Bittner v. United States

W. T. Bittner, D. E. Bittner and E. M. Bittner, Partners, Doing Business as Bittner Associates, Petitioner, v. United States of America, Respondent Bittner v. United States Docket No. 354-R. United States Tax Court 26 T.C. 765; 1956 U.S. Tax Ct. LEXIS 134; June 29, 1956, Filed *134 Held, on the facts, that a contract under which petitioner received payments during the calendar year 1943 was a subcontract within the meaning of section 403 (a) (5) (B) of the Renegotiation Act of 1943. Robert S. Foster, Esq., for the petitioner. Harland F. Leathers, Esq., for the respondent. Turner, Judge. TURNER *766 Pursuant to the provisions of the Renegotiation Act of 1943, the War Contracts Price Adjustment Board1 determined that $ 21,000 of petitioner's profits for the year ended December 31, 1943, were excessive. *135 The only question for decision is whether a contract between petitioner and its principal constituted a subcontract within the meaning of section 403 (a) (5) (B) of the Renegotiation Act of 1943. FINDINGS OF FACT. Some of the facts have been stipulated and are found as stipulated. Petitioner is a partnership consisting of Walter T. Bittner, Dorothy E. Bittner, and Edward M. Bittner, being husband, wife, and son, respectively. Walter and Edward Bittner were both professional engineers, and during the year in question petitioner employed another engineer J. W. Dopp, at an annual salary of $ 7,500. Walter Bittner has been engaged in the design, sale, and servicing of machine tools continuously from 1922. The principal business of petitioner during the year 1943 was the sale, engineering, and servicing of products of the LaPointe Machine Tool Company, sometimes referred to hereafter as LaPointe. On January 1, 1942, petitioner and LaPointe entered into a contract which provided in part as follows: This Agreement made effective January 1st, 1942 and superseding previous Agreement which remained in force since July 22, 1929, by and between The Lapointe Machine Tool Company of Hudson, *136 Massachusetts, a corporation under the laws of the State of Maine, and acting herein for The Lapointe Machine Tool Company by J. J. Prindiville, Jr., Vice President, hereto duly authorized, and Bittner Associates of Chicago, Illinois by W. T. Bittner, as duly authorized senior partner. Witnesseth: That in consideration of the Agreement herein contained, the said company hereby agrees to employ said Bittner Associates as its representative in the following territory: Illinois: The entire State Indiana: Including and north of these counties in Indiana: Jasper, Pulaski, Fulton, Miami, Wabash, Huntington, Allen Wisconsin: The entire State Iowa: The entire State Michigan: The following counties: Branch, Calhoun, St. Joseph, Kalamazoo, Cass, Berien, Van Buren, Allegan, Kent, Barry, Ottawa, Muskegon, Newaygo, Oceana, Mason, Wexford, Lake, Grand, Traverse, Manistee, Benzie, and entire Northern Penninsula. for the purpose of acting and serving in the capacity of special engineers on Ordnance, Machines Tools, etc., and the sale of its products in the above territory, *767 and to pay said Bittner Associates for their services a commission on all sales of its products procured*137 in the above territory and approved by The Lapointe Machine Tool Company, namely on all orders received by the company on or after January 1st, 1942 and billed in any calendar year thereafter during the term of this agreement, a rate of commission on all such orders shipped in each of said calendar years as follows: -- On the first $ 300,000.00 shipments a rate of 12 1/2%; on the succeeding $ 200,000.00 shipments 10%; on the next $ 500,000.00 volume of shipments a commission of 8% and on anything in excess of $ 1,000,000.00 6%. It is further agreed that on any of the products of The Lapointe Machine Tool Company ordered in another territory and shipped into above named territory, or any products ordered in the above named territory and shipped into another territory, said Bittner Associates are to receive 6 1/4% commission. The amount of shipments on which the 6 1/4% commission applies shall not be construed as part of any of the shipments which contain the differential brackets of sliding scale commission percentages as outlined in the above. In consideration of the foregoing the said Bittner Associates hereby agree to prosecute the sales, service, engineering of the products*138 as sold for the company in said territory to the best of their ability while so employed, and it is further agreed that said Bittner Associates are given the exclusive rights under this agreement in the above mentioned territory and that they will devote all of their efforts exclusively in behalf and for The Lapointe Machine Tool Company and its products. It is further agreed that they will employ during the life of this contract, and carry the expense of, two salesmen, and to accept said commission in full settlement of their services and expenses while so employed. On January 2, 1943, a supplemental agreement to the January 1 agreement was executed, which provided that: Whereas a certain Agreement exists between The Lapointe Machine Tool Company of Hudson, Massachusetts, a corporation under the laws of the State of Maine, and Bittner Associates of Chicago, Illinois, this will serve as a supplement and become a part of that Agreement as follows: -- In view of the various government laws and regulations and the uncertainty in operating expenses of The Lapointe Machine Tool Company, it is mutually agreed that should there be any question or rulings on the commission payments to Bittner*139 Associates, whereby the government claims excessive commissions, that the out-of-pocket expenses that The Lapointe Machine Tool Company is called upon to pay will be borne by Bittner Associates. It is further agreed, due to variations in prices which may exist between the quotations made by The Lapointe Machine Tool Company to Bittner Associates and the prices as covered by the order placed on such quotations, due to intimate engineering knowledge and changes that may be established by Bittner Associates on such transactions, that for the special services and incurred extra expense which may be incurred by Bittner Associates they shall receive 25% of the amount that may be accrued on the order, in addition to the fixed quotations as made by the company with respect to such specific orders. Such sums will be payable during the month of January for the