Dowd-Feder v. Commissioner of Internal Revenue, 10758.

• Decision Date: 28 March 1949
• Docket Number: No. 10758.,10758.
• Citation: 173 F.2d 673
• Parties: DOWD-FEDER, Inc. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

173 F.2d 673 (1949)

DOWD-FEDER, Inc. v. COMMISSIONER OF INTERNAL REVENUE.

No. 10758.

United States Court of Appeals Sixth Circuit.

March 28, 1949.

M. R. Schlesinger, of Cleveland, Ohio (M. R. Schlesinger, of Cleveland, Ohio, and Grossman, Schlesinger & Carter, of Cleveland, Ohio, of counsel, on the brief), for petitioner.

Carlton Fox, of Washington, D. C. (Theron Lamar Caudle, Ellis N. Slack, Lee A. Jackson and Carlton Fox, all of Washington, D. C., on the brief), for respondent.

Before HICKS, Chief Judge, and SIMONS, and MARTIN, Circuit Judges.

MARTIN, Circuit Judge.

Dowd-Feder, Inc., has petitioned this court to review the decision of the United States Tax Court holding that there is a deficiency in the corporation's income tax for 1941 in the amount of $7,885.51. The case involves determination of the proper basis of computation of the taxpayer's excess profits credits.

The Tax Court held that there is no deficiency in the excess profits tax for that year; but that where the amount of excess profits credits, computed by using average base period net income reconstructed under section 722 of the Internal Revenue Code, 26 U.S.C.A. § 722, is less than the credit resulting from application of the 75 per centum rule under section 713(e) (1) to the actual base period net income, the taxpayer, as is the situation in the case at bar, is not entitled to relief under section 722 in addition to the benefits of section 713(e) (1). This holding was based on the authority of Stimson Mill Co. v. Commissioner of Internal Revenue, 9 Cir., 163 F.2d 269, certiorari denied 332 U.S. 824, 68 S.Ct. 165, rehearing denied 332 U.S. 839, 68 S.Ct. 218, affirming 7 T.C. 1065. The two pertinent sections of the Internal Revenue Code are, in material part, set forth in the margin.¹ The case was tried in the Tax Court on a stipulation of fact.

From January 1, 1936, to the present time, Dowd-Feder, Inc., of Cleveland, Ohio, has been a distributor of Chrysler and Plymouth automobiles. As the result of a strike at the factories of the Chrysler Corporation from October 6th to November 28th, 1939, deliveries of new cars to its dealers were curtailed, in consequence of which Dowd-Feder, Inc., was unable to procure its normal allotment. The strike and the diminished operations resulting from it were "events unusual and peculiar in the experience" of the taxpayer, within the purview of section 722 of the Internal Revenue Code, Dowd-Feder, Inc., in January 1944, applied for relief under section 722 with respect to the calendar years 1941 and 1942. The taxpayer established to the satisfaction of the Tax Court that, as a result of the Chrysler strike and the resultant interruption of its normal business, its actual earnings for 1939 were abnormally low, and that its actual average base period net income is an inadequate standard of normal earnings under the provisions of section 722(b) (1) of the Internal Revenue Code.

On January 30, 1945, the Commissioner of Internal Revenue issued a statutory notice determining that there is a deficiency in income tax liability of the petitioner for the year 1941 in the amount of $7,885.51, and that there was an over-assessment of excess profits tax liability for that taxable year in the amount of $6,552.18. In making this determination the application of the taxpayer for relief in 1941, under section 722, was partially allowed in the amount of $2,990.97 and disallowed to the extent of $1,933.51. The taxpayer has stipulated and agreed that the determination of the Commissioner that $61,010.60 represents a fair and just amount of normal earnings to be used as a constructive average base period net income, for the purpose of excess profits credit for 1941 only, under the provisions of section 722.

In its claim for refund of $10,313.57 for 1941, the taxpayer contends that it is entitled to an excess profits credit carry-back of the unused excess profits credit for 1942 in the amount of $29,894.40.² The contention is based upon the proposition that the excess profits credit for 1942 should be based upon a constructive average base period net income determined by applying both section 722 and the 75 per centum rule set forth in section 713(e) (1) of the Internal Revenue Code. Using this basis of computation, the petitioner contends that the allowable credit for 1942 should be $66,098.02. The Commissioner denied the contention and disallowed the claim for refund.

