Per Curiam :
This case was referred to Chief Trial Commissioner Marion T. Bennett, with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in an opinion and report filed on December 20, 1966. Exceptions were filed by plaintiff and the case was submitted to the court on the briefs of the parties and oral argument of counsel. Since the court is in •agreement with the opinion, findings, and recommended conclusion of law of the commissioner, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Plaintiff is therefore not entitled to recover and its petition is dismissed.
OPINION OF COMMISSIONER
Bennett, Chief Commissioner:
Plaintiff, a Delaware corporation with offices in Evansville, Indiana, on December 23, 1958, purchased the business and assets of the Burgess Battery Company, hereinafter referred to as Burgess, a Delaware corporation with offices in Freeport, Illinois. The purchase was pursuant to an agreement dated December 2, 1958, which declared that the consideration provided by plaintiff would include, among other things, "all the liabilities of Burgess which shall have arisen in the ordinary and usual course of business between September 30,1958 and the Date of Closing and which are shown or provided for on its boohs at the Date of Closing."
Plaintiff now seeks judgment for income taxes assessed against Burgess and paid by plaintiff as transferee thereof, together with assessed interest. The principal question presented is whether, as plaintiff maintains, Burgess' liabilities for certain Christmas holiday pay and vacation payments became fixed and enforceable during the taxable year ending March 31, 1959. For reasons hereinafter shown, the answer is in the negative and the claim must be denied.
Burgess was engaged in the manufacture and sale of batteries. It kept its books and filed its federal income tax returns on an accrual basis for taxable years ending on March 31. Burgess' vacation year, however, ran from May 1 to April 30 of the succeeding year. Its Employee Buie Book and Foreman's Policy Manual contained provisions which determined the amount of vacation pay by the period of time that an employee had worked for the company prior to May 1 of the year in which the vacation was taken. Vacation pay was paid at the beginning of each vacation period; consequently, the vacation plan required any individual who claimed vacation pay to be an active employee of Burgess on the date that payment was made. Similarly, holiday pay to employees who worked on a legal holiday was paid with their regular pay on Fridays, or in some cases, Thursday evenings. These payments were for the time worked during the previous week.
In years prior to the taxable year ending March 31, 1959, Burgess had claimed its vacation pay deductions on a cash basis. These deductions were allowed in the taxable year within which the payments were made and within which the vacation period, beginning May 1, fell. In conformity with this practice, Burgess paid in the period which began May 1, 1958, $99,274.47 as vacation pay which had been earned during the period May 1, 1957, to April 30, 1958. This amount was allowed as a deduction for the taxable year ending March 31, 1959.
On December 22, 1958, Burgess accrued $14,254.04 on its books as Christmas holiday pay, which amount was paid by plaintiff on January 2, 1959, to the former employees of Burgess who had become plaintiff's employees on December 23, 1958. Also, on December 22, 1958, Burgess accrued on its books $100,000 as estimated vacation pay to be paid to Burgess' employees on or after May 1,1959, with respect to vacations earned in the period beginning May 1, 1958, and ending December 22, 1958. Such amounts were paid by plaintiff to those employees during the vacation year beginning May 1, 1959. In Burgess' return for the taxable year ending March 31, 1959, these accruals of $14,254.04 and $100,000 were claimed as deductions. However, both deductions were disallowed by the Internal Revenue Service. No deduction was claimed by, or allowed to, plaintiff for its payment of amounts accrued by Burgess with respect to vacations earned by former Burgess' employees during the period beginning May 1, 1958, through December 22, 1958, when Burgess ceased business operations.
Plaintiff paid $106,080.99 to the Internal Eevenue Service on March 3, 1961, representing taxes allegedly owed, to the Internal Eevenue Service as a result of its disallowance of the accrued holiday and vacation pay expenses for the taxable year ending March 31, 1959, as well as payment for other deficiencies not at issue here. On or about February 21, 1963, plaintiff filed with the Internal Eevenue Service a claim for refund of income taxes with respect to Burgess' taxable year ending March 31, 1959. This claim for refund was disallowed. Plaintiff is now before this court in order to recover the alleged overpayment of federal income taxes for the taxable year ending March 31,1959.
