
    KAUFMANN AND BAER COMPANY AND GIMBEL BROTHERS, INC. v. THE UNITED STATES
    [No. 47844.
    Decided January 31, 1956] 
    
    
      
      Mr. Harry J. RudicTc for tbe plaintiffs. Messrs. Alexander B. Royce, Mason G. Kassel and Robert E. Friou, were on tbe briefs.
    
      Mr. John A. Rees, with whom was Mr. Assistant Attorney General H. Brian Holland, for tbe defendant.
    
      Mr. Andrew D. Sharpe was on tbe brief.
    
      
       Plalntiffi’s petition for writ of certiorari dented by the Supreme Court October 8, 1956.
    
   Littleton, Judge,

delivered tbe opinion of the court:

Tbe plaintiffs, Kaufmann and Baer Company and Gimbel Brothers, Inc., sue to recover an alleged overpayment of taxes for tbe fiscal year ending January 31, 1942. Tbe question presented is whether Kaufmann and Baer Co. is entitled to have its taxable income for tbe fiscal year ended January 31, 1942, computed by valuing its opening and closing inventories for that year on tbe last-in first-out basis (hereinafter referred to as LIFO) provided in §22 (d) of the Internal Revenue Code of 1939, as amended, 26 U. S. C. §22 (d).

For purposes of this decision the facts may be summarized as follows:

Kaufmann and Baer Company (hereinafter referred to as plaintiff) kept its books and filed its Federal tax returns on the accrual method of accounting. The plaintiff’s tax returns for the fiscal year ended January 31, 1942, (the only year in question), and for the succeeding fiscal years to and including the fiscal year ended January 31,1948, were filed on the retail method of inventory based on the first-in first-out method of valuation (hereinafter referred to as FIFO). Plaintiff’s tax returns for the fiscal year ending January 31, 1942, were filed on July 13, 1942, and the taxes shown to be due thereon were paid.

Until October 21, 1942, the date of the approval of the Revenue Act of 1942,56 Stat. 198, section 22 (d) (2) (B) and Treasury Regulations 101, as amended by T. D. 4959 (1940-1 C. B. 22), approved December 28, 1939, limited the use of LIFO to taxpayers who had used no other procedure other than LIFO in inventorying goods for any period during the first taxable year for which the LIFO method was to be used in reporting to shareholders or for credit purposes. The plaintiff and Gimbel Brothers were ineligible to use LIFO at the time they filed their returns for the fiscal year ending January 31, 1942, because Gimbel Brothers had issued an interim report to its stockholders for the period February 1,1941 to July 31,1941, which was prepared on the basis of FIFO.

On April 9,1942, the directors of Gimbel Brothers decided that at that time it would be in the best interests of 'the company and its subsidiaries to adopt the LIFO method and they then approved the annual report prepared on the LIFO basis for release to the stockholders. An interim report for the fiscal year ending January 31, 1943, was also issued on the LIFO basis.

Section 118 of the Bevenue Act of 1942 removed the prohibition against the adoption of LIFO for a year during which interim reports on a non-LIFO basis had been issued. This change was retroactive to taxable years beginning after December 31, 1938. It did require that annual reports be made on a LIFO basis. The Bevenue Act of 1942 was approved on October 21, 1942. Treasury Begulations 103, applicable at that time, were amended to conform to §§ 118 and 119 of that act in T. D. 5199, 1942-2 C. B. 81, approved December 10, 1942, and was published in the Federal Begister on December 12, 1942, pp. 10366-10368. As amended by 2 T. D. 5199, § 19.22 (d)-3 of Treasury Begulations 103 read in part as follows:

Time and Manner of Making Election. — The elective inventory method [LIFO] may be adopted and used only if the taxpayer files with his return for the taxable year as of the close of which the method is first to be used (or, if such return is filed prior to March 10, 1943, the ninetieth day after the approval of Treasury Decision 5199, then at any time prior to such date), in triplicate on Form 970 (revised), and pursuant to the instructions printed thereon and to the requirements of this section, a statement of his election to use such inventory method. * * *

At a meeting of Gimbel’s executives and its accounting firm, held in the latter part of December 1942, it was decided at that time that Gimbel and its subsidiaries should file refund claims for the fiscal year ended January 31, 1942, and elections on Form 970 to adopt LIFO for the fiscal year ended January 31, 1942. The accounting firm was instructed to prepare the refund claims and election forms. Form 970 (revised) became available around the end of February 1943. The expiration date for the filing of this election under the above regulation was March 10, 1943. Application for the change could have been made in time by the accounting firm but it did not finish the preparation of this form by that date. After preparation of the form it was submitted to plaintiff, and plaintiff filed a claim for refund and the election on Form 970 (revised) on March 31,1943.

During this period and until the Tax Court decided the case of Hutzler Brothers Co. v. Commissioner, 8 T. C. 14, on January 14,1947, the Commissioner of Internal Eevenue had taken the position that LIFO was available only to taxpayers who applied the method to the cost of specific inventory items, and that LIFO was not available to taxpayers who applied the method to the total inventory of each department of a department store. The plaintiff employed the latter method, stating its inventories in dollar values rather than in cost of specific items.

