*214 Petitioners were the sales representatives of Crucible Steel Company of America under an employment contract entered into in 1935. In the same year they assigned this contract to a wholly owned corporation which performed all services called for thereunder. This employment contract could have extended to 1961. On December 30, 1943, the employment contract was ended by a cancellation agreement under which petitioners received $ 1,700,000, the corporation having been liquidated immediately prior thereto. Respondent determined $ 225,000 of this amount to be excessive profits. Petitioners contend the cancellation agreement is not encompassed by the Renegotiation Act; that no amount paid in consideration thereof is therefore subject to renegotiation. Held, section 403 (a) (5) (B) of the Renegotiation Act of 1943 authorizes adjustment of profits of petitioners even though such profits form a part of the consideration for cancellation of the employment agreement.
*1107 Petitioners seek in this proceeding redetermination of an order issued by the War *215 Contracts Price Adjustment Board determining that they derived excessive profits in the amount of $ 225,000 during the fiscal year ended December 31, 1943. The question is whether petitioners were subcontractors within the provisions of section 403 (a) (5) (B) of the Renegotiation Act of 1943, as amended on June 30, 1945. The principal issue is whether the cancellation agreement of an employment contract constituted a "contract with a Department" or a "subcontract" within the meaning of the Renegotiation Act of 1943, as amended on June 30, 1945. Facts have been stipulated and the stipulation is incorporated herein by this reference. The petitioner, Estate of Robert I. Gale, Deceased, Robert I. Gale, Jr., Executor, was substituted as one of the petitioners after the death of Robert I. Gale upon proper motion having been made to the Court.
FINDINGS OF FACT.
Robert I. Gale was especially skilled in the development (particularly as to the form of an article and adapting the same to the purposes of the customer) and sale of alloy and carbon steel axle shafts and blanks used in the manufacture of automobiles. On December 14, 1934, Pittsburgh Crucible Steel Company (now Crucible Steel*216 Company of America), hereinafter called Crucible, and Gale entered into an employment contract whereby Gale became exclusive sales representative of Crucible for its blanks division. The contract covered the sale of alloy, carbon steel shafts, and blanks which are commonly *1108 used in the manufacture of motor vehicles and motors and also sales thereof for any other uses which might thereafter develop. For his services Gale was to receive a commission of 5 per cent of all such products sold and delivered by Crucible, excepting crankshafts fabricated from alloy materials. For the latter he was to receive $ 1 to $ 2.50 per ton under four specified classifications. It was agreed that the employment contract was not to conflict with Gale's association with Mid-West Forge Company. Further, the contract provided that Gale should have the right to organize a corporation and to assign to such corporation his rights under the employment contract.
The employment contract was to be effective upon its execution and delivery and was to continue during the life of a patent license agreement entered into by Crucible and Mid-West Forge Company. The patent license agreement between Crucible*217 and Mid-West Forge Company was to continue during the life of a certain patent, issued in 1934 and described therein, including improvements, reissues, renewals, or extensions thereof. Several additional patents coming within the terms of the contract between Crucible and Mid-West Forge Company have been issued. The employment contract would have thus extended, except for the cancellation hereinafter mentioned, until December 12, 1961, and by its terms could have extended until a later date.
In 1935, Waters-Vogel Company, Inc., a Michigan corporation (hereinafter called Waters-Vogel), was organized by Gale, Guy W. Waters, and Edgar H. Vogel (hereinafter referred to as Waters and Vogel), who were the sole stockholders and officers. Gale owned 60 per cent of the capital stock and Waters and Vogel each owned 20 per cent thereof. The issued capital stock was 100 shares of $ 10 par value for which Gale invested $ 1,000 cash. Waters and Vogel each acquired his stock from Gale at no cost. The employment contract then held by Gale was assigned to Waters-Vogel. From the time of the assignment of the employment contract to Waters-Vogel until the cancellation thereof on December 30, 1943, *218 all services performed under the contract were performed by Waters-Vogel and Gale, Waters, and Vogel performed no services thereunder except in their capacity as officers of Waters-Vogel. Sales effected pursuant to the employment contract and commissions paid were as follows:
| Year | Net sales | Commissions |
| 1935 | $ 144,279.75 | $ 13,895.16 |
| 1936 | 883,644.79 | 59,553.73 |
| 1937 | 924,980.24 | 55,747.08 |
| 1938 | 641,690.90 | 39,576.62 |
| 1939 | 1,210,003.68 | 86,623.49 |
| 1940 | 1,505,666.28 | 94,958.84 |
| 1941 | 1,764,386.06 | 118,826.61 |
| 1942 | 2,431,983.40 | 117,370.25 |
| 1943 | 3,740,860.57 | 210,580.33 |
*1109 Of the $ 210,580.33 received by Waters-Vogel under the employment contract in 1943, $ 207,409 was determined by the respondent to have been derived from sales and deliveries under war contracts and subcontracts by Crucible and Waters-Vogel and said sum was accordingly subjected to renegotiation.
