*219 1. Held, the renegotiation proceedings involved were commenced in the form and manner and within the period of limitation prescribed by the applicable renegotiation statutes.
2. Held, under the circumstances herein, the respondent could validly determine the amount of excessive profits upon the basis of the consolidated profits of the two partnership contractors for the year 1942.
3. The Renegotiation Acts of 1942 and 1943 are constitutional as applied to the petitioners herein.
4. The amount of excessive profits determined.
*666 In Docket No. 183-R the respondent, under authority of section 403 of the Sixth Supplemental National Defense Appropriation Act, approved April 28, 1942, as amended (hereinafter referred to as Renegotiation Act of 1942), determined that for the year ended December 31, 1942, $ 154,628.91 of the profits of Maurice W. Harney, George E. Murphy, and Harry B. Murphy, doing business as Spar Manufacturers and Harney-Murphy Supply Co., were excessive. In Docket No. 548-R the respondent, under authority of the Renegotiation Act of 1943, determined that for the year ended December 31, 1943, $ 170,000 of the profits of the above named individuals, doing business as Spar Manufacturers, were excessive. The cases were duly consolidated for hearing. The questions for determination are:
(1) Were the renegotiation proceedings herein commenced properly and completed within the period of limitations prescribed by the applicable statutes for the fiscal years 1942 and 1943?
(2) Could *221 the respondent issue one determination of excessive profits to the individuals named as partners for their fiscal year 1942, or must he enter separate determinations for each of the two partnerships involved for that year?
(3) Are the Renegotiation Acts of 1942 and 1943 constitutional as applied to the petitioners herein?
(4) Were the profits of petitioners excessive for the years 1942 and 1943, and, if so, to what extent?
*667 FINDINGS OF FACT.
Part of the facts have been stipulated and they are so found.
Spar Manufacturers, Inc., was organized as a corporation on February 26, 1930. From that time until December 31, 1941, it manufactured lathe-turned wooden masts, cargo loading booms, spars, and kindred items.
Spar Manufacturers, Inc., was dissolved on December 31, 1941. At the time of its dissolution Maurice W. Harney, George E. Murphy, and Harry B. Murphy owned all of its stock in the following proportions:
| Maurice W. Harney | 49% |
| George E. Murphy | 25 1/2% |
| Harry B. Murphy | 25 1/2% |
Spar Manufacturers, Inc., was immediately succeeded by a partnership doing business under the name of Spar Manufacturers (hereinafter referred to as Spar). The interests of Maurice W. Harney, *222 George E. Murphy, and Harry B. Murphy in that partnership were as follows:
| Maurice W. Harney | 50% |
| George E. Murphy | 25% |
| Harry B. Murphy | 25% |
The Harney-Murphy Supply Co. (hereinafter referred to as Harney-Murphy) was organized as a partnership on June 19, 1941; it was dissolved on July 31, 1942. The partners and their interests in Harney-Murphy were the same as in Spar. Both partnerships were created for expressed identical purposes. Spar took over all the assets and assumed all of the liabilities of Harney-Murphy as of July 31, 1942.
On June 19, 1941, the date of its organization, Harney-Murphy entered into a contract with Portland Spar Co. (hereinafter referred to as Portland) whereby the former agreed to sell to Portland all iron and necessary steel parts required for any spars to be delivered by Portland under any contract between Portland and any Government agency. That agreement was "canceled" by agreement between the parties on July 31, 1942. Harney-Murphy received final payment under that contract on July 20, 1942.
On August 25, 1941, the United States Maritime Commission (hereinafter referred to as Maritime) entered into a contract with Portland which called *223 for the manufacture of 1,220 wooden cargo booms.
On January 29, 1942, Spar and Portland entered into a contract whereby Spar was to manufacture and deliver to Maritime one-half of the wooden cargo booms called for under the above mentioned contract.
*668 On the same day Maritime reached an agreement with Portland under which the latter agreed to furnish 3,990 wooden cargo booms. And also on that day Portland entered into a contract with Spar whereby the latter undertook to manufacture and deliver to Maritime one-half of the booms called for by that contract.
Spar made its final shipment under the first contract with Portland on May 21, 1942, and received final payment on June 19, 1942, and it made its final shipment under the second contract on November 9, 1943, and received final payment on January 10, 1944.
Harney-Murphy, during its existence in 1942, purchased the iron fittings necessary for the manufacture of wooden cargo booms from Isaacson & Co. for $ 122 per set. It then sold them to Portland and Spar for $ 200.50 per set. Harney-Murphy never obtained physical possession of those iron fittings. After the dissolution of Harney-Murphy, Spar furnished all of the iron fittings*224 necessary in order to complete the wooden cargo booms manufactured by Spar and Portland.
