This case presents the question whether a claim for refund of excise taxes which has been barred by the statute of limitations is deductible as a bad debt or loss in the computation of net income in the year in which the statute ran.
The taxpayer, Milton Bradley Company, is a Massachusetts corporation engaged in the manufacture of jigsaw puzzles. Under Section 609 of the Revenue Act of 1932, 47 Stat. 169, 26 U.S.C.A. Int.Rev.Acts, page 612, imposing a 10% excise tax on sporting goods and games, the taxpayer paid taxes in 1932 and 1933 in the amount of $40,-260.73. In its income tax return for 1933 the taxpayer deducted $35,288.57 as taxes paid. It took no deduction for the remaining $5,032.16, representing taxes applicable to 1932.
Upon November 8, 1937, the United States Supreme Court decided in White v. Aronson, 302 U.S. 16, 58 S.Ct. 95, 82 L.Ed. 20, that jigsaw puzzles were not games-within the meaning of Section 609, supra. Thereafter the taxpayer-filed refund claims which were allowed for the taxes paid in October, November, and December, 1933, in the amount of $1,782.77. As to $38,477.96 paid earlier in 1933, that claim was disallowed on the ground that the running of the statute of limitations barred the recovery of that amount. The taxpayer’s return for-*5421937 showed a tax liability of $19,558.51. It seasonably filed a claim for refund of $1 of this tax or such greater amount as may be allowable. That claim was disallowed in full by the Commissioner. The taxpayer thereupon brought suit in the District Court for $9,870.64, the amount by which its tax would have been reduced if it were allowed to take the $38,477.96 claim as a deduction upon its 1937 tax return. The taxpayer’s theory was that the running of the statute of limitations in 1937 constituted the claim a bad debt or loss within the meaning of § 23 of the Internal Revenue Act.1 The lower court granted the government’s motion to dismiss the complaint on the ground that the taxpayer had failed to follow the procedure prescribed for the recovery of taxes erroneously or illegally collected, without deciding whether the running of the statute of limitations converted this claim against the government into a deductible loss or bad debt. This is the only question before us on this appeal.
It is well settled that tax deductions are a matter of legislative grace and that a particular deduction will be 'allowed only where there is clear provision in the statute for the deduction claimed. New Colonial Ice Co. v. Helvering, 1934, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348; see McDonald v. Commissioner, 65 S.Ct. 96. For this tax claim to be deductible in 1937 as a bad debt or loss it must come clearly within the meaning of Section 23(f) or (k). In our opinion it does not fall clearly within the coverage of either section.
The timely filing of a claim for refund by the taxpayer and the allowance of that claim are prerequisites to any liability to pay on the part of the Commissioner. Under the statute an amount is deductible as a bad debt where there is a valid debt arising out of a debtor-creditor relationship. Hamlen v. Welch, 1 Cir., 1940, 116 F.2d 413; Allen-Bradley Co. v. Commissioner of Internal Revenue, 7 Cir., 1940, 112 F.2d 333; Harmount v. Commissioner of Internal Revenue, 6 Cir., 1932, 58 F.2d 118; Domhoff & Joyce Co. v. Commissioner of Internal Revenue, 6 Cir., 1931, 50 F.2d 893. One of the underlying conditions of validity is an unconditional obligation of the debtor to pay the creditor. “The debts which the statute permits to be charged off when ascertained to be worthless are debts where there is an obligation of the debtor to pay and a right of the creditor to receive and enforce payment.” J. S. Cullinan v. Commissioner of Internal Revenue, 19 B.T.A. 930. “The sine qua non of a debt is the obligation to pay. * * * And this means not a contingent obligation, * * Wolff v. Commissioner of Internal Revenue, 26 B.T.A. 622, 626, and cases cited. The liability to pay in the future, contingent upon something which may or may not occur, is not indebtedness, and the taxpayer may not treat as worthless debts amounts which are at a particular time merely contingent liabilities. Eckert v. Burnet, 1931, 283 U.S. 140, 51 S.Ct. 373, 75 L.Ed. 911; S. Naitove & Co. v. Commissioner of Internal Revenue, 1929, 59 App.D.C. 53, 32 F.2d 949; Wolff v. Commissioner, supra. Where the liability to pay is not absolute, the existence of a deductible debt has not been accepted. Howell v. Commissioner of Internal Revenue, 8 Cir., 1934, 69 F.2d 447, certiorari denied Howell v. Helvering, 1934, 292 U.S. 654, 54 S.Ct. 864, 78 L.Ed. 1503; American Cigar Co. v. Commissioner of Internal Revenue, 2 Cir., 1933, 66 F.2d 425 certiorari denied 1933, 290 U.S. 699, 54 S.Ct. 209, 78 L.Ed. 601; In re Park’s Estate, 2 Cir., 1932, 58 F.2d 965, certiorari denied, 1932, Park’s Estate v. Commissioner of Internal Revenue, 287 U.S. 645, 53 S.Ct. 91, 77 L.Ed. 558. The taxes in question here were collected under color of right. The timely filing of a claim for refund is a condition precedent to the recovery of such taxes, and unless that claim is timely filed the statute in effect provides that the Com*543missioner is under no liability to pay. After the running of the statute of limitations the right of the creditor to receive and enforce payment has been foreclosed. Since the obligation of the Commissioner to pay can arise only upon the timely filing of a claim for refund and cannot exist before that is done — and it was never done here— the Commissioner was under no liability to pay. We therefore hold that this claim for refund barred by the statute of limitations is not deductible as a bad debt under Section 23 (k).
For the same reason it cannot be deducted as a loss under Section 23(f). Conceding that the amount of the claim is certain and that the date of its loss is certain, the timely filing of the claim for refund is a condition precedent to recovery of the taxes. Until that is done the taxpayer’s claim is contingent, and it cannot therefore be treated as a deductible loss. In Lucas v. American Code Co., 1930, 280 U.S. 445, 450, 50 S.Ct. 202, 203, 74 L.Ed. 538, 67 A.L.R. 1010 the Supreme Court said: “Obviously, the mere refusal to perform a contract does not justify the deduction, as a loss, of the anticipated damages. For, even an unquestionable breach does not result in loss, if the injured party forgives or refrains from prosecuting his claim. And, when liability is contested, the institution of a suit does not, of itself, create certainty of loss.”
The judgment of the District Court is affirmed.
Internal Revenue Act of 1936, Ch. 890, 49 Stat. 1648, 26 U.S.C.A. Int.Rev. Acts, pp. 827, 828.
Ҥ 23. Deductions from Gross Income
*‘In computing net income there shall be allowed as deductions:
* * * ❖ * *
“(f) Losses by Corporations. In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.
“(k) Bad Debts. Debts ascertained to be worthless and charged oft within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.”