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 purposeand as the only
mode recognized by the local lawof 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.
3

During the years involved1946 through 1950respondent 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.
5

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 1941which issue
was decided by the Court of Claims in December 1955 in favor of the
Government, Consolidated Edison Co. v. United States, suprarespondent, 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 1951in which year the real estate tax
liability was determined to be $95respondent 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
8

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 remittance to the city
was not intended to and did not admit liability for, nor constitute 'payment' and
'satisfaction' of, the contested $15 of the assessment, but was, in effect, a mere
deposit, in the nature of a cash bond, required of respondent, in a practical
sense, by the local law as the only available mode of avoiding the risk of
seizure and sale of the property for the contested tax while its validity was
being diligently contested in the only way allowed by the laws of the State.

10

Thus the very narrow issue here is whether the remittance admitted liability for,
and constituted 'payment' and 'satisfaction' of, the contested part of the
assessment and thereby rendered it accruable in the year of the remittance. Like
the Court of Appeals, we think the respondent is right in its contention, and that

$10 of the contested $15 of the tax accrued when liability in that amount was
finally determined by the New York court in 1951, and that the $5, for which
respondent was by that judgment held not liable, and which was returned to it
by the city, was not income to respondent in 1951.
11

Although the Government attempts to distinguish the Anderson, Dixie Pn e and

Security Flour Mills cases on the ground that 'payment' of the contested taxes
had not been made in those cases, it primarily relies on the decisions of the
Court of Claims in Chestnut Securities Co. v. United States, 62 F.Supp. 574,
104 Ct.Cl. 489 and Consolidated Edison Co. v. United States, 135 F.Supp. 881,
133 Ct.Cl. 376.

12

The Chestnut Securities case turned on the question whether certain judicially
contested state income taxes (for the years 19361938) accrued when they
were paid in 1940, as claimed by the accrual-basis taxpayer, or when the final
judgment upholding their validity was rendered in 1942, as contended by the
Government. Squarely contrary by the contention here, the Government,
relying on Security Flour Mills Co. v. Commissioner, supra, there contended
that 'since the (taxpayer's) accounts were kept and its tax returns made on the
accrual basis, it could not take its deduction for the taxes * * * paid to the State
* * * until the year 1942, when its suit for their return was finally decided
adversely to it.' (62 F.Supp. 576, 104 Ct.Cl. 489.) On the facts of that case, the
Court of Claims held that 'the Government (was) wrong' in that contention.
Although, in full consonance with the Security Flour Mills case, the Court of
Claims said '(o)ne is not entitled to accrue a debt or other liability which is
asserted against him but which he disputes and litigates, until the litigation is
concluded,' it went on to say '(b)ut if a liability is asserted against him and he
pays it, though under protest, and though he promptly begins litigation to get
the money back, the status of the liability is that it has been discharged by
payment. It is hardly conceivable that a liability asserted against him, which he
has discharged by payment, has not yet 'accrued' within the meaning of the tax
laws and the terminology of accounting. Accrual, from the debtor's standpoint,
precedes payment, and does not survive it.' 62 F.Supp. at page 576, 104 Ct.Cl.
at pages 494 495. And after pointing to this Court's use of the phrase 'and failed
to pay' in its holding in the Security Flour Mills case that 'Since (the taxpayer)
denied liability for, and failed to pay, the tax during the taxable year 1935, it
was not in a position in its tax accounting to treat the Government's claim as an
accrued liability,' the Court of Claims concluded: 'In the instant case the
taxpayer denied liability, but paid. We think it thereby 'accrued' the taxes and
interest, if accrual is requisite at all, in the case of the debtor, when actual
payment has occurred.' 62 F.Supp. at page 576, 104 Ct.Cl. at page 495.

