Redcay v. Commissioner

Paul Irvin Redcay and Margaret Aline Redcay, Petitioners, v. Commissioner of Internal Revenue, Respondent Redcay v. Commissioner Docket No. 17525 United States Tax Court 12 T.C. 806; 1949 U.S. Tax Ct. LEXIS 197; May 20, 1949, Promulgated *197 Decision will be entered under Rule 50. 1. Petitioner held not entitled to deductions for losses or bad debts in the amount of $ 5,250 for 1944 and $ 5,200 for 1945. 2. The respondent committed no error in determining deficiency for the taxable year 1945, by reason of his failure to allow a credit for the amount of tax withheld from wages. Paul Irvin Redcay, pro se. Rollin H. Transue, Esq., for the respondent. Harlan, Judge. HARLAN *806 The respondent determined deficiencies in the income tax of petitioners in the amount of $ 1,395.73 for the calendar year 1944 and $ 1,539.79 for the calendar year 1945. The questions presented are: (1) Are the petitioners entitled*198 to deductions for losses or bad debts in the amount of $ 5,250 for 1944 and $ 5.200 for 1945, and (2) are the petitioners entitled to the full credit of $ 1,174.30, for income tax withheld, in calculating the amount of the deficiency for 1945? FINDINGS OF FACT. Petitioners are husband and wife, residing in Leonardo, New Jersey, and they filed joint income tax returns for the years 1944 and 1945 with the collector of internal revenue for the first district of New Jersey. Paul I. Redcay, hereinafter referred to as the petitioner, became principal of the Middletown Township High School in 1923. On April 17, 1939, petitioner was notified by the supervising principal of the Middletown Township Board of Education that at a meeting held on April 11, 1939, he was elected principal for the school year 1939-1940, at a salary of $ 3,800. Petitioner accepted the position. On August 11, 1939, a series of charges were preferred against petitioner by a former president of the local board, a present member of the local board, and the supervising principal. In them the petitioner was charged with inefficiency, incapacity, insubordination, lack of cooperation, unfitness, and conduct generally unbecoming*199 a principal. After conducting 19 hearings, taking testimony and 150 exhibits resulting in a record of some 1,400 typewritten pages, the local board on December 12, 1939, found petitioner guilty on most of the specifically alleged charges and dismissed him as principal and teacher. Petitioner appealed to the state commissioner of education who, on May 24, 1940, sustained the local board. On further appeal to the state board of education, the judgment of the state commissioner was affirmed on November 2, 1940. *807 An application to reopen and vacate this decision was denied at a meeting of the state board on December 14, 1940. Petitioner obtained a writ of certiorari from the Supreme Court of New Jersey to review his dismissal. On April 18, 1942, that court held that the state board of education did not properly decide petitioner's appeal in that its decision was made to rest on votes of its members who neither read nor considered the testimony, nor heard or considered oral arguments made, nor read or considered the briefs submitted. It accordingly remanded the case to the state board for reconsideration consistent with its opinion, requiring that the case be considered by a*200 majority of those members qualified to vote in the case. Upon a rehearing, the decision of the commissioner of education was affirmed by the state board of education, with the active participation of the members present. Petitioner obtained another writ of certiorari to the Supreme Court of New Jersey. In an opinion rendered on July 28, 1943, that court dismissed the writ on the ground that the evidence of petitioner's unfitness for the position was overwhelming in scope and justified the action taken by the local board, the commissioner of education, and the state board of education. In a per curiam opinion rendered on March 23, 1944, the Court of Errors and Appeals of New Jersey affirmed the judgment of the Supreme Court of New Jersey. Petitioner's then counsel refused to take his case before the United States Supreme Court on the contractual issue. Petitioner then employed new counsel for the purpose of getting his case before the United States Supreme Court. After petitioner paid the new counsel his fee, counsel claimed that it was a little too late for him to get the work done and the proposed appeal was never made. In the latter part of 1944 and in 1945 petitioner's counsel*201 told him that for certain reasons he could reopen his case before the commissioner. Petitioner tired of delaying and in 1946 asked counsel to return his papers. Petitioner's counsel proposed a compromise to the state commissioner of education after all legal remedies had been exhausted. The commissioner turned down the proposal. In the joint income tax returns filed by the taxpayers for the years 1940, 1941, and 1942 the petitioner reported as taxable income in each year the amount of $ 3,800 as salary due him by the Middletown Township Board of Education. Petitioner did not report his salary as income in 1943 or thereafter. In 1940 petitioner also reported as income $ 200 received in that year as salary due him for 1939 which he expected to receive upon being restored to his position. *808 Petitioner did not keep a set of books accounting for his income and deductions. Petitioner reported the above mentioned income in the years 1940, 1941, and 1942 for the reason that he