Petition for Writ of Certiorari — In re Thomson

Supreme Court brief1965

Ask Donna

What actually matters in this document.

Text

ical

tetemine

No.

In the Supreme Court of the

United States

OCTOBER TERM, 1964

THE BOEING COMPANY, a Delaware corporation, Petitioner,

vs.

THE UNITED STATES OF AMERICA, Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE

UNITED STATES COURT OF CLAIMS

Davip E. WAGONER

Attorney of Record for Petitioner

1900 Washington Building

Seattle, Washington 98101

Of Counsel:

ANDREW M. WILLIAMS

JAMES M. HILTON

1900 Washington Building

Seattle, Washington 98101

be Pk CP a OE ar ay

INDEX

Page

CYFArH fur Oreruee Beakse ...............0..0:.: :

PEPE NY Sass acctenpienecencnenens ens SEIT. God aoe er 2

COR IU WUD ci scenes necigncancsensvaderees 2

STATUTES INVOLVED ............. sicantenciceeaetelolieananins 3

| ) en PE IES Re AO USNC 3

REASON FOR GRANTING THE WRIT ................ 5

I nicdiaites Saisie tersenncoectarcancalnicswuemsessolscetonbaiites 9

PI, OR sncsecscncaceneccterosenses saad euiergeabesuceonlans 11

I wise scacsedcinthiccaucivanestebwinsbsanreenees CCE 55

TABLE OF UASES

Page

American Motors Corp. v. City of Kenosha,

274 Wis. 315, 80 N.W.2d 363 (1957), aff'd 356 U.S. 21,

OOn. GOGNE Jor Wie. Pia GFGSO) «on cece cece au : ae

American Pipe & steel Corporation v. Firestone Tire & Rubber Co.

Bee Te WP A Ge FO oa ons Co eee cease ste es 6

City of Detroit v. Murray Corp.,

234 F.2d 380 (6th Cir. 1956), rev'd 355 U.S. 489, reh.

er Se Oe BD oo acne sas pon aeeae ewes 7 a

Consolidated-Hammer Dry Plate & Film Co. v. Commissioner,

Pet eee ee RP Ns FOOD 6 on ep aeeeeen cease 5 ge ee Ae

Douglas Aircraft Co. v. Byram,

57 Col, Apes SN, 134 P20 18 (1983) onc ei ck. 7

Ford Motor Co. v. Korzen,

30 Ill.2d 314, 196 N.E.2d 656 sleds cert. denied 13

NE ONE Si ooo Gy es ean eee Oke ea ees 7

General Dynamics Corp. v. County of Los Angeles,

5s Coke ee Be Fe POO CIE) i si voices 7

In re American Boiler Works,

pee ee) re ere errr errr ee 7

in re Read-York,

oe ee Bo ey fe. } eve rent re reer ree Teer re 7

Shepard Engineering Co. v. United States,

287 F.2d 737, reh. denied 289 F.2d 681 (8th Cir. 1961). .. 7

State ex rel. Superior Shipbuilding Co. v. Beckley,

em Seo Me 8 A GS ) ee ee err 7

United States v. Ansonia Brass & Copper Co..

pA ee ee ee eee ro eee 7

- United States v. Blair,

321 U.S. 730, reh. denied 322 U.S. 768 (1944) .......... 6

United States v. County of Allegheny,

ie en TI cig Ge, teed las geo gve 4 Gx: et

STATUTES

Internal Revenue Code of 1939

I a ach is gs Soe eae weve LOW KS

EET Teer re ee TTT TERE TELARC CTE Le

26 USL. CIBS2 GH.) F SERED .n 5 nc ccc ccc cee wccnnces

ee Bae Re GD OGD: fic cc cv vc ecessasctscnsoases

2 ee ee eer rit rr rr rer See

RR a eee re errr eer rrr rr cr ree

MISCELLANEOUS

» Treasury Reg. 130 §§ 40.446-3(c) and 40.442-3(d)(1) .....

Leta

eae! aN aan

q La) a

ae (a~y

i 7

emg an

No.

in the Supreme Court of the

Runited States

OCTOBER TEKM, 1964

THE BOEING COMPANY. a Delaware corporation, Petitioner,

VS.

THE UNITED STATES OF AMERICA, Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE

UNITED STATES COURT OF CLAIMS

The Boeing Company prays that a writ of certiorari

issue to review the judgment of the United States Court of

Claims entered in the above entitled case on November 13,

1964.

CITATION TO OPINION BELOW

The opinion of the Court of Claims (R. Vol. 1, pp. 45-

80), printed in Appendix A hereto. infra, pp. 11-36. is

reported at 338 F.2d 342.

JURISDICTION

The judgment of the Court or; Claims was entered on

November 13, 1964 (R. Vol. 1, p. 45). Jurisdiction of this

Court is invoked under 28 U.S.C. § 1255(1).

QUESTION PRESENTED

Petitioner’s tax liability under the Excess Profits Tax

Act of 1950 (64 Stat. 1137) is dependent upon the amount

of its “total assets” on the last day of each of the years

1946-1949, inclusive. During those years petitioner had

fixed-price contracts with the United States for the manu-

facture and sale of military aircraft. On the four critical

dates petitioner had on hand inventories of property ac-

cumulated under these contracts, such as raw materials,

parts, components and partially completed aircraft. The

cost of these inventories was properly included in peti-

tioner’s total assets.

These contracts contained the “progress payments”

clause customarily to be found in fixed-price Government

contracts, the form of which has been before this Court

in City of Detroit v. Murray Corp., 355 U.S. 489 (1958).

This clause authorizes the making of progress payments

measured by costs previously incurred under the contract,

and provides for the passage of title to inventories and like

property on hand or subsequently acquired.

The question presented is whether, in computing total

assets, there should be deducted from the inventories ac-

cumulated under fixeg-price Government contracts the

amount of the progress payments received. The answer

depends on these subsidiary questions:

Are progress paymen’s made and received as part pay-

ments of an agreed purchase price incident to a concurrent

sale of invertories, or are they a mere financing device,

substantially equivalent to a loan giving rise to a liability

and having noeffect on total assets? Did the parties to these

contracts intend there to be a purchase and sale of bits

and piect:s of airplanes, or only a sale of completed, opera-

tional aircraft following delivery and acceptance? The

Court of Claims held that a sale of inventories was in-

tended to and did occur, contrary to the Seventh Circuit’s

decision in Consolidated-Haminer Dry Plate & Film Co.

v. Commissioner, 317 F.2d 825 (7th Cir. 1963), and to

American Motors Corp. v. Citv of Kenosha, 356 U.S. 21,

reh. denied 357 U.S. 912 (1958), “iffirming per curiam

the Wisconsin Supreme Court Gecision reported at 274

Wis. 315, 80 N.W. 2d 363 (1957).

STATUTES INVOLVED

The statutory provisions involved are Sections 442(f)

and 446 of the Internal Revenue Code of 1939, as

amended, 26 U.S.C. (1952 ed.) §§ 442(f) and 446. They

are reproduced in Appendix B, infra, pp. 55-57, together

with those portions of Treasury Reg. 130, Sec. 40.446-3

nition of “total assets” in 26 U.S.C. 442(f) applicable to

this case.

STATEMENT

This case involves the amount of petitioner’s excess

profits credit under the Excess Profits Tax Act of 1950.

Petitioner computed its credit under Section 446 of the

1939 Code by using the average of its total assets on the

four critical dates of December 31, 1946-1949. inclusive

(Finding 19, App. A, infra, p. 52).' The sole issue in the

' The ge of fact by the Trial Commissioner were adopted by

the Court of Claims and are set forth at pages 37 through 54 of

Appendix A, infra, and pages 22 through 36 of Vol. | of the

Record. Hereinafter references to such findings will cite only the

appropriate page of Appendix A.

case relates to the amount of total assets on the four critical

dates.

During each of the four years petitioner had certain

fixed-price contracts with the United States providing for

the production and sale of military aircraft (App. 37).

Petitioner expended money and accumulated charges in the

performance of these contracts, and carried such expendi-

tures and charges on its books of account as work-in-proc-

ess inventory until an aircraft or other article was delivered

to and accepted by the Government (App. 41, 47). Conse-

quently, on each of the four critical dates petitioner’s total

assets included a work-in-process inventory representing

expenditures and charges accumulated on the undelivered

portion of fixed-price Government contracts (App. 52).

Each of these fixed-price contracts contained a typical

progress payments clause (App. 39), pursuant to which

petitioner received certain amounts from the Government.

In its 1951 tax return, in computing the amount of its

total assets, petitioner failed to include therein the full

amount of the expenditures and accumulated charges on

fixed-price Government contracts. Instead, it subtracted

therefrom the amount of progress payments received under

such contracts (App. 53). The consequence was to reduce

petitioner’s total assets and therefore its excess profits

credit, and increase its tax liability by $913,804.64 (App.

14, 15).

Petitioner trought suit in the United States Court of

Claims to recover this overpayment (App. 14). The juris-

diction of the Court of Claims was based upon 26 U.S.C.

§ 1491. On November 13, 1964, the Court of Claims

entered its judgment adopting, with minor modifications,

the findings and opinion of the Commissioner, and dismiss-

ing the petition (App. 11). The Court of Claims placed

principal reliance on the title-passing provision of the

progress payments clause, and on authorities holding that

the title so passing to the Government is sufficiently sub-

stantial to insulate the property from local taxation and the

claims of creditors of the contractor; and concluded, on the

basis of these authorities, that a purchase and sale of inven-

tories was intended so that the progress payments should

be subtracted from the work-in-process inventories. The

Court of Claims expressed disagreement with the Seventh

Circuit which, in Consolidated-Hammer Dry Plate & Fiim

Co. v. Commissioner, supra, described the progress pay-

ments clause as establishing “a financing arrangement in

the nature of a loan,” and as not effecting a sale of prop-

erty.

REASONS FOR GRANTING THE WRIT

1. The decision of ihe Court of Claims is tased upon

the legal conclusion that the progress payments made to

petitioner under typical Government fixed-price contracts

were made in exchange for the sale of work-in-process in-

ventory. This is in direct conflict with the decision of the

Seventh Circuit Court of Appeals in Co-*olidated-Hammer

Dry Plate & Film Co. v. Commissioner, 317 F.2d 829

(7th Cir. 1963), in which the Seventh Circuit held that

under :dentical contract terms such payments were not

paid in exchange for the sale of property, but rather were

“attributes of a financing arrangement in the nature of a

joan” (317 F.2d 832), precisely as petitioner contends.

The Court of Claims dismissed this holding with the

statement that “we disagree with its reasoning.”

The Court of Claims’ decision also conflicts with this

Court’s per curiam affirmance of American Motors Corp.

v. City of Kenosha, 274 Wis. 315, 80 N.W.2d 363 (1957),

aff'd 356 U.S. 2i, reh. denied 357 U.S. 912 (1958). The

Wisconsin court held that under Government contract

provisions essentially identical to those involved here, the

TS kD RSP tt

true ownership of the work-in-process inventory remained

in the comractor. Thus, no sale was consummated until

the delivery and acceptance of the end product and the

progress payments were not received in exchange for the

sale of property.

These decisions reach conclusions diametrically opposed

to the decision of the Court of Claims. These conflicts

should be resolved, for, as noted below, they involve re-

curring issues of great importance.

2. The principal Government contract provision in-

volved in this case is the “title vesting” language of the

progress payments clause, set forth at Appendix A, pp.

39-41. The many cases cited by the Court of Claims

involving essentially identical language attest to the fre-

quency of important litigation involing its interpretation.

