Wilkes-Barre Carriage Co. v. Comm'r of Internal Revenue, Docket No. 64639.
| Decision Date | 07 March 1963 |
| Docket Number | Docket No. 64639. |
| Citation | 39 T.C. 839 |
| Parties | WILKES-BARRE CARRIAGE CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Fred R. Tansill, Esq., for the petitioner.
John J. Madden, Esq., and John E. McDermott, Esq., for the respondent.
Held, (1) there was no overpayment in petitioner's 1943 excess profits tax; and (2) the deficiency in petitioner's 1943 taxes may reflect not only uncontested adjustments made by the Commissioner but also the amount of taxes previously assessed which were allowed as a credit under section 3806(b), I.R.C. 1939, in discharge of petitioner's liability to restore excessive profits determined in renegotiation proceedings, where such previously assessed taxes had not in fact been paid. Rev. Rul. 55-474, 1955-2 C.B. 673. Cf. Morris Kurtzon, 17 T.C. 1542.
The statutory notice of deficiency, issued in July 1956, relates to petitioner's tax liability for the fiscal years ended July 31, 1943, through July 31, 1947, but fiscal 1943 is the only year presently in dispute.1 The facts have been fully stipulated.
Petitioner, an accrual basis taxpayer with a fiscal year ending July 31, is a Delaware corporation, and was engaged during the taxable years in the manufacture of ordnance for the armed services of the United States and Great Britain. Its offices were in New York City, and it filed its Federal income and excess profits tax returns here involved with the then collector of internal revenue for the third district of New York.
Petitioner concedes all of the deficiencies set forth in the statutory notice with respect to all of the years, except the excess profits tax and the declared value excess profits tax deficiencies for 1943, determined by the Commissioner in the statutory notice to be in the amounts of $311,675.46 and $6,053.14, respectively. As to 1943, petitioner admits the correctness of the various adjustments made by the Commissioner increasing its taxable income for that year, but contends that by reason of section 3806, I.R.C. 1939, relating to renegotiation, there are not only no deficiencies for 1943 but that there is in fact an overpayment in excess profits taxes for that year in the amount of $181,846.10.2 On the other hand, the Commissioner, by his answer as amended, has revised the amount of the deficiencies for 1943, claiming that the correct deficiencies in excess profits tax and declared value excess profits tax are $3,179,447.07 and $210,659.62, respectively.
Petitioner's 1943 returns, filed December 15, 1943, reported net income in the amount of $5,002,657.38, and showed the following taxes due:
+------------------------------------------+
¦Income ¦$12,600.29 ¦
+-----------------------------+------------¦
¦Declared value excess profits¦165,350.77 ¦
+-----------------------------+------------¦
¦Excess profits ¦3,815,848.10¦
+-----------------------------+------------¦
¦Total liability ¦3,993,799.16¦
+------------------------------------------+
The taxes in these amounts were assessed on January 13, 1944, but petitioner has in fact paid only a total amount of $1,556,301.30 in respect of such taxes. The payments aggregating this amount were made over a period of several years beginning in 1943, and were used to discharge in full petitioner's reported income tax and declared value excess profits tax liability and to discharge in part its reported excess profits tax liability, as follows:
+-------------------------------------------------------------------------+
¦ ¦Liability ¦Amount paid ¦Balance ¦
+---------------------------------+------------+------------+-------------¦
¦Income tax ¦$12,600.29 ¦$12,600.29 ¦ ¦
+---------------------------------+------------+------------+-------------¦
¦Declared value excess profits tax¦165,350.77 ¦165,350.77 ¦ ¦
+---------------------------------+------------+------------+-------------¦
¦Excess profits tax ¦3,815,848.10¦1,378,350.24¦$2,437,497.86¦
+---------------------------------+------------+------------+-------------¦
¦ ¦3,993,799.16¦1,556,301.30¦2,437,497.86 ¦
+-------------------------------------------------------------------------+
Accordingly, in view of that large unpaid balance and in view of the further fact that the Commissioner has made a number of presently uncontested adjustments increasing petitioner's reported taxable income, it is plain that but for the renegotiation discussed below petitioner's outstanding tax liability would be even greater than the foregoing amount of the unpaid balance. Did the renegotiation proceedings and their ultimate resolution have the effect of erasing petitioner's tax liability and indeed producing an overpayment in excess profits tax, as contended by petitioner? As will be developed hereinafter, we think that in no circumstances is petitioner entitled to any refund, and that it owes a large amount in taxes, more than determined in the statutory notice of deficiency but not as much as claimed by the respondent in his answer as amended.
