Petition — United States v. Foster Lumber Co.

n. %4-799

t

o, Supreme Court, U. S.

Iu the Supreme Court of the a ited Sthted’ P

OcTOBER TERM, 1974 DEC 24 1974

{| MICHAEL RODAF, JR., CLERK

meee ee ee ed

UNITED STATES OF AMERICA, PETITIONER

Vv.

FosTER LUMBER COMPANY, INC.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

EIGHTH CIRCUIT

ROBERT H. BORK,

Solicitor General,

Scott P. CRAMPTON,

Assistant Attorney General,

STuART A. SMITH,

Assistant to the Solicitor General,

ELMER J. KELSEY,

ROBERT G. BURT,

Attorneys,

Department of Justice,

Washington, D.C. 20530.

INDEX

Page

SN aes 1

REE ee ae ce mn eS IO 2

Gusstion presented ties 2

Statement . 3

Reasons for granting the writ... = 6

ETN eae SI 12

Appendix A Lea oT eR LOTS la

eee eteesdiniols 8a

Ee ie aN Se RR Oe 15a

EE ETERS Ae ASL ea ee De 17a

CITATIONS

Cases:

Axelrod v. Commissioner, No. 74-1511,

decided December 17, 1974, reversing

32 T.C.M. 885 (decided August 28,

1973) me Ls Fine se ee 6

Chartier Real Estate Co. v. Commissioner,

52 T.C. 346, affirmed per curiam, 428

F. 2d 474 6, 10

Continental Equities, Inc. v. Commission-

er, 33 T.C.M. 812 (decided September

25, 1974) __...... se deceenteniciameematas 7

Data Products Corp. v. United States,

(decided September 25, 1974) 7,11

Mutual Assurance Society of Virginia

Corp. v. Commissioner, C.A. 4, No. 74-

1133, decided October 18, 1974 _....__ 6, 8, 10

II

Cases—Continued Page

Naegele v. United States, decided August

6, 1973 (D. Minn.), pending, No. 73-

I eeu 6-7

Olympic Foundry Co. v. United States,

J 5 ene ee 6

Weil v. Commissioner, 23 T.C. affirmed,

I i ae

Statutes:

Internal Revenue Code of 1954 (26

U.S.C.) :

I a neeidiienas 8

ad 8

| eR aR eR ND 8

IIIT SI do sciceceecbcascenpieninedeibenintenniaeeietiniioaaseans 3, 4,9

FICS DERE ee a enone En 8

IE I: i dcadae ctaigigal eaaieindesaniaipaceianiads 8

I I const oeciciancemsaemnassabieedl 4,8,9,17a

Sec. 161 _ aes 8

Sec. 170 _. 8

SERRE ERR ee aes Sever eer Ee 2

nS amie 17a

| ee pee 6, 7,8, 9, 10, 17a

. Ea S

Sec.

Sec.

Sec.

Sec.

Sec.

Sec.

Sec.

Sec.

Sec.

246(b)

247

593 (b)

832 (a)

bo

_

on

© © © © © &S CO

Ill

Statutes—Continued Page

Lr cs )

ee 9

Sec. 1201 __........._.. 3 lenaddl 2, 3, 4, 5, 6

eS Pee 4,9, 10, 20a

Sin ae ee 2la

Miscellaneous:

H. Rep. No. 855, 76th Cong., 1st Sess..... 11

Iu the Supreme Court of the United States

OCTOBER TERM, 1974

No.

UNITED STATES OF AMERICA, PETITIONER

Vv.

FOSTER LUMBER COMPANY, INC.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

EIGHTH CIRCUIT

The Solicitor General, on behalf of the United

States, petitions for a writ of certiorari to review

the judgment of the United States Court of Appeals

for the Eighth Circuit in the above-captioned case.

OPINIONS BELOW

The memorandum and order of the district court,

and the stipulation of facts to which it refers (Ap-

pendix A, infra, pp. la-7a), are not reported. The

opinion of the court of appeals (Appendix B, infra,

pp. 8a-l14a) is reported at 500 F.2d 1230.

(1)

2

JURISDICTION

The judgment of the court of appeals was entered

on July 29, 1974 {Appendix C, infra, pp. 15a-16a).

On October 17, 1974, Mr. Justice Blackmun extended

the time for filing a petition for a writ of certiorari

to and including December 26, 1974. The jurisdic-

tion of this Court is invoked under 28 U.S.C. 1254

(1).

QUESTION PRESENTED

Section 172 of the Internal Revenue Code of 1954

permits the carryback of a net operating loss to a

taxable year prior to the year in which the loss is

sustained, and a carryover to a succeeding year of

the amount, if any, by which the loss exceeds the

taxable income for each prior year to which the loss

may be carried.

The question presented is whether, in carrying

back a net operating loss to a year in which the tax-

payer had both ordinary income and capital gains

and employed the alternative tax computation method

of Section 1201, the loss deduction available for car-

ryover to a succeeding year is the amount by which

the loss exceeds only the ordinary income for the

prior year, as the decision below held, or the amount

by which the loss exceeds both the ordinary income

and capital gains for the prior year.

