Appeal from the United States Tax Court.
Wood and Eschbach, Circuit Judges, and Swygert, Senior Circuit Judge.
The issue in this case is whether the taxpayer, David R. Webb Company, Inc., is entitled to deduct certain pension payments under § 404(a) of the Internal Revenue Code of 1954. The Tax Court held that the payments are non-deductible capital expenditures. Agreeing with the Tax Court's conclusion, we affirm.
For over 80 years there has been a business in Edinburg, Indiana, engaged in the manufacture and sale of wood veneer. The ownership of this business, however, has changed on several occasions. To understand the legal issue presented in this case, we must trace the ownership back to 1950.
In 1950 the corporate owner entered into an employment contract with a man named Ferdinand Grunwald. One term of this contract provided that in the event that Mr. Grunwald died while in the corporation's employ, the corporation would pay a lifetime pension to his widow in the amount of $12,700 per year. These conditions were met when Mr. Grunwald died in 1952; the corporation therefore began paying Mrs. Grunwald her pension.
Since 1952 the business has changed hands three times. The last change in ownership occurred on November 15, 1972, when the taxpayer in this case, David R. Webb Company, Inc., acquired the business's assets, properties, and goodwill. To purchase this property, the taxpayer agreed to pay five million dollars and to assume certain liabilities of its predecessor -- including the obligation to pay Mrs. Grunwald's pension.
The taxpayer paid Mrs. Grunwald's pension in 1973 and 1974 and claimed a deduction for these payments on its tax returns. The Commissioner disallowed these deductions and assessed deficiencies in the amounts of $3,048 and $1,407 for the years 1973 and 1974, respectively. The taxpayer, disagreeing with the Commissioner's position, brought this action in the Tax Court to obtain a redetermination of the deficiencies. The case went to trial on stipulated facts and judgment was entered in favor of the Commissioner. See 77 T.C. 1134 (1981).
II. THE APPROPRIATE TAX TREATMENT
Section 404(a) of the Internal Revenue Code of 1954 governs the deductibility of an employer's pension payments. This section states in relevant part that:
if contributions are paid by an employer to or under a . . . pension . . . plan, . . . such contributions . . . shall not be deductible under section 162 (relating to trade or business expenses) or section 212 (relating to expenses for the production of income); but, if they satisfy the conditions of either such sections, they shall be deductible under this section . . . ."
26 U.S.C. § 404(a). The taxpayer's payments to Mrs. Grunwald are deductible under § 404(a), therefore, only if the conditions of § 162 are satisfied -- particularly the requirement that the payments be "ordinary and necessary expenses," see 26 U.S.C. § 162(a).
The Commissioner contends, and we agree, that the taxpayer's payments to Mrs. Grunwald are not ordinary and necessary business expenses, but rather are nondeductible capital expenditures. See generally Commissioner v. Tellier, 383 U.S. 687, 689-90, 16 L. Ed. 2d 185, 86 S. Ct. 1118 (1966) (capital expenditures are not ordinary and necessary business expenses). Assumption of the obligation to make pension payments to Mrs. Grunwald was in theory and in fact, part of the cost of acquiring the assets of the wood veneer business from the taxpayer's predecessor. See Magruder v. Supplee, 316 U.S. 394, 398, 86 L. Ed. 1555, 62 S. Ct. 1162 (1942). The payments to Mrs. Grunwald in 1973 and 1974, therefore, constitute part of the taxpayer's capital investment and must be added to the cost basis of the acquired property. See Electronic Modules Corp. v. United States, 695 F.2d 1367, 1371 (Fed. Cir. 1982); United States v. Smith, 418 F.2d ...