Woodward v. Comm'r of Internal Revenue, Docket No. 3573-66.
| Decision Date | 30 September 1968 |
| Docket Number | Docket No. 3573-66. |
| Citation | 50 T.C. 982 |
| Parties | WALTER L. WOODWARD AND BERNICE A. WOODWARD, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Francis J. Butler, for the petitioners.
Gary C. Randall, for the respondent.
Petitioner contracted in 1956 to perform the professional engineering services required for the construction of a sewerage system and treatment plant for 7 1/2 percent of the cost, to be paid, first, $2,500 for preliminary plans, second, after voter approval of the project, 65 percent, less the preliminary payment, for detailed plans, and third, 35 percent for supervising construction. Petitioner carried out the contract. Voter approval was secured in November 1961. Petitioner received $7,500 before 1963. In 1963 he received $46,125 for detailed plans and $24,939.27 for supervising construction. In 1964 he received $15,758.60. The job was completed by May 1964. Held, petitioner's employment was for a single project and is not severable for the purpose of computing under sec. 1301, I.R.C. 1954, the tax on the income received in 1963. Held, further, respondent is sustained in disallowing deductions for expenses not substantiated as required by sec. 274(d).
Respondent determined deficiencies in income tax of the petitioners in the amounts of $3,296.17 and $325.94 for 1963 and 1964, respectively. Two issues are presented for decision, (1) whether the petitioners may apply section 1301 of the Internal Revenue Code of 1954, as effective in 1963, in computing the tax with respect to certain earnings of Walter L. Woodward received in 1963, and (2) whether respondent erred in the disallowance of certain business expenses claimed as deductions in 1963 and 1964.
The stipulated facts, together with the exhibits attached to the stipulation, are incorporated by reference.
The petitioners, husband and wife, resided in Spokane, Wash., at the time the petition was filed. They filed joint Federal income tax returns on the cash basis for the calendar years 1963 and 1964 with the district director of internal revenue at Tacoma, Wash.
Walter L. Woodward, herein referred to as the petitioner, is a consulting engineer of more than 20-years experience. He is licensed to practice in Washington, Idaho, Montana, Wyoming, and Oregon.
The Lewiston Orchards Sewer District No. 1 is, and was in February 1956, a legal governmental entity in the State of Idaho. On March 1, 1956, petitioner wrote to the board of directors of such sewer district proposing that he be retained as engineer for the project of designing and supervising construction of a sewer system for the district. In the proposal he stated:
My fee for the entire job would be 7.5% of total construction costs of which my fee for a preliminary is a part. As was suggested in my talk some time ago the figure of $2,500 would about cover this phase with what data is available thru the Irrigation District. This however is deductible from the over all fee is and when the job is completed. I have much of this work done however and adjustments could be made to fit the receipt of either District of Federal planning funds.
Up to 65% less this preliminary figure is due at the completion of Plans and Specifications. The remaining 35% would be due as construction progresses based upon Construction Monthly estimates, for General supervision. This is not to be construed as daily on the job inspection. The inspector is to be paid by you but is reportable and responsible to me. I do not add the usual percentage of from 25 to 100% as he is your employee. Many towns have found it most convenient to have the inspector be the one who is to eventually be the Superintendent or operator. It does allow a training period and he does know what and why things are done.
On March 6, 1956, the board voted to retain the petitioner for the job. During March 1956 the petitioner and the board entered into a contract providing as follows:
AGREEMENT FOR PROFESSIONAL SERVICES
1. This Agreement made at Lewiston, Idaho, this . . . day of March 1956, by and between Lewiston Orchards Sewer District No. 1, hereafter called ‘the District’, and Walter L. Woodward, hereafter called ‘the engineer’;
WITNESSETH:
THAT, WHEREAS, the District intends to construct a sewerage system and sewage treatment plant facilities, provided approval is obtained of the bond issue at an election to be held for that purpose.
