Opinion
Docket No. 28151.
1952-09-30
LEWYT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Fred R. Tansill, Esq., and Eugene Meacham, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
Held, the phrase ‘paid or accrued‘ as used in section 122(d)(6) of the Internal Revenue Code has reference to the system of accounting used by the taxpayer; held, further, amounts tendered to the collector in 1947 by taxpayer as payment of additional excess profits taxes for 1943, 1944, and 1945 were not deductible in 1947. Fred R. Tansill, Esq., and Eugene Meacham, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
The taxpayer contests the following deficiencies determined by the Commissioner:
+-----------------------------------------------+ ¦Taxable year ended: ¦Tax ¦Amount ¦ +---------------------+--------------+----------¦ ¦Sept. 30, 1944 ¦Income ¦$7,129.21 ¦ +---------------------+--------------+----------¦ ¦Sept. 30, 1945 ¦Excess profits¦428,288.05¦ +-----------------------------------------------+
The fiscal years ended September 30, 1946, and September 30, 1947, also are involved because of net operating losses sustained in those years which taxpayer contends were not properly computed before being carried back to the taxable years. The Commissioner has asked an increased deficiency for the fiscal year ended September 30, 1945, based on what he now alleges was his improper allowance of a deduction of $55,940.04 claimed as interest on taxes paid during the fiscal year ended September 30, 1947. (References hereinafter to fiscal or taxable years are to the fiscal or taxable years of petitioner ending September 30 in the year or years mentioned.)
The following questions are presented for decision:
1. May excess profits taxes for 1945 which were paid in a stipulated amount within the fiscal year 1946 and excess profits taxes for 1943, 1944, and 1945 which were paid in stipulated amounts within the fiscal year 1947, be added to the agreed net operating losses for the fiscal years 1946 and 1947 in computing the net operating loss carry-backs to the taxable years under the provisions of section 122(d)(6)?
2. Did certain amounts tendered by taxpayer to the collector of internal revenue on September 29, 1947, constitute payments of additional excess profits taxes for the fiscal years 1943, 1944, and 1945, within the fiscal year 1947?
3. Is taxpayer entitled to a deduction of $55,949.04 as interest paid or accrued during the fiscal year 1947?
4. May the amount of excess profits tax paid or accrued within the taxable year 1944 be used to reduce the net income for said year in computing the net operating loss carry-back from the fiscal year 1946 to the fiscal year 1945 under the provisions of section 122(b)(1)(A)(i)?
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
Petitioner is a New York corporation, formed in 1942, engaged in the manufacture of vacuum cleaners and electronic devices. Its income and excess profits tax returns for the years involved were filed on the accrual method using a fiscal year ending each September 30, with the collector for the third district of New York.
For the fiscal years 1946 and 1947 petitioner incurred net operating losses of $164,326.38 and $786,383.25, respectively, not including any additions under section 122(d)(6).
During the fiscal year 1944 petitioner paid a total of $759,916.50 in excess profits tax which payments were made on petitioner's excess profits tax liability for the fiscal year 1943.
During the fiscal year 1945 petitioner paid a total of $510,939.23 on its excess profits tax liability for fiscal 1944.
Respondent determined petitioner's excess profits tax liability for fiscal 1944 to be $280,540.33 and its net income for the same year to be $420,540.43.
Petitioner's net operating losses for the fiscal years 1946 and 1947 in the respective amounts of $164,326.38 and $786,383.25 were allowable as carry-back deductions in the fiscal years 1944 and 1945 and were so allowed by respondent.
Petitioner paid the excess profits tax liability shown on its return for the fiscal year 1945 during the fiscal year 1946 in the total amount of $861,118.04.
With reference to the fiscal year 1943 a dispute arose between petitioner and respondent. The major issue centered on whether the value of certain unfilled customers' orders and contracts which petitioner received by assignment from shareholders in two predecessor corporations were amortizable by petitioner and said amortization properly reflected as a deduction in cost of goods sold. Respondent by statutory notice dated August 30, 1946, asserted deficiencies against petitioner for the fiscal year 1943 of $7,757.49 in income tax and $194,992.51 in excess profits tax. These deficiencies were contested in a petition filed in this Court bearing docket No. 12526 on November 19, 1946. One of the errors assigned therein was the disallowance of the above-described item. This question was placed in issue by respondent's answer filed December 23, 1946.
