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February 2, 1965

NEW YORK SHIPBUILDING CORPORATION, a New York corporation, in its own right, and as Successor in Merger to Nesco, Inc., a New Jersey corporation, Plaintiff,
UNITED STATES of America, Defendant

The opinion of the court was delivered by: COHEN

Plaintiff, New York Shipbuilding Corporation, a New York corporation, in its own right and as successor by merger to Nesco, Inc., a New Jersey corporation (hereinafter Nesco), seeks refund of federal excess profits taxes for the tax years 1950, 1951, 1952 and 1953, paid to defendant, United States of America, amounting to $ 51,779.13, plus statutory interest. *fn1" The corporate merger of Nesco into plaintiff was effected April 23, 1954. The taxes in dispute were paid by plaintiff, New York Shipbuilding Corporation, as a result of an audit of the income and excess profits tax returns of Nesco for the years 1950-1953 inclusive. All other conditions precedent under the Internal Revenue Code, 1939, § 442, have been met. Jurisdiction is conferred by 28 U.S.C. § 1346(a)(1). Narrative herein is derived from stipulations, exhibits, depositions and oral testimony.

The issue is whether the taxpayer is entitled to the tax relief sought under the provisions of section 442(a)(1) of the Internal Revenue Code of 1939, enlarged by the Excess Profits Act of 1950, 64 Stat. 1137, 1163 (1951), 26 U.S.C. Excess Profits Taxes, § 442(a)(1). *fn2" It is the opinion of this Court that the taxpayer has met the burden of proof requisite for tax relief entitlement.

 Nesco was founded in 1899 as a result of a consolidation of four separate tinware and enamelware companies located in Milwaukee, Wisconsin; Baltimore, Maryland; Granite City, Illinois, and Laurel Hill, New York. During 1900 to 1935, it added new product lines to its basic tinware and enamelware business, and in the 1930's, in addition to its four original plants, it added sites in St. Louis, Missouri, and New Orleans, Louisiana; warehouses in Chicago, Illinois, and Philadelphia, Pennsylvania; and a steel foundry at Granite City, Illinois. During the Great Depression, the operations in St. Louis and New Orleans were abandoned, the Chicago and Philadelphia warehouses sold, and the steel foundry at Granite City became an independent corporation.

 In 1941-42, Nesco built a new factory at Jacksonville, Illinois, about 85 miles from its existing plant in Granite City, Illinois. The new plant, now being Nesco's fifth, was built as a defense products facility, with conversion into an electric appliance plant contemplated at the eventual termination of World War II.

 The principal products of Nesco may be termed housewares, i.e. fabricated metal products, such as bread boxes, coal buckets, pie plates, tinware, scrub buckets, funnels, kerosene stoves and heaters, cooking pots, stainless steel cooking utensils, electric roasters, broilers and casseroles, and additionally, milk cans, and steel shipping drums of various types. Because Nesco's primary production was not that of electrical products in the sense of industrial classification, it used the classified industrial rate of return of 15.4% For the fabricated metal products industry in its tax computations, rather than the lower rate of 14.5% Return fixed for the electrical equipment industry. The government finds no fault with this choice of classification and rate by the taxpayer, conceding that the bulk of Nesco's production during the base experience years of 1946 through 1949 consisted of fabricated metal products.

 With the end of World War II, removal of wartime defense production at Jacksonville, Illinois commenced with retooling and plant process conversion to mercantile production of electric roasters, casseroles, and broilers. Civilian production commenced in earnest in 1946. The post-war period from 1946 through 1949 provided a heavy consumer demand, and Nesco equated production of its electrical housewares with shipment on an allocation basis, without accumulating inventories of finished products.

 During 1947, just as Nesco's Jacksonville plant geared itself to full capacity production for delivery of finished products to dealers for seasonal purchasing peaks, preceding Thanksgiving and Christmas consumer demands, the unionized employees at Nesco's Jacksonville plant struck. This strike commenced with the afternoon labor-shift August 8, 1947, and continued without abatement through October 17, 1947. Picket lines were established around the plant, and the resultant work stoppage was complete.

