*22 Decision will be entered under Rule 50.
1. Monies due under settlement agreements made in 1945 compromising claims growing out of alleged patent infringement, none of which were paid to petitioner in that year but which were then largely deposited in court in litigation affecting their disposition, held, not accruable as income for 1945.
2. Attorneys' fees for services rendered in 1945 and other years but not determined in amount and billed until 1946, held, not deductible by an accrual taxpayer for 1945.
*916 The Commissioner determined the following deficiencies in petitioner's tax liability for the year ended December 31, 1945:
| Tax | Amount |
| Income | $69,850.36 |
| Declared value excess-profits | 1,256,561.95 |
| Excess Profits | 5,886,384.34 |
| Total | $ 7,212,796.65 |
By amended answer, the Commissioner claimed an increase in the deficiencies in declared value excess-profits and excess profits taxes, asserting each*23 to be respectively $ 1,388,561.95 and $ 6,511,344.34. In reply, petitioner denied liability for the increased amounts.
On petitioner's motion for severance of issues, the trial was confined to the following questions: (1) Whether the settlement of certain patent infringement claims in 1945 resulted in accruable income for that year. (2) Whether, assuming that the first question is answered in the affirmative, such income was attributable to petitioner. (3) Whether petitioner was entitled to accrue as deductions in 1945 certain attorneys' fees in the aggregate amount of $ 125,000. By reason of the conclusion reached herein as to the first question, it becomes unnecessary to consider or to make findings of fact with respect to the second question.
FINDINGS OF FACT.
The parties have stipulated some of the facts; such facts are hereby found and incorporated herein by reference.
*917 I
Petitioner, The Cold Metal Process Company, an Ohio corporation, was incorporated in 1926 with an authorized capital stock of 2,000 shares. Its initial shareholders and their holdings were as follows:
| Shareholder | No. of Shares |
| Abram P. Steckel | 600 |
| Howard S. Lamb | 200 |
| Venice J. Lamb | 600 |
| Leon A. Beeghly | 520 |
| W. E. Bliss | 40 |
| W. H. Kilcawley | 40 |
*24 At all times material petitioner kept its books and filed its returns on the accrual basis of accounting. For 1945 it filed its returns with the collector of internal revenue for the eighteenth district of Ohio.
Petitioner was organized for the purpose of owning, developing, and exploiting certain inventions relating to the hot and cold rolling of metals, and employing these inventions in the manufacture and rolling of iron and steel.
On December 28, 1940, Leon A. Beeghly (referred to hereinafter as "Beeghly"), one of the shareholders of petitioner, created a so-called charitable trust (referred to hereinafter as "the Trust"), and transferred 150 shares of stock in petitioner to the Union National Bank of Youngstown, Ohio, as trustee (referred to hereinafter as "the Trustee"), in accordance with an agreement entered into between Beeghly and the bank. On December 30, 1944, Beeghly made a further gift to the Trust of one additional share of stock in petitioner.
In 1927 Abram P. Steckel (hereinafter referred to as "Steckel"), one of the shareholders, assigned to petitioner his entire interest in certain inventions covered by a pending patent application. Pursuant to this application, *25 United States Patent No. 1,744,016 (hereinafter referred to as "patent '016") was granted to petitioner on January 14, 1930, and United States Patent No. 1,779,195 (hereinafter referred to as "patent '195") was issued on a divisional application on October 21, 1930. These patents covered a method and apparatus for cold rolling of sheet-like metals at high speeds, wherein relatively small work rolls, with larger backing rolls having anti-friction bearings, were employed.
The processes covered by patents '016 and '195 gained wide usage in the metal industry, and beginning in 1928 petitioner granted nonexclusive licenses to certain manufacturers to employ the inventions covered by these patents. Numerous other manufacturers, not licensed by petitioner, installed rolling mills which petitioner claimed embodied its inventions and infringed its patents; as a result, petitioner *918 brought numerous suits for infringement against large steel producing companies.
One of the first of these infringement suits was brought in 1934, in the United States District Court for New Jersey, against United States Steel Corporation and one of its subsidiaries, Carnegie-Illinois Steel Corporation*26 (referred to hereinafter as the "Carnegie-Illinois suit"). After extended litigation, the Court of Appeals for the Third Circuit held both patents '016 and '195 to be valid and infringed, Cold Metal Process Co. v. Carnegie-Illinois Steel Corp., 108 F. 2d 322 (1939), and the Supreme Court of the United States denied a petition for certiorari and a petition for rehearing, Carnegie-Illinois Steel Corp. v. Cold Metal Process Co., 309 U.S. 665">309 U.S. 665, 697 (1940). Thereafter, the Court of Appeals granted a petition by defendants for rehearing, but before the rehearing could be had, petitioner and Carnegie-Illinois entered into a settlement agreement on August 30, 1940, under which the latter agreed to pay $ 3,850,000 for past infringement and petitioner granted to Carnegie-Illinois and all other subsidiaries of United States Steel Corporation, on a royalty basis, an unlimited, nonexclusive license under patents '016 and '195 and two other patents owned by petitioner. Carnegie-Illinois paid the amount thus agreed upon to petitioner in two equal installments in 1940 and 1941.
