
    364 F. 2d 831
    THE A. P. SMITH MANUFACTURING COMPANY v. THE UNITED STATES
    [No. 203-61.
    Decided July 15, 1966] 
    
    
      
      Robert P. Weil, attorney of record, for plaintiff.
    
      William O. Ballard, Jrn with whom was Assistant Attorney General Mitchell Rogovin, for defendant. Richard M. Roberts, Lyle M. Turner and Philip R. Miller, of counsel.
    
      Before Cowen, Chief Judge, Whitaker, Senior Judge, Dtjrfee, Davis, and Collins, Judges.
    
    
      
      Plaintif£’s petition for writ of certiorari denied January 9, 1967, 385 U.S. 1003.
    
   Per Curiam:

This case was referred to Trial Commissioner W. Ney Evans with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in an opinion and report filed on March 19, 1965. Exceptions to the commissioner’s report and opinion were filed by plaintiff, briefs were filed by the parties and the case was submitted to the court on oral argument of counsel. Since the court is in agreement with the opinion, findings and recommendation of the commissioner, it hereby adopts the same as the basis for its judgment in this case, as hereinafter set forth. Plaintiff is therefore entitled to recover the difference between the tax as computed on ordinary income and the tax computed on the basis of a long-term capital gain representing the excess of the market value of the securities contributed by plaintiff to the pension fund and the cost to plaintiff of those securities. Judgment to this effect is entered for the plaintiff with the amount of recovery to be determined pursuant to Rule 47(c).

OPINION OF COMMISSIONER

Evans, Commissioner:

In the case of United States v. General Shoe Corporation, 282 F. 2d 9 (6th Cir. 1960) the corporate taxpayer had created, for the benefit of its employees, a pension or retirement trust which had been qualified under section 165(a), Internal Revenue Code of 1939, as exempt from taxation. During the corporate fiscal years 1951 and 1952, the taxpayer contributed assets to the trust, although it was under no obligation to do so. The assets so contributed consisted of four parcels of real estate.

On its income tax returns for 1951 and 1952, taxpayer took deductions representing the fair market values of the properties at the times they were contributed to the trust, claiming the deductions under section 23 (p) of the Internal Bevenue Code of 1939. The values so deducted were in excess of the cost of the properties to the taxpayer.

By letter of February 11, 1958, the Treasury Department ruled that the pension plan and trust did not meet the requirements of section 165 (a) and was therefore not exempt from taxation. Thereafter, deficiencies were assessed as for capital gains on the disposition of the real estate, which deficiencies the corporation paid.

Taxpayer thereupon sued in the United States District Court to recover the deficiencies. The trial court held (1) that the law does not require that the employer have a legal obligation to make contributions to a trust in order for the trust to be exempt; (2) that the ruling in 1958 that the trust did not conform to section 165 (a) was an abuse of discretion, based on an erroneous view of the law and therefore of no effect; and (3) that taxpayer was entitled to the deductions as taken. On these points, the Court of Appeals was “in complete agreement.”

The trial court further ruled that:

* * * In contributing these properties to the trust, the plaintiff did not receive any money, and did not receive the equivalent of money since no debt or legal obligation was discharged; it did not receive any “property” having “fair market value” within the meaning of * * * section [111 (b) Internal Bevenue Code of 1939] ; and hence there was no “amount realized” from the contributions to the trust. That being the case, there was no taxable gain.

Taxpayer was therefore entitled to judgment, the trial court 'held, for the amount of taxes paid by it as a result of the erroneous assessment of capital gains taxes on the contributions of real estate to the trust.

The Court of Appeals disagreed with the trial court’s conclusion that there was no taxable capital gain, reversed the decision, and vacated the judgment of the court below. Following are pertinent excerpts from the Court of Appeals’ opinion:

