The opinion of the court was delivered by: BICKS
In this action for refund of Federal income tax and declared value excess profits tax
for the fiscal year ended January 31, 1942, plaintiffs have moved for summary judgment and the defendant has cross moved for similar relief. The determinative facts having been in the main stipulated, the decision turns upon the construction and applicability of the Regulations promulgated by the Commissioner of Internal Revenue under Section 22(d) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 22(d).
(hereinafter referred to as Macy) owned and operated large retail department stores. For many years prior to the fiscal year ended January 31, 1942 Macy employed the so-called retail method of pricing or evaluating its inventories; a method approved
by the Treasury Department and in general usage by department store operators. Under that method inventories are taken in terms of selling price dollar values rather than by specific items of merchandise with the consequence that goods in a single department are treated for inventory purposes as being entirely fungible, although in fact they may, and generally do, differ considerably as to type, quality, and price.
In costing a closing inventory it becomes necessary to resort to an assumption as to what goods with what costs have been sold during the year and what goods with what costs remain on hand. One of two assumptions might be used: (1) 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 purchased last, the so-called FIFO method; or (2) that an article of merchandise 'last in', i.e., the article last purchased was the first sold and that the articles left in the closing inventory were the articles first purchased, the so-called LIFO method. Neither assumption can be entirely true; but it is essential to use one or the other as the basis for the retail method.
As long as the price structure remains relatively stable the FIFO method gives satisfactory results. In an era of inflation the method of inventory valuation looms importantly in determining taxable income. During such a period, the cost of goods sold, if values as reflected in the opening inventory are employed, will be lower and the gross profit on sales greater than would be the case if the cost of goods sold were determined under the LIFO method. Under FIFO, in periods of rising prices, taxable income may include profits that result merely from the increase in the value of the inventory on hand; whereas under LIFO such book profits are excluded. Increase in corporate tax rates, the steadily increasing rise in prices and the depreciating value of currency that accompanied the disturbed conditions in Europe immediately preceding World War II underscored the importance of this problem. The Congress recognized it by granting taxpayers permission to elect to use the LIFO method. As first enacted
permission to use the elective method was confined to taxpayers in certain industries, e.g., producers and processors of certain non-ferrous metals and tanners of hides and skins.
In 1939 this permission was extended to all taxpayers.
Section 22(d) of the Revenue Act of 1939, so far as here pertinent, provides as follows:
'(d) Method of inventorying goods. (1) A taxpayer may use the following method (i.e., the elective method) in inventorying goods specified in the application required under paragraph (2): (A) * * * (B) * * * (C) * * *
'(2) The method described in paragraph (1) may be used --
'(A) Only in inventorying goods * * * specified in an application to use such method filed at such time and in such manner as the Commissioner may prescribe; and
'(B) Only if the taxpayer establishes to the satisfaction of the Commissioner that the taxpayer has used no procedure other than that specified in * * * paragraph (1) in inventorying (to ascertain income, profit, or loss, for credit purposes, or for the purpose of reports to shareholders, partners, or other proprietors, or to beneficiaries) such goods for any period beginning with or during the first taxable year for which the method described in paragraph (1) is to be used.
'(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.'
The provision in subdivision (2)(B), precluding the use of the elective method by a taxpayer who during the first taxable year for which it is sought to be used employed some other method '* * * for the purpose of reports to shareholders * * *', was amended in 1942
retroactively to taxable years beginning after December 31, 1938, to interdict the use of the elective method by taxpayers who used some method other than LIFO '* * * for the purpose of a report or statement covering such taxable year'. The effect of the amendment was to make the elective method available notwithstanding the issuance of an interim report prepared on another basis.
In December 1939 the Commissioner of Internal Revenue promulgated Regulations pursuant to Section 22(d). From almost the very outset and until 1948 he and other representatives of the Treasury Department and the Bureau of Internal Revenue took the position that the statutory grant of leave to use the LIFO method was not applicable to users of the retail method. The Commissioner's rationale, as stipulated by the parties, was that since users of the retail method determined their inventories in terms of dollar values rather than in terms of specific goods
the specificity of the inventoried goods required by Section 22(d), I.R.C. was lacking. Accordingly, in view of the then thinking of the Commissioner and other representatives of the Treasury Department,
the Regulations did not make the necessary provisions to permit application of LIFO to users of retail method.
