Before SCHNACKENBERG, PARKINSON,*fn1 and KNOCH, Circuit Judges.
Plaintiff brought suit to recover excess profits tax and interest in the sum of $144,986.25, plus statutory interest, which plaintiff had paid for the fiscal years ending May 31, 1942, through May 31, 1946.
All facts, including jurisdiction, were stipulated. These are set out in the opinion of the distinguished District Judge in Stratton Grain Co. v. Reisimer, 1958, 165 F. Supp. 915.*fn2 Plaintiff here was the surviving corporation of a statutory merger, in a non-taxable reorganization, whereby it received the assets of all three parties to the merger. Plaintiff took and recorded all these assets as capital and treated them as capital.Subsequently plaintiff sustained operating losses which left it in a capital deficit position.
The pertinent statute reads:
" § 718. Equity invested capital
"(a) Definition. The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b) * * *
"(2) Property paid in. Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange * * *
"(4) Earnings and profits at beginning of year. The accumulated earnings and profits as of the beginning of such taxable year; * * *
"(b) Reduction in equity invested capital. The amount by which the equity invested capital for any day shall be reduced as provided in subsection (a) shall be the sum of the following amounts - * * *
"(3) Earnings and profits of another corporation. The earnings and profits of another corporation which previously at any time were included in accumulated earnings and profits by reason of a transaction described in section 112(b) to (e) both inclusive,*fn3 or in the corresponding provision of a prior revenue law, or by reason of the transfer by such other corporation to the taxpayer of property the basis of which in the hands of the taxpayer is or was determined with reference to its basis in the hands of such other corporation, or would have been so determined if the property had been other than money; * * *"
Defendants contend that where a corporation taxpayer has received the earnings and profits of transferor corporations, in a tax-free reorganization, even where (as here) it has recorded them on its books as paid-in surplus, these undistributed earnings and profits must be included in determining its accumulated profits under Section 718(a)(4) of the Code, supra, for computation of its equity invested capital in the determination of its excess profits tax credit.
Plaintiff never treated any part of these undistributed earnings and profits as its own earnings and profits, but solely as its capital surplus.
There are two alternative credits to be used in computing excess profits tax.One is based on "normal profits;" the other, used by plaintiff here, is based on the investment made to obtain the profit. This investment would include retained earnings. The greater the sum which can be established as equity invested ...