Before HASTINGS, Chief Judge, and DUFFY and KNOCH, Circuit Judges.
Plaintiff, an operator of retail department stores, seeks to recover part of the federal income and excess profits taxes paid for the fiscal years ending January 31, 1944, through 1948, through recomputation of its taxable income for those years by the retail inventory method on a last in, first out basis (popularly called "LIFO") although it was stipulated that plaintiff filed its returns for those years using the retail inventory method on a first in, first out basis (popularly called "FIFO") without any accompanying election to use LIFO.
Under FIFO the goods left in an inventory at the end of a year are assumed to be those last purchased. Under LIFO the goods left in an inventory at the end of a year are assumed to be those first purchased.
Plaintiff has used the retail method of inventory valuation for many years. Under that method, inventories are taken, recorded and maintained in terms of dollar amounts, broken down only by merchandising departments, rather than in terms of individual items of merchandise.
In 1939, the Internal Revenue Code, Section 22(d), 26 U.S.C.A.§ 22(d), was amended to permit taxpayers to elect to use LIFO.*fn1 The statute provided that change to and use of LIFO be in accordance with such regulations as the Commissioner of Internal Revenue might prescribe as necessary to reflect income clearly. The Commissioner issued regulations permitting election of LIFO only if the taxpayer filed a statement of his election with his return for the taxable year at the close of which the method was first to be used.*fn2
It is plaintiff's position that the Commissioner prevented plaintiff, and other users of the retail method, from resorting to LIFO because his regulations referred to goods specified "with particularity," and prescribed a method of determining LIFO cost by comparison of units of goods on hand at the beginning and end of the year, with no provision for adjustment of inventories taken under the retail method by use of a statistical price index, or otherwise. In addition, conferences between officials of the Treasury Department and representatives of various retailers resulted in refusal to amend the regulations, the Commissioner having taken the position that retailers could not use LIFO.
Some seventy retailers did make timely election to use LIFO, adopting, in the absence of regulation therefor, such techniques as they deemed proper. Hutzler Brothers Company was one such retailer. Hutzler appealed the Commissioner's deficiency assessment to the Tax Court which held [8 T.C. 14 (1947)] that, contrary to the Commissioner's position, use of LIFO in conjunction with the retail method was not precluded. The Commissioner, accepting the Tax Court's decision, issued amendments to the LIFO regulations on March 4, 1948, making express provision for use of LIFO by users of the retail method, but making no change in the existing provisions for election to use LIFO.
Plaintiff filed its application for use of LIFO on December 29, 1951, to be applicable beginning with the close of its taxable years ending January 31, 1944, together with claims for refund for the taxable years ending January 31, 1944, through 1948. When the Commissioner disallowed these claims on the ground that plaintiff's election was untimely filed, plaintiff brought this action in the Federal District Court to recover such refund. The District Court held that plaintiff had failed to file timely election to use LIFO, and granted the defendant's motion to dismiss the plaintiff's complaint for failure to state a claim on which relief might be granted.
Plaintiff argues that the original LIFO regulations were inapplicable to users of the retail inventory method as they required the goods to be specified "with particularity" and the LIFO closing inventory to be determined by comparison of the number of units of goods on hand in opening and closing inventories; and, in addition, did not provide for grouping of goods by classes and use of statistical price indices. The plaintiff argues further that the Commissioner maintained, prior to the Hutzler decision, that retail method taxpayers could not use LIFO, and then after the Hutzler decision, found it necessary to amend the regulations. Thus plaintiff contends that the time limitation on election was likewise inapplicable. The 1948 amendments prescribed no time limit for election as to prior years. Hence plaintiff asserts that its 1951 election was timely.
The District Court relied on R.H. Macy & Co., Inc. v. United States, 2 Cir., 1958, 255 F.2d 884, rehearing denied, p. 890, certiorari denied 1958, 358 U.S. 880, 79 S. Ct. 119, 3 L. Ed. 2d 110, reversing D.C.S.D.N.Y. 1957, 148 F. Supp. 377. Macy's position was practically identical to that of plaintiff here. The District Court there granted judgment for Macy.That judgment was reversed on appeal. The Second Circuit stated (at page 889):
"Ultimately Macy's argument is that it failed to file a timely election because the Commissioner maintained the position that LIFO was not available to users of the 'retail method.' Although this argument evokes a certain sympathy it is unavailing as an excuse for Macy's delinquency."
Plaintiff concedes that Macy is squarely in point, but submits that it is unsound and should not be followed.
Plaintiff considers it unconscionable that taxpayers who abided by the Commissioner's interpretation of the statute and regulations did so at their peril. Plaintiff asserts that it is unjust for relief to be available only to those taxpayers who disregarded the Commissioner's interpretation, prepared their own price indices for conversion of retail inventories to LIFO, filed their elections and returns, and paid their taxes for 1944 and subsequent years, on a LIFO basis, undeterred by possible liabilities for interest and ...