concurring: Although I have joined in the majority’s opinion, I write separately to set forth more fully why I believe petitioner may not accrue the contested tax liability in question.
I. Application of the All Events Test
The majority notes: “Our holding in J.H. Rutter Rex Manufacturing Co. v. Commissioner, T.C. Memo. 1987-296, was consistent with our holding in Doug-Long, Inc. v. Commissioner, 73 T.C. 71 (1979), which, in turn, followed the Supreme Court’s reasoning in Dixie Fine Prods. Co. v. Commissioner, 320 U.S. 516 (1944), and related precedent.” Majority dp. p. 16. It is upon Dixie Pine Prods. Co. and the “related precedent” that I wish to focus.
The seminal case establishing the basic rule for when a liability is incurred and, thus, is taken into account under the accrual method of accounting for Federal income tax purposes is United States v. Anderson, 269 U.S. 422 (1926), which holds that a liability is incurred in the year in which occur all the events needed to create an unconditional obligation to pay such liability. That test (the all events test) is now embodied in section 1.446-l(c)(l)(ii)(A), Income Tax Regs., which provides that, under an accrual method of accounting (in addition to the requirement of “economic performance”, added in 1984), a liability is incurred for income tax purposes “in the taxable year in which all the events have occurred that establish the fact of the liability, [and] the amount of the liability can be determined with reasonable accuracy”. See also sec. 1.461-l(a)(2), Income Tax Regs.
In Dixie Pine Prods. Co. v. Commissioner, supra, the Supreme Court amplified the all events test by holding that all of the events to establish a liability have not occurred if the liability is contingent and is contested by the supposed obligor. Id. at 519; accord Security Flour Mills Co. v. Commissioner, 321 U.S. 281 (1944).1 In Dixie Pine Prods. Co. v. Commissioner, supra, the taxpayer had contested a State excise tax that, otherwise, would have been due for the taxable year in question. The Supreme Court held that the taxpayer could claim a deduction only for the taxable year in which its liability for the tax was finally settled. Id. at 519.
In United States v. Consol. Edison Co., 366 U.S. 380 (1961), the Supreme Court applied the all events test to a situation in. which a contested real estate tax liability was paid in order to stay the seizure and sale of the property (in satisfaction of the tax lien) during the péndency of the contest. The Court held that such payment did not satisfy the all events test so long as the contest was still pending. Id. at 391-392.
The result in United States v. Consol. Edison Co., supra, was overruled (retroactively to the effective date of the 1954 Code) by section 223 of the Revenue Act of 1964, Pub. L. 88-272, 78 Stat. 19, 76, which added section 461(f), which permits a deduction for contested items in the year of payment, even though the contest is not resolved until a later year. S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, is the report of the Committee on Finance that accompanied H.R. 8363, 88th Cong., 1st Sess. (1963), which, when enacted, became the Revenue Act of 1964. The report explains the general reasons for section 461(f) (which originated in the Senate) as follows:
Although your committee does not question the legal doctrine laid down by the Supreme Court in the Consolidated Edison case, it believes that it is unfortunate to deny taxpayers a deduction with respect to an item where the payment has actually been made, even though the liability is still being contested either as to amount or as to the item itself. * * * [S. Rept. 830s supra, 1964H C.B. (Part 2) at 604; emphasis added.]
Thus, under well-established principles of tax accrual laid down by the Supreme Court, it is clear that, for, income tax purposes, the all events test is not satisfied with respect to a contested tax liability, and the contested tax liability may not be “accrued”, until the year in which the contest is terminated. If the contested liability is paid before the contest is terminated, the liability is deductible in the year of payment pursuant to section 461(f). If the same tax accrual principles apply for purposes of section 535(b)(1), there is no basis in law for the holding of the Court of Appeals for the Fifth Circuit in J.H. Rutter Rex Manufacturing Co. v. Commissioner, 853 F.2d 1275 (5th Cir. 1988), revg. T.C. Memo. 1987-296, that a taxpayer’s payment of a contested tax liability entitles the payor to treat the contested liability as “accrued” during the prior taxable year to which the accumulated earnings tax relates.
