Full opinion text
OPINION SC ALERA, District Judge. The plaintiff, Cyclops Corporation, seeks judgment against the defendant, United States, for the refund of corporation income taxes for the calendar years 1962, 1963, 1964, 1965 and 1966, plus interest as provided by law. The issue is whether plaintiff, as an accrual basis taxpayer, is entitled to a current deduction in the calendar year in which it incurred obligations variously designated as contingent, delayed, and additional delayed obligations to contribute to trusts created under Supplemental Unemployment Benefit Plans. The Internal Revenue Service has disallowed all claimed deductions by plaintiff for the delayed obligations under the SUB plan and has allowed only those amounts which were actually paid into the SUB trusts. I The complaint containing seven counts seeks a refund of corporate income taxes paid by plaintiff over a period of five years. The government’s answer is a simple denial of the allegations of the complaint. A stipulation of facts, including exhibits, was filed, which stipulation contained most of the facts in this case. Pretrial statements were filed and a formal pretrial conference was held in addition to status conferences and informal pretrial conferences. A non-jury trial was held, at which testimony was taken and the record completed. Following the filing of the transcript of the trial, the parties filed briefs and, in addition, the plaintiff filed a reply brief. The parties also filed proposed conclusions of law and statements of fact based upon the stipulation and testimony. In the appendix hereto is a statement of facts outlining in detail the provisions of the plans, the manner in which they operated, and the relevant facts of this controversy. The statement of facts, together with this opinion, shall constitute findings of fact and conclusions of law in accordance with Fed.R.Civ.P. 52(a), 28 U.S.C. This case involves three separate corporations, three identical supplemental unemployment benefit plans, and the same issues which arose out of the same industry-wide supplemental unemployment benefit plan considered by the Tax Court of the United States in Lukens Steel Co. v. Commissioner, 52 T.C. 764 (1969), and by the Court of Appeals for the Third Circuit in Lukens Steel Co. v. Commissioner, 442 F.2d 1131 (3d Cir. 1971), which affirmed the Tax Court. As in the Lukens case, Cyclops, and its predecessor companies, agreed with the Steelworkers Union to establish a supplemental unemployment benefit plan, the purpose of which was, as its title indicates, to supplement state unemployment benefits available to laid-off employees. The obligation of Cyclops under the plans consisted of current and deferred liabilities. Under the contract between Cyclops and the Union, Cyclops, which has been consistently an accrual basis taxpayer, agreed to make payments to trust funds to provide supplemental unemployment benefit payments to its employees. A part of the payments to the trust was to be made in cash and a part was to be made at future times as the financial needs of the fund required and as specified by the various provisions of the fund. The amount of all of the payments to be made was determined by events occurring during the taxable years. The contracts in existence during the taxable years provided that any excess of the delayed and/or deferred payment obligations to the trusts over the actual amounts paid out to employees by the trusts should be used for other benefits to the employees and in no way could inure to the benefit of the employer. All of the deferred and delayed obligations were accrued by the plaintiff as business expenses and deducted by it in its returns for the years in which such credits were made. The amounts credited in this fashion during the taxable years would be paid ultimately to the employees under the provisions of the contract creating the trusts. There was, however, uncertainty during the taxable years with regard to the identity of the ultimate recipients of the benefits and the time of such payments. The plaintiff claimed for each of the five years in suit as deductions its total obligations to the trusts, including its cash obligations and any deferred, delayed and future obligations under the plan. The plaintiff’s position is that these are ordinary and necessary business expenses under section 162(a) of the Internal Revenue Code of 1954 (26 U.S. C.). The government’s position is that the only proper deductions are those amounts which Cyclops paid into the trusts during each year in suit and that all other obligations, no matter how designated, are not deductible and therefore properly were disallowed. II There is no dispute as to the basic legal principles involved in this case. Section 162(a) of the Internal Revenue Code of 1954, 26 U.S.C., permits the taxpayer to deduct an ordinary and necessary business expense. There is no dispute as to the general rule for determining the particular taxable year in which a taxpayer is entitled to take a deduction. Section 461(a) of the Internal Revenue Code provides that deductions “shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.” Further, the treasury regulations provide that under the accrual method of accounting, deductions are allowable “for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.” Treas. Reg. 1.461-l(a)(2), 26 C.F.R. This regulation reflects the general rule, the “all events” test, which determines when an allowable deduction may be taken. This rule and its corollary, that the expenses are deductible only in the taxable year in which the absolute and unconditional obligation arises even though payment is not due until a subsequent year, has been repeatedly restated and approved. United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347 (1926); Aluminum Castings Co. v. Routzahn, 282 U.S. 92, 51 S.Ct. 11, 75 L.Ed. 234 (1930). Ill There is no disagreement between the parties that the SUB plan provisions and factual background involved in the Lukens Steel Company case are virtually identical to the provisions and factual background at issue in this case. Defendant concedes that the deductibility of obligations similar to the plaintiff’s obligations in this case was considered and was allowed in Lukens. The plaintiff submits that the Third Circuit’s affirmance of the Tax Court decision is binding upon the court in this case. The plaintiff points out that the only substantive difference between the Lukens Company 1962 SUB plan, as described by the Tax Court in its opinion, 52 T.C. 764, and the Cyclops revised SUB plans is' that the Lukens plan reflects a 52-53 week corporate fiscal year ending on the Saturday nearest December 31, whereas Cyclops reports on a calendar year basis. As the plaintiff points out, this is a very minor difference. The Court of Appeals held that Lukens was entitled to deduct the monthly obligation under its 1962 SUB plan, including cash contributions and delayed obligations, in the taxable year incurred because sufficient events had occurred in that year “to fix the obligation to pay this liability in the form of cash.” Id. at 1134. The court concluded that the deductible monthly obligation included the amount of the contingent liability carry-forward from Lukens earlier SUB plan to its 1962 SUB plan and that the entire amount thereof was properly accruable in its fiscal year 1962, being the year in which the contingent liability became