In 1942 Macy and other retailers, as well as representatives of the National Retail Dry Goods Association, held conferences with representatives of the Treasury Department and the Bureau of Internal Revenue for the purpose, among others, of persuading those agencies to abandon their position that users of the retail method did not fall within the class of taxpayers qualified to adopt the elective method. In anticipation that their efforts would meet with success, the Macy management decided to adopt LIFO for the purpose of its Annual Report to its Stockholders for the fiscal year ended January 31, 1942.
For the purposes of said Report the opening inventories were arrived at by use of the retail method and the LIFO adjustments in connection with the closing inventories were based upon an index of retail price changes prepared by the National Industrial Conference Board. Plaintiff's regular books of account were kept on the same basis. The taxes shown on its tentative United States Income and Declared Value Excess Profits Tax Returns for such fiscal year which were filed in April 1942 likewise were computed on the LIFO method. The final returns, timely filed in July 1942,
were prepared under the LIFO method, but the taxable incomes shown thereon were adjusted to what they would have been had the inventories been valued according to the retail method without the application of LIFO thereto.
By so doing Macy did not abandon its resolve to adopt LIFO. Its every act evidences the contrary. Witness: the numerous conferences with highly placed representatives of the Treasury Department and Bureau of Internal Revenue;
the action of the Macy Executive Committee
and of the Macy Board of Directors;
and the use of the LIFO method in computing its earnings for the purpose of the prospectus dated May 25, 1942 relating lating to a $ 12,000,000. issue of 2 1/2% Sinking Fund Debentures.
Furthermore, when the final returns were filed Macy was ineligible to adopt the elective method of inventory valuation since it had issued a semi-annual report to stockholders during the fiscal year 1942 on the old basis. As already indicated the Regulations were amended in December 1942 removing this disqualification. However, the amended Regulations again failed to make any provision for adjustment to the LIFO basis of inventories taken on the retail method.
The Commissioner persisted in his position adverse to the views urged upon him by Macy and other retailers until the Tax Court of the United States decided in Hutzler
that adaptation of the LIFO theory to inventories maintained in terms of dollars was permissible and proper within the provisions of Section 22(d) of the Internal Revenue Code. Thereafter on March 4, 1948, the Commissioner amended the regulations retroactively to all taxable years beginning after December 31, 1938 '* * * in order to adapt the retail inventory requirements of the regulations to the elective inventory principle of Section 22(d) of the Internal Revenue Code as enunciated by the Tax Court of the United States in * * *' the Hutzler case. T.D. 5605, 1948 -- 1 C.B. 16, 17. There then appeared for the first time authorized statistical price indices for use by retailers such as Macy in adjusting inventories taken on the retail method to the LIFO method. I.T. 3904, 1948 -- 1 C.B. 18.
After promulgation of the amended regulations, Macy, in October 1948, filed claims for refund
of so much of the income tax and declared value excess profits tax it paid for the fiscal year 1942 as resulted from the Commissioner's failure and refusal to make the use of LIFO available to it.
Together with each such claim Macy filed an application for the adoption and use of the elective inventory method on the form provided for that purpose by the Treasury Department (Form 970).
Under date of January 15, 1951, Macy addressed a communication to the Commissioner in which rulings were requested to the effect that (i) if its refund claims for fiscal 1942 and subsequent years are finally disallowed, then it made an election to adopt LIFO for the fiscal year ended January 31, 1948 and (ii) the granting of ruling (i) will not jeopardize the claims for refund for the earlier years. Macy received a reply from the Treasury Department dated January 31, 1951, signed 'E.I. McLarney, Deputy Commissioner,' stating in part that under even date the Internal Revenue Agent in Charge, Upper New York Division, New York, is being advised with respect to the position of the Commissioner 'regarding your claims for refund filed upon the above-mentioned basis (use of the LIFO inventory method). Accordingly, the requested rulings will not be issued at this time.' The letter of even date from the Deputy Commissioner to the Internal Revenue Agent in Charge recommended that Macy's right to use LIFO, beginning with the taxable year ended January 31, 1942, be recognized.
There then followed an audit of Macy's tax return for the 1942 fiscal year and a letter from the Internal ...