The board of directors of Gimbel Brothers decided at a meeting held on April 20,1943, to issue the annual report on the FIFO basis for fiscal year ended January 31,1943. The decision to abandon LIFO and revert to FIFO was based on the position of the Commissioner that retailers such as plaintiff might not adopt LIFO, and the disadvantages of keeping books on LIFO and filing tax returns on FIFO. Plaintiff, of course, did not elect to contest the position which the Commissioner had taken. It was also decided at that meeting that Gimbel and its subsidiaries would request permission to withdraw their elections to adopt and use LIFO for its inventory for the fiscal year ended January 31,1942, and their claims for refund, predicated on the election which had been filed late. The annual report to the stockholders notifying them of the decision to abandon LIFO was issued on April 24,1943. On April 28,1943, plaintiff wrote to the collector, referred to their claim for refund and election, and stated:

This is to advise you that we desire to withdraw this claim for refund and our application for change in inventory method.

The collector informed plaintiff that the claim for refund and election had been sent to the Commissioner in Washington and that plaintiff should advise that office of its intention. The plaintiff wrote the Commissioner on May 5, 1943, referred to the refund claim and election and stated in part:

Accordingly, we wish to advise you that we desire to withdraw this claim for refund and also to withdraw, or cancel, our application for á change in our inventory method.

The deputy commissioner replied on May 27, 1943, stating that the case had been forwarded to the Agent in Charge in Pittsburgh and that “you will be further advised by that official relative to the matter.” This agent made an investigation and found an overpayment separate and apart from the inventory question. He made no change in the inventory method used. He advised plaintiff to file another refund claim for this amount. The plaintiff filed another refund claim on March 23, 1945, and that overpayment was refunded or credited to plaintiff. On August 16, 1945, the deputy commissioner wrote plaintiff, referred to its refund claim for $106,287.97, which was its refund claim based on a change to LIFO, and stated that “this notice of disallowance of your claim or claims to the extent not previously allowed, is hereby given by registered mail.” This was simply a pro> forma reference, and the claim was not really considered in fact. The plaintiffs filed their petition in this court on August 11,1947, within two years after August 16,1945.

The Tax Court held in the Hutzler Brothers case, supra, January 14,1947, that a retailer using the retail method and valuing its inventory by department dollar totals at retail and at cost based upon price indices and not by specific; items could use LIFO. The Commissioner changed his regulations accordingly and settled certain cases on that basis.. The deputy commissioner notified the revenue agent in New-York that the case at bar might be susceptible of administrative settlement and asked him to look into the matter. However, on June 6, 1953, plaintiff was notified that its claim could not be allowed because of its failure to file a timely election and further because its election had been expressly withdrawn. The plaintiff brought this action on the basis that its election to use LIFO was made within a reasonable time and that the attempted withdrawal of the election was ineffective since such election was irrevocable.

The defendant contends at the outset that this court lacks jurisdiction in this case because plaintiff not only withdrew its election but also withdrew its claim for refund. In answer to this plaintiff claims that the attempted withdrawal of its claim for refund was conditioned on the Commissioner’s allowance of the withdrawal or cancellation of its application to change its inventory method to LIFO, and that the Commissioner did not write it approving its withdrawal. Although plaintiff’s letters of attempted withdrawal do not specifically condition the withdrawal of the claim for refund on the Commissioner’s allowance of the withdrawal of its application to change to LIFO, it is obvious that plaintiff intended to withdraw both its election and claim for refund and this was so understood by the Commissioner.

If the plaintiff could get over the hurdle of not having filed a timely election to change to LIFO, the question on the merits would be whether the filing of plaintiff’s election to change to LIFO was irrevocable and therefore could not be changed without the Commissioner’s written consent.

We find, however, that plaintiff failed to file a timely election to change to LIFO for the fiscal year ended January 31, 1942. The plaintiff had 90 days within which to file an election under the regulations as amended by T. D. 5199, which are hereinbefore set out. The plaintiff contends that it did not believe that the 90-day period applied to it because of the Commissioner’s position that retailers who inventoried their goods on dollar values were not entitled to use LIFO.

The Commissioner was authorized by § 22 (d) to promulgate regulations regarding the application to adopt LIFO and the time and manner in which the application was to be filed. The Commissioner issued the regulations setting forth the time and manner for the filing of the application. Plaintiff bad a reputable accounting firm advising it. Wben tbe statute and valid regulations give a taxpayer a right it must protect and prosecute that right within the required period, or such extension thereof as may be secured, or the right is lost. Time limitations within which to make elections would be meaningless if the law were otherwise.

The plaintiff also contends that if the 90-day period were applicable to it then the regulation was invalid because it failed to allow a reasonable time within which to file the election. In support of this argument it says that the forms upon which it was to make the election were not made available until the latter part of February 1943, when the expiration date for filing was March 10,1943, and that it was unreasonable to require the complex computation which was necessary to be done in that short a period. Other taxpayers did it. The plaintiff became entitled to adopt the LIFO method when the 1942 Revenue Act of October 21, 1942, eliminated the interim report prohibition. This was three months before the end of the taxable year in question. The plaintiff’s executives first decided in the latter part of December 1942 to adopt LIFO. If the 90 days were insufficient for plaintiff, it could and should have requested an extension of time, which is, in most cases at least, willingly granted. Many of the retailers protected themselves as did the Hutzler Brothers.

We are unable and unwilling to find under the facts and circumstances that are in the record in this case that the 90-day period was insufficient and that it was an unreasonable period within which to file an election to change to LIFO. Had plaintiff been aware of its rights and acted with diligence it could easily have filed its election within the 90-day period.

