Court Opinion

ID: 9447493
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:36:31.139259+00
Date Added: 2024-06-11T17:31:04.307723
License: Public Domain

FRIENDLY, Circuit Judge
(dissenting).
A current law review comment, under the heading “Tax Accounting: The Timing of Income and Deductions,” has this to say: “While tax men are prone to refer to many parts of the tax law as a ‘jungle,’ it is to this area that the term is applied with the greatest force and frequency.” Lyon, Federal Income Taxation, 35 N.Y.U.L.Rev. 697, 715 (1960). See also Freeman, Tax Accrual Accounting for Contested Items, 56 Mich.L.Rev. 727 (1958); Note, Accrual: The Uncertain Concept of Certainty — A History of the All Events Test, 21 U.Chi.L.Rev. 293 (1954).
This Court has recently taken important steps toward clearing the “jungle,” see Central Cuba Sugar Co. v. Commissioner, 2 Cir., 1952, 198 F.2d 214, certi-orari denied 1952, 344 U.S. 874, 73 S.Ct. 167, 97 L.Ed. 677; Bressner Radio, Inc. v. Commissioner, 2 Cir., 1959, 267 F.2d 520; Consolidated Edison Co. of New York v. United States, 2 Cir., 1960, 279 F.2d 152, as have other Courts of Appeals, Harrold v. Commissioner, 4 Cir., 1951, 192 F.2d 1002; Denise Coal Co. v. Commissioner, 3 Cir., 1959, 271 F.2d 930. This case affords an opportunity for further progress; I regret to see this lost.
Section 29.43-2 of Treasury Regulations 111 issued under the 1939 Code, which here controls, lays out the ground rules as follows:
“Sec. 29.43-2. When charges deductible' — -Each year’s return, so far as practicable, both as to gross income and deductions therefrom, should be complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. The expenses, liabilities, or deficit of one year cannot be used to reduce the income of a subsequent year. A taxpayer has the right to deduct all authorized allowances, and it follows that if he does not within any year deduct certain of his expenses, losses, interest, taxes, or other charges, he can not deduct them from the income of the next or any succeeding year. It is recognized, however, that particularly in a going business of any magnitude there are certain overlapping items both of income and deduction, and so long as these overlapping items do not materially distort the income they may be included in the year in which the taxpayer, pursuant to a *564consistent policy, takes them into his accounts. Judgments or other binding adjudications, such as decisions of referees and boards of review under workmen’s compensation laws, on account of damages for patent infringement, personal injuries, or other cause, are deductible from gross income when the claim is so adjudicated or paid, unless taken under other methods of accounting which clearly reflect the correct deduction, less any amount of such damages as may have been compensated for by insurance or otherwise. * * *»
The thrust of the Regulation seems to be that the taxpayer must be industrious to “ascertain the facts” and to take “all authorized allowances”-just as soon as he can. The Regulation warns him that “ * * * if he does not within any year deduct certain of his expenses, losses, interest, taxes, or other charges, he can not deduct them from the income of the next or any succeeding year.” Anyone reading all this without the glosses, many of them inconsistent, that have been encrusted on it and its predecessors by courts and commentators, would suppose that an accrual basis taxpayer who took a deduction for expenses paid or incurred which his auditors would require him to take in the taxable year, would be doing just what the Regulation adjured. I do not believe that any decisions of the Supreme Court or of this Court forbid us from applying the Regulation in that spirit to the Fifth Avenue Coach Lines.
Consider first the interest on the tax deficiencies for 1943-47. All the facts establishing the amount of the tax deficiencies and consequently of the interest thereon were determined in the Tax Court’s decision of December 22, 1948, which found deficiencies for 1937-39. Before the end of 1948 taxpayer indicated its acquiescence in that determination by filing amended returns for 1940-42 and by paying the deficiencies and interest both for 1937-39 and for 1940-42. It is not suggested that the deficiencies for 1943-47 and the interest thereon stood on any different footing from those for the earlier years; the only reason why these also were not paid in 1948 was that time did not permit calculation of the exact amount due. However, it is settled that the absence of such a calculation during the calendar year, or even the inability to make one, does not destroy the deduction. United States v. Anderson, 1926, 269 U.S. 422, 441, 46 S.Ct. 131, 70 L.Ed. 347; Continental Tie & Lumber Co. v. United States, 1932, 286 U.S. 290, 297, 52 S.Ct. 529, 76 L.Ed. 1111.
We are told that nevertheless the deduction must be denied because taxpayer had not formally advised the Commissioner during 1948 of its intention not to appeal, even though the Tax Court has found as a fact that taxpayer had acquiesced before the end of the year.1 Yet, *565as the majority recognize (fn. 3), actual payment of the deficiency and interest during 1948 would not have precluded an appeal, and I know of no authority that a letter announcing an intention not to appeal would have had any greater preclusive effect, at least if it were withdrawn sufficiently before the expiration of the three months’ period, Internal Revenue Code of 1939, § 1142, so that the Commissioner would not have been prejudiced by relying on it in making his own decision not to appeal. The effect of such a letter would thus have been only evidentiary. The Tax Court thought this additional evidence unnecessary to find that the dispute was no longer being contested, and its finding is entitled to the usual respect. Casey v. Commissioner, 2 Cir., 1959, 267 F.2d 26, 30-31. The majority must thus be ruling that nothing short of a formal stipulation or the running of the time to appeal will suffice; I see nothing in the statute or regulations to warrant this. The only Supreme Court decisions that come near this phase of the case, Dixie Pine Products Co. v. Commissioner, 1944, 320 U.S. 516, 64 S.Ct. 364, 88 L.Ed. 270 and Security Flour Mills v. Commissioner, 1944, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725, do not demand such a mechanical view; in those cases taxpayer was contesting liability all along and ultimately won. Neither do decisions in other Circuits, which, of course, do not bind us in any event. Although in United States v. Texas Mexican Ry. Co., 5 Cir., 1959, 263 F.2d 31, 34, Judge Wisdom makes the picturesque observation that “the existence of any liability is uncertain until the last bell is rung in the last court,” the fact was that the taxpayer was vigorously contesting the liability, as in Dixie Pine and Security Flour Mills. H. Liebes & Co. v. Commissioner, 9 Cir., 1937, 90 F.2d 932, is distinguishable since it involved the accrual of income by the taxpayer rather than a deduction, as here, and the person who had not decided whether to appeal was the party from whom the income would come; to analogize this to the instant case, where it was for the taxpayer to decide to give up, seems to confound the fisherman with the fish.
