The opinion of the court was delivered by: KNIGHT
This is an application for a rehearing. The court has held that the assessment of additional tax for the calendar year 1930 was properly made. The defendant petitioner cites numerous cases in support of its application. Examination of these satisfies the court that none show facts parallel to those in the case at bar. The difference is pointed out in the opinion of this court when it said: "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."
In Continental Tie & Lumber Co. v. United States, 286 U.S. 290, 52 S. Ct. 529, 76 L. Ed. 1111; Commissioner of Internal Revenue v. Midland Valley Ry. Co. (C.C.A.) 57 F.2d 1042; and in Commissioner of Internal Revenue v. Old Dominion S.S. Co. (C.C.A.) 47 F.2d 148, cited by defendant, the question was the year in which the moneys, paid pursuant to the Transportation Act of 1920 (41 Stat. 456), were to be included in income as a basis for assessment. The statute fixed the basis on which the compensation was to be paid. The books of the companies showed the income on which compensation was to be computed pursuant to the statute. Compensation was fixed and not dependent upon any future event. In these cases the substance of the holding was that the compensation, payable under the Transportation Act, constituted accrued income for years in which it was to be paid. With this rule of law as stated there is no intent to dissent. The facts are quite dissimilar here, since the only determination in 1929 for which year it is claimed by the defendant the tax was assessable was that this plaintiff had a claim in an undetermined amount on account of infringement of its patents. Appeal of Cincinnati, Findlay & Fort Wayne Ry. Co., 5 B.T.A. 108; Virginia Carolina Corp. & Subsidiary Companies v. Commissioner, 6 B.T.A. 84; Great Northern Ry. Co. v. Commissioner, 8 B.T.A. 225; Chicago, Rock Island & Pacific Ry. Co. v. Commissioner, 13 B.T.A. 988, 1036; Kansas City Southern Ry. Co. and Affiliated Companies v. Commissioner, 16 B.T.A. 665; Midland Valley R.R. Co. v. Commissioner, 19 B.T.A. 423; Gulf, Mobile & Northern Ry. Co. v. Commissioner, 22 B.T.A. 233; Missouri Pacific Ry. Co. v. Commissioner, 22 B.T.A. 267; Kansas City So. Ry. Co. v. Commissioner, 22 B.T.A. 949; Galveston Wharf Co. v. Commissioner, 22 B.T.A. 1312; Nashville, Chattanooga & St. Louis Ry. v. Commissioner, 24 B.T.A. 856; St. Louis Southwestern Ry. Co. v. Commissioner, 24 B.T.A. 917; Southern Ry. Co. v. Commissioner, 27 B.T.A. 673; Pittsburgh & Lake Erie R.R. v. Commissioner, 28 B.T.A. 259; cited by defendant, are each and all cases in which the Board of Tax Appeals held that compensation, received pursuant to statute for the use of property during the period of Federal control, "was income in each of the accounting periods for which allowed, irrespective of the date of final settlement with respect thereto." For the reason above stated, these cases are not authorities on the question presented here. Diligence of counsel has presented numerous other decisions of the Board of Tax Appeals in which, however, none of the opinions are in conflict with the view that this income in question was taxable as of the year 1930. Counsel cites Appeals of Henry F. McCreery et al., 4 B.T.A. 967; Schoellkopf Aniline & Chemical Works, Inc., v. United States (Ct. Cl.) 3 F. Supp. 417; Safety Car Heating & Lighting Co. v. United States (D.C.) 5 F. Supp. 276; United States v. Anderson et al., 269 U.S. 422, 46 S. Ct. 131, 134, 70 L. Ed. 347; Brown v. Helvering, 291 U.S. 193, 54 S. Ct. 356, 359, 78 L. Ed. 725.
Particular attention should be given to the decisions of the Supreme Court. In United States v. Anderson, supra, the appellee, Yale & Towne Mfg. Co., deducted from its income tax for the year 1917 the amount of munition taxes which became payable in 1917. The Commissioner of Internal Revenue held that the munition tax paid in 1917 should have been deducted from the appellee's gross income in its return for 1916. In this case the corporation kept its books on an accrual basis, and set up on its books each month in 1916 a reserve for payment of munition taxes. The court, among other things, said: "In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it." Distinction in this case from the one at bar is clear and definite.
In referring to the case of United States v. Woodward, 256 U.S. 632, 41 S. Ct. 615, 65 L. Ed. 1131, the court in United States v. Anderson, supra, said: "It did not appear [in U.S. v. Woodward] whether, as here, the taxpayer kept his books on the accrual basis or whether, as here, events had occurred before the tax became due which fixed the amount of it." The taxpayer in this case did keep his books on an accrual basis, but such books nowhere reflected any amount of any claim on account of patent infringements.
