Sharp v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 19 August 1955
• Docket Number: No. 12283,12284.,12283
• Citation: 224 F.2d 920
• Parties: Amor W. SHARP, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Katherine C. SHARP, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

224 F.2d 920 (1955)

Amor W. SHARP, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Katherine C. SHARP, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 12283, 12284.

United States Court of Appeals Sixth Circuit.

August 19, 1955.

Harold D. Cohen, Washington, D. C., Vernon C. Kohlhaas, Michael Waris, Jr., Garrett S. Claypool, Washington, D. C., on the brief, Pierson & Ball, Washington, D. C., of counsel, for petitioner.

H. Brian Holland, Ellis N. Slack, David O. Walter, Dept. of Justice, Washington, D. C., for respondent.

Before SIMONS, Chief Judge, and McALLISTER and MILLER, Circuit Judges.

MILLER, Circuit Judge.

The petitioners, Amor W. Sharp and his wife, Katherine C. Sharp, seek reviews of rulings of the Tax Court adjudging deficiencies in income tax for the taxable year 1945 in the respective amounts of $32,395.80 and $7,352.43.

The material facts which are undisputed are as follows: Petitioners, who lived in Columbus, Ohio, formed a partnership in 1922 under the trade name of Columbus Wood Preserving Company. The business of the partnership consisted in procuring untreated timber products, such as piling and ties, having them treated by subcontractor treating plants under the partnership's specifications and supervision, and then shipping them to purchasers. It kept its books and reported its income on an accrual basis. In each of the years 1942, 1943 and 1944 it valued its inventory on the basis of the lower of cost or market, as it had elected to do on its returns. It valued its inventory as of December 31, 1945 on the same basis, the correctness of which under the particular facts of this case presents the issue involved.

On May 26, 1945, the partnership entered into a written agreement with the Central Procuring Agency of the War Department, hereinafter referred to as the Government, in which the partnership undertook to furnish the Government with certain piling to be used principally for harbor work in constructing piers and docks in the South Pacific. It required the partnership to furnish the Government with 18,050 pieces of untreated piling of varying specified lengths, to treat that piling in accordance with certain specifications, and to make deliveries in accordance with an agreed schedule of delivery. The contract provided that performance of work could be terminated by the Government in accordance with Article 20 whenever the contracting officer determined such termination was for the best interest of the Government.

Paragraph (b) of Article 20 provided that after receipt of a notice of termination the partnership was required to (1) terminate work as specified in the notice; (2) place no further orders or subcontracts unless necessary for completion of unterminated work; (3) terminate all orders and subcontracts related to the performance of terminated work; (4) assign to the Government, in the manner and to the extent directed by the contracting officer, all rights under terminated orders or subcontracts; (5) settle all claims arising out of termination of orders and subcontracts with the approval of the contracting officer to the extent that he might require; (6) transfer title and deliver to the Government as directed by the contracting officer work in process, completed work, supplies and other material acquired in respect of the performance of the terminated work; (7) use its best efforts to sell as directed or authorized the property referred to immediately above; (8) complete performance of unterminated work; and (9) to take such action as necessary, or as the contracting officer directed, for protection and preservation of the property which was in the possession of the partnership and in which the Government had or might acquire an interest.

Paragraph (c) of Article 20 provided that in the event the partnership and the contracting officer agreed upon the amount to be paid to the partnership by reason of the termination of the work the Government would pay such agreed amounts.

Paragraph (d) of Article 20 provided that in the event the parties failed to agree upon an amount under Paragraph (c), the Government would pay the partnership according to a formula specified therein, which with respect to terminated contract work included the cost of settling and paying claims arising out of the termination of work under subcontracts or orders.

Following the making of the contract the partnership executed subcontracts with suppliers of raw piling and with a number of treating plants for the processing of the piling under the Government's specifications.

Upon cessation of hostilities with Japan, the Government, on August 15, 1945, sent a telegram ordering the partnership to immediately stop all work and terminate all subcontracts. The partnership immediately sent telegrams to its subcontractors ordering them to stop all work except unloading until further advised. On August 20, 1945, the Government notified the partnership that payment for certain items would be made at the contract price under certain conditions, that cut piling which was untreated because of the contract termination was to be disposed of by the partnership without cost to the Government, or, if that was not possible, to be handled in accordance with the provisions of Paragraph (b) (9) of Article 20, and requested that if the partnership had no termination claims against the Government, or if it wished to waive such claims, it execute a form of contract enclosed and described as a "No-Cost Prime Contract Settlement Agreement." The partnership considered the Government proposal to waive termination claims but did not execute the no-cost settlement agreement.

Thereafter, the suppliers of raw piling sent the partnership their invoices for the piling which it had manufactured for delivery under their contracts. In October 1945, the partnership effected settlements with all but three of these suppliers paying them 10 cents per lineal foot for the piling which was left over. These settlements were not sales on the open market. The market for such piling was glutted at that time and no one was able to dispose of such material. The partnership was not able to effect settlement with the remaining three suppliers. The untreated piling which had been manufactured by these producers had a cost basis of $73,073.

From August 15, 1945 until March 1946 the partnership contacted every possible user in the country of whom they knew, that might be interested in using all or any part of that piling at any price, but found the market virtually extinguished. An offer was received on March 12, 1946 for a small amount at 9 cents per lineal foot.

The partnership was uncertain throughout the period between August 15 and December 31, 1945 as to its rights and obligations arising from the termination of the contract. In September 1945, a representative of the Contract Termination Branch of the Government came to Columbus to discuss the possibilities arising out of a settlement. This representative recognized the difficulties of deciding what should properly be done with the inventory. The partnership requested that he give it instructions or suggestions for the disposal of the inventory but he did not do so. The partners, although asserting their best efforts to dispose of the piling, were unable to get any results by the end of December 1945, at which time they were convinced that the possibility of disposing of such inventory was remote and that they would sustain a loss thereon.

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