Nat'l Elec. Welding Machs. Co. v. Stimson , 10 T.C. 49 ( 1948 )

National Electric Welding Machines Co., a Michigan Corporation, Petitioner, v. Henry L. Stimson, Secretary for the War Department, and Robert P. Patterson, Under Secretary for the War Department, Respondents

Nat'l Elec. Welding Machs. Co. v. Stimson

Docket No. 10-R.

United States Tax Court

10 T.C. 49; 1948 U.S. Tax Ct. LEXIS 293;

January 13, 1948, Promulgated

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Decision will be entered under Rule 50.

1. Renegotiation Act amendment of July 1, 1943, expressly including contracts with Defense Plant Corporation, held to have retroactive force to date of original act rendering renegotiable petitioner's contracts with Defense Plant Corporation paid for after date of original act but prior to amendment.

2. Such retroactive provisions so applied to contracts paid for in full prior to the date of the amendment (but after date of original Renegotiation Act) held not unconstitutional. Stein Brothers Manufacturing Co., 7 T. C. 863; Ring Construction Corporation, 8 T.C. 1070">8 T. C. 1070.

3. Petitioner's contracts for sale of welding machines to civilian producers having prime contracts subject to renegotiation, held renegotiable as "subcontracts" for articles "required" for performance of prime contracts within the meaning of the Renegotiation Act.

4. Petitioner's profits from sales of machines to commercial producers having prime contracts subject to renegotiation held not to be proportionately exempt from the renegotiation statute as a matter of law by reason of possible future use of machines on civilian production after termination of war period.

Selwyn A. Lambert, Esq., and William M. Aiken, Esq., for the petitioner.

Julian R. Wilheim, Esq., and Robert H. Winn, Esq., for the respondents.

Opper, Judge. Van Fossan and Hill, JJ., concur only in the result.

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OPPER

Petitioner, by this proceeding, seeks a redetermination of an order of the Under Secretary of War upon renegotiation of its war contracts and subcontracts that $ 140,000 of petitioner's profits for its fiscal year ended October 31, 1942, were excessive. Respondents in their answer now urge that the amount of excessive profits be held to be not less than $ 185,000.

The contested issues relate to the right to renegotiate contracts made with the Defense Plant Corporation, the retroactive application of certain provisions of the Renegotiation Act, and the constitutionality thereof; the characterization of certain of the sales as "subcontracts"; and the allocation between renegotiable and nonrenegotiable business of profits from sales of machines used by the vendees for manufacture of articles both with and without war-end use.

A substantial part of the record was covered by stipulations. These were supplemented by evidence adduced at the hearing.

FINDINGS OF FACT.

All of the stipulated facts are hereby found accordingly.

Petitioner was organized in 1933 and operated until the fall of 1936 with rather limited capital. It incorporated in 1936 under the laws of the State of Michigan and took in $ 380,000 of public capital. Its principal place of business is in Bay City, Michigan. At all times material to this proceeding petitioner has maintained its books and records on an accrual basis and for a fiscal year ending October 31. As petitioner's sales were invoiced to its customers, the respective amounts thereof were accrued on petitioner's books and records.

Prior to, during, and since the year here involved, petitioner's business has been the manufacture and sale of resistance welding machines and parts for them. These machines are spot welders, flash welders, seam welders, projection welders, and butt welders. They are used in the fabrication of nearly all kinds of light metal products. They are high production machines, useful mainly in mass production operations.

For its fiscal years ended October 31, 1937, through 1941, petitioner had net sales and net profits as follows:

Fiscal year ended Oct. 31 --	Net sales	Net profits
1937	$ 703,710.68	$ 42,536.13
1938	529,606.33	23,785.45
1939	726,060.40	79,218.92
1940	1,228,992.79	210,581.31
1941	1,248,356.12	227,336.53

For its fiscal years ended October 31, 1942 through 1946, petitioner had net sales as follows:

1942	$ 1,925,343.60
1943	1,816,463.15
1944	1,747,345.79
1946	2,103,634.99
1945	1,723,157.63

Total costs attributable to the 1942 net sales were $ 1,480,339.04, and the total profit derived therefrom was $ 445,004.56.

