Court Opinion

ID: 9426660
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:18:36.695076+00
Date Added: 2024-06-11T17:23:02.231456
License: Public Domain

Mr. Justice Stewart,
with whom Mr. Justice Powell joins,
dissenting.
The Court says that § 404 (a) “places all taxpayers on a cash basis with respect to payments to a qualified profit-sharing trust.” Ante, at 578. This assumption is the keystone of today’s decision, for only by treating the petitioner as a cash-method taxpayer can the Court apply the rule of Eckert v. Burnet, 283 U. S. 140, and Helvering v. Price, 309 U. S. *584409, to require the petitioner to have paid out “cash or its equivalent” in order to be allowed a deduction. But the assumption is just that — an assumption that is not and cannot be supported.
It is true, as the Court observes, ante, at 574-577, that the statute, the applicable committee reports, and the underlying Treasury Regulations all emphasize that the employer’s contribution must be “paid”;1 mere accrual of the obligation is therefore insufficient to obtain the deduction. The question in this case, however, is whether the word “paid” requires an accrual-basis taxpayer to part with “cash or its equivalent” or whether the obligation may be “paid” by the delivery of a negotiable, interest-bearing, fully secured demand note. When the Court responds by stating baldly that “the language of § 404 (a) places all taxpayers on a cash basis,” it begs rather than answers the question.2
This question-begging assumption is at odds with the long-accepted principle that cash- and accrual-basis taxpayers should not be lumped together when applying statutes such as this one. The case of Musselman Hub-Brake Co. v. Commissioner, 139 F. 2d 65 (CA6), expressed this principle more than 30 years ago. There an accrual-method corporation sought a business-expense deduction for patent royalties and interest paid to its controlling shareholder in the form of demand promissory notes. The applicable statute, as in the present case, required business expenses to be “paid” in the taxpayer’s taxable year or within two and one-half months thereafter. Internal Revenue Code of 1939, § 24(c). The *585court held that the deduction was permissible, noting that Eckert and Price “are not in point here” because in each case “[t]he method of accounting followed by the taxpayer . . . was the premise of . . . decision.” 139 F. 2d, at 69. The court explicitly rejected the contention that the requirement of actual payment “put an accrual taxpayer on a cash basis,” and held that such a restrictive interpretation of the word “paid” was unnecessary to achieve the congressional purpose.
The Musselman decision, and the reasoning that underlies it, have been approved by the Courts of Appeals in case after case, in connection with both § 404 (a) and other analogous provisions of the Internal Revenue Code. See, e. g., Fetzer Refrigerator Co. v. United States, 437 F. 2d 577 (CA6) ; Wasatch Chemical Co. v. Commissioner, 313 F. 2d 843 (CA10); Time Oil Co. v. Commissioner, 258 F. 2d 237 (CA9) ; Sachs v. Commissioner, 208 F. 2d 313 (CA3); Commissioner v. Mundet Cork Corp., 173 F. 2d 757 (CA2); Anthony P. Miller, Inc. v. Commissioner, 164 F. 2d 268 (CA3); Celina Mfg. Co. v. Commissioner, 142 F. 2d 449 (CA6); accord, Advance Constr. Co. v. United States, 356 F. Supp. 1267 (ND Ill.). See also Hart v. Commissioner, 54 F. 2d 848, 851-852 (CAI). The Court of Appeals for the Sixth Circuit considered the doctrine most recently in Patmon, Young & Kirk v. Commissioner, 536 F. 2d 142 (1976), a case decided after the decision of the Seventh Circuit that the Court affirms today. The court in Patmon, relying on Eckert and Price, denied a § 404 (a) deduction to a cash-basis taxpayer that had contributed a guaranteed demand note to its profit-sharing trust. The court was careful, however, to distinguish accrual-method taxpayers, noting that “the word 'paid’ [must] be defined in the context and in light of the purpose of the particular statute in which it is used,” 536 F. 2d, at 144.
In short, until the Court of Appeals for the Seventh Circuit held as it did in the present case, no federal appellate *586court had ever held that use of the word “paid” in a statute such as § 404 (a) requires that cash- and accrual-basis taxpayers be treated identically.3 This unanimity was .soundly supported by a long-established principle of tax law — that the construction of words in a tax statute should be in “harmony with the statutory scheme and purpose.” Helvering v. Hutchings, 312 U. S. 393, 398. Under this principle, there is no reason to suppose that the word “paid” means the same thing with respect to taxpayers who use different accounting methods, and every reason to suppose it does not.
The Eckert and Price cases, requiring the payment of “cash or its equivalent,” were explicitly premised on the taxpayers' use of the cash method. See Eckert, 283 U. S., at 141 (“For the purpose of a return upon a cash basis, there was no loss in 1925”); Price, 309 U. S., at 413 (“As the return was on the cash basis, there could be no deduction in the year 1932 . . ,”).4 Indeed, their focus explains their result. Because the returns at issue were filed on a cash basis, the *587thrust of the inquiry was upon determining what the taxpayers had surrendered. They had given up nothing of immediate cash value to them, and so it would have been inconsistent with fundamental principles of cash-method accounting to have allowed them deductions.
In this case, however, the taxpayer seeking the deductions keeps its books on the accrual basis; no accounting principles require that the inquiry be focused on the value to it of the property it surrenders or that its payments be made in cash or the equivalent. In such a situation I think “the word 'paid’ [must] be defined in the context and in light of the purpose of the particular statute in which it is used.” Patmon, Young & Kirk v. Commissioner, supra, at 144. That is, the normal rules governing accrual-method accounting should apply except as necessary to achieve the purpose of § 404 (a). Since that purpose is to protect the employees’ trust fund and to ensure that the fund receives the “full advantage” of the employer’s deductible contribution, ante, at 579, the focus is properly on the value to the trust of what it has received. Here it received tangible, interest-bearing, fully secured demand notes, upon which the trust concededly could have obtained full face value at any local bank. The notes would have been “income” to any cash-basis taxpayer, and the trust was required to report them as such. Ante, at 582. Indeed, the Commissioner concedes that the petitioner could have obtained its deductions had it tendered to the trust identical notes of a different company, for such a transaction would have been treated as a deductible transfer of property. See Colorado Nat. Bank of Denver v. Commissioner, 30 T. C. 933.
Plainly, then, neither the purpose of the statute nor any principles of cash-basis or accrual-basis accounting require or even suggest a construction of the word “paid” in § 404 (a) to deny this accrual-method taxpayer a deduction because it did not part with “cash or its equivalent” during the statutory *588period. As the Court says, the term “paid” in § 404 (a) was used to “insure the integrity of the employees’ plan and insure the full advantage of any contribution which entitles the employer to a tax benefit.” Ante, at 579. That purpose was wholly served by the delivery of negotiable, interest-bearing, fully secured demand notes.5
I would reverse the judgment of the Court of Appeals.

