C.H. Leavell & Co. v. Comm'r of Internal Revenue, Docket No. 5864-67.
| Decision Date | 23 December 1969 |
| Docket Number | Docket No. 5864-67. |
| Citation | 53 T.C. 426 |
| Parties | C. H. LEAVELL & COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Tad R. Smith, for the petitioner.
John D. Laflin, for the respondent.
Petitioner was a member of a joint venture organized to perform a single construction contract. The joint venture computed its taxable income under the completed contract method of accounting. Held, the joint venture reported its income on the basis of a calendar, rather than a fiscal year; held, further, the existence of contingent claims for additional compensation did not cause contract to be deferred beyond the year in which the contract was ‘finally completed and accepted’; held, further, the execution of a Form 875 does not preclude petitioner from litigating the merits of the issues presented. FEATHERSTON, Judge:
Respondent determined deficiencies in petitioner's income tax for its taxable years ending March 31, 1963 and 1965, in the amounts of $116,723.43 and $699, respectively, and found an overassessment for the year ending March 31, 1964, in the amount of $3,569.55.
Certain issues have been settled; the issues presented for decision are:
(1) Whether a joint venture, of which petitioner was a member, computed its taxable income on the basis of a calendar year or a fiscal year.
(2) Whether a contract undertaken by the joint venture was finally completed and accepted in 1960.
(3) Whether, under the completed-contract method of accounting, the time for reporting the gross income from the contract must be deferred until disputed claims arising from the contract were settled.
(4) Whether the signing of a Form 875 by the representative of the managing partner of the joint venture bound petitioner to return all of its gross income from the contract for a fiscal year ending September 30, 1961.
Petitioner C. H. Leavell & Co., a corporation, had its principal place of business in El Paso, Tex., at the time it filed its petition. Petitioner is the parent of the following corporations, whose principal offices were located at the same address as petitioner:
+-----------------------------------------------+
¦Subsidiary company ¦State of incorporation ¦
+----------------------+------------------------¦
¦ ¦ ¦
+----------------------+------------------------¦
¦Leavell Cattle Co ¦Colorado ¦
+----------------------+------------------------¦
¦Leavell Invest Co ¦Delaware ¦
+----------------------+------------------------¦
¦Leabank Co ¦Washington ¦
+----------------------+------------------------¦
¦New Mexico Homes, Inc ¦New Mexico ¦
+----------------------+------------------------¦
¦Leavell Development Co¦Delaware ¦
+----------------------+------------------------¦
¦Leavell-Scott Corp ¦Delaware ¦
+----------------------+------------------------¦
¦Lequipco, Inc ¦Delaware ¦
+-----------------------------------------------+
Petitioner filed corporation income tax returns for the calendar year 1958, the short period ending March 31, 1959, and the fiscal year ending March 31, 1960, respectively, and consolidated income tax returns for itself and its subsidiaries for the fiscal years ending March 31, 1961, 1962, 1963, 1964, and 1965, respectively, with the district director of internal revenue, Austin, Tex.
