*1945 Where a contractor who kept his books of account on the cash receipts and disbursements basis, constructed public works on a unit basis, being paid 90 per cent of the contract price upon the completion of the work, the balance being retained in accordance with a city ordinance for a period of five days to guarantee the maintenance of the construction, held, that the amounts so retained are not includable in income until the year in which paid. Cleveland Trinidad Paving Co. et al.,20 B.T.A. 772">20 B.T.A. 772, followed.
*9 In this proceeding the petitioner seeks a redetermination of his income taxes for the calendar years 1924 to 1926, inclusive, for which years the respondent has determined deficiencies in the amounts of $14,693.55, $4,848.24, and $2,917.03, respectively. The petitioner alleges that the respondent erred in including in his gross income for the respective years under consideration certain sums of money retained by the city of Columbus, Ohio, for a period of five years as a guaranty for the maintenance of street improvements constructed*1946 by the petitioner.
FINDINGS OF FACT.
The petitioner is an individual, with his principal office and residence in Columbus, Ohio. For approximately twenty-five years he has been engaged in the business of street contracting in that city. During the years 1924, 1925, and 1926 the petitioner completed work on a large number of contracts for which he received compensation in the gross amounts specified in the contracts, less amounts representing 10 per cent of the contract price, which percentage was retained by the city, in accordance with the provisions of its established ordinances, as a guaranty. The amounts so retained during each of the years were as follows:
| 1924 | $53,004.98 |
| 1925 | 31,612.31 |
| 1926 | 32,090.47 |
The above amounts were retained by the city pursuant to the terms of the contracts, which provided as follows:
24. Maintenance. All settlements, defects or damages in any portion of the pavement or any derangement in the alignment, and grades of the curbing, before the expiration of five years, for all wearing surfaces, except macadam, and two years for macadam shall be repaired and made good at the contractor's expense and within thirty days after*1947 notice has been given by the Chief Engineer, and all rubbish which may accumulate during and by reason of the work herein provided for, shall be removed by the contractor, and the street left clean and in good condition but the bond for the performance of contract shall not be held to cover the above guaranty.
25. Retention. There shall be retained out of the moneys payable to the Contractor ten per centum of the amount of the contract, the same to be expended in the manner hereinafter provided in making such repairs on the line of the street as the Engineer may deem necessary. Upon the expiration of the said maintenance period provided, the said pavement shall at that time be in good order, the Contractor, upon the production of a certificate from the Chief Engineer, stating that the street is in good condition, shall receive the whole, or such part of the sum last aforesaid, as may remain after the expense of making said repairs in the manner aforesaid, shall have been paid therefrom.
*10 Ordinance 21330 of the city of Columbus, approved June 9, 1903, governing disposal of money withheld from contractors, reads as follows:
SECTION 1. That whenever any portion of*1948 the cost of any improvement shall have been reserved or retained by the City of Columbus, for a given time to indemnify and protect the City against any loss due to lack of fulfillment of contract or negligence on the part of the contractor, or to secure the keeping of such improvement in repair for a stated time, such sum retained shall, upon the payment of the final estimate, be transferred to the Trustees of the Sinking Fund of the city to be by them invested in interest bearing bounds of the City of Columbus, Ohio.
SECTION 2. The interest resulting from said investment shall be paid to the contractor semi-annually, and upon the expiration of the term of guaranty the investment shall by said Trustees be converted into money and paid over to the contractor; provided, however, that no payment of principal or interest shall be made to the contractor by said Trustees except upon a certificate which shall state that the contractor has complied with the terms and conditions of his guaranty.
This certificate shall be signed by the administrative head or heads of the department having the work in charge and if issued by the Board of Public Service shall be countersigned by the City*1949 Engineer.
The contracts entered into by the petitioner and the city of Columbus were all on the unit basis. When a unit was completed an estimate was made by the engineer, the petitioner was paid the agreed value of the unit, less 10 per cent, and no further payments on these retained percentages were made to the petitioner until the expiration of five years and then only in the event that he had kept the street in repair. It was the practice of the petitioner to complete his contract work for each year by the last of November and spend the remainder of the year in repairing construction work installed in prior years. The petitioner keeps his books of account on the cash receipts and disbursements basis. He charges himself with all cash received during the year from all sources and credits himself with all the cash disbursements made during the year. Material was bought for the needs of the contracts, which in the main were completed during the calendar year, relieving petitioner from the need of inventories, which were not kept. Receipts of funds withheld by the city of Columbus were reported as income in the years in which they were received, as was also the interest received*1950 on said funds.
In the income-tax returns filed by the petitioner for the three years here under discussion he did not include as gross income the amounts retained as a guaranty by the city of Columbus in the years in which the contracts were completed, while the respondent has determined that such amounts are required to be included in gross income.
*11 The deficiencies asserted by the Commissioner are based in the main on the addition to petitioner's income of these retained amounts. However, other minor adjustments were made in petitioner's income for each of the taxable years by respondent and these minor adjustments are not in dispute.
OPINION.
BLACK: The respondent asserts that the books of account of the petitioner have continuously been kept and maintained on the completed contract basis and that the amounts representing 10 per cent of the contract prices withheld by the city of Columbus are properly included in the petitioner's taxable income in the year in which the contracts are actually completed, i.e., the year in which the streets became ready for service. From the record it is clear that settlements were made on the unit basis and that the petitioner's*1951 books were kept on the cash receipts and disbursements basis.
The 10 per cent retained by the City of Columbus was neither paid to the taxpayer nor placed at his disposal. Whether these amounts would ever be received depended upon the condition of the work installed five years after its completion.
In , we discussed a similar situation, where a part of the income involved in the proceeding arose under paving contracts with the city of Columbus, Ohio, the same as those involved in the instant case. The essential facts in the instant case and the Cleveland Trinidad Paving Co. case are practically identical, with the exception that the books of account of the Cleveland Trinidad Paving Co. were kept on the accrual basis. We there said:
* * * While the contracts here involved named a contract price for the several paving jobs, petitioners did not have the unqualified right to receive the full amount of such contract price upon completion of the work, as the contracts specifically provided that a portion was to be retained by the several municipalities as a guarantee fund for a specified*1952 period of time. The taxpayer had no unqualified contractual right in the taxable years to demand or receive the amounts withheld pursuant to the contracts. It did not know, and had no way of determining, what portion of the amounts withheld it would ultimately receive. The city government might have found it necessary to spend the entire sum for maintenance and left nothing for the contractor. * * *
and held that amounts withheld by municipalities under paving contracts as funds to guarantee maintenance of the paving for a period of years and which funds the municipalities might themselves expend for maintenance and repairs were not accruable as income to the contractor during the withholding period.
Since , and the cases cited therein are authority for the principle that a taxpayer on the *19 accrual basis is not required to include in income sums to be received in the future where there is a substantial contingency as to the amount to be received or the time of its receipt, it follows that, in the case of a taxpayer reporting on the cash receipts basis, until the expiration of the guarantee period the amount so*1953 withheld is not properly includable in income. Under such conditions, the amounts so withheld have not been received either actually or constructively. Of course any interest received on such withheld amounts should be reported as income in the year when received.
Judgment will be entered under Rule 50.