MEMORANDUM FINDINGS OF FACT AND OPINION
SCOTT, Judge: Respondent determined a deficiency in petitioner's Federal income tax for its fiscal year ended August 31, 1967, in the amount of $19,768.58 and an addition to tax under section 6651(a), I.R.C. 1954, 1 in the amount of $4,760.42. The issues for decision are (1) whether the issuance by petitioner of its unsecured promissory notes to an employee pension trust and to an employee retirement trust constitutes the payment required by section 404 so as to entitle petitioner to deductions in the face amount of the notes for the taxable year of issuance; and (2) whether petitioner failed to timely file its corporate income tax return for its fiscal year ended August 31, 1967, and, if so, was the failure due to reasonable cause.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. Lancer Clothing Corporation (petitioner) which was organized in September 1966 under the laws of the State of New York maintained its principal office in Garnerville, New York at the time its petition in this case was filed. Its U.S. Corporation Income Tax Return for its fiscal year ended August 31, 1967, was filed with the district director of internal revenue, Manhattan district, New York. The first page of the return is stamped "Received Jan. 14, 1969, Int. Rev. Serv., Manhattan, N.Y."
Petitioner keeps its books and reports its income on an accrual basis. Its corporate stock is owned 50 percent by Carl Thier, who is its president, and 50 percent by Martin Wolk, who is its secretary.
On January 1, 1967, the board of directors of petitioner adopted a Pension Trust Agreement and a Retirement Trust Agreement for the benefit of its employees. Both agreements provided for Carl Thier and Martin Wolk to be the trustees of the trusts. On August 29, 1967, petitioner issued a check for $100 to the Pension Trust and a check for $100 to the Retirement Trust. In the minutes of a special meeting of the board of directors of petitioner held on August 15, 1967, the following appeared:
The President advised the meeting that it was necessary for the corporation to pass on the authorization of contributions to the Lancer Pension Trust and the Lancer Clothing Corp. Profit Sharing Plan. Mr. Feldman advised the body that in view of the fact that the corporation was presently producing the government contract, it would need all of its available cash and suggested that any contribution to the Pension Trust and Profit Sharing Plan be accomplished by promissory note so that the corporation would not undergo a cash flow problem.
Upon motion duly made, seconded and unanimously carried, it was
RESOLVED that the corporation make a maximum 15% contribution to the Profit Sharing Plan and that the corporation make a maximum contribution authorized under the 1954 Internal Revenue Service [sic] as amended, and that such contributions be made by promissory notes.
On October 1, 1967, petitioner executed a note to the Lancer Pension Trust for the sum of $15,891.30 with interest at a rate of 6 percent payable on October 20, 1969, at Rockland National Bank. The note was signed by Martin Wolk as secretary and Carl W. Thier as president of petitioner, but the payment of the note was not personally guaranteed by either of them and the note was unsecured. On October 1, 1967, petitioner executed a note to the Lancer Retirement Trust for a sum of $23,886.96 with interest at the rate of 6 percent payable on October 20, 1969. The note was signed by Martin Wolk as secretary and Carl W. Thier as president of petitioner, but was not personally guaranteed by either of them and was not secured. The note was payable at Rockland National Bank. The notes were delivered to the trustees of the pension and retirement plans before November 15, 1967.
On October 21, 1969, the promissory note of $15,891.30 to the Lancer Pension Trust was paid, together with interest of $1,959.21, making a total payment of $17,850.51. Also on October 21, 1969, the promissory note for $23,886.96 to the Lancer Retirement Trust was paid, together with interest of $2,944.97, making a total payment of $26,831.93.
Petitioner's primary business is the manufacture of military apparel for the United States Government under contract.
On November 15, 1967, petitioner filed with respondent an application for automatic extension of time to file its corporate income tax return for its fiscal year ended August 31, 1967, and with this application forwarded a check for $10,000 as the estimated amount of tax which it would owe for that fiscal year. This check was recorded on the records of the Internal Revenue Service under date of November 20, 1967, as payment of tax by petitioner for its fiscal year ended August 31, 1967. Petitioner later filed a further application for extension of time for filing its return which was shown by respondent on his records as having been received on December 22, 1967.
