Court Opinion

ID: 4472121
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:17:41.62083+00
Date Added: 2024-06-11T13:17:38.539379
License: Public Domain

Van Foss an, /., dissenting: It will at once be conceded that the instant case poses a difficult question and involves an intricate relationship of pertinent statutes. I can not avoid the feeling, however, that the prevailing opinion has made a hard problem harder and has added to the difficulty presented by the application of the statutes in question. Fortunately, there is no dispute as to the facts. All were stipulated. The posture of the parties with respect to the controversy is accurately stated in the majority opinion. The respondent relies on his regulation, which provides (I believe contrary to the statute) “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 petitioner inveighs the mandate of the regulation and contends that there is no basis in law for requiring a recomputation of the corporation surtax net income as dictated by the regulation. It is my judgment that petitioner is amply fortified in his contention that the term “corporation surtax net income” denotes a specific concept which for any year can be only the precise amount arrived at under section 15 of chapter 1 of the Internal Revenue Code, and that section 710 (a) (1) (B) in no way suggests a new concept of corporation surtax net income. On the contrary, Congress, by the use of the term “the corporation surtax net income,” amplified by the phrase “computed under section 15” and the reference to “Chapter 1,” indicated clearly that the 80 per cent limitation was to be based on the actual corporation surtaxnet income on which the corporation’s surtax liability is imposed. In my judgment, section 710 (a) (1) (B) was calculated to provide an alternative measure of the excess profits tax independent of the measure of such tax under section 710 (a) (1) (A). The majority correctly state that section 15 (a) of the code defines “corporation surtax net income” as “the net income” minus certain prescribed credits, including the section 26 (e) credit; that section 21 defines “net income” as “the gross income computed under section 22, less the deductions allowed by section 28,” and that section 41 provides that generally “net income shall be computed * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer.” These considerations are basic in the law. Thus “corporation surtax net income” as defined in the statutes is gross income computed under section 22, less the deductions allowed by section 23, minus certain credits enumerated in section 15 (a), and all computed in accordance with the method of accounting regularly employed by the taxpayer in keeping its books. It seems to me perfectly clear that chapter 1 establishes a specific concept of corporation surtax net income and that this concept obtained in the present situation. At this point the majority fall into inconsistency when they say that the general rule does not govern the present situation. They lean heavily on the regulation as authority, as though the regulation is sacrosanct. As a matter of fact, the whole question before us (and within our jurisdiction to decide) is the validity of the regulation. I do not agree that “the reason Congress so provided and twice left the matter to regulation obviously lay in the complexity of the excess profits statute, its interlocking with the income tax law and .the irrevoca-bility of the election.” Although the statute nowhere suggests, and to my mind it clearly dictates the contrary, the majority conclude that “the only reasonable interpretation of the statute * * * requires the use of the basis elected for every purpose of Sub-chapter E of Chapter 2 * * They thus write out of the statute the provision “corporation surtax net income, computed under section 15,” saying that this “language does not clearly, or even inferentially, prohibit computing corporation surtax net income by beginning with income upon a percentage of completion básis as required by the regulation * * I can not agree with such a negative approach to the question. The last quoted statement of the majority assumes the conclusion it seeks and clearly violates the statute. The statement by the majority that “the petitioner’s true earnings are reflected by the percentage of completion basis of accounting” is plainly erroneous. Its true earnings are those reflected in its income tax return, and for that purpose its method of accounting with respect to long term contracts was the completed contract method. It was not the desire of taxpayer and it made no election to change that method of accounting in so far as computing its “true earnings” was concerned. Its election was made only with reference to the excess profits net income. The true earnings of any taxpayer are reflected by computation thereof under the method of accounting regularly employed by it. The stipulated amount contended to be applicable by petitioner reflects the income from long term contracts computed on the completed contract method of accounting, the method regularly employed by petitioner in keeping its books. Petitioner was required to use such method in arriving at its corporation surtax net income under section 15 (a) for the imposition of the surtax under section 15 (b). In fact, from the statement attached to the notice of deficiency, it appears that the Commissioner used the net income computed on the completed contract method of accounting in determining petitioner’s 1942 surtax. Section 710 (a) (1) (B) does'not purport to change the concept of corporation surtax net income established by chapter 1, nor does it require a computation of corporation surtax net income different from that required by chapter 1. In so far as applicable here, it permits only one adjustment to “the corporation surtax net income, computed under section 15,” i. e., the elimination therefrom of the credit under section 26 (e). The respondent concedes that neither section 710 (a) (1) (B) nor any other provision of the statutes specifically states that the election under section 736 (b) is applicable to the determination of corporation surtax net income. Had it been so intended, it could easily have been so stated. The “tax imposed for the taxable year under Chapter 1” is likewise a factor under section 710 (a) (1) (B) in determining the amount of the excess profits tax. The income tax and surtax imposed under chapter 1 are also based upon income. Section 29.1-1, Regulations 111, states “The tax imposed by chapter 1 is upon income.” If section 736 (b) requires all factors necessary to determine the amount of the excess profits tax which are based upon income to be computed on the percentage of completion method of accounting, that requirement would logically extend to the computation, on the same method of accounting, of the income upon which the income tax and surtax under chapter 1 are based. Moreover, section 35.736 (b)-3, Regulations 112, provides that in computing the excess profits tax under section 710 (a) (1) (B) “the normal tax and surtax shall be the actual normal tax and surtax determined under chapter 1,” which means that the income upon which such taxes are based must be computed upon the completed contract method of accounting and not upon the percentage of completion method of accounting. In my opinion, the election under section 736 (b) is applicable to the determination of excess profits net income for the purposes of section 710 (a) (1) (A) only and not to the determination of “corporation surtax net income.” It is so stated in section 35.735 (b)-2 (c). It is significant that chapter 1 provides for the computation and determination of corporation surtax net income, whereas subchapter E of chapter 2, which includes section 736 (b), provides for the computation and determination of adjusted excess profits net income. Section 710 (a) (1), although included in subchapter E of chapter 2, does not pertain to the computation of income of any kind, but merely provides two measures for the excess profits tax, the one being the adjusted excess profits net income and the other the corporation surtax net income without regard to the credit relating to the income subject to the excess profits tax less the tax imposed by chapter 1. Without laboring the question further, it is my conclusion that section 35.736 of Regulations 112, as amended by T. D. 5388, is invalid in so far as it requires that for the purpose of section 710 (a) (1) (B) “the corporation surtax net income shall be determined by computing the income from long term contracts upon the percentage of completion method of accounting.” I therefore dissent. ARundell, Black, and Johnson, JJ., agree with this dissent.