KINGSTON PRODUCTS CORPORATION v. United States

• Decision Date: 10 November 1966
• Docket Number: No. 334-62.,334-62.
• Citation: 368 F.2d 281
• Parties: KINGSTON PRODUCTS CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

368 F.2d 281 (1966)

KINGSTON PRODUCTS CORPORATION v. The UNITED STATES.

No. 334-62.

United States Court of Claims.

November 10, 1966.

Lester M. Ponder, Indianapolis, Ind., attorney of record, for plaintiff. Louis A. Highmark and Barnes, Hickam, Pantzer & Boyd, Indianapolis, Ind., of counsel.

Gilbert W. Rubloff, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. Lyle M. Turner and Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS and COLLINS, Judges.

OPINION

PER CURIAM.

This case was referred to Trial Commissioner Herbert N. Maletz with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in an opinion and report filed on October 7, 1965. No exceptions were filed to the findings of fact in the commissioner's report, such facts having been stipulated by the parties. However, plaintiff filed exceptions to the trial commissioner's recommendation for conclusions of law. Defendant has requested that the court adopt both the findings of fact and the recommended conclusions of law. The case was submitted to the court on oral argument of counsel and the briefs of the parties. Since the court is in agreement with the trial commissioner's findings, opinion and recommended conclusions of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Plaintiff is therefore entitled to recover for income tax overpayment for the year 1953 and judgment is entered to that effect with the amount of recovery to be determined pursuant to Rule 47(c) and the stipulation of the parties. Plaintiff is not entitled to recover on the remaining claim as to which the petition is dismissed.

OPINION OF COMMISSIONER^*

MALETZ, Commissioner:

This is a suit to recover $30,249.16 for claimed overpayments on income and excess profits tax for the year ending December 31, 1953. The case presents the following issues: (1) whether plaintiff's two refund claims for that year (the first for an alleged income tax overpayment; the second for an alleged excess profits tax overpayment) were timely filed; and (2) in the event the second refund claim was timely filed, whether in computing plaintiff's excess profits credit for the year 1953, the Commissioner of Internal Revenue was correct in reducing the plaintiff's equity capital as of January 1, 1953 by the amount of post-1953 net renegotiation refunds made by the plaintiff to the government for excessive profits realized in 1951 and 1952.

The facts, virtually all of which have been stipulated, are as follows: Plaintiff, an Indiana corporation, filed its income and excess profits tax return for the taxable year ended December 31, 1953 with the District Director of Internal Revenue at Indianapolis and paid tax as reported thereon in the amount of $1,639,083.66, of which $404,316.37 represented excess profits tax.

During the years 1951, 1952 and 1953, plaintiff manufactured articles which were subject to renegotiation and price redetermination under the Renegotiation Act of 1951 (50 App.U.S.C. § 1211 et seq. (1952 ed.)). In August 1953 plaintiff executed agreements with the government wherein it was determined that profits aggregating $39,594.24 derived by plaintiff during the year 1953 from contracts and subcontracts subject to the Renegotiation Act of 1951 should be repaid to the government, and such amount was refunded in payments in April 1954 and February 1955. Plaintiff did not, however, reduce the refund by any credit which might have been allowable pursuant to section 3806(b) of the Internal Revenue Code of 1939, as amended (26 U.S.C. § 3806(b) (1952 ed.)).¹ At a later date plaintiff's profits for the years 1951 and 1952 derived from contracts subject to the Renegotiation Act of 1951 were also renegotiated. Thus, in June 1954, plaintiff and the government agreed that $900,000 of its 1951 profits should be eliminated and repaid to the government, subject to a tax credit of $612,000 under section 3806(b), and in August 1954 plaintiff made refund of $288,000, the net amount due. Further, in October 1956, plaintiff and the government agreed that $1,250,000 of its 1952 profits should be eliminated and repaid to the government, subject to a tax credit under section 3806(b) of $875,000. The net amount of $375,000 was repaid in two equal installments in May 1957 and February 1958. In all, plaintiff repaid a total of $663,000 excessive profits for 1951 and 1952 after giving effect to the allowable tax credit.

