U.S. v. CONSOLIDATED EDISON CO.
Legal provision: Internal Revenue Code
Argument of John B. Jones, Jr.
Chief Justice Earl Warren: -- United States, Petitioner, versus Consolidated Edison Company of New York Incorporated.
Mr. Jones, you may proceed with your argument.
Mr. John B. Jones, Jr.: Thank you very much Mr. Chief Justice, may it please the Court.
For the second Monday in a row, this Court is faced with a difficult question on the interrelationship of the accrual accounting and the federal income tax.
Justice William O. Douglas: Are you restricted to Mondays?
Mr. John B. Jones, Jr.: But, it was last Monday Mr. Justice Douglas that this Court considered the American Automobile Association case.
And I was trying to recall to the Court that some of the matters which are relevant here will be considered just one week ago.
At 17 years ago, this Court in the Dixie Pine Products case and in the Security Flour Mills case laid a rule which was -- which has been universally followed to the effect that when the taxpayer contest a tax which is deductible for federal income tax purpose and does not pay that tax.
That it would be contrary to the principles of accrual accounting in our federal income tax law to permit him to deduct that tax.
The question today is in a sense of refinement to that question.
What is the rule to be followed where the taxpayer pays the tax?
Perhaps, under -- as in this case, under violent protest but nonetheless pays the tax, but then -- and then goes on to contest in the appropriate forum his liability for that tax.
Position which the Government is urging is that payment is a very important matter, one that is not made likely in the business world.
And that ones payment is made, the position of the parties has changed considerably.
That change should be reflected in the tax accounting.
In this case, the respondent has been described by the Second Circuit as a well-known public utility.
It has large real estate holdings in New York City.
For the years 1946 through 1950, the respondent contested the liability alleged to be owing one hundredths of parcels of real estate which he owned.
The settlement for all five of these years, which reached in 1951, this case presents to the Court the question of the tax treatment for 1951.
However, if this Court will determine what was the appropriate accounting at the end of the tax year in question all of the other questions ini the case were fall into place.
Now, I call to the Court's attention a stipulated example which is printed in perfusion.
It's in the record page 5, petitioner's brief page 5, respondent's brief page 7.
This example has -- has been agreed by all parties and by all the courts which have considered this matter to be one which brings out with full clarity the true issues in the case.
The stipulated example takes the year 1949, but this would -- the same thing would be true as to any of the other years of the tax years in question.
On January 25, the respondent would receive a notice from the City Tax Commission that he owed in respect of certain property a tax of $100.
Within a short period thereafter, the respondent was required to file what amounted to a -- a protest.
And in this protest, which is admittedly a bona fide protest of the tax liability.
The respondent would admit that on his estimated value, a true tax would be $85.
But, respondent denied any liability in excess of that.
Now, in terms of the stipulated example, it's assumed that this administrative protest was unsuccessful which at by and large was.
Then in -- on May 25, the $400 tax was assessed by the appropriate authority.
Then, October 1st, was the payment dates for the taxes.
On that date, responded paid the $400.
Now, he did this under a violent protest and for the stated purpose of avoiding levy, seizure, penalties, interest and all of the problems that come to people who don't pay taxes.
And I want to be very careful that nothing I say later in this argument would give any indication that the Government contest that this respondent was acting in anything other than good faith in making that type of protest and that the reasons for making their payment are as stipulated.
Then on October 25, the respondent would commence in the New York Supreme Court certiorari proceedings.
And in these certiorari proceedings, it would admit as it did earlier liability for $85 of the tax.
It would deny liability for the rest.But since it had paid the money, the obvious relief sought was it would be refunded the $15 which it had paid as tax.
Now, those are all of the events which happened in the tax year.
Looking at the books of the company, at the end of -- in this case, 1949, what is the appropriate accounting treatment?
Well though, as I see it, there would be three ways that this could be done.
Perhaps, the soundest in the long run would be to say, "Well, this is such a contest.
We'd just have to hold the books open and see how things come out."
This would be the most accurate.
But nobody in this Court urges that approach.
This was foreclosed by a number of decisions of the Court perhaps Burnet versus Sanford & Brooks would be as good an example as any.
But the income tax rule requires that we do make an annual estimate if you wish, or the best -- based on the best information possible, an annual determination of the income, so that no one beliefs that you can accurately reflect everything that happened in the year 1949.
Now, the second possibility would be to say that the payment of $100 was a payment of tax and accrue the entire amount.
And say that at the end of the year, the contingency is whether the taxpayer will get a refund of the $100.
That is what we don't know.
We do know that he's paid $100.
Justice Potter Stewart: A refund of a maximum of $15.
Mr. John B. Jones, Jr.: Excuse me, a refund of a maximum of $15.
Now, this is the position which the Commissioner advised respondent to take a published and announced ruling on this.
It's the method which was followed in taxpayer's books, it's a method that the Government is urging in this case, it's a method which the Court of Claims has decided should be followed, it was a method to the District Court accepted here.
The Second Circuit held for the third possibility, which I'll now discuss.
