Petition for Writ of Certiorari — Boeing Co. v. Renegotiation Board

Supreme Court brief1964

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ku tye Suge Cou ot ie

oe uiied Siates ~

“\- Ocrosex ‘Team, 1963

o 3) Petitioner,

- VS.

‘Tue RENEGOTIATION BOARD OF a

Tue UNITED STATES OF AMERICA,

"PETITION FOR-A WRIT OF CER’ r [ORARI

st . 1O THE \

UNITED STATES COURT OF APPEALS —

FOR THE NINTH CIRCUIT, ~

t——

-Davip E. WaGONER

Attorney of Record for Petitioner”

___ 4 900-Washington Building

— ; : ‘Seattle, Washington 98101

tom: - 6.

F :

_ ANDREW M. WILLIAMS 2 | :

1900 Washington Buifting ee

Seattle, ee 9810)

—

THE BOEING Company, a 2 \

formeriy Boeing Airplane~C ompany, | ‘

. INDEX

CITATIONS TO OPINIONS BELOW «0.0.02... 4

SURFSDICTION heron NG pot Ae ci ah 2.

QUESTION PRESENTED - aay Saas 2

STATUTES INVOLVED Seti in dg una alma OR

REASONS FOR GRANTING THE WRIT .......... 3

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CURA ee 9

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APPENDIX A. perv nwerrntintmennnnntnn 11

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- APPENDIX C te ene ier ae

APPENDIX D .ccscseceo PRATT OE OM

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TABLE OF CASES :

‘Cohen v. Secretary of War, fori Pe SA la

iT¢ aes 1011 (1946) send eeeeeeeeee ‘heen kage 8

Cole v. Young, a eal eee, =

351 aot aia 557 (1956) phen eetae cous Fen weyed i

Dusenberg, Inc: v. “Commissioner of Sniervial ‘ive,

84 F.2d 921 (7th Cir. .1936) ..... png Seaatnn ae

’ Estep v. United’ States, - Sadi ees ieee

» 327US. 114, 120-123.(1946) . naan ca ees feeedeees « 6

Harmon ¥.. Brucker . 2 Vets ous

2, aciaud 579 od) eee terry: ff: 6

Lichter v. United States, | : i.

234 US. 742, 754 (1948) een reee che Rigas ioe 9

National Labor. Relations Board-v. Carlton Wood Prod. Co.,

201 F.2d wk 866 (9th Cir. 1953) «...... eskhenew “-6

Norih American “Aviation, Inc. v. Renegotiation Board, 3

39 T.C. No.. eee bavnoewaeeis eee eeeeeeees 7

_ St. Joseph Stockyards Co. v. United States, ,

298 USS. 38, 84 (1936) see eee mete e eee reeneeeee eres.

_ United States v. California Eastern Line, Inc. : es

348 US: 351 (1955) .......... 2c eeeee t.- quay --- 34

United States v. Shaughnessey, :

. 336 U.S. 806, 869 (1949) ° SP oy EVE trite. oe 6

United States v. Williams, ie a

. . 278 US. 255, 257- 258 CUED ne niles diss erence we’ 7s}

bg et

-@ Pi

STATUTES —

Page

aL UuLC nS io ses evans a vake oes nks = 43

50 U.S.C. ‘Apr: «eee ee ee

50 USC. ‘App. ON eae) e

$0 USC. App. 1213(f) . 1... ceeeeedeeeeee. ae

50 U.S.C. App. oR SRRE SY SE ~

50 USC. App. 1218(a): ei ee aa

Séetion Ne sy

Section 103(e)(6) sae ates ren oie tied ae

Geodon: HOB). isco ceeeteneer es Bogeeee

Sittin 108°....-.! co ; er Ne et 2, 3,4

26 USC § 7482 ie ork one Liat

2B USC. § 125401) coos elev tence ee joe oe

. MISCELLANEOUS |

: Page

Sen. Rep. 1669, 87th Cong., 2nd-Sess.. p.5...-:........ 8 5

Hearing on Department of Defjertse Appropriations for

1963 before. ‘a Subcommittee of House. of Repre o~

sentatives -Committee on Appréptations. 87th

i 2nd Sess., ee Are eee Pee ae ee

far

: Sosy »

No. :

4 .” the ichianir. Court of the

Hnifed States |

OCTOBER TERM, 1963°

THE BoEING COMPANY, iS

formerly Boeing Airplane Company, OR

ok ASS ane Petitioner,

vs. i ; ”,

THE RENEGOTIATION BOARD OF. .

THE UNITED STATES OF AMERICA, |

. Respondent.

rey

~e4

- PETITION FOR A WRIT OF CERTIORARI

. TO: “THE 3

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

"The Boeing Company, forinerly Boeing ‘Airplane Com-.

"pany, prays that.a writ of certiorari issue to review the

_ judgment of the United States Court of Appeals for the

Ninth Circum® entered in the above-entitled case on. De-

cember 12, 1963.

CITATIONS TO OPINIONS BELOW

The memorandum -opinien of the Tax Court of the

United States (R. Vol. II, 139-200), printed in Appendix

A hereto, infra, pp. 11-68, is reported in 37 T.C. 613, °

The opinion of the ‘Circuit Court of Appeals, printed.

. . . , .

in Appendix B hereto, infra, pp. 69-71 has not yet been

reported. .

JURISDICTION

The judgment of the Circuit Court of Appgals was .en-

tered on December 12, 1963 (R. Vol. XI). The jurisdic-

tion of this Court is invoked under 28 U.S.C, § 1254(1).

‘QUESTION PRESENTED

Section 108 of the. Renegotiation Act of 1951 confers

upon the Tax Court “exclusive jurisdiction, by order, to

* finally determine the amount, if any, of such excessive

_ profits received or .accrued byythe contractor or subcon- «

tractor,” and provides that “such determination ae

’ be reviewed or redetermined by any court or agency

question presented is whether, in a case arising under the.

Renegotiation Act, the ‘Circuit Court of Appeals sis pre- -

cluded by Section 108 from reviewing errors of law and

_arbitrary and capricious findings of fact made or com-

‘mitted by the Tax Court which are of such a nature that

they could be reviewed by the, Circuit Court of ‘Appeals.

without its ever reaching the question of “the amount, if”

any, of such ‘excessive profits,” but which do not involve

constitutional issues or issues relating to the jurisdiction of

ihe Tax Court. .

STATUTES | INVOLVED |

The statutory, provisions involved are Sections 103(e)

‘and (f) and 108 of the Renegotiation Act of 1951 as

amended: 50 U.S.C. App. 1213(e) and ’(f) and 1218.

They are.printed in Appendix C, infra, pp. 73-76.

a ‘

STATEMENT |

The Renegotiation Board, by unjlateral order dated De-

cember 5; 1955, determined that petitioner had Tealized

eee

—— =

excessive profits of $10, 000,000 from its renegotiable busi-

ness during the calendar year 1952 (R. Vol. I, 10, 53).

Pursuant, to Section 108 of the Renegotiation Act, peti-

tioner appealed to the Tax Court which, on January 8,

. 1962, entered a decision that petitioner had realized ex-

cessive profits of $13,000,000 for 1952 (R. Vol. II, 202).

Petitioner appealed to tha United States Court of —*

_ for the Ninth Circuit. 26 U.S.C. § 7482.

On appeal, petitioner contended that. the Tax Court

(1) erred in deciding that-expenditures on a research and

x development program involving a protdtype aircraft were

to no extent. allowable as a cost of renegotiable business;

(2) erred in failing to accord to petitioner the de novo

hearing required by Section 108 of the Renegotiation Act; _

(3) exceeded the limits of its statutory authority by ap-

plying a criterion of excessive profits not authorized by

Section 103 of the Renegotiation Act; (4) committed

-prejudicial errors of law in its analysis of incentive-t}pe

contracts: (5). made important factual findings that were ~

wholly unsupported -by the record; and (6) through. an

accumulation of egregious errors exceeded the bounds of

arbitrary action, thereby depriving petitioner of procedural

and substantive due process. The Court of Appeals dis-

missed the appeal for want: of jurisdiction. It held that the

.. Scope of appellate review was limited to constitutional and

jurisdictional issues, that a particularization of issues did

not amount to a deprivation df due process, andythat the

other errors assigned by petitioner could not be considered.

REASONS. FOR GRANTING THE WRIT

1. Whether the scope of appellate review in a renego-

tiation case is limited to constitutional and jurisdictional

issues is an important: question of renegotiation law not

yet resolved by this Court. In United States v. California

Eastern Line, Inc., 348 US. 351 (1955), the Court re-

* Bp

viewed a decision of the District of Columbia Circuit which

lield that a question concerning the coverage of the Re-

negotiation Act could not be reviewed, since under prior

rulings in that circuit the scope of appellate review was

_ limited to constitutional and jurisdictional questions. The

Court concurred with the Circuit Court’s decision that,

within limitations imposed by Section. 108 of the Renego-

tiation Act, Tax Court’ decisions in renegotiation cases

were reviewable under 26 U.S.C. § 7482 (then 26 U.S.C.

1411), notwithstanding that the statute spoke in terms of

“tax cases. The Court reversed the Circuit Court on the

scope of review and, it is submitted, rejected the Circuit

Court’s limitation of review to constitutional and jurisdic-

tional issues. Instead, it created a “separate but- interre-

lated” test; The Court recognized that the statute pre-

cluded review of the ultimate ‘question of the “amount, if~

any, of excessive profits”; but in deciding a renegotiation

case the. Tax Court must decide “at least” one other .

separate ‘but interrelated question-wwhether a renegoti-

‘able contract is involved. The Court held that such an

. issue was reviewable—it could be decided without ever

reaching the question of excessive profits. 348 JJ.S. 355.

The clear inference is that other questions Wkich are

separate from and can be decided without reaching the ull-

timate question of excessive profits—such as, for example,

whether a particular expenditure is a current expense of

reriegotiable business or a capital outlay—may be reviewed

by the Circuit Courts. ; ,

2., Subsequent to United States v. California Eastern

Line, Inc., S@pra, Congress amended the “Renegotiation

Act to define specifically the scope of appellate review. of

renegotiation cases filed in the Tax Court after -July 3,

1962. The amendment authorizes appellate review “to the

same extent as decisions of the District Courts in civil ac-

_ tions tried without a jury” except that there is to be no re-

OS *

view of the “existence” or “extent” of excessive profits and

findings of fact.are conclusive unless “arbitrary or capri-

cious.” 50 U.S.C. App. § 1218(a). The Senate Report in-

dicated that existing law was fraught with “problems, and

uncertainties” and that the interpretation of the scope of

review in the District of Columbia was “unduly restricted.”

Sen. Rep. 1669, 87th Cong., 2nd Sess., p. 5. The Minority .

Report asserted that the amendment was unnecessary be-

cause it would “merely eodify the existing law as declared

_. by the Supreme Court. * Id. at p. 8.

This case is the’first opportunity for the. Court to re-

examine lower court construction. of the statute prior to

the amendment to avoid the perpetuation of an unduly -re-

strictive interpretation that has been repudiated by:Con-

gress. It is within the permissible bounds of statutory con-

‘struction to allow appellate review under the old statute

substantially similar to that which would be accorded under

the 1962 amendment.

3. Petitioner may well be entitled to the broader sad —— a

_ Cial-_review-as a-matter Of constitutional right... Due-regard

for the “supremacy of the-law” (St. Joseph Stockyards Co.

v. United States, 298 U.S. 38, 84 (1936) (Brandeis, J.,.

concurring ) ) and the “Serious constitutional implications

of limited appellate review require a narrow reading of the

statutory provision giving ‘finality to Tax Court decisions

in- ‘renegotiation cases. This and other courts have fre-

: quently held that statutory and other provisions purporting

~ to give finality to administrative action are not a bar to re-

view of errors giving. rise to manifest injustice: ;

(a) Whether the decision was “wholly without « evi-

dential support or wholly dependent upon a question

of law or clearly arbitrary of capricious .. .” United

_ States v. Williams, 278 U.S. 255, 257- 258 (1929);

(b) Whether the * ‘standard” prescribed by an Ex-

ecptive Order and applied by an agency head was in

conformity with the applicable statute. Cole v.

, Young, 351 US. 536, 557 (1956);

the statuteahd regulations and . . . was, made after a

fair hearing .. .” United States v. ~ Shaughnessey, 336 ©

US. 806, 809 (1949):

(d) Whether the Secretary of the) Army had ex-

ceeded his powers under the relevant (Statutes. Har-

“mon v. Brucker, 355 U. S. 579 (958);

( e) Whether a draft board exceeded its jurifdic- '

tion by acting in disregard of the law or without evi-

dence to support its findings. Estep v. United States. .

327 US. 114, 120-123 (1946);

_ « (f) Whether a determination of the Regional Di.

rector of the NLRB was.“arbitrary or capricious, or

not in.conformity with the policies of the Board and

the requirements of the Act. . .” National Labor Re- ©

lations Board v. Carlton Wood Prod. Co., 201 F. 2d

863. 866 (9th Cir. 1953). :

- 4. There ate. now pending in the Tax Court ean

from orders of the Renegotiatton Board.taken by members

of ihe aircraft industry involving’a total dollar amednt of

almost $100,000,000 (see Appendix D). The instant case _

was the first of these cases to be heard and decided by the

Tax Court and the first to be appealed to a Circuit Court

of Appeals. The Tax Court proceeding and decision ‘in

the instant case and the extent to which appellate review

thereof is permitted wilt have a profound effect as a prece-

dent for these other cases. All of these appeals were filed

- before the 1962 amendment to the Renegotiation Act, and

the scope of judicial review of Tax Court decisions in these

~ cases will be unduly limited by the decision below if it re-

mains. unmodified. In addition, the petitioners in all these

cases, including the petitioner here, being members of the

‘same defense industry, operate in much the same cgntext

of Government procurement, and the errors committed by

the Tax Court in the instant case, particularly as regards

its treatment of incentive-type contracts, may be perpetu- ..

ated in the other cases if not reviewed and corrected. De-

fense Secretary McNamara’ has stated to Congress that if

the Tax Court decision in the instant case stands without ~

modification, it could “und&rmine our entire program

place increasing emphasis upon_cost-reduiction by. providing

incentives and penalties to contractors in relation to the

extent they do or\do not meet our objectives.” Hearing on

Department of Defense Appropriations for 1963 before a

Subcommittee’ of House of Representatives Committee on

er ae

; “Appropriations, 87th C —_- 2nd Sess., p. 234. -

» The Tax Court. in North American Aviation, Inc.

v. Renegotiation Board, 39 T.C. No. 19, appears to have

disavowed the basis for the decision in the instant case. In

' the instant case the Tax Court» repriced individual con- __

ge in ‘disregard of law and applicable regulations (R.-*

Vol. Il, 195, 200); in contrast, in North. American the

Court aggregatéd profits under all renegotiable contracts

‘before determining whether any were excessive. In the in-

stant case the Tax Court emphasized the amount of esti-

mated costs (R. Vol. II, 195, 199): in North American

the Court observed that .it was dealing only -with actual

cost figures.. In the instant ‘cas@ibeavy reliance was placed

on: Sectiof.103(e)(6) (R. VOT, 196), discussed infra:

in North American this section was not mentioned. The

entire Tax Court joined in the decision of North American,

with the exception that the single judge who decided the

instant case concurred in the result. Thus, there appears

to be a conflict in the Tax Court itself on fundamental

; sae

° 7y-

—

& / o jf c : ae

issues at the core of renegotiation law which should be re- *

_ solved by an appellate court,

6. Some of - the a serious errors committed fae the—

Tax Court, which are separate from though interrelated

with the determination of excessive profits and can be re-

viewed! without ever — that ultimate anaes are*

the following:

(a) The Tax Court held that eendinaien on a

~ research and development program involving a pro- -

totype aircraft were to no extent er" as a cost

: renegotiable business (R. Vol. II, 151). Under .

