Court Opinion

ID: 8590874
Source: CourtListenerOpinion
Date Created: 2022-11-23 15:48:14.901029+00
Date Added: 2024-06-11T16:54:27.372590
License: Public Domain

Whitaker, Judge,
dissenting:
I dissent. I agree with the decision of the Court of Appeals in the Basalt Bock Company case, supra.
Judge Laramore took no part in the consideration or decision of this case.
*343FINDINGS OF FACT. .
The court made findings of fact, based upon the stipulation of the parties, and the briefs and argument of counsel, as follows:
1. Farrel-Birmingham Company, Inc., is a corporation organized in 1921 under the laws of the State of Connecticut and is engaged primarily in the business of manufacture and sale of heavy machinery. Its principal office is located in Ansonia, Connecticut. Plaintiff sues for recovery of the sum of $1,022,120.18 excess profits tax and $168,886.18 deficiency interest, a total of $1,191,006.36, including interest thereon as provided by statute, which amount represents excess profits tax and interest paid by plaintiff for its taxable year ended December 31,1943.
2. Within the time required by law, plaintiff filed with the Collector of Internal Eevenue at Hartford, Connecticut, its corporation excess profits tax return (Form 1121) for the taxable year ended December 31, 1943, on which a liability for excess profits tax was shown in the amount of $3,489,638.68. This amount was duly paid to the said Collector on or before the statutory installment dates fixed by law. Subsequently, as the result of various adjustments made by the Commissioner of Internal Eevenue, the Commissioner made a final determination that plaintiff’s excess profits tax due for the taxable year 1943 was $4,229,656.66 with deficiency interest of $168,886.18, all of which amounts have been duly paid.
3. Under date of June 27, 1952, and within the time required by law, plaintiff filed with the Collector of Internal Eevenue at Hartford, Connecticut, a claim for refund of excess profits tax for the taxable year 1943 in the amount of $1,022,120.18, or such other amount as was legally refundable. In its claim plaintiff asserted that in computing its excess profits tax for 1943 under the provisions of Section 710 (a) (1) (B) of the Internal Eevenue Code, surtax net income should have been the amount computed in accordance with the completed contract method of accounting in*344stead of the percentage of completion method used by the Commissioner of Internal Revenue. The claim also asserted that tbe Commissioner’s computation of surtax net income had been made in accordance with an invalid regulation which had been issued by the Commissioner.
4. The Commissioner of Internal Revenue by registered letter under date of September 19, 1952, rejected the claim for refund.
5. In rejecting plaintiff’s claim for refund the Commissioner of Internal Revenue determined that plaintiff’s excess profits tax for 1943 was an amount which, when added to the normal and surtax imposed on plaintiff for that year, equaled 80 percent of plaintiff’s surtax net income computed under the percentage of completion method.
6. During the taxable year 1943 plaintiff derived income from contracts, the performance of which required more than twelve months.
7. For the taxable year 1943 plaintiff filed its corporation income and declared value excess profits tax return (Form 1120) reporting income from contracts requiring more than twelve months to perform on a completed contract basis in accordance with its regular method of reporting such income, and it filed its corporation excess profits tax return (Form 1121) for the taxable year 1943 reporting income from such contracts on the percentage of completion method of accounting pursuant to an election made under Section 736 (b) of the Internal Revenue Code.
8. With respects to the computation of the excess profits tax for 1943, Section 710. (a) (1) of the Internal Revenue Code, as amended by Section 202 of the Revenue Act 1942, provided as follows:
Sec. 710. ImpositioN or tax.
(a) imposition.—
(1) General Buie. — There shall be levied, collected, and paid, for each taxable year, upon the adjusted excess-profits net income, as defined in subsection (b), of every corporation (except a corporation exempt under section 727) a tax equal to whichever of the following amounts is the lesser:
*345(A) 90 per centum of the adjusted excess-profits net income, or
(B) an amount which when added to the tax imposed for the taxable year under Chapter 1 (other than section 102) equals 80 percentum of the corporation surtax net income, computed under section 15 or Supplement G, as the case may be, but without regard to the credit provided in section 26 (e) (relating to income subject to the tax imposed by this subchapter).
