Appendix — Consolidated Edison Co. of New York, Inc. v. United States

Supreme Court brief1956

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Text

Internal Revenue Code of 1939:*

Sec. 23. Depuctions rrom Gross Income.

In computing net income there shall be allowed

as deductions:

a o es

within the taxable year, * * * [with exceptions not

material] here]. es

(26 U. 8. C. 1946 ed., Sec. 23)

Sec. 41. Genera, Ruiz.

The net income shall be computed upon the basis

of the taxpayer’s annual accounting period (fiscal

year or calendar year, as the case may be) in ac-

cordance with the method of accounting regularly

employed in keeping the books of such taxpayer;

but if no such method of accounting has been so

employed, or if the method employed does not

clearly reflect the income, the computation shall be

made in accordance with such method as in the

opinion of the Commissioner does clearly reflect the

income. * * * y 3 ‘

(26 U.S. C. 1946 ed., Sec. 41)

Sec. 42. Pertop mv Wuicu Irems or Gross In-

come INCLUDED.

The amount of all items of gross income shall be

included in the gross income for the taxable year

in which received by the taxpayer, unless, under

methods of accounting permitted under section 41,

any such amounts are to be properly accounted for

as of a different period. * * *

(26 U.S. C. 1946 ed., Sec. 42)

Szo. 43. Pznziop For Wuicn Dezpvcrions axp

Crepits Taken.

The deductions and credits (other than the divi-

dends paid credit provided in section 27) provided

for in this title shall be taken for the taxable year

in which ‘‘paid or accrued’’ or ‘‘paid or incurred”’,

dependent upon the method of accounting upon the

basis of which the net income is computed, unless in

order to clearly reflect the income the deductions or

credits should be taken as of a different period. * * *

(26 U. 8. C. 1946 ed., Sec. 43)

Sec. 48. Derrrrions.

When used in this title——

@ oe eo

or incurred’’ and ‘‘paid or accrued’”’ shall be con-

strued according to the method of — upon

—_ of which the net income is computed under

this Part.

(26 U. S. C. 1946 ed., Sec. 48)

IN THE

UNITED STATES COURT OF CLAIMS

Nos. 49654, 49655 and 50432

(Decided December 6, 1955)

CONSOLIDATED EDISON COMPANY OF NEW

YORK, INC. v. THE UNITED STATES

Mr. James EK. Polk, for the plaintiff. Messrs. Robert E.

Coulson, Harold F. Noneman, and Gerald D. Groden were

on the briefs.

Mr. John A. Rees, with whom was Mr. Assistant Attor-

ney General H. Brian Holland, for the defendant. Messrs.

Andrew D. Sharpe and Lee A. Jackson were on the briefs.

Lrrrieton, Judge, delivered the opinion of the court:

The plaintiff sues to recover income taxes alleged to

have been overpaid for the calendar years 1938, 1939 and

1941. The plaintiff kept its books and filed its income tax

returns upon the accrual basis. The primary issue pre-

sented in these three cases is what year is the proper year

for deduction of contested real estate taxes where payment

of the full amount of the tax assessed was made to the City

and State of New York within the taxable years, but the

correct amount of the liability was not settled until a eub-

sequent taxable year.

The facts, which are fully set forth in the findings, are

summarized for the purposes of this decision as follows:

The plaintiff is a public utility corporation engaged in

the manufacture, distribution and sale of electrical energy

= ’

and gas. During the years involved the plaintiff owned

many hundreds of parcels of real estate in the City of New

York which were subject to a tax under the laws of the State

and City of New York on real estate owned by corporations.

Each parcel of real estate was appraised by the City

Tax Commission and its value was placed upon a tentative

assessment roll. Administrative proceedings were avail-

able to plaintiff to correct erroneous valuations. An appli-

cation for correction of assessment (sometimes called a

protest) had to be filed on forms supplied by the Tax Com-

mission and all pertinent questions thereon had to be an-

swered. One of the questions in the protest which had to be

answered was ‘‘ What do you consider was the full value of

the property on January 25 of this year?’’ Failure to

answer this question was fatal to the application. Judicial

review was available by way of a certiorari proceeding, an

exclusive remedy, only upon exhaustion of the administra-

tive procedure.

In all cases, except where illegality of the tax in its

entirety was alleged rather than to its form or method, the

petition for judicial review had to set forth, as did the

plaintiff’s original protest, what the full value of the prop-

erty was claimed to be. Thus in complying with the re-

quirement of the law of New York, and alleging both in the

protest and in the petition to the court the claimed full

value of the property involved, a taxpayer admitted lia-

bility for real estate tax thereon in a certain and definite

amount, namely, the claimed value of the property multi-

plied by the established tax rate.

The institution or pendency of litigation for the correc-

tion of an assessment did not postpone the dates the bills

for the real estate taxes became due and payable. Failure

to pay the tax bills when due subjected the property in-

volved to a tax lien which had the effect of a judgment lien

which could have been foreclosed and the property sold.

In addition, a penalty of interest at 7 percent per annum

—

was incurred. There was no provision in the New York law

for suspending or removing the tax lien, whether by in-

junction, bond or otherwise, other than by payment of the

taxes thereon, as billed. Thus an aggrieved property owner

had to first pay the real estate taxes and then seek to rectify

the error by the exclusive remedy or run the risk, in addi-

tion to incurring 7 percent interest, of having the tax lien

foreclosed and the property sold.

The parties have agreed that the facts are accurately

reflected in the following simplified example, for the tax-

able year 1939, which is applicable to all the years involved.

For the year 1939 plaintiff was notified, on January 25,

1939, of a tentative assessment for real estate taxes in the

amount of $100. Within the statutory period and by March

15, 1939, plaintiff, based upon the best judgment of its offi-

cers, duly filed a bona fide protest admitting liability in the

amount of $85, and petitioning for an administrative re-

duction of the tentative assessment in the amount of $100

by the amount of $15. After a hearing duly held, and on

or about May 25, 1939, final assessment was made in the

amount of $100. Thereafter, on or about October 1, 1939,

under protest and for the stated purpose of avoiding liens,

seizures, levies, penalties, interest, ete., and reserving all

rights, plaintiff made payment of the assessed tax in the

amount of $100. Within the statutory period, on October

25, 1939, certiorari proceedings were instituted admitting

liability in the amount of, and denying liability in excess

of, $85. On August 21, 1941, the Supreme Court of the

State of New York entered its order in the certiorari pro-

ceedings fixing the tax liability at $95. In October 1941,

plaintiff received a refund of the excess payment in the

amount of $5.

The plaintiff accrued on its books and deducted on its

Federal tax returns for 1939 the full $100. Upon audit the

Commissioner of Internal Revenue allowed only $95 for

that year, but included the $5 refund received in 1941, as

income for 1941. The defendant now concedes that i

a $95 deduction is allowed for 1939, then the $5

should not be included as income in 1941. Timely

for refunds based upon, among other things, an

statement of depreciation and amortization for 1938,

, these

funds by adjustments made because of his treatment

the real estate tax involved in this case.

The defendant raises pro forma the question of

statute of limitations in cases Nos. 49654 and 49655.

states that since plaintiff filed its claims for refund

1938 and 1939, on March 10, 1942, and March 11,

respectively, plaintiff could have within six

thereafter and therefore its petitions

filed on May 25, 1950, are barred

This question has been decided by our decision

Trust Company v. United States, 131 C. Ols.

we held that § 3772 of the Internal Revenue

as amended, was the governing statute of limitati

that the six-year statute of limitations contained in

U. 8. C. $2501 was not applicable. The petitions in

three of plaintiff’s cases were therefore timely filed.

SaF oF

The

cEtTERLE

E &

and above the amounts previously admitted ($10); and

exclusion from 1941 income of amounts of excess payments

of real estate taxes in the prior years which were refunded

in 1941 ($5). The defendant’s present position is that

plaintiff is entitled to deductions in 1938, 1939, and 1941

of amounts of real estate taxes paid in those years ($100),

and the inclusion in 1941 income of the amounts of excess

payments of real estate taxes for those years which were

refunded in 1941 ($5).

| ,

The pertinent provisions of the applicable sections of

the Internal Revenue Code (26 U. 8. C.) are set forth

below."

The plaintiff’s argument is twofold. First, it argues

that in order to accrue a deductible item, admission or

absence of denial of liability is necessary, relying on

United States v. Anderson, 269 U. 8. 422; Diwie Pine Prod-

ucts Co. v. Commissioner, 320 U. 8. 516, and Security Flour

Mills Co. v. Commissioner, 321 U. 8. 281. Second, it argues

The defendant contends that our decision in Chestnut Se-

curities Co. v. United States, 104 C. Cls. 489, is controlling.

In our opinion the rule stated in the Chestnut Securities

case is applicable in the instant case. In that case the tax-

payer, on the accrual basis, paid 1936, 1937 and 1938 state

taxes after a District Court decision in 1940. The Circuit

Court affirmed and the Supreme Court denied certiorari in

1942. The taxpayer contended in a suit in this court that

the state taxes were deductible in 1940 when paid and the

1 Sec. 23. Deductions grow net income there

shall be allowed as deductions: * * * (c) Taxes . ** © Taxes paid or

accrued within the taxable eee

Sec. 41. General rule. ast income call be computed spon the basis of

sigalg Fogler employed i eying the bos of ach the method of

employed keeping books “taxpayer

be Pp J Fag ot a FB 47

which or accrued” or “paid or incurred”, unan Gp sncihed of

pn the basis of which the net income is computed, unless in order

dently the income the deductions or credits should be taken as of

Sec. 4. Definitions. When used in this chapter—(c) “paid or incurred,”

“paid or accrued.” The terms “paid or incurred” and “ Deters? dail te

construed to the method of accounting upon the basis of which the net

defendant contended that they were deductible in 1942 when

the litigation was finally decided. We held they were de-

ductible in 1940 because payment discharged the liability

and accrued the taxes in that year. The Commissioner of

Internal Revenue has adopted and is following this rule.

C. B. 1947-2, G. C. M. 25298, pp. 39, 43, 44. The plaintiff

asserts that the case is either distinguishable or erroneous.

It is settled that a taxpayer may not accrue an expense

when he is denying liability and refusing and contesting its

payment. Dixie Pine Products Co. v. Commissioner, supra;

Security Flour Mills Co. v. Commissioner, supra. The plain-

tiff argues from this principle that there must therefore be

an admission or absence of denial of liability before an item

may be accrued and that the payment of the liability within

the taxable year has no effect on its accrual since payment

was made under protest and litigation was i i

started to obtain a repayment. This is not necessarily true.

