Quartz Laboratories, Inc. v. Secretary of War

Quartz Laboratories, Inc., a Corporation Bankrupt, William B. Bostian, Trustee in Bankruptcy, Petitioner, v. Secretary of War and/or War Contracts Price Adjustment Board, Respondent Quartz Laboratories, Inc. v. Secretary of War Docket No. 332-R United States Tax Court 11 T.C. 626; 1948 U.S. Tax Ct. LEXIS 57; October 18, 1948, Promulgated *57 Certain individuals organized a corporation to engage in the manufacture of crystals for radio and radar sets under renegotiable war contracts. During the taxable year the corporation paid them $ 139,098.82 as compensation for personal services. The respondent determined that the compensation paid them was unreasonable, and that the corporation had excessive profits for the taxable year of $ 60,000. Held, the compensation paid such individuals was unreasonable in view of the services rendered by them and respondent correctly determined the corporation's excessive profits for the taxable year to be $ 60,000. Frank P. Barker, Esq., for the petitioner. William V. Crosswhite, Esq., for the respondent. Arnold, Judge. ARNOLD *626 This case presents the question of whether petitioner had excessive profits for the fiscal year*58 ended September 30, 1943, upon contracts *627 subject to renegotiation within the meaning of the Renegotiation Act of 1943, as amended. Respondent determined that petitioner's excessive profits for such year were $ 60,000. The correctness of respondent's determination rests largely upon what constitutes reasonable compensation for the services of certain officers, an engineer, and an expediter. FINDINGS OF FACT. The petitioner is the duly qualified and acting trustee in bankruptcy of Quartz Laboratories, Inc., which was adjudged a corporation bankrupt by the United States District Court for the Western District of Missouri on May 16, 1946. Quartz Laboratories, Inc., (sometimes referred to herein as Quartz) was organized on September 29, 1942, under the laws of the State of Missouri, with an authorized capital of $ 5,000. It had 100 shares of capital stock. George L. Williams and Aileen M. Williams, his wife, invested the original capital of $ 5,000 and held 50 shares of stock. Ralph Hukill and Jessie Hukill, his wife, held 25 shares each. Each of the stockholders was an officer. Ralph Hukill was president, George L. Williams was secretary and treasurer, and each wife was*59 a vice president. Williams and his wife financed Quartz by loans or by endorsement of bank loans. Hukill managed its operations. John Ziegler provided the technical and engineering knowledge and John Cashman procured machinery equipment, supplies, and contracts for it. Its plant was located in a building rented from Williams in Kansas City, Missouri. Quartz was organized for the purpose of producing crystals used in transmitters for frequency control. At the time of its organization there was a critical shortage of crystals, a shortage of labor in the crystal industry, and a general lack of knowledge respecting the manufacture of crystals. The crystals were integral parts of the basic communication sets and radar used by the armed forces of the United States. World War II had created a great need and demand for crystals. When Quartz was first organized the officers voted to take 25 per cent of gross sales as compensation for their services. This percentage figure was later reduced to about 17 per cent. None of the officers received a stated salary during the taxable year. The method of compensating Ziegler and Cashman for their services is hereinafter described. During the*60 fiscal year 1943 Quartz held contracts from Hallicrafters Co. and Detrola Corporation which called for the delivery of 90,152 crystals, all of the same type, known as 171-B. The following table shows the contract or order numbers, the dates thereof, *628 the prices per crystal or unit, the quantity called for by each contract, and the quantity shipped as of July 29, 1943: HALLICRAFTERS CO. Quantity Quantity Contract or order number Date Price called for shipped — 3721 — 9- 4-42 $ 10.00 16,012 16,012 — 5164 — 9-30-42 10.00 5,000 5,000 — 6371 — 10-27-42 $ 8.50- 7.00 13,516 6,356 — 8994 — 12-17-42 8.50- 7.00 4,968 4,968 — 8998 — 12-17-42 8.50- 7.00 14,976 14,976 11759 2- 2-43 9.00 7,600 1,405 DETROLA CORPORATION W11969-511 4- 6-43 $ 7.50 28,080 5,760 Total 90,152 54,477 During the fiscal year 1943 Quartz borrowed $ 40,000 from George L. and Aileen Williams, upon notes executed in their favor. Quartz also borrowed from a bank with the aid of Williams' endorsement. The capital borrowed