# Blue Bell, Inc. v. United States

> United States Court of Claims · April 8, 1977 · 556 F.2d 1118

URL: https://www.frixlaw.com/law-library/cases/8595914

## Case

- **Full name:** BLUE BELL, INC. v. United States
- **Court:** United States Court of Claims
- **Decided:** April 8, 1977
- **Citations:** 556 F.2d 1118; 23 Cont. Cas. Fed. 81,277; 213 Ct. Cl. 442; 1977 U.S. Ct. Cl. LEXIS 12
- **Precedential status:** Published
- **Opinion:** Opinion of the court
- **Judges:** Bennett, Miller, Nichols, Skelton, Trial
- **Cited by:** 13 later opinions in the Frix Law Library

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## Opinion text

Per Curiam:
This is a petition transferred from the United States Tax Court, where it was originally filed, for redetermination of plaintiffs excessive profits for its fiscal year ended October 31, 1967, as received or accrued by its predecessor in interest, Hicks-Ponder Company, under defense contracts and subcontracts. We have jurisdiction under 50 U.S.C. App. § 1218, as amended. The Renegotiation Board, by its unilateral order dated May 14, 1970, determined that plaintiff realized excessive profits in the amount of $275,000, there being no adjustment for state income taxes, and before computation of the Federal tax credit.
The case was tried before Trial Judge Philip R. Miller who has submitted a recommended decision and conclusion of law under Rule 134(h). After briefing and oral argument, the court partly agrees with the said recommended decision, with modifications, and adopts the same as its own, with modifications. Said modifications include the omission of all of Part H and substitution of the paragraphs immediately following, in the court’s own words, leaning heavily on the Trial Judge’s reasoning, but not *445 repeating it, particularly where it is anticipated by our decision in Major Coat Co. v. United States, 211 Ct. Cl. 1 , 543 F.2d 97 (1976), which was tried after, but decided before, the instant case.
Hicks-Ponder in 1966 was a successful and growing manufacturer of men’s and boys’ casual slacks, work clothes, and jeans. It had plants along the Mexican Border at Eagle Pass, Del Rio, and El Paso, Texas, and at Yuma, Arizona. Approximately 80 percent of its production was by contract for large retail outlets such as Sears Roebuck, Montgomery Ward, and J. C. Penny. It had not done Government business for many years. In January 1966, it received a "rated order” from the Defense Supply Agency (DSA) for the manufacture of 160,000 pairs of men’s fatigue trousers, following discussions that had continued for some time. The Trial Judge describes the circumstances in more detail. The action was, of course, a result of the growing requirements of the war or quasi-war in Southeast Asia.
The order necessitated retraining of employees, and conversion of facilities, despite the apparent resemblances, to the uninitiated, of civilian and military pants. Plaintiffs executives did not believe they could retrieve the expenses thus incurred unless they were given follow on orders which were not guaranteed. They could keep their facilities operating at capacity, and expanding, with civilian business. They doubted their ability to compete for Government business with its regular suppliers when competitive conditions returned. For these reasons, as a matter of business judgment, the plaintiffs executives were much opposed to accepting the order, and would not have done so if they had not believed that coercive measures would be applied against them, in case of refusal, and if they had not believed in the existence of an emergency, wherein their assistance was greatly needed. The legal foundation and effect of a rated order is stated in Major Coat, Co., supra. But according to a knowledgeable Government witness, it was not so much a matter of direct arm-twisting as a dawning realization that those who accepted rated orders could extend them to divert from noncooperating manufacturers the mill products, the textiles, they all needed to keep producing, and which would be in short supply. At *446 any rate, the Government was able to place its rated orders without great difficulty, other producers yielding after initial reluctance, as plaintiff did, so no overt coercion was necessary. Still, a rated order is a rated order.
In Major Coat Co., supra, plaintiff accepted a similar rated order, for coats, and the adverse consequences to its civilian business were serious and so far as appears, irreparable. The consequences of entering military production, to plaintiff here, were less serious, though they did include a permanent loss of Sears Roebuck as a customer for work pants. Sears was retained for other business.
Once one was started on military production, to stay on it was the path of least resistance, if only to avert or delay another set of retraining and conversion expenses. Thus, after the use of rated orders had ceased, we see plaintiff bidding still for both prime and subcontract requirements for military pants. Such bids may be deemed to have been caused by the original rated order. As anticipated, plaintiff was unable to compete when competitive conditions fully returned, so it then, in 1968, reconverted all its facilities to civilian business as soon as might be.
In World War II, when the economy was fully converted to war production, (except for the bare minimum of essential civilian needs) we suppose all defense orders to private industry were "rated” and such ratings were welcome, for without having them to extend, a producer surely could not obtain needed materials and might be in difficulty as to labor. In World War II renegotiations, the ratings were so universal in the background that they were not even mentioned. A mention would not distinguish one case from another. However, we see in 1966-68 an economy with, in general, no mandatory conversion. We had, as the slogan went, "guns and butter.” In such circumstances, the use of war powers to force military production on a small group of producers in a particular industry only, while the suppliers of other war material are those who desire to do that business, is to present problems to us if we are to renegotiate with fairness to all concerned. The Government procurement authorities fully recognized that they owed plaintiff special consideration. They were willing to negotiate any price, within reason and having justifica *447 tion, and the prices to plaintiff at least were much above what had been the going rate a few months earlier. Finding 115 shows that some awards at the time, under the same program, were at higher prices, and some were at lower, than plaintiffs. Is it fair to take away this special concession in renegotiation, and reduce plaintiff to the same ratio of profit to sales as is allowed to a producer who makes pants for the military at all times and of his own volition?
It would appear that the statutory risk factor, 50 U.S.C. App. § 1213(e)(3), would support some favorable allowance here, both as compared to what the contractor would earn in his normal peacetime business, which he is obliged to abandon in part, for the nonce, and as compared to what a regular supplier of an item would earn, which the contractor undergoing renegotiation supplied as a temporary emergency contribution. "Where a risk is borne that is not compensated in any comparable firm’s profit” [here, a comparable of one of two above kinds] "it is nonetheless compensable by an upward adjustment of an otherwise reasonable profit for the risk-bearer, however judgmental in nature that adjustment must be.” Major Coat Co. v. United States, supra, 211 Ct. Cl. at 40 , 543 F. 2d at 119 . If the Government is unable, or unwilling, to support enough production capacity to meet the needs of this limited emergency, by its regular suppliers, it should expect to extend some kind of special recognition to those temporarily brought in against their own volition, to fill the void. The issue reduces itself to one of quantum.