3

STATEMENT ,

Respondent is in the lumber business (Appendix

A, infra, p. 4a).’ For its taxable years ended March

31, 1966 through 1968, respondent reported the fol-

lowing amounts of ordinary and capita! gains in-

come (Appendix A, infra, p. 4a):

Excess of Net

Long-Term Capital

Net Gain Over Net Total

Taxable Ordinary Short-Term Capital Taxable

Year Income Loss Income

1966 $ 17,236.05 $166,634.81 $173,870.86

1967 $114,261.82 $114,655.96 $228,917.78

1968 ($ 42,203.12) ($ 42,203.12)

Because respondent sustained a net operating loss

of $42,203.12 for its taxable year 1968, it elected to

carryback that loss to 1966, and filed Form 1139

(Corporation Application for Tentative Refund from

Carryback of Net Operating Loss). As the Code

prescribes, respondent recomputed its 1966 tax lia-

bility under the method provided by Section 11 (the

so-called “regular method’), and the “alternative tax

computation” provided by Section 1201 of the Code.

Taking into account the carryback of the 1968 loss

of $42,203.12, respondent’s computations of its 1966

income tax liability under each of the two methods

were as follows (Appendix A, infra, pp. 4a-5a):

1 The case was submitted to the district court on a stipu-

lation of facts (Appendix A, injra, pp. 3a-7a).

4

“Regular Method” (Section 11)

Taxable Income (excluding net

operating loss deduction):

Ordinary income $ 7,236.05

Capital gains income 166,634.81 $173,870.86

LESS: Net operating loss deduction

resulting from carryback of 1968

net operating loss 42,203.12

Taxable Income (Section 63 (a) ) $131,667.74

Regular tax (1966 rates) $ 58,200.52

“Alternative Method” (Section 1201)

Taxable Income (excluding net

operating loss deduction):

Ordinary income $ 17,236.05

Capital ga'ns income 166,634.81 $173,870.86

LESS: Net operating loss deduction

resulting from carryback of 1968

net operating loss 42,203.12

Taxable Income (Section 63 (a) ) 131,667.74

(Step 1—Partial Tax)

LESS: Excess of net long-term

capital gain over net short-

term capital loss 166,634.81

Balance ($24,967.07)

Partial Tax at Section 11 rates on

balance (Section 1201 (a) (1)) —0—

(Step 2—Capital Gains Tax)

PLUS: Capital Gains Tax at flat

25 percent rate on excess of

net long-term capital gain

over net short-term capital

loss (Section 1201 /a) (2) ) 41,658.70

Alternative Tax (1966 rates) $ 41,658.70

5

Since the $41,658.70 tax computed under the “alter-

native method” of Section 1201 was lower than the

tax computed under the “regular method” of Section

11, respondent was required to, and did, report the

amount of alternative tax computed under the provi-

sions of Section 1201 as its recomputed 1966 tax

liability (Appendix B, infra, p. 5a).

This suit involves respondent’s tax liability for its

taxable year ended March 31, 1967. In applying for

a tentative refund from the carryback of a net oper-

ating loss for that year, respondent claimed that

$34,967.07 of its 1968 loss of $42,203.12, which had

been carried back to 1966, was available to offset

income for 1967. Respondent based its claim on the

contention that its 1968 loss had been “‘used” in 1966

only to the extent of the ordinary income of $7,236.05

for that year (Appendix A, infra, p. 6a).

On audit, the Commissioner of Internal Revenue

disaliowed respondent’s claim for refund for its tax-

able year 1967 (Appendix A, infra, p. 7a). The

Commissioner’s disallowance was premised on the

ground that rvespondent’s 1968 net operating loss of

$42,203.12 had been entirely “used” to offset its 1966

taxable income of $173,870.86 for that year. As a

result, the Commissioner determined that no part

of the 1968 net operating loss deduction was avail-

able to respondent to carry forward from its taxable

year 1966 to 1967.

The district court upheld respondent’s claim for

refund (Appendix A, infra, pp. la-3a) and the court

of appeals affirmed (Appendix B, infra, pp. 8a-14a).

6

REASONS FOR GRANTING THE WRIT

1. The decision below directly conflicts with Mu-

tual Assurance Society of Virginia Corp. v. Commis-

sioner, C.A. 4, No. 74-1133, decided October 18, 1974.

In that case, the Fourth Circuit recognized the con-

flict and explicitly rejected the reasoning of the court

below. It held, on parallel facts, that a corporation

which carries back a net operating loss to a year in

which it employs the alternative tax computation of

Section 1201, may carry forward to succeeding years

only the excess of such loss over the prior year’s ordi-

nary income and capital gains. In concluding that

the amount of the loss carryback available to offset

incorne of succeeding years is the excess of the loss

over only the prior year’s ordinary income, the court

of appeals misconstrued the plain terms of Section

172(b)(2) of the Code.

