LEWYT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
No. 417.
Argued April 19, 1955.
Decided May 23, 1955.
Seymour Sheriff argued the cause and filed a brief for petitioner.
Assistant Attorney General Holland argued the cause for respondent. With him on the brief were Solicitor General Sobeloff, Ralph S. Spritzer, Ellis N. Slack, Lee A. Jackson and I. Henry Kutz.
Mr. Justice Douglas
delivered the opinion of the Court.
This case is a companion case to United States v. Olympic Radio & Television, Inc., ante, p. 232. The main point in the two cases is the same — whether a taxpayer on the accrual basis can, in computing its net operating loss for one year, deduct the amount of excess profits taxes which were paid in that year but had accrued in an earlier year.
The years 1944 and 1945 were years of profit for the taxpayer. For the years 1946 and 1947, the taxpayer incurred net operating losses which were allowed by the Commissioner as carry-back deductions to the years 1944 and 1945. The taxpayer sought to augment its net operating loss for 1946 by the amount of excess profits taxes which it paid in 1946 on account of its 1945 excess profits tax liability. The Commissioner disallowed the deduction and the Tax Court sustained the Commissioner. 18 T. C. 1245. The Court of Appeals affirmed. 215 F. 2d 518. The case is here on a petition for certiorari which we granted (348 U. S. 895) to resolve the conflict with the Olympic Radip case. Our views, as expressed in the latter case, coincide with those of the Court of Appeals. Accordingly, we affirm that part of the judgment.
There is present in this case a point not involved in the Olympic Radio case. The question is whether the excess profits tax that may be offset against 1944 net income is the amount of excess profits tax reported for the year in question or the amount ultimately found to be due. The taxpayer claims it is the former; the Commissioner, the latter.
The question centers on § 122 (b)(1) and § 122 (d) (6). As we have.seen in the Olympic Radio case, § 122 (b)(1) directs that the net operating loss for a given year be carried back to the two preceding taxable years. And § 122 (d) (6) allows as a deduction “the amount of tax imposed by Subchapter E of Chapter 2 [i. e., the excess profits tax] paid or accrued within the taxable year . . ..” (Italics added.)
The taxpayer’s net income for 1944, as shown by its return, was $827,852.99; and, as finally determined, was $584,866.81. The excess profits tax due according to its 1944 return was $625,561.59. The Commissioner, after allowing as a deduction a net operating loss carry-back of $164,326.38 arising in 1946, and making other adjustments, ultimately determined the taxpayer’s excess profits tax liability for 1944 to be $280,540.33. The Commissioner computed the net income for 1944 at $304,326.48, that is, $584,866.81 minus $280,540.33. Since the net operating loss of $164,326.38 was less than $304,326.48, there was no loss to be carried back to 1945, as § 122 (b)(1) provides “. . . that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such net operating loss over the net income for the second preceding taxable year . . . .”
The taxpayer, however, contends that the excess profits 'tax “accrued” in 1944 is the tax shown on its return for that year, viz., $625,561.59. If this larger amount is the correct figure, then the deduction allowed against 1944 income will be so great as to leave a carry-back which can be deducted against 1945 income.
The controversy turns on the meaning of the clause in §122 (d)(6) which reads, “the amount of tax imposed by Subchapter E of Chapter 2 . . . accrued within the taxable year . . . .” The Commissioner contends that the tax “imposed” is the tax ultimately determined to be due. The argument is that the taxpayer having once got back, through credit or refund, the difference between the amount of the tax “accrued” in 1944 and the amount finally determined to be due, no double benefit should be inferred. The double benefit, it is argued, should certainly be denied when the figure upon which it is based has no economic reality.
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. See Bullen v. Wisconsin, 240 U. S. 625, 630.
When Congress wrote the word “imposed” into § 122 (d)(6), it might have used it in one of two different senses — either to identify the tax or to define the amount of the tax that is to be levied and collected. We think that Congress used “imposed” in the former sense.
In the first place, the deduction allowed by § 122 (d) (6) is not the tax “imposed” by Subchapter E of Chapter 2. It is “the amount of tax imposed by Subchapter E of Chapter 2 . . . accrued within the taxable year.” The word “imposed” when used in conjunction with “accrued” makes tolerably clear that “imposed” merely identifies or describes the tax that “accrued.” That is to say, the sentence as a whole indicates that “imposed” is used merely by way of reference. It seems clear that Congress had that understanding. The Senate Finance Committee reported:
“Section 122 of the Code, relating to computation of the net operating loss deduction allowed by section 23 (s) of the Code, is amended so as to allow the excess profits tax paid or accrued within taxable years (subject to certain rules) as a deduction in computing net operating loss for, and net operating loss carry-over and carry-back from, such taxable years.” S. Rep. No. 1631, 77th Cong., 2d Sess., p. 67. And see H. R. Rep. No. 2333, 77th Cong., 2d Sess., p. 65.
