Gunderson Bros. Eng'g Corp. v. Comm'r of Internal Revenue, Docket No. 19672.
| Decision Date | 18 January 1951 |
| Docket Number | Docket No. 19672. |
| Citation | 16 T.C. 118 |
| Parties | GUNDERSON BROS. ENGINEERING CORP., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Carl E. Davidson, Esq., and Burton M. Smith, C.P.A., for the petitioner.
John H. Pigg, Esq., for the respondent.
1. Where the taxpayer on the accrual basis intentionally claimed an unallowable deduction on its state and Federal tax returns and did not accrue the added tax which would otherwise have been due on its books and did not admit its liability therefor until some years later, held, that the added tax and interest resulting from the subsequent elimination of the deduction was accruable and deductible only in the taxable year in which the taxpayer finally recognized and admitted its liability for such tax and interest.
2. Where the taxpayer under a contract with the Government supplies a part of the materials and equipment and all of the labor involved in the construction of certain Naval vessels but held no title to the materials and equipment it purchased or those supplied by the Government, or to the vessels at any stage of completion, held, that petitioner's interest in the vessels, materials, and equipment was not the equivalent of title to or the ownership of finished goods, partially finished goods, or raw materials and, therefore, did not constitute property includible in its inventory within the meaning of the Commissioner's regulations, and petitioner may not by means of a so-called inventory adjustment anticipate a loss it expects to realize in a following taxable year based on the estimated cost of completing certain contracts with the Government.
The respondent has determined deficiencies in declared value excess-profits tax and excess profits tax for the taxable years ended May 31, 1944 and 1945, in the following amounts:
+----------------------------------------------+
¦ ¦Declared value ¦ ¦
+------------+----------------+----------------¦
¦Year Ended ¦excess-profits ¦Excess profits ¦
+------------+----------------+----------------¦
¦5-31-44 ¦$15,144.92 ¦$182,309.48 ¦
+------------+----------------+----------------¦
¦5-31-45 ¦ ¦263,828.80 ¦
+----------------------------------------------+
Three issues are presented:
(1) Whether the petitioner was entitled to a deduction for the taxable year ended May 31, 1944, in the amount of $26,040.49 representing Oregon state excise taxes.
(2) Whether the petitioner is entitled to a deduction for the taxable year ended May 31, 1945, in the amount of $8,901.89, representing interest on Federal income and excess profits tax deficiencies determined by the Commissioner for the taxable year ended May 31, 1944.
(3) Whether the petitioner understated its closing inventory for the taxable year ended May 31, 1945, in the amount of $332,418.77 as determined by the respondent.
The parties have settled by stipulation various other issues raised in the pleadings relating to the amount of petitioner's invested capital for the taxable years 1944 and 1945 and its allowance for depreciation in the taxable year 1945 and have agreed that effect may be given thereto in proceedings under Rule 50.
Petitioner is an Oregon corporation organized on June 1, 1942, with its office and principal place of business located in Portland, Oregon. At all times material to the issues herein petitioner was engaged in the business of manufacturing life rafts, cargo lighters, landing craft, and other such vessels. Its books are maintained and its tax returns filed on the accrual basis. Petitioner's Federal tax returns for the taxable years involved herein were filed with the collector of internal revenue for the district of Oregon.
On or about September 1, 1944, petitioner files its Oregon corporation excise tax return for the taxable year ended May 31, 1944, upon which it claimed a deduction, inter alia, in the amount of $253,774.13 which it described as ‘Post-war reconversion expense deemed applicable to current year's operations although not expended— credited to reserve.‘ Petitioner's return showed a ‘Net Tax Payable‘ in the amount of $20,965.01. Deductions in the amount of $253,774.13 and $20,965.01 representing the petitioner's post-war reconversion reserve and its Oregon excise tax liability, respectively, were claimed by the petitioner in its Federal income and declared value excess-profits tax returns for the taxable year ended May 31, 1944.