On August 7, 1943, Crucible wrote Waters-Vogel the following:
I wish to inform you that at its last meeting the Executive Committee of this company gave careful consideration to the question of arranging, if possible, for the cancellation of the Sales Management Contract between your company and Pittsburgh*219 Crucible Steel Company (the latter having some time since been merged with Crucible Steel Company of America). The judgment of the Executive Committee is that the divided responsibility created by this contract militates against efficient management and development of our Forged Blanks Division. Moreover [sic], the Committee shares with the principal officers of this company the view that the proportions to which this phase of our business is expanding in connection with the war effort makes it particularly desirable, if not vitally necessary, to terminate this divided responsibility.
* * * *
Negotiations followed for several months. On December 28, 1943, Crucible sent the following telegram to Gale, Waters, and Vogel:
HEREBY OFFER $ 1,700,000 FOR STRAIGHT CANCELLATION OF EMPLOYMENT CONTRACT TIME IS ESSENCE OF THIS OFFER AND CONTRACT MUST BE DULY ASSIGNED TO CRUCIBLE OR ITS NOMINEE NOT LATER THAN NOON DECEMBER 30TH AGAINST WHICH WE WILL DELIVER OUR CERTIFIED CHECKS.
On December 29, 1943, a special meeting of the stockholders of Waters-Vogel was held at which the Articles of Incorporation were amended so that the corporate existence would expire on December 30, 1943. *220 On the same day the board of directors of Waters-Vogel met and resolved that all property and assets of Waters-Vogel (other than cash in bank) be assigned, transferred, and distributed to the stockholders in liquidation of the outstanding shares of capital stock. Pursuant thereto the assets were liquidated and Waters-Vogel dissolved on December 30, 1943. As a result of the liquidation, Gale, Waters, and Vogel, individually, became the sole owners of the employment contract on December 30, 1943. On the same day the offer of Crucible was accepted, the sum of $ 1,700,000 was paid and the employment contract was canceled. Said sum of $ 1,700,000 was a negotiated sum agreed upon by Gale, Waters, Vogel, and Crucible for the cancellation of the employment contract.
Throughout the calendar year 1943 Gale acted as an officer of Mid-West Forge Company, a corporation, and as president of Waters-Vogel, Vogel acted as vice president and secretary of Waters-Vogel, and Waters acted as vice president and treasurer of Waters-Vogel. During 1943 Gale, Waters, and Vogel, neither individually, jointly, or as partners, performed services for Waters-Vogel under the employment *1110 contract, nor*221 did they as individuals receive any profits thereunder, except that Waters, Vogel, and Waters acting for Gale executed the acceptance of Crucible's offer and they surrendered the employment contract and each received the proceeds from the surrender of the employment contract to which he was entitled pursuant to said offer and acceptance.
Of the amount of $ 1,700,000 paid to petitioners by Crucible, the sum of $ 414,000 was shown upon the books of Crucible as allocable to contracts or subcontracts with Departments named in the Renegotiation Act. Said $ 414,000 was claimed by Crucible as a renegotiable expense for its year 1943 and was allowed in full as a cost of renegotiable business by the War Contracts Price Adjustment Board, hereinafter called Board, which concluded a bilateral agreement with Crucible for 1943. Petitioners had no part in and were not advised of said allocation by Crucible on its books nor of any of the details of the renegotiation proceedings which were being carried on between the Board and Crucible. The above $ 414,000 claimed by Crucible as a renegotiable expense is in addition to the $ 207,409 which had previously been subjected to renegotiation.