Although the deduction for the prospective wage liability is more questionable and perhaps would go beyond any case yet decided, I think that it is not forbidden by any authority binding upon us and that the taxpayer’s position accords better with the statute and regulation than the Commissioner's. Any responsible auditor concerned with “the matching of costs and expenses against income,” American Institute of Accountants, Audit's by Certified Public Accountants, Their Nature and Significance (1950), p. 12, would have insisted on provision for this liability in the accounts for the years when the employees’ services were rendered. Mr. Justice Brandeis said in Brown v. Helvering, 1934, 291 U.S. 193, 200, 54 S.Ct. 356, 359, 78 L.Ed. 725, “that, where a liability has ‘accrued during the taxable year’, it may be treated as an expense incurred; and hence as the basis for a deduction, although payment is not presently due * * * and although the amount of the liability has not been definitely ascertained.” In my view taxpayer’s “liability” for 1946 accrued at least by October 7, 1946, when it entered into an agreement with the union that any new contract would be retroactive to October 1, 1946, and its “liability” for 1948 accrued on January 26,1948, when the taxpayer and the union agreed that any contract would be retroactive to February 1, 1948. To be sure, the amount of the liability was uncertain; in theory it might have proved to be zero, but in theory only, however much taxpayer may have desired this result and even have gone through the motions of seeking to accomplish it. Average hourly earnings for street railway and bus workers had increased by 5^ per hour from March, 1946, the date of the last determination between taxpayer and its workers, to September, 1946, Bureau of Labor Statistics, Monthly Labor Review, and the Consumer Price Index had rocketed from 130.2 to 146. Again, from the *566arbitrator’s award in June, 1947, to January, 1948, average hourly earnings in the industry climbed another 8.70 and the Consumer Price Index from 157 to 169. To compare negotiations or arbi-trations over wages with litigations over taxes or other contested liabilities appears quite as unrealistic as a similar attempt at analogizing labor arbitration provisions with those in other types of contracts was recently held to be, United Steelworkers of America v. Warrior and Gulf Navigation Co., 1960, 80 S.Ct. 1347, 1363, 4 L.Ed.2d 1409, 1432.
No decision of the Supreme Court or of this Court seems to me to require a disallowance here. The deduction disallowed in Brown v. Helvering, supra, was for the establishment of a reserve against income which taxpayer feared might not remain his; Lucas v. American Code Co., 1930, 280 U.S. 445, 50 S.Ct. 202, 74 L.Ed. 538, involved contested damages for the breach of an executory contract for personal services for 18 years prospective duration; Dixie Pine Products Co. v. Commissioner, supra, and Security Flour Mills Co. v. Commissioner, supra, have been discussed above; and Automobile Club of Michigan v. Commissioner, 1957, 353 U.S. 180, 188-190, 77 S.Ct. 707, 1 L.Ed.2d 746, rested on the lack of proof that taxpayer’s method of spreading the dues income properly reflected the facts, as this Court recognized in Bressner Radio, Inc. v. Commissioner, supra, 267 F.2d at page 528. Unless Spencer, White & Prentis, Inc. v. Commissioner, 2 Cir., 1944, 144 F.2d 45, certiorari denied, 1944, 323 U.S. 780, 65 S.Ct. 269, 89 L.Ed. 623, is similarly distinguishable, it is inconsistent with Bressner Radio. Here the employees had rendered the services during the taxable year; the company owed for these services whatever sums negotiation or arbitration might determine; and it had a very shrewd idea what its bill would be, as witness the absolute accuracy of its estimates. This was not happenstance. Persons concerned with labor matters keep themselves well informed of the trend of wage settlements and arbitrations and the industry pattern is fairly consistent. All that is required is a reasonable estimate; indeed, that is all we actually have for a great many items in corporate financial statements, despite their appearance of exactness.2 If the law requires deduction of such a liability on an estimated basis in the year in which the liability is incurred, as I think it does, the taxpayer does not have the free election between years that the majority assumes, and I doubt the nation will perish if taxpayers do have it within their power to overshoot or undershoot the deduction for wages in a particular year by a few cents per hour. Certainly, in an inflationary economy3 the deduction of a reasonable estimate of this expense comes far closer to the clear reflection of income demanded by § 41 of the 1939 Code than making none. In Consolidated Edison Co. of New York v. United States, supra, this Coui*t allowed a taxpayer to deduct an amount estimated, on no more scientific a basis, to be its liability for city taxes in the year in which these accrued as against the government’s contention that it must deduct the full amount assessed. I grant that the Consolidated Edison Co. did not challenge the city’s right to the estimated tax whereas here the practicalities of labor negotiation and arbitration forced the Fifth Avenue Coach Lines to assume a more bellicose stance, although it knew full well that this posture would not pre*567vail and recorded its true views of its liability on its books, as good accounting practice required. I do not think the difference requires a different result; in tax matters particularly, substance should prevail.
I would affirm on the Commissioner’s petition and reverse on taxpayer’s cross-petition.

