Opinion · United States Court of Claims

Grays Harbor Motorship Corporation v. United States

45 F.2d 259

Type: Opinion
Court: United States Court of Claims
Jurisdiction: Federal
Date: 1930-12-01
Topic: general

WILLIAMS, Judge. The plaintiff is a corporation organized under and by virtue of the laws of the state of Washington, with its executive offices and main place of business in the city of Seattle, Wash. During the years 1917 and 1918, the plaintiff entered into five contracts with the United States Shipping Board Emergency Fleet Corporation for the construction of a total of twenty-five wooden ship hulls. The plaintiff during the years 1918 and 1919 fully completed all the hulls, seventeen in number, covered by the first four contracts, to wit, contracts No. 7 W. H., No. 148 W.

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GRAYS HARBOR MOTORSHIP CORP. v. UNITED STATES,45 F.2d 259(Ct.Cl. 1930)

GRAYS HARBOR MOTORSHIP CORPORATION v. UNITED STATES.

No. B-12.

Court of Claims.

December 1, 1930.

Page 260

Suit by the Grays Harbor Motorship Corporation against the United States, wherein defendant filed a counterclaim.

Judgment for defendant.

The plaintiff in this case sues to recover sums of money alleged to be due it on various contracts it had with the United States Shipping Board Emergency Fleet Corporation, providing for the construction of wooden ship hulls and the installation of propelling machinery in said hulls, and for a refund of income and profit taxes paid by it for the years 1918 and 1919.

The defendant presents counterclaims based on alleged faulty construction of certain wooden hulls, the conversion of construction materials, and unpaid deficiency taxes assessed against the plaintiff for the years in question.

The controversy between the parties as to the plaintiff's tax liability for the years 1918 and 1919 hinges on two issues: (1) Whether income derived by the plaintiff from its government contracts should be reported for tax purposes on the basis of "completed vessels" or on the basis of "completed contracts"; and (2) whether a loss incurred by plaintiff on four barkentines, which it built for the purpose of sale in the year 1919 and sold in 1920, should be deducted for the year 1919 or the year 1920.

The case having been heard by the Court of Claims, the court, upon the report of a Commissioner and the evidence, makes the following special findings of fact:

1. At all material times the plaintiff was and still is a corporation organized and existing under the laws of the state of Washington. The various officers of said corporation are citizens of the United States and have always borne true and faithful allegiance to the United States. The plaintiff owns the claims that are sued upon in this proceeding, and there has not been any assignment of any interest or any part of any interest in the said claims.

2. During the years 1917 and 1918 the plaintiff entered into five contracts with the defendant for the construction of a total of twenty-five wooden ship hulls. These contracts were as follows:

Contract No. 7 W.H., dated May 19, 1917, calling for the construction of four wooden hulls known as Nos. 55 to 58, inclusive. Plaintiff's schedule E, attached to its third amended petition, is a correct copy of this contract, and is made a part hereof by reference.

Contract No. 148 W.H., dated November 28, 1917, for the construction of four wooden hulls known as Nos. 998 to 1001, inclusive. Plaintiff's schedule F, attached to its third amended petition, is a correct copy of this contract, and is made a part hereof by reference.

Contract No. 148 W.H., supplement A, dated December 29, 1917, for the construction of four wooden hulls for the defendant known as Nos. 1059 to 1062, inclusive. Plaintiff's schedule G, attached to its third amended petition, is a correct copy of this contract, and is made a part hereof by reference.

Contract No. 148 W.H., supplement B, dated June 8, 1918, for the construction of five wooden hulls for the defendant known as Nos. 1892 to 1896, inclusive. Plaintiff's schedule H, attached to its third amended petition, is a correct copy of this contract, and is made a part hereof by reference.

Contract dated September 12, 1918, and known as contract 468 W.H., for the construction of eight wooden hulls for the defendant. Plaintiff's schedule A, attached to its third amended petition, is a correct copy of this contract and is made a part hereof by reference.

3. Contract 468 W.H. is the contract sued upon in plaintiff's first cause of action. Plaintiff asks just compensation for the cancellation of four of the eight hulls called for by that contract.

In the said contract plaintiff agreed to construct at its own risk and expense eight wooden cargo-carrying hulls of 4,100 tons'Page 261dead weight carrying capacity each, and to deliver said hulls to the defendant afloat at the works of the plaintiff at Grays Harbor, Wash.

In consideration of the performance of this agreement by the plaintiff, the defendant agreed to pay a lump sum purchase price of $385,000 for each of such completed vessels, and, in the event that such tonnage should be more or less than 4,100 tons a vessel, the contract price per vessel was to be increased or decreased, as the case might be, to the extent of $95 per dead weight ton, or any part thereof, for any difference between the said tonnage contracted for and the actual tonnage of the vessel.

It was further agreed inter alia that, if for any reason whatsoever the defendant deemed it inadvisable to proceed with the construction of any of the vessels provided for in the contract and notified the plaintiff to that effect in writing, the plaintiff should comply with the order of the defendant in that regard, with an obligation on the defendant, however, to substitute other vessels of different design or size which it was agreed the plaintiff should construct under the terms and conditions of that contract for a sum to be determined by the defendant, which should be in proportion to the sum provided to be paid under this contract, according to the character and design of the substituted vessels.

It was agreed that title to all vessels either completed or under construction, in so far as approved by the defendant, and title to all material for the furtherance of work under the contract, however and by whomsoever contracted for or assembled or set up in the shipyard or used in the construction of the work under the contract, should be in the defendant at all times.

Contract No. 468 W.H. provided that 30 days after the signing thereof defendant would pay plaintiff 5 per cent. of the contract price of said hulls and the balance at dates named therein. Upon the signing of contract No. 468 W.H. pursuant to said provision, defendant paid plaintiff 5 per cent. of the contract price of the eight hulls, and on the dates named the balance of the purchase price of the four which were completed, except certain items hereinafter mentioned.

4. Plaintiff commenced the construction of said hulls as provided by said contract 468 W.H. On November 23, 1918, work had been commenced upon four of the eight hulls to be constructed under that contract. Two of these hulls, numbered, respectively, 2677 and 2678, were well under construction at this time, and two other hulls, numbered 2679 and 2680, had been commenced, but construction was not far advanced.

5. On November 23, 1918, the following telegram was sent to the plaintiff by the United States Shipping Board Emergency Fleet Corporation and was received by the plaintiff:

"Philadelphia, Pa., "Nov. 23, 1918 — 10.05 p.m.

"Grays Harbor M.S., Aberdeen, Wn.:

"By direction of the board of trustees, you are directed to suspend all work on hulls numbered two thousand six hundred seventy-nine, two thousand six hundred eighty, two thousand six hundred eighty-one, two thousand six hundred eighty-two, two thousand six hundred eighty-three, two thousand six hundred eighty-four. Order all work stopped on commitments made by you as to these hulls and make no further commitments or expenditures as to them. Permission is hereby given you, subject to our final approval, to solicit and accept domestic work for private account for tonnage substantially equivalent to the tonnage covered by this suspense order. Details follow by letter.

"United States Shipping Board Emergency Fleet Corp., "By Charles Piez, Vice President and General Manager."

On November 30, 1918, the following telegram was received by the plaintiff from the United States Shipping Board Emergency Fleet Corporation:

"Philadelphia, Pa., Nov. 30, 1918 — 5.48 p.m.

"Albert Schubach, President Grays Harbor Ship Corporation, Waldorf Astoria, New York:

"Suspense order on the two keels which you have laid is hereby withdrawn.

"U.S. Shipping Board Emergency Fleet Corpn., "S.M. Evans, Mgr."

This telegram referred to hulls 2679 and 2680.

6. Pursuant to the instructions contained in said two telegrams, the plaintiff suspended operations on the last four hulls contemplated in contract 468 W.H., and completed and delivered to the United States Shipping Board Emergency Fleet Corporation hulls numbered 2677, 2678, and 2680. Hull numbered 2679, otherwise known as the Agathon, when almost completed, was destroyed by fire.Page 262The plaintiff was substantially paid for these four hulls with the exception of a few disputed items for extras, which still remain unpaid.

Defendant has failed and refused to substitute any other hulls or vessels of different size or design in place of those canceled under contract 468 W.H.

7. Defendant advanced plaintiff the sum of $77,000 as part of the initial payment provided under contract 468 W.H., covering the entire contract for eight hulls. This money was turned into the general funds of the plaintiff and disbursed in the usual way for general expenses.

8. The actual cost to the plaintiff for labor, material, and direct overhead on the four hulls completed under contract 468 W.H. was as follows: Hull 2677, $317,322.13; hull 2678, $274,345.64; hull 2679, $243,280.56; hull 2680, $260,276.13 — a total of $1,095,224.46. In addition to this there was an administrative and general overhead expense on the four hulls, amounting to a total of $70,209.76. The total cost for the building of these four hulls was $1,165,434.22.

The exact sums of money received by the plaintiff from the defendant for the construction of hulls 2677 to 2680, inclusive, were as follows: Hull 2677, $452,373.38; hull 2678, $447,515.99; hull 2679, $383,995.88; hull 2680, $444,562.46 — amounting to a total of $1,728,447.71.

The difference between the amount received by the plaintiff on the four hulls and their cost amounted to $563,013.49.

The plaintiff could have built and delivered the last four hulls under this contract, which were canceled by the defendant, at the same or a less cost than the first four hulls.

9. The hull construction plant was built by plaintiff entirely at its own expense. In entering into the various hull contracts plaintiff anticipated paying for the construction of and additions to the hull plant out of the apparent profits on the construction of the hulls contracted for. The plant had been built only in part before plaintiff entered into contract 468 W.H. When this contract was canceled, plaintiff was deprived of the anticipated profit on four hulls out of which they had planned in part to pay for the additional plant construction and taxes made necessary by this contract.

10. At the time that plaintiff received the telegrams set forth in finding 5, canceling the last four hulls under contract 468 W.H., plaintiff had purchased and assembled at its yard, at its own expense, a large quantity of shipbuilding materials which it had intended to incorporate in the four canceled hulls. The principal part of these materials was at plaintiff's yard at Aberdeen, and would have been incorporated into ship hulls under contract 468 W.H. if the same had not been canceled as to the last four hulls.

11. Plaintiff was thereupon instructed by the United States Shipping Board Emergency Fleet Corporation to inventory this material. Accordingly, plaintiff took an inventory under the supervision of Mr. Hoonan, the auditor of the plaintiff. This inventory was subsequently checked by the United States Shipping Board Emergency Fleet Corporation and confirmed as correct.

This inventory correctly sets forth the quantity of materials on hand at the date of cancellation of contract 468 W.H., and the invoice cost of these materials which was paid by plaintiff.

The following is the total invoice value of the cancellation materials plus freight and handling charges paid by plaintiff:

Miscellaneous materials, invoice price ......................... $189,473.83 Freight and handling charges on the above ..................... 37,894.76 Lumber ......................... 8,752.55 ___________ Total ....................... $236,121.14

12. In addition to the material appearing in the inventory, plaintiff paid the National Malleable Castings Company the sum of $3,809.75 for a quantity of clinch rings. These rings were taken by the defendant at Chicago and were never delivered to the plaintiff, although plaintiff paid for them. Plaintiff has never been repaid.

