Pacific Far East Line, Inc. v. United States, 214-70.

• Decision Date: 19 March 1975
• Docket Number: No. 214-70.,214-70.
• Parties: PACIFIC FAR EAST LINE, INC. v. The UNITED STATES.
• Court: U.S. Claims Court

513 F.2d 1355

PACIFIC FAR EAST LINE, INC. v. The UNITED STATES.

No. 214-70.

United States Court of Claims.

March 19, 1975.

Mark P. Schlefer, Washington, D. C., Atty. of record, for plaintiff; J. Franklin Fort, T. S. L. Perlman, Leonard Egan, Stephen T. Owen, and Kominers, Fort, Schlefer & Boyer, Washington, D. C., of counsel.

Gilbert W. Rubloff, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant; Theodore D. Peyser, Washington, D. C., of counsel.

Valentine Brookes filed a brief for Pacific Transport Co. and subsidiaries as amicus curiae; Lawrence v. Brookes, Brookes, Brookes & Vogl, of counsel.

Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG and BENNETT, Judges.

ON PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DEFENDANT'S CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT

COWEN, Chief Judge:

This case is presented on cross motions for partial summary judgment and raises only one of three primary questions found in plaintiff's petition. The basic issue before us here is identical to the one found in its companion case of Lykes Bros. Steamship Co. v. United States, 513 F.2d 1342 decided today. As in Lykes Bros. Steamship Co., we have a taxpayer who claims the seven percent investment credit on its entire basis in certain vessels. As in Lykes Bros. Steamship Co., taxpayer has been allowed only a restricted credit, based on its post-1961 costs, because of defendant's interpretation of section 48(b) of the Internal Revenue Code of 1954.¹ Since our decision in Lykes Bros. Steamship Co. discusses in detail the proper criteria for determining whether property has been constructed "by the taxpayer" under section 48(b)(1) and the applicable Treasury regulations, our opinion here will be confined to the application of that test to the facts of this case. For the reasons stated below, we grant plaintiff's motion for partial summary judgment. Findings on the amount of plaintiff's recovery are reserved pending determination of the remaining portions of plaintiff's petition.

Pacific Far East Line, Inc. is a Delaware corporation engaged in business as a common carrier by water in the foreign commerce of the United States. In 1962, plaintiff accepted delivery of two new vessels, the Philippine Bear and the China Bear, for use in its transpacific common carrier service between ports in California and those in the Far East. The two vessels were constructed, with aid from the construction-differential subsidy program (CDS), pursuant to a single contract dated September 22, 1959 (FMB-100). Plaintiff financed its portion of the costs of the vessels in accordance with Section 504 of the Merchant Marine Act of 1936, as amended.² 46 U.S.C. § 1154 (1964). The 1959 agreement was entered into by the taxpayer, the United States (represented by the Federal Maritime Board),³ and Bethlehem Steel Company (Bethlehem) for construction of two vessels at Bethlehem's shipyards in San Francisco, Calif. Since the ships were built under the CDS program, approval by Maritime of the construction plans was required. Pursuant to Article I of the Special Provisions of the contract, Bethlehem promised it would perform all the work necessary to construct the vessels "in strict accordance with the Plans and Specifications," which were attached to and made part of the agreement. The ships were delivered by Bethlehem to plaintiff only after completion of all construction work, and after the vessels had passed the many tests, trials and inspections mandated by the contract.

While the foregoing facts are similar to those found in Lykes Bros. Steamship Co., our present case differs somewhat in the manner in which the contract Plans and Specifications were developed, and the factual background covering this area requires a more detailed presentation. After World War II, Maritime developed a design for a new cargo vessel unofficially known as the Mariner and designated as C4-S-1a under the Maritime Administration's classification system.⁴ The standard contract Plans and Specifications for the Mariner were prepared for Maritime by Bethlehem shortly before the Korean War.⁵ Initially, Maritime contracted for the construction of 35 Mariners, to be built between 1951 and 1954. However, not all of the vessels retained the C4-S-1a design designation, since 33 of the ships were sold to private industry, normally after a period of service with the Military Sea Transportation Service. Occasionally, these private owners modified the Mariners, usually with respect to cargo handling gear and passenger quarters, to suit their different trade requirements, and in so doing received different design designations for their vessels. For example, three of the Mariners were bought by plaintiff, and designated as C4-S-1f. However, all the vessels bought by private operators from the Government kept the same basic design as the original C4-S-1a models in such features as size, speed, power, and appearance up to the weather deck, and continued to be recognized as Mariners.