By the requirements of the fiscal year method, conversion costs incurred in 1966 were largely ineffective to reduce the renegotiable 1967 profit. The defense contracts were commenced in fiscal 1966, carried on in fiscal 1967, and completed in fiscal 1968, but a disproportionate amount of the costs were incurred in 1966 and 1968, causing the renegotiable 1967 profit to'appear larger than it would have, stated as a percentage of sales, if all the defense business had been renegotiated in a single determination, as plaintiff would have us do. There is no authority for conducting the case in that manner and we must reject the invitation to do it. As to 1966, the receipts were at any *448 rate enough to cover the startup and conversion costs, and show a modest profit. The problem of determining a fair reconversion allowance is dealt with in the Trial Judge’s opinion, and the difficulties are manifest. The reconversion costs were not directly allocable to renegotiable business in an accounting sense, but rather to the new civilian business that replaced the Government business. The claim for delays in picking up civilian business in 1968, are speculative in the extreme. We think that some reconversion allowance is mandated not as a cost but as an element to be considered in factor analysis. Butkin Precision Mfg. Co. v. United States, 211 Ct. Cl. 110 , 544 F. 2d 499 (1976). It should not be allowed as a separate item, but should be subsumed in an upward profit adjustment for risk-bearing as attributable to forced entry into a specialized and temporary market, by virtue of the rated orders, as discussed above. Conversion and reconversion expenses, personnel retraining, and unabsorbed overhead, were all implicit ás consequences.
In comparison of plaintiffs own civilian business with the military business under renegotiation, we approve in general the treatment of the material components to make them validly comparable, as the Trial Judge has done. That is, we think that for factor analysis purposes the Government Furnished Material (GFM) should be added to costs and sales to compare them with the civilian costs and sales, or else the material cost in the civilian business should be excluded (except for the 20 percent produced for inventory) or else, as the Trial Judge does, both. It seems clear that when the Government was not the buyer, the big private outlets such as Sears Roebuck very largely relieved Hicks-Ponder from having capital tied up in their work in progress. They ordered the textiles from the mills, allotted and sold them to plaintiff and plaintiff had 70 days from delivery in which to pay. Our analysis of the GFM problem in Major Coat is fully applicable here.
The Board in its statement of reasons said that the returns on capital employed and net worth were high and indicative of excessive profits. It noted the GFM as capital furnished by the Government, in effect, and also that plaintiff made extensive use of plants and machinery *449 rented from affiliated companies. Whatever information the Board may have had, the record here does not show whether the kind of capital assistance the Government rendered via the GFM, the same in substance as plaintiffs big contract customers also rendered, was not usual in the plaintiffs industry. The Board has elsewhere recognized that use of rented facilities tends to remove the capital and net worth factor from relevant application. See Butkin Precision Mfg. Co. v. United States, supra. As there suggested, if facilities are rented from an affiliated owner, really the owner’s interest should be consolidated for application of this factor. There is nothing in our record to show that the low ratio of capital employed to volume of business done, as well as to profits is not normal and usual in the industry plaintiff is a member of. In the absence of comparable data as to other companies the information as to capital and net worth in our record is meaningless. Aero Spaceline, Inc. v. United States, 208 Ct. Cl. 704, 748, 751-52 , 530 F. 2d 324, 351, 353 (1976). Nor have we had the benefit of any kind of expert testimony to interpret the meaning of such information. By calculations the Trial Judge accepted, the capital and net worth allocated to renegotiable business had a lower ratio to profit from renegotiable business, than the capital and net worth allocated to civilian business had to profit from civilian business. But that is just another way of noting the fact, obvious in the record, that the procurement authorities allowed plaintiff more profit per unit on military business, than it was getting on civilian business. If the reasons for doing this were not good, we do not need the capital and net worth factor to tell us we should require a refund; if they were good, the factor does not make them bad. The factor cannot be used for this kind of a bootstrap argument; for any valid use of it, comparisons to other companies of the same kind are necessary. Some industries need more capital than others, and defendant, having the burden of proof, could easily have told us what the capital needs of typical companies in plaintiffs industry were.
Here, as in some other renegotiation cases tried before us, the absence of expert testimony is a sore handicap to the trier of fact. Here, too, the absence of relevant *450 comparisons is almost total. We know by Finding 114, of companies participating in the program, other than plaintiff; the Board cleared four, one of which earned (excluding GFM) as much as 13.7 percent of sales, and exacted refunds from eight, including plaintiff, leaving them with profit 14.4 percent to 10.6 percent of adjusted sales. The Board must have learned all about these companies, but nothing has been allowed to transpire in the proceeding before us that would enable a comparison to be made according to the standards laid down in Major Coat, Butkin, and other of our cases. It is defendant that must suffer from this paucity of evidence, as it has the burden of proof.
From the nature of things, with plaintiff appealing from a Board determination, we cannot use the determination appealed from as a comparison, nor those made with respect to the other companies mentioned in Finding 114. Compare Major Coat Co. v. United States, supra, 211 Ct. Cl. at 43-44, 543 F. 2d at 121-122 . If we could, the comparisons would be but superficial since we are vouchsafed no data as to their similarities to plaintiff or their differences, nor do we know how plaintiff places among them as to relative efficiency. Defendant in moving for rehearing in Major Coat, urged the difficulty of defining the relevant industry and obtaining the relevant comparative data. However great such problems may be in some cases, they hardly can be said to exist here. Since defendant has the burden of proof, the absence of this almost indispensible data could well lead to a clearance determination; however, in view of the comparative novelty of trials under the burden of proof rules we have prescribed, here as in Major Coat, we will attempt to construct an equitable refund determination with the scanty material provided.
