
    OLYMPIC RADIO AND TELEVISION, INC. v. THE UNITED STATES
    [No. 19-52.
    Decided November 4, 1952]
    
    
      
      Mr. Frederick B. Tansill for the plaintiff. Mr. Eugene Meacham was on the briefs.
    
      Mrs. Elizabeth B. Davis, with whom was Mr. Acting Assistant Attorney General Ellis N. Slack, for the defendant. Mr. Andrew D. Sharpe was on the brief.
    
      
       Defendant’s petition for writ of certiorari pending.
    
   The facts sufficiently appear from the opinion of the court.

Whitaker, Judge,

delivered the opinion of the court: The plaintiff sues for the recovery of $148,841.72 with interest asserting that the excess profits tax collected from it for the year 1944 was larger, by that amount, than it should have had to pay.

The plaintiff, a manufacturer of radio and television sets, paid in 1945 an excess profits tax on its 1944 profits in the total amount of $623,454.52. In 1946 it paid an excess profits tax of $263,272.80 on its 1945 profits. The plaintiff’s return for 1946 showed no income tax liability, but instead a net operating loss of $324,844.23 reduced by the Bureau of Internal Revenue upon audit to $310,872.60. This operating loss for 1946, under the law, could be “carried back” to the year 1944. When this was done, it reduced the plaintiff’s excess profits taxes for 1944 from the $623,454.52, which it had paid, to a considerably lesser sum. The amount of that reduction has been received by the plaintiff, by payment or credit. The plaintiff says, however, that to its net operating loss of $310,872.60 for 1946 there should have been added the $263,272.80 which it paid in 1946 on its 1945 excess profits, and that the sum of these two figures, instead of the first figure only, should have been carried back to reduce the 1944 excess profits net income. If that had been done, it would have reduced the 1944 excess profits tax by the amount claimed in this suit.

Section 122 of the Internal Revenue Code, which is entitled “Net Operating Loss Deduction” provides:

(a) Definition of net operating loss. — As used in this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income, with the exceptions, additions, and limitations provided in subsection (d).
$ $ * * $
(d) Exceptions, additions and limitations. — The exceptions, additions and limitations referred to in subsections (a) (b) and (c) shall be as follows:
(6) There shall be allowed as a deduction the amount of tax imposed by Subchapter E of Chapter 2 paid or accrued within the taxable year.

Subchapter E of Chapter 2 is the part of the Code providing for excess profits taxes. Subsection (b) of Section 122 provides that if the taxpayer has a net operating loss for any taxable year, that net operating loss may be carried back to the two preceding taxable years, to reduce the income for those years.

The plaintiff, relying on the statutes referred to above, says that by Section 122 (d) (6) its excess profits tax paid in 1946 was includible in its “net operating loss” and therefore could be carried back to 1944, the second preceding taxable year, to reduce its income for that year. The Government says that these statutory provisions do not permit the plaintiff to do so, because the plaintiff was on the accrual basis for the computation of its income for tax purposes, and the tax which it desires to carry back, though paid in 1946 when the plaintiff had a net operating loss, accrued in 1945 when it did not have a net operating loss, and would not have had such a loss even if this tax had been deducted from its 1945 income. The Government points to Section 43 of the Code which says:

The deductions and credits * * * provided for in this chapter shall be taken for the taxable year in which “paid or accrued” or “paid or incurred,” dependent upon the method of accounting upon the basis of which the net income is computed * * *.

Then it points to Section 23 which says:

Deductions from Gross Income
In computing net income there shall be allowed as deductions:
(s) * * * the net operating loss deduction computed under section 122.

Both Sections 43 and 23 are in Chapter 1 of the Code. Section 48 (c) also contains a definition similar to that of Section 43.

