Appeal of Hanff-Metzger, Inc.

4 B.T.A. 1214

• Court: United States Board of Tax Appeals
• Decided: September 30, 1926
• Docket: Docket No. 5079
• Status: Published

Opinion

OPINION.

MoRRis:

We are of the opinion that the taxpayer is not entitled to classification as a personal service corporation. Appeals of McLain, Hadden, Simpers Co., 2 B. T. A. 531, and Matos Advertising Agency, 3 B. T. A. 62.

With respect to the item of reserve for short rates, the taxpayer contends that this is not income but an increase in its liabilities. This contention, on its face, is unsound. The funds for which this reserve was created were collected by the taxpayer from its clients as a regular part of its business. There does not seem to have been any distinction made, at the time of collection, in billing clients or otherwise, between the amounts which were admittedly income and the amounts placed in the reserve. As far as the record shows, this segregation of receipts was a voluntary act on the part of the taxpayer, for the purpose of providing funds from which payment could be made upon completion of the contract either to the publisher, if the lower rate had not been earned, or to the advertiser, if all the space contracted for by the taxpayer had been used. The question of the deduction of reserves has been before the Board in a number of cases. In the Appeal of William J. Ostheimer, 1 B. T. A. 18, 21, we said:

The revenue laws prior to the 1921 Act have never recognized reserves as being deductible from gross income in determining net income except in the case of insurance companies. * * * The statute specifies what deductions are allowable and, except in the case of insurance companies, no provision is made in the 1918 Act for the deduction of a reserve as such. Items of expense must actually have been paid or liability therefor incurred in order to be deductible under that Act.

See also Appeals of Consolidated Asphalt Co., 1 B. T. A. 79; Uvalde Co., 1 B. T. A. 932; Morrison-Ricker Mfg. Co., 2 B. T. A. 1008.

In Appeal of Kleeman Dry Goods Co., 2 B. T. A. 369, a deduction for a so-called reserve was allowed upon the finding that the amount claimed represented liabilities actually incurred. In the present appeal, the liability on the part of the taxpayer to refund to the advertiser or to make additional payments to the publisher was not incurred until the completion of its contract with each client. No evidence was offered to show what part, if any, of the reserve was attributable to contracts completed or terminated during the taxable year.

Judgment for the Commissioner.

Phillips and Sternhagen dissent.