In 1956 a revenue agent in the office of the District Director of Internal Revenue at Indianapolis made an examination of plaintiff's 1953 income and excess profits tax return. His report of examination dated January 18, 1957 was approved by the District Director and made several adjustments in reported income, one of which was to reduce plaintiff's 1953 taxable income by $39,594.24 (the amount repaid in 1954 and 1955 to the government as excessive profits for the year 1953). In addition, in computing plaintiff's excess profits tax for 1953, the agent's report treated plaintiff's net renegotiation repayments of $288,000 and $375,000 for the years 1951 and 1952, respectively, as reductions of accumulated earnings and profits as of January 1, 1953 and, thereby, as reductions of equity capital at that date, thus reducing plaintiff's excess profits credit and increasing its excess profits tax liability.

The computation of income and excess profits tax for 1953 in the agent's report resulted in an overassessment of $1,355.12 which was arrived at as follows: Without taking into account any other adjustments to taxable income, plaintiff would have been entitled to a refund for the year 1953 in the amount of $31,279.34 in excess profits tax by virtue of its renegotiation payment for the year 1953 in the amount of $39,594.24. Without taking into account such potential refund of $31,279.34, plaintiff would have had a deficiency in income tax in the amount of $29,924.22 for the taxable year 1953 as a result of other adjustments. The potential refund of $31,279.34 was then applied against the potential deficiency of $29,924.22, resulting in the overassessment of $1,355.12 for 1953. On February 18, 1957, plaintiff executed Treasury Form 870 accepting the overassessment, which was thereafter scheduled for credit and refund by the Director on May 6, 1957.

In making refund to plaintiff of the $1,355.12 overassessment for 1953, the District Director concluded that but for the exclusion from income of the excessive profits it had earned in 1953 in the amount of $39,594.24 from government contracts, there would have been a deficiency in the amount of $29,594.24. Adopting that position and relying on section 3771(b) of the 1939 Code, the District Director determined that since plaintiff had the use of this $29,594.24 from the date its return was due (March 15, 1954) until the respective dates of repayment of the excessive profits (April 28, 1954 and February 18, 1955), it should pay interest on that amount up to such dates of repayment. The interest thus computed was fixed at $698.32. The District Director computed interest due plaintiff on the entire amount of its overassessment ($1,355.12), but before any refund was made, he deducted therefrom interest in the amount of $698.32. The resulting amount ($656.80) was credited to the balance shown due in plaintiff's account by virtue of the District Director's application of the restricted interest provision, section 3771. Plaintiff, therefore, received a refund check on or about May 6, 1957, in the total amount of $834.08, which was composed of $656.80 in tax and $177.28 in interest.

In the meantime, on February 21, 1957, the District Director executed Treasury Form 872, which plaintiff had executed on February 18, 1957, extending the period of limitations for the assessment of additional tax for 1953 to June 30, 1957.

On December 5, 1957, plaintiff filed a refund claim for the year 1953 with the District Director at Indianapolis on the ground that its reported income should be reduced by $10,377.12 because of a price adjustment with another company, which was not reflected in either the 1953 return or in the revenue agent's report of January 18, 1957. The Director caused an examination to be made of this refund claim, and by letter dated June 28, 1958, transmitted to plaintiff a copy of the examining officer's report of examination dated January 15, 1958. The report approved the reduction of $10,377.12 and also increased gross income by the disallowance of the amount of $2,602.64 of repairs which should have been capitalized, resulting in an overassessment of $6,381.16. The overassessment, however, was never scheduled since the District Director ultimately concluded that this claim was not timely filed. Apart from this, the validity of the claim, subject to a stipulated offset of $2,602.64, is undisputed.

On April 15, 1959, plaintiff filed a second claim for refund for the year 1953 with the District Director at Indianapolis. The ground set forth therein was the reduction of equity capital in the total amount of $663,000 as of January 1, 1953, as a result of the net renegotiation repayments for the years 1951 and 1952. This claim was also denied by the District Director as not timely filed.

Timeliness of December 5, 1957 Claim

With respect to this claim, the earliest possible date for expiration of the period of limitations for filing a refund claim by plaintiff for 1953 was March 15, 1957.² On February 18, 1957, plaintiff executed Form 872 extending the period of limitations for assessment of additional taxes for the year 1953 to June 30, 1957, and on February 21, 1957 the District Director executed this Form. Thus, the effective date extending the limitation period for 1953 was February 21, 1957 — and this date was almost a month prior to March 15, 1957, which was the...