The statutory texts quoted above put a heavy burden on the plaintiff to show that it, being on the accrual basis for tax purposes, could take, in 1946, a deduction of excess profits taxes which, accrued in 1945, though they were paid in 1946. The plaintiff’s contention is that if the statutory definition of “paid or accrued” is applied to the excess profits tax situation, the deduction which the statute seems to tender to taxpayers is largely illusory, so far as taxpayers on the accrual basis of tax accounting are concerned. This would seem to be true, since it would be only rarely that a taxpayer would accrue a liability for an excess profits tax in a year in which it had a net operating loss.

According to the letter of the statutes, plaintiff is not entitled to deduct in the year 1946 taxes which accrued for the year 1945 but which were paid in 1946. When the statute referred to deductions “paid or accrued” in the taxable year, it referred to deductions paid in the taxable year if the taxpayer was on a cash basis, and to deductions accrued within the taxable year if the taxpayer was on the accrual basis. It is also true that in computing one’s income, either one basis or the other must be used, and that one cannot be used for certain deductions and the other for others.

Notwithstanding all this, we think that in order to give effect to the intention of Congress we must permit this taxpayer to deduct excess profits taxes paid in the calendar year 1946, although they accrued for the year 1945. We think so, for this reason: It was the clear intention of Congress that a taxpayer should be permitted to carry back to a former year his loss in a subsequent year, and that to this loss there should be added excess profits taxes “paid or accrued” in the calendar year.

Now, if we follow the letter of the statute, a taxpayer on an accrual basis would be denied the deduction of excess profits taxes, in practically all cases, if he is limited to the excess profits taxes accrued within the taxable year. There is rarely a case when a taxpayer would be liable for any excess profits tax in a year in which it had sustained a net operating loss; and, yet, Congress certainly intended that it should get the benefit of the deduction of excess profits taxes for some year. In order for it to get this deduction it would seem that it should be entitled to deduct the excess profits taxes which it paid in the taxable year, although they had accrued in the prior year.

It seems to us, therefore, that we must make an exception in this case to the general rule prohibiting the shifting from the “paid” to the “accrued” basis, or vice versa, in the case of specific deductions. Otherwise, we cannot give effect to the plain intention of Congress. We realize this does violence to the letter of the Act, but we are so thoroughly convinced of the intention of Congress that we feel justified in disregarding the letter in order to give effect to that intent. After all, it is the intention of Congress which we must enforce, however that intention may be divined.

No cases exactly in point have been cited to us nor have we found any; however, several of the Courts of Appeal have held that in applying the tax levied on undistributed net income, the expression “paid or accrued” need not be given its customary meaning.

In Birmingham, et al., v. The Loetscher Company, 188 F. 2d 78 (C. A. 8) the court held that a cash basis taxpayer could, under Section 505 (a) (1) of the Internal Revenue Code, deduct both taxes for a prior year paid within the taxable year and taxes accrued but not paid within the taxable year, in determining its undistributed net income for the purposes of the penalty tax on such net income. The court there relied on a holding in Commissioner v. Clarion Oil Company., 148 F. 2d 671, 80 U. S. App. D. C. 41, which, while it permitted a cash basis taxpayer to deduct taxes accrued but not paid within the tax year, refused to permit it to deduct taxes paid within the year but accrued in a prior year. In Aramo-Stiftung v. Commissioner, 172 F. 2d 896 (C. A. 2) the court permitted a cash basis taxpayer to deduct income taxes accrued but not paid within the taxable year, in determining its Section 505 (a) (1) taxable income. See also Wm. J. Lemp Brewing Company, 18 T. C.—, No. 70.

These cases support plaintiff’s contention that the definitions of the term “paid or accrued” in sections 43 and 48 (c) should not be applied in all circumstances and regardless of consequences.

The Tax Court in Lewyt Corporation v. Commissioner, 18 T. C. 1245, No. 151, has decided the question here involved

adversely to plaintiff’s contention. We regret that we are unable to agree.

