The opinion
J. L. ALLHANDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Allhands v. Commissioner
Docket No. 10284.
United States Board of Tax Appeals
10 B.T.A. 1089 ; 1928 BTA LEXIS 3967 ;
February 29, 1928 , Promulgated
*3967 The petitioner is a member of a contracting partnership that keeps its accounts on the accrual basis. In 1919 such partnership reported its income on uncompleted projects on the estimated percentage of profits method. Held, that the respondent correctly determined the partnership income for 1920 on the same basis.
Milo A. Lang, Esq., for the petitioner.
L. A. Luce, Esq., for the respondent.
LANSDON
*1089 The respondent has determined deficiencies for the years 1920 and 1921 in the respective amounts of $6,102.98 and $3.84, and an over-assessment for the year 1922 in the amount of $601.93. The petitioner alleges that the respondent erred in holding that the books of a certain partnership of which he is a member were kept on the accrual basis during the taxable years and in adding to the income of such partnership in 1919 the estimated profit on a contract which was not realized until 1922. At the hearing the respondent moved to dismiss the proceeding as to the year 1922 for the reason that he has not asserted any deficiency for such year. The petitioner adduced no evidence as to the year 1921.
FINDINGS OF FACT.
The petitioner *3968 is a resident of Joplin, Mo., where he is a member of a partnership engaged in the contracting business under the firm name of Allhands and Davis, hereinafter designated as the partnership, and is the owner of 50 per cent of such concern and entitled to share in the distributable net profits thereof on the basis of such ownership.
In the year 1919 the Road District of the County of Benton, of the State of Arkansas, hereinafter referred to as the road district, entered into a contract, hereinafter referred to as the Rogers contract, with the firm of Hayes & Adamson for the construction of 95 miles *1090 of public highway in such county. This contract was sublet to the partnership, and the construction of the highway was begun in September, 1919, and continued throughout the remainder of such year, during which time the road district paid the subcontractors monthly installments based on the amount of work done during each month, but deducting from each payment so made approximately 15 per cent of the profit earned on that part of the project completed in such month.
At the close of the year 1919 the partnership accrued on its books the estimated profit from the work done *3969 on the Rogers contract in such year, including the 15 per cent withheld by the road district, and in its income-tax return for that year included in its net income the amount of $10,690 as profit earned from such contract. This estimated profit included the 15 per cent withheld, as above stated, by the road district.
During the year 1920 work was continued on the Rogers contract and the partnership received monthly payments from the road district as in 1919, in the approximate amounts of $30,000. In this year the amount of 15 per cent of the estimated profits was withheld. Late in the year 1920 the road district was unable to pay the full amount of the partnership's estimates of completed work, but substantial payments were made in each month. On December 21 the partnership ceased work on the Rogers contract and thereafter did no more work thereon. In 1921 it brought suit against the commissioners of the road district in the United States District Court for the Western District of Arkansas, and in July, 1922, obtained judgment for the amount claimed.
During the year 1920 the partnership charged its monthly estimates of completed work to the account of the Rogers contract *3970 and credited such account with the payments received, and such account at December 31, 1920, indicated substantial profits on the work completed and paid for in such year. In its income-tax return for 1920 the partnership included no profits from the Rogers contract. Upon audit of such return, and after an examination of the books, the respondent added to the income of the partnership for the year 1920 an amount of approximately $64,000 as profit from the Rogers contract accrued in such year. The partnership kept its books on the accrual basis.
OPINION.
LANSDON: It appears from the record that the partnership in which the petitioner has a 50 per cent interest reported its income from its long-term contracts in 1919 on what is called the percentage basis, under the authority of article 36 of Regulations 45. In 1920, on account of cessation of work on the uncompleted Rogers contract, *1091 it did not use such basis or include any profit from such contract in its gross or net income, although the books showed the accrual of such income. It is admitted that no permission for changing the method of reporting income on long-term contracts was secured from the Commissioner.
*3971 The respondent maintains that having adopted the percentage of profit or accrual method for reporting income in 1919, the partnership should have used the same method in 1920. With this position we agree. The petitioner is taxable as to one-half the distributable net income of the partnership for the year 1920, as determined by the respondent.
No evidence having been adduced by the petitioner to overcome the respondent's assertion of a deficiency for the year 1921, the action of the respondent for that year is approved. The respondent having asserted no deficiency for the year 1922, the proceeding is dismissed as to that year. .
Reviewed by the Board.
Judgment will be entered for the respondent.
STERNHAGEN, PHILLIPS, and MURDOCK concur in the result.
TRUSSELL dissents.