13

The Consolidated Edison case involved the same parties, facts and questions as
the present case, though in respect to earlier tax years. Although recognizing
that this Court's opinions in Security Flour Mills Co. v. Commissioner, supra,
and Dixie Pine Products Co. v. Commissioner, supra, had 'settled' the law to be
'that a taxpayer may not accrue an expense when he is denying liability and
refusing and contesting its payment,' the Court of Claims rejected, as 'not
necessarily true,' the taxpayer's argument '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 immediately
started to obtain a repayment' (135 F.Supp. at page 884, 133 Ct.Cl. at page
382); and, purporting to follow, but seemingly departing from, its decision in
the Chestnut Securities case, the Court concluded '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.' 135 F.Supp. at page 885, 133 Ct.Cl. at pages
383384. (Emphasis added.) On that conclusion the Court rendered judgment
for the Government.

14

Just what the Court mean by the phrase we have italicized was not explained,
but it is evident that if the tax item was 'otherwise accruable in the taxable year,'
paymentwhether of a character that would constitute an admission of the
asserted liability or a mere deposit to enable contest of the liability certainly
would not render the item nonaccruable; and if, in the absence of payment, the
item was 'otherwise accruable in the taxable year,' payment would be
immaterial, or at least unnecessary, to the question of accruability. It thus
appears that the Court's judgment was contrary to its rule in that case, for,
although it regarded the remittance as 'payment' of the asserted tax liability,
admittedly the contested part of the tax was not 'otherwise accruable in the
taxable year.'

15

Disagreeing with the conclusion of the Court of Claims in the Consolidated

Edison case, the Court of Appeals concluded, we think correctly, that the
question of accruability of the taxapart from the issue respecting 'payment'
and 'satisfaction'was governed by the 'all events' test established by this
Court in United States v. Anderson, supra (see note 5), as amplified and
affirmed in Dixie Pine Products Co. v. Commissioner, supra, and reaffirmed as
amplified in Security Flour Mills Co. v. Commissioner, supra. See notes 6 and
7.

16

As to whether respondent's remittance of the full $100 to the city, in the

circumstances of this case, constituted an admission of liability for, and a

'payment' and 'satisfaction' of, the contested $15 of the assessment, the Court of
Appeals recognized that this Court's opinions in the Anderson, Dixie Pine and
Security Flour Mills cases refer to the fact that 'payment' of the taxes sought to
be deducted in those cases had not been made by the taxpayers, but it thought,
and we agree, that those references were made only for the sake of complete
accuracy to an important but, so far as those cases were concerned, a collateral
matter, and not to the determinative considerations of those cases, which were
the 'all events' test as they state it.
17

'Payment' is not a talismanic word. It may have many meanings depending on

the sense and context in which it is used. As correctly observed by the Court of
Appeals, 'A payment may constitute a capital expenditure, an exchange of
assets, a prepaid expense, a deposit, or a current expense,' and '(w)hen the exact
nature of the payment is not immediately ascertainable because it depends on
some future event, such as the outcome of litigation, its treatment for income
tax purposes must await that event.' 279 F.2d at page 156. (Emphasis added.)

18

Of course, an unconditional 'payment' made by a taxpayer in apparent

'satisfaction' of an asserted matured tax liability is, without more, plain and
persuasive evidence, at least against the taxpayer, that 'all the events (have)
occur(red) which fix the amount of the tax and determine the liability of the
taxpayer to pay it,' United States v. Anderson, supra, 269 U.S. at page 441, 46
S.Ct. at page 134, and that the item so paid and satisfied has accrued.

19

But where, as stipulated by the parties in this case, the remittance or 'payment'
did not admit, but specifically denied, liability for, and was not intended to
satisfy, the contested $15 of the assessment, but was, in effect, a mere deposit,
'in the nature of a cash bond for the payment of (so much, if any, of the
contested) taxes (as might) thereafter (be) found to be due' (Rosenman v.
United States, 323 U.S. 658, 662, 65 S.Ct. 536, 538, 89 L.Ed. 535, and see
Lewyt Corp. v. Commissioner, 2 Cir., 215 F.2d 518, 523), and was made for
the sole purpose of stayingthere being no other way to stayan otherwise
possible seizure and sale of the property for the contested tax while its validity
was being honestly and diligently contested in the only way allowed by the law
of the State, it will not do to say that the taxpayer has made an unconditional
'payment' in apparent 'satisfaction' of the contested part of an asserted matured
tax lib ility, and thereby rendered it immediately accruable.

