The opinion of the court was delivered by: SORG
This is an action against the United States for the recovery of excess profits tax, and interest thereon, paid by plaintiff for the year 1950. The facts are stipulated by the parties and are hereby adopted by the Court.
In connection with filing its income tax return for 1950, plaintiff made application under Section 447(e) of the Internal Revenue Code of 1939 for the benefits of Section 446 in computing its excess profits tax credit for the year 1950 as a member of a 'depressed industry subgroup'. 26 U.S.C.A. Excess Profits Taxes Internal Revenue Code of 1939, §§ 447(e), 446. There is no dispute that plaintiff was entitled to use Section 446 in computing its excess profits tax credit. In determining tis credit under this section, plaintiff did not deduct from its total assets the amount of advances made by its parent corporation, Hillman Transportation Company. Defendant contends that Section 446 was amended by Section 510 of the Revenue Act of 1951, c. 521, 65 Stat. 452, 26 U.S.C.A. Excess Profits Taxes, § 442(f), to require that such advances be deducted. Plaintiff contends that it was not.
Section 446, enacted as part of the Revenue Act of 1950, grants relief in computing its excess profits tax credit to a taxpayer who qualifies as a member of a 'depressed industry subgroup' whose net income during the base period (1946-1949) was depressed as defined therein. This section permits such a taxpayer to reconstruct an average base period net income by multiplying its 'total assets' by an industry rate of return determined by the Secretary of the Treasury, together with other adjustments not here involved. As originally enacted it did not contain any definition of 'total assets' nor did any other section of the Act contain any definition of total assets applicable to Section 446.
Section 510 of the Revenue Act of 1951 provides as follows:
'Sec. 510. Definition Of Total Assets For Purposes Of Sections 442-446.
'The first sentence of section 442(f) (relating to definition of total assets) is hereby amended to read as follows: 'For the purposes of this section, the taxpayer's total assets for any day shall be determined as of the end of such day and shall be an amount equal to the excess of-
"(1) the sum of the cash and the property (other than cash, inadmissible assets, and loans to members of a controlled group as defined in section 435(f) (4)) held by the taxpayer in good faith for the purposes of the business, over
"(2) the amount of any indebtedness (other than borrowed capital as defined in section 439(b)(1)) to a member of a controlled group (as defined in section 435(g)(6)) which includes the taxpayer."
The legislative history upon which defendant relies consists of comments in the report of the Senate Committee on Finance. In S.Rep. No. 781, 82d Cong., 1st Sess. (1951-2) Cum.Bull. 458,517-518), U.S.Code Cong. and Adm.Service 1951, p. 2058, the Committee stated the following:
'18. Capital reduction for loans made by parent corporations to subsidiaries.
'Section 510 of your committee's bill provides that where a subsidiary corporation computes its average earnings credit on the basis of the industry rate of return applied to its total assets and where such subsidiary has borrowed funds from its parent corporation on open account, the amount so borrowed shall be eliminated from its total assets.
'This is necessary to close a loophole in the existing excess profits law. Under present provisions, a parent corporation does not incur a capital reduction by reason of amounts loaned on open account to subsidiaries. The subsidiary, however, would obtain an increase in the amount of its total assets to which the industry rate of return is applied under several of the relief sections. By excluding from total assets of the subsidiary the amount represented by such loans from a parent corporation or from a member of a ...