Luckenbach S.S. Co. v. Commissioner , 9 T.C. 662 ( 1947 )

Luckenbach Steamship Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent

Luckenbach S.S. Co. v. Commissioner

Docket No. 9781

United States Tax Court

9 T.C. 662; 1947 U.S. Tax Ct. LEXIS 68;

October 13, 1947, Promulgated

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Decision will be entered under Rule 50.

In the forepart of 1942 the War Shipping Administration requisitioned three freight vessels owned by taxpayer. Later, charters were entered into wherein war risk insurance valuation was fixed at $ 65 per dead-weight ton, plus a bonus of $ 20 per dead-weight ton. Prior to the end of September 1942 the vessels were sunk by enemy action. Taxpayer promptly filed its claims with WSA for their loss. A controversy had arisen between WSA and the Comptroller General involving the amount allowable upon such claims. On December 17, 1942, WSA notified all owners of the suspension of all payments, including those for vessels lost, except in cases where there was a showing of resulting hardship, in which cases WSA was prepared to determine the value in accordance with the rulings of the Comptroller General, the owner thereupon to have the option of accepting the payment so determined in full settlement or taking 75 per cent thereof and suing in court for just compensation. No such determination was made in the instant case. It was not until after an advisory board, established by the President of the United States, had submitted, in December 1943, rules to WSA for its guidance in determining just compensation that WSA indicated it would pay outstanding claims under war risk insurance, subject to agreed values and verification of speed. Petitioner did not receive payments from WSA on its claims until 1944. Held, the gain realized by taxpayer was not accruable in 1942 and hence not includible in its income for 1942.

George E. Cleary, Esq., for the petitioner.

William B. Springer, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

The Commissioner determined deficiencies in income tax and declared value excess profits tax of $ 848,932.61 and $ 105,917.26, respectively, for 1942. The question involved is whether certain gains are includible in income for 1942.

FINDINGS OF FACT.

Most of the facts were stipulated. Those material to the issue are as follows:

The petitioner for many years prior to 1942 was engaged in the operation of freight vessels, and on December 31, 1941, it was the owner of 23 such vessels.

On February 21, March 21, and March 3, 1942, respectively, three of petitioner's freight vessels, viz., the S.S. Paul Luckenbach, the S.S. Mary Luckenbach, and the S.S. Edward Luckenbach (hereinafter referred to as the Paul, the Mary, and the Edward) were requisitioned for use by the War Shipping Administration (hereinafter referred to as WSA), acting under the requisition powers granted by section 902, Merchant Marine Act, 1936, as amended. At the time such vessels were requisitioned for use there was no determination of, or agreement as to, the compensation to be paid for such use, or the compensation, if any, to be paid in the event of loss through marine or war risk.

Subsequent to such requisitions and after negotiations, the vessels were chartered to the United States in 1942 under requisition time charters ("War Ship Time" Form No. 101, as revised May 16, 1942) entered into between petitioner and WSA. Each charter was dated as of the prior date of requisition. The charters were signed by petitioner and forwarded to WSA on June 26, 1942. The counterparts of such charters, executed by WSA, were returned to petitioner on August 14, 1942.

General Order No. 9, issued by WSA on May 14, 1942, and prescribing the basis for valuation of vessels for insurance purposes, provided that the basic valuation should be $ 65 per dead-weight ton and that vessels with a speed in excess of 8 1/2 knots, determined in accordance with General Order No. 10, should be allowed an additional valuation of $ 5 per dead-weight ton for each knot or major fraction thereof over 8 1/2 knots. The term "major fraction" included one-half knot and anything in excess thereof.

Each of the three charters contained war risk insurance valuation options. In each of the three charters petitioner elected option I, the provisions of which were the same in each charter. Such option provided for the "sum of $ 65.00 per deadweight ton computed in accordance with General Order No. 9 of the Charterer together with any premiums * * * as may be provided for in said General Order and which are applicable to the Vessel by the terms of said General Order; * * *"

Each of the three charters contained representations by petitioner as to the dead-weight tonnage and speed of the vessel which it covered. Based on such representations, the aggregate war risk insurance valuation of each of the three vessels was computed in each charter subject to verification. Each charter further provided that satisfactory certificate of American Bureau of Shipping as to the vessel's dead weight and speed would be accepted in lieu of the owner's representations and without further verfication except in case of subsequent pertinent changes. The representations as to dead-weight tonnage and speed of each vessel contained in each charter were as follows:

	Dead weight	Speed
Paul	11,040 tons	12.5 knots.
Mary	7,997 tons	12.82 knots.
Edward	12,250 tons	12.5 knots.

