*3825 Income received by the petitioner during the year 1919 from the sale of gun mounts to the Navy Department held, on the facts, not to be attributable to a Government contract or contracts made between April 6, 1917, and November 11, 1918, and therefore not taxable under section 301(c) of the Revenue Act of 1918.
*365 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $26,461.39. The only issue is whether certain income is taxable under section 301(c) of the Revenue Act of 1918, as income derived from a Government contract made between April 6, 1917, and November 11, 1918. The facts are stipulated.
FINDINGS OF FACT.
The petitioner is an Illinois corporation, with its principal office at 1535 Paulina Street, Chicago, and filed its return for the calendar year 1919 with the collector of internal revenue at Chicago.
On September 12, 1918, after previous negotiations and conferences with the Navy Department, the petitioner submitted a written*3826 proposal to manufacture and deliver 100 six-inch gun mounts at $23,000 each; 50 additional slides for such mounts at $6,500 each; and spare parts for such mounts at prices to be agreed upon, based upon costs, in accordance with the Navy Department specifications and drawings in that regard. Said proposal follows:
1. We propose to build for you one hundred (100) six inch Mark XIII Gun Mounts, complete with sights, in accordance with your plans and specifications, for the sum of Twenty-three Thousand Dollars ($23,000) each, f.o.b. Chicago, *366 commencing delivery on April 1st, 1919, and delivering at the rate of five (5) per week from that time on until the completion of the contract.
2. We will build fifty (50) extra slides for the six inch Mark XIII mounts, with slight modifications from the drawings submitted to us, for the sum of Six Thousand five hundred dollars ($6,500.00) each, f.o.b. Chicago, shipments to begin as early as possible during the period of our contracts for the complete six inch mounts, and to be completed not later than Nov. 1st, 1919.
Under date of September 18, 1918, the Secretary of the Navy wrote to the petitioner as follows:
Your proposal*3827 dated September 12th, offering to furnish, in accordance with the Government's drawings and specifications, 100 6-inch Mark XIII gun mounts complete with sights, at $23,000, each f.o.b. Chicago, delivery to be made at the rate of 5 per week, beginning April 1, 1919; and for 50 extra slides for said mounts with slight modifications from the drawings submitted to you for $6,500, each f.o.b. Chicago, delivery of the total number complete to be made by November 1, 1919, is hereby accepted, and contract therefor awarded to you accordingly.
This award is conditional upon your furnishing affidavit that you are not a party to any existing combination in restraint of trade within the prohibition of restrictive provisions of law. A form of affidavit is enclosed for execution and return.
Drafts of contract and bond covering this work will be sent to you at an early date for signature.
Prior thereto, and under date of September 13, 1918, L. C. Palmer, the Acting Secretary of the Navy, wrote the petitioner as follows:
The Department hereby awards you contract, in substantial accordance with your proposal of the 12th instant addressed to the Bureau of Ordnance, for one hundred (100) *3828 six-inch Mark XIII gun mounts, complete with sights (except telescopes) in accordance with plans and specifications to be furnished by the Bureau of Ordance, for the sum of twenty-three thousand dollars ($23,000) each; deliveries to commence on or before April 1, 1919, and to continue at the rate of five (5) mounts per week thereafter until completion of the contract.
Contract is also awarded for fifty (50) extra slides for six-inch Mark XIII gun mounts, with slight modifications from the drawings submitted to you, for the sum of sixty-five hundred dollars ($6,500) each; deliveries to begin as early as possible during the period of your contract for complete six-inch mounts and to be completed not later than November 1, 1919.
This award is conditional upon your furnishing affidavit that you are not a party to any existing combination in restraint of trade within the prohibition of restrictive provisions of law. A form of affidavit is inclosed for execution and return.
Drafts of contract and bond covering this work will be sent to you at an early date for signature.
Shortly after the receipt of the letter dated September 13, 1918, and prior to the receipt of the letter*3829 dated September 18, 1918, the petitioner, in reliance upon the advice of the Acting Secretary of the Navy Department that a contract was awarded, in anticipation that the statutory requirements with respect to the execution of a formal contract would be subsequently complied with conforming with the terms set forth in its proposal or bid, and in consideration of the *367 urgency for prompt delivery of the articles in the prosecution of the war and in accordance with the contemplated first delivery date April 1, 1919, (with respect to the gun mounts) started forthwith on the preliminary work. Drawings for mounts, sights, slides and parts were started, prior to September 22, 1918 (when the letter dated September 18, 1918, was received by the petitioner), and shortly after the receipt of that letter work was commenced on the manufacture of jigs and tools and special fixtures for manufacturing 6-inch mounts. The petitioner was also in negotiation with other manufacturers for the acquisition of machinery required in the manufacture of the articles mentioned in the proposal, and expended substantial amounts of money in anticipation that the award would subsequently result in a formal*3830 contract, which would necessitate the delivery of war material at definite dates.
Furthermore, at the time of the negotiations in question, the petitioner was then performing work on other contracts with the Navy Department for the manufacture of 4-inch gun mounts and from its experience in that work, was aware of the necessity for prompt action on its part in order to meet the requirements of delivery dates with respect to 6-inch mounts, as contemplated by the award.
A vice president of the petitioner, A. P. Homer, was resident in Washington, was in communication with the Navy Department, and was conversant with the war requirements of the Government so far as the petitioner could fill them.
On October 11, 1918, the Navy Department sent to the petitioner the following letter which was received on October 14, 1918:
Under authority contained in Department's letter, No. 26548-451, of September 19, 1918, to this Bureau, and to you of same number, of September 18, 1918, the Bureau transmits herewith contract and bond forms covering 100 six-inch, Mark XIII, gun mounts, with sights (except telescopes), and 50 additional slides, awarded to your company as therein specified.
*3831 Please execute this contract with the formality usual in such cases, after forward to the Bureau for execution on the part of the United States, after which one copy will be returned for your use and guidance. Please sign or initial the specifications foot of last page, and have the contract and bond uniform and complete in the case of each triplicate.
The amount of the bond will be $200,000.00.
The document mentioned in said letter as the contract, conformed with the document hereinafter referred to as the original contract, except that no signatures were contained upon the document when so sent to the petitioner. The document described as the bond also bore no signature and was undated when received by the petitioner.
On October 23, 1918, the three copies of the said document referred to, and the bond, were signed at Chicago by the petitioner by its president and sealed and attested by its secretary. The specifications also were signed by the petitioner at the same time, as well as the affidavit referred to in the letter of September 18, 1918.
*368 On October 24, 1918, the petitioner wrote to the Navy Department as follows:
Referring to your letter of the*3832 11th instant, forwarding for execution, contract and bond form with specifications in triplicate for the 100 6" mounts and 50 additional slides awarded our company under letter of authority, Department No. 26548-451, of September 19, 1918, we wish to advise that all the documents mentioned have been fully executed by this Company and forwarded to our resident vice president, Mr. Arthur P. Homer, in Washington, D.C., for delivery to the Department.
We forward these documents through Mr. Homer for the reason that the bond will have to be completed by the Federal Underwriters of Washington, D.C., through whom we are placing same; therefore all documents will be completed ready for the department's completion upon delivery of same to you by our vice president, Mr. Homer.
In addition to the documents you forwarded to us, we enclosed Schedule Nos. "A" to "H" both inclusive, dealing with the partial payments on this contract as the work progresses, which have been duly signed by our company and attached to each set of documents. These will undoubtedly be completed by the Department and returned to us with our set of the contract forms.
On October 28, 1918, the Federal Underwriters*3833 signed the bond in Washington and delivered it to Arthur P. Homer.