In May 1959 petitioner, Scott & Co., S. Patti Construction Co., and MacDonald Construction Co. (hereinafter referred to as MacDonald) entered into an agreement to form a joint venture to construct launch and service buildings for an Atlas ICBM installation (to be located near Fairchild Air Force Base, Spokane, Wash.) under a contract with the United States of America acting through the Corps of Engineers. The joint venture, known as MacDonald-Patti-Scott-Leavell (hereinafter the joint venture), was established only to carry out this contract and engaged in no other business endeavor. Each member reported its taxable income during 1960, 1961, 1962, and 1963 for taxable years ending as follows:
+-------------------------------------+
¦Company ¦TYE ¦
+-------------------------+-----------¦
¦ ¦ ¦
+-------------------------+-----------¦
¦C. H. Leavell & Co ¦March 31 ¦
+-------------------------+-----------¦
¦Scott & Co ¦April 30 ¦
+-------------------------+-----------¦
¦S. Patti Construction Co ¦October 31 ¦
+-------------------------+-----------¦
¦MacDonald Construction Co¦December 31¦
+-------------------------------------+
The pertinent provisions of the joint venture agreement are as follows:
NOW, THEREFORE, the parties hereto hereby constitute themselves as Joint Venturers for the purpose of performing and completing the Construction Contract, but not for any other purposes, it being expressly understood that this agreement contemplates only the furnishing and the performance of the work, labor and materials necessary to the completion of the Construction Contract and that the parties are not making any permanent partnership agreement or permanent joint venture agreement to bid for or undertake any contract other than the Construction Contracts, * * *
To carry out the Joint Venture hereby created the parties hereto agree with each other as follows:
2. Each party shall have an undivided interest in the Joint Venture, contribute to its working capital, participate in its net gains and profits, and share in the losses and liabilities in the proportion set opposite its name, to wit:
+------------------+
¦MacDonald ¦22 1/2%¦
+----------+-------¦
¦Patti ¦22 1/2%¦
+----------+-------¦
¦Leavell ¦25% ¦
+----------+-------¦
¦Scott Co ¦30% ¦
+------------------+
7. In order to facilitate the handling of all matters and questions in connection with the performance of the Construction Contract by the parties hereto, each of the parties appoints the person hereinafter named as its representatives with full and complete authority to act for it and in its behalf in relation to any matters or things in connection with, arising out of or relative to this agreement or said Joint Venture, and to act for and bind it in any and all matters or things involving the performance of the Construction Contract, including, but not limited to those of a contractual nature with the United States Government or third persons:
+--------------------------------------+
¦Party ¦Representative ¦
+---------------------+----------------¦
¦MacDonald appoints as¦Harold Gall ¦
+---------------------+----------------¦
¦its representative ¦ ¦
+--------------------------------------+
each party shall be bound conclusively by the acts and decisions of the representative or alternate previously appointed by it hereunder in the same manner and with the same effect as if such action had been taken or decision made by authority of its proper officers thereunto duly authorized by its board of directors, and the term ‘representative’ whenever used hereinafter shall be deemed to include the alternate then designated for him hereunder.
9. The general supervision and management of the work called for by the Construction Contract and any and all matters relating thereto shall be under the general charge and control of a Project Manager who shall be subject only to the control of the parties hereto through their respective representatives, and said Project Manager shall be given such specific powers in addition to the foregoing as said representatives from time to time may delegate. * * * The Project Manager shall be selected and designated by MacDonald and any person so designated shall serve in said capacity until MacDonald selects and designates a substitute or successor to act in his place and stead.
12. * * * A periodic audit of said books shall be made by such accountant or independent firm of accountants as the parties through said representatives may designate, and such periodic audits upon the request of any of the parties hereto shall include a comparison between the items of cost and the items set up in the estimate of cost. Upon completion of the Construction Contract a complete and final audit and true and correct accounting shall be had of all expenses and all accounts, vouchers, records and data relating to the Construction Contract and Joint Venture * * *
17. The relationship between the parties shall be limited to the performance of the Construction Contract in accordance with the terms of this agreement. This agreement shall be construed and deemed to be a Joint Venture for the carrying out of the Construction Contract and the rights and relations hereunder of the parties hereto concerning the subject matter hereof shall be determined by the ordinary rules of partnership. Nothing herein contained shall be considered to constitute the parties partners nor constitute any party hereto the general agent of any other party.
Work under the contract was begun in May 1959. One of MacDonald's vice presidents was designated as the project manager and, together with the representative from the Corps of Engineers, he conducted monthly examinations of the project. Following each such examination they agreed upon the percentage of completion of the various components of the project and then applied these percentages to the respective contract price for each component to determine the amount of the progress payment. The project manager then prepared payment estimates and submitted them to the Corps of Engineers to request compensation for the work performed to that date.
These payment estimates disclose that as of October 25, 1960, all items of work were 100-percent complete except the physical construction of the launch facility, which was 99.95-percent complete. The last on-site mechanical...
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