Douglas Aircraft Co. v. Commissioner

DOUGLAS AIRCRAFT COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Douglas Aircraft Co. v. Commissioner Docket No. 105093. United States Board of Tax Appeals 46 B.T.A. 1025; 1942 BTA LEXIS 787; April 28, 1942, Promulgated *787 Prior to the effective date of the Amended Vinson Act of June 25, 1936, petitioner had under contract delivered two airplanes to the Navy Department. They had been accepted, 98 percent of the purchase price paid, and the six-month contractual period for suggestion of correction of defects had expired without such suggestion. The contract provided for payment after a report by the petitioner upon completion of contract. The contract provided that for purposes of the Vinson Act the contract should be considered complete upon final payment. Held, that the contractual definition of completion of contract was ineffectual, that the contract was completed prior to the effective date of the Vinson Act as amended, and that the profit or loss on the contract can not be offset against that of other contracts. Dana Latham, Esq., for the petitioner. Samuel Taylor, Esq., for the respondent. DISNEY *1025 This proceeding involves a deficiency determined in excess profits liability, under section 3 of the Vinson Act of March 27, 1934. The amount determined was $15,177.45, and the petitioner does not question the correctness of the amount, if there*788 is any liability therefor. The question for determination is whether a contract between the petitioner and the United States Navy Department for the construction of two airplanes was completed prior to December 1, 1936, or in 1940 when final payment therefor was made by the Government. This in turn involves the question whether recognition should be given to the agreement of the petitioner and the Navy Department that within the meaning of the Vinson Act the contract was "completed" upon final payment by the Government for the planes. From allegations admitted, stipulations, and evidence adduced we make the following findings of fact. FINDINGS OF FACT. 1. On June 29, 1935, the petitioner and the United States of America entered into a written contract drawn and prepared by the Navy Department, providing that the petitioner build and deliver to the United States Navy two airplanes for $79,001.38 each, and in part further providing: ARTICLE 8. Payments. - The contractor shall be paid, upon the submission of properly certified invoices or vouchers, the prices stipulated herein for articles delivered and accepted or services rendered, less deductions, if any, as herein*789 provided. Unless otherwise specified, payments will be made on partial deliveries accepted by the Government when the amount due on such deliveries so warrants; or, when requested by the contractor, payments for accepted partial *1026 deliveries shall be made whenever such payments would equal or exceed either $1,000 or 50 per cent of the total amount of the contract. * * * ARTICLE 19. Guarantees. The contractor guarantees the following: (A) - That the airplanes, under all load conditions specified in Specification No. SD-111-1, will be in all respects satisfactory transport airplanes in correct flying balance, controllable and positively stable in the air about each of the three major axes, both with free and locked longitudinal, lateral, and directional controls. (B) - That the airplanes, under all load conditions specified in SD-111-1, will be controllable and stable on the ground. (C) - Weight empty of each airplane, item 1, as a transport airplane defined in paragraph 105a of contractors specification DS-142 12,107 pounds. The above weight guarantee is based on the weights of the Government Furnished Material items given in SD-111-1. (D) - Performance*790 as a transport airplane with useful load specified in paragraph 104a of Specification SD-111-1: Maximum speed at 8,000 feet altitude, 209 m.p.h. Minimum speed without power at sea level, 60 m.p.h. Service ceiling, 23,200 feet. Taking off with two engines with normal load ceiling will be maintained on one engine 8,500 feet altitude. Range at cruising speed (62.5% power) (510 gallons fuel) at critical altitude, 1,150 miles. * * * ARTICLE 22. Partial payments. (a) - Payment of 98% of the contract price for each airplane of item one will become due and payable upon delivery and final acceptance of the respective airplane. The remainder of the contract price, 2%, will become due and payable at the expiration of the guarantee period referred to in Article 29 [an obvious error; reference plainly is to section 23.], provided defects in design, installation, materials, and/or construction have been corrected. Otherwise, this two percent (2%) payment will become due and payable after the defects have been corrected. If the reported defects in these airplanes have not been corrected by the end of the guarantee period on the last airplane to be delivered on this*791 contract, deductions to be agreed upon between the contractor and the Navy Department will be made from the contract price and final settlement will be made accordingly. * * * ARTICLE 23. Correction of defects. It is agreed that the contractor shall make at his own expense, such changes involving correction of defective design, installation, material, and/or