Wolff v. Macauley

George M. Wolff and Truman E. Phillips, Co-Partners Doing Business Under the Firm Name of Wolff and Phillips, Petitioners v. Edward Macauley, Acting Chairman, U. S. Maritime Commission, Respondent Wolff v. Macauley Docket No. 498-R United States Tax Court 12 T.C. 1217; 1949 U.S. Tax Ct. LEXIS 143; June 30, 1949, Promulgated *143 Petitioners are architects operating in partnership. During the calendar year 1942 they received payments aggregating $ 132,819.79 under four subcontracts which called for the design and supervision of construction of numerous buildings. The respondent determined that petitioners' excessive profits under these four renegotiable contracts were $ 60,000 for the calendar year 1942, thus reducing the amount petitioners could retain to $ 72,819.79. Held: (1) This Court has jurisdiction of this proceeding. George M. Wolff et al. v. Macauley, 8 T. C. 146, followed. (2) Section 403 (c) (6) of the Renegotiation Act of 1942, as amended, provides a jurisdictional limit on the amounts received by a contractor or subcontractor with governmental departments of $ 100,000. After jurisdiction to renegotiate is once acquired, the renegotiating authority may find excessive profits in an amount which will reduce the amount received by the contractor or subcontractor below $ 100,000. Donald O. Lincoln, Esq., for the petitioners. Harland F. Leathers, Esq., for the respondent. Harlan, Judge. Johnson, J., dissenting. Arundell, J., agrees with this dissent. HARLAN *1218 The respondent determined that petitioners, during the year 1942, realized excessive profits, within the meaning of the Renegotiation Act of 1942, as amended, in the amount of $ 60,000. The questions presented are: (1) Should this proceeding be dismissed for lack of jurisdiction under section 403 (e) (2) of the Renegotiation Act of 1943? (2) Under section 403 (c) (6) of the Renegotiation Act of 1942, as amended, may petitioners' excessive profits be eliminated in an amount greater than that which, when deducted from the aggregate amounts received and accrued to petitioners ($ 132,819.79), will reduce them below $ 100,000? FINDINGS OF FACT. The facts are stipulated and are found accordingly. Wolff & Phillips is a partnership composed of the*145 petitioners George M. Wolff and Truman E. Phillips, both of whom are licensed architects. The partnership of the petitioners was formed in January 1942, for the purpose of conducting and carrying on a general architectural business, with its principal place of business in Portland, Oregon. Petitioners' income from contracts with the Departments or subcontracts thereunder for the fiscal year ended December 31, 1942, was received for services performed under four subcontracts. These subcontracts were as follows: A. Subcontract No. 16. This was a subcontract between petitioners and the Oregon Shipbuilding Corporation under a prime contract with the Maritime Commission in which petitioners agreed to furnish architectural personnel, facilities, and professional services consisting of conferences, preparation of preliminary studies, working drawings, specifications, large scale and full size detail drawings, drafting of forms of proposals and contracts, and general administration and inspection of the construction of certain buildings at the corporation's shipyard in Portland, Oregon. Petitioners were paid a fee at the rate *1219 of 5 per cent, computed on the total amount of*146 the contracts approved for the construction of the respective buildings. The buildings upon which petitioners rendered architectural and engineering services cost the Oregon Shipbuilding Corporation the sum of $ 395,509. Petitioners' fees at the rate of 5 per cent were $ 19,775.45 gross. B. Subcontract No. 8. This was a subcontract between petitioners and the Kaiser Co., under a prime contract with the Maritime Commission. By its terms petitioners agreed to design, delineate fully, and furnish to the Kaiser Co. all the drawings necessary for complete design of fourteen enumerated buildings in the shipyard of the Kaiser Co. at Vancouver, Washington, including the preparation of all necessary lists of materials to be used in the construction of the buildings. Petitioners further agreed to issue invitations and proper drawings of the buildings being bid on to prospective bidders, together with copies of the standard form of subcontract and the union contract of the Kaiser Co.; to exercise general supervision and inspection during the construction of these buildings; and to make such changes in the plans and layouts as might be required during such construction. A fixed fee *147 of $ 44,628 was established for these services. During the year 1942 three change order agreements were entered into whereby nineteen additional structures were embodied under the terms of this subcontract. The original fixed fee to be paid was increased by $ 42,612 for the additional work done pursuant to these change orders. Construction costs for these buildings amounted to $ 1,731,993.60. Petitioners' fees received during the year in question were $ 85,044.34, the ratio of the fee to structure cost being 4.91 per cent gross. C. Subcontract No. 17. This was a subcontract between petitioners and the Kaiser Co. under a prime contract with the Maritime Commission. By its terms petitioners