business expenses and deducted by it in its returns for the years in which such credits were made. The amounts credited in this fashion during the taxable years would be paid ultimately to the employees under the provisions of the contract creating the trusts. There was, however, uncertainty during the taxable years with regard to the identity of the ultimate recipients of the benefits and the time of such payments.
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 directly to the employee. As the government states:
. . . plaintiff's undertaking to pay money to a trust are (sic) not, when considered in vaccuo, ordinary and necessary business expenses.
In argument at various times in this case the government labeled this proposition as the distinction that must be made between the form, i.e., the trust, and the substance, i.e., the obligation to pay the employee benefits.
The government has presented no authority to support the contention that the obligation to pay money to an entity such as a trust, in itself would not properly be a deductible expense under section 162. This argument is not persuasive as it appears, as plaintiff has argued, that such a position amounts to an attack on the accrual method of accounting.
The government, in addition to its claim that the Lukens decisions were in error, attempts to distinguish this case from Lukens in two respects.
The first effort to distinguish Lukens from this case would be best set forth by quoting from the government's brief:
The defendant does not deny that the plaintiff has, for the purpose of paying specified employee benefits, committed itself to establish unfunded liability accounts in amounts determinable within the year for which deductions are sought. The defendant also acknowledges that it was this very obligation for which deductions were allowed in Lukens, supra, but the Court should note that this was only after the Tax Court had concluded . . . that such obligation "does not depend upon an estimate of anticipated future expenditures." Whether such a conclusion be considered a finding of fact or a conclusion of law, it is totally devoid of support in this case. . .. Without this intermediate finding, the ultimate conclusion of the Court is simply not helpful to the resolution of the matter in the instant case.
The government does not indicate what the quoted phrase from the Tax Court's 23-page opinion in Lukens meant in connection with the Tax Court's decision. The plaintiff notes that the Court of Appeals in its opinion in Lukens ignored the statement of the Tax Court.
It is clear that in this case the accrual of the monthly obligation was fixed by the terms of the SUB plans themselves and did not depend on estimated or anticipated future expenditures. Cyclops has incurred a fixed and absolute liability under the SUB plans. The future disbursement of benefits under those plans does not alter the obligation.
The government secondly attempts to distinguish this case from Lukens by arguing that in Lukens the (courts) found that the obligation once incurred could not be extinguished, reduced, or cancelled, or in any other manner revert to the benefit of the company. The government suggests that the opposite must be found in this case because in 1968 Cyclops by agreement with the Union cancelled $183,000 of the obligations accumulated during the years under consideration and indeed claimed a deduction on this amount.
The provisions of the industry-wide SUB plan and S & V plan which give rise to the "evaporation" in this case were before the Court of Appeals in Lukens, supra. These provisions were summarized in paragraph 72 of the stipulation filed in this case (and are described in the appendix to this opinion) as follows:
Under Section 15.0 of the 1964 Universal-Cyclops S & V Plan, Universal-Cyclops incurred a liability to pay 12.5 cents per hour worked to the FAA. . . . Under Section 15.2b of said S & V Plan, the maximum hourly accrual to the FAA was 15.625 cents per hour worked, 3.125 cents of which was in the form of spillover from the 1962 Universal-Cyclops SUB plan. . . . However, Section 15.9 of said S & V Plan provided for a maximum cumulative monthly accrual of additional delayed contributions, including splashback, in the amount of 3.5 cents per hour worked, less any spillovers to the said S & V Plan. The difference between the maximum available "spillover" of 4.5 cents per hour worked set forth in Section 15.1 of the said S & V Plan and said maximum monthly accrual of 3.5 cents as set forth in Section 15.9a of the said S & V Plan was commonly referred to as "evaporation."