Marquardt Corp. v. Comm'r of Internal Revenue, Docket No. 74983.

• Citation: 39 T.C. 443
• Decision Date: 27 November 1962
• Docket Number: Docket No. 74983.
• Parties: THE MARQUARDT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

39 T.C. 443

THE MARQUARDT CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 74983.

Tax Court of the United States.

Filed November 27, 1962.

Sidney H. Wall, Esq., for the petitioner.

James Q. Smith, Esq., for the respondent.

1. In 1951, petitioner entered into a cost-plus-fixed-fee contract with Boeing. Article 6(c) of that contract authorized petitioner to expend sums and record fees in the total amount of $1,400,000. It was provided that Boeing, in its sole discretion, might subsequently increase the foregoing amount. As of December 31, 1953, Boeing had increased this amount to $6,750,000. Notwithstanding the foregoing limitation, petitioner expended sums and recorded fees in excess of the authorized figure. The contract provided that Boeing would not be obligated to pay petitioner, either for reimbursement of expenditures or fixed fees, any amount in excess of that authorized. It was further provided that if petitioner overexpended, Boeing could, with the approval of the contracting officer, ratify and pay such expenditures. As of December 31, 1953, Boeing had not ratified the overexpenditures. As of December 31, 1953, Boeing had actually paid petitioner approximately $259,000 in excess of the authorized amount. Held, with the exception of the $259,000 actually paid to petitioner in 1953, petitioner was not required to accrue in income any amount in excess of that authorized by Boeing.

2. Petitioner was and had been engaged in the performance of a number of cost-plus-fixed-fee contracts. These contracts provided that 10 percent of the fixed fee was not payable until the contracts were completed and accepted. For the years 1949 through 1953, petitioner included the entire amount of the fixed fee in income. In 1952, petitioner set up a reserve for unearned fees. In 1952 and 1953, petitioner deducted from its income the amount added to the reserve. Held, petitioner was entitled to make this change to properly reflect its income under the accrual method of accounting.

3. During 1953, petitioner was engaged in the performance of a number of contracts that were subject to termination by or for the convenience of the Government. Eight of these contracts were terminated in 1953. As of December 31, 1953, petitioner had filed claims for reimbursement of expenditures and fees under these contracts. Petitioner did not receive final payment under these contracts until subsequent years. As of December 31, 1953, the amount of petitioner's unsettled termination claims was $105,792.19. Respondent included this amount in petitioner's income for 1953. Held: Respondent's determination sustained. The amount of $105,792.19 accrued in 1953 and was property includable in income.

TRAIN, Judge:

Respondent determined deficiencies in petitioner's income tax for the calendar years 1952 and 1953 in the amounts of $362,847.34 and $424,893.38, respectively, and overassessments for the calendar years 1951 and 1954 in the amounts of $9,809.81 and $369,568.46, respectively.

The issues for decision are as follows:

(1) Whether petitioner was required to accrue amounts which it had no fixed or unconditional right to;

(2) Whether petitioner changed its method of accounting for certain retainages; and

(3) Whether respondent erred in including the amount of certain termination claim in petitioner's income.

FINDINGS OF FACT.

Some of the facts have been stipulated and are hereby found as stipulated.

The petitioner, The Marquardt Corporation¹ (hereinafter sometimes referred to as Marquardt) has its principal place of business at Van Nuys, California. For the calendar years 1952 and 1953, petitioner filed corporate income tax returns with the district director of internal revenue, Los Angeles, California. Petitioner maintained its books and records predominately on an accrual method of accounting.

Issue 1. Subcontract with Boeing.

In 1951, petitioner entered into a cost-plus-fixed-fee subcontract (hereinafter referred to as the subcontract) with the Boeing Airplane Company (hereinafter referred to as Boeing). Previously, Boeing had received a prime contract from the United States Air Force to do certain research and development work. Both the Boeing prime contract and petitioner's subcontract were subject to termination at the Government's convenience. The pertinent parts of the subcontract are as follows:

ARTICLE 2. Estimated Cost and Fixed Fee.

The estimated cost of the work to be performed by Subcontractor hereunder is $6,110,846.00 and the fixed fee therefor is $427,759.00.

ARTICLE 3. Consideration.

