tion 2. Inasmuch as both petitioner and June are thus considered to be the taxpayers, it follows that respondent was in error in disallowing a personal exemption for June.

Decision will be entered for the petitioner.

THE BAY COMPANY, PETITIONER, v. RENEGOTIATION BOARD,
RESPONDENT.

Docket No. 952-R. Filed July 30, 1962.

During the fiscal year ended September 30, 1952, petitioner (maintaining a completed contract basis of accounting) completed four contracts subject to renegotiation totaling $1,998,933.40. Overhead expenses during the years such contracts were in process were allocated to such contracts on petitioner's books on the basis of their direct costs. Under such overhead allocation method, the profit, per books, on such contracts was $346,246.52. Held, petitioner employed a method of allocating overhead on its books and records which properly reflected its costs on the contracts. Held, further, petitioner realized excessive profits from the renegotiable contracts in the amount of $20,000.

James V. Ramsdell, Esq., for the petitioner.

Andrew P. Vance, Esq., for the respondent.

FISHER, Judge: Petitioner, for the purpose of contesting an order of the Renegotiation Board, upon renegotiation of its contracts, that $50,000 of its profits for the fiscal year ending September 30, 1952, was excessive, by this proceeding, seeks a redetermination thereof.

The contested issues relate to the amount of overhead expenses attributable to these renegotiable contracts, and the extent if any to which the profits were excessive.

FINDINGS OF FACT.

Some of the facts are stipulated and are incorporated herein by this reference.

Petitioner, during all times material herein, was and is a corporation organized under the laws of the State of Washington, engaged primarily as an engineering contractor in design, installation, and maintenance of industrial piping and plumbing.

During all times material herein, the books and records were maintained and Federal income tax returns of petitioner were filed using the completed contract basis of reporting income and expenses, and petitioner maintained a fiscal year ending September 30.

The capital stock of petitioner was owned, during all times material herein, 99 percent by the Tide Company, a Washington corporation, engaged in industrial electrical design, installation, and maintenance work. The four shareholders of the Tide Company, during all times

material herein, have been the only officers of both the Tide Company and petitioner.

For the fiscal years prior to 1952, petitioner realized the following profits or losses:

During the fiscal year ending September 30, 1952, petitioner completed numerous short-term contracts (fully completed during the fiscal year) and seven long-term contracts (work commencing in a prior fiscal year). Four of the seven long-term contracts which were completed during the fiscal year were subject to renegotiation.

For the fiscal year ending September 30, 1952, petitioner's books (including later agreed adjustments) reflect the following income and expenses concerning all contracts completed during that fiscal year.

The major long-term nonrenegotiable contracts completed during that fiscal year involved the Mountain View Sanitorium and the Animal Industries Building for the State of Oregon. Both projects commenced in 1950.

Petitioner's books reflect a loss on the Animal Industries Building contract of $63,450, and a loss on the Mountain View Sanitorium contract of $114,488.53. The losses were due mainly to the fact that both contracts were bid under very competitive conditions, and under hurried circumstances; that the subsequent start of the Korean conflict resulted in difficulties in material procurement inasmuch as they were not priority projects; delays in delivery of equipment; increase in prices of supplies and labor which were not foreseen; the loss of a subcontractor; and a defect in delivered equipment. Both contracts were

supervised by petitioner's usual employee supervision and visited and supervised by two of its officers.

Subsequent to the commencement of work on the two aforementioned contracts in 1950 and after some of the many difficulties in regard to these jobs had already presented themselves, petitioner was awarded four contracts, subject to renegotiation, which were completed during the fiscal year ending September 30, 1952. These contracts were as follows:

Hot semiworks_

Evaporator‒‒‒

Air Force Base_

Air Force Base..

Contract

Location

Hanford, Washington
Hanford, Washington

Arlington, Oregon
Fairbanks, Alaska

The largest of these four contracts, accounting for approximately 90 percent of petitioner's total profits for that fiscal year, was the "hot semiworks" project in Hanford, Washington (hereinafter sometimes referred to as the Hanford contract). This contract was a subcontract with L. H. Hoffman Company, which in turn was a subcontractor to the General Electric Company in connection with a project for the Atomic Energy Commission. The contract involved building a largescale pilot plant to test a new processing theory for some of the radioactive materials produced at Hanford, Washington.

