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U.S. Supreme Court

Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977)

Don E. Williams Co. v. Commissioner of Internal Revenue

No. 75-1312

Argued December 8, 1976

Decided February 22, 1977

429 U.S. 569


Petitioner accrual basis corporate taxpayer, by delivering fully secured promissory demand notes to the trustees of its qualified employees' profit-sharing trust, held not entitled to income tax deductions therefor under § 404(a) of the Internal Revenue Code of 1954, which allows a deduction for contributions "paid" by an employer to a profit-sharing plan in the taxable year "when paid," and further allows the deduction if the contribution was a "payment . . . made" within a specified grace period following the end of the employer's taxable year. Pp. 429 U. S. 574-583.

(a) The statutory terms "paid" and "payment," coupled with the grace period and the legislative history's reference to "paid" and "actually paid," demonstrate that, regardless of the method of accounting, all taxpayers must pay out cash or its equivalent by the end of the grace period in order to qualify for the § 404(a) deduction. This accords with the apparent statutory policy that the profit-sharing plan receive full advantage of any contribution that entitles the employer to a tax benefit. Here, the petitioner's issuance and delivery of the promissory notes did not make the accrued contributions ones that were "paid" within the meaning of § 404(a). Pp. 429 U. S. 574-579.

(b) Though the notes had value and would qualify as income to a seller-recipient, the notes, for the maker, even though fully secured, are still only a promise to pay, and do not, in themselves, constitute an outlay of cash or other property. P. 429 U. S. 579.

(c) The transactions in question cannot be treated as payments of cash to the trustees followed by loans, evidenced by the notes in return, since "a transaction is to be given its tax effect in accord with what actually occurred, and not in accord with what might have occurred," Commissioner v. National Alfalfa Dehydration, 417 U. S. 134, 417 U. S. 148. Pp. 429 U. S. 579-580.

(d) The word "paid" in § 404(a) cannot be assumed to have the same meaning it has in § 267(a) of the Code, which disallows deductions by an accrual basis taxpayer for certain items that are accrued but not yet paid to related cash basis payees. The situation under

Page 429 U. S. 570

§ 267(a) whereby the term "paid" has been used to insure that transactions between related entities received consistent tax treatment, has no counterpart under $404(a), for the qualified profit-sharing plan is exempt from tax. Pp. 429 U. S. 580-582.

(e) A promissory note cannot properly be equated with a check, since a note, even when payable on demand and fully secured, is still only a promise to pay, whereas a check is a direction to the bank for immediate payment, is a medium of exchange, and is treated, for federal tax purposes, as a conditional payment of cash. Pp. 429 U. S. 582-583.

527 F.2d 649, affirmed.

BLACKMUN J., delivered the opinion of the Court, in which BURGER, C.J.,and BRENNAN, WHITE, MARSHALL, REHNQUIST, and STEVENS, JJ., joined. STEVENS, J., filed a concurring statement, post, p. 429 U. S. 583. STEWART, J., filed a dissenting opinion, in which POWELL, J., joined, post, p. 429 U. S. 583.

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