*2986 The petitioner in computing its net income for the year 1921 is not entitled to deduct the amount of $89,152.83 involved herein either as a loss or as a debt ascertained to be worthless and charged off within the taxable year.
*1162 The petitioner has appealed to this Board from the respondent's determination as set forth in a registered letter dated March 9, 1926, that there is a deficiency in tax for the year 1922 in the amount of $5,936.98, and overassessments for the years 1921 and 1923 in the amounts of $699.41 and $3,026.46, respectively. The petitioner alleges that its tax liability for the three years mentioned is in controversy.
*1163 FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Kansas with its principal office at Leavenworth. During the years herein mentioned it was engaged in the business of constructing dams, bridges, etc. In the year 1911 the petitioner entered into a contract with the United States Government for the construction of a dam in the Ohio River. The contract provided, among*2987 other things, that:
6. If the contractor shall fail to prosecute the work covered by this contract so as to complete the same within the time agreed upon, the contracting officer may, with the prior sanction of the Chief of Engineers, in lieu of annulling the contract under the preceding paragraph, waive the time limit and permit the contractor to finish the work within a reasonable period, to be determined by the contracting officer. Should the original time limit be thus waived, all expenses for inspection and superintendence, including all necessary traveling expenses connected therewith, and all other actual losses and damages to the United States due to the delay beyond the time originally set for completion, shall be determined by the contracting officer and deducted from any payments due or to become due the contractor: Provided, however, That no charge for inspection and superintendence shall be made for such period after the date of expiration of this contract, as in the judgment of the contracting officer, approved by the Chief of Engineers, shall equal the time which shall have been lost through any cause for which the United States is responsible, either in the*2988 beginning or prosecution of the work, or in the performance of extra work ordered by the contracting officer, or on account of unusual freshets, ice, rainfall, or other abnormal force or violence of the elements or by strikes, epidemics, local or State quarantine restrictions, or other unforeseeable cause of delay arising through no fault of the contractor, and which actually prevented such contractor from commencing or completing the work or delivering the material within the period required by the contract. The findings of the contracting officer, approved by the Chief of Engineers, shall be accepted by the parties hereto as final. But such waiver of the time and remission of charges shall in no manner affect the rights or obligations of the parties under this contract.
7. If, at any time during the prosecution of the work, it be found advantageous or necessary to make any change or modification in the project, and this change or modification should involve such change in the specifications as to character and quantity, whether of labor or material, as would either increase or diminish the cost of the work, then such change or modification must be agreed upon in writing by*2989 the contracting parties, the agreement setting forth fully the reasons for such change, and giving clearly the quantities and prices of both material and labor thus substituted for those named in the original contract, and before taking effect it must be approved by the Secretary of War: Provided, That no payments shall be made unless such supplemental or modified agreement was signed and approved before the obligation arising from such modification was incurred.
8. No claim whatever shall at any time be made upon the United States by the contractor for or on account of any extra work or material performed or furnished, or alleged to have been performed or furnished under or by *1164 virtue of this contract, and not expressly bargained for and specifically included therein, unless such extra work or materials shall have been expressly required in writing by the contracting officer, the prices and quantities thereof having been first agreed upon by the contracting parties and approved by the Chief of Engineers.
The work under this contract was completed on October 6, 1916. The full amount due the petitioner under the contract was paid by the United States, final payment*2990 being made on December 1, 1916. In accepting the final payment the petitioner gave notice that it did not waive its rights to recover through the courts any additional cost arising from changes in methods of construction claimed by it to have been ordered by the Government officers in charge of the work.
On December 31, 1916, the books of the petitioner disclosed a total loss on the aforesaid contract in the amount of $139,811.55. After making certain minor debits and credits to the account during the years 1917, 1918, and 1919, a total loss of $147,111.88 was shown, which was charged to profit and loss by the petitioner as follows:
| 1915 | $100,000.00 |
| 1920 | 23,111.88 |
| 1921 | 24,000.00 |
These amounts were taken as deductions on the income-tax returns filed by the petitioner for the years 1915, 1920, and 1921, respectively. The first two deductions were allowed by the respondent, but the third deduction was disallowed.
