*3415 1. Under the Revenue Act of 1918, held, a taxpayer is entitled to make its returns of income upon the basis on which its accounts are kept, if such accounts accurately reflect its income.
2. The petitioner was engaged in raising and marketing sugar cane. The planting, cultivation, and marketing of its crop extended over three taxable years. It kept its accounts on the "crop basis" of accounting. Held, that an amount received for losses to a crop, caused by a strike, is to be accounted for in the same manner as any other receipt from the crop.
3. "Crop basis" of accounting discussed.
*977 The Commissioner determined a deficiency in income and profits taxes for the calendar year 1920 in the amount of $91,556.41, of which $35,745.84 is here in controversy. Petitioner instituted this proceeding for a redetermination of its tax and alleges that the Commissioner committed error in including as taxable income for the year 1920 the amount of $77,708.34*3416 received by the petitioner on December 31, 1920, as indemnity for losses to its 1921 and 1922 sugar crops.
*978 FINDINGS OF FACT.
1. Petitioner is a corporation organized under the laws of the Territory of Hawaii. It operates a sugar plantation on the Island of Oahu.
2. In the Hawaiian Islands a crop of sugar cane takes from 18 months of two years to mature. It is usually planted or ratooned in the summer, beginning in April or May, and is brought under cultivation by September. It is cultivated, fertilized and irrigated during the second year, and harvested and manufactured into raw or commercial sugar in the third year. During each calendar year work is being performed on three separate crops - the crop that is being harvested; the crop under cultivation, which was planted the prior year; and the crop that is being planted, which will be harvested two years thereafter.
3. The petitioner, with the approval of the Commissioner of Internal Revenue, has for many years (before, during, and after 1920) kept its accounts and made its Federal income-tax returns on the so-called "crop basis" as permitted by the Treasury regulations. The crop basis of accounting*3417 was very generally in use by sugar plantations throughout the Islands. It had been used by the petitioner since 1901. Under this system of accounts a crop was treated as a venture and an account kept for each crop. All expense incident to the crop, from the preparation of the soil to the harvest and manufacture of the cane into raw sugar, were charged to the crop account, and all receipts from the crop were credited to the crop account. When the crop was harvested and disposed of, the account was closed and it was determined whether there had been a profit realized or a loss sustained from the crop.
4. The Hawaiian Sugar Planters' Association, of which the petitioner was a member, is an unincorporated voluntary association, organized in the year 1895, whose membership (45 members) consists of substantially all of the sugar companies and individual planters in the Territory. The Association conducts an extensive experimental station for the improvement of sugar cane and elimination of cane pests, and in various other ways acts as the central organization of the Hawaiian sugar industry. It derives its income from regular and special assessments of its members based on the tonnage*3418 of sugar produced by the respective members. These assessments have been consistently allowed as a deductible business expense by the Commissioner of Internal Revenue.
5. In January, 1920, a strike of Japanese plantation laborers began on seven of the plantations, including Kahuku, situated on the Island of Oahu - one of the four sugar-producing islands in the Territory. The greater part of the labor on the Island was Japanese and the situation presented by the strike was considered very serious by the *979 Hawaiian sugar industry. The strike was financed by funds from the Japanese laborers on the other islands and it was believed that if it succeeded on Oahu, it would spread to these islands. The result was that concerted action to resist the strike was taken by all the Hawaiian sugar plantations through their organization, the Hawaiian Sugar Planters' Association.
6. It was apparent that the plantations resisting the strike would each sustain losses, either through direct property damage or on account of labor conditions incident to the strike, and the Association agreed to indemnify the plantations affected by the strike if they would take a stand against the*3419 strikers until the strike was broken. On January 29, 1920, the Trustees of the Association passed the following resolution:
RESOLVED, that the Association agrees to bear all losses to property which may be occasioned by the resistance of strikes on any and all plantations arising out of controversies over wages; it being understood that the plantations will be guided by the policy laid down by the Association from time to time in dealing with strikes for higher wages. All losses to be adjusted by the Association, whose decisions shall be final The adoption hereof is subject to the approval of the respective boards of directors and plantation owners.