During its fiscal year from November 1, 1941, to October 31, 1942, inclusive, the maximum total amounts of petitioner's sales, costs, and profits, respectively, which could be subject to renegotiation pursuant to the Renegotiation Act of 1942 as amended, are:

Sales	$ 1,501,808.08
Costs	1,154,664.45
Profits	347,143.63

The respective amounts of petitioner's sales, costs, and profits, set forth above are comprised of the following items:

	Sales	Costs	Profits
(a) Direct sales to the War and
Navy Departments	$ 267,238.35	$ 205,471.06	$ 61,767.29
(b) Sales to private corporations	726,069.22	558,235.85	167,833.37
(c) Direct sales to Defense Plant
Corporation and/or to agents
acting by and in behalf of
Defense Plant Corporation	508,500.51	390,957.54	117,542.97
Total	1,501,808.08	1,154,664.45	347,143.63

All the above mentioned sales to Defense Plant Corporation (hereinafter sometimes called DPC) or agents acting in its behalf were made under contracts which were not finally paid for prior to April 28, 1942, but were completed and finally paid for prior to July 1, 1943.

DPC was a governmental corporation created by the Reconstruction Finance Corporation (hereinafter called RFC) on October 22, 1940, pursuant to section 5 (d) of the RFC Act, as amended. DPC's stock was wholly owned by RFC. DPC was dissolved on June 30, 1945, and its duties, functions, powers, and assets were transferred to RFC.

Pursuant to its corporate powers, DPC built, equipped, and operated various plants for the production of war materials. Such plants were leased by DPC to various private corporations and other persons. The lease agreement and all agreements, documents, and papers pertaining to it were called a "Plancor," which was designated by an assigned number. All of petitioner's DPC sales were made in connection with a Plancor. All Plancors relating to petitioner's DPC sales of machinery made during its fiscal year ended October 31, 1942, originated at the request of either the War or Navy Department.

Plancor No. 957, in which Solar Aircraft Co. is the lessee, originated at the War Department's request, and is typical of the handling of other DPC projects. A letter dated April 23, 1942, generally termed a "take-out letter," was received by DPC from the War Department. The letter recited that in consideration of the execution by DPC and Solar of an agreement covering the acquisition and establishment by DPC, and the lease to Solar of certain plant facilities deemed by the War Department to be necessary in the interest of national defense and essential to enable Solar to produce and deliver exhaust manifolds for the war program, the War Department agreed to pay DPC, on evidence of the execution of the lease agreement, the sum of $ 320,018, and if Congress thereafter authorized appropriations, it would reimburse DPC for the unrecovered balance of the expenditures made by it in accordance with the agreement, with interest at 1 1/2 per cent. It was said to be understood that if the total expenditures made by DPC were less than the $ 320,018, DPC would refund the difference; that if and when DPC was reimbursed in full for the amounts expended at the request of the Department it would transfer its right, title, and interest to the facilities to the United States Government, subject to the rights of Solar as might then exist under the agreement between Solar and DPC; that except for the lease to Solar, DPC would not sell or otherwise dispose of the facilities without the written consent of the War Department; that all rental received by DPC under the agreement with Solar should be applied to the unrecovered balance of expenditures, and in the event Solar, in accordance with the agreement, exercised its option to purchase any or all of the property, DPC should be entitled to reimburse itself in full out of the purchase price, the War Department to be entitled to any excess; that the War Department should have a lien on the property to the extent of any payment it made to DPC thereunder; that the agreement with Solar should not be amended or the amount expended by DPC for the acquisition and establishment of the facilities exceed $ 1,448,044 without the written consent of the War Department. The contract also recited that pursuant to the requirement of Executive Order No. 9001, DPC warranted that it had not employed any person to solicit this contract upon any agreement for a commission or contingent fee.

The War Department did not make any advances to DPC on account of Plancor No. 957, except the original advance mentioned above and those advances provided for in amendments to the take-out letter, which amendments were dated July 17, 1944, and February 1, 1945. In the letter of July 17, 1944, it appears that DPC was to make additional expenditures in connection with the Solar facilities in the maximum amount of $ 167,443.04, and the War Department was to pay DPC the sum of $ 47,826.