Those cases, like this one, turn on the operative effect

of the “title vesting” provision. The importance of uni-

formity in the interpretation of Government contracts is

evident. See United States v. Blair, 321 U.S. 730 (1944)

(reviewing a decision of the Court of Claims interpreting «

Governmeat construction contract); American Pipe &

Steel Corporation v. Firestone Tire & Rubber Co., 292

F.2d 640 (9th Cir. 1961). Such questions are ones of

Federal law, to be ultimately decided by this Court. United

States v. Allegheny, 322 U.S. 174 (1944); American Pipe

& Steel Corporation v. Firestone Tire & Rubber Co., supra.

This Government contract provision, and the decision by

the Court of Claims as to its operative effect, directly af-

fects important areas of Federal law other than the statutes

involved here. One such area is the state taxation of Gov-

ernment property. The reported cases pertaining to that

question are numerous and turn on whether, under the prog-

ress payments clause, the ownership of work-in-process

inventory and other property is vested in the Government.

See General Dynamics Corp. v. County of Los Angeles, 51

Cal.2d 59, 330 P.2d 794 (1958); City of Detroit v. Mur-

ray Corp., 234 F.2d 380 (6th Cir. 1956), rev'd 355 US.

489, reh. denied 357 U.S. 913 (1958); Douglas Aircraft

Co. v. Byram, 57 Cal. App.2d 311, 134 P.2d 15 (1943);

State ex rel. Superior Shipwuilding Co. v. Beckley, 175 Wis.

272, 185 N.W. 199 (1921); Ford Motor Co. v. Korzen,

196 N.E.2d 656 (Til. 1964), cert. denied 13 L.ed. 2d 44

(1964); American Motors Corp. v. City of Kenosha,

supra.

The issues involved in this case also affect questions

of Federal income taxation, see Consolidated-Hammer Dry

Plate & Film Co. v. Commissioner, supra, and the immun-

ity of inventory being manufactured under Government

contracts from attachment by creditors of the contractor,

see United States v. Ansonia Brass & Copper Co., 218 US.

452 (1910): Shepard Engineering Co. v. United States,

287 F.2d 737, reh. denied 289 F.2d 681 (8th Cir. 1961):

In re Read-York, 152 F.2d 313 (7th Cir. 1945); In re

American Boiler Works, 220 F.2d 319 (3rd Cir. 1955).

It is evident that the determination of the operative

effect of the title vesting language of the progress payments

clause in Government contracts. which is the ultimate issue

involved here. affects other cases involving different laws.

‘this case is therefore of substantial importance to other

parties and to the development of uniform and prediciable

rules for the treatment to be accorded property produced

and payments made under contracts with the Federal

Government.

3. The Court of Claims. in holding that the progress

payments were made in exchange for the sale of work-in-

process inventory, ignored the obvious intention of the

applicable Go'zrnment contracts. The terms of those con-

tracts, as well as the conduct >f the parties, make clear an

» > a SR

intention that the sale take place only when the end prod-

uct was completed, delivered to, and accepted by the Gov-

ernment. See Consolideted-Hammer Dry Tate & Film

Co. v. Commissioner, supra; American Motors Corp. v.

City of Kenosha, supra.

The provisions of petitioner’s contracts with the Govern-

ment are inconsistent with any other conclusion. The peti-

tioner bears the entire risk of loss prior to delivery. The

progress payments bear no relation to the amount of any

negotiated contract price, and their payment is in no way

contingent upon the inspection or acceptance of any prop-

erty. The progress payments clause bears a close resem-

blance to the after-acquired property clause of a conven-

tional mortgage, in that it affects the title not only to prop-

erty acquired prior to the making of the payment, but to

all subsequently acquired property whether or not any

further progress payments are made. These facts, as well

as others found by the Commissioner and appearing in the

Court of Claims’ opinion, demorstrate clearly that the

progress payments were in fact the equivalent of loans to

Government contractors, and not the purchase price for

property being solid, and that no sale took place prior to

the delivery of the completed product.

Petitioner’s assets should reflect the fuil amount of its

investment in the performance of the Government con-

tracts involved, without reduction for partial payments.

The Court of Claims erred in holding otherwise, and its

decision is of vital importance rot only to petitioner, and

not only with respect to the Excess Profits Act of 1950, but

also to other persons confronted with questions of Federal

law which are dependent on the operative effect of the

common Government contract clause involved here.

CONCLUSION

For the foregoing reasons, this petition for a writ of

certiorari should be granted.

Respectfully submitted,

DaviD LC. WAGONER

Aitorne, of Record for Petitioner

1900 Washingion Building

Seattle, Washington 98101

Of Counsel:

ANDREW M. WILLIAMS

JAMES M. HILTON

1900 Washington Building

Seattle, Washington 98101

APPENDIX A

in the United States Court of Claims

No. 273-59

(Decided November 13, 1964)

THE BOEING COMPANY. A DELAWARE

CORPORATION v. THE UNITED STATES

Andrew M. Williams fcr plaintiff. James M. Hilton of

counsel.

Theodore D. Peyser, with whom was Assistant Atiorne ,

General Louis F. Oberdorfer, for defendant. Edward S.

Smith, Lyle M. Turner and Philip R. Miller were on the

brief.

Before CowEN, Chief Judge, LARAMORE. DURFEE, Davis

and CoLLins, Judges.

OPINION

PER CuRiAM: This case was referred pursuant to former

Rule 45(a) (now Rule 57(a)) to Trial Commissioner Saul

Richard Gamer with directions to make findings of fact and

recommendations for a conclusion of law. The Commis-

sioner has done so in an opinion and report filed on May

17. 1963. Plaintiff has excepted to the opinion (but not to

the findings of fact). the parties have filed briefs. and oral

a.gument has been had. With minor modifications, the

court is in agreement with the Commissioner's findings and

recommended opinion. Accordingly, the court adopts the

findings and opinion, as so modified, as the basis for its

judgment in this case, and concludes that plaintiff is not

entitled to recover and that the petition be dismissed.

Commissioner Gamer’s opinion, as modified by the

-ourt, is as follows:

During the years 1946 through 1949, plaintiff had fixed

price Government contracts for the production of aircraft

under which it received partial payments during the course

of performance. The sole question involved in this case is

what 2ffect such payments had on the amount of plaintiff's

“assets” for the purpose of computing its excess profits tax

liability for the year 1951.

By the Excess Profits Tax Act of 1950 (64 Stat. 1137,’

as amended by Section 510 of the Revenue Act of 1951, 65

Stat. 452), the Internal Revenue Code of 1939 was amend-

ed so as to require the payment by corporations of an excess

profits tax. (26 U.S.C. (1952 ed.) §§ 430, et seg.) Plain-

tiff’s excess profits tax under this 1950 act was based on its

average net income during a pre-1950 base period. By sec-

tion 446 of the Code, plaintiff, as a member of a “depressed

industry subgroup,” was permitted to compute such average

base period net income by a formula which was based upon

the average of the amounts of its “total assets” computed

as of certain base period dates. In plaintiff's case, the dates

are December 31 for the years 1946-1949, inclusive.

The parties are in dispute as to the effect that the partial

payments made by the Government to plaintiff under its

aforementioned 1946—49 contracts had on the amount of

plaintiff's “total assets” on said four dates. Under tne

statute, the higher the average base period net income, the

lower would be the excess profits tax.

In the performance of the contracts, plaintiff naturally

‘Enacted January 3, 1951, following the outbreak of the Korean

War in June 1950, and therefore sometimes referred to as the Korean

War Excess Profits Tax Act.

RRO ee a

made expenditures f .r materials aad labor. These expendi-

tures resulted in items of value in the nature of work-in-

process inventory. This inventory was justifiably considered

as an asset with a value at least equai to the amount of the

material and labor expenditures made with respeci thereto.

Under the typica’ contract “Partial Payments” article

then in use (set forth in fu.l in finding 4), partial payments

were defined as “payments prior to delivery, on work in

progress for the Government under this contract.” Such

payments were permitted -to be made “upon property ac-

quired or produced” by the contractor “for the nerformance

of” the contract in an amount which “shall not c...d 90

percent of the cost to the Contractor of the property upon

which payment is made.” The article then went on to pro-

vide that upon the making of any such partial payment

“title to all parts, materials, inventories, work in process

and non-durable tools theretofore acquired or produced by

the Contractor for the performance of this contract, and

properly chargeable thereto “ * “ shail forthwith vest in

the Government.” It was also provided that, in making fmal

payment for the aircraft. “there shall be deducted from the

contract price therefor a proportionate amount of the par-

tial payments theretofore made.”

Prior to the enactment of the Excess Profits Tax Act of

1950, pla atiff, in the calculation of its assets on the balance

sheets which it submitted with its Federal tax returns and

which it published to its stockholders regarded such partial

payments as effecting a transaction in the nature of a sale to

the Government, accompanied by a passage of title, of an

equivalent amount of work-in-process inventory. Thus such

inventory asset item was reduced by the amount of the par-

tial payment. In turn. the “cash” asset item was increased

by the amount of the payment. In this way, the total amount

of plaintiff's assets would not be affected by the payment.

chere being simply an exchange of cash for work-in-process

inventory. Plaintiff’s excess profits tax return for 1951 was

filed on this basis. with its total assets as of December 31,

1946-1945, being so computed. However, on the balance

sheet submitted with its return for the calendar year 1950,

which was the first return submitted after the passage of the

Excess Profits Tax Act of 1950, plaintiff for the first

time computed its total assets without its work-in-process

inventory being reduced by the partial payments, and plain-

tiff thereafter followed this practice in the balance sheets

submitted vith all subsequent returns.

In 1955, plaintiff, contending that in its 1951 return it

had erred in treating such partial payments as effecting

equivalent sales of work-in-process inventory and had there-

by erroneously understated its total assets with respect to

each of the years 1946 to 1949, filed a claim for refund of

excess profits taxes. Instead, plaintiff argued, these “pay-

ments” were, regardless of their form, in substance actually

nothing more than loans made by the Government to plain-

tiff to assist it, by replenishing its working capital, in fi-

nancing its huge aircraft contract operations, and that the

payments should therefore be treated as such for the pur-

pose of the tax. Given such treatment as loans, there would

be no sale or passage of title and, consequently, no equiva-

lent reduction of the work-in-process asset item by the

amount of the partial payment. Plaintiff's cash item would,

however, still be increased by the amount of the “loan.”

Thus, plaintiff’s total assets would naturally be much larger.

Indeed, with this new method of treating partial payments,

plaintiff’s assets which, prior to 1950 had been calculated as

amounting to approximately $!00 million, soared to

approximately $150 million, thus raising the base period

average and naturally reducing the amount of its subse-

quent “excess” profits based thereon. Upon the disallow-

ance of its claim, plaintiff filed ‘ts petition here to recover

said alleged overpayment of its excess profits tax paid for

the year 1951 in the amount of $913,804.64.

In support of its position that the partial payments should

be treated as loans and not as payments incident to a sale,

plaintiff's principal contention seems to be that the title-

passing provision was not intended by the parties to effect

such a full transfer of title for actual ownership purposes

and that no such ownership transfer was in fact accom-

plished. Although conceding “that a title of sorts vests in

the Government” (Pltf.’s Br., p. 22), and that “in form” the

transaction appears as a “payment.” plaintiff argues that

“in substance” the payments, although not constituting “a

conventional loan” (id., pp. 32, 33), amount to nothing

more than “cash borrowed from the Government” (id., p.

18) and should, for the purposes of this case, be so re-

garded. It contends, therefore, that at most the Government

receives simply a security title to protect its advances of

cash made prior to the final delivery and acceptance of the

completed aircraft, only at which time is the “sale” effected.

