Madden, Judge, and Laramore, Judge,
delivered the opinion of the court:
The plaintiff, an operator of a retail department store, claims that it overpaid income and excess profits' taxes in the amount of $834,469.11 for its fiscal years ending on January 31 of each of the years 1942 to 1947. The basis of its claim is that it was entitled to, but was denied, the privilege ac[453]*453corded by section 22 (d) (6) (A) of the Internal Bevenue Code of 1939, of deducting from its net income for a given tax year the amount by which the cost of goods bought to refill a depleted inventory exceeded the cost of similar goods as shown in the opening inventory of the tax year. The remarkable thing about the statutory privilege was that it applied even though the replacement goods were not bought until a year or years later. When they were bought, the tax for the earlier year was reopened and recomputed.
The privilege of section 22 (d) (6) (A) was granted only to taxpayers who used the “last in, first out” (LIFO) method of taking their inventories. In 1942 the LIFO method was still a fairly recent discovery of the accounting profession. Its advantage was that it showed whether the merchant was currently making any profit on his sales, considering the current cost of replacement of the goods sold. Under the older first in, first out method, he might be making a profit only because he was selling goods which he had earlier bought at a price below the now current price, or having a loss because the earlier bought goods had cost more than the now current price.
The plaintiff, at the end of its fiscal year 1942, took its inventory by the LIFO method. Its reason for doing so was not a tax reason, but the business reason referred to above. In fact, at that time, and until 1948 the Commissioner of Internal Bevenue was refusing to approve tax returns of department stores based on LIFO inventories. The plaintiff nevertheless made its returns on that basis for each of the years here in question, and the Commissioner entered into agreements with the plaintiff, for each of those years, extending the time for assessment of taxes, thus keeping the question open. In all those returns, the plaintiff’s inventories were on a store-wide basis, and were not broken down into departments or groups of departments. In 1947 the Tax Court of the United States, in the case of Hutzler Brothers Co. v. Commissioner, 8 T. C. 14, held that department stores were entitled to use the LIFO method. The Commissioner in 1948 acquiesced in that decision and changed his regulations to provide expressly how taxpayers using that method should make their inventories.
[454]*454The Commissioner’s 1948 regulations required department store taxpayers to make separate inventories for departments, or groups of departments, and not on a store-wide basis, and to use the index of variations in prices which had been prepared by the Bureau of Labor Statistics of the Department of Labor, or possibly an index made up by a store itself, if the index so made was approved by the Commissioner as correct. The plaintiff reworked all of its inventories for all the years in question, using groups of departments approved by the Commissioner, and using the Bureau of Labor Statistics’ index. The plaintiff’s returns were then accepted, and its taxes were adjusted for the several years.
As pointed out at the outset, the plaintiff claims that it should have been accorded the benefits of section 22 (d) (6) (A) of the Internal Revenue Code of 1939. Its amended returns filed in 1948 showed that in some of its inventory divisions, i. e. groups of departments, in each of the years, there had been “involuntary liquidation,” i. e. the unit had not been able, because of the scarcity of certain goods, to keep its stock of goods up to normal. If that fact had appeared on its original returns, as filed for each of the years, it would have had the privilege of electing, if it thought it advantageous, to accept the privilege accorded by section22 (d) (6) (A).
In making that election, the plaintiff would have had to predict whether, when it would be able to refill its depleted inventories, the cost of the replacement of goods would be more, or less, than the cost of such goods in the year in which the election was made. If the prediction had been that the cost would be greater, it would have been wise to elect to take advantage of section 22 (d) (6) (A), since the greater future costs of replacement, carried back into the year of depletion of stocks, would increase the cost of goods sold and thus reduce the taxable profits for that year. If, having elected in a given year to use section 22 (d) (6) (A), it should turn out that prices later went down, the taxes for the year of election would be increased.
As noted above, the plaintiff’s returns, filed at the end of each of the years in question, and computing profits on [455]*455the basis of the LIFO inventory method, made up on a store-wide basis, showed no depletion of stocks of goods, “involuntary liquidation,” except for the year 1943. The plaintiff could not, therefore, have elected to use section 22 (d) (6) (A), except for the year 1943, even if it had felt certain that future prices would be higher. Even for the year 1943, it did not so elect, although it could have done so.
When, in 1948, the plaintiff filed amended returns for all the years in question, which returns used LIFO inventories based on departments rather than on the store as a whole, those returns, as stated above, showed “involuntary liquidations” in some of its departments in each of the years, and by that time it was apparent that, since prices had risen from year to year throughout the period, it would have been advantageous to the plaintiff to have had the benefit of section 22 (d) (6) (A). But it could not then, in 1948, make the election, because the section as it then stood required that the taxpayer make its election at the time it filed its return, and the plaintiff’s original returns had been filed in each of the years before 1948.