Under the accrual system of accounting revenues are

accrued as nearly as practicable to the period earned and

expenses, which include taxes, are accrued in the period and

against the revenues they helped to produce. Our system of

taxation requires a determination of taxes on an annual

basis predicated on the economic events which occurred and

were in existence during a taxable year. United States v.

Anderson, supra; Burnet v. Sanford & Brooks Co., 282

U. 8. 359; Security Flour Mills Co. v. Commissioner, supra.

The Supreme Court stated that:

des orate men aerate be it pension ble to

duce a regular flow of income apply methods of

accounting, assessment, and collection capable of

seg operation. * * * [Burnet v. Sanford ¢

rooks Co., supra, at p. 365; Security Flour Mills

Co. v. Commissioner, supra, at p. 286.]

* * * The uniform result has been denial both to

Government and to taxpayer of the privilege of allo-

cating 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

has become final and definite in

amount.» ** (Scour y Flour Mills Co. v. Commie-

r, supra, at pp. 286, 287.)

When expenses are incurred and therefore should be ac-

erued under the accrual method of accounting for tax pur-

poses, is determined from a practical, not a technical legal

test. Lucas v. American Code Co., 280 U. 8. 445, 449.

Insofar as the plaintiff in the instant case was concerned

it incurred an obligation in the amount of $100 in 1939,

since it, as a practical matter, had to and did discharge the

full amount of the real estate taxes assessed. Its obligation

to pay, insofar as the taxable year 1939 was concerned, had

become final and definite in amount when it paid the full

amount of the real estate tax for 1939 assessed in that year.

Viewing the situation at the end of that taxable year, as

we must, we find that the plaintiff incurred and paid a $100

obligation, although it was under protest and with the bona

fide expectation that a part of the payment would be sub-

sequently refunded.

The plaintiff actually accrued on its books and deducted

in its tax returns the full $100 amount. We think this was

proper because the plaintiff incurred an expense in the

amount of $100 in that year. Had the plaintiff failed to ob-

tain a repayment of its real estate taxes for 1939, its returns

would have correctly reflected its income for that year under

the accrual method. There is no compelling reason why a

sustained expense should be postponed until settlement of

the question of repayment. Since the plaintiff was success-

ful and obtained a repayment of $5, under our annual ac-

counting concept this amount should be included as income

in 1941, the year plaintiff’s right to the repayment became

final.

The underlying reason for the rule in the Dizie Pine

Products and the Security Flour Mill cases of refusing a

deduction where the taxpayer has not paid the expense and

is contesting it, is because the expense may never be in-

Ah Na A tn at bP an eth a,

curred. In the instant case the expense had been incurred

and actually paid within the taxable year and is therefore

deductible in that year.

What we have said does not mean that the mere pay-

ment of an item accrues that item, but rather we hold that

payment of an item which is otherwise accruable in the

taxable year accrues the item even though payment is made

under protest and even though litigation is started within

the taxable year to obtain repayment. Therefore, the plain-

tiff’s prepayment in 1941 of part of its 1942 taxes does not

accrue those taxes in 1941.

The plaintiff’s argument based upon the fact that ac-

cepted accounting principles require that the disputed

portion of the tax liability, although paid, should not be

accrued until settlement of the dispute, lacks sufficient per-

suasiveness, under the facts presented in this case, because

such principles represent a refinement in ascertaining net

income that would be impractical and, in our opinion, in-

feasible in the administration of the revenue laws.

In view of the complex computations involved in these

three cases, the parties have agreed upon computations of

the amounts of income taxes overpaid or underpaid by the

plaintiff dependent upon which of the alternatives the

court finds to be correct. These computations are set forth

in finding 47. We hold that finding 47 (C) sets forth the

correct deductions and inclusions. Finding 47 (C) pro-

vides for the ‘‘allowance as deductions in 1938, 1939 and

1941 of amounts of real estate taxes paid in those years

($100.00) ; and inclusion in 1941 income of the amounts of

excess payments of real estate taxes for said years that

were refunded in 1941 ($5.00).’’ Translated into dollar

amounts in the individual cases, according to this finding,

the plaintiff is entitled to recover $128,329.55 in case

No. 49654; $105,305.58 in case No. 49655, and nothing in

ease No. 50432.

Judgment will be entered for plaintiff in case No. 49654

in the amount of $128,329.55, and in case No. 49655 in the

amount of $105,305.58, with interest thereon, respectively,

as provided by law. The petition in case No. 50432 is

dismissed.

Lanamorg, Judge; Mavven, Judge; Wurraxen, Judge;

and Jones, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the briefs

and argument of counsel, and the report of Commissioner

Richard H. Akers, makes the following findings of fact:

1. The plaintiff is a public utility corporation duly

organized and existing under and by virtue of the laws of

the State of New York, with its principal office located at

4 Irving Place, Borough of Manhattan, City and County

of New York, in the State of New York, and is engaged

in the manufacture, distribution and sale of electrical

energy and gas.

2. The plaintiff sues to recover income taxes alleged to

have been overpaid for the calendar years 1938, 1939 and

1941. At all times during those years, the plaintiff kept

its books and filed its income tax returns upon an accrual

accounting basis.

3. Certain formal facts with respect to the years in-

volved herein are as follows:

1B 1999 161

w e —-y a ee

g Tar tebiity aincinnd eer me $1,900, o81.31 | $800,248 | | 97,400, 18

ennnal instaliments........... --| $1,990,881.81 | $3,006,204.48 | ~ $7,440,128 3

(@ Refund claims filed within statu-

tory period. ......-.....---+--+- 3-10-42 e114 3-12-45

6-246

q 13 @

@) Amount of Refund Ciaims........ $1, 920,681.31 | $3,003,904 "tot ms 3

of Refund (Deficiency) s an

aartned Commminiomes | $218,907.25| $166,287.86 | (9002, 163.19)

a tory Interest re far FS oO4s en cl (17-50)

tofore allowed.............-----+-| Q) &3S

enact

4 The refund claims filed for the years 1938, 1939 and

1941 were based upon the alleged understatement of several

deductions, among which were the deductions for deprecia-

tion and amortization. In a consideration of those claims,

increased deductions for depreciation and amortization

were allowed by the Commissioner of Internal Revenue for

the years 1938, 1939 and 1941, but they were offset by

other adjustments made by the Commissioner, chief of

which were (1) the disallowance of that part of the real

estate tax deductions taken in 1938 and 1939, which were

refunded to the plaintiff in 1941, and (2) the inclusion of

those refunded real estate taxes (including a refund of

part of the real estate taxes paid in 1940) in the plaintiff's

gross income for 1941. In addition thereto, the Commis.

sioner disallowed the plaintiff’s claim for an increase of

$8,108,497.64 in its deduction for real estate taxes for 1941,

The allowances and the offsetting adjustments made by

the Commissioner are shown in the following tabulation:

1, 848, 679. 75

5. During the years involved herein, the plaintiff owned

many hundreds of parcels of real estate in the City of New

York which were subject to a real estate of corporations tax

(hereinafter referred to as real estate tax) under the laws

of the State of New York and of the City of New York in

general, and the New York State Tax Law, the New York

City Charter and the Administrative Code of the City of

New York in particular.

6. The New York City Charter, which became effective

January 1, 1938, changed the operating year of the City of

New York from a calendar year basis to a fiscal year basis

of July 1 to the following June 30, commencing with July 1,

1939. Thereunder, each parcel of real estate, identified by

section, block, lot and identification number, is appraised by

the City Tax Commission as of January 25; the value so de-

termined is placed upon a tentative assessment roll which

is open for inspection from February 1 to March 15; an ag-

grieved property owner could then seek an administrative

review to correct any claimed erroneous valuation by filing

with the Tax Commission, on or before March 15, a sworn ap-

plication for correction of the assessment setting forth the

bases and grounds thereof, and could request an oral hear-

ing thereon; a final determination must be made on or

before May 25; and if no action is taken by then, the tenta-

tive assessment becomes final.

The assessment roll is then sent to the Comptroller of the

City of New York who, between June 20 and June 25, pre-

pares a proposed budget for the ensuing fiscal year and sub-

mits it, together with the assessment roll and his estimate of

revenues to be raised from real estate taxes and from other

sources, to the City Council. On the basis thereof, the Coun-

cil must by June 25 adopt a budget and fix a real estate tax

rate which, after considering revenues from other sources

and when applied to the final valuation of the assessment

roll, will produce the necessary revenue to meet the operat-

ing and budgetary requirements of the City for the ensuing

year.

Bills for the real estate tax on each parcel—the product

of the tax rate thus established and the valuations on the

final assessment roll—are then sent to each property owner

and are payable in two installments, October 1 and April 1

of the fiscal year.

7. An application for correction of assessment (some-

times called a protest), referred to in finding 6, must be filed

on forms supplied by the Tax Commission and all perti-

nent questions thereon must be answered. Objections which

can be raised are (1) overvaluation, (2) inequality, or (3)

illegality. Overvaluation or inequality does not invalidate

the tax or the liability therefor but merely calls for correg-

tion of the amount of the tax. Where illegality is predi-

cated upon an illegal form or method of valuation, it is an-

other way of raising the question of overvaluation or ine-

quality ; culy where it is addressed to the validity of the tax

itself does a successful challenge wipe out the tax in its en-

tirety and all liability therefor.

8. One of the questions in the protest which must be

answered is ‘‘What do you consider was the full value of

the property on January 25 this year?’’ A similar ques-

tion was in the protest forms for earlier calendar years.

Failure to answer this question is, under New York law,

fatal to such application. The Tax Commission causes each

protest to be examined to ascertain whether this question

is answered, and if it is not, the protest is summarily re-

jected. Without answering this question, it is impossible

to obtain an administrative review of any real estate aszess-

ment in New York City.

9. Similar administrative procedures existed prior to

the adoption of the New York City Charter, which became

effective January 1, 1938, except that the dates set for the

various administrative steps to be taken in the earlier

years were moved back to fit in with the calendar year,

so as to afford similar time intervals for the commence-

ment and termination of the administrative steps. The

City Charter retained the year 1938 on a calendar year

basis and specific provisions were made for the transition

period January 1, 1939 to June 30; for example, the valua-

tions determined for the year 1938 constituted the valua-

tions for this interim period subject to modification for

additions and retirements, and the protests filed with re-

—

spect to the 1938 valuations were considered applicable

to the same valuations for the interim period.

