For the years 1940 through 1945, abatements of federal excess profits taxes; through application of 722 of the Internal Revenue Code, are not retroactive; and they relieve taxpayers from the payment of interest on deficiencies in such taxes only from the time of the abatements, rather than from the original due dates of the taxes abated. Pp. 255-271.
209 F.2d 692, affirmed.
In No. 29, the Court of Claims awarded a taxpayer a judgment for a refund of interest paid on those portions of deficiencies in excess profits taxes for the years 1940 and 1941 which were abated under 722 of the Internal [348 U.S. 254, 255] Revenue Code. 126 Ct. Cl. 847, 117 F. Supp. 181. This Court granted certiorari. 347 U.S. 965 . Reversed, p. 271.
In No. 41, the Federal District Court awarded a taxpayer a judgment for a refund of interest paid on deficiencies in federal excess profits taxes for the years 1943, 1944 and 1945 which were abated under 722 of the Internal Revenue Code. 107 F. Supp. 837. The Court of Appeals reversed. 209 F.2d 692. This Court granted certiorari. 347 U.S. 987 . Affirmed, p. 271.
[ Footnote * ] Together with No. 41, Premier Oil Refining Company of Texas v. United States, on certiorari to the United States Court of Appeals for the Fifth Circuit, argued November 12, 1954.
Hilbert P. Zarky argued the causes for the United States. With him on the briefs were Solicitor General Sobeloff, Assistant Attorney General Holland, Ellis N. Slack and Harry Baum. Ralph S. Spritzer was also with them on the brief in No. 41.
David W. Richmond argued the cause for respondent in No. 29. With him on the brief were Robert N. Miller, Frederick O. Graves, John M. Crimmins, E. S. Ruffin, Jr. and C. M. Crick.
William A. Sutherland argued the cause for petitioner in No. 41. With him on the brief were Eugene M. Locke, Harold B. Pressley, Jr. and Mac Asbill, Jr.
MR. JUSTICE BURTON delivered the opinion of the Court.
The issue in these cases is whether, for the years 1940 through 1945, abatements of federal excess profits taxes, through application of I. R. C., 722, 1 are retroactive. [348 U.S. 254, 256] For the reasons hereafter stated, we hold that they are not and that they relieve taxpayers from the payment of interest on deficiencies in such taxes from the time of the abatements, rather than from the original due dates of the taxes abated.
In No. 29, United States v. Koppers Co., the taxpayer, respondent therein, 2 reported and paid excess profits taxes of $6,512.76 for 1940, and $1,781,288.14 for 1941. 3 In [348 U.S. 254, 257] computing these taxes, it used excess profits credits based upon invested capital. 4 In 1943 and 1945, it applied under 722 for relief from all or part of these taxes, claiming that they were "excessive and discriminatory." 5 In accordance with the usual administrative practice, the Commissioner determined the amount of the excess profits taxes due without regard to the application for relief under 722. In doing so, he found it necessary to proceed under I. R. C., 713, using excess profits credits based upon the taxpayer's income, rather than upon its invested capital. As a result he found that the above taxes, as returned and paid by the taxpayer without reference to 722, had been understated and that the following deficiencies existed as of their original due dates, March 15, 1941, and 1942:
Excess profits tax under 710 (a) and 1940 1941
713 ..................................... $466,921.67 $2,208,019.09 Payments ................................. 6,512.76 1,781,288.14 ___________ ______________ Deficiencies ............................. 460,408.91 426,730.95
The Commissioner computed interest, at 6%, on the above deficiencies, amounting to $217,376.07 for 1940, and $230,504.86 for 1941. 6
After extended investigations and negotiations conducted under authority of 722, the Commissioner and [348 U.S. 254, 258] the taxpayer agreed upon a "constructive average base period net income" which fixed the excess profits credits for the years in question and, as a result, the relief available under 722. After this agreement was approved by the Excess Profits Tax Council of the Bureau of Internal Revenue, the Commissioner determined that the above-stated deficiencies, with the benefit of 722, should be reduced to $260,554.39 for 1940, and to $95,749.33 for 1941. The taxpayer consented to the assessment of these deficiencies, with interest as provided by law. Where-upon, the Commissioner issued a formal determination of them and assessed them against the taxpayer. He also assessed the above-stated interest charges, based upon the full amount of the original deficiencies.
