WHEREAS, upon investigation and examination, the board of directors of this Corporation deem and consider that the present surplus of the aggregate of the assets of the Rockford Screw Products Company over the aggregate of its liabilities, as computed and entered of record, are, within the meaning of the Business Corporation Act, sufficient to meet and pay a dividend as hereinafter provided: and,

WHEREAS, the surplus of this corporation, out of which any dividend of current earnings or previous earnings could be made is largely represented by 21 T.C. 834">*838 expenditures made for increased inventory, accounts receivable, and other assets other than cash assets, and it is necessary that a portion of the cash assets be conserved as working capital for this corporation:

THEREFORE, BE IT RESOLVED, by the board1954 U.S. Tax Ct. LEXIS 288">*298 of directors of the Rockford Screw Products Company, that a dividend by, [sic] and it is hereby declared out of the surplus of this corporation as defined in the preamble of this resolution, to and among the stockholders of record of this corporation at the close of business on this day equivalent in the aggregate to 180 percent of the par value of the outstanding shares of stock of this corporation (exclusive of shares held in the treasury of this corporation) payable forthwith, but in the following form, viz: --

A sum equal to 20 percent of the par value of said outstanding shares of stock to be paid in cash by checks to be sent to the stockholders forthwith: and, A sum equal to 160 percent of the par value of said outstanding shares of stock to be paid by the delivery forthwith to the stockholders of a promissory note, or notes, of this corporation, to be dated as of Dec. 15, A. D. 1936, and which said promissory notes shall be payable on or before Dec. 15th, A. D. 1941, and shall bear interest at the rate of seven per cent per annum, payable quarterly:

BE IT FURTHER RESOLVED, that said notes to be delivered unto the stockholders as hereinbefore provided1954 U.S. Tax Ct. LEXIS 288">*299 shall be drawn in the name of this corporation, and its corporate seal affixed thereto by its President, and attested by its Secretary & Treasurer, and countersigned by its Vice-President, and that said notes shall be in the form heretofore set forth, and that all of the provisions and conditions and restrictions therein contained, being hereby approved and adopted with the same force and effect as if fully set forth and provided for in these resolutions, and that the Treasurer of this corporation be, and he is hereby, authorized from time to time to purchase before maturity any of said notes from the payee or registered owner thereof, and upon delivery thereof, at such price at which the same may be purchased, but not in excess, however, of the face value of the principal and accrued unpaid interest thereon.

The following schedule shows the dividends paid from January 1, 1936, through June 30, 1940, the amount paid in cash, the amount paid in notes, the maturities, and the earnings:

1954 U.S. Tax Ct. LEXIS 288">*300 Petitioner had not issued dividend notes prior to December 15, 1936, and did not issue dividend notes after June 30, 1940. Dividend notes were not issued by petitioner during the taxable years ended June 30, 1943, June 30, 1944, and June 30, 1946.

21 T.C. 834">*839 The amount of petitioner's dividend notes outstanding as of the end of its fiscal years 1935 through 1946 was as follows:

The dividend notes were issued to pay dividends which were declared in order to reduce petitioner's surtaxes on undistributed profits. The reduction of undistributed profits taxes arising as a result of the issuance of notes in payment of dividends was as follows:

1954 U.S. Tax Ct. LEXIS 288">*301 The amount of interest deducted by petitioner in its Federal income tax returns from January 1, 1932, to June 30, 1946, and the segregation of such interest as to the nature of the liability on which it was incurred, are as follows:

The dividend notes issued by petitioner during its base period created an interest liability which constituted over 99 per cent of petitioner's total interest deductions during the base period.