The war risk insurance valuation as computed in each charter is as follows:

S. S. Paul
Basic valuation, $ 65 x 11040	$ 717,600
Speed bonus, 4 x $ 5 x 11040	220,800
Total	938,400
S. S. Mary
Basic valuation, $ 65 x 7997	$ 519,805
Speed bonus, 4 x $ 5 x 7997	159,940
Total	679,745
S. S. Edward
Basic valuation, $ 65 x 12250	$ 796,250
Speed bonus, 4 x $ 5 x 12250	245,000
Total	1,041,250

The Paul, the Mary, and the Edward were sunk by enemy action on September 22, September 14, and July 1, 1942, respectively.

The cost, less depreciation, of each vessel at the time of sinking was as follows:

Paul	$ 26,154.58
Mary	452,676.44
Edward	16,290.61

During 1942 the petitioner received an insurance payment from private insurance companies for the loss of the Edward of $ 428,750.

Upon securing the necessary certificate from the American Bureau of Shipping as to the tonnage and speed of the Paul, the petitioner forwarded to WSA on January 26, 1943, vouchers and certificates required for the processing of petitioner's claim for the loss of the Paul.

On December 1, 1942, the petitioner forwarded to WSA certificate of the American Bureau of Shipping as to speed and tonnage of the Mary, dated November 30, 1942, together with other documents, including vouchers, necessary for payment of claim for the loss of the Mary.

Petitioner forwarded to WSA on July 25, 1942, vouchers and other documents necessary for payment of its claim arising from the loss of the Edward, with the exception of certificates of registry, dead-weight tonnage and speed. The certificates of tonnage and speed were secured from the American Bureau of Shipping and forwarded to WSA on September 3, 1942. The certificate of registry was forwarded to WSA on September 3, 1942.

Under date of November 24, 1942, the Administrator of WSA, in a letter addressed to the Comptroller General of the United States, requested his opinion on fifteen specific questions in respect to section 902 of the Merchant Marine Act of 1936, and on November 28, 1942, the Comptroller General replied on all points.

Three of the questions contained in the letter of the Administrator are as follows:

(1) Is it your opinion that the enhancement clause in section 902 requires the Administrator to fix values for all vessels including passenger ships, freight ships, fishing vessels, tugs, barges, small craft, and other water craft as of a specific calendar date or may the Administrator fix such valuation under the ordinary rules of law applicable to the subject of valuations after deducting all "enhancements" which he finds to have been proximately caused by the necessity of the taking or use?

(2) If it is your opinion that values must be based on a specific calendar date, is the Administrator in a position to reach his own determination as to the appropriate date or is it mandatory under the law for him to pick a specific date such as the date of the President's proclamation of the limited emergency [September 8, 1939] or the date of the unlimited emergency [May 27, 1941]?

(3) If in your opinion the Administrator is required to fix values as of a specific date, please advise as to the date which in your opinion the Administration is required by law to adopt for this purpose.

The enhancement clause referred to is the italicized portion of section 902, Merchant Marine Act of 1936, as amended, set forth in the margin. ^{*76 In his letter of November 28, 1942, the Comptroller General's answer to the above questions, in part, is as follows:}

* * * the enhancement clause in said section 902 (a) prohibits the payment of compensation for such vessels to the extent that it may be based upon values in excess of the values existing on September 8, 1939, provided such excess be determined as due to economic conditions directly caused by the national emergency. * * *

Based on the Comptroller General's letter of November 28, 1942, WSA issued on December 17, 1942, a notice directed "To the Owners of all Vessels Purchased, Chartered or Requisitioned for Use or Title by the War Shipping Administration," a copy of which was received by petitioner in December 1942. The notice stated in part as follows:

In view of recent developments with respect to the interpretation of section 902 of the Merchant Marine Act, 1936, as amended, we find it necessary to advise you of the following:

During the latter part of this year, the Administrator learned for the first time that certain of the officials of the Office of the Comptroller General of the United States were of the opinion that under section 902 of the Merchant Marine Act, 1936, as amended, it was unlawful for the Administrator to pay for vessels requisitioned under section 902 of the act sums in excess of the values of these vessels as of the date of the President's proclamation of limited emergency dated September 8, 1939. Section 902 had been administered by the War Shipping Administrator and prior thereto by the United States Maritime Commission, in a manner that was inconsistent with such interpretation.

