Court Opinion

ID: 4628503
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:30.163429+00
Date Added: 2024-06-11T07:57:13.498255
License: Public Domain

Edward T. Gardner, Petitioner, v. Commissioner of Internal Revenue, RespondentGardner v. CommissionerDocket No. 33740United States Tax Court20 T.C. 553; 1953 U.S. Tax Ct. LEXIS 131; May 29, 1953, Promulgated *131 Decision will be entered for the respondent.  Amounts accrued for the cost of survey and legal work to ascertain whether land descriptions in insured titles are accurate, held, under the circumstances not to be deductible as losses or as ordinary and necessary business expenses.  Ralph R. Bailey, Esq., for the petitioner.Wilford H. Payne, Esq., for the respondent.  Johnson, Judge.  JOHNSON *553  This proceeding involves transferee liability for deficiencies in declared value excess-profits tax and excess profits tax for 1945 in the amounts of $ 369.85 and $ 5,765.98, respectively, of the Title Abstract Company of Eugene, Oregon.  Petitioner concedes liability as a transferee of assets of the corporation.  The only issue involving adjustment of the liability as determined by respondent is whether the amount*132  of $ 5,000 is accruable by the corporation as a loss sustained or an ordinary and necessary business expense.FINDINGS OF FACT.All of the capital stock of the Title Abstract Company of Eugene, an Oregon corporation, now dissolved, (hereinafter referred to as the transferor), was owned during 1945 by a partnership consisting of John B. Bell and his sister, which in 1947 sold the stock to Edward T. Gardner, the petitioner herein, residing in Eugene, Oregon, and Orville Chatt.  The transferor was dissolved on October 1, 1947.During and prior to 1945 the business of the transferor included the issuance in the name of Commonwealth, Inc., an Oregon corporation, of policies insuring authorized title to lands in Lane County, Oregon.  The agency contract rendered the transferor liable to Commonwealth, Inc., for loss sustained under any policy by reason of error, fault, or negligence of the transferor arising from any cause which the transferor might have obviated, excluding nonrecord defects in title of which the transferor had no knowledge.*554  In 1941 Commonwealth, Inc., issued through the transferor a title insurance policy in the amount of $ 3,000 covering a mortgage executed by*133  Henry L. Meyers and Helen Meyers on property of Meyers located in an area platted as L. E. Davis Claim 42.In 1945 Meyers orally informed an employee of the transferor that his neighbor had had a survey made of his lot and that he had advised him that the survey disclosed a discrepancy of 3 feet on the west side of the Meyers lot, which, if correct, placed part of Meyers' garage on his neighbor's lot.  The employee told Meyers "not to worry about it, that everything would be taken care of," and that until the true lines of his property were determined by a resurvey there was no basis on which to make a settlement of his alleged damage.  No other action of any kind has at any time been taken by Meyers.  No complaints had been made prior thereto by any other policyholder.The transferor had issued other policies covering titles of property in the area.  It had been aware since about 1935 that there was a serious question concerning the correctness of the descriptions in deeds issued for property in the area because of deviations in property descriptions from the true east-west line of County Survey No. 588 covering property adjoining the area on the north, and that policyholders would*134  eventually raise the question.  The transferor, nevertheless, continued to insure titles in the area through Commonwealth, Inc., on the theory that if adjustments of lines were found to be necessary many owners would not actually lose any land and that additional premiums would probably offset any loss.  The transferor realized that to determine the extent, if any, of errors in descriptions of insured titles to property in the area it would be necessary to ascertain by a resurvey whether there was an error in the east-west line of County Survey No. 588.  The area contained about 1,000 lots, titles to many of which Commonwealth, Inc., had insured through the transferor.In 1945, after the discussion with Meyers, Bell, a director of the transferor, consulted Ralph H. Follett, a civil engineer with an office in Eugene, about the cost of a resurvey. Follett estimated that it would take 3 months to make the survey and that he could do the work for about $ 3,500.  At that time Bell was in no hurry to make the survey and Follett advised him that he could not defer the work of other patrons to make the survey and could not do it for a long time, unless conditions changed to require that *135  the survey be started at an earlier time.  Such conditions have never developed.  The subject was discussed several times after 1945 but no time was fixed to do the work.  In January 1949 Follett informed Bell that he was not in a better position to make the survey than he was in 1945.  None of the survey work has been done and Follett has never agreed to do it at any specified *555  time. Bell does not know when the survey will be made.  No bill has been rendered by Follett to the transferor for surveying services and no payment has been made by it.Commencement of a survey would cause other holders of insured titles to inquire about the accuracy of the land descriptions in their deeds. The transferor desired to avoid as long as possible such results of a resurvey.Bell also contacted counsel with reference to a fee for performing legal services in connection with the survey and boundary questions.  After some discussion they agreed that $ 1,500 was a reasonable estimate for the legal work. He has not done any of the legal work. No bill has been rendered by him for services performed pursuant to the estimate and nothing has been paid by the transferor. The legal work can *136  not be undertaken until a resurvey is made of the area.In its returns for 1945 filed on an accrual basis with the collector of internal revenue for the district of Oregon, the transferor claimed the amount of $ 5,000 as a deduction for "Loss on faulty titles." The alleged loss is the total of estimated engineering and legal fees that would be incurred in determining the accuracy of property descriptions in the area covered by L. E. Davis Claim 42.  Respondent disallowed the deduction on the ground that no loss was sustained during 1945.OPINION.The liability of the transferor for erroneous boundary descriptions in titles insured by Commonwealth, Inc., through it under the agency contract is no longer being questioned by the respondent.  