Court Opinion

ID: 4487462
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:00:46.701185+00
Date Added: 2024-06-11T14:54:08.305933
License: Public Domain

*81OPINION.
Sternhagen:
In the years 1919 and 1920 the taxpayer received from the construction of certain asphalt street paving $1,097,216.55. About this there is no dispute. The contracts under which the work was done provided that upon the completion of the work the entire price should be paid. There was no provision such as is frequently found in such contracts that the city should withhold a portion of the price as a means of assuring the proper maintenance of the pavement, paying it over to the contractor in installments as the period of maintenance elapsed. Here the only assurance that the city had was covered by the bond. Thus this amount received by the taxpayer was its own to do with entirely as it chose. It was in fact an actual receipt.
The taxpayer contends, however, that all of the amount so received was not income, and that it had the right to omit the amount which in its wisdom it set aside as a reserve to take care of the future maintenance of the pavements in accordance with its contract obligations. Its counsel urges that the amount of the reserve was a reasonable reserve for the purpose, and that such amount is not income and can not therefore be taxed and under the Revenue Act of 1918 was not attempted to be taxed. We have no doubt that the amount is income taxable under the sixteenth amendment as *82gain derived from capital or labor or both combined, Doyle v. Mitchell Bros. Co., 247 U. S. 179, and Eisner v. Macomber, 252 17. S. 189, and that an amount thus received comes within the gross income described in sections 213 and 233 of the 1918 Act. If it can be excluded from taxable net income, it must be by reason of a statutory deduction and not because it is not in the first instance income. It is quite true that not all amounts received constitute income; but when a taxable corporation in the course of its business of making profits receives contractual compensation for work done and material furnished, it can not contend that a part of the amount received is not income because the taxpayer is subject to a collateral obligation the fulfillment of which may require it to spend some of the amount. This is in substance what we said in the Appeal of William J. Ostheimer, 1 B. T. A. 18. And as we there said, this result is not changed because in the light of general experience the taxpayer feels reasonably certain of the necessity to expend the amount and is impelled by business prudence to set up a reserve therefor. In this instance good accounting and the statute may not be in strict accord, since Congress may with entire fairness tax what a very conservative and prudent business man may wish to hold in reserve. If, as is now the law in respect of the deduction for bad debts, a reasonable reserve were deductible, it would be pertinent to consider whether in this case the reserve had been reasonably estimated. Even then we have no hesitation in saying that the evidence is far from convincing as to the reasonableness of the reserve.
The question whether the probable future expenditure for maintenance of the pavements is the proper subject of a deduction when the accounts and return are made on the accrual basis is not open for our consideration, because the stipulation of the parties expressly states that the cash receipts and disbursements basis was used. The casual statement of the witness at the hearing that the accrual basis was used must be disregarded in the light of this deliberate stipulation. The use of the cash basis means that net income must be determined by including all the gross income actually received and deducting only the amounts actually paid out. It would be an obvious distortion to return only the gross income actually received and deduct therefrom both the amounts paid out and the payments anticipated.
Our attention is directed by the taxpayer to article 36 of Regulations 45, in which special provision is made by the Commissioner for so-called long-term contracts so that an equitable adjustment of receipts and expenditures may be made by a taxpayer whose income is derived mainly from construction contracts, the performance of which may extend over a period of several years. In such case the taxpayer is permitted to apportion ratably in each year his receipts and his expenditures on each contract. By its terms the article relates to uncompleted contracts. The present taxpayer, however, stipulates that its returns were made on the “basis of completed contracts as provided for in article 36 of Regulations 45 ”, which in the light of the evidence, apparently means that they were not made on the long-term contract basis, and there is not sufficient in the record upon which the application of the method *83provided by article 36 could be based. Counsel for tbe Commissioner refers to Lamson Consolidated Store-Serviee Company v. Conyngham, 32 N. Y. Supp. 129; 11 Misc. 428, as establishing that the contracts here in question were completed at the time the original construction was completed and the price paid, irrespective of the enduring obligation for maintenance. In that case the agreement to deliver and the agreement to keep in good condition were not in the same instrument, while the present contracts contain both the obligation to construct and to maintain. But they also indicate in the sections set forth in the foregoing findings of fact that the parties regarded the work as completed when the construction was finished, and hence that the undertaking to construct and that to keep in repair were separate as in the Lamson case. In view of these circumstances we can not say that the case is one which properly comes within article 36.
The deficiency seems to have been properly found by the Commissioner and can not be disallowed.