As soon as the views of the subordinate officials of the Comptroller General were made known to the Administrator, conferences were held with the Comptroller General, but no solution to the problem developed therefrom. The Comptroller General then offered to state his views upon receipt of a formal request for an opinion which could be transmitted to Congress for such action as it deemed appropriate. Accordingly, the Administrator directed a request to the Comptroller General of the United States for formal opinion under date of November 24, 1942, on 15 specific questions, and on November 28, the Comptroller General replied on all points. * * *

You will note that, in the opinion of the Comptroller General, values of all vessels, including both large and small craft -- freighters, passenger ships, tugs, barges, fishing vessels, and other watercraft -- were, in effect, frozen by the President's proclamation of limited emergency on September 8, 1939, except for vessels built or rebuilt after that date, as to which the Comptroller apparently would allow payment of actual cost less depreciation, and that, in his opinion, the Administrator may not lawfully pay for use or title to vessels at higher rates or values than those prevailing on September 8, 1939. It will be noted that the 1939 values apply notwithstanding the fact that the vessels were purchased after that date at substantially higher cost and even though replacement vessels cannot now be obtained at 1939 prices. Charter rates also would be reduced under this ruling to September 8, 1939, levels, except for additional allowances for increases in expenses since that time.

Immediately upon receipt of this opinion, the Administrator ordered that payments for vessels purchased or requisitioned for the War Shipping Administration under section 902 of the Merchant Marine Act, 1936, as amended, be discontinued. Payments for vessels lost from marine or war casualties under charters made under this section were also stopped pending a clarification of the situation.

The Administrator promptly transmitted copies of the Comptroller General's opinion to the chairman of the Senate Committee on Commerce and the chairman of the House Merchant Marine and Fisheries Committee. There was at that time pending in the Senate Committee on Commerce legislation affecting the War Shipping Administration known as the omnibus bill and designated H. R. 7424. After considering the Comptroller's ruling, the Senate Committee on Commerce on December 4, 1942, reported out H. R. 7324 [sic] with an amendment to section 902 which would have the effect of eliminating the enhancement clause contained in the existing provision of law, thus confirming the Administrator's application of the law. The reason for this action was explained in a report submitted on behalf of the committee (No. 1813, 77th Cong., 2d sess.), pertinent excerpts of which are attached herewith. [Attachment omitted.]

However, although the bill was placed on the Senate Calendar, it did not come to a vote prior to adjournment of this Congress, leaving the entire question open for the next Congress -- see Congressional Record of December 15, 1942.

During the interim, unless the Administrator applies the statute in accordance with the Comptroller General's ruling, he will be in a position of administering the law in a manner inconsistent with the interpretation of the Government's accounting officers. Under the circumstances, the Administrator feels that it is incumbent upon him, in view of the large sums of money involved in this problem and the public interest relating thereto, to apply the Comptroller General's ruling and accordingly to take the following action:

I. With Respect To Payment for Vessels Purchased or Lost

(a) To withhold payments for all vessels previously requisitioned for title by the War Shipping Administration or purchased by the War Shipping Administration pursuant to the provisions of section 902 of the Merchant Marine Act, 1936, as amended, except in cases where the value of the vessel as determined by the Administrator does not exceed the value of the same vessel on September 8, 1939, or, with respect to vessels constructed or reconstructed subsequent to that date, where the value of the vessel is determined at an amount not in excess of actual construction or reconstruction cost less depreciation.

This means that with few exceptions -- principally yachts which have been valued at 1939 values -- payments will be withheld on all vessels heretofore taken for title, including freighters, tankers, passenger ships, tugs, barges, fishing vessels of all kinds, and all other watercraft, even though a determination of value has been reached and the owner has been notified thereof.

