SEVENTH CIRCUIT UPHOLDS SUNDSTRAND; MONEY REPAID TO U.S. FOR OVERCHARGES WAS NOT FROM CONTRACT 'RENEGOTIATION.'

SEVENTH CIRCUIT UPHOLDS SUNDSTRAND; MONEY REPAID TO U.S. FOR OVERCHARGES WAS NOT FROM CONTRACT 'RENEGOTIATION.'

Sundstrand Corp. and its subsidiaries were contractors on various government defense contracts that were subject to regulatory requirements, including the Cost Accounting Standards (CAS) of OMB and the Truth-in-Negotiations Act (TINA). Sundstrand pleaded guilty in 1988 to criminal charges relating to some of the contracts, including activities relating to violations of CAS and TINA. Under a plea agreement, Sundstrand agreed to pay the government $115 million in full payment of restitution, damages, penalties, fines, and costs. A subsidiary, Sundstrand Data Control Inc. (SDC), agreed to pay the government $500,000 as a criminal fine, $11.3 million plus interest in full administrative settlement of the government's contractual claims, and $520,000 for statutory and common law relief and reimbursement of the costs of the grand jury investigation. Under another settlement, Sundstrand agreed to pay the government over $64 million for alleged noncriminal CAS compliance, and further agreed not to charge the government $7.1 million in costs contested by the government. SDC also agreed to pay the government $1.7 million for various noncriminal CAS compliance issues. The IRS determined deficiencies against Sundstrand and its subsidiaries for the years 1979 through 1982 totaling almost $75.5 million, and the corporations petitioned the Tax Court. The IRS moved for partial summary judgment arguing that section 1481, relating to renegotiation of certain government contracts, did not apply to some of the payments made to the government. Thus, the IRS maintained, Sundstrand was not permitted to restate its income for the years in issue under section 1481, but was entitled to a deduction only in the year of repayment. The Tax Court agreed with the IRS, holding that the payments made by Sundstrand and its subsidiaries did not arise from the recovery of excessive profits through a renegotiation of a government contract under section 1481. (For a summary, see Tax Notes, May 11, 1992, p. 779; for the full text, see 92 TNT 95-18, or H&amp;D, May 5, 1992, p. 1505.) The Tax Court subsequently denied Sundstrand's motion for reconsideration. (For a summary, see Tax Notes, Nov. 16, 1992, p. 1029; for the full text, see 92 TNT 227-24.) Sundstrand appealed. The Seventh Circuit has affirmed. Circuit Judge Richard A. Posner first rejected Sundstrand's argument that the courts should simply focus on the words "any part of the contract price of a contract with the United States" in analyzing whether the adjustments required by CAS and TINA constituted an elimination of "excessive profits" by a "renegotiation" within the meaning of section 1481. Pointing out that Sundstrand admitted that its claim would not qualify under the statute as a "renegotiation" if it had fought the government to judgment rather than settling, Judge Posner explained that the term "excessive profits" requires interpretation as well, and should not be read literally to embrace any adjustments to a contract price made under CAS and TINA. Judge Posner then wrote that the statute's definitions of "renegotiation" and "excessive profits" came into the tax laws in the Revenue Act of 1942, which was passed shortly after the Renegotiation Act of 1942. The latter statute, Judge Posner noted, was designed to control war profiteering by postponing until "calmer times" final decisions on defense contractors' allowable profits. The concern behind the provision later codified as section 1481, Judge Posner explained, was that "if, as expected, tax rates rose during the war, a contractor allowed to deduct excessive profits from current income would obtain a windfall measured by the difference between the (lower) income tax that he had paid when he earned the profits and the (higher) value of the deduction from income tax when he repaid the profits to the government." The court then explained that the term "renegotiation" and the phrase "any part of any contract price" were drafted broadly to account for the government's power to eliminate excessive profits by reducing the contract price of future agreements. The court distinguished the above circumstances from a contract that "is perfectly definite but because of fraud or mistake the promisee is held by a court to be entitled to recover all or part of the contract price," as occurred in Sundstrand's case. The implication of Sundstrand's interpretation of the statute, Judge Posner wrote, is that the damages paid to the government would constitute excessive profits, and, "[w]ere it not that a judgment in a lawsuit is difficult to describe as a renegotiation, modification, or agreement, this result would be consistent with a literal reading of section 1481." However, Judge Posner added, such a result would make no sense in light of the history and purpose of the statute, which tie the provision to "a distinct class of contracts: those whose terms are tentative when made." CAS and TINA, on the other hand, do not relate to such a class of contracts, the court wrote, but rather give the government additional defenses against enforcement by the contractor, and vindication of a party's legal rights is different from the revision of terms tentative when made. In conclusion, Judge Posner wrote, section 1481 was repealed because of the expiration 14 years earlier of the last renegotiation act, not "because someone wanted to change the tax treatment of moneys required to be disgorged by defense contractors that had violated the government's rights."

