Continental Foundry & Machine Co. v. United States

• Citation: 159 F. Supp. 608,141 Ct. Cl. 604
• Decision Date: 05 March 1958
• Docket Number: No. 513-53.,513-53.
• Parties: CONTINENTAL FOUNDRY & MACHINE COMPANY v. UNITED STATES.
• Court: U.S. Claims Court

159 F. Supp. 608

141 Ct. Cl. 604

CONTINENTAL FOUNDRY & MACHINE COMPANY v. UNITED STATES.

No. 513-53.

United States Court of Claims.

March 5, 1958.

James D. Head, Chicago, Ill., for plaintiff. Grier D. Patterson, Crane C. Hauser and Winston, Strawn, Smith & Patterson, Chicago, Ill., were on the briefs.

Elizabeth B. Davis, Washington, D. C., with whom was Asst. Atty. Gen. Charles K. Rice, for defendant. James P. Garland, Washington, D. C., was on the brief.

LARAMORE, Judge.

Plaintiff, Continental Foundry & Machine Company, sues to recover claimed overpayments of income and excess profits taxes and also interest on a previously allowed excess profits tax overpayment. Plaintiff's first amended petition contains three counts. The parties have stipulated that with respect to the second and third counts the plaintiff is entitled to recover $5,052.94 (finding 17) and $3,242.95 (finding 18), and judgment will be entered to that effect. The remaining first count of plaintiff's petition involves the question of whether or not plaintiff is entitled to a refund of income and excess profits taxes for the fiscal year ended November 30, 1945, by reason of a net operating loss deduction resulting from a carry-back of a net operating loss sustained in 1946.¹

The determination of plaintiff's right to recover hinges solely on the proper method of computing the available net operating loss carry-back as provided in section 122(b) (1) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 122(b) (1).² The facts necessary to resolve this issue are as follows:

Plaintiff, an accrual basis taxpayer, filed for the taxable year 1944 tax returns showing accrued net income of $13,759,511.29 and $9,921,819.84 excess profits tax accrued thereon. This latter amount was paid or credited in installments, the last payment having been made on November 13, 1945. On July 23, 1945, the plaintiff and the War Department entered into a renegotiation agreement on account of excessive profits realized by the plaintiff on war contracts with the Government for the year 1944. Under section 3806 of the Code, 26 U.S.C.A. § 3806, plaintiff was credited with the amount of taxes paid with respect to the 1944 excessive profits and the difference between the credit and the excessive profits was paid by the plaintiff to the Government. Of the total credit for taxes paid on the renegotiated profits, $4,527,288.72 represented excess profits tax paid for the year 1944. In 1952 plaintiff received a renegotiation rebate and pursuant to section 403(a) (4) (D) of the Renegotiation Act of 1942, as amended, 50 U.S.C.A.Appendix § 1191, there was charged against the rebate an amount equal to the previous credit for taxes paid. Of the charge, $181,586.40 was due to credit for 1944 excess profits tax paid. Thus the net reduction of 1944 excess profits tax by reason of renegotiation amounted to $4,345,702.32. After all adjustments, plaintiff's excess profits tax liability for 1944 was finally determined by the Commissioner of Internal Revenue to be $4,528,628.22.³

For 1945 plaintiff reported a net income of $9,231,815.67 and paid excess profits tax as shown on its excess profits tax return in the amount of $6,239,925.40. In 1948 plaintiff's excessive profits for 1945 were renegotiated and it was credited under section 3806 with $2,273,576 in excess profits tax paid against the excessive profits so determined. As a result of the renegotiation and other adjustments, plaintiff's excess profits tax liability for 1945 was finally placed at $4,221,887.18.

In 1946 plaintiff suffered a net operating loss in the amount of $673,724. The following table shows plaintiff's net income per return, adjustments, and net income as finally determined by the Commissioner for the years 1944, 1945, and 1946.

