Opinion
Docket No. 27-R.
1946-10-22
NATHAN COHEN, PETITIONER, v. SECRETARY OF WAR, RESPONDENT.
John V. Espenshade, Esq., for the petitioner. Harland F. Leathers, Esq., for the respondent.
Petitioner's excessive profits for 1942 held, on record, to be the amount originally determined by respondent, petitioner not having sustained its burden of proving that respondent erred in his original determination, and respondent not having sustained his burden of proving, as alleged in his answer, that petitioner had additional excessive profits for the year in question. John V. Espenshade, Esq., for the petitioner. Harland F. Leathers, Esq., for the respondent.
Petitioner, for the purpose of contesting an order of the Under Secretary of War, upon renegotiation of its war contracts, the $32,000 of its profits for the year 1942 were excessive, by this proceeding seeks a redetermination thereof. The respondent, by amended answer, now urges that the amount of excessive profits be held to be in a sum of not less than $43,000.
The contested issues relate to the reasonableness of allowances for salaries to the partners actively engaged in the business, the determination of the amount of renegotiable and nonrenegotiable business, and the extent to which, if any, the profits are excessive.
At a pretrial conference the parties agreed to certain facts. The following findings are based thereon and on evidence produced at the hearing.
FINDINGS OF FACT.
The agreed facts are hereby found accordingly.
Petitioner is a partnership composed of Nathan Cohen and his three sons, Victor, Hyman, and Bernard, the sons having been associated with the business from approximately 1920, 1929, and 1934, respectively. Nathan, as an individual, had engaged in the business of manufacturing and selling wooden articles and operating a woodworking shop at 1126-28 North Orianna Street, Philadelphia, Pennsylvania, from 1907. The business was for the most part a ‘custom‘ enterprise, being the manufacture of items to customers' order, usually in small volume. In 1938 the present partnership was formed under the name ‘Nathan Cohen,‘ and it operated the business through the year in question. It also commenced the manufacture of a line of wooden products to sell in the general market in addition to its custom business.
Nathan, now about 70 years of age, has been a woodworker since a childhood apprenticeship, and the other partners were training by their father and took manual training courses in school to enable them to advance the interests of the partnership business.
From 1936 through 1942 the building on North Orianna Street contained approximately 16,000 square feet, which included both the woodworking shop and the warehousing facilities. In May 1942 petitioner leased additional space which was used solely for the storage of lumber during the balance of the year 1942. On October 29, 1942, petitioner purchased property at 1517-21 North Twenty-first Street, Philadelphia, which property was of no value in petitioner's production during 1942.
Petitioner had about 60 pieces of machinery, including saws, lathes, and joiners and some metal-working machines. The depreciated value of petitioner's plant and equipment as of December 31, of the years indicated was as follows: 1940, $1,980; 1941, $3,622; and 1942, $3,379.
During the year 1942 petitioner made no substantial increase in its manufacturing facilities as distinguished from storage space.
Petitioner's books were kept on the accrual basis for the calendar years 1940, 1941, and 1942 and on a cash basis for the years 1936 to 1939, inclusive.