Petitioner's auditor was a certified public accountant experienced and qualified to act in tax matters. Both before and after the above proceeding was at issue attempts were made to settle the case. Conferences beginning about October 23, 1946, were held attended by the auditor and technical staff advisers. Petitioner's lawyers were present at some of the conferences. One such conference was held on September 26, 1947, and as a result the auditor believed that a basis for settlement had been arrived at for computing the additional tax due for the fiscal year 1943. On that basis the auditor recomputed the petitioner's tax liability and on September 29, 1947, petitioner addressed a letter to the collector transmitting petitioner's check payable to the collector for $190,002.16 and indicating it was for additional tax for fiscal 1943 in the amount of $154,473.30 and interest of $35,528.86. The letter bears a stamp showing receipt by a cashier in the collector's office for the third district of New York on September 29, 1947. The amount of this check was placed on September 29, 1947, in a suspense account maintained by the collector.
Subsequent conferences about the settlement of the above case were held down to and including October 30, 1947. On November 6, 1947, the Head of the Technical Staff, New York Division, advised Division Counsel that settlement efforts on a satisfactory basis had proved ineffectual and defense of the case was recommended. On December 12, 1947, a written proposal of settlement was submitted by petitioner's attorney which the Technical Staff recommended on February 20, 1948, be accepted. A stipulation of settlement signed by the parties was filed with this Court on February 24, 1948. The stipulation showed that petitioner's excess profits tax liability for the taxable year 1943 was $140,147.87 and that petitioner had paid excess profits taxes on September 29, 1947, in the amount of $141,618.13, an overpayment of $1,470.26. This Court entered its decision to that effect on March 3, 1948. The amount of $141,618.13 was part of the $190,002.16 received by the collector on September 29, 1947, deposited in the above-mentioned suspense account.
Prior to September 30, 1947, and during that year a revenue agent was examining petitioner's returns for the years 1944, 1945, and 1946. This examination was expanded to include 1947. The amortization issue involved for the year 1943 was also present in 1944 and its disposition would affect the tax liability for 1945. Petitioner's auditor was in consultation with the agent and was advised of other proposed adjustments. The agent's report was dated July 26, 1948, and was forwarded to petitioner under date of August 25, 1948. Following the conference of September 26, 1947, referred to above, petitioner's auditor recomputed petitioner's tax liabilities for 1944 and 1945 on his understanding of the basis for settlement of the amortization question and giving effect to the other proposed adjustments mentioned to him by the agent.
On September 29, 1947, petitioner addressed a second letter to the collector transmitting petitioner's check payable to the collector in the amount of $178,810.92. The body of the letter stated:
Our check in the amount of One Hundred Seventy-Eight Thousand Eight Hundred and Ten Dollars and Ninety-Two Cents ($178,810.92) is computed as follows:
+-------------------------------------------------+ ¦Additional Tax-Year Ended¦ ¦ ¦ +-------------------------+-----------+-----------¦ ¦September 30th, 1944 ¦$49,953.38 ¦ ¦ +-------------------------+-----------+-----------¦ ¦Interest ¦8,492.07 ¦ ¦ +-------------------------+-----------+-----------¦ ¦Total ¦ ¦$58,445.45 ¦ +-------------------------+-----------+-----------¦ ¦Additional Tax-Year Ended¦ ¦ ¦ +-------------------------+-----------+-----------¦ ¦September 30th, 1945 ¦$108,437.36¦ ¦ +-------------------------+-----------+-----------¦ ¦Interest ¦11,928.11 ¦ ¦ +-------------------------+-----------+-----------¦ ¦Total ¦ ¦$120,365.47¦ +-------------------------+-----------+-----------¦ ¦Grand Total ¦ ¦$178,810.92¦ +-------------------------------------------------+
This sum was received by the collector on September 29, 1947, and placed in the same suspense account with the $190,002.16.
