Opinion
No. B-28.
April 6, 1936.
J. Kemp Bartlett, of Baltimore, Md. (Williams, Myers Quiggle, of Washington, D.C., and Bartlett, Poe Claggett, of Baltimore, Md., on the briefs), for plaintiff.
George H. Foster, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
The plaintiff during the World War was engaged in the manufacture of airplane propellers and was given a series of orders by defendant for these propellers. In preparation for the work required and in order to expedite it, the plaintiff enlarged its plant, installed additional machinery and equipment and otherwise increased its facilities. As the work progressed the defendant suspended or canceled orders which it had given by reason of change in design or some other cause and finally as the war came to a close suspended work on the contracts altogether. Some of the propellers ordered were finished and paid for, some were finished but not paid for, and there were a large number upon which more or less work had been done at the time when the contracts were cancelled. After all work on the propellers had ceased by reason of directions received from defendant, the plaintiff and defendant entered into an agreement known as the Potter-Downey agreement which provided for payment to the plaintiff for the work it had done on the unfinished propellers and for the cost of material used in this work. But after this agreement had been executed the plaintiff and defendant were still unable to agree as to the amount to which plaintiff was entitled under the contracts and plaintiff has not been paid even the amount provided for by this so-called Potter-Downey agreement. Plaintiff now brings this suit to recover the amount which is due under this agreement and also the loss and damage which it alleges it has sustained by reason of the suspension and cancellation of the contracts.
The defendant has filed a counterclaim for taxes assessed for the three years 1917, 1918, and 1919, but it is conceded that any further collections for the years 1917 and 1919 are barred by the statute of limitations.
In plaintiff's petition, seventeen items of charges, loss and damage are listed against defendant totaling $582,129.04. Plaintiff concedes, however, that there is due the defendant for lumber $437,891.01 and asks judgment for the balance, $144,238.03.
Eight of plaintiff's claims are conceded by defendant and it is only necessary in determining the amount of plaintiff's recovery to pass on the disputed items which will be hereinafter set out and considered.
Among the claims disputed by defendant is one for $84,365.41 "for continuing overhead expenses from date of discontinuance of manufacture to date of termination of contracts" which includes 10 per cent. profit thereon.
The so-called Potter-Downey agreement which will be considered more at length hereinafter provided for the payment to plaintiff of overhead expenses and 10 per cent. profit thereon. The agreement clearly covered the claim now being considered but it is said that plaintiff was at the same time engaged on work for other parties and that it has failed to establish by the evidence the proportion of overhead properly chargeable to defendant. This is a question of fact upon which the commissioner of this court found in favor of the plaintiff. After reviewing the evidence, we agree with the court commissioner and think it would serve no useful purpose to discuss the oral and written testimony in relation to this item. It is therefore allowed to plaintiff.
The next item of plaintiff's claims disputed by defendant is $34,306.55 "for loss resulting from erection of second story and office floors of claimant's Key Highway Plant and from installing additional special equipment therein."
The evidence shows that in preparation for the work contemplated by the contracts the plaintiff added a second story to what was known as its Key Highway Plant and that this second story was specially fitted and equipped for use in connection with the lower story in constructing propellers. Defendant does not deny this, but says that there was no agreement that the government should pay for an addition to plaintiff's plant, or for additional machinery and equipment, and if there had been such an agreement the officer of defendant that made the arrangements with plaintiff had no authority to make any such contract. This may be conceded for the purposes of the argument, but we do not think these matters prevent plaintiff's recovery thereon. The evidence, however, does show that Lt. Ryerson, head of the propeller section who was charged with making arrangements for the production of propellers for the air service, visited plaintiff's plant and while expressing himself as pleased with it in a general way said it did not have capacity to manufacture the number of propellers that the War Department required and urged plaintiff to add another story with additional facilities, and plaintiff, through its president, agreed so to do. Subsequently, having in the meantime received orders for a very large number of propellers, the plaintiff went ahead with the construction of the second story which was completed some time in the middle of summer in 1918.