construction in each of the airplanes as the Navy Department may decide should be incorporated, prior to final acceptance. Where any airplane concerned has already been delivered and accepted, material and services for correction of such defects in design, installation, material, and/or construction, are to be furnished by the contractor without cost to the Government, provided that the Government must notify the contractor of such defects not later than six (6) months after acceptance of such airplane. This time is to be the guarantee period. If defective design, material, installation, and/or construction are of such a nature that the Navy Department considers such action desirable, entire airplanes will be returned to the contractor at Government expense for complete *1027 rebuilding at contractor's expense. *792 The contractor agrees to proceed without delay with the correction of these defects in a manner satisfactory to the Navy Department and to deliver such airplanes to the original point of acceptance. If airplanes are returned for rebuilding, the guarantee period shall be extended to six (6) months after the delivery and acceptance of such rebuilt airplanes. ARTICLE 24. Disputes. If any doubts or disputes arise concerning any question under this contract or as to anything in the drawings, plans, or specifications, or if any discrepancy appears between said drawings, plans, or specifications and this contract, the matter shall be referred at once to the Secretary of the Navy for determination; and his decision in the premises and in the interpretation of the provisions of the contract and the application and administration thereof shall be conclusive and binding upon the parties hereto. * * * ARTICLE 35. Excess profit. The contractor hereby agrees: (a) - To make a report, under oath, to the Secretary of the Navy, upon completion of this contract in such form as may be prescribed by the Secretary of the Navy, including a statement of the total contract price, *793 the cost of performing the contract, the net income, and the per centum such net income bears to the contract price. A copy of such report shall be submitted by the contractor to the Secretary of the Treasury for consideration in connection with the Federal income tax returns of the contractor for the taxable year or years concerned. (b) - To pay into the Treasury profit, as shall be determined by the Treasury Department, in excess of 10 per centum of the total contract price, such amount to become the property of the United States: Provided, That if such amount is not voluntarily paid, the Secretary of the Treasury may collect the same under the usual methods employed under the Internal Revenue laws to collect Federal income taxes. * * * (g) - That for the purpose of the Vinson Act, approved March 27, 1934, (Public No. 135) the contract shall be considered complete upon final payment of the sum due under the provisions of this contract provided, however, that the obligation of the surety so far as applicable to the liability of the contractor for the return of excess profit under the provisions of the Act shall be limited (as to the Surety only) to one year from the date*794 of final settlement under the foregoing provisions. 2. The petitioner built the two airplanes and delivered them to the Navy on September 5, 1935, and September 21, 1935. An invoice in the amount of $79,001.32 for each airplane was filed with the Navy Department under the respective dates of September 11, 1935, and September 24, 1935. On October 14, 1935, the petitioner received payment of $77,421.35, or 98 percent of the contract price, for the plane delivered September 11, 1935. The voucher received in payment showed a "2% reservation pending correction of defects and expiration of guarantee period … $1,580.03." Another payment of $77,421.35 was received by the petitioner on March 9, 1936, upon the plane delivered September 21, 1935. *1028 3. No defects in or repairs to the planes were ever suggested, and no demand was ever made that further work be done in connection with the two ships. 4. Under date of November 3, 1938, the petitioner submitted to the Navy Department an invoice, in the amount of $1,580.03, as to each of the two airplanes. 5. Under date of December 29, 1938, the petitioner filed with the Navy Department an invoice in the amount of $1,580.03*795 on each airplane. Accompanying the invoice was a letter from the petitioner, referring to one from the Navy Department dated December 17, 1938, and stating that affidavits of compliance for the two airplanes were enclosed; also stating: On final payment, in accordance with the terms of the contract, report of profits as called for in the Vinson Act will be prepared and filed. It is requested that final payment be expedited on this contract. 