United States v. Consolidated Edison Company of New York, Inc

• Decision Date: 22 May 1961
• Docket Number: No. 357,357
• Citation: 81 S.Ct. 1326,6 L.Ed.2d 356,366 U.S. 380
• Parties: UNITED STATES, Petitioner, v. CONSOLIDATED EDISON COMPANY OF NEW YORK, INC
• Court: U.S. Supreme Court

366 U.S. 380

81 S.Ct. 1326

6 L.Ed.2d 356

UNITED STATES, Petitioner,

v CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.

No. 357.

Argued April 24, 1961.

Decided May 22, 1961.

Mr. John B. Jones, Jr., Washington, D.C., for petitioner.

Mr. James K. Polk, New York City, for respondent.

Mr. Justice WHITTAKER delivered the opinion of the Court.

Respondent brought this action in the United States District Court for the Southern District of New York to recover a claimed overpayment of federal income taxes for the year 1951. It keeps its books and files its returns on a calendar-year accrual basis. The case turns on the correct determination of the proper year of accrual and deduction of certain contested real estate taxes. Specifically, the question is whether the contested part of a real estate tax accrued (1) in the year it was assessed and, for the purpose—and as the only mode recognized by the local law—of avoiding seizure and sale of the property for the contested tax while the contest was pending, was 'paid' by the taxpayer, or (2) in the year the contest was finally determined.

The District Court, following the holding of the Court of Claims in Consolidated Edison Co. v. United States, 135 F.Supp. 881, 133 Ct.Cl. 376, that such a 'payment' of the tax ' accrues the item even though payment is made under protest and even though litigation is started within the taxable year to obtain repayment,' id., 135 F.Supp. at page 885, 133 Ct.Cl. at pages 383 384, held, without opinion, that the contested part of the tax accrued in the year of the 'payment.' On appeal, the Court of Appeals, by a divided court, held that the contested part of the tax accrued in the year the contest was finally determined, and reversed the judgment. 279 F.2d 152. It reasoned that inasmuch as respondent was 'keeping its books on the accrual basis,' the contested part of the tax accrued 'only when all events (had) occurred which determine(d) the fact and amount of the tax liability.' Id., at page 155. To resolve the conflict between the decision below and Consolidated Edison Co. v. United States, supra, we granted certiorari. 364 U.S. 890, 81 S.Ct. 220, 5 L.Ed.2d 186.

During the years involved—1946 through 1950—respondent owned numerous tracts of real estate in New York City which were subject to annual local property taxes. Under the New York law, the City Council annually fixes the tax rate, and the City Tax Commission annually fixes the property valuations. Thus the amount of the tax on each tract is determined by multiplying the valuation by the tax rate. The tax rate is not contestable, but a timely application (commonly called a 'protest') may be made to the City Tax Commission to correct an erroneous valuation. Among other things, the protest must state the amount which the taxpayer 'consider(s) was the full value of the property on January 25 (of the current) year' thus to establish the amount of the tax that is not contested. Upon exhaustion of this administrative procedure, a review of the Commission's determination may be had by a judicial proceeding, commonly called a certiorari proceeding, in the State Supreme Court, which is the taxpayer's o le and exclusive remedy. But the institution of such a suit does not stay or suspend the maturity of the tax bill, the accrual of 7% interest on it, nor the seizure and sale of the property to satisfy the tax lien. Thus, to obtain review, the taxpayer must either 'pay' the tax or suffer the interest penalty and run the risk of seizure and sale of its property.¹

Though taxes for each of five years on hundreds of tracts are involved and the aggregate amount is very substantial, the parties very commendably stipulated in the District Court that the facts are sufficiently reflected, for the purposes of this suit, in the following simplified example:

In each of the years 1946 through 1950, respondent was notified of a tentative valuation which, at the established tax rate, would produce a tax of $100. Respondent then timely filed a bona fide protest (in respect of many, but not nearly all, of its tracts) stating a valuation which, at the established tax rate, would produce a tax of $85, and asking that the balance of the proposed valuation be stricken as excessive. After hearing, the Commission rejected the protest, and an assessment in the amount of $100 was made. Thereupon respondent, under protest and for the honestly stated purpose of avoiding the interest penalty and the seizure and sale of its property while it was contesting the Commission's valuation by certiorari proceedings in the state court, remitted to the city cash in an amount equal to the tax of $100, and immediately thereafter commenced a certiorari proceeding in the proper court, in which it again admitted liability for a tax in the amount of $85, but denied all liability for any tax in excess of that amount. In December 1951, the court, upon the consent of the parties to the action, entered its order in (each of) the certiorari proceedings fixing respondent's tax liability at $95, and thereupon the city forthwith returned $5 to respondent.