The issue has been and continues to be widely

litigated * and resolution of the conflict by this Court

* The First and Ninth Circuits are in accord with the de-

cision below. See Chartier Real Estate Co. Vv. Commissioner,

52 T.C. 346, 356-358, affirmed per curiam, 428 F.2d 474 (C.A.

1), and Olympic Foundry Co. v. United States, 493 F.2d 1247

(C.A. 9), affirming per curiam an unreported order of Feb-

ruary 9, 1972 (W.D. Wash.). The Tax Court’s opinion in

Chartier Real Estate Co. was the first decision on the question

and contains the most detailed statement in support of the

court below. In Avelrod v. Commissioner, No. 74-1511, de-

cided December 17, 1974, reversing 32 T.C.M. 885 (decided

Augist 28, 1973), which involved an individual taxpayer, the

Sixth Circuit expressed agreement with the Mutual Assurance

Society decision of the Fourth Circuit.

These decisions have been followed in Naegele v. United

States (decided August 6, 1973) (D. Minn.), now pending

7

is essential in order that there be a uniform national

rule.

2. Section 172(b)(1) of the Code, Appendix D,

infra, pp. 17a-18a, permits a taxpayer to carry back

a net operating loss deduction to each of the three

taxable years preceding the taxable year in which

the loss was sustained. Under the procedure pre-

scribed by Section 172(b) (2), Appendix D, infra, p.

18a, the loss is first carried back to the earliest of

the three taxable years prior to the year of the loss.

For present purposes, to the extent the loss is not

fully “used” in the earliest of the prior years, Section

172(b) (2) provides for a carryover of the loss to

each of the next succeeding two years. The language

of Section 172(b) (2), which is central to the ques-

tion presented in this case, states as follows:

The portion of such loss which shall be carried

to each of the other taxable years shall be the

excess, if any, of the amount of such loss over

the sum of the taxable income for each of the

prior taxable years to which such loss may be

carried. * * *

Thus, the amount of the net operating !uss which

may be carried over to succeeding years is the excess

of the amount of the loss over the taxpayer’s “tax-

able income” for the earliest year to which the loss

is carried back.

before the Eighth Circuit, No. 73-1921, both of which have

been appealed by the government; Continental Equities, Inc. Vv.

Commissioner, 33 T.C.M. 812 (decided July 25, 1974), and

Data Products Corp. Vv. United States (decided September 25,

1974) (C.D. Cal.).

8

As the Fourth Circuit pointed out in Mutual As-

surance Society, the holding of the court below that

respondent’s 1968 loss carryback was “used” only to

the extent of its 1966 ordinary income, misconstrued

the statutory term ‘‘taxable income” as it is employed

in Section 172(b)(2). That term is defined by Sec-

tion 63(a) of the Code, Appendix D, infra, p. 17a,

as gross income less allowable deductions. Under

this definition, which is applicable to Section 172(b)

(2),° “taxable income” would include “all income

from whatever source derived” (see Section 61(a)),

and would include both ordinary income and capital

gains.

Since respondent’s 1968 loss of $42,203.12 was less

than its 1966 taxable income of $173,870.86, there

was no “excess” of the loss over taxable income to

be carried ove’ to 1967. The court of appeals’ re-

striction of “taxable income” to include only ordinary

income flatly contradicts the definition of that term

in Section 63(a).*

* The specific language of Section 63(a) applies its defi-

nition of “taxable income” to all sections of the Internal Reve-

nue Code contained in Subtitle A, which includes the pro-

visions from Sections 1 to and including 1564.

‘That the Section 63(a) definition is applicable to Section

172(b) (2) is further demonstrated by the use of the term

“taxable income” in many other Code provisions. See e.g.,

Sections 3, 4, 56, 161, 170 and 211. Indeed, when the term

“taxable income” is intended to depart from the Section

63(a) definition, the particular provision includes an explicit

9

The fact that respondent employed the alternative

tax computation under Section 1201(a) does not call

for a different result. Section 11 of the Code imposes

a “regular” tax on the taxable income of a corpora-

tion consisting of the sum of a normal tax equal to

22 percent of the taxable income and a surtax equal

to 26 percent of the taxable income exceeding $25,-

000. However, where part of a corporation’s taxable

income consists of capital gains, Section 1201(a)

prescribes an “alternative” tax computation which

must be used when it results in a lower tax than the

tax computed under Section 11. The “alternative”

computation of Section 1201(a) provides that a cor-

poration shall determine its tax liability by comput-

ing the sum of (1) a “partial” tax imposed on its

taxable income, at regular Section 11 rates, less capi-

tal gains (efiectively leaving only its ordinary in-

come subject to the “partial” tax); and (2) a “capi-

tal gains” tax imposed at a flat 25 percent rate on

the previously excluded capital gains.

As the alternative tax computation employed by

respondent for 1966 illustrates (p. 4, supra), its

modification. See e.g., Sections 593(b) (2) (E), 832(a) and

852 (b) (2).

