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September 12, 1949


The opinion of the court was delivered by: WYCHE

This is a suit brought by the United States for the recovery of corporate income and excess profits taxes for the year 1942, in the sum of $ 75,879.72, and interest, which the Government claims was erroneously refunded to the taxpayer, the defendant in this case. The case is before me upon the Government's motion for summary judgment upon the pleadings, supported by certified copies of documents from the files of various Government departments, and the defendant's cross-motion for judgment in its favor.

At the hearing of the motions, the plaintiff moved to strike an exhibit containing the Commissioner's Ruling, submitted with defendant's Motion to Strike. This motion is denied.

 On February 28, 1941, the taxpayer and the Navy Department entered into a 'Contract for the Acquisition and Installation of Special Additional Plant Equipment and Facilities Required to Expedite the National Defense Program'.

 Under the contract the taxpayer agreed to undertake the production at its plant of heavy forgings necessary for the national defense, provided the Navy Department agreed to pay for certain additional facilities. These additional facilities were to consist of buildings, furnaces, machine tools and other equipment. And the taxpayer agreed that the price of the forgings would not include any amount or allowance for the cost, amortization or depreciation of such facilities. The total cost of the emergency plant facilities, all of which were described in detail in the contract, was estimated at $ 2,500,000. Title to the facilities was to be in the taxpayer. But it was not to allow any mortgage or other lien to encumber the property except a mortgage or lien given as additional security to an assignee of the taxpayer's claim against the Government under the very contract merely to insure the Government's payment, and even then only if the mortgagee's or lienor's rights were subordinate to those of the Government. The taxpayer could make no conveyance or transfer of title to the facilities or any item of them. It was also required promptly to remove all mechanic's liens, tax liens, and other similar liens arising in the ordinary course of business, and to carry all the customary forms of insurance on the property. The taxpayer was to furnish the Navy Department with certified statements monthly and annually showing in detail the amounts expended in the construction of the facilities during the preceding month or year, and also a final cost statement upon completion of the facilities. The taxpayer was to receive no profit from the construction of such facilities. There was to be included in the reimbursable cost the interest paid by the taxpayer on funds borrowed by it for use in performance of the contract. But the taxpayer was to give the Government the benefit of all trade discounts and allowances available to the taxpayer in the purchase of materials, and where practical it was to buy materials upon competitive bids. After receipt of the final cost certificate the Government was to reimburse the taxpayer in equal payments over a period of sixty consecutive months beginning with the month after the completion of the plant facilities.

 If the taxpayer assigned its claim for reimbursement in order to obtain funds to perform the contract, the payments to be made by the Government to the assignee under the contract were not to be subject to reduction or set off for any indebtedness of the taxpayer to the United States arising independently of the contract.

 In the event that contract was terminated prior to completion of the facilities, the Government was to reimburse the taxpayer to the extent of its costs up to that time, including liability to subcontractors. Upon termination of the contract the taxpayer was to have the right to choose 'to retain * * * (the facilities) for its own use outright, free of any interest of the (Navy) Department' provided it paid to the Department the cost thereof less the loss in value due to damage, scrapping of equipment, depreciation, obsolescence, etc., the rates of depreciation to be fixed by the Navy Compensation Board; or, if the taxpayer were unwilling to pay such depreciated cost to retain the property, it could negotiate with the Navy Department to pay it a lesser sum representing fair value. Upon payment by the taxpayer to the Navy of the amount agreed upon, the contract provided that any and all interest of the Department in the facilities 'shall forthwith terminate, and the Department shall execute and deliver to the Contractor a valid release of any and all such interest and right.'

 If the taxpayer did not choose to retain the facilities by paying to the Government the depreciated cost or negotiated fair value, it was to 'transfer the same promptly to the Government' free and clear of all mortgages and liens and the government was to remove the facilities from the taxpayer's premises. The taxpayer could however still negotiate for leasing all or part of the facilities from the Government with an option to purchase them. Or, if the taxpayer did not choose to purchase or lease the facilities, did not require the Government to remove them and did not remove them himself at the Government's expense, the contractor still had the right to use them until the Government did remove them.

