Opinion ID: 419666
Heading Depth: 3
Heading Rank: 1

Heading: Same Dollars Argument

Text: 28 Perhaps some reference to familiar landmarks will be useful. An accrual basis taxpayer normally may only deduct an expense in the taxable year in which all events have occurred which determine the fact of the liability and the amount thereof .... Treas.Reg. Sec. 1.146-1(a)(2). But where a liability is contested, neither the fact nor the amount of the liability can be determined with sufficient accuracy for the liability to be deducted. See Poirier & McLane Corp. v. Commissioner, 547 F.2d 161, 164 (2d Cir.1976), cert. denied, 431 U.S. 967, 97 S.Ct. 2925, 53 L.Ed.2d 1063 (1977). In United States v. Consolidated Edison, 366 U.S. 380, 81 S.Ct. 1326, 6 L.Ed.2d 356 (1961), the Supreme Court eliminated an exception to the all events rule, which allowed an accrual basis taxpayer to deduct the payment of a contested tax liability in the year that the payment was made. 29 In reaction to Consolidated Edison, Congress, as part of the Revenue Act of 1964, added section 461(f) to the Internal Revenue Code. That section allows an accrual method taxpayer to deduct in the year of payment the transfer of money or other property to provide for the satisfaction of any contested liability where, but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer .... 11 The purpose of section 461(f) is to match, in a realistic manner, receipts and disbursements in the taxable year in which revenues were received and payments were actually made. S.Rep. No. 830, 88th Cong., 2d Sess. 100, reprinted in 1964 U.S.Code Cong. & Admin.News 1673, 1773. 30 We applied section 461(f) in Chem Aero. There, a sales agent brought a successful action against the taxpayer for unpaid commissions, and the taxpayer, in compliance with state law, posted a bond collateralized by an irrevocable letter of credit, which, in turn, was backed by a certificate of deposit, to cover the amount of the judgment while the award was appealed. When the taxpayer lost its appeal, the issuer of the bond delivered the letter of credit to the taxpayer's bank, drew out the amount of the judgment plus interest, charged the withdrawal against the certificate of deposit, and paid off the claimant. We permitted the taxpayer to take a section 461(f) deduction for the amount of the contested liability in the year that the bond was collateralized, holding that the legislative purpose of section 461(f) can be fulfilled by allowing the taxpayer to take the deduction whenever the money for the settlement of the contested liability is irrevocably parted with, provided that the manner of transfer is not open to the possibility of tax abuse. 694 F.2d at 200. See also Poirier & McLane Corp., 547 F.2d at 165-66; In re I.J. Knight Realty Corp., 431 F.Supp. 946, 954 (E.D.Pa.1977). 31 In Chem Aero, we were aware of the Tax Court decision here being reviewed. We distinguished that decision by pointing out that the moneys deposited with Seaboard by the taxpayer, Consolidated, were never used to pay claims; the actual payments came directly from Consolidated Freightways. 694 F.2d at 199 n. 4. In Chem Aero, on the other hand, the funds (in the form of a certificate of deposit) that Chem Aero pledged to the bank to secure the bond were the only funds that Chem Aero had available for the satisfaction of the judgment, and ... were necessarily used for that purpose. Id. (emphasis added). 32 The question therefore arises whether this so-called same money distinction is required by section 461(f). Consolidated argues that there is no same money requirement because (1) the legislative history of section 461(f) is silent on the point, and because (2) Consolidated's agreement with Seaboard provides for adjustment of the moneys deposited with the surety, so that the result of the arrangement is as if the same dollars were paid out. We disagree. 33 First, while the legislative history does not specifically impose a same money requirement on a section 461(f) deduction, it is noteworthy that Chem Aero and the cases and examples of permissible transactions given in the legislative history, see S.Rep. No. 830, at 100; id. at 239-40 (Supplemental Report), reprinted in 1964 U.S.Code Cong. & Admin.News 1773, 1912-13, do involve the transfer of the same money that is eventually paid to the claimant. Moreover, the Supplemental Senate Report mentions three types of transactions which would not qualify for a deduction in the year of transfer under section 461(f); in none of these transactions was a claimant paid with same money that was set aside against a contested liability. Id. at 240, reprinted in 1964 U.S.Code Cong. & Admin.News at 1913; see also Treas.Reg. Sec. 1.146-2(c)(1). Finally, the legislative history indicates that Congress was concerned lest section 461(f) be used by accrual basis taxpayers to reduce their tax burden by accelerating deductions, instead of matching receipts and expenditures. See In re I.J. Knight Realty Corp., 431 F.Supp. at 954. A same money requirement would diminish the possibility of that type of tax abuse. 34 Consolidated points out, however, that a same money requirement would be impractical in its self-insurance plan, where between 350 and 400 claims against Consolidated were outstanding at any one time. It insists that section 461(f) can be satisfied by a scheme such as it employs under which the transferred money is placed out of its control and periodic adjustments to reflect the amount of contested liabilities are made. 35 We are by no means convinced by this argument. However, even if we were, we would find that the plan Consolidated employs does lend itself to impermissible tax abuse. Thus, although we agree that the money transferred by Consolidated was under the absolute control of Seaboard, 74 T.C. at 788, we could not hold that the plan satisfies section 461(f). Its fatal flaw is that refunds by Seaboard are made only at irregular intervals. 12 Deposits were required not to be less than estimated liabilities; but refunds were not required when deposits exceeded liabilities. Consolidated's accounts therefore had the potential of not being in balance at the end of the tax year. This would allow Consolidated within a given taxable period to accelerate its deductions and to defer its income without regard to either the total estimated liabilities or the amount of claims settled. This provides an opportunity for tax abuse. 36 In sum, we hold that while we are not prepared to reject the same money requirement, the arrangement between Consolidated and Seaboard does not meet the requirements of section 461(f) even if we were to reject the same money requirement.