Hutcheson v. United States
| Decision Date | 30 March 1982 |
| Docket Number | Civ. A. No. 80-510-N. |
| Citation | 540 F. Supp. 880 |
| Parties | Everett V. HUTCHESON, Jr., and Jane R. Hutcheson, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Middle District of Alabama |
David B. Byrne, Jr., Richardson B. McKenzie, III, Robison & Belser, Montgomery, Ala., for plaintiffs.
Barry E. Teague, U. S. Atty., Kenneth E. Vines, Asst. U. S. Atty., Montgomery, Ala., Curtis L. Muncy, Tax Div., Dept. of Justice, Washington, D. C., for defendant.
This cause, in which the plaintiffs Everett V. Hutcheson, Jr. and Jane R. Hutcheson, a married couple, seek recovery of income taxes allegedly wrongfully collected, is now before the Court on the defendant United States of America's motion for summary judgment. Upon consideration of the motion and the evidence and briefs submitted in connection therewith, the Court is of the opinion for the following reasons that the motion is due to be granted.
In 1975 and 1976, the Hutchesons filed joint income tax returns in which they claimed a fifty percent maximum income tax rate for all income from E. V. Hutcheson Construction Company, a sole proprietorship owned by Mr. Hutcheson. The United States Internal Revenue Service disallowed the claimed fifty percent tax rate to all but thirty percent of the company's income and, for the resulting tax difference, assessed the Hutchesons $12,743.91 for 1975 and $12,844.01 for 1976. The Hutchesons paid these two assessments and timely filed this action for refund of the assessments.1
The E. V. Hutcheson Construction Company operated as a general contracting company for the construction and repair of buildings. The company and its customers entered into general contracts which obligated the company to furnish all labor and materials and which were obtained either by negotiation or by submission of competitive bids based upon estimates of the total costs of labor and materials necessary to perform the contracts, with, of course, an allowance for company profit.
For the years 1975 and 1976, the company's income and expenditures, as reported to the IRS, were as follows:
Income 1975 1976
Gross receipts on Construction
Contracts $ 995,311.00 $ 1,452,557.00
Less: Direct Construction Costs
Labor 124,068.00 145,825.00
Materials 272,229.00 370,395.00
Work Sub-Contracted 378,741.00 706,471.00
Equipment Rental 8,879.00 14,994.00
Utilities 830.00 563.00
Other Direct Costs 6,774.00 14,555.00
Although this schedule of income and expenditures reveals that a substantial portion of the company's expenditures in both years was devoted to the cost of materials, the company maintained no inventory except for excess materials from completed jobs. Instead, materials were ordered as needed for incorporation into each construction project and were obtained on credit "net 30 days," whereby payment was not due until thirty days after the materials were delivered. Also, the subcontracted work, which included mainly electrical, roofing and painting work, was obtained under a similar plan for delayed payments. Furthermore, the company received payments from customers on a "draw" method, by which payments from customers were required to be made periodically, usually by the tenth of each month, based upon a percentage of the work in place on projects.
By use of this arrangement for receipt of income and for delayed payment for materials and labor, the company was able to incorporate materials into a project and obtain payment from customers before the company's accounts for materials, subcontracted work, and labor employed became due. Also, it is clear that by this arrangement the company was itself primarily liable for the cost of materials, subcontracted work, and labor; materials were purchased, subcontracts made, and labor employed in the company's name, not in the name of customers. When a "loss situation" occurred, whether temporarily during construction where incoming payments on a contract would not cover the company's accounts then due, or at the completion of a project where total expenses exceeded the contracted price, the company paid, from its own capital resources, for the cost of materials, subcontracted work, and labor then due.
Finally, the company owned a building in which its offices were located, it owned and leased some equipment, and it employed a secretary and a number of other regular employees. In 1975, the company's assets totaled $969,077.00, of which $493,167.00 was in cash, and in 1976, its assets totaled $1,119,834.00, of which $614,851.00 was in cash.
