Court Opinion

ID: 9463404
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:05:25.891642+00
Date Added: 2024-06-11T17:38:04.647106
License: Public Domain

MANSFIELD, Circuit Judge
(dissenting):
I respectfully dissent for the reason that the accrual-basis taxpayer in this case, having fully complied with both the letter and the spirit of § 461(f) of the Internal Revenue Code and of Regulation 1.461 — 2(c)(1) as reasonably construed, was entitled to deduct the payment made irrevocably by it in trust to Manufacturers Hanover Trust Co. to satisfy liabilities asserted against it in a much larger amount, which were then being contested by the taxpayer. The majority, in denying deductibility on the ground that the claimants did not sign the trust instrument, acts on the basis of newly-devised theories as to Congress’ intent which find no support in the language, purpose, or legislative history of § 461(f). Indeed, not one of the ten-member panel of the Tax *168Court (either of the majority or the minority) and no party to this litigation has ever suggested or endorsed the reasoning or theory advanced by the majority. The reason for this is plain — the theory is contrary to the plain language and purpose of the statute.
Section 461(f) was adopted by Congress in 1964 in part to meet the problem created by the Supreme Court’s decision in United States v. Consolidated Edison Co. of New York, 366 U.S. 380, 81 S.Ct. 1326, 6 L.Ed.2d 356 (1961), which held that an accrual-basis taxpayer, even though it had paid a contested tax liability under protest, was not entitled to accrue the payment as a deductible expense until the year when all those events occurred which would determine the fact and amount of the liability. Congress modified this requirement in § 461(f) by expressly authorizing the taxpayer to deduct an amount transferred beyond its control to satisfy an asserted liability contested by it, provided that “but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year).” The legislative history of § 461(f) reveals that Congress’ purpose was to permit the taxpayer to match the deduction with the year in which the transfer was actually made, thus bringing it closer to the period when the income to which it is chargeable was received, rather than to wait until the fact and amount of the liability would finally be determined, which might (as in this case) take several years.
The important condition precedent to deductibility under § 461(f) was that funds placed in trust or escrow to satisfy contingent contested liabilities be put “beyond the taxpayer’s control.” S.Rep. No. 830, Part 2, 88th Cong., 2d Sess. 243 (1964). To implement § 461(f) Treas.Reg. § 1.461-2(c) was adopted. It specifies that the taxpayer may provide for satisfaction of an asserted liability in contest “by transferring money or other property beyond its control . to an escrowee or trustee pursuant to a written agreement (among the escrowee or trustee, the taxpayer, and the person who is asserting the liability) that the money or other property be delivered in accordance with the settlement of the contest, . .”
In the present case the taxpayer faced liabilities asserted by nine claimants totalling $14,781,150, which it contested. It transferred $1,100,000 not as self-controlled “contingency reserve” (as the majority would have it) but beyond its control to the Manufacturers Hanover Trust Co. for the benefit of the claimants, pursuant to a written agreement which provided that the fund be used to satisfy the claims after the fact and amount of the liability had been determined. It retained only such interest as might remain after the claims had been satisfied. The trust instrument provided that the “sole purpose” for which the funds transferred to the trustee could be used was the payment of the alleged obligations to the nine specifically designated beneficiaries. Aside from the fiduciary responsibilities to the beneficiaries which the instrument imposed on the trustee under New York law,1 the trust agreement expressly limited the trustee’s right to make any disbursements prior to termination of the litigation to those “required to satisfy and discharge the obligation and responsibility” of the settlor to the named beneficiaries. Moreover, there is not the slightest suggestion that the trustee, Manufacturers Hanover Trust Company, was or might be inclined to act illegally or against the interest of the named beneficiaries. Nor has the appellant shown that the taxpayer/settlor could have revoked the trust at his own initiative or have invaded the fund set aside for the benefit of the claimants. There is no evidence that the taxpayer’s transfer of funds to the trustee was not made in good faith or that the taxpayer had any reason to believe that the litigation would eventually result in a reduction of the liability to but a fraction of the amount asserted.