10. Under the New York law, an aggrieved property

owner could not obtain a judicial review of a protested

assessment without first exhausting the administrative pro-

cedure outlined. Upon failure to obtain satisfactory relief

through administrative process, judicial review could then

be instituted not later than October 25 (July 1 for 1938

and the first half of 1939) of the year in which the assess-

ment becomes final.

Article 13 of the New York State Tax Law specifically

provides for such judicial review (hereinafter referred to

as certiorari proceeding). This is an exclusive remedy.

Pursuant thereto, a verified petition to review the assess-

ment must be submitted to an appropriate court or judge;

an order thereon is issued directing the issuance of a writ

of certiorari to the Tax Commission returnable on a speci-

fied date; and the issues raised upon the return date are

thereafter brought to trial. In the case of properties as

large as those owned by the plaintiff herein, it is virtually

impossible to get a judicial determination of the issues

raised within one and a half to two years after the cases

are started.

11. The petition must explicitly and fully set forth the

basis upon which the relief is sought: if it is overvalua-

tion, the extent of the overvaluation must be alleged ; if it

is inequality, the instances of such inequality and the ex-

tent thereof must be alleged; and if it is illegality, the

grounds of illegality must be specified. In all cases, except

where illegality is addressed to the tax in its entirety rather

than to its form or method, the petition must set forth, as

did the original protest, what the full value of the property

is claimed to be.

Under New York law, the petitioner is bound by the

valuation thus alleged as the minimum value that could be

found by the court. Thus, in complying with the require-

ke ee le A ON A A 8 a

ment of the law of New York, and alleging both in the

protest and in the petition to the court the claimed full

value of the property involved, a taxpayer admits liability

for real estate tax thereon in a certain and definite amount,

namely, the claimed value of the property multiplied by the

established tax rate.

12. The real estate tax rate for any particular operat.

ing year does not vary or change after it is established. The

budget makes provision for estimated refunds of real

estate taxes resulting from reductions in assessed valua-

tions, and if the actual refunds exceed that estimate, the

tax rate for the year involved is in no way affected thereby.

To meet such additional expenditure, the City would have

to borrow money therefor and then provide for pay-

ment of the loan in the budget of the following year or

years, but the City Council] does not reopen the budget of

the year involved or change the tax rate already estab-

lished for that year.

13. The institution or pendency of litigation for the

correction of an assessment does not postpone the dates

the bills for the real estate taxes become due and payable.

Notwithstanding the pendency of such litigation, failure

to pay the bills when due subjects the property involved

to a tax lien which has the effect of a judgment lien and

which could be foreclosed and the property sold. In addi-

tion, 7 percent per annum penalty interest is incurred.

There is no provision in the New York law for suspend-

ing or removing the tax lien, whether by injunction, bond

or otherwise, other than by payment of the taxes thereon, as

billed. Under the New York law an aggrieved property

owner must first pay the real estate taxes thereon and then

seek to rectify the error by the exclusive remedy outlined in

the statute, or else run the risk, in addition to incurring a

7 percent interest penalty, of having the tax lien foreclosed

and the property sold.

14. Immediately prior to the years involved herein, the

Board of Taxes and Assessments (as the Tax Commission

cei ie) ite Reale

a The Ht |

Hivaal [Tala] Te | Haat

ALT Aba $ it aie A

SEESS32 3 iii « 4 if

Hf HT Ha atthe un fhe

siteetiia! || al ah —

plaintiff duly instituted proceedi

review by filing in the proper court

to the supplemental assessments for the first

which were addressed to the entire supple-

Ss SLT a rene tne

20. Under the law of New York, the plaintiff was bound

by the valuations claimed in ite petitions and thereby ad-

mitted liability for real estate taxes on the parcels of real

estate involved to the extent of the product of the valuations

thereon, as alleged, and the established tax rate for the

years involved.

«4

21. The protests and the certiorari proceedings with re-

spect to the assessments for the calendar year 1938, the first

half of the calendar year 1939, and the fiscal years 1939/1940

and 1940/1941, were bona fide and were filed, instituted, and

prosecuted by the plaintiff in good faith.

The valuations therein claimed and asserted by the

plaintiff with respect to each of the parcels were bona fide

made in dollar amounts which represented the best business

judgment of the responsible officers and management of the

plaintiff as to the full value of the properties and the

amounts that would ultimately be determined by the courts

to be correct.

22. In addition to the knowledge and information of its

own officers and employees with respect thereto, the plain-

tiff engaged in the latter part of 1937 outside, independent

appraisal experts to make appraisals of all of ite prop

erties. While the appraisal job was in progress, the plain-

tiff’s officers and employees had many conferences and were

in constant contact with the appraisers, whose reports and

working papers were at all times made available to them.

The appraisal values, as finally determined by the experts,

were generally somewhat lower than the values set forth

and claimed by the plaintiff in the protests and in the cer-

tiorari proceedings.

23. The certiorari proceedings with respect to the lump

sum assessments for the years 1936 and 1937 were settled in

the year 1940 for a lump sum amount, thereby avoiding the

extended effort and detail necessary to allocate to each in-

dividual parcel the amount and basis of that settlement.

After those suits were out of the way and in the latter half

of 1941, the plaintiff received from the City of New York

a proposal which served as a basis for settlement of the then

pending certiorari proceedings with respect to the real es

tate assessments for the years 1938 through 1941.

24. Up to the time that proposal was received, the plain-

tiff had definitely intended to prosecute the then pending

certiorari proceedings to their ultimate conclusion. It was

confidently felt by the officers and management of the plain-

tiff that the valuations claimed and asserted in the protests

and in the certiorari proceedings, supported by certificated

opinions of its experts arrived at through application of

accepted methods of appraisal, would ultimately be sus-

tained by the courts.

25. The proposal, however, contained a development

that was considered very important in that it afforded an

opportunity to fix bases and determine methods of assess-

ing the plaintiff’s properties in future years in contrast

with those employed in prior years that had resulted in

expensive litigation. Another important consideration was

the matter of public relations—the possible adverse effects

of further extended controversy between the plaintiff, a

public utility, and the City of New York, a part of the

community it served. At that time municipal ownership

of gas and electric plants was still a possibility.

26. On the other hand, acceptance of the proposal

meant surrender by the plaintiff of part of its claim which

it felt justly entitled to and firmly believed would be re-

covered. It thus became a question of alternatives between

continuing litigation and recovering the overpayments of

real estate taxes of the past years, or sacrificing a part

thereof for the savings and benefits to be derived from an

agreeable and harmonious working arrangement and re-

lationship in the future.

27. The plaintiff finally decided that the future benefits

warranted acceptance of the proposal and surrender of

part of the past values to which it considered itself entitled.

The justification of this decision was borne out by the

harmonious relationship and valuation stability that ex-

isted thereafter until 1947.

28. Accordingly, a stipulation for settlement of the

pending proceedings was entered into, which constituted

a compromise of the amounts to be recovered by the plain-

tiff and the valuations to be placed upon each parcel of

cematineesmiiass ee

real estate owned by the plaintiff. Based thereon the

Corporation Counsel of the City of New York executed

offers to allow final order, judgment or decree to be en-

tered in said proceedings reducing the assessed valuations

as agreed upon; orders thereon were entered with respect

to each parcel; and stipulations of discontinuance dated

August 29, 1941, were filed with the court. Pursuant

thereto the City of New York made refunds to the plaintiff

in 1941, aggregating $1,848,679.75, of real estate taxes paid

for the years 1938, 1939 and 1940. The settlement also took

into account and reduced the assessed valuations for the

fiscal year 1941/1942, for which protests had already been

filed.

29. The aggregate amounts of the values actually con-

tested, the extent of the reduction, and the extent of the

retention of the contested values resulting from the com-

promise and the stipulations and orders entered thereon,

are as follows:

1093 | First half | sosonou | 19s0nos

nn ecerensen-ze |$116, 536, 000 |$112, 042, 900 |$105, 859, 700 |$119, 378, 100

were retained......... 90, 841,000 | 86,247,900 | 89, 269,700 | 104,723, 100

30. The amounts and the years in which the real estate

taxes were paid and the deductions therefor taken in the

plaintiff’s income tax returns, are as follows:

12, 067, 226. 01 |12, 025, 877. 80 |12, 996, 065, 56 |11, 470, 381. 98

In 1941 the plaintiff paid an additional $5,626,518.25

real estate taxes, which represented the second half of the

1941/1942 real estate taxes, but no deduction for same

was taken in its 1941 income tax return.

31. The valuations, as admitted in the plaintiff’s pro-

tests and petitions for certiorari, as contested therein, and

as finally stipulated and adopted by the court, in terms of

the real estate taxes set forth in the preceding finding, are

at follows:

1938 1930 190 Total

(a) Assessed real estate taxes

paid and deducted in in-

Soames es Mpememe aes

(2) Contested amount 3, 423, 238.54 | 3, 187,017.04 3, 346, 920. 91 067, 177.30

under court orders.....- |, 067.

®) court orders. <=; 11, 308, 914 01 11, 408, 617. 65 | 11, 627, 967.06 3A, 240, 488. 63

Talid ander court Orders |» 04,027.04 | 2, 864,757.00 | 2,878,812.41 | 8, 108, 407. 66

() Contested amount held in-

valid and refunded in

758, 311. 00 622, 200. 25 408, 108.50 | 1,843, 679. 75

32. The plaintiff was and is under the jurisdiction and

supervision of the Public Service Commission of the State

of New York (hereinafter referred to as P. S. C.) and kept

its books and accounts in accordance with the ‘‘Uniform

System of Accounts Prescribed for Gas Corporations’’ and

the ‘Uniform System of Accounts Prescribed for Electric

Corporations’’ established by orders of the P. S. C. dated

June 16, 1937 and May 25, 1937, respectively, and in effect

during the years involved herein. These Uniform Systems

of Accounts constituted full and complete accrual systems

of accounting.

33. Paragraph 228 in each of the Uniform Systems of

Accounts dealing with Taxes Accrued provides as follows:

A. This account shall be credited during each ac-

counting period with the amount of taxes accrued dur-

ing the period, corresponding debits being made to

the appropriate accounts for tax charges. Such cred-

its may be based upon estimates, but from time to

time during the year as the facts become known, the

amount of the periodic credits shall be adjusted so as

to include as nearly as can be determined in each year

the taxes applicable thereto. Any amount repre-

senting a prepayment of taxes applicable to the

wares ie Pha sce to the date of the balance sheet

shall be shown under account 132, Prepayments.

