The opinion
Disney, J. dissenting: The majority opinion concludes, rightly 1 think, that the deductions for pensions and annuities, not having occurred through petitioner’s 35 years of previous existence, wer< abnormal in class for 1938; nevertheless, concludes that for 1939 thej were normal. In substance, the reason given for the holding of nor mality in 1939 is that they were instituted as a course of conduct ir 1938, and continued throughout 1939 to 1942, inclusive. In my view such reason contravenes the essential basis for the excess profits tar and its ascertainment. The prime object of the various sections o: the statute is to ascertain and tax excess profits. Ascertainment a: to how much is excess involves, of course, a comparison. That comparison is with the average income from a 4-year period called the bas< period. In order to arrive fairly at the amount of excess, a fail average for the base period income must be arrived at. This is dons by first computing “the excess profits net income” for each of the bas< period years, and then applying certain other sections to get at th( average. To prevent unfairness, abnormalities are avoided by the use so far as here pertinent, of the provisions of section 711 (b) (1) (J) (i), which provides for adjustment of the “excess profits net income’ for each base period year by disallowance of deductions which ari abnormal in class. The excess profit is computed after giving “excess profits credit” for 95 per cent of the average base period net inconw as finally ascertained, including the use of section 711 (b) (1) (J) (i) above. The end and object of the statute is the determination of th( average base period net income, the credit, and the tax on the excess profit. The taxable year here is 1942; the base period years are 193( to 1939, inclusive.
I can not bring myself to believe that normality of deductions foi 1939 can, under the objectives and mechanics of the excess profits law be found by examining years later than 1939 — the last base perioc year. Later years do not comprise the period with which essentiallj the profits for 1942 are compared; and of course 19⅜2 can not be com j pared with itself, which is, in effect, done by the majority opinion so far as 1939 normality is made to depend upon the deduction sitúa j tion in 1942. In my opinion, whether deductions in 1939 were normal depends upon the history of previous years and can not be predicated upon examination of later nonbase period years. The matter, I think is to be viewed, not from later years, but from the base period (anc perhaps earlier years). Otherwise, I see no comparison between 1941 and the base period, which is the basic idea in the whole statute, ir order that any “excess” may be determined. Not only does it appeal logically impossible to arrive at an “excess” of the taxable year ovei “the test period” (Regulations 112, sec. 35.711 (b)-2 (b)), but certaii statutory provisions indicate to me that it was never Congressional intent to determine abnormality of a deduction in a base period year by considering whether it was normal in later years. First, in section ril (b) (1) (J) (ii), as to abnormalities in amount, the comparison is with the four previous years; and in section 711 (b) (1) (K) (i), which is one of the “rules for application of subparagraphs (H), (I), and (J),” it is provided that if the taxpayer was not in existence for four previous years, the average to determine abnormality in amount may be ascertained by considering the previous years of existence and later years up to the “second taxable year under this subchapter”— which is 1941, since 1940 was the first year of the excess profits tax law. See Regulations 112, sec. 35.711 (b)-2. Thus, we see that in determining the average in amount, only previous years, in the usual situation, and only up to 1941 in the unusual situation of no previous four years, are to be regarded. Only in the absence of previous existence or experience, to the extent of four years, is any later time to be considered. The number of years is, in any event, to be no more than four. I think the same logic applies to determining normality in class, and that we may not determine normality in 1939 by normality in later years which do not enter into the test. Yet here, we see the majority covering five years, 1938-1942, inclusive, to determine normality, going into, future years to use hindsight, and in particular using a period after 1941, the taxpayer’s “second taxable year under this subchapter.” . In this connection, I note that Regulations 112, section 37.711 (b)-2 (b), providing for the statement required of taxpayers claiming disallowance of abnormal deductions under (H), (I), or (J), requires a showing for only four preceding years (or such years as the taxpayer is required to use in determining the average). Nothing requires or indicates that it may use later years, and, as above seen, it may not go beyond 1941, or beyond four years.
Consideration of section 722 (a) also indicates, in my opinion, that future years may not help determine abnormality; for thereunder a “fair and just amount representing normal earnings” may be “used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period'1'' (italics supplied), and “in lieu of the average base period net income otherwise determined under this subchapter”; but it is provided that, in determining such constructive average base period net income, “no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939,” (with certain exceptions not pertinent here). I suggest that this language makes it completely clear that the excess profits tax is based on comparison, and that, with good reason, events or conditions (normality or abnormality) after the “test period” are necessarily in logic not regarded. I can see no reason to distinguish in this respect between the actual and the constructive base period net income, and have no doubt that Congress intended none. Yet here, the majority determines normality of deductions in 1939 in part because of conditions in 1940-1942, inclusive. I think no sound base for an excess profits tax can be so determined.