Waterman, Friendly and Kaufman, Circuit Judges. Waterman, Circuit Judge. dissenting.
THIS PETITION BY THE COMMISSIONER OF INTERNAL REVENUE TO REVIEW A DECISION OF THE TAX COURT, 48 T.C. 75, ANNULLING HIS DETERMINATION OF DEFICIENCIES IN THE INCOME TAX OF PEPSI-COLA NIAGARA BOTTLING CORPORATION FOR 1961, 1962 AND 1963, RAISES A NICE, THOUGH NARROW, QUESTION OF THE INTERPRETATION OF § 401(A) OF THE INTERNAL REVENUE CODE DEFINING WHAT PENSION, PROFIT-SHARING AND STOCK BONUS PLANS QUALIFY FOR DEDUCTION OF CONTRIBUTIONS AS PROVIDED IN § 404. THE STATUTE, SO FAR AS HERE RELEVANT, IS SET OUT IN THE MARGIN.*fn1
IN NOVEMBER 1960 THE BOTTLING CORPORATION, AN ENTERPRISE OF MODERATE SIZE, ESTABLISHED A PROFIT-SHARING AND RETIREMENT PLAN FOR ITS SALARIED EMPLOYEES AND A TRUST TO RECEIVE CONTRIBUTIONS THEREUNDER. THE CORPORATION WAS TO CONTRIBUTE 40% OF ITS ANNUAL NET PROFITS IN EXCESS OF $4,000 BUT NOT EXCEEDING 15% OF THE COMPENSATION OF ALL PARTICIPANTS. ELIGIBILITY WAS LIMITED TO ALL REGULAR SALARIED EMPLOYEES WHO HAD COMPLETED THREE YEARS OF CONTINUOUS SERVICE ON DECEMBER 31, 1961, OR ANY ANNIVERSARY DATE OF THE PLAN. BENEFITS WERE DISTRIBUTED ON THE BASIS OF A FORMULA WHICH CREDITED EACH COVERED EMPLOYEE WITH ONE UNIT FOR EACH $100 OF COMPENSATION AND ONE UNIT FOR EACH YEAR OF CONTINUOUS EMPLOYMENT; NO DEDUCTION WAS MADE FOR THE PORTION OF COMPENSATION, $4800 IN THE YEARS IN QUESTION, CONSTITUTING "WAGES" FOR WHICH SOCIAL SECURITY CONTRIBUTIONS WERE MADE, 26 U.S.C. § 3121(A)(1).*fn2 OMITTING TEMPORARY AND SEASONAL EMPLOYEES ON AN HOURLY WAGE BASIS WHOSE EXCLUSION IS NOT CLAIMED BY THE COMMISSIONER TO DISQUALIFY THE PLAN, THE CORPORATION HAD SIX SALARIED EMPLOYEES WHO WERE COVERED AND EIGHT HOURLY WAGE EMPLOYEES WHO WERE NOT; THEIR NAMES AND COMPENSATION ARE SHOWN IN THE MARGIN.*fn3
The Corporation did not seek a determination of the plan's qualification until December 1963; the District Director of Internal Revenue denied this on the ground that the plan was discriminatory in favor of "highly paid" employees within the meaning of § 401 (a)(3)(B) and (4). The Chief of the Pension Trust Branch sustained this, the Corporation then amended the plan as of January 1, 1965, to make all permanent employees eligible for coverage, and the District Director accepted the plan as so amended. Consistently with these rulings of his subordinates, the Commissioner determined income tax deficiencies for 1961, 1962 and 1963 based on disallowance of contributions of $5,831, $5,381 and $8,080, respectively. The Tax Court annulled this determination on the basis that persons receiving the modest compensation of all the participants save the president of the Corporation could not rationally be regarded as "highly paid," particularly when the differential between them and the uncovered employees was so small, see fn. 3.
We can readily agree that a plan like the Bottling Corporation's was untypical of the "mischief and defect," Heydon's Case, 3 Co. 72 (1584), for which the Revenue Code's pension trust sections had failed to provide until 1942 when they were placed in substantially their present form, 56 Stat. 798, 862 -63. We do not, however, accept the Tax Court's result; a legislature seeking to catch a particular abuse may find it necessary to cast a wider net.