The Trial Judge, in the portion of his opinion we have deleted, showed that a reduction of the profit level on renegotiable business to that shown on the civilian sales of the same year would reduce allowable profits to $146,000 and require a refund of $347,000, but this was on the inadmissible premise of excluding GFM from sales and costs, while making no comparable adjustment in the civilian sales. If one reconstructed renegotiable sales and costs to include GFM, the excessive profits would be *451 $237,000. But if one excluded the GFM from the Government business and made a corresponding exclusion of the textile products used from the commercial business, the excessive profits elimination to reduce the renegotiable profits to the commercial level would be $202,000. The Trial Judge then averaged these two figures since they were alternative computations to accomplish the same result, producing an excessive profit figure of $220,000. He raised this to $237,500, however, to reflect the extent to which he supposed the risks and burdens of commercial material acquisition exceeded those involved in dealing with GFM. He raised this to $251,000 to account for a presumed interest saving from the use of GFM. There is no record evidence to support these adjustments. Cf, Major Coat Co. v. United States, supra, 211 Ct. Cl. at 18-21, 543 F. 2d at 107-08 . He made an alternative computation based on capital and net worth, resulting in a figure of $228,000 or $229,000. We have already shown why we believe capital and net worth are out of court in this case. The Trial Judge attached little weight to results from application of that factor for reasons we believe are only less cogent. Finally, he subtracted $40,000 for 1968 reconversion costs, making an ultimate determination of $211,000. This would allow $282,000 retained profit on renegotiable business or, according to him, 12.21 percent of sales. The correct percentage is 13.43 percent. He failed to adjust the sales by the excessive profits to be eliminated, as he should have done. Gibraltar Mfg. Co. v. United States, 212 Ct. Cl. 226, 231 , 546 F. 2d 386, 389 (1976).
The Trial Judge compares his result to that in Winfield Mfg. Co., 57 T.C. 439 (1971). This was a proceeding retained by the Tax Court as it had been processed too far along for transferability here under Pub. L. No. 92-41, § 3 , 85 Stat. 97 (1971). It involved the 1966 year of a company that produced for DSA poplin wind-resistant trousers and cotton sateen trousers, such as plaintiff also produced. Its following 1967 year is included in the tabulation in Finding 114 herein. Counsel advised that Winfield also appealed the 1967 determination but it has been settled without adjudication. Winfield differed from the plaintiff in that it was a regular producer of military clothing. The Board *452 determined a refund of $275,000. The Tax Court reduced this to $100,000. The Trial Judge was under the impression that this allowed 12.23 percent of sales, a figure closely comparable to his own 12.21 percent. But one percentage is as mistaken as the other. The correct percentage of retained profit to adjusted sales, in Winfield, is 15.43 percent. From statements here and there in the published Winfield decision, we summarize that decision as follows:
Reneg. Sales $3,598,757
Reneg. Profits 640,014
Percent profits to sales 17.78%
Profits to be eliminated $ 100,000
Adjusted sales 3,498,757
Adjusted profits 540,014
Percent adj. profit to adj. sales 15.43%
GFM was excluded from sales and costs, but given consideration as set forth in the opinion.
This decision would not be so very important here if we had other adequate comparables. From the fact we do not have them, it gains importance. It is not res judicata or even stare decisis, because excessive profits determinations are factual in nature. Newport News Shipbuilding Co. v. United States, 179 Ct. Cl. 97 , 374 F. 2d 516 (1967). It rests on its own record, necessarily different from ours. However, defendant has not shown any reason why Winfield should be left after renegotiation with a far higher percentage of adjusted profit to adjusted sales than Blue Bell, Inc., is. Winfield was allowed a lower percentage by the Board than plaintiff, in the 1967 determinations (Finding 114). The Trial Judge evidently thought his own determination should come close to that in Winfield, and it seems reasonable to suppose that if he had computed the percentages in the two cases correctly, he would have considered allowing a higher retained profit percentage than he did. His own figures work out as 13.43 percent (see below) as compared to the Winfield 15.43 percent.
We follow the Trial Judge as far along the road he chose as the refund figure of $220,000 as a "starting point,” Butkin Precision Mfg. Co. v. United States, supra, 211 Ct. *453 Cl. at 121-22, 544 F. 2d at 505-06 , based on allowing the same profit percentage for civilian and military sales, after proper adjustments to make the treatment of customer-furnished or -financed material comparable. There is nothing in the record to refute the comparability of the civilian and military business, except that the latter was somewhat more complex, or at least required more manufacturing steps. We differ as to the presumed interest saving and adjustment to the GFM. We reject the supporting calculation based on capital and net worth.
Instead of a laborious attempt to determine actual reconversion costs, the allowability of which is difficult to determine, we favor allowing a percentage upward adjustment to cover and subsume such costs. However the GFM is treated, we think neither the rate of profit plaintiff enjoyed on its civilian business, to the extent it was permitted to remain in such business, nor the rate of compensation to others who were regular military suppliers, are reasonably sufficient to compensate plaintiff for incurring the burdens of a military supplier, involuntarily, for a brief period, and then the other burdens of giving up that business, equally involuntarily. We have the authority of defendant’s expert in the Butkin case, supra, as to the propriety of making percentage allowances, under authority of the factors, in lieu of attempting to compute and reallocate to the renegotiable year costs allowable under the Internal Revenue Code only for other years, or not allowable at all for any year. Such allowances are necessarily painted with a broad brush and need not turn on disputes about coniponent sums, nor do they necessitate resolution of doubtful allowability and allocability issues, one being traded off, as it were, against another. We followed defendant’s expert in that case to the extent of using his percentage allowances as additions to the "starting point” there used. The Trial Judge found the cost impact of the conversion and reconversion here to be moderate, assessing the latter at $40,000, but if there had been none at all, we do not think the availability of the suggested allowance would have been refuted, at least in some perhaps smaller amount, since credit under the "risk” factor does not depend on the risk being realized in *454 the actual experience of loss or misfortune. The function of a risk actually realized in a loss, is to resolve all dispute whether the risk actually existed.