(b) To withhold all payments for total loss of vessels from marine or war risk assumed by the War Shipping Administration to the same extent as noted in paragraph (a). Claims for total loss of such vessels will be treated in the same manner as claims for vessels requisitioned for title by the War Shipping Administration.

(c) In cases where the application of the rules set forth in (a) and (b) result in hardship to any owner, the Administrator is prepared to determine the value of such vessel in accordance with the decision of the Comptroller General of the United States upon request for such determination from the owner, and to tender the amount so determined to the owner. The owner would then have the election of accepting the amount tendered in full settlement or of accepting 75 per cent thereof and instituting suit in the appropriate court for just compensation under section 902.

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II. With Respect to Vessels Chartered by the War Shipping Administration

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(d) Consideration is being given to the desirability of canceling all or certain classes of outstanding charters.

On December 31, 1942, the Administrator of WSA again wrote a letter to the Comptroller General, containing a review of executive, legislative, and administrative action on and after September 8, 1939, and concluding as follows:

Inasmuch as the view that the emergency powers of section 902 were not made operative by the proclamation of September 8, 1939, finds such support as herein cited from the record of Executive action, as contained in the proclamations and Executive orders of the President, together with the President's express declaration to the extraordinary session of Congress that further action under the proclamation was not necessary, and from the record of legislative action, as contained in the provisions of statutes passed by Congress and in the expressed views of the members of responsible committees. I am transmitting the substance of the review that has been made with the thought that if a reconsideration by you of this single point should lead to agreement on it between us, the questions remaining as to the meaning of section 902 would be far less difficult of solution.

The Administrator of WSA wrote another letter to the Comptroller General, dated April 27, 1943, but the Comptroller General in his answers, dated January 7 and May 17, 1943, adhered to his decisions contained in his letter of November 28, 1942.

On October 15, 1943, the President of the United States issued Executive Order No. 9387. This order established a board of three members, to be known as the "Advisory Board on Just Compensation," and authorized the Board to establish, in accordance with the applicable provisions of the Constitution and laws of the United States, fair and equitable standards, rules, and formulae of general applicability for the guidance of WSA in determining the just compensation to be paid for all vessels requisitioned, purchased, chartered, or insured by the Administration.

The Advisory Board held public hearings on November 26 and 27, 1943, listened to arguments, and accepted briefs. On December 7, 1943, the Board submitted its report to WSA. In its letter transmissing the report it stated in part:

It seems appropriate to comment briefly on the Comptroller General's ruling of November 28, 1942. Contrary to the impression existing in many quarters, the Comptroller General does not limit compensation in the case of requisitioned vessels to values existing on September 8, 1939. That date is used merely as the starting point for the determination of values. The necessity of allowing subsequent enhancement that is not directly caused by economic conditions resulting from the emergency is specifically recognized by him. This standard does not necessarily exclude subsequent enhancement which directly reflects the economic changes incident to the improvement in general conditions since 1939.

It is obviously impossible to know without very extensive inquiry into the facts to what extent any enhancement in value was due to that cause, and the order which created the Board confined its duties to the establishing of "standards, rules, and formulae." On this account we did not undertake to consider how far the rules we are submitting would in practice reach different results from the rules recommended by the Comptroller General. It is conceivable that in application the difference might turn out to be far less than has at times been assumed, and that the dispute would appear to be more in the reasoning by which the problems were solved than in the answers reached.

The Board established ten rules for WSA in determining the just compensation to be paid for all vessels requisitioned, purchased, chartered, or insured by the Administration, which are in part as follows:

Rule 1. -- Just compensation for vessels requisitioned for title or for use is to be determined on the basis of value as of the date of taking, subject to deduction on account of enhancement, if any, as hereinafter set out in rule 4, and with allowance for any loss on account of delay in payment from the date of taking, not exceeding the current commercial rate of interest. Value means value on the American market, not on foreign markets.

* * * *

Rule 4. -- From the value at the time of taking, there should be deducted any enhancement due, to the Government's need of vessels which has necessitated the taking, to the previous taking of vessels of similar type, or to a prospective taking, reasonably probable, whether such need, taking, or prospect, occurred before or after the declaration of the national emergency of May 27, 1941. Enhancement due to a general rise in prices or earnings, whenever occurring, should not be deducted. In the application of this rule neither the proclamation of limited emergency of September 8, 1939, nor the facts existing at that time, are in themselves of significance. The Board does not determine whether any enhancement after May 27, 1941, other than as enumerated above as deductible, should be excluded; since the Board is advised that the value of ocean-going vessels was higher on May 27, 1941, than at the time of taking, and that any enhancement since May 27, 1941, in vessels of other types, not deductible under the foregoing, is attributable to a general rise in prices or earnings, and should therefore not be deducted.