Petitioner had its return for the year 1967 prepared by a firm of certified public accountants. The accountant assigned by the firm to prepare petitioner's return completed preparation of that return and on March 25, 1968, forwarded the return to petitioner with an instruction sheet as to the signing and filing of the return. He kept a copy of the return in the files of the accounting office. Shortly after receiving the form as prepared by the accountant, petitioner's president, Carl Thier, signed the return and gave it to his secretary to be mailed. The customary procedure in petitioner's executive office was that the secretary deposited the day's mail in a postal box shortly before she left work for the day.
The return as prepared by the accountant and as signed by petitioner's president showed a total tax due of $9,273.08.
Under date of April 12, 1968, a computer-type notice that petitioner's return was delinquent was sent to petitioner and this notice was forwarded by petitioner to its accountant. Under date of June 7, 1968, another computer-type delinquency notice was sent to petitioner and forwarded by petitioner to its accountant.
On August 9, 1968, a delinquency investigation with respect to petitioner's return for the fiscal year ended August 31, 1967, was begun. Thereafter, the accountant was informed by petitioner that the Internal Revenue office in Manhattan did not have a copy of petitioner's Form 1120 for the year ended August 31, 1967. The accountant was furnished with a name and telephone number of an individual employed by the Internal Revenue Service. The accountant telephoned the employee of the Internal Revenue Service and was informed that the Service did not have petitioner's original income tax return for its fiscal year ended August 31, 1967. The Service employee requested petitioner's accountant to furnish him with a copy of petitioner's return for its fiscal year ended August 31, 1967. Petitioner's accountant mailed to the Internal Revenue Service at 120 Church Street, New York, New York a copy of the retained copy the accounting firm had of petitioner's return after having marked across the top of the copy "duplicate copy." It was this document so furnished by the accountant to the Internal Revenue Service which was stamped as filed January 14, 1969, and which was shown by respondent's records to be the return filed by petitioner on January 14, 1969. Sometime after this copy of the retained copy of the return prepared for petitioner by its accountant was furnished to the Internal Revenue Service, a revenue agent presented it to petitioner for signature and it was signed by Martin Wolk as secretary-treasurer of petitioner. On February 14, 1969, a refund of $762.92, the excess of $10,000 over the tax as shown on the return, was made to petitioner.
Petitioner on its income tax return for its fiscal year ended August 31, 1967, deducted $39,978.26 as payments to "Pension, profit-sharing, stock bonus, annuity plans." Respondent in his notice of deficiency disallowed all except $200 of this claimed deduction with the following explanation:
It is determined that deductions for contributions to pension and retirement trusts, aggregating $39,778.26 are not allowable. The contributions were made by promissory notes which were not redeemed until 1969 and do not constitute "payment" within the purview of section 404, Internal Revenue Code.
In his notice of deficiency respondent explained his determination of an addition to tax under section 6651(a) as follows:
Since your income tax return for the taxable year ended August 31, 1967 was not filed within the time prescribed by law and you have not shown that failure to file your return on time was due to reasonable cause, 25% of the tax is added as provided by section 6651(a) of the Internal Revenue Code.
OPINION
Section 404(a) provides that if contributions are paid by an employer to a stock bonus, pension, profitsharing, or annuity plan, such contributions shall not be deductible under section 162 or section 212; but if they satisfy the conditions of either of those sections, shall be deductible under section 404(a) in the taxable year "when paid, if the contributions are paid into a pension trust" which is exempt under section 501(a), and in the taxable year "when paid, if the contributions are paid into a stock bonus or profit-sharing trust" exempt under section 501(a). 2
Section 1.404(a)-1(c), Income Tax Regs., states that "Deductions under section 404(a) are generally allowable only for the year in which the contribution * * * is paid, regardless of the fact that the taxpayer may make his returns on the accrual method of accounting." 3 The regulation then refers to the exception provided for a taxpayer on the accrual method of accounting to make payment not later than the time prescribed by law for filing a return for the taxable year of accrual.
