On Appeal from the United States District Court for the Middle District of Pennsylvania, D.C. Civil Action No. 83-1569
Before: HIGGINBOTHAM and STAPLETON, Circuit Judges, and RODRIGUEZ, District Judge.*fn*
A. LEON HIGGINBOTHAM, JR., Circuit Judge.
This appeal concerns one aspect of the federal tax deduction available to an employer for its contributions to an employee pension plan. Because we conclude that federal law does not limit the amortizable base to be used in calculating an employer's deduction for its pension plan's past service liability to the portion that remains unfunded in a tax year, we will vacate the judgment of the district court and enter summary judgment for the appellant-taxpayer.
Neither party contests the relevant facts in this dispute. Through the end of 1975, AMP Incorporated ("AMP"), a New Jersey corporation that identifies its principal place of business as Harrisburg, Pennsylvania, maintained two distinct retirement plans for its employees. Together, the assets of these plans exceeded their liabilities by almost two million dollars. On January 1, 1976, AMP merged the assets of these two plans into the AMP Pension Plan, a new plan that was designed to comply with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), Pub. L. No. 93-406, 88 Stat. 829. Each of the prior plans thus ceased to exist, and the members of each plan became members of the AMP Pension Plan. The new plan contained new rules governing plan participation, vesting and benefit accrual, and its new benefit formulas increased the benefits payable to plan participants and their beneficiaries. As a consequence of these liberalized benefits, the past service liability*fn1 of the new plan at the time of the merger stood at $15,612,535. Due to such factors as the experience gains of the predecessor plans, however, only $12,301,375 of the past service liability of the new plan was unfunded*fn2 as of January 1, 1976.
Section 404(a)(1) of the Internal Revenue Code, as amended,*fn3 limits in a number of ways the allowable deduction for an employer's contributions to a pension plan. See 26 U.S.C. § 404(a)(1) (1982). In calculating its overall tax liability for the calendar year 1976, including its deduction under this Code section, AMP looked to the new plan's past service liability of $15,612,535 (i.e., both the funded and unfunded portions thereof). AMP apparently concluded that the lesser figure -- the plan's $12,301,375 unfunded past service liability -- was not relevant in determining its federal tax liability.
The procedural history of this dispute is similarly straightforward. In its tax return for 1976, AMP calculated its overall liability at, and therefore paid, more than fifteen million dollars in federal income taxes. This return was subsequently audited by the Internal Revenue Service ("I.R.S."). In October, 1981, AMP consented, under protest, to the I.R.S.'s additional assessments against AMP's 1976 return.*fn4 In November, 1981, the I.R.S terminated its appellate consideration of AMP's protests. Therefore, on December 11, 1981, AMP paid $1,106,358 in additional federal income taxes for 1976 and $362,828.97 in interest.*fn5 The I.R.S. District Director subsequently disallowed in full AMP's claim for a refund on its 1976 taxes.
This action against the United States was filed, pursuant to 28 U.S.C. § 1346 (1982),*fn6 on October 28, 1983. On AMP's motion for summary judgment and the United States motion for partial summary judgment, the district court referred the case to a United States Magistrate, J. Andrew Smyser, who recommended that AMP was legally entitled to deduct the portion of its pension plan's past service liability that was already funded and thus was entitled to summary judgment on the so-called pension plan controversy.*fn7 The district court did not, however, accept this recommendation. Rather, applying what it considered to be the "practical construction of the statute," the district court concluded that only the unfunded portion of AMP's pension plan's past service liability could be considered for purposes of the federal tax deduction and entered summary judgment for the government. AMP, Inc. v. United States, No. 83-1569, mem. op. at 3 (M.D. Pa. May 28, 1985). This appeal followed.
Our appellate jurisdiction over this dispute is conferred by 28 U.S.C. § 1291 (1982). Because interpreting a provision of the Internal Revenue Code is wholly a matter of statutory construction, our standard of review is plenary. Wheeler v. Heckler, 787 F.2d 101, 104 (3d Cir. 1986); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir. 1981).
The question in this appeal is whether the funded portion of AMP's past service liability is to be amortized in calculating its deduction limit for tax year 1976. Because our resolution of this question turns on the precise language of the Internal Revenue ...