Sundstrand Corp. v. Commissioner, 98 T.C. 518 (1992) (For a summary, see Tax Notes, May 11, 1992, p. 779; for the full text, see 92 TNT 95-18, or H&D, May 5, 1992, p. 1505) Sundstrand Corp. v. Commissioner, T.C. Memo. 1992-569 (For a summary, see Tax Notes, Nov. 16, 1992, p. 1029; for the full text, see 92 TNT 227-24)

The Seventh Circuit has affirmed a Tax Court decision holding that a corporation that repaid money to the government under the Truth-in-Negotiations Act and OMB's Cost Accounting Standards was not entitled to restate its income for earlier years under section 1481.

Sundstrand Corp. and its subsidiaries were contractors on various government defense contracts that were subject to regulatory requirements, including the Cost Accounting Standards (CAS) of OMB and the Truth-in-Negotiations Act (TINA). Sundstrand pleaded guilty in 1988 to criminal charges relating to some of the contracts, including activities relating to violations of CAS and TINA. Under a plea agreement, Sundstrand agreed to pay the government $115 million in full payment of restitution, damages, penalties, fines, and costs. A subsidiary, Sundstrand Data Control Inc. (SDC), agreed to pay the government $500,000 as a criminal fine, $11.3 million plus interest in full administrative settlement of the government's contractual claims, and $520,000 for statutory and common law relief and reimbursement of the costs of the grand jury investigation. Under another settlement, Sundstrand agreed to pay the government over $64 million for alleged noncriminal CAS compliance, and further agreed not to charge the government $7.1 million in costs contested by the government. SDC also agreed to pay the government $1.7 million for various noncriminal CAS compliance issues. The IRS determined deficiencies against Sundstrand and its subsidiaries for the years 1979 through 1982 totaling almost $75.5 million, and the corporations petitioned the Tax Court. The IRS moved for partial summary judgment arguing that section 1481, relating to renegotiation of certain government contracts, did not apply to some of the payments made to the government. Thus, the IRS maintained, Sundstrand was not permitted to restate its income for the years in issue under section 1481, but was entitled to a deduction only in the year of repayment. The Tax Court agreed with the IRS, holding that the payments made by Sundstrand and its subsidiaries did not arise from the recovery of excessive profits through a renegotiation of a government contract under section 1481. (For a summary, see Tax Notes, May 11, 1992, p. 779; for the full text, see 92 TNT 95-18, or H&D, May 5, 1992, p. 1505.) The Tax Court subsequently denied Sundstrand's motion for reconsideration. (For a summary, see Tax Notes, Nov. 16, 1992, p. 1029; for the full text, see 92 TNT 227-24.) Sundstrand appealed. The Seventh Circuit has affirmed. Circuit Judge Richard A. Posner first rejected Sundstrand's argument that the courts should simply focus on the words "any part of the contract price of a contract with the United States" in analyzing whether the adjustments required by CAS and TINA constituted an elimination of "excessive profits" by a "renegotiation" within the meaning of section 1481. Pointing out that Sundstrand admitted that its claim would not qualify under the statute as a "renegotiation" if it had fought the government to judgment rather than settling, Judge Posner explained that the term "excessive profits" requires interpretation as well, and should not be read literally to embrace any adjustments to a contract price made under CAS and TINA. Judge Posner then wrote that the statute's definitions of "renegotiation" and "excessive profits" came into the tax laws in the Revenue Act of 1942, which was passed shortly after the Renegotiation Act of 1942. The latter statute, Judge Posner noted, was designed to control war profiteering by postponing until "calmer times" final decisions on defense contractors' allowable profits. The concern behind the provision later codified as section 1481, Judge Posner explained, was that "if, as expected, tax rates rose during the war, a contractor allowed to deduct excessive profits from current income would obtain a windfall measured by the difference between the (lower) income tax that he had paid when he earned the profits and the (higher) value of the deduction from income tax when he repaid the profits to the government." The court then explained that the term "renegotiation" and the phrase "any part of any contract price" were drafted broadly to account for the government's power to eliminate excessive profits by reducing the contract price of future agreements. The court distinguished the above circumstances from a contract that "is perfectly definite but because of fraud or mistake the promisee is held by a court to be entitled to recover all or part of the contract price," as occurred in Sundstrand's case. The implication of Sundstrand's interpretation of the statute, Judge Posner wrote, is that the damages paid to the government would constitute excessive profits, and, "[w]ere it not that a judgment in a lawsuit is difficult to describe as a renegotiation, modification, or agreement, this result would be consistent with a literal reading of section 1481." However, Judge Posner added, such a result would make no sense in light of the history and purpose of the statute, which tie the provision to "a distinct class of contracts: those whose terms are tentative when made." CAS and TINA, on the other hand, do not relate to such a class of contracts, the court wrote, but rather give the government additional defenses against enforcement by the contractor, and vindication of a party's legal rights is different from the revision of terms tentative when made. In conclusion, Judge Posner wrote, section 1481 was repealed because of the expiration 14 years earlier of the last renegotiation act, not "because someone wanted to change the tax treatment of moneys required to be disgorged by defense contractors that had violated the government's rights."

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SEVENTH CIRCUIT UPHOLDS SUNDSTRAND; MONEY REPAID TO U.S. FOR OVERCHARGES WAS NOT FROM CONTRACT 'RENEGOTIATION.'