American Code Co., Inc. v. Commissioner of Internal Revenue, Docket No. 9077.
| Decision Date | 02 February 1928 |
| Docket Number | Docket No. 9077. |
| Parties | AMERICAN CODE CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Clark H. Hebner, Esq., for the petitioner.
Bruce A. Low, Esq., for the respondent.
The Commissioner determined a deficiency of $122.91 in income and profits taxes of the petitioner for 1919. The petitioner seeks a redetermination of such deficiency, alleging that it has made an overpayment of its taxes for such year in the amount of $9,365.11. The petition alleges that the Commissioner committed error in refusing to allow the deduction of a loss alleged to have occurred in 1919 upon breach of a contract.
FINDINGS OF FACT.
The petitioner is a New York corporation, organized in the year 1914 in the Borough of Manhattan of the City of New York.
On January 3, 1919, the petitioner entered into a contract of employment with one Cosmo Farquhar for a term to begin on January 3, 1919, and to end on February 1, 1937, the compensation of the employee to be a commission based upon the sales made in the petitioner's business.
On May 1, 1919, the petitioner discharged the said Cosmo Farquhar from its employ.
In July, 1919, Farquhar began action against the taxpayer in the Supreme Court of New York County to recover commissions due him for April, 1919, alleged to be $1,000, and for breach of the contract of employment, claiming damages for such breach in the amount of $100,000. The petitioner defended such action on the ground that Farquhar had previously breached his contract of employment and that his discharge was justified by reason of his failure to perform his duties. This action was reached for trial in January, 1922, and resulted in a verdict by the jury against the petitioner and an award of damages in favor of Farquhar for breach of contract in the sum of $21,019.19.
The petitioner appealed to the Appellate Division of the Supreme Court, State of New York, which court, on June 2, 1922, affirmed the judgment. Petitioner then appealed to the Court of Appeals of the State of New York, in which court the judgment was again affirmed on the 16th day of January, 1923.
The petitioner paid the amount of said judgment in January, 1923.
The petitioner kept its books and made its income-tax returns on the accrual basis.
The petitioner, at the close of the year 1919, set up on its books as a reserve for the breach of the contract of employment, the amount of $14,764.79, such amount having been computed at the rates of commission and on the basis specified in the said contract. At the close of the year 1920 this reserve was increased on the petitioner's books by...
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