On October 28, 1918, Homer, acting on behalf of the petitioner, delivered the aforementioned documents then signed by the petitioner to the Navy Department for execution on behalf of the United States and for approval of the bond. The bond was approved on behalf of the United States on October 31, 1918, by Graham Egerton, Solicitor of the Navy Department, and the records of the Navy Department show that the three copies of the document bearing date September 17, 1918, were signed on behalf of the United States by F. D. Roosevelt, as Acting Secretary of the Navy, on the same day, October 31, 1918, but the said documents as signed and approved by the United States were not delivered to the petitioner until January, 1919, when a triplicate original copy of said so-called contract was first delivered to the petitioner at the same time when the second so-called supplemental agreement was also delivered to the petitioner.
The contract dated September 17, 1918, and signed on behalf of the United States on October 31, 1918, provided as follows:
CONTRACT
For
100 6-INCH, MARK XIII, GUN MOUNTS COMPLETE, WITH SIGHTS, *3834 (EXCEPT TELESCOPES)
and
50 ADDITIONAL SLIDES FOR 6-INCH, MARK XIII GUN MOUNTS
This contract, of two parts, made and concluded this 17th day of September, A.D. 1918, by and between Goss Printing Press Company, a corporation organized under the laws of the State of Illinois, and doing business at Chicago in *369 the State of Illinois represented by the of said company, party of the first part, and The United States, party of the second part:
Witnesseth: That for and in consideration of the payments to be made, as hereinafter provided, the party of the first part hereby covenants and agrees to and with the party of the second part as follows - that is to say:
First. The party of the first part will, at its own risk and expense, manufacture and deliver to the Navy Department, in conformity with and subject to the conditions stated in the specifications.
Ordnance Pamphlets Nos. 400, 400-C, and 400-D and the drawings Nos. as listed on sketches 7091, 7099, 7101 and 7103, which specifications and drawings, hereto annexed, shall be deemed and taken as forming a part of this contract with the like operation and effect as if they were incorporated herein.
100 6-INCH, MARK*3835 XIII, GUN MOUNTS COMPLETE, WITH SIGHTS, MARK XXVII (EXCEPT TELESCOPES) AT $23,000.00 EACH. AND 50 ADDITIONAL (MODIFIED) SLIDES FOR 6", MARK XIII, MOD. (TO BE ASSIGNED) GUN MOUNTS AT $6,500.00 EACH
space parts to be furnished in accordance with list to be furnished by the Bureau of Ordnance, at prices to be agreed upon, which shall be based on the manufacturer's cost records, provided that the unit value in each case shall not exceed the proportionate cost of similar part furnished in completed mount; said spare parts to be paid for upon delivery.
Such mounts and slides respectively hereinafter referred to as units shall be delivered free on board at the works of the party of the first part, consigned as may be directed by the party of the second part.
Second. The party of the first part will deliver the units required under this contract within the periods stipulated below, viz:
GUN-MOUNTS - One mount on or before April 1, 1919, and five additional mounts per week thereafter until completion.
SLIDES - Deliveries to begin as early as possible and to be completed not later than November 1, 1919.
But a lien in favor of the party of the second part upon said units and*3836 the material on hand for use in the manufacture thereof, respectively and collectively, for all moneys paid on account thereof, shall begin with the first payment, and shall thereupon attach to the work done and the materials furnished, and shall, in like manner, attach from time to time, as the work progresses, and as further payments are made, and shall continue until it shall have been properly discharged, and said lien is, pursuant to the provisions of the act of August 22, 1911, paramount.
Third. It is hereby agreed that time is an essential feature of this contract, and that, if the party of the first part shall fail to deliver the said units within the periods prescribed therefor, including such extensions thereof, if any, as may be granted by the party of the second part as hereinafter provided, the party of the second part will be damaged thereby; and the amount of said damages being difficult of definite ascertainment and proof, it is hereby agreed that the amount of said damages shall be agreed upon, liquidated, and fixed in advance; and it is hereby agreed upon, liquidated, and fixed, and the party of the second part shall make deductions from the price herein stipulated, *3837 at the rate of one-tenth of 1 per cent of the contract price of each unit for each day such unit shall remain undelivered after the expiration of the period prescribed for delivery hereunder, all such deductions to be made at such time or times as may be determined by the party of the second *370 part, as liquidated damages from any payment or payments falling due under this contract. Provided, however that no liquidated damages shall be deducted for such period, after the expiration of the time or times prescribed for delivery for units, as in the judgment of the party of the second part shall equal the time that, either in the beginning or in the prosecution of the deliveries, shall have been lost on account of any cause for which the United States is responsible, or on account of strikes, riots, fire, or other disaster, delays in transit or delivery on the part of the transportation companies, or other circumstances beyond the control of the party of the first part, or if the party of the first part satisfies the party of the second part, that it used every practicable means to make the required deliveries and to complete the contract within the time stipulated; provided*3838 further, that the question of whether delays are due to causes for which liquidated damages shall be assessed, shall be determined by said party of the second part; and provided further, that written notice shall be given by the party of the first part to the party of the second part of any cause or circumstance claimed or intended to be claimed hereunder as operating to the advantage of the party of the first part in regard to the times of delivery stipulated in clause second thereof.
In case any question shall arise under this contract concerning deductions for delay, such question, with all the facts relating thereto, shall be submitted to the Secretary of the Navy, whose decision thereon shall be final and binding upon the parties hereto unless, within a year after notification of the amount found due by the Navy Department in final settlement hereunder, the party of the first part shall bring suit to recover any further amounts claimed to be due.
Fourth. All delays that the party of the second part shall find to be properly attributable to any of the causes for which penalties would not be deducted in accordance with the provisions of the third clause hereof, and to have*3839 been delays operating upon the delivery of the units within the time herein prescribed therefor, shall entitle the party of the first part to a corresponding extension of such time: Provided, however, That no such delay, nor the alleged cause or causes thereof, shall be considered by the party of the second part unless the party of the first part shall, at the time of the occurrence of such delay, notify the party of the second part in writing of the facts and circumstances in each case, and of the extent to which the party of the first part claims that the deliveries are thereby delayed.
Fifth. In order that all parts of the units to be manufactured under this contract may be interchangeable, the furnishing of jigs, gauges and templates shall be governed by paragraph 1 of specifications, Ordnance Pamphlet No. 400-C, all necessary patterns to be furnished by the party of the first part.
Sixth. The provisions of this contract and the conditions and requirements of the drawings and specifications hereinbefore referred to may be changed by the party of the second part, and if changes are thus made the actual cost thereof and the damage, if any caused thereby, and the amount of*3840 the increased or diminished compensation, if any, that the party of the first part shall be entitled to receive in consequence of such change or changes, shall be estimated by the naval inspector at the works of the party of the first part, and of less than five hundred dollars ($500) shall be determined by him, subject to the approval of the Chief of the Bureau of Ordnance; if equal to or greater than five hundred dollars ($500) the same shall be determined by a board of not fewer than three naval officers to be appointed by the Secretary of the Navy, and the determination of said board or a majority thereof shall be subject to the approval of the said Secretary. The determination of said inspector or of *371 said board as to the amount of the increased or diminished compensation the party of the first part shall be entitled to receive, if any, in consequence of such changes shall, when approved by the Chief of the Bureau of Ordnance, or by the Secretary of the Navy, as hereinbefore provided, be binding upon the party of the first part, subject, however, to appeal to the Secretary of the Navy from any decision by the Chief of the Bureau of Ordnance: Provided, That no such*3841 change shall be made when the difference in cost resulting therefrom shall, in the execution of the work, exceed five hundred dollars ($500), except on the written order of the Secretary or the Assistant Secretary of the Navy.
