*2399 Additions to a reserve for the maintenance of roofs constructed under a guaranty contract can not be excluded from gross income. Uvalde Co.,1 B.T.A. 932">1 B.T.A. 932, followed.
*1370 The respondent has asserted deficiencies in income taxes for the years 1922, 1923, 1924, and 1925 in the respective amounts of $329.31, $443.72, $226.39, and $260.81. The only issue involved is whether the Commission erred in adding to the reported taxable income of the petitioner in each of the taxable years a certain amount designated on its books as "reserve for maintenance."
FINDINGS OF FACT.
The petitioner is a Missouri corporation, with its principal offices in Kansas City. It is engaged in the business of constructing, maintaining and repairing commercial roofs. It keeps its accounts and makes its income-tax returns on the accrual basis.
*1371 All construction work done by the petitioner is by contracts, the terms and conditions of which are not disclosed by the record here except that payment of the entire contract price is due on the*2400 completion and acceptance of the work. To some of its customers the petitioner gives a maintenance agreement, which is as follows:
We hereby guarantee the workmanship and material of the roof applied on your building located at for a period of years in consideration of full and complete payment in accordance with terms of contract.
This guarantee shall not be construed to cover damage to the building by fire, cyclone or other extraordinary causes.
In event this roofing does not give satisfaction, we agree to make an examination and repair, but if the defects are due to causes other than wear and tear the owner shall stand said expense.
This agreement shall be fully performed and discharged by our furnishing, free of charge, suitable roofing material and making such repairs as may be necessary if any defects in the roofing or workmanship cause leakage during the period of this agreement.
In each case in which the above maintenance agreement is given, petitioner upon completion of the work and receipt of the contract payment therefor, credits an account, designated as reserve for maintenance, with an amount equal to 10 cents per square foot of the completed roof surface. *2401 All such credits for a given year are entered on the same ledger sheet. As expenses for maintenance and repairs are incurred the amounts paid on account thereof are debited against the reserves for maintenance for the years in which the credits to such accounts were made.
In its income-tax returns for each of the taxable years the petitioner included in its gross and net income the amounts credited to the reserve for maintenance and took as "Other Deductions" from "Total Income" the full amount of such credits for each of such years. In explanation of such deduction the following appears in each return:
The business of this corporation is the furnishing and laying of roofs. These roofs all carry a maintenance warranty of 10 years. To take care of such maintenance, a reserve is set up as herein set out.
Upon audit of petitioner's returns for each of the taxable years here involved, the Commissioner disallowed such deductions, added the same to the taxable income of petitioner for the years 1922, 1923, 1924, and 1925, in the respective amounts of $2,479.75, $3,549.86, $1,811.16, and $1,693.73, and determined the deficiency here in controversy.
OPINION.
LANSDON: The*2402 petitioner contends that in all cases in which it undertakes to maintain and repair a roof which it has constructed there are two contracts, one setting forth the terms, conditions and *1372 payments for construction of the roof, and another and separate agreement providing for maintenance for a period of 10 years. Its position in this proceeding is that the maintenance agreement is a longtime contract upon which it is impossible to compute gain or loss in advance of the final completion of the work undertaken. The oral testimony is to the effect that such separate contracts are made; that the whole amount of the compensation for repairs on each separate project is paid in advance and credited to maintenance when so paid; that the costs of maintenance under such contracts are charged against such credits as of the years in which the several advance payments are received; and that the gain or loss resulting from each contract for maintenance can be determined only at the end of 10 years, when the sum of all the credits for a single year can be compared with the sum of all the debts charged against that year.
The so-called maintenance contract was introduced in evidence and*2403 is set forth in full in our findings of fact, above. There is nothing in the agreement that indicates that for an amount of money in addition to the compensation for construction the petitioner undertakes to maintain a roof for ten years or for any other period. On the contrary, the agreement recites that this guarantee is "in consideration of full and complete payment in accordance with terms of contract." The contract so referred to obviously means the construction contract. Whatever expenses are incurred for maintenance are paid not from a separate fund received under the terms of the maintenance agreement, but from the amount received for construction. The credits to the maintenance fund do not evidence separate payments for maintenance, but rather are segregations from amounts received for construction. Such credits, we believe, were precisely what the petitioner in his income tax returns called them, viz., reserves for maintenance.
The procedure and accounting of the petitioner creates a reserve for contingent liabilities. We have held that such reserves are not a proper deduction from gross income for income-tax purposes. *2404 .
Decision will be entered for the respondent.