The plaintiff contends that the Commissioner has, by his actions over a 10-year period, waived any technical defects in plaintiff’s LIFO election and further that the Commissioner is estopped from denying that plaintiff’s election was not valid. It is true that the Commissioner did not specifically object to the timeliness of the election until in June 1953. However, objection was unnecessary since plaintiff had stated it did not desire to pursue it. The fact that many cases were settled by the Commissioner even though there were technical defects in the applications to adopt LIFO does not help plaintiff. The plaintiff relies on United States v. Kales, 314 U. S. 186, 197, in support of its proposition that the Commissioner’s action waived the technical requirements with respect to the election. That case involved a refund claim and the Court held that a timely filed informal claim for refund, which was subsequently remedied with a formal claim, sufficed to stop the running of the statute of limitations and although it may have been deficient in specificity, it was sufficient to advise the Commissioner of the nature of the claim. The Court further stated that the lack of specificity was waived by the Commissioner’s consistent treatment of the claim as a sufficient claim for refund. The Kales case lends little support to plaintiff because in that case the informal claim was timely and matters of particularity or specificity were considered waived. Had the plaintiff here filed a timely election which lacked formal or technical requirements and had pressed it, that rule might be applicable.

Moreover, we do not believe that the Commissioner’s action with respect to plaintiff’s claim for refund and the LIFO election amounted to a waiver or acceptance of anything. The Commissioner’s interpretation of the applicable sections to mean that retailers using dollar totals rather than specific items could not use the LIFO method was erroneous. If the plaintiff wanted to use the LIFO method it should have filed its returns on that basis and have made a timely election to use the method, as did other taxpayers. The Commissioner’s failure to act on the election to use LIFO did not prejudice plaintiff. It could have sought action by the Commissioner or from the courts if it desired. Instead of pursuing its legal remedies plaintiff sought to withdraw its claim for refund and its election. Notwithstanding the fact that plaintiff now contends that it was bound by its election to use LIFO, it consistently filed its tax returns on the FIFO basis and reverted to the FIFO basis in its reports to its stockholders. The record is devoid of any evidence to show that the Commissioner did anything to prejudice plaintiff’s lights other than to erroneously interpret § 22 (d).

Although the Commissioner’s action in some cases has amounted to a waiver or estoppel we do not believe a consideration of all the facts and circumstances of this case warrants holding that the Commissioner has waived or is estopped from asserting the defense of the untimely filing of plaintiff’s election to change to LIFO. Accordingly, we hold that plaintiff’s election to adopt the LIFO method was ineffective because it was not timely filed. The petition of plaintiffs is therefore dismissed.

It is so ordered.

Laramore, Judge; Madden, Judge; Whitaker, Judge; and Jones, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the briefs and argument of counsel, and the report of Commissioner George H. Foster, makes the following findings of fact:

1. Plaintiff, Kaufmann and Baer Company (hereinafter sometimes called Kaufmann and Baer), was incorporated under the laws of Pennsylvania in 1913 and since its organization and until January 31, 1946, conducted business in the city of Pittsburgh, Commonwealth of Pennsylvania, where it owned and operated a retail department store.

2. Plaintiff, Gimbel Brothers, Inc. (hereinafter sometimes called Gimbels), is a corporation organized and existing under the laws of the State of New York and it maintains its principal office and a place of business in the city of New York. It is engaged in the business of operating department stores in New York City and elsewhere.

3. Since March 15, 1926, Gimbels has owned all the issued and outstanding capital stock of Kaufmann and Baer. On January 22, 1946, it was duly resolved by the directors of Gimbels to transfer the assets of Kaufmann and Baer to Gimbels, subject to the assumption and payment by Gimbels of all unpaid debts and obligations of Kaufmann and Baer. A similar resolution was duly adopted by the directors of Kaufmann and Baer on January 23, 1946. The liquidation and dissolution of Kaufmann and Baer had been recommended by unanimous resolutions of its shareholders’ át a meeting- held January 23, 1946. Pursuant to such resolutions, Kaufmann and Baer Company on January 31, 1946, filed with the Department of State of the Commonwealth of Pennsylvania a certificate of election to dissolve, in compliance with section 1103 of the Business Corporation Law of the Commonwealth of Pennsylvania, and Kaufmann and Baer continued and still is in existence for the purpose of winding up and settling its affairs, to sue or be sued in its own name, to collect all sums due or owing to the corporation, to sell and convert into cash any assets, to pay, satisfy, and discharge all debts and liabilities, and distribute any surplus remaining to the shareholders in compliance with section 1104 of the Business Corporation Law of the Commonwealth of Pennsylvania. On January 31, 1946, Kauf-mann and Baer assigned and transferred to Grimbels all of its property and assets of every kind and nature whatsoever including choses in action owned by Kaufmann and Baer at the close of the business day on January 31, 1946.

4. Kaufmann and Baer kept its books’and filed its Federal tax returns on the accrual method of accounting for the fiscal years ending January 31. In computing the cost of goods sold, it used the retail method of taking inventory.

5. For the fiscal year ended January 31, 1942, the Kauf-mann and Baer Company filed its income and declared value excess profits tax return on July 13,1942. It paid the taxes shown to be due thereon in the amount of $433,111.47 to the collector of internal revenue for the 23rd collection district of Pennsylvania as follows:

Date Payment
April 14, 1942_$100, 320. 00
July 13, 1942_ 116,235.73
October 13, 1942_ 108,277. 87
January 12, 1943_ 108,277.87

The income and excess profits tax paid by Kaufmann and Baer, as shown above, was computed upon the retail method of inventorying goods' without application of LIFO thereto.

The Federal income tax returns filed by Kaufmann and Baer and the consolidated returns filed by Gimbels on behalf of Kaufmann and Baer for the fiscal year ended January 31, 1942, and for the succeeding fiscal years to and including the fiscal year ended January 81, 1948, were filed on tbe retail method of inventory without the application of LIFO. The consolidated return filed by Gimbel Brothers, Inc., for the fiscal year ended January 81, 1948, was filed on the retail method of inventory with the application of LIFO.