Seventh. If at any stage of the work prior to the completion and delivery of said units the party of the second part shall find that the party of the first part is unable or fails to proceed with or to make satisfactory progress in the manufacture and delivery thereof, or if, at the end of any period prescribed in the second clause hereof, including such extensions of time, if any, as shall have been granted under the fourth clause hereof, any of the units required within such period shall, through fault of the party of the first part, remain undelivered, then and in such case it shall be optional with the party of the second part to declare this contract forfeited on the part of the party of the first part. In case such forfeiture is declared the title to the units required under this contract, and to all materials on hand applicable thereto, shall forthwith vest in the party of the second part, subject, however to rejection as hereinafter provided for; *3842 and said units and materials shall on demand be surrendered to the party of the second part. The Secretary of the Navy shall thereupon cause to be taken and filed a full and complete statement and inventory of all work done or commenced in, upon or about said units, and of all said materials, and shall cause the same to be duly valued by a board of consisting of not fewer than five persons, qualified by knowledge and experience for the discharge of their duties, to be appointed by the Secretary of the Navy, which board shall proceed without unnecessary delay to examine such work and materials and ascertain and declare the fair market value thereof, the contract price being taken as the fair market value of the completed articles, and upon such examination the party of the first part may attend, by representative, and, if it so desires, by counsel, and submit such evidence as the board may deem proper.
Upon approval of the report of said board by the Secretary of the Navy, the party of the second part may proceed to complete according to the contract, with such changes as may be found necessary or desirable, in such manner and by such means as it may deem advisable, all the units*3843 required under this contract. Should the total cost of the work, making due allowance for authorized changes therein, exceed the contract price, the difference shall be charged to the party of the first part, who covenants and agrees to pay the same on demand. Should such cost be less than the contract price, the party of the first part shall be paid the amount found by the board mentioned above to be the value of the work done and material provided by the party of the first part, less previous payments to it and any other credits in favor of the party of the second part hereunder: Provided, That no allowance shall be made for profit that the party of the first part might have made by completing the work or for any excess of the contract price over the final total cost of the work; and that the party of the second part may before payment require satisfactory evidence that there exist no liens or rights in rem against the units or any part thereof or any materials incorporated therein.
In case the party of the second part should, however, decide not to proceed with the completion of said units or any of them, the same shall be rejected and *372 the party of the first part*3844 shall thereupon and upon notice thereof in writing be justly indebted to the party of the second part as and for liquidated and ascertained damages in a sum equal to the aggregate amount of all payments theretofore made to it for or on account thereof, and agrees to refund said amount on demand, and that the party of the second part shall and may hold as collateral security for such refund, said units or so much thereof as shall have been completed and all materials on hand applicable thereto.
Eighth. Notwithstanding any license the department may be held to have by reason of the provisions of the act of Congress entitled "An act to provide additional protection for owners of patents of the United States, and for other purposes," approved June 25, 1910, to use patented inventions the contractor will hold and save the department harmless from and against all liability, and all and every demand or demands of any nature or kind heretofore made or that shall hereafter be made for or on account of the adoption of any plan, model, design, or suggestion, or for or on account of the use of any patented invention, article, or appliance that has been or may be adopted or used in or about*3845 the manufacture or production of the articles or materials, or any part thereof, to be furnished under this contract, and the contractor will not urge or claim the terms of said act or any interpretation thereof as a release from or waiver of the force or the effect of the foregoing stipulation, with the exception, however, of such patented inventions, articles, or appliances, if any, as may be incorporated in the designs, drawings, or specifications of the units to be manufactured hereunder, which are to be furnished by the party of the second part, full responsibility as to which is assumed by the United States.
Ninth. Should any unit fail in the firing test it must be replaced within a reasonable limit of time, to be determined by the party of the second part, subject to deduction for delays already accrued thereon, or which may accrue after the expiration of the extended time for replacing the unit; and the rejected unit must be removed at the expense and risk of the party of the first part, who will also reimburse the Government for any expense of transportation that may have been incurred thereon.
Tenth. This contract shall not, nor shall any interest herein, be transferred*3846 by the party of the first part to any other person or persons; and in the performance of this contract no persons shall be employed who are undergoing sentences of imprisonment at hard labor.
Tenth. (a) The contractor expressly warrants that he has employed no third person to solicit or obtain this contract in his behalf, or to cause or procure the same to be obtained upon compensation in any way contingent, in whole or in part, upon such procurement; and that he has not paid, or promised or agreed to pay, to any third person, in consideration of such procurement, or in compensation for services in connection therewith, any brokerage, commission, or percentage upon the amount receivable by him hereunder; and that he has not, in estimating the contract price demanded by him, included any sum by reason of any such brokerage, commission, or percentage; and that all monies payable to him hereunder are free from obligation to any other person for services rendered, or supposed to have been rendered, in the procurement of this contract. He further agrees that any breach of this warranty shall constitute adequate cause for the annulment of this contract by the United States, and that*3847 the United States may retain to its own use from any sums due or to become due thereunder an amount equal to any brokerage, commission or percentage so paid, or agreed to be paid.
Tenth. (b) In addition to the ordinary precautions heretofore adopted by the contractor for the guarding and protection of its plant and work, the contractor *373 shall provide such additional watchmen and devices for protection of its plant and property and the work in process for the Navy Department against espionage, acts of war and of enemy aliens as may be required by the Secretary of the Navy. The contractor shall, when required, report to the Secretary of the Navy the citizenship, country of birth or alien status of any and all of his employees. When required by the Secretary of the Navy, he shall refuse to employ or if already employed forthwith discharge from employment and exclude from his works any person or persons designated by the Secretary of the Navy for cause as undesirable for employment on work for the Navy Department.
Tenth. (c) It is understood and agreed that all work required in carrying out this contract shall be performed in full compliance with the laws of the State, *3848 Territory or District of Columbia, where such labor is performed; provided, that the contractor shall not employ in the performance of this contract any minor under the age of fourteen years or permit any minor between the age of 14 and 16 years to work more than 8 hours in any one day, more than six days in any one week, or before 6 a.m. or after 7 p.m. Nor shall the contractor directly or indirectly employ any person undergoing sentence of imprisonment at hard labor which may have been imposed by a court of any State, Territory, or municipality, having criminal jurisdiction. Provided, however, that the President of the United States may by executive order, modify this provision with respect to the employment of convict labor and provide the terms and conditions upon which such labor may be employed. This provision shall be the essence of the contract.
Eleventh. No member of or delegate to Congress, officer of the Navy, or person holding any office or appointment under the Navy Department, is or shall be admitted to any share or part of this contract, or to any benefit to arise therefrom.
Twelfth. Subject to the conditions enumerated in section 2 of the eight-hour law of*3849 June 19, 1912, no laborer or mechanic during any part of the work contemplated by this contract, in the employ of the contractor or any subcontractor contracting for any part of said work contemplated, shall be required or permitted to work more than eight hours in any one calendar day upon such work. For each violation of this provision a penalty of five dollars shall be imposed for each laborer or mechanic for every calendar day in which he shall be required or permitted to labor more than eight hours upon said work, and the amount of any such penalties shall be withheld for the use and benefit of the United States from any moneys becoming due under this contract, whether the violation of this provision is by the contractor or any subcontractor. (Subject to the provisions of Executive Order No. 2559-A of March 24, 1917.)
Thirteenth. The party of the second part, in consideration of the premises, does hereby contract, promise, and engage to and with the party of the first part as follows:
1. The price to be paid for the units to be manufactured and delivered as aforesaid shall be the price therefor as stated in the first clause of this contract.
