Chesapeake Corp. of Virginia v. Commissioner

The Chesapeake Corporation of Virginia, Petitioner, v. Commissioner of Internal Revenue, Respondent Chesapeake Corp. of Virginia v. Commissioner Docket No. 25004 United States Tax Court 17 T.C. 668; 1951 U.S. Tax Ct. LEXIS 63; October 10, 1951, Promulgated *63 Decision will be entered under Rule 50. 1. Internal Revenue Code Section 23 (p) (1) (E). -- Within the year 1944 no steps were taken by the petitioner's officers, directors or stockholders toward the establishment of a retirement plan, except that information as to employees was furnished to an insurance company, and the petitioner's president approved in general a proposed plan submitted by the insurance company. Held, that the year 1944 was not the "year of accrual" under section 23 (p) (1) (E) and no deduction is allowable for that year for a group annuity premium paid within 60 days after the close of the year. 2. Annual Stock Exchange Fee. -- A fee that is required by the New York Stock Exchange to be paid annually in order to maintain the listing of stock is currently deductible. 3. Cost of Repairs. -- Cost of repairs to equipment and rental property allowed as expense deductions. William T. Hodge, Esq., for the petitioner. E. M. Woolf, Esq., for the respondent. Arundell, Judge. ARUNDELL *669 The respondent determined deficiencies in the petitioner's income and excess profits taxes for the calendar years and in the amounts as follows: [1944] Excess profits tax $ 120,030.99 [1945] Income tax 8,130.04 The principal matter in issue is whether the petitioner is entitled to a deduction for the year 1944 in the amount of $ 100,000 which was paid in 1945 as a premium on a group annuity policy issued in connection with a pension plan. Other matters remaining in issue pertain to the year 1945, and concern the disallowance of deductions for a fee paid to the New York Stock Exchange, the cost of replacing conveyor wear plates, and amounts expended in connection with a house owned by the petitioner. Other items originally placed in issue have been conceded, one by the respondent and two by the petitioner. FINDINGS OF FACT. The petitioner is a corporation which was organized under the laws of the State of Virginia, with principal offices*65 at West Point, Virginia. It filed its income and excess profits tax returns on the accrual basis with the collector of internal revenue for the district of Virginia, at Richmond. It is engaged in the manufacture of kraft paper. In 1944 some of the petitioner's officers discussed the matter of adopting a pension plan for its employees, and at a meeting of its directors held in October 1944, the idea of adopting such a plan was approved. On or about November 23, 1944, the president of the petitioner, who was also a director, a member of the executive committee, and chairman of the petitioner, visited the offices of the Life Insurance Company of Virginia at Richmond to inquire about putting a pension plan into effect. The insurance company advised him by letter as to the information that it would need in order to work up a plan. The comptroller of the petitioner prepared the necessary information and submitted it to the insurance company on December 8, 1944. The information required by the insurance company included the names of employees, dates of birth, dates of employment, Social Security status, and other data. *670 Based on the information submitted by the petitioner, *66 the insurance company prepared a written proposal for a pension plan which representatives of the insurance company submitted to representatives of the petitioner, including its president, on December 15, 1944. The annual cost of the plan was estimated by the insurance company representatives to be $ 92,800. The proposed plan, in general, met with the approval of the petitioner's president, and he authorized acceptance subject to approval by stockholders and the Securities and Exchange Commission. During the discussion at the December 15th meeting, it was brought out that the petitioner had some marine employees who were not subject to the Social Security Act. As the proposed plan was integrated with Social Security, this fact required a recomputation of the premium to be charged by the insurance company. A revised proposed plan was submitted to the petitioner within a few days after the December 15th meeting. On December 29, 1944, an employee of the petitioner went to the office of the Life Insurance Company of Virginia and was instructed as to establishment and maintenance of employee records that were required by the insurance company in connection with group annuity contracts. *67 Late in 1944 the petitioner ascertained that under regulations of the Securities and Exchange Commission it would be necessary for it to obtain bids from other insurance companies as to the cost of the proposed plan. The petitioner asked for and in February 1945, received bids from five insurance companies. One of the bids was lower than that of the Life Insurance Company of Virginia, and that company, upon being advised of the lower bid, recomputed its bid price. The petitioner did not file a formal application for a policy in 1944. As of December 31, 1944, the petitioner entered on its books the amount of $ 92,804.73, which amount was an estimate of the amount which would constitute the petitioner's first payment under the annuity contract. On February 24, 1945, the directors of the petitioner considered a retirement plan and voted to adopt it in the form submitted to them on that date, subject to qualification under the Internal Revenue Code. On February 27, 1945, the petitioner signed and filed with the Life Insurance Company of Virginia an application for a group annuity policy to provide retirement annuities for a group of its employees. The policy was issued on that date. *68 On the same date, the petitioner delivered to the insurance company its check for $ 100,000 in payment of the first premium under the policy. Of the $ 100,000 so paid, $ 47,250.64 applied to past services and $ 52,749.36 applied to current services of employees under the plan. The amount so paid for past services was 10 per cent or less than 10 *671 per cent of the total amount