6. On March 31,1943, Kaufmann and Baer filed with the collector of internal revenue, Pittsburgh, Pennsylvania, a claim for refund executed March 29, 1943, a copy of which is attached to the petition as exhibit 1 and is made a part hereof by reference. On the same date, Kaufmann and Baer also filed with the same collector a document (Form 970) entitled “application for the adoption and use of the elective inventory method,” provided by section 22 (d) of the Internal Revenue Code, which has been executed by Kaufmann and Baer on March 29, 1943. A copy of this document is attached to the petition as exhibit 2 and is made a part hereof by reference.

7. An examination made prior to November 21, 1944, by internal revenue agents resulted in adjustments other than in inventories which reduced the tax liability of Kaufmann and Baer for the fiscal year ended January 31, 1942, and produced a net overassessment in income tax of $31,486.16. This amount of the proposed overassessment was accepted by Kaufmann and Baer on December 8, 1944. A copy of the revenue agent’s report was transmitted to Kaufmann and Baer by letter of January 4, 1945. Thereafter, in response to a letter from the Deputy Commissioner dated March 12, 1945, Kaufmann and Baer filed a formal claim for the refund of the proposed overassessment on March 23, 1945. This claim was given number 2738120 by the Bureau of Internal Revenue. The overassessment was allowed on Schedule IT-99148 and a refund of that amount was made, part by credit and part by Treasury check, in the amount of $31,486.16, with interest thereon in the amount of $4,587.36. Schedule IT-99148 allowing the overassessment shows that the over-assessment of $31,486.16 was an allowance of the claim for refund filed March 23, 1945, and was not the result of the claim filed March 31, 1943, which was based on a claim for inventory adjustments.

8. On August 16,1915, the Deputy Commisioner wrote to Kaufmann and Baer with reference to the claim for refund for $106,287.97 which had been filed March 31, 1943, with Form 970 and stated as follows:

[Reference is made to claim or claims, referred to above, filed by you for the refund of income taxes.
By a Certificate of Overassessment you were advised of an allowance on Schedule of Overassessments numbered IT-99148 for the taxable year referred to, and that to the extent your claim was disallowed, notice would be issued.
In accordance with the provisions of section 3772 (a) (2) of the Internal Revenue Code, this notice of disallowance of your claim or claims to the extent not previously allowed, is hereby given by registered mail.

The certificate of overassessment referred to in the second paragraph quoted above, had no reference to a claim for refund based on the inventory adjustment.

9. Under the retail method all items of merchandise sold in a store are broken down into types of classifications (such as women’s coats, men’s suits, women’s shoes, lamps, floor covering, etc.). Each classification of merchandise is then given a department name and number and the department’s inventory, stated in aggregate for all items of merchandise handled therein, is the smallest unit of inventory control in the store. At the close of the year, or more frequently, a store’s inventory is taken by accumulating the results of the inventories of these separate departments. Kaufmann and Baer at all times material herein took inventory, in this manner, semiannually.

10. Under the retail method of inventorying, a record is kept for each department of the aggregate cost of all of the items in its inventory. This aggregate cost for a particular year includes both the aggregate cost of the opening inventory for that year and the aggregate cost of all items purchased for that department during that year. In addition to the cost record, a record is kept for each department of the aggregate retail prices of all the items in its inventory, again including both the opening inventory and purchases made during the year. At the end of the year the aggregate opening cost inventory, plus purchases at cost, is subtracted from the aggregate opening retail inventory, plus purchases at retail, to determine the aggregate net markup achieved by the department during the year. This average net markup is then divided by the aggregate opening retail inventory, plus purchases at retail, with proper adjustment to selling prices for all markups and markdowns, in order to determine the mark-on percentage achieved by the department during the year. The percentage complementary to the mark-on percent is the cost rate incurred by that department. The retail value of the closing inventory is computed by adding the retail values of the various items of merchandise on hand in the department at the date the inventory is taken. This value must be converted to cost before being credited to the eost-of-goods-sold account. The conversion is made by multiplying the aggregate retail inventory by the cost rate incurred by the department during the year, that is, by the complement of the mark-on percent.

11. For all years up to and including the fiscal year ended January 31, 1941, Kaufmann and Baer employed the retail method of taking inventories on a first-in, first-out basis, commonly known as FIFO. In determining inventory at the end of the fiscal year, this method assumes that an article of merchandise “first-in,” i. e., the article purchased earliest, was the first one sold, and that the articles left in the inventory at the end of the year were the last articles purchased. The cost of the items in the inventory at the end of the year would be based on the cost of the last articles purchased.

The LIFO method of inventory assumes that an article of merchandise “last-in,” i. e., the article purchased last, was the first sold and that the articles left in the inventory at the end of the year were the first articles purchased. The cost of the items in the inventory at the end of the year would be based on the cost of the first articles purchased.

The difference between FIFO and LIFO insofar as it relates to profits and taxable income is illustrated (a) in a period of rising prices and (b) in a period of falling prices as follows:

(a) During a period of rising prices, a retailer starts out with one shirt which cost him $2. He buys another for $3. He sells one for $4.' His closing inventory and profits on a FIFO and LIFO basis will be as follows:

FIFO LIFO
Opening Inventory_$2.00 Opening Inventory_$2.00
Cost of Purchases- 3.00 Cost of Purchases_ 3.00
Total_ 5. 00 Total_ 5.00
Less Cost' of Closing Inventory (last in)_ 3.00 Less Cost of Closing Inventory (first in)_ 2.00
Cost of Goods Sold_ 2.00 Cost of Goods Sold_ 3.00
Sales_$4. 00 Sales_$4.00
Cost of Goods Sold_ 2. 00 Cost of Goods Sold_ 3.00
Gross Margin_!_ 2.00 Gross Margin_ 1. 00

On the FIFO basis, $1 of the $2 gross margin represents paper profit since the retailer must keep a stock of one shirt. On the LIFO basis, there is no paper profit because LIFO assumes that a retailer’s basic inventory (one shirt in this example) is carried on the books at a stabilized value.

