Dravo Corporation v. United States

• Citation: 172 Ct. Cl. 200,348 F.2d 542
• Decision Date: 16 July 1965
• Docket Number: No. 381-60.,381-60.
• Parties: DRAVO CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

172 Ct. Cl. 200, 348 F.2d 542 (1965)

DRAVO CORPORATION v. The UNITED STATES.

No. 381-60.

United States Court of Claims.

July 16, 1965.

Herbert L. Awe, Washington, D. C., for plaintiff; Thomas E. Jenks, Washington, D. C., attorney of record. John P. Lipscomb and Alfred M. Osgood, Washington, D. C., of counsel.

Philip R. Miller, Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. C. Moxley Featherston, Lyle M. Turner, and Conrad T. Hubner, Jr., Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS and COLLINS, Judges.

LARAMORE, Judge.

This is an action for the recovery of income and excess profits taxes for the year 1953 and for the recovery of income taxes for the year 1955. There are two distinctly unrelated issues in this case, each based upon independent factual situations and different provisions of law. The first question for determination is whether plaintiff, a taxpayer reporting income for Federal income tax purposes on the accrual basis of accounting, should accrue and take as a deduction for the year 1953 an additional amount of Pennsylvania capital stock tax with respect to the year 1953 determined to be due by the state authorities in 1956 and paid by plaintiff in the same year without protest. The second question concerns the proper percentage depletion deduction to be taken by plaintiff in 1955 for Federal income tax purposes with respect to plaintiff's sand and gravel operations.

For the reasons given below, we hold for plaintiff on the first issue and for defendant on the second.

I. Pennsylvania Capital Stock Accrual Issue

Taxpayer is a Pennsylvania corporation which maintains its accounts and files its Federal tax returns on the accrual basis using a calendar year period. As a Pennsylvania corporation it was required to pay to that state a tax commonly known as a capital stock tax.

Pennsylvania, during the years in question, had a self-assessment procedure whereby domestic corporations subject to the tax were required to value their capital stock and pay a tax thereon at a prescribed rate. In 1954 taxpayer filed with the proper authorities its capital stock report indicating that the value of its stock as of the end of 1953 was $23,000,000 and that the capital stock tax due thereon for the 1953 calendar year was $82,461.33, which amount was remitted to the Commonwealth of Pennsylvania at the same time.

The Pennsylvania Department of Revenue had a statutory duty to notify each capital stock-taxpayer within the calendar year during which the return was filed as to whether or not it accepted the valuation placed on the stock. This notification was known as a "settlement".

On July 20, 1954, the Department accepted the taxpayer's valuation of the worth of its stock as of the end of 1953 and so notified it.

The taxpayer, which was on the accrual basis, deducted the entire amount of the capital stock tax for 1953 ($82,461.33) on its Federal income tax return for its 1953 calendar tax year.

By statutory authority, the Department of Revenue was authorized to reexamine and to reopen any "settlement" within two years after it was made and to redetermine the value of a taxpayer's capital stock and the capital stock tax attributable thereto. In 1956, the Commonwealth taxing officials reviewed the 1953 capital stock tax report of plaintiff and determined that plaintiff did not correctly reflect on its balance sheet the actual value of the shares of its subsidiaries. The revaluation by taxing officials increased the value of the taxpayer's capital stock to $32,000,000 with a resulting increase in the capital stock tax attributable to 1953 to $114,728.72, leaving a balance owing of $32,267.39 over the amount previously paid. By notice mailed on August 27, 1956, the tax authorities notified the taxpayer of the results of their revaluation. On September 11, 1956, the taxpayer paid the additional $32,267.39 to the Commonwealth without appeal or protest.

On June 1, 1959, the taxpayer filed a claim for refund of its Federal income taxes for 1953 on the grounds that the additional capital stock tax attributable to 1953, which was paid in 1956, was deductible in 1953. The claim for refund was disallowed and this suit followed.