The facts in this case show that prior to the due date of its return for its fiscal year ended August 31, 1967, petitioner executed a note to the Lancer Pension Trust and also executed a note to the Lancer Retirement Trust, and that each of these notes was delivered to the trustees of the trust to which the note was payable prior to the due date of petitioner's return for its fiscal year 1967. The record also shows that the trustees of each of these trusts were the stockholders and the two chief officers of petitioner. The record further shows that the notes were unsecured and were not personally guaranteed by either of the stockholders of petitioner.
It is petitioner's position in this case that delivery of these notes to the respective trusts constituted payment of the contribution to the trust within the meaning of section 404(a). Petitioner relies on Wasatch Chemical Company v. Commissioner,313 F. 2d 843 (10th Cir. 1963), reversing 37 T.C. 817 (1962); Time Oil Company v. Commissioner,258 F. 2d 237 (9th Cir. 1958), reversing 26 T.C. 1061 (1956); and Sachs v. Commissioner,208 F. 2d 313 (3rd Cir. 1953), reversing Slaymaker Lock Co.,18 T.C. 1001 (1952). Petitioner states that in Colorado National Bank of Denver,30 T.C. 933 (1958), we held that real property having a fair market value in excess of the amount claimed to be deductible as a contribution to an employees' pension trust, transferred to the trustees of that trust, was a payment to the pension trust in the year the property was transferred. Petitioner further states that in the Colorado National Bank case we recognized that it is not necessary that a payment be in cash and that a debt can be paid in property if the debtor is willing to accept the property in payment, and concludes that there is no reason why a deductible contribution to a pension trust could not be made in property.
Petitioner takes the position that the promissory notes it gave to the trustees of the pension and profit-sharing trusts were property just as the real property transferred in the Colorado National Bank case was property and for this reason should constitute payment when the notes were delivered.
Respondent distinguishes between a transfer of property such as was made in the Colorado National Bank case and the delivery of unsecured notes to a pension trust, relying primarily on our recent case of Don E. Williams Co.,62 T.C. 166 (1974), on appeal (7th Cir., Aug. 12, 1974).
Petitioner recognizes that the Williams case is not distinguishable from the instant case but argues that we should reconsider the issue and adopt the position stated in two dissenting opinions in that case. In Don E. Williams Co.,supra, we pointed out that initially in Logan Engineering Co.,12 T.C. 860 (1949), a Court reviewed case, we held that a solvent taxpayer on an accrual basis of accounting which issued and delivered its promissory notes having a value of their face amount to a profit-sharing trust for the benefit of its employees was not entitled to a deduction for the contribution under the predecessor of section 404(a) of the Code in the year the notes were delivered and that thereafter we followed the holding in the Logan Engineering Co. case in the three cases, the reversals of which by the courts of appeals are relied on by petitioner in this case. We pointed out in Don E. Williams Co.,supra, that in Sachs v. Commissioner,supra, the Third Circuit relied primarily on Anthony P. Miller, Inc. v. Commissioner,164 F. 2d 268 (3rd Cir. 1947), reversing in part 7 T.C. 729 (1946). The Miller case involved whether under the predecessor of section 267 a deduction for salary accrued to the taxpayer's president who was its major stockholder should be disallowed where a note in the amount of such accrued salary was delivered to the corporate officer within the time specified by statute for payment to be made in order for such an expense payable to a related taxpayer to be deductible. As we pointed out in Don E. Williams Co.,supra, different criteria govern deductions under section 267 and deductible contributions under section 404(a). In the Williams case (62 T.C. at 169-170), we also pointed out that we disagreed with the suggestion in the Sachs case that "there is little difference between a demand promissory note and a check drawn on a bank account," and further pointed out that in our view by giving a promissory note to the pension trust, the maker of that note had not transferred "property" to the trust, noting that "a promissory note in the hands of the obligor is not property of the obligor for the purposes of section 404(a)." (62 T.C. at 171)
In arguing that we should reconsider the position we took in the Williams case, petitioner not only questions our analysis of the reversals of three of our cases by the courts of appeals, but also contends that there is no merit to the further grounds which we set forth in the Williams case to support our reason for not following the reversals by the courts of appeals of the Sachs,Time Oil, and Wasatch Chemical Co. cases.
