*93 An order will issue in accordance herewith.
The amount of excessive profits of petitioner derived from its sales in 1942 which were subject to the Renegotiation Act, held, on the record, to be $ 125,000.
*269 By notice dated August 19, 1944, the Under Secretary of War determined that *94 excessive profits of $ 125,000 were realized by petitioner during the fiscal year ended December 31, 1942, on contracts and subcontracts subject to renegotiation under section 403 of the Renegotiation Act (Sixth Supplemental National Defense Appropriation Act, 1942, as amended). The present proceeding was initiated by petitioner pursuant to section 403 (e) of the Renegotiation Act.
The questions presented are: (1) Is the Renegotiation Act unconstitutional? (2) Were the profits received by petitioner from its renegotiable business during the fiscal year ended December 31, 1942, "excessive" within the meaning of the Renegotiation Act? A subsidiary question is whether, in the determination of excessive profits, if any, the amount of profits should be considered to be the net earnings after Federal income and excess profits taxes.
This proceeding was submitted under stipulations of facts, oral testimony and exhibits.
FINDINGS OF FACT.
The facts which have been stipulated are found as stipulated. The stipulations are incorporated herein by this reference.
Petitioner is a Rhode Island corporation, organized in 1912, with its principal place of business in Providence, Rhode Island. Since*95 1922 petitioner has been engaged exclusively in the manufacture and sale of metal-cutting tools, such as cutting saws, double end mills, taper shank end mills, milling cutters, and chucks. These tools, which are utilized in machine tools, are small expendable items, weighing approximately one-quarter pound each and selling for an average of $ 2.50 per item. They are made of various steel alloys, and generally require the observance of close tolerances in their manufacture. Petitioner produces both stock items, i. e., tools of standard dimensions, *270 and special items, which are tools manufactured in accordance with specifications submitted by the customers. During 1942 and the years prior thereto petitioner's sales were divided about equally between stock and special items.
Petitioner's present plant was acquired and placed in operation in 1928 and it contains approximately 54,000 square feet of floor space. As of December 31, 1941, petitioner owned approximately 188 machines, of which about 50 per cent were milling machines, 25 per cent were turret and engine lathes, and 25 per cent were grinding machines. In addition, commencing in 1941 and continuing throughout 1942, *96 petitioner leased approximately 85 similar machines from the Federal Government at a total annual rental of $ 1,848.46. The latter machines required considerable reconditioning in order to be rendered usable, and this reconditioning was completed in the early part of 1942. The cost of reconditioning was included by petitioner in its production costs for the years 1941 and 1942.
The years 1936 to 1939, inclusive, reflect a period of normal earnings and operations for petitioner.
Petitioner's comparative balance sheet for the years 1936 to 1942, inclusive, is as follows:
| 1936 | 1937 | |
| ASSETS | ||
| Current assets: | ||
| Cash in bank | $ 23,069.09 | $ 28,268.28 |
| Cash on hand | 151.51 | 338.10 |
| Notes receivable | ||
| Accouts receivable | 20,647.90 | 14,446.77 |
| Merchandise inventory | 58,924.39 | 84,173.35 |
| Prepaid assets and loans | 865.32 | 328.76 |
| Good will | 12,500.00 | 12,500.00 |
| Post war credit -- bonds | ||
| Total | 116,158.21 | 140,055.26 |
| Fixed assets: | ||
| Buildings and real estate | 69,021.25 | 66,962.50 |
| Machinery and equipment | 17,331.99 | 22,911.24 |