The third possibility would be to say that the Dixie Pine products and Security Flour Mills cases say that whenever taxes is -- is in dispute, we will never, under any circumstance, record an amount until that dispute is settled.
And under these principles, he would in the tax year accrue an expense of $85 and in effect hold the $15 in suspense until the litigation was terminated.
This is the view which the Second Circuit adopted.
Now, I stop short of the last step of the stipulated example because I wish to focus the attention of the Court on the end of tax year.
In fact, in 1951 under the stipulated example, there was a determination of this litigation.
The tax liability was found to be $95.
This meant that the taxpayer had overpaid his taxes $5.
But it also meant that the taxpayer owed the remaining $10 out of the 15.
Justice Charles E. Whittaker: But he already paid that amount.
Mr. John B. Jones, Jr.: That's right.
He had already paid that amount.
But, in effect, the -- if the item was in suspense under some method of accounting, it was supposing at that time as being forever applied to the tax liability, there was no further litigation possible.
Now, in the refund suit in this case, the taxpayer said that the method it followed in this returns in the tax years was incorrect.
It should now in 1951 when it settled five years of tax liability.
So a reading must considered that we're asking it to take a deduction five times $10.
The taxpayer says that in effect, it should deduct the $10 which is unsuccessfully contested only in the later year.
And the Government on the other hand says that the method you treated it on your tax return is what is required by the annual accounting system for income tax purpose.
The way you correct your adjustment which is now shown to have been slightly erroneous is to take the $5 which is refunded to you back into income.
Now, I'm sure that we all recognize --
Justice Potter Stewart: In other words, the -- the Government's position is, that you treat this taxpayer just as though he were a cash basis taxpayer?
Mr. John B. Jones, Jr.: Well, I'm not sure that that's true.
Justice Potter Stewart: Why not?
Mr. John B. Jones, Jr.: Well, we have the problem -- for example, there might be a prepayment of tax before the tax year which came up.
For example, if he prepaid 1949 taxes in 1948 --
Justice Potter Stewart: But I'm -- well, I'm -- I'm looking to the stipulated example.
Mr. John B. Jones, Jr.: The -- the tax -- the cash basis taxpayer would report on the method we're now urging as well.
Justice Potter Stewart: Just the same?
Mr. John B. Jones, Jr.: Well, that's right, that's right.
But this -- I don't think we're converting this man to a -- the respondent to a cash basis because it is our position not that we use a hybrid method at all, but that under any proper accrual accounting system, payment which distinguishes a liability, it so brings about an accrual within the full meaning of the accrual concept.
Justice Charles E. Whittaker: Mr. Jones.
Mr. John B. Jones, Jr.: Yes.
Justice Charles E. Whittaker: If I may ask you, in as much as you have mentioned prepayments, is it your contention that they too must be accrued even though there is no tax yet against which to apply them?
Mr. John B. Jones, Jr.: No, but it would not be our position.
That -- that is actually raised in the first Court Of Claims case involving the same parties.
There was a slight prepayment of tax in Court Of Claims though adopted the rule which the Government urges here today said that that did not go as far as to permit the prepayment to be deducted for an accrual basis of taxpayer.
I did want to mention to the Court at just this point that this is not the first time this taxpayer has made this claim.
For the years 1938 through 1940, that's three years, were similarly contested and settled in 1941.
Exactly the same contentions were made, the same stipulated example was made, this was went through the Court of Claims and it was decided adversely to the respondent, certiorari was denied.
Now, naturally enough in the first instance in the hearing of this case before the District Court, the Government urged that perhaps some doctrine of res judicata or collateral stopper would preclude respondent from re-litigating the issue.
Neither the District Court nor the Second Circuit felt that there was the complete identity of facts required by the Sunnen case, that's in 333 U.S.
Thus, both courts found against the Government of that issue, this is not raised in the petition for certiorari.
Justice Charles E. Whittaker: If you -- if you would not contend that one who prepays taxes -- the accrual basis taxpayer must accrued them, then, how can you contend that he must accrue taxes that he disputes does not admit to be due?
Mr. John B. Jones, Jr.: I -- I believe it's our position that payment is a -- is a transcendent fact when a man makes --
Justice Charles E. Whittaker: Well -- there's been payment when there's been prepayment to something that he's part with the money, can he?
Mr. John B. Jones, Jr.: That -- that's true.
But we -- we have in the code a recognition that a -- a prepayment situation would distort the annual accounting principle.
It would take the taxes out of the year to which they are attributable.
And the language in Section 43 which is sometimes cited for this purpose is design to deal with -- with that problem.
There is a special authority in there that works necessarily to clear to reflect income, the deductions or credit should be taken of a different period.
Justice Charles E. Whittaker: If I find on your books in the suit where it's to my interest and adverse to your interest and admission by you that you have a liability that you accrue, may I not use that as an admission against interest against you?
And isn't it true that if you setup -- if you require to setup an accrued liability that the taxpayer disputes, aren't you making any setup of dishonest entry?
Mr. John B. Jones, Jr.: Well, I -- I believe accounting is -- is designed to meet the realities in situation.