Renegotiation Act these aia were allow-

, t as a cost if they were properly allowable as a.

"current deduction for federal income tax purposes. .

50 U.S.C. App. § 1213(f). By specific ruling the

Copmmissioner of Internal Revenue permitted the ex-

penses to be deducted currently (R. Vol. IT, 145) and

this ruling*is in accord with decisions of other courts.

See, e.g., Dusenberg. Inc. v. ‘Commissioner. of Internal

Revenue, 84 F.2d 921 (7th Cir. 1936). There is-thus

presented on appeal a question of law as to which |

there is a conflict between these authorities and the

Tax Court. :

(b) The -Renegotiation Board determined ‘ that:

Boeing had excessive profits of $10,000,000 and the

Tax Court increased this determination to $13,000.-

0OU. Under Tax Court ruies and cases the burden

was on respondent to prove that the determination.

should be increased beyond: $10,000,000. Cohen v.”

Secretary of War. 7 TC. 1002, 1011 (1946). The

‘Tax Court in the instant case refused to follow this —..

settled principle, the only discussion of burden of |

proof in its opinion indicating that the entire burden.

was upon petitioner (R. Vol. Ii, 175).

_ (c) In reaching its ultimate determination, the Tax

Court placed principal reliance-on Section 103(e) (6)

of the Renégotiation Act, which provides .for consid-

-eration of such’ additional tests. or criteria for the de-

termination of excessive profits js may be adopted by

Renegotiation Board Regulation (R. Vol. II, 196).

50 U.S.G. App. § 1213(e)(6). No such other factors

’ having’ever been adopted by the Renegotiation Board,

the Tax Court exceeded the limits: of: its statutory ©

‘thereto.

This’ Court. has emphasized that in a renegotiation case

“the governmental action authorized, although resting’ on

‘valid constitutional grounds, is capable of gross abuse,”

and that “resulting injustices can and should be carefully

examined and as far as possible relieved.” Lichter v. United

States, 334 U.S. 742. 754 (1948).

Grave injustice has resulted to petitioner because of the

refusal of the Court below to reach the merits of the appeal.

ie i : °

"es CONCL USION

For the foregoing reasons, Bosal petition for a writ of

certiorari should be granted.

Respectfully submitted,

DAVID E..WAGONER

. Attorney of Record for Petitioner

1900. Washington Building

o- | Seattle. Washington 9810]

‘Of Counsel: rivet ;

~ ANDREW M.:- Wieiams

1900 Washington Building

- Seattle. Washington 98101

authority, in giving, special consideration and ox soma ;

__. Docket No. 935-R

11° Ttaarae ee

_ APPENDIX A. | 7

37 T.C. No. 64.

TAX CQURT OF THE UNITED STATES

BOEING AIRPLANE COMPANY, Petitioner, *

Vv.

THE RENEGOTIATION BOARD. OF THE UNITED

STATES OF AMERICA, Respondent. -

Filed January 10, 1962.

1. Expenditures made by petitiner for certain adver-

tising and other overhead expense held- not allocable to

the petitioner's renegotiable business in 1952.

2. Cost of work performed with respect to the design, *

_ development, and construction of a prototype airplane not

in pursuance of any contract with the United- States Gov-

ernment held not allocable to petitioner's renegotiable

business.

a Amount of excessive profits made by petitioner from

its renegotiable business in 1952 determined. ~

-Lowell P. Mickelwait, Esq., Andrew M. Williams, Esq.,

and David -E. Wagoner, Esq., for the petitioner. :

‘James H. Prentice, Esq., David L. Rose, Esq., and Har-

land F. Leathers, Esq., for the respondent.

WITHEY. Judge: On December 5, 1955, the re-

spondent issued its unilateral order determining that for

the year 1952 petifioner had received excessive profits in

' the amount of $9.822,340 upon renegotiable business-with

the United States Air Force. At the close of the proofs

- herein, respondent, by an amendment of its answer to con-

form to such proof, now claims total excessive profits for —

1952 in. the amount of $20,000.000. The disposition of |

two preliminary issues is necessary in order 6 arrive at

the total amount of petitioner's renegotiable profit for 1952.-

"These isues are (1) whether certain advertising and other

overhead expense is properly allocable to petitioner’s te-

—:- a,

negotiable business-and (2) whether the cost of work per-

formed with respect to the design, development, and con-

.Struction of a prototype airplane not in pursuance of any

_ “contract with the United States Government was properly

~~ allo ble to renegotiable business. Depending upon the dis-

position of those ‘issues, the parties have stipulated the

amount of petitioner’s renegotiable profits for, 1952.

_’ Preliminary Issues | ay be

‘s FINDINGS OF FACT ~

All of the extensive stipulations: of fact hereig? with re-

"spect to all issues are’found as stipulated. .

It has been stipulated and is accordingly found that

during 1952 petitioner paid. or incurred for overhead ex-

pense. $581,530.93 which was properly chargeable as re-_

negoitable cost for that year. This amtount. included

amounts paid or incurred for advertisement in trade publi-

‘cations for the dissemination. of technical information to

_ the airframe industry, for catalogues and technical pamph-

~ . lets designed to aid users, of petitioner’s products, for publi-.

«cations to aid in ‘its personnel relationships and help

' wanted advertisement. ;

_ In addition to the above, petitioner paid or incurred dur-

. ing 1952 further total overhead expense in the amount of’

$629,755 of which it ‘has on’ its books allocated to rene-

_gotiable cost the amount of $627,704. Of the amount of

$629,755 so’ paid or incurred, $238,758 was for what

“ petitioner designates: “institutional” advertising, $80,000"

was for entertainment expense, and approximately

~~ $311 .000 was for selling expense. , ‘

" Petitioner's method of bookkeeping, regularly employed

. and. in accordance with which it prepared its Federal in-

come tax .returns, provided for an “overhead pool” where

such items of overhead expense 4s could not be. charged

to a specific contract or work in progress were accumu-

pee -

i} ¢t

—————

a} 3 =

ig = sy | a ‘ -

‘lated. At the close of its: fiscal year the experfse items com-

prising the pool were ailucated between: renegotiable and

_nonrénegotiable business in direct proportion to the direct

labor man-hours expended with respect to each,

‘mary objective the’ ceping: of the Boeing name before the 2:

“Instititional” advertising is typified. by a newspaper

advertisement of petitioner extolling the uses and virtues_

of an analog computer which Boeing is there claimed . 10

have designed and developed. - The advertisement is di-

rected primarily fo Io such aig of analog com-

puters. Also typical of such adv ing is a newspaper ,

advertisement depicting a line of B47 aircraft at. Boeing's |

Wichita, Kansas, ae The advertisement has‘ as its pri-

- public and the instilling in-the public mind of the fact that.

_ craft. Likewise typical of, such advertisement is a news- .

- production basis by “ei

craft. Later than 1948, but priof to 1952, it also developed

. t tanker aircraft designated the hall wT, which (was pro-.,

it was an efficient producer of an unusually complex air-

paper advertisement depicting a Boeing Stratocr@iser in

flight over. the’ city of Paris, France. The primary objective

of this advertisement is the kéeping «of the Boeing name

before the public as producer of ‘commeréial aircraft.

The entertainment expense was.in part related to the

prémotion of employee ayfd community relationship and in

part the purchase of meals and general entertainment of .

visitors and business ‘associates. 3

Selling expenses -were incurred’ or paid principally i in con-

nection with: Boeing’stommercial business.

No part of. the above-mentioned’ $629,755 represents

expenditures properly chargeable against the petitioner's

renegotiable. business for 1952. oe

In 1948 petitioner contracted to furnish the United

States Air Force with B-47 jet bombers capable of altitude

and speeds at that time fever before ‘accomplished on a

er bombardment or fighter air-

peller-driven, with internal combustion engines, and single ++

low-wing design which was equipped with a refueling mech-

anism which also ‘had been designed and developed by

petitioner.« The KC-97 had pérformance capability suf-

ficient to refuel adequately in the air the most advanced

_ bombers then used by thé) Air Force, the’ B-29 .and ag

B-5€ which’was the improved B-29. When it became ap-

parent to petitioner that the Air Force was to acquire and

use the B-47 bomber as its primary deterrent weapon, ‘it

also became apparent that the KC-97 was not of sufficient-

ly high performance to refuel adequately the B-47 in the

_air although it was true that by stowing the B-47’s speed |

sufficiently, it was possible (to mfake contact with a KC-97

and for the refueling process to take place. Refueling a

B-47 at such low speeds and low altitudes posed undesir-

able milftaryssituations. Both aircraft while in the, refuel-

ing process were traveling at ‘such low speeds and -low

altitudes that’they were: dangerously susceptible’ to.enemy -

action. Boeing knew, upon the advent of the, B-47 that

the Air Force had contracted for its construction largely .

because the-basic design thereof contained hitherto un-.

* known growth possibilities. The basic, design of the B-47.

for instance. permitted a range of approximately 1,500 °.

miles. Béfore the completion of work under Contract

21407 by the use of newly developed: engines, rocket as-

sistg¢d take-offs, and refueling in the air, this range had

~ been extended to about 5,000 miles. It was reasonable for

Petitioner to conclude in L952 that thé B-47 had even

greater growth potentiality. were it to be refueled by a

tanker with performance characteristi¢s more nearly cqm-

parable to its own. Petitioner knew also that the Ait-Feree -” »

intended to make full use of the. growth potentialities of

the B-47... ° : ;

Petitioner atso believed. and it was <* consensus of

opinion of airframe manufacturers in this country, that jet- +

Be)

les

powered commercial sibtiner would be in demand. within

a reasonably foreseeable future. Petitioner attempted on

several occasions prior to 1952 to obtain a contract from

the Air Force for the construction of a jet-powered tanker,

Representatives of the Air Force, although interested in

such a tanker, merge they had no congressional ap-

pfopriation therefor, no program therefor, and’as a result

refused to contract. In 1952 petitioner's management was

sufficiently certain of an eventual Air Force contract for

such tankers and of a prospective commercial market for

'jet-powered transport aircraft that- without a military or

commercial contract therefor they proceeded to design, de-

/ velop. and partially construct what was designated on its -

books the Model 367-80 prototype. During 1952 petitioner .

expended $1,734,302 in this process. This work occurred

in a. walled-off area of the’ Government’s plant at Renton,

Washington. for which petitioner was charged and paid

rental. On its books the amount so expended was charged

_ as an expense to profit and loss during 1952. The prelim. ©

inary engineering and development work began in April of '

that year and construction of the prototype began in the

latter) part of that year. About 83 percent of the amount

expended in 1952 was for engineering-and development -

_ Work sand the remaining; 17 percent was for tooling and

production. In producing the’ prototype, petitioner's

management instructed its employees that where problems

arose as between the commercial.or militae¥’ concept of thé

prototype, the militaty concept was to prevail. The airplane

was constructed and first flown in 1954 and was still fly-

-ing and in use by petitioner as: a “test bed” as of the date

of the trial hereof. in October 1958. The prototype was

used to try out and test new ideas developed by petitioner

and to demonstrate its commercial and military possibilities

‘to prospective customers. It is.still in use for that purpose.

-The airplane was the prototype of Boeing Models 707

Ou -

+16

and 720-B jet aircraft and.the Model KC-135 jet tanker _

subsequently sold in substantial numbers to the commercial ©

' air lines and the Air Force of the United States, respectively.

Boeing's construction of the prototype was without a con;

. tract with the Air-Force or any commercial customer jand ;

no part of its expenses in the construction therefor was paid

for by either. All such expenses were defrayed from Boe-

ing’s funds. Boeing’s determination to construct the proto-

type in’ 1952 with its own funds and without contract re-

sulted in the availability of the KC-135 tanker to the Stra-

tegic Air Command of this country 2 years prior to the time

it would’ have been available had Boeing awaited an Air

Force contract. The ‘availability of the KC-135 constituted

and effectuated a significant advance. in the. military utility

of the B-47:and B-52 bombers of the Strategic Air Com-

mand. ~ ‘

. Upon three prior occasions petitioner had constructed

ay prototype aircraft without Government or other contract

therefor and had upon each occasion treated them _— its

books as capital assets.

In July 1952,"in response to a request by petitioner, the

Deputy Commissioner of Internal. Revenue, by. letter.

granted petitioner permission to change its accounting

method with respect to prototype 367-80 so that the cost

tuereof might be expensed by petitioner rather than. cap-

- italized as had been its method prior thereto. The request °

was made upon the grounds, as petitioner stated, of its un-

‘certainty whether income would ever be realized from the

prototype and that it had no certainty of an utlimate pur-

_ chaser or of a future market or demand for the model air-

plane of which 367-80 was a prototype. The permission

granting the right was ‘based upon the same grounds.’

The Model 367-80 prototype when constructed had a

useful life of 25 years and a. , Value of not less than

$4,000, —

17.

The expenditu.e of $1;734,302 by petitioner in 1952 -

with respect to the engineering, development, and construc-

tion of the Model 367-80: prototype was for the creation

of a capital asset. Such axpenses do not constitute réim-

bursable costs pans a to the renegotiable sales and

profits of petitione 952.0 |

> OPINION ar.

Petitioner, in claiming allocability of the advertising, en-

’ tertainment, and selling expenses set forth in our findings,

relies almost entirely upon the general provisions of sec-

tion 103(f) of the Renegotiation Act of 1951 and the regu-

lations of the respondent thereunder dealing generally with

the allocability of costs. Both that section of the Actsand

section 1459.1 of respondent’s regulations provide gener-

ally that where the contractor maintains a cost accounting

system which properly reflects renegotiable costs, the costs.

there shown’ will be allocated in accordance with that

method to renegotiable receipts. However, with respect to.

"Selling and advertising expense. the former of which would

include the entertainment expense involved herein, section

1459.7 of the regulations is specific. Subsection (a)(1)

thereof is as follows: | at tne, | |

(a) Selling—(1) Selling expense will be allo-

cated to renegotiable business only to the extent that

(i) it relates in major part,to technical, consulting and

other services performed in connection with the ap-

. plication agd adaptation of products comprising the

renegotiable business to the uses’ and requirements

of the Government or other contractors: or (ii) it re-

lates to the maintenance ‘of offices or agencies en-

gaged in the servicing of products comprising the re-

negotiable business: or (iii) it relates to the sale of

products or services comprising the renegotiable busi-

ness which are of the type ordinarily sold or rendered

by the contractor and which are sold or rendered

through the distribution system normally used by the

‘contractor; or (iv) “it is a commission of the type al-

lowed in section 1459.2(c). .

