The opinion of the court was delivered by: SCALERA
The plaintiff, Cyclops Corporation, seeks judgment against the defendant, United States, for the refund of corporation income taxes for the calendar years 1962, 1963, 1964, 1965 and 1966, plus interest as provided by law. The issue is whether plaintiff, as an accrual basis taxpayer, is entitled to a current deduction in the calendar year in which it incurred obligations variously designated as contingent, delayed, and additional delayed obligations to contribute to trusts created under Supplemental Unemployment Benefit Plans. The Internal Revenue Service has disallowed all claimed deductions by plaintiff for the delayed obligations under the SUB plan and has allowed only those amounts which were actually paid into the SUB trusts.
The complaint containing seven counts seeks a refund of corporate income taxes paid by plaintiff over a period of five years. The government's answer is a simple denial of the allegations of the complaint. A stipulation of facts, including exhibits, was filed, which stipulation contained most of the facts in this case. Pretrial statements were filed and a formal pretrial conference was held in addition to status conferences and informal pretrial conferences. A non-jury trial was held, at which testimony was taken and the record completed. Following the filing of the transcript of the trial, the parties filed briefs and, in addition, the plaintiff filed a reply brief. The parties also filed proposed conclusions of law and statements of fact based upon the stipulation and testimony.
In the appendix hereto is a statement of facts outlining in detail the provisions of the plans, the manner in which they operated, and the relevant facts of this controversy. The statement of facts, together with this opinion, shall constitute findings of fact and conclusions of law in accordance with Fed. R. Civ. P. 52(a), 28 U.S.C.
This case involves three separate corporations, three identical supplemental unemployment benefit plans, and the same issues which arose out of the same industry-wide supplemental unemployment benefit plan considered by the Tax Court of the United States in Lukens Steel Co. v. Commissioner, 52 T.C. 764 (1969), and by the Court of Appeals for the Third Circuit in Lukens Steel Co. v. Commissioner, 442 F.2d 1131 (3d Cir. 1971), which affirmed the Tax Court.
As in the Lukens case, Cyclops, and its predecessor companies, agreed with the Steelworkers Union to establish a supplemental unemployment benefit plan, the purpose of which was, as its title indicates, to supplement state unemployment benefits available to laid-off employees. The obligation of Cyclops under the plans consisted of current and deferred liabilities.
Under the contract between Cyclops and the Union, Cyclops, which has been consistently an accrual basis taxpayer, agreed to make payments to trust funds to provide supplemental unemployment benefit payments to its employees. A part of the payments to the trust was to be made in cash and a part was to be made at future times as the financial needs of the fund required and as specified by the various provisions of the fund. The amount of all of the payments to be made was determined by events occurring during the taxable years. The contracts in existence during the taxable years provided that any excess of the delayed and/or deferred payment obligations to the trusts over the actual amounts paid out to employees by the trusts should be used for other benefits to the employees and in no way could inure to the benefit of the employer.
The plaintiff claimed for each of the five years in suit as deductions its total obligations to the trusts, including its cash obligations and any deferred, delayed and future obligations under the plan. The plaintiff's position is that these are ordinary and necessary business expenses under section 162(a) of the Internal Revenue Code of 1954 (26 U.S.C.). The government's position is that the only proper deductions are those amounts which Cyclops paid into the trusts during each year in suit and that all other obligations, no matter how designated, are not deductible and therefore properly were disallowed.
There is no dispute as to the basic legal principles involved in this case. Section 162(a) of the Internal Revenue Code of 1954, 26 U.S.C., permits the taxpayer to deduct an ordinary and necessary business expense.
There is no dispute as to the general rule for determining the particular taxable year in which a taxpayer is entitled to take a deduction. Section 461(a) of the Internal Revenue Code provides that deductions "shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income." Further, the treasury regulations provide that under the accrual method of accounting, deductions are allowable "for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy." Treas. Reg. 1.461-1(a)(2), 26 C.F.R. This Regulation reflects the general rule, the "all events" test, which determines when an allowable deduction may be taken. This rule and its corollary, that the expenses are deductible only in the taxable year in which the absolute and unconditional obligation arises even though payment is not due until a subsequent year, has been repeatedly restated and approved. United States v. Anderson, 269 U.S. 422, 46 S. Ct. 131, 70 L. Ed. 347 (1926); Aluminum Castings Co. v. Routzahn, 282 U.S. 92, 51 S. Ct. 11, 75 L. Ed. 234 (1930).