Harney-Murphy, in addition to the partners, employed two people, both on a part time basis. One, Josephine H. Firminhac, a bookkeeper, devoted approximately 5 per cent of her time to the business of Harney-Murphy; the other, M. W. Robbins, also devoted approximately 5 per cent of his time to the business.
Maurice W. Harney managed the affairs of the partnership, Harney-Murphy, devoting approximately 5 per cent of his working hours to such activity. He devoted roughly 95 per cent of his time to working for Spar during 1942 and 1943.
Harney-Murphy never maintained an inventory. In the first three months of its existence it had no bank account.
Harney-Murphy and Spar kept their books of account during the periods here involved on an accrual basis. Spar's fiscal year ended on December 31 of each of the years before us; Harney-Murphy's fiscal year ended July 31.
In 1942 Spar commenced the construction of a new plant for the purpose of manufacturing wooden cargo booms and spars. That plant was completed in 1943.
In addition to her regular salary during 1942, Josephine H. Firminhac received $ 9,060*225 which was remitted to her and charged on the books of account of Spar as a withdrawal of profits from the account of Maurice W. Harney.
In addition to his regular salary during 1942, M. W. Robbins received $ 9,060 which was remitted to him and charged on the books of account of Spar as a withdrawal of profits from the account of Maurice W. Harney.
Spar also paid commissions in 1942 to Marine Lumber Service, Inc., in the amount of $ 7,662.06. Those commissions were charged *669 as a cost of renegotiable sales herein. Marine Lumber Service purportedly acted as sales agent on behalf of Spar for all business, except the Maritime business.
The books of Harney-Murphy for the year 1942 show an item of $ 4,531.06 representing traveling expenses for Harney. However, he performed the travel to which that item applied in the year 1941.
Petitioners' renegotiable profits for 1942 (Docket No. 183-R) were $ 250,970.82, computed as follows:
| Net Income per books and records | $ 238,777.70 |
| "Commissions payable" disallowed | 7,662.06 |
| "Travel expenses" disallowed | 4,531.06 |
| Net income subject to renegotiation | 250,970.82 |
The books of Spar for its fiscal year December 31, 1943, reflect*226 an item of $ 6,831.60 for a commission paid to Marine Lumber Service, Inc., charged to costs of renegotiable sales for that year. Marine Lumber Service, however, performed no service for Spar in connection with Maritime business.
Petitioners' net income subject to renegotiation for the fiscal year 1943 (Docket No. 548-R) was as follows:
| Net income per books and records | $ 238,714.12 |
| "Commissions payable" disallowed | 6,831.60 |
| Net income subject to renegotiation | 245,545.72 |
The following schedule shows the renegotiable sales and profits of Spar and Harney-Murphy and the combined renegotiable sales and profits of Spar and Harney-Murphy during 1942:
| Sales | Profits | |
| Spar | * $ 593,260.66 | $ 183,440.64 |
| Harney-Murphy | 208,520.00 | 67,530.18 |
| Combined | 801,780.66 | 250,970.82 |
*227 The following schedule shows the renegotiable sales and profits of Spar for 1943:
| Sales | Profits | |
| Spar | * $ 766,530.06 | $ 245,545.72 |
*670 The following schedule shows renegotiable sales, costs, and profits and the percentage relations of those figures of petitioners for the years 1942 and 1943 before and after renegotiation:
| 1942 | 1943 | |
| BEFORE RENEGOTIATION | ||
| Sales | * $ 801,780.66 | $ 766,530.06 |
| Costs | 550,809.84 | 520,984.34 |
| Profits | 250,970.82 | 245,545.72 |
| Per cent of profits to sales | 31.3% | 32.0% |
| Per cent of profits to costs | 45.5% | 47.1% |
| AFTER RENEGOTIATION | ||
| Excessive profits as determined by renegotiating | ||
| officials | $ 154,628.91 | $ 170,000.00 |
| Adjusted sales | 647,151.75 | 596,530.06 |
| Costs | 550,809.84 | 520,984.34 |
| Adjusted profits | 96,341.91 | 75,545.72 |
| Per cent of adjusted profits to adjusted sales | 14.9% | 12.7% |
| Per cent of adjusted profits to costs | 17.5% | 14.5% |
The sales, costs, and profits of Spar Manufacturers, Inc., predecessor to Spar, for the years 1936 to 1939, inclusive, were as follows:
| Year | Sales | Costs | Profit |
| 1936 | $ 14,497.50 | $ 14,368.74 | $ 128.76 |
| 1937 | 19,434.89 | 16,997.42 | 2,437.47 |
| 1938 | 8,779.03 | 9,610.58 | (831.55) |
| 1939 | 15,840.89 | 13,594.46 | 2,246.43 |
| 1936-1939 average | 14,638.08 | 13,642.79 | 995.29 |
The total assets and net worth of Spar Manufacturers, Inc., predecessor to Spar, for the years 1936 to 1939, inclusive, were as follows:
| Year | Total assets | Net worth |
| 1936 | $ 6,743.83 | (* $ 567.64) |
| 1937 | 7,914.18 | 119.83 |
| 1938 | 7,560.22 | (* 711.72) |
| 1939 | 10,359.48 | 1,534.71 |
The total assets of Spar Manufacturers, Inc., as of December 31, 1941, the date of its dissolution, were $ 19,499.21, while its net worth was $ 10,599.99.