The only modifications contained within Section 172 are set

forth in Section 172(b) (2) (B) (requiring the exclusion of

the net operating loss for the current loss year or any other

year thereafter) and Section 172(d) (which applies only to

corporations eligible for the special deductions under Sections

242 and 922 and the computations allowed by Sections 243,

244, 245, 246(b), and 247 of the Code). None of these de-

partures from the Section 63(a) definition of “taxable in-

come” is applicable here.

10

entire 1968 loss was “used” to offset its taxable in-

come for 1966. Indeed, the first mathematical oper-

ation of the computation prescribed by Section 1201

(a)—the substraction of the 1968 loss of $42,203.12

from respondent’s 1966 income of $173,870.86, which

reduced its taxable income for that year to $131,-

667.74—demonstrates that no part of the loss re-

mained to offset income for 1967.

Contrary to the decision below, the fact that re-

spondent’s net capital gains ($166,634.81) exceeded

its reduced taxable income ($131,667.74), so that its

partial tax under the alternative computation was

zero, does not support the conclusion that the 1968

loss was only “used” to the extent of respondent’s

ordinary income for 1966.° That loss had already

been “used” to offset respondent’s total taxable in-

come (ordinary income plus capital gains) and had

been completely absorbed in that process. Thus, the

court below has misconceived the import of the al-

ternative tax computation.

This analysis is confirmed by the congressional un-

derstanding that no net operating loss carryover is

available as a deduction from a year in which the

°The Tax Court in Chartier Real Estate Co. reached this

result by construing the phrase “to which such loss may be

carried” in Section 172(b) (2) as modifying the term “tax-

able income” (see 52 T.C. at 358). However, the Fourth Cir-

cuit in Mutual Assurance Society specifically rejected this

reading of the statute, stating that “[i]f Congress had in-

tended to enact the rule in Chartier Real Estate, it certainly

chose an obscure verbal formula to convey this meaning”

(slip op. at 17).

11

taxpayer does not suffer an economic loss. See De-

tailed Discussion of Certain Technical Provisions of

the Revenue Bill of 1939 (H. Rep. No. 855, 76th

Cong., 1st Sess., p. 17). The figures for 1966 demon-

strate that respondent did not suffer an economic

loss for that year but in fact had net income of

$131,667.74. Thus, there is no remaining loss carry-

over available to offset income for 1967.

3. We are advised by the Internal Revenue Serv-

ice that with respect to this issue there are presently

pending administratively cases involving 164 corpo-

rate taxpayers in which $30,740,027 of revenue is

at stake. This figure does not refiect additional

amounts which are expected to arise as a result of

the attempts by taxpayers to claim net operating

loss carryover deductions for succeeding years on the

ground that portions of such losses are still available

to offset income.’ Indeed, current economic condi-

tions in which many corporations are incurring losses

could substantially increase the administrative im-

portance of the question presented beyond the amount

now at issue.

°*For example, Data Products Corp. v. United States,

supra, n. 2, which the district court decided adversely to

the government, involves a refund claim of $152,451. How-

ever, the taxpayer has claimed an unused loss carryover in

excess of $5,000,000.

12

CONCLUSION

For the reasons stated, the petition for a writ of

certiorari should be granted.

Respectfully submitted.

ROBERT H. Bork,

Solicitor General.

ScotT P. CRAMPTON,

Assistant Attorney General.

STUART A. SMITH,

Assistant to the Solicitor General.

ELMER J. KELSEY,

ROBERT G. BURT,

Attorneys.

DECEMBER 1974.

la

APPENDIX A

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MISSOURI

WESTERN DIVISION

No. 19701-1

FOSTER LUMBER COMPANY, INC., PLAINTIFF

vs.

UNITED STATES OF AMERICA, DEFENDANT

MEMORANDUM AND ORDER

This case pends on a full factual stipulation filed

April 14, 1972. The facts stipulated in that pretrial

order numbered one through fifteen are incorporated

by reference and made a part of this opinion. The

Pretrial Order also provides that “The parties agree

. .. that the issue in this case shall be decided on the

basis of the agreed facts contained in this Order

and the briefs to be submitted by the parties.”

The sole issue, as stated by the plaintiff, is ‘“wheth-

er under Section 172(b) (2) of the Internal Revenue

Code of 1954 the net operating loss incurred in the

fiscal period ending July 19, 1968, having been first

carried back to reduce fiscal 1967 taxable income (1)

only to the extent such loss exceeds the entire fiscal

1966 taxable income, including the capital gains seg-

ment which may not be reduced by such a net oper-

ating loss, as the government contends, or (2) to the

2a

extent such loss exceeds that portion of fiscal 1966

taxable income to which such net operating loss may

be carried, as the plaintiff contends.”

The government candidly states that the only two

decided cases on this issue have decided the issue in

favor of the taxpayer. Chartier v. Commissioner

(1969), 52 T.C. 346, affirmed (1st Cir., 1970), 423

F. 2d 474, and Olympic Foundry Co. v. United

States, Civil No. 26-71C3 (W.D. Wash., February

9, 1972) appeal docketed No. 72-2128, 9th Cir., June

27, 1972. It submits, however, that the courts in

those cases misconstrued Section 172(b)(2) of the

Code, and therefore, the decision should not be fol-

lowed by this Court.

