B-127463, MAR. 28, 1957

B-127463, MAR. 28, 1957

TO TWIN COACH COMPANY:

REFERENCE IS MADE TO YOUR LETTERS DATED JANUARY 22, 1957, AND PRIOR CORRESPONDENCE, REQUESTING, IN EFFECT, REVIEW OF THE ACTION TAKEN BY OUR CLAIMS DIVISION IN LETTER DATED AUGUST 15, 1956, WHEREIN YOU WERE FOUND TO BE INDEBTED TO THE UNITED STATES IN THE AMOUNT OF $131,111.49, COVERING INTEREST ON AN EXCISE TAX REFUND MADE UNDER CONTRACT NO. DA 20-089-ORD- 11789FS WHICH YOU ENTERED INTO WITH THE DEPARTMENT OF THE ARMY ON JANUARY 25, 1951.

UNDER THE CONTRACT YOU AGREED TO FURNISH TO THE DEPARTMENT OF THE ARMY 1,509 PASSENGER BUSES AT $13,000 EACH OR FOR A TOTAL PRICE OF $19,617,000, IN ACCORDANCE WITH APPLICABLE PLANS AND SPECIFICATIONS. IT APPEARS THAT IN ACCORDANCE WITH CERTAIN PROVISIONS OF THE CONTRACT, WHICH PROVIDED THAT SHIPPING INSTRUCTIONS WOULD BE FURNISHED TO YOU AT A LATER DATE BY THE GOVERNMENT, 1,013 OF THE TOTAL OF 1,509 PASSENGER BUSES WERE EXPORTED AND SHIPPED TO DESTINATIONS OUTSIDE OF THE CONTINENTAL LIMITS OF THE UNITED STATES. SINCE A FEDERAL EXCISE TAX WAS ORIGINALLY REQUIRED BY THE CONTRACT TO BE, AND WAS, PAID IN CONNECTION WITH THE MANUFACTURE OF THE PASSENGER BUSES--- DOMESTIC USE ORIGINALLY CONTEMPLATED--- APPLICATION FOR A REFUND COVERING THAT PART OF THE EXCISE TAX PAID ON THE 1,013 PASSENGER BUSES WHICH WERE SUBSEQUENTLY EXPORTED WAS MADE BY YOU PURSUANT TO A REQUEST BY THE CONTRACTING OFFICER, IN ACCORDANCE WITH THE TERMS OF ARTICLE 10 (F) OF THE GENERAL PROVISIONS OF THE CONTRACT. THE INTERNAL REVENUE SERVICE REFUNDED THE AMOUNT OF $970,788.59, REPRESENTING THE AMOUNT OF THE OVERPAYMENT OF FEDERAL EXCISE TAX ON THE EXPORTED BUSES UNDER THE CONTRACT, AND THIS AMOUNT WAS IN TURN PAID OVER BY YOU TO THE DEPARTMENT OF THE ARMY AS REQUIRED BY THE PROVISIONS OF THE SAID ARTICLE 10 (F). IN ADDITION, HOWEVER, TO THE AMOUNT OF THE $970,788.59 EXCISE TAX REFUND THE INTERNAL REVENUE SERVICE ALSO REFUNDED TO YOU THE AMOUNT OF $131,111.49 REPRESENTING INTEREST THAT ACCRUED ON THE AMOUNT OF THE EXCISE TAX. THE INTEREST WAS RETAINED BY YOU AND AFTER THE MATTER HAD BEEN REFERRED TO OUR OFFICE BY THE DEPARTMENT OF THE ARMY FOR DIRECT SETTLEMENT, DEMAND WAS MADE UPON YOU BY LETTER DATED AUGUST 15, 1956, OF THE CLAIMS DIVISION, GENERAL ACCOUNTING OFFICE, FOR PAYMENT TO THE UNITED STATES OF THE AMOUNT OF THIS INTEREST OF $131,111.49, AFTER A DETERMINATION THAT THE GOVERNMENT WAS ENTITLED TO THE REFUND OF INTEREST AS WELL AS TO THE EXCISE TAX.

YOUR LETTER OF JANUARY 22, 1957, REFERS TO YOUR PREVIOUS LETTER OF FEBRUARY 22, 1955, ADDRESSED TO THE CLEVELAND ORDNANCE DISTRICT, WHICH NOW FORMS A PART OF OUR RECORD IN THE CASE, AND STATES YOU FEEL THAT YOUR POSITION REGARDING ENTITLEMENT TO THE REFUND OF INTEREST IS ADEQUATELY EXPLAINED IN THOSE TWO LETTERS.