It further appears from the letter dated February 1, 1945, that further additional facilities to be acquired and established by DPC and leased to Solar in the maximum amount of $ 66,123 were to be paid by DPC, the War Department paying DPC $ 20,702.

Except for similar partial advances of the total cost of each Plancor, the Departments did not advance funds to DPC on any Plancor, and DPC did not transfer to the Departments its title to any property acquired in connection with the Plancors.

Prior to January 24, 1947, petitioner had no knowledge of the various take-out letters from the Departments to DPC in connection with the respective Plancors covering the $ 508,500.51 of sales, and it did not have any knowledge of the terms of the agreements between DPC and the various lessees in the Plancors.

Some DPC contracts were voluntarily renegotiated, but unilateral renegotiation excluded contracts with RFC corporations, including DPC. Some closed cases have later had DPC profits scrutinized usually by the RFC Price Adjustment Board.

The parties have agreed that the $ 726,069.22 of sales to private corporations, to the extent of $ 529,806.67, are renegotiable as subcontracts under the Renegotiation Act of 1942, as amended, unless constitutionally exempt or unless they are held to be nonrenegotiable under petitioner's contention in paragraph 7 (i) of its amended petition, that respondents:

* * * erred in determining to be 100% renegotiable under the Act * * * sales of complete welding machines, capable of years of service and use, competitively sold at peacetime prices under a price ceiling to civilian peacetime customers who used such equipment, to variable extents, for only a part of the time in which such equipment is used in the performance of contracts with the Departments and subcontracts as contrasted with nonrenegotiable commercial operations in which such equipment is used for the balance of the time, and who will continue to use such equipment in their regular peacetime activities for years to come after completion or termination of the contracts with the Departments and subcontracts.

Or, under petitioner's contention in paragraph 7 (h) of its amended petition, that respondents:

* * * erred in determining to be renegotiable $ 726,069.29 [sic] of sales of complete welding machines, and parts and accessories for welding machines, competitively sold to civilian peacetime customers as being subcontracts, purchase orders or agreements to "make or furnish any article required for the performance of any other contract or subcontract" and hence included within the terms of and subject to renegotiation under the Act.

Petitioner's sales of $ 726,069.22 were comprised of $ 606,238.67 of complete welding machines, including $ 76,432 which were not adaptable to peacetime use, and $ 119,830.55 of parts and accessories for welding machines.

Of the $ 726,069.22 paid after April 28, 1942, for machines and parts sold to private corporations, $ 512,269.89 had been finally paid prior to October 21, 1942.

Petitioner's sales to private corporations made during the year here in question were sales under contracts with civilian customers engaged in war production for one of the "Departments." The contracts were for specified materials for use in connection with identified contracts or subcontracts subject to renegotiation. Petitioner's welding machines and parts permitted its purchasers to achieve high production. Competitive machines did not match petitioner's output. The use of petitioner's machines was advantageous. The machines contributed directly to the production of war materials for the armed forces.

Of all the complete welding machines of all types and descriptions sold by petitioner during its fiscal year ended October 31, 1942, mat welders accounted for a total of $ 241,251.96.

Mat welders were machines especially made by petitioner to be used in making emergency landing field mats and ship gratings. Petitioner had never made any such machines prior to the war. These mat welders were sold by petitioner during the fiscal year involved herein to private corporations which had prime contracts with the War Department and the Navy Department for emergency landing field mats and for ship gratings.

These mat welders were used by the vendees on work under prime contracts with the War and Navy Departments to the extent of 100 per cent for the three and a half years ended December 31, 1945.

Petitioner's mat welders were sold for $ 35,000 each. Their average life was approximately twenty years, including the aforesaid three and a half years ended December 31, 1945.

These mat welders can be adapted to such peacetime work as making grating for skylights, walks, catwalks, and ship grating. To make such peacetime adaptations, the changes in the mat welders would cost approximately from 15 per cent to 25 per cent of the original cost of $ 35,000.

Of all the complete welding machines of all types and descriptions sold by petitioner during its fiscal year ended October 31, 1942, spot welders, flash welders, seam welders, projection welders, and butt welders, exclusive of mat welders, accounted for the total of $ 288,554.71.