I assume that in any substantial contest, any statement of financial condition given out by the taxpayer would have to make some note of this contested taxes that there is a claim and that the financial picture of the corporation cannot be adequately represented without specifying that.
I -- I don't know whether any court would go so far as to hold that such specification was an admission of an amount.
But it seemed to me that if there was a footnote that this is contested, you could still accrue for tax purposes without embarrassing yourself before the Court.
Justice Charles E. Whittaker: (Inaudible)
Mr. John B. Jones, Jr.: Well, I would -- I -- I don't object to the footnote, I object to not accruing.
Justice John M. Harlan: Could I put something to you?
The difference in your hypothetical of $85 and $100 as the hypothetical taxpayers sought to put over to this succeeding year or at least until settlement, the $15.
Now, supposing he had undertaken to make an estimate based on his past experience with the City of New York, and instead of putting over the whole $15, he had undertaken to say, "Well, I think the reasonable estimate of what I'm going to get back is have that need and therefore, he had reported he put over $7.5 of it, half of it.
What -- what was the Government's position be there?
Mr. John B. Jones, Jr.: I think the Government would not recognize such an estimate.
Justice John M. Harlan: In other words, you say it is an all or nothing proposition and not to the -- and no question is opened as to the reason of malice of what the taxpayer undertakes to do in a particular situation.
Mr. John B. Jones, Jr.: Well, that is not our case.
Justice John M. Harlan: I know.
Mr. John B. Jones, Jr.: But I -- I -- on the basis of --
Justice John M. Harlan: But your proposition is the proposition --
Mr. John B. Jones, Jr.: Well, I think that the argument last Monday has some bearing on this, an accrual system where you put --
Justice John M. Harlan: This is a different case from last Monday.
Mr. John B. Jones, Jr.: This is a different case but you are taking a closer to that.
The accrual system when you get into the business of putting up an estimate is peculiarly subject to abuse and peculiarly beyond the control of the Government.
And unless Congress makes -- gives an express mandate that a reserve for this or for that is permitted, the Government is not going to welcome --
Justice John M. Harlan: Well, I just wanted to get your thesis.
Your thesis is that payment closes the door and once payment is made, whether under protest or otherwise that fixes the year in which recording has to be made.
Mr. John B. Jones, Jr.: Subject to this prepayment.
Justice John M. Harlan: Subject to the prepayment.
Justice Charles E. Whittaker: Well, doesn't that read Section 41 out of the book?
Mr. John B. Jones, Jr.: I don't believe so.
We -- we're not -- we're claiming that any proper accrual system takes account of the fact whether payment has been made.
Justice Charles E. Whittaker: Last stanza to 51, that if the system of accounting to use does accurately reflect income, the Commissioner has no choice but to accept it.
Mr. John B. Jones, Jr.: Well, first let me point out that there is no claim in this case that this is the method used on the taxpayer's books.
There is -- the findings in this case are somewhat less complete than they were in the earlier case.
In the earlier case, it was made very clear that the taxpayer did not follow the method which he's urging here in its own books.
It is trying to get a special rule for tax purposes which may also be adopted on its own book.
So, that this is not a case, what we are trying to do what the tax -- let the taxpayer do what it's done on his own books.
He says that the only proper way to treat the accrual of taxes is to do what he has alleged here.
Justice Charles E. Whittaker: But you -- he did expense it all here in the original years of payment when you say that was proper.
Mr. John B. Jones, Jr.: Yes, I say that's proper.
I say that the record here is perhaps -- is -- is not complete on that specific point coming as it did after the earlier case.
In the earlier case, it was quite clear that the books accrued the taxes on the basis of the original assessments.
There's been no claim by anyone that the -- that there has been a change in the taxpayer's book but, it is not -- nothing on that point is directly supportive by the record.
Now, I would like to take issue with the statement of the question as stated by the respondent on page 2 of his brief.
He purports to make an all important distinction between our phrase, "pays a local property tax assessment under protest and then sues to recover part of the payment."
Justice William J. Brennan: What page is that?
Mr. John B. Jones, Jr.: Page 2 of the respondent's brief.
He states -- we take our statement case and he says that it is improper for failing to take account of the fact that the tax is involuntary paid because "it was necessary to state the imposition of penalties and foreclosure of the tax leans."
Now, we -- we would urge on the Court very strongly that the question is as the Government has stated.
A careful reading of the Second Circuit opinion, well, I believe, convinced the members of the Court that the Second Circuit even though it reached the result contrary to the Government, did not put great weight on the fact that this payment was involuntary.
Now, I suppose it's very hard to describe a voluntary payment of taxes.
I suppose if we had a payment of tax without adequate enforcement, there would be very few payments of tax and perhaps if there were no enforcement, it could be described as voluntary.
But to attempt to go in to the motive of a person making a payment of tax or give the Government an impossible job of administration, not only are there hundreds of taxing statutes with all kinds of sanctions to compel payment but also suppose under this case, suppose another New York City taxpayer comes in and says, "Well, I know that those are penalties but that wasn't the reason I made payment.