13. Plaintiff received the following letter from the United States Shipping Board Emergency Fleet Corporation, on the letterhead of United States Shipping Board Emergency Fleet Corporation:

"Cancellation of Contracts.

"May 28, 1919.

"Grays Harbor Motorship Corp., Aberdeen, Washington.

"Gentlemen: 1. I have been directed by the home office of this corporation to notify you that you will be held responsible for the protection of any materials in your yard belonging to this corporation and in your possession as the result of cancellation of anyPage 263contracts until such time as such materials have been removed from your plant.

"Very truly yours, "[Signed] H.E. _________, "District Manager.

"Cancel.

"Referred to Hoonan. Rec'd May 29, 1919."

14. Pursuant to the instructions contained in letter appearing in finding 13, plaintiff took care of, guarded, and stored cancellation material from November 23, 1918, the date of the cancellation of contract 468 W.H., to February 8, 1922, expending the sum of $16,872.22 for this purpose, no part of which has ever been repaid. This sum was composed of the following items:

Labor and material .............. $4,143.87 Insurance premiums .............. 2,851.55 Advertising sale of materials ... 76.80 Auctioneer ...................... 50.00 Clerical services ............... 250.00 Rent of storage space ........... 9,500.00

The United States Shipping Board Emergency Fleet Corporation audited plaintiff's books and stated their willingness to pay $38,198 as a reasonable carrying charge on all this material to cover warehouses, storage, rentals, cost of handling, sorting, painting, oiling, covering materials, watchmen, insurance, etc., but failed to do so.

15. Plaintiff had occasion to use at various times a portion of the cancellation material. Accordingly, plaintiff wrote the following letter to the United States Shipping Board Emergency Fleet Corporation on May 29, 1920:

"Cancellation Claim.

"May 29, 1920.

"United States Shipping Board, Emergency Fleet Corporation, Seattle, Washington.

"(Attention Mr. Woolley.)

"Gentlemen: This is to confirm my recent statement to you to the effect that we have occasional use for miscellaneous items of materials belonging to us now stored in our warehouse at our plant, which materials are listed in detail in our cancellation claim. In such negotiations as we have had pertaining to settlement of our cancellation claim it has always been understood that the amount of compensation to be paid us for such surplus materials would be based upon an actual check of the materials as turned over to the Fleet Corporation at the time of such settlement.

"Not having heard from you concerning this matter and desiring to keep you informed as to what we are doing in the premises we are enclosing herewith a list of materials which we have used.

"Yours very truly, "Grays Harbor Motorship Corporation, "_________, Counsel. "BCS:OMB. "Encl. 1."

Mr. Wolley, district adjuster, construction claims board of the United States Shipping Board Emergency Fleet Corporation, on May 29 acknowledged this letter as follows (on the letterhead of United States Shipping Board Emergency Fleet Corporation):

"Cancellation Claim — Material.

"May 29, 1920. "Grays Harbor Motorship Corp., Seattle, Wash.

"(Attention Mr. Bruce C. Shorts.)

"Gentlemen: 1. Your letter of May 29th under the above caption is acknowledged in which you confirm your recent statement to the effect that your company has occasional use from time to time for miscellaneous items of materials which you state belong to you now stored in your warehouse at your plant and which materials you state are listed in detail in your cancellation claim.

"2. You also inclose a list of above materials removed for your own use on May 26th, 27th, and 28th. From the wording of your letter, also a previous letter from you on this subject, in which you mention `materials belonging to us now stored in our warehouse at our plant' we beg to state this office has no objection whatever to your removing any material which you claim as your property and for which, of course, the Fleet Corporation can not be expected to reimburse you.

"3. With reference to any materials which might be covered by proper cancellation claim, we also have no objection to your retaining for the use of your company any or all of such materials on the condition that they be withdrawn from any cancellation claim you have made or may make. It is further understood that the Fleet Corporation will make reimbursement for only such material as properly applies to cancellation claim and which material is to be delivered to and in the amount as determined by the supplyPage 264and sales division of the Emergency Fleet Corporation at time of lifting.

"Yours very truly, "[Signed] A.F. Woolley. "District Adjuster, Construction Claims Board.

"CC. Mr. Deane. "Mr. Cosgrove. "AFW/MSK."

16. Pursuant to the authorization contained in the letter from Mr. Woolley appearing in finding 15, plaintiff withdrew and used certain materials appearing on the said inventory. Plaintiff notified the United States Shipping Board Emergency Fleet Corporation from time to time as these withdrawals were made, giving them a list of the withdrawals.

A quantity of lumber was withdrawn in this manner by plaintiff with the consent of the defendant, the agreed value of the same being $4,000, which is a credit against the cancellation claims.

Defendant is entitled to a further credit of $10,000 for various materials withdrawn by plaintiff from the cancellation materials.

17. The balance of the cancellation materials not withdrawn by the plaintiff for its own use were sold at public auction on February 8, 1922, to avoid incurring further carrying charges. Plaintiff notified the United States Shipping Board Emergency Fleet Corporation, in writing, of the proposed sale and the time and place thereof. The following letter was sent January 24, 1922, by the Grays Harbor Motorship Corporation to the United States Shipping Board Emergency Fleet Corporation, Washington, D.C., and to the United States Shipping Board Emergency Fleet Corporation, Securities Building, Seattle, Washington:

"January 24, 1922.

"Gentlemen: Referring to the material accumulated by the Grays Harbor Motorship Corporation under contract 468 W.H., which material was designed for the construction of the remaining four hulls under said contract, we have to inform you that on February 8, 1922, the same will be sold at public auction in accordance with the notice of public sale, a copy of which is enclosed herewith.

"Respectfully, "Grays Harbor Motorship Corporation. "___________, President.

Notices of the time and place of sale were also published in various newspapers in Seattle, Wash., Portland, Ore., and in other cities. Several representatives of the United States Shipping Board Emergency Fleet Corporation were present when the sale took place.

18. The material was sold to the highest bidder for $24,100. The purchaser was William Rosenbranz, a dealer in secondhand materials and machinery, who was not connected in any way with plaintiff.

This was the then market price of such material. The smallness of the price as compared to the invoice price of the material was due to the fact that there was a great quantity of such material on the market, with virtually no demand for the same, as all shipbuilding had practically ceased on the Pacific Coast.

19. When the cancellation order was received on November 23, 1918, plaintiff had on its hands plants which it had enlarged for the purpose of building wooden ships for the government. It had a large force of men, including highly paid executives. It had numerous obligations in all directions incident to operating a shipyard as a going concern.

Up to December 31, 1918, plaintiff expended a total of $323,303.27 on the hull plant and $133,565.39 on its machinery installation plant. Both the hull plant and the machinery plant were junked and sold together for a net total salvage amounting to $38,844.90.

Plaintiff collected fire insurance for damages to both plants occasioned by the fire which destroyed hull No. 2679 (finding 6), in the sum of $43,836.17, and expended $4,938.87 for cleaning up after the fire. There is no evidence of other repairs.

The loss on hull plant by reason of these circumstances, chargeable to cancellation of the work on the four hulls, is $37,012.35.

20. Plaintiff's loss on contract No. 468 W.H., attributable to the suspension and cancellation thereof, not including interest or prospective profits, is as follows:

1. Hull plant (finding 19) ........ $ 37,012.35 2. Cancellation materials (invoice, finding 11) less withdrawals and sales (findings 16 and 18) .................... 198,021.14 3. Care of and storing cancellation materials (finding 14) ........ 16,872.22 4. Incidentals .................... 25,000.00 ___________ $276,905.71

21. The plaintiff entered into two contracts with the defendant for the installation of machinery into twenty-five wooden hulls belonging to the defendant.Page 265

The first of these contracts, dated December 28, 1917, was known as machinery installation contract No. 1 and covered the installation of machinery in the four hulls, constructed by the plaintiff under contract No. 7 W.H., which is schedule E of the third amended petition herein, and the four hulls constructed under original contract No. 148 W.H., which is schedule F of said petition. By said contract it was agreed that plaintiff would install all the propelling machinery, auxiliaries, and equipment in the eight hulls then being constructed by it, for which installation it would receive a lump sum of $65,000 per ship.

The second contract was known as machinery installation contract No. 35, and covered the installation of all propelling machinery, auxiliaries, and equipment in the seventeen hulls contemplated in hull contracts dated December 29, 1917, and June 8, 1918, and hull contract 468 W.H.

This "second cause of action" is based on partial cancellation of machinery installation contract No. 35. A copy of said contract is attached to plaintiff's third amended petition as schedule C and is made a part hereof by reference.

This contract provided, in substance, that all material would be furnished by the defendant and all labor paid for by the defendant, and that the plaintiff would receive an allowance of $18,500 per vessel to cover overhead, plant construction, etc., and an additional allowance of $5,000 per vessel as profit.

The contract further provided that the defendant should have the option during the continuance of the war of requiring plaintiff to install machinery in such additional wooden hulls as defendant might require, on the same terms except as to the amount to be paid for overhead, plant construction, plant extension, etc.

22. The following telegram was sent by the defendant to the plaintiff on April 21, 1919:

"Philadelphia, Pa., April 21, 1919 — 8.06 p.m.

"Grays Harbor Motorship Corporation, Aberdeen, Wn:

"By direction of the board of trustees your contract covering outfitting seventeen wood hulls is hereby cancelled as to eight hulls, and you will arrange to install machinery in not to exceed nine hulls under this contract. You are likewise ordered to send similar cancellation notices to all material equipment and other subcontractors for account of the vessels so affected covering any commitments which you may have made. Please prepare earliest convenience complete statement of materials on hand for these hulls, commitments made, and overhead, and such other statements as you consider pertinent, requesting proper information from subcontractors. Details follow by letter.

"Sanders."

Mr. Sanders was an executive officer of the United States Shipping Board Emergency Fleet Corporation.

23. Pursuant to the telegram appearing in finding No. 22, the plaintiff completed the installation of hull machinery, auxiliaries, and equipment in nine wooden hulls covered by machinery installation contract No. 35, and did not make the remaining eight installations provided in this contract.

Machinery installation contract 35 provided for a payment to plaintiff by defendant of $18,500 per hull to cover plant construction, extension, and overhead, but plaintiff failed to receive any part of this sum for the eight canceled installations, although plaintiff was at all times ready, willing, and able to install machinery in the remaining eight hulls and had a thoroughly equipped plant which it had built especially for this work. No sum of money or allowance of any kind has been received by the plaintiff on account of the cancellation of machinery installation contract No. 35 except as appears in finding 25.

The loss on machinery installation plant by reason of cancellation of work on said eight hulls was $52,135.03.

24. Plaintiff's loss on contract machinery installation No. 35, attributable to the suspension and cancellation thereof, not including interest or prospective profits, is as follows:

1. Machinery installation plant .. $52,135.03 2. Incidentals ................... 10,000.00 __________ $62,135.03

25. On or about November 11, 1919, plaintiff and defendant entered into an agreement respecting suspension of operations on the aforesaid contracts Nos. 468 W.H. and M.I. 35, which provided, in so far as here material, as follows:

"Article I

"(1) The owner shall pay to the contractor the sum of one hundred twenty-twoPage 266thousand eight hundred eighty-eight dollars and twenty-three cents ($122,888.23) on account of contractor's claims arising out of the suspension of the contract and the machinery contract.

