*1900 Held that a so-called supplemental agreement dated August 15, 1919, constituted a new contract between the parties and that income received in 1920 and 1921 pursuant to its provisions was not derived from a Government contract made between April 6, 1917, and November 11, 1918, both dates inclusive, and hence was not taxable under the provisions of section 301(c) of the Revenue Act of 1918 and section 301(b) of the Revenue Act of 1921. Goss Printing Press Co.,11 B.T.A. 365">11 B.T.A. 365.
*261 This proceeding was brought to redetermine the alleged deficiencies in income and profits taxes of the petitioner for the years 1920 and 1921, amounting to $3,263.22 and $162,659.17, respectively. The respondent found that for the year 1920 there was an overassessment amounting to $103,700.87, but the petitioner contends that the respondent's action in effect resulted in his determination of the above deficiency.
The questions at issue are as follows:
(1) Whether or not the net income of the petitioner*1901 arising in 1920 and 1921 from payments made to it by the United States Shipping Board Emergency Fleet Corporation under the provisions of an agreement dated August 15, 1919, should be taxed under the provisions of section 301(c) of the Revenue Act of 1918 and section 301(b) of the Revenue Act of 1921 as income derived from a Government contract made between April 26, 1917, and November 11, 1918.
(2) Whether or not the Board has jurisdiction to redetermine the assessment against the petitioner for the year 1920.
(3) Whether or not the respondent used proper comparatives in his calculation of the petitioner's taxes under the special assessment provisions of the statute.
With the approval of the Board the consideration in the third issue was deferred to a subsequent hearing.
FINDINGS OF FACT.
The facts as stipulated are substantially as follows:
The petitioner, Oscar Daniels Company, is a domestic corporation duly incorporated under the laws of the State of New York, with its principal office at 233 Broadway, New York City, New York.
The petitioner filed its returns for the calendar years 1920 and 1921 with the Collector of Internal Revenue for the Second District*1902 of New York at the Custom House, New York City.
The deficiency letter dated November 8, 1927, notified the petitioner as follows:
IT:FAR:SM-60D
FMS-C-31656
D-31657
OSCAR DANIELS COMPANY,
233 Broadway, New York, New York.
SIRS: An audit of your income and profits tax returns for the calendar years 1920, 1921 and 1922 has resulted in the determination of a deficiency in tax of *262 $162,659.17 for the year 1921 and for the years 1920 and 1922 overassessments aggregating $114,564.28, as shown in the attached statement. * * *
The portion of the overassessment assignable to the year 1920 was $103,700.87.
The deficiency letter was mailed to the petitioner on November 8, 1927, and within sixty days thereafter the petitioner filed its petition with the Board of Tax Appeals.
On or about October 30, 1917, the petitioner entered into a contract with the United States Shipping Board Emergency Fleet Corporation (hereinafter referred to as the Fleet Corporation), covering the construction of 10 steel steam vessels of 9,500 tons dead-weight capacity each for the lump-sum price of $1,539,000 each. The contract price was to be paid in installments as specified in*1903 the agreement. If the actual dead-weight tonnage of the completed vessels was less than the stipulated 9,500 tons, a deduction in the purchase price was to be made at the rate of $162 per ton. The Fleet Corporation had the right to make reasonable alterations, omissions, additions, or substitutions not materially affecting the design of the vessel. If by reason of such changes the cost of construction should be increased or decreased, the sum to be paid by the Fleet Corporation to the petitioner should be increased or decreased accordingly. If the Fleet Corporation should restrict the hours of labor or require the payment of extra compensation for overtime work the increased cost of construction should be paid by a corresponding increase in the purchase price. A schedule of deliveries was established with a premium or bonus of $300 a day for advance delivery and a penalty of $300 a day for delay in delivery. The total amount of premium or penalty should in no case exceed $15,000 for each vessel. The Fleet Corporation was permitted to supply certain scheduled material and equipment and receive appropriate credits therefor. An arbitration board was provided for in case of possible*1904 dispute. The contract contained the usual provisions as to bonds and insurance. A cancellation clause was operative if the work did not progress to the satisfaction of the Fleet Corporation. Partial payments were to be made at the various stages of construction set forth in the contract.
Thereafter the petitioner duly began and proceeded with the construction of said vessels and was proceeding with the construction of said vessels at all times up to and including April 17, 1919, and up to and including August 15, 1919.
On or about April 17, 1919, the petitioner and the Fleet Corporation entered into an agreement wherein and whereby Foster boilers were substituted for Badenhausen boilers in said vessels, with appropriate adjustments in price.
*263 From time to time, during the period between October 30, 1917, and June 6, 1919, the Fleet Corporation directed changes and modifications in the work to be done by the petitioner and increases to be made in the rate of wages to be paid for work done in the construction of said vessels.
Under date of May 12, 1919, the Fleet Corporation, by Edward S. Hurley, its president, sent a circular letter to the president of the*1905 petitioner, similar to that sent to the heads of other concerns building vessels for the Fleet Corporation, which letter was as follows:
MAY 12, 1919.
OSCAR DANIELS,
President, Oscar Daniels Company,Woolworth Bldg., New York City.