Defendant’s motion is denied, and plaintiff’s motion for summary judgment is granted. Judgment will be entered in plaintiff’s favor against the defendant in the amount of one hundred forty-eight thousand eight hundred forty-one dollars and seventy-two cents ($148,841.72), with interest as provided by law.

It is so ordered.

Howell, Judge; and Littleton, Judge, concur.

Madden, Judge,

dissenting.

I think the plaintiff is not entitled to recover. The Birmingham, Clarion Oil Company and Aramo-Stiftung cases, cited in the court’s opinion, involved the penalty tax on undistributed profits. To penalize a corporation for not distributing as dividends money which it either does not have, because it pays it out in back taxes during the year, or which prudence would require it to keep, because it will be needed to pay taxes accrued during the year though not payable until the following year, would seem to amount to penalizing sound management. The instant situation presents no comparable pressure of equity against the text of the statutes. The carry-back provision of the statutes does not permit the taxpayer to average its profit and loss experience for a five-year period. It only permits net operating losses, as determined by statutory provisions, to be carried back. To get the advantage of the statute, its requirements should be met. The Tax Court, in Lewyt Corporations. Commissioner, 18 T. C. 1245, No. 151, has decided the same question which is involved in our case, adversely to the plaintiff’s contentions. I agree with its decision.

Chief Judge Jones agrees with this dissenting opinion.

On Defendant’s Motion for a Rehearing

Whitaker, Judge,

on March 3,1953, delivered the opinion of the court:

In our opinion on plaintiff’s and defendant’s motions for summary judgment filed November 4,1952, we held that the words “paid or accrued” in section 122 (d) (6) of the Internal Revenue Code must be construed as permitting a deduction for excess profits taxes paid in the taxable year in which a loss had been sustained, although the taxpayer filed its returns on an accrual basis; and we accordingly granted plaintiff’s motion for a summary judgment.

Defendant has now filed a motion for a rehearing in which it presents a persuasive argument that our decision is wrong, but after careful consideration of defendant’s motion and the authorities cited, we adhere to our former opinion.

However, defendant in its motion for a rehearing calls our attention to the provisions of sections 711 (a) (1) and 711 (a) (2) of the Revenue Act of 1940 (54 Stat. 976), to which subsections (J) and (L) were added by sections 210 (a) and 210 (b) of the Revenue Act of 1942 (56 Stat. 907 and 908), which read in part as follows :

EXCESS PROFITS NET INCOME
(a) Taxable Years Beginning After December 31, 1939. — The excess profits 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 that the following adjustments shall be made:
(I) Excess profits credit computed under income credit. — If the excess profits credit is computed under section 713, the adjustments shall be as follows:
* * * #
(J) Net Operating Loss Deduction Adjustment.— The net operating loss deduction shall be adjusted as follows:
(1) In computing the net operating loss for any taxable year under section 122 (a), and the net income for any taxable year under section 122 (b), no deduction shall be allowed for any excess profits tax imposed by this subchapter, * * *.
(2) Excess profits credit computed under invested capital credit. — If the excess profits credit is computed under section 714, the adjustments shall be as follows:
(L) Net Operating Loss Deduction Adjustment.— The net operating loss deduction shall be adjusted as follows:
(i) In computing the net operating loss for any taxable year under section 122 (a), and the net income for any taxable year under section 122 (b), no deduction shall be allowed for any excess profits tax imposed by this subchapter, * * *.

In computing the credit which the Act allows to be taken against excess profits net income, subsections (J) and (L) plainly forbid the deduction of the excess profits taxes in question in this case, whether or not they were paid or accrued within the taxable year.

Section 122 (d) (6) of the Internal Revenue Code permits a deduction of excess profits taxes paid or accrued within the taxable year in computing the net operating loss deduction, but when a taxpayer comes to compute his excess profits credit against excess profits net income, he is denied this deduction. The result is that the deduction allowed by section 122 (d) (6) can be used only in the computation of the ordinary corporate income tax and the corporation surtax net income, but it cannot be used in the computation of the excess profits tax.

