Gaddy v. Comm'r of Internal Revenue

Citation38 T.C. 943
Decision Date26 September 1962
Docket NumberDocket No. 90213.
PartiesJ. W. GADDY AND RUTH GADDY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Brooks L. Harman, Esq., for the petitioners.

Harold D. Rogers, Esq., for the respondent.

1. Held, funds constituting overpayments made in 1957 under a rental agreement made in 1956 are not includible in gross income within the meaning of section 61(a) of the Internal Revenue Code of 1954, where in the year of overpayment the recipient discovers the overpayments, renounces his claim of right to the overpayments, and provides for their repayment under a new contract.

2. Held, further, where, under the second rental agreement executed October 1, 1957, the recipient does not discover that an overpayment was made until after the close of the taxable year, the recipient has not had the opportunity to renounce his claim of right and recognize his obligation to repay in the same taxable year and the funds are includible in gross income in the year of receipt under the claim-of-right doctrine announced by the Supreme Court in North American Oil Consolidated v. Burnet, 286 U.S. 417.

3. Held, further, even though petitioners' counsel conceded in their brief that petitioners are taxable in 1957 upon the amounts received in 1956 under the 1956 contract, such concession cannot be accepted because it is one of law and not of fact and is contrary to law. Ohio Clover Leaf Diary Co., 8 B.T.A. 1249 (1927).

The respondent determined a deficiency in the income tax of petitioners for the year 1957 in the amount of $29,928.57. The adjustments to taxable income are as follows:

+-------------------------------------------------------------------+
                ¦Taxable income shown on return               ¦          ¦$41,515.06¦
                +---------------------------------------------+----------+----------¦
                ¦Additional income and unallowable deductions:¦          ¦          ¦
                +---------------------------------------------+----------+----------¦
                ¦(a) Transport income                         ¦$39,401.90¦          ¦
                +---------------------------------------------+----------+----------¦
                ¦(b) Abandonment loss                         ¦850.57    ¦          ¦
                +---------------------------------------------+----------+----------¦
                ¦(c) Depreciation                             ¦7,039.63  ¦          ¦
                +---------------------------------------------+----------+----------¦
                ¦Total addition to income                     ¦          ¦47,292.10 ¦
                +---------------------------------------------+----------+----------¦
                ¦Taxable income as adjusted                   ¦          ¦88,807.16 ¦
                +-------------------------------------------------------------------+
                

Only adjustment (a) is in issue. It is explained in the deficiency notice as follows:

(a) It is determined that you received transport income of $39,401.90 from the El Paso Natural Gas Products Company in the taxable year 1957 which was not reported on your return for that year. Therefore, your taxable income is increased $39,401.90.

Petitioners assign error as to adjustment (a) as follows:

(a) Respondent erroneously determined that petitioners received transport income of Thirty-nine thousand four hundred one and 90/100 ($39,401.90) Dollars from the El Paso Natural Gas Products Company in the taxable year 1957, which was not reported on petitioners' return for that year, and, thereby increased petitioners' taxable income by Thirty-nine thousand four hundred one and 90/100 ($39,401.90) Dollars.

FINDINGS OF FACT.

Most of the facts have been stipulated and a stipulation of facts, together with exhibits attached thereto, was filed by the parties and is incorporated herein by this reference. Only such facts as seem necessary to an understanding of the issue will be recited herein.

Petitioners J. W. Gaddy (sometimes hereinafter referred to as Gaddy) and Ruth Gaddy, husband and wife, reside in Odessa, Ector County, Texas. They filed a timely joint income tax return for the calendar year 1957 on the cash receipts and expenditures method of accounting with the district director of internal revenue, Dallas, Texas. The income of the petitioners for the year in question was community income.

Gaddy was engaged in truck transport hauling during the years 1956, 1957, and 1958 for El Paso Natural Gas Products Company (hereinafter referred as El Paso). he was also engaged in the production of oil and gas as an independent operator, and in the pipe-coating business. In 1956 El Paso needed trucks to haul petroleum and petroleum products. It desired to have full control over the trucks, including the assignment of drivers and dispatchers, but it was not interested in purchasing such equipment. Sometime during the month of June 1956 El Paso and Gaddy entered into an oral agreement whereby El Paso leased certain tank truck equipment from Gaddy at a rental rate which, when added to the operating and maintenance costs, would not exceed the amount El Paso would have to pay if the hauling was done by a contract hauler.