I made payment because we had extra cash around and it seemed to us sound a business judgment to pay the tax, get it back with 6% interest which would be -- would fit our purposes better."
I assume that no one ask for the subjective test but I'm sure that this Court does not wish to be put in the position or to put the Government in the position of going in each payment and determining how willing the payment was.
So, this brings us back to the real issue which we -- we perhaps discuss completely whether payment in the tax year itself brings about accrual under the accrual system of accounting.
Even though at that time, there is a contest pending which may resolve in a refund.
Now, this is a question on which men may differ as indeed the court below has.
But we think that if you look at the real principles underlying Dixie Pine and Security Flour Mills, you will -- you will agree that the -- what we are looking for is where is the contingency?
What is contingent?
And at the end of the tax year in this case as in other cases arise here, the contingency is, is this taxpayer going to get his money back?
And if we permit this method of accounting, we are holding the wrong question in suspense.It's not whether he's going to pay the tax.
He's paid it.
He doesn't owe any tax.
And if it -- and if he -- for some strange reason, the dispute has never terminated, which method will reflect it better?
It would be the method that recognizes where the cash dollars are.
The city has the dollars.
It's collected its tax.
It may or may not refund the tax.
Now, I don't want to -- to claim that Dixie Pine and Security Mills compel this result.I don't believe they do.
And it would be hypocritical perhaps because the Government has often and court cases urged the opposite result.
But let me say that a reading of those two opinions which are quite briefed will make it clear to the Court that in both -- in both decisions, the Court was quite aware of the fact that the tax had not in fact been paid.
Chief Justice Earl Warren: Mr. Jones, may I ask -- may I ask this question.
Wherein would the Government suffer or the -- the respondent gained an unconscionable benefit by following his -- his theory of accounting and his present position in the case?
Mr. John B. Jones, Jr.: What is involved in his case is the fact that the -- there is a difference in tax rates between the years.
1951 was a Korean excess profits tax year.
And that the earlier years, the corporations were taxed at lower rates.
So that by not taking any deduction in 1949 for example, I'm taking it in 1951, it's worth the great deal more.
I'm not sure if the exact percentages but say that a deduction is -- is worth 40% in 1949 and its worth 65% in 1951, that's where the difference lie.
Now, may I say this --
Chief Justice Earl Warren: Well, in the tax when -- the taxes were lower in -- in second year instead of higher, why he had -- the reverse would be true, wouldn't it?
Mr. John B. Jones, Jr.: That's quite true.
Chief Justice Earl Warren: Now, may I ask if -- if there is any question -- there is no question I understood you to say about the good faith of the --
Mr. John B. Jones, Jr.: That's correct.
Chief Justice Earl Warren: -- would you make any distinctions as to all between whether it was in good faith or not?
Mr. John B. Jones, Jr.: Well, I think everybody agrees that there is a danger in the Dixie Pine approach that must be tempered by the good faith.
Let me say this though about the matter, that goes to the question of whether the contest is in good faith.
But suppose a -- a large utility paying a great number of taxes is running a -- running a big contest, who can say that --
Chief Justice Earl Warren: Running what?
Mr. John B. Jones, Jr.: It's running a big contest with the local authorities about this.
Chief Justice Earl Warren: Oh, yes.
Mr. John B. Jones, Jr.: Who is to say that when it comes to settling that dispute, it won't cast an eye at what's going to happen when it takes the deduction if the respondent's method is adopted here?
It will look to that.
Chief Justice Earl Warren: Well, it won't get anymore than it's entitled to it in the end.
Mr. John B. Jones, Jr.: No, but they -- suppose that they -- there is already a perspective lowering of rates where there's a particular reasons for lowering tax liability in this year.
Chief Justice Earl Warren: I see.
Mr. John B. Jones, Jr.: Payment makes a great deal of difference because, if the city authorities do not have any payment that they're worried about, they are not going to press for settlement.
If the city authorities do have to worry about payment, they're not going to let the taxpayer sit around and wait until it's convenient for him to take a deduction, so that the -- the danger of tax evasion is really in this running account with the local authorities.
Chief Justice Earl Warren: Well, danger to whom?
Mr. John B. Jones, Jr.: The danger to the federal revenues that they -- that they will be completely free to time their deduction to take maximum advantage if the state authorities are not present.
Chief Justice Earl Warren: Mr. Polk.
Argument of James K. Polk
Mr. James K. Polk: Mr. Chief Justice and may it please the Court.
There is a single question involved here.
The question is the proper year for the deduction of contested, litigated, unadmitted real property taxes.
The Government is -- has misstated the issue 20 odd times in its brief where it refers to this contest litigation as a suit for refund.
There has been no such thing as a suit for refund of local taxes in the State of New York since 1880.
This proceeding starts as a contest of a -- of a tentative assessment of value of real property taxes and application for correction of the assessed valuation is filed.
That is an absolute prerequisite for any contest in the State of New York.
If that is not filed, there can no suit ever be brought on any ground.
The tax will become final and owing.
That has to be followed up by a certiorari proceeding filed before the 25th of October of the taxable year.
