Sundstrand Corp. & Consol. Subsidiaries v. Comm'r of Internal Revenue

Decision Date04 May 1992
Docket NumberDocket No. 27220-89,1875-91.1
Citation98 T.C. 518,98 T.C. No. 36
PartiesSUNDSTRAND CORPORATION AND CONSOLIDATED SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

For many years, P and some of its subsidiaries, including Sundstrand Data Control, Inc. (SDC), have served as prime contractors or subcontractors on various defense contracts. These defense contracts are subject to certain regulatory requirements, including the Cost Accounting Standards (CAS), the Truth-in-Negotiations Act (TINA), the Federal Acquisition Regulations (FAR), and/or the Defense Acquisition Regulations (DAR). In 1988, following grand jury investigations, P and SDC entered guilty pleas to bills of information charging various criminal activities associated with some of these defense contracts, including some activities relating to violations or noncompliances with CAS, TINA, FAR, and/or DAR. Pursuant to its plea agreement and related settlement agreement, P, among other things, agreed to pay the Government $115 million in full payment of restitution, damages, penalties, fines, and costs. Pursuant to its plea agreement and certain related settlement agreements, SDC, among other things, agreed to pay the Government $500,000 as a criminal fine, $11.3 million, plus interest, in full administrative settlement of certain contractual claims by the Government, and $520,000 for statutory and common law relief and reimbursement of the costs of the grand jury investigation. Additionally, pursuant to another settlement agreement, P agreed to pay the Government $62.3 million and $1.9 million for alleged noncriminal CAS compliance issues and further agreed not to charge to any Government contract $7.1 million of controverted costs. Similarly, pursuant to other settlement agreements, SDC agreed to pay the Government $1.3 million and $370,000 for various noncriminal CAS compliance issues. In the petitions petitioners claim the above repayments were made pursuant to renegotiations of Government contracts and, thus, qualify for the special provisions of sec. 1481, I.R.C., for the years in suit. By motion for partial summary judgment, respondent argues that sec. 1481 does not apply to the repayments in issue.

HELD: The payments did not arise from the recovery excessive profits through a renegotiation of a Government contract within the meaning of sec. 1481. John C. Klotsche, Bertrand M. Harding Jr., Robert H. Albaral, James M. O'Brien, Mark A. Oates, and Neil D. Traubenberg, for petitioners.

Reid M. Huey, Joseph P. Grant, and Sherri L. Feuer, for respondent.

OPINION

HAMBLEN, JUDGE:

Respondent determined the following deficiencies in petitioners' income taxes for 1979, 1980, 1981, and 1982 (hereinafter sometimes referred to collectively as the years in suit):

+------------------------------+
                ¦Year  ¦Amount of deficiency   ¦
                +------+-----------------------¦
                ¦1979  ¦$13,674,981            ¦
                +------+-----------------------¦
                ¦1980  ¦28,541,936             ¦
                +------+-----------------------¦
                ¦1981  ¦27,099,275             ¦
                +------+-----------------------¦
                ¦1982  ¦18,461,344             ¦
                +------------------------------+
                

Respondent also determined that petitioners are liable for increased interest under section 6621(c), formerly section 6621(d), on the basis that the deficiencies attributable to the section 482 issue also at issue in these cases constituted substantial underpayments attributable to tax-motivated transactions. However, these issues are not before us at this time.

All section references are to the Internal Revenue Code in effect for the taxable years in issue, unless otherwise noted. All Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.

This matter is before the Court on respondent's motions for partial summary judgment filed pursuant to Rule 121. The issue which respondent seeks to have adjudicated is whether, as a matter of law, section 1481 does not apply to certain payments petitioners made to the Government in years after the years in suit.

Summary judgment is appropriate if the pleadings and other materials show that there is no genuine issue as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). A partial summary adjudication may be made which does not dispose of all the issues in the case. Rule 121(b). The nonmoving party cannot rest upon the allegations or denials in his pleadings, but must “set forth specific facts showing that there is a genuine issue for trial.” Dahlstrom v. Commissioner, 85 T.C. 812, 820-821 (1985); Rule 121(d). The moving party, however, bears the burden of proving that no genuine issue exists as to any material fact and that he is entitled to judgment on the substantive issues as a matter of law. Celotex Cord. v. Catrett, 477 U.S. 317, 323 (1986); Espinoza v. Commissioner, 78 T.C. 412, 416 (1982). In deciding whether to grant summary judgment, we view the factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 255 (1986); Naftel v. Commissioner, supra at 529. If there exists any reasonable doubt as to the facts at issue, the motion must be denied. Espinoza v. Commissioner, supra at 416.