* * * The District Court agreed with the taxpayer that it 'had not realized a taxable capital gain. We believe that this was an erroneous view of the law. We think that the rationale of International Freighting Corporation v. Commissioner of Internal Revenue, 2d Cir., 135 F. 2d 310 is persuasive. * * * We can hardly state the rationale of that decision better than Judge Frank did in his short succinct opinion in Freighting. When the taxpayer here made the contributions to the trust it was entitled to take, and did take deductions for such contributions as “ordinary and necessary” expenses. When the taxpayer evaluated the contributions on the basis of the then current market value and used those figures for its deductions, it then realized capital gain to the extent that such values exceeded its basis. There is no gainsaying this logic. The tax statutes do not operate in theory — they are practical. The disposition of the real estate 'by the taxpayer resulted in an ‘“amount realized” within the meaning of Section 111(b)—
“Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.”
The taxpayer realized exactly the same gain here by transferring the real estate as it would have had it sold the real estate for the fair market (or appraised) value and contributed the funds to the trust. Would the taxpayer say that if it had sold the real estate that there would have been no taxable capital gain in this situation ? Can a taxpayer circumvent the capital gains tax by such 'a simple device? * * * In Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 119, 50 S. Ct. 273, 274, 74 L. Ed. 733 Mr. Chief Justice Hughes, directing his attention to the issue of the reasonableness of extra compensation for work done, referred to payments made “as a matter of internal policy having appropriate regard to the advantage of recognition of skill and fidelity as a stimulus to continued effort.” 'Surely the same considerations are present in relation to a plan whose purpose is as stated in the present case:
* * * * *
The theory of economic gain comes into play. To argue, as the taxpayer does here, that there can be no gain because nothing is realized, is unrealistic. Literally the taxpayer is correct in its contention that it did not receive a tangible benefit * * * however, we do not conceive that in this day and age we are restricted to tangibles in tax matters where there is actual recognizable benefit, albeit intangible, the taxation of which is implicit in the statutory scheme, and where such benefit is clearly capable of being evaluated on an objective basis. * * * The value of what was given up here bears a direct relationship to the fair value of the “property” received. The “property” received is an economic gain to the taxpayer of exactly the market or assessed valuation Which the taxpayer used as a deduction on its income tax returns * * *. We experience no difficulty in accepting as the fair market value of the property received by the taxpayer the appraised valuation which the taxpayer took as a deduction on its income tax returns. * * *
In accordance with the foregoing reasoning, ive are of the opinion that the determination of the District Court that the taxpayer did not realize a taxable gain when it made the transfers and took the deduction for their fair market value was an erroneous one. * * *

In the instant case, the corporate taxpayer had created, for the benefit of its employees, a pension or retirement trust which had been qualified under section 165(a), Internal Revenue Code of 1939, as exempt from taxation. During the calendar tax years of 1954 and 1955, the taxpayer contributed assets to the trust, although it was under no obligation to do so. The assets so- contributed consisted of shares of stock in other corporations which taxpayer had previously purchased and which it held as investments.

On its income tax returns for 1954 and 1955, taxpayer took deductions representing the fair market value of the securities at the times they were contributed to the trust, claiming deductions under section 404(a) of the Internal Revenue Code of 1954. The values so deducted were in excess of the cost of the securities to the taxpayer.

The Commissioner of Internal Revenue determined that taxpayer realized ordinary income in both years in amounts representing the difference between the market value of the securities and their cost to taxpayer, and assessed deficiencies on these amounts. The corporation paid these deficiencies, and now sues to recover them.

Defendant, in its brief to the 'commissioner, concludes that “the income in question,” i.e., the excess of market value over cost, should be treated as a realized and recognized capital gain. To this extent, defendant concedes the point to plaintiff that if the transfer of the securities (which were, admittedly, capital assets and not stock in trade) resulted in the realization by plaintiff of any gain, that gain was capital gain and not ordinary income.

Plaintiff, however, is not content with this concession. Its brief concludes that “plaintiff should have judgment as prayed in the petition,” and the petition demands judgment for the full amount of the deficiencies (plus interest) for both years.

Similarities 'between the case of tbe General Shoe Corporation and the instant case include the following:

In each instance, the corporate taxpayer had created, for the benefit of its employees, a pension or retirement trust which had been' qualified as tax exempt under section 165 (a) of the Internal Eevenue Code of 1939.

In each instance, during 2 tax years, taxpayer contributed assets to the fund, although it was under no obligation to do so.

In each instance, the assets so contributed were held as investments and had market value at the time of contribution in excess of their cost to the taxpayer.

In each instance, the taxpayer claimed deductions of the market value of the assets as ordinary and necessary expenses.

In each instance, the Government’s position is that taxpayer realized a taxable capital gain measured by the excess of market value over cost.

Among the dissimilarities between the instant case and that of the General Shoe Corporation, the fact that the assets contributed by the taxpayer in the present case consisted of securities while those contributed by the General Shoe Corporation consisted of parcels of real estate is a distinction without a difference.

The only dissimilarity of possible significance is that the contributions by the General Shoe Corporation were made while the Internal Eevenue Code of 1939 was in effect, whereas the Internal Eevenue Code of 1954 governs the situation of the present plaintiff.

