Bien v. Comm'r of Internal Revenue

• Decision Date: 10 April 1953
• Docket Number: Docket No. 33872.
• Citation: 20 T.C. 49
• Parties: V. T. H. BIEN AND BERTHA C. BIEN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

20 T.C. 49

V. T. H. BIEN AND BERTHA C. BIEN, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 33872.

Tax Court of the United States.

Promulgated April 10, 1953.

1. Were the petitioners computed their net income upon the basis of the ‘hybrid‘ method of accounting regularly employed in keeping their books, held, the method employed does not clearly reflect income and the determination of the respondent is sustained.

2. Where petitioners failed to produce any evidence to substantiate their claimed deduction for expenses incurred in connection with the rental of a portion of their residence, held, the petitioners have failed in their burden of proof and the determination of the respondent is sustained.

3. Where petitioners incurred expenses in connection with the maintenance of an office in their residence but failed to produce evidence from which the amount could be determined specifically, held, under Cohan v. Commissioner, 39 F.2d 540, the petitioners are entitled to a deduction of $400 in each of the years 1946 and 1947. Edward A. White, Esq., for the petitioners.

Reuben G. Clark, Jr., Esq., for the respondent.

The respondent determined deficiencies in the income tax of the petitioners as follows:

+-----------------------------------------------+
                ¦V. T. H. Bien and Bertha C. Bien¦1946¦$1,669.73¦
                +--------------------------------+----+---------¦
                ¦V. T. H. Bien                   ¦1947¦735.88   ¦
                +--------------------------------+----+---------¦
                ¦V. T. H. Bien and Bertha C. Bien¦1948¦138.18   ¦
                +-----------------------------------------------+
                

The questions presented for our decision are as follows:

1. Did the Commissioner err in disapproving the method of accounting used by petitioners to determine net income derived from services as an architect and in redetermining such income on the cash basis?

2. Are petitioners entitled to additional deductions for the year 1946 for expenses in connection with the rental of a portion of their residence?

3. Are petitioners for the year 1946 and petitioner V. T. H. Bien for the year 1947 entitled to an additional deduction for expenses in connection with the maintenance of an office in their residence?

The issue raised by paragraph 4(b) of the petition relating to a claimed deductible loss on the sale of a boat was conceded by the petitioners upon brief, as well as certain minor issues relating to the disallowance of interest in the amount of $74.45 and an addition to certain trust income in the amount of $37.50. Such concessions will be taken into account in the recomputation under Rule 50.

FINDINGS OF FACT.

Petitioners, husband and wife, are residents of Bethesda, Maryland, and filed their joint income tax returns for the calendar years 1946 and 1948 and separate returns for the year 1947 with the collector of internal revenue for the district of Maryland.

Petitioner V. T. H. Bien (hereinafter referred to as petitioner) is a registered architect, practicing in Bethesda, Maryland. He has been registered as an architect in Maryland since about 1936, in the District of Columbia since about 1940, and in Virginia since about 1942.

Prior to 1927 petitioner worked as a general contractor. Subsequent to that date he was employed by the Government and private industry, returning thereafter to the private building business, which he combined for awhile with the practice of architecture. Since 1934 petitioner has been a practicing architect with the exception of the war years, 1941-1945, when he was privately employed. Since 1945 the petitioner has practiced architecture exclusively.

All costs and income unrelated to his practice of architecture have been treated by the petitioner on the cash receipts and disbursements basis and at all times the petitioner has maintained books of account relating to his practice of architecture and has consistently used the same method of accounting with relation to income derived from his profession as an architect.

Petitioner worked for himself and employed two or three draftsmen more or less continuously, who were paid on an hourly basis. In addition he employed an office secretary. Petitioner maintained an office, for the practice of his profession during the years in question, which was located in his residence.

Contractual relations between the petitioner and his clients were defined by the contract recommended by the American Institute of Architects, except in occasional instances where special contracts were employed, which were nevertheless basically the same as the American Institute of Architects' contract.

