Boeing Company v. United States

• Decision Date: 13 November 1964
• Docket Number: No. 273-59.,273-59.
• Citation: 338 F.2d 342,168 Ct. Cl. 109
• Parties: The BOEING COMPANY, a Delaware Corporation, v. The UNITED STATES.
• Court: U.S. Claims Court

168 Ct. Cl. 109, 338 F.2d 342 (1964)

The BOEING COMPANY, a Delaware Corporation, v. The UNITED STATES.

No. 273-59.

United States Court of Claims.

November 13, 1964.

Andrew M. Williams, Seattle, Wash., for plaintiff. James M. Hilton, Seattle, Wash., of counsel.

Theodore D. Peyser, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle, M. Turner and Philip R. Miller, Washington, D. C., were on the brief.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS and COLLINS, Judges.

PER CURIAM.

This case was referred pursuant to former Rule 45(a) (now Rule 57(a)) to Trial Commissioner Saul Richard Gamer with directions to make findings of fact and recommendations for a conclusion of law. The Commissioner has done so in an opinion and report filed on May 17, 1963. Plaintiff has excepted to the opinion (but not to the findings of fact), the parties have filed briefs, and oral argument has been had. With minor modifications, the court is in agreement with the Commissioner's findings and recommended opinion. Accordingly, the court adopts the findings and opinion, as so modified, as the basis for its judgment in this case, and concludes that plaintiff is not entitled to recover and that the petition be dismissed.

Commissioner Gamer's opinion, as modified by the court, is as follows:

During the years 1946 through 1949, plaintiff had fixed price Government contracts for the production of aircraft under which it received partial payments during the course of performance. The sole question involved in this case is what effect such payments had on the amount of plaintiff's "assets" for the purpose of computing its excess profits tax liability for the year 1951.

By the Excess Profits Tax Act of 1950 (64 Stat. 1137,¹ as amended by Section 510 of the Revenue Act of 1951, 65 Stat. 452), the Internal Revenue Code of 1939 was amended so as to require the payment by corporations of an excess profits tax. (26 U.S.C. (1952 ed.) § 430 et seq.) Plaintiff's excess profits tax under this 1950 act was based on its average net income during a pre-1950 base period. By section 446 of the Code, plaintiff, as a member of a "depressed industry subgroup," was permitted to compute such average base period net income by a formula which was based upon the average of the amounts of its "total assets" computed as of certain base period dates. In plaintiff's case, the dates are December 31 for the years 1946-1949, inclusive.

The parties are in dispute as to the effect that the partial payments made by the Government to plaintiff under its aforementioned 1946-49 contracts had on the amount of plaintiff's "total assets" on said four dates. Under the statute, the higher the average base period net income, the lower would be the excess profits tax.

In the performance of the contracts, plaintiff naturally made expenditures for materials and labor. These expenditures resulted in items of value in the nature of work-in-process inventory. This inventory was justifiably considered as an asset with a value at least equal to the amount of the material and labor expenditures made with respect thereto.

Under the typical contract "Partial Payments" article then in use (set forth in full in finding 4), partial payments were defined as "payments prior to delivery, on work in progress for the Government under this contract." Such payments were permitted to be made "upon property acquired or produced" by the contractor "for the performance of" the contract in an amount which "shall not exceed 90 percent of the cost to the Contractor of the property upon which payment is made." The article then went on to provide that upon the making of any such partial payment "title to all parts, materials, inventories, work in process and non-durable tools theretofore acquired or produced by the Contractor for the performance of this contract, and properly chargeable thereto * * * shall forthwith vest in the Government." It was also provided that, in making final payment for the aircraft, "there shall be deducted from the contract price therefor a proportionate amount of the partial payments theretofore made."