during the fiscal year was as follows: Date of Amount Payable to -- Interest Date Interest note of note rate paid paid 10-21-42 $ 12,500 George L. Williams 1% 9- 7-43 $ 103.88 12-10-42 7,500 Aileen M. Williams 3% 3-13-43 62.50 12-10-42 15,000 George L. Williams 4% 4- 7-43 195.03 12-30-42 5,000 George L. Williams 4% 4- 7-43 53.89 5-11-43 25,000 First National Bank 2 1/2% 6-29-43 86.80 Total interest paid 502.10 *61 The daily average borrowed capital during the fiscal year 1943 was $ 21,990. The balance sheet of Quartz Laboratories, Inc., at the beginning and at the end of the fiscal year 1943 shows assets and liabilities as follows: Oct. 1, 1942 Sept. 30, 1943 ASSETS Cash $ 25,000.00 $ 4,672.58 Accounts receivable 13,740.05 Other receivables 726.04 Inventory 23,226.10 Equipment $ 22,914.40 Less reserve for depreciation 6,779.70 16,134.70 Total assets 25,000.00 58,499.47 LIABILITIES Accounts payable 7,500.00 3,955.08 Notes payable 12,500.00 Salaries payable 7,613.36 Accrued taxes 5,962.24 Federal and state income taxes 28,489.19 Total current liabilities 20,000.00 46,019.87 Capital stock 5,000.00 5,000.00 Surplus 7,479.60 Total liabilities and net worth 25,000.00 58,499.47 *629 The profit and loss statement of Quartz for the fiscal year 1943, exclusive of certain payments as specified, shows the following items of sales, costs, expenses and profits: Net sales $ 651,824.15 Cost of sales: Materials $ 175,314.79 Labor 180,357.93 Manufacturing expense 87,519.99 443,192.71 Gross profit 208,631.44 General and administrative expense 33,563.83 Net renegotiable profit, excluding payments to officers and John H. Cashman and/or Consulting Service Co 175,067.61 *62 During the fiscal year 1943 Quartz paid its four officers the following amounts for their services to it: Ralph Hukill, president $ 33,538.17 Jessie Hukill, vice president 24,816.09 Aileen Williams, vice president 22,001.09 George L. Williams, secretary 25,629.72 Total 105,985.07 In addition to the salaries paid its four officers, Quartz paid John H. Cashman and/or Consulting Service Co. $ 33,113.75 during the fiscal year 1943 for services as an expediter, which services are hereinafter more fully described. The services rendered Quartz by, and the qualifications of, the aforementioned individuals, and John Ziegler, were as follows: Ralph Hukill, the president and production manager of Quartz, was brought into the venture by Ziegler. Hukill devoted all of his time to serving Quartz. He brought no engineering, production, or management experience to the business and depended upon Ziegler for instructions, technical advice, and assistance. His previous experience was principally in the field of education, where his maximum salary was approximately $ 3,000 per annum. For about two years prior to his association with Quartz he had been a field representative *63 in the extension division of the University of Kansas. Part of his duties in that capacity was the organization of defense training courses for war industries and the recruiting of personnel for such industries. It was in connection with this work that he learned of the crystal industry, its critical labor shortage, and the general lack of knowledge respecting the manufacture of crystals. Hukill obtained his knowledge of manufacturing crystals as a result of his association with Quartz. The production record of Quartz for the fiscal year 1943 was good, but not exceptional. *630 Aileen Williams and Jessie Hukill, the vice presidents, rendered their principal services to Quartz during the early months of the fiscal year 1943. The employees were principally women who were trained by Quartz to manufacture crystals. The employees could have secured work in other war plants and a substantial part of the services rendered by the two vice presidents was providing for the personal welfare of the women workers, maintaining their morale, and recruiting additional workers. They purchased furnishings for the smoking and rest rooms, candy on one occasion, and otherwise assisted Hukill*64 in the operation of Quartz. Aileen Williams invested money in and loaned money to Quartz, as hereinabove mentioned. Jessie Hukill turned over the salary she received to John Ziegler, less amounts paid for state and Federal income taxes thereon, as hereinafter more fully explained. George L. Williams, the secretary and treasurer of Quartz, backed the enterprise financially. He was a man with extensive business experience and connections in the locality. He devoted most of his time to the Thornton and Minor Clinic of Kansas City. He had been the director