When that is filed its certiorari to the Tax Commission to bring before the Court the proposal of assessment, it is the -- the assessment is -- is not a valid, fixed finalized thing until after this litigation is terminated.
So, the precise question in this case is whether while such a litigation is pending to determine if there is any tax and if there is a tax to the contested amount.
If there is any tax, the amount thereof whether a payment made under the circumstances related here will accelerate the time for deduction.
Now, the facts as -- as have been related are substantially accurate.
Actually, to simply the matter, reference was not made to the fact although it is stipulated and in the record, it was not made to the fact that the payment is in to installments.
The first installment is due October 1 of the tax year 1949 in the illustrative example.
The second installment is due April 1 of 1950.
Each installment was paid, it was paid because if you do not pay that tax as bills, although it as not yet determined or fix or finalized, if you do not pay it, a lean -- leans attached, the property can be seized and sold to satisfy the lean.
There is a compulsion there, an economic compulsion that makes it very practical to pay.
That gets the moneys into the city -- into the city treasuries in regular order.
That enables the city counsel to assert the proper tax rate because it knows by the time it does that exactly how much is in contest.
Only for the application for correction has been filed, admitting tax liability which is irrevocably admitted there, that's the $85, only then have you any remainder that can possibly be in dispute.
Now, the -- the taxpayer has claimed the deduction for the $85 in 1949.
It claims that no further amount is deductible until some tax is validated, finalized in a pending litigation and that did not occur in this case until 1951.
At which time, the Court's said you owe $10 more, a payment has been made.
But that payment was no different from the payment in the Rosenman case or the Lewyt in the Second Circuit, the issue that wasn't brought up here.
That is a deposit.
It's a payment in advance of a determination of tax.
It can't be a payment of tax.
The -- the reason -- the Government bases its case upon the reasoning of the Court of Claims in the Chestnut Securities case.
In the Chestnut Securities case, the facts were identical as far as the issue is concerned.
There were disputed taxes from 1936, 1937, and 1938, a dispute that it did not terminate until 1942.
In 1942, the taxpayer lost his case and owed the tax.
It paid the taxes in 1940 and attempted to deduct that amount its 1940 returned, the Government said, "No."
The Commissioner's position at that time and its position in several of these cases was the same, was it you should relate the amount back to the year for which the tax was asserted, a position untenable completely so under the Security Flour Mills doctrine of this Court.
The -- when the -- consequently, when the case got tried in the Court of Claims in the Chestnut Securities, when it got tried, the Government shifted its position adopting Dixie Pine and said, "Yes, 1940 is still not the right year but it's 1942."
That is the precise position that the respondent is now taking.
It's taking the position the Government originally took.
In the Court of Claims, in the Chestnut Securities case, announced a rule of accrual accounting.
It said accrual cannot survive payment so far as the deter is concern, and it said that that was within its understanding of the terminology of accounting.
Now, the respondent had a case involving that's been referred to of 1938, 1939 and 1941.Disputed taxes of 1938, 1939, finalized in 1941 and attempt to take the deduction in 1941, the Government disallowed it, we brought suit in the Court of Claims for a refund for that year on the ground that the tax -- the disputed amount finalized in that year was then deductible, the identical question that had been involved in Chestnut Securities.
Now, in Chestnut Securities, there is no evidence of record whatsoever concerning accrual accounting, nothing in the record, nothing in the brief of either party.
But in the Consolidated Edison case of 1938 and 1939, evidence was adduced.
Evidence was put in so that the Court found the facts respecting accrual accounting and the effective cash.Cash had -- flow of cash has absolutely nothing to do with the accrual.
Accrual can precede, coincide with or survive payment.
Payment has nothing to do with it.
The instances of accrual surviving payment are legion.
It's the foundation in the backbone of accrual accounting.
All prepaid expenses deferred charges to future operations or depreciation deductions 40 years after payment are instances of accrual surviving payment.
Inventories are -- where the purchases are not deducted in the year in which they're paid.
The -- the Government won't permit tax returns for inventories are employed except on the accrual basis.
The -- the whole fundamental concept of accrual is -- is the -- is the antithesis of the cash, receipts and disbursements theory.
The result of that was that the Court of Claims found as a fact in the -- found facts in the Consolidated Edison case respecting accrual accounting and the effect of the flow of cash and found them in the terms of this illustrative example.
Those findings of fact for the convenience of this Court are reproduced as Exhibit 2 -- appendix 2 of respondent's brief, page 55 my associates says.
Now, the Court of Claims in the Consolidated Edison case, however, had this to say when it came to reach its decision.
It said, "We do not hold that accrual cannot survive payment."
They said, "What we hold is the payment of an item which is otherwise accruable in the taxable year accrues the item."
Now, we couldn't understand that.
If an item is otherwise accruable in the taxable year, it's otherwise accruable in the taxable year and you have no need to refer the payment or to anything else in the world.
We sought to review this decision but there was no conflict at the time and this Court did not allow our application for certiorari.
However, the -- since that time, a conflict has a reason.