B. The records supporting the entries to this ae

count shall be so kept that the utility can furnish

information as to the amount, by classes, of taxes

accrued, the basis for each tax accrual and the ae-

counts to which charged, and the amount, by classes,

of taxes paid.

34. It was the plaintiff’s practice to accrue monthly

upon its books its real estate taxes over the period covered

by those taxes. These monthly accruals were entered upon

the books on the basis of assessments regardless of when

or how the payment of those taxes was made. The payment

of the taxes had no relation to, or effect upon, such accruals,

which were entered both before and after the payment of the

taxes. Such accrual of the real estate taxes conforms with

the provisions and requirements of paragraph 228 of the

Uniform System of Accounts (finding 33) and with the

principles of accrual accounting.

35. The accrual method of accounting as recognized

by well-established principles of accounting is fundamen-

tally different from the cash basis of accounting. Under

strict cash basis, transactions and events are not recorded

until cash has been received or paid, without regard to

the period to which they relate or the period in which the

revenues or expenses apply. The accrual method, however,

is based upon the principle of recording transactions and

events as they occur, regardless of when the cash receipts

and disbursements part of the activities takes place. Reve-

nues are accrued as nearly as practicable to the period

earned, and expenses, which include taxes, are accrued and

allocated in as reasonable and consistent a manner as possi-

ble in the period and against the revenues they helped to

produce. The primary purpose of accrual accounting prinei-

ples is to obtain a proper and fair determination of periodic

income, often referred to as the process of matching costs

against revenues, so that in each accounting period there

will be deducted all the ascertainable costs necessary to

produce the revenue, including indirect period costs such as

depreciation, taxes and interest.

36. Under the accrual method of accounting, the pay-

ment of cash extinguishes a liability that either has already

been recorded for purposes of determining income or is yet

to be recorded for purposes of determining income, but it

does not of itself have any effect upon the determination of

income. It may either precede or survive the accrual or re-

cordation and is a balance sheet transaction which reduces

the cash asset and is balanced by a corresponding reduc-

tion of a liability or the substitution of another asset in its

place, but it has no effect on the profit or loss—the income

determination.

37. When the term ‘‘accrual”’ is used in a balance sheet

sense, as distinguished from an income-determining sense,

it could never survive payment because payment extin-

guishes the liability and eliminates it from the balance

sheet. But in an income-determining sense, payment has

no effect upon accrual which may or may not survive pay-

ment depending upon whether the payment is in extinguish-

ment of a liability already accrued or in prepayment of a

liability to be incurred, determined, or accounted for at a

later date or period. ;

38. Under accrual accounting, when payment is made

with respect to a liability which is denied in whole or in

part, the aceounting principle as to charges against in-

come would be the same as if payment had not been made ;

such payment would not affect the treatment of any ac-

cruals. This principle applies equally to the payment of

taxes. The payment of the admitted or estimated ultimate

liability constitutes the payment of a current charge or.

expense of operations and the balance of that payment

represents an amount estimated to be ultimately recovered

and is chargeable to a suspense, deferred debit, or other

receivable account. The latter item represents an asset—

a deposit which is expected to be recovered.

39. These generally accepted principles of accrual sys-

tem of accounting apply to the real estate taxes involved

herein and are recognized in the Uniform Systems of

Accounts prescribed by the P. 8. C. (See findings 32

and 33.)

40. In recording the accruals of the real estate taxes

on its books, the plaintiff did so solely on the basis of the

assessments made and without regard to their payment,

or the amounts that were contested, or the amounts which,

in the considered judgment of the plaintiff’s officers, would

ultimately be eliminated. In all instances the accruals

upon the plaintiff’s books either preceded or survived the

payment of the taxes.

41. The accrual on the plaintiff’s books on the basis

of the assessments without regard to their payment was

in accord with the principles of accrual accounting and with

the provisions of the Uniform Systems of Accounts pro-

mulgated by the P. 8S. C. However, the accrual on the

basis of the assessments without regard to the amounts

that were contested, or without taking into consideration

the best judgment of management as to the plaintiff’s ulti-

mate liability therefor, was not in accord with the prin-

ciples of accrual accounting or the provisions of the Uniform

Systems of Accounts. In its income tax returns for the

years 1938, 1939, 1940 and 1941, the plaintiff claimed dedue-

tions for the real estate tax items as they were accrued

upon its books on the basis of these assessments.

- 42. The facts as above set forth may be simplified and

illustrated by the following example which is applicable

to all of the years involved herein:

the 1939 plaintiff was notified on January 25, 1939, of a

(2) for live assessment in the amount of $100.00

assessment of $100 by. oe 15.00

about y

se ing $8, a ot Mer B19 Sn ay

(4) thereafter on or about October 1, 1939 under protest and for the

stated purpose of liens, seizures,

etc., and reserving all fp oredeg— Gia

within the statutory October 25, 1939, certiorari proceed-

denying liability in excess of $85.00

(f) on — i041, the Sugoeme Court of Gn State of Boe 3S

liability at 95.00

43. The treatment of this simplified example as accrued

on the plaintiff’s books, as deducted on the plaintiff’s re-

turns, as finally allowed by the Commissioner of Internal

Revenue and as contended for by the plaintiff, is illus-

trated as follows:

Accrued on plaintiff's books aciininioshititiaiiias

Deleted on piskedit's return aD 100.00

Deductions by

contended for by plaintiff 85.00

1941

Added to income by Commissioner $ 5.00

Deductions for by plaintiff 10.00

An alternative contention advanced by the plaintiff is as

follows :

(6) 18.906 is to be allowed as 0 Gstaction EP,

then the $5 does not constitute income in 1941; and

(b) if the $5 is to be included in the 1941 income,

then the deduction for 1939 should be $100.

44. The proper book entries of this example, according

to well-recognized and sound principles of accrual account-

ing, and in accordance with the Uniform Systems of Ae

counts prescribed by the P. 8S. C. are illustrated by the

following set of entries:

19399

1) Dr. Tax expense $85.00

ad Cx, Tones soovecl $ 85.0

(To record the admitted liability for taxes for the year

(2) Dr. Taxes accrued 85.00

for contested taxes 15.00

(To secord gagment of the seseseed tax, pert of which is

contested)

1941

(3) Dr. Cash___ Scoik tit

Tax 10.00

(To record final settlement of the contested taxes.)

45. Under the generally accepted and well-recognized

principles of accrual accounting, the $15 in this example,

which the plaintiff paid over and above its admitted liability

of $85 for taxes in 1939, and which in the best judgment of

management would be recovered as soon as full legal pro-

ceedings were consummated, would constitute an asset until

August 1941 when the settlement was made, and when for

the first time the plaintiff had knowledge that instead of an

asset of $15 it had only an asset of $5, and that the remain-

ing $10 was, instead, an expense.

46. Under these accrual accounting principles, the $10

expense is accrued and deducted in 1941 and is not related

back to 1939 because accrual accounting principles are

based, among other things, upon reasonableness and prac-

tieability. Under accrual accounting it would be considered

unreasonable and impractical to go back and reopen closed

years, the income of which had been determined upon an

appraisal of all facts then known. Subsequent develop-

ments are taken into consideration and recorded in the year

EE — EEE

when they occur. If they occur immediately after the end

of the year involved and before the books for that year are

slosed (it usually takes about 30 days to close the books of

a substantial business that are kept on an accrual basis),

the same practical approach would prompt taking those

events into account in the prior year—but aside from this

exception, under accrual accounting principles, the facts

and developments are recorded in the year they occur.

47. In view of the complex computations involved

herein, the parties hereto, without attempting to limit or

preclude a determination herein that would involve a com-

putation upon any other basis, have made and agreed upon

tions of the amounts of income taxes overpaid or

underpaid by the plaintiff, in the event the Court disposes

of the issues herein upon any of the following bases:

A. Allowance as deductions in 1938, 1939, 1940

and 1941 of the amounts of real estate taxes ad-

mitted in those years to have been due’ ($85.00) ;

allowance as deductions in 1941 upon termination of

the litigation of the additional amounts of taxes de-

termined to be due over and above the amounts

previously admitted ($10.00); and exclusion from

1941 income of amounts of excess payments of real

estate taxes in said prior years that were refunded

in 1941 ($5.00) ;

B. Allowance as deductions in 1938, 1939, 1940

and 1941 of the amounts of real estate taxes ulti-

mately determined to have been due for said years

($95.00) ; and exclusion from 1941 income of amounts

of excess payments of real estate taxes for said years

that were refunded in 1941 ($5.00) ;

C. Allowance as deductions in 1938, 1939 and 1941

of amounts of real estate taxes paid in those years

($100.00); and inclusion in 1941 income of the

amounts of excess payments of real estate taxes for

said years that were refunded in 1941 ($5.00).

sais Hopite ts pemeteire ave Ge campers Comes fo Ce Gayhies

Such computations disclose the following unde

ments (overpayments) of principal amounts of income

made by the plaintiff for the aforesaid years:

Se ee

6 5 $400, 067.74 | * $434, 002. 51 O79 2 8 matt

(ie, aa) | Tiss, 08 a)

ah bareaty the saanet he Sato of limitatiasessept tote extent aay be goveroed Dy oe.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made

part of the judgment herein, the court concludes that as

matter of law the plaintiff is entitled to recover, and it

therefore adjudged and ordered that it recover of and

the United States one hundred twenty eight thou

three hundred twenty nine dollars and fifty-five ¢

($128,329.55) in case No. 49654; and one hundred fi

thousand three hundred five dollars and fifty-eight ¢«

($105,305.58) in case No. 49655, with interest on

amount as provided by law.

The plaintiff is not entitled to recover in case No. 504

and its petition is therefore dismissed.

INDEX

Page

« ng ee 1

IIE F EEE SO ED RR oo ER 1

ion presented - . . ...------------------------ 2

fevelved ; oo. coi ooo eel cece csecesewct 2

SR eee ee Tare SA 4

I ou gc dcaneeacsencesbacnannsecsuwt 10

‘Conclusion. - - . .-------------------------------- 16

CITATIONS

Baltimore Transfer Co. v. Commissioner, 8 T. C.

