*983 This proceeding was originally brought to redetermine deficiencies in the income and profits taxes of the Summit Coal Co., a corporation, for the years 1920 and 1921 in the sums of $9,101.08 and $21,436.13, respectively. The sole issue is whether or not the respondent erred in failing to deduct from the petitioner's income for the year 1921 the sum of $91,867.49 designated "deposits on coal contract forfeited." The petitioner asserts that the said sum was in the *984 nature of loans or advances and was not properly a part of its income derived from the production of coal. The facts were stipulated.
FINDINGS OF FACT.
The taxpayer is a corporation organized under the laws of the State of West Virginia, having its principal office at Metalton, Raleigh County, W. Va., and engaged in the business of coal mining. During the year 1921 petitioner kept its books of account reflecting its income under the accrual basis.
Under date of August 2, 1920, petitioner entered into a contract with the Raleigh Smokeless Fuel Co. (hereinafter called*2556 "Raleigh") and the Matlack Coal & Iron Co. (hereinafter called "Matlack"), whereby it should sell to Matlack through Raleigh as agent 150,000 tons of coal, and was to receive advances from these companies in the total of $150,000 of which $100,000 was to be advanced by Matlack and $50,000 was to be advanced by Raleigh.
The sums so advanced were to be applied by petitioner to the liquidation of its outstanding indebtedness and the remainder to the immediate development and enlargement of its mine and the purchase and construction of additional mining machinery and facilities, in order that petitioner's output should be quickly increased and the 150,000 tons of coal, called for by the contract, be produced and delivered as rapidly as possible.
The contract price of the coal was $5.50 per net ton, and monthly settlements were to be made therefor. From the selling price of the coal, the $150,000 advanced to petitioner as aforesaid, was to be repaid by it at the rate of $1 per ton, of which 66 2/3 cents per ton was to be applied to the repayment of the money advanced by Matlack and 33 1/3 cents per ton was to be applied to the money advanced by Raleigh.
Petitioner executed its*2557 nonnegotiable and nonassignable notes for the money advanced, made payable on October 1, 1922, by which time it was contemplated that the 150,000 tons of coal would have been produced and the advances thus repaid by the credit of $1 per ton. The contract further provided that if the tonnage called for was not produced and delivered by August 1, 1922, the time should be extended until the full amount had been paid, provided that such extension should not exceed six months after August 1, 1922.
Both Raleigh and Matlack carried out the agreement as to the advances to be made to petitioner, and petitioner received in full the sum of $150,000, $50,000 thereof being paid in cash on August 2, 1920, and the balance being paid in installments from September, 1920, to March 31, 1921. The petitioner in accordance with the terms of the agreement expended the sums thus received in the *985 liquidation of its then outstanding indebtedness and in the development of its mining properties. The advances made by these companies were not included in gross income, but were carried on petitioner's books in accounts called "Raleigh Loan Account" and "Matlack Loan Account." As credits against*2558 the advances thus received by petitioner, were shown the coal shipments at $1 per ton divided as aforesaid.
Early in 1921 petitioner was advised that, because of the condition of the coal market, Raleigh and Matlack could receive no further shipments of coal at that time as they could not dispose of the same, and the continuance of shipments would result in the accrual of demurrage against them and the confisaction of shipments therefor. There immediately began hurried negotiations among the parties as to the cessation of shipments and the extension of time for performance of the contract. Under date of February 17, 1921, petitioner, by writing, advised the parties that it would cease shipments of coal under the contract, temporarily, and would extend the time of completion of the contract "beyond six months after August 21, 1922, for such time as shipment is suspended, at your request, and for such equitable time thereafter as may be necessary to reestablish the mine organization and get the output up to normal."
As of March 31, 1921, when the last payments on this $150,000 were received by petitioner, its books disclosed substantial amounts to the credit of Raleigh and Matlack, *2559 representing the unrepaid balances of the cash advanced by them to petitioner under the contract, which credits totaled $91,867.49. Petitioner's books were kept by an accountant residing in Huntington, W. Va., who, as of March 31, 1921, entered these credit balances into "Profit and Loss" account, with the result that this sum of $91,867.49 was included in petitioner's income for the year 1921 as "deposits on coal contracts forfeited," and was so included in Schedule A-10 of the income-tax return filed by petitioner for the year 1921.
