The opinion of the court was delivered by: MOSCOWITZ
MOSCOWITZ, District Judge.
This is a suit for the recovery of income and excess profits taxes for the calendar year 1921 and interest paid thereon aggregating $16,092.53. The plaintiff is the successor of the New Process Cork Company, Inc., which commenced this action. It has been stipulated that the plaintiff has acquired the right to any refund of any tax or assessment herein. The plaintiff will be referred to herein as the taxpayer. The facts briefly are as follows:
The taxpayer kept its book and made its return for the calendar year 1921 upon the accrual basis.
On October 21, 1919, the taxpayer entered into a contract with the firm of Mir, Codina & Marques by which the taxpayer agreed to purchase 500 tons of cork waste. Subsequently the taxpayer breached the contract, and on April 19, 1921, an action was brought against it for the breach thereof in which damages were sought in the sum of $100,000.
The taxpayer filed an answer to the suit denying all the material allegations of the complaint and set up four affirmative defenses. In June, 1921, the attorneys for the respective parties attempted to settle the matter. On August 2, 1921, the taxpayer authorized its counsel to attempt to settle the case for $9,400. On March 14, 1922, a settlement for $27,500 was agreed to and was immediately carried out.
In April, 1922, the taxpayer's counsel presented their bill for $1,500 for their services and $9.81 for expenses paid. This bill was paid on May 15, 1922. It appears that prior to March 14, 1922, an entry was made in the books of the taxpayer of $1,000 as "Reserve for legal fees in Mir Codina suit."
It further appears that on December 31, 1921, an entry was made in the taxpayer's books of, "Legal Expenses Reserve for Mir Codina suit, $10,000.00."
During 1922 and before March 14 the following entries were made: "Reserve for Lawsuit Mir Codina $2,500.00. To increase the above reserve to equal settlement made in Mir Codina suit," and "To Reserve for Lawsuits Mir Codina $15,000.00. To set up provision for claim of Mir Codina Co. vs. New Process Cork Co."
On July 22, 1925, the Commissioner of Internal Revenue notified the taxpayer of a proposed additional assessment of income and excess profits taxes for the year 1921 amounting to $15,086.78 due in part to the disallowance as deductions of the reserves aggregating $28,500, which had been deducted from the gross income in the final return. The taxpayer appealed to the Board of Tax Appeals, who sustained the Commissioner's finding that the loss was not sustained in 1921. The taxpayer thereupon paid the tax and now seeks to recover the taxes paid as the result of the disallowance of these items as losses in the computation of the tax for 1921.
The statutes involved are as follows:
"Sec. 234. (a) That is computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
"(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. * * *
"(4) Losses sustained during the taxable year and not compensated for by insurance otherwise; unless, in order to clearly reflect the income, the loss should in the opinion of the Commissioner ...