Southland Steel Co. v. War Contracts Price Adjustment Board

Southland Steel Company by Agnes Gillespie, Owner, and Agnes Gillespie, Individually, Petitioners, v. War Contracts Price Adjustment Board, Respondent Southland Steel Co. v. War Contracts Price Adjustment Board Docket No. 578-R United States Tax Court 13 T.C. 652; 1949 U.S. Tax Ct. LEXIS 54; October 26, 1949, Promulgated *54 Southland Steel Co. is the trade name of an unincorporated business conducted by petitioner Agnes Gillespie. The Southland Steel Co. was a subcontractor of a corporation whose majority stock was owned by Agnes Gillespie's half-brothers. Agnes Gillespie was also a minority stockholder, director and vice president of the corporation at the time she received the subcontract, owning about 4 per cent of the corporation's stock, and the business dealings between the petitioner and the corporation were based on informal oral agreements. Held, under the facts that petitioner was not under the control of or under common control with the corporation under the provisions of section 403 (c) (6) of the Renegotiation Act of 1943, and its subcontract is not subject to renegotiation because the amounts received for the 10-month period were less than the minimum required for renegotiation. Felix Atwood, Esq., for the petitioners. Ralph G. Cornell, Esq., for the respondent. Black, Judge. BLACK *652 The respondent determined that petitioner Southland Steel Co. realized excessive profits within the meaning of the Renegotiation Act of 1943 (section 403 of the Sixth Supplemental National Defense Appropriation Act of 1942, as amended by the Revenue Act of 1943) for the period beginning March 1, 1944, and ending December 31, 1944, in the amount of $ 32,500. The issues presented by the pleadings are: (1) Were the Southland Steel Co. and the Butane Equipment Co. during the fiscal year ended December 31, 1944, "under the control of or controlling or under common control with" the other within the meaning of the Renegotiation Act? If such control is found to exist, then: (2) What is a reasonable allowance, if any, for inclusion in petitioner's costs in 1944 in lieu of proprietor's salary? *653 (3) What is the amount of excessive profits derived by petitioner during 1944 within the meaning of the Renegotiation Act? FINDINGS OF FACT. The facts which were stipulated are so found. The Southland Steel Co. (hereinafter referred*56 to as Southland) is the trade name of an unincorporated business conducted by Agnes Gillespie, sometimes herein referred to as Gillespie. It was formed on or about February 25, 1944, and during the period here involved, commencing March 1, 1944, and ending December 31, 1944, its principal place of business was in Dallas, Texas. On February 28, 1944, Agnes Gillespie made a trade name declaration to a bank stating that she was the owner of Southland and on December 8, 1944, filed a certificate with the county clerk of Dallas County, Texas, registering the firm name of Southland, wherein it was stated that she was a sole owner thereof. The Butane Equipment Co. (hereinafter referred to as Butane) is a corporation located at Dallas, Texas. It was a Government prime contractor and during its fiscal years ended September 30, 1944 and 1945, was engaged in the manufacture, among other things, of British Mark V 4,000-pound bombs. By letter dated February 25, 1944, Southland submitted a bid to Butane for the manufacture of 21,000 shipping bands for the 4,000-pound bombs at a price of $ 18 each, based upon Butane's furnishing all the subcomponent parts and required raw materials, which bid*57 was accepted by Butane. During the entire period here involved Southland was engaged solely in the performance of its subcontract with Butane for the manufacture of these shipping bands. Other bids for the manufacture and delivery of shipping bands received by the Butane Equipment Co. were as follows: Bidder Date of bid Quantity Price Texas Boiler & Machinery Co Feb. 23, 1944 2,000 $ 43,000 Dallas Tank & Welding Co July 21, 1944 5,000 or more (each) 18.40 Trinity Steel Co Jan. 6, 1945 1,000 (each) 18.40 John Nooter Boiler Works Co July 20, 1944 1,000 per month (f. o. (each) 17.60 b. St. Louis, Mo.) Some other bids were received as high as $ 40 per shipping band, but all such bids were regarded by Butane as too high and were not accepted. James Jackson, during the period here involved, was president of Butane and Melvin W. Jackson was secretary-treasurer. Melvin was also president of the Dallas Engineering Co. Butane, in 1944, had approximately 3,005 shares of stock outstanding, of which James Jackson owned 2,069.65 shares, Melvin W. Jackson owned 530.35 shares, *654 and Agnes Gillespie owned 121.50 shares. Gillespie invested only $ 500 in Butane, *58 and she never received any dividends from that business after 1942. Although holding the office of vice president up to the last part of 1944 and although she was a director during that time, she never took part in the management of Butane and attended only one directors' meeting of the company, which was in 1940. She owned between 3 and 4 per cent of Butane's stock. Agnes Gillespie is a half-sister of James Jackson and Melvin W. Jackson, and she resided with James Jackson and her mother, Leda Jackson, during 1944. Gillespie originally invested $ 7,500 in the business of Southland on February 28, 1944, and additional amounts of $ 2,500, $ 2,000, and $ 500 on April 26, May 19, and May 25, 1944, respectively. She was the only person who invested money in the business and was the only one to receive the profits thereof. All the profit from the business was reported by her for income tax purposes on her income