II. Relevance of Section 1.535 — 2(a)(1), Income Tax Regs.
The Court of Appeals for the Fifth Circuit, in J.H. Rutter Rex Manufacturing Co. v. Commissioner, supra at 1297, noted that the last sentence of section 1.535-2(a)(1), Income Tax Regs., does not prohibit an accrual deduction for paid contested taxes prior to termination of the contest because the sentence provides only that “an unpaid tax which is being contested is not considered accrued until the contest is resolved.” (Emphasis added.) In reaching that conclusion, the Court of Appeals overlooked the fact that, at the time the cited regulation was promulgated, pursuant to T.D. 6377, 1959-1 C.B. 125, the Internal Revenue Service’s published position with respect to paid contested taxes was that such taxes are deductible in the year of payment, even though they contine to be contested. See G.C.M. 25298, 1947-2 C.B. 39, 44, which followed Chestnut Sec. Co. v. United States, 104 Ct. Cl. 489, 62 F. Supp. 574 (1945).2 Under those circumstances, the general accrual rule applicable to contested taxes, contained in section 1.535-2(a)(l), Income Tax Regs., could only have applied to unpaid taxes because its extension to paid taxes would have been inconsistent with G.C.M. 25298. Since 1964, an extension of that provision to paid contested taxes would be inconsistent with section 461(f), which, in effect, codified and reinstated the Commissioner’s position in G.C.M. 25298. Therefore, petitioner’s payment of the contested taxes could serve only to accelerate a deduction to the year of payment pursuant to section 461(f). There is no basis under either the all events test or section 461(f) for the Court of Appeals for the Fifth Circuit’s suggestion, J.H. Rutter Rex Manufacturing Co. v. Commissioner, supra at 1297, that the payment itself somehow justifies an accrual of such taxes in the earlier year for which the taxpayer is subject to tax imposed by section 531.
We are left, then, to determine whether the test of a section 535(b)(1) tax accrual is the all events test.
III. Validity of Section 1.535-2(a)(l), Income Tax Regs.
The final sentence of section 1.535-2(a)(l), Income Tax Regs., reads: “In computing the amount of taxes accrued, an unpaid tax which is being contested is not considered accrued until the contest is resolved.” That sentence leaves little doubt that the Secretary of the Treasury intended the test of a section 535(b)(1) tax accrual to be the all events test. See Doug-Long, Inc. v. Commissioner, 73 T.C. at 81 (“The last sentence of this regulation is consistent with the definition of accrued taxes which has been set forth in Dixie Pine Products Co. v. Commissioner, supra; Great Island Holding Corp. v. Commissioner, * * * [5 T.C. 150, 160 (1945)]; and sec. 1.461-2(b)(2), Income Tax Regs.”). The only question is whether that is a valid interpretation of the statutory command of section 535(b)(1) that, in computing accumulated taxable income, taxable income be adjusted by subtracting certain taxes “accrued” during the taxable year. In Doug-Long, Inc. v. Commissioner, supra at 82, we held that the last sentence of section 1.535-2(a)(l), Income Tax Regs., validly interprets the statute. In J.H. Rutter Rex Manufacturing Co. v. Commissioner, supra at 1296, the Court of Appeals for the Fifth Circuit made a cogent argument that the accumulated earnings tax, a penalty tax, should not be based on earnings “that may not exist at all depending on the deficiency claimed.” Taken to its logical conclusion, the Court of Appeals’ argument is an argument to read the term “[taxes] accrued during the taxable year” in section 535(b)(1) as meaning “[taxes] finally determined for the taxable year”.3 That is a rule that Congress easily could have stated. Congress, however, used the term “taxes accrued”, and the term “accrued” has a settled meaning, incorporating the all events test, for Federal income tax purposes. See, e.g., sec. 1.446-1(c)(1)(ii)(A), Income Tax Regs. In Estate of Goodall v. Commissioner, 391 F.2d 775, 800 (8th Cir. 1968), vacating and remanding T.C. Memo. 1965-154, the Court of Appeals for the Eighth Circuit gave precisely that meaning to the term “accrued” in a predecessor version of section 535(b)(1). If section 535(b)(1) is not clear on its face, the Secretary’s interpretation is permissible, since it defines a term in a way that is reasonable in light of the legislature’s revealed design. Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984).4 Although policy considerations may suggest a taxes-as-finally-determined rule, the use of a commonly understood term suggests the common meaning, and the legislature’s design, as revealed, does not contradict such usage.5
I conclude that section 1.535-2(a)(l), Income Tax Regs., validly interprets section 535(b)(1): The test of a section 535(b)(1) tax accrual is the all events test.
