Cornelius Products Corp. v. Commissioner, 214 F.2d 173 (1954)

A taxpayer seeking relief from excess profits tax based on a constructive average base period net income must demonstrate that the assumed business operation used to construct those earnings is comparable to the actual business operation during the taxable years.

Summary

Cornelius Products Corp. sought relief from excess profits tax, arguing its credit based on invested capital was inadequate. The company claimed entitlement to use the excess profits credit based on income, reconstructing income for 1936-1939. The Tax Court denied relief, finding the reconstructed income was based on a different type of business than the one the company actually operated during the taxable years. The appellate court affirmed, holding that the reconstructed income must be based on a business of the same character as the actual business during the tax years.

Facts

Cornelius Products Corp. was a management corporation receiving a fixed fee for its services during the taxable years. Two subsidiary corporations of the Reconstruction Finance Corporation (RFC) paid for the construction, plant, equipment, and all costs of producing refined tin.

Procedural History

Cornelius Products Corp. petitioned the Tax Court for relief from excess profits tax. The Tax Court denied the relief. The corporation appealed the Tax Court’s decision to the United States Court of Appeals.

Issue(s)

Whether a taxpayer seeking relief from excess profits tax under Section 722(a) can base its reconstructed income on a type of business operation wholly different from the actual business operation during the taxable years.

Holding

No, because Section 722(a) implicitly requires that the business upon which the constructive income is based for the years 1936 through 1939 be of the same type and character as that in existence during the taxable years.

Court’s Reasoning

The court reasoned that Section 722(a) allows for relief by establishing “what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income.” Implicit in this comparison is the idea that the normal operating conditions upon which relief is based, and the operating conditions during the excess profits tax period must be comparable. The court noted that the company’s reconstruction was based on a corporation that built a smelting plant at its own expense, whereas the actual business was a management corporation receiving a fixed fee. The court cited the bulletin on Section 722, stating that the normal operating conditions upon which relief is based and the operating conditions during the excess profits tax period must be comparable. The court emphasized that Congress implicitly provided that the business upon which the constructive income is based for the years 1936 through 1939 must be of the same type and character as that in existence during the taxable years, citing the language regarding the