S.S. Silberblatt, Inc. v. Renegotiation Bd., Docket No. 1041-R.
| Decision Date | 04 March 1969 |
| Docket Number | Docket No. 1041-R. |
| Citation | 51 T.C. 907 |
| Parties | S. S. SILBERBLATT, INC., AND THE STERLING COMPANY, PETITIONERS v. THE RENEGOTIATION BOARD, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Edward J. Ross, for the petitioners.
Michael R. Lemov, and Stephen M. Truitt, for the respondent.
Held, Capehart housing contract subject to the 1951 Renegotiation Act and such prospective application is not unconstitutional under the fifth amendment.
A consolidated renegotiation proceeding was held by respondent with respect to petitioners for the fiscal year ended January 31, 1960. It resulted in respondent issuing an unilateral order which provided that of petitioners' profits realized during the aforesaid fiscal year from a Government contract and related subcontracts the amount of $1,900,000 ($1,764,853 after adjustment on account of State income taxes) was excessive within the meaning of the Renegotiation Act of 1951.
The parties have entered into a stipulation of facts and issues and submitted the case pursuant to Rule 30 of the Rules of Practice of this Court.
During its fiscal year ended January 31, 1960, and at all times material hereto, the petitioner, S. S. Silberblatt, Inc. (hereinafter the Contractor), was a corporation engaged in the general contracting business, and organized and existing under laws of the State of New York, with its office and principal place of business at New York, N.Y.
During its fiscal year ended January 31, 1960, and at all times material hereto, the petitioner, the Sterling Co. (hereinafter Sterling), was a partnership composed of Shephard S. Silberblatt, Bruce Silberblatt, and Karen Gerard, and constituted a related group with the contractor for the purposes of renegotiation proceedings.
On or about May 6, 1957, the contractor entered into housing contract No. AF-30(636)-136 (hereinafter the contract), with the United States, acting by and through the Department of the Air Force, for the construction of 1,685 dwelling units and servicing facilities, including site grading, underground utilities, streets, walks, and parking areas, at the Plattsburg Air Force Base, Plattsburg, N.Y. The dwelling units were for military personnel and other Government employees.
The contract was made pursuant to the authority of the Capehart Housing Act, title VIII of the National Housing Act, as amended, 12 U.S.C. 1748-1748(i) and 42 U.S.C. 1594-1594(k). In general, the Capehart Act authorizes the Secretary of Defense or his designee to enter into contracts with bidders for construction of urgently needed housing for military personnel on land owned or leased by the United States, on or near a military reservation.
The building contract, pursuant to the Capehart Act, is with a newly organized ‘mortgagor-builder’ corporation. The Act contemplates the securing of loans from lenders acceptable to the Federal Housing Commissioner by the ‘mortgagor-builder’ corporation. The loans provide the funds for the construction. They are evidenced by notes and secured by mortgages on the housing units and are repayable with interest by the United States over a 25-year period. All stock of the mortgagor-builder corporation is placed in escrow upon execution of the contract and may be transferred only to the Secretary upon completion of the construction or termination pursuant to the contract. The Secretary is authorized to acquire the stock and exercise all rights as a stockholder and operate and improve the housing and dissolve the corporation upon termination of the mortgages.
In the instant case it is stipulated the procedure under the Capehart Housing Act was followed by the parties to the contract.
The contract was awarded to the contractor, as the lowest bidder, following the opening of bids which had been submitted on a competitive basis after public advertising. There were three bids submitted: that of the contractor in the amount of $25,874,100 and those of two others which were higher by approximately $1,600,000 and $2,726,000, respectively. The Capehart Housing Act establishes a maximum average price of $16,500 per family unit, making a total statutory maximum of $27,802,500. The Federal Housing Administration (FHA) estimated the cost of the project at $26,800,478. The Government was not required to accept the contractor's bid and could have attempted to negotiate a lower price.
Work under the contract was commenced at the site shortly after the award, and the project was completed in October 1959. The total contract price was $27,799,717, which included four added alternates and an increase based upon a wage determination. The housing covered by the contract was constructed pursuant to specifications furnished by the Department of the Air Force.
