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decided: May 23, 1955.



Warren, Black, Reed, Frankfurter, Douglas, Burton, Clark, Minton; Harlan took no part in the consideration or decision of this case.

Author: Douglas

[ 349 U.S. Page 237]

 MR. JUSTICE DOUGLAS delivered the opinion of the Court.

This case is a companion case to United States v. Olympic Radio & Television, Inc., ante, p. 232. The main point in the two cases is the same -- whether a taxpayer on the accrual basis can, in computing its net operating loss for one year, deduct the amount of excess profits

[ 349 U.S. Page 238]

     taxes which were paid in that year but had accrued in an earlier year.

The years 1944 and 1945 were years of profit for the taxpayer. For the years 1946 and 1947, the taxpayer incurred net operating losses which were allowed by the Commissioner as carry-back deductions to the years 1944 and 1945. The taxpayer sought to augment its net operating loss for 1946 by the amount of excess profits taxes which it paid in 1946 on account of its 1945 excess profits tax liability. The Commissioner disallowed the deduction and the Tax Court sustained the Commissioner. 18 T. C. 1245. The Court of Appeals affirmed. 215 F.2d 518. The case is here on a petition for certiorari which we granted (348 U.S. 895) to resolve the conflict with the Olympic Radio case. Our views, as expressed in the latter case, coincide with those of the Court of Appeals. Accordingly, we affirm that part of the judgment.

There is present in this case a point not involved in the Olympic Radio case. The question is whether the excess profits tax that may be offset against 1944 net income is the amount of excess profits tax reported for the year in question or the amount ultimately found to be due. The taxpayer claims it is the former; the Commissioner, the latter.

The question centers on § 122 (b)(1) and § 122 (d)(6). As we have seen in the Olympic Radio case, § 122 (b)(1) directs that the net operating loss for a given year be carried back to the two preceding taxable years.*fn* And § 122 (d)(6) allows as a deduction "the amount of tax

[ 349 U.S. Page 239]

     and the amount finally determined to be due, no double benefit should be inferred. The double benefit, it is argued, should certainly be denied when the figure upon which it is based has no economic reality.

But the rule that general equitable considerations do not control the measure of deductions or tax benefits cuts both ways. It is as applicable to the Government as to the taxpayer. Congress may be strict or lavish in its allowance of deductions or tax benefits. The formula it writes may be arbitrary and harsh in its applications. But where the benefit claimed by the taxpayer is fairly within the statutory language and the construction sought is in harmony with the statute as an organic whole, the benefits will not be withheld from the taxpayer though they represent an unexpected windfall. See Bullen v. Wisconsin, 240 U.S. 625, 630.

When Congress wrote the word "imposed" into § 122 (d)(6), it might have used it in one of two different senses -- either to identify the tax or to define the amount of the tax that is to be levied and collected. We think that Congress used "imposed" in the former sense.

In the first place, the deduction allowed by § 122 (d)(6) is not the tax "imposed" by Subchapter E of Chapter 2. It is "the amount of tax imposed by Subchapter E of Chapter 2 . . . accrued within the taxable year." The word "imposed" when used in conjunction with "accrued" makes tolerably clear that "imposed" merely identifies or describes the tax that "accrued." That is to say, the sentence as a whole indicates that "imposed" is used merely by way of reference. It seems clear that Congress had that understanding. The Senate Finance Committee reported:

"Section 122 of the Code, relating to computation of the net operating loss deduction allowed by section 23 (s) of the Code, is amended so as to allow the excess profits tax paid or accrued within taxable

[ 349 U.S. Page 241]

     years (subject to certain rules) as a deduction in computing net operating loss for, and net operating loss carry-over and carry-back from, such taxable years." S. Rep. No. 1631, 77th Cong., 2d Sess., p. 67. And see H. R. Rep. No. 2333, 77th Cong., 2d Sess., p. 65.

That indicates that the test of deductibility under § 122 (d)(6) is whether the tax "accrued" within the taxable year.

Secondly, the general section dealing with deductions, § 23, allows deductions for taxes paid or accrued during the taxable year, with certain specified exceptions. § 23 (c). Some of the excepted taxes are identified by well-known names, e. g., federal income taxes, estate, inheritance, legacy, succession, and gift taxes. See § 23 (c)(1)(A), (D). Other taxes excepted are identified by reference to the taxes "imposed" by certain provisions of the law. Thus § 23 (c)(1)(B) excepts "war-profits and excess-profits taxes imposed by . . . Subchapter E of Chapter 2." The applicable Treasury Regulation indicates that the word "imposed" identifies the tax. It provides: "Subject to the exception stated in this section . . . taxes imposed by the United States . . . are deductible from gross income for the year in which paid or accrued." 26 CFR § 39.23 (c)-1.

Section 23 is especially relevant here, since the language of § 122 (d)(6) was taken almost verbatim from § 23. That section as amended by the Revenue Act of 1941 had provided that, in computing net income, a deduction for taxes "paid or accrued within the taxable year" should be allowed.

As respects the excess profits tax, § 23 (c)(2) provided:

"For the purposes of this subsection, in the case of the excess-profits tax imposed by ...

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