United States Steel Corporation v. United States

Citation316 F. Supp. 990
Decision Date14 July 1970
Docket NumberNo. 65 Civ. 3043.,65 Civ. 3043.
PartiesUNITED STATES STEEL CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — Southern District of New York

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White & Case, New York City, for plaintiff; A. Chauncey Newlin, Haliburton Fales, 2d, Thomas B. Leary, Rayner M. Hamilton, Edmund W. Pavenstedt, Donald T. MacNaughton, New York City, of counsel.

Whitney North Seymour, Jr., U. S. Atty., S. D. New York, for defendant; Alan B. Morrison, Richard M. Hall, Asst. U. S. Attys., David A. Wilson, Atty., Dept. of Justice, Washington, D. C., of counsel.

OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW.

LEVET, District Judge.

This opinion involves issues in an action by United States Steel Corporation ("U. S. Steel") against the United States, pursuant to 28 U.S.C. § 1346(a) (1), for refund of certain 1950 income and excess profits tax payments, together with interest. By agreement of the parties, the present issues were tried by the court without jury. (2-4)1

PRIOR PROCEEDINGS IN THIS LITIGATION
A. The Complaint

In a complaint dated September 30, 1965 and filed October 11, 1965, U. S. Steel2 brought suit under 28 U.S.C. § 1346(a) (1) to recover portions of federal income tax paid for the year 1950. Plaintiff claimed that certain 1950 federal income and excess profits tax payments were erroneously and illegally assessed and collected.

In general, U. S. Steel maintained in the complaint:

1. That it was entitled to additional depletion deductions for the year 1950.

2. That certain alleged abnormalities occurring during 1947, 1948 and 1949 should have been considered by defendant in the computation of the "average base period net income" figure for the relevant base period years 1947-1949, which figure was used to determine the extent to which U. S. Steel was subject to income and excess profits taxes for the year 1950. The abnormalities alleged were (a) low quality of coking coal and iron ore, resulting in loss of production; (b) abnormal cost-price relationships, resulting in the depression of plaintiff's business and earnings; (c) numerous and protracted strikes, resulting in the interruption and diminution of plaintiff's normal production, output and operation; and (d) other abnormalities referred to at the time plaintiff's 1950 consolidated federal income and excess profits tax return was filed.

3. That, if it be determined that plaintiff is entitled to no relief or only certain partial relief under 2 above, plaintiff should be entitled to press an alternative claim for disallowance of deductions for certain "strike expenses."

B. Rulings on Motions for Summary Judgment

As to plaintiff's claim for additional depletion deductions, both parties moved for summary judgment. On May 19, 1967, this court denied plaintiff's motion and granted defendant's motion, holding in substance that, for the purpose of calculating the deduction for percentage depletion under 26 U.S.C. §§ 23 (m) and 114(b) (4) of the Internal Revenue Code of 1939, plaintiff, as lessee, could not include payments of Minnesota ad valorem and royalty taxes in its gross income from mining. 270 F.Supp. 253 (S.D.N.Y.1967).

As to plaintiff's claim that "low quality of coking coal and iron ore, resulting in loss of production" was a qualifying abnormality for excess profits tax purposes within the meaning of 26 U.S.C. Excess Profits Taxes § 442 (1939 Code), the defendant moved for summary judgment. The motion was granted on July 1, 1969 and plaintiff's subsequent motion for reargument was denied on October 2, 1969. In substance, this court held as a matter of law that war-induced shortages of men and materials and delays by suppliers and subcontractors during the period of 1941 to 1948 may not constitute the basis for relief under § 442, because effects directly attributable to United States government policies during World War II, including post-war competitive pressures engendered by wartime conditions, are not qualifying abnormalities within the meaning of the statute. 305 F.Supp. 497 (S.D.N.Y.1969), 305 F.Supp. 516 (S.D. N.Y.1969).

As to plaintiff's claim that "abnormal cost-price relationships, resulting in the depression of Plaintiff's business and earnings" constituted a qualifying abnormality within the meaning of § 442, the defendant moved for summary judgment. The motion was granted on July 1, 1969 and plaintiff's subsequent motion for reargument was denied on October 2, 1969. This court held in substance that the factors submitted by plaintiff were not shown to consist of more than the valid exercise of governmental regulatory authority or competitive pressures which businessmen must reasonably expect in the course of their operations. 305 F.Supp. 508 (S.D.N.Y. 1969), 305 F.Supp. 516 (S.D.N.Y.1969).