"(2) The owner shall continue the examination of the said claims and upon a final settlement and adjustment of the said claims (herein called `final settlement') shall pay to the contractor such other and further sums, if any, as may be justly due and owing the contractor.

"Article II

"If upon the said final settlement it be determined that the advance payment herein provided for is in excess of the amount of the final settlement, then and in that event the contractor shall pay to the owner the difference between the amount of final settlement and the advance herein provided."

Pursuant to this agreement defendant paid plaintiff the said sum of $122,888.23.

26. At defendant's request plaintiff completed some work on a vessel of the defendant for the agreed sum of $2,500. On paying the bill rendered by the plaintiff for this work, the defendant deducted the sum of $308.16 on the theory that it had already paid plaintiff for a portion of this work. Upon investigation, defendant found that it had not already paid for this work, but insisted it was still entitled to a credit of $66.93 on account of a previous wage adjustment affecting the same work. This was consented to by Bruce C. Shorts, the secretary of the plaintiff, and the defendant agreed to pay the balance of $241.23. The defendant, however, has failed to pay the plaintiff as agreed.

27. The United States Shipping Board Emergency Fleet Corporation, after the delivery to it by the plaintiff of hull No. 1893, ordered the Todd Dry Dock Company in Seattle, Wash., to install fair weathers on the after side of the strut palms of this hull. Although the plaintiff was not required to do this work under the contract with the defendant, the defendant compelled plaintiff to pay for this work by deducting the sum of $230.44 from another payment which defendant owed plaintiff.

28. After the delivery by the plaintiff of hull No. 1062 to the United States Shipping Board Emergency Fleet Corporation, the latter had this hull dry-docked at the plant of the Todd Dry Dock Company, and ordered certain extra work done. For this work three bills were rendered by the Todd Dry Dock Company, one of which was paid directly to the Todd Dry Dock Company by the plaintiff, which admitted that it owed the same; the other two being paid by the United States Shipping Board Emergency Fleet Corporation. Captain S. Rustad, a supervising constructor at Seattle of the United States Shipping Board Emergency Fleet Corporation, agreed with Mr. Bruce C. Shorts, secretary of the plaintiff, that the Fleet Corporation was responsible for these two bills paid by it. Subsequently some one connected with the Fleet Corporation deducted the amount of the third bill, amounting to $1,966.25, out of a payment which the Fleet Corporation actually owed the plaintiff for other work done, and thus compelled the plaintiff to pay for the work done by the Todd Dry Dock Company, although this charge should have been borne by the Fleet Corporation, who had previously admitted that they were responsible for the same.

29. The United States Shipping Board Emergency Fleet Corporation brought hull No. 1892 to Seattle and there had the galley in that hull changed somewhat; this work being done by the Pacific Construction Engineering Company. This work had nothing to do with the contract between the plaintiff and the defendant, and was admittedly for the account of the Fleet Corporation, who paid the bill of the Pacific Construction Engineering Company. Included in this bill was a charge in the sum of $197.94 for overhead, which amount the Fleet Corporation arbitrarily deducted from other payments actually owing to the plaintiff by the Fleet Corporation for other work, on the theory that, if the plaintiff had done this work, there would have been no overhead charge, as that would have been taken care of under the terms of the machinery installation contract. Plaintiff had never been requested to do this work.

30. Under exactly the same circumstances and facts as set forth in finding 29 and referring likewise to hull No. 1892, the United States Shipping Board Emergency Fleet Corporation deducted the sum of $138.65 from payments otherwise admittedly due the plaintiff from the Fleet Corporation.

31. The United States Shipping Board Emergency Fleet Corporation, prior to June 8, 1918, ordered the plaintiff to do additional work not included in certain contracts on various hulls, for which plaintiff was to receivePage 267$3,350 per hull. There is no satisfactory proof that plaintiff has not been paid in full therefor.

32. The United States Shipping Board Emergency Fleet Corporation desired certain work under the hull contract for the construction of hull No. 1895 delayed until after the machinery had been installed in that hull. In order to insure that the balance of the hull work would be completed after the installation of the machinery, the Fleet Corporation withheld the sum of $5,000 from the contract price of the hull. After installing the machinery in hull 1895, the plaintiff completed the work under the hull contract, for which the $5,000 was withheld, which work was accepted by the Fleet Corporation. Plaintiff rendered the Fleet Corporation a bill for the $5,000, but has never been paid.

33. The Fleet Corporation ordered the plaintiff to install water-tight sliding doors on hulls 1893 and 1895; this being additional work not included in the hull contract. The plaintiff completed this work and rendered bills to the Fleet Corporation in the sum of $1,436.34 for each vessel. In reply, the plaintiff received a letter from the Fleet Corporation signed by J.L. Kennedy, district comptroller, in which the liability of the Fleet Corporation to the plaintiff was admitted for the amounts stated in the bill. The Fleet Corporation has failed to pay the plaintiff any part of this amount.

34. The plaintiff received an order in writing from the United States Shipping Board Emergency Fleet Corporation to install bill plates in hulls Nos. 2677, 2678, and 2680. Plaintiff did this work, which was an extra, and submitted to the Fleet Corporation bills in the sum of $780 each for the work done on each of these three ships. No part of these bills has ever been paid to the plaintiff.

35. Plaintiff received from the Fleet Corporation, a written order dated April 18, 1919, requesting plaintiff to waterproof tarpaulin to be used on the hatch covers of all the ships subsequently turned out. Plaintiff did this work and was paid $260.74 in each case except for the work done on the tarpaulin for hull 1894, for which plaintiff has never been paid.

36. Under the two machinery installation contracts entered into between the defendant and the plaintiff the machinery for installation into the various hulls was to be furnished by the United States Shipping Board Emergency Fleet Corporation and delivered by them at plaintiff's yard, all freight and railroad charges prepaid. The machinery arrived irregularly. For several days none would arrive, and then ten to fifteen carloads would come on the same day. The freight was not prepaid, and the railroad refused to allow the machinery to be unloaded until the freight was paid, and also a demurrage charge against the machinery incurred because of delay in unloading, which delay was no fault of the plaintiff's, but was caused by irregular arrival of the machinery. To expedite matters, plaintiff paid the railroad the freight and demurrage charges, assuming it would be repaid by the Fleet Corporation. The Fleet Corporation later repaid plaintiff the actual freight charges, but did not repay plaintiff for the demurrage, which amounted to the sum of $571.65.

37. The various vessels completed under these contracts were being built according to Lloyd's classification, and on their completion Lloyd's certificates were issued for each vessel so classed. The burden of paying Lloyd's the classification fee was on the Fleet Corporation, and as a matter of practice plaintiff would pay Lloyd's this fee directly, and then submit a voucher to the Fleet Corporation for reimbursement. The Fleet Corporation reimbursed the plaintiff in all cases with one exception. This was for the classification fee of the steamer Gray Cloud, amounting to $874.25, which amount plaintiff paid Lloyd's. Plaintiff has never been reimbursed for this expenditure.

38. At one time the Steamship Kenosha, a vessel owned by the United States Shipping Board Emergency Fleet Corporation, but which had not been constructed by the plaintiff, was repaired by the plaintiff at the request of the Fleet Corporation as a special rush job. Plaintiff made a special effort and completed this work the same day, presenting to the Fleet Corporation a bill in the sum of $36.90, which was a reasonable charge. The Fleet Corporation refused to pay this bill on the ground that they considered it $3 too much. Plaintiff has never been paid for this work.

39. In connection with the construction of these wooden hulls, plaintiff had entered into a contract for the purchase of a quantity of locust wood squares to be used as fastenings. A part of this order was received and paid for by the plaintiff. The United States Shipping Board Emergency Fleet Corporation then commandeered the output of locust squares and shipped thePage 268balance of this contract requirement to the plaintiff, billing them for the same at an increase in price amounting to $4,503.87. Plaintiff paid this amount to the Fleet Corporation under protest.

40. Plaintiff had bought and paid for and was in possession of a quantity of ship's felt. The United States Shipping Board Emergency Fleet Corporation, in writing, ordered the plaintiff on June 14, 1919, to ship a quantity of this felt to the Ames Shipbuilding Corporation, which was constructing vessels for the Fleet Corporation on a cost plus basis. The Fleet Corporation agreed to reimburse plaintiff for the value of this felt and for all expenses incurred by plaintiff in packing and shipping the same. Plaintiff crated this felt and shipped it to the Ames Shipbuilding Corporation and paid the freight thereon, but has never been reimbursed therefor; plaintiff's loss amounting to $1,075.20.

41. Under the machinery installation contract, the United States Shipping Board Emergency Fleet Corporation agreed to furnish the plaintiff with all the machinery and equipment to be installed in the various hulls. At times the Fleet Corporation was unable to supply all the material required. They then directed plaintiff to obtain the same in any way possible so that completion of the ships would not be delayed. Accordingly the plaintiff contracted with the Seattle Plumbing Supply Company for a quantity of valves which had to be specially made up. About the time the Seattle Plumbing Supply Company was ready to ship these valves to plaintiff, the Fleet Corporation was itself able to obtain some valves and shipped them to plaintiff's yard. So as not to have a duplicate supply of this material, plaintiff canceled its contract with the Seattle Plumbing Supply Company, but was unable to agree on the amount to be paid them. As a result, this company brought an action against plaintiff for the full amount in the sum of $2,468.60. On June 22, 1920, plaintiff notified Mr. Fray, local district manager for the Fleet Corporation, by letter, of this suit, sending him a copy of the summons and complaint, and requested him to assist in the defense. When the case came on for trial, as plaintiff had no defense except as to the amount to be paid, a settlement was finally negotiated, and $1,600 was paid the Seattle Plumbing Supply Company by plaintiff. This was a reasonable way of disposing of the matter. Although the Fleet Corporation paid the plaintiff for all other purchases of this nature, they have never paid the above amount expended in settling for this cancellation.

42. Hull contract dated June 8, 1918, schedule H of the petition, between the plaintiff and the defendant, provided that full protection should be given to plaintiff on freight above the existing rates. On June 25, 1918, there went into effect an advance in freight rates of approximately 25 per cent. over the rates existing on the date on which the contract was entered into. As a result of this advance, plaintiff was compelled to pay a differential or advance in the freight rates on materials which went into the hulls under that contract in the total amount of $11,783.50. A freight claim, prepared in writing by the plaintiff, was approved by S.P. Coch, an examiner, Division of Construction, United States Shipping Board Emergency Fleet Corporation. Plaintiff has never paid any part of this amount.

43. On June 24, 1919, defendant entered into a contract with W.A. Magee in which defendant agreed to sell and W.A. Magee to buy all fir lumber belonging to defendant in three certain shipyards that would grade No. 1 common or better, with the exception that, should said "shipyards desire to use any small part of the lumber in their yards" on vessels under construction, they might take such part and the same would not come within the terms of sale to the said Magee. The price named was $17.50 per thousand feet board measure, and the lumber in said contract was therein stated as estimated at approximately 5,000,000 feet. A few days later and before any deliveries had been made under this contract it was assigned by W.A. Magee to the plaintiff for a consideration. Copy of this contract and the assignment thereof appears in the record attached to the third amended petition as schedule J, and is made part hereof by reference.

