1958 U.S. Tax Ct. LEXIS 93">*101 In short, the statutory formula as here applicable, for computing the carryback to 1945, is that the carryback is the amount of the 1946 loss, less a certain figure which is to be arrived at by subtracting from the net income for the second preceding year (1944) the excess profits tax paid or accrued within the taxable year (1944).

The dispute centers over the appropriate figures to be used for net income and accrued excess profits tax for the fiscal year 1944. The parties agree that the net income and the excess profits tax accrued for each of the fiscal years 1944 and 1945 for the purposes of section 122 (b) should be computed before the allowance of any net operating loss deduction based upon carryback. Jacobs contends that the proper net income for the fiscal year 1944 to be used for this purpose is the net income finally determined, that is, the net income computed after all other agreed adjustments, including the allowance for accelerated amortization and the elimination of excess profits due to renegotiation. The parties agree that the net income as thus computed for the fiscal year 1944 is $ 4,908,979.33. Jacobs also contends that the proper accrued excess profits 1958 U.S. Tax Ct. LEXIS 93">*102 tax for the fiscal year 1944 to be used for this purpose is the excess profits tax computed as of the end of the year, that is before giving effect to accelerated amortization and before elimination of excessive profits due to renegotiation, but after giving effect to all other agreed adjustments. The parties agree that the accrued excess profits tax as thus computed is $ 6,435,282.11.

30 T.C. 1194">*1198 Respondent takes alternative positions. The first alternative position is that both net income and accrued excess profits tax for the fiscal year 1944 should be computed after taking into account all agreed adjustments, including the elimination of excessive profits due to renegotiation and the allowance of accelerated amortization. The parties are in agreement that the proper figures to be used as computed under this alternative are the amounts of $ 4,908,979.33 for net income and $ 3,772,807.02 for accrued excess profits tax. Respondent's second alternative position is that both net income and accrued excess profits tax for the fiscal year 1944 should be computed before taking into account any later adjustments, including elimination of excess profits tax due 1958 U.S. Tax Ct. LEXIS 93">*103 to renegotiation and allowance of accelerated amortization. The parties are in agreement that the proper figures to be used as computed under this alternative are the amounts of $ 8,220,367.81 for net income and $ 6,401,871.87 for accrued excess profits tax. In short, the respondent is arguing for consistent treatment of both the net income and the accrued excess profits for the fiscal year 1944 in computing the amount of the carryback under section 122 (b) for the fiscal year 1945.

As to the correct excess profits tax figure to be used by Jacobs in making the disputed computation, we agree with Jacobs that it should be the tax as computed at the end of the fiscal year 1944, before giving effect to subsequently accelerated amortization and before elimination of subsequently determined excessive profits due to renegotiation but after giving effect to all other agreed adjustments. We think that Lewyt Corporation v. Commissioner, 349 U.S. 237">349 U.S. 237, is controlling on this point. In that case the Supreme Court was faced with the interpretation of sections 122 (b) (1) and 122 (d) (6), which are the same subsections involved here. There, the accrual basis1958 U.S. Tax Ct. LEXIS 93">*104 taxpayer argued that the excess profits tax "accrued" was the tax as shown on its 1944 return, while the respondent made the argument that the excess profits tax to be used was the one ultimately determined, after taking cognizance of renegotiation in a subsequent year relating to 1944, a 1946 carryback, and other adjustments. The Court held as follows:

In short, the amount of tax accrued within the taxable year under § 122 (d) (6) is to be determined in accord with the normal accounting concepts relevant to the accrual basis. That amount is not, of course, to be ascertained solely by reference to the figure set forth in the taxpayer's return, for that figure may be erroneously computed on the accrual basis. But when an amount is arrived at by proper application of recognized accounting principles on the accrual basis, the test of § 122 (d) (6) has been met. Events and transactions of later years, irrelevant to a determination of income on the accrual basis, do not warrant alteration of the figure computed under § 122 (d) (6) for the year in question.

