84 F.2d 382 | 3rd Cir. | 1936
This is a petition for review of a decision of the Board of Tax Appeals. In June, 1932, a judgment was entered against the petitioner in favor of one Finley. The petitioner took an appeal. The Fidelity & Deposit Company of Maryland became surety on the appeal bond. The petitioner purchased bonds valued at the amount of the judgment and deposited them with the surety- company. It set up a reserve on its books for 1932 in a sum equal to the amount of the judgment and costs. The judgment was affirmed in 1932, and in January, 1933, the surety company sold the bonds deposited with it by the petitioner and paid the judgment. The petitioner deducted this amount in its 1932 income tax return on the theory ^that the loss had been conclusively determined in December, 1932, when the judgment was affirmed. The deduction was disallowed by the Commissioner on the theory that, since the petitioner kept its books on the cash receipts and disbursements basis, it did not suffer its loss until the actual payment of the judgment by the surety company in 1933.
The two most common accounting methods’for tax purposes are the accrual method and the cash receipts and disbursements method, sometimes designated the cash receipts method. Under 'the former method, entries are made of credits and debits when the liability arises, whether or not then received or disbursed, whereas, under the latter, credits yet to become due or obligations yet to be paid are ignored. Aluminum Castings Co. v. Routzahn (D.C.) 24 F.(2d) 230. The successive Revenue Acts have been consistent on this point. Section 43 of the Revenue Act of 1932 (47 Stat. 169, 185) provides that credits shall be taken for the taxable year in which “paid or accrued” or “paid or incurred,” depending upon the method of accounting used in computing the taxpayer’s net income. Sec
The decision of the Board of Tax Appeals is therefore affirmed.