Rule 5. -- The enhancement clause of section 902 (a) of the Merchant Marine Act of 1936, has no application to the valuation of chartered vessels for the purpose of insurance.

* * * *

Rule 9. -- Valuations agreed upon by the Administrator and owners are binding, if not in excess of just compensation determined as above prescribed; and settlements should be made on the basis of such valuations with an allowance for any actual loss due to the delay in payment from the date when such settlements would have been made, if no objections had been raised, not exceeding the current commercial rate of interest.

WSA, on December 16, 1943, addressed a letter to the Association of American Shipowners, a copy of which was received by petitioner during December 1943. The letter stated that the "Administrator is now giving active consideration to action necessary to apply promptly the standards, rules and formulae prescribed" by the Advisory Board and that he had adopted a "broad general program," in part as follows:

1. The War Shipping Administration will pay all outstanding claims under war risk insurances issued subject to agreed values to the Owners of chartered and requisitioned vessels. Such payment will be made promptly after the settlement of any outstanding questions as to the vessel's speed under the terms of such charter or requisition, and will exclude any amounts which may be claimed by reason of loss on account of delay in payment. Such claims for loss, if any, on account of delay will be considered by the Administrator as set forth in Item 3 below and the releases tendered claimants in connection with the payments referred to above will not prejudice the claimants with respect to any sums hereafter determined to be payable as set forth below.

2. The War Shipping Administration will pay promptly all outstanding claims for title requisition, or for loss through a risk assumed (not insured) by it under charter or requisition charter, where values have been agreed, to the extent that such values would not exceed the limitation contained in Rule 9 established by the Board.

3. The position of the War Shipping Administration with respect to claims on account of delay as set forth in Rules 1 and 9 established by the Board has not, as yet, been fully formulated. Any such claims should be filed with the War Shipping Administration at the earliest practicable date and not later than February 1, 1944 so that full consideration may be given to the establishment of a basis for disposition of such claims.

The formulae for calculating the speed of vessels under charters made by WSA were first fixed in General Order No. 10, issued on May 14, 1942, by WSA. Supplement No. 1 to General Order No. 10 was issued by WSA on December 8, 1942. Supplement No. 2 to General Order No. 10, as modified by Supplement No. 1, was issued by WSA on February 25, 1944. The provisions of Supplement No. 2 were retroactive to May 14, 1942.

The petitioner filed with WSA certificates of speed as computed under Supplement No. 2 to General Order No. 10 for the Paul on June 19, 1944, and for the Edward on June 14, 1944. On July 11, 1944, WSA confirmed acceptance by it of speed in accordance with General Order No. 10, Supplement No. 1, on the Mary.

The speed of each of the three vessels, computed under General Order No. 10 and as modified by Supplements Nos. 1 and 2, and certified by the American Bureau of Shipping, is as follows:

	Paul	Mary	Edward
General Order No. 10	12.6 knots	12.8 knots	12.4 knots.
Supplement No. 1	12.2 knots	12 knots	12.4 knots.
Supplement No. 2	12 knots	11.7 knots	12.1 knots.

The dead-weight tonnage of each vessel was certified in each of the certificates pertaining to it as follows: The Mary, 8,000 tons; the Paul, 11,050 tons; and the Edward, 12,250 tons.

During January 1944 the petitioner received from WSA vouchers prepared by WSA covering amounts to be paid as compensation for the loss of the Paul and the Mary, and in June of the same year it received a similar voucher covering the Edward. Upon receipt thereof, petitioner signed and returned the same to WSA, as requested, and received payment from WSA on the dates and in the amounts as follows:

Vessel	Date	Amount
Paul	Feb. 4, 1944	$ 939,250
Mary	Feb. 7, 1944	680,000
Edward	June 29, 1944	1,041,250

The above payments of war risk insurance were made on the basis of a speed bonus of $ 20 per dead-weight ton and a basic valuation of $ 65 per dead-weight ton. They included no compensation for delay in payment of the respective amounts.

