McDonnell Aircraft Corporation v. United States
| Decision Date | 22 April 1965 |
| Docket Number | No. 17407.,17407. |
| Citation | 342 F.2d 943 |
| Parties | McDONNELL AIRCRAFT CORPORATION, Appellant, v. UNITED STATES of America, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
William H. Charles, of Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., made argument for the appellant and filed brief with John Peters MacCarthy, of Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo.
Mildred L. Seidman, Atty., Tax Div., Dept. of Justice, Washington, D. C., made argument for appellee and filed brief with Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., Lee A. Jackson and Harry Marselli, Attys., Tax Division, Dept. of Justice, Washington, D. C., and Richard D. FitzGibbon, Jr., U. S. Atty. and John A. Newton, Asst. U. S. Atty., St. Louis, Mo.
Before VAN OOSTERHOUT, BLACKMUN, and MEHAFFY, Circuit Judges.
The issue here is the refundability of approximately a half million dollars in federal excess profits taxes, plus interest thereon, paid by McDonnell Aircraft Corporation for its fiscal years ended June 30, 1952, 1953, and 1954. The case was tried to the court and was submitted on the pleadings and a stipulation. The district court entered judgment for the United States. Its supporting opinion is at 218 F.Supp. 640. The Internal Revenue Code of 1939, of course, controls1 and section references herein, unless otherwise indicated, are to that Code.
McDonnell is a corporation organized in 1939. It is engaged, among other things, in the business of manufacturing and selling airframes for aircraft. During the taxable years in question more than 90% of its income was derived from government contracts. It kept its books on the accrual basis and filed returns for the fiscal year ended June 30.
McDonnell derived income from many contracts which required more than one year to complete. Under the Code, §§ 41 and 42(a), and under § 29.42-4 of Regulations 111, taxpayer, for fiscal 1950 and prior years, elected, for income tax purposes, to report its gross income from these "long-term contracts" upon the completed contract method of accounting. By this method income and expenditures are reported only in the year in which the contract is completed.
For fiscal 1951, however, taxpayer effected a change in this reporting method. With the approval of the Commissioner, granted pursuant to §§ 29.42-4(b) and 29.41-2(c) of the same Regulations, McDonnell changed from the completed contract method of accounting for long-term contracts to the percentage of completion method. By the latter a taxpayer reports for the year that percentage of total gross income to be derived from the contract as the work completed during the year bears to all the work to be performed under the contract, and expenditures of the year are deducted. As a condition for this change, however, the Commissioner required McDonnell, among other things, to agree to report in fiscal 1951 all the income from any contract completed during that taxable year and, with respect to a contract not yet completed in that year, the appropriate percentage of income from the very beginning of the contract. Taxpayer accepted this condition and changed to percentage of completion accounting for all purposes.
This accounting change naturally resulted in the gathering or bunching in fiscal 1951 of a substantial amount of income not theretofore reported by the taxpayer under its formerly employed completed contract method. For the year McDonnell reported normal tax net income of almost $11,000,000. Of this amount something more than $4,000,000 was attributable to percentage of completion in fiscal 1951 but more than $6,000,000 to work performed in fiscal 1949 and fiscal 1950 but theretofore unreported. The accounting change thus threw this additional amount of more than $6,000,000 into fiscal 1951. Its effect on normal and surtax is not at all in issue here.
For McDonnell's fiscal years 1951 through 1954, inclusive, (more accurately, for the period from July 1, 1950, through December 31, 1953), the Excess Profits Tax Act of 1950 Korean Hostilities, 26 U.S.C. §§ 430-474, was in effect. This imposed an excess profits tax in addition to regular corporation normal and surtaxes.
As is generally characteristic of excess profits tax laws, the 1950 Act was designed to reach only that portion of a corporate taxpayer's income attributable to the special wartime conditions, as distinguished from its normal peacetime profits. Fardale Corp. v. United States, 175 F.Supp. 175, 177, 146 Ct. Cl. 532 (1959). This was accomplished by granting the taxpayer an excess profits credit against excess profits net income. This credit was intended to reflect normal profit and the excess profits tax was to attach only to the remainder. If a taxpayer enjoyed less than normal income in a particular year, the excess profits credit not used in that year could be carried over and added to the credit available in the next year and thus utilized to offset any excess profits income of that succeeding year. There were also unused excess profits carryback provisions. Sections 430-432.
