*305 Decisions will be entered for the respondent.
Petitioners' partnership, on an accrual basis, had leases for strip mining. The leases and state law provided for refilling the surface of the land after completion of mining, and for a bond to guarantee such refilling. The mining was done in 1945, the taxable year. Near the close of the year the partnership estimated the cost (later reduced in an amended return to the actual cost) of refilling and credited the estimated amount to a reserve for refilling. The refilling was done in 1946. Held, deduction in 1945 properly denied.
*135 These cases duly consolidated involve income taxes for the calendar year 1945. Deficiency was determined in the amount of $ 12,935.95 in Docket No. 24532 and in the amount of $ 11,458.04 in Docket No. 25545. Only a portion of such amounts is involved. The only issue presented is whether the petitioners' partnership, on the accrual basis, may for 1945 deduct $ 25,210.18, an amendment of $ 31,090 credited at the end of 1945 to a Reserve for Strip Mining Bonds to record*306 expense in replacement of surface for "backfilling" land from which they strip-mined coal in 1945, though the backfilling was not done until 1946. We make the following findings of fact.
FINDINGS OF FACT.
The petitioner Paul Harrold is a resident of Fairmont, West Virginia. He filed his Federal income tax return for the year 1945 with the collector of internal revenue for the district of West Virginia. The petitioner John H. Cromling is a resident of Monongahela, Pennsylvania. He filed his Federal income tax return for the year 1945 with the collector of internal revenue for the twenty-third district of Pennsylvania.
During the taxable year 1945 and prior thereto the petitioners were equal partners, doing business under the firm name of Cromling & Harrold, and engaged in the mining of bituminous coal from lands by the strip mining method. The partnership at all times material kept its books and filed its Federal income tax returns on the accrual basis. Strip mining is a process of mining, whereby the soil or overburden is removed so that the coal can be mined with shovels.
In 1945 the partnership mined coal by the strip mining method from 31.09 acres of land in West Virginia*307 held by it under five leases and contracts.
These leases and contracts required the partnership to conduct the mining operations in a workmanlike manner and in conformity with the laws of the State of West Virginia, and of the United States, and to restore and replace the surface in compliance with provisions of pertinent laws of West Virginia.
Before starting mining operations on the leased lands, the partnership obtained strip mining permits required by the State of West Virginia, and posted bonds with the State to insure faithful performance of its statutory obligation to refill the lands.
*136 The partnership was required to put the soil back not only the way the State wanted it, but also the way the lessor-farmers wanted it. It was necessary to fertilize and replant the land with grass, shurbs, or clover before the Department of Mines of West Virginia would release the bonds.
At the end of 1945, the partnership estimated the cost of backfilling the 31.09 acres to be $ 31,090, computed at the rate of $ 1,000 an acre, the cost of backfilling other lands.
The entry recorded the liability incurred in 1945 in connection with the operations during 1945, and was in accord with*308 sound accounting practices. The entry reads:
| Dec. 1945 | ||
| $ 31,090.00 | Expense, Hartly, Righter etc; | |
| $ 31,090.00 | Depletion-Strip Mining Bonds to Credit Reserve | |
| for Strip Mining Bonds, Hartly etc; | $ 31,090.00 | |
| To record expense accrued in replacement of | ||
| surface (backfilling) in accordance with | ||
| stripping permits as follows: | Acres | |
| Permit No. 507 Walter Cottrill | 2 | |
| Permit No. 970 Baker Righter | 3.86 | |
| Permit No. 600 Fletcher E. E. Righter | 15.5 | |
| Permit No. 911 Mae Seese | 2.73 | |
| Permit No. 388 Hartley, Haun | 7 | |
| Total | 31.09 | |
| 31.09 acres at $ 1,000.00 per acre | ||
| estimated cost. |
The backfilling of the lands in question was not done in 1945 because the partnership was busy getting out coal, and was using all of its equipment stripping the coal and loading it. The partnership in 1945 admitted its obligation to backfill the lands.
The process of backfilling was commenced in the spring of 1946, when the weather became favorable and was completed during 1946 at a cost of $ 25,210.18. In 1946 the partnership obtained releases from the State of West Virginia upon completion of the backfilling.
Upon ascertaining the actual*309 cost of complying with its liability to backfill the 31.09 acres, the partnership reduced the accrual by an entry reading as follows:
| December 1946 | ||
| $ 5,879.82 | Reserve for Restoration of Soil Profit and Loss | |
| (Surplus) | $ 5,879.82 | |
| To adjust the Reserve for Restoration at 12/31/45 to | ||
| actual cost thereof expended during 1946. | ||
| Reserved | 31,090.00 | |
| Actual Cost | 25,210.18 | |
| $ 5,879.82 |
*137 None of the strip mining permits expired prior to the end of the year 1946, which was one year after the date of the completion of the stripping operations.
Permit No. 507 expired on April 1, 1947, and permit No. 600, which covered fifteen and one-half acres, approximately one-half of the entire Righter Tract, did not expire until December 31, 1947.
Strip mining operations were conducted by the partnership during the last few months of 1944 and during the entire year 1945.
As of the end of the year 1944, the partnership had not backfilled any of the Righter Tract.
During the year 1945, the partnership expended the sum of $ 916.41 for work performed within the year 1945 backfilling a small portion of the Righter Tract.
