author: BENNETT, Judge.

text:
    J. O. JOHNSON, INC. v. The UNITED STATES.
    No. 308-72.
    United States Court of Claims.
    April 13, 1973.

      Robert A. Schnur, Milwaukee, Wis., attorney of record, for plaintiff; Michael, Best & Friedrich, Milwaukee, Wis., of counsel.
    Kenneth R. Boiarsky, Washington D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant; Gilbert E. Andrews, Jr., Washington, D. C., of counsel.
    Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG and BENNETT, Judges.
   ON DEFENDANT’S MOTION TO DISMISS

BENNETT, Judge.

Defendant has moved to dismiss count II of the petition on the grounds that plaintiff has failed to state a claim upon which relief may be granted. The question is whether plaintiff’s claim for the recovery of sums paid in satisfaction of an accumulated earnings tax is barred by plaintiff’s failure to file a timely claim for refund. Specifically, this motion concerns the issue of the applicability of section 6511(a) [Limitations on Credit or Refund] of the Internal Revenue Code (IRC) to a claim by a corporate taxpayer for the refund of an overpayment of accumulated earnings taxes. While the precise issue involved was not handled in the body of the opinion in Alexander Proudfoot Co. v. United States, 454 F.2d 1379, 197 Ct.Cl. 219 (1972), the matter was disposed of in footnote 7 of that opinion. The plaintiff now wishes the court to reconsider the conclusion it reached in that footnote. The facts are as follows:

On June 15, 1965, the plaintiff filed a corporate tax return for the fiscal year ending March 31, 1965. On October 9, 1967, the IRS District Director notified the plaintiff that certain deficiencies had been proposed with respect to the 1965 return, including an accumulated earnings tax deficiency (IRC § 531 et seq.). A formal notice of deficiency was sent to the taxpayer on February 28, 1969, which included a deficiency of $22,628.34 in accumulated earnings taxes. By September 24, 1969, the plaintiff made the last payment on the amount owed which included $5,409.97 in interest computed from June 15, 1965, the date the original return was filed.

On September 13, 1970, the taxpayer filed a claim for refund of the $5,409.97 paid in interest, which claim was finally disallowed by the IRS on October 29, 1971. Thereafter on November 29, 1971, the plaintiff filed a separate claim for refund of the principal of the accumulated earnings tax paid. This latter claim has never been formally acted upon by the IRS. In the petition to the court, the taxpayer's count I seeks a refund of the interest paid on the accumulated earnings tax, and is not presently at issue. Count II seeks refund of the tax itself and is the subject of the defendant’s motion to dismiss the petition.

The defendant contends that section 7422(a) of the IRC of 1954 requires the filing of a refund claim before a plaintiff can maintain a suit to recover the amount sought. The procedure for filing such a refund claim is' controlled in pertinent part by section 6511(a) of the 1954 Code which reads as follows:

Sec. 6511. Limitations on credit or refund.
(a) Period of limitation on filing claim. — Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid. [Emphasis added.]

Regardless of whether the 2- or the 3-year period is applied to these facts, this plaintiff’s filing of the claim for refund of the principal tax on November 29, 1971, was too late. As a result, the claim for refund was ineffective, requiring the dismissal of the suit under the requirements of section 7422(a). The plaintiff’s principal defense to the Government’s motion is the assertion that the accumulated earnings tax is not a tax “in respect of which * * '>:' the taxpayer is required to file a return,” making section 6511(a) inapplicable. Therefore, the time limitation that should govern this suit is the general 6-year statute of limitations (28 U.S.C. § 2401), with which the plaintiff has complied.

The real focus of this problem is the language in section 6511(a) which states: “* * * or if no return was filed by the taxpayer [the claim for refund must be filed], within 2 years from the time the tax was paid.” Both sides recognize that the accumulated earnings tax is not self-assessing in nature and is only levied after the return has been filed and an administrative determination has been made that the accumulation is in excess of the amount required for the reasonable needs of the business (§§ 533, 537). See, Motor Fuel Carriers, Inc. v. United States, 420 F.2d 702, 705, 190 Ct.Cl. 385, 390 (1970). To this extent, the accumulated earnings tax is not the type of tax that is reported on the return, which the plaintiff contends is the only type of tax covered by 6511(a). Plaintiff interprets the clause above to apply only to taxes for which a return is required, but in which no return was in fact filed. Since there is no place on the return in which to account for the accumulated earnings tax, no return was required with respect to this tax and the 2-year time limit applicable to taxes for which a return is required but not filed does not apply to the accumulated earnings tax. The defendant would read the language of the clause quite literally to include any tax for which no return is actually filed whether required or not. Such a reading would, of course, include a subsequent assessment of an accumulated earnings tax. This was the interpretation given 6511(a) by this court in footnote 7 of the opinion in Alexander Proudfoot:

* * * § 6511(a) was obviously intended to cover all taxes, whether or not a return is required, and its wording can easily carry that understanding since it expressly provides for the case where “no return was filed by the taxpayer.” [454 F.2d at 1382, n. 7, 197 Ct.Cl. at 225, n. 7.]

The plaintiff has presented an impressive array of arguments to undercut the footnote holding in Alexander Proudfoot and to otherwise seek to avoid the application of section 6511(a) to the count II claim for refund. These arguments will be detailed individually, but it should first be noted that a reversal of the footnote holding would likewise erode to some extent the basis for that over-all decision. In Alexander Proudfoot the plaintiff sought only the refund of the pre-notice deficiency interest paid with respect to an accumulated earnings tax assessment. Following the decision by this court in Motor Fuel Carriers, Inc., supra, it was clear that pre-notice deficiency interest could not be lawfully claimed by the IRS with respect to the accumulated earnings tax. The court included the claim for refund of the deficiency interest within the operation of section 6511(a) and found the claim to have been filed too late to be effective. This conclusion was reached in part because the “interest demand would be as much governed by § 6511 as the claim for the tax itself, and could not be separated out from the requirement of a proper and timely administrative claim.” 454 F.2d at 1382, 197 Ct.Cl. at 226. “The hair goes with the hide.” This, of course, presumes that the tax (here the accumulated earnings tax) is within section 6511(a) which is precisely the proposition being challenged by the present plaintiff.

Plaintiff first goes through a thorough grammatical exercise to indicate that its reading of.section 6511(a) is proper and reasonable. This, of course, does not mean that the defendant’s reading is ipso facto unreasonable. It simply becomes a choice of what is most reasonable. Plaintiff urges that the language in S.Rep. No. 1622, 83d Cong., 2d Sess. (3 U.S.Code Cong. & Admin. News, p. 5235 (1954)), emphasizes that section 6511(a) was to apply only to those taxes “in respect of which a taxpayer is required to file a return.” This is nothing more than a restatement of the wording in the section itself and seems to add nothing to the problem of assigning a given meaning to the section. Plaintiff next argues that, at most, the language in section 6511(a) is ambiguous and the language should be interpreted in favor of the taxpayer since the Government’s construction would result in an extension of the meaning of the statute, which would run contrary to the normal judicial trend to read tax statutes narrowly and strictly. While it seems that plaintiff’s point is well taken, it is likewise clear that other factors come into play when any court must interpret a tax statute, for example, consistency and harmony with other related sections. In this case as the defendant points out, and as the court pointed out in Alexander Proudfoot, 454 F.2d at 1384, 197 Ct.Cl. at 229, the plaintiff’s reading of section 6511(a) to exclude those taxes assessed by the IRS after the return is filed but not part of the return itself, would render section 7422(a) almost meaningless with respect to this group of assessments. Section 7422(a) makes the filing of a claim for refund or credit a condition precedent to the maintenance of any suit for the recovery of any wrongfully assessed tax, penalty, or “of any sum alleged to have been excessive or in any manner wrongfully collected.” [Emphasis added.] Clearly section 7422(a), with its all-inclusive “any sum” term, would include the assessment for the accumulated earnings tax; yet, if this tax were outside the time limitations imposed by section 6511(a), the claim for refund and petition to this court could be filed anytime within 6 years of either the payment or the date of the return. Plaintiff contends that such a result is warranted by the peculiar nature of the accumulated earnings tax. In particular, it points out that the major purpose for having the shorter periods for filing claims for refunds as defined in section 6511(a) is to allow the Government sufficient time to make an administrative investigation of the merits of the taxpayer’s claim before deciding to contest it. Union Pac. R. R. v. United States, 389 F.2d 437, 442-443, 182 Ct.Cl. 103, 109 (1968). Such a purpose would be unnecessary with respect to the accumulated earnings tax where, by necessity, an administrative investigation is carried out before the tax is ever assessed. Once again the plaintiff’s point is well taken, but it does not seem to carry as far as plaintiff argues. The filing of a claim for a refund is designed in part to give the IRS adequate notice of the nature and extent of the intended claim. United States v. Felt & Tarrant Mfg. Co., 283 U.S. 269, 272, 51 S.Ct. 376, 75 L.Ed. 1025 (1931). It likewise appears that the shorter refund period is aimed at allowing the IRS to isolate the areas of controversy and limit the scope of the impending litigation. Union Pac. R. R. v. United States, 389 F.2d at 442, 182 Ct.Cl. at 108. The fact that the Government agents had undertaken an administrative determination prior to assessment of the tax does not mean that additional determinations would not be required once the nature and extent of the claimed refund becomes known. Thus, even in the area of the accumulated earnings tax the shorter refund period would serve a valid purpose. The Supreme Court in United States v. A. S. Kreider Co., 313 U.S. 443, 447, 61 S.Ct. 1007, 1010, 85 L.Ed. 1447 (1941), has said, in addition, that the shorter limitation statute for tax refunds was a congressional recognition of the fact “that suits against the United States for the recovery of taxes impeded effective administration of the revenue laws, * Allowing plaintiffs, seeking refunds of this type, to have 6 full years in which to file their claims, where no clear reason for such exceptional treatment is apparent in either the Code or in fact, would seem to run contrary to the usual Code pattern and apparently congressional intent as well.

