Armstrong v. War Contracts Price Adjustment Board ( 1950 )

James B. Armstrong, Petitioner, v. War Contracts Price Adjustment Board, Respondent

Armstrong v. War Contracts Price Adjustment Board

Docket Nos. 446-R, 755-R

United States Tax Court

15 T.C. 625; 1950 U.S. Tax Ct. LEXIS 48;

November 15, 1950, Promulgated

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Petitioner, a manufacturers' representative, during 1943 and 1944 earned commissions based upon orders largely from commercial firms to which he had been selling for his principals for many years. The products sold by him for his principals had in large measure a war end use by the vendees in contracting with the Government. Held, that to the extent of such war end use of products sold, the petitioner was a subcontractor within section 403 (a) (5) (B) of the Renegotiation Act of 1943. Amount of excessive profits determined. Held, further, that the fact that petitioner declined to file the statements required by section 403 (c) (5) (A) did not set the statute of limitations in motion, and the renegotiation proceeding was not barred as to 1944.

Frederick H. Koschwitz, Esq., for the petitioner.

Frederick N. Curley, Esq., for the respondent.

Disney, Judge.

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DISNEY

These cases, duly consolidated, involve the determination under section 403 (a) (5) (B) of the Renegotiation Act of 1943 of allegedly excessive profits for the years 1943 (Docket No. 446-R) and 1944 (Docket No. 755-R) in the respective amounts of $ 25,000 and $ 7,500 (without application of tax credits). Three questions are presented: (1) Whether the petitioner is a subcontractor within the provisions of the Renegotiation Act of 1943; (2) what was the amount of excessive profits, if any, received by the petitioner during each of the years involved; and (3) whether the renegotiation proceedings as to the year 1944 are barred by the statute of limitations. A stipulation of facts was filed in each case and certain stipulations were orally entered into at the time of hearing. Such stipulations are adopted by reference, all of the facts therein set forth are found, and only those portions of the stipulations necessary to examination of the questions involved are set forth, with other evidence adduced, in our findings of fact.

FINDINGS OF FACT.

After early training as a salesman of steel products, the petitioner, about 1926, went into business for himself as a representative of companies producing drop forgings and steel castings. He opened an office in New York City. For the past 20 years petitioner's office address has been One East 42nd Street, New York City. He has one employee, a secretary-stenographer. He pays all his own expenses and those of his office.

About 1933 he aligned himself with Endicott Forging & Manufacturing Co., of Endicott, New York, manufacturers of drop forgings, Hartford Electric Steel Corporation, of Hartford, Connecticut, producers of carbon steel castings and Cooper Alloy Foundry Co., of Hillside, New Jersey, makers of fine steel alloys, including stainless steel, as well as Monel metal and nickel castings. On March 1, 1941, the Hartford Electric Steel Corporation acquired the Roxbury Steel Casting Co. of Boston, Massachusetts, also makers of steel castings, and after that date petitioner acted as sales representative for that concern. Prior to January 1, 1946, the management of Hartford Electric Steel Co. changed hands and petitioner ceased to represent that company and its said subsidiary, Roxbury Steel Casting Co., as of that date. He has continued his representation of Endicott Forging & Manufacturing Co. and Cooper Alloy Foundry Co., which are his present principals.

During all the times petitioner has acted as sales representative for the companies mentioned above his territory covered the Metropolitan area of New York City, including Long Island, northern New Jersey, eastern New York and western New England. Petitioner had exclusive territorial rights.

A large portion of petitioner's commissions was received on repeat orders and on orders which were sent directly to his principals. Petitioner often did not know of repeat orders until copy of the order reached the plant. He put it in his files, serviced the order and got the commission.

Petitioner's arrangements with his principals were oral and have always been oral. As sales representative for them, he performed the usual duties of a commission salesman. He made frequent calls on his customers for the purpose of maintaining their good will, ascertaining what their requirements might be and obtaining, if possible, orders for his principals' products. He followed up orders and when possible assisted in adjustments of complaints, and received and forwarded to his principals inquiries and specifications and such other information as might be needed in the execution of orders. He kept himself informed of new products or devices that any of his customers might develop to see if the products of his principals could be used in connection therewith. He also called on new prospects and endeavored to obtain business from them. If petitioner made a sale, it would be evidenced by a printed order form which would be mailed to his principal's plant. The order itself usually developed from a request by the customer for a quotation for making a desired article. An estimate was then made by the plant of the cost of the work, based on material and labor costs and other pertinent factors. A price was then quoted to the customer, and if the quotation was satisfactory the order would be placed. In connection therewith, it was necessary to obtain such details, specifications or blue prints as might be required to execute the order.

