14 T.C. 589">*589 Respondent determined that petitioners' profits on contracts and subcontracts subject to renegotiation during petitioners' tax year ended 14 T.C. 589">*590 December 31, 1943, were excessive1950 U.S. Tax Ct. LEXIS 225">*227 to the extent of $ 95,000 for the partnership entitled United States Drill Head Co., and to the extent of $ 25,000 for the partnership entitled United StatesMachine Tool Co., within the meaning of the Renegotiation Act. These proceedings, questioning the validity and propriety of such determinations, were consolidated for hearing and trial.

The issues concerning jurisdiction and the determination of excessive profits will be discussed in the opinion. The issues raised concerning the constitutionality of the Renegotiation Acts were not argued at trial nor on brief, and we assume the abandonment thereof. ¹

1950 U.S. Tax Ct. LEXIS 225">*228 In addition to oral and documentary evidence, a stipulation was entered into between the parties which is incorporated by this reference in our findings of fact.

FINDINGS OF FACT.

During the calendar year 1943 petitioners William C. Moening and Harry A. Heckmann owned and operated as general and equal partners two businesses entitled "United States Drill Head Company" and "the United StatesMachine Tool Company" (hereinafter referred to as "Drill Head" and "Machine Tool," respectively), at Cincinnati, Ohio. The two businesses were conducted separately in adjoining buildings, with a common office and telephone. Each business was operated under separate partnership agreements. The Drill Head partnership was formed in 1919, and the Machine Tool agreement became effective in January of 1943. The business of both partnerships was the production of machine tools, but the type of machine tools manufactured by each was dissimilar, manufactured by different methods, by different personnel in the separate shops, and sold to different customers.

William C. Moening, by the year in question, had thirty-six years of experience in the administration, general, and selling phases of the machine1950 U.S. Tax Ct. LEXIS 225">*229 tool industry. He performed, directed, and supervised the selling, the advertising, and the general administrative details of both businesses, with the assistance of one bookkeeper and one clerk during 1943.

Harry A. Heckmann had approximately forty-three years of experience in the production phases of the machine tool industry. He directed and supervised the shop operations, including the hiring, the firing, and the determination of the wages of employees of both companies during the year in question.

14 T.C. 589">*591 Both men worked six to seven days a week, at nights, and on Sundays, without vacation during the year in question. Both were considered top men in the industry in their fields of endeavor, and to them is largely attributable the success of the partnership businesses and their considerable contribution to the war effort.

An allowance for the reasonable salaries of each partner for his activities in both drill head and miller businesses during the year 1943 is $ 40,000. This salary allowance of $ 80,000 for both business enterprises should be allocated between the drill head and the miller business in the ratio of two to one. The amount of the salary allowance allocated1950 U.S. Tax Ct. LEXIS 225">*230 to each business should be charged between renegotiable and other business in the same ratio as other costs are so charged.

Drill Head was formed as a partnership by petitioners as general and equal partners in 1919, and has remained substantially unchanged. The business of Drill Head is the engineering and construction of multiple spindle drill heads, a machine tool which permits the simultaneous, close tolerance drilling of numerous holes. Approximately 90 per cent of Drill Head products were each designed for one particular job. The remaining 10 per cent of the products have adjustable centerheads, but each has to be separately engineered to the drilling machine or other pieces of equipment, so that even this standard equipment has a possible 20 per cent engineering change in order to fit a particular machine.

The engineering was done by petitioners and their employees. They then purchased ball bearings, patterns, castings, and rough steel. Petitioners used twenty engine and turret lathes, one planer, one shaper, three grinders, four jog-boring lathes, three gear-cutting machines, six drill presses, and one vertical boring mill to manufacture the drill heads to a tolerance1950 U.S. Tax Ct. LEXIS 225">*231 of .001 and .0001 of an inch to meet the tool specifications for war production of such items as tanks, fuses, and shell parts. The partnership also developed machines for drilling track links, and participated in the production of rockets and the Norden bomb sight.

The product of Drill Head manufacturing was substantially the same in prior years, although made for other than war production. The following table sets forth and compares the business as performed in the years 1936 through 1939, and the year in question:

14 T.C. 589">*592 The average annual sales, costs, and profits, without any adjustments for salaries to partners, of Drill Head for the period 1936 through 1939, with readjustments necessitated by a flood in 1937, ² were as follows:

For Drill Head the total sales, costs, and profits segregated between total and renegotiable for 1943, before adjustment for salary allowance, were as follows:

Of the total renegotiable sales, $ 40,895.29 of sales derived from direct contracts and the remainder derived from subcontracts.