These spot welders, flash welders, seam welders, projection welders, and butt welders so sold by petitioner fall into two categories:

(a) Those upon which the engineering work had been done and which essentially conformed to the standards of the Resistance Welder Manufacturers Association and which can be used without change on war and peacetime work.

(b) Those upon which petitioner originally had to do some engineering work and as to which there are no Resistance Welder Manufacturers Association standards and which can be used on war and peacetime work with little or no changes.

The foregoing spot welders, flash welders, seam welders, projection welders, and butt welders so sold by petitioner during its fiscal year ended October 31, 1942, and totaling $ 288,554.71 as set out above, were used by the vendees on work under prime contracts with the War and Navy Departments to the extent of 75 per cent of the three and a half years ended December 31, 1945; to the extent of 25 per cent of such time they were used on commercial work that was not renegotiable under the Renegotiation Act of 1942, as amended.

The average life of these spot welders, flash welders, seam welders, projection welders, and butt welders is approximately twenty years, inclusive of the aforesaid three and a half years.

Private corporations to which petitioner sold machines and parts during the fiscal year here involved were petitioner's ordinary peacetime customers or corporations engaged in the same types of manufacture as petitioner's ordinary peacetime customers.

The parties have agreed that if we should find that the maximum total amounts of sales, costs, and profits, respectively, set forth above, are subject to renegotiation, pursuant to the Renegotiation Act of 1942, as amended, we shall enter a final order of determination that petitioner realized during its fiscal year from November 1, 1941, to October 31, 1942, inclusive, excessive profits, within the meaning of the Renegotiation Act of 1942, as amended, in the principal amount, before any Federal income tax credit to which petitioner may be entitled under the pertinent provisions of the Renegotiation Act of 1942, as amended, of $ 185,000. The parties have further agreed that if, however, we should find that any single item, or combination of items, is not subject to renegotiation, pursuant to the Renegotiation Act of 1942, as amended, we shall assign to the remaining item, or combination of items which are subject to renegotiation, pursuant to the Renegotiation Act of 1942, as amended, their proportionate part of the aforesaid $ 185,000.

OPINION.

All of the questions involved in determining this controversy as to the excessive character of petitioner's wartime profits under the Renegotiation Act are issues of law. Those we find it necessary to decide are three questions of statutory construction and a related issue dealing with the constitutionality of one of the applicable provisions.

A number of petitioner's contracts were not made directly with a "Department," as that was defined under the Renegotiation Act in its earliest form. ^{*309 The precise language by which DPC contracts were incorporated in the Renegotiation Act was as follows:}

* * * clauses (1) and (2) of subsection (a) of section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942, as amended, are amended to read as follows:

Sec. 403. (a) For the purposes of this section --

1. The term "Department" means the War Department, the Navy Department, the Treasury Department, the Maritime Commission, Defense Plant Corporation, Metals Reserve Company, Defense Supplies Corporation, and Rubber Reserve Company, respectively.

2. In the case of * * * Defense Plant Corporation * * * the term "Secretary" means the board of directors of the * * * corporation.

But Congress did not content itself with that provision. It added a further amendment as subsection (k) of the same section, reading as follows: "(k) All the provisions of this section shall be construed to apply to Defense Plant Corporation * * *."

Among the provisions of section 403 thus made applicable to DPC is the following language in subsection (c) (1):

Whenever, in the opinion of the Secretary of a Department, the profits realized or likely to be realized from any contract with such Department, or from any subcontract thereunder whether or not made by the contractor, may be excessive, the Secretary is authorized and directed to require the contractor or subcontractor to renegotiate the contract price.

the following language in subsection (c) (2):

Upon renegotiation, the Secretary is authorized and directed to eliminate any excessive profits under such contract or subcontract * * *.

and the statement contained in subsection (c) (6) that:

This subsection (c) shall be applicable to all contracts and subcontracts hereafter made and to all contracts and subcontracts heretofore made, whether or not such contracts or subcontracts contain a renegotiation or recapture clause, unless (i) final payment pursuant to such contract or subcontract was made prior to April 28, 1942 * * *. *311 We think it evident that both the structure of the statute and the requirement that legislative language shall be deemed to have had some purpose require the interpretation that the amendment including DPC contracts was intended to be retroactive to the date of the enactment of the original Renegotiation Act. No other reason for the additional language contained in subsection (k) is apparent. If the only purpose to be served had been to include DPC contracts prospectively, that would have been accomplished by the amendment to section 403 (a) (1).