The total assets of Harney-Murphy as of December 31, 1941, were $ 36,102.10. These total assets were represented entirely by accounts receivable, except for $ 12.10, the value of office equipment. The net worth (partnership account) of Harney-Murphy on December 31, 1941, was $ 3,922.33.
Amounts distributed *229 to the partners from Harney-Murphy for the period January 1 to July 31, 1942, were as follows: *671
| Maurice W. Harney | $ 26,188.56 |
| George E. Murphy | 18,405.28 |
| Harry B. Murphy | 18,405.28 |
| Total | 62,999.12 |
Amounts distributed to the partners of Spar for the fiscal period ended December 31, 1942, were as follows:
| Maurice W. Harney | $ 87,019.18 |
| George E. Murphy | 43,509.59 |
| Harry B. Murphy | 43,509.60 |
| Total | 174,038.37 |
The amounts distributed to the partners of Spar for the year ended December 31, 1943, were as follows:
| Maurice W. Harney | $ 117,323.06 |
| George E. Murphy | 58,661.53 |
| Harry B. Murphy | 58,661.53 |
| Total | 234,646.12 |
The total assets of Spar as of December 31, 1942, were $ 138,393.84. The net worth (partnership account) was $ 110,920.46.
By agreement of the partners, Maurice W. Harney received $ 9,000 as compensation for services rendered to Spar during the year 1942, and $ 9,000 as compensation for services rendered to Spar during the year 1943.
Petitioners' inventory at the beginning of 1942 had a value of $ 2,450; at the beginning of 1943 it had a value of $ 9,508; and at the end of 1943 it had a value of $ 5,630. The value assigned*230 to petitioners' plant and equipment at the beginning of 1942 was $ 2,851, and at the beginning of 1943 it was valued at $ 41,008.
Upon Spar's completion of the second contract in 1943, no further orders from Government agencies were forthcoming. In 1944 and 1945 attempt was made to utilize the plant for another business, but this failed.
Facts in Respect of Statute of Limitations -- 1942.
A letter dated March 15, 1943, was forwarded by the Maritime Commission Price Adjustment Board to Spar requesting the submission of information with regard to the contracts or subcontracts of Spar with the War, Navy, and Treasury Departments and the Maritime Commission during Spar's latest fiscal year.
By letter dated March 25, 1943, Spar acknowledged the request referred to above and requested a delay until May 1, 1943. It was stated in this letter that Harney, Spar's general manager, was then on the east coast.
*672 By telegram to Spar from the Maritime Commission Price Adjustment Board, dated March 29, 1943, the Board suggested that Harney call upon the Board if convenient.
On April 5, 1943, Harney conferred with the Board in Washington, D. C. During this conference Harney explained*231 the method of operation and the nature of the business of Spar and Harney-Murphy. It was agreed at this conference that Spar and Harney-Murphy would submit information relative to their total sales, costs, and profits for their 1942 fiscal period. Harney also agreed that Spar and Harney-Murphy would segregate that portion of these total sales, costs, and profits which were received from contracts or subcontracts with the Departments named in the Renegotiation Act of 1942, as amended. It was also agreed that the transactions between Portland, Spar, and Harney-Murphy would be disclosed.
By letter dated May 7, 1943, from Spar to the Maritime Commission Price Adjustment Board, a portion of the information which was requested during the conference of April 5, 1943, concerning Spar and Harney-Murphy was submitted to the Board. This letter stated in part as follows:
Spar Manufacturers absorbed Harney-Murphy Supply Company as of July 31, 1942 since their business was of exactly the same nature and owned by the same proprietors. This is our reason for showing a combined percentage of profit for the two companies. [Italics supplied.]
