Case Name: Appeal of FIDELITY & DEPOSIT CO. OF MARYLAND
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-07-20
Citations: 4 B.T.A. 283
Docket Number: Docket No. 3503
Parties: Appeal of FIDELITY & DEPOSIT CO. OF MARYLAND.
Judges: Before GeaufNee, Teammell, and Phillips.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 4
Pages: 283–286

Head Matter:
Appeal of FIDELITY & DEPOSIT CO. OF MARYLAND.
Docket No. 3503.
Decided July 20, 1926.
Washington Bowie, Jr., Esq., for the taxpayer.
Benjamin Saunders, Esq., for the Commissioner.
Before GeaufNee, Teammell, and Phillips.
This decision was prepared during Mr. Graupner’s term of office.

Opinion:
OPINION.
Phillips:
The facts which are relied upon by the taxpayer to establish jurisdiction in the Board are set out in the findings. As to 1919, it appears that on the original return taxpayer computed a tax liability of $130,199.57, while the Commissioner determined the liability to be $82,979.50, resulting in an overassessment of $47,220.07. It is clear that under section 274 (g) of the Revenue Act of 1926 the Board has no jurisdiction of the appeal so far as it relates to 1919. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.
The chief assignment of error made by the taxpayer is the refusal of the Commissioner, in computing the amount of increase in its reserves for 1919, to include in the computation the "Reserve for liquidation of foreign business" in the amount of $101,086.57. On the theory that this reserve was not set up for the purpose of meeting policy losses which had accrued, the Commissioner has refused to allow it as a deduction in 1919, but proposes to allow the amounts as deductions when paid, having allowed $89,924.19 in 1920.
It is taxpayer's contention that its net income and its tax liability for 1919 should be reduced and the overassessment for that year increased, at the same time increasing the net income and the deficiency for 1920. Since we have no jurisdiction to determine the question as to 1919, the sole question for consideration is whether the net income, and, consequently, the deficiency determined by the Commissioner for 1920 should be increased by disallowing the deduction in that year of the amount allowed by the Commissioner.
The reserve of $75,000 set up in January, 1919, appears to have been for the purpose of meeting the losses reported by its European manager to exist as a result of the agreement with the Harmonia Company. This agreement had been entered into in 1912 and terminated in October, 1917. The greater part of the losses arising under that agreement had been reported to the taxpayer prior to the declaration of war, and in 1917, as a part of its general loss reserve, it had set aside $40,000 to meet its obligation under this agreement. The insurance examiners, however, had seen fit to eliminate from taxpayer's assets and liabilities all assets owned and all liabilities owed in enemy countries. The loss reserve of $2,076,852.19 carried by the taxpayer at the close of the year 1919 does not appear to have included any amount for policy losses incurred in enemy countries. In such circumstances the taxpayer was doubtless justified in setting up a separate reserve for such losses. The reserve which was carried on its books at the close of 1919 was not $75,000, as originally set up on the basis of the information from its European director, but $101,086.57. In the meantime it had paid, out during the year 1919, according to its statement of receipts .and disbursements, $210,-040.07 as " Expense account of liquidation of foreign business." We do not know what part of such sum was paid to the Harmonia Company. If the taxpayer's theory is to be accepted, we must assume that no part of this sum was paid to that company, although the letter from the European manager states that the final settlement with that company is to be made in 1918. There is no convincing testimony in the record that the reserve for the liquidation of foreign business existing at the close of 1919 was to meet policy losses, as claimed by the taxpayer, and was not a reserve to cover the expense of finally winding up taxpayer's affairs in Europe, as contended by the Commissioner, or to show that the payment of $89,-924.19, made during 1920 and charged against such reserve, was for policy losses occurring and reported prior to 1920 and which should properly have been the subject of a reserve in prior years. The record is insufficient to enable us to determine that the treatment accorded this payment by the Commissioner is incorrect, and for that reason his determination must be accepted.
Both parties to the appeal have proceeded on the theory that, under the Revenue Act of 1918, the net addition to a reserve for losses under fidelity and casualty policies is properly deductible. In our discussion we have assumed, without deciding, that this assumption is correct. See Laws of Maryland, 1914, ch. 631. From a casual examination it would appear that the reserve for outstanding losses required under such law is to" include an amount reasonably sufficient to cover probable expenses, as well as the probable payment in each case. The evidence submitted in this appeal, however, is insufficient to establish that the payment made in 1920 was such that it should have been made from any reserve which was properly set up in a prior year.
It was stipulated that certain errors had been made in the amounts of depreciation. This stipulation is included in the findings of fact. '
The proceeding, so far as relates to 1919, is dismissed and an order will he entered accordingly. The deficiency for 1920 should he recomputed in accordance with the stipulation concerning depreciation. Order of redetermi-nation will he entered on 15 days' notice, under Bule 50.