The administrative officers, charged with the enforcement of the provision and who were obviously familiar with its purpose and immediate history, accepted this as the required construction. See Great Northern Railway Co. v. United States, 315 U.S. 262">315 U.S. 262, 275. This appears also from the testimony of Mr. Jesse Jones before the Ways and Means Committee of the House given (September 10, 1943) shortly after the passage of the 1943 amendment. Mr. Jones there stated:

* * * The amendment suggested for use, in the event the Congress wished to make subject to renegotiations the R. F. C. subsidiary contracts under which final payment had not been made prior to April 28, 1942, was added in conference on the Military Appropriations Act of 1944. I call attention to this particularly since it seems to me to clearly evidence the intention of the Congress that the amendment was to be retroactive in its application to the contracts of the four R. F. C. subsidiaries.

Mr. Jones made reference to a letter written while the bill was in conference to the chairman of the Senate Appropriations Committee, which was annexed as an exhibit to this testimony. *313 Since the purpose of the hearings and the consideration of the Congress in that connection was directed to possible further amendments to the renegotiation provisions, it may be added that, had the construction immediately attributed to the legislation by the administrative officers involved and forthwith brought explicitly and forcibly to the attention of the same Congress, been contrary to the congressional purpose, it seems highly improbable that the subsequent amendments would not have taken occasion to correct the interpretation adopted. We conclude that, regardless of the proper construction of the act between April 28, 1942, and July 1, 1943, the 1943 amendment and its retroactive operation require that petitioner's contracts with DPC, not fully paid for prior to April 28, 1942, be regarded as renegotiable.

Petitioner's insistence upon the unconstitutionality of the renegotiation legislation, if applied to it, presents nothing essentially novel. It is true that some of its contracts with DPC were paid for before July 1, 1943, when the statute was amended to include an express reference to such contracts. But it is not true that the effect of that phase of the Fifth Amendment which forbids the taking of private property for public use without just compensation is without previous consideration in renegotiation cases. In Stein Brothers Manufacturing Co., 7 T. C. 863, 878, we said:

The petitioner claims that the Renegotiation Act is unconstitutional as applied retroactively to two contracts entered into and wholly or partially performed before April 28, 1942, the effective date of the Act, even though payments were received on those contracts after that date. They contained no clause authorizing renegotiation * * * This, the petitioner says, takes its property without due process of law or just compensation in violation of the Fifth Amendment to the Constitution of the United States. * * * [Emphasis added.]

This argument was not disregarded in concluding in that case that the retroactive application of the Renegotiation Act was not unconstitutional, as must be gathered from the following language (p. 878):

* * * all of its assignments [of error] and arguments have been carefully considered. The ones upon which it seems to place the greatest reliance are discussed herein, but none has been overlooked. We are unable to agree that the act is unconstitutional for any of the reasons advanced.

Congress, we there said (p. 879), might, indeed, "have gone even further in applying the act retroactively. If the power exists, it is complete enough to prevent all war profiteering."

The fact that some of petitioner's contracts were paid for in full before July 1, 1943, but after April 28, 1942, presents a distinction in fact, but no difference in principle. In the Stein case petitioner argued (p. 878) "that the Government can not retroactively repudiate its obligation for accepted goods which had already arisen under those valid contracts." But it is elementary that a contract and the right to perform and collect under it are property within the meaning of the Fifth Amendment. Lynch v. United States, 292 U.S. 571">292 U.S. 571. In Ring Construction Corporation, 8 T. C. 1070, 1081, which also upheld the constitutionality of the renegotiation statute, respondent did "not argue that a contractual right is not a property right." Referring to Perry v. United States, 294 U.S. 330">294 U.S. 330, we recognized that that case sustained the contractual effectiveness of the gold clause as between Government and citizen, but added (p. 1081): "The case, however, involved no application of the war powers of Congress, and offers no assistance here."