This must, of course, be the heart of plaintiffs contention,

for if full title and actual ownership to the work-in-process

inventory effectively passes to the Government at the time

of the partial payment, then obviously plaintiff would not

be justified in considering the Government’s property as

instead plaintiff's property and including it in a listing of

plaintiff's assets.

Furtner, plaintiff points to various otaer contract pro-

visiors, aS well as the practices of the parties thereunder,

which it claims are inconsistent with the conclusion that

the parties intended that complete ownership, incident to a

“sale,” of any part of the work-in-process inventory shifts to

the Government when the partial payment is made. These

provisions and practices include those relating to final in-

spection, delivery, and nayment for completed aircraft, with

plaintiff becoming entitled to “the contract price” only upon

final delivery and acceptance of such aircraft; the lack of

inspection as a prerequisite to the making of a partial pay-

ment; the provision that the contracting officer “may” make

partial payments, thus presenting the “hardly likely” situa-

tion of leaving the “agreed purchase price to the discretion

of the buyer”; the provisions that title to ail work-in-process

inventory, no matter how large, acquired either prior or

subsequent to the first partial payment passes with the mak-

ing of such payment, no matter how small, thus allegediy

making plain that only a type of security title is involved;

the lack of relationship between the amount of any partial

payment and the contract unit price of aircraft; the nonseg-

regation of the Government’s “prererty”; the imposition

upon plaintiff of the risk of loss of the property, with plain-

tiff’s actually insuring the inventory for its own benefit on

the basis of plaintiff's full investment therein, without dimu-

nition on account of partia! payments; the disposition rights

given to plaintiff during contract performance; and the

reversion to plaintiff of title, upon completion of the con-

tract, to all remaining inventory items not incorporated into

delivered aircraft, allegedly indicating the real “intention of

the parties to buy and sell completed aircraft, and not bits

and pieces of inventory.” Plaintiff's own intention in this

respect is buttressed by its internal books and accounting

records—as distinguished from its above-mentioned pub-

licly issued balance sheets—which were kept so as to show

the partial payments as a current liability owing to the

Government, as would be the case in connection with any

loan from a lender, and, similarly, to show, until final

delivery of a unit of aircraft was made, its entire investment

in the work-in-process inventory, regardless of the source

of the funds, as an asset, without reduction to reflect the

receipt of partial payments.

Contentions such as these have frequently been advanced

over the years in attempts to escape the effect of the title-

passing provision of fixed price Government contract partial

payment articles similar to or identical with the one herein

involved. They have met with little success. At least to the

extent of the partial payments, the courts have, in a variety

of situations, almost unanimously sustained the provision as

effecting a full and complete passage of title or ownership.

and as not creating only a lien or security interest. United

States v. Ansonia Brass & Copper Co., 218 U.S. 452

(1910); Shepard Engineering Co. v. United States, 287 F.

2d 737 (8th Cir. 1961), reh. den. 289 F. 2d 681 (1961);

City of Detroit v. Murray Corp., 234 F. 2d 380 (6th Cir.

1956), rev'd on other grounds, 355 U.S. 489 ( 1958); Gen-

eral Dyrzmics Corp. v. County of Los Angeles, 51 Cal. 2d

59, 330 P. 2d 794 (1958); Martin Co. v. State Tax Com-

m’n of Md., 225 Md. 404, 171 A. 2d 479 (1961): In re

Read-Y ork, Inc., 152 F. 2d 313 (7th Cir. 1945); Douglas

Aircraft Co. v. Byram, 57 Cal. App. 2d 311, 134 P. 2d 15

(1943); State ex rel. Superior Shipbuilding Co. v. Beckley.

175 Wis. 272, 185 N.W. 199 (1921); Consolidated-Ham-

mer Dry Plate & Film Co. v. Commissioner, decided April

25, 1962 (C.C.H. Federal Tax Rep. 1962, Vol. 7, Par.

7469(M)) [reversed, 317 F. 2d 829 (C.A. 7, 1963) ].

The issue has arisen when the Government contractor has

fallen into financial difficulty and, in attempts by its credi-

tors to satisfy their debts out of the contractor’s assets, it

becomes necessary to ascertain whether certain property

in the contractor’s possession actually belongs to the con-

tractor or to the Government, Government property, of

course, being immune from state materialmen’s and me-

chanics’ liens. In the leading Ansona Brass & Copper Co.

case, supra, creditor-suppliers of a shipbuilding company

attempted to enforce liens against a partially built vessel

which the company was constructing for the Government

under a contract calling for the making of partial payments

during construction. The contract provided that: “The parts

paid for under the system of partial payments * * * shall

become _ thereby the sole property of the United States

ie * There too the contention was made that various

other provisions of the contract indicated that the parties

actually intended that ownership of the vessel remain in

the builder until it was completed and turned over to the

Government. However, the Court, after holding that “if the

contract is such as to clearly express the intention of the

parties that the builder shall se!) and the purchaser shall buy

the ship before its completion. and at the different stages of

its progress, and this purpose is expressed in the words of

the contract, it is binding and effectual in law to pass the

title” (p. 467), rejected the contention that any other pro-

visions of the contract, when “read in the light of the pur-

poses of the contracting parties as gathered from the entire

contract,” negatived the plain wording of the ownership

provision. The contract provisions as to the Governinent’s

rights of inspection and rejection upon completion of the

vessel, the builder’s duty to keep the property insured. and

other duties imposed upon it with respect to the property,

were not, the Court held, inconsistent with the provision

“passing * * * the title in parts as paid for” and did not

serve to “cut down or lessen the binding force of the clear

and distin-t provisions * * * as to ownership.”

The parties therein dealt with a specific part of the

contract, they expressed themselves clearly upon the

subject, and it is not to be presumed, in the absence of

clear expression or necessary implication, that they

intencGed to supersede this provision in dealing with

other speciiic or general parts of the agreement. (p.

469)

Since full title to the uncor:pleted vessel thus effectively

passed to the Government under the partial payment pro-

vision, the Court held that the creditors were powerless to

levy on the Government's property. However, as te two

other vessels being constructed under contracts which did

not contain a “stipulation as to passing of the title on partial

payments in the progress of the work” (p. 472). the Court

did sustain the suppliers’ liens.

Plaintiff's attempt to distinguish the Ansonia case on the

grounds that there the parties clearly contracted “that serv-

ices or products shall be sold and paid for as the work

progresses, and at various stages of performance” ( Pitf.’s

Br., p. 19) is unconvincing, for the provisions for title pass-

ing as an incident to the system of partial payments are sub-

stantially similar to those herein involved.

In Shepard Engineering Co. v. United States, supra, a

bankrupt prime contractor's work-in-process inventory was

covered by a Government contract partial payment title-

passing provision which was identical with the provision in

the instant case. Its attempted sale of a part of the inven-

tory to a third party was held to be void since the title to

the property had, under the provision, vested in the Govern-

ment prior to the sale “to the innocent purchaser for value

without notice.” The court stated: “There is no ambiguity

in the words of the contract that the material ‘shall forth-

with vest in the Government’ and there*is no reason why the

contract should not be enforced by the courts ~ (287 F. 2d.

at 741.) And further, “that at the time of this purported

purchase” the prime contractor “had no title to transfer—

under the clear and unambiguous terms of the partial pay-

ments clause, title had vested in the United States.” (289

F. 2d, at 682.)

The Read-York, inc. case. supra, similarly presented the

situation of crediiors aitempting to reach incomplete gliders

being constructed by a bankrupt Government contractor

under an Army Air Force contract containing a partial pay-

ment title-passing provision. Again the court, after con-

sidering the partial payment article and various other con-

tract provisions alleged to be inconsistent with the title-

passing provision, held, principally on the authority of An-

sonia Brass, that, as to the partial payment article, “it would

be difficult to state in more precise terms the conditions

upon ‘vhich title to the property vests in the Government.”

and, as to the other contract provisions “we find nothing in

any other section of the contract inconsistent with” such

article. (152 F. 2d, at 316.)

indeed, a title-passing provision standing alone and with-

out being incident to a partial payment provision has been

held to be effective as against the creditors of a bankrupt

Government contractor. See Jn re American Boiler Works,

220 F. 2d 319 (3d Cir. 1955), where the court held that,

with respect to a bankrupt buiider of vessels for the Navy, a

provision in the contract to the effect that “title to all ma-

terials and equipment acquired for each vessel shall vest in

the Government upon delivery thereof to the plant of the

Contractor or other place of storage selected by the Con-

tractor” was effective “without any mention of payment as

a prerequisite thereto.” (p. 321.)

Cases involving various types of taxes have arrived at the

same result. Most of these are persona! property tax cases

in which the validity of the assessment was dependent upon

ownership of the property since Federal Government prop-

erty is, of course, immune from direct state or local taxa-

tion. United States v. Allegheny Coumty, 322 U.S. 174

(1944). In the General Dynamics case, supra, county and

city ad valorem personal property taxes were assessed

against a Government contractor operating under fixed

price contracts containing what was therein described as a

progress payment clause’ with a title-passing provision. Al-

* The parties here have used the terms “progress payment” and

‘partial payment” synonymously and interchangeably.

though conceding that “a title clause standing alone is not

conclusive of ownership for tax purposes when it appears

that the taxpayer retains the essential indicia of ownership

* * * or that the government title is for security only” (330

P. 2d, at 798), the court, after reviewing the other allegedly

inconsistent contract provisions, including those giving the

contractor certain rights to dispose of the inventory, as well

as those placing the risk of loss on the contractor. concluded

they were “not inconsistent with the government's owner-

ship of the property for tax purposes during the crucial

period when title was vested in it.” (p. 800.) It pointed out

that the contractor's right to dispose of the property was a

limited one. This is also true in the instant case, as article

46(d) (finding 4(c)) makes plain. And it further held.

relying on the Ansonia Brass case, that “the mere fact that

the risk of loss was borne by the contractor is not inconsist-

ent with government ownership. ‘(p. 801.) See. also, Mariin

Co. v. State Tax Comm'n of Md., supra.

Again in City of Detroit v. Murray Corporation, supra,

city and county personal property taxes were held to have

been illegally assessed upon property in the possessicn of

an Air Force subcontractor pursuant to a subcontract sim-

ilarly containing a partial payment title-passing provision

which appears to have been identical with the article herein

involved, providing. as does the instant article. that upon

the making of any partial payment title to the specifted in-

ventory and work in process should “forthwith vest in the

Government.” The court not only rejected the contention

that the partial payment and transfer of title clause was 1n-

valid, but sustained the holding of the District Court “that

under the partial payment ciauses title to the property in

question was vested in the United States ~ ~ © and that

this is an absolute and not a bare lien or security ttle * ~~.”

(234 F. 2d, at 381)°. To the same effect is Dougias Air-

craft Co. v. Byram, supra, where the court similarly held

invalid county and city property taxes levied against parti-

ally constructed airplanes and certain materials covered by

a Government contract containing a partial payment title-

passing provision. Rejecting the contention that “if title

did pass to the federal government, it was at most a bare,

legal title, for security only, the beneficia! title remaining in

*he” contractor, the court concluded that “the terms of the

contract providing that title passes contain no suggestion

that it is taken for security only.” (134 P. 2d, at 17.)*

‘ For the thesis that partial payment articles are illegal as violative

of Revised Statutes. § 2648 (31 U.S.C. $ 529), providing that “no

advance of puttic money shall be made in any case * * *,” se

McClelland, The Illegality of Progress Payments as a Means of Fi-

nancing Government Contractors, 33 Notre Dame Law. 380 (1958).

The history of the series of holdings by the Attorney General and the

Comptroller General establishing “that payments under contracts may

be made where the United States receives an equivalent benefit there-

for in the form of transfer of title to contract materials or work in

progress” is set forth in Whelan, Government Supply Contracts: Prog-

ress Payments Based on Costs; The New Defense Regulations, 26

Fordham L. Rev. 224 (1957) at 231. et seg. Plaintiff in the instant

case does not question the legality of the partial payment article.

