A. D. Irwin v. Commissioner of Internal Revenue, A. O. Leighton and Gertrude Leighton v. Commissioner of Internal Revenue
238 F.2d 874 · Court of Appeals for the Third Circuit · 1956
Facts
Partnership Irwin & Leighton contracted to build a library for the U.S. government. Delays occurred, and the partnership claimed government fault, estimating $25,700 in damages, which they accrued as income in 1938. The government granted time extensions but did not unequivocally admit liability for the damages. In 1946, the Court of Claims awarded the partnership $10,415.66 for the delays.
Issue
Can a taxpayer using the accrual method properly accrue income from a disputed claim for damages due to breach of contract in the year the work is completed, when the government has not unequivocally admitted liability?
Holding
No. The court affirmed the Tax Court's decision that the partnership could not properly accrue the estimated damages in 1938 because the government had not unequivocally admitted liability, making the claim uncertain. The award was properly includible as income in 1946.
Rule
Income from a disputed claim for breach of contract cannot be accrued unless there is a definite admission of liability by the other party, negotiations for settlement are begun, and a reasonable estimate of the amount is accrued on the books. A mere willingness to consider a future claim is not an unequivocal admission of liability.
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