The Overlakes Corporation v. Commissioner of Internal Revenue

348 F.2d 462

• Court: Court of Appeals for the Second Circuit
• Decided: July 8, 1965
• Docket: 29378_1
• Status: Published

Opinions

PER CURIAM:

We affirm the decision of the Tax Court. 41 T.C. 503 (1964). The facts of the case are fully set forth in the Tax Court’s opinion. The petitioner entered into a defense contract in 1951 with the Army Signal Corps Procurement Agency to supply a number of reels of wire as required. The contract contained a provision for redetermination of price “because of the experimental and developmental nature of the work * * * and the great uncertainty as to the cost of performance.” Since petitioner used the accrual method of accounting, the amounts for which it billed the contracting agency during 1951 and 1952 were accrued as income for each of those years. In 1954 the petitioner and the contracting agency, after a study of “cost and profit factors,” agreed upon a contract price redetermination which resulted in a refund of $475,612.17 by the petitioner to the contracting agency which was accomplished by offsetting the refund against amounts owed the petitioner. The Tax Court held that the petitioner, having reported as income during 1951 and 1952 the $475,612.17 which it refunded in 1954, is entitled under Section 3806(c) of the Internal Revenue Code of 1939¹ to a credit for overpayment of taxes for each of those prior taxable years. The only issue here is the method of allocating the $475,612.17 refund between the taxable years 1951 and 1952. The Tax Court upheld as reasonable the Commissioner’s method of allocation “in proportion to the amounts originally accrued in income in those years.” 41 T.C. at 519-520.

We agree with the Tax Court in finding the Commissioner’s allocation reasonable. As provided in the contract and in the price modification agreement, what was being redetermined was the total price, including “cost and profit factors,” rather than profits alone as contended by the petitioner.²

Affirmed.

1 . Added by ch. 619, 56 Stat. 966 (1942).

2 . Subsequent to oral argument the Commissioner informed the court and counsel for petitioner of the decision of the Eighth Circuit in McDonnell Aircraft Corp. v. United States, 342 F.2d 943 (1965). That case concerned “the usual complicated fact situation attendant upon an excess profits tax case * * * [which was] triggered by [the taxpayer’s] statutorily permitted change of accounting for its long-term contract income.” Id. at 946. Also involved in the case was the interpretation of the Renegotiation Acts of 1948 and 1951, as well as § 3806 of the Internal Revenue Code of 1939. The instant case is distinguishable because (1) the contractual price redetermination herein was not brought about by renegotiation of “excessive profits” under the Renegotiation Acts as in McDonnell, and (2) the petitioner herein has not obtained permission for a change of its accounting method as was done by the taxpayer in McDonnell. We also note that the Eighth Circuit itself distinguished the instant case. Id. at 950.