Jud Plumbing & Heating v. Commissioner of Int. Rev., 11481.

Citation153 F.2d 681
Decision Date18 February 1946
Docket NumberNo. 11481.,11481.
PartiesJUD PLUMBING & HEATING, Inc., v. COMMISSIONER OF INTERNAL REVENUE. JUD v. SAME (two cases).
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

A. N. Moursund, of San Antonio, Tex. for petitioners.

Richard H. Forster, of Los Angeles, Cal., for amicus curiæ.

Harold C. Wilkenfeld and J. Louis Monarch, Sp. Assts., to Atty. Gen., Sewall Key, Acting Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Bernard D. Daniels, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before McCORD, WALLER, and LEE, Circuit Judges.

WALLER, Circuit Judge.

Ed. J. Jud was the President and owned substantially all of the capital stock of Jud Plumbing & Heating, Inc., a corporation under the laws of Texas, which corporation was dissolved on September 5, 1941. In the dissolution all assets of the Corporation were transferred, as of August 31, 1941, to the chief stockholder, Jud, who assumed all of its obligations, with the result that the contracts which the Corporation had begun before its dissolution were continued and completed without interruption.

From the year 1933 to the date of its dissolution the Corporation had made its income tax returns from the "completed contract" or "job cost" method of accounting as to all income from contracts where the amount involved exceeded $100. This method of accounting enabled the corporation accurately to ascertain and report the profit derived from each contract, and apparently had been satisfactory to the Commissioner of Internal Revenue throughout former years.

Upon the dissolution of the Corporation Jud not only completed the existing contracts of the Corporation, but undertook to continue the same method of accounting, holding the view that since the Corporation would not have reported or accounted for income on any of the contracts until same had been completed, and since it had not completed the contracts involved, and had transferred all of its assets, including its profits, it, therefore, was not required to account, in whole or pro tanto, for any unrealized and undetermined profits under any of the contracts which the Corporation had begun but which Jud, as an individual, had completed; and since he had succeeded to all assets and liabilities of the Corporation, he should likewise account for the profits on each of the contracts when ascertained upon completion; that completion of contract determined not only income but liability for the tax on such income.

Jud and his wife reported, on the community basis, the net income from all of the contracts of the Corporation which Jud had completed within the tax year, and they insist that since the Corporation made no completions of these contracts it realized no profits and had no income to report therefrom, and no taxes to pay thereon.

Income from repair work, or from jobs which did not exceed $100, was reported and accounted for on the cash basis and is not involved in this controversy.

The Commissioner computed the gross income of the Corporation so as to include the sum of $32,854.06 as its income for the year 1941 which had accrued to it out of the contracts which it had begun but which it had not completed at the time of its dissolution. The Commissioner did not reject the completed-contract method of accounting that had been previously followed by the Corporation, but thought that such a method of accounting, under the facts in this case, did not reflect the income that should be allocated to the Corporation.

The Commissioner recognized the right of the taxpayer to adopt and follow the method of waiting until the completion of the contract in order to ascertain the profits therefrom, but rejected the contention that none of the income from the contracts so completed was allocable to the Corporation. The Commissioner used the completed-contract method to ascertain the profits, but then computed, by what he considered an equitable and proper method, the portion of the income from such contracts that should be charged to the Corporation. This method was to determine the total cost incurred for each job prior to the transfer, by ascertaining from the books of the Corporation and from the books of Jud the items in each job that the Corporation and its successor each had paid. He thus determined the total cost of each completed job, as well as the profits therefrom. The percentage of job cost paid by the Corporation to the total cost was ascertained as determinative of the percentage of completion of the contract by the Corporation. This percentage of completion so obtained was then applied to the ultimate profit so as to ascertain, or to approximate, the income that had accrued to the Corporation at the time of the transfer of its assets and liabilities to its chief stockholder.1

The Corporation had twenty-two uncompleted contracts at the time of its liquidation. There was an ultimate profit in all except two, but the profit or loss from eighteen of these contracts was so inconsequential that the Commissioner disregarded them and made his determination only on four which involved substantial sums and which were all completed within the same tax year as the corporate dissolution.

It is not disputed that the transfer of the assets rendered the Corporation insolvent, and that if the Corporation is liable for taxes, its transferees are likewise liable. Nor is the question as to whether or not the Corporation realized a capital gain or a capital loss by the transfer involved here.

It is conceded, also, that the Corporation, prior to its dissolution, received progress payments from its contracts as the work went forward. These payments would be a part of the gross income of the Corporation unless the dissolution or transfer would otherwise alter their character.

The Tax Court upheld the Commissioner.

The question involved is whether, under the completed-contract method of accounting which had been used by a corporation in previous years, such corporation was liable for taxes on income, earned during the year of its dissolution, from long-term contracts entered into by it but completed by its successor after the dissolution of the corporation; and whether the Commissioner used, and the Tax Court approved, an erroneous method of accounting, under Secs. 41, 42, and 45, Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code §§ 41, 42, 45, in allocating income for the year of dissolution between the Corporation and its successor, based upon the relative percentages that the cost paid by the Corporation during that part of the tax year prior to its dissolution and the cost paid by its...

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49 cases
  • CIR v. South Lake Farms, Inc.
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • November 22, 1963
    ...Lynch, 9 Cir., 1951, 192 F.2d 718, 721-22; Standard Paving Co. v. Commissioner, 10 Cir., 1951, 190 F.2d 330; Jud Plumbing & Heating, Inc. v. Commissioner, 5 Cir., 1946, 153 F.2d 681; and Williamson v. United States, Ct.Cl., 1961, 292 F.2d 524, are similar. Here, on the other hand, no income......
  • Greenstein v. Comm'r of Internal Revenue (In re Estate of Munter)
    • United States
    • U.S. Tax Court
    • March 19, 1975
    ...does not preclude a challenge to that method for the year of liquidation. Jud Plumbing & Heating, Inc., 5 T.C. 127 (1945), affd. 153 F.2d 681 (C.A. 5, 1946). ...
  • Berger v. Commissioner
    • United States
    • U.S. Tax Court
    • February 22, 1996
    ...partially completed construction contracts by the corporations in Jud Plumbing & Heating, Inc. v. Commissioner [46-1 USTC ¶ 9177], 153 F.2d 681 (5th Cir. 1946) (liquidating corporation), affg. [Dec. 14,573] 5 T.C. 127 (1945), and Standard Paving Co. v. Commissioner [51-2 USTC ¶ 9376], 190 F......
  • Beauty Acquisition Corporation v. Commissioner
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    ...the Commissioner relied on Jud Plumbing & Heating, Inc. v. Commissioner [Dec. 14,573], 5 T.C. 127 (1945), affd. [46-1 USTC ¶ 9177] 153 F.2d 681 (5th Cir. 1946), and Carter v. Commissioner [Dec. 16,015], 9 T.C. 364 (1947), affd. [48-2 USTC ¶ 9415] 170 F.2d 911 (2d Cir. 1948), contending that......
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