                      Net income (loss)                 1944 1945 1946
                       per return ................. $13,759,511.29     $9,231,815.67    $(519,191.14)
                      Adjustments
                       Renegotiations of excessive
                        profits ...................  (6,153,086.00)    (3,272,027.00)      --
                       Other adjustments ..........    (172,884.49)       353,918.58     (154,670.36)
                                                    _______________    ______________   _____________
                      Net income (loss) before net
                       operating loss deductions ..  $7,433,540.80     $6,313,707.25    $(673,861.50)
                                                    ===============    ==============   =============
                

The Commissioner determined and allowed a $673,092.63 deduction by reason of the net operating loss for 1946, adjusted according to statute, to be carried back and used as a net operating loss deduction in 1944.⁴ In so doing he further determined that the loss carry-back deduction was completely used up in 1944 and not available as a carry-back against 1945 income. This is precisely the issue before the court, inasmuch as the plaintiff contends that under sections 122(b) (1) and 122(d) (6)^* it is entitled to use the full amount of the allowed 1946 net operating loss as a deduction in 1945 as well as in 1944.

Section 122(b) (1) provides that a net operating loss for years after December 31, 1941, shall be a net operating loss carry-back for each of the two preceding taxable years except "that the carry-back in the case of the first preceding taxable year 1945 shall be the excess, if any, of the amount of such net operating loss over the net income for the second preceding taxable year 1944 computed (A) with the exceptions, additions, and limitations provided in subsection (d) (1), (2), (4), and (6), and (B) by determining the net operating loss deduction for such second preceding taxable year without regard to such net operating loss."

As applied to this case, section 122(b) (1) means that in order to determine if there is any available net operating loss for carry-back to 1945, the net income for 1944, as adjusted by subsections (d) (1), (2), (4), and (6), must be subtracted from the net operating loss. The excess, if any, is then applied as a deduction against 1945 income. The controversy here centers squarely on how much the 1944 income will be adjusted by the deduction allowed in subsection (d) (6) which provides:

"There shall be allowed as a deduction the amount of tax imposed by Subchapter E excess profits tax of Chapter 2 paid or accrued within the taxable year, * * *." Italics supplied.

As we have seen, plaintiff reported net income in excess of $13,000,000 for 1944 and accrued and paid excess profits taxes in excess of $9,000,000. By renegotiation and other adjustments, these figures were reduced to $7,433,540.80 and $4,528,628.22, respectively. The Commissioner in applying sections 122(b) (1) and (d) (6) subtracted the adjusted excess profits tax from the adjusted net income. This left a figure far in excess of the 1946 net operating loss leaving nothing to be used as a carry-back to 1945.

However, in Lewyt Corp. v. Commissioner of Internal Revenue, 349 U.S. 237, 242, 75 S.Ct. 736, 740, 99 L.Ed. 1029, the Supreme Court held that the excess profits tax to be deducted from the second preceding taxable year's net income was not the tax as finally determined, but the tax accrued "in accord with the normal accounting concepts relevant to the accrual basis." Further, that "events and transactions of later years, irrelevant to a determination of income on the accrual basis, do not warrant alteration of the figure computed under § 122(d) (6) for the year in question." Thus, if plaintiff properly accrued over $9,000,000 in excess profits tax for 1944, it may deduct this amount from the finally determined net income⁵ for that year in arriving at the net operating loss carry-back available for use in 1945. Since the final 1944 net income is less than the accrued excess profits tax for that year there would be nothing to reduce the net operating loss carry-back and it would all be available for use in 1945. This naturally results in the use of the same deduction for both the first and second preceding taxable years and a double benefit to the taxpayer, since the 1946 net operating loss had already been applied as a carry-back deduction to 1944 income. Such a result was both recognized and approved by the Supreme Court in Lewyt.

Defendant concedes, as it must, that the plaintiff presents a case very much like Lewyt, but contends that the accrual of excess profits tax on profits later renegotiated should not be considered as part of the tax accrued for the purposes of section 122(d) (6). Under the Lewyt decision only the excess profits tax properly accrued could be considered in applying the section 122(d) (6) deduction against income of the second preceding taxable year. Was it therefore proper for the plaintiff, an accrual basis taxpayer, to accrue tax on income it was later to lose by reason of renegotiation? We think that it was and that the Supreme Court so held in deciding the Lewyt case.

It is true, as defendant points out, that the Supreme Court in its majority opinion did not say in so many words that excess profits tax on profits later renegotiated were properly accruable, but clearly that is what they had to hold in deciding the case. As pointed out by Mr. Justice Frankfurter in his dissenting opinion, the taxpayer in that case was subjected to renegotiation which created a reduction in excess profits tax by reason of the section 3806 credit, and it was that credited tax which the majority held was properly accrued. This was not a "Question which merely lurks in the record," Webster v. Fall, 266 U.S. 507, 511, 45 S.Ct. 148, 149, 69...