tax return. She paid an income tax of $ 32,972.76 for the year 1944. She made all the decisions with reference to the business and its policies, purchased materials for the operation thereof, and subcontracted some of the operations in the manufacture of the shipping bands. *59 She also borrowed money for the business on her own credit. During the period from 1915 to approximately 1923, Agnes Gillespie was a teacher in several Dallas high schools. She taught algebra, Latin, and some English. From approximately 1923 to 1930, she was proprietor of a suburban dry goods store, and from 1933 to 1944, she was in the real estate business. In 1943 she took a war-training course in drafting, served as inspector with the Dallas Engineering Co., and performed services for Butane. At the time the purchase order for the manufacture of 21,000 shipping bands was issued by Butane to Southland, Southland had no factory building, no equipment, and no pay roll of trained or other employees. A building for the manufacture of the bands at 1715 Forest Avenue was obtained from Butane by informal arrangement. The premises were held by Butane under a lease with the owner. Rentals were at first reimbursed by Southland to Butane and later paid by Southland direct to the owner. In the latter part of 1944 Southland commenced construction of a new factory building on land which was owned by James Jackson, and it was agreed that when completed it would pay rental on the land. *60 However, the construction of the building was discontinued when its subcontract with Butane was terminated on or about February 4, 1945. The first piece of equipment purchased by Southland was a large bending roll. The original purchase was made by Butane and it was delivered to and installed in Butane's plant. However, payment of the draft therefor in the amount of $ 5,250 on March 24, 1944, was made by Southland. Southland had an informal arrangement *655 with Butane to install it in Butane's plant, as it required a special foundation for installation which was not available at Southland's plant. Rental for the installation at Butane's plant was paid by Southland in February 1945 at the close of the contract. Other equipment furnished to Southland by Butane consisted of a small bending roll, a punch, two automatic welding machines, and four generators. The welding machines and generators were obtained by Butane from Army Ordnance. The equipment was furnished under an informal agreement to pay rental, but no rental was paid during 1944. During 1944 performance by Butane under its bomb contract became unsatisfactory and on or about August 1, 1944, at the request of Army*61 Ordnance, M. J. Neeley, then president of the Hobb Manufacturing Co. at Fort Worth, Texas, became manager of Butane and J. C. Galleher, Jr., was appointed assistant manager. Jesse R. Black, formerly associated with the Dallas Engineering Co., became plant manager of Southland on August 2, 1944. In connection with production and inspection and the meeting of delivery schedules of shipping bands from Southland, Neeley and Galleher consulted James Jackson and Jesse R. Black. Petitioner's performance under its subcontract with particular reference to meeting inspection requirements and delivery schedules was poor. Approximately 50 per cent of the bands delivered failed to pass Ordnance inspection and had to be reworked. During the period February 28 to December 31, 1944, Southland had total sales of $ 240,548.94, cost of sales of $ 168,336.72, gross profit of $ 72,212.22, and net profit of $ 54,651.44 before any allowance of compensation for services of Agnes Gillespie. Butane in its fiscal years ended September 30, 1944 and 1945, reported sales subject to renegotiation in the respective amounts of $ 1,100,000 and $ 2,378,000. Upon these sales it reported a loss of $ 86,000 in the*62 fiscal year ended September 30, 1944, and a profit of $ 96,400 for the fiscal year ended September 30, 1945. Agnes Gillespie was the sole owner of her business operating under the trade name of Southland Steel Co., and she alone controlled or had the power of control over the business. She had no control or right of control over the Butane Equipment Co. The two businesses were not under common control. The War Contracts Price Adjustment Board issued a unilateral order on June 4, 1946, determining that Southland had realized excessive profits of $ 32,500 for the 10-month period March 1 to December 31, 1944, upon renegotiable sales made during that period. OPINION. The basic question here is whether Southland is subject to renegotiation under the provisions of the Renegotiation *656 Act of 1943. Petitioner contends that it is not subject to renegotiation under section 403 (c) (6) of the act 1 because the amounts received by it for the 10-month period here involved did not exceed $ 416,666.66 (10/12 of $ 500,000). It is stipulated that petitioner's sales for the 10-month period were $ 240,548.94. It is also stipulated that Butane, in its fiscal years ended September 30, 1944*63 and 1945, reported sales subject to renegotiation in the respective amounts of $ 1,100,000 and $ 2,378,000. Respondent contends that petitioner was under the "control of or controlling or under common control with" Butane under the provisions of section 403 (c) (6), supra, and petitioner is therefore subject to renegotiation, since petitioner's and Butane's aggregate sales exceeded the limitation of $ 500,000 provided in section 403 (c) (6), supra. It is undisputed that petitioner's gross sales were only $ 240,548.94 for the period involved and are not subject to renegotiation unless petitioner was under the control of or under common control