Vandra Bros. Construction Co., Inc. v. Commissioner
| Decision Date | 02 August 2000 |
| Docket Number | Docket No. 15483-96. |
| Citation | 80 T.C.M. 125 |
| Parties | Vandra Bros. Construction Co., Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Michael J. Occhionero, Cleveland, Ohio, for the petitioner. Joseph P. Grant, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $405,017, and an accuracy-related penalty under section 6662(a) in the amount of $81,003.40, for petitioner's 1992 taxable year. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the year in issue.
After a concession by respondent,1 we must decide whether respondent abused his discretion in determining that petitioner's use of the cash method of accounting did not clearly reflect income. We hold that he did.
Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts and attached exhibits. At the time of filing the petition, petitioner was an Ohio corporation with its principal place of business in Oakwood Village, Ohio.
Petitioner specialized in the construction of streets, sidewalks, curbs, and similar improvements for governmental entities. All of petitioner's customers were governmental and municipal agencies, including the State of Ohio and municipalities within the State. Petitioner's expertise was construction, in particular laying concrete, on public sites such as city streets and sidewalks that required the project to be completed with a minimal amount of disruption in traffic flow and in compliance with governmental regulations. Petitioner provided labor and equipment,2 but petitioner did not maintain a supply of any of the materials that were used at a construction site, instead relying on suppliers to deliver needed materials to the construction site at the appropriate time. Petitioner only ordered the materials it needed for the job for the particular day. Petitioner had no plant or other facility to store materials and could not store materials at the construction site. (Petitioner left no material on site overnight except, occasionally, a negligible amount.) Concrete could not be stored on site for an additional reason: Within a few hours of delivery, it would harden and become useless and worthless. Thus, petitioner tried to estimate as closely as possible the amount of materials needed so there would not be anything left over. Petitioner bore the cost of any wasted materials if they were the result of an over order, or, in the case of concrete, of it not being laid in time. If the materials were defective or, in the case of concrete, delivered too late, the supplier was responsible and bore the cost.
Virtually all of petitioner's projects required laying some concrete. Petitioner also engaged in related work, such as preparing a site by removing existing concrete or stone. Petitioner also installed items such as reinforcing steel, piping for sewers and drainage, and guardrails. During the year in issue, 67 percent of petitioner's total materials cost was due to concrete, 16 percent was due to stone, 6 percent was due to reinforcing material, and the remainder was due to other materials. In general, petitioner subcontracted for certain parts of projects, such as electrical work, asphalt, or landscaping.
Petitioner's work was generally obtained through competitive bids. Petitioner's bids comprised costs for labor, equipment, and materials. In computing its bid, petitioner estimated the cost of labor and equipment and added a markup to the cost of labor. Further, petitioner estimated the quantity of materials, which could include concrete, aggregate (stone and gravel), reinforcing steel, piping for sewer and drainage, guardrail, etc. However, petitioner did not add a markup to the cost of materials but rather included the cost of the materials, as quoted by the supplier, as an item in the bid. During the year in issue, 27 percent of petitioner's gross revenue came from the material cost of concrete. Petitioner would always solicit materials costs from at least two suppliers, and sometimes three or four, and would choose the lowest quoted cost for use in the bid. The cost of materials was subject to slight variations due, for example, to the distance between a supplier and the job site. However, petitioner got a discount for early payment to suppliers, which was not passed along to customers. Occasionally a customer itself would supply materials (e.g., concrete), but this did not happen during the year in issue.
Bids were calculated by estimating the cost of each individual job that was necessary to complete the entire project. The bid price of most of the individual jobs was calculated on a per-unit basis. For instance, in arriving at a total bid for the reconstruction of a street in the City of South Euclid, petitioner bid $28 per square yard to install 9-inch reinforced concrete pavement, and $5 per linear foot to install 6-inch drainage conduit, and separate amounts for numerous other items. The bid price for some individual jobs was calculated on a per-item basis (for instance, $23 per each 9-foot guardrail post) or on a lump-sum basis (for instance, $60,000 for clearing and grubbing a certain area indicated in the project plan). The bid calculation also included the estimated number of units or items that the project required. However, petitioner would bill the customer on the basis of the number of units or items actually used on the project, not the number shown in the bid. In some cases, petitioner was required by the customer to state separately the cost of materials (i.e., without labor), and when so required, petitioner did so on a per-unit or per-item basis. Even if two jobs used the same amount of material, the amount of the bid could have differed substantially, due to different cost of labor and equipment. For instance, to maintain traffic flow, petitioner might be limited in the amount of work it could complete in one day, thus increasing costs of labor. Petitioner did not begin any work without a written contract for that particular project. There were penalties if petitioner did not comply with the contract.
When petitioner subcontracted, the subcontractor was responsible for labor, equipment, and materials for its part of the project. Petitioner took bids on the subcontractor work and did not mark up the subcontractor's bids, except to cover its own bond costs and insurance. When petitioner subcontracted, if the subcontractor did not pay its suppliers, those suppliers could file liens against petitioner. Thus, petitioner took care in selecting subcontractors, trying to ensure they could pay their suppliers.
The construction season in general lasted from April to November. Generally petitioner bid in the spring and finished the projects by November or December. Occasionally work carried over to the next year.
Petitioner's business was strictly regulated by its customers. Both the State of Ohio and local governments stationed an engineer at each construction site to inspect materials and oversee the project. Petitioner was required to pour concrete within 1 hour after the concrete supply truck left the supply plant. If this condition was not met, the onsite engineer had the right to reject the load of concrete. Further, the engineer inspected the concrete to make sure it was not defective and had the right to reject it if it was. If concrete was rejected, the party responsible assumed the loss. For instance, if the supplier delivered defective concrete or did not deliver the concrete to the site in time to lay it within 1 hour of leaving the supplier's plant, the supplier assumed the loss. However, if petitioner failed to pour properly delivered concrete in time, petitioner assumed the loss. The governmental entity worked with petitioner and the supplier but ultimately held petitioner responsible for any failure to meet contractual obligations. Petitioner signed for the concrete after the government's inspector found it to be acceptable. The government's engineer gave permission to pour the concrete. Thus, for instance, if permission was given and concrete was poured, and then the concrete was damaged by rain before it dried, the governmental entity assumed responsibility. For State projects, the governmental regulation was so strict that petitioner did not need to guarantee materials; if the State allowed use of the materials, the State assumed responsibility for defects. For city projects petition...
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