| Total | 86,353.24 | 89,873.74 |
| Total assets | 202,511.45 | 229,929.00 |
| LIABILITIES AND NET WORTH | ||
| Current liabilities: | ||
| Accounts payable | 11,096.01 | 5,796.79 |
| Notes payable | 12,000.00 | 42,000.00 |
| Loans and advances | 32,975.94 | 30,132.04 |
| Reserve for Federal income tax -- current | 800.06 | 8,581.41 |
| Reserves for Federal income tax -- prior years | 2,303.82 | 2,850.19 |
| Accrued taxes -- misc | ||
| Accrued interest | ||
| Total | 59,175.83 | 89,360.43 |
| Net worth: | ||
| Capital: | ||
| Capital stock | $ 64,500.00 | $ 64,500.00 |
| Paid in surplus | 10,500.00 | 10,500.00 |
| Total | 75,000.00 | 75,000.00 |
| Surplus: | ||
| Earned surplus (at beginning) | 67,378.75 | 68,335.62 |
| Net profit before Federal income tax | 1,756.93 | 38,914.36 |
| Federal income taxes -- current | (800.06) | (8,581.41) |
| Net profit after taxes | 956.87 | 30,332.95 |
| Dividends paid | (30,000.00) | |
| Miscellaneous items | (3,100.00) | |
| Earned surplus (at end) | 68,335.62 | 65,568.57 |
| Total liabilities and net worth | 202,511.45 | 229,929.00 |
| 1938 | 1939 | |
| ASSETS | ||
| Current assets: | ||
| Cash in bank | $ 2,903.19 | $ 20,986.69 |
| Cash on hand | 345.40 | 401.79 |
| Notes receivable | ||
| Accounts receivable | 14,455.11 | 20,332.34 |
| Merchandise inventory | 87,462.87 | 81,199.75 |
| Prepaid assets and loans | 860.16 | 1,607.08 |
| Good will | 12,500.00 | 12,500.00 |
| Post war credit -- bonds | ||
| Total | 118,526.73 | 137,027.65 |
| Fixed assets: | ||
| Buildings and real estate | 64,903.75 | 62,845.00 |
| Machinery and equipment | 24,383.71 | 22,945.89 |
| Total | 89,287.46 | 85,790.89 |
| Total assets | 207,814.19 | 222,818.54 |
| LIABILITIES AND NET WORTH | ||
| Current liabilities: | ||
| Accounts payable | 6,941.32 | 4,332.71 |
| Notes payable | 42,000.00 | 54,000.00 |
| Loans and advances | 18,509.81 | 20,176.50 |
| Reserve for Federal income tax -- current | 1,591.37 | |
| Reserves for Federal income tax -- prior years | 2,132.83 | |
| Accrued taxes -- misc | 684.48 | 310.91 |
| Accrued interest | 1,943.75 | 1,200.00 |
| Total | 72,212.19 | 81,611.49 |
| Net worth: | ||
| Capital: | ||
| Capital stock | $ 64,500.00 | $ 64,500.00 |
| Paid in surplus | 10,500.00 | 10,500.00 |
| Total | 75,000.00 | 75,000.00 |
| Surplus: | ||
| Earned surplus (at beginning) | 65,568.57 | 60,602.00 |
| Net profit before Federal income tax | (5,455.85) | 12,596.42 |
| Federal income taxes -- current | (1,591.37) | |
| Net profit after taxes | (5,455.85) | 11,005.05 |
| Dividends paid | (5,400.00) | |
| Miscellaneous items | 489.28 | |
| Earned surplus (at end) | 60,602.00 | 66,207.05 |
| Total liabilities and net worth | 207,814.19 | 222,818.54 |
| 1940 | 1941 | |
| ASSETS | ||
| Current assets: | ||
| Cash in bank | $ 26,165.57 | $ 64.882.63 |
| Cash on hand | 329.02 | 439.04 |
| Notes receivable | ||
| Accounts receivable | 37,659.02 | 54,379.01 |
| Merchandise inventory | 98,975.85 | 156,899.51 |
| Prepaid assets and loans | 2,112.30 | 6,570.68 |
| Good will | ||
| Post war credit-bonds | ||
| Total | 165,241.76 | 283,170.87 |
| Fixed assets: | ||
| Buildings and real estate | 60,786.25 | 58,727.50 |
| Machinery and equipment | 30,664.13 | 33,823.35 |
| Total | 91,450.38 | 92,550.85 |
| Total assets | 256,692.14 | 375,721.72 |
| LIABILITIES AND NET WORTH | ||
| Current liabilities: | ||
| Accounts payable | 5,412.57 | 6,236.60 |
| Notes payable | 78,000.00 | 58,000.00 |
| Loans and advances | 245.66 | 13,648.14 |
| Reserves for Federal income tax -- current | 15,742.90 | 80,789.64 |
| Reserves for Federal income tax -- prior years | (97.13) | (209.37) |
| Accrued taxes -- miscellaneous | ||
| Accrued interest | ||
| Total | 99,304.00 | 158,465.01 |