On February 21, 1920, the Trustees of the Association passed the following resolution:
A motion was also unanimously carried that the sense of the strike sharing resolution adopted by the Association on the 29th day of January, 1920, is that losses to net profits are to be borne rather than losses to property. In connection with the suggestion of the Committee that the Trustees decide at this time the scope of said strike sharing resolution, it was moved by Mr. Dowsett, seconded by Mr. Bottomley, and voted that the losses occasioned*3420 by strike resistance to be borne by the Association are only losses sustained by those plantations the laborers of which are out on a strike.
8. The strike was finally broken in July, 1920, but not until the seven Oahu plantations affected by it, including petitioner's plantation of Kahuku, had sustained damages to their growing crops of cane. During the period of the strike there was in the ground most of the 1920 crop, planted in 1918; all of the 1921 crop, planted in 1919; and all of the 1922 crop, planted in 1920. The strike caused a shortage of labor. The strike-breakers were inexperienced men and the hours worked were less than the regular plantation hours. As a consequence, labor performed on the three crops was less than that which would normally have been performed. As a result of this shortage in labor and other conditions brought about by the strike, the harvest, and consequently the manufacture and marketing of the 1920 crop, was delayed. During the period of delay the market price of sugar fell. The cultivation, irrigation and fertilization of the 1921 and 1922 crops were delayed and irregular. This stunted the growth of the cane and as a consequence the yield*3421 was less than it otherwise *980 would have been. The planting of the 1922 crop was delayed and the acreage planted was less that of the 1920 crop which it followed. When it became apparent that the strike was likely to continue for some time and that losses were being sustained against which there was no check, the Association decided that steps should be taken to have a record made of the conditions on each of the plantations so there might be some evidence of loss other than the statement of the respective managers.
9. On February 16, 1920, the Trustees of the Association authorized the President to appoint a committee to make a survey of the plantations under strike and to determine the conditions on the plantations and maintain a record from day to day of the effect of the strike on each of the plantations. The purpose was expressed in the minutes of the Trustee's meeting as follows:
Mr. Tenney stated that the time has arrived for the Association to do something toward making a survey of the plantations under strike; that losses are being piled up against which there is no check and the liability therefor is running against the Association; that steps should be*3422 taken to have a record made of the conditions and situation on each of the plantations so that there will be some evidence other than the statements of the respective managers. That an independent committee, so far as possible to form one, should be put to work to make a survey and determine the conditions on the plantations and maintain a record from day to day so that the real facts may be known.
On motion made by Mr. Wodehouse and seconded by Mr. Bishop, it was voted that the President appoint such a committee as suggested by Mr. Tenney.
In general, the duties of said committee, as understood by the Trustees, appeared to be that it should have experts investigate the general conditions of the plantations and keep a check on such conditions from time to time; and to keep records as to the losses that are being sustained owing to the strike.
This committee was appointed from among the agricultural experts at the experimental stations and sent out to the plantations affected by the strike, to observe and report the conditions of the fields and the effect of the strike upon the growing crops, particularly irregularities in irrigation, the application of fertilizer, or any*3423 other conditions that would tend to retard the growth and progress of the crops. These technical experts remained continuously at the plantations during the strike and made regular notes as to the conditions affecting the crops.
10. When the strike had been settled, the Hawaiian Sugar Planters' Association, through its strike claims committee, estimated the net losses sustained by the affected plantations. The estimated tonnage loss to petitioner's plantation was as follows: loss to 1920 crop, 445 tons; to 1921 crop. 129.52 tons; to 1922 crop, 744.22 tons.
