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Commissioner of Internal Revenue v. Flory Milling Co.

decided: May 26, 1955.

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
v.
FLORY MILLING CO., INC., RESPONDENT.



Author: Staley

Before MARIS, GOODRICH and STALEY, Circuit Judges.

STALEY, Circuit Judge.

The government has appealed from a decision of the Tax Court*fn1 which held that there was no deficiency in the taxpayer's (Flory Milling Co., Inc.) excess profits income tax payments for its fiscal year which ended September 30, 1944.

The proper amount of the 1944 excess profits tax depends upon the amount of unused excess profits credit which the taxpayer had in 1946, because this amount can be carried back from 1946 to 1944. In turn, the taxpayer's 1946 unused excess profits credit is affected by a 1948 net operating loss, which can be carried back to 1946.

Thus, the determination of taxpayer's 1944 excess profits tax depends upon the permissible amount of net operating loss carry-back from 1948 to 1946.

It is agreed by the parties that Flory Milling Co. sustained a net operating loss in 1948 of $47,241.50. For ordinary income tax computations, this entire amount can be carried back, but the government claims that when net operating losses are carried back to prior years for the purpose of determining excess profits taxes, an adjustment for interest must be made.

During the years when the excess profits tax was in effect, Section 711 of the Internal Revenue Code provided, in part:

" § 711. Excess profits net income

"(a) Taxable years beginning after December 31, 1939. The excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section 13(a) (2), for such year except that the following adjustments shall be made:

"(2) Excess profits credit computed under invested capital credit. If the excess profits credit is computed under section 714, the adjustments shall be as follows:

"(L) Net operating loss deduction adjustment. The net operating loss deduction shall be adjusted as follows:

"(i) In computing the net operating loss for any taxable year under section 122(a), and the net income for any taxable year under section 122(b), no deduction shall be allowed for any excess profits tax imposed by this subchapter, and, if the excess profits credit for such taxable year was computed under section 714, the deduction for interest shall be reduced by the amount of any reduction under subparagraph (B) of this paragraph for such taxable year." 26 U.S.C. § 711 (1952 ed.).

According to subparagraph (B) refered to in subparagraph (a) (2) (L) (i) of this section, only one-half the interest on the indebtedness included in the daily amounts of borrowed capital could be considered in arriving at the net operating loss which was to be carried back for excess profits tax purposes, if, during the year for which the net operating loss is being computed, the taxpayer computed an excess profits credit under Section 714.*fn2

If the excess profits tax had not been repealed and if the taxpayer had computed the 1948 excess profits credit under Section 714, then the government would be correct, and the taxpayer could ...


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