previous calendar year and are in addition to any commissions received under regular Sales Agreement. It is mutually agreed that in event that orders accepted and in process are canceled, the rate of commission payable thereon will be definitely fixed at 12 1/2% and will not be construed as part of the clause pertaining to the various*140 brackets of variable rates applying to certain definite total shipments for canceled sums in each calendar year. *768 The items sold by petitioner for LaPointe under the above contract included broaching tools, broaching machines, hydraulic pumps, hydraulic machines, and fixtures. Petitioner received commission payments from LaPointe, pursuant to the above contract, during the year ended December 31, 1943, in excess of $ 25,000, but less than $ 500,000. Such income received from LaPointe constituted substantially all of petitioner's income for that year. Other income than that received from LaPointe was derived from engineering services rendered to customers, with respect to broaching tools where no sale of tools was involved. OPINION. By section 403 (c) (6) of the Renegotiation Act of 1943, 2 the profits received under a subcontract, as defined by section 403 (a) (5) (B) of the Act, are not subject to renegotiation, unless the aggregate of the amounts received or accrued in a fiscal year ending after June 30, 1943, exceeds $ 25,000. The income of the petitioner for the calendar year 1943 under the contract herein was in excess of $ 25,000, and petitioner has stipulated *141 that if the $ 25,000 limitation specified in section 403 (c) (6) is the controlling limitation, a decision may be entered "determining excessive profits in the amount previously determined, namely $ 21,000." The question for decision accordingly is whether the contract between petitioner and LaPointe was a subcontract as defined in section 403 (a) (5) (B). *142 Omitting exceptions, not here pertinent, a subcontract is defined by section 403 (a) (5) (B) 3 as meaning "any contract or arrangement" under which "(i) any amount payable * * * is contingent upon the procurement of a contract or contracts with a Department or of a subcontract or subcontracts, or determined with reference to the amount of such contract or subcontract or such contracts or subcontracts, *769 or (ii) * * * any part of the services performed or to be performed consists of the soliciting, attempting to procure, or procuring a contract or contracts with a Department or a subcontract or subcontracts." *143 It is the claim of petitioner that it was a firm of engineers engaged in the selling of engineering services, which consisted of the designing, installing, and servicing of highly specialized cutting tools known as broaches; that, not having the capital to finance the manufacture of the tools it designed, it entered into a contract with the LaPointe Machine Tool Company to manufacture the said tools which were designed for and sold by petitioner to its, petitioner's, customers; that LaPointe did not hire petitioner, but that petitioner in effect hired LaPointe; that under its contract with LaPointe, it was not engaged in the solicitation or procurement of "contracts with a Department" within the purview of section 403 (a) (5) (B), and accordingly was not a subcontractor within the meaning of that section. It is our opinion that both the facts and the law are clearly otherwise. By the terms of the contract, it was LaPointe which did the employing, and not the petitioner. LaPointe agreed to employ, and did employ, petitioner as its exclusive sales representative to sell its, LaPointe's, products in a specifically designated territory. And while as a part of its employment petitioner*144 was to supply engineering services and to service the products sold for LaPointe, its compensation was to be in the form of commissions, the rate and the amount of which were contingent upon the volume of sales made. The commissions were to be received only where sales were consummated, and were to be accepted by petitioner "in full settlement" for its services and expenses "while so employed." Applying the words of the statute, it is thus apparent that all amounts, not "any amount," payable were contingent upon the procurement by petitioner of sales contracts for LaPointe; that all of the amounts so payable were to be determined directly by reference to the amount of such contracts, and dominant in "the services performed or to be performed" were "the soliciting, attempting to procure, or procuring" of sales contracts. Furthermore, the petitioner has stipulated that all payments made to it by LaPointe were made pursuant to the contract here under consideration, that the payments were in excess of $ 25,000, and were "based upon Contracts or Sub-Contracts with Departments named in the Renegotiation Act." We accordingly conclude and hold that petitioner's contract with LaPointe was*145 a subcontract within the meaning of section 403 (a) (5) (B) of the Renegotiation Act of 1943, and that the $ 25,000 limitation provided in section 403 (c) (6) is the controlling limitation. See Armstrong v. War Contracts Price Adjustment Board, 15 T. C. 625, and Iverson & Laux, Inc., 6 T. C. 247. An order will be entered in accordance herewith. Footnotes 1. By order of the Court, dated September 19, 1952, the United States of America was substituted as respondent, as provided in section 201 (h) of the Renegotiation Act of 1951.↩ 2. Sec. 403 (c) (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 * * * (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 (* * * 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. * * *↩ 3. Sec. 403 (a). For the purposes of this section -- * * * * (5) The term "subcontract" means -- * * * * (B) Any contract or arrangement other than a contract or arrangement between two contracting parties, one of which parties is found by the Board to be a bona fide executive officer, partner, or full-time employee of the other contracting party, (i) any amount payable under which is contingent upon the procurement of a contract or contracts with a Department or of a subcontract or subcontracts, or determined with reference to the amount of such a contract or subcontract or such contracts or subcontracts, or (ii) under which any part of the services performed or to be performed consists of the soliciting, attempting to procure, or procuring a contract or contracts with a Department or a subcontract or subcontracts: * * *↩