# Eastman Kodak Co. v. United States

> United States Court of Claims · April 14, 1976 · 534 F.2d 252

URL: https://www.frixlaw.com/law-library/cases/8595552

## Case

- **Full name:** EASTMAN KODAK COMPANY v. United States
- **Court:** United States Court of Claims
- **Decided:** April 14, 1976
- **Citations:** 534 F.2d 252; 209 Ct. Cl. 365; 37 A.F.T.R.2d (RIA) 1200; 1976 U.S. Ct. Cl. LEXIS 252
- **Precedential status:** Published
- **Opinion:** Dissent by Skelton
- **Judges:** Bane, Bennett, Cowen, Davis, Durfee, Kashiwa, Kunzig, Skelton
- **Cited by:** 20 later opinions in the Frix Law Library

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## Opinion text

Skelton, Judge,
dissenting:
I cannot agree with the majority opinion in this case for the many reasons set forth below:
I
The majority opinion is in direct conflict with the unanimous decision of the Supreme Court in Otte v. United States, 419 U.S. 43 (1974).
In the instant case the majority holds that the accrual taxpayer, Eastman Kodak Company (Kodak), had a fixed, de *381 termined, and certain obligation and liability for taxes under the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and various state unemployment tax statutes, in 1964 on certain described wages of its employees for services rendered in that year and could accrue and deduct such taxes in 1964 as expenses paid or incurred in that year even though such wages were not paid until 1965. 1
The Supreme Court held in positive and unequivocal language in the Otte case, speaking through Mr. Justice Black-mun, that no such tax liability exists until the wages are paid and that the accrual of such tax liability occurs only when the wages are paid. Quoting from the opinion in the Otte case we find that the Court held:
* * * Liability for the taxes accrues only when the wage is paid. Sections 3402(a) and 3101(a) of the 1954 Code; * * *. The wages that are the subject of the wage claims, although earned before bankruptcy, were not paid prior to bankruptcy. Freedomland [the employer] had incurred no liability for the taxes. Liability came into being only during bankruptcy. [When the trustee paid the wages to the employees.] * * * [Id. at 55.] [Emphasis supplied.]
Speaking further, the Court said:
* * * As has been noted above, the taxes did not become due and owing at all wntil the claims, constituting wages, were paid. * * * [Id. at 56.] [Emphasis supplied.]
With further reference to the accrual of the taxes, the Court stated:
* * * They [withholding taxes] accrue only as those claims [for wages] are paid and, to the extent of that payment, the payment of the taxes should be assured. * * * [Id. at 57.] [Emphasis supplied.]
*382 I agree with our Trial Judge George Willi that the Otte case is controlling and dispositive of the instant case against the taxpayer. The majority has 'apparently brushed the Otte decision aside because it was a bankruptcy case, but in doing so they have ignored the holding of the case that is controlling here, namely, that an employer, (such as Kodak), •has no liability whatever for withhholding taxes on wages of its employees until the wages have been paid, and such taxes cannot be accrued until after the payment of such wages. Kodak was in the same position in 1964 with respect to such taxes as the employer in the Otte case. Neither employer had paid the wages to the employees, and, consequently, had no liability for the payment of the taxes, and for that reason could not accrue them until the underlying wages were paid. For all of these reasons, the majority opinion conflicts with the Otte decision. The majority has failed and refused to follow that decision of the Supreme Court, which is error. 2
II
The majority opinion is contrary to the following controlling statutes.
1. Section 162 of the Internal Revenue Code of 1954 ( 26 U.S.C. § 162 (1964)) provides as follows:
§ 162. Trade or business expenses.
(a) In general.
There shall be allowed as a deduction all the ordinary and necessary expenses ‘paid or incurred during the taxable year in carrying on any trade or business, * * * [Emphasis supplied.]
Certainly the taxes here were not paid during the taxable year of 1964 when the taxpayer accrued and deducted them. Neither were they incurred during that year. We need look no f urther than the Otte case to decide that there was no obligation or liability on Kodak for the taxes in 1964 because *383 the underlying wages had not been paid. Therefore, the tax liability on such wages was not incurred during that taxable year and could neither be accrued nor deducted. The word “incur” is defined in Webster’s Third new International Dictionary (1967 ed.) as follows:
Become liable or subject to; to render liable or subject to.
Kodak was neither liable for nor subject to the payment of the taxes until it paid the wages. Therefore, it must be concluded that the majority opinion is in conflict with Section 162 of the Code.
2. The FICA provision of the Code ( 26 U.S.C. § 3111 (1964)) provides as follows:
§ 3111. Kate of Tax. [As amended by Sec. 201 (c), Social Security Amendments of 1961, Pub. L. No. 87-64, 75 Stat. 131.]
In addition to other taxes, there is hereby imposed on every employer an excise tax with respect to having individuals in his employ, equal to the following percentages of the wages (as defined in section 3121(a) ) paid by him with respect to employment (as defined in section 3121(b))—
$ $ ‡ ‡
(2) with respect to wages paid during the calendar years 1963 to 1965, both mclusive, the rate shall be 3% percent; [Emphasis supplied.]
The FUTA provisions of the Code ( 26 U.S.C. § 3301 (1964)) are very similar, as follows:
§3301. Kate of tax. [As amended by Sec. 523(a), Social Security Amendments of 1960, Pub. L. No. 86-778, 74 Stat. 924 and Sec. 2(a), Act of May 29, 1963, Pub. L. No. 88-31, 77 Stat. 51.]
There is hereby imposed on every employer (as defined in section 3306 (a)) for the calendar year 1961 and for each calendar year thereafter an excise tax, with respect to having individuals in his employ, equal to 3.1 percent of the total wages (as defined in section 3306(b)) paid by him during the calendar year with respect to employment (as defined in section 3306(c) after December 31, 1938. In the case of wages paid during the calendar year 1962, the rate of such tax shall be 3.5 percent in lieu of 3.1 percent. In the case of wages paid during the calendar year 1963, the rate of such tax shall be 3.35 percent in lieu of 3.1 percent. [Emphasis supplied.]
*384 It is clear from these provisions of the Code that the taxes are imposed on employers, such as Kodak in our case, on wages paid by the employer during the calendar year in question. If he does not pay any wages during a calendar year, he is neither obligated to pay a tax nor liable for one, and, of course, could neither accrue a tax as an expense nor deduct it from his income tax. That is Kodak’s situation here. It did not pay the wages in 1964 and consequently no tax was imposed upon it and it could not legally accrue or deduct any tax. The majority is in error in holding contrary to these statutes.
Ill
The majority opinion conflicts with the following Treasury Regulations on Employment Tax (26 C.E.R.)
The applicable Treasury Regulations provide as follows:
§ 31.3111-3 When employer tax attaches.
The employer tax attaches at the time that the wages are paid by the employer. * * * [Emphasis supplied.]
§ 31.3111-4 Liability for employer tax.
The employer is liable for the employer tax with respect to the wages paid to his employees for employment performed for him. [Emphasis supplied.]
These regulations could not be stated more clearly that the employer is liable for taxes on wages paid to his employees and that such tax attaches at the time wages are paid and not before. The majority apparently ignore these regulations and the foregoing statutes upon which they are based and allow Kodak to accrue and deduct taxes on wages due its employees in 1964 even though the wages were not paid in that year and even though it had no liability for such taxes in 1964 by the plain wording of the statutes and regulations. The majority have not held that the statutes and regulations are invalid, yet such a holding is required if the decision of the majority is a correct interpretation of the law. It is clear that even the majority is unwilling to go that far. Therefore, the statutes and regulations are valid and controlling, and the majority erred in their opinion which clearly conflicts with the statutes and regulations.
*385 IV
The majority opinion fails to meet the requirements of the “all events” test of the Supreme Court and Treasury Regulations.
The mainstay of the majority opinion is that the requirements of the “all events” test have been met in this case, and their decision is based on that premise. It follows that if the “all events” requirements have not been complied with, the majority opinion is wrong. I propose to show in the following paragraphs that the majority opinion does not comply with the “all events” test.