Subsection (b) (1) is as follows:

(b) Advertising —(1) Itenis of advertising ex-

" pense comprising “hélp wanted” advertising, advertis-

ing in trade publications which are primarily directed

to the dissemination of technical information within -

the contractor’s industry, catalogues and technical

pamphlets designed to aid users of the contractor’s

products. and house organs and other publications di- ©

rected to labor and personnel management and rela-

tions, are recognized as costs allocable to renegotiable

business. The aggregate of such costs will be allocated

‘’ in accordance with the. method of.accounting found

by the Board to be acceptable under section 1459.1(by

of this subchapter.

~ Subsection (b) (2) (ii) thereof is as follows:

(b) Advertising — * * *

(2) Other advertising expense is allocable to a

tiable business as follows:

“2 ££ & 2: ¢. &, or

. (ii) An cases in which it can be demonstrated that

a prime contractor or subcontractor engaged in rene-

gotiable business to the detriment of its normal com-_

mercial business in the year under review, and thereby

incurred the risk of loss of its competitive ‘position in

the industry concerned, the Board will allocate to re-

negotiable business that portion of the prime con- _

tractor’s or subcontractor’s normal advertising expense

which thé Board deems properly attributable to the

effort by the prime contractor or subcontractor to-

forestall such loss. of competitive position. .

We are unable to find from this record that petitioner's

‘disputed advertising expense falls within, any of the cate--

gories.of such expense set forth in subsection (b) above

quoted and have found as a fact that it was here paid or .

incurred with respect to its commercial business or to main-

tain its name before the public as a producer of commercial

aircraft. No evidence has been introduced -to establish that

. any of such advertising had the effect of recruiting employ-

ees, raising or maintaining the morale of its employees or of

recruiting: suppliers. It is apparent that under the stipula-

tion of the parties petitioner. has- received adequate. allow- .

ance. of such expense as renegotiable cost.

We are likewise unable to find from the record ‘that the .

disputed selling expense falls within the provisions of sub- |

section (a)(1) above quoted and have found as a fact that

svch expense related to. petitioner’s commercial business.

As inthe advertising issue. we note that adequate allowance

has been made.in the stipulation for such expense as a

charge against renegotiable receipts. .

On this #ssue we find for the respondent.

Relying on section 103(f) of the Renegotiation Act and

the provisions of sections. 1459.1(b)(3) and 1459.8(e)(3)

of the respondent's regulations under the Act. the petitioner

-ontends that its expenditures of $1.734.302 during 1952

with respect to the 367-80 prototype airplane constitute

experimental and. developmental costs incurred and. paid —

by it during that year in the operation of its experimental

and development division and as such the allocable por-

tion thereof based upon a comparison of direct labor hours

ex ended on renegotiable and nonrenegotiable business. or

$1 731.283. is chargeable as renegotiable cost herein. The

pet tioner makes this contention despite the fact that the

exp2nditures were not made in the performance of a.con-

trac with any agency of the United States Government.

Respondent contends. or the contrary, that the expendi-

tures do not constitute experimental or developmental ex-

ly a

Y A"

20 R

penses within the meaning of either the portion of the Re-

negotiation Act or the provisions of the respondent’ Ss regu-

lations thereunder relied on by petitioner but are’in reality

- expenditures for the acquisition of a capital asset which is _

ms not chargeable, Fenegotiable:cost.—-.--—— - —--: -..

' The portion of the Renegotiation Act and the: provisions

of the respondent's regulations . relied on by. petitioner in.

support of its position are not here applicable, and no part

of the expenditures is allocable to renegotiable- business if

“the expenditures, were made for the =" of a id

_ asset.

-In support of its contention petisiones Jikens the ex-

penditures here involved to those which are ingurred in the

operation of an experimental laboratory. Inasmuch as pe-

titioner’s president in his testimony herei ip-repeatedly stated

that the prototype was a “test bed.” we think the simile is

proper but in a different respect. While it is clear that lab-

oratory expenses for fuel. expendable test tubes. chemicals.

salaries and wages. and genétal overhead are properly to be

-. regarded as the expense of operation of an experimental |

laboratory. no one could properly claim that the cost of

construction of the laboratory itself is overhead expense.

The laboratory has a utility beyond a single year: it has a

‘49 g determinable value and may be put to use in other fields

of business than that of its owner. We not only liken the

prototyre here involved to an experimental laboratory but

to one-of the tools of a laboratory such as one owned by

petitioner, i.e.. its wind tunnel. There is no évidence here

that petitioner has attempted to reduce its 1952 receipts °

by amounts expended for the construction of its wind tun-

nel. The wind tunnel like the prototype is an experimental

tool or test part, with a useful! life caine than one year

and value of its own.

We are not impressed either with petitioner’ s.contention

that there was no certainty when the prototype’ § construc-

+. Me..

Wren 5.

Pike

- tion was begun in 1952 that it would ever be completed or -

_, that it would ever derive. income as a result of ‘its use or

that there was a market for the model of which it was a -

prototype: . The word * “certainty” as petitioner uses it has a

‘ broad philosophical connotation and, of course, in that

~~" ""—~senge.there, is considerable authority for the philosophical

: proposition that literally nothing is certain except

. and taxes. As.used by this and other courts, however, fn the

context hereof the word means reasonably certain from a

~ business standpoint, that is, an assurance baséd:upon exist-

ing factors which lead in the normal! course of business to

an expected result. Hart-Bartlett-Sturtevant Grain Co., 12

T.C. 760. In view of its loss with respect to a prior proto-

type, we do not believe that petitioner would have so en-

dangered its comparatively small net worth as to enter

upon the construction of a multimillion dollar prototype

airplane without reasonable business assurance that the

prototype would be completed and that there would be a

reasonably assured and profitable future market for the

models 6f jwhich it was a prototype. We are convinced that

' from a business standpoint petitioner, took .#-calculated

risk with respect to a future market but that such risk was

no more than that which is to be expected in the ordinary

conduct of any business. The prototype has all of the at-

tributes of a capital asset. and we find. that it was one and

that the costs pertinent to its engineering. designing, and

construction incurred and paid by petitioner during 1952-

cannot therefore be properly allocated to renegotiable

business.

In accordance with the stipulation of the parties we

therefore find thai petitioner's renegotiable profit for 1952

was $56,734.119.

Reasonablesne-- or Excessivenes+ of Profit

FINDINGS OF FACTS .

Petitioner is a Delaware corporation, organized in 1934.

‘and at all times material herein had its headquarters and

principal place of business in Seatle, Washington. With

few exceptions its business has always been the- manufac-

ture of airframes. To and through the year 1952 about 99

percent of its production has been that of airframes for ‘the’

military services of this country. Airframes consist of the

fusilage. wings, landing gear, anc control surfaces of an

airplane. All of its Government production has been per- -

formed under contract with one or another of, the military

services. Toa large degrée such contracts ‘have. resulted

from demonstrations of petitioner’s products arid designs in ©

competition with those of other members of the airframe

industry. Generally, the airframe industry is marked by un-

usually intense competition due largely to the fact ‘that it

is compas itively new and, since the close of World War II.

_.has experienced an extremely rapid advancement and

growth in the-art of the design ef aircraft. Throughout its

existence petitioner has never exferienced normal business

as that term is generally undegstood. When performing

under Government contracts, 4 has consistently produced |

an article of high unit cost, if volume being low int com-

parison to manufacturers generally. Its profits have been.

in one form or another. based upon its. cost of production

and have been correspondingly high in amount. However. -

the contratts have aiways contained a provision that they

might be terminated by the Government without notice. In

petitioner's experience such contracts. have upon occasion

been so terminated leaving petitioner's plants. equipment.

and personnel suddenly idle. In fact, whether petitioner was

working to capacity of completely idle has been almost en-

tirely governed by the exigencies of international politics

and the safety or danger to the United States engendered

thereby. Its business has always been characterized by peaks .

and valleys and abnormality rather than normalcy. Com-

pared to the total sums involved in petitioner's production

' under Government contracts. its invéstment in fixed busi-

ness assets has been and was in 1952 small. Its successes

in obtaining contracts with the Government have been pri- -

marily due to the experience, know-how, and skill of its

employees both direct labor and general administrative,

supervisory, and especially its design engineering staff. Its

" attempt, prior to 1952. to break into the civilian aircraft

field was at financial loss but. was nevertheless undertaken

_for the purpose of maintaining in its employ a core of ex- ~

perienced and skilled personne! so that the integrity of its

over-all know-how would remain intact: This attempt was ~

‘the result of the sudden termination of lagge Government

contracts subsequent to the close of hostilities at the: close

of World Warll. :

During and subsequent to World War II petitioner manu-

factured’ B-29 heavy -bombardment aircraft under. contract

with the United States Air Force. During World: War II, as

the result of winning a design competition i on under

Air Force auspices, its design was chosen as that which was

to be the medium bombardment aircraft for the use of the

Strategic Air Command. and petitioner was chosen as the

design prime contractor for the manufacture thereof, The *

bomber so chosen was designated the B-47.

The B-47 was chosen by the Air Force partly because of —

the “great advancement it represented in the art of bomber

‘design but largely because of the growth possibilities inher-

ent therein. It was the first swept- wing, jet-powered bomber

ever constructed. Its performance was far superior to the

best performing bombardment aircraft theretofore manu-

factured. its service altitude being 45,000 feet as compared

to the previous limit of 35,000 feet and its speed. exceeding ug

600 miles per hour. represented an advancement over for-

mer bombér speeds of about 300 miles per hour and alti-

‘tudes of 10,000 feet. Its wing-type. although having been

'. used by the Germans in World wa IT in fighter aircraft.in

bes)

- 24

_ comparatively crude form, was an innovation in the con-

struction of bombing aircraft. The wings were swept-back,

very thin for the weight of the B-47, with a high aspect

ratio, and contained six jet engines in pods protruding for-

ward and below the leading edge of the wing. Whereas the

wing covering of previous bombers, although metal, was

not designed to carry much, if any, of the wing-loading.

that of thee B-47 was of metal and was designed to bear a

substantial part of that weight. The wing covering tapered

_.consistently from a thickness of five-cighths inch at the root

‘to three-sixteenths inch at the tip. As manufactured by’pe- °

_ titioner the plane was equipped with its landing wheels

placed in tandem rather than side-by-side and at the nose.

To aid in’ reducing its approach speed and its. landing run,

_ it contained a “drogue” parachute in-a tail compartment

which could be opened by the crew while in flight. Al-

_ though the B-47 as experimentally constructed, was

equipped with conventional ailerons, these were found to -

_ reverse their function at very high speed due to the bending

"and twisting upwards of the outer portion of each wing up-

_ on which they were located. To cortect this effect, petitioner

installed spoilers upon, each wing which made it possible

to counteract the reversing effect by interference with the

smooth flow of air over the wing, thus causing that wing to -

lose its lift and lower. The bending and twisting effect was

also-counteracted by the placement of the engines as above

described. The plane, due to its radical wing design, as ex-

. perimentally built, was deficient in its lateral control at ap-

proach and landing speeds. As manufactured. petitioner

designed and installed wing flaps at the inner portion of

each wing. These could be extended from the trailing edge

of the wing to increase its lift at low’speed and could ‘be’

used as supplements to the ‘ailerons to increase low speed

lateral control. The wings also contained the plumbing for

the injection of water into its engines. To aid in its take-off.

eo 3

25 =

the B-47 \ was cuihaels with: rocket-type thrust i in the fo

of multiple “Jato Bottles.”

As finally manufactured in 1952, the B-47 was the den-

sest bombardment aircraft ever produced. Density i is the de- -

gree of insidé space: which is occupied by the. equipment

necessary to its operation as an airplane and as a weapon.

As experimentally designed and built, when accepted by the.

Air Force, the gross weight of the B-47 was 120,000

pounds. In 1952 its gross weight had advanced to 220,000

pounds. Gross weight is the number of pounds of weight

represented by the aircrafe itself, its fuel load, its crew,

bombs, and weapons which it is capable of lifting on take-

off: Gross weight has a direct bearing upon its value as a

weapon in that the more fuel lifted along with its full load

of bombs the greater its range of operation.

In 1952 the B-47, in accordance with — ipsiliiaty

tions, was to have installed, fogether with water injection,

a bomb-navigation system necessary | forthe successful de- |

livery of its bomb load and a system of defensive’ armament

control. Each of these systems was of such advanced design

that .the subcontractors who manufactured and designed

them had not. during 1952, completely developed them.

Each of them was equipment. the furnishing of which was

the Tesponsibility of the Air-Force. Because of the aie de-

velopment and delivery to petitioner of these systems, they

or one of them were not installed in some of the B-47’s

delivered by petitioner and accepted by the Air Force in

1952. Such B-47's were fistéd as “deficient.”

Because there is a limit to the fuel load which an airplane

can lift. its range. as before stated. is thereby limited. The

Air Force in 1946 réquested petitioner. to design a mechan-

ism which would permit the rapid transfer of fuel from-a

tanker plane to a bomber while in flight. Petitioner designed

_and constructed such a mechanism and installed it in a C-97

cargo plane which thereby, after being equipped with the ~

‘

° . : /

ad . a”

- .

a 263° Ae

necessary tank EOPTS became the KC.97 tanker airplane

after its acceptance by the Air Force. These planes were ' -

“propeller-driven and had sufficient speed so that fuel could

be transferred from them to a B-47 provi latter re-

duced iis speed and altitude to conform to that of the former.

. A B-52 is a bombardment aircraft of the same basic con-

figuration’ as the B-47 with. the exception that it is consider-

ably larger.- Its gross weight is more than double that at-

_ tainéd by the B-47. Its performance capabilities exceed

_ those of a B-47 to about the same degree as the B-47 ex-

ceeded those of its predecessor, -the B-50 propeller-driven

bomber. The Air Force in 1947 naa is the peti-

_ fioner for the design and construction of two experimental

models .of the B-52. In 1952 it successfully designed and |

p built two such aircraft. Because of petitioner's experience

_with the B-47, it was discovered thaf metal wing surfacing

er design to permit the full attainment of the B-52’s per-

formance and growth capabilities. To correct this, peti-

"with the consistent taper used on the B-47 was not of prop--

tioner, through its design engineering, accomplishell ‘one |

of the few innovations in airframe construction which has —

Metal wing sut/ace with an incgnsistent taper. from-.root.

occurred in late yefts. This “np of the designing of a

to. tip to a de ree of tolerance theretofore unknown in air-

frame manufacture. When constructed, the wing appears /)

to be slightly concave. In addition; petitioner designed or

both the B-47 and B-52 a method of rolling the wing sur-

face metal with the proper taper .whereas theretofore it

would have been necessary to machine it to the cesired.

thickness tolerances.

The B-50 bomber is a propeller-driven aircraft which is

an.advanced B-29, which latter bomber -was the bomber

used by the Air Force in the Pacific theater of operation

during World War II. Petitioner, under contract with the

Air Force, manufactured 22 B-50 bombers during 1952.

Sy goa

‘ 4

The contract called" for the manufacture and delivery of

_36 B-50's.