The petitioner in 1942 and in years subsequent thereto kept its books and records and filed its Federal income tax returns on an accrual basis.

The petitioner, at various dates shortly after the loss of each of the three vessels involved, established on its books accounts receivable against the WSA in the amounts of the war risk insurance value as computed in the charters covering the respective vessels. It also set up on its books in 1942 replacement accounts for each of these vessels which reflected the excess of such accounts receivable over book value. These accounts were carried on the books of petitioner with only minor modifications through the years 1942 and 1943. When the payments from WSA were received in 1944, accounts receivable were credited with the amounts received. The gain realized by petitioner from the sinking of the three vessels was never reflected in its profit and loss or surplus accounts, but was carried only in its replacement accounts covering the three vessels.

In computing the deficiencies the Commissioner included in 1942 income, as long term capital gain resulting from the payments received in 1944 from WSA for the loss of the Paul, the amount of $ 913,093.71, and for the loss of the Mary, the amount of $ 227,323.56. He also included in 1942 income, as long term capital gain resulting from the payments received in 1942 from private insurance companies and received in 1944 from WSA for the loss of the Edward, the amounts of $ 423,999.66 and $ 1,029,709.73, or a total of $ 1,453,709.39.

The portions of the payments received by petitioner representing long term capital gain to it are as follows:

Vessel	Long term capial gain
Paul	$ 913,095.42
Mary	227,323.56
Edward (payments from private insurance companies)	412,459.39
Do (payment from WSA)	1,041,250.00

In its Federal tax return for 1944 petitioner reported capital gain with respect to the amounts received from WSA for the loss of the three vessels involved in the amount of $ 913,095.42 for the Paul, $ 227,323.56 for the Mary, and $ 1,029,705.36 for the Edward. The taxes reported on such return have all been paid by petitioner.

The record discloses the following additional facts:

The petitioner filed its income and declared value excess profits tax return for 1942 in the second district of New York on August 12, 1943. The gains on the amount received by petitioner from private insurers on the loss of the Edward and on the amounts received from WSA on all vessels were not reported in such return.

The petitioner during 1943 continued to press WSA for payment of its claims, but WSA would not pay the charter valuations of such vessels and adhered to its position announced in its notice of December 17, 1942. On May 20 and July 16, 1943, WSA, in a form letter, made a tender to petitioner of $ 20 per dead-weight ton, or 75 per cent of cost less depreciation, not exceeding $ 20 per ton. In a bulletin issued October 15, 1943, WSA tendered payment of $ 40 per dead-weight ton on dry cargo vessels, such as the Paul, the Mary, and the Edward. These tenders were made as being within a value which the Comptroller General would approve. No payments were made to petitioner pursuant to such tenders.

In 1943 legislation (H. R. 2731) was introduced in the House, and in June of that year hearings were held on the bill, which were attended by representatives of the petitioner. The bill contemplated the appointment of a committee of awards and favored the views of the Comptroller General in that it sought to restrict valuations to those of September 8, 1939, plus an enhancement based on an increase in general commodity prices. The taxpayer opposed this bill in its appearances at the hearings thereon. The bill was withdrawn after the President of the United States announced the appointment of the Advisory Board. No legislation was enacted settling the controversy between WSA and the Comptroller General.

The petitioner participated in the arguments during the hearings before the Advisory Board.

The sea speed of each of the three vessels represented in the charters was based upon petitioner's many years of experience and was conservative. The petitioner challenged the speed of the Mary of 11.7 knots as calculated under Supplement No. 2 to General Order No. 10, because if not overcome it would have caused a reduction in the bonus to the extent of $ 40,000 and a refund of that amount to WSA. In July 1944 WSA advised petitioner that it would accept a speed of 12 knots for the Mary.

The sale value on September 8, 1939, of each of the vessels involved was from $ 20 to $ 25 per dead-weight ton.

OPINION.

It is agreed that the gain of $ 412,459.39 realized upon receipt of $ 428,750 in 1942 from private insurers upon the loss of the Edward is includible in 1942 income. The question to be determined is whether the gain realized upon the amounts received from WSA is includible in 1942 income, as contended by respondent.