Comparative statements of petitioner's profits and losses for the years 1936 to 1942, inclusive, are as follows:
+--------------------------------------------------------------------------------------------+ ¦Accrual basis ¦ ¦ ¦Cash basis¦ ¦ ¦ ¦ ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦ ¦1942 ¦1941 ¦1940 ¦1939 ¦1938 ¦1937 ¦1936 ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Net sales ¦$257,103.30¦$89,644.73¦$55,645.71¦$35,793.74¦$23,461.67¦$31,272.87¦$20,106.24¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Cost of goods ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦sold: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Material used ¦130,754.29 ¦29,712.94 ¦19,675.91 ¦15,673.79 ¦6,106.10 ¦12,636.73 ¦6,807.14 ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Labor ¦17,924.83 ¦11,188.82 ¦7,806.27 ¦5,828.47 ¦6,529.96 ¦8,552.57 ¦6,401.00 ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Factory ¦5,999.25 ¦4,255.55 ¦3,163.25 ¦1,568.45 ¦428.33 ¦1,346.31 ¦1,769.33 ¦ ¦overhead ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Total ¦154,678.37 ¦45,157.31 ¦30,645.43 ¦23,070.71 ¦13,064.39 ¦22,535.61 ¦14,977.47 ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Gross profit ¦102,424.93 ¦44,487.42 ¦25,000.28 ¦12,723.03 ¦10,397.28 ¦8,737.26 ¦5,128.77 ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Selling and ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Administrative¦8,352.66 ¦4,510.59 ¦3,224.59 ¦2,297.35 ¦638.33 ¦2,129.22 ¦2,034.49 ¦ ¦expenses ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+-----------+----------+----------+----------+----------+----------+----------¦ ¦Net profit ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦before ¦94,072.27 ¦39,977.35 ¦21,775.69 ¦10,425.68 ¦9,758.95 ¦6,608.04 ¦3,094.28 ¦ ¦compensation ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦to partners ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------------------------------------------------------------------+
Included in petitioner's expenses for 1941 and 1942 are the following:
+------------------------------------------------+ ¦ ¦ ¦Power, heat¦Office ¦ ¦ +----+------+-----------+--------+---------------¦ ¦Year¦Rent ¦and light ¦expense ¦Office salaries¦ +----+------+-----------+--------+---------------¦ ¦1941¦$1,200¦$644.81 ¦$876.22 ¦ ¦ +----+------+-----------+--------+---------------¦ ¦1942¦1,550 ¦823.14 ¦1,417.62¦$1,442.96 ¦ +------------------------------------------------+
The years 1936 to 1939, inclusive, fairly reflect the normal operation of petitioner's business. During 1942 the dollar volume of petitioner's sales was more than nine times normal volume. The increase in the volume of petitioner's sales and profits in 1942 was due primarily to war conditions.
Petitioner's assets, liabilities, and capital, as of December 31 for the years indicated, according to books, were as follows:
+-----------------------------------------------------------------------------+ ¦ ¦1939 ¦1940 ¦1941 ¦1942 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦ASSETS ¦ ¦ ¦ ¦ ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Current assets: ¦ ¦ ¦ ¦ ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Cash ¦$503.06 ¦$2,845.49¦$4,632.93¦$21,311.09 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Accounts receivable ¦3,697.45 ¦7,434.72 ¦14,149.69¦18,918.19 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Inventory ¦7,078.60 ¦9,317.24 ¦14,738.50¦16,676.88 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Securities ¦ ¦ ¦7,230.00 ¦29,024.00 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Total ¦11,279.11¦19,597.45¦40,751.12¦85,930.16 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Prepaid insurance ¦ ¦ ¦ ¦612.00 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Bid deposits ¦ ¦425.00 ¦1,850.00 ¦ ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Plant and equipment, less ¦ ¦1,980.00 ¦3,622.03 ¦* ¦ ¦depreciation ¦ ¦ ¦ ¦13,379.29 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Automobiles, less depreciation ¦770.83 ¦793.95 ¦1,181.33 ¦1,367.63 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Building ¦ ¦ ¦ ¦6,869.42 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Loans to employees ¦ ¦130.00 ¦130.00 ¦130.00 ¦ +----------------------------------+---------+---------+---------+------------¦ ¦Total assets ¦12,049.91¦22,926.40¦47,534.48¦108,288.50 ¦ +-----------------------------------------------------------------------------+
LIABILITIES Current liabilities: Federal unemployment taxes 54.04 Accounts payable 500.00 516.92 235.53 130.07 Pennsylvania unemployment taxes 46.90 59.28 88.66 211.20 Federal unemployment taxes 44.51 33.46 Old age benefit taxes 34.74 43.92 65.68 156.44 Philadelphia income taxes 165.67 240.73 412.31 838.58 Philadelphia wage taxes 15.58 62.74 Total 747.31 905.36 851.22 1,453.07 Capital 11,302.60 22,021.04 46,683.26 106,835.43 Total liabilities and capital 12,049.91 22,926.40 47,534.48 108,288.50
FN* Plant and equipment includes $10,000 book write-up.
Petitioner's inventory on December 31, 1941, was $14,738 and on December 31, 1942, it was $16,676.
Petitioner's books and records do not contain purchase orders supporting all of petitioner's sales during the year 1942. Purchase orders missing from petitioner's books and records were destroyed by petitioner about one year after the end of the calendar year 1942.