of that clinic for 19 years and was also employed by the Cleary Clinic of Excelsior Springs, Missouri. The clinics and his other business interests occupied most of his time. Before investing his funds in Quartz he investigated the reputation and standing of John Ziegler as a crystal engineer. His principal services to Quartz were rendered in connection with the organization of the company and financing its operations. His business connections and contacts were used to provide Quartz with credit, equipment, furnishings, and supplies. One of his companies released space in a building which he rented to Quartz. His interest*65 and activity in behalf of Quartz enabled it to begin operations earlier. After the first three months he devoted very little time to the affairs of Quartz. John Ziegler, an experienced piezo electrical, or crystal, engineer, was a partner in Crystal Products Co. of Kansas City, Missouri. His agreement with Crystal Products Co. prevented him from holding an office in Quartz, and due to domestic difficulties he did not wish to appear on its pay roll. Ziegler agreed with Williams that he would furnish the technical knowledge and experience if the latter would finance Quartz. Hukill agreed that Ziegler should receive the salary paid his wife in return for Ziegler's services to Quartz. Ziegler's company had a contract for crystals with Hallicrafters which was turned over to Quartz under circumstances hereinafter related. Ziegler set up the plant for Quartz, sent some of his men from Crystal Products to aid and instruct the personnel, mapped out the progress of the work from raw material to finished product, drew up the manufacturing steps for a high rate of production, and set up the requirements for personnel capable of manufacturing crystals in accordance with contract specifications. *66 Ziegler's services were rendered principally *631 before and for a few months after Quartz was organized. Thereafter his services were inconsequential. At no time did Ziegler go into the plant and supervise the manufacturing operation. For the fiscal year 1943 Ziegler received about $ 13,000 for his services, which represented the salary paid Jessie Hukill, less income taxes paid thereon. At or about this time the Signal Corps was paying piezo electrical engineers a top salary of $ 8,000 and industry was paying about $ 12,000 per year. A fair salary for a consulting crystal engineer during 1943 was $ 50 to $ 100 per day. A crystal engineer could list the machinery and equipment needed to manufacture crystals and outline the flow of production in a period of two or three days. John H. Cashman was employed by Hallicrafters Co., a Chicago firm, at a salary of $ 8,100 per annum. Hallicrafters had prime contracts with the Government for the delivery of radio and radar sets. Some of these sets required as many as 72 crystals per unit. To maintain the delivery schedules on its prime contracts Hallicrafters had to receive a steady flow of crystals from its subcontractors. One*67 of Cashman's duties was to expedite this flow of crystals to Hallicrafters from its subcontractors. Some of the problems Cashman had to solve were production problems at the subcontractors' plants, and some involved the procurement of equipment and supplies needed in the manufacture of crystals. Competition between prime contractors to procure scarce items and supplies was keen, and it was common practice for them to employ people who were experienced in the trade as expediters. Cashman had been in the radio industry for about 22 years and was well acquainted with the trade. He spent 75 per cent of his time during the taxable year traveling all over the United States in behalf of Hallicrafters, visiting its subcontractors, and ironing out their problems. He was interested in at least two other companies, besides Quartz, that had subcontracts with Hallicrafters. Cashman's knowledge and wide acquaintance in the trade enabled him to locate and procure equipment items used in the manufacture of crystals. Prior to September 29, 1942, the Crystal Products Co. was a subcontractor for two competing prime contractors, Galvin and Hallicrafters. Due to pressure from Galvin, Crystal Products*68 Co. had been unable to supply Hallicrafters with any crystals. Cashman, seeking crystals for Hallicrafters, was pressing Ziegler for deliveries by Crystal Products Co.Ziegler, who had previously worked under Cashman at Aircraft Accessories, inquired if Cashman would be interested in a new company being formed in Kansas City by Hukill, Williams, and himself. Cashman was