The “all events” test was established by the Supreme Court in United States v. Anderson, 269 U.S. 422 (1926). In that case the Revenue Act of 1916 imposed a tax on manufacturers on their profits on munitions manufactured by them in 1916. This tax was paid in 1917. The Government contended that the taxpayer should have deducted the munitions tax in 1916 in computing its income tax. The accrual basis taxpayer contended that the tax was deductible in 1917 when it was paid. The Court held that the statutory liability to pay the tax was fixed as soon as the income was earned, and, since the income and profits were earned by the end of the 1916 taxable year, the liability for the tax became fixed in 1916 and was deductible in that year rather than in 1917, the year of payment. It is clear that in that case the tax was by statute fixed as a charge on the earnings of the company in 1916. Furthermore, everything had been done in 1916 to fix the liability of the company for the taxes and nothing remained to be done in 1917 to fix or determine such liability. It is evident that the facts in Anderson are distinguishable from those in the instant case, because here everything had not been done in 1964 to fix and determine the liability of Kodak to pay the taxes. The missing and controlling event was the failure to pay the wages in 1964. Without such payment, there was no fixed, certain, or determined liability on Kodak to pay the taxes. Consequently, the vital, controlling, and missing “event” was missing from the “all events” test, namely the payment of the wages in 1964, without which all events had not occurred to fix or determine *386 any tax liability on Kodak on such, wages in 1964. In fact, without the payment of the wages in 1964, there was no liability whatever on Kodak in 1964 to pay taxes on such wages. See Otte v. United States, supra, and the above statutes and regulations.
The all events test set forth in the Anderson case states :
* * * [A]ZZ the events may occur which fix the amount of the tana and determine the liability of the taxpayer to pay it. * * * [T]Ae munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee’s books. * * * [ 269 U.S. at 441 .] [Emphasis supplied.]
It will be noted that in Anderson the Court was dealing with an entirely different statute that fixed a munitions tax liability on munitions profits for 1916, which was an actual expense or element of cost in the production of income for that year, and a definite liability to pay the tax that had been imposed on the manufacturer by the end of 1916. Every fact or circumstance affecting the fixing or determination of the tax as a definite obligation of the taxpayer had occurred by the end of that year. By the close of 1916, liability for the tax had become definitely fixed, the tax being imposed by statute on the operations for 1916, which were terminated on December 31, 1916. Neither liability for the tax nor the amount payable could be affected under the law by anything occurring after December 31,1916. The taxpayer in that case set up a monthly reserve of $35,000 on its books in 1916 to pay the munitions tax on its profits for that year, and on December 31,1916, this reserve account was closed out and a charge was made on its books against the corporate surplus for account of the 1916 munitions taxes of $86,541.95. The Court concluded that the reserves for munitions taxes on taxpayer’s books were deductible under the Act of 1916 for that year.
Thus, we see that Anderson involved an entirely different statute compared to those in the instant case. The munitions statute fixed a definite liability on the taxpayer in 1916 for taxes on its profits in that year. There is no statute in our case fixing liability on Kodak in 1964 for withholding taxes on unpaid 1964 wages. Furthermore, Kodak did not set up a reserve for such taxes in 1964.
*387 It is clear that the Anderson case and our case are both controlled by different applicable governing statutes and regulations. In Anderson, the statute imposed and fixed the tax liability of the taxpayer in 1916 on the profits for that year. In our case, the FICA and FUTA statutes impose taxes on wages whenever paid, whether in 1964 or later, but there is no tax liability until the wages are paid.
The all events test was designed to allow the accrual of expenses that were fixed, determined, and certain, as for instance, the wages in our case. The services had been performed by the employees in 1964 and the liability of Kodak to pay them their wages was fixed, determined, and certain. Nothing further remained to be done to fix or make certain taxpayer’s liability in this regard, even though the wages were not yet due or payable, and, accordingly, the wages were properly accruable in 1964. The liability for the taxes on wages is an entirely different matter, because nothing occurred in 1964 to fix, determine, or establish liability of Kodak for taxes on wages, because the controlling event that would allow the taxes to be accrued had not yet occurred, namely the payment of the wages. See Oble and the above statutes and regulations.
The so-called all events test is set forth in Treasury Regulation 1.461-1 in pertinent part as follows:
§ 1.461-1 'General rule for taxable year of deduction
*!• ¥ $ $ $
(2) Taxpayer using an accrual method. * * * [A]n expense is deductible for the taxable year in which all events Time occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy. * * * [A]o accrual shall be made in any case i/n which all of the events have not occurred which fix the liability, * * *. [Emphasis supplied.]
It will be noted that both the Anderson case and the foregoing regulation require a liability to be “fixed” and “determined” by the occurrence of 'all the events necessary to establish the fact of liability before it can be accrued and deducted in a taxable year. It is clear that the facts in the instant case do not meet the requirements of this test.
*388 The word “fix” is defined in Black’s Law Dictionary 765 (4th ed. 1968) as follows:
Determine; settle; certainty and definiteness. To fasten a liability upon one. To transform a possible or contingent liability into a present and definite liability.
The word “determine” is defined in Webster’s Third New International Dictionary (1967 ed.) as follows:
To fix conclusively or authoritatively; to set bounds or limits to; to limit in extent or scope.
It must be conceded that there was no fact in this case that fixed, determined, or made certain a present and definite liability of Kodak in 1964 for the taxes on the unpaid wages of its employees. Consequently, the accrual and deduction of such taxes by it in 1964 when it had no liability in that year with respect to such taxes, was contrary to the decision of the Supreme Court in Anderson and in conflict with Treasury Regulation 1.461-1(2) cited above.
The majority have allowed Kodak to accrue and deduct in 1964 a contingent tax liability on the unpaid wages of its employees. To put it another way, its liability for taxes on wages was not fixed, determined, nor certain as an obligation in 1964 but was contingent on its payment of the wages. The Supreme Court and other courts have held many times that an accrual taxpayer may not accrue and deduct a contingent liability under the all events test. Considering the Supreme Court decisions on this question in chronological order, we find the following:
In Lucas v. American Code Co., 280 U.S. 445 (1930) an accrual taxpayer sought to deduct as a loss in 1919 the amount of a judgment for breach of contract it suffered in 1922 and paid in 1923. The Court disallowed the deduction in 1919 even though the breach of contract occurred then because its liability was contingent. The Court said:
The prudent business man often sets up reserves to cover contingent liabilities. But they are not allowable as deductions. The reserve set up by the Company was of that character. It cannot be said that the loss actually paid by the Company in 1923 was, as a matter of law or of undeniable fact, sustained in 1919. Nor did the Company so regard it. The case at bar is unlilce United States v. Anderson, 269 U.S. 422 . There, the liability for *389 the munitions tax at a fixed rate on the business done in 1916 'had confessedly accrued in that year and was a charge on the business of that year, although the exact amount due may not have 'been then ascertainable and the tax was not payable until 1917. It is also unlike American National Co. v. United States, 274 U.S. 99 . There, the bonus contract provided definitely for the payment of a fixed amount. It was debitum in praesenti, solvendwm in futuro. The case at bar is in principle more like Lewellyn v. Electric Reduction Co., 275 U.S. 243 . [Footnote omitted.] [Emphasis supplied.] [Id. at 452.]
It should be noted that as shown above, the Court distinguished the Anderson case by saying that the tax in that case had confessedly accrued in 1916 and was a charge on the business of that year.
