Fruehauf Corporation v. CIR, 16335.

• Decision Date: 10 March 1966
• Docket Number: No. 16335.,16335.
• Citation: 356 F.2d 975
• Parties: FRUEHAUF CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

356 F.2d 975 (1966)

FRUEHAUF CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16335.

United States Court of Appeals Sixth Circuit.

March 10, 1966.

Raymond C. Cushwa, Washington, D. C. (Alfons Landa, George D. Webster, Washington, D. C., on the brief; Davies, Richberg, Tydings, Landa & Duff, Washington, D. C., of counsel), for petitioner.

Richard J. Heiman, Dept. of Justice, Washington, D. C. (John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before PHILLIPS, Circuit Judge, CECIL, Senior Circuit Judge, and KENT, District Judge.

CECIL, Senior Circuit Judge.

The sole question presented on this petition for review of a decision of the Tax Court is whether an order of the Commissioner, changing the petitioner's method of inventorying used trailers, made in 1959, can be retroactive to the petitioner's tax years 1954, 1955 and 1956. The Tax Court decided the issue adversely to the petitioner.

The facts are fully stated in the Findings of Facts and Opinion of the Tax Court. 42 T.C. 83. The pertinent facts are not in dispute. We restate here only such facts as demonstrate the question involved. The petitioner, Fruehauf Trailer Company, began acquiring used trailers about the year 1926. These used trailers were inventoried by the petitioner at one dollar per unit. This practice was not questioned by the Commissioner for the years prior to 1942. The Internal Revenue Service had examined and audited the petitioner's federal income tax returns for the years prior to 1942, and had made no change with respect to the method of inventorying used trailers. The method was questioned in the examination of the 1939 return but nothing was done about it.

On April 28, 1948, the petitioner received the revenue agent's report of March 15, 1948, for the four years 1942 through 1945. In this report the agent proposed to adjust the used-trailer inventory at December 31, 1945, from one dollar per unit to the lower of cost or market. The petitioner protested this change. It was argued on behalf of the petitioner that the one dollar per unit should be continued, but that if the change was made for December 31, 1945, similar adjustments should be made for the opening and closing inventories for the four years 1942 through 1945. At a conference at the Detroit office of the Internal Revenue agent, in September 1948, a tentative agreement was made to revise the inventories for the four years in question, on the lower of cost or market method.

The petitioner executed a Form 874 on November 9, 1948, agreeing to the deficiency for the four years in question. On February 11, 1949, petitioner was notified by the Detroit office that the case would be disposed of in accordance with the agreement evidenced by Form 874. The petitioner paid the assessment on June 8, 1949. The Commissioner never certified the over-assessments as set forth on Form 874.

As of January 1, 1949, partly because petitioner thought the inventory issue was settled, in accordance with Form 874, and partly in the interest of more accurate reporting of annual earnings, petitioner changed, on its books, its method of inventorying used trailers to the lower of cost or market.

It was necessary that the agreement of November 9, 1948, as evidenced by Form 874, be approved by the national office of the Internal Revenue Service. On March 7, 1950, the office of the Chief Counsel returned to the Income Tax Unit in Washington the administrative file for the years 1940 through 1945, for reconsideration of the proposed revision of the used-trailer inventory. The 1940 and 1941 years came under consideration by reason of an allowance of petitioner's claims in part by the Excess Profits Tax Council. It was stated in the memorandum of the Chief Counsel's office, that,

"While taxpayer\'s method of computing inventories of used trailers is obviously erroneous, it is the opinion of this office that a correction should not be made in this case in a manner that will result in the substantial benefit to the taxpayers as now proposed. * * * Unless a settlement on a more equitable basis can be reached or the correction made starting in a year where the opening inventory is small and the double benefit would not be so great (as, for instance, the year 1944), it is the opinion of this office that the Government should refuse to permit a change in the erroneous method of inventorying used trailers used by the taxpayer."

Negotiations between representatives of the petitioner and representatives of the Detroit office and the national office of Internal Revenue Service failed to reach any agreement for the settlement of the inventory issue.

On June 20, 1950, the Deputy Commissioner of Internal Revenue addressed a letter to the internal revenue agent in charge in Detroit which stated in part:

"The taxpayer\'s representatives have not made an acceptable offer whereby the double deduction created by the opening inventory for 1942, could be compensated on an equitable basis, but have indicated that recomputation of the inventories on the dollar value basis, heretofore consistently followed by the taxpayer, would be satisfactory."

Following this, on June 23, 1950, the chief conferee of the Detroit office advised a representative of the petitioner that it had been decided to accept petitioner's used-trailer inventory of one dollar per unit. It was then agreed that recomputations would be made for the years 1940 through 1945 on the basis of one dollar per unit inventory. A revised Form 874 was executed to this effect on July 5, 1950, and on July 7, 1950, the petitioner was advised through the Detroit office that the case would be disposed of in accordance with the recomputation. On November 15, 1950, petitioner received a refund of $1,503,230.81 in federal income and excess profits taxes (including interest) for the years 1940 through 1945, in accordance with the recomputations agreed to in Form 874 dated July 5, 1950. This restored the petitioner to the dollar per unit method of inventory.

In the meantime, after the tentative agreement of September 10, 1948, but before June 20, 1950, petitioner filed a claim for refund for 1946, an amended return for 1947, and an original return for 1948, all based on the inventorying of used trailers at the lower of cost or market. The Commissioner rejected the claim for refund on the 1946 return on January 28, 1953. He rejected the amended return for 1947, and the 1948 return was recomputed on the basis of inventorying used trailers at one dollar per unit. This action was taken in accordance with the agreement reflected in Form 874, dated July 5, 1950. In 1949 and thereafter, the petitioner filed its returns with its inventory of used trailers at one dollar per unit. The petitioner's returns for the years 1949 through 1953 were examined by a revenue agent and, while the one dollar per unit practice was questioned, it was not disturbed.

"On March 31, 1959, the revenue agent informed petitioner that the national office of the Internal Revenue Service had decided that it could no longer go along with petitioner\'s practice of inventorying its used trailers and that, beginning with the trailers acquired during 1954 the inventory would have to be computed on the lower of cost or market basis. Thereafter, on April 28, 1960, and August 29, 1960, the deficiency notices which form the basis for this proceeding were issued." Findings of Fact, Tax Court. 42 T.C. 83, 94.

In this Court it is conceded that the Commissioner could make the change prospectively, in the method of reporting the petitioner's inventory of used trailers. It is argued that the change cannot be made retroactive to the years 1954, 1955 and 1956.

The petitioner, on the issue now before us, argued in the Tax Court that it was an abuse of discretion on the part of the Commissioner to apply the order of March 1959, changing the method of inventory, retroactively. The Tax Court decided...