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ROYER'S, INC. v. UNITED STATES

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF PENNSYLVANIA


June 24, 1958

ROYER'S, INC., Plaintiff,
v.
UNITED STATES of America, Defendant

The opinion of the court was delivered by: GOURLEY

This is a corporate income tax proceeding which arises out of the termination of a profit sharing trust in which the taxpayer claims a right to recover from the United States of America overpayment of corporate income tax for the fiscal year of 1950, or in the alternative for the fiscal year 1949.

The question for determination is --

 Where a taxpayer made contributions to a profit sharing trust under a profit sharing plan for the benefit of the employees in the years 1946, 1947 and 1948 in excess of the amount which it was permitted to deduct under Section 23(p)(1) (C), Internal Revenue Code of 1939, 26 U.S.C.A. § 23(p)(1)(C), may the excess of the amount be carried forward and deducted in the fiscal year 1950 even though the trust was terminated on February 1, 1948, and if the excess payments by the taxpayer cannot be carried forward as a deduction to the fiscal year 1950, may the taxpayer claim the excess in the amount permitted to be deducted as a financial loss for the fiscal year 1949 resulting from the worthlessness of an asset?

 The question posed has not been ruled upon by any United States District Court or Circuit Court, and necessarily raises a question of first impression. *fn1"

 The taxpayer is a Pennsylvania corporation and during the fiscal year 1946 executed a profit sharing trust for the benefit of its employees. In accordance with the provisions of said trust, the taxpayer made contributions during the years 1946, 1947 and 1948, and all contributions made by the taxpayer to the trust were paid by the trustee to the employees for whose benefit the plan was created.

 Since the trust was terminated on February 1, 1948, the taxpayer's claim against the government is premised on the legal thesis that the excess of the amount which it was permitted to deduct in the years 1946, 1947 and 1948 should either be carried over as a deduction for the year 1950 or, in the alternative, that said amount should be permitted as a deduction for a loss arising from the worthlessness of an asset in the fiscal year 1949.

 The allowance of a deduction from a gross income becomes a matter of legislative grace. A particular deduction which is claimed will be allowed only if there is a credit provision for it in the law. New Colonial Ice Co., Inc. v. Helvering, 292 U.S. 435, 54 S. Ct. 788, 78 L. Ed. 1348; John Wanamaker Philadelphia v. Com'r of Int. Revenue, 3 Cir., 139 F.2d 644.

 It is necessary, therefore, to determine whether there is a provision for the deduction claimed in circumstances such as exist in this case. *fn2"

  Plaintiff admits that Section 29.23(p)-10 of Treasury Regulation 111, as amended, promulgated under the Internal Revenue Code of 1939 would deny it any relief since the regulation requires that contributions carried over may be deducted in a succeeding taxable year only in the event the trust or plan was in existence in said succeeding year. *fn3" In this connection, I am guided by the well established rule of law that treasury regulations are presumptively valid and must be sustained unless unreasonable and plainly inconsistent with the revenue statutes. Commissioner of Internal Revenue v. South Texas Lumber Co., 333 U.S. 496, 68 S. Ct. 695, 92 L. Ed. 831; United States v. Birdsall, 233 U.S. 223, 34 S. Ct. 512, 58 L. Ed. 930; United States v. Grimaud, 220 U.S. 506, 31 S. Ct. 480, 55 L. Ed. 563; Palmisano v. United States, D.C., 159 F.Supp. 98.

 Plaintiff, however, advances the proposition that said treasury regulation is arbitrary, unreasonable, and not authorized by Congress, and that since said regulation was issued four months after the trust involved in this proceeding had been terminated, the same was retroactive and therefore void.

 I am satisfied that the clear and unambiguous language of the statute in no way is at variance with or contradictory to the regulation. It is further my considered judgment that since the regulation merely clarifies what the language of the statute always was intended to convey, it is no more retroactive in its operation than is a judicial determination construing and applying a statute to a case in hand. Manhattan General Equipment Co. v. Commissioner of Internal Revenue, 297 U.S. 129, 56 S. Ct. 397, 80 L. Ed. 528.