As a result of our deliberations above, we determíne as a matter of judgment that the plaintiff is entitled to a profit adjustment of 3 percent of sales, that is 3 percent of the figure of $2,310,000, to be added to the "starting point” figure. The percentage would of course be less if computed on sales including GFM. The allowance is rounded off at $70,000. Subtracting this from the tentative excessive profits of $220,000, we have a determined figure of $150,000, as the excessive profits to be eliminated.
The portions of the opinion we have adopted, with minor changes, gives our analysis under the statutory factors. We consider our determination reasonable in light of all of them.
The determinations compare as follows:
Board Trial Judge Court
Reneg. Sales $2,309,810 $2,310,000 $2,310,000
Reneg. Profit 521,211 493,000 493,000
Percent Profit to Sales 22.6% 21.34% 21.34%
Profit to be eliminated $ 275,000 $ 211,000 $ 150,000
Adjusted sales 2,034,810 2,099,000 2,160,000
Adjusted profit 246,211 282,000 343,000
Percent adj. profit to adj. sales 12.1% 13.4% 15.88%
Upon the following findings of fact and for the reasons set forth in the opinion, pursuant to Rule 148, the court concludes and determines as a matter of law that plaintiff as successor in interest to the Hicks-Ponder Company realized excessive profits of $150,000 for its fiscal year ended October 31, 1967, from contracts and subcontracts subject to renegotiation under the Renegotiation Act of 1951, as amended. The case is remanded to the Trial Judge for further proceedings in the event the parties are unable to agree as to the appropriate allowance for state and Federal income taxes and interest on the net amount to be repaid to the Government by plaintiff.
The Trial Judge’s opinion, as modified by the court, follows:
*455 OPINION OF TRIAL JUDGE
Miller, Trial Judge:
This is a suit for redetermination of the excessive profits, if any, for the fiscal year ended October 31, 1967, to be refunded by Blue Bell, Inc., on contracts for the production of military trousers. Blue Bell is the successor in interest to the Hicks-Ponder Company, the government contractor, as a result of a merger effective March 31, 1969. Except as otherwise noted, the term plaintiff will be used interchangeably to refer to either or both companies. References hereinafter to plaintiffs 1967 year and to its other peripheral years will refer to the fiscal year ended October 31.
The Renegotiation Board determined that of $492,615 in profits received by plaintiff from government contracts in 1967, $275,000 was excessive. Plaintiff contends that it had no excessive profits, while defendant, the Government, maintains that the $275,000 is correct.
Hicks-Ponder was incorporated in 1920 and maintained its executive offices in El Paso, Texas. It was primarily engaged in the manufacture and sale of men’s and boys’ casual slacks, work clothes and jeans. Although it had manufactured military trousers for the Government during the Korean war, it normally did not seek government business.
In 1965 the Department of Defense determined that there was a shortage of clothing necessary for the Armed Forces in Southeast Asia. Defense Supply Agency (DSA) personnel then called upon various producers of civilian trousers and asked them to take government contracts for the manufacture of military trousers. Although the Government had the power to require acceptance of rated orders and the manufacturers were so told, in fact DSA never found it necessary to institute legal proceedings or other coercive acts to require acceptance of military clothing orders. DSA attempted to spread the rated orders out in a manner which would not use more than 25 percent of the capacity of any. one company. Some manufacturers who had special problems, such as difficulty in converting to government work or the prospect of too substantial a loss of civilian business, were allowed to persuade DSA to *456 cancel rated orders. Prices and contract terms were arrived at by negotiation after the rated orders were placed. At some time during 1966 sufficient manufacturer interest in obtaining government business was generated as to obviate the need for rated orders and to allow competitive bidding. By 1967 no pants contracts were the product of rated orders.
On January 27, 1966, after discussions during the prior month, DSA issued a rated order to plaintiff for the manufacture of 160,000 pairs of men’s cotton sateen fatigue trousers. After commencing work on the first order plaintiff bid competitively on a second government sateen trouser contract, and on May 18,1966, it received an award for 200,000 additional pairs. DSA also requested plaintiff to either submit a bid or receive a rated order for the manufacture of poplin tropical combat trousers. Shortly thereafter plaintiff bid on such a contract, and on May 16, 1966, it received an award for 35,000 trousers. On June 29, 1966, DSA issued a rated order to the company for an additional 82,500 combat trousers. On January 31, 1967, pursuant to its bid, plaintiff received an award for 210,000 additional pairs with an option for 105,000 more, which the Government in fact exercised. Thereafter, during 1967 and 1968 plaintiff bid on other prime contracts but received no further awards because its bids were too high. However, during 1967 plaintiff obtained four subcontracts for sateen trousers which it completed during the year and carried over into 1968. Plaintiffs shipments of sateen and poplin trousers under government contracts and subcontracts during 1966-68 may be summarized as follows:
Sateens Poplins ^ r» ^
289,449 65,028 1C CO CO CO Gi r-1
525,642 436,039 CO tH CO 05 I>CO G) r-1
105,433 47,659 O coi IC r-ti 00 CO Gi rH
Totals 920,524 548,726 1,469,250
Sixty-five and one-half percent of the shipments occurred during 1967, the renegotiable year at issue.
All of the government contracts were essentially identical in form. The Government furnished the fabric (GFM), and the contractor supplied the remainder of the materials *457 and the cut, make, and trim labor. The contracts were at specified unit prices less the value of the GFM going into each unit. The contractor billed at the total unit price and prompt payment discount in favor of the Government was computed on the total unit price, but the value of GFM was deducted so that plaintiff received only the net.
At the time plaintiff commenced its government work in 1966, all of its plants were running at substantially full capacity. Plaintiff converted a portion of its Del Rio, Texas, plant to production of the sateen fatigue trousers and its entire Yuma, Arizona, plant to production of the poplin combat trousers. Prior to such conversion the Del Rio plant had been engaged in the manufacture of dress jeans, and the Yuma plant had been engaged in the manufacture of deluxe work pants for Sears Roebuck and Co., and casual slacks.
Substantially all of plaintiffs production workers were on a piecework basis, each trained to perform a single operation. For example, a standard commercial jean involved approximately 30 different operations and 30 different operators using approximately 20 different kinds of machines. If the piece rate did not result in an aggregate weekly wage equivalent to the minimum statutory hourly rate, plaintiff made up the difference.