An investigation of the total commercial purchase orders in petitioner's file for 1942 (contracts completed or paid for after April 28, 1942) discloses the following with reference to the priority symbols stamped upon them:
+-----------------------------------------------------------------------------+ ¦Total ¦Purchase orders bearing ¦Purchase ¦Purchase orders bearing¦ ¦purchase ¦purchase symbols * USA; ¦orders with ¦purchase symbols ** ¦ ¦orders in ¦USN; or LL ¦no ratings ¦FP or DP ¦ ¦file ¦ ¦ ¦ ¦ +------------+--------------------------+-------------+-----------------------¦ ¦$94,551.41 ¦$72,329.18 ¦$17,062.61 ¦$5,159.62 ¦ +-----------------------------------------------------------------------------+ FN* References are to the United States Army, United States Navy, and Lend Lease.FN** References are to foreign purchases and domestic purchases.
Petitioner's books disclose the following with reference to gross sales for 1942:
+-----------------------------------------------------------------------------+ ¦ ¦Total ¦Sales paid for and ¦Sales paid for or ¦ ¦ ¦sales for ¦contracts completed prior ¦contract completed after¦ ¦ ¦1942 ¦to Apr. 28, 1942 ¦Apr. 28, 1942 ¦ +--------------+----------+--------------------------+------------------------¦ ¦Sales to U.S. ¦ ¦ ¦ ¦ ¦Government ¦$99,486.70¦$10,559.03 ¦$88,927,67 ¦ ¦agencies ¦ ¦ ¦ ¦ +--------------+----------+--------------------------+------------------------¦ ¦Sales to ¦ ¦ ¦ ¦ ¦commercial ¦162,221.33¦26,630.30 ¦135,591.03 ¦ ¦companies ¦ ¦ ¦ ¦ +--------------+----------+--------------------------+------------------------¦ ¦Total gross ¦* ¦37,189.33 ¦224,518.70 ¦ ¦sales ¦261,708.03¦ ¦ ¦ +-----------------------------------------------------------------------------+ FN* The difference between this figure and the $257,103.30 of net sales heretofore shown is presumably a matter of discounts.
Petitioner had renegotiable net sales of not less than $161,541 and not more than $181,494.
Petitioner's books and records do not show the amount of costs allocable to renegotiable sales. It is stipulated that the only satisfactory method of determining such costs is to apportion total costs between renegotiable and nonrenegotiable sales on the basis of the respective dollar amounts thereof. Renegotiable net sales for 1942 of $181,494 would be 70.6 per cent of petitioner's total net sales of $257,103 for that year, and $161,541 would be 62.8 per cent. The costs allocable to renegotiable net sales of $181,494 would amount to $115,100, being 70.6 per cent of $163,031 total cost,
and to renegotiable net sales of $161,541 would amount to $102,383.47, being 62.8 per cent of such total cost.
An order will issue in accordance herewith. $154,678.37 cost of goods sold, plus $8,352.66 selling and administrative expenses.
During 1942 petitioner had as part of its renegotiable net sales the amount of $33,859.58 which represented articles completely manufactured by others and shipped directly by them to the purchasers, and $93,361 of sales represented products which had been delivered in a partly finished condition. Subcontractors did work for petitioner extending into 1943, for which they were paid approximately $28,000.
The partners referred to themselves as a ‘team.‘ Their activities interlocked.
On some of their office work and most of their billing, which they did at night, they were assisted by the two girls in the family.
Nathan, by reason of having grown up with the business, was successful in obtaining hard-to-get items such as lumber, paint, and nails. He would make personal calls to this end. Nathan also handled partnership finances and general factory supervision. He could not load trucks, but he is an expert sawyer and hand wood turner. He worked the normal factory hours of 48 to 53 hours and frequently put in 2 or 3 hours overtime, attending to setting up jobs and administrative work, sometime taking work home. He was compelled to slow down in 1944.
Victor shared Nathan's duties except those pertaining to finances. His principal work was the operation of warehouses. He is an all-round woodworker and his specialty was developing special tools, jigs, and lay-outs. He kept the Diesel engine in operation and he did some expediting, with particular reference to subcontracts in Pennsylvania, New Jersey, and New Hampshire, frequently devoting week ends to trips relating thereto. In addition, he assisted in obtaining priorities. He loaded and unloaded trucks. It was not unusual for Victor and Hyman to work 65 or 70 hours a week.
Hyman handled most of the procurement and the business negotiations and sales, including the Firestone account. He expedited material from Virginia and North Carolina, developed small tools, ran the paint spray room, and loaded and unloaded trucks.
