1943 U.S. Tax Ct. LEXIS 247 | Tax Ct. | 1943
Lead Opinion
OPINION.
Three questions here are presented: Has the statute of limitations run as to assessment for the year 1935? Did the respondent err in denying the depreciation claimed by the petitioner? Did he err in adding to the petitioner’s income on the ground that the petitioner’s system of computing income from long term contracts did not clearly reflect income ?
The three-year period of limitations upon assessment had admittedly expired on the date of the deficiency notice. Therefore the respondent had the burden of showing an exception to section 275 (a), Revenue Act of 1934,
In the case of most of its long term contracts the petitioner’s books were kept and returns were prepared upon the basis of “percentage of completion,” under Regulations 86, article 42-4 (a), relative to long term contracts, to the extent that clients were billed in accordance with engineers’ determinations of percentage of work completed. Costs actually incurred were entered upon the books, and income tax returns reflected the difference between billings and costs. A very similar system was, in Hegeman-Harris Co. v. United States, 23 Fed. Supp. 450, regarded as the “percentage of completion” system; and the Commissioner so determined here, but determined in effect that it did not clearly reflect income.
Section 41, Revenue Acts of 1934 and 1936,
We think that Hegeman-Harris Co. v. United States, sufra, is authority that the petitioner’s method here does accurately reflect income. In both cases actual expenses were deducted from bills sent clients, and overhead expenses were separately used as deductions^ The Court of Claims regarded clear reflection of income shown because, in that case, “Where the profits or losses under the foregoing method differed from the correct profits and losses determined on the completion of a contract, compensating adjustments were made upon completion of the work.” In the instant case the same situation exists as to compensating adjustments. The petitioner’s method necessarily involved adjustment of each contract in the year of completion, for in that year only the remainder of costs expended and the remainder of billings within the contract price showed upon the books. All contracts but two ended in 1937, and in that year adjustments were made to offset insufficient profits or losses taken into 1935 and 1936. Considering such adjustment, the situation is indistinguishable from that in the Hegeman-Harris case. Any deviations from yearly accuracy in reflecting income are offset by the final reconciliation at the end of the contracts, in much the same way as in case of on the permissible completed contract • basis. In effect the contracts were in the last year closed on that basis, and reconciliation was made for differences because of previous estimates.
We conclude and 'hold that the petitioner’s method of reporting clearly reflected its income, for both taxable years, that as to 1935 the respondent has failed in his burden of showing otherwise, and therefore of showing that more than 25 percent of properly includible gross income was omitted from the petitioner’s return for 1935. Indeed, the Commissioner did not consistently follow his own theory, for he transferred some items, such as on the Pittsburgh Joint Stock Yards contract and the Pennsylvania Railroad account, to other years rather than allocate profit or loss according to ratio of cost. It follows that the statute of limitations on assessment had run at the time of the issuance of the deficiency notice as to the year 1935. For the year 1936, the petitioner had the burden of proof, but it follows from the above that the Commissioner erred in adding to petitioner’s income for that year.
There only remains for consideration the question of depreciation claimed in both taxable years, but under our conclusion above as to the statute of limitations, considered here as to 1936 only: The petitioner has the burden of showing erroneous the determination made by the respondent. The only evidence offered was that a graduate civil engineer, long in the petitioner’s employ, testified that he was familiar with the company’s depreciable equipment, had purchased much of it and used it, was familiar with the ordinary life of depreciable assets and with the depreciation deducted by the petitioner in 1935 and 1936, and from his experience and knowledge of the assets of the petitioner he believed that the 33% percent depreciation deduction claimed was reasonable and reflected the life of the asset. In our opinion such showing is altogether insufficient to show error in the determination of the Commissioner, and we so hold, with reference to the year 1936.
Reviewed by the Court.
Decision will be entered under Bule 50.
SEC. 276. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
Except as provided in section 276—
(a) General Rule. — The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
(c) Omission From Gross Income. — If the taxpayer omits from gross income an amount properly includible therein which is in excess of 26 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within' 5 years after the return was filed.
SEC. 41. GENERAL RULE.
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. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. (For use of inventories, see section 22 (c).)