In 1950 Congress by Public Law 756, 81st Congress, 64 Stat. 592, amended section 22 (d) (6) (A). It changed the requirement that the election must be 'made at the time of the return, and said it might be made
at such time and in such manner and subject to such regulations as the Commissioner * * * may prescribe, * * *.
An important feature of the amendment was that it was retroactive. It was made applicable to any taxable year beginning after December 31, 1940 and before January 1, 1948.
The Commissioner in 1951 amended the regulation applicable to section 22 (d) (6) (A) to make it provide that the election under the section might be made within 6 months after filing the return for the year in which the liquidation occurred. This regulation, taken by itself, would have nullified the retroactivity of the amendment to the statute. However, there was in effect a general regulation to the effect that in any case where an election by a taxpayer is [456]*456provided for, the Commissioner might, upon application, extend the time for making the election.
The plaintiff says that (1) the Commissioner’s six months regulation was invalid because it nullified the statute and (2) even if the regulation was valid, the Commissioner’s action in refusing to extend the plaintiff’s time for election under the general regulation referred to above was arbitrary and capricious.
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Madden, Judge, and Laramore, Judge,
delivered the opinion of the court:
The plaintiff, an operator of a retail department store, claims that it overpaid income and excess profits' taxes in the amount of $834,469.11 for its fiscal years ending on January 31 of each of the years 1942 to 1947. The basis of its claim is that it was entitled to, but was denied, the privilege ac[453]*453corded by section 22 (d) (6) (A) of the Internal Bevenue Code of 1939, of deducting from its net income for a given tax year the amount by which the cost of goods bought to refill a depleted inventory exceeded the cost of similar goods as shown in the opening inventory of the tax year. The remarkable thing about the statutory privilege was that it applied even though the replacement goods were not bought until a year or years later. When they were bought, the tax for the earlier year was reopened and recomputed.
The privilege of section 22 (d) (6) (A) was granted only to taxpayers who used the “last in, first out” (LIFO) method of taking their inventories. In 1942 the LIFO method was still a fairly recent discovery of the accounting profession. Its advantage was that it showed whether the merchant was currently making any profit on his sales, considering the current cost of replacement of the goods sold. Under the older first in, first out method, he might be making a profit only because he was selling goods which he had earlier bought at a price below the now current price, or having a loss because the earlier bought goods had cost more than the now current price.
The plaintiff, at the end of its fiscal year 1942, took its inventory by the LIFO method. Its reason for doing so was not a tax reason, but the business reason referred to above. In fact, at that time, and until 1948 the Commissioner of Internal Bevenue was refusing to approve tax returns of department stores based on LIFO inventories. The plaintiff nevertheless made its returns on that basis for each of the years here in question, and the Commissioner entered into agreements with the plaintiff, for each of those years, extending the time for assessment of taxes, thus keeping the question open. In all those returns, the plaintiff’s inventories were on a store-wide basis, and were not broken down into departments or groups of departments. In 1947 the Tax Court of the United States, in the case of Hutzler Brothers Co. v. Commissioner, 8 T. C. 14, held that department stores were entitled to use the LIFO method. The Commissioner in 1948 acquiesced in that decision and changed his regulations to provide expressly how taxpayers using that method should make their inventories.
[454]*454The Commissioner’s 1948 regulations required department store taxpayers to make separate inventories for departments, or groups of departments, and not on a store-wide basis, and to use the index of variations in prices which had been prepared by the Bureau of Labor Statistics of the Department of Labor, or possibly an index made up by a store itself, if the index so made was approved by the Commissioner as correct. The plaintiff reworked all of its inventories for all the years in question, using groups of departments approved by the Commissioner, and using the Bureau of Labor Statistics’ index. The plaintiff’s returns were then accepted, and its taxes were adjusted for the several years.
As pointed out at the outset, the plaintiff claims that it should have been accorded the benefits of section 22 (d) (6) (A) of the Internal Revenue Code of 1939. Its amended returns filed in 1948 showed that in some of its inventory divisions, i. e. groups of departments, in each of the years, there had been “involuntary liquidation,” i. e. the unit had not been able, because of the scarcity of certain goods, to keep its stock of goods up to normal. If that fact had appeared on its original returns, as filed for each of the years, it would have had the privilege of electing, if it thought it advantageous, to accept the privilege accorded by section22 (d) (6) (A).