| Net worth: | ||
| Capital: | ||
| Capital stock | 64,500.00 | 64,500.00 |
| Paid in surplus | 10,500.00 | 10,500.00 |
| Total | 75,000.00 | 75,000.00 |
| Surplus: | ||
| Earned surplus (at beginning) | 66,207.05 | 82,388.14 |
| Net profit before Federal income tax | 47,123.99 | 143,358.21 |
| Federal income taxes -- current | (15,742.90) | (80,789.64) |
| Net profit after taxes | 31,381.09 | 62,568.57 |
| Dividends paid | (2,700.00) | (2,700.00) |
| Miscellaneous items | (12,500.00) | |
| Earned surplus (at end) | 82,388.14 | 142,256.71 |
| Total liabilities and net worth | 256,692.14 | 375,721.72 |
| 1942 | |
| ASSETS | |
| Current assets: | |
| Cash in bank | $ 81,531.75 |
| Cash on hand | 351.87 |
| Notes receivable | |
| Accounts receivable | 97,253.85 |
| Merchandise inventory | 267,691.68 |
| Prepaid assets and loans | 9,537.39 |
| Good will | |
| Post war credit-bonds | 16,763.14 |
| Total | 473,129.68 |
| Fixed assets: | |
| Buildings and real estate | 56,668.75 |
| Machinery and equipment | 36,345.73 |
| Total | 93,014.48 |
| Total assets | 566,144.18 |
| LIABILITIES AND NET WORTH | |
| Current liabilities: | |
| Accounts payable | 5,713.43 |
| Notes payable | 13,000.00 |
| Loans and advances | 2,422.64 |
| Reserves for Federal income tax -- current | 225,670.78 |
| Reserves for Federal income tax -- prior years | (729.84) |
| Accrued taxes -- miscellaneous | 6,155.98 |
| Accrued interest | |
| Total | 252,232.99 |
| Net worth: | |
| Capital: | |
| Capital stock | 96,500.00 |
| Paid in surplus | 10,500.00 |
| Total | 107,000.00 |
| Surplus: | |
| Earned surplus (at beginning) | 142,256.71 |
| Net profit before Federal income tax | 283,262.10 |
| Federal income taxes -- current | (208,907.64) |
| Net profit after taxes | 74,354.46 |
| Dividends paid | (14,400.00) |
| Miscellaneous items | 4,700.00 |
| Earned surplus (at end) | 206,911.18 |
| Total liabilities and net worth | 566,144.18 |
*100 *272 The average of the fixed assets of the petitioner for the years 1936 through 1939 was $ 87,826.44. In 1942 fixed assets increased $ 5,188.04, to the total amount of $ 93,014.48.
The average profit before taxes during the period 1936 through 1939 (excluding the year 1938, when loss was sustained), was $ 17,755.90 per annum. Petitioner's profits before taxes for the year 1942 amounted to $ 283,262.10, which represented a total increase of $ 265,506.20 above the average annual profit during the period 1936 through 1939.
The following schedule shows the changes in ratios in the 1936-1939 period, and in 1942, of current assets to current liabilities, and of profits to net worth:
| 1936-1939 | 1942 | |
| Ratio of current assets to current liabilities | 171% | 188% |
| Ratio of profits (before taxes) to net worth | ||
| (at start of year), excluding loss | ||
| year of 1938 (average) | 12.7% | 130% |
The following is a breakdown of petitioner's inventories during the above period:
| Summary of Inventories for Years 1936 to 1942 | ||||
| 1936 | 1937 | 1938 | 1939 | |
| Raw stock | $ 7,292,75 | $ 12,520.77 | $ 12,254.83 | $ 11,965.09 |
| Work in process | 16,856.31 | 15,058.97 | 12,465.33 | 17,417.99 |
| Finished goods | 34,775.33 | 56,593.61 | 62,742.71 | 51,816.67 |
| 58,924.39 | 84,173.35 | 87,462.87 | 81,199.75 |
| Summary of Inventories for Years 1936 to 1942 | |||
| 1940 | 1941 | 1942 | |
| Raw stock | $ 20,976.29 | $ 29,220.06 | $ 84,260.37 |
| Work in process | 47,633.32 | 97,586.94 | 136,505.38 |
| Finished goods | 30,366.24 | 30,092.51 | 46,925,93 |
| 98,975.85 | 156,899.51 | 267,691.68 |
Petitioner had orders on hand amounting to approximately $ 689,000 in the latter part of 1942, or almost three times its 1942 closing inventory of $ 267,691.68. There was no substantial number of orders canceled in that year.
