The opinion of the court was delivered by: RYAN
Defendant moves for summary judgment in this suit filed by the Standard Oil Company (New Jersey) for refund and recovery of $ 2,181,489.88, representing interest paid computed on consolidated excess profits taxes for the years 1943 and 1944, cancelled by an excess profit credit.
On the audit of the consolidated excess profits tax returns filed by Standard Oil and its affiliated companies for 1943 and 1944, it was determined by the Commissioner that Standard Oil's excess profits tax deficiencies for these years were extinguished by an excess profits tax credit carryback from 1945. It was also ruled, however, that since this cancellation of the deficiencies in excess profits tax was effected by operation of a credit carryback, it did not relieve Standard Oil from the obligation to pay interest on these deficiencies for the period prior to cancellation. Interest on these 'potential deficiencies' for the years 1943 and 1944 was assessed. See Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S. Ct. 386, 94 L. Ed. 346 (1950).
Standard Oil maintains that deficiencies in excess profits tax for the years 1943 and 1944 were cancelled not by a credit carryback from the year 1945 but rather by excess profits credit carryovers from the years 1941 and 1942, thus precluding the arising of any potential deficiency. This contention is based on taxpayer's claim that it had sustained certain 'war losses' in the year 1941, and that although it had elected not to claim such 'war losses' in computing its 1941 normal tax net income under Chapter 1 of the Internal Revenue Code of 1939 for income tax purposes, it could claim such 'war losses' in computing its 1941 normal tax net income under Subchapter E of Chapter 2 of the 1939 Code for excess profits tax purposes. Computed thus, Standard Oil contends that it had a sufficiently large excess profits tax credit carryover from the year 1941 to offset the excess profits tax liability for 1943 and 1944.
The Commissioner, on the other hand, takes the position that Standard Oil could claim 'war losses' in computing normal tax net income for excess profits tax purposes only to the extent that it had claimed such 'war losses' in computing normal tax net income for income tax purposes. Since no part of the war losses now asserted were claimed for income tax purposes for 1941, the Government contends that they may not now be claimed as war losses for excess profits tax purposes for that year. The essence of the argument of the Government is that under the statute taxpayer was required to elect whether it would take the war loss deduction from income tax and that having decided not to do so, it is now entirely barred from applying this as a deduction to excess profits tax computations.
Taxpayer's argument is that this deduction for war losses was required under the statute to be allowed as a matter of law and that its failure to take it did not and should not operate to deprive it of the benefits flowing from these war losses. This is so, Standard Oil argues, because the Commissioner's failure to allow this as a loss sustained on the last applicable date under the statute constituted a mistake of law which should now be rectified by permitting its deduction against excess profits income.
It is a fact that Standard Oil, an March 14, 1942, filed with the Collector of Internal Revenue a tentative federal income tax return for the year 1941 disclosing a total tax of $ 2,366,608.00; and that on June 13, 1942, Standard Oil filed its final income tax return for the year 1941, disclosing therein a total tax due of $ 2,191,177.31.
It also appears undisputed that Standard Oil Company of New Jersey (hereinafter referred to as 'Esso') is a wholly owned subsidiary of Standard Oil; that for the year 1941, Esso filed its income tax return on a separate return basis but joined with its parent corporation Standard Oil, in filing a consolidated excess profits tax return for such year; and that Esso's tentative and final income tax returns for 1941 were filed on or about the same dates as its parent's returns and showed a total tax due of $ 8,303,184.00 on the tentative return and $ 8,296,778.89 on its final return.
The final consolidated excess profits tax returns filed by Standard Oil on behalf of itself and its affiliated companies including Esso, showed no excess profits liability for the year 1941. None of these returns claimed war loss deductions simply because the amendment to the statute allowing them had not yet been passed.
