Stow Mfg. Co. v. Commissioner

Stow Manufacturing Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Stow Mfg. Co. v. Commissioner Docket No. 19923 United States Tax Court 14 T.C. 1440; 1950 U.S. Tax Ct. LEXIS 144; June 30, 1950, Promulgated *144 Decision will be entered for the respondent. On June 1, 1943, petitioner entered into a final renegotiation agreement with the Secretary of the Navy in which it was agreed that its excessive profits were $ 350,000 and should be paid, $ 70,000 in cash and $ 280,000 by an excess profits tax credit under section 3806 (b) (1), I. R. C. This $ 280,000 excess profits tax credit was erroneous and should have been $ 252,000. Notwithstanding the error the renegotiation agreement, by its very terms, could not be reopened. On May 20, 1948, respondent determined a deficiency in petitioner's excess profits tax by eliminating from petitioner's gross income the $ 350,000 excessive profits and then, pursuant to section 271 (a), I. R. C., treated the credit given under section 3806 (b) as a credit against petitioner's excess profits tax originally assessed, plus an additional assessment. Held, the deficiency was correctly determined. Baltimore Foundry & Machine Corporation, 7 T. C. 998, followed. National Builders, Inc., 12 T. C. 852, distinguished. George C. Coughlin, Esq., and Carbery O'Shea, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. Black, Judge. BLACK *1440 In this proceeding respondent has determined a deficiency in excess profits tax for the calendar year 1942 in the amount of $ 27,436.69. Petitioner claims that it has overpaid its excess profits tax for 1942 by $ 563.31. The question which we have here to decide may be stated thus: Can respondent properly determine a deficiency by a computation method*146 in which he excludes from petitioner's excess profits net income the amount of excessive profits determined in renegotiation and treats the credit under section 3806 allowed against excessive profits in renegotiation as an amount of tax previously credited under section 271 (a) of the Code? FINDINGS OF FACT. The facts which were stipulated are so found. Petitioner is a corporation organized under the laws of the State of New York with its principal office at Binghamton, New York. Petitioner filed its income and excess profits tax returns for the calendar year 1942 with the collector of internal revenue for the 21st district of New York at Binghamton. During the year 1942, petitioner was engaged in the business of manufacturing and selling flexible shafting. The Navy, during the war, used large quantities of this shafting for remotely operating valves on a ship from the deck. During the early war years and in *1441 1942, it manufactured flexible shafting for the United States under contracts with certain departments of the United States and the Maritime Commission. In the year 1943, prior to June 1, 1943, petitioner negotiated with the Secretary of the Navy and his representatives*147 with respect to the renegotiable contracts and business of petitioner for all fiscal periods of petitioner up to and including December 31, 1942. The negotiations were conducted pursuant to section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942, (Public 528, 77th Congress) approved April 28, 1942, as amended by section 801 of the Revenue Act of 1942 (Public 753, 77th Congress) approved October 21, 1942. As a result of such renegotiation proceedings, the Secretary of the Navy determined that petitioner realized excessive profits for the fiscal year ended December 31, 1942, in the amount of $ 350,000. Thereafter, in order to ascertain the amount of excessive profits which petitioner would be required to repay to the United States, respondent, through his agents in the Bureau of Internal Revenue, was asked to determine the amount of the credit or refund of Federal income and excess profits taxes which would result from the elimination from petitioner's gross income of excessive profits of $ 350,000 for its fiscal year ended December 31, 1942. On May 14, 1943, respondent, through his agents in the Bureau of Internal Revenue, determined and notified petitioner*148 and representatives of the Secretary of the Navy that the amount of the tax credit under section 3806 of the Internal Revenue Code against the excessive profits of $ 350,000 for the fiscal year ended December 31, 1942, to which petitioner would be entitled by reason of the elimination of this $ 350,000 from its gross income would be $ 280,000. The internal revenue agent in charge, in accordance with the "policy of this office," computed the section 3806 credit of $ 280,000 with "no consideration" being given to section 783 of the code, relating to the credit for debt retirement. Such credit is one of the items entering into the calculation of excess profits tax payable. He allowed the credit for debt retirement claimed on the original return, instead of allowing a lesser credit for debt retirement which would result from excluding the $ 350,000 excessive profits from petitioner's excess profits net income. Petitioner concedes that the credit of $ 280,000 thus given results from an erroneous computation of respondent, as the true credit should have been $ 252,000. The Navy Department then prepared the renegotiation agreement and sent it to petitioner. The president of petitioner*149 presented the agreement to its board of