DocketNumber: Docket No. 13483-78
Citation Numbers: 1981 U.S. Tax Ct. LEXIS 2, 77 T.C. 1369
Judges: Nims
Filed Date: 12/31/1981
Status: Precedential
Modified Date: 1/13/2023
1981 U.S. Tax Ct. LEXIS 2">*2
Petitioner, a taxpayer using the accrual method of accounting, is engaged in strip-mining coal in Ohio. Under the law of that State, strip miners are required, inter alia, to file a reclamation plan accompanied by a surety bond equal to the total estimated reclamation cost. The parties agree that petitioner's estimate of the cost of reclamation work required by the reclamation law, but not accomplished as of the close of the taxable year in question, was computed with reasonable accuracy.
77 T.C. 1369">*1369 OPINION
Respondent determined deficiencies in petitioner's income tax for the tax year ending June 30, 1975, in the amount of $ 112,515.67. Petitioner claims an overpayment of income tax in the amount of $ 85,166.80 for such year.
Due to concessions by the petitioner, the only issue remaining for decision is whether petitioner, an accrual basis1981 U.S. Tax Ct. LEXIS 2">*4 taxpayer, may deduct the reasonably estimated expenses necessary to satisfy its obligation under Ohio law to reclaim strip-mined land in the year it incurred the obligation.
The facts of this case are fully stipulated. The stipulation and its attached exhibits are incorporated herein by reference.
Petitioner, an Ohio corporation, maintained its principal 77 T.C. 1369">*1370 office in Bannock, Ohio, at the time the petition in this case was filed.
Petitioner, at all relevant times, was an accrual basis taxpayer. It regularly kept its records using the accrual method of accounting.
Ohio River Collieries Co. (hereinafter petitioner) strip-mined coal exclusively in Ohio. Strip mining involves the removal of topsoil and the overburden from above the coal seam, followed by removal and sale of the coal and reclamation of the affected area.
In April 1972, Ohio enacted a comprehensive reclamation statute which regulated the strip mining of coal during the tax year before us. 1 Operators needed a strip-mining license before they could strip-mine coal. The State issued a license only after it approved a plan for mining and reclamation and after the operator deposited a surety bond payable to the1981 U.S. Tax Ct. LEXIS 2">*5 State if the operator failed to perform (inter alia) its reclamation duties.
The Ohio law details requirements for refilling, grading, resoiling, and planting mined areas. These activities, except planting, had to be completed within 12 months after mining ceased. Reclamation also was required as mining progressed, whenever possible. Planting had to occur in the next appropriate season following completion of refilling, grading, and resoiling. Status reports by the operator and periodic inspections by the State monitored compliance.
The operator's bond was for payment of an amount of money equal to the estimated cost to the State to perform the reclamation required by the statute. The bond would not be released until the State was satisfied that the operator had fulfilled its reclamation duties.
If an operator failed to perform any of its reclamation obligations, the State reclaimed the land and satisfied its costs from the fund created by the bond. If the costs exceeded1981 U.S. Tax Ct. LEXIS 2">*6 the funds available from the bond, then the operator was personally liable for the amount of money required to complete the reclamation.
Operators violating the Ohio reclamation law also faced potential civil and criminal penalties.
77 T.C. 1369">*1371 Ohio has required full compliance with the law at all times since the statute's enactment.
Petitioner performed its reclamation duties within the time required by the law. Petitioner did substantially all of the reclamation work itself.
The petitioner's estimate of the cost of reclamation work required by the reclamation law, but not accomplished as of June 30, 1974, was $ 150,527.86. The petitioner's estimate of the cost of reclamation work required by the reclamation law, but not accomplished as of June 30, 1975, was $ 397,883. The parties stipulate that these estimates were determined with reasonable accuracy.
All of the reclamation work required by Ohio law, but not accomplished as of June 30, 1974, was completed by petitioner during the fiscal year ended June 30, 1975. Consequently, the estimate for work not accomplished as of June 30, 1975, is the unfinished reclamation obligation arising from the strip mining which occurred during1981 U.S. Tax Ct. LEXIS 2">*7 the tax year ended June 30, 1975.
Petitioner accrued on its books, and claimed as a deduction for Federal income tax purposes, the estimated cost of reclamation work required by Ohio law but not accomplished as of the end of the pertinent fiscal years ended June 30, 1973, June 30, 1974, and June 30, 1975. Respondent disallowed the deduction for the tax year ended June 30, 1975.
The question presented to us is whether petitioner, an accrual basis taxpayer, may accrue and deduct as a section 162 2 business expense the reasonable estimate of the cost of fulfilling the reclamation obligation in the year in which the duty to reclaim arose. 31981 U.S. Tax Ct. LEXIS 2">*8 The parties agree that application of the "all of the events" test contained in
77 T.C. 1369">*1372 Section 461(a) states the general rule that a taxpayer is allowed a deduction in "the taxable year which is the proper taxable year under the method of accounting used in computing taxable income," and the regulations elaborate on this general provision. For accrual basis taxpayers, such as petitioner,
Under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy. * * * While no accrual shall be made in any case in which all of the events have not occurred which fix the liability, the fact that the exact amount of the liability which has been incurred cannot be determined will not prevent the accrual within the taxable year of such part thereof as can be computed with reasonable accuracy.
