decided as amended july 24 1947.: May 23, 1947.
POHATCONG HOSIERY MILLS, INC.,
COMMISSIONER OF INTERNAL REVENUE.
Before GOODRICH, MCLAUGHLIN, and KALODNER, Circuit Judges.
KALODNER, Circuit Judge.
In this petition for review of the decision of the Tax Court we are met with a problem in the administrative procedure for obtaining excess profits tax relief under Section 722 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 722.
The issue is whether (1) payment of any part of the petitioner's excess profits tax and (2) denial in whole or in part by the Commissioner of a claim for refund or credit under Section 722, are prerequisites to the jurisdiction of the Tax Court to determine petitioner's right to relief under Section 722.
The facts, which are not in dispute, are as follows:
Petitioner filed its excess profits tax return for the calendar year 1942, computing its tax without the application of Section 722. In the return it reported its excess profits net income as $206,334.07, its excess profits credit based on invested capital as $73,428.16, and its unused excess profits credit adjustment as $142,794.08. Since the credits exceeded the excess profits net income, the return showed no excess profits tax due, and none was paid.
On September 4, 1943, the petitioner filed, on Form 991, an application for relief under Section 722, covering the years 1940, 1941 and 1942. Subsequently, the Commissioner notified the petitioner that he proposed to determine a deficiency of $88,642.23 in excess profits tax for 1942, based upon an increase in petitioner's excess profits tax net income and decreases in petitioner's credits.On July 20, 1944, petitioner filed, on Form 991, an amended application for relief, in the same amount as the proposed deficiency, under Section 722 covering the tax year 1942. After numerous conferences between petitioner's and Commissioner's representatives, the Commissioner, on August 29, 1945, mailed a notice of deficiency in excess profits taxes for 1942 in the amount of $88,642.23. In this deficiency notice, the Commissioner said:
"You have filed Forms 991, Application for Relief under Section 722 of the Internal Revenue Code, one on September 4, 1943, covering the years 1940, 1941 and 1942, and one, amended on July 20, 1944, covering the year 1942. Since these applications do not constitute claims for refund, no excess profits tax having been paid for any of the aforementioned years, this letter is not a notice of disallowance under Section 732 of the Internal Revenue Code. However, consideration has been given to your contentions relative to reconstruction under Section 722 of your base period income for excess profits credit purposes, and it has been determined that you have not established that the tax computed under subchapter E of Chapter 2 of the Internal Revenue Code, without the benefit of Section 722 of the Code, results in an excessive and discriminatory tax within the provisions of Section 722(a) and (b) of the Code, and that you have not established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during the excess profits tax taxable years ended December 31, 1940, December 31, 1941, and December 31, 1942." (Emphasis supplied)
From this deficiency determination, a petition was made to the Tax Court on November 21, 1945. In two general assignments, the petition alleged error in determining the deficiency; nine other assignments were directed toward the Commissioner's failure to grant relief under Section 722. Thereafter, the Tax Court granted a motion by the Commissioner to dismiss the proceeding for lack of jurisdiction insofar as it related to petitioner's application for relief under Section 722 on the ground that no excess profits tax had been paid by petitioner in 1942, and its application for relief had not been denied; it did so expressly upon the authority of its decisions in American Coast Line, Inc., v. Commissioner, 6 T.C. 67 (No. 10), since affirmed 2 Cir., 1947, 159 F.2d 665; Uni-Term Stevedoring Co., Inc., 3 T.C. 917; and Pioneer Parachute Co., Inc., 4 T.C. 27.
Following the answer of the Commissioner, the petitioner amended its petition before the Tax Court to clearly reflect that no issue other than relief under Section 722 was intended to be raised. Thereupon, pointing out that the pleadings as they then stood raised no issue as to any adjustments made by the Commissioner in determining the excess profits tax deficiency and that the only errors assigned related to the failure of the Commissioner to grant relief under Section 722, the Tax Court entered its order sustaining the deficiency determined by the Commissioner.
As is immediately apparent, we are not here concerned with the merits of petitioner's claim for relief under Section 722; we are concerned with the procedure for the realization of such relief.
Petitioner takes the position that the Tax Court is required to pass upon its right to Section 722 relief before it determines whether any proposed deficiency exists, for under Section 729(a)*fn1 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 729(a), Sections 271 and 272 are applicable. Briefly, these sections grant a taxpayer the right to petition the Tax Court for a redetermination of any deficiency determined by the Commissioner before payment thereof, and define a deficiency as the amount by which the tax imposed exceeds the amount shown as the tax on the taxpayer's return.
