decided: July 17, 1951.
STOW MFG. CO., INC.
COMMISSIONER OF INTERNAL REVENUE.
Before SWAN, Chief Judge, and AUGUSTUS N. HAND and L. HAND, Circuit Judges.
L. HAND, Circuit Judge.
This appeal (petition to review) challenges the validity of the assessment of a deficiency in the taxpayer's excess profits tax for the year 1942. The taxpayer is a corporation which makes "flexible shafting," and which in 1942 had contracts with the United States Navy to supply it with that article. During the year 1943 it entered into "renegotiation" with the Navy under the Renegotiation Act*fn1 for the repayment of a part of what it had received from the Navy under the terms of its contracts. The negotiations ended in a contract between it and the Secretary of the Navy on June 1, 1943, in which it was agreed that the taxpayer had received excessive profits to the amount of $350,000, but as the revenue agent in charge at Buffalo allowed a credit of $280,000 as the taxes properly apportioned to the excess, the Secretary "allowed" it as a credit against said $350,000, leaving a net debit of $70,000 which the company paid. The renegotiation contract declared that it was to be "a final conclusive determination of the excessive profits for all fiscal periods of the Contractor up to and including December 31, 1942, and * * * full discharge of all liability * * * to refund or repay * * * excessive profits" and that it "shall not be modified by any officer * * * of the United States" except for reasons not here relevant. Upon examination of the corporation's tax return for 1942 the Commissioner of Internal Revenue decided that the credit allowed was too large by $27,000 and assessed that sum as a deficiency for the year 1942. The taxpayer does not challenge the correctness of the tax as finally assessed; but it relies upon the renegotiation contract as a final and definitive liquidation, not only of the gross amount of excess profits, but of credits to which it was entitled; it asserts that the Treasury had no power to assess it for a tax deficiency, based upon a smaller credit. The Commissioner does not question the finality of the amount of excess profits agreed upon between the Company and the Secretary, but he does challenge the amount of credit deducted in reaching the balance due. He says that the credit in such cases is only provisionally liquidated, and that it is to be finally computed like any other tax liability. This position the Tax Court affirmed in banc, and the taxpayer appealed. The parties are in accord as to the figures involved.
We agree that it was the purpose of the Renegotiation Act to provide a summary procedure by which a contractor, who was compelled to repay as excess profits part of what he had received under the terms of his contract, may set off against that amount such part of the taxes as had been levied upon the excess. Moreover, the Commissioner agrees that the taxpayer is not obliged to pay the gross excess profits "eliminated" and sue to recover the tax he has paid as an overpayment. Not only is that no more than obvious justice, and presumably serves to promote speedy settlements; and in any case the statute is peremptory. It seems to us in entire accord with the purpose of the statute that the tax credit should be regarded as fixed only provisionally and tentatively, leaving to both sides the opportunity to correct any errors that may creep into the inevitably summary negotiations of the settlement. It was unlikely that a later examination would disclose that the amount actually due from either side would be seriously crippling; yet it was by no means unlikely that the ad hoc liquidation might turn out to be wrong. That was not true as to repayment of excess profits: first, the secretary of the department concerned would be familiar with all the circumstances of the work performed; second, the determination of how much of the contract price was "excess profits" was in any event a subject matter not really justiciable at all, unlike the question as to what credits were properly "allowable" upon them when fixed. Therefore it is reasonable to suppose that Congress may have meant the contracts to be conclusive as to excess profits, but not conclusive as to "allowable credits." Be that as it may, it is indubitable that, certainly as to contractors, Congress did make just that distinction.
