B-123906, MARCH 30, 1956, 35 COMP. GEN. 533

B-123906: Mar 30, 1956

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LEASES - INTENTION OF PARTIES - RENT - COMPUTATION IN VIEW OF THE EVIDENCE OF THE INTENT OF THE PARTIES TO A LEASE THAT THE DEFINITION "NET SALES" WAS NOT TO BE RESTRICTED TO TRADE DISCOUNT AND RETURN ALLOWANCE DEDUCTIONS ON GROSS SALES. WAS TO INCLUDE DEDUCTIONS CUSTOMARILY TAKEN. 1956: REFERENCE IS MADE TO LETTER OF DECEMBER 12. WHEREIN IT WAS HELD THAT FREIGHT CHARGES ARE NOT PROPERLY DEDUCTIBLE IN ARRIVING AT A NET SALES FIGURE FOR USE IN COMPUTATION OF RENTALS PAYABLE PURSUANT TO LEASE NO. THE PERTINENT PROVISION OF THE LEASE ( ARTICLE 2 (D) (1) ( IS AS FOLLOWS: (D) AS USED ABOVE. THE TERMS "NET SALES" AND "INCREASE IN VALUE" SHALL HAVE THE MEANING SET FORTH BELOW: (1) THE TERM "NET SALES" SHALL BE DEEMED TO MEAN GROSS SALES LESS TRADE DISCOUNTS AND RETURN ALLOWANCES.

B-123906, MARCH 30, 1956, 35 COMP. GEN. 533

LEASES - INTENTION OF PARTIES - RENT - COMPUTATION IN VIEW OF THE EVIDENCE OF THE INTENT OF THE PARTIES TO A LEASE THAT THE DEFINITION "NET SALES" WAS NOT TO BE RESTRICTED TO TRADE DISCOUNT AND RETURN ALLOWANCE DEDUCTIONS ON GROSS SALES, BUT WAS TO INCLUDE DEDUCTIONS CUSTOMARILY TAKEN, THE LEASE MAY BE CONSTRUED AS AUTHORIZING THE DEDUCTION OF FREIGHT ALLOWANCES IN THE COMPUTATION OF NET SALES. 35 COMP. GEN. 16, MODIFIED.

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, MARCH 30, 1956:

REFERENCE IS MADE TO LETTER OF DECEMBER 12, 1955, WITH ENCLOSURES, FROM YOUR PREDECESSOR, RELATIVE TO OUR DECISION OF JULY 13, 1955, 35 COMP. GEN. 16, WHEREIN IT WAS HELD THAT FREIGHT CHARGES ARE NOT PROPERLY DEDUCTIBLE IN ARRIVING AT A NET SALES FIGURE FOR USE IN COMPUTATION OF RENTALS PAYABLE PURSUANT TO LEASE NO. GS-00-B/S/-1539, ENTERED INTO WITH THE KAISER ALUMINUM AND CHEMICAL CORPORATION. THE PERTINENT PROVISION OF THE LEASE ( ARTICLE 2 (D) (1) ( IS AS FOLLOWS:

(D) AS USED ABOVE, THE TERMS "NET SALES" AND "INCREASE IN VALUE" SHALL HAVE THE MEANING SET FORTH BELOW:

(1) THE TERM "NET SALES" SHALL BE DEEMED TO MEAN GROSS SALES LESS TRADE DISCOUNTS AND RETURN ALLOWANCES, AS CUSTOMARILY COMPUTED IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE, DURING THE LEASE YEAR OF PRODUCTS PRODUCED OR PROCESSED BY THE LEASED PREMISES; * * *

THE DECISION OF JULY 13, 1955, HELD THAT THE TERM "NET SALES" AS DEFINED IN THE LEASE HAS A DEFINITE AND UNEQUIVOCAL MEANING AND IS FREE FROM SUCH ELEMENTS OF AMBIGUITY AND UNCERTAINTY AS WOULD JUSTIFY ANY RESORT TO ALLEGED TRADE PRACTICE OR ACCOUNTING CUSTOM.

IN REQUESTING RECONSIDERATION OF THE CASE, HOWEVER, THE KAISER CORPORATION, IN A LETTER DATED OCTOBER 25, 1955, TO YOUR ADMINISTRATION, CONTENDS THAT THE LANGUAGE OF THE LEASE IS AMBIGUOUS; THAT IT WAS THE INTENT OF THE PARTIES TO PERMIT THE DEDUCTION OF FREIGHT ALLOWANCES IN COMPUTING NET SALES; THAT ANY AMBIGUOUS LANGUAGE IN THE LEASE SHOULD BE SO INTERPRETED AND THAT, EVEN IF THE LANGUAGE OF THE LEASE IS HELD TO BE CLEAR AND UNAMBIGUOUS, THE LEASE SHOULD BE REFORMED TO CORRECT A MUTUAL MISTAKE.