 Inasmuch as the trust in the instant case was liquidated during the taxable year and on July 31, 1949, there was no trust or plan in existence during the succeeding taxable years which can be said to have participants in those succeeding taxable years.

 Accordingly, no compensation could have been otherwise paid or accrued under the plan to persons who qualify as participants in those succeeding taxable years to form the basis for applying the excess within the limitations provided under the Internal Revenue Code to justify a carry-over in the years which followed the termination of the trust. This conclusion is required since the clear and unambiguous provision of the statute and the regulations prevent the carry-over of excess contributions into the taxable year 1950, and the taxpayer's claim cannot be sustained for the refund alleged to have been erroneously assessed and collected for the fiscal year which ended January 31, 1950.

 The alternative claim of the taxpayer of applying the unused contributions in excess of the amount permitted under the Internal Revenue Code to the profit sharing trust as a loss in the fiscal year ending January 31, 1949, on the theory that a loss resulted from the worthlessness of an asset is also without legal basis.

 Deductions of this nature can be allowed only as provided under Section 23(p) of the Internal Revenue Code, which is the exclusive section under which payments in the nature of those with which we are concerned may be allowed as a deduction.

 Since the taxpayer's contributions do not fall within section 23(p) for the reason that the trust had been terminated in the year 1948, as a matter of law, no deduction can be legally sustained for the taxable year ending January 31, 1950. South Chester Tube Co. v. Commissioner, 14 T.C. 1229.

 The facts upon which the conclusions herein made are premised have been stipulated and agreed to by the parties and are approved, as follows:

 1. Plaintiff at all of the times hereinafter mentioned was, and now is, a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania, with registered office at 112-114 South Main Street, Greensburg, Westmoreland County, in this District.

 2. The plaintiff brings this action against the United States of America to recover income taxes and interest thereon assessed and collected by the defendant from the plaintiff. Plaintiff is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, and jurisdiction is conferred upon this court by 28 U.S.C.A. § 1346(a)(1).

 3. In keeping its books, plaintiff regularly used the accrual method of accounting and regularly computed its taxable income for Federal Income Tax purposes on the basis of a fiscal year ending on the last day of January.

 4. Plaintiff's claim is for the recovery of income taxes in the principal amount of $ 12,558.71 for the fiscal year ended January 31, 1950; or, in the alternative, in the principal amount of $ 9,513.08 for the fiscal year ended January 31, 1949; together with interest thereon.

 5. Plaintiff, during its fiscal year ended January 31, 1946, established the 'Royer's, Inc. Profit Sharing Plan' which together with the Trust forming a part thereof, was embodied in an Agreement executed by Royer's, Inc., and the Union Trust Company of Pittsburgh, as Trustee, on December 27, 1945, but effective as of January 31, 1946. Under the terms of the said plan, plaintiff was required to make annual irrevocable contributions, to be used for the exclusive benefit of the employee beneficiaries, equal to 50% of plaintiff's annual net income after the deduction therefrom of all taxes, including Federal Income and Profits Taxes, and 5% of its net worth at the close of plaintiff's preceding taxable year.

 6. By letter dated April 10, 1946, the Commissioner of Internal Revenue, hereinafter referred to as the 'Commissioner', advised the plaintiff that in his opinion the Royer's, Inc., Profit Sharing Plan, and the Trust forming a part thereof, meet the requirements of Section 165(a) of the Internal Revenue Code of 1939 (26 U.S.C.A. § 165(a)), as amended. 7. With respect to its fiscal years ended January 31, 1946, January 31, 1947 and January 31, 1948, plaintiff, pursuant to the terms of said Plan, paid the following sums to The Union Trust Company of Pittsburgh, as Trustee, as its contributions to the aforesaid Plan for the fiscal years shown: Year Contribution Date Paid to Trustee Jan. 31, 1946 $ 33,359.81 Jan. 21, 1946 $10,000.00 Mar. 26, 1946 17,201.06 Mar. 28, 1946 6,155.43 Apr. 15, 1946 3.32 $33,359.81 Jan. 31, 1947 72,697.85 Mar. 29, 1947 Jan. 31, 1948 50,204.55 Mar. 23, 1948 $156,262.21

19580624

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