Sanford & Brooks Co. v. Commissioner of Internal Revenue

• Decision Date: 15 October 1929
• Docket Number: No. 2827.,2827.
• Citation: 35 F.2d 312
• Parties: SANFORD & BROOKS CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

35 F.2d 312 (1929)

SANFORD & BROOKS CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 2827.

Circuit Court of Appeals, Fourth Circuit.

October 15, 1929.

Harry N. Baetjer, of Baltimore, Md. (J. Crossan Cooper, Jr., of Baltimore, Md., on the brief), for petitioner.

Andrew D. Sharpe, Sp. Asst. to Attorney General (Mabel Walker Willebrandt, Asst. Atty. Gen., Sewall Key and John Vaughan Groner, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Prew Savoy, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before WADDILL, PARKER, and NORTHCOTT, Circuit Judges.

PARKER, Circuit Judge.

This is a petition by a taxpayer to review a decision of the Board of Tax Appeals. Petitioner, as agent for the Atlantic Dredging Company, was engaged during the years 1913, 1914, and 1915 in dredging a part of the Delaware river under a contract with the United States. It expended in the performance of the contract a total of $176,271.88 in excess of the amounts received thereunder. In December, 1915, it learned that certain vital representations, on the faith of which the contract had been accepted, were untrue, whereupon, it stopped work and, in 1916, instituted suit against the United States in the Court of Claims for the losses under the contract and for the profits which would have been realized on the basis of a contract subsequently entered into. The Court of Claims gave judgment in favor of petitioner, but only for the actual loss which it had suffered; and this judgment was affirmed by the Supreme Court (U. S. v. Atlantic Dredging Co., 253 U. S. 1, 40 S. Ct. 423, 425, 64 L. Ed. 735) on the ground that it was "simply compensatory of the cost of the work, of which the government got the benefit."

Under this judgment there was paid to petitioner in the year 1920 the sum of $192,577.59, which amount represented the $176,271.88 loss with interest on same amounting to $16,305.71. The Commissioner of Revenue held that this entire amount was taxable as income for the year 1920; and the Board of Tax Appeals sustained this holding. Petitioner concedes that the $16,305.71 representing interest is thus taxable, but contends that the $176,271.88, being mere reimbursement of loss, is not. It appears that in its returns for the years 1913 to 1916 petitioner claimed as losses the excess of expenditures over receipts under the contract and that this served to decrease the income reported during these years. After the collection of the judgment, however, it filed, or proposed to file, amended returns for the years in question, eliminating the losses claimed under the contract, which had been reimbursed under the recovery against the government.

Two questions are presented by the petition: (1) Whether the amount collected under the judgment in reimbursement of the losses sustained under the contract is taxable income within the meaning of the Income Tax Law; and (2), if not, whether petitioner, by reporting the excess of expenditures over receipts under the contract as losses during the years when they occurred, must be held to have made a final election in the matter and to be now estopped thereby from claiming that the recovery should be treated as extinguishment of loss and not as income. We think that both of these questions must be answered in the negative.

On the first question, it should be observed that income, even gross income, within the meaning of the taxing acts, is not synonymous with receipts; for receipts may represent a mere reimbursement of capital expenditure, and certainly it was not the intent of Congress to tax this. See opinion of Commissioner Korner in the appeal of James P. McKenna, 1 B. T. A. 326, 333. There has been much discussion as to what is meant by "income" as that word is used in the income tax laws; but it would seem that the Supreme Court has settled the matter. After full consideration, that court has declared that income within the meaning of these laws may be defined as gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital assets. Eisner v. Macomber, 252 U. S. 189, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 174, 46 S. Ct. 449, 70 L. Ed. 886.