Bee Se Ai EL AD ie seackebetbace 11,14

Bartlett v. Delaney, 173 F.2d 535, certiorari denied, >

906 U. &. G17 2.2 222 cc Se ccc nce cence sonse 14

Bergan v. Commissioner, 80 F.2d 89...--. -- 14

Brown v. Helvering, 291 U.S. 193. ------------ 12

Chestnut Securities Co. v. United States, 62 F . Supp.

i posdecddcocesbdédpwtdasdtbodvvctdceiaé 11

ev: Boylston Market Ass'n, 131 F. 2d

Le ina baupemepondamabaanepaas ion 13

eta thee v. Commissioner, 144 F. 2d

693, certiorari denied, 323 U. S. 772--------- 13

Dizie Pine Co. v. Commissioner, 320 U.S. 516... 13,15

Elliott Co. v. Commissioner, 45 B. T. A. 82...--- 11,15

Gibson Products Co. v. Commissioner, 8 T. C. 654 - 11

Hart Furniture Co. v. Commissioner, 12'T.C. 1103,

Inland Products Co. v. Blair, 31 F. 2d 867.....- 14

Re peeenmanham v. Commissioner, 16 T. C.

ee tL ss benbo nad eesnmenmehe 14

Lehigh Valley Rotireed Oo. v. Commissioner, 12

ttt nt amsestanbdedassmecassgnnaens ll

Lewyt Corp. v. Commissioner, 349 U. 8. 237-..-- 13

Lucas v. American Code Co., 280 U.S. 445----.-- 12

Security Mills Co. v. Commissioner, 321 U.S. 281. 12,15

879825—66——1

Western Cartridge Co. v. Commissioner, 11 T. C.

athe Sepreme Gout of he ied Ses

Ooevsas ‘Tans, 2060

No. 695

Consomapatep Enviwson Company or New Yourx,

INC., PETITIONER

Tue Untrep States or AMERICA

OW PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATER COURT OF CLAIMS

-_——o_

—_—_——————————

The opinion of the Court of Claims (R. 17-

25)’ is reported at 135 F. Supp. 881.

The judgment of the Court of Claims was en-

tered on December 6, 1955. The petition for

a writ of certiorari was filed on February 16,

1956. The jurisdiction of this Court is invoked

ander 28 U. S. C., Section 1255 (1).

_ *Record references are to Appendix B of taxpayer's

oat aw

QUESTION PRESENTED

Where local real estate taxes are assessed and

paid in one year and there is a challenge to

the amount of the assessment, which is partially

suecessful and results in a refund in a later

year, should an accrual basis taxpayer, as the

Court of Claims held, compute its federal in-

come taxes by deducting the full amount of the

real estate taxes in the year when paid pur-

suant to the assessment, and include in its in-

come the amount of the refund in the later year

when it became entitled to receive it?

STATUTE INVOLVED

Internal Revenue Code of 1939:

Sec. 23. Depuctions From Gross INcoME.

In computing net’ income there shall be

allowed as deductions:

* * & ee @

(ec) Taxes Generally.—Taxes paid or ac-

erued within the taxable year, * * *

* * *

_ *

(26 U. S. C. 1952 ed., Sec. 23.)

Sec. 41. GeneRaL RULE.

The net income shall be computed upon

the basis of the taxpayer’s annual account-

ing period (fiscal year or calendar year,

as the case may be) in accordance with

the method of accounting regularly em-

ployed in keeping the books of such tax-

payer ; but if no such method of accounting

has been so employed, or if the method

employed does not clearly reflect the in-

come, the computation shall be made in

accordance wiih such method as in the

opinion of the Commissioner does clearly

reflect. the income. * * *

(26 U. 8. C. 1952 ed., Sec. 41.)

Sec, 42. Pentop 1s WuicH Irems or Gross

IncoME INCLUDED.

The amount of all items of gross income

shall be included in the gross income for

the taxable year in which received by the

taxpayer, unless, under methods of ac-

counting permitted under section 41, any

such amounts are to be properly accounted

for as of a different period. * * *

(26 U. 8. C. 1952 ed., Sec. 42.) .

Sec. 43. Periop For WuxicH DEpUcTIONS

AND Crepits TAKEN. :

The deductions and credits (other than

the corporations dividends paid credit pro-

vided in section 27) provided for in this

chapter shall be taken for the taxable year

in which “paid or accrued” or “paid or

incurred”, dependent upon the method of

accounting upon the basis of which the

net income is computed, unless in order to

clearly reflect the income the deductions

or credits should be taken as of a different

peri ** *

(26 U. 8. C. 1952 ed., See. 43.)

Sec. 48. DEFINITIONS.

When used in this chapter—

(ce) “Paid or Incurred”, “Paid or Ac-

crued’’.—The terms “‘paid or incurred” and

‘“‘paid or accrued”’ shall be construed ac-

cording to the method of accounting upon

the basis of which the net income is com-

puted under this Part.

(26 U. 8. C. 1952 ed., See. 48.)

STATEMENT

Taxpayer is a public utility corporation or-

ganized and existing under the laws of the State

of New York and is engaged in the manufacture,

distribution, and sale of electrical energy and

gas. (R. 25.) During the years involved (1938,

1989, 1941), it owned several hundred parcels

of real estate in the City of New York which were

subject to real property taxes under the laws of

the State and City of New York.

The procedures established by New York law

may be summarized as follows. Parcels are ap-

praised by the Citr Tax Commission and the

determined values are placed upon a tentative

assessment roll. Administrative procedures are

available to challenge allegedly erroneous valua-

tions. To make a challenge a taxpayer must file

an application for correction of assessment

(sometimes called a protest) on a form supplied

by the Tax Commission, and must reply to all

pertinent questions there set forth. One of these

questions is, “What do you consider was the full

value of the property on January "25 of this

year?’ Following exhaustion of the adminis-

trative remedy, an unsuccessful applicant may

seek judicial review by means of a certiorari

procedure. (R. 18.)

A petition for judicial review must set forth

the taxpayer’s claim as to the correct value of the

property involved (except where the taxpayer is

challenging the validity of the entire tax). Thus,

compliance with New York’s provisions relating

to administrative protest and to petition for

judicial review requires the taxpayer to set forth

what he claims to be the full value of the property

and to admit liability for real estate tax to that

extent. (R. 18.)

The institution or pendency of litigation for

the correction of an assessment does not postpone

the date on which real estate taxes become due

and payable. Moreover, failure to pay the as-

sessed tax when due subjects the property in-

volved to a tax lien and to the possibility of

foreclosure. In addition, New York laws im-

poses a penalty of seven per cent per annum for

non-payment. Thus an aggrieved property

owner has to pay assessed real estate taxes in the

first instance and then seek to rectify any as-

serted error by pursuing the statutory remedies.

Otherwise, the taxpayer runs the risk of having

the tax lien foreclosed and the property sold.

(R. 18-19.)

Following the procedure outlined above, tax-

payer sought administrative relief from, and

review of, the valuations of its properties as they

appeared on the tentative assessment rolls for

the years involved. After the valuations, as

found by the City Tax Commission, became final,

taxpayer paid the real estate taxes, as billed for

the years 1938-1941, and accompanied the pay-

ment with letters of protest. (R. 31-33.)

Thereafter, taxpayer duly instituted proceedings

in the New York courts for judicial relief and

review, setting forth the grounds for relief and

the respective amounts claimed to be the full and

fair value of each individual parcel of property.

All of the petitions alleged, inter alia, over-

valuation. (R. 33.)

’ (he New York proceedings were compromised

by a settlement agreement in 1941, which specified

the amounts to be recovered by taxpayer and the

valuations to be placed upon each parcel of real

estate. Orders were entered thereon and the pro-

ceedings discontinued on August 29, 1941. Pur-

suant thereto, the City of New York made re-

funds to taxpayer, in 1941, of the excess taxes

paid for 1938, 1939, and 1940.2 (R. 35-36.)

Taxpayer kept its books of account and filed its

federal income tax returns upon the accrual basis

of accounting. (R. 25.) For the calendar years

1938, 1939, and 1941, it filed timely claims for

refund which were allowed by the Commissioner

2 The settlement also took into account and reduced the

assessed valuations for the fiscal year 1941-1942, for which

protests had already been filed. (R. 36.)

of Internal Revenue in certain amounts that are

not here in controversy, but there were offset

against these amounts certain sums that are dis-

puted. So far as now pertinent, the Commis-

sioner disallowed portions of the real estate tax

deductions, taken in 1938 and 1939, in amounts

equivalent to the sums refunded to taxpayer by

New York in 1941. The Commissioner included

refunded real estate taxes (including a refund of

part of the real estate taxes paid in 1940) in

taxpayer’s gross income for 1941. (R. 26.)

The parties have stipulated that the facts are

accurately reflected and illustrated in the follow-

ing simplified example, for the taxable year 1939,

which is applicable to all the years involved.

For the year 1939, taxpayer was notified, on Jan-

uary 25, 1939, of a tentative assessment for real

estate taxés in the amount of $100. Within the

statutory period and by March 15, 1939, taxpayer,

based upon the best judgment of its officers, duly

filed a bona fide protest admitting liability in the

amount of $85, and petitioned for an administra-

tive reduction of the tentative assessment by the

amount of $15. After a hearing duly held, and

on or about May 25, 1939, final assessment was

made in the amount of $100. Thereafter, on or

about October 1, 1939, under protest and for the

stated purpose of avoiding liens, seizures, levies,

penalties, interest, ete., and reserving all rights,

_ taxpayer made payment of the assessed tax in the

3798283—56——2 ’

amount of $100. Within the statutory period, on

October 25, 1939, certiorari proceedings were in-

stituted in New York admitting liability in the

amount of, and denying liability in excess of, $85.

On August 21, 1941, the Supreme Court of the

State of New York entered its order in the cer-

tiorari proceedings fixing the tax liability at $95.

In October 1941, taxpayer receiwed a refund of

the excess payment in the amount: of $5. (R. 41.)

In terms of the example, taxpayer accrued

on its books and deducted on its federal tax

returns for 1939 the full $100. Upon audit,

the Commissioner allowed only $95 for that year,

and included the $5 refund received in 1941 as

income for 1941.

In the Court of Claims, the taxpayer contended

that it should have accrued $85 in the year when

the $100 of tax was paid and should have ac-

crued an additional $10 in the year when it

became settled that the liability was $95. Al-

ternatively, the taxpayer maintained that if a

$95 deduction was proper for 1939, it should not

be obliged to include the $5 refund in 1941 in-

come. (R. 19-20.)

The Court of Claims found (R. 38) that it

was taxpayer’s practice to aecrue monthly upon

its books its real estate taxes over the period

covered by those taxes; that these monthly aec-

cruals were entered upon the books on the basis

of assessments regardless of when or how pay-

ment of those taxes was made; that the pay-

ment of the taxes had no relation to, or effect

upon, such accruals, which were entered both

before and after the payment of the taxes; and

that such accrual of the real estate taxes con-

formed with the provisions and requirements of

the Uniform System of Accounts, prescribed and

ordered for gas and electric companies by the

Public Service Commission of the State of New

York, which constituted full and complete ac-

crual systems of accounting (R. 37, 38).