with the Butane Equipment Co. *64 Respondent's contention that petitioner was under the "control of or controlling or under common control with" Butane during 1944 is based on the fact that there was a family relationship consisting of two brothers, James and Melvin Jackson, and Agnes Gillespie, who was a half sister; that all had some interest in Butane (James, the president, owned 2,069.65 shares of stock, Melvin, the secretary-treasurer, owned 530.35 shares, and Agnes Gillespie, the vice president and a director, owned 121.50 shares of stock); that petitioner was formed for the sole purpose of manufacturing shipping bands for the British 4,000-pound bombs, for the manufacture of which Butane was the prime contractor; and that the various business dealings between petitioner and Butane set out in our findings of fact show that in fact petitioner was under the control of or under common control with Butane during the period here involved. We do not agree with respondent's contention that Southland was in any manner under the control of Butane. The statute does not define what is meant by the term "control." Webster's New International Dictionary, 2d ed., defines the word "control" as meaning, among other things: *65 "To exercise *657 restraining or directing influence over; to dominate, regulate, hence to hold from action; to curb, to subject." Respondent, as has been heretofore stated, argues that Southland during 1944 was "under the control of or controlling or under common control with" the Butane Equipment Co. within the meaning of the Renegotiation Act. Respondent, in arguing that this is so, relies upon its regulations. It points out that regulations were formulated pursuant to the Renegotiation Act of 1942 (Joint Renegotiation Manual, published January 27, 1944) which interpreted the phrase "common control," as printed in the margin. 2 *66 Respondent does not contend that (1), (2), and (3) of the regulations are applicable, but it does stress (4) as being applicable and contends that under that part of the regulations the War Contracts Price Adjustment Board was justified in finding that there was actual control by Butane of petitioners. We think the evidence clearly shows that Southland was not controlled by Butane, nor did Gillespie, the sole owner and operator of Southland, have any control over Butane. We have made findings of fact to that effect after a careful review and consideration of all the evidence. We make no adverse holding with respect to the regulation upon which respondent relies, but, giving full faith and credit to it, we think petitioner has proved there was no control, either actual or otherwise, over Southland by Butane and there was no control over Butane by either Southland or Gillespie. No doubt James and Melvin Jackson rendered valuable help and assistance to their sister in running Southland, but they exercised no control over that business. The overwhelming weight of the testimony is to the contrary. The respondent having determined that petitioner had excessive profits under facts which*67 show that it lacked authority to do so, an order will be entered that there are no excessive profits for the period in question. Cf. Callahan v. War Contracts Price Adjustment Board, 13 T. C. 355. This latter case held that, since each of the respondent's two contested determinations of the contractors' excessive profits for two fiscal periods, each less than its taxable year, *658 were without statutory authority, respondent's determinations should both be expunged. The conclusion we have here reached makes it unnecessary that we rule upon petitioners' other issues, which were raised only in the alternative. An order will be issued in accordance herewith. Footnotes 1. (6) 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, whether such contracts or subcontracts were made on, prior to, or after the date of the enactment of the Revenue Act of 1943, and whether or not such contracts or subcontracts contain the provisions required under subsection (b), unless (A) the contract or subcontract provides otherwise pursuant to subsection (i), or is exempted under subsection (i), or (B) the aggregate of the amounts received or accrued in such fiscal year by 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 (including those described in clause (A), but excluding subcontracts described in subsection (a) (5) (B)) do not exceed $ 500,000 and under subcontracts described in subsection (a) (5) (B) do not exceed $ 25,000 for such fiscal year. If such fiscal year is a fractional part of twelve months, the $ 500,000 amount and the $ 25,000 amount shall be reduced to the same fractional part thereof for the purposes of this paragraph.↩ 2. 348.3. Tests of "Control". In determining whether the contractor controls or is controlled by or under common control with another person, the following principles should be followed: (1) Corporate Control: A parent corporation which owns more than 50% of the voting stock of another corporation controls such other corporation and also controls all corporations controlled by such other corporation. (2) Individual Control: An individual who owns more than 50% of the voting stock of a corporation controls the corporation and also controls all corporations controlled by the corporation. (3) Partnership Control: A general partner who is entitled to more than 50% of the profits of a partnership controls the partnership. (4) Other Cases↩: Actual control is a question of fact. Whenever it is believed that actual control exists even though the foregoing conditions are not fulfilled, the matter may be determined by the Department or Service conducting the renegotiation.