Revenue, testified that in his opinion the assumptions used were entirely too conservative and made the cost much higher than was necessary for any sound Pension Trust Plan. He testified that the level annual premium method was adapted for small enterprises from fifty employees down, that it might be used but with some difficulties (which difficulties did not impress the Court) in medium sized establishments with employees running into a few hundred, and that above this number of employees the aggregate method was definitely indicated. He classified the present Plan as in the medium group. He further testified without explanation that in arriving at the assessment of the deficiency the Commissioner had used certain empirical factors not disclosed which he, the Commissioner, felt would be fair both to the taxpayer and the Government. His testimony clearly indicated that this calculation was based upon the alternate method of clause (iii) and not on clause (ii).
The consensus of the testimony of the three actuarial experts was that actuarial science is an inexact science. All three testified that the level annual premium method was a known method in the science and that where it was contemplated, as in the Saalfield case, that individual insurance contracts be purchased for each employee, the method was a generally recognized and used one. The instant Trust Plan gave to the Trustees the right to make such purchases if in the judgment of the Trustees such a procedure was advisable. The testimony, however, reveals that this is a self-insured Plan and that no such contracts have ever been actually purchased although in contemplation at the time of the institution of the Plan. The testimony further indicated that as between practicing actuaries there is quite a bit of secrecy about methods so that it would be impossible for any individual practicing actuary to give accurate statistics as to the number of times this method was used in Pension Plans. The one witness probably best qualified to give statistics, Mr. Kripke, did not give the Court the benefit of any special knowledge which he might have had in that regard. Specifically each of the two practicing actuaries testified that they had personal knowledge of other actuaries using the level annual premium method in Plans of this sort. From the testimony I must conclude, therefore, that the level annual premium method was in the then state of the actuarial science a well known and recognized method of funding Pension Trust Plans. Furthermore, I that it was a reasonable method.
While the amounts in the first two years allocated to the Pension Trust Fund were very substantial, the argument of the Commissioner that they were excessive based on subsequent events does not appeal to me. Because of a fortunate increase in the value of property and securities assigned to the Pension Trust, the Trustees were able to sell some of the property and securities of the Trust at a substantial profit within the first seven years. In two of those seven years it was not necessary for the Company to turn over any money whatever to the Pension Trust Fund. In those years all earnings of the Company were taxable at highest rates, both as to income and excess profits, and to that extent the Government profited. The Court is asked to view this case in the light of 'after the fact' events to substantiate the position of the Commissioner that the 'estimated' amounts assigned to the Pension Trust were not 'necessary' for the sound fiscal operation of the Plan. That I cannot do.
I find that the assumptions used by the taxpayer and revealed to the Internal Revenue Bureau long before this controversy arose were based on sound actuarial principles. They represented the best judgment obtainable by the taxpayer at that time and, consequently, were 'necessary' within the meaning of the Statute and Regulations. Nor do I feel that this case should be viewed either in the light of the Supplemental Bulletin of June 1, 1945 or the Amended Treasury Regulations of 1948. It must be decided under the Revenue Act of 1942 and the Regulations of 1943. The taxpayer in his disclosed calculations followed both sound actuarial and business principles. That future events have proved that the Company could have had a sound pension system with lesser contributions is not in my opinion controlling. Actually, and I find this as a fact for purposes of appellate review, the Trust would have been adequately funded with lesser contributions. But the deductions taken in 1943 and 1944 by the taxpayer were at the time in accordance with both law and regulations and consequently the action of the Commissioner in disallowing any part thereof was in error.
Since the Stipulation of Facts provides that certain allowances and adjustments must be made in favor of the Government in the event of a judgment for the plaintiff in this case, counsel for the plaintiff will submit an Order for Judgment in favor of the plaintiff making due allowance for the adjustments provided for in the Stipulation of Facts.
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