The court further found, however, that the ac-

erual of the taxes on the basis of the assess-

ments without regard to the amounts that were

contested, or without taking into consideration

the best judgment of management as to tax-

payer’s ultimate liability therefor, was not in

accord with the principles of accrual accounting

or the provisions of the Uniform Systems of

Accounts (R. 40, par. 41); that, in terms of the

illustration and example given, the proper book

entries, “‘according to well-recognized and sound

principles of accrual accounting, and in accord-

ance with the Uniform Systems of Accounts

prescribed by the P. 8. C.,’’ should show the

admitted liability of $85 as an accrual expense

in 1939, and the $15 as a deposit for. contested

taxes which, when settlement was made in 1941,

constituted income in the amount of $5 and an

accrued expense of $10 (R. 42, par. 44).

Nevertheless, the court concluded that, as a

matter of tax accounting, taxpayer was entitled

to deductions im 1938, 1939, and 1941 of the full

amounts of real estate taxes paid in those years

($100), and that excess payments of real estate

taxes for those years that were refunded in 1941

($5) should be included in 1941 income. (R. 24,

44.) Translated in dollar amounts in the indi-

vidual cases, the court concluded that taxpayer

was entitled to recover $128,329.55 in Case No.

49654, involving the year 1938; $105,305.58 in

Case No. 49655, involving the year 1939; and

nothing in Case No. 50432, involving the year

1941, which is the subject of taxpayer’s petition

herein. (R. 24, 44.)

ARGUMENT

1. The Court of Claims was correct in holding

that an accrual basis taxpayer is required to de-

duct, in the year when paid, local real estate taxes

which have been assessed by the appropriate tax-

ing authorities, and that the right to the dedue-

tion is not affected by the facts that the taxpayer

is contesting, in part, the amount of the assess-

ment and is ultimately successful in securing

some refund. The decision is also correct in

holding that the taxpayer is required to include

in income the amount of the refund which it

obtains as a result of the contest, the income to

be accrued in the year when the right to it is

finally determined.

The principles applied by the Court of Claims

are in accord not only with its own prior decision

in Chestnut Securities Co. v. United States, 62

F. Supp. 574, but also with a consistent line of

decisions of the Tax Court, beginning with Stan-

ard-Tilton Milling Co. v. Commissioner, 3 T. C.

1026 (overruling Elliott Co. v. Commissioner,

45 B. T. A. 82). See also: Baltimore Transfer

Co. v. Commissioner, 8 T. C. 1; Gibson Products

Co. v. Commissioner, 8 T. C. 654; Western Cart-

ridge Co. v. Commissioner, 11 T. C. 246; Lehigh

Valley Railroad Co. v. Commissioner, 12 T. C.

977; Taylor Instrument Cos. vy. Commissioner, 14

T. C. 388. These principles follow the rule an-

nounced by the Internal Revenue Service in G.

C. M. 25298, 1947-2 Cum. Bull. 39, 43-44. See

also I. T. 3999, 1950-1 Cum. Bull. 129.

Although the taxpayer had actually accrued

these real estate taxes on its books and had

claimed deductions in its federal income tax re-

turns in the years of payment (R. 23, 41)—the

very method which the Court of Claims held to

be proper—it now attacks the decision of the

court below on the ground that it departs from

sound principles of accrual accounting. Indeed,

the argument advanced in taxpayer’s petition is

based largely on the assumption that the tax

deductions afforded an accrual basis: taxpayer

‘must parallel familiar accounting practices (even

though this taxpayer did not follow the par-

ticular practice which it now urges). But the

short answer is that the accrual basis for tax

purposes does not always follow particular ac-

U. S. 445; Borwn v. Helvering, 291 U. 8. 193.

In the situation here presented, taxpayer dis-

charged, by payment, the real estate tax lia-

bility asserted against it. It could not properly

postpone the accrual of some part of this item

until a later year, just as though it had con-

tinued to have an outstanding liability, when

in fact its liability had been discharged by what,

as it happens, proved to be an overpayment.

Nor is there any merit in taxpayer’s attempt

to treat part of its real estate tax payments

as though they were merely a deposit of money

with the taxing authorities of New York. (Pet.

4-5, 7.) The facts, as found by the Court of

Claims, are that the taxpayer “paid’’ its real

estate taxes. (R. 32.) No matter how an ac-

countant might treat the situation—and various

accountants might treat it differently—the money

was received by the City of New York as a

payment of taxes, not as a deposit of money.’

* The taxpayer is plainly mistaken in the attempt to anal-

ogize its situation with that presented by Security Mills Co.

v. Commissioner, 321 U. 8. 281, where, in an injunction pro-

ceeding, pursuant to court order, the money was i

by the taxpayer in » bank, designated as a depository of

the court, pending final determination of the validity of the

tax. In that case, the money was neither paid nor received

in satisfaction of the tax liability.

2. The petition cites no decisions which are

in conflict with the decision below. Dizie Pine

Co. v. Commissioner, 320 U. 8. 516, and Security

Mills Co. v. Commissioner, 321 U. 8. 281 (Pet.

6-8, 12-13), holding that there cannot be an

accrual of unpaid, contested taxes until the lia-

bility is finally settled, are not opposed to the

decision here. In both cases, the opinions em-

phasized that the taxes remained unpaid, and,

because liability was being contested, it was held

that it would be premature to permit the liability

to be acerued prior to the time when it became

fixed. In the present situation, as we have seen,

liability ceased to exist when payment was made,

so that the deduction became proper at the

time of payment. Neither United States v.

Olympic Radio & Television, 349 U. 8. 232, nor

Lewyt Corp. v. Commissioner, 349 U. 8. 237,

decided anything which is opposed to the decision

below.

Finally, Commissioner v. Boylston Market

Ass’n, 131 F. 2d 966 (C. A. 1st), and Cooperstown

Corp. v. Commissioner, 144 F. 2d 693 (C. A. 3d),

certiorari denied, 323 U. S. 772, cited in a foot-

note in the taxpayer’s petition (p. 7, fn. 3) and

daimed, without amplification, to be in conflict

with the decision below (pet. 10), are plainly

distinguishable.

The Boylston case merely holds that a cash

basis taxpayer, which makes a prepayment of

expenses for a series of future years, must, as is

true whenever a capital expenditure is made for

a wasting asset, amortize the expense over the

useful life of the asset.

The Cooperstown case involved a cash basis

taxpayer who paid a tax and simultaneously

sought (and later obtained) its refund. The

holding that the payment could not be allowed

as a deduction turned on the fact that the tax

was paid voluntarily and without any apparent

obligation existing. The case has been distin-

guished on that ground. Bartlett v. Delaney, 173

F. 2d 535, 540 (C. A. 1st), certiorari denied, 338

U. 8S. 817; Baltimore Transfer Co. v. Commis-

sioner, 8 T.C.1,7. Indeed, the Tax Court, which

follows the rule applied by the Court of Claims

in this kind of case, has also followed the

Cooperstown case where similar circumstances

were presented. Kenyon Instrument Co. v. Com-

missioner, 16 T. C. 732, 741-742; Hart Furniture

Co. v. Commissioner, 12 T. C. 1103, 1107-1108,

reversed on other grounds, 188 F. 2d 968

(C. A. 5th).

3. The brief of the amicus curiae, being filed

on behalf of the New York Telephone Company

in support of the petition, cites two additional

authorities which are claimed to be in conflict with

the decision of the Court of Claims in this case,

Inland Products Co. v. Blair, 31 F. 2d 867 (CO. A.

4th), and Bergan v. Commissioner, 80 F. 2d 89

(C. A. 2d).

While, in a technical sense, these early cases

are opposed to the views of the court below, we

doubt that they represent the kind of contem-

by this Court at this time. Both cases were de-

cided before this Court’s decisions in Dixie Pine

Co. v. Commissioner, 320 U. 8. 516, and Security

Mills Co. v. Commissioner, 321 U. 8. 281. Neither

the Second Circuit nor the Fourth Circuit has had

an opportunity to reexamine the soundness of

those decisions in the light of more recent de-

velopments. It may be that, when the question

is squarely presented, those courts, like the Tax

Court in Stanard-Tilton Milling Co. v. Commis-

sioner, 3 T. C. 1026 (overruling Elliott Co. v. Com-

missioner, 45 B. T. A. 82>, will conclude that

these earlier decisions should no longer be fol-

lowed and that they should apply the principles

which are now being consistently followed by the

Tax Court, the Court of Olaims, and the Com-

missioner. Indeed, we are informed that the

New York Telephone Company intends to test

this issue in a refund suit in the District Court

for the Southern District of New York. Ac-

cordingly, the Second Circuit may soon have the

opportunity of stating its present position.

Under the circumstances, we believe that the

conflict in decisions which the amicus curiae

brings to the Court’s attention is not ripe for

consideration by this Court. We also observe

that the amicus curiae is urging a position which

is different from that argued by the taxpayer.

We believe that it would be preferable for the

Second Circuit to express its views on the merits

of that position before this Court is asked to con-

sider it.

CONCLUSION

The decision below is correct. There are no

conflicting decisions which require review by this

Court at the present time. Accordingly, the peti-

tion for a writ of certiorari should be denied.

Respectfully submitted.

Smon E. Sospe.orr,

Solicitor General,

CHARLES K. Riz,

Assistant Attorney General,

Hiupert P. Zarxy,

Georce F. Lyncu,

Attorneys.

Marcu, 1956.

U. S. COVERNMENT PRINTING OFFICE: 1986

id eu ———EEEE———

' }__4PR_5_ 1956

[harown 8. witicr, c

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1955

CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.,

Petitioner,

THE UNITED STATES OF AMERICA,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

REPLY BRIEF OF PETITIONER

JAMES K. POLK,

Counsel for Petitioner,

40 Wall Street,

New York 5, N. Y.

Of Counsel:

Rosert E. Coutson,

Haroip F, NoNeEMAN,

| —— ou

IN THE

Supreme Court of the United States

OCTOBER TERM, 1955

No. 695

ConsoLipaTep Epison CoMPAny OF

New York, Inc.,

Petitioner,

v. “

Tue Unirep States or AMERICA,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

REPLY BRIEF OF PETITIONER

The Government’s restatement of the faets is correct

except for the statement (p. 9) that the Court below found

that under well-recognized and sound principles of accrual

accounting and the Uniform Systems of Accounts pre-

scribed by the Public Service Commission of the State of

New York the $5 in the illustrative example constituted in-

come in 1941. On the contrary the Court found that under

those principles the $5 did not constitute income in 1941

(Pet., Appendix B, p. 42, Par. 44, 45).