The Tax Court found that, in computing its excess profits tax for the taxable years involved, the petitioner is entitled to use an excess profits credit based upon net earnings within the base period years of 1936 to 1939, inclusive, in accordance with section 713 of the Internal Revenue Code, as amended. The Court pointed out that the Commissioner admits that the taxpayer's earnings for 1939 (prior to taxes) should be reconstructed under section 722 from the actual amount of $63,151.29 to the reconstructed amount of $88,338.43; and that the excess profits credit for 1942 would, by calculation, amount to $56,838.71.

But the taxpayer contends that, in addition to the adjustment computed by the Commissioner under section 722, its excess profits credit for 1942 should be computed by the addition of an increase in the excess profits net income for the year 1938, under section 713(e) (1), which would raise the excess profits credit to $66,098.02. The petitioner stipulates and agrees that, unless it is entitled to the adjustment claimed under section 713(e) (1) for the base period year 1938, it is entitled to no further constructive adjustments to actual earnings for the base period years 1936, 1937 and 1938 under section 722 of the Internal Revenue Code as presently constituted.

From the stipulation of facts adopted as findings by the Tax Court, it appears from the calculations therein, and is so declared, that inasmuch as the excess profits credit of $58,620.59, determined by averaging actual base period net income adjusted as to the year 1938 under section 713(e) (1), is greater than the excess profits credit computed by the use of an average based on actual excess profits net income for 1936, 1937, and 1938, and excess profits net income for 1939 reconstructed under section 722, relief under that section for the year 1942 should be and is denied.

The petitioner agrees that, if it is not entitled to relief under section 722 of the Internal Revenue Code in addition to the benefits contained in Section 713(e) (1) of the Code, in computing the excess profits credit for the year 1942, the proposed deficiency and the over-assessment as set forth in the notice of deficiency of January 30, 1945, are correct and have been properly determined by the Commissioner.

In its opinion, the Tax Court states that the case has been considered in entirety by the Excess Profits Tax Council of the Bureau of Internal Revenue, which, on January 16, 1947, sustained the original determination set forth in the statutory notice of deficiency issued by the Commissioner on January 30, 1945.

The argument of petitioner here is, upon analysis, the same as that made in behalf of the taxpayer in Stimson Mill Co. v. Commissioner, supra. The contention is that the taxpayer is entitled to obtain the benefits of both section 713(e) (1) and section 722, affording special discretionary relief. As was pointed out by the Court of Appeals for the Ninth Circuit, Congress has provided in section 722 that a taxpayer must establish a fair and just amount representing normal earnings which he must then use as a "constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter"; and that section 713(e) (1) is the only section of the revenue law where the "average base period net income" is otherwise determined in the subchapter. It is then reasoned, correctly we think, that there is no statutory authorization for using the 75 per centum rule of section 713(e) (1) in computing the constructive average of section 722; but, to the contrary, there is a statutory prohibition against using both sections, inasmuch as section 722 requires the constructive average to be used in lieu of the average provided for in section 713(e) (1). Moreover, we agree with the Court of Appeals that the Treasury Regulations relating to the subject matter constitute a reasonable and correct interpretation of the statutes: "Section 722(a) provides for the determination of a constructive average base period net income. * * * Therefore, in computing such amount a taxpayer is not entitled to use the rules provided by section 713(e) (1). * * * Since the constructive average base period net income is the fair and just amount representing normal earnings and will reflect adjustments for abnormally low base period years, a taxpayer having computed such amount is not entitled in addition to apply the rules provided by section 713(e) (1)." Section 35.722-2(b) (1) of Regulations 112.

Inasmuch as we are in accord with the basis of decision of the Ninth Circuit and of the Tax Court whose opinion was affirmed, we find no occasion for rewriting and rejecting arguments made by the taxpayer in the instant case which have been considered in detail and rejected in those opinions. In all material aspects relating to the merits we are in accord with the reasoning of the Ninth Circuit upon the points presented.

The Commissioner of Internal Revenue has raised a more troublesome question by his motion to dismiss the petition for review on the ground that this court is without jurisdiction by reason of section 732(c) of the Internal Revenue Code, 26 U.S.C.A. § 732(c), which provides: "Finality of determination. If in the determination of the tax liability under this subchapter the determination of any question is necessary solely by reason of two specified sections, or section 722 the determination of such question shall not be reviewed or redetermined by any court or...