By letter dated May 29, 1943, the Maritime Commission*232 Price Adjustment Board requested explanation of a portion of the data and information submitted by Spar and Harney-Murphy by the letter dated May 7, 1943. In addition thereto, additional information relative to Spar's and Harney-Murphy's 1942 fiscal periods was requested. This letter stated in part as follows:
We have examined recent statements which you have submitted and request the following additional information:
1. A certificate of your auditors certifying to the accuracy of the statements submitted with their report dated March 4, 1943.
2. A sworn copy of the opening balance sheet of Spar Manufacturers, a co-partnership, together with a reconcilation [sic] of difference between this and the closing balance sheet of Spar Manufacturers, Inc., and with the balance sheet dated December 31, 1941 for Spar Manufacturers, Inc., which you have submitted to us, if this was not the final statement of the incorporated company.
3. Statements summarizing your sales to Portland Spar Company showing:
a. in detail the exact method which you follow in billing for (1) cargo booms and spars and (2) fittings, giving the dollar amounts.
b. whether or not you bill them separately for fittings*233 which have been (1) added to booms you deliver to them and (2) unattached fittings sold to them.
4. Schedules showing the names and amounts of compensation received by each individual receiving in excess of $ 5,000 in 1942 and their compensation in 1941.
*673 5. Supporting data for the following items: Traveling Expense, Commissions Paid, Commissions Received, Interest Paid and Discounts Allowed.
It is evident from a study of your accounts and those of Portland Spar and Harney-Murphy Supply Company that it will be necessary for the Board to consider the position of all of the associated companies under Section 403 of Public Law 528, and we, therefore, require full information from all companies concerned.
We have addressed a letter to Portland Spar Company for your attention and one to Harney-Murphy Supply Company for your attention. We are enclosing herewith as part of this letter copies of letters addressed to these concerns.
Inasmuch as you were planning to conduct renegotiation of your company and of Harney-Murphy Supply Company on June 15, 1943, it is imperative that all of the information from all companies concerned be in our hands prior to that date. We shall expect*234 you, in your capacity as vice president of Portland Spar Company, and as a former partner of Harney-Murphy Supply Company, to be in possession of all details requested in the separate letters to these companies and to be able to act for them.
By letter dated May 29, 1943, the Maritime Commission Price Adjustment Board requested that Spar and Harney-Murphy submit certain additional information. This letter stated:
In connection with the financial statement which you have submitted to us, we shall appreciate the following additional information:
1. The opening balance sheet of the partnership.
2. Balance sheet as of approximately January 1, 1942 or at the date when you closed your first fiscal period.
3. Details supporting the following expense accounts: (1) Salaries and Empl. Comp., (2) Traveling Exp.
4. A sworn statement by one of the partners attesting to the accuracy of the figures requested above and previously submitted.
5. A copy of the information returns filed with the Bureau of Internal Revenue for your fiscal periods.
By letter dated June 7, 1943, the additional information and data requested by the Board in its letter dated May 29, 1943, above set forth, were submitted *235 by Spar and Harney-Murphy to the Board.
On June 25, 1943, Harney met with the Maritime Commission Price Adjustment Board in Washington, D. C. At this meeting the Board advised Harney of its proposed determination of excessive profits, which determination was based in part upon information submitted to the Board by Spar and Harney-Murphy. During this conference, it was stated by the Board that it would obtain the proper tax credits allowable under section 3806 of the Internal Revenue Code and would thereafter prepare and submit a bilateral agreement for the amount of excessive profits involved.
By letter dated June 26, 1943, the Maritime Commission Price Adjustment Board submitted to Harney, as representative of Spar and Harney-Murphy, an analysis of the accounting data upon which the determination of the Board was based.
*674 On July 5, 1943, Harney visited the Washington, D. C., office of the Board and advised the Board that its suggested figure as to the amount of excessive profits was not acceptable.
During the week of July 12, 1943, a series of meetings between Harney, as representative of Spar and Harney-Murphy, and the Board were held in Washington, D. C.
Facts in Respect*236 of Statute of Limitations -- 1943.
By letter dated April 18, 1944, the Price Adjustment Board requested Spar to submit for its latest completed fiscal year the information required by the Renegotiation Act of 1943. To assist Spar in the preparation and submission of the required information, a standard form of contractor's report was enclosed, with instructions as to its preparation. A copy of the Renegotiation Acts of 1942 and 1943 was also enclosed.
On May 31, 1944, the Board received from Spar the information submitted by Spar on the standard form of contractor's report. This report was dated May 29, 1944, and signed by Maurice W. Harney.
By letter dated June 5, 1944, the Board requested from Spar additional information as per contractor's information and work sheet for renegotiation, which was enclosed.
By letter dated July 19, 1944, Spar forwarded to the Board the information requested by the letter of June 5, 1944.