The respondent argues that WSA never denied liability under the charters; that there was no contest between petitioner and WSA and that the latter was merely withholding payment during a clarification period; that subsequent payments by WSA to petitioner of war risk insurance for the three vessels involved were made under and pursuant to the charters; and, hence, the gain was accruable in 1942.

The petitioner contends that, although its right to compensation on some basis was admitted, there was no way, by investigation of facts or records, by reference to an established statutory or contract formula, or otherwise, by which the petitioner or WSA could, at the end of 1942, determine with reasonable accuracy the amount of compensation for loss to which petitioner was entitled. It is further argued that the amount of compensation was not reasonably determinable until 1944, when WSA finally determined the amount and paid it accordingly.

The record discloses that there was a serious controversy between WSA and the Comptroller General. The respondent concedes that there was such a controversy with respect to the question of valuation between WSA and the Comptroller General, and that each of them carried their controversy to the appropriate committees of Congress throughout 1943 and maintained his position until the President, by Executive order, established the Advisory Board on Just Compensation.

It is not necessary to discuss the controversy in detail or the conflicting views of WSA and the Comptroller General. It is significant that, although the charters fixed a valuation of $ 65 per dead-weight ton, plus a bonus of $ 20 per dead-weight ton, the Administrator, as a result of the controversy, determined that it was incumbent upon him to apply the Comptroller General's ruling. In the notice of December 17, 1942, the Administrator informed petitioner to that effect, and, further, that no payments for total loss of vessels from marine or war risk assumed by WSA would be made except in cases where the value of the vessel as determined by the Administrator did not exceed the value of the same vessel on September 8, 1939. The notice further stated that, in cases where the withholding of payment resulted in hardship to any owner:

* * * the Administrator is prepared to determine the value of such vessel in accordance with the decision of the Comptroller General of the United States upon request for such determination from the owner, and to tender the amount so determined to the owner. The owner would then have the election of accepting the amount tendered in full settlement or of accepting 75 per cent thereof and instituting suit in the appropriate court for just compensation under section 902.

The tender of payment of some undetermined amount was made only to those to whom the withholding of all payment as provided in the charters would result in hardship. Furthermore, the submission by WSA to owners of lost vessels of an election to accept either some indefinite sum, later to be determined by it upon request, "in full settlement," or to take part payment on the same basis and institute suit for just compensation, is not an unconditional offer of payment upon which an accrual of income could be based. In substance and effect, the notice, so far as this petitioner is concerned, was tantamount to a denial of liability for the payment of any amount under its charters for the loss of its three vessels. It may be noted also that it is stated in the notice of December 17, 1942, that consideration was being given to the desirability of canceling all or certain classes of outstanding charters.

An employee of the United States Maritime Commission, successor to WSA, testified on behalf of respondent that on May 20, 1943, a form letter or bulletin was sent to petitioner tendering $ 20 per ton in payment on account of the total loss of the Mary and the Paul, or 75 per cent of their valuation computed under General Order No. 24, which provided for a cost less depreciation basis, subject to a minimum of $ 20 per ton; that on July 16, 1943, a similar letter was sent with respect to the Edward; and that later, on October 15, 1943, another form letter was sent to petitioner making a tender of $ 40 per ton on dry cargo vessels, in which category petitioner's three vessels fell. He further testified that the tenders were not offers of settlement; that no action on the part of the owners was required, but that no payments were made because "there would be no sense in having the owner sign a voucher, if, after all that large amount of administrative work, they were to be rejected. Other owners who wanted payment on account would then have to wait all that additional time."

It would appear that such form letters were supplemental to the notice of December 17, 1942, subject to its terms and conditions, and issued to indicate the amount which WSA considered to be the value as of September 8, 1939, which the Comptroller General would approve. In any event, since no payments followed upon such letters, it is apparent that the so-called tenders or offers of WSA were not accepted by petitioner and that they were not the expression of an intent to make payments on account of a conceded or possible liability greater in amount.