‘The court relied heavily on the holding in the similar case of

Craig v. Ingalls Shipbuilding Corp., 192 Miss. 254. 5 So. 2d 676

(1942). Instead of a fixed price contract with a partial “es agory

clause, the contractor in Craig held a cost-plus contract which did,

however, contain a similar provision for passage of title to property

“on account of which payments are made.” The court there con-

cluded that state, county, and municipal ad valor=m tax assessments

on such property were invalid.

However where, in the personal property tax cases, * is, in other

types of situations, plain that the Government's title is omy for secur-

ity purposes, the property is heid to be subject to local taxation. For

instance, where the Government as title holder is in the position of a

seller (instead of a buyer, as in the instant case), with a balance due

on account of the purchase price, it will be recognized that it “retains

only a legal title as security” since in such a case it is in substance

simply in the position of a mortgagee. $.R.A., Inc. v. Minnesota, 327

U.S. 558, 565 (1946). To the same effect is Offutt Housing Co. v.

Sarpy County, 351 U.S. 253, 261 (1956), where the Government's

title was held to be — a “paper title” to secure it for moneys owed

on a Wherry Military Housing Act project.

American Motors Corp. v. City of Kenosha, 274 Wis.

315, 80 N.W. 2d 363 (1957),° is the one case which sup-

ports plaintiff's contentions. Holding that “the question of

ownership for tax purposes is one of local law,” the court

concluded that a city personal property tax on property

(“aircraft engine inventory,” consisting of raw materials,

supplies, work in process and completed parts) located at

the plant of a Government contractor building aircraft

engines for the Air Force under a contract containing a par-

tial payment title-passing clause was valid as constituting a

tax on the contractor’s, and not the Government's, property.

After examining the terms of the contract other than the

title-passing provision, the court held that although “title”

passed to the Government, the contractor was nevertheless

“the true owner” of the property.” The court held: “In our

opinion, the unrestricted right of the Company under the

contract to acquire and dispose of the property and the risk

of loss are 2lements of ownership inconsistent with the vest-

ing of such title in the Government as would render the

property immune from taxation.” (80 N.W. 2d, at 367.)

However, as the Court in the General Dynamics Corp.

case pointed out, the authority of American Motors Corp. is

* Motion to affirm granted per curiam, 356 U.S. 21 (1958), evi-

dently on the same basis as the Supreme Court’s holding in City of

Detroit v. Murray Corp., 355 U.S. 489 (1958), i.e., that although

the state tax was styled a “personal property tax,” it was, as actually

applied, a tax on the possession and use of property. regardless of

ownership. The Court specifically stated (at 492, fn. 2) that: “For

purposes of this case we assume that the United States nad full title

to the property not just a bare security interest.” .

* The court felt constrained to make this distinction between “title”

and “ownership” in view of the Supreme Court’s holding in United

States v. Allegheny County, supra, that: “The validity and construc-

tion of contracts through which the United States is exercising its

constitutional functions, their consequences on the rights and obliga-

tions of the parties, the titles or liens which they create or permit, all

present questions of federal law not controlled by the law of any

State” and its conclusion in that case “that title to the property in

question is in the United States and is effective for tax purposes.” (at

183.)

weakened because of the court’s seeming misconstrtction of

the provisions of the contract concerning the contractor’s

“unrestricted” right during contract performance to dispose

of the inventory. The court in General Dynamics stated:

“The decision in the American Motors case, however, ap-

pears to have overlooked the fact that the contractor’s right

to acquire or dispose of the property other than scrap could

only be exercised at the option of the government. Until

such option was exercised in favor of the contractor, it * * *

had no right to acquire or dispose of government property.”

(330 P. 2d 801.) The identical option language is con-

tained in the article hereii: involved. And the court went

on to criticize the American Mctors holding by reiterating

“that the mere fact that the risk of loss was borne by the

contractor is not inconsistent with government ownership,”

as was made plain by the Supreme Court’s Ansonia Brass

holding, which apparently had not been called to the court’s

attention in the American Motor. case, for it faiis to even

mention it, as it similarly fails to mention its own earlier

decision to the contrary in State ex rel. Superior Shipbuild-

ing Co. v. Beckley, supra.’ In the latter case, the court,

relying principally on Ansonia Brass, held invalid state per-

sonal property tax assessments against a Government con-

tractor building vessels covered by a partial payment title-

passing clause. It stated: “If it is possible to use language

which is plain and definite passing the title to partially con-

structed vessels and the materials on the premises designed

therefor, it must be conceded that the language of the con-

tract in this case does it” and that “the fact that the contract

contained other clauses relating to insurance, * * * does not

operate to modify the clear intent of the parties as expressed

* As was noted by Justice Whittaker in his dissenting opinion in

City of Detroit v. Murray Corp., supra, at 524, fn.$. The dissent

was to the Court’s construction of the tax as being one on the pos

session and use of property rather than an ad valorem personal prop-

erty tax.

eo DG

in the language of the contract relating to the tirae when

the title shall pass.” (185 N.W., at 201.)

And as to income taxes, the Tax Court arrived at the

same result in the Consolidated-Hammer Dry Plate & Film

Co. case, supra. Since it held that partial payments made

pursuant to Air Force contracts upon submission of in-

voices certifying costs incurred (as in the instant case)

were payments received without restriction and resulted in

title to the property vesting in the Government on the date

of payment, it concluded that such payments were includ-

ible in the contractor’s income in the year of receipt and

not upon the later delivery of the final product’ Plaintiff

seeks to distinguish this case on the grounds that it is one

involving income taxes and the time when taxable income

was received, and that it therefore does not involve or

require a determination of plaintiff's assets, as does the in-

stant excess profits tax. But the essence of plaintiff's con-

tention in the determination of its assets is “that the partial

payments involved in this case are not payments of the

contract price for work previously done.” (Pitf.’s Br. [to the

Commissioner], p. 27.) And this is exactly what the Tax

Court held they were, with a resultant passage of title to

the Government. Were the partial payments in effect noth-

ing more than loans, as both the taxpayers there and here

contend, ‘here would have been no passage of title, the prop-

erty would therefore have remained in plaintiff's inventory

as its assets, and the payments could not have been re-

garded as income when received.*

* Since the Commissioner's opinion was filed, the Seventh Circuit

has reversed the Tax Court in the Consolidated-Hammer case. 317

F. 2d $29, decided May 21, 1963. Insofar as the Court of Appeals

viewed the partial payments clause as establishing “a financing arrange-

ment in the nature of a loan.” we disagree with its reasoning. How-

ever, that case involved the income tax, not the special provisions of

the excess profits tax here in issue, and the Seventh Circuit’s ultimate

conclusion may conceivably be sustainable on the income tax facts it

thought it had before it, or on other grounds irrelevant to the present

case.

On. the other hand, where m~ncys paid under a contract

are, as a result of “a careful study of the contract * * * and

of the actions of the parties under” the contract, determined

to be “advances * * * in the nature of loans,” the advances

have been held not to constitute income at the time they

were made. Summit Coal Co. v. Commissioner, 18 B.T.A.

983. 988 (1930). In the. Summit Coal case, the advances

were made prior to contract performance and notes were

given to evidence the indebtedness. To the same effect is

Veenstra & DeHaan Coal Co., 11 T.C. 964 (1948),

where advance deposits by customers to be applied to later

deliveries of coal at then prevailing prices were held not to

constitute taxable income in the year when the deposits

were received.

With the exception of American Motors, all of the above

discussed cases in which Government contract partial pay-

ment articles with title-passing provisions were involved, as

in the instant case, reject practically every contenticn plain-

tiff here makes concerning whether a sale occurs and title

passes. However, the case of Anderson Brothers Corpora-

tion v. Commissioner, 296 F. 2d 627 (Sth Cir. 1961), is an

even stronger holding against plaintiff because it involves

the precise assets determination issue under the same 1950

Excess Profits Tax Act as is herein involved in a situation

where a partial payment clause contained in a private con-

tract does not appear to have been accompanied by any

title-passing provision. Yet the court there too held, in

affirming the Tax Court (34 T.C. 199),‘that the taxpayer,

a pipeline contractor receiving such partial payments from

its customers on the basis of a percentage of the work done

during a preceding period (as is true in the instant case)

could not include in its assets both its “Work in Progress”

investment and the partial payments received with respect

thereto. The taxpayer’s “Work in Progress” asset item was,

the court held, to be redr ced to the extent of the payments.

This is, of course, simply another way of saying that the

partial payment constituted a true “payment” for the appro-

priate percentage of inventory work-in-process accom-

plished theretofore, and to that extent a sale had resulted

with a concurrent passage of title to the property from the

contractor to its customers who had paid therefor.

Plaintiff argues :hat this case too is to be distinguished in

that the partial payments were, by the very nature of the

subject matter of the contract, in fact true current pro tanto

payments for completed work, i.e., pipeline laid in place

“with no work in process thereafter held by the taxpay«r.”

(Pltf..s #:. [to the Commissioner], p. 28.; But there is

nothing in the opinions of either the Tax Court or the Fifth

Circuit to so indicate. The alleged lack of any such work-

in-process would be wholly inconsistent with the primary

concern of the jitigation, i.c., how the partial payments af-

fected the “Wurk in Progress” asset item. And on this

issue, and in clear rejection of plaintiff's contentions here,

the Tax Court flatly held that“ ‘payment’ has a spec:fied and

clear meaning which is that a claim has been paid. ‘Pay-

ment’ is clear!y distinguishable from loans and advances.”

And the Court of Appeals, in affirming, similarly held that

“no amount of theory can overcome the fact, which is that

a creditor seeking to seize the property of such a contractor

would not be able to reach both the item representing ex-

penditures on uncompleted contracts and the cash sums

actually paid by the owner and received of the contractor in

repayment of these expenditures.” (296 F. 2d, at 630.)

Thus, as noted above, a title-passing clause without any

accompanying partial payment provision (Jn Re American

Boiler Works, supra), as well as 4 partial payment clause

without any accompanying title-passing provision, as in the

Anderson Brothers Corporation case, each standing alone.

have been held to have effectively transferred ownership in

inventory or work-in-process. Certainly, in the instant sit-

uation, as shown by the cases hereinabove set forth, where

the contract contains both provisions, the ownership trans-

fer is all the more soundly based.*

The contention that, because discretion is vested in the

contracting officer in that he “may” make the partial pay-

ments, the status of such payments as true sale payments is

weakened while their status as loans is ennanced, is not per-

suasive. It could be equally argued that it would be hardly

likely that there would be vested in the contracting officer

the unlimited discretion as to whether or not “loans” to the

extent of millions of dollars should be made to the contrac-

tor. United States v. Lennox Metal Mfg. Co., 225 F. 2d 302

(2d Cir. 1955).

And as to the further contention relating to the passage

of title to greater amounts of property than the actual

amounts of the partial payments, any such problem would

here appear to be academic since defendant is simply con-

* This is not to say that every construction type contract calling for

installment payments as the work progresses will automatically be

held to effect equivalent concurrent title transfers. The basic problem

in each cuse is tc ascertain “the presumed intention of the parties.”