(a) Boeing will, subject to the limitations set forth in ARTICLE 6, hereof, pay Subcontractor upon satisfactory performance of all services and delivery

of all items specified in this Subcontract, subject to reimbursement for costs as outlined in ARTICLE 6, hereof, the cost as approved by the Contracting Officer, plus a fixed-fee of $427,759.00, being seven (7%) per cent of the total estimated cost. The estimated cost and the fixed-fee are subject to increase or decrease resulting from changes as provided in ARTICLE 5, hereof; provided, however, that there shall be no adjustment in the amount of the fixed-fee as provided for herein because of any errors and/or omissions made in computing the original estimated cost of the work or where the estimated cost varies from the actual cost.

ARTICLE 5. Changes.

Boeing may at any time, by a written order, make changes in or additions to the drawings and specifications, issue additional instructions, require additional work or direct the omission of work covered by this subcontract. If such changes cause a material increase or decrease in the amount or character of the work to be done under this subcontract, or in the time required for its performance, an equitable adjustment of the estimated cost, the amount of the fixed-fee to be paid to Subcontractor and the delivery schedule shall be made and the subcontract shall, with the approval of the Contracting Officer, be modified in writing accordingly. Any claim for adjustment under this Article must be asserted within thirty (30) days from the date the change is ordered or within such further time as may at any time be agreed to in writing by the parties, and if the parties fail to agree upon the adjustment to be made, such claim shall be determined as provided in Article 16 hereof. Nothing provided in this article shall excuse Subcontractor from proceeding with the prosecution of the work so changed.

ARTICLE 6. Payments.

(a) Reimbursement for Cost. Boeing will currently reimburse Subcontractor or cause Subcontractor to be reimbursed for allowable items of cost incurred by it under this subcontract as may be approved or ratified by the Contracting Officer, whose determination with respect thereto shall be final and binding except as provided in Article 3(e), Article 16 hereof, and this paragraph, and upon certification to and verification by the Contracting Officer of the original signed payrolls for labor, the original paid invoices for materials or other original papers, provided, however, that subject to the requirements of paragraph (b) of Article 7 hereof, in respect to the maintenance so far as practicable of a complete separate system of accounts for work under this subcontract, in the event it be impracticable to furnish the Contracting Officer with the original signed payrolls for labor, original paid invoices for materials, or other original papers, Subcontractor shall furnish evidence in a form satisfactory to the Contracting Officer covering expenditures to be reimbursed under this Article. Payment by Boeing shall be made against commercial invoices of Subcontractor as approved by the Contracting Officer. Generally, reimbursement will be made monthly but may be made at more frequent intervals if the conditions so warrant. Disagreement as to whether any cost or expenditure is an allowable item of cost under Article 3 hereof, or as to the right of Subcontractor to reimbursement for any cost or expenditure made by it, shall be deemed a dispute ‘concerning a question of fact’ under the terms of Article 16 hereof. Subcontractor shall, upon request, promptly furnish Boeing copies of any papers or certificates furnished by Subcontractor under this paragraph to the Contracting Officer which Boeing may be required to furnish the Government under the Prime Contract.

(b) Payment of the Fixed Fee. Ninety per cent (90%) of the fixed fee to be paid pursuant to paragraph (a) of Article 3 hereof, as such fee may be increased

or decreased from time to time, shall be paid as it accrues, in monthly installments based upon the percentage of the performance of the work as determined from estimates made and approved by the Contracting Officer. Upon completion of the work under this subcontract and its final acceptance, any unpaid balance of the fee, including the additions thereto, if any, to which Subcontractor may be entitled, as provided in said paragraph (a) of Article 3, shall be paid to Subcontractor.

(c) By reason of the limitation on the amount of Government funds available for the performance of the Prime Contract, the total amount of funds allocated by Boeing for the performance of this subcontract is $1,400,000.00. This sum may be increased from time to time by Boeing at its sole discretion. Subcontractor will be advised in writing of any such increase. Boeing shall not be obligated to pay Subcontractor either by way of reimbursement of allowable items of cost or as fixed fee or otherwise any amount in excess of the amount above specified, or the amount to which it has been increased as above provided. Notwithstanding any other provision of the subcontractor, Subcontractor shall not take any action in the performance of this subcontract that would, but for the terms hereof, result in Boeing's being obligated to pay Subcontractor any greater amount than that above provided and the obligation of the...