The question of when items accrued for Federal income tax purposes has been the subject of extensive litigation and many decisions. From them emerge a series of simple propositions which determine the appropriate period for reflecting items of income and expense. We start with the admonition that in order for tax accrual accounting to provide a meaningful picture of operations, the expense items or deductions must be included in the same period as the income items they help to produce. In other words, interrelated items of expense and income must be "matched" in some particular period. United States v. Anderson, 269 U.S. 422, 440, 46 S.Ct. 131, 70 L.Ed. 347 (1926). To achieve this result the Supreme Court in Anderson, supra at 441, 46 S.Ct. 131, devised what is now called the "all events test" whereby an accrual basis taxpayer may deduct taxes or any other expense items if all the events fixing the fact of, and the amount of, the taxpayer's liability have transpired though not paid. This requires that "each `taxable year' must be treated as a separate unit, and all items of gross income and deductions must be reflected in terms of their posture at the close of such year." United States v. Consolidated Edison Co., 366 U.S. 380, 384, 81 S.Ct. 1326, 1329, 6 L.Ed.2d 356 (1961); Security Flour Mills Co. v. Commissioner of Internal Revenue, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725 (1944). The Supreme Court somewhat departed from this traditional concept of accrual accounting when it added a refinement to the "all events test" by its holding in Dixie Pine Products Co. v. Commissioner of Internal Revenue, 320 U.S. 516, 519, 64 S.Ct. 364, 365, 88 L.Ed. 270 (1944), 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." Emphasis added. The concept of contest since Dixie Pine has been expanded not only to include litigation in the courts but also a dispute formally lodged with the tax authorities. E. g., G.C.M. 25298, 1947-2 Cum.Bull. 39; Southwest Exploration Co. v. Riddell, 232 F.Supp. 13, 20 (S.D.Cal.1964) (dicta); Great Island Holding Corp., 5 T.C. 150 (1945).

In the instant case the government wants us to expand this concept by finding a "contest" for purposes of the rule enunciated in Dixie Pine, where a taxpayer merely files a state tax return acknowledging a liability in a stated amount since this "entails a denial by the taxpayer that it owes an amount of tax greater than that specified on the return." In support of this contention the government relies on Southwest Exploration Co. v. Riddell, supra; Agency of Canadian Car & Foundry Co., 39 T.C. 15 (1962); Gunderson Bros. Engineering Corp., 16 T.C. 118 (1951); Great Island Holding Co., supra, (dicta); Rev. Rul. 57-105, 1957-1 Cum.Bull. 193 (modified by Rev.Rul. 59-59, 1959-1 Cum.Bull. 97).

Contrary to the government's position taxpayer cites National Forge & Ordnance Co. v. United States, 141 Ct.Cl. 880, 158 F.Supp. 860 (1958); Montgomery v. United States, 87 Ct.Cl. 218, 23 F.Supp. 130 (1938), cert. denied, 307 U.S. 632, 59 S.Ct. 833, 83 L.Ed. 1514 (1939); Colt's Mfg. Co., 35 T.C. 78 (1960); Jack M. Chesbro, 21 T.C. 123 (1953); Gulf States Utilities Co., 16 T.C. 1381 (1951); H. E. Harman Coal Corp., 16 T.C. 787 (1951); Standard Paving Co., 13 T.C. 425 (1949), aff'd on other issues, 190 F.2d 330 (10th Cir. 1951), cert. denied, 342 U.S. 860, 72 S.Ct. 87, 96 L.Ed. 647 (1951); Burton-Sutton Oil Co., Inc., 3 T.C. 1187 (1944), aff'd in part and rev'd in part on other grounds, 150 F.2d 621 (5th Cir. 1945), rev'd on other grounds, 328 U.S. 25, 66 S.Ct. 861, 90 L.Ed. 1062 (1946); Oregon Pulp & Paper Co., 47 B.T.A. 772 (1942).

The government argues that the mere filing of a state tax return acknowledging a liability in a stated amount is a "contest" since that entails a denial by the taxpayer that it owes an amount of tax greater than that specified on the return. By the same token, the argument can be made that a taxpayer in a self-assessment situation remits what he thinks is the proper amount but acknowledges that a greater amount might be due and levied by the taxing authorities. We do not think it proper to extend the concept of "contest" to the instant situation where the only basis for such an extension is taxpayer's subjective motive as to what was intended when a return was filed. If a departure from the traditional concepts of proper accrual tax accounting is required by the fact of contest,¹ it should be evidenced by taxpayer's objective acts; i. e., lodging a formal protest with the tax authorities or instituting a suit in a court of law. To conclude otherwise would ignore the principle of an uncontested tax, and equate actual contest with acquiescence without contest. But more important, in order that income may be clearly reflected for any taxable year, it is necessary to reflect the state tax liabilities for that year. When the liability is not disputed and the precise amount is later determined, it is in accordance with sound principles of accounting that the tax accrue in the year in which the liability occurred. The government's position would result in completely distorting taxpayer's income for the years 1956 and 1953.

The government finally argues that if we do not find a contest by a mere filing in a self-assessment situation, taxpayer would be able to choose the year in which the deduction would benefit it the...