SCOTUS Reports

Tag: Aircraft Assembly Jigs

  • Arrow Tool and Die Company v. Commissioner, 18 T.C. 705 (1952): Establishing Normal Earnings for Excess Profits Tax Relief

    Arrow Tool and Die Company v. Commissioner, 18 T.C. 705 (1952)

    A taxpayer seeking relief from excess profits tax under Section 722 must demonstrate not only eligibility under specific provisions (e.g., 722(c)(2) or (c)(3)), but also a fair and just representation of normal earnings for a constructive average base period net income, failing which, relief will be denied.

    Summary

    Arrow Tool and Die Company, formed after 1939, sought relief from excess profits tax under Section 722(c)(2) and (c)(3) of the Internal Revenue Code, arguing its invested capital was an inadequate standard for determining excess profits. The Tax Court denied relief. While the company argued it would have been successful during the base period years (prior to 1940) had it been in operation, the court found the company failed to prove it would have been profitable or even remained in business during those years, especially considering the skepticism of aircraft manufacturers to subcontracting assembly jig construction. Without establishing a fair and just amount representing normal earnings, the court held Arrow Tool and Die failed to meet the requirements for relief under Section 722(a).

    Facts

    • Arrow Tool and Die Company was organized after December 31, 1939.
    • The company sought to compute its excess profits tax credit using the invested capital method but requested relief under Section 722(c)(2) and 722(c)(3) of the Internal Revenue Code.
    • The company specialized in aircraft assembly jig tooling.
    • Aircraft manufacturers were generally of the opinion that assembly jig construction was not suitable for subcontracting during the base period years (prior to 1940).
    • Arrow Tool and Die argued that its skill and efficiency would have allowed it to secure contracts during the base period years despite the opposition.

    Procedural History

    The Commissioner assessed excess profits tax against Arrow Tool and Die Company. The company petitioned the Tax Court for relief under Section 722 of the Internal Revenue Code. The Tax Court reviewed the case and ruled in favor of the Commissioner, denying the relief sought by Arrow Tool and Die.

    Issue(s)

    1. Whether Arrow Tool and Die Company is entitled to relief under Section 722(c)(2) or 722(c)(3) of the Internal Revenue Code.
    2. Whether Arrow Tool and Die Company has established a fair and just amount representing normal earnings for use as a constructive average base period net income as required by Section 722(a).

    Holding

    1. No, because the court did not need to determine if Arrow Tool and Die met the requirements of section 722(c) as they failed to meet the requirements of section 722(a).
    2. No, because the company failed to prove it would have made a profit or remained in business during the base period years.

    Court’s Reasoning

    The court reasoned that to qualify for relief under Section 722, a taxpayer must demonstrate both eligibility under one of the provisions of subsection (c) and establish a fair and just amount representing normal earnings for a constructive average base period net income, as required by Section 722(a). The court found that Arrow Tool and Die failed to prove it would have been profitable or even remained in business during the base period years. The court noted that the company’s projections were based on unsubstantiated assumptions and that aircraft manufacturers were hesitant to subcontract jig construction during the base period, primarily for economic reasons. The court emphasized that the company’s success was largely due to the wartime emergency and that its profits were the type the excess profits tax was designed to cover. The court stated, “Excess profits taxes were imposed not only to raise revenue, but to take the ‘excess profits out of war.’ Petitioner’s excess profits are exactly the type of profits such taxing provisions were intended to cover.” Because the company failed to show facts that could be used to establish a fair and normal profit during the base period, the court concluded that it had not established a basis for reconstruction of a base period net income under Section 722(a).

    Practical Implications

    This case highlights the stringent requirements for obtaining relief from excess profits tax under Section 722. It emphasizes that taxpayers must provide concrete evidence and reasonable assumptions to demonstrate what their normal earnings would have been during the base period years. The decision shows that a mere theoretical possibility of success is insufficient. Taxpayers need to convincingly demonstrate financial viability during the base period. This case serves as a cautionary tale for businesses seeking such relief, emphasizing the need for robust documentation and persuasive evidence of pre-war potential, especially when arguing against prevailing industry practices. This case is often cited when the IRS challenges a taxpayer’s projections for base period earnings, requiring detailed substantiation rather than speculative claims.