The case is very similar to that of the Barrett Co. v. United States, 273 U.S. 227, 47 S.Ct. 409, 412, 71 L.Ed. 621. In that case the Navy Department contracted for certain materials to be furnished within a given time. The contract also provided for the construction of a plant with equipment with which to carry out its provisions. The plaintiff, believing that a larger plant than was contracted for would be necessary for the manufacture of the material required by the government, expended a large sum to increase its capacity. None of these changes were directly authorized or approved by the Navy Department, but the Supreme Court said that the plaintiff was entitled to just compensation under the statute and that just compensation included "the outlay which it can show there was reasonable ground for making in order to fulfill its engagements." What we have stated above with reference to the case now before us shows that as the government requirements were presented to plaintiff there was abundant reason for an enlarged plant and additional facilities.
The defendant, however, contends that the Barrett Co. Case, supra, and other similar cases have no application for the reason that they were based on the statute of June 15, 1917, which provided for just compensation whenever war contracts were suspended, canceled, or modified, but applied only to contracts for the "building, production, or purchase of ships or material," and that other language in the statute shows that the word "material," as used therein, refers only to stores, supplies, and equipment for ships. This seems to be a very narrow construction of the statute, but we can find no case in which it has otherwise been applied. The defendant not only insists that the statute referred to above has no application to the case now before the court, but says also that if it did apply, the contracts were not canceled pursuant to its provisions. We do not think this precludes the plaintiff from recovering for loss or damage occasioned by the cancellation or suspension of the contracts. The general principles in relation to contracts will still apply and plaintiff is not left without a remedy for violation of the agreements, express or implied, made by defendant. Under well-settled authority plaintiff could have elected to treat the contracts as still in force, and, if it had so elected, could recover for potential profits, but by executing the Potter-Downey agreement it elected to consider the contracts terminated by the breach thereof made by defendant. We are clear that plaintiff may recover what it lost by reason of the cancellation of the contracts even if it be conceded that there is no special statute which so provides.
This court and the Supreme Court long ago fixed the rules for the measure of damage when a contract was suspended or cancelled in the case of Behan v. United States, 18 Ct.Cl. 687, affirmed in United States v. Behan, 110 U.S. 338, 4 S.Ct. 81, 84, 28 L.Ed. 168. In that case this court said that "in calculating the damages to a contractor when, without his fault, the other party, during its progress, puts an end to the contract before completion, the object is to indemnify him for his losses sustained." The Supreme Court, in passing on the same question, said with reference to the contractor's rights in such a case: "When he elects to go for damages for the breach of the contract, the first and most obvious damage to be shown is the amount which he has been induced to expend on the faith of the contract, including a fair allowance for his own time and services."
The Supreme Court went on further to say that the contractor may also claim and recover, if proved, anticipated profits. In the case at bar there is no attempt to show any anticipated profits, probably because the Potter-Downey agreement rendered such profits not recoverable, but the Supreme Court went on to say that "It does not lie, however, in the mouth of the party, who has voluntarily and wrongfully put an end to the contract, to say that the party injured has not been damaged at least to the amount of what he has been induced fairly and in good faith to lay out and expend * * * after making allowance for the value of materials on hand; at least it does not lie in the mouth of the party in fault to say this, unless he can show that the expenses of the party injured have been extravagant, and unnecessary for the purpose of carrying out the contract."
There is nothing to show that any of the expense incurred by the plaintiff was extravagant and unnecessary for the purpose of carrying out the contracts. On the contrary, when we consider all of the testimony and the circumstances under which the contracts were made it appears that plaintiff had good cause and reason to make the additional expenditures by reason of which it incurred the losses which it now seeks to recover. The contracts were made in war times. It is a matter of common knowledge that the government was then in urgent need of airplanes. War never admits of delays or even of ordinary preparations and exertions. Its needs are urgent and pressing and it must have been well understood by plaintiff that it was making contracts to supply what are commonly referred to as "rush orders." Plaintiff was told by one of defendant's officials that its plant was insufficient, and the evidence as a whole shows that it was amply justified in providing additional facilities for hastening the completion of the orders which it received.
