Before BIGGS, Chief Judge, and McLAUGHLIN and STALEY, Circuit Judges.
These cases were heard separately but present identical questions of law and will be disposed of in one opinion. The facts were not disputed and may be stated very briefly.
Before the close of the taxable year, each taxpayer delivered its negotiable demand note made payable at a bank to the trustee of its exempt employees' pension trust. Although the full amount of each note was paid in cash with interest before the end of the calendar year following the taxable years involved, the amounts now in dispute were not paid in cash until more than sixty days after the close of those taxable years. Both were accrual-basis taxpayers, and both attempted to deduct from gross income the face amount of the notes, under Section 23 (p) (1) (E) of the Internal Revenue Code.*fn1 The Tax Court sustained the Commissioner's disallowance of the claimed deductions, holding that timely delivery of a negotiable demand note does not constitute "payment" within the meaning of Section 23(p) (1) (E) of the Code.*fn2 Thus is the sole question framed: Does a solvent, accrual-basis taxpayer "pay" a contribution to an exempt employees' pension trust by making timely delivery to the trustee of its negotiable demand note, which note is worth its face value and is later paid in cash?
The record in each case shows that the pension-trust board contemplated some difficulty in investing the contribution in favorable securities, such as first mortgage notes, and that, until that could be arranged, it was decided that the amount of the contribution would be loaned to the taxpayer at 3 and 4 per cent interest in the Slaymaker*fn3 and Sachs cases, respectively. In order to avoid the circuitous transaction of the taxpayer paying cash to the trust and the latter lending it back to the taxpayer and taking its note, the transaction was telescoped into one step: Each taxpayer delivered its demand note to the trust.
In neither case did the Tax Court make findings as to the solvency of the taxpayers or the value of the notes when delivered. In the Slaymaker case, however, it appears to be undisputed that the taxpayer was solvent at the time of delivery of the note and at all pertinent times thereafter and that the note was worth its face value at the time of delivery. Indeed, there was positive and uncontroverted evidence to that effect on both points. Such evidence is lacking in the Sachs case. For the moment, however, we will pass over that factual difference between the two cases.
As to the law, there are no four-square cases in the courts of appeals, but there are some rather persuasive analogies.
In Anthony P. Miller, Inc. v. Commissioner of Internal Revenue, 3 Cir., 1947, 164 F.2d 268, certiorari denied, 1948, 333 U.S. 861, we held that the taxpayer had "paid" its president's salary by delivery to him of its negotiable demand notes within two and one-half months after the close of its taxable year and, therefore, was entitled to deduct the face amount of the notes from its gross income as an expense "paid" within Section 24(c)(1) of the Code.*fn4 The Second and Sixth Circuits have similarly construed the word "paid" in Section 24(c)(1),*fn5 as has the Tax Court itself.*fn6 Moreover, that court has held that the word "payment" (in Section 23 (o), allowing deductions for charitable contributions) was satisfied when the contribution was made by check on December 31 and not paid in cash until the following year.*fn7 Furthermore, the Tax Court has allowed a "dividends paid" credit under Section 27(b)(1) when a check was delivered on December 31 but not cashed until the next year.*fn8 Finally, in Dick Brothers, Inc. v. Commissioner of Internal Revenue, 3 Cir., 1953, 205 F.2d 64, we held payment by check to an exempt employees' pension trust to be sufficient to satisfy the requirements of Section 23(p)(1)(E). It is noteworthy that there the Commissioner did not dispute the form of the payment but raised only the question, regardless of the form, whether the check had been delivered to the trustee in time. Indeed, in that case, the Tax Court appears to have taken for granted that, if there was a timely delivery of the check, the fact that it was a check and not cash could not defeat the deduction asserted.*fn9 We take the result of all this to be that "payment" or "paid" does not invariably mean "in cash." If a check is sufficient, we see no reason why a negotiable demand note payable at a bank is not likewise sufficient. On that score, we can add little, if anything, to what Judge Goodrich said in Anthony P. Miller, Inc., supra. There it was said, in discussing checks and negotiable demand notes, "* * * the two instruments have much in common * * *." 164 F.2d at page 269. A further factor appears in the cases now before us. The demand notes were made payable at a bank. Section 87 of the Negotiable Instruments Law seems to make such notes very much like checks, at least as between the maker and the bank.*fn10
We think the Miller case was rightly decided and should be applied here unless there is some compelling reason why the word "paid" should be construed differently in Section 23(p) (1) (E) than it has heretofore been construed in Section 24(c) (1).
We are told that the reason compelling a different construction here is that Section 165(a) (2)*fn11 prohibits an exempt pension trust from using the corpus or income therefrom prior to the satisfaction of all liabilities to employees for any purpose other than for the exclusive benefit of the employees, and that this proscription is violated if the employer-taxpayer retains the actual cash but is, nevertheless, allowed the deduction simply by giving its note. The trouble with that argument is that the Treasury Regulations themselves state rather clearly that the trust may invest in the employer company,*fn12 and the Commissioner has issued a specific ruling to the same effect.*fn13 That is what happened here, and, thus, the argument fails.
Next, it is said that when Congress intends to be liberal in allowing deductions, it uses the phrase "paid or accrued" or "paid or incurred",*fn14 but here it used only the word "paid," and, therefore, cash is the only acceptable medium. The asserted distinction does not avoid the sweep of the Miller case, however, since there, too (24(c) (1), the single word "paid" was used.
As noted above, the Sachs case is nearly barren of evidence as to the solvency of the taxpayer and the value of the note at the time of delivery, and the Tax Court made no finding on either point. The only testimony on either matter was Miss Sachs' affirmative answer, on cross-examination, to the question whether the taxpayer could have paid the note in cash immediately after its delivery.Of course, the note was in fact paid in cash about three and one-half months after its delivery. Quite possibly that fact might be enough upon which to base a finding of solvency and value as of delivery. In Akron Welding & Spring Co., 1948, 10 T.C. 715, the Tax Court so held. But, however persuasive that may be to the fact-finder, it remains a very shaky basis for a like finding by a reviewing court, especially when it appears that the Commissioner disputes the point, which was not the fact in the Slaymaker case. It would be an unjustified extension of the teaching of the Miller case to hold that there had been a "payment" when there may be serious doubt as to the value of the note. Thus, the Sachs case must go back to the Tax Court. If it should be found that the note was worth its face value, or some lesser value, the deduction should be allowed in the appropriate amount.
For the reason stated, the judgment of the Tax Court in No. 11,113 will be reversed. The judgment in No. 11,056 will be vacated and the cause will be remanded to the Tax Court for ...