*2684 The petitioner was engaged during the year 1917 in constructing aeroplane hangars and other buildings for the United States Government. All expenses of operation were paid out of borrowed money and current earnings. Held, that the petitioner is entitled to have his excess-profits tax computed under section 209, of the Revenue Act of 1917.
*16 A deficiency has been found for the year 1917 in the amount of $7,405.81. Respondent has computed the petitioner's excess-profits tax under section 210 of the Revenue Act of 1917, whereas the petitioner contends that he is entitled to a computation under section 209. There is no other issue of fact or law.
FINDINGS OF FACT.
The petitioner is an individual residing at Pensacola, Fla. During the year 1917 he secured certain contracts for the construction of aircraft hangars, shops, and other buildings, for the United States Government. Some of these contracts were described as lump-sum contracts, that is, where the petitioner furnished labor and materials and completed a certain piece of work for*2685 a specified lump sum, and others were described as cost-plus contracts, where the Government paid all of the cost of construction, including lumber and materials, plus a certain per cent to the petitioner for his services.
Before submitting his bids for the contracts the petitioner, who had practically no funds of his own, had obtained a promise from J. S. Reese, president of the Citizens & Peoples National Bank of Pensacola, that the latter would furnish the money necessary to carry on the work if the contracts were secured. Subsequent to the securing of the contracts Reese made the petitioner a loan of $25,000. The petitioner gave his personal notes for the amount of the loan, one for $5,000, dated May 30, 1917, payable 90 days from date, two for $5,000, dated May 30, 1917, payable 9 months from date, and one for $10,000, dated May 30, 1917, payable 25 days from date. The notes all bore interest at 8 per cent and were made payable to J. S. Reese personally. As a bonus for the loan the petitioner gave Reese two additional notes for $5,000 each, dated May 30, 1917, payable 9 months from date without interest. The latter two notes were endorsed by the petitioner's superintendent, *2686 James W. Eley. None of the others was secured by collateral or otherwise.
*17 The petitioner owned no personal property of consequence. He owned a house and lot at Pensacola, Fla., which he and his wife occupied for residential purposes during the year 1917, and an additional piece of real estate nearby, of the value of approximately $500. He owned no other real estate. His wife owned personal property of the value of several hundred dollars, some real estate in North Carolina, and an undivided half interest in 312 acres of land in California, which she had inherited from her parents. None of these properties was pledged as security for the aforesaid loan. The petitioner had known Reese personally for a number of years and had previously kept an account at the bank of which he was president.
The petitioner began work upon the contracts in April or May of 1917. At that time he had no equipment or material except a few small tools, such as wheelbarrows, shovels, etc., of a value not in excess of $250. Under the terms of the contracts the Government paid a certain amount upon delivery of materials at the yard and a certain amount upon completion of the work. The*2687 first payments were made upon the contracts about 15 or 30 days from the date the work was begun. Under the lump-sum contracts 10 per cent of the contract price was withheld until final completion of the contracts. There was so withheld upon the work done during the year 1917, $30,000 or $40,000 that was not paid during the year.
The gross receipts and disbursements for the year 1917 under each of the types of contracts were as follows:
| Cost-plus contracts | Lump-sum contracts | |
| Gross receipts | $393,938.24 | $245,388.52 |
| Disbursements | 363,419.70 | 243,985.08 |
| Profits | 30,518.54 | 8,640.55 |
The petitioner did no other work during the year 1917 and had no income except from the Government contracts. All of the money received upon these contracts was deposited in a single account at petitioner's bank and all disbursements were made out of that account. James W. Eley, the petitioner's superintendent, received a salary of $10 per day plus a certain percentage of earnings amounting to about $5,000 for six months' work. There were three or four foremen who received salaries of $10 per day. Most of the work of construction was done by subcontractors whom the petitioner*2688 employed. During the year 1917 the petitioner withdrew from the business approximately $15,000. In December of 1917 he withdrew $1,050 with which to purchase Liberty bonds. He purchased two steam shovels at a cost of approximately $2,000. In his income-tax return *18 for 1917 the petitioner did not report any income from the lumpsum contracts. The income reported from the cost-plus contracts was computed from the vouchers submitted by the Government.
