APPEAL FROM THE UNITED STATES TAX COURT (T.C. No. 8280-74)
Before Aldisert and Higginbotham, Circuit Judges, and Stern, District Judge.*fn*
The question presented in this appeal by the taxpayer, Sunbury Textile Mills, Inc., is whether the Tax Court properly interpreted a contract between Sunbury, a small textile producer in northern Pennsylvania, and Crompton & Knowles Corp. (C&K), a manufacturer of weaving machines.
In March 1969, Sunbury contracted to purchase 72 looms from C&K. Delivery was made in three segments over a period of several months. The Tax Court ruled that even though Sunbury purchased all of the looms as scheduled, it had, during the course of the contract, the unrestricted power to cancel the second and third segments and was therefore not subject to a binding contract for purposes of investment credits claimed by Sunbury on its 1970 and 1971 tax returns. We disagree with the Tax Court's interpretation of the contract and reverse.
We are called upon to decide which of two interpretations of the contract is proper, based on written documents, the extrinsic evidence received by the Tax Court to assist in interpreting the documents, the findings of fact which the court made, and the legal conclusions drawn therefrom. The conflict between the taxpayer and the Commissioner is not sophisticated. Sunbury contends that in March 1969 it entered into a binding contract to purchase 72 looms, subject only to the right to cancel a portion thereof for cause. The Commissioner contends that Sunbury was obligated to purchase only 24 of the looms and had an absolute right to cancel the remainder.
The question of whether the entire contract for 72 looms was binding on Sunbury in March of 1969 is vital because of the termination period created by § 49 of the Internal Revenue Code, 26 U.S.C. § 49,*fn1 which suspended the investment credits in effect for the taxable years in question. Section 38 of the Code allows an investment credit for all property defined as "section 38 property." 26 U.S.C. § 38. The definition of this term is set out in § 48 of the Code and need not be examined in detail, for the Commissioner readily concedes that all 72 looms will qualify as "section 38 property" if the requirements of § 49 are satisfied. For our purposes it is sufficient to say that § 49(a)(2) excludes from "section 38 property" any property acquired by the taxpayer after April 18, 1969, other than pre-termination property; and § 49(b)(1) provides that any property shall be treated as pre-termination property if it was acquired pursuant to a contract that was, on April 18, 1969, and at all times thereafter, binding on the taxpayer. 26 U.S.C. §§ 49(a) and (b). Therefore, we must determine if such a contract existed between Sunbury and C&K for the 72 looms.
The foregoing provisions of the Internal Revenue Code concededly govern the contract before us. The investment credit incentives were only temporarily affected by the termination provisions of 26 U.S.C. § 49(a) and (b), for in 1971 Congress repealed these restrictions and restored the credit. 26 U.S.C. § 50. Thus, it was only for a discrete period of less than two years, from April 19, 1969 to March 31, 1971, that the taxpayer and like businesses were faced with the termination provisions.
The parties have stipulated, and the Tax Court agreed, that state law, in this case Massachusetts law, governs the interpretation of the contract, Sartori v. Commissioner, 66 T.C. 680, 689 (1976).
The Tax Court's findings may be summarized as follows. In 1967, Sunbury began to explore the market for a high-speed shuttleless loom capable of weaving its jacquard upholstery fabric. One of the firms contacted was C&K, which was in the business of building customized weaving machines. After examining a number of different shuttleless looms, Sunbury determined that C&K's Outside Filling Supply (OFS) loom was the best model available. By a unanimous vote of its board of directors, Sunbury decided to purchase 72 OFS looms at a contract price of $684,948.
Gordon G. Matheson, Sunbury's president, represented the mill during the negotiations with C&K for the purchase of the OFS looms. Henry C. Wingard was the domestic sales manager of C&K and personally negotiated the sale. In addition, since C&K's service department was under his jurisdiction, Wingard had overall responsibility for starting up the looms and making them perform.
Testimony presented in the Tax Court showed that Wingard sent Matheson a letter dated February 27, 1969 entitled "Proposal for New OFS Looms." This letter provided:
We believe that the proposal we have now worked out does offer the best approach we can give in regard to being able to make continuous shipment and still at the same time allow for your people to make some evaluation of the first looms which are installed, before proceeding with the entire order, and our proposal is as follows:
1. If we can have your order for seventy-two new OFS looms by Friday, March 7, 1969, we would ship the first twelve looms in July in order to let your people get started with training and evaluation. (This would be before our shut-down for vacation.) The next twelve looms would then follow in September.
2. You would then let us know by October 15, 1969, whether you wished to cancel the balance of forty-eight looms, or have us proceed to build them for you. There would be no cancellation charge, provided we hear from you by September 15, 1969.
68 T.C. 528, 531. Other testimony was adduced relating to subsequent communications by Sunbury to its two mortgagees, Philadelphia Life Insurance Company and the First National Bank of Sunbury, concerning the proposed contract with C&K.
On March 25, 1969, C&K forwarded to Sunbury a document entitled "Specifications," which included seven typed pages prepared by Wingard. The specifications provided, Inter alia:
Quantity 72 Type Outside Filling
Quantity 72 Supply Jacquard Looms
Total order of seventy-two (72) looms to be divided into three (3) separate sections each comprising twenty-four (24) looms. The first section to be shipped twelve (12) looms in July 1969, twelve (12) looms in September 1969. The second section to be shipped twelve (12) looms January 1970, twelve (12) looms February 1970. The ...