In 1917 the petitioner filed a suit in the Court of Claims to recover the amount of $89,152.83 claimed by it as extra cost and expense in building the dam under the contract above mentioned, made necessary by the construction changes ordered by*2991 the Government. The said amount of $89,152.83 is included in the above said total loss of $147,111.88.
No part of said amount of $89,152.83 has ever been accrued as income on the petitioner's books or included as gross income in any of its income-tax returns. The petitioner's books were kept on the basis of completed contracts.
On March 29, 1920, the Court of Claims held that the petitioner was not entitled to recover any amount from the United States Government, and it rendered judgment against the petitioner for costs and dismissed its petition. The petitioner did not appeal or prosecute error from said judgment of the Court of Claims but sought relief in Congress, and in August, 1921, it reached the conclusion that it could not obtain such relief.
The petitioner filed an income and profits-tax return for the year 1921 and reported a net income of $8,994.06 and tax due thereon in the amount of $699.41, which was duly assessed. For the year 1922 *1165 the petitioner filed an income-tax return and reported a net income of $20,742.09 and tax due thereon in the amount of $2,342.76, which was assessed. For the year 1923 the petitioner filed an income-tax return showing*2992 a net income of $80,397.39 and tax due thereon in the amount of $10,049.67, which was assessed by the respondent.
The respondent, upon audit of the petitioner's returns for the years 1921, 1922, and 1923, disallowed as a deduction from gross income for 1921 the amount of $24,000 claimed by the petitioner as a loss under its Government contract as hereinbefore set forth; made other adjustments in the petitioner's income which are not material here; determined that the petitioner had sustained a net loss of $136,834.74 in the year 1921, and that there was an overassessment in tax for that year in the amount of $699.41. For the year 1922 the respondent determined that the petitioner had a net income subject to tax of $66,237.95 and that there is a deficiency in tax in the amount of $5,936.98. The respondent also determined that for the year 1923 the petitioner's net income was $56,185.70, and that there is an overassessment in tax for that year in the amount of $3,026.46.
OPINION.
MARQUETTE: It is the contention of the petitioner that in computing its net income for 1921 it is entitled to deduct, either as a debt ascertained to be worthless and charged off within the taxable*2993 year, or as a loss sustained in that year, the amount of $89,152.83 mentioned in the findings of fact. If this contention is well taken the petitioner's net loss for 1921 as determined by the respondent will be increased by the amount of $89,152.83 and as so increased will wipe out the taxable income for 1922 and result in no deficiency for that year.
The petitioner's argument is ingenious but not convincing, and we are unable to perceive any merit in its claim. Before a deduction can be allowed on account of a worthless debt it is essential that the existence of a valid debt be established. ; ; . In the last case cited this Board said:
If the debtor was not legally liable to the taxpayer, then there was no debt to become worthless. It can not become worthless because of inability to establish legally the liability for the debt, for in such a case there is not an ascertainment of worthlessness of an existing debt, but an ascertainment of the nonexistence of such a debt.
In the instant case the petitioner has wholly failed to prove that*2994 there was ever a valid debt due it from the United States. On the other hand the record shows that the United States at no time admitted any liability and that the Court of Claims judicially determined *1166 that the petitioner had no valid claim for the amount in controversy, or for any other amount, and that it rendered judgment against the petitioner and dismissed its suit. The petitioner declined to appeal from that judgment and it became final some time in 1920. The decision of the Court of Claims was the ascertainment of the nonexistence of the debt that the petitioner claims, and is binding upon this Board. It follows that since no debt existed there was nothing to charge off or deduct.
We are also of opinion that the petitioner is not entitled to deduct the amount in question as a loss sustained in 1921. The evidence shows that the petitioner sustained a loss on its construction contract with the United States in the amount of $147,111.88 but it seems clear to us that the entire loss occurred prior to 1921. When the Court of Claims rendered its judgment adverse to the petitioner, and the petitioner declined to appeal therefrom, its claim for any further compensation*2995 or payment under the contract became completely and finally adjudicated and foreclosed and the loss on the contract became final and complete at that time, if not before. The fact that the petitioner appealed to Congress does not alter the situation. If Congress had seen fit to give the petitioner any relief it would have undoubtedly been on account of moral, not legal obligations, for if the petitioner had a legal claim against the United States an application to Congress for relief would not have been necessary.
Judgment will be entered for the respondent.