16 T.C. 267 (1951)

A refund of excessive profits under the Renegotiation Act in a later year does not automatically permit the IRS to revise a taxpayer’s prior year excess profits taxes by including the refund amount in the taxable income of that prior year.

Summary

Equinox Mill received a refund in 1947 related to excessive profits determined in 1942 under the Renegotiation Act, specifically due to an increase in the value of excess inventory. The IRS sought to include this refund in Equinox Mill’s 1942 taxable income, thereby increasing its excess profits tax liability for that year. The Tax Court held that the IRS could not revise the 1942 taxes based on the 1947 refund, emphasizing that while the Act addresses repayments of excessive profits, it does not explicitly authorize upward revisions of prior year taxes when excessive profits are later refunded.

Facts

During 1942, Equinox Mill performed contracts subject to renegotiation by the War Department.
In 1943, it was determined that Equinox Mill realized $260,000 in excessive profits during 1942.
Equinox Mill entered an agreement to restore the $260,000, less applicable excess profits taxes, as per Section 3806 of the Internal Revenue Code.
The Revenue Act of 1943 amended the Renegotiation Act, allowing for refunds based on the increased value of excess inventory, even for prior years.
Equinox Mill filed a claim for a refund, which was approved, and it received $75,338 in 1947.
Equinox Mill reported this amount as income in its tax return for the year ending August 31, 1947.

Procedural History

Equinox Mill filed its 1942 income and excess profits tax returns.
The Commissioner determined a deficiency in Equinox Mill’s excess profits taxes for 1942.
The deficiency was challenged by Equinox Mill, leading to a case before the Tax Court.
The Tax Court addressed whether the refund received in 1947 should be included in the 1942 taxable income.

Issue(s)

Whether the Commissioner erred in including a refund of $75,338, received by the petitioner in 1947 under the Renegotiation Act, in the taxable income of the petitioner for the year 1942, thereby increasing its excess profits tax liability for 1942.

Holding

No, because while Section 3806 requires the reduction of a contractor’s excess profits taxes for an earlier year by reason of repayment of