Space Controls, Inc. v. Commissioner, Docket No. 87161.
| Decision Date | 15 March 1962 |
| Docket Number | Docket No. 87161. |
| Citation | 21 TCM (CCH) 295,1962 TC Memo 54 |
| Parties | Space Controls, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Leland E. Fiske, Esq., for the petitioner. John P. Higgins, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's income tax for its fiscal year ended February 28, 1955, in the amount of $44,965.14. The issue for decision is whether petitioner properly reduced its inventory on February 28, 1957, from cost to an amount it states represents market in computing its net operating loss to be carried back to its fiscal year ended February 28, 1955. Another issue raised by the pleadings has been conceded by petitioner.
Some of the facts have been stipulated and are found accordingly.
Petitioner, a corporation with offices at Forth Worth, Texas, formerly known as Gremco, Inc., filed its income tax returns under its former name for the fiscal years ended February 28, 1955, 1957, and 1958 with the district director of internal revenue at Dallas, Texas, and its return for the fiscal year ended February 29, 1956, with the district director of internal revenue at Fort Worth, Texas. In the fiscal year ended February 28, 1955, petitioner had taxable income; in the fiscal years ended February 29, 1956, and February 28, 1957 and 1958, it sustained operating losses and had no taxable income.
On June 27, 1956, petitioner was awarded a contract with the United States Army Ordnance Corps for the construction and delivery of 382 military ¾-ton cargo trailers, at a unit price of $804.2175 per unit or a total contract price of $307,211.09. This contract was designated by petitioner as Job No. 1120. These trailers were of a special military design and were not suitable for commercial or civilian use.
On February 28, 1957, petitioner had completed and shipped 96 units, leaving 286 units yet to be shipped. The 96 units shipped prior to the end of petitioner's fiscal year 1957 were shipped during the period January 16, 1957 through February 26, 1957. The remaining 286 units were shipped during the period from March 1, 1957, through July 31, 1957. Of these 90 were shipped during the month of March 1957, 10 of the 90 being shipped on March 1 and another 10 on March 7, 1957.
Based upon the percent of completion, as shown by petitioner's shipping and inventory records, petitioner's accountants determined that at February 28, 1957, the number of equivalent units which had been completed was as follows:
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Equivalent
Total Percent Finished
Item Units Complete Units
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Units shipped before 2-28-57 ....... 96 100 96
Units on hand, shipped 3-1-57 ...... 10 100 10
Units per inventory
Tickets Nos. 37558 and 38177 ... 2 100 2
Nos. 38178 and 38179 ........... 2 80 1.6
No. 38182 ...................... 1 50 .5
Nos. 38180 and 38181 ........... 2 75 1.5
Components per other tickets ....... 160 41 65.6
___ _____
273 177.2
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Costs incurred to February 28, 1957, for materials, direct labor and overhead for Job No. 1120 as shown by petitioner's job cost ledger, amounted to $308,702.13. These costs as determined by petitioner's accountants, amounted to $305,992.85.
Based upon their determination of the costs incurred and the equivalent units completed to February 28, 1957, petitioners' accountants determined that the cost of manufacturing these trailers would amount to $1,164.41 per unit, computed as follows:
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Equivalent
Total Finished Unit
Item Costs Units Cost
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Materials
Materials purchased ................. $125,031.04
Freight ............................. 8,280.54
Subcontracts ........................ 76,661.67
___________
Total materials ..................... $209,973.25
Less not yet in process ............. 99,893.56
___________
Cost of material for units finished or in
process ............................... 110,079.69 177 $ 621.92
Direct labor ............................ 38,407.84 177 217.00
Overhead ................................ 57,611.76 177 325.49
___________ ___ _________
$206,099.29 $1,164.41
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Substantially all of the material for the completion of Job No. 1120 had either been acquired or ordered at February 28, 1957. This was material specially ordered for this job and was not suitable for use on petitioner's other contracts. Based upon the final costs of completing the contract and the costs incurred to February 28, 1957, as determined by petitioner's accountants, the percent of such costs incurred up to February 28, 1957, was as follows:
Percent
Materials in process or finished 43.63
Materials not yet in process.... 39.59
_____
Total materials ............. 83.22
Direct labor ................... 48.57
Overhead ....................... 48.94
_____
Total costs ................. 68.14
Petitioner used the accrual method of accounting and on its first return an election was made to value its inventories on the basis of the lower of cost or market.
As of February 28, 1957, petitioner's inventories on hand pertaining to Job No. 1120 consisting of materials, direct labor, and overhead, taken at cost, as shown by petitioner's inventory tickets, amounted to $126,770.28, classified as raw materials not yet in process in the amount of $96,332,93, materials in process in the amount of $13,550.55 and labor and overhead in the amount of $16,886.80. The same inventories taken at cost, as determined by petitioner's accountants, amounted to $194,209.49, classified as raw materials in the amount of $99,893.56 and work in process in the amount of $94,315.93.
Based upon the costs already incurred and upon the unit manufacturing cost of $1,164.41 determined by petitioner's accountants, the accountants estimated that the cost of completion of the 286 units for Job No. 1120 yet to be delivered would amount to $138,811.77.
The actual cost of manufacturing these trailers, as determined after the contract was completed, from the costs shown in petitioner's job cost ledger, amounted to $1,175.57 per unit. The actual cost of completing the 286 units during the fiscal year ended February 28, 1958, based on the difference between the final costs and the costs incurred to February 28, 1957, both as shown by petitioner's job cost ledger, amounted to $140,363.88. The cost of completing the 286 units, based on the difference between the final costs shown in petitioner's job cost ledger and the costs incurred to February 28, 1957, as determined by petitioner's accountants, amounted to $143,073.16.
Based upon the contract price petitioner's accountants determined that the amount which would be received for the 286 units when they were completed and delivered was $230,007.11.
In its income tax return for the fiscal year ended February 28, 1957, petitioner reported its inventories for Job No. 1120 at a total net value of $91,195.34 by reporting goods in process at a value of $65,141.82, a reduction of $29,174.11 from the cost of such goods in process as determined by petitioner's accountants and by reporting raw materials at a value of $99,893.56, offset by a deduction for estimated loss on uncompleted contract of $73,840.04. The adjustment of $103,014.15 was considered by petitioner's accountants to represent a reduction of petitioner's inventory as of February 28, 1957, from cost to market.
The deduction of $73,840.04 taken on the income tax return for the fiscal year ended February 28, 1957, as estimated loss on uncompleted contracts was entered on the books of the petitioner. The item also appeared on the balance sheet in the audit report for the year ended February 28, 1957, submitted to petitioner by its accountants on June 17, 1957.
Respondent in his notice of deficiency decreased the amount claimed on petitioner's return for the fiscal year ended February 28, 1957, as cost of goods sold by $103,014.15 with the following explanation:
It is determined that the cost of goods sold in the year ended February 28, 1957 was overstated on your return by $103,014.15. This is based on a determination that you have not shown that the "market value" of your inventory of work in process on Job No. 1120 at February 28, 1957 was less than your cost of $94,315.93, thus it is necessary to increase your closing inventory, as reported, by $29,174.11, which reduces your cost of goods sold by a like amount. In addition you have not shown that a reserve of $73,840.04 included in the cost of goods sold is deductible under any section of Internal Revenue Code of...
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