During 1943 and 1944 petitioner frequently called upon his good customers, maintained their good will, kept his eyes open for new prospects, and watched to see whether there was development of any new products or devices in which his clients' products could be used. It was necessary in case of complaint and any difficulty for him to report to his principal and place the customer in touch with the proper parties at the plant of his principal. Sometimes it was necessary for him to arrange with a representative of one of his principals to visit the customer with him and sometimes for him to arrange for the customer to make a trip to his principal's plant to lay the problems before the proper people. He had duties with reference to the dates of delivery and substitutions of materials. If questions arose in the filling of an order for a customer, he normally contacted the customer as promptly as possible and arranged to put him in touch with the proper people at his principal's plant. He devoted all of his business time to the business of his principals. During 1943 and 1944 he worked from 8 to 15 or 16 hours a day, including Saturdays, and sometimes worked on Sundays. He was required to travel. He had to cover his territory to see his customers and prospects. His service in these matters was all compensated for in the commission he received on the sales. His employment was on a straight commission basis as a sales representative. His principal job was to sell the products of his principals and his income was based directly on the value of the sales. He received income from sales he did not make because of repeat orders going to his principals upon which he received a commission. His commissions were based on the volume of sales covered by the invoices of each month. His principals figured the prices. His compensation was based only on the sales. Practically all of his orders were repeat orders. He handled no billings, collected no payments, and assumed no credit risks. Credit was not his responsibility.

He did not during the years involved in this matter solicit or attempt to procure for his principals any Government business and was never instructed by his principals to do so. He did not call on any representative or any employee or official of any governmental department or any agency of the United States Government in an effort to procure business for his principals from such persons and never communicated with any procurement officials in any department or agency of the Government to attempt to sell the officials the products of his principals. He had no understanding with any of his principals that it was part of his job to call on a governmental agency or procurement office and he never went to any department of the United States Government or to any agency of the United States Government to see or talk to any one in those departments and try to get a purchase order. It was no part of his duty to do so and his compensation was not conditioned on getting purchase orders or making sales to any Government department or agency. He had no Washington office and never went to Washington on business. It was his duty to solicit business from his principals' regular customers and most of the business he brought in was produced from their regular customers. His sales were made only to commercial concerns. It was no part of his duty to solicit business from any one other than commercial concerns and his compensation was on a strictly commission basis. He received commissions on sales which had a governmental or war end use.

Petitioner is not a graduate engineer and had no contract or arrangement with his principals to render any technical or engineering services to his customers. Whenever any technical or engineering or metallurgical question arose in the course of filling an order, he would arrange to have the customer interview the metallurgists at the plant and if a question arose as to price of production, he would arrange for a meeting with the proper people.

During 1943 and 1944 there was a rising trend in sales volume and in his sales in comparison with his previous earnings. This increase in business increased his duties.

The principal and largest customers served by petitioner and his employers include General Electric Co., American Car & Foundry Co., Worthington Pump & Machinery Corporation, Chicago Pneumatic Tool Co., Bigelow-Sanford Carpet Co., Wright Aero Corporation, International Paper Co., and many other manufacturing concerns located in plaintiff's territory. The customers on that list accounted for approximately 90 per cent of petitioner's sales. He has been selling to all of them for long periods of time extending back as much as 30 years. He has been selling about 25 or 30 of them since about 1921 or 1922. During 1943 and 1944 customers were pushing petitioner for the material they wished and his principals were operating at 100 per cent capacity, with customers still asking for things which could not be supplied. It was sometimes hard to fill orders due to scarcity of material.

