DocketNumber： Docket No. 18816.
Citation Numbers： 16 B.T.A. 993, 1929 BTA LEXIS 2472
Judges： Teammell
Filed Date： 6/11/1929
Status： Precedential
Modified Date： 11/21/2020
1929 BTA LEXIS 2472">*2472
16 B.T.A. 993">*994 This is a proceeding for the redetermination of a deficiency in income tax of $15,578.10 for 1922. The matter in controversy is the action of the respondent in refusing to allow as a deduction $30,000, representing an amount segregated by the petitioner and deposited in a bank as a separate fund for the purpose of liquidation a judgment which might be obtained against him as the result of a suit instituted against him during the taxable year for alleged neglect in the conduct of his profession as a lawyer.
FINDINGS OF FACT.
The petitioner is a practicing attorney in the City of New York. In 1922 one of the justices of the Supreme Court of New York recommended to him Caroline McCarthy, the widow of a deceased judge. 1929 BTA LEXIS 2472">*2473 The petitioner was asked to give his attention to certain matters that she had in hand. After going over certain of the matters, the petitioner found that he was not justified in bringing suit for her, since if there had been any merit in her cause of action, the statute of limitations had operated to bar it and no court would give her any relief. He so advised her and declined to bring suit. She conferred with other members of the petitioner's office staff, and shortly thereafter in 1922 brought suit against the petitioner for $30,000 for alleged negligence in having refused to bring suit for her, as she claimed, within the period of limitations. The petitioner declined to make any adjustment of the matter. Answer was filed and the case was placed at issue. The case proceeded in the courts in various steps until 1924, when it was disposed of favorably to Oppenheimer.
In 1922 the petitioner had associated with him three lawyers who shared with him a percentage of the net profits. At the close of the year, and on December 31, 1922, he called their attention to the fact that under the practice and procedure in New York and because of the congrested condition of the court calendars, 1929 BTA LEXIS 2472">*2474 several years might elapse before the case was finally disposed of and that he would take out of the profits of the year $30,000, the amount for which the McCarthy suit had been brought and place the money in a designated bank to hold until the suit had been disposed of. He thereupon drew $30,000, and deposited it as a separate fund, in the Bank of the Manhattan Company, to await the outcome of the suit and for the sole purpose of liquidating any judgment that might be obtained against him as a result of this suit. The petitioner considered that business prudence, professional ethics and the uncertainty of litigation not only justified, but called upon, him to make such deposit against the possibility of the action being disposed of unfavorably to him at some later time when his then associates were no longer with him. The amount placed on deposit was not regarded by the 16 B.T.A. 993">*995 petitioner as a part of his business assets during the period in which it remained on deposit for the purpose mentioned.
In his income-tax return for 1922 the petitioner stated that the amount of $30,000 had been reserved, awaiting the result of the suit against him by Caroline McCarthy, and showed1929 BTA LEXIS 2472">*2475 why the amount was deposited in cash as a reserve from the profits of that year. In determining the petitioner's net income for 1922, the respondent refused to allow as a deduction the $30,000 representing the amount placed on deposit as heretofore set out.
OPINION.
TRAMMELL: The only issue in this proceeding is whether the petitioner is entitled to the deduction of $30,000, representing the amount placed by him on deposit in a separate fund under the circumstances set out in our findings of fact.
There is nothing in the record to show whether the petitioner's return was made from books kept on the cash receipts and disbursements basis or from books kept on the accrual basis. If the books were kept on the cash receipts and disbursements basis, the amount in question clearly would not be deductible, since the petitioner had paid nothing on the McCarthy claim, but had only set aside an amount awaiting the outcome of the suit thereon. It was merely a reserve for a future contingent liability.
The petitioner contends that inasmuch as those engaged in business are permitted to deduct additions made to reserves for bad debts, that he as a professional man should be permitted1929 BTA LEXIS 2472">*2476 to set up a reserve against the outcome of the suit filed against him. Reserves, however, are not allowable deductions from gross income unless specifically provided for by statute. . It is true that the Revenue Act of 1921, the Act under which the petitioner's tax liability for the year here involved is to be determined, provides under certain circumstances for the deduction of additions to reserves for bad debts. We are not dealing here with a reserve for bad debts, but with a reserve for a future contingent liability. In considering whether such a reserve was among the specific deductions allowed individuals under the Revenue Act of 1921, we said in :
These specific deductions do not comprehend any such item as a reserve against a contingent liability. This Board has had occasion to pass upon this question in numerous appeals. In , it said:
"Since the statute does not permit a taxpayer to deduct as an expense an amount which he fears he may some day be called upon to spend, there can be no sanction for such a deduction. 1929 BTA LEXIS 2472">*2477 "
16 B.T.A. 993">*996 See also Appeals of ; ; ; ; ; .
We think what we said in the
This is not a case where liability was admitted. Here the petitioner denied liability and did everything possible to defend the suit. No liability arose during the taxable year or at any other time with respect to the matter. In our opinion the deduction claimed is not allowable.