We have carefully reviewed the briefs filed by the

parties and the cases cited. We express our agree-

ment with the rationale of Chartier, supra, and

Olympic Foundry Co., and the construction given

Section 172(b)(2) by those courts.

We hold, therefore, that the operating loss incurred

in fiscal 1968 may be carried to fiscal 1967 ‘axable

income to the extent such loss exceeds that po.tion

of fiscal 1966 taxable income against which the net

operating loss may actually be applied in the recom-

putation of the tax due on fiscal 1966 income.

For the reasons stated it is

ORDERED that this memorandum opinion shall,

pursuant to Rule 52 of the Rules of Civil Procedure,

3a

be considered as our findings of fact and conclusions

of law. It is further

ORDERED that the defendant shall promptly

compute the amount of judgment and submit it to

the plaintiff in order that an agreed form of judg-

ment may be entered.

/s/ John W. Oliver

District Judge

Kansas City, Missouri

May 7, 1973

[Caption Omitted]

STIPULATIONS

The parties hereto stipulate and agree that venue

is properly laid in this District; that the United

States District Court for the Western District of

Missouri, Western Division has jurisdiction of the

parties hereto and subject matter hereof, and, that

all proper, necessary and indispensable parties are

before the Court. The following facts are admitted

and require no proof:

1. Plaintiff, Foster Lumber Company, Inc., is a

Colorado corporation with its principal office located

at 912 East Sixty-Third Street, Kansas City, Mis-

souri.

4a

2. Plaintiff is the successor to Foster Lumber

Company (a Missouri corporation, Liquidated on

July 19, 1968) by virtue of the plaintiff’s acquisi-

tion of substantially all the operating assets and

liabilities of said Foster Lumber Company (here-

after referred to as the taxpayer) under an agree-

ment dated November 22, 1967, in exchange solely

for plaintiff’s voting stock.

3. Taxpayer kept its books and records and filed

its federal income tax returns on the basis of a fiscal

year ending March 31.

4. Taxpayer timely filed its U.S. Corporation In-

come Tax Returns (Forms 1120) for its fiscal years

ending March 31, 1966, March 31, 1967 and July

19, 1968, with the District Director of Internal Reve-

nue, St. Louis, Missouri, and paid the amount of

tax shown due on the returns.

5. Taxpayer realized taxable income for its fiscal

year ending March 31, 1966 of $173,870.86, of which

7,236.05 was ordinary income and the remaining

$166,634.81 was net long-term capital gain.

6. Taxpayer realized taxable income for its fiscal

year ending March 31, 1967 of $228,917.73, of which

$114,261.82 was ordinary income and the remaining

$114,655.96 was net long-term capital gain. |

7. Taxpayer suffered and reported a net operat-

ing loss of $42,203.12 for the fiscal year ending July

19, 1968.

8. Taxpayer filed a Corporation Application For

Tentative Refund From Carrvyback of Net Operating

Loss (Form 1139) on September 11, 1968, in which

5a

taxpayer recomputed its tax for its taxable year end-

ing March 31, 1966, taking into consideration the

net operating loss carryback from its taxable year

ending July 19, 1968.

9. The taxpayer’s federal income tax liability for

its fiscal year ending March 31, 1966, as computed

under the regular method as provided under Section

11 of the Internal Revenue Code of 1954, was $58,-

200.52, computed as follows:

Ordinary tax: 22% x ($173,870.86—net

operating loss carryback of $42,203.12) = $28,966.91

Surtax: 26% x ($173,879.86—$42,203.12—

$25,000 = 27,733.61

Tax on multiple surtax exemption: 6%

x $25,000 = 1,500.00

Total tax: $58,200.52

10. The taxpayer’s federal income tax liability

for its fiscal year ending March 31, 1966, as com-

puted under the alternative method as provided un-

der Sections 11 and 1202 of the Internal Revenue

Code of 1954, was $41,658.70, computed as follows:

Ordinary tax: 22% x ($7,236.05—net operating

loss carryback of $7,236.05) = —0—

Capital gains tax: 25% x $166,634.81 = $41,658.70

Total tax: $41,658.70

(The alternative method, as provided under Sections

11 and 1201 of the Code, was used in computing the

taxpayer’s tax liability for the fiscal year ended

March 31, 1966.)

6a

11. The taxpayer’s federal income tax liability”

for its fiscal year ending March 31, 1967, as deter-

mined by the Internal Revenue Service, was $68,-

136.45, computed as follows:

Ordinary tax: 48° x ($114,261.82—no net

operating loss deduction) —$6500 = $48,345.68

Capital gains tax: 25° x $114,853.96 = 28,663.99

$77,009.67

Less: Investment credit 8,873.22

Total tax: $68,136.45

(The taxpayer paid income tax in the amount of

$68,136.45, for the fiscal year ending March 31, 1967.

