Graham-Bumgarner Co. v. Commissioner

GRAHAM-BUMGARNER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Graham-Bumgarner Co. v. Commissioner Docket No. 8357. United States Board of Tax Appeals 11 B.T.A. 603; 1928 BTA LEXIS 3762; April 16, 1928, Promulgated *3762 Payments received in 1919 by a taxpayer under an agreement canceling a war-supply contract made between April 6, 1917 and November 11, 1918, constituted income attributable to a Government contract within section 301(c), Revenue Act of 1918. A. B. Kirschbaum Co.,5 B.T.A. 65. S. A. Hays, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. LITTLETON *603 The Commissioner determined a deficiency of $713.36 for 1919. The question is whether certain income received in 1919 is taxable under section 301(c), Revenue Act of 1918 as income received under a Government contract. The facts are either covered by stipulations of the parties, or are admitted in the pleadings. FINDINGS OF FACT. Petitioner is a West Virginia corporation with office at Parkersburg. During the calendar years 1918 and 1919, the petitioner engaged in the manufacture of shoes. During the year 1918, it entered into a contract with the Ordnance Department of the United States under which it agreed to manufacture 21,000 pairs of shoes according to certain specifications set out in a certain contract, designated Contract No. 5143. Petitioner*3763 purchased material and equipment necessary to carry out the contract and the shoes were in part manufactured during 1918, but no shoes were shipped on the contract. Sometime subsequent to the Armistice, November 11, 1918, and prior to December 31, 1918, petitioner received instructions from the Ordnance Department of the United States Army to cease work on the shoes under Contract No. 5143. During the year ending December 31, 1918, petitioner made specific disbursements incidental to the contract in the amount of $2,167.36. In closing its books for the calendar year 1918, the foregoing amount was charged to profit and loss, and deducted from gross income in the income-tax return filed for the year 1918. During 1918 a portion of the general plant overhead expense was applicable to the work performed on account of Contract No. 5143. No segregation of such overhead expense to the Government contract was attempted, but the overhead expense attributable to such contract was duly reflected as business expense and deducted in reporting taxable net income for 1918. *604 Early in 1919, Captain Kelly of the United States Ordnance Department came to Parkersburg, for the purpose*3764 of making a settlement with the petitioner on the contract in question, and a settlement was made in 1919 with the Government on the contract to manufacture 21,000 pairs of shoes, none of which were ever delivered. The settlement effected in 1919 resulted in the payment by the Government to petitioner of $2,167.36, representing reimbursement for expenditures hereinbefore mentioned, and $7,875, representing the estimated overhead expense for 1918 allocable to Contract No. 5143, thus making the total amount here in question $10,042.36. In addition to the two foregoing amounts totaling $10,042.36, petitioner also received from the Government $16,178.27, which was designated on its books as follows: U.S. Leather Co $3,534.98 American Leather Co 3,697.42 Merchandise 8,945.87 Total $16,178.27 The material portions of the cancellation agreement under which the payments in question were made to the petitioner are as follows: WHEREAS the furnishing and delivery of further articles of work, under said original contract, would exceed the present requirements of the United States; and WHEREAS it is in the public interest to terminate said original contract as*3765 herein provided; and WHEREAS the contractor, in pursuance of the original contract, has incurred expenses and obligations for the purpose of furnishing and delivering articles or work under said original contract and is relinquishing prospective profits on the unexecuted portion thereof: NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, it is agreed between the parties hereto as follows: I. The contractor shall not furnish or deliver and the United States shall not accept or pay for any articles or work agreed to be delivered under said original contract to wit: 21,000 Pair Metallic Fastened Marching Shoes, being the total amount called for in original contract; contractor to be paid the sum of $26,220.63 in consideration of the cancellation of said contract. II. The United States shall pay forthwith to the contractor the sum of Twenty-six Thousand Two Hundred Twenty Dollars and Sixty-three cents ($26,220.63), which sum shall constitute full and final compensation for articles or work delivered, services rendered, and expenditures incurred by the contractor under the original contract. III. The Contractor does hereby, for*3766 itself, its successors, heirs, legal representatives and assigns upon receipt of the payment set forth in paragraph II supra, remise, release, and forever discharge the United States of and from all and all manner of debts, dues, sum or sums of money, accounts, reckonings, claims, and demands whatsoever due or to become due in law or in equity under or by reason of or arising out of said original contract. Upon receipt of the amount herein agreed to be paid, the contractor shall execute and deliver to the United States such further or additional instruments of receipt or release as the United States shall demand. *605 Petitioner kept its books and rendered its returns on the accrual basis for 1918 and 1919. When filing its income-tax return for the calendar year 1919, petitioner returned as taxable net income the sum of the above two items amounting to $10,042.36 as ordinary income of the nature of a reimbursement of items previously charged to expense, and computed the tax due on same along with its other taxable income under the provisions of section 301(b) of the Revenue Act of 1918. On the other hand, the Commissioner, in computing the taxes for 1919, applied the*3767 provisions of section 301(c) of the Revenue Act of 1918 to the $10,042.36, thus considering this amount as income from a Government contract in excess of $10,000. OPINION. LITTLETON: Petitioner's first contention is that, since it was on the accrual basis in 1918 and 1919, the amount of $10,043.26, or at least $2,167.36 thereof, represented a valid claim against the Government at the close of 1918 and, therefore, should have been accrued and reported as income in 1918. To this we can not assent. The most that can be said is that in 1918 petitioner had a contract with the Government, and that upon the signing of the Armistice petitioner was ordered to stop work under the contract. At the close of 1918, there had been no recognition of liability on the part of the Government to make any payments for work done, or expenditures made, under the contract. While it might be reasonable to assume that petitioner could have expected, when the work was ordered stopped, that it would be reimbursed in some manner, there was no assurance of this fact and, consequently, no basis on which an accrual of income could then have been predicated. Apparently, one of the reasons for inserting*3768 a provision in the Revenue Act of 1918 under which income derived in 1919 from Government contracts would be taxed at 1918 rates was because of the realization that amounts would be paid in 1919 in the settlement of these contracts which represented 1918 profits, but that no basis existed for determining the extent to which payment would be made on a particular contract until settlement was finally effected. . The second proposition advanced is that while there was admittedly some profit in the item of $7,875, the amount of $2,167.36 could not represent income, since it was "simply a reimbursement of actual expenses incurred by the taxpayer in connection with the contract." That is to say, where an award is made in the settlement of a Government contract, does the portion paid in reimbursement of expenditures made under the contract constitute income? A similar situation arose in the , in which the *606 Board held that a "reasonable remuneration for expenditures and obligations or liabilities necessarily incurred in performing or preparing to perform" under a Government*3769 contract analogous to the one involved in this proceeding, constituted income. The wording of the cancellation agreements, as to the bases of the awards, is practically identical in both instances. See , wherein the same principle was affirmed. In passing, it might be observed that when petitioner is required to pay tax at the 1918 rates on the income in question received in 1919, no apparent injustice is being done for the reason that the income which would otherwise have been reported in 1918 was reduced to the same extent that income is now being reported, since the expenditures for which reimbursement was made were taken as deductions from gross income in 1918. Judgment will be entered for the respondent.