21 T.C. 834">*840 Petitioner's net sales and gross income for its taxable1954 U.S. Tax Ct. LEXIS 288">*302 years 1932 through 1946 were as follows:

According to the corporate tax returns filed by petitioner for its taxable years 1936 through June 30, 1940, petitioner's total assets, liabilities, and net worth, and the principal assets, liabilities, and net worth items constituting such totals, were as follows:

Petitioner's investment in plant and equipment, both total and net investment, more than doubled during its base period. The increased investment of over $ 500,000 in plant and equipment by petitioner during its 1954 U.S. Tax Ct. LEXIS 288">*304 base period represents actual monetary cost of additional assets and improvements and is not the result of any writeup in value of existing assets. The expansion of petitioner's plant and equipment during its base period years increased petitioner's capacity for production.

21 T.C. 834">*841 Petitioner's inventory more than doubled during petitioner's base period. Petitioner financed its expansion of plant and operations during its base period without increasing its capitalization, other than a $ 1,000 increase during the fiscal year 1937, and without resort to borrowed capital.

In 1938 petitioner entered the aviation industry field and commenced manufacturing screw products for use in that industry. In conjunction with its entrance into the aviation industry, petitioner acquired a new line of customers.

Petitioner on September 15, 1943, filed three applications for relief (Form 991) seeking excess profits tax relief under section 722, Internal Revenue Code, for the years ended June 30, 1941, June 30, 1942, and June 30, 1943. In each application petitioner stated that relief was claimed under section 722 (b) (4) based upon a change in the character of the business immediately prior to 1954 U.S. Tax Ct. LEXIS 288">*305 or during the base period evidenced by (1) a difference in capacity for production or operation; (2) a difference in the production or services furnished; and (3) a change in the operation of the business. Petitioner had not determined the actual amount that would represent normal earnings to be used as a constructive average base period net income but had assumed that the reconstruction would result in refunds in the amounts claimed. On April 4, 1944, petitioner executed a document under which it waived, withdrew, and agreed not to prosecute its section 722 applications. These applications were filed to protect petitioner and were withdrawn because petitioner concluded that its claim did not have a sufficient basis.

The petitioner's interest deductions for the base period, January 1, 1936, through June 30, 1940, were in excess of 125 per centum of the average amount of deductions of such class for the 4 previous taxable years. The abnormality was not a consequence of an increase in the gross income of the petitioner in these base period years, a decrease in the amount of some other deduction in these years, or a change at any time in the type, manner of operation, size, or condition1954 U.S. Tax Ct. LEXIS 288">*306 of the business engaged in by the petitioner.

OPINION.

Respondent issued a timely notice of deficiency with respect to petitioner's excess profits tax for the fiscal year 1946. In its petition placing that deficiency in issue petitioner also complained of respondent's failure to act favorably on claims for refund which petitioner had filed with respect to fiscal years 1943 and 1944 based upon a recomputation of its accelerated amortization pursuant to the subsequent Presidential proclamation issued following the conclusion of World War II. That claim has never been rejected as untimely and 21 T.C. 834">*842 would have been allowed in full except that from the amount concededly due a deduction was made by respondent because of his disallowance of certain items incorporated in petitioner's computation of its original tax liabilities for those years by reason of the provisions of section 711 (b) (1) (J).

Respondent moved to dismiss as to the latter 2 years, 1943 and 1944, on the ground that no deficiency had been determined with respect to them. This motion was granted. Petitioner meanwhile had filed further claims for the same years in which it again referred to the 711 (b) (1) (J) adjustments1954 U.S. Tax Ct. LEXIS 288">*307 and again requested allowance of the full amount claimed as a refund. By notices stated to be sent by registered mail and given pursuant to section 732, Internal Revenue Code, respondent rejected those claims to the extent that they had not already been allowed but gave as his reason with respect to 1943 only that under the statute of limitations the claim had been filed too late.

In a second petition, Docket No. 37269, the proceedings under which were consolidated with those initiated by the first petition, petitioner contested the disallowance so communicated to it and reiterated its demand that the full amount of the conceded refund due to accelerated amortization be allowed, complaining at the same time of any rejection of its position originally taken pursuant to the provisions of section 711. Procedurally the year 1944 is no longer in controversy as respondent concedes that an agreement to extend the statute of limitations made the second claim timely with respect to that year. But the first question still persisting as to 1943 is whether we have jurisdiction to determine the correctness of the 711 adjustments on the merits as we are called upon to do by both parties with1954 U.S. Tax Ct. LEXIS 288">*308 respect to 1944 and 1946.

