SPRAGUE ELECTRIC COMPANY v. CIR, 6155.

• Decision Date: 28 April 1964
• Docket Number: No. 6155.,6155.
• Citation: 330 F.2d 1005
• Parties: SPRAGUE ELECTRIC COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — First Circuit

330 F.2d 1005 (1964)

SPRAGUE ELECTRIC COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 6155.

United States Court of Appeals First Circuit.

Heard March 3, 1964.

Decided April 28, 1964.

Hugh C. Bickford, Washington, D. C., with whom Arthur G. Connolly, James M. Mulligan, Jr., Wilmington, Del., Edmund Burke, Boston, Mass., Connolly, Bove & Lodge, Wilmington, Del., and Hale & Dorr, Boston, Mass., were on brief, for petitioner.

Harry Marselli, Atty. Dept. of Justice, with whom Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Fred R. Becker, Attys., Dept. of Justice, were on brief, for respondent.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

ALDRICH, Circuit Judge.

In this proceeding to review a decision of the Tax Court taxpayer, Sprague Electric Company, seeks to minimize or avoid impositions under the Excess Profits Tax Act of 1940 by proof that certain income was to be excluded as "abnormal" because attributable to "* * * research, or development of tangible property, patents, formulae, or processes * * *" carried on during pre-tax years. 1939 I.R.C. § 721 (a) (2) (C). As to some items it was successful, but as to one, known as networks, it was not. At the threshold in this court respondent Commissioner moves to dismiss the petition on the ground that the decision of the Tax Court is final under section 732(c) of the 1939 Code, concededly applicable to the years in question, which provided,

"Finality of Determination. If * * * the determination of any question is necessary solely by reason of * * * section 721 * * * the determination of such question shall not be reviewed or redetermined by any court * * * except the Tax Court."

Our first question, accordingly, is the scope of this impediment.

Taxpayer is a manufacturer of electronic components. Some of its products are standard, but others are of its special design. In order to excel competitively it maintains a research department. Continuous activity is required of this department because competitively a product remains superior only for a few years, and there must be constant improvement and replacements. During the years 1936 to 1939 taxpayer, through experimentation with dielectrics, developed a group of markedly efficient general and special purpose condensers. Some of these it sold, beginning in 1942, to Massachusetts Institute of Technology (M.I.T.), which assembled them, together with standard choke coils and other elements, into circuits which taxpayer designates by the generic term "networks." The M.I.T. assembly was mechanically awkward, and M.I.T. shortly requested taxpayer to revise the procedure and to do the assembling itself. The development of the condensers had required several years. In a matter of weeks taxpayer perfected an efficient assembly and enclosed it in a container. An enormous number of such networks was sold for wartime radar. Throughout the later tax years (1942-1945) taxpayer continued to design and improve its networks, for which it established a separate classification on its books, but basically it still employed the special condensers it had developed in the prior years. In addition it sold such condensers separately for miscellaneous uses, military and civilian.

The Tax Court held taxpayer entitled to treat a portion of its ordinary sales of condensers as abnormal income within section 721(a) (2) (C) attributable to other years, but excluded from such treatment in their entirety networks and the condensers included therein. Its first ground was that pursuant to Treasury Regulations 112 Sec. 35.721-3¹ the development and sale of networks from which net abnormal income was derived was due to a special wartime demand, so that such income was not attributable to other years under cases such as Breeze Corporations, Inc., 1951, 16 T.C. 587.² Alternatively it held taxpayer had failed to show that networks of the type sold in the tax years were not, as such, new products developed only in those years,³ but that if, because of the substantial contribution of the condensers, a portion of the income was attributable to prior research taxpayer had failed to make the separation and offer the necessary accounting and other evidence to permit a mathematical segregation. Admittedly, this second ground was based upon an argument advanced for the first time in the Commissioner's post-trial brief. Taxpayer moved to "revise the opinion," but its motion was denied.

Taxpayer raises two other matters. Because it had succeeded with respect to some of its claims it was necessary, in order to apply the formula contained in the act, to determine amounts of taxpayer's income during a number of base years falling within the section 721(a) (2) (C) classification. The Tax Court so attributed income from a product known as an electrolytic condenser. Taxpayer objects to that determination on the ground that this item had already become standard, and had been so treated at the trial. In addition, it disagrees with the Tax Court's construction of the statute requiring its inclusion when, concededly, during the tax years it had received no net abnormal income therefrom. Finally, taxpayer objects because the Tax Court included administrative expense as part of its "direct costs and expenses"⁴ in computing the statutory formula.

We think the Commissioner's attempt to short-circuit the taxpayer must succeed. While there are recognized situations to which the finality section does not extend, none is here applicable. It has been loosely said that in spite of this provision there is power to review the Tax Court on errors of law as distinguished from errors of fact. However, examination of the cases discloses that such review has always involved another section of the act, so that the determination might be said not to involve "solely" a section enumerated and falling within section 732(c), see, e. g., Dowd-Feder, Inc. v. Commissioner, 6 Cir., 1949, 173 F.2d 673; Stimson Mill Co. v. Commissioner, 9 Cir., 1947, 163 F.2d 269, cert. den. 332 U.S. 824, 68 S.Ct. 165, 92 L.Ed. 400; May Seed & Nursery Co. v. Commissioner, 8 Cir., 1957, 242 F.2d 151, cert. den. 355 U.S. 839, 78 S.Ct. 62, 2 L.Ed.2d 51; Utility Appliance Corp. v. Commissioner, 9 Cir., 1958, 256 F.2d 39, Headline Pubs., Inc. v. Commissioner, 2 Cir., 1959, 263 F.2d 541, or has involved extraneous principles of law, so that it may be said that the taxpayer has not had a fair "determination" under the enumerated section, e. g., George Kemp Real Estate Co. v. Commissioner, 2 Cir., 1953, 205 F.2d 236, cert. den. 346 U.S. 876, 74 S.Ct. 129, 98 L.Ed. 384; Stern & Stern Textiles, Inc. v. Commissioner, 2 Cir., 1959, 263 F.2d 538, cert. den. 361 U.S. 831, 80 S.Ct. 80, 4 L.Ed.2d 73 (Tax Court held taxpayer bound by collateral estoppel), or for some reason or other there has been no determination at all, Arkansas Motor Coaches, Ltd. v. Commissioner, 8 Cir., 1952, 198 F.2d 189; cf. Packer Pub. Co. v. Commissioner, 8 Cir., 1954, 211 F.2d 612. Our citation of these cases does not necessarily mean that we would agree with all of them, cf. United States Rubber Co. v. Commissioner, 2 Cir., 1960, 274 F.2d 307, cert. den. 363 U.S. 827, 80 S.Ct. 1596, 4 L.Ed.2d 1522, but is simply to show the limits to which the courts have gone. Conceivably it might...