Farrel-Birmingham Co. v. United States, 598-52.

• Decision Date: 08 June 1954
• Docket Number: No. 598-52.,598-52.
• Citation: 121 F. Supp. 636
• Parties: FARREL-BIRMINGHAM CO., Inc. v. UNITED STATES.
• Court: U.S. Claims Court

121 F. Supp. 636

FARREL-BIRMINGHAM CO., Inc. v. UNITED STATES.

No. 598-52.

United States Court of Claims.

June 8, 1954.

N. Barr Miller, Washington, D. C., J. Marvin Haynes, Haynes & Miller, Washington, D. C., Julius G. Day, Jr., Hartford, Conn., F. Eberhart Haynes and Oscar L. Tyree were on the briefs, for plaintiff.

J. W. Hussey, Washington, D. C., with whom was H. Brian Holland, Asst. Atty. Gen., Andrew D. Sharpe and Lee A. Jackson, Washington, D. C., were on the brief, for defendant.

Before JONES, Chief Judge, and LITTLETON, WHITAKER and MADDEN, Judges.

MADDEN, Judge.

The plaintiff corporation is in disagreement with the Government as to what is the right way to compute its excess profits tax for the year 1943. It computed its tax by the method which it claims to be right, and found the tax to be $3,489,638.68 which it paid on time. The Commissioner of Internal Revenue computed the tax by the method which he claimed to be right, and it came to $1,022,120.18 more, which he assessed, together with interest of $168,886.18. The plaintiff paid these additional sums, and filed a timely claim for refund to get them back. The claim for refund was denied, and the plaintiff brought this suit.

The dispute concerns the interpretation of certain sections of the Internal Revenue Code, 26 U.S.C.A., and the validity of a Regulation of the Treasury Department which Regulation places upon the sections of the code the interpretation for which the Government contends.

The plaintiff is a manufacturing corporation, and had work contracted for in 1943 which required more than twelve months for its completion. That fact created an accounting problem with regard to the computation of its profits on those contracts, for its income tax and other accounting purposes. Section 41 of the Internal Revenue Code provides that a taxpayer shall compute his income, for normal income and surtax purposes, in accordance with the method of accounting regularly employed in keeping his books. The plaintiff, in keeping its books, in relation to its contracts requiring more than 12 months for completion, used the "completed contract" method of accounting, that is, it did not count its profit on such a contract until the contract was completed. It therefore computed its normal income tax and surtax on this same basis of accounting.

Our problem concerns the plaintiff's excess profits tax. The following section of the Internal Revenue Code is pertinent:

"§ 710. Imposition of tax

"(a) Imposition.

"(1) General rule. There shall be levied, collected, and paid, for each taxable year, upon the adjusted excess-profits net income, as defined in subsection (b), of every corporation (except a corporation exempt under section 727) a tax equal to whichever of the following amounts is the lesser:

"(A) 90 per centum of the adjusted excess profits net income, or

"(B) an amount which when added to the tax imposed for the taxable year under Chapter 1 (other than section 102) equals 80 per centum of the corporation surtax net income, computed under section 15 or Supplement G, as the case may be, but without regard to the credit provided in section 26(e) (relating to income subject to the tax imposed by this subchapter) * * *."

Section 736(b) of the Internal Revenue Code provided that a taxpayer, having contracts requiring more than 12 months for their performance, if certain other conditions existed which did exist in the case of this plaintiff, might elect, in its excess profits tax return, to compute its income from such contracts upon the "percentage of completion" method of accounting. That meant that the taxpayer could, if he so elected, apportion his profits or prospective profits on such contracts over the period of performance, thus keeping them from being "bunched" in the year in which he happened to complete the contracts. Section 736(b) said that this computation should be made "in accordance with regulations prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury."

The plaintiff elected, as it had a right to do under Section 736(b), to compute its excess profits income on the "percentage of completion" method of accounting. This produced a figure much higher than the figure which would have been produced by its regular "completed contract" method, which method, as we have said, it used for its own internal accounting, and for computing its normal tax and surtax. It then made its computations taking, under Section 710 (a) (1) (A), 90 percent of its excess profits net income, so determined, and taking, under Section 710(a) (1) (B), 80 percent of its surtax net income as actually computed for the determination of the amount of its surtax, plus and minus certain items not here in dispute. The 90 percent figure was $4,979,035.74, while the 80 percent figure, applied, of course, to a different base, was $3,563,929.31. As provided in Section 710(a) (1) it paid the lesser amount.

The Government urges that the plaintiff having elected, for the purpose of the (A) computation, to use the "percentage of completion" method, it must do likewise in making the (B) computation. That means that it had to recompute its surtax net income as if its regular method of accounting had been the "percentage of completion" method, thereby, in this instance, getting for this purpose a higher surtax net income than the one on which it had actually computed and paid its surtax. Since Section 710(a) (1) (B) called for 80 percent of that surtax net income, with certain deductions, the Government's (B) figure was much higher than the plaintiff's. It was, nevertheless, not as high as the (A) figure, and therefore set the amount of the tax.

The plaintiff points to the statute, Section 710(a) (1) (B) which as we have seen, speaks of the "surtax net income, computed under section 15". Section 15 defines the term "corporation surtax net income" and imposes the surtax.

The Government points to the language of Section 736(b) which says that the corporation may elect to compute "in accordance with regulations prescribed by the Commissioner with the approval of the Secretary" and in the following sentence says "Such election shall be made in accordance with such regulations * * *." It then points to Treasury Regulations 112, Section 35.736(b)-3 as amended by T. D. 5388, 1944 Cum.Bull. 387, applicable to Section 736(b) of the Code, which Regulation says:

"For such purpose, the corporation surtax net income shall be determined by computing the income from long-term contracts upon the percentage of completion method of accounting."

The Regulation is directly applicable, and, if it is valid, it settles the question. The plaintiff contends that it is invalid because it contradicts the statute. The plaintiff says that the reference in Section 710(a) (1) (B) to the "corporation surtax net income, computed under section 15", so plainly means the surtax net income as actually computed by the taxpayer in his return that that meaning cannot be changed by a Regulation. That position was taken practically without...