Koppers Company v. United States

• Decision Date: 04 October 1955
• Docket Number: No. 161-52.,161-52.
• Citation: 134 F. Supp. 290
• Parties: KOPPERS COMPANY, Inc., Successor on Merger to Koppers United Company and Subsidiaries, v. The UNITED STATES.
• Court: U.S. Claims Court

134 F. Supp. 290

KOPPERS COMPANY, Inc., Successor on Merger to Koppers United Company and Subsidiaries, v. The UNITED STATES.

No. 161-52.

United States Court of Claims.

October 4, 1955.

David W. Richmond, Washington, D. C., for plaintiff. Robert N. Miller, Frederick O. Graves, Miller & Chevalier, Washington, D. C., E. S. Ruffin, Jr., and C. M. Crick, Pittsburgh, Pa., were on the briefs.

John A. Rees, Washington, D. C., with whom was Asst. Atty. Gen., H. Brian Holland, for defendant. Andrew D. Sharpe, Washington, D. C., was on the brief.

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

LITTLETON, Judge.

The plaintiff sues to recover $1,486,667.22, with interest thereon, which sum represents excess profits tax and interest for the calendar year 1943. Three issues were presented in the amended petition. One involved interest on "potential deficiencies" and one involved net operating loss carry-backs. Both of these issues have been abandoned by plaintiff because of the adverse decisions in United States v. Koppers, Co., Inc., 348 U.S. 254, 75 S.Ct. 268, and United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 75 S.Ct. 733. The remaining issue is whether an unused excess profits credit for the first taxable period of a surviving corporation in a statutory merger can be employed as an unused excess profits credit carry-back under section 710 (c) (3) (A) of the Excess Profits Tax Act of 1940, as amended,¹ to reduce the consolidated excess profits net income of the corporations which were merged.

The facts, which have been stipulated by the parties, may be summarized as follows: Koppers United Company was the parent company of Fuel Investment Associates, Koppers Company and The Koppers Erecting Corporation. The first two companies were Massachusetts trusts and the latter two were Delaware corporations. Koppers United Company and its subsidiaries filed a consolidated excess profits tax return for 1943 disclosing an excess profits net income of $14,840,421.35, an excess profits credit of $4,070,456.97 and an excess profits tax liability of $8,719,621.15. Koppers United Company paid $6,539,715.86 of this liability.

On September 30, 1944, Koppers Company, Inc., the plaintiff herein, was organized. On November 10, 1944, Koppers United Company and its subsidiaries were merged under the laws of Delaware into the Koppers Company, Inc. The Commissioner ruled that the merger was a tax free reorganization under section 112 of the code, 26 U.S.C. A. § 112. The balance of the excess profits tax liability for 1943 was paid by the plaintiff, the surviving corporation. A deficiency of $366,079.15 for 1943, plus interest of $210,110.13 was assessed against plaintiff and its predecessors and was paid by plaintiff.

Returns were filed and the taxes shown thereon were paid for the taxable period January 1, 1944, to November 10, 1944. On February 6, 1951, plaintiff executed an Agreement to Amount of Constructive Average Base Period Net Income Determined Under Section 722, 26 U.S. C.A. § 722, for the taxable period ended November 10, 1944. The constructive average base period net income agreed to for this period, $3,525,481.13, resulted in an excess profits credit of $3,260,875.07 for this period and an overpayment of excess profits tax in the amount of $153,733.52. This overpayment has apparently been refunded or credited to plaintiff. The amount of section 722 relief (increase in average base period net income) allowed for the taxable period ended November 10, 1944, was $597,171.13.

The plaintiff filed an excess profits tax return for the taxable period September 30, 1944, to December 31, 1944, disclosing an excess profits net income of $679,609.22, and an excess profits credit of $1,529,711.46. After adjustments made by defendant, plaintiff had no excess profits net income for this taxable period of 1944. The plaintiff claims an unused excess profits credit carry-back in the amount of $435,551.74. The defendant disputes plaintiff's right to carry back any amount but admits that plaintiff has an unused excess profits credit in the amount of $384,517.64. It has been stipulated that the taxable year in which the unused excess profits credit arose was the period September 30, 1944, to December 31, 1944, and that the period January 1, 1944, to November 10, 1944, is the first preceding taxable year. The calendar year 1943, which is before the court, is the second preceding taxable year for purposes of the carry-back issue here in question.

