Before GOODRICH, KALODNER and STALEY, Circuit Judges.
The Budd Company, a Pennsylvania corporation, seeks in this action to recover 1947 income tax which it has paid and for which a claim for refund was filed in the amount of $2,796,918.28 including interest. The plaintiff was successful in the trial court (D.C.E.D. Pa. 1957, 148 F. Supp. 792), and the United States appeals.
The facts present no difficulty, except to understand their significance. Indeed, they were largely stipulated. The law involved is the Internal Revenue Code of 1939, especially the carry-back and carryover rules set out in § 122, 26 U.S.C. § 122.
There was a full finding of facts by the district court. Only those will be repeated here which are necessary to pose the legal point involved.
In 1946, the taxpayer sustained a net operating loss of more than ten million dollars. Under sections 23(s) and 122 (b)(1)(A) of the 1939 Code,*fn1 Budd was entitled to carry back this loss as a deduction for 1944. Since the 1946 loss was greater than the 1944 income, all the 1944 taxes were subject to a claim for refund. In 1947 the taxpayer applied for and received in cash all its 1944 excess profits taxes not already received as a renegotiation credit or otherwise.
In 1945 the taxpayer sustained a net operating loss, but it is agreed that we are not concerned with its application here.
It is the second application of the 1946 loss, by way of carry-over deduction from 1947 income, which makes our case here. Section 122(b)(2) authorizes a carryover of that portion of the 1946 loss which exceeded "net income" for 1944. And in computing 1944 "net income" for this purpose, § 122(b)(2) allowed a taxpayer to take certain adjustments, including a deduction, under § 122(d)(6), of its 1944 excess profits taxes. As originally accrued these were something over eight million dollars. So computed, its net income under § 122(b)(2) was something more than one and one-half million. Therefore, taxpayer was entitled to carry over the difference between this figure and its 1946 net operating loss. Since this carry-over deduction exceeded the 1947 income, Budd contends that it is entitled to a refund of all its 1947 taxes, and so thought the district court.
The Government, however, disputes this even with the embarrassing precedent of Lewyt Corp. v. Commissioner, 1955, 349 U.S. 237, 75 S. Ct. 736, 99 L. Ed. 1029, which bears upon §§ 122(b)(1) and 122(d)(6). In that case the Government argued that the taxpayer, having recovered part of his money paid as 1944 excess profits taxes, due to the first application of the 1946 net operating loss, should not be able to utilize that amount as a reduction of the 1944 net income in computing the carry-back of that loss to 1945. The Court held otherwise. The opinion was narrowly based on the reasoning that § 122(d)(6) permitted the reduction from 1944 income of taxes accrued in 1944 and that figure could not be affected by events occurring in later years, even if they resulted in less taxes ultimately found to be due. As a result of this decision a larger portion of the loss remained unabsorbed and available for the second application as a carry-back in 1945.
Finding itself defeated on this approach, the Government now attacks the problem from another direction. Here it concedes that the appellee is entitled under Lewyt to use the full amount of its 1944 excess profits tax in computations which eventually culminate in a reduction of its 1947 tax.However, the United States now contends that the taxpayer, having obtained this tax benefit from the 1944 tax, should be required to account for that part of the tax which it has gotten back from the Treasury as income either in 1946 when the refund accrued or in 1947 when it was actually paid. In either case should it succeed the Government would be able to achieve substantially the same goal that it failed to gain in the Supreme Court. This is most apparent considering the income as accrued in 1946, since the net operating loss would thereby be directly decreased. By the second alternative the loss would remain quantitatively the same, but of less effect in reducing 1947 taxes, in that there would be more income to offset.
In support of its argument the Government urges that the "tax benefit" doctrine should induce this Court, notwithstanding the conclusion reached in Lewyt, to deny a recovery for the plaintiff. The rationale of this judicially created rule, the argument runs, is to prevent the unjust enrichment that would occur by leaving untaxed a refund previously paid which has also been utilized to diminish taxable income. But applying broad equitable considerations to problems raised by a tax statute is dangerous business, at least for an intermediate court. We were reversed for doing so in Rothensies v. Electric Storage Battery Co., 1946, 329 U.S. 296, 67 S. Ct. 271, 91 L. Ed. 296, reversing 3 Cir., 1945, 152 F.2d 521.
The literal directions given by the statute applicable here allow the taxpayer to do just what the district court said it could do.In fact, a similar contention was made in the Lewyt case and the majority opinion by Mr. Justice Douglas uses language concerning the point which we think should be the guide for us. It is:
"But the rule that general equitable considerations do not control the measure of deductions or tax benefits cuts both ways. It is as applicable to the Government as to the taxpayer. Congress may be strict or lavish in its allowance of deductions or tax benefits. The formula it writes may be arbitrary and harsh in its applications. But where the benefit claimed by the taxpayer is fairly within the statutory language and the construction sought is in harmony with the statute as an organic whole, the benefits will not be withheld from the taxpayer though they represent an unexpected windfall." Lewyt Corp. v. Commissioner, supra, 349 U.S. at page 240, 75 S. Ct. at page 739.
Not only is this the Supreme Court's answer to the general line of argument, but we have an express decision from the Court of Claims in National Forge & Ordnance Co. v. United States, 1957, 151 F. Supp. 937, on all fours with our problem here. The Court of Claims decided the case against the Government. The appellant's brief in this case not unnaturally disagrees with the Court of Claims result and attributes it to a lack of understanding on the part of the court of the purpose of the computations under § 122(b). It may or may not be the case that the court ...