T. E. McShaffrey Constr. Co. v. Commissioner ( 1930 )

T. E. MCSHAFFREY CONSTRUCTION CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

T. E. McShaffrey Constr. Co. v. Commissioner

Docket No. 14967.

United States Board of Tax Appeals

18 B.T.A. 750; 1930 BTA LEXIS 2593;

January 13, 1930, Promulgated

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The respondent's action in disallowing a deduction from income for 1920 claimed on account of an alleged loss from the transaction involved herein, sustained.

John T. Kennedy, Esq., for the petitioner.

D. A. Taylor, Esq., for the respondent.

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MARQUETTE

This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent in the amount of $15,625.55 for the year 1920. The petitioner alleges that the respondent spondent erred in disallowing a loss claimed to have been sustained on a contract for the construction of the Marne Hotel at Akron, Ohio.

FINDINGS OF FACT.

The petitioner is and was during the years 1918 to 1920, inclusive, a corporation organized under the laws of the State of Ohio with its principal office and place of business at Akron. About 90 per cent of its capital stock was, during the years 1918, 1919, and 1920, owned by T. E. McShaffrey.

In November, 1918, the petitioner entered into an oral contract with T. E. McShaffrey to construct for him an eight-story hotel at Akron, Ohio, to be known as the Marne Hotel. Subsequently, but before the eight stories were completed, the petitioner entered into a second oral contract with McShaffrey to construct an additional story. The contracts were for a fixed price.

In connection with the construction of the said hotel the petitioner entered into a subcontract with one John J. Russell, in which Russell agreed to install all of the plumbing and steam fittings of said hotel on a cost-plus basis, the total contract price not to exceed $50,000. This subcontract was for the heating and plumbing in the entire nine stories of the hotel.

The said Russell purchased from and there was delivered to him by a company known as the Standard Sanitary Manufacturing Co., plumbing and heating fixtures and supplies for use in the construction of said hotel. On or about August 1, 1920, Russell defaulted on his contract after having installed and attached to the building the major portion of such fixtures and supplies. The petitioner then proceeded to complete the work undertaken by Russell and in so doing used the remainder of said fixtures and supplies. At the time Russell defaulted the petitioner had paid him $49,462.48 on said subcontract.

At the time Russell defaulted he had not paid for the fixtures and supplies purchased from the Standard Sanitary Manufacturing Co. The Standard Sanitary Manufacturing Co. then presented to the petitioner for payment its bill in the amount of $39,385.75. The petitioner, perceiving that the bill included items not purchased by Russell for use in the construction of said hotel, began negotiations for settlement which culminated in an agreement by the petitioner to pay the Sanitary Manufacturing Co. the amount of $28,750 in full discharge of its claim. No part of this amount was paid in 1920, but a portion thereof was paid in 1921 and promissory notes maturing subsequent to 1921 were executed in favor of the Standard Sanitary Manufacturing Co. by the petitioner for the remainder of the amount agreed upon.

In the year 1920 the petitioner was forced and did expend the amount of $2,461.01 for labor in completing the work abandoned by Russell.

The petitioner computed a loss of $155,624.90 on its contract for the construction of the Marne Hotel on the basis of a contract price $320,000 and a cost of construction of $479,624.90, and allocated $59,805.46 of said loss to 1919 and $95,819.44 to 1920. The respondent refused to allow said amounts as deductions from income for 1919 and 1920.

OPINION.

MARQUETTE: In the petition herein the petitioner alleges that it entered into contracts with T. E. McShaffrey to construct for him a hotel for the amount of $324,000; that the hotel was constructed during the years 1919 and 1920 at a total cost of $479,624.90, and that the petitioner sustained a loss on the transaction of $155,624.90, of which the amount of $59,805.46 was sustained in 1919 and the amount of $95,819.44 in 1920. It appears from the deficiency letter that the petitioner claimed these amounts as deductions from its gross income for the years 1919 and 1920, and that they were disallowed by the respondent. The tax liability of the petitioner for 1919 is in controversy in this proceeding for the reason that the respondent has heretofore determined a net loss for 1919, and, if the additional amount of $59,805.46 should be allowed as a deduction for 1919, the net loss for that year would be increased, and would thereby increase the amount of the net loss to be applied against the petitioner's income for 1920 after the application to the year 1918. However, at the hearing counsel for the petitioner stated that it is now impossible to trace and identify certain items connected with the construction of the Marne Hotel, and that therefore they are unable to establish the loss alleged in the petition. They contend, however, that the amount paid or incurred on the Russell subcontract in excess of the $50,000 maximum payment provided by the subcontract, constitutes a loss separate and apart from its construction contract with McShaffrey, which should be allowed as a deduction in computing 1920 income, regardless of whether the contract with McShaffrey resulted in gain or loss. The respondent urges (1) that the loss, if any, on the contract was not sustained in 1920, because payment to the Standard Sanitary Manufacturing Co. was not made until 1921 and subsequent years, and (2) that the amount in question constituted part of the cost to the petitioner of constructing the Marne Hotel and is, therefore, a part of the basis for computing profit or loss on that contract.

For the purpose of this opinion we may assume, without deciding that upon the default of Russell on the subcontract the petitioner became liable for the material furnished Russell by the Standard Manufacturing Company, that the liability attached and was acknowledged in 1920, and that any claim the petitioner had against Russell was worthless. Granting all this, we are, nevertheless, of the opinion that the petitioner is not entitled to the deduction it seeks. The obligation of the petitioner under its contract was to construct a hotel, including the plumbing and heating, for a certain sum. It chose to install the plumbing and heating fixtures through a subcontractor, and on account of the default of the subcontractor, after he had received practically the maximum amount that might become due him under the subcontract, was required to pay for certain materials for which the subcontractor should have paid, and to complete and pay for their installation. The petitioner was primarily liable to furnish and install these plumbing and heating fixtures, and the amount they finally cost the petitioner, was, in our opinion, a part of the total cost to it of constructing the hotel, and the total cost is the basis for computing gain or loss on the contract with McShaffrey. We are unable to agree with the petitioner that the amount it paid for the plumbing and heating fixtures and for their installation in excess of the maximum amount it had contracted to pay Russell should be considered as a loss separate and apart from any profit or loss arising under the original contract. The petitioner relies on the . However, that case involves payments made by an owner of a building in settlement of mechanics' liens placed by subcontractors on the building after the owner had settled in full with the original contractor. In our opinion that case is distinguishable on its facts and is not controlling in the instant proceeding.

Reviewed by the Board.

Judgment will be entered for the respondent.