There is no disagreement between the parties that the SUB plan provisions and factual background involved in the Lukens Steel Company case are virtually identical to the provisions and factual background at issue in this case. Defendant concedes that the deductibility of obligations similar to the plaintiff's obligations in this case was considered and was allowed in Lukens.
The plaintiff submits that the Third Circuit's affirmance of the Tax Court decision is binding upon the court in this case. The plaintiff points out that the only substantive difference between the Lukens Company 1962 SUB plan, as described by the Tax Court in its opinion, 52 T.C. 764, and the Cyclops revised SUB plans is that the Lukens plan reflects a 52-53 week corporate fiscal year ending on the Saturday nearest December 31, whereas Cyclops reports on a calendar year basis. As the plaintiff points out, this is a very minor difference.
The Court of Appeals held that Lukens was entitled to deduct the monthly obligation under its 1962 SUB plan, including cash contributions and delayed obligations, in the taxable year incurred because sufficient events had occurred in that year "to fix the obligation to pay this liability in the form of cash." Id. at 1134. The court concluded that the deductible monthly obligation included the amount of the contingent liability carry-forward from Lukens earlier SUB plan to its 1962 SUB plan and that the entire amount thereof was properly accruable in its fiscal year 1962, being the year in which the contingent liability became non-cancellable.
It should be noted that the parties involved here have stipulated that the express terms of each of the revised SUB plans provide for the carry-forward of the full amount of the "contingent liability" under the three earlier SUB plans as part of the delayed contribution element of the monthly obligation on the respective effective dates of the revised SUB plans (i.e., July 1, 1962 in the case of Universal-Cyclops, and February 1, 1963 in the case of Empire-Reeves and Reeves Steel).
The Court of Appeals in Lukens rejected the Commissioner's arguments that the liability for the delayed obligation was wholly contingent, rather than fixed and certain, and therefore was not accruable until actually paid into the Lukens SUB trust.
The decisions of the United States Courts of Appeals, of course, are binding upon the District Courts within such Circuit. As Judge Weber said in Minnich v. Nabuda, 336 F. Supp. 769 (W.D. Pa. 1972), while he "believes most strongly" in an opposite point of law, the District Court is nevertheless "bound by the current holding of this circuit." Id. at 770. In Thompson v. United States, 148 F. Supp. 910 (E.D. Pa. 1957), involving a federal estate tax refund action, the District Court indicated that a "similar fact situation to that here involved" was recently considered in the Third Circuit, and that "that decision controls this case." Id. at 913. See also Shoffner v. Glenshaw Glass Co., 173 F. Supp. 850, 854-855 (W.D. Pa. 1959), and Shupe v. Pennsylvania R. Co., 19 F.R.D. 144, 145 (W.D. Pa. 1956).
The plaintiff and defendant have stipulated in this case that the 1962 revised SUB plans as adopted by Universal-Cyclops, Empire-Reeves, and Reeves Steel were substantially in the same form as the 1962 SUB plan developed by the steel industry and Union negotiators during the 1962 steel industry labor negotiations and adopted by the major steel companies. The 1962 SUB plan litigated in Lukens was also in the same form developed in the 1962 steel industry negotiations and adopted by the major steel companies. 52 T.C. at 766-767. The Tax Court's findings of fact in Lukens, 52 T.C. at 765-781, are virtually identical to the stipulation of facts between the parties in this case aside from the amounts of the monthly obligations.
In summary, the government's effort to persuade this court to either consider Lukens, supra, to be in error or to distinguish Lukens from this case are not successful.
The government argues that, while it is "fully aware that the deductibility of obligations similar to the plaintiff's was considered and allowed" in the Lukens case, both the Tax Court and the Appellate Court were "in error in deciding Lukens, not because of any misunderstanding regarding the principles controlling the timing of deductions under section 461 of the Code, but rather because the courts did not first analyze under section 162 the nature of the obligations for which the taxpayer was seeking a deduction."
This argument of the government appears to be an effort to distinguish between the obligation to pay money to the trusts and an obligation to pay the benefits provided under the SUB plans ...