Court Opinion

ID: 4591335
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:05:35.028144+00
Date Added: 2024-06-11T07:50:38.933353
License: Public Domain

ROBERT G. LASSITER & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Robert G. Lassiter & Co. v. CommissionerDocket No. 15882.United States Board of Tax Appeals16 B.T.A. 1151; 1929 BTA LEXIS 2442; June 25, 1929, Promulgated *2442  1.  Transaction held to have been entered into and carried on by the corporation rather than by an individual.  2.  Contract held to have been a single continuing one and the resulting loss properly reported at the completion upon the completed contract basis under the consistent practice of the petitioner.  Benjamin W. Parham, Esq., and J. Gilmer Korner, Jr., Esq., for the petitioner.  Bruce A. Low, Esq., and L. H. Rushbrock, Esq., for the respondent.  SIEFKIN*1151  This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended January 31, 1922, in the amount of $17,966.65.  The only error alleged is the disallowance of a deduction from taxable income of $45,484.23 alleged to be one-third of a loss sustained in a joint enterprise known as the Lassister-Porter Co.  FINDINGS OF FACT.  The petitioner is a North Carolina corporation, with its principal office at Oxford.  It was organized in 1916 to take over the general contracting business of Robert G. Lassiter who had operated such business as an individual.  After incorporation Robert G. Lassiter did not engage in the contracting*2443  business as an individual, but all of such business was done by him for and on behalf of the corporation.  On incorporation he owned approximately 80 per cent of the stock.  During the taxable year in question he owned approximately 70 per cent of the stock.  Stock held by others was donated to them by R. G. Lassiter.  He has been president of the corporation since its incorporation.  Article 5 of the by-laws of the petitioner is as follows: ARTICLE V The President shall preside at the meetings of the Board of Directors, shall see that all orders and resolutions of the Board of Directors are carried out; shall have general management and direction of all of the business of the Corporation; *1152  shall sign and execute bids, proposals, contracts, surety bonds, agreements and conveyances; shall have the power to sign and endorse notes and other negotiable instruments and to borrow from time to time such sum or sums of money as in his judgment the needs of the company may require and he is further authorized to pledge as collateral security for any sum or sums so borrowed any accounts receivable, notes, bonds or other securities owned by the Corporation; shall sign all certificates*2444  of stock and shall see that all of the officers and employees of the Corporation perform their duties.  Prior to 1919 the petitioner corporation had been associated in several enterprises with William G. Porter and L. B. DeWitt, consisting of construction contracts of different kinds.  DeWitt and Porter had been contractors and engineers, had known each other for many years, and were associated as partners in a number of construction enterprises, in some of which the petitioner corporation was associated, and in some of which other corporations, individuals or firms were associated.  The petitioner corporation was also engaged in contracting enterprises unassociated with anyone else, and also in enterprises in which firms or corporations other than DeWitt and Porter were interested.  The customary practice in such associations was to determine in advance the proportion of "cut-in" that each participant had in a particular contract or job.  In one or two instances where the petitioner and DeWitt and Porter were concerned, the contract of association was in writing, but in most instances the agreement was oral and provided for the sharing of gains and losses upon the percentage basis. *2445  In 1919 Beaufort County, North Carolina, voted to issue bonds in excess of a million dollars for the purpose of building hard roads in that county.  A board of county road commissioners was formed and specifications and contracts were prepared and bids invited for the construction of a number of miles of hard road to be 9 feet in width.  The petitioner, through its representatives charged with the duty of information as to such proposed improvements, was advised of the asking for bids, and R. G. Lassiter, the president of the petitioner, conferred with Porter and DeWitt as to the advisability of bidding on the work.  Porter was at that time engaged in supervising a contract in New Jersey in which he and DeWitt were jointly interested, so that he did not inspect the territory in which the roads were to be built.  DeWitt, however, went to Beaufort County with R. G. Lassiter and agreed on his behalf and that of Porter to enter into the contract, together with the petitioner, with the board of county road commissioners for the construction of the roads in question.  The terms of agreement between DeWitt, Porter and the petitioner were that each was to share one-third in the venture. *2446  The association was called the Lassiter-Porter Co. and a bid was made for the job under that name.  All of the bids, however, were *1153  in excess of the amount which the county had to spend and the bids were rejected, and, after an investigation by the board of county road commissioners, new bids were solicited for 15 miles of 18-foot hard road.  The Lassiter-Porter Co. was the successful bidder and was awarded the contract, which was signed by the chairman of the Beaufort County Road Commission, attested by the secretary of the commission, and signed by the Lassiter-Porter Co. (Robert G. Lassiter, Wm. J. Porter, and L. B. DeWitt) on December 1, 1919.  The agreement provided for completion of the work by November 1, 1920.  At the time the contract was made DeWitt was engaged in supervising a contract job at the naval base which was nearing completion and it was expected that he would immediately start the management of the Beaufort County job.  The work at the naval base, however, was delayed and it was not until well along in the spring of 1920 that work really started upon the Beaufort County contract.  Matters progressed fairly smoothly until June of that year, when many*2447  difficulties were encountered.  It rained almost continually for two months.  