During the following two years only desultory coal shipments were taken by Raleigh and Matlack and, as the coal market had not improved, it seemed apparent that the contract would not be performed within a reasonable time and, as the extension of time granted by petitioner in its letter of February 17, 1921, had expired and petitioner had not been notified to resume shipments, action was taken to cancel the contract and to determine the damage resulting from the nonperformance thereof.
On July 17, 1923, action was brought by petitioner in the Circuit Court of Raleigh County, West Virginia, asking for the recovery of damages (based upon the anticipated*2560 profits) caused it by the defendants' *986 failure to take the tonnage called for by the contract of August 2, 1920. At about the same time action was brought by Raleigh against petitioner for the recovery of the unrepaid balance of the cash advanced to petitioner by Raleigh under the contract, Raleigh maintaining that it acted merely as an agent for Matlack and was not, therefore, liable for Matlack's failure to comply with the contract and was entitled to the recovery of the balance of the advances made by it as aforesaid. These actions subsequently went to trial, Raleigh recovering a judgment for the amount of its unrepaid balances, and petitioner being denied recovery for anticipated profits. An appeal was taken to the Supreme Court of Appeals of West Virginia, which, on April 21, 1925, reaffirmed the judgment of the trial court. A petition for rehearing was refused on June 10, 1925, and the mandate of the Supreme Court was certified on June 15, 1925, thus putting an end to the litigation arising out of this contract.
Shortly after this final determination of the rights of the parties, petitioner, on July 30, 1925, repaid to Raleigh the balance due it of the advances*2561 made by it to petitioner, amounting to $39,472.49, which sum included the $3,949.11 transferred to profit and loss as of March 31, 1921 (as more fully set forth in Exhibit B). At the same time Matlack relinquished its claim to the unrefunded part of the advances made by it to petitioner, amounting to said $87,898.23, in consideration of the cancellation of the contract, by which it was still bound for the purchase of a large amount of coal.
Exhibit B, mentioned above, is as follows:
| MATLACK COAL & IRON CORPORATION | ||
| LOAN ACCOUNT | ||
| 1920 | ||
| Aug. 19. Cash, CB-187 | $33,333.34 | |
| Sept. 4. Cash, 190 | 10,000.00 | |
| Sept. 30. Cash, 193 | 10,000.00 | |
| Oct. 14. Cash, 194 | 10,000.00 | |
| Dec. 6. Cash, 206 | 10,000.00 | |
| Dec. 30. Cash, 206 | 10,000.00 | |
| Dec. 31. $1 per ton retained, J-208 | $10,055.87 | |
| 1921 | ||
| Jan. 31. $1 per ton retained, 216 | 1,433.15 | |
| Feb. 28. Cash, 216 | 10,000.00 | |
| Feb. 28. $1 per ton retained, 216 | 2,041.05 | |
| Mar. 31. Cash, 218 | 6,666.66 | |
| Mar. 31. $1 per ton retained, 221 | 4,622.58 | |
| Subtotals | 18,152.65 | 100,000.00 |
| Mar. 31. One-third of $1 per ton retained charged to Raleigh, J-221 | 6,050.88 | |
| Mar. 31. Balance credited to profit and loss, 221 | 87,898.23 | |
| 106,050.88 | 106,050.88 |
| RALEIGH SMOKELESS FUEL COMPANY | ||
| LOAN ACCOUNT | ||
| 1920 | ||
| Aug. 19. Cash | $16,666.67 | |
| Sept. 4. Cash | 5,000.67 | |
| Oct. 14. Cash | 5,005.00 | |
| Nov. 30. Cash | 5,008.17 | |
| Dec. 7. Cash | 5,005.00 | |
| Dec. 31. Balance | $36,685.51 | |
| 36,685.51 | 36,685.51 | |
| 1920 | ||
| Dec. 31. Balance | 36,685.51 | |
| Dec. 31. Cash | 5,008.33 | |
| Dec. 31. Interest | 27.18 | |
| 1921 | ||
| Feb. 28. Cash | 5,000.00 | |
| Feb. 2. Cash | 3,333.33 | |
| Feb. 28. Balance | 49,999.99 | |
| 50,027.17 | 50,027.17 | |
| Feb. 28. Balance | 49,999.99 | |
| Mar. 31. One-third of $1 on coal shipped | 6,050.88 | |
| Mar. 31. Charged off to profit and loss | 3,949.11 | |
| June 30. Balance | 40,000.00 | |
| 49,999.99 | 49,999.99 | |
| June 30. Balance | 40,000.00 | |
| June 30. Interest, Mar. 1, 1921-June 30, 1921 | 666.67 | |
| Sept. 30. Interest, June 30, 1921-Sept. 10, 1921 | 534.84 | |
| Oct. 30. Interest, Sept. 10, 1921-Oct. 26, 1921 | 305.36 | |
| Dec. 31. Interest, Oct. 26, 1921-Dec. 31, 1921 | 415.33 | |
| June 30. $0.20 on 2935.67 tons, cash | 587.19 | |
| Sept. 30. Cash | 784.52 | |
| Oct. 31. $0.20 on 8647.68 tons, June, July, and August, cash | 1,729.54 | |
| Dec. 31. Adjustment of interest credit | 67.76 | |
| Dec. 31. Balance | 38,753.19 | |
| 41,922.20 | 41,922.20 | |
| 1922 | ||
| Jan. 1. Balance | 38,753.19 |
*2563 *987 OPINION.