The Hanford contract was awarded in February 1951, on a lumpsum basis in competitive bidding in the amount of $1,763,000. The next two lowest bids for the contract were in the amounts of $1,875,000 and $2,304,000. Petitioner's contract amount was later increased due to specification changes and the wage escalation clause to $1,859,034.34. The Hanford contract required the use of highly critical materials which were predetermined to be of an extremely high quality so that they would have a long life in a process involving highly radioactive substances. Such project required a great amount of technical knowledge and ingenuity inasmuch as it presented highly complex problems in an area new in development.

Petitioner had difficulty in procuring materials that were originally specified because of governmental regulations. The original specifications for stainless steel in the project were prohibited by Executive order. Petitioner was required to resort to substituted materials with no changes in the quality requirements. It was also forced to use materials of one type which were new in technology, the technique of making them not being yet perfected. It was necessary for petitioner to work with and assist its suppliers in numerous cases obtaining for them raw materials to make the various pieces of machinery products which were required. In preparing its estimate for costs, petitioner included a contingency factor to provide for uncertainties in obtaining

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materials. The actual expenses were $87,702 less than that which it had allowed in its estimate.

One item of equipment needed, known as a slug charger, was specially designed by the General Electric Company with extremely high and rigid requirements. Believing that the cost of having one manufacturer assume complete responsibility for this item would be prohibitive petitioner assumed this responsibility itself, and went to several sources of supply, machine shops, raw material suppliers, and was successful in having the devices manufactured under its own supervision.

The total cost of all subcontracting in connection with this contract was $390,000, or approximately one-fourth of the total direct costs. Except for the hiring of a single engineer, the same four officers provided management supervision to all of petitioner's and its parent corporation's work during the fiscal year ended September 30, 1952.

The four corporate officers of petitioner made trips to various places in the United States in working out design problems and procuring materials for petitioner and manufacturers of equipment. Of the 15 suppliers on the Hanford project, 13 were located in the State of Washington. All four officers spent a considerable portion of their time in connection with the project, thus making it difficult for them to solve many of the problems which arose in connection with the Mountain View Sanitorium and Animal Industries Building contracts. In addition, many of the other personnel at petitioner's Washington office devoted much of their time to the Hanford project.

Petitioner was required to and did work closely with the Atomic Energy Commission, General Electric Company, and the L. H. Hoffman Company.

Petitioner's performance in its renegotiable work was of good quality and petitioner was economical in the use of materials, facilities, and manpower. The procuring and expediting of equipment and materials particularly materials on the critical list was difficult. Petitioner's parent company and the four officer-shareholders guaranteed the financing of petitioner.

Petitioner, during all times material herein, kept its books and prepared its income tax returns on a basis of accrued costs and completed contracts. The return for each fiscal year showed profits and costs allocated to the contracts for which final payment was received in that year. Under petitioner's normal method of accounting all direct costs were charged to the contract for which they were incurred on a separate job cost ledger sheet maintained for each contract. Upon the completion of a contract all direct costs charged to such contract would be charged to the cost of completed contracts account and be deducted that fiscal year as an expense.

Generally, the Tide Company paid all of the general overhead expense and officers' salaries for both companies. While some of the overhead expenses and salaries were directly charged to a specific contract (as was the practice with direct costs) it was not the general practice to so directly charge overhead expenses or officers' salaries to any particular contract.

At the end of each fiscal year the general overhead expenses (except for the officers' salaries) of both companies which were not previously charged directly to a specific contract were allocated between the two companies in promotion to the total cost of work performed by each during the year.

Also at the end of each fiscal year, the officers' salaries were charged to each company in proportion to the amount of time the officers worked for the two companies.

Of the total officers' salaries charged to petitioner each year, portions were charged directly to specific contracts. The unallocated balance of these salaries would then be added to the general unallocated overhead expense which was charged to petitioner that year.

The following represents the total amount of officers' salaries which were charged to petitioner, the portions of such salaries charged directly to specific contracts, and the total unallocated overhead expenses charged to petitioner for the fiscal years ended September 30, 1951 and

The record does not disclose to which contract the salaries were directly charged.

The total overhead expense for each fiscal year was then charged to the overhead expense account to be closed into the cost of completed contracts account after all adjustments were made.

If all of the contracts worked on during a particular fiscal year were commenced and completed within that year, all overhead expenses charged to the overhead expense account that year would necessarily have been attributable to completed contracts, and the entire overhead expense account would have been deducted with no adjustments made. Petitioner, in such a situation, did not deem it necessary to allocate the total overhead expense to the individual completed contracts.