## Facts

- Consolidated Edison Company of New York, Inc. (Con Ed) kept its books and filed federal income tax returns on a calendar-year accrual basis.
- Con Ed owned numerous parcels of New York City real estate subject to annual local property taxes for 1946–1950.
- The tax rate set by the City Council was not disputable, but Con Ed could contest the City Tax Commission’s property valuations.
- New York law allowed a taxpayer to challenge valuation, but the challenge did not suspend the duty to pay; nonpayment risked interest, penalties, and seizure and sale of property.
- For each year 1946–1950, Con Ed admitted liability for 85% of the assessed tax, denied liability for 15%, paid the full amount under protest, and promptly began refund litigation over the disputed portion.
- In 1951, state proceedings ended with a final determination that Con Ed was liable for 95% of the assessed taxes; 5% of the amounts previously remitted was refunded.
- Con Ed sought a federal income tax refund for 1951 based on when the disputed portion of the property taxes “accrued” for deduction purposes and how the refunded portion should be treated.

## Issues

1. For an accrual-basis taxpayer, does the contested portion of a property tax accrue in the year it is assessed and remitted under protest, or in the year the contest is finally resolved?
2. Is the portion of disputed taxes later determined not owed and refunded taxable income in the year of the final determination and refund?

## Decision

- The Supreme Court affirmed the Second Circuit in a unanimous decision.
- The Court held that the contested portion of Con Ed’s property taxes did not accrue in the years of remittance (1946–1950) but accrued in 1951, when the final state-court order fixed liability.
- The Court held that the refunded portion of the contested taxes was not income to Con Ed in 1951.

## Legal Principles

- Under the accrual method, an expense is taken into account only when all events have occurred that establish the fact of liability and the amount can be determined with reasonable accuracy.
- When liability for a tax is genuinely contested, a remittance made under protest to avoid enforcement consequences does not, by itself, establish the fact of liability for accrual purposes.
- A contested liability accrues when the contest is finally resolved and the taxpayer’s obligation is fixed by adjudication or settlement.
- A refund of an amount that is judicially determined never to have been owed is not taxable income in the year received when, under proper accrual treatment, the amount was not a validly accrued (and deducted) liability.

## Conclusion

The Court held that an accrual-basis taxpayer may not deduct the disputed portion of a property tax merely because it was paid under protest; the disputed amount accrues only when final proceedings fix liability, and any portion refunded because it was never owed is not includible in income upon refund.


United States v. Consolidated Edison Co. of New York, Inc., 366 U.S. 380 (1961)