The taxpayer paid the deficiencies and interest so assessed but claimed refunds of $94,358.71 for 1940, and $178,784.48 for 1941. Those sums represented the interest on the abatements in its excess profits taxes made under 722. When the Commissioner disallowed the claims, the taxpayer sued in the Court of Claims to recover their amounts. With one judge dissenting, that court deducted a setoff and rendered judgment in favor of the taxpayer for $270,216.34. 126 Ct. Cl. 847, 117 F. Supp. 181. To resolve the resulting conflict with United States v. Premier Oil Co., 209 F.2d 692, we granted certiorari, 347 U.S. 965 .
In No. 41, Premier Oil Co. v. United States, the taxpayer, petitioner therein, paid the excess profits taxes shown on its original returns in the following amounts: for 1943, $564,167.70 (adjusted to $560,484.84); for 1944, $353,292.15 (adjusted to $313,639.13); and for 1945, $45,679.67. Thereafter, several deductions which the taxpayer had made from its income were disallowed, resulting, in 1948, in the following deficiencies in its payment of its excess profits and income taxes as of their original due dates: [348 U.S. 254, 259]
The Commissioner computed interest, at 6%, on the above excess profits tax deficiencies as follows:
For 1943 - on $78,359.80, March 15, 1944, to June 23, 1948 .................................................. $20,084.79
For 1944 - on $55,529.92, March 15, 1945, to June 23, 1948 .................................................. 10,901.36
For 1945 - on $190,785.32, March 15, 1946, to June 19, 1948 ................................................... 25,869.26 __________
Total .................................................... 56,855.41
In the meantime, the taxpayer had applied for relief under 722, seeking acceptance of a "constructive average base period net income" of $357,000 for each of the years at issue. The Excess Profits Tax Council approved that figure as a credit in lieu of $93,150.36 for each of the years 1943 and 1944, and of $116,437.95 for 1945. This credit so far reduced the taxpayer's taxable excess profits as to abate its excess profits tax deficiencies for 1943 and 1944 entirely, and that for 1945 to $366.52. 7 Accordingly, the [348 U.S. 254, 260] Commissioner's assessment of the remainder of the taxpayer's deficiencies in excess profits taxes was for only $366.52. However, as in the Koppers case, supra, he assessed against the taxpayer the full amount of the interest charges based upon the original deficiencies.
The taxpayer paid the deficiency and interest so assessed but claimed refunds totaling $56,855.41. That sum represented the interest on the abatements in its excess profits taxes made under 722. When the Commissioner disallowed those claims, the taxpayer brought the instant action to recover their amounts, in the United States District Court for the Northern District of Texas, under 28 U.S.C. 1346 (a) (1). That court rendered judgment for the taxpayer. 8 107 F. Supp. 837. The Court of Appeals reversed. 209 F.2d 692. We granted certiorari to resolve the conflict with United States v. Koppers Co., supra. 347 U.S. 987 . 9
As the underlying issue is the same in each case and for each year, we shall discuss it in relation to the 1940 taxes in the Koppers case. There, the taxpayer, under the usual procedure, computed and paid the excess profits tax of $6,512.76 shown on its return for 1940. In due course the Commissioner, without the application of 722, determined that the payment should have been $466,921.67, [348 U.S. 254, 261] and, therefore, that a deficiency of $460,408.91 was due the United States, with interest from March 15, 1941. I. R. C., 53 (a), 56 (a). If the taxpayer had made no application for relief under 722, there is no doubt that such interest would have remained due the United States until paid and that, when paid, it would not have been refundable. The same would have been true if the taxpayer's application for relief under 722 had been finally denied. The taxpayer contends, however, that, because the Commissioner has abated the taxpayer's deficiency from $460,408.91 to $260,554.39 under 722, such reduction is necessarily retroactive to March 15, 1941, and that the taxpayer, accordingly, is entitled to a refund of the interest on the sum abated. The Commissioner, on the other hand, contends that the determination under 722 is not retroactive but is a current abatement effective when made.
Congress could have prescribed either treatment but did not expressly specify either. Our answer is determined from our consideration of the statutory scheme as a whole, the related provisions of the statute, the legislative history of 722 and the administrative interpretation that has been given the statute.