Although it was then engaged in a contest with the Commissioner in the Court of Claims over an identical question, namely, the proper income tax treatment to be accorded the $15 for each of the years 1938, 1939 and 1941—which issue was decided by the Court of Claims in December 1955 in favor of the Government, Consolidated Edison Co. v. United States, supra—respondent, in terms of the illustrative example, accrued on its books and deducted on its federal income tax returns, for each of the years 1946 through 1950, the full $100; and in its return for the year 1951—in which year the real estate tax liability was determined to be $95—respondent failed to deduct the $10 from, and included the $5 in, its gross income for that year.²

Believing that this treatment of the $15 in 1951 was erroneous and resulted in its paying a lesser amount of federal income taxes in each of the years 1946 through 1950, and more in the year 1951, than it should have paid,³ respondent filed in February 1955 its claim for refund of so much of its 1951 income taxes as resulted (1) from its failure to deduct the $10 of real estate tax that was determined, in that year, to be valid, and (2) from its inclusion in gross income of the $5 returned to it in that year. Upon rejection of that claim, respondent timely brought this action in the District Court to recover the refund claimed, and obtained the result already stated.

It is settled that each 'taxable year' must be treated as a separate unit, and all items of gross income and deduction must be reflected in terms of their posture at the close of such year. Burnet v. Sanford & Brooks Co. 282 U.S. 359, 51 S.Ct. 150, 75 L.Ed. 383; Heiner v. Mellon, 304 U.S. 271, 58 S.Ct. 926, 82 L.Ed. 1337; Guaranty Trust Co. of New York v. Commissioner, 303 U.S. 493, 58 S.Ct. 673, 82 L.Ed. 975; Security Flour Mills Co. v. Commissioner, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725. And the parties agree that, under the applicable federal statutes,⁴ neither the Government nor an accrual-basis taxpayer may cause an item to be deducted in a year other than the one in which it accrued. United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347; Security Flour Mills Co. v. Commissioner, supra; United States v. Olympic Radio & Television, 349 U.S. 232, 75 S.Ct. 733, 99 L.Ed. 1024. They also agree that the 'touchstone' for determining the year in which an item of deduction accrues is the 'all events' test established by this Court in United States v. Anderson, supra,⁵ and since reaffirmed by this Court on numerous occasions, so that it is now a fundamental principle of tax accounting. See, e.g., Lucas v. American Code Co., 280 U.S. 445, 50 S.Ct. 202, 74 L.Ed. 538; Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725; Dixie Pine Products Co. v. Commissioner, 320 U.S. 516, 64 S.Ct. 364, 88 L.Ed. 270; Security Flour Mills Co. v. Commissioner, supra.⁶ The parties also recognize that this Court amplified, or as the Government says 'added a refinement to,' the 'all events' test by its holding, in Dixie Pine Products Co. v. Commissioner, supra, that an accrual-basis taxpayer could not, while 'contesting liability in the courts,' deduct 'the amount of the tax, on the theory that the state's exaction constituted a fixed and certain liability,' but '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. at page 519, 64 S.Ct. at page 365. That principle was specifically reaffirmed in Security Flour Mills Co. v. Commissioner, supra. ⁷

That $85 of the $100 assessment was admitted to be owing and was intended to be paid and satisfied by the remittance, and thus accrued in the year of the remittance, is not in dispute. Respondent's good faith, in contesting $15 of the assessment, is not in dispute, for the Government expressly 'disavow(s) any suggestion that the respondent * * * filed its claims against the City of New York in bad faith, * * * calculatingly inflated those claims, or * * * failed to prosecute them with diligence.' Nor is it questioned that accrual of such taxes in the proper year accords with 'good accounting' principles.

But concordance of the views of the parties ends at this point. The Government contends that the remittance by respondent to the city, in each of the years in question, of cash in an amount equal to the whole of the assessed tax admitted liability for, and was intended to and did constitute 'payment' and 'satisfaction' of, both the disputed and undisputed parts of the assessment; and that when 'the taxpayer pays the item and thereby discharges its liability, the expense has been incurred and there is no longer any contingency which would prevent its accrual.' Respondent, on the other hand, insists that its...