17 T.C. 1325 (1952), 870-R, California Eastern Line, Inc. v. Chairman of U.S. Maritime Comm'n

Docket Nº:870-R.
Citation:17 T.C. 1325
Opinion Judge:RAUM, Judge:
Attorney:Harold B. Finn, Esq., and Robert E. Kline, Jr., Esq., for the petitioner. Frederick N. Curley, Esq., and James H. Prentice, Esq., for the respondent.
Judge Panel:TURNER, J., dissenting:
Case Date:February 15, 1952
Court:United States Tax Court

Page 1325

17 T.C. 1325 (1952)




No. 870-R.

United States Tax Court.

February 15, 1952

Where the British Ministry of War Transport entered into a space charter for the hire of petitioner's steamship, and the charter was financed with Lend-Lease funds provided through the United States Maritime Commission, which also cooperated in negotiating the charter and supervising aspects of performance under it, held, the charter was not a contract with the Maritime Commission, within section 403(c)(1) of the Renegotiation Act, and therefore was not renegotiable.

Harold B. Finn, Esq., and Robert E. Kline, Jr., Esq., for the petitioner.

Frederick N. Curley, Esq., and James H. Prentice, Esq., for the respondent.

Respondent determined by unilateral order, under the Renegotiation Act, as originally enacted in 1942,[1] that profits realized by petitioner on a war contract were excessive to the extent of $164,000. Petitioner brought this proceeding to redetermine its excessive profits on that contract. On its motion for a severance of issues, the trial was limited to whether petitioner's profits under that contract were subject to renegotiation. Thereafter, the parties stipulated that there are now presented for decision the following questions under the provisions of the Renegotiation Act: (1) Whether the war contract was a contract or subcontract with a ‘ Department‘ named in that Act. (2) Whether ‘ final payment pursuant to such contract or subcontract‘ had been made prior to April 28, 1942. (3) Whether renegotiation was commenced more than one year after the close of petitioner's fiscal year in which ‘ completion‘ of that contract had occurred. Determination of any of these questions in petitioner's favor obviates consideration of those remaining, and requires decision for petitioner.

Page 1326


The facts stipulated by the parties are found as stipulated, and the written stipulation and accompanying exhibits are incorporated herein by reference.

California Eastern Line, Inc., is a corporation organized under the laws of Delaware, and has its principal office at Vancouver, Washington. Effective March 16, 1942, it acquired all the assets and assumed all the liabilities of an Oregon corporation of the same name. The Oregon corporation prior to that date, and the Delaware corporation thereafter, will be referred to as the ‘ petitioner.‘ Petitioner owned a steamship named the ‘ Vermont,‘ which was operated in the United States intercoastal trade.

At all times material hereto, petitioner kept its books and filed its Federal income tax returns on the accrual basis and for a calendar year; except that for 1942 the bookkeeping and tax period of the Oregon corporation ran from January 1 to March 16, while the Delaware corporation accounted for the remainder of the calendar year.

The national defense program in 1941 required mobilization of American facilities for ocean transportation. President Roosevelt communicated with Admiral Emory S. Land, Chairman of the United States Maritime Commission (hereinafter referred to as the ‘ Commission‘ ), to assure satisfaction of ocean shipping needs, and on February 25, 1941, the Commission created a Division of Emergency Shipping to handle emergency transportation problems and to supervise sales, charters, transfers, requisitions, reallocations, and reassignments of all vessel tonnage in connection with emergency transportation. In April 1941 the President directed Admiral Land to secure at least 2,000,000 tons of merchant shipping in the service of the defense effort. On April 10, 1941, the President issued a proclamation modifying the existing ban on American vessels against sailing in certain combat areas, and made it lawful for American vessels to proceed through the Gulf of Aden into the Red Sea as far as Port Said.

At that time, the British Purchasing Commission had acquired war equipment and supplies in the United States, and shipping facilities were needed to transport that portion of the equipment and supplies to North Africa as might be assigned to that theatre of operations. In this connection, the British Government sought shipping facilities under the American Lend-Lease program, and for this purpose a ‘ Requisition For Defense Articles,‘ dated May 15, 1941, was submitted to American authorities by the British Government.