44. The full quantity of fir lumber in said shipyards belonging to the defendant, grading No. 1 common or better, is not proved. A total footage of 2,529,097 feet board measure was delivered by defendant to plaintiff under this contract. Plaintiff requested defendant for the balance. The defendant, on August 9, 1919, refused to deliver more, and no more was delivered by defendant or received by plaintiff. Defendant could have delivered to plaintiff, from the agreed source of supply, 1,038,846 feet of the grade specified more than it did deliver,Page 269not including that used by the shipyards themselves.

At the purchase price of $17.50 per thousand feet there was due and owing on 2,529,097 feet the sum of $44,259.21, demand for which was made upon plaintiff. The plaintiff sent to the Fleet Corporation its check for $7,371.84, part thereof. The check was not cashed by the Fleet Corporation, and, after 18 months from date of issue, plaintiff stopped payment thereof.

45. On August 9, 1919, the market price of lumber of the type described in the contract was, at the agreed place of delivery, $41.08 per thousand feet, or $23.58 in excess of $17.50.

The excess on 1,038,846 feet, at $23.58 per thousand, is $24,495.99. This amount deducted from $44,259.21 leaves an amount due defendant of $19,763.22.

46. During the calendar years 1918 and 1919, the plaintiff was engaged on the following seven government contracts, five of which were for building a total of twenty-five wooden ship hulls, and two of which were for installing machinery in the same twenty-five hulls:

==================================================================================================================== | | | | Date Completed | | Hull | Machinery Installation | Vessel Contract No. and Date. | Name of Vessel. | No. | Contract, Date and No. | was Accepted | | | | by Defendant. ---------------------------------|----------------------|---------|------------------------------|-------------------- | | Abrigada ........ | 55 | | | Aug. 31, 1918 | | Wishkah ......... | 56 | | | July 3, 1918 7 W.H., May 19, 1917 ........... | Kaskaskia ....... | 57 | | | July 26, 1918 | | Blackford ....... | 58 | M.I. 1, Dec. 28, 1917 ... | Aug. 23, 1918 | | Bromela ......... | 998 | | | Sept. 31, 1918 | | Brompton ........ | 999 | | | Dec. 31, 1918 148 W.H., Nov. 28, 1917 ........ | Broncha ......... | 1000 | | | Dec. 7, 1918 | | Brookdale ....... | 1001 | | | Jan. 9, 1919 | | Brookfield ...... | 1059 | | | Apr. 3, 1919 | | Brookhaven ...... | 1060 | | | Apr. 23, 1919 148 W.H., Supplement A, Dec. 29, | Brookland ....... | 1061 | | | June 10, 1919 1917 ......................... | | Brookside ....... | 1062 | | | July 3, 1919 | | Grayling ........ | 1892 | | | July 16, 1919 | | Gray Eagle ...... | 1893 | | | Aug. 6, 1919 148 W.H., Supplement B, June 8, | Mannahocking .... | 1894 | | | Sept. 5, 1919 1918 ......................... | | Gray Cloud ...... | 1895 | | | Sept. 26, 1919 | | Aberdeen ........ | 1896 | M.I. 35, Sept. 6, 1918 .. | Oct. 6, 1918 | | Adria ........... | 2677 | | | June 4, 1919 | | Agron ........... | 2678 | | | June 19, 1919 468 W.H., Sept. 12, 1918 ....... | | Agathon ......... | 2679 | | | May 19, 1919¹| | Agylha .......... | 2680 | | | July 18, 1919 | | | 2681 | | | | | Canceled ........ | | 2682 | | | | | | 2683 | | | | | | | 2684 | | | ----------------------------------------------------------------------------------------------------------------------

All hull contracts provided for the payment to the plaintiff by the defendant of a fixed and stated sum for the construction of each hull. Said sum was due and payable in fixed and stated amounts as the construction work progressed; the balance of the contract price of each hull was due and payable when such hull had been completed, delivered to, and accepted by, the defendant. Likewise machinery installation contracts provided for a fixed and definite profit for the installation of machinery in each hull. None of the hull contracts provided for a "cost plus" compensation.

Plaintiff's books at all times showed the cost of constructing each hull and also the cost incurred in the installation of machinery in each hull; such costs being shown separately. Upon the completion and delivery of each hull, the books of account and the records of the plaintiff reflected the cost, gross receipts, and net profit accrued or arising out of the construction of each hull and the installation of machinery in such hull, and at the close of each taxable year involved herein the books of account of said corporation reflected the profits realized by it in the construction of all hulls completed and accepted by the defendant during each such taxable year, together with profit realized in connection with the installation of machinery in each hull so completed, delivered and accepted.

47. The plaintiff received a total sum of $10,223,975.52 from the defendant in payment for the construction of hulls and the installation of machinery under the said seven contracts. The cost and expenses incurred in connection with the construction of the said hulls and installation of machinery wasPage 270$7,714,534.43, making the plaintiff's net receipts under such contracts $2,509,441.09.

The amount received by the plaintiff for each vessel completed, delivered, and accepted during the years 1918 and 1919, together with the costs and expenses incurred in connection with the construction of said hulls and the installation of machinery therein, and the net profits realized by the plaintiff in connection with each vessel so constructed, delivered, and accepted, are shown as follows:

============================================================================================================== E.F. | | Date Vessel | Total Receipts | Total Cost of | Profit on C. | Name of Vessel. | was Delivered | for 1918 and | Each Vessel. | Sale of No. | | and Accepted. | 1919. | | Each Vessel. -----|---------------------------------------|----------------|----------------|---------------|-------------- 55 | Abrigada ............................ | Aug. 31, 1918 | $469,036 52 | $360,607 90 | $108,428 62 56 | Wishkah ............................. | July 3, 1918 | 475,880 15 | 355,700 05 | 120,180 10 57 | Kaskakia ............................ | July 26, 1918 | 469,077 61 | 359,275 04 | 109,802 57 58 | Blackford ........................... | Aug. 23, 1918 | 463,087 82 | 362,698 75 | 100,389 07 | (Hull contract, May 19, 1917.) | | | | 998 | Bromela ............................. | Sept. 21, 1918 | 511,929 80 | 370,481 96 | 141,447 84 999 | Brompton ............................ | Dec. 31, 1918 | 518,375 92 | 386,732 38 | 131,643 55 1000 | Broncha ............................. | Dec. 7, 1918 | 502,488 15 | 363,877 44 | 138,610 71 1001 | Brookdale ........................... | Jan. 9, 1919 | 506,703 44 | 383,043 14 | 123,660 30 | (Hull contract, Nov. 28, 1917.) | | | | 1059 | Brookfield .......................... | Apr. 3, 1919 | 492,063 63 | 413,941 15 | 78,122 48 1060 | Brookhaven .......................... | Apr. 23, 1919 | 483,507 19 | 404,668 54 | 78,838 65 1061 | Brookland ........................... | June 10, 1919 | 484,659 11 | 425,659 21 | 59,000 90 1062 | Brookside ........................... | July 3, 1919 | 483,048 94 | 422,713 29 | 60,335 65 | (Hull contract, Dec. 29, 1917.) | | | | 1892 | Grayling ............................ | July 16, 1919 | 482,986 94 | 408,596 75 | 74,390 19 1893 | Gray Eagle .......................... | Aug. 6, 1919 | 483,980 32 | 392,962 85 | 91,017 47 1894 | Mannehocking ........................ | Sept. 5, 1919 | 485,390 02 | 423,961 62 | 61,428 40 1895 | Gray Cloud .......................... | Sept. 26, 1919 | 487,435 05 | 384,612 41 | 102,822 64 1896 | Aberdeen ............................ | Oct. 6, 1918 | 493,807 25 | 421,788 37 | 72,018 88 | (Hull contract, June 8, 1918.) | | | | 2677 | Adria ............................... | June 4, 1919 | 453,474 14 | 311,589 09 | 141,885 05 2678 | Agron ............................... | June 19, 1919 | 448,058 65 | 268,772 25 | 179,266 40 2679 | Agathon ............................. | May 19, 1919 | 384,019 39 | 237,883 65 | 146,135 74 2680 | Agylha .............................. | July 18, 1919 | 445,077 24 | 254,969 59 | 190,107 65 2681 | | Amount awarded by government in | | | | 2682 | | 1919 upon cancellation of contract | | | | 2683 | No. .............................. | .............. | 77,000 00 | ........... | 77,000 00 2684 | | | | | | | | Amount awarded by government in | | | | | 1919 upon cancellation of contract | | | | | No. .............................. | .............. | 122,888 23 | ........... | 122,888 23 --------------------------------------------------------------------------------------------------------------

Included in the above receipts are the sums of $77,000, referred to in finding 7, supra, and $122,888.23, finding 25.

48. During 1917 and 1918, the plaintiff built a schooner, Marie de Ronde, at a cost of $441,331.42, under a contract with a private concern, for which it received $475,000 in full, thus making a profit of $33,668.58.

49. In 1919 the plaintiff built four barkentines of its own for the purpose of sale, at a cost of $731,199.68, and sold them in the latter part of 1920 for $300,000, a difference of $431,199.68.

Plaintiff valued its inventories for the years 1918, 1919, and 1920 at cost, and so stated in its original returns filed for each of said years. The four barkentines were carried in plaintiff's inventory at the close of 1919 at $731,199.68, the cost price thereof, and were also reflected in plaintiff's opening inventory for the year 1920 at the same cost price.

It is not shown by any competent evidence that the market value of the barkentines on December 31, 1919, or on January 1, 1920, was any less or different from the cost value at which they were carried in the plaintiff's closing and opening inventories, respectively, for the said years.

50. Plaintiff duly filed its income and profits tax returns as required by law for the years 1918, 1919, and 1920, and in its original returns reported the following amounts as income and tax due, and paid the tax as indicated, and no additional payment of tax has been made:

========================================================= Year. | Net Income. | Tax due. | Tax Paid. ----------------|-------------|-------------|------------ 1918 .......... | $194,354 62 | $150,316 21 | $103,231 06 1919 .......... | 406,981 34 | 317,999 29 | 213,155 34 1920 .......... | None. | None. | None. ---------------------------------------------------------

On or about December 13, 1919, the plaintiff filed an amended return for the year 1918, and on or about June 28, 1921, anPage 271amended return for 1920; these two amended returns showing net income and tax liability as follows:

========================================= Year. | Net Income. | Tax Liability. -----------|-------------|--------------- 1918 ..... | $206,372 46 | $160,218 91 1920 ..... | 102,996 12 | 63,761 31 -----------------------------------------

On or about November 3, 1924, plaintiff filed amended returns for the years 1918, 1919, and 1920, which amended returns show the following:

============================================= Year. | Net Income. | Tax Liability. -----------|-----------------|--------------- 1918 ..... | $33,668 58¹| None. 1919 ..... | 608,167 88²| None. 1920 ..... | 57,184 19²| None. ---------------------------------------------

The tax of $150,316.21 shown due for 1918 was assessed by the Commissioner of Internal Revenue in due course, and on September 2, 1920, the Commissioner increased the assessment by $9,902.70, making the total assessment for 1918, $160,218.91.

