Continental Foundry & Machine Co. v. United States, No. 513-53.

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

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.

159 F. Supp. 609

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

159 F. Supp. 610

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

159 F. Supp. 611

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...