*1868 ,1. Petitioner acquired the assets and assumed the liabilities of another corporation, and, during the taxable year, to assure fulfillment of its obligation, it made a deposit of cash and bonds with sureties on the bond of its predecessor to save the sureties harmless from the demand of the United States for reimbursement of increased costs incurred in completing a contract on which the predecessor had defaulted, The amount of cash and bonds deposited was equal to the face amount of the bond, and the deposit was made upon the condition that the cash and bonds should belong to the sureties to the extent of the amount recovered by the United States. Held, there was no loss or expense, and no basis for a deduction, in the taxable year.
2. Where a contract provides for liquidated damages of a fixed sum for each week of delay in performance, the deduction of an amount computed upon the basis of the delay occurring in the taxable year is not allowable where the evidence establishes the delay, but it appears that there was no demand for payment or admission of liability or accounting entry or deduction taken or claimed, and that a supplemental contract was thereafter entered into*1869 between the parties.
3. A new and separate corporation, organized to take over the business, assets, and liabilities of its predecessor, is not entitled to carry forward a net loss of its predecessor in computing its loss or income of a later year.
4. Where a corporation was organized during a calendar year as the successor of another, and a loss appears to have been sustained from operations during the entire period and is determined in the deficiency notice to be the loss of the successor, and the respondent asserts in his answer that the loss previously recognized by him was excessive, the burden is upon him to prove the actual loss sustained by each corporation during the period of its operation within the year and it is not sufficient for him to rely upon a mathematical apportionment.
*503 The respondent determined deficiencies in petitioner's income tax of $18,672.27 for 1924 and $3,204.90 for 1925, resulting from numerous adjustments in its net income.
The petitioner alleges error (1) in the disallowance*1870 of a deduction in 1924 of $85,000, representing an alleged liability for costs incurred by the United States in completing work under a dredging contract entered into by it with the petitioner's predecessor; (2) in the disallowance of a deduction in 1925, not claimed in the original return, *504 of $11,212.50, representing alleged liability for liquidated damages accrued in that year under a dredging contract with the Government of the Bahama Islands; and (3) in the disallowance of deductions in the respective years 1924 and 1925 of net losses of $73,787.06 and $9,408.92 alleged to have been sustained in 1923 and 1924. The respondent by amended answer claimed increased deficiencies for 1924 and 1925, on the ground that in his original determination he had erroneously given the petitioner the benefit of prior year net losses of a predecessor corporation.
FINDINGS OF FACT.
The petitioner is a Texas corporation engaged in the dredging and general contracting business. Its principal place of business is at Miami, Fla. It was organized on August 26, 1922, for the purpose of conducting a business of the same kind as that theretofore conducted by the Bowers Southern Dredging*1871 Company, a Texas corporation organized in 1899, and by a receiver and a creditors' committee of the latter.
On February 5, 1920, the Bowers Company was placed in the hands of a receiver, and on July 1, 1920, its entire property and assets were transferred to a creditors' committee.
The creditors' committee employed Robert P. Clark, president and principal stockholder of the Bowers Company, to carry on the work of performing its contracts. The conduct of the business through the management of a creditors' committee rendered it difficult to secure new contracts and furnish bonds. Upon the suggestion of the stockholders that more work could be obtained if the business were reorganized and that in this way enough could be earned to pay off the liabilities, the creditors assented to the formation of a new corporation. The petitioner was thereupon organized with a capital stock of 3,750 shares of the par value of $100 per share, which was issued to the stockholders of the Bowers Company in the proportion of one share of stock of the petitioner for two shares of stock of the Bowers Company. At the time of organization, the assets of the Bowers Company were held by the creditors' *1872 committee as trustees, under a deed of trust dated July 1, 1920. On August 31, 1922, the trustees at the request of the stockholders of the Bowers Company, and with the consent of the holders of the remaining unpaid certificates of interest issued under the deed of trust, conveyed to the petitioner all of the assets acquired under the deed of trust then remaining in their hands. The conveyance was made in consideration of the sum of "$10 and other valuable considerations to be performed by the petitioner." The petitioner assumed the liabilities of the Bowers Company, and issued its first mortgage bonds on the *505 assets acquired in satisfaction of outstanding liens thereon. Prior to the organization of the petitioner, the Bowers Company had executed bonds for the performance of certain contracts with the United States, including the contract for dredging at Miami, hereinafter mentioned, and, at the time of the transfer of the assets to petitioner, there was a possibility of losses on the contracts for which the sureties on the bonds would become liable, and the sureties on the bonds were asserting priority of payment out of the assets for such losses. On August 26, 1922, the*1873 petitioner, in consideration of the assent of the sureties to the transfer of the assets, executed an agreement to indemnify them for any loss or liability which they might sustain under the bonds.