We also agree with Jacobs that the correct net income figure to be used in the section 122 (b) (1) computation for the fiscal year1958 U.S. Tax Ct. LEXIS 93">*105 1944 is the net income reflecting all adjustments, including the subsequent 30 T.C. 1194">*1199 allowance relating back to 1944 for accelerated amortization, the elimination of excessive profits for 1944 due to renegotiation, as well as various other adjustments made to net income by revenue agents. Again we think that the Lewyt case is controlling. In the Lewyt case, supra, the net income figure used for the fiscal year 1944, in the section 122 (b) (1) computation, was the figure, after all agreed adjustments were made, including a renegotiation adjustment which was made in subsequent years and related back to the net income figure for 1944. It is true that the issue before the Supreme Court was as to the "accrued" excess profits tax for the fiscal year 1944, but it is equally true that the net income for that year was an indispensable part of the computation. In reaching its decision the Supreme Court was obviously aware of the inconsistent method of determining the two figures, the net income being determined after all adjustments, and the excess profits tax figure being determined before the adjustment for renegotiation. In fact, the dissenting opinion of Mr. Justice Frankfurter1958 U.S. Tax Ct. LEXIS 93">*106 focuses upon this inconsistency and we can assume that the majority reached the decision it did with this inconsistency clearly in mind.

An examination of the statutory scheme also calls for the result we have reached here with respect to the net income figure to be used. Section 122 (b) (1) provides that it is the "net income" of the second preceding taxable year (here, Jacobs' fiscal year 1944) which is to be adjusted by the exceptions, additions, and limitations of section 122 (d) (6). Section 124 (d) (4) requires a taxpayer who has elected to take accelerated amortization to relate the adjustment back to the net income of prior years and to recompute his tax for those years. In connection with the renegotiation adjustment, the Code also calls for a retroactive adjustment of the net income for prior years. Section 3806 (a) (1) provides that "the part of the contract or subcontract price which was received or was accrued for the prior taxable year shall be reduced by the amount of excessive profits eliminated." Section 3806 (a) (3) contains the corollary provision that "[the] amount of the payment, repayment, or offset described in paragraph (1) or paragraph (2) shall not constitute1958 U.S. Tax Ct. LEXIS 93">*107 a deduction for the year in which paid or incurred." Thus, in each instance the adjustment must, under the express provisions of the Code, be related back to the prior year so that they can be reflected in the net income for such prior year. It would be illogical, we think, in view of the purpose of section 122, to interpret "net income" as an amount that does not reflect such adjustments. Section 122, it is clear, contemplates the allocation of true economic loss over a period of years, and we think that the renegotiation and the amortization adjustments must be taken into account in achieving this statutory purpose.

30 T.C. 1194">*1200 Respondent makes a formidable argument for its consistent treatment theory -- that the figure for accrued excess profits tax, and the figure for income, should both be computed before taking into account all adjustments or both be computed after taking into account all adjustments. Respondent realizes his first task is to explain away the precedent of the Lewyt case.

His first argument is that the Lewyt opinion did no more than decide that the excess profits figure that was to be used was to be computed before the allowance of the net operating1958 U.S. Tax Ct. LEXIS 93">*108 loss carryback for 1946. We do not so read the opinion. The majority opinion speaks of this loss carryback figure for 1946 and "other adjustments." The dissenting opinion of Mr. Justice Frankfurter shows the other adjustments included refunds or credits of 1944 excess profits taxes due to renegotiation proceedings in later years. Clearly the case holds that no adjustment of 1944 excess profits tax because of renegotiation in later years is to be made when applying the statutory formula for computing the carryback to 1945. Continental Foundry & Machine Co. v. United States, 159 F. Supp. 608">159 F. Supp. 608.

Respondent argues that the Lewyt case did not decide any formula for determining the income figure of 1944 for that figure was stipulated. It is true that there the figure was stipulated but the stipulated figure was the figure arrived at by reflecting the adjustment for renegotiation rather than the figure originally reported as net income for 1944. In Mr. Justice Frankfurter's dissent it is stated the statute "justifies the assumption, made by the Court and both parties, that the figure for 1944 net income to be used in the formula is the lower figure1958 U.S. Tax Ct. LEXIS 93">*109 reflecting the adjustment for renegotiation * * * rather than the one originally reported."

The only difference between this case and the Lewyt case, as we read the latter opinion, is that here there was the added adjustment for an increased accelerated amortization deduction. That the treatment for such an adjustment, happening in a later year, is identical with the treatment of a renegotiation adjustment such as was involved in the Lewyt case, see Todd Shipyards Corp. v. United States, 161 F. Supp. 401">161 F. Supp. 401, (Ct. Cl., 1958).

