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
A partnership, Irwin & Leighton, contracted to build a library for the U.S. government. Delays occurred, and the partnership estimated $25,700 in damages from government fault, accruing this amount as income in 1938 under the completed contract method. The government's letter acknowledged the delay but did not admit liability, and the partnership later received a $10,415.66 award for these damages in 1946 from the Court of Claims.
Issue
Can a taxpayer using the accrual method properly accrue income from a disputed claim for 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 $25,700 claim for delay damages was not properly accruable in 1938 because the government had not unequivocally admitted liability, making the right to income uncertain. The award was properly includible as income in 1946.
Rule
Income from a disputed claim for breach of contract is not accruable 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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