American Radiator & Standard San. Corp. v. United States

• Decision Date: 29 August 1963
• Docket Number: No. 295-59.,295-59.
• Parties: AMERICAN RADIATOR & STANDARD SANITARY CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

162 Ct. Cl. 106, 318 F.2d 915 (1963)

AMERICAN RADIATOR & STANDARD SANITARY CORPORATION v. The UNITED STATES.

No. 295-59.

United States Court of Claims.

June 7, 1963.

As Amended August 29, 1963.

M. Bernard Aidinoff, New York City, for the plaintiff. Norris Darrell, Kendyl K. Monroe and Sullivan & Cromwell, New York City, were on the briefs.

Theodore D. Peyser, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for the defendant.

Before JONES, Chief Judge, and LARAMORE, DURFEE and DAVIS, Judges.

DAVIS, Judge.

The only contested point in this suit for refund of income and excess profits taxes is the timeliness of plaintiff's refund claim. The defendant does not deny that the taxes were overpaid, but it contends that recovery is now barred because the formal claim for refund came some months too late. We reject the defense and hold that plaintiff made a seasonable demand.

For the span of years beginning with 1941, plaintiff duly elected to use the "last in, first out" ("Lifo") method of inventorying goods under Section 22(d) ("method of inventorying goods") of the Internal Revenue Code of 1939; in particular, plaintiff chose to come under Section 22(d) (6), relating to the involuntary liquidation and replacement of inventory for the years from 1941 to 1948.¹ The general scheme of this inventory system was that a taxpayer was entitled, in defined circumstances, to consider inventory lost or left unreplaced in those eight years because of "war conditions" — i. e., involuntarily liquidated — to have been replaced in a subsequent taxable year (prior to 1953) by new goods, generally at higher cost. In that event, there was to be an exchange of costs between the liquidated and the replacement goods, and two tax adjustments would follow: (1) the income for the year of involuntary liquidation was to be decreased by the excess cost of replacement (the amount by which the cost of the replacement goods exceeded the cost of the liquidated goods) and the tax liability for that year redetermined;² and (2) the replacement goods were to be included in the purchases and inventory for the year of replacement at the inventory cost basis of the goods replaced.

In 1942, 1943, and 1945, plaintiff's closing inventories of certain goods reflected a decrease, attributable to such "involuntary liquidation", from its opening inventories for those years. Replacements of these involuntarily liquidated inventories were made in later years, including 1949, at excess costs. Plaintiff made the adjustments required by Section 22(d) (6) (A) and (C) for the years of liquidation and replacement; it found itself entitled to refunds of income and excess profits taxes for 1942, 1943, and 1945 (the liquidation years) on account of goods replaced in 1949 (the replacement year for this case).

Under the special provisions of Section 22(d) (6) (E) (see footnote 1, supra), if such adjustments for a liquidation year are prevented by the normal statute of limitations, the taxpayer is nevertheless allowed to take advantage of a favorable adjustment if a claim for refund is made within three years after the date of filing of its income tax return for the replacement year. Plaintiff filed its return for 1949 (the replacement year) on March 15, 1950. In December 1952, the parties extended, by proper agreement, the time for the assessment of additional income taxes for 1949 to June 30, 1954; this agreement had the effect, under Section 322(b) (3) of the 1939 Code, of extending until December 31, 1954, the time within which plaintiff could file claims for refund of its 1949 income taxes.

Plaintiff did not file formal claims for refund of the overpayments of its taxes for 1942, 1943, and 1945 (resulting from its excess cost of replacement in 1949) until May 1953 and January 1954 — more than three years after March 15, 1950. In 1958, these claims were finally rejected by the Internal Revenue Service as untimely.

This conclusion is attacked on alternative grounds.³ One is that the formal refund claims for 1942, 1943, and 1945 were covered by the agreed extension of time to December 31, 1954, for filing refund claims for 1949 taxes. That agreement, which was made under Section 276(b)⁴, operated under Section 322 (b) (3)⁵ to postpone to the end of 1954 the time within which plaintiff could file its refund claims for 1949 taxes. There is no explicit qualification comparable to Section 322(b) (3) in Section 22(d) (6) (E) (footnote 1, supra), which establishes the period for seeking refunds for liquidation years; the latter simply provides that if the adjustments to be made in the tax for the liquidation years are barred by the time of the replacement year the taxpayer's period for filing the refund claim will be extended to "three years after the date of the filing of the income tax return for the year of replacement." It is appropriate, however, to imply the condition that, if the parties prolong the time for filing refund claims for the replacement year beyond the statutory three-year period, the date for refund claims for the liquidation year will also be stretched to the same extent.

