*1002 1. Where petitioner filed two income tax return forms for the taxable year 1925, neither of which contained the items of gross income and deductions required by section 239(a), Revenue Act of 1926; and an examination of petitioner's books was made by a revenue agent in 1927, a copy of this report being transmitted to petitioner, held, neither the forms filed by petitioner nor the report of the revenue agent constitute the "return" required by section 277(a)(1), Revenue Act of 1926, to start the running of the statute of limitations, and therefore under section 278(a) a deficiency determination in the year 1935 was not barred; held, further, that no "return" was ever filed, and consequently the imposition of the 25 percent addition to tax was mandatory under section 3176, Revised Statutes, as amended by section 1103 of the Revenue Act of 1926.
2. Where petitioner purportedly assigned all of its construction contracts to two of its principal stockholders and a banker in equal shares, reserving only profits therefrom not in excess of $31,500; and petitioner continued to perform the contracts and carry them on its books as theretofore, the three individuals receiving from*1003 petitioner profits totaling $73,500 in cash and petitioner's stock, held, that the $73,500 must be included in petitioner's gross income and is not deductible as an ordinary and necessary expense.
3. Where petitioner, on the "completed contracts" basis, completed one contract in 1919 and accrued as income therefrom its disputed claim in litigation for profits and reimbursement for expenditures, the litigation being determined adversely to it in 1925; and petitioner closed another contract in 1925, without accruing a disputed claim in litigation, held, that, since the completed contracts method of reporting requires consistent treatment of similar items, and such claims should not be accrued, no bad debt deduction is allowable in 1925 for the claim improperly accrued in 1919; held, further, that expenditures claimed as deductions on the 1925 contract are allowable, since they were actually disbursed or incurred.
*690 The respondent has determined a deficiency in income tax against the petitioner for the year 1925 in the amount of $23,272.38, *1004 and a 25 percent penalty of $5,818.10 for failure to file a return within the meaning of the statute. The total deficiency and penalty is $29,090.48. The petitioner has withdrawn an issue raised in the pleadings regarding the amount of a net loss for 1924 which is deductible in 1925, and the respondent has consented to the exclusion of three items totaling $4,274.10 from petitioner's income for the year 1925, since they represent profits from contracts completed in prior years. The questions which are still at issue are as follows:
(1) Was a sufficient return filed by or for the petitioner to start the running of the statute of limitations against the assessment of income taxes for the year 1925 so that the deficiency determination in 1935 is barred?
(2) Is the item of $73,500 paid by the petitioner in stock and cash to three individuals pursuant to a purported assignment of contracts to them by the petitioner to be excluded from the petitioner's gross income or deducted as an ordinary and necessary expense allocable to a contract which was completed in 1925?
(3) Is the item of $60,204.16 paid or accrued as expenses resulting from an injunction proceeding deductible in 1925*1005 from gross profits of a contract completed in that year?
*691 (4) Is the item of $21,665.15 accrued as income upon the completion of a contract in 1919, although a disputed claim in litigation, deductible as a bad debt in 1925 when the litigation terminated unfavorably to the petitioner as to this item?
(5) Is the petitioner liable for the 25 percent addition to tax for failure to file a return sufficient to fulfill the requirement of section 3176, Revised Statutes, as amended by section 1103 of the Revenue Act of 1926?
FINDINGS OF FACT.
1. The petitioner is a Minnesota corporation engaged in the general contracting and building business, with its principal office in Minneapolis, Minnesota. It kept its books and reported the profit or loss from its long term contracts on a completed contracts basis, pursuant to article 334 of Treasury Regulations 74.
2. On March 9, 1926, the petitioner filed with the collector of internal revenue at St. Paul, Minnesota, an income tax return form 1120 for the year 1925, which is stamped "Tentative Return." The form was blank except for the name, address, date and state of incorporation, and kind of business of the petitioner, *1006 and the notation opposite "Net Income" on line 24, "Estimated Loss", and on line 29, "No Tax." This form was sworn to by the president of the petitioner.
