Court Opinion

ID: 4605848
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:37:15.004762+00
Date Added: 2024-06-11T07:53:16.758378
License: Public Domain

DAN BIRKEMEIER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  WILLIAM SAREMAL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Birkemeier v. CommissionerDocket Nos. 89615, 89616.United States Board of Tax Appeals39 B.T.A. 1072; 1939 BTA LEXIS 934; May 25, 1939, Promulgated *934  1.  A partnership keeping no books, which derived profits from a construction contract begun in the preceding year and completed in the taxable year, held not taxable on the completed contract basis.  2.  A partnership which is a member of another firm may not deduct on its return any part of amounts paid by the other partnership to an individual for services in organizing a foreign corporation and seeking contracts.  Robert R. Rankin, Esq., for the petitioners.  John H. Pigg, Esq., for the respondent.  STERNHAGEN *1072  The Commissioner determined deficiencies for 1935 of $1,733.96 in the income tax of Dan Birkemeier, and $1,647.76 in the income tax of *1073  William Saremal.  Petitioners, conducting a partnership engaged in construction work, assail (1) the computation of partnership income on a completed contract basis, and (2) the disallowance of amounts paid to an individual for services in seeking Mexican Government contracts allegedly for the partnership.  Other issues were settled or abandoned.  FINDINGS OF FACT.  Petitioners, residents of Milwaukie, Oregon, are equal partners engaged since 1923 in the general contracting*935  business under the firm name of Birkemeier & Saremal.  1.  On October 1, 1934, the partnership began work on a viaduct over Tanner Creek under a subcontract.  After a suspension of work during the winter months, the job was completed in July 1935.  In June 1935 work was started under a contract for the relocation of railroad tracks at Bonneville, Oregon, called job No. 10.  This contract was held by a partnership formed in 1935 by Sam Orino and petitioners, under the firm name of Orino, Birkemeier & Saremal Co.  Job No. 10 was not completed until 1936.  In prior years Birkemeier & Saremal had performed other contracts which were not completed until the calendar year next after they were made.  One such was a contract for road construction which was begun in July 1931 and completed in October 1932.  The partnership reported gross income of $10,753.15 on its income tax return for 1931; it reported nothing on its return for 1932.  Before 1935 petitioners kept no books of account.  About May of that year they employed a bookkeeper to prepare accounts of the Tanner Creek contract, and in December they employed a certified public accountant to open a set of books and prepare income tax*936  returns.  Partnership returns had been prepared for every year since 1923, with the possible exception of 1933, with the aid of a revenue agent, on the basis of bank books, bills paid, and receipts, and filed by petitioners with no precise knowledge of the basis on which income was reported.  The 1934 return was prepared by a bookkeeper.  Finding that it omitted some $46,000 received in that year under the Tanner Creek contract, the certified public accountant prepared an amended return in which income of $14,587.69 was reported.  This was 27.73 percent of a total profit of $54,320.06 from the contract, as computed by him.  The remaining 72.27 percent, $39,257.11, was reported on the 1935 return.  Similarly, $16,191.06 was reported as income of 1935 from the partnership of Orino, Birkemeier & Saremal Co. from the contract for job No. 10.  This amount represented 30 percent, the computed share of the partnership of Birkemeier & Saremal, of the profit from job No. 10 allocable to 1935.  The remaining 70 percent, $37,779.14, *1074  was reported as income on the return of Orino, Birkemeier & Saremal Co.  The computations of profit allocable to 1934 from the Tanner Creek contract*937  and to 1935 from job No. 10 reflect not only cash received but also estimates of earnings to the end of the year and a percentage of the amount to be withheld as a guaranty.  The amended return for 1934 and the return for 1935 were filed on March 23, 1936.  2.  In September 1935 the partnership of Orino, Birkemeier & Saremal Co. agreed to pay Ralston Wilbur $8,500: * * * to organize a Construction Co. under the laws of Mexico.  * * * to secure Contracts in the Republic of Mexico from the Government of the Republic of Mexico.  It was understood that "All money spent now shall be returned from the 1st earnings of the Company organized." Orino, Birkemeier & Saremal Co. paid the $8,500 to Wilbur by its check for $4,500, dated September 25, 1935, and by two checks for $2,000 each, dated November and December 10, 1935, respectively.  On December 27, 1935, Wilbur advised that he had not been able to secure any contracts, and he never did.  OPINION.  STERNHAGEN: 1.  The petitioners, as clearly shown by the evidence, did not use the "completed contract" method and indeed kept no accounting system whatever before the bookkeeper was hired in the spring of 1935. *938  This man was hired primarily to make accounts for the Tanner Creek job, and not until December 1935 was a general set of books begun.  Under these circumstances there was obviously no "method of accounting regularly employed in the keeping the books", as described in section 41, Revenue Act of 1934.  The situation is as described in the last sentence of the section, "the taxpayer * * * does not keep books", and therefore "the net income shall be computed on the basis of the calendar year." Cf. . The Commissioner determined that the Tanner Creek contract was a long term contract all of the income of which was taxable upon its completion in 1935, "inasmuch as the information at hand indicates that income had been previously reported on a completed contract basis." The postulate was erroneous, and hence there was no foundation for the use of the completed contract basis.  The taxpayer is not required to use that basis unless he has used it regularly and has the permission of the Commissioner.  In the absence of either such use or permission, there is no reason to require it.  Of course it was error for the petitioners to omit the $46,000 from*939  the partnership return of 1934.  But there is no contention of estoppel, cf. , and the error is not to be corrected by an artificial enlargement of the income of 1935 *1075  or the use of an artificial basis of accounting.  The petitioners were required to use the cash and calendar year basis, and their income and deficiencies must be computed on that basis.  The Commissioner's determination is reversed in so far as it includes in 1935 income the $14,587.69 of the amount received in 1934.  2.  The partnership of Orino, Birkemeier & Saremal Co. paid Wilbur $8,500 in 1935 to form a corporation in Mexico and promote construction contracts with the Mexican Government.  How the petitioners were to or did participate in this payment does not appear, but they argue that they should have deducted $5,700 on their return.  There is not enough in the record to establish their claim.  The partnership return of Orino, Birkemeier & Saremal Co. is where the deduction would be accounted for, and no such deduction appears on that return.  Whether petitioners paid anything on account of the item does not appear, and if they did, the*940  character of the payment is shrouded in doubt.  Under these circumstances, the determination of the Commissioner in accordance with the return is not shown to be erroneous.  Decision will be entered under Rule 50.