Empire Printing & Box Co. v. Commissioner

5 B.T.A. 203, 1926 BTA LEXIS 2916

• Court: United States Board of Tax Appeals
• Decided: October 27, 1926
• Docket: Docket No. 7214.
• Status: Published

Opinion

OPINION.

Trammell :

The question involved in this proceeding is whether the taxpayer is entitled to a deduction in 1920 as an accrued liability on account of the breach of contract to take paper which it had agreed to take in that year. We have heretofore discussed the principle involved in the Appeal of New Process Cork Co., 3 B. T. A. 1339, and the Appeal of Bump Confectionery Co., 4 B. T. A. 50. In the latter case it is said:

We do not believe that the breach of contract, standing alone, under the circumstances here in question, furnishes the basis for an accrual of possible damages. With the breach there of course arises a cause of action by the injured party, which it may or may not see fit to pursue. Should it, for reasons of policy, or otherwise, not demand damages, the obligor may escape payment. Conceding that it may be proper to accrue any approximation, it is certainly essential that there be a recognized obligation to pay before one’s right to accrue arises, and a mere liability to suit is not sufficient. Where the liability is denied and the injured party takes no action to compel payment, there is no basis for an accrual, and any amount set up on the books to take care of this liability would be in the nature of a contingent reserve which, as we have held in the Appeal of Consolidated Asphalt Co. 1 B. T. A. 79, is not permitted under the Revenue Acts.

Petitioner places its reliance on the Appeal of Producers Fuel Co., 1 B. T. A. 202, but in that case there was an admission of liability within the taxable year and an actual accrual on the books. We believe the distinction vital and can not regard the Producer Fuel Co. Appeal as controlling. We have also pointed out in the Appeal of New Process Cork Co., 3 B. T. A. 1339, the inapplicability of the reasoning of the Supreme Court in the case of United States v. Anderson, 269 U. S. 422, to a situation such as is here present. There the court was dealing with the deductibility of munitions taxes, which were measured by the profits made from the sale of munitions within the taxable year. The court found that the amount was susceptible of definite ascertainment at the close of the year and was a proper accrual within the year.

While the taxpayer was liable for the breach of contract, it had refused to acknowledge its liability until 1923. In 1920 it had no means of knowing whether it would ever be called upon to pay damages or not. While the Weston Paper & Manufacturing Co. could have brought suit, it did not do so. It could have waived enforcing any liability and the taxpayer would not have been liable to pay out any money under the contract unless the other party thereto required it to do so. There might have been considerations which would have induced the other party to the contract not to enforce any liability. In this respect the liability was contingent and not definitely known in 1920.

For the foregoing reasons, it is our opinion that the taxpayer is not entitled to any deduction with respect to the breach of contract in 1920.

Judgment will be entered for the Oommis-sioner.