DEAR MR. DANIELS: The present appropriations for shipbuilding will be used up by July 15. If our shipbuilding program is to be carried out Congress will have to appropriate approximately $700,000,000 before that date. It is possible that, owing to the terms of some of our contracts, this appropriation may prove insufficient, and additional funds may have to be asked for later on. For these reasons it is important that we all visualize the situation as accurately as possible at once.
You are building a number of ships for the Emergency Fleet Corporation, contracts for which were placed during the war. It was necessary for you to enter into these contracts with caution and due consideration for your company and your employees as regards the price and terms under which you were to build these ships. We recognize that, owing to the uncertainty of the industrial situation, it was absolutely necessary for you to have every protection.
*1906 In recognition of the uncertainty of the shipbuilders' position during the war the Board of Trustees of the Emergency Fleet Corporation, at the instances of the Shipbuilder, agreed to numerous revisions of contracts and increases in the prices at which the shipbuilders had agreed to build ships. These revisions and increases involved the additional outlay of many millions of dollars. The Government also furnished much of the working capital with which the shipbuilding industry was run during the war. These things were done by the Government because the best results could be achieved by labor and shipbuilders only if they were enabled to operate free of unnecessary restrictions which might cause delay in production, and in order to insure that the shipbuilders would have absolute protection against loss, and also to guarantee them a fair profit.
Six months have now elapsed since the signing of the Armistice, and industrial conditions are returning to normal. Therefore we feel that the contracts you were awarded during the war should be revised in adaptation to the conditions under which the work will be done. In all cases where keels have not been laid cost-plus-fee contracts*1907 should be placed upon the lump-sum basis, and all contracts whether cost-plus-fee or lump-sum, should be revised to meet present conditions.
When this has been done we shall be able to go before Congress and state definitely what the ships we wish Congress to permit us to build are going to cost. There can be little doubt that the prompt presentation of accurate and convincing data on this subject will be influential in determining whether *264 or not Congress will make appropriations sufficiently large to carry out our program of building a fleet adequate to meet the peace-time needs of the nation.
Of course you will agree that we should not go before Congress and ask for appropriations to build ships without knowing what they are going to cost. We know you will appreciate the importance of the above request, and we shall welcome any suggestions you have to offer which will be helpful towards giving us a revised flat price, in order that the Board of Trustees can present to Congress definite figures which unquestionably will have more effect upon the size of the appropriation Congress will make to finish the program than any other data which could be submitted.
*1908 Yours very truly,
(Signed) EDWARD N. HURLEY,
President.
Thereafter and on or about June 6, 1919, the petitioner replied to said letter as follows:
WOOLWORTH BUILDING,
New York City, June 6, 1919.
UNITED STATES SHIPPING BOARD, EMERGENCY FLEET CORPORATION,
140 North Broad Street,
Philadelphia, Pa.
GENTLEMEN: We have transmitted under separate cover, a per ton estimate of the cost to the Shipping Board of the 9500 ton ships which we are building at Tampa, Florida, under our Contract #97. This estimate shows the following:
| Original Contract Price per ton | $162.00 |
| Additional cost per ton above contract price due to wage | |
| increase, additions and changes | 41.55 |
| TOTAL COST TO SHIPPING BOARD | $203.55 |
Your auditor at Tampa, Florida, has gone over our books and this estimate very carefully, and has checked and approved the same as to the accuracy of this cost.
While we can not effect any saving on the materials entering into the construction of our ships as we have contracted for everything necessary, and while we thoroughly believe that wages will not decrease, but, if anything will increase, we do know that our shipyard is becoming*1909 more efficient every month and that we will do our remaining work more economically than the portion of the work done during the war.
We, therefore, beg to make the Shipping Board the following proposition:
1. We will accept a cancellation of our present contract and take a new contract for the construction of the ten (10) ships which we are building and reduce the price per ton to a flat price of $193.00 per D.W.T. based on 9500 tons per ship.
2. The new contract to contain proposition giving our company reasonable time to complete these ships and with no penalty exacted under the old contract.
3. This price of $193.00 per D.W.T. will include all extra wages and maintenance of wages as awarded under the Macy Board Award and will also include all extra work which has been ordered up to June 1, 1919, and will further include the payment to the Shipping Board of all material actually furnished by the Shipping Board under Schedule "C" at the Schedule "C" prices.
*265 4. This proposition as outlined above, will mean a saving to the Emergency Fleet Corporation of over $1,000,000.00 and we will keep the same open to acceptance for 30 days from date of this letter.
*1910 5. If the above proposition is accepted by the Shipping Board, we will not ask or expect to receive guarantees of any kind as to either labor or material.
We believe that this arrangement will be beneficial both to ourselves and to the Emergency Fleet Corporation, as we now have opportunities to take further contracts.
Yours very truly,
OSCAR DANIELS COMPANY,
By (Signed) DAVID E. BAXTER
Vice-President.
Said letter was duly received by the Fleet Corporation and thereafter and on or about June 26, 1919, the Fleet Corporation wrote the petitioner as follows:
UNITED STATES SHIPPING BOARD
EMERGENCY FLEET CORPORATION
PHILADELPHIA, PA., June 26, 1919.
OSCAR DANIELS COMPANY,
Woolworth Building,
New York City.