We hold that the net income figure to be used by Jacobs in the section 122 (b) (1) computation for the fiscal year 1944 is the one finally determined, that is, the one after all adjustments have been made, including those connected with renegotiation and accelerated amortization. We also hold that the correct accrued excess profits tax figure to be used by Jacobs for that year is the tax computed as of the year end, that is, before giving effect to subsequently accelerated amortization and before elimination of subsequently determined excess profits due to renegotiation, but after giving effect to all other agreed adjustments. 1958 U.S. Tax Ct. LEXIS 93">*110 30 T.C. 1194">*1201 Our holding on this issue with respect to Jacobs is equally applicable to Parts.

The next issue involves the applicability of the tax benefit doctrine to Jacobs' fiscal year 1947. In the statutory notice of deficiency in Docket No. 56526, dated November 29, 1954, the respondent determined a net operating loss for the year ended July 31, 1947, of $ 471,259.91, which was allowed as a net operating loss deduction in the fiscal year ended July 31, 1945. In a statutory notice of deficiency in Docket No. 69983, dated July 24, 1957, the respondent determined a net income of $ 3,651,184.68 for the fiscal year ended July 31, 1947. Respondent contends that the deduction of accrued excess profits tax for the year ended July 31, 1944, from net income for the same year in computing the amount of the net operating loss carryback from the year ended July 31, 1946, to the year ended July 31, 1945, resulted in a tax benefit to Jacobs and the subsequent recovery by Jacobs of such excess profits tax in the amount of $ 3,745,013.83 by way of refunds or credits within the year ended July 31, 1947, constitutes income to Jacobs in the latter year. Similarly, respondent contends that the 1958 U.S. Tax Ct. LEXIS 93">*111 deduction by Parts of accrued excess profits tax for the year ended June 30, 1944, from net income for its same year in computing the amount of the net operating loss carryback from the year ended June 30, 1946, to the year ended June 30, 1945, resulted in a tax benefit to Parts, or Jacobs, as successor in interest and transferee of Parts, and the subsequent recovery by Jacobs of such excess profits tax in the amount of $ 379,489.63 by way of refunds or credits within the year ended July 31, 1947, constitutes income to Jacobs in the latter year.

Jacobs seeks to apply as a defense the doctrines of consistency and estoppel against the respondent, apparently in an attempt to tie the respondent to his initial determination that a net operating loss was incurred by Jacobs in the fiscal year 1947. However, we need not go into this particular defense, since, even if we assume that these doctrines do not apply here and go on to the merits of the issue, we do not think that the tax benefit doctrine is applicable under the facts of this case. Budd Company v. United States, 252 F.2d 456; National Forge & Ordnance Co. v. United States, 151 F. Supp. 937">151 F. Supp. 9371958 U.S. Tax Ct. LEXIS 93">*112 (Ct. Cl.).

The tax benefit principle, typically, comes into play where at some prior time the taxpayer has taken a deduction of some item and, subsequently, in a later year, that item is recovered. If the original deduction actually caused a reduction of the tax for that prior year, then the subsequent recovery of the same item constitutes income, in the year of recovery, to that extent. Sec. 22 (b) (12). Here, there was no prior deduction by Jacobs of excess profits taxes in the fiscal year 1944 from the income of that year. In fact, this is specifically forbidden by the Code. Sec. 23 (c) (1) (B). Moreover, it is obvious that the subtraction 30 T.C. 1194">*1202 of the 1944 excess profits tax from 1944 net income, in the carryback computation under section 122 (b) (1), does not reduce the tax liability for 1944. As the Court of Claims pointed out in the National Forge case, supra, such deduction was "only for the purpose of determining how much of the net operating loss was to be applied against 1944 income and how much against 1945 income."

Congress thought it proper to permit a taxpayer to spread his true economic loss over a period of years and to give this purpose effect, 1958 U.S. Tax Ct. LEXIS 93">*113 it devised the statutory scheme under section 122. If we were to apply the tax benefit doctrine in a case like this, as respondent contends, it would have the effect of diluting the benefits of that section. We do not think we would be justified in doing so. It is true that windfalls may result. But the provisions of the section in the Code are explicit. 349 U.S. 237">Lewyt Corporation v. Commissioner, supra.In the Budd case, supra, the respondent presented the same argument as is here made and the opinion brands it as an attempt "to achieve substantially the same goal that [respondent] failed to gain in the Supreme Court" in the Lewyt case. The case holds the "tax benefit" doctrine should not be applied in a situation identical with the instant case.

We hold for Jacobs on this issue. In view of our holdings above, we do not reach the further arguments made by the parties on brief.

Decisions will be entered under Rule 50.