Case Name: Appeal of RUSSEL WHEEL & FOUNDRY CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-04-03
Citations: 3 B.T.A. 1168
Docket Number: Docket No. 2029
Parties: Appeal of RUSSEL WHEEL & FOUNDRY CO.
Judges: Before GRaupneR, Tkammell, and Phillips.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 3
Pages: 1168–1172

Head Matter:
Appeal of RUSSEL WHEEL & FOUNDRY CO.
Docket No. 2029.
Submitted October 1, 1925.
Decided April 3, 1926.
Edward McCarthy, Jr., 'Esq., and E. M. StroAley, O. P. A., for the taxpayer.
Robert A. Littleton, Esq., for the Commissioner.
Before GRaupneR, Tkammell, and Phillips.

Opinion:
OPINION.
Phillips
: It appears that in 1912 taxpayer entered into a contract to furnish steel for the erection of a theatre building. The plans for the building were changed, making unavailable for use certain steel fabricated by the taxpayer. Differences arose between the parties and each claimed a violation of the contract by the other. Suits were brought by the Theatre Co. for damages for delay in delivery and by the taxpayer for the amount claimed by it to be due. It appears that a part, at least, of taxpayer's claim was for steel not actually delivered but prepared for delivery prior to the change in plans. We are satisfied from the evidence that the claim asserted by the taxpayer was bona fide and that the compromise was the result of the suit for damages for failure to perform. It is' our opinion that, in these circumstances, the taxpayer sustained a loss at the time of the compromise of the two suits in the amount of the account as carried upon its books. The amounts written off in prior years were, so far as the income-tax law is concerned, improperly written off and were not proper deductions from income in those years, either as losses sustained or debts ascertained to be worthless. The amount of the Washington-Detroit Theatre Co. account written off the books of the taxpayer prior to May 1, 1917, should be restored to invested capital and $9,938.62 allowed as a deduction from income for the taxable year ending April 30, 1919. Appeal of George C. Peterson Co., 1 B. T. A. 690.
The situation with reference to the account with the Nisqually-Russel Car & Locomotive Works is similar to the Theatre Co. account and should be treated in the same manner. The taxpayer had advanced money and sold and consigned goods to that company and had charged interest on the account. Taxpayer's books were kept on an accrual basis, and presumably each of these items had entered into the computation of the income of the taxpayer in previous years. The debtor disputed the correctness of the charges and also claimed to be entitled to commissions upon goods sold on consignment. There was also the question as to whether certain goods sold by the Nisqually-Russel Co. were the property of that company or of the taxpayer. It was not until final adjustment of the account was made that the taxpayer could ascertain what would be realized from the account.
The taxpayer should also be allowed as a deduction for 1919 the loss of $2,492.06 sustained on the liquidation of its stockholdings in the Nisqually-Russel Car & Locomotive Works.
The taxpayer further alleges that the Commissioner committed error in reducing its invested capital for 1918 and 1919 by deducting from the invested capital at the beginning of the year the income and profits taxes for the preceding year, prorated from the date when each installment became payable. In the Appeal of Guarantee Construction Co., 2 B. T. A. 1145, the Board decided that such a reduction of invested capital was not justified by the law. Since that appeal was decided, the Revenue Act of 1926 has become effective. That Act provides in section 1207 as follows:
See. 1207. The computation of invested capital for any taxable year under the Revenue Act of 1917, the Revenue Act of 1918, and the Revenue Act of 1921, shall be considered as having been correctly made, so far as relating to the inclusion in invested capital for such year of income, war-profits, or éxcess-profits taxes for the preceding year, if made in accordance with the regulations in force in respect of such taxable year applicable to the relationship between invested capital of one year and taxes for the preceding year.
The regulations which were in force at the time the Revenue Act of 1926 became effective, in respect of the taxable years here involved, provide:
For the purpose of computing invested capital federal income and war profits and excess profits taxes are deemed to have been paid out of the net income of the taxable year for which they are levied. Amounts payable on account of such taxes for the preceding year may be included in the computation of invested capital only until such taxes become due and payable. A deduction from the invested capital as of the beginning of the taxable year must therefore be made for such taxes or any installment thereof, averaged for the proportionate part of the taxable year, after the date when the tax or the installment is due and payable. (Art. 845, Regulations 45, Revised January 28, 1921.)
The adjustment of invested capital made by the Commissioner by reason of the income and profits taxes for the preceding years was made in accordance with this regulation and must be approved, except as the amount of the deduction may be affected by a redeter-mination of these taxes in accordance with this opinion.
Order of redetermination will Toe entered on 15 days' notice, under Rule 50.