While extensive rearrangement of tax provisions and many changes in language were effected in the 1954 Code as compared to the 1939 Code, examination of the pertinent provisions reveals no changes in’ substantive law which would make a difference as between the instant case and that of the General Shoe Corporation. Neither plaintiff nor defendant so contends.

Under these circumstances, the instant case and the case of the General Shoe Corporation are, in my opinion, on all fours, and the former is controlled by the latter.

Plaintiff was and is cognizant, of course, of the decision in United States v. Generad Shoe Corporation. Its brief to the commissioner says (p. 64) that that decision—

* * * will not support a judgment for the Government here 'because the case does not decide whether a contribution in property to a self-administered, fixed benefit pension plan constitutes a transaction closed and completed during the year of contribution and so capable of generating taxable gain as assessed by the Commissioner of Internal Pevenue.

Following are further recitations in plaintiff’s brief to the commissioner related to the General Shoe Corporation case:

* * * no case which counsel has been able to discover decides whether gain is realized precisely on the factual situation here obtaining, namely whether a contribution on account of the undetermined cost of expected employee annuities is a closed and completed transaction where in exchange for the expectation of these annuities, the employer has received an increment of employment advantage without market value. * * * that question, unfortunately, was neither discussed nor decided in United States v. General Shoe Corp. * * *.

Again, at p. 79:

In United States v. General Shoe Corp., supra * * * [n] dthing in the opinion tells us whether this was a fixed benefit plan or a money purchase plan, i.e.} whether the increment of employment advantage deriving from a fixed benefit plan was 'bestowed in exchange for benefits whose costs were unknown in the taxable year, with contributions merely deposits on account, or whether under a money purchase plan, contributions were in fact exchanged for the increment of employment advantage in a series of annual closed and completed transactions. * * *

Once more, at p. 81:

* * * Plaintiff submits that General Shoe is not a precedent here because in General Shoe there was no determination of the question of fact or of the mixed question of fact and law as to whether, in funding a voluntary, fixed benefit, self-administered pension plan, the employer’s contribution is part of a transaction closed and completed in the taxable year, so as to realize gain or loss.
For two other reasons it is submitted that United States v. General Shoe Corp., supra, ought not to be followed 'here. In the first place the court reasoned that General Shoe’s contribution being for a business purpose, the act of making the contribution realized to the employer the appreciation in the contributed property, under Helvering v. Horst [311 U.S. 112 (1940)] * * * [which] does not apply * * * here * * *. In the second place the court assumed that the before-tax effect of sale of the plants and contribution of the proceeds of sale would have been the same as the before-tax effects of the contribution of the plants directly to the pension fund and that therefore and thereby General Shoe became obligated to pay the tax which would have been generated by the sale. * * * If the taxpayer had sold the plants for cash, that would have constituted a closed and completed transaction on which the taxpayer would have realized gain or loss * * *. On the other hand, conveyance of the plants to the pension fund would have had no tax effect if the transaction was not closed and completed in the taxable year. * * *

And finally, at p. 83:

* * * In the General Shoe case, the District Court held that the properties had been validly contributed. * * * This conclusion the Court of Appeals affirmed. * * * In the premises, it was error for the Court of Appeals to fail to accord to the transaction its full tax consequences as prescribed by Congress.

In summary, plaintiff’s contentions (in inverse order) are: (1) that the decision (by the Court of Appeals) in General Shoe was wrong; and (2) that, in any event, that decision is not controlling here because of the failure of the court to consider and decide whether, in the funding of a voluntary, fixed benefit, self-administered pension plan, the contribution by the employer is part of a transaction closed and completed in the taxable year. Plaintiff contends that neither of its contributions was part of a transaction closed and completed during the taxable year because each was a contribution on account of the undetermined cost of expected employee annuities ; and further that, as a result of each contribution, the employer received an increment of employment advantage without market value.

At the trial of the case plaintiff presented extensive evidence (some of it over objection by defendant) tending to show (1) the nature of the trust as a voluntary, fixed benefit, self-administered pension plan; (2) the effect of these characteristics upon (a) the management of the plan by the trustee, (b) the participation in the plan by the employees, and (c) the accounting by the employer for its contributions; and (3) the logic of the corollaries (a) that the cost of expected employee annuities was unknown at the time of the contribution and could not be determined for 40 to 70 years and (b) that the increment of employment advantage to the employer arising from the contribution therefore had no market value.