On May 12, 1945, the Board sent a registered letter to Spar setting July 4, 1945, as the date for the renegotiation conference for Spar's fiscal year ended December 31, 1943. This letter further provided:
This notice, sent by registered mail, constitutes commencement*237 of the renegotiation proceedings in conformity with the provisions of subsection (c) (1) of the Renegotiation Act.
This letter was received by Spar in Seattle, Washington, on May 15, 1945. It reads in part as follows:
The War Contracts Price Adjustment Board has determined that renegotiation proceedings under the Renegotiation Act (Title VII of the Revenue Act of 1943) for your fiscal year ended December 31, 1943 shall be conducted initially by this Department.
A conference with you with respect to this matter is hereby set for 10:00 a. m. July 4, 1945, at 1200 Fifteenth Street, N. W., Room 512, Washington (5), D. C.
This notice, sent by registered mail, constitutes commencement of the renegotiation proceedings in conformity with the provisions of subsection (c) (1) of the Renegotiation Act.
At the request of Spar's counsel, the conference scheduled for July 4, 1945, was postponed until July 5, 1945.
On July 5, 1945, the conference referred to above was held in Washington, D. C., and Spar was represented by its attorney of record.
*675 In a notice dated January 20, 1945, the United States Maritime Commission Price Adjustment Board, acting on behalf of the Chairman *238 of the Maritime Commission, stated in part as follows:
You are hereby notified by registered air mail that pursuant to renegotiation under the Renegotiation Act and pursuant to due authority, the Chairman of the United States Maritime Commission issued and entered an order on January 20, 1945, determining that of your profits derived from contracts with the Departments and subcontracts for the fiscal year of Spar Manufacturers ended December 31, 1942, and for the fiscal period of Harney-Murphy Supply Company, beginning January 1, 1942 and ended July 31, 1942, one hundred fifty-four thousand dollars ($ 154,000) [figure before adjustment "on account of taxes, other than Federal taxes" was $ 154,628.91] represent excessive profits which should be eliminated. A copy of such order is enclosed herewith.
In a notice dated April 26, 1946, the Maritime Commission Price Adjustment Board, acting on behalf of the War Contracts Price Adjustment Board, stated in part as follows:
You are hereby notified by registered air mail that pursuant to renegotiation under the Renegotiation Act, and in accordance with authority delegated by the War Contracts Price Adjustment Board, the Chairman of the United*239 States Maritime Commission acting in its behalf, issued and entered an order on April 26, 1946, determining that of your profits derived from contracts with the Department and subcontracts for your fiscal year ended December 31, 1943, one hundred sixty-nine thousand five hundred fifty dollars ($ 169,550.00) [figure before adjustment "on account of taxes, other than Federal taxes" was $ 170,000] represents excessive profits which should be eliminated. A copy of such order is enclosed herewith.
OPINION.
Issue 1. -- Petitioners contend that the renegotiation proceedings involved "were not begun in the form or manner nor within the time provided * * *" by the Renegotiation Acts of 1942 and 1943.
With respect to 1942 petitioners argue that the commencement of the proceeding is governed by section 403 (c) (5) of the Renegotiation Act of 1942. 1*241 That is not correct. Section 403 (c) (5) is applicable *676 when the proceeding is initiated by the contractor by voluntarily filing information with the Secretary. The contractors here did not voluntarily file any information with the Secretary relative to 1942. On the contrary, the Secretary 2 initiated the 1942 proceeding, so *240 we must consult section 403 (c) (6) of the Renegotiation Act of 1942 3 in solving any problems relating to the form or manner of the commencement of such proceeding. Spray Cotton Mills, 9 T.C. 824">9 T. C. 824.
Concerning both the fiscal years 1942 and 1943 the petitioners contend that there has been no compliance with the applicable statutes, since the notices sent to them were mailed to "Spar Manufacturers" and to "Harney-Murphy Supply*242 Company." They state that "the law applicable to service of notice in this instance is the law of the State of Washington," and that under that law:
Service of notice on the partnership could not legally be effected except by mailing the required notices by registered mail, to such of the partners and each of the partners from whom the Maritime Commission desired to attempt to recover excess profits. * * *
Petitioners cite no authority for their statement, nor have we been able to find any. First of all, there is no requirement in the section of the act applicable that the notice should have been sent by registered mail. In Spray Cotton Mills, supra, p. 833, we stated that section 403 (c) (6) "contains no directions for the Secretary concerning formalities to be observed by him or the manner in which the proceeding shall be commenced and carried to final determination." It would seem clear that, if Congress had intended that state law should govern in respect of the proper parties to whom notice should be mailed, it would have so provided.