required under the annuity contract on account of past services as of the time of payment. At a meeting of the petitioner's board of directors, the retirement plan was amended so as to increase both the future and past service credits above those provided in the original plan. The amendments were approved by the stockholders at a meeting held on March 20, 1945. Both the pension plan and the annuity contract provide that the effective date is September 1, 1944. Both provide that the normal retirement of employees is to be the first day of the month next following the employee's 65th birthday. By letter dated June 20, 1945, the Bureau of Internal Revenue ruled that the petitioner's pension plan meets the requirements of section 165 (a) of the Internal Revenue Code. The pension plan and annuity contract*69 have continued in effect without material amendment since their inception. The petitioner's common stock is listed on the New York Stock Exchange. The Exchange requires the payment of an initial fee for listing stock, and also a continuing listing fee which is payable annually for 15 years but no longer than the stock is listed. The continuing listing fee paid by the petitioner in the year 1945 was in the amount of $ 375. In 1945, the petitioner paid $ 1,229.68 for wear plates for one of its conveyors. Wear plates are steel plates which form a trough along a pulpwood conveyor and keep the pulpwood in place on the conveyor. From 1941 to 1946, it was necessary to replace such plates on an average of every eight to ten months. The plates did not change the capacity or use of the conveyor or prolong its life. In 1945, the petitioner owned a house which it rented to one of its officers for $ 50 a month. In that year, the petitioner spent $ 2,879.02 for work done on the house and materials used in connection with such work. The work that was done consisted of painting the entire house, papering the rooms, repairing cracked bath tiles, patching outside woodwork, and scraping and painting*70 floors. The work done on the house did not result in any additions of space or any structural changes. The house is located about 500 feet from the petitioner's pulp mill which emits acid fumes that have a tendency to make paint peel from wood. The petitioner owns other houses that are occupied by officers and employees. In order to keep the wood in such houses in good condition, it is the practice of the petitioner to paint them at least once a year. OPINION. There is no disagreement between the parties as to the deductibility, in some year, of the $ 100,000 paid by the petitioner *672 in February 1945 to the Life Insurance Company of Virginia as the first premium under the group annuity policy issued on February 27, 1945. The pension plan in connection with which the policy was issued has been ruled by the respondent to be a qualified plan, and the respondent does not contend that the cost exceeds the amount that is deductible under Internal Revenue Code section 23 (p) (1) (B) as representing "contributions paid by an employer * * * toward the purchase of retirement annuities * * *." The difference between the parties is entirely as to whether the premium payment is a *71 proper deduction for the year 1944 for which it was claimed by the petitioner. This difference arises out of the parties' application to the facts of this case of the provisions of section 23 (p) (1) (E). There are several subparagraphs of paragraph (1) of section 23 (p), three of which should be noticed before considering subparagraph (E). They are subparagraphs (A), (B), and (C). Each provides for a deduction "In the taxable year when paid" for employers' contributions, respectively, into a pension trust (subparagraph (A)), toward the purchase of retirement annuities (subparagraph (B)), and into a stock bonus or profit-sharing trust (subparagraph (C)). Subparagraph (E) provides as follows: (E) For the purposes of subparagraphs (A), (B), and (C), a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made within sixty days after the close of the taxable year of accrual. Counsel for the petitioner concedes that section 23 (p) (1) (B) states generally that payments made towards the purchase of retirement annuities can be deducted only in the year they are paid. He contends, *72 however, that subparagraph (E) provides in effect a 60-day grace period for payment by taxpayers on the accrual basis. On this premise the argument runs that this petitioner being on the accrual basis, having made payment within 60 days after the end of 1944, and such payment having been made on account of the year 1944, all the requirements of subparagraph (E) have been satisfied. Counsel for the respondent takes the position that since no annuity plan was in effect at the close of the year 1944, there was no contribution or premium that rightfully could have been accrued for that year. We are of the opinion that the respondent correctly disallowed the deduction for the year 1944 of the $ 100,000 premium that was paid in February 1945. Subparagraph (E) of section 23 (p) (l) allows a deduction for a payment made within 60 days after the close of "the taxable year of accrual." This seems to us to mean that in order to support a deduction there must have been an accrual in the taxable year -- in this case 1944 -- in the sense that "accrual" is understood for *673 tax accounting purposes. That is, all events must have occurred which fixed the amount of the premium and the petitioner's*73 liability to pay it. United States v. Anderson, 269 U.S. 422. "It is settled by many decisions that a taxpayer may not accrue an expense the amount of which is unsettled or the liability for which is contingent * * *." Security Flour Mills Co. v. Commissioner, 321 U.S. 281. In order for a deduction to be allowable to an accrual basis taxpayer, "the existence of an absolute liability is necessary; absolute certainty that it will be discharged is not." Helvering v. Russian Finance & Construction Corp., 77 F. 2d 324. Under the principle of the cited cases, we are unable to see how the year 1944 can be said to be the "year of accrual." In that year nothing had been done to fix any liability on the petitioner for a premium payment or contribution