Ehret-Day Co. v. Comm'r of Internal Revenue
| Decision Date | 08 June 1943 |
| Docket Number | Docket No. 109528. |
| Citation | 2 T.C. 25 |
| Parties | EHRET-DAY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. During the taxable year the petitioner performed the work of constructing a building in all important particulars called for by the contract, but at the close of the year several minor defects in workmanship remained to be corrected. The architect issued his certificate during the taxable year authorizing a final payment to the contractor and stating that a small amount was retained for final adjustment. Held that within the meaning of art. 42-4, Regulations 101, the contract was ‘finally completed‘ in the taxable year; and that the architect's certificate supports the Commissioner's determination that the contract was ‘accepted‘ in that year.
2. The acceptance within the taxable year of a contract for the reconstruction and repair of a hotel building held established by the conduct of the work, without questioning the sufficiency of the performance.
3. Amount allowable as reasonable compensation for services rendered by the petitioner's officers and sole stockholders, determined. Fred L. Rosenbloom, Esq., for the petitioner.
Harry L. Brown, Esq., for the respondent.
The respondent determined deficiencies of $9,957.04 in income tax and $6,996.90 in excess profits tax for the year 1938. The deficiencies are due in part to the inclusion in the petitioner's income for the taxable year of profits from building construction contracts in the amount of $46,643.71 and to the disallowance of $12,000 of a deduction claimed for salaries paid to the petitioner's officers. The questions for determination are (1) whether the contracts were completed and accepted within the taxable year; and (2) whether the officers' salaries were reasonable in amount.
The proceeding was submitted upon the pleadings, testimony, documentary evidence, and a stipulation of facts. The stipulated facts which are not set forth in our findings of fact are included therein by reference.
FINDINGS OF FACT.
The petitioner is a corporation of the State of New Jersey which, from the time of its incorporation in 1929 up to the time of the hearing, has been engaged in business as a building contractor, with its principal office at Asbury Park. The petitioner has regularly made its returns on the calendar year basis and has kept its books and reported its income of the basis of completed contracts. It filed its return for the calendar year 1938 with the collector for the first district of New Jersey.
The petitioner was organized by William C. Ehret and Stephen J. Day. They are the president and secretary-treasurer, respectively, of the petitioner, and since the organization of the petitioner, they have been its only officers and have owned the four shares of its outstanding capital stock in equal proportions. Day did not pay anything for his shares. Ehret originally paid in to the petitioner $5,000, but he withdrew all but $1,700 of that amount prior to 1938. The petitioner's business in 1938 was carried on principally with rented machinery and equipment.
The petitioner entered into a contract with Ruth Keator Fredericks on July 16, 1937, for the construction of a building at 532-558 Cookman Avenue, in Asbury Park, at a contract price of $127,578. The negotiations preceding the signing of the contract and all matters relating to the performance of the work and the payment therefor were handled under power of attorney by George J. Fredericks, husband of Ruth Keator Fredericks. The building was to contain nine stores and twenty offices. The contract covered the excavation work, the foundations, the steel, stone, and brick work, and the roofing, but did not include the erection of the store fronts or the partitioning and finishing of the offices. The work was to be performed in accordance with drawings and specifications prepared by Frank Grad & Sons, architects, and was to be substantially completed by January 15, 1938. The contract contained the following provisions:
Article 4. Progress Payments— The owner shall make payments * * * as follows: On or about the fifth day of each month ninety per cent of the value, based on the Contract prices, of labor and materials incorporated in the work and of materials suitably stored at the site thereof up to the last day of that month, as estimated by the Architect, less the aggregate of previous payments; and upon substantial completion of the entire work, a sum sufficient to increase the total payments to ninety-five per cent of the Contract price.
Article 5. Acceptance and Final Payment— Final payment shall be due thirty days after substantial completion of the work provided the work be then fully completed and the Contract fully performed.
