Babcock & Wilcox Co. v. Pedrick. Babcock & Wilcox Tube Co. v. Pedrick

212 F.2d 645, 45 A.F.T.R. (P-H) 1488, 1954 U.S. App. LEXIS 4469

• Court: Court of Appeals for the Second Circuit
• Decided: April 7, 1954
• Docket: 22865_1
• Status: Published

Opinions

CLARK, Circuit Judge.

These appeals bring up questions concerning the proper method of computing corporate excess profits taxes for the years 1942 and 1943 and of interest upon asserted deficiencies in their payment. The taxpayers’ appeals in both the actions before us present the interesting contention that a corporation may accept a higher tax than the commissioner allows in order thus to take advantage of a higher refund under the statutory postwar refund of 10 per cent herein applicable. And the government’s appeal in the first action, taken for the adminis-tratrix of the estate of a deceased collector who is the defendant of record in both actions, asserts that interest must be separately assessed in favor of the taxpayer and the government upon offsetting excesses and deficiencies in income and excess profits taxes.

The Internal Revenue Code, 26 U.S. C., provides alternative methods of computing excess profits taxes covering the years in question. Section 713 allowed an excess profits credit, in the case of a domestic corporation, of 95 per cent of average net income over a base period. Section 714 alternatively provided for such a credit based upon stated percentages of invested capital. Section 712 (a) directed that the credit to be allowed shall be an amount computed under § 713 or § 714, “whichever amount results in the lesser tax under this subchapter * * Section 26(e) adjusted ordinary income tax to the excess profits tax by in substance relieving of ordinary tax the amount of income subject to excess profits tax; and § 710(a) (1) (B) placed an 80 per cent ceiling on the combined income and excess profits taxes.

Taxpayers The Babcock & Wilcox Company and The Babcock & Wilcox Tube Company, plaintiff and plaintiffs below in these actions for tax refund, found themselves in a position where under either calculation the 80 per cent ceiling of § 710(a) (1) (B) would govern to limit the total tax. But in 1942 an addition was made, by I.R.C. § 780, to the provisions for this tax (originally established in 1940) whereby upon the cessation of hostilities of the then war, a refund of 10 per cent would apply. With an eye to a greater refund the taxpayers so calculated their returns as to maximize that portion of their over-all 80 per cent liability allocable to the excess profits tax and to minimize that due on the ordinary income tax. Their claim for credit under § 780 calculated on this maximized basis was disallowed and they brought these actions. The only difference in this regard in the two actions is that, as is permissible, the taxpayer in the first action relied on the average net income method of calculation, and in the second on the invested capital method.

The plaintiffs’ quite ingenious argument on the issue of tax computation, an argument which Judge Holtzoff rejected below in granting defendant’s motions for summary judgments, presents with some elaboration the contention that Congress, since it was granting these alternative methods of tax computation as a measure of relief to hard pressed taxpayers, must have desired such choice to extend to — and to be operable in reverse, so to speak, in — the application of the tax refund later to be made, in order that full measure of relief be accorded. But we agree with Judge Holtzoff that this hardly rises above the level of supposition, however shrewd, and cannot vary the plain language of the statute. We see little, if anything, to be added to his reasoning and, so far as concerns this issue, accordingly affirm on his opinion, D.C.S.D.N.Y., 98 F.Supp. 548-551.

The question of interest requires more extensive consideration. This is presented only in the first action brought by plaintiff, The Babcock & Wilcox Company, and comes before us upon the defendant’s appeal from the grant of plaintiff’s motion for summary judgment for the refund. It arises as follows: When the collector recalculated the excess profits tax liability of this plaintiff to find an “overpayment” upon its chosen method of computation, he necessarily found a corresponding “deficiency” of like amount in its ordinary income tax. In accordance with the interest provisions of §§ 292(a) and 3771(b) (1), set forth below, he allowed interest on the overpayment and assessed interest on the deficiency. Due to the different dates from which the two computations run, he determined and assessed a net interest liability of $52,621.84, which plaintiff paid and for which it now sues.

It is plaintiff’s position that the government had in its possession at all times all the funds to which it was entitled. Accordingly the overpayment and deficiency were fictitious bookkeeping transactions and the government was in no way injured. Since interest is designed to compensate for lost use of funds, it cannot here apply. This argument found favor in the district court. D.C.S.D.N.Y., 98 F.Supp. 548, 551.

Against this contention based upon equities, the government vigorously urges the specific mandates of the cited statutes. Section 292(a) provides that deficiency interest shall be computed “from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) * * This, for each of the years in question, was the following March 15. Section 3771(b) (1) directs that interest on overpayments shall run “from the date of the overpayment,” which under § 321 infra and Blair v. U. S. ex rel. Birkenstock, 271 U.S. 348, 46 S.Ct. 506, 70 L.Ed. 983, is the date when the total of installments paid exceeds the total tax liability for the year. In our case this was December 15 following each taxable year.