The Bomarc: is. an intercontinental ballistic anti-missile -

missile. It represents the entry of the United States into the -

anti-missile field. It consists of an airfrarne in\which is con-

. tained a war-head, fuel-carrying capacity, and the plumbing

necessary to its delivery to combustion chambers, a stable

' platform upon which is installed électronic equipment. for

ground control and for its self-guidance to a target, and.

-gimbal-type combustion chambers for steering and stabiliz-

ing purposes. Petitioner, under Air Force contract, designed

and constructed two such experimental missfles in’ 1952.

Upon the opening of hostilities in Korea in 1950, the

Air Force had determined that the B-47 bomber repre-

¢ sented its chief deterrent weapon with res ‘to threatened

attack on the United States by, an ene “éountry. It there-

upon expanded’ its order for B-478-" It adopted a policy ©

which required that ‘they be manufactured not only by

- Boeing in Wichita, Kansas, but by Lockheed Aircraft Cor-

poration and Douglas Aircraft Company in their factories

situated elsewhere than Seattle or Wichita. To expedite the

advent of the latter two companies into the manufactpre of

B-47’s and to act 4s a clearinghouse for the problems which

would thereby arise, the Air Force. in July of. 1951, estab-

lished the B-47 Joint Production Committee made upvof

representatives of the three manufacturers and the: Air

Force. with an Air Force officer as chairman. As design

prime contractor of the B-47. petitioner :was required by

* «the Committee to furnish Lockheed and Douglas. competi-

' tors of .petitioner. with master tooling gauges which it had

developed for production of the B-47. to furnish them with .

designs and drawings. to teach Lockheed and Douglas en-.

gineers and employées Boeing’s production methods, and

generally to make available to them its’ manufacturing

know-how. Boeing actually ferntehed them 18% complete

”

sets of B-47 components and over 18,000 miscellaneous

—~ - vos

Under Contract 22413, which was a cost-plus-a-fixed-fee

@ arrangement entered into on October 31, 1949, petitioner

manufactured and delivered to the Air Force in 1952, 36

B-47’'s. This type of contract is customarily used for the pro-

curement of airframes ‘in their experimental and develop

mental stage. In this instance, it provided for the’ reimburse-

ment to petitioner of all costs of prodyction, together with.

a fixed profit of 6 percent of such costs in addition thereto.

For B-47’s delivered undér this contact, petitioner in 1952

received cost reimbursement of $10, 646,214 and a profit

of $1,730,607. -

. &

"Under Contract 21407, which was a fixed price in-

centive type contract entered into on May 10. -1952,

petitioner, in 1952, manufactured anddelivered to: the

‘Air Force 263 B-47’s. This contract provided ‘for the

reimbursement to petitioner of all cost of production,

plus a fixed fee of 7¥2 percent of estimated costs, which

estimated costs, “as was .the case with respect ta each

incentive contract here involved, were first negotiated

‘between petitioner and the Air Force prior to the execution

- of the contyact and were thereafter renegotiated as a “firm:

~ target” estimate of cost tq apply. retroactively and prospec-

tively from delivery of the 100th bomber throughout the

_ life of the.contract. For its cooperation in the activities of

the B-47 Committee and its aid in getting Lockheed and

Douglas into the’ production of B-47’s, the fixed fee was

' raised 12 of 1 percent so that petitioner's total fixed fee

under this contract was 8 percent of the firm negotiated

target cost estimate. The cost estimates as negotiated were

-based upon an 80 percent improvement fate. This rate of

improvement is the average rate of the airframe industry

upon the date of the execution of this contract. It means -

° 29

that each time the number of airframes produced is doubled,

the latter half is produced for 80 percent of the cost of the

former. The cost formula is represented. in graph form in

the industry by an 80 percent improvement.curve. The in-

centive provision of this contract provides that in case

petitioner .in actuality underruns the firm oe cost esti- -

mate, it will receive as profit, in addition to the 8 .percent

fixed fee, 20 percent of such underrun.. In case of an over-.

"run, petitioner must stand 20. percent of the overrun and

the United States 80 percent provided the overrun does not

exceed 125 percent of the firm target cost as negotiated.

Petitioner must defray all cost overruns in excess of that

percentage’. At the termination of the contract the parties

were to: ss with Fespect to and finally agree upon .

e actual alloWable costs incurred with ‘respect to per-

(tormance of this contract. For B-47’s delivered under this

contract, petitioner? in 1952, received reimbursement of

cost in the amount of $347,365,355, a profit of $33, 440, -

\590 of which the incentive profit was-$4,903/340.

The following is a list by number designation of the

comracts in force between the Air. Force and petitioner

and \apder which petitioner received renegotiable profits in.

1952 and-ageneral description of the goods manufactured

‘and services performed thereunder:

Type of Contract, and

Contract Designation or ;

Contracting Party . Preduct or Subject Matter

- Cost-Plus-A-Fixed-Fee

21096. Model B-52 Aiplanes and Spare Parts

19589 + Research and Development Bomarc

Pilotless Aircraft Missile -

22413 Model B-47 Airplanes and Spare Parts

6993 | “Tucson Modification of Model B-47

Airplanes

- 7 °

Model XB-52 and YB-52 Airplanes

~ Model RB-47 Mock-up

' Modification of Model B-50 Airplanes

- Modification of Model B-50 Airplanes -

Bombing and Navigation Systems

Flying Boom Modification Program |

Phase I—Design of Airplane

Modification of Model B-47 hibits

Model B-29 and Model B-50 Airplanes

“Bombing System |

Modification of Model B-47 Airplanes

Prototype Installation on Model B-50

Airplane

Electric Power Sets

_Gas Turbine Power Unit

Modification of Model B-29 Airplanes -

Engine Studies :

Modification of Model B-47 Airplanes

Model B-47 Producibility Study:

Model 502-2C Turboprop Development

Installation of Photographic Equipment

_ on Model YC-97 Airplanes

Modification of Model B-50 Airplanes

Model 502-2 Gas Turbine :

Storage and Services

Model B-50 and Model C-97 Airplane

Tool Storage

Model 502-12 Gas Turbine ©

Model: B-47 Airplane Studies

(Continued ),

14764

14809

5097.

19823

"9825

5805

5065

Product or Subject Matter

. Flying Boom Developmental and

-- Modification Program —

“GAPA” Guided Missile Program

__ Modification of Model B-47 Airplanes

Modei B-47. Airplanes and Spare Parts

‘Model KC-97 Airplanes and Spare Parts

odel TB-50 Airplanes and Spare Parts

re Parts -

“Model B-50 Airplanes and Spare. Pains:

Model C-97 Airplanes and Spare’ Parts

* Model KC-97 Airplanes and aie Parts ©

Spare Parts

Magnetic Minesweeping Equipment

Spare Parts

Model B-29 and Model B-50Kits+ —*

Model C-97 Airplanes and Spare Parts

Modification of Model B-50 Airplane

Power Packages -

Spare Parts at |

Model B-50 Airplanes and Spare Parts

Spare Parts

Bomb Lifts

(Continued)

32 x» ™

Type of Contract, and :

Contract Designation or

Contracting Party Product or Subject. Matter

Price Redetermination

(Continued)

28882 , Spare Parts | :

3783 Seryices in Connection with Govern-

, ment-Furnished Property

25898 Sling Assemblies ;

13013 Model B-50 Airplanes and ard Parts !

21763 - Spare Parts

Miscellaneous Minor Contracts ;

Prime Contracts —

22009 Services of Technical Representatives

3699 Repair of Government-Furnished ,

Property :

7610 — Suspension Line Clamps

3700 Repair of Government-Furnished

| _ Property

20383 Technical Data

20578 - Spare Parts

_ 25932" Sling Assemblies |

53975 Model 502-2 Gas Turbine -

17803 Sling Assemblies

9853 Lock Assemblies

4529A Analog Computers

70106 . Maintenance Parts .

6481 Modification Kits for Jack Assemblies,

20756 Special Tools

Miscellaneous Minor Contracts

Douglas Aircraft Material, Parts. Trailer Compressor

Company, Inc. Unit

Lockheed Aircraft. Material, Parts, Analog Computer

Corporation re

. (Continued)

Contract Designation or

Contracting Party Product or Subject Mutter

Subcontracts :

(Continwed) =

_ Curtiss-Wright Spare Parts

_- Aeronautical

Corporation ©

Briggs Manufac- _ Spare Parts

turing Company

Grand Central Air- Bomb Rack Assemblies and Spare

craft Company Parts

General Electric Parts and Engineering Laboratory

Company’ Vork

National Rivet & Material, Parts

Mfg. Company , .

Consclidated = Pump Assemblies

Vultee Aircraft

Corporation

. ~. Miscellaneous Minor Subcontracts

21378 Special Facilities

22291 Special Facilities _

2862 Special Facilities

Petitioner produced B-47’s in Government - furnished

manufacturing facilities in Wichita, B-50’s, Bomarc mis-

siles, and B-52’s. at its plants in Seattle, and C-97’s and °

- KC-97’s in a Government-furnished facility at Renton, a

_ suburb of Seattle. “Except to the extent petitioner used

Government facilities: for nonrenegotiable business, such —

facilities were furnished without charge to petitioner.

-During World War II petitioner had used the Wichita

plant for production of aircraft for the Air Force and had

there employed over 20,000 persons in doing so. Wpon

termination of the World War II contracts, virtually all of

this labor force had been discharged except for a skeleton.

crew of about 1,200. Because of the Air Force's insistence

upon the manufacture of B-47’s at Wichita, rather than

Seattle and Renton where petitioner had an adequate. .

trained labor force, it was necessary for petitioner t6 recruit

a new and untrained labor force again and of approxi-

mately-the size there employed during World War il. Be-

' fore 1952 the problem involved in recruiting such a labor

force was that, in doing so, petitioner was in competition

for labor with commercial manufacturers due to. the “guns

‘and butter economy” which then: existed. In 1952 the

problem so involved was that which necessarily arose in

the fabrication and assembly of a new. complex, and ex-

tremely dense airframe represented by the B-47 with a new

and inexperienced labor force which had to be trained.

In addition, it was necessarv for petitioner to train engineers

and employees of Lockheed and Douglas in both Wichita

and Seattle.

During its production of B-47's prior to 1952 and until

April of that year. petitioner did not deliver i in accordance

with the contract delivery schedules. By April of 1952, it

had attained the monthly rate of delivery required by. the -

contracts and for the entire year produced and delivered

the required number. Its delivery slippage was primarily

due to its inexperienced and untrained labor force, but was

secondarily due to. the.fact that its corporate executive and .

managerial organization was that of an essentially one-

plant manufacturer. By January 1. 1952. petitioner had be-

gun to make changes in its executive and managerial or-

ganization in accordance with recommendations made ‘by

a competent managerial consultant which it had employed

prior to 1952 for the purpose of identifying and defining

faults in its corporate set-up and its operation which had the

tendency to cause its cost of production to be high. The

35 «

consultant, who had theretofore been without experience-

‘in the appraisal of an airframe manufacturer but who had

‘much experience with automobile and other manufac- .

turers, determined that petitioner's lack of direct labor

standards was one of the prime factors leading to high

production costs. He recommended the-establishment and

use of complete. factory-wide labor standards but estimated

that.such a procedure would require 3 years to complete.

Although petitioner was using direct labor standards*to a

degree. it established a committee. which existed in 1952,

for the purpose of studying the feasibility of establishing

' and using such standards in the production of an airplane

- such as the B-47. Over 60 per cent.of petitioner’s labor

force was employed in its assembly area. and it did establish ~

and use additional labor standards in connection therewith.

- That portion of direct labor used in the fabrication of parts

it determinéd was not amenable to such standards, how-

ever, and didnot apply them to the same degree as to its |

assembly workers. Petitioner determined. after study pf the

problem. that’to the degree it-had not followed the recom-.

mendation of the managment consultant, such. proposed

_ changes would cost more than they would save in —

tion cost.

Although automobile manufacturers had successfully

used direct labor standards in the production of B-}7's and

B-29’s during World War II. these aircraft were’so much

less dense and presented such comparatively simple pro-

duction’ problems that their comparison from a production

standpoint with that of B-47's and B-52’s is not significant.

While an automobile manufacturer fixes his design at the

inception’ of each new mode' and makes few if any design’

or other changes. Boeirig. producirg an airplane the design

complexity of which. as originally accepted by the Air

Force, was without parallel. was forced to incorporate about

8,000 design and other changes therein while producing

510 B-57’s. About 2,000 such changes were ordered by ~-

the Air Force in 1952.-The Air Force had adopted a policy |

that speed of production was more desirable than absolute

conformance with contract specifications and to that end

accepted certain B-47’s which did not entirely so conform,

reduced petitioner’s profits according to such specification

shortages, and established a modification center at Tucson,

Arizona, wherein to bring such planes to specification. This

a or eee

of aircraft. |

Under Contract 6993 entered into in December of 1951

petitioner agreed to complete these modifications which

in addition to bringing each plane to. the specifications

existing at the time of its construction also in some cases

consisted of the incorporation therein of changes ordered .

as a result of the growth of the B-47. For 1952 petitioner

was reimbursed for costs incurred in such modification in

the amount of $11,661,257 and received a — in addi-

‘tion. thereto of $240, 341.

The Air Force directed that the modification work be

: subcontracted. and -when it appeared in 1951 that the

subcontractor was performing in an unsatisfactory manner

and petitioner suggested to the Air Force that it (Boeing)

perform. the work, the Under Secretary of the Air Force |

’ refused co permit the change. In order to make it possible.

for the subcontractor to perform adequatelv the required

modifications, it was therefore necessary .J1 petitioner to

assign many of its top grade personnel to the subcontractor's

plant in order to trains its employees As, of October 2.

1952, 178 of Boeing's finest shop, planning, inspection, and

methods personnel were so assigned. Whatever the defi-

ciencies were with respect to performance under this con-

tract during 1952, they are.not properly laid at ‘petitioner's

door. Its performance of this contract, in the light of the

above circumstances, was reasonably efficient. 7

As before stated, the basic B-47 is susceptible - -to great

growth possibilities. Changes ordered by the Air Force

emanated alike from it and petitioner. As the growth of the

bomber advanced the Air Force concept of its military use

altered and this alone accounted for many changes. It

was contemplated by both parties to these contracts at *

their inception that the B-47 would present novel procuc-

_ tion problems; that the speed of its production was a para-

mount necessity taking priority over comfiplete compliance

with contract specifications; that the later bombers pro-

duced, although like those first produced in basic conforma-

tion, would be radically changed ia many ways throughout

the performance of the contracts. and that time-consuming

testing would be required with respect to such changes.

In fact, both parties came to realize, as was the fact, that

the B-47 and the changes made therein represented such

an advance in the state of the art that the design of elec-

tronic, and other eqhipment. such as the bomb-navigation.

system arid jet engines, to be furnished by the Government.

had not sufficiently kept pace so as to permit petitioner's

incorporation of such equipment during production in.some.

‘instances. Nevertheless such variances from contract spe-

cifications were listed as shortages and deficiencies at the

- time of delivery of aircraft which for. such reasons did not

conform to contract specifications.

Certain deficiencies in design engineering were disclosed

upon testing of the B-47's. Typical of such deficiencies were”

_ the “Dutch-roll” and bomb-bay buffeting. Both were con-

ditions which became evident upon operation of the bomber :

_ atspeeds never before attained by bombardment aircraft.