The average net worth of Drill Head for the base period was $ 38,887.44. 1950 U.S. Tax Ct. LEXIS 225">*233 The net worth December 31, 1943, was $ 45,563.49. The net worth of Drill Head was turned over more than eleven times during 1943. Gross sales of Drill Head in 1943 were over four times the average annual sales during the base period, and profits were over six and one-half times the average profits during the base period. The increase in sales is largely attributable to meeting the increase in wartime output. Although the prices of the finished product did not increase, there was a great increase in profits in 1943 over those in the preceding four years. This increase, to some extent is attributable to the efficiency of petitioners in reducing administrative and factory burden far below those of the average business, but is, to a greater extent, due to the increased volume of business caused by the national 14 T.C. 589">*593 war effort. The margin of profit above costs was sufficiently high to eliminate any pricing risk derived from expenses of labor, material, and other costs, including delays which were subject to Government wartime regulations. The largest risk involved was whether the drill head, although meeting specifications, would perform the job for which it was engineered. 1950 U.S. Tax Ct. LEXIS 225">*234 Petitioners were efficient, with particular regard to quantity and quality of production, reduction of costs, and economy in the use of facilities, materials, and manpower. Petitioners' increased production and engineering development work, as well as the assistance given by them to other contractors in improving their technique and in installing drill heads, were substantial contributions to the war effort.

Machine Tool was operated as a sole proprietorship by Harry A. Heckmann prior to 1943. The partnership between Heckmann and Moening became effective January 1, 1943. The business of Machine Tool was the production and sale of milling machines with hand feeds used to smooth metal and cut key slots in shaft ends. Machine Tool purchased ball bearings, electric motors, V-pulleys, patterns, castings, and rough steel. These parts were planed, scraped, and assembled into the finished product by the use of Machine Tool's fourteen lathes, five radial drill presses, one grinder, one shaper, three screw-cutting machines, three milling machines, and three planers.

The average number of employees of Machine Tool and the millers produced were:

1950 U.S. Tax Ct. LEXIS 225">*235 The average annual sales and profit of Machine Tool during the years 1936 through 1939, as adjusted to delete the effect of the 1937 Ohio River flood, were:

14 T.C. 589">*594 The total sales, costs, and profits, before adjustments for salary allowance, of Machine Tool, as segregated into total and renegotiable business for 1943, were:

Of the total renegotiable sales, $ 30,688.10 represented sales on direct contracts and the remaining amount represented subcontracts.

The net worth of Machine Tool, which was turned over more than nine times in the course of the operation for 1943, was $ 38,905.62 on December1950 U.S. Tax Ct. LEXIS 225">*236 31, 1943. Its average net worth during the base period was $ 14,719.62. Sales for 1943 were in excess of nine times the average base period sales, whereas profits for 1943 exceeded twelve times the average base period profits. The price of the product remained constant and was determined by O. P. A. maximum price regulations. The increase in comparative percentage of profits is, to some extent, attributable to petitioners' efficiency with regard to the reduction of factory, administrative, and sales overhead burden, and in the management and operations of materials, facilities, and manpower while increasing quantity of production and maintaining the quality. However, to a greater extent, such increase was due to the increased volume of business caused by the national war effort. The efficiency of operation during the period 1936-1939 had enabled Machine Tool to undersell the majority of competitors who produced various types of milling machines with hand feeds. The risk of pricing policy was controlled as much as possible by O. P. A. and other Governmental regulations.

The capital, equipment, plant, facilities, and materials incident to the production of both partnership businesses1950 U.S. Tax Ct. LEXIS 225">*237 belonged entirely to the petitioners. Petitioners received no capital or other assistance from the United States Government, agencies, or other contractors in the operation of the business. None of the investment was covered by certificates of necessity. Some equipment had already been fully depreciated, and had been used in World War I.

The profits for 1943 from the renegotiable business of the two partnerships composed of Moening and Heckmann were excessive in the aggregate sum of $ 65,000. Such profits of Drill Head were excessive in the sum of $ 50,000, and those of Machine Tool in the sum of $ 15,000.

