Court Opinion

ID: 4625577
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:28.361101+00
Date Added: 2024-06-11T07:56:43.736364
License: Public Domain

LANE CONSTRUCTION CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lane Constr. Corp. v. CommissionerDocket No. 21630.United States Board of Tax Appeals17 B.T.A. 826; 1929 BTA LEXIS 2230; October 10, 1929, Promulgated *2230  Contingent reserve set up to cover estimated unliquidated damages disallowed as a deduction.  Jonathan Grout, Esq., for the petitioner.  F. R. Shearer, Esq., for the respondent.  VAN FOSSAN *826  This proceeding is brought to redetermine deficiencies in income and profits taxes for the years 1922 and 1923, aggregating $6,346.12.  The petitioner alleged that the respondent erred in not allowing as deductions from income certain reserves set up by it against contingent liabilities, including particularly damages resulting from its negligence.  FINDINGS OF FACT.  The facts in this proceeding are essentially the same as those presented in , involving *827  the years 1920 and 1921, with the addition of expert testimony relating to the petitioner's accounting practice, and are as follows: The petitioner is a corporation organized under the laws of the State of Connecticut, having its principal office in Meriden.  In 1920 it was engaged in road construction work in the State of Rhode Island.  On June 25, 1920, one Emery, a resident of Massachusetts, was killed when his automobile*2231  struck an obstruction placed by the petitioner to prevent traffic on a public highway which it was constructing in the State of Rhode Island.  In 1920 suit was instituted in the Massachusetts courts to recover damages from the petitioner by reason of Emery's death.  The laws of Massachusetts limit the recovery in such accident to $10,000 but the laws of Connecticut and Rhode Island permit the recovery of larger amounts.  In 1922 the case was tried and the trial court applied the laws of Rhode Island for the purpose of determining the measure of damages and on May 24, 1922, returned a jury verdict for $131,000.  Petitioner thereupon made a motion to set aside the verdict as excessive.  The motion was denied and an appeal was taken to the Appellate Court.  In 1924 the petitioner settled the case by the payment of $75,000 in cash on the day before the case was reached for argument in the Appellate Court.  In 1920 the petitioner set up on its books a reserve of $10,000 to cover its estimated liability.  During the years 1921, 1922, and 1923 it set up the amounts of $10,000, $20,000, and $30,000 respectively, for the same purpose.  In 1924 the petitioner received $5,000 in payment of*2232  the liability insurance due to it on account of Emery's death.  Thus, by a coincidence, the amounts of reserves, together with the insurance received, aggregated exactly the amount paid by petitioner in compromise of its liability.  The petitioner kept its books upon the accrual basis.  Although it set up the reserves as above mentioned, it did not admit at any time that it was liable in any sum for damages as a result of the death of Emery.  OPINION.  VAN FOSSAN: In , we considered the same facts and principles involved in the present proceeding and announced a conclusion adverse to petitioner.  The addition of the testimony of an expert accountant that the reserves set up by the petitioner were in accordance with proper bookkeeping methods and standards does not lead us to modify that conclusion.  We have held repeatedly that bookkeeping methods and entries must reflect true income in order to form a proper basis for determining income tax.  ; *2233 . *828  The liability resulting from the death of Emery was not such that the estimated amount thereof could be accrued in the year 1920, nor in the years 1921, 1922, or 1923.  The liability of the petitioner was not definitely and finally determined and fixed until the agreement by it in 1924 to pay $75,000 as a compromise settlement.  Until that time there was a possibility that the appellate court might vacate the judgment of the lower court and that ultimately the petitioner might be declared free from all liability whatever.  It is also well established that an actual liability incurred during the taxable year may be deducted, but that the deduction is not allowable so long as the liability is disputed or remains contingent.  ; ;; ; . See, also, *2234 ; and . Therefore, the reserves set up by the petitioner during the years 1922 and 1923 are not deductible from its income for such years.  Decision will be entered for the respondent.