6. Under date of February 15, 1939, the Navy Department wrote the petitioner in substance referring to "Public Voucher 2805 for $3,160.06" and stating: Sirs: It will be necessary to forward the above noted public voucher to the General Accounting Office for settlement because of the fact that the appropriation involved, "Aviation, Navy, 1935" has lapsed. Before this can be done, however, it will be necessary that you submit a Report of Profit under the Vinson Act as required by the terms of the above noted contract. From Treasury Decision No. 4723, quoted in enclosure in conjunction with the ruling of the Comptroller General, also quoted in part in enclosure, the report is required to be made after the completion date of the contract*796 work. This completion date of the contract is not affected by the status of the payment due under the contract. In order that the voucher may be submitted to the General Accounting Office at an early date it is requested that you submit a Report of Profit at your earliest convenience. The "ruling of the Comptroller General" referred to in the letter was attached, and is an extract from a decision of the Acting Comptroller General dated July 25, 1938, and states in part that under the terms of the statute (the Vinson Act) as amended (by the Act of June 25, 1936), "the time for making the report under section 3(a) is governed by the time of completion of the contract work by a contractor, the same as under section 3(b), and not by the time the contractor receives final payment." The opinion relies upon and quotes the definition of "Completion of contract" in the regulations, approved December 31, 1936, by the Secretary of the Treasury and on January 6, 1937, by the Secretary of the Navy. The regulation quoted recites in part that "With the exception of those contracts which provide a method for determining the date of completion" the date of delivery of the article shall be considered*797 the date *1029 of completion of the contract, unless otherwise determined by the Secretary of the Navy and the Secretary of the Treasury, or their duly authorized representatives. 7. On March 18, 1939, the Navy Department wrote the petitioner on the subject of the report of profit under the Vinson Act, and asked that a reply to the letter of February 15, 1939, be expedited. On March 24, 1939, the petitioner wrote the Navy Department in part in reply to its letter of February 15, 1939, and stated: Sirs: 1. Report of Profit on the above subject contract has been withheld awaiting payment of Public Voucher 2805 for $3,160.06, reference (b). 2. Completion date of this contract is definitely stated in paragraph (g) of Article 35 "- the contract shall be considered complete upon final payment of the sum due under the provisions of this contract -" and as final payment has not been made, we do not consider the contract complete as accepted by us. 3. It is requested that payment of above referenced Public Voucher be made, or a definite ruling clarifying "completion date" on this contract be furnished us. 8. On April 4, 1939, the Navy Department responded as follows: *798 Sirs: Treasury Decision No. 4723 interprets the completion date as of completion of work under the contract and this is not affected by the status of the payments due under the contract. As the General Accounting Office will require submission of the Final Report of Profit before acting on referenced invoices, it is requested that submission of this Report be expedited. 9. On April 21, 1939, the internal revenue agent at Los Angeles wrote the petitioner, quoting a letter from the Commissioner of Internal Revenue in effect defining "Completion of the Contract" under the Vinson Act as meaning date of delivery of the vessel, aircraft or portion thereof covered by the contract, and requesting the filing of a report of profit with the collector at Los Angeles, with an affidavit explaining the causes for delay in filing the report. 10. On June 7, 1939, the petitioner replied to the Internal Revenue Agent's report, stating that in a few days a report would be filed, but adding: * * * However, it should be definitely understood that in filing these reports, in accordance with your request, nothing in these reports is constituting an admission by this contractor that said Navy*799 Contract NOs-42859 is completed, or that said report to be filed, Form #937, is due, or that any portion of said excess profits is now payable to the Collector of Internal Revenue, or to any other person. 11. On or about June 16, 1939, the "Report of Profit on Navy Contract" was filed, accompanied however by a schedule in substance reciting the provision of paragraph 35(g) of the contract, defining completion of contract as final payment, pointing out that Treasury Decision 4723 makes an exception of contracts providing a method *1030 for determining the date of completion, and contending that the contract was not yet completed and therefore no report was due; but that in order to comply with requests made, it was being filed, without admission that the contract was completed or the report was due. 12. On August 29, 1939, the General Accounting Office certified to the petitioner that $3,160.06 was due petitioner under the contract. 13. Petitioner received final payment upon the contract price of the two planes upon April 22, 1940, in the amount of $3,160.06. 14. Notice of deficiency was issued on September 16, 1940, stating as the ground thereof that date of*800 completion of the contract was September 24, 1935. 