The first has been described hereinbefore in connection

with the reversal of lateral controls. The latter was caused “

by the action of air currents entering the bomb-bay when

its doors were opened while the plane was operating at

extremely high-speed. This air action had an adverse effect _

upon the accuracy with which bombs could be delivered.

Neither condition could have been reasonably anticipated

prior to the high-speed testing of the B-47. Another de-

ficiency in design engineering was disclosed by testing.

This was damage to the trailing edges of wings caused by

. high-frequency vibration of a part of the fuel injection

plumbing contained in the wings where, at certain speeds,

such vibrgtion would conform to and be accentuated by

engine vibration. Each of these deficiencies was corrected

by petitioner within reasonable times after their discovery:

No airplane in the procurement experience of the Air Force

was ever delivered without deficiencies and shortages. -

The term “combat-capable” or “combat-ready” was in

the. minds of both parties to B-47 contracts descriptive of \

the condition of B-47’s which were to be delivered by peti- ©

tioner although that term is not used nor*the thought other-

wise expressed in the contracts. The specifications and-the -

changes as ordered from time to time, though, do sum up

to the Air Force’s concept of those terms. Throughout the

performance of the B-47 contracts the concept of combat

capability, although basically unchanged, nevertheless al-

tered. with change orders brought about as the growth fac-

tor of the plane developed. From time to time B-47’s were

delivered to and accepted by the Air Force which therefore

were not “combat-capable.” Had the need arisen. however,

- #,.0,use-such planes in case of attack upon the United States,

they could and would have been used to deliver bombs to

an enemy target. In fact, in 1952, the B-47 was the chief

. deterrent weapon possessed by the United States. Although _.

some such “deficient” planes. were delivered, their mere

présence at air bases around the world had a deterrent

effect upon the enemies of this country.

_ The Air Force had adopted a policy of wide subcontract-

ing for a twofold purpose. It desired the manufacture, of

‘nomically depressed manufacturing areas. of ‘the country.

Petitioner, as prime design contractor therefor, in addition

to its own production commitments, became responsible.

for the production of B-47 parts in the plartts, of about 200

subcoptractors and ‘Parts suppliers throughou: the United

States. Some of them, principally those which had been

automobile or automobile parts manufacturers, not previ-

ously having had experience with the extremely close toler-

ances required for B-47 construction. had difficulty in the

performance of their subcontracts and fell behind delivery

schedules: It was necessary in those instances for top man-

agement personnel, much needed in petitioner's own plants:

to be sent to the plants of such subcontractors to instruct

them in production methods and procedures. Upon some

Occasions it was necessary for petitioner to cancel subcon-

tracts with such subcontractors. Petitioner fulfilled its obli-

gations. with respect to subcontractors with ordinary - effi-

ciency. . | Se

During 1952 delivery schedules were altered by the Air a

Force largely for the purpose of allowing sufficient time for

petitioner's incorporation in the B-47 of the numerous

changes ordered therein, the increased amount of testing

required thereby. and additional time for the arrival at its

plant of necessary Government-furnished equipment. such

as the bomb-naVigation system. For) that year petitioner

delivered and the Air Force accepted. B-47’s in accordance

with the contract schedules.

Petitioner's total investment in machinery, equipment,

property, and plant.-at Wichita during 1952 averaged

Na |

40!

_ $2,397,866. Government-furnished facilities of the same

kind: at Wichita averaged during that year $34,875,128.

- About 88 per cent of the plant floor space used by petitioner

in 1952 in Wichita in its production of B-47’s was Govern-

ment-owned and furnished to petitioner without charge.

In’ addition to the land, plant, miachinery, and equip- . -

ment referred to above, the Government paid for the spe-

cial (or contract) tooling, including jigs, dies, fixtures,

molds, patterns, and special gauges, usable on the B-47

_ airframe only. Machinery and equipment are usable in

the production of several types of airplanes or in manufac-

‘turing generally, while special tooling is usable only in the

production of one model or type of airplane, The special

tooling was included in the supplies called fOr in the con- *

tract, so that petitioner not only was reimbursed for the °

cost of procuring the special ee but received an ele-

ment of profit thereon.

_ .Under B-47 Contract 22413, as ‘under its other i oie

a-fixed-fee cay pao was reimbursed “currently” -

for costs incurred in the performance of the contiact, in

| weekly payments upon the payroll sheets, invoices, and“

other evidences of costs to petitioner. In addition, petitioner

received 90 percent of its fixed. fee in monthly installments

based upon estimates of the percentage of completion of

_ the work. Any unpaid balance of the fee was to be paid to

petitioner upon completion of the work,

Under B-47 Contract 21407, as under the o her incentive

contracts in force in 1952, petitioner received partial pay-

ments of 90 per cent of the lower of the.cost to petitioner

of the property acquired or produced in the performance of

the contract, or of the total contract price for articles still °

to be delivered: The remainder of the price was paid to peti-

tioner upon the delivery of the aspiane or other articles

' ~~ ¢alled for.

41 7

In the inception of the cost-plus-a-fixed-fee and incentive

contracts under which B-47's and C:97/KC-97's wete

manufactured, arm’s lergth negotiations took place with

respect to each aspect thereof. “The same type of negotia-

tion took. place with respect to periodic’ change orders and

particularly. with respect to the fixing of a firm {arget cost.

The latter event took~place in the case of B-47 Contract

41047 in November 1952. The negotiators were highily

skilled and of more than ordinary competence on each side

‘ofthe bargaining table. The negotiators had available to

them experience in airframe procurement extending over »

Many years and including the more recent procurement

during World War II. They considered and gave what they

corisidered to be proper effect to petitioner's net worth as

applied to its prospective earnings. the fact that Govern-

ment facilities were furnished petitioner free of change. the

rates of profit prevailing in the airframe industry, the -

amount and source of publit and private capital to be em-—

: ployed: by petitioner iri performing the contracts, petitioners —

contribution to the, defense of the country. and, 4n fixing

firm target costs, to the “de* iciencies” of already delivered

irframes.- The. firm target costs thus arrived at were in

excess of $30,000,000 below. the proposals submitted. by

petitioner: Considering the complexity of design and the

great growth potentiality of the B-47 with the unknown or

unforeseeable changes which were to result therefrom. the

negotiators arrived at reasonably accurate cost estimates.

Contract 21407 provided that for the purpose of negotl-

ating a firm target cost petitioner was to furnish the Air

Force its proposed firm target cost estimates and -data-in

support thereof immediately upon completion of the 100th. —

B-47. which evert took place in June of.1952. Negotiations

immediately commenced after petitioner's compliance with

this provision. but due to the desire of the negotiators to _

obiain as much dctual current cost data as possible, peti-|

-. &

oe ae ae aoe

tioner was required to furnish such data currently as nego-

tiation continued. Largely because of this procedure the\—

firm target cost was not — upon until November of

: ee

Boeing's corporate existence to and including 1952 has |

been marked from its beginning by a state of abnormalcy

‘in the sense that it has not experienced any period where.

except for jong-lived Government contracts, its business has

become stable. Its sole customer for: all intents and pur-.

poses has been the United States. The exigencies of inter-

national politics have to a great extent constituted the

catalyzing factor which has precipitated contracts from

that customer. Whether those charged with the defense of

this country felt the imminence of danger and. the degree |

thereof determined the size of those contracts. _The-con-

tracts could and upon. occasion were terminated with little

or no notice by the United States. This resulted in petitioner

being forced to discharge nearly all its direct labor force

and all but key people in its engineering staff. When a

new contract was forthcoming it then became necessary to

re-employ labor and engineering personnel and train them -

in petitioner’s manufacturing techniques, a time-consuming:

and costly process. The extent of employment was depen-

dent upon the size of each contract and the extent of neces-

sary training depended upon the nature of the product to

' be produced thereunder. and the past experience of nev.

employees.

' Petitioner's price per pound of production i in the case of

’ the C-97: KC-97 decreased from $35.89 in 1946 to $15.15

in 1952 and its profits per pound decreased accordingly. In

the case of the B-47 its price per eis decreased from

$47.10 in 1949 to $22.53 in 1952.

‘The petitioner's cenegotiable profit for 1952, $56,.734.-

‘119, is 98- percent of the amount of its book net worth.

$57,794,057, as of the beginning of that year. Adjusting its

book net worth at the beginning of the year to its average

book net worth for 1952 arid for the value of its design.

engineering, and over-all manufacturing know-how, we find

its percentage of profit to net worth was approximately 50

percent in 1952. Its volume of sales was among the 50

leading American jAdustrial concerns measured by the vol-

ume of sales. Of the 50 leading concerns, with the excep-

tion of petitioner; the average percentage of profit to net

worth during 1952 was 26.9 percent.

During 1952 petitioner's labor costs and those for ma-

terials, with the exception of direct labor jn the case of

C-97 /KC-97, production, were influenced: by a rising mar-

ket and were higher than in the immediately preceding years.

- At the same time its total average cost per airplane pro-

duced based upon a reasonably adjusted. statement of work

performed, in the case of B-47 production, decreased from

$1.781,000 for those produced under Contract 22413 to

$861,000 for those produced under Contract 21407 and

its cost per plane in the case of C-97/KC-97's produced

under Contracts 12450. 18821, 9825. and 14764 de-

creased respectively as follows: $1,286,000, $635.000.

$597,000, and $438,000.

Due largely to a rising general economy petitioner's pro

duction overhead costs at Wichita rose from $2.14 per hour

in 1951 to $2.82 per hour in 1952. :

Petitioner’s compensation to itscorporate officers was

low in 1952 in comparison to industry generally. Its divi-

dend policy was conservative based on the same compari-

son. It paid bonuses to its employces under an “incentive

compensation plan” of $2.500.000. The payment of

bonuses was based upon the profits of the company and the

plan was implemented at least partly as an incentive to

lower the over-all cost of production. oe

Petitioner's products under the contracts here involved,

with the exception of the C-97, bear little similarity to its

peacetime products. The only similarity is that in each case

the product is an airplane. The C-97 is the military counter-

part of the Stratocruiser commercial airliner which was pro-

duced for a short time by petitioner at the close of World

- War II. Its production of Stratocruisers resulted in substan-

tial financial loss. It, gs fact, has never prior to 1952 suc-

cessfully engaged in Business on’ a commercial basis. Its

construction of Stratocruisers for the commercial market

was primarily for the purpose of maintaining in its employ

a core of experienced engineers and production personnel.

’ In its history petitioner has had no peacetime experience’

which is reasonably comparable to its wartime experience.

Its history discloses no period’ of normal operation which is

reasonably comparable to its performance under the con-

-tracts at issue. E

Petitioner subcontracted, in terms of direct labor-hours

27 percent of its production of B-52’s, 32 percent of B-47

production, and 25 percent of KC-97 production. Its

production of B-47’s and KC-97's ir 1952 was almost en-

tirely by the use of Government-furnished facilities.

_ - Its 1952 profits, compared to industry as a whole, were

high.

- The petitioner's profits of $56,734,119 for 1952 are

urreasonable and excessive in the amount of $13,000,000.

» OPINION :

_ ° The burden of proof in these de novo proceedings: rests .

upon the petitioner to establish by a preponderance of the

evidence that its renegotiable profits during the year ended

December 31. 1952, of $56,734,119 were reasonable. In

determining the reasonableness of those profits. we are

guided by the provisions oi the Renegotiation Act of 1951

and aided by the rules’ and regulations of the respondent

and the decisions of this Court. The phrase “profits de-

rived from contracts’ with the Departments and subcen-

tracts” as used in section 103(e) of the Act is defined in

section 103(f) therevf as “the excess of the amount re-

ceived or accrued under such contracts and subcontracts

over the costs paid or incurred with respect thereto and de-

termined to be allocable thereto.” .

In its pleadings and on brief respondent takes issue with

petitioner's right to favorable consideration with respect

to every criterion for decision provided by applicable law

and its own regulations. Even so. however, its primary

_ contention is that petitioner's profits constitute an unrea-

sonable return upon its invested net worth during 1952.

Petitioner: recognizes that its return on its ‘book net worth

during,that year is abnormally high but contends first that .

its book net worth is an: unreliable. inaccurate. and unfair

picture of its true net worth and, lastly, that any use of the

net worth factor in this particular case is unwarranted and

of no, value in determining-the reasonableness of its profits:

that. in lieu therecf. we should measure its profits by a

comparative ratio of its profits to its sales.

We cannot agree with either contention. The contract-

‘tor’s return ch its invested net worth must be given consid-

' eration but in the light of and in conjunction with the other

_ statutory. factors. While. it is true that petitioner's return

of profit upon its book net worth indicates an unusually

high profit. its books do not accou,:: for the value of its

design engineering and manufacturing know-how. Al-

though the record does not show the specific value thereof.

when considered as a whole.” it .does~indicate that these

categories of know-how in the highly competitive airframe

industry constitute an asset which is of great value which

should be added to its book net worth in applying the net

worth factor. See Aycraft Screw Products Co., 80 T.C.

1037. a

The petitioner obtained the contracts here involved by

virtue-of the application of this asset in competition with

.its competitors. In order to remain competitive in the

industry, it is necessary that the design engineering staff of |

a member not only keep pace with the rapidly advancing

art of airframe design, but be capable of leading the ad-

vancement. This we think has occurred here with respect to

the B-47 and B-52 designs. It is reasonable to conclude

that this asset in petitioner’s case was of’at least the value

of all its book assets combined. So viewed petitioner’s re-

. turn on its whole net worth is approximately 50 percent.

Respondent contends ‘that, petitioner was inefficient in

its performance of each contract here at issue but empha-

sized on trial and on brief only those involving B-47, C97 ’

KC-97, B-52, Bomarc, and B-50 production in that order.

We here follow this lead. We have found as a‘fact that

petitioner. under the conditions prevailing in 1952. per-

formed ‘under the contracts in a reasonably efficient man-

ner. Over 61 percent of its profits for 1952-was derived

from Contracts 22413 and 21407 under which it manu-

factured B-47 airframes, Respondent. in contending that

petitioner was inefficient, completely disregards the true

conditions: under which these contracts were performed.

The B-47 was. of a character with which neither the Air

Force nor any manufacturer had theretofore acquired more

than meager manufacturing experience. It is true that the

basic .principle that an airplane must consist of ,fusilage.

wings, control surfaces, landing gear, and a means of mo-

tive power was ancient. It is even true that the swept-back

design of a'wing and a tandem or bicycle landing gear did -

not emanate from petitioner. The. fact is, however. that

the uSe of 2 thin, swept-back wing of: high aspect ratio

on a hombardment type aircraft was unique in 1952 and

prior thereto. The B-47 was designed to perform and did.

perform at speeds and altitudes never before attained. It

contained equipment of a nature never before used in

bombing aircraft. The nature of such equipment, its fit-

tings, wiring, and placement created manufacturing prob- »

lems for which there was little if any precedent. The B-47

was the “densest” bombardment aircraft ever produced.

The-B-47 design as accepted by the Air Force during World

War II was so accepted substantially because of its unusual

growth potentiality. Both parties to the contract anticipated?

as was the fact. the exploitation of these possibilities. Be-

cause of this ‘factor over 8,000 change orders were

issued by the Air Force during the life of Contracts 22413

and 21407, 2,000 of them occurring in the year 1952.