The rate of petitioner's commission on sales for Endicott Forging & Manufacturing Co., Hartford Electric Steel Co. and Roxbury Steel Casting Co. was approximately 5 per cent. Though Hartford and Roxbury by letter placed a ceiling on his commissions during 1943 and 1944, the rate remained the same. His rate of commission on sales for Cooper Alloy Foundry Co. ranged from about 5 to 10 per cent according to variation in the cost of material. His rates of commission during 1943 and 1944 were substantially the same as had prevailed since he first began to represent his principals. The commissions from Endicott remained 5 per cent without limitation, but the price of steel increased and his 5 per cent was then put at 5 cents a pound instead of 5 per cent, as to a higher grade of steel, such as aircraft steel and bearings steel.

During 1943 and 1944 Endicott Forging & Manufacturing Co. had six other commissioned salesmen all on straight commission basis and on commissions generally the same as those of the petitioner.

During the year 1943 petitioner incurred expenses in connection with his business in the amount of $ 7,519.64, of which $ 6,832.34 is allocable to his receipts of $ 63,751.03 from sales having a war end use, showing a net profit of $ 56,918.69 from such sales, as follows:

		Allocable to
	Total	war end use
Income	$ 70,167.81	$ 63,751.03
Expenses	7,519.64	6,832.34
Net Income	$ 62,648.17	$ 56,918.69

Approximately 87 per cent ($ 55,057.63) of petitioner's total war end use receipts of $ 63,751.03 in 1943 were earned at a rate of not exceeding 5 per cent.

During the year 1944, petitioner incurred expenses in connection with his business in the amount of $ 9,383.21, of which $ 6,090.64 is allocable to his receipts of $ 31,324.05 from sales having a war end use, showing a net profit of $ 25,233.41 on such sales as follows:

		Allocable to
	Total	war end use
Income	$ 48,260.08	$ 31,324.05
Expenses	9,383.21	6,090.64
Net Income	$ 38,876.87	$ 25,233.41

The petitioner's average net income for the period 1936-1939 was approximately $ 9,500. The following is a statement of the gross and net earnings of the petitioner for the entire period beginning 1936 and ending with 1944, with subtotals for the years 1936 to 1939, inclusive:

Income and expenses for period 1936-1944
Year	Income	Expenses	Net income
1936	$ 9,045.16	$ 2,168.77	$ 6,876.39
1937	14,930.07	2,949.70	11,980.37
1938	9,616.68	2,580.45	7,036.23
1939	14,751.26	2,680.19	12,071.07
Average, 1936-1939	12,085.79	2,594.77	9,491.02
1940	31,303.39	2,975.05	28,328.34
1941	50,852.98	5,165.49	45,687.49
1942	61,162.96	6,438.18	54,724.78
1943	70,167.81	7,519.64	62,648.17
1944	48,260.08	9,383.21	38,876.87

The petitioner was not during 1943 or 1944 an executive officer of, partner in, or full time employee of any of his principals.

During 1943 and 1944 the parts sold by the petitioner continued in general to be fairly stable as far as forgings and castings were concerned, though there were occasional new parts and changes of models.

Endicott Forging & Manufacturing Co., one of the principals of petitioner, was renegotiated by the Air Force and a refund of excessive profits was made by that company. That company made no attempt to recover from the petitioner any adjustment for excessive profits. Hartford Electric Steel Corporation and Roxbury Steel Casting Co. were renegotiated for the years 1943 and 1944 by the Price Adjustment Board of the Navy Department. They showed the commissions paid to the petitioner as sales commission in accordance with the system of cost accounting regularly used by them. His commissions were not, as to either company, reduced, disallowed, or excepted to.

By letter dated January 25, 1945, respondent advised petitioner that renegotiation proceedings against him for the year 1944 had been assigned to the Department of the Navy, Services and Sales Renegotiation Section. With the letter respondent enclosed certain forms of contractors' reports and stated that unless the amount of his income was less than the statutory minimum under the Act, he was required to furnish the information called for by the reports which should be filed with Services and Sales Renegotiation Section as soon as possible, in any event prior to the first day of the fourth month following the end of his fiscal year.

