Masonry Magazine April 1969 Page. 23
Taxes
(Continued from page 11) even though it had outstanding claims for extras, changes, changed conditions and delays.
The Tax Court pointed out that while claims for extras, changes, changed conditions are not uncommon in construction contracts, such claims are not part of the original contract work. It was this court's opinion that the purpose of the completed contract method is best served by closing the contract in the year when work is completed and accepted, and accruing in such year all contract income and settled claims, and deferring disputed and contingent claims until later years when the claims are settled and payments therefor, if any, can be determined with reasonable accuracy. Thus, an amount ($192,000) withheld by the government for possible liquidated damages for delay in completing one of the contracts was accruable as income to the corporation in the year of completion of the contract as there was no dispute that the amount had been earned by the taxpayer. On the other hand, any disputed or contingent claims should be accrued as income in the year in which they are settled rather than in the year of the completion and acceptance of the contract work. A. S. Wikstrom, Inc. v. Commissioner, T.C.Memo 1969-32.
A construction contractor asked advice from the IRS regarding the taxable year in which to report an amount received by the contractor under the following circumstances.
The construction company, which used a cash method of accounting, entered into a contract with a city housing authority. The contract provided that 10% of the construction payments should be withheld until final acceptance and completion of all work covered by the contract. However, the company was permitted to substitute for the retained funds government bonds valued at not less than 110% of the retained percentage. The construction company wished to know when to report receipt of the funds so secured.
The IRS advised that the requirement that the taxpayer substitute securities in place of the withheld amounts did not detract from the taxpayer's unrestricted dominion over the funds received. Therefore, the portion of the contract price that was withheld by the housing authority pending final acceptance of the construction work should be included in gross income for the taxable year in which received, even though the taxpayer was required to deposit government obligations in order to secure receipt of such amount prior to completion of the contract. Rev. Rul. 69-92.
Somewhat on the same subject, the Tax Court had to rule on the method of reporting a 10% retainage from partial payments to a company's subcontractors. The taxpayer was a highway construction firm and used the accrual method of accounting. In its contract with the State, the taxpayer was entitled to monthly payments for work completed less 10% retainage which was kept by the State until final acceptance of the entire work.
In its contracts with its subcontractors, the taxpayer followed the same procedure for payments. In its income tax returns, the construction company did not report the amounts withheld by the State as retainage until the year in which the work was accepted as completed. However, it did deduct on its returns for the amounts withheld by it from subcontractors as retainage although such amounts were not paid until the work was accepted by the State.
The Tax Court ruled that the taxpayer could not deduct such amounts retained until the State had given final approval of the work because until that time all events had not occurred which rendered the taxpayer's obligation to pay them fixed and certain. Shepherd Construction Co., Inc. v. Commissioner, 51 T.C. -No. 88.
AVERAGE DEDUCTIONS
While every taxpayer must be able to substantiate all deductions he takes on his income tax return, it may be of some interest to see how you stack up against a list of average 1967 itemized deductions. Commerce Clearing House prepared the following table based on some 28.1 million taxpayers who itemized their deductions in 1967.
Average Average Adjusted Average Itemized
Gross Income Gross Income Deductions
$5,000-10,000 $ 7,369 $ 1,521
10,000-15,000 11,982 2,115
15,000-20,000 16,967 2,729
20,000-50,000 28,131 4,158
50,000-100,000 65,994 9,462
100,000-200,000 131,738 21,651
Profit-Sharing Trusts
Whether a pension, profit-sharing, stock-bonus plan, etc. is discriminatory seems to be one of the main problems that confronts employers in trying to get the IRS to approve their plans. Section 401 of the Code provides that a trust must not only meet certain coverage requirements but the plan must be one where the contributions or benefits of the plan "do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising work of other employees, or highly compensated employees." Two recent cases involved plans covering salaried employees only. In both cases the plans were found to be discriminatory.
In the first case, the taxpayer was a heavy construction company. It had adopted a profit sharing plan limited to its salaried employees. The company had only three salaried employees, two of whom were highly paid and were officers and shareholders. The third covered employee was not regarded as highly paid nor was he an officer or shareholder. The taxpayer had 37 other regular employees who were paid hourly rates under union agreements. Of these 37 employees, 26 were covered by pension plans of two labor unions to which the taxpayer paid contributions. The remaining 11 regular employees were not members of the unions and were not covered by any pension plan.
The court pointed out that while the law allows the salaried-only classification to be used, it is not to be used if its effects are to discriminate in favor of the prohibited group. The taxpayer's plan was found to be discriminatory since it covered its two shareholders who were its officers; each one was highly paid in comparison with the average annual wages paid to the hourly-paid employees. Further, the court held that the inclusion of one employee, whose rate of annual salary was commensurate with the annual wages of several of the hourly paid employees, did not help to remove the discriminatory character of the plan. Therefore, it was held that the plan did not qualify and the taxpayer's contributions to the plan were not allowable deductions. Peter F. Mitchell Corp. v. Commissioner, Sept. 1968, T. C. Memo 209.
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