In Brown v. Helvering, 291 U.S. 193 (1934), an insurance agent attempted to deduct an amount from his income tax representing estimated future cancellations of policies based on past year’s experience. The Supreme Court disallowed the deduction on the ground that the liability was a contingent one and could not be accrued and deducted as expenses of the current year. The Court held:
These charges on account of credits to the “Return Commission” reserve account are claimed as deductions on the ground that they are expenses “incurred,” “during the taxable year.” It is true that where a liability has “accrued during the taxable year” it may be treated as an expense incurred; and hence as the basis for a deduction, although payment is not presently due, United States v. Anderson, 269 U.S. 422, 440, 441 ; American National Co. v. United States, 274 U.S. 99 ; Aluminum Castings Co. v. Routzahn, 282 U.S. 92 ; and although the amount of the liability has not been definitely ascertained. United States v. Anderson, supra. Compare Continental Tie & Lumber Co. v. United States, 286 U.S. 290, 296 . But no liability accrues during the taxable year on account of cancellations which it is expected may occur in future years, since the events necessary to create the liability do not occur during the taxable year. Except as otherwise specifically provided by statute, a liability does not accrue as long as it remains contingent. Weiss v. Wiener, 279 U.S. 333, 335 ; Lucas v. American Code Co., 280 U.S. 445, 450, 452 ; compare New York Life Ins. Co. v. Edwards, 271 U.S. 109, 116 ; Ewing Thomas Co. v. McCaughn, 43 F. (2d) 503; Highland Milk Condensing Co. v. Phillips, 34 F. (2d) 777.
*390 The liability of Edward Brown & Sons arising from expected future concellations [sic] was not deductible from gross income because it was not fixed and absolute. * * * [Emphasis supplied.] \Id. at 200-01.] [Footnote omitted.]
Again in Dixie Pine Co. v. Commissioner, 320 U.S. 516 (1944), the Supreme Court denied an accrual taxpayer the right to deduct taxes in a current year because the liability for the taxes was contingent. The Court held:
* * * It has never been questioned that a taxpayer who accounts on the accrual basis may, and should, deduct from gross income a liability which really accrues in the taxable year. It has long been held that in order truly to reflect the income of a given year, all the events must occur in that year which fix the amownt and the fact of the taxpayer's liability for items of indebtedness deducted though not paid, and this cannot be the case where the liability is contingent and is contested by the taxpayer. * * * [Footnotes omitted.] [Emphasis supplied.] lid. at 519.]
The Supreme Court again declared in Security Flour Mills Co. v. Commissioner, 321 U.S. 281 (1944) that a contingent liability for taxes could not be accrued and deducted in a current taxable year. There the Court said:
It is settled by many decisions that a taxpayer may not accrue an expense the amount of which is unsettled or the liability for which is contingent, and this principle is fully applicable to a tax, liability for which the taxpayer denies, and payment whereof he is contesting. * * * [Footnote omitted.] [Emphasis supplied.] lid. at 284.]
In that case, the Court compared the deduction of a contingent liability for taxes to an accrual taxpayer who has a lease for a period of years with the rental payable in installments over a series of years. In this regard, the Court said:
* * * For example, a tenant would not be compelled to accrue, in the first year of a lease, the rental liability covering the entire term nor would he foe permitted, if he saw fit to pay all the rent in advance, to deduct the whole payment as an expense of the current year. * * * lid. at 285.]
*391 It is obvious that such accrual could not be allowed because the rental liability for the succeeding years is not an obligation that is fixed and owing by the taxpayer until “the event” (rental due date) fixing liability for the rent on the taxpayer has occurred. Kodak is in exactly the same situation in the case before us. Until the event (payment of wages) occurs, Kodak has no liability or obligation to pay the taxes and cannot accrue them in advance. The taxpayer here argues that it will have to pay the taxes or else breach its contract with its employees to pay their wages. This is unpersuasive. Employers breach their contracts to pay employees’ wages every day. That is what happened to the employer in Otic. He never paid the wages and for that reason never became liable for the taxes. While it is unlikely that a company as large and as responsible as Kodak would fail to pay wages due its employees, it is possible that this might happen due to circumstances beyond its control. If this happened, Kodak would never owe the taxes involved here. Therefore, it is inescapable that its liability for the taxes is contingent on its paying the wages, and this is the kind of contingent liability that the Supreme Court has held repeatedly cannot be accrued and deducted in the current year.
In the Security Mills case, the Supreme Court stated further:
The rationale of the system is this: “It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment, and collection capable of practical operation.”
This legal principle has often been stated and applied. The uniform result has been denial both to Government and to taxpayer of the privilege of allocating income or outgo to a year other than the year of 'actual receipt or payment, or, applying the accrual 'basis, the year in which the right to receive, or the obligation to pay, has become -final and definite in amount. '['Footnotes omitted.] [Emphasis supplied.] [Id. at 286-87.]
The holdings of the Court in the Dixie Pine and Security Mills cases were quoted with approval by the Supreme Court *392 in United States v. Consolidated Edison Co., 366 U.S. 380 (1961). (See footnotes 6 and 7 at 385-86.)
One of tbe most comprehensive and case-supported statements to be found that contingent liabilities cannot be accrued and deducted by an accrual taxpayer is set forth in an opinion by the Third Circuit Court of Appeals in the case of ABKCO Industries, Inc. v. Commissioner, 482 F. 2d 150 (3d Cir. 1973). The case involved an attempt by a taxpayer to accrue and deduct royalties he claimed a contract required him to pay a performing artist, even though the royalties were not paid. The court held against the taxpayer saying the liability was contingent and could not be accrued for deduction purposes. The statement and decision of the court, in pertinent part, is as follows:
Sections 446(a) and (c) of the Internal Revenue Code of 1954 authorize an accrual basis taxpayer to deduct an obligation in the taxable year in which all the events home occurred which are necessary to establish the fact of liability and the amount thereof with reasonable accuracy. See Treas. Reg. § 1.446-1 (c) (1) (ii). The Commissioner and the Tax Court rely upon the settled principle that a taxpayer using the accrual method of accounting may not deduct any liability until the contingencies relating to such liability are removed. Security Mills Co. v. Commissioner, 321 U.S. 281, 284 , 64 S. Ct. 596 , 88 L. Ed. 725 (1944); Dixie Pine Co. v. Commis sioner, 320 U.S. 516, 518-519 , 64 S. Ct. 364 , 88 L. Ed. 270 (1944); Lucas v. American Code Co., 280 U.S. 445, 449-451 , 50 S. Ct. 202 , 74 L. Ed. 538 (1930) ; American National Co. v. United States, 274 U.S. 99, 104-105 , 47 S. Ct. 520 , 74 L. Ed. 946 (1927); United States v. Anderson, 269 U.S. 422, 440-441 , 46 S. Ct. 131 , 70 L. Ed. 347 (1926); Lustman v. Commissioner, 322 F. 2d 253, 258 (3d Cir. 1963); Noxon Chemical Products Co. v. Commissioner, 78 F. 2d 871 (3d Cir. 1935). These cases hold that if all the events necessary to establish the fact of liability have not occurred, the liability is “contingent” and may not be accrued for purposes of deduction. * * * [Emphasis supplied.] \ld. at 151.]
Judge Hastie, in his concurring opinion in that case, stated:
* * * [T]he items deducted by the taxpayer as fixed accrued liabilities of the taxable years were only contingent obligations of undeterminable amount until some subsequent time. [Emphasis supplied.] \_Id. at 156.1
*393 The court also held that the determination of whether the events necessary to establish the fact of liability (the all events test) is a question of law rather than a question of fact. This appears to be correct.
There can be no doubt that a review of the above decisions show beyond any question that a contingent liability such as Kodak had in 1964 for the taxes in the instant case could not be accrued nor deducted in that year when the wages had not been paid and no liability whatever existed for the taxes until and unless the wages were paid. The majority errs in holding to the contrary, because the cited authorities show conclusively that the all events test had not been met as to this contingent tax liability.
In addition to the foregoing cases holding that contingent liabilities cannot be accrued or deducted by an accrual taxpayer in a current year, there are other cases that hold that where the taxpayer has no obligation or liability to pay an expense in a current year, such as Kodak here, he cannot accrue or deduct the expense in a current year because the all events test has not been met. Some of these cases will be discussed below.
