*16 Decision will be entered under Rule 50.
1. Deduction -- Accrual -- Ordinary and Necessary Expense -- Vacation Pay -- Section 23 (a) (1) (A). -- Liability for 1946 vacation pay did not accrue in 1945 where there was no contract in existence covering it and where the contract for 1945, if allowed to remain in effect, would require employment on May 1, 1946, as a condition precedent for 1946 vacation pay.
2. Capital Expenditure or Advertising Expense -- Catalogs -- Section 23 (l). -- The 1944, 1945, and 1946 costs of catalogs published in September 1946 were not deductible as ordinary and necessary expenses of those years and the Commissioner did not err in allowing only deductions under section (l) on the basis of a useful life of 5 years for the catalogs.
*482 The Commissioner determined a deficiency of $ 15,292.68 in income tax for 1945 and deficiencies of $ 72,691.69 and $ 50,007.29 in excess profits tax for 1943 and 1944. The only issues for decision are whether the petitioner *17 is entitled to deduct for 1945 $ 14,143.16 alleged to represent vacation pay liability of the petitioner accruing during the period May 1 through December 31, 1945, and whether catalog costs paid in 1944, 1945, and 1946 were deductible expenses of those years instead of capital expenditures recoverable through deductions for amortization. The parties have settled all other differences by agreement.
FINDINGS OF FACT.
The petitioner filed its corporate returns for the taxable years with the collector of internal revenue for the district of Michigan. It kept its books and filed its returns on an accrual and calendar year basis.
The petitioner entered into an agreement with a labor union in May 1945 for the period May 1, 1945, through April 30, 1946. It could not be changed during that period and would remain in effect for another year unless notice of a desire to terminate or change the contract was served by one party upon the other not less than 60 days prior to April 30, 1946.
Article XIV of the agreement was as follows:
Vacations
Vacation pay is to be determined and computed May 1st, the start of each contract year.
Union employees in good standing to be eligible for such vacation*18 pay must fall into one of the two following groups:
Group 1. -- Union employees with one year's service as of May first and with less than five year's service with the Company will receive a one-week's vacation with pay. Such Vacation pay in Group 1 is to be 2% of the previous contract year's straight time earnings not to exceed 48 hours straight time earnings and is to be paid at the time the vacation is taken.
Group 2. -- Union employees with five or more year's service with the Company will receive a two week's vacation with pay. Vacation pay in group 2 is to be 4% of the previous contract year's straight time earnings not to exceed 48 hours straight time earnings and is to be paid at the time the vacation is taken.
Any employee separated, shall be entitled to vacation pay on the above basis, depending upon which classification of eligible employee he may be.
Vacation shall be mandatory and vacation pay shall only be accepted in lieu of vacation in case of extended sickness or on account of governmental emergency regulations or orders.
The vacation period shall be from May first to December first in each and every year.
The time and duration of the vacation must be *19 mutually agreed upon between the employee and the department head.
The petitioner paid $ 21,214.40 under the agreement to employees in 1945 as vacation pay and claimed and was allowed a deduction in *483 that amount for 1945. It claimed but was not allowed as a deduction for 1945 the additional amount of $ 14,143.16 which it estimated on December 31, 1945, would be two-thirds of its vacation pay obligation payable in 1946. It paid $ 20,232.42 as vacation pay during 1946 and deducted that amount on its return for 1946.
The relations between the petitioner and its employees at the end of 1945 were good and no layoffs or strikes were anticipated at that time.
The petitioner was engaged at all times material hereto in designing, manufacturing, and installing laboratory equipment. It tried to supply a complete laboratory rather than merely to sell pieces of laboratory equipment. It used salesmen, sales engineers, and others to sell its products. It carried only a few items in stock and made most of its products on orders. It advertised in a few trade and professional magazines, mailed circulars to selected groups, and printed and distributed catalogs from time to time. Selected*20 sections of catalogs were sometimes separately printed and distributed. No prices were shown in any of the catalogs.
Complete catalogs were published in 1927, 1931, 1937, and 1946 and another was in process of being printed in April 1952. Several reprints and a number of sections were also printed and distributed during that period of time.
The catalogs and sections were distributed to superintendents, architects, and purchasing agents for educational institutions, to organizations engaged in industry, to teachers, to hospitals, to the salesmen, sales engineers, and other representatives of the petitioner and to others. Some were mailed from the main office of the petitioner while others were distributed by salesmen and sales engineers of the petitioner. The petitioner published new sections and new complete catalogs from time to time as it brought out new and improved products and designs. It would continue to make sales of some of the products shown in its catalogs over long periods of time while other products shown in the catalogs might become obsolete within a relatively short time.
The catalogs played a part in practically every sale but few sales were made solely because*21 of the catalogs. Most of the products sold by the petitioner were manufactured especially on orders and with practically all sales the petitioner supplied service pertaining to installation of the products.
The catalogs were intended to be reference books of information on equipment which was available and a tool to aid the representatives of the petitioner to get in touch with those desiring its products so that they could suggest and eventually sell a complete laboratory.
