Commissioner of Internal Rev. v. S. Frieder & Sons Co.

• Decision Date: 28 December 1955
• Docket Number: No. 11625.,11625.
• Citation: 228 F.2d 478
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. The S. FRIEDER & SONS COMPANY, Respondent.
• Court: U.S. Court of Appeals — Third Circuit

228 F.2d 478 (1955)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. The S. FRIEDER & SONS COMPANY, Respondent.

No. 11625.

United States Court of Appeals Third Circuit.

Argued November 2, 1955.

Filed December 28, 1955.

Harry Marselli, Washington, D. C. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson, Special Assts. to the Atty. Gen. on the brief), for petitioner.

Samuel H. Levy, Philadelphia, Pa., Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa. (Bernard Wolfman, Philadelphia, Pa., on the brief), for respondent.

Before GOODRICH, STALEY and HASTIE, Circuit Judges.

HASTIE, Circuit Judge.

This litigation originated in the Tax Court as a proceeding, under Section 732 of the Internal Revenue Code of 1939, initiated by the taxpayer for a redetermination of its excess profits tax liability for 1944 in order to obtain "abnormality" relief under Section 722, 26 U.S. C.A. §§ 722, 732. The Commissioner now is asking that we review an order entered in that proceeding granting a motion to strike from his answer to the taxpayer's petition a claim of an excess profits tax deficiency for the taxable year. In terms, the Tax Court ordered that the Commissioner's "answer, in so far as it relates to a request for the determination of a deficiency in the petitioner's excess profits tax be, and the same hereby is, dismissed for lack of jurisdiction." Otherwise, the litigation is still pending in the Tax Court.

In these circumstances, our first problem is whether the quoted order is an appealable decision within the meaning of Section 7482(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 7482 (a), formerly Section 1141(a) of the 1939 Code, which defines our jurisdiction to review action of the Tax Court. That section authorizes the United States Courts of Appeals "to review the decision of the Tax Court * * *." It does not say what constitutes a "decision" of the Tax Court. However, Section 7459 of the 1954 Internal Revenue Code, 26 U.S. C.A. § 7459, formerly Section 1117 of the 1939 Code, which regulates procedure in the Tax Court, does elaborate the conception of "decision" as it applies to action of the Tax Court.¹ A reading of these sections together has led to the judicial conclusion that, normally at least, "the word `decision' of the Tax Court has a meaning of art; it refers only to two kinds of judicial action by the Tax Court, viz., (1) `dismissing the proceeding' pending before it, whether for lack of jurisdiction or otherwise, or (2) formally determining a deficiency, or the lack of a deficiency."²

In this frame of reference the question is posed here whether the order we are asked to review is an order dismissing for lack of jurisdiction a proceeding for the determination of a deficiency. In asserting that it is, the Commissioner seems to reason that in substance there are two proceedings here; one, a special proceeding by the taxpayer to establish its claim to a 1944 excess profits tax refund under the abnormality relief provisions of Section 722, and the other, a kind of counterclaim by the Commissioner to establish a deficiency in the taxpayer's excess profits tax as already reported and paid for that year. Although procedurally the claim of deficiency was asserted in the Commissioner's answer to the taxpayer's claim and was adjudicated by granting a motion to strike this matter from the answer, it is argued that in substance the Tax Court has disposed of a proceeding attempted by the Commissioner to establish a deficiency. This contention is supported by pointing out that Section 732(c) of the 1939 Code specifically provides that the Tax Court's disposition of the merits of an abnormality issue is not reviewable by a Court of Appeals.³ Thus, the disposition of the deficiency claim is the only part of the Tax Court's action in this case which can be reviewed by this court, whether immediately or at the termination of the Tax Court litigation.

These arguments did not persuade the Court of Appeals for the First Circuit in Commissioner of Internal Revenue v. Smith Paper, Inc., supra note 2. In the view of that court a case like this begins and continues as a special proceeding to adjudicate an abnormality claim asserted under Section 722, whatever related or collateral matters a party may seek to introduce. Accordingly, it is said that there can be no such dismissal of the proceeding as constitutes a "decision" so long as the abnormality claim itself remains unadjudicated. However, we think a somewhat different approach to this matter is sound and has significance both for the issue of appealability and for the merits of the order rejecting the government's deficiency claim.

As heretofore stated, the present litigation began in the Tax Court with a petition filed by the taxpayer asking for a redetermination of its excess profits tax liability for 1944. The taxpayer says that what it initiated was a proceeding of limited scope restricted to the determination of its right to abnormality relief under Section 722. However, as we view the relevant statutes, there is in law no such restricted proceeding. The only way a taxpayer can litigate a disallowed claim for abnormality relief under Section 722 is by a statutory proceeding in the Tax Court for a general determination of his excess profits tax liability for the year in question.

The outline of the excess profits tax subchapter of the Internal Revenue Code, Subchapter E of Chapter 2 of the 1939 Code, is familiar. A special tax at high rate is imposed upon income above a certain level. A scheme is set out for determining above what level profits become subject to this tax. Guided by this scheme the taxpayer must in regular course make his return, reporting his income and computing and paying the tax. Procedures are provided whereby the Commissioner can determine and assess any deficiency. Thereafter, the taxpayer can sue to contest this deficiency or assert any overpayment, or both.

Distinct and additional provision is made in Section 722 — and two other sections not involved here — for relief in certain hardship situations. To avail himself of this relief provision a taxpayer must first pay the excess profits tax computed and returned under the normal scheme. Thereafter, he may file a claim for refund based upon such a showing of abnormality as Section 722 authorizes. If the Commissioner allows that claim as submitted the matter is concluded to the satisfaction of all concerned. However, the Commissioner may, for what he considers good cause, disallow the abnormality claim. In that event he is required by Section 732 to send a formal notice of disallowance to the taxpayer. Here again the matter may end. But if the taxpayer is unwilling to let well or bad enough alone, he may at this stage institute a formal proceeding in the Tax Court as has been done in the present case. It is the nature and conception of this proceeding which create our present difficulty.

Section 732 of the 1939 Internal Revenue Code alone authorizes such a proceeding and defines its scope. That section provides that within 90 days after notice of disallowance of the abnormality claim is mailed "the taxpayer may file a petition with the Tax Court for a redetermination of the tax under this subchapter. If such petition is so filed, such notice of disallowance shall be deemed to be a notice of deficiency for all purposes relating to the assessment and collection of taxes or the refund or credit of overpayments." There follows a special provision that if the Tax Court shall find a deficiency and no overpayment it "shall have jurisdiction to determine the amount of such deficiency and such amount shall * * * be paid * * *."

At least five Courts of Appeals,⁴ adopting the view of a substantial minority of the judges of the Tax Court,⁵ have concluded that the proceeding thus described is not a limited proceeding to adjudicate an abnormality claim, but rather, as Section 732 indicates both on its face and in legislative history,⁶ a general proceeding "for a redetermination of the tax under this subchapter", meaning Subchapter E, which contains the excess profits tax legislation in its entirety. Without repeating the persuasive reasoning of these cases we agree with their...