(b) During a period of falling prices, the difference between FIFO and LIFO is illustrated by the following example : Assume that in the following year, the retailer buys another shirt for $2 and sells one for $3 instead of $4. His inventory and profits on a FIFO and LIFO basis for such second year will be as follows':

FIFO LIFO
Opening Inventory_$3.00 Opening Inventory-$2.00
Cost of Purchases_ 2. 00 Cost of Purchases_ 2. 00
Total_ 5.00 Total_ 4.00
Less Cost of Closing Inventory (last in)- 2.00 Less Cost of Closing Inventory (first in)_ 2.00
Cost of Goods Sold_ 3.00 Cost of Goods Sold- 2.00
Sales ._$3. 00 Sales_$3.00
Cost of Goods Sold_ 3.00 Cost of Goods Sold_ 2.00
Gross Margin_NONE Gross Margin_ 1.00

12. In 1942 and 1943 and continuously thereafter until 1948, the Treasury Department and the Bureau of Internal Revenue took the position that LIFO was available only to taxpayers who applied the method to the cost of specific inventory items and that LIFO was not available to taxpayers who applied the method to the total inventory for a department store. For this reason such agencies held that LIFO was not available for use in computing the income of retail department stores which applied LIFO to the total inventory for each store department, such inventory being stated in terms of dollar values in accordance with the retail inventory method. The Treasury Department regulation, promulgated under section 22 (d) of the Internal Revenue Code, made no provision for retailers to use LIFO and made no provision for the employment of retail price index figures to apply LIFO in connection with the retail inventory method. On February 5, 1944, in pursuance of such position, the Bureau of Internal Revenue issued a deficiency notice to Hutzler Brothers Company, a Baltimore department store. This notice disapproved the adoption and use by Hutzler Brothers Company of LIFO by employment of retail price index figures in connection with the retail inventory method for the taxable year of said Company ended January 31, 1942. Continuously thereafter the Treasury Department and the Bureau of Internal Revenue maintained the position that LIFO was not available for use by taxpayers who did not apply the method to determine the cost of specific items of inventory. In 1947 the Tax Court of the United States decided (8 T. C. 14) in favor of the adoption and use of LIFO by Hutzler Brothers by employment of retail price figures in connection with the retail inventory method for its taxable year ended January 31, 1942, and. thereafter the Treasury Department and the Bureau of Internal Revenue agreed that LIFO was available for use in determining the income of retail department stores by application of the method of the total inventory for each department (stated in terms of dollar values determined by the retail inventory method).

13. Until October 21, 1942, the date of approval of the Revenue Act of 1942, section 22 (d) (2) (B) and Treasury [Regulations 101, as amended bj T. D. 4959 (1940-1 Cum. Bull. 22), approved December 28, 1939, limited the use of LIFO to taxpayers who could establish as a fact that they had not used any procedure other than LIFO in inventorying goods for any period during the first taxable year for which the LIFO method was to be used. Kaufmann and Baer Company was therefore ineligible to use LIFO until that date since it had prepared an interim statement for the period February 1,1941, to July 31,1941, which did not use LIFO, and this statement was included in a statement of the earnings of the consolidated Cimbel Companies, which was published in an interim report distributed to the stockholders of Gimbels and covering the same six-month period.

14. Section 118 of the Revenue Act of 1942 removed the prohibition against the adoption of LIFO for a year during which interim reports on a non-LIFO basis had been issued. This change was retroactive to taxable years beginning after December 31, 1938. It did require that annual reports be made on a LIFO basis. Gimbels’ directors, at a special meeting on April 9, 1942, decided that it would be in the best interests of the company to adopt the LIFO method and they then approved a statement prepared for release to Gim-bels’ stockholders which included a letter addressed to the directors on April 9,1942, by Touche, Niven and Company, accountants for Gimbels and its subsidiaries, including Kauf-mann and Baer. This statement was an annual report of Gimbel Brothers, Inc., and subsidiary companies for the year ended January 31, 1942. It was dated for release and released to all stockholders of Gimbels on April 11, 1942. It read in part:

Merchandise inventories at January 31, 1942 aggregated $17,809,565 compared with $13,130,458 a year ago, an increase of $4,679,107. Although the basis of “cost ■or market, whichever is lower” has been continued this year “cost” was determined pursuant to the “last-in first-out” (LIFO) method based upon an index of retail price changes since January 31, 1941. Under the “last-in first-out” method, unrealized price increases are excluded from income and inventories are carried forward at lower values. As a result of this change, inventories and profits before Federal taxes on income were '.$1,867,469 léss than on the basis formerly used, and provision for these taxes was lower by $1,311,000, resulting in a net reduction of $556,469 in profits as above stated. While “last-in first-out” is an acceptable method of inventory valuation under present tax laws for certain types of business, amendments to the tax laws will be necessary for its use by us for the year covered by this report. If adequate retroactive legislation is not enacted, the taxable income will be increased by approximately $1,867,469 and the Federal tax liability will be increased by $1,311,000, the amounts above mentioned.