On July 27, 1943, the United States started a suit*27 (hereinafter referred to as the "cancellation suit") in the United States District Court for the Northern District of Ohio, Eastern Division, against petitioner and Steckel as defendants. In its complaint, the United States alleged that patents '016 and '195 had been procured from the Patent Office through fraudulent misrepresentation or mutual mistake of fact. It was asserted that the suit was brought because of the public interest, and because the United States was paying large sums of money, through suppliers of war materiel, as royalties on these patents. The United States requested the following relief: (1) cancellation entirely and ab initio of patents '016 and '195; (2) if the patents were not cancelled completely, then cancellation of certain specified claims which were important to the Steckel inventions; (3) such other relief to which the United States might be entitled. The defendants filed an answer denying all charges of the complaint.
On April 6, 1944, the United States moved in the cancellation suit for a temporary injunction to prevent receipt by petitioner of monies due or paid in connection with these patents pending decision of the suit, and to have these*28 monies paid into court. In support of the motion, the Government alleged, inter alia, that petitioner would receive various monies and promptly distribute them; that persons paying those monies might be unable to assert the fraud practiced in procuring the patents; that if the Government should prevail in the suit, the United States and the people thereof would be irreparably *919 damaged if these monies continued to be paid to petitioner. Over petitioner's vigorous opposition, the District Court granted the motion as prayed for (and filed an opinion reported at 57 F. Supp. 317">57 F. Supp. 317), and on October 10, 1944, entered an interlocutory order (hereinafter referred to as the "impounding order") which enjoined petitioner, its representatives and agents, from the following until entry by it of final judgment in the suit: (1) receiving any further monies by way of royalties, payments in settlement of claims, satisfactions of judgments for damages, or otherwise, on account of patents '016 and '195; (2) taking any steps for the collection of payments under these patents or under contracts or judgments relating to them, except that petitioner was permitted to*29 reduce claims to judgment or to settle them, and to direct monies due thereunder to be deposited with the Clerk of the Court; (3) making further distribution to its stockholders of monies received on account of these patents, whether in settlement of claims or satisfaction of judgments or otherwise; (4) transferring in any manner whatsoever patents '016 and '195.
The cancellation suit was tried in the District Court during November and December 1944 and January 1945. On August 13, 1945, the court filed findings of fact, conclusions of law and memorandum (reported at 62 F. Supp. 127">62 F. Supp. 127), pursuant to which final judgment was entered for petitioner on September 20, 1945, as to all matters in issue, and the complaint was dismissed in its entirety. The court found the facts essentially as petitioner asserted them, and concluded that there had been no mutual mistake of fact and that no fraud had been practiced upon the Patent Office in the procurement of the patents.
The Government appealed from this judgment, and on October 1, 1945, it moved the District Court for restoration of the impounding order. Over petitioner's resistance, the motion was granted, by an*30 order entered October 8, 1945, "pending the determination of this action by the Circuit Court of Appeals, all subject to any further or other order of said Circuit Court of Appeals."
At the time the Carnegie-Illinois suit was brought, petitioner had been asserting claims against other steel manufacturers for infringement of patents '016 and '195. Both before and after the conclusion of the Carnegie-Illinois suit, petitioner made efforts to negotiate license agreements and agreements for settlement of infringement claims with various other steel companies which were claimed to be infringing petitioner's patents. Several such agreements were made, but when certain claimed infringers refused to take licenses under petitioner's patents, suits were brought during 1942 and 1943 against a number of steel companies. The matter of settlement of these suits was the subject of consideration between petitioner and some of these steel companies at least as early as the middle of 1944, and negotiations continued through December 1945.
*920 On December 28, 1945, final agreements were reached with six steel companies, whereby they agreed to pay an aggregate of $ 9,000,000 for past infringement*31 as follows:
| American Rolling Mill Co | $ 2,407,500 |
| Bethlehem Steel Co | 2,132,100 |
| Crown Cork & Seal Co | 200,700 |
| Jones & Laughlin Steel Corporation | 1,380,600 |
| Wheeling Steel Corporation | 1,643,400 |
| Youngstown Sheet and Tube Co | 1,235,700 |
| Total | $ 9,000,000 |
The agreements were substantially identical, except for amounts and the names of the companies, and in each agreement the particular company involved undertook to pay the amount applicable to it to the clerk of the District Court of the United States for the Northern District of Ohio, pursuant to the impounding order which was then in effect in the cancellation suit. All six agreements were signed by the steel companies on December 28, 1945, and by petitioner and the Trustee on December 29, 1945. 1 They were all dated December 29, 1945. Pursuant to their settlement agreements, the six companies in fact paid $ 9,000,000 to the clerk of the District Court on December 29, 1945. These were the first funds paid into court under the impounding order.
*32 On December 31, 1945, a settlement agreement on substantially identical terms was reached with Inland Steel Company, whereby the latter undertook to pay $ 600,000 for release of infringement claims against it. The agreement was signed on that day by Inland, petitioner, and the Trustee; and on the same day, Inland paid $ 600,000 to the clerk of the District Court in accordance with the impounding order.
The $ 9,000,000 paid on December 29, 1945, and the $ 600,000 similarly paid on December 31, 1945, were continuously retained in the registry of the District Court pursuant to the impounding order until July 26, 1948.
Settlements were also reached during December 1945 with two other steel companies against whom petitioner was asserting infringement *921 claims, Allegheny Ludlum Steel Corporation and its subsidiary, Wallingford Steel Company. In settlement of these claims, Allegheny agreed to pay $ 700,000 and Wallingford agreed to pay $ 300,000. These settlement sums were not paid at that time, the settlement agreements providing that they were to be paid either to the clerk of the District Court or to the Trustee upon modification or revocation of the impounding order. This*33 aggregate settlement amount of $ 1,000,000 was paid into the District Court on July 9, 1947, in another suit later brought by the United States, described more fully hereinafter.