Petitioner's condensed comparative profit and loss statement for the years ended December 31, 1936 to 1942, inclusive, is as follows: *273
| 1936 | 1937 | |
| Income: | ||
| Net sales | $ 224,430.39 | $ 290,259.00 |
| Other income | 230.12 | 479.79 |
| Total income | 224,660.51 | 290,738.79 |
| Costs: | ||
| Material used: | ||
| Inventory at beginning of year | 63,350.20 | 58,924.39 |
| Material purchased | 52,211.72 | 64,293.96 |
| Total | 115,561.92 | 123,218.35 |
| Inventory at end of year | 58,924.39 | 84,173.35 |
| Material used | 56,637.53 | 39,045.00 |
| Labor: | ||
| Productive -- direct | 50,538.41 | 67,747.06 |
| Nonproductive -- indirect | 10,959.01 | 16,238.04 |
| Prime cost | 118,134.95 | 123,030.10 |
| Manufacturing expenses | 25,733.57 | 35,012.12 |
| Administrative expenses | 9,118.72 | 10,194.95 |
| Selling expenses | 31,824.21 | 43,096.03 |
| Building expenses | 8,782.38 | 9,521.89 |
| Loss from bad debts | 193.75 | 515.62 |
| Total costs -- before officers' compensation | 193,787.58 | 221,370.71 |
| Net profit before taxes and officers' compensation | 30,872.93 | 69,368.08 |
| Officers' compensation | 29,116.00 | 30,453.72 |
| Net profit after officers' compensation and before | ||
| Federal taxes | 1,756.93 | 38,914.36 |
| 1938 | 1939 | |
| Income: | ||
| Net sales | $ 168,589.19 | $ 236,103.16 |
| Other income | 305.34 | 384.31 |
| Total income | 168,894.53 | 236,487.47 |
| Costs: | ||
| Material used: | ||
| Inventory at beginning of year | 84,173.35 | 87,462.87 |
| Material purchased | 31,274.78 | 37,314.63 |
| Total | 115,448.13 | 124,777.50 |
| Inventory at end of year | 87,462.87 | 81,199.75 |
| Material used | 27,985.26 | 43,577.75 |
| Labor: | ||
| Productive -- direct | 37,936.02 | 45,976.88 |
| Nonproductive -- indirect | 8,794.63 | 15,489.61 |
| Prime cost | 74,715.91 | 105,044.24 |
| Manufacturing expenses | 25,848.08 | 27,319.60 |
| Administrative expenses | 11,018.74 | 12,137.79 |
| Selling expenses | 35,710.55 | 37,529.37 |
| Building expenses | 10,684.73 | 10,881.64 |
| Loss from bad debts | 434.54 | 142.41 |
| Total costs -- before officers' compensation | 158,412.55 | 193,055.05 |
| Net profit before taxes and officers' compensation | 10,481.98 | 43,432.42 |
| Officers' compensation | 15,937.83 | 30,836.00 |
| Net profit after officers' compensation and before | ||
| Federal taxes | (5,455.85) | 12,596.42 |
| 1940 | 1941 | |
| Income: | ||
| Net sales | $ 378,578.09 | $ 693,455.02 |
| Other income | 847.54 | 1,349.48 |
| Total income | 379,425.63 | 694,804.50 |
| Costs: | ||
| Material used: | ||
| Inventory at beginning of year | 81,199.75 | 98,975.85 |
| Material purchased | 87,942.28 | 168,569.62 |
| Total | 169,142.03 | 267,545.47 |
| Inventory at end of year | 98,975.85 | 156,899.51 |
| Material used | 70,166.18 | 110,645.96 |
| Labor: | ||
| Productive -- direct | 71,408.67 | 177,082.86 |
| Nonproductive -- indirect | 27,763.70 | 19,858.97 |
| Prime cost | 169,338.55 | 307,587.79 |
| Manufacturing expenses | 41,621.08 | 78,006.77 |
| Administrative expenses | 17,131.93 | 24,482.86 |
| Selling expenses | 43,510.79 | 47,561.72 |
| Building expenses | 12,539.16 | 15,835.47 |
| Loss from bad debts | 58.13 | 81.68 |
| Total costs -- before officers' compensation | 284,199.64 | 473,556.29 |
| Net profit before taxes and officers' compensation | 95,225.99 | 221,248.21 |
| Officers' compensation | 48,102.00 | 77,890.00 |
| Net profit after officers' compensation and before | ||
| Federal taxes | 47,123.99 | 143,358.21 |
| 1942 | |
| Income: | |
| Net sales | $ 975,507.21 |
| Other income | 2,086.19 |
| Total income | 977,593.40 |
| Costs: | |
| Material used: | |
| Inventory at beginning of year | 156,899.51 |
| Material purchased | 257,517.48 |
| Total | 414,416.99 |
| Inventory at end of year | 267,691.68 |
| Material used | 146,725.31 |
| Labor: | |
| Productive -- direct | 178,846.38 |
| Nonproductive -- indirect | 82,994.84 |
| Prime cost | 408,566.53 |
| Manufacturing expenses | 108,022.05 |
| Administrative expenses | 28,501.02 |
| Selling expenses | 47,263.72 |
| Building expenses | 23,774.28 |
| Loss from bad debts | 22.70 |
| Total costs -- before officers' compensation | 616,150.30 |
| Net profit before taxes and officers' compensation | 361,443.10 |
| Officers' compensation | 78,181.00 |
| Net profit after officers' compensation and before | |
| Federal taxes | 283,262.10 |
*274 The following table sets forth the compensation paid to petitioner's officers for the period 1936 to 1942, inclusive, and the percentage of the stock of petitioner which was held by the respective officers of the petitioner.