3. On May 15, 1926, the petitioner filed another return form 1120 for the year 1925. On its face only the formal parts at the top of the form were filled in, and a typed sheet was pasted to the form, which states in substance that the return is submitted subject to the final disposition of the petitioner's tax liability for the years 1920-1924 "now pending before the Commissioner of Internal Revenue", and that the right is reserved to amend the return upon such final disposition since there are items pending which affect the year 1925. This rider states further that, the taxpayer having elected to report on a completed contract basis, there is no taxable profit since no contracts were completed during the taxable year, and all expenses during the year were assigned to contracts under way and not completed. The remainder of the form contains only comparative balance sheets as of the beginning and the end of the year, and the verification affidavit subscribed to by the president and treasurer of the petitioner.
4. In 1927*1007 a revenue agent examined the petitioner's books and made a report covering the taxable year 1925, which showed items of income as follows:
| Profit, contract No. 68 | $2,363.89 |
| Profit, equipment sold | 560.00 |
| Interest and discount | 2,169.03 |
The revenue agent made other adjustments and allowed the deduction of various expenses and depreciation, with the result that his *692 report showed a net loss for the petitioner of $52,733.29. The preliminary statement of the report is as follows:
Years Additional Tax Overassessment
1925
Net additional tax or overassessment: None.
The report states: "The result of this examination was explained in detail to Mr. J. O. Shulind, President of the company, and with [sic] Mr. A. G. Shulind, Vice President of the company. They concurred with the examining officer in all findings." A copy of this report was forwarded to the petitioner with a letter of transmittal dated April 16, 1927, at St. Paul, Minnesota, and headed "Office of Internal Revenue Agent in Charge." The letter is signed "G. W. Kurtz, Internal Revenue Agent in Charge." The petitioner on April 27, 1937, mailed its acknowledgment of receipt of the "report*1008 covering the examination made by Revenue Agent Alfred Greguson of the income tax returns of the above-named taxpayer for the year 1925." The form attached to the report (headed, Form 875, revised May 1926), containing the statement: "The undersigned has reviewed this report and hereby accepts as correct the finding of the examining officer", submitted for the taxpayer's signature, was not signed.
5. On January 8, 1935, the respondent determined a deficiency in income tax against the petitioner for the year 1925, from which determination the present appeal was instituted.
6. No other document purporting to be a return was filed by or for the petitioner for the year 1925.
7. At a meeting of the board of directors of the petitioner on May 16, 1920, a resolution was passed stating that "In view of the unsettled condition generally and the large outstanding amount invested principally in work at Virginia and Buhl and obligations due together with additional capital required to finance new work" the officers of the petitioner recommended that an effort be made to interest outside capital for the purpose of paying off the obligations of the petitioner and financing new and uncompleted*1009 work. It was therefore resolved that the president and vice president of the company be "authorized to negotiate with responsible parties, and if a deal can be consummated, to execute on behalf of the corporation, subcontracts and assignments of all uncompleted work and contracts, together with any or all additions or extensions of the work in connection with such contracts, providing the company shall receive, as consideration or profit the sum of $31,500 above the actual cost of all said work including office expense, salaries and interest." The resolution further provided that the subcontractors should pay all future expenses and all obligations already contracted for as a part of the cost of the *693 work on the contracts assigned; and that a copy of the resolution should be attached to and become a part of any subcontract entered into.
8. At the time of this resolution the petitioner had obtained only two of the eight contracts which were ultimately received from Independent School District No. 35 at Buhl, Minnesota, and were all treated by the petitioner as one contract under the designation of contract 60-63-64. The petitioner at that time had bid upon the third*1010 Buhl contract and the bonding company required a better financial condition before issuing any further bonds covering additional contracts which the petitioner hoped to obtain.
9. On June 10, 1920, the petitioner by written instrument purported to sell, sublet, assign, and set over to one Tollef Jacobson and to the petitioner's two principal stockholders, A. G. Shulind and J. O. Shulind, each an undivided one-third interest in five named contracts and all contracts with the Independent School District of Virginia, Minnesota, as well as all contracts for extensions and additional work in connection with all of the foregoing contracts.
10. Tollef Jacobson was given a share under the assignment because he was a banker who sometimes served as the personal surety required by the bonding company and also placed part of the petitioner's loans with his banks or through his banking connections, and the petitioner desired to assure his continued cooperation in these matters.