Swift, Whalen, and Marvel, JJ., agree with this concurring opinion.It should be noted that, in the absence of a contest, the all events test is satisfied with respect to the additional tax attributable to an income tax deficiency as of the close of the deficiency year. See Dravo Corp. v. United States, 172 Ct. Cl. 200, 348 F.2d 542 (1965) (additional State capital stock tax paid without protest by accrual method taxpayer in year 3 with respect to year 1 properly accruable for year 1). Such additional tax is, therefore, properly aeeruable for the deficiency year under sec. 535(b)(1). Rev. Rul. 68-632, 1968-2 C.B. 253.
Chestnut Sec. Co. v. United States, 104 Ct. Cl. 489, 62 F. Supp. 574 (1945), was effectively overruled by United States v. Consol. Edison Co., 366 U.S. 380 (1961).
That is, finally determined before the corporation’s liability for accumulated earnings tax becomes final.
Petitioner suggests that the Chevron standard of review should not apply because the accumulated earnings tax is in the nature of a penalty. Even if we were to conclude that the final sentence of sec. X.535 — 2(a)(1), Income Tax Regs., is invalid on that basis, it would not necessarily follow that petitioner would be entitled to deduct from its 1995 accumulated taxable income the amount of its 1995 Federal income tax deficiency as determined by this Court. That is, if we were to invalidate the final sentence of sec. 1.535-2(a)(l), Income Tax Regs., we would still be required to interpret the meaning of the term “[taxes] accrued during the taxable year” as used in sec. 535(b)(1). In this regard, petitioner offers no support for the proposition that Congress intended a taxes-as-finally-determined rule as opposed to, say, a taxes-as-actually-reported rule.
The Court of Appeals for the Fifth Circuit in J.H. Rutter Rex Manufacturing Co. v. Commissioner, 853 F.2d 1275, 1297-1298 (5th Cir. 1988), cites a line of cases beginning with Stern Bros. Co. v. Commissioner, 16 T.C. 295 (1951), in support of its position. Those cases uphold the accrual of contested taxes in the year in which the contested tax liability arises when computing accumulated earnings and profits for invested capital purposes under the excess profits tax imposed in World War II. Id. at 322-323. See also Estate of Stein v. Commissioner, 25 T.C. 940, 966 (1956), which extends the Stern Bros. Co. rationale to permit the accrual of contested taxes in computing earnings and profits for purposes of determining whether corporate distributions are taxable dividends or nontaxable distributions from capital. In Stern Bros. Co., we were interpreting a regulation that required an accrual basis taxpayer to subtract income and excess profit taxes “for the preceding taxable year”. That is not necessarily the same as allowing a deduction for any such taxes as are “accrued” during such preceding taxable year. Moreover, Stern Bros. Co. and its progeny, including Estate of Stein, specifically distinguish the computation of accumulated earnings and profits from the computation of taxable income, where Dixie Pine Prods. Co. v. Commissioner, 320 U.S. 516 (1944), is acknowledged to be applicable. See, e.g., Stern Bros. Co. v. Commissioner, supra at 322-323. The concept of taxable income is not so different from that of “accumulated taxable income”, upon which the accumulated earnings tax is imposed, as to make the extension of Dixie Pine Prods. Co. to the latter an unreasonable interpretation of the term "accrued” as it is used in sec. 535(b)(1).