Petitioner points out that section 3-802 of the U.C.C. which was set forth in the Williams case as having been adopted by Illinois, the state in which the transaction in the Williams case occurred, has also been adopted by the State of New York and argues that the provisions of that section 4 were included in the U.C.C. primarily to make it clear that on a dishonor of a negotiable instrument, an action may be maintained either on the instrument or the underlying obligation.
In our view, regardless of the reason for its enactment, the section makes it clear that a negotiable instrument, other than one in the nature of a bank draft, merely suspends the underlying obligation until the instrument is paid. It would follow that a promissory note not payable until a stated period or until demand is made on the maker for payment, is not a "payment" of the underlying obligation upon delivery of the promissory note.
We likewise do not agree with petitioner's criticism of our reference in the Williams case to the legislation which was under consideration as an amendment to section 503(b) of the Code at the time of our decision in that case. It should be noted that no deduction is allowable under section 404(a) to a pension or profit-sharing plan unless such plan is exempt under section 501(a), and that the provisions of section 503(a), prior to amendment by Pub. L. 93-406, effective January 1, 1975, provided for denial of exemption under section 501(a) to "an organization described in section 401(a) * * * if it has engaged in a prohibited transaction after March 1, 1954." 5
Section 503(b) describes prohibited transactions to include any transaction in which an organization as set forth in section 503(a) "lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest to * * * the creator of the organization (if a trust)." Respondent's regulations, section 1.503(c)-1(b)(1), 6 specifically provides that in defining adequate security, a "borrower's evidence of indebtedness, irrespective of its name, is itself not security for a loan, whether or not it was issued directly to the exempt organization." This section makes it clear that in order for a debt to be secured within the meaning of section 503(b)(1), collateral which may be sold or foreclosed upon may be the security for the instrument or it may be guaranteed by an accommodation endorsement of those financially capable of meeting the indebtedness. It would appear that if petitioner's argument were followed and the notes given by petitioner to the trustees of the pension and retirement trusts were to be viewed as property transferred to the trusts in payment of contributions to them, it would then follow that by holding the notes, the trusts would have lent part of their corpus to their creator. In this case, the loan would be without adequate security as required by the statute. If we accept petitioner's view of payment by the issuance of notes, it would follow that the pension and retirement trusts would under the provisions of section 503(a) be subject to being denied exemption under section 501(a) because of engaging in a prohibited transaction, and the contributions would not be deductible by petitioner because of failing to meet the requirements of section 404(a)(1) that the pension and retirement trusts be exempt under section 501(a). 7
We are not suggesting that the notes given by petitioner in this case to the pension and retirement plans should be considered as payment with the corpus loaned back to petitioner, but merely point out a possible result of considering the notes as payment in property, as petitioner contends we should. Section 503(b) in our view is a further indication that it was not the Congressional intent that the issuance of an unsecured note should be considered payment under section 404(a). The legislative history of section 503(b) as amended by Pub. L. 93-406 specifically stating that "the committee intends that it would be a prohibited transaction (in effect, a loan by the trust to the employer) if the employer funds his contributions to the trust with his own debt obligations," in S. Rept. No. 93-383, 93d Cong., 1st Sess., p 98 (1973), which we quoted in the Don E. Williams Co. case (62 T.C. at 171) further shows the Congressional intent that a payment under section 404(a) may not be made by an unsecured note.
Relying on our holding in Don E. Williams Co., supra, as well as for the reasons set forth herein, we sustain respondent's disallowance of petitioner's claimed deductions for contributions to the pension and retirement trusts in its fiscal year ended August 31, 1967.