. Reference is made to the minutes of a meeting of taxpayer’s board of directors on February 26, 1949, recording that “Mr. Boykin C. Wright stated that after consultation with the officers of the Corporation in regard to the advisability of appealing from the decision of the Tax Court, he had recommended that the corporation should not appeal unless the Commissioner of Internal Revenue should appeal, in which case he believed that the Corporation should file a cross-appeal.” To me this refers to advice given in December, 1948, by Mr. Wright, who had died before the Tax Court hearing, rather than meaning that this was his position, much less the company’s, in February, 1949. Taxpayer’s viee-president and comptroller testified that, after having conferred with counsel in December, 1948, he discussed the matter with the company’s president, that they reached a definite decision not to appeal, that a government appeal would not have altered his own conclusions not to appeal, and that despite a government appeal “we would still have gone through giving us [sic] the right to appeal when we made our decision to pay the deficiency and the interest accrued up until that time.” Certainly the Tax Court’s finding that “Petitioner had acquiesced in this Court’s decision, and the liability for the interest was not being contested and was finally determined as of the end of 1948” was not clearly erroneous.

. “Actually, the values of most items in financial statements cannot be measured exactly. By their nature, many of the amounts shown have to be approximations and represent the best estimate which those responsible for the statements can make.” American Institute of Accountants, Audits by Certified Public Accountants, Their Nature and Significance (1950), p. 10.

. For the ten-year period, 1949-59, the annual rate of depreciation of the dollar (compounded), determined by reciprocals of the consumer price index, has been 2%. See First National City Bank Monthly Letter, July, 1960.