Court Opinion

ID: 4623386
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:52:52.514765+00
Date Added: 2024-06-11T07:56:21.243215
License: Public Domain

D. L. WHEELOCK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wheelock v. CommissionerDocket No. 7974.United States Board of Tax Appeals10 B.T.A. 540; 1928 BTA LEXIS 4085; February 6, 1928, Promulgated *4085  A contracting partnership keeping its books on the closed-job basis should deduct operating expenses from gross income when such expenses are taken into profit and loss on its books.  Ray G. Ransom, C.P.A., for the petitioner.  P. M. Clark, Esq., for the respondent.  LANSDON *540  In his notice of deficiency the respondent asserted deficiencies in income tax for the years 1920 and 1921 in the respective amounts of $522.27 and $1,518.33, and an overassessment for the year 1922 in the amount of $122.33.  The petitioner seeks a redetermination of the deficiencies and asserts that the respondent erred in overstating his income for the taxable years by including therein certain amounts that are deductible as operating expenses of a partnership of which he was a member.  The parties filed a stipulation which the Board accepts and from which we make the following findings of fact.  *541  FINDINGS OF FACT.  The petitioner is an individual, residing at Clay Center, Kans.  During the taxable years he was a member of the partnership of Reed and Wheelock, Municipal Contractors, of Clay Center, Kans., and had a 50 per cent interest in the business*4086  and profits thereof.  During the years 1920 and 1921 the partnership kept its books and made its income-tax returns on the "closed job" basis.  Certain expenditures such as interest, traveling and office expenses, when paid during the year, were charged to the respective appropriate accounts and were so classified on the books until the close of the year, when such expenses were allocated to various jobs under construction, such allocation being the result of an approximate estimate of the proportionate share of such expenses chargeable to each job.  The amounts of such expenses so charged were not closed into profit and loss until the jobs were completed.  During the year 1920 the partnership paid the following expenses, which were allocated to jobs completed in the year 1921 and closed to profit and loss on the books in the year 1921: (a) Interest on borrowed money for the year 1920 in the sum of $732.84.  (b) Traveling expenses of the partners and general office employees for the year 1920 in the sum of $1,275.  (c) Office expense of the general office of the partnership for the year 1920 in the sum of $527.  The above expenses, totaling $2,535.54, were allowed as deductions*4087  by the Commissioner for the year 1921.  During the year 1921 the partnership paid the following expenses, which at the close of the year 1921 were arbitrarily allocated to jobs completed in subsequent years and closed to profit and loss on the books in the years in which the respective jobs were completed: (a) Interest on borrowed money for the year 1921 in the sum of $2,804.79.  (b) Traveling expenses of the partners and general office employees for the year 1921 in the sum of $1,994.  (c) Office expense of the general office of the partnership for the year 1921 in the sum of $2,404.13.  The above expenses, totaling $7,202.92, were allowed by the Commissioner as deductions in 1922 and subsequent years as the respective jobs to which the expenses were allocated were completed.  The petitioner waives the contention contained in paragraph 5(b) of the petition.  OPINION.  LANSDON: The only controversy here relates to the year in which operating expenses which the parties agree are deductible from gross income shall be so deducted.  There is no dispute over the *542  facts.  The petitioner is a member of a contracting partnership that keeps its books on the closed-job*4088  basis, as set forth in our findings of fact.  The respondent contends that the expenses in question should be deducted from gross income in the respective years in which they are charged to profit and loss.  The petitioner maintains that regardless of the methods of bookkeeping employed by the partnership, expenses are deductible from income in the year in which they are paid or incurred.  The administrative regulations permit contractors to make their returns on the so-called closed-job or long-time-contract basis, on the theory that it is only when a project is completed and payment therefor received that income can be determined.  The petitioner's contention in effect is that the partnership is entitled to deduct expenses as incurred, regardless of when resulting income is realized.  We are not able to adopt this view.  The partnership, having decided to keep its books on a basis that takes income into profit and loss only as and when projects are completed, we think that the expenses incident to the production of such income are deductible at the same time.  Reviewed by the Board.  Judgment will be entered for the respondent.STERNHAGEN concurs in the result only.