The "all of the events" test appearing in the1981 U.S. Tax Ct. LEXIS 2">*9 quoted portion of the regulations was first enunciated in
Only a word need be said with reference to the contention that the tax upon munitions manufactured and sold in 1916 did not accrue until 1917. 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 for 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. * * *
It is apparent from the
(1) All of the events which determine petitioner's reclamation liability must have1981 U.S. Tax Ct. LEXIS 2">*10 occurred before the end of the tax year in issue.
(2) Petitioner must have been able to estimate with reasonable accuracy during the tax year ended June 30, 1975, the amount of the reclamation expenditure to be made in subsequent years.
Since the parties have stipulated that the petitioner's estimate of the cost of reclamation work required by the Ohio reclamation law as of June 30, 1975, was determined with reasonable accuracy, part two of the regulation's two-step test is satisfied. This fact therefore distinguishes this case from such prior decisions of this Court as
In
77 T.C. 1369">*1374 We think it is essential to focus on the fact that the tax accounting problem confronting us results from two separate and distinct events: the
It may readily be seen, however, that having stipulated that reclamation costs were reasonably estimated, respondent has substantially circumscribed his area of maneuverability. By making this stipulation, respondent is precluded from arguing that events occurring in the succeeding year or years might substantially alter the cost of the reclamation. Apparently, fully accepting this constriction, he focuses his argument instead on petitioner's "liability to pay." Respondent's position is stated in the following manner in his brief: "It is respondent's position that this taxpayer's statutory duty to reclaim did not create any
Respondent's liability-to-pay approach1981 U.S. Tax Ct. LEXIS 2">*14 is, in actuality, an argument that the reclamation expenses are deductible only when, as, and if the reclamation is performed, as above quoted from his brief. Such an argument, however, flies in the face of the reality of the Ohio law which requires the strip miner to estimate his reclamation cost and post a surety bond to cover it. Accordingly, once these two acts have been performed, followed by a third, the intended strip mining, the liability becomes certain. Either the strip miner performs the reclamation or he forfeits the bond. There is nothing whatever in this record to support respondent's argument that petitioner might do neither.
We think that this case presents a question similar to the 77 T.C. 1369">*1375 issue addressed in
In the
a liability fixed as to existence and amount by reference to facts existing during the taxable years with its ultimate payment reasonably certain in fact but indeterminate during the years of accrual with regard to the ultimate recipients' exact shares of the accrued amounts and with regard to the times of actual payouts * * * [
The same rule properly applies in this case. During the tax year, petitioner's obligation to reclaim, and thus its liability to pay reclamation expenditures, was fixed by the fact of strip mining and, by concession of the parties, fixed as to amount. The fact that the recipients of petitioner's reclamation payments and the relative portions that they would receive were not identified in the tax year is irrelevant. Petitioner need not wait until the reclamation1981 U.S. Tax Ct. LEXIS 2">*17 work is done before it can accrue 77 T.C. 1369">*1376 and deduct the anticipated reclamation expenses where, as here, the events fixing the fact of liability to pay these expenses occurred during the tax year.
A decision for petitioner in this case requires us to confront and deal with an earlier decision of this Court which reached an opposite result:
The Fourth Circuit Court of Appeals reversed our holding in
In its opinion, the Circuit Court in
One of the issues in
In a case involving the deductibility of the accrued costs of completing a manufacturing contract, the Sixth Circuit Court of Appeals (the court to which an appeal in this case would lie), relied upon the Fourth Circuit's decision in
In summary, we hold that petitioner has satisfied both facets of the all-events test of
1.
2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 in effect for the year in question.↩
3. The parties agree that the reclamation costs are properly deductible as a business expense. The controversy concerns only the year in which petitioner may take the deduction.↩
4. Respondent does not argue that petitioner's accounting method does not clearly reflect income. See sec. 446(b).↩
5. We reaffirmed the
6. As indicated in note 4, the question of whether petitioner's books clearly reflect income, as required by sec. 446(b), is not an issue in this case.↩
Spencer, White & Prentis v. Commissioner of Int. Rev. , 144 F.2d 45 ( 1944 )
Lukens Steel Company v. Commissioner of Internal Revenue , 442 F.2d 1131 ( 1971 )
Harrold v. Commissioner of Internal Revenue. Cromling v. ... , 192 F.2d 1002 ( 1951 )
commissioner-of-internal-revenue-v-gregory-run-coal-co-commissioner-of , 212 F.2d 52 ( 1954 )
denise-coal-company-v-commissioner-of-internal-revenue-estate-of-charles , 271 F.2d 930 ( 1959 )
Patsch v. Commissioner of Internal Revenue (Six Cases). ... , 208 F.2d 532 ( 1953 )
Brown v. Helvering , 54 S. Ct. 356 ( 1934 )
Crescent Wharf & Warehouse Company v. Commissioner of ... , 518 F.2d 772 ( 1975 )
Henry Hilinski v. Commissioner of Internal Revenue, Steven ... , 237 F.2d 703 ( 1956 )
The Washington Post Company v. The United States , 405 F.2d 1279 ( 1969 )