At issue in this case is whether plaintiff may recover under Int. Rev. Code of 1954, § 162(a), 446, and 461, for income taxes assessed against the Burgess Battery Company and paid by plaintiff as transferee thereof. Burgess had claimed accrued salary expense deductions which were disallowed by the Internal Eevenue Service. Inasmuch as salary expenses are deductible under Int. Rev. Code of 1954, § 162(a), 26 C.F.E. §1.162-7(a) (1961), the primary issue concerns the proper year in which the deductions may be allowed. See Int. Rev. Code of 1954, §461 (a), 26 C.F.E. §1.461-1 (a)(2) (1961). An accrual of holiday pay by Burgess normally would have been unnecessary, because payment occurred in the same taxable year in which the deduction was claimed. However, Burgess went out of business before the Christmas holiday; hence, the court must consider the propriety of an accrual expense which, in fact, was paid during the same taxable year, but by a different taxpayer. Due to the fact that the accruals of vacation and holiday pay require a consideration of essentially identical issues, the following discussion will be concerned primarily with the vacation pay accrual in order to avoid repetition and unnecessary prolixity.
A taxpayer's method of accounting must clearly reflect income. Int. Rev. Code of 1954, § 446 (b), 26 C.F.R. §1.446-1(a) (2) (1961). Income may be accurately reflected even though the taxpayer, in shifting from a cash to accrual basis, deducted its vacation expenses on a cash and accrual basis. See Texaco-Cities Serv. Pipe Line Co. v. United States, 145 Ct. Cl. 274, 170 F. Supp. 644 (1959).
"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." 26 C.F.R. § 1.461-1 (a) (2) (1961). United States v. Consolidated Edison Co. of N.Y., 366 U.S. 380 (1961); United States v. Anderson, 269 U.S. 422 (1926). Taxpayers may accrue a deduction for liabilities which have not been assessed but are predictably going to be assessed and the size of which is immediately determinable. Hershey Creamery Co. v. United States, 122 Ct. Cl. 423, 101 F. Supp. 877 (1952). But, where payment—specifically, payment of vacation pay—is contingent upon employment up to the beginning of the vacation period, a taxpayer cannot accrue expenses for vacation pay before the taxable year in which the payments are made. Until the vacation period begins, the "all events" test, 26 C.F.R. § 1.461-1 (a) (2) (1961), has not been satisfied. Turtle Wax, Inc., 43 T.C. 460 (1965); Denver & Rio Grande W. R.R., 38 T.C. 557 (1962); Texaco-Cities Serv. Pipe Line Co. v. United States, supra.
Plaintiff here has argued that, in its own words,
The crucial fact which distinguishes the present case from such cases as Turtle Wax, Inc., supra, and Denver & Rio Grande Western Railroad Co., supra, is that by accruing such amount, coupled with plaintiff's unconditional agreement that the amount so accrued would be paid, as it was, Burgess effectively eliminated the condition of the vacation pay plan previously observed, viz., that an employee be in service at the beginning of the vacation season, May 1st, in order to be entitled to a paid vacation.
If Burgess, in previous taxable years, had tried to claim a deduction for accrued vacation pay—without there being a sale or imminent sale of Burgess' business—such deduc tions would have been highly susceptible to disallowance under the decisions by this court and the Tax Court. Turtle Wax, Inc., supra; Denver & Rio Grande W. R.R., supra; Texaco-Cities Serv. Pipe Line Co. v. United States, supra. Plaintiff argues, though, that accrual, at a time when the sales contract had been signed and was about to be executed, had an impact on Burgess' liability for vacation pay by altering a contingency into a fixed liability. Consequently, the significance of the sales contract, taken alone and in combination with the accrual, must be assessed.
The sales contract established a continuum of liability between Burgess and Servel. But Servel was liable only to the extent and in the amount that Burgess was liable. Moreover, Servel had no liability of any kind toward Burgess' employees until after the date of closing, which was December 23,1958. Until then the sales contract was without effect or legal significance, and before the closing date Servel could not interfere with or vary the status of Burgess' employees. So, on the date of accrual, December 22, 1958, Burgess was but a party to an unexecuted sales contract which, when considered by itself, was unable to modify the conditions of Burgess' vacation plan.