As a further objection to this claim, and the remainder of the disputed items, it is urged on behalf of defendant that plaintiff cannot recover for loss and damage resulting from cancellation or suspension of the contracts by reason of the so-called Potter-Downey agreement set out in finding 16 to which reference has heretofore been made. It is contended that this agreement disposed of all claims of every kind and nature which the plaintiff held against the defendant arising out of orders given for construction work.
The so-called Potter-Downey agreement was divided into two parts, one which related to the item of $10,200 for Charavay propellers which was left unsettled but is now conceded by defendant, and another part which provided that the plaintiff should "be paid for all work as it now stands on a basis of cost of materials, all direct and indirect labor costs, all over-head charges * * * and 10% profit on the costs so obtained. * * *" (Italics ours.)
It is contended on behalf of defendant that this agreement operated as a full settlement of all claims arising out of the contracts including the claims which are now in dispute. This contention cannot be sustained. If it had been intended that this agreement should act as a full settlement to all claims which the plaintiff held, there is every probability that it would have been so provided in express language, for this would have been the ordinary and usual course. Moreover, the agreement mentions three and only three distinct items for which payment was to be made, namely, work, labor costs, and overhead charges. It provided for the recognition and measuring of claims based on these matters. Obviously the plaintiff had other claims against the defendant growing out of the suspension and cancellation of the contracts, some of which had already been presented to defendant. There is no evidence to show that these claims were taken up in any manner when the negotiations were had that led to the Potter-Downey agreement. On the contrary, as the agreement made specific mention of certain of plaintiff's claims against defendant this tends to show that those not mentioned were excluded from its operation. A reasonable construction of the Potter-Downey agreement under all of the circumstances of the case shows that it settled nothing except those matters included in its specifications, and it cannot properly be contended that these specifications covered the claim for the addition of the second story to the Key Highway Plant and the equipment connected therewith or any of the remaining disputed claims which will next be considered. This claim therefore should be allowed.
The amount of the loss of plaintiff incurred by reason of the construction of the second story of the Key Highway Plant with its equipment was found by the court commissioner to be $25,605.62, and with this finding we concur. Plaintiff also claims to be entitled to 10 per cent. profit on this amount, or a total of $34,306.55, but no explanation is given as to why a profit should be allowed thereon. It is plain and we have already held that the item was not covered by the Potter-Downey agreement which provided for 10 per cent. profit on certain items. Plaintiff should be awarded compensation for its loss, but there is no reason why it should be allowed a profit thereon and this portion of plaintiff's claim is denied. For the same reason, the plaintiff cannot be allowed profit on any of the disputed items hereinafter mentioned.
There is no exception to the finding that plaintiff expended for repairs, alterations, additions, and betterments on leased premises, used as manufacturing plants, for the purpose of expediting the production of propellers for the War Department, on contracts and orders involved herein, less a suitable proportion applicable to propellers completed and shipped, $15,583.69. These expenses were a loss to plaintiff except in so far as they facilitated work upon the propellers which were completed and paid for, and for this matter a deduction is made. Plaintiff should be allowed $15,583.69 on this item.
On its claim for what it expended for machinery and equipment for the purpose of expediting the production of propellers, the plaintiff is entitled to recover the cost thereof, less a suitable deduction on account of propellers completed and delivered and a further deduction of the salvage value. Under this rule the facts found show that plaintiff is entitled to recover $22,224.35.
Another claim of plaintiff is based on the purchase and installation of 12 Cutler curtain kilns which were facilities added for the purpose of more rapidly completing the contracts, and the cost thereof, less due allowance for propellers completed and delivered, was $19,035.60. We think there is some evidence that tends to show that the market value of these kilns after the cancellation of the contracts was only $2,600. This would be the salvage value of the property and on this basis plaintiff sustained a loss of $16,435.60, which should be allowed in computing its damages.