ARTICLE 10 OF THE GENERAL PROVISIONS OF THE CONTRACT COVERS THE MATTER OF TAXES. PARAGRAPH (B) THEREOF STIPULATES THAT "THE CONTRACT PRICE INCLUDES ALL APPLICABLE FEDERAL TAXES IN EFFECT ON THE CONTRACT DATE.' PARAGRAPH (E) PROVIDES, IN PERTINENT PART, FOR A CORRESPONDING INCREASE OR DECREASE IN THE CONTRACT PRICE BY VIRTUE OF ANY SUBSEQUENT CHANGE IN THE CONTRACTOR'S FEDERAL TAX LIABILITY. PARAGRAPH (F) PROVIDES---

"REFUND OR DRAWBACK.--- IF ANY TAX OR DUTY HAS BEEN INCLUDED IN THE CONTRACT PRICE OR THE PRICE AS ADJUSTED UNDER PARAGRAPH (E) OF THIS CLAUSE, AND IF THE CONTRACTOR IS ENTITLED TO A REFUND OR DRAWBACK BY REASON OF THE EXPORT OR RE-EXPORT OF SUPPLIES COVERED BY THIS CONTRACT, OR OF MATERIALS OR COMPONENTS USED IN THE MANUFACTURE OR FURNISHING OF THE COMPLETED SUPPLIES OR SERVICES COVERED BY THIS CONTRACT, THE CONTRACTOR AGREES THAT HE WILL PROMPTLY NOTIFY THE CONTRACTING OFFICER THEREOF AND THAT THE AMOUNT OF ANY SUCH REFUND OR DRAWBACK OBTAINED WILL BE PAID OVER TO THE GOVERNMENT OR CREDITED AGAINST AMOUNTS DUE FROM THE GOVERNMENT UNDER THIS CONTRACT: PROVIDED, HOWEVER, THAT THE CONTRACTOR SHALL NOT BE REQUIRED TO APPLY FOR SUCH REFUND OR DRAWBACK UNLESS SO REQUESTED BY THE CONTRACTING OFFICER.'

IN SUPPORT OF YOUR DENIAL OF THE GOVERNMENT'S CLAIM, YOU SUBMIT TWO GENERAL BASIC CONTENTIONS: FIRST, THAT THE GOVERNMENT CANNOT SUPPORT A CLAIM FOR "EQUITABLE ADJUSTMENT" OF THE CONTRACT PRICE BY REQUIRING THE CONTRACTOR TO PAY OVER THE INTEREST TO THE GOVERNMENT; AND, SECOND, THAT THERE IS NO LEGAL OBLIGATION ON THE PART OF THE CONTRACTOR TO PAY THE INTEREST. WITH RESPECT TO YOUR FIRST CONTENTION, YOU REFER TO THE EQUITIES ALLEGED TO SUPPORT YOUR POSITION, AND ASSERT THAT (1) YOUR PROFIT FROM THE CONTRACT WAS LESS THAN EXPECTED BECAUSE OF DELAYS FOR SPECIFICATION CHANGES, (2) THE GOVERNMENT OBTAINED A MORE USEFUL VEHICLE BECAUSE OF THE CHANGES, AND (3) YOU DID NOT OBTAIN PARTIAL PAYMENTS PRIOR TO SUPPLEMENTAL AGREEMENT NO. 11 WHICH PERMITTED YOU TO BILL THE INCREASED SELLING PRICE FOR THE CHANGED VEHICLES.

WE THINK THAT YOUR FIRST CONTENTION MAY BE READILY DISPOSED OF ARTICLE 2 OF THE CONTRACT'S GENERAL PROVISIONS AUTHORIZES CHANGES, INCLUDING DESIGN AND SPECIFICATIONS, AND PROVIDES THAT IF ANY SUCH CHANGE CAUSES AN INCREASE OR DECREASE IN THE COST OF, OR THE TIME REQUIRED FOR, PERFORMANCE OF THE CONTRACT, AN EQUITABLE ADJUSTMENT SHALL BE MADE IN THE CONTRACT PRICE, OR DELIVERY SCHEDULE OR BOTH. IT FURTHER PROVIDES THAT ANY CLAIM BY YOU FOR ADJUSTMENT MUST BE ASSERTED WITHIN 30 DAYS FROM RECEIPT OF THE NOTIFICATION OF A CHANGE AND ESTABLISHES YOUR RIGHT TO APPEAL TO THE SECRETARY OF THE ARMY FOR REVIEW OF THE ADJUSTMENT, PURSUANT TO THE "DISPUTES" CLAUSE, ARTICLE 12, OF THE CONTRACT. ACCORDINGLY, ANY INCREASED COSTS TO YOU BY VIRTUE OF CHANGES IN THE DESIGNS OR SPECIFICATIONS WERE MATTERS FOR EQUITABLE ADJUSTMENT UNDER THE "CHANGES" ARTICLE. BUT, IT IS ONLY NECESSARY TO POINT OUT THAT THE CLAIM OF THE GOVERNMENT TO THE SUBJECT INTEREST IS NOT ASSERTED UPON THE BASIS OF AN EQUITABLE ADJUSTMENT. IT IS PREMISED UPON THE GOVERNMENT'S CONTRACTUAL RIGHTS UNDER ARTICLE 10 OF THE CONTRACT.