Clarkson v. Stevens, 106 U.S. 505, 515 (1882). In that case the

Court held that despite such payments made under a Navy contract

for the construction.of a ship, and despite a contract orovision that

the construction materials should be marked with the letters “U.S.”

and should become the Government’s property, it was not the actual

intention of the partics, as shown by other circumstances, that any

title should pass to the Government until the ship was completed and

delivered. “The courts of this country have not adopted any arbitrary

rule of construction as controlling such agreements, but consider the

question of intent, open in every case, to be determined upon the

terms of the contract, and the circumstances attending the transac.

ion” (p. 515). And in Armstrong v. United States, 364 U.S. 40

(1960), where a shipbuilding contract provided for the making of

progress payments based on a percentage of the work completed, but

without any provision “that ownership of the portion of the work

paid for should vest in the United States” (p. 43}, the Court held

that materialmen’s liens on the partially constructed vessels could not

be extinguished by a later transfer of title to the Government of the

uncompleted vessels. The Ansonia case, with its title-passing pro-

vision as a part of the partial payment clause was distinguished.

tending that the work-in-process asset item be, for the pur-

pose in question, reduced only to the extent of the partial

payments.

The conclusion that the partial payments are here to be

considered as true contract sale payments and not loans is

not to deny, as plaintiff points out, that in a broad financial

or economic sense, partial payments are concededly one way

of financing Government contractors and in that respect

perform quite the same general function as loans. The De-

fense Department Regulations specifically so recognize. See

Armed Services Procurement Regulations, 32 C.F.R., Part

163, App. E.; Whelan, Government Supply Contracts: Pro-

gress Payments Based on Costs; The New Defense Regula-

tions, 26 Fordham L. Rev. 224 (1957). “Progress pay-

ments are the largest single segment of contract financing in

the Department of Defense.” Bachman, Defense Department

Contract Financing, 25 Geo. Wash. L. Rev. 228, 229

(1956). The other two principal contract financing methods

in which the Government participates (as distinguished

from purely private financing) are Government guaranteed

loans made by private lenders (“V-loans”) and advance

payments, which precede contract performance. See Bach-

man, supra. Progress payments are “singularly advanta-

geous” however, because, unlike the other two methods,

they do not bear interest nor are they secured. Whelan.

supra, at 229. Advance payments are, as plaintiff concedes,

true loans. See Uniiec’ States v. Butterworth-Judson Corp.,

267 U.S. 387 (1925).

And, indeed, for certain purposes, where consideration

must be given to how much Government aid a contractor

has received as distinguished from private financing, prog-

ress payments may be put in the same general category as

Government loans. For instance, in determining the reason-

ableness or excessiveness of profits under the Renegotiation

Act, and in applying the guides provided by the act and the

regulations for such determination, including such factors

as the financial risks undertaken in performing the contract

and the amount of Government aid it received, the Tax

Court in Boeing Airplane Co. v. Renegotiation Board, 37

T.C. 613 (1962), considered the fact that the contracter

“was an inadequately financed and equipped airframe man-

ufacturer” (p. 648), that its “operations were largely fi-

nanced by the United States through early reimbursement

of costs and payments of profit through progress payments

and the furnishing of Government-owned manufacturing

facilities” (p. 647), and that “we view these payments re-

gardless of their labels as in the nature of loans.” (p. 648.)

But the fact that for certain general policy purposes partial

payments may be considered as a form of contract financ-

ing and in the catego:y of loans does not, as ihe Liany cases

hereinabove analyzed make clear, put them in that category

when it is necessary to ascertain the legal relationships they

create, including the passage of title, in accordance with

specif*c contract provisions, and the effect such passage has

on the amount of a company’s assets.

As Justice Whittaker stated in City of Detroit v. Murray

Corp., 355 U.S. 489, (p. 517, fn. 4, dissenting opinion, the

majority opinion being based on grounds other than those

herein involved ) in considering the difference between “ad-

vance payments” and “partial payments”:

* ** ** At the time the Act [Armed Services Procure-

ment Act of 1947, c. 65, 62 Stat. 21] was passed the

terms “advance payments” and “partial payments” had

long since become terms of art in government procure-

ment iaws and regulations. * * * The two terms are

not synonymous. It ‘1as long been recognized and un-

derstood that an “ai ance payment” is a loan by the

Government and cai be made “only upon adequate

security” as provided in § 5 of the Armed Services

Procurement Act, but “partial payments” are pay-

ments made by the Government in purchase of mater-

ials and are authorized when ownership thereto vests

in the Government. Army Procurement Regulations

(November 18. 1947), §§ 804.400-7, 805.405,

805.407-2 (a)(b). 12 Fed. Reg. 7692-7693, 7700.

7704-7705. The distinction is made clear in Armed

Services Procurement Regulations of November 23.

1950 (32 CFR (1949 ed.) § 402.501). saying:

“Advance payments shall be deemed to be payments

made by the Government to a contractor in the form

of loans or advances prior to and in anticipation of

complete performance under a contract. Advance pay-

ments are to be distinguished from ‘partial payments’

and ‘progress payments’ and other payments made bhe-

cause of performance or part performance of a con-

tract.” [Emphasis supplied by Justice Whittaker. ]

Plaintiff makes no convincing showing either by legisla-

tive history or otherwise that Congress intended that. in the

determination of a corporation’s assets for the purpose of

the Excess Profits Tax Act hereii involved, such contract

partial payments should not be given the treatment the par-

ties clearly intended by the contract terms and as long inter-

preted by the courts. and that there was instead some other

purpose to be served based upon the broad economic and

financial effects of such payments. The contention that the

work-in-process inventory was an asset created by plaintiff

“regardless of the source of the money expended.” and that

“plaintiff's assets should be reflected in the full amount of

the investment in the performance of the contract * * *

until such time as sold” (Pitf.’s Br. [to the Commissioner].

pp. 18-19). assumes the very point in question. i.e.. the time

when the assets were “sold.” For certainly, plaintiff's “in-

vestulent” in the creation of the asset was reduced when it

became reimbursed therefor to the extent of the partial

payment.

In the Anderson Brothers Corporation case. supra, the

Tax Court. in addressing itself to the congressional intent in

enacting the Excess Profits Tax Act herein involved, could

find no purpose as would call for disregarding the effect of

partial payment clauses. On the other hand, the court held

that it would be “inequitable” and violative of the congr-s-

sional purpose “to permit the computation of excess profits

credits on duplicating assets” (34 T.C., at 204), and that

“the legislative purpose seems to us to preclude the recegni-

tion as an asset of items which tend to be merely du ‘ication

of other assets.” (34 T.C., at 205.)

Plaintiff contends that Congress, in enacting this act,

could not have intended to discriminate between contrac-

tors obtaining financing through advance payme=ts, guar-

anteed loans, or private loans, on the one hand, and partial

payments on the other hand, in that the former unquestion-

ably would have their assets increased by the amount of the

loan. However, this overlooks the basic fact that. in the

formula for the computation of the “average base period net

income” under section-446(b) (4) and (5) of the 1939

Coce, there must be deducted the interest paid or incurred

by the taxpayer during the base period (average base period

assets the industry rate of return—the interest paid dur-

ing the base period). Thus, those who operate under loans

would not necessarily be favored at all, for loans are, of

course, ordinarily interest bearing. Indeed, should partial

payments be considered as loans for the instant purpose,

the favoritism might well be in plaintiff's favor, because this

would be a peculiar type of non-interest bearing “loan” and

the application of the formula would cal! for a large in-

crease in the assets part of the formula without any interest

reduction whatsoever, whereas other contractors financing

their operations through true or conventional loans would

be subject to the interest deduction. The Tax Court in the

Anderson Brothers Corporation case noted that the adop-

tion of the taxpayer's contention “means, of course, the

elimination of the offset to excess profits credit * * * con-

sisting of interest, which is presumably intended to measure

the effect of borrowed capital on petitioner’s income.” 34

1. a2

The parties here. as did the parties in the Anderson

Brothers Corporation, case, supra, presented evidence of

accounting practice. However, as the Tax Court stated in

Anderson Brothers, the problem is not “primarily one of

accounting practice” (34 T.C.. at 203). And the Fifth Cir-

cuit. in affirming, similarly stated that “giving every proper

deference to the theoietical accounting arguments * * * it

would seem that even to posc the proposition that the ex-

penditure item continues to be property even after cash has

been received in full payment of the amount of the expendi-

* Of course. if, as plaintiff points out. plaintiff's industry engages

primarily in Government business and finances such business sub-

stanially through partial payments, there would be little. if any. dis-

crimination in plaintiff's favor as against other members of the indus-

try group.

Similarly, it may well be that the industry hax in a sense been

otherwise prejudiced under the act by the "onpayment of interest

on partial payments so that the benefit resulting from the lack of an

interest deduction in computing the average base period net inceme

would only be in essence somewhat of a compensating factor. Such

prejudice would come about as a result of the statutory formula for

calculating the industry rate of return. Under section 446(d)(1)(2)

such rate of return is determined by adding the interest paid by the

corporations in the industry during the prescribed base period to their

net income for such period. and then dividing such total by their

aggregate assets. Thus, the lower the interest payments by the indus-

try, the lower the industry’s rate of return. And correspondingly, the

lower the rate of return, the lower would be plaintiff's average base

period net income.

However. in their application to the situation of any individual!

industry .°2mber. these considerations would appear to border too

much on speculation. In any event they would be more appropriately

addressed to the Congress which could, of course, specifically legis-

late on the mattter. as it did. for instance. when it included, in section

439(g)(1). indebtedness evidenced by conditional sales contracts

within the definition of “borrowed capital.”

tures is to answer it.” (296 F. 2d, at 630.)*° As shown,

what is determinative is the proper interpretation of the con-

tract as to the effect and the legal consequences of partial

payments. True. insofar 23 such interpretation is dependent

upon the intent of the parties, and insofar as the accounting

practices that were contemporaneously adopted may throw

light upon such intent. such practices may well be relevant.

Piaintiff now concedes that this is the only pertinency the

accounting aspects have in this case. And in this connection,

plaintiff places special emphasis on the accounting proced-

ure relating to the submission of bills following delivery of

completed aircraft. Upon such delivery, the practice was for

plaintiff to submit a bill to the contracting officer for the

full unit contract price. Such officer then forwarded the bill

(together with the supporting documents) to the Air Force

Finance Officer, who then applied against the bill the

amount of the partial payments previously made. Plaintiff

concludes that this practice of billing for the full unit price

of the aircraft at the time of the delivery of the completed

aircraft evidences the fact that the parties intended that no

sale was made until such delivery was effected.

“Where a contractor's books are kept on the completed contract

basis of accounting. the contractor is permitted to wait until the con-

tract is fully completed before income is reported. Accordingiy, as

appeared in the Anderson Brothers Corporation case, it would be

proper for such a contractor for such purpose, “to accumulate its

expenditures under an asset item for bookkeeping purposes and then

go accumulate actual payments which are thereafter received as

partial payments under the contract in some sort of a reserve account

which does not offset the asset item on the books unul the contract

is finally completed and it has been determined that there has been a

profit or loss on the transaction.” (296 F. 2d, at 630). The court

went on io hold, however, that such a:counting practice for that

particular purpose would not be determ’aative of the question of

“what cash or property a taxpayer actually had on” a certain date

and that to apply it for such purpose would be “completely falla-

cious.” (id.)

Plaintiff infers too much from this billing procedure. As

a matter of mechanics. it seems plain that there would be

little difference between giving credit for the prior partial

payments as part of the Sill, and merely billing for the bal-

ance due, or, as was the adopted procedure, preparing the

bill in the full amount of the unit price and then applying

the partial payments against the billing. Either procedure

would appear to be consistent with the partial payments

being considered as either true contract payments or as

loans.

Equally unconvincing is plaintiff's further contention that

because the partial payments were measured by and restric-

ted to a percentage of plaintiff's expenditures. without any

allowance for profit. they therefore cannot be considered as

true sale payments since it would mean that plaintiff would

be indulging in the hardly likely operation of making cur-

rent sales at 2 loss. Since the payments are. by their very

nature and designation. only “partial” payments. the for-

muia applied to determine their amounts would hardly be of

substantial significance on the question of their true nature.