| Compensation | |||
| Officers | |||
| 1936 | 1937 | 1938 | |
| Joseph M. Redinger, Sr., president | |||
| and treasurer | None | None | None |
| Joseph M. Redinger, Jr., vice president | |||
| and general manager: | |||
| Salary | $ 5,200.00 | $ 5,300.00 | $ 5,200.00 |
| Bonus | 6,200.00 | 6,403.27 | 386.92 |
| Total | 11,400.00 | 11,703.27 | 5,586.92 |
| Charles F. Redinger, secretary: | |||
| Salary | 3,640.00 | 4,385.00 | 4,420.00 |
| Bonus | 5,200.00 | 4,959.71 | 194.33 |
| Total | 8,840.00 | 9,344.71 | 4,614.33 |
| Ira H. Redinger, mechanical engineer | |||
| and assistant secretary: | |||
| Salary | 1,820.00 | 2,455.00 | 2,600.00 |
| Bonus | 4,100.00 | 3,666.74 | 120.58 |
| Total | 5,920.00 | 6,121.74 | 2,720.58 |
| Henry Gabrielson, assistant treasurer: | |||
| Salary | 2,756.00 | 3,034.00 | 3,016.00 |
| Bonus | 200.00 | 250.00 | 0 |
| Total | 2,956.00 | 3,284.00 | 3,016.00 |
| Total compensation | 29,116.00 | 30,453.72 | 15,937.83 |
| Compensation | |||
| Officers | |||
| 1939 | 1940 | 1941 | |
| Joseph M. Redinger, Sr., president | |||
| and treasurer | None | None | None |
| Joseph M. Redinger, Jr., vice president | |||
| and general manager: | |||
| Salary | $ 5,200.00 | $ 5,850.00 | $ 7,800.00 |
| Bonus | 6,000.00 | 12,000.00 | 20,000.00 |
| Total | 11,200.00 | 17,850.00 | 27,800.00 |
| Charles F. Redinger, secretary: | |||
| Salary | 4,420.00 | 4,940.00 | 6,500.00 |
| Bonus | 5,000.00 | 10,000.00 | 18,000.00 |
| Total | 9,420.00 | 14,940.00 | 24,500.00 |
| Ira H. Redinger, mechanical engineer | |||
| and assistant secretary: | |||
| Salary | 2,950.00 | 3,640.00 | 5,200.00 |
| Bonus | 4,000.00 | 8,000.00 | 16,000.00 |
| Total | 6,950.00 | 11,640.00 | 21,200.00 |
| Henry Gabrielson, assistant treasurer: | |||
| Salary | 3,016.00 | 3,172.00 | 3,640.00 |
| Bonus | 250.00 | 500.00 | 750.00 |
| Total | 3,266.00 | 3,672.00 | 4,390.00 |
| Total compensation | 30,836.00 | 48,102.00 | 77,890.00 |
| Compensation | Percentage of | |
| stockholdings | ||
| Officers | as of 1942 | |
| 1942 | ||
| Joseph M. Redinger, Sr., president | ||
| and treasurer | None | 53.83% |
| Josph M. Redinger, Jr., vice president | ||
| and general manager: | ||
| Salary | $ 7,800.00 | |
| Bonus | 20,000.00 | |
| Total | 27,800.00 | 15.39% |
| Charles F. Redinger, secretary: | ||
| Salary | 6,500.00 | |
| Bonus | 18,000.00 | |
| Total | 24,500.00 | 15.39% |
| Ira H. Redinger, mechanical engineer | ||
| and assistant secretary: | ||
| Salary | 5,200.00 | |
| Bonus | 16,000.00 | |
| Total | 21,200.00 | 15.39% |
| Henry Gabrielson, assistant treasurer: | ||
| Salary | 3,840.00 | |
| Bonus | 841.00 | |
| Total | 4,681.00 | None |
| Total compensation | 78,181.00 |
*105 *275 Joseph M., Jr., Charles F., and Ira H. Redinger are sons of Joseph M. Redinger, Sr. The latter, a highly skilled engineer, has held the controlling interest in petitioner since 1922; during the years 1936 to 1942, inclusive, he devoted approximately 20 per cent of his time to petitioner's operations. The sons, all technically trained, devoted their time exclusively to petitioner, working long hours in 1942. As shown in the table setting forth the compensation of officers, supra, the bonuses of $ 12,000, $ 10,000 and $ 8,000 received by the Redinger sons, respectively, in 1940, were increased to $ 20,000, $ 18,000 and $ 16,000 in 1941 and 1942.
