Rev. Rul. 60-237

Advice has been requested as to when an accrual method taxpayer, who has contested an increase in the per diem charge for the rental of railroad freight cars, is entitled to accrue and deduct the amount in dispute for Federal income tax purposes.

A railroad company using the freight cars of another railroad company is required to make per diem rental payments for such cars at a stated rate. When the rate was increased, the taxpayer, employing the accrual method of accounting, contested the increase. However, in accruing charges for the rental of the freight cars, the taxpayer accrued such charges at the increased rate but declined to pay the increases.

The general rule applicable to taxpayers who keep their accounts and file their returns on the accrual method is that expenses should be accrued and deducted in the year in which all the events have occurred which determine the fact of the liability of the taxpayer and the amount thereof can be determined with reasonable accuracy. See section 1.461-1(a)(2) of the Income Tax Regulations; and Continental Tie and Lumber Co. v. United States , 286 U.S. 290, Ct.D. 494, C.B. XI-1, 260 (1932).

Where the item depends upon a contingency or future events, it is not accruable until the contingency or events, have occurred. Where the liability is substantially in controversy, accrual of income or deduction must await the resolution of the controversy. Lucas v. American Code Co., Inc. , 280 U.S. 445, Ct.D. 168, C.B. IX-1, 314 (1930); Security Flour Mills v. Commissioner , 321 U.S. 281, Ct.D. 1603, C.B. 1944, 526.

Revenue Ruling 57-105, C.B. 1957-1, 193, holds that, where a taxpayer disagrees with the determination of an additional liability through a contest by litigation, the amount in dispute does not constitute a deductible expense when employing the accrual method of accounting as long as the outcome is unsettled.

In the instant case, the increase in the rental of railroad freight cars has been contested. Accordingly, under the well established principle that a taxpayer cannot accrue an amount with respect to which he denies liability and contests payment, it is held that the railroad company contesting the issue is not entitled to accrue and deduct the amount in dispute until the controversy is resolved. This manner of accounting treatment is equally applicable for the purpose of determining the taxable year of the inclusion of the contested amount in gross income where the right thereto is in dispute. See section 1.451-1(a) of the regulations.