2. Payment under this contract*3850 shall be made as follows: viz:
Partial payments from time to time as the work progresses in accordance with a schedule to be sumbitted by the contractor and approved by the Bureau of Ordnance; provided that final payment on completed units shall not be withheld beyond a period of 60 days if the unit is delayed in proof through fault of the party of the second part; provided further, that from the last payment *374 or payments becoming due hereunder there shall be reserved the sum of $10,000.00.
3. No payment shall be made except upon bills certified by the inspector in such manner as shall be directed by the Chief of the Bureau of Ordnance, whose final approval of all bills thus certified shall be necessary before payment thereof.
4. All warrants for payments under this contract shall be made payable to the party of the first part or its order.
5. When a payment is to be made under this contract, as a condition precedent thereto, the Secretary of the Navy may, in his discretion, require evidence satisfactory to him, to be furnished by the party of the first part, showing what, if any, liens or rights in rem of any kind against said units or the material on hand*3851 for the use in the construction thereof have been or can be acquired for or on account of any work done or material already incorporated as a part of said units, or on hand for that purpose; but it is hereby further stipulated, covenanted, and agreed, by the party of the first part for itself and on its own account and for and on account of all persons, firms, associations, and corporations furnishing labor and materials for said units, and this contract is upon the express condition, that no lien or rights in rem of any kind shall lie or attach upon or against said units, or the materials therefor, or any part thereof, or of either, for or on account of any work done upon or about said units, or materials, or of any materials furnished therefor or in connection therewith, nor for or on account of any other cause or thing or of any claim or demand of any kind, except the claims of the department.
6. When all the conditions, covenants, and provisions of this contract shall have been performed and fulfilled by and on the part of the party of the first part, said party of the first part shall be entitled, within ten days after the filing and acceptance of its claim to receive the*3852 amount reserved, as aforesaid, or so much thereof as it may be entitled to, on the execution of a final release to the United States, in such form and containing such provisions as shall be approved by the Secretary of the Navy, of claims against the United States arising under or by virtue of this contract.
Fourteenth. If any doubts or disputes arise as to the meaning of anything in this contract or in the drawings or specifications aforesaid, or if any discrepancy appear between said drawings or specifications and this contract, the matter shall be at once referred to the Secretary of the Navy for determination; and the party of the first part hereby binds itself to abide by his decision in the premises.
Fifteenth. This contract having been awarded, conformably to restrictive provisions in the Naval Appropriation act of March 4, 1917, upon the express understanding that the party of the first part is not a party to any existing combination or conspiracy to monopolize the interstate or foreign commerce or trade of the United States or the commerce or trade between the States and any Territory or the District of Columbia in structural steel, ship plates, armor, armament, or*3853 machinery, and the party of the first part having furnished the Secretary of the Navy with an affidavit to this effect, it is hereby further covenanted and agreed, and this contract is upon the express condition, that in case it be ascertained at any time after the signing hereof that false representations were made in said affidavit with respect to the requirements referred to above of said statute, this contract may be annulled in whole or in part by the Secretary of the Navy at his discretion.
In witness whereof, the respective parties hereto have hereunto set their hands and seals the day and year first above written.
*375 Under date of November 20, 1918, the petitioner wrote to the Navy Department as follows:
1. We request that the deliveries on our present contract No. 1958 for one hundred six inch mark XIII gun mounts be extended, and that we be permitted to commence delivery on July 1st, 1919, instead of April 1st, 1919, as specified; and that we be allowed to deliver two mounts per week instead of 5 per week, completing delivery on June 15, 1920; providing we find these extended deliveries necessary in getting our organization back into commercial work; and*3854 that, if we find it better to make deliveries earlier than the deliveries we request, we be permitted to do so.
2. If, at any time, the Department finds it necessary to have these mounts completed earlier than the deliveries mentioned above, we will put on a double shift of men and complete them as soon as possible.
3. The reason we are obliged to ask for these extended deliveries is that we are obliged, on account of the cancellation of our sub-contract from the Savage Arms Corporation for four inch mounts, to sell printing presses immediately to provide work for our men between now and next March when we begin the production of six inch mounts; it being impossible to sell presses now and complete and deliver them before next March, we are asking for a later start and a longer period on the six inch mounts, so that we can deliver the printing presses while we are delivering the gun mounts.
4. We are offering printing press business immediately, deliveries of which will be influenced by the Department's action, and on this request we urge an immediate decision.
Under date of November 20, 1918, the Navy Department wrote the petitioner as follows:
SUBJECT: Contract*3855 #1958 for 50 additional slides; Goss Printing Press Co. - Cancellation of contract.
REFERENCE: (A) Bureau's telegram #16319 to Inspector, Chicago, of Nov. 19, 1918.
1. The Bureau of Ordnance in its telegram of reference (A) states that the Bureau is preparing for immediate cancellation of contract #1958 for 50 additional slides and directs that the Inspector so notify you.
2. The Bureau directs that you submit a statement of the present status of work on this contract as a basis for cancellation.
The Bureau in its telegram states also that materials on order should be cancelled.
3. It is requested that you submit as soon as possible the statement of the present status of the work as directed by the Bureau of Ordnance.
Under date of November 22, 1918, the Navy Department wrote the petitioner as follows:
In view of the present conditions the Bureau has no need for the 50 additional slides which were to be manufactured on the Company's contract 1958, and desires to effect cancellation. This cancellation would apply only to the 50 slides, the 100 mounts and sights complete to stand.
The Bureau requests to be informed under what terms these slides may be cancelled*3856 from the Company's contract. It is requested that all work affecting these slides be stopped immediately and all contracts, for raw materials be cancelled.
It is requested that the above information be forwarded as promptly as practicable.
*376 Under date of November 23, 1918, the Navy Department wrote the petitioner as follows:
The Secretary of the Navy having authorized cancellation of 50 slides from the Company's contract No. 1958, the Company is hereby directed to case all work in connection therewith not later than December 2.
A just and fair settlement will be made as provided by the terms of the contract and in accordance with the statute covering such cases. The details of settlement will be arranged with this Bureau.
The Company is requested to submit all claims in detail at an early date. Such material as cannot be absorbed on the Company's other contracts or in commercial work, should be carefully inventoried and held for such disposition as may eventually be determined upon.
Acknowledgement of receipt of this letter is requested.
Under date of November 27, 1918, the Navy Department wrote to the petitioner as follows:
SUBJECT: Contract #1958*3857 - 6" mounts - Goss Printing Press Co., - Proposed cancellation of contract.
REFERENCE: (A) Bureau's wire #13026 of Nov. 26th, 1918, to Inspector, Chicago.
1. The Bureau of Ordnance in its wire of reference (A) states that it desires cancellation of contract #1958 with Goss Printing Press Company for 100 - 6" gun mounts, if this action can be taken without imposing unusual hardship on the Company or unusual expense to the Government, and directs that the Inspector notify the Company and request it to submit a statement of the present status of the work as a basis for cancellation and further directs that early action be requested.
Please furnish this office at the earliest possible date with a statement of the present status of work under the above contract.
2. The above information was telephoned this morning to Mr. Walser of the Goss Printing Press Company.
Under date of November 30, 1918, the petitioner wrote to the Navy Department as follows:
SUBJECT: Contract 1958 - 6" mounts, Proposed cancellation of contract.
REFERENCE: Your letter 301 - November 27, 1918.