The professional services rendered by the petitioner were performed in three stages: (1) a preliminary stage, consisting of necessary conferences to determine the needs of the client and how much he expected to spend, preliminary studies and sketches; (2) a working drawings stage, consisting of the preparation of working drawings, large scale and full-sized detailed drawings, specifications, the drafting of proposals and contracts, and the letting of bids; and (3) the supervisory stage, involving supervision of the job under construction by the petitioner, who must visit the job frequently, checking plans and specifications against work and materials used, and ending in the issuance of a certificate of completion.

The petitioner's fee on individual jobs was based on a percentage of the cost of the building. The basic fee as determined is a percentage of the ultimate hypothetical cost of the building. Payments to the petitioner on account of his fee were made in accordance with paragraph 5 of the standard contract of the American Institute of Architects, which reads as follows:

5. Payments.— Payments to the Architect on account of his fee shall be made as follows, subject to the provisions of Art. 4:

Upon completion of the preliminary studies, a sum equal to 20% of the basic rate computed upon a reasonable estimated cost.

Upon completion of specifications and general working drawings (exclusive of details) a sum sufficient to increase payments on the fee to 75% of the rate or rates of commission arising from this agreement, computed upon a reasonable cost estimated on such completed specifications and drawings, or if bids have been received, then computed upon the lowest bona fide bid or bids.

From time to time during the execution of work and in proportion to the amount of service rendered by the Architect, payments shall be made until the aggregate of all payments made on account of the fee under this Article, but not including any covered by the provisions of Article 4, shall be a sum equal to the rate or rates of commission arising from this agreement, computed upon the final cost of the work.

Payments to the Architect, other than those on his fee, fall due from time to time as his work is done or as costs are incurred.

No deductions shall be made from the Architect's fee on account of penalty, liquidated damages, or other sums withheld from payments to contractors.

It was petitioner's practice to render his first bill, 20 per cent of the basic fee, after the preliminary sketch stage and his second bill for an additional 55 per cent of the basic fee after completion of the plans and specifications, but prior to letting bids. The final statement was rendered on completion of the job, when all costs were fixed, and was adjusted to whatever the final cost of the job may have been, instead of the basic fee.

The length of the jobs varied from less than a year to as long as 5 or 10 years. Costs incurred by the petitioner in rendering his services were (1) direct costs, consisting of wages paid to draftsmen, payments for outside engineering services, and blueprinting, mimeographing, and specification costs, which were charged to the individual job accounts, and (2) indirect costs, consisting of office salaries, architectural supplies and expenses, professional dues, technical books and magazines, telephone, legal and accounting fees, payroll taxes, automobile and other miscellaneous expenses, which were not charged to the individual jobs.

The three basic books of account maintained by the petitioner were a journal, including receipts and disbursements, a ‘completed job cost sheets‘ book, and a general ledger.

Direct costs as paid were entered in check disbursements in the journal, with information showing the date, to whom paid, the check number, the amount, and a description of the job to which the amount related. From there, they were then posted to the individual job cost sheets. Monthly totals, reflecting all direct costs paid in such month, were posted to a special ledger expense account, #131, known as ‘jobs in progress.‘

Indirect costs were also posted initially to the check disbursements journal from the check book, and from there to separate individual general ledger expense accounts such as office salaries, telephone, professional dues, and technical books and magazines.

Receipts derived from services as an architect were entered in the cash receipts journal from deposit slips; they were then posted to the individual job cost sheets, from which monthly totals, reflecting all receipts for such month, were posted to a special ledger income account, #600, known as ‘deferred architectural fees.‘

At the close of each calendar year, indirect costs paid in such year, appearing in the general ledger accounts, were closed out to profit and loss in order to determine net income. However, the totals of direct costs paid in such year, as appearing in the ledger account #131, and the totals of architectural income received in such year, as appearing in the ledger account #600, were not closed out to profit and loss, or taken into account in such year in order to determine net income. Instead, petitioner advised his accountant which individual jobs should be considered to have been completed for the year in question, and the income and direct costs relating thereto were closed out to profit and...