The opinion of the court was delivered by: Marovitz, District Judge.
This is a civil action against the United States of America for
the recovery of Federal Income taxes assessed and collected for
the calendar year 1967. This Court has jurisdiction to hear this
complaint under 28 U.S.C. § 1346(a)(1).
The basic facts leading to the dispute between the corporate
taxpayer (Advance) and the Government have been stipulated to and
this matter is before the Court for decision by agreement of the
parties based on the stipulations, pleadings and briefs filed
In December of 1962 Advance created an employees Profit Sharing
Trust, which in April of 1963 was approved by the District
Director as conforming to the requirements of § 401(a) of the
Internal Revenue Code of 1954, 26 U.S.C. § 401(a) and was
exempted under § 501(a) of the Internal Revenue Code, 26 U.S.C. § 501(a).
On December 12, 1967, the tax year here in question, the Board
of Directors of Advance adopted a resolution that Advance make a
contribution to the Profit Sharing Trust in the amount of
$37,300.00. Fifteen percent of the eligible compensation for
Advance's employees for the year 1967 amounted to $32,257.36, the
$5,042.64 balance being charged against the total available
contribution carryover from preceding years.
The Profit Sharing Trust dissatisfied with its previous
investments was at this time seeking alternate investment avenues
for its funds. Consequently when it discovered that Advance was
in the process of purchasing equipment for $61,230.00 the
trustees decided to lend the money as would a bank to Advance.
After a down payment of $12,000.00, the Trust would lend the
balance of $49,230.00 and take in return a note payable over a
three-year period with interest at a 4% add-on rate and secured
by a security agreement. In addition a personal guaranty by Paul
I. Carson, Jr., President of Advance was requested. Rather than
have the Trust liquidate assets to provide the $49,230.00 for the
loan, and to avoid the circuitous route of having Advance first
pay its $37,300.00 contribution to the Trust and then having the
Trust pay the seller of the
equipment, it was agreed that when Advance paid the equipment
seller the sum of $37,300.00 or more such payment would be
treated as payment in full of the 1967 contribution of Advance to
the Trust, and a simultaneous satisfaction of the Trust's
obligation to pay that amount to Advance pursuant to the
agreement of the Trust to lend Advance the money for the
Advance delivered to the Trustees: 1) its negotiable
installment note dated December 27, 1967 in the principal sum of
$49,230.00 payable to the order of the Trust in monthly
installments of $1,531.62 including principal and 4% add-on
interest; 2) a security agreement with the Trust covering the
equipment securing the payment of the note (this lien was
paramount to all other security interests in the equipment); 3)
a financing statement with respect to the loan and the security
and; 4) at a later date, the personal guaranty required of
Advance's President, Carson.
On January 6, 1968 Advance paid the equipment seller the sum of
$48,246.00, the total value of the purchased equipment being
$61,230.00. Both Advance and the Trust treated this payment as
satisfaction of their respective obligations, i.e. of this
$48,246.00 amount paid to the equipment seller, $37,300.00, the
sum originally designated by Advance as its 1967 contribution to
the Trust was considered as technically having been paid to the
Trust, and the Trust was considered to have lent back that same
amount to Advance. Since the total indebtedness of Advance to the
Trust by virtue of its December 27, 1967 note was to be
$49,230.00 and only $37,300.00 of that amount was technically
"loaned" to Advance by the Trust when it permitted the $37,300.00
due it to be expended on the new equipment, the Trust delivered
a check in the amount of $11,930.00 to Advance as the balance of
the loan. ($37,300.00 originally designated for the Trust paid to
equipment seller $11,930.00 paid by Trust to Advance =
$49,230.00, the full amount of the Trust's loan to Advance.)
The Note was paid in full and cancelled on December 3, 1970.
Advance's accountants state that as of December 31, 1967, the
time these dealings were taking place, Advance had a net worth of
$353,354.00 and that Paul I. Carson, the personal guarantor of
the loan made by the Trust to Advance, had a net worth in excess
On October 25, 1967 Advance made a partial payment to the Trust
for the 1967 year by making payment in the amount of $2,349.00 on
account of the premium due on the life insurance policy issued on
the life of Paul I. Carson. Defendant has conceded that this
$2,349.00 sum was properly deductible. Thus the questionable
deduction involved herein is not $37,300.00 but rather $34,951.00
($37,300.00 - $2,349.00 = $34,951.00).
The refund sought is $21,395.32, $17,904.00 of tax and
$3,491.32 of assessed interest, which represents the tax paid on
the disallowed deduction.
The Government has counterclaimed in the amount of $89.48, the
additional interest owing should it prevail in this case.
(Advance paid $3,491.32 in interest.) It was initially assessed
$3,746.84 in interest of which $166.04 was abated. $3,746.84
(original interest) - $166.04 (abatement) = $3,580.80; $3,580.80
(corrected interest) - $3,491.32 (amount paid by Advance for
interest) = $89.48 (counterclaim).
The substantive question we are being asked to resolve is
whether the delivery by Advance, an accrual basis taxpayer, of
the term promissory note with a face value of $49,230.00 secured
by equipment worth $61,230.00 and personally guaranteed by the
President of Advance constituted the "payment" under 26 U.S.C. § 404
to the Profit-Sharing Trust of Advance's $37,300.00
designated contribution to the Profit Sharing Trust for the year
The Internal Revenue Code of 1954, § 404, 26 U.S.C. ...