On the basis of such evidence, plaintiff has requested findings of fact covering 55 typewritten pages in support of the following “summary findings” :

87. Neither of plaintiff’s contributions in securities to its pension fund m 1954 or 1955 was part of a sale or exchange between plaintiff and the pension fund or the pension trustee.
88. Any increment of employment advantage which accrued to plaintiff during each of the years 1954 and 1955 in respect of the pension plan accrued to plaintiff by reason of the expectation of the benefits which accrued under the plan, not by reason of plaintiff’s contributions during those years. Such increments had no market value.
89. The pension benefits which accrued under the plan in 1954 and 1955 were not the liability of plaintiff or of the pension fund or of the pension trustee or of any other person, firm or corporation. Those benefits had no market value.
90. The cost of the pension benefits which accrued during 1954 and 1955 were unknown to plaintiff, and could not be known, during those years, since they de- ? ended on events which would not take place until 40-0 years thereafter.

On the basis of the foregoing findings of ultimate fact, plaintiff’s brief asks for conclusions of law to the effect (1) that plaintiff realized no gain in respect of the contributions which it made to its pension fund during 1954 and 1955; (2) that the amount deductible by plaintiff as contributions to its pension fund in 1954 and 1955 were, respectively, $89,459 and $49,845.50; and (3) that plaintiff is therefore entitled to judgment.

While the writer agrees (1) that plaintiff is entitled to judgment (for the difference in taxation as between ordinary income and capital gain) and (2) that the amounts deductible by plaintiff as contributions to its pension fund are as recited by plaintiff, he does not agree that plaintiff realized no gain in respect of the contributions.

Neither does the writer agree that the extensive findings of subsidiary facts requested by plaintiff in support of these refinements are germane to the issue. For this reason, such subsidiary facts have been omitted from the findings contained in this report. Several of plaintiff’s contentions on points of law have been likewise omitted from the legal analysis in this opinion.

There are three reasons for this short cut to decision, in addition to the inherent concession to the shortness of life.

The first reason is that, since "[t]he tax statutes do not operate in theory — they are practical,” plaintiff’s reasoning borders on the esoteric. For example, its reply brief contains the following statement:

_ * * * The concept of a closed and completed transaction expresses one of the requirements for the realization of gain or loss on the sale or conversion of capital assets, to which type of transaction the concept of ordinary and necessary business expense, including a pension plan contribution, is inapplicable.

Here, as in United States v. General Shoe Corporation, supra, and in International Freighting Corporation, Inc. v. Commissioner, supra:

* * * When the taxpayer * * * made the contributions to the trust it was entitled to take, and did take deductions for such contributions as “ordinary and necessary” expenses. When the taxpayer evaluated the contributions on the basis of the then current market value and used those figures for its deductions, it then realized capital gain to the extent that such values exceeded its basis. There is no gainsaying this logic. * * * [Emphasis supplied.]

The second reason is that, as I read the relevant precedents, the completion and closing of the transaction within the taxable year is inherent in the allowance of the deductions as “ordinary and necessary” expenses.

The third, and most compelling reason, is that the logic of plaintiff’s reasoning leads inexorably to the conclusion that if, as plaintiff contends, plaintiff received in return for its contributions only “an increment of employment advantage without market value,” plaintiff’s initial position vis-a-vis the deductibility of the contributions as “ordinary and necessary” expenses is placed in jeopardy.

Plaintiff cannot have it both ways, viz, that a substantial contribution by it is deductible as an ordinary and necessary expense of carrying on its business, in return for which it has now received an advantage but that the value of such advantage cannot be determined until after the lapse of some 40 to 70 years.

To paraphrase a sentence from United States v. General Shoe Corporation, supra, a taxpayer cannot circumvent the capital gains tax by a device, simple or complex. As in that case, so here—

* * * The theory of economic gain comes into play. To argue, as the taxpayer does here, that there can be no gain because nothing is realized, is unrealistic. Literally the taxpayer is correct in its contention that it did not receive a tangible benefit * * * however, we do not conceive that in this day and age we are restricted to tangibles in tax matters where there is actual recognizable benefit, albeit intangible, the taxation of which is implicit in the statutory scheme * * *.

In recognizing contributions to a pension fund as compensation for services actually rendered, within the meaning of the statute, the courts have gone as far as they are likely to go, or as they should go, in a situation of this kind. Further refinements upon the returns to be realized by the employer from the contributions, at least in terms of postponement of realization for tax purposes into the indefinite future, as plaintiff would have done here, would, in my opinion, place an unwarranted and unacceptable strain upon the recognition which the courts have so far extended.