Additional support for this view may be found in the treatment of other additions to the tax in IRC section 6659. As the plaintiff correctly points out, section 6659 is not, by its own terms, applicable to section 531 et seq. (accumulated earnings tax) assessments. But, since Motor Fuel Carriers, swpra, this court has treated accumulated earnings tax assessments as additions to the tax. Those additions to the tax covered by section 6659 are to be “assessed, collected and paid in the same manner as taxes,” while any reference to the word “tax” is to include additions to the tax. The general policy which would justify the treatment of these additions to the tax as though they were the tax itself would likewise cover the claim now before the court. There are as many reasons to apply the limitation period of section 6511(a) to section 531 et seq. taxes as there are to apply those limitations to taxes specifically enumerated on the return itself.

The taxpayer’s final arguments assume arguendo that section 6511(a) applies to this case. First, plaintiff urges that this claim was filed within 3 years of the return if the word “return” in this context is read to mean the document by which the Government notified the taxpayer of the deficiency. The plaintiff argues that such a definition is the most reasonable since the tax did not become due until that date (February 28, 1969). While plaintiff’s argument on this point might make some sense in the abstract, there is no support for the position in the statute. It seems fairly clear that the word “return” as it is used in section 6511(a) refers to the income tax return, which in this case was filed by the taxpayer in 1965. There appears to be no sound reason for the court to define it otherwise. The plaintiff’s last argument urges that the filing of the claim for refund on September 13, 1970, for the pre-notice deficiency interest served notice on the Government that the assessment of the principal was likewise being contested. This is a distortion of the “hair goes with the hide” analogy. The reverse is not necessarily true where, as in Alexander Proudfoot, the claim sought only the refund of interest, not the principal. The language of the decision of this court in Union Pac. R. R., 389 F.2d at 442, 182 Ct.Cl. at 108, would seem to require a higher standard of notice than this plaintiff’s September 13, 1970 claim for refund of the interest provided. “It is an undisputed general rule that a ground for refund neither specifically raised by, nor comprised within the general language of, a timely formal or informal application for refund to the Internal Revenue Service cannot be considered by a court in which a suit for refund is subsequently initiated.” Plaintiff’s failure to raise the claim for the refund of the principal tax in the September 13, 1970 claim would seem to prevent it from relying on that claim at this point.

There is, finally, one further interpretation of the language of section 6511(a) which bears examination. The defendant argues that this section, covering all taxes “in respect of which” a return is filed, covers assessments for accumulated earnings taxes despite the fact that these taxes are not paid or reported as part of the return itself. The tax is assessed based on figures and statements that are part of the return and to this extent it is a tax “in respect of which” the taxpayer has filed a return. The plaintiff does not answer this argument, and it need not be pursued one way or another since there is other language in section 6511(a), discussed supra, which brings this taxpayer’s claim within that section.

For all of the above reasons the court grants the defendant’s motion to dismiss count II of the plaintiff’s petition for failure to state a claim upon which relief may be granted. The plaintiff has filed a motion for summary judgment with respect to count I of its petition, which motion is not presently before the court since it is now subject to a partial suspension of proceedings granted February 12, 1973. Should it become necessary, the merits of count I of the plaintiff’s petition will be examined in a later proceeding.

      . On February 12, 1973, the court allowed plaintiff’s motion for a partial suspension of the proceeding with respect to count I in order to permit settlement discussions to continue.

      . “Sec. 7422. Civil actions for refund.
      “(a) No suit prior to filing claim, for refund. — Mo suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary or his delegate, according to the provisions of law in that regard, and the regulations of the Secretary or his delegate established in pursuance thereof.”

      . The Government argues that since section 7422(a) makes the filing of a claim for refund a condition precedent to maintaining the suit, the taxpayer’s cause of action would not accrue and the 6-year statute of limitations would not begin to run until the claim for refund was filed. This would permit a taxpayer to delay the filing of suits with respect to this type of tax for many years.

      . See note 1, supra.


source: Caselaw Access Project

author:
KASHIWA, Judge.
     DAVIS, Judge

license: Public Domain

text:
    BANK OF PALM BEACH & TRUST COMPANY and Marie E. Bardsley, Executors of the Will of Chester T. Bardsley and Marie Bardsley, et al. v. The UNITED STATES.
    No. 308-69.
    United States Court of Claims.
    April 13, 1973.
    Elliott Manning, New York City, attorney of record, for plaintiffs.
    Richard D. Silvester, Tax Div., U. S. Dept, of Justice, Washington, D. C., with whom was Asst. Atty. Gen., Scott P. Crampton, for defendant. Gilbert E. Andrews and Theodore D. Peyser, Jr., Washington, D. C., of counsel.

      Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG and BENNETT, Judges.
   OPINION

KASHIWA, Judge.

Plaintiffs are taxpayers who claim refunds of federal income taxes paid by them with respect to the calendar year 1960, plus statutory interest. They were all partners, or bear some relationship to individuals who were partners, of Salomon Bros. & Hutzler (hereinafter referred to as “Salomon”), a Wall Street brokerage firm, during Salomon’s fiscal year ending September 30,1960.

Salomon made payments aggregating $60,130.84 to the widow of Sydney J. Carter, the latter being an employee who died on March 1, 1960. Salomon deducted said payments on its Form 1065 for the fiscal year 1960. The deductions were disallowed by the Government on the returns of the various plaintiffs who, after paying their respective assessments, filed their timely petition in this court. We hold for the plaintiffs for reasons hereinafter stated.

At issue is the deductibility by the partnership of said payments totaling $60,130.84 made during its fiscal year ending September 30, 1960, to Mrs. Dorothy T. Carter, widow of a deceased employee, Sydney J. Carter. Mr. Carter had been employed by Salomon since 1922, and, at the time of his death, was serving as the head of the firm’s institutional contract department. For some years prior to his death Mr. Carter had been one of Salomon’s so-called “percentage men.” Percentage men are employees who earn a specified salary plus a share of the profits. During Salomon’s fiscal year ending September 30, 1960, Mr. Carter’s salary was $15,000 per year plus .55 percent of the firm’s net profits. Mr. Carter’s compensation for the three years prior to the year of his death was as follows:

Fiscal year ending Salary Share of Total com-

September 30 profits pensation

1959 $14,000 $16,026.94 $30,026.94

1958 14.000 47,500.17 61,500.17

1957 13.000 5,907.00 18,907.00

Shortly after Mr. Carter’s death on March 1, 1960, Salomon’s administrative committee made a decision to pay to his widow the amounts that would have been paid to him as salary and a share of the profits if he had lived until the end of the fiscal year ending September 30, 1960. The salary continuation checks paid to Mrs. Carter began on March 22, 1960, and continued until September 30, 1960. Their total amount was $8,653.80. On September 30, 1960, the firm sent Mrs. Carter two checks in the total amount of $51,477.04, representing the share of the firm’s profits or bonus fund to which Mr. Carter would have been entitled had he survived to that date. Salomon filed a Form 1099 with resect to the bonus fund payments made to Mrs. Carter, declaring the amount paid to be “Salaries, Fees, Commissions, or Other Compensation.” Salomon did not file either a Form 1099 or a Form W-2 with respect to the salary continuation payments made to Mrs. Carter. These payments were reflected in the journal entries to a miscellaneous and sundry items expense account. No employment taxes were withheld from either the bonus fund or the salary continuation payments.

Before discussing the merits of this case, it is proper that we consider the effect, if any, of the recent decision of the United States Court of Appeals, Second Circuit, in Estate of Carter v. Commissioner of Internal Revenue, 453 F.2d 61 (2d Cir. 1971), rev’g 29 CCH TCM 1407 (1970). Estate of Carter basically involved the wife’s side of the identical transaction between Salomon and Mrs. Carter which we have before us. The Second Circuit, in a two-to-one decision, held that the payments received by Mrs. Carter were excludable from her income under the provisions of section 102(a) of the Internal Revenue Code of 1954, as amended.