We assume the facts described below on the basis of the pleadings and other pertinent materials in the record. Rule 121(b). They are stated solely for purposes of deciding the motion for partial summary judgment, however, and are not findings of fact for these cases. Fed. R. Civ. P. 52(a).

BACKGROUND

In the petitions filed with the Court petitioners allege that overpayments are due them pursuant to claims for refund they filed for the years in suit in the following amounts:

+-----------------------------+
                ¦Year  ¦Overpayment claimed   ¦
                +------+----------------------¦
                ¦1979  ¦$114,540              ¦
                +------+----------------------¦
                ¦1980  ¦9,506,909             ¦
                +------+----------------------¦
                ¦1981  ¦17,043,706            ¦
                +------+----------------------¦
                ¦1982  ¦1,288,025             ¦
                +-----------------------------+
                

The overpayments arose as a result of certain payments Sundstrand Corporation (hereinafter petitioner) and its subsidiary Sundstrand Data Control, Inc. (SDC), agreed to pay to the Government as a result of the transactions described below. Petitioners claim the payments were made pursuant to the renegotiation of Government contracts within the meaning of sections 1481 and 1482, 2 and, therefore, the payments are entitled to the tax treatment set forth in those sections.

The nature and amount of the payments for which section 1481 treatment is claimed are as follows:

+--------------------------------------------------------------------+
                ¦               ¦          ¦               ¦Total amounts claimed 1  ¦
                +---------------+----------+---------------+-------------------------¦
                ¦Nature of      ¦Years in  ¦Payment        ¦under sec. 1481          ¦
                +---------------+----------+---------------+-------------------------¦
                ¦payment        ¦dispute   ¦(in millions)  ¦(in millions)            ¦
                +---------------+----------+---------------+-------------------------¦
                ¦Rockford civil ¦          ¦               ¦                         ¦
                +---------------+----------+---------------+-------------------------¦
                ¦settlement     ¦1981-1988 ¦$115.0         ¦$100.0                   ¦
                +---------------+----------+---------------+-------------------------¦
                ¦Rockford admin.¦          ¦               ¦                         ¦
                +---------------+----------+---------------+-------------------------¦
                ¦settlement     ¦1981-1988 ¦71.6           ¦71.6                     ¦
                +---------------+----------+---------------+-------------------------¦
                ¦Seattle civ.   ¦          ¦               ¦                         ¦
                +---------------+----------+---------------+-------------------------¦
                ¦plea &         ¦          ¦               ¦                         ¦
                +---------------+----------+---------------+-------------------------¦
                ¦settlement     ¦1978-1989 ¦12.3           ¦11.3                     ¦
                +---------------+----------+---------------+-------------------------¦
                ¦Seattle admin. ¦          ¦               ¦                         ¦
                +---------------+----------+---------------+-------------------------¦
                ¦settlement     ¦1978-1986 ¦1.9            ¦1.9                      ¦
                +---------------+----------+---------------+-------------------------¦
                ¦Misc. aviation ¦          ¦               ¦                         ¦
                +---------------+----------+---------------+-------------------------¦
                ¦payments       ¦1985-1986 ¦0.3            ¦0.3                      ¦
                +---------------+----------+---------------+-------------------------¦
                ¦               ¦          ¦               ¦                         ¦
                +---------------+----------+---------------+-------------------------¦
                ¦Totals         ¦          ¦201.1          ¦185.1                    ¦
                +---------------+----------+---------------+-------------------------¦
                ¦               ¦          ¦               ¦                         ¦
                +--------------------------------------------------------------------+
                

The obligation for these payments arose from the transactions described below.

Petitioner and some of its subsidiaries, including SDC, have for many years served as contractors with the Department of Defense (DoD), as well as other Government agencies. As a Government contractor, petitioner enters into contracts for supplies and services with the Government. Petitioner enters into certain of these contracts directly with the DoD as a prime contractor (prime contracts) and indirectly as a subcontractor to various prime contractors and higher tier subcontractors (subcontracts).

The Government's process of procuring supplies and services begins by either the DoD or the prime contractor sending solicitations to petitioner. Petitioner...

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