Cancellation of this contract for one hundred 6" Mounts would be a great hardship to the company*3858 and its employees. The company has devoted practically its entire capacity to Government work for the past year and one-half and the present contract for 6" Mounts would occupy its capacity for practically another year; and the company having demonstrated its ability to produce quality and quantity has relied solely on this Government work to keep its plant going for another year and cannot now get back onto printng press work for a long period of time with consequent idleness of its plant and laying off practically its entire force of mechanics. The resulting loss would be an unusual hardship on the company and a great expense to the Government.
We cannot at this early date give you much of a detailed statement of the present status of this 6" Mount work. We have been so occupied with the cancellations of the 4" Mounts and 50 extra 6" Slides that it has been impossible to even start gathering exact data on the 6" Mounts. All we can say is that we have made rapid progress and that the fixtures and tools are about 90% done and that five of the new machine tools have been received; and we have been working to-day, November 30, about one hundred men on 6" Mount parts, fixtures, *3859 and tools, and in one more week we will have two hundred men on this *377 work and in two to three more weeks practically our entire force will be on it. We are finding it possible to supply the men work on the 6" Mounts as fast as they finish operations on the 4" Mounts, due greatly to the relief in getting material.
Sincerely hoping that we will be permitted to finish these 6" Mounts and avoid a shut-down of this plant, we remain * * *
During the period aforesaid, as well as subsequent to November 30, 1918, Homer, acting in behalf of the petitioner, had been in communication with officials of the Navy Department with respect to the proposed action of the Department not to permit delivery of the articles mentioned at the prices theretofore in contemplation.
As the result of his conferences with officials of the Navy Department, Homer obtained information to the effect that the Department required the 100 six-inch gun mounts for installation on ships then under construction, and that the Department believed that if it declined to go on with the contract as contemplated, it might later order the same articles at a lower price. Homer communicated this information to*3860 the petitioner in Chicago, and a conference was subsequently arranged with officials of the Navy Department to discuss the subject of price reduction and extension of delivery dates. At that time, the petitioner had contracted for machinery in substantial amounts, and there had already been delivered to it two large type boring and turning machines, costing more than $14,000 each; a third machine was delivered on December 1, 1918, and a fourth later in December. The petitioner had then also expended substantial amounts on jigs, tools, drawings and patterns. The utilization of the petitioner's plant during 1918 for the manufacture of war materials had so demoralized its regular business, which was the manufacture of printing presses, that the sudden withdrawal of the petitioner from the manufacture of gun mounts would necessarily have resulted in the discharge of a large number of skilled mechanics, whose services would later be required in the petitioner's regular business when the same could be normally reestablished.
In this situation, Homer held conferences with the officials of the Navy Department, at which he was informed that all work would be stopped unless new arrangements*3861 could be made to furnish the gun mounts at a material reduction in price, and he was requested to submit a proposition along that line. He later submitted a proposition orally, and then confirmed same by letter dated December 3, 1918, as follows:
1. We beg to confirm our verbal offer of this afternoon, to Commander Reichmuth, to reduce the contract price of the 100 6" Mounts, Mark XIII covered by contract No. 1958 to Twenty Thousand and seven hundred Dollars ($20,700.00) each providing we are allowed the extension of the contract time we requested in our letter to you of November 20th.
*378 2. We will make a still further reduction in price if we can get our subcontractors to furnish the material at prices lower than already agreed upon, all the material having been purchased.
3. We will notify the Bureau on Thursday afternoon, December 5th, as to the amount of this further reduction in price.
Again on December 5, 1918, the petitioner wrote to the Navy Department as follows:
1. We wrote you yesterday that we would reduce the price on each of the 100 - 6" Mounts to $20,700.00 certain, and would make a further reduction if we could get the sub-contractors to*3862 furnish the material at prices lower than already agreed upon.
2. We have secured concessions on Material amounting to about $400.00 per mount and may be able to get some additional concessions, and allowing for this and making a further reduction ourselves, we will make a further reduction to you of $850.00 per mount, making the net price to us, Nineteen Thousand, Eight Hundred and Fifth Dollars ($19,850.00) per mount.
,3. We sincerely hope you will be able to let us build these 100 - 6" Mounts at this greatly reduced price, as this is the only work in sight to keep our machinists employed, and we feel that their good and patriotic services in building the 4" Mounts so perfectly and in such good time should be rewarded with this additional work.
4. The reduction in price can be taken from the payments in whatever way you desire, but it would be a convenience to us if it were all taken from the third payment.
Under date of December 6, 1918, the Navy Department wrote to the petitioner as follows:
Reference: (a) Your letter of December 5, 1918.
SIRS:
The Bureau will accept the proposal of the Goss Printing Press Company which reduces the price on contract #1958*3863 for 100 6" Naval Gun Mounts from $23,000 per unit to $19,850.
The necessary steps will be taken to have this contract altered accordingly.
Subsequent to the letters above set out, and on and after December 9, 1918, Homer held further conferences with officials of the Navy Department as indicated in the following letters from him to the petitioner:
Washington D.C.,
December 9, 1918.
SUBJECT: 6" CONTRACT.
1. I have had a conference with Mr. Werntz on the subject of contract 1958, and he has agreed that he will issue to us the original contract with the supplement covering the change in price. He can not agree to paying us except on the basis of percentages of the contract price as changed.
2. He protested against the issuance of the contract, but I explained to him that this was what we would insist on, and he finally agreed to it. He will approve the lists as forwarded by you on past payments and will change the dates of delivery on the contract as per my conference with Reichmuth this morning.
3. Mr. Werntz agrees to have these contracts ready for us on Wednesday.
*379 Washington, D.C.,
December 11, 1918.
SUBJECT: CONTRACT FOR 6" MOUNTS.
*3864 1. Mr. Werntz advises that he will have the contract executed by the last of the week. He is spending most of his time before the Finance Committee at Congress, endeavoring to get enough money for this and similar contracts.
Washington, D.C.,
December 13, 1918.
SUBJECT: CONTRACTS FOR 6" GUN MOUNTS.
1. Beg to advise that we have today had a conference with Commander Reichmuth, who advises that the original contract for the 6" Mounts will go to the Secretary at the same time as the supplement, which is now being prepared and they expect it to be ready for us Monday or Tuesday of next week.
2. I will obtain same and forward it to you at that time.
Washington, D.C.,
December 17, 1918.
SUBJECT: CONTRACT AND SUPPLEMENT FOR 6" MOUNTS.
1. Captain Kearney informs me today that he will see that the contract and supplement, in accordance with our conferences and agreements, are in our hands before Christmas, that is, the original contract, plus the supplement modifying the price, etc.
2. Captain Kearney apologizes for the delay in this and says that at present they are spending night and day doing work for Congress, and that as soon as this is out of the way, *3865 they will be in position to get our papers completed, which he hopes will be in the course of the next two or three days.
On December 27, 1918, the Acting Secretary of the Navy, in compliance with Section 3745 of the Revised Statutes, made the following affidavit:
Contract dated September 17, 1918, with Goss Printing Press Company, of Chicago, for manufacture of 100 gun mounts with sights and 50 additional slides for gun mounts.
AFFIDAVIT.
I do solemnly swear (or affirm) that the copy of contract hereto annexed is an exact copy of a contract made by me personally with Goss Printing Press Company, of Chicago, By: Sam G. Goss, President, that I made the same fairly, without any benefit or advantage to myself or allowing any such benefit or advantage corruptly to the said Goss Printing Press Company, of Chicago, By: Sam G. Goss, President, or any other person; and that the papers accompanying include all those relating to the said contract, as required by the statute in such case made and provided.
Under date of December 28, 1918, Homer notified the petitioner at Chicago as follows:
THE GOSS PRINTING PRESS CO.,
Washington, D.C.,
December 28, 1918.