11. The purported assignees agreed to assume the obligations of the contracts and to carry them out as provided in the corporate resolution of May 16, 1920, described in finding No. 7, a copy of which was attached*1011 to the assignment.
12. In addition to the contracts with the Independent School District of Virginia, Minnesota, the other contracts enumerated in the purported assignment were:
| Contracting party | Date of contract | Construction | Gross amount |
| W. D. Felder | Nov. 15, 1919 | Cottage | $20,500 |
| Flynn, Bjerken & Nelson of Osakis, Minn | Feb. 11, 1920 | 5,500 | |
| County of St. Louis, Minn | Apr. 12, 1920 | Court house | 276,961 |
| Ind. School Dist. No. 35, Buhl, Minn | Feb. 7, 1920 | School | 143,226 |
| Ind. School Dist. No. 35, Buhl, Minn | Apr. 27, 1920 | School | 208,714 |
13. The other six contracts with Independent School District No. 35 at Buhl, Minnesota, which were later obtained by the petitioner automatically became subject to this agreement by its terms. Those contracts were secured on the following dates: June 26, 1920; August 26, 1920; April 19, 1921; June 27, 1921 (two contracts); and July 11, 1921.
*694 14. All of the contracts with Independent School District No. 35 at Buhl, Minnesota, were related by reference to the same set of provisions called "The General Conditions of the Contract." One of the provisions which was thus made applicable to all of*1012 the eight contracts known as contract 60-63-64 was as follows:
ART. 42. ASSIGNMENT. - Neither party to the Contract shall assign the contract without the written consent of the other, nor shall the Contractor assign any moneys due or to become due to him hereunder, without the previous written consent of the Owner.
15. A. G. Shulind and J. O. Shulind either gave to the corporation their own notes, which were discounted by the corporation at the banks, or assumed or paid notes of the corporation, which resulted in the retirement of a total of $33,100 of outstanding notes of the corporation. Of this amount $25,000 was credited to A. G. Shulind's account with the corporation and $8,100 to J. O. Shulind's account. These loans are recorded on the books of the petitioner by credit to the respective individual's accounts under date of May 20, 1920.
16. During 1920 the three purported assignees were credited with shares of the profits and estimated profits from the contracts covered by the assignment in a total net amount of $73,500, or $24,500 to each individual. The petitioner corporation credited itself with $31,500 as its share of the profits, as provided in the corporate*1013 resolution which was made a part of the contract. Tollef Jacobson was paid by petitioner $24,500 in cash, most of it in 1920. A. G. Shulind was paid by petitioner $24,500 in its stock worth $22,500 and the remainder in cash. J. O. Shulind was paid by petitioner $24,500 in its stock. Of the stock issued to the two Shulinds, preferred stock of a value of $25,000 is recorded as transferred to them on May 20, 1920, and the remainder of the stock on July 23, 1920. As of the end of 1920 a 20 percent cash dividend on the petitioner's common stock was declared.
17. Contract 60-63-64 was carried out by petitioner and completed by it in the year 1925. Entries on its books referring to that contract extend throughout the period 1920-1925.
18. The work under contract 60-63-64 was enjoined at the instance of a taxpayer of the district on October 8, 1921. The injunction remained in effect until June 1923, when it was dissolved and work was renewed and continued until completion of the contract in 1925.
19. During the period the injunction was in effect the construction already completed was damaged by the elements and upon resumption of work it was necessary to do restorative*1014 work and to use additional materials and to replace equipment in order to continue construction. Upon the resumption of the work the school district agreed to pay these extra costs, but was son informed by its attorney of its lack of authority to make such expenditures, and therefore refused to *695 repay the expenses paid or incurred by the petitioner. The petitioner also paid attorney fees incurred in defending the injunction proceeding. The expenditures of the petitioner thus resulting from the injunction proceeding were $60,204.16. This total represents actual outlays or liabilities incurred before the end of 1925 because of the injunction proceeding.
20. Suit was brought by the petitioner and others against the parties who were plaintiffs in the injunction proceeding, on their bond, for the damages resulting from that proceeding, including the above expenditures. This suit was settled in 1927 for $130,000.
21. In July 1919 the petitioner undertook certain construction work, known as contract 53, for Independent School District No. 35 at Buhl, Minnesota, under an oral contract on a "cost plus" basis. Work under this contract was stopped in November of the same*1015 year by an injunction.