11. On December 29, 1920, the Association empowered the Strike Claims Committee to make a final determination of the amount of strike loss indemnity to be allowed to the Oahu plantations. This Committee then took up in detail the matter of determining the *981 amount of the losses occurring on each plantation with respect to each crop affected. On November 17, 1920, it presented to the Trustees of the Association a detailed from to be employed by the plantations in submitting their claims for strike losses. It was the purpose of this form to measure losses by the decreased receipts from each crop, with adjustment*3424 for increased or decreased costs in the planting, cultivation and marketing of such crop. The computation of the amount so ascertained and paid to the petitioner was summarized on one of these forms as follows:
| Losses | Gains | |
| 1920 crop: | ||
| Exhibit 2(D) (operations) | $57,842.97 | |
| Exhibit 3 (D) (bonus) | $57,165.13 | |
| Exhibit 4(B) (receipts) | 344,775.48 | |
| Exhibit 5(D)(E) (rents) | 13,791.02 | |
| Exhibit 6(C) (miscellaneous) | 31,217.28 | |
| Total, 1920 crop | 433,835.73 | 60,956.15 |
| Subtract gains 1920 crop | 60,956.15 | |
| Net loss, 1920 crop | 372,879.58 | |
| 1921 crop: | ||
| Exhibit 8(C) (operations) | 5,337.05 | |
| Exhibit 9(M) (receipts) | 14,427.23 | |
| Exhibit 10(D)(E) (rents) | 686.30 | |
| Exhibit 11(D) (miscellaneous) | 1,664.54 | |
| Total, 1921 crop | 19,764.28 | 2,350.84 |
| Subtract gains, 1921 crop | 2,350.84 | |
| Net loss, 1921 crop | 17,413.44 | |
| 1922 crop: | ||
| Exhibit 13(c) (operations) | 23,213.58 | |
| Exhibit 14(M) (receipts) | 82,989.67 | |
| Exhibt 15(D)(E) (rents) | 3,943.47 | |
| Exhibt 16(C) (miscellaneous) | 4,553.28 | |
| Total, 1922 crop | 87,451.95 | 27,157.05 |
| Subtract gains, 1922 crop | 27,157.05 | |
| Net loss, 1922 crop | 60.294.90 |
12. The plantations kept their cost accounts in an elaborate and detailed form, so that*3425 it was possible to determine the cost by units, either per acre or per ton of cane, for the various operations such as clearing, planting, hoeing, or weeding, irrigating, fertilizing, cutting, loading and transportation. In arriving at the amount of loss from operations on account of the strike, the Committee took the average cost of these various operations for the preceding years 1917, 1918, and 1919 as a basis for normal cost and compared these normal costs with the actual cost which had been or would be paid.
13. Under a contract between petitioner and its laborers, petitioner would have had to pay a bonus to its regular plantation laborers in 1920 had there been no strike. The strike breakers received a flat wage and were not entitled to a bonus. The difference between this flat wage and the amount of bonus the plantation would have paid such laborers had there been no strike was treated by the Committee*982 as a saving and deducted from the gross losses in arriving at the net losses sustained in that year.
14. Due to labor conditions there was a delay in harvesting and shipping the 1920 crops, during which the price of sugar fell. The loss from receipts was*3426 determined as the difference between the price actually received and the price which would have been received had the 1920 crop been harvested and marketed under normal conditions. The loss in receipts from the 1921 crop was determined by applying a price of 8 cents per pound to the estimated loss in tonnage by reason of inadequate care and cultivation during the strike. From this was deducted the decreased expense of cutting, milling and marketing the smaller crop. The loss in receipt from the 1922 crop was determined in the same manner. The principal cause of the reduced tonnage in the 1922 crop was the decrease in the amount of planting and the delay in starting the crop with a consequent stunting of the cane and a shortening of the growing period.
15. Rentals were paid by the plantations upon the basis of a percentage of the crop. The Committee treated as a gain the difference between the rents actually paid and those which would have been paid on a normal crop.
16. Extraordinary expenses, such as additional cost for fuel oil for the mill furnaces, extra police, cost of camps for strike breakers and similar items were grouped by the committee as miscellaneous losses.
*3427 17. In estimating the loss sustained the Committee took into account any savings which would be effected on account of a normal expenditure which would not be necessary to make on account of changed conditions resulting from the strike. These items were deducted from the gross determination of loss in arriving at the net loss sustained.
18. The sum of $450,587.92, representing its estimated loss with respect to the three crops, was paid to petitioner by the Hawaiian Sugar Planters' Association in December, 1920.