The claim for $851.76 for dies (see finding 29) should be allowed plaintiff, but the item of $4,134.64 for clamps purchased in excess of normal requirements cannot be allowed for the reason that the purchase was made in anticipation of further orders and contracts which never were received from the government.
We think the plaintiff should be allowed $2,111.70 on account of extra motortrucks purchased to increase the facilities of the plant, and also $4,408.63 on account of boilers and equipment used in connection therewith purchased and installed to expedite the production of propellers.
There is no claim that anything has been paid plaintiff on any of these disputed items.
The facts which support the eight items or claims made on behalf of plaintiff upon which defendant concedes plaintiff is entitled to recover are set out in findings 18, 19, 20, 21, 22, 24, 33, and 34. The total of the items conceded in plaintiff's favor is $385,717.29. Adding this amount to the total of the amount allowed plaintiff on the disputed claims, we find that the aggregate sum allowed plaintiff is $557,304.05. From this should be deducted $437,891.01, which plaintiff concedes is due defendant for lumber. The balance, $119,413.04, is the amount we find plaintiff is entitled to recover on the various claims set out in its petition. Plaintiff claims to be entitled to interest on part of this sum, but plaintiff's recovery is not based upon a statute which awards "just compensation," and under the general rules with reference to contracts no interest can be allowed.
Defendant's Counterclaim.
In the year 1924 the Commissioner of Internal Revenue made an additional assessment of income taxes against the plaintiff for the year 1918 in the amount of $191,403.77, no part of which has been paid. The counterclaim is based on this assessment. The plaintiff asserts that the assessment resulted principally from the fact that the Commissioner of Internal Revenue added large sums to plaintiff's gross income and greatly increased its net income by refusing to allow the plaintiff to set up its closing inventory for the year in question at its then market value and by substituting in lieu thereof the cost of the inventoried articles which were purchased while this country was at war. Plaintiff further contends that when the Commissioner of Internal Revenue increases the taxpayer's closing inventory and thus increases its income for the year in question the burden is upon the defendant to establish that the change was correctly made and that as defendant has presented no evidence on this point the additional assessment must be set aside. We do not need to determine what the rule would be if the Commissioner had claimed on the trial of the case that plaintiff's taxes should be larger than the amount which was assessed, or had otherwise sought to show that his ruling in the matter was incorrect, for no such claim is made here. The defendant relies on an assessment regularly made. It was the final decision of the Commissioner and it is well settled that his determination is prima facie correct. This rule is founded in reason for the taxpayer has full knowledge of all of the facts pertaining to a proper assessment while often the government officials are without the means of obtaining proper information. A contrary rule would often put the government at the mercy of an unscrupulous taxpayer whose dealings were not open and aboveboard.
The plaintiff, however, insists that even if it has the burden of proof, this burden has been met and sustained by the evidence which it introduced. With this conclusion we do not agree, but, on the contrary, have found that the evidence in the case is not sufficient to enable a calculation of plaintiff's taxes to be made except by using the Commissioner's computation as a basis. This conclusion, however, does not, in our opinion, prevent corrections being made in definite and specific items where it is shown that the Commissioner's action was erroneous, and the same rule applies to inventories.
The plaintiff owned certain valuable patents which it had acquired by issuing stock of the par value of $107,100 therefor. As the evidence shows that the stock was worth par, the patents may be said to have a cash value of that amount. The Commissioner, however, did not include anything on account of the patents in the amount found by him to be the invested capital of the plaintiff. The total amount of capital stock outstanding was $120,000. The Revenue Act of 1918 (section 326, 40 Stat. 1092) provided with reference to intangible property which formed a part of invested capital that the taxpayer, in making up the amount of its invested capital, might include either the actual cash value of such property, or the par value of the stock or shares issued therefor, or 25 per cent. of the par value of the stock outstanding, whichever is the lowest. The taxpayer therefore was entitled to have included in its invested capital 25 per cent. of the par value of the total amount of the stock outstanding, which was $30,000, and this amount should be added to the amount of invested capital as found by the Commissioner.