In Lucas v. Ox Fibre Brush, Co., 281 U.S. 115 (1930), the board of directors of an accrual basis company voted in 1920 to pay each of its officers $24,000 as extra pay for “past services.” The money was paid in 1920 and accrued and deducted the same year. The Government contended it should have been accrued and deducted in prior years since it was for services rendered in prior years. The Supreme Court held for the taxpayer on the ground that the payments were actually incurred and made in 1920 and “there was no prior agreement or legal obligation to pay the additional compensation.” 3 [Id. at 119, emphasis supplied.] The Court held:
This section [Section 212(b) of the Revenue Act of 1918] relates to the method of accounting; the Commissioner may make the computation on a basis that does clearly reflect the income, if the method employed by the taxpayer does not. But this section does not justify the Commissioner in allocating to previous years a reasonable allowance as compensation for services actually *394 rendered, when the compensation was properly paid during the taxable year and the obligation to pay was incurred during that year and not previously. In the present instance, the expense could not be attributed to earlier years, -for it was neither paid nor incurred in those years. There was no earlier accrual of liability. It was deductible in the year 1920 or not at ail. Being deductible as a reasonable payment, there was no authority vested in the Commissioner to disregard the actual transaction and to readjust the income on another basis which did not respond to the facts. [Id. at 120.] [Emphasis supplied.]
In that case, the Supreme Court refused to follow the Anderson case relied on by Kodak in the instant case, saying :
The case of United States v. Anderson, 269 U.S. 422 , is not in point, as there the liability for the manitions tax at a fixed rate had accrued in the earlier year (1916) and was a charge on the business of that year, although the precise amount was ascertained and was payable in 1917. In American National Company v. United States, 274 U.S. 99 , there was a contract providing definitely for the payment. Compare Lucas, as Commissioner of Internal Reverme v. American Code Company, 280 U.S. 445 . (Id. at 120-21.] [Emphasis supplied.]
It should be clear from the above statement of the Supreme Court, as well as by statements of the Court in other cases and by other courts where the Anderson case is cited, that in Anderson, where the all events test was first announced, there was a definite, fixed, and positive liability and obligation for the munitions tax on the company in 1916 that was a charge on its business for that year. By contrast, in the case before us, there was no liability or obligation whatever on Kodak in 1964 for the withholding taxes on the unpaid wages of its employees. It is clear that the Anderson case is of no help to Kodak. It could be stated, as the Supreme Court did in the above case, that Anderson is not in point in our case.
The case of Bauer Bros. Co. v. Commissioner, 46 F. 2d 874 (6th Cir. 1931), cert. denied, 283 U.S. 850 , was another case where a taxpayer gave bonuses to its employees in 1919 for services rendered in 1918 and accrued the amounts in 1918. There was no prior legal obligation to pay the bonuses for the 1918 services. The court held that since there was no legal obligation in the taxable year of 1918 for the taxpayer *395 to pay the bonuses, it could not accrue them in that year, but had to accrue them in 1919 when authorized and paid. The court said:
* * * [T]he only question presented is whether they were incurred in 1918 within the meaning of the statute. Our first concern is with the sense in which the term “incurred” is used in section 234. It seems not to be disputed here that expenses are incurred only when there is an agreement or a legal obligation to pay them within the tamable year. Indeed, that seems to be the view taken of the very language of this section by the Supreme Court of the United States in Lucas, Commissioner of Internal Revenue v. Ox Fibre Brush Co., 281 U.S. 115 , 50 S. Ct. 273 , 74 L. Ed. 773 .
$ * # % $
It will therefore be observed that, whether the term “incurred” as used in the Revenue Act of 1918 is used in a technical legal sense or in an economic or bookkeeping sense, the expenses are not incurred, v/rdess there has arisen a legal obligation to pay them, a/nd they do not accrue within a given taxable year unless all of the events which fix the amount and determine the liability of the taxpayer to pay occur within that year. * * * [Id. at 875-76.] [Emphasis supplied.]
The holding in Bauer Bros, set forth above was quoted with approval by the Eighth Circuit Court of Appeals in Stern-Slegman-Prins Co. v. Commissioner, 79 F. 2d 289 (8th Cir. 1935). In that case corporate officers had made donations from their salaries to the paid-in surplus of the corporation. The donations were accrued as a liability of the corporation during the taxable year the donations were made. The court held that this could not be done as the corporation had no liability or obligation to repay the donations to its officers and the expense was accordingly not incurred. The court said:
* * * After these proceedings, all occurring within the taxable years involved, there was no liability or obliges tion on the part of the corporation to pay the questioned amounts to its officers, a'nd it did not in fact pay them The expense was therefore not incurred. Bauer Bros. Co. v. Commissioner of Internal Revenue (C.C.A. 6) 46 F. (2d) 874, 875; Skinner Mfg. Co. v. United States (Ct. Cl.) 8 F. Supp. 741, 745 ; Desco Corporation v. *396 United States (D.C.) 55 F. (2d) 411. [Id. at 291.] [Emphasis supplied.]
The same result should be reached in the instant case because Kodak had no liability or obligation in 1964 to pay the taxes and in fact did not pay them, and, therefore, the tax expense was not incurred and could not be accrued nor deducted in that year.
In C. A. Durr Packing Co. v. Shaughnessy, 81 F. Supp. 33 (N.D. N.Y. 1948) the court explained the meaning of the Anderson case as follows:
The case of United States v. Anderson, 269 U.S. 422 , 46 S. Ct. 131 , 70 L. Ed. 347 is repeatedly urged as an authority holding that when all of the events have occurred which fixed the amount of the tax and determined the liability of the taxpayer to pay, then it may be said that the liability therefor has accrued. This rather broad rule seems to ha/oe been limited in its application to such claims or liabilities which are reasonably certain in fact, and ascertainable in amount. Lucas v. American Code Co., 280 U.S. 445 , 50 S. Ct. 202 , 74 L. Ed. 538 , 67 A.L.R. 1010 . “It is settled by many decisions that a taxpayer may not accrue an expense the amount of which is umsettled or the liability for which is contingent * * Security Flour Mills Co. v. Commissioner, 321 U.S. 281 , at page 284, 64 S. Ct. 596 , at page 597, 88 L. Ed. 725 . “The requirement of valuation comprehends the element of collectibility." Helvering v. Enright's Estate, 312 N.S. 636, 61 S. Ct. 777, 782 , 85 L. Ed. 1093 .
From the above authorities it appears that a claim may be accrued by a taxpayer for tax purposes when, (a), all of the events have occurred, which fix the amount of the claim and determine the question of liability; (b), the amount is readily ascertainable; (c), the liability therefor is determined rather than contingent. [Id. at 35.] [Emphasis supplied.]
The holding of the court as set forth above was quoted with approval in Driscoll Bros. & Co. v. United States, 221 F. Supp. 603 (N.D. N.Y. 1963).
The decision of the court in Spencer, White & Prentis, Inc. v. Commissioner, 144 F. 2d 45 (2d Cir. 1944), cert. denied, 323 U.S. 780 , is dispositive of the instant case against the contentions of Kodak and literally destroys its position. In that case the accrual taxpayer was a contractor who ac *397 crued in a current year estimated expenses for work to finish a contract yet to be performed in a future taxable year. The deduction was disallowed. The court said:
* * * But the fact that payments would have to be made by the taxpayer in a future year for work which had not been done in the year in question did not give rise to a proper tax deduction. It is argued that it did give rise to sueh a deduction because a liability existed to -perform the work during that year. This theory, however, proves too much, for under it a taxpayer on the accrual 'basis could estimate the entire gross income which might be received from his contract, though no work had been begun, could deduct the estimated expense of performance and could compute the taxes accordingly. * * *
The difficulty with the taxpayer’s claim is that it ignores the fact that our income tax law is based upon annual periods of computation and that it seeks to have the taxes computed under a system which Justice Roberts, in Security Flour Mills Co. v. Commissioner, 321 U.S. 281, 287 , 64 S. Ct. 596, 599 , termed “partly annual and partly transactional.” In Dixie Pine Products Co. v. Commissioner, 820 U.S. 516 , 519, 64 S. Ct. 364, 365 , the same Justice said: “It has never been questioned that a taxpayer who accounts on an accrual basis may, and should, deduct from gross income a liability which really accrues in the taxable year. It has long been held that, in order truly to reflect the income of a given year, all the events must occur in that year which fix the amount and the fact of the taxpayer's liability for items of indebtedness deducted though not paid; * * The liability for the estimated deduction clearly had not accrued during the year in which deduction was sought. The only thing which had accrued was the obligation to do the work which might result in the estimated indebtedness after the work was performed.