The settlement agreements signed by the six steel companies on December 28, 1945, and the agreement with Inland, contained the following provision.
In consideration of the releases and licenses granted and covenants made by Cold Metal and the Trustee herein, the Manufacturer hereby agrees that the payment made by it to the Clerk of the Court * * * is and shall be unconditional and the Manufacturer hereby waives all claim to the return of the sum so paid or any part thereof under any condition whatsoever.
The Allegheny and Wallingford agreements provided that if the settlement amounts should be paid to the clerk of the District Court, and
if the said Clerk should for any reason be ordered by an appropriate Court to return to Allegheny [or Wallingford] all or any part thereof, Allegheny [or Wallingford] agrees that the same may be paid to the Trustee and hereby irrevocably assigns the same to the Trustee, it being the intent of the parties hereto, insofar as any moneys payable hereunder are concerned, to*34 settle all issues between the parties as to all patents referred to in Article I hereof.
Requirement of such waivers by the steel companies was a term imposed by petitioner, and agreed to by the steel companies, from the beginning of the negotiations which culminated in the settlements made in December of 1945.
By an agreement dated March 19, 1946, infringement claims against Signode Steel Strapping Company were settled for $ 39,000 on terms substantially identical with those of the agreements signed by the six steel companies on December 28, 1945. Another settlement agreement dated September 30, 1946, released Crucible Steel Company of America from infringement claims for a payment of $ 110,000. Both Signode Steel and Crucible Steel paid their entire settlement amounts into the District Court in 1946 in the cancellation suit.
On December 12, 1947, the judgment of the District Court in the cancellation suit was unanimously affirmed by the Court of Appeals for the Sixth Circuit. United States v. Cold Metal Process Co., 164 F. 2d 754. On January 8, 1948, the Government filed a motion with the Court of Appeals to stay its mandate in that suit pending*35 application by the Government to the Supreme Court for a writ of certiorari. *922 Petitioner, in addition to opposing this motion, moved to have the impounding order vacated or modified so as to permit withdrawal of the impounded funds, and in that connection expressly relied upon the provisions of the settlement agreements with the steel companies whereby they had undertaken to part unconditionally with the amounts paid into the registry of the District Court. In opposing modification of the impounding order the United States argued, inter alia, that there could be no recovery of the impounded funds by petitioner or the Trustee if the United States were ultimately successful in the cancellation suit, notwithstanding the provisions in the agreements relied upon by petitioner, and also that such funds were subject to the Royalty Adjustment Act and orders of the Royalty Adjustment Board previously made thereunder. The Court of Appeals denied petitioner's motion, and granted the motion to stay its mandate. A petition for certiorari which followed was denied on May 3, 1948 (334 U.S. 811">334 U.S. 811), and a petition for rehearing was thereafter denied on June 1, 1948 (334 U.S. 835">334 U.S. 835).*36
Petitioner then moved the District Court on June 2, 1948, to have the impounding order vacated and to be permitted to withdraw the impounded funds. This motion was resisted by the United States. On June 16, 1948, the District Court entered an order in the cancellation suit granting the motion, but directing that release of the impounded funds be not made prior to June 25, 1948.
In August and September 1943, notices were issued to petitioner and certain of its licensees by the War Department, the Navy Department, the Treasury Department, the Maritime Commission, the Defense Plant Corporation, and the Metals Reserve Company, under the Royalty Adjustment Act (Public Law 768, 77th Cong., 2d Sess., 35 U. S. C. secs. 89-96). The notices stated that royalties being paid directly or indirectly by the United States on account of license agreements between petitioner and its licensees, including licensees under patents '016 and '195, were believed to be unreasonable or excessive; that an order would thereafter be issued fixing fair and just rates or amounts of royalties which the licensees would be authorized to pay; and that, after the effective date of*37 the notices, the licensees were prohibited from paying to petitioner, or charging directly or indirectly to the United States, a royalty in excess of that to be fixed in the order, and that until the making of such order no royalties should be paid on account of any disposition for the United States.
Such an order was issued on December 29, 1944, by "The Cold Metal Process Company Joint Board." The order fixed at zero the royalties payable to petitioner by its licensees other than McLouth Steel Corporation, and provided that it applied to all royalties charged or chargeable directly or indirectly to the United States for metal deliveries *923 (1) made after the effective dates of the notices, or (2) made prior to those effective dates but on which the royalties had not been paid prior to those dates. The licensees were directed to deposit in the United States Treasury all royalties payable in excess of the amounts so authorized to be paid.
The royalty notices and the order were issued to petitioner and to some 29 licensees which included American Rolling Mill, Allegheny, Wallingford, Inland, and Youngstown Sheet and Tube. Not included among the notified licensees were Bethlehem, *38 Crown Cork & Seal, Jones & Laughlin, and Wheeling.
