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December 15, 1972


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 herein.

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 equipment.

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 of $600,000.00.

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 1967.


The Internal Revenue Code of 1954, ยง 404, 26 U.S.C. ...

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