Under the decided cases plaintiff is entitled to deduct the amount of its contributions to the pension fund but, in doing so, it must recognize that it realized a taxable capital gain to the extent of the excess of the market value of tihe securities contributed over the cost to it of those securities.

FINDINGS oa? Fact

1. (a) This is a refund suit instituted by the plaintiff for the recovery of income taxes for its calendar tax years of 1954 and 1955.

(b) Plaintiff is a 'corporation organized and existing under the laws of the State of New Jersey. It manufactures valves and other heavy equipment for the water and gas utilities and other industries, and employs skilled personnel who remain in its employ over long periods of time.

2. (a) On December 30, 1944, plaintiff adopted a pension plan (effective as of December 1,1944) in order to place itself in a position to compete with other employers for personnel, to establish a regular rule with respect to timely retirements and through, retirements to facilitate promotions, and to provide a scheme under which reserves could be accumulated during the period of active service of its employees toward the cost of their retirement.

(b) Shortly after the pension plan was established, all of plaintiff’s employees received a full copy of the entire plan, and the provisions of the plan were also communicated to all employees subsequently hired. All employees, on becoming participants of the plan, would sign “instruments of election” by which they acknowledged receipt of a copy of the plan and agreed to be bound by all of its provisions.

(c) On December 30, 1944, as part of plaintiff’s pension plan, a trust was created when plaintiff, as grantor, and D. F. O’Brien, H. F. O’Brien, and F. J. Mullany, as trustees, mutually executed and delivered a trust agreement establishing a trust to receive, hold, and invest money and other property and to distribute therefrom, pursuant to the plan, pensions to retired employees of plaintiff. As of December 1,1945, Bankers Trust Company, a corporation organized and existing under the banking law of the State of New York and authorized to act as trustee of mter vivos trusts, became the successor trustee of said trust and thereafter remained as such successor trustee at all subsequent material times.

3. The plan inclusive of all amendments has in successive rulings been held by the Bureau of Internal Revenue to be a qualified plan within the meaning of section 165(a) of the Internal Revenue Code of 1939, with the result that the trust was held exempt from income tax under section 165 (a) and, in computing plaintiff’s net taxable income (and subject to verification upon examination of plaintiff’s income tax returns), plaintiff’s contributions to the plan were ruled deductible to the extent permitted by section 23 (p) of the 1939 Code. Under the 1954 Code, controlling with respect to the tax years 1954 and 1955, here in question, the applicable substantive law provisions of former section 165(a) are to be found in sections 401(a) and 501(a) and 501(c) (17), and of former section 23(p) in section 404(a) (1) (C).

4. (a) The full text of the pension plan and of the trust created as part of the plan, as effective at all times during plaintiff’s taxable years 1954 and 1955, is set forth in Annex A to the petition (the trust being Exhibit A thereto). The provisions of the plan and trust here material are as follows.

(b) The plan provided two types of benefits to participants, retirement income and a death benefit, and a factor in determining the amount of 'benefits in both instances was the length of an employee’s continuous service.

(c) All of plaintiff’s employees, whether employed at the time of the adoption of the plan or subsequently employed, were eligible for participation in the plan after the completion of 2 years of continuous employment with the plaintiff.

(d) Employees who terminated their employment before their normal retirement age and prior to their death had a vested right to retirement income after they satisfied certain time of employment requirements.

(e) The plan was designed to provide for the livelihood of plaintiff’s employees after their retirement at age 65 or for their beneficiaries.

(f) The entire trust corpus together with any increment and income thereto was held by the trust solely for the execution of the plan.

(g) The trust fund was solely for the benefit of the beneficiaries thereunder (plaintiff’s employees), and no part of it could be diverted to any purpose other than the exclusive benefit of plaintiff’s employees or their beneficiaries.

(h) The trustees of the trust had the power to hold, sell, exchange, etc., the trust property, and to do all acts which they deemed necessary or proper for the protection of the trust property.

(i) As indicated by the foregoing, plaintiff’s plan is fairly standard and so can be considered not only in terms of its particular provisions and statistics, but in terms of principles applicable to pension plans generally. Plaintiff’s pension plan, as with the pension plans of other employers, was intended to pay its employees part of their compensation in a manner which would provide income to them when they retired because of age or disability.

5. Plaintiff never considered terminating its employees’ pension plan, for it realized that to do so would be highly disruptive to employee morale, and if plaintiff had discontinued the plan and not paid to employees the benefits which they expected upon retirement it would have at least three adverse effects upon the plaintiff:

(1) Plaintiff’s operational efficiency would have been reduced, because employees would need to continue their employ beyond their more productive years.