From the beginning, the statute also provided, in 722, a means of subsequent adjustment of the tax in special instances where the normal computation of the tax was found to result in inequity. The adjustment could be made only after administrative action and, pending its consideration, it did not eliminate the tax return or the tax payment otherwise required. Until 1942, it did not permit even the postponement of the payment of any part of the standard tax. Indeed, the full payment of that tax soon was made an express condition of the application for adjustment. I. R. C., 722 (d). In 1943, Congress stated that if overpayments for either of the taxable years 1940 or 1941 were found to be attributable to 722, no interest on such overpayments was to be paid the taxpayer. 11 At least to that extent, Congress expressly recognized that the funds paid as excess profits taxes, when due and without the benefit of 722, were funds owed to and usable by the Government.
The significance of this statutory scheme further appears when it is applied to the instant case. If the instant taxpayer had paid its required tax in 1941, the Government would have received an additional $460,408.91 at that time. Accordingly, it would have had the use of that money, without charge, during the crucial war years. Correspondingly, the taxpayer would have been without that money during the same period. Instead, the taxpayer, in fact, retained the funds for its own use and now contends that it need not compensate the Government for such use of a substantial part of it.
While in the instant case the taxpayer did not underpay any amount actually shown on its return, as contemplated by I. R. C., 294 (a), it understated its tax and thus withheld the amount in question. The detriment to the Government and benefit to the taxpayer was the same - the use of $460,408.91 for eight years. The above [348 U.S. 254, 263] distinction, emphasized by the taxpayer, may have helped it in initiating its application for relief under 722 (d) because it could establish that, at least, it had paid "the tax shown on its return." The distinction, however, supplies no ground for different results once the deficiencies have been determined. We find no implication that a self-serving error in the understatement of its tax on its tax return entitles the taxpayer to a greater ultimate tax advantage than does a self-serving error of the same size in the underpayment of the same tax. A fortiori we find nothing to justify a greater tax advantage to any taxpayer that underpays its correct tax, over one that pays such tax in full when due.
2. The interest here in controversy is attributable to I. R. C., 292 (a). 12
The interest here in controversy was due under 292 (a) from March 15, 1941, until paid. Accordingly, to obtain a refund of it, the taxpayer must sustain the proposition that the tax relief granted under 722 is necessarily retroactive, extinguishing the deficiency as of the original due date of the tax and thus eliminating the interest charges for the corresponding period. To that end, the taxpayer emphasizes the statement in 722 (a) that, as a condition of securing the application of 722, a taxpayer must establish that the usual procedure "results [348 U.S. 254, 264] in an excessive and discriminatory tax" and also must establish "what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income." Once the taxpayer has done that, "the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter." Standing alone, this directive language is elastic. It can be read consistently either with the interpretation that the new computation replaces and abates the old one currently, when the new one is determined and assessed, or that it retroactively replaces the old tax from its original due date. It leaves the issue open for disposition by the effect of other clauses relating more specifically to the issue. For the reasons hereafter stated, we read it as looking forward, rather than backward. 13
3. I. R. C., 710 (a) (5), 14 permits a taxpayer, seeking relief under 722, to defer a part of its existing excess profits taxes where its adjusted excess profits net income exceeds 50% of its normal tax net income.
In 1942, Congress added 710 (a) (5), conditionally authorizing partial deferment of the tax in cases where a [348 U.S. 254, 265] taxpayer claimed benefits under 722. The condition was that the taxpayer's "adjusted excess profits net income (computed without reference to section 722)" must exceed 50% of the taxpayer's normal tax net income for the year. Even then, deferment was limited to 33% of the benefit claimed under 722. If a taxpayer, without this amendment, could have successfully deferred payment and avoided interest charges by following the course taken in the instant cases, it could, by understatement of its tax, have deferred, without incurring interest charges, the payment of a corresponding part of its tax pending relief. If so, there would have been little need for 710 (a) (5). The 1942 amendment, by its restrictions, fairly meant that, under all other circumstances, the existing taxes were to be paid when due, or be subjected to interest during their delinquency under 292 (a). [348 U.S. 254, 266]
4. The denial of interest on refunds is prescribed by I. R. C., 3771 (g). 15
Although 3771 (g) was not enacted until 1943, it was then made applicable to taxable years before, as well as after, January 1, 1942. It denied all interest on refunds attributable to 722 where the refunds related to the taxable years 1940 or 1941. It also denied interest on refunds relating to taxable years beginning after January 1, 1942, but limited such denials to the first year after the filing of an application for relief under 722, or to periods prior to September 16, 1945 (two years after the effective date of the amendment), whichever was the later. 16 [348 U.S. 254, 267]
In cases where the Government has authorized refunds of excess profits taxes overpaid to it by reason of the abatement of taxes attributable to 722, 3771 (g) expressly precludes the payment of interest by the Government upon the amounts abated. This treats the Government as entitled to the use of the abated amounts between the time of their overpayment and that of their abatement. Equity demands a comparable result in the case of underpayments. Where unpaid taxes are abated by reason of 722, the taxpayer then receives a release from its existing obligation to pay the amount abated. However, the Government having been entitled, up to that time, to collect and use the sum abated, the Government should receive interest, on the abated sum, for the period during which the Government was entitled to have its use. This is the natural counterpart of the Government's freedom from paying interest on refunded overpayments.