WITH REGARD TO YOUR SECOND CONTENTION, AS RECOGNIZED BY YOU IN YOUR LETTER OF FEBRUARY 22, 1955, THE SPECIFIC LEGAL QUESTION IS WHETHER ARTICLE 10 (F) OF THE CONTRACT, WHICH REQUIRES THAT ANY REFUND BY REASON OF EXPORT OR RE-EXPORT OF THE BUSES BE PAID OVER TO THE GOVERNMENT, OBLIGATES YOU TO PAY OVER TO THE GOVERNMENT THE INTEREST RECEIVED ON SUCH REFUND. THERE WOULD APPEAR TO BE NO DOUBT THAT THE INTENTION AND PURPOSE OF ARTICLE 10 WAS TO REIMBURSE THE CONTRACTOR FOR HIS OBLIGATION OF FEDERAL TAXES UNDER THE CONTRACT AND TO GUARANTEE HIM AGAINST LOSSES THEREFROM (EXCEPTING, OF COURSE, ANY PENALTIES IMPOSED UPON HIM FOR FAILURE TO PROPERLY AND TIMELY MEET SUCH OBLIGATIONS) BY INCLUSION OF THESE EXPENSES IN THE CONTRACT PRICE, AND ADJUSTMENTS THERETO. NOTWITHSTANDING THIS, YOU CONTEND THAT IN THE ABSENCE OF AN EXPRESS AND AFFIRMATIVE OBLIGATION UPON YOU TO PAY OVER THE INTEREST TO THE GOVERNMENT, YOU ARE NOT LEGALLY OBLIGATED THEREFOR. ALSO, YOU ARGUE THAT THE CASE OF NORTHROP AIRCRAFT, INC. V. UNITED STATES, 130 C.CLS. 626, WHEREIN THE COURT OF CLAIMS FOUND THE GOVERNMENT ENTITLED TO THE INTEREST OF A TAX REFUND, IS INAPPLICABLE BECAUSE THE CONTRACT THERE INVOLVED WAS OF THE "COST-PLUS" TYPE AND THE INTEREST SERVED TO REDUCE THE CONTRACTOR'S COST, WHILE YOUR CONTRACT WAS A "LUMP-SUM" TYPE AND THE OVERPAYMENT WAS MADE FROM YOUR FUNDS.

WE CANNOT AGREE THAT THIS DISTINCTION IS MATERIAL. AS HEREINABOVE INDICATED, THE TAX PROVISION OF YOUR CONTRACT CONTEMPLATES A COST REIMBURSEMENT TO YOU OF THE FEDERAL TAXES AND, TO THAT EXTENT, IS ANALOGOUS TO THE "COST-PLUS" TYPE OF CONTRACT UNDER CONSIDERATION IN THE NORTHROP CASE. THIS COST REIMBURSEMENT IS INCLUDED IN THE CONTRACT PRICE AND PARTIAL PAYMENTS THEREFOR ARE AUTHORIZED. CONSEQUENTLY, IT MAY NOT BE CONCEDED THAT ANY PAYMENT OF THE TAXES BY THE CONTRACTOR IN ADVANCE OF HIS RECEIPT OF PARTIAL PAYMENTS WAS NOT WITHIN THE TERMS OF THE CONTRACT AND CONSIDERED IN THE AGREEMENT ON THE CONTRACT PRICE. EVEN IF IT BE ASSUMED THAT THE NORTHROP CASE IS NOT CONCLUSIVE OF YOUR LIABILITY, IT IS A WELL- ESTABLISHED PRINCIPLE OF LAW THAT ACCRETIONS ON MONEY, SUCH AS INTEREST, FOLLOW THE PRINCIPAL, OR OWNERSHIP, THEREOF. IN RE GRANT, 52 F.2D 171. HENCE, IT IS IMMATERIAL THAT THE CONTRACT IN THIS CASE CONTAINS NO EXPRESS PROVISION AS TO THE DISPOSITION OF INTEREST. THAT THE WORD "REFUND," IN THE ABSENCE OF EXPRESS LANGUAGE TO THE CONTRARY, INCLUDES INTEREST, SEE SCHAFFER V. HOTEL AND RAILROAD NEWS COMPANY, 165 N.E. 389, WHEREIN THE COURT SAID---

