Thompson-King-Tate, Inc. v. United States

• Decision Date: 11 December 1961
• Docket Number: No. 14393.,14393.
• Citation: 296 F.2d 290
• Parties: THOMPSON-KING-TATE, INC., a Kentucky Corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

296 F.2d 290 (1961)

THOMPSON-KING-TATE, INC., a Kentucky Corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 14393.

United States Court of Appeals Sixth Circuit.

December 11, 1961.

Jack F. Mattingly, Lexington, Ky., for plaintiff-appellant, William B. Gess, Gess, Mattingly, Saunier & Atchison, Lexington, Ky., on the brief.

Loring W. Post, Atty., Tax Div. U. S. Dept. of Justice, Washington, D. C., for defendant-appellee, Abbott M. Sellers, Acting Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, Lloyd J. Keno, Attys., Dept. of Justice, Washington, D. C., Jean L. Auxier, U. S. Atty., Lexington, Ky., on the brief.

Before MILLER, Chief Judge, and WEICK and O'SULLIVAN, Circuit Judges.

SHACKELFORD MILLER, Jr., Chief Judge.

The appellant taxpayer, Thompson-King-Tate, Inc., brought this action in the District Court to recover income taxes alleged to have been illegally assessed and collected from it for the year 1953. The question involved is whether the gain resulting from the completion by the taxpayer of a long-term construction subcontract was taxable income in the year 1953, as claimed by the Government, or in the year 1955, as claimed by the taxpayer.

The facts were stipulated by the parties. Included among them are the following.

The taxpayer was engaged in the business of excavating for and installing water and sewer lines, constructing streets, selling building materials, etc. It kept its books and reported its income on the accrual basis. It accounted for and reported its gain or loss from long-term contracts on the completed contract basis, as provided by Section 39.42-4, Regulations 118, Revenue Code of 1939.

On March 11, 1952, the Richmond Municipal Housing Commission (Kentucky) entered into a written contract with Perkins and Gray Construction Company, as prime contractor, for the general construction work of a low rent housing project No. Ky. 16-1, Richmond, Kentucky. Perkins and Gray, by written contract of May 15, 1952, sublet to taxpayer a portion of the construction of the project. On November 28, 1952, Perkins and Gray and the taxpayer entered into a supplemental oral contract, per revised plans for the project, dated November 11, 1952, specifying extras and additions consisting of the removal of trench rock for utility lines and the construction of additional sidewalks and terrace steps. The initial subcontract price was $106,110.00. The supplemental oral contract price was $27,858.42, resulting in a total subcontract price of $133,968.42.

All work on the project was subject to the approval and acceptance thereof by the City of Richmond Municipal Housing Commission and by the Public Housing Administration, herein referred to as PHA. It was specifically agreed by the parties that Perkins and Gray would not be required to accept and pay for the work of the taxpayer until the entire Prime Contract for the general construction work on the project was finally and fully completed and accepted by the Housing Commission.

Several Change Orders were issued during the construction of the project, including Change Order No. G-12 dated December 7, 1954, concerning rock excavation in utility trenches, extra backfill, steps and sidewalks, which was approved by PHA on March 15, 1955.

The taxpayer completed its initial and supplemental contracts in October 1953. After the completion of the contracts, however, the taxpayer made several additions and adjustments in 1954, without charge, to satisfy the Housing Commission.

For the purpose of renting as many of the housing units as could be occupied, the Housing Commission in October 1953 took possession of a portion of the project and rented 53 of the 99 housing units in the project, even though all work was not complete or acceptable. On this date various phases of the job had not been finished, particularly the landscaping and installation of acoustical tile and the punch list of items. The installation of acoustical tile was completed in December 1953 but the punch list items were not completed until 1954.

As of March 10, 1954, certain items continued to be in dispute in the negotiations for a final acceptance of the project by the Housing Commission. The Housing Commission would not accept all of the work of the taxpayer until the adjustments and additions above referred to were made in 1954.

Representatives of the Housing Commission, Perkins and Gray, and the taxpayer had numerous conferences and discussions between March 1954 and April 1955 regarding the quality and quantity of the work performed, the replacements and corrections needed on the project and payment of the balances due therefor. On April 18, 1955, the Housing Commission and PHA expressed satisfaction with the work on the project and the adjusted account of the prime contractor, which included the account of the taxpayer. The replacements and corrections referred to were performed in 1954.

"Certificate of Completion — Part II," testifying to the fulfillment of all contract obligations, was executed on April 18, 1955. April 18, 1955, was the date of final approval and acceptance of the work on the project. On the same day a Certificate of Release was obtained by the Housing Commission from Perkins and Gray.

Perkins and Gray refused to accept, approve or pay for the work of the taxpayer until the Housing Commission had approved, accepted and paid for all work on the project. A major portion of the items in controversy, which partially caused the delay in the approval and acceptance of the project, involved the work performed by the taxpayer. On April 19, 1955, Perkins and Gray approved and accepted the work of the taxpayer and paid the balance due, as adjusted, therefor.

The taxpayer sent Perkins and Gray a final bill based on the total contract price of $133,968.42 on November 6, 1953. The initial contract price of $106,110.00 was paid to taxpayer in 1953 except for 10% retainage, which was paid to taxpayer on May 20, 1954. Payment for extra work under the supplemental agreement was made on April 19, 1955, in the sum of $27,508.42, after being adjusted by a reduction of $350.00 in the contract price.

According to taxpayer's accounting records, the total cost of the contract was $88,121.13, of which $86,709.80 was paid in 1953. The balance of $1,411.33 was paid in 1954. The taxpayer reported $19,400.20 gain on the original contract ($106,110.00 less $86,709.80) in its 1953 return, and reported $26,447.09 gain on the extra work ($27,858.42 less $1,411.33) in its 1954 return.

On the basis of his determination that taxpayer's entire contract was finally completed and accepted in 1953, the Commissioner included the entire gain of $45,847.29 (total contract price of $133,968.42 less total cost of $88,121.13) in taxpayer's income for 1953. This ruling transferred the $26,447.09 profit on the long-term housing contract from the year 1954 to the year 1953. During the audit the taxpayer requested the Internal Revenue Agent making the audit to transfer the profit of $19,400.20 and $26,447.09, as reported in its returns for 1953 and 1954, respectively, to the taxpayer's 1955 taxable year, in which year taxpayer claims the contract was finally completed and accepted. After conferences between the taxpayer and officials of the Internal Revenue Service, a statutory notice of deficiency, including an income tax deficiency for the year 1953 in the sum of $30,732.71, was mailed to the taxpayer. This deficiency was assessed on the basis that the long-term housing contract was completed and accepted in 1953, and the gain therefrom was accordingly taxable in that year. Payment of said deficiency together with interest was made on April 8, 1957. Following a timely claim for refund, which was denied, this action was filed.

As a basis for recovery the taxpayer alleged that its accountant erroneously reported taxable income from the aforesaid contract for the years 1953 and 1954, but that since the long-term housing contract was completed and accepted in 1955, the entire profit thereon should have been included in taxpayer's income in 1955 rather than in 1953.

The District Judge pointed out that the record of the PHA and of the prime contractor indicated substantial completion of the project as of October 20, 1953, although final acceptance was delayed until May 6, 1955; that the taxpayer knew in ...