Case Name: Farmers National Bank of Rome, N. Y., Executor under the Last Will and Testament of Nelson Adams, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1927-04-25
Citations: 6 B.T.A. 1036
Docket Number: Docket No. 8038
Parties: Farmers National Bank of Rome, N. Y., Executor under the Last Will and Testament of Nelson Adams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 6
Pages: 1036–1039

Head Matter:
Farmers National Bank of Rome, N. Y., Executor under the Last Will and Testament of Nelson Adams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 8038.
Promulgated April 25, 1927.
Neal Brewster, Esq., for the petitioner.
D. D. Shepard, Esq., for the respondent.

Opinion:
OPINION.
Teammell :
The question is whether the amount of the judgment with interest which was paid by the partnership of Adams & Jewell in 1921 is a deductible loss in that year or in 1920 when the judgment was entered in the lower court. The suit was instituted in 1919 for the alleged breach of contract. Judgment was entered in 1920 in the lower court and an appeal taken during the same year. In 1921 the judgment was affirmed on appeal. A further appeal was being perfected in 1921 when the amount in controversy was settled by compromise and payment.
The question- thus is whether the amount of the liability should be accrued as of the date of the breach of the contract, as of the date judgment was entered adjudicating the fact of the breach and awarding damages, at the time when the judgment was affirmed on appeal, or at the time the further appeal was withdrawn and the compromise made.
At the time of the alleged breach in 1919 when suit was instituted, there was no known liability, liability for breach of contract being denied. ' When judgment was entered in the lower court, the liability still was not definitely determined. It was contingent upon the affirmance of the judgment on appeal. While it was affirmed in the Appellate Division of the Supreme Court, that was not the final determination and final affirmation. The Appellate Division of the Supreme Court was not the court of final resort. The liability still remained contingent and was so until it had been finally affirmed on appeal or until liability was acknowledged. A different situation would have resulted if further appeal had not been taken. When further appeal was taken the question of the liability depended upon the action of the appellate court and it was not known until the disposition of the appeal whether there would be a liability or not.
We held, in the Appeal of Bump Confectionery Co., 4 B. T. A. 50, that "A liability to respond in damages for breach of contract occur ring in 1920, which the taxpayer does not admit to the injured party and does not accrue on its books, is not a proper deduction for the taxable year in which the breach occurred." There is the same fundamental principle involved here.
While it is true that the adjudication of the lower court was that there was a liability for the breach of contract, that adjudication was not final, was not considered by the partnership of which the petitioner was a member as being a final determination of the question, nor was it known that a liability would ever be finally determined and adjudicated against the partnership.
In the case of the Malleable Iron Range Co. v. United States, 82 Ct. Cls. 425, a similar question was presented. In that case it appears that in January, 1918, a judgment was entered against the taxpayer. In March, 1920, that judgment was, upon appeal, affirmed in principle as to liability but increased as to amount. The taxpayer in that case deducted in its return for 1918 the amount of the judgment and the interest thereon and in its return for 1919 deducted an additional amount to provide for a possible increase in the final judgment together with the interest which had accrued during 1919. In that case the court said:
It would seem plain from the foregoing that when there is a question of whether or not there is any liability, no amount can accrue until it is determined that a liability exists. When the amount in question is in litigation, it can not be determined until the litigation is ended. If any other rule were adopted, it would inevitably result in confusion and there would be no certainty at any given time as to when the liability should be allowed for.
When the plaintiff appealed the case it denied in effect the liability, and certainly that liability did not accrue to it on the date of the judgment in the lower court. The plaintiff by its action in talcing the appeal distinctly denied the liability.
The liability which is being claimed by the plaintiff in this case is not a fixed liability. For the liability was contingent upon the action of the higher court, and until that action was taken there was no fixed liability which could be deducted under the internal revenue act of 1918.
An actual liability incurred during a taxable year may be deducted, but the deduction is not allowable so long as the liability remains contingent. The judgment entered in this case in 1920 was not final so long as an appeal was pending or in process of preparation. During that time it was not known that there ever would be any liability to respond in damages for the amount claimed, or any other amount. See Appeal of H. Northwood & Co., 4 B. T. A. 697; Appeal of Lane Construction Corporation, 4 B. T. A. 1133.
For the foregoing reasons, it is our opinion that the petitioner is not entitled to the deduction claimed for 1920.
Judgment toill be entered on 15 days' notice, under Rule 50.