VAN FOSSAN: The only issue presented for our consideration in this case is whether or not the sum of $91,867.49 charged to profit and loss on the petitioner's books on March 31, 1921, and included in the petitioner's return of income for the year 1921 as "deposits on coal contracts forfeited" was a proper element of income. (The said sum of $91,867.49 differs by $20.15 from the sum of the entries of $87,898.23 and $3,949.11 appearing in the exhibits filed with the stipulation of facts.) The said $91,867.49 represents balances *988 due to the Matlack Coal & Iron Co. and the Raleigh Smokeless Fuel Co. (called Matlack and Raleigh, respectively, in the findings of fact), after having credited against the $150,000 advanced to the petitioner by Matlack and Raleigh the sum of $1 for each ton of coal produced under and pursuant to the terms of the contract of August 2, 1920.
The petitioner claims that the action of its accountant in charging the above sum to profit and loss was erroneous and urges that when the entire situation is considered no income accrued except the amounts credited at the rate of $1 for each ton of coal delivered.
*2564 We have held that bookkeeping entries are evidentiary and not conclusive and that we may disregard erroneous and improper entries in order to determine the true income of the petitioner. ; ; ; ; .
A careful study of the contract of August 2, 1920, and of the actions of the parties under that contract leads us to the conclusion that the entries so made by the accountant were, in fact, improper. As provided by the contract, Matlack and Raleigh advanced to the petitioner the sum of $150,000 from August 19, 1920, to March 31, 1921, inclusive. Notes were given to evidence the indebtedness. It appears clear to us that the advances so made were in the nature of loans to be repaid by the deduction from subsequent payments of $1 for each ton of coal delivered to Matlack and Raleigh. These advances became income to petitioner only as and when recoupment was made from deliveries. Nor did the unrecouped balance on hand when the contract*2565 was breached automatically become income.
The actions brought in the Circuit Court of Raleigh County, West Virginia, in 1923 resulted in the recovery by Raleigh of a judgment for the amount of its unpaid balance, which justment was affirmed by the Supreme Court of the State on June 15, 1925. Thereupon, petitioner repaid to Raleigh $39,472.49, which amount included the sum of $3,949.11 previously transferred to profit and loss on March 3, 1921. Obviously, the erroneous entry in petitioner's books in 1921 did not make this sum income. In fact, by the determination of the court and the subsequent repayment by petitioner it was established that this amount never was income to the petitioner.
Matlack, being still bound under the contract for the purchase of a large amount of coal, from which obligation it desired to be released, in 1925 entered into an agreement with petitioner under which petitioner, in consideration of releasing its claim against Matlack, retained the unrecouped balance in its hands amounting to $87,898.23. This settlement constituted a total departure from the previously obtaining situation and created new rights. Whether the sum of *989 $87,898.23, *2566 which Matlack agreed petitioner should retain (apparently as liquidated damages), became income to petitioner in 1925 we need not decide. Certain it is that it was not income in 1920 or 1921. On March 31, 1921, the date of the erroneous entry, the rights of the parties were still undetermined. The settlement had not been made. It was not until the final adjustment and determination of July 30, 1925, that petitioner's right to retain this sum was fixed. Until that date it occupied the status of a loan to the repayment of which petitioner was obligated.
We are of the opinion, therefore, that the sum of $91,867.49 erroneously charged to profit and loss on petitioner's books on March 31, 1921, did not constitute income to petitioner for that or the preceding year.
Decision will be entered under Rule 50.