If the practices and mechanics adopted in connection with

the making of the partial payments is of significance. it

could equally be pointed out that the partial payments were

made pursuant to “bills” or “invoices” prepared and sub-

mitted by plaintiff—terminology customarily applied in the

business world to “sales.”

On this question of intent and how plaintiff regarded the

partial payments. of far greater significance is the fact that

plaintiff. prior to the 1950 act in question. on its public bal-

ance sheets as well as those submitted with its tax returns.

did regard partial payments as effecting equivalent sales of

work-in-process inventory. reducing such asset item by the

amounts of the payments. As was true in the Anderson case.

¢é

eset

it seems quite clear that plaintiff changed its “long-con-

tinued method of accounting” only when “it became advan-

age to do so for tax purposes.” (34 T.C., at 205.}"

' However, on the intent issuc, it is true, as hereinabove noted,

that, as distinguished from its balance sheets, plaintiff has consistently

treated partial payments in its internal accounts as advances of work-

ing capital and classified them as current liabilities. The testimony of

its expert accounting witness was to the effect that this was a per-

missible method. However, his testimony was that treating the partial

payments as offsets to the work-in-process inventory asset item would

also be proper.

The conclusion that accounting practices are not determinative of

the particular problem here in issue does not result from any lack of

accounting authority to support the legal conclusion here:nabove

arrived at. Plaintiff's former method of preparing its balarce sheets

were certified by independent accountants as-being “in accordance

with accepted principles of accounting” (finding 16(aj}. Practi-

cally all the other aircraft companies, both before ‘and after the pass-

age of the act, prenare their balance sheets on that basis. Also, the

American Institute of Accountants. “long a source of thoughtful

guidance to the accounting profession and of increasing impo: ‘ince

to lawyers” (Herwitz, Accounting for Long-Term Construction Con-

tracts: A Lawyer's Approach, 70 Harv. L. Rev. 449, 450 (1957)).

in its Accounting Research Bulletin No. 45, pertaining to “Long-term

Constructior-:ype Contracts.” provides, with respect to the two

accounting methods commonly followed by contractors, the “percent-

age of completion method” and the “completed contract method,”

that, as to the former, “current assets may include costs * * * not

yet billed” (par. 5) and as to the latter, only “an excess of accumu-

lated costs over related billings should be shown in the balance sheet

as a current asset” (par. 12). As — .erminology, i: suggests “that

the asset item be described as ‘costs of uncomple ‘ed contracts in

excess of related billings’ rather than as ‘inventory’ or ‘work in pro-

ae? 9" Goer. Fas:

Heritz’s rather strong criticism of this bulletin does not relate to

the problem :avolved in the instant case.

Plaintiff's contention that this bulletin is inapplicable in that it

refers only to construction contracts rather than the type of contract

herein involved seems unwarranted. The bulletin refers to “Construc-

tion-type Contracts,” and a long-term contract for the building of

airplanes would seem to fall in this category. The bulletin specifically

provides that it “would also be applicable in appropriate cases to the

manufacturing or building of special items on a contract basis in a

contractor’s own plant” (par. 1).

1G eo aR GRIEG GE ROE SOS BRAN 0

FINDINGS OF FACT

The court, having considered the evidence, the report of

Trial Commissioner Sau! Richard Gamer, and the briefs

and argument of counsel, makes findings of fact as follows:

i. At all times hereinafter mentioned, plaintiff has been

and is now a corporation organized and existing under the

laws of the State of Delaware and having its principal place

of business at Seattle, Washington. Plaintiff commenced

business on or about August 31, 1934.

2. On or about September 15, 1952, plaintiff filed with

the Collector of Internal Revenue at Tacoma, Washington,

its U.S. Corporation Income Tax Return for the calendar

year 1951, which return reported a total Federal income

tax for that year in the amount of $9,160,011.93 and a

total Federal excess profits tax for that year in the amount

of $2,294.280.88, together totaling $11,454,292.81. Plain-

tiff made the following payments to the Collector or Dis-

trict Director of Internzi Revenue, on or aboat the dates

indicated. with respect to its 1951 Federal income and ex-

cess profits tax:

Total Excess profits

payment tax included

“peso deg, Wi. ni, REE REET $4,445 ,000.00

RE Eee 4.445.000.00

wepesmumer $5, 1952............. 846,148.89

eo ge, ee 1,718,143.92

Total tax per return...... 11,454,292.81 $2.294,280.88

July 8, 1957—Deficiency per revenue ~

IGS INS fs 6 cs ss 6 184,405 11 178,783.47

' Yotal payments... ....... 11,638,697.92 2,473,064.3-

On June 2, 1959, the District Director refunded to piaintiff

$4,158.63 in principal amount of tax.

3. Plaintiff's principal business activity has been and is

now the manufacture of military and commercial aircraft.

During the years 1946 to 1949, inclusive, plaintiff’s princi-

pal military production programs, carried on under Govern-

ment contract, were the C-97 military cargo transport and

the B—50 bomber. Contract W33 (038) ac—19823 was a

contract undet which B—-50 bombers were procured, and

this contract, exclusive of the precise work to be performed

and the stated prices, was typical of the fixed price con-

tracts involved in the 1946-49 period.

4. (a) Contract 19823, entitled a “contract for sup-

plies,” called for 132 B—S5OD airplanes, spare parts and

data. By article 15(a), item 1. plaintiff agreed to furnish

and deliver such aircraft to the Government at a unit price

of $699,671.82 and total price of $92,356,680. The air-

craft were to be manufactured and supplied in strict ac-

cordance with a stated model specification. Deliveries of

completed aircraft were to be made in accordance with a

delivery schedule specified in the contract. The cor*ractor

was to be paid “upon the submission of properly certified

invoices or vouchers, the prices stipulated herein for articles

delivered and accepted or services rendered. less deductions,

if any, as herein provided.”

(b) Prior to delivery of the aircraft, the contractor was

responsible for all the articles and materials covered by the

contract. The contract provided for periodic inspection of

work in process, prior to delivery, but such inspection and

approval did not relieve the contractor from responsibility

for defects in materials and workmanship subsequent't’ dis-

covered prior to final accepiance. However, the contract

provided for final inspection and acceptance of compieted

aircraft after delivery, and provided that such acceptance

would be conclusive except as regards latent defect, frauc,

or such gross mistakes as amount to fraud.

contracting officer to make partial payments to the contrac-

tor. Said article provided as follows:

A Lana AE ESET RIA PRS Bhs

ARTICLE 46—Fartial Payments—Partial payments,

which are hereby defined as payments prior to delivery,

on work in progress for the Government under this

contract, may be made upon the following terms and

conditions:

(a) The Contracting Officer may, from time to

time, authorize partial payments to the Contractor

upon property acquired or produced by it for the per-

formance of this contract; Provided, that such partial

payments shall not exceed 90 per cenit of tiie cost to

the Contractor of the property upon which payment is

made, which cost shall be determined from evidence

submitted by the Contractor and which must be such

as is satisfactory to the Contracting Officer; Provided,

further, that in no event shall the tota) of unliquidated

partial payments (see (c) below) and of unliquidated

advance nayments, if any, made under this contract,

exceed 90 percent of the total contract price of sup-

plies still to be delivered.

(b) Upon the making of any partial payment under

this contract, title to all parts, materials, inventories,

work in process and non-durable tools theretofore ac-

quired or produced by the Contractor for the perform-

ance of this contract, and properly chargeable thereto

under sound accounting practice, shall forthwith vest

in the Government; and title to all like property there-

after acquired or produced by the Contractor for the

performance of this contract and properly chargeable

thereto as aforesaid shall vest in the Government fortk -

with upon said acquisition or production; Provided,

that nothing herein shall deprive the Contractor of any

further partial or final payments due or to become due

hereunder: or relieve the Contractor or the Govern-

ment of any of their respective rights or obligations

under this contract.

hereunder. there shall be deducted from the contract

price therefor a proportionate amount of the partial

payments theretofore made to the Contractor. under

the authority herein contained.

(d) It is recognized that property (including, with-

out limitation, completed supplies, spare parts, draw-

ings, information, partialiy completed supplies, work

in p‘ucess, materials, fabricated parts and other things

called for herein) title to which is or may hereafter be-

come vested in the Government pursuant to this

Article will from time to time be used by or be put in

the care. custody or possession of the Contractor in

connection with the ;-rformance of this contract. The

Contractor, either before or after receipt of notice of

termination at the option of the Government, may

acquire or dispose of property to which title is vested

in the Government under this Article, except that if

any major assembly is acquired or disposed of, the

Contractor shall obtain approval of the Contracting

Officer prior to the transfer or other disposition of

such assembly, provided, that, after receipt of notice of

termination, any such property that is a part of term-

ination inventory may be acquired or disposed of only

in accordaace with the provisions of the te:mination

article of this contract and applicable laws and regula-

tions. On or before the 10th of each month the Con-

tractor shall make a written repo t to the Contracting

Officer listing the property sold or disposed of pur-

suant to the foregoing sentence during the preceding

monih. If, in the opinion of the Contracting Officer,

90% of the cost of the property referred to in para-

graph (a) hereof, and not disposed of at the date of

such report is less than the unliquidated partial pay-

ments under this Article, he may notify the Contractor

in writing of the amount by which in his opinion, the

unliquidated partial payments exceed 90% cf the costs

of the property referred to in paragraph (a) which has

not been disposed of, and the Contractor shall there-

upon pay or credit the amount of such excess to the

Government, as the Contracting Officer shall direct.

Upon liquidation of all partial payments hereunder or

upon completion of deliveries called for by this con-

tract, title to all property (or the proceeds thereof)

which has not been delivered to and accepted by the

Government under this contract or which has not been

OO eS Sth te te a ae. ee

incorporated in supplies delivered to and accepted by

the Government under this contract and to which title

has vested in the Government under this Article shall

vest in the Contractor.

(e¢) The article of this contract captioned “Liability

for Government Property” shall be inapplicable to

property to which the Government shall have acquired

title solely by virtue of the provisions of this Article.

The provisions of this Article -hall not relieve the Con-

tractor from risk of loss or destruction of or damage to

property to which title vests in the Government under

the provisions hereof.

(f) If this contract (as heretofore or hereafter sup-

plemented or amended) contains a provision for Ad-

vance Payments, and in addition if at the time any

partial payment is to be made to the Contractor under

the provisions of this Partial Payments Article any un-

liquidated balance of advance payments is outstanding,

then notwithstanding any other provision of the Ad-

vance Payments Article of this contract the net amount,

after appropriate deduction for liquidation of the ad-

vance payment, of such partial payinent shal! Se de-

posited in the special bank account or accounts main-

tained as required by the provisions of the Advance

Payments Article, and shall thereafter be withdrawn

only pursuant to such provisions.

(d) The contract was terminable at the convenience of

the Government. The contract provided that upon such

termination, the contractor s: Guld “transfer title and de-

liver to the Government” al! parts, work in process, com--

pleted work, supplies and other materials produced or ac-

quired in the performance of the contract, and take such

other action as the contracting officer might direct for the

preservation or disposition of such property.