interested; and the deal ultimately worked out by the interested parties brought Cashman into Quartz as its "expediter" at an agreed compensation of 5 per cent on gross revenue, or 50 cents per crystal on the first order. Shortly after the deal was consummated *632 the Hallicrafters' contract with Crystal Products Co. was turned over or reissued to Quartz. Thereafter Quartz secured additional contracts from Hallicrafters and one from Detrola during the taxable year. The total amount of equipment purchased by Quartz during the fiscal year was less than $ 23,000. Some of this equipment was acquired through Ziegler's Crystal Products Co. Some of it represented improvised equipment that was used until manufactured equipment could be obtained. Some of it was acquired through Cashman's services as an expediter. *69 The first payment received by Cashman for his services was a $ 1,000 check by George L. Williams, dated November 6, 1942. Subsequent payments were made to the Consulting Service Co., a partnership composed of John Cashman and his wife. The total deposits of the Consulting Service Co. in its bank account with the National Bank of Hyde Park from March 29 to September 15, 1943, was $ 32,113.75. It is stipulated that John Cashman and Consulting Service Co. are the same for the purposes of this proceeding. Quartz repaid Williams the $ 1,000 that he gave Cashman in November 1942. The 171-B crystal produced by Quartz during the taxable year was probably the easiest crystal to manufacture that was purchased by the Signal Corps. Quartz received an order for the new DC-34 and DC-35 crystals in the latter part of the taxable year, but there was no production on this order during the fiscal year 1943. The manufacture of 171-B crystals was not a particularly complicated process. Precision machinery was available, at first through the conversion of machines used in other industries and later through machines especially designed for manufacturing crystals. These machines enabled crystal *70 manufacturers to use production line technique in producing crystals from quartz. The employees of Quartz were usually started at 50 cents per hour. Supervisors averaged 85 cents an hour, and the men in charge of the saw room and the finishing room received approximately $ 450 per month. All of the business transacted by Quartz during the taxable year was renegotiable. The profits realized by Quartz on its contracts in the fiscal year 1943 were excessive. The amount of the excessive profits for the taxable year is $ 60,000. The compensation paid by Quartz to John Ziegler, John H. Cashman, and its officers was unreasonable for the services rendered. OPINION. The fundamental question here is whether Quartz had excessive profits in the taxable year. The answer depends upon whether all or only a part of the $ 139,098.82 paid by Quartz for executive, *633 managerial, engineering, and expediting services should be considered as an element of cost in carrying out its war contracts. The parties are agreed that the contracts are renegotiable and that the amount of Quartz's net renegotiable profits for 1943, before compensation for the above services, is $ 175,067.61. Petitioner contends*71 that the compensation paid its officers, and John H. Cashman for expediting services, was reasonable and should be taken into account as part of the cost of fulfilling its contracts. It is contended that the officers had no fixed salaries other than the arrangement to pay them compensation based upon a percentage of gross revenue. It is further contended that the amounts paid in the taxable year covered services rendered in the second and third years of operation and that the sales of the latter years should be considered in determining the reasonableness of compensation paid in the taxable year. Respondent contends that Quartz had excessive profits for the taxable year of at least $ 60,000; that a reasonable compensation for managerial and executive salaries is $ 35,000; that Quartz's net profit subject to renegotiation, after allowing $ 35,000 for managerial and executive salaries, is $ 140,067.61; that consideration of all the pertinent factors in connection with petitioner's operations discloses the existence of excessive profits; and that sales for subsequent years are immaterial in determining whether Quartz realized excessive profits in the taxable year. We have found as *72 a fact that Quartz realized excessive profits on its war contracts for the taxable year. We have further found that the amount of such excessive profits was $ 60,000. We base our findings upon