Moreover, it is contended that the "tax shown on its return" was "paid" since its return showed no excess profits tax due, and that the Commissioner has disallowed petitioner's claim for relief. Accordingly, petitioner asserts that the Tax Court had jurisdiction to redetermine the deficiency in its excess profits tax for the year 1942, and should have considered petitioner's right to relief under Section 722.
The Commissioner's position is that the excess profits tax structure contemplates the determination and payment of petitioner's "normal" excess profits tax, with the proviso that petitioner may obtain the benefits of Section 722, an "abnormality" provision designed to alleviate the tax burden in hardship cases, only by way of a claim for refund or credit. The Commissioner further contends that the Tax Court may consider a taxpayer's right to relief under Section 722 only after the taxpayer has paid the excess profits tax due and filed a claim for refund, and that claim has been disallowed in whole or in part by the Commissioner.
Before continuing, a word may be said as to the scope of our review. We, of course, credit the Tax Court's decision great weight and persuasiveness, particularly since we are dealing with a matter affecting procedure before the Tax Court itself, although it has not favored us with a full length picture of its views; for those, we are relegated to its prior decisions. Nevertheless, we think we have here a pure question of law and the enforcement of a rule of general applicability. Crane v. Commissioner, 67 S. Ct. 1047. It is not otherwise contended by the Commissioner.*fn2
The answer to the dispute herein rests within the Internal Revenue Code.*fn3 Turning to the Code, we find the excess profits tax imposed in the sections commencing with Section 710. Section 721 is an "abnormalities" provision intended to afford relief from excess profits taxes by excluding from income in the current taxable year items of net abnormal income attributable to other taxable years. A taxpayer may take advantage of Section 721 by proper adjustment in the excess profits tax return filed, or by making no adjustment in the return, but thereafter filing a claim for refund, the denial of which may be reviewed by the Tax Court.*fn4
Section 722, on the other hand, affords relief from excessive or discriminatory excess profits taxes resulting from abnormally low excess profits credit. The method of obtaining that relief is specifically stated in the margin.*fn5
It is immediately apparent that Section 722 relief, except as not pertinent here*fn6 is not available to the taxpayer in the first instance, for he may not take advantage of that section in his excess profits tax return.
Careful examination of the statute exposes the error in the critical assumption of petitioner's argument that the total excess profits tax due cannot be found without deciding to what extent it is affected by Section 722. The answer must be, as the Commissioner asserts, that except in instances already mentioned, the extent of excess profits tax liability is determined separately and independently of the considerations contained in Section 722. Having saddled the taxpayer with a tax that undoubtedly could choke off its wind, Congress, reminiscent of sovereign gracious clemency, granted relief under specified conditions. This approach is consistent with American Coast Line, Inc., v. Commissioner, 2 Cir., 159 F.2d 665, at page 668, wherein the Court said, "This argument might perhaps be persuasive, if the denial of 'benefits' under § 722 were regarded as a constituent factor of the tax itself, as for example are the conditions detailed in § 721. We do not so regard § 722; on the contrary it was a favor; it presupposed that, even after taking into account the ameliatory conditions of § 721, the tax was due unless ex gratia the blow was softened; it was a tempering of the wind to the shorn lamb." Although the Court there was primarily concerned with Section 722 as it was amended by the Revenue Act of 1942, 56 Stat. 798, 914, we think it applies equally as well now.
Viewing the legislation in this light, it is not difficult to follow the reasoning of the Commissioner, that the essential characteristic of an application for relief is that it is a claim for refund or credit. The statutory requirements that the excess profits tax due be determined without reference to Section 722, the tax thus shown on the return be paid, and the relief be made available only upon application, are wholly consistent with that conclusion.
The evolution of Section 722nd) affords additional basis for the determination of the Tax Court, as it is explained in Uni-Term Stevedoring Co., supra, Pioneer Parachute Co., supra, and American Coast Line, Inc., supra.