In its return for 1918 as amended the plaintiff claimed $106,558.87 for amortization of war facilities. The Commissioner of Internal Revenue disallowed this claim and the court commissioner found that a reasonable amount for amortization was $96,788.57. It is contended on behalf of defendant that if plaintiff's damage claims based on expenses incurred and losses sustained on special facilities in the way of buildings and material acquired for the purpose of completing the contracts are allowed, plaintiff cannot also have amortization for the same items.
Amortization is allowed, if at all, under the provisions of the statute (section 234(a)(8), Revenue Act of 1918, 40 Stat. 1078) "in the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war."
The statute further provides that "there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer. (Italics ours.)"
Every item for which amortization could be properly claimed is included in the allowances already made to plaintiff for damages sustained by reason of the defendant's suspension or cancellation of the contracts, consequently the costs involved have not been borne by the taxpayer. The taxpayer has lost nothing by reason of these matters and is not entitled to amortization therefor. See A.J. Tower Co. v. Commissioner (C.C.A.) 38 F.2d 618.
It may be argued that in the case last cited above the items of damage which also covered the matters for which plaintiff claimed amortization, had been previously allowed and determined, while in the case at bar the defendant had disputed and is still disputing the validity of these claims; and the costs or expenses which plaintiff seeks to have amortized have so far been borne by the taxpayer. We do not think a reasonable construction of the act requires that such a distinction should be made. The effect of such a construction in cases like the one at bar, or in any case in which the government did not make settlement of the damage claims within the taxable year, would be that a taxpayer would not only recover the amount of his costs and expenses as damages, but receive another allowance of the same kind by way of amortization. Congress intended by the amortization provisions of the act to compensate the taxpayer for losses actually sustained and not for a cost which the courts order repaid to him. We think the words "borne by the taxpayer" mean that the taxpayer on the final adjudication of his account with the government sustains the burden of the costs and expenses which he seeks to have amortized. What is said in United States Cartridge Co. v. United States, 284 U.S. 511, 52 S.Ct. 243, 76 L.Ed. 431, as to the difference between obsolescence and amortization has no application here.
Plaintiff also contends that in computing its net income for 1918 the Commissioner erred in using the cost price as the value of the lumber on hand which was included in its closing inventory. Plaintiff claims that the market price at the close of the year should have been used instead and asks to have a deduction made from the inventory of the difference between the cost and market price of the lumber. We do not understand on what theory the Commissioner based his action. In one division of the argument, defendant assumes that the lumber never was the property of plaintiff, but if this were so it is manifest that nothing should be included in the inventory on account of it. We do not need, however, to consider this assumption as it is entirely inconsistent with the position of both parties. The facts are that the defendant furnished the plaintiff with a large quantity of walnut lumber and made a charge against plaintiff for it. This charge and the amount thereof is conceded by plaintiff. After the contracts were canceled, defendant removed or took back the unused portion of the lumber and plaintiff claims a credit on account of this action. This credit and the amount thereof is conceded by defendant and we have followed these concessions in determining the amount which plaintiff is entitled to recover. On this basis, defendant again objects on the ground that plaintiff has been allowed a credit for the lumber returned and having lost nothing by reason of the defendant having taken back the unused lumber it is not entitled to any amortization thereon. But this is not an amortization item. It is a matter of inventory and the question is: What was the amount of plaintiff's inventory at the close of the year 1918? At that time defendant had not taken back the lumber and plaintiff had no assurance that defendant would take it back and give a credit for the lumber thus returned. The case of United States Cartridge Co. v. United States, supra, involved a similar situation. In that case, as in the case now before us, the government subsequently took back certain property or made settlement for it, but the Supreme Court decided that the closing inventory of the taxpayer should be based on the market value of the property then held by it during the tax year under consideration. Following the decision in this case, a correction should be made in the calculation of the tax by the Commissioner of Internal Revenue by deducting from the amount of the inventory as found by him the difference between the market value of the lumber then held by the taxpayer and the cost price thereof as used by the Commissioner. This difference is $108,477.98.