On March 3, 1947, the United States started another suit in the District Court for the Northern District of Ohio, Eastern Division. The defendants were petitioner, the Trustee, and twenty-five licensees under patents including '016 and '195, and the suit was entitled United States of America v. Thomas Steel Corporation, et al. (referred to hereinafter as the "Thomas Steel royalty suit"). Included among the defendants were the above-named licensees to which the royalty notices and order had been issued; not included were the above steel companies to which the royalty notices and order had not been issued. The complaint alleged that the defendants had failed to comply with the Royalty Ajustment Act and the order issued thereunder, and had failed to deposit monies with the Treasury as required by that order. The court was asked to direct pendente lite that the licensee-defendants pay into the court all such monies then due or owing to the United States, petitioner or the Trustee, and to adjudicate the rights of the parties to such monies and order distribution of the monies accordingly. It was in this suit that Allegheny and*39 Wallingford, on July 9, 1947, paid the total amount of $ 1,000,000 into the court.
On June 25, 1947, the War, Navy, and Treasury Departments, the Maritime Commission, and the Reconstruction Finance Corporation, pursuant to the Royalty Adjustment Act, issued notices to petitioner, the Trustee, and certain steel companies. The notices stated that royalties, "both retroactive and prospective," chargeable directly or indirectly to those agencies on account of dispositions made to or for the United States, were believed to be unreasonable and excessive. The companies were directed, pending the making of an order, not to pay any such royalties to petitioner or the Trustee, and to segregate the same. On June 11, 1948, "The Cold Metal Process Company Joint Board No. 2," created under the Royalty Adjustment Act, issued an order directed to petitioner, the Trustee, and the same steel companies, fixing at zero the royalties payable, and directing the companies to transmit for deposit in the United States Treasury all royalties to which the order applied, which were defined in a manner similar to that in the royalty order of December 29, 1944. The licensees to *924 which the notices *40 and order applied consisted of American Rolling Mill, Bethlehem, Crown Cork & Seal, Jones & Laughlin, Wheeling, Youngstown Sheet and Tube, Inland, Signode Steel, Crucible Steel, Allegheny, and Wallingford.
By a complaint filed on June 23, 1948, two days before the date as of which withdrawal of the funds impounded in the cancellation suit was authorized, the Government started a third suit in the same District Court entitled United States of America v. Youngstown Sheet and Tube Company (hereinafter referred to as the "Youngstown royalty suit"). Named as defendants were petitioner, the Trustee, and the steel companies to which the royalty order of June 11, 1948, was directed. The complaint alleged that there had been a failure to comply with this order and the preceding notices of June 27, 1947; that there had been lack of such compliance in respect of royalties due under the licenses granted in the settlement agreements made on and after December 29, 1945; that the funds impounded with the court in the cancellation suit were also subject to the same notices and order and should either continue to be retained by the court or be deposited with the Treasury. The Government asked that*41 the court direct that these royalties and funds be paid into and retained by the court pendente lite, and that the court determine the rights of the parties thereto.
Simultaneously with the filing of this complaint, the Government filed a motion for a temporary restraining order enjoining the clerk of the court from paying out the funds impounded in the cancellation suit, and for a preliminary injunction pendente lite impounding these funds and all other monies affected by the royalty order of June 11, 1948. Over the objection of petitioner and the Trustee, the District Court granted such a temporary restraining order of June 23, 1948 (effective for 10 days, and later extended for 10 days more), and issued an order to show cause why the requested preliminary injunction should not be granted. Then, on July 6, 1948, the court denied the Government's motion for a preliminary injunction, and directed the clerk of the court to pay out the impounded funds upon expiration of the temporary restraining order. The court ruled that the Royalty Adjustment Act applied only to royalties, and not to monies paid in settlement of infringement claims. United States v. Youngstown Sheet & Tube Co., 81 F. Supp. 996">81 F. Supp. 996.*42
The Government appealed from this denial of the preliminary injunction. It made an application to the District Court for a stay of its order of denial pending an appeal to the Court of Appeals. This application was denied, although it did stay its order of denial to permit a similar application for a stay to be made to the Court of Appeals. Such an application was then made and it was denied on *925 July 21, 1948, on condition that the impounded funds, when withdrawn from the District Court, be deposited with the Federal Reserve Bank at Cleveland for safekeeping and investment until final disposition of the appeal. Pursuant to this order, the impounded funds were withdrawn on or about July 26, 1948, and deposited as directed.
On December 6, 1948, the Court of Appeals affirmed the District Court's denial of a preliminary injunction and that court's ruling on the scope of the Royalty Adjustment Act. United States v. Youngstown Sheet & Tube Co., 171 F. 2d 103. It appearing that the Government did not intend further to litigate the Youngstown royalty suit, the Court of Appeals entered an order on January 7, 1949, permitting the Trustee to withdraw*43 the funds deposited with the Federal Reserve Bank at Cleveland.
After termination of the Youngstown royalty suit in this manner, the District Court entered an order in the Thomas Steel royalty suit on January 12, 1949, permitting withdrawal of the $ 1,000,000 deposited by Allegheny and Wallingford.
On January 6, 1949, prior to withdrawal of the aforementioned funds deposited with the Federal Reserve Bank at Cleveland, the collector of internal revenue for the eighteenth district of Ohio served on that Federal Reserve Bank a notice of levy, two warrants of distraint, and a notice of tax lien. On January 14, 1949, the Commissioner issued a notice of deficiency to petitioner, which included in petitioner's income for 1945 the amount of $ 9,600,000 which had been paid into the District Court in that year in the cancellation suit. Transferee liability against the Trustee, for the taxes claimed to be due from petitioner on account thereof, was also asserted in a notice of deficiency issued to the Trustee on the same date. Since the collector's action had barred withdrawal of the funds deposited with the Federal Reserve Bank, the Trustee, on January 28, 1949, paid $ 8,449,973.33 to the*44 collector in full payment of the asserted deficiencies and interest thereon, and simultaneously withdrew the funds on deposit with the Federal Reserve Bank.