Petitioner charged the following amounts as taxes against earned surplus account in its books as of September 30, 1947:
+----------------------------------------------------+ ¦For the Fiscal Year Ended Sept. 30, 1943¦$154,473.30¦ +----------------------------------------+-----------¦ ¦For the Fiscal Year Ended Sept. 30, 1944¦49,953.38 ¦ +----------------------------------------+-----------¦ ¦For the Fiscal Year Ended Sept. 30, 1945¦108,437.36 ¦ +----------------------------------------+-----------¦ ¦Total ¦$312,864.04¦ +----------------------------------------------------+
The amount of $312,864.04 referred to in the preceding paragraph was reflected on the petitioner's Federal income tax return filed for the fiscal year ended September 30, 1947, as a charge against earned surplus.
Among the items petitioner charged as taxes against earned surplus account in its books as of September 30, 1947, there are three items totaling $312,864.04. The first of the three items is the amount of $154,473.30. This represents the additional tax liability of petitioner for the taxable year ended September 30, 1943, as recomputed by its auditor and tendered by petitioner to the collector by check on September29, 1947. Of this amount, $141,618.13 represented excess profits taxes and $12,855.17, income taxes. The second item is the sum of $49,953.38, being the additional excess profits tax liability as recomputed by the auditor for the year ended September 30, 1944, and is the same amount shown in the letter transmitted to the collector of internal revenue on September 29, 1947, and tendered by check on the same day. The third item is the additional excess profits tax liability as computed by the auditor for the taxable year ended September 30, 1945, and is in the sum of $108,437.36. This is the same amount referred to in the letter addressed to the collector of internal revenue dated September 29, 1947, and tendered by check dated the same day.
In one of the letters to the collector of internal revenue dated September 29, 1947, interest was computed and indicated in the sum of $35,528.86, and said amount of interest was included in the total amount of the check drawn payable to the collector of internal revenue in the total amount of $190,002.16.
In the second letter to the collector of internal revenue dated September 29, 1947, interest is indicated and computed in the amount of $8,492.07 on the additional tax for the year ended September 30, 1944, and in the amount of $11,928.11 on the additional tax for the year ended September 30, 1945. The check attached to said letter in the face amount of $178,810.92 drawn payable to the collector of internal revenue includes these two amounts.
Petitioner charged as an expense the following amounts as interest on taxes in its books for the fiscal year ended September 30, 1947:
+---------------------------------------------------+ ¦For the Fiscal Year Ended Sept. 30, 1943¦$35,528.86¦ +----------------------------------------+----------¦ ¦For the Fiscal Year Ended Sept. 30, 1944¦$8,492.07 ¦ +----------------------------------------+----------¦ ¦For the Fiscal Year Ended Sept. 30, 1945¦11,928.11 ¦ +----------------------------------------+----------¦ ¦Total ¦$55,949.04¦ +---------------------------------------------------+
The total of the three interest items referred to in the amount of $55,949.04 is the total of the amounts referred to in the two letters of September 29, 1947, and is the same amount deducted on the petitioner's books as of September 30, 1947.
The amount of $55,949.04 referred to in the preceding paragraph was claimed, together with other amounts, as an interest deduction on the petitioner's Federal income tax return filed for the fiscal year ended September 30, 1947, which interest deduction was not adjusted or reduced by the respondent in his revenue agent's report.
Petitioner did not file any amended returns showing greater liability in income and excess profits taxes for the fiscal years ended September 30, 1944, and September 30, 1945, and no deficiency in tax for either of those years was asserted or determined by the Commissioner until after the close of the fiscal year ended September 30, 1947.
OPINION.
TIETJENS, Judge:
As we understand it, from opening statements of counsel and the briefs filed herein, the question upon which disposition of most of the issues herein depends is the construction of the words ‘paid or accrued within the taxable year‘ as they appear in section 122(d)(6) quoted in the footnote.