a careful examination and a full consideration of the evidence offered by the parties. It is unnecessary to review all the facts that we considered in reaching our conclusion. We shall, however, discuss in the succeeding paragraphs some of the facts and testimony which convinced us that Quartz realized excessive profits of $ 60,000 during the taxable year 1943. One of the points relied upon by petitioner to justify the compensation paid to the various individuals is that the manufacturing technique was extremely complex, requiring great skill. In our opinion the evidence is to the contrary. Petitioner admitted that respondent's witness, Johnson, was an expert in the manufacture of quartz crystals. During the war Johnson was the assistant or was in charge of the quartz crystal section of the Signal Corps. He was familiar with production and procurement problems of the crystal manufacturers. Among other plants, he visited that operated by Quartz. He testified that the 171-B crystal was*73 "probably the easiest crystal that the Signal Corps was having made for it at that time"; that the Signal Corps *634 furnished technical service, expediting service, assistance in obtaining orders, and operated a school for training personnel, all for the assistance of crystal manufacturers and without cost to them; that the position or standing of Quartz in the industry was "ordinary"; that the period between the organization and the first delivery of crystals by Quartz was "about average; about 90 days"; that with the machinery known to the trade at the time, the production of quartz crystals was "a straight-forward production line matter" and that the precision machines used in the manufacturing process were "relatively simple to operate"; that the Quartz plant "looks just like every other crystal plant I have ever been in"; that a fair average price for the 171-B type crystal in 1943 would be $ 6.50; that reasonable compensation for the managerial services of a company like Quartz would be $ 35,000; that a reasonable amount of profit for such a company to retain in its business for a year like the fiscal year 1943 of Quartz would be $ 60,000; that approximately 18,000,000*74 crystals were made in 1943 and 28,000,000 in 1944; that Quartz's payment to Cashman was the only instance he knew of in the industry where a person in the employ of a prime contractor received money from one of the latter's subcontractors; that he considered the payments "highly unethical"; that he reported the matter to Washington and within a matter of days Hallicrafters' officials were called into Washington; that it is one of the duties of expediters of prime contractors to give every possible assistance or take every possible step to secure equipment for the use of war industries and that such knowledge was passed on to subcontractors. The several witnesses appearing for petitioner did not, in any way, refute the testimony of Johnson. Much of their testimony is to the same effect as his. We can not agree, therefore, that the manufacturing technique was extremely complex, requiring great skill. The wages paid employees would also seem to refute this contention. In 1943 an employer could not secure skilled technical employees to do an extremely complex manufacturing job requiring great skill for 50 cents an hour. Nor could the employer secure supervisors for such skilled employees*75 for 85 cents an hour. Furthermore, it is extremely unlikely that Hukill, the production manager, could have managed such a complicated manufacturing operation with no more technical knowledge than he had. It is an established fact that only Ziegler had the technical "know-how" requisite to set up the manufacturing plant. Ziegler testified that he never supervised the operations, but depended upon Hukill to follow his instructions. Petitioner points out that the capital employed was for the most part private capital and that public capital was amply secured by the endorsements of its officers of the risk assumed. Our findings show that only $ 5,000 was invested in the business. The remaining funds *635 used by Quartz in its operations were secured by interest-bearing loans from the Williamses and from a bank upon George L. Williams' endorsement of the note. With an original investment of $ 5,000 and a daily average borrowed capital of $ 21,990, Quartz ended the fiscal year 1943 with a surplus of $ 7,479.60 according to its balance sheet. The surplus item of $ 7,479.60 is the same as the alleged profit for the year if the net renegotiable profits of $ 175,067.61 are reduced*76 by