19. Petitioner's balance sheet at December 31, 1920, was as follows:
| Assets: | |
| Permanent Improvements | $1,315,590.08 |
| Growing Crop 1921 | 340,600.84 |
| Growing Crop 1922 | 84,941.89 |
| Investments | 32,866.00 |
| Supplies and Sundries | 132,391.36 |
| Accounts Receivable | 75,587.08 |
| Cash | 637,540.46 |
| Total assets | 2,619,517.71 |
| Liabilities: | |
| December Pay roll | 22,112.55 |
| Personal Accounts payable | 35,772.67 |
| Strike Compensation 1921 and 1922 Crops | $77,708.34 |
| Reserve for Taxes | 325,000.00 |
| Capital Stock | 1,158,924.15 |
| Surplus | 1,000,000.00 |
| Total liabilities and capital | 2,619,517.71 |
*983 20. In its accounts and in its Federal income-tax returns petitioner*3428 treated the amount received as indemnity for the estimated losses to its 1920 crop as income for 1920. It treated the amounts received as indemnity for the losses to its 1921 and 1922 crops as income for the years 1921 and 1922, respectively, and not as income for 1920.
21. The respondent, in the determination of the deficiency, treated the amount of $17,413.44 received on account of the 1921 crop, and $60,294.90 received on account of the 1922 crop, as taxable income for 1920.
22. In petitioner's business of running a sugar plantation there are items of expense and income that can not be allocated to any particular crop and are properly applied to the year in which they are incurred or received.
OPINION.
PHILLIPS: During the years involved the petitioner was engaged in the operation of a sugar plantation on the island of Oahu, in the Territory of Hawaii. In the Hawaiian Islands a sugar crop matures in about two years. The cane is planted or ratooned during the spring and summer of the first year, cultivated during the second year and cut and ground in the third year. During each calendar year there are, therefore, three crops to be considered; the crop which is being*3429 harvested, the crop which is being started, and the intermediate crop, planted the previous year, which is under cultivation. Substantially all of the expenses incurred upon such a plantation are upon account of some one crop and may readily be charged against such crop. Expenditures made during the course of one year upon account of one crop differ from those made in the same year for the other crops and are of little or no benefit to such other crops. The acreage of crop planted varies from year to year, as does the cost of production and the price realized. Experience has shown that the only practicable method by which the results of operations may be gauged and profit or loss determined is to keep the accounts upon a basis by which the expenses of each crop are separately kept and are carried forward as a capital or asset item until the crop is harvested, when the entire expenditure is charged against the receipts from that crop. This system of accounting is known as the crop basis of accounting and during the taxable years was employed by the petitioner and by substantially all the plantations in the Hawaiian *984 Islands. It is expressly recognized in the regulations*3430 promulgated by the Commissioner, which read:
If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such cases the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized.
As herein used the term "farm" embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit and truck farms, also plantations, ranches, and all land used for farming operations. (Article of Regulations 45, 62, 65 and 69.)
This regulation was issued pursuant to sections 212(b) and 213(a) of the Revenue Act of 1918 which provided in part:
SEC. 212. (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis*3431 and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *
SEC. 213. (a) * * * The amount of all such item [of income] shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * *
The subsequent revenue acts have contained similar provisions and the regulation has remained unchanged since it was first promulgated under the 1918 Act.
The crop basis of accounting is an adaptation of the voyage or venture methods of accounting. Such methods of accounting go back to the earliest known history of voyages and are among the earliest known forms of accounting. They continue to play an important part in accounting theory and practice, particularly in those cases where the transaction involved is an isolated one, or the business transacted is a series of ventures maturing at regular or frequent intervals and is of such a nature that the result of a comparison of current receipts with current expenditures bears no fixed relationship to the true earnings*3432 of the accounting period. This principle of accounting has been recognized by the Board as proper in the case of a round-trip voyage of a vessel, where receipts for passage and freight received in advance of the voyage are to be offset by the expenses of the voyage subsequently incurred. .
There is no dispute between the parties that the crop basis of accounting is properly used in computing the income from sugar plantations in the Hawaiian Islands; the returns of petitioner were filed and audited and the deficiency computed upon the basis of such *985 method of accounting. The parties differ only as to its proper application to the facts in this case.