The tax of $317,999.29 shown as due for the year 1919 was assessed by the Commissioner in due course.

On January 6, 1922, the Commissioner issued an assessment certificate purporting to show a tax liability on the part of plaintiff of $63,761.31 for the year 1920.

On July 12, 1922, the Commissioner of Internal Revenue rejected a claim of plaintiff for abatement of $104,843.95 taxes for the year 1919, being the difference between the tax of $317,999.29 shown as due in the original return and $213,155.34, the amount paid.

51. For the year 1918, plaintiff reported on its original income tax return all profits on sales of vessels completed, delivered, and accepted during said year except as to the vessel Brompton. The records of the plaintiff indicated that said vessel Brompton had been completed during 1919, whereas internal revenue agents, upon investigation, discovered that said vessel had in fact been completed and accepted by defendant during 1918, and, upon the reaudit, the Commissioner of Internal Revenue included the profit realized upon the construction of said vessel in plaintiff's income for 1918.

For the year 1919 plaintiff reported on its original income tax return all profits on the sales of vessels completed, delivered, and accepted during said year except as to vessels constructed under hull contract No. 468 W.H., dated September 12, 1918. All the profits realized in connection with the construction of said vessels, together with amounts awarded to the plaintiff in 1919 upon the cancellation of said contracts during said year, were reported for tax purposes in the year 1920. Upon the reaudit of the tax liability of said company the Commissioner of Internal Revenue restored to income for 1919 all profits realized in connection with the four vessels completed and accepted during 1919 under contract 468 W.H. September 12, 1918, and amounts awarded to the plaintiff by the government in 1919 upon the cancellation of contracts.

Plaintiff in its return for the year 1920 stated that it did not report the profits realized on the four vessels completed and accepted during the year 1919 under contract No. 468 W.H., and the amount awarded to the plaintiff by the government in 1919 on account of the cancellation of contracts because "the contract from which the income arose is still unsettled."

52. The original return for the year 1919 omitted to deduct anything for loss on barkentines referred to in finding 49, supra. The amended return for 1919, filed on or about November 3, 1924, deducted the $431,199.68 loss on barkentines for the year 1919.

53. The amended returns filed on or about November 3, 1924, computed income on a basis which showed the receipts and expenses on account of all the government contracts held in suspense pending determination of the profits or losses thereon under the various claims and counterclaims involved in this suit.

54. On March 19, 1921, the Commissioner of Internal Revenue advised the plaintiff by letter that its income and profits tax for the calendar years 1918 and 1919 had been redetermined, as follows: "For the calendar year 1918 under the provisions of section 328 of the revenue act of 1918 and for the calendar year 1919, under the provisions of section 302 of the revenue act of 1918" — and indicated the total tax assessable in 1918 as $269,797.10 and in 1919, $445,439.14. This letter also stated:

"You are privileged to file at a later date, if you so desire, an application for assessment of the profits tax under the provisions of section 328 of the revenue act of 1918 forPage 272the year 1919, which will be considered when the returns of representative corporations for the year 1919 are available for comparative purposes."

Again, under date of June 19, 1922, the Commissioner of Internal Revenue advised plaintiff by letter that its tax had been redetermined, as follows:

"For the calendar year 1918 under the provisions of section 328 of the revenue act of 1918 and for the calendar year 1919 under the provisions of section 301 of the revenue act of 1918 a detailed tabulation of your tax developed by audit and field investigation is as follows."

The letter continues:

"You are privileged to file at a later date, if you so desire, an application for assessment of the profits tax under the provisions of section 328 of the revenue act of 1918 for the year 1919, which will be considered when the returns of representative corporations for the year 1919 are available for comparative purposes. You will be advised by the collector of internal revenue for your district as to the time and manner of making payment of this additional tax. This letter supersedes office letter addressed to you March 19, 1921."

55. Upon final audit of plaintiff's said returns for 1918, the Commissioner of Internal Revenue determined that its net income for 1918 was $527,991.88, instead of $206,372.46, as reported by plaintiff, and that the correct amount of tax due from plaintiff for 1918 was $360,041.83, instead of $100,218.91, as reported by it. In June, 1922, the Commissioner of Internal Revenue made an additional assessment of $109,578.19 of the said deficiency in tax of $199,823.92, leaving a balance of said deficiency in tax unassessed of $90,224.73. The plaintiff corporation paid $103,321.06 as income and profits tax for 1918, leaving unpaid a balance of the tax as assessed the sum of $166,496.04.

Upon final audit of plaintiff's said return for 1919, the Commissioner of Internal Revenue determined that its net income for 1919 was $847,446.81 instead of $406,981.34, as reported by plaintiff, and that the correct tax due from plaintiff for 1919 was $584,099.67 instead of $317,999.29, as reported. In June, 1922, the said Commissioner assessed against the plaintiff the deficiency in tax found due for 1919. The total payments made by plaintiff as income and profits tax for 1919 was $203,155.34, leaving a balance due and unpaid as income and profits tax for 1919 of $370,944.33.

Claims for abatement of the additional amount of the deficiency assessments aforesaid were immediately thereafter filed with the collector of internal revenue for the district of Washington. No action on these claims appears to have been had.

On December 18, 1923, plaintiff filed with the collector of internal revenue for the district of Washington a claim for refund of $116,341.57 of the income taxes paid by it for the years 1917 to 1920, inclusive, requesting a refund of said amount for the following reasons:

"This corporation has paid the government income taxes for the years 1917 and 1920, inclusive, to the amount of $316,341.57. The corporation has applied for, and has been granted, consideration of its assessments for these years under the special assessment provisions of the statute but no determination of its assessment under that statute has yet been made by the department. It is our belief, and we so claim, that the total taxes of this corporation in the years 1917 to 1922, inclusive, when finally determined under the special assessment provisions of the statute will not exceed $200,000, leaving an overpayment of $116,341.57."

This claim for refund has not been acted upon by the Commissioner of Internal Revenue.

56. In his audit and computation of plaintiff's tax liability for the years 1918 and 1919, shown in finding 55, the Commissioner of Internal Revenue adopted the basis employed by the plaintiff in its original returns for reporting income received in connection with government contracts.

57. The vessels involved in this action were constructed by the plaintiff under continual inspection during the progress of the work. Before it was launched, each vessel was subjected to a water test for leaks. If any defects were found, they were remedied, and, when launched, each vessel was properly constructed and water-tight.

58. Government inspectors were present in plaintiff's yard day and night and made inspections during the construction of these vessels. Before launching, the government inspectors gave each vessel a water test to determine if any leaks were present. After launching and undergoing a 200-mile trip,Page 273each vessel was dry-docked and again subjected to inspection by the defendant. After this dry-docking inspection, another trial run took place, at which time additional inspection was made by the Fleet Corporation.

After such inspections, defendant accepted each of the vessels from the plaintiff and issued acceptance certificates for each vessel except the Agathon, which was destroyed by fire before completion. These certificates cover both hulls and machinery installation, except as to the last four hulls, in regard to which the machinery installation contract was canceled.

The acceptance certificates issued by the defendant provided that —

"This acceptance is made at this time without waiver of any of the terms and conditions imposed upon the Grays Harbor Motorship Corporation under said contract."

59. Prior to the acceptance by the defendant of each completed vessel they were inspected and passed by the United States Department of Commerce Steamboat Inspection Service and certificates of inspection issued by this organization.

Each of the completed vessels was examined and passed by inspectors of the San Francisco Board of Marine Underwriters.

Lloyd's Register of Shipping (Lloyd's) is a body composed of shipowners, underwriters, merchants, shipbuilders, and engineers; they employ practical surveyors, shipbuilders, and engineers to survey vessels during construction and during the life of the vessel. During the course of construction the surveyor in that district sees that the work is carried out in accordance with the approved plans and rules of the society. After the vessel is completed, a report is submitted by the surveyor to the committee of Lloyd's, and, if the vessel has been properly constructed, it is then classified. Only surveyors who have been shipbuilders or engineers by profession are employed by Lloyd's as surveyors. Lloyd's is known internationally as a classification society.

Each of these vessels except the Blackford was inspected by Lloyd's and given the highest classification for vessels of their type.

The Blackford was on Lloyd's list for classification but was lost at sea in a severe storm before she could be classed.

Plaintiff's yard was efficiently run, and and the vessels turned out were among the best type of wooden ship built in this country at that time.

60. Prior to the filing of the counterclaim for $409,807.97 on April 28, 1924, for repairs on hulls necessary on account of faulty construction, the only claims for repairs on any of these vessels that had been brought to the attention of the plaintiff amounted to less than $3,000. Plaintiff was never asked to make any of these repairs, and they were not made with either the knowledge or consent of the plaintiff. Defendant's claim that these alleged repairs were made necessary by reason of faulty construction of the vessels is not supported by the evidence.

61. Except as the items included in defendant's counterclaim of "Bills Receivable" may also be included in the foregoing findings of fact, they are not supported by competent evidence.

62. During the course of construction and after completion, the Blackford was inspected and tested by inspectors of the plaintiff and of the Fleet Corporation. Upon completion, the defendant accepted the Blackford, and on August 23, 1918, issued to the plaintiff an acceptance certificate covering both hull and machinery installation, which certificate provides that "this acceptance is made at this time without waiver of any of the terms and conditions imposed upon the Grays Harbor Motorship Corporation under said contract." This vessel was inspected and passed by the San Francisco Board of Marine Underwriters and by the United States Department of Commerce Steamboat Inspection Service, which issued a certificate of inspection to the plaintiff.

63. On the arrival of the Blackford at San Francisco from Seattle, just prior to her loss, it was discovered that she had 37 inches to 47 inches of water in her. Although ample dry-dock facilities were available, no repairs to the leak were made nor any report of this condition rendered. The Shipping Board did not locate or repair the leak before sailing. The cause of the leak is not known. After leaving San Francisco, bound for Chile, the Blackford ran into a tropical hurricane off Lower California in which several other vessels were lost. During this storm water entered the ship faster than it could be pumped out, because of the ineffectiveness of her pumps and auxiliaries which had been supplied by the defendant.

Although the storm had abated, the vessel was abandoned by the officers and crew. ThePage 274vessel did not sink, but floated ashore, and was later surveyed by Mr. L. Curtis Shipping Board surveyor. Mr. Curtis refused to give plaintiff a copy of his survey report on the ground it was confidential matter with the Shipping Board, but stated that the Blackford's hull was tight and sound and that her loss must have been due to incompetence of the Shipping Board crew.

64. The crew of the Blackford was green and inexperienced. The officers and engineers of the Blackford were tried by the United States before the United States steamboat inspectors at Seattle, who found the master, the first, second, and third mates, the chief engineer, and the first, second, and third assistant engineers guilty of negligence on this voyage.

Cletus Keating, of New York City (Staunton Williams and H. Maurice Fridlund, both of New York City, on the brief), for plaintiff.

W.W. Scott, of Washington, D.C., and Herman J. Galloway, Asst. Atty. Gen. (I.V. McPherson, E.O. Hanson, and C.M. Charest, all of Washington, D.C., on the brief), for the United States.

