Waters-Vogel Co. v. Commissioner, 16 T.C. 316 (1951)

Payments received for the cancellation of a contract are subject to renegotiation under the Renegotiation Act of 1943 if they are determined with reference to the amount of subcontracts that would have been performed under the original contract.

Summary

Waters-Vogel Co. sought a redetermination of excessive profits determined by the War Contracts Price Adjustment Board. The company argued that the cancellation agreement with Crucible Steel was not subject to the Renegotiation Act of 1943. The Tax Court held that the portion of the $1.7 million cancellation payment that was determined with reference to the commissions Waters-Vogel would have earned under the original employment contract was subject to renegotiation, as the original contract fell under the purview of the Act. The court emphasized that it was not the cancellation agreement itself being renegotiated, but rather the profits derived from the underlying employment contract.

Facts

Waters-Vogel Co. had an employment contract with Crucible Steel, where they received commission payments. Crucible Steel, desiring to terminate this contract, offered $1.7 million for its cancellation, which Waters-Vogel accepted. The War Contracts Price Adjustment Board determined that $225,000 of this payment represented excessive profits.

Procedural History

The War Contracts Price Adjustment Board determined that a portion of the payment received by Waters-Vogel was excessive profit. Waters-Vogel Co. petitioned the Tax Court for a redetermination, arguing that the cancellation agreement was not subject to the Renegotiation Act. The Tax Court upheld the Board’s determination, finding that the payment was tied to the underlying employment contract.

Issue(s)

1. Whether any portion of the sum paid by Crucible Steel in cancellation of the employment contract represents renegotiable profits of Waters-Vogel Co. for 1943 within the meaning of the Renegotiation Act of 1943, as amended.

Holding

1. Yes, because the consideration paid for the cancellation agreement was “determined with reference” to probable prospective income under the terms of the employment contract, which falls within the scope of the Renegotiation Act.

Court’s Reasoning

The Tax Court reasoned that the cancellation agreement’s value was directly linked to the potential future commissions Waters-Vogel Co. would have earned under the original employment contract. The court emphasized that the War Contracts Price Adjustment Board was created to determine which portion of income received under any contract represents profits falling within its jurisdiction. The court distinguished its prior holdings, noting, “We are here simply holding that the respondent has renegotiated sums which, although paid under the cancellation agreement, were nevertheless based upon the employment contract which both parties agree is subject to renegotiation.” The court stated that to hold otherwise would subvert congressional intention, allowing contractors to avoid renegotiation by entering into ancillary agreements. Waters-Vogel Co. failed to prove that the Board’s determination of excessive profits was incorrect, therefore the Tax Court supported the Board’s determination.

Practical Implications

This case clarifies that payments for contract cancellations can be subject to the Renegotiation Act if those payments are directly related to the profits expected under the original contract. It prevents companies from circumventing the Act by structuring agreements as cancellations. This decision emphasizes the importance of examining the underlying basis for cancellation payments to determine if they represent excessive profits tied to government contracts. Later cases will consider whether the payments are truly independent from the anticipated profits of the underlying agreement. This ruling is a warning to businesses that they cannot avoid scrutiny of payments that are essentially substitutes for renegotiable profits simply by re-characterizing them as cancellation fees.