On October 6, 1945, petitioner entered into a final agreement with the Navy Price Adjustment Board in respect to its renegotiable profits for the fiscal year ended May 31, 1944. In determining the amount of petitioner's renegotiable profits, the deduction representing the post-war reconversion reserve of $253,774.13 was disallowed as an item of expense, and the petitioner was allowed a credit against the profits to be eliminated in the amount of $15,040, which figure was determined as being petitioner's Oregon corporate excise tax liability for the taxable year ended May 31, 1944, after the elimination of the excessive profits to be refunded under the renegotiation agreement.
On or about November 30, 1946, petitioner filed an amended Oregon corporation excise tax return for the taxable year ended May 31, 1944, in which the deduction of $253,774.13 for post-war reconversion reserve was eliminated and which disclosed an excise tax liability in the amount of $26,040.49.
Petitioner made no accrual on its books during or as of the close of the taxable year ended May 31, 1944, on account of its state excise taxes for that year.
In determining the deficiencies in declared value excess-profits tax and excess profits tax for the taxable year ended May 31, 1944, respondent allowed $15,040 of the $20,965.01 claimed by petitioner as a deduction for state excise taxes in that year, and disallowed the post-war reconversion reserve item of $253,774.13 in full.
There was no accrual on the petitioner's books during, or as of the close of, the taxable year ended May 31, 1945, on account of interest in respect of the deficiencies in declared value excess-profits tax and excess profits tax determined by the Commissioner for the taxable year ended May 31, 1944.
Petitioner's Federal and state tax returns for the taxable years in question were prepared by a certified public accountant who advised the petitioner's officers that the $253,774.13 claimed as a deduction for post-war reconversion reserve was not properly deductible. Petitioner's officers, understanding that the amount was not deductible under existing legislation, claimed the deduction in the hope that legislation would be passed to validate it.
On or about September 25, 1944, the petitioner entered into a fixed price contract, hereinafter referred to as Contract 1847, with the Government for the construction of five 65-foot steel harbor tugs at a contract price for each vessel of $79,746, amounting to a total contract price of $398,730.
In respect to payments on the contract price of each vessel, the contract provided in part as follows:
ARTICLE 10. PAYMENTS.— (a) The Government shall make payments on account of the contract price of each vessel as follows:
Twenty-five percent (25%) of the contract price when all steel plating for the vessel is received at the plant of the Contractor.
Twenty-five percent (25%) of the contract price when the vessel is framed and ninety percent (90%) plated.
Twenty percent (20%) of the contract price when the main propulsion machinery is installed and the vessel is launched.
Ten percent (10%) of the contract price when the vessel is substantially ready for trials.
Such payments may, if the Supervisor so directs, be based upon the contract price as adjusted from time to time as the result of change orders under Article 3.
(d) On final acceptance of each vessel, payment of the balance then owing on account of such vessel shall be made to the Contractor.
The contract required petitioner to furnish all materials other than those furnished by the Government, necessary for the construction of the tugs, and all labor, including that necessary to the installation of Government furnished materials.
The contract provided that ‘The Contractor shall not, unless otherwise directed in writing by the Department, carry, or incur the expense of any insurance against any form of loss of or damage to the vessels or to the materials or equipment therefor to which the Government has acquired title or which have been furnished by the Government for installation by the Contractor. ‘ The contract further provided that ‘Title to the Government-Furnished Material shall remain in the Government.‘
Under the general provisions of Contract 1847, it was provided that:
ARTICLE 3. LIENS AND TITLES.— * * *
(c) Title to each vessel under construction shall be in the Government and title to all materials and equipment acquired for any of the vessels shall vest in the Government upon delivery thereof to the plant of the Contractor or other place of storage selected by the Contractor, whichever of said events shall first occur: Provided, that the Supervisor may by written direction require that title shall vest in the Government upon delivery of such materials and equipment to the carrier for transportation to the plant of the Contractor or other place of storage selected by the Contractor. * * * Upon completion of each vessel, all such materials and equipment which have not been included therein and which are no longer required therefor, except materials and equipment which were furnished by the Government, shall become the property of the Contractor.
The contract also provided that under certain specified conditions it could be suspended or terminated by the Government. It was further provided that neither the contract ‘nor any interest herein nor any claim arising hereunder ‘ could be assigned by the petitioner,...
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