Callahan v. War Contracts Price Adjustment Board

Jere J. Callahan, Individually and as Trustee for Edward J. Whyte III and Mary Elen Whyte; W. Richard Ralph; Florence Eva Ralph, as Trustee for William Richard Ralph, Jr.; Gustav E. Nyquist; and Florence E. Nyquist, Co-partners, Doing Business as the Die Engraving Company, Petitioners, et al., 1 v. War Contracts Price Adjustment Board, Respondent Callahan v. War Contracts Price Adjustment Board Docket Nos. 512-R, 513-R United States Tax Court 13 T.C. 355; 1949 U.S. Tax Ct. LEXIS 85; September 26, 1949, Promulgated *85 Decisions will be entered for the petitioners. Since each of the respondent's two contested determinations of petitioner's excessive profits for two fiscal periods, each less than its "taxable" year, was without statutory authority, respondent's determinations are both expunged. Maguire Industries, Inc., 12 T. C. 75 (on appeal, App. D. C.), distinguished. Raymond A. Fox, Esq., and Harvey H. Berger, C. P. A., for the petitioners. Paul L. Muilenberg,*86 Esq., and Harland F. Leathers, Esq., for the respondent. Leech, Judge. LEECH *355 These proceedings were consolidated. The Die Engraving Co. (hereinafter referred to as petitioner) is a copartnership organized under the laws of the State of Michigan, with its principal place of business in Detroit, Michigan. In Docket No. 512-R, the respondent determined that petitioner, for the fiscal period January 1 to March 31, 1944, had excessive profits in the amount of $ 26,000, and in Docket No. 513-R, for the two months' fiscal period ended May 31, 1944, it had excessive profits in the amount of $ 9,000. The parties have stipulated that the quantum of excessive profits for the two periods used by respondent in the determinations contested in the respective docket numbers is as determined by the respondent. The petitioner attacks each determination upon the same grounds. These are that: (1) During the two respective periods for which the two determinations of excessive profits were made, giving rise to these proceedings, the petitioner was not "under the control of or under common control with" the General Tool & Engineering Co. within the meaning of the Renegotiation Act*87 as amended by section 701 of the Revenue Act of 1943; (2) petitioner should have been consolidated with the General Tool & Engineering Co. for renegotiation under that act; and (3) petitioner was not subject to renegotiation for the respective periods January 1 to March 31, 1944, and April 1 to May 31, 1944, as determined by respondent. *356 A stipulation of facts, with exhibits, was filed. Oral testimony was also presented. The facts as stipulated are so found. FINDINGS OF FACT. The beginning of petitioner's 1944 fiscal year was January 1, 1944. During the period January 1 to March 31, 1944, the petitioner's partnership consisted of the following members: Jere J. Callahan, individually Jere J. Callahan, as trustee for Edward J. Whyte III and Mary Elen Whyte W. Richard Ralph Florence E. Ralph, as trustee for William Richard Ralph, Jr. Gustav E. Nyquist Florence E. Nyquist On April 1, 1944, Florence Eva Ralph, individually, became a partner in the petition. On June 1, 1944, Jere J. Callahan ceased to be a partner individually and become a partner as trustee of a one-sixth interest for the children of his daughter, Dorothea S. Simpson. As of the close of business on *88 March 31, 1944, an operating statement of profit and loss was prepared by petitioner which determined the profit to the constituent partners for the fiscal period January 1, 1944, to March 31, 1944. As of the close of business on May 31, 1944, an operating statement was prepared by petitioner which determined the profit to the constituent partners for the fiscal period April 1 to May 31, 1944. During both the fiscal periods involved, W. Richard Ralph, Sr., and the members of his immediate family, owned a one-third interest; Gustav E. Nyquist and his wife, Florence E. Nyquist, owned a one-third interest; and Jere J. Callahan, either individually or as trustee for members of his family, owned a one-third interest in the petitioner. During both fiscal periods involved, the stock of General Tool & Engineering Co. (hereinafter referred to as General Tool) was owned as follows: Jere J. Callahan, together with his daughters, Dorothea S. Simpson and Isobel S. Whyte, owned approximately 72 per cent; Gustav E. Nyquist and his wife, Florence E. Nyquist, together owned approximately 20 per cent; and W. Richard Ralph, Sr., owned approximately 2 per cent. Approximately 6 per cent was owned by *89 employees. During both fiscal periods Jere J. Callahan was president, secretary, and director; Gustav E. Nyquist was vice president, director, general manager, and shop superintendent; and W. Richard Ralph, Sr., was office and sales manager of General Tool. General Tool was incorporated in the State of Michigan on March 8, 1917. It is engaged in the business of manufacturing drop forge *357 dies. It follows the orthodox manner of milling dies by skilled workers known as die sinkers. Petitioner, during its existence, has engaged in the manufacture of drop forge dies, which are manufactured by the use of Keller machines and do not require the services of skilled die sinkers. The Keller machines require a model or master die and