*2354 Held that the amount received by pettioner in 1922 as partial compensation under a certain contract was taxable to him as income in that year.
*646 The respondent has asserted a deficiency in income tax for the year 1922 in the amount of $11,846.45. For his causes of action the petitioner alleges that respondent erred (1) in adding to his income for the taxable year the amount of $44,743.53 which, he alleges, was constructively received in 1920, and (2) in disallowing as a deduction from income in such year the amount of $2,500 as a loss therein sustained by certain stocks becoming worthless. The parties stipulated that the findings of fact made by the Board in Docket No. 12115, promulgated April 9, 1929, should be considered as evidence in this proceeding, together with additional evidence adduced at the hearing.
FINDINGS OF FACT.
Petitioner is an individual with his principal office at 160 North La Salle Street, Chicago, Ill.
Some time in 1918 the Carolina Shipbuilding Corporation, a corporation organized, owned and controlled by the George*2355 A. Fuller Co., entered into a contract with the United States Shipping Board Emergency Fleet Corporation to construct 12 steel vessels of approximately 9,600 gross tons capacity each. Work began in May, 1918. The Shipbuilding Corporation constructed a shipyard with four ways and also bought or placed orders for the material necessary for 12 boats.
Shortly after the Armistice the contract between the Carolina Shipbuilding Corporation and the United States Emergency Fleet Corporation was canceled. None of the boats had been completed. The contract was, thereafter, in August, 1919, replaced by a new contract between the George A. Fuller Co. and the United States Shipping Board. Under the terms of the new contract the United States Shipping Board was to purchase 8 of the 12 boats at a price of $1,944,000 per boat. The Fuller Co. was required to take over from the Shipping Board the shipyard at a cost of $500,000. It also took over at cost all the material and supplies acquired.
*647 Since the organization of the Shipbuilding Corporation, Lorenzo C. Dilks, the petitioner herein, had been in charge of the shipbuilding plant located at Wilmington, N.C. He remained in*2356 the employ of that company until the end of 1919. On January 1, 1920, and after the execution of the contract between the George A. Fuller Co. and the Shipping Board, Dilks entered into the employ of the George A. Fuller Co. under the terms of a written contract dated February, 1920. This contract was as follows:
THIS AGREEMENT, made this eighteenth day of February, 1920, between LORENZO C. DILKS, of Wilmington, North Carolina, party of the first part, and GEORGE A. FULLER COMPANY, a corporation organized under the laws of the State of New Jersey, party of the second part * * * WITNESSETH:
The said Lorenzo C. Dilks agrees to diligently serve said George A. Fuller Company as Vice-President of the Company at its office in Wilmington, North Carolina, to April 30, 1921. In consideration of such service so to be performed, said George A. Fuller Company agrees to pay said Lorenzo C. Dilks the sum of Twenty Thousand ($20,000) per annum in equal monthly instalments during said term; and the George A. Fuller Company agrees to set aside a sum equal to twenty per centum (20%) of the net profits earned by the Wilmington office, of which fifty per centum (50%) or one-half (1/2) is to be*2357 paid to said Lorenzo C. Dilks as additional compensation. In arriving at the net profits, the value of the plant shall be ascertained by sale or otherwise, and profit or loss on same to be taken into account. It is understood that the word "earned" shall mean the actual net profits taken into account on the books of the Company during that period and under its customary rules. Settlement of the said ten per centum (10%) additional compensation is to be made in May, 1920, as of April 30, 1920, and in May, 1921, as of April 30, 1921. If any of the profits realized are represented by mortgage bonds or other securities, which the Company has taken on account of contracts in the Wilmington territory, the pro rata proportion thereof may, if the Company so elects, be delivered to said Lorenzo C. Dilks in lieu of cash under this agreement.
This agreement may be terminated by either party upon sixty (60) days' notice in writing, and in such event the amount due said Lorenzo C. Dilks is to be determined by taking the actual amount of the net profits earned on the last day of the month prior to the expiration of the said sixty (60) days' notice, and settlement made thereon on or before*2358 the 15th day of the following month. In case no such notice is given by either party, and no change in terms is made by mutual agreement, the same arrangement is to be continued for another year, subject to the limitations herein contained.
This agreement takes the place of and cancels all other agreements, whether written or verbal.
IN WITNESS WHEREOF, said parties have hereunto set their hands and seals the day and year first above written.
LORENZO C. DILKS,
GEORGE A. FULLER COMPANY,
By PAUL STARRETT, President.
During 1920 the George A. Fuller Co. completed the construction of the eight boats known as Hulls 1446 to 1453, inclusive, in accordance *648 with the terms of its contract with the Shipping Board. The boats were delivered to the Shipping Board in 1920.
As work progressed on the vessels the petitioner received reports of the cost of construction from the bookkeeper and entered the totals of such costs on separate cost sheets, each one showing the cost of an individual vessel. Upon the completion of the vessel the sheet showed a total figure which was designed "estimated final cost total." These estimated costs of the 8 boats, the dates*2359 of delivery of each boat, the sales prices, and the estimated profits made on each boat before any charges on account of distributions to Dilks, Starrett, or other employees, were as follows:
| Name of boat | Number | Date delivered | Sale price | Cost | Profit per boat |
| Cranford | 1,446 | Jan. 17, 1920 | $1,944,000 | $1,726,465 | $217,535 |
| City of Omaha | 1,447 | Mar. 12, 1920 | 1,944,000 | 1,692,794 | 251,206 |
| Winston-Salem | 1,449 | Apr. 26, 1920 | 1,944,000 | 1,588,277 | 355,723 |
| City of Joliet | 1,448 | May 25, 1920 | 1,944,000 | 1,751,167 | 193,833 |
| Nemaha | 1,450 | July 13, 1920 | 1,944,000 | 1,542,392 | 401,068 |
| City of Fort Worth | 1,451 | Sept. 2, 1920 | 1,944,000 | 1,443,278 | 500,722 |
| Huybert | 1,452 | Sept. 27, 1920 | 1,944,000 | 1,437,622 | 506,378 |
| Syros | 1,453 | Nov. 10, 1920 | 1,944,000 | 1,462,888 | 481,112 |
In August, 1920, the George A. Fuller Co. entered into a contract with the Eagle Oil Transport Co. for the construction and sale of two oil tankers at a price of $1,820,000 per boat. The bulk of the material and parts used in the construction of these boats consisted of the supplies and material taken over by the George A. Fuller Co. at the time it made its contract with the*2360 Shipping Board. These boats were delivered in February and March of 1921. The cost of these boats was $1,997,652 and $1,827,800, respectively. Losses were sustained on these boats in the amounts of $177,652 and $7,800, or a total of $185,452.
