US SUPREME COURT DECISIONS

A corporation which kept its accounts, and made its income tax returns, on the accrual basis sought to deduct, under § 234(a) of the Revenue Act of 1918, as a loss sustained in 1919, the amount chanrobles.com-red

Page 280 U. S. 446

of a judgment which it suffered in 1922 and paid in 1923. The judgment was founded on a breach of contract committed by the taxpayer in 1919, in discharging a sales manager who, by the terms of the contract, was to be employed for eighteen years more and be compensated by commissions on sales. Though denying and contesting its liability, the taxpayer had set up on its books in 1919 a reserve equal to the commissions for that year, and had increased it in 1920 on the same basis, and, after the rendition of the judgment, it had adjusted the reserve to the amount of the recovery.

Held:

1. Since the general requirement of the statute that losses be deducted in the year in which they are sustained calls for a practical, and not a legal, test, and since the direction, § 212(b), that net income be computed according to the method of accounting regularly employed by the taxpayer is expressly limited to case where the Commissioner believes that the accounts clearly reflect the net income, the administrative interpretation and practice in these regards should not be disturbed by the courts unless clearly unlawful. P. 280 U. S. 449.

2. Since it could not be said that the loss actually paid by the taxpayer in 1923 was, as a matter of law or undeniable fact, sustained in the year 1919, and since the taxpayer did not in that year accrue an estimated amount of the loss on its books, rejection of the deduction for that year should be sustained. Pp. 280 U. S. 450-452.

3. Mere reserves to cover contingent liabilities are not allowable as deductions. P. 280 U. S. 452.

30 F.2d 222 reversed.

Certiorari, 279 U.S. 832, to review a judgment of the circuit court of appeals reversing a decision of the Board of Tax Appeals, 10 B.T.A. 476, which sustained the Commissioner in rejecting a claim for a refund and in asserting a deficiency. chanrobles.com-red

Page 280 U. S. 447