*3236 The petitioner is entitled to take as a deduction as an ordinary and necessary expense of its business in the year 1920, $28,901.38 for which amount the Interstate Commerce Commission in that year finally determined that the petitioner was liable to certain railroads as demurrage for failure to unload certain freight cars in 1919 without fault on the part of the petitioner, where petitioner disputed liability from the beginning and until said final decision by the Interstate Commerce Commission; and where the petitioner did not enter this or any other amount as a liability on its books at the time the claim was asserted by the railroads nor until after the final decision was rendered by the Interstate Commerce Commission.
*490 This is a proceeding for the redetermination of deficiencies in income and profits tax for the calendar years 1918, 1919, and 1920 in the aggregate amount of $50,474.38. The deficiency determined by the respondent for the year 1920 is $23,399.66, which has been assessed and*3237 for which an abatement claim was filed. Certain assignments of error stated in the petition were withdrawn at the hearing. The sole question in issue is whether the petitioner may deduct as an ordinary and necessary expense paid or incurred during the year 1920 in carrying on its business $28,901.38 finally determined by the Interstate Commerce Commission in that year to be due from the petitioner to certain railroads as demurrage on freight cars, where the delay in unloading cars occurred in 1919 without fault of petitioner and where the petitioner disputed all liability until the said determination by the Interstate Commerce Commission and did not enter up the amount nor any other amount as a liability upon its books until after the said adverse decision by the Interstate Commerce Commission in 1920.
FINDINGS OF FACT.
1. The petitioner is a Pennsylvania corporation with its principal office at Philadelphia. It is engaged in the wholesale coal trade and was so engaged in 1919 and in 1920.
2. Petitioner's books were kept on the accrual method of accounting during the years herein mentioned.
3. In accordance with various Interstate Commerce Commission regulations and*3238 orders demurrage is charged by railroad companies *491 for retention of freight cars beyond a given period. Because of strikes in and around the harbor of New York during the year 1919 of all the employees of the towboat and barge owners in New York harbor and of all the employees of the Marine Department of the United States Railroad Administration, the movement of coal into and from the port of New York was completely paralyzed except that moving to public utility plants, hospitals, and to meet emergency needs.
4. As a consequence of the strikes bills for demurrage for retention of freight cars amounting to $31,336.96 were rendered to petitioner during the year 1919. Counsel for the petitioners, after conferring with a number of other lawyers representing coal dealers similarly situated, came to the conclusion, and so advised the petitioner, that the demurrage bills were illegal and noncollectible, and that said bills should not be paid.
5. During the year 1919 petitioner did not treat the demurrage bills sent to it as items of expense and none of them was charged to expense during 1919. Petitioner entered all of said bills on its books in one entry on September 20, 1919, in*3239 a memorandum account charging Demurrage Suspense Account and crediting Demurrage Not Paid Account. The amount was set up on the books of account for that year in the following manner:
| JOURNAL ENTRY | ||
| September 30, 1919. | ||
| Demurrage Suspense - Dr | $31,336.96 | |
| Demurrage Suspense Not Paid - Cr | $31,336.96 | |
| $1,992.83 Pennsylvania Railroad 1/1/19 to 5/31/19. | ||
| $18,044.57 Philadelphia & Reading Railroad April and May, 1919. | ||
| 4,898.56 Lehigh Valley Railroad 1/1/19 to 5/31/19. | ||
| 6,401.00 Erie Railroad 1/1/19 to 5/31/19. |
| LEDGER | ||
| Demurrage Suspense | ||
| 1919 | ||
| 9/30 Dr | $31,336.96 | |
| Demurrage not paid | ||
| 1919 | ||
| 9/30 Cr | $31,336.96 |
6. Petitioner did not deduct any of these bills as an expense in its Federal income and profits-tax return for 1919 and none of these bills was paid by petitioner in 1919.
