Cuba R. Co. v. Commissioner

The Cuba Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Cuba R. Co. v. Commissioner Docket No. 9397 United States Tax Court 9 T.C. 211; 1947 U.S. Tax Ct. LEXIS 125; August 18, 1947, Promulgated *125 Decision will be entered under Rule 50. Income -- Accrual. -- A taxpayer using an accrual method of accounting does not have to accrue an item where it appears at the end of the taxable year that there is real doubt as to the collectibility of the item. Josiah Willard, Esq., Philip H. Weeks, Esq., and Richard S. Greenlee, Esq., for the petitioner. William A. Schmitt, Esq., for the respondent. Murdock, Judge. MURDOCK *211 The Commissioner determined deficiencies in income and declared value excess profits taxes of $ 80,003.39 and $ 10,718.25 for the taxable year ended June 30, 1942. The main issue for decision is whether the Commissioner erred in holding that the petitioner should have accrued, as income for the taxable year, the amount which it billed to the Cuban Government for services rendered during that year in carrying*126 freight, passengers, and mail. An alternative issue is whether charges for carrying mail (included within the total involved in the principal issue), the amounts of which were contested by the Cuban Government during the taxable year, should have been accrued. FINDINGS OF FACT. The petitioner, a New Jersey corporation, filed its return for the taxable year with the collector of internal revenue for the third district of New York. *212 The petitioner was incorporated in 1902 for the purpose of building and operating a railroad in the Republic of Cuba. The Cuban Government granted it substantial subsidies to enable it to build the railroad. The petitioner agreed in return to make concessions to the Cuban Government, such as carrying government personnel and freight at reduced rates. The following table shows the charges made by the petitioner for services rendered to the Cuban Government, the cash collections from the government, the excess of charges over collections, and the total railway operating revenue of the petitioner for the period July 1, 1937, to June 30, 1945: Charges Fiscal year ended Passenger 6/30 -- Mail service, Total service freight service, etc. [1938] $ 118,180.92 $ 309,342.77 $ 427,523.69 [1939] 126,177.62 278,878.09 405,055.71 [1940] 116,483.19 256,716.77 373,199.96 [1941] 112,130.86 222,599.52 334,730.38 [1942] 110,657.19 214,039.40 324,696.59 [1943] 110,862.24 322,532.08 433,394.32 [1944] 114,536.11 428,948.46 543,484.57 [1945] 115,228.80 444,057.75 559,286.55 *127 Excess of Total railway Fiscal year ended Cash charges over operating 6/30 -- collections collections revenues [1938] $ 98,228.71 $ 329,294.98 $ 5,341,257.41 [1939] 255,934.53 149,121.18 4,466,015.99 [1940] 76,513.77 296,686.19 4,780,998.61 [1941] 41,526.25 293,204.13 4,931,980.82 [1942] 55,902.89 268,793.70 6,786,351.21 [1943] 87,273.86 346,120.46 11,720,715.81 [1944] 107,209.93 436,274.64 13,515,915.14 [1945] 75,359.71 483,926.84 13,647,883.37 The entire gross income of the petitioner for the taxable year was derived from Cuban sources. The petitioner kept its books and filed its returns on an accrual basis for its fiscal years ending June 30. The petitioner reported all amounts billed to the Cuban Government as gross income up to the taxable year, without regard to collection. It excluded from its gross income for the taxable year $ 268,793.70, representing amounts which it billed to the Cuban Government for services rendered during that year in carrying passengers, freight, and mail, but which it did not collect during that year. The Commissioner, in determining the deficiencies, increased the petitioner's net income for the taxable year by that*128 amount. The Cuban Constitution, adopted October 10, 1940, provides for an annual budget fixing all revenues and expenditures of the nation. The budget provides the specific and maximum amount that may be expended for a particular project. If expenditures are incurred by the government for a service for which an appropriation in the budget had been made, but those expenditures are in excess of the appropriation, the constitution and the organic law of the executive branch of the government prevent payment of that excess. The Cuban Government for many years has incurred annual expenses substantially in excess of the amounts for which payment was provided in the annual budgets. The excess is referred to as the "floating debt" and is generally reported to be about $ 70,000,000. The Cuban Congress passed an act in 1938 whereby a commission was appointed to make an investigation of the amount of the floating *213 debt and to report to the congress its recommendations for the recognition, liquidation, and payment of those amounts which it considered legitimate, just, moral, or of public interest. The constitution of 1940 went into effect before any action was taken by that commission*129 and it superseded the law relating to the commission. Article 259 of the constitution of 1940 is as follows: In the part relating to expenses, the budgets shall contain sections which shall specify: (a) The exact amount of the legitimate liabilities of the Nation liquidated but not paid, pertaining to previous budgets. (b) The proportion of that amount that will be paid from regular revenues of the new budget. The Law of Bases shall establish, with respect to the foregoing sections, the rules relative to the manner in which the amount or amounts fixed for payments during the life of the budget shall be prorated among creditors with liquidated claims. The constitution also provided that a tribunal of accounts was to be set up to determine the amount of the floating debt and render a report thereon. No such tribunal has ever been set up and subparagraphs (a) and (b) of article 259 have never been put into effect. The constitution