Before MAJOR, Chief Judge, and KERNER and DUFFY, C2rcuit Judges.
This is a petition for a review of a decision of the Tax Court. The question to be decided is: In a petition for a review from a notice of disallowance of claims for relief under Sec. 722, Internal Revenue Code, 26 U.S.C. § 722, did the Tax Court correctly dismiss for want of jurisdiction the taxpayer's petition in so far as it related to issues other than Sec. 722 relief?
Specifically the issue is whether the Tax Court has jurisdiction to determine the correct tax liability for excess profits tax under Sec. 732, Internal Revenue Code, 26 U.S.C. § 732, which section gives the taxpayer the right to petition the court "for a redetermination of the tax" within 90 days after the Commissioner has mailed a notice of disallowance of a claim for refund based upon the relief provisions of Sec. 722. The Tax Court held, with three judges dissenting, that upon such a notice of disallowance its jurisdiction is limited to questions of relief under Sec. 722, and that the petitioner may not raise any other question affecting the correct tax liability. The petitioner contends that the statute requires the Tax Court to consider any question properly raised by the pleadings necessary for "a redetermination of the tax."
Under the Excess Profits Tax Acts of World War II, 26 U.S.C. § 710 et seq., the tax authorized was based upon a concept of "normal income" and "excess profits" The excess profits were to be that part of a taxpayer's income which exceeded an "excess profits tax credit." The act provided two methods for determining the excess profits tax credit, one known as the earnings method and the other the invested capital method. The former took the average earnings during the base period from 1936 to 1939 and treated such average earnings as "normal." The invested capital method took a percentage of invested capital and treated this as the credit for determining normal income. The taxpayer was permitted to use the method giving the most favorable credit. Furthermore, Congress recognized that using the period 1936 to 1939 as a gauge to measure normal earnings might not work out fairly to all taxpayers, and therefore provided that if there were "abnormalities" existing in the base period, a taxpayer must pay his tax according to the general method of calculation and then file a claim for refund under Sec. 722, which defined the types of abnormalities to be considered as grounds for relief.
The petitioner herein claims it had depressed earnings during the base period. It filed its return showing the actual earnings as the basis for computing the excess profits tax credit by the earnings method. However, the credit resulting was lower than 8% of its invested capital, and the taxpayer used the invested capital method in computing its excess profits taxes. It then filed claims for relief under Sec. 722, claiming that its earnings were depressed and that its constructive earnings should be determined at $260,000. If its claim was correct the corstructive earnings under Sec. 722 would be more than the invested capital credit.
After filing its returns taxpayer claimed that it discovered that it had incorrectly computed its invested capital by failing to include the amount of $1,250,000 in its equity invested capital, representing the value of trade-marks and good will paid into the corporation in 1920 by its stockholders at the time its business was changed from a partnership to a corporation. It duly filed claims for refund covering this point, claiming it was entitled to include said sum as paid in for stock, as paid-in surplus, or as a contribution to capital under Sec. 718(a) (2), Internal Revenue Code, 26 U.S.C. § 718(a) (2). If taxpayer was correct in this claim, its invested capital credit would be increased by 8% of $1,250,000, and the excess profits tax would be accordingly reduced.
The Commissioner issued a notice of disallowance which concluded with this statement: "Within ninety days * * * from the date of the mailing of this letter, you may file a petition with The Tax Court of the United States * * * for a redetermination of your excess profits tax liability under the Internal Revenue Code." The Commissioner's notice also stated that the claims filed under Sec. 722 would be disallowed but did not refer to petitioner's claims for refund concerning the inclusion of good will in invested capital. If petitioner proved either claim by evidence, the excess profits credit would be in excess of taxpayer's income for 1943, 1944, and 1945, and all of its income would be considered normal and none excess profits.
Within 90 days petitioner filed a petition with the Tax Court in which it petitioned "for a redetermination of its excess profits tax liability under subchapter E of Chapter 2 of the Internal Revenue Code, as determined by the Commissioner of Internal Revenue in his notice of disallowance." The petition then expressly alleged as errors, among other things, (1) the disallowance of the claim for inclusion of good will in computing its invested capital, and (2) the failure to allow relief under Sec. 722.
The Commissioner filed a motion to dismiss that portion of the petition relating to the good will issue, contending that such a "standard" issue, affecting the excess profits tax liability, could not be raised in a petition filed in opposition to the Commissioner's notice. The Commissioner contended that upon the issuance of a notice of disallowance under Sec. 732, the Tax Court's jurisdiction was limited only to the question whether relief was to be granted under Sec. 722. The Tax Court granted this motion, upon the authority of its opinion rendered on the same day in the case of Mutual Lumber Co. v. Commissioner, 16 T.C. 370. The petitioner asks for a review of the order of dismissal.
Agreeing with the dissenting opinion of the Tax Court, we hold that the court did have jurisdiction, upon the petition filed herein, to consider the correct tax liability of taxpayer for excess profits tax. It is reasonable to assume that Congress recognized the advisability of putting the responsibility for determination of the correct tax liability before the same court that was authorized to determine the correct tax under the relief provisions of Sec. 722.
Title 26 U.S.C. § 732(a) provided: "If a claim for refund of tax under this subchapter for any taxable year is disallowed * * * by the Commissioner, and the disallowance relates to the application of section * * * 722, relating to abnormalities, the Commissioner shall send notice of such disallowance to the taxpayer by registered mail. Within ninety days * * * the taxpayer may file a petition with the Board of Tax Appeals*fn1 for a redetermination of the tax under this subchapter. If such petition is so filed, such notice of disallowance shall be deemed to be a notice of deficiency for all purposes relating to the assessment and collection of taxes or the refund or credit of overpayments."
It will be noted that the statute hereinbefore quoted states that a taxpayer may petition "for a redetermination of the tax under this subchapter." Sec. 732(a) was a part of subchapter E of Chapter 2 of the Internal Revenue Code relating to the years 1942-1945. Subchapter E contained all the provisions relating to excess profits tax from Sec. 710 to Sec. 784 inclusive. It follows that when Congress referred to the "tax under this subchapter," it referred to the entire excess profits tax. Respondent's contention ignores the last three words of the sentence, viz., "under this subchapter."
When this section was before the Congress, the House Ways and Means Committee stated (House Rep. No. 146, 77th Cong., 1st Sess., p. 560): "Under existing law, unless a deficiency has been determined by the Commissioner, a taxpayer has no right of appeal to the Board * * *. Thus, for example, if a refund claim were filed by a taxpayer, and the Commissioner disallowed the claim in whole or in part, but did not determine deficiency, no right of review of the Commissioner's action by the Board would be present. Inasmuch as the taxpayer's right to relief under certain of the relief provisions provided in this bill may only be raised by a claim for refund, it is necessary that a procedure be provided whereby the Board may obtain jurisdiction to review a decision by the Commissioner disallowing such claims. Accordingly section 732 (added to the Excess Profits Tax Act of 1940 by sec. 9 of the bill) provides that the taxpayer may file a petition with the Board of Tax Appeals within 90 days ...