I respectfully dissent. The “transfer” in this case did not meet the literal requirements of Treasury regulations section 1.461-2(c)(l) that a qualifying transfer under section 461(f)(2) must either be made “(i) to the person who is asserting the liability,” or “(ii) to an escrowee or trustee pursuant to a written agreement (among the escrowee or trustee, the taxpayer, and the person who is asserting the liability).” (Emphasis added.) The “transfer” therefore cannot qualify unless, as the majority holds, the regulation’s requirement was a mere inadvertence or imprecision upon which the Commissioner may not rely, or unless, as Judge Forrester’s concurring opinion finds, the regulation is invalid. Being unable to agree with either of these views, I would sustain the deficiency.
As I read the regulation, the Treasury has deliberately construed the statute to prevent a secret trust from qualifying. A trust is usually created by agreement between trustor and trustee. The unusual requirement here of the beneficiary’s participation is, I believe, of great policy significance and was' no mere inadvertence.
In fact, the requirement of participation by the other party to the litigation in a qualifying section 461(f) transfer was even more clearly spelled out in the proposed regulation:
A taxpayer may provide for the satisfaction of an asserted liability by transferring money or other property to the person who is asserting the liability, or with the agreement of such person to an escrowee or trustee to deliver the money or other property in accordance with the settlement of the contest, provided that the money or other property is transferred beyond the control of the taxpayer. [29 Fed. Reg. 9798, 9800 (1964); emphasis added.]
The Commissioner, unfortunately, raised a false issue by contesting this case on the ground that the entrusted funds were not transferred “beyond the control” of the petitioner. If that were all that the regulation required, I would join the majority opinion. I do not doubt that the taxpayer created a valid trust, or that it placed the assets within the trustee’s control pursuant to the terms of the trust instrument. But by no legitimate stretch of syntactical interpretation could there be an agreement among three parties which was unknown to one of the three.
Nor am I able to find the regulation invalid. The statute requires a “transfer.” That this was not intended to be read entirely literally as covering any kind of transfer, however, is made clear by the committee report, which reads as follows:
A taxpayer may provide for the satisfaction of an asserted liability by transferring money or other property to the person who is asserting the liability, or by a transfer to an escrow agent provided that the money or other property is beyond the control of the taxpayer. However, purchasing a bond to guarantee payment of the asserted liability, an entry on the taxpayer’s books of account, or a transfer to an account which is within the control of the taxpayer is not a transfer to provide for the satisfaction of an asserted liability [S. Rept. No. 830, 88th Cong., 2d Sess., 1964-1 C.B. (Part 2) 746.]
The statute and committee report make clear that a transfer to the opponent or to an escrow agent will qualify if the property leaves the taxpayer’s control. An escrow, of course, presumes two parties with adverse interests as well as a third-party escrow-holder, so that the litigation opponent, inferentially, would at least be aware of any escrow arrangement. The committee report does not, however, appear to anticipate the precise issue raised here — the secret trust in which the taxpayer seeks the benefit of the special deduction without the litigation disadvantage of disclosing his hand to the other party. The regulations do not permit the taxpayer seeking the solace of section 461(f) thus to have it both ways. In my view this construction does not overreach. In the first place, the legislative history, adequately set out in the majority opinion, and the Consolidated Edison case, clearly involved only arrangements known to both parties to the litigation. The secret trust was not adverted to by Congress. Secondly, the apparent lack of explicit congressional familiarity with such a device in a litigation context should be no surprise. There would normally be only one motive, a tax motive, to set up a secret trust. A defendant has too little brotherly solicitude for his opponent to be gratuitously setting up secret trusts for the plaintiff’s benefit. Instead of arising in the normal litigation context which Congress adverted to in enacting section 461(f), the secret trust in the present context is spawned by section 461(f) itself. It is a rare sport, not to be found in nature. It is simply an effort to enjoy the deduction without the effects on one’s litigation posture of disclosure. And since virtually any large company is constantly and increasingly beset as defendant with a swarm of lawsuits of varying degrees of merit, the majority’s rejection of the regulation’s deliberately established prerequisites of the litigation opponent’s knowledge and participation in a section 461(f) arrangement opens the door to large-scale avoidance. Deductions will now be subject to being manufactured and timed to please, by the simple expedient of setting aside in secret trusts the amount sought to be deducted, as long as that doesn’t exceed the maximum allowable litigation exposure. Little genuine change of business posture is involved, for if the litigation is won, the money will return; if lost the judgment must be paid anyway; in the meantime the secret trustor can enjoy the income, and the litigation opponent is none the wiser. Nothing in the legislative history suggests that Congress intended to establish any such regime, nor does it seem likely that it would have intentionally so legislated. We should resolve doubts in favor of the validity of Treasury regulations. Commissioner v. South Texas Lumber Co., 333 U.S. 496 (1948).I cannot, under the circumstances, find the Treasury remiss in blocking this avenue to facile avoidance.
Section 461(f) was designed to alleviate a hardship created by a taxpayer who under pressure of litigation was forced to lay out cash before becoming entitled to a deduction. It was designed to meet bona fide exigencies of business litigation. The issue facing the Treasury in drafting its regulations was whether the statute should also be construed to permit a taxpayer to thrust himself artificially within its protection through a formalistically perfect arrangement designed for no apparent purpose except qualifying for the deduction, while avoiding the collateral litigation consequences of disclosure to the opponent. I cannot find it beyond the regulatory power for Treasury to decide that such an arrangement would be “an operation having no business or corporate purpose” and to find that “the transaction upon its face lies outside the plain intent of the statute.” Gregory v. Helvering, 293 U.S. 465,469,470 (1935).
Raum, Simpson, and Quealy, JJ., agree with this dissent.