C. Issues Remaining for Trial

The present proceedings arise primarily from U. S. Steel's allegations in the complaint that "numerous and protracted strikes, resulting in the interruption and diminution of Plaintiff's normal production, output and operation; and other abnormalities" qualify as "unusual" occurrences under § 442. U. S. Steel now contends that the allegedly "unusual" events—a 1948 explosion, two 1948 strikes by the United Mine Workers and a 1949 strike by the United Steel Workers—significantly affected plaintiff's taxable income within the meaning of § 442(a) during the years 1948 and 1949, which years were designated as part of the base period pursuant to the Excess Profits Tax Act of 1950, 26 U.S.C. Excess Profits Taxes § 430 et seq. As a result of the alleged effects of these events on its taxable income in 1948 and 1949, plaintiff suggests, the defendant should have computed U. S. Steel's "average base period net income" for the relevant base period years 1947-1949 in accordance with relief provisions contained in § 442, so as to decrease the amount of tax owed for 1950 by the taxpayer.

If it develops that plaintiff is not entitled to any application of § 442 for 1948 and 1949 or that it is entitled to § 442 application for only one of the years (i. e., 1948 or 1949), plaintiff presents an alternative claim under 26 U.S.C. Excess Profits Taxes § 433(b) (9) for disallowance of deductions for certain "strike expenses" incurred in the year 1949. If U. S. Steel should then be eligible for application of § 442 and § 433(b) (9) for 1949, plaintiff may opt for application of whichever section would afford greater relief to the taxpayer. (Stipulation, May 26, 1970)

PLAINTIFF'S POST-TRIAL CONTENTIONS

The plaintiff's claims after trial may be set forth generally as follows:

1. The two 1948 United Mine Workers' strikes which shut down U. S. Steel's coal-producing facilities and resulted in interruptions in production at plaintiff's steel-making facilities were "unusual" occurrences within the meaning of § 442;

2. The 1948 explosion at plaintiff's South Works in Chicago, Illinois was an "unusual" occurrence within the meaning of § 442;

3. U. S. Steel's 1948 income before federal income taxes was reduced (as a result of "unusual" occurrences within the meaning of § 442) to a legally significant extent below what such income otherwise would have been; consequently plaintiff is entitled to application of § 442 for the year 1948.

4. The 1949 United Steel Workers' strike which shut down plaintiff's steel-making facilities was an "unusual" occurrence within the meaning of § 442;

5. U. S. Steel's 1949 income before federal income taxes was reduced (as a result of the "unusual" occurrence) to a legally significant extent below what such income otherwise would have been; consequently, plaintiff is entitled to application of § 442 for the year 1949.

6. If plaintiff is not entitled to any § 442 application for 1948 and 1949 or if plaintiff is entitled to § 442 application for only one of the years (i. e., 1948 or 1949), plaintiff presses an alternative claim under § 433(b) (9) for disallowance of deductions for certain 1949 "strike expenses;" if plaintiff qualifies for application of both § 442 and § 433 (b) (9) for 1949, it seeks relief under whichever section is more favorable.

DEFENDANT'S POST-TRIAL CONTENTIONS

The defendant's positions in response to plaintiff's contentions may be set forth generally as follows:

1. The 1948 United Mine Workers' strikes were not "unusual" events under § 442;

2. The 1948 explosion at U. S. Steel's South Works was concededly an "unusual" event; but

3. Plaintiff's 1948 income before federal income taxes was not reduced to a legally significant extent as a result of the 1948 explosion, the only "unusual" occurrence which affected U. S. Steel's 1948 income.

Consequently, plaintiff is not entitled to application of § 442 for the year 1948.

4. The 1949 United Steel Workers' strike was concededly an "unusual" event; but

5. U. S. Steel's 1949 income before federal income taxes was not reduced to a legally significant extent as a result of the 1949 strike.

Consequently, plaintiff is not entitled to application of § 442 for the year 1949.

6. Plaintiff is not entitled to any relief for its alternative claim under § 433(b) (9).

ISSUES

The following issues are before the court for determination:

1. Were the two 1948 strikes against plaintiff by the United Mine Workers qualifying abnormalities within the meaning of 26 U.S.C. Excess Profits Taxes § 442(a) (1939 Code)?

2. If the two 1948 strikes were qualifying abnormalities, has U. S. Steel proved by a fair preponderance of the credible evidence that its 1948 income before federal income taxes was reduced to a legally significant extent (below what such income otherwise would have been) as a result of 1948 qualifying abnormalities, i. e., the 1948 explosion at plaintiff's South Works in Chicago, Illinois, which explosion is conceded by defendant to have been a qualifying abnormality, and the two 1948 strikes (if it has been determined that the strikes were qualifying abnormalities)?

3. If the...

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