also provides that a new budget is to be prepared each year, but if that is not done, the one that had been in force is understood to be extended for three-month periods. The budget for 1938 provided for an appropriation of $ 260,000 for all transportation*130 services furnished to the government. There has been no new budget since June 30, 1938, and, although after that date government expenditures increased greatly and the executive branch submitted new and larger budgets each year, the Cuban Congress refused to approve them. The amount of $ 260,000 appropriated for transportation in the 1938 budget was the maximum amount which the government could pay for transporation in any one year thereafter. The appropriation of $ 260,000 was apportioned for each year, including the taxable year, among about 60 transportation companies, including three other railroads, approximately in proportion to the relative amount of the billings of the transportation companies. The petitioner's share of that appropriation was about one-third. The general counsel of the petitioner presented its claims for services rendered to the Cuban Government and made an effort to collect those claims in every year since 1938. The Minister of the Treasury stated in reply that is was not possible to meet them because of lack of funds and that it could not be expected that his administration would pay amounts involved in the floating debt incurred by other administrations. *131 The general counsel considered the advisability of suing the government to recover the amounts billed but not paid for the taxable year, but concluded that such action would be useless. Although a private *214 corporation can get a judgment against the government under the Cuban law, it can not enforce its judgment beyond the extent permitted by the budget. A judgment based upon transportation services rendered would not aid the petitioner, since the appropriation in the budget for transportation for the taxable year had been completely exhausted, and since no other provision has been made in any budget for the payment of any judgment against the government obtained subsequent to 1938. The government had not denied its liability and there was no dispute as to the amounts the government owed to the petitioner, except as to charges for the transportation of mail. The controversy over the charges for transportation of mail arose when the government took the position that the amounts thereof were erroneous. The petitioner's charges of $ 110,000 for carrying the mail during 1942 were reduced to approximately $ 66,000 by agreement of the parties after the matter had been litigated*132 before the Supreme Court of Cuba. The government made no payments for mail transported from 1938 to 1942 and those unpaid charges as adjusted are now considered to be a part of the floating debt. Presidential Decree No. 1451, of July 16, 1938, greatly restricted the deductibility of bad debts by Cuban taxpayers. Presidential Decree No. 1117, of May 15, 1939, was promulgated to alleviate the harshness of the earlier decree. The effect of the latter decree is that a Cuban taxpayer on an accrual basis, who renders services to the government of the type performed by the petitioner, does not have to include as taxable income amounts billed to the Cuban Government which are not paid during the taxable year. No legitimate debt has been repudiated formally by the Cuban Government. The $ 268,793.70 here in question was not properly accruable in the taxable year ended June 30, 1942. The stipulation of facts is incorporated herein by this reference. OPINION. The principles applicable in a case like this are sufficiently set forth in the following quotation from San Francisco Stevedoring Co., 8 T. C. 222: * * * A taxpayer, using an accrual method of accounting, *133 must accrue an item in the year in which the taxpayer acquires a fixed and unconditional right to receive the amount, even though actual payment is to be deferred. There must be no contingency or unreasonable uncertainty qualifying the payment or receipt. Income does not accrue to a taxpayer using an accrual method until there arises in him a fixed or unconditional right to receive it. United States v. Anderson, 269 U.S. 422; Continental Tie & Lumber Co. v. United States, 286 U.S. 290; Spring City Foundry Co. v. Commissioner, 292 U.S. 182; United States v. Safety Car Heating & Lighting Co., 297 U.S. 88; Putnam's Estate v. Commissioner, 324 U.S. 393; H. Liebes & Co. v. Commissioner, 90 Fed. (2d) 932; Mertens Law of Federal *215 Income Taxation, sec. 12.60. The time when an item accrues is largely a question of fact, to be determined in each case. The petitioner contends that collection of the unpaid amounts due it from the Cuban Government was so uncertain and contingent*134 as to justify it in failing to accrue those items for the taxable year, even though it was using an accrual method of accounting. There was no uncertainty as to the amount which the Cuban Government owed the petitioner for services rendered during the taxable year, but there was great uncertainty as to when and whether the Cuban Government would pay that amount. It has never paid it. The petitioner had an unenforceable claim. Collection was apparently at the mercy of the political whims of future Cuban administrations. The evidence as a whole shows that there was real doubt and uncertainty at the end of the taxable year as to whether any of the amount due and unpaid would ever be paid. A taxpayer, in such circumstances, is not required to accrue an item like this as income and pay income tax thereon, but is permitted to wait until the uncertainty is removed in some way. A similar rule applies to the accrual of obligations to pay. Cf. Brighton Mills, Inc. v. Commissioner, 161 Fed. (2d) 791, affirming 7 T. C. 819. Decision will be entered under Rule*135 50.