non-cancellable. It should be noted that the parties involved here have stipulated that the express terms of each of the revised SUB plans provide for the carry-forward of the full amount of the “contingent liability” under the three earlier SUB plans as part of the delayed contribution element of the monthly obligation on the respective effective dates of the revised SUB plans (i. e., July 1, 1962 in the case of Universal-Cyclops, and February 1, 1963 in the case of Empire-Reeves and Reeves Steel). The Court of Appeals in Lukens rejected the Commissioner’s arguments that the liability for the delayed obligation was wholly contingent, rather than fixed and certain, and therefore was not accruable until actually paid into the Lukens SUB trust. The decisions of the United States Courts of Appeals, of course, are binding upon the District Courts within such Circuit. As Judge Weber said in Minnich v. Nabuda, 336 F.Supp. 769 (W.D.Pa.1972), while he “believes most strongly” in an opposite point of law, the District Court is nevertheless “bound by the current holding of this circuit.” Id. at 770. In Thompson v. United States, 148 F.Supp. 910 (E.D.Pa.1957), involving a federal estate tax refund action, the District Court indicated that a “similar fact situation to that here involved” was recently considered in the Third Circuit, and that “that decision controls this case.” Id. at 913. See also Shoffner v. Glenshaw Glass Co., 173 F.Supp. 850, 854-855 (W.D.Pa.1959), and Shupe v. Pennsylvania R. Co., 19 F.R.D. 144, 145 (W.D.Pa.1956). The plaintiff and defendant have stipulated in this case that the 1962 revised SUB plans as adopted by Universal-Cyclops, Empire-Reeves, and Reeves Steel were substantially in the same form as the 1962 SUB plan developed by the steel industry and Union negotiators during the 1962 steel industry labor negotiations and adopted by the major steel companies. The 1962 SUB plan litigated in Lukens was also in the same form developed in the 1962 steel industry negotiations and adopted by the major steel companies. 52 T.C. at 766 — 767. The Tax Court’s findings of fact in Lukens, 52 T.C. at 765 — 781, are virtually identical to the stipulation of facts between the parties in this case aside from the amounts of the monthly obligations. In summary, the government’s effort to persuade this court to either consider Lukens, supra, to be in error or to distinguish Lukens from this case are not successful. IV The government argues that, while it is “fully aware that the deductibility of obligations similar to the plaintiff’s was considered and allowed” in the Lukens case, both the Tax Court and the Appellate Court were “in error in deciding Lukens, not because of any misunderstanding regarding the principles controlling the timing of deductions under section 461 of the Code, but rather because the courts did not first analyze under section 162 the nature of the obligations for which the taxpayer was seeking a deduction.” This argument of the government appears to be an effort to distinguish between the obligation to pay money to the trusts and an obligation to pay the benefits provided under the SUB plans directly to the employee. As the government states: plaintiff’s undertaking to pay money to a trust are (sic) not, when considered in vaceuo, ordinary and necessary business expenses. In argument at various times in this case the government labeled this proposition as the distinction that must be made between the form, i. e., the trust, and the substance, i. e., the obligation to pay the employee benefits. The government has presented no authority to support the contention that the obligation to pay money to an entity such as a trust, in itself would not properly be a deductible expense under section 162. This argument is not persuasive as it appears, as plaintiff has argued, that such a position amounts to an attack on the accrual method of accounting. V The government, in addition to its claim that the Lukens decisions were in error, attempts to distinguish this case from Lukens in two respects. The first effort to distinguish Lukens from this case would be best set forth by quoting from the government’s brief: The defendant does not deny that the plaintiff has, for the purpose of paying specified employee benefits, committed itself to establish unfunded liability accounts in amounts determinable within the year for which deductions are sought. The defendant also acknowledges that it was this very obligation for which deductions were allowed in Lukens, supra, but the Court should note that this was only after the Tax Court had concluded . that such obligation “does not depend upon an estimate of anticipated future expenditures.” Whether such a conclusion be considered a finding of fact or a conclusion of law, it is totally devoid of support in this case. Without this intermediate finding, the ultimate conclusion of the Court is simply not helpful to the resolution of the matter in the instant case. The government does not indicate what the quoted phrase from the Tax Court’s 23-page opinion in Lukens meant in connection with the Tax Court’s decision. The plaintiff notes that the Court of Appeals in its opinion in Lukens ignored the statement of the Tax Court. It is clear that in this case the accrual of the monthly obligation was fixed by the terms of the SUB plans themselves and did not depend on estimated or anticipated future expenditures. Cyclops has incurred a fixed and absolute liability under the SUB plans. The future disbursement of benefits under those plans does not alter the obligation. The government secondly attempts to distinguish this case from Lukens by arguing that in Lukens the court(s) found that the obligation once incurred could not be extinguished, reduced, or can-celled, or in any other manner revert to the benefit of the company. The government suggests that the opposite must be found in this case because in 1968 Cyclops by agreement with the Union cancelled $183,000 of the obligations accumulated during the years under consideration and indeed claimed a deduction on this amount. The provisions of the industry-wide SUB plan and S & V plan which give rise to the “evaporation” in this case were before the Court of Appeals in Lukens, supra. These provisions were summarized in paragraph 72 of the stipulation filed in this case (and are described in the appendix to this opinion) as follows: Under Section 15.0 of the 1964 Universal-Cyclops S & V Plan, Universal-Cyclops incurred a liability to pay 12.5 cents per hour worked to the FAA. . . Under Section 15.2b of said S & V Plan, the maximum hourly accrual to the FAA was 15.625 cents per hour worked, 3.125 cents of which was in the form of spillover from the 1962 Universal-Cyclops SUB plan. . However, Section 15.9 of said S & Y Plan provided for a maximum cumulative monthly accrual of additional delayed contributions, including splash-back, in the amount of 3.5 cents per hour worked, less any spillovers to the said S & V Plan. The difference between the maximum available “spillover” of 4.5 cents per hour worked set forth in Section 15.1 of the said S & V Plan and said maximum monthly accrual of 3.5 cents as set forth in Section 15.9a of the said S & V Plan was commonly referred to as “evaporation.” Notwithstanding the 3.5 cent limitation in the S & V plan, the maximum 4.5 cent SUB accrual under the appendix to the SUB plan continued in full force and effect. Under