That indicates that the test of deductibility under § 122 (d) (6) is whether the tax “accrued” within the taxable year.
Secondly, the general section dealing with deductions, § 23, allows deductions for taxes paid or accrued during the taxable year, with certain specified exceptions. § 23 (c). Some of the excepted taxes are identified by well-known names, e. g., federal income taxes, estate, inheritance, legacy, succession, and gift taxes. See § 23 (c) (1) (A), (D). Other taxes excepted are identified by reference to the taxes “imposed” by certain provisions of the law. Thus § 23 (c) (1) (B) excepts “war-profits and excess-profits taxes imposed by . . . Subchapter E of Chapter 2.” The applicable Treasury Regulation indicates that the word “imposed” identifies the tax. It provides: “Subject to the exception stated in this section . . . taxes imposed by the United States . . . are deductible from gross income for the year in which paid or accrued.” 26 CFR § 39.23 (c)-1.
Section 23 is especially relevant here, since the language of § 122 (d) (6) was taken almost verbatim from § 23. That section as amended by the Revenue Act of 1941 had provided that, in computing net income, a deduction for taxes “paid or accrued within the taxable year” should be allowed.
As respects the excess profits tax, § 23 (c) (2) provided:
“For the purposes of this subsection, in the case of the excess-profits tax imposed by Subchapter E of Chapter 2—
“(A) The deduction shall be limited to the .tax imposed for the taxable year . . . .” (Italics added.)
It would seem that (A) would have limited the § 122 (d)(6) adjustment to the tax finally paid. But (A) was omitted from §122 (d)(6). The word “imposed” as used in the quantitative sense was dropped, while the word “imposed” as used to identify the tax was retained.
Finally, the tax that “accrued” within a given year is not the tax finally determined to be due but the tax before ultimate adjustments are made. That is elementary in tax law. See Security Flour Mills Co. v. Commissioner, 321 U. S. 281, 284. It would seem therefore that the concept “accrued” embodies the annual accounting principle. If, in case of a taxpayer on the accrual basis, events after the taxable year are taken into account, the word “accrued” would be effectively read out of § 122 (d) (6) or given a varied meaning, contrary to our ruling in the Olympic Radio case.
It is true that the computations under § 122 are designed to spread losses over a five-year period. But we are concerned with a technical concept that is being used as the basis of the formula for that reallocation. We find no justification for taking “accrued” as used in § 122 (d) (6) to mean one thing in the setting of the Olympic Radio case and another in this situation.
Our conclusion is in accord with a line of related decisions. The whole tax scheme has been posited on the basis that the duty to pay is without regard to the deduction made available by the carry-back. See Manning v. Seeley Tube & Box Co., 338 U. S. 561, 567. Only recently we applied that principle to the excess profits tax. In United States v. Koppers Co., 348 U. S. 254, we held that these taxes were payable in full the year when they were due and that interest was payable on the amounts so due, even though ultimately portions of the taxes were abated.
In short, the amount of tax accrued within the taxable year under § 122 (d)(6) is to be determined in accord with the normal accounting concepts relevant to the accrual basis. That amount is not, of course, to be ascertained solely by reference to the figure set forth in the taxpayer’s return, for that figure may be erroneously computed on the accrual basis. But when an amount is arrived at by proper application of recognized accounting principles on the accrual basis, the test of § 122 (d) (6) has been met. Events and transactions of later years, irrelevant to a determination of income on the accrual basis, do not warrant alteration of the figure computed under § 122 (d) (6) for the year in question.
Affirmed in part and reversed in part.
Mr. Justice Harlan took no part in the consideration or decision of this case.
Section 122 (b)(1) provides:
“If for any taxable year beginning after December 31, 1941, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-back for each of the two preceding taxable years, except that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such net operating loss over the net income for the second preceding taxable year computed (A) with the exceptions, additions, and limitations provided in subsection (d)(1), (2), (4), and (6), and (B) by determining the net operating loss deduction for such sécond preceding taxable year without regard to such net operating loss.”
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