 It is the contention of plaintiff that, as a consequence of this strike, its normal production was substantially interrupted by an event which was unusual and peculiar in its experience, and that, as a result thereof, it sustained a gross sales loss of approximately $ 800,000.00, and an estimated profit loss of $ 124,928.00. Plaintiff supports these figures in the record. *fn3" Additionally, unproductive plant expenses during the strike were not less than $ 62,590.00. *fn4" Hence, the computed combined loss of $ 187,518.00 represented 10.2% Of the overall profit which would have been realized by Nesco, but for the fortuitous eventuality of the strike in question. Plaintiff submits that under section 442(a) Excess Profits Act, these facts qualify it for tax relief, entitling it to reconstruct its excess profits net income under the automatic provisions of section 442(c) of the Act during its base period. Plaintiff further maintains that such reconstructed base period net income would have been larger than that otherwise determined, but for the strike in question; and the result thereof would be to increase its excess profits credit, decrease its income subject to excess profits taxes in the years 1950, 1951, 1952 and 1953, and result in the refund sought, plus statutory interest.

 Defendant does not dispute plaintiff's classification of its industry as one of fabricated metal products, nor its use of the reconstruction of income formula provided by the statute. Defendant's point of departure is principally on the question of taxpayer 'eligibility.' It contends that what constitutes 'normal production, output or operation' for this, as well as any particular taxpayer, is that established by the actual production experience up to the time of the alleged qualifying event, and it supports its position by reference to Treasury Reg. 130, sec. 40.442(a)(1), as being a contemporaneous construction of the Congressional enactment. Defendant urges that 'Neither Congress nor the Commissioner have indulged in subjective speculations about 'what might have been' but for the Korean War or but for an interruption to production.' *fn5" The defendant insists that the standard called for is an objective one, based solely on past performance; and that the subjective standard of normalcy urged by plaintiff is that which was sought to be eliminated by the Korean War Excess Profits Tax Act, *fn6" making the taxpayer's realistic experience the base rather than speculative reconstruction.

 Such, then, are the respective positions of the parties, and briefly stated, also, their approaches to the tax law. The problem is not without complexity, as most tax matters seem destined. However, much aid is afforded by the opinion of the Court of Appeals for the Second Circuit in the case of Oxford Paper Co. v. C.I.R., 33 T.C. 943, reversed, 302 F.2d 674 (2 Cir. 1962). As stated by Judge Friendly, at page 678:

 'To us 'normal' means what would have occurred but for the 'unusual and peculiar events' that produced the deviation from the norm. Indeed, the Commissioner himself properly recognized this in his regulations under the similar language of § 722(b)(1) of the World War II Act, Regulations 112, § 35.722-3(a):

 "Normal production, output, or operation means the level of production, output, or operation which would have been reached by the business of the taxpayer had the unusual and peculiar events not occurred."

 In Oxford, the event sought to be qualified as one unusual and peculiar in the experience of the taxpayer was a drought which cut off the power-supply of a Maine Paper Manufacturing Company. There had been other droughts, but none so severe. In the instant case, there was a strike, the labor force being completely withdrawn from the Jacksonville plant of the taxpayer. In Oxford, the profits of the drought year were higher than prior years, but less than they would have been but for the drought. A similar situation prevails here. Nesco's profits in 1947, although higher than in 1946, its first year of peacetime production, were less than they would have been, but for the strike in question. Thus, there was in fact, an interruption of production of Nesco, although the defendant insists such was not a qualifying event under the Act as augmented by Treasury Reg. 130, § 40.442, it not being an event unusual and peculiar in the experience of the taxpayer. The effort of defendant, by a strained construction of the Treasury Regulation, to preclude consideration of what would have been production, output, or operation, but for the event alleged as the eligibility factor for tax relief, cannot prevail. True, such a regulation is entitled to great weight as an interpretative aid of source legislation, Commissioner or Internal Revenue v. South Texas Lumber Co., 333 U.S. 496, 68 S. Ct. 695 (1948), but administrative amplification must not conflict with the philosophy and avowed purpose of legislation. As stated in Oxford, supra, 302 F.2d p. 679:

 'Hence, if the reference in Regulation 130, § 40.442-2(a)(1), to 'the actual experience of the taxpayer up to the time of unusual and peculiar event occurred' would prevent consideration of increased capacity that would have been used but for the 'unusual ...

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