Conversion from civilian production to military production necessitated retraining of the operators and the use of different and additional machines. The sateen trousers involved more than 30 different operations, while the poplin trousers involved 57 different operations. Retraining an operator to achieve the high degree of speed and efficiency which plaintiff demands of its employees for normal production could take from 8 to 16 weeks depending on the complexity of the operation involved. Retraining of entire units operating at successive stages of production to achieve company standards of speed and efficiency could take as long as 26 weeks.
Since during the retraining period the operator might be deprived of a portion of her customary wages through no fault of her own, plaintiff generally guaranteed such operator a wage equal to her previous average hourly *458 piecework earnings, or at the least the statutory minimum wage.
The sateen trousers were somewhat more complicated to manufacture than were the dress jeans, the average time per dozen of the former requiring 2.6 hours as against 2.0 hours for the latter. The poplin combat trousers were considerably more complex than plaintiffs normal civilian production, requiring 57 different sewing operations per unit and 7.3 hours production time per dozen for the former, as against 40 different sewing operations and 3.7 hours per dozen for the civilian production at the Yuma plant. The Del Rio factory produced an average of 37.15 sateen trousers per operator per 8-hour day, while the Yuma plant produced an average 13.69 poplin trousers per operator per 8-hour day.
In addition to retraining operators for the military production plaintiff was also required to undergo the expense of purchasing or leasing new machinery to be able to perform this work and to idle some of its prior equipment. The new machinery was, however, usable thereafter in civilian work.
Prior to commencing government work as well as during the period of government production Hicks-Ponder was primarily engaged in the contract sales business. In this type of business merchandise was not manufactured for plaintiffs inventory but rather for the needs of its customers, with the contracts being entered into in advance of production. The contract customer selected and paid for the material and then resold it to plaintiff at the same terms, and plaintiff picked up the material at the mill. During the years 1966 through 1968 approximately 80 percent of Hicks-Ponder’s total sales were of the contract variety, with the bulk of such sales being made to Sears Roebuck and Co., J. C. Penney & Co., and Montgomery Ward. The government contracts to some degree disrupted such civilian business. However, as the table which follows shows, Hicks-Ponder’s civilian business was not substantially adversely affected, since such sales were considerably higher than they had been in 1964 and 1965, and remained at about the same plateau from 1966 through 1968 with *459 gross profits increasing in successive years from 1965 through 1968.
Furthermore, as a percentage breakdown of Hicks-Ponder’s sales to its major customers from 1964 through 1968 shows, during 1967, the renegotiable year at issue, not only was it able to keep most of its business with its major customers but it actually increased such business.
A. The Allocation of Profit Sharing and Officers’ Bonus Contributions
In determining whether or not plaintiffs profits on its government business during 1967 were excessive it becomes necessary to ascertain the sales, expenses and profits attributable to the renegotiable business as distinct from plaintiffs other business. The parties have made such an allocation but differ with respect to two items. During 1967 plaintiff maintained a profit-sharing plan for its *460 employees. The company made annual contributions to the plan equal to 25 percent of its net income above 6 percent of the net worth of the company at the beginning of the taxable year, such contribution not to exceed 15 percent of the aggregate compensation of all participants. It also had a bonus plan for certain key officers, which entitled them to a fixed percentage of the company’s profits. For 1967 plaintiff incurred $322,320 of expense with respect to its profit-sharing and officer-bonus plans.
Plaintiff allocated the $322,320 between renegotiable and non-renegotiable business on the basis of the respective profits earned in each segment before deducting the expense in question. Defendant allocated the profit-sharing element of the $322,320 on the same basis as direct-labor costs were allocated, and it divided the officers’-bonus element on the same basis as the general and administrative expenses were divided. Under plaintiffs theory, $76,133 of the $322,320 is properly allocable to renegotiable business, and $246,187 is attributable to non-renegotiable business for 1967. If defendant’s position is correct only $52,360 of the $322,320 is properly attributable to renegotiable business and $269,960 is allocated to plaintiffs other business. In short, plaintiff asserts that its renegotiable profits were $23,773 less than what defendant claims they were.
In support of its argument plaintiff relies upon sections 1459.1(b)(1), (5) and (6) of the Renegotiation Board Regulations (32 C.F.R.). These provide in general that the contractor must ordinarily follow the method of accounting used for federal income tax purposes. On its income tax return for 1967, as well as on its audited financial statement for the year, Hicks-Ponder deducted the $322,320 as expenses rather than as a part of the cost of goods sold. This treatment was not disturbed by the Internal Revenue Service in its audits. Plaintiff claims that this supports its theory of allocation, because under plaintiffs method of accounting all additions to direct labor costs and some portion of general and administrative expenses were required to be included in the company’s inventory valuation used in computing cost of goods sold. Plaintiff also argues that because Hicks-Ponder only *461 incurred profit-sharing and officer-bonus expenses to the extent it had profits, in any allocation they should be in proportion to such profits. Defendant argues that on the plaintiffs books and income tax return the officer-bonus and profit-sharing expenses were treated as general and administrative expenses in the nature of additional salary and therefore should be allocated in the same manner as were the other salaries.
It is obvious that neither the books and records, the audit reports, nor the income tax returns are helpful in resolution of this question. None of these had occasion to divide up the items at issue into renegotiable and non-renegotiable expenses. Furthermore, there is no authority in any cited case which decides the issue.
On balance, defendant appears to be correct. The officer-bonus and profit-sharing distributions were expenses. They were deductible on the income tax returns only to the extent that they were part of total wages and salaries, which in the aggregate were reasonable in amount for services actually rendered. Internal Revenue Code, sections 162(a) and 404(a). As salaries, also they had to be necessary and ordinary expenses of the business. Under the circumstances, they should be allocated in the same manner which other salaries and expenses were allocated. To say that such additional salaries should be charged to renegotiable profits because the efforts of the recipients produced the renegotiable profits assumes the conclusion in the case. It may well be that the high renegotiable profits were more the product of the Government’s large wartime needs than the efforts of plaintiffs officers and other employees. If plaintiffs position were correct, the larger the excessive profits the more plaintiff would be entitled to charge officers’ bonuses and profit sharings against them. Plaintiff would then have a device whereby it could directly reduce excessive profits by distributing them to its officers and other employees in the form of bonuses and profit-sharing distributions.