On January 1, 1942, petitioner owed notes payable in the aggregate amount of $ 58,000, which amount included a total of $ 32,000 worth of notes payable held by the Redinger sons. On the same date petitioner's capital stock outstanding, all held by the Redinger family, amounted to $ 64,500. During 1942 petitioner reduced its notes payable account to $ 13,000, largely by the issuance of additional capital stock to the Redinger sons in exchange for their notes payable, thus increasing the capital stock outstanding by $ 32,000. *106 Dividends in the amount of $ 14,400 were distributed by petitioner in 1942.
Of petitioner's total net sales of $ 975,507.21 in 1942, the following represents a breakdown between nonrenegotiable and renegotiable net sales:
| Nonrenegotiable net sales: | ||
| Jan. 1 to Apr. 28 | $ 225,000.00 | |
| Apr. 29 to Dec. 31 | 151,507.21 | |
| Total nonrenegotiable net sales | 376,507.21 | |
| Renegotiable net sales (Apr. 29 to Dec. 31): | ||
| Sales directly to Government agencies | $ 193,398.39 | |
| Sales to civilian customers for war end use | 405,601.61 | |
| Total renegotiable net sales | 599,000.00 | |
| Total net sales in 1942 | 975,507.21 |
Petitioner's total profits before Federal taxes in 1942 amounted to $ 283,262.10. Petitioner's books do not show the portions of these profits allocable as between nonrenegotiable and renegotiable net sales. However, the parties have stipulated that such allocation of profits is made properly for the purposes of this proceeding by applying to the total profits the ratios that nonrenegotiable net sales and renegotiable net sales bear to total net sales, which ratios are, approximately, 39 per cent and 61 per cent, respectively.
Petitioner's profits before*107 Federal taxes on its nonrenegotiable net sales amounted to $ 109,327.95, and its profits on its renegotiable net sales amounted to $ 173,934.15.
Petitioner's average annual net sales rose from $ 250,264 during the profit-making years from 1936 through 1939 to $ 975,507 in 1942. Of *276 the latter amount, $ 599,000 represented renegotiable sales. The ratio of profits before taxes to net sales increased from about 7 per cent during the above prewar years to 29 per cent in 1942.
The nature of petitioner's products and its manufacturing technique remained substantially the same in 1942 as during the period 1936 to 1939, inclusive. However, petitioner changed from a one-shift to a two-shift basis in 1941, and during 1942 its plant operated on two ten-hour shifts, six days a week. Also, some change-over in heat-treating equipment was necessitated by the Government's directive, issued in 1941 or 1942, that petitioner and all other companies in the industry use a less efficient molybdenum alloy in certain percentages of their products, in place of the high tungsten alloy. This requirement was suspended in 1944.
Before and during the war petitioner manufactured its double-end mills*108 and chucks under royalty-free licenses from Joseph M. Redinger, Sr., the holder of patents thereon; the sales of these patented items comprised approximately 25 per cent of petitioner's total sales in 1942. Petitioner did not borrow any funds from the Government in 1942, nor did it purchase any machinery under certificates of necessity. Petitioner extended no financial assistance to other contractors or subcontractors during 1942.