expected to win his case, be restored to his position, and receive the entire amount in back salary. Petitioner was gainfully employed in other occupations during 1940, 1941, and 1942. He did not consider*202 the compensation received therefrom as being in mitigation of his claim against the Middletown Township Board of Education. In the joint income tax return filed by petitioners for the year 1944 the amount of $ 5,250 was deducted as a loss on the ground that petitioner conceived an idea from his counsel that half or 50 per cent of the amount of his claim against the Middletown Township Board of Education was unrecoverable. In the joint income tax return filed for the year 1945 the petitioner deducted the amount of $ 5,200 on the ground that he felt that this amount represented the part of his claim which became worthless in this year. The balance of the accruals in the amount of $ 950 was withheld by the petitioner in 1945 for the purpose of claiming a deduction of that sum in his income tax return for a later taxable year. There was withheld from the wages of petitioner for the taxable year 1945 income tax in the total amount of $ 1,174.30. In the statement attached to the deficiency notice, the respondent determined the amount of the deficiency for the taxable year 1945 as follows: Total income tax liability $ 1,904.21 Income tax liability disclosed by return 364.42 Deficiency in income tax 1,539.79 *203 OPINION. The first question relates to the deductions of $ 5,250 for 1944 and $ 5,200 for 1945 claimed by petitioner as losses or bad debts. After his discharge as principal of a high school on December 12, 1939, the petitioner reported as taxable income in his returns for 1940, 1941, and 1942 the salaries he would have received had he continued to serve as principal. These salaries were reported because petitioner believed that he would be successful in obtaining reinstatement to the position of principal and in obtaining compensation for the period between discharge and reinstatement. Litigation to bring about reinstatement met with no success. Redcay v. State Board of Education (1942), 25 Atl. (2d) 632; (1943), 33 Atl. (2d) 120; and (1944), 36 Atl. (2d) 428. After a decision by the Supreme Court of New Jersey on July 28, 1943, sustaining the action *809 of the local board, the commissioner of education, and the state board in dismissing him, the petitioner discontinued reporting salaries from this source as taxable income. Petitioner contends that he filed his income tax returns on*204 the accrual basis; that he had the right to receive the salaries in question in 1940, 1941, and 1942, and properly included them in his taxable income; and that, inasmuch as he lost this right in 1944 and 1945, he was entitled to either loss or bad debt deductions in those years. We are unable to agree with the petitioner. "He had no method of accounting, for he kept no books, and, except in an extraordinary case * * * an accrual method without accounting records is an anomaly." John A. Brander, 3 B. T. A. 231. But even if it be assumed for the purposes of this case that he was entitled to report his income on the accrual basis of accounting, the accruals of the amounts reported in 1940, 1941, and 1942 were improper. Under the accrual method, income is accruable when the right to receive it becomes fixed. Spring City Foundry Co. v. Commissioner, 292 U.S. 182. During the years 1940, 1941, and 1942 petitioner's claim for compensation was in litigation and his right to receive any part of the $ 11,400 reported by him never became fixed so as to be includible in taxable income on the accrual basis. Dixie-Pine Products Co. v. Commissioner, 320 U.S. 516;*205 Security Flour Mills Co. v. Commissioner, 321 U.S. 281. All petitioner ever had was a disputed claim for compensation. The Middletown Township Board of Education was never indebted to him for any part of the $ 11,400, he had no indebtedness which became worthless, and he sustained no loss during the taxable years. The petitioner may not correct the error made in overstating his income for the years 1940, 1941, and 1942 by taking deductions therefor, in a subsequent year. Cf. Gould Paper Co., 26 B. T. A. 560, 578; affirmed on this point, 72 Fed. (2d) 698. Our decision on this issue is for the respondent. Pursuant to permission granted at the hearing, the petitioner amended his petition to allege as error the failure of the respondent in determining the deficiency to allow a refund or credit for $ 1,174.30 income tax withheld during the year 1945. Our decision of the first issue for the respondent eliminates any question of overpayment or refund. There remains for consideration, therefore, only the question of the correctness of the "deficiency" determined by the respondent. "Deficiency" *206 is defined in subsection (a) (1) of section 271 of the Internal Revenue Code to be the excess of the tax imposed over the amount shown as the tax by the taxpayer on his return, and subsection (b) (1) of the same section provides that the tax imposed and the tax shown on the return shall both be determined without regard to the credit for tax withheld under section 35. The tax imposed for 1945 *810 was $ 1,904.22, the tax shown on the return $ 364.42, and the deficiency determined by the respondent $ 1,539.79. The respondent committed no error in determining the deficiency by failing to allow a credit for income tax withheld during the year 1945 in the amount of $ 1,174.30. Decision will be entered under Rule 50.