agreed to design, delineate fully, and furnish to the Kaiser Co. all of the drawings necessary for the complete design of twenty-two buildings, including the preparation of all necessary lists of materials to be used in the construction of the buildings; to issue invitations and proper drawings of the buildings being bid on to prospective bidders, together with copies of the standard form of subcontract and union agreement of the Kaiser Co.; to exercise general supervision and inspection during*148 the construction of the buildings; and to make any changes in the plans or layouts that might be required during construction. A fixed fee of $ 25,000 was established for these services. Petitioners received fees of $ 23,750 during the year 1942. The construction costs of these structures upon which petitioners received these fees amounted to $ 1,398,527.42. The ratio of fee to structure costs was 1.70 per cent gross. *1220 D. Air reduction subcontract. This was a subcontract between petitioners and the Air Reduction Sales Co., confirmed by purchase order No. 71742, under a prime contract with the Maritime Commission for architectural services in the construction of an oxygen plant at the shipyard of the Kaiser Co. at Vancouver, Washington. A fee of $ 4,250 was fixed based on the estimated costs. The estimated cost of construction of this plant was $ 85,000, the ratio of fee to structure cost being 5 per cent gross. The amount of renegotiable income received by petitioners from each of the four subcontracts during the fiscal year ended December 31, 1942, and the total renegotiable income received during the year in question were as follows: Subcontract No. 16 $ 19,775.45 Subcontract No. 8 85,044.34 Subcontract No. 17 23,750.00 Air reduction subcontract 4,250.00 Total 132,819.79 *149 Petitioners have consented to the entry of an order by this Court fixing excessive profits in an amount not to exceed $ 60,000, subject, however, to petitioners' contention that such excessive profits may not be eliminated in an amount which will reduce petitioners' renegotiable income (aggregate receipts from contracts with the Departments or subcontracts thereunder) below the "floor" of $ 100,000, as set forth in section 403 (c) (6) of the Renegotiation Act of 1942, as amended. OPINION. The respondent contends that this Court lacks jurisdiction and must therefore dismiss this proceeding. The same contention was made by respondent in connection with a motion to dismiss heretofore considered by this Court. This motion was denied in George M. Wolff et al. v. Macauley, 8 T. C. 146. For reasons stated therein, we hold that the petitioners are not subcontractors described in section 403 (a) (5) (B) of the Renegotiation Act, as amended, and that this Court has jurisdiction of the instant proceeding. The only remaining issue is whether petitioners' excessive profits may be eliminated in an amount which will reduce petitioners' renegotiable income below*150 $ 100,000. Under the Renegotiation Act of 1942, as amended, the secretaries of the Departments were separately authorized to renegotiate contracts entered into by contractors with certain governmental agencies and all subcontracts connected with the contracts. There was no central authority vested with the power of renegotiation. This led to conflicting constructions of the same act by the different Departments. *1221 The Price Adjustment Board of the Navy Department construed the language of section 403 (c) (6) to mean that no determination of excessive profits to be eliminated should be made in an amount greater than that which, when deducted from the aggregate amount of gross receipts or accruals for the contractor's fiscal year under contracts with the Departments or subcontracts thereunder, would reduce them below $ 100,000. The United States Maritime Commission, however, adopted the view that this section did not prevent it from eliminating excessive profits below $ 100,000. The pertinent provisions of section 403 of the Renegotiation Act of 1942, as amended, are the following: Sec. 403 (a). For the purposes of this section -- * * * * (4) The term "excessive profits" *151 means any amount of a contract or subcontract price which is found as a result of renegotiation to represent excessive profits. * * * * Sec. 403 (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 * * * may be excessive, the Secretary is authorized and directed to require the contractor or subcontractor to renegotiate the contract price. * * * * * * * (6) This subsection (c) shall be applicable to all contracts and subcontracts hereafter made and to all contracts and subcontracts heretofore made * * * unless * * * (iii) the aggregate sales by and amounts payable to the contractor or subcontractor and all persons under the control of or controlling or under common control with the contractor or subcontractor, under contracts with the Departments and subcontracts thereunder * * * do not exceed, or in the opinion of the Secretary will not exceed, $ 100,000 * * *. [Italics supplied.] From the above statutory provisions, it is apparent that excessive profits applies to "any amount" of profits which the renegotiation authority deems to be excessive. *152 There is no statutory provision in any way eliminating any part of the profits from consideration after the