Originally,*fn7 Section 722 briefly provided, "For the purposes of this subchapter, the Commissioner shall also have authority to make such adjustments as may be necessary to adjust abnormalities affecting income or capital, and his decision shall be subject to review by the United States Board of Tax Appeals." But this was merely a stop-gap provision, and not intended as the last word on the subject.*fn8 Even under this statute the Commissioner had promulgated regulations requiring the taxpayer to compute and pay its excess profits tax without regard to the Section, and to file an application therefor.*fn9
The procedure for obtaining relief was first fully provided, when Section 722 was enlarged, and subsection (e) was added by the Excess Profits Tax Amendments of 1941.*fn10 This amendment required a taxpayer to compute its tax and file its return without the application of Section 722.*fn11
Accordingly, the taxpayer was required to apply to the Commissioner for the "benefits" of the section within six months from the statutory date for the filing of returns. However, if the Commissioner issued a preliminary notice of deficiency in excess profits tax, the taxpayer had ninety days to apply to the Commissioner for the relief; or, if the Commissioner mailed a final notice of deficiency without having mailed a preliminary notice or within ninety days after the preliminary notice, the taxpayer could claim the benefits of Section 722 in his petition (or in an amended petition) before the then Board of Tax Appeals.*fn12
In the same amending Act,*fn13 Section 732 was added providing, if there were a disallowance in whole or in part of a "claim for refund" of tax under that subchapter, the Commissioner must send a notice to the taxpayer of such disallowance; within ninety days thereafter the taxpayer could file a petition with the then Board of Tax Appeals for a redetermination of the tax; if that petition was filed, the notice of disallowance was deemed to be a notice of deficiency.*fn14 The Board was also granted broad authority to determine a deficiency under this procedure and its review of Section 722 issues was made final.
Moreover, the Commissioner adopted regulations which considered the application for relief required by the amended statute as "a claim for refund or credit with respect to the excess profits tax for the taxable year paid at or prior to the time such application is filed."*fn15
By Section 222(a) of the Revenue Act of 1942, 56 Stat. 914, subsection (e) of Section 722 was redesignated subsection (d). While the general procedure for obtaining relief was retained, the new provision, aside from extending the time limitations, required the taxpayer not merely to compute its tax and file its return, but also to pay its tax under the subchapter without the application of Section 722, except, of course, as provided in Section 710(a) (5).*fn16 Section 222(c) of the 1942 Act also amended Section 732, with the addition of subdivision (d) thereto, to provide that determinations and redeterminations by any division of the Board involving any question arising under Section 722, or another section not pertinent here, shall be reviewed by a special division, whose determination is not subject to review by the Board.*fn17
It was pursuant to this amendatory statute that the Court in American Coast Line, Inc., v. Commissioner, supra, held that payment of the excess profits tax was a necessary condition to review by the Tax Court of matters pertaining to Section 722. Thus, relief under Section 722 was accorded what fully amounts to the status of a claim for refund.
The next legislative step in the development of Section 722(d), was taken in Section 1(a) of the Excess Profits Tax Amendments of December 17, 1943, 57 Stat. 601, wherein Section 722(d) was modified to read as already noted.*fn18 This amendment was made applicable retroactive to taxable years beginning after December 31, 1939.*fn19
The most significant feature of this amendment was the repeal of those provisions permitting the taxpayer to by-pass the Commissioner and to make his application for Section 722 relief by way of petition directly to the Tax Court. Thus, Congress "wholly assimilated the situation to a claim for refund." American Coast Line, Inc., v. Commissioner, supra, 159 F.2d at page 668. Even under the prior statutory arrangement, the specific permission to petition the Tax Court for relief in the first instance would not have been necessary unless Congress had already considered Section 722 relief available only by a claim for refund; for, the Commissioner's deficiency determination otherwise would have been sufficient to carry the whole matter to the Tax Court as with other sections of the subchapter relating to the excess profits tax.
It may be noted that on the assumption that Congress did not intend to by-pass the Commissioner, and with a view toward affording the fullest consideration to the complex claims based on Section 722, the Commissioner has set up an intra-departmental method of processing such claims by establishing a field division and an "Excess Profits Tax Council". Bulletin on Section 722 (November, 1944), 463A CCH § 5145. Support for this assumption may be found in subsection (g) of Section 722, added by Section 206 of the Revenue Act of 1943, 58 Stat. 21, 55, providing for publication of relief allowed by the Commissioner or the Tax Court, and "In the case of relief allowed by The Tax Court of the United States, the Commissioner shall also set forth the data previously reported under this subsection with respect to relief previously allowed in such case by the Commissioner." We may assume that this was another step to assure a "consistent and uniform application of the principles" in Section 722.*fn20
The difficulty with petitioner's exegesis of the relevant statutes lies in the assumption that the relief accorded under Section 722 may be treated in the manner of a deduction or credit which could or should have been taken on the excess profits tax return. But we think it apparent, from our review, that in cases like the present, the rebate was intended to be made available by a claim for refund, over which the Tax Court would have had no jurisdiction except by virtue of Section 732.
