Opinion
Docket No. 7132.
1947-01-3
AERO SUPPLY MFG. CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Ferdinand Tannenbaum, Esq., for the petitioner. Rollin H. Transue, Esq., for the respondent.
VINSON ACT— SUBCONTRACTOR— AGGREGATION OF SMALL ORDERS.— Many small orders placed by a prime contractor with the petitioner may not be considered one subcontract aggregating more than $10,000 so as to limit the petitioner's profits under the Vinson Act. Ferdinand Tannenbaum, Esq., for the petitioner. Rollin H. Transue, Esq., for the respondent.
The Commissioner determined a deficiency of $4,280.87 in the petitioner's excess profit liability for 1939 under the Vinson Act.
FINDING OF FACT.
The petitioner, a New York corporation, is engaged at Corry, Pennsylvania, in the manufacture and sale of screw machine hardware such as bolts, screws, pins, nuts, bushings, and turn buckles, and also valves, pumps, machine control instruments, bomb racks, gun mountings, and other more or less similar equipment. Most of the merchandise which it sells consists of standard stock items and most of it is sold to aircraft manufacturers.
Grumman Aircraft Engineering Corporation (hereinafter referred to as Grumman) and Curtiss-Wright Corporation (hereinafter referred to as Curtiss) were contractors for the construction of aircraft, each under a single contract subject to the Vinson Act. Each of these prime contractors gave to the petitioner a number of separate orders for standard stock and special run materials which it needed in connection with its Navy contract.
The orders from Grumman were received during the period from August 1937 to December 31, 1938. There were 93 of those separate orders and they covered 506 different items. The total amount received by the petitioner on all those orders was $19,400.26. Only $47.98 of that amount was received on materials shipped during 1939.
The orders from Curtiss were received during the latter part of 1938 and 1939. There were 99 of those orders covering 166 different items. The total amount received by the petitioner on those contracts was $22,174.64, more than one-half of which was received on shipments made during 1939.
More than one-half of the 192 orders were for less than $100 and only 6 of the orders were for more than $1,000. No single order was for more than $4,200 worth of material.
Each purchase order was marked with the prime contract number and each order from Grumman contained a statement as follows: ‘The Navy contract mentioned herein is subject to the provisions of the Vinson Act.‘
Grumman and Curtiss ordered the materials on their own purchase order forms, at times of their own choosing, in accordance with their own schedules for delivery, from the stock catalog and price lists or from special bids tendered by the petitioner. The petitioner invoiced and shipped the goods to the prime contractors on terms ‘net 30 days.‘ The petitioner charged the goods to each purchaser on open accounts which it maintained in its books.
The standard practice of the engineering departments of the prime contractors was to requisition materials for a specific contract as the work progressed rather than to delay and requisition them all at one time. The requisitions were then forwarded to the purchasing department, which usually issued purchase orders as the requisitions were received. The prime contractors did not keep material received from the petitioner separate from other similar materials previously supplied by the petitioner or its competitors. Small items were placed in bins and might or might not be used upon the contract for which they were ordered. All materials were inspected by Navy inspectors at the plant of the petitioner before shipment and were marked with the prime contract number.
Neither Grumman nor Curtiss issued any blanket order to or had any general agreement or understanding with the petitioner for the purchase from the petitioner of materials which might be needed in the construction of aircraft under their prime contracts.
Each of the purchase orders issued by Grumman and Curtiss and filed by the petitioner was a bona fide separate contract and was not a subdivision made for the purpose of evading the provisions of the Vinson Act.
The stipulation of facts is incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
The Vinson Act, as amended and applicable hereto, prohibits the Secretary of the Navy from making any contract for the construction of aircraft unless the contractor agrees to certain things. He must agree to pay to the Treasury all profit in excess of 12 per cent of the total contract price of contracts completed within the income taxable year. The contractor must agree:
To make no subdivisions of any contract or subcontract for the same article or articles for the purpose of evading the provisions of this Act, but any subdivision of any contract or subcontract involving an amount in excess of $10,000 shall be subject to the conditions herein prescribed.
The contractor must further agree to make no subcontracts unless the subcontractor agrees to the various conditions imposed upon the contractor. The law contains the following provision: ‘The contract or subcontracts referred to herein are limited to those where the award exceeds $1,000.‘
The Commissioner of Internal Revenue prescribed regulations under the Vinson Act. T.D. 4906, 1939-2 C.B. 404. Section 17.1(e) of his regulation is as follows:
(e) ‘Subcontract‘ means an agreement entered into by one person with another person for the construction or manufacture of a complete naval vessel or aircraft or any portion thereof, the prime contract for such vessel or aircraft or portion thereof having been entered into between a contractor and the Secretary of the Navy or his duly authorized representative.
Section 17.3 is in part as follows:
* * * If a contracting party places orders with another party, aggregating an amount in excess of $10,000, for articles or materials which constitute a part of the cost of performing the contract or subcontract, the placing of such orders shall constitute a subcontract within the scope of the Act, unless it is clearly shown that each of the orders involving $10,000 or less is a bona fide separate and distinct subcontract and not a subdivision made for the purpose of evading the provisions of the Act.
It is provided both in the law and in the regulations that the limitation on profits prescribed in the law is not to apply to separate contracts involving less than $10,000. Each order which the petitioner received from Grumman and Curtiss was for materials to cost the purchaser less than $10,000. The respondent does not contend that these orders were deliberately subdivided for the purpose of evading the provisions of the Vinson Act, and the evidence shows clearly that neither the purchaser nor the petitioner had any such purpose in mind. Grumman and Curtiss from time to time placed small separate orders with the petitioner for materials and the petitioner filled each of those orders separately. Each order resulted in a separate contract between the petitioner and one of the prime contractors. Fully justifiable business purposes prompted both Grumman and Curtiss in placing all of these relatively small orders with the petitioner separately rather than as a single order.
The respondent contends that all of the separate orders given by each of the prime contractors and designated as being under a certain prime contract should considered as one contract in determining whether the petitioner is subject to the profit limitations of the Vinson Act. However, he is not able to advance any sound reason why that should be done and his contention is directly contrary to his regulation. The evidence fairly establishes that there was no overall or blanket agreement or understanding of any kind between the petitioner on the one hand and Grumman or Curtiss on the other, relating to the materials which the petitioner eventually furnished to those purchasers under their prime contracts. The petitioner was not committed in any way to supply the prime contractors with materials and the prime contractors were not committed in any way to purchase materials from the petitioner except as they agreed in the 192 separate contracts involved herein. Their entire dealings were simply on a day to day basis. If the contractor wanted something, it ordered it, and the petitioner filled the order. There was no connection whatsoever between the separate orders except the circumstance that each prime contractor placed all of its orders as incidents of carrying out its one prime contract. The statute itself and particularly the regulations of the Commissioner recognize that there may be separate subcontracts between the same prime contractor and the same subcontractor under any given prime contract. The present is a case clearly recognized by the regulations as one in which the profit limitations of the Vinson Act do not apply.
Decision will be entered for the petitioner.