Bernard performed odd jobs, including receiving, inspecting, marketing, and shipping, and he worked on production. He gathered data for use in convincing the Signal Corps that substitution of materials would be satisfactory. He also worked 65 or 70 hours a week, notwithstanding considerable trouble with his ears.
During the years 1942, 1943, and 1944 the partners took no vacations and almost no holidays.
During 1942 the maximum number of petitioner's employees in any quarter was 33; the average number was 25. Of these, 8 were employed throughout the year, and the largest annual payment to any employee during 1942 was $2,622.
Petitioner's books showed no amount charged to the business as salary or compensation to partners during 1942, or for any year from 1936.
Fair and reasonable compensation for the respective partners for the services rendered by them to the partnership in 1942 is as follows:
+-------------------------------------+ ¦ ¦Not more than—¦Not less than—¦ +-------+--------------+--------------¦ ¦Nathan ¦$10,000 ¦$6,250 ¦ +-------+--------------+--------------¦ ¦Hyman ¦7,500 ¦3,750 ¦ +-------+--------------+--------------¦ ¦Victor ¦7,500 ¦3,750 ¦ +-------+--------------+--------------¦ ¦Bernard¦5,000 ¦3,750 ¦ +-------+--------------+--------------¦ ¦ ¦30,000 ¦17,500 ¦ +-------------------------------------+
The fair and reasonable value of such services in connection with renegotiable net sales during 1942, in accordance with the stipulation for allocating costs, is not less than $12,500 nor more than $18,850.
The percentage relationship of profits to net sales for the years indicated (without allowance for compensation to partners) is as follows:
+---------------------------+ ¦ ¦Per cent¦ ¦Per cent¦ +----+--------+----+--------¦ ¦1936¦15.39 ¦1940¦39.13 ¦ +----+--------+----+--------¦ ¦1937¦21.13 ¦1941¦44.61 ¦ +----+--------+----+--------¦ ¦1938¦41.58 ¦1942¦36.58 ¦ +----+--------+----+--------¦ ¦1939¦29.12 ¦ ¦ ¦ +---------------------------+
The average for the years 1936 to 1939, inclusive, is 26.8 per cent; the average for the years 1936 to 1941, inclusive, is 31.8 per cent.
Prior to 1942 petitioner manufactured or sold the following types of articles.
Acorns
Balls
Boards: game, bread, cake, sprengerle
Dowels
Faucets
Handles: acid cup, brush, tool, grip, hammer, mallet, masher, pail, rolling pin, stencil, switch
Mallets
Mashers
Mauls
Mouldings: plain, rope, twist
Paddles: paint, laundry, soup
Pegs
Pins: rolling, sprengerle
Planks: steak and fish
Plates: collection, serving, bread
Plugs: deck, pipe
Pipe
Poles: all types, round, octagon, square
Prints: butter
Pounders: steak
Pushers: meat
Rollers: machinery, house moving, etc.
Spears: flag, ornamental
Squeezers: lemon and orange
Tongs: pickle
Sticks: drum
Wedges
Wheels
During 1942 petitioner manufactured, furnished, or both, for war-end use lumber and plywood and the following types of articles:
Adaptors: metal
Arms: side, cross, transmitter, brass
Balusters: stair
Beeties: hawsing
Brackets: metal
Chests: tool
Doors: offices
Dowels: miscellaneous materials
Blocks: dies, cushion, packing, level
Bushings: paper, grinding wheels, aiming post, oil plug
Cable dressers: dogwood and lignumvitae
Clubs: police
Cores: textile, teletype taper
fids: cringle, hand
Handles: boat pump, mallet, maul, pilot wheel, chisel, auger, maul, switch (five types)
Holders: baton (leather)
Legs: tripod, table, wardroom
Mallets: caulking, coppersmith, tinner, carpenter, tent stake
Mandrels: fibre, asbestos
Mashers: potato
Mauls: pickeye, round eye
Moulding: crown, glass, beading
Newels: landing, post
Tips: lance pole (metal)
Paddles: food, ice
Parts: machine gun, assorted
Patterns: leather case assembly
Pins: rolling, drift, point, polishing
Plugs: deck, insert, rammer, ammunition
plywood
Poles: pull, boat hook, lance, pike
Pushers: food
Rammers: gun muzzle
Rod: eccentric
Rails: miscellaneous guard, stair
Rollers: textile, machinery, beach landing
Rounds: miscellaneous
Rungs: ladder, rope, Jacobs
Spacers: Buss, support
Staffs: cleaning, pickup, flag
Staves: barrel
Sticks: dressing, polishing, ice, packing, snakewood drum
The articles manufactured or furnished by petitioner for war-end use during 1942 were produced in a substantially similar manner to articles manufactured or sold by petitioner prior to 1942, and during the period 1936-1939, inclusive.