DeWitt got into difficulties and disputes with the county officials and the engineers in charge of the work for the county.  Disputes arose as to the extent of work required under the contract, and as to the manner in which the work was being constructed.  There was a shortage of labor and of materials as well as difficulty in obtaining open-top cars for the shipment of construction materials.  During this period the petitioner, through several of its employees, was in touch with the progress of the work and the difficulties encountered, and Porter, who was still engaged in the New Jersey contract, was advised of the difficulties both by the petitioner and by DeWitt.  Porter and Lassiter went to Beaufort County in August, 1920, to see what could be done to remedy the situation.  The work was not progressing fast enough so that the county would release enough money to pay current bills.  In addition, there had been various claims and suits filed against the Lassiter-Porter Co. for damages for tort.  In one instance suit was brought for the value of a house alleged to have been burned by sparks from the steam*2448  shovel.  In another case a land owner was suing for sand removed from his property.  It was apparent to both Lassiter and Porter that the contract would show a substantial loss, and that the loss would continue to increase if something could not be done.  Lassiter considered the trouble to be mainly difficulties in finance, and Porter and DeWitt succeeded in inducing the county to pay to the Lassiter-Porter Co. approximately $30,000, being the retained percentage on work already done, and also induced the county to make payments on weekly estimates instead of monthly estimates.  The consent of the bonding company *1154  was necessary to such a change in the contract and DeWitt and Porter accordingly sought the consent of the bonding company to make such change in the following letter: AUGUST 31ST, 1920.  UNITED STATES FIDELITY AND GUARANTY COMPANY, Baltimore, Maryland.GENTLEMEN: On account of the financial condition of the work of our firm in connection with the construction of roads in Beaufort County, North Carolina, we request your Company to consent to and authorize the following: - 1.  The County Road Commission of Beaufort County to pay us weekly instead*2449  of monthly estimates.  2.  The County Road Commission to pay us all retained percentages due to date.  Almost uninterrupted rains for the last two months in Beaufort County, N.C., have prevented our working to any extent on our highway contract, and our expenses have necessarily been very great and in excess of our income.  At the same time, limited loaning capacity of bankers and restrictions imposed by general conditions have made it impossible to raise money from almost any source to go ahead with this work.  The statement of the financial condition of this contract as of August 5th is attached.  In this work the firm of Porter & DeWitt has a two-thirds interest, and they are associated with Robert G. Lassiter & Company of Norfolk, Virginia, who have a one-third interest, the firm being known as "Lassiter Porter Company." Porter & DeWitt have only one other contract, that at Edgewater, N.J., for the State of New Jersey, the financial statement of which as of August 1st is also attached, from which you will observe a profit to date of $50,000.  Robert G. Lassiter & Company have five (5) contracts in which Porter & DeWitt have no financial interest.  These are in or near the*2450  cities of Norfolk, Va., and Durham, Rocky Mount, Raleigh and Greensboro, N.C.  The contract at Raleigh is just completed and ready for the final payment.  The other roads are in various stages of completion of from 25 to 75%, and in all of these the banking stringency applies as in our case.  We being unable to secure further funds necessary to carry on the Beaufort County Work, are making the above request, and if granted, believe that this firm can carry on its work to completion without loss to the surety or ourselves.  Your immediate action and authority are requested in order that this may be put before the Beaufort County Road Commission for its action at the next regular meeting, September 6th, 1920.  Yours truly, LASSITER PORTER COMPANY By L. B. DE WITT WM. J. PORTER The consent asked was given, but the resulting relief was insufficient to help the Lassiter-Porter Co.  Matters became worse and Lassiter and Porter went again to Beaufort County in November, 1920, to see what further steps could be taken.  Porter, who had a lucrative contract in New Jersey, was desirous of getting out of the Beaufort County contract, and DeWitt was also anxious to get out.  Conferences*2451  were had with all of the interested parties, including the road commissioners, the county attorney and the engineers, and it was *1155  agreed that the county would release DeWitt and Porter but would continue to hold the petitioner who should carry on and complete the work under the original contract.  Accordingly, a new proposal was made by the petitioner incorporating the figures and specifications of the original contract, and a new contract was entered into on November, 1920, similar to the old one entered into by the Lassiter-Porter Co. and the county, which contract contained the following further agreements: FURTHER AGREEMENTS.  This contract shall cover all work to be done and materials to be furnished to complete the five (5) miles of road extending from Aurora towards Edwards - and the building complete of the five (5) miles of paved road from Belhaven via Pantego towards Washington; including on both roads the construction of the necessary culverts and bridges, grading, clearing and grubbing, etc., and such ditching as may be ordered by the Engineer in compliance with said contract.  The contractor shall be responsible for the work already done by Lassiter-Porter*2452  Company on the Aurora-Edwards Road until its final completion and acceptance, and shall make good any defective work that may develop, and upon completion of the road, shall guarantee and maintain the pavement of the entire road, including the foundation, for five (5) years period, and shall furnish the Commission, with a satisfactory Maintenance Bond in an acceptable Surety Company (at the price bid for said bond) covering the pavement; providing however, the Commission may waive the giving of said Bond.  