Hastie, Chief Judge, and McLaughlin and Gibbons, Circuit Judges. Hastie, Chief Judge (concurring).
GERALD McLAUGHLIN, Circuit Judge.
The Commissioner of Internal Revenue seeks a review of the Tax Court's decision 52 T.C. 764, allowing Lukens Steel Co., an accrual basis taxpayer, a business expense deduction for amounts which it credited to its contingent liability account for the years 1962 and 1963.
The majority of Lukens Steel Co. employees have been represented by the United Steelworkers of America. In 1956 a new contract was agreed upon between the Steelworkers Union and the steel industry. This contract was subsequently adopted by Lukens Steel Company. Among other things, the contract called for the establishment of a Supplemental Unemployment Benefit Plan (hereinafter called SUB Plan). The purpose of this plan was to ameliorate the effects of cyclical unemployment in the steel industry by supplementing state unemployment benefits available to laid off employees. To be eligible for these benefits an employee must have been laid off, before he quits, strikes, or is discharged, and have been continuously employed for two years prior to such a layoff. He must also receive state unemployment benefits and be able to work. The funds to finance this plan were to be contributed by Lukens to a trust fund which in turn would be the exclusive source of the benefits. These benefits were fixed as to maximum rates and length of time payable. The rates would be decreased when the fund went below a specified amount.
Lukens' financial obligation under the SUB Plan consisted of a current cash obligation and a contingent liability. With respect to the former, Lukens was obligated to pay monthly to the trust, in cash, three cents for each hour worked by its eligible employees during the month, subject to limitations designed to prevent the total finances of the Plan from exceeding prescribed maximum levels (herein called maximum financing).*fn1
Lukens was also subject to a contingent liability of an additional two cents for each hour worked by eligible employees, until maximum financing was reached. Amounts credited to this contingent liability were payable to the SUB Plan Trust only if the trust assets were insufficient to permit payment of unemployment benefits. The contingent liability was cancellable at such times and to the extent that the total finances of the SUB Plan exceeded maximum.
Also, upon termination of the SUB Plan Agreement on July 31, 1959 any remaining contingent liability not needed for the pay out of unemployment benefits was cancellable in full. All assets in the trust resulting from cash contribution were to be used until exhaustion and could in no event be returned to Lukens. The SUB Plan Agreement expired on July 31, 1959; however, as a result of collective bargaining it was extended to December 31, 1962.
In its federal income tax returns for fiscal years from 1956 through 1961, Lukens claimed and was allowed deductions for cash contributions paid or payable to the SUB Plan Trust. Lukens did not claim deductions in its tax return for the unpaid contingent liability.
As a result of hard bargaining between representatives of the steel industry and the United Steelworkers of America certain changes were made in the SUB Plan in 1962. The 1962 SUB Plan broadened and increased the benefits to the employees and altered the method of financing the Plan. The balance of the contingent liability under the previous plan was carried forward as a 1962 SUB Plan Trust asset and treated as contingent liability under the 1962 SUB Plan. The terminology of the original SUB Plan was carried over to the revised plan with reference to the unfunded portion of the steel company's obligation and referred to as "contingent liability" even though it was no longer truly contingent.
Some of the chages made in the 1962 SUB Plan were: benefits would be extended to include a relocation allowance; certain disability benefits were included; and maximum financing was increased. Also, every month, the company incurred the obligation to contribute 9.5 cents to the Fund for each hour worked by eligible employees. The obligation was divided so that 4.5 cents per hour was given to the Trust Fund, and 5 cents per hour to be credited to the contingent liability account.
This obligation, once incurred, could not be extinguished, reduced or cancelled or in any other manner revert to the benefit of the steel company. It was expressly provided that upon termination of the SUB Plan, the contingent liability shall be subject to all the applicable provisions of the Plan then in effect and shall be used until exhausted to pay benefits to the employees. Moreover, if the operation of the steel company should be permanently shut down, disposition of the assets in the SUB Plan Trust Fund and the contingent liability account were to be made in a manner designed to promote the purposes of the SUB Plan Agreement.
As in the original SUB Plan the revised agreement placed a ceiling on the obligation of the steel company. It provided that the monthly obligation, both the current cash element and contingent liability would not be incurred if total finances of the SUB Plan exceeded maximum financing. Where maximum financing was exceeded the companies were permitted to effect an absolute saving to the extent of 5 cents per hour. It was provided that 4.5 cents per hour instead of accruing to the SUB Plan would be paid to the steel industry's Saving and Vacation Plan to the extent needed to pay benefits thereunder; if not needed there, it would revert to the SUB Plan.
The 1962 SUB Plan financing provisions were carefully worked out upon the basis of a comprehensive statistical analysis of relevant cost factors and unemployment experience. In the light of the analysis the negotiators concluded that a contribution rate of 9.5 cents per hour would be required to provide the benefits. It was assumed that after a few years the plan ...