Court Opinion

ID: 9450350
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:43:11.659466+00
Date Added: 2024-06-11T17:32:15.836472
License: Public Domain

FRIENDLY, Circuit Judge
(dissenting):
If the issue here were whether Standard could utilize different figures of net income for normal income and excess profits taxes for 1941,1 would agree that § 711(a) of the 1939 Code would require a negative answer. Standard never attempted to do that; the issue is a quite different one — whether in computing its 1943 and 1944 excess profits taxes Standard could determine its “unused excess profits credit” arising from 1941 operations by taking an altogether proper deduction which it had not taken, and never did take, from its 1941 income as reported on returns relating to its taxes for that year. I think it could.
Section 710(c) (2) defines “unused excess profits credit” as “the excess, if any, of the excess profits credit for any taxable year beginning after December 31, 1939, over the excess profits net income for such taxable year, computed on the basis of the excess profits credit applicable to such taxable year.” Section 711 (a) says that “the, excess profit net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section 13(a) (2) * * *, for such year” except for certain adjustments. I see nothing in this language that prevents calculation of the unused excess profits credit for a prior year on the basis of net income for that year as it really was, rather than on the basis of a higher figure reported in the original or an. amended return. The Government has pointed to no policy reason why Congress would have thought it important to insist that a corporate taxpayer should not reduce its excess profits tax by so recomputing its net income and consequently its unused excess profits credit for a prior year to take account of a valid deduction, previously overlooked or disregarded as inconsequential, unless the taxpayer also revised its income tax return for the earlier year — usually with a further reduction in the revenue; the rare case where taking the deduction might increase the regular tax was hardly in Congress’ mind. Precisely such re-, computation has long been allowed in an analogous situation — where a taxpayer wishes to make an upward adjustment of net income for a base period year in order to increase its “excess profits credit” under §§ 712 and 713. Rosemary Mfg. Co., 9 T.C. 851 (1947); Leonard Refineries, Inc., 11 T.C. 1000 (1948); United States Guarantee Co., 8 CCH Tax Ct.Mem. 510 (1949), rev’d on other grounds sub nom. C. I. R. v. United States Guarantee Co., 190 F.2d 152 (2 Cir. 1951); American Pad & Textile Co., 16 T.C. 1304 (1951). These decisions are best justified on the ground, stated in Leonard Refineries, 11 T.C. at 1006, that “No excess profits tax provision in the code specifically requires that the excess profits credit under section 713 be computed by the use of net income figures used by the taxpayer in its income tax returns for base period years”; I read § 734, added to the Code in 1941 and also mentioned in Leonard Refineries, as designed to prevent abuses from such re-computation of base period net income rather than as the authorization for it. See, contra, Bulova Watch Co. v. United States, 163 F.Supp. 633, 636, 143 Ct.Cl. 342 (1958), aff’d on other grounds, 365 U.S. 753, 81 S.Ct. 864, 6 L.Ed.2d 72 (1961). The failure of Congress to enact a provision similar to § 734 with re*11S'péCt to the recomputation of income for an excess profits year is readily explicable; few taxpayers would omit a deduction for such a year, and when one was omitted and later claimed for purposes of the excess profits credit, this was almost bound to be at a time when the Commissioner was not yet barred by limitation from demanding a corresponding adjustment for the prior year in the rare cases where the Government would profit by it. Congress could readily have directed that the unused excess profits credit for any year should be determined on the basis of the excess profits net income as finally determined for that year. But Congress did not say that, and what it did say does not produce a result so absurd that we should read into the statute words that Congress did not put there. C. I. R. v. Acker, 361 U.S. 87, 80 S.Ct. 144, 4 L.Ed.2d 127 (1959); Hanover Bank v. C. I. R., 369 U.S. 672, 687-688, 82 S.Ct. 1080, 8 L.Ed.2d 187 (1962). Contrast J. C. Penney Co. v. C. I. R., 312 F.2d 65 (2 Cir. 1962).
My brothers seek to buttress their position by stressing that the deduction here in question was a war loss, which, in their view, was “elective” and which Standard “elected” not to claim. I see nothing in the language of § 127 of the 1939 Code or in the legislative history that makes a war loss elective in anything other than the practical sense in which all deductions have long been recognized to be — that “a taxpayer may neglect or refuse to make a correct computation of income in a given year and pay a greater tax than he owes — and nobody will force the excess tax back upon him.” Even Realty Co., 1 B.T.A. 355, 362-363 (1925). The real test of the alleged “elective” character of the war loss deduction would be the rare instance where, because of the complex interrelations in the Code, insistence by the Commissioner on a deduction would increase the tax. I find nothing to preclude him from taking that position; although Shahmoon v. C. I. R., 185 F.2d 384 (2 Cir. 1950) and Kenmore v. C. I. R., 205 F.2d 90 (2 Cir. 1953) are not decisive, they at least point that way. When Congress has desired to provide a true election, it has not left the matter to guesswork but has established, or authorized the Commissioner to establish, definite procedures for making the election so that no one can ever be uncertain how matters stand; we have just sustained the Commissioner in refusing to allow the benefit that would have come from election to taxpayers who had not strictly complied with such a provision although their intention to elect was not really doubtful. Lambert v. C. I. R., 338 F.2d 4 (2 Cir. 1964), affirming T. C. Mem. 1963-296. Also, if the war loss deduction were indeed elective, I am unable to understand how Standard is thought to have elected not to take it in any sense here relevant. In its 1943 excess profits tax return it elected to take the deduction in order properly to reflect its 1941 net income and, accordingly, its unused excess profits credit for that year —which is all that it now seeks. I likewise see no basis for finding an election in Standard’s behavior in 1947 when it failed to respond to the revenue agent’s suggestion that it amend its 1941 income tax return, but left standing the computation taking the deduction from 1941 net income in its 1943 excess profits tax return. Neither Standard nor the Commissioner thought at that time that the 1941 war loss deduction had any significant tax consequences; Standard no more “elected” to forego the war loss deduction than the Commissioner “elected” not to insist upon it. If my brothers are saying only that Standard had to revise its 1941 return at some time if it wished to use the 1941 war losses in computing its unused excess profits credit, there is no need to talk about election. That is the issue, first here discussed, as to which I respectfully disagree.
I would reverse for further necessary proceedings in the District Court.