IN SUPPORT OF ITS CONTENTION REGARDING THE INTENT OF THE PARTIES, THE LESSEE STATES THAT THE NEGOTIATOR FOR THE GENERAL SERVICES ADMINISTRATION HAD ASSURED IT THAT THE LANGUAGE "GROSS SALES LESS TRADE DISCOUNTS AND RETURN ALLOWANCES" WOULD NOT LIMIT THE DEDUCTIONS TO TRADE DISCOUNTS AND RETURN ALLOWANCES BUT WOULD PERMIT ANY OTHER DEDUCTIONS CUSTOMARILY ALLOWED IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE.

AMONG THE ENCLOSURES FORWARDED WITH THE LETTER OF DECEMBER 12, 1955, IS A COPY OF A MEMORANDUM DATED SEPTEMBER 16, 1953, FROM THE DIRECTOR, NATIONAL INDUSTRIAL RESERVE DIVISION, PBS, TO THE OFFICE OF THE GENERAL COUNSEL, GENERAL SERVICES ADMINISTRATION, WHEREIN IT IS STATED THAT---

* * * THERE WAS NO INTENTION ON THE PART OF THE NEGOTIATORS OF THIS LEASE THAT DEDUCTIONS ALLOWABLE FROM GROSS SALES TO DETERMINE "NET SALES" SHOULD BE CONFINED TO TRADE DISCOUNTS AND RETURN ALLOWANCES, BUT RATHER THAT ANY ITEMS WHICH ARE CUSTOMARILY DEDUCTED WHEN APPLYING PRINCIPLES OF GOOD ACCOUNTING PRACTICE SHOULD BE ALLOWED. THIS STATEMENT WAS REITERATED IN ANOTHER MEMORANDUM DATED OCTOBER 19, 1953, FROM THE SAME SOURCE TO THE DIRECTOR, INTERNAL AUDIT DIVISION, OFFICE OF THE COMPTROLLER, WITH THE EXPRESSED OPINION THAT---

* * * IF GOVERNMENT HAS PREVIOUSLY APPROVED AND ACCEPTED ALLOWANCE FOR FREIGHT CHARGES AS A REDUCTION FROM GROSS SALES IN CONNECTION WITH OTHER COMPARABLE LEASE CONTRACTS AND/OR THE JURISDICTIONAL ACCOUNTING SERVICE CONSIDERS SAME "GOOD ACCOUNTING PRACTICE," SUCH ALLOWANCES SHOULD BE PERMITTED. HOWEVER, IT IS CONSIDERED APPROPRIATE THAT SUCH ADMINISTRATIVE DETERMINATION IS THE PREROGATIVE OF THE JURISDICTIONAL ACCOUNTING SERVICE.

THAT THE DEDUCTION OF FREIGHT ALLOWANCES FROM GROSS SALES TO ARRIVE AT NET SALES CONFORMS WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IS CLEARLY ESTABLISHED. SEE THE AUTHORITIES CITED IN KAISER CORPORATION'S LETTER OF NOVEMBER 29, 1954, TO YOUR ADMINISTRATION. FURTHER, THE RECORD SHOWS THAT THIS PRACTICE HAS BEEN ADOPTED GENERALLY BY THE ALUMINUM INDUSTRY AND HAS BEEN FOLLOWED CONSISTENTLY BY THE KAISER CORPORATION. THIS CONNECTION, IT IS OBSERVED THAT THE CORPORATION APPARENTLY WAS PERMITTED TO DEDUCT FREIGHT ALLOWANCES IN COMPUTING NET SALES UNDER ANOTHER LEASE FOR THE OPERATION OF THE TRENTWOOD PLANT WHICH PROVIDED, IN PERTINENT PART, THAT " THE TERM "NET SALES" MEANS THE NET SALES, AS CUSTOMARILY COMPUTED IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE, DURING THE LEASE YEAR OF PRODUCTS PRODUCED AT THE LEASED PREMISES.' ( ITALICS SUPPLIED.)

IN VIEW OF THE FACTS NOW OF RECORD IT CLEARLY APPEARS THAT IT WAS NOT INTENDED THAT THE DEFINITION OF "NET SALES" AS SET FORTH IN THE HALETHORPE LEASE WOULD RESTRICT DEDUCTIONS SOLELY TO TRADE DISCOUNTS AND RETURN ALLOWANCES. RATHER, IT APPEARS TO HAVE BEEN THE UNDERSTANDING THAT WHATEVER DEDUCTIONS ARE CUSTOMARILY TAKEN IN COMPUTING NET SALES IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE WOULD BE PERMITTED. ACCORDINGLY, THE LEASE NOW SHOULD BE CONSTRUED AS AUTHORIZING THE KAISER CORPORATION TO COMPUTE NET SALES BY DEDUCTING THE AMOUNT OF FREIGHT ALLOWANCES GRANTED TO PURCHASERS. CF. B-123662, JUNE 1, 1955, 34 COMP. GEN. 641.

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