The conflict has a reason not in the -- in the frame that the Government puts the picture not where there has been a payment of a tax and then he suit for refund because the payment of a tax where tax is finalized and paid is customarily and admission of that liability.
And as an admission of liability, a proper basis for accrual that by the way is the basis for the decision of the Court in the Western Cartridge case which I will discuss in a moment.
But the Court did decide in the Northern District -- the District Court of the Northern District of Ohio in the Standard Oil of Ohio case that the accrual can -- can of course survive payments and that the Chestnut Securities doctrine was in error.
Now, in that case, you had some excised taxes, excised taxes, federal excised taxes on oil from 1932 and 1933.
The Commission of Internal Revenue does not have to send a notice of deficiency for excised taxes and he just assessed them as a jeopardy assessment.
The taxpayer litigated this.
The propriety of that tax liability contested it until 1947 when he lost his case in the Circuit Court of Appeals.
He deducted in 1937 the amount when he paid it.
The Commissioner said, "No, throw it back to 1932 and 1933 the years for which the taxes asserted."
And of course, that's wrong under the Security Flour Mills.
And then the taxpayer deducted it in 1947 when the contest finished.
This time, the Commissioner said, "No, it belongs back in 1937 under -- under Chestnut Securities."
The accrual cannot survive payment so the issue was precisely before the Court.
And what did the Court say?
The Court said the rule to be uniformed should follow the straight rule, laid down in Dixie Pine and Security Flour that all events do not occur within the taxable year that fix the amount and the fact that tax liability until the litigation has ended.
Then the Court observed, after all, payment is not really one of the events which fix the amount or the fact of the -- tax liability and the final adjudication is the last to those events.
The -- the Government has -- has urged that there's some converse of a claim of right doctrine involved here that cash should be followed because it's definitive.
When you receive cash, it has to be income.
Therefore, when you pay cash out, it must be a deduction.
Utterly inconsistent with accrual accounting concepts but, it's also inconsistent because it isn't the convert.
This case is not the converse of the Claim of Right doctrine.
This is a disclaimer of deduction and its -- its opposite or converse would be a disclaimer of right and that has been litigated.
That was litigated in this Ohio Corporation case.
In that case, the taxpayer had been compelled by state law to take -- to receive moneys which he said it didn't belong to it and sought to have a law declared unconstitutional.
But the Commission said, you have received cash under color of title, if not claim of right something, you have received cash and you must be taxable on it.
But the Court disagreed.
The Court said, "We do not think that when a taxpayer is compelled by state authority over its protest to retain possession temporarily of funds, he can't be charged with having income on that account."
The cases of Dixie Pine and Security Flour dealt with deductions from income and held that a taxpayer may not accrue and expense the liability for which is contingent and is contested by the taxpayer.
The problem in the present case concerns income rather than a deduction but we think the same principle applies.
If as a matter of law a deduction is not accruable, if the liability as contingent and contested by the taxpayer, similarly, income is not accruable if the right thereto is contingent being denied and contested by the taxpayer.
We would contend that just as for a taxpayer who receives moneys is because of his disclaimer of right not taxable on them, so a taxpayer who denies a liability -- who denies a liability and who disclaims a deduction cannot be compelled to take the deduction.
Now, there's a variation between tax accounting and recognized principles of accounting in respect of the protection of the revenue aspect where an item is contingent under general -- generally recognized principles of accounting.
You will use a reserve approach and accrue something to measure that and bring the addition to the reserve or the charge to the reserve in the current year.
You have that for reserve for intermission damages.
All sorts of reserves in that kind which are not recognized for tax purposes although they are for accounting purposes.
The Congress in enacting Section 462 sought to bring those to closure together.
It sought to permit in 462 the deduction of some of this contingent liability provision -- provision for those things in the year of the transaction gave rise to the liability.But, and if later repeal that section, it's true.
But it's a particular significance to note that the Congress said even as to Section 462, it shall not reach the type of contingent liability that is in litigation.
It's specifically excluded litigated matters from the reach of 462 and let them to United States versus Anderson, all the events must occur to fix the amount and effect of liability before you can have a deduction, to Chestnut Securities that a -- a contested item must await the outcome of the litigation before it can mature, and the Security Flour Mills that each year stands on its own basis.
Justice Charles E. Whittaker: May I ask you Mr. Polk?
Mr. James K. Polk: I meant Dixie Pine, pardon me.
Justice Charles E. Whittaker: Mr. Polk.
Mr. James K. Polk: Yes, sir.
Justice Charles E. Whittaker: May I ask you, can there be such a thing under your law, in the state law as a voluntary payment of real property tax?
Or is it always a deposits and you can sue she'd find you've overpaid, now what is the situation?
Mr. James K. Polk: You -- you cannot sue if you find you have overpaid.
When you said is there such a thing as a voluntary payment of taxes, I was a little puzzled.
I don't think that anybody makes any very voluntary payment of a -- of an enforced obligation like a tax.
But in the State of New York, unless you contest that the -- the tentative assessment by filing an application for correction by March 15th and admit your liability to the extent that you admitted, the $85 and then denied that there is any further liability unless you do that.