The policy of treating Section 722 relief as a claim for refund further presupposes a payment. The Commissioner has so dealt with the matter in his regulations. Significantly, these regulations have remained constant, in treating the application under Section 722 as a claim for refund, throughout the legislative changes referred to herein. See Commissioner v. Munter, 67 S. Ct. 1175, footnote 6.
Petitioner, however, urges upon the Court the thought that the statute merely requires payment of the "tax shown on its return" in contra-distinction to the prior requirement to "pay its tax", and suggests that since the return filed disclosed no tax due, it has "paid" the tax shown. Accordingly, it is argued, the Commissioner erred in refusing to consider its application as a claim for refund and the notice of deficiency, as quoted above, amounts to a disallowance of the claim; hence, the jurisdictional prerequisites were met.
The obstacle in the path of that conclusion is the fact that petitioner puts itself in the anomalous position of requesting a refund or credit for money which it never paid. Section 722 relief is afforded by way of "recapture," so to speak, and presupposes something paid. This is particularly true in the instant case, since, as has already been pointed out, Section 722 may not be considered by a taxpayer on its excess profits tax return, except as noted. Accordingly, there is nothing to refund to petitioner, nor anything for which it may be credited. Therefore, we fully agree with the Tax Court that "until some (excess profits) tax is paid, there is no basis for relief," and on the basis of what has already been said, it is apparent that "the relief is not affected through reduction of a deficiency in the excess profits tax." Uni-Term Stevedoring Co., Inc., v. Commissioner, supra, 3 T.C. at page 919.
Finally, petitioner voices the fear that on such construction as we have given the law, the Commissioner would be in a position to assert the finality of the proceeding with respect to the deficiency determination against a subsequent contest with respect to the claim for refund. Of course this would be true if petitioner's view, that the claim for refund may be asserted upon a deficiency determination, were controlling. But as this case stands, the claim for relief may not be asserted at that time; for this reason alone the petitioner would not be precluded from asserting its claim if and when the Commissioner rejects it. The Tax Court so ruled in the Uni-Term case, and the Commissioner disavows any contrary thought. Moreover, Section 729(a) makes other provisions of the law applicable only insofar as they are not inconsistent with the excess profits tax subchapter. Thus, the Commissioner cannot take the position that, the notice of disallowance being the equivalent of a notice of deficiency, one notice of deficiency in excess profits tax under Section 272(a) has already been mailed and Section 272(f) prohibits another notice of deficiency where the taxpayer filed a petition with the Tax Court based on the existing notice. Section 732 (a) expressly requires the Commissioner to send a notice of disallowance of the claim for refund to the taxpayer, and the taxpayer may appeal to the Tax Court on the basis of that notice. Accordingly, Section 272(f) would be inconsistent with the excess profits tax subchapter if the notice of disallowance may be said to be a notice of deficiency for by hypothesis that section must be read in the light of the specific relief provisions provided for realization of the benefits of Section 722.
Petitioner also asserts that, having paid the deficiency pursuant to Section 1145, it could not recover such overpayment in view of Section 322(c),*fn21 but whatever plausibility exists in that argument, it fails to take into account Section 322(c) (1).
On this score, a nice point is made in the Tax Court's decision in the Uni-Term case, 3 T.C. at page 921, note 7, where attention is called to the fact that jurisdiction to review the Commissioner's disallowance of a claim under Section 722 is exclusively in the Tax Court, but, for other excess profits tax purposes, the taxpayer has the alternative of suing for refund in a District Court or the Court of Claims. Thus, liability for the excess profits tax in the first instance being without consideration of Section 722, if the argument of finality were effective to prevent the application of the procedure under Sections 722 and 732, then a taxpayer could not take advantage of a suit for refund in such other courts lest it abandon its claim under Section 722. The procedural views of the Tax Court preserve those alternative rights with respect to other provisions of the excess profits tax.
For the reasons stated the order of the Tax Court is affirmed.