*188 Decision will be entered under Rule 50.
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
*839 OPINION.
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, *840 and it filed its Federal*190 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
*191 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 *841 income, it is*192 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 proceedings 3 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*193 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
*195 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
*196 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 *843 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:
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
The underlying premise of petitioner's argument is that the
Petitioner's fallacy lies in the use of
*201 In the typical case the contractor will already have paid the taxes shown on his return, and
In our judgment the respondent is entitled to determine a deficiency that will reflect (a) that portion of the
*202 *845 The conclusion that we reach is in accord with
In determining the amount of a tax credit under
We hold that this ruling is valid and must be given effect here.
There has been much confusion as to the precise issues presented in this litigation, and petitioner has devoted much effort to the question whether
Decision*205 will be entered under Rule 50.
Footnotes
1. This old case was heard and briefs submitted only within the past 6 months. Waivers of the statute of limitations have kept it alive so as to render timely the statutory notice and commencement of the litigation in 1956; delays thereafter have been due to various continuances requested by the parties.↩
2. Petitioner originally claimed an overpayment in the amount of $ 239,124.90, but in its reply brief, it has reduced its claim to $ 181,846.10. For the computation of this amount, see p. 843, infra↩.
3. Section 403 of the Sixth Supplemental National Defense Appropriation Act of 1942 (56 Stat. 245 "Renegotiation Act"), as amended.↩
4.
Section 3806↩ was added to the Code by section 508 of the Revenue Act of 1942, ch. 619, 56 Stat. 798.5.
SEC. 3806 . MITIGATION OF EFFECT OF RENEGOTIATION OF WAR CONTRACTS OR DISALLOWANCE OF REIMBURSEMENT.(a) Reduction for Prior Taxable Year. --
(1) Excessive profits eliminated for prior taxable year. -- In the case of a contract with the United States or any agency thereof, or any subcontract thereunder, which is made by the taxpayer, if a renegotiation is made in respect of such contract or subcontract and an amount of excessive profits received or accrued under such contract or subcontract for a taxable year (hereinafter referred to as "prior taxable year") is eliminated and, in a taxable year ending after December 31, 1941, the taxpayer is required to pay or repay to the United States or any agency thereof the amount of excessive profits eliminated or the amount of excessive profits eliminated is applied as an offset against other amounts due the taxpayer, the part of the contract or subcontract price which was received or was accrued for the prior taxable year shall be reduced by the amount of excessive profits eliminated. * * *
* * * *
(b) Credit Against Repayment on Account of Renegotiation or Allowance. --
(1) General Rule. -- There shall be credited against the amount of excessive profits eliminated the amount by which the tax for the prior taxable year under Chapter 1, Chapter 2A, Chapter 2B, Chapter 2D, and Chapter 2E, is decreased by reason of the application of paragraph (1) of subsection (a); * * *
* * * *
(c) Credit in Lieu of Other Credit or Refund. -- If a credit is allowed under subsection (b) with respect to a prior taxable year no other credit or refund under the internal revenue laws founded on the application of subsection (a) shall be made on account of the amount allowed with respect to such taxable year. If the amount allowable as a credit under subsection (b) exceeds the amount allowed under such subsection, the excess shall, for the purposes of the internal revenue laws relating to credit or refund of tax, be treated as an overpayment for the prior taxable year which was made at the time the payment, repayment, or offset was made.↩
6. In 1948 the United States brought suit in a Federal District Court to recover that balance and obtained judgment against petitioner for the full amount of the $ 724,794.04 claimed. The judgment was not then paid. Subsequently, in a suit in the Court of Claims brought by an affiliate of petitioner, the United States counterclaimed to recover the foregoing balance embodies in the District Court judgment. The Court of Claims litigation was settled in 1954, and, as part of the settlement, petitioner's liability to repay the balance of the excessive profits, $ 724,794.04, was satisfied.↩
7. That recomputation, apparently agreed to by petitioner, eliminated the excessive profits pursuant to
section 3806(a)↩ , but reflected the Commissioner's various additions to taxable income which petitioner does not contest. Based on the returns as filed, without giving effect to the additions, the excess profits tax would be $ 916,671.91 if computed after eliminating the excessive profits.8. Petitioner argues that if the
section 3806(b) credit in this case is treated as an erroneous refund it was made in 1947; that a suit to recover an erroneous refund at that time had to be filed within 2 years (sec. 3746(b), I.R.C. 1939 ); and that since the statutory notice herein was not issued until 1956, the claim is barred. But petitioner misconceives the nature of this suit. Its position would be correct if this were a suit brought by the United States to recover an erroneous refund. However, this suit involves the determination of a deficiency which has been kept open by waivers that went beyond the institution of this litigation, and it is clear that "refunds must be considered in determining the amount of any deficiency."Universal Oil Products Co. v. Campbell, 181 F. 2d 451, 478↩ (C.A. 7).9. The stipulated facts show that the
section 3806(b) credit in the amount of $ 3,064,526.96 consists of two components, $ 165,350.77 declared value excess profits tax and $ 2,899,176.19 excess profits tax; that petitioner had paid $ 1,378,350.24 excess profits tax; and that petitioner's excess profits tax on its income as reported but after eliminating the excessive profits would be $ 916,671.91. Accordingly, the difference of $ 461,678.33 represents actual payment by petitioner of excess profits tax in respect of the excessive profits. Thus, thesection 3806(b) credit of $ 2,899,176.19 in excess profits tax was supported to the extent of $ 461,678.33, and petitioner is entitled to have this fact taken into account in the determination of the deficiency. The respondent's determination in his answer as amended did not take this consideration into account, but he now concedes on brief that a recomputation in this respect is proper.Of course, to the extent that the
section 3806(b)↩ credit was based upon the declared value excess profits tax it was fully backed up by the payment of the $ 165,350.77 in taxes.