14 T.C. 589">*595 OPINION.

The respondent, by unilateral orders, had determined that the partnerships ³ of Drill Head and Machine Tool received excessive profits in the amounts of $ 95,000 and $ 25,000, respectively, under the provisions of the Renegotiation Act, as amended by section 701 of the Revenue Act of 1943, herein referred to as the "Renegotiation Act."

1950 U.S. Tax Ct. LEXIS 225">*238 The petitioners raise two jurisdictional questions. The first question presented is whether Machine Tool and Drill Head, during the calendar year ended December 31, 1943, were "under the control of or controlling or under common control with" the other within the meaning of the Renegotiation Act. The second question is whether the product of Machine Tool is exempt from renegotiation as a "standard commercial article" within the meaning of the Renegotiation Act.

A decision in favor of petitioners on either of the two preliminary questions would render unnecessary any decision with respect to the amount, if any, of excessive profits. Both questions, however, must be decided in favor of respondent.

Respondent can make determinations validly in the present proceedings only if the renegotiable sales of Drill Head and Machine Tool may be combined to reach the jurisdictional minimum of $ 500,000, as required under section 403 (c) (6) of the Renegotiation Act, which states: "This subsection shall be applicable to all contracts and subcontracts, * * * unless * * * (B) the aggregate of the amounts received or accrued in the fiscal year by the contractor or subcontractor and all persons under1950 U.S. Tax Ct. LEXIS 225">*239 the control of or controlling or under common control with the contractor or subcontractor, * * * do not exceed $ 500,000 * * *." See also Joint Regulations Manual (published January 27, 1948), par. 348.3 (4).

Petitioners contend that neither partner is under the control of or controls the other partner, and that both partners are not under common control of a third party; therefore, there is no ground for the aggregation of the renegotiable receipts of either the two businesses or the two partners.

We think petitioners' viewpoint is unduly limited. We have, in the instant case, two partnerships composed of the same equal and general partners, each of whom acts in partnership matters as a reciprocal agent and principal. Thus, each partnership is controlled by the two individuals as between whom there is a mutuality of rights and obligations characteristic of general partnership and justifying the paradox that each controls and is controlled by the other within the range of partnership matters. If the partnership businesses be considered 14 T.C. 589">*596 not as entities, but as associations of the individual partners, we are of the opinion that the reciprocal rights, obligations, and control1950 U.S. Tax Ct. LEXIS 225">*240 existing as between the general partners and above referred to, compels a conclusion that there is a common control of the two partnerships. If the partnerships are considered as entities (see Continental Chemical & Engineering Supply v. War Contracts Price Adjustment Board, supra), the same conclusion results a fortiori. It would be contrary to reality to conclude that there was no common control of two business enterprises of each of which Moening and Heckmann were equal general partners.

The general intent of the Renegotiation Act is to return to the United States Government excessive profits made from war contracts.

The minimum jurisdictional amount set forth in the act is to relieve the administrators of the act from the burden of redetermining all excessive profits, regardless of the amount. House Report No. 733, 78th Cong., 1st sess., p. 12.

The purpose of the "common control" clause in question is at least in part to prevent contractors from establishing, either in corporate or partnership form, a series of ad hoc business enterprises, each of which is to work on a phase of war contracts, in order to prevent the total receipts 1950 U.S. Tax Ct. LEXIS 225">*241 of the individual contractors derived from war contracts or subcontracts from reaching the jurisdictional minimum. See Senate Report No. 440, part 2, 80th Cong., 2d sess., p. 11.

In the present case, two general and equal partners constitute the common control of the two partnership businesses established by them and operating under fictitious names, and whose combined total renegotiable receipts exceed $ 500,000. Cf. Southland Steel Co. v. War Contracts Price Adjustment Board, 13 T.C. 652. Therefore, on the first jurisdictional issue, we decide in favor of respondent.

In connection with the second question raised with respect to jurisdiction, the statute provides:

[Section 403 (i) (4).] The Board is authorized, in its discretion, to exempt from some or all of the provisions of this section --

* * * *

(D) any contract or subcontract for the making or furnishing of a standard commercial article, if, in the opinion of the Board, competitive conditions affecting the sale of such article are such as will reasonably protect the Government against excessive prices.