We think it follows that the mere distinction between a contract completely performed but not yet paid for, and one where the profits have already been collected by the contractor can not justify the distinction between the Stein and Ring cases and this proceeding. Contracts completely paid for prior to April 28, 1942, are excluded from the operation of the Renegotiation Act not because its application to them would constitute an unconstitutional exercise of legislative power, but because the statute itself selects that date as the barrier between renegotiable and nonrenegotiable business. As we have pointed out, no similar action was taken in connection with the amendment applying to DPC contracts. We have already expressed our view that, on the contrary, Congress affirmatively selected for the effective date of the amendment the same date as that applicable to the original act. We are not prepared to say that legislation, which is constitutional when referring to a completed contract as to which all that remains is the collection from the Government of the payments due, goes outside the scope of the Government's war powers when the profits said to be excessive have found their way into the contractor's hands.

If the concept of a taking of private property for public use governs in such a case as this, ^{*318 profits on contracts made with DPC and paid for between April 28, 1942, and July 1, 1943, does not violate any constitutional safeguard to the protection of which petitioner is entitled. Stein Brothers Manufacturing Co., supra;Ring Construction Corporation, supra.}

Certain other sales were made by petitioner, not to any Government agency, but to civilian producers having prime contracts subject to renegotiation. As to these the question is whether they were "subcontracts," within the meaning of the Renegotiation Act. Petitioner contends that those for which payment was completed prior to October 21, 1942, are not renegotiable because not until then was the word "subcontract" so defined in the Renegotiation Act as to include sales of productive equipment to a prime contractor, and that the amendment of that date was not intended to be retroactive.

But we take the view that the amendment

In the first place the language used by Congress demonstrates its intention to exercise its power to the broadest possible extent within the field it purported to cover, eliminating only contracts completed and paid for before the original Renegotiation Act was passed. Supply Division, Inc., 9 T. C. 1103; cf. Helvering v. Stockholms, Enskilda Bank, 293 U.S. 84">293 U.S. 84. In the statutory language already quoted in the discussion of the prior issue, the legislators referred to "any subcontract thereunder," that is, any subcontract under "any contract" with a Department.

In the second place, the purpose to be served and the mischief at which the legislative remedy was aimed required that the term "subcontract" be used so as to sweep into the scope of the legislation all activities directly related to production for the war-making Departments. ^{Aluminum Co. of America, 47 B. T. A. 543, which involved not the Renegotiation Act, but the Vinson-Trammell Act, although it is to be noted that even this decision was disapproved on review (C. C. A., 3rd Cir.), 142 Fed. (2d) 663 (certiorari denied, 323 U.S. 728">323 U.S. 728). And see Grob Brothers, 9 T. C. 495; Supply Division Inc., supra.}

In the third place, the administrative construction adopted under the language of the original act and prior to the amendment, and which represented the view of the officers of the War Department most intimately acquainted with the legislation, included in its definition of the term "subcontract" "any purchase order from, or any agreement with, the contractor * * * to make or furnish any articles acquired by the contractor primarily for the performance of this contract * * *. The term 'articles' includes any * * * machinery, equipment or other personal property." War Department, Price Adjustment Board, "Principles, Policy and Procedure To Be Followed in Renegotiation," Aug. 10, 1942, p. 7. It was this very position on the part of the administrative officials which led to the adoption of the amendment. The definition was resisted by some contractors, partly on the authority of the Aluminum Co. case, and for that reason the War Department requested that Congress put the matter beyond doubt by inserting the clarifying provision. Hearings before the Committee on Finance, United States Senate, 77th Cong., 2d sess., on section 403 of Public Law Numbered 528 (Sept. 22 and 23, 1942), p. 37 et seq; Hearings before a Subcommittee of the Committee on Finance, United States Senate, 77th Cong., 2d sess., on section 403 of Public Law Numbered 528 (Sept. 29 and 30, 1942), p. 22 et seq. While there was some disagreement among the War and Navy Departments and the Maritime Commission as to the precise language to be used, the Government agencies ultimately composed their differences and agreed upon wording which was in that very form enacted as the amendment. The administrative construction already adopted having been called to the attention of Congress and having in fact constituted an impelling cause for consideration of the question, it seems hardly conceivable that, had the interpretation which the legislation had already received been contrary to that originally intended, the amendment would have been adopted at all, or at least in its unrestricted scope. It would have been a simple matter to have included either in the legislation itself or in the material submitted by the respective committees an admonition that the amendment constituted new legislation and hence should be applied only with a prospective effect.