Plaintiff seems to admit that this is correct where the excess profits tax is computed under section 710 (a) (1) (A) of the Revenue Act of 1942, but it says that it is not correct when the excess profits tax is computed under section 710 (a) (1) (B) of the Revenue Act of 1942.

Section 710 (a) (1) provides that the excess profits tax shall be the lesser sum computed under subsection (A) and subsection (B). Subsection (A) provides for a tax of 90 per centum of the adjusted excess profits net income, increased to 95 per centum by the Revenue Act of 1943. Subsection (B) provides for a tax which shall be “an amount which when added to the tax imposed for the taxable year under Chapter 1 (other than section 102) equals 80 per centum of the corporation surtax net income, * *

Plaintiff says that when it computed its tax under subsection (B), it arrived at a figure which was less than that computed under subsection (A), and, therefore, that the tax to be demanded of it is a tax computed tinder subsection (B); and then it says that in computing the excess profits tax under subsection (B) it is not prohibited from deducting the excess profits taxes paid or accrued in another year in which it had sustained a loss.

We think this position is sound.

Section 711 (a) provides that the excess profits net income, upon which the excess profits tax is levied, shall be the normal tax net income with the following adjustments:

If the excess profits credit is computed under section 713, the adjustments shall be as follows: * * * [subsection (1)]

Subsection (J) (i) provides for the “net operating loss deduction adjustment.” It says, “The net operating loss deduction shall be adjusted as follows:”

(i) In computing the net operating loss for any taxable year under section 122 (a), and the net income for any taxable year under section 122 (b), no deduction shall be allowed for any excess profits tax imposed by this subchapter, * * *.

The same restriction is made if the excess profits credit is computed under section 714.

Therefore, when a taxpayer goes to compute his excess profits tax under section 710 (a) (1) (A) he cannot take credit for “any excess profits tax imposed by this sub-chapter” ; and he must pay 95 percentum of his excess profits net income, less the adjustments allowed, which exclude an adjustment for excess profits taxes paid in another year.

However, section 710 (a) (1) provides that if the amount of the excess profits tax computed under subsection (A) is greater than the amount computed under subsection (B), then the taxpayer is required to pay only the amount computed under subsection (B).

So, the taxpayer proceeds to compute its excess profits tax under subsection (B). This subsection provides that the tax is “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).”

It will be seen that in computing the tax under subsection (B), the taxpayer is not concerned with its adjusted excess profits net income. What it is concerned with is the tax imposed under Chapter 1, which is the normal corporation tax and the corporation surtax net income. This subsection says that the excess profits tax, as computed under it, is the difference between 80 percentum of the corporation surtax net income and the normal corporation income tax.

When computing the tax under subsection (B), no regard is to be had to the excess profits net income, but only to the ordinary net income and the corporation surtax net income. No one denies that in computing the ordinary net income that the taxpayer is permitted to carry back or forward the net operating loss in another year, which net operating loss includes a deduction for the excess profits tax paid or accrued within the taxable year in which there was a loss. This is also true in the computation of the surtax net income.

Section 711 (a) relates alone to the computation of the excess profits net income; it does not relate to the computation of the ordinary corporate net income nor to the surtax net income; hence, the prohibition therein contained against the deduction of excess profits taxes in a year in which a loss was sustained does not apply when a corporation is computing its ordinary net income or its surtax net income.

Therefore, inasmuch as this taxpayer’s tax was computed under section 710 (a) (1) (B) of the Revenue Act of 1942, and since the tax imposed by this section is not based on excess profits net income, the limitation imposed by subdivision (J) (i) of section 711 (a) (1) and subdivision (L) (i) of section 711 (a) (2) is not applicable.

It results that the judgment heretofore entered in the sum of $148,841.72 will stand.

Howell, Judge, and Littleton, Judge,

concur.

Madden, Judge, and Jones, Chief Judge, adhere to the views expressed in their former dissenting opinion.  