Court Opinion

ID: 6850886
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:35:55.015357+00
Date Added: 2024-06-11T16:05:04.273961
License: Public Domain

LITTLETON, Judge (concurring).
The defendant’s computation gives the plaintiffs the refund of all the overpayment to which they are entitled under section 284' (c). The Commissioner’s method of computing the amount of overpayment refundable may not he mathematically perfect, but when, as in this case, various factors of computa^ tion and various profits tax rates are applicable, it is clear that the result of his computation is more nearly correct than any that we can work out or that has been suggested by the plaintiffs. The plaintiffs, while admitting ■ that the only overpayment which they may recover is limited to the overpayment for 1917 resulting from their failure to receive the benefit of adequate deductions from income for depletion and depreciation, contend that the entire overpayment for 1917 of $730,196.16 was due .to their failure to take or receive the benefit of adequate deductions for 1917, which deductions, when properly computed, operate to decrease invested capital in the subsequent year.
The argument in support of this claim is ' that plaintiffs’ correct invested capital was determined for the first time when the Commissioner was called upon to refund the overpayment for 1917; that the previous determination and computation of the profits tax for 1917 under section 210 of the Revenue Act of 1917 (40 Stat. 307) must be ignored, because the provisions of that section limit its application to eases where the invested capital cannot be satisfactorily determined, and the plaintiffs’ consolidated invested capital could be determined; that section 284 (e) of the Revenue Act of 1926 (26 USCA § 1065 (c) makes no mention of invested capital for “previous years”; and that there is only one “invested capital,” and that is the correct invested capital; that therefore, in determining the amount of refund payable under section 284 (e), the correct invested capital for 1917 must he used, and the refund computed upon the correct percentage of excess profits tax to net income, instead of at a rate considerably lower than the rate at which the additional profits tax was paid.
It is further pointed out by plaintiffs that the Commissioner of Internal Revenue in 1919, when he determined and computed the profits tax in accordance with section 210 of the 1917 act and determined the additional tax of $1,625,442.77, which was paid, made only one ehange in the net income reported in the return, such ehange being a reduction in the depletion unit from $9.39141 to $2.80 per ton; that, if the depletion unit had not been reduced, the plaintiffs would have had the benefit of an invested capital of $36,217,521.-20 shown on the return. This, the plaintiffs say, makes the entire overpayment determined by the defendants on April 29, 1927, by the use of the correct invested capital of $16,605,-060.92 and correct net income of $4,384,445.-36, refundable under section 284 (e).
The plaintiffs are in error in contending that the defendant’s determination under section 210 of the Revenue Act of 1917 of the amount, of profits tax computed upon such determination is immaterial to a determination of the amount of the overpayment refundable under section 284 (c). The provisions of section 210 are mandatory, if the Commissioner is unable satisfactorily to determine invested, capital, and, if he concludes that he cannot determine invested capital, it is his duty to so compute the profits tax. This section is recognized in the revenue law as much as is section 207 of the 1917 act, and a tax computed thereunder is as legal and valid as a tax computed on invested capital determined under section 207. Section 284 (e), which was first enacted as a part of section 252 of the Revenue Act of 1921 (42 Stat. 268), does not mention invested capital for the previous year or years, nor does it mention any factor that might affect the correct tax liability for such previous year-or years except those deductions from gross income which, when increased in order to determine the correct invested capital for a subsequent year, had the effect of reducing invested capital, and thereby increasing the profits tax for the year under consideration over what such taxes would be, if the deductions claimed and allowed in such previous year were permitted to stand. It is clear that the words “such overpayment” for the previous year refer to an overpayment measured by the inadequate deductions and nothing else, and that the words “with the result that there has been an overpayment” do not contemplate a de*482termination of statutory invested capital where it has not theretofore been determined or a redetermination of invested capital through the retroactive allowance of a paid-in surplus, or for any other reason, except as it may be affected by deductions from gross income. It is evident in this ease that the determination of the correct invested capital for 1917 was the cause of a large portion of the overpayment which had been made as the result of the assessment of an additional tax based upon a computation of the excess profits tax under section 210. Any portion of the overpayment resulting from this is not now refundable.
The excess profits tax computed by the Commissioner in 1919 under section 210 and paid by plaintiff for 1917 was $1,506,169.87, and the correct profits tax computed in 1927 on the correct invested capital and correct net. income was $795,816.87, a difference of $710,-353. The income tax determined by the Commissioner in 1919 on the net income computed without allowing adequate deductions for depletion and depreciation was $227,744.13, and the income tax determined in 1927 upon the correct net income, after allowing adequate deductions for depletion and depreciation and after adjusting the income on account of certain inventory items and a claimed deduction for royalties disallowed, resulting in a net decrease in income of $140,748.98, was $207,-903.97, a difference of $19,840.16. The income and profits tax determined and computed by the Commissioner of Internal Revenue under the provisions of section 210 of the Revenue Act of 1917 upon a consolidated net income of $4,525,194.34 determined, without allowing plaintiffs adequate deductions for depletion and depreciation, amounted to' $1,733,914. This resulted in the payment of t an additional tax of $1,625,442.77 in excess of that shown and paid on the returns. The total income and profits tax computed upon the ' same net-income of $4,525,194.34, arrived at without the allowance of adequate deductions for depletion and depreciation, and increased to $5,106,112.26 by proper adjustments in respect of the opening and closing inventories for 1917, and the restoration to income of the amount claimed as a deduction on the returns as royalties, and upon the correct consolidated invested capital of $16,605,060.92', was $1,325,433.25. The correct income and profits tax for 1917, computed upon a correct consolidated net income of $4,384,445.36, arrived at by making all proper adjustments and allowing adequate deductions for depletion and depreciation and upon the correct invested capital for 1917 of $16,605,060.92, is $1,003,720.84. It is clear, therefore, that the difference of $231,929.48 between the tax computed without the allowance of adequate deductions, but with all other proper and legal adjustments, and the tax computed upon the correct consolidated net income after the allowance of adequate deductions and upon the correct invested capital, is that portion of the overpayment for 1917 resulting from the failure of the plaintiffs to take or receive the benefit of adequate deductions for 1917.
The fact that, had the Commissioner of Internal Revenue in 1919' not reduced the value of the depletion unit below what it should have been, the plaintiffs would have received an adequate deduction for depletion in 1917, and would have had the benefit of a corresponding invested capital, and therefore would not have overpaid its tax, does not help the plaintiffs’ case. Section 284 (c) does not contemplate or include -within its terms any items affecting the tax which may have some neeessary relation to the inadequate deductions. It is the deductions, the increase of which in a subsequent year results in a decrease of invested capital for the subsequent year, that mark the limit of the amount which may be refunded after the expiration of the statute of limitations, and no other items are included, however closely they may be connected or related to such deductions.