17 F.3d 965 (7th Cir. 1994), 93-2250, Sundstrand Corp. v. C.I.R.

Docket Nº:93-2250.
Citation:17 F.3d 965
Party Name:SUNDSTRAND CORPORATION, et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Case Date:February 22, 1994
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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17 F.3d 965 (7th Cir. 1994)

SUNDSTRAND CORPORATION, et al., Petitioners-Appellants,



No. 93-2250.

United States Court of Appeals, Seventh Circuit

February 22, 1994

Argued Jan. 3, 1994.

Rehearing and Suggestion for Rehearing

En Banc Denied April 8, 1994.

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Francis D. Morrissey, James M. O'Brien, Baker & McKenzie, Chicago, IL, John C. Klotsche (argued), Robert H. Albaral, Owen P. Martikan, Neil D. Traubenberg, Baker & McKenzie, Dallas, TX, for petitioners-appellants.

Gary R. Allen, Bruce R. Ellisen, Frank P. Cihlar (argued), Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for respondent-appellee.

Before POSNER, Chief Judge, ROVNER, Circuit Judge, and MIHM, District Judge. [*]

POSNER, Chief Judge.

Ordinarily when a taxpayer repays money that he had previously received as income and included in his gross income in the year of receipt, he can deduct the payment from his current income in figuring his current income tax liability but he cannot go back and recompute his tax liability for the year in which he received the money that he is now repaying. Money received under a claim of entitlement to it as income is income for purposes of the federal income tax even if the claim is defeasible and eventually defeated. E.g., North American Oil Consolidated v. Burnet, 286 U.S. 417, 424, 52 S.Ct. 613, 615, 76 L.Ed. 1197 (1932); United States v. Lewis, 340 U.S. 590, 71 S.Ct. 522, 95 L.Ed. 560 (1951); Continental Illinois Corp. v. Commissioner, 998 F.2d 513, 521 (7th Cir.1993). But there are exceptions, one created by section 1481 of the Internal Revenue Code, which though repealed in 1990 applies to taxable years before the repeal. We are asked to decide whether a defense contractor that agreed to repay hundreds of millions of dollars to the government pursuant to the Truth in Negotiations Act, 10 U.S.C. Sec. 2306a, and OMB's Cost Accounting Standards, 48 C.F.R. pt. 9904, can use section 1481 to restate its income for the years (1979 through 1982) in which it received income under contracts negotiated and performed in violation of CAS and TINA. Such a restatement would be more profitable to Sundstrand than deducting the repayments from its current income. The corporate income tax was higher in the contract period than it is today, and a deduction is worth more the higher the tax rate.

Section 1481(a)(1) provides, with respect to any contract (or subcontract, but we can ignore that detail) with a federal agency, that "excessive profits" eliminated as the result of a "renegotiation" shall be used to reduce the contract price that was used in figuring the contractor's taxable income in the year that the contractor received the excessive profits. A "renegotiation" includes "any transaction

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which is a renegotiation within the meaning of the Renegotiation Act ..., any modification of one or more contracts with the United States or any agency thereof, and any agreement with the United States or any agency thereof in respect of one or more such contracts." 26 U.S.C. Sec. 1481(a)(1)(A). "Excessive profits" include "any amount which constitutes excessive profits within the meaning assigned to such term by the Renegotiation Act ..., any part of the contract price of a contract with the United States or any agency thereof, ... and any profits derived from one or more such contracts." 26 U.S.C. Sec. 1481(a)(1)(B). The Tax Court, concluding that the adjustments...

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