The articles manufactured or supplied by petitioner for war-end use during 1942 were comparatively simple to manufacture. Such articles were produced in accordance with blue prints and specifications issued by the Army, and required a comparatively simple manufacturing technique.
During 1942 petitioner owned no patents, made no payments for the use of patents, and filed no application for any patent.
During 1942 petitioner borrowed no money and procured no advance payments from any Government agency for the purpose of fulfilling its contracts, and petitioner extended no financial assistance by way of loans, advance payments, or otherwise to any of its subcontractors or suppliers.
Petitioner's renegotiable contracts specified delivery within six months or less from the date of the contract. Delivery was usually made after the specified date, the length of the delay varying from one day to approximately six weeks.
Petitioner's 1942 war contracts were negotiated contracts, which were made by selection by the contracting officer from bids submitted by various contractors. This differs from competitive bidding in that there was no requirement to accept the lowest bid price. The contracts contained a provision making them subject to renegotiation and an option in the Government to increase the quantity under the contract by from 25 per cent to 100 per cent. Such provisions injected a risk of petitioner's ability to secure satisfactory and adequate lumber. Substitutions of materials were a cause of uncertainty. Petitioner obtained its lumber from as far as the west coast and Florida. Government allocation of lumber did not aid petitioner in procurement.
The prices charged to Government agencies were reduced from time to time. Lance poles originally prices at $2.62 were reduced to $1.70 each; drift pins from $.88 to $.62 each; and cable dressers from $1.80 to $1.60 each.
Petitioner's operations were reviewed ten or twelve times during 1942 by a plan agent of the United States Army Signal Corps, who made a cost analysis of petitioner's contract to ascertain whether the price the Government was paying was fair.
Petitioner developed a special process for treating lance poles so that they could be painted as required by Government specifications; it also developed a rig for shaping and dipping cable dressers, a new type of wooden mallet for Ordnance, a small special mallet for the Marine Corps, and a new style of laminated hickory staves for use with canvas water tanks. Petitioner also cooperated in expediting the manufacture and delivery of wooden plugs urgently needed for use in Army tanks, and it assisted in locating and having manufactured 5,000 wooden rollers used to facilitate the handling of tanks on the beaches in the African campaign. Petitioner aided in increasing production of teletype rollers from approximately 3,500 a day up to approximately 35,000 a day. It also helped to locate a source for the production of wooden pile driver cushions.
By letter dated October 7, 1942, petitioner received commendation from the District Chief, Ordnance Department, on its cooperation on a special, urgent job.
Petitioner's operation of its business during 1942 was reasonably efficient.
Petitioner's margin of profit above costs in 1942 was sufficiently high to eliminate any pricing risk to petitioner.
By order dated December 14, 1943, the Under Secretary of War found and determined:
That $32,000 of the profits realized by the Contractor during its fiscal year ended 31 December 1942, under its contracts and sub-contracts subject to renegotiation pursuant to the provisions of the Act, are excessive.
In its petition, petitioner ‘alleges that in view of all of the circumstances, the profits earned by it in connection with the renegotiable business performed during the period in question are fair and reasonable and are not excessive.‘
By amendment to amended answer, the respondent pleaded as follows:
V. Respondent denies that it committed error as alleged in Paragraph V of the petition or in any subparagraph thereunder or in any other manner whatsoever except it alleges that the amount of petitioner's excessive profit derived from sales subject to renegotiation during the period involved herein is not less than $43,000.
During 1942 petitioner's profits from sales subject to the Renegotiation Act were excessive within the meaning thereof.
During 1942 petitioner realized from sales subject to renegotiation excessive profits in the amount of $32,000.
OPINION.
