Nat'l Builders, Inc. v. Comm'r of Internal Revenue
| Decision Date | 26 May 1949 |
| Docket Number | Docket No. 15015. |
| Citation | 12 T.C. 852 |
| Parties | NATIONAL BUILDERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner was a member of a joint venture which in 1942 and 1943, under a a contract with the Government, constructed buildings at an Army base. Although the contract was substantially completed by the joint venture and its work accepted prior to the close of its first fiscal year on March 31, 1943, final payment of $362,778.33 was frozen by the Government pending renegotiation of the profits realized on the contract. The $362,778.33 was paid to the joint venture on August 16, 1943, and the joint venture, which was on the cash receipts and disbursements basis, reported that amount as income and deducted various sums as expenses in its return for the fiscal year ended March 31, 1944. The Under Secretary of War on December 21, 1944, made a unilateral determination that the joint venture had realized excessive profits of $575,000, which amount was repaid by the members of the joint venture in cash and by way of a tax credit computed under section 3806(b)(1) of the Internal Revenue Code. Immediately thereafter the joint venture filed a petition for a redetermination of the finding of excessive profits made by the Under Secretary of War, which proceeding is at present pending before this Court. Held:
(1) That the respondent, in determining the income of the joint venture for the fiscal year ended March 31, 1943, and the petitioner's distributable share thereof, erred in reallocating contract costs to years other than the year in which they were actually paid.
(2) In determining the amount of any deficiency or overpayment, petitioner's tax liability for 1943 should be computed without reference to adjustments under section 3806 incident to the renegotiation of its Government contracts. Orin M. Culman, Esq., for the petitioner.
Jackson L. Boughner, Esq., for the respondent.
This case involves a deficiency in income tax of $2,903.43 and in excess profits tax of $45,449.49 for the year 1943 as determined by the respondent in his notice of deficiency. By way of amended answer, respondent claims these deficiencies for 1943 should be increased in the amounts of $925.56 in income tax and $156,913.69 in excess profits tax.
The principal question for determination is whether the respondent, in determining petitioner's income tax liability for 1943, was justified in allocating business expenses of a joint venture of which the petitioner was a member to a year other than the year of actual payment upon the basis that the reallocation more clearly reflects the joint venture's true income than the cash receipts and disbursements method it employed.
The second issue herein, which is raised by amended answer, concerns the treatment, in respect to the petitioner's tax liability for 1943, of the excessive profits repaid by the petitioner to the Government under renegotiation proceedings in cash and by way of a tax credit computed under section 3806 of the Internal Revenue Code. Petitioner has abandoned an issue raised in the petition in respect to an adjustment by respondent of its income for the taxable year 1942 and does not contest various other adjustments made by the respondent to its income for the taxable year 1943.
The facts have been stipulated and, in so far as may be necessary to an understanding of the issues, they are set forth below.
National Builders, Inc., hereinafter referred to as the petitioner, is a corporation, organized and existing under the laws of the State of Minnesota, with its principal office in Minneapolis, Minnesota. Petitioner kept its books on the accrual basis and filed its Federal income tax returns for the years involved on calendar year basis with the collector of internal revenue for the district of Minnesota.
The petitioner and A. Hedenberg & Co., of Duluth, Minnesota, another Minnesota corporation, and the B. H. Stahr Co. of Minneapolis, Minnesota partnership consisting of B. H. Stahr and Roger B. Stahr, entered into a joint venture agreement on April 17, 1942. All the members of this joint venture was engaged in the general contracting business.
The respective interests of the members of the joint venture were as follows:
+---------------------------+
¦National Builders, Inc ¦35%¦
+-----------------------+---¦
¦B. H. Stahr & Co ¦35%¦
+-----------------------+---¦
¦A. Hedenberg & Co ¦30%¦
+---------------------------+
The joint venture kept its books and filed its Federal tax returns on the cash receipts and disbursements basis for fiscal years ending on March 31 of each year. Partnership returns of its income were filed for the fiscal years ended March 31, 1943 and 1944, with the collector of internal revenue for the district of Minnesota.
On April 16, 1942, the joint ventures entered into an agreement with the United States Government to construct, prior to October 3, 1942, certain facilities at Camp McCoy, near Sparta, Wisconsin, for a consideration of $4,552,210. The original contract was modified by various change orders, which resulted in a final contract price of $4,554,733.17. Construction work by the joint venture was commenced on April 16, 1942, and was completed, approved, and accepted by the Government prior to March 31, 1943. No work was done on the project site after March 31, 1943, except for repairs costing $2,164.55, which were completed in December 1943.
As schedule of the receipts and disbursements of the joint venture for the fiscal years ended March 31, 1943 and 1944, is as follows:
In 1942 the Under Secretary of War commenced proceedings to renegotiate the construction contract in question and the final payment was frozen in that year. On March 24, 1943, the Price Adjustment Section of the War Department advised petitioner orally at a conference held in Chicago, Illinois, that the amount of $700,000 was considered to be excessive profits under the Renegotiation Act.
On August 11, 1943, the joint venture received from the Government approved final estimate for payment, and on August 16, 1943, it received final payment in the amount of $362,778.33.
On December 21, 1944, the Under Secretary of War ‘made a unilateral determination that $575,000 of the prices and profits realized by National Builders Inc., B. H. Stahr Company and A. Hedenberg and Company, Inc., joint contractors and co-adventurers, on the above mentioned contract subject to renegotiation pursuant to the provisions of Section 403, are excessive.‘
On March 12, 1945, the internal revenue agent in charge at St. Paul, Minnesota, computed, under section 3806(b) of the Internal Revenue Code, the amount of offsetting tax credit of petitioner based upon excessive profits of $575,000. Of the $575,000 repaid to the Government by the joint venture, petitioner was liable for $201,250, or 35 per cent, of the total amount. respondent determined that $185,220.70 of the $201,250 should be eliminated from petitioner's taxable income for the year 1943. The result of this adjustment was to give tax credits of $2,158.36 for normal tax and surtax and $113,590.98 for excess profits tax, or an aggregate of $115,749.34. By the application of this credit and the payment in cash of $85,500.55, petitioner fully repaid to the Government its share of what had been determined as excessive profits.
Under date of April 1, 1947, respondent determined a tax deficiency against petitioner for the year 1943. This deficiency arose by reason of respondent recomputing the income of the joint venture for 1943, wherein he reallocated contract costs between the fiscal years ended March 31, 1943 and 1944, upon the basis of gross contract receipts in each year. The joint venture had received 92.035 per cent of the total contract receipts in the fiscal year ended March 31, 1943, and the remaining 7.965 per cent in the fiscal year ended March 31, 1944. Contract costs were then allocated between the two fiscal years upon the basis of 92.035 per cent and 7.965 per cent, instead of the manner in which they actually had been expended, that is, approximately 98 per cent in the fiscal year ended March 31, 1943, and 2 per cent in the fiscal year ended March 31, 1944.
On the basis of the foregoing reallocation of costs, respondent determined that the net profits from the joint venture before renegotiation were $1,015,898.06 for the fiscal year ended March 31, 1943, and $87,912.33 for the fiscal year ended March 31, 1944. The profits as determined represent an increase of the joint venture's net profits for the fiscal year ended March 31, 1943, in the amount of $228,181.22 and a...
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