Before BOOTH, Chief Justice, and LITTLETON, GREEN, and WILLIAMS, Judges.

WILLIAMS, Judge.

The plaintiff is a corporation organized under and by virtue of the laws of the state of Washington, with its executive offices and main place of business in the city of Seattle, Wash.

During the years 1917 and 1918, the plaintiff entered into five contracts with the United States Shipping Board Emergency Fleet Corporation for the construction of a total of twenty-five wooden ship hulls.

The plaintiff during the years 1918 and 1919 fully completed all the hulls, seventeen in number, covered by the first four contracts, to wit, contracts No. 7 W.H., No. 148 W.H., No. 148 W.H. supplemental A, and No. 148 W.H. supplemental B, and completed four of the eight hulls covered by contract No. 468 W.H.

The twenty-one hulls completed as aforesaid were all delivered to the defendant, and accepted by it during the taxable years 1918 and 1919, except hull No. 2679, the Agathon, which was destroyed by fire at about the time of its completion. The plaintiff, however, was compensated for the loss of this hull through insurance carried on the same, and it is in no way an issue in this suit.

Four of the eight hulls covered by contract No. 468 W.H. were not completed; the contract as to them being canceled and suspended by the United States Shipping Board Emergency Fleet Corporation on November 23, 1918. Just compensation for the loss sustained by reason of the partial cancellation and suspension of this contract is plaintiff's first cause of action.

The plaintiff in 1917 entered into a contract with the defendant, machinery installation contract No. 1, which contract provided for the installation by the plaintiff of propelling machinery and auxiliary equipment in the eight wooden hulls covered by contract No. 7 W.H. and contract No. 148 W.H. This contract was fully executed by the plaintiff.

In 1918 the plaintiff entered into another machinery installation contract with the defendant, contract No. 35 M.I., whereby the plaintiff was to install the propelling machinery in the seventeen remaining hulls covered by the several hull construction contracts above set out. Under this contract the plaintiff installed machinery in nine out of the seventeen hulls and did not make installation in the remaining eight, as the contract as to them was, on April 21, 1919, canceled and suspended by the defendant.

The plaintiff's second cause of action is a claim for just compensation for the loss it sustained by reason of the partial cancellation and suspension of this contract.

For the third cause of action the plaintiff says there is due it the sum of $30,393.30 for miscellaneous services rendered by the plaintiff in the performance of its several contracts for which it has not been compensated.

The plaintiff in its petition states a fourth cause of action growing out of the failure of the defendant to fully perform a contract which it has entered into with one McGee, on June 24, 1919, which contract had been assigned by McGee to the plaintiff, under the terms of which the defendant had agreed to supply the said McGee with 5,000,000 feet of lumber at a price of $17.50 per thousand feet board measure. The plaintiff claims there is due it under this claim the sum of $28,734.13.Page 275

As a fifth cause of action, the plaintiff claims it has overpaid its taxes in the sum of $103,231.06 for the year 1918, and has overpaid its taxes in the sum of $213,155.34 for the taxable year 1919, which sums it seeks to recover with interest from the dates of payment.

The plaintiff concedes that, against the total of its claims under the several causes of action set out in its petition, the defendant is entitled to the following credits: (1) $122,888.23 for cash advanced by the defendant, December 1, 1919, on account of the plaintiff's claims arising out of the partial cancellation of contract No. 468 W.H., and M.I. No. 35; (2) the sum of $77,000, the amount of the initial payment made to the plaintiff upon the execution of contract No. 468 W.H., as provided by the terms of the contract; (3) the sum of $14,000 for materials purchased at various times by the plaintiff from the defendant; and (4) the sum of $24,100, the amount realized by the plaintiff on the sale of materials on hand after the cancellation of the aforesaid contracts.

The amount claimed by the plaintiff as due it under its several causes of action, exclusive of interest claimed as a part of the just compensation to which it is entitled because of the partial cancellation of its contracts, and exclusive of interest on the sums alleged to be overpayments of its taxes for the years 1918 and 1919, aggregates $637,515.60.

The defendant has filed a counterclaim in the sum of $2,778,482.10, consisting of the following items:

1. Repairs on hulls necessary on account of defective construction .................. $409,807.97 2. Bills receivable ............... 501,218.08 3. Construction cost, U.S.S. Blackford ..................... 684,775.63 4. Lumber sold and delivered ...... 44,259.21 5. Cancellation of materials converted ..................... 208,421.21 6. Unpaid taxes and penalties ..... 930,000.00

These claims and counterclaims are presented in a voluminous record consisting of 165 exhibits and more than 1,000 pages of printed testimony. The contentions of the respective parties have been ably presented by counsel in oral argument and in elaborate briefs. The numerous questions of fact involved and their complicated nature have necessarily made the statement of ultimate facts as set out in the findings quite lengthy, and a restatement of these facts in detail, further than is absolutely necessary, will be avoided in our discussion of the issues presented.

Under the provisions of the Act of June 15, 1917, c. 29, § 1 (40 Stat. 182), the President of the United States was authorized to place orders with any person for ships or material as the necessities of the government might require during the period of the war. The act also authorized the President to modify, suspend, or cancel such contracts.

The President, by an executive order, dated July 11, 1917, delegated to the United States Shipping Board Emergency Fleet Corporation all the powers conferred upon him by the above act, so far as applicable to the construction of ships, or the requisitioning of vessels, material for ship construction, or contracts for the construction of ships.

Under this delegation of power from the President, the United States Shipping Board Emergency Fleet Corporation had authority to make the several contracts with the plaintiff hereinbefore set out, and likewise had the authority to suspend or cancel the same.

The plaintiff's direct loss because of the partial cancellation of contract No. 468, exclusive of interest and prospective profits (finding 12), is as follows:

1. Hull plant (finding 19) ....... $ 37,012.35 2. Cancellation materials (invoice finding 11) less withdrawals and sales (findings 16 and 18) .................. 198,021.14 3 Care of and storing cancellation materials (finding 14) 16,872.22 4. Incidentals ................... 25,000.00 ___________ $276,905.71

Its loss because of the cancellation and suspension of machinery installation contract No. 35, exclusive of interest on or prospective profits (finding 24), is as follows:

1. Machinery installation plant ... $52,135.03 2. Incidentals .................... 10,000.00 __________ $62,135.03

There is due the plaintiff on miscellaneous items in controversy the following amounts:Page 276

1. For clinch rings paid for by plaintiff and not received (finding 12) .................... $ 3,809.75 2. For work on a vessel of the defendant (finding 26) .......... 241.23 3. For extra work on hull No. 1893 (finding 27) ............... 230.44 4. For extra work performed by the Todd Dry Dock Company on defendant's hull No. 1062 and erroneously charged to the plaintiff (finding 28) .................... 1,966.25 5. For an erroneous overhead charge to plaintiff on account of work done by the Pacific Construction Co. on defendant's hull No. 1892 (findings 29 and 30) ............ 336.59 6. For balance withheld on contract price for construction of hull No. 1895 (finding 32) ............................. 5,000.00 7. For additional work on hulls Nos. 1893 and 1895 (finding 33) ............................. 1,436.34 8. For extra work on hulls Nos. 2677, 2678, and 2680 (finding 34) ............................. 2,340.00 9. For waterproofing tarpaulin used on hatch cover of hull No. 1894 (finding 35) ........... 260.74 10. For freight demurrage paid by the plaintiff (finding 36) ... 571.65 11. For classification fee paid Lloyds on S.S. Gray Cloud (finding 37) .................... 874.25 12. For repairs to S.S. Kenosha (finding 38) .................... 36.90 13. On account of increased price to the plaintiff of locust wood squares (finding 39) ....... 4,503.87 14. For quantity of ship's felt furnished to Ames Ship Building Corporation by plaintiff at defendant's request (finding 40) .................... 1,075.20 15. On account of money paid by plaintiff to Seattle Plumbing Supply Co. on cancellation of order for valves made at the defendant's direction (finding 41) .................... 1,600.00 16. On account of increased freight rates on materials (finding 42) .................... 11,783.50 __________ $36,066.71

The following counterclaims presented by the defendant are not supported by any competent proof:

1. Repairs on hulls necessary on account of defective construction (findings 57, 58, and 60) ............ $409,807.97 2. Bills receivable (finding 51) ......... 501,218.08 3. Construction cost of S.S. Blackford (findings 62 and 63) ....... 684,735.63 5. Cancellation of materials converted ... 208,421.21

There is due the defendant on its counterclaim No. 4, the Magee lumber contract (findings 43, 44, and 45), the sum of $19,763.22.

The Act of June 15, 1917 (40 Stat. 183), provides:

"Whenever the United States shall cancel, modify, suspend or requisition any contract, make use of, assume, occupy, requisition, acquire or take over any plant or part thereof, or any ship, charter, or material, in accordance with the provisions hereof, it shall make just compensation therefor. * * *"

The Supreme Court has defined just compensation for the taking of property to be the value of such property at the time of the taking, plus such additional amount as will produce the full equivalent of that value paid contemporaneously with the taking. It has also held that interest at the proper rate is the measure by which the amount to be added may be ascertained.

In Seaboard Air Line Railway v. United States,261 U.S. 299,43 S. Ct. 354,356,67 L. Ed. 664, the court said:

"The compensation to which the owner is entitled is the full and perfect equivalent of the property taken. * * * It rests on equitable principles and it means substantially that the owner shall be put in as good position pecuniarily as he would have been if his property had not been taken.

"* * * The requirement that `just compensation' shall be paid is comprehensive and includes all elements and no specific command to include interest is necessary when interest or its equivalent is a part of such compensation. Where the United States condemns and takes possession of land before ascertaining or paying compensation, the owner is not limited to the value of the property at the time of the taking; he is entitled to such addition as will produce the full equivalent of that value paid contemporaneously with the taking. Interest at a proper rate isPage 277a good measure by which to ascertain the amount so to be added. * * *

"The addition of interest allowed by the District Court is necessary in order that the owner shall not suffer loss and shall have `just compensation' to which he is entitled."

In Phelps v. United States,274 U.S. 341,47 S. Ct. 611,612,71 L. Ed. 1083, the court said:

"Judgment in 1926 for the value of the use of the property in 1918 and 1919, without more, is not sufficient to constitute just compensation. Section 177 [of the Judicial Code (28 USCA § 284)] does not prohibit the inclusion of the additional amount for which petitioner contends. It is not a claim for interest within the purpose or intention of that section. * * * The government's obligation is to put the owners in as good position pecuniarily as if the use of their property had not been taken. They are entitled to have the full equivalent of the value of such use at the time of the taking paid contemporaneously with the taking."

The just compensation to which the plaintiff is entitled in this case is the amount of the direct loss resulting to it because of the cancellation of the two contracts, at the time of the cancellation, less the credits due the defendant thereon, with such additional amount as will put the plaintiff in as good a position pecuniarily as it would have been had its total loss been paid contemporaneously with the cancellation of the contracts.