DEAR SIRS:
REVISION OF CONTRACT #97
1. Your proposition of June 6th to contract the ten (10) ships now building under Contract 97 at the price of $193.00 per D.W.T., this price to include cost of wage increases and extra work ordered up to June 1, 1919, and payment to the Emergency Fleet Corp., for all material actually furnished by the Corporation under Schedule "C" at Schedule "C" prices, is accepted in substance, the Emergency Fleet*1911 Corporation agreeing to a revision of Contract 97 in the usual manner, i.e., by adding a supplement to the present contract which will contain provisions covering the new price per D.W.T., and granting you a reasonable time to complete the vessels with no penalty imposed for delay in delivery.
2. Please advise us whether you desire a supplemental agreement to Contract 97, covering the revisions noted above, to be drawn up by our Legal Division for your approval. It it also requested that we be furnished with the proposed delivery dates which you wish to have incorporated in the new supplement.
Very truly yours,
(Signed) J. C. ACKERSON,
Vice-President.
Thereafter and on or about July 3, 1919, the petitioner replied to said letter as follows:
WOOLWORTH BUILDING,
New York City, July 3, 1919.
UNITED STATES SHIPPING BOARD, EMERGENCY FLEET CORPORATION,
140 North Broad Street,
Philadelphia, Pa.
ATTENTION: Mr. J. C. ACKERSON, VICE-PRESIDENT, REVISION OF CONTRACT No. 97.
GENTLEMEN: We beg to state that we will accept a new flat rate price of $193.00 per dead weight ton for our contract #97, as outlined in your letter of *266 June 26, 1919, and*1912 would request that you have your Legal Division draw up such supplemental agreement as soon as convenient. We would suggest that in such supplemental agreement, the time of delivery for our first ship be made August 20, 1919, and a delivery of one ship every six (6) weeks thereafter, and would also suggest that the agreement mention the material and price of the articles which are being furnished under Schedule "C" by the Fleet Corporation and for which we are to pay the Fleet Corporation, the Schedule "C" price, such articles being as follows:
| Ten (10) Main Condensers | $13,500.00 Each |
| Ten (10) Auxiliary Condensers | 3,200.00 Each |
| One Hundred (100) Double Cylinder Steam Winches | 900.00 Each |
| Ten (10) Steam & Hand Steering Engines and Controllers | 6,300.00 Each |
| Ten (10) Windlasses | 4,800.00 Each |
| Ten (10) Aft Capstans | 1,250.00 Each |
We have as yet done no work on the last two ships of our contract and have only the material on hand, and, we would appreciate very much if you can see your way clear to cancel the contract for these last two ships and give us a new contract for the construction of these two vessels, the construction of these last two vessels to be in*1913 all particulars the same as the preceding vessels. If you feel that this cannot be done, you can have the supplemental agreement cover all ten (10) ships.
Yours very truly,
OSCAR DANIELS COMPANY,
By (Signed) DAVID E. BAXTER,
Vice-President.
The Fleet Corporation duly received said letter and thereafter under date of July 21, 1919, replied to the petitioner as follows:
UNITED STATES SHIPPING BOARD
EMERGENCY FLEET CORPORATION
PHILADELPHIA, PA., July 21, 1919.
OSCAR DANIELS COMPANY,
Woolworth Building,
New York City.
(Attention - Mr. D. E. Baxter)
GENTLEMEN:
SUPPLEMENTAL AGREEMENT TO CONTRACT #97
1. Receipt is acknowledged of your letter of July 3rd. We have requested the Legal Division to prepare a supplemental agreement covering the ten ships along the lines indicated in your letters of June 6th and July 3rd and our letter of June 26th. We find it inadvisable to enter into a new contract for the last two vessels.
Very truly yours,
A. A. WILKIE,Asst. Manager, Ship Construction Division.
On or about August 15, 1919, the petitioner and the Fleet Corporation entered into the following agreement:
SUPPLEMENTAL AGREEMENT made*1914 this 15th day of August, 1919, between Oscar Daniels Company, a corporation organized under the laws of the State of New York, party of the first part (herein called the Contractor), and the *267 United States Shipping Board Emergency Fleet Corporation, a corporation organized under the laws of the District of Columbia, representing and acting for the United States of America, party of the second part (herein called the Owner), WITNESSETH, That
WHEREAS, the Contractor and the Owner entered into a certain contract dated October 30, 1917, known as Contract No. 97 S.C., for the construction of ten (10) steel steam vessels, complete, of the Isherwood type, of 9,500 tons, deadweight capacity each, and eleven (11) knots speed at deep load draught, for the construction of which the Owner agreed to pay Contractor the lump sum purchase price of $1,539.000 for each of the such completed vessels; and
WHEREAS, the Contractor has partly performed and is now performing the said contract; which has not been completed, and during the progress of the work of construction the Owner has ordered the Contractor to make certain alterations, omissions, additions and substitutions in the design*1915 of the vessels, which orders have increased the cost of construction and for which increase the Contractor is entitled to reimbursement from the Owner; and
WHEREAS, the wages paid by the Contractor to its employees have been largely increased by reason of the orders and actions of the Shipbuilding Labor Adjustment Board; and
WHEREAS, the Contractor and the Owner have agreed upon a new lump sum purchase price covering the construction of said vessels and upon certain other amendments to said original contract.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is agreed as follows:
1. The first paragraph of Sub-division 1, Article II of original contract dated October 30, 1917, reading as follows:
In consideration of the performance of this agreement by the Contractor, the Owner agrees to pay therefor a lump sum purchase price of the One Million Five Hundred and Thirty-nine Thousand Dollars ($1,539,000.00), for each of such completed vessels. Such purchase price shall be paid in the following manner:
is hereby cancelled, and in lieu thereof, it is agreed that, in consideration of the performance by the Contractor of said contract, dated October 30, 1917, as*1916 heretofore and herein amended, the Owner agrees to pay therefor a lump sum purchase price of the One Million Eight Hundred Thirty-three Thousand Five Hundred Dollars ($1,833,500) for each of such completed vessels. Said purchase price shall be paid in the manner and at the times provided in the original contract as heretofore amended, and shall cover all increased cost of construction due to alterations, omissions, additions and/or substitutions in the drawings and specifications of the vessels which have been ordered by the Owner prior to and including June 1, 1919, (except the substitution of Foster boilers in place of Badenhausen boilers, as provided in supplemental agreement dated April 17, 1919) and also all excess wage costs and all extra costs of overtime during the entire life of the contract, except as provided in next succeeding paragraph of this supplemental contract. All payments heretofore made by the Owner to or for the account of the Contractor under said contract shall be considered and credited as payments on the new purchase price herein fixed.