OPPER, Judge:
Disposition of the ultimately contested issue of whether and to what extent petitioner's profits from war contracts were excessive seems to us to be dictated in this proceeding by application of the principle of burden of proof. The Under Secretary of War determined that petitioner's profits were excessive to the extent of $32,000. The claim that they were not, in that or any amount, is made in the petition filed here. Respondent now seeks to have the amount increased to $43,000. This claim was made by answer as required by our Rules of Practice (Rule 64-III). The rules further provide (Rule 64-I):
Except as otherwise prescribed by this Rule, proceedings for the redetermination of excessive profits under the Renegotiation Act shall be governed by the existing Rules of Practice before this Court. * * *
Rule 32 provides:
The burden of proof shall be upon the petitioner, except as otherwise provided by statute, and except that in respect of any new matter pleaded in his answer, it shall be upon the respondent.
There is nothing in the statute forbidding expressly or by implication the result thus arrived at by the rules that the present petitioner has the burden of proof with respect to any amount up to that originally determined as excessive, and that the respondent has the burden in respect to any additional amounts proposed for the first time in his answer in the present proceeding. The legislation, it is true, emphasizes the independence of proceedings for redetermination of excessive profits and refers to them as ‘de novo.‘ There is little doubt that it was intended that the evidence taken and the judgment exercised should to no extent be limited by that of the Renegotiation Board or a Secretary.
Nevertheless, the mechanical requirements of any litigation call for some method by which the inertia of even balance can be eliminated. Upon one of the parties there must be placed the obligation to initiate the proceeding and to go forward by placing in evidence some basis for its disposition. Similarly, when at any other point in the hearing the opposing evidence is of substantially equal strength, the necessity for some conclusion likewise exists. That situation is the traditional and classic occasion for application of principles dealing with the burden of proof. See Abrath v. N.E. Ry. Co., L.R. 11; Q.B. Div. 440, 455; 11 A.C. 247; Jones, ‘The Law of Evidence,‘ 3d ed., 238; Thayer, ‘A Preliminary Treatise on Evidence,‘ 357, 358; Pennsylvania Railroad Co. v. Chamberlain, 288 U.S. 333, 339; District of Columbia v. Vignau (App. D.C.), 144 Fed.(2d) 641. There is no reason to assume that Congress intended such problems in renegotiation cases to be incapable of solution; and there is every justification for the belief that, when jurisdiction in such cases was entrusted to the Tax Court, it was on the assumption that its procedure and practice
would be adopted as far as reasonably consistent with renegotiation proceedings.
Section 403(e)(1), Sixth Supplemental National Defense Appropriation Act, 1942, as amended by Revenue Act of 1943, Act of February 25, 1944, section 701(b), referring specifically to Internal Revenue Code, section 1111.
‘The proceeding before The Tax Court shall not be treated as a proceeding to review the determination of the Board or Secretary, but shall be a proceeding de novo. Thus the court may adduce any evidence which it sees fit in making its determination. It is provided that the contractor or subcontractor, as the case may be, is to have the burden of going forward with the evidence, whether as to the existence of excessive profits or as to the amount thereof. The burden of the proof, however, may be upon the Government or the contractor or subcontractor according to the court's determination.‘ H. Rept. No. 871, 78th Cong., 1st sess., Nov. 18, 1943, p. 77.
On the two subordinate issues of fact in the present proceeding the evidence is incomplete and indecisive. The first requires a determination of the amount of renegotiable business, which is in turn dependent upon whether the contracts for which petitioner received payment in the year before us were completed after April 28, 1942, and involved a war-end use. The invoices and purchase orders which form the foundation for any finding on this question were missing to a considerable enough extent to leave a wide gap between the possible conclusions to be drawn. And even the attempted allocation suggested as a possibility by respondent can not be founded on any evidence that the existing purchase orders were typical and probative of those missing.
See Molnar v. Commissioner (C.C.A., 2d Cir.), 156 Fed. (2d) 924.
‘* * * The petitioner has failed to show that the undestroyed records were representative of those destroyed. * * * ‘However, it may be conceded arguendo that in the present case sufficient evidence appears to warrant the assumption that the purchase orders actually found are representative of petitioner's total sales to persons other than the Army, Navy, or Marine Corps. * * *‘ Respondent's brief, pp. 27, 28. The record is devoid of any such evidence, and, of course, respondent's concession can not supply it in his favor.