The plaintiff's total loss attributable to the cancellation of the two contracts amounts, exclusive of interest and anticipated profits, to $339,040.74. It is conceded the defendant is entitled to credit on this amount for $77,000, the amount received by the plaintiff upon the execution of contract No. 468 W.H., and for the sum of $122,888.23, the amount awarded to the plaintiff on November 11, 1919, on account of cancellation claims. This leaves $139,152.51 of the amount of the plaintiff's direct loss growing out of the cancellation of the contracts due and unpaid.

The proper measure of the additional amount necessary to give the plaintiff just compensation is interest at the rate of 6 per cent. on the amount of its total loss, treating the items of $77,000 and $122,888.23 as partial payments of the said amount in computing such interest. The additional amount required, computed in this manner, is $108,519.97, which makes the just compensation now due the plaintiff attributable to its loss by reason of the cancellation of the said contracts the sum of $247,732.48.

The controversy between the plaintiff and the defendant as to the plaintiff's tax liabilities for the years 1918 and 1919 turns on two issues:

(1) What is the proper method of reporting the income received by the plaintiff on its seven government contracts during the years 1918 and 1919?

(2) Should the loss sustained by the plaintiff on the four barkentines which it built for sale be deducted from income for the year 1919 or the year 1920?

During the years 1918 and 1919 the plaintiff was engaged on work on seven separate and distinct contracts with the government. Five of these contracts had to do with the construction of wooden hulls, and two covered the installation of propelling machinery in the said hulls.

Each of the five hull contracts provided for the payment to the plaintiff of a fixed and stated sum for the construction of each hull; said sum was due and payable in fixed and stated amounts as the construction work progressed; the balance of the contract price of each hull was due and payable when such hull had been completed, delivered to, and accepted by the defendant. Likewise, the two machinery installation contracts provided for a fixed and definite profit for the installation of machinery in each hull.

The plaintiff kept its books of account on the accrual basis. Its books showed the cost of constructing each hull and also the cost incurred in the installation of machinery in each hull, such costs being shown separately.

Upon the completion and delivery of each hull, the books of account and the records of the plaintiff reflected the cost, the gross receipts, and net profit accrued or arising out of the construction of such hull, and the installation of machinery in such hull, and, at the close of each taxable year involved, the said books of account reflected the profits realized by the plaintiff in the construction of all hulls completed and accepted by the defendant during such taxable year, together with the profit realized in connection with the installation of machinery in each hull so completed, delivered, and accepted.

The plaintiff's original tax return for the year 1918 was made upon the basis on which its books of accounts were kept. It included in its return for that year all profits received by it on all vessels completed, delivered, and accepted during the year, except as to the vessel Brompton (hull No. 999, covered in contract No. 148 W.H.). Upon the reaudit ofPage 278the plaintiff's tax return, it was ascertained that the said vessel was in fact completed, delivered, and accepted by the defendant during the year 1918, and the Commissioner of Internal Revenue included the profit realized by the plaintiff upon the said vessel in plaintiff's income for 1918. The correctness of the Commissioner's determination that the vessel Brompton was completed, delivered, and accepted during the year 1918 is not questioned.

For the year 1919, the plaintiff on its original income tax return reported all profits derived from vessels completed, delivered, and accepted during the year, except as to four vessels constructed, delivered, and accepted under hull contract No. 468 W.H., which contract had been canceled as to four vessels. The profits realized on the four vessels which were completed, delivered, and accepted during the year 1919 covered by the said contract were reported by the plaintiff in its tax return for the year 1920.

Upon the reaudit of the plaintiff's tax return and its tax liability for the year 1919, the Commissioner of Internal Revenue included in income for the year 1919 all profits realized in connection with the four vessels completed and accepted under contract No. 468 W.H. during the year 1919, and also the amount awarded to the plaintiff by the government in 1919 upon the cancellation of contracts.

The plaintiff on December 13, 1919, filed an amended return for the year 1918, showing a tax liability of $160,218.91, and on June 21, 1921, filed an amended return for 1920, showing a tax liability for that year of $63,761.31.

The plaintiff on November 3, 1924, filed amended returns for the years 1918, 1919, and 1920, in which returns all income derived by the plaintiff on its several government contracts for the years 1918 and 1919 was withheld pending a final determination of the various claims and counterclaims involved in this suit. The amended returns are made on the "completed contract" method; it being the contention of the plaintiff that under this method it can withhold the reporting of receipts from each of its seven contracts until they have all been completed, and that such contracts are not completed until all the claims and disputed matters growing out of each of them have been determined.

The amended returns filed November 3, 1924, are based on the theory that none of the plaintiff's seven contracts with the government were completed during the years 1918 and 1919, and that they will not be completed until the exact amount of compensation due the plaintiff, on account of the cancellation in part of two of the contracts, and all other claims and matters in dispute between the parties growing out of the several contracts have been definitely settled; that, until these matters have been adjusted, it cannot be shown whether the plaintiff realized a profit or sustained a loss in connection with the said contracts; and that, pending the ascertainment of such facts, the plaintiff may withhold the reporting for tax purposes the income derived from any and all said contracts.

Article 334 of Treasury Regulation 74 provides:

"Income from long-term contracts is taxable for the period in which income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term `long-term contracts' means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns on the following bases:

"(a) Gross income derived from such contracts may be reported on the basis of percentage of completion * * *.

"(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted, if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income."

The right of a taxpayer to report income from "long-term contracts" on the basis of either of the two options provided in the foregoing regulations is permissible only. He may, as to such income, "prepare his returns" upon either of the bases authorized. It is clear the plaintiff did not avail itself of the option to prepare its returns on the basis of percentage of completion of its contracts.

Assuming that the contracts in this case are long-term contracts, within the meaning of the regulations, the plaintiff's right, under the second option provided in the regulations, to report its income in the taxable year in which such contracts are finally completed is predicated on two conditions: (1) That the plaintiff elected as a consistent practice to so treat such income; and (2) that such method clearly reflected the net income.

Did the plaintiff in this case elect, as a consistent practice, to treat the income derivedPage 279from its several contracts on the "completed contract" basis?

We are of the opinion that it did not. Its books of account were not kept on the "completed contract" basis, showing the receipts and expenditures and net profits as to each of its contracts separately. The "completed vessel" is the unit used by plaintiff on its books and accounts in accruing the receipts and expenditures and determining its profits in connection with the construction of all hulls and the installation of machinery under all of its contracts. This fact, together with the further fact that the plaintiff in its original tax return for the year 1918, the year in which it first reported income from any of its contracts, treated the "completed vessel," not the "completed contract," as the basis for determination of its income, clearly shows that the plaintiff did not elect as a consistent practice to treat the income from its several government contracts on the "completed contract" basis, to be reported, as income, in the taxable year in which such contracts were finally completed. It is significant also, as showing how the plaintiff elected to have its income treated, to note that in its 1918 return it reported income derived from five out of the seven contracts, only one of which, contract No. 7 W.H., was fully completed within the year, thus reporting income for the year from four contracts, none of which were completed.

At no time, either in the method of keeping its books and records or in its original or amended tax returns reporting income from these contracts prior to the filing of its amended returns on November 3, 1924, for the years 1918, 1919, or 1920, did the plaintiff indicate its election to have the income from such contracts treated on the "completed contract" basis.

The plaintiff cannot, in our opinion, by virtue of amended returns, filed six and five years, respectively, after its original tax returns for 1918 and 1919 were made, make the election provided in the regulation of treating as a consistent practice such income on the "completed contract" basis, and reporting income therefrom in the taxable year in which such contracts are finally completed. The plaintiff cannot in the year 1924 make its election as to how income accruing to it during the years 1918 and 1919 shall be treated.

The second condition to the plaintiff's right to report the income from its contracts in the taxable year in which such contracts are finally completed is that such method clearly reflects the net income.

It is conceded the net receipts accruing to the plaintiff, during the taxable years 1918 and 1919, in connection with its several government contracts, amount to the sum of $2,509,441.09.

The receipt of this large income by the plaintiff during the years in question is not denied. It is also shown that a part of this income was, during each of the years in question, distributed in the form of dividends by the plaintiff to its shareholders. The whole of this income is held in suspense by the plaintiff on its amended returns of November 3, 1924, with the result that it is made to appear from the said returns that, instead of making a profit during the years 1918 and 1919, it actually incurred a loss therefrom.

In view of the fact that the plaintiff's books of account clearly establish the accrual of this income to the plaintiff during the years 1918 and 1919, and the usually accepted rule that the income tax is an annual tax, and that income must be reported for tax purposes in the year in which it is determinable, and that such income shall be computed in accordance with the method of accounting regularly employed by the taxpayer in keeping its books, where such method clearly reflects income, we are of the opinion, the plaintiff is not entitled to have its tax liability for the years 1918 and 1919 computed on the basis of its amended returns filed November 3, 1924. The plaintiff neither elected, as a consistent practice, to treat the income from its several government contracts on the "completed contract" basis, nor does such method clearly reflect its income for the years in question.

The plaintiff urges that, even if income derived from the uncanceled contracts is held to be properly reported on the basis of "completed vessels" in the years in which such vessels are completed, delivered, and accepted, the plaintiff nevertheless is entitled to hold in suspense the net receipts derived for the year 1919, from the four hulls, completed, delivered, and accepted, under contract No. 468 W.H., which contract was canceled as to four other hulls, until the amount due the plaintiff on account of such cancellation has been determined in this suit.

It is shown by the plaintiff's books and records, the correctness of which is not questioned, that it derived a net profit of $563,013.49 out of the four hulls constructed by it under this contract. We think this profit isPage 280taxable income to the plaintiff for the year 1919. The fact that the contract under which these four hulls were constructed was canceled as to certain other hulls which were not constructed does not in any way affect the plaintiff's profit derived from the four hulls which were actually constructed, delivered, and accepted under the said contract. Under the provisions of the canceled contract, the plaintiff was not entitled to any profit as to those hulls, the construction of which was canceled. It was entitled only to just compensation for loss incurred by it because of such cancellation.

Whatever compensation it might receive on account of the cancellation of certain hulls covered in the contract would neither increase nor decrease its certain and determined profits in connection with the four hulls that were constructed and accepted.

The Commissioner of Internal Revenue properly included the profits derived by the plaintiff from the construction of these four hulls in its income for the year 1919.

Also his action in including in income for the year 1919 the amount awarded by the government to the plaintiff during the year on account of the two canceled contracts was correct. Article 51 of Treasury Regulations No. 62 provides that "such items as claims for compensation under canceled Government contracts constitute income for the year in which they are allowed, or their value is otherwise definitely determined." The amounts awarded to the plaintiff and received by it during the year 1919, on account of its claim growing out of the cancellation of the two canceled contracts, was income for that year. Whatever additional amount, if any, may be awarded the plaintiff on its cancellation claim, will be income, to the plaintiff, in the year in which it is allowed or determined.

Even if the plaintiff is correct in its position that it is entitled to report the income from its several government contracts on the "complete contract" method, it would be required to report the income for each separate contract in the year in which that particular contract is finally completed. It would not be permitted to withhold the reporting of income from a contract, finally completed, until other contracts upon which it is working are also completed.

Where the completed contract method is adopted for reporting income on long-term contracts, such income is properly reported when the work under the contract has been completed and accepted. That is the date for the determination of the profit involved in the contract. Thomas Cronin v. Lewellyn (D.C.)9 F.2d 974.