2. Contractor agrees that it will promptly comply with all instructions given to it in writing by the Owner with regard*1917 to wages of employees and conditions of employment, and in the event such instructions hereafter given shall impose upon the Contractor additional cost of construction, such additional cost of construction as may be incurred prior to November 15, 1920, shall be reimbursed *268 to the Contractor by the Owner. If no such instructions are given to it, then any wages paid by the Contractor in excess of the wage scale now existing, shall be at the cost of the Contractor, and no reimbursement shall be made it therefor by the Owner. It is hereby mutually understood and agreed that should the Contractor intentionally deviate from or violate any instructions so given to it by the Owner, then and in that event, Contractor shall pay to the Owner in full of all damages suffered by the Owner, as liquidated damages and not as a penalty, the sum of Fifty Dollars ($50.) for each and every such deviation or violation. Unless the Owner shall make claim in writing against the Contractor within ninety (90) days from the date of each such deviation or violation specifying the same, it shall be deemed to have waived its claim against the Contractor on account of such deviation or violation as*1918 to which no claim is made.
3. Sub-division 5, Article II, of original contract dated October 30, 1917, reading as follows:
It is agreed that as to all the installment payments provided for in Section 1 of this Article after the first payment described in sub-division (a) of said Section 1, no payment made shall with the payments theretofore made exceed the value of the labor and materials already expended up to that time, and such fact is certified to the Owner's inspector and is accepted as satisfactory by the Owner,
is hereby amended by the addition thereto of the following:
Provided, however, the provisions of this paragraph may be waived at any time by an instrument in writing signed by the Vice President of the Owner.
4. Sub-division 8, Article II of the contract, dated October 30, 1917, reading as follows:
The Contractor, in estimating the above lump-sum purchase price, has estimated the main engines, boilers, auxiliaries and deck machinery and other material required for the construction of the vessels, at the prices stated in Schedule "C." The Contractor agrees not to make any commitments with respect to any of the aforesaid main engines, or turbines, boilers, *1919 auxiliaries, and deck machinery and other material without the written approval of the Owner, and that in the event the Owner shall be able to purchase the same for any sum less than the prices stated in Schedule "C" the Owner shall be entitled to such saving, and further agrees that the Owner may purchase and deliver the same to the Contractor and withhold the price thereof stated in Schedule "C" from the payments (which in the ordinary course of events would be due upon the use of such items) required to be made by the Owner to the Contractor under Section 2 of this Article,
is hereby cancelled, and in lieu thereof, it is hereby agreed that in estimating the above mentioned lump sum purchase price, the Contractor, has estimated the condensers, winches and other material required for the construction of the vessels at the prices stated in Schedule "C" attached hereto. The Contractor agrees not to make any commitments in connection with the aforesaid condensers, winches, and/or other material listed in Schedule "C" without the written approval of the Owner, and that in the event the Owner or Contractor shall be able to purchase the same, or any part thereof, for any less sum than*1920 the prices stated in Schedule "C," the Owner shall be entitled to such saving, and the Contractor further agrees that the owner may purchase and deliver the same or any part thereof to the Contractor and withhold the price thereof stated in the Schedule "C" attached hereto, from the payments which in the ordinary course of events would be due upon the use of such items.
*269 5. The first paragraph of Sub-division 10, Article II of contract, dated October 30, 1917, reading as follows:
The Owner shall make a deduction at the rate of One Hundred and Sixty-two Dollars ($162.00) per ton (or any part thereof) to cover the difference between the actual deadweight tonnage and contracted deadweight tonnage of Ninety-Five Hundred (9500) tons, provided that no deduction shall be made for deficiency due to changes or alterations in the vessels, or any of them, made pursuant to the Owner's instructions,
is hereby cancelled and in lieu thereof, it is agreed that reduction shall be made from the lump sum contract price above fixed at the rate of One Hundred Ninety-three Dollars ($193.00) per deadweight ton (or any part thereof) to cover the difference between the actual deadweight*1921 tonnage and contracted deadweight tonnage of 9500 tons, provided that no deduction shall be made for deficiency due to changes or alterations in the vessels or any of them made pursuant to Owner's instructions.