are used only in the production of duplicate dies. For the period January 1 through March 31, 1944, substantially all transactions of petitioner, in the amount of $ 65,556, were with General Tool. Of these transactions, $ 6,556 did not relate to war work and $ 59,000 was for subcontracts within the meaning of the Renegotiation Act. For the period April 1 through May 31, 1944, petitioner's business transactions amounted to $ 47,459. Of these transactions, *90 $ 4,745 did not relate to war work and $ 42,714 was for subcontracts within the meaning of the Renegotiation Act. Of these transactions, $ 35,909 came from General Tool and $ 11,550 came from outside companies. Callahan, Nyquist, and Ralph, all representing both the petitioner and General Tool, met two, three, four, or more times a week, at which meetings matters relating to the management and other problems of the two companies were discussed. Nyquist and Ralph acted in an executive capacity for both petitioner and General Tool in the following situations: (a) In studying General Tool's incoming orders for the purpose of determining whether it was a job for General Tool or for petitioner to do, or for both companies; (b) in fixing prices to customers of General Tool when a job was to be turned over to petitioner; (c) General Tool made model dies for petitioner at a price which was determined after the completion of an entire order for a number of dies; and (d) in determining the amount petitioner was to receive and the amount General Tool was to receive in the distribution of the total price to be received from the customer of General Tool on a given order of dies. Petitioner billed*91 General Tool for duplicating die jobs done by it under a General Tool order after the respective amounts to be received by each company under the order had been previously determined by the estimates of Nyquist and Ralph. Petitioner, during its first fiscal period, kept no labor cost records. Such records were kept for petitioner by General Tool on its cost records, upon which basis profits were divided. During the two fiscal periods involved petitioner and General Tool interchanged employees. The following tabulation sets forth the names of certain employees and the amounts paid by each company. *358 First period Employee Paid by petitioner Paid by General Tool E, Ralph $ 130.00 $ 260.00 Hilda A. Bryant 130.00 455.00 D. Lundgren 260.00 1,597.58 A. Bergeson 260.00 1,766.12 Wm. Greblicki 75.80 1,377.00 F. Perret 104.00 1,291.42 Second period Employee Paid by petitioner Paid by General Tool E, Ralph $ 130.00 $ 260.00 Hilda A. Bryant 130.00 455.00 D. Lundgren 260.00 1,402.42 A. Bergeson 260.00 1,233.88 Wm. Greblicki 1,390.55 156.65 F. Perret 734.39 48.75 During the second fiscal period the names of twelve*92 other employees appear as having been employed by each company. Each company kept separate employment records and each paid its employees separately. Petitioner and General Tool had common office space. Both companies employed the same office girl and each paid her separately for work done. In April 1940, 14 Keller die duplication machines were purchased from the Ford Motor Company out of the funds of General Tool by check signed by Jere J. Callahan as president. These machines were carried in the machinery fixed assets account of General Tool after their purchase in April 1940. Two of these machines were moved from storage in the General Tool plant to petitioner's plant on September 14, 1940, and two more of them were moved to petitioner's plant on January 7, 1941. Payment for these machines was made on March 1, 1941. Four additional machines were delivered to petitioner on November 4, 1941, and were subsequently paid for January 8, 1942. The six remaining machines were delivered to petitioner on November 10, 1941, and were paid for March 17, 1942. The cost of the fourteen machines to petitioner was $ 2,100, the same amount which General Tool paid for the machines in April*93 1940. Formal articles of copartnership were executed on January 18, 1941, by Callahan, Nyquist, and Ralph. The books of petitioner were opened on September 12, 1940. Petitioner began business operations in January 1941. Ralph, Nyquist, and Callahan had been executives of General Tool for some years prior to 1941. They worked together harmoniously. Nyquist and Ralph, in performing their office duties for General Tool and the petitioner, occupied the same room in the office of General Tool. The shop of General Tool was adjacent to the office. Both the office and the shop were owned by General Tool. Petitioner had one plant located at 10465 Knodell Avenue and another plant located at 2822 East Grand Boulevard, Detroit, Michigan. It leased both these plants during the periods involved from third parties. *359 During the year 1944 General Tool paid to Jere J. Callahan a salary of $ 21,000; to Gustav E. Nyquist, $ 16,100; and to W. Richard Ralph, Sr., $ 10,040. Petitioner paid no salaries to these individuals. OPINION. We pass the first two grounds of petitioner's attack on the respondent's determinations and proceed to a consideration of the third. The stipulated facts disclose*94 that a new partner was admitted as of April 1, 1944, and another as of June 1, 1944. It is the contention of petitioner that the admission of new partners did not have the effect of dissolving the petitioner. The respondent, on the other hand, argues that the old partnership was dissolved and a new partnership was created upon the admission of each new partner. Under the Uniform Partnership Law in effect in the State of Michigan during the pertinent period, the entrance of a new partner with the consent of the old did not dissolve the partnership. 