Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 70-67

1970-1 C.B. 117

IRS Headnote

An architect is not entitled to report income from contracts extending over more than one year on the completed contract basis; G.C.M. 7998 superseded.

Full Text

Rev. Rul. 70-67 /1/

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulation, the position set forth in G.C.M. 7998, C.B. IX-2, 206, (1930).

The question presented is whether the taxpayer, an architect, is entitled to report income from his contracts as an architect on the completed contract basis under the provisions of section 451 of the Internal Revenue Code of 1954.

The taxpayer's business includes drawing of plans to be used in the construction of buildings and furnishing of the necessary supervision to secure the following of such plans by the builder. The taxpayer, as an architect, does no building or constructing. He is engaged to a substantial extent as an architect for buildings taking more than one year to construct. Under his contracts, drafting and supervisory services are required for periods extending over more than one year. Under the contracts the taxpayer receives 60 percent of the fee upon the completion of the drawings, which includes the specifications and general working drawing, exclusive of details. Usually, at the time that this 60 percent of the fee is received less than 60 percent of the cost allocable to such contracts has been paid or incurred.

Section 1.451-3 of the Income Tax Regulations provides, in pertinent part, that income from long-term contracts (which means building, installation, or construction contracts covering a period in excess of one year from the date of execution of the contract to the date on which the contract is finally completed and accepted), determined in a manner consistent with the nature and terms of the contract, may be included in gross income in accordance with certain methods, provided such method clearly reflects income. One of the two methods mentioned is the completed contract method. The completed contract method as set forth in section 1.451-3(b)(2) of the regulations provides that gross income derived from long-term contracts may be reported for the taxable year in which the contract is finally completed and accepted.

In the instant case the taxpayer does not build or construct anything, but simply draws the plans and supervises the work of construction insofar as necessary. The person who has the construction contract is the building contractor. The work done by the taxpayer is not building or construction work. The work done by the taxpayer is in the nature of personal service.

One of the reasons why permission to report on a completed contract basis is given in the case of building, installation, and construction contracts is the fact that there are changes in the price of articles to be used, losses and increased cost due to strikes, weather, etc., penalties for delay, and unexpected difficulties in laying foundations which makes it impossible for any construction contractor, no matter how carefully he may estimate, to tell with any certainty whether he has derived a gain or sustained a loss until a particular contract is completed. This situation, however, does not apply to the taxpayer in the instant case. The architect is not affected by the foregoing problems affecting the contractor. As the contracts in the instant case only involve the drawing of plans and the supervision of construction to accord therewith, it cannot be held that the taxpayer's income was derived from building, installation, or construction contracts within the meaning of section 1.451-3 of the regulations.

Accordingly, the taxpayer, in the instant case, is not entitled to report his income as an architect on the completed contract basis under the provisions of section 1.451-3 of the regulations.

G.C.M. 7998 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

/1/ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.