these provisions, the full amount of the additional delayed contribution (up to 4.5 cents) continued to be incurred without regard to the S & V plan limitations. During each of the years from 1964 through 1967, plaintiff accrued and deducted the additional delayed contribution required under the 1962 SUB plan. Once a fixed and absolute obligation of the plaintiff, the additional delayed contribution (including the amount ultimately labeled “evaporation”) could only be used for the payment of unemployment benefits or possible transfer in future years to the S & V plan if needed to pay S & V benefits. The plaintiff, consistently having utilized the accrual method of accounting, was required to accrue and deduct its full SUB liability in each of the calendar years in which it was incurred; otherwise, its income would be distorted. As stated by the Supreme Court in United States v. Consolidated Edison Co., 366 U.S. 380, 384-385, 81 S.Ct. 1326, 1329, 6 L.Ed.2d 356 (1961): It is settled that each “taxable year” must be treated as a separate unit, and all items . . . must be reflected in terms of their posture at the close of such year. . . . And the parties agree that, under the applicable federal [income tax] statutes, neither the Government nor an accrual-basis taxpayer may cause an item to be deducted in a year other than the one in which it accrued. (Citations and footnotes omitted). The same rule had been stated earlier by the Supreme Court in Security Flour Mills Co. v. Comm’r, 321 U.S. 281, 285-286, 64 S.Ct. 596, 598, 88 L.Ed. 725 (1944): [T]he well understood and consistently applied doctrine that cash receipts or matured accounts due on the one hand, and cash payments, or accrued definite obligations on the other, should not be taken out of the annual accounting system and, for the benefit of the Government or the taxpayer, treated on a basis which is neither a cash basis nor an accrual basis, because so to do would, in a given instance, work a supposedly more equitable result to the Government or to the taxpayer. Under this authority, the plaintiff did accrue and deduct its full SUB liability under the plans because “all events” had accrued in each of the four years to establish and fix the amount of that liability. An item properly accrued under the “all events” test may in some later year, because of changed circumstances, lose its character as a fixed and absolute liability. In such a case, an accrual basis taxpayer is required to include the item in income in the later year to the extent it had received an earlier tax benefit. See Regulations, § 1.111-1(a), 26 C.F.R. This occurred in the case of the cancellation of the “evaporation” in 1968. The Union and Cyclops agreed in 1968 that the 1 cent differential (which could produce “evaporation” under certain circumstances) should not accrue thereafter as an additional delayed contribution in light of the provisions of the 1964 S & V plan, and, further, agreed to cancel the “evaporation” amount which had already built up in the amount of $183,000. This action by the plaintiff and the Union in 1968 by separate and subsequent agreement in no measure affects the proper accruability of the full SUB liability incurred under the plans in earlier years. That the accrual of a fixed and certain liability in one taxable year is not altered by changes occurring in a subsequent taxable year was emphasized in Rath Packing Co. v. Bacon, 255 F.Supp. 809 (S.D.Iowa 1966). The company and union had initially agreed to establish a committee to study certain problems in connection with the expenditure of moneys being accrued in an automation fund. In a later year, the company and union agreed that the committee should not be appointed, but it was held nevertheless that this subsequent event did not alter the fixed and absolute liability which existed under the labor agreement in the earlier year of accrual. The court rejected the same argument now being advanced by the government in this case by stating that: [T]he subsequent turn of events did not affect the liability incurred by the taxpayer to contribute to the Fund during the years in question. The taxpayer’s obligation to establish the Fund was fixed by the contract. The deductions must be viewed in light of the circumstances existing when the contract obligation was incurred. Id. at 812. That same result was also reached recently by the Commissioner in Rev.Rul. 72-489, 1972-2 Cum.Bull. 89, involving deductions for contributions to an industry-wide wage supplementation plan. Under the formula used in that plan for calculating employer costs, certain distortions of the true employer cost could occur. These true costs did not become known, however, until after the end of the calendar year. Thus, in any given year an accrual basis employer might have deducted more than its true liability. The Commissioner ruled that the events which occurred in a subsequent taxable year did not affect the earlier accrual and, further, stated that: In instances where other employers receive amounts from the administrator representing their incurred costs under the Plan that is in excess of their respective pro rata share of the total industry cost, such amounts, to the extent that a tax benefit was received in a prior taxable year, are includable in their gross income in the year of recovery. VI The government next argues that “all the events which establish a deductible liability with certainty have not occurred” in this case. The government maintains that although the plaintiff has committed itself to pay particular employee benefits under the terms of the SUB plans in future years, there is no certainty that the events giving rise to the payment of the benefits, “i.e., individuals in the continuous employ of the plaintiff for at least two years being laid off during periods of total or partial unemployment, will occur.” In support of this argument, the defendant cites Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725 (1934), in which the Supreme Court denied a deduction for amounts which the taxpayer would be required to pay if and when any of its insurance policies were cancelled, the rationale of the court being that there was not a proper deduction because the liability for expected future cancellations was not fixed and absolute. The facts of Brown are not similar to the facts of this case. In Lukens, the Court of Appeals found that sufficient events occurred during the years in question to make the delayed obligation absolute and irrevocable. The court discussed several reasons for its decision, all of which are equally germane to this action. First, the court looked to the provisions of the 1962 SUB plan which determine the fact and amount of the employer’s liability to make contributions into the SUB trusts. These provisions state that it is the rendition of services, hour by hour, by the employees represented by the Union which gives rise to the obligation and determines its amount. By virtue of these provisions, the court stated at page 1134 that: “once earned, the money was committed to inure to the benefit of the eligible members of the Steelworkers Union” and further stated at page 1135 that: “At the end of [Lukens’] fiscal year, the amount of liability is determined by events which happened during the year.” Plaintiff’s liability, as was Lukens’, for the monthly obligation incurred under the revised SUB plans, was simply one of several elements