The 1950 Act provided two methods of computing the excess profits credit. A taxpayer could select the one which resulted in the lesser tax. Section 434 (a). One method, prescribed by § 436 and succeeding sections, was based on invested capital and is of no concern here. The other method, prescribed by § 435 and which McDonnell selected, was based on income. By this method the excess profits credit was related to average income during a portion of a period of presumed normal experience for the taxpayer. This base period was defined, § 435(b), with stated exceptions, as the four calendar years 1946-49. Section 435(e), however, provided special relief for a taxpayer whose business had substantial growth during that base period. This was of advantage to McDonnell and its base period accordingly consisted of only its two fiscal years 1949 and 1950.
For its fiscal 1951 return McDonnell elected for excess profits tax purposes, as it was allowed to do under § 455(b), to compute income from long-term contracts on the percentage of completion method.2 This corresponded to the general accounting change hereinabove described. It resulted, after initial audit and accepted adjustments, in normal-tax net income of $11,079,127.79 and excess profits net income of $4,373,761.20. The difference between these figures was due to work performed in fiscal 1949 and 1950 (when the excess profits tax was not in effect) on long-term contracts uncompleted by June 30, 1950. The difference was therefore excluded in computing 1951 excess profits net income.
For fiscal 1949 and 1950 McDonnell was subject to renegotiation under the Renegotiation Act of 1948, 62 Stat. 259, 50 U.S.C. App. § 1193. For those years it employed the completed contract accounting method for long-term contracts for both renegotiation and for tax purposes. It received renegotiation clearances, that is, a determination that no excessive profits existed, for both years.
For fiscal 1951, which was divided between calendar 1950 and 1951, McDonnell was subject to renegotiation under the 1948 Act and also the Renegotiation Act of 1951, 65 Stat. 7, 50 U.S.C. App. §§ 1211-33. However, as provided by § 102(c) of the 1951 Act, 50 U.S.C. App. § 1212(c), it was agreed by the parties that the 1951 Act was to apply to the entire fiscal year. Here, again, the same method of accounting was employed for both renegotiation and tax purposes but this time it was percentage of completion accounting.
In September 1955 McDonnell and the government executed a renegotiation agreement by which excessive profits to be eliminated for fiscal 1951 were fixed at $1,450,000. Under § 3806(a) (1) of the 1939 Code, as added by the Revenue Act of 1942, § 508, 56 Stat. 964, and thereafter amended, this amount of eliminated excessive profits for fiscal 1951 operated to reduce the taxpayer's accrued income on its government contracts for that year3 and, accordingly, resulted in a decrease of McDonnell's income tax and the elimination of excess profits tax for fiscal 1951. Under § 3806(b) (1), however, the amount of the reduction in tax constitutes a credit against the excessive profits eliminated. This credit was determined by the Internal Revenue Service to be $756,059.86 and was specified in the renegotiation agreement. Its amount is not in dispute. The net of $693,940.14 (the difference between the eliminated excessive profits of $1,450,000 and the credit of $756,059.86) was paid by McDonnell in October 1955.
The crux of the present case, as the district court pointed out, p. 642 of 218 F.Supp., is the proper treatment of the eliminated excessive profits in the determination of the taxpayer's excess profits tax liability. McDonnell would apply the entire $1,450,000 as a deduction in the determination of its fiscal 1951 excess profits net income. The government, on the other hand, would allocate that amount, on a sales proration basis, among fiscal 1951 and, as well, the two base period years of 1949 and 1950 during which work on long-term contracts not completed by June 30, 1950, was performed. The taxpayer's position would affect, in its favor, the unused excess profits credit for fiscal 1951 eligible for carryover. The government's allocation would result in decreased base period net income and in decreased excess profits credit. The details of these respective approaches are set forth in footnotes 3 and 4 of the district court's opinion, pp. 643-644 of 218 F.Supp.
Thus, despite the usual complicated fact situation attendant upon an excess profits tax case, the issue before us perhaps is comparatively simple and is one triggered by McDonnell's statutorily permitted change of accounting for its long-term contract income. The government would phrase the issue thusly: whether part of the excessive profits eliminated by renegotiation is allocable to the...
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Overlakes Corporation v. CIR, 339
...is nothing to show that Congress ever intended or authorized such treatment, and it is arbitrary and unfair. McDonnell Aircraft Corp. v. United States, 342 F.2d 943 (8th Cir.1965), while distinguishable on the facts, recognized "* * * the statute § 3806 speaks in terms of the taxable year a......