Another correction should be made in the Commissioner's calculation of the tax for 1918. In determining the amount of net income he fixed the value of what have been called by both parties "general stores" in the closing inventory at cost when it should have been fixed at the market value. This made a difference of $23,442.50, for which plaintiff is entitled to a deduction from the amount of net income fixed by the Commissioner.
The Commissioner, in computing the net income of plaintiff for 1918, included in the inventory $42,421.68 for purchases which he found to have been erroneously not capitalized. Plaintiff claims this was an error but no satisfactory evidence has been presented to support this claim and it is disallowed.
After making the corrections in invested capital and net income as stated above, we find that the 1918 tax of plaintiff should be computed on the basis of $103,071.67 as the invested capital and $171,546.00 as the net income. Making the calculation on this basis, we find that the excess profits tax of plaintiff for 1918 is $100,916.17 and its income tax, $8.235.58, making a total of $109,151.75. Plaintiff paid on its tax for that year $48,778.31. The tax was therefore underpaid in the sum of $60,373.44.
The circumstances of the case cause the question to arise as to whether the defendant should be allowed interest on the deficiency for 1918. We have already found and determined that at the close of 1918 defendant was indebted to plaintiff on the matters which form the basis of plaintiff's suit in a sum much larger than the amount of this tax, but we have also decided that plaintiff could not be allowed any interest thereon. The statute provides for interest on the tax from the time it was assessed, and it may seem quite inequitable that the defendant should be allowed interest on the amount of this tax for a number of years during all of which it was indebted to the plaintiff. If the case were between private individuals to be decided upon their respective claims, such a result would not follow; but, as was said in United States v. Verdier, 164 U.S. 213, 218, 17 S.Ct. 42, 44, 41 L.Ed. 407: "We are unable to see how the fact that there were mutual claims can authorize us to disregard the plain letter of the statutes."
In the case last cited, each party had claims against the other. The government first established its claims and in another case obtained a judgment against Verdier which under the statute drew interest. Verdier then brought suit in the Court of Claims to recover a portion of his salary due him by readjustment under a special statute. The Court of Claims found that the government was indebted to Verdier at the time it obtained its judgment although the amount had not then been ascertained in a sum greater than the amount owed by Verdict to the government. As the law did not permit Verdict to be allowed any interest, the Court of Claims held that it would be inequitable to allow the government interest and entered its judgment accordingly. When the case came before the Supreme Court on appeal, that court said: "It would certainly seem to be equitable that, if the government were indebted to Verdier at the time it obtained judgment against him, it should not charge him with interest upon its judgment. But, interest being a matter of purely statutory regulation, we are bound to give or withhold it as the statute directs."
The court also said: "An inherent vice of petitioner's argument is in the assumption that he and the government stand upon an equality with respect to interest. The truth is that, in its dealings with individuals, public policy demands that the government should occupy an apparently favored position. It may sue, but, except by its own consent, cannot be sued. In the matter of costs, it recovers, but does not pay, and the liability of the individual would not be affected by the fact he had a judgment against the government which did not carry costs. [Citing many cases previously decided by the Supreme Court.]"
While the case last cited does not involve a claim for taxes, the principles laid down in its decision apply here. Interest will be computed on the amount of plaintiff's tax for 1918 at 6 per cent. from June 14, 1924, when the Commissioner made the additional assessment, to the date of the judgment herein, April 6, 1936. The interest so computed is $42,784.64, which added to the amount of the underpayment of the tax makes a total of $103,158.08 due defendant upon its counterclaim. Subtracting this from the amount which we have found plaintiff is entitled to recover on the cause of action set out in its petition, the balance in favor of plaintiff is $16,254.96, for which judgment will be entered in its favor accordingly.