*51OPINION.
Arundell:The petitioner urges its right to take as a deduction in its income-tax return for 1920 the amount of damages incurred by breaching its contracts with the American Sugar Refining Co. That the contracts were breached in 1920 is unquestioned. The petitioner could not accept delivery of the shipments and remain solvent, and it therefore deliberately chose to break its contracts, knowing full well that to do so would make it liable in damages for the breach. It did not, however, during the taxable year, admit its liability to the consignor, or enter on its books an estimate of the damages due. Negotiations looking toward settlement were carried on during 1920 without success, and in January, 1921, suit was instituted in which damages were asked in the sum of $30,000. In October, 1921, a settlement was reached, based on the capacity of petitioner to pay.
We do not believe that the breach of contract, standing alone, under the circumstances here in question, furnishes the basis for an accrual of possible damages. With the breach there of course arises a cause *52of action by the injured party, which it may or may not see fit to pursue. Should it, for reasons of policy, or otherwise, not demand damages, the obligor may escape payment. Conceding that it may be proper to accrue any approximation, it is certainly essential that there be a recognized obligation to pay before one’s right to accrue arises, and a mere liability to suit is not sufficient. Where the liability is denied and the injured party takes no action to compel payment, there is no basis for an accrual, and any amount set up on the books to take care of this liability would be in the nature of a contingent reserve which, as we have held in the Appeal of Consolidated Asphalt Co., 1 B. T. A. 79, is not permitted under the Revenue Acts.
Petitioner places its reliance on the Appeal of Producers Fuel Co., 1 B. T. A. 202, but in that case there was an admission of liability within the taxable year and an actual accrual on the books. We believe the distinction vital and can not regard the Producers Fuel Co. Appeal as controlling. We have also pointed out in the Appeal of New Process Cork Co., 3 B. T. A. 1339, the inapplicability of the reasoning of the Supreme Court in the case of United States v. Anderson, 269 U. S. 422, to a situation such as is here present. There the court was dealing with the deductibility of munitions taxes, which were measured by the profits made from the sale of munitions within the taxable year. The court found that the amount was susceptible of definite ascertainment at the close of the year and was a proper accrual within the year. In the case before us the sugar was never received; consequently none of the income for the year was derived from its sale or disposition and there was no necessary relationship between the income for the year and this transaction making necessary its accrual to clearly reflect the income of petitioner. We believe the -Commissioner’s determination is correct, and so find.
Order of ‘redetermination will he entered on 10 days’ notice, under Rule 50.
On reference to the Board, Phillips dissents.