1926 BTA LEXIS 2413 | B.T.A. | 1926
Lead Opinion
The petitioner, relying upon Producers Fuel Co., 1 B. T. A. 202, and United States v. Anderson, 269 U. S. 422, urges the right to deduct in 1921 both the amount of its liability as ultimately agreed upon in 1922 and its estimate of its attorneys’ fees for the services rendered in respect of the suit. The controlling facts, it contends, are that the contract was broken by it in April, 1921, and that the amount of its liability was entered in its accounts before they were actually closed for 1921. The Commissioner, on the other hand, contends that, since the contract is not in evidence, nor the pleadings in the lawsuit, it can not be said that there was a liability in 1921, and also that, since there was no admission of liability and no entry made within the year in question, the petitioner’s claim would stretch the Producers Fuel decision beyond any reasonable limit.
The Commissioner, in our opinion, has treated the situation correctly. While it is true that the Supreme Court in the Anderson case used language which, if separated from its context, might be read as a recognition of a taxpayer’s right to deduct estimated reserves set up by it upon its books for the years when the related earnings were derived, there is no reason to believe that the court went beyond its traditional custom of deciding the matter in hand. The court had before it the question of deducting Federal munitions taxes treated by the taxpayers upon their books as accrued within the year 1916. The question of tax accruals had been seriously debated for some time and the arguments on both sides were concerned not so much with accruals generally as with accruals of taxes in particular; and especially under the provisions of the Revenue Act of 1916. It was to this that the court directed its attention, and this alone was adjudicated. The Board would not be justified in assuming that the court, without information or argument, intended to overthrow the established law that books of account are only evidentiary and not conclusive of liability, Doyle v. Mitchell
Here we have a situation in which the petitioner had a contract, made in 1920, to be supplied with, and presumably to pay for, some ■of its raw material. How the contract ivas to be performed, whether by periodic shipments in specific quantities at stated times, or only in such amounts and at such times as from time to time requested by the petitioner, does not appear, for the contract is not before us. It is simply stated and admitted that in April, 1921, the petitioner refused to accept further deliveries and that the vendor brought suit for damages. The petitioner, it is said, after consultation with its attorneys, regarded -itself as subject to liability, although it employed counsel to defend the suit and formally denied liability. This is all that happened in 1921. The formal pleading of a general denial is not, to be sure, much indication as to the existence of a liability, but in view of the uncertainty of litigation it does indicate that during the year 1921 almost anything might have happened to affect this alleged liability. The most that the petitioner had was an estimate of the ultimate outcome. If it had failed to place any figure upon its books, could anyone have criticized it? Suppose that, instead' of settling in March, 1922, final adjustment by either litigation or settlement had not been made for several years ?
The situation of the Producers Fuel Co. was substantially different, for that corporation, as we said in Brighton Mills, 1 B. T. A. 392,
“ when it refused to perform its contract, admitted its liability, made an offer in settlement, and before the close of the tax year entered the full amount of its ultimate liability upon its books.” This petitioner did not admit its liability, and although it made an offer in settlement out of all proportion to the vendor’s demand and very materially less than the amount ultimately paid, did not enter any amount upon its books within the tax year. So far as we know, there may have been no liability in the tax year, and certainly there was no act of recognition by the petitioner of such a liability. The employment of counsel and a nominal offer of settlement is too frequently the price of peace for this Board to regard it as a significant recognition of liability accrued.
The item of $1,000 sought to be deducted as a legal fee is clearly not deductible. The mere fact that services had been performed does not establish an accrual of an amount erroneously estimated to be the probable compensation which would be payable therefor.