 Upon transfer of the facilities to the Government, the Government had the right to require the taxpayer at the Government's expense to maintain and preserve the facilities for such period of time up to five years as the Secretary of the Navy might require in the interests of national defense.

 In the event of destruction of the facilities the Government could require the taxpayer to apply the insurance proceeds to their restoration or replacement. The Government was then to reimburse the taxpayer for any excess cost; but the taxpayer was to return any excess insurance proceeds to the Government.

 The taxpayer was to inventory separately every item of equipment, machinery and tools covered by the contract, to give a copy to the Government, and to mark each piece or unit so as readily to identify it as having been constructed or acquired under the contract.

 While the facilities were in its possession during the term of the contract, the taxpayer was responsible for their care and maintenance, and the Government was to notify taxpayer at the end of each year as to the respects in which the taxpayer failed to satisfy it with regard to maintenance. Items which became obsolete or no longer useful could, after approval of the Navy Department, be sold, and the proceeds of the salvage either applied to the unpaid balance of reimbursements due from the Government or repaid to the Government.

 Only upon approval of the Secretary of the Navy and upon terms satisfactory to him was the taxpayer authorized to sell or lease part of the emergency plant facilities, and the consideration was to be applied on any balance of reimbursements due from the Government or to be paid over to the Government.

 Priority of use of the emergency facilities was to be given contracts or orders from or for the Government. The taxpayer also agreed that no part of the price of any of the taxpayer's products sold directly or indirectly to the Government would include in any part the cost, amortization, or depreciation of the emergency facilities. The taxpayer was to keep adequate records and accounts of all costs in connection with the construction and maintenance of the facilities. And it was to give representatives of the Department access at all times to the premises, work, materials, books and records. The taxpayer was also required to furnish the Government with such information and reports as might be necessary for expediting the national defense.

 The taxpayer was authorized to assign all or part of its claims for moneys to become due under the contract to any bank or other financing institution, which was then permitted further to assign them. The assignee then was to file written notice of the assignment with the General Accounting Office and the Navy Department. The assignee could then be protected by an agreement effective under the contract that so long as any sums were due from the Government to the contractor under the contract, the taxpayer would not, without the assignee's consent, acquire the Government's interest in the facilities or make any sale or lease of them. If the taxpayer permitted a mortgage or lien to become an encumbrance upon the property in violation of the contract, the Government agreed not to withhold reimbursements to the assignee in excess of the debt secured by the mortgage or lien.

 The agreement also required the taxpayer to furnish to the Government a report of a title company or other evidence showing clear title to the emergency plant facilities without mortgage or liens, upon completion of the facilities, and once a year thereafter.

 Article X of the contract provided as follows:

 'Article X- Tax Amortization. Inasmuch as it is the intent of Sections 23 and 124 of the Internal Revenue Code (26 U.S.C.A. §§ 23, 124), unless payments made on account of Government Reimbursements for Plant Costs are included in gross income, not to allow (1) the tax deduction for amortization over a 60-month period of the Emergency Plant Facilities or (2) the inclusion of such payments in invested capital for purposes of the excess-profits tax, the Contractor agrees that, if such payments, to the extent they constitute reimbursements for capital expenditures made in acquisition or construction of such Emergency Plant Facilities, are not includible in gross income, then, for Federal tax purposes, (1) the basis of such Emergency Plant Facilities shall be computed without taking into account capital expenditures for which the Contractor has been or will be so reimbursed and (2) the amount of such reimbursements shall not be treated as paid-in surplus or contributions to capital for purposes of the excess-profits tax. In the event that the Contractor makes application to the Advisory Commission to the Council of National Defense and to the Department of the Navy for a certificate with respect to terms contained in this contract, or the necessity for any item or group of items of the Emergency Plant Facilities, acquired, constructed or installed subsequent to June 10, 1940, under Sections 23 and 124 of the ...

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