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PHILADELPHIA SUBURBAN TRANSP. CO. v. SMITH

June 27, 1952

PHILADELPHIA SUBURBAN TRANSP. CO.
v.
SMITH.



The opinion of the court was delivered by: Clary, District Judge.

The factual situation evidenced by the Stipulation of Facts filed in this case and the testimony at hearing discloses that plaintiff herein, a corporation of the Commonwealth of Pennsylvania, operates a transportation system in suburban Philadelphia. Its employees for several years have numbered about six hundred. In 1943, one of the Railroad Brotherhoods representing the employees, as part of its collective bargaining agreement with the Company, prevailed upon the Company to install a Pension and Retirement Plan for its employees in order to provide a retirement income for each eligible employee. The details of the Plan are not important to a decision in this case and are, therefore, not set out.

Copies of the Plan were submitted under appropriate Statutes and Regulations to the Commissioner of Internal Revenue. On July 28, 1944, the Commissioner ruled that the Plan, effective as of January 1, 1943, met the requirements of Section 165(a) of the Internal Revenue Code, 26 U.S.C. § 165(a). In its submission for the approval of the Plan the Company included not only a description of the Plan but also the annuity table, interest and mortality assumptions used in determining its cost. It also included that the level annual premium method was being used, showing the total amount of the annual premiums for all employees included in the Plan. Because of these disclosures the Company erroneously assumed that in approving the Plan the Commissioner had also approved the method of funding.

A review of the taxpayer's income and excess profit tax returns for the calendar years 1943 and 1944 was made by an Internal Revenue Agent and based upon a Departmental Bulletin of June 1, 1945 (promulgated by Joseph D. Nunan, then Commissioner of Internal Revenue), for the year 1943, $79,907.42 out of $138,545 contributed by the Company to the Pension Trust was disallowed as an excessive amount legally deductible under appropriate Statutes and Regulations. For the year 1944, $6,754.53 out of $64,856.58 contributed by the Company to the Pension Trust was disallowed as an excessive amount legally deductible. Thereupon, under date of November 18, 1946, the plaintiff herein belatedly requested specific approval of the Commissioner of its method of funding, pointing out that it had assumed that the Bureau's ruling letter approving the Plan had also approved the method of funding. Under date of January 6, 1948 the Commissioner refused to approve the method of funding for reasons hereinafter discussed. A deficiency was assessed, paid by the taxpayer, and this suit is to recover the deficiency paid.

The Statute involved is Section 23 of the Internal Revenue Code, Title 26 U.S.C. § 23(p)(1)(A), which reads as follows:

    "(p) Contributions of an employer to an employees'
  trust or annuity plan and compensation under a
  deferred-payment plan.
    "(1) General Rule. If contributions are paid by an
  employer to or under a stock bonus, pension,
  profit-sharing, or annuity plan, or if compensation
  is paid or accrued on account of any employee under a
  plan deferring the receipt of such compensation, such
  contributions or compensation shall not be deductible
  under subsection (a) but shall be deductible, if
  deductible under subsection (a) without regard to
  this subsection, under this subsection but only to
  the following extent:
    "(A) In the taxable year when paid, if the
  contributions are paid into a pension trust, and if
  such taxable year ends within or with a taxable year
  of the trust for which the trust is exempt under
  section 165(a), in an amount determined as follows:
    "(i) an amount not in excess of 5 per centum of the
  compensation otherwise paid or accrued during the
  taxable year to all the employees under the trust,
  but such amount may be reduced for future years if
  found by the Commissioner upon periodical
  examinations at not less than five-year intervals to
  be more than the amount reasonably necessary to
  provide the remaining unfunded cost of past and
  current service credits of all employees under the
  plan, plus
    "(iii) in lieu of the amounts allowable under (i)
  and (ii) above, an amount equal to the normal cost of
  the plan, as determined under regulations prescribed
  by the Commissioner with the approval of the
  Secretary, plus, if past service or other
  supplementary pension or annuity credits are provided
  by the plan, an amount not in excess of 10 per centum
  of the cost which would be required to completely
  fund or purchase such pension or annuity credits as
  of the date when they are included in the plan, as
  determined under regulations prescribed by the
  Commissioner with the approval of the Secretary,
  except that in no case shall a deduction be allowed
  for any amount (other than the normal cost) paid in
  after such pension or annuity credits are completely
  funded or purchased.
"*   *   *   *   *   *"

The Treasury Regulation issued pursuant to the provision of that Statute and pertinent to a decision in this case is Treasury Regulations 111, Section 29.23(p)-6, approved March 8, 1943, which reads as follows:

    "The level amount or level percentage of
  compensation under clause (ii) of section 23(p)(1)(A)
  may be determined by any reasonable and generally
  accepted actuarial method selected by the employer.
  While the need for actuarial calculations is implicit
  in clause (ii), the statute leaves the determination
  of specific methods to regulations to be prescribed
  by the Commissioner with the approval of the
  Secretary. Clause (ii) must be construed in the light
  of its obvious relationship to clauses (i) and (iii)
  and the interplay of clauses (i), (ii), and (iii).
  Each employer desiring to fund under clause (ii)
  shall submit the proposed method to the Commissioner
  and receive approval of such method before the
  results will be acceptable. Any method which does not
  fund cost of past service credits more rapidly than
  that permitted under clause (iii) will be acceptable,
  and the approval of the Commissioner will not be
  necessary in such a case.
    "If the total costs computed under clause (ii)
  exceed the amount allowable under clause (i), the
  amount allowable under clause (ii) will be the excess
  of such total cost over the amount allowable in
  clause (i). In other words, if a deduction is claimed
  under clause (ii), the total amount allowable under
  both clauses (i) and (ii) will be the total cost for
  the ...

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