22. The petitioner up to the time when performance was enjoined had expended the following sums in performance of contract 53:
| Labor | $34,720.12 |
| Material | 38,392.46 |
| Miscellaneous Items | 1,327.52 |
| Total | 74,440.10 |
Petitioner also claimed $6,515.67 for its overhead and profits.
23. Petitioner treated contract 53 as completed in 1919 and reported its claimed profits therefrom as income in that year and paid the tax thereon.
24. The petitioner brought a cross action in the injunction proceeding referred to in finding No. 21, claiming an amount corresponding approximately to the $80,955.77 which is the total of the items listed in finding No. 22, less the payments and adjustments made on the contract up to that date. The petitioner was ultimately given judgment on a Quantum meruit basis for a part of its claim, final judgment being entered on January 16, 1925. Including the $5,661.27 (apart from interest) awarded by the final judgment the petitioner received a total of $59,290.62 in payments on this contract. The difference between $59,290.62 and the $80,955.77 itemized above, viz., $21,665.15, the petitioner charged off on its*1016 books in 1925 as unrecoverable.
OPINION.
OPPER: Issues (1) and (5). - The first issue is whether there was a failure to file a return as defined in the Revenue Act of 1926 so that respondent's determination of a deficiency has not been barred by the statute of limitations. For convenience the fifth issue, whether the 25 percent addition to tax for failure to file a return (imposed *696 by section 3176 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926) is collectible, will be discussed at the same time.
Neither the "tentative return" filed by the petitioner in March 1926 nor the further document filed by it shortly thereafter and not designated "tenative" contain the itemized statements of gross income and deductions and credits required by section 239 of the Revenue Act of 1926. 1 These documents were not the returns required by the act and consequently petitioner did not thereby set the statute of limitations in operation. Florsheim Brothers Drygoods Co. v. United States,280 U.S. 453">280 U.S. 453. Nor did the examination or audit of petitioner's books by the Commissioner have that effect. *1017 Cem Securities Corporation,28 B.T.A. 102">28 B.T.A. 102; affd., 72 Fed.(2d) 295; S. Feather Co.,28 B.T.A. 432">28 B.T.A. 432.
The real issue between the parties is whether the revenue agent's report, and accompanying papers, introduced as Joint Exhibit 3, either separately or collectively constitute such a return within the meaning of the act 2 as would have the effect in 1927 of setting the period of limitation in operation so that by 1935, the date of respondent's 90-day letter, further action by respondent was barred. No cases are cited by counsel for either side which appear to be directly determinative of this question. It is clear, however, that the burden of proof of any facts necessary to sustain the defense of the statute of limitations is upon the petitioner. *1018 M. A. Nicholson,22 B.T.A. 744">22 B.T.A. 744.
Joint Exhibit 3 consists of four parts - a revenue agent's report of the ordinary type covering an examination of the books of the petitioner; a letter from the office of the internal revenue agent in charge transmitting a copy of this report to the taxpayer; a form (No. 875) acknowledging receipt and stating acceptance of the examing officer's findings which was submitted for the taxpayer to sign; and a copy of a letter from the petitioner acknowledging receipt of the revenue agent's report. The letter of transmittal is headed "Office of Internal Revenue*1019 Agent in Charge." It is signed "G. W. Kurtz, *697 Internal Revenue Agent in Charge." The preliminary statement of the agent's report begins:
Years Additional Tax Overassessment
1925
Net additional tax or overassessment: None.
The acknowledgment of receipt signed by petitioner refers to "report covering the examination made by Revenue Agent Alfred Greguson of the Income tax returns of the above-named taxpayer for the year 1925." (Italics ours.) "Assessments are frequently based on audits of the Income Tax Unit. However, the purpose of these audits is not to eliminate the necessity of filing the return but to safeguard against error or dishonesty." Florsheim Brothers Drygoods Co. v. United States, supra.