It is our view that the law is clear that the fact that the Court of Appeals has permitted Mrs. Carter to treat the payments in question as a gift is not determinative for purposes of the present case since the authorities recognize that, at least prior to the passage of section 274(b) of the Code, a payment might be excludable by the recipient and nevertheless deductible by the employer. See, e. g., Fifth Avenue Coach Lines, Inc., 31 T.C. 1080, 1093-1094 (1959), rev’d on other issues 281 F.2d 556 (2d Cir. 1960); Weyenberg Shoe Mfg. Co., 23 CCH TCM 1997, 2003 (1964).

In the hallmark case of Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), the Supreme Court stated:

* * * The taxing statute does not make nondeductibility by the transferor a condition on the “gift” exclusion; * * *.
Specifically, the trier of fact must be careful not to allow trial of the issue whether the receipt of a specific payment is a gift to turn into a trial of the tax liability, or of the propriety, as a matter of fiduciary or corporate law, attaching to the conduct of someone else. The major corollary to the Government’s suggested “test” is that, as an ordinary matter, a payment by a corporation cannot be a gift, and, more specifically, there can be no such thing as a “gift” made by a corporation which would allow it to take a deduction for an ordinary and necessary business expense. * * * [W] e find no basis for such a conclusion in the statute; * * *. [363 U.S. at 287-288, 80 S.Ct. at 1198.] [Emphasis supplied.]

In fact, the Court of Appeals, itself, in Estate of Carter, was careful to point out that the question of whether the payments were a gift to the recipient was not determinative on the question of whether the payments could be deducted by the employer. 453 F.2d 69, n. 14, and 70.

Since symmetry of treatment with respect to the recipient and the payor is not required, it may appear that the defendant is being “whipsawed” in those situations in which the widow (er) is entitled to exclude the payments as gifts while the company is allowed to deduct the very same payments. The passage of section 274(b) in 1962 prevents any such whipsaw in the future, at least in cases in which the item was excludable by the widow (er) only on the basis of section 102. In fact, the very passage of section 274(b) indicates that prior to its enactment the fact that payments by an employer might be considered to be a gift to the recipient did not necessarily mean that the employer could not deduct the payment from income under section 162(a). Section 274(b) limits the deduction which a business may take for gifts in any taxable year to $25 per do-nee. The term “gift” is defined to include any “item excludable from gross income of the recipient under section 102. * * * ” It appears clear that the provision was added, at least in part, to reverse the line of cases prior to its passage which permitted the recipient to treat the payments as gifts and the employer to deduct the payments as “ordinary and necessary expenses.” Section 274(b) is, of course, inapplicable to the instant case since the payments were made to Mrs. Carter in 1960.

This case involves simply the deductibility by a business partnership of payments made, without legal obligation, to the widow of a deceased key employee who was not related by blood or marriage to any member of the firm. It is our view that the amount in issue is deductible pursuant to section 162 since the dominant motivation prompting the payments was a business motivation. See also section 404(a). The aspects of this dominant business motivation include the award of additional compensation as well as a general policy directed toward the increased morale of similarly situated employees. This basic, motivational test has been described by the United States Supreme Court in Commissioner v. Duberstein, supra,, in the following language:

* * * We take it that the proper criterion, established by decision here, is one that inquires what the basic reason for his conduct was in fact— the dominant reason that explains his action in making the transfer. * * * [363 U.S. at 286, 80 S.Ct. at 1197.]
* * * For the Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 730 [49 S.Ct. 499, 504, 73 L.Ed. 918], And, importantly, if the payment proceeds primarily from “the constraining force of any moral or legal duty,” or from “the incentive of anticipated benefit” of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41 [58 S.Ct. 61, 65, 82 L.Ed. 32], it is not a gift. And, conversely, “[w]here the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it.” Robertson v. United States, 343 U.S. 711, 714 [72 S.Ct. 994, 996, 96 L.Ed. 1237]. A gift in the statutory sense, on the other hand, proceeds from a “detached and disinterested generosity,” Commissioner v. LoBue, 351 U.S. 243, 246 [76 S.Ct. 800, 803, 100 L.Ed. 1142]; “out of affection, respect, admiration, charity or like impulses.” Robertson v. United States, supra, at 714 [72 S.Ct. 994], * * * [Footnote omitted.] [363 U.S. at 285, 80 S.Ct. at 1196.]

With respect to whether the expenditures constitute additional compensation, the parties have spent considerable effort analyzing the holding of Fifth Avenue Coach Lines, Inc., supra, a leading case with respect to the issue of the deductibility by an employer of death benefit payments made to the family of a deceased employee. In that case, the payments were made to the widow over a period of ten years and amounted to approximately $90,000. The court found that the payments made to the

* * * widow were intended in part as additional compensation for past services rendered * * *, in part to show gratitude for such past services, and in part to aid in the support of * * * [the deceased’s] widow. [31 T.C. at 1094.]

The court held that these mixed motives would support the deduction of the payments by the employer under section 23 of the 1939 Code providing for the deduction of “ordinary and necessary expenses.” The “ordinary and necessary expenses” deduction was re-enacted in a substantially similar form as section 162(a) of the 1954 Code. The Tax Court noted, in the alternative, that

" * * [T]o be deductible, the payments need not be in the nature of additional compensation. * * * [31 T.C. at 1096.]

The Government appears to argue that for a payment to be considered as additional compensation, the facts of the case must disclose that the deceased was seriously undercompensated during his years with the company, as was the situation in Fifth Avenue Coach Lines, Inc. We disagree with the Government’s analysis. If the amount paid to the widow is not, in reality, a disguised gift or dividend, and if the additional compensation is not unreasonable, the company is free to review its history with respect to the deceased employee and conclude that additional compensation is warranted. There is no one salary immutably indicated for a business position. Reasonable parameters for salary payments are especially indicated when the employee is to a large extent rewarded under a contingency based on profit. Cases which have held that the company was paying additional compensation when no significant under-compensation for previous years was established include J. Aron and Co., Inc., 22 CCH TCM 788 (1963); John B. Canepa Co., 22 CCH TCM 1770 (1963); Oppenheimer Casing Co., 22 CCH TCM 1082 (1963). The payments were made with respect to Mr. Carter’s past services and not Mrs. Carter’s present needs.

We find that additional compensation treatment is even more clearly warranted with respect to those amounts which, by means of moral obligation, had “accrued” to the deceased’s bonus account. While, of course, it is true that the company was not legally obligated to pay any bonus if the percentage man was not actually employed by the company at the end of the fiscal year, Mr. Carter had nonetheless lived through five months of the fiscal year and the bonus allocable to this period was $21,449. Had he lived to the end of the year, this amount plus the remainder of the bonus would have vested.

We find further confirmation for our view that the $60,130.84 in payments constitute additional compensation by an analysis of the treatment of the payments by Salomon itself. While it is true that a party cannot change the basic nature of a payment by calling it what it is not, it is also true that the action of the petitioner is relevant in determining intent. The intent of Salomon, the party making the payment, is of central importance. Commissioner v. Duberstein, supra. In a letter dated February 1, 1961, set out below, sent by Salomon to Nathan Berkman & Company, Mrs. Carter’s accountants, we note that Salomon informed Berkman that Salomon viewed the bonus payments from its own tax standpoint as additional compensation. This is made clear by the fact that a Form 1099 was filed. On the Form 1099 the bonus payment aspect of the payments made to Mrs. Carter were designated under the heading of “Salaries, Fees, Commissions, or Other Compensation.”

While the body of this letter contains phrasing which, if read in isolation, might indicate a donative intent, we deem the letter of very limited probative value for the same reason the Tax Court expressed in the trial of the widow’s side of this transaction:

While the statement of the partner at the meeting and the letter drafted subsequent to the meeting warrant our consideration, we consider these factors to be of only slight probative value in establishing the intent of the firm at the time the decision to make the payments to Mrs. Carter was reached by the committee. The statements of the partner were made and the letter was written after the decision to make the payments had been made and implemented and at a time when the income tax consequences of the payments were being considered by Mrs. Carter (and her accountants) who had a strong interest in having the payments classified as a gift. In these circumstances we cannot attach more than a slight weight to the statements of the partner and the letter as indicative of the firm’s intention to make a gift.
******
* * * while expressions of sorrow and high regard mitigate language which characterizes payments as compensation, it is not inconsistent to express sorrow and at the same time to pay additional compensation. * * * [Estate of Sydney J. Carter, 29 CCH TCM 1407, 1411-1412 (1970).]

