United States v. Premier Oil Refining Co. of Texas, 14487.

• Decision Date: 22 March 1954
• Docket Number: No. 14487.,14487.
• Parties: UNITED STATES v. PREMIER OIL REFINING CO. OF TEXAS.
• Court: U.S. Court of Appeals — Fifth Circuit

209 F.2d 692 (1954)

UNITED STATES v. PREMIER OIL REFINING CO. OF TEXAS.

No. 14487.

United States Court of Appeals Fifth Circuit.

January 6, 1954.

Rehearing Denied March 22, 1954.

Louise Foster, Ellis N. Slack, Robert N. Anderson, Sp. Assts. to the Atty. Gen., H. Brian Holland, Asst. Atty. Gen., Frank B. Potter, U. S. Atty., Midland, Tex., Tom M. Shaw, Asst. U. S. Atty., Dallas, Tex., for appellant.

Harold B. Pressley, Jr., Eugene M. Locke, Locke, Locke & Purnell, Dallas, Tex., for appellee.

Before HUTCHESON, Chief Judge, and BORAH, and RIVES, Circuit Judges.

BORAH, Circuit Judge.

In an action against the United States of America to recover the amount of $56,855.41 withheld as interest on excess profits tax deficiencies which were subsequently abated, the District Court gave judgment for the plaintiff Premier Oil Refining Company of Texas. The Government has appealed.

Appellee, a Texas corporation, timely filed its income and excess profits tax returns for the calendar years 1943, 1944, and 1945 with the Collector of Internal Revenue for the Second District of Texas. In its excess profits tax returns appellee reported an average base period net income of $93,150.36 for the years 1943 and 1944 and $116,437.95 for 1945, on the basis of which amounts its excess profits taxes were computed and paid. Title 26 U.S.C. 1946 ed., § 713(d) and (e) sets forth the method of determining average base period net income, which in turn¹ involves the computation of net income under the sections of Chapter I of the Internal Revenue Code which relate to income tax on corporations. In the making of its computations and in stating in its returns its net income for each of the three years appellee omitted substantial amounts therefrom as a result of having made unallowable deductions. Upon discovering this, the Commissioner disallowed the deductions² and re-computed the taxes for each year. The taxpayer after first protesting the disallowance of its claimed deductions, later consented to the assessment of the income tax deficiencies, and such deficiencies were collected with interest.

On March 2, 1947, appellee filed timely Form 991 applications for relief for the taxable years 1943, 1944, and 1945 under Section 722 of the Internal Revenue Code, 26 U.S.C. 1946 ed., § 722. This section in pertinent part provides that "In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter." Appellee claimed a constructive average base period net income of $357,000 for each of the years 1943, 1944, and 1945, as it had previously done for the years 1941 and 1942. The prior claims were allowed by the Bureau on September 25, 1944, at which time it was determined that use of the average base period net income for the two earlier years resulted in an excessive and discriminatory tax for those years and that the larger credit of $357,000 should stand as a substitute therefor. Under existing regulations of the Commissioner adopted in 1941, appellee was entitled to use the larger credit so determined (except as further adjustments might be required) in subsequent taxable years. On September 12, 1947, the Excess Profits Tax Council determined that appellee was entitled to a constructive average base period net income of $357,000 for the years 1943, 1944, and 1945. Thereafter, the Commissioner computed appellee's tax liability for those years and made findings³ as to such liability both prior and subsequent to the application of the relief adjustments under Section 722. These findings show that before allowance under Section 722 there was a "deficiency" in income and excess profits taxes for each year whereas after allowance under § 722 there were overassessments of excess profits taxes for 1943 and 1944, a small deficiency in such tax for 1945, and deficiencies in income taxes for the three years.