On September*222 11, 1947, the Board issued an order determining that petitioners had derived excessive profits in the amount of $ 225,000 for the fiscal year ended December 31, 1943. The Board in its statutory letter, dated February 16, 1948, did not inform petitioners what their income or expenses were for the fiscal year ended December 31, 1943.
Petitioners were subcontractors within the purview of section 403 (a) (5) (B) of the Renegotiation Act of 1943, as amended.
Petitioners realized excessive profits in the amount of $ 225,000.
OPINION.
Petitioners and respondent agree that the employment contract between Crucible and petitioners was subject to renegotiation and under such contract Waters-Vogel renegotiated commission payments totaling $ 207,409 made during the year 1943. The record shows Crucible was anxious to terminate the employment contract, as a result of which Crucible made an offer of $ 1,700,000 for cancellation thereof. The petitioners accepted the offer. Respondent determined that $ 225,000 of the $ 1,700,000 was excessive profit.
At the outset we should state petitioners have not submitted any evidence relating to the amount of excessive profits. They limit their case to the*223 sole question as to whether the cancellation agreement is subject to the Renegotiation Act of 1943, as amended. We must decide whether any portion of the sum paid by Crucible in cancellation of the employment contract represents renegotiable profits *1111 of the petitioners for 1943 within the meaning of the Renegotiation Act of 1943, as amended.
Petitioners contend that they did not receive any amounts under a contract with a Department or from a subcontract during the year 1943. Further, that the amounts actually received were in consideration of the cancellation of the employment contract between Crucible and petitioners, and, hence, did not represent commissions paid under a contract or subcontract within the purview of the Renegotiation Act. Respondent argues the cancellation agreement was a subcontract within the purview of section 403 (a) (5) (B). He contends that in the light of congressional history and prior decisions of this Court section 403 (a) (5) (B) is to be given an extremely broad interpretation to include the cancellation agreement here in issue. Further, that the amount paid was in lieu of future commissions and therefore the determination of the Board*224 was proper.
The applicable section of the Renegotiation Act of 1943, as amended, reads as follows:
SEC. 403. (a) For the purposes of this section --
* * * *
(5) The term "subcontract" means --
* * * *
(B) Any contract or arrangement other than a contract or arrangement between two contracting parties, one of which parties is found by the Board to be a bona fide executive officer, partner, or full-time employee of the other contracting party, (i) any amount payable under which is contingent upon the procurement of a contract or contracts with a Department or of a subcontract or subcontracts or determined with reference to the amount of such a contract or subcontract or such contracts or subcontracts, or (ii) under which any part of the services performed or to be performed consists of the soliciting, attempting to procure, or procuring a contract or contracts with a Department or a subcontract or subcontracts: Provided, That nothing in this sentence shall be construed (1) to affect in any way the validity or construction of provisions in any contract with a Department or any subcontract, heretofore at any time or hereafter made, prohibiting the payment of contingent fees or commissions; *225 or (2) to restrict in any way the authority of the Secretary or the Board to determine the nature or amount of selling expenses under subcontracts as defined in this subparagraph, as a proper element of the contract price or as a reimbursable item of cost, under a contract with a Department or a subcontract.
The phrase in section 403 (a) (5) (B), "determined with reference to the amount of such a contract or subcontract or such contracts or subcontracts," has been interpreted by this Court in , wherein the Court quoted from , as follows:
In other words, the phrase "determined with reference to the amount of such a contract," etc., may not be isolated, as the respondent would have it, but must *1112 be construed in connection with the preceding language and in the light of the purpose sought to be accomplished by Congress. So construed, the language of the statute aptly applies to manufacturers' agents and sales engineers who procure Government contracts for their principals and whose compensation is contingent upon the business they are able to obtain for *226 the principals or fixed by the amount of such business.
In the Fine case, the Court, citing the Wolff case further, said:
the petitioner was not a subcontractor within the meaning of section 403 (a) (5) (B) merely because his compensation was based or computed upon the amount of the contracts or subcontracts procured by his principal. Since petitioner's compensation of $ 17,467.07 received from Raymond De-Icer Co. was not based or contingent upon the amount of contracts procured by him for his principal, it was not derived pursuant to subcontracts as defined in section 403 (a) (5) (B), as construed in the Wolff case.