After the assets had been transferred, the charter of the Bowers Company was delivered to its attorney for cancellation. The petitioner opened a new set of books and carried forward to them the assets and liabilities of the Bowers Company, and it commenced operation of the business on September 1, 1922.
The petitioner kept its books and filed its returns, except the original return for 1922, on the accrual basis.
1. On September 26, 1916, the Bowers Company entered into a contract with the United States to furnish plant, material, and labor for dredging and rock removal, in accordance with specifications, at Miami Harbor, Fla. The contract provided for payments of 68 cents per cubic yard for rock, and 20 cents per cubic yard for sand, place measurement. The specifications, which formed part of the contract, provided as follows:
15. Commencement, Prosecution, and Completion. The contractor will be required to commence work under the contract within thirty (30) days after*1874 the date of receipt by him of notification of approval of the contract by the Chief of Engineers, United States Army, unless a later date for commencement is authorized in writing by the contracting officer as herein provided for, to prosecute the work at an average rate of not less than sixty thousand (60,000) cubic yards of sand or its equivalent per month during the first two (2) months after the limiting date fixed for commencement, and at an average rate of not less than one hundred thousand (100,000) cubic yards of sand or its equivalent, per month thereafter, and to complete it within the time determined by applying to the total quantity of material to be paid for actually removed under the contract the average monthly rates above stated, for the periods to which each rate applies; provided that the contractor will be required to so conduct his work that at the end of each month during the life of the contract the total progress from the beginning of the contract to the end of that month shall be not less than that required by the above-stipulated rates of progress; provided further, that the amount of material removed in any one month shall in no case be less than a minimum*1875 of forty thousand (40,000) cubic yards of sand or its equivalent; provided further, that no waiver by the contracting officer of any failure of the contractor to make in any month or series of months the rate of progress required by this paragraph shall be construed as relieving the contractor from his obligations to make up the deficiency in *506 future months and to complete the entire work within the time allowed by the contract; and provided further, that should the award be made to a contractor whose plant is engaged in work for the United States which will not be completed in time or permit work under this contract to be begun within the time specified the time limit for commencement under this contract may be extended in writing by the contracting officer not more than three (3) months with a corresponding extension of time limit for completion.
For the purposes of this paragraph one cubic yard of rock will be considered as the equivalent of such number of cubic yards of sand as multiplied by the unit contract price per cubic yard of sand, shall equal the unit contract price per cubic yard of rock.
16. The time allowed by the specifications for the completion of*1876 the contract to be entered into is considered sufficient for such completion by a contractor having the necessary plant, capital, and experience, unless extraordinary and unforseeable conditions supervene.
If, at any time after the date fixed for beginning work, it shall be found that operations are not being carried on at the prescribed rate or at a rate sufficient in the opinion of the contracting officer to secure completion within the contract time, the contracting officer shall have the power, after 10 days' notice in writing to the contractor, to put on such additional labor or plant, or to purchase such materials as may be necessary to put the work in a proper state of advancement, and any actual final excess cost thereof to the United States over what the work would have cost at the contract rate, after crediting the contractor with the value to the United States (as determined by the contracting officer) of the remaining plant and unused materials so purchased, shall be deducted from any sums due or to become due the contractor. The right is reserved to the United States to assume the capacity of the plant and force actually on the work at any time as a measure of probable*1877 progress thereafter.