in its overall hourly wage cost. In reality, the 9.5 cents maximum monthly obligation per hour worked is no different than the basic hourly wage paid to employeés or any of the other fringe benefits provided under the basic labor agreement. Upon the completion of one hour’s work, the plaintiff became absolutely and unconditionally committed to expend the full amount of the monthly obligation incurred, without any distinction between cash contribution or delayed obligation, for the sole and exclusive benefit of its employees. The SUB plan in no manner conditions this absolute commitment on employee layoffs or any other event. After initially determining that the performance of services by the eligible employees triggered the liability and amount of the liability, the Court of Appeals next determined that the liability once incurred could not be cancelled. The court noted the non-cancellability feature of the delayed obligation on page 1134: “It was not possible for Lukens to cancel the contingent liability account without paying it to the Union.” It then noted that the delayed obligation could not be cancelled even in the event of termination of the SUB plan or of shut-down of Lukens’ operations: The amount credited to the contingent liability [i.e., delayed obligation] would always be potentially available to Lukens’ eligible employees. In no event could the contingent liability be can-celled by Lukens, actually it was the latter’s fixed and absolute liability and the only uncertainty pertaining to it was the time of payment. Id. at 1135. The express and unambiguous provisions of the 1962 SUB plan provide that upon termination of the plan, all the assets in the trust funds, including the delayed obligation, shall be used until exhausted to pay unemployment benefits to employees. In the remote chance that the trust funds would not be used to pay unemployment benefits, the funds would be used in a manner designed to promote the purposes of the plan. Moreover, each of the trust agreements between Universal-Cyclops, Empire-Reeves, and Reeves Steel and the respective corporate trustees provides that none of the assets of the trust funds shall at any time be used for, or diverted to, purposes other than for the exclusive benefit of employees and their beneficiaries under the plan. Vincent L. Matera, one of the principal negotiators, drafters and interpreters of the SUB plans since their inception in 1956, testified that it was intended that the 1962 settlement agreement was to provide explicitly that all the contingent liabilities would become non-cancellable under any and all future circumstances. VII The government argues that the plaintiff’s obligations to provide for specified employee benefits have not been determined with reasonable accuracy. In elaborating upon this point, the government assumes for the sake of argument that the plaintiff’s commitment to contribute funds for the benefits specified in the SUB plans is certain. The government, however, urges that the plaintiff, to qualify for the deduction, must in addition establish that the amount of such commitment can and has been determined with reasonable accuracy. The government, in support of its proposition, asserts that the SUB plans were so structured as to create a built-in reserve. It contends that the $488,975.60 of contingent liability carried forward in 1962 under the revised plan was intended initially to provide this reserve. The government concludes that because the reserve’s continuing existence was necessary to insure the desired operation of the plans, i.e., the payment of 100 percent of benefits, the amount of the reserve was never intended to be paid out. The government attempts to show by a table in its brief the pay-out of the contingent liability carry-forward under the 1962 Universal-Cyclops SUB plan. It notes that this table indicates that the annual amount of plaintiff’s obligation is more than sufficient, matched to the actual needs of the employees’ trusts, to avoid any significant resort to the initially assumed reserve. Finally, the government argues that the relationship between the delayed contribution and the additional delayed contribution is evidence that the accrual of the additional delayed contribution was excessive and beyond what could be considered a reasonable estimate of anticipated expenses. However, as the plaintiff has correctly pointed out, the 1962 carry-forward of the contingent liability was before both the Tax Court and the Court of Appeals in Lukens, and explicitly accepted as part of the delayed contribution. And, as settled in Lukens, the monthly obligation was properly accruable and deductible under section 162 of the Code because it was a fixed and certain liability, rather than a mere estimate of anticipated expenses. VIII The next proposition advanced by the government is that “the facts existent at the time of accrual do not establish that it was probable and that the parties anticipated that the obligations would be paid in a reasonable period of time.” The government in this portion of its argument noted that in Lukens there was evidence to the effect that the parties reasonably anticipated that the money represented by the liability accounts would be paid out in a relatively short time. The government maintains that there is no evidence in this case to support a finding similar to that of the Lukens courts. The government is inaccurate. The Court of Appeals for the Third Circuit held in Lukens that the taxpayer could accrue the delayed obligation in the year incurred even though the date of payment of the unemployment benefits was not definite. Furthermore, it has been uniformly held that an uncertain date of payment of an accrued liability does not materially affect the application of the “all events” test of United States v. Anderson, supra. Before Lukens, the principle that a fixed obligation is currently accruable even though the ultimate date of payment is indeterminate most recently received expression in Washington Post Co. v. United States, 405 F.2d 1279, 186 Ct.Cl. 528 (1969), and in Rath Packing Co. v. Bacon, 255 F.Supp. 809 (S.D.Iowa 1966). There are several cases holding that an accrual basis taxpayer need not have even a reasonable expectation at the time of the liability’s accrual that the liability will in fact be paid. Keebey’s Inc. v. Paschal, 188 F.2d 113 (8th Cir. 1951); Grand Avenue Motor Co. v. United States, 124 F.Supp. 423 (D.C.Minn.1954); and Jenkins Wright Co., Inc., B.T.A. Memo. Dec. 12, 255-6 (1942). It is, of course, now beyond question that mere uncertainty as to the time of the payment is immaterial under the “all events” test. The 1962 SUB plan was designed to provide for a payment of the delayed obligation within a reasonable time after accrual and plaintiff’s delayed obligation under the 1962 revised SUB plans actually was paid out within a few years of its accrual. The Court of Appeals in Lukens focused on the substance of the matter. The court examined the negotiation history of the 1962 SUB plan and the actual plan provisions to determine the intention and expectation of the companies respecting the use of the delayed obligation. The court noted that the 1962 SUB plan financing provisions were carefully worked out on the basis of a comprehensive statistical analysis of relevant cost factors and unemployment experience. The cost of funding the plan was not arbitrarily determined, a group