On the other factual controversy, involving the amount reasonably to be allocated to partners' salaries, evidence of comparable payments made or demanded by others similarly situated— an element of heavy probative significance in the presentation of such an issue, see L. Schepp Co., 25 B.T.A. 419, 430— does not seem to us by any means reliable. None was submitted in admissible form on behalf of petitioner, and that produced by respondent was so far from apparent equivalence that we find it of equally little value. For practical purposes, it can be said that the record on both of the factual issues is as strong— or as weak— in favor of one party to the controversy as of the other. On neither has the evidence of either party succeeded in persuading us that the figure should be different from that conceded by the other.
For these reasons, we have made no findings as to the precise amount of total renegotiable business nor of the reasonable value of partners' services. For purposes of the two branches of the case and in the posture in which the record leaves it, the figures must be different according to the location of the burden of proof.
On the branch of the case which places in issue the excessive character of the $32,000 of profits determined to be such by the Secretary and as to which petitioner has the burden of proof, we must assume in respondent's favor, because petitioner has not succeeded in proving otherwise, that renegotiable business was $181,500 and that partners' salaries attributable to the renegotiable business would be unreasonable in excess of $12,500. Deduction of compensation to partners, and of the allocable costs in accordance with the stipulation of the parties, would leave renegotiable profits of almost $54,000, or approximately $22,000 after deducting the $32,000 of excessive profits. This $22,000 represents 12 per cent on renegotiable net sales and 36 per cent on total capital employed.
These ratios are not only large by themselves, but they, as well as the absolute amount of profits, compare favorably with the peacetime years when a deduction for partners' salaries would have wiped out most, if not all, of the firm's operating profit. On the basis of a comparison with net sales, capital employed, prewar profits, or any other standard which the record makes available, it is impossible to say that $22,000 of profits after adequate compensation to partners would not be more than reasonable for a business of the size and nature shown here. See Stein Brothers Manufacturing Co., 7 T.C. 863.
Approximately $61,000, the use of which in the business seems reasonably probable.
On the other hand, when we come to respondent's affirmative claim, the figures correspondingly redound to petitioner's benefit. On this branch of the case we must assume, for lack of contrary evidence, that the renegotiable business was only $161,500, and that compensation to partners attributable to it would be reasonable at $18,850. Appropriate adjustments for over-all costs would bring renegotiable profits down to approximately $39,000, from which the deduction of the $32,000 treated as excessive would leave but $7,000. This is 4 1/3 per cent of net sales, and only slightly in excess of a return of 10 per cent on invested capital. Respondent has himself selected a figure for permissible profits of $11,148, which leaves little warrant for rejecting a smaller amount.
Under the circumstances, the figure in question can not, in our view, be regarded as so palpably unreasonable or excessive as to justify an increase in the amount over that determined by the Secretary of War.
Respondent also computes a permissible profit of 6 or 7 per cent in reference to the statutory limitation upon cost-plus fixed-fee contracts; 6 per cent would be about $9,700 on renegotiable business of $161,500.
Resort to other considerations appropriate in an examination of the excessive character of war profits leads to no different result. It is true that petitioner cooperated faithfully in the procurement program and in fact received commendation from one of the War Department offices. The partners were industrious, diligent, and skillful, the operations efficient and economical, and some independent contribution was made to the planning of the articles manufactured. All of the financing was supplied by petitioner and none was called for from the Government. Cf. Stein Brothers Manufacturing Co., supra.
On the other hand, the plant was small and uncomplicated, the products and the manufacturing process simple, and the designs and specifications were supplied to petitioner by Government agencies. A considerable proportion of the articles was received by petitioner in either completely or partially fabricated form. The capital required was small and the pricing risks were negligible. Not only were the articles manufactured essentially similar to those forming petitioner's peacetime product, but its civilian business was maintained and in fact increased over the prewar average, so that problems of both conversion to war production and of reconversion after the emergency must be considered relatively slight. Finally, the periodic reductions in contract prices appear to have been rather the result of demands by the procurement agencies than of voluntary action by petitioner. The upshot is that none of the factors in this field is outstanding or constitutes a compelling force in either direction. The record in these respects likewise is close to an even balance.
It follows, as we took occasion to note at the outset, that application of the principle of burden of proof disposes of the contested fundamental issues with respect both to the amount of excessive profits originally determined and to the additional amount affirmatively proposed by respondent in this proceeding. The conclusion is that petitioner received excessive profits in the amount of $32,000.
Reviewed by the Court.