Board of Tax Appeals has held, in a series of well-reasoned opinions, that a loss occasioned by the taxpayer's breach of contract is not deductible in the year of the breach, except under the special circumstances where, within the tax year, there is a definite admission of liabilty, negotiations for settlement are begun, and a reasonable estimate of the amount of the loss is accrued on the books.1

It may be assumed that, since the Company kept its books on the accrual basis, the mere fact that the exact amount of the liability had not been definitely fixed in 1919 would not prevent the deduction, as a loss of that year, of the amount later paid. But here there are other obstacles. Obviously, the mere refusal to perform a contract does not justify the deduction, as a loss, of the anticipated damages. For, even an unquestionable breach does not result in loss if the injured party forgives or refrains from prosecuting his claim. And, when liability is contested, the institution of a suit does not, of itself, create certainty of loss. In the few cases in which the

บ.

1 Appeal of Producers Fuel Co., 1 B. T. A. 202; Appeal of Brighton Mills, 1 B. T. A. 392; Appeal of New Process Cork Co., 3 B. T. A. 1339; Appeal of Bump Confectionery Co., 4 B. T. A. 50; Appeal of Hamler Coal Co., 4 B. T. A. 947; Empire Printing & Box Co. Commissioner, 5 B. T. A. 203; Appeal of Nice Ball Bearing Co., 5 B. T. A. 484, 495; Raleigh Smokeless Fuel Co. v. Commissioner, 6 B. T. A. 381; Farmers National Bank v. Commissioner, 6 B. T. A. 1036; Jewell v. Commissioner, 6 B. T. A. 1040; Lynchburg Colliery Co. v. Commissioner, 7 B. T. A. 282; Hidalgo Steel Co. v. Commissioner, 8 B. T. A. 76; Fraser Brick Co. v. Commissioner, 10 B. T. A. 1252, 1258; Safe Guard Check Writer Corporation v. Commissioner, 10 B. T. A. 1262; Ledbetter Manufacturing Co. v. Commissioner, 12 B. T. A. 145; J. G. Curtis Leather Co. v. Commissioner, 13 B. T. A. 1259, 1265. Compare Appeal of Lane Construction Co., 4 B. T. A. 1133; Celluloid Co. v. Commissioner, 9 B. T. A. 989, 1005; GrahamBumgarner Co. v. Commissioner, 11 B. T. A. 603, 605; Lehigh & Hudson River Ry. Co, v. Commissioner, 13 B. T. A. 1154, 1164.

Board of Tax Appeals has allowed a deduction in the year of the breach, the contracts, involving the purchase and sale of goods, were performable in a comparatively short period; the approximate amount of the damages was reasonably predictable; negotiations for settlement had been commenced within the year and were completed soon after its close; and the taxpayers had accrued on their books, at the end of the year, a liability reasonably estimated to equal the amount of the damages.2

In the case at bar, the contract had nearly eighteen more years to run, at the time of his breach. Liability for the breach was denied and strenuously contested, the litigation being carried to the highest court of the State. The amount of the damages, if any, was wholly unpredictable. While the facts determining liability had occurred in the year of the breach, the amount to be recovered, if there was legal liability, depended in large part on the course of future events. Farquhar was under a duty to mitigate damages. He might have procured new employment which would have reduced his recovery to a nominal amount. Or, recovery might have been reduced or defeated by his death. Finally, the Company did not accrue on its books, within the tax year, a liability in the estimated amount of the loss. The reserve set up had no relation to the apprehended total loss. It constituted simply the amount of the commissions which would have

2 Thus, in Appeal of Producers Fuel Co., note 1 supra, there were two contracts for the purchase, respectively, of 15,700 and 20,000 tons of coal in equal monthly instalments between May 1920 and March 1921 and between May 1920 and May 1921. Both contracts were broken in December 1920 and offers of settlement were immediately made. Reserves of $7,500 and $30,000 were set up in 1920. The claims were settled in January 1921 for $5,500 and $29,792.40. Similar situations were involved in Raleigh Smokeless Fuel Co. v. Commissioner and Fraser Brick Co. v. Commissioner, ibid.

been payable in that year if Farquhar had remained in the Company's employ. That the Company did not intend the reserve to be an accrual of the total estimated loss is clearly indicated by the fact that, in 1920, it charged to the reserve, to cover the commissions which would have been payable in 1920, an additional amount, more than double that charged in 1919.