The notice of deficiency issued to petitioner and the Trustee did not treat, as petitioner's income for 1945, the $ 1,000,000 for which Allegheny and Wallingford settled the infringement claims against them. By amended answer herein, the Commissioner now asserts that this sum should be added to petitioner's 1945 income, and claims additional deficiencies on account thereof.
The settlement funds totalling $ 9,600,000 paid into the District Court in 1945 and the $ 1,000,000 contracted to be paid by the Allegheny and Wallingford companies did not accrue as income to petitioner in 1945. By the end of 1945, the United States was seriously disputing petitioner's right to these monies, amounting to $ 10,600,000. As of *926 the end of 1945, it was uncertain that petitioner would ever receive these monies. By the end of 1945, petitioner did not have a fixed and uncontested right to those monies.
II
Legal services had been rendered to petitioner by the law firm of Baker, Hostetler & Patterson (hereinafter referred to as the "Baker*45 firm"), of Cleveland, over a period of several years, including 1945, resulting in an indebtedness of $ 90,000 for services and $ 1,577.34 for cash disbursements. Fifty per cent of these services were rendered in 1945, and the remaining 50 per cent in years preceding 1945. Of the services rendered in 1945, 98 per cent were rendered in the cancellation suit. Of the services rendered prior to 1945, 95 per cent were likewise rendered in the cancellation suit. None of these services was rendered on a contingent fee basis.
Legal services had also been rendered to petitioner by the law firm of Stebbins, Blenko and Webb (hereinafter referred to as the "Stebbins firm"), of Pittsburgh. This firm represented petitioner in patent matters over a period of several years, including 1945, resulting in an indebtedness of $ 35,000 for such services. None of these services was rendered on a contingent fee basis. Neither the Stebbins firm, nor any partner or associate of that firm, represented petitioner in the cancellation suit.
At the request of petitioner, the Baker and Stebbins firms submitted separate statements for the indebtedness to them referred to above. The Stebbins statement was *46 received by petitioner on or about January 28, 1946, and the Baker statement on or about February 28, 1946, before petitioner's books had been closed or its income tax return had been filed for the year 1945. Each statement was dated December 28, 1945.
The amounts of the Stebbins and Baker statements were charged, as of December 29, 1945, to an account on petitioner's books called "Accrued Legal and Auditing Expense." It was petitioner's practice to enter invoices, for services furnished to it in a particular year, in the books of account for such year before closing entries were made even though such invoices may have been received after the close of such year.
The Accrued Legal and Auditing Expense account was in the nature of a reserve against bills which it was anticipated would be rendered. In that account, at the end of each year, there was maintained a credit balance of about $ 100,000. As bills relating to legal and accounting expense were received during the year, they were charged against this account. The credit balance was restored to about $ 100,000 by the end of the year through charges to an expense account called "Professional *927 Services and Expenses" and*47 corresponding credits to the Accrued Legal and Auditing Expense account.
As of December 29, 1945, the Professional Services and Expenses account was debited with $ 201,556.99, and the Accrued Legal and Auditing Expense account was credited with a like amount. The credit balance in the latter account was thereby brought to $ 350,000. The Accrued Legal and Auditing Expense account was increased in this manner because of the services which had been rendered petitioner for which no bills had yet been issued. As of the same date, December 29, 1945, the Accrued Legal and Auditing Expense account was then debited with $ 126,577.34, the aggregate amount of the Stebbins and Baker bills, and Accounts Payable was credited with the same amount. This entry was made to record petitioner's liability for the Stebbins and Baker bills. As of the same date, the Accrued Legal and Auditing Expense account was debited with $ 123,422.66, and Professional Services and Expenses was credited with a like amount. This entry was made to reduce the balance in the Accrued Legal and Auditing Expense account as of the end of the year to $ 100,000. Then, as of the same date, December 29, 1945, the Accrued Legal*48 and Auditing Expense account was debited with $ 100,000, and "Profit and Loss Surplus" was credited with a like amount, reducing to zero the balance in the Accrued Legal and Auditing Expense account. The foregoing entries relating to the Stebbins and Baker bills, although dated December 29, 1945, were in fact made during 1946.
The indebtedness of petitioner to the Stebbins firm, in the sum of $ 35,000, was paid by the Trustee on January 31, 1949. The indebtedness of petitioner to the Baker firm, in the amount of $ 91,577.34, was paid by the Trustee as follows:
| August 7, 1946 | $ 1,577.34 |
| February 2, 1948 | 25,000.00 |
| February 3, 1949 | 65,000.00 |
| Total | $ 91,577.34 |
Petitioner deducted the amounts of the Baker and Stebbins statements in its income tax return for the year 1945. The Commissioner allowed the cash disbursements of $ 1,577.34 as a deduction for 1945, but refused to allow as a deduction for that year the fees of $ 125,000 billed for legal services.
There was no arrangement between petitioner and the Stebbins and Baker firms which enabled petitioner to make a reasonably accurate estimate of the fees owed those firms as of December 31, 1945. Petitioner was unable*49 to ascertain for 1945 the fees owed those firms for legal services prior to the rendition by those firms of bills in 1946.
*928 OPINION.