A similar statement and report to stockholders for the year ended January 31, 1943, also was approved by Gimbels’ directors and released to its stockholders. It was dated for release and released on April 24, 1943, and it read in part:

Merchandise inventories at January 31, 1943 aggregated $24,101,609 compared with $19,677,035 a year ago, an increase of $4,424,574. As was explained in the Annual Report for the year ended January 31, 1942, the “last-in first-out” (LIFO) method of determining inventory costs, based upon an index of retail price changes, was adopted for the year covered by the report. It was there pointed out that while such “last-in iirst-out” method might not be used for tax purposes under the then existing provisions of the tax laws, there was reason to believe that retroactive legislation might be enacted permitting such use. Legislation subsequently enacted was only part of that contemplated at the time the report was issued. It has been determined, therefore, to abandon the “last-in first-out” method of inventories and to return to the method formerly in use, and to adjust the figures for the year ended January 31,1942 accordingly. This has resulted in an adjustment increasing the net profits for the year ended January 31, 1942 by $556,469. Of such increased net profits it has been deemed advisable to transfer $500,000 to a reserve for post-Avar contingencies. The balance has been added to earned surplus. The comparative figures for the year ended January 31, 1942 above set forth have been adjusted so as to present them as if the “last-in first-out” method of inventory had not been in use during that year.

15. The principal reason for the insistence of the Treasury Department and the Bureau of Internal Revenue that retailers were not entitled to use the LIFO method of inventorying authorized in section 22 (d) of the Internal Revenue Code lay in the manner by which inventories are valued under the retail method of inventorying (the method used by Kaufmann and Baer). The Treasury Department and Bureau of Internal Revenue constantly maintained that the nature of the retail method of inventorying made it impossible for retailers to elect LIFO since the Internal Revenue Code permitted the election of LIFO only as to “goods specified in the application,” whereas under the retail method inventories are stated in terms of dollar values rather than in terms of specific goods, a procedure which, they asserted, lacked the specification required by the section.

Due to the multiplicity of items carried by retail department stores, and the varying price ranges of these items, it is not practicable to control the inventories of these stores-on an item basis. The retail method of inventorying was developed early in the history of the industry and it has been long approved by Treasury Department regulations and was used at all times by Kaufmann and Baer.

16. The Revenue Act of 1942 was approved October 21, 1942, at 4: 30 p. m., 56 Stat. 798. Treasury Regulations 103,. applicable at that time, were amended to conform to sections 118 and 119 of the Revenue Act of 1942 in T. D. 5199,1942-2 Cum. Bull. 81, approved December 10, 1942, and first published in the Federal Register on December 12, 1942, pp. 10366-10368. As amended by paragraph 2 T. D. 5199, section 19.22 (d)-3 of Treasury Regulations 103 read in part’, as follows:

Time and Manner of Making Election. — The elective-inventory method may be adopted and used only if the taxpayer files with his return for the taxable year as of the close of which the method is first to be used (or, if such return is filed prior to March 10,1943, the ninetieth day after the approval of Treasury Decision 5199, then at any time prior to such date), in triplicate on Form 970 (revised), and pursuant to the instructions printed thereon and to the requirements of this section, a statement of his election to use such inventory method. * * *'

Neither Gimbels nor Mr. Friedman, of Touche, Niven and' Company, thought that this quoted language applied to retailers generally or to their own tax problem and they did not,’ ask for any extension of time after March 10, 1948, within which to file Treasury Form 970.

17. Section 118 of the Revenue Act of 1942 removed the prohibition against the adoption of LIFO for a year during' which interim reports on a non-LIFO basis had been issued and this amendment was made retroactive to all taxable years beginning after December 31,1938. It retained the requirement that the annual reports be made on a LIFO basis, and Kaufmann and Baer’s final report on its earnings for the year ended January 31, 1942, was prepared by an application of LIFO (as described in the annual report made by Gimbels to its stockholders as certified by Touche, Niven and Company) to the retail method of inventorying.

18. At the end of December 1942, there was a meeting of plaintiffs’ executives at which Mr. Friedman, of Touche, Niven and Company, was present to consider the problem of using LIFO inventories with respect to the Federal income tax returns' which had already been filed for the fiscal year ended January 31, 1942, for all the Gimbel companies including Kaufmann and Baer. It was decided at that meeting plaintiffs should file refund claims for the fiscal year ended January 31,1942, and elections on Form 970 to adopt LIFO for the fiscal year ended January 31,1942.

At the conference between plaintiffs’ officials and Mr. Friedman held at the end of December 1942, Mr. Friedman was instructed to prepare the necessary claims and elections and whatever forms were appropriate to permit plaintiffs to adopt LIFO for the fiscal year ended January 31, 1942. Plaintiffs relied on Mr. Friedman for the timely preparation of such necessary forms.

19. Pursuant to such instructions, Touche, Niven and Company, accountants for Kaufmann and Baer and Gimbels, prepared the claims for refund and election document referred to in finding 6. These documents were delivered by messenger to plaintiffs on March 25, 1942. Thereafter, they were properly signed and filed as shown in finding 6. No one from Touche, Niven and Company advised plaintiffs that these documents had to be filed by any specific date.

The firm of Touche, Niven and Company believed that plaintiffs, having filed their returns and paid the tax for the fiscal year ended January 31, 1942, thereby being unable to attach the Form 970 to the return, that the proper procedure would be to file a claim for refund and attach the Form 970 to the claim. The firm also believed that the time limitations had no application to retailers because of the strong position the Bureau of Internal Revenue had taken against permitting such retailers to employ the LIFO method.