By 1957 the disposition of the original group of 35 Mariners was completed. In 1959, when plaintiff was contractually obligated under a new operating-differential subsidy agreement to replace two of its older cargo ships, plaintiff used Section 504 of the Merchant Marine Act to finance construction of the new vessels. There is evidence to show that the specifications for the new vessels were directly based on the Mariner design which had been developed by Maritime. In an affidavit presented on plaintiff's behalf, E. Scott Dillon, a naval architectural consultant formerly employed by Maritime, concludes:

Pacific Far East Line, Inc.'s two dry cargo ships built between 1959 and 1962 by Bethlehem Steel Company in accordance with design C4-S-1t, Maritime Administration Hull Numbers 89 and 90, were clearly within the Mariner class of vessels. In my opinion, design C4-S-1t is directly based upon the prototype Mariner design C4-S-1a. Pacific Far East Line's subject vessels are properly described as Mariner class vessels, having the original hull form, dimensions, speed, and power characteristics.

The total cost of the two vessels was $27,931,945, of which $14,558,924.66 was paid by plaintiff. For tax years 1962, 1963, and 1964, the period at issue in this litigation, plaintiff computed its tax credit based on its entire share of the cost of the two vessels. On audit, the Service concluded, in part, that plaintiff's entitlement to the credit was restricted under section 48(b)(1) to that portion (15.3 percent) of its total basis in the vessels attributable to post-1961 construction costs. Accordingly, deficiencies were assessed by the Service⁶ and were paid by plaintiff. On April 30, 1970, the Service disallowed taxpayer's refund claims. Plaintiff then filed its petition in this court to recover taxes in the amount of $791,927.60, plus interest.

As we held in Lykes Bros. Steamship Co., property is constructed "by the taxpayer" under section 48(b)(1) only if we find that the taxpayer possesses the right to control the details of the construction process. In that case, we also held that the question whether the ships were constructed in accordance with taxpayer's specifications, within the meaning of Treasury Regulation 1.48-2(b)(1), is to be determined largely by the extent of the Government's supervision and control. In this case, plaintiff has shown, even more conclusively than was done by the taxpayer in Lykes Bros. Steamship Co., that plaintiff did not have the right to exercise and did not in fact maintain the degree of control necessary to place the construction of the property within the provisions of section 48(b)(1).

The degree of Government control over the details of this construction contract was even more pervasive than it was in Lykes Bros. Steamship Co. Pursuant to the CDS program, Maritime was required to approve the final contract Plans and Specifications, to supervise the awarding of the construction contract, to approve any revisions by Bethlehem of the Plans and Specifications, and to test the vessels after construction for compliance with the contract. Only after the vessels had passed all of the post-construction tests could plaintiff actually take delivery of the ships. In this case, however, the Government played a larger role in designing the vessels than in Lykes Bros. Steamship Co. As shown by Mr. Dillon's affidavit on this issue, the design for the ships was developed some years before their construction by Bethlehem and Maritime; plaintiff merely requested Maritime to approve certain minor modifications of this model so that the completed vessel would more nearly meet its commercial needs.

It should be noted that defendant has not contested Mr. Dillon's affidavit by an opposing affidavit, deposition, or documentary evidence. Instead, it merely asserts in its brief that it "disputes taxpayer's assertion that the ships were built to Government specifications." Defendant's Reply Brief, at 21. Defendant contends that the mere similarity between fundamental design and basic characteristics such as size, speed, power and general appearance does not demonstrate that the Government established the performance characteristics of the ships or the type of materials to be used in construction. Defendant's assertion is merely that the vessel modifications may have been so extensive as to change the overall style of the ships in question. On this ground, defendant asks us to "remand to the Trial Judge...