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Royer's Inc. v. United States

decided: April 7, 1959.


Author: Goodrich

Before GOODRICH, KALODNER and HASTIE, Circuit Judges.

GOODRICH, Circuit Judge.

This is a suit to recover taxes paid on contributions to an employees' profit-sharing plan set up by the taxpayer. The District Court decided against him, E.D. Pa. 1958, 163 F. Supp. 225, and he seeks our help.

The facts are uncomplicated and undisputed. There is only one point of law and it is as neat as a point of common law pleading before the Hilary rules.

The taxpayer set up his profit-sharing plan for employees under a trust agreement entered into December 27, 1945. The plan became effective in 1946. Under it the plaintiff was required and did make annual irrevocable contributions to the trust in an amount equal to 50 per cent of his net income. The taxpayer secured a ruling from the Commissioner to the effect that the plan and the trust met the requirements of Section 165(a) of the Internal Revenue Code of 1939.*fn1 In 1948 the plan was terminated and the trust corpus distributed to the employees entitled to it.*fn2

Now comes the problem. The payments which Royer's made to the trust during its existence exceeded the maximum amount which could have been deducted in those years under the formula stated in Section 23(p)(1)(C).*fn3 This same section provided that the excess over the amount deductible in any one year "shall be deductible in the succeeding taxable years in order of time * * *" What the taxpayer asks for is to deduct the permitted percentage for the taxable year 1950, the taxable year after the trust had terminated.*fn4 This was what both the Commissioner and the District Court told him he could not do.

The hurdle which was set up for him and which it was denied that he could jump over is a regulation issued in 1948.*fn5 This regulation provided that for contributions of the type in question to be carried over to succeeding taxable years, the succeeding year must end within a taxable year of the trust for which it is exempt under Section 165(a).

The taxpayer agrees that if this regulation is effective he must lose, for the deduction he seeks is for the year after his trust terminated.

But he says, to get over the hurdle, that the regulation has no business there. He says that the statute is perfectly clear as it stands and that what the regulation does is to add an additional requirement. A regulation is for the interpretation and application of a statute, he urges, but it cannot add to requirements which the Congress has imposed or take away rights or privileges which the Congress has given.

We do not need to waste good printer's ink in acknowledging that only such exemptions and deductions as the statute provides may be had by the taxpayer; nor do we need lines of print to make our bow to the effectiveness of regulations established by experts to interpret a statute; and the extra force to be given to those contemporaneous with its passage and unaffected by subsequent legislation. This regulation can hardly get in the class of those contemporaneously made because it was not written until six years after the statute was passed.

The taxpayer explains to us his theory on which the regulation was founded. He says that it was promulgated under the mistaken belief that the Internal Revenue Code in 1948 contained a provision identical with the regulation. This, says he, is the way it came about. The 1939 Code was amended by the Revenue Act of 1942.Prior to the amendment this Section 23(p), dealing with the deductibility of employer contributions, had a provision numbered (3) which said:

"(3) Exemption of trusts under section 165. The provisions of paragraphs (1) and (2) of this subsection shall be subject to the qualification that the deduction under either paragraph shall be allowable only with respect to a taxable year (whether the year of the transfer or payment or a subsequent year) of the employer ending within or with a taxable year of the trust with respect to which the trust is exempt from tax under section 165."

When one reads over this provision two or three times he reaches the conclusion that if it were the law the regulation here challenged would be valid. The last two or three lines of the paragraph would support such a conclusion. But, says the taxpayer, when this statute was amended in 1942*fn6 this paragraph which was in the House bill*fn7 was eliminated by the Senate*fn8 and the conference agreed to the elimination.*fn9

Here is where the trouble comes. The compilers of the United States Code, 1946 Edition (and, of course, United States Code Annotated), printed the excised ...

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