It is well settled that deductions may only be taken for the year in which the taxpayer's liability to pay becomes definite and certain, even though the transactions (such as the contract in the present case) which occasioned the liability, may home taken place i/n an earlier year. Brown v. Helvering, 291 U.S. 193 , 54 S. Ct. 356 , 78 L. Ed. 725 ; American Hotels Corp. v. Commissioner, 2 Cir., 134 F. 2d 817 ; Amalgamated Housing Corp. v. Commissioner, 37 B.T.A. 817 , affirmed 2 Cir., 108 F. 2d 1010 ; cf. Security Flour Mills Co. v. Commissioner, 321 U.S. 281, 287 , 64 S. Ct. 596 ; Burnet v. Sanford & Brooks Co., 282 U.S. 359 , 51 S. Ct. 150 , 75 L. Ed. 383 . Here the work for which the deduction is sought was *398 unperformed and its cost was, as we have already indicated, no more than a fair estimate. Such a deduction as the taxpayer seeks had not accrued “during the taxable year” and, therefore, did not meet the requirements of Section 23 (a) of the Revenue Act of 1936,26 U.S.C.A. Int. Rev. Code, § 23 (a).
The petitioner's reliance upon United States v. Anderson, 269 U.S. 422 , 46 S. Ct. 131, 70 L. Ed. 347 , is misplaced. There the deduction of certain estimated tax liabilities set up in a reserve entered on the taxpayer’s books in accordance with a Treasury Regulation was allowed, though the taxes had not been assessed. But all the events had occurred which determined the liability to pay the tax. Here liability for the work done after July 1 1938, had not been incurred for the work had not been performed. Cf. Lucas v. American Code Co., 280 U.S. 445 , 50 S. Ct. 202 , 74 L. Ed. 538 , 67 A.L.R. 1010 . [Id. at 46-47.] [Emphasis supplied.]
Although the facts are different in that case to those in the case before us, the fundamental principles of law are the same in the two cases. It will be noted that in Spencer the contractor claimed the right to make the deduction of future expenses because he was obligated by contract in the current year to finish the work in a future taxable year when he would have to pay the expenses. That is the same argument made by Kodak in our case, namely, that it was obligated in 1964 to pay the wages to the employees in 1965 and by reason of that fact it would have to pay the taxes in' 1965. The court in Spencer held that such an argument was not valid because “the only thing which had accrued was the obligation to do the work which might result in the estimated indebtedness after the work was performed.” (Emphasis supplied.) In like manner, in our case, the only thing that had accrued was the obligation to pay the wages, which when paid in 1965 would create an obligation on Kodak to pay the taxes at that time. Neither the future contract expenses in Spencer nor the taxes in our case could be accrued until the liability for such expenses had been incurred in the taxable year when the deduction was made. The court in the Spencer case held in clear and unequivocal language that all events must occur in the year of deduction that fix the amount and fact of liability for the expenses deducted, and that a deduction may only be taken in the year in *399 which the taxpayer’s liability to pay becomes definite and certain even though the transaction which occasioned the liability (such as the agreement to pay wages in our case) may have taken place in an earlier year. Kodak simply cannot meet these requirements in the instant case. It is significant, too, that the court in Spencer held that the taxpayer’s reliance on Anderson was misplaced because there all the events had occurred which determined (fixed, established, made certain and definite) the liability to pay the tax, but in Spencer the liability for the (future) work had not been incurred “for the work had not been performed.” In our case, the liability to pay the tax had not been incurred in 1964 because the wages had not been paid in that taxable year, just as the work had not been done in Spencer during the year of the deduction.
The majority surprisingly agrees in footnote 12 that if a liability is “contingent” the “all events” test fails of application. This is an admission that the taxpayer ccmnot accrue a debt that it does not owe. That is exactly the situation of the taxpayer in the instant case. This admission forecloses the case against the plaintiff and emphasizes that the majority opinion is clearly erroneous when it allows the plaintiff to accrue and deduct taxes it does not owe. The majority intimates that if the taxpayer knows “how much” his taxes will be if and when he owes them, he can accrue and deduct them even though he is not obligated or liable to pay them. This is nothing more nor less than allowing the taxpayer to accrue and deduct a contingent liability, which even the majority agrees cannot be done.
While the majority holds that Kodak may not accrue and deduct in 1964 the dividend-bonus payment and the vacation pay withholding taxes because the amount due is uncertain and the all events test is not complied with, is a correct result, the reasoning and theory of such decision is incorrect and contrary to law. The dividends and vacation pay were vested in the employees at the end of 1964, which is a circumstance that did not exist in Union Pacific R.R. v. United States, 208 Ct. Cl. 1 , 524 F. 2d 1343 (1975), relied on by the majority. The employees were entitled to the dividends and vacation pay on December 31, 1964, based on the wages *400 they earned in 1964. 4 What happened to their wages in 1965 is immaterial, as we are only concerned with wages earned in 1964. Yet the majority says that the dividends and vacation pay taxes cannot be accurately determined on December 31, 1964, because the employees might get a raise in salary in 1965. It is difficult to understand how a raise in wages in 1965 could affect the taxes on wages for 1964. The statutes fixing limits on wages with reference to FICA and FUTA taxes are Sections 3121 and 3306 of the Code. Section 3121 places a ceiling on wages of $4,800, with respect to employment paid to an individual by an employer d/wring a calendar year, above which amount FICA taxes would not be paid on the salary. Section 3306 places the same limitation with respect to FUTA taxes, except the ceiling is $3,000 paid during curvy calendar year. The calendar year involved in this case is 1964 and the FICA and FUTA taxes must be calculated on the basis of wages, etc., paid or incurred during that year. What happened in 1965 with respect to the wages was immaterial. Besides any possible increase in wages in 1985, as suggested by the majority is wholly speculative and without any facts to support the theory.
Furthermore, the decision of the majority in this regard is in error for the additional reason that it indicates that the taxes for the dividends and vacation pay could be accrued and deducted in 1964 were it not for the possibility that the wages might be increased in 1965. This is contrary to all of the statutes, regulations, and decided cases cited above, because Kodak had no liability or obligation to pay the taxes on the dividend or vacation pay in 1964, and, therefore, could not accrue nor deduct such taxes in that year. Also, the possibility of an increase in salary in 1965 was not raised by the parties, was not briefed nor argued, and is a wholly speculative theory advanced by the majority. In any event, an increase in salary in 1965 could have no effect on the contingent liability of Kodak for withholding taxes on wages for 1964 as and when the wages for 1964 were paid by Kodak.
*401 v
Conclusion
For all of the reasons stated above, I would enter judgment for the defendant and deny the plaintiff the right to accrue and deduct the involved taxes in 1964 on the unpaid wages, dividends and vacation pay earned by its employees as of the end of that year. I agree that the case should be remanded to the trial judge for further proceedings to determine the extent to which, if any, the deficiency assessment effected what amounts to a double disallowance of the same payroll tax items for purposes of computing the taxpayer’s 1964 taxable income, which issue was severed by the trial judge pending the decision of the case by the court.
FINDINGS OF FACT
1. Plaintiff, Eastman Kodak Company, is a New Jersey corporation with its principal place of business at 343 State Street, Rochester, New York 14650. Its 'business is the manufacture and sale of photographic equipment and supplies and various chemical products.
2. On its books and its income tax returns plaintiff uses the accrual method of accounting, and since 1954 it has used a fiscal year of 52-53 weeks ending, in any event, on the last Sunday in December of each year. Prior to 1954 it filed its income tax returns on the basis of the calendar year.
3. At the end of 1964, plaintiff had 45,340 employees, located in forty states and the District of Columbia. Over 90 percent of those employees were in New York and Tennessee ; over 98 percent were in New York, Tennessee, California, Illinois, New Jersey and Texas.