of experts on economics and statistics was selected by the steel companies and the Union to deal with the problem. In the light of their analysis, the negotiators concluded that a contribution rate of 9.5 cents per hour would be required to provide the agreed upon SUB Plan benefits. The amount actually disbursed to the Trust Fund in cash and immediately available for distribution was less than one half of the amount the experts felt was needed, the balance was to be in [the] contingent liability account. As a result of this arrangement it was anticipated that the Plan would be funded exclusively with contingent liability within a few years after it was in effect The SUB Plan was designed so that even if the experts were wrong, and the contingent liability was not needed, the remaining assets including contingent liability were to be used to pay benefits to Lukens’ eligible employees, either at the termination of the Plan or of the Company. The amount credited to the contingent liability would always be potentially available to Lukens’ eligible employees. Id. at 1134. From the stipulation of facts entered into by the parties in this, case, including comprehensive and detailed schedules showing essentially all accruals by Cyclops under the revised SUB plan and all payments from the SUB trusts in the form of unemployment benefits, and further showing the computation, month by month, of the derivation of the accruals for the monthly obligation with references to the applicable sections of the plan itself, little more needs to be said concerning the virtual certainty of full payment of the delayed obligation to eligible employees within a reasonable period of time. A brief summary of the 1962 labor negotiations and the relevant portions of the 1962 SUB plan in the appendix indicates the overwhelming nature of the evidence relating to the reasonableness of the period of payments. The parties have stipulated that Cyclops, in accordance with the accepted practice in the industry, had no practical alternative but to accept the terms of the 1962 SUB plan which were negotiated by the major steel companies and the Union. Plaintiff had maintained a record of its own layoff experience since at least 1956 following the original adoption of the SUB plan and regularly reported the relevant data to the Union; was privy to the proposals under consideration in the 1962 joint negotiations and most certainly was cognizant of the cyclical nature of unemployment in the steel industry by virtue of its substantial payments of unemployment benefits between 1956 and 1962 under the 1956 SUB plan. Further, indicating its cognizance of absolute liability, plaintiff consistently carried its entire unpaid delayed obligation as an accrued expense and/or accrued liability on its books of account, in its published financial statements and in reports filed with the Securities and Exchange Commission. See Ohmer Register Co. v. Comm’r., 131 F.2d 682 (6th Cir. 1942). The Court of Appeals said in Lukens that it was anticipated that the delayed obligation would be paid in a reasonable period of time. This statement was based on a finding by the Tax Court that “Lukens intended, and reasonably expected, that its entire contingent liability under the 1962 SUB plan as in effect during the years at issue would be paid.” 52 T.C. at 781. The Tax Court made a further finding, which the Court of Appeals cited in its opinion at page 1134, that the cash assets of the Lukens SUB trust were entirely exhausted as of December 31, 1963 through the payment of unemployment benefits and that any further payments from the trust would be financed from the “Contingent Liability” account. 52 T.C. at 778, 780. The Tax Court in its opinion said that both Lukens and the union “reasonably anticipated that the amounts credited by petitioner to the plan as contingent liabilities during the taxable years would be required, on a ‘first-in first-out’ approach, to be paid by the petitioner to the trust within a few years.” 52 T.C. at 785. Chief Judge Hastie, concurring in Lukens, stated: The Tax Court found that it was probable and was reasonably anticipated by the parties that the sums the taxpayer irretrievably committed to the Supplemental Unemployment Benefit Fund during the taxable years would have to be paid out within a relatively short time that could be estimated approximately. That finding makes it unnecessary to decide whether sums committed to such a fund as this are then immediately deductible as an accrued business expense if the time of future disbursement is entirely speculative and is as likely to occur decades hence as in the near future. Yet the opinion of the Court seems broad enough to cover that situation. I prefer not to express any opinion whether an immediate deduction would have been allowable in such a case. Id. at 1135-36. In this case, even the more stringent test suggested by Judge Hastie’s concurring opinion is satisfied. Plaintiff’s payouts cannot occur “decades hence” since a substantial part of the delayed obligation has already been paid by plaintiff in the form of unemployment and related benefits. This case involves five calendar years, (1962 through 1966) and another six years elapsed before the institution of this action in December 1972, hence it is not necessary to speculate on the length , of the deferral period. The evidence of what has happened since 1962 is in the record. First, the parties have stipulated that beginning with the month of September 1962, all unemployment benefits payable thereafter by Universal-Cyclops under the 1962 Universal-Cyclops SUB plan from its SUB trust were financed solely through the delayed obligation and none was financed through current contributions. (Stip. X 28.) Moreover, the parties have stipulated that all unemployment benefits payable by Empire-Reeves under its 1962 Empire-Reeves SUB plan from and after its effective date on February 1, 1963 were financed solely through the delayed obligation. (Stip. X 32.) Thus, in both cases, the intention of the drafters of the 1962 SUB plan that full funding of bénefits thereunder would be in the form of delayed obligation within several years after its effective date (see 442 F.2d at 1133) was greatly overestimated, at least as applied to plaintiff. This fact makes doubtful any argument that the creation of the delayed obligation was a device to obtain current tax deductions from an obligation which might never be payable. The delayed obligation was in fact used almost immediately for the payment of unemployment benefits by plaintiff. Inquiry must turn to the length of time of the payment of the delayed obligation to see if the actual payments by plaintiff satisfy Judge Hastie’s more severe test that payment should not occur “decades hence.” Utilizing the first-in first-out method of accounting expressly authorized by the Tax Court in Lukens, 52 T.C. at 785, and based upon actual cash contributions by Universal-Cyclops into its SUB trust for the purpose of financing unemployment benefits, the delayed obligation accrued under the 1962 Universal-Cyclops SUB plan between July 1, 1962 and December 31, 1970 was completely paid out over the following periods: Year of Final Total Elapsed Year of Accrual Payment Years 1962 (June 30 carry- 1967 5 forward) 1962 (July 1-Dec. 31) 1968 6 1963 1970 7 1964 1970 6 1965 1971 6 1966 N/A N/A 1967 1971 4 1968 1971 3 1969 1971 2 1970 1972 2 If, however, the