The ‘rules‘ referred to in that section are not material to the issue except as may be indicated hereafter. The taxes imposed by subchapter E of chapter 2 are ‘excess profits taxes‘ and that term will be used for convenience. The question is urged by taxpayer as one of first impression.
SEC. 122. NET OPERATING LOSS DEDUCTION.(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, subject to the following rules—
Taxpayer admittedly maintained its books and records and filed its tax returns using a fiscal year and computed its net income using the accrual method of accounting. Nevertheless, it contends that in applying section 122(d)(6) it is entitled to use, with reference to the year 1946, the amount actually paid in that year in satisfaction of its excess profits tax liability for the year 1945. A similar contention is made for the year 1947 during which certain amounts were tendered to the collector as additional excess profits tax for the years 1943, 1944, and 1945. And for the year 1944, the argument is made that taxpayer is entitled not only to use, in making adjustments required under section 122(b)(1)(A)(i),
the amount of excess profits taxes ‘paid‘ in 1944 on the liability for the previous year, but is also entitled to add to that amount at least $280,540.33 (its ultimate excess profits tax liability for 1944) which was ‘paid‘ in 1945.
SEC. 122. NET OPERATING LOSS DEDUCTION.(b) AMOUNT OF CARRY-BACK AND CARRY-OVER.—(1) NET OPERATING LOSS CARRY-BACK.—(A) Loss for Taxable Year Beginning Before 1950.— If for any taxable year beginning after December 31, 1941, and before January 1, 1950, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-back for each of the two preceding taxable years, except that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such net operating loss over the net income for the second preceding taxable year computed—(i) with the exceptions, additions, and limitations provided in subsection (d)(1), (2), (4), and (6), and
In arriving at these conclusions taxpayer argues that the phrase ‘paid or accrued within the taxable year‘ refers ‘to the fact that an excess profits tax liability has arisen or that such a liability has been liquidated by payment ‘ in the taxable year. On the other hand, the Commissioner refers to section 48(c)
and says that consonant therewith the phrase should be construed according to taxpayer's method of accounting.
SEC. 48. DEFINITIONS.When used in this chapter—(c) ‘PAID OR INCURRED,‘ ‘PAID OR ACCRUED‘.— The terms ‘paid or incurred‘ and ‘paid or accrued‘ shall be construed according to the method of accounting upon the basis of which the net income is computed under this Part.
The phrase is not defined either in section 122 itself or in the regulations issued thereunder. Neither do we think the legislative history of the section which is analyzed in the taxpayer's briefs and which we have diligently studied throws any light on the question.
It is noted that the Revenue Act of 1941 added a new subparagraph (2) to section 23(c) of The code permitting a direct deduction for excess profits taxes paid or accrued within the taxable year. Thereafter, section 105 of the Revenue Act of 1942 withdrew this deduction and at the same time added the new provision— section 122(d)(6) which is in question here. A comparison of section 23(c) with section 122(d)(6) follows.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(c) TAXES GENERALLY.
(1) ALLOWANCE IN GENERAL.— Taxes paid or accrued within the taxable year, except
(2) EXCESS-PROFITS TAX UNDER CHAPTER 2E— SPECIAL RULES.— For the purposes of this subsection, in the case of the excess-profits tax imposed by Subchapter E of Chapter 2
(A) The deduction shall be limited to the tax imposed for the taxable year, but any portion of such tax paid after the taxable year shall be considered as having been paid within the taxable year;
(B) No reduction in such tax shall be made by reason of the credit for income, war-profits, or excess-profits taxes paid to any foreign country or possession of the United States:
(C) Such tax shall be computed without regard to the adjustments provided in section 734; and
(D) Such tax, in the case of a consolidated return under section 730, shall be allocated to the members of the affiliated group under regulations prescribed by the Commissioner, with the approval of the Secretary.