$67,300.74 was paid in accordance with its tax re-

turn and $835.91 was paid pursuant to a deficiency

assessment. )

12. The taxpayer’s federal income tax liability

for its fiscal year ending March 31, 1967, as alleged

by the plaintiff, was $51,352.28, computed as follows:

Ordinary tax: 23° x ($114,261.32—net operating

less carryback of $34,967.07) = $17,444.85

Surtax: 267 x [($114,261.82—34,967.07)—

25,000] = 14,116.64

Capital gains tax: 25° x $114,655.96 = 28,663.99

$60,225.48

Less: Investment credit 8,873.22

Total tax: 51,352.26

7a

13. Taxpayer timely filed its Claim for refund

(Form 843) with the Internal Revenue Service for

its taxable year ending March 31, 1967 on January

23, 1970, claiming an overpayment of income tax in

the amount of $16,784.39, computed as follows:

Tax paid $68,136.65

(minus) Alleged correct

tax liability 51,352.26

Alleged overpayment $16,784.39

14. On or about December 9, 1970, the Internal

Revenue Service disallowed taxpayer’s Claim for re-

fund.

15. This suit was timely instituted on September

11, 1971.

8a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 73-1659

FOSTER LUMBER COMPANY, INC., APPELLEE

OF

UNITED STATES OF AMERICA, APPELLANT

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MISSOURI

Submitted: January 18, 1974

Filed: July 29, 1974

Before MEHAFFY, Chief Judge, LAY

and ROSS, Circuit Judges

MEHAFFY, Chief Judge.

This is a refund suit by the successor in interest

of a Missouri corporation to recover a portion of the

9a

taxpayer’s 1967 federal corporate income tax pay-

ment. The taxpayer bases its claim on a recomputa-

tion of its 1967 tax liability to include the carryback

of a net operating loss it had incurred in 1968. The

Internal Revenue Service disallowed taxpayer’s claim

on the ground that the net operating loss in question

had been fully absorbed in the recomputation of tax-

payer’s 1966 tax liability. The district court sus-

tained the taxpayer’s refund claim, and IRS brought

this appeal. For the reasons stated below we affirm

the judgment of the district court.

The relevant facts have been stipulated and may

be briefly stated. In fiscal 1966 the taxpayer realized

$7,236.00 of ordinary income and $166,634.00 in net

long-term capital gains. In fiscal 1967 the taxpayer

realized $114,261.00 of ordinarv income and $114,-

656.00 in net long-term capital gains. In fiscal 1968

the taxpayer suffered a net operating loss of $42,-

203.00. Pursuant to the provisions of INT. REV.

CODE § 172 the taxpayer sought to carry back the

1968 net operating loss to its prior taxable years.

The taxpayer first carried the net operating loss

back to 1966, and there is no dispute over the tax-

payer’s recomputation of its 1966 tax liability.

Under the regular corporate income tax rates the

1966 liability was recomputed as follows:

Taxable Income as Originally Reported $173,870.00

Net Operating Loss Deduction 42,203.00

Recomputed Taxable Income $131,667.00

Regular Corporate Tax on Recomputed

Taxable Income $ 58,200.00

19a

Under the alternative tax provided in section 1201

the 1966 tax liability was recomputed as follows:

Ordinary Income Element of Taxable

Income $ 7,236.00

Net Operating Loss Deduction 42,203.00

Recomputed Ordinary Income Element

of Taxable Income —0—

Net Long-Term Capital Gain Element

of Taxable Income $166,634.00

Tax on Recomputed Ordinary Income

Element —0—

Tax on Net Long-Term Capital Gain

Element 41,658.00

Alternative Tax $ 41,658.00

The alternative tax method resulted in a smaller

1966 tax liability than that computed under the

regular rates, and the parties agree that the section

1201 alternative tax is controlling.

Given the agreement among the parties on the re-

computed 1966 tax liability, the sole controversy pre-

sented here is over the amount of the net operating

loss carryback that is available to be carried forward

to 1967. The controlling statutory language, in per-

tinent part, states that:

The portion of such loss which shall be carried

to each of the other taxable years shall be the

excess, if any, of the amount of such loss over

the sum of the taxable income for each of the

prior taxable years to which such loss may be

carried.

INT. REV. CODE § 172(b) (2).

lla

The taxpayer contends that the above-quoted lan-

guage allows it to carry forward to 1967 the excess

of the net operating loss over the amount of the 1966

taxable income to which the loss had been carried:

Net Operating Loss $ 42,203.00

Taxable Income to which NOL Was

Carried 7,236.00

NOL to be Carried Forward — $ 34,967.00

IRS contends that section 172(b)(2) allows tax-

payer to carry forward only the excess of the net

operating loss over the total amount of the taxable

income for the year 1966:

Net Operating Loss $ 42,203.00

Total Taxable Incoine 173,870.00

- NOLtobeCarried Forward —O—_

Stated somewhat differently, the issue in this case is

whether the last phrase of section 172(b)(2), “to

which such loss may be carried,” modifies “taxable

income” as well as the words “prior taxable years.”