It is apparent, moreover, that here the proper parties were notified of the commencement of this proceeding, *243 for communications with respect to petitioners' fiscal years 1942 and 1943 were directed at various times to Spar Manufacturers and Harney-Murphy Supply Co., both of whom were "contractors" within the meaning of the statute. See section 403 (a) (5) (ii) (B) of the Renegotiation Act of 1942. See Moening v. War Contracts Price Adjustment Board, 14 T.C. 589">14 T. C. 589.
Petitioners next argue that none of the communications discussed in *677 our findings constituted a proper commencement of the proceeding for 1942 within the statutory meaning. We do not agree.
This problem was presented to the Court in Spray Cotton Mills, supra, and in reaching a solution there we set forth certain questions as follows:
* * * When, in this renegotiation proceeding, did the Secretary make a beginning, perform the first act, or take the first step toward refixing the contract price? When did he first perform an act which was adequate to bring in the contractor as a party to a proceeding which would lead to a determination by the Secretary respecting excessive profits?
We believe the facts here show that the Secretary first performed an act*244 adequate to bring the contractor in as a party to the proceeding which ultimately led to a determination of excessive profits for the year 1942 when he wrote the letters to Spar on May 29, 1942, which are set forth in our findings, requesting detailed statements concerning the sales of wooden cargo booms, spars and fittings involved.
With respect to the argument of petitioners that the 1942 proceeding was not begun "within the time" provided by the act, it should be noted that section 403 (c) (6) of the Act of 1942 provides that no renegotiation proceedings shall be begun more than one year after the close of the fiscal year of the contractor or subcontractor within which completion or termination of the contract or subcontract, as determined by the Secretary, occurs. The contracts which Harney-Murphy and Spar entered into with Portland were completed in 1942, as shown in our findings. Within one year after the close of their respective fiscal years, July 31, 1942, for Harney-Murphy, and December 31, 1942, for Spar, there was a commencement of the proceeding in the statutory sense, as we have hereinabove pointed out.
This leaves for our consideration the problem of whether the 1943*245 renegotiation proceeding was begun within the period of limitations provided by the Renegotiation Act of 1943. Sections 403 (c) (1), (c) (5), and (c) (3), which are necessary for our discussion of this problem, are set forth in the margin. 4
*246 *678 The facts disclose that on May 29, 1944, Spar filed the financial statement which set forth such information as the War Contracts Price Adjustment Board prescribed by regulations in accordance with section 403 (c) (5) of the Renegotiation Act of 1943. In accordance with section 403 (c) (3) any renegotiation proceeding in respect of the fiscal year 1943 could not have been commenced more than one year "after the statement required under paragraph (5) is filed with the Board * * *." On May 12, 1945, the Maritime Commission Price Adjustment Board, the delegatee of War Contracts Price Adjustment Board, sent a registered letter to Spar which contained the statement "this notice, sent by registered mail, constitutes commencement of renegotiation proceedings in conformity with the provisions of subsection (c) (1) of the Renegotiation Act." It is thus apparent that the renegotiation proceedings herein involved were timely commenced for the fiscal year ended December 31, 1943, and that issue 1 should, therefore, be decided in favor of respondents.
Issue 2. -- The petitioners also contend that:
In respect of 1942, the Court cannot determine any excess profits against either *247 Spar Manufacturers or Harney-Murphy Supply Company for the reason that these separate legal entities were each independent subcontractors and the determination of excess profit of $ 154,000.00 does not profess to determine what part thereof is applicable to one or the other.
There can be no doubt that the contracts involved for the fiscal year 1942 were renegotiable, despite petitioners' argument to the contrary on reply brief, for final payment pursuant to such contracts was made after April 28, 1942. See section 403 (c) (6) of the Renegotiation Act of 1942.
Respondent points out, and correctly we think, that he did not determine the excessive profits of Spar and Harney-Murphy, but rather determined the excessive profits of the three individuals, Harney and the two Murphys, doing business as Spar Manufacturers and Harney-Murphy Supply Co. The order determining excessive profits reads as follows:
Pursuant to due authority a renegotiation proceeding was duly commenced with Maurice W. Harney, of Seattle, Washington, George E. Murphy, of Portland, Oregon, and Harry B. Murphy, of Boise, Idaho, partners, doing business *679 under the firm name and style of Spar Manufacturers, and*248 also doing business under the firm name and style of Harney-Murphy Supply Company. * * *
We do not believe it was necessary for the respondent to have gone through the procedure of entering a separate determination against the several contractors involved. So far as the facts are concerned, the liability of the individuals for the fiscal year ended December 31, 1942, under the determination of the respondent, would have been the same no matter in what form issued.