Finally, we take occasion to note that the question here is different from that presented under the first issue. The provision there involved included a definition of the word "Department," which might at least colorably be taken to mean that situations not falling within the defining language were to be excluded; while here, the absence of any definition at all is no less consistent with a use of the word in its broadest possible scope as with any other interpretation. We conclude that the term "subcontracts" must be construed as including, from the effective date of the original act, *325 It seems equally clear that petitioner's machines were "required" for the performance of the prime contracts within the purview of the Renegotiation Act.

Nor does the suggestion that such products were also sold for civilian production under price ceilings, even if that be the fact, meet the issue. Whether the costs of war material became excessive because of the volume of production created by the war demand is no more answered by the application of civilian price ceilings than is the similar proposition that a war contractor's profits would not be unreasonable if its quantity prices to the Government were no higher than the peacetime level. See "Joint Statement of the War, Navy, and Treasury Departments and the Maritime Commission, Purposes, Principles, Policies, and Interpretations," etc. (March 31, 1943), p. 7; see Stein Brothers, supra, p. 886; Ring Construction Corporation, supra, 1087; Western Precipitation Corporation, 9 T.C. 877">9 T. C. 877. And, as we have already had occasion to observe, the legislative history, far from supporting petitioner's position, indicates that Congress proposed to attack the entire problem of costs directly related to the price charged by a prime contractor for products needed by the war-making Departments for the prosecution of the war.

Petitioner's contention is essentially that advanced by the machine tool manufacturers and rejected by the ultimate legislative conclusion. *328 As the final issue is framed, it also presents exclusively a question of law. Petitioner's contention is thus stated in its brief:

Petitioner now argues alternatively that if its orders from private corporations are renegotiable at all, orders for complete machines are renegotiable only to the extent that the machines were used on renegotiable business. [Emphasis added.]

This aspect of the proceeding has two phases, but only one is in controversy. The parties have agreed as to the relationship between the renegotiable and nonrenegotiable business engaged in by petitioner's customers at the time it made the sales, and respondents now concede that an allocation of petitioner's profits may be made accordingly, thus eliminating a percentage of its profits so computed from respondents' claim. To this extent they accept the applicability of rulings of the War Contracts Price Adjustment Board, par. 322.3 "Joint Renegotiation Manual, approved effective January 27, 1944, by the Joint Price Adjustment Board"; see also "Joint Statement by the War, Navy and Treasury Departments and the Maritime Commission, Purposes, Principles, Policies, and Interpretations," etc., (March 31, 1943), p. 10, and on this point there is no issue.

But petitioner also insists that the stipulated fact of the estimated total useful life of the machines compared to the portion of that life during which the war continued entitles it to have eliminated, as being beyond the scope of the renegotiation statute, a comparable proportion of its profits from these sales. We think it vital to emphasize this reliance upon the nonrenegotiability of such business as a matter of law. The position amounts in essence to the proposition that some part of the profits concededly realized by petitioner from sales of machines actually used for war production may not legally be scrutinized for the purpose of determining the extent to which its profits were in fact excessive.

This emphasis seems to us necessary to distinguish what might otherwise have been a contention of an essentially factual nature. Petitioner is not contending here that its profits were not excessive because to some extent they were due to the filling of civilian needs subsequent to the war. Such a relationship to its peacetime or civilian business could well be an element meriting consideration in the overall factual determination of the excessive nature of war profits. The statute itself might be said to envisage such consideration. *331 of renegotiation thereunder.

The disputed questions of law must all be decided in favor of respondents, and under the formula agreed to by the parties the conclusion must be that petitioner's profits were excessive to the full extent asserted in respondents' answer, as modified by their present concession.

Decision will be entered under Rule 50.