The petition filed herein is predicated primarily upon

the fact that the Court below disregarded the principles of

accrual and the construction of the accrual provisions of

the Internal Revenue Code as established by this Court, and

has rendered a decision contrary thereto. The Govern-

ment’s brief in opposition does not address itself to the

gravamen of the petition and fails to disprove the validity

of the reasons advanced by the petitioner for the granting

of the writ. To avoid confusion, the order in which these

reasons are set out in the petition will be adhered to.

1. The decision of the Court below is contrary

to the principles of accrual and statutory

construction established by this Court.

The Government’s only answer to that part of this

reason which is based on United States v. Olympic Radio ¢

Television, Inc., 349 U. 8. 232, and Lewyt Corporation v.

Commissioner, 349 U. S. 237, 242-243, is the bare statement

that neither case ‘‘decided anything which is opposed to

the decision below’’ (p. 13). Ignored completely is the

presentation of the principles of accrual and the statutory

construction of the accrual sections of the Internal Revenue

Code which were the bases for the decisions in those cases.

(See pet. 8).

The sole basis of the Government’s argument in answer

to that part of this reason which is based on Dizie Pine

Products Co. v. Commissioner, 320 U. 8. 516, and Security

Flour Mills Co. v. Commissioner, 321 U. 8. 281, is the fact

that petitioner paid the taxes while denying and contesting

its liability for them.

One prong of this argument is the Government’s state-

ment that ‘‘In both cases, the opinions emphasized that the

taxes remained unpaid * * *’’ (p. 13)—the implication being

that had the taxes been paid the opinions indicate an op-

posite conclusion would have been reached. Neither the

statement nor the implication is borne out by the opinions.

The only reference to unpaid taxes in Dixie Pine is when

this Court adverted to the ‘‘all events’’ test. The crux

1 320 U. 8S. 516, 519 ‘‘It has long been held that in order totruly |

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’’.

| ; 4 iat

of the decision in Dixie Pine is that a taxpayer, contesting

liability

‘‘must, in the circumstances, await the event of the

state court litigation and might claim a deduction

only for the taxable year in which its liability for

the tax was finally adjudicated’’. 320 U. S. 516, 519.

There is no suggestion whatever, as the Government im-

plies, that had payment been made while the contest was

in progress the taxpayer would have become entitled to a

deduction prior to the year its liability for the tax was

finally adjudicated.

In Security Flour Mills the issue before this Court was

whether the taxpayer could relate back to 1935 rebates made

to its customers in 1936, 1937 and 1938 of part of the pur-

chase price they had paid in 1935, which represented the

amount of Agricultural Adjustment Act taxes the taxpayer

had figured in its cost of goods sold. The question whether

the taxpayer had or had not paid the AAA taxes had

nothing to do with this issue. To argue, as the Govern-

ment does, that this Court ‘‘emphasized that the taxes re-

mained unpaid’’ (p. 13) is to misread the opinion in that

case.

The other prong of the Government’s argument is the

statement (p. 13) ‘‘In the present situation, as we have

seen, liability ceased to exist when payment was made,

so that the deduction became proper at the time of pay-

ment’’.? Inherent in the Government’s stress of payment

as the basis for accrual is an acknowledgment that at least

up to the time of payment, the contested liability, under

Dizie Pine, was contingent and accrual had to await the

2The Government’s brief had previously stated (p. 12) that

asserted against it’’; taxpayer could not postpone acerual ‘‘when

in fact its liability had been discharged by * * * an overpayment’”’ ;

and ‘‘The facts, as found by the Court of Claims, are that the tax-

payer ‘paid’ its real estate taxes’’.

outcome of the litigation. But the payment did not termi-

nate the litigation—the ultimate extent of the liability was

yet to be determined in the pending litigation.* To say,

as the Government does, that petitioner’s ‘‘liability ceased

to exist when payment was made’’ is to fail the grasp the

holding of Dizie Pine for, to the extent that the liability is

contested, it never does exist for purposes of accrual—it

is contingent upon the outcome of the pending litigation.

It therefore could not have ‘‘ceased to exist’’ when the

payment was made.

2. The importance of the question.

Apparently the Government agrees with the petitioner —

as to the importance of the question for it submits nothing

in opposition.

3. The decision of the court below is erroneous

on its own facts and reasoning.

In answer to this reason the Government states (pp. —

10-11) that ‘‘The principles applied by the Court of Claims

are in accord not only with its own prior decision in Chest-

nut Securities Co. v. United States, 62 F. Supp. 574, but also

with a consistent line of decisions of the Tax Court, * * *

(citing cases]’’.

But the Government makes no attempt to explain the

change in the basis of the decision of the Court below from

that of Chestnut Securities (see pet. 11-12).

The Government’s claim that the decision is in accord

with a consistent line of Tax Court cases does not bear up

upon scrutiny of those cases or consideration of the deci-

sion in the light of the briefs submitted to the Court below.

* Petitioner’s payment in the instant case only removed the

possibility of foreclosure and seizure of its property by the City of

New York. The involuntary nature of the payment is also over-

looked by the Government.

APIO NALD OR ARAL EDL LT C8 TNE NE meee tw a

| —

There, the Government cited the very same cases it now

cites, in support of its contention that Chestnut Securities

had been followed by the Tax Court on the principle that

payment of an unadmitted and contested tax liability ac-

crues that liability. In reply thereto petitioner showed that

not a single one of these cases followed Chestnut Securities

on this question. The absence from the opinion of the Court

below of any reference to, or reliance upon, these cases is

not without significance.

In relying upon GCM 25298, 1947-2 C. B. 39, 43-44,

(p. 11) the Government is attempting to raise itself by its

own bootstraps because that ruling was issued to the peti-

tioner in the denial of the very claim now before this Court.

The Commissioner has not been entirely consistent with

respect to the principle on which this GCM is based. He

has adopted an inconsistent position and has modified this

GCM in Mim. 6444, 1949-2 C. B. 11,‘ a fact entirely over-

looked in the Government’s brief. Moreover, since the

Court of Claims has in effect disavowed in its decision the

basis of the Chestnut Securities decision upon which the

GCM was predicated (pet. 11-12), the very foundation of

the GCM is now removed. The Commissioner may not by

merely issuing a ruling perpetuate an error especially

when it is contrary to principles of accrual and statutory

construction established by this Court. Bingham’s Trust

v. Commissioner, 325 U. S. 365, 376-377, (1945) ; Manhattan

General Equipment Co. v. Commissioner, 297 U. S. 129,

134-135, (1936).

In view of all of the foregoing, it is submitted that the

Government has failed to refute the reasons advanced by

* 1949-2 C. B. 11—‘‘ Where payment of a tax is required as a

prerequisite to further appeal, such payment is not to be regarded

a 4 payment of a demanded tax deficiency’’. There is no logical

distinction between payment of an unadmitted and contested tax

liability to enable the taxpayer to prosecute an appeal and payment

of an unadmitted and contested tax liability to prevent a tax lien

upon, and the foreclosure and seizure of, the taxpayer’s property.

petitioner for the granting of the writ and has failed to

show why a writ of certiorari to the United States Court of

Claims should not be granted.

Respectfully submitted,

James K. Pouk,

Counsel for Petitioner,

40 Wall Street,

New York 5, N. Y.

Of Counsel

se, ee ee

=—— WHET 1956

Supreme Court of the United States

Ocroser Term, 1955.

No. 695.

CONSOLIDATED EDISON COMPANY OF

NEW YORK, INC.,

Petitioner,

THE UNITED STATES,

Respondent.

BRIEF OF AMICUS CURIAE IN SUPPORT OF THE

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF CLAIMS.

Raten W. Brown,

140 West Street,

New York 7, N. Y.

A. CHauncey Newlin,

14 Wall Street,

New York 5, N. Y.

Counsel for New York Telephone

Company.

Amicus Curiae

Of Counsel:

Epmunp W. Pavenstepr,

Victor E. Ferrawn,

Pamir Waaner.

* Cas . he OLLI oa —

—

Supreme Court of the Gnited States

Ocroszr Term, 1955

No. 6965.

Consotmatep Epison Company or New York, Inc.,

Petitioner,

Tae Unrrep Srares,

Respondent,

BRIEF OF AMICUS CURIAE IN SUPPORT OF THE

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF CLAIMS.

This Brief is filed, with the consent of both Petitioner

and Respondent, on behalf of New York Telephone Com-

pany, 140 West Street, New York, New York.

Reasons for filing this Brief.

The Federal income and profits taxes of New York

Telephone Company for the years 1940-1945 raise the same

questions that are presented in the Consolidated Edison

case. The case of the Telephone Company involves a very

large amount of tax, and the effect on it of the decision of

the Court of Claims in the Consolidated Edison case would

be, in our opinion, extremely harsh and unreasonable.

AFIT OLN AL IPL 0 A SPOLETO re

The factual situation in the Telephone Company case,

except for amounts involved, is substantially the same as

that presented in the Consolidated Edison case. That is,

for the years 1936-1939 the City of New York made

excessive real estate tax assessments on the properties of

the Telephone Company. The Telephone Company was

obliged to pay these assessments because otherwise liens

would have attached which could have been foreclosed and

the properties sold, and the Company would have been

subject to penalty interest of 7% per annum. (Finding 13,

Pet., p. 30.) There was no way of avciding these oppressive

consequences except to pay the assessments, even though

there was every reason to believe they were excessive and

that a substantial part of the amount paid later would be

refunded.*

The Telephone Company promptly instituted judicial

proceedings contesting the assessments. These proceedings

were terminated in 1944 under an order of the Supreme

Court of the State of New York reducing the assessments

for each of the years 1936-1939. This order was entered

pursuant to a stipulation embodying an offer made by the

City and accepted by the Company. Under the settlement

the City refunded over $3,500,000 of the amounts paid as

real estate taxes for those years.

1 Payments under these conditions, as a matter of law, are con-

sidered as made, not voluntarily, but under duress and coercion.

Adrico Realty Corporation v. City of New York, 250 N. Y. 29, 164

N. E. 732 (1928); Goldberg v. New York, 260 App. Div. 61, 20

‘isi 2d 801 (1940), aff’d without opinion, 285 N. Y. 705

2One of the main reasons for the excessive assessments was 8

claim by the City that the many separate parcels of the Telephone

Company could be assessed in bulk, and that so assessed they had a

value much greater than the total of the separate assessments.