1. The correctness of the deficiencies asserted against petitioner turns largely on whether petitioner realized income in 1945 as a result of the settlement of certain patent controversies. The amounts involved in the settlements were not in fact received in 1945, and petitioner contends not only that such amounts were not properly accruable in that year, but also that even if they were then accruable they must be ascribed to the so-called charitable trust rather than to petitioner. However, it becomes of no moment to determine to whom such amounts would be accruable, if we conclude that they were not income in 1945 for a taxpayer on the accrual basis.
Prior to 1945, petitioner had become the owner of two patents covering a method and apparatus for the cold rolling of sheet metal. The validity and infringement of those patents became the subject of much dispute and gave rise to a considerable volume of litigation. Numerous steel manufacturers were charged by petitioner with infringement, and some of them entered into settlement and license*50 agreements. Others, however, refused to come to terms, and during 1942 and 1943 petitioner started suits against a number of them.
At about the same time, there were two important developments respecting these patents. First, in August and September 1943, several Federal departments and agencies issued notices, under the Royalty Adjustment Act (35 U. S. C. secs. 89-96), declaring that the royalties being charged the United States directly or indirectly under petitioner's patents were believed to be unreasonable and excessive. Thereafter, on December 29, 1944, an order was issued which, with one exception not here material, fixed at zero the royalties so chargeable under these patents, and directed named licensees under the patents to deposit in the United States Treasury royalties payable "in excess of" those authorized by the order.
Secondly, in July 1943, the United States brought suit (referred to herein as the "cancellation suit") in a Federal district court for the cancellation of the two patents, or important portions thereof, on the ground that their issuance by the Patent Office had been induced by fraud or mistake. On motion of the United*51 States, and over the vigorous opposition of the defendants in that suit, the District Court issued an interlocutory order on October 10, 1944 (referred to herein as the "impounding order"), effective until entry of final judgment by the District Court, which restrained petitioner and its officers and agents from receiving any further monies on account of the two patents, whether as royalties or damages or payments in settlement of infringement claims; required such monies to be deposited in the registry of the court; and enjoined transfer of the patents in any *929 manner. United States v. Cold Metal Process Co. (N. D. Ohio), 57 F. Supp. 317">57 F. Supp. 317.
The cancellation suit was decided by the District Court against the United States as to all matters in issue, and final judgment was entered on September 20, 1945 (N. D. Ohio), 62 F. Supp. 127">62 F. Supp. 127. The United States took an appeal, and then moved before the District Court for reinstatement of the impounding order pending determination of the appeal. This motion was granted on October 8, 1945, again over petitioner's opposition.
While the cancellation suit was in this posture, six*52 steel manufacturers agreed to a settlement of the suits brought against them by petitioner and of the claims against them under the two patents. With full knowledge of the cancellation suit and the charges made therein by the United States, and with complete awareness of the outstanding impounding order, these companies executed settlement agreements dated December 29, 1945, in which they consented to make payments to the clerk of court in the cancellation suit in the aggregate amount of $ 9,000,000. They agreed, moreover, that such payments would be unconditional and they undertook to waive all claim to have the funds returned to them "under any condition whatsoever."
A settlement agreement with substantially identical terms was executed by Inland Steel Company on December 31, 1945, settling the infringement claims against it for $ 600,000, which was paid into court by Inland on the same date. Two further settlements were executed on December 29, 1945, on similar terms, with Allegheny-Ludlum Steel Corporation and its subsidiary, Wallingford Steel Company. The former agreed to pay $ 700,000, and the latter $ 300,000. It was not until July 9, 1947, that these sums were paid, being*53 deposited at that time with the clerk of the court.
The judgment of the District Court in the cancellation suit was affirmed by the Court of Appeals in December 1947. United States v. Cold Metal Process Co. (C. A. 6), 164 F.2d 754">164 F. 2d 754. A petition for certiorari was denied by the Supreme Court of the United States in May 1948, 334 U.S. 811">334 U.S. 811, as was a petition for rehearing in June 1948, 334 U.S. 835">334 U.S. 835. A motion was then filed with the District Court to release the imponded funds, and it ordered their release, but not prior to June 25, 1948.
Meanwhile, in March 1947 the United States had started a second suit (referred to as the "Thomas Steel royalty suit") in the same District Court based on the royalty adjustment order of December 29, 1944. The suit was brought to collect monies alleged to be due under that order and which improperly, so it was alleged, had not been deposited in the United States Treasury, and to determine rights *930 to those monies. It was in this suit that Allegheny and Wallingford paid $ 1,000,000 into the District Court. On June 25, 1947, a second series of notices was*54 issued under the Royalty Adjustment Act in reference to these patents, and a second royalty adjustment order was issued on June 11, 1948, which also fixed the royalties at zero. The licensees, to which these notices and this order were directed, consisted almost entirely of the Allegheny and Wallingford companies and the manufacturers which had deposited $ 9,600,000 with the court in 1945 in the cancellation suit, in which these monies were then still impounded. Then, two days before June 25, 1948, the date on which withdrawal of these impounded funds from the court was authorized, the United States started a third suit (referred to as the "Youngstown royalty suit") based on this last royalty adjustment order, and alleged that the impounded funds were affected by this order, and that they therefore should either continue to be held by the court or be paid into the United States Treasury.