With knowledge of the President's directives, Commission officials held informal discussions with certain American shipowners during April 1941. On April 25, 1941, a meeting was called and attended by Commission officials to point out to these shipowners or their

Page 1327

representatives that vessels were needed to transport cargo to the Red Sea area for the British, and to work out an arrangement with the shipowners by which to secure the tonnage needed for this operation. Petitioner was represented at this meeting. Thereafter, to secure the necessary tonnage and to fix the terms under which the supplies and equipment were to be transported in this operation, further conferences were held between Commission officials and shipowners or representatives of American vessels, in 1941 on May 3, 7, 9, 13, 16, and 21. Petitioner was also represented at these conferences.

In its discussions and dealings with the Commission, petitioner was represented by C. E. Dant (hereinafter referred to as ‘ Dant‘ ), of the States Steamship Company, and by R. A. Nicol (hereinafter referred to as ‘ Nicol ‘ ), president of R. A. Nicol & Co.

On or about April 26, 1941, in a letter to Nicol, the Commission's Director of Emergency Shipping confirmed an understanding with Dant and Nicol reached on April 25, 1941, for the latter to make available the Vermont and other ships in response to the Commission's request for allocation of vessels to the ‘ North Atlantic/Red Sea service.‘ Thereafter Dant and Nicol, on the one hand, and officials of the Commission, on the other, communicated with each other by letter and telegram concerning conditions on which the Vermont was to be provided for the Red Sea operation.

Commission officials and the shipowners or their representatives negotiated the terms under which the Vermont and the other ships involved were to be hired or ‘ chartered‘ for the Red Sea operation, including the charter rates according to which the shipowners were to be paid. Petitioner, through Dant and Nicol, participated in these negotiations with the Commission. Agreement was reached between the Commission officials and the owners on the terms of a ‘ space charter‘ [2] to cover the Red Sea operation, and a draft of the charter was then prepared and submitted to the Commission for its approval. The following explanation, given to the Commission in a memorandum dated May 21, 1941, from its Director of Operations and Traffic, describes the arrangements made between Commission officials and the shipowners for the Red Sea operation:

Pursuant to the direction of President Roosevelt to the Chairman on April 30, 1941, the Division of Emergency Shipping has thus far arranged for the employment of about 43 United States flag vessels in service to the Red Sea. It is expected that approximately 12 or 15 vessels will sail during the present month and about 25 during June.

Page 1328

The vessels in question are owned by a number of companies normally engaged in trade elsewhere than to the Red Sea. In order to concentrate the operations in as few hands as possible, we have arranged for the vessels to be loaded by the berth operators— in this case, American Export Lines and Isthmian Steamship Lines. The vessels will be spotted and loaded under the supervision of one or the other of these companies who will also book any commercial cargo for which space may be available.

Our plans call for the execution of a space charter between the vessel owners and the British Ministry of War Transport. A copy of the proposed form of charter is attached. It provides that the owner of the vessel will receive 75¢ per cubic foot on the total bale cargo capacity of his vessel and, if any cargo is carried on deck, 60¢ per cubic foot on actual measurement of such cargo. Out of this, the owner must pay all expenses of the voyage (except cargo expense for loading; discharging expense abroad being assumed by the British Government), including an agency fee to the berth operator of 1/4¢ per bale cubic foot, not to exceed $1,000. The berth operator will book such commercial cargo as may be available and necessary to fill out the space not used by the British Ministry of War Transport, and, on this, he receives a commission of 5% which is, of course, deductible from the revenue. For example, on a vessel with 400,000 cubic feet of bale cargo space and no cargo carried on deck, the vessel owner will be paid $300,000 for the voyage to Suez; the agent will receive $1,000 as an agency fee and, if commercial cargo with a total revenue of, say, $75,000 is booked by him, he will also obtain $3,750 in commission.

The British Ministry of War Transport will secure reimbursement for the amounts paid to the vessel owner and for the amounts paid for loading British cargo on the vessel (which is not included in the above-mentioned charter rate) from Lease-Lend funds. In the example cited above, they will secure $300,000 plus the loading expense of British Ministry cargo less the net revenue secured from commercial cargo after deduction of cargo handling expense, agents commissions, etc.

The loading operations of the United States flag vessels involved in this program will take place at New York and Philadelphia. At New York, the American Export Lines and Isthmian Steamship Lines have arranged to...

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