It will thus be seen that nothing appears in this exhibit which purports to treat any part of it as a return. It is true that the revenue agent in his report says: "The result of this examination was explained in detail to Mr. J. O. Shulind, President of the company, and with [sic] Mr. A. G. .Shulind, Vice President of the company. They concurred with the examining officer in all findings." But the form attached to the report (No. *1020 875) was evidently not signed on behalf of the corporation, as it appears in Joint Exhibit 3 in blank. This form includes the statement "the undersigned has reviewed this report and hereby accepts as correct the finding of the examining officer." Failure to execute this statement precludes petitioner from taking the position, even if it were otherwise able to do so, that its formal acceptance of the revenue agent's report resulted in the adoption of that report by it as its return.
Petitioner calls attention to the following language in section 3176: 3 "Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes." This provision, far from leading to the conclusion advanced by the petitioner, appears to require an exactly contrary result. No evidence whatever was introduced by petitioner that any part of Joint Exhibit 3 was either subscribed by a collector or *698 deputy collector or subscribed or approved by the Commissioner. A ruling promulgated in 1925 specifically denies to revenue agents and inspectors any authority to exercise*1021 the power of filing returns for delinquents under section 3176. S.M. 3389, C.B. IV-1, p. 49. Even had the document purported to be a return, which as we have seen it did not, no action by an unauthorized subordinate by way of approval or subscription could have had the statutory effect.
*1022 It follows that petitioner has failed to sustain the burden of proof that any return whatever was filed at any time which so complies with the requirements of the Revenue Act of 1926 that the statute of limitations constitutes a bar to respondent's action.
This conclusion necessarily results in the further consequence that the 25 percent additional tax is applicable. It is only "when a return is filed after such time" 4 that, if there is reasonable cause and absence of willful neglect, the additional tax is not imposed. Cf. Jockey Club,30 B.T.A. 670">30 B.T.A. 670. Here no return was ever filed. In such a case imposition of the additional tax is mandatory. Scranton, Lackawanna Trust Co., Trustee,29 B.T.A. 698">29 B.T.A. 698; affd., 80 Fed.(2d) 519.
*1023 Issue (2). - It is not entirely clear from the pleadings and briefs upon what theory the respective parties are proceeding. The Commissioner's 90-day letter states: "The Bureau has held that the alleged assignments were invalid, and that the profits from these contracts constituted income to you. * * * In order to deduct such payments from gross income it must be shown that they represented ordinary and necessary expenses of doing business, * * *." The petition alleges that the Commissioner "erred in holding that a deduction of $73,500 should not be allowed to the taxpayer on account of amounts paid by it to Tollef Jacobson, A. G. Shulind and J. O. Shulind paid to them in 1920 by reason of a certain resolution dated May 16, 1920 and assignment dated June 10, 1920 and his ruled invalidity of such resolution and assignment and that as a result that the money so paid was not an ordinary or necessary business expense. * * *." (Italics ours.)
It is, however, sufficiently apparent that the questions are: Whether the assignment was valid; whether, even though valid as between the parties, the assignment operated as a valid transfer of income from the petitioner for tax purposes; *1024 and whether (if the assignment be invalid or if despite its validity amounts received by petitioner must *699 nevertheless be included within its gross income) the circumstances under which the payments were made by the petitioner made them deductible as ordinary and necessary expenses of its business.
Whatever may have been the form of the transaction, it is evident from the action of the parties under it that the assignment in question was no more than an assignment of petitioner's expected profits. The contract itself forbade its assignment without the consent of the school district and no such consent appears; the work was done, even after the assignment, by the petitioner; petitioner's books carried items in connection with these contracts after, just as before, the assignment; and, perhaps most significantly, even in the present proceeding petitioner treats the contracts as its own and attempts to secure the benefit of expenses and deductions connected with the contracts during periods subsequent to the date of assignment. These facts sufficiently distinguish the present proceeding from *1025 Iowa Bridge Co. v. Commissioner, 39 Fed.(2d) 777.
Whether the assignment was valid and particularly whether it could be enforced as between the parties does not now call for decision. Suffice it to say that at most the assignment was a transfer of a future right in earned income without any accompanying transfer of the services or property from which the income is derived. Such a transfer is insufficient to avoid the requirement that the proceeds be included in gross income by the assignor. Burnet v. Leininger,285 U.S. 136">285 U.S. 136; Van Meter v. Commissioner, 61 Fed.(2d) 817; Saenger v. Commissioner, 69 Fed.(2d) 631. See also Traylor Engineering & Manufacturing Co. v. Lederer,271 Fed. 399.