*462 B. Reasonableness of Profits with Regard to Sales and Normal Earnings
Title 50, Appendix, United States Code, section 1213(e) provides that in determining excessive profits there shall be taken into consideration:
(1) Reasonableness of costs and profits, with particular regard to volume of production, normal earnings, and comparison of war and peacetime products.
Renegotiation Board Regulations, section 1460.10(b)(1) (32 C.F.R.), comments that comparisons should be made with "the contractor’s own costs and profits in previous years and with current costs and profits of other contractors, if such information is available.” Consideration for comparative purposes is also to be given to—
(2) * * * profits of the contractor, ahd of the industry, on products and services not subject to renegotiation, especially in cases in which the renegotiable business involves products or services substantially similar to those not subject to renegotiation. * * *
The products involved in this case are sufficiently similar to those involved in the contractor’s normal commercial business, both during the year at issue and in other nearby years, so as to enable rational comparison.
On the basis of the agreed allocations and the foregoing resolution of the one allocation issue in controversy, plaintiffs renegotiable and non-renegotiable income, costs and expenses for the 3 years, 1966-68, may be set forth as shown on Chart A following.
Since defendant offered no evidence challenging plaintiffs costs, it must be assumed that plaintiffs costs were reasonable and that only the reasonableness of its profits are in issue.
Comparison of the results of plaintiffs 1967 operations with those of the 5 prior years and 1 subsequent year shows the following as set forth on Chart B.
The Chart B tabulation shows that for 1967 plaintiffs renegotiable net profit represented 21.34 percent of sales as compared to net profit on its other sales of only 6.32 percent. It also compares with an average net profit of only 4.73 percent on other sales for the prior 5 years, and with
*463
*464 CHART B
Hicks-Ponder Co. Comparisons of Results of Operations for Years 1962-68 (In Thousands)
Cost of % Gross % Net Net Goods Gross Profits Net Profits Year Sales Sold Profit to Sales Profits to Sales
1962 $14,583 $12,182 $2,402 16.47 IO 00 I>
1964 18,148 15,436 2,712 14.95 Oi CO 00 00
1965 20,314 17,283 3,031 14.92 t> rH c— ic l> -q Or
Government — CO eq ' o
Independent 23 rH eq t> eq i co rHl ;to cn
100% Total 100%
Computed Sales to
Major Customers
(In Thousands) $13,974 $15,235 $18,506 $19,438 $17,061
66. Hicks-Ponder’s remaining sales (exclusive of those to DSA) were made to wholesalers and department stores for retail sale after the company had manufactured the garments for inventory in the hope of finding customers at the best price available.
67. When Hicks-Ponder was first required to take on government business, its existing contract operations were disrupted because the company then had no excess capacity.
68. At the Del Rio plant Hicks-Ponder was required to curtail jean production, and at Yuma the company was forced to discontinue its entire production of Sears’ work pants and casual slacks.
69. Hicks-Ponder’s government work terminated in January and February 1968. At or before that time it became apparent to company officials that the company would no longer be able to secure additional government work, either directly or by way of subcontract. Although it bid on a number of government solicitations, it found its bids were too high to secure the contracts.
70. Thereafter, Hicks-Ponder endeavored to regain its former position with its contract customers, but was unable to secure such contracts immediately. One reason was *490 because contracts for spring production were normally negotiated during the previous September, October and November. However, in addition it may have been due to an undetermined extent to a temporary decreased demand or excess capacity for products of the kind manufactured by plaintiff which existed at the time. This latter reason testified to by defendant’s industry specialist is to some degree corroborated by the proxy statement incident to the merger of Blue Bell and Hicks-Ponder issued to stockholders on September 26, 1968, which reported—
"During 1967 the apparel industry in general experienced depressed sales brought about by the pressure for reduced inventories at the wholesale and retail levels. This general condition contributed to Blue Bell’s sales being below expectations, resulting in depressed profit margins, higher inventory financing requirements and higher selling and general and administrative expenses per dollar of sales volume. This general condition continued to affect Blue Bell’s profits through the first quarter of its 1968 fiscal year. * * *”
71.Hicks-Ponder’s government and nongovernment sales and gross profits for the years 1964-68 were as follows:
72. Plaintiffs renegotiable and non-renegotiable receipts, income, costs and expenses for the 3 years 1966-68 were as shown on Chart F following.
73. The results of plaintiffs operations for the years 1962-68 are as shown in the figures on Chart B of this opinion.
74. A comparison of plaintiffs sales and profits for the same years including GFM in renegotiable sales is as shown on Chart G following.
75. When Hicks-Ponder discontinued government production in December of 1967 and January of 1968, the
*491
*492 \CHART G
Hicks-Ponder Co. Comparisons of Sales and Profits for Years 1962-68 Including GFM in Renegotiable Sales (In Thousands)
Cost of % Gross % Net Net Goods Gross Profits Net Profits Year Sales Sold Profit to Sales Profits to Sales
1962 $14,583 $12,182 $2,402 16.47 io © r-T €/3-
1963 16,349 14,026 2,323 14.21 ^ ^ OO th co t-
1964 18,148 15,436 2,712 14.95 ^ 00 CD r> co oo
1965 20,314 17,283 3,031 14.92 CO ts5 -3 in co co
52 4.20 Reneg. 1966 1,239 1,053 186 14.98
819 3.47 Other 1966 23,635 20,749 2,886 12.21
493 12.14 Reneg. 1967 4,057 3,253 804 19.82
1,493 6.32 Other 1967 23,607 20,101 3,506 14.85
18 2.68 Reneg. 1968 689 607 82 11.88
1,072 4.54 Other 1968 23,619 19,853 3,767 15.95
company incurred the expense of retraining the operators who had worked on govenment contracts to enable them to work on civilian production. Plaintiff claims that the cost of reconverting its Yuma, Arizona, plant to civilian production was $64,117, consisting of excess make-up in the sum of $29,144 and lost overhead absorption of $34,973, and that the cost of reconverting its Del Rio, Texas, plant to civilian production was $23,723, for a total cost of $87,840, all of which was incurred in fiscal 1968. Defendant’s asserted comparable total cost is $16,697, of which 86 percent, or $14,359, should be allocated to 1967. For reasons discussed in the opinion it is found herein that the record does not support either total cost figure.