From: The Goss*3866 Printing Press Co., Washington, D.C.
To: The Goss Printing Press Co., Chicago, Ill.
Subject: CONTRACT 1958
1. The signed contract and supplement have to-day reached Mr. Werntz's desk and he advises me that by Monday or Tuesday of next week he will have *380 all the papers, schedules, etc., together, and will give same to me to forward to you.
A. P. Homer.APH.HD
Under date of December 31, 1918, the Navy Department wrote to the petitioner at its Washington office as follows:
Subject: Modification of contract No. 1958 with Goss Printing Press Company for 6-inch mounts.
Inclosure (Herewith):
(A) Forms of supplemental agreement in triplicate.
Sirs:
The Bureau forwards herewith in triplicate forms of Supplemental agreement modifying the contract above referred to to provide for the furnishing of 100 6-inch Mark XIII gun mounts complete, with sights Mark XXVII (except telescopes), at $19,850.00 each.
It is requested that these forms of agreement be executed by your company and by the surety on the bond attached to the original contract, the forms then to be returned to the Bureau for execution on the part of the United States, after which one copy will*3867 be furnished for your file.
Homer on the same date then wrote to the Chicago office of the petitioner as follows:
1. I enclose herewith original Bureau letter just received and Supplemental agreement. Immediately upon receipt of the Supplemental agreement properly executed, the Department will have same executed and attached to the original contract, which will then be delivered to us.
2. Please be certain to return the executed Supplemental Agreement to me at this office.
The documents were received at the Chicago office of the petitioner on January 2, 1919, were executed on that date by the petitioner, and were forwarded to Homer with the following letter:
1. We have your special delivery letter of the 31st ultimo, enclosing supplemental agreement to contract 1958 for execution. The documents are returned to you herein duly executed by our vice president and attested by our secretary with the corporation seal affixed. All three copies are executed in like manner.
2. We notice that the Bureau's letter requests that the surety of the bond also execute these contracts so that it will be necessary for you to take these three copies to the Bonding Company and have*3868 them also execute them. Then you can deliver them to the Bureau for final execution together with the original contract.
3. Will you kindly follow this matter up and see that the original contracts, together with supplements are returned to us fully executed at an early date?
4. Also in this connection we notice that the supplemental agreement does not stipulate or touch upon the matter of partial payments as the work progresses. The schedule dealing with this feature was attached as a supplement to the original contracts and in the absence of any advice to the contrary, we assume that the schedule of payments as submitted by ourselves is accepted by the Bureau and that payments will be made in accordance therewith.
Homer thereafter obtained the approval of the surety company and delivered the documents to the Navy Department.
*381 The supplemental agreement (so-called) according to the records of the Navy Department was signed by the Secretary of the Navy on January 16, 1919, reading as follows:
SUPPLEMENTAL AGREEMENT
THIS AGREEMENT made and concluded this 28th day of December, 1918, by and between the Goss Printing Press Company, a corporation organized*3869 under the laws of the State of Illinois, and doing business at Chicago, in the State of Illinois, party of the first part (hereinafter called the contractor) and the United States represented by the Secretary of the Navy, party of the second part, (hereinafter called the Department).
WHEREAS, it has been determined by the Department that readjustments incident to the cessation of active warfare and in the interests of Public Economy require that the contract entered into by the parties hereto, under date of September 17, 1918, (Dept. No. 1958), which provides for the furnishing of 100 6" gun mounts and 50 additional 6" slides, and spare parts therefor, should be modified as to materials to be furnished and the price to be paid therefor, and;
WHEREAS, it is provided by the Act approved July 1st, 1918, making appropriation for the Naval Service for the fiscal year ending July 30th, 1919, and for other purposes any existing contract for the building, production or purchase of ships or war material may be cancelled or modified, and;
WHEREAS, the Department has determined and the contractor has agreed to the just basis of compensation for the modification of said contract as desired*3870 by the Department;
NOW THEREFORE, this agreement witnesseth, that in consideration of the premises and for and in consideration of the payments to be made as hereinafter provided the said contract it hereby modified as follows:
In lieu of the 100 6-inch gun mounts complete with sights and 50 additional slides for 6-inch gun mounts and the spare parts required to be furnished under said contract;
The contractor will at his own risk and expense manufacture and deliver to the Navy Department, 100 6-inch Mark XIII gun mounts complete with sights Mark XXVII (except telescopes) at $19,850.00 each;
Just settlement, to be mutually agreed upon, shall be made on account of work already done on the 50 additional 6-inch slides which are not now required to be furnished.
The contractor will deliver the gun mounts required under this agreement within the period herein stipulated, namely; one mount on or before April 1, 1919, and 3 additional mounts per week from and after May 1, 1919, until completion.
Except as specifically provided herein, all the provisions of the contract aforesaid shall be and remain in full force and effect. Nothing contained in this agreement or done or*3871 required under its terms shall operate to annul, release or otherwise affect the validity of any bond given in connection with said contract, but said bond shall remain in full force and effect in the same manner and with like effect as if the modifications provided for herein had been made a part of the original contract at the time of its execution, and the surety on said bond shall, and by signing hereby does consent to this agreement for the purpose of extending its obligation to the modification aforesaid.
Under date of January 24, 1919, the Navy Department made delivery to the petitioner of the two documents in question dated *382 respectively September 17, 1918, and December 28, 1918, and wrote in connection therewith a letter stating as follows:
Subject: Contract No. 1958 dated September 17, 1918 with Goss Printing Press Company for 6" gun mounts.
Enclosure (Herewith): (A) Copy of contract with specifications and bond.
(B) Supplemental agreement dated December 28, 1918, modifying the contract above referred to.
Sirs:
Your contract of September 17, 1918 covering 100 6" gun mounts and 50 additional 6" slides, having been duly executed by the Navy Department*3872 on the part of the United States one copy is herewith returned for your files.
A copy is also enclosed of supplemental agreement dated December 28, 1918, modifying this contract to provide for the furnishing of 100 6" gun mounts at a reduced price, and providing also for a just settlement on account of work already done on the 50 additional 6" slides called for by the original contract, but which will not now be required.
This material is to be billed on special blanks for mounts which will be furnished on application, and submitted in septuplicate (one original and six memorandum copies). These mounts are chargeable to the appropriation "Increase of the Navy, Armor and Armament", which appropriation should be noted at the head of each voucher.
This contract will be known as "Department No. 1958," which number should be entered at the top of each voucher, and referred to in all correspondence in connection therewith.
On January 28, 1919, the Navy Department wrote to the petitioner as follows, with the enclosure of the schedules referred to:
Subject: Contract No. 1958 dated Sept. 17, 1918, for 6-inch mounts - schedule of payments.
Inclosures (Herewith): (A) Schedule*3873 submitted by the Company.
(B) Copy of this letter with copy of inclosure (A) attached for the Naval Inspector of Ordnance.
Sirs:
The contract above referred to provides for "partial payments from time to as the work progresses in accordance with a schedule to be submitted by the contractor, and approved by the Bureau of Ordnance."
The schedule submitted by the Company, inclosure (A), is hereby approved for the purpose of making partial payments under this contract as follows:
First payment of 25% of the price of each mount when the principal parts of that mount, as listed in schedule "A" herewith, have been provisionally accepted.
Second payment of 50% of the price of each mount when the parts, listed in schedule "B" herewith, are machined ready for fitting into assemblies, and all the material for said mount is on hand.
Third payment of 15% of the price of each mount when said mount is completed and delivered F.O.B. works ready for test.