Late in 1941, or during 1942, petitioner developed a fixture for increasing its production of double-end mills, which effected some saving in tungsten. Petitioner also developed or redesigned a number of devices for saving labor in its production operations, such as a machine for automatically resharpening teeth in saws, and an "automatic indexing device" for semiautomatically cutting the side teeth in saws. Petitioner received unsolicited letters of commendation for its war work from the Commanding General of the Springfield Armory, and from the Commanding General of the Army Service Forces, in September 1945.
Petitioner's plant had not operated at full capacity at any time before 1941. Except for a reduction in its charges for sharpening tools, petitioner's*109 prices remained substantially the same in 1942 as during the period 1936 to 1939, inclusive. The following schedule shows the approximate average number of tools sold, cost per tool, and profit per tool during the period 1936 through 1939 (excluding 1938 when a loss was incurred) and the entire year 1942, and on renegotiable sales in 1942:
| Average number | Average cost | Average | |
| of tools | per tool | profit per | |
| sold | tool | ||
| 1936 through 1939 (excluding 1938) | 100,106 | $ 2.34 | $ 0.16 |
| 1942 | 390,203 | 1.77 | .73 |
| Renegotiable sales in 1942 | 239,600 | 1.77 | .73 |
*277 The parties have stipulated that petitioner's representatives attended several hearings before respondent or his representatives with respect to its renegotiatble profits for the year 1942, and petitioner was afforded an opportunity to submit to respondent or his representatives such financial or other data as petitioner desired, before the issuance of respondent's determination herein.
The parties in the instant case have stipulated that the testimony taken in , appearing at pages 615-764 of the transcript therein, *110 together with exhibits Q through GG in that case, shall be deemed in evidence herein to the extent that such evidence is material on all constitutional issues involved herein and on all questions of construction of the Renegotiation Act, reserving to counsel in the instant case the same objections made by counsel in the Stein Brothers case. The evidence referred to is incorporated herein by this reference.
Petitioner's profits during the fiscal year ended December 31, 1942, from its sales subject to the Renegotiation Act were excessive, within the meaning of that act, in the amount of $ 125,000.
OPINION.
The first contention of the petitioner is that the Renegotiation Act of 1942 is unconstitutional. The Supreme Court has upheld the constitutionality of the act, in .
The question to be decided is whether the profits received by petitioner from its renegotiable business in 1942 were excessive within the meaning of the Renegotiation Act. Petitioner's profits before Federal taxes, subject to renegotiation, amounted to $ 173,934.15. Respondent determined that these profits were excessive in the amount of *111 $ 125,000, which would leave petitioner profits of $ 48,934.15 on its renegotiable sales. Petitioner has the burden of proving that respondent's determination is erroneous. .
Certain factors to be considered in determining whether profits are excessive are set forth in section 403 (a) (4) (A) of the Renegotiation Act, as amended by section 701 of the Revenue Act of 1943. Although these elements were not outlined in the Renegotiation Act before the above amendment, they "were already known by Congress to be in use in voluntary renegotiation when the act here in question was enacted," and "are the factors which any reasonable person would naturally use in determining the amount of excessive profits." . The factors are as follows:
*278 (i) Efficiency of contractor, with particular regard to attainment of quantity and quality production, reduction of costs and economy in the use of materials, facilities, and manpower;
(ii) reasonableness of costs and profits, with particular regard to volume of production, normal pre-war earnings, and comparison*112 of war and peacetime products;
(iii) amount and source of public and private capital employed and net worth;
(iv) extent of risk assumed, including the risk incident to reasonable pricing policies;
(v) nature and extent of contribution to the war effort, including inventive and developmental contribution and cooperation with the Government and other contractors in supplying technical assistance;
(vi) character of business, including complexity of manufacturing technique, character and extent of subcontracting, and rate of turn-over;
(vii) such other factors the consideration of which the public interest and fair and equitable dealing may require, which factors shall be published in the regulations of the Board from time to time as adopted.
We have considered each of these elements as applied to petitioner's operations and financial status, and have accorded each factor the weight which we deemed proper.
The petitioner contends that, in the determination of the question whether its profits for 1942 were excessive, and if so, in the determination of the amount of the excessive profits, consideration should be given, "either directly or indirectly," to the amount of its Federal income*113 and excess profits tax liability. Petitioner calls attention to the high rates of the income and excess profits taxes in 1942. While petitioner does not state its argument clearly to be that Federal taxes should be deducted, tentatively, from its profits on its renegotiable sales, so as to focus the first consideration upon the amount of profits after Federal taxes, petitioner does challenge the validity of the broad proposition that the question is whether profits, before allowance for taxes, are excessive. The argument has been presented to this Court before. See ; and .
