The opinion of the court was delivered by: KNIGHT
Defendant moves for an order declaring an assessment of additional income tax levied on the defendant for the taxable year 1930 illegal and invalid. In a certain patent litigation in 1928, wherein defendant herein was plaintiff and Federal Electric Company, Inc., Chicago Minature Lamp Works, and others were defendants, defendant herein was awarded a decree finding its patents valid and infringed, enjoining further infringement, and referring to a special master the question of the damages to be recovered. The Circuit Court of Appeals for the Seventh Circuit confirmed the decree in that case on June 18, 1929, Federal Electric Co. v. Flexlume Corporation, 33 F.2d 412. Certiorari was denied by the Supreme Court, 280 U.S. 590, 50 S. Ct. 38, 74 L. Ed. 638. By this decree the right of the defendant herein to recover damages became fixed, although the amount of the damages was not determined. In February, 1930, a settlement was effected whereby defendant accepted two checks to the amount of $51,580, and three notes, each for $50,000, one payable in 1930, the others in 1931. The latter two notes were discounted in 1930, but were returned as income in 1931.
Defendant kept its books on an accrual basis. The Commissioner of Internal Revenue, upon auditing the defendant's returns, transferred the amount of $100,000 reported as income for 1931 to the taxable income for 1930, and levied the additional tax of $14,411.66, with interest amounting to $2,492.62.
Defendant contends that the entire amount of the settlement should be transferred to income for the taxable year 1929 for the reason that in that year the right to receive the payment became fixed. It is argued that, as long as the right to receive if finally determined, it is not essential that the exact amount be determined within the year in which the tax thereon is payable. Defendant's return of the receipts from the patent suit is alleged to be in accord with the procedure laid down in previous returns, which included income from a patent infringement suit in which defendant recovered a judgment in 1925 against the Opalite Company. A partial payment of the damages was made in that year; the balance being secured by notes payable in the future. The Commissioner ruled that the portion paid in 1925 was returnable in that year. The corporation returned the income from the notes in the years in which the notes were paid. It is now admitted that this procedure was not in accord with the tax laws and the regulations established thereunder.
Briefly stated, the Commissioner's position is that the additional assessment for the year 1930 was made on the theory that the taxpayer, whose books were kept and whose returns were made on an accrual basis, had an accrual of the stipulated sum of $201,580 in the taxable year 1930.
There is no question as to the rule to be applied when the year of the accrual has been determined. It is agreed that the entire amount is returnable as income for the year in which it accrued. The problem lies in determining the year of accrual of the income.
The decree in favor of the defendant, affirmed in 1929, determined only the right of defendant to recover. While the decree was final for the purposes of an appeal, it was not final as to enforcement. The damages had not been computed and execution could not have been issued. This is not a case such as United States v. Anderson (United States v. Yale & Towne Mfg. Co.), 269 U.S. 422, 46 S. Ct. 131, 70 L. Ed. 347, wherein all the events which fixed the amount of the tax and determined the liability of the taxpayer to pay it had occurred in the year 1916, so that deduction of the accrued tax should have been made in the return for 1916. However, I believe the principle there followed to be applicable here.In the present case, in 1929, all of the events had not occurred to fix the amount of the income from the litigation, and thus it had not accrued and could not be set up as income for the year 1929.
Solicitor's Memorandum 923, C.B. 108, does not indicate whether the question here involved was raised, but the defendant there was not allowed to deduct a loss sustained by reason of an adverse judgment in a patent case until the year in which the master's report was confirmed by the court. W.W. Sly Mfg. Co. v. Commissioner of Internal Revenue, 24 B.T.A. 65, is not parallel to the present case, for the reason that, when the decree of the highest court was rendered in 1923, the amount of the recovery had been determined and was settled by the decree of affirmance. In Buffalo Union Furnace Co. v. Commissioner of Internal Revenue, 23 B.T.A. 439, a settlement was effected in 1921 prior to trial of an action brought by petitioner on an order of the Interstate Commerce Commission, which had previously determined the liability of the defendant in the action and fixed the amount of the damages. It was held that the income was returnable in 1921. Nibley-Mimaugh Lumber Co. v. Commissioner, 26 B.T.A. 978, is not an authority for the defendant's position. Although the agreement provided that the amount to be paid was to be subject to adjustment in the following year if certain terms could not be met by the seller, the opinion points out that all of the required conditions were met by the vendor before the end of 1923, so that the purchaser's obligation to purchase and the price of the transaction had become unconditional in 1923. Therefore, in order to properly reflect its transactions during the year, the return of the taxpayer, which kept its books and made its returns on an accrual basis, would be required to show that amount.
The report, cited by defendant, I.T. 1924, Internal Revenue Bulletin I-I, June, 1922, page 111, does not indicate that the judgment was not final as to amount as well as to the right to recover. The language of the opinion there, that "Inasmuch as the books of the Corporation are kept on an accrual basis, the amount in each case must be accounted for in the return for the year in which the judgment of the highest court was rendered," is not determinative in defendant's favor.
I find that the tax in question accrued at the time of the settlement of the amount of damages to which the defendant was entitled, namely, February 14, 1930, and that the entire amount of the settlement should have been included in the return for 1930, and that the assessment of the additional tax levied upon the defendant for the taxable year 1930 is valid.
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