Respondent's first contention applicable to the year 1943 is that the jurisdictional matter is now res judicata, or the law of the case, and that the second proceeding must also be dismissed. But concededly additional developments have occurred since then. See Tait v. Western Maryland Ry. Co., 289 U.S. 620">289 U.S. 620. Petitioner has revised its claim and respondent has denied it by a new notice -- one which for the first time categorically ¹ refers to section 732. If petitioner's first petition was premature because of the absence of any "notice of disallowance" it would have no more effect on the second proceeding than if a taxpayer appealed from a so-called 30-day letter and later a true notice of deficiency was issued. We are hence unwilling to say that the first dismissal is conclusive here.

1954 U.S. Tax Ct. LEXIS 288">*309 The contention that the second claim was untimely as having been filed more than 3 years after filing the return and more than 2 years 21 T.C. 834">*843 after payment, section 322, Internal Revenue Code, would be valid only if that claim is to be considered as a new claim. This argument may not be one that goes to jurisdiction, see United Business Corporation of America, 19 B. T. A. 809, 831, affd. (C. A. 2) 62 F.2d 754, certiorari denied 290 U.S. 635">290 U.S. 635; General Lead Batteries Co., 20 T.C. 685, on appeal (C. A. 3), although respondent so frames it. If the later claim was no more than an amendment of the first, raising no issues not inherent in the original claim and concededly filed before the first claim had been acted on under section 732, it seems to us invulnerable to the charge of untimeliness. See United States v. Memphis Cotton Oil Co., 288 U.S. 62">288 U.S. 62; Keneipp v. United States, (C. A., D. C. Cir.) 184 F.2d 263. That respondent, in passing upon the section 124 claim, felt at liberty to delve into the1954 U.S. Tax Ct. LEXIS 288">*310 computations arising from petitioner's reliance upon section 711 (b) (1) (J) adequately demonstrates that the second claim, ² specifically relying on the 711 computation, was connected with and a development of the first. See Packer Publishing Co., 17 T.C. 882, 898.

Any possible argument that the first claim had already been rejected by the time the second claim was filed, cf. Solomon v. United States, (C. A. 2) 57 F.2d 150, may be disposed of with the comment that petitioner's original claim was necessarily still pending, at least to the extent of the amount of the 711 (b) (1) (J) adjustment. The Tax Court has exclusive jurisdiction ³1954 U.S. Tax Ct. LEXIS 288">*311 to consider actions by the Commissioner with regard to claims under section 711 (b) (1) (J), see Colonial Amusement Co. of Philadelphia v. Commissioner, (C. A. 3) 173 F.2d 568; James F. Waters, Inc. v. Commissioner, (C. A. 9) 160 F.2d 596, certiorari denied 332 U.S. 767">332 U.S. 767, and no notice of rejection had yet been given by the Commissioner that would enable the taxpayer to go to the Tax Court. See Midtown Catering Co., 13 T.C. 92; McKesson & Robbins v. Edwards, (C. A. 2) 57 F.2d 147. Furthermore, any attempt to set off a section 711 disallowance against a section 124 refund was expressly prohibited by section 124 itself, which says:

The amount to be * * * refunded or credited in the same manner as if it were an overpayment, shall not be diminished by any credit or set-off based upon any item, inclusion, deduction, credit, exemption, gain or loss, other than one resulting from the effect of paragraph (4) of this subsection. (Sec. 124 (d) (5), I. R. C.)