The legislative history of section 403 (a) (5) (B) discussed in , and , indicates that Congress intended to give the Government the right to recover excessive fees and profits earned not only by manufacturers but also by manufacturers' agents on contracts procured by such agents for supplying commodities of a war-end use.
Petitioners' theory of this case, as evidenced by their pleadings and brief, is based upon the cancellation*227 agreement only. Their contention is that the respondent has renegotiated the cancellation agreement, which agreement they claim is not a "contract" or "subcontract" under the Renegotiation Act, and the amount payable in consideration thereof is not based or contingent upon any "contract" or "subcontract" falling within the meaning of said Act. Respondent, on the other hand, contends that the cancellation agreement falls within said Act and that it therefore has a right to renegotiate any sums paid thereunder. We do not agree with either contention in that we do not agree that the respondent has renegotiated any sum because it was payable under the cancellation agreement. We find that the respondent has in effect renegotiated only sums which are contingent and based upon the employment contract which all parties agree properly falls within the ambit of the Renegotiation Act. Petitioners have given us no evidence upon which to reach a contrary conclusion. Granted, it has fully shown the negotiations between the parties leading to the cancellation agreement so far as those negotiations appear in writing, but we are in the dark completely as to any factors considered by the parties*228 in arriving at the various sums from time to time proposed as the consideration to be paid for the cancellation agreement. Petitioners have in this respect failed to sustain their burden of proof.
That the consideration paid for the cancellation agreement was "determined with reference" to probable prospective income under *1113 the terms of the employment contract is apparent when it is considered that it was cancellation of the employment contract which was the sole object of the cancellation agreement. We can find no plausible basis upon which to find otherwise. It is straining credulity beyond all bounds to believe experienced business men such as petitioners have shown themselves to be would agree to sell a right so valuable without reference to that value. The value of the employment contract and the value of the cancellation agreement can be measured from petitioners' viewpoint on the basis of two factors. As of the date of the cancellation agreement the value of both agreements depended upon commissions still to be received by petitioners under the employment contract. The other factor which might have an effect upon the value of the two agreements would be *229 Crucible's desire and the strength of that desire to regain control of its own sales department and deal directly with customers theretofore procured by petitioners. We in effect hold that the respondent has not determined to be renegotiable that part of the $ 1,700,000 allocable to the latter factor but that he has rightly determined to be renegotiable that part of said sum allocable to the first value factor referred to.
Petitioners argue that, this renegotiation having taken place some 2 years subsequent to the cancellation of the employment contract, it necessarily follows that the contract subjected to renegotiation was the cancellation agreement. This argument has no force. It is not "contracts" which are renegotiated under the Act, but the profits or "prices" realized therefrom. Congress created the War Contracts Price Adjustment Board for the express purpose of making such determinations as the respondent has here made. In all cases of price adjustment a determination must first be made by the Board as to that portion of income received under any contract or arrangement (in this case the cancellation agreement) which represents profits falling within its jurisdiction. *230 Congress most certainly did not intend to limit the Board's powers to the life of contracts falling within the Renegotiation Act, but rather to profits received at any time which are contingent or based upon such contracts (in this case the employment agreement) even though no longer in existence. Mere incorporation of renegotiable profits in the consideration to be paid for a contract which might not fall within the Act is not sufficient to place such profits beyond the reach of the Board. To hold otherwise would be in effect to subvert congressional intention in adopting section 403 (a) (5) (B) of the Renegotiation Act, for, should we find for petitioners, any contractor or subcontractor falling within that Act might avoid renegotiation merely by entering into an agreement ancillary to a renegotiable contract, the consideration for which might be in reality a lump sum payment of amounts allocable to the renegotiable contract.
*1114 We do not deem this holding to be inconsistent with our holding in , and , as we are here simply holding that the respondent has renegotiated*231 sums which, although paid under the cancellation agreement, were nevertheless based upon the employment contract which both parties agree is subject to renegotiation.
Petitioners do not dispute the amount of profits respondent has found to be excessive, nor have they offered any evidence upon that point. The burden of proof is on the petitioners to establish the incorrectness of respondent's determination. ; .
For the above reasons we have found it a fact that petitioners' profits were excessive in the amount of $ 225,000.
An order will be issued in accordance herewith.