The housing facilities were built on Government-owned land, and were leased for 55 years to private corporations formed for such purpose, called the mortgagor-builders, the stock of which was initially owned by the contractor. The stock of the mortgagor-builders was placed in escrow by the contractor at the time of the execution of the contract. The stock was endorsed in blank by the contractor. Resignations of all officers and directors of the mortgagor-builders were similarly placed in escrow at the time of execution of the contract. The escrow agreement provided that the stock and resignations were to be delivered only to the Department of the Air Force upon completion or termination of the project.
The mortgagor-builders obtained construction loans and mortgages pursuant to the provisions of 12 U.S.C. 1748-1748(i). The mortgages and loans were from a private banking institution, the Chemical Bank New York Trust Co., repayable in installments over a 25-year period, with the remaining balance of principal due June 1, 1984. The mortgages were insured by the FHA and guaranteed by the Department of the Air Force.
The mortgagor-builders used the proceeds of the mortgage loans, advanced by the private banking lender to pay construction costs. They then paid the balance to the contractor as its profit.
Upon completion of each separate building project, the stock of the mortgagor-builder relating to each such separate project, which had been held in escrow under an agreement whereby it would be delivered to the department upon completion or termination of the particular project, was delivered to the Secretary of Defense.
On completion, the buildings were allocated to military personnel. Payments of principal and interest on the mortgage notes are made to the lending institution by the Department of the Air Force from appropriations made available by Congress for such purpose. Such payments commenced after construction was completed, after the stock of the mortgagor-builder had been delivered to the Government by the contractor, and after the contractor had received its profit.
At or about March 1, 1968, the Government had paid to the lending institution, approximately $15,157,000 in principal and interest payments on the mortgages on the Plattsburg homes. The Government did not make the first payment on such mortgage until after the contractor had completed construction under the contract and after it had received its profit. Sterling performed work as a subcontractor for the contractor with respect to the contract. During petitioners' fiscal year ended January 31, 1960, petitioners had receipts and accruals from the contract and related subcontracts of Sterling.
As stated, renegotiation proceedings were instituted by respondent involving alleged excessive profits realized by the contractor and Sterling during the fiscal year ended January 31, 1960. By agreement between all of the parties, the renegotiation proceedings against the contractor and against Sterling were consolidated for hearing and determination and the contractor was authorized to act for Sterling as its agent in connection with the renegotiation proceedings. Hereafter the term ‘petitioner’ will be understood as referring to the related group of the contractor and Sterling. It was in these proceedings that respondent determined petitioners had realized excessive profits in the sum of $1,900,000.
The following is the issue stipulation that was filed by the parties:
It is hereby further stipulated and agreed:
15. In the event the Court holds (a) the Contract is not subject to the Renegotiation Act of 1951 (50 U.S.C.App. 1211, et seq.), or (b) the Contract is exempt from the Renegotiation Act pursuant to 50 U.S.C.App. 1216(a)(9), or (c) the Renegotiation Act as applied to the Contract, or the determination of allegedly excessive profits issued by the Board in this case, is unconstitutional, the Court shall enter judgment that the petitioners realized no excessive profits for the aforesaid fiscal year. Otherwise, the Court shall enter judgment as determined by respondent that petitioners realized excessive profits from contracts and subcontracts subject to the Renegotiation Act in the amount of $1,900,000 for said fiscal year, less any applicable tax credit. The foregoing issues are the sole issues in this case.
Petitioner states the two issues to be decided are as follows: (1) ‘Is the Housing Contract subject to the Renegotiation Act’ and (2) ‘Is the Renegotiation Act unconstitutional to the extent it may apply to Capehart Housing Contracts or to the determination of allegedly excessive profits issued by the Renegotiation Board in this case?’
Section 1212 of the Renegotiation Act (50 U.S.C. App.) provides for renegotiation of ‘all contracts with the Departments specifically named in section 103(a)’ (50 U.S.C.App. 1213(a)).1 The last numbered section provides ‘The term ‘Department’ means * * * the Department of the Air Force.'
It is difficult to understand how, in the light of such express statutory direction, there could be any argument that the contract here involved would not be subject to the Renegotiation Act. Petitioner does not discuss this plain statutory...
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