5. The legislative history of 722.
The excess profits tax was initiated in 1940. 54 Stat. 975 et seq. It provided for prompt payment of large taxes computed on income reflecting unusual profits. Computation of the tax on the basis of the taxpayer's prior income or invested capital was prescribed in 713 and 714. A standardized treatment of abnormalities was provided in 721. In addition, 722 authorized the Commissioner "to make such adjustments as may be necessary to adjust abnormalities affecting income or capital." 54 Stat. 986. The procedure under 722 was formalized by the Excess Profits Tax Amendments of 1941, 55 Stat. [348 U.S. 254, 268] 23-25, and put in its final form by the Revenue Act of 1942, 56 Stat. 914-917, as amended, 57 Stat. 601-602. The technical and discretionary nature of the adjustment was emphasized by the provision that the determination of most computations under 722 was reviewable only by a special division of the Tax Court constituted for the occasion and by no other court or agency. 55 Stat. 26, as amended, 56 Stat. 917, 59 Stat. 295, 673, 26 U.S.C. 732. A taxpayer never was permitted to file a return of its own under 722. S. Rep. No. 75, 77th Cong., 1st Sess. 13; H. R. Rep. No. 146, 77th Cong., 1st Sess. 13.
The statute has been interpreted as authorizing a procedure that is in the nature of a claim for a refund preceded by long investigations of complicated special circumstances, and followed by extended negotiations between the Commissioner and taxpayer to develop a mutually satisfactory "constructive average base period net income." This interpretation leaves the usual procedure under 710 et seq. complete in itself but subject, upon application, to ultimate adjustment in instances accepted by the Commissioner under 722. 17 We find no statement of a purpose that 722 shall relieve taxpayers from penalties or interest charges due either to their defaults in paying, or their errors in computing, their taxes. On the contrary, it has been suggested that Congress considered relief under 722 to be in the nature [348 U.S. 254, 269] of a favor and as not relieving the taxpayer of its duty to pay the original tax when due. 18
The regulations do not deal specifically with the issue before us but, from their beginning, in Treasury Regulations 109, they have been consistent with the interpretation given the Act by the Government. See 30.722-5, as added by T. D. 5264, 1943 Cum. Bull. 761, as amended, T. D. 5393, 1944 Cum. Bull. 415. In addition to the practice of the Commissioner in the instant cases, there is in the record of the Premier Oil Co. case an undisputed affidavit by a Treasury Department reviewer to the effect that the policy followed was the administrative policy of the Bureau:
While the deficiency for 1940 in the amount of $460,408.91 was properly determined without reference to 722 and treated as a deficiency for that year by the Commissioner, it was not separately assessed as such. This was not necessary because, at the time of its determination [348 U.S. 254, 271] and before its assessment, it was abated to $260,554.39. The latter sum, with interest in the amount of $217,376.07 computed on the whole deficiency of $460,408.91, was correctly and adequately assessed and paid. 20
For the foregoing reasons, we conclude that the Government, in each case, is entitled to retain the interest now in controversy. Therefore, in No. 29, the judgment of the Court of Claims is reversed and, in No. 41, the judgment of the Court of Appeals is affirmed.
[ Footnote 2 ] Koppers Company, Inc., is, in fact, the successor to Koppers United Company and its subsidiaries, which filed consolidated excess profits tax returns for the years in question. For convenience, all of such corporations are referred to as the taxpayer.
[ Footnote 3 ] This tax was computed and paid pursuant to the Excess Profits Tax Act of 1940, 54 Stat. 975, as amended. See I. R. C., 710 et seq. On November 8, 1945, these provisions became inapplicable to any calendar year beginning after 1945. 59 Stat. 568.
[ Footnote 4 ] Two methods of computation of the excess profits credit were authorized: the invested capital method under I. R. C., 714, or the base period income method under I. R. C., 713.