Another aspect of the dominant business motivation prompting the payments was the desire by Salomon to secure a legitimate business benefit, an increase in employee morale. Because of the fact that Mr. Carter was the first of the percentage men to die while in the employ of Salomon, petitioners’ evidence has necessarily been directed to the company’s response to the subsequent deaths of six other percentage men. While evidence of this type is not conclusive, it provides an indication of intent in an area where formal plans do not always exist. The parties have stipulated that

31. The Administrative Committee, in authorizing the payments was also motivated by a desire to boost employee morale, which it was hoped would result from the other employees’ awareness of the payments to Mrs. Carter. Carter was very popular with the employees of Salomon and it was thought by some of the members of the Administrative committee that if some form of recognition payments were made to Mrs. Carter, the other employees would be pleased. * * *

The facts as stipulated go on to state that while no formal announcement was made of this decision, as a consequence of the “office grapevine” the facts with respect to the payments became generally known to Salomon’s other percentage men.

As further indication that the business benefit of increased morale was contemplated by the taxpayer, the stipulation reveals that since Carter’s death, six percentage men have died. Except for two cases, the families of each have received payments equal to a continuation of the deceased’s salary for the remainder of the fiscal year in which he died and an additional amount equal to the deceased’s share of profits for the fiscal year from the firm’s bonus fund. The two exceptional instances involved situations in which the deceased died toward the very beginning of the fiscal year, and in one of these two cases a payment of $5,000 was made. The bonus (not including continuation of salary) for each of the four cases in which percentage men died at a time other than the very beginning of the fiscal year amounted to $102,779.99, $98,337.-61, $32,934.49, and $19,760.69. The measurement in each of these four cases was the amount the employee would have received had he lived until the end of the company’s fiscal year.

The payments made to Mrs. Carter were computed in precisely the same manner and there is no indication that her general circumstances, if in fact she was in a less secure financial position, were taken into account. Normally, the financial condition of the family of the deceased percentage man is not investigated by Salomon. The partners in our case were generally aware of Mrs. Carter’s financial condition, including the fact that she was entitled to the sum of $52,337.68 as a distribution from the firm’s profit-sharing plan. This latter amount was paid to Mrs. Carter, as the named beneficiary, by check enclosed in a letter dated September 29, 1960. However, there has been no showing by the Government that the payments made to Mrs. Carter were in response to her financial condition. In fact, other than what was generally known by the partners about Mr. and Mrs. Carter, there was no specific inquiry made into her financial affairs before (or after) the payments were made. This failure has been deemed significant, on the recipient’s side of the issue, in several cases. Fritzel v. United States, 339 F.2d 995 (7th Cir. 1964); Cronheim’s Estate v. Commissioner, 323 F.2d 706 (8th Cir. 1963); Roy I. Martin, 36 T.C. 556 (1961), aff’d 305 F.2d 290 (3d Cir. 1962), cert. denied, 371 U.S. 904, 83 S.Ct. 209, 9 L.Ed.2d 165 (1962); Margaret H. D. Penick, 37 T.C. 999 (1962).

While the company did not adopt an ironclad policy as to the automatic consequences on the death of a percentage man, it is clear that, in general, a post-death payment was contemplated as a means of increasing employee morale. Although Salomon did not legally obligate itself to make such payments, or consider the payments to Mrs. Carter as a binding and immutable precedent to be followed upon the death of all other percentage men, this does not alter the fact that the general policy, to which the Government has, in effect, stipulated, did exist. In addition, the fact that Salomon would probably not have made the payments if Mr. Carter were not survived by a wife and son is not crucial in determining whether Salomon was generally pursuing a policy of increasing employee morale. The employee in such cases is, typically, most concerned with his surviving wife and children. An employee without such dependents would more likely be far less concerned with whether, say, an estate, the distributees of which are composed of third cousins, is adequately funded. Thus, a more flexible policy is clearly sensible with respect to increasing employee morale.

While this case, as in all the death benefit cases we have researched, contains a multiplicity of motives — -some favoring gift treatment, others favoring business treatment — we conclude that the totality of factors indicate that Salomon’s dominant motive in continuing the salary and bonus payments through the end of the fiscal year was proximately related to business. The payments were additional compensation and made to increase employee morale. The payments were made on the basis of Mr. Carter’s having survived to the end of the fiscal year during which he died, a fairly common formulation in these death-benefit cases. We hold that this constitutes a reasonable formulation under section 162, especially since he did not die at the very beginning of the fiscal year.

Accordingly, plaintiffs are entitled to recover and judgment is entered for plaintiffs with the amounts of recovery to be determined pursuant to Rule 131(c).

DAVIS, Judge

(concurring in the result) :

I join the judgment on the ground that the payments to Mrs. Carter were (at the least) business-motivated gifts, deductible for 1960 under section 162 of the Code. I am satisfied that, if gifts, the amounts paid were, as the court’s opinion makes clear, sufficiently colored by business purposes to be deductible by the payor.. Because of that conclusion, I need not and do not reach the separate question, discussed in the court’s opinion, whether these sums were not gifts at all but additional compensation for Mr. Carter’s work.

       This opinion contains all the essential findings of fact which the parties have stipulated pursuant to Rule 134 (b) (2) of the Rules of this court.

      . “Sec. 102. Gifts and inheritances.

      “ (a) General rule.

      “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”

      . Unless otherwise stated, all references to statutory provisions of the tax law are to the Internal Revenue Code of 1954, as amended.

      . “Sec. 274. Disallowance of certain entertainment, etc., expenses.

      *****
      “(b) Gifts.

      “(1) Limitation. No deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. For purposes of this section, the term “gift” means any item excludable from gross income of the recipient under section 102 which is not excludable from his gross income under any other provision of this chapter, but such term does not include—

        % }j< sfi ifc
      “(2) Special rules.
      “(A) In the case of a gift by a partnership, the limitation contained in paragraph (1) shall apply to the partnership ns well as to each member thereof.
      “(B) For purposes of paragraph (1), a husband and wife shall be treated as one taxpayer.”

      . In the Technical Explanation to the House bill, the following appears:
      “Any item which is excludable from gross income under a provision of chapter 1 of the code other than section 102 is not a “gift” within the meaning of subsection (b) (1). To illustrate the applicability of subsection (b)(1), a payment by an employer to a deceased employee’s widow which is excludable from her income by reason of the gift exclusion provision, section 102, will not be deductible by the employer in excess of $25, whereas the treatment by an employer of a payment to a deceased employee’s widow which constitutes an employee’s death benefit ex-cludable by the recipient under section 101(b) of the code will not be affected by this provision. * * * ” [H.R.Rep.No. 1447, 87th Cong., 2d Sess., p. A31 (1962-3 Cum.Bull., p. 529).]
      The Senate Report Technical Explanation contains similar language:
      “Any item which is excludable from gross income under a provision of chapter 1 of the code other than section 102 is not a “gift” within the meaning of subsection (b) (1). To illustrate the applicability of subsection (b)(1), a payment by an employer to a deceased employee’s widow which is excludable from her income by reason of the gift exclusion provision, section 102, will not be deductible by the employer in excess of $25, whereas the treatment by an employer of a payment to a deceased employee’s widow which is not a gift but which constitutes an employee’s death benefit excludable by the recipient under section 101(b) of the code will not be affected by this provision. * * * ”
      [S.Rep.No.1881, 87th Cong., 2d Sess., p. 170 (1962-3 Cum.Bull., p. 874).]

      . “Sec. 162. Trade or business expenses.

      “(a) In general.

      “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
      “(1) a reasonable allowance for salaries or other compensation for personal services actually rendered The Government has conceded that the payment satisfied the “ordinary” requirement of section 162 and makes its stand on the “necessary” requirement. The United States Supreme Court has held that an expenditure is “necessary” if it is “appropriate and helpful” to the business. Commissioner v. Heininger, 320 U.S. 467, 471, 64 S.Ct. 249, 88 L.Ed. 171 (1943).

      . The plaintiffs have noted that applicability of the section 404(a) (5) deferred compensation plan. However, both plaintiffs and defendant agree that to be deductible under section 404(a) and Treas.Reg. § 1.404(a)-12, the expense must still satisfy the “ordinary and necessary” requirement of section 162. The problem in this case is not whether the payments have the effect of a “plan” ; nor is the problem one of “timing,” since the payments were made during the same year that the nonforfeitable right of the beneficiary to the payments arose. Rather, in light of the Government’s concession that the payments were “ordinary,” the case can be disposed of upon a showing that the payments were “necessary.”