The provisions of this paragraph, however, shall not be construed to affect the right of the United States to annul the contract, as provided for in the contract form; nor shall any failure of the contracting officer to take action under this paragraph or to annul the contract, in case the contractor fails to make the specified rate of progress during any month or any series of consecutive months, be construed as a waiver of the right of the United States to require the contractor to make good the deficiency in future months, or to take further action under this paragraph, or to later annul the contract if the deficiency is not made up within a reasonable time.
Article 4 of the contract provided as follows:
If the contractor shall delay or fail to commence with the delivery of the material or the performance of the work as specified herein, or shall, in the judgment of the contracting officer fail to prosecute faithfully and diligently the work in accordance with the specifications and requirements of this contract, then, in either case, the contracting officer shall have power, with the prior sanction of the Chief of Engineers, to take the work out of*1878 the hands of the contractor by giving notice in writing to that effect to the contractor and his surety or sureties; and upon the giving of such notice all payments to the contractor under this contract shall cease, and all money or reserved percentage due or to become due thereunder shall be retained by the United States until the final completion and acceptance of the work herein stipulated to be done; and the contracting officer shall have the right to proceed forthwith to secure the delivery of the material, or the performance of the work, by contract or otherwise, in accordance with law; and whatever sums may be expended by the United States in completing the said contract in excess of the price herein *507 stipulated to be paid the contractor for completing the same, and also all costs of inspection and superintendence, including all necessary traveling expenses connected therewith, incurred by the United States in excess of those payable by the United States during the period herein allowed for the completion of the contract by the contractor shall be charged to the contractor, and the United States shall have the right to deduct such excess cost out of or from any money*1879 or reserved percentage retained as aforesaid, or to recover the same, or any part thereof, from the contractor and his surety or sureties.
The Bowers Company executed a bond for the performance of the contract in the sum of $85,000. Under the terms of the contract, the work should have been completed on August 13, 1917.
On August 10, 1918, the Bowers Company requested that the contract be canceled or that it be paid additional compensation. The request was denied. Thereafter the United States Engineer Office issued notice to the Bowers Company to resume work by May 1, 1921, and, work not having been resumed by that date, the Bowers Company and the surety on its bond were notified on May 31, 1921, that the contract had that day been taken out of the hands of the Bowers Company, pursuant to article 4 of the contract. The United States continued the work with hired labor and completed it on December 9, 1923. In doing so the United States performed more work than was required under the terms of the original contract.
In the summer of 1921, Robert P. Clark engaged William S. Hammers, an attorney, to secure for the Bowers Company relief from liability under the contract of*1880 September 26, 1916, in accordance with the Rivers and Harbors Act of July 1, 1918. In December, 1921, Hammers endeavored to secure from the War Department a modification of the contract granting the Bowers Company increased compensation. He was confronted with the fact that the contractor had discontinued operations and the contract had been taken over by the United States. The Comptroller of the Treasury at that time had ruled that any contractor whose work should have been, but was not completed prior to July 1, 1918, was not entitled to relief under the Act of July 1, 1918, unless the delay during the period from the scheduled date of completion and the date of modification was due to causes beyond his control. Hammers undertook to convince the Government engineers that the delay from August, 1917, to July 1, 1918, was not due to the fault of the Bowers Company, and finally secured a recommendation from the Chief of Engineers that the contract be canceled as of May 31, 1921, and that the contractor waive its right to retained percentages of payments for work already done. The Judge Advocate General ruled that the Bowers Company was not entitled to relief under the Act of July 1, 1918, and*1881 that the recommendation could not be approved. In January, 1923, Hammers conferred with Assistant Secretary of War Wainwright, who *508 expressed the opinion that the Bowers Company was entitled to relief and turned the papers over to a subordinate, but, on March 3 or 4, 1923, shortly before his resignation, a letter denying relief was placed before him and signed.
Hammers thereafter interviewed Wainwright who, because he had resigned, could not modify his action. He was, however, given another hearing before Assistant Secretary of War Davis. In the latter part of 1923, Davis denied relief, and in February, 1924, the Secretary of War approved his action.