elapsed years are weighted to reflect the percentage of cash contributions made by Universal-Cyclops to the SUB trust made in each of the years of payment, the delayed obligation was completely paid out over the following periods: Total Elapsed Year of Accrual Years 1962 (June 30 carry- 3.05 forward) 1962 (July 1-Dec. 31) 5.74 1963 6.00 1964 6.00 1965 5.39 1966 N/A 1967 4.00 1968 3.00 1969 2.00 1970 1.01 Thus, over a total accrual period of nine years, including the five calendar years involved in this action, the longest elapsed period of time to pay out any given year’s accrual of delayed contribution was seven years, while the shortest period was only two years. This supports the notion of plaintiff’s compliance with both the opinion of the Court of Appeals in Lukens and Judge Hastie’s concurring opinion concerning the period of payout. IX The government lastly argues that the plaintiff’s savings and vacation plans are deferred compensation plans and that deductions available for benefits under such plans are controlled by section 404 of the Internal Revenue Code, not section 162. It contends that the savings and vacation plans defer the receipt of compensation, since Cyclops’ obligations under the SUB plans can be used in part to pay benefits under the savings and vacation plans, thus benefits under those plans are deductible only in the year when actually paid. Defendant’s argument relies on several allegations. First, that the S & V plans, at least in part, have the effect of deferring the receipt of compensation and, therefore, the allowance of deductions to the plaintiff for contributions to those S & V plans is governed by section 404. Second, that the additional delayed contributions under the. revised SUB plans under certain circumstances may be transferred to the S & V plans for the payment of savings and vacation benefits. Third, that all, or some part, of the amounts accrued by plaintiff as additional delayed contributions under the revised SUB plans are claimed as deductions for tax purposes under section 162, which is improper because some undetermined amount thereof is deductible under section 404 only, at least to the extent such amounts in the year accrued were not either paid out in employee benefits or made non-forfeitable. The plaintiff responds to each of the government’s arguments. First, plaintiff argues that whether or not the S & V plans have the effect of deferring the receipt of compensation is irrelevant. It argues that this case involves only the deductibility of its annual accruals under the revised SUB plans. The accruals were claimed as deductions under section 162 of the Code as ordinary and necessary business expenses. The plaintiff asserts that defendant does not, and indeed could not, argue that the revised SUB plans are plans deferring the receipt of compensation as described in section 404 of the Code. In order to establish the required nexus with a section 404 plan, therefore the defendant points to the S & V plans. There is no dispute over plaintiff’s claimed deductions of the amount of its payments or accruals during the relevant years under the S & V plans. The government never disallowed claimed deductions under either sections 162 or 404 of plaintiff’s obligations arising under the S & V plans. The defendant seeks to apply section 404 limitations to a section 162 plan even though all claimed deductions under the section 404 plan have been allowed in full. The SUB plans and S & V plans are separate, distinct and totally different plans arising out of collective bargaining with the Union. Whereas the industry-wide SUB plan was first adopted in 1956, the S & V plan did not become effective until 1962. The SUB plan supplemented state unemployment benefits, while the S & V plan essentially and primarily provided vacations to eligible employees. All unemployment benefits were paid from the SUB trusts. All vacation benefits paid under the S & V plans were paid directly by the plaintiff to the employees. Only a small part of the total S & V plan benefits were paid through separate S & V trust funds. The characterization of the 1964 S & V plan as a section 404 plan by the government thus must rest on two propositions. First, on the so-called “retirement benefits” feature which more correctly constitutes nothing but an extended vacation benefit payment accelerated to coincide with an employee’s retirement. Second, on the notion that the savings option was, except for the year 1964 when it was not an option for senior group employees, non-existent in actual practice. The defendant argues that these remote connections taint the proper deductions of additional delayed contributions under the separate SUB plans of some unknown amount between $1,296,689 and $246,053. The argument is not persuasive. Plaintiff secondly points out that defendant’s argument is grounded on a misunderstanding or misinterpretation of the inter-related financing provisions of the S & V plans and revised SUB plans. Much of the defendant’s argument is predicated on the same theory used by the Commissioner in disallowing the original deductions claimed for additional delayed contributions under the SUB plans. It appears that the Commissioner failed to understand that the SUB plans and S & V plans are separate and distinct, such with its own funding and benefit provisions. In large part, the S & V plans were financed on a current cash basis, with virtually all accrued benefits paid out in cash during each year. Payments of benefits under the SUB plans were made during periods of unemployment which do not necessarily occur during each calendar year. X Plaintiff vigorously argues that the defendant may not in its post-trial brief raise for the first time a new issue relating to the plaintiff’s savings and vacation plans. The plaintiff contends that the argument that plaintiff’s savings and vacation plans are deferred compensation plans and that deductions for obligations thereunder are controlled by section 404 of the Code rather than section 162 is not properly before this court and should not be considered. Plaintiff urges that to permit any party in litigation, particularly in cases such as the one at bar where the issues are clear cut and the facts are carefully drafted by both parties in a 47-page stipulation, to raise an entirely new issue after (i) the pleadings are closed, (ii) the broad and virtually unlimited discovery procedures are completed, (iii) the pretrial narrative statements are filed, (iv) the pretrial conference is completed, and (v) the trial itself is consummated, violates the precepts of fairness and “evenhanded justice.” The complaint in this case, containing seven counts, sought a refund of corporate income taxes paid by plaintiff over a period of five years. For each of those five years plaintiff claimed a deduction as an ordinary and necessary business expense under section 162 of the Code for the total monthly obligations, including the delayed contribution and additional delayed contribution, accrued under the 1962 revised SUB plans. No deduction for any of these amounts was ever claimed under section 404. The defendant’s answer simply denied plaintiff’s allegations relating to the proper deductibility of such amounts under section 162. No mention of the alleged applicability of section 404 appeared in the defendant’s answer. Section 404 is never mentioned in the stipulation of facts or in any of the exhibits