DocketNumber: No. 46314
Citation Numbers: 107 Ct. Cl. 69, 67 F. Supp. 1007
Judges: Jones, Littleton, Madden, Took, Whaley, Whitaker
Filed Date: 10/7/1946
Status: Precedential
Modified Date: 1/13/2023
delivered the opinion of the court:
Plaintiff seeks to recover $50,000, paid under protest, as a special excise capital stock tax with respect to the carrying on or doing business for the short period of plaintiff’s existence as a corporation prior to July 1,1941.
Plaintiff’s amended petition sets forth two causes of action, the second being in the alternative.
In the first cause of action plaintiff seeks to recover the amount mentioned on the ground that it was not engaged in carrying on or doing business within the meaning of the taxing act prior to July 1,1941, and that no special excise tax on the declared value of its capital stock was therefore due for that period.
In the second or alternative cause of action it alleges and claims that if the court should hold that the corporation was engaged in carrying on or doing business prior to July 1, 1941, merely because it signed the cost-plus-a-fixed-fee contract entered into between the plaintiff, the General Motors Corporation (Fisher Body Division), and the Government, on June 27, 1941, the special excise tax of $50,000 paid at the statutory rate on the declared value of the capital stock was a cost incurred for and incidental to the performance
Plaintiff was incorporated on June 24, 1941, and the first meeting of its incorporators was held on that date. At that meeting the board of directors was elected, bylaws were adopted, and the board was authorized to issue shares of capital stock. The board held its first meeting June 26 and took the usual corporate actions, as set forth in finding 5, among which was the authorization to the proper officers of the corporation to issue and deliver to North American Aviation, Inc., 6,000 shares, having a par value of $1 each, of plaintiff’s capital stock in exchange for $3,000,000 cash, being at the rate of $500 a share. In addition the directors authorized certain officers of the corporation to execute a contract with the United States to which the General Motors Corporation (Fisher Body Division) was also to be a party, as the major subcontractor, for the manufacture by plaintiff, in a plant then under construction by the United States in Kansas City, of 1,200 military airplanes, on a cost-plus-a-fixed-fee basis. The contract provided for the manufacture by the General Motors Corporation of certain parts and subassemblies of the airplanes to be manufactured by plaintiff. This work by General Motors was to be paid for by plaintiff out of its fixed fee without reimbursement.
On the following day, June 27, 1941, plaintiff received from North American Aviation, Inc., $3,000,000 in payment for the 6,000 shares of its stock, and, on the same day, plaintiff executed the cost-plus-a-fixed-fee contract with the Government. The contract was also signed on the same day by the General Motors Corporation (Fisher Body Division), as the major subcontractor, and by the United States by its contracting officer, and was approved June 28, 1941, by the Secretary of War. The plant then under construction by defendant at Kansas City, Kansas, was not completed or ready for use by plaintiff in beginning manufacturing operations until October 1941.
The contract was prepared and presented by defendant for execution by plaintiff and the General Motors Corporation prior to July 1, 1941, and it was executed prior to the end of the fiscal year June 30, 1941, solely at the request of
The buildings and facilities constituting the plant in Kansas City were built and provided by and at the expense of the United States. Plaintiff’s first operations in this plant began October 16, 1941, when the plant was substantially completed, and the first contract flight of airplanes manufactured by plaintiff under the contract of June 27 was accomplished January 3,1942. Plaintiff carried on no manufacturing operations of any kind prior to July 1, 1941, and engaged in no business activities, other than the making and signing of the contract on June 27, 1941, as hereinbefore mentioned.
The contract with defendant provided that in addition to reimbursement for the cost of performance plaintiff would be paid a fixed fee of $6,540,000, being 5.45 percent of $120,-000,000, representing the estimated cost of 1,200 airplanes, as determined by the Secretary of War; and, in addition, a fixed price of $900,000 for engineering information and services to be furnished by plaintiff to the General Motors Corporation for the various subassemblies for the airplanes called for. Payment of the $900,000 for the engineering services was to be made by the United States in monthly installments, based on the percentage of cost of partial performance to date of the monthly payments to .the total cost of full performance under the contract. No payments of any kind were made to plaintiff under the contract until after October 1941.