Under section 403 (i) (2), the Board is authorized to interpret and apply the definition1950 U.S. Tax Ct. LEXIS 225">*242 of "standard commercial article" contained in section 403 (a) (7) by regulation.

A "standard commercial article" is defined as an article which is (A) identical in every material respect with one manufactured and sold in general civilian, industrial, or commercial use prior to January 1, 1940; (B) which is identical in every material respect with one 14 T.C. 589">*597 having the same uses, or being manufactured and sold as a competitive product by more than one manufacturer; and (C) which is sold under a maximum price which is in effect under the Emergency Price Control Act of 1942, or which is sold at a price not in excess of the January 1, 1941, selling price.

Assuming, without deciding, that this Court has the authority to review the discretionary authority of the Board to exempt standard commercial articles from renegotiation, and that the hand-feed miller is such a standard commercial article, petitioners have not shown that competitive conditions were such as would reasonably protect the Government against excessive prices within the meaning of section 403 (i) (4), quoted above. In fact, the evidence in the instant case discloses unusually wide variations in the prices charged for 1950 U.S. Tax Ct. LEXIS 225">*243 their products by the several manufacturers of hand millers, indicating that whatever competition existed had little effect on prices. It is apparent from the record that the price of machine tools is not often determined by competitive conditions alone, but depends much upon the technical skill and ability of highly specialized artisans in the machine tool industry, as well as the precision and utility of the tool. This situation would, in part, account for the absence of any machine tools either as a class or individual article from the War Contracts Price Adjustment Board exemption list found in section 845 of the Renegotiation Regulations. In any event, the denial of exemption does not serve to shift the burden of proof from petitioners for purposes of these proceedings. Rules 64-I and 32 of Rules of Practice before The Tax Court of The United States. Under the circumstances, we can not say that petitioners have demonstrated that they are entitled to exemption from renegotiation under section 403 (i) (4) (D).

The ultimate problem is the amount of excessive profits.

Respondent determined that $ 95,000 and $ 25,000 of total renegotiable profits of $ 166,382.26, and $ 77,707.171950 U.S. Tax Ct. LEXIS 225">*244 on renegotiable sales of $ 460,790.95 and $ 294,317.37 of Drill Head and Machine Tool, respectively, were excessive.

The first question is whether excessive profits are to be determined after an allowance for "salaries" to the partners. Respondent has conceded that some allowance for such an item is appropriate. See Regulations 382.2 (2); Greaves v. War Contracts Price Adjustment Board, 10 T.C. 886; Grob Brothers v. Secretary of War, 9 T.C. 495. His figure for both partners for both businesses aggregates $ 40,000.

We deem the respondent's proposed allowance as unreasonably low in view of extent and scope of the work of petitioners as well as their qualifications and the salaries they could command in comparable enterprises, and conclude as indicated by our findings of fact that aggregate salaries of $ 80,000 are appropriate and reasonable under all the circumstances.

14 T.C. 589">*598 This brings us to the broad question of determining the extent, if any, to which petitioners' profits were excessive. There are many pertinent factors ⁴ which must be interpreted in favor of petitioners. The price of the products, which1950 U.S. Tax Ct. LEXIS 225">*245 was low compared to prices listed by competitors, remained the same; the factory and administrative costs were unusually low and were decreased during the war period; the partners met increased production schedules with their own capital, without certificates of necessity, and with the use of depreciated machines; the quantity and quality of the products were substantial contributions to the war effort; and the partners were highly competent and skilled, and worked day and night, without vacation, to manufacture the products in question.

Other factors show that, although the war situation increased sales and led to a proportionate reduction of the costs of each article sold, and a resultant increase of percentage of profits, there was no voluntary reduction of sales price; that there were few problems of reconversion; that although the character of the Drill Head machine was extremely complex, the operation of Machine Tool was predominantly the acceleration of production of its standard 1950 U.S. Tax Ct. LEXIS 225">*246 machine tool; that the pricing policy of petitioners adequately covered the standard risks of petitioners' operations; and that petitioners had nonrenegotiable sales comparable to average sales during the base period.

Upon a full consideration of the entire record and all the pertinent factors, including those urged by the contending parties, we have concluded that, in the year in question, Drill Head and Machine Tool received aggregate excessive profits of $ 65,000.

An order will be entered in accordance herewith.