76. Plaintiff also claims that as a result of being unable to regain its civilian-contract position until after the end of fiscal 1968, plaintiff failed to absorb $128,719 in overhead expenses which it continued to incur and which would have been absorbed if production had continued at prior budgeted levels. For reasons likewise stated in the opinion no such finding is warranted by the record.
77. Plaintiff further claims a loss in 1968 profits of $94,000 as a direct consequence of the plaintiff having been engaged in government business from fiscal 1966 through *493 1968. However, for reasons discussed in the opinion the record also fails to support a finding to this effect.
78. In its civilian contract business, Hicks-Ponder incurred no expenses in locating or acquiring material which went into the finished garments because the purchaser of the finished garments originally located the material which it then sold to the company on the same terms as it had purchased the material.
79. Sears and Hicks-Ponder’s other contract customers invoiced Hicks-Ponder for the material used in the garments at the time of shipment.
80. During its fiscal years 1966 through 1968, the standard payment terms for the material sold to Hicks-Ponder by its contract customers were net 70 days from date of shipment.
81. Shipment commenced when the material was picked up in Hicks-Ponder trucks at the mills.
82. The material arrived at Hicks-Ponder’s plant within a week or less of the date of shipment.
83. Hicks-Ponder’s sales to its civilian customers were made on a net 30 days from date of shipment basis.
84. Piece goods material used in Hicks-Ponder’s civilian contract sales business during its fiscal years 1966-68 were on hand for approximately 90 to 120 days before being shipped to the contract customer as finished garments.
85. In its contract business, Hicks-Ponder ran no risk of being left with excess inventory of piece goods or finished garments because the company only purchased enough material necessary to fill an order for a predetermined number of garments which its customer was obligated to purchase.
86. Plaintiff was permitted to set up its own schedule for release and pickup of government furnished materials (GFM). GFM was picked up at the mills in Hicks-Ponder’s own trucks and transported to the company at its own expense where it was inspected, shaded, marked, spread and cut just as was material for the civilian trade.
87. Although Hicks-Ponder was not required to pay for GFM, it could have obtained payment terms of net 70 days just as it did in its civilian trade since those were the standard mill terms at the time.
88. No discounts were allowed for payment in less than 70 days with respect to the poplins and sateens used in Hicks-Ponder’s government business.
89. Omitted.
90. Initially GFM was on hand at Hicks-Ponder’s plants for 3 to 4 weeks after it was picked up and before it was shipped out in the form of manufactured garments. The *494 time was reduced to 3 weeks after plaintiff was asked to accelerate production.
91. The turnover of GFM was more rapid than the turnover of civilian cloth, because DSA wanted immediate shipment of the garments as they came off the production line whereas Hicks-Ponder was able to some degree to produce garments for the full season in its civilian contract business as its own convenience dictated and hold them for shipment as the customer’s sales warranted.
92. Garments sold to DSA were sold on 20-day payment terms.
93. During its fiscal year 1967, Hicks-Ponder maintained a profit-sharing plan for its employees. The company made annual contributions to the plan equal to "25% of its net income above 6% of the net worth of the company at the beginning of the taxable year; such contribution not to exceed 15% of the aggregate compensation of all participants.”
94. Hicks-Ponder also had a bonus plan for certain key officers which entitled them to a fixed percentage of the company’s profits. The percentage was set prior to the beginning of the year and payment was not discretionary.
95. For fiscal 1967, Hicks-Ponder incurred $322,320 of expense with respect to its profit-sharing and officer-bonus plans.
96. On its income tax return for fiscal 1967, as well as on its audited financial statement for that year, Hicks-Ponder deducted the $322,320 of profit-sharing and officer-bonus expenses and did not include this amount in cost of goods sold.
97. Hicks-Ponder’s fiscal 1967 income tax return was audited by the Internal Revenue Service and the company’s treatment of profit-sharing and officer-bonus expenses was not challenged.
98. For the 3 fiscal years, 1966, 1967 and 1968, Hicks-Ponder earned a total of $563,107 from renegotiable business»
99. In fiscal 1966, 1967 and 1968, Hicks-Ponder used a total of $2,548,253 of GFM in its renegotiable business.
100. For the 3 fiscal years, 1966, 1967 and 1968, Hicks-Ponder’s total renegotiable sales excluding GFM were $3,436,114. Total renegotiable sales including GFM for the 1966 to 1968 period were $5,984,367.
101. For the 3 fiscal years 1966, 1967 and 1968, Hicks-Ponder’s total renegotiable profits were 16.39 percent of renegotiable sales excluding GFM while they were 9.41 percent of renegotiable sales including GFM.
*495 102. For the 5 fiscal years 1961 through 1965, Hicks-Ponder’s average annual rate of profit return on sales was 5.67 percent.
103. Hicks-Ponder’s rate of profits to sales for the fiscal years 1963 through 1966 were affected by rapid growth which involved heavy expansion expenses. The company increased employment by 55 percent during that period and greatly expanded its plant capacity.
104. During its fiscal year 1967, the rate of Hicks-Ponder’s non-renegotiable profits as a percent of sales was greater than in the 4 preceding fiscal years because among other reasons the company experienced no expansion of capacity and because of the installation of formal budgeting procedures which allowed the company to ascertain more accurately all of the costs which had to be properly reflected in its prices.
105. Plaintiffs return of operating profit ($1,124,615) on beginning capital (defined as total assets, or stockholders’ equity plus debt) for its fiscal year 1962 ($4,065,464) was 28 percent. Its return on stockholders’ equity alone ($2,541,285) was 44 percent for 1962.