6. Sub-division 5, Article I of the contract dated October 30, 1917, reading as follows:
The Contractor agrees to deliver said vessels complete with propelling machinery, auxiliaries, and equipment, according to said drawings and specifications, to the Owner, afloat at the works of the Contractor at Brunswick, Georgia, as follows: One (1) vessel to be delivered within twelve (12) months after the date of the execution of this contract, and thereafter deliver one vessel as aforesaid, on or before the first day of each succeeding month until the final completion of this contract,
is hereby cancelled and in lieu thereof, the Contractor agrees to deliver said vessels complete with propelling machinery, auxiliaries and equipment according to the said drawings and specifications as heretofore amended, to the Owner afloat at the works of the Contractor at Tampa, Florida, as follows:
One vessel to be delivered August 20, 1919
One vessel to be delivered October 1, 1919
*1922 One vessel to be delivered November 15, 1919
One vessel to be delivered January 1, 1920
One vessel to be delivered February 15, 1920
One vessel to be delivered April 1, 1920
One vessel to be delivered May 15, 1920
One vessel to be delivered July 1, 1920
One vessel to be delivered August 15, 1920
One vessel to be delivered October 1, 1920
One vessel to be delivered November 15, 1920
7. The second paragraph of Article VIII of the contract, dated October 30, 1917, reading as follows:
Should the Contractor succeed in delivering any of said vessels to the Owner complete before the dates above provided, the Owner agrees to pay, as premium for advanced delivery of each completed vessel so delivered, the sum of Three Hundred Dollars (300) per day for each and every day gained by such advanced delivery. Should the Contractor fail to deliver any of said vessels on the dates herein fixed, the Contractor agrees to pay the Owner, as liquidated damages, on each such vessel Three Hundred Dollars ($300) for each and every day of delay in delivery of such vessel; but it is hereby agreed that the total premium of liquidated damages so to be paid shall in no case exceed the sum*1923 of Fifteen Thousand Dollars ($15,000) for any such vessel. Premiums or liquidated damages shall be added to or subtracted from the final payment hereunder,
is hereby cancelled.
*270 8. It is expressly understood and agreed that the prices for steel fixed in Schedule "B" attached to original contract, dated October 30, 1917, are base prices, and the phrase; "f.o.b. cars at mill" contained in said Schedule "B" is hereby amended to read as follows:
f.o.b. cars at mill where actually manufactured.
9. It is expressly understood and agreed that nothing herein contained shall relieve either the Owner or the Contractor of the obligations assumed in supplemental agreement dated April 17, 1919. In other words, the Owner shall not be relieved of the obligation to pay for and furnish to the Contractor twenty-one (21) Foster boilers for installation on hulls Nos. 741-748 inclusive, and to pay to Contractor the sum of Three Thousand Five Hundred Dollars ($3,500) as additional purchase price for each of the seven vessels which will be equipped with Foster boilers to cover the increase in cost of construction occasioned by change in type of boilers; and the Contractor shall not*1924 be relieved of the obligation to deliver to the Owner the materials therein described and to pay to the Owner the sum of Two Hundred Ten Thousand Eleven Dollars and Eighty-eight Cents ($210,011.88), which was the exact amount of balance due the Badenhausen Company by Contractor on April 17, 1919, as purchase price of boilers and parts of boilers, which have been or were to be delivered by the Badenhausen Company for installation in the vessels covered by contract No. 97 S.C.
10. This contract shall constitute a supplement to said original contract, dated October 30, 1917, and the supplemental contracts heretofore entered into, which shall remain in full force and effect except as herein modified; provided, however, that whenever the terms and provisions of said original contract and the supplemental contracts heretofore entered into shall conflict with the provisions hereof, then and to the extent of such conflict only, said original contract and supplements heretofore entered into, shall be ineffectual and the provisions hereof shall prevail but in all other respects said original contract and the supplemental contracts heretofore entered into shall be and remain in full force*1925 and effect.
This contract shall be executed in triplicate and the respective copies shall be known as Parts I, II and III. Parts I and III shall be delivered to the Owner and Part II shall be delivered to the Contractor. Said respective parts shall be of equal legal force and effect for any and all purposes.
IN WITNESS WHEREOF, the parties hereto have caused this contract to be signed by their corporate officers and their corporate seals to be duly attested.
OSCAR DANIELS COMPANY,
(Signed) By DAVID E. BAXTER,
Vice President.
[SEAL.]
Attest:
(Signed) CHARLES G. TRIPP, Secretary.
UNITED STATES SHIPING BOARD,
EMERGENCY FLEET CORPORATION,
(Signed) By J. C. ACKERSON,
Vice President.
[SEAL.]
Attest:
(Signed) JAS. V. WATSON, Assistant Secretary.