"* * * ALTHOUGH THE AGREEMENT BETWEEN THE PARTIES DID NOT IN EXPRESS TERMS REFER TO INTEREST, WE ARE OF OPINION THAT CORRECTLY CONSTRUED IT WAS INTENDED THAT WHATEVER REFUND WAS RECEIVED BY THE DEFENDANT, EITHER AS PRINCIPAL OR INTEREST THE PLAINTIFF WOULD BE ENTITLED TO ONE HALF THEREOF. INTEREST ON THE PRINCIPAL WAS INCLUDED IN AND WAS A PART OF THE AMOUNT PAID TO THE DEFENDANT AND WAS TREATED BY THE GOVERNMENT AS PART OF THE REFUND. * * *"

ALSO, SEE ESPECIALLY THE CASE OF PHILADELPHIA JOINT BOARD OF AMALGAMATED CLOTHING WORKERS OF AMERICA V. UNITED STATES, 106 F.SUPP. 534, WHEREIN IT WAS HELD THAT UNDER A STATUTE WHICH REQUIRED THE UNITED STATES TO PAY TO EMPLOYEES OF A GOVERNMENT CONTRACTOR "ALL SUMS * * * RECOVERED AS * * * UNDERPAYMENTS OF WAGES," THE GOVERNMENT WAS OBLIGATED TO PAY OVER TO THE EMPLOYEES NOT ONLY THE AMOUNT OF A JUDGMENT IT OBTAINED AGAINST THE CONTRACTOR REPRESENTING UNDERPAYMENT OF WAGES, BUT ALSO THE INTEREST THEREON GRANTED IN THE JUDGMENT.

MOREOVER, IN VIEW OF THE EXPRESS AGREEMENT IN ARTICLE 10 (F) THAT THE CONTRACTOR WILL PAY TO THE GOVERNMENT ANY TAX REFUNDS RECEIVED BY IT, AND THAT THE CONTRACTOR WILL NOT BE REQUIRED TO APPLY FOR THE REFUND UNLESS SO REQUESTED BY THE CONTRACTING OFFICER, IT SEEMS CLEAR THAT THE PARTIES CONTEMPLATED THAT IN APPLYING FOR, AND OBTAINING, THE REFUND THE CONTRACTOR WAS ACTING SOLELY FOR THE BENEFIT, AND AS THE AGENT, OF THE DEPARTMENT OF THE ARMY. PHILADELPHIA JOINT BOARD OF AMALGAMATED CLOTHING WORKERS OF AMERICA V. UNITED STATES, 106 F.SUPP. 534. CERTAINLY THERE IS NO PRINCIPLE OF LAW WHICH WOULD SUPPORT OR JUSTIFY AN AGENT'S RETENTION OF INTEREST ACCRUING ON FUNDS DUE HIS PRINCIPAL, AS PROPOSED BY YOU, IN THE ABSENCE OF AN EXPRESS AGREEMENT TO THAT EFFECT.

IN SUMMARY, IT MUST BE CONCLUDED THAT IN THE ABSENCE OF AN EXPRESS RESERVATION TO YOU IN THE CONTRACT OF THE INTEREST EARNED ON THE PRINCIPAL AMOUNT (THE OWNERSHIP OF WHICH WAS EXPRESSLY RESERVED TO THE GOVERNMENT) YOU ARE CONTRACTUALLY OBLIGATED TO PAY THE INTEREST OVER TO THE GOVERNMENT. ACCORDINGLY, THE INDEBTEDNESS ACTION IN OUR LETTER OF AUGUST 15, 1956, IS SUSTAINED, AND IT IS REQUESTED THAT YOU LIQUIDATE THE DEBT IN ACCORDANCE WITH THE INSTRUCTIONS THEREIN IN THE IMMEDIATE FUTURE IN ORDER TO AVOID THE NECESSITY FOR FURTHER ACTION TO EFFECT COLLECTION.