compensation payments of $ 139,098.82 and state and Federal taxes of $ 28,489.19 shown on the balance sheet. It is urged that this profit of $ 7,479.60 on the invested and borrowed capital is not an excessive profit when net sales totaled $ 651,824.15. The fallacy in this argument is that Quartz's profits for 1943 were far in excess of $ 7,479.60. Analyzing the services rendered by the various individuals receiving compensation from Quartz, we find only one who devoted his full time to its affairs, Ralph Hukill. He brought to Quartz a willingness to work. He had no engineering, technical, or managerial experience to offer. His earning ability prior to the fiscal year 1943 was less than $ 3,300 per annum. Yet, he received over $ 33,000 from Quartz for his services. Obviously, it was not Hukill's qualifications or ability that commanded this salary or compensation; it was the war contracts plus the profit-sharing agreement with Williams, Ziegler and Cashman. The compensation of $ 24,816.09 paid Jessie Hukill was intended primarily for Ziegler. Nevertheless, Williams testified to services rendered by Jessie Hukill in an effort to justify this disbursement to her. The facts*77 disclose, however, that she was a conduit for money paid Ziegler for his services. The record indicates that Ziegler was not too well pleased with the amount received after the taxes payable by Jessie Hukill were deducted therefrom. Ziegler's services to Quartz were, of course, valuable. He was the only person connected with Quartz who knew how to manufacture crystals. Hukill depended upon Ziegler for instructions. Ziegler spent some time setting up the plant and getting it started, but thereafter he devoted very little time to Quartz. Hukill testified that Ziegler probably visited the plant once each day for a few minutes during the first month and that he spent less and less time there as the plant progressed. Ziegler testified that his principal services to Quartz were rendered before and while the plant was being set up. Johnson testified that a good crystal engineer could lay out a crystal manufacturing plant in two or three days. Ziegler testified that he used a similar set-up to that used by his Crystal Products Co. Here, again, it seems plain that the compensation for Ziegler was based not so much upon the value of his services as upon the agreement as to how war*78 contract profits would be split. Ziegler, unfortunately, could not receive Jessie Hukill's compensation tax-free, and after taxes were deducted the compensation for his services *636 was much less proportionately than Williams' and Hukill's, who knew nothing about manufacturing crystals. Ziegler's dissatisfaction with his cut under the arrangement is not difficult to understand. The compensation of $ 22,001.09 received by Aileen Williams for the services she rendered Quartz is clearly unreasonable. The services she rendered have been detailed in our findings. We have no doubt that she aided the business in every way she could. She had a small investment therein which she would naturally protect. But no reasonable person would pay her $ 22,000 for equipping and furnishing the women's smoke and rest rooms, recruiting some women employees, buying a box of candy for certain employees as a work bonus, and helping to maintain the employees' morale. She was recompensed for her financial assistance to Quartz by the interest paid on her loan. We are convinced, therefore, that the compensation paid Aileen Williams for her services was unreasonable. Quartz paid George L. Williams*79 $ 25,629.72 for his services to it. Williams was a full time employee of the Thornton and Minor Clinic in Kansas City and was also an employee of the Cleary Clinic of Excelsior Springs, Missouri. He testified that his principal services to Quartz were in organizing and financing it. His business connections enabled him to accomplish a number of things for the benefit of Quartz. His services were rendered principally over a three-month period and thereafter he devoted very little time to Quartz. He rented a building to Quartz and loaned it money at interest. He rendered some valuable service to Quartz, but, like his associates Hukill and Ziegler, his compensation rested on the agreement dividing war contract profits rather than the value of his services. Some measure of the value of Cashman's services to Quartz, if any, can be gained from the salary paid him by Hallicrafters. He testified that he traveled 75 per cent of the time all over the United States for Hallicrafters and received a salary of $ 8,100 per annum. He