These changes in many .instances required an alteration in

the design of the B-47 and many of such changes required .

exhaustive testing after their incorporation. The extent

of such testing and problems which arose from the changes

and were disclosed by the testing we are convinced could |

not reasonably have been foreseen by petitioner.

Another circumstance which is disregarded by respon-

dent is the effect of the Air Force's changing concept of

combat suitability or combat readiness. Neither of these

terms was used in the B-47 contracts, but it “is clear to us

that both parties knew and contemplated that the airplanes

were not manufactured in accordance with contract specifi-

cations unless they were capable of delivering their bomb

load accurately upon an enemy target while providing a

degree of safety for the crew and the capability of return

to base. However, combat suitability was a variable term

in this instance. As exploitation of the B-47 growth poten-

_ tial progressed. more and better performance was expected

by the Air Force in order for the plane to fulfill its concent

of combat capability. Some of the B-47’s delivered to and

accepted by the Air Force in 1952 were not, by this meas-

ure, combat-suitable. In many instances this was so because

Government-furnished equipment. such as parts of the

watei injection system, jet engines, bomb-navigation sys-

tem, and electronic defensive armament, ‘had not been

available to. petitioner at the date of delivery. In most cases

their. nonavailability was caused by the fact that their ~

manufacturers ‘had not kept pace with the advancement in

the art of airframe design exemplified by the B-47.

Respondent complains that the B-47's in some cases

evidenced faulty and inefficient design engineering. Typical

of such cases is the “Dutch-roil,” cracking of trailing wing.

edges caus sonic vibration of water injection plumbin;,

installed i¢ the wires, cracking of and difficulty in jettison-

ing the copkpit canopy, and bomb-bay buffeting caused by

the air ts entering the bomb-bay when its doors were

: . Each of these difficulties became eviderit only

upon the high-specd testing of the airplane and could not in

our opinion have been. by the use of design engineering effi-

ciency, foreseen prior to actual testing ‘These defects, along

with others pointed to by respondent. were corrected as

speedily as was reasonably possible by petitioner. We note

too that the Air Force in ali its procurement experience had -

‘never known of an instance where an airplane had been

delivered without deficiencies and it is in fact ‘clear from

this record that it viewed thie B-47 procurement with such

deficiencies in mind. It adopted a policy upon the advent

of the Korean hostilities of accepting B-47's as rapidly as

- possible whether or not they were in every respect combat:

suitable and. under contract with petitioner. ‘set up a reha-

~ bilitation center at Tucson. Arizona. wherein to bring such ~

planes to a state of combat suitability.

Respondent complains too that deliveries of B-47's fell

behind contract delivery schedules. While it is true that

the required monthly rate of delivery was not being met

during the first part of 1952, that rate was me‘ by April

of that year and its deliveries for the entife year were in .

accordance with contract delivery requirements. Under the

circumstances we are unable to conclude that petitioner

was inefficient in its design engineering or the quality of

B-47’s produced or its compliance with delivery schedules

in its production of B-47's.

Respondent, in contending ‘that petitioner was ineffi-

cient, points to petitioner's failure to adopt and use time

and motion man-hour standards in its B-47 production at

Wichita. In doing so, it implies that petitioner should have

more closely complied: in that respect with the recommen-

dations of a management consulting firm which petitioner

had employed in 1951 ‘0 make a management survey for

the purpose of identifying management problems in its

corporate organization and management operations which

tended to result in high cost of operation. That petitioner

obtained the consultant's. report and recommendations

tends. it seems to us. to evidence an intention and effort to

lower its cost of operation. That petitioner did not during

1952 adopt and put into effect completely the ‘onsultant’s

recommendations is: understandable and not inconsistent

with the efficiency of its operation. The consultant, al-

though widely experienced in the operation of manufactur-

ers generally, had never theretofore surveyed and made

recommendations for the improvement of operation of an

airframe manufacturer. An examination of his report and

review of his testimony leads us to believe that he was

‘preoccunied in his opinions with the use of direct labor

standards in the automobile industry and particularly with

respect to such standards used by that industry in the pro-

duction of B-29 bombers during Wofld “Var II. We do

not find that the operation of an automobile plant to con-

struct either automobiles or B-29’s was sufficiently akin to

petitioner's production of B-47’s*to warrant a conclusion

that universal company-wide use of direct labor standards

would necessarily have resulted in greater efficiency and |

resulting lower cost of production. The underlying differ-

“ence lies in the nature of the asticles being manufactured

and the manufacturing policy relating theteto An auto-

‘mobile is mass-produced 1 in numbers far greater than those

involved in -petitioner’s production of B-47’s. Mass-pro-

- duction machine tools are there usable to a much greater -

extent because of the auto-manufacturer’s policy of adopt-

ing a fixed and virtually unchanged design for each model,

production of which is much greater in -number, while

petitioner was here required in the year 1952 alone to

adopt and adapt into its manufacturing operations about

2,000 changes, many of them being so basic as to require

a change in design while producing comparatively few-

_ B-47’s. To a lesser degree. the same may be said with

respect to the manufacture of B-29’s. Compared to the

B-47, its design was relatively simple and it was much less

- dense in that more internal space was available for the

assembly operation. Petitioner employed only about 60

percent of its direct labor if the assembly area of its plant.

. while the remaining 40 percent was employed in the fabri-

cation areas thereof. After detailed and conscientious study

of the recommended adoption of complete labor standards.

_ petitioner, in the use of reasonable management judgment.* -

determined to use such standards in its assembly function

and to use them to a lesser degree in its fabrication function.

It had employeu such standards in its assembly. areas prior

to the report of the consultant and continued to do so. in~

195Z. In-the consultant's opinion a period of-3 years

would have been required to insta]l complete labor stand-

ards in petitioner's plant. Petitioner judged it to be doubt-

ful that the cost of installing such standards over that period

of time would actually lessen its cost of production. We

think petitioner's use and nonuse of direct labor standards |.

@ was justified under the above circumstances and did not

s result i in inefficient performance leading to high produc-

Respondent contends too that defects in petitioner’s cor-

porate executive line of authority aad responsibility tended

to inefficient management and resulted in high production

costs. It is true that prior to January 1. 1951, nearly all

of petitioner's executive authority and the responsibility

for its over-all supervision and management resided in its -

president. Its character was that of a-one-plant, single-site

manufacturer. In essence, when petitioner was not manu-

"facturing under contracts with the Government, it was a

one-plant operation centered in and about Seattle. When in

.1952 the Air Force greatly expanded its demand for

B-47’s and still required that they be manufactured in the

Government plant at Wichita, Kansas. the resulting decgn-

tralization of petitioner's @peration would have lace a

nearly impossible burden upon its president had petitioner

_ failed to alter its executive function. The management con-

sultant, above referred to; had pointed to the foregoing situ-

ation asa defect in petitioner's corporate organization -

which would lead to high-cost production and had, in 1951.

_ recommended rather sweeping changes therein. Among

such recommended changes-was the delegation by the pres-

ident to executive vice presidents of a portion of his execu-

tive authority and responsibility. As of January 1, 1952.

petitioner had transferred such authority ‘to an executive

_ vice president who was made responsible, for petitioner's |

Wichita operation, and he remained in that. capacity

throughout 1952 -and theréafter. In our view whatever

high production cost tendencies existed prior to 1982 which

were caused by the c.1c-plant. one-site charact ‘of petition-

er’s corporaté organization were with reasonable prompt-

mess corrected or.in the process of being corrected by:

January | of 1952. ,

Respondent also contends that petitioner was inefficient

‘and negligent in its compliance with the directives of the

B-47 Committee. referred to in our findings. The chiei

complaint is with respect to petitioner’s alleged failure to

furnish Lockheed and Douglas timely with master gauges

cand design information which would permit those com-

panies to begin the production of B-47’s earlier. Although

the record does indicate some delay in the early stages of

the operation of the B-47 Committee with respect to peti-

tioner’s furnishing of master gauges. it also shows clearly

that because of petitioner's cooperation and attention to

the directives of the Committee,; Lockyged and Douglas

were able to begin full ‘production of B-47’s earlier than

had been expected by the Committee or the Air Force. We

.think respondent's complaint in this respect is not well

grounded. — : = 3

~ We have carefully examined the record with respect to .

the alleged inefficiency of petitidher in thé supervision of its

many subconfractors and suppliers and cannot conclude

that, under the circumstances, petitioner was less than

ordinarily efficient in this regard. The policy of the Air.

Force with respect to subcontracting was that it be carried

out on as wide a base as reasonably possible; that the plant

facilities and labor force of economically depressed areas of

the country be employed wherever possible. This resulted

in petitioner, which as prime contractor was responsible for

the perfarmance of subcontractors, having to provide the.

necessary supervisory and other personnel to supervise

about 200 subcontractors and suppliers with respect to

the B-47 production alone. A» has been before stated. the

tolerances necessary and allowable for B-47 production

were theretofore virtually unknown in the manufacturing

industry in this country, particularly in the manufacture of

automobiles. Automobile ffanufacturers comprised a sub-

stantial proportion of the subcontractors used in the pro-

duction of B-47’s. Even though petitioner needed its ex-

_ perienced and trained personnel ‘in its own proc uction of

B-47’s, it was forced to assign substantial numbers thereof

‘33

to, the subcontractors’ plants for varying periods in order to

train sufficiently the subcontractors and in some cases assist

in the lay-out of machinery in their plants to permit them to

perform adequately under their subcontracts. In some cases

it was necessary that subcontracts be canceled because of

the inability of certain subcontractors to produce to such

close tolerances. It must be borne in mind too that-peti-

tioner’s supply of experienced and trained personnel was

limited in- 1952. No subcontractor could be employed or

discharged by petitioner without the authorization of the

Air Force or the B-47 Committee. Even so, respondent com-

plains that pétitioner did not furnish sufficient supervisory

help and. in those cases where it was necessary to discharge

subcontracto- did not discover their inadequacies and —

discharge them soon enough. We think respondent is un-

reasonable in this complaint and that petitioner was reason-

ably efficient in its relations with subcontractors.

Petitioner’s performance under the B-47 contracts is

graphically illustrated by its cost underrun of the 80 per-

cent improvement curve which represents the average cost

of production improvement in the airframe industry in this

‘county. Its performance was on a 65 per cent improve-

ment curve. Respondent contends that. this illustration is

misleading and not significant ‘because such an improve-

ment curve. prior to the setting of a firm target cost. incor-

porates costs which were incurred only once and which are

nonrepetitive. We are unable to follow this line of reason-

ing as the very nature of an improvement curve seems to us

to require the inclusion of all costs repetitive or nonrepeti-

tive, and it is obvious that, nonrecurring expense being in-

cluded in both curves. the cost underrun is valid and signifi

cant. The inclusion of nonrepetitive costs. which might be

expected in the early stages of production of an article as

complex and unique in its manufacturing problems as a

B-47, would be the very factor which would impart the

os ’

. (se ®

\ 2?

rapid reduction in cost evident n n improvement wk

of these percentages. Because pe itioner’s production costs:, ..

underran the industry average, $5,826,656 profit accrued

to petitioner in 1952 ufder the incentive pfevisions of its

contfacts, over $4, 000,000 of which is attributable to Con- —

tract 21407. | me

€

# The record is clefig’t that in 1952 petitioner's ‘deliveiies of

. s wére on schedule and that the B-47 which it pro-

uced was of*food quality and exceeded in performance the -

“expectations of the Air Force. If any portion of petitioner's :

profits for 1952 was unreasonably high, it did not result.

om any ineffici@Acy in its manufatture of B-47 bombard-

ent aircrafte . eee.

* B-47’s in Wichita, B-52's and Bomarc missiles in Seattle. |

and KC-97’'s in Renton. In addition it was the prime con-

.tractor responsible for the performance Of:about 200 sub-

cc.stractors and many parts suppliers and also was Apecenl ?

to do all things necessary to the’advent of two of its com-

petitors into the manufacture of B-4XKs in addition to func-*

tioning as a member of the B-47 Joint Production Commit-

tee and overseeing and being responsible for the perform- :

~ * ance of, a subcontractor located in Tucson, _Atizona, who —

arged with the bringing, = all: “deficient” ‘B-47’s |

to. Mate of “combat capability” or “readiness.” Generally,

- with respect to each of its inlets a different person or-

officer, responsible to the Ait Force, was charged path over- |

seeing pétitioner’s performance in respect thereto“¥n each

case: such individuals were-understand&ly primarily: inter-

“ ésted in only that function each.was to oversee. The ten-

dency of such soverseers was to consider as performance

defects any emphasis placed by petitioner Upons@ne or the

other ‘of its contractual obligations which was at.all detri-

: mental to another such obligation.” We think this record is _

‘

aa ~

replete with such instances which -accouhht largely for_re-

spondent’s contention that petitioner lacked ee

the performance: of these contracts. .

Complicating the picture still further i is the fact that ae

manufacturing problems incident to the B-47’s were in

many respects unprecedented and had to be solved as pro-

duction proceeded and this while petitioner was incorporat-—

ing some 2,000 changes ‘in the product being manufactured,

many of which changes involved changes in or new design.

The tooling problems with. respect to gaan for pro-

-dyction of B-52’s were so se edented that -

" they ‘constituted the most difficult

. groping'in the dark With respect to the costs involved. The .

perienced aeronautical engineer dad ever encountered.

The Bomarc misile prototype construction and testing

represented the first effort of the United States to enter the

anti-missile missile field and also necessarily presented

theretofore unknown problems. With respect to B-52 and

Bomarc contracts both parties thereto were more or less

’ statutory criteria for decision aré jn. jarge part unhelpful

_ tracts leaves someth

with respect to the latter contracts bécause of the nature of

the “work being performed | and the eecnait ——

thereunder. ,

g to be desired in the way of design

engineering efficiendy. This aitplane is a tanker. the pur-

pose of which is to refuel B-47% in flight. Important in their

equipment is tankage for aircraft fuel, In 1952 it developed

that-such tanks had been designed. by. petitioner and pro-

duced by a “subcontractor with: the metal comprising the

ends thereof of insufficient gauge to withstand the stresses.

of changes of altitude so that some of them collapsed in use.

Although this defect: was -promptly corrected after its dis-.

Petitioner's at ides te C-97 /KC-97 --con-

‘covery, we think petioner, by the use of ordinary effi-

ch pioblems an ex-

ee fy NL a: ®

ciency, could and should interes the problem and de- .

signed to avoid it thus reducihg jts cost of production. Other.

_ deficiencies in the KC-97 plant $0 by respondent do not

- appear to have been foreseeable or discoverable short of |

actual testing, and they appear to be the defects-which

~ would normally: appear, in the development of anew oduct. |

- Petitioner's performance of its B-50 contracts was not —

impeded by the factors above noted with, respect to per-

formance where’a new product was iavolved. The B-50

is @n improved version of the B-29 borftber with respect to -

which petitioner had, during and before 1952, much manu-

facturing experience. [ts Contract 14809 called for the de-

livery of 36 B-50's in 1952, It actually. delivered only 22

of them. The record contains no adequate. explanation or

excuse for _Boeing’s failure'to deliver B-50's in. accordance

‘ with contract delivery schedules. Petitioner’s cost reim-.

| bursement. under these contracts was $22,557,860 and its —

profits $1,852,366. It was.clearly inefficient in its ae?

of B- 50's in 1952.