Together with the filing of its complaint in the Youngstown royalty suit, the United States filed a motion for a temporary restraining order and a preliminary injunction pendente lite to bar the clerk of the court from paying out the impounded funds. The restraining order was granted, but thereafter*55 the preliminary injunction was denied on July 6, 1948, on the ground that the Royalty Adjustment Act did not apply to monies paid in settlement of infringement claims. United States v. Youngstown Sheet & Tube Co. (N. D. Ohio), 81 F. Supp. 996">81 F. Supp. 996. An appeal followed, and this denial was sustained by the Court of Appeals on December 6, 1948 (C. A. 6), 171 F. 2d 103. Pending this appeal, the Court of Appeals had authorized withdrawal of the impounded funds from the District Court on July 26, 1948, provided they were deposited with the Federal Reserve Bank at Cleveland. No further attempt at review being made, the District Court permitted withdrawal of these funds from the Federal Reserve Bank on January 7, 1949.
With the termination in this manner of the Youngstown royalty suit, an order was entered in the Thomas Steel royalty suit by the District Court on January 12, 1949, permitting withdrawal of the $ 1,000,000 deposited by the Allegheny and Wallingford companies.
This summary statement demonstrates, in our opinion, that at the close of 1945 there was considerable doubt, because of the position taken by the United States, *56 that petitioner, or anyone who might stand in its place, had a right to the settlement funds, totalling $ 10,600,000, which respondent says must be accrued for that year. The Government then appeared to be firmly convinced, and was strenuously acting on its conviction, that the two patents had been improperly obtained, were invalid, and ought to be cancelled, and *931 that petitioner, or anyone who might stand in its place, was not entitled to enjoy and retain any benefits under these patents. Included in such benefits were these settlement funds, and the Government was plainly determined to exercise every legal means to deny them to petitioner or any of its successors.
The steel companies, it is true, as part of their settlement had explicitly agreed to forfeit all right to the return of these monies, which, except for the $ 1,000,000 undertaken to be paid by the Allegheny and Wallingford companies, they actually paid into court prior to the end of 1945. But the Government was nevertheless contending that petitioner, or anyone in its place, had no right to those monies, and that the fruits of the patents had to fall with the patents. The Government was successful in obtaining*57 a court order requiring payment into court pendente lite of funds due under these patents, including the settlement payments, and subsequently fought repeatedly and with success to have these funds remain impounded in court until final decision of the suit on appeal some years later, notwithstanding petitioner's vigorous attempts to have the impounding order modified so as to release the funds paid in by the steel companies.
It is immaterial that the steel companies had agreed to abandon any claim to the return of their settlement payments. The important thing is that peitioner's right to these payments was being contested by the United States. The Government was contending that it, as well as others, was being injured as a result of patents issued to petitioner through fraud or mistake, and that the dictates of equity required that the patents be cancelled and that petitioner be shorn of all its gains thereunder. Accordingly, notwithstanding the disclaimers of the steel companies of their rights to the possible return of the settlement payments, the Government persistently blocked every effort to have the impounding order modified so as to permit the release of those funds.
*58 The Government's position in this connection is reflected by the argument made in January 1948 in its brief to the Court of Appeals, requesting a stay of that court's mandate of affirmance in the cancellation suit in view of its announced intention to file a petition for certiorari with the Supreme Court. Petitioner had countered with a motion to vacate or modify the impounding order, emphasizing the complete surrender by the steel companies of any interest in the fund. The Government declared:
The contracts [of settlement] in question carry a provision [the waiver] of the general type suggested, but obviously should plaintiff ultimately prevail in this action and, as would inevitably follow in such circumstance, should the existing injunction be made permanent forbidding defendants from collecting or receiving any benefits or gains by virtue of their fraudulent acquisition of the patents here charged to be tainted with fraud in procurement, this provision *932 [the waiver], strictly between the parties, would be inoperative since equity will not permit a defrauder to profit by his fraud. Where the impounded funds would go should plaintiff prevail here is a matter of no present*59 concern to this Court, we respectfully urge, beyond the certainty that under such circumstances the moneys would not go to defendants.
Thus, the right of petitioner to obtain the impounded funds was being contested, and successfully so, for some three years after the close of the tax year here involved. Meanwhile, the funds were withheld from it, and there was no certainty that its right thereto would ever be established. In the circumstances, it could not be required to accrue the amounts involved as income in 1945. Under the accrual system a taxpayer may be charged with an item of income where its right has been established or is uncontested and where merely the time of payment is postponed to some future date. But petitioner's right to the amounts herein was seriously disputed in 1945, and it was that very dispute that effectively prevented petitioner or its successor from receiving payment in that year.
Nor is a different result called for because the Government was uniformly unsuccessful on the merits of its claims. Where claims are not advanced frivolously and are made in good faith, a taxpayer is not required to evaluate his chances of success for the purpose of determining*60 whether an item is to be accrued. Cf. E. T. Slider, Inc., 5 T. C. 263, 268. It is sufficient that the right is in fact in contest, and accrual must await resolution of the dispute. Cf. North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417, 423; Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, 451; Dixie Pine Products Co. v. Commissioner, 320 U.S. 516">320 U.S. 516; Boston Elevated Railway Co., 1084">16 T. C. 1084; William Justin Petit, 8 T. C. 228; London-Butte Gold Mines Co., 41 B. T. A. 852, affd. (C. A. 10), 116 F. 2d 478. No part of the $ 10,600,000, here involved, was received by petitioner in 1945, and as a result of the claims being advanced by the United States, petitioner's right to that amount had not yet been established so as to require accrual in that year. We conclude that to the extent that the deficiencies asserted by the Commissioner are based upon including that amount in petitioner's 1945 income they must be disapproved.
