H. P. Robertson Co. v. Commissioner

H. P. ROBERTSON CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. H. P. Robertson Co. v. Commissioner Docket No. 14104. United States Board of Tax Appeals 14 B.T.A. 887; 1928 BTA LEXIS 2889; December 21, 1928, Promulgated *2889 Petitioner's property was damaged by a flood in 1920. In 1924 petitioner secured judgment against the party responsible for the damage in the amount of damage shown to have been suffered. Held, that a deductible loss was sustained in 1920 under the provisions of section 234(a)(4), Revenue Act of 1918. Edward N. Mills, Esq., for the petitioner. W. F. Gibbs, Esq., for the respondent. LITTLETON *887 The Commissioner determined a deficiency in income and profits tax for the calendar year 1920 of $2,447.71. The issue is whether the petitioner is entitled to a deduction on account of a loss suffered in 1920. The facts are stipulated. FINDINGS OF FACT. In July, 1920, petitioner's property located in Jamestown, N.Y., was damaged by a flood. The petitioner estimated that the damage suffered was $8,910.47 and claimed this amount as a deduction in its return for 1920. Petitioner instituted an action in the Supreme Court of the State of New York against the City of Jamestown to recover for damages occasioned by the said flood, and in 1924 a final judgment was rendered *888 in this proceeding in favor of the petitioner in the amount*2890 of $7,923.30. The City of Jamestown at no time prior to judgment against it admitted liability to petitioner. The petitioner included the amount received on the aforementioned judgment in its gross income for the taxable year 1924. The Commissioner allowed as a deductible loss for 1920 the sum of $4,065.47, but now alleges that by such action the net income as shown in the deficiency notice is understated in the amount of $4,065.47, due to the fact that no deductible loss was sustained in 1920. In the stipulation which formed the basis of the foregoing facts, the parties have stipulated further as follows: If the said sum of $7,923.30 is not deductible in the year 1920, then the net income of the petitioner as set out in the deficiency letter dated February 13, 1926, is understated in the amount of $4,065.47. If the said sum of $7,923.30 is deductible in the year 1920 then the net income of the petitioner as set out in said deficiency letter is overstated in the amount of $3,858.83. OPINION. LITTLETON: A deduction is here claimed under the provisions of section 234(a)(4), Revenue Act of 1918, which reads as follows: (a) That in computing the net income of a corporation*2891 subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise. In this instance, damage was suffered by petitioner in 1920 from a flood, and at that time the petitioner estimated that the loss suffered was $8,910.47. The party ultimately shown to have been responsible for the damage denied liability and petitioner brought suit which was decided in petitioner's favor in 1924, when a judgment was rendered for $7,923.30. No evidence was introduced as to the correctness of the estimate made in 1920 other than the judgment which the parties appear to have accepted as the measure of the loss suffered. The question here is, Did a deductible loss result in 1920? We think so. At that time the damage was done, and certainly it is reasonable to say that at the same time the extent of the damage was capable of determination. While a disallowance of the deduction claimed on the ground that it was an estimate, unsupported by acceptable evidence as to its accuracy, would have been justified, it is likewise true that when, subsequently, the amount of the loss which occurred*2892 in 1920 had been determined, it would have been an allowable deduction in 1920, provided that the loss was not compensated for by insurance or otherwise. And this would have been true, leaving out of account *889 the compensation feature, whether the petitioner's books were kept on the cash or accrual basis, as to which we are not here advised. Does the fact that a judgment was secured against the City of Jamestown in 1924 equal to the amount now recognized as the damage suffered in 1920, make the deduction unallowable? Again our answer must be in favor of the allowance. Tax liability under our Federal revenue laws is determined upon the basis of annual accounting periods, except in certain instances not here material, and when a determination is made for a given year, the facts and conditions occurring and existing during such year must be the basis upon which we predicate our action. When viewed in this light, we fail to see how the recovery under the judgment in 1924 can be used to offset the loss suffered in 1920. On a receipts and disbursements basis of returning income there would certainly be no basis for offsetting the loss suffered in 1920 against the compensation*2893 received in 1924. Nor do we think there is any more reason on a basis which considers items of income and expense which have accrued at the end of the year, but which had not yet been received or paid at such time. At the end of 1920 there was a denial of liability on the part of the party responsible for the damage and apparently petitioner's chances of recovery lay in its ability to establish its claim through court proceeding which it had instituted. Under such circumstances and when we reflect that the suit was against a municipality where recovery is not always easy, it would indeed require a high degree of optimism to say, at the close of 1920, that the loss suffered would be compensated for, and as Justice Stone said in , where the provision here under consideration was being considered, "The Taxing Act does not require the taxpayer to be an incorrigible optimist." The facts here made this case essentially different from the line of cases where liability was recognized at the close of the year and it was merely a question of computing the exact amount for which the party was*2894 liable or which would be received. ; ; . In so far as the compensation feature is concerned, this case is more nearly analogous to the situations in ; ; ; , and , wherein the liability was not admitted and we refused to recognize a deduction on account thereof. In the instant case the liability on the part of Jamestown, N.Y., was contested until 1924, and appartnely prior to this time there was no assurance that the petitioner would recover on account of the loss. No basis, therefore, existed, in so far as the return for 1920 is concerned, on which we could deny *890 the deduction in 1920 on the ground that the loss had either been compensated for or, with any degree of certainty, was then likely to be compensated for. *2895 In view of the foregoing, we are of the opinion that the petitioner is entitled to a deduction in 1920 of $7,923.30 under the provisions of section 234(a)(4), Revenue Act of 1918. Cf. , and Reviewed by the Board. Judgment will be entered under Rule 50. STERNHAGEN and MORRIS concur in the result. PHILLIPS PHILLIPS, dissenting: The statute allows the deduction of a loss "if not compensated for by insurance or otherwise." The facts found above establish that petitioner's loss was "compensated for" and that, therefore, no deductible loss was sustained. It was not the judgment of the court in 1924 that created the liability on the part of the city to compensate petitioners. That judgment served only to determine that such liability existed in 1920. That it took some years to establish the fact that petitioner was entitled to compensation can not, in my opinion, change the fact that the petitioner was compensated for its loss. To the same effect, see opinion of the Court of Claims in Piedmont Grocery Co. v. United*2896 States, decided December, 3, 1928. TRAMMELL concurs in this dissent.