(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, subject to the following rules
(A) No reduction in such tax shall be made by reason of the credit for income, war-profits, or excess-profits taxes paid to any foreign country or possession of the United States;
(B) Such tax shall be computed without regard to the adjustments provided in section 734; and
(C) Such tax, in the case of a consolidated return for excess-profits tax purposes, shall be allocated to the members of the affiliated group under regulations prescribed by the Commissioner, with the approval of the Secretary.
It will be seen that Rule (A) of section 23(c)(2) which had the effect of putting all taxpayers, regardless of cash or accrual basis, on an accrual basis as far as the excess profits tax deduction was concerned, was omitted from the new section 122(d)(6). The taxpayer here infers from this that Congress must have intended not to place all taxpayers on an accrual basis. We do not clearly see how this inference helps the taxpayer, since it can be just as effectively argued as an inference that the omission was intended to place each upon its method of accounting, though it may be true, as taxpayer says, that this might lead to inequitable results since accrual basis taxpayers would normally not be in position to accrue an excess profits tax liability in a loss year. However that may be, the omission is unexplained in the legislative history and we must take the section as we find it.
This controversy has been anticipated by writers on tax problems. See J. K. Lasser, Excess Profits Tax Controversies, New York University Fourth Annual Institute on Federal Taxation, 806, 808, where he says with reference to section 122: ‘There is also some confusion as to the adjustment to be made for excess profits taxes 'paid or accrued within the taxable year.’ This adjustment increases the net operating loss carryover. Some say that the adjustment is ordinarily available only to cash basis taxpayers, since no excess profits taxes would accrue in the year of the net operating loss except in very rare cases. But others argue strenuously that this would be an undue discrimination against accrual basis taxpayers, and that the words 'paid or accrued' permit accrual basis companies to make the adjustment for taxes accrued during the prior year but paid during the year of the net operating loss. This could produce very odd results in some cases, and the question will have to await further clarification.‘Also see footnote to Jacquin D. Bierman. Excess Profits Net Income for the Current Taxable Year, New York University Tenth Annual Institute on Federal Taxation, 231, at page 24: ‘It might be noted, in passing that cash basis taxpayers can no longer add to the net operating loss the excess profits tax paid during the year of the loss. See Section 304(e) of Excess Profits Tax Act of 1950 repealing Section 122(d)(6) for years ending after June 30, 1950.‘ (Emphasis added.)
To bolster its position that ‘paid or accrued‘ should be given a broader construction than merely referring to accounting systems, taxpayer cites Commissioner v. Clarion Oil Co., 148 F.2d 671, reversing 1 T.C. 751, which involved, among other issues, the interpretation of the terms ‘paid or accrued‘ as used in the Personal Holding Company provisions of the Internal Revenue Code. See sections 505(a)(1) and 507(a). We think the rule there applied rests upon the peculiar nature of the problem of determining the undistributed income on which the penalty tax was levied and should not be extended to the present controversy. In passing, we point out that only recently has this Court concluded to follow Commissioner v. Clarion Oil Co., supra, Wm. J. Lemp Brewing Co., 18 T.C. 586.
Despite taxpayer's belief that the present case is one of first impression, the Commissioner cites and relies on Estate of Julius I. Byrne, 16 T.C. 1234. One of the issues in that case was petitioner's claim under section 122 that its net operating loss carry-back from 1945 should be increased by the amount of its excess profits taxes for 1944 which were paid in 1945. This claim was based on petitioner's allegation that its returns were filed on the cash basis. We held that petitioner had failed to prove it was on the cash basis, and ‘as a consequence, it has failed to show that it is entitled to deduct the excess profits taxes for 1944 in computing the 1945 carry-back. It did not owe any excess profits taxes for 1945 and did not accrue any.‘ In other words, an accrual basis taxpayer cannot increase its net operating loss carry-back for a particular year by adding in the amount of excess profits taxes paid in that year on its liability for the previous year. This case seems to us squarely to confirm the Commissioner's contentions here, and we hold that in making the computations called for under section 122(d)(6) the phrase ‘paid or accrued‘ should be construed according to the method of accounting upon the basis of which taxpayer's net income is computed.