2. The remaining*61 question concerns respondent's disallowance for 1945 of a deduction for the legal fees of two law firms, Stebbins, Blenko & Webb and Baker, Hostetler & Patterson. The bills for these fees were not issued, and petitioner was not notified of the charges made thereby, until the early months of 1946. The Baker fee was for services rendered almost entirely in connection with the cancellation suit, and amounted to $ 90,000, besides a charge of $ 1,577.34 for cash disbursements. The Stebbins fee was for services in petitioner's patent matters over a period of years including 1945, and amounted to $ 35,000. On receipt of these bills in 1946, petitioner recorded them *933 in its books as of December 29, 1945, and claimed a deduction for the entire amount for 1945. The Baker bill was paid in installments in 1946, 1948, and 1949, and the Stebbins bill was fully paid in 1949.
For 1945 respondent allowed a deduction of $ 1,577.34 for the cash disbursements, but disallowed the remainder of the billed charges. His position is that the fees were not accruable for 1945, and that they were capital expenditures rather than current expenses. We hold that they were not accruable for 1945.
*62 Petitioner's auditor in 1945 testified that the regular method of bookkeeping was to debit its Accrued Legal and Auditing Expense account as "bills were received during the year." 2 He made it clear, upon being pointedly asked, that the Accrued Legal and Auditing Expense account was a reserve account, to which were charged bills which it was anticipated would be rendered. But bookkeeping entries made in reserve accounts to reflect expected expenses are not acceptable as a basis for deductions for income tax purposes in the absence of specific statutory authorization, and such anticipatory charges made in 1945 would not support deduction of these amounts in that year. Cf. Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445; Brown v. Helvering, 291 U.S. 193">291 U.S. 193; Gude Brothers, Kieffer Co., 2 B. T. A. 1029.
*63 While it may have been certain during 1945 that there was some liability for legal services, the amount was undetermined in that year, and there is no evidence that it could have been estimated with reasonable certainty before the end of that year. No proof was made that an amount of compensation had been agreed upon, or that there was any arrangement between petitioner and its attorneys which would have enabled it to make a reasonably accurate estimate of the charge to be rendered. Indeed the contrary is suggested by the fact that petitioner's first bookkeeping entry, actually recording in its accounts payable its liability to the Baker and Stebbins firms, was not made until 1946 on the issuance of the invoices, although the entry was dated back to 1945. On the evidence before us, the liability represented by the fees in these bills was not accruable for income tax purposes before the bills were rendered in 1946. Cf. Crown Cork & Seal Co. v. United States, (E. D. N. Y.) 4 F. Supp. 525">4 F. Supp. 525, 527, affd. per curiam (C. A. 2) 73 F.2d 997">73 F. 2d 997; Kanne v. American Factors (C. A. 9), 190 F. 2d 155, 160-161;*64 New Process Cork Co., 3 B. T. A. 1339, 1342; Canton *934 v. United States (Ct. Cl.), 94 F. Supp. 561">94 F. Supp. 561, 565-566. It therefore becomes unnecessary to decide whether the expenditure for these fees was a current expense or a capital charge, although there appears to be substance to respondent's contention that it was, at least in largest part, a capital expenditure. Cf. Porter Royalty Pool, Inc., 7 T. C. 685, 699-700, affd. (C. A. 6) 165 F. 2d 933, certiorari denied 334 U.S. 833">334 U.S. 833; Safety Tube Corporation, 8 T. C. 757, 762-764, affd. (C. A. 6) 168 F. 2d 787; South American Gold & Platinum Co., 8 T. C. 1297, 1302, affd. per curiam (C. A. 2) 168 F. 2d 71; Addison v. Commissioner (C. A. 8) 177 F.2d 521">177 F. 2d 521.
Decision will be entered under Rule 50.
Footnotes
1. On December 29, 1945, the Trustee became the owner of all the remaining shares of stock in petitioner, not theretofore owned by the Trustee, and steps were taken at once to dissolve petitioner and transfer its assets to the Trustee subject to the impounding order. However, the impounding order had forbidden petitioner to transfer patents '016 and '195 in any manner, and it was not until May 31, 1946, that the order was modified so as to enable the Trustee to obtain title thereto. Modification was granted on condition that the Trustee enter its general appearance in the cancellation suit and subject itself to orders in that litigation. Thereafter, on June 1, 1945, the Trustee entered its general appearance, and on June 3, 1946, petitioner transferred to the Trustee by formal recorded assignment all its right, title and interest in and to patents '016 and '195↩ and all claims and demands growing out of such patents. The facts leading up to the Trustee's acquisition of all of petitioner's stock, the dissolution of petitioner, and the Trustee's participation in the execution of the settlement agreements, relate to the second issue, which is not reached herein, and are therefore not set forth in these findings.
2. A. This [Accrued Legal and Auditing Expense Account] is a liability on the accounts of the company when the company was active, and it was created for the purpose of reflecting an accrued legal and auditing expense at the end of each year. We maintained a balance in this account of $ 100,000. As bills were received during the year, attorneys and auditors, and so forth, they were charged against this account, and provision was made by a charge against an expense account to restore the balance to $ 100,000 at the end of each year.
Q. It was the regular practice, was it, to keep a balance of $ 100,000 in this accrued -- in this account at the end of each year?
A. Yes.↩