CLARK DREDGING COMPANY v. Commissioner of Internal Revenue, Docket No. 39566.
| Decision Date | 29 May 1931 |
| Docket Number | Docket No. 39566. |
| Citation | 23 BTA 503 |
| Parties | CLARK DREDGING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
William S. Hammers, Esq., for the petitioner.
Miles J. O'Connor, Esq., and E. L. Updike, Esq., for the respondent.
The respondent determined deficiencies in petitioner's income tax of $18,672.27 for 1924 and $3,204.90 for 1925, resulting from numerous adjustments in its net income.
The petitioner alleges error (1) in the disallowance of a deduction in 1924 of $85,000, representing an alleged liability for costs incurred by the United States in completing work under a dredging contract entered into by it with the petitioner's predecessor; (2) in the disallowance of a deduction in 1925, not claimed in the original return, of $11,212.50, representing alleged liability for liquidated damages accrued in that year under a dredging contract with the Government of the Bahama Islands; and (3) in the disallowance of deductions in the respective years 1924 and 1925 of net losses of $73,787.06 and $9,408.92 alleged to have been sustained in 1923 and 1924. The respondent by amended answer claimed increased deficiencies for 1924 and 1925, on the ground that in his original determination he had erroneously given the petitioner the benefit of prior year net losses of a predecessor corporation.
FINDINGS OF FACT.
The petitioner is a Texas corporation engaged in the dredging and general contracting business. Its principal place of business is at Miami, Fla. It was organized on August 26, 1922, for the purpose of conducting a business of the same kind as that theretofore conducted by the Bowers Southern Dredging Company, a Texas corporation organized in 1899, and by a receiver and a creditors' committee of the latter.
On February 5, 1920, the Bowers Company was placed in the hands of a receiver, and on July 1, 1920, its entire property and assets were transferred to a creditors' committee.
The creditors' committee employed Robert P. Clark, president and principal stockholder of the Bowers Company, to carry on the work of performing its contracts. The conduct of the business through the management of a creditors' committee rendered it difficult to secure new contracts and furnish bonds. Upon the suggestion of the stockholders that more work could be obtained if the business were reorganized and that in this way enough could be earned to pay off the liabilities, the creditors assented to the formation of a new corporation. The petitioner was thereupon organized with a capital stock of 3,750 shares of the par value of $100 per share, which was issued to the stockholders of the Bowers Company in the proportion of one share of stock of the petitioner for two shares of stock of the Bowers Company. At the time of organization, the assets of the Bowers Company were held by the creditors' committee as trustees, under a deed of trust dated July 1, 1920. On August 31, 1922, the trustees at the request of the stockholders of the Bowers Company, and with the consent of the holders of the remaining unpaid certificates of interest issued under the deed of trust, conveyed to the petitioner all of the assets acquired under the deed of trust then remaining in their hands. The conveyance was made in consideration of the sum of "$10 and other valuable considerations to be performed by the petitioner." The petitioner assumed the liabilities of the Bowers Company, and issued its first mortgage bonds on the assets acquired in satisfaction of outstanding liens thereon. Prior to the organization of the petitioner, the Bowers Company had executed bonds for the performance of certain contracts with the United States, including the contract for dredging at Miami, hereinafter mentioned, and, at the time of the transfer of the assets to petitioner, there was a possibility of losses on the contracts for which the sureties on the bonds would become liable, and the sureties on the bonds were asserting priority of payment out of the assets for such losses. On August 26, 1922, the petitioner, in consideration of the assent of the sureties to the transfer of the assets, executed an agreement to indemnify them for any loss or liability which they might sustain under the bonds.
After the assets had been transferred, the charter of the Bowers Company was delivered to its attorney for cancellation. The petitioner opened a new set of books and carried forward to them the assets and liabilities of the Bowers Company, and it commenced operation of the business on September 1, 1922.
The petitioner kept its books and filed its returns, except the original return for 1922, on the accrual basis.
1. On September 26, 1916, the Bowers Company entered into a contract with the United States to furnish plant, material, and labor for dredging and rock removal, in accordance with specifications, at Miami Harbor, Fla. The contract provided for payments of 68 cents per cubic yard for rock, and 20 cents per cubic yard for sand, place measurement. The specifications, which formed part of the contract, provided as follows:
15. Commencement, Prosecution, and Completion. The contractor will be required to commence work under the contract within thirty (30) days after the date of receipt by him of notification of approval of the contract by the Chief of Engineers, United States Army, unless a later date for commencement is authorized in writing by the contracting officer as herein provided for, to prosecute the work at an average rate of not less than sixty thousand (60,000) cubic yards of sand or its equivalent per month during the first two (2) months after the limiting date fixed for commencement, and at an average rate of not less than one hundred thousand (100,000) cubic yards of sand or its equivalent, per month thereafter, and to complete it within the time determined by applying to the total quantity of material to be paid for actually removed under the contract the average monthly rates above stated, for the periods to which each rate applies; provided that the contractor will be required to so conduct his work that at the end of each month during the life of the contract the total progress from the beginning of the contract to the end of that month shall be not less than that required by the above-stipulated rates of progress; provided further, that the amount of material removed in any one month shall in no case be less than a minimum of forty thousand (40,000) cubic yards of sand or its equivalent; provided further, that no waiver by the contracting officer of any failure of the contractor to make in any month or series of months the rate of progress required by this paragraph shall be construed as relieving the contractor from his obligations to make up the deficiency in future months and to complete the entire work within the time allowed by the contract; and provided further, that should the award be made to a contractor whose plant is engaged in work for the United States which will not be completed in time to permit work under this contract to be begun within the time specified the time limit for commencement under this contract may be extended in writing by the contracting officer not more than three (3) months with a corresponding extension of time limit for completion.
For the purposes of this paragraph one cubic yard of rock will be considered as the equivalent of such number of cubic yards of sand as multiplied by the unit contract price per cubic yard of sand, shall equal the unit contract price per cubic yard of rock.
16. The time allowed by the specifications for the completion of the contract to be entered into is considered sufficient for such completion by a contractor having the necessary plant, capital, and experience, unless extraordinary and unforseeable conditions supervene.
If, at any time after the date fixed for beginning work, it shall be found that operations are not being carried on at the prescribed rate or at a rate sufficient in the opinion of the contracting officer to secure completion within the contract time, the contracting officer shall have the power, after 10 days' notice in writing to the contractor, to put on such additional labor or plant, or to purchase such materials as may be necessary to put the work in a proper state of advancement, and any actual final excess cost thereof to the United States over what the work would have cost at the contract rate, after crediting the contractor with the value to the United States (as determined by the contracting officer) of the remaining plant and unused materials so purchased, shall be deducted from any sums due or to become due the contractor. The right is reserved to the United States to assume the capacity of the plant and force actually on the work at any time as a measure of probable progress thereafter.
The provisions of this paragraph, however, shall not be construed to affect the right of the United States to annul the contract, as provided for in the contract form; nor shall any failure of the contracting officer to take action under this paragraph or to annul the contract, in case the contractor fails to make the specified rate of progress during any month or any series of consecutive months, be construed as a waiver of the right of the United States to require the contractor to make good the deficiency in future months, or to take further action under this paragraph, or to later annul the contract if the deficiency is not made up within a reasonable time.
Article 4 of the contract provided as follows:
If the contractor shall delay or fail to commence with the delivery of the material or the performance of the work as specified herein, or shall, in the judgment of the contracting officer fail to prosecute faithfully and diligently the work in accordance with the specifications and requirements of this contract, then, in either case, the contracting officer shall have power, with the prior...
To continue reading
Request your trial