The petitioner began to prepare a new catalog in 1944, the first copies of which were received in September 1946. The complete catalog was called No. 25 and 3,676 copies of it were printed and distributed. *484 Portions of the complete catalog showing the equipment available for use in industry and advanced sciences was bound as catalog 26 and 4,800 copies thereof were printed and distributed. Portions of the complete catalog showing the equipment available for use in educational institutions was bound as catalog 27 and 7,800 copies thereof were printed and distributed. The following table shows the portion of the total cost of producing catalogs 25, 26, and 27 incurred in each of the taxable years, the*22 amounts deducted on the tax returns and the manner in which the costs were accounted for on the books of the petitioner:
| Charged (or | Balance in deferred | |||
| Year | Total costs | Deducted on | credited) to | expense |
| incurred | tax returns | deferred expense | account at end | |
| account | of year | |||
| 1944 | $ 8,000.00 | 0 | $ 8,000.00 | $ 8,000.00 |
| 1945 | 22,610.51 | $ 19,810.51 | 2,800.00 | 10,800.00 |
| 1946 | 37,485.88 | 42,285.88 | (4,800.00) | 6,000.00 |
| $ 68,096.39 |
The deductions for catalog expense claimed by the petitioner on its 1945 and 1946 returns were disallowed by the Commissioner in determining the deficiencies on the ground that the cost of the catalogs was recoverable only through amortization over a period of useful life of 5 years commencing on September 1, 1946, the date of publication. He allowed $ 4,985.16 of the total cost as a deduction for 1946.
Each of the catalogs 25, 26, and 27 represented property used in the business of the petitioner which had a useful life beyond the year of publication. A reasonable allowance for the exhaustion, including a reasonable allowance for obsolescence, of those catalogs for 1946 was not in excess of $ 4,985.16, the deduction*23 allowed by the Commissioner.
The expenditures of the petitioner for catalogs 25, 26, and 27 made in the years 1944, 1945, and 1946 were not ordinary and necessary expenses of carrying on the business during those years but were capital expenditures.
The stipulations of the parties are incorporated herein by this reference.
OPINION.
Decision of the first issue depends upon whether any obligation of the petitioner to pay its employees for vacations in 1946 accrued in 1945. A liability accrues when it becomes fixed and determined, that is, when the conditions and events which determine the liability have all occurred. Here they did not occur in 1945 and there is no reason to allow the amount to be deducted.
*485 No employee was entitled to vacation pay under the agreement unless he was an employee at the beginning of the contract year and had been an employee for at least 1 year prior thereto. Employees on May 1, 1945, who had been employees for 1 year or more prior to that date were entitled to vacations with pay to be taken between May 1 and December 1, 1945, regardless of any possible separation after May 1, 1945, and before December 1, 1945. The amount payable to any employee*24 for 1945 vacation pay would depend upon the amount of his wages for the 12 months prior to May 1, 1945. The petitioner accrued, deducted, and has been allowed for 1945 the amount required to discharge that obligation. It here seeks to deduct an additional amount, equal to two-thirds of the 1945 payment, upon the theory that continued employment of the same men for the last 8 months of 1945 obligated the petitioner to pay them additional vacation pay during the period May 1, 1946, to December 1, 1946. Not only would that method distort income for 1945 by deducting from it vacation pay for 20 months but it would also allow a deduction for a contingent liability which did not accrue in 1945.
It was not known in 1945 whether or not the contract then in effect would remain in effect after April 30, 1946, but if it did, nevertheless the mere employment of a man during the period May 1, 1945, through December 31, 1945, did not entitle him to vacation pay for 1946. If he thereafter separated from the petitioner for any reason he would fail to qualify on May 1, 1946, for vacation pay for the employment period beginning on that day. Likewise some employees would first qualify for Group*25 1 or for Group 2 depending upon events after December 31, 1945, and that would be another uncertainty in their cases.
Thus no liability of the petitioner for 1946 vacation pay accrued during 1945 and the Commissioner did not err in failing to allow a deduction for the $ 14,143.16. .
The petitioner contends that the cost of the catalogs was deductible in the years in which it was paid, although they used an accrual method of accounting which, if properly followed, would probably produce a different result. One reason urged in support of that contention is that these were advertising expenses or substantially the equivalent of advertising expenses. However, if a taxpayer purchases an asset having a useful life of several years and uses it to advertise its products over several years, its cost is not deductible as an expense of the first year. ; , reversed for other reasons . The respondent contends that the costs of the catalogs were capital*26 expenditures since the catalogs were capital assets which had useful *486 lives extending well beyond 1 year. The catalogs were capital assets and their useful lives extended beyond the year 1946 in which they were issued. Those here in question, Nos. 25, 26, and 27, had no effect whatsoever upon the income of 1944, 1945, and the first 8 months of 1946 since they were not in use during that period. Income of those periods would be distorted if a part of the cost of the catalogs were to be allowed as deductions against the income of those periods. The catalogs were put in use for the first time in September 1946 and they continued to benefit the business for more than 5 years thereafter. The petitioner contends that the cost should not be capitalized and recovered through deductions for amortization under section 23 (l) because the exact period of usefulness of the catalogs is not determinable and their value to the petitioner did not diminish with use. The same thing could be said in regard to many capital assets, the cost of which is recoverable under section 23 (l). Deductions under that section are approximations at best and it is only necessary that a reasonable allowance*27 be determined. Cases where the period of useful life was so problematical and uncertain that costs could not be fairly recovered under section 23 (l) but had to be allowed when paid or incurred are not to be extended to a case like this. The Commissioner has determined a reasonable allowance based upon an estimated 5-year life of the catalogs and the petitioner has not shown that the deduction allowed for 1946 was other than reasonable. Furthermore, the income of the petitioner is more accurately reflected by the method adopted by the Commissioner than it would be under that contended for by the petitioner. The petitioner has not shown that the Commissioner erred in either of the two points in issue.
Decision will be entered under Rule 50.