Inasmuch as accrual is a bookkeeping technique which recognizes a preexisting relationship—without, at the same time, the power to establish any new polarizations of rights and liabilities, for it is but a reflection of underlying fact —the accrual by Burgess could not waive the contingent condition of its vacation plan. By the same token, an impending transfer of authority and obligation to Servel could not change this fundamental limitation on the character of an accrual in Burgess' books. Therefore, the argument that a combmation of sales contract and accrual could create a fixed liability is erroneous, for they have not been shown to have attained a significance together greater than that which was obtained when they were considered separately. Viewing the problem on a more specific level, the combination of events could not constitute a waiver of the contingency re quirement by Burgess because a purchaser's promise to accept and honor all liabilities of the seller is patently not a promise by the seller to waive a condition in its vacation plan in order to establish a fixed liability for the purchaser to assume; and, as indicated above, the act of accrual is not a waiver when taken alone or in combination with a sales contract. See 5 williston, contracts §678, 679 (3d ed. 1961). In addition, the board of directors passed no resolution, and the shareholders expressed no opinion on the subject, so that this case is demonstrably distinguishable from Champion Spark Plug Co., 30 T.C. 295 (1958), aff'd per curiam, 266 F. 2d 347 (6th Cir. 1959). " payments are deductible only in the year in which a fixed liability or obligation to pay is created. Such a liability implies a proper authorization. The authorization must be outstanding at the end of the year; 2 mertens, federal income taxa-12.88,12.89.
Without evidence that Burgess incurred a fixed liability toward its employees, plaintiff's petition must be dismissed. Turtle Wax, Inc., supra; Denver & Rio Grande W. R.R., supra; Texaco-Cities Serv. Pipe Line Co. v. United States, supra. That Servel actually made vacation payments to its employees does not alter this conclusion, for Servel would have been equally as liable for vacation pay under the contingent plan if Servel had decided to continue it. Moreover, Servel would certainly want to maintain labor peace. Vacation payments in conformity with the contingency plan— even if Servel were not technically bound by it — would facilitate harmonious labor-management relations. Therefore, the fact of payment by Servel is not persuasive evidence that Servel was absolutely liable to make such payment at the date of closing.
As indicated earlier, the principles which controlled a consideration of Burgess' accrued vacation pay relate also to a consideration of its accrual of Christmas holiday pay. Fundamentally, the "all events" test was not met because holiday pay was dependent upon employment during the holiday. If an employee were fired or quit on the 23d or 24th of December 1958 he would not have been entitled to Christmas vacation pay. The reasons for denying plaintiff's argument for accruing vacation pay, i.e., that a waiver had not occurred by dint of the sales contract and accrual, apply here also, and as Burgess' liability for Christmas pay remained contingent on December 22, 1958, its claim for a deduction must be similarly denied. Turtle Wax, Inc., supra; Denver & Rio Grande W. R.R., supra; Texaco-Cities Serv. Pipe Line Co. v. United States, supra.
Because the "all events" test was not satisfied, the additional arguments by plaintiff that, under Illinois law, Burgess' employees were third-party beneficiaries of the sales contract, and the argument by defendant that the accrual had to be denied because the prior consent of the Commissioner had not been obtained, need not be considered. Furthermore, for the same reason, the court does not have to consider the contentions by the parties relating to the recent decision of John Wanamaker Philadelphia, Inc. v. United States, 175 Ct. Cl. 169, 359 F. 2d 437 (1966).
The petition must be dismissed.
FINDINGS op Fact
1. Plaintiff is a corporation organized under Delaware laws, with its principal office and place of business during the taxable periods involved herein at 119 North Morton Avenue, Evansville, Indiana.
2. During the taxable periods involved, Burgess Battery Company, hereinafter referred to as Burgess, was a Delaware corporation with its principal place of business in Free-port, Illinois. Its books of account were kept and federal income tax returns filed on an accrual basis and for taxable periods ending March 31. On or about December 23, 1959, its name was changed to The Freeport Liquidating Company, Inc., and it was formally dissolved under Delaware laws on or prior to December 19, 1959. During the taxable periods involved and for many years prior thereto, Burgess had been engaged in the manufacture and sale of batteries.
3. Burgess' vacation year during the taxable periods involved ran from May 1 to April 30 of the succeeding year and Burgess' Employee Buie Book and Foreman's Policy Manual, in effect for the taxable period involved, contained the following:
VACATIONS.
