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Crump v. Commissioner of Internal Revenue.

decided: August 23, 1948.


Author: Mclaughlin

Before BIGGS, MCLAUGHLIN, and KALODNER, Circuit Judges.

MCLAUGHLIN, Circuit Judge.

The question involved in this appeal is whether, under the particular facts of the case, the taxpayer in its excess profits return for 1942 was entitled to elect to compute the income from a long-term contract on a percentage of completion method of accounting in accordance with Section 736 (b) of the Internal Revenue Code, 26 U.S. C.A. Int. Rev. Code, § 736(b).*fn1

The taxpayer is a Pennsylvania building construction corporation. It kept books on a calendar year basis. The income tax returns through 1942 were made on a completed contract basis. The only long-term contract as defined in Section 736(b) (performance of which requires more than twelve months) it ever had was the one in question.Work thereon started in the fall of 1940, continuing through 1941, and was completed in the spring of 1942. Prior to filing the corporation's 1941 returns, Edward Crump, Jr., president and treasurer of the company, was aware of the fact that higher excess profits tax rates would apply in 1942. He discussed the matter with a Mr. Sabel, an accountant and officer of the petitioner. He told Sabel that as the contract was practically completed at the end of 1941, the profit from it should be reported in that year, and this was done. Sabel explained this in his testimony as follows:

"Q. How did you determine in the 1941 Return the profit of $25,359.26? A. The total cost of the contract to the end of 1941 was determined, and that was subtracted from the total amount of the billings to December 31, 1941.

"Q. Were any adjustments made to those figures, and, if so, why? A. Included in those figures was the amount that was computed to be necessary to complete the contract in costs and the necessary billings to complete the conlract, to the total billing price as of that date.

"Q. Now, you are thinking about the original contract of $369,000? A. No, I am thinking about the original contract plus those additions and change orders which have been received in 1941.

"Q. Now, assume that the Government is correct - which we must assume now - that only one contract was involved, and that the original contract of $369,000, which is Exhibit 1, plus all the change orders and additions and omissions constituted one and only one contract, which was completed sometime in 1942, did you report in the 1942 Return the method - strike that - did you report in the 1942 Return the income from that contract on a completed contract basis? A. No, sir.

"Q. On what basis did your method constitute, from an accounting standpoint? A. We reported in 1942 the work which was performed in 1942, and in 1941 the work which had been performed, and the profit made up to the end of 1941." (Emphasis added.)

The 1941 return was filed prior to the enactment of Section 736(b). Petitioner makes no claim that Section 721(a) (2) (B) as amended by Section 5 of the Excess Profits Tax Amendments of 1941, 55 Stat. 17, 26 U.S.C.A. Int. Rev. Code, § 721(a) (2) (B), was intended to apply to its 1941 return. That provided in principle relief similar to that in the later Section 736(b). The testimony for petitioner as seen indicates that a completed contract method of accounting was contemplated.

Petitioner's 1942 returns were also prepared under Sabel's direction, and the 1942 profit under the particular contract was stated. This amounted to $6,778.29. The total profit realized from the contract was $32,137.55. There is no mention of the contract in the excess profits returns or the income tax returns for either 1941 or 1942. The return for 1942 carried the following question: "(g) Does this return involve an adjustment of the excess profits tax liability due to the application of the sections specified in (1) below?" It was answered "No." The (1) referred to reads as follows: "* * * If the answer is 'Yes' (1) Check the appropriate sections and submit schedules showing computation: * * * 736(b)

The Commissioner in determining the deficiencies for the two years included the entire profit from the contract in each of the years. The 1941 assessment was merely protective. It is agreed that the contract was not finished until 1942.

The Tax Court found that the petitioner in its 1942 excess profits tax return having "expressly renounced the elective change in method, rejection of its claim to adopt it is required", and so sustained the deficiency.

The government forcibly argues that petitioner in 1941 expressly reported on the completed contract method, that it followed this in 1942 by so stating in its income tax return with nothing to the contrary in its excess profits tax return, and therefore the taxpayer is not entitled to any inference that in 1942 it elected to report on a percentage of completion basis. It cannot be denied that petitioner did attempt to compress the entire contract into the 1941 income but was unsuccessful because, unexpectedly, considerable work under it developed for 1942, the profits for which had to be reported that year. Petitioner, urging that the actual treatment of income in a return fixes the method chosen for treating such income, contends that having set out in its 1941 return the profit from the contract of that year, ...

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