Unless that paper is filed under New York law, it is impossible at any time on any basis to recover an amount paid.
The -- the New York statute says that this is a pre -- that the filing of this application for correction is a prerequisite to the institution of the exclusives judicial remedy that is allowed.
Justice Charles E. Whittaker: I suppose you have by far payment, the prepayment made -- put enough money with the tax collector to cover this tax in advance at the time you had to act.
You still -- but -- by the taking the steps you will require here or you outlined here, the query application, that 22 tax, could you?
Mr. James K. Polk: I think you probably could.
Justice Charles E. Whittaker: Well, I'm taking out (Inaudible)
Normally, if one makes whether it's a voluntary payment then he was on the accrual basis, it's -- he (Inaudible) statute ruin.
Mr. James K. Polk: Yes.
Justice Charles E. Whittaker: But if I make a deposit to secure a debt or something of that kind which is not include the payment, then, I don't have to admit a payment.
Mr. James K. Polk: That is correct.
That is --
Justice Charles E. Whittaker: (Inaudible) did you make payment or did you make a deposit (Voice Overlap)?
Mr. James K. Polk: We -- we claim it was a deposit.
The Court of Claims on the basis of the testimony of the expert accountants in their findings of fact which we have reprinted at appendix 2 of our brief found that that was a deposit and should be so accounted for as a deposit under accrual principles of accounting.
It is not the satisfaction of a liability because the liability isn't fixed yet.
That is the fundamental proposition that respondent urges.
There was no satisfaction of a liability here by this half payments October and the next April.
And by the way, the payments were not made in advance of the initiation of the contest.
The -- the respondent believes as I have said that the decision of the court below is in complete accord with sound accrual accounting concepts that the rate that the Internal Revenue Code in Sections 41, 42, 43 require that returns be filed in accordance with these sound accrual accounting concepts and that viewed therefore either from the legal aspect of the case or from the accounting aspect of the matter.
The decision of the court below is proper.
We respectfully urge the Court affirmed the decision of the court below.
Chief Justice Earl Warren: Mr. Jones.
Rebuttal of John B. Jones, Jr.
Mr. John B. Jones, Jr.: Well, I -- I can agree with Mr. Polk that if this payment of tax liability was a deposit of tax, then he is correct and the Government is wrong.
But I see no evidence in this record that would suggest that this was anything other that a payment of tax.
I don't have the full New York statutes with me.
They are here.
They're cited in Mr. Polk's brief but note to the New York statute talks about a refund.
It is not a return of deposit.
A substantial change of position has occurred.
This is a matter which this Court considered carefully in the Rosenman case in -- for federal tax purposes in deciding when a payment has occurred.
And that this Court should decide it under the New York procedures.
This is not a payment of tax.
It did not extinguish the liability and Mr. Polk is correct.
But I'm sure that this record will not in any sense support such a finding.
Justice Felix Frankfurter: When you say the record, I want to know Mr. Jones what extent determination of this case turn on a precise, an exact appreciation of the New York law with reference to this tax?
Mr. John B. Jones, Jr.: Well, I don't believe that it got to that because I don't believe despite the -- the attempt of respondent here, there really is an issue under New York law that this is a full payment of tax which extinguishes the liability and subject to refund.
The New York statute calls to that, so for that reason I don't believe the Court (Voice Overlap) --
Justice Felix Frankfurter: What you're saying is that -- that as a matter of New York law, it's clear for federal purposes what this is.
But what I want to know is does one have to determine, will he be alright about that.
It doesn't have to pass a construe New York legislation.
Mr. John B. Jones, Jr.: Well, Mr. Justice Frankfurter, I think that it is true in our approach that we must find whether there is a payment or not.
We -- we would agree that if there's a merely a deposit, then it should not be treated to satisfaction.
That's necessary to be consistent with earlier decisions of this Court.
Justice Felix Frankfurter: And that turn on how New York conceive this, is that right?
Mr. John B. Jones, Jr.: Yes.
And I have no doubt --
Justice Felix Frankfurter: Well, that turns -- well, that turns on the first statutes in how the Court has construed it, is that right?
Mr. John B. Jones, Jr.: Yes, yes.
But I think the statute is evidence on its phase.
There is no question but what -- in a deposit, the liability has not discharged.
Justice Felix Frankfurter: I'm -- I'm not contesting anything you say.
I'm just trying to find out the basis on which I must decide this case.
You said the statute is clear on its phase.
But nothing is more pressure but you suggest -- for you to suggest that for us to act on the suggestion that all one has to do is to read the New York statute to find out what it mean.That is true sometimes but I should think it -- that it isn't enough.
Mr. John B. Jones, Jr.: I -- I won't --
Justice Felix Frankfurter: If you say -- if you say that the statute is quite clear, there has been no litigation under it, there'd be doubt cash on it or no practice that looks the other way as that.
Mr. John B. Jones, Jr.: Well, that --
Justice Felix Frankfurter: Can you say all that?
Mr. John B. Jones, Jr.: The only litigation I'm aware is awarding interest to the taxpayer.