There remains for discussion however the question whether the amounts paid by petitioner to the three individuals were ordinary and necessary expenses of carrying on petitioner's trade or business. Financing is of course ordinary and necessary in many business enterprises. However, the burden of proof is on the petitioner to show "that extraordinary, unusual and extravagant amounts paid by a*1026 corporation" are in reality "ordinary and necessary expenses." Botany Worsted Mills v. United States,278 U.S. 282">278 U.S. 282; Alexander Sprunt & Son, Inc. v. Commissioner, 64 Fed.(2d) 424.
The evidence shows that Tollef Jacobson advanced nothing to the corporation in consideration of the $24,500 paid to him under the assignment. He was a banker who sometimes served as the personal surety required by the companies which bonded the petitioner, and the petitioner's borrowings were largely obtained from Jacobson's banks or through his banking connections. It was for his continued cooperation in these matters that he was paid $24,500. While these were services rendered to the petitioner by Jacobson, there is no showing of details as to their time or extent, nor of their *700 entire applicability to contract 60-63-64, nor that $24,500 or any other sum represented their reasonable value. The statute 5 specifically limits deductions for compensation for services to "reasonable" allowances, and since there is no showing that Tollef Jacobson's compensation was reasonable the deduction therefor can not be allowed. *1027 Reynard Corporation,30 B.T.A. 451">30 B.T.A. 451.
The payments to A. G. Shulind and J. O. Shulind did not purport to be compensation for services, but payments in consideration of loans to the petitioner. The advances totaled $33,100, for which the two individuals received $49,000 from the petitioner within the same year, chiefly in stock. The advances remained as liabilities owing to them as open accounts on the books of the petitioner. The two Shulinds were its principal stockholders. In such a case the petitioner must show that it is not merely distributing profits to its stockholders in another guise. L. Hyman & Co.,21 B.T.A. 159">21 B.T.A. 159, 167; *1028 Moxa Building Co.,31 B.T.A. 457">31 B.T.A. 457; affirmed per curiam, 79 Fed.(2d) 1004; Samuel Heath Co. v. United States,2 Fed.Supp. 637; C. S. Ferry & Son, Inc.,18 B.T.A. 1261">18 B.T.A. 1261. Far from showing this, what evidence there is indicates the contrary. One significant circumstance is that an issue of preferred stock accounting for $25,000 of the payment to the Shulinds is recorded on May 20, 1920, contemporaneously with the advances and prior to the actual assignment under which it purports to be authorized, which was not executed until June 10, 1920. Again, in addition to these payments, a 20 percent cash dividend on the common stock was declared as of the end of the same year. Finally, there is the disproportionate return which the compensation represents compared to the amount of the advances. The petitioner failed to show the impossibility of borrowing money elsewhere more cheaply. We do not accept as sufficient proof the general and unsupported statement that the petitioner "had no other means of financing itself at that time."
We conclude therefore that whether the transaction entered into be considered from the standpoint*1029 of possible reduction of gross income on the one hand, or a deduction on account of ordinary and necessary expense on the other, the petitioner has not sustained its burden of proof that respondent's determination was erroneous.
Issues (3) and (4). - For convenience of discussion issues (3) and (4) will be treated together, since we are of the opinion that they involve two aspects of the same question. Issue (3) is the claimed *701 deduction of $60,204.16 paid or incurred up through 1925 as expenses growing out of an injunction proceeding against the petitioner with respect to contract 60-63-64; and issue (4) is a claimed bad debt of $21,665.15 resulting from a failure to recover that sum which had been accrued in 1919 as a claim partly for profits and partly for reimbursement of expenditures under contract 53, the performance of which was permanently halted by injunction in 1919.