The district judge did not meet this argument by specific rationale or precedent, but relied generally upon the equities, saying: “No money changed hands. The Government was not deprived of the use of any money. To charge the taxpayer with additional interest under the circumstances is obviously unfair and inequitable.” D.C.S.D. N.Y., 98 F.Supp. at page 551. But, however appealing, this is somewhat dangerous ground for the testing of taxes. To many persons various parts of the taxing policy seem unfair, e. g., the taxation of capital gains or the entire scheme of progressive taxation. Compare discussion by Randolph Paul in Book Review of Blum & Kalven, The Uneasy Case for Progressive Taxation, in 67 Harv.L.Rev. 725-731. “The Internal Revenue Code, not general equitable principles, is the mainspring of the Board’s jurisdiction.” C. I. R. v. Gooch Milling & Elevator Co., 320 U.S. 418, 422, 64 S.Ct. 184, 186, 88 L.Ed. 139. And so we must turn to the statutes.

To meet the question of statutory authority plaintiff relies on the broad provisions for statutory setoff and credit on tax overpayment. I.R.C. § 321 provides that if the taxpayer has paid as an installment or in full more than the correct amount “of the tax” the overpayment shall be credited or refunded as provided in § 322; while § 322(a) (1) provides inter alia that overpayment “of any tax imposed by this chapter” shall be credited “against any income, war-profits or excess-profits tax or installment thereof then due from the taxpayer.” Plaintiff asserts that this context shows the reference to “the tax” as necessarily including both forms of taxes and that hence there was here but a single payment due (in installments) to cover both taxes. But the principle of credit allowances here stated is a broad one, so broad in fact as to make clear that it applies after the offsetting amounts are ascertained and not to their ascertainment. Thus it applies as between different forms of tax, Kjar v. United States, 108 Ct.Cl. 119, 69 F.Supp. 406, certiorari denied 332 U.S. 768, 68 S.Ct. 79, 92 L.Ed. 353 (income tax and distilled spirits tax), or as against taxes of different years, Noyes v. United States, 9 Cir., 55 F.2d 870. But it does not and cannot be used to override statutory impositions elsewhere levied, as the cases discussed below (among others) demonstrate. Like considerations apply to the doctrine of equitable recoupment which has been lim-itedly applied both for and against the taxpayer, Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421; Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265; as the later cases strictly restricting application of the doctrine show, it cannot be employed to dissipate specific tax obligations. C. I. R. v. Gooch Milling & Elevator Co., supra, 320 U.S. 418, 64 S.Ct. 184, 88 L.Ed. 139; Rothen-sies v. Electric Storage Battery Co., 329 U.S. 296, 67 S.Ct. 271, 91 L.Ed. 296.¹

Returning therefore to the statutes, we perceive that the issue comes down in essence to the question whether the excess profits tax under the Code may properly be considered as a part of the corporate income tax or whether it is essentially a separate tax. For, once it is determined that the tax is separate, the statutory mandate is clear. The tax each year was due, at least in part, and the deficiency arose on March 15. I.R.C. § 56 (a, b). There was no overpayment to apply to it until December 15. I.R.C. § 321; Blair v. U. S. ex rel. Birkenstock, supra, 271 U.S. 348, 46 S.Ct. 506, 70 L.Ed. 983. Whether, thereafter, § 322 would serve to apply the overpayment to the deficiency or whether interest arose on both, cancelling each other out, is immaterial. For the interest in dispute arose between March and December when no overpayment existed.

But the point of substantial identity of the two taxes (except of course as to rates) appears to be settled against the contention both by the statutes themselves and by the precedents. The excess profits tax and the ordinary income tax are not one, but are made and levied in separate and distinct manner. They are imposed by separate legislation separately enacted. Thus Subchapter E — Excess Profits Tax, §§ 710-783, was added to the Code by Act of Oct. 8, 1940, and was repealed (for future years) on Nov. 8, 1945, 59 Stat. 568, without impairment of the regular corporate income tax. The point is made quite clear on a careful analysis of the background of the legislation made by Judge Chase in Superheater Co. v. C. I. R., 2 Cir., 125 F.2d 514, 516, in finding the background of the excess profits tax in the former capital stock tax and in affirming a ruling of the Board of Tax Appeals that it did not have jurisdiction to redetermine the excess profits tax of a petitioner on a petition to review the determination of a deficiency only in the ordinary taxes of the petitioner for the same period.² Plaintiff objects that this is a matter affecting the jurisdiction of the Board or Tax Court only, and not in point as to an action in the district court; but this is to cite only the ultimate consequence of the decision, and not the persuasive rationale upon which it was based.³