      . We note, in passing, that the Government has relied on many cases in which the issue was whether the payments constituted a dividend. Since Mr. Carter was an employee of Salomon and not a partner, and since Mrs. Carter was not even an employee during any recent period, the analogy to the “dividend” cases is greatly weakened.
      If the deceased was a major or controlling stockholder in the company, payments by the company to the widows of such controlling persons could hardly have any appearance of being an arm’s-length business transaction. In certain of these cases, the death benefit payments have been held to be constructive dividends. See, e. g., Lengsfield v. Commissioner, 241 F.2d 508 (5th Cir. 1957); Barbourville Brick Co., 37 T.C. 7 (1961).
      In other cases involving close corporations and decedents who were majority stockholders, deductions of death payments made to their families have been disallowed on the grounds that the payments were not “ordinary and necessary expenses.” See, e. g., Interstate Drop Forge Co., 22 CCH TCM 701 (1963). See also Vesuvius Crucible Co., 24 CCH TCM 750 (1965). Clearly, however, there is strong reason to find payments not to be “ordinary and necessary expenses” when they are made by a close corporation only to the families of deceased officers and directors, who also happen to be major stockholders. In the Fifth Avenue Ooaeh Lines case, for example, the court stated:
      “ * * * neither [deceased] nor his widow were stockholders * * * and the rule of close scrutiny * * * is not applicable here. * * * ” [31 T.C. at 1093.] For other cases in which deduction was disallowed, and the deceased had been a principal stockholder, see, e. g., Allen Industries Inc. v. Commissioner, 414 F.2d 983 (6th Cir. 1969); Loewy Drug Co. v. United States, 356 F.2d 928 (4th Cir. 1966); Schner-Block Co. v. Commissioner, 329 F.2d 875 (2d Cir. 1964); Republic Engineers, Inc., 54 T.C. 702 (1970).

      . “In connection with the preparation of Dorothy T. Canter’s [Mr. and Mrs. Carter were also known as “Canter”] Federal income tax return for 1960, you have asked us to furnish you with the basis upon which we made two payments of $21,-448.76 and $30,028.28 to her.
      “Mrs. Canter’s husband had been an employee of this firm for many years. He died on March 1, 1960. After a review of his employment contract, we concluded that there was no obligation to make any post-mortem payments to Mr. Carter’s estate or to his widow.
      “Mr. Canter had worked for us for many years and we held him in the highest personal regard. Accordingly, the partners determined to give some tangible expression to that feeling by making the above payments in his honor to his widow.
      “This firm does not have any established policy or plan for making payments to the widows of contract employees such as Mr. Carter. As a matter of fact, Mr. Canter’s death presented us for the first time with this situation.”
      The postcript of this letter provided:
      “We have filed form 1099 showing the above figures and sent copy to Mrs. Canter.”

      . The Government in the instant case seeks to make much of the fact that the representatives of Salomon “hoped” that Carter’s widow would receive “gift” treatment. The point which the Government has failed to appreciate in this case is that Salomon did not consider that “gift” treatment to Mrs. Carter was inconsistent with its own “deduction” claim. Certainly, the state of the law was that there was no necessary inconsistency. In addition, Salomon had been advised by counsel that the letter written to the accounting firm, supra, footnote 8, would not jeopardize its right to the deduction.

      . In Plastic Binding Corp., 26 CCH TCM 687, 690-691 (1967), it was said:
      “In ascertaining the dominant motive, we must carefully examine all the surrounding circumstances, including the statements of the parties at the time the payments were made. Though we must give proper weight to such statements, we must also recognize that the parties have engaged in some ‘window dressing’, and we must look through the window and find out what was behind it. * * * ” [Footnote omitted.]


author: NICHOLS, Judge:

text:
    AMF INCORPORATED v. The UNITED STATES.
    No. 217-72.
    United States Court of Claims.
    April 13, 1973.

      Eric R. Fox, Washington, D. C., attorney of record for plaintiff; Ivins, Phillips & Barker, Washington, D. C., of counsel.
    Theodore D. Peyser, Washington, D. C., with whom was Asst. Atty. Gen., Scott P. Crampton; Gilbert E. Andrews, Jr., Washington, D. C., of counsel.
    Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG, and BENNETT, Judges.
   ON DEFENDANT’S MOTION FOR JUDGMENT ON THE PLEADINGS AND PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT

NICHOLS, Judge:

Plaintiff brings this action to recover the sum of $356,372.25 or such greater amount as is refundable, representing income tax and interest thereon, paid by the plaintiff for the calendar years 1961, 1962 and 1963. The case is before us on defendant’s motion for judgment on the pleadings and plaintiff’s motion for summary judgment. There is no issue of fact. We hold that defendant must prevail.

On or about March 1, 1961, taxpayer sold, at par, convertible debentures having an aggregate face amount of $39,911,100. Each debenture had a face amount of $100. They were due on March 1, 1981, and bore interest at the rate of 4% per cent per annum. They were convertible into the taxpayer’s common stock at the rate of five-sixths of one share for each $100 debenture through March 1, 1971, and at a somewhat lesser rate thereafter. The conversion rate was subsequently adjusted for a two-for-one stock split approved on April 18, 1961. The taxpayer alleged in its petition that as of the date of issuance, the value of the conversion right was $3,591,999 and the value of the debt was $36,319,101. In its motion the Govenment accepted these figures for the purposes of that motion only. The sole issue in this case is the taxpayer’s assertion that the value of the conversion rights measures or reflects a debt discount amortizable for the years 1961, 1962 and 1963.

The current Treasury Regulation on Income Tax, § 1.163-3(a) (1) (as did the Regulation in effect at the time of the transactions in question, § 1.61-12(c)(3)) provides that “If bonds are issued by a corporation at a discount, the net amount of such discount is deductible * * * over the life of the bonds.” For the purpose of determining the payee’s gain, original issue discount was defined at the time of the transaction in IRC of 1954 § 1232(b)(1) of the Code as “ * * * the difference between the issue price and the stated redemption price at maturity”, and issue price was defined in § 1232(b)(2) as “the initial offering price to the public * * * at which price a substantial amount of such bonds or other evidences of indebtedness were sold.” To sustain plaintiff’s position would require us to depart from that definition.

It is an established rule of law that discount is a form of interest, i. e., a cost of obtaining capital. Helvering v. Union Pacific R. Co., 293 U.S. 282, 55 S.Ct. 165, 79 L.Ed. 363 (1934); Erie Lackawanna R.R. v. United States, 422 F.2d 425, 190 Ct.Cl. 682 (1970); Chock Full O’Nuts Corp. v. United States, 453 F.2d 300 (2d Cir. 1971). It follows that for there to be a discount there must be an added cost to the issuer, over and above the stated interest, for the use of the payee’s capital. The question presented is whether under the circumstances of this case there was such added cost. We hold that there was not and that therefore taxpayer cannot recover.

In support of its contention, taxpayer argues that the transaction in question constituted an economic loss and as such an increased cost of obtaining capital. We are told that if the taxpayer had sold the conversion feature of the debenture separately it would have surely obtained some consideration for it. Thus during the life of the debenture the holder obtaining something of value without having to pay any separate consideration for it. Therein, lies an alleged economic loss and the added cost for the use of the holder’s capital. Taxpayer draws an analogy between the transaction in question and the case of a bond issued with a detachable warrant and points out that in the latter case a discount for the value of the warrant is permitted.

Taxpayer’s contention fails and a comparison to the ease of the bond issued with a warrant demonstrates why it must. In the case of the debenture issued with a conversion feature the holder may either convert his debenture into stock or redeem the debenture at the end of the prescribed period, one or the other but not both. The issuer will not in any event incur costs over and above the face value of the debenture plus the stated interest. If the holder elects to convert, the issuer pays nothing. On the other hand, in the case of the bond issued with a warrant, the holder may exercise either or both of his options. He may for example, exercise his warrant or sell it and still redeem his bond at the end of the period. The issuer of the bond issued at par with a warrant is faced with the possibility of incurring an economic detriment over and above the stated interest. The difference involved when a debenture is issued with a conversion feature is how the issuer will pay for the capital received. Certainly there may be economic consequences to the issuer for choosing not to sell the conversion feature separately but any such “loss” will likely be reflected, as it was here, in a lower interest rate on the debenture. If there was a more profitable mode-of accomplishing the taxpayer’s motives he would have taken advantage of it. This court will not correct the taxpayer’s business judgment.

Of importance also is the matter of consistency of treatment of the parties to the transaction. § 1232(b) (2) defines issue price as the initial offering price to the public, therefore, a holder of a debenture issued at par need not report any income from a “discount” resulting from the inclusion of a conversion feature. It would be inconsistent to permit the issuer of that same debenture to claim that the bond was sold at a discount.

Taxpayer points to the treatment afforded a bond issued at a premium with a conversion feature under Regulation § 1.61-12(c) (2). In that case the amount of the bond price allocable to the conversion feature must be deducted from the premium to determine the amount of the premium the issuer is receiving to offset interest. Taxpayer argues that the treatment of a premium under § 1.61-12(c)(2) is inconsistent with the treatment the Government would apply to the case of a discount. Taxpayer’s observation may be well taken but defendant answers that the parties on both sides of the transaction involving the bond premium or discount are treated consistently in both cases. It is more important that the parties to the transaction involving a bond issued with a conversion feature, issuer and holder, be treated consistently with one another. Since § 1232(b)(2) precludes the possibility of the holder recognizing a discount in the case of bond issued at par, consistency of treatment for all parties to the transaction directs that the issuer also be precluded from recognizing a discount for the same bond. The asserted inconsistencies between the sections dealing with different types of transactions are matters for Congress to consider.

