Waterman Steamship Corp. v. United States/Opinion of the Court

This case involves the tax consequences of the purchase by petitioner of a number of ships from the United States Government during the Second World War and the subsequent post-war refund by the Government, pursuant to an Act of Congress, of a substantial portion of the purchase price.

At various times during the years 1942 through 1946, petitioner purchased from the United States Maritime Commission a total of 18 ships that had been built by the United States Government. It paid a total of $46,973,167 for these vessels (after an allowance for the trade-in by petitioner of four of its own ships). The vessels purchased by petitioner were immediately chartered back, by bareboat charters, to the United States so that the Government continued to operate them. The United States paid a total of $13,430,431 in charter hire to petitioner for the wartime use of these ships during the years 1942 through 1946, which amount petitioner reported in its federal income tax returns for those years.

On March 8, 1946, Congress enacted the Merchant Ship Sales Act of 1946, 60 Stat. 41, as amended, 50 U.S.C.App. § 1735 et seq. (1958 ed.), which gave American citizens the right to purchase warbuilt ships from the United States as statutory sales prices which were substantially below the prices at which such vessels were sold by the Commission during the war. Section 9 of the Act, 50 U.S.C.App. § 1742 (1958 ed.), provided the opportunity, upon application, for those, like petitioner, who had bought ships during the war years to obtain a downward adjustment in their sales price 'by treating the vessel as if it were being sold to the applicant on the date of the enactment of this Act (March 8, 1946), and not before that time.' The details of a § 9 adjustment are complex. They consist, however, essentially of two parts: (1) an adjustment in the purchase price down to the new statutory price (§§ 9(b)(1)-(4)); and (2) an unwinding of the transactions, including tax payments, that occurred as a result of the sale prior to 1946 (§§ 9(b)(5), (6), (c)(1)).

Petitioner applied for a downward adjustment of the sales price of its 18 ships purchased prior to the Act. The Maritime Commission granted such an adjustment, determining that under the statute the sales price of these vessels should be $17,685,424. Petitioner therefore was credited with $29,287,743, the difference between the statutory sales price and the original price of $46,973,167.

The pre-Act transactions were then unwound, pursuant to the statute, as follows: (1) the Government was credited $13,430,431, representing the charter hire which had been paid by the Government to petitioner for use of the 18 vessels from 1942 to 1946; (2) the Government was debited $1,495,125, representing charter hire which would have been paid by the Government to petitioner prior to 1946 for use of the four ships traded in by petitioner on the original purchase; (3) the Government was debited $2,686,262, representing a return of the interest petitioner paid on the mortgages and interest income which petitioner could have earned on the cash invested in the 18 vessels prior to the date of the Act had this cash not been so committed; and (4) the Government was debited $430,206, representing an overpayment by petitioner of federal income taxes, which, under the Act, were recalculated to give effect to the foregoing unwinding. The sum of the unwinding credits and debits was a net credit in favor of the Government of $8,818,838. This amount reduced petitioner's credit on the original sales price of $46,973,167 from $29,287,743 to $20,468,904.

In tabular form, the computations and credits made under the Act were as follows:

Statutory Adjustments.

1. Original sales price.................. $46,973,

2. Statutory sales price.................17,685,

(§§ 9(b) (1)-(4) and (7)).......$29,287,

(§ 9(b) (6))......................13,430,

(§ 9(b) (6))...................... (1,495,125)

(§ 9(b) (5))...................... (2,686,262)

income taxes (§ 9(b) (8)).

(line 5 minus line 7-9)...............8,818,