That case is cited in our brief that they awarded interest to the taxpayer when they gave the money back.That's inconsistent with the deposit.
The discharge of liability is inconsistent.
I don't believe there is a substantial question.
I don't believe this meets the federal standard of the deposit.
Now, just in closing let me state.
Justice Felix Frankfurter: Well, you now should be federal standard.
That's what the whole --
Mr. John B. Jones, Jr.: Well, we are getting --
Justice Felix Frankfurter: (Voice overlap) -- my question.
Mr. John B. Jones, Jr.: Well --
Justice Felix Frankfurter: Do I have to decide whether this -- whether the payment is a general federal concept or does one revert to the New York situation?
Mr. John B. Jones, Jr.: Well, I -- I -- New York cannot call it a deposit if it doesn't have the earmarks of the deposit.
Justice Felix Frankfurter: I understand that, can capriciously but --
Mr. John B. Jones, Jr.: And --
Justice Felix Frankfurter: -- but the incidence, that legal consequences and incident that New York may attach, they make a difference.
Mr. John B. Jones, Jr.: That's correct, sir.
Justice Felix Frankfurter: And you say that -- I even bother about that.
It's clear -- it's clear as the basis?
Mr. John B. Jones, Jr.: I will (Voice Overlap) --
Justice Felix Frankfurter: May be on the day like this.
Justice Charles E. Whittaker: Mr --
Mr. John B. Jones, Jr.: I -- I will walk in you independent reexaminations.
Justice Felix Frankfurter: Alright.
Justice Charles E. Whittaker: Mr. Jones, it would help me if you could give your idea of when this tax became fixed in fact and amount.
Was it 51 or prior 51?
Mr. John B. Jones, Jr.: It -- it is -- it is my view and the view of the Government that the full tax became due -- due and paid in the tax year.
Justice Felix Frankfurter: Well, that is the one I want to know.
When did it become fixed in law in amount?
Mr. John B. Jones, Jr.: I believe it became fixed in law in amount there.
What happened afterwards was whether the man got a right to a refund subsequent -- by subsequent events.
And the subsequent event which determined whether he got a refund and how much of a refund he got occurred in 1951.
Justice Charles E. Whittaker: The case turns on the answer to that question, doesn't it?
Mr. John B. Jones, Jr.: Yes.
But I don't believe there's any.
I -- I think that the record is clear on that.
Justice Potter Stewart: How do you say it became fixed in amount in 1949 --
Mr. John B. Jones, Jr.: He --
Justice Potter Stewart: -- at $100 when it -- when it never -- never was $100?
Mr. John B. Jones, Jr.: Well, that extinguished his liability for tax -- for a tax of $100 shown on the books and he could never be sued for that and if the contest had been allowed to go on forever without being settled, his tax liability for the year was paid.
There was no further contingency as to that $100 which had in fact been paid.
Justice John M. Harlan: How could the tax payer contest to this otherwise (Inaudible)?
Mr. John B. Jones, Jr.: Well, let me answer it this way Mr. Justice Harlan that -- that there it -- let us take the taxpayer's word that there is no other method under the laws of New York.
Justice John M. Harlan: Well, there isn't any doubt about that.
Mr. John B. Jones, Jr.: Yes.
And so therefore, he cannot contest the tax but we're not harming taxpayers here.
If this was a case where taxpayers were trying to accelerate their deductions and there were some, excuse me -- if taxpayers were -- were in a position where it harmed them to bring the deductions down to the current year, then I would think there would be some equity in the fact that New York does not offer an alternate procedure.
But, by and large for the run of the mill common taxpayer, a decision that -- in accordance with the Government's position today will -- will aid most taxpayers.
It's only the occasional taxpayer who's able to collect the liability, keep it in suspense for a while and then pull it down when he needs it.
That's -- and he -- I don't think we need to worry about an equity that New York deprives him of this way of manipulating tax form.
Justice John M. Harlan: I wasn't thinking about equities.
I was thinking about law that has bearing on as Mr. Justice Whittaker asked you as to whether or not this was a voluntary payment so called or whether it was a --
Mr. John B. Jones, Jr.: In suppose -- in suppose that there is -- perhaps suggested.
No question that this is a payment of tax and the New York just set --
Justice John M. Harlan: Statement of tax --
Mr. John B. Jones, Jr.: Suppose --
Justice John M. Harlan: (Voice Overlap) disputed tax.
Mr. John B. Jones, Jr.: Alright.
Suppose the New York law just stated absolutely boldly the tax must be paid so is for refund may be entertained in the succeeding year, it seems to us that that's almost as what law does say here.
And in that situation, the contingency is will the man get a refund.
He has discharged his liability.
His books vis-à-vis the governmental entity are satisfied.
They are not going to be pressing him for anything and that a true substance of this matter is that the contingency lies in the refund.
And in effect under the respondent's method here, you're allowed to anticipate the refund and if you're wrong in that, make the adjustment in later year.
We say that payment is what governs.
It extinguishes the liability and after that, there is no tax in dispute.
What in dispute is the right of refund.