The parties are agreed that the petitioner is properly subject to the completed contract provisions 6 and that contract 60-63-64 was completed in 1925; and the petitioner's claim is not disputed that contract 53 was completed so far as the petitioner was concerned in 1919 and was so treated. *1030 It is not, therefore, necessary for us to consider whether the petitioner might, under the completed contract method of accounting and in accordance with a consistent practice, have treated each contract as open until all claims arising out of it were settled (cf. Rice, Barton & Fales, Inc. v. Commissioner, 41 Fed.(2d) 339, 341; Carolina Contracting Co.,32 B.T.A. 1171">32 B.T.A. 1171). No such contention is made by the petitioner and no showing of any such attempted treatment or consistent practice is in evidence. The contracts were, therefore, properly treated as closed in 1925 and 1919, respectively, when the work under them was completed. See National Contracting Co.,25 B.T.A. 407">25 B.T.A. 407; affd., 69 Fed.(2d) 252. We are concerned, however, with the question of the correct method of accounting for the two contracts when completed in 1925 and 1919, respectively, since that appears to be determinative of both of the deductions which are claimed under these issues by the petitioner.
In the case of*1031 contract 53 the petitioner's claim for profits and reimbursement for expenditures was accrued by the petitioner when the contract was completed in 1919. In the case of contract 60-63-64 no accrual of the petitioner's claim for reimbursement of the injunction expenditures incurred in the performance of that contract was made when the contract was completed in 1925. Both items were disputed claims in litigation, so that no reason appears for the petitioner's failure to show a consistent treatment in closing its contracts. Only one of the two methods can in any event be permissible; the petitioner must at least be held to a uniform practice, 7 and if the accrual of the litigated claim in the one case is not proper the same result must follow in the other.
Under the completed contracts method of accounting the ordinary rule in the case of items outstanding when a contract is "completed" is that "it is the right to receive and not the actual receipt that determines *702 the inclusion * * *." 8 Unless this*1032 accrual of outstanding items is made in the year of completion, the purpose of the completed contracts method, namely, to account for the entire results of a contract at one time, 9 is defeated. However, as a general principle, when outstanding items are "contingent and uncertain," such as disputed claims in litigation, accrual is not proper. Commissioner v. John Thatcher & Son, 76 Fed.(2d) 900; North American Oil Consolidated v. Burnet,286 U.S. 417">286 U.S. 417. While no case has apparently purported to determine this question under the long term contracts method, no reason appears why the rule should be less applicable to that type of accrual. And that this procedure may leave the exact profit or loss open for future adjustment is not fatal. W. J. Scholl Co.,30 B.T.A. 993">30 B.T.A. 993, 997.
We conclude therefore that it was improper for the petitioner to accrue in 1919 its outstanding claim under contract*1033 53. Consequently no deduction can be allowed in 1925 for the failure to recover $21,665.15 thereof. Commissioner v. John Thatcher & Son, supra.The $60,204.16 claimed as a deduction under contract 60-63-64 is, however, allowable since it represents expense actually paid or incurred and not disputed. Commissioner v. John Thatcher & Son, supra.The petitioner was not required to accrue in 1925 an equal amount representing its outstanding claim for reimbursement which would have offset the deduction; nor, what would have been similar in result, to suspend the accrual of this item of deduction until the outstanding claim was finally determined.
Decision will be entered under Rule 50.
Footnotes
1. (a) Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. * * * ↩
2. Revenue Act of 1926 -
SEC. 277. (a) Except as provided in section 278 -
(1) The amount of income taxes imposed by this Act 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.
* * *
SEC. 278. (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a 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. * * * ↩
3. Section 3176, Revised Statutes, as amended by section 1103, Revenue Act of 1926:
"If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner of Internal Revenue may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes. * * *" ↩
4. Section 3176, Revised Statutes, as amended by section 1103, Revenue Act of 1926:
"* * * In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner or Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * *" ↩
5. Revenue Act of 1926 -
SEC. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *. ↩
6. ART. 334, Treasury Regulations 74. See National Contracting Co.,↩ Docket No. 79290 (memorandum opinion) decided herewith.
7. Cameron, Joyce & Co. v.United States, Fed.Supp. (U.S. Dist. Ct., Iowa, Dec. 7, 1937). See Owen-Ames-Kimball Co.,5 B.T.A. 921">5 B.T.A. 921, 927↩.
8. Cameron, Joyce & Co. v.United States, supra; Vansant v. Crooks, 43 Fed.(2d) 166; see Rosa Orino,34 B.T.A. 726">34 B.T.A. 726, 730↩.
9. See James C. Ellis,16 B.T.A. 1225">16 B.T.A. 1225, 1228↩.