also testified that he was interested in two other companies that had subcontracts with Hallicrafters. Plainly Cashman could devote very little time to Quartz. *80 Yet, he drew about four times the compensation from Quartz that he did from Hallicrafters. Johnson testified that the Signal Corps provided expediting services for crystal manufacturers and that prime contractors provided like services for their subcontractors. Part of Cashman's duties with Hallicrafters was to do exactly the things for which he charged Quartz. Another point against the reasonableness of Cashman's compensation is to be found in the amount of equipment purchased. Quartz's balance sheet shows its equipment account at the end of the taxable year 1943 as $ 22,914.40. Cashman was supposed to have expedited the acquisition of this equipment in consideration for the payments made to him. *637 The testimony shows that he did not expedite all of the equipment. Some of it was acquired from Crystal Products Co., some of it was improvised, and some of it was expedited by Cashman. Cashman, therefore, devoted not more than 20 per cent of his time to Quartz, expedited not more than $ 20,000 of its equipment, and received a salary of only $ 8,100 from his principal employer, but petitioner claims, nevertheless, that the $ 33,113.75 paid him during the taxable year was*81 reasonable compensation for services rendered. To limit ourselves, as we do, to a holding that petitioner's contention is unconvincing, is a clear understatement of the facts. Finally, petitioner contends that the compensation paid in the taxable year covered services rendered in the second and third year of operation and that the sales of the latter years should be considered in determining the reasonableness of the compensation paid in the taxable year. Petitioner cites no authority in support of this contention, nor has research developed any authority therefor. On the contrary, the Renegotiation Act, as amended, 1 provides that the Board (respondent herein) "shall exercise its powers with respect to the aggregate of the amounts received or accrued during the fiscal year * * * by a contractor or subcontractor * * *" (sec. 403 (c) (1)); and that, "This subsection [subsec. (c)] shall be applicable to all contracts and subcontracts, to the extent of amounts received or accrued thereunder in any fiscal year ending after June 30, 1943, whether such contracts or subcontracts were made on, prior to, or after the date of the enactment of the Revenue Act of 1943 * * * [sec. *82 403 (c) (6)]." (Emphasis supplied.) These and other references in the Renegotiation Act, together with statements contained in the committee hearings and the Joint Statement of Renegotiating Services, show that Congress intended excessive profits, as defined in the Renegotiation Act, to be determined on the contractor's or subcontractor's fiscal year basis. The sales of the second and third years can not, in view of the foregoing, be considered in determining the reasonableness of the compensation paid in the taxable year. In reaching our conclusion that Quartz realized excessive profits on its war contracts in the taxable year, we have taken into account the various contentions advanced *83 by petitioner and the evidence received with and without objection. We have made no attempt to determine what amount constituted a reasonable salary for the services rendered by each of the aforementioned individuals. We have made no attempt to determine precisely in dollars what their total reasonable compensation *638 would be. It is sufficient for present purposes to hold that the compensation paid them was unreasonable for the services they rendered in the taxable year; that to the extent that such compensation was unreasonable it should not be allowed as a part of the cost of Quartz's war contracts in the taxable year; that no part of the compensation determined to be unreasonable for the taxable year can be allocated to the sales for subsequent years; that by virtue of this reduction in the costs of its contracts Quartz had excessive profits in the taxable year 1943; and that, in our opinion, the excessive profits for the taxable year 1943 were $ 60,000. An order will issue in accordance herewith. Footnotes 1. Sixth Supplemental National Defense Appropriation Act of 1942, ch. 247, 56 Stat. 226, Public Law 528, 77th Cong., 2d sess., as amended. Amendments found in section 801, Revenue Act of 1942; the "Military Appropriation Act of 1944," approved July 1, 1943, Public Law 108, 78th Cong., 1st sess.; and Title VII, Revenue Act of 1943.↩