The final issue in this case is whether petitioner timely filed its corporate income tax return for its fiscal year ended August 31, 1967, and if it did not whether its failure to timely file the tax return was due to reasonable cause. Under the facts we have set forth herein, there is no basis for concluding that petitioner actually timely filed its income tax return for its fiscal year 1967. The record does show that petitioner filed for an automatic 3-month extension on the due date of its fiscal year 1967 return, November 15, 1967. The 3-month extension would mean that petitioner's 1967 return was due to be filed on February 15, 1968. The record shows that petitioner filed a further application for extension of time for filing its return, which respondent's records show was received on December 22, 1967. There is nothing in the record to indicate the further time requested by petitioner in this second request for extension or what action, if any, was taken by respondent with respect to granting an extension past the 3-month automatic extension which petitioner requested on November 15, 1967.
Section 6081(a) provides for the granting of extension of time for filing a return, and section 6081(b) provides for an automatic extension for corporation income tax returns for 3 months when the proper form requesting such extension is filed. 8 There is no provision for any further automatic extension, and there is nothing in this record to indicate that any further extension was granted to petitioner for filing its return. There is nothing in this record to show that on March 25, 1968, when the record indicates petitioner's accountant mailed a Form 1120 to petitioner, the time for filing the return had not run. The evidence shows that shortly after receiving the Form 1120, petitioner's president signed the return and gave it to his secretary to be mailed. The secretary was not a witness in the case and no reason was shown why she was not called as a witness. Therefore, there is no evidence in this record to show that the return signed by petitioner's president was actually mailed, or if it were ever mailed, when it was mailed. Under these circumstances there is no basis for a conclusion that petitioner actually timely filed its corporation income tax return for its fiscal year 1967.
We turn now to whether petitioner has shown reasonable cause for failure to timely file its return. The burden is, of course, on petitioner to show reasonable cause for failure to timely file its return. The record here shows that petitioner received a delinquency notice from respondent dated April 12, 1968. If, in fact, at the time petitioner's president signed the return and gave it to his secretary to be mailed he was of the opinion that the return, if then mailed, would be timely filed, it would appear that this delinquency notice came either before the return was due under some second extension, which the record does not show was received, or shortly after the expiration of that time. All the record shows with respect to this delinquency notice, as well as a second delinquency notice mailed to petitioner under date of June 7, 1968, is that petitioner forwarded the notices to its accountant.
The responsibility for seeing that the return was timely filed was on petitioner. Its officers are intelligent men and certainly understood the import of the delinquency notices. At a minimum, it would appear that they should have discussed the delinquency notices with their accountant. Of course, the return prepared by petitioner's accountant for petitioner and ultimately, in January of 1969, filed by petitioner, showed that the $10,000 which had been paid with the application for automatic extension was in excess of the tax due by petitioner as shown on its return as filed. However, the fact that petitioner's officers believed that no further payment was due is no excuse for failure to timely file its return since ignorance of the law, if petitioner's officers were ignorant of the law, is not reasonable cause for failure to timely file within the meaning of section 6651(a). Samuel Goldwyn Inc., Ltd.,43 B.T.A. 1086, 1089 (1941).
The only explanation given by petitioner's accountant of why he did not investigate the delinquency notices to determine if in fact petitioner had filed the return timely was to the general effect that you can't talk to a computer. Even if petitioner would have been justified in relying on its accountant to see that its return was timely filed, which we do not consider it was under the circumstances of this case, the accountant's explanation totally fails to amount to reasonable cause for failure to timely file. Even though the notices were computer notices, the information contained in the notices should have been taken up with the proper individuals in the Manhattan office of the Internal Revenue Service.
If, as petitioner contends, it had an additional 90 days' extension from February 15, 1968, granted under its second request for an extension of time to file its return, which is not supported by the record, a return filed promptly after receipt of the April 12, 1968 delinquency notice would have been timely. If such were the fact, it is difficult to understand why petitioner did not promptly reply to the delinquency notice and if necessary file a return in answer to that notice.
On the basis of this record, we sustain respondent's determination of addition to petitioner's tax under section 6651(a) for failure to timely file its return.
Decision will be entered for the respondent.