By letter dated April 10, 1945, to the Services and Sales Renegotiation Section, Department of the Navy, petitioner acknowledged receipt of its letter of January 25, 1945, and the enclosures and stated, among other things, that he held no contracts or subcontracts of any kind with any governmental agency or department, had never been engaged in soliciting any such contracts or subcontracts for himself or any one else or in "'selling' the Government in any way" and was merely a commission salesman "As your office has already been advised"; also that examination of the addressee's file would disclose that he and his attorney had previously set out in considerable detail in letters and personal conferences the reasons for taking the position that he was not a subcontractor within the meaning of section 403 (a) (5) (B) of the renegotiation statute. He closed by stating "For the above reasons, I must decline to file the reports requested in your letter for the year 1944."

By letter dated October 24, 1945, respondent again requested that petitioner prepare and file not later than November 10, 1945, the forms of reports, copies of which were enclosed. By letter of November 9, 1945, the petitioner acknowledged receipt of the letter of October 24, 1945, referred to his letter of April 10, 1945, "in which I set forth quite clearly the reasons why I must decline to file the reports and submit the other information requested * * *" and suggested that his attorney would be glad to meet with a representative of the department at a time and place mutually convenient.

The petitioner at no time ever submitted the reports requested by the respondent and never submitted any reports as required under the Renegotiation Act or the regulations pursuant thereto. He gave oral information at various times. Petitioner did furnish respondent with copies of his income tax-forms.

On May 9, 1947, the Navy Price Adjustment Board of the Navy Department notified the petitioner by registered mail that renegotiation proceedings had been commenced against him for the year ended December 31, 1944.

Renegotiation proceedings for 1943 were commenced on December 9, 1943.

The profits of the petitioner were excessive in the amount of $ 22,500 in 1943 and in the amount of $ 6,750 in 1944.

OPINION.

Briefly stated, the questions presented are whether the petitioner is a subcontractor, whether his earnings were excessive, and as to the year 1944 whether the proceedings were instituted within the time prescribed by law.

Since the last question, as to limitation, determines whether we consider that year on its merits, we will first give attention to it. The petitioner's view, in substance, is that since on April 10, 1945, he declined to furnish the reports required by the respondent and again declined so to do on November 9, 1945, both times upon the ground that he was not a subcontractor under section 403 (a) (5) (B) of the Renegotiation Act, since the respondent did not act until May 9, 1947, and since section 403 (c) (3) of the Renegotiation Act provides that proceedings must be commenced within one year after the close of the fiscal year in question or within one year after the filing of the statement required by contractors or subcontractors, whichever is later, that the proceeding by the respondent is too late. He contends that by this limitation it was the obvious intent of Congress to avoid unnecessary hardship and inconvenience to any "proposed renegotiatee" by prescribing that proceedings shall be conducted without undue lapse of time. The proceedings should have been begun, petitioner contends, reasonably soon after receipt of his letters of April 10, 1945, and November 9, 1945. We can not agree. The respondent, of course, does not contend that the proceedings were instituted within one year after the end of the fiscal year so that question is not presented, but the other portion of section 403 (c) (3) provides a limitation of one year after the filing of the statement required by the subcontractor, which section 403 (c) (5) (A) requires to be filed within three months after the close of the fiscal year. ^{*633 do so and that he by filing them made no admission that he came within the law. The petitioner does not seem to contend that the respondent should have filed his proceeding within a year of the letters refusing to file the statements, but rather that the respondent should have filed his procedure within a reasonable time thereafter. We have before us a definite statute of limitation and the question of reasonable time, therefore, does not enter. The principle of laches is not applied. We hold that the renegotiation proceedings as to 1944 were not barred by the statute of limitation.}

We next consider the question whether petitioner was a subcontractor within the purview of section 403 (a) (5) (B) of the Renegotiation Act of 1943, *67 The petitioner's contention is, in substance, that the language of section 403 (a) (5) (B) was never intended to apply to a person like himself, a manufacturers' representative who sold, and for years before World War II had been selling, commercial products for his principals, even though such products during the war years here involved were utilized in the performance of contracts with the Government, but that the language of the statute was intended to reach and cover "Washington sales representatives" and "war brokers," later called "5 percenters," and not commercial manufacturers' representatives. He appears to rely chiefly upon various expressions in statements made in the hearings before the Congressional committees. The respondent, on the other hand, contends that the petitioner is a subcontractor within the intendment of the Act, points to a report of the Committee on Naval Affairs, and contends that within the thought of the adjudicated cases the petitioner, having sold for his principals materials which had war end use and having received his commissions dependent upon the amount thereof, comes within the plain meaning of the statute.