OPINION.
SMITH: Petitioner claims that he is entitled to have his excessprofits tax for the year 1917 computed under section 209 of the Revenue Act of 1917, which imposes a flat-rate tax of 8 per cent upon a trade or business having "no invested capital or not more than a nom nal capital." Respondent has determined that the petitioner's trade or business is one which requires more than a nominal amount of capital and has computed the excess-profits tax under the provisions of section 210 of the Act. The sections referred to read as follows:
SEC. 209. That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition*2689 to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.
SEC. 210. That if the Secretary of the Treasury is unable in any case satisfactorily to determine the invested capital, the amount of the deduction shall be the sum of (1) an amount equal to the same proportion of the net income of the trade or business received during the taxable year as the proportion which the average deduction (determined in the same manner as provided in section two hundred and three, without including the $3,000 or $6,000 therein referred to) for the same calendar year of representative corporations, partnerships, and individuals, engaged in a like or similar trade or business, bears to the total net income of the trade or business received by such corporations, partnerships, and individuals, plus (2) in the case of a domestic corporation*2690 $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000.
On beginning the business in 1917 the petitioner had no money except borrowed money and no capital or materials except a few small tools of negligible value. The contracts with the Government had been obtained upon open bids without cost. It is clear that there was no invested capital employed in the business as the term is defined in section 207 of the 1917 Act. See ; ; . It is admitted that the $25,000 of borrowed money was used in the business and was perhaps necessary to its existence in the beginning. In , the court found that a corporation which had borrowed all of the money used to purchase and operate a mine had *19 no invested capital and was, therefore, subject to be taxed under section 209. In *2691 , it was held that a partnership engaged in buying and selling timber and lumber products which conducted its business entirely on borrowed money in considerable amount had "nominal capital" but not "invested capital" and was entitled to have its excess-profits tax computed under section 209. The facts in these cases are not distinguishable in any material respect from those in the case at bar. Those businesses can not be said to require any less use of capital than the one in which the petitioner was engaged.
The petitioner's total expenditures for the year were $607,404.78. He was not required to complete his contracts before receiving any remuneration from the Government. A part of the contract price was paid as soon as the material was delivered upon the job and another part paid when the work was completed. These funds, together with the $25,000 borrowed money, the petitioner kept in a general account out of which all the expenses of operation were paid. In , a corporation conducting an amusement park had a capital stock of $2,000. *2692 Gross expenditures of approximately $150,000 for the year were made out of current receipts. It had a net income for the taxable year of $30,000. The court held that the corporation had not more than a nominal capital of any kind and was subject to excess-profits tax at the flat rate of 8 per cent under section 209. With respect to the expenditures made by the corporation out of current earnings, the court said:
In a sense, of course, expenditures may be said to be capital, but not in the sense in which the word is employed in any taxing laws, and not in the sense which is commonly ascribed to the word. The sum total of expenditures has usually a direct relation to the volume of business done; but it does not necessarily bear any relation to capital, because a concern with a small, although ample, capital may do a large business in one line, when the same volume of business, measured in money, may require a much larger capital in another line. To call the aggregate sum of all the money employed in buying and selling capital, when the same dollar may have been used any number of times, is to make "ducks and drakes" of words.
*2693 See also ; ; ; .
The weight of legal authority is that in a case where no invested capital or only a nominal capital is actually invested in the business, even though the business is conducted upon a financial plan which calls for the use of a large amount of money, as was the case here, there can not be set up a theoretical capital for the purpose of effecting *20 an harmonious application of the taxing statutes. We think that the petitioner has proven his right to have his excess-profits tax for the year 1917 computed at the flat rate of 8 per cent, as provided in section 209 of the Act.
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by LITTLETON, TRUSSELL, and LOVE.