12 T.C. 61">*62 The respondent determined that petitioners' profits on contracts and subcontracts subject to renegotiation during petitioners' fiscal year ended November 30, 1943, were excessive to1949 U.S. Tax Ct. LEXIS 291">*293 the extent of $ 70,000 within the meaning of the Renegotiation Act. The respondent has now affirmatively alleged that petitioners' excessive profits for the period in question amounted to $ 80,000. The issues presented by the pleadings will be discussed in the opinion.

FINDINGS OF FACT.

All of the stipulated facts are hereby found accordingly.

The petitioners are individuals and citizens of the United States, residing in the city of Houston, Texas. Since January 1, 1943, they have been doing business as copartners under the firm name of Texas Pipe Bending Co.

On November 1, 1932, Alfred S. Beeley organized the Texas Pipe Bending Co. in Houston, Texas, and operated it as a sole proprietorship until January 1, 1943, when a partnership was organized to carry on the business under the same name of Texas Pipe Bending Co. The following gives the names of the partners, their relationship to Alfred S. Beeley and their respective interests during the period from January 1 to November 30, 1943:

The business1949 U.S. Tax Ct. LEXIS 291">*294 of the Texas Pipe Bending Co. consists of coiling, bending, welding, threading, and vanstoning metal pipes for customers. During the 11-month period from January 1 to November 30, 1943, the nature of the operations of the partnership was substantially the same as its peacetime operations. Prior to 1938 or 1939 there was not any great demand in Texas for the type of work performed by the Texas Pipe Bending Co.

Alfred S. Beeley has been engaged in the pipe fabricating business almost continuously since 1907. He started as a mechanic in 1907 in Pittsburgh, where he later became shop superintendent and also a partner in the business. In 1923 he left Pittsburgh and went to St. Louis, where he was employed as a shop superintendent of a pipe fabricating business until 1925, when he and George B. Duckworth organized the St. Louis Pipe Bending Co., which they operated profitably until 1929, when they sold it. In 1930 the purchaser of the St. Louis Pipe Bending Co. sent him to Houston as superintendent of a 12 T.C. 61">*63 new pipe fabricating plant. In 1932 he was released, due to the depression, and in that year he started the Texas Pipe Bending Co. From 1932 until January 1, 1943, he was1949 U.S. Tax Ct. LEXIS 291">*295 general manager of the sole proprietorship and from January 1, 1943, until 1945 he was general manager of the partnership.

Raymond Beeley started in the pipe fabricating business with the St. Louis Pipe Bending Co. about 1927, while he was still in high school. He spent his summers at the plant, except for about six months in the fall of 1930, when he went to college. Since then he has been engaged continuously in the pipe fabricating business. He has been connected with the Texas Pipe Bending Co. since its organization in 1932, and he is a skilled workman in all of the pipe fabricating crafts, such as pipe bending, pipe welding, and machinist.

George E. Duckworth started in the pipe fabricating business in St. Louis in 1924 with the Midwest Piping & Supply Co. He handled orders in the shop, got out work sheets, posted and correlated time, and became well acquainted with the pipe fabricating business from the shop viewpoint. In 1925 he cooperated with Alfred S. Beeley in the organization of the St. Louis Pipe Bending Co. and worked in its shop until April 1933. In 1934 Duckworth became associated with the Texas Pipe Bending Co. and he has been connected with it ever since, working1949 U.S. Tax Ct. LEXIS 291">*296 for some time in the shop as a skilled mechanic.

From the time he graduated from high school in 1925 until 1929, James A. Beeley worked for the Shell Oil Co. and a large automobile distributor in St. Louis. In 1933 he graduated from Rice Institute. For two years thereafter he worked as general bookkeeper for the Federal Intermediate Credit Bank. In 1935 he became office manager of the Burroughs Adding Machine Co. in Houston, Texas, which position he held until 1937. From 1932 until 1937 he gave a part of his time to his father's business, the Texas Pipe Bending Co., and in 1937 he became a full time employee. A part of this time he spent in the shop as a skilled mechanic.

During 1943 the plant occupied a piece of ground about 250 feet by 300 feet and included a shop building, an office building, and a warehouse building. The shop building housed the various pieces of machinery and equipment used in the fabricating operations, such as cutting, welding, threading, and vanstoning machines (no one else south of St. Louis had the latter type of machines), furnaces, set-up tables, bending units, Crane systems, pulling devices, winches, lathes, punches, and shears.