The parties have discussed two recent cases: Chock Full O’Nuts, supra, and Hunt Foods & Industries, Inc. v. Commissioner, 57 T.C. 633 (1972), pending on appeal (9th Cir.). Both of these cases dealt with the question presented in this case and both lend support to our conclusion. It would be superfluous to quote all the reasons they adduce. Any not mentioned here may be deemed incorporated by reference. Chock Full O’Nuts is very nearly on all fours with the case at bar. In that case the corporation issued convertible debentures at a conversion rate somewhat different than those issued by our taxpayer. Aside from that difference, the facts of the cases and the arguments made by the parties are very much the same. Judge Mansfield writing for the court noted as we do that the language of § 1232(b) (1) does not support the contention that there can be a discount where a bond is offered at par, and went on to say at p. 304 of 453 F.2d:

Furthermore, if we look to the substance of the transaction * * * the taxpayer has failed to satisfy its burden of showing that the amount of the issue price allocable to the conversion feature represents a cost of borrowing money that must without qualification be paid. * * *

The parties in the case at bar discuss the retroactivity of Treasury Regulations §§ 1.163-3 and 1.1232-3 issued in 1968. Defendant points out that these Regulations were issued to cover the years in question and clearly bar taxpayer’s recovery in this case. We agree with the Second Circuit opinion in Chock Full O’Nuts, that the matter of retroactivity of the 1968 Regulations is not of import in view of the language of the Statute and Regulation in effect at the time of the transactions in question. We do not depend on the 1968 Regulations to hold that taxpayer cannot recover in this case.

The Tenth Circuit has recently issued an opinion in the case of National Alfalfa Dehydrating & Milling Co. v. Commissioner, 472 F.2d 796 (1973). The issue in that case was the question of discount where $50 face value debentures were issued in exchange for $50 par value stock having a fair market value 'of under $50. That court held, with one dissent, that there could be a discount. Although the majority takes issue with certain decisions of ours, we have not cited those cases here only because we do not regard them as relevant under the facts of this case. Since the decision of the Tenth Circuit has no bearing on the question at bar, we do not consider that it is in conflict with the decision in this case.

For the reasons above, we hold that plaintiff cannot recover. Defendant’s motion is granted, plaintiff’s is denied. Plaintiff’s petition is dismissed.


author: ALMOND, Senior Judge. BALDWIN, Judge

text:
    60 CCPA
    ALBERT E. PRICE, INC., Appellant, v. The UNITED STATES, Appellee.
    Customs Appeal No. 5507.
    United States Court of Customs and Patent Appeals.
    May 3, 1973.

      Allerton deC. Tompkins, New York City, atty. of record, for appellant.
    Harlington Wood, Jr., Asst. Atty. Gen., Andrew P. Yance, Chief, Customs Section, Michael S. O’Rourke, New York City, for United States.
    Before MARKEY, Chief Judge, RICH, BALDWIN, and LANE, Judges, and ALMOND, Senior Judge.
   ALMOND, Senior Judge.

This is an appeal by the importer from the decision and judgment of the United States Customs Court, 68 Cust.Ct. 50, C.D. 4334 (1972), wherein certain spice cabinets were held to have been properly classified under item 206.-97 of the Tariff Schedules of the United States (TSUS) as household utensils of wood and assessed with a duty of 16% per centum ad valorem.

The involved merchandise consists of “Thoma-Wood Wall Spice Set wood cabinet with louver door hutch with two drawers at bottom.”

Appellant in its protest alleged that the merchandise in issue should have been classified under item 727.35, TSUS, as other, wood furniture dutiable at the rate of 10.5 per centum ad valorem.

In overruling appellant’s claim, the trial court held that Sprouse Reitz & Co. v. United States, 67 Cust.Ct. 209, 332 F.Supp. 209, C.D. 4276 (1971), was stare decisis of the issues presented.

The statutes involved are:

Tariff Schedules of the United States

Classified:

Household utensils and parts thereof, all the foregoing not specially provided for, of wood:

* ****** * * *

206.97 Other................................... 16%% ad val.

Claimed:

Furniture, and parts thereof, not specially provided for:

* ' * * * * * * * * *

Of wood:

****** * * * *

Other:

727.35 Furniture other than chairs................ 10.5% ad val.

Headnote 1, schedule 7, part 4, Sub-part A:

1. For the purposes of this sub-part, the term “furniture” includes movable articles of utility, designed to be placed on the floor or ground, and used to equip dwellings, offices, restaurants, libraries, schools, churches, hospitals, or other establishments, aircraft, vessels, vehicles, or other means of transport, gardens, patios, parks, or similar outdoor places, even though such articles are designed to be screwed, or bolted, or otherwise fixed in place on the floor or ground; and kitchen cabinets and similar cupboards, seats and beds, and sectional bookcases and similar sectional furniture even though designed to be fixed to the wall or to stand one on the other; . . .

A careful analysis of headnote 1, sub-part A, part 4, schedule 7, TSUS, persuades us that the evidence of record fell short of establishing that the imported merchandise was embraced within the statutory definition of furniture. The Tariff Classification Study, schedule 7, page 242 states that “The concept of furniture embraced in this subpart is stated as a definition in Headnote 1.” It is obvious that spice cabinets or racks such as we have in the instant importation are not “movable articles of utility designed to be placed on the floor or ground * * Furthermore, we agree with the conclusion reached by the Customs Court in Sprouse Reitz & Co., supra, that “it would be farfetched to say that they are kitchen cabinets or cupboards.”

We find nothing to indicate that the articles in issue are known or even thought of as kitchen cabinets or that they were ever offered through any means to the public as furniture.

We deem it pertinent to note that the importation in issue consists of two models, W-1151 being 15% x 11% x 2% inches and W-1152 being 15% x 16% x 2% inches, each consisting of shelves enclosed by two louvered doors above two drawers. We think it would strain credulity to consider an article only 2% inches deep to be a kitchen cabinet or anything similar thereto. The court below was correct in its conclusion that the small, decorative articles in issue were not similar in any way to kitchen cabinets.

We share the view so aptly expressed by the Customs Court that:

* * * the headnote discussion of furniture was, on its face, intended to certify the inclusion of furniture which was permanently fastened to the premises, either on the floor or on the walls, as opposed to furniture which was movable at will. In this respect, kitchen cabinets and similar cupboards were mentioned as examples of furniture which were capable of permanent placement. The mention of kitchen cabinets was not intended to expand the term “furniture” to articles of lesser substantiality than full size, genuine kitchen cabinets.

We agree with the Customs Court that “We are unable to conclude that the instant spice cabinets are more than household articles of a convenient and useful nature. It does not follow that they are furniture within the common meaning of that term.”

We hold therefore that the imported merchandise was properly classified under item 206.97 of the Tariff Schedules of the United States as household utensils of wood.

The judgment of the Customs Court is affirmed.

Affirmed.

BALDWIN, Judge

(dissenting).

The term “furniture” as it is used in item 727.85 is defined by Headnote 1, schedule 7, part 4, subpart A, to include “kitchen cabinets and similar cupboards * * The question before us is whether the merchandise at bar is included within that statutory definition. Webster’s Third New International Dictionary (1961 ed.) gives the following definitions:

cabinet * * * 1: a box for storing chiefly small articles usu[ally] closed by a hinged or sliding door, fitted with shelves or drawers, and suitably finished as an item of home, office, or laboratory furniture: a: an upright case or cupboardlike repository for utensils, materials, or documents conveniently accessible for use (a bathroom wall [cabinet] for medicines, bandages, and toilet articles) (cards alphabetically arranged in rows of file [cabinets]) (installation of a [cabinet] sink in the kitchen) * * *
cupboard * * * la: a board or shelf for cups and dishes * * * 3: a closet with shelves to receive cups, dishes, or food; also: any small closet

The main reason the majority and the Customs Court considered the merchandise not to be kitchen cabinets was because of its size. Clearly there is no difference in function between the merchandise at bar and whatever larger cabinets the majority considers the term “kitchen cabinets” to be limited to. In my view, any difference in size is one of degree rather than a difference in kind. Nor is it important whether the merchandise was offered to the public as “kitchen cabinets” or as “furniture.” We can safely assume that the merchandise was offered to the public as spice cabinets. The question is not what they are offered as but what they are, i. e., do they fit within the statutory definition of “furniture.”

Accepting, arguendo, the view that the cabinets at bar are not “kitchen cabinets,” no reason is apparent why they are not “similar cupboards” within the meaning of the statutory definition. The entire function of the merchandise is to receive and store containers of food. Again the only possible basis for finding that the cabinets are not “similar cupboards” is the difference in size. Yet the size difference is not such as would prevent the cabinets from performing the function of cupboards. Moreover, the merchandise at bar is finished in the same manner that other wood furniture is finished, and it is just as suitable for permanent placement as any kitchen cabinet, bathroom cabinet, bookcase, or any other furniture designed to be fixed to the wall.

I would reverse the decision of the Customs Court.


author: MARKEY, Chief Judge.

text:
    Application of E. I. DuPONT DeNEMOURS & CO. (Assignee of Horizon Industries Corporation).
    Patent Appeal No. 8866.
    United States Court of Customs and Patent Appeals.
    May 3, 1973.

