Stevens Bros. & the Miller-Hutchinson Co. v. Comm'r of Internal Revenue

• Decision Date: 29 August 1955
• Docket Number: Docket No. 49117.
• Citation: 24 T.C. 953
• Parties: STEVENS BROTHERS AND THE MILLER-HUTCHINSON COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

24 T.C. 953

STEVENS BROTHERS AND THE MILLER-HUTCHINSON COMPANY, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 49117.

Tax Court of the United States.

Filed August 29, 1955.

DIVISION OF PROFITS— MONEY FURNISHED AT RISK OF JOB.— A taxpayer contractor is not taxable with entire profits from a job where, in order to obtain required $75,000 of funds subrogated to the rights of all creditors, it agreed that the corporation furnishing the funds should have one-half of the profits from the job. A. J. Schmitt, Jr., Esq., for the petitioner.

J. Marvin Kelley, Esq., for the respondent.

The Commissioner determined a deficiency in income tax of $24,693.16 for 1948 and one of $37,621.49 for 1949. The issue for decision is whether one-half of the profits from a construction contract was properly a part of the net income of the petitioner although paid to Stevens Brothers Foundation, Inc., under an agreement pursuant to which the Foundation advanced to the petitioner money essential to the earning of the profits.

FINDINGS OF FACT.

The petitioner's returns for the taxable years were filed with the collector of internal revenue for the district of Louisiana.

The petitioner was incorporated in 1936 and succeeded to the business formerly carried on by partnerships. The business was that of of heavy construction. The principal office of the petitioner is in New Orleans. The stock of the petitioner was owned two-thirds by Stevens Brothers, a partnership of St. Paul, Minnesota, and one-third by R. C. Hutchinson. The partners of Stevens Brothers were E. F. Stevens, C. R. Stevens and H. O. Stevens, brothers, and S. A. Stevens, the wife of E. F. Stevens. Hutchinson was secretary-treasurer and the active manager of the petitioner. Stevens Brothers did not carry on any business in the Louisiana area.

The United States Engineers of the New Orleans District advertised in the early part of May 1947 for bids for laying reinforced concrete floors for the Algiers Locks. The bids were to be opened on June 3. The petitioner had had prior experiences in such work. Hutchinson anticipated that its equipment would be released from other work about the time it would be needed on this prospective job. He obtained a copy of the plans for the lock floor job, studied them, estimated the cost, realized that it would require more money than the petitioner had available, and consulted the Whitney National Bank of New Orleans about a loan for the purposes of the job. That bank has been lending money to the business for many years. The bank not only refused to lend money for the purpose but requested that existing loans amounting to about $60,000 be reduced. The financial condition of the petitioner was not as good as it had been, due to unprofitable contracts in recent years. Hutchinson also consulted its bonding source, the Maryland Casualty Company, about a bid bond and a construction bond and was told that neither bond would be furnished unless $50,000 of additional capital was put into the petitioner. He then advised the Stevens in St. Paul of the situation and conferred with them in St. Paul. They required that material commitments be obtained and then to him that Stevens Brothers Foundation, Inc., would furnish the additional capital of $50,000 for this job upon condition that it would receive one-third of the net profits from the job. Hutchinson returned to New Orleans where he learned from Maryland that it would require the petitioner to have $75,000, instead of $50,000, of additional capital. Hutchinson again communicated with the Stevenses in St. Paul and was advised that the Foundation would supply the $75,000 provided it would receive one-half of the profits from the job. The Foundation and the petitioner adopted appropriate resolutions and entered into a contract under which the Foundation agreed to furnish the $75,000 immediately which would remain under the complete control of the petitioner until completion of the lock floor contract and the payment of all accounts due. The Foundation was to receive one half of any profit, before income taxes, from the job, and was to share any losses up to the $75,000.

Hutchinson bid on the job for the petitioner, that bid was the lowest of three submitted, and the petitioner was awarded the contract. The petitioner's bid was ‘approximately’ $1,053,409.80. The other two bids submitted were for $1,322,088 and $1,599,994. Maryland furnished the bonds but reinsured 80 per cent of the construction bond because of the lowness of the petitioner's bid. The reinsurers would not have taken any of the risk had the $75,000 not been in as capital.

Foundation loaned $40,000 to the petitioner in 1948. That amount was needed for a short period as a revolving fund with which to pay for steel shipments until promptly reimbursed by the Government after which the money would be used again to pay for another shipment. The bank had refused to lend money for that purpose. Foundation received no additional remuneration for supplying the $40,000. That money was repaid to it by the...