In January, 1920, the Japanese laborers on the plantations on the Island of Oahu went on strike. The greater part of the labor on that island and on the three other sugar producing islands in Hawaii was Japanese. The sugar industry looked upon this strike as a matter of the gravest character. It was believed that if the strike succeeded on Oahu, it would spread to the other islands. This was based on information that the strikers were largely financed by funds from the*3433 Japanese laborers on these other islands. The result was that concerted action was taken by all the Hawaiian sugar plantations through their organization, the Hawaiian Sugar Planters' Association.
It was seen that each plantation resisting the strike would sustain losses through it; possibly through direct property damage and certainly through inadequate labor supply, which would mean delay in harvesting the 1920 crop, poor cultivation of the 1921 crop, and a reduced area or defective planting and care of the crop to mature in 1922. The plantations as a group desired to make certain that the Oahu plantations would fight the strike to the end in spite of the damage and cost. With this in view, the Trustees of the Hawaiian Sugar Planters' Association, shortly after the outbreak of the strike, agreed on behalf of the Association to indemnify the plantations affected by the strike for losses sustained in resisting the strike, and these plantations agreed that they would be guided by the decisions of the Association in the handling of the strike resistance.
It soon became apparent that the strike was likely to continue for a considerable period, and the Association desired to keep*3434 fully advised at all times during its progress as to the losses resulting therefrom. Consequently, on February 16, 1920, the Trustees of the Association authorized the President to appoint "an independent committee * * * to make a survey and determine the conditions on the plantations and maintain a record from day to day so that the real facts" (as to the strike losses) "may be known," which Committee was thereafter appointed. This Committee appointed experts from the technical staff of the Association, who remained continuously at the plantations affected by the strike and made regular notes as to the conditions of growth of the cane, the irrigation conditions and other matters bearing on the effect of the strike upon the growing crops.
The resistance to the strike was successful, and by the end of July the strike was practically over and substantially all of the strikers remaining in the Islands had returned to work.
The Strike Claims Committee then took up in detail the matter of determining the amount of the losses occurring on each plantation with respect to each crop affected. On November 17, 1920, the Committee*986 as a result of their work presented to the*3435 Trustees a detailed form to be employed by the plantations in submitting their claims for strike losses. The items going into the tabulation of net loss were intended to be such as to put these plantations upon the basis which would have existed had there been no strike. In the case of the petitioner the amount paid it was summarized upon one of these forms as set out in our findings.
The largest item in the computation is the loss from receipts. In the case of the 1920 crop, this was due principally to the delay in harvesting the crop. Because of this the cane did not produce the quantity of sugar which would have been obtained had it been harvested at the proper time, and the sugar was marketed late. The probable loss in tonnage was determined by the experts from the staff of the Planters' Association. But the principal loss in receipts in 1920 was due to the collapse in the price of sugar during the latter part of 1920, the strike having delayed the plantations affected in getting their crop to market. The date when the raw sugar would have been ready for shipment was determined from date of previous years. The price which the normal corp shipped at the usual dates would*3436 have brought, after the payment of shipping costs, was computed and compared with the amount realized. The loss in receipts from the 1920 crop was determined to be $344,775.48. The loss in receipts from the 1921 crop was determined by applying to the tonnage of sugar that would be lost by reason of inadequate cultivation during the strike, a price of 8 cents per pound. This was considered to be a fair average of the prospective price for the 1921 crop. The probable loss in tonnage was determined by the experts on the staff of the Association on the basis of the survey by them of the growing crop, made at frequent intervals during the strike and subsequently during 1920. The estimate of the price of sugar in 1921 was fixed by the Trustees of the Association. The loss in receipts from the 1922 crop was determined in the same manner. The principal cause of the reduced tonnage in this crop was the decrease in the acreage planted and the delay in starting the crop with a consequent shortening of the growing period.
The items of losses from operations represent the increased cost of field operations, such as clearing, planting, hoeing, irrigating, fertilizing, cutting, loading, *3437 transportation of cane from field to mill, and other increased labor costs. The computation of the increased cost was based on the average cost of the same operations for the three preceding years.