Appellee thereafter, in May, 1948, pursuant to Section 272(d) of the Internal Revenue Code, 26 U.S.C. 1946 ed., § 272(d), filed waivers of the restrictions provided in Section 272(a)⁴ of the Code, thereby consenting to the assessment and collection of the income tax deficiencies for the three years with interest and accepting the overassessments for 1943 and 1944 — all of which figures were based on the Commissioner's findings after allowance under Section 722.⁵ However, the interest which appellee agreed to pay and did pay did not include interest on the excess profits tax "deficiencies" which were found to exist before allowance of relief under Section 722. This interest was computed by the Commissioner on forms prepared for his own use which specifically refer to "interest on potential deficiency". And was calculated from the date prescribed for the payment of the tax to the thirtieth day after the filing of waivers as specified in 26 U.S.C. 1946 ed., § 292(a).

By letter dated June 2, 1948, the Internal Revenue Agent in Charge at Dallas transmitted to appellee a recomputation of its tax liability for the years 1943 and 1944 and notified appellee among other things that after the overassessments had been certified to the Collector by the Commissioner it would be advised as to how the overassessments had been applied. On June 8th the Agent in Charge notified appellee by letter of the Bureau's conclusions as to its tax liability for 1945. This letter enclosed a copy of a supplemental report disclosing deficiencies in appellee's income tax and excess profits tax for that year and stated "This office approves such supplemental report and is closing your 1945 returns on the basis thereof." Thereafter, Certificates of Overassessment were issued. These certificates are not before us but the pleadings show that they do reflect that the overassessments of excess profits taxes for the years 1943 and 1944, to the extent here relevant, was credited as follows: "To additional excess profits tax interest for the year 1943, $20,084.89" and "$10,901.36 to additional excess profits tax interest for the year 1944." This interest was demanded from appellee on August 25, 1948, at which time it received from the Bureau Form 7658 showing excess profits tax interest in the above-mentioned amounts to be due for 1943 and 1944. There was, however, no explanation as to how this interest had been computed and upon appellee's inquiry the Commissioner transmitted to taxpayer Form M-1698 whereon it was specifically shown that there had been a computation of a "deficiency before allowance under Section 722" and that interest was computed on such amounts from the due date of the respective return to a date 30 days after the filing of a waiver in the amounts of $20,084.79 for the year 1943, $10,901.36 for 1944, and $25,869.26 for 1945. Appellee paid these three items of interest in full and filed Form 873 claiming a refund of these amounts. These claims were disallowed in full by the Deputy Commissioner, whereupon appellee instituted this suit.

The amended complaint alleged among other things that Form M-1698 as received by the corporation taxpayer showed that the Bureau had computed excess profits tax that would have been due by it but for the granting of relief under Section 722; but that such relief was in fact granted, and, as a consequence, no warrant exists in law for the collection of interest on a tax for which it was never liable and which tax was not and could not have been assessed. It alleged that the facts entitling taxpayer to relief under Section 722 existed at the time it filed returns for 1943, 1944, and 1945; that such facts were identical with those upon which it had been granted relief for 1941 and 1942, and were facts taken into consideration by the Revenue Agent in making his initial report on the returns for the years 1943 and 1944 which was before applications for relief for the years 1943, 1944 and 1945 had been filed. Further, that Section 722(a) of the Internal Revenue Code provides that if the taxpayer establishes that he is entitled to relief under that section, the constructive average base period net income shall be used "in lieu of the average base period net income otherwise determined"; and that the relief granted under Section 722 completely replaces the credit otherwise computed in determining the tax liability of a taxpayer. The relief prayed was that judgment be entered in favor of appellee and against the defendant, the United States of America, for $56,855.41 with interest and costs.

The United States in its answer sets forth that the Commissioner determined that there were deficiencies in excess profits taxes for the three years before any allowance of relief under Section 722 and it is averred that the application of the additional excess profits credit under Section 722 extinguished these excess profits tax deficiencies. After the pleadings were closed the Government filed a motion for summary judgment on the pleadings together with supporting affidavits and attached exhibits and this motion was denied and a trial was had on the merits. The court below found as facts that no excess profits tax deficiency was ever found or determined and that there was no assessment thereon and concluded that under § 292(a) of the Internal Revenue Code, supra, interest on a deficiency may be charged after the deficiency is definitely found and determined and an assessment is made thereon but that these three steps were never taken by the Government. Judgment was accordingly entered that the...