Pursuant to that oral agreement, the parties entered into a written contract dated July 1, 1956. The contract provided for a rental rate of 23 cents per mile for certain equipment for hauling such petroleum and petroleum products. Both Gaddy and El Paso understood that this rental rate would be checked at regular intervals and adjusted either by an amendment to such contract or by writing a new contract in the event such rental rate, plus the costs of operating such equipment, proved to be too high or too low in comparison with the rate El Paso would have to pay if the hauling had been done by a contract hauler. The parties agreed that the rate of 23 cents per mile should constitute the proper rate for the rental of such equipment to meet the orally agreed level of total costs.

The rate of 23 cents per mile specified in the contract of July 1, 1956, proved to be too high. However, due to changes in El Paso's accounting personnel who were not familiar with the agreement to review and adjust the contract rate, the contract price was not adjusted until October 1, 1957. Sometime during the month of September 1957 El Paso discovered and informed Gaddy that from July 1, 1956, through July 31, 1957, Gaddy had been paid $15,434.41 more than the contract hauling rate would have been for the same work by contract hauler and consequently $15,434.41 more than the parties had agreed upon. Of this amount, $14,990.01 had been paid to Gaddy during the calendar year 1956. Sometime prior to October 1, 1957, the parties agreed that the overpayment figure was correct and a new contract was negotiated and executed on October 1, 1957, at a rental rate of 18 cents per mile for such equipment. It was agreed at the time that Gaddy would return such overpayment to El Paso. The new contract was designed to recover the excess funds by reducing the rental to 18 cents per mile and it was intended that the overpayment would be returned by Gaddy in that manner.

A review of the facts in February 1958 revealed that the rental rate specified in the contract of October 1, 1957, was still too high. This was mainly due to changes in the transportation needs of El Paso, and the parties agreed that Gaddy had been overpaid in the amount of $24,411.89 during the entire calendar year of 1957, which, added to the overpayment of $14,990.01 during 1956, resulted in a total overpayment as of December 31, 1957, in the amount of $39,401.90.

A third contract was negotiated and executed on March 1, 1958. The March 1, 1958, contract contained a rental provision calling for a rate of 12.5 cents per mile until such equipment had been driven a total of 1,128,800 miles, and a rate of 16 cents per mile thereafter. It was estimated that the rate of 16 cents per mile, plus the operating and maintenance costs of such equipment, would be equivalent to the contract carrier rate. The differential of 3.5 cents per mile (the difference between the 12.5 and the 16 cent rates per mile) for the first 1,128,800 miles would recover the overpayment of $39,401.90 and it was agreed, through the execution of the contract, that such overpayment would be recovered in this manner. Gaddy was notified that the overpayments to him for the years 1957 and 1956 totaled $39,509.17. This figure was subsequently corrected to $39,401.90. The amount of the overpayment was determined by subtracting from the amounts paid to Gaddy the equivalent contract carrier rate.

Additional overpayments occurred in 1958. The total overpayment was $57,664.14 and Gaddy repaid $10,000 in 1958, at the rate of $2,000 per month, which was withheld from the monthly remittances made to Gaddy during the months from March through July 1958. Petitioners have not paid any other amounts to El Paso other than the $10,000 paid during 1958 except through possible adjustments and credits made in arriving at the net overpayment of $47,664.14 as of July 31, 1958.

The final contract dated March 1, 1958, was terminated as of July 31, 1958. At the time of termination of that contract the overpayments totaled $47,664.14. At the time the March 1, 1958, contract was terminated, Gaddy acknowledged his liability to El Paso for all overpayments in accordance with the oral agreement. He orally agreed to repay all that he owed to El Paso. The hauling contract was terminated because El Paso changed to a pipeline operation and the equipment was no longer needed. At the time of termination, El Paso discussed with Gaddy other possible hauling contracts and it was contemplated that El Paso would recover the overpayments in this manner; however, a further lease agreement was never made.

All records pertaining to the computations of amounts due Gaddy were made and kept by El Paso. Gaddy has never executed any written agreements or notes acknowledging any liability to El Paso although Gaddy has had verbal discussions with El Paso concerning his indebtedness. No time has been set...

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