15. On September 28, 1940, an amended Report of Profit was mailed by the petitioner to the collector at Los Angeles, and to the Secretary of the Navy, with revised computation, and contending that the contract was not completed until April 22, 1940, and therefore that return of excess profit would be filed for the year 1940, by August 15, 1941. A second amended report of profit was executed by the petitioner on September 24, 1941, conforming with and accepting the internal revenue agent's figures as to cost of performance of contract. 16. Petitioner's books of account were maintained, and its Federal income tax returns filed, on the basis of a year ending November 30. It filed an annual report of profit on Navy contracts for the following fiscal years ending November 30: 1937, 1938, 1939, 1940. For the year ending November 30, 1940, the return was tentative. A final return has been prepared. The contract herein involved was not included in such returns except for the year ending November 30, 1940. Each return discloses net loss on Vinson Act contracts. The contract entered into between the petitioner and the United*801 States of America on June 29, 1935, was completed prior to December 1, 1936. OPINION. DISNEY: The petitioner in 1935 entered into a contract to construct airplanes for the Navy Department of the United States. At that time the "Vinson Act" of March 27, 1934, provided, in short, that one contracting with the Secretary of the Navy must contract to make a report to the Secretary upon the completion of the contract, and pay into the Treasury profit above 10 percent, provided that if not voluntarily paid, the excess profit should be collected by the Secretary of the Treasury under the usual methods employed under the internal revenue laws. The act, so far as pertinent here, is set *1031 forth in the margin. 1 No definition of "the completion of the contract" was contained in the act. No provision was made by the act for offsetting one contract against another. The Vinson Act was amended on June 25, 1936. In material part, the amendment is shown in the margin. 2 The amendments provide, in substance, that the profit to be paid into the Treasury should be the profit in excess of 10 percent "of the total contract prices" of such contracts "as are completed by the particular*802 contracting party within the income taxable year", and define the income taxable year as beginning after December 31, 1935. Section 3(a) of the 1934 Act, containing reference to report upon "completion of the contract" was not amended. *803 The petitioner herein seeks to bring the contract made in 1935 within the purview of the amended act. Since its fiscal year ended on November 30, under the last proviso to section 3 of the 1936 Act, just above quoted, petitioner's first year affected by the amended act began December 1, 1936; and it is therefore incumbent upon the petitioner, in order to come under the amended act, to show that the contract *1032 made in 1935 was "completed by the particular contracting party" after December 1, 1936. The petitioner argues, in effect, that such completion took place after December 1, 1936, because the written contract between the parties contained a provision that for the purposes of the Vinson Act "the contract shall be considered complete upon final payment of the sum due under the provisions of this contract"; and that such final payment (of the 2 percent withheld) was made on April 22, 1940. The respondent agrees that final payment was made on that date, but contends that such payment is not determinative of completion, notwithstanding the contract provision. The petitioner's argument is threefold: That the contract governs, first, because the Vinson Act does not*804 impose the liability for the excess profits, but that it is contractual, and petitioner is therefore bound only by the contract; second, that even if the liability for excess profit arises from the statute itself, nevertheless the parties could by contract define an expression which is undefined in the statute, i.e., define "completion of the contract", and define it as final payment; and, third, that regardless of statutory expression, or contractual provision defining it, nevertheless, in fact the contract was completed only when both parties had fully performed, i.e., only when final payment was received, in 1940. The respondent on his part argues, first, that the contract was completed by delivery of the airplanes in 1935, or, in the alternative, that if not, then it was completed by the expiration of the six-month period within which the petitioner was under obligation to replace defective parts or material - which period expired prior to December 1, 1936. Therefore, he argues, the provisions of the amended Vinson Act do not apply to petitioner's contract here involved. After much consideration of this question, we are of the opinion that the parties were not free to define*805 in their agreement "completion of the contract", the expression in the Vinson Act. We think that such act does impose the liability for the excess profits. It is true that the form of the act is not altogether clear in this respect, for the provision as to liability for profit is found in connection with the enumeration of points to which anyone contracting with the Secretary of the Navy must agree. Yet, it is a proviso following section 3(b), and we think it was not intended by Congress as a mere contractual item, but as a positive provision, to the effect that, if the contracting party should fail to pay the excess profit to