4. Plaintiff filed a federal income tax return for its taxable year ended December 27,1964, with the District Director of Internal Revenue at Buffalo, New York, reporting a tax liability of $153,962,660 which it duly paid in installments in 1964 and 1965.
5. By timely consents in writing executed by plaintiff and the District Director, the time for additional income tax assessments for 1964 was extended to June 30,1970, and the *402 time for filing claims for refund of income tax for 1964 was extended to December 31,1970.
6. On audit of plaintiff’s 1964 return, the Internal Revenue Service determined that it had improperly deducted liability for payroll taxes — i.e., under the Federal Insurance Contributions Act (FICA), the Federal Unenrpioyment Tax Act (FUTA), and state imemployment tax statutes — on certain employee compensation (“year-end” wages, bonuses, and vacation pay) that plaintiff had not paid at the end of the taxable year. The audit report concluded that such payroll tax deductions did not meet the “all events” test of Treas. Reg. § 1.461-1 (a) (2) because the liability for these payroll taxes did not “attach” until the compensation was paid. On the basis thereof, the Service proposed an increase in plaintiff’s taxable income for 1964 in the amount of $1,914,273, calculated as total payroll taxes that plaintiff had deducted on unpaid compensation in 1964 in the amount of $2,835,802, reduced pursuant to Section 481 of the Internal Revenue Code by total payroll taxes that plaintiff had deducted on unpaid compensation in 1953 in the amount of $921,529.
7. On May 4, 1970, plaintiff paid additional income taxes for 1964 of $970,537, and interest thereon of $281,455.73. The additional taxes paid included $957,347 attributable to the income adjustment for the disallowance of the payroll tax deduction as reflected in the audit report.
8. On October 13,1970, plaintiff filed a claim for refund of the federal income tax payment for 1964 attributable to the described adjustment, and for the interest on such payment. No part of this claim has been allowed or paid.
9. On its books and income tax return for 1964 plaintiff followed its prior practice, as hereafter described, of accruing liabilities for three types of employee compensation which had been earned prior to the end of the year but which was not paid until the following year — “year-end” wages, bonuses and vacation pay. The relevant circumstances were as follows:
(a) “Year-end” wages. — Plaintiff’s employees carried on its weekly payroll are regularly paid each Thursday the wages earned by them in the preceding week. On its books and income tax returns, plaintiff, at the end of each taxable year, has accrued the wages earned during *403 the last week of that taxable year which were to be paid in the following taxable year. No issue is herein raised as to the propriety of the accrual of these “year-end” wages.
(b) Bonuses.—
(i) Under plaintiff’s bonus plans applicable to all bonuses paid during 19J±5 and in all years prior thereto, each year (with the exception of 1934), it declared cash bonuses which were regularly paid to its eligible employees in March of the following year. Under those plans, an employee’s entitlement to a declared bonus was generally dependent upon events subsequent to the end of the year in which the bonus was declared. With respect to all bonuses under those plans, plaintiff, at the end of each taxable year, accrued bonuses on its books in the year declared, and on its income tax returns in the year paid.
(ii) Under plaintiff’s bonus plan applicable to all wage dividends paid subsequent to 191¡5, it has each year declared cash bonuses which are regularly paid to its eligible employees in March of the following year. Under that plan, an employee’s entitlement to a declared bonus and the amount thereof were unaffected by events subsequent to the end of the year in which the bonus was declared. With respect to all bonuses under that plan, plaintiff, at the end of each taxable year, has accrued on its books and income tax returns the bonuses declared during that taxable year which were to be paid in the following taxable year. No issue is herein raised as to the propriety of the accrual of these bonuses.
(c) Vacation fay.—
(i) Under plaintiff’s vacation pay plan applicable to all vacation pay payments made during 1953 and in all years prior thereto, it has each year granted vacations with pay to qualified employees. Under those plans, an employee’s entitlement to a vacation with pay arose in the same year in which the vacation was taken and payment was made. With respect to all vacations to which employees became entitled under those plans, plaintiff, at the end of each taxable year, accrued vacation pay on its books and on its income tax returns in the year in which the vacation pay was paid.
(ii) Under plaintiff’s vacation pay plan applicable to all vacation pay payments made subsequent to 1953, it has each year granted, to qualified employees, vacations to be taken in the following year with pay. Under that plan, an employee’s entitlement in one year to a vacation in the following year was unaffected by events *404 subsequent to the year in which the employee became entitled to a vacation, though the vacation pay rate was dependent upon subsequent events since it was based upon either the rate in effect at the end of the year in which the employee became entitled to a vacation or upon the rate in effect at the time the vacation was taken, whichever was greater. With respect to all vacations to which employees became entitled under that plan, plaintiff, at the end of each taxable year, has estimated and accrued on its books and income tax returns the vacation pay for vacations to which employees became entitled during that taxable year, which were to be taken in the following year. No issue is 'herein raised as to the propriety of the accrual of this vacation pay.
10. The circumstances under which “year-end” wages were paid had been the same since prior to 1944. Those under which a current year’s bonuses were paid had been the same since the bonuses for 1945 that were paid in 1946. Earlier bonuses were not paid to employees who terminated their employment before the payment date. The circumstances under which vacation pay allowances were paid had been the same since those based on 1953 that were paid in 1954. Earlier vacation pay allowances were not paid to employees who terminated their employment without the required notice before the payment date.
11. Plaintiff’s liabilities for “year-end” wages earned in one fiscal year and paid in the following year have always been accrued in the previous year, both on its books and on its income tax returns. Since 1945 its liabilities for declared bonuses, and since 1953 its liabilities for vested vacation pay, have always been expensed in the year preceding the year in which paid, both on its books and on its income tax returns. Earlier bonuses and vacation pay allowances were deducted on plaintiff’s tax returns in the year in which paid.
12. For each year since 1944 with respect to “year-end” wages, since 1945 with respect to bonuses, since 1953 with respect to vacation pay, plaintiff has estimated and deducted payroll taxes (FICA, FUTA, and state unemployment taxes), both on its books and on its income tax returns, in the year in which the underlying compensation was accrued.
13(a). With respect to “year-end” wages earned in all yeai-s prior to 1944, it was plaintiff’s practice to accrue those *405 wages in the year they were earned, and to deduct payroll taxes thereon in the year in which those wages were paid. With respect to “year-end” wages earned in 1944 and all subsequent years, it has been plaintiff’s practice to accrue those wages and deduct payroll taxes thereon in the year those wages were earned. Accordingly, in 1944, plaintiff “doubled up” on the payroll tax deduction, deducting both the payroll taxes on such wages earned in 1943, which wages were paid in 1944, and the payroll taxes on such wages earned in 1944, which wages were to be paid in 1945.
(b) With respect to bonuses declared in all years prior to 1945, it was plaintiff’s practice, for federal income tax purposes, to accrue the amount thereof, and deduct payroll taxes thereon, in the year in which those bonuses were paid: this even though for book purposes it accrued such bonuses in the year declared. With respect to bonuses declared in 1945 and all subsequent years, it has been plaintiff’s practice to accrue the amount thereof, and deduct the payroll taxes thereon, in the year in which those bonuses were declared. Accordingly, in 1945, plaintiff “doubled up” on the bonus accrual and the payroll tax deduction, accruing both the bonuses declared in 1944, which bonuses were paid in 1945, as well as deducting payroll taxes thereon, and the bonuses declared in 1945, which bonuses were to be paid in 1946, as well as deducting the payroll taxes thereon.
(c) With respect to all vacation pay payments made in all years prior to and during 1953, it was plaintiff’s practice to accrue that vacation pay and deduct payroll taxes thereon in the year that vacation pay was paid. With respect to all vacations to which employees became entitled in 1953 and each subsequent year, which vacations were to be taken with pay in the respective following year, it has been plaintiff’s practice to accrue that vacation pay and deduct payroll taxes thereon in the year in which the employee became entitled to the vacation. Accordingly, in 1953, plaintiff “doubled up” on the vacation pay accrual and payroll tax deduction, accruing the vacation pay paid in 1953, as well as deducting payroll taxes thereon, and accruing the vacation pay to be paid in 1954 (as the result of employees’ entitlement to vacations in 1953), as well as deducting the payroll taxes thereon.
