Contracts for the purchase of flour by the Government included
as part of the price any federal tax theretofore imposed by
Congress applicable to the material purchased, and provided that,
if any processing or other tax were imposed or "changed by
Congress" after the date set for opening of bids and were paid to
the Government by the contractor on the supplies contracted for,
then the price would be "increased or decreased" accordingly.
Held, that the subsequent decision in
United States v.
Butler, 297 U. S. 1,
adjudging the processing tax void, and the recognition of that
holding through provisions of the Revenue Act of 1936, amounted to
a "change" of the vendor's tax liability made "by Congress," within
the meaning of the contract, and that amounts paid by the
Government as part of the contract price to offset processing taxes
presumptively payable by the vendor but which, because of that
decision the vendor escaped, were recoverable by the United States.
P.
314 U. S.
217.
92 Ct.Cls. 390, reversed.
Certiorari, 313 U.S. 554, to review a decision of the Court of
Claims awarding damages to the flour mills company on a contract
for the sale of flour and bran, and denying the right of the United
States to offset payments made by it on earlier contracts to cover
processing taxes which were subsequently held to be
unconstitutional so that the vendor was not obliged to pay
them.
Page 314 U. S. 213
MR. JUSTICE ROBERTS delivered the opinion of the Court.
Between May, 1935, and January 6, 1936, the respondent entered
into eight contracts for the sale of flour to the United States.
Deliveries were duly made, and the contract price was paid.
Each of the eight contracts provided:
"Prices set forth herein include any Federal tax heretofore
imposed by the Congress which is applicable to the material
purchased under this contract. If any sales tax, processing tax,
adjustment charge or other taxes or charges are imposed or changed
by the Congress after the date set for the opening of the bid upon
which this contract is based and made applicable directly upon the
production, manufacture, or sale of the supplies covered by this
contract, and are paid to the Government by the contractor on the
articles or supplies herein contracted for, then the prices named
in this contract will be increased or decreased accordingly, and
any amount due the contractor as a result of such change will be
charged to the Government and entered on vouchers (or invoices) as
separate items."
Under the terms of the Agricultural Adjustment Act, [
Footnote 1] processing taxes were due
in respect of the flour sold aggregating $28,419.20.
In 1936, the respondent entered into four contracts for the sale
of flour and bran to the United States for a total price of
$23,288.11. The commodities were delivered, and vouchers for the
purchase price tendered to the General Accounting Office. Payment
was withheld by the Comptroller General, who notified the
respondent that the Government had overpaid it in the sum of
$28,419.20.
The respondent had obtained an injunction against the collection
of any processing taxes from it, and, as a result
Page 314 U. S. 214
of the decision in
United States v. Butler,
297 U. S. 1, paid no
processing taxes on the wheat used in the manufacture of flour
covered by the 1935 contracts.
The respondent sued in the Court of Claims to recover the
purchase price under the four 1936 contracts, and contested the
offsets claimed by the Government arising out of the eight 1935
contracts. Judgment was rendered in favor of the respondent for
$23,288.11. We granted certiorari, 313 U.S. 554, because of the
importance of the question [
Footnote 2] and of the number of pending cases involving
the same question. We are of opinion that the respondent was not
entitled to recover.
The contracts are to be construed in the light of the relations
between the parties at the time they were executed. The
Agricultural Adjustment Act did not exempt a vendor to the United
States from the processing tax, and a Treasury Regulation required
that he pay the tax. [
Footnote
3] The quoted clause shows that this tax was specifically in
the minds of the parties, for it was stipulated that it was
included in the price bid. The Government stood in a dual relation
to the respondent. It became at the same time a purchaser at the
named price and also a claimant of the processing tax upon the
material purchased. The stipulation was evidently made in view of
the facts that the purchasing officer could not buy the goods tax
free, and that the Government desired that the price to it should
be ex-tax. To accomplish this, the sale price was
pro
tanto offset by the amount of the tax. Plainly, if the United
States had not been thought entitled to collect the tax, the bid
price would not have been acceptable. Plainly, also, if the
respondent had not been thought
Page 314 U. S. 215
liable for the tax, the bid price would have been less.
[
Footnote 4] As disclosed by
the contracts, the understanding was that the price would have been
less by the amount of the tax. The respondent disputes this,
contending that we cannot say how much of the tax it was willing to
absorb in order to obtain the contracts; that it may have been
making the sales at an actual loss. But this is not the theory of
the contracts. They provide that, if, in future, any existing tax
described therein is changed by Congress the price named in each
contract "will be increased or decreased accordingly." This does
not mean, as contended by respondent, that the amount of increase
or decrease is an unknown quantity to be made definite and certain
by proof. It means that the amount of any increase in tax shall be
added, and the amount of any decrease subtracted from, the contract
price. This view is strengthened by the provision for separate
billing of the increase, if any.
The respondent, however, argues that, under any construction,
the Government is not entitled to maintain its set-off, first,
because the contracts contain no undertaking by respondent that it
will pay the tax and, secondly, that even if they do, the
stipulation for reduction of price applies only to changes by
Congress, and excludes relief from the tax by an adjudication that
the exaction is unconstitutional.
In support of the first proposition, the respondent relies on
numerous decisions holding tax clauses in private contracts not to
require adjustment of the contract price as a result of the
decision in the
Butler case,
supra. [
Footnote 5] These
Page 314 U. S. 216
go on the absence of an express provision respecting the
constitutional validity, and upon the omission of the parties to
bill the tax separately from the purchase price. We think they are
inapplicable in the present case, since the tax clause here had a
purpose different from those in private contracts. As we have said,
the purpose here was to deprive either party of the advantage or
disadvantage resulting from the incidence of the tax, and therefore
it was sought to eliminate the effect of the exaction on the
contract price.