Section 710(c) (3) (A) provides:

"(3) Amount of unused excess profits credit carry-back and carryover — (A) Unused excess profits credit carry-back.

"If for any taxable year beginning after December 31, 1941, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-back for each of the two preceding taxable years, except that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such unused excess profits credit over the adjusted excess profits net income for the second preceding taxable year computed for such taxable year (i) by determining the unused excess profits credit adjustment without regard to such unused excess profits credit, and (ii) without the deduction of the specific exemption provided in subsection (b) (1)."

The plaintiff contends that it is the same taxpayer as its constituent companies for the purposes of section 710(c) (3) (A) since it absorbed them in a statutory merger and that it is the taxpayer for purposes of section 710(c) (3) (A) because the tax to be reduced is its own direct and primary liability. The defendant contends that plaintiff is not the taxpayer within the meaning of section 710(c) (3) (A) and that Congress did not intend to allow the carry-back.

The literal language of the code allows the carry-back. Section 740 (a) provides: "* * * The term `acquiring corporation' means — * * * (3) A corporation the result of a statutory merger of two or more corporations * * *." 26 U.S.C.A. § 740. Subsection (b) of section 740 provides: "* * * The term `component corporation' means—* * * (3) In the case of a statutory merger, all corporations merged, except the corporation resulting from the merger * * *." The plaintiff was clearly an "acquiring corporation" and the companies it absorbed were "component corporations." Section 742 provides: "Supplement A average base period net income. In the case of a taxpayer which is an acquiring corporation, its average base period net income (for the purpose of the credit computed under section 713) shall be the amount computed under section 713 or the amount of its Supplement A average base period net income, whichever is the greater. * * *" 26 U.S.C.A. § 742. Basically, the average base period net income computed under this section is the consolidated excess profits net income with certain adjustments not here material. That plaintiff was entitled to compute its average base period net income under section 742 is clear and is conceded by the defendant.

The section 742 average base period net income is then used to determine the taxpayer's excess profits credit under section 713(a), 26 U.S.C.A. § 713(a). After the amount of the excess profits credit is determined, the specific exemption, if any, the excess profits credit and the unused excess profits credit, if any, are deducted from the excess profits net income in arriving at the adjusted excess profits net income. The unused excess profits credit is the amount of the unused excess profits credit adjustment computed under subsection (c) of section 710. Subsection (c) (1) provides that the adjustment is the aggregate of the unused excess profits credit carry-overs and unused excess profits credit carry-backs. Subsection (c) (2) provides: "* * * The term `unused excess profits credit' means the excess, if any, of the excess profits credit for any taxable year beginning after December 31, 1939, over the excess profits net income for such taxable year, computed on the basis of the excess profits credit applicable to such taxable year. * * *" Paragraph (3) of section 710(c) provides: "* * * (A) If for any taxable year beginning after December 31, 1941, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-back for each of the two preceding taxable years * * *." Because of the interrelationship of sections 740, 742, 713 and 710, the literal language of the code specifically provides for such a carry-back of an unused excess profits credit.

The defendant contends, however, that since Congress was specific in setting forth in section 742 how the average base period net income should be determined when there was a merger, consolidation, or other joinder of taxpayers, and did not expressly state in that section that an acquiring corporation was entitled to a carry-back, or carry-over of an unused excess profit credit, Congress did not intend to allow such a carry-back or carry-over. The Tax Court appears to have adopted this position. Stanton Brewery, Inc., v. Commissioner, 11 T.C. 310, reversed 2 Cir., 176 F.2d 573; California Casket Co. v. Commissioner, 19 T.C. 32. We cannot agree.

The defendant's argument based on section 742 is not well founded. Section 742 strengthens rather than weakens plaintiff's case. That section provides, what would otherwise be lacking in specificity, that the acquiring corporation can use its components' base period experience to determine its average base period net income, which in turn is used to determine its excess profit credit. Section 742 is merely a stepping stone for the plaintiff in determining its excess profits credit. It does not pretend to cover all problems or questions that may arise from a merger and is not a restriction on section 710(c) (3). We think it is clear that the section 742...