[ Footnote 5 ] By timely consents, the Commissioner and the taxpayer agreed that the amount of any income, excess profits, or war profits tax due for 1940 and 1941 could be assessed at any time on or before June 30, 1951.
[ Footnote 6 ] The interest on the 1940 tax ran from March 15, 1941, to January 28, 1949, which was treated as the date of its payment; that on the 1941 tax ran from March 15, 1942, to March 16, 1951, which was 30 days after the filing of a waiver consenting to the assessment and collection of the deficiencies finally determined. See I. R. C., 292 (a), infra, note 12.
[ Footnote 7 ] ABATEMENT OF EXCESS PROFITS TAX DEFICIENCIES UNDER 722.
Deficiencies without application 1943 1944 1945 of 722 .................. $78,359.80 $55,529.92 $190,785.32 (Decreases) under 722 .... (175,307.78) (175,174.49) (190,418.80) ____________ ____________ ____________ Resulting (credits) and deficiency .................... (96,947.98) (119,644.57) 366.52
By reducing that part of the taxpayer's income that was subject to excess profits taxes, this application of 722 automatically left more of the taxpayer's income subject to the normal tax and surtax. Those increases in the taxpayer's income taxes and their consequences are not before us.
[ Footnote 8 ] The original judgment for $56,855.41 was modified to $52,292.40 to reflect several adjustments, including the deduction of $49.72, representing interest on the unabated deficiency of $366.52 upon which the taxpayer conceded that interest was chargeable.
[ Footnote 9 ] The grant was limited to the following question stated in the petition:
[ Footnote 10 ] I. R. C., 713 - on the basis of income, or I. R. C., 714 - on the basis of invested capital. I. R. C., 721, authorized standard allowances for specified abnormalities. No return by the taxpayer under I. R. C., 722, was permissible.
[ Footnote 11 ] I. R. C., 3771 (g), infra, note 15, discussed at 266-267, infra.
[ Footnote 12 ] "SEC. 292. INTEREST ON DEFICIENCIES.
[ Footnote 13 ] Section 722 (d) looks forward when it provides that if a constructive base period net income has been determined under 722 for any taxable year, the Commissioner may, by regulations approved by the Secretary, permit waivers of the section's limitations for the purpose of determining excess profits taxes for a subsequent taxable year. Even this effect is not automatic, whereas it might have been expected to be so if the adjustment were a retroactive correction of the standard excess profits credit.
[ Footnote 14 ] "SEC. 710. IMPOSITION OF TAX.
[ Footnote 15 ] "SEC. 3771. INTEREST ON OVERPAYMENTS.
[ Footnote 16 ] The same Act added I. R. C., 292 (b), containing comparable provisions prohibiting the assessment of interest upon deficiencies attributable to the final determination of an application for relief under 722. 53 Stat. 88, as amended, 57 Stat. 602, 26 U.S.C. 292 (b). This applied, for example, to deficiencies in the payment of ordinary income taxes resulting from an abatement under 722 of excess profits taxes. Such an abatement automatically would leave a larger portion of a corporation's taxable income subject to the [348 U.S. 254, 267] normal income tax and surtax. This increase, however, was not made retroactive any more than the decrease in the excess profits tax which caused it was made retroactive. Congress thus appropriately charged no interest on the resulting deficiency just as it had allowed none on the related overpayment.
[ Footnote 17 ] When Congress, in a later Act, authorized deferment of payments of comparable taxes pending determinations of applications for relief, it did so unequivocally. The relief provisions in the Excess Profits Tax Act of 1950, 64 Stat. 1137, adding I. R. C., 430-472, prescribed formulas for determining a substitute average base period net income, 442-446, and permitted the taxpayer to adjust its base period net income at the time the return was filed, 447 (e). See S. Rep. No. 2679, 81st Cong., 2d Sess. 17-21, discussing the general relationship between these provisions and the experience gained under 722 now before us.
[ Footnote 18 ] See legislative history outlined in American Coast Line v. Commissioner, 159 F.2d 665, and Pohatcong Hosiery Mills v. Commissioner, 162 F.2d 146.
[ Footnote 19 ] See also, Standard Roofing & Material Co. v. United States, 199 F.2d 607; Rodgers v. United States, 123 Ct. Cl. 779, 108 F. Supp. 727; Cumberland Portland Cement Co. v. United States, 101 F. Supp. 577, aff'd, 202 F.2d 152.