Because of the assurance of return of all costs expended

or incurred by petitioner with respect to its performance

of the contracts here involved and the periodic payment

of profits which are based upon negotiated estimated costs,

'_we find petitioner incurred no risk of loss thereunder with-

‘in the meaning of the Renegotiation ct by reason of any

failure to meet. delivery schedules or faNure or inability to

"meet quality specifications. The only possible risk inherent

in any of these contracts is exemplified by the B-47 incen-

tive contract where petitioner would receive no profit but —

instead would experience a loss im case its cost of produc-

tion overran the firm target cost estimate by: 125 percent. .

Under the facts we do not think this risk was at all signifi-

cant. It is clear from the record, however, that petitioner

did incur considerable risk of another sort.

‘commercial airline use were voluntarily relinquished in its

e e ~~

cAs we have found, the airframe industry is extremely.

competitive and has experienced increasingly’ rapid ad-

vancement in the art of airframe design. ‘This condition.

has, in fact, led us to conclude that petitioner’s design en-

gineering staff and manGfacturing know-how are to,be

considered a part of its net worth in considering the statu-

tory net worth factor. Because of the decision of the Air

Force to have B-47'§ manufactured by two of petitioner's

competitors and petitioner's ¢ ration with that decision,

these competitors were ied ih possession of master

“gauges and designs develéped -by petitioner and their engi-

neering and labor personnel trained in petitioner's manu-

facturing technique and procedures. In short, the competi- ~

tors were given petitioner's manufacturing know-how with

respect to the manufacture of an airplane’which was clear-

-ly a prototype for future commercial airline use. Petitioner

believed at the time that a potential commercial market

existed for such airframes. After events have borne this

out. The benefits petitioner would normally have expectéd —

to reap because of its position as the designer and developer —

of the first swept-wing jet-powered airplane suitable for

cooperation with the B-47 Committee. That it was paid for

its part in making it possible for Douglas and Lockheed to

manufacture B-47’s does not in our view detract from the .°

risk it incurred. nor adequately compensate it for this type

*. of risk.

Because in this case we lack most of the statutory cri-

teria for determining the comparative reasonableness: or

* excessiveness of petitioner's 1952 profits, we have used

the net werth factor to a large degree in determining she

eae or excessiveness of petitioner’s-profits as a

‘comparison to other. business. In doing so, we have ad-

’ justed petitioner's book net worth to include what we have

concluded is a fair value for its design, engineering, and -

——.

; manufacturing know-how and have used an average 1952

book nef worth as distinguished from its beginning 1952

book net worth. We have not adjusted the book net worth

> reflect current market vatue of its assets because there

is no comparative criteria in the record based upon such

‘an adjustment to net worth. We have ‘considered the fact

that, whatever petitioner’ s adjusted book nef worth may

be, it.was to some extent invested in ifs work in progress

during 1952 for a period beginning years prior to 1952

with its first efforts in the design and development of ‘the

B-47.,We have by this method arrived-at a ratié of profit to

net worth of about 50 percent, The ratio of profit to aver-

‘age book net worth for aff mamufacturers in 1952 was

22.1, per cent and when limited to the six manufacturers .

‘of airplanes and parts, shaving no long term debt, before °

renegotiation of their profits the ratio is about 44 per cent.

This sentence is as revised by orders at Vol. -II, 201, , 260.

Prior thereto, the sentence read (Vol: II, 190): .

o “The-ratio- of profit to average book net worth for

‘all manufacturers in: 1952 was 11°87 percent and,

when limited to the manufacturers of airplanes and

parts, the ratio is 16.83 percent.”

Petitioner urges | that in lieu of the net worth factor we

‘should use as a more meaningful factor the comparative

ratio of profit to’sales. We have not done so herg for the

reason that such a factor does not take into consideration

one of ,the important differences (so. far as the record

shows) which may exist during 1952° between. petitioner

and other manufacturers ‘including those engaged only in

airplane manufacture. That difference may. be the great

preponderance in petitiorier’s case of Government-furnished

. facilities and production equipment over that furnished by

petitioner. The record is’ silent in this respect with regar

_ to others engaged in the manufacture of airplanes d

° . . \

59°

= other. manufacturers generally. We think, as the respon-

dent contends, that petitioner's profits cannot be viewed in

the same light as those of.a mantfacturer which in perform.

ing a Government contract furnishes all or a major pro-

rtion_of, the manufacturing facilities’ used. It seems clear

to us that, regardless of petitioner's efficiency, its comiri-

bution to the defense effort, the risk it assumed under the

- B-47 contract, and’ the complexity’ of the. manufacturing

techniques required in its performance of the contracts at

issue,-its function with respect to the production of B-47's

and C-97 /KC-97 airframes was, as respondent contends, to

some extent that of a manager and not a manufacturer. That

is not to say, however, that in the light of the-other.statutory

factors, petitioner's profits can be limited by this fact alone.

Clearly in producing’ a new and complex product as

rapidly and of the quality represented by the B-47, begin-

- ning with a virtually unmanned facility (the Wichita plant)

and at the same.time making it possible for its two chief.”

competitors (Lockheed and Douglas). to manufacture them

_. and supervising the dutput of highly complex par by ‘many

inexperienced subcontractors ant supptiers-conselutes: tigre aasan

formance of these contracts which is deserving of higher

compensation than would be indicated by the sole criterion

of the percentage of contractor-owned facilities employed

in the manufacture of B-47'’s and C-97/KC-97’s. Particu-

larly is this true when the importance of the B-47, the BS2.

and the. Bomarc missile to this Nation’s defense is con-

sidered. | a

We have therefore concluded that on a comparative basis

‘petitioner's 1952 aggregate profits are unreasonable and

excessive to an amount less than that contended for by

respondent. ee. >

The contribution¢made by petitioner ‘to the defense of

the United States myst be viewed with respect‘to its 1952

-@¢

experienice alone, Brsicalty its desig <'ths 8-47 ‘and the

KC-97, together with its in-flight refueling equipment, and

its design of the B-52 were accomplished prior to 1952 and

cannot be considered a contribution in that year. The cop-

notation vf.the tion” as used in the ‘Renego-

tiation Act i is, in our view, broader than its dictionary mean-

ing. It iste notconly services performed without com- -

- pensation, but the cooperative and enthusiastic performance

* of that work and, in addition, the importance of th® product

produced and the services rendered, even though paid for,

_ tothe defense of thiscountry.

There can be no doubt here that those charged with this

country’s defense in 1952 believed the country to be under

imminent peril of attack by an enemy or enemies; that they

had fixed upon the B-47 bomber as our chief deterrent to

such attack’ and were so determined to obtain B-47’s as

rapidly as possible that a policy was adopted whereby: they”

would be accepted by the Air Force with deficiencies in

ness at our Strategic Air Command bases around the world.

session of this country:and were in that year superior in

quality and performance to any bomber or interceptor air-

_. plane then in existence as an operational weapon.

. for its function was to extend the range and rns

. The KC.97 tanker airplane and its in-flight -refueling

equipment were likewise of great importance to our defense

capacity of the B-47. i ¥

- _combat capahility i in order to have them in apparent readi- -

The development of the Bomarc anti-missile interconlt

nental ballistic mfssile was the initial phase of this country’s

effort to counteract ‘the threat of nuclear~attack from

this country’s defense is self-evident.

: :

abroad, and we think its importance as a contribution to’

They constituted, in 1952, the best air weapon in the i > @

AT a atin Oe Mi Seay

We take judicial ‘notice of the fact that the creation of .

each new and increasingly efficient and potent weapon

throughout history has been accompatiied or closely’ fol-

. lowed bythe creation of corresponding defenses thereto.

. For that reason the designing and construction of tooling for

- the two experimental B-52’s were likewise of vital i

“ance to the defense of this country. The B-52 represented

an advance over the B-47 as great or greater thani the latter's

advance over the B-29 of World War II fame. It has now

become the chief deterrent ‘weapon ‘of the Strategic Air

Command and as such, together .with our missile strength

and the continued use of B-47’s, constitutes a-major defense

weapon. Petitioner’s cooperation with the B47 Joint Pro-

duction Committee arid with its incidental delivery to its

cémpetitors of not only designs and master gauges devei-

oped for manufacturé.of the B-47, but its delivery to them

_ Of and the actual training, of their personnel with respect

to its manufacturing and procedural know-how constitute, a

we find, an important, and substantial contribution to this ~~

-country’s defense. in 1952.

Prior to 1952 petitioner’ s corporate character was essen-

" tially that of a centralized, one-plant manufacturer._Upon

the acceptarice by the Air Force of its B-47 design with the

resulting contracts for its manufacture at Wichita, Kansas,

and .the contract for the manufacture of C-97/KC-97’s at

' Renton, Washington, petitioner was forced to reassess the — .

capability of its corporate and-managerial organiz organization in

_4 ae light thereof. At least partly at the suggestion of the

Air Force, it employed the services: of a competent man-

agement consulting firm for the purpose of identifying and -

making suggestions with respect to the correction of such

’ corporate organizational defects.as would tend to cause in-

efficient, high-cost operation. It, thereafter, beginning in

January of 1952, began to alter its corporate organization

so as to delegate its executive managerial function to execu-

tive officers who were placed in immediate charge of and —

mage responsible for the nee of each of its manufac-

turing divisions. :

. The source and nature of menetiale used by petitioner ‘do

not appear to be‘ of material significance here. The com-

"plexity of petitioner's manufacturing techniques was con-

- reference not to a parts and materials supply but to the item

troHed by the complexity of design of the B-47 and B-52

airplanes which we find to be unprecedented in the air-

frame industry and with which we have dealt more in detail

elsewhere herein. The bulk .of the subcontracting, its-na- -

ture, and petitioner’s problems in connection therewith

have also been dealt with above. )

The statutory use of the phrase “inventory turnover” ‘has

of property to be sold. In this case it consists of work: in

progress, i.e., airframe at varying stages of completion.

- We do not find the inventory. turnover factor. to be. of sig.

nificance here for the reason that the. evidence before us

indicates that various methods of ‘computation, all of them

justified to some extent, produce turnover rates for peti-

tioner of from 20 times to 2'times per year. Six inventory _

Aurnovers was. the average-in 1952 for the 49 other leading

; American industrial concerns heretofore mentioned.

Of ‘greater significance we think is the fact that peti-

tioner’s operations were largely financed by the United

States through. early reimbursement.of costs and payments

OF profit through progress payments and the furnishing of

: generally have'been given due consideration in the negotiat- °

Government-owned manufacturing facilities. Petitioner |

contends that the latter factor particularly and the former

ing of the rates of profit negotiated with respect to the B-47

and C-97/KC-97 contracts. Respondent contends, on ‘the

other hand, that whatever those rates were ‘they are unrea-

;

sonable in ‘view of the fact, as it contends, tHat with respect

aga

Fan.

Sy : 63

to these two products petitioner acted only as a manager

_ and not as a manufacturer and that the negotiated rates are

premised upon the proposition that petitioner was to bear

__ the same risks as one who finances hiniself in these respects.

- Petitioner’s rate of profit on thé B-47 contract was: 7/2

percent of al§wable costs. On the C-97/KC-97. contract it

was 9 per cent of such costs with respect to deliveries under -

Contract 9825 and 8 percent under Contract 14764. Inas-

much as these rates are roughly in the same rapge with -

rates for products produced and services rendered in facili-

_ ties wholly-owned by ag we are unable to-agree

-- with petitioner’s contentign. -In this connection we note

that the negotiated es compare favorably, so far

as this record. is concerned, with. other“ airframe manufac: |

turers’ rates of profit where, so far aS is shown here, such

other manufacturers’ have furnislted their own production.

facilities. Et follows, we think, ‘that petitioner’ s rates of profit

on the B-47 and KC-97 contracts weré to some extent. un-

‘reasonably high and clearly so’ when applied to estimated

as ee: from actual cost of ‘production.

It is with respect j6)the application of subsection 103( e):

\C 6): that it most strongly appears titioner’s 1952: profits

ob over $56, 009,600 are to an ext t unreasonable.

Eighty and eight-tenths percent-of the profit here under

consideration was derived from performance under what - ~

‘ are here: termed incentive contracts.. Such contracts are .

based’ —— cost ‘of production: They are exem-

plified by ract 21407 whereunder petitioner re-

_ &eived a fixed» and unchangeable percentage fee applied |

to a firm target cost negotiated and agreed to subsequent ~

to the delivery of the? 100th B-47 ‘and. 20’ percent of the

* difference between the firm target cost and actual costs as

negotiated and agreed upon at the termination of the B-47

contracts, but only in case attual cost underran the target

cost. In case. petitioner had overrun the target cost its profit _

- :would have been 8 percerit of target cost less 20 percent

of such overrun. Should the overrun’ have exceeded the -

target cost by 125 percent, petitioner was ‘required to pay

~ all costs above that percentage and in:casé the overrun ex-

-. ceeded about 121. percent, petitioner would have ceased

+ wealizing a profit. “Such contracts shad been put in use

. in Air Force procurement in order that an‘ incentive for

the lowering of production costs be made available to con-

’ tractors. Contracts 21407 for the production of B-47’s and

_ 14764 “for the production of KC-97’s, togethet with the

. other incentive contracts under which-petitioner received.

‘ renegotiable profits in 1952, did not carry out the Jaa

of tending to lower production costs.

Boeing in 1951 was an inadetjuately financed and

equipped airframe manufacturer as compared to its aggre-

. gate obligations under fhcentive contracts then in force and

contracts which were of that type executed-in 1952. It is

reasonable. to conclude from this record that this condition

was one of the ‘prime factors leading to the use of such

contracts in ¢his instance Boeing” was the designer of and

_ had the only production know-how with respect. to’ B-47's,

'. the refueling equipment of KC-97’s. and B-52’s. The Air

Force, due tc what it considered to. be an imminent threat

of attack upon the United States, required the manufacture

and — f B-47’s as rapidly as possible. It was there-

fore ‘that Boeing be maintained in a healthy finan-

cial condition: and that no time or effort should be lost in

_ its self-financing, To that end, some basis for such financing

' was sought and weekly progress payments based upon ac-

tual costs and monthly payments of a portion of Boeing’ s

profit were agreed upon. In order that Boeing might main-

P tain its operating- capital position, it was agreed that its

: _pbasic profit payments would be unalterably fixed at.a per-

centage of the cost of production which it and the Air Force _

iS aa © 65

could agree upon prospectively as an estimate, taking into

. . account all known and foreseeable elements of cost. In the —

instance of the B-47 ahd-R-52, due.to their great advance

"in ‘the art, their manufacture was bound to ptesent unex-

pected design and production problems, which contingen- —

cies constituted an undesirable risk to petitioner’ S operating |

cash position, alike undesirable to both h parties. T two

aspects of ‘the incentive céntracts. before us were clearly

ie adopted as a substitute for bank financing.“That this is true

is further demonstrated by the fact that although the Gov: :

ernment agreed to take title to work in progress, as pay-

q ment ‘therefor was: made, it was at the same time agreed

‘ _ that petitioner would not thereby, be relieved of risk. We

3 “view these payments’ regardless of their labels as in the —

nature of loans. Actual profits and costs in thei entirety

could not be dnd’ were not; under these contracts, rmin-

‘ able until the contracts had been fully performed in a year

| subsequent to 1952. This is true because, although by far

the greater portion of petitioner’ s profit was based upon «.

