National Contracting Co. v. Commissioner of Int. Rev.

• Decision Date: 11 July 1939
• Docket Number: No. 11397.,11397.
• Citation: 105 F.2d 488
• Parties: NATIONAL CONTRACTING CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

105 F.2d 488 (1939)

NATIONAL CONTRACTING CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11397.

Circuit Court of Appeals, Eighth Circuit.

July 11, 1939.

H. V. Mercer, of Minneapolis, Minn., for petitioner.

Ellis N. Slack, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before GARDNER and WOODROUGH, Circuit Judges, and BELL, District Judge.

WOODROUGH, Circuit Judge.

This case is brought to this court on petition of the National Contracting Company to review the decision of the Board of Tax Appeals, reported in 37 B. T. A. 689. Taxes on income of petitioner accrued in the year 1925 are involved. Also a penalty assessed for failure to make return for the year 1925. The assessments were made by the Commissioner upon determination of deficiency on January 8, 1935.

The case follows upon another between the same parties, decided by this court on February 19, 1934. Helvering v. National Contracting Company, 8 Cir., 69 F.2d 252. In that case the Commissioner sought to collect income tax from the corporation in respect to income received by it during the years 1923 and 1924. It was there made to appear to this court that at various times between February 7, 1920, and July 11, 1921, the Contracting Company and the Independent School District No. 35 of the State of Minnesota had entered into eight contracts for the construction of school buildings for and on the property of the latter, and that the contracting company had begun the construction in February, 1920, and had completed 90 per cent of it in October, 1921, when further prosecution of the work was enjoined at the instance of a taxpayer, causing delay to the contracting company. The company completed the buildings and discharged all the obligations of its contracts early in 1925. It claimed that it was not liable to any income tax in respect to the large amounts which it admitted it had received on the contracts during the tax years 1923 and 1924, because it had not completed the contracts during those years, and it relied upon Regulation 69, Article 36(b), which reads:

"Art. 36. Long-term contracts. — Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term `long-term contracts' means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:

* * * * * *

"(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of completion."

This court held that the contracting company having elected "as a consistent practice" to report its gross income from its construction contracts in the taxable year in which its contracts were completed, could not be held in respect to the income which it had derived from part performance of the contracts in the years prior to the completion in 1925. We avoided the tax on that ground.

Thereupon the Commissioner found deficiency and assessed the tax against petitioner on the basis of income accrued from the same building contracts referred to as Contracts 60-63-64, in the year 1925. He also assessed penalty of 25 per cent for failure of the petitioner to make the return required by law. The petitioner thereupon claimed that the statute of limitations had run against the assessment and it appealed on that and other grounds to the Board of Tax Appeals. The Board found that the petitioner had failed to make return for the tax year 1925 as required by section 239(a), Revenue Act 1926, 44 Stat. 45, and that the statute of limitations had not commenced to run against assessment of tax on the income accrued in 1925. It sustained the tax and also the assessment of the penalty, and this appeal is taken to reverse the decision.

The facts are found with meticulous care and set forth by the Board in connection with its reported opinion, supra. The taxpayer contends, (1) that this court should find that it did make return for the year 1925 sufficient to start the statute of limitations running in 1927 and to bar the assessment made in 1935, (2) that sums aggregating $73,500 paid out by it in the year 1920 to Tollef Jacobson, A. G. Shulind and J. O. Shulind, were an ordinary and necessary business expense incurred by it in performing the building contracts for which it was entitled to deduction or else that the sums so disbursed were not a part of its gross income, and (3) that an item of $21,665 should have been deducted as a debt found to be bad and lost in the taxable year.

1. As stated by the Board, the burden of proof of facts sufficient to sustain the plea that the statute of limitations had run against the assessment was upon the petitioner. Its testimony was, that in March, 1926, it had filed an income tax form 1120 for the year 1925, verified by its president and stamped "Tentative Return", and that on May 15, 1926, it filed another return form 1120 for the same year, as to which the Board found: "On its face only the formal parts at the top of the form were filled in, and a typed sheet was pasted to the form, which states in substance that the return is submitted subject to the final disposition of the petitioner's tax liability for the years 1920-1924 `now pending before the Commissioner of Internal Revenue', and that the right is reserved to amend the return upon such final disposition since there are items pending which affect the year 1925. This rider states further that, the taxpayer having elected to report on a completed contract basis, there is no taxable profit since no contracts were completed during the taxable year, and all expenses during the year were assigned to contracts under way and not completed. The remainder of the form contains only comparative balance sheets as of the beginning and the end of the year, and the verification affidavit subscribed to by the president and treasurer of the petitioner."

The document is in the record and conforms to its description by the Board. We think the Board correctly held that as the documents filed by the taxpayer did not state, or attempt or purport to state, the items of its gross income or deductions or credits as required by section 239 of the Revenue Act 1926, they were not the returns required by that section, and that their filing did not set the statute of limitations in operation. Lucas v. Pilliod Lumber Co., 281 U.S. 245, 50 S.Ct. 297, 74 L.Ed. 829, 67 A.L.R. 1350; Florsheim Bros. v. United States, 280 U.S. 453, 50 S.Ct. 215, 74 L.Ed. 542. They did not evince "an honest and genuine endeavor to satisfy the law" requiring items of gross income deductions and credits to be returned. Zellerbach Paper Co. v. Helvering, 293 U.S. 172-180, 55 S.Ct. 127, 131, 79 L.Ed. 264.

It appears that in 1927 a revenue agent examined the petitioner's books and made a report covering the taxpayer's business for the taxable year 1925. He reached the conclusion that the taxpayer's operations had resulted in loss to it during the period and that no tax was assessable. His report states that he explained his findings to the officers of the taxpayer and they concurred with him in all his findings. A copy of the report was thereafter transmitted by the revenue agent to the taxpayer and it acknowledged receipt thereof. The form attached to the report contained a blank to be signed by the taxpayer to the effect that the taxpayer had reviewed the report and accepted as correct the findings of the examining officer, but the taxpayer did not sign it.

The letter of the revenue agent transmitting copy of his report to the taxpayer contained the following: "In the event the recommendations are not approved upon review in Washington, you will be notified and given opportunity to discuss the changes with this office, or should you fail to protest to this office, any protest which you may subsequently file with Washington will be referred to this office for consideration." The report of the revenue agent was transmitted to Washington and was attached to the taxpayer's purported return of May 15, 1926. A stamp is found upon that return, copied into the record here by photostat from the document as it appears in the file in Washington, in the space left blank for "Auditor's Stamp", which reads, "Tax Liability — None". "Audited by W. A. Simpson".

In 1928 the president of petitioner went to Washington to ascertain whether the whole tax situation of the company could not be opened up and straightened out as a unit, but litigation was then pending concerning the taxes for 1923 and 1924 and permission was refused.

The taxpayer contends here that even if the filing of documents which it made in March and May of 1926 did not constitute making a return within the statute, that such documents should be taken together with the examination and report and letter of the revenue agent and the actions of the employees of the government at Washington, and it should be found on consideration of all that was done that the statute was started running. It is also contended that what was done amounted to a final assessment of "no tax" sufficient to start the statute. The arguments to support the conclusion that a tentative signed report may be considered together with a later complete but unsigned report are persuasively stated in Pilliod Lumber Company v. Commissioner...