Upon these facts and under the applicable provisions of the taxing act (Sections 1200 and 1202, Internal Eevenue Code, as amended by Section 301 (a), Eevenue Act of 1941), which imposed a special excise tax on the right or privilege of carrying on or doing business in corporate form, and under the provisions of Treasury Eegulations 64, arts. 41-44, inclusive, we are of opinion that the making of the agreement and the execution of the contract of June 27, 1941 with the United States and the General Motors Corporation, constituted the carrying on or doing business by plaintiff.
The making of the agreement with the Government for the manufacture of 1,200 airplanes and the furnishing of the engineering services mentioned, and the execution of the formal contract embodying the terms and conditions of that agreement appear to us to have been an important business activity and, since this occurred prior to July 1, 1941, we think the statutory condition for the imposition of the special excise tax, namely, the carrying on or doing business, is satisfied by these business activities of the corporation. The phrase “doing business” is a comprehensive term and, in particular, embraces any business activity as that term is generally and ordinarily understood by the laymen. Flint v. Stone Tracy Company, 220 U. S. 107. The exercise of business judgment in relation to matters and activities, for the carrying out of which the corporation was organized, has been held to be a business activity sufficient to constitute doing business within the meaning of the statute. Section Seven Corporation v. Anglim, 136 Fed (2d) 155; Kettleman, Hills Royalty Syndicate No. 1 v. Commissioner of Internal Revenue, 116 Fed. (2d) 382. The entering into contracts pursuant to a charter power for the purchase of elevators and warehouses before the corporation began the actual operation of the business was held sufficient to sustain the excise tax with respect to the carrying on or doing business. Cargill, Inc. v. United States, supra, and the same rule was applied in Associated Furniture Corporation v. United States, supra.
Treasury Department regulations 64, in effect on June 30, 1941, relating to the special excise tax with respect to the carrying on or doing business provided, so far as material to the first cause of action, as follows:
Art. 41. Nature and rate of tax. — The tax is an excise tax imposed with respect to carrying on or doing business during a taxable year ending June 30, or any fractional part thereof. It is an excise tax upon the exercise of the privilege of doing business and not upon the business itself and is imposed upon each corporation with respect to carrying on or doing business and*82 not upon each business carried on. . * * *. The tax may not be apportioned under any circumstances. If a corporation is engaged in business for any portion of a taxable year, liability for the tax' is incurred for the entire taxable year.
Art. 42. Doing Business. — The term “business” is very comprehensive and embraces whatever occupies the time, attention, or labor of men for profit. Accordingly, regardless of the nature of its activities, any corporation organized for profit and carrying out the purpose of its organization is doing business within the meaning of the Act. Similarly, even if not organized for profit, any corporation which nevertheless engages in activities ordinarily carried on for profit is also doing business. It is immaterial whether the activities result in a profit or a loss, whether the corporation has been successful in its enterprise, or that because of unfavorable business conditions, no operations are carried on for a particular period. No particular amount of business need be done, nor is it necessary that the business be continuous throughout the taxable year.
The case is exceptional in which the activities of a corporation organized for profit do not amount to doing business within the meaning of the Act. Such a case is generally limited to one in which the corporation is not pursuing the ends for which organized, i. e., profit.
Art. 43. Illustrations. — (a) General. — In general “doing business” includes any activities of a corporation * * *.
Hi ❖ ❖ H* Hi
(b) Exceptions. — Ordinarily the exceptions to “doing business” are restricted to limited activities of a corporation. For example—
Hi Hi Hi ❖
(2) A corporation may complete its organization and sell its capital stock for cash without incurring liability. However, the exchange of its capital stock for property other than cash or the use of the proceeds from the sale of its capital stock for the purchase of property are corporate business acts and constitute doing business. Entering into contracts for the purchase of property or the construction of a plant are also corporate acts and constitute doing business. In other words, it is not necessary that a corporation be actually engaged in the manufacture of its intended product or that it be actually creating profit or gain to incur liability, since making contracts, buying materials or machinery, and employing and dischargmg individuals are necessary*83 business acts leading to the ultimate attainment of the object and purposes for which the corporation was created and has its existence.