106. Defendant’s FBI-accountant witness used various alternative methods for allocating capital and equity between renegotiable and non-renegotiable business for 1967. The first method was to compare cost of goods sold for renegotiable business with total cost of goods sold, including GFM in both. This produced a 14 percent allocation to renegotiable business. An alternative comparison without GFM came out to a 7 percent allocation of capital for renegotiable business. The second method was to compare renegotiable direct labor with total labor. This showed a 15 percent allocation for capital used in renegotiable business. The third method compared direct labor for the 3 years 1966-68 for renegotiable business with total direct labor for the same years, resulting in an 8 percent allocation. The fourth method derived its allocation from the proportion which 1967 renegotiable sales bore to total sales, both without GFM. From this there was derived a 9 percent allocation. The fifth method compared renegotiable sales for the 3 years with total sales for the 3 years, producing a 5 percent allocation of capital used for renegotiable business. The sixth method compared specific assets used in production for renegotiable business with total assets. From this the witness derived a 9 percent allocation. Although the witness preferred method three, which produces an 8 percent allocation of capital used in renegotiable business to total capital, he concluded that an average of the various methods should be used. This resulted in an allocation of 10 percent of capital and equity *496 to renegotiable business and 90 percent to non-renegotiable business for the fiscal year 1967.
107. Plaintiff proposed no particular figure for allocation of capital and equity to renegotiable business and to non-renegotiable business.
108. As of the beginning of plaintiffs fiscal year 1967 plaintiffs stockholder equity was $5,017,164 - and total capital employed in the business (total assets, or stockholder equity plus debt) was $10,407,322, including therein $2,839,995 in current liabilities.
[Findings 109-112 deleted; duplicated in opinion.]
113. Four other manufacturers of trousers with average 1967 renegotiable sales of $2,100,000 and which were cleared without action by the Renegotiation Board had an average of 10.03 percent profits to renegotiable sales (without GFM) for 1967. 1
114. During 1967 a number of manufacturers of combat and sateen trousers made renegotiable profits that were deemed excessive by the Renegotiation Board. The following chart shows the name of the company, the sales before and after renegotiation excluding GFM, the profits before and after renegotiation, and the percent of profits to sales.
Before Renegotiation (In Thousands) After Renegotiation
115. On January 27,1966, plaintiff received a valid order for sateen trousers under contract No. DSA 100-2162 at a net price of $2.76 per pair (less GFM of $1.33). On the same day, Mann Mfg., Inc. received a rated order at $2.54 a pair. Oxford Mfg. Co. received a rated order at $2.41 per pair. Clefton Mfg. Co. received a rated order for $2.71 per pair. However, Dickson Jenkins Mfg. Co. also received a rated order for sateen trousers on January 27, 1966, and the price was $3.10 per pair. Within 30 days prior to the date selected by defendant and 30 days after that date, rated *497 orders for sateen trousers were issued to many contractors at prices higher than $2.76 per pair; e.g., $2.83 net to Choctaw Mfg. Co., $3.08 net to J.M. Wood, $3.03 to Glenn Berry, $2.90 net to Progressive Coat & Apron, $3.27 to Smith Bros., $3.32 net to San Benito, $3.35 to Steiner Lobman Dry Goods, $2.95 to Oshkosh B’Gosh, $2.77 net to New Hebron and Williamson Dickie and $2.99 net to Progressive Coat & Apron.
116. On May 18, 1966, defendant awarded through negotiation eight contracts for sateen trousers, including one to plaintiff at a net price of $2.76 a pair (less GFM). Except for the award to Mann Mfg. and plaintiff, all contracts were FOB destination.
117. On May 16, 1966, plaintiff and three other companies were awarded contracts for combat trousers. Plaintiffs contract was FOB origin, while two others were FOB destination. Plaintiffs cut, make and trim price was $4.75 per pair. The others were respectively $4.80, $4.38 and an average of $4.04.
118. Plaintiff was the unsuccessful bidder on a number of government contracts for which bids were advertised in 1967.
119. The last prime contract received by plaintiff for sateen trousers was DSA 100-4275 awarded May 18, 1966, at a total net price of $2.76 a pair (including the value of GFM), which contract was negotiated.
120. The cotton sateen contracts on which plaintiff was the unsuccessful bidder were awarded to other bidders at prices ranging from $2.22 to $2.49 a pair (including GFM). On one bid opening in January 1967 plaintiffs bid ranged from $2.64 to $2.80 for different quantities. Plaintiffs prices on other solicitations also remained higher although its exact bids are not in the record.
121. The quality of trousers produced by Hicks-Ponder was good and rejections were extremely minute.
122. Hicks-Ponder’s delivery record was excellent with all deliveries being made on schedule.
123. Hicks-Ponder was economical in the use of materials, facilities and manpower and made very effective use of its facilities.
124. The Government rated Hicks-Ponder’s performance "Excellent” and issued a "Quality Award” to the company.
125. Prices charged to the Government by Hicks-Ponder were in line with those paid by the Army for the manufacture of the type of trousers involved.
*498 CONCLUSION OF LAW
Upon the foregoing findings of fact and for the reasons set forth in the opinion, pursuant to Rule 148, the court concludes and determines as a matter of law that plaintiff as successor in interest to the Hicks-Ponder Company realized excessive profits of $150,000 for its fiscal year ended October 31, 1967, from contracts and subcontracts subject to renegotiation under the Renegotiation Act of 1951, as amended. The case is remanded to the trial judge for further proceedings in the event the parties are unable to agree as to the appropriate allowance for state and federal income taxes and interest on the net amount to be repaid to the Government by plaintiff.
The material portion of the "Net Change in Finished Stock Inventory” were computed in the ratio of material cost to total cost of goods sold each year.
Plaintiffs overhead rate during the 6 months beginning February 1, 1968, was 120 percent of direct labor.
Indeed, even for the 6 months ended April 30, 1968, Hicks-Ponder’s aggregate sales despite reduced government business actually increased from the prior year. Six-month sales were $9,264,499. For the 6-month period ended April 30, 1967, its *477 sales were $9,224,078. However, both its gross and net profits declined; its gross profits for the same periods were $1,818,869 and $1,628,720, respectively; and its net earnings before income taxes were $8,354,426 and $8,903,416, respectively.
The four contractors and their percentages were: Lankford and Sons, 8.0%; Tennessee Overall Co., Inc., 12.0%; Hubbard Pants, 6.4%; and Lerner Slone Clothing Corp., 13.7%.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8595914. Public record. Not legal advice.