On December 15, 1942 (following year 1941 claiming as a deduction war Section 13 in October, 1942) Esso filed an amended income tax return for the year 1941 claiming as a deduction war losses sustained in 1941 in the amount of $ 6,801,094.50. A revision of that figure was allowed as a deduction in computing Esso's normal tax net income for 1941 for both income and consolidated excess profits tax purposes. Subsequently and in 1944, Standard Oil, on behalf of itself and its affiliated companies (Esso included), filed a consolidated excess profits tax return for the year 1943, claiming an excess profits credit carryover from 1941 based in part on alleged 'war losses' of $ 50,000,000. suffered in 1941, no part of which included the war loss of $ 6,801,094.50 which Standard Oil had claimed when computing its 1941 normal tax net income. This claimed credit carryover from 1941 eliminated according to this computation, any excess profits tax liability for 1943. On 1945, Standard Oil on behalf of itself and its affiliated companies filed a consolidated excess profits tax return for 1944 similarly claiming an excess profits credit carryover from the year 1942, arising in part from the same claimed $ 50,000,000 war losses of 1941, which carryover also eliminated any excess profits tax liability for the year 1944.
In 1947, in the course of the audit of Standard Oil's 1941 income tax return, the Internal Revenue Agent in charge of the audit of Standard Oil's tax returns, specifically called the attention of Standard Oil to the fact that no deduction for the $ 50,000,000. of alleged 'war losses' had been claimed by Standard Oil in computing normal tax net income for income tax purposes for the year 1941. He also pointed out to Standard Oil that, if it claimed such alleged 'war losses' as deductions in computing normal-tax net income for the year 1941, the Internal Revenue Service would, subject to substantiation of such alleged 'war losses', allow them as deductions in computing normal-tax net income for 1941. Standard Oil states that it did not claim this item of war losses in computing normal-tax net income because 'at that time the excess profits credit carryover from 1945 was known and was more than sufficient in amount to eliminate any excess profits tax in 1943 and to eliminate any problem incident to determining and reporting war loss recoveries.' As the head of its tax department explained: in 1947, at the time of the audit of the 1941 income tax return, the allowance of the war loss for excess profits tax purposes 'did not appear to be of any consequence' because even without taking into account any deduction for the war loss, Standard Oil's consolidated net income during the war years did not exceed the minimum return which any taxpayer was permitted to earn without liability for excess profits tax. In any event, there was sufficient excess profits credit carryback from 1945 to take care of any excess profits tax for 1943, if the carryover for 1941 were not allowed.
In 1950, the Supreme Court of the United States affirmed the District Court for the District of New Jersey which had held that the wiping out of a tax liability deficiency after assessment by a carryback did not wipe out the liability to pay interest from the due date to the date of the assessment (1948). Seeley Tube & Box Co. v. Manning, D.C., 76 F.Supp. 937; affd. 338 U.S. 561,
70 S. Ct. 386, 94 L. Ed. 346.
In 1954, the Collector sent taxpayer a notice of assessment for interest due on the potential deficiencies for the years 1943 and 1944 from their respective due dates to March 15, 1946 the date on which these deficiencies abated by the application of the unused excess profits credit carryback from the year 1945. The deficiencies arose out of the disallowance of the war losses which taxpayer had used to effect an unused excess profits credit carryover from 1941.
Section 710(c) as amended by I.R.A. of 1942 permitted adjustments to be made in the taxable year by way of carrybacks of unused excess profits credits from the two subsequent years in addition to carryovers from the two preceding taxable years, and defined 'unused excess profits credits' as the excess in a taxable year of the excess profits tax credit over the excess profits net income for such year. (Sec. 710(c)(2))
Standard Oil, therefore, in computing its consolidated adjusted excess profits net income for the years 1943 and 1944 could avail itself of the benefits of an unused excess profits tax credit carryover, if any, from the year 1941 (and, in turn, any resultant carryover from the year 1942).
There is no dispute concerning the amount of Standard Oil's excess profits tax credit for the year 1941. But there is dispute concerning the amount of Standard Oil's excess profits net income for the year 1941 and specifically whether or not such excess profits net income could be reduced by the alleged 'war losses' (never claimed as deductions by Standard Oil in computing ...