 In some instances the language is “actually paid,” see, e. g., H. R. Rep. No. 2087, 80th Cong., 2d Sess., 13 (1948) (emphasis added), quoted ante, at 576, an embellishment that adds nothing of substance.

 The only thread of support the Court finds is the statement of one witness before the Senate Committee on .Finance that § 404 (a) puts corporations “on a cash basis on the payment to trusts.” Ante, at 575 n. 7. We have recently noted the gossamer quality of that kind of legislative history. Ernst & Ernst v. Hochfelder, 425 U. S. 185, 204 n. 24.

 The invocation of the “re-enactment doctrine” in the Court’s opinion today, ante, at 576-577, is therefore dramatically misplaced. The “administrative construction” of § 404 (a) that supposedly received congressional approval when the 1954 Code was enacted was in fact nothing more than an administrative rehash of the statutory language that did not illumine its meaning. The regulation, Treas. Reg. § 1.404 (a)-l (c), 26 CFR § 1.404 (a)-l (e) (1975), refers simply to “actual payments” and restates the statute’s requirements that the employer’s contribution to the profit-sharing plan be “paid” before a deduction may be had. That the contribution must be “paid” whether the taxpayer files his returns on the accrual or cash method of accounting of course does not bear on the question whether the word “paid” means the same thing in both situations. The answer to this question in the appellate courts as of 1954 was clearly “no.” Thus, the “re-enactment doctrine” not only fails to support the Court’s decision in this case, but cuts strongly against it.

 The Court correctly notes that Eckert and Price have been applied to claimed deductions for items other than bad debts, such as interest and business losses, ante, at 578 n. 9, but all of the cases that the Court cites involved cash-basis taxpayers.

 The Court’s construction of § 404 (a) is inconsistent with its analysis of §267 (a). The term “paid” in §267 (a), the Court acknowledges, was used “merely, and only insofar as” necessary to accomplish that section’s purpose of ensuring consistent tax treatment of transactions between related entities. Ante, at 582. The implication is that normal accounting principles continue to apply to the full extent that their application is consistent with that purpose, and the cases the Court cites so hold. Anthony P. Miller, Inc. v. Commissioner, 164 F. 2d 268 (CA3); Musselman Hub-Brake Co. v. Commissioner, 139 F. 2d 65 (CA6). The Court never explains why the same logic should not inform the construction of § 404 (a).