(2) The quality of the service rendered to plaintiff by its employees would be reduced, and if an opportunity presented itself plaintiff’s employees might have left its employ.

(3) Plaintiff’s competitive situation in the labor market would have been adversely affected, and plaintiff would have had difficulty in attracting the kind of employees it desired and in retaining those employees to retirement.

6. (a) During 1954, the actuaries for the plan reported to the plaintiff that the estimated amount needed to fund the plan for its eleventh fiscal year (beginning October 1, 1954) would be $89,459.

(b) On November 30, 1954, plaintiff contributed to the pension fund $2,000, and, on December 13,1954, an additional $10,000. This reduced the amount of $89,459 reported by the actuaries to $77,459. In addition, the actuaries reported $808 as the cost of insurance on the lives of employees with less than 2 years’ service with plaintiff.

(c) On December 17, 1954, plaintiff owned the following securities:

Tear acquired
300 shares Bethlehem Steel common_1942
100 Shares ROA common-1954
58 shares Standard Oil of NJ capital_1936
142 shares Standard Oil of NJ capital-1951
200 shares Standard Oil of NJ (stock dividend)_1951

(d)On December 17, 1954, plaintiff’s board of directors resolved that the 300 shares of Bethlehem Steel, 100 shares of RCA, and 400 shares of Standard Oil (all noted in the preceding paragraph) be contributed by the plaintiff to the pension plan. On December 27, 1954, these shares were assigned and delivered by plaintiff to the trustee of the pension fund. At that time, the aggregate market value of the shares was $78,787.50, and plaintiff’s aggregate adjusted basis therein was $24,953.43.

7. (a) During 1955, the actuaries for the plan reported to the plaintiff that the estimated amount needed to fund the plan for its twelfth fiscal year (beginning October 1, 1955) would be $69,489.

(b) On December 12, 1955, plaintiff contributed to the pension fund $3,000 cash. This reduced the amount of $69,489 reported by the actuaries to $66,489.

(c) On December 27, 1955, plaintiff owned the following securities:

Year acquired
200 shares Kennecott Copper common_ 1936
50 shares Peerless Cement preferred_1926

(d)On December 27, 1955, plaintiff’s board of directors resolved that the 200 shares of Kennecott Copper and 800 shares of Peerless Cement (both noted in the preceding paragraph) be contributed by plaintiff to the pension plan. The Peerless shares were assigned and delivered by plaintiff to the trustee of the pension fund on December 28, 1955, and the Kennecott shares on December 29, 1955. The aggregate market value of these shares on their respective delivery dates, was $46,325, and the plaintiff’s aggregate adjusted basis therein was $11,458.33.

8. (a) In respect to the assignment of the securities referred to in finding 6 (d), plaintiff made the following entries on its books of account:

Employees’ Betirement & Benefit Fund (Debit)_$78,787.50
Private Ledger — Securities (all credits) :
300 shares Bethlehem Steel_ 6, 269. 00
100 shares BOA_ 2, 829. 00
400 shares Standard Oil of NJ_ 15, 855.43
Earned surplus (Credit)_ 53,834.07
78, 787.50

Thus, the credits to the securities account (totaling $24,953.43, the amount referred to in finding 6(d)), were exactly equal to plaintiff’s adjusted 'basis therein, and the entire amount of the appreciation on the securities was added to plaintiff’s earned surplus.

(b) In respect to the assignment of the securities referred to in finding 7 (d), plaintiff made the following entries on its books of account:

Employees’ Retirement & Benefit Fund (Debit)-$46,325. 00
Private Ledger — Securities (all credits) :
800 shares Peerless Cement- 2, 653.33
200 Shares Kenneeott Copper_ 8, 805. 00
Earned surplus (Credit)- 34,866.67
46,325.00

Thus, the credits to the securities account (totaling $11,458.33, the amount referred to in finding 7(d)), were exactly equal to plaintiff’s adjusted basis therein, and the entire amount of the appreciation on the securities was added to plaintiff’s earned surplus.

(c) If the plaintiff had not recorded this transaction in the manner described above, its books and records would not have properly reflected the actual gain achieved by the plaintiff when it made the described disposition of the securities to the pension plan.

9. (a) All of the securities contributed by the plaintiff to the pension plan were high-grade investment securities, and if plaintiff had wanted to sell them rather than assigning them to the pension trust it could have done so. If this had been done, then, in a matter of days, the proceeds from the sale of the securities could have been paid over to the pension trust.

