Court Opinion

ID: 4480692
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:28.495751+00
Date Added: 2024-06-11T14:53:59.693375
License: Public Domain

Tannenwald, J., concurring: I think the majority has reached the right result for the wrong reason. Contributions to the plan were discretionary with the original employer, Philco-Penn. The agreement with Ford provided that Ford would be furnished with “assignments of all pension, retirement, profit-sharing, bonus, and other welfare or benefit plans” of Philco-Penn and “evidence of such other corporate action by [Philco-Penn] as may be needed to place Ford in the position [Philco-Penn] now occupies under such plans” and that “Ford agrees to take appropriate action and to enter into appropriate argeements with respect to adoption of, amendment of, or substitution for such plans.” Moreover, the agreement between Philco-Penn, Philco-Del, and the trustee of the plan provided that Philco-Del “shall succeed to all the rights and liabilities of [Philco-Penn] under the Trust Agreement.” Philco-Penn by appropriate corporate action amended the plan to implement the foregoing and specifically provided in such amendment that the term “Philco Corporation” as used in the trust agreement should include Philco-Del. All of the foregoing antedated the closing of the transfer of the business of Philco-Penn to Philco-Del on December 11, 1961. It seems to me that, by virtue of that closing, Philco-Del adopted the plan. By the terms of the plan, contributions were permitted but not required, and there is nothing in the record before us to indicate that the decision of Philco-Del in this regard had to be made before the end of 1962.1 To be sure, Philco-Del in fact made no contributions to the plan but we have no way of determining on the record herein when the decision not to contribute was taken. For aught that appears, that decision may not have been made until well into 1962.2  Petitioner became an employee of Philco-Del at the time of the closing, to wit, December 11, 1961. He did not receive notice of his right to elect withdrawal of Ms share under the plan until January 1962 and did not exercise this right of election until later in that month. He was still an employee of Philco-Del at the time of actual distribution on March 31,1962, and did not retire until June 30,1965. Under the foregoing circumstances, I think this case falls squarely within the ambit of Jack E. Schlegel, 46 T.C. 706 (1966), and E. N. Funkhouser, 44 T.C. 178 (1965), affd. 375 F. 2d 1 (C.A. 4, 1967). Even if petitioner’s right to withdraw was fixed prior to the closing and therefore these two decisions are not controlling (see Jack E. Schlegel, sufra at 709), the result herein should be the same. It cannot be gainsaid that petitioner separated from the service of Philco-Penn on December 11,1961. But it does not follow that the distribution to him was “on account of” such separation. Petitioner had the option either to have his share distributed to him or remain under the plan. It was his choice, not his “separation from the service,” which was the reason for the distribution. E. N. Funkhouser, 44 T.C. at 184-185. For the foregoing reasons, it is, in my opinion, imnecessary to face, as the majority does, the question whether there is a conflict between section 402(a) (2) and Mary Miller, 22 T.C. 293 (1954), affirmed per curiam 226 F. 2d 618 (C.A. 6, 1955), and Lester B. Martin, 26 T.C. 100 (1956). As Judge Baum succinctly pointed out in E. N. Funkhouser, 44 T.C. at 184, those cases are “To be sharply distinguished” ■with respect to situations such as are involved herein. I also think the majority’s rationale that “separation from the service” under section 402(a) (2) requires a “substantial change in the make-up of employees” is incorrect. When the “separation from the service” provision (sec. 165(b), I.R.C. 1939) was first introduced into the Bevenue Act of 1942, the Senate Finance Committee explained that it was intended to cover a situation where an employee was entitled to be paid his total distributions in the year “in which he retires or severs his connection with his employer.” (Emphasis added.) See S. Rept. No. 1631, 77th Cong., 2d Sess., p. 138 (1942). See also Estate of Frank B. Fry, 19 T.C. 461, 464 (1952), affirmed per curiam 205 F. 2d 517 (C.A. 3, 1953); Edward Joseph Glinske, Jr., 17 T.C. 562, 565 (1951). In 1952, when the Congress amended section 165(b) to deal with the problem of appreciation of distributed securities of the employer corporation, the committee reports again emphasized “the employee’s separation from the employer's service.” (Emphasis added.) See H. Rept. No. 2181, 82d Cong., 2d Sess., p. 1 (1952); S. Rept. No. 1831, 82d Cong., 2d Sess., p. 1 (1952). When the proposed Internal Revenue Code of 1954 was first introduced and as it passed the House of Representatives, it contained sections 402(a) (2) and 402(a) (3) (B) (ii).3 H.R. 8300, 83d Cong., 2d Sess., pp. 97-98 (1954); H. Rept. No. 1337, 83d Cong., 2d Sess., p. A147 (1954). During the course of the hearings before the Senate Finance Committee, it was pointed out by the Association of the Bar of the City of New York that such a provision might lead to abuse in that there could be technical compliance with the provision even though the business was continued. See Hearings before the Committee on Finance, United States Senate, 83d Cong., 2d Sess., p. 572 (1954). The result was a more restrictive provision which, with minor changes in conference not material herein, became section 402(e) of the 1954 Code (see H. Rept. No. 2543, 83d Cong., 2d Sess. (1954)). In incorporating this provision, the Senate Finance Committee stated: The House bill extends capital gains treatment to lump-sum distributions to employees at the termination of a plan because of a complete liquidation of the business of the employer, such as a statutory merger, even though there is no separation from service. This was intended to cover, for example, the situation arising when a firm with a pension plan merges with another firm without a plan, and in the merger the pension plan of the first corporation is terminated. Your committee’s bill revises this provision of the House bill to eliminate the possibility that reorganizations which do not involve a substantial change in the make-up of employees might be arranged merely to take advantage of the capital gains provision. Thus, your committee’s bill would