Moreover, petitioners apparently never raised this objection at any time before this hearing. Indeed, it is apparent from the facts that they were the initiators of using the combined profits of Spar and Harney-Murphy for the purposes of this renegotiation proceeding. This is shown by a letter of Spar dated May 7, 1943, addressed to the United States Maritime Commission, which reads in part as follows:
Spar Manufacturers absorbed Harney-Murphy Supply Company as of July 31, 1942 since their business was of exactly the same nature and owned by the same proprietors. This is our reason for showing a combined percentage of profit for the two companies.
We therefore believe that their argument on this point is untenable.
*249 Issue 3. -- In their pleadings petitioners maintain that the Acts of 1942 and 1943 are unconstitutional as applied to them in this case. However, we believe the acts are constitutional under the facts of this case in accordance with the rationale of Lichter v. United States, 334 U.S. 742">334 U.S. 742, and those cases of this and other courts which have followed it. See also Stein Bros. Mfg. Co., 7 T. C. 863.
Issue 4. -- The next question is whether petitioners' profits for the years involved were excessive and if so, to what extent.
"One of the important factors in determining whether or not profits are excessive is the amount of fixed assets and other capital risked and used in the renegotiable business." Stein Bros. Mfg. Co., supra. The individual petitioners' net worth as of December 31, 1941, was $ 14,522.32; their net worth as of December 31, 1942, was $ 110,920. 5 During 1942 the petitioners' operation showed a profit of $ 250,970.82, a return of over 1,700 per cent on their capital investment; in 1943 their activities reflected a profit of $ 245,545.72, which represents a return*250 of over 220 per cent of their net worth at the end of 1942. After renegotiation, the profits left undisturbed by the renegotiators of approximately $ 96,000 for 1942 and $ 75,500 for 1943, represented a return of 151.3 per cent and 68.1 per cent, respectively, for these years.
The petitioners took no substantial risks in connection with their operations during either year involved. As pointed out in our findings, *680 in 1942 petitioners' sales were $ 801,780.66 and costs were $ 550,809.84, and their profits were $ 250,970.82. Their profits were 31.3 per cent of their sales and 45.5 per cent of their costs. During 1943 their sales were $ 766,530.06, and costs were $ 520,984.34, and their profits were $ 245,545.72. For that year the profits were 32 per cent of their sales and 47.1 per cent of their costs. Their costs could have been increased by 45 per cent *251 and 47 per cent in 1942 and 1943, respectively, before they would have sustained any losses from their operations. It is thus apparent that petitioners had no substantial pricing risks during the years involved.
Moreover, when petitioners' inventories are compared with their profits, it is apparent that they had no inventory risks during the periods involved. Their inventory at the beginning of 1942 was only $ 2,450, at the beginning of 1943 it was $ 9,508, and at the end of 1943 it was only $ 5,630.
During 1942 and 1943 petitioners, doing business as Spar Manufacturers and Harney-Murphy Supply Co. 6 took no risk through conversion to wartime business since they performed the same type of operations as before entering upon the renegotiable business. It is true that they built a new plant and installed new equipment, but their plant and equipment only increased from a value of $ 2,851 at the beginning of 1942 to $ 41,008 at the beginning of 1943.
The above*252 consideration, together with the fact that it is obvious from the facts that the volume of petitioners' gross income resulted more from the fortuitous factors of a wartime economy than anything else, lead us to believe that the determination of the respondent in each of the proceedings before us was eminently fair.
The petitioners' principal argument on the issue of whether or not there were any excessive profits is that they were faced with a serious reconversion problem when their war contracts were completed in 1944. It is difficult to follow their argument. As above stated, during the years before 1942 and 1943 the individual petitioners were in the same type of production as is involved here. After the war it is true that petitioners attempted to enter upon a new type of business, but we do not believe that Congress gave to the renegotiation acts any purpose of guaranteeing profits to contractors who, after completion of the renegotiable business, entered into lines of business completely foreign to any they carried on either during or before the war years.
Petitioners have pointed to various favorable factors in their record of production, such as important labor and time-saving*253 processes, the fact that practically none of the products manufactured by them were rejected, and that they put forth "unusual effort for the purpose of fulfilling the contracts." We believe that the amount of profit allowed *681 by the renegotiators contains an ample cushion to absorb all of the allowances for favorable things that may be said about the efficiency of petitioners' performance under the war contracts.
It is, therefore, our judgment, after giving careful consideration to all the evidence and to the contentions of counsel, that the profits for the years involved are excessive in the amounts as determined by the respondents.
Orders will be entered in accordance herewith.
Footnotes
*. Stipulated to be $ 594,300.10. The figure here used is the one used by respondent on brief and represents stipulated figure less sales discounts.