The item of gain from bonus, which occurs only in 1920, represents the amount of bonus which would have been paid to laborers under normal operations but which was not paid because of the strike. Such bonus is based upon the price received from sugar.
*987 The gains from rents represent the difference between the rentals which would have been paid on the receipts from a normal crop, as estimated, and those payable on the basis of the receipts from the reduced crop which would be harvested in each of the crop years. Rentals were payable upon the basis of a fixed percentage of the crop.
The amounts included under miscellaneous losses consisted of such items as increased cost of fuel oil for the mill furnaces - due to the irregularity with which the crop was harvested, extra amounts paid for police, losses of amounts advanced to former employees who went on strike and left the plantations without paying such advances, and other items which were not considered ordinary agricultural*3438 expenses.
In computing each item there was charged against it any saving which would be effected. For instance in the case of the 1922 crop, a gain from operations was computed. In this case the crop was late in planting and was smaller in amount and while it would yield less, it would also require smaller expenditures for irrigating, cultivating, fertilization and harvesting than would a normal crop. The amount saved in this manner over the amount which would have been expended on a normal crop was treated in the computation as a gain.
That items of income need not necessarily be included in gross income of the year when received is recognized in section 213(a) of the Revenue Act of 1918, which, after stating what is to be included in gross income, provides:
* * * The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * *
When the method of accounting employed is the so-called crop method, the cost of planting, cultivating, and harvesting of*3439 the crop and all other expenses incidental to the production and marketing of the crop are charged to one account, usually denominated "crop account," and the receipts from the sale thereof are credited to the same account. The usual practice, which was followed in this case, is to carry a separate account for each crop. The balance in the crop account is carried upon the books and into the balance sheet as an asset or liability until the total receipts and expenditures can be ascertained, whereupon the balance, representing the profit or loss upon the crop, is carried into the profit and loss statement and the crop account closed. In such circumstances a proper balance sheet will show as an asset the amount invested in each crop which has not yet been harvested and the profit and loss statement will reflect the result of the crop harvested in the current year, without attempting to estimate in any way the profit or loss on crops in the ground. The situation is comparable with that of a manufacturer who inventories at cost those goods produced in his factory. The *988 principle of this method of accounting is to bring into the crop account all receipts from that crop and*3440 all expenses chargeable to that crop. If an item of income or expense relating to the crop is excluded from the crop account, this will necessarily disturb the accuracy of the accounting and will result in showing a net gain or loss from that crop different from the true net gain or loss. The same would be true of any accounting system based upon the principles of venture or voyage accounting.
Under such a method of accounting, receipts are not to be treated as income or payments treated as expenses until the sale or other disposition of the crop is substantially completed and its outcome is known. Thus, receipts from a crop in a year prior to that in which that crop is completed are not accounted income until the year of sale or other disposition of the crop. Additional expenses will arise, in connection with the producing, harvesting and marketing of the crop, until the sale or other disposition is completed, or substantially so, all of which are incidental to the earning of the gross income represented by the receipts from the crop.
The parties do not question that these are the proper principles to be applied in this case and these principles have, we believe, the unqualified*3441 support of standard works of accounting. The respondent, however, contends that the receipts in question are not, in fact, receipts from the crop but an award made by the Association for the privilege of conducting the strike in such a manner that the outcome would benefit all of its members. The amount of the award, says the respondent, was not income from the crops and had no connection with them save that they were employed as a means of measuring the amount to be paid under the agreement between the Association and the planters. Petitioner, on the other hand, contends that the payment was awarded for specific losses to each of the respective crops.
That the payment may have been liquidated damages for the privilege of conducting the strike would not prevent it from going into the crop account if it was made in respect of the crop. Receipts from hail insurance for damages to crops, insurance for loss of receipts from freight, insurance from the partial destruction of goods involved in a venture, are all treated as receipts from the crop, voyage or venture. The question to be determined is whether the payment was in fact a receipt arising out of the crop.