the Treasury as he had contracted to do, it would be collected under the usual internal revenue laws. This conclusion is reinforced by the form of the amending Act of June 25, 1936. Therein appears not merely the one proviso contained in the original act, but a series of provisos, containing matter on its face not contractual, but comprising positive *1033 provisions of law as to collection of tax on the excess profit. This proceeding involves a proceeding by the Commissioner of Internal Revenue to do precisely what the act provided - to collect*806 where the contracting party fails to pay the excess profit voluntarily into the Treasury. We think that the Vinson Act imposed the liability for the payment to the Treasury of excess profit. The Commissioner's authority rests upon the Vinson Act. We note that I.T. 3284 (C.B. 1939-1, p. 407) is to the effect that failure to include in the contract a provision for limitation of the profit does not prevent liability to pay the excess profit into the Treasury. Having concluded that the Vinson Act imposes the liability herein involved, we are of the opinion that it follows that the parties may not, in their agreement, define an expression in such statute. That duty devolves upon the tribunal interpreting the statute, and though legislative history, the actions of the parties in performing the contract, and other aids to statutory interpretation may furnish assistance, the parties may not in advance and by their agreement adjudicate the meaning of the statute. Zappala v. Industrial Insurance Commission,144 Pac. 54. We need not decide whether they might define an expression in a case where the expression defined by the contract did not comprise a part of the*807 statute forming the basis for the contract and proceeding thereunder. Herein they particularly and carefully contracted a definition "for the purpose of the Vinson Act." Although the regulations for some time after the amendment of the Vinson Act in 1936, in providing that date of delivery is date of completion of the contract, make an exception of contracts which "provide a method for determining the date of completion" which may have meant to cover a definition such as herein involved, we think the regulation could validly make no such exception. We hold that the mere contract of the parties did not serve to settle the statutory meaning of "completion of the contract" and that such contractual agreement that completion was final payment does not alone put the completion in 1940 when final payment took place. But the petitioner urges, in effect, that the contract was in fact, and regardless of the definition contained, completed only when both parties performed, that is, when the United States finally performed on its part by final payment. In *808 Foster Wheeler Corporation,42 B.T.A. 36, we considered a situation where final payment was urged as completion of contract under the Vinson Act, on the question of offsetting contracts, as here. No contractual definition was there involved; only the question of fact as to when the contract was completed. We examined the amended act and concluded that the expression "such contracts * * * as are completed by the particular contracting party within the income taxable year" was clear and unambiguous and said: "The contracts referred to are *1034 those which are completed by the contractor." We held that the contract involved, entered into in 1934, could not be brought within the provisions of section 3(b) of the amended Vinson Act. Though the petitioner strongly assails the soundness of that opinion, we adhere to the view taken therein, for we think it plain that Congress intentionally, in the amended act, referred to contract as completed by the particular contracting party, as additional to the previous expression "completion of the contract"; that such treatment was explanatory; and that it is incumbent upon the petitioner, in order to bring the contracts*809 of 1935 within the effect of the amended Vinson Act of 1936, to show, not merely that the Navy Department did not perform, by final payment, until after December 1, 1936, but that the petitioner as "particular contracting party" had not by that date completed the contract on its part. The amended act uses the expression "completed by the particular contracting party" or "particular contractor" three times. We see intent to distinguish from completion by both parties. This is consistent with the fact that the contract here considered, though in the beginning reciting mutual agreement, in article 35 recites merely that "The contractor hereby agrees", among other items, that final payment shall be considered completion of the contract. That the petitioner had on its part fully completed the contract prior to December 1, 1936, can not be doubted. It had done everything the Navy Department could possibly require it to do, for its airplanes had been delivered and accepted, and the period for suggesting anything further had expired with the end of six months from acceptance. Indeed, we do not understand the petitioner to argue otherwise. In any event, we consider it obvious that, *810 with the delivery and acceptance of the airplanes in 1935, payment of 98 percent on the purchase price thereof, and the passage of the period within which