2 In Helvering v. Archbald, 70 Fed. (2d) 720; certiorari denied, 293 U.S. 594, it is stated: * * * Whatever was the rule at common law, the entrance of a new partner with the consent of all the old partners is not now a cause of dissolution under the Partnership Law of New York (Consol. Law N. Y. c. 39) § 62; Cameron v. Com'r., 56 F. (2d) 1021 (C. C. A. 3). 3 *95 We hold that petitioner was not dissolved by the entrance of a new partner. Section 20.29 of the Uniform Partnership Act of Michigan, which provides for dissolution "caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business," relied upon by the respondent, is not applicable here in any event because no partner ceased to be associated in the carrying on of the business during the entire period January 1 to June 1, 1944. Section 403 (c) (6) of the Renegotiation Act as amended by section 701 of the Revenue Act of 1943 furnishes respondent with his only authority to make the contested determinations. That section provides: This subsection 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 * * *. Section 403 (a) (8) defines the term "fiscal year" as the taxable year of the contractor or subcontractor under chapter 1 of the Internal Revenue Code. Section 48 (a) of chapter 1 of the code defines the "taxable year" as the calendar year, or the fiscal year ending during *360 such calendar year, upon the basis of which the*96 net income is computed. While a partnership is not a unit for taxation, it is a tax computing unit. Section 187 of the code requires a partnership to make a return for each taxable year, as a basis for determining the distributive share of the partnership profits taxable to each partner. It has been stipulated that petitioner's taxable year commenced on January 1, 1944. And, since the admission of a new partner did not terminate the partnership, it follows that respondent had no authority to determine excessive profits for either of the two periods in question, that there could be no excessive profits determined under the law for those two respective periods, and that, accordingly, there are no excessive profits under the law for those two periods. Mrs. Grant Smith, 26 B. T. A. 1178; Oklahoma Contracting Corporation, 35 B. T. A. 232; Estate of Cyrus H. K. Curtis, 36 B. T. A. 899. It is true that the three cited cases involve redeterminations of income tax deficiencies in which this same question as to fiscal year was raised under the Internal Revenue Code as is raised here under the Renegotiation*97 Act involving redetermination of determinations of excessive profits. However, the similarity in the proceedings before this Court of those arising under the Renegotiation Act to those arising under the code is sufficiently great, we think, to render those cases strongly persuasive, if not controlling, authorities for our position here. In Maguire Industries, Inc., 12 T. C. 75 (on appeal, App. D. C.), we dismissed the proceeding for lack of jurisdiction because, for one reason, the determination had not been made "with respect to a fiscal year." But the basis of our jurisdiction there was section 403 (e) (2) 4*98 of the Renegotiation Act as added by section 701 of the Revenue Act of 1943, whereas the basis of our jurisdiction here is section 403 (e) (1) of the Renegotiation Act as added by section 701 of the Revenue Act of 1943. 5 No such requirement appears in the latter provision. Decision will be entered for the petitioners. Footnotes 1. Proceeding of the following petitioners is consolidated herewith: Jere J. Callahan, Individually and as Trustee for Edward J. Whyte III and Mary Ellen Whyte; W. Richard Ralph; Florence Eva Ralph, Individually and as Trustee for William Richard Ralph, Jr.; Gustav E. Nyquist; and Florence E. Nyquist, Co-partners, doing business as the Die Engraving Company. [Docket No. 513-R.]↩ 2. Michigan Ann. Stat., vol. 14, sec. 20.31 (C. L. '29, § 9871).↩ 3. Sec. 62 of the Partnership Law of New York is identical with section 20.31 of the Uniform Partnership Act of Michigan.↩ 4. * * * Any contractor or subcontractor * * * aggrieved by a determination of the Secretary made prior to the date of the enactment of the Revenue Act of 1943, with respect to a fiscal year ending before July 1, 1943, as to the existence of excessive profits, which is not embodied in an agreement with the contractor or subcontractor, may * * * file a petition with The Tax Court of the United States for a redetermination thereof * * *.↩ 5. Sec. 403 (e). (1) Any contractor or subcontractor aggrieved by an order of the Board determining the amount of excessive profits received or accrued by such contractor or subcontractor may, within ninety days (not counting Sunday or a legal holiday in the District of Columbia as the last day) after the mailing of the notice of such order under subsection (c) (1), file a petition with The Tax Court of the United States for a redetermination thereof. * * *↩