The courts of New York gave short shrift to this contention. People

ez rel. Brocklyn Union Gas Co. v. Miller, 172 Mise. 169, 14 N. Y.

Supp. 2d 444 (1939), aff’d without opinion, 258 App. Div. 1066,

17 N. Y. Supp. 2d 1022 (1940).

—

The Federal excess profits taxes of the Telephone Com-

pany for the years 1940-1945 were determined on the

average earnings basis. That is, the excess profits tax

credit of the Telephone Company was calculated on the

basis of its average earnings for the base period years

1936-1939,—the years in which the excessive real estate

tax assessments were paid.

If the Telephone Company is required to take Federal

income tax deductions in the years 1936-1939 for the

amounts paid as real estate taxes in those years which

were erroneously and illegally assessed and collected, and

which were later refunded by the City, the Federal excess

profits tax credit of the Company will be reduced and its

excess profits taxes for all of the years 1940-1945 will be

very substantially increased.

It is for this reason that the decision of the Court of

Claims in the Consolidated Edison case produces in the

case of the Telephone Company a situation which is extra-

ordinarily serious and which it is difficult to believe the law

intended. The result would be to impose on the Telephone

Company a severe Federal tax penalty because of the error

of the City taxing authorities in asserting taxes which

they later conceded to be improper. While we are not

pressing this as a reason for granting the writ, we never-

theless believe it might be helpful to the Court, in con-

sidering the Petition, to be aware that such erratic conse-

quences flow from the Court of Claims decision.

Issues raised in the Consolidated Edison case.

For simplicity of illustration and discussion the parties

there assumed the hypothetical case of a real estate tax

assessment in 1939 of $100; payment of this amount in that

year; admission by the taxpayer of a liability of $85 and

Mee ed in a ee ee hn en, fe

pe a a

Clin tlt hl we De —

a contest by it as to $15; final judicial determination in 1941

of a liability of $95, and a refund in 1941 of $5 (Pet., p. 19).

Three possible ways of handling this situation, for Federal

income and profits tax purposes, were submitted to the

Court of Claims (Finding 47, Pet., p. 43), viz.:

Basis A. Allow deductions of $85 in the earlier year

of payment and of $10 in the later year of

termination of contest, and exclude from

income the $5 refunded in the later year.

Basis B. Allow deduction of $95 (the amount ulti-

mately determined to have been due) in the

earlier year of payment, and exclude from

income the $5 refunded in the later year of

‘3

termination of contest.

Basis C. Allow deduction of the entire $100 in the

earlier year of payment, and include in income

: for the year of termination of contest the $5

# refunded in that year.

4 The Court of Claims held in favor of Basis C and

5 rejected Bases A and B (Pet., p. 24). In its Petition for a

3 Writ of Certiorari Consolidated Edison argues that this

4 decision is contrary to decisions of this Court and that,

; under those decisions and for other reasons, Basis A is the

4 proper basis.

“3

Without in any way questioning the position of Consoli-

dated Edison, New York Telephone Company desires to

point out that the decision of the Court of Claims in

upholding Basis C is to the effect that Basis B is not the

proper basis. And we respectfully submit to the Court

that this decision of the Court of Claims, rejecting Basis

B, is in conflict with decisions in the Second, Third and

Fourth Circuits. For this reason we urge the Supreme

Court should grant certiorari.

Certiorari should be granted because, in rejecting

Basis B, the decision of the Court of Claims is in

conflict with decisions of the Second, Third

and Fourth Circuits.

The conflicting decisions referred to are Inland Products

Co. v. Blair, 31 F. 2d 867 (4th Cir. 1929) ; Bergan v. Com-

missioner, 80 F. 2d 89 (2d Cir. 1935); and Cooperstown

Corporation v. Commissioner, 144 F. 2d 693 (3d Cir. 1944),

cert. den., 323 U. S. 772 (1944).

These decisions hold that, if a taxpayer makes a pay-

ment in respect of a tax and, for Federal income tax pur-

poses, takes a deduction for such payment, and later it is

determined that the taxpayer was not obligated to make the

payment and it is refunded, if the statute of limitations on

the assessment of additional income tax for the year of

deduction has not yet run, the deduction must be reduced

by the amount of the refund, and the refund is not income

for the year in which received. That is, these decisions in

the Second, Third and Fourth Circuits hold that the proper

way to handle the matter is as set forth in Basis B of

Finding 47 (Pet., p. 43).

The decisions go on the theory that the question is one

of correcting a mistake, and since the amount refunded was

not due, it was not a payment of a ‘‘tax’’ and, therefore, it

was not deductible when paid. See Inland Products Co.,

supra, at p. 868; E. B. Elliott Co., 45 B. T. A. 82 (1941).

The decisions are in accord with administrative practice

which appears to have been consistently followed by the

Commissioner for over thirty years.’

80, D. 741, 3 C. B. 115 (1920) ; S. M. 4683, V-1 C. B. 59; L. T.

2578, X-1 C. B. 119; Mim. 3958, XI-2 C. B. 33; I. T. 2741, XII-2

C. B. 48. Cf. Mim. 6444, 1949-2 C. B. 13; G. C. M. 26211, 1949-2

C. B. 112. It will be noted the later rulings, reversing the Com-

missioner’s prior position, were issued years after the taxable years

involved in the Consolidated Edison and Telephone Company cases.

)

Beh eine

It is necessary to consider the significance, for present

purposes, of this Court’s decision in Security Flour Mills

Co. v. Commissioner, 321 U. S. 281 (1944). That case was

decided after Inland Products Co. v. Blair, supra, and

Bergan v. Commissioner, supra, and before Cooperstown

Corporation v. Commissioner, supra.

Security Flour Mills denied to a taxpayer the right to

relate back against cost of goods sold such part of a refund

of processing taxes made in a later year, after the Agri-

cultural Adjustment Act had been declared unconstitutional,

as the taxpayer voluntarily, for reasons of maintaining

goodwill, turned over to a few favored customers which had

paid to it an amount equivalent to the tax, not as a tax but

as part of the purchase price of the goods. It presented

an attempt to give retroactive effect to subsequent voluntary

acts of the taxpayer, and it did not involve an adjustment

in the light of later knowledge that in fact there was no

liability for a payment made as a tax in an earlier year.

Since Security Flour Mills involved a situation signifi-

cantly different from that presented in Inland Products Co.

v. Blair and Bergan v. Commissioner, we submit Security

. Flour Mills does not overrule those decisions.

. As noted, Security Flour Mills preceded Cooperstown

Corporation v. Commissioner. In Cooperstown the corpor-

ate taxpayer, owning substantial assets and having sub-

stantial income, filed a Federal capital stock tax return for

1937, paid the tax shown on it to be due, and took the

capital stock tax as a deduction. Subsequently, it filed a

claim for refund of the capital stock tax, on the ground

that it was not subject to the tax because it was not ‘‘doing

business’’—often a very close question. The claim was

allowed and the capital stock tax was refunded in 1939.

The taxpayer took the refund into income for 1939, but the

Commissioner insisted it must be related back to eliminate

ner, - d

the deduction claimed in the earlier year. The Commis-

sioner took the position that, even though the taxpayer

thought it was liable for the tax, since it was mistaken it

could not take a deduction for the payment. The Third

Circuit upheld the Commissioner, and in the course of its

opinion referred to the line of cases with which the instant

ease is in conflict. Thereafter, the Supreme Court decided

Security Flour Mills. In view of this decision, the Third

Circuit, on its own motion, granted a rehearing, after which

it decided that its original conclusion was right. The tax-

payer appealed to this Court for review and certiorari was

denied, 323 U. S. 772 (1944).

It may be suggested that Cooperstown is not in point

here because there the taxpayer voluntarily made a pay-

ment as a tax which it thought was due but which actually

was not due, and it may be contended that only under such

extraordinary circumstances should the mistake be cor-

rected in the year in which it was made. But, in fact, the

circumstances in the Cooperstown case were not extraor-

dinary. In this country, where many taxes are self-assessed,

in the nature of things many, probably most, cases of tax

refunds result from voluntary overpayments by taxpayers.

In Inland Products Co. v. Blair, supra, the Circuit Court

found the amounts were ‘‘paid voluntarily by the taxpayer

under mistake of law.’’ (p. 868) This conclusion defies

making any distinction between Inland Products Co. and

Cooperstown. Except for a refund resulting from retro-

active legislation, any tax refund is an admission of a mis-

take. Who made the initial mistake, whether the taxpayer

or the taxing authorities, and how quickly the mistake is

corrected, would seem wholly irrelevant.

* Apparently, this position in that case had the effect of bene-

fiting the revenue, since it resulted in not only an additional income

tax for the earlier year but also a heavy personal holding company

surtax for that year.

+) Vin ce

It is therefore submitted that Cooperstown is squarely

in conflict with the instant case. And since Cooperstown

was decided after Security Flour Mills, and since the

Supreme Court denied certiorari in Cooperstown, it cannot

be said that Security Flour Mills resolved the very clear

cut conflict which now exists.

What, we submit, is an erroneous view as to the scope

of the Security Flour Mills decision was expressed by the

First Circuit in Bartlett v. Delaney, 173 F. 2d 535 (1st Cir.

1949), cert den., 338 U. S. 817 (1949). However, the facts

of the Bartlett case did not raise the issue as to the treat-

ment of a payment made as a tax. Since this Court denied

certiorari in Bartlett, as it did in Cooperstown, presumably

it considered that the decision in Bartlett was not in con-

flict with the decision in Cooperstown.

It is now impossible to tell whether the decision of the

Court of Claims in the instant case and the views expressed

by the First Circuit in its opinion in the Bartlett case, on the

one hand, or the above cited decisions of the Second, Third

and Fourth Circuits, on the other hand, represent the cor-

rect view with respect to what is an important and con-

stantly recurring question in the administration of the

internal revenue laws. It is submitted that, in order to

resolve this conflict, the Court should grant certiorari in

this case.

Conclusion.

The Petition for a Writ of Certiorari should be granted,

and this Court should review all three theories presented

to the Court of Claims.

Respectfully submitted,

Raters W. Brown,

A. Cuauncey Newuix,

Counsel for New York Telephone

Company.

Amicus Curiae

Epmunp W. Pavensrepr,

Victor E. Ferran,

Pamir Wacner,

Of Counsel.

March 1956.

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.