Essex Constr. Co. v. Comm'r of Internal Revenue

• Decision Date: 30 June 1949
• Docket Number: Docket No. 20238.
• Citation: 12 T.C. 1212
• Parties: ESSEX CONSTRUCTION COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

12 T.C. 1212

ESSEX CONSTRUCTION COMPANY, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 20238.

Tax Court of the United States.

Promulgated June 30, 1949.

1. Income from Government construction contract awarded to petitioner and assigned by it to its president, held, on facts taxable to petitioner as income earned by it.

2. Payment to petitioner's president by architect employed to work on contract held not taxable to petitioner.

Joseph A. Rafferty, Esq., for the petitioner.

E. J. Woolf, Esq., for the respondent.

This proceeding was brought for a redetermination of deficiencies in tax as follows:

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                Declared     Excess
                Year Income tax value excess profits    Penalty
                                profits tax  tax
                1943 $1,250.00  $9,978.00    $56,240.30 $14,060.07
                1944 356.32     216.75
                

The issues are whether petitioner's portion of the profits, for the years in question, on a contract awarded to petitioner and others by the Federal Government is taxable to petitioner or to its assignees; whether part of an amount paid to an architect working on the contract is taxable to petitioner; and whether respondent erred in disallowing $1,184.21 as a net operating loss deduction for 1944.

FINDINGS OF FACT.

Petitioner, a Delaware corporation, is inactive at the present time. Its address for mailing purposes is 2005 Bladensburg Road NE., Washington, D.C. The Federal income tax returns for the periods in question were filed with the collector of internal revenue for the district of Maryland. No excess profits tax return was filed for the year 1943.

During the years 1943 and 1944, and for some years prior thereto, petitioner was engaged in the construction business. All of petitioner's capital stock was owned by Frank B. Essex, Sr., and his two sons, Frank, Jr., and Richard. Of 1,000 shares issued, Frank B. Essex, Sr., president of petitioner, held 10 shares, Frank B. Essex, Jr., 985 shares, and Richard B. Essex, 5 shares. The two sons paid nothing for the shares of stock issued in their name, never worked for petitioner, and took no active part in its business. Petitioner had three regular employees. It was managed and operated by Frank B. Essex, Sr., until his death, October 23, 1947.

Prior to May 27, 1942, petitioner was awarded a contract, hereinafter called the ‘primary contract,‘ by the Federal Public Housing Authority for the construction of 2,000 dwelling units in Norfolk, Virginia. Petitioner was unable to satisfy the Government's bond requirements, and in order to comply joined with George T. McLean and Nicholas C. Wright of Norfolk, Virginia, who were able to satisfy the bond requirements. Petitioner, McLean, and Wright collectively entered into a contract as ‘Contractor‘ with the Federal Government on May 27, 1942, for the construction of the 2,000 dwelling units at Norfolk for a total consideration of $2,282,832.80.

Under the ‘General Conditions‘ of the contract, paragraph 3 provided as follows:

Assignment

Except as provided in the Assignment of Claims Act of 1940 (Public No. 811, 76th Congress, approved October 9, 1940), neither the Contract nor any part thereof nor any claim arising therefrom shall be assigned by the Contractor to any person, firm or corporation. This provision shall not preclude the Contractor from sub-letting parts of the work in accordance with section 7, hereof.

Under article 23 of the contract it was provided that the consideration stated should be the full payment for the work to be performed, and that the several parties (other than the United States) ‘have agreed among themselves as to the proper distribution of the total amount of such consideration and the periodic payments on account thereof; and have duly designated George T. McLean of Portsmouth, Virginia, and Nicholas C. Wright of Norfolk, Virginia, jointly, as agent, for them and for each of them, for the collection and disbursements of all moneys payable by the United States hereunder. Payments to such agent shall be deemed, in so far as the United States is concerned, payments to the Essex Construction Company, Inc., George T. McLean, and Nicholas C. Wright, herein collectively called the principal; * * * ‘ On the same day on which the contract with the Government was executed, i.e., May 27, 1942, pursuant to authority of petitioner's board of directors, petitioner entered into an agreement with McLean, Wright, and Frank B. Essex, Sr., president of petitioner, whereby it was agreed that ‘the furnishing of all materials and the performance of all the work obligatory upon the 'Contractor’ under the terms of said contract with The United States shall be furnished and performed by‘ McLean and Wright, and that petitioner ‘will perform no part of said work, and that all of said work shall be under the exclusive management and control of‘ McLean and Wright, who were to receive the full consideration; that petitioner was to receive no part of the consideration, except that McLean and Wright would pay it 36 per cent of the net profits realized under the contract; that petitioner thereby designated ‘Frank B. Essex, as the Party to whom said Thirty-six percentum (36%) of said net profits shall be paid.‘

On the same date a memorandum of agreement between petitioner (designated as ‘second party‘) and Frank B. Essex, Sr., (designated as ‘first party‘) was executed. It recited:

WHEREAS, said second party has indicated its willingness to assign and transfer all right, title and interest in and to certain Contract of May 27, 1942 for the construction of two thousand dwelling units at Norfolk, Virginia, said Contract being numbered VA-44184, to said first party, provided said first party secure from George T. McLean and Nicholas C. Wright, second parties to said Contract with said Federal Public Housing Authority of the United States, as indemnity that said Contract will be performed by them without the necessity of said second party hereto being required to perform any part thereof and protecting said second party hereto against any financial loss in connection therewith; and said second party hereto against any financial loss in connection therewith; and provided further that said first party hereto by appropriate agreement further indemnify said second party hereto against any loss in connection with said Contract of May 27, 1942 with said Housing Authority aforesaid, and,

WHEREAS, said first party has already secured the consent of said George T. McLean and Nicholas C. Wright for the indemnity protection herein mentioned, and is further himself willing to indemnify said Company additionally against any loss that may be incurred by reason of said Corporation entering into said Contract aforesaid.

NOW, THEREFORE, in consideration of the premises and of One ($1.00) Dollar in hand paid by each of the parties hereto to the other, they have and do hereby agree as follows:

1. The first party hereto has and does hereby agree to protect and indemnify the second party from any loss that it may suffer by reason of becoming a party to the Contract of May 27, 1942 for the construction of said two thousand dwelling units at Norfolk, Virginia, and said first party further agrees that said indemnity hereby provided shall have the legal effect of substituting him in the place and stead of the second party hereto in said Contract so that any loss that might be suffered in connection therewith will be the loss of the individual party hereto.

2. In consideration of the foregoing indemnity, the second part...