Upon completion of each two miles of pavement (together with the construction work necessary to complete the two miles of road ready for use) the Commission will pay the Contractor the retained percentage withheld on account of said two miles of road, but the payment on said percentage shall not in any way constitute an acceptance of the work, nor release the Contractor from his responsibility for said work until the final completion and acceptance of the road. The date of completion of the road shall be the date of the beginning of the five (5) year Maintenance and Guarantee period.  The Contractor shall furnish a separate Maintenance Bond for each road as completed. *2453  If said Bond is required by the Commission.  This contract shall become operative only when the approval of Bonding Company on the bond of Lassiter-Porter Co., and the approval of Lassiter-Porter Co., is delivered in writing to the Commission.The Belhaven Road will be constructed of Warrenite on five (5) inch concrete base - except that portion (about one mile) which is low enough to subject it to unusual conditions of moisture.  This latter portion will be constructed of cement concrete.  The amount of percentage retained shall be fifteen (15%) per cent and not ten (10%) per cent.  See Section 15 - Page 17.  The Commissioner agrees to loan the Contractor the sum of - not to exceed $20,000.00, upon its demand note (endorsed by Robert G. Lassiter) * * *.  At the same time DeWitt and Porter computed the amount of loss to date to each of them, being approximately $45,000 each, and the various obligations of the job to that time were assumed partly by the petitioner and partly by Porter, acting for himself and for DeWitt *1156  and Porter signed notes payable to the petitioner for the share of the loss incurred by him and by DeWitt.  Thereafter, the petitioner carried*2454  on the work under the contract and completed the job on September 5, 1921, when the work was accepted by the county engineers and final payment was made by the county including settlement of disputes, claims which had been filed by DeWitt with the county commissioners and by the petitioner after DeWitt left.  The various accounts, claims and law suits pending against the Lassiter-Porter Co. at the time the petitioner took over complete charge of the work were settled and finally disposed of during the month of January, 1922.  During all of the time that the petitioner was connected with the Lassiter-Porter Co. the accounts of the Lassiter-Porter Co. were carried on the books of the petitioner in a continuing account until the account was closed on January 31, 1922, at which time the petitioner's one-third of the loss upon the contract as determined, or $45,484.23, was charged as a loss sustained.  On its income-tax return for the fiscal year ended January 31, 1922, it deducted said amount as a loss sustained within the taxable year.  The respondent disallowed the deduction and determined the deficiency in controversy.  The petitioner has at all times since incorporation consistently*2455  reported its income upon a long-term-contract basis.  That is, it has reported income or loss upon a given construction contract having a period of more than one year at the time the contract is finally completed and accepted.  OPINION.  SIEFKIN: The respondent has disallowed the deduction of the loss in question on two grounds - first, that the loss was the loss of R. G. Lassiter, an individual, rather than the loss of the petitioner, and, second, upon the ground that the loss was not sustained in the taxable year in question.  As to the first reason, we are satisfied that the respondent was clearly in error.  The principal reason for the respondent's position seems to be that the original proposal and contract entered into with the Beaufort County Road Commissioners was signed Lassiter-Porter Co. by R. G. Lassiter, Wm. J. Porter and L. B. DeWitt.  The evidence is overwhelming, however, both from the conduct of the parties and other documentary evidence originating during the period of the contract, as well as the understanding of the other contracting party, the county commissioners, that they were dealing with the petitioner rather than the individual, and that the petitioner*2456  was a party in interest in a joint venture, the other two parties to which were DeWitt and Porter.  Money going to the Lassiter-Porter Co. in the form of *1157  checks all came from the petitioner rather than the individual.  The letter to the surety company asking a modification of the contract signed by DeWitt and Porter recites that they are jointly interested with the petitioner.  The books of the petitioner show that it was the party in interest rather than the individual.  There is no merit in the respondent's contention that the petitioner is not the party entitled to take the loss, if there was a loss.  As to the time the loss was realized, we are also clear that the Commissioner was in error.  Beginning in 1919 and extending to January 31, 1922, the petitioner was engaged in a single continuing contract with the Board of County Road Commissioners for Beaufort County, North Carolina.  The fact that in November, 1920, two individuals who were joint venturers with the petitioner, withdrew and left the petitioner to carry on alone, does not, in our opinion, affect the liability or the rights of the petitioner.  Disinterested witnesses who represented the county in the*2457  negotiations looking to the retirement of DeWitt and Porter testified unequivocally that, so far as the county was concerned, there never was more than one contract, and that during that entire contract, the petitioner was considered the responsible party up to the time of acceptance of the work and final payment.  That acceptance came during the fiscal year in question and settled the affairs of the petitioner so far as the county was concerned.  That settlement, however, did not close the affairs of the petitioner with DeWitt and Porter on their venture, because it was not until the final settlement of the various claims filed against the Lassiter-Porter Co. during the incumbency of DeWitt that the petitioner was able to state fairly what its loss had been on the entire venture.  This also happened during the fiscal year in question, and we hold that the loss was sustained during the year in question and that the respondent was in error in determining otherwise.  Reviewed by the Board.  Judgment will be entered under Rule 50.GREEN dissents.