By this action, the Hutchesons renew their claim that for the years 1975 and 1976 all income from the company was subject to a tax rate ceiling of fifty percent. In particular, relying on 26 U.S.C. § 1348,2 which provides that the maximum tax rate on "earned income" is fifty percent,3 they contend that the income from the company for these years was earned income which is generally defined to include "professional fees, and other amounts received as compensation for personal services actually rendered." 26 U.S.C. § 911(b). See also 26 U.S.C. § 1348(b)(1).4 In response and relying on subsection (i) of Treasury Regulation § 1.1348-3(a)(3), the United States contends that only thirty percent of the company's income for these years was entitled to the fifty percent ceiling. This regulation provides that for a business in which both earned income and capital are "material income-producing factors," only thirty percent of the income from the business may be treated as earned income subject to the fifty percent tax rate ceiling.5
It is clear from the positions of both the Hutchesons and the United States that the sole issue for this Court is whether capital was also a material income-producing factor for the company, it being undisputed that earned income was such a factor. However, for purposes of clarity, it should be emphasized what the issue is not: it is not whether capital was a material income-producing factor to the exclusion of earned income; to prevail, the United States does not have to show this. Rather, the issue for the Court is simply whether capital was also or an additional material income-producing factor, along with earned income.
On a motion for summary judgment, the movant has the burden of establishing that there are no genuine disputes as to any material fact and that the movant is entitled to judgment as a matter of law. Rule 56(c), Federal Rules of Civil Procedure. See, e.g., McLaughlin v. City of LaGrange, 662 F.2d 1385, 1388 (11th Cir. 1981) (per curiam); First National Bank of Chicago v. Pendell, 651 F.2d 419, 420 (5th Cir. 1981) (per curiam).6 In the present case, the United States has met this burden. The facts as given above are undisputed; and, for reasons which follow, this Court is of the opinion that as a matter of law capital was a material income-producing factor in the company's business for the two years in question. See Edward P. Allison Co. v. Commissioner, 63 F.2d 553, 556 (8th Cir. 1933) (). See also Dillin v. United States, 433 F.2d 1097, 1100-01 (5th Cir. 1970).
In searching for the answer as to whether capital is a material income-producing factor in a business, this Court is given substantial direction by subsection (ii) of Treasury Regulation § 1.1348-3(a)(3) which provides:
Whether capital is a material income-producing factor must be determined by reference to all the facts of each case. Capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to employment of capital in the business, as reflected, for example, by a substantial investment in inventories, plant, machinery, or other equipment. In general, capital is not a material income-producing factor where gross income of the business consists principally of fees, commissions, or other compensation for personal services performed by an individual. Thus, the practice of his profession by a doctor, dentist, lawyer, architect, or accountant will not, as such, be treated as a trade or business in which capital is a material income-producing factor even though the practitioner may have a substantial capital investment in professional equipment or in the physical plant constituting the office from which he conducts his practice since his capital investment is regarded as only incidental to his professional practice.
Applying this regulation to the undisputed facts in the instant case, this Court is of the opinion that capital as a material income-producing factor is clearly reflected in the operation of the E. V. Hutcheson Company for the years 1975 and 1976. Substantial use of capital to produce income is reflected, first of all, in the materials used to complete construction projects. For the year 1975, these materials costs were $272,229.00 and accounted for 34 percent of the company's total expenses, and consumed 27 percent of the company's gross receipts; and for the year 1976, these costs were $370,395.00 and accounted for 30 percent of the company's total expenses, and consumed 25 percent of the company's gross receipts. Furthermore, customers of the company looked to the company for both services and materials, and both services and materials were purchased from the company in the form of a building or repairs to a building. Accordingly, under these circumstances, materials or capital cannot be viewed as anything other than as a material...
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Kalker v. Comm'r of Internal Revenue
... ... COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5554–81. United States Tax Court Filed August 4, 1983 ... Petitioner owned and operated an ... 9638, 42 AFTR2d 78–5799 (SD Ohio 1978) (electrical contracting business); Hutcheson, Jr. v. Commissioner, 540 F.Supp. 880 (MD Ala. 1982) (construction contracting business). But see ... ...
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