The petitioner contends that immediately upon the assertion by Meyers of a title defect, the transferor became liable for the expense of curing the alleged defect and payment of damages, and being upon an accrual basis the amount of the liability is accruable as a deduction.  He asserts that the minimum liability is $ 5,000, an amount representing the total cost of resurveying the area covered by L. E. Davis Claim 42 and attorney fees for legal services. *137  The substance of respondent's contention is that the alleged arrangement made with a surveyor and an attorney for the work is not a basis for accruing any amount for deduction purposes.  As to respondent's view, petitioner says that liability to cure the alleged defects was a sufficient basis for accrual and that the expenditures necessary to correct the defects were determined with reasonable certainty.The testimony of the surveyor, without more, would establish the existence of a contract at the close of 1945 to perform the survey work for $ 3,500.  Testimony of Bell, who represented the transferor in the discussion of the matter with the surveyor, is considered to be more reliable.  The effect of his testimony is that the total amount of $ 5,000 *556  for surveying and legal services was estimated by the transferor after discussion of the subject with the engineer and attorney.  His testimony is corroborated by an affidavit he executed in December 1949.  Obviously, if enforceable contracts had been entered into in 1945 for performance of the work for specified amounts there would not have been any need to characterize the total figure as an estimate of the cost of the work. *138  In any event, there was no agreement for the performance of the survey work at any specified time. The legal work could not be started until the resurvey had been made.  No part of the work had been done at the time of the hearing herein on July 7, 1952, 7 years after Meyers called at the office of the transferor, and there was no definite plan at that time to do the jobs at any definite time in the future.  Meyers has not pressed the matter in any manner and a similar notice was not received from any other insured. The inference to be drawn from the testimony is that the transferor was content to defer the survey until it became necessary to adjust bona fide claims of holders of insured titles.  Such a time has not arrived.Petitioner cites ; reversing , as containing the applicable principles to be applied, and when applied to the facts to require a similar result.  In that case the court said:We conclude that when all the facts have occurred which determine that the taxpayer has incurred a liability in the tax year, and neither the fact nor the amount of the liability*139  is contested, and the amount, although not definitely ascertained, is susceptible of estimate with reasonable accuracy in the tax year, deduction thereof from income may be taken by a taxpayer on an accrual basis. This procedure does not violate the principle that income taxes must be calculated on an annual basis, but, on the contrary, allocates to each year the proper income and expense, and prevents distortion of the taxpayer's financial condition in the tax year. See . It gives heed to the true facts of each case rather than to an arbitrary rule of thumb; and the adjustments which must be made after the precise amount is ascertained are as easily consummated as those which are required when it is impracticable to make precise calculations of income or outgo before the end of the year, although all of the events which fix the amount have accrued therein.  We think the proper approach to the problem before us should be realistic and one that accords with good business practice, rather than an approach based upon subtle technicalities.In that case the taxpayers, as partners, engaged in the mining of*140  coal by the strip method on leased land, were under a contractual obligation to restore and replace the surface in compliance with the laws of West Virginia.  The coal was completely removed in 1945 from the entire acreage under lease, and based on their experience in backfill operations the partners set up a reserve on the books of the partnership expense at the rate of $ 1,000 an acre for the work.  The refilling operations were completed in 1946 at a cost less than the estimate *557  and accrual, and thereafter an amended return was filed for 1945 to reflect the actual cost.Like mining operations were involved in , and . There, deductions of amounts accrued for refilling mined areas were disallowed partially on the ground that some of the work had not been performed.  We said in the Vincent case, "An obligation to perform services at some indefinite time in the future will not justify the current deduction of a dollar amount as an accrual."Here, the transferor was aware as early as about 1935, 10 years before the taxable year, that descriptions in the *141  area were erroneous and must be charged with knowledge prior to 1945 of its liability to adjust the defects.  Notice to it in 1945 by Meyers of information received from his neighbor residing on an adjoining lot that a survey had disclosed an error in the land descriptions of his, Meyers', deed, did not create a liability, or increase the existing obligation.  Notwithstanding the alleged liability, no expenditure has been made in an effort to cure the defects.  The transferor was dissolved on October 1, 1947, and no contention is expressly made that the contracts allegedly entered into for performance of the survey and legal work continued in force after the liquidation of the corporation under circumstances not disclosed by the evidence.In , we said:The general rule is well established that the expenses are deductible in the period in which the fact of the liability therefor becomes fixed and certain.  ; ; .*142  Applying that rule we sustained the disallowance by the Commissioner of accrued costs of labeling and packing of and freight charges on goods sold in the year of sale upon the ground that the expenses did not become fixed and certain until the work was performed and the goods were shipped in a subsequent year, citing , in which the court said that deductions under section 23 (a) could be taken only when the obligation to pay "becomes definite and certain, even though the transactions * * * which occasioned the liability, may have taken place in an earlier year." Definiteness and certainty of payment, as already pointed out, does not exist here.  The evidence strongly infers that no obligation to pay will ever occur, for there is uncertainty that the work ever will be performed.Accordingly, we find no error in the refusal of the respondent to allow the accrued amount as a deduction for loss sustained or as an ordinary and necessary business expense.Decision will be entered for the respondent.