In making that election, the plaintiff would have had to predict whether, when it would be able to refill its depleted inventories, the cost of the replacement of goods would be more, or less, than the cost of such goods in the year in which the election was made. If the prediction had been that the cost would be greater, it would have been wise to elect to take advantage of section 22 (d) (6) (A), since the greater future costs of replacement, carried back into the year of depletion of stocks, would increase the cost of goods sold and thus reduce the taxable profits for that year. If, having elected in a given year to use section 22 (d) (6) (A), it should turn out that prices later went down, the taxes for the year of election would be increased.
As noted above, the plaintiff’s returns, filed at the end of each of the years in question, and computing profits on [455]*455the basis of the LIFO inventory method, made up on a store-wide basis, showed no depletion of stocks of goods, “involuntary liquidation,” except for the year 1943. The plaintiff could not, therefore, have elected to use section 22 (d) (6) (A), except for the year 1943, even if it had felt certain that future prices would be higher. Even for the year 1943, it did not so elect, although it could have done so.
When, in 1948, the plaintiff filed amended returns for all the years in question, which returns used LIFO inventories based on departments rather than on the store as a whole, those returns, as stated above, showed “involuntary liquidations” in some of its departments in each of the years, and by that time it was apparent that, since prices had risen from year to year throughout the period, it would have been advantageous to the plaintiff to have had the benefit of section 22 (d) (6) (A). But it could not then, in 1948, make the election, because the section as it then stood required that the taxpayer make its election at the time it filed its return, and the plaintiff’s original returns had been filed in each of the years before 1948.
In 1950 Congress by Public Law 756, 81st Congress, 64 Stat. 592, amended section 22 (d) (6) (A). It changed the requirement that the election must be 'made at the time of the return, and said it might be made
at such time and in such manner and subject to such regulations as the Commissioner * * * may prescribe, * * *.
An important feature of the amendment was that it was retroactive. It was made applicable to any taxable year beginning after December 31, 1940 and before January 1, 1948.
The Commissioner in 1951 amended the regulation applicable to section 22 (d) (6) (A) to make it provide that the election under the section might be made within 6 months after filing the return for the year in which the liquidation occurred. This regulation, taken by itself, would have nullified the retroactivity of the amendment to the statute. However, there was in effect a general regulation to the effect that in any case where an election by a taxpayer is [456]*456provided for, the Commissioner might, upon application, extend the time for making the election.
The plaintiff says that (1) the Commissioner’s six months regulation was invalid because it nullified the statute and (2) even if the regulation was valid, the Commissioner’s action in refusing to extend the plaintiff’s time for election under the general regulation referred to above was arbitrary and capricious.
If Congress by its 1950 amendment intended to re-open all the “involuntary liquidation” situations clear back to 1940, then the Commissioner’s six months’ regulation was contradictory to the statute, as the plaintiff urges. That Congress did not so intend seems clear both from the text of the statute and from its legislative history. The statute placed with the Commissioner the power to determine when the election had to be made. If it had intended to reopen all involuntary liquidation situations, it would merely have set the time for election at some date after the enactment of the statute in 1950. The committee reports spoke of the Commissioner’s power to relieve hardships. The intent of Congress was, then, that the Commissioner should, by regulations and action under them, relieve hardships.
As section 22 (d) (6) (A) stood before the 1950 amendment, the Commissioner had no power to extend the time for making the election. The statute said the election must be made at the time the return was filed, and that ended it. But the 1950 amendment and the six months’ regulation brought the situation within the terms of the general regulation reserving to the Commissioner the power to extend the time for making any election.
The plaintiff’s case, then, must rest upon its claim that the Commissioner was arbitrary in not extending the plaintiff’s time for making its election. Congress would not have intended that the Commissioner could, without reason or policy, extend or refuse to extend the time of election for individual taxpayers. A grant of such an arbitrary power to an executive officer is not to be assumed. If then, the statute was not to be, on the one hand, a grant of arbitrary power to the Commissioner, or, on the other hand, a nullity, Congress must have had some idea of what would be a hard[457]*457ship, which the Commissioner was expected to relieve. Our only evidence of what that idea was is in the committee reports, which said:
Present law provides that, in order to have the advantage of such a tax recomputation, the taxpayer must elect to have these provisions apply “at the time of the filing of the taxpayer’s income-tax return” for the year in which the inventory liquidation occurred. However, in some cases taxpayers did not know, at the time the return was filed, that it would be to their advantage to make such an election. For example, there are cases where, at the time of a subsequent investigation of the return, Government agents home segregated into two groups or classes an inventory which the taxpayer considered as consisting of only, one class of items. As a result of this segregation it is now held that a liquidation of the inventory of one class of items occurred, although there was no decrease in the number of both classes combined. It is held that, not having made a timely election, the taxpayer cannot apply the excess cost of replacing these items in a subsequent year to reduce the tax for the year in which the liquidation occurred. [Italics supplied.] [S. Rep. 2366, 81st Cong., 2d sess.]