Section 403(c)(3) of the Renegotiation Act directed the renegotiating officer to "allow" the contractor a "credit" for taxes "as provided in section 3806" of the Internal Revenue Code; a section which had three "subsections." Subsection (a) (1) provided that when in renegotiation a part of what the taxpayer received under his contract shall be "eliminated" and he has been required to pay it back, that part of the "contract * * * price" shall be "reduced by the amount * * * eliminated." Subsection (b)(1) gave a "credit" against so much of the excess profits as are "eliminated," consisting of "the amount by which the tax * * * is decreased" by the elimination. It might well be, if this somewhat obscure language were all, that once the amount of the tax had been "decreased by reason of" eliminating part of the excess profits, that ended the matter. However, subsection (c) precludes such an interpretation of subsections (a)(1) and (b) (1). It consists of two sentences, of which the first declares that, once a renegotiation credit has been "allowed" to a contractor, it shall be the final allowance of any "credit" to be allowed against the repayment of excess profits for that particular year. That sentence, if taken alone, might be thought to bar all reconsideration of the credit "allowed" though it had been too small. Be that as it may, the second sentence of subsection (c) shows that a renegotiation contract does not bar the contractor from showing that the credit "allowed" was less than that "allowable," or from treating the difference as an overpayment, to be recovered as such. Thus although the contractor must pay the balance fixed in the renegotiation contract, he nevertheless retains his remedy to obtain the repayment of that part of the excess profit which was denied him because of the too low credit allowed. Against him at any rate the renegotiation settlement is not a final liquidation of taxes, but only provisional and tentative. So far, the statute conforms aptly with the purpose of Congress to effect speedy settlements, and yet not to cut off the rights of contractors who may be willing to cooperate in that aim. The amount of the "excess" they must agree to irrevocably; the credit for taxes are not irrevocably concluded.
To this the taxpayer at bar answers that § 403(c)(4) declares that "Any such agreement" - that is, any agreement "for the elimination of excessive profits and for the discharge of any liability for excessive profits" - "shall be final and conclusive according to its terms", and that it "shall not be annulled, modified, set aside, or disregarded in any suit, action, or proceeding." The "liability for excessive profits" does not, it says, mean the minuend of an equation of which the credit for taxes is the subtrahend; it means the difference - the sum that the contractor must pay. Section 403(c)(3) is though to give plausibility to this argument by saying that "In determining the amount of any excessive profits to be eliminated hereinunder the Secretary shall allow" credit for taxes, and by making immutable such contracts. But the credit he must allow is that "provided in section 3806," and the credit is to be fixed therefore under subsection (c) of that section and certainly the renegotiation is not immutable as to the contractor. The only escape from construing the finality of the contract with a similar condition, when the credit "allowed" is more than that "allowable," is by the following argument. Although Congress has provided for contractor's recovery when the "allowable" credits were less than those "allowed," concededly it has not granted in terms a correlative privilege to the Treasury to treat as a deficiency so much of the taxes "allowed" as were not "allowable." That choice must have been deliberate: expressio unius, exclusio alterius. So far as this argument has cogency, it depends upon the hypothesis that without the second sentence of subsection (c) neither the contractor nor the Treasury would have had any means of correcting the error. So far as concerns the contractor, it is true that as a taxpayer he would have an action*fn2 to recover his payment of any taxes which were "illegally assessed or collected * * * [or] unjustly assessed * * * or in any manner wrongfully collected." However, the taxes in question were not illegally assessed or unjustly assessed or wrongfully collected; true, it has turned out that by cutting down the income on which they were computed, it would be unjust and illegal to collect them; but §§ 3770 and 3772 do not, at least literally, apply to the contractor's situation. Certainly the second sentence of subsection (c) was at least highly desirable in order to make the remedy clear. The Treasury on the other hand needed no similar added remedy. Section 3760 of the Internal Revenue Code*fn3 provides for final "closing agreements" "relating to the liability * * * in respect of any internal revenue tax"; but such agreements must be approved by at least an Assistant Secretary of the Treasury. No one pretends that there was any such agreement in the case at bar; the taxpayer rests its case, as we have already said, upon the proposition that none was necessary because the renegotiation contract finally fixed the "balance" due, and that its finality was not, as we think, confined to the excess profits which must be returned, leaving to the usual procedure the final liquidation of the "credit" "allowable" upon the income as revised. Since therefore the renegotiation contract did not impair any of the means at the disposal of the Treasury for correcting too large a "credit," the inference, inherently feeble, is shown to be baseless that the failure to give an added remedy to the Treasury indicated an intention to relieve mistakes only when they favored the taxpayer.