prepared specifically for this case. Throughout this entire period, the court understood that the sole issue was whether the accrual of the delayed contributions under section 162 met the “all events” test as enunciated by the Court of Appeals in Lukens, supra. This belief was based on the defendant’s answer, the stipulation of facts, the defendant’s pretrial statement and the complete absence of any suggestion by defendant’s counsel at the formal pretrial conference and in the other conferences that the government would raise a section 404 issue. Perhaps even those omissions might not have been prejudicial if the defendant had revealed at the trial its argument with respect to section' 404. Although the defendant had ample opportunity to raise section 404 during the trial, it did not. For the first time, the government’s argument appears in its post-trial brief. While claims for refunds are not governed by common law pleadings, e.g., Crook v. United States, 185 F.Supp. 242, 249-250 (W.D.Pa.1955), and it is well-established that equitable principles govern defenses to tax refund suits, Stone v. White, 301 U.S. 532, 51 S.Ct. 851, 81 L.Ed. 1265 (1937), nevertheless, the rudimentary notice requirements of the Federal Rules of Civil Procedure, 28 U.S.C., apply. Understandably, there are few reported cases on this principle. However, in Budd Co. v. United States, 19 F.R.D. 346 (E.D.Pa.1956), Judge Van Dusen had occasion to review the general applicability of the Federal Rules of Civil Procedure in the context of a tax refund suit. There the defendant, before the trial, filed a motion for leave to file a second amended answer, essentially seeking to add a defense that a net operating loss sought to be carried forward should be eliminated by credit against taxpayer’s excess profits tax liabilities from a prior year and to demand a refund of that year’s excess profits tax. The government’s first answer had specifically denied the allegations in the refund claim and denied other allegations in the complaint. The court stated: It is quite clear that the defendant does not deny all the figures shown in the refund claim and it is well recognized that the abovementioned rule [Fed.R.Civ.Proc. 8(b)] requires the defendant to give the plaintiff notice of the defenses which it shall be called upon to meet. Id. at 348 (footnote omitted). The court addressed itself to the relationship between the Stone v. White doctrine of equitable defenses and the Federal Rules of Civil Procedure, and concluded that the right of the government to invoke equitable defenses in a refund suit must give way to the basic notice requirements of the Federal Rules and therefore denied the government’s motion, with leave to renew the motion at a subsequent hearing. Obviously, such a ruling as in Budd is not possible in the instant case because the trial is over. The manifold prejudice to plaintiff cannot be cured at this late date. Had the government, prior to trial, made known its intention to raise the section 404 issue, plaintiff would have been able to seek additional fact stipulations bearing on the issue or at least would have offered additional testimony. The matter of timeliness of raising a new issue in a refund suit also was raised in Purnell v. United States, 332 F.Supp. 65 (W.D.Pa.1971). There, the government argued that the claim for refund was insufficient to raise the question of the amount of deduction allowable for a certain debt. Judge Knox acknowledged that the claim for refund was somewhat vague, but observed that the controlling point is whether the Commissioner’s attention has been focused upon the events of the case, and held that the government was barred from raising the issue because: In any event, the government did not raise the question of the adequacy of the claim for refund in its answer to the complaint or in the pretrial narrative statement and is thus procedurally barred from raising it at this time. Id. at 71. The factual situation in the instant case is not dissimilar from that in Purnell. Neither the plaintiff nor the court was ever made aware of any contemplated argument involving section 404, although the government had full knowledge of the existence of the savings and vacation plans and inter-related finances between those plans and the revised SUB plans. This court agrees with plaintiff’s contention. One of the major underlying factors the court must consider is the absence in the record of relevant evidence relating to the section 404 issue. There is, however, one relevant fact which is in the record and which therefore may be considered by the court. Contrary to all the inferences in Part II of defendant’s post-trial brief, none of the additional delayed contribution, which was accrued by plaintiff as of December 31 of each taxable year during the period 1962 through 1966, exclusive of amounts actually transferred or “spilled over” to the S & V plans during the taxable years, was ever used during those years and has not been used to date, for the payment of S & V plan benefits. Thus, defendant’s basic assumption that all the additional delayed contributions could have been used to pay benefits under the S & V plans is based on sheer speculation. Defendant’s section 404 issue must be rejected. XI The defendant’s attempt to raise a new issue under Section 404 is not only untimely, but is neither persuasive nor supported by the record. What is involved in this case is the proper deductibility of plaintiff’s absolute and unconditional obligation under arms-length, industry-union negotiated supplemental unemployment benefit plans. All events had occurred in each of the years involved to fix the fact and amount of its liability and the amounts thereof were, under its method of accounting, properly accrued and deducted for tax purposes in the particular taxable year required by law. In view of this court’s conclusion based on the entire record, plaintiff is entitled to a judgment in its favor for refunds of corporate income taxes paid in each of the years 1962 to 1966, inclusive. The parties are directed to calculate the amount to be recovered by plaintiff and to submit a proposed judgment in accordance with this opinion. APPENDIX STATEMENT OF FACTS Universal-Cyclops Steel Corporation was a Pennsylvania corporation with its principal place of business in Pittsburgh, Pennsylvania. Empire-Reeves Steel Corporation was an Ohio corporation. Before April 30, 1965, Empire-Reeves operated plants at Mansfield, Ohio, and, through its Reeves Steel and Manufacturing Division, at Dover, Ohio. On April 30, 1965, Empire-Reeves was merged into Universal-Cyclops and the name of the surviving corporation was changed to Cyclops Corporation. The former Universal-Cyclops became the Universal-Cyclops Specialty Steel Division of Cyclops and the former Empire-Reeves became the Empire-Reeves Steel Division of Cyclops. Plaintiff consistently has engaged in the manufacture, fabrication, and sale of steel products. Cyclops, Universal-Cyclops and Empire-Reeves each reported its income on the accrual method of accounting and filed its federal corporate income tax returns on a calendar year basis for all years relevant to this action. A majority of plaintiff’s hourly employees were represented in collective bargaining by locals of the United Steelworkers of America. During the calendar years 1962 through 1969, Universal-Cyclops employed the following average number of active hourly employees who were represented by the Union: Year Number 1962 2,469 1963 2,381 1964 2,479 1965 2,639 1966 2,841 1967 2,501 1968 2,299 1969 2,349 The Union, an international labor organization functioning principally in the basic steel industry, represents workers in plants accounting for more than 90 percent of total national steel ingot capacity. The Union also functions in related industries, including steel processing and fabricating, aluminum, copper, iron mining and ore shipping, containers, certain other transportation, and miscellaneous enterprises. The Union has over one million individual members (consisting of individuals in the non-supervisory occupations, including some white-collar workers, in the industries in which it claims jurisdiction) who are organized into about 3,000 local unions. 