Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-92

1969-1 C.B. 138

Sec. 451

IRS Headnote

A cash basis taxpayer must include as income in the year received that porton of the contract price withheld pending completion of the contract, even though the taxpayer was required to deposit other property to secure release of the withheld amount.

Full Text

Rev. Rul. 69-92

Advice has been requested regarding the taxable year of inclusion in gross income of an amount received by a construction contractor under the circumstances described below.

The taxpayer, a construction company that uses the cash receipts and disbursements method of accounting, entered into a construction contract with a city housing authority. The contract provides that 10 percent of the construction payments due to the taxpayer shall be withheld by the authority until final acceptance and completion of all work covered by the contract. The authority, however, if it deems the performance of the taxpayer to be satisfactory, may permit the taxpayer to substitute for the retained funds government bonds having a market value of not less than 110 percent of the amount of the retained percentage. The securities so transferred may be retained and applied by the authority for the same purposes for which the authority may retain and apply the funds for which the securities were substituted. In the event the authority deems it necessary to use or apply any of the retained funds, the taxpayer has the option of returning the money to the authority or of allowing the authority to liquidate the securities.

Section 451(a) of the Internal Revenue Code of 1954 provides the general rule that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Section 1.451-1 of the Income Tax Regulations provides in part that under the cash receipts and disbursements method of accounting items representing gross income are includible when actually or constructively received.

The filing of a bond as security in order to obtain receipt of funds places no restriction on the use of the monies received. See Commissioner v. Brooklyn Union Gas Co., 62 F. 2d 505 (1933), affirming 22 B.T.A. 507 (1931), acquiescence, C.B. 1955-1, 4.

Revenue Ruling 55-137, C.B. 1955-1, 215, holds that possible excess revenues collected by an electric power company pending settlement by court order of the question of a disputed increase in service rates, are includible in gross income for the taxable years in which such excess revenues were received, even though amounts equivalent to the excess were deposited in a special bank account subject to the joint control of the company and a bonding company. The setting up of a separate bank account to receive amounts equalling the excess revenues did not differ in legal effect from the depositing of any other assets of the company as collateral to secure the bond, nor interfere with the company's exercise of the power of absolute dominion over the full amounts collected. Similarly, in the instant case, the requirement that the taxpayer substitute securities in place of the withheld amounts does not detract from the taxpayer's unrestricted dominion over the funds received.

Accordingly, in the instant case, the portion of the contract price that may be withheld by the city housing authority pending final acceptance and completion of construction work performed by the taxpayer is includible in gross income for the taxable year in which received, even though the taxpayer is required to deposit government obligations with the housing authority in order to secure receipt of such amount prior to completion of the contract.