions were, therefore, not irrevocable, but revocable. TURNER and Opper, JJ., agree with this dissent.   An authority for the holding in this ease is United States v. Chase, 135 U. S. 255, from which the following is quoted: “It is an old and familiar rule that, ‘where there is, in the same statute, a particular enactment, and also a general one, which, in its most comprehensive sense, would include what is embraced in the former, the particular enactment must be operative, and the general enactment must be taken to affect only such cases within its general language as are not within the provisions of the particular enactment.’ ” And, if this rule were not applicable in construing section 23 (a) (1) (A), I. R. C., “the particular enactment’’ therein covering “a reasonable allowance for * * * compensation * * *” completely loses its effectiveness, and the right of the Commissioner to pass on the reasonableness of compensation payments in determining their deductibility under section 23 (a) (1) (A) is lost — a conclusion, I think, inconsistent with the law and its long consistent administration.    It may be argued that, in this reversal, the Circuit Court of Appeals for the Sixth Circuit held that contributions to certain employees’ trusts there were deductible as ordinary and necessary business expenses under section 23 (a) (1) (A), I. R. C., alone, regardless of whether these contributions were "compensation” — reasonable or unreasonable. If such an argument is sound, of course, that Circuit Court would disagree with the proposition for which the Lincoln case is cited above as an authority.    SEC. 23. DEDUCTIONS EROM GROSS INCOME. In computing net Income there shall be allowed as deductions : (a) Expenses.— (1) TBADB OB BUSINESS EXPENSES.— (A) In General. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has no( taken or is not taking title or in which he has no equity.