NOW, THEREFORE, in consideration of these premises and of the mutual covenants herein set forth for the construction of above named improvement as follows:
2. The engineer agrees to furnish and perform the various professional services required for the construction of above named improvement as follows:
a. Preliminary investigations, studies and reports, preliminary general plan or plans, approximate estimate of cost and all necessary conferences with the District.
b. Complete general and detail plans, specifications and detailed estimate of cost.
c. Prepare forms for construction proposals, advertisements, construction contracts and bonds, subject to the approval of the District.
d. Receive and tabulate proposals, report same to the District and assist in awarding contract for construction.
e. Furnish general supervision of the work of the Contractor including line and grade surveys as the construction progresses to assist in a correct interpretation of the plans and specifications and to safeguard the District against defects and deficiencies on the part of the Contractor, but the Engineer does not guarantee the performance of the contract by the Contractor. (The general supervision of the Engineer is to be distinguished from and does not include the resident personal supervision as hereinafter mentioned.)
f. Furnish resident supervision and/or such other surveys or services as may be mutually agreed upon between the District and the Engineer, at the field payroll actual costs to the Engineer plus field, traveling and ‘out of office’ expense.
g. Furnish property, boundary, right-of-way or other surveys at the actual cost to the Engineer plus field, traveling, and ‘out of office’ expense.
h. Furnish all necessary copies of reports, plans and specifications necessary or needful to the District or Contractor. All original documents, survey notes and tracings are and shall remain the property of the Engineer.
i. Meet with the District, or their representatives when requested or necessary for consultation or conferences.
j. Furnish and perform the supervision of work of inspection bureaus and laboratories in the inspection and tests of materials entering into the construction of structure, receive, and pass upon by approval or rejection all reports by such laboratories or bureaus on the material tested for use in the structure.
k. Furnish and perform the supervision of all test borings, sub-surface explorations or other investigations required for the determining of foundation conditions for the structure. (The cost of such borings, tests, explorations, or investigations to be paid for by the District.)
l. Compute and determine the amount of special assessments if required by the District. The cost of such service to be paid for by the District at actual cost to the Engineer or as by mutual agreement.
m. Prepare necessary plans and applications for permits for the submission to and approval of local, state and Federal authorities (such as municipal building departments, state boards of health, etc.) as may be required for the initiation, prosecution and construction of the improvement. The cost of such permits to be paid by the District but the cost of preparing such plans and applications shall be included in the fee paid the Engineer.
n. To pay for the computations, determinations and tabulations of special assessments as required by the District, except for stenographic work which shall be paid for by the District.
3. The District agrees to pay the Engineer as compensation for such professional engineering services Seven and One-Half (7 1/2%) percent of the entire cost of the construction of the structure, to be paid as follows:
a. Twenty Five Hundred ($2,500.00) Dollars upon the completion of the preliminary investigation studies, preliminary general plan or plans and the approximate estimate of cost, or upon the receipt of the monies obtained from a loan from the Federal Government, application for which has been made, or receipt of sufficient tax monies, whichever shall the sooner occur.
b. Sixty Five (65%) percent, minus, however, the $2,500.00 paid for preliminary work, when working or contract plans and specifications with detailed estimate of cost are completed.
c. Thirty Five (35%) percent payable in monthly installments as construction progresses in proportion to work completed until the aggregate of all payments shall equal the amount due under this agreement.
d. It is mutually understood by the parties hereto that the compensation to the Engineer of 7 1/2% of the entire cost of construction shall cover the entire cost to the District for the professional services of the Engineer to the District. Any additional services ordered or required by the District to be performed by the Engineer shall be upon such terms and conditions as the District and Engineer may agree upon at any regular meeting or at any special meeting called for that purpose. e. If the proposed bond election for financing the project shall fail to carry and the District should be financially unable to proceed with the project, then the $2,500.00 agreed to be paid for the preliminary survey, as hereinbefore set forth, shall constitute payment in full to the said Engineer and the District shall be relieved from further liability hereunder to the said Engineer, at the time of the next general election of the Board of Directors of...
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