9. Supplement G of the Internal Revenue Code, as amended, for the taxable year 1943 did not apply to plaintiff. Plaintiff’s corporation surtax net income, computed under Section 15 of the Internal Revenue Code, but without regard to the credit provided in Section 26 (e), as finally determined by the Commissioner for the taxable year 1943 was $4,738,648.27 as computed on the completed contract basis and the amount of $6,158,259.64 as computed on the percentage of completion basis.
10. In computing plaintiff’s excess profits tax for the year 1943, and in rejecting plaintiff’s claim for refund with respect thereto, the Commissioner of Internal Revenue determined that the surtax net income for purposes of the 80 percent limitation prescribed in Section 710 (a) (1) (B) should be computed under the percentage of completion method of accounting and that the surtax net income was $6,158,259.64, of which 80 percent was $4,926,607.71. The Commissioner determined that plaintiff’s adjusted excess profits net income was $5,532,261.93 and that 90 percent thereof was $4,979,035.74. Having determined that plaintiff’s normal tax and surtax for the year 1943 was the amount of $226,989.31, the Commissioner determined under his regulations that the excess profits tax of plaintiff computed under Section 710 (a) (1) (B) for the year 1943 was the amount of $4,699,618.40, ($4,926,607.71 minus $226,989.31).
11. The computation of plaintiff’s net income on the percentage of completion basis as finally determined by the Commissioner, which he designated as “surtax net income” pursuant to Section 35.736 (b)-3 (a) of Reg. 112, is shown as follows in a revenue agent’s report dated July 2,1951:
*346Schedule 18-A
subtax net income — percentage of completion basis
Surtax net income:
Completed contract basis, sch. 12_$4, 738,719. 37
Add: Increase in income on % of comp, basis, sch. 17_ 1, 419, 611.37
6,158,330. 74
Less: Dividends received credit- 71.10
Surtax net income_ 6,158,259.64
After arriving at the above surtax net income figure, the Commissioner in his final determination proceeded to compute the excess profits tax under Section 710 (a) (1) (B) in the following manner:
7. Surtax net income (computed without regard to the credit provided by section 26 (e))_$6,158,259.64
8. 80% of Item 7_ 4,926,607.71
9. Income tax (other than section 102)_ 226,989.81
10. Excess of Item 8 over Item 9_ 4,699, 618.40
12.Plaintiff asserts that its excess profits tax for the year 1943 is limited under the provisions of Section 710 (a) (1) (B) of the Internal Bevenue Code, as amended, to an amount which, when added to its normal tax and surtax for the year 1943, equals 80 percent of its surtax net income for said year determined under the provisions of Section 15 of the Internal Bevenue Code on a completed contract basis, as follows:
Surtax net income as determined by the Commissioner under Section 15 on the completed contract basis, without regard to the credit provided in Section
26 (e)-$4,738,648.27
80 percent thereof_ 3,790,918. 62
Less normal and surtax_ 226, 989.31
Excess profits tax under Section 710 (a) (1) (B)__ 3,563,929.31
13. For the year 1943 with respect to income from contracts which required more than twelve months to perform, plaintiff computed its surtax net income under Section 15 of the Internal Bevenue Code in accordance with the completed contract method of accounting.
14. Plaintiff computed its income from contracts requiring more than twelve months to perform on the percentage *347of completion method of accounting, in accordance with its election under Section 736 (b), only for the purpose of computing its adjusted excess profits net income, which enters into the computation of its excess profits tax computed under the provisions of Section 710 (a) (1) (A).
15. The Commissioner of Internal Revenue, in computing the limitation on plaintiff’s excess profits tax under Section 710(a)(1)(B) by determining plaintiff’s so-called surtax net income on the percentage of completion method of accounting, did so in accordance with the following provisions of Reg. 112, Section 35.736(b)-3(a), which he promulgated:
The excess profits tax may be computed under section 710 (a) (1) (B) as an amount which when added to the normal tax and surtax computed under Chapter 1 for the taxable year equals 80 percent of the corporation surtax net income properly adjusted under the provisions of section 710 (a) (1) (B) applicable to such year. For such purpose, the corporation surtax net income shall be determined by computing the income from long-term contracts upon the percentage of completion method of accounting. The credit for dividends received used in computing corporation surtax net income shall be limited to 85 percent of the net income determined by computing income from long-term contracts upon the percentage of completion method of accounting, and the normal tax and surtax shall be the actual normal tax and surtax determined under Chapter 1.