The George A. Fuller Co. is a corporation engaged principally in building construction. Its construction contracts usually cover a long term. It had adopted the practice of entering on its books the proportion of total profit earned each year which the amount of completed work bore to the total. To that end it kept accurate costs of all work, monthly computations being made of the progress of the work.
At December 31, 1920, the George A. Fuller Co. set up on its books and took into its accounts an estimated profit of $700,000 on account of the eight Government boats completed and delivered. This was arrived at by taking as a profit $100,000 on each boat with the exception of Hull 1453, on which no profit was taken.
*649 During the latter part of 1921, the shipyard and the unused material remaining was sold for a sum in excess of $300,000. The final payment of $37,641.65 on account of this sale was not made until March 31, 1922.
*2361 During the year 1920 the George A. Fuller Co. paid Dilks various sums in addition to his annual compensation of $20,000. These sums, according to the testimony of Dilks, amounted to $74,703.94. According to the testimony of B. M. Fellows, treasurer of George A. Fuller Co., however, the amount shown on the books of the George A. Fuller Co. as having been advanced to the petitioner during the year 1920 was $72,766.88. This sum was carried by the company as an account receivable.
In the personal account of Lorenzo C. Dilks, as kept by the George A. Fuller Co., it is shown that by May, 1921, there was a debit balance to his account of $82,446.02, representing amounts advanced to Dilks. Between December 31, 1920, and May 1, 1921, there was advanced to the petitioner over and above his salary an amount of $9,679.14. This sum is included in the amount of $82,446.02 shown on May 1, 1921, as due from Dilks to the company. On December 30, 1921, the company credited to Dilks' account the sum of $87,500.
Dilks kept his books and filed his returns on a cash receipts and disbursements basis. For the year 1920 he did not include in the return any part of the advances received over*2362 and above his salary.
In his return for the year 1921 the petitioner did not include as incme any amounts received from the George A. Fuller Co. in excess of $20,000 salary, but attached to the return a statement reading: "During the year 1921 I received from the George A. Fuller Company the sum of $74,703.94 as a gratuity, and I am informed that the company is reporting it as such."
On November 23, 1921, the George A. Fuller Co. filed an amended return for its subsidiary, the United States Realty & Improvement Co., which contains the following statement:
During the years 1919 and 1920 the George A. Fuller Company made certain payments to its officers over and above their regular yearly compensation which payments wre treated as expense in the George A. Fuller Company's part of the Consolidated Return of the U.S. Realty and Improvement Company. This deduction made by the Company was evidently in error inasmuch as the officers of the George A. Fuller Company understood that the amounts received wee not paid as compensation for services rendered during these taxable years and therefore did not include them in their personal income tax returns. The amounts were clearly deducted*2363 in error as they were not ordinary and necessary expenses of the taxable years. Upon discovering that this matter had been erroneously treated in the Corporation's Income Tax Returns, the Directors of the George A. Fuller Company held a meeting at which the original *650 intention was set forth in the minutes and it was ordered that amended returns be made and the correct amount of tax due be paid.
Reference to the statements attached to the individual income tax returns of the officers will show that these payments were not considered as having been made for services rendered during these taxable years and it was not the officers' intention that they be deducted in the Corporation's tax return as they were not proper deductions. Amended return is herewith submitted, together with check for amount of tax due.
During the life of the contract set forth above and while the work was being done the George A. Fuller Co. maintained a bank account at Wilmington, N.C., where the construction was in progress. Petitioner as an officer of such company had authority to write checks on such account, which was not overdrawn at any time during the year 1920, or later.
In the year*2364 1922 petitioner received the amount of $44,743.53 as part of his compensation under the contract set forth above. In his income-tax return for that year he designated such amount as a gratuity from the George A. Fuller Construction Co. and did not include it in his gross income. Upon audit of the return respondent added such amount to petitioner's income, made certain other adjustments, and determined the deficiency here in controversy.
OPINION.
LANSDON: The petitioner contends that the amount of $44,743.53, which he received in 1922, and which the respondent proposes to include in his gross income for that year, was constructively received in 1920. This contention is based on the fact that petitoiner was in charge of the construction and funds of the George A. Fuller Co., that profits on construction under the contract could be and were estimated monthly, and that at any time he could have paid himself the amounts due him under the contract. We think our decision in , in which we held that petitioner's compensation under the contract could not be determined in 1920, disposes of this claim. The petitioner reported his income*2365 on the cash receipts and disbursements basis. There is no convincing evidence that the amount of $44,743.53 was at his command or available for his use prior to the date of its receipt in the taxable year. On this issue the determination of the respondent is approved.
At the hearing counsel for petitioner abandoned his second allegation of error.
Decision will be entered for the respondent.