BEN C. GERWICK, INC. v. Commissioner, Docket No. 38089
| Decision Date | 31 March 1954 |
| Docket Number | Docket No. 38089,39045. |
| Citation | 13 TCM (CCH) 314 |
| Parties | Ben C. Gerwick, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Gordon Johnson, Esq., A. Barlow Ferguson, Esq., and Robert L. Bridges, Esq., for the petitioner. T. M. Mather, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner has determined deficiencies for the years 1945 and 1946, as follows:
Docket
No. Year Tax Deficiency
38089 1945 Income .............. $ 15,959.12
Declared Value Excess
Profits ........... 1,172.48
Excess Profits ...... 546,811.90
39045 1946 Income .............. 84,749.54
The question to be decided is whether income from a contract with the Navy for the construction of three submarine and destroyer drydocks at Hunters Point, California, which is attributable to work completed and paid for before the end of 1945, is includible in petitioner's income for 1945.
The deficiency for 1946 results from including the income from the same contract in petitioner's income for 1946 solely to protect the Government's interests against the running of the statute of limitations. The parties are agreed that the decision of the question relating to 1945 will enable the parties to dispose of petitioner's income tax liability for 1946 under Rule 50.
The petitioner filed its returns for 1945 and 1946 with the collector for the first district of California.
The facts which have been stipulated are found as facts. The stipulations of facts and the attached exhibits are incorporated herein by this reference.
Petitioner is a California corporation, incorporated on January 25, 1926, with its principal office in San Francisco. Since its incorporation, it has been engaged in the construction contracting business, specializing in the construction of piers, wharves, docks, terminals, and foundations for industrial facilities.
Petitioner has at all times regularly and consistently kept its books and reported its income from long-term contracts on the basis provided by Regulations 111, section 29.42-4(b), and the same subsection of prior regulations.
On May 13, 1943, petitioner filed a bid with the Navy Department, Bureau of Yards and Docks, for the construction of three drydocks at the Naval Drydocks at Hunters Point, San Francisco, on a lump sum contract basis. Petitioner's bid was accepted by the Navy, and on June 11, 1943, the United States Government entered into a lump sum contract with petitioner in the amount of $3,684,000. The contract was designated Contract NOy-6183. Under the original contract, petitioner agreed to furnish all necessary material and equipment, and perform all work for providing and securing the construction of three submarine and destroyer drydocks, known as Drydocks Nos. 5, 6, and 7, and auxiliary facilities.
The parties to the original contract understood that the entire project was not covered by plans and specifications completed at the time the contract was signed but that as soon as additional and necessary plans and specifications for the entire contract project were prepared and approved they would be incorporated into and made part of the contract under the "Change Order" procedure. When the contract was signed, only the plans and specifications for foundations and basic drydock structures had been prepared. As the work progressed, the Navy Department issued the so-called "change orders" which called for the progressive construction of the basic project and for the necessary auxiliary facilities such as steam, electric, and air power, closure gates, access to the docks from the shore, and so forth. Forty-three change orders were entered into which amended the original contract and increased the total consideration under the contract to $6,710,290.08.
All of the work under the original contract and most of the change orders was completed before the end of 1945. Work which was not completed was work under Change Order "T", and the work under that order was 92 per cent complete by the end of 1945. The work designated as Change Order "T" was usably complete at the end of 1945 but delay in the completion was occasioned by the unavailability of valves, fittings, and materials, which was beyond petitioner's control. By October 22, 1945, all of the work under the contract had been completed, and 90 per cent of the work under Change Order "T" had been completed. The work under Change Order "T" was completed February 21, 1946.
In the contract and change orders, the price to be paid for each part of the progressive work was stated separately.
Prior to October 22, 1945, payments received by petitioner amounted to $6,510,535.08. By the end of 1945, petitioner had been paid $6,661,490.08 which was the total consideration for the original contract and all change orders except $48,800 representing the balance of the contract price under Change Order "T" in the amount of $30,000, and retained percentages of $18,000. The sum of $48,800 was paid to petitioner on September 5, 1946 under a final voucher dated August 5, 1946. On August 7, 1946, the entire contract work was accepted by the Officer in Charge of Construction.
Under date of August 14, 1945, the Officer in Charge of Construction for the Navy, pursuant to petitioner's request, in its letter of July 30, 1945, accepted the work which had been completed, up to August 14, 1945, relieving petitioner from responsibility and releasing the retained percentage of the moneys previously withheld on such completed work.
Petitioner, in its letter of July 30, 1945, requesting the acceptance of completed work, stated as follows:
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