The movement for reform of the deduction for pension, profit-sharing and bonus plans had begun with a message to Congress from President Roosevelt on June 1, 1937. This incorporated a letter from the Secretary of the Treasury stating that the exemption "has been twisted into a means of tax avoidance by the creation of pension trusts which include as beneficiaries only small groups of officers and directors who are in the high income tax brackets." 81 Cong. Rec. 5125, 75th Cong., 1st Sess. After investigating and deciding that correction was indeed in order, Congress had to determine in what manner to move from the agreed general purpose to legislation that could be practically applied to the thousands of varying situations with which the Internal Revenue Service would be faced. Congress adopted a two-fold approach. Plans would qualify if a sufficient proportion of the firm's employees were eligible or participated. If, however, a plan's coverage provisions were not so broad as to include the minimum percentage of employees prescribed in § 401(a)(3)(A), they were to be subjected to a more intensive scrutiny by the Treasury Department whose nature the legislature could prescribe only in a more generalized way. Restrictive plans were to qualify only if the Secretary or his delegate were to find that the eligibility requirements were not "discriminatory" in favor of officers, shareholders, supervisors, or "highly paid employees." The legislative history suggests that Congress did not believe itself equipped to give more content to the two phrases we have quoted. The original House Bill sought to define more precisely the characteristics of plans that discriminated in favor of the "highly paid," at least with regard to a companion provision, § 401(a)(4), which guarded against the danger that highly paid employees would gain a disproportionate share of pension benefits despite the fact that eligibility requirements were not found discriminatory under § 401(a)(3). It stated that the "benefits or contributions" required under the plan shall "not have the effect of discriminating in favor of any employee whose compensation is greater than that of other employees." H.R. 7378, § 144(a)(4), 77th Cong., 2d Sess. (1942) (emphasis supplied). A literal reading of this provision would unequivocally have made fairness to the lowest paid employee covered by the plan the test of qualification. This formulation, however, was apparently believed to be unduly rigid, for when the tax bill was returned from the Ways and Means Committee to which it had been referred for reconsideration, § 401(a)(4) had been amended to correspond with the more general language of § 401(a)(3)(B), simply banning discrimination in favor of the "highly paid."
The Commissioner found himself confronted with problems in administering the statute similar to those that Congress had encountered in drafting it. While there are attractions in the idea that a plan can be rejected under §§ 401(a)(3) and (4) only if it discriminates in favor of employees who would generally be regarded as "highly paid," it poses difficulties of administration which the Tax Court did nothing to resolve. Words like "high" and "highly" clamor for a referent. A 500 foot hill would look high in Central Park but not among the Grand Tetons or even at Lake Placid. Apparently the Tax Court regarded the president of the Bottling Corporation with a $28,000-$30,000 salary as "highly paid," and we assume he would be so considered in Niagara Falls, but he hardly would be in Hollywood. More to the point, while we would not regard Bernard J. Riggs, with a salary of $7595-$8580 from the Bottling Corporation as "highly paid," that might not be the view of Helen Kendall whose wages ranged from $3969 to $4420 in the same period, see fn. 3. Considerations such as these led the Commissioner to rule in 1956:
In order for the plan to meet the coverage requirements, there must be sufficient participation by the lower paid employees to demonstrate that in practice the plan does not discriminate in favor of the high paid employees. * * * The terms "highly compensated" and "lower compensated" are relative, and the distinction between them must be based upon the circumstances of each case. Rev. Rul. 56-497, 1956-2 Cum. Bull. 284, 286.*fn4
We cannot say that in thus reading "highly" as "more highly" and taking the compensation of non-covered employees as the standard, the Commissioner went beyond the powers Congress conferred upon him by § 401(a)(3). When Congress has used a general term and has empowered an administrator to define it, the courts must respect his construction if this is within the range of reason. Gray v. Powell, 314 U.S. 402, 411-413, 62 S. Ct. 326, 86 L. Ed. 301 (1941); NLRB v. Hearst Publications, Inc., 322 U.S. 111, 130-132, 64 S. Ct. 851, 88 L. Ed. 1170 (1944). That requirement was met here and it was not for the Tax Court to substitute its reading for that of the administrator on the firing line.*fn5
The Tax Court's decision likewise cannot be sustained on the basis that, given the Commissioner's reading of the statute, the facts did not fairly support his determination of non-compliance. While use of the phrase "found by the Commissioner," § 401(a)(3)(A), does not preclude meaningful judicial review, it does suggest an intention that the Commissioner's finding be given a shade more than its usual substantial weight. Compare Grenada Industries, Inc. v. C.I.R., 17 T.C. 231, 255, aff'd, 202 F.2d 873 (5 Cir.), cert. denied, 346 U.S. 819, 74 S. Ct. 32, 98 L. Ed. 345 (1953). In two of the three years every one of the covered eligible employees received higher compensation than any of the noncovered employees, although the differential between the lowest of the covered group and the highest of the uncovered group was only in the neighborhood of $1000; and even in 1962 only one noncovered employee received more than one covered employee. The median salary of the covered group was around $9000; the median wage of the noncovered group was less than $6000. Averages would produce a larger discrepancy. Just how high a penetration of the covered group by the uncovered group would require the Commissioner to find the taint removed is an issue not here before us.
We add only that the Corporation's case is not aided by § 401(a)(5). While that subsection says that a plan shall not be considered discriminatory "merely because it is limited to salaried or clerical employees," this is quite different from saying that no plan covering all salaried employees can be discriminatory. See Fleitz v. C.I.R., 50 T.C. No. 35 (1968).
The judgment is reversed, with directions to the Tax Court to sustain the ...