the Navy Department could suggest and require correction of defects, without any such suggestion - all long prior to December 1, 1936 - that the petitioner had on its part fully performed, fully completed the contract. Whether delivery of the airplanes, or on the other hand expiration of the period for suggestion of and correction of defects, constituted completion, we need not here determine, for in either event nothing remained on December 1, 1936, for petitioner to complete. In addition to guarantees under article 19 of the contract, petitioner had a definite obligation under article 23 to make changes involving defects, upon notice within six months after acceptance of the airplanes. In that respect the present case differs from Foster Wheeler Corporation,supra, where there was only "guarantee" to replace defective parts within one year. The petitioner in the Foster Wheeler case expressly pointed out that he did not contend that completion was coincident *1035 with the end of a guarantee period*811 set in the contract. That the Navy Department failed to pay, as provided by the contract, after the expiration of the period for suggestion of defects, suggests to us, not incompleted contract, but breach of contract, which would, in the absence of any other factor (such as petitioner's failure to file report) ordinarily be ground for action for the contract price unpaid. A statute of limitation would not, we think, be tolled by failure to pay, after accrual of such cause of action. In our opinion the contract was not completed within a taxable year covered by the amended act, within the intendment thereof, and the petitioner is therefore under its terms not entitled to offset one contract against another. We hold that the respondent did not err in determining deficiency on the theory of disallowance of such offset. The petitioner having agreed that under such theory the amount of the deficiency was correctly computed, Decision will be entered for the respondent. Footnotes 1. SEC. 3. The Secretary of the Navy is hereby directed to submit annually to the Bureau of the Budget estimates for the construction of the foregoing vessels and aircraft; and there is hereby authorized to be appropriated such sums as may be necessary to carry into effect the provisions of this Act: Provided, That no contract shall be made by the Secretary of the Navy for the construction and/or manufacture of any complete naval vessel or aircraft, or any portion thereof, herein, heretofore, or hereafter authorized unless the contractor agrees - (a) To make a report, as hereinafter described, under oath, to the Secretary of the Navy upon the completion of the contract. (b) To pay into the Treasury profit, as hereinafter provided shall be determined by the Treasury Department, in excess of 10 per centum of the total contract price, such amount to become the property of the United States: Provided, That if such amount is not voluntarily paid the Secretary of the Treasury may collect the same under the usual methods employed under the internal revenue laws to collect Federal income taxes. * * * (e) To make no subcontract unless the subcontractor agrees to the foregoing conditions. * * * ↩ 2. SEC. 3. (b) To pay into the Treasury profit, as hereinafter provided shall be determined by the Treasury Department, in excess of 10 per centum of the total contract prices, of such contracts within the scope of this section as are completed by the particular contracting party within the income taxable year, such amount to become the property of the United States, but the surety under such contracts shall not be liable for the payment of such excess profit: Provided, That if there is a net loss on all such contracts or subcontracts completed by the particular contractor or subcontractor within any income taxable year, such net loss shall be allowed as a credit in determining the excess profit, if any, for the next succeeding income taxable year: Provided further, That if such amount is not voluntarily paid the Secretary of the Treasury shall collect the same under the usual methods employed under the internal-revenue laws to collect Federal income taxes: Provided further, That all provisions of law (including penalties) applicable with respect to the taxes imposed by Title I of the Revenue Act of 1934, and not inconsistent with this section, shall be applicable with respect to the assessment, collection, or payment of excess profits to the Treasury as provided by this section, and to refunds by the Treasury of overpayments of excess profits into the Treasury: And provided further, That this section shall not apply to contracts or subcontracts for scientific equipment used for communication, target detection, navigation, and fire control as may be so designated by the Secretary of the Navy, and the Secretary of the Navy shall report annually to the Congress the names of such contractors and subcontractors affected by this provision, together with the applicable contracts and the amounts thereof: And provided further, That the incometaxable years shall be such taxable years beginning after December 31, 1935, except that the above provisos relating to the assessment, collection, payment, or refunding of excess profit to or by the Treasury shall be retroactive to March 27, 1934. ↩