Rice, Barton & Fales v. Commissioner of Internal Revenue

• Decision Date: 05 June 1930
• Docket Number: No. 2413.,2413.
• Parties: RICE, BARTON & FALES, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

41 F.2d 339 (1930)

RICE, BARTON & FALES, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 2413.

Circuit Court of Appeals, First Circuit.

June 5, 1930.

Harry Friedman, of Washington, D. C., for petitioner.

Randolph C. Shaw and J. Louis Monarch, Sp. Assts. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Joe S. Franklin, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for Commissioner.

Before BINGHAM, ANDERSON, and WILSON, Circuit Judges.

WILSON, Circuit Judge.

This is a petition for review of a decision of the Board of Tax Appeals sustaining the action of the Commissioner of Internal Revenue in ordering the petitioner to pay a deficiency tax for the calendar year of 1921.

Some time in 1920, Mitsui & Co., Ltd., of Japan, ordered of the petitioner two very large machines for making book paper to be shipped to Japan. The machines were so large that they could not be assembled here and shipped, but had to be constructed in units and required twenty cars for their shipment by rail to the Pacific Coast from Worcester, Mass., where the petitioner's plant is located. They were not stock machines, or machines the petitioner manufactured according to stock patterns or designs, were described by no particular trade-name, but had to be specially designed for a particular purpose and use. By reason of their size it was not practical to assemble either of them here and test it as to its suitability for the purpose for which they were ordered.

It is difficult to tell from the record just when the order for the machines was placed with the petitioner. A written form of a contract for their construction is made a part of the record which is dated October 1, 1920; the specifications attached are dated June, 1920. The contract provided that $10,000 was to be paid on the placing of the order, $25,000 on July 2, 1920, $25,000 on August 2, 1920, $25,333.33 on September 2, 1920, and the balance in cash "against shipping documents." The last of the parts of the machines were shipped in September, 1921. The final payment was made at this time. The various parts did not arrive in Japan until the spring of 1922, and were not fully assembled for testing until the late summer of that year.

The contract contained provisions designed for the protection of both parties: The petitioner, by the provision that payment should be fully made before shipment; the purchaser, by the guaranty of the design, material, and workmanship as specified, and the correct mechanical operation of its several component parts. These provisions were no doubt inserted owing to the nature of the machines, and the situs of the purchaser. It was impossible, or, at least, impractical, for the purchaser to inspect and test the machines until assembled in their plant, and the manufacturer would have been at a distinct disadvantage if it did not receive the contract price, which was $256,000, before shipment.

By reason of the nature of its business of constructing large machines requiring special designs and plans, the time frequently taken to complete an order, the express or implied obligation that a machine when delivered would be suitable for the purposes for which it was designed, and the need of adjustments after completion and delivery for proper mechanical operation, sometimes at considerable expense, the petitioner had, as early as 1920, at least, adopted the bookkeeping practice of not entering its profits on any contract until the machine had been accepted by the purchaser, or on a "finished or accepted contract plan," and this practice had been consistently followed in 1921 and 1922, authorized, as it claims, under section 212(b) of the Revenue Acts of 1918 and 1921 (40 Stat. 1064, 42 Stat. 237), and section 36 of article 45 of regulation 62 of the Bureau of Internal Revenue, which provides "that gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income."

"Net income under section 212a shall be computed `in accordance with the method of accounting regularly employed in keeping the books of such taxpayer.'" Lucas v. American Code Co., 280 U. S. 445, 448, 50 S. Ct. 202, 203, 74 L. Ed. ___; United States v. Anderson, 269 U. S. 422, 439, 46 S. Ct. 131, 70 L. Ed. 347.

The Board of Tax Appeals undertook to differentiate the contract in this case from other contracts entered into by the appellant during the years 1920, 1921, and 1922 upon the ground that this was the only contract under which payment was received before delivery. Even so, though there is nothing in the record except an inference on which to base the conclusion that in no instance was any payment made before delivery except in the case of Mitsui & Company, we think it would make no difference under the Revenue Act and the practice of the petitioner in its method of bookkeeping whether payment was made before delivery or after.

The conclusions of the Board were evidently based on the theory that by payment of the purchase price and delivery to a carrier, title passed in 1921 and inspection was waived as a condition precedent to acceptance, and the guaranty of suitability and against defective parts was a condition subsequent and a collateral promise and analogous to the street construction contracts under consideration by the court in Uvalde Co., 1 B. T. A. 932; Cronin Co. v. Lewellyn (D. C.) 9 F.(2d) 974; Harrison v. Heiner (D. C.) 28 F.(2d) 985. But we think the situation in these cases, and in Vang v. Lewellyn (C. C. A.) 35 F.(2d) 283, cited by the government in its brief, is not analogous to the situation here. In those cases there was a considerable period of time following completion and acceptance of a street paving or street construction work in which the contractor agreed to maintain it against certain imperfections. The agreement to maintain was there clearly collateral, as was the guaranty in this case for a year against defective parts.

Where a manufacturer undertakes to construct a special machine for a particular purpose he impliedly warrants it fit for that purpose, and such we construe to be the express warranty as to the design and correct mechanical operation of the component parts in the contract for the construction of these machines, and according to the testimony in behalf of the petitioner it was so understood. If the buyer has an opportunity for inspection before delivery and inspects or waives it, delivery may be held to be also an acceptance; but where inspection is impractical, as in this case, delivery to a carrier will not constitute acceptance, though it may pass title so far as the manufacture is concerned. It may be only a conditional title. Alden v. Hart, 161 Mass. 576, 581, 37 N. E. 742. The buyer has still the right of inspection, and if not as ordered, or if not suitable for the purpose for which designed, acceptance does not take place so as to bar the right of rejection until an opportunity for a practical inspection is afforded, which in this case could...