1954 U.S. Tax Ct. LEXIS 288">*312 21 T.C. 834">*844 Consider the taxpayer's dilemma if the July 6, 1950, letter was a true notice of rejection. He cannot come to the Tax Court because, there being no deficiency and no notice under section 732, no jurisdiction would be thought to attach. ⁴ See Midtown Catering Co., supra.And if he proceeds to the District Court he can be met with the response that the rejection "relates to the application of section 711 (b) (1) (J)" and hence not that court, but only the Tax Court has jurisdiction. Sec. 732, I. R. C. See May Broadcasting Co.v.United States, 52-1 U. S. T. C., par. 66035,    A. F. T. R.   . If this were so respondent by his own extra-legal procedure would have succeeded in depriving petitioner of his day in any court. We cannot believe that under such circumstances Congress could have intended that jurisdiction should be withheld from the Tax Court, nor that the claim should be rejected as untimely rather than being adjudicated on the merits.

1954 U.S. Tax Ct. LEXIS 288">*313 A public officer cannot be presumed to be disobeying the law. United States v. Carr, 132 U.S. 644">132 U.S. 644; United States v. Crusell, 81 U.S. 1">81 U.S. 1. We prefer to regard the letter as lawful, and hence no notice of rejection. But if it was such, being contrary to the law it was a nullity and cannot be given any effect. We conclude that petitioner's claims should be considered under section 732:

SEC. 732. REVIEW OF ABNORMALITIES BY BOARD OF TAX APPEALS.

(a) Petition to the Board. -- If a claim for refund of tax under this subchapter for any taxable year is disallowed in whole or in part by the Commissioner, and the disallowance relates to the application of section 711 (b) (1) (H), (I), (J), or (K), section 721, or section 722, relating to abnormalities, the Commissioner shall send notice of such disallowance to the taxpayer by registered mail. * * * such notice of the disallowance shall be deemed to be a notice of deficiency. * * *

On the merits, petitioner does not contend that the interest it paid on notes issued as dividends was a separate class of deduction, see Green Bay Lumber Co., 3 T.C. 824,1954 U.S. Tax Ct. LEXIS 288">*314 but only that the total paid was in excess of 125 per cent of normal -- a proposition not controverted by respondent. His sole opposition is based on the provisions of section 711 (b) (1) (K) (ii) forbidding allowance of the offset if the abnormal deduction was the consequence of "an increase in the gross income of the taxpayer" or "a change at any time in the type, manner of operation, size or condition" of the taxpayer's business. The best way for petitioner to discharge the burden placed upon it by this section of disproving the negatives listed is to show affirmatively that the cause was something other than those mentioned. See 21 T.C. 834">*845 William Leveen Corporation, 3 T.C. 593. This, we think, petitioner has done.

The stated and obvious purpose of issuing the notes which in turn were the cause of the payment of interest was petitioner's desire to obtain a dividends-paid credit which for the first time became significant under the provisions of the undistributed profits tax of 1936. Whether or not petitioner's business had expanded would have little, if any, bearing on this motive. See Harris Hardwood Co., 8 T.C. 874, 884-885.1954 U.S. Tax Ct. LEXIS 288">*315 Petitioner, desiring to maintain its cash for working capital, ⁵ resorted to the device of paying dividends in notes and thereby pursued the very course which Congress in enacting the legislation had intended. ⁶ We think it would be unreasonable to conclude that the manifest desire to save taxes and distribute its earnings in a taxable form was the consequence in anything but a remote degree, if at all, of a change in the operation of the business. See Mine & Smelter Supply Co., 10 T.C. 1179, 1190-91; Arrow-Hart & Hegeman Electric Co., 7 T.C. 1350, 1377-79; Laredo Bridge Co., 7 T.C. 17, 23-25.

1954 U.S. Tax Ct. LEXIS 288">*316 Had there been no undistributed surplus tax and no corresponding motive for the issuance of the dividend notes, no interest payments thereon would have been required. In that event petitioner's base period net income and consequently its excess profits credit would have been enhanced. We take the view that this is precisely the situation to which section 711 was directed and that nothing more need be shown by petitioner as to 711 (b) (1) (K) than is contained in the present record.

Decisions will be entered under Rule 50.