(b) Prior to contributing the securities to the employees’ pension plan, plaintiff believed that it would be desirable for business purposes that such securities be liquidated, and in subsequently assigning them to the plan it was plaintiff’s purpose “to realize” their fair market value.

(c) Plaintiff was under no obligation to make either contribution to the pension fund.

10. (a) Plaintiff duly and timely filed its Federal income tax returns for 1954 and 1955. In accordance with is accounting records, the returns were prepared and filed on the basis of the accrual method and the calendar year. In these returns, plaintiff deducted (based upon a contention that it bad satisfied sections 404 and 162 of the 1954 Code) from its gross income $89,459 and $49,845.50, respectively, representing the amounts of cash and fair market value of shares of stock which it transferred to the pension fund in those respective years.

(b) With its returns for 1954 and 1955, plaintiff paid to defendant the amounts of tax indicated thereon as due, $146,-045.35 and $88,149.82, respectively. In its returns for 1954 and 1955, the plaintiff did not report — either as ordinary income or as capital gain — the excess of the fair market value of the securities transferred to its employees’ pension fund over its adjusted basis in those securities.

(c) Thereafter, on April 10, 1959, the Commissioner of Internal Revenue assessed against plaintiff deficiencies in income tax for 1954 and 1955 in the amounts of $27,993.70 and $18,130.67, respectively. Those amounts, together with assessed interest thereon of $6,805.92 and $3,320.15, respectively, were paid by the plaintiff to the defendant on April 27, 1959, except that $10 of the aforesaid amounts was paid on May 20,1959.

(d) On November 20,1959, plaintiff duly and timely filed with the District Director of Internal Revenue at Newark, New Jersey, claims for refund for 1954 and 1955 for the respective amounts of $27,933.70 and $18,130.67, and on December 4,1959, amended claims for the respective amounts of $34,799.62 and $21,450.82 to include in the amounts claimed the assessed interest described in the preceding paragraph (c). Plaintiff’s claim herein arose on May 20, 1960, when 6 months elapsed from the filing of plaintiff’s claims for refund with the District Director of Internal Revenue, during which period neither the Secretary of the Treasury nor his delegate rendered a decision thereon.

(e) The assessments of deficiencies of $27,993.70 and $18,-130.67 referred to in paragraphs (c) and (d) above were based upon four adjustments ((a), (b), (c), and (d)) as explained in the statement — appearing as Annex B on pages 18-22 of the petition — accompanying the Commissioner of Internal Revenue’s 90-day letter dated December 2, 1958. However, plaintiff does not now dispute, for either of the years in suit, the correctness of the adjustments (or the portion of the deficiencies applicable hereto) designated (a), (b), and (d) in the aforesaid statement. Plaintiff’s sole remaining claim in this action concerns the correctness of the adjustments (and the portion of the deficiencies applicable thereto) designated (c) in the aforesaid statement for both years in suit.

(f) The deficiencies assessed with respect to the adjustments designated (c) were based upon the Commissioner’s contention, first, that the plaintiff realized ordinary income of $58,834.07 in 1954 and $34,866.67 in 1955 upon the transfer of the securities to its employees’ pension plan — representing the difference between plaintiff’s adjusted basis in such securities and their fair market value at the time of said transfer ; or, second, that if it is held that income was not realized by reason of the benefit which the plaintiff obtained from such transfer, then the deduction which the plaintiff claimed under section 404(a) for the contribution to the pension plan should be limited in both years to the amount of the adjusted basis of the shares contributed, plus the cash contributed rather than the amount of cash, plus the fair market value of those securities which the plaintiff had deducted on its tax returns.

CONCLUSION OK LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover the difference between the tax as computed on ordinary income and the tax computed on the basis of a long-term capital gain representing the excess of the market value of the securities contributed by plaintiff to the pension fund and the cost to plaintiff of those securities. The amount of the recovery will be determined pursuant to further proceedings under Rule 47(c). 
      
      The opinion, findings of fact and recommended conclusion of law are submitted under tlie order of reference and Rule 45(a), now Rule 57(a).
     
      
       The date of the decision was September 2, 1960. General Shoe Corporation’s petition for a writ of certiorari denied, 365 U.S. 843 (1961).
     
      
       For the Middle District of Tennessee.
     
      
       Taxpayer did not report as income (either as ordinary income or as capital gain) the difference between the cost of the securities and their market value at the time of contribution. The same was true, apparently, with respect to the real estate contributed by General Shoe Corporation.
     