In Brown v. Helvering, supra, the deductions for liabilities for expected future cancellations of insurance policies were not fixed and absolute. This would seem to be applicable to the infringing corporation had it sought to deduct the amount paid this defendant on account of infringement. The court held that the deductions could not be made, because "the events necessary to create the liability do not occur during the taxable year." The court further said: "Except as otherwise specifically provided by statute, a liability does not accrue as long as it remains contingent." After judgment the liability herein was not contingent. But the judgment adjudging infringement did not determine that any damages had been sustained.
In Bowers v. Max Kauffmann & Co. (C.C.A.) 18 F.2d 69, it is held that where a corporation makes an income tax return on accrual basis, accrued taxes are to be treated as paid in one period though not actually paid until the following period. Aluminum Castings Co. v. Routzahn (C.C.A.) 31 F.2d 669. In American Code Co. v. Commissioner (C.C.A.) 30 F.2d 222, it was held that damage is suffered when the contract is broken. There the taxpayer discharged the general sales manager employed under a long-term contract. It contested the employee's suit, but set up on its books reserve for liability for breach of the contract. The circuit court held that the amount of a judgment thereafter recovered was deductible in the year when the liability arose or accrued. The Supreme Court in Lucas v. American Code Co., 280 U.S. 445, 50 S. Ct. 202, 203, 74 L. Ed. 538, 67 A.L.R. 1010, reversed the circuit court, and, in the opinion, it is said that: "Generally speaking, the income tax law is concerned only with realized losses, as with realized gains. * * * The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal, test. * * * The Board of Tax Appeals had held, in a series of well-reasoned opinions, that a loss occasioned by the taxpayer's breach of contract is not deductible in the year of the breach, except under the special circumstances where, within the tax year, there is a definite admission of liability, negotiations for settlement are begun, and a reasonable estimate of the amount of the loss is accrued on the books.* * * The case at bar is unlike United States v. Anderson, 269 U.S. 422, 46 S. Ct. 131, 70 L. Ed. 347. There, the liability for the munitions tax at a fixed rate on the business done in 1916 had confessedly accrued in that year and was a charge on the business of that year, although the exact amount due may not have been then ascertainable and the tax was not payable until 1917. It is also unlike American National Co. v. United States, 274 U.S. 99, 47 S. Ct. 520, 71 L. Ed. 946. There, the bonus contract provided definitely for the payment of a fixed amount. * * * The case at bar is in principle more like Lewellyn v. Electric Reduction Co., 275 U.S. 243, 48 S. Ct. 63, 72 L. Ed. 262."
In Patrick McGuirl, Inc., v. Commissioner (C.C.A.) 74 F.2d 729, 730, the facts are comparable to the facts in this case. Among other things the court said: "As a general proposition, where the right to receive money is certain, namely, the liability to pay is unconditional, and books are kept on an accrual basis, the money actually received is considered income as of the year the right to receive it arose and not as of the year when received, even though the amount to be received is not certain as of the year the right to the money accrued. But here, though the petitioner was entitled to just compensation for property condemned under eminent domain, the amount of the award was to be determined in judicial proceedings involving values placed upon the real estate by expert testimony. These are indefinite, depending upon the court's conclusion as to values. The amount awarded may not have been as much as the cost of the property to petitioner. The expenses incident to the prosecution of petitioner's claim necessarily were reflected in the net gain to be realized, and interest was to be added as part of the award. The amount of interest was directly dependent upon the duration of the litigation. Thus the amount of award depended upon the course of future events. * * * Unless all the events which fixed the amount and determined the liability of the city to this taxpayer occurred within the year, it may not be said that this was taxable in the year the right to an award accrued."
Certain of the language of the District Judge in Consolidated Tea Co., Inc., v. Bowers (D.C.) 19 F.2d 382, 384, is pertinent here as showing when a deduction on account of losses is to be allowed for income tax purposes. It was there held that the tax was not deductible as of the year when the judgment was rendered but as of the year when the appeal from the judgment was finally determined. The court in its argument against its acceptance of the year of recovery of the judgment as the proper year of deduction points out: "From a tax income standpoint, both logical and practical, reasons seem to me to support the conclusion that a loss should be deductible, not in the year when the judgment was rendered, but in the year when the claim was adjudicated to be final and definite, or possibly, under certain circumstances, in the year when the claim originated."
In this case the liabilities for infringement apparently arose in years preceding the date of the recovery of the judgment. So if we are to follow the reasoning of the court in the last-mentioned case, the amount of the recovery would have to be apportioned during such years. The practical way is to fix the tax as of the year when a fixed amount was determined to be due the plaintiff. It is only then that a definite amount could be ascertained.
The motion for a rehearing is denied.
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