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Footnotes

• 1. Sec. 403. (a) For the purposes of this section, the term "Department" means the War Department, the Navy Department, and the Maritime Commission, respectively; * * *↩

• 2. The quotation is from the original Renegotiation Act (Public Law 528, 77th Cong., 2d sess.), April 28, 1942, as amended by Public Law 753, 77th Cong., 2d sess., October 21, 1942, the only change of consequence in the quoted subsections being that the specific date was inserted in the amendment in lieu of the original provision reading: "This subsection shall be applicable to all contracts and subcontracts hereafter made and to all contracts and subcontracts heretofore made," etc., in the original act.↩

• 3. The letter read in part:

  "It is, of course, a matter for Congress to determine to what extent, if at all, the statute is to apply to uncompleted contracts of subsidiaries of the Reconstruction Finance Corporation. If the Congress selects the date, April 28, 1942, as contained in the present statute, the following amendment which would immediately follow the above proposed amendment to H. R. 2996, is presented for your consideration:

  "'Section 403 of the Sixth Supplemental National Defense Appropriation Act, as amended, is further amended by adding at the end thereof the following subsection:

  "'"Subsection (k). All the provisions of this section shall be construed to apply to Defense Plant Corporation, Metals Reserve Company, Defense Supplies Corporation, and Rubber Reserve Company."'

  "Should the Congress, however, determine that the renegotiation statute should apply to contracts of R. F. C. subsidiaries uncompleted as of a different date than that now contained in the statute, the following amendment is presented for your consideration:"↩

• 4. Collection of the disputed payments was made in this case by offset against other moneys due petitioner. There was no physical "taking" of the original payment.↩

• 5. Revenue Act of 1942 (Act of Oct. 21, 1942), sec. 801, amending Sixth Supplemental National Defense Appropriation Act to read as follows:

  "Sec. 403. (a) For the purposes of this section --

  * * * *

  "(5) The term 'subcontract' means any purchase order or agreement to perform all or any part of the work, or to make or furnish any article, required for the performance of another contract or subcontract. The term 'article' includes any material, part, assembly, machinery, equipment, or other personal property.

  "For the purposes of subsections (d) and (e) of this section, the term 'contract' includes a subcontract and the term 'contractor' includes a subcontractor."↩

• 6. Mr. Cannon reported for the House conferees:

  "Mr. Speaker, this provision proposes to limit profits on war contracts.

  "In every war there have been men who made an unconscionable profit out of the national misfortune * * *. With that in view there has been a general understanding from the beginning that no one shall make undue profits out of the sacrifices which every citizen is required to make to win this war * * *." (Congressional Record, House, April 21, 1942, p. 3697.)

  Senator McKellar reported for the Senate conferees:

  "* * * I asked the representatives of the three departments concerned if they would not go back to their offices and prepare an amendment dealing with the question of profits which would be workable * * *. The amendment in the conference report is substantially and really the amendment prepared by the representatives of these three departments, and I think I can say it has been very well prepared." (Congressional Record, Senate, April 23, 1942, p. 3763.)↩

• 7. On this disposition of the preliminary issue no constitutional question of retroactivity arises. Petitioner reserves a contention similar to that advanced in Stein Brothers Manufacturing Co. and Ring Construction Corporation, supra↩, but recognizes the controlling effect of those decisions here and makes no effort to reargue the principle there laid down.

• 8. See footnote 5, supra↩.

• 9. In connection with the Revenue Bill of 1943 a "new" definition of subcontract was proposed:

  "Under the new definition of subcontract, factory supplies such as tools or equipment, typewriters, business machines, etc., are exempt from renegotiation. * * *" (Rept. No. 871 on H. R. 3687, 78th Cong., 1st sess., p. 78.) (Emphasis added.)

  An amendment to the Senate bill, however, offered by the Committee on Finance on the floor of the Senate "would restore the provision of existing law * * *. Of course, that would have the effect of throwing the issue into conference." Cong. Rec. Senate, Jan. 21, 1944, p. 561. In conference an amendment was agreed to which "restores the language of existing law (the subject of settled administrative construction) * * *. The House recedes with an amendment excluding office supplies * * *" (Rept. No. 1079 on H. R. 3687, 78th Cong., 2d sess., pp. 78-79). It thus appears that amendments proposing to restrict the original definition to the line of petitioner's present contention were never accepted.↩

• 10. See section 403 (a) (4) (A), Sixth Supplemental National Defense Appropriation Act, 1942, as amended by the Revenue Act of 1943.↩