A long-term contract is completed when the work has been performed on the one hand, and payment of the contract price made on the other. Mesta Machine Co. v. Commissioner,12 B.T.A. 523.

In the instant case, contract No. 7 W.H., providing for the construction of four hulls was finally completed during the taxable year 1918. These four hulls were all completed by the plaintiff and were received, and accepted, by the defendant within the year. Under the completed contract method of reporting income, the plaintiff would be required to report the income from this contract for the year 1918.

Likewise, the thirteen wooden hulls covered in contracts Nos. 148 W.H., 148 W.H. supplement A, and 148 W.H. supplement B, were all completed, delivered, and accepted, and the plaintiff received the contract price for each of said hulls within and before the close of the taxable year 1919. Also machinery installation contract No. 1 was finally completed during the year 1919.

Under the completed contract method of reporting income, the plaintiff would be required to report the income from these four completed contracts on its 1919 tax return.

Plaintiff in its amended returns for the years 1918 and 1919 does not report the income from these completed contracts for the years in which they were finally completed. Consequently the plaintiff has not, either in its original tax returns, or in its amended returns for the years in question, reported its income under the completed contract method.

The plaintiff's contention that, under the completed contract method of reporting income, a contract is not finally completed until all claims and counterclaims growing out of such contract have been definitely settled, cannot be sustained.

Profits accruing from a completed contract may not be held in suspense pending the ascertainment and adjustment of claims and contingent liabilities growing out of such contract.

If expenses be incurred by a taxpayer later on account of such liabilities, such expenditures are properly deducted from income in the year in which they are paid. Harrison v. Heiner (D.C.)28 F.2d 985; Cronin v. Lewellyn, supra.

However, in view of our decision that the plaintiff did not elect, as a consistent practice,Page 281to treat the income from its various contracts on the completed contract basis, and did not use that method originally in reporting such income for the years in question, and that such method does not clearly reflect its income, further discussion of what would be a correct accounting of the plaintiff's income under that method is not necessary.

During the year 1919, the plaintiff constructed for its own use and for the purpose of sale four barkentines at a cost of $731,199.68. In the latter part of the year 1920, the plaintiff sold these four barkentines to a corporation, whose stockholders were identical with the stockholders of the plaintiff, for a consideration of $300,000 resulting in a loss of $431,199.68.

In its closing inventory for the year 1919, the plaintiff carried these barkentines at $731,199.68, the cost thereof, and also carried them on its opening inventory for the year 1920 at the same figure.

In its original tax return for the year 1919, the plaintiff did not claim a deduction for its barkentine loss for that year, but did claim such deduction for the year 1920 on its original tax return for that year.

In its amended returns for the years 1918, 1919, and 1920, filed November 3, 1924, the plaintiff deducted its barkentine loss of $431,199.68 from income for the year 1919. The Commissioner of Internal Revenue allowed the deduction for the year 1920 in conformity with the plaintiff's original return.

It is not shown that the market price of the four barkentines on December 31, 1919, was any less or different from the cost price of the same. The fact that the barkentines were sold at a loss, nearly a year after they were inventoried by the plaintiff at cost does not establish the fact that such sale price was the market value of such barkentines at the date of the inventory. Conceding that plaintiff was entitled to inventory the four barkentines on December 31, 1919, on the basis of "cost or market, whichever is lower," it is incumbent on the plaintiff to establish, by competent proof, the market value of the barkentines as of that date, if they are to be inventoried at market price. This the plaintiff has failed to do. The action of the Commissioner in deducting the loss incurred by the plaintiff on account of the barkentines for the year 1920, the year in which they were sold, and in which both the plaintiff's books and its original tax return shows the loss was incurred, is correct.

If, however, the amended returns filed November 3, 1924, are correct, the plaintiff is not entitled to recover the taxes paid for the years 1918 and 1919, unless within the time prescribed by law it filed a proper and sufficient claim for the refund of such taxes.

The claim for refund filed December 15, 1923, set out the basis of the plaintiff's claim as follows:

"This corporation has paid the Government income taxes for the years 1917 to 1920, inclusive, to the amount of $316,341.57. The corporation has applied for, and has been granted, consideration of its assessments for these years under the special assessment provisions of the statute, but no determination of its assessment under that statute has yet been made by the department.

"It is our belief, and we so claim, that the total taxes of this corporation for the years 1917 to 1922, inclusive, when finally determined under the special assessment provisions of the statute will not exceed $200,000, leaving an overpayment of $116,341.57."

This claim is attacked by the defendant as insufficient, in that such claim does not set out the same ground for a refund that is relied upon by the plaintiff for recovery in this suit.

The applicable Treasury Regulations (article 1036 of Regulations No. 62) provide in part as follows:"Claims for Refund of Taxes Erroneously Collected. — Claims by the taxpayer for the refunding of taxes and penalties erroneously or illegally collected shall be made on Form 843. In this case the burden of proof rests upon the claimant. All the facts relied upon in support of the claim should be clearly set forth under oath. * * *"

Section 3226 of the Revised Statutes, as amended by the Revenue Act of 1921 (26 US CA § 156), provides:

"No suit or proceeding shall be maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof. * * *"

The rule is well established by decisions of this and other courts that compliance with the statutory requirements with reference toPage 282the filing of claims for refund is a condition precedent to the right of a taxpayer to maintain a suit for the recovery of taxes claimed to have been illegally or erroneously collected. Feather River Lumber Co. v. United States, 66 Ct. Cl. 54; Hazel M. Davis v. United States, 67 Ct. Cl. 643; Swift Co. v. United States, 68 Ct. Cl. 97.

In Feather River Lumber Co., supra, the court said:

"While it has been held that the form of the claim for refund is not essential, there has been no deviation from the well-established rule that the aggrieved taxpayer must assert his right to a refund by an application to the commissioner containing the grounds upon which he relies for such recovery before he will be permitted to bring an action for same."

The Circuit Court of Appeals for the Eighth Circuit in Red Wing Malting Co. v. Willcuts,15 F.2d 626,634, 49 A.L.R. 459, held:

"The precise ground upon which the refund is demanded must be stated in the application to the Commissioner, and we think, if that is not done, a party cannot base a recovery in the court upon an entirely different and distinct ground from that presented to the Commissioner."

In J.H. Williams Co. v. United States,46 F.2d 155, decided March 25, 1930, by the United States District Court for the Eastern District of New York, the court said:

"The law is well settled that the purpose of a refund claim is to inform the Commissioner of the nature of a taxpayer's complaint and to give the Commissioner an opportunity to act upon the complaint on the merits, and to correct any errors, mistakes or omissions made by his department before the taxpayer is allowed to bring an action based upon such errors, mistakes or omissions. The precise ground upon which the refund is demanded must be stated in the application to the Commissioner. It is a required precedent or limitation that the action shall be upon the same grounds and only such as are presented in the claim."

Under the rule announced in the cases cited, the refund claim filed by the plaintiff in this case is clearly insufficient to support an action for the recovery of the taxes paid by it for the years 1918 and 1919. The refund claim filed by the plaintiff did not request a refund of taxes on the ground that its income should have been reported on the completed contract basis, upon which basis it had no tax liability for either of the years in question. On the other hand, the claim expressly recognizes that the plaintiff did derive taxable income for the said years from its contracts. The claim for refund is based wholly upon the ground that the plaintiff had applied for and had been granted consideration of its assessments for the years in question under the special assessment provisions of the statute, in which case, it was asserted in the claim, the plaintiff's total tax liabilities for the said years would not exceed $200,000, leaving an overpayment of $116,341.57.

This is an entirely different claim from that relied upon by the plaintiff in this suit. In its refund claim, the plaintiff sought a return of taxes imposed upon income for the years 1918 and 1919, which it did not then claim was wrongfully reported for the said years, but the tax upon which it claimed was in excess of the amount it would be required to pay under the special assessment provisions of the statute. The claim did not protect plaintiff's right to sue on any other ground.

The plaintiff is now seeking a recovery of all the taxes paid by it for the years in question on the ground that income from its government contracts was improperly reported and that it had no tax liability whatever for the said years. The refund claim does not mention the loss incurred by the plaintiff on the barkentines, and no claim is made that this loss should be deducted for the year 1919, which claim the plaintiff urges in this suit.

It is clear that the ground relied upon by the plaintiff in this suit for the recovery of taxes paid for the years 1918 and 1919 is entirely different and distinct from the ground stated in the claim for refund presented to the Commissioner of Internal Revenue. The plaintiff, therefore, cannot maintain its action in this court for the recovery of the said taxes.

The final computation of the plaintiff's tax liability for the years 1918 and 1919 shows the tax due from the plaintiff for 1918 was $360,041.83, instead of $100,218.91, as reported by it, and the amount due for the year 1919 was $584,099.67, instead of $317,999.29, as originally reported by plaintiff.

In June, 1922, the Commissioner made a deficiency assessment against the plaintiff for the year 1918 of $109,578.19, leaving a balance of the deficiency in tax for that year as determined by him of $90,224.73 unassessed.Page 283

In June, 1922, the Commissioner made an additional assessment against the plaintiff for the year 1919 for the amount of the deficiency found due for the said year.

In making the computation of the plaintiff's tax liability for the years 1918 and 1919, the Commissioner of Internal Revenue did not change or alter the method of reporting income adopted by the plaintiff in its original returns for the said years, only changing such returns so as to make them conform to the facts as to the years in which various vessels were completed, delivered, and accepted, which changes have already been discussed.

There is no controversy between the parties as to the figures used. They are all taken from the plaintiff's books and records, and are accepted by both the plaintiff and defendant as correct.

Holding, as we do, that the action of the Commissioner of Internal Revenue was correct in computing the plaintiff's tax liability for the years in question on the basis of accrued receipts and expenditures as to each vessel when completed, accepted, and delivered, as such receipts and expenditures are shown by its books and records, and that the barkentine loss is deductible for the year 1920, the defendant is entitled to recover on its counterclaim (No. 6) for unpaid taxes and penalties for the years 1918 and 1919 the sum of $537,440.37, the difference between the amount of taxes assessed against it for the said years and the amounts paid thereon, together with such interest and penalties on the said unpaid taxes as may be provided by law.

There is due the plaintiff on the first and second causes of action alleged in its petition the sum of $247,732.48 as just compensation for loss resulting to it from the cancellation by the defendant of contracts Nos. 468 W.H. and 35 M.I. There is due the plaintiff under its third cause of action the sum of $36,066.71 for miscellaneous services rendered the defendant in connection with the several contracts, making a total sum due the plaintiff of $283,799.19.

There is due the defendant on its counterclaim No. 4 (the Magee lumber contract) the sum of $19,763.22; and on its counterclaim No. 6 for unpaid taxes for the years 1918 and 1919 there is due the defendant the sum of $537,440.37, or a total of $557,203.59.

The defendant is therefore entitled to judgment against the plaintiff for the sum of $273,404.40. Judgment is therefore awarded in favor of the United States against the plaintiff for the said amount. It is so ordered.

WHALEY, Judge, did not hear this case, and took no part in its decision.

Burned. ↩
Less 1919 loss. ↩
Loss. ↩