During the period between July 31, 1943, and April 3, 1947, petitioner participated in renegotiation proceedings3 with the War Department of the United States, directed toward the determination of the amount of payments made by the United States to petitioner under certain war contracts, which were to be refunded to the United States as ‘excessive profits' under the Renegotiation Act. By order of April 3, 1947, the War Contracts Price Adjustment Board, acting under the Renegotiation Act, determined that petitioner's profits under contracts subject to renegotiation for the fiscal year ending July 31, 1943, were excessive in the amount of $3,789,321. And it is the repayment of those excessive profits to the United States or the manner in which petitioner's liability to restore those excessive profits to the United States was discharged that gives rise to the tax problem that is before us.
The method for recapturing such excessive profits was spelled out in certain provisions that were added in 1942 to the Internal Revenue Code of 1939 and are contained in section 3806 thereof.4 Pertinent portions of section 3806 are set forth in the margin.5 Section 3806 merely incorporated into the statute the method which had previously been employed administratively without specific statutory authorization. I.T. 3577, 1942-2 C.B. 163; I.T. 3611, 1943 C.B. 978; S. Rept. No. 1631, 77th Cong., 2d Sess., p. 254. The theory underlying that method was that since large amounts of taxes had already been paid or assessed with respect to such excessive profits, it should be necessary for the contractor to restore to the Government only the difference between the excessive profits and the taxes applicable thereto. The fact that such taxes had been paid or would be paid as assessed was considered as an offset against the total excessive profits. Section 3806(a) provided the means for determining the extent to which the contractor's taxes were reduced by eliminating the excessive profits, and section 3806(b) in substance provided the means whereby the contractor could discharge his liability to restore the excessive profits in part by applying against that liability a refund or credit with respect to the taxes which had already been imposed upon such excessive profits.
Thus, in terms of the $3,789,321 excessive profits in this case, a credit for taxes in the total amount of $3,064,526.96 was allowed under section 3806(b), leaving a balance of only $724,794.04 to be repaid to the United States as excessive profits. And petitioner's liability in respect of the payment of that $724,794.04 balance has since been satisfied.6 Its liability to repay the $3,789,321 excessive profits has therefore been fully discharged.
What gives rise to the present controversy is the fact that petitioner has actually received the benefit of a credit or refund of $3,064,526.96 in taxes that was applied against its liability to restore its $3,789,321 excessive profits to the Government, notwithstanding that it had not in fact paid anything like that amount in taxes. To be sure, it had filed returns for 1943 disclosing tax liabilities in an aggregate amount that was sufficient to support a $3,064,526.96 refund or credit to be applied against its liability to restore the excessive profits. But the fact is that it had not paid the taxes to support any such refund or credit, and indeed there was an unpaid balance of $2,437,497.86 in its assessed 1943 excess profits taxes.
It is in the light of these circumstances that we must consider petitioner's extraordinary contention that there was an overpayment in its 1943 excess profits taxes. The argument is deceptively simple, and may be stated as follows: Section 3806(a) requires the elimination of the $3,789,321 excessive profits from its 1943 taxable income; the excess profits tax as recomputed (by the Commissioner) after such elimination is $1,196,504.14; 7 petitioner in fact has paid $1,378,350.24 on its 1943 excess profits tax liability; it has therefore overpaid its excess profits tax by $181,846.10, namely, the difference between the foregoing amounts.
We reject that argument as fallacious. We hold that there was in fact no overpayment; that the overpayment claimed by petitioner is an illusion brought about by a misunderstanding of the purpose and operative scope of section 3806; and that petitioner in fact is liable for a substantial amount of taxes.
The underlying premise of petitioner's argument is that the section 3806(a) elimination of excessive profits can be used to do double duty: First, to reduce the contractor's taxes and provide a refund or credit in the amount of such reduction under section 3806(b) to be applied against his obligation to repay the excessive profits;...
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