      
       The determinations were explained in a statement accompanying the Commissioner’s 90-day letter dated December 2, 1958, which was 21 months prior to the decision in United States v. General Shoe Corporation, supra.
      
     
      
       Alternatives were state! in tile determinations to the following effect:
      (1.) If it is held that income was not realized by reason of the benefit utilized by such transfer, the deduction claimed under section 404(a) for the contribution should be limited to an amount equal to the sum of the cash contribution plus the [cost] basis of the investment securities.
      (2) In the alternative, it has been determined that the transfer of investment securities having a fair market value in excess of their [cost] basis resulted in a long-term capital gain.
     
      
       Payment was made on December 4, 1959.
     
      
       The action was filed on May 22, 1961, 7 months after the decision in United States v. General Shoe Corporation, supra.
      
     
      
       Plaintiff further asserts in its reply brief that “the applicable rules of law require judgment for plaintiff os demanded in the petition” [emphasis supplied] . The petition demands judgment on the first count (1954) for $34,799.62 and on the second count (1955) for $21,450.82. In a stipulation of facts filed at pretrial, the parties agreed (1) that these were the amounts set forth in plaintiff’s amended claims for refund, filed December 4, 1959 ; (2) that such amounts represent the totals of deficiencies assessed, plus interest; (3) that portions of the total deficiencies were based on adjustments set forth in paragraphs designated (a), (b), and (d) in the Commissioner’s statement; and (4) that plaintiff does not dispute the correctness of those adjustments, but “does dispute the correctness of the adjustments (and the portion of the deficiencies applicable thereto) designated (c) in the * * * statement, for both years in suit.”
      Inasmuch as the parties have further stipulated, with the approval of the commissioner, that the trial in the first instance shall be limited to the issues of law and fact relating to the right of the plaintiff to recover, the circumstances recited above will be pertinent to further proceedings, if any, to determine the amount of recovery.
     
      
       The pertinent provisions of the Internal Revenue Code of 1939 are: section 23(a)(1)(A) ; section 23(p)(l) ; and section 111(b). See: Title 26, united States Code, 1952 ed.
     
      
       The pertinent provisions of the Internal Revenue Code of 1954 are: section 162(a)(1) ; section 404(a)(1) ; and section 1001(b). See: Title 26, United States Code, 1958 ed.
     
      
      
         In excerpts quoted from the opinions in International Freighting Corporation, Inc. v. Commissioner, 135 F. 2d 310 (2d Cir. 1943) and United States v. General Shoe Corporation, supra, both of which were controlled by the 1939 Code, defendant, in its brief to the commissioner, has substituted (for the sections of the 1939 Code cited by the court) the comparable sections of the 1954 Code.
     
      
       Plaintiff’s brief, p. 74.
     
      
       The findings of fact contained in this report are predicated on the findings requested by defendant which, in turn, were largely based upon the parties’ stipulation of facts.
     
      
      
        United States v. General Shoe Corporation, supra, at p. 12. Cf. International Freighting Corporation, Inc. v. Commissioner, 45 B.T.A. 716, 720 (1941), aff’d, 135 F. 2d 310 (2d Cir. 1943).
     
      
       P. 8.
     
      
       At p. 12.
     
      
       In addition to United States v. General Shoe Corporation, supra, and International Freighting Corporation, Inc. v. Commissioner, supra, cf. Charles E. Smith & Sons Co. v. Commissioner, 184 F. 2d 1011, 1014 [4, 5] (6tli Cir. 1950), cert. denied, 340 U.S. 953 (1951) ; and General Electric Company v. United States, 156 Ct. Cl. 617, 299 F. 2d 942 (1962), cert. denied, 371 U.S. 940.
     
      
       The parties agreed, with the approval of the commissioner, that the trial of this action would be limited in the first instance to the issues of law and fact relating to the right of the plaintiff to recover.
     
      
       At all material times, Hubert IT. O’Brien has been a director, president, and chief executive officer of plaintiff.
     
      
       At all material times, Frank J. Mullany has been a director, secretary, and treasurer of plaintiff and the officer having custody of all financial records of plaintiff.
     
      
      Subsequently converted to 500 common and thereafter Increased by stock dividend to 800 common.
     
      
       That Is, the amount of $89,459 in 1954 was composed of $12,000 cash and $77,459 In fair market value of shares of stock; and the amount of $49,845.50 In 1955 was composed of $3,000 in cash and $46,325 in fair market value of shares of stock, plus $520.50, the excess amount transferred by it to the pension fund in 1954.
     