1956 Negotiations In 1956, a group of ten or eleven large steel companies bargained jointly with the Union on major issues, with the understanding that the economic settlement agreed upon would be applied uniformly among the group of major companies. A four-man negotiating team, composed of two representatives from the United States Steel Corporation and one each from Bethlehem Steel and Republic Steel represented the companies. Each company bargained individually with the Union on local issues and on problems peculiar to their company. One of the issues on which the major companies bargained jointly with the Union in 1956 was a proposal by the Union for a supplemental unemployment benefit program. Each of the major companies agreed to establish a supplemental unemployment benefit plan. After agreement on the terms of the SUB plan had been reached in the joint negotiations, the remaining companies in the basic steel industry whose employees were represented by the Union also adopted the SUB plans. Thus, separate, virtually identical SUB plans were placed in operation in practically all companies in the industry. Before the 1956 labor negotiations and apparently to assist in the formulation of a proposal for supplemental unemployment benefits, the Union, by letters dated February 23, 1956, requested the following employment data from the companies, including plaintiff: (a) A record of fluctuations in employment for the period from January 1, 1949 to the date of letter (including new hires, lay-offs, and withdrawals from service). (b) A year-by-year record of the total duration of lay-offs of employees, grouped into certain categories, omitting, in any year, those employees whose layoffs aggregated less than one week and any period of lay-off of an employee whose continuous service at the start of such period was less than one year. (c) Man-hours (i) worked and (ii) paid for, and total compensation paid, by months, in the same period. (d) A record, by year, of employment terminations or transfers resulting from the permanent closing or discontinuance of a plant, department, or substantial part thereof, during the same period. On May 9 and May 31, 1956, Universal-Cyclops furnished the Union with the available data. The purpose of the SUB plan was to supplement the benefits available to laid-off covered employees under state system unemployment benefit programs. The objective was to provide laid-off employees (with two or more years’ service) with 65 percent of their after-tax take-home pay, taking into account state benefits, for periods up to 52 weeks. The Union presented two arguments in support of the SUB plan: (1) benefits payable under state unemployment programs were too low for steel workers because the state benefits were generally established by relation to average earnings of the state work force; and (2) the steel industry had traditionally been a cyclical industry with occasional periods of unemployment longer than the period of between 13 and 26 weeks during which most state benefits were paid. 1956 Universal-Cyclops SUB Plan Universal-Cyclops, a smaller company in the basic steel industry, did not participate in the joint negotiations in 1956. After the pattern of the “economic package,” including the SUB plan, had been established for the industry by the joint negotiations, the Union presented the package to Universal-Cyclops as its proposal for settlement. On August 31, 1956, Universal-Cyclops agreed with the Union to establish effective August 3, 1956 a Supplemental Unemployment Benefit Plan. Under Articles IY and V of the plan, Universal-Cyclops agreed to contribute funds to provide its employees with cash benefits during periods of total unemployment resulting from a reduction in work force or the permanent shutdown of a plant, department or subdivision, and during weeks in which, because of lack of work, an employee was scheduled or assigned to work less than 32 hours. Article III of the plan required plaintiff to establish a trust fund for the payment of benefits. All contributions were to be paid into the trust fund. To implement this provision, Universal-Cyclops entered into a trust agreement dated August 3, 1956 with The Hanover Bank, now Manufacturers Hanover Trust Company, of New York, New York, as trustee for the creation of the trust fund. The Universal-Cyclops SUB Trust was determined by the Internal Revenue Service to be exempt from federal income taxes as an organization under section 501(c) of the Internal Revenue Code of 1954, as amended. Article VII of the plan fixed the weekly benefits payable to employees on layoff at 65 percent of their after-tax straight-time weekly wage (reduced by the amount of any state unemployment benefits to which they were entitled), subject, however, to prescribed máximums. The maximum weekly benefit was set at $25 (plus $2 for each of not more than four dependents) for weeks in which state unemployment benefits were received, and $47.50 (plus $2 for each of not more than four dependents) for weeks after state benefits were discontinued. In addition, provision was made in Article VIII for the reduction of weekly benefits by a percentage factor when the total finances of the plan dropped below prescribed levels. The duration for which benefits would be continued for an employee on layoff was dependent upon the number of his credit units (earned at prescribed rates during periods when working) as defined in Article VI, but could in no event exceed 52 weeks. The obligations óf Universal-Cyclops under the 1956 SUB plan consisted of a cash liability and a contingent liability and were to be paid or incurred in the following manner: (a) Under section 1 of Article IV, Universal-Cyclops was required to make cash contributions to the SUB Trust at the rate of 3 cents per hour worked by employees covered by the 1956 SUB plan for the calendar month of August, 1956 and for each calendar month thereafter during the term of the 1956 SUB plan, subject, however, to certain enumerated limitations intended to prevent the total finances of the 1956 SUB plan from exceeding defined maximum levels. (b) Under section 3 of Article IV, Universal-Cyclops incurred a contingent liability to make additional contributions to said trust at the rate of 2 cents per hour worked by covered employees during the same periods described in (a) above. The accumulation of this contingent liability was subject to limitations designed to prevent the total finances from exceeding defined maximum levels. Universal-Cyclops was required to make cash contributions in satisfaction of its contingent liability only in th