The same reasoning has also been applied in the single other case, where the exact issue before us appears to have been presented. In W. G. Duncan Coal Co. v. Glenn, D.C.W.D.Ky., 120 F.Supp. 948, before Circuit Judge Martin, the issue was, as here, a question of discrepancy amounting to $4,366.29 for 1943 and $8,507.31 for 1944 between the commissioner’s separate computation of interest on excess profits tax deficiencies and income tax overpayments as against the taxpayer’s treatment of both taxes as one and computation of interest only on the net deficiencies due the government. In upholding the commissioner’s position and dismissing the taxpayer’s suit for refund, Judge Martin said: “An analysis of the plaintiff’s computation appears to show that income taxes imposed in Chapter 1 and excess-profits taxes imposed by Chapter 2 have been treated as one type of tax. Since the income taxes and the excess-profits taxes are separate and distinct types of taxes there appear to be no provisions of the Internal Revenue Code to warrant the plaintiff’s treatment of the two types as one tax for .the purpose of computing interest. Interest was properly computed on the several amounts of excess-profits and declared value excess-profits tax deficiencies for each of the fiscal years 1943 and 1944, sought to be recovered. Interest was also computed and allowed on the overpayments of income taxes for the fiscal years 1943 and 1944 and were included in the overassessment determined for the plaintiff.”⁴

This decision, squarely contrary to the position taken below, seems to us persuasive in its reasoning. The concept of separate taxable units is of course a fairly usual one in the revenue law, as we have had occasion to hold only recently with reference to different taxable years. Rosenthal v. C. I. R., 2 Cir., 205 F.2d 505, 511; and see also Helvering v. Pfeiffer, 302 U.S. 247, 58 S.Ct. 159, 82 L.Ed. 231; Arrowsmith v. C. I. R., 344 U.S. 6, 73 S.Ct. 71, 97 L.Ed. 6. So on a taxpayer’s appeal from the commissioner’s determination of a deficiency in tax for 1936, the Board was held without jurisdiction to determine the amount of a 1935 overpayment. C. I. R. v. Gooch Milling & Elevator Co., supra, 320 U.S. 418, 64 S.Ct. 184, 88 L.Ed. 139. In Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346, a taxpayer was held not entitled to a refund of the interest assessed on a tax deficiency which was later abated under the carry-back provisions of the Code by a net operating loss for a later year. Standard Roofing & Material Co. v. United States, 10 Cir., 199 F.2d 607, is to similar purport. In cases such as these the equities appear as strong as in the present case; but in them — as here in our view — the provisions of positive law prevented the abatement. This plaintiff, obviously thoroughly advised, took a calculated risk or tax gamble; having failed, it must pay the collector. Its claim for interest refund must therefore be denied.

On the plaintiffs’ appeals in both actions the judgments must be affirmed; on the defendant’s appeal in the first action the judgment must be reversed and the action remanded for the entry of judgment for the defendant.

1 . Both Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (the single decision by the Court for the taxpayer), and Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265, cite and rely on a doctrine of equitable recoupment of long standing in civil litigation that a claim itself barred by a statute of limitation may be employed to reduce a claim in suit accruing with the recouped claim. See Huggins v. Smith, 141 Ark. 87, 216 S.W. 1, 16 A.L.R. 323, with annotation at pages 339-341, and see further annotation at 1 A.L.R.2d 666 et seq. See also discussion and citation in Clark, Code Pleading 666, 667 (2d Ed.1947), which is an amplification of Clark & Sur-beck, The Pleading of Counterclaims, 37 Yale L.J. 300, relied on by Judge Goodrich to sustain the taxpayer’s recoupment in Electric Storage Battery Co. v. Rothensies, 3 Cir., 152 F.2d 521. The reversal of this case in Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 67 S.Ct. 273, 91 L.Ed. 296, severely restricting recoupment here to the single transaction, shows that novel extensions of the doctrine thus applicable in the instance of the barred claim will not be tolerated in tax litigation.

2 . Followed in Pioneer Parachute Co., 4 T.C. 27; Difco Laboratories, 10 T.C. 660; Emeloid Co., 14 T.C. 1295, reversed on other grounds, 3 Cir., 189 F.2d 230.

3 . Not to mention the unique anomaly which would result if important differences in tax levies occurred because of the chance of the court where the taxpayer was able to place himself.

4 . In central Fibre Products Co. v. United States, D.C.N.D.Ill., 115 F.Supp. 147, Judge La Buy quoted with approval the discussion below as to the equities; bu't the ease there involved merely two computations of the same tax.