The opinion of the court was delivered by: CLARY
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 ...