The respective dates on which the petitioner began to lay the keels of the said 10 vessels, the respective dates of completion, and their approximate percentage of completion on August 15, 1919, were as follows:
| Vessel | Date of laying keel | Date of completion | Approximate percentage of |
| completion on Aug. 15, | |||
| 1919 | |||
| Per cent | |||
| 739 | Apr. 5, 1918 | Oct. 24, 1919 | 80 |
| 740 | Apr. 17, 1918 | Dec. 30, 1919 | 80 |
| 741 | May 13, 1918 | Feb. 4, 1920 | 50 |
| 742 | June 3, 1918 | Apr. 1, 1920 | 50 |
| 743 | Dec. 18, 1918 | Apr. 22, 1920 | 40 |
| 744 | Mar. 10, 1919 | July 15, 1920 | 22 |
| 745 | Apr. 29, 1919 | Oct. 14, 1920 | 22 |
| 746 | June 18, 1919 | Dec. 24, 1920 | 15 |
| 747 | July 29, 1919 | Feb. 28, 1921 | 8 |
| 748 | Oct. 31, 1919 | May 31, 1921 | 0 |
*1926 *271 The petitioner duly completed the construction of said 10 steel vessels and duly delivered the same to the Fleet Corporation and said 10 vessels were accepted by and became the property of the Fleet Corporation.
From time to time, after August 15, 1919, the Fleet Corporation made payments to the petitioner on account of its construction of said steel vessels, which payments, in addition to those made prior to and including August 15, 1919, aggregated $1,833,500 per vessel.
The petitioner duly secured extensions of time to May 15, 1921, within which to file its corporation income and profits-tax return for the year 1920. On March 15, 1921, the petitioner paid the collector of internal revenue $75,000 on account of its income and excessprofits tax for the year 1920. On May 14, 1921, the petitioner duly filed its Federal income and profits-tax return for the year 1920. The return, made out on Form 1120, showed a gross income of $640,405.09 and a net taxable income of $580,465.93. The taxes thereon were entered on the return in Items 4 (excess-profits tax) and 11 (tax of 10 per cent on balance subject to income tax) in Schedule D as $409,081.95 and $16,658.29, respectively, *1927 totaling $425,740.24. Opposite the entry of the said sum of $425,740.24, after Item 15 ("balance of tax") appear the words "SEE ATTACHED CLAIM." On the lower margin of page 1 of the return appear the following notations:
| 1/4 due March 15, 1920 | $79,694.04 |
| Paid March 15, 1921 | 75,000.00 |
| 4,694.04 | |
| Interest for 2 months | 46.94 |
| Check attached | 4,740.98 |
Attached to the return were the two following papers:
(1) Payment on this return is made as provided in Section 327 and 328 of the Revenue Act of 1918 and application is respectfully made for assessment under these sections of the Revenue Act for the following reasons:
*272 The tax is computed on the income of this Corporation for 1920 on its book figures and amounts to $425,740.24, on an income of $580,465.93, or over 73% of this income, and it is felt that the tax on that basis works on exceptional hardship on this corporation because of the disproportion between the tax that would be paid by this Corporation and the tax paid by representative corporations in the same line of business. This Corporation in 1917 contracted with the United States Shipping Board to build ten ships at a lump sum price. Over*1928 ten per cent (10%) of the gross contract price, or, $1,789,000.00 was advanced to this Corporation by the Shipping Board under the terms of said contract. This Corporation gave Surety Company Bonds to cover a large amount of the money so advanced and this Corporation was responsible for and had the use of the $1,789,000.00 but, under the regulations, is not permitted to include the same as invested capital.
The profits shown in the taxable year, represent profits for work done over a period of three years and to tax all such profits in one year would work an undue hardship on the Corporation. There are four ships to be completed during the year 1921, and should the Corporation be compelled to pay the tax as figured in the present return and without the benefits of sections 327 and 328 of the Revenue Act, it would be without sufficient working funds to continue in business and to complete its contract.
The privilege of a hearing is respectfully requested.
