<strong><em>Joseph Weidenhoff, Inc., et al., Petitioners, v. Commissioner of Internal Revenue, Respondent, 32 T.C. 1222 (1959)</em></strong>

In computing net operating loss carrybacks and carryovers, the net income for the carryback year must be reduced by the excess profits tax accrued for that year, including consideration of any credit or deferral of payment.

<strong>Summary</strong>

The United States Tax Court addressed several issues concerning the computation of corporate income and excess profits taxes. The primary issue revolved around how the excess profits tax affected the calculation of net operating loss (NOL) carrybacks. The court held that for accrual-basis taxpayers, the deduction for excess profits tax under Section 122(d)(6) of the Internal Revenue Code of 1939 should be the tax properly accrued as of the end of the year, reduced by the 10% credit and deferral of payment. The court also addressed issues related to the inclusion of a subsidiary’s operating losses in the consolidated return after the subsidiary ceased operations, as well as the application of certain regulations limiting the consolidated excess profits credit. Ultimately, the court sided with the petitioners on several issues, determining the correct methods for calculating NOL carrybacks and consolidated credits.

<strong>Facts</strong>

Joseph Weidenhoff, Inc., along with several related companies, filed consolidated income and excess profits tax returns. The petitioners and respondent disputed the correct calculation of net operating loss carrybacks and carryovers. The key facts include:

1. The taxpayers were all members of an affiliated group with Bowser, Inc. as the common parent.
2. Separate returns were filed in 1946 and 1947, with consolidated returns filed for all other relevant years.
3. The central issue was whether the excess profits tax for 1945, used in calculating the 1947 net operating loss carryback, should be reduced by the 10% credit and the deferral of payment.
4. Another issue was whether the consolidated returns could include operating losses of the Fostoria Screw Company for 1948 and 1949, even after it sold its assets in 1949 but was not dissolved until 1952.
5. A third issue concerned the applicability of Regulations 129, section 24.31(b)(24), limiting the consolidated excess profits credit.

<strong>Procedural History</strong>

The Commissioner of Internal Revenue issued notices of deficiency to the petitioners for deficiencies in income and excess profits taxes. The cases were consolidated and submitted to the Tax Court based on a stipulation of facts. The Tax Court addressed several issues. The primary issue was whether the excess profits tax amount should be gross or net of credits and deferrals. The court resolved the issues under Rule 50, meaning that the parties could compute the exact amounts based on the court’s decisions on the legal issues.

<strong>Issue(s)</strong>

1. Whether, in computing net operating loss carrybacks and carryovers, the excess profits tax deduction allowed under Section 122(d)(6) of the Internal Revenue Code of 1939 should be the gross amount of the tax, or the net amount after reductions for the 10% credit and deferral of payment.
2. Whether the consolidated returns for Bowser, Inc., and its affiliated group could include and carry forward operating losses of the Fostoria Screw Company for 1948 and 1949 after Fostoria sold its operating assets in 1949.
3. Whether Regulations 129, section 24.31(b)(24), applied to limit the amount of the affiliated group’s consolidated excess profits credit for 1951 and 1952.

<strong>Holding</strong>

1. No, because the excess profits tax accrued for the year 1945 should be reduced by the deferral in payment and the credits, following the Supreme Court’s reasoning in the <em>Lewyt</em> case.
2. Yes, because Fostoria was not de facto dissolved until 1952 and remained a member of the affiliated group.
3. No, because the Commissioner had failed to provide a satisfactory explanation for the application of the regulation.

<strong>Court's Reasoning</strong>

The court relied on the Supreme Court’s decisions in <em>United States v. Olympic Radio & Television</em> and <em>Lewyt Corp. v. Commissioner</em> and applied its reasoning to the facts. The court stated that the excess profits tax deduction allowed under Section 122(d)(6) of the Internal Revenue Code of 1939 is the tax that accrued for the year, not the tax that was actually paid or may be paid. Regarding the 10% credit and the deferral of payment, the court determined that these reduced the amount of the tax properly accrued as of the end of the year, because section 784 allowed a direct credit against the tax. The court also concluded that Fostoria had not ceased to be a member of the affiliated group by virtue of selling its operating assets and not formally dissolving until 1952. The court reasoned that Fostoria continued to exist as a corporate entity, was required to file tax returns, and therefore could still be included in the group's consolidated returns. Finally, the court held that the Commissioner's application of Regulations 129, section 24.31(b)(24), was improper because he did not explain the reasons for its application.

The court referenced <em>United States v. Olympic Radio & Television, 349 U.S. 232</em>, and <em>Lewyt Corp. v. Commissioner, 349 U.S. 237</em>, to clarify the timing of the accrual, emphasizing the importance of using accrual basis accounting to determine the amount of the tax for purposes of section 122(d)(6). The Court reasoned that "the amount of excess profits tax for the year 1945, which may be deducted from the 1945 net income in computing the amount of carryback of 1947 net operating losses to the year 1946, is the amount of excess profits tax properly accruable as of the end of the year 1945." The Court also provided that for section 784 the 10 per cent credit should be deducted in determining the amount of excess profits tax accrued.

<strong>Practical Implications</strong>

This case provides clear guidance on calculating net operating loss carrybacks and carryovers for accrual basis taxpayers. It is vital for tax professionals and businesses dealing with corporate taxation. Its practical implications include:

• When determining the deduction for excess profits tax under Section 122(d)(6) of the 1939 Code, the tax should be based on the amount properly accrued.
• The accrued excess profits tax should include consideration of any credits or deferrals, with some credits, such as the 10% credit, reducing the tax properly accrued for the year.
• Taxpayers are required to compute NOL carrybacks considering the total tax due, net of any credits.
• The case reinforces the importance of formal dissolution processes for corporations and the implications for consolidated tax filings.
• The decision highlights the need for the IRS to provide clear explanations for the application of complex tax regulations, particularly when they involve discretionary elements.

Subsequent cases will rely on this precedent to properly calculate NOL carrybacks in similar situations.