As shown in finding 20, the Commissioner, in administering the amended statute, gave relief to a rope manufacturing company which, in its returns, showed a single inventory of fiber including both manila and sisal. This inventory showed no “involuntary liquidation” hence the taxpayer could not have, and did not, claim the benefits of section 22 (d) (6) (A). The Commissioner, upon examining the return, established separate inventories for manila and sisal, and the manila inventory showed an involuntary liquidation. The taxpayer claimed the benefits of section 22 (d) (6) (A). The Commissioner concluded that it was a hardship case, extended the time for making the election, and granted relief.
The plaintiff says that its situation is like that of the rope manufacturer, and is covered by the thought expressed in the committee reports. It used a store-wide inventory which showed no involuntary liquidation except in the year 1943; it was required by the Commissioner to break down its inventory according to departments; the breakdown showed [458]*458involuntary liquidations; it was too late to elect to take advantage of section 22 (d) (6) (A), as it then stood.
The Government says that if the plaintiff gets relief, it gets the benefit of hindsight, which a taxpayer whose current returns showed involuntary liquidations did not get. Those taxpayers, in electing, had to take the chance of whether future prices would go up or down. The plaintiff, in electing in 1951, took no chances. It knew just what had happened to prices in the years in question.
Congress must have known, when it passed the 1950 amendment, retroactive to 1940, that anyone who got any benefit from the amendment would have, when he made his election, the benefit of hindsight. The rope manufacturer who was granted relief by the Commissioner, of course, had the benefit of hindsight. If prices had not gone up in the meantime, he would not have asked for relief. There is nothing in the hindsight argument, if the amendment was to have any effect at all.
The Government says that the plaintiff knew, during all the years in question, what the trend of prices was in its different departments, although it was filing its returns on a store-wide basis. It says that the plaintiff had in its hands trade publications showing the percentages by which prices in the various departments of a department store had increased, and must have known that if it had broken down its inventory by departments, some departments would have shown involuntary liquidations. It will be remembered that during these years the Commissioner was taking the position that department stores could not use LIFO at all, whether store-wide or by departments. That being so, there was no reason why the plaintiff should make its original returns on a departmental basis, though the Commissioner ultimately, in 1948, required it to do so. The fact that the trend of prices, by departments, would be and was well known to a prudent storekeeper would not tell him whether the stock of goods in a particular department was depleted to the point of an involuntary liquidation, when he was making his inventory on a store-wide basis.
The Government says that it is apparent that the plaintiff, until it had the benefit of the hindsight available to it [459]*459in 1951, never would bave taken the chance of electing to come under section 22 (d) (6) (A). If it were possible to construct an answer to that hypothetical question, it might well be that the Government’s contention is correct. The Government’s evidence is that in 1943, when the store-wide inventory showed involuntary liquidation, the plaintiff did not elect to come under the statute, and that for the year 1948, not here in question, the plaintiff’s original returns showed departmental involuntary liquidations, yet the plaintiff did not elect to come under the statute. Since plaintiff had an opportunity to elect under section 22 (d) (6) (A) for 1943 and failed to exercise this right, we think it is not now entitled to the benefits of Public Law 756 for that year. However, if the amendment of section 22 (d) (6) (A) was not a futile gesture of Congress, it would seem to have granted the plaintiff a right to relief for the years 1942. 1944, 1945, 1946, and 1947 in which plaintiff suffered involuntary liquidations that were not apparent until after the then existing time for statutory election had expired.
At the hearing before a trial commissioner of this court, testimony was limited to the issue of whether or not the plaintiff is entitled to relief, as provided for by Public Law 756, 81st Cong., 64 Stat. 592, which amended section 22 (d) (6) (A), supra; that is to say, whether the plaintiff’s elections to invoke the provisions of section 22 (d) (6) (A), supra, were filed within time. The extent of any involuntary liquidations within the meaning of section 22 (d) (6) (A) was reserved for later determination under Pule 38 (c) of this court.
Plaintiff is entitled to recover for the years 1942, 1944, 1945, 1946, 1947 and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Pule 38 (c) of the Pules of this Court.
It is so ordered.
Littleton, Judge,; and Jones, Chief Judge, concur.