Palda v. Comm'r of Internal Revenue, Docket Nos. 13705-7.

• Decision Date: 30 November 1956
• Docket Number: Docket Nos. 13705-7.
• Citation: 27 T.C. 445
• Parties: CHARLES H. PALDA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.S. R. OKES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.DAY OKES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

27 T.C. 445

CHARLES H. PALDA, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.S. R. OKES, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.DAY OKES, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 13705-7.

Tax Court of the United States.

Filed November 30, 1956.

[27 T.C. 445]

William H. Oppenheimer, Esq., for the petitioners.

Thomas A. Steele, Jr., Esq., for the respondent.

In computing the percentage of gross income required by section 251, Internal Revenue Code of 1939, relating to income from United States possessions, held, a partner's gross income includes his distributive share of the gross income of the partnership.

In these consolidated proceedings respondent determined deficiencies as follows:

+---------------------------------------------+
                ¦ ¦1941 income ¦1943 income and ¦
                +-------------+-------------+-----------------¦
                ¦Petitioner ¦tax ¦Victory tax ¦
                +-------------+-------------+-----------------¦
                ¦Charles Palda¦$52.08 ¦$240,546.21 ¦
                +-------------+-------------+-----------------¦
                ¦Day Okes ¦1 (10.77) ¦495,816.32 ¦
                +-------------+-------------+-----------------¦
                ¦S.R. Okes ¦10.05 ¦495,687.36 ¦
                +-------------+-------------+-----------------¦
                ¦ ¦ ¦ ¦
                +---------------------------------------------+
                

[27 T.C. 446]

The 1943 deficiencies remain in dispute. The sole issue is whether petitioners properly excluded from gross income their distributive shares of profits from a joint venture as income derived from a trade or business within a United States possession.

FINDINGS OF FACT.

Some facts are stipulated and are hereby found.

Petitioner, United States citizens, engaged as partners in the construction business under the name of Okes Construction Company, hereafter referred to as the Company.

Petitioners each filed Federal income tax returns according to the cash receipts and disbursements method with the collector of internal revenue for the district of Minnesota for the calendar years 1942 and 1943. Each 1943 income tax return contained a Form 1040-E.

The Company maintained its books and filed its partnership information returns, Form 1065, according to the percentage of completion-accrual method of accounting. It filed those returns on a fiscal year basis for the year ended February 28, 1942. Thereafter, the Commissioner of Internal Revenue granted permission to change to the calendar year basis for income tax purposes. To accomplish the change the Company filed a Form 1065 for the period March 1, 1942, to December 31, 1942. Thereafter, it filed its returns on the calendar year basis. The partnership filed its returns with the collector of internal revenue for the district of Minnesota.

As of October 4, 1940, the Washington, D.C., office of the Panama Canal invited bids for the furnishing of all plant, labor, materials, and performance of work required for the excavation of an approach channel, a lock structure, and a drainage canal, and for grading a railroad relocation, all in connection with the construction of a third set of locks on the Atlantic side of the Panama Canal in the Panama Canal Zone, a United States possession.

Martin Wunderlich Company was a partnership, composed of Martin Wunderlich and others, engaged in the construction business.

In 1940, the Company and Martin Wunderlich Company, jointly, hereafter referred to as the joint venture, submitted a bid to do the work. The Company held a 25 per cent interest in the joint venture, Martin Wunderlich Company having 75 per cent. The United States accepted the bid of the joint venture and on January 6, 1941, entered into a contract with them at a price of $8,517,100. Subsequent change orders and supplemental agreements changed and

[27 T.C. 447]

enlarged the contract so that the total price exceeded 12 million dollars.

On January 7, 1943, the joint venture contracted with the United States to erect power plant equipment for the Gatun and Miraflores locks in the Canal Zone for $146.640. The final amount was $168,464.17. On March 30, 1943, the joint venture contracted with the United States to construct and complete access roads to the magazine area at Fort Gulick in the Canal Zone for $36,143.90. The final amount was $67,531.10. On May 28, 1943, the joint venture contracted with the United States for the treating and blasting of parade grounds for Fort Gulick for $16,895. The final amount was $16,733.24.

Except for certain work in Nicaragua the joint venture engaged in only the construction work contracted for under the Canal Zone contracts mentioned above. With that exception it performed all work in the Canal Zone.

Immediately upon notification of the acceptance of their bid, S. R. Okes, Palda, and Wunderlich flew to the Canal Zone, arriving January 16, 1941. Wunderlich returned shortly to the United States, but Okes and Palda remained to organize the work. They arranged for housing for the workmen, banking facilities, credit with the area authorities, preparation of an area for shops and equipment, and a place for the workers to eat. As part of this organizational work, they prepared progress charts and attended labor meetings.

They required a large number of skilled laborers because of the extensive use of machinery in the operation. They set up a complete working organization, the office being managed by Kent Taylor, the job operations being directed by Stewart, the job superintendent.

On October 5, 1942, February 15, 1943, and July 1, 1943, the joint venture leased certain equipment to Martin Wunderlich Company for use in Costa Rica. On January 24, 1942, the joint venture leased certain equipment to the United States to be delivered at and for use in construction of France Field in the Canal Zone.

The joint venture commenced operations under the main contract early in 1941 and completed work under the Canal Zone contracts in October 1943. The joint venture finally concluded its business on December 31, 1943.

On October 20, 1943, the joint venture sold used construction equipment to the United States for $1,019,801.26, delivered to the purchaser f.o.b. seller's yard, Gatun, Canal Zone. At that time the joint venture had completed its work and no longer needed the equipment. The sale and disposal of equipment conformed to the usual custom and usage...