®. During the years 1946 to 1949, inclusive, the plaintiff

incurred costs and expended money in the performance of

Contract 19823 and similar fixed price contracts, such ex-

penditures being made for labor, materials and overhead

used and consumed in the manufacturing operation or in-

corporated into the end product contracted for. The costs

chargeable to the performance of a typical fixed price con-

tract include (1) costs of engineering and developmental

labor expended in designing and developing the end pro-

duct, preparing and interpreting engineering documents for

use by the manufacturing department, and testing parts and

components through wind tunnel operations and flight tests;

(2) tooling costs which include the cost of labor and ma-

terials expended in the design and coordination of tooling

and the production of such tools as jigs, fixtures, tools and

dies used in the manufacture of the end product; and (3)

production costs which include costs of labor and materials

expended in the fabrication of detail parts end minor and

major assemblies and the assembly thereof into the com-

pleted aircraft or other article. In addition, each of the

above categories of labor are charged with a proportionate

share of indirect overhead costs. These costs are those which

are not charged directly to work in progress as they are in-

curred. They include administrative salaries and wages and

related office expenses, all costs of owning, maintaining

and operating a manufacturing plant, the purchasing and

storing ard handling of all materials necessary to fulfill the

contractual requirements, as well as the cost of necessary

accounting, personnel management, quality control, con-

tract administration and other services necessary to carry-

ing out the normal functions of the business.

6. Because of the fact that airplane production contracts

are by their very nature long-term contracts, and because

each aircraft unit is in process of manufacture “ra “1bstan-

tial period prior to delivery—in excess of a year in the case

of C-97 aircraft—substantial amounts of working capital

are required to perform such production. The princip?!

sources of working capital used by plaintiff during the

1946-49 period were partial payments, sometimes also

called progress payments, and bank loans, with partial pay-

ments being by far the larger amount. The reason wliy

partial payments were used as a source of working capital

to a considerably greater extent than bank loans is that un-

like bank loans, the Government does not charge interest

on partial payments. In addition, interest paid on bank

loans is not an allowable item of cost under military con-

tracts, so that providing the required working capital

through bank loans would involve a substantial item of cost

to the contractor.

The partial payment device was one of the plans in use

duriig the 1945-1950 period to provide necessary funds

for contractors i their military work. It was quite usual for

the Air Force to pay partial payments to major aircraft

manufacturers engaged in the performance of fixed price

contracts, and for such payments to provide the greater por-

tion of the funds required to perform the contracts. Partial

payments were made because the programs were of such

magnitude that not many contractors had the financial re-

sources to operate without financial assistance.

7. (a) Pursuant to the partial payment provisions of its

fixed price Government contracts, the plaintiff, from time

to time during each of the years 1946 to 1949, inclusive,

received partial payments from the Government. The plain-

tiff, having incurred costs in the performance of such con-

tracts, was entitled to request, and the contracting officer

could authorize, a partial payment within the percentage

limitation set forth in the contract. The standard procedure

of billing for partial payments was for the plaintiff to sub-

mit a partial payment invoice periodically to the contract-

ing officer, an Air Force representative stationed at the

plaintiff's plant. The contracting officer routed the invoice

to the office of the Air Force auditor with an inquiry

whether the plaintiff's books of account reflected the costs

which were stated in the invoice as having been incurred.

Having satisfied himself that the books did reflect such

costs, the Air Force auditor would so advise the contracting

officer, the contracting officer would approve the partial

pavment invoice, and the invoice would then be forwarded

to the Army Finance Officer for payment.

(b) Each invoice submitted for a partial payment bore

the following certificate signed by a supervisor in plaintiff's

Accounting, Records, and Billing Department:

I certify that the above bill is correct and just; tha.

payment therefor has not been received; that all statu-

ory requirements as to American production and labor

standards, and all conditions of purchase applicable to

the transaction have been complied with, and that

State or local sales taxes are not included in the

amounts billed.

8. During the 1946 to 1949 period, there was an Air

Force Plant Representative stationed at the plaintiff’s plant.

The office of the Air Force Plant Representative was di-

vided into five primary functions or departments, one of

which was the contracting officer. The other four were pro-

duction. quality control, property accounting, and flight

test. The quaiity contro! division maintained surveillance

over plaintiffs quality control organization to ensure that

the Air Force obtained products conforming to the specifi-

cations. and its inspection of the work in process went on at

all times. However, such inspection and approval was not

made a condition precedent to the approval of partia! pay-

ment biilings, and aeither the quality control division nor

any other division of the Air Force Plant Representative’s

office, other than the contracting officer, participated in or

had anything to do with the approval of partial payment

invoices.

9. Plaintiff's fixed price contracts provided that the

amount of pertial payments which the contracting officer

SATE GEL EE EEA REL AEC Bide

could authorize was limited to 90 percent of the cost to the

contractor of the property upon which the payment was

riade. Plaintiff's books of account accumulated costs on the

basis of the total contract, and not by aircraft units, and did

not permit a segregation of actuai costs by units. Accord-

ingly, there was no relationship between the amount of a

partial payment invoice and the costs incurred in the pro-

duction of any particular aircraft unit. Partial payment in-

voices were based on costs incurred on a particular contract

and could be verified from plaintiff's books.

10. The tangible property included in the work-in-pro-

cess inventories, the title to which was in the Government

pursuant to the provisions of the partial payments clause of

fixed price Government contracts, was not physically segre-

gated from similar property in the plaintiff's possession in

which the Goverument had no interest. A certain portion of

such property was stamped wiih the model designation of

the aircraft type for which it was produced, but such prop-

erty was not otherwise marked or secteemaas identified to

indicate the Government’s title.

11. During the years 1946 to 1949, inclusive, and prior

and subsequent thereto, the plaintiff regularly maintained

fire and extended coverage insurance, with loss payable to

the plaintiff, covering all tangible property included in

work-in-process inventories, the title to which was in the

Government pursuant to the provisions of the partial pay-

ments clause of its fixed price Government contracts. The

amount of such insurance was not less than the total

amount accumulated in the work-in-process inventory, with-

out reduction for any partial payments received with respect

thereto.

12. During the years 1946 to 1949, inclusive, the tan-

gible property included in work-in-process inventories, the

title to which was in the Government pursuant to the pro-

visions of the partial payments clause of fixed price Govern-

ment contracts, was not subjected to ad valorem personal

property taxes by any state in which such property was

physically located.

13. Upon completion of manufacture of each airplane,

the plaintiff conducted a flight test program. Thereafter, the

Air Force quality control and flight test divisions inspected

and tested the airplane, and based on these tests, certified

that contract specifications had been met, that the airplane

had been flown, and that it operated satisfactorily.

Following the completion by the plaintiff of each aircraft

and its delivery to and acceptance by the Air Force, the

piaintifr billed the Air Force for the contract unit price. For

example, the contract unit price for each B—50 covered by

Contract 19823 was $699,671.82, and the plaintiff's billing

on delivery was in the same amount. The certificates fur-

nished by the plaintiff and by the quality control and flight

test divisions of the Air Force Plant Representative’s office

accompanied the invoice to the Finance Officer. It was on

the basis oi those certifications that the Finance Office paid

the invoice.

14. Plaintiff's invoice for the full contract unit price of

the delivered aircraft was paid partly by check or voucher,

and partly by the application or Jiquidation of a portion of

the partial payments previously received from the Govern-

ment unger the particular contract. The Government Fi-

nance Officer, upon receipt of the billing, determined the

percentage relationship between the amount of unliquidated

partial payments theretofore paid to the plaintiff and the

contract price of the work remaining to be performed by

the plaintiff, including the contract price of the aircraft for

which the billing was made. This percentage was then ap-

plied by the Firance Officer to the amount of the billing to

determine the amount of the partial payments to be liqui-

eta ee — oe a

ET: 2 SRD G A NUR Ra i a nc cee

dated by application against the billing. The plaintiff re-

ceived from the Finance Officer, in due course ‘ollowing the

submission of the billing, a Government check or voucher

for a portion of the amount billed, and an attached leter of

transmittal setting forth the Finance Officer’s computation

of the amount of partial payments to be applied against the

billing.

For example, on delivery during December 1949 of five

B—SOD’s, the plaintiff sent five invoices to the Finance Offi-

cer, each in the amount of $699,671.82, and totaling

$3.198,359.10. The Finance Officer determined that the

amount of unliquidated partial payments previcus.y paid to

plaintiff was 29.6776 percent of the contract price of the

work remaining to be performed under the contract. includ-

ing the work covered by the five invoices. Therefore.

29.6776 percent of $3,498,359.10. or $1.038.229.02. was

determined to be the amount of partial payments to be

liquidated or applied against the total billing of $3,498.-

359.10. Accordingly, plaintiff's billings totaling $3,498.-

359.10 were paid to the extent of $1.038,229.02 by appli-

cation of partial payments previously paid. and the balance

by Government check or voucher.

15. The plaintiff's accounting practice, consistently fol-

lowed during the years 1946 to 1949 and prior and subse-

quent thereto, was to record in its books of accouni all par-

tial payments received in an account which plaintiff's

General Account Classification classified as a current lia-

bility account. This was an acceptable accounting classifica-

tion account of such paymenis. although there is no

generally accepted accounting practice or principle with

respect thereto. All costs chargeabie to the performance of

a contract were accumulated in a work-in-process inventory

account until the aircraft or other article contracted for was

delivered. The plaintiff's accounting practice was to record

a sale, cost of sale and profit or loss at the time of delivery

of each completed aircraft. The accounting procedures con-

sistently followed by plaintiff with respect to the billing,

payment and liquidation of partial payments, and with res-

pect to costs, sales and profit: under fixed price contracts,

were as follows:

(a) Upon the incurring of custs or spending of inoney

chargeable to the performance of such a contract, the plain-

uff debited a work-in-process inventory account and

credited the cash or account payable account.

(b) Upon the billing of a partial payment, the plaintiff

by journal entry debited accounis receivable with the

amount billed, and credited the partial payments account

with the same amount. These entries were in due course

posted in the piaintiff’s General Ledger.

Air Force, the plaintiff debited to the cash account the

amount received, and made an offsetting credit to the

accounts receivable account. No entry of any kind was

made in the partial payment account by reason of the pay-

ment by the Air Force of the partial payment billing.

(d) The accounting entries made following delivery of

an aircraft and the billing of the Air Force for the contract

price thereof were, first, a debit to accounts receivable for

the amount so billed, and a corresponding credit to the sales

account. The plaintiff determined the cost chargeable to

the production of the aircraft by estimating the total cost

of the whole contract and dividing the total estimated cost

by the number of aircraft covered by the contract; and the

resuiiing amount was removed from the accumulated costs

carried as an asset in the work-in-process inventory account,

and was transferred to the cost of saies account by a credit

to work-in-process and a debit to cost of sales. The sales

and cest of sales accounts were then closed into a profit and

los’ summary. and the difference between the two, repre-

senting the plaintiff's profit or loss on the sale of the wr-

craft, was closed into net worth.

(e) Following the submissicn of its billing for the con-

tract unit price of a delivered aircraft, the plaintiff received

a Government check or voucher for a portion of the billing,

and a letter of transmittal reflecting the application or liqui-

dation of partial payments in an amount corresLonding to

the balance of such billing. The account receivable set up

when the billing was made was credited to reflect the receipt

ot cash and the application against such account receivable

of the liquidation of certain amounts of partial payments.

The amount of pertial payments recorded in the partial pay-

ments account was reduced or debited by the amourt so ap-

plied and liquidated.

(i) A period of time from one day to several weeks

elapsed between the submission or a bill for a partial pay-

ment and payment thereof by the Government. As a result,

at various times there were included in the accuunts re-

ccivable on plaintiff's books amounts representing progress

payments on fixed price Government contracts for which

bills had been submitted but payment thereof had not yet

been made. Three specific instances in which such amounts

were included in plaintiff's accounts receivable as of De-

cember 31, 1946, 1947, 1948 and 1949, are as follows:

(1) On December 41, 1948, accounts receivable

was debited and the progress payment account for

Contract 13013 was credited with $60,001.48. Plain-

tiff received from the Government a payment in this

amount on January 12, 1949, on whic’ date cash was

debited and accounts receivable creditea in this

amount.