7. A petition protesting the demurrage charges was filed with the Interstate Commerce Commission by the Wholesale Coal Trade Association *492 of New York, of which petitioner was a member, on behalf of petitioner, inter alia, on April 25, 1919, Docket No. 10594. Hearings were had before an examiner of the Interstate Commerce Commission, *3240 who filed a report on January 30, 1920, recommending a reduction of the demurrage on the freight cars from $31,336.96 to approximately $10,000. Briefs were filed by the Railroad Administration asking that demurrage be allowed to stand as originally billed. After hearing before the Interstate Commerce Commission a decision was rendered June 4, 1920, which reduced the demurrage liability due from the petitioner from $31,336.96 to $28,901.38, which was paid during 1920 and 1921. As of December 31, 1920, after said final decision, petitioner charged said demurrage to expense. The total of the demurrage bills as reconstructed by the decision of the Interstate Commerce Commission was not finally arrived at in all cases until 1921 and said demurrage bills as adjusted were finally paid by petitioner as follows:
| 1920 | $21,228.46 |
| 1921 | 7,672.92 |
| 28,901.38 |
The resulting balance from the charge to expense of said demurrage bills at the end of 1920, amounting to $2,435.58, was charged off petitioner's books at the end of 1922 by a credit to Demurrage and Transfer Account of that amount.
The following represent the book entries leading to the final adjustment and payment*3241 of the demurrage charges in question:
| JOURNAL AND LEDGER | ||
| 1920 | ||
| 12/31 Profit and Loss | Dr. $31,336.96 | |
| Demurrage Suspense | Cr. $31,336.96 | |
| LEDGER | ||
| 1920 Demurrage Not Paid | ||
| 12/8 Cash | Dr. $4248.46 | |
| 12/30 Cash | 10320.00 | |
| 12/30 Cash | 6660.00 | |
| 1921 | ||
| 3/14 Cash | 107.12 | |
| 4/27 Cash | 6284.03 | |
| 7/20 Cash | 1141.24 | |
| 10/5 Cash | 140.53 | |
| Representing payments of Demurrage found to be due of | 28,901.38 | |
| 1922 | ||
| 12/30 | Dr. 2435.58 | |
| (Representing Demurrage found not to be due.) | ||
| DEMURRAGE & TRANSFER | ||
| 1922 | ||
| 12/30 | Cr. $2,435.58 |
*493 In its income-tax return for 1920 the petitioner claimed the deduction of $28,901.38, representing demurrage either paid or accrued within the year. The Commissioner disallowed the deduction of this amount, but allowed the deduction from gross income of $31,336.96 as demurrage which accrued during that year.
OPINION.
SMITH: It is the contention of the respondent herein that petitioner became liable to demurrage charges of $31,336.96 in 1919, and that in making its return for that year it should have deducted from gross income that amount as an ordinary and necessary expense of doing business; that the demurrage bills were in*3242 accordance with the law and regulations of the Interstate Commerce Commission; and that the petitioner had no reasonable ground for questioning the correctness of them. The petitioner contends, on the other hand, that it had good ground for contesting the demurrage charges; that the basis of such ground was the opinions of expert counsel; and that in point of fact the Interstate Commerce Commission modified the determinations of the railroad companies and reduced the demurrage payable to the amount of $28,901.38.
The net income of a corporation under the Revenue Act of 1918 is to be determined in accordance with the provisions of section 232 of the Act, which specifies that the term "net income" means the gross income defined in section 233 less the deductions allowed by section 234 "and the net income shall be computed on the same basis as provided in subdivision (b) of section 212 or in section 226." Section 212(b) provides:
The net income shall be computed upon the basis of the taxpayer's annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; * * *
Petitioner admittedly kept its books of account*3243 upon the accrual basis. The respondent argues from this fact that it was necessary for it to charge itself with the demurrage which had been asserted against it by the several railroad companies which, during the year 1919, had transported coal for it.