Now the amount collected by the petitioner as reimbursement of loss is certainly not income within this definition. It is not gain derived from capital, from labor, or from any other source. A case directly in point is that of Marshall v. Commissioner, 10 B. T. A. 1140, in which it was held that an amount received under the War Minerals Relief Act (50 USCA § 80 note), as partial reimbursement for losses sustained, did not constitute income. In that case it appeared that the taxpayer in 1918 had erected a plant for carrying out a government contract. With the signing of the Armistice it found itself with a worthless plant on its hands, from which only a small amount was realized as salvage. In 1921 the government reimbursed it for its capital outlay to the extent of $20,048.77. In holding that this was not taxable as income for the year 1921, the Board of Tax Appeals said, "We do not see how the partial reimbursement for losses sustained can be construed to be income," and quoted from Bowers v. Kerbaugh-Empire Co., supra, "The mere diminution of loss is not gain, profit, or income."

It is said, however, that each year must be treated as a unit for income tax purposes, and that for this purpose we must view the expenditures and collections of each year entirely apart from those of other years. It is undoubtedly true that the year is the unit in income taxation and that income received or accrued within a given year must be reported as of that year; but it by no means follows that the events of other years may not be considered along with a particular item of alleged income in determining whether it constitutes taxable income or mere reimbursement of loss. As a matter of fact, the regulations of the Treasury Department in many instances expressly provide for reference to matters occurring in other years as a means of determining the income of a particular year. Thus under article 52 of Regulation 45, issued under the 1918 act (40 Stat. 1057), it is provided:

"In view of the unusual conditions prevailing at the close of the year 1918 it is recognized that many items of gross income, such as claims for compensation under cancelled contracts, together with claims against contracting departments of the Government for amortization and other matters, while properly constituting gross income for the taxable year 1918 were undecided and not sufficiently definite in amount to be reported in the original return for that year. In every such case the taxpayer should attach to his return a full statement of such pending claims and other matters, and when the correct amount of such items is ascertained an amended return for the taxable year 1918 should be filed."

We are dealing here with a long-term contract, extending into a number of taxing periods; and from the beginning of the experience of the federal government with income taxation, it has been found necessary to provide either for the return of income after the completion of such a contract or for the amending of returns at that time upon the basis of facts then ascertained. See T. D. 2161; Regulation 33, art. 121; Regulation 45, art. 36; Regulation 69, art. 36; Regulation 74, art. 334. Regulation 33, art. 121, while directed to the application of the Act of Sept. 8, 1916 (39 Stat. 756) was based upon Treasury Decision 2161, which was promulgated February 19, 1915, in construing the act of 1913 (38 Stat. 114). That article provided:

"Art. 121. Contracting Corporations. — Corporations engaged in contracting operations and which have numerous uncompleted contracts, which in some cases run for periods of several years, will be allowed to prepare their returns so that the gross income will be arrived at on the basis of completed work — that is, on jobs which have been finally completed — any and all moneys received in payment for completed jobs will be returned as income for the year in which the work was completed. If the gross income is arrived at by this method, the deduction from gross income should be limited to the expenditures made on account of such completed contracts.

"Income on Basis of Estimates. — Or the percentage of profit from the contract may be estimated on the basis of percentage of completion and payments made thereon, in which case the income to be returned each year during the performance of the contract will be computed upon the basis of the expenses incurred on such contract during the year; that is to say, if one-half of the estimated expenses necessary to the full performance of the contract are incurred during one year, one-half of the gross contract price should be returned as income for that year; all under or over statements of income to be adjusted upon completion of the contract and return made accordingly. (T. D. 2161)."

This article was brought forward in substantially the same form in the other regulations referred to above. The last clause of the article, however, was changed in subsequent regulations, evidently for the purpose of clarity, so as to provide:

"Upon the completion of a contract if it is found that as a result of such estimate or apportionment the income of any year or years has been overstated or understated, the taxpayer must file amended returns for such year or years."

The case of the petitioner here falls within the spirit, if not within the letter, of this regulation. Its contract with the government was never completed in a technical sense; but upon the collection of the judgment there was a completion of what was necessary to be done to determine what was to be received for the work done under the contract. Petitioner then, under the regulation quoted,...