The business activities engaged in by plaintiff between June 26, and June 30, 1941, amounted to “doing business” within the meaning of the taxing statute as interpreted by the regulations above quoted. We think these regulations are reasonable and that they properly interpret and apply the special excise tax provisions of the statute. Plaintiff is therefore not entitled to recover the capital stock tax of $50,000 as an overpayment under its first cause of action.
Under the second or alternative cause of action we are of opinion that plaintiff is entitled to recover as a reimbursable item the excise tax of $50,000 paid as a proper reimbursable item of cost incurred and paid for and incident to the performance of the cost-plus-a-fixed-fee contract June 27, 1941. Flint v. Stone Tracy Co., 220 U. S. 107; Wm. Cramp & Sons Ship & Engine Building Co. v. The United States, 72 C. Cls. 146. The sole business in which plaintiff was engaged in 1941 was the preparation for performance and the actual performance in part of the contract of June 27.
Article 3 of the contract contained certain provisions for reimbursement to plaintiff of the cost of performance and, in addition to these provisions, incorporated as a part thereof Treasury Decision 5000 (Internal Revenue Cumulative Bulletin, 1940, Vol. 19, Part 2, P. 397) theretofore prepared, approved and promulgated by the Secretary of the Treasury, the Secretary of War, and the Secretary of the Navy (finding 9). This Treasury Decision was signed by the Secretary of War August 2, 1940. It was originally prepared and published for the purposes of determining costs under contracts for the purpose of fixing and determining the amount of excess profits under such contracts to be paid into the Treasury by the contractor under the provisions of the Vinson Act of March 24, 1934 (48 Stat. 504), and the National Defense Act of June 28, 1940 (54 Stat. 676, 677). Under this Treasury Decision and by separate rulings excise taxes with respect to the carrying on or doing business were held to constitute proper reimbursable items of cost of performance of cost-nlus contracts.
The express exclusion of Federal and State income and profits taxes and certain other taxes as unallowable items of cost implies that the excise tax on capital stock, which had been in existence since 1917, was considered an allowable reimbursable item of cost when the contract was prepared and executed, or, at least, that such excise tax on the right or privilege of carrying on or doing business was not among the items of cost of performance or preparation for performance of the contract to be excluded. On the record we must hold that the parties and the contract as drawn by defendant intended that the capital stock tax paid by plaintiff for the period ending after the contract was executed on the value of the capital stock as declared by the corporation under and pursuant to existing law should and would be an allowable item of reimbursable cost.
Excise taxes such as are here involved, and frequently referred to and designated as franchise or privilege taxes, are recognized and uniformly treated, under Treasury rulings and well established principles of accounting, as an expense of doing business and as an allowable item of cost of performing a contract. In.I. T. 3398 (1940), Cum. Bull. 1940-2, P. 396, the Treasury Department published a decision for the guidance of the War and Navy Departments in
In this case defendant expressly admits that under the terms of the contract of June 27, 1941, the excise tax imposed by Congress with respect to the right to carry on or do business was a proper reimbursable item of cost under the , contract and agrees in principle with plaintiff’s contention. Defendant contends, however, that plaintiff should not be allowed to recover as a reimbursable item the full amount of $50,000 excise tax paid for the sole reason that such tax was paid at the statutory rate upon the value of the capital stock as declared by the corporation rather than upon the basis of what the stock may be said to have been fairly worth on June 30,1941. Defendant therefore insists that since plaintiff has not sustained the burden of proof by showing the fair actual value of the capital stock on June 30, 1941, the petition should be dismissed. We cannot agree with this theory of reimbursment. On this record we cannot say that plaintiff so unreasonably inflated the declared value of its capital stock as to defraud the Government. Plaintiff has made a prima facie case under the law and the terms of the contract, and if there was any attempt to defraud the Gov-
At the time Treasury Decision 5000 was prepared and published in 1940, and at the time the contract of June 27, 1941, was prepared and executed the excise tax here involved and the related excess profits tax had been in effect without change, except as to rate, for eight years; having been imposed in its present form on June 16, 1933. (Prior to that
Plaintiff is entitled to recover under its second cause of action, and judgment will be entered in its favor for $50,000. It is so ordered.'