toward the purchase of retirement annuities. No retirement plan had been adopted. A proposed plan had been submitted in that year by an insurance company to the president and a director of the company, and the president approved, in general, the provisions of the proposal. But there is no evidence that the president had been authorized *74 by either the directors or stockholders to commit the petitioner to a retirement plan. Evidently he had not been so authorized, as the proposed plan was submitted to the directors and stockholders in March 1945. It might well have occurred that the directors and stockholders would have repudiated the proposed plan. The application for the underwriting group annuity policy was not filed within the year 1944, nor was such an application authorized within the year. No annuity policy was issued within that year, and the petitioner did not incur any liability for any premium payment. In short, no steps were taken, or acts performed within the year 1944 which would support an accrual within that year. The parties have stipulated that "as of December 31, 1944" the petioner entered on its books the estimated amount of the first premium under the annuity contract. An entry on the books without liability therefor does not give rise to an allowable deduction. The entry may perhaps have been regarded by the petitioner's officers as a reserve for a contingent liability. Such reserves do not warrant a deduction for tax purposes. Lucas v. American Code Co., 280 U.S. 445.*75 One of the petitioner's arguments is that the application of subparagraph (E) is not conditioned upon the existence of an executed annuity contract because enforceable liability under such a contract depends upon the payment of the premium -- not upon the execution of the contract. Further, it is stated that there is never any obligation on the part of the insured to pay a premium. From this it is reasoned that, if the respondent is correct in requiring that there be an enforceable contract in effect at the close of the taxable year, such enforceability *674 can result only from the payment of the premium within that year, and that such interpretation renders meaningless the 60-day grace period. We do not find it necessary to analyze the petitioner's statements of the law defining the rights and obligations of insurer and insured. Our conclusion rests upon the term "taxable year of accrual" in subparagraph (E) of Internal Revenue Code section 23 (p) (1). Upon examination of all of the petitioner's acts in the year 1944 with respect to a proposed retirement plan, we do not find therein support for an accrual in that year. The cases of 555, Inc., 15 T. C. 671,*76 and Crow-Burlingame Co., 15 T. C. 738, involved the application of section 23 (p) (1) (E) to trusts created for the benefit of employees. In both cases deductions were allowed for payments made within 60 days after the close of the taxable year. It was shown in both of those cases that within the taxable year the directors of the taxpayer corporations had authorized the establishment of the trusts, had approved tentative trust agreements, and had appropriated funds as trust corpus. Those cases are thus distinguishable on their facts from the present proceeding. For the year 1945 the petitioner claimed a deduction in the amount of $ 375 which represents the amounts that it paid in that year to the New York Stock Exchange to maintain the listing of its stock. The respondent disallowed the deduction with the explanation that it was a "Fee for listing on N. Y. Stock Exchange." It appears that the listing of the petitioner's stock on the Exchange took place prior to the taxable year. In each year thereafter, including the year 1945, the petitioner paid to the Exchange an amount to cover what the Exchange designates as a "Continuing Annual Fee for Stock." *77 The amount of such fee is payable annually for 15 years and is calculated on the number of shares outstanding and listed on the anniversary date of the admission of the stock issue to deal on the Exchange. In support of his disallowance of the Stock Exchange fee, counsel for the respondent cites cases which he contends have held that the cost of listing a stock issue is not a deductible expense. Dome Mines, Ltd., 20 B. T. A. 377; Baltimore & Ohio Railroad Co., 29 B. T. A. 368. We are not here concerned with a listing fee, which is an item that is paid but once, and any benefits flowing therefrom presumably last over a period of years. Such a payment has been ruled to be a capital expenditure. I. T. 1836, II-2 C. B. 158. The item here in dispute is an annually recurring cost for the annual maintenance of the listing. Therefore, even on the assumption that it is a capital expenditure, it is one made for a capital item which is exhausted within one year and, consequently, an amount equivalent to the amount of the expenditure is deductible in the year in which it is made. We hold that the respondent *675 erred in*78 disallowing the fee paid to the New York Stock Exchange. In the year 1945 the petitioner expended $ 1,229.68 for wear plates for one of its conveyors. Such plates did not change the capacity or use of the conveyor or prolong its useful life. At that time such plates needed replacement every eight to ten months. The plates did "not add to the value of the property nor * * * appreciably prolong its life * * *" but merely kept "the property in an operating condition over its probable useful life for the uses for which it was acquired." Illinois Merchants Trust Co., Executor, 4 B. T. A. 103. We hold that the respondent erred in not allowing the cost of the wear plates as an ordinary and necessary business expense. The remaining item in issue is the cost in the amount of $ 2,879.02 of repairs to a house owned by the petitioner and rented to one of its officers. The evidence establishes that these repairs are such as are customarily made to keep rental property in a tenantable condition. No structural changes and no additions were made. The repairs fall in the same category as those under the last previously discussed issue, and it is held that the respondent*79 erred in disallowing the claimed deduction. Decision will be entered under Rule 50.