3

The prudent business man often sets up reserves to cover contingent liabilities. But they are not allowable as deductions. The reserve set up by the Company was of that character. It cannot be said that the loss actually paid by the Company in 1923 was, as a matter of law or of undeniable fact, sustained in 1919. Nor did the Company so regard it. The case at bar is unlike United States v. Anderson, 269 U. S. 422. There, the liability for the munitions tax at a fixed rate on the business done in 1916 had confessedly accrued in that year and was a charge on the business of that year, although the exact amount due may not have been then ascertainable and the tax was not payable until 1917. It is also unlike American National Co. v. United States, 274 U. S. 99. There, the bonus contract provided definitely for the payment of a fixed amount. It was debitum in praesenti, solvendum in futuro. The case at bar is in principle more like Lewellyn v. Electric Reduction Co., 275 U. S. 243.

Reversed.

3 Compare Appeal of Uvalde Company, 1 B. T. A. 932; Appeal of M. C. Stockbridge, 2 B. T. A. 327; Appeal of Northwestern Bakers Supply Co., 2 B. T. A. 834; Appeal of Richmond Light & R. R. Co., 4 B. T. A. 91; Alston v. Commissioner, 4 B. T. A. 1159; The Davis Co. v. Commissioner, 6 B. T. A. 281, 283; Fibre Yarn Co. v. Commissioner, 10 B. T. A. 479, 480; Kaufman Department Stores, Inc. v. Commissioner, 11 B. T. A. 949,

Syllabus.

FLORSHEIM BROTHERS DRYGOODS COMPANY, LTD., v. UNITED STATES.

WHITE, COLLECTOR, v. HOOD RUBBER CO.

WRITS OF CERTIORARI TO THE CIRCUIT COURTS OF APPEALS FOR THE FIFTH AND FIRST CIRCUITS RESPECTIVELY.

Nos. 118 and 414. Argued January 13, 14, 1930.-Decided February 24, 1930.

1. Although the Revenue Act of 1918 was not approved until February 24, 1919, § 241(a) required that returns on the basis of the calendar year be made on or before March 15, and § 239 required that a corporation's return should state specifically the items of its gross income and deductions and credits. In order to allow corporations extended time to prepare their returns under § 239, and in order to avoid the postponement of initial payments of tax that would have resulted, under § 250(a), if extensions were granted unconditionally, the Commissioner of Internal Revenue devised a plan whereby extensions of time to file the return required by the Act were granted to corporations only on condition that, on or before March 15, they send to the Collector one-fourth of their estimated tax with an instrument executed under oath, containing only a statement that one-fourth of the estimated tax was remitted therewith and that, for reasons set forth, an extension of time to file the "complete return" was requested. The form provided by the Commissioner for this purpose was entitled "Tentative Return of Corporation Income and Profits Taxes and Request for Extension of Time for Filing Return." Held:

That this so-called "tentative return" was not the return within the meaning of §§ 250 (d) of the Revenue Act of 1921, limiting the time within which taxes under the Act of 1918 might be determined and assessed to five years after the return was filed, etc., and that the filing of such "tentative return" did not start that period of limitation. P. 456.

2. A waiver executed by the Commissioner and a taxpayer pursuant to § 250(d) of the Revenue Act of 1921, consenting to a determination, assessment and collection of income taxes under the

Act of 1918, and to be in effect for one year after the expiration of the statutory period of limitation, was not a contract preventing Congress from extending the statutory period for the collection of such taxes, by legislation enacted before that period as extended by the waiver has expired. P. 465.

3. Income taxes assessed within the statutory period, as extended by waiver, and after the enactment of the Revenue Act of 1924, the collection of which had not been previously barred, could be collected pursuant to §§ 278 (d) of that Act at any time within six years of the assessment. P. 467.

4. Income taxes assessed at any time within the statutory period, as extended by waiver, and the collection of which was not barred on the enactment of the Revenue Act of 1926, could be collected under § 278 (d) of that Act within six years of the assessment. Id. 29 F. (2d) 895, affirmed; 33 F. (2d) 739, reversed.

CERTIORARI, post, pp. 539, 547, to review judgments of Circuit Courts of Appeals in actions to recover amounts assessed and collected as income and excess profits taxes. In No. 118, the action was brought in Louisiana against the United States, and the judgment of the District Court, 26 F. (2d) 505, for the defendant was affirmed by the Circuit Court of Appeals. The other case was an action against the Collector, in Massachusetts. The judgment of the District Court, 28 F. (2d) 54, was for the plaintiff, and was affirmed by the Circuit Court of Appeals.

Mr. James Craig Peacock, with whom Messrs. Allen Rendall, A. B. Freyer and E. H. Randolph were on the brief, for Florsheim Brothers Drygoods Company, Ltd.

Mr. Harold C. Haskell, with whom Messrs. Frank S. Bright, Charles C. Gammons and H. Stanley Hinrichs were on the brief, for the Hood Rubber Company.

Mr. Claude R. Branch, Special Assistant to the Attorney General, with whom Solicitor General Hughes, Assistant Attorney General Youngquist, and Messrs. Sewall