Many decisions have heretofore been rendered by this Board as to the circumstances under which a taxpayer keeping its books upon an accrual basis must accrue a liability in the year in which the transaction occurred out of which the liability arose, and as to the circumstances under which a taxpayer must accrue it only in the year *494 when the liability is finally determined, either with or without court adjudication. Each of these cases turns on its own facts and circumstances. The sound rule established is that where the taxpayer acting in good faith disputes the liability and does not enter the item as a liability as of the year in which the transaction occurred out of which the liability arose the taxpayer can not take the deduction in that year but must take the deduction when the liability is finally determined or admitted. In *3244 , we held that the deduction involved in that case must be taken in the year when the transaction arose. This was upon the ground that the taxpayer had no sound reason to dispute the liability in the earlier year. In that case we said:
* * * In the same manner compensation for services is to be deducted in the year in which the liability arose and the date of accrual may not be postponed by the debtor by disputing either the liability or the amount thereof.
We think it is clear that there is no election in a taxpayer to shift at his convenience the year in which the deduction for expenses must be taken merely by disputing the liability where is no reasonable ground to deny liability. It does not follow, however, that where a taxpayer in good faith and on reasonable grounds disputes the liability he must nevertheless charge himself with the liability on his books and render tax returns accordingly. A taxpayer operating a large number of trucks in a populous city might have many claims filed against it for damages both to the person and to property. Some of these claims may be entirely groundless. We think it can not*3245 be maintained that merely because the taxpayer may be subject to a liability on some of these claims he should charge himself with a liability prior to the date the amount thereof is actually ascertained. In , we had before us the question as to whether a railroad company keeping its books of acount on the accrual basis should be required to return as a part of its gross income interest upon bonds owned by it where the debtor corporation did not pay the interest during the taxable year and in all probability never would be able to pay it. It was noted that under the requirement of the Interstate Commerce Commission interest accrued on funded securities could not be credited to income account prior to actual collection "unless its payment is reasonably assured by past experience, guaranty, anticipated provision, or otherwise." We held that in such case the petitioner was not required to accrue interest upon the funded securities and pay income tax upon such interest. The mere fact that the petitioner kept its books upon an accrual basis did not require it to accrue as income that which in truth and in fact was not income.
*3246 *495 The rule enunciated in , is equally applicable here. In , the taxpayer claimed the right to deduct as a loss the seizure of property by the German Alien Property Custodian. The Commissioner denied the right to take the loss at the time the seizure was made. The Supreme Court, in sustaining the taxpayer, pointed out that the regulations consistently with the statute contemplated that a loss may become complete enough for deduction without the taxpayer establishing that there is no possibility of an eventual recoupment.
A taxpayer is entitled to report income for taxation on the same sound business judgment on which he keeps his books for business purposes. If in good faith he does not recognize a claim as a valid claim against him it is not an accrued liability. To hold that every liability asserted against a taxpayer and independently of whether it was reasonably based, must be taken as a deduction from income of the year when asserted, would lead to just as impossible results as would result from allowing a taxpayer, merely by questioning*3247 an undisputed liability, to shift at his election the year in which the deduction may be taken.
The Board has held in numerous cases that the deduction for a liability must be taken in the year when the liability was determined. ; ; ; ; ; ; ; ; ; ; ; . In all of the above cases the taxpayer disputed liability and the Board ruled that the deduction must be taken in the year when the liability was determined and not in the year when the transaction occurred, the dispute of the liability being reasonable, although in some of the cases the taxpayer had entered*3248 the liability on its books of account. See also .
We are of the opinion that there was no accrued liability on the part of petitioner in 1919 with respect to demurrage charges which had been made against it. The Interstate Commerce Commission held in 1920 that petitioner was liable to demurrage charges in the amount of $28,901.38. Such demurrage charges were paid in 1920. We think that they accrued in that year within the meaning of the *496 statute and that the amount paid is a legal deduction from gross income of 1920.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MARQUETTE agrees with the result.
PHILLIPS dissents.