Upon receipt of written notice that the work is ready for final inspection and acceptance, the Architect shall promptly make such inspection, and when he finds the work acceptable under the Contract and the Contract fully performed he shall promptly issue a final certificate, * * * stating that the work provided for in this Contract has been completed and is accepted by him * * * and that the entire balance found to be due the Contractor, and noted in said final certificate, is due and payable. * * *
The contract price of $127,578 included a charge of $16,500 for heating, but Mrs. Fredericks made a subcontract for the heating on which the petitioner had not ‘set-up‘ for handling charges. The contract price was subsequently, on August 8, 1938, increased to $159,923.72 on account of additions, including electrical work, duct work, ice water lines, one store front, and partitioning and finishing several offices. The cost to the petitioner of performing the contract, exclusive of the salaries paid to its officers, was $127,590.97. The petitioner realized a profit of $32,332.75 from the contract.
Between October 26, 1937, and July 26, 1938, the petitioner received payments on the contract in the total amount of $131,819.76. On September 23, 1938, Frank Grad & Sons issued and delivered to Fredericks a certificate stating that the petitioner was entitled to a payment of $16,617.96. The certificate contains the following:
+-----------------------------------------------------------------------------+
¦Amount of contract ¦ ¦$111,078.00¦
+---------------------------------------------------+-------------+-----------¦
¦Additions to date ¦ ¦23,900.10 ¦
+---------------------------------------------------+-------------+-----------¦
¦Total ¦ ¦$134,978.10¦
+---------------------------------------------------+-------------+-----------¦
¦Deductions to date ¦ ¦2,504.89 ¦
+---------------------------------------------------+-------------+-----------¦
¦Net total ¦ ¦$132,473.21¦
+---------------------------------------------------+-------------+-----------¦
¦Am't of this Cer. ¦$16,617.96 ¦ ¦
+---------------------------------------------------+-------------+-----------¦
¦Previously authorized ¦114,008.60 ¦ ¦
+---------------------------------------------------+-------------+-----------¦
¦Total authorized to date ¦ ¦$130,626.56¦
+---------------------------------------------------+-------------+-----------¦
¦Balance ¦ ¦$1,846.44 ¦
+-----------------------------------------------------------------+-----------¦
¦Final sum subject to further adjustments of approximately ¦$1,846.44 ¦
¦$2,000.00. ¦ ¦
+-----------------------------------------------------------------+-----------¦
¦retained (10%) for final adjustment. ¦ ¦ ¦
+-----------------------------------------------------------------------------+
Final sum subject to further adjustments of approximately $2,000.00. $1,846.44 retained (10%) for final adjustment.
After the issuance of the architect's certificate mentioned above, and on September 26, 1938, the petitioner received a payment of $26,257.52, leaving $1,846.44 as the unpaid balance on the total contract price of $159,077.28. The petitioner received a further payment of $1,000 on December 3, 1938, leaving $846.44 unpaid at the close of 1938.
Fredericks inspected the building weekly as the work progressed. In November or December 1938, he notified Day that the terrazzo flooring in the main entrance of the building was cracked and pointed out certain minor imperfections in the steel work and in the work in one of the upper floors. Except for the adjustment of those matters, all of the work provided for in the contract had been completed prior to the close of the year 1938. Two of the nine stores were occupied by tenants in the latter part of the year 1938. Fredericks withheld payment of the balance of $846.44 because of the above mentioned defects. In February 1939 Fredericks, Day, and the architect spent about a half day in making an inspection of all parts of the building, and Fredericks at that time told Day that the work was acceptable. A few days later he entered into a contract with the petitioner for the completion of the store fronts and offices. Fredericks did not, in February 1939 or at any other time, deliver to the petitioner a formal acceptance of the building in writing.
The sum of $846.44 remained unpaid in January 1940, and, on January 4, 1940, in response to an inquiry from one of his office employees concerning it, Fredericks wrote a letter in which he stated: ‘I have not as yet accepted the building nor do I intend to accept it until Ehret-Day Company makes the...
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