Form 970 was available around the end of February 1943. The computations necessary to establish the amount of the refunds were numerous and to have prepared them after the issuance of the Treasury Decision of December 10, 1942, and before March 10, would have cast a heavy burden on the staff of Touche, Niven and Company.

Touche, Niven and Company, now known as Touche, Niven, Bailey and Smart have been auditors for Gimbels and its associates since 1922.

20. During the fiscal year ended January 31,1943, Gimbels issued an interim report to its stockholders and this, showing consolidated operations in which the inventories were computed on the LIFO basis, covers the period February 1,1942, to July 31,1942.

21. On April 20, 1943, a meeting of the board of directors of Gimbels was held to determine the basis for inventory to be used with respect to the fiscal year ended January 31, 1943. Mr. Friedman of Touche, Niven and Company, was present at that meeting and he told the board that the Treasury Department and the Bureau of Internal Revenue were adamant in their position that retailers could not elect to adopt LIFO; that there were disadvantages to keeping the books on a LIFO basis, and filing income tax returns on a FIFO basis since earnings would be completely distorted because LIFO would not only produce lower earnings but such earnings would be reduced by the accrual of income taxes computed on a FIFO basis; and that for these reasons many other department stores were reverting to FIFO. Thereupon, the board of directors of Gimbels determined to issue the report to stockholders for the year ended January 31,1943, on a FIFO basis but with a deduction for reserves.

On April 24, 1943, Gimbels issued its annual report to stockholders for the fiscal year ended January 31, 1943, covering the operations of itself and its subsidiaries, including Kaufmann and Baer, stating its inventories on the basis of FIFO but setting up a reserve against profits, the effect of which was to show profits at about the same amount which would have been stated had the company continued on a LIFO basis.

22. As a result of its decision of April 20, 1943, with respect to the report to stockholders for the fiscal year ended January 31,1943, the board of directors of Gimbels decided that it would request permission to withdraw the elections to adopt LIFO for the fiscal year ended January 31, 1942, filed for itself and its subsidiaries including Kaufmann and Baer.

23. On April 28, 1943, Kaufmann and Baer addressed a letter to the collector at Pittsburgh, Pennsylvania, relating to the refund claim and to the application to adopt LIFO filed on March 31, 1943 saying: “This is to advise you that we desire to withdraw this claim for refund and our application for change in inventory method.” The collector replied in a letter addressed to Kaufmann and Baer on April 30, 1943, stating that the claim for refund had been forwarded to the office of the Commissioner of Internal Bevenue in Washington, D. C., and in part said: “This office suggests that you advise that office of your intention.” On May 5, 1943, Kaufmann and Baer addressed a letter to the Commissioner of Internal Bevenue in Washington, reading as follows:

Under date of March 30, 1943, we filed with the Collector of Internal Bevenue at Pittsburgh, Pennsylvania, a claim for refund for Kaufmann and Baer Company in the amount of $106,287.97 as a result of the change of inventory method, and at the same time made application for permission to change our inventory method to a LIFO basis.
We. attach hereto copy of the letter from the Collector of the 23rd District of Pennsylvania, stating that the claim was forwarded to the Office of the Commissioner under date of April 17,1943.
Accordingly, we wish to advise you that we desire to withdraw this claim for refund and also to withdraw, or cancel, our application for a change in our inventory method.

On May 27,1943, a letter was addressed by a deputy commissioner to Kaufmann and Baer, reading as follows:

Reference is made to your letter dated May 5, 1943,. relative to your claim for refund of income tax in the-amount of $106,287.97, for the fiscal year ended January 81,1942.
Your case is being forwarded to the Internal Revenue-Agent in Charge, 2300 Farmers Bank Building, Pittsburgh, Pennsylvania, for investigation. 'You will be-further advised by that official relative to the matter.

24. At the date the plaintiffs commenced this proceeding,, all of the tax years subsequent to 1942 of Gimbels and its subsidiaries including Kaufmann and Baer were open by waiver or otherwise and the Commissioner of Internal Revenue, if the price spiral had turned in the other direction,, could have assessed deficiencies for each of the years subsequent to 1942 if plaintiffs’ LIFO elections were timely and irrevocable because no permission had ever been granted to-Kaufmann and Baer to withdraw the election to adopt LIFO.

25. On May 27, 1948, Gimbels issued its annual report to-stockholders for the fiscal year ended January 31,1948. In said report, the inventories were stated on a LIFO basis for the fiscal year ended January 31, 1948, and restated on a LIFO basis for the fiscal years ended January 31, 1943, to-January 31, 1947, inclusive. Its Federal income tax return for the fiscal year ended January 31,1948, was also filed on a LIFO basis.

26. Subsequent to the decision of the Tax Court in the-Hutzler case, the Treasury Department issued proposed regulations under which stores, like Hutzler Brothers Company and the other members of the group of the National Retail Dry Goods Association which cooperated with Hutzler Brothers in the litigation before the Tax Court, were permitted to adopt the LIFO inventory method for the fiscal year ended January 31, 1942, and for subsequent years even though the elections filed by these companies for the fiscal year ended January 31,1942, were invalid and they had filed no new elections. Thereupon, plaintiffs objected to the proposed regulations because they did not provide relief for plaintiffs who in good faith had attempted to adopt LIFO but had been dissuaded from such position by virtue of the Treasury’s objection. Thereafter the Treasury advised plaintiffs that the regulations would be drawn to apply to those retailers who had persisted in the contest of this issue •and the retailers in the category of the plaintiffs who had not -so persisted would be covered by separate regulations. About •a year later, plaintiffs were informed by the Treasury Department that the Department did not intend to draft regulations applicable to plaintiffs and other retailers who had evidenced •an intention to and had taken affirmative steps to adopt LIFO and who were dissuaded from that position by the Treasury Department’s announced policy that LIFO was not available to retailers'.