In the case of private contracts, the vendees purchase for
resale, and the tax burden assumed is passed on to their customers.
The fact that the processor -- the vendor -- is protected from the
payment of the tax by injunction does not reduce the price to the
vendee or to purchasers from him. The courts will not permit the
unjust enrichment involved in recovery by the vendee of the amount
of tax which he has passed on to his customers. [
Footnote 6] In the contracts in question, the
Government did not buy for resale. Unless it received the tax, it
suffered a definite disadvantage. [
Footnote 7] Its purpose, as shown by the contracts, was to
balance the tax element in the price
Page 314 U. S. 217
paid with the tax collected. [
Footnote 8] The Government, which could not pass on the
tax on resale, was thus protected not against a fall in the market
price, but against a loss in its tax revenues. In cases of private
sales, the processor's injunction against collection of the tax, as
held by the cases cited, worked no harm to his vendee. A similar
injunction, in the case of Government contracts, would leave the
price to the Government at the higher level reflecting the tax, and
deprive the Government of the reciprocal benefit flowing from
collection of the tax.
In its second position, the respondent attempts to meet what has
been said as to the inequity of its retaining the full price, when
it escapes paying the tax, with the argument that the result is
inevitable under the contracts. It refers to the fact that it had
already obtained an injunction against the collection of the
processing tax when some of the 1935 contracts were made, and
asserts that, if the Government desired to provide against a
decision that the taxing act was unconstitutional, this could
readily have been done by the addition of a single phrase.
As we have said, there is respectable authority for the position
that tax clauses in private contracts do not reach a judicial
decision of invalidity of the statute. We think, however, these
decisions have no application in the present instance. Here,
legislation recognizing the decision in
United States v.
Butler, supra, and imposing taxes on the enrichment of those
who passed on the amount of the tax without having to pay it, may
properly be said to have been a change of the tax by Congress
within the terms of the contracts.
The decision in the
Butler case was rendered January 6,
1936. It is true that, after that decision, a taxpayer's right to
an injunction against the collection of the tax
Page 314 U. S. 218
was clear. [
Footnote 9] But,
by the Revenue Act of 1936, [
Footnote 10] which became a law June 22, 1936, Congress
not only recognized the effect of that decision as doing away with
the tax in question, but legislated with respect to the consequent
rights and remedies of those who had paid the tax and the liability
of those who had passed on its burden and escaped payment.
By Title III, a tax is laid on the unjust enrichment consequent
upon the passing on to customers the burden of unpaid processing
taxes. In § 501(b), (i)(2), and (j)(2), Congress defines the
date of termination of the tax as, "in the case of a Federal excise
tax held invalid by a decision of the Supreme Court, the date of
such decision." In Title IV, there is a provision relative to floor
stock taxes which recognizes the invalidity of the Agricultural
Adjustment Act by reenacting the refund provisions of that Act in
respect of transactions prior to January 6, 1936, the date of the
Butler decision. § 601(a). The title defines a taxable
commodity as one on which a processing tax was provided for as of
January 5, 1936, the day before the
Butler decision.
§ 602(c)(1).
Title VII makes provision for the refund of processing taxes
collected under the Agricultural Adjustment Act, and is a
recognition by Congress that the taxes were invalid.
Thus, a change in respondent's tax liability has been recognized
and confirmed by Congress. Even though this legislative action was
a confirmation of or acquiescence in the
Butler decision,
and although its effect may have been merely cumulative, it
amounted to a change made by Congress in respondent's liability for
the tax within the meaning of the contracts.
The judgment is
Reversed.
[
Footnote 1]
U.S.C.Supp. V, Tit. 7, § 609.
[
Footnote 2]
United States v. Hagan & Cushing Co., 115 F.2d 849;
Ismert-Hincke Milling Co. v. United States, 90 Ct.Cls. 27;
United States v. American Packing & Provision Co., 122
F.2d 445.
[
Footnote 3]
Regulations 81, Art. 9, under the Agricultural Adjustment
Act.
[
Footnote 4]
Compare United States v. Glenn L. Martin Co.,
308 U. S. 62.
[
Footnote 5]
Moundridge Milling Co. v. Cream of Wheat Corp., 105
F.2d 366;
Consolidated Flour Mills v. Ph. Orth. Co., 114
F.2d 898;
United States v. American Packing & Provision
Co., 122 F.2d 445; City Baking Co. v. Cascade Milling &
Elevator Co., 24 F. Supp. 950;
G. S. Johnson Co. v. N.
Sauer Milling Co., 148 Kan. 861, 84 P.2d 934;
Sparks
Milling Co. v. Powell, 283 Ky. 669, 143 S.W.2d 75;
Crete
Mills v. Smith Baking Co., 1939, 136 Neb. 448, 286 N.W.
333.
[
Footnote 6]
See the cases cited
Note 5 The respondent urges that the unjust enrichment tax
imposed by Title III of the Revenue Act of 1936, 49 Stat. 1734,
destroys the equity of the Government's case, but, if respondent is
required to reduce its price by the amount of its unpaid processing
tax, it will not be subject to the unjust enrichment tax on these
transactions.
See §§ 501(b)(2) and
501(j)(4).
[
Footnote 7]
In
United States v. American Packing & Provision
Co., 122 F.2d 445, the Government was held entitled to
maintain a set-off asserted under conditions like those here
involved on the ground that the vendor had received money from the
Government which, in equity and good conscience, it should
repay.
[
Footnote 8]
Compare United States v. Cowden Mfg. Co., 312 U. S.
34,
312 U. S.
36-37.
[
Footnote 9]
Rickert Rice Mills, Inc. v. Fontenot, 297 U.
S. 110.
[
Footnote 10]
49 Stat. 1648.