CONSOLIDATED ELECTRONICS INDUS. CORP. v. United States

• Citation: 140 F. Supp. 405
• Decision Date: 01 May 1956
• Docket Number: No. 546-53.,546-53.
• Parties: CONSOLIDATED ELECTRONICS INDUSTRIES CORP., v. The UNITED STATES.
• Court: U.S. Claims Court

140 F. Supp. 405

CONSOLIDATED ELECTRONICS INDUSTRIES CORP., v. The UNITED STATES.

No. 546-53.

United States Court of Claims.

May 1, 1956.

Clifford H. Domke, Jackson, Mich., for plaintiff. McKone, Badgley, Domke & Kline, Jackson, Mich., were on the briefs.

George Willi, Washington, D. C., with whom was Charles K. Rice, Acting Asst. Atty. Gen., for defendant. Andrew D. Sharpe and Elizabeth B. Davis, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and LARAMORE, Judges.

LITTLETON, Judge.

The Consolidated Electronics Industries Corp. (formerly the Reynolds Spring Company, hereinafter referred to as plaintiff) sues to recover $8,049.80, as an overpayment of interest on excess profits tax deficiencies for the period January 1, 1940, to September 30, 1940, and for the fiscal year ended September 30, 1941. The facts are not in dispute.

The plaintiff filed its income and excess profits tax returns for the period January 1, 1940, to September 30, 1940, and for the fiscal year ended September 30, 1941 (hereinafter referred to as years 1940 and 1941, respectively), and paid the taxes shown due thereon. On its returns for these years plaintiff computed its excess profits credit under the equity invested capital method, which produced a lower profits tax.

On August 28, 1943, plaintiff filed with the Treasury Department an application to have its profits tax determined under section 722 of the Internal Revenue Code of 1939, as amended, 26 U.S.C. § 722, note (1946 Ed.), 26 U.S.C.A. Excess Profits Taxes, § 722, page 175.

On August 21, 1947, the Commissioner of Internal Revenue, by 90-day letter, determined deficiencies in excess profits taxes for 1940 and 1941 in the respective amounts of $44,437.50 and $63,075.36, based on the equity invested capital method. The plaintiff filed a petition with the Tax Court, as provided by the statute, for a redetermination of these deficiencies. The only issue submitted to the Tax Court was the determination of the correct amount of equity invested capital and the amount of excess profits tax liability based thereon, the taxpayer claiming that invested capital should be in excess of what the Commissioner had determined.

On June 26, 1947, plaintiff executed an agreement with the Commissioner in which it agreed that its constructive average base period net income was $344,687.70. This is necessary before the provisions of section 722 may be applied. The Excess Profits Tax Council, representing the Commissioner, approved this agreement on the same date. The Excess Profits Tax Council considered the case and after a study thereof made a determination granting the taxpayer relief pursuant to section 722, and on April 20, 1948, the Commissioner formally approved the allowance and the elimination of a portion of the tax theretofore asserted. The approval by the Commissioner on April 20, 1948, of the elimination of such excess as determined and computed by the council under section 722, resulted in fixing the amount of plaintiff's additional excess profits tax liability for 1940 and 1941, exclusive of interest, at $28,243.25 and $30,267.29, respectively, or a total of $58,510.54, if plaintiff computed its tax on the basis of the income method rather than the equity invested capital method. After this approval by the Commissioner he was not at liberty to assess and collect more than the $58,510.54.

Inasmuch as plaintiff was entitled to use either the income method under section 722 or the equity invested capital method, whichever was most advantageous, in determining its excess profits tax credit, it continued its Tax Court proceeding because it knew, and so did the Commissioner, that if its position on the disputed items with respect to the equity invested capital method was sustained, it would owe no additional excess profits taxes for 1940 and 1941.

On January 31, 1949, the Tax Court, Reynolds Spring Company v. Commissioner of Internal Revenue, 12 T.C. 110, sustained the equity invested capital deficiencies which the Commissioner had determined in the 90-day notice in the amount of $44,437.50 for 1940 and $63,075.36 for 1941, or a total of $107,512.86, computed on the equity invested capital method. This decision was affirmed by the Circuit Court, 6 Cir., 181 F.2d 638, and certiorari was denied by the Supreme Court on October 9, 1950, 340 U.S. 821, 71 S.Ct. 53, 95 L.Ed. 603. If that had been all there was to the case the Tax Court decision would have become final on October 9, 1950. But here it was not.

Excess profits tax deficiencies, computed on the basis of plaintiff's constructive average base period net income, were assessed on December 8, 1950, in the principal amount of $58,510.54 ($28,243.25 for 1940 and $30,267.29 for 1941). Interest, however, was assessed at the same time, computed on the previously proposed deficiencies based on the equity invested capital method on $107,512.86 ($44,437.50 for 1940 and $63,075.36 for 1941) from the due dates of the returns to December 8, 1950, on the theory of the date of the finality of the Tax Court's decision. But we think that under the facts of this case that was not all there was to the case.

On January 15, 1951, and January 23, 1951, plaintiff paid the deficiencies and interest, together with the additional interest because of some delay in payment after notice and demand. Timely claims for refund were filed, rejected, and this suit followed.

The plaintiff originally contended that no interest was collectible by the Government on the $107,512.86 because this sum represented only potential deficiencies. However, after the decision in United States v. Koppers Company, Inc., 348 U.S. 254, 75 S.Ct. 268, 99 L.Ed. 302, plaintiff conceded that interest was due the Government on the $107,512.86 until April 20, 1948, the date the Commissioner approved the allowance by him of relief which had the effect of eliminating $49,002.32 of the $107,512.86.

The only issue remaining, therefore, in the instant case is whether the Government was entitled to assess and collect interest on the deficiency of $107,512.86 after the Commissioner had approved, on April 20, 1948, the use of the constructive average base period net income for these years, which fixed the maximum additional excess profits tax liability for these years at $58,510.54.

The Internal Revenue Code does not expressly cover interest on "potential" deficiencies. Both parties rely on United States v. Koppers Company, supra. The plaintiff contends, and we think rightly, that the accrual of interest on the $107,512.86 ceased on the date the Commissioner approved the plaintiff's right, as determined by the Tax Council, to use the agreed upon constructive average base period net income, because at that time the Government's right to assess and collect or retain any more excess profits taxes for 1940 and 1941 than would be due under the constructive average base period net income ($58,510.54) terminated or no longer existed. The defendant contends that interest was due on the $107,512.86 from the due dates of the returns to the date of assessment of the final deficiencies, and that the Supreme Court so held in the Koppers case supra.

The facts of the Koppers case and the instant case are in some respects very similar, but in others they are very different. In the Koppers case the taxpayer underpaid its excess profits taxes for the years 1940 and 1941, thus giving rise to excess profits tax deficiencies for...