It was said in , that:
We are to determine the excess profit in "profits derived from contracts with the Department and subcontracts," which under the statute means "the excess of the amount received or accrued under such contracts and subcontracts over the costs paid or incurred with respect thereto." (Italics supplied.)
See section 403 (a), 4 (A) and (B) *114 of the Renegotiation Act. Our first inquiry must be about the amount of profits, regardless of the amount of Federal taxes thereon. Our analysis must start at that point. A determination which eliminates part of the profit as excessive also eliminates part of the burden of taxation, the tax being a variable which depends upon the profit allowed. Under section 403 (c) (3), in determining the amount of any excessive profits to be eliminated, there shall be allowed "credit for Federal income and excess *279 profits taxes." The factor of the income and excess profits taxes is one which follows upon the determination of what part of the profit is excessive, and the statute sets forth the chief factors which are to be considered in making that determination, as set forth above. All who are subject to the Renegotiation Act must be accorded equal consideration, and the act, properly construed, does not afford anyone avoidance of his share of the increased tax burden which was required to maintain the war effort. See .
Whether or not the elimination of a certain amount of profit, as excessive*115 profit, will leave a concern too small a profit after taxes, or even will result in financial embarrassment, is a fact problem in a particular case. It would be unrealistic to fail to recognize that the revenue acts operate to reduce retained profits, entirely apart from the administration of the Renegotiation Act. Petitioner has called to our attention the following provision in section VI of the War Department Price Adjustment Board's "Principles, Policy and Procedure to be followed in Renegotiation," dated August 10, 1942, at page 12:
* * * The effect of the excess profits tax on companies which are financially extended and have little or no tax base is frequently so severe, however, that strict adherence to the principle of considering only profits before taxes would leave practically nothing for the company, or even result in financial embarrassment, and under these circumstances the profit after taxes is a factor which may be taken into consideration in order not to impair its incentive to production.
However, the record fails to support an application of the above in this proceeding. It does not appear that petitioner was "financially extended" in 1942, nor that it was*116 in the position of having "little or no tax base" for excess profits tax purposes. Furthermore, even assuming the refund as determined by respondent, there is no persuasive evidence that "practically nothing" would be left for petitioner as profits on its renegotiable sales after taxes, or that such refund would result in "financial embarrassment." Cf.
We have noted in our analysis that petitioner's products, manufacturing technique, and prices remained substantially the same in 1942 as during the pre-war years 1936 to 1939, inclusive. Yet, a comparison of petitioner's approximate net sales and earnings during the profit-making years of the period 1936 through 1939 with those during 1942 reveals the following data: Petitioner's average annual net sales rose from $ 250,264 during the pre-war years to $ 975,507 in 1942, the latter amount including $ 599,000 of renegotiable business. Petitioner's average annual profits before taxes increased from $ 17,756 during the pre-war period to $ 283,262 in 1942. Of the 1942 figure, $ 173,934 represented profits on renegotiable sales alone. Thus, petitioner's total sales during*117 1942 were almost four times, and its renegotiable sales alone were about twice, the average sales during the pre-war years; *280 its total profits during 1942 were more than fifteen times, and its profits on renegotiable sales were almost ten times, its average annual profits during the pre-war years; and the ratio of profits to sales increased from about 7 per cent in the pre-war period to approximately 29 per cent in 1942. These increases, it may be observed, were accomplished not by appreciable additions to petitioner's fixed assets, but with the aid of machinery acquired at low rental from the Federal Government.
As previously stated, respondent determined that $ 125,000 of petitioner's profits on its renegotiable business was excessive. This refund would leave petitioner with profits of $ 48,934 on renegotiable sales alone, which amount is almost as much as petitioner's total profits during the entire period 1936 through 1939 ($ 53,268).
We are not persuaded from the evidence that the market for petitioner's products was saturated during the post-war years. Moreover, inasmuch as petitioner had orders on hand amounting to almost three times its inventory at the end*118 of 1942, we do not believe that petitioner was subjected to any extraordinary risk by reason of this inventory.
It is concluded, and has been found as a fact, after a careful analysis of all the relevant evidence and the arguments of counsel, that the respondent correctly determined that the petitioner's profits from its renegotiable business during 1942 were excessive in the amount of $ 125,000.
An order will issue in accordance herewith.