Court Opinion

ID: 6803370
Source: CourtListenerOpinion
Date Created: 2022-07-23 18:43:52.31883+00
Date Added: 2024-06-11T16:03:19.966619
License: Public Domain

*275OPINION.
Mobbis:
The petitioner is seeking to reduce its gross sales for 1919 by the amount of certain credits or payments made to jobbers in 1920 in adjustment of 1919 sales. Goods were sold with a guarantee that price declines within fifty days on not more than 1,000 cases, as to stock still on hand, would be paid back or credited to purchasers in the amount of the decline. The question is as to the legal effect of the clause which protects the buyer from declines in the market price.
The petitioner contends that the basis for ascertaining profit from sales for 1919 is the contract price to which it was entitled and which it received, and such contract price was the lowest producers’ market price prevailing prior to resale by the jobbers, and therefore the gross sales for 1919 should include only the difference between the original price and the amount of the credits and payments made thereon in 1920 due to the decline. The Commissioner contends that the amounts credited or refunded in 1920 on sales made in 1919 did not accrue as liabilities until 1920 and are therefore not deductible from the gross income of the earlier year.
The status of the petitioner on December 31, 1919, was that it had executed sales upon which refunds and credits would have to be made should there be a decline in the producers’ market price within fifty days from date of delivery. Market prices were high, and, as subsequently developed, at their peak price. Petitioner was satisfied that declines would occur, but just when it was impossible to state. It did not control the market nor could it foresee what price reductions, if any, would be made by its competitors, which would necessitate a like reduction on its part. Nothing could be more uncertain than the fact that, within a limited period of time, an unknown amount might become due because of the happening of a contingency. If the price went up or remained constant the sale price stood; but if the producers’ market price went down within the fifty days there was a corresponding reduction to the jobbers.
*276There is no doubt in our minds that, as of December 81,1919, there was no actual liability on the part of petitioner to pay any determined or determinable amount. The liability was contingent. The contingency did not develop until February 7, 1920. As income is reported on an annual basis, there was no incurred liability on December 31, 1919, which could have been accrued.
Counsel for the petitioner has argued at length that the contingency here in question is as to profits and not as to losses. But with this contention we can not agree. At the time of the sale every act necessary to consummate the sale was done. The price was fixed subject to change only in one possible event. Counsel admits that a contingency exists but claims that the contingency exists only as to profits. The logic of the proposition seems to us to point entirely the other way. The sale was made at the market price, with a guarantee that the seller would stand for market declines within a limited period. Any liability of the petitioner in such cases is contingent upon the decline.
Suppose the petitioner had set up a reserve for such contingent liability: the decisions of the Board are uniformly to the effect that such reserves are not deductible, but that the deduction must be taken when the liability is satisfied. This question was dealt with in the Appeal of William J. Ostheimer, 1 B. T. A. 18, where the Board said (p. 21):
The question remains as to whether the taxpayer in this case was entitled to accrue and take as a deduction in the respective periods included in this appeal a liability which it was known would arise when the leased property would be required to be returned to the lessor as good as when received. Since the taxpayer kept his books on the accrual basis, all deductions allowable in determining his net income should be on that basis, including his contractual obligation under the terms of the lease. In order that an item may be accrued, however, a liability must actually be incurred in the taxable year. Schuster & Co. v. Williams, 283 Fed. 115. The statute recognized the accrual basis of making returns by providing for the deduction of expenses incurred but not paid. It is apparent that no liability in praesenti was incurred under the terms of the lease in question in the years 1918 and 1919 however well known it might have been that a liability in some amount would be incurred at some time in the future. The liability to restore chattels as good as new or as good as when received when a lease is ultimately canceled or surrendered at some indefinite or indeterminate time in the future is not a present actual liability, and is not the actual incurring of an expense or liability.
See also Appeal of Richmond Light & Railroad Co., 4 B. T. A. 91; Appeal of Brighton Mills, 1 B. T. A. 392; Appeal of Pan-American Hide Co., 1 B. T. A. 1249; Appeal of Uvalde Co., 1 B. T. A. 932; Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008; Appeal of Thatcher Medicine Co., 3 B. T. A. 154; and Appeal of Greenville Coal Co., 3 B. T. A. 1323.
*277In view of the foregoing, we are of the opinion that the gross sales for 1919 may not be reduced by the amount of credits and payments made to jobbers in 1920 on 1919 sales, and that the credits and payments made in 1919 on 1918 sales are a deduction from the 1919 gross income.

Judgment toill be entered for the Commissioner.