The taxpayer concedes that its interpretation of

section 172(b)(2) is counter to the position an-

nounced in Treasury Regulation 1.172-4(b) (ii), but

notes that every court which has considered the issue

has squarely rejected the position taken by IRS.

Naegele v. United States, 32 Am. Fed. Tax R.2d 73-

5689 (D. Minn. 1973), appea! docketed, No. 73-1921,

8th Cir., Dec. 26, 1973; Olympic Foundry Co. v.

United States, 29 Am. Fed. Tax R.2d 72-759 (D.

Wash. 1972), aff'd per curiam, 493 F.2d 1247 (9th

12a

Cir. 1974); Sidney Axelrod, 42 P-H Tax Ct. Mem.

{ 73,190 (1973), appeal docketed, No. 74-1511, 6th

Cir., May 7, 1974; Mutual Assurance Society of Vir-

ginia Corporation, 42 P-H Tax Ct. Mem. § 73,177

(1973), appeal docketed, No. 74-1133, 4th Cir., Jan.

28, 1974; Chartier Real Estate Company, 52 T.C.

346 (1969), aff'd per curiam, 428 F.2d 474 (ist Cir.

1970). IRS concedes that the unanimous weight of

judicial opinion is, at least thus far, against its posi-

tion. IRS argues, however, that these cases are

merely ill-considered reaffirmations of an allegedly

aberrant secondary holding in the original Tax Court

decision on this issue, Chartier Real Estate Company,

supra. Each party also argues that its position is

supported by the plain meaning of the statutory

language and the policy behind that language.

As one should probably expect in a case involving

the Internal Revenue Code, it is impossible to find

any plain meaning in the statutory language that

would dispose of this controversy. Given the typi-

cally tortured wording of the Code, we feel that each

of the parties’ interpretations presents a plausible

reading of section 172(b) (2) on its face. Moreover,

the legislative history offers little assistance in as-

certaining Congress’s intent. Neither party has

cited, nor have we been able to find, any legislative

history that directly addresses the issue presented in

this appeal. We are convinced, however, that the basic

policy considerations underlying sections 1201 and

172 decisively support the result reached by the dis-

trict court.

ae ee ee

13a

The basic purpose behind the net operating loss

carryback provisions of section 172 is to ameliorate

the harsh tax consequences that can result from the

necessity of accounting for certain exceptional eco-

nomic events within the confines of an arbitrary an-

nual accounting period. The purpose behind the

alternative tax in section 1201 is to alter the tax rate

to reflect the traditionally unique character of in-

come arising out of the sale of capital assets. These

purposes are quite distinct, as are the economic events

with which they are concerned. IRS contends that

the taxpayer’s position in this case will result in a

double benefit. We agree that the tax benefits of the

separate provisions may under certain circumstances

be “double,” at least in the sense that they are cumu-

lative. But, given the differing purposes behind each

benefit, we see no reason why the chance relative

timing of basically unrelated economic events should

negate the cumulative impact of the separate provi-

sions. Indeed, to hold otherwise would frequently

subject otherwise similarly situated taxpayers to sig-

nificantly different treatment solely on the basis of

arbitrary timing; precisely the reverse of section

172’s original purpose.

In reaching our conclusion we have carefully exam-

ined the Internal Revenue Service’s argument re-

garding the judicial decisions on the issue presently

before us. None of the decisions is binding precedent

in this court, and several of the opinions are quite

brief in their discussion of the issue. Nevertheless,

we cannot dismiss lightly the cumulative weight of

l4a

our fellow judges’ decisions or the divisiveness and

administrative confusion that a contrary conclusion

at this point might foster.

The judgment of the district court is affirmed.

A true copy.

Attest:

Clerk, U. S. Court of Appeals, Eighth Circuit.

15a

APPENDIX C

JUDGMENT

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

SEPTEMBER TERM, 1973

[Filed Jul. 29, 1974, Robert C. Tucker, Clerk]

No. 73-1659

FOSTER LUMBER COMPANY, INC., APPELLEE

vs.

UNITED STATES OF AMERICA, APPELLANT

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MISSOURI

THIS CAUSE came on to be heard on the record

from the United States District Court for the West-

ern District of Missouri and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now

here ordered and adjudged by this Court, that the

16a

judgment of the said District Court, in this cause,

be, and the same is hereby, affirmed.

July 29, 1974

Costs taxed

in favor of

Appellee:

Costs of printing 25

copies of Appellee’s brief: $49.30

Total cost of Appellee for $49.30

recovery from Appellant in

the U. S. District Court:

[SEAL |

A true copy:

Attest: ‘s’ Robert C. Tucker

Clerk, U. S. Court of Appeals, 8th Circuit.

17a

APPENDIX D

Internal Revenue Code of 1954 (26 U.S.C.):

Sec. 63. TAXABLE INCOME DEFINED.

(a) General Rule-—Except as provided in sub-

section (b), for purposes of this subtitle the

term “taxable income” means gross income,

minus the deductions allowed by this chapter,

other than the standard deduction allowed by

part IV (sec. 141 and following).