(2) Calculation of Tax for the year 1920 under Sections 327 and 328 of the Revenue Act of 1918:
| Net Income, 1920 | $580,465.93 | ||
| Excess Profits Tax, 50% | 290,232.96 | ||
| Income Tax: | |||
| Net Income, 1920 | $580,465.93 | ||
| Less: | |||
| Taxable Interest | $2,801.07 | ||
| Excess Profits Tax | 290,232.96 | ||
| Exemption | 2,000.00 | ||
| 295,034.03 | |||
| 10% of | 285,431.90 | 28,543.19 | |
| Excess Profits Tax | 290,232.96 | ||
| Total Tax | $318,776.15 | ||
| 1/4 of Tax | $79,694.04 | ||
| Paid March 15, 1921 | 75,000.00 | ||
| 4,694.04 | |||
| Interest for 2 months | 46.94 | ||
| Amt. payable May 15, 1921 | $4,740.98 |
*1929 Payments in 1921 account Tax for year 1920:
| Due dates, 1921 | Interest | 1/4 of tax | Amount of payment | Date of payment |
| March 15 | $79,694.04 | $75,000.00 | March 14. | |
| May 15 | $46.94 | 4,740.98 | May 14. | |
| June 15 | 79,694.04 | 79,694.04 | ||
| Sept. 15 | 79,694.04 | 79,694.04 | ||
| Dec. 15 | 79,694.03 | 79,694.03 | ||
| Totals | 46.94 | 318,776.15 | 318,823.09 |
*273 The following is a correct statement of taxpayer's 1920 income and profits-tax assessments and payments:
| Paid | ||||
| Taxable | List and year | Amount assessed | Date or | Amount |
| year | Schedule No. | |||
| 1920 | May, 1921 | $425,740.24 | 5/14/21 | $4,694.04 |
| 3/15/21 | 75,000.00 | |||
| 6/20/21 | 79,694.04 | |||
| 12/14/21 | 79,694.03 | |||
| Total | 318,776.15 | |||
| Total | 318,776.15 | |||
| May, 1921 | Int. $46.94 | 5/14/21 | 46.94 | |
| July, 1922 | Pen. Int. $32.82 | 6/21/22 | 32.82 |
In addition, the records of the Collector of Internal Revenue for the Second District of New York show the following credits and abatement made by such Collector against the above mentioned assessment for the year 1920:
| Date or Schedule No. | Amount |
| 6/27/23 | |
| ITA 5457 | $163.04 Cr. |
| 1/7/25 | |
| ITA 12493 | 4,717.82 Cr. |
| 4/15/25 | |
| ITA 14107 | 22,668.00 Cr. |
| 3/22/28 | |
| ITA 29044 | 79,415.23 Ab. |
*1930 In the deficiency letter from which this appeal was taken, the respondent computed petitioner's profits taxes for 1920 under the provisions of sections 327 and 328 of the Revenue Act of 1918.
The petitioner's statutory invested capital for 1920 was $538,071.01; its net income for 1920 was $575,088.70; its operations other than in connection with the contract for the construction of the 10 vessels resulted in a loss.
On June 14, 1922, the petitioner duly filed its Federal income and profits-tax return for the year 1921, showing a taxable net income of $87,530.40 and a total tax liability of $8,753.05. The said amount of $8,753.05 was paid by the petitioner during the year 1922.
*274 In the deficiency letter from which this appeal was taken, the respondent computed the petitioner's profits taxes for 1921 under the provisions of sections 327 and 328 of the Revenue Act of 1921.
The petitioner's invested capital for the year 1921, subject to such adjustment as may result from a change in its determined tax liability for 1920, was $981,704.20. Its taxable net income for said year was $366,728.04, 68.15 per cent of which was derived from payment's made to it by the*1931 Fleet Corporation in connection with the construction of the said 10 steel vessels, and the remaining 31.85 per cent thereof derived from other sources, not including any Government contracts.
Except as aforesaid, the petitioner derived no income from any Government contract and, except as aforesaid, had no Government contract, as said term "Government contract" is defined in the Internal Revenue Acts of 1918 and 1921.
Subject to the approval of the Board of Tax Appeals, the determination or redetermination of petitioner's taxes for the year or years involved in the instant appeal, as provided in section 328 of the Internal Revenue Acts of 1918 and 1921, respectively, is reserved until after the decision of the Board of Tax Appeals upon the other issues herein raised.
We find the following additional facts:
At the time of writing the letter of June 6, 1919, to the Fleet Corporation the vice president of the petitioner estimated that the work under the contract of October 30, 1917, was approximately one-third completed and that the estimated profits thereon were $2,000,000. He thereupon calculated that the price of $193 per ton would result in a profit of approximately $1,000,000. *1932 In order to avoid the cancellation of the original contract of October 30, 1917, and suffer considerable loss thereby, the petitioner proposed a new agreement at $193 per ton. All of the ships built by the petitioner are still in operation with the exception of one which hit the rocks off Newfoundland and was sunk. In 1929 the Fleet Corporation selected ten of its best ships in which to install Diesel engines. The nine remaining ships built by the petitioner were so chosen.
OPINION.
VAN FOSSAN: For the year 1920 the respondent determined an overassessment. Despite the elaborate argument made by petitioner, we believe the Board to be without jurisdiction as to this year. ; ; .
*275 The remaining issue to be decided at this time is whether or not the supplemental agreement, dated August 15, 1919, constituted a new contract superseding the contract dated October 30, 1917, and thus rendering the income derived therefrom not subject to sections 301(c) and 301(b) of the Revenue Acts of 1918 and*1933 1921, respectively.
Section 301(c) of the Revenue Act of 1918 provides as follows:
For the taxable year 1919 and each taxable year thereafter there shall be levied, collected, and paid upon the net income of every corporation which derives in such year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, a tax equal to the sum of the following:
(1) Such a portion of a tax computed at the rates specified in subdivision (a) as the part of the net income attributable to such Government Contract or contracts bears to the entire net income. In computing such tax the excessprofits credit and the war-profits credit applicable to the taxable year shall be used; * * *
Section 301(b) of the Revenue Act of 1921 contains a similar provision applicable to the calendar year 1921.