The reason why it is sound to add this qualification to the bare words of the Code is that a refund under Section 22 (d) (6) for the liquidation year is intimately linked, in practice and by the statute, to the return and the tax for the replacement year. The right to an adjustment for the earlier period cannot arise until the replacements are made; the existence and amount of the permissible adjustment depend upon the aggregate replacement cost, as accepted for tax purposes; if that replacement cost should be altered (e. g., as a result of a Revenue Service audit) the adjustments for the liquidation years could well be affected (in addition to the tax for the replacement year itself). Congress recognized this close, almost inseparable, relationship by fixing the time for filing refund claims for the liquidation year⁶ as the same three-year period during which the taxpayer could demand refunds for the replacement year (under Section 322(b) (1)) and the Internal Revenue Service could assess additional taxes for that year (under Section 275 (a)). Where that three-year period has been extended for the taxes of the replacement year, it is sensible to prolong it, also, for refunds and deficiency assessments for the liquidation year. Otherwise it might not be possible to take account for the earlier period of a change in the figures for the replacement year made, for instance, as a result of a Government audit of the later return which was conducted within the extended period but after the original three years. There is a reciprocal connection between the two years — liquidation and replacement — which calls for coordination between their respective limitation periods.

Defendant's stark reply is that Congress did not so provide and we are powerless to fill the gap. Congress did not say so in terms, but we are given no reason why it would have wished to confine the refund or assessment period for the liquidation year to three years, even though the similar period for the necessarily-related replacement year had been extended.⁷ Where all the pertinent considerations push toward a single goal and only the literal words of the legislation seem to bar the way, it is proper to search hard for an opening through which to pass along the indicated road. We think that such an opening exists in this case. The form of words may have been awkwardly chosen, but when Section 22(d) (6) (E) makes a refund claim or deficiency assessment for the liquidation year timely if made "within three years after the date of the filing of the income tax return for the year of replacement" — the ordinary period for further assessments or refund claims for the year of replacement — it is quite possible to understand Congress as designating nothing less than the full period prescribed by Section 275(a), 276(b) and 322(b) (1) and (3) (footnotes 4, 5, supra) for filing a refund claim or levying a deficiency for the replacement year. The reference to the normal three-year span could well stand, elliptically, for its appendages as well. We take it that that is what the statute means, and therefore hold that plaintiff's formal refund claims were timely.

An independent basis for deciding that plaintiff is not barred is that it made a timely informal claim for refunds for the liquidation years (1942, 1943, and 1945) within three calendar years of the filing of its tax return for 1949 (the year of replacement). Informal refund claims have long been held valid (United States v. Kales, 314 U.S. 186, 62 S.Ct. 214, 86 L.Ed. 132 (1941), and cases cited). But they must have a written component (Sicanoff Vegetable Oil Corp. v. United States, 181 F.Supp. 265, 149 Ct.Cl. 278, 286 (1960); Wrightsman Petroleum Co. v. United States, 35 F.Supp. 86, 96, 92 Ct.Cl. 217, 238 (1940), cert. denied, 313 U.S. 578, 61 S.Ct. 1095, 85 L.Ed. 1535 (1941)), and should adequately apprise the Internal Revenue Service that a refund is sought and for certain years. Newport Industries, Inc. v. United States, 60 F.Supp. 229, 104 Ct.Cl. 38 (1945); Rosengarten v. United States, 181 F.Supp. 275, 278-279, 149 Ct.Cl. 287, 293-294, (1960), cert. denied, 364 U.S. 822, 81 S.Ct. 60, 5 L.Ed.2d 53; Newton v. United States, 163 F.Supp. 614, 619, 143 Ct.Cl. 293, 300 (1958); Sweeney v. United States, Ct.Cl. No. 188-55, decided Jan. 18, 1961, 285 F.2d 444, 446; Philipsborn v. United States, 53 F.2d 133, 138-139, 72 Ct.Cl. 545, 554-55 (1931), cert. denied, 285 U.S. 548, 52 S.Ct. 405, 76 L.Ed. 939 (1932). It is not enough that the Service have in its possession information from which it might deduce that the taxpayer is entitled to, or might desire, a refund; nor is it sufficient that a claim involving the same ground has been filed for another year or by a different taxpayer. Rosengarten v. United States, supra; Byron Weston Co. v. United...