Court Opinion

ID: 4498837
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:09.457013+00
Date Added: 2024-06-11T14:54:16.809248
License: Public Domain

Smith,
dissenting: Section 41 of the Revenue Act of 1934 provides:
The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the ease may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *
The petitioner kept its books of account upon the accrual basis and made its income tax returns in accordance therewith. In connection with such method of reporting, the United States Supreme Court, in United States v. Anderson, 269 U. S. 422, said that the accrual system was incorporated into the law:
* * * to enable taxpayers to keep their books and make their returns according to scientific accounting principles, by charging against income earned during the taxable period, the expenses incurred in and properly attributable to the process of earning income during that period; * * * [Italics supplied.]
*94It seems to me that, if the accrual method of accounting employed by the taxpayer for 1934 is given effect, the solution of the problem involved in this proceeding is very simple. The first three issues should be decided in favor of the petitioner and the last one against it. The only possible question relates to the second issue, viz., whether the $4,000 paid in 1934 in settlement of litigation is a capital expenditure or a deductible expense.
With respect to the first question, the majority opinion holds that moneys deposited by advertisers under advertising contracts are taxable income of the year in which the deposit is made. Petitioner takes such deposits into income as the contracts are performed. I think this method of reporting is proper under the accrual system.
The second question is whether the petitioner is entitled to deduct from gross income, the $4,000 which it paid in settlement of litigation. The total amount paid, including expenses, was $5,686.13. The respondent allowed the deduction of $1,686.13, but disallowed the balance. I think that the respondent erred in such disallowance.
In my opinion it is unreasonable to consider that the $4,000 was a capital expenditure. The amount was paid for the purpose of freeing the petitioner from the harassment of a suit. In substantially a similar case, International Shoe Co., 38 B. T. A. 81, 95, the Board held that an expenditure of the taxpayer in 1932 of $150,500 to settle embarrassing litigation was a deductible expense. That litigation did not involve title to property. Neither, I think, did this. In my opinion the deduction was proper.
The third question is whether petitioner is entitled to deduct from gross income a debt ascertained to be worthless and charged off during 1934. I think there is no question but that it was ascertained to be worthless in that year and there is no question as to the charge-off. When there was a collection of a portion of the debt in 1935 that amount constituted taxable income of that year.
The fourth question is whether the petitioner’s deduction for an electric light bill for 1934 should be adjusted by reason of a refund received in 1939. In my opinion there can be no question but that the amount charged for 1934 was an accruable item of that year. The refund received in 1939 accrued in 1939 and constituted income of that year. Under the rule of the Supreme Court in Burnet v. Sanford & Brooks Co., 282 U. S. 359, each tax year stands by itself. The tax liability for 1934 was not affected by what happened in 1939.