The employees consisted1949 U.S. Tax Ct. LEXIS 291">*297 of pipe benders, pipe welders, pipe machine operators, vanstone machine operators, lathe operators, layout men, helpers, and common laborers, none of whom belonged to a union. 12 T.C. 61">*64 With the exception of helpers and common laborers, all employees were skilled mechanics. During 1943 an average of 50 men were employed in the shop, of whom 25 to 30 were skilled mechanics. The partnership experienced no difficulty in holding its regular employees during 1943, due to its traditional policy of retaining them and paying them their regular wages even though business was poor. There were not many pipe fabricating mechanics available during 1943, as pipe fabrication was comparatively new in Texas. Due to the fact that the partnership's wages were frozen under the Wage Stabilization Act and the employees of its competitors paid union wages, the partnership's wages were from 15 per cent to 20 per cent lower than the wages of its competitors. Part of this, however, was made up at the end of the year when the partnership gave its men a bonus of about one-twelfth of their annual earnings, so that the net result was from 5 per cent to 8 per cent less than the union scale of competitors.

1949 U.S. Tax Ct. LEXIS 291">*298 During 1943 the partnership had from 150 to 200 customers, consisting of oil refineries, recycling plants, power-generating plants, food-processing plants, gas and oil transmission companies, boat companies, and the Maritime Commission. These customers usually requested bids before giving orders. Upon receipt of such requests, the partnership would make a take-off of materials, ascertain whether suppliers could furnish the necessary materials and deliver them on time, determine the prices for which the partnership could do the work, and then make quotations to the customers. Orders when received were usually accompanied with written descriptions, blue prints, and specifications, giving dimensions, types of materials, weight, series, codes, and intended use. In most all instances the partnership furnished the materials required to fill the customers' orders and never sublet any work to others.

During 1943 James A. Beeley was office manager and also participated in the formulation of the business policies of the partnership. He kept in touch with the customers, consulted with them and made trips to their plants, if necessary, had charge of the collections and payment of bills, 1949 U.S. Tax Ct. LEXIS 291">*299 and employed the labor and other help. The partnership never had more than three employees in the office at the same time and sometimes not as many as three, because, due to the Salary Stabilization Act, it was impossible to employ more help at the salary range which the partnership was permitted to pay. James A. Beeley worked every day in the week from about 7 o'clock in the morning until about 9 or 10 o'clock at night, unless he was out of town, which was very seldom.

During 1943 George E. Duckworth did the work preliminary to making the bids, had charge of the customers' orders, and supervised 12 T.C. 61">*65 the making of the shop drawings or sketches from the blue prints and specifications furnished by the customers. These drawings or sketches showed the shape of the finished item and gave the necessary details, such as dimensions, bends, curves, angles, radii, and stresses, for the shop to do the work. Duckworth's work not only called for a thorough working knowledge of the operations of the shop, but, in addition, for familiarity with the codes and what they required in the way of stress relieving, welding, and wall thickness. Duckworth also participated in the formation of the1949 U.S. Tax Ct. LEXIS 291">*300 business policies. During 1943 he worked nine or ten hours a day and many times on Saturday and Sunday.

During 1943 Alfred S. Beeley and Raymond Beeley participated in the making of the business policies of the partnership and also had supervision of the shop and the approximately 50 men employed there. Alfred S. Beeley and Raymond Beeley did the work usually performed by foremen, as none were employed in 1943. During 1943 the partnership worked a night shift and a day shift of 10 hours each, 7 days a week. Raymond Beeley spent the entire 10 hours with the day shift and considerable time with the night shift, averaging 10 to 14 hours a day, 7 days a week. Alfred S. Beeley worked 5 full days and part of Saturdays and Sundays, averaging 40 to 50 hours a week.

The year 1943 was a crucial one in the Houston area, as plants were being organized under finance arrangements by the Defense Plant Corporation and the Army. Labor conditions were at great tension. It was difficult to get men to manage plants and high grade men were unwilling to work on a strictly salary basis, so it was customary to pay a bonus as well as a salary. Respondent allowed salaries to the partners of $ 50,0001949 U.S. Tax Ct. LEXIS 291">*301 on a yearly basis, or $ 45,833, of which $ 39,836.34 was allocated to renegotiable business for the 11-month period from January 1 to November 30, 1943, in determining excessive profits in the amount of $ 70,000. A reasonable allowance for salary for the 4 partners on a yearly basis is $ 60,000, or $ 55,000 for the 11-month period from January 1 to November 30, 1943, $ 48,725 of which should be allocated to renegotiable business in determining petitioners' excessive profits.

During 1943 deliveries never were seriously behind and some were ahead of time. Such delays in deliveries as there were did not interfere materially with the completion of customers' projects.