  • Crowncraft, Inc. v. Commissioner, 16 T.C. 690 (1951): Establishing a Fair Profit for Excess Profits Tax Relief

    16 T.C. 690 (1951)

    A taxpayer seeking relief from excess profits tax under Section 722 of the Internal Revenue Code must establish both qualification for relief under the statute and a fair and just amount representing normal earnings to be used as a constructive average base period net income.

    Summary

    Crowncraft, Inc., a California corporation formed after the base period, manufactured aircraft assembly jigs. It sought relief from excess profits tax for 1942 and 1943 under Sections 722(c)(2) and 722(c)(3) of the Internal Revenue Code, arguing its invested capital was an inadequate standard for determining excess profits. The Tax Court denied relief, holding that while the taxpayer may have met the requirements under Section 722(c), it failed to prove it would have been profitable during the base period (pre-1940). Without establishing a fair and just amount representing normal earnings, Crowncraft could not establish a constructive average base period net income as required by Section 722(a).

    Facts

    Crowncraft was organized in April 1941 to manufacture aircraft assembly jigs. Its organizers were Everett Gray, a manager with experience in institutional management, and Harvey Lemke, a skilled tool and die maker. At the time of Crowncraft’s organization, there were no businesses in southern California exclusively manufacturing aircraft assembly jigs. Crowncraft secured contracts with several aircraft companies. By May 31, 1944, the business was continued as a partnership, Crowncraft Engineering Company, by Gray and Lemke, but the partnership terminated in July 1945 following cancellation of aircraft contracts by the U.S. Government.

    Procedural History

    The Commissioner of Internal Revenue determined excess profits tax deficiencies for 1942 and 1943 and denied Crowncraft’s applications for relief under Sections 722(c)(2) and 722(c)(3). Crowncraft petitioned the Tax Court for review, seeking refunds for the excess profits taxes paid. The Tax Court upheld the Commissioner’s determination, denying Crowncraft relief.

    Issue(s)

    Whether Crowncraft is entitled to relief from its excess profits tax liabilities for 1942 and 1943 under Section 722(c) of the Internal Revenue Code.

    Holding

    No, because Crowncraft failed to prove it would have made a profit, or even remained in business, during the base period years, and thus failed to establish a fair and just amount representing normal earnings as required by Section 722(a).

    Court’s Reasoning

    The court emphasized that to qualify for relief under Section 722, a taxpayer must prove both qualification under one of the provisions of subsection (c) and a fair and just amount representing normal earnings for use as a constructive average base period net income under subsection (a). The court found that Crowncraft failed to establish that it would have been financially successful during the base period (pre-1940). The court noted that aircraft manufacturers were initially hesitant to subcontract jig construction, and it was only during the war emergency, with cost-plus-fixed-fee contracts, that subcontracting became prevalent. The court stated, “[E]very step of the way is shrouded with doubts as to its value, or indeed its plausibility, a serious question is immediately raised as to whether any relief is justified.” The court found that the company grew with the war, was successful because of the war, and ceased with the ending of hostilities. Thus, the court concluded that Crowncraft had failed to demonstrate that it would have been profitable during the base period, precluding relief under Section 722.

    Practical Implications

    This case illustrates the stringent requirements for obtaining excess profits tax relief under Section 722 of the Internal Revenue Code. It highlights the importance of demonstrating not only that a taxpayer’s circumstances during the excess profits tax period were atypical, but also that the taxpayer would have been profitable during the base period. Taxpayers seeking such relief must provide concrete evidence to support their claims regarding normal earnings, rather than relying on speculative assumptions. This case serves as a cautionary tale for businesses whose success is heavily reliant on temporary or emergency conditions, emphasizing that excess profits taxes were designed to capture profits arising from such circumstances.