Appeal of Uvalde Co.

[935] OPINION. Littleton : This appeal presents a similar question to that decided by this Board in the Appeal of Consolidated Asphalt Company, 1 B. T. A. 79. It is contended, however, by the taxpayer that the facts in this appeal are different from those which obtained in the Consolidated Asphalt Company's Appeal and are such as to entitle it to report its income upon a long-term contract basis as provided for in article 36, Regulations 45. Granting, without deciding, that article 36 is authorized by law, the contracts from which taxpayer received its entire income were not long-term contracts within the definition of such contracts as therein set forth. These contracts required that the work specified should be completed within ninety days, and provided further a penalty of Twenty ($20.00) Dollars "a day liquidated damages for each day beyond the ninety-day limit. We can find no authority for construing such a contract as a long-term contract. It is further contended that these contracts come within the meaning of “long-term contracts,” for the reason that they contain a provision for the maintenance of the paving constructed, for a period of from three to ten years; that such maintenance requirement was a part of the contract for construction and, therefore, that it was entitled to report its income on a long-term contract basis. We cannot agree with such contention. The maintenance provision may have been and was embodied in the contracts for the construction, but it was a sc:pavate and collateral undertaking based upon a con [936] tingency. Any taxpayer suspending business at tbe end of any taxable year and baring at that time future collateral undertakings might possibly find it necessary to expend a portion of the income received in a prior year in fulfilling obligations in connection with transactions which produced said income if occasion therefor should arise, but this does uot entitle a taxpayer to withhold from taxable income, in addition to all expenses paid or incurred within the taxable year, a liberal portion of the income because he may possibly be called upon to expend sums to make good guaranties entered into respecting work completed and for which he received full compensation within the taxable year. This taxpayer is not seeking to report strictly on a long-term contract basis for the reason that it did not have long-term contracts. It had ninety-day contracts containing a provision that it would construct the work in such manner that it would remain in good condition for a period of from three to ten years, depending upon the nature of construction, and, collaterally, it agreed that in the event of any defects appearing it would repair the same at its own cost. If no defects occurred no expenditure would be necessary. It would be impossible, upon any basis, definitely to determine what amount would be necessary to keep the street in good condition. Even taxpayer itself does not contend that it had actually incurred any determined liability in the taxable year to pay any definite amount, all expenses paid or incurred being deducted. For such possible future expense, taxpayer withheld from taxable income the sum of $68,759.82, charging that amount on its books as a reserve for maintenance. If it should not in the future be required to make repairs equal to such sum the amount would not be expended, and we cannot find in the revenue law any authority for deducting from income in any taxable year sums, as expenses, neither paid nor incurred within the year. The law specifically provides to the contrary. Section 234 (a). This taxpayer having derived considerable taxable income during one taxable year, and thereafter remaining inactive for several years, is seeking to reduce its taxes by spreading its income over several 12-month periods instead of one 12-month period, as required by law. This it cannot do. In the Appeal of Consolidated Asphalt Co., 1 B. T. A. 79, this Board said: We have no doubt that the amount is income taxable under the sixteenth amendment as gain derived from capital or labor or both combined, Doyle v. Mitchel Bros. Co., 247 U. S. 179, and Eisner v. Macomber, 252 U. 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. Ntt is quite true that not all amounts received constitute income; but when a taxkble corporation in the course of its business of making profits receives contractual compensation for work done and material furn'shed, 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 [937] 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. What was said in that'appeal applies here. The fact that the taxpayer kept its books and rendered its return upon an accrual basis does not change the situation. What we have said in respect to the amount reserved for maintenance applies equally to the amount of $12,914.85 withheld as a reserve for future promotion expenses. No part of the amount deducted as promotion expense was paid or incurred within the year. The expenditure of any amount for that purpose was purely optional and, if deductible at all, would be deductible in the year in which paid or incurred. The taxpayer, knowing that it would be inactive during the subsequent taxable year and in all probability have no taxable income, attempts by these reserves to reduce the tax on its true net income for the fiscal year ended June 30, 1921. Under the law taxable net income is gross income from all sources for any taxable year less certain authorized deductions and exemptions. The deductions herein claimed cannot be found among those authorized by law and the action of the Commissioner in holding the amounts to be income for the fiscal year ended June 80, 1921, was correct.