The nature of the business of the partnership is such that failure on its part to furnish good workmanship in its fabrication might result in disaster and in death to the people using the fabricated pipes. There could be no tolerance as the pipes had to fit perfectly in order to carry oil, gas, gasoline, water and air under heavy pressures. The 12 T.C. 61">*66 partnership always operated its business on the policy of doing its work as close as humanly possible to the blue prints and specifications furnished by the customers. 1949 U.S. Tax Ct. LEXIS 291">*302 Its work was so satisfactory that there were no rejections by customers of pipe fabricated by the partnership out of 25,000 to 40,000 individual pieces in 1943.

During 1943 the partnership did everything possible to increase production and used existing facilities and equipment to the extent possible and, when it was necessary to expand or enlarge to take care of increased business, second-hand materials and equipment were always used if it was possible to obtain them. Used equipment was kept in repair and renovated when necessary. Only the pipes, flanges, and welded fittings, etc., necessary to fill the customers' orders were kept on hand and there were no materials wasted on account of poor workmanship. There was no hoarding of materials.

The Government furnished no financial assistance to the partnership whatsoever in 1943. The partnership borrowed as much as $ 50,000 at the bank, due to the delinquency of the Maritime Commission in paying its bills, and the partners also loaned the partnership $ 10,000 personally. The bank loans were repaid as soon as possible and then additional loans were made when necessary. The loans made by the partners were not repaid until after 1949 U.S. Tax Ct. LEXIS 291">*303 the bank loans had been paid and the partnership was in position to repay them. The policy was to operate on the capital of the partnership and loans from the partners as long as possible and to borrow from the banks only when necessary. There were no certificates of necessity.

When the Texas Pipe Bending Co. was organized in 1932 there was only one competitor in the Houston area, a branch of a national organization which was quite dormant. In fact, there was no great demand for pipe fabricating work such as the Texas Pipe Bending Co. did until 1938 or 1939, and real competition did not start until after that time. Competitors of the partnership in 1943 were Houston Pipe & Steel Co., T. & R. Construction Co., and M.-B and M. Pipe Fabricating Co., all of which were unionized. The Texas Pipe Bending Co. had more experience than any of its competitors and its prices compared favorably with those of its competitors.

Joint Exhibit 1-A, which is attached to the stipulation of facts, contains comparative profit and loss statements of the Texas Pipe Bending Co. for the years 1936 to 1943, inclusive. It shows net profits before and after salary payments made to James A. Beeley, Raymond1949 U.S. Tax Ct. LEXIS 291">*304 Beeley, and George E. Duckworth, who were employees from 1936 to 1942, inclusive, and without any allowance to Alfred S. Beeley, the proprietor, during those years. Nor does Exhibit 1-A show any allowance to the partners in 1943. This exhibit is made a part hereof by reference and is summarized as follows: 12 T.C. 61">*67

1949 U.S. Tax Ct. LEXIS 291">*305 The following shows the respondent's determination of net profit on renegotiable sales of $ 54,657.42 after renegotiation:

The War Contracts Price Adjustment Board issued a unilateral order on October 30, 1945, determining that petitioners had realized excessive profits of $ 70,000 during its fiscal period January 1 to November 30, 1943, upon renegotiable sales made during that period. Petitioners realized excessive profits of $ 61,880 during such period on sales of its products which were subject to renegotiation.

OPINION.

(1) Petitioners' first contention is that the entire Renegotiation Act of 1943, as amended by the Revenue Act of 1943, is unconstitutional. This proceeding was heard and petitioners' brief was filed prior to the Supreme Court's decision in .1949 U.S. Tax Ct. LEXIS 291">*306 The Supreme Court sustained the constitutionality of the Renegotiation Act in the Lichter case. It, therefore, follows that petitioners' attack on the general constitutionality of the Renegotiation Act is without merit, and it is overruled.

(2) Petitioners' next contention is that the Renegotiation Act is unconstitutional if applied to petitioners' sales to Defense Plant Corporation. Petitioners concede that the Tax Court upheld the constitutionality of the act as applied to Defense Plant Corporation sales in , but they do not concede the correctness of the Tax Court's decision in that case and continue to press it as one of the issues of law in this proceeding. Neither of the three cases decided by the Supreme Court in its opinion 12 T.C. 61">*68 in the Lichter case, supra, had in it the precise question here raised. However, in , we went into the constitutionality of the Renegotiation Act amendment of July 1, 1943, expressly including contracts with the Defense Plant Corporation, and we held that the provisions dealing1949 U.S. Tax Ct. LEXIS 291">*307 with sales made under such contracts were constitutional. We think it is unnecessary here to repeat our discussion in that case. We think it is sufficient to say that we adhere to it. It follows that petitioners' contention (2) is denied.