This would dispose of the case were it not for taxpayer's alternate contention with reference to the amounts tendered to the collector in 1947. As to these amounts taxpayer argues, that, accepting the interpretation we have put on the controversial phrase, nevertheless, the amounts paid to the collector in 1947 were properly accrued in that year notwithstanding they represented additional excess profits taxes for prior years. The argument goes that the additional taxes were in dispute— those for 1943 by virtue of the petition filed with this Court— those for 1944 because their amount depended upon a recurring issue present in the Tax Court case, and those for 1945 because excess profits credits and franchise taxes for that year were not knowable until the disputes for the prior years had been resolved, and further, that the amounts received by the collector on September 29, 1947, constituted tax payments which an accrual basis taxpayer was required to deduct not later than the date of payment.
We think the Commissioner must be sustained on this point, even though taxpayer's liability for 1943 was contested by the filing of a petition in this Court. True, that effectively postponed its right to accrue the contested liability under the principles enunciated in Dixie Pine Products Co. v. Commissioner, 320 U.S. 516. And it is established that when an accrual basis taxpayer pays all or part of the contested liability, that taxpayer is required to deduct the amounts paid in the year of payment. Chestnut Securities Co. v. United States (Ct. Cl.), 62 F.Supp. 574; Lehigh Valley Railroad Co., 12 T.C. 977.
The troublesome point is whether the amounts tendered to the collector on September 29, 1947, representing estimated additional taxes for 1943, 1944, and 1945 constituted ‘tax payments‘ or ‘taxes paid‘ in 1947 and were thus properly deductible in 1947. We are of the opinion the answer should be ‘no.‘
As far as the amount for 1943 is concerned the taxpayer concluded that an acceptable formula for settling its Tax Court case had been found. But the amount determined pursuant to the formula was turned over to the collector in 1947 and deposited by him in a ‘suspense account.‘ The Tax Court case was not be this means settled or determined. Further conferences were held respecting the pending settlement after the formula was arrived at, and as late as November 6, 1947, the Technical Staff was recommending defense of the case to the Division Counsel. Both the taxpayer and the Commissioner were still free to pursue the contest of the 1943 liability and neither was foreclosed on that score at least till the stipulation disposing of the case was signed on February 24, 1948, after the Technical Staff had recommended that this be done on February 20, 1948. Under the facts of this case petitioner is not entitled to deduct the amount tendered for 1943 taxes in 1947.
Nor does the record before us furnish for allowing taxpayer to deduct in 1947 the amounts tendered to the collector purportedly representing additional excess profits taxes for 1944 and 1945. The taxpayer filed no amended returns showing greater liability in income and excess profits taxes for 1944 and 1945 and no deficiencies in tax for either of those years were asserted or determined by the Commissioner until after the close of fiscal 1947. The most that can be said is that an audit was under way involving those years. True, it probably appeared to the taxpayer that there would be additional taxes due, but nothing definitive had developed. The revenue agent's report covering 1944 and 1945 was not forwarded to taxpayer until August 25, 1948. In these circumstances the taxpayer cannot take deduction for these amounts in 1947. See Rosenman v. United States, 323 U.S. 658 and Roles v. Earle (C.A. 9, 1952), 195 F.2d 346, which indicate that none of the amounts tendered in 1947 and placed in the suspense account in that year constitute ‘taxes paid.‘ We accordingly hold that the amounts paid over by taxpayer to the collector in 1947 cannot be deducted in that year.
The parties are agreed that our decision as to the principal amounts involved will govern the treatment to be accorded the interest payments made and consequently no discussion of that question will be necessary.
With reference to issue 4 set out in the preliminary statement hereto, petitioner states on brief that it, as well as issues 1 and 2, turns ‘upon the meaning to be placed on the same identical phrase,‘ i.e., ‘paid or accrued.‘ The Commissioner in his brief has addressed no argument specifically to this issue and we take it that the interpretation which we have above given to the critical phrase will also dispose of this question.
Reviewed by the Court.
Decision will be entered under Rule 50.