Fourth payment of 10% of the price of each mount, when said mount has been completed, finally accepted, and delivered.
On March 4, 1919, the Solicitor of the Navy Department wrote to the petitioner as follows:
There is enclosed*3874 for your files one of the triplicates of the bond dated February 12, 1919, in the penalty of $148,875 submitted by your company in *383 substitution of the previous bond on the amount of $200,000, accompanying your contract of September 17, 1918, for the furnishing of 100 6-inch gun mounts.
By direction of the Secretary:
The petitioner thereafter proceeded to manufacture the 6-inch gun mounts and during the year 1919 completed and delivered 13 of said mounts and partially completed some of the remaining gun mounts.
Nothing was paid or accrued to the petitioner in 1919 on account of the 50 slides mentioned in said documents, and no part of its income for 1919 was income from such source.
The following communications were sent to the petitioner from the Navy Department:
March 21, 1919.
Subject: Contract 1958 for 6" Mark XIII gun mounts, Suspension of work on 50 mounts.
Gentlemen:
At the present time much discussion is under way in Naval office circles of all countries as to the types of heavy ships most suited to meet the demands of the future in Naval warfare. The Department, therefore, directs that you immediately suspend all work on 50 of the 6" Mark XIII*3875 mounts ordered on contract 1958. These 50 mounts were intended for battle cruisers 1 to 6. You will incur no further expense on this portion of the contract and will direct all subcontractors doing work for you to act in a similar manner.
This suspension of work will undoubtedly continue for several months.
Despatch
Navy Department
Bureau of Ordnance
June 25, 1919.
Telegram
Goss Printing Press Co.,
Chicago, Ill.
Referring to Bureau letter 35985 of March 21st calling for suspension of work on fifty six inch mounts on contract number 1958 stop your company is authorized to proceed with the manufacture of all mounts on this contract.
RALPH EARLE
Chief, Bureau Ordnance, Navy.
NAVY DEPARTMENT
Bureau of Ordnance.
Washington, D.C.
35985 (M2-6) - O
EH
July 2, 1919.
Note: Letter 3-21-19
Subject: Contract 1958 for 6" mounts, authorization for completion of contract.
Reference: (a) Bureau's telegram of June 25, 1919, No. 35985.
(b) Bureau's letter No. 35985 of March 21, 1919.
Gentlemen:
Supplementing the Bureau's telegram reference (a), the Company is hereby authorized to proceed with the manufacture of the 100 - 6" mounts and sights*3876 *384 called for on contract No. 1958. The Bureau in reference (b) directed the suspension of work on 50 of these units and this order is hereby revoked.
Chicago, Ill.
7 July 1919
Forwarded
July 8, 1919
Frank Burns.
NAVAL INSPECTOR OF ORDNANCE
N. W. Davis.On March 12, 1919, Josephus Daniels, the Secretary of the Navy, in compliance with section 3745 of the Revised Statutes, made the following affidavit:
26548-451:5
S/GT
Agreement, dated December 28,
1918, with the Goss Printing Press Co.
for gun mounts Dept. No. 1958-A
AFFIDAVIT
I do solemnly swear (or affirm) that the copy of contract hereto annexed is an exact copy of a contract made by me personally with the Goss Printing Press Company, of Chicago, Ill. By: Geo. H. Eddy, Vice-President, that I made the same fairly, without any benefit or advantage of myself or allowing any such benefit or advantage corruptly to the said The Goss Printing Press Company, of Chicago, Ill. By: George H. Eddy, Vice-President, or any other person; and that the papers accompanying include all those relating to the said contract, as required by the statute in such case made and provided.
The balance of the 100*3877 six-inch mounts which were not delivered during 1919 were delivered during 1920 at the price of $19,850 each.
The determination of the deficiency asserted by the respondent is predicated upon the treatment of a portion of the 1919 net income of the petitioner as attributable to a Government contract made between April 6, 1917, and November 11, 1918, and likewise to the same percentage of the aggregate net income of the petitioner for the year 1919 being attributable to such a contract as the proportion which the 1919 gross sales attributable to a Government contract bears to the aggregate gross sales of the petitioner for said year.
Of the petitioner's total gross sales in 1919, the amount of $1,362,511.76 was derived from the sale of printing presses; and the balance was derived either from the sale of war materials to the United States under Government contracts made between April 6, 1917, and November 11, 1918, other than the contracts here in question, or was attributable to the sale to the United States of 13 six-inch mounts delivered during the year 1919 and the partial completion of others, under the circumstances heretofore set forth, or was derived in part from both*3878 sources.
The petitioner, during 1919, derived a net income of more than $10,000 from a Government contract other than the one here involved in this proceeding, and the net income not attributable to a Government contract or contracts made between April 6, 1917, and November *385 11, 1918, is the same percentage of the total net income for 1919 as the proportion which the sales not attributable to such contract or contracts bears to the total sales.
The petitioner's gross sales in 1919 of 6-inch gun mounts manufactured under the contract in question amounted to $258,050.
OPINION.
TRAMMELL: There is no controversy with respect to the facts material in this proceeding, which were stipulated by the parties and are set out in our findings of fact, above. The sole issue for decision is whether certain income, received by the petitioner during the calendar year 1919 from the manufacture of 6-inch gun mounts for the Navy Department is taxable under section 301(c) of the Revenue Act of 1918, as income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918.
The Revenue Act of 1918 provides as follows:
SEC. 301. (c) For the taxable*3879 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 excess-profits credit and the war-profits credit applicable to the taxable year shall be used; * * *
The petitioner admits that in 1919 it derived a net income of more than $10,000 from a Government contract made between April 6, 1917, and November 11, 1918, other than the contracts here in question, and the income involved herein is, therefore, taxable under section 301(c) of the Revenue Act of 1918, supra, if derived from a Government contract made between the dates stated in the statute.
The respondent has determined that said income was so derived, and has computed the deficiency on that basis. The petitioner contends*3880 that the action of the respondent in this respect was erroneous for the following reasons: (1) Because the original contract dated September 17, 1918, was not "made" within the meaning of the taxing statute between the dates specified therein; (2) because, even if said original contract was made between the dates stated the income in controversy is not attributable to said contract, but was derived from a contract made subsequent to November 11, 1918; and (3) for the reason that section 301(c) of the Revenue Act of 1918 is unconstitutional.
The stipulated facts disclose that, under the circumstances set out in our findings of fact, above, the petitioner, on September 12, *386 1918, submitted to the Navy Department a written proposal to manufacture certain gun mounts and extra slides at prices and for delivery on dates specified. On September 18, 1918, the Secretary of the Navy advised the petitioner that its proposal was accepted, and on October 11, 1918, the Navy Department forwarded contract and bond forms to the petitioner for execution. These contract forms, dated September 17, 1918, provided for the manufacture and delivery by the petitioner of 100 six-inch gun mounts, *3881 50 additional slides for 6-inch gun mounts and spare parts to be furnished in accordance with list to be furnished by the Bureau of Ordnance at prices to be agreed upon. This document is referred to for convenience as the original contract of September 17, 1918. On October 23, 1918, the three copies of the contract, and the bond, were signed by the petitioner, and on October 28, 1918, the bond was executed by a surety company. On October 31, 1918, the bond was formally approved by the Navy Department, and on the same date the three copies of the contract were signed on behalf of the United States. On January 24, 1919, a triplicate original copy of this contract was delivered by the Navy Department to the petitioner, together with a copy of another agreement, designated for convenience as the supplemental contract.