*169Thus the payment satisfied the plain language of § 461(f) and of Treas.Reg. 1.461-2(c) by placing the money beyond the taxpayer’s control to satisfy a contested contingent liability. Although the trust agreement was signed by the taxpayer and by the trustee but not by the claimants, the latter, by the clear intent of the taxpayer/settlor, were just as much parties to it as if they also had signed it, since under its terms and applicable New York law, they acquired irrevocable rights once the fund was transferred to the trustee; thereafter the trustee could not, absent the beneficiaries’ consent, return the funds to the taxpayer without becoming liable. See N.Y.E.P. T.L. § 7-19; Schoellkopf v. Marine Trust Co., 267 N.Y. 358, 196 N.E. 288 (1935). The terms of this trust fall under the rule that a settlor “may manifest an intention to create a trust in favor of the creditor and to give him an interest in the property of which the debtor cannot subsequently deprive him by revoking the disposition.” Restatement of Trusts 2d § 330, Comment h.
In denying deductibility the majority bases its holding on some assumptions which strike me as being both unfounded and illogical. First, it erroneously asserts that Congress intended § 461(f) to apply only to instances “where payment had been ‘actually made’ ” to the claimant, since “[b]y satisfying the asserted claim, the taxpayer fixed the fact and amount of its liability in that taxable year.” Nothing in the language or legislative history of § 461(f) supports this bald ipse dixit. On the contrary, the report of the Senate Committee on Finance (S.Rep. No. 830), which accompanied the bill (H.R. 8363, Revenue Act of 1964), made it clear that the statute was designed to permit deduction of payments made in satisfaction of liabilities that might be contingent as to amount rather than substantially fixed, subject to the condition that any overpayment would have to be included by the taxpayer in reportable income in the year when this amount of the liability would ultimately be determined. On this subject, the Report states:
“To the extent that deductions are allowed under this rule and then subsequently as a result of the contest the items were found not to be payable, adjustment can be made for this overstatement of the deduction by the inclusion of the overstatement in income in the year in which the amount of the liability is finally determined.
“. . . The amendment provides that if a taxpayer contests an asserted liability, such as a tax assessment, but makes a payment in satisfaction of this liability and the contest with respect to the liability exists after the payment, then the item involved is to be allowed as a deduction or credit in the year of the payment. This is based upon the assumption that the deduction or credit in this case would have been allowed in the year of payment, or perhaps in an earlier year when it would have been accrued, had there been no contest.
“The treatment provided here can be illustrated by an example. Assume that in 1965 a $100 liability is asserted against a business which it pays at that time but contests the liability in a court action. Assume further that in 1967 the court action is settled for $80. Under present law, before the enactment of this provision, the deduction of $80 would be allowed in 1967. Under your committee’s action, the taxpayer could claim a $100 deduction in 1965 but then in 1967 would have to take $20 into income except as provided in section 111 of the code, relating to recovery of bad debts, prior taxes, and delinquency amounts.” S.Rep. No. 830, 88th Cong., 2d Sess. 100-101 (1964), U.S.Code Cong, and Adm.News, p. 1773.
The majority seeks to avoid this plain statement of legislative intent by suggesting that Congress was referring to payments made pursuant to “escrow” agreements rather than “trust” agreements and that a payment made under an escrow agreement is somehow or other a more final and binding recognition of the fact and amount of the taxpayer’s liability than is a payment into an irrevocable trust to satisfy the claim, even though in both cases the liability and amount may not yet be deter*170mined. Under the “trust" agreement in the present case, just as under the “escrow” agreement to which the majority refers, the money is placed by the taxpayer beyond his control, and the trustee, just like the escrowee, is obligated to use it to satisfy the contested claim when the taxpayer’s liability and the amount due are ultimately fixed. The trustee, like the escrowee, may return any overpayment to the taxpayer who is then obligated to declare it as income in the year of receipt.
The trust agreement, therefore, is the legal equivalent of the escrow agreement and does not represent, as the majority characterizes it, a “reserve” or a bank account under the taxpayer’s control. Furthermore, in paying the money to an escrowee, which is conceded by the majority to be permissible under § 461(f), the taxpayer has just as much “discretion over the timing” and over the amount to be paid as he does in making the payment to a trustee as in the present case. Undoubtedly it was for this reason that the Commission, in enacting Regulation 1.461 — 2(c)(l)(ii), uses the terms “trustee” and “escrowee” interchangeably in describing transfers that will satisfy § 461(f).