* * * >

Sec. 172. NET OPERATING Loss DEDUCTION.

(a) Deduction Allowed.—There shall be al-

lowed as a deduction for the taxable vear an

amount equal to the aggregate of (1) the net

operating loss carryovers to such year, plus (2)

the net operating loss carrybacks to such year.

For purposes of this subtitle, the term “‘net oper-

ating loss deduction” :aeans the deduction al-

lowed by this subsection.

(b) [as amended by Sec. 317(b), Trade Ex-

pansion Act of 1962, P.L. 87-794, 76 Stat. 872]

Net Operating Loss Carrybacks and Carry-

overs.—

(1) Years to which loss may be car-

ried.—

(A) (i) [as amended by Sec. 210

(a) (1), Revenue Act of 1964, P.L. 88-

272, 78 Stat. 19 and Sec. 3(a) (1), Act

of December 27, 1967, P.L. 90-225, 81

Stat. 730] Except as provided in clause

18a

(ii) and subparagraphs (D) and (EB),

a net operating loss for any taxable

year ending after December 31, 1957,

shall be a net operating loss carryback

to each of the 3 taxable years preced-

ing the taxable year of such loss.

(ii) In the case of a taxpayer with

respect to a taxable year ending on or

after December 31, 1962, for which a

certification has been issued under sec-

tion 317 of the Trade Expansion Act

of 1962, a net operating loss for such

taxable year shall be a net operating

loss carryback to each of the 5 taxable

years preceding the taxable year of

such loss.

* * a >

(2) Amount of carrybacks and carry-

overs.—Except as provided in subsections

(i) and (j), the entire amount of the net

operating loss for any taxable year (here-

inafter in this section referred to as the

“loss year’’) shall be carried to the earliest

of the taxable years to which (by reason of

paragraph (1)) such loss may be carried.

The portion of such loss which shall be car-

ried to each of the other taxable years shall

be the excess, if any, of the amount of such

loss over the sum of the taxable income for

each of the prior taxable years to which

such loss may be carried. For purposes of

the preceding sentence, the taxable income

for any such prior taxable year shall be

computed—

19a

(A) with the modifications specified

in subsection (d) other than para-

graphs (1), (4), and (6) thereof; and

(B) [as amended by Sec. 210(b)

(1) and (2), Revenue Act of 1964,

supra| by determining the amount of

the net operating loss deduction—

(i) without regard to the net

operating loss for the loss year or

for any taxable year thereafter,

and

(ii) without regard to that por-

tion, if any, of a net operating loss

for a taxable year attributable to

a foreign expropriation loss, if

such portion may not, under para-

graph (1)(D), be carried back to

such prior taxable year,

and the taxable income so computed shall

not be considered to be less than zero. For

purposes of this paragraph, if a portion of

the net operating loss for the loss year is

attributable to a foreign expropriation loss

to which paragraph (1)(D) applies, such

portion shall be considered to be a separate

net operating loss for such year to be ap-

plied after the other porticn of such net

operating loss.

* * ? >

(d) Modifications.— The modifications _ re-

ferred to in this section are as follows:

* * a *

20a

(2) Capital gains and losses of taxpayers

other than corporations.—In the case of a

taxpayer other than a corporation—

* * * *

(B) the deduction for long-term

capital gain provided by section 1202

shall not be allowed.

x * * *

Sec. 1201. ALTERNATIVE TAX.

(a) [as amended by Sec. 8(g)(3), Revenue

Act of 1962, P.L. 87-834, 76 Stat. 960] Corpo-

rations.—If for any taxable year the net long-

term capital gain of any corporation exceeds the

net short-term capital loss, then, in lieu of the

tax imposed by sections 11, 511, 821(a) or (c),

and 831(a), there is hereby imposed a tax (if

such tax is less than the tax imposed by such

sections) which shal! consist of the sum of—

(1) a partial tax computed on the tax-

able income reduced by the amount of such

excess, at the rates and in the manner as

if this subsection had not been enacted, and

(2) an amount equal to 25 percent of

such excess, or, in the case of a taxable year

beginning before April 1, 1954, an amount

equal to 26 percent of such excess.

In the case of a taxable year beginning before

April 1, 1954, the amount under paragraph (2)

shall be determined without regard to section 21

(relating to effect of change of tax rates).

2la

SEC. 1202. DEDUCTION FOR CAPITAL GAINS.

In the case of a taxpayer other than a corpo-

ration, if for any taxable year the net long-term

capital gain exceeds the net short-term capital

loss, 50 percent of the amount of such excess

shall be a deduction from gross income. In the

case of an estate or trust, the deduction shall be

computed by excluding the portion (if any), of

the gains for the taxable year from sales or ex-

changes of capital assets, which, under sections

652 and 662 (relating to inclusions of amounts

in gross income of beneficiaries of trusts), is

includible by the income beneficiaries as gain

derived from the sale or exchange of capital

assets.

ov. S. GOVERNMENT PRinTiNG OFrice, 1974 Sesiis 63