Norton Constr. Co. v. Commissioner

*443 This proceeding is for the redetermination of an alleged deficiency in income tax for the calendar year 1924 amounting to $3,684.06. The petitioner alleges that the respondent erred in refusing to allow as deductions from gross income for the calendar year 1924 certain deferred overhead expenses carried forward from the years 1922 and 1923.

FINDINGS*1848 OF FACT.

The petitioner is a corporation organized under the laws of the State of Virginia and is engaged in a general road construction business. Its principal office is located at Norton, Va., and in about 1926 the name of the petitioner was changed from Scott & Trinkle, Inc., to Norton Construction Co., Inc.

*444 Some of the contracts for road construction work secured by the petitioner involved construction work that would not be completed in the year in which the contract was secured. Due to this fact it consistently filed its income-tax returns for 1922 and subsequent years in accordance with its conception of the long-term-contract basis for the reporting of income from such contracts.

During 1922 the petitioner paid or incurred administrative and general expenses amounting to $46,220.49. None of these expenses could be allocated to any particular contract. In its income-tax return for 1922 the petitioner reported receipts from completed contracts amounting to $187,447.92 and receipts from uncompleted contracts amounting to $169,767.89. On the ratio thereby established the petitioner charged to completed contracts, and took as a deduction from gross income*1849 for 1922, the sum of $24,365.54 on account of overhead expenses, and the remaining overhead expenses, amounting to $21,854.95, were carried over into 1923.

During 1923 the petitioner reported administrative and general expenses paid or incurred amounting to $31,925.81. None of these expenses could be allocated to any particular contract. In its income-tax return for 1923 the petitioner reported receipts from completed contracts amounting to $163,875.88 and receipts from uncompleted contracts amounting to $302,031.48. The petitioner added the $21,854.95 overhead expenses carried forward from 1922 to the $31,925.85 reported overhead expenses for 1923; applied to the aggregate figure $53,789.76, the ratio established by receipts from completed and uncompleted contracts; deducted $19,413.18 from gross income for 1923 on account of overhead expenses, and carried over to 1924 the sum of $34,367.58 on account of such expenses.

The petitioner filed an income-tax return for the calendar year 1924 in which it reported receipts from completed contracts amounting to $516,077.48 and no receipts from uncompleted contracts. In that return the petitioner took as a deduction all the overhead*1850 expenses paid or incurred during the year 1924, amounting to $32,266.95, plus the deferred expenses incurred in 1922 and 1923, making a total deduction of $66,634.53, as follows:

All of the contracts secured by the petitioner in 1922 or prior thereto were completed before the end of the year 1923. Income for the year 1924 was derived wholly from contracts entered into during the years 1923 and 1924. The overhead expenses of any year could not be allocated to any particular contract and the *445 larger portion of such expenses would go on even if petitioner were not engaged on any contracts.

The respondent made a field audit and an examination of petitioner's returns, books, and records for the years 1922 and 1923. No objection was made by the respondent to the method of accounting employed by the petitioner as reflected by the returns for 1922 and 1923, which returns were accepted without objection.

OPINION.

SMITH: Broadly speaking, *1851 the issue in this proceeding is whether the method of accounting employed by the petitioner clearly reflected its net income. Specifically, the question is whether deferred overhead expenses incurred during 1922 and 1923 may be deducted from its gross income for 1924.

Section 212(b) of the Revenue Act of 1924 provides in part:

The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *

Article 24, Regulations 65, states in part:

Methods of accounting. - It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. * * *

Article 36 of the same Regulations states*1852 in part:

Long-term contracts. - Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term "long-term contracts" means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:

* * *

(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of completion.

Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly*1853 reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of *446 accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return.

We have heretofore held in , that the long-term-contract basis of reporting income will properly reflect the income derived from long-term contracts.

It is apparent that none of the petitioner's long-term contracts. entered into in 1922 or prior thereto extended into the year 1924 and that some of the contracts entered into during 1923 did extend into and were completed in 1924. In view of these facts, we are of the opinion that the petitioner was entitled to carry forward and deduct from gross income for 1924 a proportionate part of its 1923 overhead expenses. With respect to the overhead expenses for 1922, we are of the opinion that the respondent committed no error in refusing to allow any portion of such expenses as*1854 a deduction from gross income for the year 1924.

Judgment will be entered under Rule 50.