We have studied at length statements and cases cited by both parties, and the history of the Renegotiation Acts, to ascertain, if possible, the Congressional intent underlying the text of the statute involved. We think we need not go into the details of Congressional procedure or the cases, and their bearing direct or indirect upon this problem. The general question as to meaning of subcontract and the length to which renegotiation was intended to go was considered (though the case does not primarily involve the particular language here in question) in . *69 which any service performed consists of soliciting or procuring contracts with a Department or a subcontract with a Department, or subcontracts. Though there are to be found various expressions in the hearings before Congressional committees with reference to what the petitioner calls Washington agents, war brokers and 5 percenters, and we have no doubt that they were intended to be included perhaps primarily under the statute, from an examination of the whole history of this matter we are not convinced that the petitioner's activities do not come within the language and purview of the statute and the intendment of Congress.

In the Providence Wool Combing case, supra, we said:

Review of the legislative hearings which preceded and attended the adoption of the definition of subcontract convinces us that in this proceeding it is correct to adopt the views previously expressed by this Court that "The statutory definition of a subcontract is extremely broad," ; and that "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"; and that this could not be done without including articles "bought primarily for the purpose of producing products with a war-end use." [Emphasis added.] National Electric Welding Machines Co. [ * * *.

Elsewhere in the same case we noted that Congress understood the term subcontract "extended to orders for materials which were to be a component part of, or incorporated into an article which was made under Government contracts." Though we are not here dealing with the petitioner's principals manufacturing war end materials, we are dealing with "orders for materials," which he procured for his principals, and which were devoted to a war end use under the facts before us -- and the amounts payable to him were contingent upon the procurement of the contract for such materials, that is, subcontracts, and he procured such contracts for his principals. A footnote to the Providence Wool Combing case, quoting a House Report of the Naval Affairs Investigating Committee on Renegotiation, touches upon the point which the petitioner here appears specially to stress, that is, that commercial sales should not be considered within the statute. The argument was considered to have no merit and it was pointed out that figures presented to the committee demonstrate the increased and excessive profits made by the manufacturers of standard commercial products as a result of greatly expanded volume -- due to the war. The report of the Committee on Naval Affairs above referred to refers to the fact that the expense of selling commissions and fees in respect to subcontracts "must ultimately be borne by the taxpayers." Though the petitioner argues that this refers only to "Washington agents" or "war brokers" who did practically no commercial selling, we can not think that this demonstrates intent to exclude the expense of commercial selling of materials with war end use. It is clear, as pointed out in the report of the Naval Affairs Investigating Committee above referred to, that excessive profits might during the war have resulted from the selling of standard commercial products, because of the war-inflated volume and in this case therefore expand the commissions based on the amount of such sales. Without further discussion or citation of the various cases, we conclude and hold that the language of section 403 (a) (5) (B) covers the petitioner as a subcontractor and that his commissions under the facts before us are subject to renegotiation.

We come now to the question whether petitioner's earnings were excessive profits under the Renegotiation Act to the extent determined by the respondent. It was determined that for the year 1943 there was excessive profit in the amount of $ 25,000 ($ 22,727.09 after proper adjustment on account of taxes other than Federal tax measured by income), and that there was excessive profit to the extent of $ 7,500 in 1944. The petitioner's argument on this issue may be summarized as follows: That the rate of the commissions received by him was the same as those received by him for many years and was substantially the same as paid other salesmen similarly situated; that though he received substantially increased earnings in 1943 and 1944 over those received in earlier years, they were "not entirely attributable to war business," and that they were received in part due to the years he had spent in developing his territory and through hard work and careful attention to servicing his accounts. He argues also that in the renegotiation of his principals no exception was taken to his commissions and they were not disallowed, reduced or objected to in any way. The respondent argues, on the other hand, that the rate of commissions is not important, the statute being interested only in the amount and whether that amount is excessive; that it is immaterial that petitioner's commissions were not excepted to or adjusted in the renegotiation of his principals, for he was not therein being renegotiated; that the record refutes the petitioner's contention that his increase in earnings in 1943 and 1944 were not attributable to the war; that his earnings in the years here involved were, due to the war, far higher than his average earnings in previous years and did not result from his efforts; that his wartime and peacetime operation was the same; that he took no risks, shows no investment except that he maintained an office with one employee; and that he rendered no engineering or other service.