Prior to the enactment of the Excess Profits Tax Act of 1950, plaintiff, in the calculation of its assets on the balance sheets which it submitted with its Federal tax returns and which it published to its stockholders, regarded such partial payments as effecting a transaction in the nature of a sale to the Government, accompanied by a passage of title, of an equivalent amount of work-in-process inventory. Thus such inventory asset item was reduced by the amount of the partial payment. In turn, the "cash" asset item was increased by the amount of the payment. In this way, the total amount of plaintiff's assets would not be affected by the payment, there being simply an exchange of cash for work-in-process inventory. Plaintiff's excess profits tax return for 1951 was filed on this basis, with its total assets as of December 31, 1946-1949, being so computed. However, on the balance sheet submitted with its return for the calendar year 1950, which was the first return submitted after the passage of the Excess Profits Tax Act of 1950, plaintiff for the first time computed its total assets without its work-in-process inventory being reduced by the partial payments, and plaintiff thereafter followed this practice in the balance sheets submitted with all subsequent returns.

In 1955, plaintiff, contending that in its 1951 return it had erred in treating such partial payments as effecting equivalent sales of work-in-process inventory and had thereby erroneously understated its total assets with respect to each of the years 1946 to 1949, filed a claim for refund of excess profits taxes. Instead, plaintiff argued, these "payments" were, regardless of their form, in substance actually nothing more than loans made by the Government to plaintiff to assist it, by replenishing its working capital, in financing its huge aircraft contract operations, and that the payments should therefore be treated as such for the purpose of the tax. Given such treatment as loans, there would be no sale or passage of title and, consequently, no equivalent reduction of the work-in-process asset item by the amount of the partial payment. Plaintiff's cash item would, however, still be increased by the amount of the "loan." Thus, plaintiff's total assets would naturally be much larger. Indeed, with this new method of treating partial payments, plaintiff's assets which, prior to 1950 had been calculated as amounting to approximately $100 million, soared to approximately $150 million, thus raising the base period average and naturally reducing the amount of its subsequent "excess" profits based thereon. Upon the disallowance of its claim, plaintiff filed its petition here to recover said alleged overpayment of its excess profits tax paid for the year 1951 in the amount of $913,804.64.

In support of its position that the partial payments should be treated as loans and not as payments incident to a sale, plaintiff's principal contention seems to be that the title-passing provision was not intended by the parties to effect such a full transfer of title for actual ownership purposes and that no such ownership transfer was in fact accomplished. Although conceding "that a title of sorts vests in the Government" (Pltf.'s Br., p. 22), and that "in form" the transaction appears as a "payment," plaintiff argues that "in substance" the payments, although not constituting "a conventional loan" (id., pp. 32, 33), amount to nothing more than "cash borrowed from the Government" (id., p. 18) and should, for the purposes of this case, be so regarded. It contends, therefore, that at most the Government receives simply a security title to protect its advances of cash made prior to the final delivery and acceptance of the completed aircraft, only at which time is the "sale" effected. This must, of course, be the heart of plaintiff's contention, for if full title and actual ownership to the work-in-process inventory effectively passes to the Government at the time of the partial payment, then obviously plaintiff would not be justified in considering the Government's property as instead plaintiff's property and including it in a listing of plaintiff's assets.

Further, plaintiff points to various other contract provisions, as well as the practices of the parties thereunder, which it claims are inconsistent with the conclusion that the parties intended that complete ownership, incident to a "sale," of any part of the work-in-process inventory shifts to the Government when the partial payment is made. These provisions and practices include those relating to final inspection, delivery, and payment for completed aircraft, with plaintiff becoming entitled to "the contract price" only upon final delivery and acceptance of such aircraft; the lack of inspection as a prerequisite to the making of a partial payment; the provision that the contracting officer "may" make partial payments, thus presenting the "hardly likely" situation of leaving the "agreed purchase price to the discretion of the buyer"; the provisions that title to all work-in-process inventory, no matter how large, acquired either prior or subsequent to the first partial payment passes with the making of such payment, no matter how small, thus allegedly making plain that only a type of security title is involved; the lack of relationship between the amount of any partial payment and the contract unit price of aircraft; the nonsegregation of the Government's "property"; the imposition upon plaintiff of the risk of loss of the property, with plaintiff's actually insuring the inventory for its own benefit on the basis of plaintiff's full investment therein, without diminution on account of partial payments; the disposition rights given to plaintiff during contract performance; and the reversion to plaintiff...