      Eugene L. Grimm, Wilmington, Del., atty. of record, for appellant. Gerald A. Hapka, Washington, D. C., of counsel.
    S. Wm. Cochran, Washington, D. C., for Commissioner of Patents. Jack E. Armore, Washington, D. C., of counsel.
    Before MARKEY, Chief Judge, RICH, BALDWIN and LANE, Judges, and WATSON, Judge, United States Customs Court, sitting by designation.
   MARKEY, Chief Judge.

This appeal is from the decision of the Trademark Trial and Appeal Board, 166 USPQ 351 (1970), affirming a refusal to register DuPont’s “inark RALLY for a combination polishing, glazing and cleaning agent for use on automobiles on the basis of likelihood of confusion under section 2(d) of the Lanham Act with Horizon’s registered mark RALLY for an all-purpose detergent. We reverse.

The application now before us was originally filed by Horizon. DuPont had earlier filed for registration of RALLY for a combination wax and cleaning agent for automobiles. That application was refused in view of Horizon’s registration. DuPont appealed and the board affirmed.

While its appeal was pending, DuPont purchased Horizon’s mark for the automobile product, the present application and the good will of that business. Because Horizon retained RALLY for all-purpose detergent, an agreement designed to avoid conflict was entered into on the same day. Boundaries of use of the marks were established, permitting the sale of products “incidentally usable” in the other party’s market but prohibiting any promotion as “especially suited for use in such market.” DuPont’s realm was the “automotive aftermarket.” Horizon’s encompassed the “commercial building or household market.”

The examiner, aware of the assignment and agreement, nonetheless refused registration, citing Horizon’s registration and describing the issue as “ruled upon” in the board’s earlier decision. The board affirmed, holding:

It is our opinion that despite any agreement between the parties the public interest cannot be ignored, and when the goods of the parties are as closely related as those here involved, their sale under the identical mark “RALLY” would be likely to result in confusion, mistake, or deception, cf. In re Avedis Zildjian Co., 157 U.S. p. 2517 [394 F.2d 860, 55 CCPA 1126] (CCPA, 1968); and In re Continental Baking Company, 156 U.S. p. 2514 [390 F.2d 747, 55 CCPA 967] (CCPA, 1968). * *' * The mere fact that registrant may have precluded itself from selling an automobile cleaner under the mark “RALLY” does not overcome the likelihood of confusion as set forth in Section 2(d) of the Trademark Statute.

OPINION

Our decision turns on the application of Sec. 2(d) to the facts before us. DuPont, having an unquestioned right to use, argues that the “right to register follows the right to use,” particularly where the right on its goods is exclusive, Horizon having given up use of the mark in DuPont’s market. The Patent Office solicitor denies such a broad relationship in the rights to use and register and emphasizes the duty of the Patent Office “to guard the public interest” against confusion.

Both parties have cited prior opinions of this court. We are thus presented with a welcomed opportunity to set forth a reliable guide for decision-making in cases involving Sec. 2(d). It need hardly be said that concepts expressed in our prior opinions and inconsistent with what we say here may be considered no longer viable in this court.

The Statute

We begin with interpretation of the Lanham Act (Chapter 22, Title 15) as it applies here. The legislative history of the Act as a whole describes its objectives as making registration “more liberal,” dispensing with “mere technical prohibitions and arbitrary provisions” and modernizing the trademark statutes “so that they will conform to legitimate present-day business practice.” The basic goal of the Act, which dealt with a good deal more than registration, was “the protection of trademarks, securing to the owner the good will of his business and protecting the public against spurious and falsely marked goods.” Accordingly, we consider the pre-Lanham Act decisions presented here to be inapt.

Sec. 2 (15 U.S.C. § 1052), in pertinent part reads:

No trademark by which the goods of the applicant may be distinguished from the goods of others shall be refused registration on the principal register on account of its nature unless it
* * * * * *
(d) Consists of or comprises a mark which so resembles a mark registered in the Patent Office or a mark or trade name previously used in the United States by another and not abandoned, as to be likely, when applied to the goods of the applicant to cause confusion, or to cause mistake or to deceive: * * *

Under the statute the Commissioner must refuse registration when convinced that confusion is likely because of concurrent use of the marks of an applicant and a prior user on their respective goods.

The phrase “on account of its nature” in Sec. 2 clearly applies to the “resembles” element of See. 2(d). But the question of confusion is related not to the nature of the mark but to its effect “when applied to the goods of the applicant.” The only relevant application is made in the marketplace. The words “when applied” do not refer to a mental exercise, but to all of the known circumstances surrounding use of the mark.

The Decisional Process

The ultimate question of the likelihood of consumer confusion has been termed a question of fact. Coca-Cola Company v. Snow Crest Beverages, Inc., 162 F.2d 280 (1st Cir. 1947), cert. den. 332 U.S. 809, 68 S.Ct. 110, 92 L.Ed. 386 (1947). If labeled a mixed question or one of law, it is necessarily drawn from the probative facts in evidence. As so often . said, each case must be decided on its own facts. There is no litmus rule which can provide a ready guide to all cases.

In testing for likelihood of confusion under Sec. 2(d), therefore, the following, when of record, must be considered :

(1) The similarity or dissimilarity of the marks in their entireties as to appearance, sound, connotation and commercial impression.
(2) The similarity or dissimilarity and nature of the goods or services as described in an application or registration or in connection with which a prior mark is in use.
(3) The similarity or dissimilarity of established, likely-to-continue trade channels.
(4) The conditions under which and buyers to whom sales are made, i. e. “impulse” vs. careful, sophisticated purchasing.
(5) The fame of the prior mark (sales, advertising, length of use).
(6) The number and nature of similar marks in use on similar goods.
(7) The nature and extent of any actual confusion.
(8) The length of time during and conditions under which there has been concurrent use without evidence of actual confusion.
(9) The variety of goods on which a mark is or is not used (house mark, “family” mark, product mark).

(10) The market interface between applicant and the owner of a prior mark:

(a) a mere “consent” to register or use.
(b) agreement provisions designed to preclude confusion, i. e. limitations on continued use of the marks by each party.
(c) assignment of mark, application, registration and good will of the related business.
(d) laches and estoppel attributable to owner of prior mark and indicative of lack of confusion.

(11) The extent to which applicant has a right to exclude others from use of its mark on its goods.

(12) The extent of potential confusion, i. e., whether de minimis or substantial.

(13) Any other established fact probative of the effect of use.

Where the Patent Office follows such process, it is not abandoning its duty under Sec. 2(d) or allowing individuals to take the law into their own hands. Consideration of evidence emanating from the only place where confusion can occur, i. e. the marketplace, is not related to who decides but to the process of deciding.

The required inquiry, though more sweeping, is not unlike that provided for in Patent Office Rule 2.41 wherein the applicant is specifically invited to submit all evidence, including letters from the trade or public, tending to show that the mark, otherwise merely descriptive, distinguishes the goods.

The evidentiary elements are not listed above in order of merit. Each may from case to case play a dominant role. In Schenley Distillers, Inc. v. General Cigar Co., Inc., 427 F.2d 783, 57 CCPA 1213 (1970), and in McKesson & Robbins, Inc. v. P. Lorillard Co., 120 USPQ 306 (TTAB 1959), element (9) led to a finding that confusion was unlikely when the same mark was used on a beverage and a tobacco product. In John Walker & Sons, Limited v. Tampa Cigar Company, Inc., 124 F.Supp. 254 (S.D.Fla.1954), aff’d, 222 F.2d 460 (5th Cir. 1955) element (5) made confusion likely when the same mark was used on beverages and tobacco. See, also, Carling Brewing Company, Inc. v. Phillip Morris, Inc., 277 F.Supp. 326 (N.D.Ga.1967) and Geo. A. Dickel Co. v. Stephano Brothers, 155 USPQ 744 (TTAB 1967) involving beverages and tobacco.

We find no warrant, in the statute or elsewhere, for discarding any evidence bearing on the question of likelihood of confusion. Reasonable men may differ as to the weight to give specific evidentiary elements in a particular case. In one case it will indicate that confusion is unlikely; in the next it will not. In neither case is it helpful or necessary to inject broad maxims or references to “the public interest” which do not aid in deciding. Only the facts can do that. In every case turning on likelihood of confusion, it is the duty of the examiner, the board and this court to find, upon consideration of all the evidence, whether or not confusion appears likely. That determination ends the decisional process.

Decision

Applying the above criteria, and after a thorough review of the entire record, we are convinced that confusion is not likely. The agreement and assignment herein constitute far more than mere “consent.” They play, in this case, a dominant role.

The record of DuPont’s original application, like so many, included only the application, specimens, reference mark and descriptions of goods. From these the examiner made a judgment, necessarily subjective and requiring assumptions. The only facts were identical marks on “related” goods. Confusion appeared likely and registration was refused.