The profit of Spar is $ 7,662.06 greater than the net income shown on Joint Exhibit N, sheet 2. This increase in profit is because the account on the exhibit entitled "Commissions payable" is a cost not properly allocable to renegotiable business.
The profit of Harney-Murphy is $ 4,531.06 greater than the net income shown in the above exhibit, which increase in profit is because the account entitled "Travel expenses" under the column headed "Harney-Murphy" is a cost not properly allocable to renegotiable business.↩
*. The figure stipulated is $ 768,109.33. The figure here used is the one used by respondent on brief and represents stipulated figure less sales discounts.
The profit is $ 6,831.60 greater than the net income shown on Joint Exhibit O. This increase in profit is because the account on the exhibit entitled "Commissions Payable" is a cost not properly allocable to renegotiable business.↩
*. Figure for Harney-Murphy and Spar combined.↩
*. Deficit.↩
1. [Sec. 403 (c)] (5) Any contractor or subcontractor who holds contracts or subcontracts, to which the provisions of this section are applicable, may file with the Secretaries of all the Departments concerned statements of actual costs of production and such other financial statements for any prior fiscal year or years of such contractor or subcontractor, in such form and detail, as the Secretaries shall prescribe by joint regulation. Within one year after the filing of such statements, or within such shorter period as may be prescribed by such joint regulation, the Secretary of a Department may give the contractor or subcontractor written notice, in form and manner to be prescribed in such joint regulation, that the Secretary is of the opinion that the profits realized from some or all of such contracts or subcontracts may be excessive, and fixing a date and place for an initial conference to be held within sixty days thereafter. If such notice is not given and renegotiation commenced by the Secretary within such sixty days the contractor or subcontractor shall not thereafter be required to renegotiate to eliminate excessive profits realized from any such contract or subcontract during such fiscal year or years and any liabilities of the contractor or subcontractor for excessive profits realized during such period shall be thereby discharged.↩
2. Section 403 (a) (2) of the Renegotiation Act of 1942 states as follows concerning the term "Secretary":
"(2) In the case of the Maritime Commission, the term 'Secretary' means the Chairman of such Commission * * *."
See also section 403 (a) (2) of the Renegotiation Act of 1943.↩
3. [Sec. 403 (c)] (6) This subsection (c) shall be applicable to all contracts or subcontracts hereafter made and to all contracts and subcontracts heretofore made, whether or not such contracts or subcontracts contain a renegotiation or recapture clause, unless * * * *
No renegotiation of the contract price pursuant to any provision therefor, or otherwise, shall be commenced by the Secretary more than one year after the close of the fiscal year of the contractor or subcontractor within which completion or termination of the contract or subcontract, as determined by the Secretary, occurs.↩
4. [Sec. 403 (c)] (1) Whenever, in the opinion of the Board, the amounts received or accrued under contracts with the Departments and subcontracts may reflect excessive profits, the Board shall give to the contractor or subcontractor, as the case may be, reasonable notice of the time and place of a conference to be held with respect thereto. The mailing of such notice by registered mail to the contractor or subcontractor shall constitute the commencement of the renegotiation proceeding. * * *
* * * *
(3) No proceeding to determine the amount of excessive profits shall be commenced more than one year after the close of the fiscal year in which such excessive profits were received or accrued, or more than one year after the statement required under paragraph (5) is filed with the Board, whichever is the later, and if such proceeding is not so commenced, then upon the expiration of one year following the close of such fiscal year, or one year following the date upon which such statement is so filed, whichever is the later, all liabilities of the contractor or subcontractor for excessive profits received or accrued during such fiscal year shall thereupon be discharged. * * *
* * * *
(5) (A) Every contractor and subcontractor who holds contracts or subcontracts, to which the provisions of this subsection are applicable, shall, in such form and detail as the Board may by regulations, prescribe, file with the Board on or before the first day of the fourth month following the close of the fiscal year (or if such fiscal year has closed on the date of the enactment of the Revenue Act of 1943, on or before the first day of the fourth month following the month in which such date of enactment falls), a financial statement setting forth such information as the Board may by regulations prescribe as necessary to carry out this section. In addition to the statement required under the preceding sentence, every such contractor or subcontractor shall, at such time or times and in such form and detail as the Board may by regulations prescribe, furnish the Board any information, records, or data which is determined by the Board to be necessary to carry out this section. * * *
* * * *↩
5. The figure for 1941 represents the combined net worth of Spar and Harney-Murphy, and the figure for the year 1942 represents the net worth of Spar.↩
6. Harney-Murphy Supply Co. was dissolved as of July 31, 1942.↩