*406 14(a). The amount of plaintiff’s 1944 deduction of payroll taxes on “year-end” wages, as described in finding 13(a), supra, was not separately identified in the 1944 income tax return or the accompanying schedules, though Schedule M of that return contained an adjustment of $7,787.52 as an “additional provision for unemployment taxes.” The computation of the figure $7,787.52, while not detailed in Schedule M, was set forth in plaintiff’s 1944 federal income tax work-papers which were made available to the Internal Revenue agent in connection with the audit of the 1944 return, as follows.
Allowable Deduction for Income Tax Purposes
Federal Unemployment Tax per Form 940 — 1944_ $218, 080. 71
Contributions Paid to States for 1944 per Form 940_ 1, 890, 887. 20
Contributions for Week Ended 12/30/44 Paid in 1st Quarter 1945 per Schedule attached_ 35, 334. 00
Allowable Deduction 1944_$2, 144, 301. 91
Charged to 1944 Book Profits_ 2, 136, 514. 39
Additional Deduction — Sch. M Adj_ $7, 787. 52
Summary
Federal State Unemployment Unemployment
Tax paid per Form 940_ $218, 080. 71 $1, 890, 887. 20
Tax for week ended 12/30/44_ 3, 643. 00 31, 691. 00
Total.. $221,723.-71 $1,922,578.20
221, 723. 71
$2, 144, 301. 91
While the above computations referred to payroll tax “Contributions for the Week Ended 12/30/44 paid in 1st Quarter 1945 per Schedule attached” in the amount of $35,334, the schedule attached thereto referred instead to “Taxable wages for week ended 12/30/44 paid in 1945” in that amount. Further, the above computation, which pertained only to “unemployment” taxes, neither identified nor included FICA taxes.
With reference to the $7,787.52 item identified in Schedule M as “additional provision for unemployment taxes,” the *407 Internal Revenue agent’s audit report states “Additional accrual allowable.” There was no indication given to plaintiff, other than as stated above, that the propriety of plaintiff’s 1944 accrual of payroll taxes was being considered by the Service in connection with the 1944 audit, nor was any such issue raised in that audit.
(b) The amount of plaintiff’s 1945 deduction of payroll taxes on accrued-but-unpaid bonuses, as described in finding 13 (b), supra, was not separately identified in the 1945 income tax return or the accompanying schedules, nor was any adjustment for payroll taxes made in Schedule M similar to that for 1944 as described in finding 14(a), supra, of the return, though plaintiff’s federal income tax workpapers, which were made available to the Internal Revenue agent in connection with the audit of the 1945 return, contain the following:
Allowable Deduction for Income Tax Purposes
Federal Unemployment Tax per Form 940— 1945--- $213, 622. 08
Contributions paid to state in 1944 * per 940_ 1, 188, 778. 89
Contributions paid for week ended 12/29/45 paid in first quarter 1946 per schedule attached_*$fT 32, 371. 00
Less: Contributions paid for week ended 12/30/44 paid in 1945 — see Inc. Tax w/p for 1944 ¡e*¡gá (page 41)-' ¿.(35, 344. 00)
Estimated unemployment tax on 1945 wage dividend [bonus]-^ 57, 800. 00
Allowable Deductions 1945_$1, 457, 207. 97
Schedule M Adjustments — Additional Deductions- $2, 645; 43
No adjustment made — follow books_
Summary
Federal State Unemployment Unemployment
Tax paid per Form 940_ $213, 622. 08 $1, 188, 778. 89
Tax for week ended 12/29/45_ 3, 683. 00 28, 688, 00
Tax for week ended 12/30/44_ (3, 643. 00) (31, 691. 00)
$213, 662. 08 $1, 185, 775. 89
*408 While the above computation referred to payroll tax “Contributions for the week ended 12/29/45 paid in first quarter 1946 per schedule attached,” in the amount of $32,371, the “Schedule” attached thereto referred instead to “Unemployment Tax Paid for Week Ending 12-31-45” in the same amount. Further, the above computation, which pertained only to “unemployment” taxes, neither indentified nor included FIC A taxes.
There was no indication given to plaintiff that the propriety of its 1945 deduction of payroll taxes was being considered by the Service in connection with the 1945 audit, nor was any such issue raised in that audit.
(c) The amount of plaintiff’s 1953 deduction of payroll taxes with respect to vacations to which employees became entitled in 1953 to take with pay in 1954, as described in finding 13(c), supra, was not separately identified in the 1953 income tax return or the accompanying schedules, nor was any adjustment for payroll taxes made in Schedule M similar to that for 1944, as described in finding 14(a) supra, of the return, nor did plaintiff’s 1953 federal income tax workpapers separately identify those payroll taxes.
There was no indication given to plaintiff that the propriety of its 1953 deduction of payroll taxes was being considered by the Service in connection with the 1953 audit, nor was any such issue raised in that audit.
15. In conjunction with its federal income tax returns for 1944,1945 and 1953, on which it first deducted payroll taxes attributable to “year-end” wages, bonuses, and vacation pay, respectively (having theretofore only deducted such taxes as were attributable to underlying compensation that had been paid), plaintiff did not attach or otherwise submit any specific request to the Commissioner of Internal Revenue for approval of such deductions accompanied by a statement of the facts on which it relied to support those deductions.
16. Each of plaintiff’s federal income tax returns from 1944 to 1964, inclusive, was audited by the Internal Revenue Service. No issue is raised as to the propriety of plaintiff’s accrual of “year-end” wages, bonuses or vacation pay for any of those years. In none of the audits prior to the one for 1964 was any issue raised as to the propriety of plaintiff’s deduc *409 tion of payroll taxes on “year-end” wages, bonuses or vacation pay.
17.The following schedule shows the amounts of payroll taxes which plaintiff deducted for 1964 on compensation not paid in that year, and the amounts of payroll taxes that plaintiff deducted for 1953 on compensation not paid in 1953, stated separately for each type of tax and each type of compensation, and, finally, the difference between the 1964 and 1953 totals:
“Year-end” Wages Bonuses Vacation Pay Totals
FICA 1964_$17, 471 $1, 514, 126 $340, 184 $1, 871, 781
FUTA “ .. 3,074 168,609 15,382 187,065
S.U.T. “ -. 10, 275 698, 571 68, 110 776, 956
Total_$30,820 $2,381,306 $423,676 $2,835,802
FICA 1953_ $7,446 $447,763 $126,731 $581,940
FUTA “ _ 69,689 14,064 83,753
S.U.T. “ _ 220,802 35,034 255,836
Total_ $7, 446 $738, 254 $175, 829 $921, 529
Total Net_$1,914,273
18. About 90 percent of the total payroll taxes that plaintiff deducted on unpaid compensation for 1964 was allocable to manufacturing divisions, and was recorded as part of cost of goods sold or year-end inventory.
19. At the end of each taxable year, plaintiff computes its deduction of payroll taxes on accrued-but-unpaid compensation by separate calculations made for each major plant (of which there were fourteen in 1964) and for each type of tax (FICA, FUTA, and state unemployment tax) as applied to the totals of each type of accrued-but-unpaid compensation (“year-end” wages, bonuses, and vacation pay). Each calculation involves two steps — an estimation of the total amount of each type of compensation which, when paid in the following year would be subject to payroll tax, and a determination or estimation of the applicable payroll tax rate. This method of calculation is described in greater detail in the following subparagraphs:
(a) For each of plaintiff’s plants, a percentage for each type of payroll tax (FICA, FUTA, state unemployment tax) was applied to each type of compensation *410 accrued by that plant, i.e., one percentage rate for each type of tax was applied by each plant to its total accrual of “year-end” wages, one percentage rate for each type of tax was applied by each plant to its total accrual of bonuses and one percentage rate for each type of tax was applied by each plant to its total accrual of vacation pay. In each case, the percentage rate applied by plaintiff was generally derived from a comparison of the total of each type of compensation paid by each plant during the previous year with the total of each type of that previous year’s compensation which, when paid by each plant, was subject to each type of payroll tax. In effect, the percentage applied by plaintiff represented the overall proportion of similar compensation for the previous year which, when paid, did not exceed the statutory payroll tax dollar ceilings in effect for each type of tax at the time that the underlying compensation was paid. (The payroll tax statutes for FICA, FUTA, and state unemployment payroll taxes apply only to the compensation paid in a payroll tax year to such employee up to a certain fixed dollar ceiling, which, for example, for 1965 payments was $4,800 under FICA, $3,000 under FUTA, and amounts ranging from $3,000 to $4,500 under the various state statutes.)
