Miller v. Commissioner

*281 Respondent determined a deficiency of $ 5,733.77 in petitioner's income tax liability for the year 1944. In the deficiency notice respondent adjusted net income and explained the adjustments as follows:

*177 The parties have stipulated that if the reserve for renegotiation expense is determined by the Court to be an allowable deduction, then the petitioner is entitled to deduct the sum of $ 1,626.42 as medical expense. Otherwise, petitioner's deduction for medical expense is limited to $ 1,276.42.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found accordingly.

The petitioner is a resident of Pontiac, Michigan. His income tax return for the taxable year ended December 31, 1944, was filed with the collector of internal revenue for the district of Michigan at Detroit.

During the year 1944, petitioner was employed as a salesman by the Huse-Liberty Mica Company of Boston, Massachusetts. By the summer of 1944 petitioner had earned in excess of $ 25,000 from his sales for Huse-Liberty Mica Company and under the applicable Renegotiation Act the petitioner became subject to renegotiation. The petitioner *282 knew from past experience that he would be renegotiated for the taxable year and planned to contest the renegotiation and to that end to employ attorneys and accountants.

For the taxable year petitioner reported income from the Huse-Liberty Mica Company in the *178 amount of $ 77,313.83, all of which income was subject to the Renegotiation Act of 1943, as amended. In anticipation of contesting the renegotiation of said income, petitioner set up a "Reserve for renegotiation expense" in the amount of $ 7,000 and deducted said amount as a business expense on his 1944 income tax return.

The amount of $ 7,000 was an estimate by the petitioner of what would be the cost of contesting the renegotiation. An attorney was retained by the petitioner in 1944 but he did not perform services of any consequence in the taxable year. No part of the reserve for renegotiation expense was paid by the petitioner in or during 1944, the taxable year. Petitioner kept his books and records and filed his return on a cash receipts and disbursements basis during the taxable year. The Commissioner determined that said deduction of $ 7,000 was not allowable under section 23 (a) of the Internal Revenue Code.

OPINION.

Petitioner is an individual who kept his books and filed his income tax return for the taxable year on a cash basis. He believed that excessive profits realized by him during the taxable year would be renegotiated by the Navy Department in a subsequent year. *179 In anticipation of contesting the renegotiation, he set up a reserve of $ 7,000 for renegotiation expense and deducted the amount as a business expense on his 1944 income tax return. No part of the reserve was paid by the petitioner in 1944. The Commissioner maintains that the reserve deducted by the petitioner is not an allowable deduction under the provisions of the Internal Revenue Code.

Petitioner concedes in his brief that business expenses may be deducted only in the year during which they were paid or incurred even though such expenses may relate to transactions giving rise to income items in previous years. Regulations 111, section 29.43-1. He contends, though, that an exception to the aforementioned general principle is found in section 3806 ¹ of the Internal Revenue Code, *283 entitled "Mitigation of Effect of Renegotiation of War Contracts or Disallowance of Reimbursement." This section provides that income of any year which is renegotiated shall be reduced by the amount of excessive profits eliminated and repaid under the renegotiation. The amount declared excessive does not constitute a deduction for the year in which paid or incurred. The section also provides*180 that repayment shall be made by crediting against the excessive profits eliminated the amount by which the tax for the year, subject to renegotiation, is decreased by reason of the provisions of section 3806(a) (1). Morris Kurtzon, 17 T. C. 1542. Petitioner argues that since the excessive profits must be related back to the year the income was received, under section 3806 (a) (3), he should be allowed to deduct the costs of renegotiation in the year when he earned the renegotiable income. *284 He also contends that to require him to deduct the expense of renegotiation when he pays it would distort his income for the year he earned the renegotiable income and also for the year he paid the cost of renegotiation. He states that, even though Congress made no specific provision for renegotiable expenses comparable to section 3806, to deny him the right to deduct such reserve would be to repudiate the effect of section 3806. We can find no basis in section 3806 for petitioner's position.

*181 The section petitioner relies on relates to an administrative function of the Commissioner whereby he credits against the amount of excessive profits eliminated the amount by which the tax for the prior taxable year, under Chapters 1, 2A, 2B, 2D, and 2E, is decreased by reason of the application of paragraph (1) of subsection (a). National Builders, Inc., 12 T. C. 852, 860. Prior to the enactment of this section the only procedure provided for recovery of excess income tax paid under circumstances similar to those here at issue was that the renegotiated taxpayer must repay the entire excessive profits and then file a claim for refund for the overpayment of income taxes. Section 3806 provides for the repayment of only the difference between the excessive profits and the amount of overpayment of taxes. This section relates only to a tax credit. Morris Kurtzon, supra.It does not provide any deductions in addition to those found in section 23 of the Code.

In the case of Cramp Shipbuilding Co., 17 T. C. 516, 532, affd. 202 F. 2d 280, the Commissioner attempted to*182 relate back to a prior year recoveries from Government contracts made in later years. We there held that section 3806 concerns only decreases in profits. Had Congress desired to keep the renegotiation years open for adjustment of subsequent renegotiable items of income and expense it would have so provided. By expressly limiting section 3806 to excessive profits, Congress intended that the usual methods of accounting applicable to income and deductions should be maintained.

Section 41 provides that deductions shall be taken in the taxable year "paid or accrued" or "paid or incurred" depending on the taxpayer's method of accounting. Petitioner was on the cash basis in the taxable year and this Court has held that in the case of such taxpayers only amounts paid during the year are allowable deductions. Consolidated Asphalt Co., 1 B. T. A. 79. Therefore, since this reserve was not paid, it is not an allowable deduction.

Decision will be entered for the respondent.