It can not be*3442 questioned that the strike did have its effect upon the crops in question. The tonnage of sugar produced was reduced, the cost of the necessary labor during the strike was increased, and the cost of cultivation in the period following the strike was increased, for the testimony is that a late or neglected crop requires greater attention than a normal crop. The expense already incurred was rendred of less value than would have been the case under *989 normal circumstances. We are thus presented with a situation where receipts are reduced and expenses increased. The award made by the Planters' Association represented a computation, based on the best available data, of the amount by which receipts and expenses were affected and a balancing thereof. A balance so arrived at is in no true sense net income, for it must be considered in connection with other expenditures made or to be made and other receipts to result from the crop before we may determine whether any part represents a gain. It may well be that under normal conditions a loss would have resulted from the crop, and the payment is no more than a reduction in the amount of such loss. So long as it relates to a crop*3443 planted it represents nothing but a computation of the net loss in receipts. To refuse to consider such an item in computing gain or loss from the crop is to distort the gain or loss from that crop. It is just this which the Revenue Act seeks to avoid.
We have said that the parties, the Commissioner's regulations, and the accounting authorities are agreed that amounts received from hail insurance for damage to a crop are to be reported as a part of the crop income. The basis for the computation of the damage in such a case is precisely that followed in this case. The courts hold that the recovery under a policy insuring growing crops against damage is the market value of the crop destroyed, less the expense of preparing it for market. The loss in bushels, less the cost of maturing, harvesting, and marketing may be shown as indicating the amount of the loss. ; ; ; . This is the measure which was used in this case and we see no difference in principle between a payment for losses by hail and a payment for losses*3444 from a strike. It is true that in either case the amount received represents gross income, but it does not represent a profit; and until the crop for the year is completed it can not be known whether there has been a profit or a loss. Under the crop system of accounting, the receipt from this source must be considered with the other receipts from the crop, and compared with the expenses.
It is claimed that the expenses of the crop have no connection with the amount awarded. This overlooks the fact that the starting point of the award was the amount to be received from the crop under normal conditions, and that such a crop can be produced only by reason of such expenditures.
It is our opinion that to the extent that the award was for losses to the crop, it is to be considered as a receipt from that crop and accounted for as such. It appears that the amount awarded for 1921 was entirely on account of damage to the crop to mature in that year. We find, however, that in computing losses to be paid on the 1922 crop, consideration was given to the smaller acreage which was planted. Any amount which was included in the computation *990 for that reason does not represent*3445 a receipt from the 1922 crop, but rather a payment in the nature of a reimbursement for profits foregone. It is a payment of the estimated profits on acreage never planted and comprising no part of the crop. It represents income of the year when received and not income from a future crop for it can not be said to be in any true sense a payment arising from petitioner's crop for 1922. There is no basis on which we may determine how much of the payment made on account of 1922 represents reimbursement for the net loss of receipts from the crop of that year, and how much represents a computation of profits on the acreage which was not planted. The computation made by the Association is such as to lead to the belief that a substantial portion of the payment falls in the latter classification. We are of the opinion that the payment of $17,413.44 on account of the net losses to the 1921 crop is properly to be accounted for as a receipt on account of the crop of that year, to be used in determining the income come from that crop and that it was erroneously included by the Commissioner in computing the taxable income for 1920. The action of the respondent with respect to the payment for*3446 1922 losses is approved.
Counsel for the respondent place reliance upon the decision of the Circuit Court of Appeals for the Ninth Circuit in . In that case the court had for decision the proper treatment under the Hawaiian income-tax law of these strike-loss payments. It decided that the entire payment was income for 1920. The difference in the situation, however, appears from the opinion where it is said:
The inference is not deducible from the decisions of the Supreme Court of Hawaii that income actually received in one year is not taxable as income of that year but is to be carried into the income of another year.
The statute which governs this case provides in express terms for precisely that which the court finds missing in the Hawaiian statute. The underlying principles of the two statutes are so divergent, so far as they affect the treatment of this payment, that the decision can not be considered as controlling here. The court also points out in that case that the amount paid was compensation or liquidated damages for losses sustained. Counsel for respondent argue from this that the amount was income. *3447 Unquestionably so, but this does not decide the question for it must still be determined whether this payment of compensation or liquidated damages for losses was for losses to the crop of a future year to the extent that it constitutes a payment received out of that crop. This we have done.
Reviewed by the Board.
Decision will be entered under Rule 50.