directors and explained that of the $ 350,000 excessive profits determined, petitioner would have to pay back to the Government only $ 70,000 on account of the $ 280,000 tax credit allowed against such excessive profits. He explained it was a closed agreement *1442 and that petitioner would not have to pay anything further with respect to the excessive profits. The board then approved the agreement without change and authorized its execution. On June 1, 1943, the United States of America and petitioner entered into the renegotiation agreement pursuant to section 403 of the Sixth Supplemental National Defense Appropriation Act of 1942, as amended. The renegotiation agreement of June 1, 1943, provides that the parties thereto are the United States of America and petitioner. It was executed by the United States as follows: UNITED STATES OF AMERICA By Forrestal Acting Secretary of the Navy The agreement contains various recitals which provide, in substance, as follows: The Secretary of the Navy has found that petitioner realized $ 350,000 excessive profits for the year 1942 on its renegotiable contracts; the Treasury Department has reported*150 that the taxes shown on petitioner's 1942 income and excess profits tax returns would be decreased $ 280,000 by eliminating such excessive profits from petitioner's 1942 income; and the parties desire to enter into a final agreement for the elimination of the excessive profits and the discharge of any liability of the contractor for such excessive profits for the year 1942 under section 403 of the Sixth Supplemental National Defense Appropriation Act, as amended. The agreement then provides various stipulations and actions to be taken by petitioner and "the Government," among which is that the petitioner must pay the Government $ 70,000 on account of excessive profits realized by it for the year 1942. The agreement also contains the following provision: 4. The tax credit of $ 280,000 allowed to the Contractor against said $ 350,000 of excessive profits shall be the only refund of or credit against Federal taxes to which the Contractor shall be entitled by reason of elimination of said excessive profits. The agreement further provides that: 6. The finding set forth in this agreement with respect to the excessive profits of the Contractor shall be a final conclusive determination*151 of the excessive profits for all fiscal periods of the Contractor up to and including December 31, 1942, and performance by the Contractor in accordance with the terms of this agreement shall be in full discharge of all liability of the Contractor under said Section 403 to refund or repay to the Government any amount of excessive profits realized by said Contractor under said contracts and subcontracts for all fiscal periods of the Contractor up to and including December 31, 1942, and this agreement shall not be modified by any officer, employee, or agent of the United States, and any determination made in accordance herewith shall not be annulled, modified, set aside, or disregarded in any suit, action or proceeding; subject to the right of the Secretary of the Navy, or his duly authorized representative, to reopen *1443 renegotiation in his discretion at any time hereafter upon a showing of fraud or malfeasance or a wilful misrepresentation of a material fact, including a wilful omission to state a material fact required to make any representation of the Contractor not misleading. On August 5, 1943, the Navy Price Adjustment Board sent a memorandum to the Internal Revenue agent*152 in charge, Buffalo, New York, which reads as follows: Subject: Tax Credit Allowed to Stow Manufacturing Company, Inc., 443 State St., Binghamton, N. Y. 1. By agreement dated as of June 1, 1943, the Secretary of the Navy or his duly authorized representative has determined that the subject company realized excessive profits within the meaning of Section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942 (Public 528, 77th Congress), as amended, for the fiscal year ended December 31, 1942 in the amount of $ 350,000, against which there was allowed a tax credit under Section 3806 of the Internal Revenue Code in the amount of $ 280,000. The subject company agreed to refund to the Government the net amount of $ 70,000. Petitioner fully performed all the terms and conditions in the agreement required to be performed by it. The Navy Department never attempted to reopen the agreement or to obtain further excessive profits from petitioner. The agreement is still in full force and effect. In accordance with the provisions of paragraph 3 of the renegotiation agreement dated June 1, 1943, the petitioner paid to the Treasurer of the United States the sum of $ 70,000, as*153 follows: July 13, 1943 $ 17,500 September 14, 1943 17,500 December 6, 1943 35,000 Petitioner paid excess profits tax of $ 437,115.49 for the calendar year 1942 in four equal quarterly installments during the year 1943 and on May 24, 1948, paid further excess profits tax for such year of $ 9,657.90. In the notice of deficiency, which was duly mailed to the petitioner on May 20, 1948, the proposed deficiency in excess profits tax of $ 27,436.69 was computed in part as follows: Correct excess profits tax liability $ 190,185.16 Excess profits tax assessed: Original, May 1943 list, Acct. No. 400009 $ 437,115.49 Plus -- Additional assessment, May 11, 1948 9,657.90 Total $ 446,773.39 Less: Tentative overassessment allowance $ 4,024.92 Sec. 3806 (b) credit 280,000.00 284,024.92 162,748.47 Deficiency in excess profits tax $ 27,436.69 OPINION. There is but one issue in this proceeding: Whether an erroneous and excessive tax credit given petitioner under section *1444 3806 (b) of the Internal Revenue Code and which credit was incorporated in a final renegotiation agreement can be made the basis of the*154 determination of a deficiency in petitioner's excess profits tax in the manner which has been detailed in our findings of fact. Respondent determined a deficiency in excess profits tax by eliminating from petitioner's gross income $ 350,000 which represented excessive profits determined in a final renegotiation agreement. After computing petitioner's excess profits tax liability, respondent then treated the credit given under section 3806 (b) as a credit against petitioner's excess profits tax originally assessed, plus an additional assessment. The portion of respondent's computation which relates to the 3806 (b) credit is set out in our findings of fact. Petitioner contends that the method of computation used by respondent is not in accord with National Builders, Inc., 12 T. C. 852, wherein we held that the excessive profits not finally determined were not to be eliminated from income in computing the excess profits tax, and that respondent was not permitted to treat the 3806 (b) credit as a rebate under section 271. Petitioner also contends that the renegotiation agreement between it and the United States which specifically sets forth the amount*155 of the section 3806 (b) credit (albeit erroneous and excessive) precludes respondent from asserting a deficiency in taxes resulting in what petitioner claims is a smaller credit than the $ 280,000 stated in the renegotiation agreement. Respondent relies on Baltimore Foundry & Machine Corporation, 7 T. C. 998, which allowed a computation of excess profits tax identical to the method of computation employed by respondent in the instant proceeding. Respondent also asserts that the renegotiation agreement is not a closing agreement and that the $ 280,000 credit set out in the renegotiation agreement is, in fact, the actual credit given petitioner in the deficiency notice. There is no dispute in this proceeding as to the amount of excessive profits. The renegotiation agreement between petitioner and the Secretary of the Navy wherein the parties agreed that petitioner's excessive profits were $ 350,000 is a final determination. Maguire Industries, Inc. v. Secretary of War, 12 T. C. 75. The question before us is one which involves the computation of a deficiency and the 3806 (b) credit of $ 280,000 set out in the renegotiation*156 agreement. Petitioner argues that National Builders, Inc., supra, is controlling in the instant proceeding and, therefore, respondent's computation of a deficiency is erroneous. In National Builders, we had a situation where the amount of excessive profits had not been finally determined. There is, in fact, pending before this Court an appeal from the unilateral determination of excessive profits made by the Under Secretary of War. Our decision in National Builders was necessarily *1445 predicated on the fact that the amount of excessive profits was not finally determined. National Builders does not apply to the instant situation where the amount of excessive profits has been finally determined. We think that Baltimore Foundry & Machine Corporation, supra, is controlling here. In that case, as in the instant proceeding, the tax liability was before us after the amount of excessive profits had been finally determined. In Baltimore Foundry the taxpayer received an excessive 3806 (b) credit as a result of a typographical error. It is true, as petitioner states, that the erroneous credit therein*157 was not specifically set out in the renegotiation agreement; however, the renegotiation proceeding in Baltimore Foundry was nonetheless finally closed as is the case in the instant proceeding. In Baltimore Foundry, we said: * * * The revenue agent gave incorrect information and a mistake was made in the renegotiation settlement with Harrison for the year here involved. There was credited against the amount of excessive profits eliminated $ 2,000 more than the amount by which the tax should have been decreased as a result of reducing income for that year by $ 20,000. The petitioner received the full benefit of the credit. That matter has been closed and can not be reopened. We are concerned, however, with a correct interpretation of section 271 (a). It provides that the amount shown as the tax on the return shall be decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax. The $ 2,000 here in question of the amount of tax shown on the return was credited or otherwise repaid. It does not make any difference, for present purposes, whether it was incorrectly credited or repaid. * * * The tax shown on the return should *158 be decreased by that credit in computing the deficiency under 271 (a). * * * The method of computation set out in Baltimore Foundry has not been overruled by National Builders for, as stated above, National Builders involves an entirely different situation. On the strength of our decision in Baltimore Foundry, we think respondent's determination must be approved. Decision will be entered for the respondent.