The opinion of the court was delivered by: LEVET
The plaintiff-taxpayer, Time, Inc., seeks by this tax refund action to recover $ 61,451.40 assessed by the Commissioner as interest on an income tax deficiency of the taxpayer for the year 1944. Time paid the interest assessed and preserved its right to recover the amount by the timely filing of claims for refund. Both the plaintiff and defendant move for summary judgment.
The entire dispute centers about the date on which interest was to commence. The Commissioner, relying upon the second parenthetical exception of Section 292(b),
assessed interest on $ 683,313
of an income tax deficiency of $ 952,005 from March 14, 1945, the due date of Time's 1944 income tax return. Time claims the second parenthetical exception is inapplicable and the general rule of Section 292(b) precludes the assessment of interest prior to September 14, 1946, one year after Time filed its application for excess profits tax relief under Section 722. The interest assessed between March 15, 1945 and September 14, 1946 amounts to $ 61,451.40 and is the subject of this action.
While there is no dispute as to the facts, their exposition must await a brief, but necessary, explanation of the interrelationship of the excess profits and income tax laws in effect in 1944.
The World War II Excess Profits Tax was designed, as its name implies, to tax the abnormally high profits resulting from the large governmental expenditures made for the national defense. H.R.Rep.No.2894, 76th Cong. 3d Sess., 1-2. The basic philosophy of the excess profits tax was to tax all corporate profits and gains over and above what Congress deemed to be a fair and normal return for the particular corporate business. Since it was imposed in addition to the regular income tax, the basic statutory scheme
in force for the taxable year 1944 was to effectively segregate a corporation's income into two portions, one subject to the normal income tax, the other to the excess profits tax. This segregation was accomplished by permitting a credit against the corporation's net income of an amount which was to approximate what Congress deemed a fair and normal return. Denominated an 'excess profits credit,' it determined the amount of net income subject to the income tax but not to the excess profits tax.
Choosing one of the alternate methods the statute provided, Time attempted to determine its excess profits credit by computing its average earnings during the base period of 1936 through 1939. This amount, called the average base period net income, or, as among the initiate, ABPNI, was to be a credit against the earnings subject to the excess profits tax. Simply stated, this excess profits credit was the amount of income subject to the income tax but not to the excess profits tax. By subtracting from its net income the excess profits credit, a corporation determined the amount subject to the excess profits tax.
Congress, foreseeing that the use of an ABPNI for the base period 1936 through 1939 might prove to result in 'an excessive and discriminatory tax,' provided in Section 722 a procedure by which a taxpayer could seek an increase in its excess profits credit by claiming a constructive average base period net income, CABPNI. The allowance to the taxpayer of any relief under Section 722 would have the automatic effect of reducing its net income subject to the excess profits tax while at the same time increasing the amount of income subject to the income tax. Simply stated, the allowance of Section 722 relief would invariably result in an excess profits tax overassessment and an income tax deficiency.
In conjunction with Section 722, Congress permitted the taxpayer in Section 710(a)(5) to defer the payment of 33% Of the amount of tax relief which would result from the Section 722 relief.
Briefly, the facts are as follows: On September 14, 1945, Time filed its final income and excess profits tax returns for the calender year 1944. Its income tax return reported the following amounts:
Adjusted net income $ 13,515,517
Less: Adjusted excess profits
Net Income $ 10,277,037
Other Deductions 211,718 $ 10,488,755
Normal-tax net income $ 3,026,762
Income Tax Due $ 1,217,340
Excess Profits net income $ 13,136,375
Less: Excess Profits Credit $ 2,849,338
Adjusted excess profits net income $ 10,277,037
In determining its excess profits tax liability, Time used an excess profits credit based on its average base period net income (ABPNI) pursuant to Section 713(a)(1). Simultaneously with the filing of its 1944 tax returns, Time filed an application for relief of its 1944 excess profits taxes under Section 722. Alleging that a significant change in the character of its business during the base period of January 1, 1963 through December 31, 1939 made its actual ABPNI an inadequate standard of normal earnings, Time claimed a constructive average base period net income (CABPNI) of $ 8,959,000. The reduction in excess profits tax which would have resulted if Time's requested relief had been granted would be $ 5,171,862. As was permitted under Section 710(a)(5), Time elected to defer $ 1,706,714 (one-third of $ 5,171,862) of its excess profits tax liability for 1944 pending final determination of its Section 722 application.
On December 30, 1948, Time filed a refund claim for the year 1944, based on a claimed carryback from the year 1946 of an unused standard excess profits credit.
The claimed carryback from 1946 was computed as follows:
1946 Excess profits net
income $ 474,436
Excess profits credit 2,709,666
Unused excess profits credit $ 2,235,230
In computing the excess profits credit, Time claimed an average base period net income (ABPNI) of $ 3,115,743. (Ex. B)
On October 12, 1949, Time filed a second application for relief under Section 722, denominated an 'amended and supplemental' application, for the year 1944. In this application Time sought Section 722 relief for the year 1946 and sought to have any resulting 1946 unused excess profits credit carried back and applied to decrease its adjusted excess profits net income for the year 1944. On this application Time claimed a constructive average base period net income (CABPNI) for the year 1946 of $ 8,936,235 rather than an ABPNI of $ 3,115,743 used on its 1948 refund claim. On Schedule A-6.2 Time recomputed its excess profits net income for 1946 utilizing the CABPNI as follows:
Excess profits net income $ 474,436
Less: Excess profits credit --
based on CABPNI 8,239,134
Unused excess profits
credit for 1946 $ 7,764,698
On November 26, 1956, the Excess Profits Tax Council made a final determination that Time, under Section 722, was entitled to a CABPNI for the years 1942 through 1946 of $ 5,500,000. This determination had the following effects on Time's income and excess profits tax liability for 1944:
(1) Time's 1945 application for relief under Section 722 resulted in a reduction from excess profits tax liability for 1944 in the aggregate amount of $ 1,975,406. This amount was first applied to eliminate the liability of $ 1,706,714 in excess profits tax which plaintiff had deferred under Section 710(a)(5) on its 1944 return, resulting in a refund or credit of excess profits tax for 1944 of $ 268,691 ($ 1,975,406 minus $ 1,706,714). Correspondingly, there resulted an income tax deficiency of $ 952,005 for the year 1944. The income tax deficiency resulting from the grant of Section 722 relief to Time for 1944 exceeded the excess profits tax overassessment by $ 683,313.
(2) The increase in the 1946 unused excess profits credit by virtue of a CABPNI of $ 5,500,000 rather than an ABPNI of $ 3,115,743, resulted on the carryback of the unused credit to 1944 in an overassessment of $ 1,936,612 of excess profits tax for the year 1944 and in an income tax deficiency for 1944 of $ 906,017.
Taken together, the applications resulted in an excess profits tax refund or credit of $ 2,205,303 ($ 1,936,612 plus $ 268,691) and an income tax deficiency of $ 1,858,022 ($ 952,005 plus $ 906,017).
COMMISSIONER'S INTEREST ...