. estimated cost, a substantial portion represented by incen-

tive profit could be determined only after agreement upon

_ actual allocable costs at that time. In view of its inadequate

financing Boeing, literally could not await the completion —

of these contracts for its: profit and remain in business. The

B-47 procurement was, when initiated, the largest single~

procurement evér to that time made by the military serv-

‘ ices of this country. Both the Air. Force and petitioner

_negc~iated the estimated cost thereof in its. incéption and

". at the time of the cost-reset in good faith, with highly quali-

fied negotrators, with mitch past experience in airframe

_. procurement and with full knowledge of all available in-

formation on the subject. In setting the rate of profit on the

estimated “cost, they considered and gave what they con-

sidered to be proper credit to the Government for its facil-

ities furnished me —* without charge. In connection )

pie ae

». & =

‘ Caw —s .

Leet He Ht at OR RR

e .

-, 56

therewith they considered and gave effect to the relation-

ship of petitioner’ s net worth to its anticipated profits. They . *.

considered and gave ‘effect to the source and amount of

‘petitioner's invested capital. They could)not. however, for

lack of. precedent, foresee and give effect to the problems

which arose because of the complexity of design of the

B-47 and because of its great grewth potentiality. That

_ the latter factors were unknown strengthens our belief that

- - neither party envisaged | “the progress payments as other

than Government financing of petitioner. -

Because petitioner’s real profit was not detefminable —

until the incentive contracts had been fully performed, it . :

follows that under those contracts such profits were fin-

ally fixed when actua! costs were known. Actual cost be- — -

ing determinable when final profits weré computed we see _

‘no justification for the payment to petitioner of more profit

than that which would accrue to it by application of a—

reasonable percentage profit rate to actual as distinguished

from estimated costs. Otherwise, with that rate applied te

estimated firm target costs the very purpose of this type

of contract is vitiated. With the rate factor so applied it is’.

obvious it will produce profits in direct ratio to the esti-

mated cost, thereby creating a high estimated cost incen-

tive rather than the contrary. Coupled with the 20 percent:

a of underruns of cost, the high estimated cost

tendency is enhanced. Only provided the profit rate factor 7

is applied to actual cost and.the firm target cost estimate

ased as a measure for under- or overruns does the ef- *

fect of the contract provide any incentive to lessen actual

cost. Even so applied, however, such contracts are iden-

‘tical with cost-plus-a-percentage-of-cost contracts. in that

they contain an obvious incentive to increase actual

cost. This is offset only by the necessity to lower actual

cost in order for thé-contractor to share in the underrun

on a 20 percent basis. Simple arithmetic demonstrates .

She RE

. R 67-_

_that the 8 percent profit factor.is of more importance

dollar-wise than the 20 percent factor until cost under-

"runs approach 40 percent at which point the two factors -

take on equal weight. It is enly at this point, which we

think is unrealistic, where real incentive to produce at low

cost begins to’exist under such contracts. There is io such ee

cost underrun here. saa ; ;

, In our view, even in the light of petitioner's over-all ef-

ficiency in ‘the’ performance of the contracts before us and -

the favorable consideration to be given it with respect: to

the application of the risk, contribution, and character of

business factors, its rates are not commensurate with its ,

- ‘performance of the B-47 and KC-97 contracts by the use

of- largely Government-furnished facilities, and the use of

those rates in the incentive contracts under which by- far

its greatest profits were collected constitutes an unconscion--

able exploitation of the ‘United States in its procurement of

military necessities. — .

After consideration of the record as a whole. we have.

found as a fact that petitioner's profits for’ 1952 ‘in the

amount of $56, 734,119 are unreasonable in-the amount

of $13, 000. 000, which latter amount is to be eliminated.

me “An | eee will be entered

; in Accordance herewith.

= ~

APPENDIX B

UNIT ED SFATES COURT OF APPEALS

FOR THE NINTH CERCUIT

“a

tHe BoEING ComPANY, formerly rt

rplane Company,

— No: 18 276

. Dec, 12, 1963

VS.

Tir RENEGOTIATION BOARD OF THE

iy UNITED. STATES OF AMERICA, - ‘e

Respondent.

On Review ieee the Tax Court

_ - of the United States

224

Before: POPE, HAMLEY and | DUNIWAY; ‘Circuit Judges .

_ DUNIWAY, Circuit Judge:

This case arises under the Renegotiation Act of 1951.

‘50 U.S.C., App. §1211, ff. Involved is the amount of ex-

-cess profits received by the petitioner during the calendar

* year 1952. The Tax Court determined that petitioner had

received excess profits in the sum of $13,000,000. Jurisdic-

' tion of the Tax Court is ca@ferred by stction 108 of the

Renegotiation Act, 50 U.S.C., App. §1218. Petitioner says

_Revenue Code of 1954, 26 U.S.C. §7482. The Renegotia-

proceeding must be dismissed.

Section 108 of the Renegotiation Act: (50 U. s. C., App.

. $1218) provides in part as follows: |

_ tion Board asks us to dismiss for want of jurisdiction. We :

_ conclude that the Board’s position is correct and that this

70 eae

: “Upon wits filing such court [the Tax Court] shall

have exclusive jurisdiction, by order, to finally deter-

mine the amount, if any, of, such excéssive. profits

received or accrued by the ontractpr or.subcontrac-

tor, and such determination shall not be reviewed or

redetermined by any court or agency. " (Emphasis -

added)’.

> The history of the judicial interpretation of the language

emphasized is reviewed in an opinion by Judge (now Mr. °

Justice) Stewart in Ebco. Mfg. .Co. v. Secretary of Com- —

merce, 6 Cir., 1955, 221 F.2d 902, and we do not repeat

that review here. We agree with the views there expressed,

. that the Supreme Court in United States VW California East-

‘ern Line, Inc., 1955, 348 U.S. 351, approved the construc-

tion given to-the statute by the Court of Appeals for the”

District of Columbia Circuit: That court had held in a

series of decisions, cited in the Ebco case, that thé Court

of A Peals has jurisdiction to review the Tax Court in

“renegotiation cases on ‘constitutional or jurisdictional

grounds, but that the limitation contained in the statute

prevents a review of the Tax Court’s determination of the ~

amount of excess profits, sr questions of both law

and fact in such determination.”

All of the questions presented i in Boeing’s petition are, in’

our judgment, questions of law and fact entering into the

determination of the amount. of its excessive profits. It

claims that the Tax Court: erred in deciding that certain

expenditures on a prototype aircraft were not to .any extent

allowable as a cost of re negotiable business. It asserts that |

‘In 1962 (Pub. L. 87-520, 87 Cong., 76 Stat. 134) this pro-

vision was modified by the addition of section 108A, and a cor-

responding amendment of section 108 (see U.S.C. Supp. IV,

50 U.S.C., App. §§ 1218, 1218A). The amendment is not ap-

plicable here: 2 .

o .

ee |

the Tax Court misapplied certain of the statutory factors

to be taken into account under section 103(e) of the

#Renegotiation Act (50 _,U.S.C.,, App? §1213(e)). It ob- -

jects to the Tax Court’s analysis of incentive type contracts.

Clearly, all of these are questions of both fact and law

entering into the determination of the amount in question.

_It also asserts that it did not get a de noyo hearing before-

thé Tax Court, primarily because the Tax Court placed the

burden of proof upon it. This is certainly neither a juris-

dictional nor a constitutional question. (See Golbert v.

Renegotiation Board, 2 Cir.; 1958, 254 F.2d 416). Finatly,

Boeing asserts that the various errors of which it complains

are so egregious when taken together as to have deprived

it of. due process of law, thus attempting to raise a con-

stitutional issue. We_agree pig” the view of the 4th Circuit

in Grannis & Sloan, Inc. v. Renegotiation Board, 1961,

285 F.2d 908 sais. “parsioabanieation of the issue does not

make it jurisdictional,” nor in this case does it make it

constitutional. In its petition Boeing states: “Boeing is

aware that mere error or mistake on the part of the trial

court does not necessarily deprive an unsuccessful litigant

of property without due process of law.” We agree, and we

think this is.an accurate description of Boeing’s coritentions -

under this heading.

Dismissed.: 8

(Endorsed) Opinion Filed Dec. 12, 1963°

Frank H. Schinid, Clerk.

APPENDIX C

"\ RENEGOTIATION ACT OF 1951, As AMENDED

SEC. 103. DEFINITIONS.

For the purposes of this title— |

* 7 * * - Re. ss

(e) EXCEssivE. PROFITS.—The term “excessive profits” |

means the portion of the profits derived from contracts ‘with

‘the Departments and subcontracts which is determined in

accordance with this title to be. excessive. ‘In determining

excessive. profits favorable recognition must be given to

the efficiency of the contractor or subcontractor, with

particular regard. to attainment of quantity and quality

-production, reduction of costs, and economy in the use of

materials,’facilities, and manpower; and in addition, there

shall be taken into consideration the following factors:

(1) Reasonableness of costs. and profits, with par-—

ticular regard to volume of production, normal earn-

(2) The net worth, with particular regard to the

amount and source of public ; and private capital em-

ployed; a

eee 2 Extent of risk shinai. including the risk.in-

cident to reasonabie pricing policies;

(4) Nature and extent of contribution to the i

- fense effort, including inventive and developmentai

contribution and cooperation with the Government

and other contractors in supplying technical assist-

ance, ‘ : :

(5) Character of business, including source and

-nature of materials, complexity of manufacturing

technique, character and extent of -subcontracting,

and rate of turn-over;

| A ‘

me 4

RENEGOTIATION Act OF 1951, AS AMENDED

(6) Such other factors the consideration of which

-the: public interest and fair: and equitable « dealing may

require, ‘which factors shall be published ‘in the regu-

lations of the Board from time to time as adopted. —

(f) PRorits DERIVED From CONTRACTS WITH THE

DEPARTMENTS AND SUBCONTRACTS.—The term “profits

derived from contracts with the Departments and subcon-

tracts” means the excess of the amount received or accrued

pees such contracts and subcontracts: over the costs paid

rred ‘With thereto and determined to be

allocable théreto. All items estimated to be allowed as —

deductions and exclusions under chapter 1 of the Internal

Revenue Code (excluding taxes measured by income)

shall, to the extent allocable to such contracts: and’ sub-

contracts, be allowed as items of cost, except that no amount

“shall be allowed-as an item of cost by reason of the appli-

cation of a carry-over or carry-back. * * * * Costs

shall be determined in accordance with the method of ac-

counting regularly employed by the contractor or sub-

contractor in keeping his records, but, if no such method

of accounting has-been employed, or if the method so.em-

ployed does not, in the opinion of the Board, or upo ‘re-

’ determination, in the opinion of the Tax Court of the ;

_ United States, properly reflect such costs, such costs shall be

determined jn accordance with such method ws in the

“opinion of the Board or; upon redetermination, in the

opinion of the Tax Court of the United States, cos prop-

/ etly reflect such costs.

‘SEC... 108 REVIEW BY THE .TAX COURT.

-Any contractor or subcontractor aggri¢ved by an order

of the. Board determining the amount of excessive profits

. received or accrued by such contractor or subcontractor

—

{ >

‘Rasseoniarion ACT OF 1951, AS AMENDED

(a) if the case was conducted ‘ initially by the

Board itself—waiihin ninety days’ (not counting Sun-—

' day or a Jegal holiday in the District of Columbia as

the last day) after the mailing undér _—n. 105 (a)

en ee or

“'(b) if the case was not conducted initially _ the |

Board itself—within ninety days {not counting Sun-

day or a legal holiday in the Districfaf Columbia as. -~

the last day) after the mailing under section 107 (e) | .

of the notice of the decision of the Board not to re- .

view the case or the Notice of the order of the Board

determining the amount of excessive profits,

file a petition with the tax court of the United States for

a redeterthination thereof. Upon such filing such court —

shall have exclusive jurisdiction, by order. to finally de-,

» termine the amount, if any, of such excessive profits re-

-.ceived or accrued by the contractor or subtontractor, and

such determination shall not be reviewed or cedetermined

by any court or agency. The court. may determine as the

‘amount of excessive profits an amount either less than. —

equal t0, or greater than thay determined by the Board: A

‘ proceeding before the Tax Court to finally determine the -

amount, if ariy. of excessive profits shall not be treated as

a proceeding to review the determination of the Board. but

shall be treated as .a proceeding de novo. For the purposes

of this section the court shall have the sate powers and

duties, insofar as applicabie in respect of(t hie contractor.

the subcontractor. the Board. and the Secretary. and, in

respect of the atfendance of witnesses and the production

of papers. notice’ of hearings. hearings before divisions.

review by the Tax Court of decisions of divisions, steno

graphic reporting. and reports of proceedings. as such

court has under sections 1110, 1111. 1143, 1114, 1115

? @

. RENEGOTIATION ACT OF 1951, as AMENDED

(a), 1116, 1117 (a), 1448, 1120, and “1121 of the In-

ternal Revenue Code in the case of a proceeding to redeter-

mine a deficiency. In the case of any witness for the Board,

the fees and mi , and the, expenses of taking any depo-

sition shall be paid out of appropriations of the Board

_ available for that purpose, Se ee

witnesses shall be paid, subject to rules prescribed by the

court, by the party at whose instance the witness appears

or the deposition is taken. The filing of a petition under

. this section shall operate to stay the execution of the order

of the Board_under subsecyon (b) of section 105 only

_. tioner files with the Tax Court a good and sufficient bond,

approved by such court, in such amount as may be fixed

by the court. amount collected by the United States .

under an-order of the Board if-excess of the amount found

to be due under a determination of excessive profits by the

Tax Court shall be refiindéd to the contractor or subcon- »

tractor with interest thereon at the rate of 4 per centum

per annum from the date of collection by the United States

to the date of refund. . -

-Boeing Airplane Company |

* @

Sa eas ae

_Temco Aircraft Corporation 929-R

-Temco Aircraft Corporation 963-R

Fairchild Engine and — ve

. Corporation ' 957-R

_ Douglas Aircraft Ciaiipeny, Inc. 958-R

- Douglas Aircraft Company, Inc. § 979-R

Douglas Aireraft-Company, Inc. - 1000-R

/The Martin Compary . 964-R

The Martin Company 992-R

The Martin Company * 1002-R

The Martin Company 1015-R

‘Lockheed Aircraft Corporation _-—«-_:-965-R

Lockheed Aircraft Corporation 993-R

Lockheed Aircraft Corporation 1001-R

‘Lockheed Aircraft Corporation 1011-R

. Boeing Airplane Company 959-R

_ Boeing Airplane Company > 978-R

998-R -

Amount -

- $ 750,000

- 3,500,000

_-2,000,000

6,000,000

7,500,000

3,500,000

6,250,000

_ 3,500,000

4,796,101

6,000,000

3,500,000

- 4,079,227

7,500,000

10,000,000

6,784,165

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.