27. On April 20, 1951, E. I. McLarney, Deputy Commissioner of Internal Revenue, wrote to the internal revenue agent in charge, 341 Ninth Avenue, New York 1, New York, with respect to plaintiff’s claim in part as follows:

The Chief Counsel has determined with reference to the taxpayers’ suits pending in the United States Court of Claims that the single issue involved, i. e., whether the taxpayers are entitled to use the Lifo inventory method, is susceptible of administrative settlement and in this connection has requested that your office determine the proper amount of the Lifo inventories and the refunds of tax for all years for which claims have been filed.

28. In 1951 plaintiffs had requested an extension of time from the Commissioner of Internal Revenue with respect to the filing of elections to have the provisions of section 22 (d) (6) of the Internal Revenue Code and section 29.22 (d)-7 of Regulations 111 apply to certain involuntary liquidations of LIFO inventories sustained during the fiscal years ended January 31,1942, to January 31, .1947, inclusive.

29. In the spring or summer of 1952, Revenue Agent Abramowitz appeared at the offices of the plaintiffs and advised Mr. Samuel Nass that the claims for refund which had been filed by Gimbels and its subsidiary companies, including Kaufmann and Baer, had been forwarded to him for examination and verification to determine the amount of the refunds to be made in the event of an administrative decision that the refund would be allowed.

30. On June 6,1953, a meeting was held, attended by plaintiffs’ executives and their attorney, Kenneth Gemmill of the Treasury Department, Mr. Davis, Chief Counsel of the Bureau, and about 15 other representatives of the bureau. At that meeting, the representatives of the bureau stated that they had come to the conclusion that plaintiffs’ claims would not be allowed because the Form 970 elections had not been filed within the time required by T. D. 5199 and, furthermore, the elections had been withdrawn. This was the first time that these objections to the allowance had been raised with the plaintiffs by either the Treasury Department or the Bureau of Internal Bevenue.

31. In the event that it is held that plaintiffs are entitled to a refund of taxes paid by the Kaufmann and Baer Company, judgment may be entered in favor of Gimbel Brothers, Inc., as the successor to the said Kaufmann and Baer Company.

32. It has been stipulated that in the event this court shall determine the issue involved in this proceeding in favor of the plaintiffs, the amount to be refunded for the fiscal year ended January 31, 1942, exclusive of plaintiffs’ claim under the involuntary conversion statute (section 22 (d)-6, Internal Bevenue Code) is $63,199.43 in income tax and $8,572.27 in declared value excess profits tax less $36,991.85 which represents the additional tax for the fiscal year ended January 31,1941, because of the change in the amount of inventory at the beginning of the fiscal year ended January 31, 1942. Said refunds have been computed on the LIFO basis in accordance with the applicable Treasury Begulations.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a. part of the judgment herein, the court concludes that as a matter of law the plaintiffs are not entitled to recover, and the petition is therefore dismissed.. 
      
       Gimbel Brothers, Inc. owned all of the outstanding stock of Kaufmann and Baer Company. On January 81, 1946, Kaufmann and Baer Company was liquidated and its assets were transferred to Gimbel Brothers, Inc.
     
      
       Section 22 : (d) Method of inventorying goods.
      
      (1) A taxpayer may use the following method (whether or not such method' has been prescribed under subsection (c)) in inventorying goods specified in the application required under paragraph (2) :
      (A) Inventory them at cost;
      (B) Treat those remaining on hand at the close of the taxable year as-being: First, those included in the opening inventory of the taxable year (in the order of acquisition) to the extent thereof, and second, those acquired in. the taxable year ; and
      (C) Treat those included in the opening inventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method.
      (2) The method described in paragraph (1) may be used—
      (A) Only . in inventorying goods (required under subsection (c) to be-inventoried) specified in an application to use such method filed at such time- and in such manner as the Commissioner may prescribe; and
      (B) (As amended by Sec. 118 (a) of the Revenue Act of 1942, 56 Stat. 798) Only if the taxpayer establishes to the satisfaction of the Commissioner that the taxpayer has used no procedure other than that specified in subparagraphs (B) and (C) of paragraph (1) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method described in paragraph (1) is to be used, for the purpose of a report or statement covering such taxable year (i) to shareholders, partners, or other proprietors, or to beneficiaries, or (ii) for credit purposes.
      (3) The change to, and the use of, such method shall be in accordance with such regulations as the Commissioner, with the approval of the Secretary, may prescribe as necessary in order that the use of such method may clearly reflect income.
      (4) In determining income for the taxable year preceding the taxable year for which such method is first used, the closing inventory of such preceding year of the goods specified in such application shall be at cost.
      (5) If a taxpayer, having complied with paragraph (2), uses the method described in paragraph (1) for any taxable year, then such method shall be used in all subsequent taxable years unless—
      (A) With the approval of the Commissioner a change to a different method is authorized ; or
      (B) [As amended by See. 118 (b) of the Revenue Act of 1942, supra] The Commissioner determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in subparagraph (B) of paragraph (1) in inventorying the goods specified in the application to ascertain the income, profit, or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year (i) to shareholders, partners, or other proprietors, or beneficiaries, or (ii) for credit purposes; and requires a change to a method different from that prescribed in paragraph (1) beginning with such subsequent taxable year or any taxable year thereafter.
      In either of the above cases, the change to, and the use of, the different method shall be in accordance with such regulations as the Commissioner, with the approval of the Secretary, may prescribe as necessary in order that the use of such method may clearly reflect income.
     