As a result of negotiations between the petitioner and the Navy Department, entered into subsequent to the Armistice, looking to the cancellation or modification of the original contract, forms of a supplemental agreement, in triplicate, dated December 28, 1918, were delivered by the Navy Department to a representative of the petitioner for execution by it. The so-called*3882 supplemental contract was executed by the petitioner on January 2, 1919, and was signed by the Secretary of the Navy on January 16, 1919. A copy of the supplemental contract was thereafter delivered to the petitioner by the Navy Department on January 24, 1919, coincident with the delivery of a copy of the original contract.
The issue here is whether the income derived from the manufacture and sale of the gun mounts above mentioned is attributable to a Government contract made between April 6, 1917, and November 11, 1918. Two separate written documents, the so-called original contract and the so-called supplemental contract, are involved. The first problem, then, is to determine whether these documents constitute two separate and distinct contracts, or whether the so-called supplemental contract is merely a modification of, or a supplement to, the so-called original contract, so that the two instruments together form in effect one contract. If the facts are such that in law the supplemental contract amounted to a new and separate agreement, which abrogated and superseded the original contract, and if the income in question is attributable to the so-called supplemental contract*3883 of *387 December 28, 1918, it will in that event be unnecessary to consider the petitioner's first and third assignments of error.
Was the supplemental agreement a new contract? To determine this question we must look to the provisions of the two documents, examine into the circumstances surrounding their execution, and consider the effects flowing therefrom.
Under the original contract, the petitioner agreed to manufacture and deliver to the Navy Department 100 six-inch gun mounts at $23,000 each, 50 additional slides for 6-inch gun mounts at $6,500 each, and spare parts at prices to be agreed upon. The so-called supplemental contract provided only for the manufacture and delivery by the petitioner of 100 six-inch gun mounts at the price of $19,850 each. Time was of the essence of the original contract, but was not an essential consideration of the supplemental contract, under which, as a matter of fact, only 13 gun mounts were manufactured and delivered during the year 1919.
The negotiations leading up to the original agreement were conducted during the period of active hostilities, and the prices were agreed upon under war conditions. After the Armistice, the*3884 Navy Department found that the 50 additional slides and other spare parts were not needed, but that the 100 six-inch gun mounts were required for installation on ships then under construction. However, it was believed that if the Department declined to go on with the original contract as contemplated, the gun mounts could be purchased later at a lower price. The price stipulated for the gun mounts in the supplemental agreement was based upon market conditions obtaining in December, 1918, after the signing of the Armistice. Thus, it appears that the agreement evidenced by the so-called supplemental contract was materially different from that embodied in the so-called original contract, and was made under materially different circumstances and conditions.
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*3885 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." United Transp. & Lighterage Co. v. N.Y. & Baltimore Transp. Line,185 Fed. 386.
In Mason v. United States,17 Wall. 67">17 Wall. 67, the facts were similar to those in this proceeding. Mason accepted an order from the War Department to manufacture 100,000 muskets on certain terms specified. *388 Later, a commission was appointed to adjust all contracts, orders and claims on the Department in respect to arms. Pursuant to a recommendation of the commission, the order to Mason was reduced to 30,000 muskets, upon condition that he should execute a bond for performance of the contract. The bond was executed, and the 30,000 muskets were manufactured and delivered by Mason in accordance with the new or modified agreement. In considering the status or effect of the agreements, the court, in its opinion, said:
Much discussion of the case is certainly unnecessary, as it is as clear as any proposition of fact well can be, that the claimant voluntarily accepted*3886 the modification of the contract as suggested by the commissioners, and that he executed a new contract in its place, which he must have understood was intended to define the obligations of both parties.
Since the so-called supplemental contract constituted, in our opinion, a new agreement executed after November 11, 1918, we must conclude that it does not come within the purview of section 301(c) of the 1918 Act. It was intended by the provisions of that section to subject to the 80 per cent war-profits tax only the net income of corporations amounting to more than $10,000 derived in 1919 and subsequent years from Government supply contracts, made during the war period. It is not difficult to comprehend the reason for, and the equity of, such a provision. The situation is clearly disclosed by an examination of the legislative history of section 301(c). This section was first introduced into the 1918 revenue bill in the Conference Committee. In explaining the provision to the House, the Chairman of the Ways and Means Committee stated:
Though the 80 per cent war profits tax is eliminated for the next fiscal year - since there are no war profits for 1919-20 - the conferees*3887 put in a provision extending the 80 per cent war profits tax for the calendar year 1919 to catch the profits that are derived in 1919 from war contracts made in 1918 and 1917, so that the profiteers will not get off with 80 per cent eliminated after January 1, 1919. They will receive some income during 1919 from war contracts made between the beginning of the war and the signing of the Armistice, November 11. The conferees, senate and House, were unanimous in the opinion that this should be done. The 80 per cent tax will, under this provision, apply to such income. (57 Cong. Rec., p. 3005.)
In explaining this section to the Senate, the Chairman of the Committee on Finance stated:
Mr. Simmons: The Secretary of the Treasury, in his recommendation asking that the war-profits tax be abolished after 1918, suggested that there ought to be provision by which the 80 per cent rate would be continued for profits realized after 1918 from Government contracts made during the war; and the purpose which the conference committee had in view was to see to it that a Government contract heretofore made, and based upon the prices that had heretofore obtained, should pay the same tax upon*3888 its war profits when those war profits were made in 1919 as it is required under the law to pay when those profits were made in 1918. (57 Cong. Rec., p. 3133.) (Italics supplied.)
*389 The petitioner's income, here in controversy, does not represent war profits. The gun mounts were actually manufactured and delivered pursuant to the provisions of the contract of December 28, 1918, and the payments therefor were made by the Navy Department in accordance with its terms. The amount of the income derived by the petitioner in 1919 is measured by the price of the gun mounts specified in said contract.
For the foregoing reasons, the facts here lead us to the conclusion that the income in controversy is not attributable to a Government contract within the meaning of section 301(c).
The conclusion reached by us in this case is not inconsistent with our decision in A. B. Kirschbaum Co.,5 B.T.A. 65">5 B.T.A. 65, where we held that income received in 1919 by a taxpayer under an agreement entered into in that year for the cancellation of war supply contracts made between April 6, 1917, and November 11, 1918, is income attributable to a Government contract or contracts within*3889 section 301(c). See also R. Hoe & Co.,7 B.T.A. 1277">7 B.T.A. 1277.
In the Kirschbaum case we held that the original contract alone was the cause of the taxpayer's receipt of the income. If there had been no original contract there would have been no compensation for its cancellation. Here, manifestly, we have a materially different situation. As pointed out above, the original contract did not produce the income received by the petitioner. Nor can the income received under the supplemental contract be said to constitute compensation for cancellation of the former contract. The so-called supplemental contract recited that "The Department has determined and the contractor has agreed to the just basis of compensation for the modification of said contract as desired by the Department;" and further provided that "Just settlement to be mutually agreed upon, shall be made on account of the work already done on the 50 additional 6-inch slides which are not now required to be furnished."
Obviously, the compensation mentioned in the supplemental contract as having theretofore been agreed upon on account of the modification of the original contract, as well as the compensation*3890 provided to be thereafter mutually agreed upon on account of the work already done on the 50 additional slides, is an extraneous matter not material in this proceeding. The facts in the record before us do not, in our opinion, justify the conclusion that the income received under the supplemental contract of December 28, 1918, constituted compensation for cancellation or modification of the original contract of September 17, 1918.
The income here in controversy, not being attributable to a Government contract made between April 6, 1917, and November 11, 1918, is not taxable under section 301(c) of the Revenue Act of 1918, *390 and the respondent erred in so holding. The deficiency should be redetermined accordingly.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.
MORRIS and ARUNDELL did not participate.