renegotiating authority has legally assumed jurisdiction. Section 403 (c) (6) provides that there shall be no renegotiation of any contract unless the aggregate sales by, and the amount payable to, the contractor or subcontractor shall exceed $ 100,000. There is no provision in the renegotiation law whereby the renegotiating authority, after having once assumed jurisdiction, shall not have authority to declare profits to be excessive as soon as the amount of those profits subtracted from the amount of aggregate sales or amount payable to the contractor or subcontractor shall equal $ 100,000. If it had been the intention of Congress to impose such an administrative limitation on the renegotiating authority, it would certainly appear that such an intention should have been expressed in the legislation itself. *1222 In support of petitioners' contention that our determination of excessive profits under the act can not be sufficiently large to reduce the total amount received by petitioners below $ 100,000, we are cited to regulations of the War Contracts Price Adjustment*153 Board issued for the fiscal year ended after June 30, 1943, and designated as paragraph 348.3, which reads as follows: (2) No determination of excessive profits to be eliminated from the aggregate amount of gross receipts or accruals under contracts and subcontracts (other than subcontracts referred to in subsection (a) (5) (B) of the 1943 Act) shall be made in an amount greater than that which when deducted from the aggregate amount of such gross receipts or accruals for the contractor's fiscal year will reduce them below $ 500,000. If we accept for the argument that this regulation applying to the 1943 Act should carry interpretative authority on a similar section of the 1942 Act, nevertheless, it seems evident that the regulation makes definite legislative provision which is not authorized by either the 1942 or the 1943 Renegotiation Act. Therefore, its provisions go beyond the authority of an administrative agency in that it writes substantive law. Our attention is also directed to a statement on the floor of the United States Senate by Senator George, Chairman of the Senate Finance Committee at the time the conference report on the Revenue Act of 1943 was under consideration. *154 This statement reads as follows: We have received some complaints from contractors whose total contracts for the fiscal year aggregate slightly over $ 500,000. For example, a contractor might receive total amounts for his fiscal year aggregating $ 510,000. While this would make his contracts subject to renegotiation, it is not intended that the renegotiation shall reduce such amounts received below $ 500,000, and, on inquiry, I find that that is the disposition of certain of the Departments charged with renegotiation. [Italics supplied.] It will be seen that the Senator was not discussing terms in the act of dubious meaning. He was setting forth what he evidently thought to be the provisions of the act, but if the reading of the act itself fails to disclose such provisions, the remarks of the Senator can not be accepted as establishing statutory provisions which are not included in the act. In Alfred S. Beeley, 12 T. C. 61, this Court had before it the renegotiation of a contract under the 1943 Act and the contractor in that case contended that because of the $ 500,000 jurisdictional limitation set forth in the act he should be allowed profits*155 on the initial $ 500,000 before being renegotiated on excessive profits in income received above that amount. This issue is very similar to the issue in the case at bar and the Court therein said: We find no support for this theory either in the legislative history of the act or in the regulations which have been promulgated to govern its enforcement. *1223 Petitioners having consented to the entry of an order fixing the excessive profits in an amount not to exceed $ 60,000, which was the amount determined by the respondent, we hold, therefore, that the amount of petitioners' excessive profits shall be fixed at $ 60,000 as determined by respondent. An order will enter in accordance herewith. JOHNSON Johnson, J., dissenting: Admitting, as they must, that petitioners' contention is supported by the statement of Senator George and paragraph 348.3 of the regulations of the War Contracts Price Adjustment Board, the majority hold that petitioners must refund the full $ 60,000, even though it reduces contract receipts below $ 100,000. They base this conclusion on Congress' failure to provide any limitation on the amount of excessive profits determinable in cases to which the*156 renegotiation act applies. I agree that there is no limitation, but in my opinion, when a determined refund reduces a contractor's receipts to $ 100,000, it follows that "the aggregate sales by and amounts payable to the contractor * * * do not exceed * * * $ 100,000," and thereby the renegotiation provisions become inapplicable by the literal terms of section 403 (c) (6). The statute is certainly susceptible of this construction, and, to resolve doubts, Senator George's remarks and the administrative interpretation are entitled to consideration. It seems to me, moreover, that only such a construction insures an equitable application of the $ 100,000 limitation on contracts subject to renegotiation.