The original contract of October 30, 1917, was negotiated and entered into during the period of active hostilities and was predicated on the exigencies and circumstances peculiar to that period. The situation on August 15, 1919, the date of the supplemental contract, was entirely changed and the material differences*1934 between the original and the supplemental agreements clearly reflect such change. In specific language the supplemental contract "cancelled" certain provisions of the original contract. Time was of the essence in the original contract, but was not in the supplemental agreement, in which the provisions relating to the penalty for delay and premium or bonus for advanced delivery were eliminated. The paragraph pertaining to the wages of employees and the conditions of employment were decidedly different in the two contracts. The original contract provided for adjustments for alterations, omissions, additions and substitutions; the supplemental eliminated all such equalizations except as to the substitution of Foster boilers for Badenhausen boilers and also included all excess wage costs except as governed by the express instruction of the Fleet Corporation. In the supplemental agreement the provision relating to the payment of any amounts in excess of the value of labor and materials already expended was made subject to waiver by the Fleet Corporation. The paragraph prohibiting the petitioner from making any commitments for main engines, turbines, etc., without the written approval*1935 of the Fleet Corporation was changed to apply to condensers, winches, etc. In the supplemental agreement a possible deficiency in the tonnage of the completed ships was to be compensated for at the rate of *276 $193 per dead-weight ton instead of $162 per dead-weight ton as in the original contract. In case of any conflict in the terms and provisions of the two contracts the supplemental contract was to prevail. The supplemental agreement was entered into in response to the letter of Edward N. Hurley, president of the Fleet Corporation in which the following appears:
Six months have now elapsed since the signing of the Armistice, and industrial conditions are returning to normal. Therefore we feel that the contracts you were awarded during the war should be revised in adaptation to the conditions under which the work will be done.
The petitioner recognized the changed conditions mentioned by Mr. Hurley and its offer to enter into a new contract was based thereon.
The case of , contains facts in all respects comparable to those in the case at bar. In that case we said:
*1936 This so-called supplemental contract was, we think, a new agreement, which cancelled and took the place of the original contract, and which by its express terms defined and fixed the rights and obligations of both parties. "An agreement when changed by the mutual consent of the parties, becomes a new agreement, which takes the place of the old, and consists of the new terms and as much of the old agreement as the parties have agreed shall remain unchanged." 13 C.J. 595. "A contract once made can not be modified except by a new meeting of minds, and when such mind-meeting occurs a new contract springs into existence." . .
In the Goss opinion we also set forth at length the purpose and history of the legislation embodied in section 301. It is unnecessary to repeat that comment here. Judged by the test established in the Goss case, we are of the opinion that the contract of August 15, 1919, constituted a new agreement between the parties to the original contract of October 30, 1917. The price of the articles manufactured*1937 is a vital element in comparing the two contracts. Payments of the purchase price were made under the supplemental contract with appropriate credits for any payments or advances that may have been made under the original agreement. The payments from which the income arose were made upon the delivery of the ships. None had been completed and delivered by August 15, 1919, and, therefore, none of the income was attributable to the original contract. On that date the petitioner was entitled to no part of the purchase price of $1,539,000 for each completed vessel and would have been entitled to compensation for services and materials furnished only in case of a cancellation or other breach of contract on the part of the Fleet Corporation. However, under the supplemental agreement it was required to render further services and to furnish additional material in order to manufacture and deliver the articles enumerated therein. *277 If such services and material had not been supplied the petitioner would have derived no income from any source. It merely would have failed to complete its contract made on August 15, 1919.
In the cases cited by the respondent the contractors had*1938 been ordered to stop work. Subsequently "cancellation contracts" were entered into fixing the amount of damages sustained by the contractors by reason of the Government's breach of contract. We must bear in mind that in both the case under consideration and the Goss case the Government chose to receive the manufactured products rather than to cancel the contracts. Such a course was to the mutual advantage of both the Government and the petitioner. The Government saved the payment of damages by reason of its cancellation and the petitioner avoided the inconvenience and possible serious loss due to the sudden cessation of industrial operation by a going concern. In order to effect a new agreement it became necessary to establish new terms and new provisions consonant with the changed economic and business situation which developed during the post-war period. Hence, the continuation of operations under either a new or supplemental contract, whichever term we may use, was, by virtue of that agreement, carried on under market and manufacturing conditions quite different from those existing during the period from April 6, 1917, to November 11, 1918, inclusive. Therefore, the income*1939 of the petitioner during the years 1920 and 1921 was attributable to its operations under the supplemental agreement and was not derived from a Government contract made between April 6, 1917, and November 11, 1918, inclusive. Such income is not taxable under the provisions of sections 301(c) and 301(b) of the Revenue Acts of 1918 and 1921, respectively.
Reviewed by the Board.
Judgment will be entered under Rule 50.
STERNHAGEN, dissenting: The petitioner is taxable at war rates upon such proportion of its income as was attributable to its original Government contract. Some of its income was apparently attributable to the new contract, but not all of it. Plainly more that $10,000 was from work under the original contract, and section 301 requires that under such circumstances, an apportionment must be made and the war rates applied to the portion of the income which is attributable to the war contract. While I agree that there was a new contract, it does not follow that all of the income is attributable alone to the new contract. A substantial part of it was earned before the new contract was made. In the Goss case there was, so far as the*1940 report shows, no income from the original contract, *278 which was made a few days before the Armistice; no manufacturing was done under the original contract and nothing was earned. The corporation had merely provided itself with some machinery in anticipation of securing a war contract, but before performance began the new peace-time contract was made.
MORRIS and ARUNDELL agree with this dissent.