The following schedule is effective:
(a) One-half week's vacation with one-half week's pay for any employee who on May 1st has worked continuously six months but less than one year for this Company.
(b) One week's vacation with one week's pay for any employee who on May 1st has worked continuously for one year or more but less than five years for this Company.
(c) Two weeks' vacation with two weeks' pay for any employee who on May 1st has worked continuously 5 years or more for this Company.
(d) Three weeks' vacation with three weeks' pay for any employee who on May 1st has worked continuously 15 years or more for this Company.
(e) Vacation pay shall be paid to the employee at the start of the vacation period and shall be individually computed as to each employee by the use of the following formula: The gross earnings of each employee, not including any overtime premium, for the first three months of each calendar year shall be divided by the actual number of hours worked by the employee in the first calendar quarter, and the result thus obtained shall be multiplied by the average number of hours of work for which the individual employee was scheduled to work per week during the first calendar quarter. The amount so obtained shall then be used to determine one-half week's, one week's, two weeks' or three weeks' vacation pay as required by either paragraph (a), (b), (c),or (d) above.
(f) The employee may be requested to work during his vacation period in which event the employee shall be paid his vacation pay plus any actual pay earned during the vacation period. The vacation plan and vacation pay shall apply to those employees who are on the active payroll of this Company, and the payment of vacation pay shall be made to only those employees who are employed by the Company on the date that payment is made.
Any questions relating to vacations should be referred to the foreman.
FAT
Payment of Wages is made weekly on Friday, except as here-in-after stated, as employees leave the cloakroom ; and payment is for time worked the previous week. Shift workers starting at 2:00 p.m. or after will be paid on Thursday evening.
^ ‡ $ ^5 ‡
Holiday Pay: Hourly employees will receive 8 hours pay (or their average shift if less) for six legal holidays if they occur on days on which work is scheduled to be performed. The six legal holidays are: New Year's, Memorial Day, Fourth of July, Labor Day, Thanksgiving and Christmas. Should the above named holidays fall on Sunday, they will be observed on the following Monday. Should the above named holidays fall on Saturday, they will be observed on the preceding Friday. Kate of pay will be at average straight time earnings of the previous pay period. Hours for which pay is received on holidays will not be considered hours worked for the computation of overtime.
In the event employees work on any of the above holidays, they will receive the 8 hours holiday pay and regular pay at straight time for the hours worked.
4. On December 23, 1958, plaintiff purchased for cash the entire business and assets of Burgess pursuant to a purchase agreement with Burgess dated December 2,1958, which provided in part, as follows:
10. Purchase Price.
The purchase price and consideration for the purchase and sale herein provided for shall be:
(a) the sum of $16,892,720 payable as hereinafter provided in Section 12D(1) hereof; together with
(b) the assumption by Servel of (1) all the liabilities of Burgess shown or provided for on the September 30,1958 balance sheet (excepting any thereof paid prior to the Date of Closing), and all the liabilities of Burgess which shall have arisen in the ordinary and usual course of business between September 30, 1958 and the Date of Closing and which are shown or provided for on its books at tiie Date of Closing, including provision on the books for liabilities for income taxes under the laws of the United States or any state thereof or Canada or any province thereof based upon or arising out of the operations of Burgess up to the Date of Closing, (2) any liabilities of Burgess which are not shown or provided for on its books at the Date of Closing not in excess of an aggregate of $300,000 pins amounts assumed under clause (3) of this subsection (b), and (3) liabilities for any Canadian income and sales taxes imposed as a result of the sale of Burgess' Canadian properties pursuant to this Agreement and for any unfunded past service costs under Burgess' retirement plans; .
5. On December 22, 1958, Burgess accrued on its books $14,254.04 as Christmas holiday pay, which amount was paid by plaintiff on January 2, 1959, to the former employees of Burgess who had become plaintiff's employees on December 23, 1958, when plaintiff began operation of the business acquired from Burgess. On December 22, 1958, Burgess also accrued on its books $100,000, estimated to represent vacation pay to be paid to Burgess' employees beginning May 1,1959, in respect of vacations earned in the period beginning May 1, 1958, and ending December 22, 1958. Such amounts were paid by plaintiff to those employees during the vacation year beginning May 1, 1959.