20

We therefore conclude that $10 of the contested $15 tax liability accrued not in
the year of the remittance, but in 1951 when the New York court entered its
final order determining that liability; and that the $5, for which respondent was

held not liable by that judgment and which was returned to it by the city, was
not income to respondent in 1951.
21

Affirmed.

The procedures allowed by the laws of New York for the contest of real
property taxes are more fully set forth in Consolidated Edison Co. v. United
States, 135 F.Supp. 881, 882, 133 Ct.Cl. 376, 378.

Respondent asserts that this treatment of the $15 in its 1951 federal income tax
return was made under compulsion of the Commission's erroneous G.C.M.
25298, issued directly to it in 1947 (19472 Cum.Bull. 39), saying, 'a
contested tax liability accrues not later than time of payment, notwithstanding
continuation of contest. The accrual basis of accounting relates to the
deductibility of unpaid items,' and that the Commissioner insisted upon that
treatment, despite his modification thereof in Mim. 6444 (19492 Cum.Bull.
11), saying in pertinent part, that 'payment of (a) contested tax liability as a
prerequisite for appeal is not deductible under G.C.M. 25298.'

The economic consequences to the parties arise from the fact that corporate
income tax rates (normal plus surtax) were increased from 38% in 1946 to 50
3/4% in 1951, and, in this particular instance, more revenue would be produced
by taking the deduction in 19461950 than in 1951. The taxpayer recognizes
that, if its position be sustained, the Commissioner will have one year after
entry of final judgment herein to reaudit the taxpayer's 19461950 returns and
to assess deficiencies based upon deduction of the $15 in those years, in
accordance with the provisions of 13111315 of the Internal Revenue
Code of 1954, 26 U.S.C.A. 13111315.

The applicable statutes are 23(c), 41, 42, 43 and 48 of the Internal Revenue
Code of 1939 (26 U.S.C. (1952 ed.), 23(c), 41, 42, 43, 48, 26 U.S.C.A.
23(c), 41, 42, 43, 48). These provisions are the same as their counterparts in
prior Revenue Acts and in the Internal Revenue Code of 1954. Inasmuch as
those statutes are not really in contest in this case, it would serve no useful
purpose even to abstract them here.

In the Anderson case, this Court declared the so-called 'all events' test as
follows: 'In a technical legal sense it may be argued that a tax does not accrue
until it has been assessed and becomes due; but it is also true that in advance of
the assessment of a tax, all the events may occur which fix the amount of the
tax and determine the liability of the taxpayer to pay it. In this respect, for

purposes of accounting and of ascertaining true income fr a given accounting

period, the munitions tax here in question did not stand on any different footing
than other accrued expenses appearing on appellee's books. In the economic
and bookkeeping sense with which the statute and Treasury decision were
concerned, the taxes had accrued.' 269 U.S. at page 441, 46 S.Ct. at page 134.
6

In the Dixie Pine case, this Court reaffirmed the 'all events' test as follows: 'It
has long been held that in order truly to reflect the income of a given year, all
the events must occur in that year which fix the amount and the fact of the
taxpayer's liability for items of indebtedness deducted though not paid; and this
cannot be the case where the liability is contingent and is contested by the
taxpayer.' 320 U.S. at page 519, 64 S.Ct. at page 365.
In the Security Flour Mills case, this Court reaffirmed that test as follows: 'It is
settled by many decisions that a taxpayer may not accrue an expense the
amount of which is unsettled or the liability for which is contingent, and this
principle is fully applicable to a tax, liability for which the taxpayer denies, and
payment whereof he is contesting.' 321 U.S. at page 284, 64 S.Ct. at page 5979

In the Security Flour Mills case, after saying 'that a taxpayer may not accrue an
expense the amount of which is unsettled or the liability for which is
contingent,' the Court concluded that '(s)ince (the taxpayer) denied liability for,
and failed to pay, the tax during the taxable year 1935, it was not in a position
in its tax accounting to treat the (tax) claim as an accrued liability.' 321 U.S. at
page 284, 64 S.Ct. at page 597.