Although the case of American Hotels Corporation v. Commissioner, 134 Fed. (2d) 817, affirming 46 B. T. A. 629, involved the accrual of a liability of $ 25,000 and its deduction in 1937 as an expense, what the court stated in its opinion in affirming the decision of the Board of Tax Appeals disallowing the deduction is equally apposite herein:

* * * when, as here, the taxpayer keeps its books on an accrual basis, such a deduction can be taken only for the taxable year in which the expense was "incurred." That means that there must be some reasonably clear definitization, within that year, of the amount of the expenses. Whether or not there was, depends upon the peculiar facts of each particular case. We think that here there was substantial evidence to sustain the finding of the Tax Court that there was no such definitization in the taxable year 1937.

In that year the taxpayer offered to pay $ 4,200. Had it then said unconditionally that it would pay that sum, leaving open for further negotiations any greater liability, perhaps it could have deducted $ 4,200 for 1937. But that it did not do; it offered that amount only on condition that it be released in full. The amount claimed by Metropolitan was $ 42,000, and the taxpayer, although it did not so advise Metropolitan, was then prepared to go even beyond that limit; but taxpayer, in 1937, did not know how far it would go; it was ready to pay anything from $ 4,200 up to an undetermined maximum. In fact, in 1938, it agreed to pay $ 25,000. But, as there was no expression in 1937 of a willingness unconditionally to pay any definite amount, we cannot say that the Tax Court was not justified in finding that no expense was then incurred.

Herein, in December 1942, after petitioner had filed its claims with WSA under its charters for the loss of its three vessels, WSA refused to make any payment whatsoever to owners of vessels which had been lost except to those to whom its refusal would result in hardship, and as to those it made no unconditional offer of a definite amount. There was no expression by WSA in 1942 or shortly thereafter of a willingness unconditionally to pay a definite amount, whether on account or in full settlement.

Petitioner did not know the amount of the compensation it would receive from WSA until it received its vouchers in January 1944 covering the Paul and the Mary, and in June 1944, covering the Edward. It is apparent that as soon as WSA decided actually to pay the claims it sent out its vouchers, with the request to sign and return the same. Shortly after petitioner returned the vouchers it received payment, exclusive of any amount for delay in payment.

In William Justin Petit, 8 T. C. 228, it is stated:

When a taxpayer is on the accrual basis it is the right to receive the income and not the actual receipt that determines the inclusion of the amount in gross income. Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182. However, in order for items to be accrued as income the event must occur which determines the amount due. When the amount to be received depends upon a contingency or future events, it is not to be accrued until such contingency or the events have occurred and fixed with reasonable certainty the fact and amount of income. U. S. Cartridge Co. v. United States, 284 U.S. 511">284 U.S. 511.



To the same effect see Patrick McGuirl, Inc. v. Commissioner, 74 Fed. (2d) 729; certiorari denied, 295 U.S. 748">295 U.S. 748.

To ascertain with any degree of certainty the amount it would receive from WSA, petitioner was required to await the outcome of the controversy between WSA and the Comptroller General and the further action of WSA, or to institute suit for just compensation. Since the amount to be received by petitioner depended upon events which did not occur in 1942, and over which petitioner had no control, it is our conclusion that the gains upon the amounts received from WSA were not accruable in 1942 and, hence, not includible in 1942 income.

The respondent relies in particular upon Continental Tie & Lumber Co. v. Burnet, 286 U.S. 290">286 U.S. 290; Automobile Insurance Co. v. Commissioner, 72 Fed. (2d) 265; Georgia School-Book Depository, Inc., 1 T. C. 463; and Dumari Textile Co., 47 B. T. A. 639; affd., 142 Fed. (2d) 897. These cases are clearly distinguishable upon the facts. In all of them the amount of income was certain or ascertainable with a fair degree of accuracy. Such is not true in the instant case.

Decision will be entered under Rule 50.

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Footnotes

• 1. Sec. 902. (a) Whenever the President shall proclaim that the security of the national defense makes it advisable, or during any national emergency declared by proclamation of the President, it shall be lawful for the Commission to requisition or purchase any vessel or other watercraft owned by citizens of the United States, or under construction within the United States, or for any period during such emergency, to requisition or charter the use of any such property. The termination of any emergency so declared shall be announced by a further proclamation by the President. When any such property or the use thereof is so requisitioned, the owner thereof shall be paid just compensation for the property taken or for the use of such property, but in no case shall the value of the property taken or used be deemed enhanced by the causes necessitating the taking or use↩. * * * [Emphasis supplied.]