(3) The next issue which petitioners raised in their petition and which they strongly urge in their brief is that the first $ 458,300 (11/12 of $ 500,000) of petitioners' sales was not renegotiable in view of section 403 (c) (6) of the Renegotiation Act. Section 403 (c) (6) of the Renegotiation Act reads as follows:

This subsection shall be applicable to all contracts and subcontracts, to the extent of amounts received or accrued thereunder in any fiscal year ending after June 30, 1943, whether such contracts or subcontracts were made on, prior to, or after the date of the enactment of the Revenue Act of 1943, and whether or not such contracts or subcontracts contain the provisions required under subsection (b), unless (A) the contract or subcontract provides otherwise pursuant to subsection (i), or is exempted under subsection (i), or (B) the aggregate of the amounts received or accrued in such fiscal year by the contractor or subcontractor 1949 U.S. Tax Ct. LEXIS 291">*308 and all persons under the control of or controlling or under common control with the contractor or subcontractor, under contracts with the Departments and subcontracts (including those described in clause (A), but excluding subcontracts described in subsection (a) (5) (B)) do not exceed $ 500,000 and under subcontracts described in subsection (a) (5) (B) do not exceed $ 25,000 for such fiscal year. If such fiscal year is a fractional part of twelve months, the $ 500,000 amount and the $ 25,000 amount shall be reduced to the same fractional part thereof for the purposes of this paragraph.

Speaking with reference to the foregoing provision of the Renegotiation Act, petitioners contend in their brief as follows:

Even though the aggregate of the amounts received is in excess of $ 500,000.00, it does not necessarily follow that Congress intended that a contractor or subcontractor should be deprived of its profits in respect of amounts received on the first $ 500,000.00 of sales. To state it another way, it does not seem reasonable that Congress intended that a competitor of petitioners with sales of less than $ 500,000.00 should be entirely exempt from renegotiation in respect of its 1949 U.S. Tax Ct. LEXIS 291">*309 entire sales under $ 500,000.00 and at the same time that petitioners should be deprived of their profits in respect of sales up to $ 500,000.00 on an annual basis.

In , we held that the taxpayer in that case, whose aggregate renegotiable sales were in excess of $ 500,000, was subject to renegotiation notwithstanding its subcontracts were in amounts of less than $ 100,000 each. In that case, among other things, we said:

* * * Under the terms of paragraph (6), subsection (c) is applicable to all contracts and subcontracts to the extent of amounts received or accrued 12 T.C. 61">*69 thereunder in any fiscal year ending after June 30, 1943, regardless of whether they contain the provisions required under subsection (b), unless "the aggregate of the amounts received or accrued in such fiscal year * * * do not exceed $ 500,000." Here the aggregate of the amounts received or accrued was $ 1,692,243.98, which clearly exceeds the $ 500,000 limitation. * * *

In the instant case it has been stipulated that petitioners' net sales for the period January 1 to November 30, 1943, were $ 634,444.66. It has also been agreed that of this 1949 U.S. Tax Ct. LEXIS 291">*310 amount $ 72,380.54 was nonrenegotiable. This leaves $ 562,064.12 of petitioners' net sales which are renegotiable. Thus, it is clear that in the instant case the limitation of $ 500,000 provided in section 403 (c) (6) is exceeded. Petitioners concede this fact if the sales to the Defense Plant Corporation are included. We have held they must be included under our decision in But, while petitioners concede that the $ 500,000 limitation has been exceeded if we take into account the Defense Plant Corporation sales, they argue in substance that we should construe section 403 (c) (6) so as to exempt $ 500,000 of the contractor's sales from renegotiation. Petitioners base this argument on the premise that because a contractor whose sales do not exceed $ 500,000 is not renegotiated at all, therefore, Congress must have intended to exempt $ 500,000 of sales from renegotiation to the contractor whose profits are renegotiable under the law. Pursuing this argument further, petitioners arrive at the conclusion that not more than $ 23,011.43 of their profits during the period in question should be held to be excessive. 1949 U.S. Tax Ct. LEXIS 291">*311 We find no support for this theory, either in the legislative history of the act or in the regulations which have been promulgated to govern its enforcement. Therefore, petitioners' contention that the first $ 458,300 of its sales during the period in question is not renegotiable is rejected.

