*3502 A judgment for damages for loss of property which became binding on the taxpayer in one year and was paid the following year, is not deductible in the first year, when taxpayer's accounts are kept on the basis of cash receipts and disbursements.
*548 The proceeding is for a redetermination of deficiencies in income and excess-profits taxes for the calendar year 1921 amounting to approximately $2,870.60.
FINDINGS OF FACT.
Petitioner is an Ohio corporation, with principal office at 717 Superior Avenue, N.E., Cleveland.
The petitioner is now and was in the taxable year 1921 engaged in the business of health building and physical training. During the taxable year 1921 the petitioner operated such an institution for men in the Guardian Building, Cleveland, and for women at the Cleveland Athletic Club Building. The services of the petitioner were rendered to patrons consisting largely of business and professional men of the City of Cleveland and vicinity, and a selected clientele of women.
An action for damages was filed by one of petitioner's*3503 clients against petitioner in the January, 1920, term of the Court of Common Pleas of Cuyahoga County, Ohio. The plaintiff in that action asked damages largely in excess of $2,500 for the alleged loss by her of jewelry in petitioner's Ladies Department. The case was tried in said Common Pleas Court before a jury on October 1, 1921, and resulted in a verdict for the plaintiff against petitioner of $4,005.04, for which amount judgment was rendered by said court. *549 Thereafter, in 1921, said judgment was settled for $2,500, all of which was paid during the calendar year 1922. Petitioner kept its books and rendered its income-tax returns on a cash receipts and disbursements basis. Petitioner set up a reserve of $2,500 on its books in 1921 to provide for the payment of the judgment and deducted that amount from its net income for that year. The Commissioner has determined that the said $2,500 was improperly deducted from petitioner's net income for 1921.
Petitioner deducted $7,990.04 from net income for 1921 for depreciation and obsolescence of furniture, fixtures, and fixed equipment. Commissioner restored this amount to net income as capital expenditures. The parties*3504 have agreed that petitioner is entitled to a deduction for 1921 for depreciation and obsolescence of $6,213.12. Petitioner has abandoned the contention contained in its petition involving the balance of the amount claimed for depreciation and obsolescence.
OPINION.
PHILLIPS: The parties having stipulated the amount to which petitioner is entitled as a deduction for the exhaustion of its equipment, the sole question remaining for decision in this proceeding is whether petitioner, which kept its books on a cash receipts and disbursements basis, was entitled to deduct the amount of a reserve set up on its books in 1921 to cover its liabilities on a settlement of a judgment obtained against it for loss of jewelry lost in its business establishment. The facts with respect to this issue are all stipulated.
Section 234(a) (4) of the Revenue Act of 1921 provides:
That in computing the net income of a corporation * * * there shall be allowed as deductions * * * losses sustained during the taxable year and not compensated for by insurance or otherwise; unless, in order to clearly reflect the income, the loss should in the opinion of the Commissioner be accounted for as of a*3505 different period.
In view of the fact that petitioner kept its books on the cash receipts and disbursements basis, we are of the opinion that it did not sustain a deductible loss during 1921. .
Petitioner, adopting a seemingly hybrid method of bookkeeping, set up a "reserve" to provide for its liability under the judgment as reduced by the compromise. The establishment of such a "reserve" is inconsistent with the cash receipts and disbursements basis. A taxpayer can not obtain deductions, to which it is not otherwise entitled, by bookkeeping entries.
Petitioner relies upon article 111 of Regulations 62 reading in part:
* * * Judgments or other binding adjudication, such as decisions of referees and boards of review under workmen's compensation laws, on account of *550 damages for patent infringement, personal injuries, or other cause, are deductible from gross income when the claim is so adjudicated or paid, unless taken under other methods of accounting which clearly reflect the correct deduction, less any amount of such damages as may have been compensated for by insurance or otherwise. If subsequently to its occurrence, *3506 however, a taxpayer first ascertains the amount of a loss sustained during a prior taxable year which has not been deducted from gross income, he may render an amended return for such preceding taxable year including such amount of loss in the deductions from gross income and may file a claim for refund of the excess tax paid by reason of the failure to deduct such loss in the original return. A loss from theft or embezzlement occurring in one year and discovered in another is ordinarily deductible for the year in which sustained.
It is to be noted that a deduction on account of a judgment is to be taken when the claim is "adjudicated or paid." We do not understand this to mean that the taxpayer may choose the year for the deduction, if adjudication takes place in one year and payment in another. When read in connection with the law and other regulations, it seems clear that whether it is to be taken as a deduction when adjudicated or when paid depends on the system of accounting employed. On an accrual basis it is taken as a deduction when adjudicated; on a cash basis, when paid. The action of the Commissioner is consistent with his regulations.
Decision will be entered*3507 under Rule 50.