6. In its return for the taxable year ending March 31,1959, Burgess claimed a deduction for the $14,254.04 accrued Christmas holiday pay and the $100,000 accrued vacation pay. These deductions were disallowed by the Internal Bevenue Service.
7. For the taxable year ending March 31, 1958, and prior years, Burgess had claimed and was allowed deductions with respect to vacation pay for the taxable year within which paid and within which the vacation period (beginning May 1) fell. The following schedule shows the vacation payments made by Burgess, the taxable year within which paid and deducted, the vacation period to which such payments related, and the periods within which such vacation payments were earned by employees:
Year of payment and deduction Amounts paid and deducted by, and allowed to, Burgess For vacation periods beginning Period in which vacation earned
Taxable year ending 3/31/57. $83,531.61 May 1,1956 5/1/55-4/30/56
Taxable year ending 3/31/68. 89,189.81 May 1,1957 5/1/56-4/30/57
Taxable year ending 3/31/59. 99,274.47 May 1, 1958 5/1/57-4/30/58
8. No deduction was claimed by, or allowed to, plaintiff for its payment of amounts accrued by Burgess, with, respect to vacations earned by former Burgess' employees during the period beginning May 1, 1958, through December 22, 1958, when Burgess ceased business.
9. The following statement shows Burgess' taxable income as adjusted upon audit by the Internal Eevenue Service and increased by the adjustments:
Taxable year ending 3/31/57_$1,981,444.33
Taxable year ending 3/31/58_ 2,545,127. 59
Taxable year ending 3/31/59- 2,188,187.19
10. On or about March 3, 1961, plaintiff delivered to the Internal Eevenue Service, Freeport, Illinois, its cheek to the order of the District Director of Internal Eevenue in the amount of $106,080.99. This check represented taxes allegedly owed by Burgess with respect to various adjustments and claimed from plaintiff as a transferee of Burgess by the Internal Eevenue Service, in part, as follows:
Taxable year ending 3/31/58, $9,627.48, plus interest thereon of $1,534.80;
Taxable year ending 3/31/59, $86,334.56, plus interest thereon of $8,586.15.
11. On or about February 25,1963, plaintiff filed with the District Director of Internal Revenue at Chicago, Illinois, its claim for refund (form 843) of income taxes with respect to Burgess' taxable year ending March 31, 1958, collected from plaintiff as a transferee of Burgess in the amount of $8,085.66. On or about February 21, 1963, plaintiff filed with the District Director of Internal Revenue at Chicago, Illinois, its claim for refund (form 843) of income taxes with respect to Burgess' taxable year ending March 31, 1959, collected from plaintiff as a transferee of Burgess in the amount of $65,169.50 as a result of the actions taken by the Internal Revenue Service referred to above, plus other adjustments not in issue here. On October 25, 1963, plaintiff filed an amendment of said claim specifically to claim an additional overpayment of $6,481.24 representing deficiency interest paid by plaintiff with respect to the claimed overpayment of tax in the amount of $62,770.90 involved herein. Under date of November 20, 1963, the District Director notified plaintiff of the disallowance in full of its claim for refund referred to above with respect to the taxable year ending March 31,1959.
Ultimate Finding of Fact
12. Plaintiff is not entitled to recover because on December 22, 1958, Burgess was not liable for either Christmas holiday pay or vacation pay, and the amount thereof could not be determined with reasonable accuracy. The liability for these expenses was contingent upon continued employment by the claimant employees through the Christmas holidays or until the vacation period began.
CONCLUSION OF LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover and the petition is dismissed.
The opinion, findings of fact, and recommended conclusion of law are submitted under tbe order of reference and Rule 57(a).
Because Burgess transferred its business assets and liabilities to the plaintiff during the taxable year at issue, however, plaintiff would be unable to claim a deduction for these particular salary expenses in any subsequent taxable year. Thus, the taxable year ending March 31, 1959, is the only year for which plaintiff may claim these deductions on behalf of Burgess.
Not the other way around, as plaintiff would argue: " that the shadows which he formerly saw are truer than the objects which are now shown PLATO., THE REPUBLIC, BOOK VII.
Does not include the $100,000 accrued by Burgess on December 22,1958, deducted In its return for the year ending March 31, 1959, and paid by plaintiff.