(4) Petitioners contend in the alternative that, if we hold that the first $ 458,300 of sales during the fiscal period in question is renegotiable, the act if so applied is unconstitutional. Petitioners' precise point in this respect, so far as we have been advised, has not been passed upon in any renegotiation case thus far decided by the Tax Court. It was not involved under the facts in the three cases which were before the Supreme Court in However, we think the rationale of the Supreme Court's opinion in the Lichter case is applicable, and petitioners' contention that the act is unconstitutional if thus applied is denied. Cf. .

(5) The assignment of error here presented is that respondent erred in allowing only $ 50,000 instead of $ 75,000 for salaries1949 U.S. Tax Ct. LEXIS 291">*312 on an annual basis to the partners in making its determination of excessive profits. In , we pointed out that 12 T.C. 61">*70 section 403 (c) (3) of the Renegotiation Act, applicable hereto, provides for recognition of deductions allowed for income tax purposes. A partnership is not allowed any deduction for income tax purposes on account of compensation of inactive partners, but the renegotiating authorities have recognized that allowance should be made for reasonable compensation for services actually rendered by them. In the instant case, in making its determination of petitioners' excessive profits, the respondent has allowed $ 50,000 on an annual basis as a deduction for services actually rendered to the partnership by the four partners. Respondent has apportioned eleven-twelfths of this amount to the period here in question and has allocated the resulting figure to renegotiable sales and to nonrenegotiable sales on a proportionate basis. At the hearing there was considerable evidence devoted to what would be reasonable salaries for the four partners of the business during the period in question. After careful consideration1949 U.S. Tax Ct. LEXIS 291">*313 of all this evidence, we have found that a reasonable amount for salaries of the four partners would be $ 60,000 on an annual basis. Of this amount eleven-twelfths should be apportioned to the period here in question and the resulting amount should be allocated to renegotiable sales and nonrenegotiable sales on the same proportionate basis as respondent used in its determination.

(6) Petitioners' last contention is that they received no excessive profits whatever during said fiscal period from January 1 to November 30, 1943. The statute involved in this case is the Renegotiation Act of 1943, enacted February 25, 1944. Subsection (a) (4) (A) of that act provides:

* * * In determining excessive profits there shall be taken into consideration the following factors:

(i) efficiency of contractor, with particular regard to attainment of quantity and quality production, reduction of costs and economy in the use of materials, facilities, and manpower;

(ii) reasonableness of costs and profits, with particular regard to volume of production, normal pre-war earnings, and comparison of war and peacetime products;

(iii) amount and source of public and private capital employed and net worth;

1949 U.S. Tax Ct. LEXIS 291">*314 (iv) extent of risk assumed, including the risk incident to reasonable pricing policies;

(v) nature and extent of contribution to the war effort, including inventive and development contribution and cooperation with the Government and other contractors in supplying technical assistance;

(vi) character of business, including complexity of manufacturing technique, character and extent of subcontracting and rate of turn-over;

(vii) such other factors the consideration of which the public interest and fair and equitable dealing may require, which factors shall be published in the regulations of the Board from time to time as adopted.

12 T.C. 61">*71 In respondent's notice of determination which is the basis of this appeal, it states:

In determining the excessive profits hereinafter determined, due consideration has been given to all such financial, operating and other data and information so furnished or obtained, to each of the contentions so presented and to all of the factors referred to in subsection (a) (4) (A) of the Renegotiation Act.

The burden of proof to show that respondent erred in its determination of excessive profits is on petitioners. .1949 U.S. Tax Ct. LEXIS 291">*315 We have carefully considered the whole record and we find no error in respondent's determination except in the matter of the salaries allowed for the four partners discussed in (5) above. Petitioners' contention that we should find no excessive profits whatsoever during the period in question is not sustained.

The foregoing disposes of all the issues raised by petitioners.

Respondent has raised an affirmative issue by an amendment to its answer filed at the hearing. In this amendment respondent asks that we determine the excessive profits of petitioners to be $ 80,000 instead of $ 70,000 as determined in respondent's notice. Respondent bases its contention for this increase in petitioners' excessive profits solely on the ground that in its original determination it allowed too much salary for the four partners and that a reasonable allowance for salaries of the four partners would be not more than $ 25,000. The burden of proof to sustain its affirmative allegations is on respondent. We do not think respondent has sustained this burden and we so hold, and we find against its contention that we should increase the amount of petitioners' 1949 U.S. Tax Ct. LEXIS 291">*316 excessive profits to $ 80,000.

Our ultimate conclusion is that petitioners' profits for the period here in question subject to renegotiation were excessive in the amount of $ 61,880.

An order will be issued in accordance herewith.