In August, 1924, the United States sent to the sureties a statement of the work done by it in completing the contract, showing the cost of completion in excess of the value of the material removed at the unit contract price to be $171,478.12, and the sureties furnished a copy thereof to the petitioner. The petitioner disagreed with the statement on many minor points, but never presented its objections to the United States. The War Department transmitted the papers to the Department of Justice in August, 1924, for*1882 the preparation of suit against the sureties on the bond, and the suit was instituted in that year. The petitioner was required to deposit $85,000 to protect the sureties. At some time between September 1, 1922, and the close of 1924, it deposited $50,000 in cash with Hutchins, Sealy & Company. In 1925 the latter demanded a further deposit of $50,000 in bonds of the petitioner, and this demand was thereafter met by a deposit of $35,000 in bonds of the petitioner which were owned by its president. The cash and bonds were delivered to the sureties with the understanding that they should belong to them if the claim of the United States amounted to $85,000. After the suit was instituted, Hammers had numerous conferences with officials of the War and Treasury Departments concerning the amount of the excess costs and also conferred with the United States Attorney at Galveston, tex., in an effort to secure a recommendation equivalent to cancellation of the contract. The United States Attorney submitted his recommendation to the Department of Justice and Hammers again conferred with the various officials in Washington to whom the recommendation had been referred, and his proposals were*1883 again rejected. He secured another recommendation from the United States Attorney and the case finally reached the Treasury Department for a compromise of the $85,000. The Bowers Company was brought in as a party to the suit so as to dispose of the entire claim on the compromise, and, in 1928, a settlement was made for $40,000, and $45,000 of the cash and bonds deposited with the sureties was returned to the petitioner.
While the negotiations for compromise of the suit were pending, Hammers prepared a bill for the relief of the Bowers Company from *509 any claim of the United States for increased costs or excess costs over the contract rates which may have accrued after May 21, 1921. The bill was introduced in the Senate by Senator Fletcher on February 9, 1927, but, after an adverse report by the War Department, the committee refused to report the bill.
Under date of December 31, 1924, an entry was made in the petitioner's journal, at the direction of its president, setting up the amount of $85,000 as "Contingent liability on Miami Bar contract," and the liability was credited on its ledger to an account "Contingent liability under Miami Bar contract." That amount was*1884 charged to profit and loss on December 31, 1924.
The petitioner deducted the liability of $85,000 in its return for 1924, and the deduction was disallowed by the respondent on the ground that the sureties on the bond were contesting the claim of the United States and their refusal to pay the amount of the bond indicated that petitioner was "not willing to recognize the Government's claim as final."
2. On March 24, 1924, the petitioner entered into a contract with the Government of the Bahama Islands for dredging the channel and turning basin at the harbor of Nassau. The work was to be completed within sixteen months, or by July 24, 1925. The contract contained a provision obligating the contractor to pay as and for liquidated damages, and not by way of penalty, the sum of 100 pounds for each and every completed week which should elapse between the date prescribed for completion and the date on which the work was actually completed, such damages to be deducted from any money due the contractor or to be recovered from the contractor as a debt. The work was not completed in 1925 or in 1926.
The Government of the Bahamas notified petitioner of the amount due it for failure*1885 to complete the work in time, but it did not withhold any payments due the petitioner or demand payment. A supplemental contract was entered into sometime after 1926.
On December 31, 1926, the petitioner charged to the Nassau contract, on its journal, liability for liquidated damages in the amount of $11,212.50 for 23 weeks of 1925, and in the amount of $25,350 for 52 weeks of 1926, computed at the rate of 100 pounds per week, credited the total of $36,562.50 to "Contingent liability - Bahama G or L," and credited the latter amount on its ledger to an account entitled "Contingent Liability Bahama Government." The liability of $11,212.50 was not claimed as a deduction in the petitioner's return for 1925, nor does it appear from the record that it was at any time claimed before the respondent.
