McNulty v. Commissioner , 15 B.T.A. 507 ( 1929 )

THOMAS J. MCNULTY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McNulty v. Commissioner

Docket Nos. 10188, 29126.

United States Board of Tax Appeals

15 B.T.A. 507; 1929 BTA LEXIS 2850;

February 19, 1929, Promulgated

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Contracts entered into in 1912 held not to represent increase in value of property accrued prior to March 1, 1913, which may be distributed tax-free in 1922.

Harry Friedman, Esq., for the petitioner.

F. R. Shearer, Esq., and E. L. Corbin, Esq., for the respondent.

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ARUNDELL

Proceeding for the redetermination of a deficiency in income tax for the year 1922 in the amount of $23,955.74. Petitioner alleges that the respondent erred (a) in treating as dividends certain amounts received from McNulty Brothers Co., a corporation, and (b) in treating the alleged dividends as a taxable distribution. The assignment (b) is based on the ground that the distribution was out of earnings accrued prior to March 1, 1913.

FINDINGS OF FACT.

Petitioner, during the year 1922 was president of McNulty Brothers Co., a corporation (hereinafter called the corporation) and owned 997 shares of stock in the corporation of a total of 1,500 shares outstanding. The corporation is engaged in various branches of the contracting business, principally in plastering and ornamental work.

In 1912 the corporation secured two contracts for certain work in the construction of the Field Museum of Natural History in Chicago. One of the contracts, dated February 1, 1912, was for the installation of metal furring, metal lathing, and plain and ornamental plastering. This work was to be performed for the consideration of $304,900. Some of the provisions were that the corporation was to start preparation of material at once, to be prepared to start erection on or before May 1, 1913, and to start erection when notified. The other contract dated March 1, 1912, was for concrete work in and about the building. The consideration under this contract was $114,000. The corporation was to be prepared to start construction on or before April 1, 1913, and to start construction when notified. The work under both contracts was to be completed by June 1, 1914. The contracts were not assignable except with the consent of the other party.

At the time the plans were drawn for the museum it was contemplated that it would be erected in Jackson Park, but when the contracts were executed it was decided to erect the building in Grant Park and the contracts provided for the location at the latter place. At March 1, 1913, the corporation knew that, due to the change in location, work could not be started as provided by the contracts and in all probability several years would elapse before construction of the building would begin. The corporation commenced the work called for in the contracts in 1918 and completed it in 1921. At the time the contracts were executed the corporation estimated that its profits on the work would be $125,000. The profits actually realized amounted to $119,426.20, which was included in income.

The surplus of the corporation at March 1, 1913, was $125,213.43, and at December 31, 1921, it was $260,152.15. These figures do not include any value for the contracts above mentioned. The net earnings of the corporation for the year 1922 were $96,462.52.

On March 30, 1922, the corporation declared a dividend of 130 per cent, which on petitioner's 997 shares amounted to $129,610. This amount petitioner advanced to other enterprises in which he was interested and which were in need of temporary financial aid. Petitioner later returned the amount received to the corporation in such sums and at such times as needed by the corporation.

The respondent determined the deficiency herein on the basis of $105,717.89 of the dividend received in 1922 being taxable, which amount he arrived at by the following computation:

Surplus at December 31, 1921	$260,152.15
One-fourth of 1922 net earnings	24,115.63
	284,467.78
Less surplus at March 1, 1913	125,213.43
Amount earned after March 1, 1913	159,054.35
997/1500 of $159,054.34	105,717.89

OPINION.

ARUNDELL: We have in this proceeding two petitions for redetermination of deficiencies for the year 1922. One petition, that in Docket No. 10188, is based on respondent's notice dated October 23, 1925, in which a deficiency of $18,033.52 was found. The other is based on respondent's notice of April 14, 1927, finding a deficiency in the amount of $23,955.74. The second petition contains the same allegation of error, though stated differently, as the earlier one and which is given as allegation of error (a) in our preliminary statement. Upon motion of counsel for respondent, the two proceedings were consolidated and we will here consider them as one proceeding involving a deficiency in the amount of $23,955.74. See .

On the first issue counsel for petitioner rested his case on the pleadings. The facts gathered therefrom are, in brief, that in 1922 the corporation in which petitioner was the principal stockholder declared a 130 per cent dividend and that petitioner's share thereof was later returned by him to the corporation. There is nothing in these facts to indicate that the amount received was not a dividend.

The second claim of petitioner rests on that part of section 201(b) of the Revenue Act of 1921, which provides that:

* * * Any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed.

Under this second claim alternative arguments are made. First, that the contracts for construction work on the Field Museum represented an increase in the value of property accrued prior to March 1, 1913, which may be distributed tax-free, and, second, that the contracts were capital which the corporation is entitled to have returned before computing the earnings thereunder available for dividends.

These arguments are predicated on the idea that the contracts had a determinable value on March 1, 1913. The only evidence offered as to the value of the contracts was the testimony of petitioner, to which, for reasons here set forth, we ascribe but little weight. While petitioner has had many years experience as a contractor and was able to state the factors to be taken into consideration in computing contract prices and the profit to be realized from the performance of construction contracts, his experience in valuing contracts for purposes of purchase or sale was exceedingly limited. In fact he had participated in but one such transaction, when some 10 years prior to March 1, 1913, he had purchased a contract involving a comparatively small amount. At that time, according to the testimony, labor and material costs were radically different from what they were in 1913. Moreover, the contingencies involved in these contracts can not be overlooked. It was not known at March 1, 1913, when construction would begin, but it was known that in all likelihood it would not be for several years, due to the necessity of securing authorization for location on the newly proposed site and other delays incident to the change of location. Further, the corporation could not assign the contracts except with the consent of the other contracting party. These considerations lead us, in weighing the evidence, to seriously doubt the soundness of the conclusion of the witness, and we are not convinced that the contracts had the value claimed for them.

But aside from this, and assuming that the contracts did have some value, on the authority of the decided cases we would still be compelled to deny the relief sought. In , and , the question here presented was decided adversely to petitioner's claims. In the latter case the court found that the taxpayer "had a property right that had value." In , the March 1, 1913, value of the anticipated receipts was determined. In all of these cases it was uniformly held that the amounts received after March 1, 1913, pursuant to contracts entered into before that date, were income in their entirety, regardless of whether or not the contracts had a measurable value on that date. In some of the decided cases at least a part of the service contracted for had been rendered. Here, no part of the corporation's obligation under the contract had been performed; the contract was wholly executory, and the compensation entirely contingent.

Judgment will be entered for the respondent.