Other than the above-mentioned backfilling work*310 which cost the partnership $ 916.41, the partnership did not perform or contract for the performance of any restoration work on the Righter Tract during or within the taxable year 1945.
To do the restoration work, the partnership, in addition to utilizing its own machinery and employees, hired the machinery and employees of independent contractors.
The partnership had no liability to pay the above-mentioned independent contractors any amounts of money as of the close of its taxable year 1945.
The Department of Mines of the State of West Virginia made no demands upon the partnership to backfill the Righter Tract during the taxable year 1945.
The backfilling work was completed in the year 1946. In July and August 1946 the Department of Mines of the State of West Virginia issued "Releases of Surety Bonds" to the partnership.
On January 6, 1947, petitioners filed an amended partnership return for the taxable year 1945 and reduced the estimated deduction of $ 31,090 claimed on the original return to the actual cost of restoring the Righter Tract of $ 25,210.18.
At the end of 1945 all that the partners knew was that at sometime in the future, possibly sometime after the permits expired, *311 the partnership would have to start backfilling the lands or lose on its surety bond.
At the end of 1945 the partnership had only a contingent liability for the cost of backfilling the land.
OPINION.
The petitioners, who were on the accrual basis of accounting, argue in substance that in order correctly to reflect true income they could and should deduct in 1945 the estimated cost of *138 "backfilling" the strip-mined land, which in December 1945 was entered, in the amount of $ 31,090 (later by amended return reduced to $ 25,210.18), on the books as:
| Depletion-Strip Mining Bonds to Credit Reserve for Strip Mining | |
| Bonds * * * | $ 31,090.00 |
| To record expense accrued in replacement of surface (backfilling) | |
| in accordance with stripping permits * * * |
This was, they argue, in accord with sound accounting, and the partnership was under contractual and statutory liability, during 1945 when mining, to backfill or replace the surface of the property mined, and had executed bond to the State to guarantee performance. The respondent argues that the partnership is not entitled to match income earned and reserved in 1945 against expenses incurred and paid in 1946; that the provisions*312 of the Internal Revenue law do not necessarily give the same result as what the accounting profession terms good accounting theory, which requires setting up reserves for all liabilities, however contingent, whereas the Internal Revenue Code, with certain exceptions, does not permit deductions for creation or addition to reserve accounts; that (except for $ 916.41 for backfilling claimed by petitioners for 1944, though done in 1945) no cost for backfilling was incurred in 1945; 1 that income tax law is based upon annual periods of computation; that though admittedly the partnership had an obligation during 1945 to backfill the land, it had the same obligation in 1944 by virtue of the leases and contracts fixing the obligations of the parties; that the reserve involved was first set up in 1944 and no consistent method was used in computing additions to it, and that an obligation to incur a liability may not be accrued, and accrual is not proper until all facts giving rise to liability become fixed.
*313 Both parties cite cases to support their respective positions, all of which need not be noted here, though all have been studied. Many are distinguishable from the instant matter. After careful examination of this question, we consider it clear that the petitioner is not entitled to deduct for 1945 the reserve set up in that year. The petitioners' argument for good accounting practice and reliance upon , is met by , which distinguishes the Anderson case by pointing out that it involved munitions taxes confessedly accrued and a charge on the business of 1916, the year for which deduction was allowed, and says:
*139 The prudent business man often sets up reserves to cover contingent liabilities. But they are not allowable as deductions. * * *
In our opinion, the matter is controlled by , certiorari denied, ; , affd., *314 ; ; . They stand for the proposition that a general obligation, such as to renovate, or restore property, is not such liability as to be basis for deducting a reserve based upon an estimate of the future cost of such work. In , the Court said, speaking of the estimated future cost of work which had not been performed in the taxable year:
* * * The only thing which had accrued was the obligation to do the work which might result in the estimated indebtedness after the work was performed.
The accrual of such estimate was denied, the Court further stating:
It is well settled that deductions may only be taken for the year in which the taxpayer's liability to pay becomes definite and certain, even though the transactions (such as the contract in the present case) which occasioned the liability, may have taken place in an earlier year. * * * [Citations] Here the work for which the deduction is sought was unperformed and its cost was, as we have*315 already indicated, no more than a fair estimate. Such a deduction as the taxpayer seeks had not accrued "during the taxable year" * * *.
The Court distinguishes the Anderson case, supra, as one of estimated tax liability where all events determining liability had occurred. In , the Court says the point is the same as in , and holds that though the obligation to pay the cost of "handling out" (paying cost of removal of goods from a warehouse) had become final during the taxable years in the sense that it was not a contingent liability, nevertheless the amount of the liability or cost of handling out was not definite or fixed and could not be deducted. In , the situation was very similar to the one here involved. Property was leased for the purpose of excavating sand and gravel deposits. A city ordinance required a permit and bond to cover cost of refilling the proposed excavation. It was held that a credit to a reserve for refilling the *316 sand pit, set up prior to such refilling, could not be deducted, the petitioner not having "incurred any liability in the taxable years for the payment of amounts to refill the sand pit." See also ; .
We conclude and hold that the Commissioner did not err in disallowing deduction of the $ 25,210.18.
Decisions will be entered for the respondent.
Footnotes
1. Though the respondent concedes the $ 916.41 to be a proper deduction for 1945, the petitioners do not ask for it, but asked for and obtained deduction in 1944. That year is not before us. We therefore make no further reference to the $ 916.41.↩