After analysis of these arguments and study of the facts before us, we think it is apparent that the petitioner's commissions during 1943 and 1944 were far greater than his average earnings prior thereto. It is stipulated that his average earnings for the period 1936-1939 were approximately $ 9,500, whereas his net income, after expenses from business, allocable to war end use was for 1943 $ 56,918.69 and for 1944 was $ 25,233.41. We think it is obvious that the matter of rate, stressed by the petitioner, is not controlling for the objective of the statute is inquiry into the amount, as to whether it is excessive. Petitioner errs also, in our opinion, in the view that the fact that renegotiation of his principals did not involve any exception, disallowance, reduction or objection to his commissions, "is strong indication" that the renegotiation agencies considered his commissions legitimate, and reasonable compensation. His commissions were actual expense to his principals and he was not being renegotiated. The Renegotiation Act was not intended to lump together the renegotiation of petitioner and his principals, and we are unable to give effect here to the fact that these expenses were not questioned in the renegotiation of the principals. Nor do we think that the fact that the rate of commissions received by the petitioner was the rate ordinarily paid to the petitioner and to salesmen similarly situated indicates that his commissions were not excessive in amount. We have indeed before us no evidence showing comparison of amounts earned by petitioner and those in similar situations. As above stated, the amount and not the rate is the element of importance under a statute inquiring into the effect of the war as to possibly excessive profits.

We have in this matter made the examination required of us by section 403 (a) (4) (A) of the Renegotiation Act of 1943, considering petitioner's efficiency, reasonableness of profits with regard to volume of production, normal pre-war earnings in comparison to war and peacetime production, the extent of risk assumed by him, and all other factors suggested by the statute. As already indicated, we do not agree with the petitioner's views above examined on this issue. It is apparent, however, from the record before us that not all of the increase in petitioner's earnings during the war years here involved was due solely to the war. The evidence indicates clearly that though the major portion of the increase in his earnings was attributable to war, some portion of the increase was due to his efforts and years of experience in developing his territory. This factor the respondent opposes with the thought that a large percentage of his sales was repeat orders and that his principals were due to the war operating at capacity. In our opinion, it may not with fairness and logic be eliminated. Considering all of the evidence, therefore, we conclude and hold that the profits of the petitioner were excessive for the year 1943 in the amount of $ 22,500 and for the year 1944 they were excessive in the amount of $ 6,750. These figures take no account of adjustment for taxes.

Orders will be issued accordingly.

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Footnotes

• 1. The statute provides in pertinent part as follows:

  No proceeding to determine the amount of excessive profits shall be commenced one year after the close of the fiscal year in which such excessive profits were received or accrued, or more than one year after the statement required under paragraph (5) is filed with the Board, whichever is the later, * * *.

  * * * *

  Every contractor and subcontractor who holds contracts or subcontracts, to which the provisions of this subsection are applicable, shall, in such form and detail as the Board may by regulations prescribe, file with the Board on or before the first day of the fourth month following the close of the fiscal year (or if such fiscal year has closed on the date of the enactment of the Revenue Act of 1943, on or before the first day of the fourth month following the month in which such date of enactment falls), a financial statement setting forth such information as the Board may by regulations prescribe as necessary to carry out this section. * * *↩

• 2. (5) The term "subcontract" means --

  (A) 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 any other contract or subcontract, but such term does not include any purchase order or agreement to furnish office supplies: or

  (B) Any contract or arrangement other than a contract or arrangement between two contracting parties, one of which parties is found by the Board to be a bona fide executive officer, partner, or full-time employee of the other contracting party, (i) any amount payable under which is contingent upon the procurement of a contract or contracts with a Department or of a subcontract of subcontracts, or determined with reference to the amount of such a contract or subcontract or such contracts or subcontracts, or (ii) under which any part of the services performed or to be performed consists of the soliciting, attempting to procure, or procuring a contract or contracts with a Department or a subcontract or subcontracts: * * *↩

• 3. We are conscious that that case involved primarily matters in 1942 but the examination entailed the same general question as here involved and the Renegotiation Act of 1943 was particularly examined.↩