(2) On December 31, 1948, accounts receivable

was debited and the progress payment account for

Contract 18821 was credited with $490.77 1.66. Plain-

tiff received trom the Government a payment in this

amount on January 19, 1949, on which date cash was

debited and accounts receivable credited in this

amount.

(3) On December 31, 1949, accounts receivable

was debited and the progress payment account for

Contract 18821 was credited with $125,000.85. Plain-

tiff received from the Government a payment of

$122,850.31 on January 3, 1950, on which date cash

was debited and accounts receivable credited in this

amount. The ciffererice of $2,150.54 represents inter-

est due the Government on advance payments. On

January 3, 1950, an account for interest expense was

debited and accounts receivable was credited in the

amount of $2,150.54.

There may have been additional amounts included in ac-

counts receivable as of December 31, 1946, 1947, 1948,

a..d 1949, on account of progress payments on fixed price

Government contracts for which bills had been submitted

but payment thereof had not yet been made. However,

certain records of the plaintiff necessary to determine def-

initely whether there were or were not any such additional

amounts were destroyed prior to an attempted determina-

tion of this matter for the purposes of this case.

i. (a) On the balance sheets included in plaintiff’s an-

nual report to stockholders for the calendar years 1936

through 1942 and 1946 through 1951, partial payments

were shown on the asset side as offset to inventories or ac-

cumulated charges on contracts with the United States. No

progress payments were shown on the balanc. sheets in-

cluded in plaintiff's annual report to stockholders for 1943

through 1945. Each report included a certificate by inde-

pendent certified public accountants to the effect that the

balance sheet fairly presented plaintiff’s financial position

“in accordance with accepted principles of accounting.”

(b) Boeing Aircraft Company, a wholly owned subsid-

iary of plaintiff, was merged into plaintiff as of December

ALS Aa ata NOS Ro taL oe

31, 1947. On the balance sheets included in the Federal

income and excess profits tax returns filed by Boeing Air-

craft Company ior the calendar years 1938 through 1943

and 1946, partial payments were shown on the asset side as

an offset to inventories. No partial payments were shown on

the balance sheets included in the returns filed by Boeing

Aircraft Company for 1944 and 1945. Boeing Aircraft

Company filed no separate return for 1947, plaintiff having

filed a consolidated return for that year.

come and excess profits tax returns filed by plaintiff for the

calendar years 1938 through 1941 and 1947 through 1949,

partia! payments were shown on the asset side as an offset

to inventories or accumulated charges on contracts with the

United States. No partial payments were shown on the bal-

ance sheets included in plaintiff's returns for 1942 through

1946.

(d) On the balance sheets included in the Federal in-

come and excess profits tax returns filed by plaintiff for the

calendar years 1950 and 1951, and in all subsequent re-

turns, partial payments were shown under current liabilities,

thus conforming plaintiff's tax return balance sheets to its

internal books of account.

17. (a) Plaintiff's Federal income tax return for 1949

was filed on or about May 15, 1950; its return for 1950

was filed on or about November 13, 1951, after passage on

January 3, 1951, of the Excess Profits Tax Act of 1950;

and its return for 1951 was filed on or about September

15, 1952. On its return for 1950, plaintiff applied for bene-

fits of section 446 of the Internal Revenue Code of 1939

and computed its average base period net income urder

section 446 in the same manner as it did on its return for

1951. Gn March 8, 1957, plaintiff filed a claim for refund

for 1950 based on the ground that plaintiff's 1950 excess

profits tax should be computed by reference to total assets

at the end of the years 1946 to 1949, inclusive, without re-

duction for progress payments received on fixed price Gov-

ernment contracts. No statutory Notice of Disallowance of

said claim for 1950 has been issued.

(b) On the balance sheet included in plaintiff's return

for 1949, total assets for the end of the year is shown to be

$112,793,771.27. On the balance sheet included in plain-

“tiffs return for 1950, total assets for the beginning of the

year is shown to be $156,504,184.51.

18. At the end of each of the years 1946 to 1949, inclu-

sive, the plaintiff's books of account reflected the full

amoun¢ of costs accumr’ated ‘1 the production of articles

whicn had not beer delivered, and the amount of unliqui-

dated partial p2yments received or for which bills had been

rendered, 2; described in finding 15(f), with respect there-

to. Plaintiff’s total accumulated costs on fixed price Gov-

ernment contracts, as of December 31. 1946, were

$23.216,400; as of December 31, 1947. were $52,477,401;

as of December 31, 1948, were $42,844,214: and as of De-

cember 31, 1949, were $53,540,263. The unliquidated par-

tial payments received by plaintiff or for which bills had

been rendered as described in said finding 15(f). as of De-

cember 31, 1946, were $14,923,922.32; as of December

31, 1947, were $40,830,833.12; as of December 31, 1948,

were $28 896,208.20: and as of December 31, 1949, were

$43.710,413.24.

19. For purposes of determining its excess profits tax

liability for the year 1951, plaintiff was a member of a de-

pressed industry subgroup as defined ir section 446 of the

Internai Revenue Code of 1939. In its U.S. Corporation

Income Tax reiurn for the year 1951, plaintiff applied for

the benefits of section 446 as required by section 447 of

said code, and computed its average base period net income

I OE I CEE RS We 2 oe

under said section 446. Such computation required a de-

termination { the amount of total assets held by plaintiff

in good faith for the purposes of its business as of the last

day of each of the taxable years ended December 31, 1946,

1947, 1948 and 1949, in accord with sections 442 and 446

of the Internal Revenue Code of 1939. In plaintiff's 1951

tax return, the amount of its total assets so held (other than

inadmissible assets and loans to members of a controlled

group) was stated to be, as of December 31, 1946, $77.-

650,707.91; as of December 31, 1947, $82.630.335.98: as

of December 31, 1948, $128,166.688.57: and as of Decem-

ber 31, 1949, $116,833,763.48.

20. In plaintiff's tax return for the year 1951, the

amounts stated therein as constituting plaintiff's total assets

for the last day of each of the years 1946 to 1949, inclusive.

were in part computed by substracting from plaintiff's total

accumulated charges on fixed price Government contracts

the amount of the unliquidated partial payments received

by plaintiff from the Government, or for which bills had

been rendered as described ia finding 15(f). all in the

amounts set forth in finding 18. If in the determination of

plaintiff's total assets under section 446 of the Internal

Revenue Code of 1939 the total amount of accumulated

charges on fixed price Government coniracts are properly

includible therein without reduction on account of partial

payments received from the Government, or for which bills

had been rendered as described in said finding 15(f). plain-

tiff’s total assets as of December 31, 1946, were $90.430.-

108.63: as of December 31, 1947, were $121,791.207.75:

as of December 31, 1948, were $154.894,857.28: and as of

December 31, 1949, were $158.695,708.09.

21. All assets held by the plaintiff at any time materia!

to this action were held by it in good faith for purposes of

its business.

22. On March 10, 1955, plaintiff duly filed with the

District Director of Internal Revenue at Tacoma, Washing-

ton, a claim for refund of income and excess profits taxes

for the calendar year 1951 in the amount of $1,828,775 or

such greater amount as might be legally refundable. One of

the reasons asserted for the allowance of said claim and

upon which said claim was based was therein stated to be

that its 1951 excess profits tax should be computed by ref-

erence to total assets at the end of the years 1946 to 1949,

inclusive, without reduction for partial payments received

on fixed price Government contracts. By letter dated June

28, 1957, plaintiff was given notice by registered mail that

said claim for refund was disallowed in full. The date of

mai:ing said letter was less than 2 years prior to the filing of

the petition.

CONCLUSION OF LAW

Upon the foregoing findings of fact. which are made a

part of the judgment herein, the court concludes as a mat-

ter of law that the plaintiff is not entitled to resover, and

the petition is therefore dismissed.

APPENDIX B

Internal Revenue Code of 1939:

SEC. 442. [as added by Sec. 101, Excess Profits Tax Act

of 1950, c. 1199, 64 Stat. 1137, and as amended by

Sec. 510, Revenue Act of 1951, c. 521, 65 Stat. 452.]

AVERAGE BaSE PERIOD NET INCOME—ABNORMALI-

TIES DURING BASE PERIOD.

(f) Total Assets—For the purposes of this section,

the taxpayer’s total assets for any day shall be deter-

mined as of the end of such day and shall be an amount

equal to the excess of—

(1) the sum of the cash and the property (other

than cash, inadmissible assets, and loans to mem-

bers of a controlled group as defined in section

235(f)(4)) held by the taxpayer in good faith

for the purposes of the business, over

(2) the amount of any indebtedness (other than

borrowed capital as defined in section 439(b)(1))

to a member of a controlled group (as defined in

section 435(g) (6)) which includes the taxpayer.

Such property shall be included in an amount equa! to

its adjusted basis for determining gain upon sale or

exchange, determined under the rules provided in section

441.

(26 U.S.C. 1952 ed., Sec. 442.)

SEC. 446. [as added by Sec. 101, Excess Profits Tax Act

of 1950, supra] AVERAGE BASE PERiOD NET INCOME-

DEPRESSED INDUSTRY SUBGROUPS.

(a) In General—If a taxpayer which commenced

business on or before the first day of its base period is

a member of a depressed industry subgroup, as defined

in subsection (c), its average base period net income

wiser EN Ur iaed g aR eL

determined under this section shall be the amount com-

puted under subsection (0).

(b) Average Base Period Net Income.-—The average

base period net income determined under this section

shall be computed as follows:

(1) By determining the amount of the taxpay-

er’s total assets for the last day of each of its tax-

able years ending after the first day of its base

period and prior to the first day of its first taxable

year under this subchapter.

(2) By computing the average of the amounts

ascertained under paragraph (1).

(3) By multiplying the amount ascertained un-

der paragraph (2) by the adjusted rate of return,

proclaimed by the Secretary under subsection (e),

for the taxpayer’s industry subgroup.

(4) By determining the aggregate amount of

interest paid or incurred by the taxpayer for all

taxable years ending after the first day of its base

period and prior to the first day of its first taxable

year under this subchapter, dividing such aggregate

by the total number of months in such years and

mu, “lying the quotient by 12.

(5) By subtracting the amount ascertained un-

der paragraph (4) from the amount ascertained

under paragraph (3).

ae * * *

(26 U.S.C. 1952 ed., Sec. 446.)

Treasury Regulations 130 (1939 Code).

Sec. 40.442-3 [as amended by T.D. 5973, 1953-1 Cum.

Bull. 321, 337]. Computation of average base period

net income.—

Hc ok *

(d) De;initions—For the purpose of section 442—

(1) The term “total assets” for any day means the

excess, determined as of the end of such day, of—

(i) the sum of the cash and other property

(other than inadmissible assets, as defined in sec-

tion 440(a)(1), and other than loans to members

of a controlled group, as defined in section 435 (f)

(4) held b; the taxpayer in good faith for purposes

of the business, over

(ii) the amount of any indebtedness (other than

borrowed capital, as defined in section 439 (b)

(1)) to a member of a controlled group, as de-

fined in section 435(g2)(6), which includes the

taxpayer. Property shall be included in an amount

equal to its adjusted basis for determining gain

upon sale or exchange * * *.

SEC. 40.446-3. Computation.

(a) Average base period net income.—The compu-

tation of the average base period net income under

section 446(b) is as follows:

(1) The amount of the taxpayer’s total assets

for the last day of each taxable year ending after

the first day of its base period and prior to July 1,

1950, is determined under section 442(f) and un-

der section 40.442-3(d)(1).

% 8 3k 7K

So Le Loe

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.