By multiplying each type of the current year’s accrued-but-unpaid compensation by the applicable percentage (described above), plaintiff estimated that portion of the current year’s accrued-but-unpaid compensation which, when paid, would be subject to payroll tax.
(b) The amounts of the current year’s accrued-but-unpaid compensation which plaintiff estimated (in the manner described above) would, when paid, be subject to payroll tax, was then multiplied by the applicable payroll tax rate. The applicable payroll tax rate for FICA taxes was obtained directly from the Internal Revenue Code {see, Sec. 3111). The applicable payroll tax rate for FUTA taxes was also obtained from the Internal Revenue Code {see, Sec. 3301), since plaintiff calculated the tax by assuming the maximum statutory credit for contributions to state funds (see, Sec. 3302). With respect to state unemployment tax rates, in the case of New York State, for example, where the predominant amount of plaintiff’s state unemployment tax is paid, an employer’s rate for each calendar year is determined on the basis of his account status as of September 30 of the prior year adjusted for benefit charges at the end of the prior calendar year. Plaintiff maintains a record of all benefit charges, as well as a record of tax payments made *411 to tlie unemployment insurance fund. On the basis of that information plaintiff estimated the payroll tax rate. Similar procedures were followed for such other states as California, Georgia, Texas, and Hawaii. New. Jersey, Ohio, Tennessee and Illinois use a rate computation date ending on June 30. Accordingly, in those states, the rates applicable to wage payments in the first six months of 1965 were known. Plaintiff assumed that the rates applicable to the last six months were the same.
20. After the issue of plaintiff’s accrual of payroll taxes was raised on the audit of plaintiff’s 1964 federal income tax return, plaintiff made a survey of its records to review the payroll taxes actually paid in 1965 and 1966 on compensation accrued in 1964 and paid in 1965, as compared with the payroll taxes deducted in 1964 on such compensation. The year 1966 is implicated, with respect to plaintiff’s 1964 employment tax accruals, because the actual payment of those taxes did not altogether occur in 1965, the next succeeding year. There is this lag, in the case of FICA, because that tax is by law payable by or before the last day of the first calendar month following the calendar quarter in which cognizable compensation was paid. [/See Secs. 6011, 6071, and 6151 of the 1954 Code and Employment Tax Eegulations Secs. 31.-6011 (a)-1, 31.6071 (a)-l(a), and 31.6151-1 (a).] A similar situation obtains in the case of FUTA although the taxable period there is annual rather than quarterly. [See Secs. 6011, 6071, and 6151 of the 1954 Code and Employment Tax Eegu-lations Secs. 31.6011 (a)-3, 81.6071 (a)-l(c), and 31.6151-1 (a).] Thus, the FUTA taxes that plaintiff accrues under the practice that it has adopted are typically not paid until the beginning of the second year following the accrual. Moreover, the due date for payment of state unemployment taxes generally parallels that for FICA taxes. [See for California, Unemployment Insurance, west’s ann. calif, codes, § 1110(a); for Illinois, smith-i-iurd ill. ann. stat., ch. 48, § 559.] For New York, Tennessee, New Jersey and Texas, the state statutes make no specific provision but instead provide authority for the promulgation of regulations in this regard. [See for New York, Labor Law, mckinney’s consol, laws of n.y. ann., § 570(1); for Tennessee, tenn. code ann., §50-1326; for New Jersey, n.j. stat. ann., § 43.21-(7) (a) *412 (1); for Texas, vernon’s tex. civil stat. ann., Art. 5221b-5 (a).]
The results of the survey indicated that the total taxes actually paid on such compensation were $2,840,775, as compared with the total taxes deducted of $2,835,802, reflecting a consolidated negative variance of less than 0.18 percent. For each of the three types of taxes considered separately, the results indicated a negative variance for FICA taxes of about 2 percent, a positive variance for FUTA of about 4 percent, and a positive variance for state unemployment taxes of about 4 percent. Additionally, plaintiff made comparisons for seven years, 1963-1969, of the FICA taxes deducted on bonuses with those actually paid on such bonuses in the following year — this representing by far the largest element in the disputed accrual. The results of this survey indicated that the average variance for the seven years was about 1.1 percent and the greatest variance for any one of the years was about 3.5 percent.
21. Plaintiff calculated its total payroll tax deductions for each year as the sum of taxes on compensation paid plus taxes on compensation accrued and unpaid, reduced by the taxes accrued for the preceding year on compensation accrued and unpaid in that year. This method of calculation had the effect of compensating in the following taxable year for errors resulting from plaintiff’s estimation in the previous taxable year of the amount of payroll taxes with respect to compensation accrued but unpaid as of the end of that previous taxable year.
22. In the opinion of qualified accounting experts, both the treatment of payroll taxes asserted by plaintiff (i.e., that payroll taxes should be deducted when the underlying compensation is accrued) and the treatment of payroll taxes asserted by the defendant (i.c., that payroll taxes should be deducted when the underlying compensation is paid) are in accordance with the generally accepted commercial accounting principles, and the use of both methods is widespread in commercial accounting practice. Plaintiff’s treatment of these payroll taxes is generally preferred in theory for commercial accomiting purposes in recognition of the association of payroll taxes to the underlying compensation and in an effort to match costs and revenues within a period.
*413 ULTIMATE BINDINGS OK FACT
23. Plaintiff has shown that by the end of 1964 there occurred all events necessary both to fix with certainty the fact of liability and to reasonably ascertain the payroll taxes on “year-end” wages for individual employees.
24. Plaintiff has not demonstrated that there occurred by the end of 1964 all events necessary to fix the fact of liability with regard to payroll taxes on bonuses and vacation pay for individual employees.
CONCLUSION OF LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to a 1964 income tax deduction for payroll taxes on “year-end” wages, and that plaintiff is not entitled to a 1964 income tax deduction for payroll taxes on bonuses and vacation pay. The amount of the recovery will be determined pursuant to Pule 131 (c). Further, the court hereby remands the case to the trial division for additional proceedings consistent with the above, including the extent to which, if at all, the present result creates a double disallowance of the same payroll tax items for purposes of computing plaintiff’s 1964 taxable income.
In this opinion the terms “wages,” “dividend bonuses,” and “vacation pay” will be considered and referred to as “wages” because of the provisions of Section 3306 of the Internal Revenue Code (26 U.S.C. 8 3306 (1964)) as follows:
Ҥ 3306. Definitions.
* * * * *
(b) Wages.
For purposes of this chapter, the term “wages” means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash ; * * *”
Both parties agreed that all of these items should be treated as “wages.”
In refusing to follow the decision of the Supreme Court in the Otte case, the majority appears to be making the same error the then majority made in Mason v. United States, 198 Ct. Cl. 599 , 461 F. 2d 1364 (1972), when they failed to follow the Supreme Court’s decision in West v. Oklahoma Tax Comm’n, 334 U.S. 717 (1948). The Supreme Court reversed the decision in the Mason case in United States v. Mason, 412 U.S. 391 (1973) because the majority failed to follow its decision in the West case.
See Seabright Woven Felt Co. v. Ham, 38 F. 2d 114 (D. Maine 1930), for a similar ease.
Vacation pay and bonuses are wages. See Sec. 3300(b) in footnote 1 and United States v. Munro-Van Helms Co., 243 F. 2d 10, 13 (5th Cir. 1957) and 6 Remington on Bankruptcy, 382, Sec. 2807.
The parties agree that the year properly referred to is 1945 instead of 1944.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8595552. Public record. Not legal advice.