In short, the payment made by Poirier and McLane was no more unilateral, arbitrary or fixed in amount than a payment into escrow which, the majority concedes, is authorized by § 461(f). The effect of the majority’s restrictive interpretation is to limit the availability of § 461(f) whether by trust or escrow to those “all or nothing” contests where the amount of the claim is substantially undisputed and the issue or contingency turns on whether the taxpayer is liable at all.
The majority further proceeds to reason that the claimant’s signature on the trust agreement is required since it “fixes the fact and amount of the liability, warranting an accrual taxpayer to take the deduction when payment is made.” Aside from the erroneous assumption that the amount of the liability must be fixed during the year of the deduction (already discussed above), I find no logic in the further assumption that a claimant’s participation would tend to fix the amount of the liability or that it might promote a policy of limiting the deduction to the lowest amount within reasonable range of the anticipated liability. On the contrary, before signing the claimant would prefer, and might insist, that the largest possible amount be transferred in trust or escrow — in this case some $14,781,500 instead of the $1,100,000 transferred in trust — in the interest of insuring payment of his claim, preferably in the full amount. The majority’s assertion that Treas.Reg. 1-461-2(c) requires the claimant’s signature on the trust agreement could therefore only have the adverse effect of encouraging deductions at the highest range of possibilities since no litigating claimant would agree to a lesser amount for fear of an uncollectible judgment or of prejudicing his litigation position or possible settlement of his claim.
The majority’s additional assertion that the signature of the beneficiary on a § 461(f) trust would somehow serve the purpose of matching the deduction with the year of the alleged accrual of the liability is unrealistic and at odds with the language of § 461(f). In enacting the statute, Congress recognized that the accrual method taxpayer could not hope uniformly to take his deduction in the same year as the alleged liability would have been payable but for the contest; its expressed purpose was to overturn the Supreme Court’s holding in Consolidated Edison, which restricted the availability of the deduction to the year of the final adjudication of the dispute. That the taxpayer might have some choice as to the year when the deduction might be taken is recognized by § 461(f)(4), which states that a qualifying “deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year).” Even accepting as a goal the desire to restrict the taxpayer’s choice of the year when the deduction might be taken and assuming that it would be more equitable to have the deduction taken in a year closer to the occurrence of the facts giving rise to the disputed claim so as to accurately match that year’s receipts with disbursements chargeable to that year’s operations, the *171requirement that the beneficiary sign the trust agreement would contribute nothing toward achieving that goal. On the contrary, the signature requirement here imposed by the majority might well delay the deduction because the claimant could use the requirement as a bargaining chip in negotiations. Furthermore, there is no assurance that the taxpayer would propose the creation of either a trust or escrow in any given year.
For the foregoing reasons I construe Treas.Reg. 1.461-2(c) as not requiring the nine claimants’ signatures on the trust instrument in the present case, and I conclude that § 461(f) was fully satisfied by the taxpayer’s transfer of the trust fund beyond its control to satisfy their contingent claims. This interpretation not only accords with the language and purpose of the statute but makes it unnecessary to hold, as would be required if the word “among” as used in the Regulation were construed as requiring the claimants’ signatures on the trust agreement, that the Regulation to such extent is unlawful for the reason that it adds a condition and restriction not contemplated by Congress and not reasonably necessary to accomplish Congress’ purpose. See Morrill v. Jones, 106 U.S. 466, 467, 1 S.Ct. 423, 27 L.Ed. 267 (1882); Miller v. United States, 294 U.S. 435, 439, 55 S.Ct. 440, 79 L.Ed. 977 (1934); Koshland v. Helvering, 298 U.S. 441, 447, 56 S.Ct. 767, 80 L.Ed. 1268 (1936); Manhattan General Equipment Co. v. Commissioner of Internal Revenue, 297 U.S. 129, 134, 56 S.Ct. 397, 80 L.Ed. 528 (1936).
I would affirm.

. In re Bond and Mortgage Guarantee Co., 303 N.Y. 423, 103 N.E.2d 721 (1952); N.Y.E.P.T.L. § 11-2.1(a) (McKinney’s 1967).