grant capital gains treatment to lump-sum distributions occurring in calendar year 1954 where the termination of the plan is due to corporate liquidation in a prior calendar year. The purpose of granting capital gains treatment to such distributions is to avoid hardship in the case of certain plans which it is understood were terminated on the basis of mistaken assumptions regarding the application of present law. [See S. Rept. No. 1622, 83d Cong., 2d Sess., p. 54 (1954).] The majority, following the lead of Judge Wisdom in United States v. Johnson, 331 F. 2d 943 (C.A. 5, 1964), seizes upon the words “substantial change in the make-up of employees” to support its rationale. In so doing, the majority, in my opinion, misreads the report of the Senate Finance Committee. That report reflects a concern with changes in employment involving no realistic structural change in the employer, such as the liquidation of a subsidiary corporation into its parent and a continuation of the business and the employment relationship without any accompanying change in beneficial ownership. That this is the case is revealed 'by the language in the committee report referring to “a substantial change in the make-up of employees” which “might be arranged merely to take advantage of. the capital gains provisiorU (emphasis added; see S. Rept. No. 1622, supra) and to the fact that section 402(a) (2) is by its terms directed toward the narrow area of corporate liquidations and not reorganizations generally.4  In effect, the majority unnecessarily and erroneously indicates that a change of employer accomplished as a part of a transfer of ownership can never be a “separation from the service” unless there is also a change in the makeup of the employee group — something that, in most transfers of businesses, is in fact unlikely to occur. Nothing in the legislative history requires such a rationale. Indeed, although section 402(e) may not have accomplished all that was originally intended by the House provision, I think it unwarranted, within the contest of the total legislative history, to extend that section to situations beyond those involving modifications in corporate structures which bring about “a change in the employment relationship in no more than a formal or technical sense,” i.e., unaccompanied by a meaningful change in the beneficial ownership of the business. See Rev. Rul. 58-94, 1958-1 C.B. 194, 196; Sellin, Taxation of Deferred Employee and Executive Compensation 368 (1960). Concededly, the decided cases and rulings have a “bramble bush” character. See Jack E. Schlegel, sufra at 108. United States v. Johnson, supra, and United States v. Martin, 337 F. 2d 171 (C.A. 8, 1964), are distinguishable on their facts since, in those cases, the taxpayer remained as an employee of the same entity after the transfer of ownership. The same can be said of United States v. Peebles, 331 F. 2d 955 (C.A. 5, 1964); language in the opinion in that case indicating that the identity of the employer was an immaterial consideration is pure dicta and, I think, wrong.5 Perhaps some language in the opinions in Mary Miller, supra, and Lester B. Martin, supra, can be construed to permit capital gains treatment of distributions where there is only a formal or technical change in the employment relationship; if so, I think such a construction should not be followed. A whole series of rulings by respondent reflects the rationale that change of employer plus meaningful change of 'beneficial ownership is sufficient to constitute “separation from the service” and that, if these two conditions are met, a “substantial change in the make-up of employees” is not a prerequisite. Rev. Rul. 58-94, 1958-1 C.B. 194; Rev. Rul. 58-95, 1958-1 C.B. 197; Rev. Rul. 58-96, 1958-1 C.B. 200; Rev. Rul. 58-97, 1958-1 C.B. 201; Rev. Rul. 58-98, 1958-1 C.B. 202; Rev. Rul. 58-99, 1958-1 C.B. 202; Rev. Rul. 58-383, 1958-2 C.B. 149. Even if the discernible pattern of legislative history is not as clear as I think it is, these rulings constitute a contemporaneous construction of what is at best an unclear statutory provision, the interpretation of which is controversial. See Funkhouser v. Commissioner, 375 F. 2d 1, 5 (C.A. 4, 1967). Particularly since respondent at no point herein seeks to disavow these rulings, they should be accorded substantial weight. Cf. Hanover Bank v. Commissioner, 369 U.S. 672 (1962). Under these circumstances, I simply do not understand their gratuitous rejection by the majority. In the area of section 402(a) (2), taxpayers are sufficiently victims of decisions over which they have no control. See Jack E. Schlegel, supra at 710. I see no justification for adding to their misery. Naum, /., agrees with this concurring opinion.   The plan provided that contributions, If any, were to be made on account of the fiscal year of the corporation ending with or within the fiscal year of the plan and that the amount of any contribution was to be fixed prior to the close of the fiscal year of the corporation. The record indicates that the plan was on a calendar year but is silent as to the fiscal year of Philco-Penn or Philco-Del.    On Dec. 7, 1961, Philco-Del wrote to all employees that Philco-Del had “no present plan to change [Philco-Penn’s] retirement and pension plans.”    Sec. 402(a) (2) provided for capital gains treatment ■with respect to total distributions in 1 year “by reason of the termination of the plan as a result of the complete termination of the business of the employer.” Sec. 402(a) (3) (B) (ii) provided as follows: (ii) the term “complete termination of the business of the employer” means, in the ease of an employer which is a corporation, the complete liquidation of such corporation whether or not such liquidation qualifies as a complete liquidation under section 336 and whether or not such liquidation is incident to a corporate acquisition of property, a statutory merger, or consolidation.    The reference to “reorganizations” would seem to have been intended tn make sure that a statutory merger- of a, subsidiary into- a parent would sitill be considered! a liquidation.    The Fifth Circuit Court of Appeals rceognized that the taxpayer was on the payroll of the subsidiary corporation prior to the transfer of stock ownership, but, because of its approach, found it unnecessary to question the District Court’s finding that the taxpayer was an employee of the parent corporation prior to the transfer.