3. By letter of May 1, 1928, the respondent notified the petitioner of deficiencies in tax and overassessments, as follows:
| Year | Deficiency in tax | Overassessment |
| 1921 | None. | |
| 1922 | None. | |
| 1923 | $2,031.63 | |
| 1924 | $18,672,27 | |
| 1925 | 3,204.90 | |
| 1926 | None. |
*510 The amended return of the Bowers Company for 1921 disclosed a net loss of $95,338.84, which the respondent*1886 reduced to $88,672.17. For 1922 the petitioner filed a return on the actual receipts and disbursements basis, covering the entire year, including the period during which the business was operated by the creditors' committee. It reported therein a net income of $21,115.40. The return bears a notation that no tax is due by reason of the loss of $95,338.84 sustained in 1921. Thereafter it filed an amended return for 1922, on the accrual basis, showing a net loss of $109,020.89, which was accepted without change by the respondent.
For the year 1923 the petitioner filed an amended return showing a net loss of $80,453,73, which was computed by deducting from gross income the net loss of $95,338.84 for the year 1921. The respondent reduced the net loss of $80,453.73 to $73,787.06, the reduction representing the difference between the net loss reported in the 1921 return and the amount of the net loss as finally determined by him.
For the year 1924 the petitioner filed a return showing a net loss of $20,242.61, which was computed by deducting from gross income the net losses of $109,020.89 for 1922 and $80,453.73 for 1923. The respondent refused to allow the deduction of the net*1887 loss of $80,453.73, on the ground that it represented the excess of the claimed net loss for 1921 over the net income reported for 1923 and the Revenue Act of 1924 did not authorize the carrying of a net loss into the fourth year, and, after making other adjustments not here in controversy, determined that the petitioner's net income was $149,378.14.
For the year 1925 the petitioner filed a return showing a net income of $114,507.62, which was computed by deducting from gross income the net loss of $20,242.61 for 1924. The respondent refused to allow the deduction, on the ground that the audit of the return for 1924 disclosed a net income, and, after making other adjustments not here in controversy, determined that the petitioner's net income was $139,160.72.
OPINION.
STERNHAGEN: 1. The petitioner claims a deduction in 1924 of $85,000 in respect of the cash and bonds which it deposited with the *511 sureties to meet the demand of the United States for reimbursement of the increased cost of performing the work contemplated by the Miami Bar contract of the Bowers Company. It is not stated upon which of the enumerated statutory provisions the claimed deduction is based, *1888 and, when we come to describe the situation in 1924, the difficulty of bringing it within the statute may explain the failure to define the claimed deduction. What happened in 1924 was not a payment, but a deposit to assure the fulfillment of one of the obligations assumed in 1922 when the petitioner took over the properties of the Bowers Company. Clearly there was no loss or expense in 1924, and no basis for a deduction in that year. The respondent is sustained.
2. The petitioner claims a deduction in 1925 said to represent the amount accrued in that year of the liquidated damages of 100 pounds a week provided for delay in performance of the Nassau dredging contract. The computation is apparently made upon the assumption of par value of the pound, although the evidence does not show the value of exchange. The evidence shows the delay, the contract for liquidated damages, that there was no demand therefor or admission of liability or accounting entry or deduction taken or claimed, and that there was some sort of a supplemental contract. In our opinion, the amount is not deductible in 1925. *1889 .
3. The respondent affirmatively pleads an error in his determination and claims pro tanto an increase in the deficiency. The gist of this claim is that, since petitioner and the Bowers Company were separate corporations, the losses of the Bowers Company may not be carried forward to affect the income of the petitioner. This is plainly true and results necessarily in the elimination of the 1921 loss of $88,672.17 from the computation of petitioner's loss or income of later years. ; ; .
But as to 1922, petitioner was in existence for four months. During that period it seems to have had a loss. Respondent recognized that loss to be $109,020.89, which he now pleads to be excessive. But the evidence does not affirmatively support his claim. It must be proven in fact, and it is not sufficient to say that since petitioner was only in existence during one-third of the year, a like proportion of the year's loss is the maximum chargeable to it. Such a mathematical apportionment*1890 may not be taken as fact; and since the burden is on respondent, the omission falls upon him. The actual loss of petitioner after September 1, 1922, may in fact have *512 been $109,020.89, and since that was determined in the notice of deficiency as petitioner's loss, it should be used in redetermining the deficiencies for 1924 and 1925.
Judgment will be entered under Rule 50.