The present application, however, was rejected without proper consideration, in our view, of all the evidence. The examiner said the earlier decision had “ruled upon” the issue and referred to the “public interest” as though likelihood of confusion were established. The board, also citing the public interest, found confusion likely “despite any agreement.”

It has been said that agreement evidence may resolve “doubt,” In re Harvey Aluminum (Inc.), 161 USPQ 366 (TTAB 1969) or may be useful when the issue is “debatable,” In re Vim Corp., 161 USPQ 58 (TTAB 1969), but there are only two practical possibilities. Either there is no indication of likely confusion, in which case the registration promptly issues, or there is some indication that confusion may be likely. In the latter case, the question must remain open (i. e., “debatable”) until any or all of the elements listed above have been reviewed and studied, the final decision being made on the basis of the entire record.

In considering agreements, a naked “consent” may carry little weight. Absent more, the consenter may continue or expand his use. The consent may be based on ignorance or misconception of the law. The facts may show, on the other hand, that consent could exist only in the absence of any real likelihood of confusion.

The weight to be given more detailed agreements of the type presented here should be substantial. It can be safely taken as fundamental that reputable businessmen-users of valuable trademarks have no interest in causing public confusion. The genius of the free competitive system is the paralleling of the interest of the entrepreneur and the consuming public so far as possible. Altruism aside, it is in his pecuniary interest, indeed a matter of economic survival, that the businessman obtain and 'retain customers, the very purpose and function of a trademark, and that he avoid and preclude confusion. Millions of advertising dollars are spent daily for that precise purpose. The history of trademark litigation and the substantial body of law to which it relates demonstrate the businessman’s alertness in seeking to enjoin confusion. In so doing he guards both his pocketbook and the public interest.

Thus when those most familiar with use in the marketplace and most interested in precluding confusion enter agreements designed to avoid it, the scales of evidence are clearly tilted. It is at least difficult to maintain a subjective view that confusion will occur when those directly concerned say it won’t. A mere assumption that confusion is likely will rarely prevail against uncontroverted evidence from those on the firing line that it is not.

The parties here agreed to restrict themselves in effect to the general purpose cleaning market (Horizon) and the automobile market (DuPont). Horizon is subject to suit for breach of contract and infringement if it promotes its RALLY products for cleaning automobiles. DuPont can be sued if it promotes its RALLY products in general cleaning. The fact that the goods of one party “could be used” in the field of the other is too conjectural and too widely applicable to form the sole basis of decision, particularly where, as here, the parties have agreed to avoid the promotion of such cross-use.

The mere fact of diverse marketing emphasis alone may not in every case preclude confusion. Without more, it may well be that purchasers active in both markets and familiar with products sold under a particular mark could attribute to the same source closely related goods sold under the same mark. The agreements herein, however, considered as a whole and notwithstanding certain phrases subject to contrary interpretation, evidence that confusion will be unlikely. As we read them, the very purpose and aim of the present agreements the avoidance of public confusion. Under provision 6 of the assignment the parties agreed “to take any further actions and execute any further agreements needed to carry out the spirit and intent of this agreement.” The words of this court in a concurrent use proceeding, In re Beatrice Foods, Co., 429 F.2d 466, 57 CCPA 1302 (1970) are particularly apt:

* * * there can be no better assurance of the absence of any likelihood of confusion, mistake or deception than the parties’ promises to avoid any activity which might lead to such likelihood.

It is reasonable to conclude that experienced businessmen fully and continuously alert to each others’ products, labels, trade channels and advertising and parties to the agreements before us, will be quick to act against confusion. We cannot believe that Horizon would have sold its automotive business, assigned its mark and entered into the agreement of that DuPont would have accepted and paid for the assignment and entered into the agreement, if either thought for a moment that purchasers would seriously be confused as to source. Dollars were at stake. Decisions of men who stand to lose if wrong are normally more reliable than those of examiners and judges.

We have no hesitancy in holding, therefore, under the facts of this case, that confusion is not likely to stem from concurrent use of RALLY by Horizon and DuPont on their respective goods under the terms of their agreement. Accordingly, the decision of the board must be reversed.

From all of the foregoing, it can be seen that the arguments presented in this and prior cases regarding the effect of a right to use and the need for protection of the public interest against confusion provide of themselves inadequate guides in determining likelihood of confusion under Sec. 2(d).

Right to Use — Right to Register

Decisional maxims like “the right to register follows the right to use,” sometimes defended as “reflecting the realities of the marketplace,” founder on their non-universality of application and the existence of Sec. 2(d). As attractive as that approach appears in In re National Distillers Products Co., 297 F.2d 941, 49 CCPA 854 (1962) and in the dissents in Ultra-White Company, Inc. v. Johnson Chemical Industries, Inc., 465 F.2d 891, 59 CCPA _ (1972), In re Avedis Zildjian Co., 394 F.2d 860, 55 CCPA 1126 (1968) and In re Continental Baking Co., 390 F.2d 747, 55 CCPA 967 (1968), it is recognized as a goal and that the phrase “as nearly as possible” must be read into it. Clearly, a right to use is not a right to confuse. The rights to use and register are not identical. Alfred Dunhill of London, Inc. v. Dunhill Tailored Clothes, Inc., 293 F.2d 685, 49 CCPA 730 (1961), cert. den., 369 U.S. 864, 82 S.Ct. 1030, 8 L.Ed.2d 84 (1962). Many marks, including those described in Sec. 2(a), (b), and (c), merely descriptive terms and those on labels defective under other laws (Rule 2.69), might all be used but not registered.

Although a naked right to use cannot always result in registration, the Act does intend, as we said above, that registration and use be coincident so far as possible. Post-Lanham Act opinions relating to Sec. 2(d) which maintain an iron curtain between the rights to use and register do not contribute to stability in the law. Treating those rights as totally divorced entities only perpetuates the “arbitrary provisions” respecting confusion that the Congress thought it was eliminating more than twenty-five years ago.

The Public Interest

Whether offered in response to a right-to-use argument or against any of the evidentiary considerations listed above, citation of “the public interest” as a basis for refusal of registration is a bootless cry. We need add little to the shattering of that shibboleth in the concurring opinion in National Distillers, supra, and in the dissents in Ultra-White, Zildjian and Continental Baking, supra. Writers and scholars listed in those reported opinions have also shown the fallacy in the notion that the Patent Office is somehow guarding the public against confusion when it refuses a registration. After a likelihood of confusion is found (and the case thus decided) citation of the public interest is unnecessary.

The Patent Office does have a guardianship role under Sec. 2(d). It lies not in a negative, nay-saying of refusal alone, but in the protection of a mark by registering it and then rejecting later improper attempts, of which the registrant is unaware, to register it or a similar mark. Refusal to register cannot prevent confusion. At most, it might discourage further use. Refusal can, under certain circumstances, encourage potential confusion. Absence of a registration of RALLY for auto cleansers in the present case may, for example, lead others to adopt and use that or a similar mark for auto cleansers. Granting a registration will not produce confusion. Use alone can do that and neither we nor the Patent Office can grant or deny a right to use.

Presumably, everything the Patent Office and this court does is in the public interest. We find no place for “the guardianship of the public interest” as support for refusals to register under See. 2(d).

Conclusion

What we have said under the heading “decisional process,” supra, which has been in effect or in part followed on occasion in the past by this and other courts and by the Patent Office, and the elimination of considerations regarding right to use and the public interest should in time lead, we believe, to increased conformity of the register with the realities of use in the marketplace, and to the greater stability sought in the Act. '

Reversed.

BALDWIN, J., dissents.

      . Serial No. 307,711, filed September 19, 1968.

      . Reg.No.675,713, issued March 17, 1959.

      . Serial No. 270,842, filed May 8, 1967.

      . Decision of Trademark Trial and Appeal Board, abstracted at 160 USPQ 830 (1968).

      . S.Rep.No.1333, 79th Cong., 2d Sess. (1946) in U.S.Code Cong.Service, 79th Cong., 2d Sess. at 1274-1278 (1946).

      . Skookum Packers Association v. Pacific Northwest Canning Co., 45 F.2d 912, 18 CCPA 792 (1930); Van Camp Sea Food Co., Inc. v. Westgate Sea Products Co., 48 F.2d 950, 18 CCPA 1311 (1931); Jacob Ries Bottling Works, Inc. v. The Coca-Cola Co., 138 F.2d 56, 31 CCPA 706 (1943).

      . See the decisions listed in “Appendix A” to Judge Smith’s dissenting opinion in In re Continental Baking Co., 390 F.2d 747 at 753, 55 CCPA 967 at 976.

      . We are aware, of course, of our part in encouraging this very cry. In re Contimental Baking Co., above.

      . That a rejected applicant might elect to abandon use, and thus reduce the potential for confusion, is a matter of the applicant’s choice. Cf. Glenwood Laboratories, Inc. v. American Home Products Corp., 455 F.2d 1384, 59 CCPA _ (1972).